Free market?

I’ve been reading quite a lot of articles and comments about the recent Comprehensive Spending Review (CSR) and there is – as you would imagine – a wide variety of different views. What I find quite interesting (to put it politely) are those people with what I think of as right wing (or conservative) views who seem to believe that the state should be smaller and that there should be more of a free market approach to how to provide things in society. The kind of things that I’ve read are along the lines of “get money out of the public sector into the private where it can work to generate wealth”.

What I would really like is for someone to explain (without using the typical rhetoric that uses words like “waste” and “efficiency”) why a smaller state with services being provided through a free market would be better than what we have now. Let me lay out, in general, the reason why I find this free market ideology confusing in certain circumstances. I assume that most people accept that there are some things that should be provided by the public sector. Examples would be the military, policing, etc. There are others, such as education and healthcare, that are probably amongst the kind of things that some would like to see provided by the private sector, rather than by the public sector.

Here’s where I get slightly confused – and hence would like someone to explain the free market ideology to me. If we consider healthcare, it has a total cost of something like £100 billion per year and makes up about 15% of public spending. We could presumably privatise healthcare, reduce public spending by 15%, and return £100 billion back into the marketplace (assuming that we actually do reduce the deficit). Let’s assume that the goal is to continue to provide healthcare for all, but just to do so through the private sector rather than the public. How do we achieve this? To first order, providing healthcare for all must cost about the same whether done through the private or public sector (any efficiency savings will probably be cancelled out by the fact that some profits will have to be made for those who have invested). The cost per person will therefore be about £1500 per year and the cost per family will be something like £5000 – £6000 per year. Currently 50% of jobs in the UK pay £19000 per year or less and 50% of household have income of £25000 per year or less. Given that very little of the £100 billion that is returned to the private sector will go to the lowest earners, how are these people meant to suddenly start paying for healthcare?

One option is that the private sector redistributes wealth so that everyone in employment can afford healthcare. The other is that it is provided directly by employers, although this then begs the questions of what happens to the unemployed and those who are retired. What I want to know is how this is significantly different from what we already have? Roughly £100 billion a year will be spent providing healthcare for people in the UK. This money isn’t going to be available for anything other than providing health coverage, so how does it suddenly generate wealth in the private sector when it supposedly wasn’t when in the public sector?

Possibly my initial assumption is wrong and that those who want a reduced public sector actually do not believe that everyone should get reasonable healthcare. Maybe the idea is that providing health coverage through the private sector would introduce choice. You could choose to have no healthcare, pay very little and get very basic healthcare, or pay a lot and get the best possible healthcare. Presumably this then implies that the unemployed would have no coverage, the lowest earners would only have basic coverage, and only the highest earners could afford coverage similar to what we all get today. If this is what is essentially being suggested by those who support small government, then they are probably correct that the total cost of healthcare will be less than it is today and some money will be consequently available for other, potentially wealth creating, enterprises. What is possibly not recognised, however, is that having a healthy workforce is, in itself, a way of creating wealth (or at least of creating more wealth than a comparable society in which many do not have health coverage).

The third possibility that I can imagine is that those who want small government and more private sector involvement in providing services, really haven’t given it much thought at all and simply believe all the rhetoric that is being thrown around by various conservative thinktanks. You can probably work out that my view, at this stage, is that providing services like healthcare and education through the public sector is preferable to providing it through the private sector. I’m more than happy to accept that some kind of savings could be made and that there may well be inefficiencies in the system, but I’m not – at this stage – convinced that it would be significantly different if it were in the private sector. I am, however, genuinely interested in having someone explain – including all goals and assumptions – why providing certain services through the private sector is preferable to providing it through the public sector.

The “greatest macro-economic mistake in a century”

Interesting article in the Guardian today about David Blanchflower’s views on the upcoming cuts. David Blanchflower was, until recently, a member of the Bank of England’s Monetary Policy Committee and is known for being something of a maverick; regularly voting in the minority.

