One of my all-time favourite books is Louis Menand’s 2001 [amazon_link id=”0007126905″ target=”_blank” ]The Metaphysical Club[/amazon_link], an intellectual history of a quartet of philosophers whose influence helped the United States emerge from the trauma of the Civil War and grow into the successful society, economy, world power it became in the 20th century. The philosophy of the four – Oliver Wendell Holmes, William James, John Dewey and Charles Peirce – was pragmatism. This is best understood not as a body of ideas but – in Menand’s words – as “an idea about ideas”. Ideas are not entities out there in the world but are produced by groups of people. Ideas are social.

“The belief that ideas should never become ideologies – either justifying the status quo, or dictating some transcendent imperative for renouncing it – was the essence of what they taught. … They taught a kind of skepticism that helped people cope with life in a heterogeneous, industrialized, mass market society. … This skepticism is also one of the qualities that make societies like that work. It is what permits the continual state of upheaval that capitalism thrives on. Holmes, James, Peirce and Dewey helped to free thought from thralldom to official ideologies, of the church, the state, or even the academy. There is also, though, implicit on what they wrote, a recognition of the limits of what thought can do in the struggle to increase human happiness.”

I highly commend this book to anyone unfamiliar with it. It is beautifully written and a gripping story as well as a philosophical reflection. Its relevance as background reading in the year of a dispiriting US presidential election should already be obvious.

[amazon_image id=”0007126905″ link=”true” target=”_blank” size=”medium” ]The Metaphysical Club: A Story of Ideas in America[/amazon_image]

Some books arrive on my desk for reasons of their own. I can’t remember how or why Alfred Chandler’s 2005 book, [amazon_link id=”067401720X” target=”_blank” ]Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical Industries (Harvard Studies in Business History)[/amazon_link], reached me. But I am glad it did.

Its subtitle explains the purpose: “The remarkable story of the evolution of the modern chemical and pharmaceutical companies.” It is indeed a remarkable story, and one that prompts a few thoughts about industrial dynamics and economic policy.

The first fact to leap out is the venerable age of many of these companies (the book looks at industrial chemicals, petrochemicals and pharmaceuticals). They are of course the survivors, and thanks to consolidation in the relevant sectors have subsumed many businesses. Failures are always shorter-lived. Still, when the average age of listed companies is now 10-15 years, a 19th century creation is a rarity. But in chemicals there are many of them, while the roots of today’s big pharma companies date back 50 years.

The second is the importance of exogenous events. World wars, for example, had a decisive shape on the sectors covered, either through vastly increasing demand, or by shutting out imports from ‘enemy’ competitors, or by creating a new market via the creation of colonies.

A third striking point sounds obvious really but here goes. There is a tendency to think of high-tech in a narrow way. It’s computers and the web. It’s electricity, it’s steam. These are the General Purpose Technologies, which underpin innovation across the economy. However, basic scientific discovery and its technological implementation are high tech too, and what Robert Gordon has described as a ‘big wave’ develops. The chemicals and pharma industries rest on major scientific discovery, albeit giving way to decreasingly lie sky development as the years go by. Thus Du Pont established one of the first ever corporate R&D centres at the turn of the 20th century but downgraded its R&D function by the 1960s. So when thinking about the ‘big wave’ we are experiencing, it is important not to forget biotech, nanotechnology, robotics, materials science etc. It’s genomes and graphene as well as mobiles and broadband.

Chandler’s vast experience of business history (this book is a sequel to [amazon_link id=”0743215672″ target=”_blank” ]Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Science Industries[/amazon_link]) means he sets this particular industrial story in the context of an appreciation of the importance of organisation and management. These capabilities are essential for a successful strategy, he argues. A capable central management will embed the institutional and practical knowledge that turns a business into a long-lived sector leader. What he calls the ‘integrated learning base’ creates a path-dependency that – alongside scale – an insuperable barrier to entry. This theme of organisational capability creating knowledge that is too hard for others to copy is one [amazon_link id=”019828988X” target=”_blank” ]Foundations of Corporate Success: How Business Strategies Add Value[/amazon_link] has also emphasised. Anyway, Chandler’s combination of command of detail with this wider analytical perspective is illuminating.

