A Level Economics 83: Costs of Inflation

Inflation, the sustained increase in the general price level of goods and services over time, can have various costs that impact different aspects of the economy. These costs include redistributive effects, macroeconomic effects, and efficiency effects.

1. Redistributive Effects: Inflation can lead to redistributive effects, meaning it redistributes wealth and income among different groups in the economy. Those on fixed incomes, such as retirees and low-income individuals, may suffer the most during periods of high inflation. Their purchasing power decreases as the prices of goods and services rise faster than their income. On the other hand, borrowers may benefit from inflation, as the value of their debts erodes over time. This income redistribution can lead to social and economic inequalities.

2. Macroeconomic Effects: High and unpredictable inflation can create macroeconomic instability and uncertainty, impacting various economic objectives:

• Price Stability: One of the main macroeconomic objectives is maintaining price stability. High inflation erodes the value of money, making it difficult for individuals and businesses to plan and invest, hindering overall economic stability.
• Economic Growth: High inflation can hinder economic growth. Uncertainty and erosion of purchasing power discourage investment, leading to reduced economic output and lower GDP growth rates.
• Employment: Persistent high inflation can lead to reduced business confidence and investment, resulting in lower job creation and labor demand. This can impact the macroeconomic objective of achieving full employment.
• External Balance: Inflation affects a country's external balance by impacting export competitiveness and import prices. High inflation can lead to a deteriorating trade balance, hindering the achievement of external equilibrium.
• Financial Stability: Inflation can impact financial stability by influencing real interest rates, asset prices, and overall confidence in the financial system. Maintaining stable inflation contributes to overall financial stability.

3. Efficiency Effects: Inflation can lead to efficiency effects, causing distortions in resource allocation and decision-making:

• Distorted Relative Prices: High inflation can distort relative prices, making it challenging for businesses and individuals to make optimal economic decisions. Individuals may be encouraged to spend rather than save, leading to suboptimal allocation of resources.
• Shoe-Leather Costs: High inflation increases transaction costs as individuals and businesses make more frequent trips to banks and financial institutions to protect their wealth from losing value. This results in higher administrative costs and reduced efficiency.
• Menu Costs: Inflation can impose menu costs on businesses, which refers to the costs associated with changing prices. Frequent price changes can be time-consuming and costly for businesses, reducing their efficiency.

Evaluation of Inflation Costs:

• Moderate Inflation: Moderate and stable inflation can be beneficial for an economy as it can signal a growing economy and encourage investment. Additionally, if inflation is expected and well-anchored, it may not have severe redistributive effects, and businesses can better plan for the future.
• Hyperinflation: Extremely high inflation, such as hyperinflation, can have catastrophic consequences for an economy, leading to a loss of confidence in the currency and a breakdown of economic activity. In such cases, the costs of inflation far outweigh any perceived benefits.
• Inflation Targeting: Many central banks adopt inflation targeting as a monetary policy framework. They aim to keep inflation within a specific target range. By doing so, they seek to balance the costs and benefits of inflation, ensuring price stability while promoting sustainable economic growth.

Conclusion:

The costs of inflation are multifaceted, impacting different aspects of the economy. High and unpredictable inflation can lead to redistributive effects, hinder macroeconomic stability, and cause distortions in resource allocation and decision-making. Policymakers must carefully manage inflation and inflation expectations to achieve their macroeconomic objectives effectively. Maintaining price stability, sustainable economic growth, and financial stability are essential considerations when evaluating the costs of inflation and formulating appropriate economic policies.

A Level Economics 15: Demand Curve

 Why do demand curves normally slope downward from left to right.

The downward slope of demand curves, from left to right, is primarily driven by two key effects: the income effect and the substitution effect. Together, these effects help explain why consumers tend to buy more of a good as its price decreases.

1. Income Effect: The income effect describes how changes in price impact consumers' purchasing power. When the price of a good decreases, consumers can afford to purchase the same quantity of the good with less income. As a result, their real income increases, allowing them to have more purchasing power for other goods and services. This leads to an increase in the quantity demanded of the lower-priced good. Conversely, when the price of a good increases, consumers may not be able to afford the same quantity with their existing income, resulting in a decrease in the quantity demanded.

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3. Substitution Effect: The substitution effect reflects consumers' tendency to switch to alternative goods when there is a change in relative prices. When the price of a good falls, it becomes relatively cheaper compared to other goods. Consumers perceive it as a better value and tend to substitute other goods with the lower-priced good. As a result, they increase their quantity demanded of the lower-priced good. Conversely, when the price of a good rises, consumers may switch to alternative goods that are now relatively cheaper, leading to a decrease in the quantity demanded of the higher-priced good.

Combining the income effect and the substitution effect, we observe the overall downward slope of the demand curve. As the price of a good decreases, consumers experience a higher real income and a greater incentive to substitute other goods with the lower-priced good. Both effects contribute to an increase in the quantity demanded. Conversely, as the price rises, the income effect reduces consumers' purchasing power, while the substitution effect encourages them to seek alternatives, resulting in a decrease in the quantity demanded.

