Author Archives: Diane Coyle

Economic thought and its idiosyncracies

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This weekend my reading was [amazon_link id=”0231172583″ target=”_blank” ]Economic Thought: A Brief History[/amazon_link] by Heinz Kurz. It really is brief, just 183 pages, starting with the Ancient Greeks and ending with behavioural economics and RCTs. So it sets out the broadest outlines of economics, with a strong bias towards macroeconomics and thinking about economic systems. Marxism is covered – indeed, gets a whole chapter of 14 pages – but industrial organisation is absent save for a bit of Schumpeter and a bit of new institutional economics.

9780231172585

Within its self-imposed limitations of space and selectivity, the book does a decent job in outlining the key features of, say, classical thought and the marginalist turn – for example, Kurz emphasises the introduction of the emphasis on the flow of commodities produced each year in classical thinking. I learned a few new names: Hermann Heinrich Gossen, anyone? I hadn’t heard of him before, but learn here that he introduced the earliest version of marginal utility theory. I thought the discussion of utility theory is particularly good. Kurz writes:

“Compared with cardinal utility theory, ordinal utility theory – with its rejection of interpersonal comparisons – dramatically privileges the individual relative to society. In this perspective, the individual, one might say, is in principle attributed a right to veto public decisions that affetc his or her (subjective) well-being … As a consequence, economic policy seems unable to improve social situations. Since every policy alternative has some gainers and som losers, how could one ever judge the gains of the former against the losses of the latter, if interpersonal utility comparisons are prohibited?”

Very clear. There are a couple of other points where Kurz highlights interesting and deep methodological issues – another one, for instance, critiques Heckher-Ohlin-Samuelson in terms of its assumption of a single homogeneous ‘quantity of capital’. And in a short section on economic geography, there’s the point that in a constant returns to scale world assumed by so much of economics (including productivity accounting), “economic activity will be evenly distributed across a homogeneous plain, carried out by autarkic units of production and consumption.”

So, some nice insights. I did find myself wondering what audience the author had in mind as he wrote. He tries to explain some concepts – indifference curves, Keynesian aggregate demand, Hicks-Kaldor compensation and Skitovsky’s rebuttal – in a couple of pages at most. Economists reading this book wouldn’t need the explainers. Normal people reading it will find these far too condensed and impenetrable. As one of the former group, I’d have traded off the attempts at explanation of basic concepts for some more of Kurz’s critique of the ideas he is covering. Still, this would be a useful book for students just starting to get into the history of thought – one step beyond [amazon_link id=”0140290060″ target=”_blank” ]The Worldly Philosophers[/amazon_link], and a prelude to a bigger book like Saadmo’s excellent [amazon_link id=”B00HRFGZ7I” target=”_blank” ]Economics Evolving[/amazon_link].

[amazon_image id=”067163318X” link=”true” target=”_blank” size=”medium” ]The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers (A Touchstone book)[/amazon_image]  [amazon_image id=”B00HRFGZ7I” link=”true” target=”_blank” size=”medium” ]Economics Evolving: A History of Economic Thought by Sandmo. Agnar ( 2010 ) Paperback[/amazon_image]

The health of the publishing industry

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Yesterday the Publisher’s Association put out the press release on its 2015 figures  with the headline ‘Strong Year for UK publishing industry.’ Total revenues increased by 1.3% (or about £100m) to £4.4bn. With inflation around zero last year, this is a real terms increase. The release highlighted the increase in physical book sales (and particular non-fiction – but I don’t know if this category includes the depressing proliferation of adult colouring books); and the first recorded decrease in digital sales.

You have to buy the statistics, so I’ve only done a few sums on the figures in the press release. This is not helped by the fact that the author of the release was a bit hazy about the difference between millions and billions, so there was a bit of guesswork involved. Revenues from physical book sales were up 0.4% to £2.76bn (an increase of around £12m). Revenues from digital sales were down 1.6% to £554m. Interestingly, then, physical sales continue to be much larger in scale.

And what about the gap? There is a line stating: “2015 was a great year for learned journals sales and demonstrates the strength of academic publishers in driving new innovative business models that contribute towards maintaining the UK’s position as a hub of global research excellence.” Piecing together the figures, it looks like a 5% (or approx £50m) increase to £1.1bn in sales of academic journals.

Export sales were down slightly – the rest of Europe accounts for 35% of the UK industry’s sales. As far as I can tell, the export figures are included in the above three categories (physical, digital, academic journals).

