For some time I’ve been writing about the healthy state of innovation in publishing thanks to digital technologies – see for example this post and this earlier one. I spotted in the newspapers very recently a couple of articles making the same point, one in The Observer and one in the New York Times, while the BBC programme Imagine this week covered the same subject. The latest trend I’ve noted is short e-books, with publishers ranging from my own dear Princeton University Press to Penguin now publishing these. This is evidence of a healthy industry, and a great contrast to the resistance of the music industry to using digital technologies to serve consumers’ preferences – maybe the newspaper industry itself could learn something from these contrasting examples?

The key lesson is not so much about being clever in using technology, though. It’s about paying attention to consumers. Technologies enable successful businesses when they are used to serve unmet demands. Diet and celebrity books dominate the best seller lists of course, but there is in these times in particular a strong appetite for understanding, for serious fiction, current affairs, debate. Faster publishing cycles, print on demand, e-book shorts, all enable publishers to respond and that’s what they’re doing.

One of the best recent books about financial markets is [amazon_link id=”1861977654″ target=”_blank” ]The (Mis)Behaviour of Markets[/amazon_link] by Benoit Mandelbrot with Richard Hudson. The book attacks the conventional modelling of financial markets based on the statistical theory derived originally from Bachelier. Instead, Mandelbrot presents pretty compelling evidence that fractal mathematics is a far sounder basis for the analysis of financial markets. (See more on fractals on Mandelbrot’s website for his class at Yale.) This makes natural systems such as the weather or the oceans apt metaphors for the patterns of price movements – in Mandelbrot’s words they are, like turbulence at sea, “a complicated pattern of churning eddies and torrents, all interrelated.” (p227, Profile paperback edition) It is possible to describe general regularities common to all fractal systems such as the scaling, long term dependence etc – but impossible to make specific forecasts. Except to say that markets are far, far riskier than we had grown used to thinking.

Contemplating this morning the renewed implosion of trust that the global banks have for each other – reflected in them not wanting to lend some of their number any money at all overnight – it occurred to me that the situation is even worse than just turbulent. We have the turbulence of a massive storm at sea washing over institutional structures (banks, corporate treasuries) simply not designed to withstand the scale of the buffeting. Time to hide under the duvet for the holidays?

[amazon_image id=”1861977654″ link=”true” target=”_blank” size=”medium” ]The (mis)Behaviour of Markets: A Fractal View of Risk, Ruin and Reward[/amazon_image]

A good question, many people would say right now. Why indeed? So it’s brave and probably timely for monetary economist Allan Meltzer to have written a book called [amazon_link id=”0199859574″ target=”_blank” ]Why Capitalism?[/amazon_link] (due out in March 2012 from Oxford University Press). Brave because it’s going against the flow. Timely because there are certainly some people who are over-reacting to the recent failures in financial markets by either forgetting for now the failures of governments or by assuming that a failure in specific markets is evidence that all markets fail. In this short and vigorously argued book Meltzer sets out to make the arguments for the capitalist market economy as the best of all possible (inevitably flawed) set of arrangements for allocating resources. Its great virtues are freedom and adaptability.

These are useful reminders in the present climate of opinion. Although Meltzer will find it an uphill struggle to convince many people that financial markets were over- rather than under-regulated, I did like his three laws of regulation:

1. Markets can circumvent regulations faster than bureaucrats can invent and implement them;

2. Regulations are static but markets are dynamic – the behaviour being regulated will change as a result of that fact. (ie. Goodhart’s Law)

3. Regulation is most effective when it changes the incentives of the regulated rather than just instructing them.

However, there are a couple of glaring omissions from Meltzer’s argument if he wants to engage with the centre of gravity of public opinion at present. The book doesn’t acknowledge that in many areas what we have is not a capitalist market economy but a capitalist oligopoly, certainly in banking and also in some other key sectors. What he presents as the merits of markets are often in fact the merits of competition. Nor does he address the concern about, not so much inequality per se as the fact that the middling families on whom a healthy democracy and society depend have not shared in advances in productivity and growth for a generation.

Readers who think these are the presenting problems of our times will perhaps find this book aggravating, but it’s good to challenge one’s prejudices from time to time. And I do think there’s a danger in these times that we’ll forget that more market rather than less can be a big improvement.