Essentially Blanchflower thinks the government is making a huge mistake in making cuts of this magnitude and are, in fact, being extremely cowardly. As the title of this post indicates, he has also described the proposed cuts as the “greatest macro-economic mistake in a century”. I hope he’s wrong, but my gut feeling is that he is not. What I think makes perfect sense is his comment that even though you do need to cut the deficit, there is no economic theory that says you have to do it extremely quickly. Why is there an insistence that it has to happen within this government? I’m getting somewhat tired of hearing government ministers insisting that there is no alternative and that it is all the previous government’s fault (although there is some merit to the latter). It’s clear that the longer it takes, the greater our total debt will become. However, if we cut too fast and too deep, we risk another recession, reduced revenues and having to borrow more money anyway.

I notice that Alan Johnson, the new shadow chancellor, has now released his plan for cutting the deficit. He is proposing a combination of cuts and tax rises – aimed primarily at the banking sector. It’s probably a little too late, but I much prefer this to the government’s plan of reducing the deficit mainly through cuts. Firstly, I think that the cuts are going to influence a number of things that are fairly crucial to the UK’s well being. Higher education and research funding being things that influence me directly, but the benefits system and policing are two other areas that may be severely affected. There is a second reason why I think tax rises are justified together with cuts.

A cut of £83 billion is equivalent to 3.3 million people earning an average salary (£25000). I’m not necessarily suggesting that 3.3 million people will lose their jobs, but 10% unemployment is not necessarily unlikely. The cuts also mean that £83 billion has left the UK economy, it hasn’t simply gone back into private industry. Private industry is unlikely to suddenly generate £83 billion in wealth overnight. Private industry is also unlikely to reduce profits and the salaries of those in employment simply to reduce unemployment levels (they can’t really employ more people without finding the money to do so). The unemployed are therefore likely to remain unemployed for quite some time. Combining cuts with tax rises means it’s more likely that we will be able to manage a smooth transition from the public to the private sector. I know the CEOs of major corporation will argue that this will inhibit growth, but I’m not convinced. What is more, essentially insisting that 10% of the working population are forced into unemployment so that the wealthiest can continue to get wealthier seems entirely wrong. That doesn’t really feel as though we’re all making equivalent sacrifices for the future of the UK. I hope the government rethinks its strategy before Wednesday’s CSR announcement, but I doubt it.

Paul Drayson and Scientific Impact!

Paul Drayson recently gave the Nairn Lecture in Oxford and the title of his speech was “Science: where now?”. Apart from mentioning how successful and clever he had been, it seemed to focus primarily on the relationship between scientific research and economic impact. He specifically states “our capacity to create wealth from science needs to improve – to deliver the strong economic growth and jobs”. If any have read my other posts you will know that I am not a fan of the current impact agenda. This is not because I think scientific research shouldn’t deliver impact, it’s because I don’t believe what is being introduced will in any way help scientific research to deliver more impact and will ultimately be a complete waste of time and money.

It’s my view that if the government wants scientific research to deliver more impact, it should be putting more pressure on industry to communicate with researchers and to take more risks. To me, this is illustrated by the following statement taken from Paul Drayson’s speech

“I remind you that it was UK scientists who invented ultrasound. It was UK scientists who sequenced DNA. It was UK scientists who made the breakthrough on plastic electronics. It was UK scientists who got there first on monoclonal antibodies. In each case, commercialisation happened elsewhere.”

What I think he is trying to say here is that researchers in the UK have been very good at doing world class research, but very bad at exploiting it.  This may indeed be true, but what it actually illustrates – in my view – is that UK industry is very poor at exploiting the world class research that takes place in this country.  Is it reasonable to expect scientific researchers to do both the research and the exploitation (at the moment I seem to barely have time for the research).  In my opinion, it is not.  What motivates researchers is solving the puzzle, what motivates entrepreneurs and industrialists is presumably exploiting the results of the research.  Providing a way for entrepreneurs and industrialists to exploit the results of research done in the UK with public money (assuming that an appropriate amount of the resulting wealth remains in the public sector) seems perfectly reasonable.  Doing it by suggesting that the world class researchers should do better does not.

