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notes_on_real_life

Looking after the aged

The Alzheimer鈥檚 Society is clearly on to something. But it's a far more general problem than Alzheimer鈥檚.

elderlywoman_cred203.jpgIn fact, it is arguably the big, unresolved issue of our time.

We have a number of periods in our lives when we are not productive - and require the support of someone else to look after us.

Alzheimer鈥檚 is one extreme case of such a condition, but there are far more obvious ones, from the period we are children, or college students, to those where we are too old or sick to work.

Indeed, if - quite plausibly - you are born at age zero, start work after university at 21, retire at 67, and live to 92, you will only have spent half your life at work.

As it happens, of the current total UK population, only 48% are out earning. Most of the rest are either young, old, sick, pretending to be sick, or caring for any the above.

Now, however you cut it, somehow we have to channel resources from the half of the population who are working, to the other half who are not. Or, to put it slightly differently, we have to channel resources from the half of your life when you work, to the half when you don't.

Now the traditional way of doing it is via the family. Mum or dad works and pays for one or two other dependants. Of course, you have to have a family - it's a bit hit and miss for everyone else.

But the main problem is that while it's fulfilling to bring up dependent children, it seems far less satisfying to look after aged parents. My evidence for that is that couples will go to a lot of trouble to adopt children, but there is no equivalent market for adopting grandparents.

And when you examine the other ways of looking after the aged, outside the family, the sad news is that none of them are as painless as handing over the needy to the NHS or the council, because someone has to pay for the NHS or the council.

In the end, we always come back to the same old painful choices: taxes, (which we grumble about); charity (which we love, but which doesn't raise enough cash), or insurance (which we generally call an outrageous privatisation of the welfare state).

We can tamper with these options, yet the basic grumble is the same - in each case, the people out of work end up getting some support, but the people in work end up losing part of their money.

The only other well-developed idea for paying for aged care is to use the housing wealth of those who that have it, to pay for their care. (After all, it doesn't seem unreasonable to say that if I can't be bothered to look after granny, I shouldn't expect to inherit her house.)

But that option hasn't been proved popular either.

So aged care remains an unresolved issue. We haven't voted for any of the obvious choices, but we seem to be voting with our feet against each of them. That's why pensions have been a headache, and why long term care is under funded, and why Alzheimer鈥檚 is a growing problem.

Short of employing young children to look after aged parents, any new ideas would be welcome.

notes_on_real_life

A fine line

queue424.jpg
Should the NHS let waiting times grow in order to save money this year?

Certain NHS trusts have apparently decided to save cash by postponing treatments, even though this increases waiting times. (Although they only do it if they remain within the waiting time targets. You can read a bit about this in .)

Now this sounds like a very different question to the one discussed in the last entry which obliquely looked at whether we should have road pricing.

But in fact, the very same idea that queues are awful can be used to justify road pricing and can also be used to criticise the NHS, if the allegation that queues are re-developing is true.
queuingtheory2_203.gif

The link between road pricing and NHS waiting times is that queues are often very inefficient. And it is often incredibly cost-effective to invest in ways of preventing queues growing. Let me explain why.

There are three very simple rules about queues.

• 1. They grow longer when the number of people joining at the back of the queue exceeds the rate at which people are being dealt with at the front.

• 2. They grow shorter when the rate at which people are dealt with at the front exceeds the rate at which people join at the back.

• 3. They stay constant when the flow of new arrivals is equal to the flow of people being seen.

The rules explain a pattern you see at the ticket office at my local station. During the first hour of the morning rush, lots of people arrive at the station, and the queue grows longer and longer. The ticket seller can only handle a certain number.

Then, during the second hour, things fall into balance. The queue no longer grows. One person joins at the back at the rate that one person is dealt with at the front.

Finally, in the third hour, hardly anyone arrives to join the queue, so the queue begins to shorten.
head203.jpg

Now, simple as this account is, it has an important implication. During the second hour when the ticket seller is dealing with customers as fast as they are arriving and the queue is in balance, the queue is already long and stays long.

Suppose that in the first hour, the queue grows up to 20 people. (It can be a lot worse than that in my station). That means for the whole of the second hour, there are 20 people waiting. (It鈥檚 not the same people waiting for the whole hour 鈥 but 20 person-hours of waiting are wasted by people standing in the queue.)

