A new paper by Professor Nicholas Crafts of Warwick University dropped into my inbox today, Saving the Eurozone: Is A Real Marshall Plan The Answer? This means ‘real’ as in ‘structural’ or ‘supporting the real economy’, which economic historian Prof Crafts points out was the purpose of the original Marshall Plan. He writes:

“Faster productivity growth in the euro periphery could help improve competitiveness, fiscal arithmetic and living standards; the main role of a real Marshall Plan would be to promote supply-side reforms that raise productivity growth. This would repeat the main achievement of the original Marshall Plan of 1948.”

In advocating this course of action, he points out that a plan of this kind, investing in infrastructure for example, would not alleviate the need for fiscal federalism and effective European-level democracy – these steps being the lesson of the 1930s experience. But it would support those moves by encouraging faster growth in the southern periphery. One of the most striking tables in the report contrasts the dismal productivity performance of Greece, Italy, Spain and Portugal from 1995-2007 with the much faster productivity growth of 2004 accession countries such as Lithuania, Estonia and Poland.

Productivity in the Eurozone

The paper is pretty sobering – what analysis of the Eurozone isn’t? I think the Marshall Plan analogy is an interesting one. In a nice OECD book I have, [amazon_link id=”9264155031″ target=”_blank” ]From War to Wealth[/amazon_link], published for the 50th anniversary of its founding as the Organisation for European Economic Cooperation, Marshall’s speech is quoted:

“The remedy seems to lie in breaking the vicious circle and restoring the confidence of the people of Europe in the economic future of their own countries and of Europe as a whole.”

He strongly emphasised the need for co-operation – hence the OEEC.

Professor Crafts’ Real Marshall Plan would link Structural and Cohesion funds conditionally to specific structural reforms. He suggests this might achieve a 1% point a year increase in productivity growth. The paper concludes:

“The experience of the Gold Standard’s collapse in the 1930s suggests that seeking to keep the eurozone intact by imposing a ‘golden straitjacket’ on the policy choices of independent nation-states is not a viable option. This points to fiscal federalism with genuine democracy at the EU level as the long-run solution; a new Marshall Plan may not be a substitute for reforms of this kind, but it can certainly serve as a valuable complement.”

[amazon_image id=”9264155031″ link=”true” target=”_blank” size=”medium” ]From War to Wealth: 50 Years of Innovation[/amazon_image]

My dear sister-in-law, not an economist at all, heartily recommended to me [amazon_link id=”0141046481″ target=”_blank” ]What They Teach You At Harvard Business School[/amazon_link], by Philip Delves Broughton. Finally I got around to it – this is a 2 or 3 commute book. It’s a very well written description of the author’s MBA course in the mid-2000s, and a mixture of compelling and repelling.

Compelling because the book is extremely well written and it’s also interesting to find out what they do teach at HBS. Repelling because this was the height of the boom and the ethos of many of the author’s classmates is rather shocking. Most wanted nothing more than to make money – jobs are ranked by remuneration, with venture capital firms at the top, followed by investment banking. I must be naive, but was terribly shocked – as was this book’s author – to learn that many students maximise the financial aid they get from HBS by buying an expensive car and parking their savings with their parents in order to minimise their apparent assets when applying.

HBS is famous for its case study method, and for the intensity with which students have to work. It emerges on the whole pretty well from this book, trying to instil business ethics and teaching entrepreneurship, although the book ends with a series of suggested changes ranging from barring professors with no business experience from teaching entrepreneurship to ending the brutal and counterproductive grading system.

On the other hand, the student body, at least in those boom years, seems very unappealing even seen through the diplomacy of the author. As one student puts it pithily: “If you want to change the world, get on a plane to fucking Darfur.” The MBA course is about money.

This book was published in mid-2008. There was clearly a kind of collective madness earlier in the noughties, facilitated by the tax code making debt interest tax deductible. I know that now, wearing my hindsight spectacles. But what, I wonder, do today’s Harvard MBA students aspire to?

[amazon_image id=”0141046481″ link=”true” target=”_blank” size=”medium” ]What They Teach You at Harvard Business School: My Two Years Inside the Cauldron of Capitalism[/amazon_image]

Sad individual that I am, I’ve been thinking and reading recently about the state of economics. One conclusion is that any assessment is confused by the existence of different tribes of economists, so not only do non-economists mix up one for another, but economists themselves also make assertions that only speak to their own tribe. In a famous article, Life Among the Econ, Axel Leijonhufvud described the separate castes of Macro and Micro. Here is my quick (and far less amusing) guide to today’s key distinctions.

