Monthly Archives: August 2012

Out in paperback!

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As [amazon_link id=”0691156298″ target=”_blank” ] The Economics of Enough[/amazon_link] is out in paperback next Tuesday, it seemed a good moment to reflect on how it looks in the light of events since it was first published in February 2011.

[amazon_image id=”0691156298″ link=”true” target=”_blank” size=”medium” ]The Economics of Enough: How to Run the Economy as If the Future Matters[/amazon_image]

I don’t know about other authors, but as soon as I’ve sent off the file with the last fiddly bits of proofreading done, I put a book out of my mind. When the bound copies arrive, it’s a joy to handle them and see how they look, but I can only bear to peep briefly inside at the words. It’s always possible to spot things that could be improved, and anyway I find it faintly embarrassing to look at my own work with the kind of external perspective having a physical book in hand seems to bring – it makes it ‘official’, somehow. Like looking at a photo of yourself, which I hate as well.

So although I’ve been giving many talks about the book, it is only this week that I’ve re-read most of it. It’s a relief to find it stands up pretty well. When I was still writing, and even during the gap between writing and publication, neither I nor many other people expected the economic situation to remain as weak as it has. The already sharp debate between deficit cutters and advocates of stimulus has grown even sharper as a result of another 18 months of at best weak growth, at worst continuing recession. The Eurozone crisis does not feature in the book, but the structural and demographic challenges faced by Europeans do.

I probably understated the political challenges of delivering any kind of long-term policies addressing structural economic change – events have made me more pessimistic. Since publication, I’ve thought some more about inequality, its causes and solutions. This was the subject of my Joseph Rowntree Foundation lecture at the University of York in February 2012. Great inequality at a time of economic recession/depression certainly contributes to the bitter political atmosphere, and at present I find it hard to predict what the results will be. On a good day, I remain optimistic about the scope for social and institutional innovation to start reversing the inequality trend, but on a bad day, I think it will get played out in the political arena, nastily.

As for fiscal sustainability, I hesitate to dip once again into the macroeconomic debate. Although I can’t see how the transmission mechanisms of either more expansionary monetary policy (with billions of unacknowledged bad debts remaining on banks’ balance sheets) or an infrastructure-geared fiscal stimulus (when it will take two years or more to happen) can boost growth quickly, the macroeconomists I know are mainly advocates of an urgent government spending boost. Additional current government spending would by definition boost GDP growth in the short term (C+I+G+X-M) and there seems to be a consensus that the multiplier is (probably) greater than one. Higher long-term growth is a supply-side issue, though; and the long-term fiscal arithmetic that I discuss in the book makes it clear that a bigger deficit now will require a smaller deficit/bigger surplus later, unless growth potential improves more than currently seems likely. At any rate, I defer to others on the short-term stimulus vs austerity debate, on which I have nothing to add; but there’s definitely no quick fix for the longer term problem.

So, overall, The Economics of Enough more than stands the test of time, I think. The trouble is that genuinely sustainable growth, in all its dimensions, involves difficult choices, trade-offs. Events have made those less palatable, not more, while the challenges of sustainability have grown.

Magic bullets, war and peace, and defeating metaphors

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The books I chose for my recent holiday turned out to be uniformly excellent, which doesn’t always happen. Another cracker was Siddartha Mukherjee’s [amazon_link id=”0007250924″ target=”_blank” ]The Emperor of All Maladies: A Biography of Cancer[/amazon_link]. Although detailed and authoritative on the medicine and science, and quite a chunky book, it reads like a thriller and is packed with fascinating stuff.

[amazon_image id=”0007250924″ link=”true” target=”_blank” size=”medium” ]The Emperor of All Maladies[/amazon_image]

One of the most interesting strands concerns the importance of randomized control trials in testing both causes of different cancers and potential treatments for it. Medical trials are expensive, fraught with ethical dilemmas, and slooooow. But failure to carry them out can maim and kill. For many years women underwent massively radical mastectomies that made no beneficial difference to their health and mortality. The surgeons were carried along on the crest of their own certainty and self-esteem. (In fact, the disconnect between cancer researchers and surgeons who treat patients is another interesting theme.) The Doll and Hill test of the link from smoking to lung cancer was so decisive because it assigned subjects to trial groups randomly, before they had developed the disease.

