Johan Fourie's blog

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The unintended consequences of good intentions

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party

We all hope to live long, healthy lives. And we want that for other people too. So when we have medical breakthroughs that allow us to alleviate the suffering of others, almost all of us would agree that it should be rolled out to those needing it most.

Opioid abuse kills 42000 Americans annually. Opioids are a class of drugs usually prescribed to treat pain, but many patients develop addictions that result in the illegal use of prescription drugs or even cheaper alternatives, like herion. Opioid abuse has increased steadily over the last decade to now constitute more than two-thirds of all drug overdose deaths. How to stop and reverse this rising trend has been the subject of debate amongst public health officials and policymakers for some time.

One option, preferred by most US health experts, is Naloxone. Naloxone is a drug that can reverse the effects of an opioid overdose if administered quickly. In short: it can save many lives if it is easily accessible. With this knowledge, many US states began to pass laws that facilitated the widespread distribution and use of Naloxone. Surely this policy would save thousands of American lives?

Unfortunately and surprisingly, it had the opposite effect. This is the astounding conclusions of a new study by Jennifer Doleac of the University of Virginia and Anita Mukherjee of the University of Wisconsin-Madison. The two economists find that broadening Naloxone access had ‘no reduction in opioid-related mortality’.  Why? Because the availability of Naloxone encouraged riskier behaviour; access to Naloxone increased the use and abuse of opioids. Doleac and Mukherjee show, for example, that where Naloxone became available, it was followed by a clear increase in opioid-related emergency room visits and more opioid-related theft. In some places, like the Midwest, there was even an increase in opioid-related deaths, as abuse increased because people were comforted by the knowledge that there is a way out. A policy with fundamentally good intentions had perverse outcomes.

This is a classic example of the dilemma that policymakers face on a daily basis. Good intentions do not equate to good policy. Differently put, the road to hell is paved with good intentions. What is needed is an understanding that humans react to incentives, and that if the incentives change, so will their behaviour.

Sport is a great example of how policies can have undesired consequences. Increase the points awarded for a try to encourage more running rugby? Maybe it works, but it is more likely that it will encourage foul play because a penalty is now a relatively less expensive mistake. Design cricket helmets to make batsmen safe from bouncers? Possibly, but it is equally likely that fewer batsmen now learn to play the bouncer well, and are thus hit on the head more often (obviously with less severe consequences). Give three log points for a win in a soccer championship instead of two to encourage more attacking play? Expect more defensive home games and draws as teams want to avoid ‘losing three points at home’. These examples may be somewhat facetious, but they show just how difficult it is to regulate human behaviour.

One policy that is likely to have serious ramifications for South Africans is the proposed Liquor Amendment Bill, which will increase the minimum drinking age from 18 to 21 years. The goal, ostensibly, is to reduce the number of alcohol-related deaths of teenagers, both from overconsumption and from the associated violence and car accidents. There is no doubt of the good intentions here. Alcohol abuse can have deadly consequences. Limiting the drinking age to 21 seems like a rational way to reduce consumption amongst a group of young people that is most at risk. What could go wrong?

The answer is: we don’t really know. Would young adults be happy teetotallers for three years, or would they find alternative means of enjoying the products of Bacchus? Are the alternatives – hiding consumption from adult supervision, or consuming unregulated drinks bought on the black market – not potentially worse?

Perhaps we can find examples elsewhere. Empirical evidence in the US seems to suggest that increasing the minimum drinking age reduced car accidents by around five percent. That would be great, of course, although those results rely on strict enforcement capabilities and supporting institutions. Would violence, particularly against woman, cease? Perhaps it would, but the new bill might also shift drinking away from bars and public places and into the home, with even worse outcomes.

Any policy, regardless of its intentions, has consequences. Some are obvious to see, but often our good intentions have undesired or even perverse outcomes that nullify or even contradict the initial aims. We can avoid the worst of these by carefully considering the alternatives, through modelling behaviour and empirical testing (of similar policy experiments). But often the bad news is that, despite our best intentions, humans are best left to their own devices.