It is worth noting that the downward slope of the demand curve assumes ceteris paribus, meaning other factors influencing demand, such as income and preferences, remain constant. Changes in these factors can shift the entire demand curve, altering the quantity demanded at any given price. However, the income and substitution effects provide a foundational understanding of why demand curves typically slope downward from left to right.

A Level Economics Essay 5: Inflation

"Inflation likely to go above target in the UK" - Explain the main costs of inflation to an economy.

Inflation refers to the general increase in prices of goods and services in an economy over time. When inflation goes above the target level set by the government in the UK, it can have several costs or negative effects on the economy. Here's a simplified explanation of the main costs of inflation, along with the definitions and explanations of different types of inflation:

1. Demand-Pull Inflation: Demand-pull inflation occurs when aggregate demand in an economy outpaces the available supply of goods and services. It is typically caused by increased consumer spending, investment, or government expenditures that exceed the economy's production capacity. As demand rises, businesses respond by increasing prices to match the higher level of demand. Examples include situations where excessive government spending or robust consumer confidence leads to an overheating economy.

2. Cost-Push Inflation: Cost-push inflation arises when there is an increase in production costs that leads to higher prices for goods and services. It is often driven by factors such as rising wages, increased costs of raw materials or energy, or changes in government regulations. When businesses face higher costs, they pass them on to consumers by raising prices. This type of inflation can be triggered by events like oil price shocks or wage hikes that exceed productivity growth.

3. Built-in Inflation: Built-in inflation, also known as embedded inflation, refers to the inflationary expectations that become ingrained in the behavior of individuals and businesses. It occurs when people anticipate future inflation and factor it into their decisions about wages and prices. For instance, workers may negotiate higher wage increases to compensate for expected inflation, and businesses may preemptively raise prices to cover anticipated higher costs. This self-reinforcing cycle can sustain inflation even without any initial external factors driving it.

4. Imported Inflation: Imported inflation occurs when a country experiences rising prices for goods and services due to increases in the cost of imported goods. It can result from factors such as changes in exchange rates, higher international commodity prices, or trade restrictions that limit competition. When the cost of imported goods rises, businesses may pass on the increased costs to consumers, leading to inflationary pressures within the domestic economy.

5. Hyperinflation: Hyperinflation is an extreme form of inflation characterized by an extraordinarily rapid and typically accelerating increase in prices. It erodes the value of money at an exceptionally high rate, leading to a loss of confidence in the currency. Hyperinflation is often caused by severe economic imbalances, such as excessive money supply growth, loss of productive capacity, or political instability. Historical examples include hyperinflation in Zimbabwe in the late 2000s and the Weimar Republic in Germany in the 1920s.

The main costs of inflation to an economy include:

1. Reduced Purchasing Power: Inflation erodes the purchasing power of money, as prices rise and each unit of currency buys fewer goods and services. This reduces people's ability to afford the same quantity of goods and services as before, particularly impacting those on fixed incomes or with limited financial resources.

2. Uncertainty and Planning Challenges: High inflation creates uncertainty, making it difficult for individuals and businesses to plan for the future. Volatile price levels discourage long-term investments and economic growth as businesses become hesitant to make commitments amid unpredictable inflationary pressures.

3. Reduced Real Returns on Savings: Inflation can erode the real value of savings, particularly if interest rates on savings accounts do not keep up with inflation. As a result, the purchasing power of savings diminishes over time, impacting individuals' ability to achieve financial goals or provide for retirement.

4. Distorted Price Signals: Inflation can distort price signals in the economy, making it harder for businesses and consumers to make informed decisions. Rapid price increases make it challenging to distinguish between changes in relative prices (the price of one good compared to another) and changes caused by overall inflation. This can lead to misallocations of resources and inefficient production decisions.

5. Wage-Price Spiral: High inflation can trigger a wage-price spiral, where rising prices lead to demands for higher wages, and higher wages, in turn, drive up prices further. This cycle can become self-reinforcing, resulting in continuous inflation and reduced purchasing power for individuals.

6. Redistribution of Income and Wealth: Inflation can have distributional effects, redistributing income and wealth within society. Those on fixed incomes or with limited bargaining power may struggle to keep up with rising prices, while those with assets such as real estate or stocks may benefit from the inflationary environment. This can exacerbate income inequality and create social and economic disparities.

A relevant economic diagram to illustrate the costs of inflation is the Phillips curve, which depicts the relationship between inflation and unemployment. It demonstrates how higher inflation can lead to reduced purchasing power and increased uncertainty, which can impact economic growth and employment levels.

It's important to note that different types of inflation can interact with and influence each other. Understanding these different types of inflation and their costs helps policymakers and economists analyze and respond to inflationary pressures in the economy effectively.

One group of people can’t substitute their way out of inflation

Tim Harford in The FT

In a laboratory in College Station, Texas, in 1990, six lab rats pressed levers and lapped at tubes as root beer and tonic water were released. They were participating in the quest for an elusive quarry: the Giffen good. 

