I’ve thoroughly enjoyed reading [amazon_link id=”1780320140″ target=”_blank” ]The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy[/amazon_link] by Yanis Varoufakis. (An aside: I also quite like this trend towards long and chatty subtitles, a return to a much older style.) However, although I agree strongly with certain points the author makes, it’s essentially a conspiracy theory view of the world. At times it felt a bit like wearing a pair of glasses with slightly the wrong prescription, so that the scene is recognisable but subtly distorted. I’m not a conspiracy theorist – I believe problems are much harder to solve than that perspective implies.

You can tell Prof Varoufakis is a proper, crunchy economist. He recounts this anecdote:

“A friend of mine once complained that he could not sell his stunning holiday home. I offered him $10 to make the pedantic (but not inconsequential) point that it was not that he could not sell it, but rather that he could not sell it at a price of his choosing.”

The book also makes a lot of proper, crunchy points about the financial crisis and how it came about. He sets out the evidence on the failure of the great majority of Americans to see increases in their real incomes despite huge productivity gains – all of which went to the profit share of national income. That was unsustainable, and is in the process of no longer being sustained, although we do not yet know how the politics will play out. He describes the multiple contributory factors to the growth of toxic derivatives transactions.

The book’s central argument is that the huge transfers of capital from current account surplus countries to the United States, year after year, were the main reason for the collapse. Hence his metaphor of the Minotaur, needing constant tribute from the rest of the world. This is not exactly controversial, albeit told in a very readable way – I like an economist who can cite Classical myths and literature. Martin Wolf, for example, has made the same argument.

However, Varoufakis superimposes on the conventional economic account a political story – that the emergence of the American minotaur and the global recycling of capital was a deliberate strategic plan on the part of the US authorities. I’m really not convinced. The book does not make enough detailed reference to works of political history to lend this argument credibility. There’s one specific point on which I know it’s at least over-confident and probably wrong – a note claims Harry Dexter White was hounded to his death by false allegations that he was a Soviet spy. The hounding was real, but he almost certainly was a Soviet agent, it emerged in the Mitrokhin archive (see Christopher Andrews, [amazon_link id=”0465003109″ target=”_blank” ]The Sword and the Shield[/amazon_link] –  although this IMF paper of 2000 argues the case is unproven). A few quotations are offered (Paul Volcker referring in a 1978 speech to the ‘controlled disintegration of the world economy’). The political history is selective – Jimmy Carter, for example, does not rate a mention; we jump straight from Nixon to Reagan. And finally, my own minor brushes with the inner workings of government make the cock-up theory of history profoundly more credible than the conspiracy theory.

So in the end, although I always find it interesting to get a completely different perspective, and although I certainly think it’s useful to think about the crisis in the context of longer-term geopolitical and global economic trends, and although this is a very enjoyable read, I wouldn’t recommend it unless you want your own conspiracy theory taste buds tickled. And it’s a shame Professor Varoufakis has been devoured by his own Minotaur metaphor, because the reality is shocking enough without interpreting it in the light of a supposed 50-year conspiracy by the American elite.

[amazon_image id=”1780320140″ link=”true” target=”_blank” size=”medium” ]The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy – Economic Controversies[/amazon_image]

As his new novel [amazon_link id=”0571234607″ target=”_blank” ]Capital [/amazon_link]is published, John Lanchester has written a nice essay (‘Show Me The Money’) in this morning’s Financial Times about the curious lack of interest modern literature has in business – a striking contrast to many writers of the 19th century. In fact he names only one modern exception, Jay McInerney’s marvellous [amazon_link id=”0747584850″ target=”_blank” ]Brightness Falls[/amazon_link].

There are a few others I can think of. [amazon_link id=”0099541270″ target=”_blank” ]Bonfire of the Vanities [/amazon_link]of course. David Lodge wrote a campus novel, [amazon_link id=”0099554186″ target=”_blank” ]Nice Work[/amazon_link], that specifically addressed the chasm between the humanities and the world of business – a much greater chasm actually than between the humanities and the sciences. A while ago I wrote a post (The economist as hero) about a batch of novels about economists, notable rarities.

As Lanchester points out, genre fiction has shown more interest in the business world. He mentions Arthur Hailey, or recently Robert Harris’s terrific thriller, [amazon_link id=”0091936969″ target=”_blank” ]The Fear Index[/amazon_link]. And in a funny way, crime fiction is often quite business-focussed, albeit the illicit business of the illegal drugs trade or underworld bosses.