However, as Mukherjee notes, the campaigning by activists for people with HIV and AIDS to receive new drugs and combinations of drugs before trials had been completed – on the entirely understandable grounds that the patients were dying and so anything, even anything unproven, was worth trying – changed the environment for rigorous trials. We see this all the time now with new cancer drugs. Desperate patients learn very quickly from online forums that an experimental treatment is available, and each of them faces the choice between certain early death and a whisper of uncertainty. See this recent example described in The Guardian – although the article doesn’t state whether the pioneering treatment available in the US has actually been trialled there either).

Thank goodness the stakes in economic policy, increasingly looking at the methodology of randomized control trials, are not so high. I think Mukherjee makes a strong case for sticking with the methodology, and resisting the activism, although it would make sense to ask whether formal trials need to take so long or cost so much. After all, apart from slowing down results, they form a massive barrier to entry in the pharmaceuticals industry.

I could pick out lots of other terrific sections. The book describes Vannevar Bush’s view of research at the wartime Office of Scientific Research and Development – namely, that the government had to fund research directly serving the needs of war. Programmatic research was a much higher priority than basic research. And also his change of mind as soon as the war was over, writing to the President in 1945: “The striking advances in medicine during the war have been possible only because we had a large backlog of scientific data accumulated through basic research in many scientific fields in the years before the war.”

What else? The heterogeneity of cancers. The fact that humans and cancer are in an arms race because tumours develop resistance, and that a “war on cancer” is, like all metaphorical wars, unlikely to be won. That as early as 1910 a researcher (a Paul Ehrlich, although not that one) declared (wrongly) that he had found a ‘magic bullet’, a metaphorical weapon in the metaphorical war. A highly recommended book.

PS I’d no sooner posted this than I found this THES review of two new books on the tobacco industry’s (ab)use of areas of scientific doubt.

More on parallel universes

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The holiday wasn’t all work (although below is the photographic evidence of me writing my next book). One of the novels I read was [amazon_link id=”1846556260″ target=”_blank” ]The Banker’s Daughter[/amazon_link] by Emran Mian. The daughter of an international banker flees London with her father when his BCCI-style bank collapses under allegations of fraud, some time before the global financial crisis. The two of them live an odd, deracinated life in a luxury hotel in Beirut. For the character of the title, the only meaning comes from designer shopping – until she discovers a photograph that raises in her mind a dreadful suspicion that her father has done something much worse than commit fraud. The action moves on to Lahore and finally back to London for the denouement. To say more would reveal too much about the plot.

[amazon_image id=”1846556260″ link=”true” target=”_blank” size=”medium” ]The Banker’s Daughter[/amazon_image]

The novel is a terrific read, a page turner with complex and credible characters – a rarer combination than one might hope. It is set in not one but three universes completely outside my own experience – globe-trotting banking, designer-shopping levels of wealth, and a Pakistani family. Like all good novels, The Banker’s Daughter is universal and specific at the same time, and I found the depiction of these parallel universes really interesting. Highly recommended. We need more creative and literary engagement with the world of the bankers and financial markets.

As a footnote, I’m afraid my other fiction reading was crime novels. The latest Camilleri paperback in his Montalbano series, [amazon_link id=”0330507672″ target=”_blank” ]The Track of Sand[/amazon_link], and another book by the outstanding South African writer Deon Meyer, [amazon_link id=”B003ODIWCS” target=”_blank” ]Heart of the Hunter[/amazon_link]. Well, I deserved some lighter reading after writing about the history of GDP for two hours a day.

An author at work

In their own moral universe

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After two weeks in Brittany with next to no internet and email access, and two days at home getting the email inbox down from 449 unread after the immediate deletions to 21 read and needing action, I can start reporting here on some of my holiday reading.

