Diminishing returns to information

Although it was published three years ago, when the financial crisis was much fresher in our minds, the essays in What’s Next? unconventional wisdom on the future of the world economy (edited by David Hale and Lyric Hughes Hale) remain interesting.

Looking this morning at the chapter The Diminishing Returns of the Information Age by Mark Roeder, his two main points remain just as relevant. One is to underline the paradox that at a time when there was more information than ever about the financial markets, people in general failed to notice the huge phenomenon of the developing crisis – the signals were there and nobody paid attention. This attention deficit is something Paul Seabright has also explored.

A related point is the way certain themes or stories develop online and stick in the collective mind even if untrue. Roeder gives the example of people in the US continuing to buy unaffordable homes on sub-prime deals even after it had become very clear in 2007 that the narrative of ever-rising property prices was untrue. He links this power of certain narratives to the ‘online oligarchy’ of large news providers, increasingly keen on sensationalizing stories to grab attention, in the battle for advertising. But it is surely even more the case on social media. This is part of the tussle about ‘the right to be forgotten’ debate: falsehoods as well as truths last forever online.

Roeder ends pessimistically: “Never before have we had access to so much information, yet so little understanding of how to manage it.” Three years on, we don’t seem to have progressed any further in working out how to have understanding catch up.

As a brighter footnote, I have also read the lovely poems Dog Songs by Mary Oliver, an early Christmas gift from a friend. Here are a few lines from a poem about watching TV with her dog Ricky:

‘I’m getting a headache looking at this.
I have to bark.’ And he began.
It does no good to bark at the television
I said. I’ve tried it too. So he stopped.

Diminishing returns to barking at the TV too?

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On reading Polanyi (sigh)

As promised in my last post, I’ve started re-reading Karl Polanyi’s The Great Transformation, which I first read (and shouted at) more than 20 years ago. It hasn’t started well.

On the first page he writes, about ’19th century civilization’: “The fount and matrix of the system was the self-regulating market.” The market system, he continues (writing in 1944), is the “explanation of one of the deepest crises in man’s history.” This dramatic accusation is left hanging for a while, the book turning to the balance of power, international finance and the Gold Standard. When he returns to markets in Chapter 4, he explains that the market system is an economy “directed by market prices and nothing but market prices” – a construct so unnatural that it requires strong intervention by the state to create and sustain it. Before the 19th century, the role of markets in the organisation of the economy had been minimal, he says – and there is an ethnographic turn to demonstrate the point. Polanyi asserts that pre-market societies had all had reciprocity and redistribution at the heart of their economic organisation, along with production for own consumption.

At this point, I’m obviously thinking that pre-market societies were all poor, and household production made the division of labour impossible. Besides, there surely were plenty of markets and market transactions before the 19th century. I’m also reflecting on the extraordinary evolution of non-market economic institutions in the 19th century – trade unions, friendly societies, mutual savings and insurance organisation, not to mention free schools, scientific and philosophical societies, working men’s clubs, lending libraries etc. But I’m going to stay open minded as I read on.

It’s tempting not to bother – this sympathetic recent summary by Robert Kuttner, also reviewing the Block and Summers book, is much clearer and more readable. But as Kuttner makes a point of noting that economists don’t read Polanyi, I’d better defy the stereotype and plough on.

Monday morning market fundamentalism

Easing myself into the week with a bit of browsing, this review by Michael McCarthy in The Boston Review of a new book about Karl Polanyi piqued my interest. The book is The Power of Market Fundamentalism: Karl Polanyi’s Critique by Fred Block and Margaret Somers.

As stated in the review, I wholeheartedly agree with the Polanyi perspective on markets: “Polanyi’s key work, The Great Transformation, demonstrates that markets and states are not separate entities, which each have their own unique and endogenous dynamics, but instead are inescapably intertwined and mutually constitutive.” Yet when I first readThe Great Transformation – some time in the mid-1980s – it irritated me enormously. I can’t remember why, and my brief notes on the book give no clue, but I do remember the emotion. So I’ve hauled it off my bookshelf and will have to re-read it, to find out why and whether it still has the same effect.

The review of the Block and Somers book, alluding to Albert Hirschman’s The Rhetoric of Reaction, makes it sound as though they are in effect arguing that there is a performative aspect to ‘free markets’: “Block and Somers’s unique contribution is to argue that these public narratives about the economy are key drivers of regulatory policy…. markets are not only embedded socially and politically; markets are also embedded in ideas.” Again, something I would agree with. One of the quotations I jotted down in my brief notes from The Great Transformation is: “The introduction of free markets, far from doing away with the need for control, regulation and intervention, enormously increased their range.”

  

Institutions and droughts

Reading about the Californian drought in today’s Observer, I wondered what Elinor Ostrom would have made of it. The drying up of bore holes used in the agricultural lands of central California is discussed as a problem of simple over-use, along of course with the absence of adequate rains. Ostrom would have pointed out, though, that it is also an institutional problem. Her dissertation was on collective arrangements for managing scarce water supplies in California, and she did much subsequent work on irrigation and water management arrangements. I don’t know anything about the current institutions managing water supply, but am willing to bet they have changed a lot since the late 1940s and 50s.

Ostrom’s second main area of study was the policing of metropolitan America, something else much in the news lately that could have done with her insight. She overturned the prevailing wisdom that large, centralised police departments were most efficient. “For patrolling, if you don’t know the neighborhood, you can’t spot the early signs of problems, and if you have five or six layers of supervision, the police chief doesn’t know what’s occurring on the street,” she said. But centralisation in areas of policing like dispatch or forensic laboratories made sense to take advantage of economies of scale. Again, it would have been good to hear her analysis of what has gone wrong in those police departments that enter neighbourhoods as if they’re an occupying force.

    

Anybody who still thinks the importance of institutions is exaggerated should consider access to electricity: a late 19th and early 20th century technology still not available to all in many countries – even some countries that electrified many decades ago can regress in the availability of power, as power cuts and brownouts in places from California to Italy demonstrate.

Economists and refractory wild beasts

This morning I was grazing through The New Economics: Keynes’ Influence on Theory and Public Policy edited by Seymour Harris, a collection of essays published shortly after Keynes’s death giving an early evaluation of the great man’s influence.

The biographical essay by Joseph Schumpeter has this marvellous line:

“He had no taste for politics, but he had less than no taste for patient routine work and for breaking in, by gentle arts, that refractory wild beast, the politician.”

(I also like Schumpeter’s further description of him as: “A formidable controversialist whom nobody could overlook, everybody respected, and some liked.”)

By coincidence, I used a Keynes quotation recently in a presentation myself:

“There is nothing a government hates more than to be well-informed; for it makes the process of arriving at decisions much more complicated and difficult.”

No doubt he would have hated our present combination of electoral uncertainty and social media hyperbole.