It means that if 鈥 in the first hour 鈥 you could just employ one extra ticket seller to cope with just 20 tickets, you would ensure that no queue develops, and 20 person-hours of waiting in the second hour would be saved.

This is a simplified example, but it illustrates the potential disjuncture between costs and benefits in dealing with queues. The key is that when a system is coping in a balanced way 鈥 i.e. when the inflows and outflows of people match 鈥 it is far better that they balance with a short queue than a long one.

So, resources should be invested in those periods when the queue is growing, in order to save the waiting time not just of the people waiting in that period, but all the people who wait in the queue thereafter.

If you allow yourself a short period of imbalance in which a queue develops 鈥 for example to solve a one year deficit crisis in the NHS 鈥 you might be stuck with permanently longer waiting times as a result. All for a one-year benefit in financial results.

It's not just the NHS which might be affected by this. In many real situations, you have a growing queue in the first part of the morning, then a balanced queue for most of the rest of the day, and finally a shrinking queue at the very close of the day.

Clearly, the inflows and the outflows of the queue balance over the whole day, but the total waiting time that has been expended in getting that balance could amount to weeks and weeks of person-time.

If the average queue length for the whole day is 23 people long, the total time wasted amounts to the equivalent of 23 person-days, or one person working for a month. And that queue might easily have been avoided by one extra hour of labour first thing in the morning.

In summary, it鈥檚 very hard to get a solid intuition of the costs and benefits of reducing queue sizes. The relationship between queue length, and queue inflows and outflows appears absurdly simple, but is in fact quite complicated, with some very unpredictable effects.

Queuing theory is in fact, quite a science. It comes up in the discipline of Operations Research, which studies processes, production and organisations using maths, statistics, economics and management science. It鈥檚 a fascinating subject.

I should of course stress that some queues are efficient, in that it would cost more to eradicate them than live with them. But you don鈥檛 need a PhD to know that other queues represent an awfully bad use of customer time.

And finally one comment: in the very competitive supermarket sector, check-out queues are pretty short. A lot of effort has been expended in getting them down. That鈥檚 because in competitive businesses, your customer time matters a great deal.

notes_on_real_life

Queuing conundrum

Here鈥檚 an old economist conundrum about queues.

Suppose there is a water fountain in a park. It鈥檚 a hot day and lots of people want to drink from the fountain. Being awfully British and civilised, they form an orderly queue at the fountain.

Now, if the number of thirsty people strolling past the fountain is large enough, the rate at which people join the queue will exceed the rate at which people satisfy their thirst and leave the queue. So the queue will get longer and longer.

drinking.jpgBut at some point, thirsty people will reason to themselves that the displeasure of waiting in the queue is not worth the pleasure of the drink at the end. They鈥檒l avoid the wait, and the queue will grow no longer.

So far so good. That鈥檚 how life works in many ways.

But this simple account has a devastating implication.

If there are people who are not joining the queue because it鈥檚 not worth it, then the people who do join the queue are probably barely getting any positive benefit out of their drinking fountain experience at all. They enjoy the drink, but for them, it is only just worth the wait. It鈥檚 a close run thing between bothering to drink or not.

In fact, you might as well not have a drinking fountain on the hot day, as no-one can enjoy it without paying a time penalty that more or less wipes out the benefit.

I hope I鈥檝e explained this properly. It鈥檚 a simplified account, and it relies on all the people in the park having a similar taste for drinking and not queuing.

queue.jpgBut it shows that when queuing does the rationing, it does a really bad job.

In the park, if you could get a warden to ban people from queuing, and who instead insisted that only random people could drink, (people whose surname begins with A to K for example), the fountain would give more benefit, (although that benefit would be distributed a little unfairly).

There is another alternative that鈥檚 a little more equitable. If it鈥檚 practical, you can charge people to use the fountain.

Now, those who do pay, have the benefit of drinking without queuing, but they have the cost of paying. So on balance they are better off using the fountain, but probably only just better off. As far as they鈥檙e concerned, we haven鈥檛 improved things much over the queuing situation: we鈥檝e just changed the pain of queuing by the pain in the purse.

