Monthly Archives: May 2014

Handling policy on the ground

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Like all thinking economists, I’ve been fascinated by the transformation of China in our lifetimes and the implications of its emergence as a major economic power. Although no expert, I’ve read quite a lot of the popular books on the country and its economy. Many fall into the hype trap – either China will take over the world, or it will experience a terrible setback because of the many challenges of rapid development on a huge scale.

My favourites have been the books of reportage such as Leslie Chang’s [amazon_link id=”033044736X” target=”_blank” ]Factory Girls[/amazon_link] or Richard McGregor’s [amazon_link id=”0141975555″ target=”_blank” ]The Party[/amazon_link] or even Fuschia Dunlop’s [amazon_link id=”0091918324″ target=”_blank” ]Shark’s Fin and Sichuan Pepper[/amazon_link]. I’m also looking forward to Danny Quah’s forthcoming book on global economic hegemony in the post-US unipolar world  – he recently posted this online.

Meanwhile, this week I’ve read one of the best books so far about the drama of China’s journey – in my lifetime – from the brutality of the Cultural Revolution to the cultural and political as well as economic and social tensions of a society whose average living standards have doubled every seven years but very unevenly distributed. It’s Jianying Zha’s [amazon_link id=”1595588809″ target=”_blank” ]Tide Players: the movers and shakers of a rising China[/amazon_link].

[amazon_image id=”1595586202″ link=”true” target=”_blank” size=”medium” ]Tide Players[/amazon_image]

It’s a slim book, a series of essays focussing on certain individuals in the business and in the cultural worlds. Ms Zha has lived her adult life between China and the US, having grown up with a family sent to work on a farm out of Beijing during the Cultural Revolution, and having made her way out via university as soon as the climate began to change. The dual perspective is illuminating. I particularly enjoyed the chapter about economist Zhang Weiying’s proposals for reforming Beijing’s university – some of the description of the controversy could have been applied verbatim to the UK context. “Like a typical economist, he marches stridently by the logic of the market and tries to turn the university into an efficient production line, a lean and mean academic market. … He sees running the university essentially as a management affair, not a supple and subtle art which requires, among other things, tolerance and the ability to recognize idiosyncratic geniuses who don’t fit a cookie cutter plan.” Are there any universities even in the US that really march by the logic of the market?

The book also furnished me with a bunch of new-to-me Chinese proverbs. My favourite: “When there is policy from above, there is always a way of handling it on the ground.” Also: “Dropping a stone on someone’s head after he falls into a well.” (Equivalent obviously to kicking someone when he’s down.)

It’s beautifully written and illuminating about debates within China, rather than the western debate about China. Highly recommended.

Pop economics and pop economic methodology

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It took me a while to work out what was odd about Ha-Joon Chang’s [amazon_link id=”0718197038″ target=”_blank” ]Economics: The User’s Guide[/amazon_link]. It is that the title is literally descriptive. I was expecting a book about the economy, or economies, told from the author’s refreshingly distinctive perspective. It’s actually a book about the economics profession. An alternative title would be Economic Methodology: an introduction to the issues, although it would obviously sell fewer copies. So it’s a useful book but I wonder about the intended audience? The campaigning economics students will really enjoy it, but I’m just not sure what the general intelligent readership will make of it.

[amazon_image id=”0718197038″ link=”true” target=”_blank” size=”medium” ]Economics: The User’s Guide: A Pelican Introduction (Pelican Books)[/amazon_image]

The first couple of chapters irritated me. He asks, ‘Why are people not very interested in economics?’ Actually, they are. Student numbers are going up, and pop economics books sell well (including [amazon_link id=”0141047976″ target=”_blank” ]23 Things They Don’t Tell You About Capitalism[/amazon_link]).

He then goes on to distinguish between the imperialist version of economics (anything can be seen through the lens of rational choice and claimed as economics) and economics as the study of economies – and I agree with his view that it should mainly be the latter. But along the way the book asserts that ‘most’ economists pay no attention to issues such as bargaining power in labour markets, or technology and the structure of production. Excuse me?! This is a simple bizarre dismissal of huge swathes of economics (including my own areas). I find it increasingly frustrating that critics of economics portray the subject in such a Manichean way that they can’t acknowledge that we’re not all Eugene Famas or Steven Levitts, and in fact very, very, very few actual economists take the kind of approach presented as the ‘neo-liberal mainstream’. Indeed many of us agree with some aspects of the criticisms, and would like to engage in fruitful debate rather than Punch and Judy knockabout. Many – most – of the economists I know think economic history is important and read it themselves, in contrast to Ha-Joon Chang’s assertion. Maybe it’s just Cambridge, although I don’t think so.

