Making economic miracles

I’ve always really liked Michael Best’s 2001 book The New Competitive Advantage, and his latest, How Growth Really Happens: The Making of economic miracles through production, governance, and skills is a worthy successor. Best, who has vast experience of visiting businesses and learning in detail how they produce their goods and services, centres his account on the idea of a ‘capability triad’. Growth requires success in three linked domains: skills, a production system and a business model. Note how largely intangible these capabilities are – this is not a matter of investing in capital equipment or even inventing molecules or gadgets. Policies should aim at ensuring businesses can access or develop these capabilities, broadly understood, rather than taxes and subsidies.

The book has a number of examples, historical and more recent, illustrating the concepts, ranging from the wartime transformation of the US economy to modern Greater Boston’s reinvention to the present loss of production capabilities and skills in the US; from the UK’s postwar relative decline to Japan and China’s more recent experience.

There is also a chapter looking at the tradition of thinking about production systems and capabilities in the history of economic thought. Smith is there but also some names too often overlooked in modern economics: Charles Babbage; work on increasing returns models by Thomas Schelling and Paul Krugman, following in the footsteps of Alfred Marshall and Allyn Young (author of a 1928 article ‘Increasing Returns and Economic Progress’; and above all Edith Penrose. I knew too little about her work until a fine biography by Angela Penrose, No Ordinary Woman, sent me to it earlier this year. Given the obvious prevalence of increasing returns in modern economies, it’s high time to revisit this tradition.

The book ends with some reflections about the links between the productivity slowdown of the past 10 years and diminishing capabilities in the affected economies it mainly looks at the US here. Like a growing number of others (see for instance this article by Gregory Tassey), Best argues that the worst long-term consequence of offshoring has been the loss of know-how embedded in production systems and skills. The way to address this? A policy framework aimed at strategic economic development, something that has been lost from the vocabulary of policy for a generation, although tacitly recognised perhaps in the UK’s debates about an industrial strategy.

There’s a mass of interesting detail in the book – perhaps too much compared to the more reflective sections, but then the ideas do pick up on Best’s earlier work where there is much more on the conceptual framework. How Growth Really Happens is well worth a read, along with the earlier book – so much so it’s on the Enlightened Economist Prize 2018 longlist.

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Once upon a time in the British Economy

Managing the Economy, Managing the People: Narratives of Economic Life in Britain from Beveridge to Brexit by Jim Tomlinson is an interesting economic history of modern Britain. It appealed to me from the first page, where Tomlinson talks about the absence of a fixed meaning for the term ‘the economy’. The book therefore focuses: “[O]n the ways in which successive governments, in seeking to manage the economy, have sought simultaneously to manage popular understanding of economic issues.” In other words, to manage the economy is to tell a persuasive story about it – to have a narrative in other words.

This is not, as many economists’ first instinct will tell them, woolly nonsense. It is because there are many possible self-fulfilling (or self-averting) outcomes, given the role of both expectations about the future and interactions between individuals. In different ways many fine economists are starting to incorporate such insights, from Roger Farmer in macroeconomics to Robert Shiller, George Akerlof and Dennis Snower, Kaushik Basu, and George Akerlof and Rachel Kranton.

Anyway, as Tomlinson points out, talking about the electorate misunderstanding economic reality is therefore missing the point that economic outcomes are to some degree always constructed (and besides, it backfires – people don’t like to be told they’re stupid and should listen to clever folk). The body of the book therefore traces the ebb and flow of these political and policy acts of construction, and the interplay of ideas, ideologies, and events. The first part considers some of the key narratives, broadly chronologically – “You’ve never had it so good,” “rolling back the state,” etc. The second part looks at the period through the lens of key macroeconomic indicators, and why some are more salient at specific times due to the way they feature in public debate.

An interesting conclusion considers two broader narratives’: the rise of neoliberalism; and deindustrialisation. Tomlinson argues that while academics (outside economics) focus on the former, the latter – having had a briefl flurry of scholarly interest in the late 1970s – is more significant in understanding the trajectory of people’s lives in postwar Britain. The book comes to a rather sudden halt, and it is by no means a vanilla economic history of Britain, but it’s a stimulating read.

 

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Enlightened Economist 2018 Prize – longlist

It’s the time of year when I look back over the past 12 months of my reading and draw up a list of the 10 or so best from which to select the ultimate winner of the 2018 Enlightened Economist Prize. The rules are: any non-technical or accessible econ/business/tech book I read is eligible (it doesn’t have to have been published during the 12 months); my decision is final. The prize is the offer of an excellent celebratory lunch, for a living author, should the winner and I find ourselves in the same place.

This year’s longlist is long – I’ve read some wonderful books. In no particular order:

Exact Thinking in Demented Times – Karl Sigmund (my review here)

The Attention Merchants – Tim Wu (my review here)

No Ordinary Woman – Angela Penrose (my review here)

Twitter and Tear Gas – Zeynep Tufekci (my review here)

A University Education – David Willetts (my review here)

Price: £15.15
Was: £25.00

Black Edge – Sheila Kolkhatar (my review here)

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How Growth Really Happens – Michael Best (this is sitting on my desk waiting for me to write it up)

The Marshall Plan – Benn Steil (my review here)

Republic of Beliefs – Kaushik Basu (my review here)

Behemoth – Joshua Freeman (my review here)

Factfulness – Hans Rosling (my review here)

Unelected Power – Paul Tucker (my review here)

The National Debt – Martin Slater (my review here)

Deep Thinking – Gary Kasparov (my review here)

Scale – Geoffrey West (I didn’t write on – it’s excellent pop science with a final chapter on cities)