There’s a similar lacuna in film and TV, once you set aside criminal enterprise. [amazon_link id=”B000679PWG” target=”_blank” ]Dallas[/amazon_link] had the oil business. There was [amazon_link id=”B000JLTE6G” target=”_blank” ]The Brothers[/amazon_link]. My all-time favourite, though, was [amazon_link id=”B000MGB0XS” target=”_blank” ]The Onedin Line[/amazon_link], which was sharply focused on trade and commerce, and even better was set Up North. As for movies, [amazon_link id=”B00347A32G” target=”_blank” ]Wall Street[/amazon_link], of course, and its [amazon_link id=”B003IHUHZU” target=”_blank” ]sequel[/amazon_link]. [amazon_link id=”B00004SPVI” target=”_blank” ]Bonfire of the Vanities[/amazon_link], the movie. No doubt there are others, but they don’t leap to mind, which perhaps proves the point about their scarcity.

The Onedin Line

The phenomenon of short topical e-books continues with [amazon_link id=”B0076O2W7W” target=”_blank” ]Who’s In Charge Here?[/amazon_link] by Alan Beattie, just out as a Penguin Short. FT readers will know that his views on the shambles that is global economic management will be well worth reading. Alan was on the UK economy beat when I was a reporter for a rival paper, so I can vouch for his delightfully sharp wit. Best of all, it has a lovely old-fashioned Penguin ‘cover’. I might have to read it even as a Kindle edition….

[amazon_image id=”B0076O2W7W” link=”true” target=”_blank” size=”medium” ]Who’s in Charge Here? (Penguin Shorts): How Governments are Failing the World Economy[/amazon_image]

I was prompted by an enjoyable essay by Yanis Varoufakis for Channel 4 news to order his book, [amazon_link id=”1780320140″ target=”_blank” ]The Global Minotaur[/amazon_link], which has just arrived via Abe Books. Actually one of the nice things about the news item was seeing an economist not kitted out in standard-issue grey suit, but rather a leather jacket.

Yanis Varoufakis - no suit

Flicking through, I’m not at all sure that I’m going to agree with Prof Varoufakis, but I’m certainly going to enjoy an economics book that not only references classic Greek mythology (that Minotaur) but also takes a longer-term perspective (back to the late 70s), relates the economics to the politics, and is well-written. I will report back when I’ve read it.

[amazon_image id=”1780320140″ link=”true” target=”_blank” size=”medium” ]The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy – Economic Controversies[/amazon_image]

I’ve been reading an article by Joseph Stiglitz whose title made it sound very promising: Rethinking Macroeconomics: What Failed And How To Repair It. His work on how information asymmetries and uncertainty shape institutions and markets make Stiglitz a strong candidate for setting out a new approach to macroeconomics. And it’s needed. Standard macro has failed, even though many macroeconomists who have invested so much in their human capital are understandably reluctant to agree. Even with modifications such as heterogeneous agents (ie people who are not all identical) and, the standard Dynamic Stochastic General Equilibrium model is not an empirically or theoretically useful representation of an economy.

I was disappointed with the Stiglitz article, however. It’s powerful as a critique, weaker on what to put in place of the standard model, although Stiglitz rightly identifies the institutional reality of money and banking, and credit markets, as essential missing elements. (Non-economists may be surprised to learn that banking does not feature as such in conventional macro models, which are indeed highly abstract).

An alternative tack which some of the most brilliant economists around think is most promising is to look at the complexity models used by physicists and biologists. Paul Ormerod’s [amazon_link id=”0465053564″ target=”_blank” ]Butterfly Economics[/amazon_link] is a great introduction to this approach, and I’m about to start Alan Kirman’s [amazon_link id=”0415594243″ target=”_blank” ]Complex Economics: Individual and Collective Rationality.[/amazon_link] Andy Haldane at the Bank of England and Robert May have written in Nature about this modelling strategy as well. I’ve just been having another look at John McMillan’s [amazon_link id=”0393323714″ target=”_blank” ]Reinventing the Bazaar: A Natural History of Markets[/amazon_link]. It’s a terrific book which looks at the institutions and detailed operations of many specific markets. He too concludes that the complexity approach is the right one at the macro scale, adding:

“The economic system has an additional layer of complexity: its components are people, who react intelligently to it and even reshape it.”

McMillan very sensibly notes that: “[Markets] have impressive achievements; they can also work badly. Whether any particular market works well or not depends on its design.”

Economics has a rapidly improving understanding of market design principles at the sub-macro scale. But this still leaves a huge modelling gap at the aggregate level. Until some future Nobel winner comes up with an alternative workhorse macro model that can be described readily in academic papers and taught to students, whether it is a complexity model or not, we will be stuck with the standard DSGE approach. Nor is it clear to me at what level of aggregation one has to switch from the tools of the market design approach to the tools of analysing complex systems. That is the problem of macroeconomics: not only how should we do macroeconomics, but also where does the boundary between micro and macro lie?

[amazon_image id=”0393323714″ link=”true” target=”_blank” size=”medium” ]Reinventing the Bazaar: A Natural History of Markets[/amazon_image]