Warwick Lightfoot is an economist with specialist interests in monetary economics, public finance and labour markets. He was Special Adviser to the Chancellor of the Exchequer between 1989 and 1992 and before that was Special Adviser to the Secretary of State for Employment Norman Fowler between 1987 and 1989. For many years he was a bank economist and is a former Economics Editor of The European. His many articles on economics and public policy have appeared in newspapers that range from the Wall Street Journal and Financial Times to the Guardian, Sunday Telegraph and Sunday Times and in specialist publications that vary from International Economy and Financial World to The Spectator and the TLS. His books include Margaret Thatcher: the economics of creative destruction and America's Exceptional Economic Problem published in 2017.
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The purpose of this Substack and the ideas and perspective that inform it
The purpose of this Substack is to explore economics and the economic analysis of public policy and financial markets. It is informed by a perspective that is interested in the international dimensions of the complex and interesting challenges that are shared by many advanced market economies.
Analysis that is clear for a reader interested in the subject
Its purpose is to frame the pieces so that they are intelligible and readable several years later, when the precise circumstances at the time of the publication have changed. The articles aim to be drafted so a person with a conventional purchase on the English language and interest in the subject, without prior knowledge, can get a clear understanding of the issues discussed. This means that it tries to spell out the roles of institutions or relevant aspects of a public figure’s life that are relevant for an easy understanding of the text. For example, in illustrating the role of corporate hospitality as part of non-price competition in financial markets where trading commissions are fixed and stockbrokers and investment bank customers in London are taken to Lords and Wimbledon, the text is drafted to make clear that Lords means going to the cricket and Wimbledon to the international tennis tournament played in London
Economic Analysis rooted in the tradition of the Marginalist Revolution in Economics
In terms of subject and tone, its focus on economics and related public policy, avoiding partisan glosses on matters, while identifying examples of specific political choice or sensibility in terms of a ‘mercantilist’ or ‘collectivist’ reflex or 'from a socialist perspective'. At the same time, it should be clear that the Sunstack is written by someone who is rooted in the broad approach of neo-classical economic analysis, is sympathetic to the use the price mechanism, alert to the role of incentives in the functioning of economies, the importance of property rights, contracts and a reliably functioning legal system. While also recognising merit goods, and beneficial and malign externalities that conventional prices and markets are unable to capture and the limits of markets.
Importance of Institutions and the Role of Economic History
Several things inform analysis presented in the Substack. These include the importance of appreciating economic and financial history in understanding how contemporary economies work. Institutional history and policy evolution is helpful in explaining economics events and the way different economic agents respond to them. For example, it is impossible to explain some of the institutional blind spots of the Bank of England without appreciating that it was originally a private profit making bank, the mercantilist reflex of the institutions of the EU cannot be understood without appreciating the role of the protectionist farm policy as its first and even now its principal spending programme, and the continuing folk memory of the social and economic disaster of the American Great Depression in framing US Federal Government policy, the anxieties of the Federal Reserve and that memory’s continuing influence in framing Democrat policy platforms and their distinct rhetoric of nostalgia.
Uncertainty and the Difficulty of Knowing – drawing on David Hume’s empirical epistemology.
The pieces on the Substack are alert to the limits of what we know. They are written from a perspective that accepts the central difficulty of establishing causation and with it strong and reliable evidence. The British empirical philosophical tradition is encapsulated in David Hume's theory of knowledge. Hume’s writings provide the classical statement about the challenges of establishing causation. This should provide a powerful constraint on the assertions of any economist. Just. because something happened yesterday, is no guarantee it will happen tomorrow. Hume's 18th century observations go to the heart of the identification problem in the social sciences.
Changed national accounting conventions and data and the changing structure of economies
It is next to impossible to construct reliable predictive equations on the basis of the sophisticated interrogation of data. Moreover, much of the data, not least that of contemporary national accounts, is unreliable. As a result of historical revisions to the national accounts in the UK means databases held by the Bank of England, the Office of National Statistics ONS and Office of Budget Responsibility OBR bear only a limited relationship to what happened at the time. The recorded data for the economic crises that Ted Heath, Denis Healey, Geoffrey Howe, Nigel Lawson, John Major and Norman Lamont went through, no longer coheres with their lived experience. The radical reconstruction of the national accounts over the last twenty-five years is a feature of EU economies and the UK.
There is a broader issue that also applies to economies that have not radically changed their national accounting conventions, such as the US that still poses a fundamental challenge to our historical and contemporary understanding of the data. This is that the shape and structure of the economies recorded in the data have changed, profoundly. The increased role of services, big tech, the role of intangibles and intellectual property rights in relation to value added have refashioned the structure of modern economies. In many respects such change vitiates reliable comparisons about the behaviour of economic agents over previous economic cycles.
During and after the Covid public health crisis, economic analysis was in many respects, flying blind. In these circumstances of huge uncertainty and when considering the scale of the shocks that policy makers have encountered since 2000, such as the Great Financial Crisis between 2007 and 2009, policy makers deserve understanding and genuine congratulation. So far this century, despite these shocks the world economy has not endured the economic and social catastrophe of the 1930s Great Depression.
Knightian Uncertainty
The concept of Knightian uncertainty is an increasingly useful consideration. The concept was developed by Frank Knight in the 1920s. He made the important observation that there were many things so complicated that however clever you may be and however sophisticated the technical statistical approach employed, there are things that cannot be properly understood and certainly not forecast.
A practical example of this is the set of questions that relate to contemporary economic growth, such as what does make economies grow and have the advanced economies entered a protracted period of very slow incremental growth compared to the two centuries that followed the industrial revolution. Societal policy choices that potentially involve both awkward opportunity costs and zero-sum choices about public spending, taxation and adapting to de-carbonisation are elided by the ‘grow the pie’, assertion that economic growth will ensure that such trade-offs do not have to be made. We do not know. Sir Gordon Newton who edited the Financial Times for over twenty-two years from 1950 sometimes published pungent leading articles or opinion articles that after making a powerful polemical case, would end with the post-fix, ‘or maybe not’.
Warwick Lightfoot
21 July 2023
