On holiday in France last week, I spotted an advert in Madame Figaro encouraging readers to continue to shop at their local bookstore. “With millions of books to choose from, who will help me decide if my bookshop is no longer there?” runs the copy.

Evidently, online sales are endangering bricks and mortar bookshops there too. What’s interesting about this familiar tale of decline – Borders in the US, Waterstones struggling in the UK – is that it’s always portrayed as the result of changing consumer habits. However, publishers play a part too. They choose how big a discount from the cover price of a book to give to different retail outlets. A combination of the market power of the biggest retailers – Amazon, some supermarkets – and the lower cost of distribution to their centralised warehouses means that publishers have always given bigger discounts to these outlets. The obvious consequence is that small bookstores can’t match the prices offered by their big competitors. As a particular title is the same everywhere, it’s no wonder consumers have changed their habits. If physical bookstores matter to publishers in the long term, as all publishers tend to claim, the publishing industry will need to change its habits too.

Meanwhile, here is the lovely bookshop in Toulouse which benefited from a few of my euros.

The Ombres Blanches bookstore in Toulouse

Tomas Sedlacek’s [amazon_link id=”0199767203″ target=”_blank” ]Economics of Good and Evil: The quest for economic meaning from Gilgamesh to Wall Street[/amazon_link] looked like a good way to make the transition from work to vacation, so it was my first poolside read on holiday. It had been well reviewed by Samuel Brittan in the Financial Times. I’m also a sucker for anything to do with [amazon_link id=”014044100X” target=”_blank” ]Gilgamesh[/amazon_link], from the epic itself to the brilliant Australian novel [amazon_link id=”1843541831″ target=”_blank” ]Gilgamesh[/amazon_link] by Joan London.

Back to Sedlacek, whose author picture shows him to be rather stylish for an economist, and was an adviser to Vaclav Havel. The first part of the book traces certain economic concepts from ancient times to Adam Smith. Thus for example, he attributes the first macroeconomic forecast to Joseph’s dream about the seven years of plenty and famine. He sees Plato’s theory of forms as the philosophical origin of the concept of an economic model as the hidden true structure underlying reality. He discusses the differences between the stoics and the hedonists in Ancient Greece, and traces the utilitarianism of economics to hedonism. Utility is judged by results, and is judged from the point of view of the individual. By contast, the stoics judged morality by concordance with rules. Adam Smith, Sedlacek argues, was much more in favour of the latter view, emphasising the correctness of the act itself.

In this, the author joins other recent reclamations of Adam Smith from the free market fundamentalists, including Emma Rothschild’s [amazon_link id=”0674008375″ target=”_blank” ]Economic Sentiments [/amazon_link]and Nicholas Phillipson’s new biography of Smith, [amazon_link id=”0140287280″ target=”_blank” ]Adam Smith: An Enlightened Life[/amazon_link]. This part makes the book a good complement to Sandmo’s [amazon_link id=”0691148422″ target=”_blank” ]Economics Evolving[/amazon_link], which covers the period from Adam Smith onwards.

The second half of Economics of Good and Evil turns to a discussion of the themes emerging from the historical account (a structure that actually makes for repetitiveness). Sedlacek argues that the perpetual debate in economics is a philosophical one – are humans good or evil at heart? Schools of economics differ over whether we can rely on the uncoordinated free will of many individuals to lead to good outcomes, or rather do we need for coordination from above. Does free activity lead to good or evil results?

He also asks how did economics change from being an area of moral philosophy to a mathematized allocative science, and traces this to Mandeville’s [amazon_link id=”0865970750″ target=”_blank” ]Fable of the Bees[/amazon_link]. Sedlacek writes: “I would like … to express my reservations against the belief among economists that mathematics is able to contain and describe the whole real world.” (p288). I don’t think that most economists believe this, certainly not now if they ever did (see [amazon_link id=”0691143161″ target=”_blank” ]The Soulful Science[/amazon_link]). However, it is a common trope. Sedlacek, like Richard Bronk In [amazon_link id=”0521735157″ target=”_blank” ]The Romantic Economist[/amazon_link], would like economists to include history and philosophy and even poetry in their approach to the economy. At one level this is unarguable – economists certainly ought to know history, including the intellectual history of their own discipline, and other relevant disciplines such as the other social and human sciences. A widely read and broadly educated economist will be a better economist. However, I would argue that if economics were to ditch its own methodology for the methodology of history or philosophy, it would no longer be economics.

