It has taken me a long time to finish Steve Keen’s [amazon_link id=”1848139926″ target=”_blank” ]Debunking Economics: The Naked Emperor Dethroned[/amazon_link]. Its author has enjoyed great celebrity, at least for an economist. For example, he featured in a recent BBC Radio 4 Analysis programme, and has battled Paul Krugman in the blogosphere.  This might be a touch cynical of me, but I’m pretty sure his popular acclaim is due to the appeal of his conclusions rather than a detailed appraisal of the nearly 500 pages he takes to reach them. For this is a dense and rather academic book, although Professor Keen presents it as an explanation for non-experts – he explicitly says it is written for non-economists, but that does not make it an easy read.

The first two parts present a detailed critique of the basics of economic theory, all of it from the basics of consumer choice and theory of the firm through general equilibrium theory to conventional macroeconomics. Keen describes the flaws of conventional theoretical economics on its own terms, with detailed reference to original papers, and I think he does a reasonably convincing job.

Does that make me want to throw away everything I know about economics? Well, no. For example, the book spends pages analysing the internal contradictions of the standard derivation of a downward sloping demand curve: “Market demand curves should have any shape except the one that is drawn in the textbooks.” He draws a ‘true’ market demand curve as a wiggly snake. However, when I contemplate my eight years of market analysis on the Competition Commission, and more than a decade of consultancy, I conclude that, you know what, demand tends to go up when prices go down. Similarly, Keen concludes that output and prices will be identical in competitive and monopolistic markets. That could only be true by chance as firms with and without monopoly power set prices in completely different ways: competitive firms know what their costs are and charge a cost-plus price; firms with market power charge ‘what the market will bear’ and find it difficult to identify and allocate their costs.

After chapters of logical analysis, I realised that Professor Keen’s theorising is as abstract as the theories he criticises. I have no trouble agreeing with him about the practical unreality of the basics of economic theory, but I don’t think it’s the knock-out blow he considers it to be. The reason is related to a classification of types of assumptions he sets out on pp161-163 of the book. I for one regard most of the assumptions made in the theory as ‘heuristic’ assumptions, known to be false but useful as a device for thinking about a problem. It wouldn’t trouble me at all to ditch the formalities of Arrow-Debreu general equilibrium theory, as long as we keep the deeper reality that the economy is a connected system. My guess is that many applied economists are in my camp. Maybe, though, many academic economists would be as scandalised by Professor Keen’s debunking as he thinks. I certainly agree with his plea from the heart for wholesale reform of the way economics is taught. (See the forthcoming What’s The Use of Economics – watch this space.)

The book hits its stride in the sections on macroeconomics, in the third part, in which Keen sets out his own theory, a Marx-Minsky-Keynes (M-M-K) approach that meant he was able to issue public warnings of the impending crisis ahead of 2008. The key difference between his model and more mainstream ones is the inclusion of a financial sector and financial cycles with asset bubbles. All credit to Professor Keen for talking about a debt problem when most macroeconomists hadn’t even noticed the astonishing aggregate build-up of leverage in the global economy.

This section is easier going than the earlier parts of the book. Although Debunking Economics cites non-mainstream approaches such as Alan Kirman’s network and complexity theories (in [amazon_link id=”0415594243″ target=”_blank” ]Complex Economics[/amazon_link]) earlier in the book, it does not include them in this section as an alternative way of thinking about the aggregate economy, which seems a bit of an omission. The trouble with Keen’s M-M-K synthesis, using aggregate variables in different relationships than in the conventional model, is that it might lack generality. This worry is what originally drove the project of finding micro-foundations for macro-models, even though it took us in the end into the madness of Dynamic Stochastic General Equilbrium modelling of representative agents. Perhaps a lack of generality is ok. I’ve always been a fan of Malinvaud’s distinction (in [amazon_link id=”063117690X” target=”_blank” ]Theory of Unemployment Reconsidered[/amazon_link]) between different states of the macroeconomy, requiring entirely different policy regimes. However, I do think we ought to be open as well to a completely new modeling strategy.

So, without in any way wanting to defend the mainstream theories at all costs, I don’t think Debunking Economics is the last word on either what’s wrong with the subject or how to fix it. I have a lot of sympathy with the details of Professor Keen’s project, but not its ultimate ambition. For in the end I think the Naked Emperor needs to be reclothed rather than dethroned.

[amazon_image id=”1848139926″ link=”true” target=”_blank” size=”medium” ]Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned?[/amazon_image]

In honour of the centenary of Alan Turing’s birth, I’ve been reading [amazon_link id=”B008CJ4EE4″ target=”_blank” ]Computing: A Concise History[/amazon_link] by Paul Ceruzzi. It’s a delightful small book, very nicely produced and with illustrations, perfect for a journey or to slip in a pocket for commuting. It’s also, in 150 pages, a super overview of the history of this utterly transformational technology from the early days of applications of digital approaches in mechanical forms (including – I never knew this – holes punched into old movie tape) to the Web.

