Economics for good

Jean Tirole’s book Economics for the Common Good is out now and is highly recommended. As I had the privilege of helping prepare the English edition, I’ve read it with careful attention, and most appreciated Tirole’s ability to crystallise complicated issues in a straightforward way, combining surgical analysis with very clear explanation. This is too rare a skill among economists.

The first part of the book concerns the influence of economics and economists on society and the role of the market, followed by a section on what doing (good) economics involves, and also how economics is changing. There are then two chapters on organisation, the first on the relationship between state and market, the second on the role of business. These sections are in the same spirit as Dani Rodrik’s Economics Rules, although their experiences and examples differ. Here in Economics for the Common Good is an economist at the pinnacle of the profession (Tirole won the 2014 Nobel prize) giving a thoughtful, reflective account of what economics can properly contribute to – well, the common good. Although much of his work is highly technical, he has always been concerned with its application to practical challenges in organising society: “Academics must ..collectively aim to make the world a better place; consequently, they cannot refuse, as a matter of principle, to take some interest in public affairs.” If an economist has appropriate professional competence in some area, she has an obligation to take a position on it – while acknowledging that what is known changes and re-evaluation may always be necessary.

The final two sections of the book turn to applications of economics, big macroeconomic questions such as financial market stability or tackling climate change, and then applied microeconomic issues such as competition policy, digital platforms, intellectual property and the regulation of network industries. Given my own interests, this final section was riveting. No other individual economist has done more than Tirole to take forward the economic analysis of these kinds of areas, incorporating issues of asymmetric information, principal-agent problems, incentive compatibility, and so on. The final chapter, on sector regulation, is a must-read for anyone interested in this area. (I drew on it in a recent FT column.)

The book is non-technical, aimed at the general reader, and packed with examples. It does in parts require a careful read, but each sections and chapters stands being read alone, so one can dip into the book. There’s a nice publisher blog post in which Tirole explains his motivation for writing the book and what he hopes it can achieve.

It ends with an epilogue reflecting on the status of technical knowledge in a time of populism (the French edition was published early enoug in 2016 that it feels like a different era), and the even greater responsibility economists have to engage and communicate – “Economists must … with humility and conviction, harness economics for the common good.”

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Economic observation

On Friday all the researchers in the new Economic Statistics Centre of Excellence (ESCoE) met at its home in the National Institute to catch up on the range of projects and it was terrific to hear about the progress and challenges across the entire span of the research programme.

One of the projects is concerned with measuring uncertainty in economic statistics and communicating that uncertainty. The discussion sent me back to Oskar Morgenstern’s 1950 On the Accuracy of Economic Observations (I have the 2nd, 1963, edition). It’s a brilliant book, too little remembered. Morgenstern is somewhat pessimistic about both how meaningful economic statistics can be and whether people will ever get their heads around the inherent uncertainty.

“The indisputable fact that our final gross national product or national income data cannot possibly be free of error raises the question whether the computation of growth rates has any value whatsoever,” he writes, after showing that even small errors in levels data imply big margins of error in growth rates.

On the communications front, he noted that members of the public were often suspicious of economic statistics – and rightly so: “The professional users of economic and social statistics strangely enough often seem to be less skeptical than the public.” Yet, he added, public trust was essential both to deliver the appropriations of funding for statistical agencies and so that people had the confidence to provide information to statisticians.

I do find it odd that many economists download the productivity data from standard online sources uncritically and pronounce on the ‘puzzle’ of its zero growth when so many providers of raw data point (businesses in this case) out that from their perspective there are significant productivity gains. But that’s what the ESCoE is about – trying to resolve a different puzzle, that of two contradictory sets of evidence – and it’s keeping me gainfully occupied.

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The weaponization of trade

The latest Perspectives title is here. It’s The Weaponization of Trade by Rebecca Harding and Jack Harding (respectively a trade economist and a security researcher), and it couldn’t be more timely. The book looks at the shift from trade as an issue debated squarely in the economic domain to trade as a tool of politics and international relations.

