Practical social welfare

I just finished (re-)reading Amartya Sen’s Collective Choice and Social Welfare. The parenthesis isn’t because I can’t remember but because the original 1970 book has been republished with a chunky new section. It isn’t an easy read, even with the corralling of the technical proofs into alternate, starred chapters. Sen addresses the dilemma raised by Arrow’s impossibility theorem and the wider family of impossibility results, which state that a few totally reasonable-seeming assumptions about principles of social choice end up with no decision rule able to satisfy them. The technical language is that between them the assumptions – transitivity, independence of irrelevant alternatives, unrestricted domain, the Pareto (or unanimity) principle, and non-dictatorship – leave a null set. I’ve always thought of it in the shorthand of there being unavoidable conflicts/trade-offs/dilemmas in social choice. Sen shows that for many social choice questions, the assumptions are too restrictive. ‘Unrestricted domain’ means throwing away relevant information; the Pareto condition forbids interpersonal comparisons such as between the rich and the poor. He argues that welfare economics has been impoverished by the Lional Robbins diktat that interpersonal comparisons could not be permitted: it is bizarre that the subject has had so little to say about the distribution of resources and incomes, self-hamstrung for decades.

The additional chapters extend the original and present in a more rigorous manner some of the material in Sen’s The Idea of Justice. There’s a timely chapter on democracy: “Given the mixed bag of results that we can actually get from majoritarian democracy, its defence, important as it is, needs to be seriously supplmented by probing scrutiny of its limits and conditionality.” This written after last November’s US Presidential election.

Not a book for the general reader – The Idea of Justice is a better presentation of Sen’s important work for that audience. But economists should have read Collective Choice and Social Welfare, especially those working on or in public policy. For all its logical abstractions, this is a very practical book.818GkIguxCL


Errant economics

A while ago I checked Thomas Schelling’s essays Choice and Consequence out of the library to read his ‘The Mind as a Consuming Organ’ (which I wrote about in the FT). I just read the other essays in the collection that were new to me. I love his work. Rather like Ronald Coase, he has a way of asking questions that seem obvious with hindsight but not at all so with foresight. There’s a terrific essay (Economics and Criminal Enterprise) on the economics of crime, categorising types of crime according to the underlying economic characteristics of supply and demand. Are there economies of scale (drugs distribution) or the reverse (backstreet abortions, a person-to-person service)? Is the market a legally-created monopoly because of some prohibition which has the effect of substantially raising entry barriers?

The essay also covers ‘organized criminal services’ – bankers, lawyers and accountants linking the underworld and upper-world – and also argues that the interaction between policies and the organization of the criminal enterprise need to be better understood. For example, Schelling writes: “The role of vending machines [in stores paying protection money to a racketeer] appears to be that they provide a tax deductible and ‘respectable’ way of paying tribute.” I love that he bothered to wonder why local laundries so often have a vending machine.

Loads of insights too. The chapter on the relation between state and market points out that businesses often welcome coercion by the state, in situations where neither they nor any competitor could be the first to move. “Barbershops, for example, appreciate mandatory closing on Wednesday in Massachussetts, since it precludes competitors from staying open.” I once tried and failed to convince a UK official that this was a reason for a regulation requiring shops to close their doors rather than heat the high street – none would move first for fear their competitors would entice in all the impulse shoppers. This is a good reason too for outlawing ‘free’ bank current accounts; many banks would like to end this pricing distortion, but none dares act first.

Sadly, Schelling died late last year; we need a new crop of errant economists asking questions about aspects of the economy we take for granted.



Economy and society

It’s fair to say the average economist doesn’t pay much attention to sociologists, but to the extent that (s)he does, Mark Granovetter will be a familiar name. His concept of the distinct roles of ‘strong’ and ‘weak’ ties has become widely-cited in the economics literature. Now Granovetter, a Professor of Sociology at Stanford, has published a new book – intended as the first of two volumes – aiming at a synthesis of his views on how the economy and society are enmeshed with each other (it’s out in 2 weeks, can be pre-ordered now)

. Society and Economy: Framework and Principles, sets out at a high level of abstraction definitions and relationships between concepts such as trust, power, norms, values, as they relate to economic decisions and actions.

