Author Archives: Diane Coyle

Macroeconomics – is it all underpants?

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A couple of days ago, Simon Jack of BBC Radio 4’s Today Programme interviewed me about unconventional economic indicators. We chatted about the cranes index, written up by Chris Giles in the FT as a marker of regional imbalance in the UK economy, about hemlines, lipstick, champagne sales. One new to me, unearthed by the researcher, was Alan Greenspan’s supposed interest in sales of men’s underpants. I thought it was in Greenspan’s book, [amazon_link id=”0141029919″ target=”_blank” ]The Age of Turbulence[/amazon_link], where he does talk about his interest in detailed economic statistics, but it turns out the source is a 2008 NPR interview about the book.

[amazon_image id=”0713999829″ link=”true” target=”_blank” size=”medium” ]The Age of Turbulence: Adventures in a New World[/amazon_image]

My discussion on the radio was mildly frivolous, but the light-heartedness covers a serious point about macroeconomics, namely how studiously unempirical it is. This might seem a contrarian statement, given how frequently macroeconomists bandy about debt-GDP ratios, GDP growth rates, inflation and unemployment rates. But in fact Greenspan was something of an exception with his obsession with the statistics underpinning the aggregates. Most macroeconomists trade blows with the same aggregate figures drawn from the same online databases, and their differences are disagreements about the interpretation of the figures in the light of their prior beliefs about a ‘true’ model of the economy. They demonstrate confirmation bias in finding aggregate figures to support their views.

One of the problems with macroeconomics, therefore, is how little attention its practitioners pay to either understanding the construction and intellectual framework underpinning the aggregate statistics they do use (none of them being natural entities, all analytic constructs – see my forthcoming GDP book), or to collecting new statistics. So I’m with Alan Greenspan on this point, and think sales of underpants could be more revealing than the conventional figures.

Austerians, Stimulards, Krugmanites and history

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If you divide history up into separate decades or eras – arbitrary, of course – the average growth rate of similar economies differs greatly between them. For example, growth was 1-3 percentage points slower in all of the major western economies in 1973-1995 as compared with 1950-1973. If this doesn’t sound much, remember the power of cumulative arithmetic: at 2% a year growth, real incomes double after 34 years, compared to just 23 years at 3% a year growth. Stephen King starts his terrific new book [amazon_link id=”0300190522″ target=”_blank” ]When The Money Runs Out: The End of Western Affluence[/amazon_link] by suggesting that the west is currently in one of the eras of structural slow growth – and goes on to argue that there are good reasons to expect this to last for a long time. So he also starts out by picking an argument with all those economists and commentators who present the debate as a cyclical one, i.e. asking how can policymakers correct for the downturn and get things back to trend? King is neither an Austerian nor a Stimulard: “Both sides believe in economic recovery. Each happens to think that the opposing view is totally wrong.”

[amazon_image id=”0300190522″ link=”true” target=”_blank” size=”medium” ]When the Money Runs Out: The End of Western Affluence[/amazon_image]

This gets the book off to a good start, as far as I’m concerned. Whenever I’ve voiced, far more tentatively than it does, some consternation at the current macro debate, I’ve been shouted down by people on each side who tell me that I’m just wrong, and the data prove for a fact that their view is correct. What’s more, certainty is popular – wouldn’t we all love things to get back to the way they were pre-crisis?

A second point the book makes early on is that, precisely because of the stagnation, “Economic policy is no longer for the technocrats. It has become inherently political.” Again, I wholly agree. Structural slowdowns in growth will not end without structural economic reforms, and that’s economics jargon for difficult political choices. The historical episodes described in the book, some well-known, others less so, help shed light on the type of political dilemmas facing western economies now.

The first chapter looks at the roots of the current stagnation, and finds them in the common presumption that economic growth could be taken for granted. Some of the examples are staggering – for example, I learned that by the end of the 1980s it was not uncommon for Japanese homebuyers to take out 100 year mortgages, thus explicitly living on their children’s incomes. In all the western economies, future generations have been defrauded in more and less overt ways – and again, I wholeheartedly agree (this was a theme of [amazon_link id=”0691156298″ target=”_blank” ]The Economics of Enough[/amazon_link]). The debt overhang consists not just of financial instruments but also political promises that might not be achievable.