Robert Giffen was born in Lanarkshire in 1837, the year of Queen Victoria’s accession. He would become by turns assistant editor at The Economist, chief statistician at the Board of Trade, President of the Royal Statistical Society and co‑founder of the Royal Economic Society. An eminent Victorian indeed, even if one biographer sniffed, “He was one of those figures . . . whose not inconsiderable power and prestige appears to be disproportionate to their actual contribution to economic science.” Ouch. 

Yet Giffen’s name is known to every economics student. This is not because of the research he published, but because of a thought experiment which reached his contemporary Alfred Marshall, who put it in his inescapable textbook Principles of Economics. The idea is that certain goods might be consumed more when their prices rise, because the increased cost backs consumers into a corner. 

Here’s how I imagined it, as an impoverished student. My staple diet was jacket potatoes with cheese or tuna mayo, bought from a nearby kebab van. Imagine that the price of potatoes rose. Ordinarily, I’d be expected to buy fewer potatoes and more of something else. 

The problem is everything else was still more expensive than potatoes. With my budget squeezed, I couldn’t afford the luxury of the cheese and tuna topping. The missing calories would come from . . . more potatoes. 

In this example, potatoes are a “Giffen good”. Potatoes were a major part of my diet; when their price rose, I effectively became poorer and switched towards the cheapest foodstuff. The cheapest foodstuff was potatoes. 

Of course, this did not actually happen. I was never that destitute and never such a potatophage. For about a century, economists looked for real examples of Giffen goods and did not find them until 1990, when economists Raymond Battalio, John Kagel and Carl Kogut demonstrated Giffen behaviour in lab rats. (The lab rats, I am assured, were well looked after by Battalio’s neighbour, a vet.) 

The researchers offered the rats quinine-flavoured water, which the rats disliked, and root beer, which they loved. The effective prices of these drinks were changed by adjusting the volume of drink released each time the rat pressed a lever. Root beer was “expensive” because it was dispensed in smaller portions. And sure enough, it proved possible to provoke Giffen behaviour: when the cheaper quinine water became less cheap, rats still needed a drink and they cut back on the luxury of root beer, drinking more quinine water. 

So are Giffen goods little more than a theoretical curiosity? Not quite. Eventually, the economists Robert Jensen, Nolan Miller and Sangui Wang used both public health data and a field experiment to demonstrate that in the poorest parts of Hunan, China, rice was a Giffen good. As Jensen wrote in 2008, “It’s funny that people have looked in crazy places for Giffen behaviour . . . and it turns out that it could be found in the most widely consumed food in the most populous nation in the history of humanity.” 

Giffen goods also teach us something important about the impact of price rises on the poorest people. One of the most basic lessons of economics is that people respond to price hikes by finding cheaper options. If apples are expensive this week, buy oranges; when the price of oranges rises and the price of apples falls, switch back to apples again. Or just look for the bargain-basement option. If a West End show is too expensive, go to the cinema. If the cinema costs too much, watch television. You don’t have to pay higher prices; you can make do with a cheaper alternative. 

Inflation is always a little lower than it seems once you allow for such substitutions. But one group of people can’t play that game: those who are already relying on the cheapest staples have nowhere to run from price rises. 

So it wasn’t quinine water in a Texas laboratory, or rice in Hunan, that made me think recently of Giffen goods. It was the alarming rise in the price of a cheese salad sandwich. The latest data from the UK show that sliced white bread has risen in price by 29 per cent over the past 12 months, with tomatoes up 16 per cent, butter up 30 per cent, cheddar cheese up 42 per cent and cucumber 55 per cent more expensive. (Headline inflation, meanwhile, is just over 10 per cent.) 

I am not claiming that cheddar cheese is essential to life; it just seems that way. Nor is it a Giffen good. But basic foodstuffs are Giffen-adjacent. They are the last resort of people who cannot afford fancier stuff. 

Food poverty campaigners — most prominently Jack Monroe — have argued that the price of these basics has risen much faster than the general rate of inflation. As I’ve written before, it’s hard to be sure if that’s true. The Office for National Statistics tends to focus on the most popular products, not the cheapest bargains, and so the relevant data is patchy and experimental. 

Whether or not inflation really is higher for the poorest households, what is not in doubt is that inflation hits them hardest. That is both because they are more vulnerable, and because they have less room for manoeuvre as they ponder their options in the supermarket aisle. The Bank of England’s chief economist, Huw Pill, recently said that, “We’re all worse off.” Maybe so. But some of us are worse off than others.

Management lessons from the next World Cup winners

On December 18th the winners of the football World Cup in Qatar will lift the famous golden trophy. Several rituals will then unfold. The final entry will be made on fans’ wall charts. Pundits will share their lists of players of the tournament. In the victors’ home country, cars will clog the streets and drivers will lean on their horns. And in the days that follow, leadership coaches will post drivel about the secrets to be learned from the successful manager. 

But why wait till the end of the World Cup to find out how Hansi Flick of Germany, Didier Deschamps of France or whoever actually wins did it? Why even hang around for the start of the tournament on November 20th? Before a whistle has been blown and a ball has been kicked, here is your cut-out-and-keep guide to what bosses everywhere can learn from the winning manager (wm). All you have to do is delete anything that doesn’t quite fit the narrative.