The more I encounter Paul Drayson, the less impressed I am.  We may well have a problem in the way in which we deliver impact from scientific research.  Trying to fix this by putting more pressure on those who are doing their part well, however, seems simplistic and short-sighted.   Part of me is pleased that he probably only has a few months left as science minister. Another part is terrified by what we will get in his place.

Academic retrenchments

I’ve just seen the reports from the Time Higher Education about compulsory academic redundancies at King’s College London, Imperial College, and possibly also University College London. Although I think some redundancies may have happened in the past, this is still somewhat unprecedented. Until sometime in the 1990s most UK academics had tenure, meaning that it was virtually impossible for them to be fired or made redundant. This has now changed and all new appointments, or anyone who has been promoted, is now on what is known as an open-ended contract. This does mean that redundancy is possible, but – until now – academics have been effectively permanent.

One could argue that times are tough for everyone and if there are redundancies in other sectors, why shouldn’t it be true for academia too. This may be a valid point, but let me tell you a personal story that may put this into some perspective. Including my years as a PhD student, I have worked (I was fortunate to be fully employed for most of my PhD) in the academic sector for almost 20 years. I’ve worked professionally on numerous different continents, I’ve moved across the Atlantic a number of times, and my 2 children were born in different countries (they don’t even share a citizenship at the moment). Prior to returning to the UK, I had a tenure-track position in the US. What attracted me to academia was getting paid what I felt was a fair wage to do a job I enjoyed, that gave me some freedom, and that provided job security. Although I have largely enjoyed everything I have done with may career so far, in some sense I have sacrificed quite a lot to get to where I am today. In particular, I don’t live anywhere near my or my wife’s parents or siblings and my children rarely see their grandparents, aunts, uncles or cousins. If 5 or 6 years ago, when I was evaluating my career options quite carefully, I had felt that academic jobs would be less secure in the future, I would have seriously considered alternative career options. Although I have no reason to believe that this will happen to me, if I was to be made redundant I would feel extremely cheated and deceived. In some sense, the sacrifices that academics make are made in return for job satisfaction and job security.

Although the above may illustrate why many academics may feel justifiably annoyed if faced with redundancy, it’s not really a strong argument for not doing it. Most people who are made redundant are probably more than justified in feeling annoyed and let down. The caveat, however, is how do you – in the future – attract people from all over the world to work in British universities if you remove what are the attractive aspects of such a career – job satisfaction and job security? This isn’t to say that those who take advantage of this job security and perform poorly shouldn’t risk losing their jobs. British universities may well have been soft on poorly performing academics, but in my experience the number of such people is really quite small. Compared to some academics I met while working in the US, most UK academics that I have encountered are extremely dedicated and hard working researchers and teachers. To a certain extent Britain already struggles to compete with the top US universities in attracting the top people. Introducing compulsory redundancies in some of Britain’s top universities is not going to make it any easier.

There is maybe one argument why making academics redundant is not quite the same as redundancies in other sectors. When an organisation is not performing well, making staff redundant reduces costs, allows the organisation to become more competitive, and ultimately may help the economy overall (not sure how true this is, but let’s assume it is for now). Those made redundant clearly suffer as a result, but hopefully find new careers when things improve. It’s not clear that the same argument applies in the University sector. Making redundancies now may save money (which is clearly the goal) but will damage the sector’s ability to attract the top people into academic jobs in the future. It’s therefore not clear that making redundancies will strengthen the sector in the long term. Academics also tend to become very specialised. I suspect that I would find it much harder now to find a job outside academia than I would have done 10 or 15 years ago. I’m probably either over-qualified or too expensive. Why hire me when you can probably hire someone younger who will cost less (even if I was willing to take a lower salary I’m not convinced that I would find work easily). What is more, when things improve it is unlikely that universities would then rehire those who’ve been made redundant. It is possible that academics find it harder to recover from a redundancy than those in other sectors, although in no way do I think it is easy for those in other sectors.

