Author Archives: Diane Coyle

All-powerful economists?

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There are really two separate books rubbing shoulders in [amazon_link id=”0857284592″ target=”_blank” ]Economists and the Powerful: Convenient Theories, Distorted Facts, Ample Rewards[/amazon_link] by Norbert Häring and Niall Douglas.

One of them is a clear and well-made case that modern economics has been in error in ignoring the part played by institutions, politics and power relations in actual economies. It has chapters covering the acquisition and abuse of power by the financial services industry, the distortion of business in the interests of executives rather than customers, employees or shareholders, and the increasing concentration of the US economy through merger waves. Although many or most professional economists who work in business or regulators or consultancy have always been well aware of institutional detail, I think it is fair comment that academic economics overlooked the reality of markets and economies for too long. I’d also add that this has been changing quickly, with the rise over 20 years of institutional economics, behavioural economics etc (see [amazon_link id=”0691143161″ target=”_blank” ]The Soulful Science[/amazon_link]) – but there is further to go.

The second book within this set of covers is more tendentious. It is a history of economic methodology in the first chapter (I must say, I’d have put this at the end if I’d been the author). While the authors land some punches, and make some good points about the way theory shapes reality (see my Tanner Lectures on this question of performativity), they are too conspiracy theorist about it. The original spin-meister Edward Bernays is wheeled out, along with the Inside Job accusations that the financial crisis came about because some economists were paid to write a report by the Icelandic government. Although many economists in universities do paid consulting work – and should certainly declare it when they publish their work – I don’t believe there is signficant distortion of what gets published as there seems to be in the case of pharma companies and medical research. The economists simply have a much wider choice of options, and are not beholden to one set of powerful business interests. There would be something interesting to say, nevertheless, about the narrowing of economic research as published in mainstream journals – I just don’t believe it’s as crudely marxist as suggested here. Similarly, the way economic theory and practice developed from the 1940s to 1980s was certainly bound up with the wider ideological/political climate (like any social science discipline is sure to be), but not in such a purposive way. I think the messy sociological reality of the profession would be far more interesting to understand than the ideological, top-down assertions presented in this book.

Still, it’s an interesting read. The argument that marginalism, the refusal to compare individuals’ utility and rational choice added up to the inevitable demotion of interest in economic institutions is quite interesting. Besides, I’m all in favour of economists continuing to introspect for at least as long as the world economy remains in such a fragile state.

[amazon_image id=”0857284592″ link=”true” target=”_blank” size=”medium” ]Economists and the Powerful: Convenient Theories, Distorted Facts, Ample Rewards (The Anthem Other Canon Series)[/amazon_image]

Class consciousness

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I’ve started reading Owen Jones’s [amazon_link id=”1844678644″ target=”_blank” ]Chavs: The Demonization of the Working Class[/amazon_link], my follow up to the excellent [amazon_link id=”1847087027″ target=”_blank” ]Estates[/amazon_link] by Lynsey Hanley (I reviewed Estates here). Two chapters in, Chavs describes examples of that demonisation of the working class (white British and non-white and/or immigrant). Some of the examples he quotes from posh, mainly female journalists are staggeringly crass and awful. I hope he includes later more about the interplay between socio-economic class and culture – just as in the days of ‘U and non-U’, part of the demonisation is mocking the cultural differences. My northern working class family had ‘settees’, although obviously I’ve made it to the ‘sofa’ class myself.

[amazon_image id=”1844678644″ link=”true” target=”_blank” size=”medium” ]Chavs: The Demonization of the Working Class[/amazon_image]

Class has been overlooked for too long in public political and cultural discourse. It’s always seemed clear to me that you can’t discuss, for example, the role of race in society without considering how race and class overlap. It seems the increase in inequality may have made it permissible to bring the subject up again, although I note that many people are still more comfortable talking about ‘the 99 per cent’ or ‘low-income families’ than about ‘the working class’ or even ‘poor people’.

I’ll review Chavs later in the week.

Where *do* banks get their money?

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Yesterday I attended an interesting session trying to identify specific reforms to the banking system – competition policy, regulatory change, consumer-facing advice and so on – run by the Finance Innovation Lab. The event ran under the Chatham House Rule so I can’t be specific about who said what. There were some very thoughtful comments, however.

– there are large (private) economies of scale in finance but large (social) diseconomies of scale. How should competition and other policy interventions change to reflect the latter?

– financial services lies at the bottom of the Edelman trust barometer, tech companies at the top. Why this contrast, when finance is also an IT-intensive information business – what does it tell us about finance?

Edelman – trust in industries

– is low trust an opportunity to bring about change?

– the big incumbent UK banks simply can’t lend to SMEs as they’re too big. If Lloyds wants to grow its £1 trillion balance sheet by a modest 5% a year, it will be looking to lend to hedge funds, not people or small businesses.

