Frankenstein economics

I’m preparing, slowly and steadily, to give the Tanner Lectures at Brasenose College, Oxford in May, on ‘The public responsibilities of the economist’. One of the issues I’m reading about is the question of the ‘performativity’ of economics – I mentioned it in my talk last week to the Stiftervervand/Handelsblatt conference on Rethinking Economics. This is a term from linguistic philosophy, originating with J.L.Austin, and it refers to phrases whose utterance forms the action they describe – for example, to say ‘I’m sorry’ is the act of apology.

Just a few social scientists have thought about this, and they feature in a book called [amazon_link id=”0691138494″ target=”_blank” ]Do Economists Make Markets?[/amazon_link], edited by Donald Mackenzie and others. He argues very persuasively that the model of the options market has been performative, as the prices that enable the market to exist could not be calculated before there was a model. Other authors in the volume take the theme more broadly. The introduction starts in an attention-grabbing way with the young Jeff Sachs flying from Harvard to La Paz to advice the Bolivian Government on a shock therapy to counter hyper-inflation. It was only much later, Sachs realised, that the fact that Bolivia is mountainous and land-locked plays a lead role in explaining its persistent poverty. Despite gasping for breath at the altitude of La Paz, his original analysis of the economy was entirely abstract.

The books comments: “Economics is at work within economies in a way that is at odds with the widespread conception of science as an activity whose sole purpose is to observe and study, that is to ‘know’ the world.”

Hence (and with a nod to John Quiggins’ excellent book [amazon_link id=”0691145822″ target=”_blank” ]Zombie Economics[/amazon_link]) my thought about [amazon_link id=”0199537151″ target=”_blank” ]Frankenstein[/amazon_link] economics. Has the nature of the subject itself shaped the way the economy works and thus caused the crisis?

[amazon_image id=”0199537151″ link=”true” target=”_blank” size=”medium” ]Frankenstein: or `The Modern Prometheus’: The 1818 Text (Oxford World’s Classics)[/amazon_image]

The contributors to the Mackenzie et al volume have no doubts. But they’re all academics, and are looking only at the effect of academic economics on the world. I’m beginning to conclude that there has been a low-profile but rather serious drifting apart in the past decades between academic economics and practical economics as carried out in regulatory agencies, consultancies and business. The kind of abstract Bolivia of the mental model that Jeff Sachs had in mind when he first landed there in 1986 would have differed importantly from the Bolivia of a Foreign Office analyst. The practical economists have certainly adopted the models of the academic economists but – I hypothesise – didn’t take them so seriously.

If so, we practitioners did wrong to ignore them. Dr Frankenstein’s monster seems to have been on the rampage….

[amazon_image id=”0691138494″ link=”true” target=”_blank” size=”medium” ]Do Economists Make Markets?: On the Performativity of Economics[/amazon_image]

Urban ethos and economic success

Two political theorists writing on globalisation and urban identity – normally indicators of a worthy tome written in the special impenetrable jargon of modern academic social science. But [amazon_link id=”069115144X” target=”_blank” ]The Spirit of Cities: Why the Identity of a City Matters in a Global Age[/amazon_link] by Daniel A Bell (no relation to the other Daniel Bell) and Avner de-Shalit doesn’t live up to those fears. I’ve greatly enjoyed reading it, although I’m not completely sure what to take from it.

The two write about a handful of cities they know well, for the most part places they have lived. The method of selection means Beijing and New York are there but London isn’t, Oxford and Paris make it but not Boston. The method of study is to walk around and talk to people and draw on their own accumulated lived experience. I’m a huge fan of the walking around method. It’s my own approach to any city I visit, although it can cause bemusement – as in Delhi where a business visitor is expected to take taxis everywhere. The authors cite Baudelaire and Walter Benjamin as authorities for the tradition of flanerie, but oddly don’t mention [amazon_link id=”0955955335″ target=”_blank” ]Guy Debord[/amazon_link], the derive and modern psycho-geography. Odd because this modern tradition explicity aims to reclaim individual identity from the anonymity of modern consumer society.

Having quibbled, I must say I think the approach in this book works well in illuminating the way different cities retain a distinctive character. [amazon_link id=”0571276660″ target=”_blank” ]Orhan Pamuk once wrote[/amazon_link] that cities have their own sounds – the electric buzz of New York, the squeal of Metro trains in Paris, the background hum of traffic in London. The visual iconography of the streets is different, the smells. The homogenising effect of globalisation has been over-stated (as Tyler Cowen has pointed out in [amazon_link id=”0691117837″ target=”_blank” ]Creative Destruction[/amazon_link]) – it’s more kaleidescopic than grey goo. The Spirit of Cities does, I think, establish that each can have a distinctive ethos as well. The argument is that urban planners should promote their ethos, and let the economy look after itself. Or at least that economic instrumentalism is not the criterion for judging policies or outcomes. They are not against urban planning, and on the contrary even rather admire the ambitious failures,  but they argue that plans “must be rooted in some latent ethos that the residents care about.” There is almost a paradox that aiming for success too directly will lead to failure: aim instead to enhance the spirit of the city. Hence each chapter labels each city with its dominant ethos – learning for Oxford, materialism for Hong Kong, religion for Jerusalem and so on.