An obvious concern I have in making the above argument is that it will be interpreted as an arrogant academic arguing that we should be given special treatment. In fact similar arguments may actually apply in other sectors. The short term economic benefits of making redundancies may be destroyed by the reduction in loyalty and trust. So what is the reason for the introduction of compulsory redundancies in some of the UK’s top universities. Well, it is presumably a lack of money. Personally I don’t believe that now is the time to make cuts in the HE sector and we should be arguing that making such cuts will do damage to the UK economy as a whole. On the other hand, things will be very difficult for quite some time, so maybe we need to accept that some cuts are fair and necessary. Some US universities are actually introducing salary reductions and furloughs. Although I don’t think I get paid too much, I would be willing to accept a reduction in salary if it removed the need to make compulsory redundancies. With young kids I would also be fairly happy to work half a day less per week in exchange for a reduction in salary (although I would probably want to have an agreement that this wouldn’t be permanent). As a sector we should be doing everything we can to avoid making compulsory redundancies, but we also need to be careful not to end up being classed together with those in the financial sector who are threatening to leave the country if they don’t continue to get paid ridiculous salaries. I believe in the value of the UK HE sector and believe it has a very positive impact on the UK both socially and economically. I think that academics should be willing to make some kind of sacrifice to keep the UK HE sector world leading, and protect something that has been and should continue to be of benefit to everyone in the UK.

Fair and balanced?

To be honest, I’ve been finding it difficult to write about the whole STFC crisis at the moment as I’m so resigned to the situation that I’m not really getting too worked up about it anymore. The recent article by John Womersley (the STFC Science Director) claiming that the prioritisation excercise was “fair and balanced” does, however, seem to require some kind of response. I don’t personally know any of the senior STFC people, but of all those of whom I’m aware, John Womersley is the one I’ve been most impressed with. Whenever I’ve encountered him, I’ve found what he says quite reasonable. His article claiming that the facilities cuts were “fair and balanced” has therefore been somewhat disappointing since it seems to be effectively toeing the party line, and once again missing some of the fundamental points.

His article starts by at least implying that the prioritisation exercise was largely a result of the global financial crisis. The decrease in the value of the pound has clearly had an impact on STFC finances, but as many people have pointed out in the past, this is not the primary reason why STFC has a financial problem. The CSR2007 settlement that STFC received was not sufficient for STFC to carry out all the programmes it had inherited from PPARC and CCLRC. This has even been acknowledged in a parliamentary select committee report, so why senior STFC people cannot at least acknowledge that this was a major part of the problem is beyond me. I do agree with the claim that the prioritisation exercise was required (i.e., there wasn’t enough money to carry on as before), I just don’t agree that the primary problem was the global financial crisis (although this clearly did not help).

The article then goes on to claim that STFC based it’s prioritisation on recommendations from independent advisory panels. These panels may well be independent in the sense that they weren’t manned by STFC staff, but they clearly weren’t independent in the sense that the people on the panels didn’t have anything to lose from this exercise. I suspect everyone on all the panels were involved with something that was funded by STFC and hence clearly cannot have been truly independent. As far as I understand the process there were five advisory panels : the Particle Physics Advisory Panal (PPAP), the Nuclear Physics Advisory Panel (NPAP), the Particle Astrophysics Advisory Panel (PAAP), the Near Universe Advisory Panel (NUAP), and the Far Universe Advisory Panel (FUAP). Each of these were made up of people from the relevant disciplines and essentially determined priorities in their own discipline. The recommendations then went to the Particle Physics, Astronomy and Nuclear Physics Science Committee (PPAN) which then interleaved these recommendations into a single priority list. Given the short timescale, this may well have been the best way to do this, but the claim by the Nuclear Physics community that they have been hit especially hard because there was only a single nuclear physicist on PPAN may well have some merit. It must have been extremely difficult to have been part of these panels and not have been very aware of how the decisions were going to influence projects with which you were personally involved (although I’m not claiming that everyone involved didn’t do their utmost to be completely objective).