*An edited version of this article originally first appeared in the 29 March edition of finweek

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Written by Johan Fourie

May 7, 2018 at 10:00

A moment to remake South Africa

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Cyril

At the dawn of independence, it fell on the first generation of African leaders to choose a new economic paradigm to deliver economic freedom to their people. In the Cold War between capitalism and communism, these African leaders almost unilaterally preferred a third option – ‘African socialism’ – a potpourri of policies built on the ethic of egalitarianism grounded in African history and culture.

At the second annual LEAP Lecture at Stellenbosch University in October 2017, Emmanuel Akyeampong, professor of African history at Harvard University, returned to the topic of ‘African socialism’ following independence, and its consequences for the continent. In countries as diverse as Ghana, Tanzania, Senegal and Guinea, he notes, the new policies were, ultimately, attempts to industrialise, to break away from the agriculture-based systems of the colonial economies.

In Kwame Nkrumah’s Ghana, for example, plans were drawn up for massive infrastructure investments. Sadly, many of these projects never got off the ground, or were only finished much later. In one project, for example, Nkrumah convinced the Russians to build a railway from Kumasi to Ouagadougou, the capital of Burkino Faso, but the railway was never completed.

The most extreme version of ‘African socialism’ was Julius Nyerere’s umajaa (villagization) campaign in Tanzania in 1967. This essentially meant the collectivization of all forms of productive capacity, notably in agriculture; Tanzanians, Nyerere believed, must learn to free themselves from dependence on European powers by becoming self-reliant.

Nyerere’s bold vision, and those of his contemporaries, failed miserably. Says Akyeampong: “The 1980s put paid to the concept and the vision, as steep economic decline resulted in what has been called Africa’s ‘lost decade’; the most notable architect of African socialism, Nyerere, conceded that his attempt at ujamaa had failed and stepped down from power in 1985; and the collapse of the Soviet Union in 1989 marked the triumph and ascendancy of capitalism.”

But Akyeampong is less interested in the reasons for their failures than in the boldness of their visions.  “It is the vision of bold and broad transformative change that I find admirable and worthy of emulation, and the desire to lift entire populations out of poverty and give them a decent life.” This optimism and boldness was not limited to the African leaders themselves; even the World Bank, soon after independence, remarked: ‘For most of Africa, the economic future before the end of the century can be bright’.

As I listened to Cyril Ramaphosa deliver his first State of the Nation address, I was reminded of that special moment in time when monumental change seemed possible. The general mood seems to have lifted after Jacob Zuma’s departure. Is this another moment when the trajectory of history seems to shift gear?

We should, of course, learn from history. Utopian visions of the future can easily become a justification for social engineering. While a powerful state can quickly transform society, it can do so at the cost of freedom. This is not the route I have in mind. Instead, this opportune moment can be used to redefine the social contract, to implement a nuanced set of social democratic policies with two explicit aims: economic security and economic freedom. In short, we want to live in a just and prosperous society.

How do we achieve that? Security requires that people have a basic standard of living. One policy proposal that has attracted a lot of interest is the basic income grant, a small monthly grant (of say R752, the lower-bound poverty line) to every South Africa, regardless of income. This would replace the child support grant. Every person with an ID document will be required to open a bank account (perhaps with a new state deposit bank), which will be linked to their SARS account. To partially fund this, VAT will increase. A tax on consumption means we incentivise savings and investment, the heart of creating economic prosperity.

There are many such policy options. State ownership of some assets, like aeroplanes and television stations, make little sense. These can be sold to pay off national debt and lower personal income taxes. Government can also save by reducing the number and size of departments and keeping the increases in the public wage bill to less than inflation.

As South African cities have some of the longest transit times in the world, infrastructure investment in urban areas – notably in public transport and housing – needs urgent attention. Water and electricity can benefit from innovations like desalination and solar panels. Broadband access can be expanded through incentive programmes.