The difference is though, that the money they鈥檝e handed over can be of benefit to someone else, or the population at large. There is an upside to the drinkers鈥 displeasure, unlike in the case where the queue does the rationing.

Or to put it another way: when you queue 鈥 I get no benefit from your pain. When you pay, I probably do.

Now that is a pretty good argument against the use of rationing by queues.

It may not be a good argument for road pricing, but it does explain why economists tend to think of the price mechanism as a better method of rationing things than congestion.

vital_statistics

Happy talk

The latest Consensus Forecasts have landed on my desk.

You might remember from a previous entry that Consensus Forecasts is a simple document that compiles all the reputable forecasts that are out there 鈥 and ingeniously takes the average of them! I think of it as a very useful compendium of the general economic view of where the economy is going.

(As it happens, I also think that economic forecasts are of limited value as the periods that are worth forecasting - when the economy turns up or down - tend to be the periods that are most unpredictable.)

But that all being said, short-term forecasts have a value and Consensus Forecasts is the best way of seeing where we are. The interesting feature this month is that the forecasters seem to have been upping their dose of happy pills since last month.

The UK is now expected to grow 2.6% this year, not the 2.5% a month ago. The Eurozone is expected to grow 2.1%, not 2.0. But most striking, the US is now expected to grow at 2.7% this year, not the 2.4 previously reported.

In all three economies, the forecast growth of personal consumption has been raised. The odd thing about the change is that this was the year that the US and the rest of us began to converge, as the Eurozone grew faster, and the US slowed down.

Now, it seems, economists are postponing that convergence. It seems they think the golden scenario prevalent over the last few years has another year to run, and the US can continue to outpace everybody else.

Given the momentum in the world economy at the moment, economists are probably right. But at some stage, 诲辞别蝉苍鈥檛 it seem like the US has to slow down?

vital_statistics

Good news on inflation

Today's from the Office for National Statistics suggests that last month's surge in inflation was a blip. We are now back to where we were two months ago.

If you want to read my short missive on where this leaves us, it's over on the business website .

But this month's fall in inflation after last month's rise, raises an interesting question. Do we tend to overreact to monthly data?

There is necessarily always a lot of "noise" in these monthly statistics from the ONS. They go up, they go down. And they go up again.

Indeed, in my early years as an economics journalist, after reporting the inflation figures for the 28th time, I asked myself how I would keep my interest up when I got to 228th time. The answer is that one doesn't need to be too interested in monthly movements at all. There's little point in slavishly following every twist and turn in the figures. Reading meaning into every data release is a distraction from the real goal, which is about identifying the underlying story of the economy.

The monthly data may come in thick and fast, and we might react to it rapidly. But if we react sensibly, the monthly data should only affect our view of the underlying story of the economy fairly slowly.

That being said, we did cover the jump in inflation , and led most of our news bulletins with it. I like to think that was not because we overreacted to the data; it was because until then, we had not given enough prominence to the real underlying story that inflationary pressure had picked up. The figures that day made us realise we had a bit of catching up to do.

Finally, a good question for today: should we give much prominence to the fall in the inflation rate this month? If we give you the bad news with lurid headlines in January, shouldn't we give equal space to the good news in February?

Again, I think not. The underlying story last month stands, even if it is not quite as urgent or extreme is it seemed. The inflationary pressure has not entirely evaporated.

evans_reading_list

Irrationality

Evan's reading list

Irrationality by .

This is a classic book, and it鈥檚 great to see it is being re-published this month, nine years after the author himself died.

The book simply documents some of the common quirks of human behaviour that can be described as 鈥渋rrational鈥.

It鈥檚 full of short examples of psychological tests and their implications, and it is an especially good read for economists who tend to assume that people behave according to some simple precepts of rationality.

So here鈥檚 an interesting but familiar example: the sunk cost error (outlined on page 71).

You visit the theatre but have forgotten your 拢15 ticket. The box office refuses to replace your ticket, but as the theatre isn鈥檛 full, offers to sell you another one for 拢15. Should you buy it?

The rational answer is probably yes. If the play was worth 拢15 before you visited the theatre, it is surely still worth 拢15 and so if the choice is whether you watch the play for a 拢15 sacrifice, consistency demands you should choose to watch the play and thus buy the second ticket.

