Last night I attended the recording of the first of this year’s BBC Reith Lectures, historian Niall Ferguson giving the first of four on the subject of ‘The Rule of Law and its Enemies.’ Prof Ferguson tends to arouse strong feelings – I’m a fan – but whether you love or hate him, he’s certainly a lively and provocative lecturer. The big lecture theatre at the LSE was packed.

His theme in the first lecture was the breakdown in the social contract between the generations, citing, as one would expect from a conservative historian, Edmund Burke (from [amazon_link id=”0199539022″ target=”_blank” ]Reflections on the Revolution in France[/amazon_link]):

“Society is indeed a contract. It is a partnership in all science; a partnership in all art; a partnership in every virtue, and in all perfection. As the ends of such a partnership cannot be obtained in many generations, it becomes a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.”

[amazon_image id=”0199539022″ link=”true” target=”_blank” size=”medium” ]Reflections on the Revolution in France (Oxford World’s Classics)[/amazon_image]

This took him into the current financial crisis and the question of debt, a subject on which Prof Ferguson has famously clashed with Paul Krugman over the latter’s insistence on fiscal stimulus to pep up growth now (an argument on which Prof Krugman’s got a new book out, [amazon_link id=”0393088774″ target=”_blank” ]End This Depression Now![/amazon_link] – I’ve not yet read it.)

[amazon_image id=”0393088774″ link=”true” target=”_blank” size=”medium” ]End This Depression Now![/amazon_image]

Prof Ferguson made the case for proper generational accounting and a national balance sheet – readers of [amazon_link id=”0691156298″ target=”_blank” ]The Economics of Enough[/amazon_link] will know I’m an ardent advocate of these measures. Anyway, the lecture will be broadcast on BBC Radio 4 and The World Service on 19 June, with a repeat and a podcast to follow, then the other three in the following weeks.They’re going to be a must-listen for me.

The point of this post was to highlight some of the many books cited in last night’s lecture. They included (as well as Burke) Daron Acemoglu and James Robinson’s [amazon_link id=”1846684293″ target=”_blank” ]Why Nation’s Fail [/amazon_link](reviewed here), Timur Kuran’s [amazon_link id=”0691147566″ target=”_blank” ]The Long Divergence[/amazon_link] (reviewed here), Carmen Reinhardt and Kenneth Rogoff’s [amazon_link id=”0691142165″ target=”_blank” ]This Time is Different[/amazon_link], along with Mandeville’s [amazon_link id=”0140445412″ target=”_blank” ]Fable of the Bees[/amazon_link] and Adam Smith’s [amazon_link id=”0140432086″ target=”_blank” ]The Wealth of Nations[/amazon_link].

[amazon_image id=”0691156298″ link=”true” target=”_blank” size=”medium” ]The Economics of Enough: How to Run the Economy as If the Future Matters[/amazon_image]

In preparation for a lecture, I’ve been mulling over some books and papers on co-operation in human societies. One of my favourites is Paul Seabright’s [amazon_link id=”0691146462″ target=”_blank” ]The Company of Strangers[/amazon_link]. Another is [amazon_link id=”0691151253″ target=”_blank” ]A Co-operative Species: Human Reciprocity and its Evolution[/amazon_link] by Samuel Bowles and Herbert Gintis. This latter book, published last year combines evolutionary theory and game theory to analyse reciprocity. As the authors point out, it is easy to see the benefits of co-operation among groups of humans, in our early history as now – but not so easy to see how co-operation evolved or is sustained, as the costs of reciprocity fall relatively heavily on individuals while the benefits are shared among the whole group.

The question of sustaining co-operation becomes all the more pressing. The problems we face are complicated and global, and will not be tackled without co-operation. Think about climate change, or the continuing economic crisis. The social and economic structures we have built depend on sustaining an almost miraculous level of co-operation – think about the global supply chains for many of the products we have come to depend on, or the fact that more than half of us now live in close contact in massive, cosmopolitan cities. Can the mutual trust and co-operation that has got us here be sustained?

Bowles and Gintis see this as a question about the “distinctive human capacity for institution-building and cultural transmission of learned behaviour.” (p197) They reference Elinor Ostrom’s work on the role of incentives and sanctions in a specific institutional framework in supporting contemporary co-operation. The authors conclude with a reasonable degree of optimism that the forces that made altruism and co-operation a competitive advantage in pre-historic times continue to operate – we are simply better off by co-operating. But, as they conclude, neither private market contracts nor government fiat have ever shaped the actual forms of co-operative economic activity. In a minor way, this was brought to mind by our Jubilee street party on Monday, an entirely self-organised phenomenon, repeated many times over, all around the country.

Diamond Jubilee street party

This kind of co-operation is a question of culture and institutions, which need to develop continually as our economies and societies change. To continue yesterday’s theme, what kind of culture and institutions will support a complex globalized economy facing multiple crises?

[amazon_image id=”0691151253″ link=”true” target=”_blank” size=”medium” ]A Cooperative Species: Human Reciprocity and Its Evolution[/amazon_image]

At the fabulous Trento Festival of Economics I picked up a copy of Dani Rodrik’s talk from last year, which sent me to his terrific book, [amazon_link id=”0199603332″ target=”_blank” ]The Globalization Paradox[/amazon_link]. The challenge he sets out is that we have a combination of economic globalization and national politics, and it’s difficult to see a way out of the mismatch because political legitimacy is created at the level of the nation state. To call for ‘global governance’ is unrealistic – and clearly all the more so now the Eurozone is wholly unable to deliver zone-wide political responses to the economic crisis. The global institutions that we have, like the WTO, lack legitimacy.

