This paper presents an alternative foundation to the standard quadratic loss function characterizing central bank inflation policy. The alternative treats high employment as a social benefit. In recognition of the inherent asymmetry of the output gap, two self-imposed constraints provide guardrails that rule out excess unemployment and opportunistic reflation. The loss function includes a novel reverse discounting mechanism that penalizes the bank for more sustained inflation gaps that could undermine confidence in the central bank’s target. In the absence of anchoring, the central bank is obliged to use economic slack to accomplish a disinflation but the presence of anchoring creates greater policy flexibility, freeing it from the tyranny of the sacrifice ratio. The central bank’s optimal policy differs dramatically from the standard Taylor Rule recommendation in choosing policy plans with higher employment, in its willingness to overshoot inflation targets, and in avoiding excess unemployment, all while observing the discipline needed for successful inflation targeting.

This article develops ideas contained in a previous paper on conflict inflation (Rowthorn [1977]. 'Conflict, Inflation and Money.' Cambridge Journal of Economics 1 (3): 215-239). It begins with a summary of that paper, stressing the importance of staggered markets, conflicting aspirations and unanticipated inflation. It then examines three recent articles that share a similar perspective. In the light of this discussion, it makes some general observations about the nature of conflict inflation. Finally It concludes with an application of conflict theory to the recent cost of living crisis in the UK. It argues that private companies have used their market power to defend their profit margins and ensure that the entire burden of higher world prices is borne by consumers, in particular wage and salary earners.

This paper uses an SEIR model to study in detail what we have learned, over the first eighteen months of the Covid-19 pandemic, about the optimal duration of lockdown and the optimal severity of subsequent policy. We produce two new sets of results. First, we show that the inevitable trade-off between deaths and economic costs may be non-convex. This means that the optimal policy choice may be discontinuous: a small increase in the value of life can imply that lockdown should last much longer and that subsequent policies should be much more severe. Second, we examine the effectiveness of test-and-trace and vaccination. We show that these are complementary policies: the former exerts its main effect on infections and deaths immediately, whereas the latter acts more gradually but ultimately more effectively. We use data from the UK, beginning at a time when there was a spike in infections. We optimise over a two-year period, and assume that in each ten-day period there is a continuum of possible interventions, ranging from no intervention to full lockdown. The SEIR model is highly non- linear, and the resulting intertemporal optimisation problem is non-convex, meaning that sophisticated control-engineering techniques are needed to find an optimal solution.

In the United Kingdom, as elsewhere, there has been a debate on how to escape from lockdown without provoking a resurgence of the Covid-19 disease. This paper presents a simple cost-benefit analysis inspired by optimal control theory, incorporating an SEIR model of disease propagation. Our calibration accords with UK experience and simulations start from the beginning of January 2021. The optimal path for government intervention is computed under different assumptions about the value of life. We examine how the test & trace system and vaccination affect this optimal path and show that these policies are complements. Test & trace has most effect at the beginning when prevalence is high, whereas vaccination only affects infections gradually. Comparing optimal paths, we show that economic cost is much lower under vaccination alone than under test & trace alone. Deaths, in contrast, are somewhat higher under vaccination. In general, the greater is the value of life, the longer is the optimal lockdown. Under certain conditions, this relationship is discontinuous: a small increase in the value of life leads to a jump in the optimal length of lockdown.

AbstractThe British government has been debating how to escape from the lockdown without provoking a resurgence of the COVID-19 disease. There is a growing recognition of the damage the lockdown has caused to economic and social life. This paper presents a simple cost–benefit analysis inspired by optimal control theory and incorporating the SIR model of disease propagation. It also reports simulations informed by the theoretical discussion. The optimal path for government intervention is computed under a variety of conditions. These include a cap on the permitted level of infection to avoid overload of the health system, and the introduction of a test and trace system. We quantify the benefits of early intervention to control the disease. We also examine how the government’s valuation of life influences the optimal path. A 10-week lockdown is only optimal if the value of life for COVID-19 victims exceeds £10m. The study is based on a standard but simple epidemiological model, and should therefore be regarded as presenting a methodological framework rather than giving policy prescriptions.

This paper surveys some of the main developments in macroeconomics since the anti-Keynesian counter-revolution 40 years ago. It covers both mainstream and heterodox economics. Amongst the topics discussed are: New Keynesian economics, Modern Monetary Theory, expansionary fiscal contraction, unconventional monetary policy, the Phillips curve, hysteresis, and heterodox theories of growth and distribution. The conclusion is that Keynesian economics is alive and well, and that there has been a degree of convergence between heterodox and mainstream economics.