[amazon_image id=”0199859574″ link=”true” target=”_blank” size=”medium” ]Why Capitalism?[/amazon_image]

There are not many books about finance that make me laugh out loud on the train, and, heaven knows, it’s not an inherently amusing subject at the moment. But Michael Lewis has written another superb book about the distinctive madness of financial markets. In [amazon_link id=”1846144841″ target=”_blank” ]Boomerang: The Meltdown Tour[/amazon_link] his specific subject is the Euro debt crisis, a follow-up to [amazon_link id=”0141043539″ target=”_blank” ]The Big Short[/amazon_link], which covered the US sub-prime crisis.

Who knows, maybe he’s on his way already to China to talk to the minority of clear-eyed sceptics who can see the impending implosion of its real estate and banking bubble – one bit of this global debacle yet to unravel is the (downwards) revaluation of all those US assets the Chinese have bought since the turn of the millennium. For the Lewis approach is to take an outsider’s perspective on a part of the financial world in order to reveal just how weird events prove to be when you’re not completely immersed in them. The sideways light puts all the peculiarities in sharp relief. This has worked for Lewis since his first book, the brilliant [amazon_link id=”0340839961″ target=”_blank” ]Liar’s Poker[/amazon_link], which he wrote from the point of view of an ingenue in the newly deregulated late 1980s bond markets.

Lewis also has an eye for the extraordinarily revealing fact or example of behaviour which has somehow been overlooked in mainstream analysis. For example, in the context of a received wisdom that Greeks have been profligate and idle spendthrifts living beyond their means while Germans have been hard-working and cautious, it is useful to be reminded that the German Landesbanken were some of the most enthusiastic and stupid participants in sub-prime lending and the writing of CDS insurance for securitized mortgages. Oh, and people in Iceland believe firmly in elves, and no construction project can go ahead until the ground has been certified elf-free. Who knew?

Boomerang has some flaws, the main one an excess of national stereotyping for comic effect. It doesn’t work in all chapters, particularly the German one. Mostly I still laughed. It’s better than despair, especially when you fully expect another sequel.

[amazon_image id=”1846144841″ link=”true” target=”_blank” size=”medium” ]Boomerang: The Meltdown Tour[/amazon_image]

It has seemed a good moment to reflect on the European big picture. As mentioned in a previous post, Tony Judt’s [amazon_link id=”009954203X” target=”_blank” ]Postwar A History of Europe Since 1945[/amazon_link] is a marvellous long-run history of the whole European continent. Its inclusion of the central and eastern European countries in the story gives the British reader a subtle but useful shift of perspective, far wider than our usual local take on our relationship with the rest of Europe. This morning I picked up a 1996 book, [amazon_link id=”052149964X” target=”_blank” ]Economic Growth in Europe since 1945[/amazon_link], edited by Nick Crafts and Gianni Toniolo. The overview chapter similarly offers an interesting perspective, rather different from the one that’s at front of mind as we ponder the slow but still seemingly almost inevitable disintegration of the Euro.

Take for example the following table, which uses Angus Maddison’s indispensable long-run GDP data.

One of the standouts is Greece, fastest growing from 1950-73, then one of the slowest from 1973-92, whereas Spain, Portugal and Italy all remained in the top ranks for growth. The UK’s growth ranking has been lacklustre for more than two generations – slowest growing of all 16 countries listed in the first period, not much better in the second. France and Germany have seen solid growth throughout – although of course the average is much lower for the second period than for the previous ‘golden age’ of growth.

The authors (writing, remember, in the mid-90s) discuss the possible explanations for these patterns. They conclude that there is little evidence for export-led growth theories. Investment, capital stocks, and education, determining productivity and supply capacity, are most important in the long run trends. This is interesting in the context of a crisis that is clearly shaped in large part by the inability of the peripheral countries in the Eurozone to devalue. Perhaps the right conclusion is that the devaluation option is important for financial and fiscal reasons rather than for long-term growth potential – but I’d be interested in others’ thoughts about that. One of the challenges facing macroeconomics at present is how short-terms add up to the long-term….

Either way, Greece looks in terrible shape. I’m mid-way through the Greece chapter of Michael Lewis’s brilliant book, [amazon_link id=”1846144841″ target=”_blank” ]Boomerang: the Meltdown Tour[/amazon_link], which makes it abundantly clear that Greece should never have been allowed into the Euro in the first place. Given that the new head of the Greek statistical agency is being taken to court over his lack of patriotism in publishing less inaccurate figures on the Greek economy, there is obviously quite a way to go before the debate there turns to these longer term issues.

[amazon_image id=”052149964X” link=”true” target=”_blank” size=”medium” ]Economic Growth in Europe since 1945[/amazon_image]