[amazon_image id=”B008CJ4EE4″ link=”true” target=”_blank” size=”medium” ]Computing (MIT Press Essential Knowledge)[/amazon_image]

What I like about the book is that it draws out the important analytical milestones such as binary code or the principle of storing programmes naturally from the course of events – it is not simply a catalogue of inventions, as a short book covering a huge territory could be. It also emphasizes the way the converged computing and communication we have today is the confluence of very many rivers of innovation. While this looks inevitable with hindsight, there was much happenstance along the way.

In a short book, Alan Turing himself gets little space. I enjoyed Andrew Hodges’ biography [amazon_link id=”069115564X” target=”_blank” ]Alan Turing: The Enigma[/amazon_link]. George Dyson’s [amazon_link id=”B0076O2VXM” target=”_blank” ]Turing’s Cathedral: The Origins of the Digital Universe[/amazon_link] is on my wishlist. There’s a new paperback out, [amazon_link id=”1845136330″ target=”_blank” ]The Secret Life of Bletchley Park [/amazon_link]by Sinclair Mackay. Another recent book, on the analytics of computing, is John MacCormick’s 9 Algorithms [amazon_link id=”0691147140″ target=”_blank” ]That Changed the Future[/amazon_link], which I reviewed here.

For the commercial history of the American computer industry, the best I’ve come across is Robert Cringely’s [amazon_link id=”0140258264″ target=”_blank” ]Accidental Empires[/amazon_link] – a bit outdated now, though. Georgina Ferry’s [amazon_link id=”1841151866″ target=”_blank” ]A Computer Called Leo[/amazon_link] is a nice bit of the UK industry’s history. And for something more reflective about computers and society, [amazon_link id=”0571172431″ target=”_blank” ]Cultural Babbage: Technology, Time and Invention[/amazon_link] edited by Francis Spufford and Jenny Uglow is an all-time favourite.

[amazon_image id=”069115564X” link=”true” target=”_blank” size=”medium” ]Alan Turing: The Enigma The Centenary Edition[/amazon_image]

The BBC website has a series of nice essays about Turing. There’s also the Science Museum exhibition to look forward to.

A handful of new books have arrived recently, all looking enticing and/or useful:

[amazon_link id=”0300186304″ target=”_blank” ]Good Italy, Bad Italy[/amazon_link] by Bill Emmott

[amazon_image id=”0300186304″ link=”true” target=”_blank” size=”medium” ]Good Italy, Bad Italy: Why Italy Must Conquer Its Demons to Face the Future[/amazon_image]

[amazon_link id=”1610390040″ target=”_blank” ]Wait: The Art and Science of Delay[/amazon_link] by Frank Partnoy

[amazon_image id=”1610390040″ link=”true” target=”_blank” size=”medium” ]Wait: The Art and Science of Delay[/amazon_image]

[amazon_link id=”0571279201″ target=”_blank” ]Positive Linking: How Networks Can Revolutionise the World[/amazon_link] by Paul Ormerod

[amazon_image id=”0571279201″ link=”true” target=”_blank” size=”medium” ]Positive Linking: How Networks Can Revolutionise the World[/amazon_image]

[amazon_link id=”0230392547″ target=”_blank” ]Going South: Why Britain will Have A Third World Economy by 2014[/amazon_link] by Larry Elliott and Dan Atkinson

[amazon_image id=”0230392547″ link=”true” target=”_blank” size=”medium” ]Going South: Why Britain will have a Third World Economy by 2014[/amazon_image]

[amazon_link id=”B008CJ4EE4″ target=”_blank” ]Computing: A Concise History[/amazon_link] by Paul Ceruzzi

[amazon_image id=”B008CJ4EE4″ link=”true” target=”_blank” size=”medium” ]Computing (MIT Press Essential Knowledge)[/amazon_image]

I’d better get reading.

I’ve been taken to task by a friend – a macroeconomist – for being overly dismissive about macroeconomics. I won’t name him – he can always do so himself if he likes.

He agrees that macro is not covered in glory at the moment, but disagrees with my charge that its intellectual flaws are substantial, and that it does not stand on the same kind of increasingly sound empirical footing as much of microeconomics. He also is sure, absolutely sure, that UK government policy is wrong-headed and what we need is an urgent dose of fiscal stimulus.

I’d already annoyed my friend by criticising the state of macro, no doubt in exaggerated terms, in my recent Tanner Lectures (pdf). (I confess I did compare it to Mr Rochester’s mad wife in the attic, too embarrassing to acknowledge.) The more recent prompt for my telling off was my tweet suggesting the first of this year’s BBC Reith Lectures by Niall Ferguson was worth a listen. Ferguson argues that public debt burdens in the UK and elsewhere represent a breakdown of the social contract between us and future generations. He believes ‘austerity’ policies remain necessary. I think this is an important argument to acknowledge in public debate – taking due account of the future is an important theme of [amazon_link id=”0691145180″ target=”_blank” ]The Economics of Enough[/amazon_link]. My friend doesn’t disagree with this but says Prof Ferguson is empirically wrong in his reasoning about why a fiscal stimulus is a bad idea, and consequently in his blanket dismissal of the standard macro analysis, and therefore shouldn’t be taken seriously in economic policy discussions (to quote, he thinks Ferguson should have suffered ‘a terminal loss of credibility’).