Cognitive Gadgets – Cecelia Heyes (my review here)

Ingenious Pursuits – Lisa Jardine (I didn’t review this either – innovation in history, Mokyr-ish)

The Book of Why – Judea Pearl (I haven’t yet written about it, am mulling it over as he’s very down on causal inference methods used in economics)

The Rise and Fall of the British Nation – David Edgerton (my review here)

The Community of Advantage – Robert Sugden (my review here)

Accounting for Slavery – Caitlin Rosenthal (my review here)

 

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Cost benefit analysis – don’t get over-excited

Cass Sunstein’s new book, The Cost Benefit Revolution, almost managed to achieve the opposite of its aim, which is to persuade me of the merits of ubiquitous use of this tool for assessing social welfare so beloved by economists. I’m an economist so I think CBA is pretty useful but the book’s just so Panglossian about its ability to apply objective reason to regulatory decision making. “In a nutshell, quantitative cost benefit analysis is the best available method for assessing the effects of regulation on social welfare,” he writes (his italics). Except it doesn’t. He isn’t alone in thinking this. I once said to a Very Distinguished British economist that economics needed to take social welfare far more seriously. “Oh but it already does,” he replied. “We use CBA all the time.”

But the point is – as Sunstein does sort of concede in accepting that there are what he calls Hard Cases – it ignores (and the Pareto criterion ignores too) one of the key points about social welfare, namely distribution. Whose costs and whose benefits? It also – as has always been known in the literature, reiterated recently, and always ignored in practice – is a linear approximation suitable for use to assess the net effects of small changes. It furthermore has no validity in assessing any intervention that might change the path of growth or productivity or have any non-marginal effect.

Economists do think of CBA as one of the practical contributions of the field to policy, and I’m in favour of doing the CBA exercise as a source of information about decisions. In practice, for big decisions, that’s exactly what happens. Politics takes over, not least for the distributional reasons. After all, if CBA had been in use in the 19th century, Bazalgette would never have built London 150 years worth of sewerage capacity, and we would lack the magnificent town halls of cities like Manchester and Leeds.

Elsewhere in the book, in the excellent historical sections describing the (non-partisan) spread of CBA in US government, Sunstein gives some persuasive examples of how to use CBA well. (One of the poignant sections describes how an analysis changed Ronald Reagan’s mind – a Republican president open to reason.) There are nice, classroom friendly, examples of using CBA in different domains of policy and is actually more nuanced than the general enthusiasm would suggest about how to use CBA in the context of environmental science, especially when risk attitudes and discount rates differ greatly between groups of voters. All in all, it’s worth the read for anyone interested in the role of reason in policy making. Just don’t drink the same Kool Aid.

PS Tim Harford reviewed the book today and is a bit more enthusiastic.

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More classics (and other novels) for economists

Yesterday I reposted my 2013 list of classic novels for economists. Commenters on the post and many people on Twitter offered other suggestions. Here they are. First, classic novels:

Balzac – Alexandre Delaigue & others mentioned Le Père Goriot (cited by Thomas Piketty) and Eugenie Grandet was recommended by Rebecca Spang (about greed, speculation and coins).

Price: £8.99
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Mary Shelley’s Frankenstein (of course! how could I have omitted it. Thanks Stephen Kinsella.

From Laurent Franckx, The Count of Monte Cristo by Alexandre Dumas.

Merjin Knibbe & others pointed to Dostoyevsky’s Crime & Punishment and The Gambler, and Gogol’s Dead Souls. Also Hemingway’s The Old Man and the Sea.

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On the Gogol, “The plot of this hilarious satire revolves over an attempt by the protagonist to acquire fictious collateral (dead serfs) for which money could be borrowed from the Russian state bank (in early 19th century)”, writes Juha Tarkka.

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Merjin also suggested some others I hadn’t even heard of: by Heijermans, Kamertjeszonde (no translation?!). Multatuli’s Max Havelaar. Fukazawa’s The ballad of Narayama, Malot’s Sans Familie.

Price: Check on Amazon

Matt Clancy suggested The Grapes of Wrath. Of course! Another one I should have thought of, were it not for the A Level aversion therapy: hated it when forced to read it.

Nick Isles proposed Jude the Obscure. (I hate Hardy’s novels; I always want the characters to just pull themselves together.)

Zola was popular:  The Ladies’ Paradise, L’Argent. Anything by Zola is magnificent.

Trollope’s The Way We Live Now was a popular one, and again a glaring omission from the original list.

Robbie Mochrie, impressively, suggested a Jane Austen work I’ve never heard of, about “the ways in which economic activity was shifting from land use to provision of goods and services early in the industrial revolution,” Sanditon.

Cyril Ritter points to Carlo Levi’s Christ Stopped at Eboli, 1945, “For its depiction of a system that exploits poor people and keeps them poor and uninformed.”

Then there were some non-classic suggestions, which was against the rules but there were some great ideas.

I thoroughly agree with all those recommending Francis Spufford’s Red Plenty, which in effect makes the point about the formal identity under ideal conditions of decentralised general equilibrium and the centrally planned economy. But more than that it’s a cracking good read. Also Spufford’s Golden Hill and The Backroom Boys. He’s a wonderful writer.

Price: £7.88
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Jacques Crémer recommended The Godfather, Mario Puzo, on game theory.

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Others in this category:

China Miéville, Embassytown

Price: £4.23
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Michael Crichton’s Rising Sun (international capital flows)

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Asimov’s Foundation series

Dune

Bonfire of the Vanities, Tom Wolfe

Price: £6.05
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David Lodge’s Nice Work

Price: £8.46
Was: £8.99

 

 

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