So all in all, yes a good year, pleasing for those of us devoted to physical books. But most pleasing of all to the publishers of academic journals (and not so good for taxpayers and students who fund the library purchases).

Timely advice for voters?

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Here’s a timely new book that arrived at Enlightenment Towers this week: [amazon_link id=”0691170142″ target=”_blank” ]How to Choose a Leader: Machiavelli’s Advice to Citizens[/amazon_link], by Maurizio Viroli.

[amazon_image id=”0691170142″ link=”true” target=”_blank” size=”medium” ]How to Choose a Leader: Machiavelli’s Advice to Citizens[/amazon_image]

It’s a small book, which Viroli frames for an American readership choosing a new president later this year. He points out that Machiavelli was an important influence on John Adams and others of the Republic’s Founding Fathers, because of his emphasis on government without tyranny. While we always think of The Prince, Discourses on Livy and The Art of War were also highly influential.

Each chapter addresses and explains a quotation from Machiavelli, such as “I love my country more than my soul,” or “It is the common good which makes republics great.” (‘Machiavelli invites citizens to use their reason to evaluate political and social matters.’ Riiiiight.) Then Viroli gives some modern examples of rulers who did – and didn’t – follow the relevant advice.

I haven’t read it properly, just paged through, but it looks great for dipping into. Very handsomely produced little book, too.

Surviving disruption through paranoia

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Joshua Gans’s new book [amazon_link id=”0262034484″ target=”_blank” ]The Disruption Dilemma[/amazon_link] is aimed at business readers. It takes the famous Clayton Christensen analysis [amazon_link id=”142219602X” target=”_blank” ]The Innovator’s Dilemma [/amazon_link] – a change in the competitive landscape that even a well-managed business might not survive – and sets out the possible strategies the defensive firm might successfully deploy. In doing so, Gans argues that the original disruption story is too simplified, and there are different kinds of challenge, some more threatening to incumbent survival than others.

[amazon_image id=”0262034484″ link=”true” target=”_blank” size=”medium” ]The Disruption Dilemma[/amazon_image]

As Gans points out, ‘disruption’ has become an over-used term, so he is specific about addressing fundamental shifts in the landscape. Where Christensen and many of his successors have focused on defences against the demand side of disruption where a new entrant offers a product to a niche group of customers, Gans is interested in the supply-side, when the disruptions  use an entirely new technology or approach to production. For this means the incumbent businesses find it very hard to respond. To do so effectively means completely redrawing the fundamentals of how they produce their product or service. The book advisers readers not to worry about ‘demand side’ disruptions but to focus their efforts on how to prepare for a ‘supply side’ event

Counter-intuitively, one of Gans’s defensive strategies is to run a highly integrated organisation that is in the habit of working on a sequence of innovations – which runs contrary to the usual advice to ‘disrupt yourself’ with some kind of skunk works. This is the dilemma of the title: if you run a highly integrated business, then you can’t try the independent unit option. The other strategies are: ensure you have some unique complementary assets (something [amazon_link id=”019828988X” target=”_blank” ]John Kay[/amazon_link] has always emphasised); and don’t tie your corporate identity to your technology.

This all seems sensible advice and the case studies cited are very interesting. I have to say, though, that although Gans concludes than [amazon_link id=”1861975139″ target=”_blank” ]Andy Groves[/amazon_link] overdid the paranoia – “academic research and market experience demonstrate that the fear of inevitable and imminent disruption is unfounded” – I’m not so sure. Or at least, labelling management in a time of technical change as ‘disruption’ might well be exaggeration, but it doesn’t meant the job of managing a business is easy. Stuff happens all the time, and the really difficult decisions need to be made when the stuff has started happening but your business is still doing fine. Paranoia seems the right attitude.

Even for the non-paranoid and possibly over-relaxed, this is a nice, concise overview of the disruption debate and possible responses. It is firmly rooted in proper research, the best kind of business book.

Economists and morality

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This weekend I sat in the garden a lot, reading Sam Bowles’ excellent new book [amazon_link id=”0300163800″ target=”_blank” ]The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens[/amazon_link]. The book explores the incorrect standard (although shifting, I think) assumption in economics that incentives and morals do not affect each other – or in jargon, that they are additively separable. It describes research involving many, many experiments looking at how people behave in different contexts, cultures and communities in response to incentive changes.

