On my travels, I’m allowed to read books that are not specifically about economics, and I’ve just finished Mavis Gallant’s [amazon_link id=”0241127122″ target=”_blank” ]Paris Notebooks[/amazon_link]. In it is a marvellous essay about the architectural and social damage done to Paris in the 1970s. And I found this comment about the large numbers of alienated and despised young people already living in the desolate estates in the Parisian outer suburbs – for obvious reasons it brought to mind our London ‘riots’:

“One wonders if any society is so rich in youth and strength and vivacity that it can afford such a waste.”

The first half of the book is her diary of the events of May 1968, and makes for gripping reading too.

Looking at the various reactions to Ben Bernanke’s speech yesterday at Jackson Hole, with its hint that the Fed could consider QE3, but not yet, I was reminded of a fascinating memoir of the 1930s by Benjamin Roth. Roth was a lawyer in Youngstown, Ohio, and kept a diary about financial and economic events, recently republished as [amazon_link id=”158648799X” target=”_blank” ]The Great Depression: A Diary[/amazon_link]. What struck me when I first read it was the way the Depression dragged on and on, with numerous false dawns. As Roth noted in 1936: “When I started these notes, it never occurred to me that the depression would last more than two years. We are now in the beginning of the seventh year and the road is not yet clear – with the possibility of inflation ahead. We seem to be emerging form the panic, industry is picking up etc – but so much of it has been created by artificial spending that it is difficult to know where we stand.”

The long, long era of slow Japanese growth, and many other examples set out in that essential resource [amazon_link id=”0691152640″ target=”_blank” ]This Time Is Different[/amazon_link] by Reinhardt and Rogoff, underline the same point. It takes a long time for the economy to recover from a significant banking crisis.

[amazon_image id=”158648799X” link=”true” target=”_blank” size=”medium” ]Great Depression Diary[/amazon_image]

The departure of Steve Jobs from day-to-day control at Apple has prompted a debate about whether the company can continue to create such beautiful, innovative products that reshape how we spend our lives. There are two possible answers to this question, pretty equally reflected in the debate. While I hope the answer is ‘yes’, I fear it is ‘no’.

The reason is to be found in a wonderful book by William Baumol, published in 2002. In [amazon_link id=”069111630X” target=”_blank” ]The Free Market Innovation Machine[/amazon_link], he documents the existence of two types of innovation, the incremental and the dramatic. Most innovation is the former type. It is carried out mainly by big corporations, which make successive improvements to their products. Radical innovation is rarer – it changes the world and is usually carried out by entrepreneurial, smaller firms.

The book describes the market dynamic this pattern sets in play – and it applies especially to high-tech firms, Baumol says. “For oligopoly firms in the high-tech sectors of the economy, it [innovation] is in fact a matter of survival. The firm that lets its rivals outperform it substantially in innovative products and processes is faced with the prospect of imminent demise. The firm must innovate or die.” But because it is hard for a big company to think in radically innovative ways – large corporations don’t employ or listen to mavericks very often –  many instead turn to trying to protect their market position by creating barriers to entry, to try to prevent the arrival of a new upstart whose radical innovation could topple them from their dominant position.

Apple was actually lucky in losing Steve Jobs for a while. His return gave it another turn at being the radical incomer. However, it is now the high-tech titan. Baumol’s account makes me think the industry dynamic he describes so convincingly will come into play here. Timothy Wu’s terrific book [amazon_link id=”B004DUMW4A” target=”_blank” ]The Master Switch[/amazon_link], which is about the ebb and flow of market power in communications industries, might point to the same conclusion.

[amazon_image id=”069111630X” link=”true” target=”_blank” size=”medium” ]The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism[/amazon_image]

A damp and dreary London morning (well, it is the height of summer) has been cheered by reading an advance copy of the [amazon_link id=”0809033615″ target=”_blank” ]second, macroeconomics, volume of The Cartoon Introduction to Economics [/amazon_link]by Grady Klein and Yoram Bauman. The book will be published in January in time for stand-up economist Bauman to take part in the now-traditional humour session at the annual meeting of the American Economic Association. Let it not be said that economists don’t know how to have a good time. In fact, there are several websites of jokes about economics (eg this and this), although it must be said that most of the jokes were around when I was a student a Very Long Time Ago. More recently, the Hayek-Keynes raps are incredibly witty and give a fantastically clear idea of the issues at debate, with the lightest of touches.

[amazon_link id=”0809094819″ target=”_blank” ]Volume 1[/amazon_link] of the Cartoon Introduction covered microeconomics. Both books similarly serve as a very good, deft introduction to the subject, suitable for pupils/students and also partners who from time to time wonder what it is you actually do as an economist. Besides, illustrator Grady Klein has a thing about bears and I love them.

[amazon_image id=”0809033615″ link=”true” target=”_blank” size=”medium” ]The Cartoon Intro to Economics: Vol 2: Volume Two: Macroeconomics[/amazon_image]

In 1930 Keynes wrote an essay titled ‘The Great Slump of 1930′ which set out an early account of the way an economy can be trapped in a vicious spiral of depression. It’s one of the collection in his [amazon_link id=”0230249574″ target=”_blank” ]Essays in Persuasion[/amazon_link]. It bears re-reading. Unlike The General Theory, or indeed a 1931 talk for the BBC, the emphasis here is on lending and investment rather than saving and consumption. The essay starts and ends by noting that, for all the dark clouds currently looming over the economy, “The resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording everyone a high standard of life.”

The problem, he argues, is a mismatch in credit markets. Firms are cautious and therefore less willing to borrow in order to invest in capital goods. Banks require a risk premium so high as to charge interest rates the deter borrowing still more. This wedge, Keynes argues, has become wider than in a normal business cycle but can be closed by central bank intervention. He would have approved in principle of Quantitative Easing, but not with its actual effect which has been to subsidise bankers’ bonuses rather than the rates they charge to their borrowers.

But perhaps the key message of the essay is the underlying optimism. There are still amazing innovations just waiting for real capitalists – as opposed to financiers – to invest in them.

[amazon_image id=”0230249574″ link=”true” target=”_blank” size=”medium” ]Essays in Persuasion[/amazon_image]