Author Archives: Diane Coyle

I really want to read this book

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‘This book’ is Mark Mazower’s latest, [amazon_link id=”0713996838″ target=”_blank” ]Governing the World: The History of an Idea[/amazon_link]. There’s an extract in the current issue of The Nation that gives a good flavour of its themes in discussing the international (dis)order and what replacement for it might stagger out of the mists of the current crisis.

It will be interesting to compare it to Philip Bobbitt’s [amazon_link id=”0141007559″ target=”_blank” ]The Shield of Achilles[/amazon_link], which also looked at the clash between nation state-based organisation and globalized financial markets, but in far happier times. And to Tony Judt’s amazing [amazon_link id=”009954203X” target=”_blank” ]Postwar: A History of Europe since 1945[/amazon_link].

I loved Mazower’s book [amazon_link id=”0007120222″ target=”_blank” ]Salonica, City of Ghosts[/amazon_link], and his [amazon_link id=”0140241590″ target=”_blank” ]Dark Continent: Europe’s 20th Century[/amazon_link]. He also wrote an op-ed in the Financial Times recently, and the new book was reviewed positively by Paul Kennedy in the FT, and negatively in Standpoint.

[amazon_image id=”0713996838″ link=”true” target=”_blank” size=”medium” ]Governing the World: The History of an Idea (Allen Lane History)[/amazon_image]

You chose my next book

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Last week I asked for suggestions about which book from my pile I should read next. I was distracted by Bo Xilai, and finished Genres of the Credit Economy during the week. Opinion about the next one was reasonably evenly divided.

Actually, one person on Twitter – @theJeremyVine – nominated his own new book, [amazon_link id=”1849837767″ target=”_blank” ]It’s All News To Me: How I got locked inside the BBC for 25 years.[/amazon_link] As my husband has been locked inside the BBC for 32 years, he has found this a total page-turner and been laughing, distractingly, as he reads.

[amazon_image id=”1849837767″ link=”true” target=”_blank” size=”medium” ]It’s All News to Me[/amazon_image]

Anyway, the ‘winner’ was [amazon_link id=”184467617X” target=”_blank” ]Envisioning Real Utopias [/amazon_link]by Erik Olin Wright – I’ve agreed to write something about it, so will crack on.

[amazon_image id=”184467617X” link=”true” target=”_blank” size=”medium” ]Envisioning Real Utopias[/amazon_image]

Poetry, and economics

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It has taken me some weeks to read Mary Poovey’s [amazon_link id=”0226675335″ target=”_blank” ]Genres of the Credit Economy: Mediating Value in 18th and 19th Century Britain[/amazon_link]. She is a Professor of English, so writing in a different academic language than the one I’m used to, and it’s quite a dense book of subtle argument and loads of detail about the evolution of finance in early capitalist Britain. Yet it has amply repaid the effort. Poovey’s argument is fascinating and, I think, persuasive.

The book traces the separation from the 18th century onward of three different genres of writing that were not all that distinct to start with. The era described in the book saw huge growth in the amount being written and published, and in literacy and the appetite for information among readers. It was the Information Age 1.0. (In fact, I learned from the book that Thomas Carlyle designated 1774-1784 the start of the ‘Paper Age.’)

One ‘genre’ considered here is the writing on financial instruments, including bank notes: what began as quite discursive text on bills of exchange about the creditor and debtor, and the hands through which the bills passed, and the specific promises and dates they contained gradually became standardised and more or less invisible (as fictional writing). By the late 19th century, the leap of faith that was needed to trust the fiat money of Bank of England notes and commercial bills only ever came into focus during financial crises.

The second genre is writing about political economy, or factual writing about money, and the third literary writing. Poovey demonstrates that in the early part of the period she looks at, writers did not hesitate to use fiction and fables to write about financial matters. Yet steadily both the abstract language of professional scholarly economics and the factual writing provided by the emerging class of financial journalists drove out literary and imaginative ways of understanding credit. In parallel, literary writers were at pains to demarcate their fictional writing from the taint of the marketplace – although increasing numbers of literary writers sought to sell their work, they were disdainful about commerce, including the non-literary fictions and publications that sold well to the emerging mass market of readers. Indeed, criticism of the market became the only acceptable way for the literary world to relate to the market.