Team spirit. The wm instilled a tight bond among the team by showing them unwavering support/creating an atmosphere of fear. He was known for putting his arms around the shoulders/hands around the necks of underperforming players. His oxytocin-releasing bearhugs/scarlet-faced rages ensured that a group of elite performers relaxed/did not relax. “He showed us love/utter contempt and we all responded to that,” said a man in shorts from the winning team. The power of empathy/barely suppressed terror will surely not be lost on managers in the workplace.

Data. The wm obsessively immerses himself in data/does not know how to turn on a computer. In the build-up to each game he took each player through a detailed analysis of his opposite number/encouraged everyone to play table tennis. After the matches were over he watched videos of each game/Netflix. “He planned everything in minute detail/told us to just go out there and have fun,” said another happy man in shorts. In the office, as on the pitch, rigorous analysis/gut instinct is often the difference between success and failure.

Purpose. The choice of Qatar as a venue for the World Cup was mired in controversy from the start; questions have swirled about corruption, human rights and worker safety. The wm turned these concerns to his advantage/seemed totally unaware of them. He made it clear that the team were ambassadors for the sport/only there to win. His decision to always wear a rainbow-coloured wristband/refuse to answer any questions about the host country was incredibly astute. “He gave us a much-needed sense of purpose,” recalled one of his players. “Only an absolute cretin would have wondered what we were in Qatar to do,” said another.

Stars. The wm built his whole team around/eschewed the very idea of a star player. “A superstar like Neymar/Harry Maguire/someone else has to be given freedom to express himself/realise that the team comes first,” he said afterwards. Every organisation will have its own outstanding performers. The clear message from this World Cup is that they should sometimes/never be given special treatment.

There is an alternative way of thinking about the lessons for corporate managers from an event like the World Cup: there are none. First, the jobs are wholly different. Football managers don’t need to change strategy because the market is shifting (“we will use our excellence in the field of spherical objects to diversify into basketball”). Corporate bosses do not tend to get customer feedback from people making hand gestures in a crowd. Nor do their career prospects usually rely on the split-second decision-making of a bunch of talented 20-somethings.

Second, all leadership writing depends on the dubious premise that an entity was successful because a person was in charge, rather than while they were in charge. The “halo effect” is the name given to the tendency for a positive impression in one area to lead to a positive impression in another. But just as a high-flying firm does not necessarily signal a world-beating ceo, so a World Cup winners’ medal does not mean the manager was a genius.

Just one, Vittorio Pozzo of Italy, has ever successfully defended the World Cup title; only eight countries have ever lifted the trophy in the history of the tournament. Whoever ends up celebrating on December 18th, the pool of people available for selection, the role of luck and the quality of the competition will have mattered at least as much as the person at the top. That is one management lesson worth learning.

Never mind that the tournament hasn’t started yet writes Bartleby in The Economist

BREXIT - The Great Taboo in British Politics

George Parker and Chris Giles in The FT

As he battled to save his job this month, Boris Johnson warned his MPs not get into “some hellish, Groundhog Day debate about the merits of belonging to the single market”. Brexit, he warned his mutinous party in a sweaty House of Commons meeting room, was settled. 

Later that day, Johnson limped to victory in a confidence vote, but only after 41 per cent of his MPs had voted to oust him from Downing Street. He is safe for now but the defining project of his premiership — Brexit — still hangs like a cloud over Britain’s fragile economy. 

Johnson may not want his party “relitigating” Brexit but neither does Sir Keir Starmer, leader of the opposition Labour party, around a third of whose supporters voted Leave in the 2016 referendum. Nor does Andrew Bailey, governor of the Bank of England. Rishi Sunak, the chancellor, would rather talk about something else. Brexit has become the great British taboo. 

But as the sixth anniversary of the UK’s vote to leave the EU approaches, economists are starting to quantify the damage caused by the erection of trade barriers with its biggest market, separating the “Brexit effect” from the damage caused by the Covid-19 pandemic. They conclude that the damage is real and it is not over yet. 

The UK is lagging behind the rest of the G7 in terms of trade recovery after the pandemic; business investment, seen by Johnson and Sunak as the panacea to a poor growth rate, trails other industrialised countries, in spite of lavish Treasury tax breaks to try to drive it up. Next year, according to the OECD think-tank, the UK will have the lowest growth in the G20, apart from sanctioned Russia. 

The Office for Budget Responsibility, the official British forecaster, has seen no reason to change its prediction, first made in March 2020, that Brexit would ultimately reduce productivity and UK gross domestic product by 4 per cent compared with a world where the country remained inside the EU. It says that a little over half of that damage has yet to occur. 

That level of decline, worth about £100bn a year in lost output, would result in lost revenues for the Treasury of roughly £40bn a year. That is £40bn that might have been available to the beleaguered Johnson for the radical tax cuts demanded by the Tory right — the equivalent of 6p off the 20p in the pound basic rate of income tax. 