This paper fully characterizes the optimal control of a recurrent infectious disease through the use of (non-vaccine) prevention and treatment. The dynamic system may admit multiple steady states and the optimal policy may be path dependent. We find that an optimal path cannot end at a point with maximal prevention; it is necessarily zero or at an intermediate level. In contrast, an optimal path must end at a point at which treatment is either maximal or minimal. We find that the comparative statics of the model may radically differ across steady states, which has important policy implications. Last, we consider the model with decentralized decision making and compare the equilibrium outcomes with the socially optimal outcomes. We find that steady state prevalence levels in decentralized equilibrium must be equal to or higher than the socially optimal levels. While steady state treatment levels under decentralization are typically socially optimal, steady state prevention (if used) is socially suboptimal.

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Thomas Piketty's Capital documents long-term trends in income and wealth in advanced economies. It also provides a theoretical framework for analysing the past and projecting the future. Piketty argues that the ratio of wealth to national income is on an upward trend and that this is responsible for the rising income share of wealth-owners. This note accepts Piketty's main empirical findings but questions his interpretation. The rising income share of wealth-owners is not due to the over-accumulation of capital, as he claims, but just the opposite. There has been too little real investment. The note also considers the long-term dynamics of Piketty's model and explores the effect of modifying his assumptions about savings behaviour. Finally, it considers the implications of rising asset prices, which are documented by Piketty but are not adequately taken into account in his theoretical analysis or projection of future trends.

We present a microeconomic model of social stratification, which includes an endogenous fertility component. In the model, egalitarian and stratified societies coexist. The latter are divided into 2 hereditary classes: a warrior elite and a productive class. The model entails that the extra cost warriors must incur to train and equip their children for war determines the relative sizes of both classes and the degree of economic inequality. Higher costs of warrior children imply a greater economic advantage for warriors and a smaller ratio of warriors to producers. These results are consistent with the historical evidence. Finally, we explore conditions under which the social contributions of the warrior elite could discourage a revolution.

This note responds to the recent critique by Goodridge, Haskel and Wallis (GHW) of our 2012 study of Britain's productivity puzzle. We show that a correct reworking of the latest official data on changes in labour composition overturns GHW's main criticism. We also question the strength of the empirical evidence offered by GHW in support of their alternative explanations of the productivity puzzle.

sector was due to labour-intensive expansion encouraged by falling real wages. We made no assumption about the educational attainment of the extra workers employed in these relatively low-productivity trades. The fact that upskilling has occurred in both high-productivity and low-productivity sectors – the true difference between the two is masked by the available data – is not, however, surprising, for the reasons stated in our main response to GHW’s earlier critique.

Religious people nowadays have more children on average than their secular counterparts. This paper uses a simple model to explore the evolutionary implications of this difference. It assumes that fertility is determined entirely by culture, whereas subjective predisposition towards religion is influenced by genetic endowment. People who carry a certain ‘religiosity’ gene are more likely than average to become or remain religious. The paper considers the effect of religious defections and exogamy on the religious and genetic composition of society. Defections reduce the ultimate share of the population with religious allegiance and slow down the spread of the religiosity gene. However, provided the fertility differential persists, and people with a religious allegiance mate mainly with people like themselves, the religiosity gene will eventually predominate despite a high rate of defection. This is an example of ‘cultural hitch-hiking’, whereby a gene spreads because it is able to hitch a ride with a high-fitness cultural practice. The theoretical arguments are supported by numerical simulations.

In the wake of the global recession and signs of fragility in the UK's own recovery, a panel of eminent economics thinkers and innovators gathered to debate whether and how the notion of government intervention in industry might be resurrected as part of a new approach to economic policy.

In the multitude of people is the king's honour; but in the want of people is the destruction of the prince-Proverbs 14: 28.

This paper is concerned with the geography of structural change in Great Britain since 1971. It divides the country into two broad areas-the 'North' comprising Northern England, the West Midlands, Wales and Scotland, and the 'South' comprising the rest of mainland Britain. The paper documents the uneven regional impact of industrial decline and the rise of the new service economy. The role of the export base is analysed in an appendix using a simple mathematical model to link together regional competitiveness, employment, fiscal transfers, population and migration.

Gratuitous cooperation (in favour of non-relatives and without repeated interaction) eludes traditional evolutionary explanations. In this paper we survey the various theories of cooperative behaviour, and we describe our own effort to integrate these theories into a self-contained framework. Our main conclusions are as follows. First: altruistic punishment, conformism and gratuitous cooperation co-evolve, and group selection is a necessary ingredient for the co-evolution to take place. Second: people do not cooperate by mistake, as most theories imply; on the contrary, people knowingly sacrifice themselves for others. Third: in cooperative dilemmas conformism is an expression of preference, not a learning rule. Fourth, group-mutations (e.g., the rare emergence of a charismatic leader that brings order to the group) are necessary to sustain cooperation in the long run.