First up is a book that could have been either a bit of a disappointment or a gripping read, and that’s because it’s an anthology. It’s [amazon_link id=”0231160739″ target=”_blank” ]The Best Business Writing 2012[/amazon_link], selected by editors for the Columbia Journalism Review. The times could not be more suited to compelling reporting about the world of business, finance and economics. We have seen events that will, with due hindsight as well as now, change the course of history. I’d read/heard/seen some of the essays and extracts in this book already but the collection of this superb reporting in one volume is compelling.

To read them one after the other is to have the experience of one’s sense of righteous anger about the behaviour of the business and financial elite being focused like a laser. Merrill Lynch bankers having a saying: “We’re in the moving business, not the storage business.” The use of crops for ethanol making millions of people hungry. Corporate executives in a healthcare business ignoring multiple warnings from the FDA about breaches of cleanliness and failure to uphold proper procedures – and the agency for doing nothing more than issue verbal warnings for a decade. A human resources director taking a company helicopter to commute to work while imposing major redundancies. Social security effectively requiring low-income parents in the US to medicare their children with inappropriate drugs in order to qualify for certain payments. And more on every page.

[amazon_image id=”0231160739″ link=”true” target=”_blank” size=”medium” ]Best Business Writing Book 2012 (Columbia Journalism Review Books)[/amazon_image]

In case there is any doubt, this is not because all the contributions are written from a particular partisan standpoint. The range of perspectives and subjects is wide. I found the corporate reporting particularly interesting because I was least likely to have read any of it before. In fact, it is the very breadth of these reports that made me so furious. It seems that many people in the world of finance, and some people in the corporate world too, have been living in an entirely separate moral universe from the rest of us. Nor is it clear that they have yet returned through the wormhole back into normal decency.

This is the first volume of an annual series, and I’ll certainly be adding the next edition to my reading pile for summer 2013.

While the dog snoozed on the beach, I read

Frankenstein’s monster at large

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The possibility that economic theory is ‘performative’ – that the theory creates the reality – has long fascinated me. I talked about it in my Tanner Lectures earlier this year. Donald Mackenzie of Edinburgh University has long related the concept to the financial markets. It was with what I thought was some dramatic hyperbole that I described financial economics as [amazon_link id=”0140623329″ target=”_blank” ]Frankenstein’s Monster[/amazon_link], on the rampage still despite the crisis. Melodramatic because at that time – although I had read Mackenzie’s [amazon_link id=”0262633671″ target=”_blank” ]An Engine Not A Camera: How Financial Models Shape Markets[/amazon_link] and [amazon_link id=”0691138494″ target=”_blank” ]Do Economists Make Markets?[/amazon_link], Robert Harris’s thriller [amazon_link id=”B005EWDAFQ” target=”_blank” ]The Fear Index[/amazon_link], and a few articles about the 2010 Flash Crash, including this one also in Wired, not to mention some regulatory reports and specialist algo trading publications – even so, high frequency trading hasn’t been dominating the headlines.

Now we have had, of course, the Knight Capital meltdown. I’ve also come across some other things well worth reading, among them Scott Patterson’s excellent [amazon_link id=”1847940978″ target=”_blank” ]Dark Pools[/amazon_link] (which I reviewed here),a new Wired feature, Raging Bulls, and among several by Felix Salmon this blog post with an astounding animation showing the growth of high frequency trading. On my list too is Sal Arnuk’s [amazon_link id=”B0085AQS3A” target=”_blank” ]Broken Markets[/amazon_link].

[amazon_image id=”B0085AQS3A” link=”true” target=”_blank” size=”medium” ]Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio[/amazon_image]

I do sincerely hope financial regulators are not too busy fretting about their failures to limit the credit boom to pay attention to the next financial disaster. Algo trading is how it’s going to happen. Besides, as Patterson’s book makes clear, there is no efficiency gain here; this is a zero sum game in which algo traders win and investors (you and me) lose.

[amazon_image id=”1847940978″ link=”true” target=”_blank” size=”medium” ]Dark Pools: The rise of A.I. trading machines and the looming threat to Wall Street[/amazon_image]