The book gets better after this. There are a couple of chapters that cover – briefly – key economic concepts and an outline of global economic history. This is a kind of ‘pass notes’ introduction. A description of the main ‘schools’ of economic thought follows, a one-chapter intro to the history of economic thought. It’s a bit tendentious, but hard for anybody not to be in such a concise summary.

The remaining chapters pick selected macroeconomic topics , including inequality, the role of the state, growth, welfare and happiness, finance. In most cases, Ha-Joon Chang’s preferred approach to the question is contrasted with what a ‘free market’ economist would say about it. There is little about all the other schools of thought such as the Austrian or straight Marxist, described in the earlier history of thought chapter. The presentation is: ‘here’s my sensible, realistic way to think about think about this issue, and here’s what most mainstream economists (by implication, mad ideologues) say about it.’ So it’s a bit irritating but they are decent overviews of the chosen issues.

It takes me back to the audience question, though. This is an interesting read for 6th formers or undergraduates but as a supplement because there isn’t enough economics in it, or rather not enough economics to make sense of the meta-economics. Still, it would give them a useful perspective on macroeconomic issues. The history of thought chapter seems to me the most useful because it is a good capsule overview of something too rarely taught. As for the general reader, I find it hard to tell. I might have to try it on my economist son and my non-economist husband to see what they think. Perhaps I’m just too close to this debate to judge.

Butterflies and hurricanes

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I received a copy in the post this weekend of [amazon_link id=”0691154708″ target=”_blank” ]The Butterfly Defect: How globalization creates systemic risks[/amazon_link], and what to do about it by Ian Goldin and Mike Mariathasan. I’d read the book in draft and it’s a thought-provoking and rather alarming account of some of the vulnerabilities arising from interconnected global systems. Exhibit number one is the financial crisis, I suppose, made significantly more severe by the criss-crossing and largely unmonitored links between banks and shadow banks in many countries. The book also discusses global supply chains, infrastructure, ecology, public health and the social risks arising from inequality (this last obviously written well before Piketty-mania).

The growing complexity in each if these areas is well-documented. The title is a riff on the well-known butterfly effect whereby a small initial disturbance in a complex system with feed-back loops can rapidly lead to large and unexpected results – the flap of a butterfly’s wings in one place leads to a hurricane somewhere else entirely. It has become a defect because our governance systems haven’t remotely kept pace with the changes of the past 25 years. Connectivity has led to complexity has led to systemic risks – but policies address only local risks.

The final chapter asks how to start managing the new risks, without wholly answering it – although to be fair it would take a new book for each of the previous chapters to set out ay detail about what to do. The authors do not want to reverse the interconnectedness, although they acknowledge that some people might prefer that. They call instead for more global management of risk, more awareness of the new kinds of risk on the part of all policymakers and businesses everywhere – better risk measurement, transparent communication about the dangers and the policy uncertainties, gearing economic policies towards giving people incentives to take more account of the personal risks they face, clear definition of legal responsibilites, and contingency planning.

This all seems perfectly sensible. Will it happen? I think the most sobering section of the book talks about the way the post-World War II global governance changes, the ‘Bretton Woods moment’, came about as a result of the cataclysm of total war. The book ends on a very optimistic note:

“With better management, there is the potential for all citizens to share in our world’s magnificent achievements, the most impressive of which could be yet to come.”

But I ended up feeling daunted. Anyway, both pro- and anti-globalizers should read it.

[amazon_image id=”0691154708″ link=”true” target=”_blank” size=”medium” ]The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do about It[/amazon_image]

Humans or freaks?

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I wasn’t a fan of [amazon_link id=”0141019018″ target=”_blank” ]Freakonomics[/amazon_link] and it sounds like the new Dubner and Levitt book, [amazon_link id=”1846147557″ target=”_blank” ]Think Like a Freak[/amazon_link], is one to skip, at least judging from this review by David Runciman (author of the marvellous [amazon_link id=”0691148686″ target=”_blank” ]The Confidence Trap[/amazon_link]). The freakiness of [amazon_link id=”0606324305″ target=”_blank” ]Freakonomics[/amazon_link] is what bothered me. What that book really did was apply the assumptions and quantitative methods of economics to all sorts of social questions.

