I mean big in the sense of what geographic scope does an economy cover. This question is prompted by Acemoglu and Robinson’s [amazon_link id=”1846684293″ target=”_blank” ]Why Nations Fail[/amazon_link]. Their thesis in a nutshell (as far as I’ve got with the book) is that economies that develop successfully need to have inclusive economic institutions combined with a centralized polity in order to enforce the law. Presumably economies of scale and scope apply as well. But I haven’t yet found their answer to the question, centralized over what territory? Italian and German unification were presumably helpful to the industrial development of those economies from the late 19th century. But turning to Paul Seabright’s [amazon_link id=”0691146462″ target=”_blank” ]The Company of Strangers[/amazon_link], he argues that the viable size of the state/economy has risen over time. Jane Jacobs argued in [amazon_link id=”0394729110″ target=”_blank” ]Cities and the Wealth of Nations[/amazon_link] that the large city in its hinterland is the natural economic unit. My instinct is that the UK economy is too centralized around London, certainly more so than comparable countries – see William Nordhaus’s economic geography globe. But the analysis of the optimal size for the economy – I’ve not found that yet.

[amazon_image id=”0691146462″ link=”true” target=”_blank” size=”medium” ]The Company of Strangers: A Natural History of Economic Life (Revised Edition)[/amazon_image]

“You can’t do with the state, but you can’t do without it.”

So Douglass North sums up his conclusion from a Nobel-winning career researching the role of institutions in economic growth – in [amazon_link id=”0262025620″ target=”_blank” ]Lives of the Laureates [/amazon_link](4th edition, 2004) edited by William Breit and Barry Hirsch. He rejects the pure public choice approach, which sees the state as “a leviathan to be contained, … little more than a giant theft machine.” Equally, North’s own work revealed many historical examples of states, and state ideologies, which were productively inefficient (and worse) over long periods of time.

As North ruefully points out, the question is at least as old as [amazon_link id=”0192805924″ target=”_blank” ]The Federalist Papers[/amazon_link]. He ends his essay here by saying the institutional approach he pursued over his career needs to be joined with new discoveries from cognitive science about why people form the beliefs they hold. I’m sure that will prove fruitful – we are in one of those periods when economics will do a lot of useful absorbing of knowledge from the biological sciences, from ecological modelling to psychology and neuroscience. But, reading the Acemoglu and Robinson book, [amazon_link id=”1846684293″ target=”_blank” ]Why Nations Fail[/amazon_link], institutional economics itself is at an exciting stage.

[amazon_image id=”0262025620″ link=”true” target=”_blank” size=”medium” ]Lives of the Laureates: Eighteen Nobel Economists[/amazon_image]

[amazon_image id=”0451528816″ link=”true” target=”_blank” size=”medium” ]The Federalist Papers (Signet Classics)[/amazon_image]

I’ve started reading Daron Acemoglu and James Robinson’s eagerly-awaited book, [amazon_link id=”1846684293″ target=”_blank” ]Why Nations Fail: The Origins of Power, Prosperity and Poverty[/amazon_link], and am enjoying it.

[amazon_image id=”1846684293″ link=”true” target=”_blank” size=”medium” ]Why Nations Fail: The Origins of Power, Prosperity and Poverty[/amazon_image]

I think the book is going to prove one of the classics of political economy, as the argument links economic outcomes to political institutions but also endogenises the politics. So that notorious Clinton phrase from the 1992 campaign, ‘It’s the economy, stupid,’ in fact got it backwards. It’s all about the politics.

Its early chapters have reminded me of Mancur Olson’s [amazon_link id=”0300030797″ target=”_blank” ]The Rise and Decline of Nations[/amazon_link] (1982), in which he applied the logic of collective action to differing international economic trajectories, arguing that the emergence of increasingly powerful special interest groups steadily caused a kind of furring of the arteries of each economy. As he put it: “Special interest organizations and collusions reduce efficiency and aggregate income in the societies in which they operate and make political life more divisive.” (p47) This process over time would cause the relative decline of what was the leading economy, and see the rise to prominence of a less sclerotic rival. His book compares the 20th century fortunes of the UK and US.

[amazon_image id=”0300030797″ link=”true” target=”_blank” size=”medium” ]The Rise and Decline of Nations: Economic Growth, Stagflation and Social Rigidities[/amazon_image]

A batch of new books about American decline and China’s revival – reviewed by Gideon Rachman in the Financial Times today and including Arvind Subramanian’s [amazon_link id=”0881326062″ target=”_blank” ]Eclipse: Living in the Shadow of China’s Economic Dominance[/amazon_link] – bring this dynamic into the 21st century. For it’s hard not to see the Olson logic of cartelisation and special interest politics dominating America today. My review of Acemoglu and Robinson will follow in a few days.

[amazon_image id=”0881326062″ link=”true” target=”_blank” size=”medium” ]Eclipse: Living in the Shadow of China’s Economic Dominance[/amazon_image]

Review of [amazon_link id=”B007GE9KPO” target=”_blank” ]In Gold We Trust—The future of money in an age of uncertainty[/amazon_link]
By Dave Birch

Just as I put down this enjoyable read by Matthew Bishop, American Business Editor of The Economist, and the economist Michael Green, I saw that the Indian government has doubled the import duty on gold (to 4%) having already doubled it at the beginning of the year. Why? Because massive gold imports have led to widening current account deficits as money flows out of the country to pay for them. It seems that gold’s ability to bend the trajectory of money remains, pun intended, unalloyed.

