Who are the historians of the strange institutional developments in modern financial markets? I mean the straight narrative accounts that could, say, be used as reading material in university courses on money and banking (whose re-introduction was one of the suggestions made at the recent Bank of England/Government Economic Service conference on the teaching of economics). David Kynaston’s history of the [amazon_link id=”0701186534″ target=”_blank” ]City of London[/amazon_link], a work to which the adjective magisterial has to be applied, runs up to 2000 and is London-centric. (John Lanchester explains here why it’s  essential reading.) Michael Lewis has given us [amazon_link id=”0340767006″ target=”_blank” ]Liar’s Poker[/amazon_link] for the 1980s and [amazon_link id=”1846142571″ target=”_blank” ]The Big Short [/amazon_link]for the 20002. There have also been some terrific books, post-crash. Gillian Tett’s [amazon_link id=”B002VK2EK6″ target=”_blank” ]Fool’s Gold[/amazon_link] is one that illuminates a corner of the investment banking world in the 2000s. But I hunger for the kind of book which is common in business history – there are loads looking at the car industry, the oil industry, the computer industry. Finance suffers from a dearth of this kind of scrutiny, a mix of history, sociology and journalism.

[amazon_image id=”0701186534″ link=”true” target=”_blank” size=”medium” ]City of London: The History: 1815-2000[/amazon_image]

The reason this comes to mind is because of some of my weekend reading. One is a terrific essay by Andy Haldane of the Bank of England, The Doom Loop, in the London Review of Books. It has some obviously good suggestions. For example, bankers’ pay should be linked not to the return on equity (which incentivises them to take risks) but to return on assets (i.e. the loans they make, which would test whether they were doing their basic job of intermediating between savings and investment). The essay notes the increasing concentration of banking in the UK and the evolution of incentives to take risks. How did banking change its character so much? What regulatory and technological and social changes got us here?

The second was a terrifying Wired report on new research into high speed trading. ‘Flash crashes’ like the one that occurred in May 2010 turn out to happen very often, except normally so fast that humans can’t spot them. A new $300m undersea cable is being laid across the Atlantic (the first since the mid-1990s) to cut 0.006 of a second off the time it will take computers to communicate financial orders between the US and UK. How did this high speed financial market come about, who are the participants, what is being traded and where?

For now we have fiction – Robert Harris’s [amazon_link id=”0099553260″ target=”_blank” ]The Fear Index[/amazon_link], John Lanchester’s forthcoming [amazon_link id=”0571234607″ target=”_blank” ]Capital[/amazon_link]. One sociologist – Donald MacKenzie – has also looked at high frequency trading. But we need more light on this hidden world of finance. This is the story I want to be told.

There’s something very appealing about those bright plastic ducks one can but for children. Who can forget Ernie from Sesame Street singing this classic?

So my eye was caught by a new book, [amazon_link id=”0670022195″ target=”_blank” ]Moby Duck: an accidental odyssey (The true story of 28,800 bath toys lost at sea)[/amazon_link] by Donovan Hohn. It turns out the toys are pretty much indestructible, so when a large cargo container full of them capsized, in 1992, they sailed to the end of the ocean and stayed there. Fifteen years later, Hohn set out on their trail, with destinations including Alaska and the North Pacific Gyre, which has become a large garbage dump in the ocean.

[amazon_image id=”0670022195″ link=”true” target=”_blank” size=”medium” ]Moby-Duck: The True Story of 28,800 Bath Toys Lost at Sea and of the Beachcombers, Oceanographers, Environmentalists, and Fools,[/amazon_image]

Books about the nuts and bolts of globalisation always fascinate me. I enjoyed [amazon_link id=”0470287160″ target=”_blank” ]Travels of a T-Shirt in the Global Economy[/amazon_link] by Pietra Rivoli, and [amazon_link id=”0691136408″ target=”_blank” ]The Box[/amazon_link] (about shipping containers, by Marc Levinson – which also inspired a BBC project to follow a container).

So I’m going to have to read this one. It’s been favourably reviewed in the FT and The New York Times.

There are some chances in the next few days to hear Avner De-Shalit, co-author of [amazon_link id=”069115144X” target=”_blank” ]The Spirit of Cities[/amazon_link], speaking in the UK – on Monday 20th February and Tuesday 21st in London and on the Tuesday evening in Bristol. It’s a lovely book and I’m sure it will be worth getting to one of the talks if you can. I can’t but had chance to put a few questions to Avner.