The book’s subsequent chapters set the policy response to the current crisis alongside a number of historical examples. King notes that the large economic stimulus, mainly through monetary policy, has meant growth post-2008 hasn’t been as bad as it might otherwise have been. But he’s sceptical about ongoing quantitative easing on the present massive scale. “If QE fails to deliver a lasting recovery in economic activity, it shifts from being part of the solution to becoming part of the problem.” And he argues that the impact of QE on growth is unpredictable, with a larger impact on the distribution of economic activity than on its level.

King picks a particular argument with Paul Krugman, which (I know from my own modest experience of mildly criticising Krugman’s messianic certainty) will bring much ire down on his head. He believes Krugman is overly obsessed with parallels between the present and the 1930s ([amazon_link id=”0393345084″ target=”_blank” ]End This Depression Now![/amazon_link]), overlooking some important differences. King points out that the value of national income in the US declined in the 1930s – there was deflation. Now, the volume of US GDP has fallen short of expectations, but the value has not, and fears of deflation proved unfounded. No doubt the Krugmanites would explain that this is due to the fact of stimulus policies. The book’s counterargument is that inflation has run ahead of expectations for some years, pre-dating the crisis, and is due to a progressive deterioration of the economy’s supply potential. “In any case, the ammunition available to Roosevelt no longer exists,” he adds; FDR inherited a healthy fiscal position, and under him the budget deficit peaked at 9% of GDP, in contrast to the large pre-crisis deficits in the US and many other countries.

King’s conclusions are gloomy – the title of the penultimate chapter is ‘Dystopia’. Trust in banks, politicians, foreigners, business and more has declined. There are strains between haves and have-nots, between old and young, between regions. (I’ve written about declining trust in an essay for the OECD ahead of its annual Forum later this month.) There is an entitlement culture, including elites like bankers, which prevents fiscal reform. Globalization may be going into reverse. We are far from hyperinflation, but higher inflation can co-exist with stagnation, as it did in the 1970s. Political extremism may be on the rise.

Can anything be done? A brief final chapter is called ‘Avoiding Dystopia’. The key challenges are addressing the global savings imbalances that lay at the root of the crisis, creating something close enough to fiscal union for the Eurozone to work, bring down high levels of government debt over time with a lasting and credible commitment to lower government spending relative to revenues, find mechanisms to take account of the interests of future generations (in ageing societies where pensioners are the most likely to vote), and unwind QE and put in place a new and credible monetary framework such as nominal GDP targeting. Oh, and sort out the banks’ balance sheets and regulatory regime, fix the education system, and reform the economics profession. If anything, seeing written down the scale all of these challenges is even more depressing than the ‘Dystopia’ chapter.

I’ve got no doubt that even my setting down a description of a book that isn’t avidly anti-austerity will bring down on this post the wrath of the Krugmanites and Stimulards. But I’d urge both teams, both Austerians and Stimulards, to be a tiny bit open-minded and read the book. Look at the past history of growth: there is no guarantee that it must recover to 2% or more a year. Is it not possible that it’s more important for policymakers to address the underlying structural challenges? I fear that unless attention moves away from the Punch and Judy act of so much macro debate, we’re bound to face a long era of economic stagnation.

 

Jane Austen: a better game theorist than a novelist

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Here is a confession, one that will surely rank for unpopularity with my post about how much I dislike the Kindle. I really dislike Jane Austen’s novels. This is only partly because they were force-fed to me at school, along with Charles Dickens and Thomas Hardy, other unfavourite authors of mine. It’s also because who cares about who gets married to whom? I could never be bothered, and indeed the novels have all merged into one general pink romantic mush in my memory. Give me Eliot or Gissing or Zola or Hugo.