A prosperous society requires an educated populace and work for them. Investing in early childhood development is key to eradicate large discrepancies that already exist when kids arrive at school. Incorporating the private sector in secondary and tertiary education, perhaps through a voucher system, is one way to not only improve the quantity of seats in class, but also provide opportunities for entrepreneurs at the local level. We should also welcome immigrants with skills with open arms; they not only bring much-needed expertise, but they often build new businesses that create jobs and improve living standards.

Cyril Ramaphosa has a window of opportunity in the first few months of his tenure. He can dare to be bold, and should do so. Says Akyeampong: “We need the bold and transformative vision of the likes of Nyerere and Nkrumah to ensure that come 2050 we do not find ourselves in the same predicament as on the eve of independence, when our new leaders, coming out of decades of repressive colonial economic policies, were faced with what appeared to be insurmountable challenges.” What will economic historians, fifty years from now, say about Ramaphosa’s moment to remake South Africa?

*An edited version of this article originally first appeared in the 15 March edition of finweek

Do management consultants really add value?

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management-consulting

That good managers matter for corporate success, should be a surprise to no-one. Early economists like Alfred Marshall, back in the nineteenth century, already noted the importance of good management practices to drive productivity. But because managers and the way they behave is such a difficult thing to quantify, economists have struggled to measure how important good management practices are in explaining firm success.

In 2008, five leading economists from Stanford University and the World Bank, tackled this difficult question. They wanted to know whether investing in good management practices improve productivity and profits, and so, between 2008 and 2010, they conducted a large field experiment in India. They approached large, multi-plant Indian textile firms and divided them in two groups. For one group – the treatment group – they gave five months of extensive management consulting through a large international consulting firm. This included a month of diagnosis, where the consulting firm would find opportunities for improvement, and four months of intensive support for the implementation of these strategies. In contrast, the other group – the control group – received only one month of diagnostic consulting, but no intensive follow-up.

At the end of the study, in 2011, they tested the performance of the firms in the two groups. The results, published in the Quarterly Journal of Economics in 2013, were quite remarkable. Even with just four months of follow-up, those in the treatment group saw an increase of 11% in productivity, and an increase in annual profitability of about $230 000. Interestingly, firms also spread these management improvements from their treatment plants to other plants they owned, creating positive spillovers that resulted in returns that far outstripped the initial investment.

What made the difference? The authors suggest two reasons for the improvements: First, owners delegated greater decision making power over hiring, investment and pay to their plant managers. “This happened in large part because the improved collection and dissemination of information that was part of the change process enables owners to monitor their plant managers better.” Second, the extensive data collection necessary for quality control, for example, led to a rapid increase in computer use. Better information management resulted in better performance.

The concern with the study, though, was that it failed to measure the persistence in performance. Did the differences between the treatment and the control group wither away as soon as the management consultants left, or did they persist for a month, a year, or even longer? To answer this question, almost the same team of authors returned to India in 2017 to measure the performance of the firms eight years after the initial intervention. Their results appeared in an NBER Working Paper last month.

It seems that management practices do persist. Despite the fact that several firms (in both the treatment and control group) dropped some of the management practices that were initially proposed by the consultants, the difference between the two groups were still large – worker productivity is 35% higher in the treatment group compared to the control group. The spillover effects, in particular, were still there: in fact, in most cases, the plants that did not receive treatment but were part of the same firm, were indistinguishable from the plants that did receive management consulting services. As the authors note: While “few management practices had demonstrably spread across the firms in the study, many had spread within firms, from the experimental plants to the non-experimental plants, suggesting limited spillovers between firms but large spillovers within firms”.

The authors were also able to collect information on the reasons certain management practices were dropped over the period of 8 years. Three reasons were frequently mentioned: the new management practices faded when the plant manager left the firm, when the directors, notably the CEO and CFO, were too busy, and when the practice was not commonly used in many other firms. “The first two reasons highlight the importance of key employees within the firm for driving management practices, while the latter emphasizes the importance of beliefs.”