I was surprised not to find any discussion of regulation as a barrier to entry, nor anti-trust policy. There is nothing about the FDA, or the combined lobbying power of the pharma giants and health insurance industry, while the FTC is mentioned just twice en passant. Perhaps I’m being too cynical, but the omission means that too much emphasis is placed on the wise strategic choices of these giants, as opposed to their luck and political skill. This is a bit odd given how much emphasis Chandler places on the importance of barriers to entry. Still, this book is an excellent overview and underlines the point that in this as in other industries, the only hope for successful entry by new firms is radical new science based innovation. Otherwise, the advantages of the incumbents are simply insuperable, even when they have reached the mimics of their own phase of innovation and rapid growth.

[amazon_image id=”0674032217″ link=”true” target=”_blank” size=”medium” ]Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical Industries (Harvard Studies in Business History)[/amazon_image]

[amazon_link id=”0575402776″ target=”_blank” ]Arthur C Clarke[/amazon_link] said that any sufficiently advanced technology was indistinguishable from magic. So true. It’s how I feel about the car, or turning on the TV (although DVD players have obviously regressed, technology-wise, as I can no longer manage to work ours). So John MacCormick’s[amazon_link id=”0691147140″ target=”_blank” ] 9 Algorithms That Changed the Future: The Ingenious Ideas That Drive Today’s Computers[/amazon_link] looked appealing. It sets out to explain some key bits of computer magic – public key cryptography, search engine indexing and ranking, data compression and so on – and to do so in layman’s terms.

The book succeeds in this. It is very clear and taught me a lot about the principles of these and other fundamental algorithms. Having said that, it still takes quite a lot of concentration – as some of the examples crank up in realism and complication, one needs a certain amount of self-discipline not to say, ‘whatever’, and turn to the next section. I found that I couldn’t read it with an undemanding TV programme on in the background, for example.

However, this means that another thing the book achieves is to convey a real sense of both the brilliance and the amount of sheer hard work and attention to detail that has gone into our reliance on everyday computer magic. I have on my shelf an old (1999) book, [amazon_link id=”073560505X” target=”_blank” ]Code: The Hidden Language of Computer Hardware and Software[/amazon_link] by Charles Petzold, that does the same with electronic circuits and logic gates, except that I admitted defeat partway through that one. Reading 9 algorithms does make one ask – again – why we’re restricting children to learning how to use commercial software packages in their ICT lessons in school, rather than understanding these vital ideas and principles. This book is too difficult for GCSE, I think (certainly for my 13 yr old), but could form the basis of a school text.

The next-to-last chapter is especially intriguing. It’s about what computers can’t do – the existence of undecidable problems. McCormick writes: “If you believe that the human brain could, in principle, be simulated by a computer, then the brain is subject to the same limitations as computers. In other words, there would be problems that no human brain could solve – however intelligent or well-trained that brain might be.” (p197). Or the converse, of course. But McCormick notes that the barriers in principle to a computer simulating the brain are philosophical rather than physical or chemical.

[amazon_image id=”0691147140″ link=”true” target=”_blank” size=”medium” ]Nine Algorithms That Changed the Future: The Ingenious Ideas That Drive Today’s Computers[/amazon_image]

Before the New Year I wrote here and here about some forthcoming books to look forward to. Here is a round-up of a few I missed, in no special order.

[amazon_link id=”1846684293″ target=”_blank” ]Why Nations Fail[/amazon_link] by Daron Acemoglu and James Robinson (development or rather its absence)

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

[amazon_link id=”1846556023″ target=”_blank” ]Pity the Billionaire[/amazon_link] by Thomas Frank (US politics – I enjoyed his earlier [amazon_link id=”080507774X” target=”_blank” ]What’s the Matter with Kansas?[/amazon_link])

[amazon_link id=”0571234607″ target=”_blank” ]Capital [/amazon_link]by John Lanchester (a novel from the author of the brilliant [amazon_link id=”014104571X” target=”_blank” ]Whoops[/amazon_link] on the crisis)

[amazon_link id=”0374203032″ target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_link] by Michael Sandel (I’m looking forward to this after his last book, [amazon_link id=”B002RUA4XE” target=”_blank” ]Justice[/amazon_link])

[amazon_image id=”1427214921″ link=”true” target=”_blank” size=”medium” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_image]

[amazon_link id=”0241145104″ target=”_blank” ]Making the Future[/amazon_link] by Noam Chomsky (if it’s your cup of tea – very much not mine)

[amazon_link id=”0465019668″ target=”_blank” ]100 Plus[/amazon_link] by Sonia Arrison (about longevity, looks like it’s more in the self help/personal finance line but she’s recommended by a friend)

[amazon_link id=”1849542872″ target=”_blank” ]The Bank – Inside the Bank of England[/amazon_link] by Dan Conaghan (I know nothing about this but the author followed me on Twitter….)