Despite these sobering figures, Johnson’s complaints about the prospect of “relitigating” Brexit was exaggerated, intended to portray himself as the victim of a putative plot by pro-Remain MPs. In fact, British politicians — and the wider country — are still traumatised by the bitter Brexit saga, and deeply unwilling to revisit it. 

Still, this month has seen the first stirrings of a debate that until now has been buried as the evidence of Brexit-induced economic self-harm starts to pile up. Few are talking about reversing Brexit altogether, but another question is being asked: should the UK start to explore with Brussels ways of softening its edges? 

Show, don’t tell 

Downing Street insisted this week it was “too early to pass judgment” on whether Brexit was having a negative impact on the economy, which could be heading into a recession. “The opportunities Brexit provides will be a boon to the UK economy in the long run,” Johnson’s spokesman said. 

Both Johnson and Sunak insist that it is hard at this stage to separate Brexit’s economic impact from the shock of Covid. In the meantime, the prime minister promotes the “benefits of Brexit”, such as new trade agreements with Australia and New Zealand and the freedom for the UK to set its own rules. 

Sunak has promised a reform of rules in the City of London, including reforming the EU’s Solvency II rules to allow insurers to spend more money on infrastructure projects. He has announced eight new freeports with special tax privileges. 

But economists have not yet been able to find any significant positive impacts of these policies. Some, including Johnson’s patriotic promise to put a “crown stamp” on pint glasses in pubs and to allow traders to sell their wares in pounds and ounces, are primarily symbolic. 

Critics of government Brexit policy are routinely derided. Suella Braverman, attorney-general, last week accused the ITV presenter Robert Peston of “Remainiac make-believe” after he challenged her over the government’s unilateral plan to rip up the Brexit treaty relating to Northern Ireland. Braverman claimed the so-called Northern Ireland protocol had left the region “lagging behind the rest of the UK”. In fact, Northern Ireland (the only area of the UK to remain in the EU’s single market for goods) is the best performing part of the country, apart from London. 

When Bailey appeared before the House of Commons treasury committee in mid May, the BoE governor acknowledged that his predecessor Mark Carney had made himself “unpopular” for saying Brexit would have a negative effect on trade, but that the bank held to that view. 

Kevin Hollinrake, a Tory member of the committee, says Bailey was trying to avoid becoming a political target and was “deliberately avoiding” talking about Brexit. “It’s a singular issue for the UK,” the MP says. “We have changed our immigration rules. It’s about non-tariff barriers. You’ve got to be willing to look at what’s happening on the ground.” 

While some gloomy predictions have failed to materialise, such as former chancellor George Osborne’s 2016 warning of a recession immediately after a Leave vote, there is growing evidence that Brexit is causing more lasting damage to UK economic prospects. 

Ministers are becoming more reluctant to proclaim the economic upsides of Brexit. Kwasi Kwarteng, business secretary, was asked last week at the FT Global Boardroom to list some Brexit benefits. He focused on the UK’s ability to respond swiftly to Russian aggression in Ukraine — “it has substantial benefits particularly in international policy” — rather than on business. Sunak’s allies say the chancellor’s approach is to “show, not tell” on Brexit, pushing through City regulatory reforms rather than giving boosterish speeches on its economic merits. 

The fallout in data 

The first and most obvious economic blow delivered by Brexit came when sterling fell almost 10 per cent after the referendum in June 2016, against currencies that match the UK’s pattern of imports. It did not recover. This sharp depreciation was not followed by a boom in exports as UK goods and services became cheaper on global markets, but it did raise the price of imports and pushed up inflation. 

By June 2018, a team of academic economists at the Centre for Economic Policy Research calculated that there had been a Brexit inflation effect, raising consumer prices by 2.9 per cent, with no corresponding increase in wages. 

Some households, such as those relying on state pensions, were compensated in higher benefits, but the CEPR team found no overall offset with higher incomes. “The Brexit vote delivered a swift negative shock to UK living standards,” they wrote. 

While the UK was still in the EU and during the Brexit “transition phase”, there were no significant effects on trade flows. But this has changed since stricter border controls were introduced at the start of 2021, imposing no tariffs, but significant checks and controls at the formerly frictionless border. 

Economists have used this point in time to contrast how the UK’s trade performance compares with those of other countries before and after the TCA’s imposition. The results have been increasingly ugly, especially for small companies trading with Europe. 

Red tape caused a “steep decline” in the number of trading relationships after January 2021, according to a study by the Centre for Economic Performance at the London School of Economics. The number of buyer-seller relationships fell by almost one-third, it found. 

The same group found food prices had risen as a result of Brexit. Comparing the prices of imported food such as pork, tomatoes and jam, which predominantly came from the EU, with those that came from further afield such as tuna and pineapples, it found a substantial Brexit effect. “Brexit increased average food prices by about 6 per cent over 2020 and 2021,” according to the research. 

Summing up the effects on trade in which imports from the EU have fallen while exports have not risen, Adam Posen, head of the Peterson Institute of International Economics, says “everybody else sees a recovery in trade following Covid and the UK sits flat”. 