The author also has a rant against the focus on GDP and growth, a contemporary theme that readers of my own [amazon_link id=”0691145180″ target=”_blank” ]The Economics of Enough[/amazon_link] will know I believe to be misplaced. Who could disagree with this statement: “If we pursue happiness and happiness alone, we will never be happy. Happiness seems to come as a byproduct of doing something good, not as an end in itself.” (p222) But that is an entirely separate issue from the question about the proper indicators of economic policy and progress.

There are some terrific moments in this book. I like the author’s classification of crises into either the self-fulfilling or the self-averting – and as he points out, we never know which kind we have. I loved his description of money as a form of energy that can travel in time. “Because money is an abstract construct, it is not bounded by matter, space or even time. All you need is a word, possibly written, or even a verbal promise. ‘Start it, I’ll pay.'” (p85).

You have to like a book that quotes [amazon_link id=”B00002695C” target=”_blank” ]Leonard Cohen[/amazon_link] and refers to [amazon_link id=”B00004R80K” target=”_blank” ]The Matrix[/amazon_link]. Its big theme is that economics needs to rediscover poetry and myth. The book reads like the author’s own quest to be a good man although an economist (echoes here of Deirdre McCloskey’s [amazon_link id=”0472067443″ target=”_blank” ]How to be Human Though an Economist[/amazon_link]). Economics is definitely changing, iron grip of mainstream is weakening but I hope we don’t end up throwing out the rigour of conventional economics, which is the danger of this swing of the philosophical pendulum. Sedlacek rightly points out that we teach economics oddly, teaching only the one approach and with no history of thought to put that into context. Economics of Good and Evil was a best seller in the Czech republic almost certainly because there’s a big audience now for the idea that economics, the philosopher king, is wrong. It’s an interesting book, but like many attacks on economics gives no hint of the reality of an exciting scientific renaissance in many areas of the subject, and widespread querying of the old and narrow orthodoxy.

[amazon_image id=”0199767203″ link=”true” target=”_blank” size=”medium” ]Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street[/amazon_image]

Back from a peaceful two week holiday in the depths of the French countryside – no internet, no mobile signal, walks and swims with a decreasingly grumpy teenage son – I found amidst the weekend newspaper articles analysing the UK riots an interesting Financial Times feature announcing that this is the summer of the e-book. Its author, Carl Wilkinson, sings the praises of e-readers in place of a heavy stack of physical books in the suitcase. The article goes on the describe the flurry of innovation in publishing, a healthy phenomenon that I wrote about here a while ago.

But I do disagree with the FT’s opening premise that e-readers are better for holiday reading. The owners of the house we rented will find I’ve left them a stack of paperbacks finished on holiday, so the weight in the luggage is only one way. And here are all the other reasons physical books, including the paperbacks Mr Wilkinson predicts will be squeezed out of the market by e-readers like the Kindle, are superior.

1. You can’t safely spill sunscreen or wine on an electronic device, or get sand in it, or leave it out in bright sunshine.

2. You can’t share books on a device. I can’t even get e-books I bought on one device onto another device I own, although no doubt one of my domestic IT support staff (sons) could do it for me. I certainly can’t read the e-books my husband downloaded because he’s onto his next e-book on his iPad. E-books torpedo domestic and friendly sharing.

3. They could do the same to the second hand book market (our local Oxfam book shop was damaged in the riots although I fear it was wanton damage rather than self-improving looting; 2nd hand book sales form an important revenue stream for the shops). Nor can you leave your e-books on the book-swap shelf at the local station. No doubt publishers think it’s a good idea to shrink the second hand trade, but they’re wrong: a small number of additional physical sales of new books for them does not remotely compensate for the loss of consumer welfare from a much smaller book market. Besides, as reading is an experience good – consumers have to do it to know how much benefit they get from it – publishers should be thinking of the second hand market as a sort of advertising that drives longer-term sales of their product, especially as students – the most likely long-term readers – have low incomes. Publishers will only thrive if reading thrives!

How big an issue is this? Without having researched the question of second hand sales thoroughly, I did find this report of a now out-of-date US study (via the Booksellers Association):

“Used books are one of the fastest growing segments of the US book industry and the report notes that, propelled by e-commerce, the used book market is ‘exploding’, and it estimates that in 2004 total used-book revenue exceeded $2.2 billion, with 111 million used book units sold, up 11% over 2003. Overall, used book sales are estimated to comprise 8.4% of total consumer spending on books.”

