Beyond simple-minded economics (and policies)

It isn’t that I haven’t been reading. I devoured a proof copy of Kaushik Basu’s The Republic of Beliefs and Michael Best’s How Growth Really Happens. As they’re not out until the summer, it’s a bit early to post reviews, but they will both be contenders for the 2018 Enlightened Economy Prize, essential reads.

It was interesting in the light of reading those two to also read this week an important pamphlet by Rachel Reeves MP, who chairs the Business, Energy and Industrial Strategy Committee in the House of Commons. The Everyday Economy starts the left-of-centre policy task of bringing together a vision of how the economy operates – or can operate –  more fairly, to the benefit of many more people than has been the case for a generation. It isn’t a work of economic theory of course, but is aligned with important strands of work in modern economics incorporating the importance of institutions and political economy, bargaining power, asymmetric information, and so on. I was pleased to see it cites the work of the Industrial Strategy Commission. Although the focus of Reeves’s pamphlet is fairness and sharing the benefits of economic growth, rather than how that growth should be generated in the first place, this seems to me to be an important contribution to the development of a coherent and realistic policy framework for a left-of-centre party. What’s particularly encouraging is that the two main parties here now both speak of industrial strategy and the need for a strategic framework for managing the economy on the supply side. It’s about time.

Anyway, what all of these signal in their various ways is a decisive public intellectual shift away from simple-minded states vs markets economics – at least from the non-partisan and from thoughtful politicians. As I’ve been saying for some years now, the high tide of simplistic free marketism in academic economics occurred a long time ago. I hope this is filtering through into the world of policy and politics. Maybe I’m being over-optimistic…. (reading the headlines).

In between I read Jon Kalman Steffenson’s About the SIze of the Universe. I was in a discussion with him (and director Anna Ledwich, and Dharshini David, whose new book is The Almighty Dollar) on Start the Week recently, about the aftermath of financial crisis. The novel isn’t really about post-crash Iceland, as the discussion led me to expect, but the universal theme of escape from a small nowheresville and the pleasures and pains of uprooting.

Price: £12.18
Was: £14.99

Now I’m starting with great eagerness Benn Steil’s The Marshall Plan – first chapter already ace.


The culture of finance

Shelia Kolhatkar’s Black Edge is a cracking good read about how the growth of hedge funds was rocket-fuelled by their extensive reliance on insider trading. The focus of the story is Steve Cohen’s SAC capital. The abuse was enabled by the fact that the regulators were slow to cotton on to the scale and interconnections of the sector, and by the presence at the head of the SEC at the time a Bush-appointed free marketeer who thought the government should keep out of the way of the markets. The book reads like a thriller (leaving just the usual slight uneasiness about how the author knows what people were feeling, and wondering who spilled the beans out of two people in a reported conversation).

It left me reflecting about the culture of financial markets and how quickly and extensively unethical and illegal behaviour spread, like a rampant infection, after the deregulatory turn in the US and UK. Perhaps the obvious conclusion is that a culture of eternal vigilance is necessary in finance, and there was something sensible about the extremely strong cultural prohibitions applying to finance in times past. It is interesting, and sobering, to note how much the main characters in this sorry saga act just like homo economicus.

The authorities did eventually charge Cohen with failing to prevent insider trading; SAC was fined Capital and the fund was closed. Cohen is active again in the markets and a super-wealthy man.


Republic of Beliefs

I’ve just devoured the proof copy of Kaushik Basu’s The Republic of Beliefs: A New Approach to Law and Economics, which is due to be published in June. It’s too early to post a review but I can’t resist a quotation from the intro: “For the law to develop roots and the rule of law to prevail requires ordinary people to beliefe in the law; and to believe that others believe in the law. Such beliefs and meta-beliefs can take very long to get entrenched in society.” The book addresses a key contradiction in standard law and economics models, for my mind in a thoroughly convincing and accessible way despite it being 100% game theoretic.

In my years in various policy roles, it’s always amazed me how few policy makers think in terms of how all the other parties involved will respond to their interventions, and how in turn they ought to adjust what they do. I’ve always revered Thomas Schelling, who did apply game theory to policy. Republic of Beliefs might be joining his Micromotives and Macrobehavior in my pantheon of must-reads. It certainly should prompt a more rflective (or reflexive) approach to setting policy.