The third visible effect of Brexit on the UK economy has been in discouraging business investment. In the first quarter of 2022, real business investment was 9.4 per cent lower than in the second quarter of 2016. That fall was mostly due to Covid, but it had flatlined since the referendum, ending a period of growth since 2010 and falling well short of the performance of other G7 countries. 

Weak investment is a particular worry for Sunak, who sees business investment as the route to greater prosperity. Before departing the BoE in 2020, Carney told a House of Lords Committee that Brexit uncertainty was holding back business investment. Worse, he said, business planning for various Brexit scenarios was taking up a lot of management effort. “Time spent on contingency planning is time not spent on strategic initiatives,” he said. 

Since then, negative perceptions of the UK have continued among business with the chancellor finding he had little bang for his £25bn buck of super deductions in corporation tax to encourage capital spending. As Bailey told MPs last month, the super-deductor was “not at the moment having the impact that was expected”. 

Complaints about high immigration was one of the most contentious issues of the referendum, with a central promise of the Brexit campaign being tougher controls over the number of people entering the country. While net immigration from EU countries has stopped, with effectively no change apparent in the two years to the end of June 2021, net immigration from non EU countries has remained high, with 250,000 in the latest year. 

Collateral damage 

There is, as yet, little appetite among Britain’s political leaders for a return to the EU — even if the other 27 member states were prepared to open the door. Even the pro-EU Liberal Democrats admit reversing course is a long-term aspiration, rather than an immediate goal. 

As part of his attempt to avert a coup, Johnson wrote to MPs this month that he had “created a new and friendly relationship with the EU”. The opposite is true. Brussels restarted legal action against the UK this week over the Northern Ireland protocol: relations are at rock bottom. 

The EU has warned that British scientists will be excluded from the €95bn Horizon research programme as “collateral damage” in the row about Northern Ireland. The prospect of any kind of rapprochement at the moment, at least while Johnson remains prime minister, seems remote. 

But in recent weeks, a tentative debate has started over whether the UK would be better off trying to reach accommodations with the EU to smooth trade in some areas, rather than launching a new front in the Brexit war with unilateral action over Northern Ireland. 

In an article much-discussed at Westminster, the pro-Leave Times columnist Iain Martin wrote this month: “To deny the downsides of Brexit on trade with the EU is to deny reality.” 

Tobias Ellwood, a former Tory defence minister, suggested Britain should rejoin the EU single market to soften the cost of living crisis, and said there was “an appetite” for a rethink and claimed polling indicated “this is not the Brexit most people imagined”. And Daniel Hannan, a leading Tory Brexiter, repeated his longstanding view that Britain should have stayed in the single market under a Norway-style relationship with the EU, while adding that to rejoin it now “would be madness”. 

Anna McMorrin, Labour shadow minister, was recorded telling activists: “I hope eventually that we will get back into the single market and customs union.” She was forced to apologise by Starmer: such talk remains dangerous in political circles. 

Even so, a Starmer-led future Labour government would change UK relations with the EU. The party’s mantra has become “make Brexit work”: rejoining the single market may be off the agenda, but Labour wants to find ways to improve on the bare-bones tariff-free trade agreement Johnson negotiated with the EU. 

Rachel Reeves, the shadow chancellor, told the Financial Times last year that Labour wanted to strike a deal with the EU to reduce the most onerous paperwork and checks on food exports. The party also wants an agreement with Brussels on the mutual recognition of professional qualifications. 

Even among the Eurosceptics in Johnson’s cabinet, there is now an acceptance that the UK should be seeking to rebuild economic relations with the EU, including in areas like the Horizon programme, to avoid exacerbating the looming cost of living crisis. 

“Would I like to be in a better place on Brexit?” asked one pro-Brexit cabinet member. “Yes, absolutely. But we’ve got to find a way of doing it without it looking like we’re running up the white flag and we’re compromising on sovereignty.”

'There is no such thing as past or future': physicist Carlo Rovelli on changing how we think about time

Charlotte Higgins on Carlo Rovelli's book on the elastic concept of time. Source The Guardian


What do we know about time? Language tells us that it “passes”, it moves like a great river, inexorably dragging us with it, and, in the end, washes us up on its shore while it continues, unstoppable. Time flows. It moves ever forwards. Or does it? Poets also tell us that time stumbles or creeps or slows or even, at times, seems to stop. They tell us that the past might be inescapable, immanent in objects or people or landscapes. When Juliet is waiting for Romeo, time passes sluggishly: she longs for Phaethon to take the reins of the Sun’s chariot, since he would whip up the horses and “bring in cloudy night immediately”. When we wake from a vivid dream we are dimly aware that the sense of time we have just experienced is illusory.

Carlo Rovelli is an Italian theoretical physicist who wants to make the uninitiated grasp the excitement of his field. His book Seven Brief Lessons on Physics, with its concise, sparkling essays on subjects such as black holes and quanta, has sold 1.3m copies worldwide. Now comes The Order of Time, a dizzying, poetic work in which I found myself abandoning everything I thought I knew about time – certainly the idea that it “flows”, and even that it exists at all, in any profound sense.