It was the logical extension of the [amazon_link id=”0226041123″ target=”_blank” ]Gary Becker[/amazon_link] approach, the economic imperialism of claiming non-economic subjects for economic analysis. And while this cast an interesting, and accurate, light on many subjects, I think it went too far. It is interesting to understand the economic aspect of marriage choices, but wrong to claim this is the most important aspect. On this I’m with Ha-Joon Chang’s [amazon_link id=”0718197038″ target=”_blank” ]Economics: The User’s Guide[/amazon_link]. (I’m part way through.) Economics is (mainly) about the economy, and while there is a fuzzy boundary between the economy and society, the Freakonomics world oversteps it.

Tim Harford has a terrific column about this, reflecting on Becker’s legacy after his death the other week. He’s more positive about Becker’s influence.

[amazon_image id=”1846147557″ link=”true” target=”_blank” size=”medium” ]Think Like a Freak: How to Think Smarter about Almost Everything[/amazon_image]   [amazon_image id=”0226041123″ link=”true” target=”_blank” size=”medium” ]The Economic Approach to Human Behavior[/amazon_image]

[amazon_image id=”0070067090″ link=”true” target=”_blank” size=”medium” ]The Economics of Life: From Baseball to Affirmative Action to Immigration, How Real-World Issues Affect Our Everyday Life[/amazon_image]   [amazon_image id=”0226041026″ link=”true” target=”_blank” size=”medium” ]Uncommon Sense: Economic Insights, from Marriage to Terrorism[/amazon_image]

A call for stubborn unreasonableness

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[amazon_link id=”0691155240″ target=”_blank” ]Fragile by Design: The Political Origins of Banking Crises and Scarce Credit[/amazon_link] by Charles Calomiris and Stephen Haber is a fascinating exploration of the relationship between banking and politics, and raises some important questions. The bulk of the book is a series of historical narratives looking at the banking history of several countries – the US, UK, Canada, Mexico and Brazil. These histories are seen through the prism of the tight connection between finance and politics, in what the authors call the Game of Bank Bargains.

They argue that banking is inherently political because it is by design potentially unstable – pooling the money of many individuals to make loans to other people –  and depends on the enforcement of certain property rights by legal and political authorities to navigate the conflicting incentives. Three property rights challenges follow: the need for mechanisms to reduce the risk of government appropriation of banks’ assets (either outright, or through regulation, or by printing fiat money); mechanisms to protect depositors and shareholders from the banks’ managers channeling resources to themselves; and mechanisms to prevent borrowers from defaulting. Stability requires finding a balance between the conflicts of interest. It is rare – Canada is the exceptional case, having experienced no systemic crises since 1840 in contrast with the dozen in the US. Populist democracies and more autocratic governments make different types of political deal but both fail to balance the competing interests. Achieving a stable democracy with robust defences against populism is clearly a tricky tightrope act.

The historical narratives are very interesting and do underline the importance of the political context in shaping the banking system. As the final chapter points out, the narrative explanations do offer insights that general theoretical explanations of the financial crisis can not. The general theories fall into one of three categories: inherent structural mismatch of funds and the resulting liquidity risk; inter-connections between banks that give rise to spillovers and domino effects when one bank is in trouble; and the inherent operation of human nature with periods of over-optimism and myopia alternating with pessimism and retrenchment (the Kindleberger and Minsky version). What no general theory can do is explain the contrasting historical paths of the different countries. “The decisive influences determining whether the threats highlighted by these three theories will result in banking crises are political…. The extent of safety nets and prudential regulation are choices made by politicians, and in making those choices they are generally motivated by maximizing what is good for their own short-run political futures, not what is socially desirable in the long run.”

This seems completely persuasive to me. One gap in the book, however, is the part played by the globalization of finance and how that is related to the combination of national politics and international agreement. The historical narratives are entirely focused on the domestic politics of each country. However, globalization has obviously changed the political economy dynamic, even if only by making national politicians feel they face new constraints on their choices. The big global investment banks and the shadow banking sector are surely a key part of the story.

I do like the way the book ends: “As [amazon_link id=”0140437886″ target=”_blank” ]George Bernard Shaw said,[/amazon_link] ‘The reasonable man adapts himself to the world; the unreasonable man persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.’ Meaningful reform in a democracy depends on informed and stubborn unreasonableness.”

[amazon_image id=”0691155240″ link=”true” target=”_blank” size=”medium” ]Fragile by Design: The Political Origins of Banking Crises and Scarce Credit (The Princeton Economic History of the Western World)[/amazon_image]   [amazon_image id=”0140437886″ link=”true” target=”_blank” size=”medium” ]Man and Superman: A Comedy and a Philosophy (Penguin Classics)[/amazon_image]