It’s hard to argue with this (although I suspect many urban planners might consider economic instrumentalism trumps anything else). But this isn’t a highly analytical book, but rather one to sit back and enjoy, especially if you know any of the cities described: Jerusalem, Montreal, Singapore, Hong Kong, Beijing, Oxford, Berlin, Paris New York.

[amazon_image id=”069115144X” link=”true” target=”_blank” size=”medium” ]The Spirit of Cities: Why the Identity of a City Matters in a Global Age[/amazon_image]

Happiness? Bah, humbug!

Human emotions are elusive, easy to recognise but hard to define and harder still to command. So why are so many economists and politicians convinced they can and should deliver on a happiness target?

A new collection of essays from the Institute of Economic Affairs, [amazon_link id=”0255366566″ target=”_blank” ]….and the Pursuit of Happiness[/amazon_link], edited by Philip Booth, has a valiant attempt at derailing the happiness policy bandwagon, although I suspect it is just too fashionable and appealing in these anxious times to knock off the tracks. It makes an interesting contrast to a book by a dear friend of mine, Henry Stewart, [amazon_link id=”0956198619″ target=”_blank” ]the happy manifesto[/amazon_link]. Henry runs Happy Computers, which is certainly where I would want to work if I were not my own boss, and is a stalwart of the campaign Action for Happiness.

One of the things that bugs me about the happiness business is that the campaign is based on a statistical error, one that has now been pointed out by many people (including Paul Ormerod, and Betsey Stevenson and Justin Wolfers, who have essays in the IEA volume, and again this week by Stefan Bergheim of the Zentrum für gesellschaftlichen Fortschritt (there’s a link to his slides here). The origin of the idea that there’s no link between the level of GDP and happiness is Richard Easterlin’s original observation that although within any country rich people reported themselves to be happier than poor people, and average happiness levels were higher in rich countries than poor ones, happiness did not keep pace with GDP in any individual country over time. Therefore, many people concluded, economic growth doesn’t bring happiness. Forget growth! Forget economics!

But happiness is reported on an index running from 1 to 3 or 1 to 10 and can never get above the top of that scale. GDP can increase without limit. There will never be a statistical correlation between the two over time just because of the way the statistics are constructed. The absence of correlation between the two time series therefore has no economic meaning. Look instead at GDP growth (not its level), and this is correlated with happiness.

Does this matter? Yes. Happiness studies certainly offer some important findings. For example, mental health is greatly under-resourced in our health system, and changing that would significantly contribute to well-being. As Henry’s happy manifesto advises, the happiness perspective can make businesses better-managed and more productive. I would commend the advice he offers in this delightful book to anybody running a business, large or small.

However, the well-being agenda at the aggregate level is diverting attention from the important policy priority of enabling growth and employment. A job is the most fundamental contributor to happiness – it gives people meaning and social relations as well as an income (if it is a paid job rather than unpaid care or home-working). Given population and productivity growth, the UK economy needs to grow by about 2.5% a year to keep employment levels where they are. GDP growth is about zero currently. What’s more, as Pedro Schwartz explains in the IEA book, the utilitarianism and psychology underpinning the happiness bandwagon bring some philosophical problems. To give just one example, if poor people in a developing country report themselves to be as happy as, say, the French, on average, what is the justification for anti-poverty policies and aid? Why bother?

As readers of my book [amazon_link id=”0691145180″ target=”_blank” ]The Economics of Enough[/amazon_link] will know, I strongly favour using other indicators as well as GDP, but I would really prefer it if the government and statisticians were not faffing about measuring well-being and telling me to be happy. Stick to the knitting – deliver the jobs, and yes, resource mental health services, cut commuting times, keep down noise and other pollution levels, the things we do know people care about. Leave happiness where it belongs, in the hearts of individuals, including fabulous bosses like Henry Stewart.

[amazon_image id=”0956198619″ link=”true” target=”_blank” size=”medium” ]The Happy Manifesto: Make Your Organisation a Great Workplace – Now![/amazon_image]

Sir Samuel Brittan has reviewed the IEA volume in the FT today. As he points out, the government in Aldous Huxley’s [amazon_link id=”0099518473″ target=”_blank” ]Brave New World [/amazon_link]fed happiness pills to the population, and we consider that a dystopia…..

Working class heroes

My esteemed chairman (of the BBC Trust), Lord Patten, gave a marvellous speech at the Oxford Media Convention today. Do read it – Is the BBC as good as it can be? –  if you have an interest. A large part of the speech is about respecting the seriousness and ambition of audiences. As he expressed it: “I remain unashamedly of the view that introducing people to good books, great paintings, or beautiful music – allowing them to better pursue and appreciate their passions and interests – helps to enrich them as individuals and to improve the quality of civic life for all of us.”