We meet outside the church of San Petronio in Bologna, where Rovelli studied. (“I like to say that, just like Copernicus, I was an undergraduate at Bologna and a graduate at Padua,” he jokes.) A cheery, compact fellow in his early 60s, Rovelli is in nostalgic mood. He lives in Marseille, where, since 2010, he has run the quantum gravity group at the Centre de physique théorique. Before that, he was in the US, at the University of Pittsburgh, for a decade.

Carlo Rovelli in Bologna. Photograph: Roberto Serra / Iguana Press / G/Iguana Press / Getty Images

He rarely visits Bologna, and he has been catching up with old friends. We wander towards the university area. Piazza Verdi is flocked with a lively crowd of students. There are flags and graffiti and banners, too – anti-fascist slogans, something in support of the Kurds, a sign enjoining passers-by not to forget Giulio Regeni, the Cambridge PhD student killed in Egypt in 2016.

“In my day it was barricades and police,” he says. He was a passionate student activist, back then. What did he and his pals want? “Small things! We wanted a world without boundaries, without state, without war, without religion, without family, without school, without private property.”

He was, he says now, too radical, and it was hard, trying to share possessions, trying to live without jealousy. And then there was the LSD. He took it a few times. And it turned out to be the seed of his interest in physics generally, and in the question of time specifically. “It was an extraordinarily strong experience that touched me also intellectually,” he remembers. “Among the strange phenomena was the sense of time stopping. Things were happening in my mind but the clock was not going ahead; the flow of time was not passing any more. It was a total subversion of the structure of reality. He had hallucinations of misshapen objects, of bright and dazzling colours – but also recalls thinking during the experience, actually asking himself what was going on.

“And I thought: ‘Well, it’s a chemical that is changing things in my brain. But how do I know that the usual perception is right, and this is wrong? If these two ways of perceiving are so different, what does it mean that one is the correct one?’” The way he talks about LSD is, in fact, quite similar to his description of reading Einstein as a student, on a sun-baked Calabrian beach, and looking up from his book imagining the world not as it appeared to him every day, but as the wild and undulating spacetime that the great physicist described. Reality, to quote the title of one of his books, is not what it seems.

He gave his conservative, Veronese parents a bit of a fright, he says. His father, now in his 90s, was surprised when young Carlo’s lecturers said he was actually doing all right, despite the long hair and radical politics and the occasional brush with the police. It was after the optimistic sense of student revolution in Italy came to an abrupt end with the kidnapping and murder of the former prime minister, Aldo Moro, in 1978 that Rovelli began to take physics seriously. But his route to his big academic career was circuitous and unconventional. “Nowadays everyone is worried because there is no work. When I was young, the problem was how to avoid work. I did not want to become part of the ‘productive system’,” he says.

Academia, then, seemed like a way of avoiding the world of a conventional job, and for some years he followed his curiosity without a sense of careerist ambition. He went to Trento in northern Italy to join a research group he was interested in, sleeping in his car for a few months (“I’d get a shower in the department to be decent”). He went to London, because he was interested in the work of Chris Isham, and then to the US, to be near physicists such as Abhay Ashtekar and Lee Smolin. “My first paper was horrendously late compared to what a young person would have to do now. And this was a privilege – I knew more things, there was more time.”

Albert Einstein worked at the Swiss patent office for seven years: ‘That worldly cloister where I hatched my most beautiful ideas.’ Photograph: Keystone/Getty Images

The popular books, too, have come relatively late, after his academic study of quantum gravity, published in 2004. If Seven Brief Lessons was a lucid primer, The Order of Timetakes things further; it deals with “what I really do in science, what I really think in depth, what is important for me”.

Rovelli’s work as a physicist, in crude terms, occupies the large space left by Einstein on the one hand, and the development of quantum theory on the other. If the theory of general relativity describes a world of curved spacetime where everything is continuous, quantum theory describes a world in which discrete quantities of energy interact. In Rovelli’s words, “quantum mechanics cannot deal with the curvature of spacetime, and general relativity cannot account for quanta”.

Both theories are successful; but their apparent incompatibility is an open problem, and one of the current tasks of theoretical physics is to attempt to construct a conceptual framework in which they both work. Rovelli’s field of loop theory, or loop quantum gravity, offers a possible answer to the problem, in which spacetime itself is understood to be granular, a fine structure woven from loops.

String theory offers another, different route towards solving the problem. When I ask him what he thinks about the possibility that his loop quantum gravity work may be wrong, he gently explains that being wrong isn’t the point; being part of the conversation is the point. And anyway, “If you ask who had the longest and most striking list of results it’s Einstein without any doubt. But if you ask who is the scientist who made most mistakes, it’s still Einstein.”

How does time fit in to his work? Time, Einstein long ago showed, is relative – time passes more slowly for an object moving faster than another object, for example. In this relative world, an absolute “now” is more or less meaningless. Time, then, is not some separate quality that impassively flows around us. Time is, in Rovelli’s words, “part of a complicated geometry woven together with the geometry of space”.