The argument is that there economics and politics are always at play in trade policy, and they need to be in balance, with neither set of criteria dominating the other. Too much focus on economics, and the distributional – and hence political – consequences get overooked. Too much focus on politics and the chances are that there will be economic damage. We are in one of the latter phases – the Brexit “negotiations” and Donald Trump are both gifts that keep on giving in the context of this book. The rhetoric shows that politicians are conceiving of trade as a tool of state strategy (not necessarily effectively, either). These periods are never pretty in terms of their economic consqeuence. “Weaponized language has the capacity to do lasting damage,” they write. It is perfectly valid for trade to have regard to national interest, but the weaponized language of national interest is as dangerous as weapons can always be.

The joint disciplinary perspective really brings this argument to life. The economics draws on the Krugman tradition of analysing strategic trade. The security dimension, locating trade policy alongside other security issues, is illuminating. And Donald Trump makes this more timely reading every day.

By the way, the most recent preceding Perspectives were the outstanding Before Babylon, Beyond Bitcoin by Dave Birch and Britain’s Cities, Britain’s Future by Mike Emmerich. Upcoming titles cover digital organisations and driverless cars…

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The slow demise of a company town

Amy Goldstein’s Janesville: An American Story is one of the books on the Financial Times business book of the year shortlist & I have quite enjoyed reading it. It consists of reportage over several years (2008-2013) of a small Wisconsin town whose prosperity had long depended on the well-paying jobs provided by a General Motors plant and its suppliers. When the GM plant is mothballed and later permanently closed, the economic fortunes of the town and its families spiral down. As people use up their unemployment benefits and savings, or scrape by with low-paid service sector jobs, families that were solidly middle class find they need to rely on charitable food handouts, or supplies a teacher at school collects for the kids – shampoo, jeans.

The portraits of the individuals are mainly sympathetic – perhaps least so the Republican-supporting bank manager, although the results of her role as a cheerleader for Janesville’s economic future without GM are acknowledged. It is always a shock to a Briton to be reminded that people in the US with no job have no access to healthcare, and that private philanthropy has to fulfil (inadequately) the role the welfare state plays here. The American healthcare debate is, like the gun control debate, absolutely unfathomable to Europeans. There are some interesting insights into the reasons what support there is for retraining fails to achieve its aims – bureaucratic constraints on access to funding and how it’s used. It was also a surprise to learn that the ex-auto workers who had opted for retraining were doing less well, five years later, than those who had just taken the first job they could find and stayed in the labour market. All in all, it’s a sobering tale of the heart being wrenched out of a company town.

Having said all this, I thought the book was less compelling than George Packer’s The Unwinding. The Janesville tales are not set in a wider context of progressive deindustrialisation and the prospects of automation. Janesville is also silent on race, and I can’t decode the names. Unless it’s an all-white town – surely not? – this must be one of the relevant aspects of how families cope after an economic shock? Or subsequent American politics? There was also less insight into family finance than in the recent detailed study of income uncertainty and its corrosive effects in The Financial Diaries: How Americans Cope in a World of Uncertainty, or in Lisa Servon’s The Unbanking of America: How the New Middle Class Survives. (I haven’t read Hillbilly Elegy – should I?)

This shouldn’t put off readers as Janesville is worthwhile, but I’d be slightly surprised if it emerges the winner of the FT prize.

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An arts interlude

I finished the tome that’s been my reading at home for a while – Jennifer Homans’ magisterial history of ballet, Apollo’s Angels. The economics angle is that although I know Keynes set up what became the Arts Council, and that he married a Russian ballet dancer,  I hadn’t realised how influential he was in shaping ballet into a popular creative art in Britain. What’s more, so refreshing to be reminded that a fine economist (whether you agree with ‘Keynesianism’ or not) understood both the economic and the human importance of cultural life.

For anyone interested in ballet, the book is great, although I think her ultimately gloomy view about the future is a function of being US-based and thinking Balanchine was the pinnacle of the art. Me, I’m not so keen on Balanchine and far more of a Kenneth Macmillan fan than is Homans.

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