“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]

I’ve just returned from the Trento Festival of Economics, founded by Tito Boeri, full of enthusiasm for the idea. The programme included lots of interesting speakers. As the photo below shows, publishers take full advantage of the occasion to show off their wares – the Italian edition of my book prominent among them.

The book tent at the Trento Festival of Economics

The most exhilarating aspect, however, was the audience. The talks were all full of people, some economists but many not. One woman I met taught economics in a high school, another has a son who has started to study the subject at school. There were bankers, local politicians, parents with their teenage children, and I suppose the kind of people who go to all of these literary and ideas festivals, the concerned reader of newspapers worried about the state of the world. One of the many paradoxes of our times is that economics is in such disrepute and yet people are so interested in the subject.

It’s a little odd to find economists being so celebrated – there were huge posters of previous speakers hanging above the streets, including Gary Becker, below. Yet how marvellous to confront economists with people. Surely we must have a Festival of Economics in the UK to make sure our academic economists, and business economists and policy makers, regularly meet each other and normal people too.

Gary Becker in the Trento sky

I finished reading a terrific book (recommended to me by the terrific Tim Harford), [amazon_link id=”1594482675″ target=”_blank” ]The New Kings of Non-Fiction[/amazon_link] edited by Ira Glass. One of the essays is Losing the War by Lee Sandlin (also available here). Although it’s not really about the economic aspects of World War II, it nevertheless underlines the extent to which total war required the economy of all combatants to be totally geared to war production. Sandlin also writes:

“Modern warfare has grown so complicated and requires such immense movements of men and materiel over so vast an expanse of territory that an ever increasing proportion of every army is give over to supply, tactical support, and logistics…. The war was essentially a self-contained economic system that swelled up out of nothing and covered the globe.” (p338)

[amazon_image id=”1594482675″ link=”true” target=”_blank” size=”medium” ]The New Kings of Nonfiction[/amazon_image]

I have in my in-pile David Edgerton’s [amazon_link id=”B004TRQAOA” target=”_blank” ]Britain’s War Machine[/amazon_link], which I’ve been meaning to read for a while. I’ll turn to it after my impending trip to the Trento Festival of Economics, where I’ll be talking about [amazon_link id=”0691145180″ target=”_blank” ]The Economics of Enough[/amazon_link], which is just out in Italian.

[amazon_image id=”B004TRQAOA” link=”true” target=”_blank” size=”medium” ]Britain’s War Machine: Weapons, Resources and Experts in the Second World War[/amazon_image]

A few days ago I was mulling over here the way the physical network created by modern information and communication technologies has transformed the economy in the past generation and yet has not been recognised very much at all in the way we theorise about the economy. That same point applies with even more force when it comes to thinking about globalisation. After all, the post-1980 globalisation is entirely driven by ICTs. Without computer power, the internet, cheaper phone calls etc, the phenomenon of sliced-up global supply chains and the massive growth of trade in intermediates would not have taken place. Few people realise how much of China’s success lies in supply chain logistics, as well as low-cost manufacturing. Its firms can not only assemble the materials and make cheap clothes, they can also adopt new designs quickly and get the items to shops in the US and Europe, ready-packaged for display, with appropriate labels, within a few weeks.

Yet the radically changed character of international trade has not been thoroughly reflected in economics. Even my reference book, the [amazon_link id=”069112812X” target=”_blank” ]Princeton Encyclopedia of the World Economy,[/amazon_link] has little about technology. So it was with delight this morning that I read this Vox column by the brilliant Richard Baldwin, which is exactly about the way technology has transformed the character of trade (and consequently trade policy). (There is also a longer CEPR policy brief by him on the subject, link at the bottom of his column). Given the likely role of global imbalances in the crisis, the doubts about what trade statistics are actually measuring, and the extraordinary complexity of the global economy, this is a key area for more thinking and empirical research.

On reflection, the fact that the literal rewiring of the global economy and national economies has not been the subject of much debate and research is a striking example of how hard it is for us to see large phenomena that are in plain view. Another is the astonishingly little attention economists paid to the explosion of bank balance sheets ahead of the financial crisis, one of the most dramatic macro-level phenomena. It does make you ask what else we are missing.

[amazon_image id=”069112812X” link=”true” target=”_blank” size=”medium” ]The Princeton Encyclopedia of the World Economy. (Two volume set)[/amazon_image]

For those who have not read Daniel Bell’s [amazon_link id=”0465014992″ target=”_blank” ]The Cultural Contradictions of Capitalism[/amazon_link], it is, as Mike Elliott points out in his comment on yesterday’s post, a brilliant analysis. Here is the essence of the argument:

“The characteristic style of an industrial society is based on the principles of economics and economizing: on efficiency, least cost, maximization, optimization, and functional rationality. Yet it is at this point that it comes into sharpest conflict with the cultural trends of the day, for the culture emphasizes anti-cognitive and anti-intellectual currents. … The one emphasizes functional rationality, technocratic decision-making and meritocratic rewards. The other, apocalyptic moods and anti-rational behavior. It is this disjunction which is the historic crisis of Western society. This cultural contradiction, in the long run, is the deepest challenge to the society.”

A contradiction played out every day, and engaging scientists as well as economists, as we saw in a field in Hertfordshire the other day. I don’t think it’s obvious which side will triumph.

[amazon_image id=”0465014992″ link=”true” target=”_blank” size=”medium” ]The Cultural Contradictions of Capitalism[/amazon_image]