[amazon_image id=”069115144X” link=”true” target=”_blank” size=”medium” ]The Spirit of Cities: Why the Identity of a City Matters in a Global Age[/amazon_image]

Which are your favourite books about cities by other authors, and why?

If it’s a sociology of cities I like coming back to [amazon_link id=”8871444426″ target=”_blank” ]Georg Simmel’s classic book[/amazon_link], but it’s because I think the opposite — he thought it was impossible to
create a sense of community in the city and I think it’s the only place where
a genuine community can rise. But my best cities book is [amazon_link id=”1878818198″ target=”_blank” ]Yehuda Amichai’s poems book on Jerusalem.[/amazon_link] I wish I could do the same: squeeze the entire city
into two to three sentences.

Of all the cities you’ve visited which are the most interesting to walk
around?

Well, I am biased. I am just in love with Jerusalem, and it’s such a lunatic
city. Half of its inhabitants believe they have a direct line to God. But
outside my city, I think Berlin is the most exciting city today. One can see
that the city simply changes every day, and that people are excited about it.
The combination of ultra modern architecture with the remains of the Communist
architecture, and the abundance of sites of collective memory — this is just
amazing. Not very easy for somebody Jewish like me, but still, terribly
interesting.

Your book advocates walking to imbibe the spirit of cities. Which group is winning the battle for control of urban space – people or vehicles? Are many cities becoming unwalkable?

Well, now that Time Square NYC is walkable, there is hope. In the US there is
a list of the 50 most walkable cities and the 50 which are most friendly to
cyclists. While cars still dominate today’s cities, at least planners and
mayors are well aware of the need to think differently.

If you had to choose another city to live in, which would it be?

Oxford, Oxford, Oxford. When I studied there one of my professors heard me
saying I liked it a lot, and he said: But you know it’s not a real place. Now
I know he was wrong. Oxford is a city which is full of life and energy and
creativity. Only one has to get away from the colleges, to walk in the
neighbourhoods. You can see artists, novelists, poets, and people who want to
be artists, novelists and poets.

Avner De-Shalit

By the by, I noticed that Ed Glaeser’s [amazon_link id=”0330458078″ target=”_blank” ]The Triumph of the City[/amazon_link], another terrific read for lovers of the urban, is out in paperback. Worth a read if you haven’t so far.

[amazon_image id=”0330458078″ link=”true” target=”_blank” size=”medium” ]Triumph of the City: How Our Greatest Invention Made us Richer, Smarter, Greener, Healthier and Happier[/amazon_image]

My current reading matter, [amazon_link id=”0691138494″ target=”_blank” ]Do Economists Make Markets[/amazon_link], edited by Donald MacKenzie and others, opens with a chapter describing the construction of a market for strawberries in the Sologne region of France. Construction physically – a new building – and intangibly – the creation of trading rules of engagement and a regulatory framework. The author, Marie-France Garcia-Parpet, describes the social process whereby the market was brought into being, which included the advice of an economist who aimed to design a perfectly competitive market, but also debates among farmers and existing institutions, the co-operatives and regulators. Many of the outcomes were favourable, including transparency and standardisation, and the region became a more important one for the production of strawberries. But some people, including shippers who had benefited under the previous system of personal relationships with individual producers, were not happy.

[amazon_image id=”0691138494″ link=”true” target=”_blank” size=”medium” ]Do Economists Make Markets?: On the Performativity of Economics[/amazon_image]

Sociological analyses of markets are fascinating, and quite rare. I was reminded by a comment on my previous post about John McMillan’s [amazon_link id=”0393323714″ target=”_blank” ]Reinventing the Bazaar: A Natural History of Markets[/amazon_link], one brilliant study of the institutional details of markets. Donald MacKenzie and some co-authors have a brilliant new paper Drilling Through the Allegheny Mountains: Liquidity, Materiality and High-Frequency Trading, (pdf) on high frequency trading in the financial markets, where the speeds are such (the speed of light) that the location of servers has become a competitive issue. The development of high frequency trading has even involved some tunnelling through the Allegheny Mountains to reduce the distance the signals need to travel down fibre optic cables.

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

Any applied micro-economists – working on competition cases, as I used to, or in a regulatory body or business – understands that the models we learn as students are abstractions, intellectual devices. Real markets are idiosyncratic, and the institutional detail matters.

