Markets in stories

Yesterday I attended a very interesting conference, on Non-Equilibrium Social Science, which stands for making economics more realistic and interesting – looking at the economy in terms of non-linear dynamic systems. As ever at a good conference there were some great opportunities for conversation – and book recommendations. I came away with Marion Fourcade’s Economists and Societies, and W.E.G.Salter’s Productivity and Technical Change, and William Hazlitt’s 1805 Essay on the Principles of Human Action.


Also, after hearing him speak, David Tuckett’s Minding the Market. His argument was, in a nutshell: “Financial markets are markets in stories.” He classed as standard models both the rational choice and ‘behavioural’ approaches to decision making, because both assume there is an objective reality about which an optimum can in principle be known or calculated. Instead, Prof Tuckett argued, the decision problem is one of making any sense at all of how to act now on the basis of information now about an ontologically uncertain future. His answer is that we act on the basis of ‘conviction narratives’ which are collective interpretations of what today’s ‘facts’ (all based on our sense perceptions) mean for tomorrow. He described some empirical work looking at the stories that run in financial markets, as extracted from unstructured texts such as newswire reports, brokers’ notes and Bank of England reports.

This is intriguing. It certainly chimes with my unease (as in my Tanner and Pro Bono lectures) about the way economists talk – especially in the context of policy – as if they are omniscient outsiders, not part of what they are analysing. My question – which Prof Tuckett agreed is still-unexplored territory – is how reality interacts with our narratives, sometimes changing them. I’d like to have followed up by asking if the idea is a Kuhnian paradigm shift, but in the domain of financial markets, or economic life in general, rather than scientific exploration.

Another conference highlight was Bridget Rosewell on the inadequacy of our standard cost-benefit approach for deciding whether or not to go ahead with transport infrastructure projects, inadequate because they use a comparative static, equilibrium framework for something that is bound to change the dynamics of the economy. She gave many examples of projects that would never have passed a modern cost-benefit assessment, from Bazalgette’s London sewers to the Jubilee Line Extension and – as she is scrupulous – an example of one that wasn’t making it in terms of her tale of self-fulfilling visions that deliver the benefits they subscribe. (This is the fantasy airport on Boris Island, which she supports.) Bridget touches on this infrastructure question in Reinventing London.


The bosky by-ways of the internet, and John Dewey

It’s half term week, and I’ve spent a peaceful half hour this morning, before embarking on the long process of waking up my teenager, meandering down the bosky by-ways of the internet. It took me, via Philip Ball’s blog post on a new book on the uncertainty principle (The Quantum Moment by Robert Crease and Alfred Scharff Goldhaber), to the Stanford Encyclopedia of philosophy’s entry on John Dewey: “He is probably the only philosopher in this Encyclopaedia to have published both on the Treaty of Versailles and on the value of displaying art in post offices.” This is highly promising.

Dewey is someone who has always sounded appealing in fact, but is somehow a terrible gap in my knowledge. Which of his books should I start with? The Quest for Certainty (1929) appeals, but so does The Public and Its Problems (1927), especially having just read about Walter Lippmann. The internet obviously favours How We Think. Advice welcome.

Festival of Economics

The third annual Festival of Economics is happening in Bristol next month, from 20-22 November, and tickets are selling well. There’s a fine crop of books associated with the speakers too:

How To Speak Money by John Lanchester

The Social Life of Money by Nigel Dodd


Housing: What’s the Plan by Kate Barker

Free Lunch by David Smith

Economics After the Crisis by Adair Turner

How Do We Fix This Mess? by Robert Peston

Prisonomics and Greekonomics by Vicky Pryce

Why Fight Poverty? by Julia Unwin

Reinventing London by Bridget Rosewell

and of course

GDP: A Brief But Affectionate History by Diane Coyle

Walter Lipmann, public economist

A new biography, Walter Lippmann: Public Economist by Craufurd Goodwin, is a very interesting portrait of someone not all that well known now. I ended it appreciating that Lippmann was a more important figure in early 20th century America than I’d realised, perhaps a Martin Wolf of his day. The mixture of intellectual rigour and status with an ability and urge to communicate with the wider public is relatively rare, and important in modern democracies, with all their political and economic complexities. Lippmann was probably the first ‘public economist’.