1. Macro and micro still differ enormously, but a more important distinction is overlaid on it, academic versus applied. Many academic macroeconomists adhere to Dynamic Stochastic General Equilibrium models and are, in my view, away with the fairies. This approach is exemplified by Mike Wickens’ textbook, [amazon_link id=”0691152861″ target=”_blank” ]Macroeconomic Theory[/amazon_link]. (I like him enormously but not his models… sorry, Mike.)

2. Sticking with macroeconomics, City and financial market economists probably form their own category. Their preoccupation tends to be asset markets and global financial flows, for obvious reasons. There is a high variance in the quality of their work, although this is difficult to judge from their frequent media appearances.

3. A third group of macroeconomists are often really microeconomists who feel compelled to try to make a sensible contribution to the policy debate because they are so exasperated by Group 2 above. Among them is my good friend Jonathan Portes.

4. The gap between the academic and practical world is smaller in microeconomics – more academic micro-economists do directly policy relevant empirical research, and there are more think tanks and research centres doing this cross-over work too. Microeconomics has been open to behavioural research, experimental methods and so on. However, there is still a gap, and too many academics are still inflicting a narrow and reductionist version of micro theory on impressionable young minds.

5. Finally, there are the people who have been refusniks from mainstream economics for many years and find it hard to accept that the crisis has made the mainstream far more open to a range of ideas than it has been for decades. Another friend, Paul Ormerod, may be in this category – his new book [amazon_link id=”0571279201″ target=”_blank” ]Positive Linking [/amazon_link]is about network theory, and paging through it suggests he thinks the mainstream has a long way to go before network models are seen as acceptable. Maybe he is right – but on the other hand Andy Haldane at the Bank of England has advocated this approach in his financial stability role, and network theory is used in many of the applied working papers I read on telecoms markets. Anyway, in general the ‘heterodox’ economists are in the habit of being oppositional, for understandable reasons.

[amazon_image id=”0571279201″ link=”true” target=”_blank” size=”medium” ]Positive Linking: How Networks Can Revolutionise the World[/amazon_image]

There may well be other categories I’ve not thought of – maybe others can think of more. Sociologist Dave O’Brien of City University has suggested to me that the existence of other tribes has been useful for those economists in the mainstream citadel who want to deflect criticism of the subject. The present confusion is perhaps more suggestive of a subject in a state of intellectual flux – or at least I hope so. It would be a silver lining to the economic stormcloud if economics itself responded with reflection and reform.

It has taken me a long time to finish Steve Keen’s [amazon_link id=”1848139926″ target=”_blank” ]Debunking Economics: The Naked Emperor Dethroned[/amazon_link]. Its author has enjoyed great celebrity, at least for an economist. For example, he featured in a recent BBC Radio 4 Analysis programme, and has battled Paul Krugman in the blogosphere.  This might be a touch cynical of me, but I’m pretty sure his popular acclaim is due to the appeal of his conclusions rather than a detailed appraisal of the nearly 500 pages he takes to reach them. For this is a dense and rather academic book, although Professor Keen presents it as an explanation for non-experts – he explicitly says it is written for non-economists, but that does not make it an easy read.

The first two parts present a detailed critique of the basics of economic theory, all of it from the basics of consumer choice and theory of the firm through general equilibrium theory to conventional macroeconomics. Keen describes the flaws of conventional theoretical economics on its own terms, with detailed reference to original papers, and I think he does a reasonably convincing job.

Does that make me want to throw away everything I know about economics? Well, no. For example, the book spends pages analysing the internal contradictions of the standard derivation of a downward sloping demand curve: “Market demand curves should have any shape except the one that is drawn in the textbooks.” He draws a ‘true’ market demand curve as a wiggly snake. However, when I contemplate my eight years of market analysis on the Competition Commission, and more than a decade of consultancy, I conclude that, you know what, demand tends to go up when prices go down. Similarly, Keen concludes that output and prices will be identical in competitive and monopolistic markets. That could only be true by chance as firms with and without monopoly power set prices in completely different ways: competitive firms know what their costs are and charge a cost-plus price; firms with market power charge ‘what the market will bear’ and find it difficult to identify and allocate their costs.

After chapters of logical analysis, I realised that Professor Keen’s theorising is as abstract as the theories he criticises. I have no trouble agreeing with him about the practical unreality of the basics of economic theory, but I don’t think it’s the knock-out blow he considers it to be. The reason is related to a classification of types of assumptions he sets out on pp161-163 of the book. I for one regard most of the assumptions made in the theory as ‘heuristic’ assumptions, known to be false but useful as a device for thinking about a problem. It wouldn’t trouble me at all to ditch the formalities of Arrow-Debreu general equilibrium theory, as long as we keep the deeper reality that the economy is a connected system. My guess is that many applied economists are in my camp. Maybe, though, many academic economists would be as scandalised by Professor Keen’s debunking as he thinks. I certainly agree with his plea from the heart for wholesale reform of the way economics is taught. (See the forthcoming What’s The Use of Economics – watch this space.)

