A sideways look at economics

A friend used to coach table tennis to a very high level. He told me about a girl he was coaching, who had a shot at representing Great Britain at the Olympics in due course (she was aged 14 at the time). He said the most difficult part of coaching her was to shift her energy and attention from the negative to the positive:

“She would spend hours, and wake up at night, fretting about the one tiny mistake she made in a match, and completely ignore the hundreds of other brilliant things she did and always does as a matter of course.”

We’re all like this to a degree. We accentuate the negative. The dropped catch in cricket – even in a game you won, perhaps in part thanks to other catches that you held. The moment when you got someone’s name wrong – ignoring the many other names you got right. In this author’s world, lost clients trouble me for years afterwards, even if we simultaneously and subsequently gain many other and larger clients. And, less parochially: the relentless focus in macroeconomics on the growth rate in the current year or, in the UK right now, the probable negative impact of Brexit on the British economy, which remains extremely wealthy by its own historic standards and by the current standards of the rest of the world…

This tendency, in the parlance of behavioural economics, is addressed (by Kahneman and Tversky) in their ‘prospect theory’, which posits that people value gains and losses differently. Some such asymmetry is characteristic of a standard utility function (except in cases of risk-neutrality): for a risk-averse individual, wherever you start, the positive impact of a one-unit increase in income will be less than the negative impact of a one-unit decrease. But Kahneman and Tversky argue for something much stronger than that – for a discontinuity of the utility function around the starting point, wherever that is for each individual. Specifically, among other things, they find that we dislike risk when it applies to prospective gains, but we like it when it applies to prospective losses. Standard utility theory would not permit us to be both risk-averse and risk-loving simultaneously, but the evidence suggests that we are.[1]

Prospect theory is one approach to capturing a common neurosis (or, less pejoratively, a common behavioural trait), shared by this author: we dwell on past losses and worry about prospective future losses to a much greater degree than we do on past or about prospective future gains. I recognise this tendency in myself, and I wish it were otherwise. The aim of this note is to start to put that right: to accentuate the positive for a change. So here goes: here are (more than three) reasons to be cheerful, from the dismal science.

The human species is doing well, very well. In most important respects, better than it has ever done.

1) Both the average and the median real standard of living globally are at an all-time high
2) The level of income inequality globally has been falling for decades (both of these first two points are captured in some beautiful charts, which you can find in Our World in Data, or from Branko Milanovic)
3) Average life expectancy globally is higher than ever at all levels of human development (UN Human Development Report)
4) The population is larger than ever and its growth is likely to slow gradually from now on (UN World Population Prospects 2017)
5) The supply of food per capita is higher than ever recorded (dietary energy per capita, dietary protein per capita, data back to 1990 according to the UN Food and Agriculture Organisation [FAO]), globally and in every region
6) The global supply of clean water per capita is higher than ever recorded (share of global population enjoying ‘piped on premises’ or ‘other improved’ water supply has increased continuously since 1990, where the data begin, according to UN World Health Organisation ‘Safely Managed Drinking Water’ 2017)
7) The proportion of the global population that is in danger of starvation is lower than ever (prevalence of undernourishment down from 18.6% globally in 1990-92 to 10.8% globally in 2014-16, according to the UN FAO), and the same is true across all regions
8) The infant mortality rate is lower than ever globally and across all regions, according to the UN World Population Prospects
9) Global educational attainment is higher than ever (literacy rates, years of schooling, rates of ‘no education’, etc., according to UNESCO) across all regions
10) The gender gap in education is closing globally (literacy rate, Gender Parity Index, UNESCO)

These are unprecedentedly good times for the species. We’ve never had it so good. I can already hear the voices saying: “what about environmental sustainability?” or “what about the absolute numbers, not just the shares?” or “what about within-country inequality?” or “what about wealth inequality?” and so on. Kindly save such negative whataboutery for the New Year! Tis the season to be merry:

You’ve got to accentuate the positive
Eliminate the negative
Latch on to the affirmative
Don’t mess with Mister In-Between

You’ve got to spread joy up to the maximum
Bring gloom down to the minimum
Have faith or pandemonium
Liable to walk upon the scene

Bing Crosby

Happy holidays![2]

[1] These findings (and others) are convincingly demonstrated in Daniel Kahneman and Amos Tversky, ‘Prospect Theory: An Analysis of Decision under Risk’, Econometrica, March 1979, and elsewhere.
[2] In the interest of saving trees, this note sends seasons greetings to all of our clients and readers. The company has made a small donation to the Marie Curie Hospice charity: thank you to all of our clients for making that, and the continuing success of the company, possible.