I was aware of Lippmann only through his 1920 book Liberty and the News, which for some random reason sits on my shelves, and Public Opinion, published in 1922. The biography concentrates instead on his books and columns on economics and political economy, tracing the development of his thought as he watched the Depression and war unfold, and engaged with both Keynes’s and Hayek’s work. Throughout the decades, however, in an era when the old order was dying, Lippmann challenged the attractive certainties of the extremes, observing that ‘free’ markets had never existed, and that collectivism relied on censorship, spying and terror. This search for a way to manage the modern economy, and deliver to voters in democracies the economic well-being or assurance they demanded, while safeguarding liberty, remained his theme throughout, above all in The Good Society.

Lippmann sounded (in The Method of Freedom) rather like a modern behavioural economist: “The classical economists over-estimated the enlightenment which is based on self-interest and the fortitude based on self-reliance. … Imitation, the herd instinct, the contagion of numbers, fashions, moods, rather than enlightened self-interest, have tended to govern the economy.” And elsewhere, he emphasised the importance of institutions, regretting the fact that economists had not combined their powerful analysis with a ‘humanly satisfactory’ social philosophy. Economics needed to show concern not only with liberty, but with a ‘concern always for those who could not cope with modernity,’ as Goodwin puts it.

Lippmann, always interested in education and closely involved in the economics department at Harvard, was unable, though, to resist the tide of increasing specialization, to stop the schism between the humanities and social sciences, or the isolation of economics from politics, philosophy, psychology and history. What a shame.

This is a timely biography. Lippmann’s concern to navigate through the real complexities and uncertainties of a transitional, even revolutionary, economic era while avoiding the appealing, easy answers was admirable. So was his determination to explain to fellow citizens the economic debates of the day. Not surprisingly, I find the idea of a public economist very attractive. As a character, Lippmann seems slightly unappealing – brilliantly successful from his undergraduate days on and wholly plugged in to the establishment, he comes across as rather smug, although this is no doubt partly because of my anachronistic reading of his letters as quoted here. There is also perhaps a bit too much detail in the book for the mildly interested reader, although having said that it is well-written and not at all too long. Lippmann is well worth re-discovering as we continue through our own period of economic and political upheaval, and this book sheds light on what made him an important figure who deserves to be better known.


Hume, Keynes and wisdom

What’s not to like about a book that starts with David Hume’s contribution to economics. In Keynes: Useful Economics for the World Economy by Peter Temin and David Vines begins with a chapter on Hume’s essay ‘Of the Balance of Trade’. They argue that not only was economics born in 18th century Britain, but so too was the first economic model with Hume’s price-specie flow mechanism. This classical tradition of thinking in terms of internal and external imbalance formed the background to Keynes’s thinking about global imbalances – and, this book argues, is an essential prism on today’s global economy.

This short book (and I like a short book) aims to re-introduce the Keynes who thought with such clarity about international links to a modern audience. It includes the historical context, including Keynes’s membership of the Macmillan Committee in 1930-31 and his early thinking about the gold standard, as well as (relatively brief) mention of Bretton Woods. It goes on to walk through the basics of Keynesian international macroeconomics – the IS-LM framework, the Swan diagram showing schedules of internal and external balance, and aggregate demand and supply. There is a final chapter on ‘An International Paradox of Thrift’ which argues there is a parallel between 2014 and the fag end of the gold standard in the 1920s-30s, with too many countries trying to increase savings.

What would Keynes recommend now, they ask, answering that all of Germany, China, the US and UK should expand their domestic economies. Of course, there’s nothing novel about suggesting that Germany and China need to acknowledge the harm their ever-increasing export surpluses have been causing – I’m more surprised by the advice to the US and UK to expand their external deficits further. The book justifies this on the basis that both countries have significant stocks of overseas assets and low interest rates.

This would be a useful book for students starting out on their international macro – it’s a very clear exposition of the basic models. I’m sceptical that one can find all of the wisdom needed to solve today’s problems in re-readings of Keynes, not least because of his trite remark that “in the long run we are all dead.” We’re in Keynes’s long run now, and the flaws with a framework that has looked only at flows (GDP) and not assets (natural, physical capital) are all too plain. Still, the international Keynes is more relevant to today than the domestic Keynes, and the pre-2008 global imbalances problem is still a problem today.


Update: I’ve been reprimanded on Twitter for misrepresenting Keynes. It’s true that his “long run” comment was a reference to how useless it is to think about equilibrium outcomes when the world never gets to equilibrium. However, whenever I’ve seen it quoted, it has been in the sense of there being no need to worry about long-run consequences of a favoured action. Still, to be accurate, I should indeed have attributed the triteness not to Keynes but to subsequent uses of the remark.