Facing up to disorder

I read the proofs of Helen Thompson’s magnificent new book Disorder: Hard Times in the 21st Century a while ago, and specifically before the Russian invasion of Ukraine. Having just read the finished product, it seems all the more prescient and timely. Take this observation, for instance: “For five decades, Central and Southern European energy dependency on Russia has been a geopolitical fact of life. Indeed, since the First World War’s end, the periods in which Germany has eschewed Russian/Soviet oil and later gas have been short … Since it has endured three decades into a post-Cold War world where Moscow uses gas as an instrument of power, Germany cannot escape responsibility for whathappens to states with borders with post-Soviet Russia.”

The book braids together three themes in its synopsis of present disorder and instability. The first is energy-driven geopolitics entwining the fates of the world’s major powers, destabilised periodically by discoveries or technologies (eg fracking in the US) and by events (eg Fukushima and the German abandoment of nuclear). Secondly, and relatedly, there is a sequence of economic crises with their own internal dynamic (the rise of market-oriented philosophies, China’s admission to the world trading system) but also “structural material causes”, in particular the energy shocks of the 1970s and increased energy demand due to China’s economic rise. The final section turns to democratic politics, related to the economic upheavals, and the challenges posed to liberal democracies by plutocracy and inequality, mass migration and the various shocks – the China effect on manufacturing, the GFC.

Along the way, the book weaves in much more – the institutional history of the EU, the breakdown of Bretton Woods, Middle Eastern politics. I’m in awe of Helen’s ability to take a synoptic view of underlying structural trends while mastering so much detail. How much must she read?? The book ends with some observations about what various (democratic) governments might do to tackle these linked predicaments, but it’s pretty pessimistic. I’m left with a sense of not just the length of the shadow of history but also its tenacity: instability is baked in. And as the final words put it: “How… democracies can be sustained as the likely contests over climate change and energy consumption destabilize them will become the central political question of the coming decade.” Read it to be informed, but not to be cheered.

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Grasping the intangible nettles

Second albums after a huge first hit are always tricky, but the famous econ duo of Jonathan Haskel and Stian Westlake pull it off with Restarting the Future: how to Fix the Intangible Economy, a sequel to their best-selling Capitalism Without Capital.

That title was missing a ‘Physical’ in parenthesis before ‘Capital’, because the point was to underline the relative importance of intangible capital in the economy now – everything from patentable drug formulae to reputation to social trust to the tacit know-how that makes complex organisations function. While intangibles have always been important in the economy, they now predominate in the creation of economic value. Indeed this has been the case for decades now (my book The Weightless World is 25 years old this year). Jonathan and Stian (who are friends of mine) set out the special characteristics of intangibles – fours Ss, scalability, sunkenness, spillovers, and synergies – and explored the implications.

The new book starts with the observation that all is not well in the economy, with a litany that has become all too familiar: stagnant productivity, excessive inequality, a lack of resilience, ‘dysfunctional’ competition and what they term inauthenticity. They note, too, that investment in intangibles has slowed down markedly. Their diagnosis is that while existing institutions (in the broad sense in which that term is used in economics) were able to support intangible growth up to a point, progress now will depend on institutional reform: “institutions are out of sync with the intangible economy”. In their sights for reform are institutions and policies to support better (and fund) research and development, a redesigned competition policy, improvements to the financial architecture and monetary policy, and fixing cities.

The first half of the book is diagnosis, including rejecting some alternative diagnoses. In particular, they reject the idea that markets have become too concentrated, arguing that firms’ mark-ups have not risen when their intangibles are measured properly. I must say I don’t find this persuasive, given for example the steady consolidation of service sectors (pharmacies, vets, private healthcare, accountancy firms, financial advisers….) or simply observing the steady degrading of big tech service offers (eg Amazon searches being dominated by paid-for items). Still, competition policy certainly needs (and is getting) a refresh. Nor does this mean the intangibles explanation is invalid – on the contrary, it seems to be an integral part of the way production has been restructured.

The second half of the book then goes on to recommendations for reforms of policies and institutions, all rather sensible albeit not tangling with the politics of how these changes might come about except to observe that winners from the old regime will use their power to lobby against change.