There, confession made. So it was with some trepidation that I started reading Michael Chwe’s [amazon_link id=”0691155763″ target=”_blank” ]Jane Austen: Game Theorist[/amazon_link], despite the absolutely glowing reviews it’s been receiving (see for example these articles in the New York Times and The Washington Monthly). My Austen-antipathy notwithstanding, I thought it very good indeed. The early and later chapters are superb, giving other literary examples such as Shakespeare and African-American folktales, and one can easily extract the argument from the Austen-focused chapters in the middle while skipping details about the various tedious marriage plots.

[amazon_image id=”0691155763″ link=”true” target=”_blank” size=”medium” ]Jane Austen, Game Theorist[/amazon_image]

The book hits several targets. It demystifies game theory, explaining it as a systematic way of thinking about strategic behaviour; that is, about choosing actions based on thinking through other people’s likely reactions. It defends game theory against the (silly but all-too-common) accusation that people don’t behave rationally and game theory is therefore a tool of neo-liberal economic imperialism. The first part of this assertion is obviously true, but – as the book demonstrates – strategic thinking is a useful tool long pre-dating modern neoclassical economics. Indeed, one of Chwe’s other aims is to support his argument that Jane Austen was explicitly writing about the difference between people who think strategically and those who don’t.

The most interesting part of the book for me was about why, indeed, there are people who do not strategise – about ‘cluelessness’, as he names it, borrowing from the movie. For instance, Chwe points out that in folk tales as in Austen, high-status people are often ‘clueless’ and therefore easily tricked by subordinates whom they cannot imagine think more strategically than they do. He finds five explanations in the Austen novels:

– some people aren’t naturally adept at it, and it’s harder work for the brain than not being strategic

– sometimes the social or cultural distance is too great for people to think through the likely reaction of another (Chwe gives another example of this in the context of US army checkpoints in Iraq)

– some people are too self-focused and assume others are just like themselves

– the fourth reason is status: to admit that a lower status person can strategise, or to strategise about them as an equal, is actually to undermine one’s superior status

– finally, some people assume they don’t need to think about another person’s preferences because they can change them

The book also adds some supplementary explanations for ‘cluelessness’. For example, he argues that the status-related reason is self-reinforcing because naturally clueless people will gravitate towards status-oriented situations, the hierarchy removing the need to be strategic about others. “In other words, stereotypically ‘male’ organizations like the military might be more hierarchical and status-oriented, with each person given an explicit rank, not because men love hierarchy but because their relative cluelessness requires that every social interaction have explicitly defined roles and rules.”

Another reason for adopting overtly ‘clueless behaviour’ is that it can be a good commitment device – for instance, if two cars are approaching head-on, the driver who does worry about the other’s reaction will be the one who gives way, while the one who fails to make eye contact will sail on. Chwe also suggests that thinking strategically involves empathy towards others, which some social superiors will want to avoid (eg. antebellum slaveowners), or involves actually envisioning being in their bodies to understand how they might think or feel. Interestingly, he also points out that a failure to be strategic is often linked with characteristics often found in autistic people, such as literal-mindedness, and a weak ‘theory of mind’.

All of these reasons ring very true – it has often amazed me how unstrategic most people are, especially in business. It is harder, a bit, to think about how other people will react to your actions and choices, but not that hard. [amazon_link id=”0691155763″ target=”_blank” ]Jane Austen, Game Theorist [/amazon_link] should join the list of strategic classics like [amazon_link id=”9562912515″ target=”_blank” ]The Art of War[/amazon_link], or the good how-to game theory guides like Dixit and Nalebuff’s [amazon_link id=”0393310353″ target=”_blank” ]Thinking Strategically[/amazon_link], on the shelf of everybody who wants to be effective in life.

Anthropology and all that jazz

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It’s a salutary experience to read a book in a different discipline, even a neighbouring one, because it’s a reminder of how specialized we become, and how hard it is to communicate across the boundaries. Reading Gregory Bateson’s [amazon_link id=”0226039056″ target=”_blank” ]Steps to an Ecology of Mind[/amazon_link] – hailed as a classic of anthroplogy and psychology – was hard work. This was partly because of the unknown technical language, and partly because the methodology is so very different to how we economists do economics. In addition, there are areas of detail that are just not all that interesting to me, such as Balinese religious customs, say.

