I’m very much looking forward to hearing Joris Luyendijk talk about his book Swimming With Sharks at the Festival of Economics in Bristol next month. It’s an excellent piece of reportage on the City and the ways in which it traps its workers into certain forms of behaviour.
However, Joris’s attack on economics in The Observer this weekend is, unfortunately, stuffed with all the false old chestnuts critics of the subject always trot out: economics is not objective like physics (string theory? hello?!); modelling involves the assumption that there are ‘timeless truths’ in economic behaviour; GDP is not an objective temperature measurement of the economy (I can recommend him an excellent book – by an economist – on that issue!)
He writes: “Why should bankers ask themselves if a lucrative new complex financial product is safe when the models tell them it is? Why give regulators real power when models can do their work for them?” That question answers itself: because it was more profitable. Surely a sociologist of the City would find that almost nobody in banking gave much thought at all to the underlying economics of financial markets? Financial economists have much to answer for, but there is an odd tendency among critics of economics to attribute extraordinary power to ‘the model’ rather than to politics or the sociology of financial institutions.
The article argues there should have been more research into the sociology and anthropology of the City. Quite right. But isn’t that what sociologists and anthropologists do? Economists like me have no training or experience in those research methods. I agree, too, that there are economists who disguise their politics as technocracy; I’d call them macroeconomists but some of them take umbrage when I do so. There is tons we don’t know about aggregate behaviour in actual economies. Neither that fact nor its acknowledgement make economics rubbish, or even unscientific. There is tons we don’t know about the natural world too. And by the way, physicists, biologists and chemists all use models. So do historians, just with words instead. Possibly even sociologists.
Don’t read me as saying economics has no criticisms to answer; it certainly does. But it is exasperating to read the same old same old nonsense from a critic who uses the misuse of one sub-field of economics by people in the financial markets to rubbish the whole subject, about which he seems to know very little. So I look forward to welcoming Joris to the Festival, where he’ll be able to hear a lot of economists engaging with the public, and talking about the environment, social mobility, immigration, the scope of government and many other issues.
Meanwhile, I agree with Dani Rodrik’s tweet:
One reason I wrote Economics Rules is commentary like this, which misleads more than it illuminates https://t.co/y1v2dk5d76
and recommend strongly his Economics Rules. I might buy a copy for Joris.
On the whole I haven’t been among the most pessimistic people about the likely impact of a potential Artificial Intelligence revolution on the economy and life – although not blithely optimistic either about the scale of the adjustment that will be needed in labour markets and education. But Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence by Jerry Kaplan has made me more apprehensive. This is not because of anything he writes about the economy, which is standard fare, but rather because of something he says about AI in the first half of the book (quite a short and very readable volume).
It starts with an account of high frequency trading and the Flash Crash of 2010. This will be familiar to anybody who has read Michael Lewis’s very entertaining Flash Boys. It seems pretty clear to me that financial regulators need to rein in HFT – not that they are showing any sign of interest in doing so – and there is even a proposed solution recommended in Al Roth’s terrific book about market structure, Who Gets What and Why, as well as in this volume. That is to regulate to allow computer trading to occur only once every second. This would re-create liquidity in the markets (which are illiquid at the milli- or nano-second timescale) and stop the speed arms race.
However, what Kaplan points out is that other AI applications will have undesirable consequences because they will look like the swarms of computers trading in financial markets, and doing it super-well with no application of judgment. One example is the use of AI to personalize the offers made to shoppers online, which will become so efficient that the synthetic intelligence will be able to price discriminate perfectly, extract all the consumer surplus in each market, and undo the hope that online retailing would lead to less rather than more price dispersion. Nobody will be forced to buy, of course. “But while you may exercise freedom as an individual, collectively we will not. Synthetic intellects are fully capable of managing the behaviour of groups to a fine statistical precision while permitting individuals to roam in whatever direction their predictable little hearts desire.”
The book asks many other thought-provoking questions about social norms and ethics. Will my personal robot be allowed to stand in a queue for me? Or repark my car to avoid tickets all day? How can we ensure robots understand what are the moral boundaries on their actions when they’ve been programmed to fulfil a certain kind of task?
It also has one interesting policy suggestion, the “job mortgage”, a means of allowing people to train and retrain without being tied to one specific employer: the government loans people money and is repaid from their subsequent earnings. This would replace the existing student loan schemes and apprenticeships, which Kaplan sees as too restrictive for the period of upheaval ahead.
There seem to be lots of books on this subject out now, but I thought this one worth a read, especially for an economist like me, as the author’s background is a technical one and he explains the technology trends very clearly.
Monday sees the announcement of the 2015 prize winner. There are various tips around the place, some of which I’ve collected below. I think any of these would be a deserving winner – with links to various of their books too. Well worth reading, every one of them! There are surely other deserving candidates too.
I have been trying to think of women who are plausible winners, and there are certainly some younger ones who could win further down the line. Am I overlooking female economists who are old/distinguished/influential enough for this year?
Environmental economics: Partha Dasgupta, William Nordhaus
Update: Twitter folks strongly recommend adding Martin Weitzman in this category.
Growth: Paul Romer, Robert Barro
Inequality: Anthony Atkinson, Angus Deaton
Innovation (and much else): Will Baumol (now 93!)
Econometrics: David Hendry
Some are tipping Thomas Piketty but that seems unlikely to me.
* Yes, I do know it isn’t a ‘proper’ Nobel Prize. People still seem to think it’s worth winning….
From The Theory of Economic Growth by Arthur Lewis (after whom my department building is named):
“[T]he advantage of economic growth is not that wealth increases happiness, but that it increases the range of human choice … We do not know what the purpose of life it, but if it were happiness then evolution might just as well have stopped a long time ago, since there is no reason to believe that men are happier than pigs or fishes. What distinguishes men from pigs is that men have greater control over their environment; not that they are more happy. And on this test, economic growth is greatly to be desired. The case for economic growth is that it gives man greater control over his environment and thereby increases his freedom.”
Shades of Sen’s capabilities approach. Lewis is quoted in H.W.Arndt’s The Rise and Fall of Economic Growth.
There is an interesting new summary of the work of the Systemic Risk Centre, whose theme is the idea of endogenous risk: risk created by the interaction of participants in a market or economy, and amplified through feedback loops. The pamphlet opens with a statement from Milton Friedman: “The great mistake everyone makes is to confuse what is true for the individual with what is true for society as a whole…. Almost any interesting economic problem has the following characteristic: what is true for the individual is the opposite of what is true for everybody together.”
It also, of course, quotes Hayek: “Nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nusiance if not a positive danger.”
The centre focuses on finance. The summary is particularly good on the paradoxes: that making each individual market participant behave prudently will destabilise the whole financial system, in a real fallacy of composition; that many regulations amplify pro-cyclical feedback loops; that the Tobin tax on transactions would amplify market volatility; and so on. The work sounds like a terrific addition to the points made in Ian Goldin’s book The Butterfly Defect, which has a chapter on finance. Adair Turner’s forthcoming Between Debt and the Devil also looks at some of these issues.