The book begins with an explanation of the first theorem of welfare economics and underlines its power as a demonstration of the fact that in life, contracts are almost always incomplete, asymmetric information pervasive – and ever more so in modern economies – and externalities rife. Given the reality, Bowles writes: “Morals must sometimes do the work of prices, rather than the other way round.” His key argument is familiar in the post-public choice literature discussion targets and incentives in the public sector: that treating people as knaves (in Hume’s well-known formulation) makes them more likely to act knavishly. Introducing incentives – like the standard Pigouvian taxes or subsidies to correct externalities – can crowd-out intrinsic motivation, sometimes to the extent that the policy intervention backfires altogether.

[amazon_link asins=’0300163800′ template=’ProductAd’ store=’enlighteconom-21′ marketplace=’UK’ link_id=’39e6b984-7dee-11e7-b0d6-df43673ee614′]

Later chapters go on to consider the information conveyed by the standard incentives tool kit – the social information contained in a fine, for instance – and the importance of the social context in which policies are being implemented. For the experimental results show that behaviour in something like the Ultimatum game differs greatly between cultures. Paradoxically, there is far more pro-social or altruistic behaviour in advanced market economies than in those where the role of the market is limited. Bowles suggests it is because these long-standing capitalist societies have a liberal social order, meaning tolerance, respect for individual rights, relatively few barriers to social mobility. He quotes [amazon_link id=”2012183840″ target=”_blank” ]Voltaire[/amazon_link]’s astonishment on visiting the London Stock Exchange:

“The Jew, the Mohameddan, the Christian deal with one another as if they were of the same religion, and give the name infidel only to those who go bankrupt. … upon leaving this peaceful and free assembly some withdraw to the synagogue, others retire to their churches, some to have a drink … and everyone is happy.”

An apt quotation the week after the Mayoral election in London. The book suggests that there is a virtuous circle whereby “in more market-oriented societies … people learn from their market experiences that fair dealing with strangers is often profitable.” Equally, there can be a vicious circle of distrust outside the family or clan. The point is that preferences are endogenous, not fixed. But, “Where market failures arise because contracts are incomplete, socially valuable norms like trust and reciprocity may be important in attenuating these market failures.”

Finally, the book touches on mechanism design, and why it is not a solution for the policymaker who wants to stick with incentive-based responses to market failures, explaining the impossibility result in this literature: that if there is private information, no voluntary mechanism produces a Pareto efficient outcome. It would also be interesting to think about the role of Al Roth-style market design in using the informational power of markets to devise better policies even where the involvement of money would be ‘repugnant’.

The book does end with some rather general suggestions for ‘Aristotelian’ policymakers who understand the important role of virtue in underpinning efficient as well as fair outcomes. I concluded that in fact there is still a lot of work to be done to understand how incentives and intrinsic values interact. Early in the book, Sam talks about the well-known experiment in a nursery introducing fines for parents who were late to collect their children; the fines made parents feel they were paying for being late, so lateness rose rather than declining. But other examples go the other way: [amazon_link id=”0718193660″ target=”_blank” ]Duflo and Banerjee[/amazon_link] report on the use of mosquito nets rising when a small charge was introduced, rather than giving the nets away for free.

We don’t understand well enough when markets and price incentives are effective and when counter-productive, or the balance between the anonimity of market transactions, the role of reputation and trust in repeated transactions, and the power-laden character of both market and non-market transactions. There is a reason people flock away from their villages for the monetary relations of the big city. In an interesting section the book discusses the importance of identity for understanding these distinctions: people mind being manipulated through incentives by their boss – ‘he doesn’t trust me’ – but they don’t seem to mind the application of monetary incentives like fines so much when the authority is the collective decision of their peers.

It would be good to get to first base with policy makers, and have them appreciate the fact that policies change behaviour at all – there are still so many examples of the assumption that the economist or rule maker is ‘outside’ the economy. For this reason I find the fashion in policy circle for ‘nudging’ alarming as it is being done so much in the spirit of Madison Avenue. Having said this, the insights of [amazon_link id=”0300163800″ target=”_blank” ]The Moral Economy[/amazon_link] point to a potentially far more fruitful approach to policy than either of the current modes of the policy world, where it is either all about incentives or all about nudges. Fundamentally, designers of policies need to recognise that the people to whom they will apply have moral agency. So I applaud this book. And as it is non-technical and a terrific summary of the research on the relevant kinds of experiment concerning collective choice, I’ll be adding it as ‘further reading’ to my public policy course syllabus next semester.