And still more to read

Having slightly daunted myself yesterday with the in-pile of books here at Enlightenment Towers, I picked up the Autumn 2017 catalogue from Princeton University Press. As they have the good judgment to have me as one of their authors, it’s no surprise that the list is full of what look like terrific new books :-). I’ve read in proof both Capitalism Without Capital by Jonathan Haskel and Stian Westlake – an overview of the importance of intangibles – and Eloi Laurent’s Measuring Tomorrow – about the practicalitles of measurement ‘beyond GDP’.

There are so many other tempting titles it’s hard to pick out just a few. But how about The Infidel and The Professor by Dennis Rasmussen (about the friendship between David Hume and Adam Smith), Janet Browne’s The Quotable Darwin (I loved, loved, loved her Darwin biography), Scott Page’s The Diversity Bonus (he wrote the excellent The Difference), and Reputation: What it is and Why it Matters by Gloria Origgi (she’s appearing at the Festival of Economics in November, in another excellent line-up, which we’ll be announcing in July).

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They don’t make economists like they used to

I’ve finished reading Will Baumol’s (1952) Welfare Economics and the Theory of the State. It’s a short and seriously impressive book, essentially pointing out that if you assume individuals do not either influence each other’s preferences or affect each other’s profits then you conclude that individual maximization delivers the most efficient outcome and the role for the state to restrict or co-ordinate activity is minimal. The laissez faire argument is inherently circular. However, social influence on preferences is pervasive, production by individual firms is interlinked when there are any economies of scale, and externalities in production and consumption are common. The book anticipates – briefly – much of the work done in the following decades in social choice theory, public choice, and Ostrom-style institutional political economy.

What makes it all the more impressive is that (a) it was Baumol’s PhD thesis and (b) he had read historical works including those in French and German – the book cites Petty, Say, Bastiat etc. He apologizes for not being able to read Italian. Clearly, Baumol was exceptional even for his time and surely was a serious miss by the Nobel committee; but I can’t imaging today’s PhD students ever dreaming of looking at any ‘history of thought’ texts, or (at least for the Anglophones) thinking it might useful to have a foreign language. They don’t make economists like they used to. Reform of the undergraduate curriculum has real momentum now (at least outside the US); time to turn our attention to the graduate courses?

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Global gloom and community currencies

I’m late to Mervyn King’s The End of Alchemy, which as all the reviewers have noted is a very well written and interesting book. It isn’t exactly cheering. On the contrary, it cast me into gloom.

As the final chapter puts it, “Without reform of the financial system, as proposed in Chapter 7 [a set of reforms with approximately zero chance of happening…..] another crisis is certain, and the failure to tackle the disequilibrium in the world economy makes it likely it will come sooner rather than later.” The chapter goes on to say not to worry, there’s something that can be done: forgive Greek debt and break up the Euro (or go for a full political union). Globally, stop struggling with Dani Rodrik’s trilemma of democracy, national sovereignity and economic intergration – King seems prepared to give up on the third leg. Change policies in China, Japan and Germany. In short, just tackle the underlying global imbalances and all the other problems or symptoms – debt overhangs, zero interest rates etc – will resolve themselves. No problem then.

To be fair, King does speak of “the audacity of pessimism”. Trouble is, you need a lot of people to get a lot more pessimistic before such policy changes would come about. As the book also points out, the last time there was such a big re-ordering was after the 1930s and 2nd world war.

More cheering is Dave Birch’s wonderful forthcoming book Before Babylon, Beyond Bitcoin, the latest in the Perspectives series (and the first full-length one). It surveys the history and the future of money. In this blog post, Dave suggests an e-currency for Manchester (and other cities). As in his previous work, Identity is the New Money, Dave points out the close link between money and trust – indeed, Mervyn King makes this point too. So financial stability is a question of communities of trust. It’s more comforting to think about trust from the ground up rather than global imbalances and crises….

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The prescience of Will Baumol

The sad news about Will Baumol’s death sent me looking at his publications, and I’ve been reading the (1950) book of his PhD thesis, Welfare Economics and the Theory of the State.

The book begins by noting that laissez faire is certainly not no-government anarchism, but the list of things the government ‘ought’ to do (defence, justice, street lights, roads….) can vary between laissez faire writers and is rather arbitrary. Can there be a set of criteria based on first principles? What about asking, “Which, if any, are the circumstances in which the people composing an economy will find that a particular extension of the authority of the government is requisite for the most efficient pursuit of their own economic interests.” The thesis seeks to answer this question by an extension of the notion of external economies in consumption and production, and concluded that this approach can yield a consistent list of government activities (and moreover one that has governments do more than is often the case, rather than less).

The book then essentially destroys some of the standard convenient assumptions of welfare economics, in amazingly prescient ways. Baumol for example argues that individual preferences are not fixed, but rather influenced by other people, that monopoly and monopolistic competition are the norm, and that there is imperfect knowledge, prefiguring behavioural economics and information economics by some decades. The book ends with an Epilogue: “The Wreck of Welfare Economics.” He writes: “The simplifying premise that these types of interdependence [ie of production costs or preferences] are negligible or non-existent is misleading. Such an assumption is not neutral; it leads inexorably to the acceptance of laissez faire.” He concludes that until economics can say more about external economies and diseconomies, in terms of empirical investigation, there is no point in applying welfare theory.

 

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