You should treat the forgotten ticket as a sunk cost - it鈥檚 gone whatever action you take now, and so is irrelevant to the choice of how much you pay and whether you see the play.

But - as has commonly been observed - people don鈥檛 always follow this logic. They reason that the play is costing them 拢30, the price of two tickets, and if it isn鈥檛 worth that much, they choose not to buy the second ticket.

As the Sutherland book notes, this kind of mistaken thinking has far more significant consequences than missed theatre plays. Generals persist in following failing strategies, investors hang on to falling shares, waiting to recoup their losses.

Sutherland鈥檚 book is packed with many, many different types of irrationality, and by alerting us to common forms of misguided reasoning, it arms with some protection against our own predictable errors.

But if the book persuasively demonstrates that we do make systematic mistakes, does it debunk the whole subject of economics, a science that seems to rely on rational economic man?

The answer of course is no. The point of the assumption of rationality in economics is not that it is accurate. Of course not. The reason we make the assumption is that it makes life easier鈥 it simplifies our understanding of the choices we make.

The assumption of rationality in economics is like the map of the London Underground: it strips out the complexity of the system, to illuminate the essence of it.

Of course, in practice we err, but it鈥檚 still useful to know what we would do if we were rational.

And then we can read books like Stuart Sutherland鈥檚 to understand some of the ways life is in truth more complicated. Just we look at proper street maps once we鈥檝e navigated our way round the Tube system.

Irrationality, Stuart Sutherland.
Pinter&Martin 拢8.99

notes_on_real_life

Compensating Bernard Matthews

Should the taxpayer compensate Bernard Matthews for the culling of his diseased turkeys?

This is part two of a two-part mini-series. Part one below looks at whether the taxpayer should compensate people who have lost their company pensions through no fault of their own.

But what about the turkeys?

One of the surprising features of the debate over the bird flu-infected turkey stock this week, is that few people seem to have questioned the idea that the government should offer compensation.

turkeycull_203ap.jpgI haven鈥檛 even heard vegetarians grumble that their tax-pounds might be spent on supporting an industry which they would rather didn鈥檛 exist.

Well, I鈥檓 not going to take a view on whether that is the right thing to do or not, but let me at least raise the question as no one else seems to have done so.

As I understand it, the government offers compensation for the healthy birds culled in the interests of preventing further spread of the virus.

The principle was followed during foot and mouth, where you might remember farmers were compensated for the farm stock they lost, while other suffering businesses like hotels received nothing.

Is this fair?

The first thing to note is that Bernard Matthews is in business. He is more or less obliged to cover the costs of turkey production, and in return he enjoys most of the profits he earns.

(There are little deviations from this simple picture - things like taxes and farm subsidies, and his use of roads and educated workers to make it happen, but for sake of argument, let鈥檚 assume he covers his costs and keeps his profits.)

Now if Mr Matthews loses some turkeys, he must surely expect to bear that cost like he does most others. End of story.

And under the British government arrangements, Mr Matthews does have to bear the cost of the diseased turkeys who die on his watch.

So why single out the cost of the healthy birds that are culled for special treatment and give Mr Matthews compensation for those?

After all, is it not just a normal professional hazard in the apparently lucrative business of turkey farming, that sometimes there are culls necessary to prevent diseases?

Mr Matthews stands to gain by other farmers culling their stock sometimes, as they stand to gain when his flock is culled. It seems like a private matter for the farmers to sort out between themselves, not one for the taxpayer.

Now when you look at the total support for farmers through BSE and foot and mouth, hazards of this kind seem a) pretty expensive and b) not infrequent.

It might be that with all this compensation, we are using taxpayers鈥 money to make the meat industry bigger and more viable than it would otherwise be.

If farmers believe that they will be compensated for much of the inevitable cost arising from occasional disease outbreaks, they will allow themselves to select too many activities that are prone to disease. It鈥檚 a form of moral hazard.

If farmers had had to bear the costs of their own problems, we would have fewer meat producers, marginally more expensive meat, and marginally lower taxes.

As it happens, the government seems to accept this argument and is apparently trying to promote some kind of cost-sharing for this insurance scheme. It wants the industry to foot the bill to some degree.

