Post-Festival reading

This year’s Festival of Economics in Bristol ended yesterday and was another great success. The thing that most delights me, as the programmer, is the engagement of the (large) audiences with the issues debated by the panels. The aim of the Festival is to ensure there is a forum for debate between economists – and other social scientists and practitioners – and members of the public. We are in extraordinary times and it is essential to have a public space for discussion. In our small way, and with huge thanks to the organisers of the Festival of Ideas and all the sponsors, we achieved that again.

A while before the Festival I blogged about the books by contributors. This is an update about the books they variously mentioned in their talks.

Bridget Rosewell cited Kurt Vonnegut’s Player Piano on the fear of technological unemployment. Gavin Kelly referred to John Stuart Mill‘s assessment of the Industrial Revolution (it had had no impact, he said in 1870 – the point being that in the previous 70 years real wages had risen by just 0.4% a year, whereas they trebled between 1870 and 1950). I referred to Brynjolfsson and McAfee’s The Second Machine Age. Adair Turner quoted statistics from Thomas Piketty’s Capital in the 21st Century. Nigel Dodd referred to Keith Hart’s The Memory Bank. An audience member quoted Francis Fukuyama,The Origins of Political Order.

There are lots of tweets under #economicsfest, and when the videos are online I’ll add the link here. Next year’s Festival of Economics will take place from 12-14 November. Ideas for subjects are welcome!


The revolution will not be disintermediated

I’m on the road this week, University of Manchester, BBC North, and the Festival of Economics in Bristol. My book companion is Rebecca Solnit’s Encyclopedia of Trouble and Spaciousness, a collection of essays. It’s as brilliant as any fan of her writing would expect.

One essay, The Butterfly and the Boiling Point, is about the many little causes of popular rebellions that accumulate until, suddenly, large-scale protest erupts on the streets and in public squares. The title alludes to the the idea in complexity theory that the merest flap of a butterfly’s wings in one part of the world can change the path of a hurricane on the other side of the globe. Small causes turn into big consequences. But in thinking about political movements, there are many butterflies and their flaps have no consequences until there are enough separate little causes that the boiling point is reached.

Solnit discusses why popular rebellions in 2011 happened where they did – Tunisia, Egypt – but could not happen in the US. “It is remarkable how in other countries, people will simply one day stop believing in the regime that had, until then, ruled them.” Fear evaporates. There is a sudden shift in consciousness. She argues that it could be because the US lacks “symbolically charged public spaces.” The capital city isn’t a centre, and many other cities lack centres. “Revolution is an urban phenomenon,” she writes. “It’s all very well to organize on Facebook and update on Twitter, but these are only preludes. …. You need to be together in body for only then are you truly the public with the full power that a public can possess.”

The revolution will not be disintermediated?

Rights versus utils

Does this make me a bad person? I wasn’t wowed by John Dewey’s The Public and its Problems. This wasn’t because of any disagreement with its arguments so much as finding it a rather waffly, even dull read.


In fact, the opening argument is persuasive, drawing the distinction between a public – a collective identity beyond the household or immediate community, with principles and officials for mediating different interests – and the abstraction of ‘the state’ that features in political thought. In my translation, Dewey is in the camp of Elinor Ostrom in looking for a natural history of how collective institutions and decision-making mechanisms emerge, albeit on the scale of the nation or beyond.I like, too, his insistence on the importance of understanding concrete circumstances, including when it comes to understanding the powerful special interests that get in the way of the public interest and effective democracy.

One interesting point he makes is the way the economic doctrine of laissez faire, built on economics based on utilitarian philosophy, has merged with the philosophy of natural rights, despite the contradiction between the two approaches. The laissez faire approach said private profit served social prosperity, in the absence of any meddling, because of the harmonious character of natural law, or divine providence. Jeremy Bentham was particularly critical of the natural rights doctrine. He said they are, “Simple nonsense: natural and imprescriptible rights, rhetorical nonsense, — nonsense upon stilts.” He said they encouraged mischievous individualism and revolution against established governments. Rights are, “The fruits of the law, and of the law alone. There are no rights without law—no rights contrary to the law—no rights anterior to the law.” The law being properly determined by the greatest good of the greatest number – nothing could trump the hedonic calculus.

Anyway, I’m sure there’s more of his work I ought to read but that will do me for the time being on Dewey.


Orthodoxy, radicalism and sanity

Fans of his columns in the Financial Times will know there’s no danger of finishing reading a whole book by Martin Wolf in an optimistic frame of mind. So it is with his new book, The Shifts and The Shocks. The subtitle is ‘What we’ve learned – and still have to learn – from the financial crisis’, and the message of the book is that there is more still needing to be done than sorted out already.

The main thing the book argues has been learned (by some people) since the crisis is that pre-crisis ‘official’ macroeconomics comprehensively failed. To echo the title of the relevant chapter, orthodoxy has been overthrown. Props to Wolf for acknowledging his own change of mind in the light of events (after all, he wrote an earlier book called Why Globalization Works.) He points out that the features of the global economy that turned out to matter in real life – the accumulation of debt and the growth of shadow banking – had been assumed to be unimportant or irrelevant. Wolf has become a wholehearted Minskian, but you obviously don’t need to jump into any new camp to agree that pre-crisis dynamic stochastic general equilibrium models were a nonsense. What’s rather depressing is that some macroeconomists still seem to think these DSGE models just need a bit of tinkering, a little bit of financial ‘friction’ adding in. As the book’s introduction forcefully points out, a theory in which something that did happen is impossible is a rubbish theory.