Economic development in 150 pages

It sounds an impossible challenge, but Ian Goldin does an impressive job combining clarity and conciseness in his Development: A Very Short Introduction, one of the well-known OUP series. The book seems to be a version of his longer book from a couple of years ago, The Pursuit of Development. Its six chapters cover: what it is, how it happens, why some countries are poor and others rich, aid, sustainable development, and globalization. The book manages to give a reasonable capsule description of the debates among economists and some sense of how development economics has changed over time. It studiously avoids reacinh strong conclusions on the efficacy of aid, this being a rather factual chapter.

There’s a useful list of further reading at the end. I think someone knowing more or less nothing about the subject would come away with a rounded overview and the capacity – and interest, probably – to read more. I like the pay-off too: “Development is not simply or mainly about the lives of others. It is about ourselves and what we care about. Development is about who we are and our collective future.

My quibble would be that the charts aren’t all that illuminating and only partly because they’re in black & white. Maybe all charts from now on should be left to Max Roser and his team at Our World in Data.


Economies in space and time

There’s a section of Economic Geography: A Critical Introduction by Trevor Barnes and Brett Christophers about the richness of border zones – not physical ones as these tend to be quite the opposite when it comes to economic activity, but intellectual. Interdisciplinarity has been a buzzword for a long time, and immensely hard to achieve within conventional academic structures. But perhaps its moment has come. At any rate, the number of in-principle interdisciplinary research centres is increasing (including the new Institute for Public Policy at Cambridge, which I join tomorrow). Perhaps more important, more and more people appreciate that solving pressing challenges – ageing, the consequences of climate change, trade wars, technological change – requires multiple social science, humanities and scientific perspectives.

Besides, I’ve always found the borders of economics interesting, including economic geography. The gap between economists who do geography and geographers who think about the economy has perhaps been narrowing in recent times. The book – a textbook but one accessible outside the framework of a university course – makes surprisingly little of what I think must be one of the main reasons for this. Which is that the technology-driven changes in the structure of production and consumption have made face-to-face interaction more valuable. The digital economy is an economy of clusters and dense cities, as well as one of globalisation. The classic Marshallian spillovers are bigger, the more important tacit knowledge (which, it turns out, is often complementary to codified knowledge, rather than a substitute for it). The evident importance of city regions is boosting urban economics and what is typically described as the ‘new economic geography’.

The geographer authors are understandably wary of the way economics is expanding into this territory. We economists do have a habit of presenting as marvellous new insights things other disciplines have known for ages, albeit wrapped in some nice econometrics. However – and inevitably there are some frictions in this process of inter-disciplinary engagement – it’s bemusing-to-painful to see how economics is perceived. The book describes (mainstream) economics as being only about constrained optimisation, which is the kind of reductionist statement an economist might make (and anyway, constrained optimisation under conditions of asymmetric information is everywhere in nature). It also defines the economy and economics as being essentially about ‘materiality’, material resources. Surely this can’t be literally intended? But in that case I’m not sure what this means.

Finally, the book notes – rightly – that economists insist on the importance of models, but conflates this with the use of mathematics. A lot of economists cheered Paul Romer’s assault on ‘mathiness’, but we like non-mathy maths because it is a concise way of trying to ensure models have a certain logical internal consistency and clarity. One could write many of them out in words instead – just as historians do when they model the causes of the first world war or literary critics when they theorize about the imperial perspective in late 19th century English novels. All scholars use models whether good or bad ones, and whether they know – or like – it or not.

These gripes aside, I enjoyed the book a lot. It’s a clear and comprehensive survey of the territory (sorry) of economic geography and at the same time manages the difficult feat of stepping outside the substance to deliver the critique promised in the subtitle. The first half of the book discusses the definition, history, boundaries and theorising/methodology in economic geography. The second half covers topics such as globalization, cities, finance, the environment and technological change. These topics chapters would make useful stand-alone readings for economics courses on the relevant subjects, giving students a healthy alternative perspective. In any discipline, we quickly socialise our students into our usual ways of thinking. Extending their frame of reference must be a useful contribution to their education.

It’s interesting that economic history is clearly enjoying something of a revival in economics, albeit from a base sadly diminished since before my PhD days, when most doctoral programmes had an economic history requirement (mine, at Harvard, still did but I think many others had already dropped it by the early 80s). There is much talk (and some action) now about ensuring economic history is in the standard economics curriculum, and the CORE course for one weaves some throughout the whole text. Economic geography doesn’t have that traction, but I’d be happy to see options at least for economic geography and economic sociology. I for one am also happy to try to explain to other social scientists #whateconomistsdo as long as they will be as patient with me.

PS I also applaud the sensible pricing of this book by the publisher (WILEY Blackwell), in contrast to many textbooks.