But I鈥檝e struggled to think of a good economic reason for the taxpayer to offer any support at all.

In the logic of economics, all the taxpayer needs to do is help the farmers organise their own arrangements.

Is that argument right?

It can鈥檛 be.

So what is the economic case for helping farmers in these situations, other than the mere fact we like animals and we want to help them?

notes_on_real_life

Who deserves compensation?

Who should the taxpayer help? Which innocent victims of mis-fortune should we compensate?

In part two of this mini-series, I鈥檒l talk about Bernard Matthews - the wealthy turkey farmer whose birds have been culled and who stands to be compensated (reported in one newspaper to be at least 拢2.5 million). But before that, here in part one, let me talk about pensioners.

I鈥檝e been outside Parliament today, reporting on the predicament of a group of demonstrators.

They were there, because they had saved in their company pension schemes, had believed (partly on the basis of falsely-reassuring government literature) that their pension was 鈥済uaranteed鈥, and had found that when their company went insolvent, they were left with a fraction of what they thought they were going to get.

There has been a small amount of compensation for them, but nothing like enough for them to live life as they had reasonably expected to live it.

A legal obligation?

They want government to do more 鈥 and argue that it has a duty to help, as maladministration was to blame for their position. In particular, as government leaflets had mis-advised them on the safety of their pension, and as the Parliamentary Ombudsman has ruled that they should get help, they argue the government has a legal obligation to sort the problem out.

I鈥檓 not sure.

Suppose the government issued a leaflet telling us 鈥淚t鈥檚 always safer to wear a seat-belt鈥, when in fact very occasionally wearing a seat belt causes injury. Would we expect the government to 鈥渃ompensate鈥 the small number of victims for whom the seat-belt was a problem? Probably not.

It might help them, but not because the road safety information was flawed.

A moral obligation?

But even if one does dismiss the idea there鈥檚 a legal case for support 鈥 and it鈥檚 the high court judges who will ultimately decide the merits on that score 鈥 you can still make a case for more government help anyway.

After all, wouldn鈥檛 we want that help if the same misfortune befell the rest of us? Would taxpayers really resent spending money on a pensions bail-out?

Indeed, to reinforce this view, one can even view the state as a kind of giant insurance policy to help people out in the event of mis-fortunes that were not easily insurable privately. That鈥檚 a lot of what the state does. Indeed, it鈥檚 why we have a benefits system.

Why not extend that to some ad hoc help for people suffering such a drop in expected income?

Moral hazard

The counter-argument says that if we go round helping people too much, then they become careless about looking after themselves. In other words, you can screw up people鈥檚 incentives, by giving them too much insurance.

In economics jargon, the problem is called moral hazard. People who are helped in the event of mis-fortune take less care to prevent themselves being unfortunate. It鈥檚 a ubiquitous phenomenon.

    People (like me) ride motorbikes in the knowledge that our hospital bills will be paid by someone else.
    Teenagers allow themselves to miss the last train home, knowing that mum or dad can pick them up.
    Americans build coastal cities below sea-level in the knowledge that the government will help them when the flood protection breaks. (er, this may not be such a good example.. ED).

You get the idea.

Moral hazard is a a real issue in the design of public policy.

But it pretty clearly 诲辞别蝉苍鈥檛 arise in the case of the unlucky pensioners - who did after all, not behave recklessly in saving for themselves. They behaved responsibly.

And that鈥檚 why it is important that in this case that government leaflets told them they were doing the right thing.

It鈥檚 not that everything said in a leaflet immediately imposes on the taxpayer an obligation to underwrite the full losses incurred from a mistake. It鈥檚 that the leaflet proves the victims were not to be blamed in any way at all. The leaflets prove they were doing the 鈥渞ight thing鈥.

It鈥檚 thus hard to argue that bailing them out would discourage people from being prudent in future.

And so, what is normally an important argument against government reaching out and helping people all over the place, does not appear to apply in this case.

small_change

Odds on a rate rise

The close vote at the last meeting implies the is not panicking, and as rates affect inflation a year or two years ahead there may be no need to rush to a second rise now.

However, there's a significant chance rates will go up again, as the data has been surprisingly strong in the last month.. rising pay settlements, strong retail figures, the economy still growing at an annual equivalent rate of over 3%... why would you wait?