The article also claims that cuts to the Nuclear Physics community will have no impact on the UK’s ability to build and maintain future nuclear power stations.  This isn’t my area of expertise, but this doesn’t quite seem right.  My suspicion is that a large number of the people who teach nuclear physics in Physics department today are STFC funded, or at least do research in an STFC funded area.  The ability to teach nuclear physics in the future must surely be affected by a large cut in STFC’s nuclear physics funding.

Although there are things in the article with which I disagree, the tone of the article is actually quite reasonable and the articles does at least acknowledge that this will be difficult for university departments. What I find most disappointing is the final paragraph of the article  that makes the standard statements about the importance of research for the UK economy and essentially seems to argue that the prioritisation exercise was a key part of making the case for future funding.  This may be true and it certainly would not have been good to have had a funding (facilities) council that developed a programme that it could not afford.  What I would like to see, however, is a senior STFC executive at least showing some annoyance at the fact that the STFC was funded at a level that forced them to impose these extremely damaging cuts.  If research is crucial to the future of the UK economy (and if physics does indeed pay its way in the sense that the fraction of the economy that relies on physics dwarfs the level of physics funding in the UK) then why are we not all (STFC plus the community) making an extremely strong case for increased funding in these areas.

I actually went to a talk by JohnWolmersley a few years ago, just before the STFC crisis started.  During the talk he hinted that a crisis was looming and that when we became aware of it we should all shoot outwards rather than inwards.  I took this to imply that we should all work together, rather than fighting amongst ourselves.  In general I agree with this, but this would only have worked if STFC had done some fighting itself, rather than lying down and accepting these cuts as if they were reasonable and just what we deserved.  In fairness, John Womersley (I believe) has worked in the US, so maybe he used the words “fair and balanced” in the Fox News sense, implying that he doesn’t believe they were in any way “fair and balanced”.  Maybe this is the beginnings of a fight back, but that might just be my eternal optimism at work.

Paul Drayson

Just finished listening to the Times Higher Education debate titled Blue Skies Ahead? featuring Brian Cox as the chair and including Paul Drayson (the Science Minister) on the panel. It also featured a number of other young scientists but it ended up being dominated by Paul Drayson (although this was more because most questions were fired at him than because he explicitly tried to take over).

It was quite interesting and although Paul Drayson comes across reasonably well I think he generally seems to miss the point. One of the issues was the inclusion of impact in the upcoming Research Excellence Framework (REF). His argument was that it is retrospective and is intended to make scientists think about the impact of their research and allow future funding to depend on past impact. One of the criticisms is that to a certain extent this is what peer review does anyway to which he responded, well what’s the problem then? The problem – as pointed out well by someone in the audience – is that it is generally accepted (and supposedly this has been studied) that adding these kind of impact assessments has a negative effect on future impact. Yes, we need some kind of review process to determine the value of proposed research (or how well a particular university has done in the recent past) but when you try to define – too narrowly – the assessment criteria, people (organisations?) start to play games to optimise how well they satisfy these criteria and ultimately research impact suffers.

The other point I think he missed is the issue of the funding of the Science and Technology Facilities Council (STFC). The Science and Technology Facilities Council manages all major UK research facilities (including international partnerships such as ESA, ESO, and CERN), but also directly funds research in Astronomy, Particle Physics and Nuclear Physics. The problem is that STFC has a £40 million hole (or what is now referred to as a hole) in its budget which is likely to significantly affect upcoming research grant applications. According to Paul Drayson, STFC was given a sufficient budget and any problems are poor management (in which case, why are they still there) or projects running over budget. His views seems to be that if projects run over budget then something else has to suffer and it is not reasonable to expect the government to step in and help, or to take money from other research councils to help STFC. I would agree with him if the only scientists who exploit STFC facilities were STFC funded scientists, but they’re not. STFC manages all major UK research facilities so why should STFC scientists be the only ones to suffer when STFC projects cost more than expected.

All in all, I thought Paul Drayson is genuinely interested in reaching some kind of consensus and is really trying to listen to the views of others, but ultimately I don’t think he quite gets all of the subtleties of the situation. My impression is that he is a better politician than scientist.