[amazon_image id=”0199603332″ link=”true” target=”_blank” size=”medium” ]The Globalization Paradox: Why Global Markets, States, and Democracy Can’t Coexist[/amazon_image]

So Rodrik draws three conclusions:

“Markets need to be deeply embedded in systems of governance to work well.”

“These institutions of governance…. are organized largely within nation states and they are likely to remain so.”

There is no single way to design institutions and governance. “The institutional designs that underpin market economies will differ according to the democratic preferences of different jurisdictions.”

This makes it pretty scary that the economy has become as globalized as it is in a world of firmly national politics that seem to be getting more nationalistic by the day. Richard Baldwin’s recent work on the ‘two unbundlings’ – the separation of production from consumption and then of steps in the production chain from each other – indicates that reversing globalization would be catastrophic economically. But how are world markets to be governed when these supply chains link separate nation state institutional frameworks?

I don’t have an answer but do think one path forward will involve using the structure of supply chains themselves to govern economic activity. There are many industries where standards bodies and trade bodies are reasonably effective, where export credits work very well, where large companies at the head of the supply chain provide leadership. These are not state bodies, but they are collective institutions – maybe part of the answer to Rodrik’s paradox will lie in expanding the domain of these institutions and not expecting the state to solve everything. Especially given the dysfunctionality of politics and lack of trust in politicians everywhere.

Fabulous Trento

The way technology is changing the economics of publishing, both demand and supply sides, is fascinating. Here’s a round-up of some recent articles and posts – not systematic, just the ones I’ve come across.

David Gauntlett on the LSE Review of Books blog, about academic e-publishing. This was a reply to an earlier post by Patrick Dunleavy.

The Guardian on Amazon’s dominance in the e-book market – and what its downfall might be.

Marketwatch on the impact of e-books on publishing.

An anti-Amazon slideshow on The Nation.

A literary agent’s thoughts on the changes in the industry – Ed Victor in the Daily Telegraph.

The publishers’ reaction to the DoJ anti-trust suit.

Latest e-book market data from Publishers Weekly.

A handy guide (via CNET) to how to publish your own e-book.

And from NPR, libraries’ struggle with e-books.

“This book reflects my debate with myself about economic theory,” writes Ariel Rubinstein near the start of Economic Fables. “On the one hand, I am captivated by the charm of formal models: tales emerge from the formal symbols and these tales have almost miraculous powers over me. On the other hand, I am obsessively occupied with denying any interpretation contending that economic models produce conclusions of real value.” (p37)

There is, rightly, much introspection among economists at present, or at least among those of us with a heightened sense of humility and self-awareness following the crisis. This book was first published in Hebrew in 2009, so quite early in the unfolding economic crisis, but is essential reading for anybody (economist or not) trying to make sense of both the intellectual and practical status of the subject. Rubinstein is a distinguished game theorist, which makes it all the more interesting to read his reflections about what models can and cannot tell us. Others who have criticised the undue weight placed on economic models, or emphasised their metaphorical status, tend not to have come from the mathematical hard core of the profession. For example, Deirdre McCloskey, who has written brilliantly about the nature of economics and models (in [amazon_link id=”0472067443″ target=”_blank” ]How to be Human Though An Economist[/amazon_link], for example), is an economic historian.

[amazon_link id=”1906924775″ target=”_blank” ]Economic Fables[/amazon_link] weaves together Rubinstein’s experiences in childhood and youth, his family history, and general intellectual formation and explanations of economic theory. This makes for a highly readable mix of storytelling and analysis. (I must add, it’s a very nicely designed book too – I have the physical book with a great cover photo and nice format, easy to pop into a bag or pocket. It’s from Open Book Publishers so there is also a low-cost pdf version and multiple e-book versions.)

Some of the author’s points are familiar to thoughtful economists. For example, like McCloskey and Ziliak, he attacks the over-reliance on the totem of ‘statistical significance’ by people who give not thought to the way statistics are collected, measurement errors, and meaning. (p83). Yet this point bears constant repetition as young economists are not taught this at university. Other points were new to me. For instance, I was struck by the observation that in assuming people behave ‘as if’ they are optimising, we can glide over the strong assumptions on which economic models are based, and the welfare conclusions drawn from them. (p53)

I also particularly enjoyed Rubinstein’s meta-analysis of game theory experiments. He has conducted many online polls posing thousands of students game theoretic questions – how do they respond to classic ultimatum or traveller’s dilemma games, for example. According to the polling, those who have studied game theory tend to choose the equilibrium solution, ignoring the reality that most people have not studied game theory so the actual outcome will be different, and one would be better off choosing a ‘natural’ rather than an ‘equilibrium’ answer.

So, all in all, this is a great book for economics students, giving a clear introduction to some basic models and just as important to some important advice about how to use models, and how not to use them. The book has a terrific website where readers can try out some of the exercises. I would definitely use this if I were teaching. It is also a very enjoyable and thought-provoking read for practising economists, not to mention for all non-economists trying to pin down why they think economics has failed them during the crisis.

[amazon_image id=”1906924775″ link=”true” target=”_blank” size=”medium” ]Economic Fables[/amazon_image]