Overall, I'd say there's a one-third chance rates will rise again this month.

notes_on_real_life

Welcome to Evanomics

Does the world really need yet another blog?

Good question.

The cost of creating a blog is relatively small, so there are already a lot of blogs out there.

Indeed, there are arguably too many for the good of the blog-economy, because the true cost of a new blog is not the time spent by the blogger. It's the time devoted by bloggees ascertaining that it is right for them.

By my experience it takes at least 20 seconds to discover that something is not worth reading, by which time you have wasted 20 seconds. (If you want to experiment with this claim, try looking at this randomly selected account of someone : )

So given all this, does the world really need a new economics blog?

Well: no but yeah but yeah but no, as Vicky Pollard would undoubtedly write if she had a blog of her own.

For one thing, Evanomics is not quite a blog. I'm not intending to make entries every day, or to update you with my views on every twist and turn in the financial pages.

But Evanomics is designed to have some blog-like characteristics. A place where you'll find a variety of material, frequently updated, and with plenty of opportunity to comment or contribute.

Secondly, Evanomics is not quite the same as economics. At least, not quite the same as the conventional stuff you find in the business pages of the newspapers. It is not a running macro-economic commentary.

Instead, this aims to be a location for economic insights. The focus is on economics as a way of thinking about issues, and as a tool kit of useful concepts and statistical techniques that can say a lot about the world. If you've read the book Freakonomics, you'll know what I mean.

So in Evanomics you'll find a mix: bits of personal finance, some statistics, and some academic research findings. You'll find some questions and issues for discussion and lots of brief personal thoughts on the news too. You'll find some short notes, and some long articles. And you'll find things by me, and hopefully, by some others.

Ideally, teachers and students can find some useful stuff here as well.

We'll see how it evolves.

And of course, I should stress there will be some of the familiar macro-economics we all know and love . Not the minute-by-minute reaction to data that you get on the city wire services, but the underlying story of the economy as it affects the public.

Or to put it another way, I'll always be happy to write about house prices when the Evanomics hit rate goes too low.

notes_on_real_life

How to choose wine

I'm not very good at selecting wines.

wine.jpgFrankly, there are far too many confusing labels to choose from, and my taste buds are not sophisticated enough for me to remember particular flavours and associate them with particular vineyards.

To make it even worse, most of my friends seem to be strangely knowledgeable about wine. They gaze at the bottles on the restaurant wine list as though it means something, and then make a careful choice, usually after a brief consultation.. "are you all right with a recent Bordeaux?"

However, despite my ignorance, I have a technique for buying wine that seems to me as effective as that employed by my mates. I use the power of economics to help me.

All I do is buy on the basis of price and make the assumption that there is a more or less direct link between the quality of the wine and the price I pay. Quite simply, I assume I'll get what I pay for.

As the price of a bottle of wine is normally well-marked and easy to comprehend, comparison between wines of all grape varieties and vintages is easy.

So all I have to do on any occasion is decide how much I want to splash out, which in my book is more or less the same as asking how nice a wine I want to pay for and consume that day.

If I choose to pay 拢7.95 for a bottle, it'll be better than if I choose to pay 拢5.95, and not as special as if I pay 拢9.95. If there are several wines at my chosen price, then it probably doesn't much matter which one I buy because they'll be about the same quality.

It's a rather obvious technique I know. Indeed, the old adage (passed down to me by my father) that "you always should buy the second least expensive bottle available", is a crude application of the same idea.

Now the big and obvious question is, does my wine-buying technique succeed in selecting wines efficiently?

I think it probably does, but only because I believe two basic assumptions. If you drop the assumptions, the economists' way of selecting wine won't work.

The first assumption is that most of us have a very similar taste in wine.

If we don't have similar tastes - if some like it smooth, some like it sharp, some like it fruity others like it musty - then price will not be a guide to quality, as the word "quality" ceases to have a shared meaning at all.

That's the case with music, for example, where we very obviously have very different tastes. And it is no surprise that if you look at the market for music downloads, the prices charged per track are almost uniform, and are useless in guiding us to what to buy. No-one says "This track must be ok, because it costs 79p and you get what you pay for."

