I’m still reading both Steve Keen’s [amazon_link id=”1848139926″ target=”_blank” ]Debunking Economics[/amazon_link] and [amazon_link id=”1444703951″ target=”_blank” ]Spitalfields Life[/amazon_link] by The Gentle Author. But I’m prepared to take your suggestions on what to pick out of my book pile next. [amazon_link id=”0199608431″ target=”_blank” ]Darwin The Writer[/amazon_link] by George Levine is my personal leading contender.
The in-pile, 16 June 2012
It’s been a hectic week so each night I’ve been taking twenty minutes or so to relax with a completely marvellous book, [amazon_link id=”1444703951″ target=”_blank” ]Spitalfields Life[/amazon_link] by The Gentle Author. I’ve been a devotee of the blog of the book for some time, and this is a collection of posts by the anonymous author who is documenting one of my favourite areas of London in what is turning into an all time classic of social observation.
Many of the posts/chapters concern the small businesses and markets of the area. I’ve been forcefully struck by the difficulties of operating at a small scale. For example, a visit by The Gentle Author and Leila McAlister to Covent Garden Market to buy fruit and veg reveals Leila to be the only buyer looking for small quantities of seasonal crops – most are wholesalers looking for large purchases of consistent (and bland) produce. There are many other examples.
We have created an economy where only large scale is viable, which cannot be healthy. In almost any sector I can think of, a handful of very large firms have such economies of scale that only very small businesses clinging on around the margins can co-exist with them, and that’s tough anyway. Large scale does bring consumer benefits in the form of much lower prices than would otherwise prevail, in the products or services on offer; but also the large consumer detriment of a narrower range of products and characteristics. What’s more, an economy of giants whose shadow prevents any competition from growing to fruition is vulnerable over time to a loss of innovation and dynamism. As we are seeing.
So all thanks to The Gentle Author for this reminder, page after page, of what an alternative might look like.
[amazon_image id=”1444703951″ link=”true” target=”_blank” size=”medium” ]Spitalfields Life: In the Midst of Life I Woke to Find Myself Living in an Old House Beside Brick Lane in the East End of London[/amazon_image]
News this morning that executive pay in big UK companies rose by 10% in the past year, about five times the rate of increase in average earnings. My question is rhetorical. This latest manifestation of economic opportunism by the executive classes (that is, seeing what they can get away with) is of course unseemly as well as immoral. But what of the economic drivers? My old favourite, Oliver Williamson’s [amazon_link id=”068486374X” target=”_blank” ]The Economic Institutions of Capitalism[/amazon_link], was published in 1985. It notes that earlier discussions of governance, at least since [amazon_link id=”0887388876″ target=”_blank” ]Berle and Means[/amazon_link], had paid little attention to the role of management, but the book’s own perspective on management does not discuss the reasons for the power of executives. After all, they were not yet flaunting it, and the book pre-dates the modern greed-fest.
I think the explanation requires a beefed-up principal-agent asymmetric information approach. Intangible value accounts for a massive proportion of the market cap of all large corporations, and it is impossible for any party other than the internal executives to monitor the contribution of those individuals to the value of the company. In fact, executive pay structures have also become a signalling device to indicate the individual’s contribution. (Are there any models of this kind around? I’m not up to date with this bit of the literature.) Shareholders, workers and customers alike have to trust the board. Looking at this morning’s reaction to the latest pay news, I rather think that trust has been torpedoed.
[amazon_image id=”068486374X” link=”true” target=”_blank” size=”medium” ]The Economic Institutions of Capitalism[/amazon_image]
I’ve just started reading Steve Keen’s [amazon_link id=”1848139926″ target=”_blank” ]Debunking Economics: The Naked Emperor Dethroned[/amazon_link], and it looks a very enjoyable rant. I’m sure I’ll agree with quite a bit of it. But a page in, and two issues of terminology are very apparent.
One is that by ‘economics’ he means ‘macroeconomics’. Of course, he’s not alone in this – most people think macro is the entirety of economics – but then, he’s an economist and could be more precise. We microeconomists are as shocked as any normal person that, as it turns out, pre-crisis macro models didn’t have a financial sector. We’re certainly going to have to get out much more and explain to people what it is that we, as opposed to the macro guys, actually do.
The second is revealed by footnote 1, page xv, in which Prof Keen describes his realisation early in his education that economics has no clothes (to continue the metaphor in the title) when he appreciates that getting rid of unions to let the labour market work freely is a bad idea when there are monopolies on the other side of the market. The footnote refers to reader to the classic Lancaster and Lipsey theory of second best, a familiar result in – economics. While it’s true that the language of market forces in public policy for the past generation has meant that their insight about second best has not been implemented, it isn’t entirely correct to say either that ‘economics’ is therefore useless.
Perhaps we need different typefaces. There is economics, as it is actually practiced by economists, much of it micro not macro, empirically-based and increasingly eclectic in its methodology. Then there is
the not entirely unreal but equally not much observed in the wild version that critics object to. If anybody wants to read more in this vein, my recent Tanner Lectures go into it, and here again is the link to the excellent Stumbling and Mumbling post on the same kind of issue, and a follow-up post.
[amazon_image id=”1848139926″ link=”true” target=”_blank” size=”medium” ]Debunking Economics – Revised and Expanded Edition: The Naked Emperor Dethroned?[/amazon_image]
In 1996, the Centre for Economic Policy Research published [amazon_link id=”052149964X” target=”_blank” ]Economic Growth in Europe Since 1945[/amazon_link], edited by Nick Crafts and Gianni Toniolo. At times like now, it’s supremely useful to remind oneself of the historical perspective. The chapter on Spain (by Leandro Prados de los Escosura and Jorge C Sanz) suggests the country’s story is one of sustained long-run underperformance.
The authors identify just two periods when Spain grew faster than other large economies: the 1960s, and the years from 1986-93. The former they attribute to a delayed post-war reconstruction, much slower in Spain than elsewhere because of the political context. The latter reflects structural reforms and access to European markets after Spain joined the EU. Over the longer period, however, there is only one of the comparator countries with a weaker trend economic growth rate than Spain – and that’s the UK. Uh oh – but at least we recapitalised our banks quickly.
[amazon_image id=”052149964X” link=”true” target=”_blank” size=”medium” ]Economic Growth in Europe since 1945[/amazon_image]
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