I finished reading a terrific book (recommended to me by the terrific Tim Harford), The New Kings of Non-Fiction edited by Ira Glass. One of the essays is Losing the War by Lee Sandlin (also available here). Although it’s not really about the economic aspects of World War II, it nevertheless underlines the extent to which total war required the economy of all combatants to be totally geared to war production. Sandlin also writes:
“Modern warfare has grown so complicated and requires such immense movements of men and materiel over so vast an expanse of territory that an ever increasing proportion of every army is give over to supply, tactical support, and logistics…. The war was essentially a self-contained economic system that swelled up out of nothing and covered the globe.” (p338)
I have in my in-pile David Edgerton’s Britain’s War Machine, which I’ve been meaning to read for a while. I’ll turn to it after my impending trip to the Trento Festival of Economics, where I’ll be talking about The Economics of Enough, which is just out in Italian.
A few days ago I was mulling over here the way the physical network created by modern information and communication technologies has transformed the economy in the past generation and yet has not been recognised very much at all in the way we theorise about the economy. That same point applies with even more force when it comes to thinking about globalisation. After all, the post-1980 globalisation is entirely driven by ICTs. Without computer power, the internet, cheaper phone calls etc, the phenomenon of sliced-up global supply chains and the massive growth of trade in intermediates would not have taken place. Few people realise how much of China’s success lies in supply chain logistics, as well as low-cost manufacturing. Its firms can not only assemble the materials and make cheap clothes, they can also adopt new designs quickly and get the items to shops in the US and Europe, ready-packaged for display, with appropriate labels, within a few weeks.
Yet the radically changed character of international trade has not been thoroughly reflected in economics. Even my reference book, the Princeton Encyclopedia of the World Economy, has little about technology. So it was with delight this morning that I read this Vox column by the brilliant Richard Baldwin, which is exactly about the way technology has transformed the character of trade (and consequently trade policy). (There is also a longer CEPR policy brief by him on the subject, link at the bottom of his column). Given the likely role of global imbalances in the crisis, the doubts about what trade statistics are actually measuring, and the extraordinary complexity of the global economy, this is a key area for more thinking and empirical research.
On reflection, the fact that the literal rewiring of the global economy and national economies has not been the subject of much debate and research is a striking example of how hard it is for us to see large phenomena that are in plain view. Another is the astonishingly little attention economists paid to the explosion of bank balance sheets ahead of the financial crisis, one of the most dramatic macro-level phenomena. It does make you ask what else we are missing.
For those who have not read Daniel Bell’s The Cultural Contradictions of Capitalism, it is, as Mike Elliott points out in his comment on yesterday’s post, a brilliant analysis. Here is the essence of the argument:
“The characteristic style of an industrial society is based on the principles of economics and economizing: on efficiency, least cost, maximization, optimization, and functional rationality. Yet it is at this point that it comes into sharpest conflict with the cultural trends of the day, for the culture emphasizes anti-cognitive and anti-intellectual currents. … The one emphasizes functional rationality, technocratic decision-making and meritocratic rewards. The other, apocalyptic moods and anti-rational behavior. It is this disjunction which is the historic crisis of Western society. This cultural contradiction, in the long run, is the deepest challenge to the society.”
A contradiction played out every day, and engaging scientists as well as economists, as we saw in a field in Hertfordshire the other day. I don’t think it’s obvious which side will triumph.
Chatting to a philosopher friend yesterday about the state of the world in general and capitalism in particular, we concluded that a lot of the heavy analytical lifting on the changing structure of post-industrial economies had been done long ago by Daniel Bell and Peter Drucker. Bell’s The Coming of Post-Industrial Society was published in 1973 and The Cultural Contradictions of Capitalism in 1976, while Drucker’s key books were published even earlier - Technology, Management and Society came out in 1970, a year after The Age of Discontinuity, with its coinage of the term ‘the knowledge economy’.
I have on the shelf a 1970 collection of essays edited by Bell and Irving Kristol, Capitalism Today, in which Bell and Drucker again stand out for their prescience. Drucker writes about the development of mass global markets in capital and professional careers, alongside the mass market in products and services, and calls for economic theory to integrate the three in order to understand the global economy. Bell’s essay discusses the break between the dynamics of the economy and the cultural and moral foundations that had always made capitalism work until then; and the disjunction between the rational, technocratic decision-making of the economy and the “anti-cognitive and anti-intellectual currents” of modern culture.
Is it cheering or depressing that today’s deep problems are at least a generation old? It does feel like a return to the 1970s in so many ways, from maxi dresses in fashion and a punk revival, to exchange rate crises and the back-to-the-future macro debate of Keynesians versus monetarists.
Is it 1978 again?
I’ve been mulling over the Malcolm Gladwell comment mentioned in my previous post – “Poverty is not deprivation; it is isolation.”
Much of my consultancy work during the past eight years has concerned the social and economic impact of mobile phones in low-income countries. The first report I did for Vodafone (on the impact of mobiles in Africa, in 2005, Paper 2 in this series) included a now-famous piece of econometrics by Len Waverman and co-authors estimating that an additional 10 mobile phones per 100 people (from 1995 to 2003) had raised a country’s per capita GDP growth 0.6%. Although this was large, an estimate we thought was probably biased upward a bit by simultaneity despite the team’s best efforts to take this into account, it made sense that the impact could be large when looking at earlier research on the effects of fixed line telephony in the US.
One comparison Len made always stuck in my mind: at that time mobile penetration rates in a country like Kenya were similar to fixed-line penetration rates in a country like France in the early 1970s. When I grew up in northern England in the 1960s and 70s, few of us had phones at home – we had to walk about 10 minutes to the nearest call box. My parents got a phone in the late 1970s, and shared the line with another house even then. Within the past generation, communication has changed the way all of us on Earth engage in everyday economic (and social) activities like shopping or finding work.
I looked back at the first book I read about networks, Albert-Lásló Barabási’s Linked: The New Science of Networks. He points out that the structure of the economy or its sub-components like industries or firms is a tree. Poor countries, or people are at the outmost branches, with the fewest opportunities. Unhealthy, uncompetitive industries have too few over-large trees whose shade destroys the vigorous undergrowth.
Andy Haldane at the Bank of England has spoken of the need to apply network thinking to the banking industry, and the risk of systemic failure. Mainstream economists actually need to consider much more carefully how network models might apply across the board, as a few pioneers such as Alan Kirman and Paul Ormerod have long argued.
Thinking about networks is natural in the field of telecoms, but the connection between the physical networks that fundamentally underpin the economy and the mental models we use to analyse the economy hasn’t been fully made. The economy has been rewired since around 1980 but economics hasn’t yet.
The internet tree