The authors say at one point that money is “a technology invented by humans to help us to get things done.” Absolutely. It’s a technology: the Bank of England and £20 notes are not laws of nature! This is why it is so important to develop the debate around the future of money. We are about to undergo a seismic shift in the nature of money, possibly triggered by a near-future euroquake. Money’s foundations will crumble, its walls will fall. And then it will be time to rebuild for the post-industrial economy just as it was for the industrial economy. Then we saw the invention of the central bank, paper money, industrial coinage and the gold standard. What will we see a generation from now?

The current version of the technology (Money 4.0, by my reckoning) is fiat national currency. It’s showing signs of failure and is surely due a refresh soon. Which means that, while it’s reasonable to observe that new technologies do take some time to percolate through society, a generation now money will look as different to us as the money of 1717 did to the people of 1687. I couldn’t agree with Bishop and Green more that money is subject to the same “rules” of innovation as any other technology (including our welcome friend, the law of unintended consequences) and this makes it very hard for them to make specific predictions, but it doesn’t stop them from asking important questions. Will new forms of money be invented? If they are, will they be better than gold or “traditional” fiat currency? And what does “better” mean in this context anyway?

One thing that “better” might mean is “more reliable store of value” and therefore “efficient mechanism for deferred payment”. In which case, as the authors show, gold isn’t quite the technology that the “gold bugs” proclaim. In their brisk and informative history of the gold standard from Newton to Nixon they make it clear that the history of this particular mechanism for managing international monetary affairs is not one of undeviating stability and prosperity. So better doesn’t mean gold. Perhaps an alternative technology might be acquired through innovation.

The focus of Silicon Valley-style innovation to date has been on the mechanisms for storing and transport fiat currency (apart from some early experiments with Beenz and Flooz and the like) but perhaps the focus is now shifting. A great many potential moneyers will have read Facebook’s S1 declaration with interest, noting that they saw more than half a billion dollars revenue from Facebook Credits last year. Google may well have shelved “Google Bucks” for the time being, but they and others will be back, because just as English thinkers wanted a currency capable of supporting the nascent English industrial revolution so Mark Zuckerberg, Sergei Brin and other internet revolutionaries want currency capable of supporting the next wave of commerce, trade and prosperity, money founded not on central control and paper but mobile phones, the internet and competition. (Whether Mark Zuckerberg might be the John Locke or the John Law of post-industrial money it is impossible to say!)

We have the technology to reinvent money, certainly. But if it’s not going to be electronic fiat currency, then what will this new money look like? The authors say that “as we try to understand how to improve money in the 21st century, the ideas of these two rival 20th century intellectual giants are a great place to start on a journey that could end at a range of destinations from a recommendation to buy gold to the use of an algorithm to build an entirely new virtual currency”.

They are, of course, talking about Keynes and Hayek.  Keynes saw no need for a return to the gold standard after the war and he was implacably opposed to Churchill’s insistence on deploying the weapon of mass deflation. The authors seemed to me to agree that whereas his alternative (the synthetic global currency) might make sense on paper and in an ideal world, Hayek’s prescription for competing private currencies might afford a better prognosis in this one. I think I detect a slight tilt toward Hayek – I share the authors’ animal sentiments here – and while in the book the authors only really look at gold and Bitcoin in detail, I support their observation that (as Hayek thought) we might reasonably expect many forms of private currency to develop in the post-fiat world and there is no reason to imagine that only a single alternative will emerge.

Personally, I think that some of the hankering for the single alternative of gold, while well-founded in its suspicion of government management of fiat currency, is tinged with a misplaced nostalgia for a simpler time. The renewed interest in a gold standard is therefore both a reflection on uncertain economic times and the first step on a path of monetary innovation. We might not know where that path will take us, the authors argue, but we do know that it will take us away from the technology of government-controlled fiat currency.

In summary, an enjoyable read with thought-through conclusions that helped me to clarify my thinking on an important topic. The only uninteresting section of the book is the chapter on whether to invest in gold or not, which seemed oddly out of place and doesn’t add to the narrative.

[amazon_image id=”B007GE9KPO” link=”true” target=”_blank” size=”medium” ]In Gold We Trust? The Future of Money in an Age of Uncertainty (Kindle Single)[/amazon_image]

From time to time I relax with detective fiction or a thriller, and yesterday polished off a bit of enjoyable hokum from Raphael Cardetti, [amazon_link id=”0349122555″ target=”_blank” ]Death in the Latin Quarter[/amazon_link] (in French it has the much more sophisticated title[amazon_link id=”2266196308″ target=”_blank” ] Le Paradoxe de Vasalis[/amazon_link]). The author is a Professor of Italian history and Renaissance specialist, and so although the novel is of the Dan Brown ilk (precious mediaeval manuscripts, secret wisdom, thugs with guns and car chases through Paris), it has a whiff of realism about what universities are like. Even better, the protagonists are not very successful as scholars, and poor to boot. What struck a particular chord was that the book at the heart of a mystery is a palimpsest – just after I had written here about palimpsests!

But it also reminded me of my own long-standing ambition to write a thriller. This will revolve around the international merry-go-round of summit meetings, the IMF and World Bank ones, the G7 and G20, and so on, which I used to cover as a reporter. It has the financial crisis to provide the intrigue, the glamorous locations, the nexus of power and money, and of course an intrepid journalist as a heroine. I have a store of incidents. The leading regulator who drowned a cat in Venice, the senior journalist who had a temper meltdown in a Washington hotel lobby, the press officer who let slip to a taxi driver the results of a secret investigation – you know who you are, and you will all one day find yourself immortalised (anonymously, naturally) in my blockbuster novel, Summit!

[amazon_image id=”0349122555″ link=”true” target=”_blank” size=”medium” ]Death in the Latin Quarter[/amazon_image]

[amazon_image id=”2266196308″ link=”true” target=”_blank” size=”medium” ]Le paradoxe de Vasalis[/amazon_image]