Lord P cited a book I absolutely loved, Jonathan Rose’s [amazon_link id=”0300098081″ target=”_blank” ]The Intellectual Life of the British Working Classes[/amazon_link].The book traces the rise – and decline since the mid-20th century – of the strong auto-didactic tradition among working people, including the role played by the BBC. As Lord P notes, the BBC’s Third Programme was fiercely and intentionally elitist, making no concessions to middlebrow listeners (as the snobbish Virginia Woolf characterised them). Yet a third of the audience in the first week consisted of working class listeners, and  by 1949 21% of working class audiences had listened to it (compared with 63% of the middle classes). (P437, 2002 paperback edition.) Similarly, Wilfred Pickles successfully broadcast poetry on his Light Programme show, The Pleasure’s Mine, despite being advised by more elitist types that it would never work (p195).

As for news, in January 1938 the BBC found that 60% of working class listeners regularly tuned in to the 6pm news, compared with 54% of middle class listeners. Rose writes that the BBC’s newscasts: “Made political discourse intelligible to the under-educated, something that ‘quality’ newspapers, weekly reviews, and most statesmen failed to do.” He gives the example of a 1939 speech by Labour politician Herbert Morrison, a populist who had been a shop assistant – a survey of his audience found that 50 words had been over their heads – ‘lineal’, ‘suppliant’ and so on. (p223)

The book only touches on the BBC. The tradition of working class self-improvement went far, far wider. Rose’s account of the passion and determination of so many people to learn and debate and participate is very moving. It’s a terrific book which deservedly won a bunch of prizes.

I have a particular soft spot for the Workers’ Educational Association, still in existence. In her retirement my mother took one of its courses for working people (wine appreciation, no longer available alas) along with a watercolour class provided by her local council. Suitable retirement hobbies, I think, for a clever woman who had been forced out to work in a factory at the age of 14 but sent her own four children to Oxford and on to PhDs.

[amazon_image id=”0300098081″ link=”true” target=”_blank” size=”medium” ]The Intellectual Life of the British Working Classes (Yale Nota Bene)[/amazon_image]

Too big to know

A flight and a night in a hotel have been the perfect opportunity for polishing off David Weinberger’s [amazon_link id=”0465021425″ target=”_blank” ]Too Big to Know[/amazon_link]. I don’t mean to be as disparaging as this might sound, but it’s the perfect book for business travel. I mean it’s well written, with pithy thoughts, and not over-demanding. Ironically, as the theme of the book is that the web is rendering long-form thinking and writing (ie books) redundant, it would have made a perfect long form online read, or a very long magazine article. The examples are all very nicely done, but the basic idea gets stretched a bit too much.

The basic idea: it’s that we now have this medium that allows us to store knowledge in a different way, outside the confines of pages and minds. As Weinberger puts it in a phrase that’s become quite well known: “the smartest person in the room is the room itself: the network that joins the people and ideas in the room and connects to those outside of it.” (pxiii) His argument is that we need to learn to use the room effectively. One of the most interesting chapters is about the access the network of knowledge gives us to a diversity of perspectives, for more effective decision-making. Weinberger cites one of my favourite books, Scott Page’s [amazon_link id=”0691138540″ target=”_blank” ]The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies[/amazon_link], on this subject. It’s simple really: people who know different things than you do have more to offer you than people who know the same things because of their similarity to you.

I also very much enjoyed Weinberger’s turn of phrase. For example, talking of post-modernism, he writes that this kind of writing tends to be impenetrably dense “because they are using the fog of language to hide the emptiness of their ideas.” (p89) Hear, hear! Having skewered them effectively, he goes on to give the clearest, concisest and most appealing definition/summary of postmodernism I’ve ever come across. It made me realise that the pomo mistake has been to think their perspectives on discourse exhaust all there is to say, when they are only part of the whole.

Weinberger’s loves books but argues that we should not romanticise them. We think of leather armchairs in cosy libraries, he argues, not crumbling paperbacks coved in dust. I think he needs to check out the bookshelf porn website…but of course have to agree. Of course it must be true that access to the web is changing how we store and access knowledge. I think this must be a good thing; perhaps we lose some memory skills but we gain many, many other things. And anyway, we mustn’t be romantically nostalgic about the shape of memory any more than we are about its storage devices.

The one truly important point, and the one this book ends on, is that access to knowledge is distinct from creating knowledge. No technology can substitute for the slow and painstaking work of Charles Darwin before he published [amazon_link id=”B000JML90Y” target=”_blank” ]On the Origin of Species By Means of Natural Selection, or, the Preservation of Favoured Races in the Struggle for Life[/amazon_link]. No amount of linking substitutes for investigative journalism. Assuming otherwise is the real danger the ability to access knowledge online poses for us.

[amazon_image id=”0465021425″ link=”true” target=”_blank” size=”medium” ]Too Big to Know[/amazon_image]