The tax burden

Fascinating article in the Guardian by Polly Toynbee , called
cooling the cutting fisticuffs – take a long, hard look at tax . What the article claims, and what I found particularly interesting, is that the bottom 10% of earners pay 46% of their income in tax, while the richest 10% pay only 34% of their income in tax. What is more, the top fifth of earners take 51% of the national income while the bottom fifth take 3%. This comes from a report by a centre-left pressure group called Compass , and I have no real reason to doubt its veracity.

Apparently the reason for this discrepancy is that the highest earners can take some (or most) of their income in the form of capital gains which is only taxed at 18%. So even though their salary is taxed at a high rate, their actual salary only makes up a small fraction of their total earnings – most of it coming in the form of capital gains. When I first read this I immediately thought that although this may be true, most low earners effectively recover what they lost through taxes in benefits, but I think this doesn’t really make a difference. The public sector makes up something like 40% of the UK’s economy. If we want to sustain what the public sectors offers people in the UK, we have to roughly recover 40% of the total income. We could of course decide that the public sector should only make up 30% of the UK economy which we could achieve by privatising some parts of the public sector, but I happen to believe that this would not be improve things in any way.

So assuming that we accept that the public sector is going to make up about 40% of the UK economy, how do we fund that? Well a simple way would be to take 40% of everyone’s income. This could be through both direct and indirect taxation, but at the end of the day we need this to fund the public portion of the economy. What you could then choose to do is to take a slightly higher fraction of the top earners’s income, leaving those on lower incomes with more money. You can even give some of money back to the lowest earners through benefits since they take such a small fraction of the total income, that this won’t really have a significant impact on government revenue. What you certainly don’t do is take less than 40% of the highest earners’s income. They take such a large portion of the total income that this will have a huge effect on the total amount of government revenue. How can we possibly expect to both sustain the public sector – which I think we should be doing – and draw down the deficit if we don’t at least tax the the highest earners at a rate that will give the government sufficient revenue.

In some sense this isn’t even a discussion about what is fair or not, it seems logical that the simplest way to ensure that government revenues are sufficient is to start by making sure that the highest earners are taxed appropriately. If not enough is recovered from the highest earners, it becomes increasingly difficult to get the remainder of what is required from the lowest earners since they take a smaller fraction of the total income. It seems ridiculous that we are only taking 34% of the total income of the top 10% of earners in a country that intends to have a public sector that makes up 40% of the economy. The top earners presumably would argue that they don’t rely on the public sector to the same extent as the lowest earners, but this is nonsense. Also, in an average sense, something like 40% of their income presumably comes from the public sector. In fact, since they take such a large fraction of the total income, more than 40% must come from the public sector and so taxing them at a higher rate, to a certain extent, is simply recovering public money.

Ignorant university leadership?

There is a report in the Times Higher Education that a group of 25 senior university sector figures met to discuss the objection by many in the academic sector to economic and social impact being included in research assessments. They claim to have completely “bought into the impact agenda”, but that there is a group of middle ranking academics/researchers who have “rather lost the plot”.

What these senior figures seem to think is that academics don’t want their research to have impact. This was illustrated by one speaker who was quoted as saying “take a large number of academics into a room and ask them to put their hand up if they wish their work to have no impact whatsoever … I have yet to see a hand”. This statement either illustrates that the speaker is completely ignorant of what drives academics, or it is a completely disingenious comment that intentionally misrepresents the debate in an attempt to make it appear that academics are selfish prats who believe that because they’re so clever they deserve to have taxpayers’ money spent on them without giving anything in return. Of course academics want their work to have impact. They debate is about the optimum way in which to achieve and measure impact.

There is ample evidence to suggest that in many cases impact from fundamental research, be it in the sciences or social sciences, occurs many years after the research is done and in many cases is totally unpredictable. Not only this, but this unpredictable impact can have immense value, much more than would generally be true of predictable research. This is the fundamental point. The argument being made by academics is that you generally cannot predict the economic and social impact of a particular research project in advance. Additionally, if you try to do so and make this an important factor in determining whether to fund research or not, you will drive research to become more predictable and significantly reduce the potential impact.

