Monthly Archives: May 2014

Economics: The User’s Guide

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Ha-Joon Chang’s new book, [amazon_link id=”0718197038″ target=”_blank” ]Economics: The User’s Guide[/amazon_link], is sitting enticingly on my desk. It starts: “Why are people not very interested in economics?” A false premise surely? All the evidence from rising student numbers to popular economics book sales (not to mention the Piketty phenomenon) is that people are *hugely* interested in economics. And a good thing too – far too important to be left to us economists.

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

I was disappointed by his column with Jonathan Aldred in last Sunday’s paper, which pretends that it’s only a beleaguered but wise minority of economists who want to see curriculum change, and dismisses the CORE curriculum that’s under development without – on the internal evidence of the column – having looked at it. Calls for radical reform make for good newspaper copy but ignore the practicalities of achieving change. It would be a shame if the real momentum behind curriculum reform got dissipated because of ill-informed comment from people who should be supporting it. Still, it’s the prerogative of would-be revolutionaries to be idealistic/unrealistic. Here is my VoxEU column, trying to be balanced about the curriculum debate.

Paging through the new book, though, it looks very good. It’s one of the launch titles in the new Pelican series. And at £7.99, about the same price adjusted for inflation as my 1970s were £1.95 Pelicans.

The economic classics

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One of the constants in calls to reform economics, and how it’s taught, is the demand for more history of thought. The most contact students have with the history of economics itself is probably Robert Heilbroner’s [amazon_link id=”068486214X” target=”_blank” ]The Worldly Philosophers[/amazon_link]. I really liked Agnar Sandmo’s [amazon_link id=”0691148422″ target=”_blank” ]Economics Evolving: A History of Economic Thought[/amazon_link], because it links how economists thought to changes in the economic context. Economics is, like geology or evolutionary biology, an historical science – the specifics of time and place are fundamental to what happens.

However, even if they read a survey like one of these books, economists hardly ever read the originals, not even [amazon_link id=”1451522851″ target=”_blank” ]Adam Smith[/amazon_link] or [amazon_link id=”9650060251″ target=”_blank” ]Maynard Keynes[/amazon_link]. Still, it was intriguing to get the announcement of the launch of a new series of republished (minor) classics by Vernon Press – the titles include some better known ones like Friedrich List’s [amazon_link id=”1622730100″ target=”_blank” ]The National System of Political Economy[/amazon_link], [amazon_link id=”1622730097″ target=”_blank” ]The Great Illusion[/amazon_link] by Norman Angell; and some hardly known at all ones – [amazon_link id=”1622730003″ target=”_blank” ]Women in Industry[/amazon_link] by Edith Abbott anyone? Or perhaps Daniel Defoe’s [amazon_link id=”1622730011″ target=”_blank” ]A Plan of the English Commerce[/amazon_link]. New to me.

[amazon_image id=”1622730003″ link=”true” target=”_blank” size=”medium” ]Women in Industry: A Study in American Economic History (Vernon Series in Economic Methodology)[/amazon_image]   [amazon_image id=”1622730011″ link=”true” target=”_blank” size=”medium” ]A Plan of the English Commerce (Vernon Series in Economic History)[/amazon_image]

The Game of Bank Bargains

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My progress through [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 ever so slow (partly because of the distraction of Chimamanda Ngozi Adichie’s wonderful novel [amazon_link id=”000735634X” target=”_blank” ]Americanah[/amazon_link]), but I’m enjoying it a lot.

[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=”000735634X” link=”true” target=”_blank” size=”medium” ]Americanah[/amazon_image]

Take these two quotations from Chapter One, ‘If stable and efficient banks are such a good idea, why are they so rare?’:

“Banking systems are susceptible to collapse only when banks both expose themselves to high risk in making loans and investments and have inadequate capital on their balance sheets to absorb the losses associated with those risky loans and investments. If a bank makes only solid loans to solid borrowers, there is little chance that its loan portfolio will suddenly become non-performing. If a bank makes riskier loans to less solid borrowers but sets aside capital to cover the possibility that its loans will not be repaid, its shareholders will suffer a loss but it will not become insolvent. These basic facts about banking crises are known.”