The book starts out by quite fairly skewering the ‘Just So’ character of some economists’ uses of sociological concepts to explain how economic norms or institutions have come about. The book suggests that if economics wants to use a concept such as ‘social norm’, then it must engage with questions of how norms come about, which will involve cognition and emotion and social relations. Economics has of course started to dabble in psychology with the ‘behavioural’ revolution, but in the limited sense of simply noting behavioural regularities. Here Granovetter echoes Daniel Hausman (Preference, Value, Choice and Welfare) in arguing that it “does not seem a good recipe for scientific progress” to claim that how people reach economic decisions, or how groups settle on social norms, is simply outside the domain of economics.

If this seems a bit high-fallutin, just consider how much influence social norms have on outcomes. In the 1970s, for corporate executives to pay themselves many hundreds of times what they paid their average employee lay outside the ‘moral economy’ of the times; within a generation that norm had shifted entirely. Surely it is important for economists to understand how that came about?

The book has a particularly interesting chapter on trust, which notes that the outcome of trusting behaviour can arise for different reasons. Granovetter argues that many researchers define trust narrowly to be trust due to their favourite reason, whether that’s an internal psychological state, or an expectation of reciprocal behaviour, or risk-taking with regard to others’ behaviour for some expected benefit.

The promised second volume will apply the concepts defined and analysed in this first volume to specific topics such as corporate governance, organisational forms, and corruption. That’s something to look forward to – this first volume is pretty abstract as it concerns definitions and methodological debates in the literature. Still, the challenge to economists is a fair one, I think. We don’t all have to become competent psychologists or sociologists, but I agree that somehow economics does have to take up the methodological challenge of making sure our borrowing of concepts such as trust or norms is meaningful.



Global (Dis)order

I’ve been on a run of reading history books, and am about to finish Adam Tooze’s The Deluge: The Great War, America, and the Remaking of the Global Order 1916-1931. It’s beyond my professional competence to review properly, in the sense that the book clearly has a distinctive perspective on the way Woodrow Wilson used America’s financial lifeline during and after the war, and the Treaty of Versailles negotiations, to shape the impending American Century. My guess is some historians would disagree about how purposeful this exercise of financial power was. Nevertheless, to the non-expert reader, this is a brilliant and compelling book – above all for taking a global perspective. I particularly liked the inclusion of substantial sections on Japan and China, and on India and the seeds of collapse of the British Empire. It is easy for a west European to forget for example the role of Japan in Siberia, and to concentrate on Russia’s western borders.

91HjfjpIRfLThere are also illuminating perspectives on the impact of the war on America itself, including the deployment of the new Federal Reserve Board and the governance of the US economy. Tooze points out that before Wilson committed to support the Entente, substantial private finance had been directed to the war effort: “Through the private business contacts of JP Morgan, supported by the business and political elite of the American Northeast, the Entente was carrying out the mobilization of a large part of the US economy, entirely without the say-so of the Wilson Administration.” When the US officially entered the war, the state’s role in the management of capitalism expanded greatly, only to be firmly contained again in the post-war era. It is often forgotten how severe the post WW1 recession was, even in the US – Tooze underlines its impact on the inter-war order. (Another book that focuses on this event, in a fascinating albeit maverick interpretation, is James Grant’s The Forgotten Depression)

Another very interesting thread running through The Deluge, at least for economists whose only perspective to date comes from Keynes’s famous The Economic Consequences of the Peace, is Tooze’s argument that Keynes’s polemic was a distortion of the truth. Tooze argues, contra Keynes, that the Germans tricked the Entente into the armistice, rather than the other way round. He agrees that the book reflected widespread disillusion with the Treaty, but also contributed to its loss of legitimacy and “helped to further poison the atmosphere between London and Paris.” It might not even have helped Germany, Tooze suggests: “A good faith effort to honour the Treaty, even if it had fallen short, might well have steered the Weimar Republic away from the ruinous crisis of 1923.” Furthermore, Keynes painted the alternative financial settlement he suggested as “an entirely novel idea, a great opportunity that had been missed at Versailles,” knowing well (as he had been there) that it was discussed at Versailles and rejected by Wilson (not Clemenceau). For if there had been greater generosity toward the Germans, the British and French would have had to seek debt write-offs from the US. “The result was grossly to misrepresent the politics of the peace making process,” Tooze concludes.

As it happens, I was (nearly) finishing the book at the Trianon Palace hotel in Versailles where the treaty was signed. Another fine historian, Margaret McMillan (The War That Ended Peace and Peacemakers) was attending the same conference. Here she is in front of the commemorative plaque.IMG_3905