The area of market design makes a virtue of the fact that the specifics matter. Spectrum auctions, kidney exchanges, carbon trading are all examples of markets created by economists from paper plans – deliberately performative, to use the sociologists’ term. (Al Roth’s website has some great introductory material.) Some of these work brilliantly. The human and social benefits of the kidney exchange or job matching markets, for example, are pretty clear. Others don’t function so well – the carbon market is an example. And we might all prefer it if the Black-Scholes equation had not given birth to the options markets. The point, though, is that it isn’t necessarily a bad thing if economic theory changes reality by creating markets where none existed. I’m very much looking forward to reading Michael Sandel’s forthcoming book, [amazon_link id=”184614471X” target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_link]. But I suspect he will argue that the scope of markets has grown too large and needs rolling back, whereas I think it’s much more complicated.

[amazon_image id=”184614471X” link=”true” target=”_blank” size=”medium” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_image]

Inspired by the recent 70th anniversary of Desert Island Discs, and by finishing Susan Hill’s delightful [amazon_link id=”1846682665″ target=”_blank” ]Howards End is on the Landing[/amazon_link], with a list of her 40 top desert island books, on this morning’s run with the dog I fell to reflecting about my Desert Island economics books. Difficult. Do you choose books that will take ages to read, to keep you going, or ones that bear re-reading, or classics, or books that cover a wide spread of material? Anyway, to kick of the parlour game, here are my eight choices. Hope everyone enjoys drawing up their own list!

1 [amazon_link id=”0198751729″ target=”_blank” ]A Treatise of Human Nature[/amazon_link] by David Hume. My founding text. Understanding the social choices we make by understanding our place in the natural and physical world.

[amazon_image id=”0140432442″ link=”true” target=”_blank” size=”medium” ]A Treatise of Human Nature: Being an Attempt to Introduce the Experimental Method of Reasoning into Moral Subjects (Penguin Classics)[/amazon_image]

2 [amazon_link id=”0691152640″ target=”_blank” ]This Time is Different[/amazon_link] by Carmen Reinhart and Ken Rogoff. A history of debt crises, an instant classic and still relevant for our times (although not perhaps on an island cut off from the financial markets).

3 There has to be a good, chunky economic history but which one? Greg Clark’s [amazon_link id=”0691141282″ target=”_blank” ]A Farewell to Alms[/amazon_link]? Jared Diamond’s [amazon_link id=”0099302780″ target=”_blank” ]Guns, Germs and Steel[/amazon_link]? Joel Mokyr’s [amazon_link id=”0691120137″ target=”_blank” ]Gifts of Athena[/amazon_link]? [amazon_link id=”0691090106″ target=”_blank” ]The Great Divergence[/amazon_link] by Kenneth Pomeranz? Or [amazon_link id=”0349111669″ target=”_blank” ]The Wealth and Poverty of Nations[/amazon_link] by David Landes? I’ll choose later.

4 A biography of Keynes. Either Roy Harrod’s [amazon_link id=”B006KKQ7HO” target=”_blank” ]Life of John Maynard Keynes[/amazon_link] or the recent [amazon_link id=”0674057759″ target=”_blank” ]Capitalist Revolutionary[/amazon_link] by Roger Backhouse and Bradley Bateman. Hmm, another difficult choice.

[amazon_image id=”0674057759″ link=”true” target=”_blank” size=”medium” ]Capitalist Revolutionary: John Maynard Keynes[/amazon_image]

5 [amazon_link id=”1846141478″ target=”_blank” ]The Idea of Justice[/amazon_link] by Amartya Sen. Michael Sandel’s forthcoming book about the limits of markets, [amazon_link id=”184614471X” target=”_blank” ]What Money Can’t Buy[/amazon_link], might challenge it – we’ll see.

6 What to choose from the huge field of development economics? This field is moving rapidly but at present it would have to be Banerjee and Duflo’s [amazon_link id=”1586487981″ target=”_blank” ]Poor Economics[/amazon_link].

7 [amazon_link id=”0262012766″ target=”_blank” ]Lives of the Laureates[/amazon_link]. In which winners of the Nobel memorial prize explain their work and their motivations – there are several volumes, so maybe I can count them all as one book. Or [amazon_link id=”0691148422″ target=”_blank” ]Economics Evolving[/amazon_link] by Agnar Sandmo, a terrific history of economic thought. Another late packing choice to be made.

8. There’s a vast array of books on institutions and technology and growth. I’ll tentatively pick Oliver Williamson’s [amazon_link id=”068486374X” target=”_blank” ]The Economic Institutions of Capitalism[/amazon_link] for a thorough grounding.

I’ve had to omit all the terrific financial crisis books – maybe I can slip my old friend Andrew Lo’s fascinating and useful review (pdf) of 21 of these titles into my suitcase.