From my perspective as an economist, the most interesting parts of the book concern the causes and consequences of the professionalisation of economics as a serious intellectual discipline. As Poovey writes:

“If economic writers had not pursued natural philosophical and then mathematical models to the exclusion of other ways of modelling value, if these writers had not been successful in popularizing a theoretical consensus about which economic questions mattered, and if they had not embraced marginal utility theory in a way that narrowed the discipline and ignored what their models could not explain, economics as a discipline might not have assumed the form it now takes. By the same token, …. if Literary writers had not cloaked their participation in the market economy …. then imaginative writing of all kinds might now seem to have something to  contribute to the discussions about value we need so desperately to restart. …. Writers developed genres that seemed to be different in kind and were arranged in an increasingly rigid hierarchy that divided their audiences in ever-more-differentiated segments too.”

It is interesting to note that she sets economics’ ambition to attain the status of the natural sciences far earlier than often claimed – in the marginal revolution and adoption of utilitarianism, rather than in the cybernetic era (as claimed for example by Philip Mirowski in [amazon_link id=”0521775264″ target=”_blank” ]Machine Dreams: Economics Becomes a Cyborg Science[/amazon_link]). I also found it illuminating to follow Poovey’s tracing of the increasing abstraction and adoption of jargon by early economics writers. Some, including J.S.Mill, acknowledged that this abstraction had limitations when it came to describing the reality of the economy, and suggested this would change as the infant science grew to maturity, and political economists learned more. As we know, however, the habit of abstraction has stuck.

The argument in this book has some similarities to Richard Bronk’s [amazon_link id=”0521735157″ target=”_blank” ]The Romantic Economist[/amazon_link] – he advocated bringing the techniques and habits of mind of literature to an understanding of the economy. I also found echoes of Deirdre McCloskey’s [amazon_link id=”0472067443″ target=”_blank” ]How To Be Human (Though An Economist)[/amazon_link], a marvellous dissection of the kinds of rhetoric used in economics. What Poovey adds, that ought to be thought-provoking for economists, is the realisation that our habitual way of thinking about the economic and financial world does not have a natural epistemological superiority over other ways of thinking about the subject, not even poetry.

Perhaps the problem is that the poets have abandoned the territory.

 [amazon_image id=”0226675335″ link=”true” target=”_blank” size=”medium” ]Genres of the Credit Economy: Mediating Value in Eighteenth- and Nineteenth-Century Britain[/amazon_image]

Google, big guys and little guys

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Google and the Association of American Publishers have settled their long-standing lawsuit over Google’s digitization of out-of-print but in-copyright books, but the case between Google and the Authors’ Guild remains open.Here is the New York Times report, here is the FT’s, and here is Timothy Lee on Ars Technica, highlighting the separation of interest between publishers and their food course, authors.

The settlement in effect means publishers are contracting out to Google the preparation of e-book versions of their back catalogues – they will pay a fee and get an electronic text they can readily publish. Publishing is a concentrated industry – although there is a competitive fringe, newly enabled by technology-driven reductions in cost, most books are sold by a small number of very large firms. These titans are engaged in a commercial wrestling match with some other very large businesses who are gatekeepers between them and their customers – Google, Amazon, Apple. The economies of scale in the marketing of books, in gaining readers’ attention, are large indeed. So are the network economies in providing a sales platform and suitable reading devices.

Small publishers and authors are minnows in this competition for access to readers. Yet of course some manage to use the technologies to break through, like the famous (notorious?) 50 Shades phenomenon. Let’s hope the fact the authors are hanging on in the US courts means the anti-trust issues get a thorough exploration. As Tim Wu’s excellent book [amazon_link id=”1848879865″ target=”_blank” ]The Master Switch[/amazon_link] demonstrates, there are inherent cycles of concentration in media and communication businesses, punctuated by periodic technological upheavals.

[amazon_image id=”1848879865″ link=”true” target=”_blank” size=”medium” ]The Master Switch: The Rise and Fall of Information Empires[/amazon_image]

 

Unicorns, Higgs Bosons, and the state of macroeconomics

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In 2005 the UK Treasury sponsored a conference with the title [amazon_link id=”023001903X” target=”_blank” ]’Is There a New Consensus in Macroeconomics?[/amazon_link]’; a book of the conference was published in 2007. Its answer was ‘yes, but….’, the ‘but’ being – correctly, as it turned out in hindsight – the flagging up of some puzzles and controversies as well as shortcomings such as the absence of international flows and imbalances in the conventional model. At the time this sense of consensus was (by definition) widespread – Olivier Blanchard at the IMF famously wrote about it too, in The State of Macro.