There were other surprising consequences of intervention too. Not only was worker productivity higher in the treatment group, but treated firms continued to use consulting services in the years following the initial intervention, not only improving their operational management practices, but also their marketing practices.

Management consultants often get a bad rep, but random control trials like these – experiments that are costly and time-consuming – clearly demonstrate the advantages, in profits and productivity, of investing in good management practices. Successful firms thrive because of good managers. The key is to hang on to them, empower them with the ability to make decisions, and free up their time.

*This article originally appeared in the 1 March edition of finweek.

Written by Johan Fourie

April 6, 2018 at 15:21

Bad boys, what you gonna do?

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Bad-Boys

A social revolution is underway that most of us are blissfully unaware of. Its causes are fuzzy, but its consequences are likely to be significant: it could radically alter how we work, whom we marry, how many children we have, and, perhaps in the extreme, the likelihood of conflict. This social revolution is a relatively recent phenomenon. We’ve seen it emerge only in the last two decades, but it’s accelerating at a rapid pace. Welcome to the era of the widening gender gap in education.

Girls, nowadays, outperform boys at astonishing rates, both at school and at university. Two new studies, both by economists at Stellenbosch University’s Research in Social Policy unit, attest to this. First, a study by Chris van Wyk, Anderson Gondwe and Pierre de Villiers follow all 2007 Western Cape Grade 6 learners (77,633) until matric in 2013. They find that men are 29% more likely to have dropped out of school by 2013 compared to their female counterparts. These results confirm nationally representative studies of reading and math scores. Hendrik van Broekhuizen and Nic Spaull show that the gender gap in reading at South African primary schools is one of the largest in the world. But it is also in mathematics, a subject where boys traditionally outperformed girls, where the closing and then widening of the gender gap is most evident. Says Van Broekhuizen and Spaull: “In the 2000 and 2007 rounds of SACMEQ, South African grade 6 girls outperformed their male counterparts, but this difference was not statistically significant. However, in the more recently conducted TIMSS-Numeracy assessment of 2015, grade 5 girls outperformed grade 5 boys by a statistically significant margin of 16 points. This was the fourth largest (pro-girl) gender gap in mathematics of the 49 countries that participated.”

SchoolPerformance

Source: Van Broekhuizen and Spaull (2017)

Not only do girls do better than boys at school, women outperform men to an even greater extent at university. Van Broekhuizen and Spaull follow the 2008 matric cohort, and show that, while girls obtained 27% more bachelor passes in matric, more females access university (34% more), and considerably more females complete any undergraduate qualification (56% more) or any undergraduate degree (66% more). These gaps exist for all of South Africa’s race groups, although it is slightly bigger for white and coloured students. The pyramid summarizes the gap at every level: for every 100 females in matric in 2008, there were only 8 females that earned any undergraduate degree by the end of 2014, and only 5 males.

We don’t yet know what explains this gap. One argument, with some supporting evidence, is that women have more traits and behaviours that are favourable to schooling in its current form, also known as non-cognitive skills. These skills include self-control, self-motivation, dependability, sociability, perceptions of self-worth, locus of control, time-preference and delayed gratification. But why exactly these non-cognitive skills have become more valuable in the last two decades is not entirely clear. Others have pointed to technological change, particularly in computer and video games, as an explanation for why men are performing worse. But that does not explain gender differences at very young ages.

What is more interesting, though, is to think through the likely consequences. The most obvious is the effect on the job market. Graduates have a much lower unemployment rate (5%) compared to those without any tertiary qualification (33%) in South Africa. If more women have degrees, women are likely to have significant lower unemployment rates than men. And because the best students in almost all subject fields are now women, they are likely to find the best jobs, and move up the job ladder quicker.

We know that men have historically held the majority of high-ranking positions in the workplace, and this outcome can do a lot to balance things out. But it is also important that we think carefully through the full range of consequences. People prefer to match on education, meaning that women prefer men with a similar level of education, and vice versa. What does the gender-unbalanced pool of graduates mean for finding your soulmate? If women become the main (or only) breadwinners, how will that affect family planning? Women already face a more difficult trade-off than men between having to balance a family and career – will this cause fertility rates to fall further, especially for those at the upper-end of the income distribution where the gender gap is most pronounced?