4. You can’t cut and paste quotes from an e-book. Their makers are so paranoid about “intellectual property theft” that to quote from an e-book on this blog, I have to retype the whole thing.

5. How are you supposed to refer others to specific pages of the text – in a footnote for example, or in a review? Floating “locations” have replaced fixed  “pages”. Will authors have to start numbering their paragraphs, as if in a mediaeval manuscript?

6. I particularly hate the Kindle. This is a personal thing, as obviously many eager readers luuuurve the Kindle. What I hate is the smallness of the screen, meaning you only get a couple of hundred words of text on it. I read quickly so have to keep thumbing to the next “page” and get thumb-ache. I hate not having the text immediately preceding the bit I just read. I hate having to keep scrolling back by several “locations” to go back to something rather than just turning back a page. I also hate the greyness of the screen and the ugliness of the device – and correspondingly do love my iPad on which I read work papers and an occasional e-book. I hate the way my e-book has comments and highlights from strangers on it, even if I can turn the feature off.

7. I have other idiosyncratic dislikes of e-books too. For example, I can’t see what other people are reading when I’m on the train. This used to offer moments of delight. One time, sitting in a block of four seats on the Tube, I was reading an improving economics book, and my fellow-passengers were reading a [amazon_link id=”0140293450″ target=”_blank” ]Nick Hornby novel[/amazon_link], Seamus Heaney’s [amazon_link id=”0571230970″ target=”_blank” ]District and Circle[/amazon_link], and [amazon_link id=”0199535663″ target=”_blank” ]Herodotus[/amazon_link]. How cheering is that?

[amazon_image id=”0571230970″ link=”true” target=”_blank” size=”medium” ]District and Circle[/amazon_image]

Enough ranting. Tomorrow, the first of my reviews of my holiday reading.

I’ve just finished reading [amazon_link id=”0691148422″ target=”_blank” ]Economics Evolving: A history of economic thought[/amazon_link] by Agnar Sandmo, and commend it to every economist and student of economics. It’s a clear and fair account of the contribution to the subject by the key figures in its intellectual history, with a focus on Adam Smith and his immediate predecessors to the 1970s. The book would make an ideal text for a history of thought module in a degree course, but is also an accessible general read for an economist seeking some perspective on the state of economics today. I particularly appreciated not being able to tell the author’s own opinions; the book simply gives a straightforward account of both sides of the various controversies.

Throughout there are enjoyable nuggets from the various economists. I liked Adam Smith’s: “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only in so far as it may be necessary for promoting, that of the consumer.” (p51). Also Marshall’s call for economists to have a cool head and warm heart, a useful reminder when so many hotheads have the stage (p265). There are also interesting sidelights: Christen Smith, one the first economics professors in the Nordic countries, had a joint appointment in economics and botany – it apparently was not uncommon to link the study of natural resources and economics in the early 19th century. What a good idea.

That it’s important for economists to know more than is the norm now about the intellectual history of their own subject seems obvious to me. As Sandmo puts it (in a discussion of Ricardo and Ricardian equivalence): “When modern economists invoke the economists of the past in support of their own views, they may sometimes provide a misleading impression of what the older economists actually said.” (p85) The book demonstrates interesting continuing strands in economic thought: there is a thread linking John Stuart Mill to John Maynard Keynes to Tyler Cowen in their shared belief – in successive centuries – in the inevitability that as capital accumulates over time, the rate of return on investment is bound to decline.

Also interesting, though, is the clear evolution of the subject. Compared with the 19th and 20th centuries, economics is now a far more empirical subject – the book touches briefly on the history of econometric thought while noting that most intellectual history of the subject ignores it. The fact that for the past decade only we’ve started to accumulate substantial amounts of economic data and the computer power and econometric techniques to analyse the datasets is going to transform the subject for the better. Economics is now also more global, with an international community of scholars in constant communication (hello Twitter economists!). Finally, economics is thoroughly professionalised compared to its early days, although only now is there a sufficiently self-aware debate amongst economists about what professional status ought to consist in, and – to an extent – what responsibilities it brings.

Anyway, Economics Evolving is a highly commended book, which completely defied my initial impression that it was going to be worthy but dull. Heilbronner’s [amazon_link id=”0140290060″ target=”_blank” ]The Worldly Philosophers[/amazon_link] is still a terrific introductory read but is nothing like as substantial as this book, which is the best overview I’ve come across of the history of thought in economics.