I was asked to look out for forthcoming titles on Japan but haven’t found any. But there is this interesting contrarian feature by Eamonn Fingleton, The Myth of Japan’s Failure.

And here as a bonus is my review for The Independent of Philip Coggan’s new book, [amazon_link id=”1846145104″ target=”_blank” ]Paper Promises[/amazon_link], well worth a read.

In the Philip Dick novel [amazon_link id=”0575079932″ target=”_blank” ]Do Androids Dream of Electric Sheep[/amazon_link] (later turned into the movie Blade Runner), when androids are as intelligent as people, it is the capacity for empathy that is the mark of the human. Empathy plays an important part in David C Rose’s account of [amazon_link id=”0199781745″ target=”_blank” ]The Moral Foundation of Economic Behavior[/amazon_link] – or rather, what he describes as ‘the empathy problem’. The problem is that in large and complex societies like a modern economy, opportunistic behaviour that benefits the individual (for example, shirking at work because nobody can truly monitor your effort, or pirating a digital song or movie, or insider dealing) damages collective outcomes but only harms other identifiable individuals to a minuscule degree. We feel empathy with other people, not with corporations or society as a whole.

Economics notoriously assumes that people in fact act like androids in their decisions, but Rose argues that can’t be true. In small groups, economic exchange and co-operation are policed by the fact that people know each other. If you ‘cheat’ in your own immediate self-interest, you will be found out, and shamed. You will know your victims personally and feel guilty. So it turns out the self-interest over anything but the immediate moment will lead to co-operation. But economic prosperity as we know it now in the developed countries requires co-operation in large groups, very large. And it must be hard to achieve because many economies haven’t managed. Opportunism is rife and entrepreneurship remains small scale. Trust is confined to the family or community or ethnic group, so transactions costs are high and growth limited.

Rose argues that the development of certain institutions helped combat opportunism. Certain institutions help make opportunism imprudent by introducing sanctions – but they only help when there is a risk of detection. In fact, many institutions themselves depend on the existence of a reasonably high  level of generalized trust. To achieve co-operative behaviour when this risk is negligible, successful economies need to develop internalised moral rules. People need to have instilled in them from childhood a sense of duty, so culture is important. Laws and lawyers are no substitute for moral restraint on selfish behaviour. “We are inclined to under-estimate how much we actually trust each other – especially relative to how much people trust each other in most of the rest of the world,” Rose writes of the US (and other prosperous economies). (p55)

In sum, if a society is to enjoy the economic benefits of large scale and the specialization and trade it enables, they have to make people feel sufficiently guilty about behaving badly. This is not natural, or hardwired in human psychology. Breaching moral restraints needs to feel wrong, whereas positive actions simply need to bring one some benefit.

Rose’s aim in the book is to demonstrate that the economist’s usual approach to trust, basing it on incentives via the argument that there are mutual benefits from high trust, is not valid in a large-scale complex economy. “This is because as any society closes in on being a high trust society, the gains to opportunistic behavior skyrocket if opportunism is only combated by prudential restraint [ie. the fear of being found out].” (p220) Rather, high trust is created by a moral foundation that has nothing to do with empathy – feeling bad about harming people – but instead is a culture-based and hard-won set of foundational rules for eliminating bad behaviour.

The book ends with what Rose describes as a ‘troubling speculation’ that this moral foundation has crumbled in the West. He points to the plentiful evidence of a decline in trust in the US. And it will not be tackled by asserting that moral behaviour is in our own interest really. We have to restrain our tendency to act selfishly because it’s just the right thing to do.

All in all, this is a very interesting and timely argument. It builds on earlier work by Robert Frank, especially [amazon_link id=”0691124019″ target=”_blank” ]What Price the Moral High Ground: Ethical Dilemmas in Competitive Environments.[/amazon_link] I’m not a philosopher, only a flighty economist, so I must admit that I found the more philosophy-based parts of the book pretty hard going. However, the message is important and sobering. Do western economies any longer have the solid moral foundations on which their prosperity was built, or is the dystopia of Blade Runner ahead of us?

[amazon_image id=”0199781745″ link=”true” target=”_blank” size=”medium” ]The Moral Foundation of Economic Behavior[/amazon_image]