And what of the men? Will they be happy to step in and take up more of the family responsibilities? In a world that increasingly rewards human capital, a large pool of unskilled men will find no outlet for their only productive resource: manual labour. If these men, without proper interventions, become more indolent and isolated, what are the likely political and social consequences? It is not surprising that the political extremes are often dominated by men. Men already outnumber women in all major crime categories. If unchecked, violence and conflict, at the household, community and international level, will in all likelihood increase.

It is natural to ask what can be done about this. Those who argue that the cause for the gender gap is the sudden increase in rewards for non-cognitive abilities would argue that the schooling system can do more to nurture these traits in men. Others would argue that the technological change that make men less productive – like video games – should be taxed.

Others, again, will say that it is pointless to intervene – why should we care about men when women have been suppressed for centuries, and many remain the victims of abuse and dominance? I would argue that that is exactly why we should care about the rising gender gap in education: if we don’t, the consequences are likely to be dire, for men and women.

Written by Johan Fourie

March 26, 2018 at 08:30

The formula for success

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The world of work is changing. Skills that were valuable only a decade or two ago seem less valuable nowadays, displaced by newer trends and technologies. Every few weeks a news article report on the threat of automation, and how it will destroy millions of jobs, including yours. A YouTube video of a robot jumping over obstacles confirms that the inevitable is only a few months away.

The answer, many seem to think, is to become like computers. Students, in South Africa and elsewhere, are encouraged to pursue STEM – science, technology, engineering and mathematics – careers. Humanities degrees or those in the social sciences, in contrast, are often considered less prestigious. We know that the best-paying jobs are still those where a decent amount of math is required. In South Africa, this is of particular concern, as the gender and racial composition of those enrolling for STEM degrees differ significantly from those enrolling for degrees in the humanities, exacerbating inequality.

Occupations

But the story is more complicated than that. A new paper by David Deming, published in the Quarterly Journal of Economics (QJE), suggests that, at least in the United States, STEM graduates are not doing very well. In fact, between 2000 and 2012, STEM jobs shrank by 0.1 percentage points, after growing by 1.3 percentage points in the previous two decades. In contrast, all other ‘cognitive occupations’, jobs like managers, teachers, nurses, physicians, lawyers and economists , grew by 2.9 percentage points between 2000 and 2012, faster than the 2 percentage points in the previous decade. The figure below demonstrates this clearly: only 36% of STEM occupational categories had positive growth, compared to 85% of other professional occupations.

The reason for this, Deming argues, is that managers, teachers and physicians all require significant interpersonal skills. And because of the technological change – the same technological change we all fear! – these social skills are increasingly in demand. Deming explains: ‘The skills and tasks that cannot be substituted away by automation are generally complemented by it, and social interaction has, at least so far, proven difficult to automate. Our ability to read and react to others is based on tacit knowledge, and computers are still very poor substitutes for tasks where programmers don’t know “the rules”.’

Using a wide variety of sources, Deming finds that jobs that require high levels of both cognitive and social skills have fared particularly well, while high math, low social skill jobs (including many STEM occupations) have fared especially poorly. ‘Social skills were a much stronger predictor of employment and wages for young adults age 25 to 33 in the mid-2000s, compared to the 1980s and the 1990s.’ There is a revolution in the job market underway that no-one is talking about.

CyanideHappiness

Where do these social skills come from? Deming speculates that much of it is formed during early childhood development, although this is difficult to prove. The latest research that have followed children from a young age into adulthood have found strong correlations between kids’ socioemotional skills in kindergarten and adult outcomes such as employment and earnings.

The demand for social skills may also have implications for gender imbalances in the workplace. Women often choose careers that require more social interaction. If these jobs are in greater demand, with faster earnings increases, the gender gap may close quicker.