The only positive spin I can put on the view of these senior university figures is that they believe that including economic and social impact in the assessment of research activities is going to happen whether we like it or not. We may as well, therefore, just get on with it and make the best of it. If this is the case
then I think it is incredibly cowardly and simplistic. It may well happen, but that doesn’t mean that we shouldn’t be doing our best to illustrate that it may do immense damage and that if too much pressure is put on academics to illustrate the potential impact of their research, it will encourage predictable research that will have minimal impact. This will ultimately be a waste of taxpayers’s money and if anything we have an obligation to spend this money as wisely as possible. Accepting the impact agenda may well violate this principle.

Goldman Sachs

It has been reported that Goldman Sachs will make a record profit in 2009 and will consequently pay record staff bonuses, setting aside as much as $18 billion. Personally I find this obscene, as do many others, and was really hoping that the banking industry would show some restraint and try to illustrate that they recognise the damage that has been done to the world economy by their risk taking.

On the other hand, some argue that this is simply capitalism working and if they choose to distribute some of their profits amongst their staff, that is entirely up to them. In principle this is fine, but I thought I would try to see if their was some reason why this argument wasn’t quite correct. In the past few years Goldman Sachs has had revenues of about $50 billion. It may be slightly higher in 2009 since there are fewer banks operating, but it probably isn’t more than $100 billion. The bonus pot is about half of their total profit, suggesting a total profit of $35 billion. This means that their profit is something like 35 % – 70 % of their revenue (depending what their actual revenue is). How does this compare with other large companies. Well, I quickly looked up Toyota and in the last few years they’ve had revenues of about $220 billion and profits of about $15 billion, about 5 % of their revenue.

The above isn’t particularly statistically significant. I thought I would try to have a slightly deeper look at this. I downloaded data for the top 100 companies (by revenue) in the world and worked out the average percentage profit. It is about 6.5 %. When I do the same for the Banking sector only, it turns out to be 9.5 % (it is the same whether I take the top 20, top 25 or top 50 banks in the world). This may not seem like a lot, but it does suggest that the banking sector operates in a way that allows it to make a larger percentage profit – in general – than most, if not all, other industries.

Maybe the above is fine, I don’t really know. Personally I have a problem with it. Although banks compete amongst themselves, unlike many other industries, there isn’t really an alternative to banking. We don’t have to buy a car, we could use public transport or ride a bike. If, however, we want to buy a house or invest some money, we need to use a bank (there may be some exceptions, but this is generally true). Is the reason that banks can attain larger percentage profits than comparable industries in other sectors because they have the brightest most capable staff, or simply because the type of competition they face is different to what other industries face. Personally I favour the latter interpretation. I don’t know how to change this, and even if there is a way to do so, but it is my opinion that our economy would be better off if more of the money remained in industries that actually build things and develop new technologies than being swallowed up by banks and divided up amongst their staff and investors.

Economic Impact

There is a lot of pressure for academic researchers to think more about what kind of economic impact their work might have. If this is just a suggestion that we should at least consider this, then it is probably fine. There is, however, a chance – a pretty good one in my view – that this pressure will ultimately force researchers to start doing more applied research that would be perceived as being more economically viable.

Presumably the reason this is happening is that there is a belief amongst those who make these kind of decisions that in an economic downturn it is more important to do research that may have economic value today than it is to do fundamental research that may have no economic value today and if it does ultimately have some impact, it will only be in the distant future. This may sound reasonable, but there could well be a strong argument that this is precisely the wrong thing to do.

It would seem – to me a to least – that most wealth in an economy simply circulates. It is pretty difficult to generate new wealth. If this is true then it doesn’t really matter if the money spent on research goes to fundamental research or to applied research. It still employs people and things will still need to be built. What is worse, if we start encouraging applied research over fundamental research we will not only lose something that is of great interest to us as a society, we will be using taxpayers money to do something that private industry should be paying for itself. It is certainly my view that we should continue using taxpayers money to do what industry cannot be expected to do and we should be encouraging industry to become less risk averse rather than the reverse.