I’ve got a three-fold answer to my friend (if he’ll still talk to me).

First, macroeconomists simply do not realise how low their stock has sunk in the eyes of their microeconomist colleagues. When popular critics attack ‘economics’, they mean macro. It’s bringing us into disrepute, we fear. Although macroeconomists will insist that there are known scientific facts, they do not appear to agree on what these are. One of the (micro)economists I discussed my lectures with sent me this email about a public occasion when he’d been on a panel with four (macro)economists:

“They disagreed fundamentally with each other and almost every statement was introduced by “in my opinion…” or “I think…” leaving the audience with no way of coming to an intelligent way of judging between the opinions. But I think that is a different issue (is it?) from what happens in academic macro where the failure of macroeconomists to agree on the basic model feels to me more like some other social sciences where there are very
basic disagreements which seem impossible to reconcile using evidence.”

In a forthcoming collection of essays about the teaching of economics, What’s the Use of Economics? (out in September), the section on macro reveals an extraordinary spread of views, from those who think existing models just need a few tweaks to those who argue for an entirely new intellectual project involving network science (one of these is Paul Ormerod in his new book [amazon_link id=”0571279201″ target=”_blank” ]Positive Linking[/amazon_link]). I’m trying to educate myself by reading the excellent macro blogs such as those by Simon Wren-Lewis and Jonathan Portes, but I don’t see them acknowledging at all the possibility of an entirely new approach to modelling economic aggregates. No wonder the ESRC is sponsoring an important conference this autumn on the state of macro.

[amazon_image id=”0571279201″ link=”true” target=”_blank” size=”medium” ]Positive Linking: How Networks Can Revolutionise the World[/amazon_image]

This takes me to my second point, which is that it is hard to believe in the existence of a significant consensus about empirical truths in macro policy when the discussion among macroeconomists is so shouty. Paul Krugman in his new book [amazon_link id=”0393088774″ target=”_blank” ]End This Depression Now[/amazon_link] plainly thinks those who disagree with him about a fiscal stimulus now are blithering idiots. OK, maybe I am, but it’s not a good tactic to win me over in the debate. Chris Giles’s views in his recent FT column were more persuasive: a fiscal stimulus might be needed soon, he says, but it won’t fix the economy and it will need reversing later – and by the way, there would be an adverse impact on policy credibility.

[amazon_image id=”0393088774″ link=”true” target=”_blank” size=”medium” ]End This Depression Now![/amazon_image]

Finally, and following on from the point about shoutiness, all economists need to do far, far better at explaining their work to the general public. This is all the more important for macroeconomists in the context of a macro crisis in which voter attitudes materially limit the courses of action open to politicians. The process of education will need to start from what macroeconomists do agree about, not what they disagree about in vituperative public rows. My friend assures me that some theories have performed well in recent years. I – a professional economist, albeit of the micro and possibly even blithering idiot kind – do not know what they are. I shouldn’t have to keep up with the professional literature in a different field from mine to know, either. So I’ll end with a challenge. Can some of the macroeconomists out there agree about what they agree is empirically well-founded, including the policy implications, and let us know? It will be a lot more interesting than the polemics, and maybe it would stop me being so naughtily dismissive about macroeconomics.

As I was listening to the report on the radio this morning about Aung San Suu Kyi’s first visit to the UK in 24 years, it set me thinking about how much has changed since 1988. The London of those days – a city to which I’d recently moved from the US – was dirtier, not as lively, far less cosmopolitan. We were all much poorer, even the bankers, well worth remembering in the midst of the crisis. According to the new IFS and Joseph Rowntree Foundation study, 3.4 million children here lived in poverty in 1988-89, down to 1.7 million in the latest figures (still too high, but the biggest decline in the years since 1961 when the data start).

Personally, 1988 is so long ago that I was still doing macroeconomics, and hadn’t yet quite begun my 13-year journey in journalism. I had just met the man who became my husband, and our now grown-up eldest son hadn’t been imagined yet. And here is what I was reading in 1988. Some good stuff among the detective novels. Ian Jack’s [amazon_link id=”0099754215″ target=”_blank” ]Before the Oil Ran Out[/amazon_link] is a marvellous piece of reportage about how Britain had been changing in the 1980s. I was obviously also in the middle of a lot of travel writing and a [amazon_link id=”0141183063″ target=”_blank” ]George Orwell[/amazon_link] fest.

July 1988 books

August 1988 books