The optimism about the closing of the gender gap, though, is pegged by another study published in the same journal, by authors Matthew Wiswall and Basit Zafar. They test a group of New York University students about their preferences for flexible hours when they enter the job market, and find that students are willing to give up 2.8% of their annual earnings for a job with a centage point lower probability of job dismissal. They also find that students are willing to give up 5.1% of their salary to have a job that offers the option of working part-time hours. But there is a large gender difference: female students have a much higher average preference for flexible hours – 7.3% – compared to men – 1.1%. What the authors then do is to track the students after they graduate, and record their actual earnings four years later. Wiswall and Zafar find that those students with a high preference for work flexibility do actually end up in occupations with greater flexibility. But because women already prefer more flexible work even before they’ve started working, they also tend to earn less once they’ve entered the labour market, choosing jobs with lower pay and greater flexibility. At least a quarter of the gender gap in the labour market, the authors argue, can be explained by just these differences in preference.

These studies show how our social skills and preferences affect our labour market outcomes. Policies that aim to address labour market distortions, like race or gender gaps, should know that the roots of the problem may lie in preferences and skills moulded in the early years of development.

That is not to say that nothing can be done: for those going to university this year, perhaps one thing to keep in mind is that your future earnings depend not only on attending math class, but also on developing your social skills. Here’s one formula to remember: Math + beer = success.

>>> An edited version of this article originally appeared in the 1 February 2018 edition of finweek.

Written by Johan Fourie

March 13, 2018 at 08:00

Thuma Mina

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Ramaphosa

Today is a good day to be South African. Cyril Ramaphosa, one day after being sworn in as South Africa’s fifth democratic president, delivered a State of the Nation address last night that reminded us who we can be. Over the last nine years, we had become conditioned to the mediocrity of Jacob Zuma, had set the bar so low that our optimism of a better tomorrow had withered away. With one speech, Ramaphosa allayed the melancholy. Rise, South Africa, he said, and rebuild the dream of a prosperous and just society.

It requires action, and he has many plans. A smaller and more efficient government, support for entrepreneurs, investment in innovation, welcoming tourists, broader ownership of agriculture. But success will not depend on him alone. It cannot. In what reminded me of Kennedy’s ‘ask not what your country can do for you, ask what you can do for your country’, Ramaphosa told South Africans to take responsibility for the future they want: In the words of Hugh Masekela, thuma mina (Send Me).

We are at a moment in the history of our nation when the people, through their determination, have started to turn the country around.

We can envisage the triumph over poverty, we can see the end of the battle against AIDS.

Now is the time to lend a hand.

Now is the time for each of us to say ‘send me’.

Now is the time for all of us to work together, in honour of Nelson Mandela, to build a new, better South Africa for all.

Much work must be done. Not everything promised can surely be delivered. But the tide has turned. Today is a good day to be South African.

Written by Johan Fourie

February 17, 2018 at 10:01

Patience is not only a virtue

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CologneCathedral

Cologne Cathedral. Painting by Josef Langl

Patience is not only a virtue. It might also be the root of economic prosperity.

On 15 August 1248, the Archbishop of Cologne laid the foundation stone of a cathedral that would take 632 years to complete. One of the remarkable things about the cathedral, apart from the mesmerizing Gothic architecture of its twin spires that stand 157m tall, is that it was largely funded by civil society. How is it possible, one wonders, that a community can fund the construction of a building that they, nor their children, nor even their children’s children, would never see completed?

Patience is a virtue, says a fifth-century poem, but economists are increasingly confident that is a key building block of economic prosperity too. Two concepts are of relevance. The first is to what degree do you consider the future in your decision-making – your time preference. The second concept is the period of time that is relevant for you current decision-making – your time horizon. Patient people tend to have a high time preference and a long time horizon. And as more and more experimental evidence now show, so do successful people.