[amazon_image id=”0691148422″ link=”true” target=”_blank” size=”medium” ]Economics Evolving: A History of Economic Thought[/amazon_image]

The Enlightened Economist is off on her annual two-week summer break now. Normal service will resume in mid-August with a series of reviews of my holiday reading.

A Guest Review of Tim Harford’s [amazon_link id=”1408701529″ target=”_blank” ]Adapt:Why Success Always Starts With Failure[/amazon_link]

By Keith Wade, Chief Economist, Schroders

Tim Harford’s latest book is an appeal for more experimentation in government policy, business and life. The complexity of the modern economy and society means that efforts to solve our problems are often thwarted by the interactions and unforeseen consequences which unfold on any chosen path. We should accept the limits to our wisdom and be a little more humble in our approach to problem solving. Viewed from the wreckage of the post financial crisis economy such an argument has great appeal.

To highlight the complexity of the modern economy Harford begins with the case of someone trying to build a toaster from scratch. An extraordinary project which demonstrates the effort involved in bringing together the resources needed to construct a simple household appliance – the modern toaster contains more than four hundred components and sub components – and illustrates the extraordinary level of specialisation present in today’s world economy.

In the light of such intricacy, Adapt goes on to argue for an experimental approach to decision making where policymakers and businesses are open to the idea that a single line of attack is unlikely to succeed. Instead, a more experimental and adaptive method is needed where decisions are reached through a process of trial and error.  One consequence of this is that we should be more tolerant of failure as it is part of the evolutionary process through which we reach solutions.

Harford marshals an impressive array of evidence to support his case from the Iraq conflict, where an adaptive approach to the insurgency which responded to local conditions ultimately triumphed over the top down strategy of the Pentagon, to the development of the Spitfire fighter plane where a civil servant was prepared to go against conventional wisdom and take a flyer on a different approach to stopping Hitler’s bombers. More recently he cites the so called “randomistas” in development economics who have pursued a series of trials to capture the best approach to tackling poverty. In short it is a call for more decentralised and less top-down decision making.

Such an argument is hard to disagree with and, of course, underpins the market economy where thousands of experiments are carried out every day by individuals and businesses, whether they know it or not. “The market fumbles its way to success as successful ideas take off and less successful ones die out”.

Of course, the argument is not new and has been expounded by others, most recently by John Kay in “The truth about markets”. Where Adapt succeeds is in its ability to draw together the conclusions of different fields to tell a coherent story. Harford acknowledges his debt to Kay and others, but goes on to develop his case by examining the shortcomings of markets and the experimental approach. Here he draws on the experience of engineers in learning from industrial accidents to identify situations where a market driven experimental approach may prove very costly.

Experiments are fine in a world where failure does not cause much damage. Many situations are like this where the creative destruction of the market can be contained i.e. most businesses can fail safely without bringing down the entire economy. However, there are others where this is not the case and failure can have catastrophic consequences. The financial crisis of 2008 was one searing reminder of the danger of allowing markets free reign as the failure of Lehman Brothers threatened to bring down the entire banking system and world economy.

From Harford’s perspective the banking crisis was not caused by any particular action by an individual or institution, but by the nature of the financial system itself which had become “tightly coupled”. This is an engineering term used to describe systems which are closely linked so that rather than absorbing shocks they magnify them until they ultimately spiral out of control. Here Adapt goes into the world of industrial accidents and the experience of the nuclear industry where engineers have grappled for years with tightly coupled systems.

In the lead up to the financial crisis, products such as credit default swaps made the system more tightly coupled as they enabled banks to move risks off their balance sheets and take on more and more risks. The problem was compounded by the fact that the authorities did not know where the risk had ended up (mostly in the insurance industry) and so did not know how to short circuit the problem as the banking system blew up. Harford’s message to those trying to build a better banking system today is that human error cannot be avoided so the challenge is to build structures which can withstand shocks rather than exacerbate them.

It is hard to find fault in such a wide ranging and cogent analysis which deserves to be widely read. However, there is an elephant in the room. In accepting the case for more experimentation and more decentralisation how do we account for the rise of China? The world’s second largest economy arguably represents the triumph of top down planning over the free market. As the West struggles in the aftermath of the financial crisis the contrast with fast-growing China has become even starker. Perhaps because it might warrant another volume, Adapt does not address the rise of China. An omission certainly, although not one which detracts from a brilliant book in which ideas sweep superbly across the economic landscape.

[amazon_image id=”1408701529″ link=”true” target=”_blank” size=”medium” ]Adapt: Why Success Always Starts with Failure[/amazon_image]