[amazon_image id=”0226039056″ link=”true” target=”_blank” size=”medium” ]Steps to an Ecology of Mind: Collected Essays in Anthropology, Psychiatry, Evolution and Epistemology[/amazon_image]

Still, I’ve taken a couple of useful overarching thoughts from the book, mainly about epistemology and methodology in the social sciences. One is that in social science, the game is to discover the rules of the game. Economics, I think, misses this point altogether. To make matters even more difficult, the game is like Alice’s game of croquet with the Red Queen – with mallets that are flamingos and balls that are hedgehogs, or in other words, it consists of wholly unpredictable components.

I liked also his emphasis, citing Margaret Mead, on avoiding the dualism of means and ends, and the instrumentalism that is used to justify. Bateson insists that not only do ends never justify means, but means are in fact ends in themselves. Echoes here of [amazon_link id=”0141037857″ target=”_blank” ]Sen’s theory of justice[/amazon_link]. There is a rejection of dualism threaded through the book, for example the dualism of ‘man’ and ‘nature’ or generally of the living creature and its environment; these co-evolve, Bateson argues. “If we continue to operate in terms of a Cartesian dualism of mind versus matter, we shall probably also continue to see the world in terms of God versus man; elite versus people; chosen race versus others; nation versus nation; and man versus environment. It is doubtful whether a species having both an advanced technology and this strange way of looking at its world can endure.” This is similar to the message of a book I greatly admire, [amazon_link id=”0521578493″ target=”_blank” ]Mourning Becomes The Law: Philosophy and Representation[/amazon_link] by the late Gillian Rose.

[amazon_image id=”0521578493″ link=”true” target=”_blank” size=”medium” ]Mourning Becomes the Law: Philosophy and Representation[/amazon_image]

The other interesting area is of course his application of cybernetic theory to anthropology and psychology. I found this very hard to follow, however. It seems to concern the well-known warning about reductionism and absence of systems-thinking: Korzybski’s ‘the map is not the territory’. Bateson warns that many problems stem from ignoring the systemic nature of the world in favour of ‘common sense’. John Kay’s[amazon_link id=”1846682894″ target=”_blank” ] Obliquity: Why Our Goals Are Best Achieved Indirectly[/amazon_link] is an accessible riff on this theme, a warning against social engineering by trying to intervene directly to fix things. Beyond this, I find it hard to summarize Bateson’s final section, although I now have his phrase in my head: “Information is a transform of difference”.

One day, I’ll do more than dabble in the other social sciences, and learn some of it properly. For now, back to economics.

How predictable are you?

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Gregory Bateson’s [amazon_link id=”0226039056″ target=”_blank” ]Steps to An Ecology of Mind[/amazon_link] is tough going for a simple-minded economist, although there’s one insight that’s going to prove very useful for the Pro Bono Economics lecture I’m giving next month, The Economist As Outsider. I’m not yet ready to review the book, but meanwhile was very taken with this comment (in the ‘metalogue’ ‘Why Do Things have Outlines?’):

“It’s just the fact that animals are capable of seeing ahead and learning that makes them the only really unpredictable things in the world. To think that we try to make laws as though people were quite regular and predictable.”

[amazon_image id=”0226039056″ link=”true” target=”_blank” size=”medium” ]Steps to an Ecology of Mind: Collected Essays in Anthropology, Psychiatry, Evolution and Epistemology[/amazon_image]

That seems obviously true, but clashes with another of my favourite insights, which also seems obviously true, from John Seely Brown and Paul Duiguid in [amazon_link id=”1578517087″ target=”_blank” ]The Social Life of Information[/amazon_link]; namely, that while everyone thinks computers are predictable and people are unpredictable, it’s actually the other way round.

[amazon_image id=”0875847625″ link=”true” target=”_blank” size=”medium” ]The Social Life of Information[/amazon_image]