– the cost of financial intermediation has not fallen despite the growth in the finance sector; Thomas Philippon’s paper ‘Has the US finance industry become less efficient?’ was cited.

I can talk about my own contribution, which was my usual riff about competition: UK (retail) banking is not a ‘market’ as there is no entry and no exit, only failed or unprofitable new entrants; the incumbent UK banks’ back-book of inert deposits combines with other barriers to make entry impossible, and they might need to be broken up, not just into retail and investment banks, but into smaller units altogether; banking is the only dinosaur industry not yet made extinct by digital disruption, but it’s ripe for this – if only regulators will make it possible for new technology-based entrants with entirely different business models. I’m not wildly optimistic about this. The regulators know this in principle but they don’t have the understanding or staff or contact with new start-ups to enable it.

Another speaker was Professor Richard Werner of Southampton University, whose contribution I can describe because he’s published it in [amazon_link id=”1908506237″ target=”_blank” ]Where Does Money Come From? A Guide to the UK Monetary and Banking Sytem[/amazon_link]. He  talked persuasively of the need for regional or local institutions with detailed knowledge of local businesses. He also quite rightly pointed out that almost nobody understands money, not least because all the textbooks he has ever looked at get it wrong (I agree!). I didn’t buy his argument for centralised, state-owned money creation. But I’ll read his essay in the book to give the argument a chance.

[amazon_image id=”1908506237″ link=”true” target=”_blank” size=”medium” ]Where Does Money Come From?: A Guide to the UK Monetary & Banking System[/amazon_image]

Does British business have a history?

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The proofs for a book out in April, [amazon_link id=”0674050916″ target=”_blank” ]The People’s Car: A Global History of the Volkswagen Beetle[/amazon_link] by Bernhard Rieger, have landed here in Enlightenment Towers. It looks terrific, although I’ll put off reading it until a bit closer to publication date.

[amazon_image id=”0674050916″ link=”true” target=”_blank” size=”medium” ]The People’s Car: A Global History of the Volkswagen Beetle: A Global History of the Volkswagen Bettle[/amazon_image]

I do like a business history but can’t think of all that many on British firms. No doubt that’s my ignorance, and people will have lots of suggestions. But the only one that comes to mind this morning is [amazon_link id=”1841151866″ target=”_blank” ]A Computer called LEO: Lyons Tea Shops and the world’s first office computer[/amazon_link] by Georgina Ferry (partly because I was chatting to a friend about it). Geoffrey Owen did a splendid overview of post-war British industry a few years ago in [amazon_link id=”0006387500″ target=”_blank” ]From Empire to Europe[/amazon_link]. I can think of one or two other more general books, like Andrew and Melanie Kelly’s [amazon_link id=”0955074231″ target=”_blank” ]Take Flight[/amazon_link], which combines business and regional history.

There are loads of books on American computer and internet pioneers – we didn’t have many of those in the UK although by beloved husband Rory Cellan-Jones wrote about the millennial dot com boom in the UK in [amazon_link id=”1854107909″ target=”_blank” ]Dot Bomb: The Rise and Fall of Dot Com Britain[/amazon_link].

American business historians have a rich tradition beyond the tech sector – Alfred Chandler forged the way with his [amazon_link id=”0674940520″ target=”_blank” ]The Visible Hand[/amazon_link], albeit covering more than one firm in that masterwork. (The Economist obit of Chandler describes him as: “the man who more or less invented the history of the big corporation.”) Daniel Yergin has written definitely about the oil industry in [amazon_link id=”1847376460″ target=”_blank” ]The Prize[/amazon_link] and the more recent [amazon_link id=”0143121944″ target=”_blank” ]The Quest[/amazon_link] on energy security. I can even think of a number on German firms – like this VW book and also Harold James’s recent [amazon_link id=”069115340X” target=”_blank” ]Krupp: A History of the Legendary German Firm[/amazon_link].

Help me out on the history of British business giants! Surely there are histories of BP, Rolls Royce, John Lewis, the Pru?

Adrift in theory and history

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A new book has flown through the letter box and landed, squawking gently to attract attention, on my desk this afternoon. I’m distracted enough from my work to page through it, and am jolted alert by the title of the concluding chapter: “Using Theory to Learn from History.” That’s exactly what economists presuming to give policy advice ought to do.

The theory in [amazon_link id=”069115743X” target=”_blank” ]The Leaderless Economy[/amazon_link] by Peter Temin and David Vines is the theory of internal and external balance in international economics. The history is the Great Depression – “The economic problems of the 1930s only became known as the Great Depression after the fact. Politicians and economists struggled to understand what was happening in real time.”

The real time choices political leaders around the world make now will have large and lasting effects. Will theory and history help them avert Great Depression 2.0? My quick scan of the book suggests the authors are not optimistic. Back to work.

[amazon_image id=”069115743X” link=”true” target=”_blank” size=”medium” ]The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It[/amazon_image]