An economic experiment

  1. Find a three-year-old.
  2. Measure the emotional state of the three-year-old.
  3. Give the three-year-old an icecream.
  4. Re-measure the emotional state.
  5. Snatch away the icecream before they have had a chance to start eating it.
  6. Re-measure the emotional state – is it equal to that measured at (2.)?
  7. Give the three-year-old its icecream back.
  8. Re-measure the emotional state – is it equal to that measured at (4.)?

Self-devised employment and the hysteresis of hope

British workers are putting in the same number of hours as before the recession, but they’re not getting anywhere near the same output. The Office for National Statistics released the latest figures on GDP and the labour market May 23rd, and they show hours worked in Q1 2013 back to the level of Q1 2008 for the first time. GDP (down 3% over the last 5 years) still lags behind both hours worked and employment.
Izabella Kaminska of FT Alphaville noted this productivity gap back in January, and theorized about output hidden in the collaborative, online economy. I think I was one of many people who didn’t buy this explanation.

The other way of looking at the decoupling, is that low GDP does reflect the general poor health of the economy, and that the labour market recovery is an illusion. This is the theory of hidden unemployment, not hidden growth. One place for this unemployment to hide is in the form of entrepreneurship. There is some anecdotal evidence that especially laid-off fi nance workers (less in need of Jobseeker’s Allowance, and perhaps more stigmatized by sustained unemployment) are taking this route.

#1: Every unemployed asshole in a bathrobe with a Bloomberg free trial calls himself a hedge fund these days.

[@GSElevatorGossip on Twitter]

I dug up some Companies House data on the number of incorporations in the UK throughout the noughties. Company creation barely took a hit in the recession, with the trough in (financial year) 2008-09 no lower than 2004-05, and 2009-10 back to pre-crisis.

Break down the new companies by share capital though, and you see that something changed in 2009-10. Companies with less than GBP 100 in initial capital go from about a third to almost all of the new incorporations.


The low levels of share capital suggest that the new businesses are owned by individuals or households, and run by their owners. Since they don’t have either external shareholders or bank loans, there’s no need for the owners to put up an initial fi nancial stake rather than fund the business as it goes along.

You could see this under-capitalization as a reflection of the nature of the ‘new economy’. Today’s technology startups are not Hewlett and Packard, buying expensive hardware for their garage factories. App makers and bloggers only need a laptop and a connection. (Whether economic growth based solely on iPad games, amateur Tumblr pornography, and various forms of linkfarming is sustainable is another matter.)

On the other hand, it could be a clue as the ‘placebo’ nature of these jobs. There are social and psychological reasons why someone might launch a startup in preference to claiming unemployment benefi ts, and these combined with the sunk costs fallacy, could lead them to keep putting the hours in despite seeing little or no pro fits. This explains both the labour market recovery and the GDP stagnation.

This ‘placebo work’ mirrors that which takes place in Third World cities, where the unemployed and unskilled scrape a living guarding parked cars, fetching drinks for train passengers, and various other activities on the border between entrepreneurship and begging. My sister wrote a post about this ‘self-devised employment’ in Egypt.

If these company creations do reflect a new trend in small and unproductive businesses, then the graph also shows a huge and sustained drop in traditional startups, flat for the last three years at around 50,000 a year, a sixth of the peak, and a third of the pre-boom (2000-01) numbers.

Paul Krugman told Andrea Leadsom on Newsnight a year ago:

you know, the average young person is not going to start a business

It looks a bit like half a million Britons did just that. Whether this is really just shifted unemployment, or if these startups are about to flower into a couple of GDP points worth of smartphone apps, lifestyle blogs and asset management, remains to be seen.