[amazon_image id=”023001903X” link=”true” target=”_blank” size=”medium” ]Is there a New Consensus in Macroeconomics?[/amazon_image]

Earlier this week, the ESRC sponsored a symposium on macroeconomics hosted by the Oxford Martin School, with the aim of evaluating the state of macro now. As the ESRC’s Adrian Alsop put it in his introduction: “While in the economics profession, macro is but a sub-set of what we do, any perceived lack of vitality and strength in macro tarnishes economics as whole in the eyes of citizens and policy makers alike; and that in turn causes reputational damage for the whole of social science. So this is big stuff the profession, let alone the funding agencies.” Internationally, funding agencies are considering what kind of research in macro is needed – and particularly in the UK, where this is an area of economics in this country flagged up as weak by a 2008 benchmarking study (scroll down) for the ESRC, led by Elhanan Helpman.

My headline from the symposium is that macroeconomists are deeply divided, with any sense of consensus shattered. There is a division between those who regard increasing the sophistication and flexibility of existing models and approaches as an adequate response to the crisis, and those who believe a more far-reaching re-tooling is essential for both scientific and public policy credibility. This is more or less the same as the division between adherents to DSGE models, or more broadly a deductive equilibrium framework that uses a small number of aggregate variables to make analytical predictions; and those who believe macroeconomics must now become more inductive and data-based. As Professor Neil Ferguson, Professor of Mathematical Biology at Imperial College, put it in his comment on day 2 of the symposium, he was astounded by how little macroeconomists discussed data and the new techniques available for handling large amounts of data.

When this division between deductive and inductive approaches, between parsimonious analytical models and computer-based statistical techniques (agent-based modelling, econo-physics, statistical exploration of the data) surfaced, the discussion grew a little heated. This included the breaks: many of those who disagree with the prevailing, albeit broken, ex-consensus feel unable to bring about change even in their own research, and are not eager to speak out or change the nature of their work because it will harm their career prospects. To advance in UK economics departments requires publication of numerous articles in a small number of American journals which are firmly sticking to the conventional modelling approach.

My view is that if macroeconomics does not abandon its obsession with being able to write down analytical 3 equation models with maybe 12 or even 20 variables to explain and predict what is happening at large scale in the economy, it will lose all meaning and purpose. Below is a picture of my son burning his macroeconomics notes as soon as he’d taken his final exam – despite having an outstanding teacher, it seemed obvious to him that macroeconomics was a fairy tale, a fable. Yet many macroeconomists seem not to realise that they are dealing in metaphors, and that IS-LM curves are more like unicorns than Higgs bosons. Microeconomics suffers in the same way but not so badly and applied microeconomists are already a bit more flexible – more willing to use ad hoc rules of thumb derived from behavioural psychology, more willing to use qualitative evidence and business data, not just highly aggregated time series data.

Burning unicorns?

So I was wholly in agreement with Professor David Hendry, who in his presentation on statistical techniques for exploring data, said:

– all macroeconomic theories are incomplete, incorrect and changable

– all macroeconomic time series are aggregated, inaccurate and rrely match theoretical concepts

– all empirical macroeconometric models are aggregated, inaccurate and mis-specified in numerous ways

So why justify an empirical model by an invalid theory that will soon be altered? Why is internal model credibility considered more important than verisimilitude? “It’s why people think economists are daft,” he said. And, as he pointed out, DSGE models are not even logically internally consistent because they incorrectly regard agents’ expectations today of the future state of the world, conditioned on what they know today, as the same as their equivalent expectations tomorrow, bar for an unpredictable error – but this would only be true in a stationary world. When the state of the world can change in a non-stationary way between today and tomorrow, the kind of ‘model-consistent’ or rational expectations conventionally used are not possible.

I hope the ESRC and other social science funders will focus their efforts on enabling the reformist macroeconomists to pursue their alternative approaches. None of us knows what approach to macroeconomics will ultimately prove most fruitful, but at present given the institutional structures in academia, none of the alternatives are being pursued. Academic economists who have spent their careers doing everyday macroeconomics will need 2 or 3 years to change direction and learn new techniques and approaches to data. But if they want to keep their jobs, they will not get the space to do that – they will need to publish another tweak on a DSGE model in the American Economic Review.

Following the conference earlier this year that resulted in [amazon_link id=”1907994041″ target=”_blank” ]What’s The Use of Economics[/amazon_link], a working group hosted by the Government Economic Service has been considering the institutional barriers to reform of the undergraduate curriculum, and we will report next year. A parallel consideration is needed of barriers to reform in research, and I don’t excuse microeconomists from the need to think deeply about their subject, but it’s more urgent in macroeconomics because of the crisis.