Author Archives: Diane Coyle

Markets and planners

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I finished reading True Stories, a book of essays by the wonderful Francis Spufford. Mostly they are definitely not about economics but there is one essay about his terrific book Red Plenty. If you haven’t read Red Plenty, do so – borrow or buy it now! It’s a wonderful read. And for an economist there is the spine-tingling excitement of having the formal equivalence of a general competitive equilibrium and a perfectly centrally-planned economy embedded in brilliant work of fiction. If you don’t believe me, read Cosma Shalizi saying the same thing at some length, in In Soviet Union, Optimization Problem Solves You.

And by the way, True Stories and pretty much any other book by Francis Spufford are well worth reading too. Great writer.

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Getting a grip on intangibles

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One of the missing parts of the picture when it comes to measuring and understanding the economy consists of intangibles. This is a big gap, given that services make up four fifths of the UK economy, and that firms invest so much in intangibles, which account for the great majority of their stockmarket valuation. Yet it is so hard to get a grip of the implications of changes we find hard to visualize and do not measure.

A big contribution to starting to fill this gap comes from a new book by Jonathan Haskel and Stian Westlake, Capitalism Without Capital: The Rise of the Intangible Economy. It starts with a description of what the intangible economy is and how we do (currently) and could (in future) measure it. The characteristics of intangible investment are captured in four Ss: intangible assets are more likely than tangible ones to be scalable; they involve higher sunk costs; they are likely to involve spillover effects or externalities; and they exhibit synergies with each other.

Scalability comes about largely because of the non-rival character of intangible goods. Sunk costs are the result of the need for high upfront investment – with software or databases or movies for instance – and then very low marginal cost. Spillovers are present in knowledge-based goods, again due to non-rivalry – the famous Thomas Jefferson quotation, “He who receives an idea from me receives intstruction himself without lessening mine.” This is the fundamental point in endogenous growth theory. Finally, the synergies reflect the need for complementary investments (tangible ones too) to embody ideas in useful outputs.

Having set the scene, the book goes on to consider the implications of the intangible economy in a number of areas: the productivity puzzle; inequality; finance; business management; and public policy. These are explored through the lens of the four Ss. For example, does the public goods characteristic of non-rivalry imply that a greater proportion of the total investment will need to be publicly funded? Should governments encourage a switch from debt to equity financing of investment through changes to the tax system? (This chapter is set up as a series of essentially rhetorical questions – the answers are yes and yes!)

The key message is that the economy has changed and is changing its character fundamentally, yet businesses and governments have hardly begun to get to grips with the implications. After all, we are not even measuring intangibles properly. In both the winning Indigo Prize essays fixing this was one of the key recommendations – it is hardly surprising the essays included this as mine was co-authored with the head of Australia’s intellectual property agency and the other co-authored by Jonathan Haskel, but my point is that the distinguished panel of judges saw this as important.

There are some other books emphasising intangibles, such as Baruch Lev’s work on accounting, The End of Accounting being the most recent. For an introduction, though, it would be hard to do better than Capitalism without Capital, which is clear and lively and raises – without having all the answers – the relevant questions.

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True wealth

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I’ve been meaning to write about National Wealth: What is Missing, Why it Matters edited by Cameron Hepburn and Kirk Hamilton. This volume (in which I have a chapter, The Political Economy of National Statistics) looks at different types of wealth from a number of perspectives. The opening set of chapters look at the link between wealth and sustainability (measurement of assets being essential to take the future into account) and the link between wealth and well-being, as well as my paper looking at how one might move from a GDP/income flow to a wealth measurement standard. Part two covers the historical perspective on wealth. Part 3 looks in more detail at the measurement of specific components of wealth, and part 4 at sustainability.

As the editors write, “Policies that create wealth go beyond increasing output; they involve investments today for returns in the future … A focus on wealth generation … shifts policy away from supporting immediate consumption.” There are plenty of ideas and an increasing amount of data making it possible to start accounting for wealth, and specifically the change in real wealth. The challenge is the policy challenge of getting consensus about the need to change the focus.

