Most popular posts of 2014

It’s that time of year. Here they are, most-visited first.

1. Investment rats – massively visited, and massively followed up in many places.

2. Inequality, economics and politics – summary of a Piketty conference at the Bank of England

3. Capital and destiny – review of Thomas Piketty’s Capital in the 21st Century

4. Canada versus Minsky – review of Fragile by Design

5. Teaching economics

6. Not bowling alone – a review of Hard Times: The Divisive Toll of the Economic Slump (not Hard Times!)

7. Economics books in 2014 – my annual preview of the catalogues for the year ahead. This year’s coming up soon!

8. The eclipse of capitalism – or maybe not – a review of The Zero Marginal Cost Society by Jeremy Rifkin

9. Festival of Economics – books associated with the Festival

10. Calling young economists who want to write – about the FT/McKinsey competition. I hope it had lots of entries.

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My brilliant holiday reading

Cormac O Grada’s Eating People Is Wrong (and other essays on famine) proved a good antidote to seasonal over-indulgence. It’s a – perhaps surprisingly – compelling read. I have a proof copy, so will save a review until closer to publication date in April.

My other holiday read was Elena Ferrante’s My Brilliant Friend. I’d never heard of the author until a newspaper feature on her books appeared a few weeks ago, and happened to pick up a copy because it was on the table at the front of Daunts, one of my favourite bookshops. It’s one of the best novels I’ve read. It’s about the specifics of two girls growing up in a tough, violent working class community in mid-20th century Naples. But also, as with all great novels, about the generalities of human life: friendship between girls (even better than Margaret Atwood’s Cat’s Eye); relations between men and women; economic and social forces changing the fabric of life; education as a ladder out of poverty and the resulting deracination. My Brilliant Friend is the first of a quartet, and the author has three previous novels, so that’s my fiction for 2015 sorted.

Rogues and capitalists

“The whole life I place before myself is money, money, money and what money can make of life,” says Bella in Dickens’ Our Mutual Friend. The Victorian novelists wrote a lot about money, not just Dickens, but Mrs Gaskell (remember the bank failure in Cranford, the exigencies of factory life in Mary Barton), George Gissing (New Grub Street, The Whirlpool), Trollope (The Way We Live Now) and, across the Channel, Balzac (famously referred to by Thomas Piketty), Hugo, Zola.

Bella’s line is quoted in Ian Klaus’s Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Capitalism. An irresistible title. The book gives an account of the essential role played by trust as capitalist markets developed through the century:

“Here is a fundamental point about free market capitalism and trust within it: without social exclusion or extensive processes of verification, trust is hard to come by. Whereas other risks could be hedged or managed through new assets or new types of insurance, the risk of fraud became more prevalent as the market expanded. Simply put, trust was sometimes a market inadequacy but always a market necessity.”

This central argument is illustrated through a series of brilliant stories about both the evolution of new assets and commercial relationships but also about a series of colourful rogues and swindlers. They played on the importance of reputation to pull off their confidence tricks; in a kind of arms race, new methods of verifying information were devised, such as audits, or detailed prospectuses -  and new audacities were developed by the rogue fraternity. We ended with the modern system of ‘a series of overlapping institutions’ authenticating transactions.

The book starts with Adam Smith’s Wealth of Nations, noting its pairing with the Theory of Moral Sentiments. It ends with Friedrich Hayek’s The Road to Serfdom, a hymn of praise to markets, arguing that it has to be read alongside The Constitution of Liberty. Klaus writes: “The greatest intellectual salesmen of free market capitalism all supposed the market would be buttressed by morality. You could not possibly unleash the power of the one without the support of the other.” Unfortunately, of course, that’s just what happened in every period of turbulence in capitalism’s history, including our most recent. Now, just as in the early Victorian era, reputation is everything – because morality and institutions have let us down.

     

One final thought: will new technologies help bridge the gap? Dave Birch’s Identity is the New Money suggests the combination of ubiquitous mobile and social media means they might. Social connection, perhaps asset ownership and provenance, can in principle be verified now in a way the Victorians couldn’t have dreamed of.

Fast and slow thoughts about extended warranties

Dozing through the early business news this morning, I heard that extended warranties are back in the frame for offering consumers a bad deal (I’ll add the link when the programme is up on the iPlayer). It brought back memories. More than ten years ago (in 2002-3), I was a member of a Competition Commission inquiry into the UK extended warranties market.

For the great majority of consumers, these service or insurance contracts on domestic electrical goods are never a good deal. Appliances are well covered against malfunction by manufacturers’ warranties and UK consumer law, and often against accidental damage by normal domestic insurance policies too; and are anyway not all that prone to breaking down these days. The expected cost of repair bills or replacement is sufficiently low that most people are better off self-insuring (i.e. using their savings). A small number of cash-constrained (i.e. poor) people will benefit from paying for an extended warranty when they have the money upfront, but that’s about it.

At the time on the Competition Commission, we debated whether or not we should ban the sale of the warranties in-store. It was a close call – we decided instead to insist that stores display the warranty price alongside the price of the item so customers had a bit of time to think about it rather than (as was then the norm) being pressed to buy one when paying at the till.

With hindsight, I think we should have banned their sale in stores. Knowing what we now do about behavioural insights – especially how bad people are at assessing probabilities and expected values – would have tipped the decision, I think. The OFT looked at the market again in 2011, and the ombudsman is still saying the market isn’t working well for consumers. Oxera has a nice report about behavioural insights for these products. The right behavioural remedy it alludes to in the conclusion is probably to stop people having to decide under any pressure at all whether or not to buy one – they should do so at home, at leisure, and stores could always send them home with a form or email them a link. Maybe a copy of Kahneman’s Thinking, Fast and Slow as well?

Eating people is wrong

A proof copy of Cormac Ó Gráda’s Eating People is Wrong (& other essays on famine, its past and its future) has arrived in the post, and it all looks terrific. I’ve skimmed the title essay, the point being that not all famines result in cannibalism, raising the question – why not? What cultural shifts or social norms might account for the different experiences concerning “one of the human race’s darkest secrets.”

The book ends with a reflection on Amartya Sen’s observation in his famous book Poverty and Famines (and again in Development as Freedom) that eliminating famine is ‘easy’, but eliminating hunger is not, and we shouldn’t pretend it is so. The task is “constrained by vested interests, by power politics, by poverty, by ignorance, by cynicism and by false analysis.”

Can’t wait to read the bits in the middle. Probably not right after our Christmas lunch.