The study of patience was made famous by the Stanford marshmallow experiment. In the late 1960s, Walter Mischel offered children, in a controlled experimental environment, a choice between a small reward like a marshmallow immediately or a larger award (two marshmallows) if they waited 15 minutes. Some children immediately grabbed the marshmallow and swallowed it down. Others waited a while, and then had a bite. But several waited diligently until the fifteen minutes had passed for their second marshmallow. To their surprise, the researchers found in follow-up studies that children who were able to wait for the higher pay-off were also more likely to have better school outcomes, BMI and other life measures.

The question, of course, is whether patience is the result of genetic inheritance or environmental influence. In a 2007 Journal of Public Economics paper, Eric Bettinger and Robert Slonim found that parent’s patience are uncorrelated with their children’s patience, questioning the belief that it’s only nature at work. They also found, however, that mathematics scores and whether a child has attended a private school was also uncorrelated, suggesting that nurture’s influence is also limited.

The one result that most studies find is that girls tend to be more patient than boys. This has important implications for motiving children. Girls are more likely, for example, to respond to student performance incentives. A study that paid Israeli students conditional on their performance on university exams had a greater effect on girls. Knowing what determines patience can go a long way in helping kids perform better at school, and achieve better life outcomes.

While most research focus on individual-level outcomes, the question is whether patience also matters at the societal level? Global surveys now ask questions that allow us to deduce some measure of time preference or time horizon. The results suggest that while these generally correlate positively with GDP per capita, it is not always the case. Citizens of Botswana and Kenya, for example, are more patient, on average, than those of Japan and France. (South Africa, by the way, is very close to the world average.)

Patience does not only vary across space, but also across time. At a conference at Stellenbosch University during November last year, Jan Luiten van Zanden and Gerarda Westerhuis of Utrecht University presented a paper on how time preference has changed across the last few centuries. They argue that, during the Middle Ages in Europe, the ‘future’ became more important, in other words, people’s time preference increased. The consequence was that saving and investment increase, and that people started to accumulate capital with long time horizons. The construction of the Cologne Cathedral is one example of this. Why that is remains somewhat of a mystery, but there are clues in the changing (religious) beliefs and institutions of the time. Consider, for example, the emergence of corporations, initially religious institutions and guilds but later companies, notably the limited liability company, which would transcend the life of shareholders. The rise of big business would follow in the late nineteenth and early twentieth century, where salaried managers now focused on long-term value creation.

Van Zanden and Westerhuis argue, however, that this trend has reversed in the last few decades. Since the 1970s, ‘short-terminism’ is on the increase, reflected in the focus of short-term value for shareholders (and performance-related pay for managers). One of the factors that might explain this is the shift from modernism to post-modernism. Modernists believed that the future could be changed, for example, through strategic planning in a business environment or (in the case of the Soviet Union) even an economy. The rise of post-modernist beliefs – the belief that reality cannot be known and the future cannot be predicted or changed – has shifted our long-term gaze to the present. Instant gratification, exacerbated by social media, is now the order of the day.

There are valid reasons to question these preliminary findings. Companies like Alphabet (Google’s parent company), Apple and Facebook seem to be able to invest in new technologies where the pay-offs are only likely to be in the medium- to long-run. But it is difficult to imagine that we invest in something that we won’t see the end of: perhaps that is why tackling climate change is so difficult!

Time preference and time horizon remains vastly understudied topics. We know that time preference (roughly proxied for by people’s patience) matters at the individual level; more patient people are more ‘successful’ later in life. What we don’t know is why they are patient, and how to improve our impatient natures.

Similarly, we know that some societies, at certain times in history, had a longer time horizon. Those societies were then able to invest and accumulate, improving the prosperity of the generations to follow.

Consider this: children born in 2018 are likely to live to the year 2100. Are our political and business leaders factoring the year 2100 into their long-term strategies? Unlikely. Perhaps we need a bit more of the long-term horizon the inhabitants of Cologne had when they decided to build a cathedral 632 years before it was completed.

>>> An edited version of this article originally appeared in the 14 December 2017 edition of finweek.