I’m taking a break from economics by reading Revolutionaries: Inventing an American Nation by Jack Rakove, a history of the American revolution told through the debates among its leaders. The gaps in my knowledge on this subject are large, and it’s a beautifully written book, so I’m enjoying it. It has made me realise, once again, how few people think strategically at all – that is, think about how their interlocutor is going to react in his (or her) next move – never mind what their end-game might be. The American victory over Britain could almost be summed up as the result of having a few more strategists.
This is just as true in modern life. The best business book on strategy is, at least in my reading, Nalebuff and Dixit, Thinking Strategically. It uses game theory but isn’t all that difficult. Still, just as Daniel Kahneman points out in Thinking, Fast and Slow, how hard it is to calculate anything, I’m sure it must also be hard to strategise.
There’s obviously much excitement in the publishing world about the Random House-Penguin merger. It’s the kind of merger that makes me wish I was still on the Competition Commission, as the issues are fascinating. The justification given by the parties is that they will be able to invest on a larger scale in e-books. Clearly, all publishers are anxious about Amazon’s market power – 40% of all retail book sales in the UK according to one figure I saw. But this is complicated territory, competition-wise.
I was a member of the Competition Commission group that gave the 2006 go-ahead for Waterstones and Ottakar’s (remember them?) to merge on the grounds that online book sales offered vigorous competition to high street booksellers. Since then, Borders/Books Etc has also gone from British high streets, although Daunts and Blackwells seem to be more than holding their own. Ironically, the publishers – including Penguin – were vociferously opposed to the Waterstone’s merger, saying online sales would not pose an effective competitive threat to a single big high street chain.
What a lot of today’s commentary is not discussing in detail is the question of which markets along the whole value chain need to be assessed. There’s a transaction between author and publisher – mega-publishers look bad for most authors but on the other hand there seem to be quite a few reasonably successful small publishers springing up. Then the wholesale transaction between publishers and retailers – and here there is growing concentration on both sides, with the intriguing wrinkle that Amazon can act as a platform for smaller publishers to reach readers.
Finally, there is the retail market, both in its physical and e-book manifestations. Amazon is clearly dominant, and seems to be pricing Kindle devices at cost to hook customers in, but is not blatantly using its market power to raise prices to consumers, as opposed to squeezing the publishers’ margins – although given that the price of an e-book is a rental rather than a purchase price, that is a hypothesis to be tested. Anyway, one would need a two-sided market model to assess the competitive impact of changes in the two separate margins, as there is no reason these would be the same under perfect competition. Besides, any competition regulator would want to see a standardised e-book format emerge.
All in all, it would be a terrific case to be on! I’m not sure it will be referred – Penguin seems confident it can avert that with sufficient undertakings and disposals – but if there is an inquiry, the report will make a cracking good read.
I’ve been looking through the new Oxford Handbook of the Economics of Poverty, edited by Philip Jefferson. It isn’t a book to read from cover to cover and review, as a handbook, and I’ve only read two of the chapters. Still, this looks like a useful resource for economists interested in two fields, development economics and income dynamics. In fact, this is something I particularly like about the book, that it includes some research on developing countries alongside the US (although a shortcoming is that its developed world focus is very US-centric). Surely, to the extent that we think economics should aspire to any universality, the economics of poverty must have some application to poverty in any country? So there are chapters by Martin Ravallion (about global patterns) and by Gary Fields (about low earnings in the developing world – he wrote the excellent Working Hard, Working Poor, which I reviewed here) and by Juliet Elu & Gregory Price about gender inequality in sub-Saharan Africa.
The overlap between development economics and the economics of poverty in western societies is surely fruitful territory. One of my favourite books is Portfolios of the Poor, a sort of ethnographic, diary-based study of how poor people in India and South Africa actually handle money. A study of this kind would be most helpful in assessing concerns about payday lending in the UK; these short-term lenders are clearly satisfying an otherwise unmet demand. What financial needs of people on low incomes, exactly, are conventional financial services unable to address and is there really a policy or regulatory gap, or is payday lending actually a market solution?
The Handbook also has some cross-cutting chapters that look interesting, on subjects like obesity, healthcare, housing and place-based policies. I read and liked the chapter on the need to get the best from both economics (analytical & empirical rigour) and sociology (illuminating detail and understanding of social networks/capital) in studying poverty.
Andrew Hill has a nice feature in the weekend FT about the secret of writing a successful business book. It’s a trailer for what must be the upcoming decision on the FT’s Business Book of the Year. The shortlisted titles are:
The Hour Between Dog and Wolf by John Coates
Private Empire by Steve Coll
Steve Jobs by Walter Isaacson
Volcker by William Silber
What Money Can’t Buy by Michael Sandel. (I reviewed it here.)
Why Nations Fail by Daron Acemoglu and James Robinson. (And I reviewed this one here.)
The shortlist makes it plain that the definition of business book is capacious as there are economics books and biographies here. I suspect the ranks of ‘self help’ business books that fill the relevant bookshop sections will rarely if ever make it onto the FT’s shortlist. The correct definition for eligible books is probably ‘thoughtful books about business in its broadest sense – history, philosophy, psychology, society – but not about how to run a business’.
That’s fine – the aim of contests like these is to get people reading serious books, which must be a good thing. The shortlist gives me an appealing reading list. Of the two of the above list I have read already, I think Sandel should not win it, as my review will explain.
Of course, the Enlightened Economist book of the year winner has already been announced – it was Ariel Rubinstein’s Economic Fables.
Here is my review of the book. And here was my shortlist.
Yesterday I had a brilliant visit to the Rolls Royce aero engines plant in Derby. Factory visits are always fascinating, and this was particularly so. It’s of course a superb company, and its qualities manifested themselves in all kinds of ways: the focus of the conversations on the long term, on 2020 and 2025; the superb apprenticeship and management training programmes, now being provided for companies in the supply chain as well as Rolls Royce itself; the fact that everyone I spoke to from apprentices to top execs talked about their bit of the business in a way that was consistent and fitted into the same overall strategic picture. Above all, of course, the engines. Amazing technology, so complex, highly dependent on research, long-term investment, IP and skilled people. It was interesting to hear the emphasis on ideas and skills, and on services provided with the product, in a manufacturing company.
A Rolls Royce engine – one of the big ones
There have been a couple of excellent books recently on the areas of strength in UK manufacturing - Made in Britain by Evan Davis and The New Industrial Revolution by Peter Marsh (the latter is speaking at the Festival of Economics in Bristol on 24 November). (See also the excellent TV programmes by Evan D, Built in Britain, which turned to infrastructure.) Given that I also recently heard about the potential for a significant revival of the Lancashire textiles industry (to which I have an emotional attachment), I do tend to agree with these two authors in believing that our manufacturing industry still has areas of strength.
However, I think there are two big worries. One is about investment in skills: we have had far too few industrial apprenticeships for too long, and although this is improving slowly, it will take many years to rebuild a sufficiently large skill base. There is also still too much of a presumption that university is better than an apprenticeship – I would disagree with this priority on academic or cognitive skills.
The second is the gap between the superb big companies like Rolls Royce and small, albeit vigorous, manufacturers. The UK needs the middle rank of companies that can feasibly supply the biggest ones – the small ones just can’t deliver on an appropriate scale, can’t afford to invest either in basic R&D or even product development, can’t take on more than one or two apprentices. A lasting manufacturing revival will need to look again at the long-standing barriers that are stopping successful small companies from growing above a certain size.