So the question about system instability is why are banks allowed to take risks without adequate levels of equity? Of course, Adam Admati and Martin Hellwig asked the same question in their brilliant book [amazon_link id=”0691162387″ target=”_blank” ]The Bankers’ New Clothes[/amazon_link].

[amazon_image id=”1480577006″ link=”true” target=”_blank” size=”medium” ]The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It[/amazon_image]

The chapter concludes:

“The fact that the property rights system underpinning banking systems is an outcome of political deal making means there are no fully ‘private’ banking systems; modern banking is best thought of as a partnership between the government and a group of bankers, a partnership that is shaped by the institutions that govern the distribution of power in the political system…. We call this process of deal making the Game of Bank Bargains.”

Exhibit number one is the stability of the Canadian banking system (zero systemic crises since 1840) versus the instability of the US (12 crises). In this light, it was interesting to read Edward Luce’s strongly worded article on finance and US democracy in this morning’s Financial Times.

Book retailing

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Ever since I was on the 2006 Competition Commission inquiry into the takeover of bookstore chain Ottakars by Waterstones, I’ve been interested in the book retailing business. This week brought news that Penguin Random House have created an online store, My Independent Bookshop, to compete with Amazon. A small proportion of every sale goes to a nominated independent bookshop.

The site hasn’t yet launched so it isn’t possible to compare prices or efficiency of delivery. It will be hard to match Amazon not only on price but also on range, logistics, and the attractions of Prime membership (albeit less attractive since the huge price rise) and the associates programme.

The ironic thing about this venture by the publishers is that when the takeover of Ottakars was under debate, they argued vociferously to us that we should not allow the removal of one physical retail chain on the high street, given the fact that Amazon was destroying the livelihood of the independent stores. What I never fully understood was the publishers’ own short-termism: they told us they wouldn’t accept a lower margin on their sales to the independent stores – which are more costly to deliver books to. So they themselves helped bring about the large online price advantage. If they had seen a lower margin as an investment in their future shop windows, we might not have lost so many small retailers.The Publlishers Association representatives who attended the hearing – I can see the row of dignitaries in my mind’s eye – didn’t understand the point we were trying to make about them facing a strategic choice. We gave the merger the go-ahead.

Still, I wish the new site well – more competition  for Amazon would be good. (The links on this blog are all to the Amazon site because of the associates programme. It brings in £30-50 a month which helps buy other books and pay the occasional guest reviewer.)

The trouble with economics, part 92

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I’ve had a busy week, to say the least. So I’ve only been inching my way very slowly through the very interesting [amazon_link id=”0691155240″ target=”_blank” ]Fragile By Design[/amazon_link] by Charles Calomiris and Stephen Haber.

On Monday at the OECD Forum, though, as well as talking about my own book, [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link], I had a very interesting debate with Marie-Laure Djelic and Yves Flückiger about economics and economics education. They were both critical of economics, for familiar reasons – many of which I agree with.

However, Marie-Laure made one really interesting point I hadn’t thought of before. She was talking about Michael Sandel’s [amazon_link id=”0241954487″ target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_link]. A weakness of the book, in my view, was its failure to answer the question about where those limits lie. Sandel criticises the fact that people pay other people to stand in line for them to pick up free tickets for plays in Central Park. But why is that worse than paying people for their time in other ways, like babysitting? Marie-Laure argued that he should not have tried to specify the limits of the market, however – she sees it as a collective, political decision, not a question to which there can be a technocratic answer.

[amazon_image id=”0241954487″ link=”true” target=”_blank” size=”medium” ]What Money Can’t Buy[/amazon_image]

I only partly agree with that. Of course political imperatives should be able to override a market – think of the civic need for rationing during wartime even though it fuels a “black market”. However, it seems clear to me that instincts or political outcomes should be tested from the perspective of what a market outcome would look like. Take the example of emissions markets: there are people, maybe many people, who think markets and the environment shouldn’t mix at all, but that’s just perverse if a market process can lead to a better environmental outcome. And if there is a strong moral instinct not to allow payment for queuing, the moral philosophers should try to explain why it does differ from other forms of payment for labour time.