For Rovelli, there is more: according to his theorising, time itself disappears at the most fundamental level. His theories ask us to accept the notion that time is merely a function of our “blurred” human perception. We see the world only through a glass, darkly; we are watching Plato’s shadow-play in the cave. According to Rovelli, our undeniable experience of time is inextricably linked to the way heat behaves. In The Order of Time, he asks why can we know only the past, and not the future? The key, he suggests, is the one-directional flow of heat from warmer objects to colder ones. An ice cube dropped into a hot cup of coffee cools the coffee. But the process is not reversible: it is a one-way street, as demonstrated by the second law of thermodynamics.

String theory offers an alternative to Rovelli’s work in loop quantum gravity.

Time is also, as we experience it, a one-way street. He explains it in relation to the concept of entropy – the measure of the disordering of things. Entropy was lower in the past. Entropy is higher in the future – there is more disorder, there are more possibilities. The pack of cards of the future is shuffled and uncertain, unlike the ordered and neatly arranged pack of cards of the past. But entropy, heat, past and future are qualities that belong not to the fundamental grammar of the world but to our superficial observation of it. “If I observe the microscopic state of things,” writes Rovelli, “then the difference between past and future vanishes … in the elementary grammar of things, there is no distinction between ‘cause’ and ‘effect’.”

To understand this properly, I can suggest only that you read Rovelli’s books, and pass swiftly over this approximation by someone who gave up school physics lessons joyfully at the first possible opportunity. However, it turns out that I am precisely Rovelli’s perfect reader, or one of them, and he looks quite delighted when I check my newly acquired understanding of the concept of entropy with him. (“You passed the exam,” he says.)

“I try to write at several levels,” he explains. “I think about the person who not only doesn’t know anything about physics but is also not interested. So I think I am talking to my grandmother, who was a housekeeper. I also think some young students of physics are reading it, and I also think some of my colleagues are reading it. So I try to talk at different levels, but I keep the person who knows nothing in my mind.”

His biggest fans are the blank slates, like me, and his colleagues at universities – he gets most criticism from people in the middle, “those who know a bit of physics”. He is also pretty down on school physics. (“Calculating the speed at which a ball drops – who cares? In another life, I’d like to write a school physics book,” he says.) And he thinks the division of the world into the “two cultures” of natural sciences and human sciences is “stupid. It’s like taking England and dividing the kids into groups, and you tell one group about music, and one group about literature, and the one who gets music is not allowed to read novels and the one who does literature is not allowed to listen to music.”


In the elementary grammar of things, there is no distinction between ‘cause’ and ‘effect’

The joy of his writing is its broad cultural compass. Historicism gives an initial hand-hold on the material. (He teaches a course on history of science, where he likes to bring science and humanities students together.) And then there’s the fact that alongside Einstein, Ludwig Boltzmann and Roger Penrose appear figures such as Proust, Dante, Beethoven, and, especially, Horace – each chapter begins with an epigraph from the Roman poet – as if to ground us in human sentiment and emotion before departing for the vertiginous world of black holes and spinfoam and clouds of probabilities.

“He has a side that is intimate, lyrical and extremely intense; and he is the great singer of the passing of time,” Rovelli says. “There’s a feeling of nostalgia – it’s not anguish, it’s not sorrow – it’s a feeling of ‘Let’s live life intensely’. A good friend of mine, Ernesto, who died quite young, gave me a little book of Horace, and I have carried it around with me all my life.”

Rovelli’s view is that there is no contradiction between a vision of the universe that makes human life seem small and irrelevant, and our everyday sorrows and joys. Or indeed between “cold science” and our inner, spiritual lives. “We are part of nature, and so joy and sorrow are aspects of nature itself – nature is much richer than just sets of atoms,” he tells me. There’s a moment in Seven Lessons when he compares physics and poetry: both try to describe the unseen. It might be added that physics, when departing from its native language of mathematical equations, relies strongly on metaphor and analogy. Rovelli has a gift for memorable comparisons. He tells us, for example, when explaining that the smooth “flow” of time is an illusion, that “The events of the world do not form an orderly queue like the English, they crowd around chaotically like the Italians.” The concept of time, he says, “has lost layers one after another, piece by piece”. We are left with “an empty windswept landscape almost devoid of all trace of temporality … a world stripped to its essence, glittering with an arid and troubling beauty”.

More than anything else I’ve ever read, Rovelli reminds me of Lucretius, the first-century BCE Roman author of the epic-length poem, On the Nature of Things. Perhaps not so odd, since Rovelli is a fan. Lucretius correctly hypothesised the existence of atoms, a theory that would remain unproven until Einstein demonstrated it in 1905, and even as late as the 1890s was being written off as absurd.

What Rovelli shares with Lucretius is not only a brilliance of language, but also a sense of humankind’s place in nature – at once a part of the fabric of the universe, and in a particular position to marvel at its great beauty. It’s a rationalist view: one that holds that by better understanding the universe, by discarding false beliefs and superstition, one might be able to enjoy a kind of serenity. Though Rovelli the man also acknowledges that the stuff of humanity is love, and fear, and desire, and passion: all made meaningful by our brief lives; our tiny span of allotted time.