The book hits its stride in the sections on macroeconomics, in the third part, in which Keen sets out his own theory, a Marx-Minsky-Keynes (M-M-K) approach that meant he was able to issue public warnings of the impending crisis ahead of 2008. The key difference between his model and more mainstream ones is the inclusion of a financial sector and financial cycles with asset bubbles. All credit to Professor Keen for talking about a debt problem when most macroeconomists hadn’t even noticed the astonishing aggregate build-up of leverage in the global economy.

This section is easier going than the earlier parts of the book. Although Debunking Economics cites non-mainstream approaches such as Alan Kirman’s network and complexity theories (in [amazon_link id=”0415594243″ target=”_blank” ]Complex Economics[/amazon_link]) earlier in the book, it does not include them in this section as an alternative way of thinking about the aggregate economy, which seems a bit of an omission. The trouble with Keen’s M-M-K synthesis, using aggregate variables in different relationships than in the conventional model, is that it might lack generality. This worry is what originally drove the project of finding micro-foundations for macro-models, even though it took us in the end into the madness of Dynamic Stochastic General Equilbrium modelling of representative agents. Perhaps a lack of generality is ok. I’ve always been a fan of Malinvaud’s distinction (in [amazon_link id=”063117690X” target=”_blank” ]Theory of Unemployment Reconsidered[/amazon_link]) between different states of the macroeconomy, requiring entirely different policy regimes. However, I do think we ought to be open as well to a completely new modeling strategy.

So, without in any way wanting to defend the mainstream theories at all costs, I don’t think Debunking Economics is the last word on either what’s wrong with the subject or how to fix it. I have a lot of sympathy with the details of Professor Keen’s project, but not its ultimate ambition. For in the end I think the Naked Emperor needs to be reclothed rather than dethroned.

[amazon_image id=”1848139926″ link=”true” target=”_blank” size=”medium” ]Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned?[/amazon_image]

In honour of the centenary of Alan Turing’s birth, I’ve been reading [amazon_link id=”B008CJ4EE4″ target=”_blank” ]Computing: A Concise History[/amazon_link] by Paul Ceruzzi. It’s a delightful small book, very nicely produced and with illustrations, perfect for a journey or to slip in a pocket for commuting. It’s also, in 150 pages, a super overview of the history of this utterly transformational technology from the early days of applications of digital approaches in mechanical forms (including – I never knew this – holes punched into old movie tape) to the Web.

[amazon_image id=”B008CJ4EE4″ link=”true” target=”_blank” size=”medium” ]Computing (MIT Press Essential Knowledge)[/amazon_image]

What I like about the book is that it draws out the important analytical milestones such as binary code or the principle of storing programmes naturally from the course of events – it is not simply a catalogue of inventions, as a short book covering a huge territory could be. It also emphasizes the way the converged computing and communication we have today is the confluence of very many rivers of innovation. While this looks inevitable with hindsight, there was much happenstance along the way.

In a short book, Alan Turing himself gets little space. I enjoyed Andrew Hodges’ biography [amazon_link id=”069115564X” target=”_blank” ]Alan Turing: The Enigma[/amazon_link]. George Dyson’s [amazon_link id=”B0076O2VXM” target=”_blank” ]Turing’s Cathedral: The Origins of the Digital Universe[/amazon_link] is on my wishlist. There’s a new paperback out, [amazon_link id=”1845136330″ target=”_blank” ]The Secret Life of Bletchley Park [/amazon_link]by Sinclair Mackay. Another recent book, on the analytics of computing, is John MacCormick’s 9 Algorithms [amazon_link id=”0691147140″ target=”_blank” ]That Changed the Future[/amazon_link], which I reviewed here.

For the commercial history of the American computer industry, the best I’ve come across is Robert Cringely’s [amazon_link id=”0140258264″ target=”_blank” ]Accidental Empires[/amazon_link] – a bit outdated now, though. Georgina Ferry’s [amazon_link id=”1841151866″ target=”_blank” ]A Computer Called Leo[/amazon_link] is a nice bit of the UK industry’s history. And for something more reflective about computers and society, [amazon_link id=”0571172431″ target=”_blank” ]Cultural Babbage: Technology, Time and Invention[/amazon_link] edited by Francis Spufford and Jenny Uglow is an all-time favourite.

[amazon_image id=”069115564X” link=”true” target=”_blank” size=”medium” ]Alan Turing: The Enigma The Centenary Edition[/amazon_image]

The BBC website has a series of nice essays about Turing. There’s also the Science Museum exhibition to look forward to.