With my co-author Benjamin Mitra-Kahn, we suggested how to go about this as our entry for the inaugural Indigo Prize, which we were honoured to win jointly with Jonathan Haskel and his colleagues. Their ideas for improving GDP are excellent; but Ben and I still think priority needs to be given to the sustainability-enhancing potential of a wealth focus rather than an amended GDP focus. Wealth and sustainability are “joined at the hip,” as National Wealth puts it.

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What do software developers really do?

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When talking to my students about the difficulty of monitoring effort, and therefore how information asymmetries shape the operation of markets (or policies), an example I often use is hiring a software consultant or coder. Someone who is not a software developer, and perhaps even someone who is, will not be able to tell whether the employee or consultant is working hard, or what the quality of their output is – certainly not until it is finished and maybe not even then.

So I was intrigued by a new book that arrived here, Working With Coders: A guide to software development for the perplexed non-techie, by Patrick Gleeson. The author has worked as a software developer and is designed for people who are hiring or contracting people like him. I’ve never had to do this so can’t contribute any personal experience. Still, this seems like a really useful book for anyone in such a position. It explains some of the basics, demystifies jargon, explains how to set up the development process to ensure quality standards, describes the warning signals that a project is going wrong and finally offers some thoughts about what to do when it has gone wrong. There are some example bits of code but no prior knowledge on the part of the reader is assumed.

I would say that if you have any responsibility for software projects without any technical knowledge, and know even less than you would ever be prepared to admit, this book would be well worth your while. Given that one of the main reasons big software projects go wrong is that the executives or managers in charge have so little understanding, the cover price is a very reasonable investment in chipping away at the information asymmetry – alongside, of course, the classic (1975) The Mythical Man Month: Essays in software engineering by Frederick Brooks (“Adding manpower to a late software project makes it later.”)

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Economics for good

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Jean Tirole’s book Economics for the Common Good is out now and is highly recommended. As I had the privilege of helping prepare the English edition, I’ve read it with careful attention, and most appreciated Tirole’s ability to crystallise complicated issues in a straightforward way, combining surgical analysis with very clear explanation. This is too rare a skill among economists.

The first part of the book concerns the influence of economics and economists on society and the role of the market, followed by a section on what doing (good) economics involves, and also how economics is changing. There are then two chapters on organisation, the first on the relationship between state and market, the second on the role of business. These sections are in the same spirit as Dani Rodrik’s Economics Rules, although their experiences and examples differ. Here in Economics for the Common Good is an economist at the pinnacle of the profession (Tirole won the 2014 Nobel prize) giving a thoughtful, reflective account of what economics can properly contribute to – well, the common good. Although much of his work is highly technical, he has always been concerned with its application to practical challenges in organising society: “Academics must ..collectively aim to make the world a better place; consequently, they cannot refuse, as a matter of principle, to take some interest in public affairs.” If an economist has appropriate professional competence in some area, she has an obligation to take a position on it – while acknowledging that what is known changes and re-evaluation may always be necessary.

The final two sections of the book turn to applications of economics, big macroeconomic questions such as financial market stability or tackling climate change, and then applied microeconomic issues such as competition policy, digital platforms, intellectual property and the regulation of network industries. Given my own interests, this final section was riveting. No other individual economist has done more than Tirole to take forward the economic analysis of these kinds of areas, incorporating issues of asymmetric information, principal-agent problems, incentive compatibility, and so on. The final chapter, on sector regulation, is a must-read for anyone interested in this area. (I drew on it in a recent FT column.)

The book is non-technical, aimed at the general reader, and packed with examples. It does in parts require a careful read, but each sections and chapters stands being read alone, so one can dip into the book. There’s a nice publisher blog post in which Tirole explains his motivation for writing the book and what he hopes it can achieve.

It ends with an epilogue reflecting on the status of technical knowledge in a time of populism (the French edition was published early enoug in 2016 that it feels like a different era), and the even greater responsibility economists have to engage and communicate – “Economists must … with humility and conviction, harness economics for the common good.”

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