I have some other quibbles. Jonathan and Stian put James Scott (Seeing Like A State) and Ernst Schumacher (Small is Beautiful) in the same ideas basket, which seems a bit odd to me although it’s decades since I read Schumacher. I don’t really understand their argument about inauthenticity, which draws on Graeber’s ‘bullshit jobs‘ and on Baudrillard, as an economic phenomenon – I decided it was about (lack of) trust or social capital but am not sure. The chapter on competition seems to claim that the debate about big tech etc only has one proposition, namely break-up, whereas in fact there is a rich debate about reshaping competition policy and enforcement in these large scale, spillover-laden markets. It also shoehorns in positional arms races in the jobs market into the ‘dysfunctional competition’ basket, when this is ja distinct labour market phenomenon.

But these really are quibbles about an excellent book. Their fundamental point about institutions lagging the structure of the economy is spot on, as is the implication that different kinds of collective approaches are needed to the economy. In the world of the four Ss, individualism and market-knows-best policies make for stagnation and discord. A final note: the book is published as the Russian invasion of Ukraine reminds us that tangibles from tanks to wheat really matter too. Simon Schama writes in the Financial Times that Ukraine’s ‘software’ has so far held out better than anybody might have feared against Russia’s hardware. But the world of the post-1989 era is changing.

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Firms and households

Harold Demsetz’s essays in From Economic Man to Economic System are an interesting read. They range over a few subjects, including the selfish gene versus the selfish economic agent, and demographics. But most circle around the idea of property and markets, and Coase’s analysis of externalities on the one hand and firms on the other. Demsetz’s main aim, in my reading, is to argue that the proper scope of markets is wider even than in the free-market interpretation of the Coase theorem. It will be familiar territory to many readers. But there was one point that I’m mulling over, which is that transaction costs don’t determine what happens inside the firm versus in the market – rather, they may change the way firms are structured (more or less verticallyintegrated) but mainly affect the division between household and ‘economic’ production. “Zero transaction cost maximizes the importance of firms in the economic system by raising the percentage of total output of goods produced withing specialised production units as compared to the percentage¬† produced within self-sufficient households.” This is wrong – there are other reasons for firms to exist – but interesting. Another reason why economic analysis needs to bring household production fully into the picture.41V9pDSQlqL._SX331_BO1,204,203,200_

 

Systems and choices

Concentration on everyday matters is obviously hard at the moment, so it feels like an achievement to have read Hunter Heyck’s Age of System: understanding the development of modern social science. It was strongly recommended on Twitter by Paul Nightingale, or I wouldn’t have done so – and I found it quite interesting but not earth-shattering.

The key idea is that the post-World War Two decades, approx 1950 to the mid-70s, was a period of ‘high modernism’ in the social sciences. This was the spread in social sciences in the US of a unified, top down, bureaucratic world-view of society as a system whose structures could be analysed by scientists who would then advise decision-makers. This was a period seeing the launch of schools of public administration – specialising in the application of the sciences of decision-making – and also of many interdisciplinary research centres. Another manifestation was the idea of a national economic system, the book argues.

The book then traces the steady shift toward disciplinary specialisms, alongside a stronger emphasis on methodological individualism, from the 1970s on: “What leading social scientists in the 1940s to the mid-1960s saw as wholes, later generations often saw as aggregations of individuals, as is evidenced by the rise of rational choice theories across a range of fields. Interdisciplinary work was fruitful – think Herbert Simon – but unstable as its funding depending on individual program officers at the major foundations; and by 1980 most social science funding in the US came from two sources rather than the same amount of funds from 10 sources a decade earlier.

There are interesting chapters on the idea of rational choice and on the emergence of the concept of modelling (so inbred in me as an economist that it took me a while to get my head around the idea of not having a model): “It is revealing that people always talk of ‘building’ models….. modelers and their audiences think of models as machines. … It is pragmatism formailzed, operationalized and assigned a payoff function.”

Overall, I found this an interesting read but wasn’t sure what it implies. Is this detailed account of US social science of any more than historical interest? Probably, but that’s what I’m left unsure about. The book ends by arguing that the post-1970s ‘neoliberal’ worldview – ‘late modern’ – had an embedded distrust of the possibility of organized intervention in the world. The final sentences are: “The world built on the structure of logic and system and the world built on the logic of contingency and choice are different worlds. Today we are at home in neither. It is time to build anew.” Indeed. ‘Late modernism’ is crumbling too. But how to avoid another trip round the same hamster wheel?

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