Hamish McRae: Societies hinge on people being seen as individuals

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In the daily flow of news, economists seem always to be making forecasts and usually getting them wrong. Growth of GDP, what is happening to consumer prices and unemployment, the next move of interest rates, understanding the Budget, and so on – all this is the public face of the profession. But actually there is another side to economics that seeks to explain our behaviour as individuals and organisations, and draw lessons from it. It is called microeconomics, as opposed to macroeconomics. Occasionally, as with the book Freakonomics, it hits the headlines, too.

This week, the profession is on parade at the annual conference of the Royal Economic Society in Cambridge and the bulk of the research presented there focuses on the micro rather than the macro. The sheer scale is astounding: more than 500 papers with nearly 700 participants over three days, with subjects including the benefits (and harm) from universal childcare, attitudes to foreign aid, how to stop multinationals relocating offshore, and the ideal number of mobile phone operators to deliver the lowest charges. (The answer to that one is four or five: fewer and you don't get the competition; more and you don't get the economies of scale.)

With such a range, it is almost invidious to single out any, but three papers seemed particularly useful. One, by a team headed by Stephen Machin, Professor at University College London, looks at the relationship between education and crime among young men. As you might expect, they found that a 1 per cent increase in the number of young men who stay on at school after the age of 16 reduces crime committed by men by 1.7 per cent. This is partly because young men were off the streets and in the classroom but also because they had better job opportunities.

One conclusion that follows is that we should look at ways of keeping people in education after 16, either by creating other educational opportunities or even by raising the school leaving age. The sixth-form colleges founded in the late 1980s and early 1990s have had a clear positive effect.

A second bit of research looks at the impact on people's happiness if they move from being unemployed to being retired. The researchers, led by Clemens Hetschko, of the Free University of Berlin, looked at German data that showed that people's self-worth shot up if they changed their identity in this way. The result was particularly marked for men who had experienced several periods of unemployment before retiring. They were no longer working in either instance, but being retired made them happy while being unemployed made them miserable. "They no longer expect to be working, so do not feel down about not doing so," the authors said.

Quite how you use this information, I don't know, for one cannot pretend people are retired when they are really unemployed. But there must be a case for trying to soften the boundaries between full-time work, part-time work and retirement, so that the transition is buffered.

The third study has direct relevance to the last Budget. Some work by Li Liu, of the Said Business School in Oxford, looks at the effect of changes in business taxation on the levels of company incorporation. She studied the US between 1904 and 1919 and found that sudden increases in business taxation, relative to personal taxation, had a really big impact, discouraging company formation. What we have had in Britain in recent years has, of course, been the opposite: increases in personal taxation and cuts in corporation tax. The effect, unsurprisingly, has been lots of professionals ceasing to be employees and becoming services companies instead.

A number of commentators have professed to be surprised at the scale of the response to the tax changes. Indeed, had the Treasury been aware of this, it might have acted differently. Britons, it seems, are not so different now in their behaviour from their US cousins 100 years ago.

Services – with a smile

A word about exports. Information about physical exports comes out all the time and, while sometimes encouraging, the fact remains that the UK has a large deficit on physical trade. Data on services exports comes out after a long delay and gets neglected as a result. So, to correct this imbalance, note these facts from an ONS report yesterday about 2010.

Service exports have risen every year through the recession, reaching just under £90bn, a 6 per cent increase on 2009. There is a surplus of more than £47bn on trade in services, which now account for 39 per cent of our exports, up from 25 per cent 30 years ago. These figures exclude travel, transport and financial services, so they are not skewed by our large deficit on travel nor by our large surplus on finance. Nor do they include foreign earnings on investments, on which we also have a sizeable surplus.

So, without wanting to dismiss those earnings, you could say these are "genuine" services – professional, scientific and technical – and it is comforting that they have continued to grow right through the deepest recession since the Second World War.

h.mcrae@independent.co.uk

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