The first chunk of the book is a high-level description and an analysis of the origins and unfolding of the financial crisis, with particular emphasis on the Eurozone. He has long been writing in his Financial Times columns about the problem global imbalances, particularly between the US and China. This book focuses more on Europe. Much of the description is familiar territory, but seen this time through Wolf’s new spectacles of the Minsky convert.This section culminates in the ‘orthodoxy overthrown’ chapter, which includes a quick rundown of the various alternatives, in a nice, brief summary of the history of macroeconomic thought including those turned into renegades by the DSGE triumphalists of the 1990s and 2000s. Wolf ends by concluding that in a system in which the state is the ultimate supplier of money but most money and credit in use is created by the private sector is a ‘pact with the devil’. “Moreover, the liberalization of finance seems to lead to crises almost automatically. Surely this suggests the need for a new kind of system.”

So what might a new system look like? To fix finance, he advocates – following Anat Admati and Martin Hellwig’s outstanding The Bankers’ New Clothes – a much higher equity ratio for banks, maybe 20%, and serious macro-prudential tools. These seem such no-brainers that the real question is why regulators are so hesitant about them – but this takes us into the analysis of power in the western economies. A chapter on the Eurozone concludes that it isn’t working but it isn’t clear either how to turn it into a ‘good marriage’. This chapter is surprisingly diffident – Wolf writes: “Germany’s insistence on retaining its huge external surplus, on keeping inflation so low, on national responsibility for bank debts and on ever tighter fiscal discipline will not work. The Eurozone needs to become something different.” I would have expected him to predict the unlikeliness of this happening – although he does also acknowledge how messy a divorce would be.

The final chapter has a key point: “Unless regulation and the supply of fiscal backstops is to be much more global, finance should be far less so.” Little would be lost by decreasing the global integration of banking, he argues. Wolf is more radical than what he describes as the ‘new orthodoxy’, which aims to preserve the globally integrated financial system through incremental reform – and, I would say, keeping fingers tightly crossed.This section echoes the chapter in Ian Goldin’s The Butterfly Defect, which underlines the inherent risks in the complex, integrated financial network.

Wolf argues that western elites are continuing to let people down, to a dangerous degree. He accuses them of ‘three huge failures’ – misunderstanding the consequences of financial liberalization and fantasizing about the self-stabilizing features of finance; ignoring the consequences of the emergence of a plutocratic global elite for the civic glue that enables democracy to function; and turning what should have remained a mundane common currency or currency management plan in the EU into a German currency administered by unaccountable ECB and Commission officials without channels of accountability to other Eurozone countries and citizens.

If we cannot implement radical changes – more radical than most people recognize, Wolf says – then, well he doesn’t explicitly spell it out, but implies, economic and political disaster.

By and large, I agree. There’s no point just tinkering with a fundamentally broken system. There are some questions not covered in the book that would only add to the gloom. For example, the extent of outstanding debt left over from the crisis is ginormous. Without a growth miracle – no sign of that on the horizon – the options are explicit or implicit default. How will that happen? The large international banks have returned to pre-crisis behaviours with only marginally more capital – and are still being allowed to judge their own riskiness! What happens when a modest decline in some market somewhere sets us off on the downward spiral of liquidity and solvency we saw in 2008, but this time without any fiscal or monetary firepower left? And by the way, what about demographic and environmental challenges?

The Shifts and the Shocks is a dense and chunky book about economics, not a manifesto for the Occupy movement. I can’t quite picture Martin Wolf in a Guy Fawkes mask outside the ECB. Still, he makes a good case that the ‘new orthodoxy’ of minor reforms favoured by global finance is madness. Radicalism is the only sanity.

Making the future happen

Yesterday I spoke at Nesta’s Future Shock conference, focusing on the UK’s poor productivity record, and the part played in that by under-investment. You get the future you invest in.

This comment from Keynes, in a 1945 memo to the War Cabinet, went down especially well: “If by some sad geographical slip the American air force (it is now too late to hope for much form the enemy) were to destroy every factory on the North East coast and in Lancashire (at a time when the directors were sitting there and no-one else), we should have nothing to fear.” Keynes was, however, fearful about the country’s likely ability to export, and thus repay war debts, in the years ahead. He was all too well aware of what he called the ‘antiquated inefficiency’ of British factories.

The Bank of England’s recent working paper on productivity attributes about a quarter of the 16 point shortfall compared to the previous trend to measurement problems, the rest to low investment, ‘impaired resource allocation’, and fewer closures of inefficient businesses than is normal during a downturn.

The quotation comes from Donald Moggridge’s Maynard Keynes: An Economist’s Biography, and I think it is also in the Roy Harrod volume, The Life of John Maynard Keynes, rather than the better-known Robert Skidelsky one – I can’t find it paging through Volume 3, Fighting for Britain. My favourite recent book about Keynes isn’t a conventional biography but a biographical reflection on his relevance today,  Capitalist Revolutionary by Roger Backhouse and Bradley Bateman.