As it happens, when it comes to wine, my experience is that we do generally have fairly similar tastes. Sure, we sometimes want white, sometimes red; sometimes sweet, sometimes dry. And sure there are some people who have their own little idiosyncracies.

But beyond some crude and obvious categories, I'm amazed at how little disagreement there is among ordinary folk, at the wines they drink. Even the experts have a measure of agreement about what is good and what is not, and that is why they can be snobbish about other people's tastes.

However, even accepting we all share the same taste, if you want to believe in my technique for buying wine, you also have to believe a second assumption: that the wine market is efficient.

What I mean by that is, that you don't find bargains and you don't find rip-offs. Loosely speaking, a market is efficient if the buyers are so effective at boycotting over-priced products they don't sell until their price falls into line. And the sellers find they quickly run out of stock if they under-price an item, until they raise the price into line.

So on any given day, all wines on the shelf are priced in line with quality.

Is the wine market efficient in this way?

Probably not exactly - there are some undoubted bargains, and some rip-offs. But as a rough approximation, it is reasonable to assume that if a wine is priced above comparable quality bottles, it will fail to sell and will thus fall in price. The people setting the prices kind of know where their wine fits into the great scheme of things, and price accordingly.

In addition, the professional wine-buyers - in the shops and restaurants - are expert at understanding wines, and are careful not to pay prices that deviate far from the going rate.

If the two assumptions are right, then my method of wine-buying works fine. And even if the assumptions are not perfect and the theory is flawed - believe me, so are the wine-selecting skills of my friends.

So now, you've read the theory. First, ask yourself whether you agree with me that price is as good a guide to buying wine as your wine-afficionado friends. And then ask yourself whether you think the following markets are efficient or not:

The market for football players.

The market for company shares.

I'd be interested to hear your views.

vital_statistics

Gulp!

There's more evidence that pay settlements are edging up in response to higher inflation. The pay research group, Incomes Data Services, says the median settlement for pay rises in the last three months has been 3.5%, which is half a point higher than the previous published figure.

It was a month ago that the first trickle of data suggested an upward trend in pay rises. But with 64 pay deals now effective this month, the evidence is more than anecdotal.

If the Bank of England was hoping that higher inflation would be dismissed by pay-negotiators as nothing more than a blip, the news is discouraging. Especially, as many of the rises included in this latest survey were settled before the headline inflation rate hit 4.4%.

If pay rises too fast, it obviously threatens to push inflation yet higher.

The good news is that the Bank can always cure the problem.

The bad news is they only have one remedy, and that's to use ever higher interest rates to reduce borrowing and spending, to slow the economy down and to make jobs more insecure. That'll make us worry less about how much extra we're getting this year!

This is a real test of the Bank's credibility. If we all believe the Bank really will crack the whip to hold inflation down, then the Bank may not need to hit us at all, as we'll "behave" in the knowledge that inflation is going to be low again soon.

But if the Bank lacks credibility, and we don't really believe their threats, then we're probably in for a good whipping to knock us into line.

The Bank has always thought it has credibility as polls have long suggested that people believe inflation will be about on target.

But the Bank has not faced a test of its credibility as severe as this one, since gaining independence ten years ago.

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Europe: A basket case?

I'm sure you don't expect me to answer this question. We are the 大象传媒 after all, and take a view on these things. But the OECD's annual report on the Euro area has landed on my desk with some reasonable views. So let me give you my three point executive summary of the full executive summary of the actual OECD report.

First, the Eurozone recovery seems to be underway. After slow growth for ages, and after predicting recovery for about six years, it does at last seem that growth is returning. This is a good thing, as the world needs someone to be doing some shopping so the fatigued American consumer can take a rest.

Second, the euro gets the blame for everything that goes wrong in Europe, which is misguided as in fact many of problems are longer term and structural rather than currency related. They'll take a lot more to cure than merely tinkering with monetary policy.

Third, fiscal policy is a bit ragged in the eurozone. Governments have not taken tough decisions to reduce borrowing and debt, and they had better start doing so because the changing demographics of the continent mean that things are set to get worse as pension and health systems become more expensive.

By the way, these points are not gospel, just because they come from the OECD. But the organisation is staffed by some very sensible and reasonable-minded economists.

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