A guest review of What you Need to Know about Economics by
George Buckley and Sumeet Desai
Phil Thornton, Clarity Economics

This may seem an odd way to begin a book
review, but this is not a book that readers of this website will need to read.

It is, however, exactly the book they should
give to non-economist friends and acquaintances who ask them obvious questions
such as “What is that you do, exactly?” “What has economics ever done for us? “
and “Why did you fail to spot the credit crunch?”

As can be guessed from the title this is
effectively a primer in economics for non-economists who are interested in the
state of the world financial system but don’t plan to go to night school. It is part of a series of “What you need to know” books that have
covered areas such as leadership, business and strategy and follows a
straightforward structure.

When it comes to “plain English” economics,
there are many similar books that are structured by answering specific
questions. This can often make it harder for a non-specialist to understand the
big concepts.

This book does not make that mistake, instead
opting for eight chapters on growth, inflation, employment, trade, money,
central banking, public finances and housing. Each chapter begins with a page of bullet
points titled ‘What’s it all about?’ and then goes methodically through the
issue. Paragraphs are nicely spaced apart and the pages illustrated with
easy-to-understand graphs, pie charts and flow diagrams.

The text is also broken up by potted
biographies of luminaries such as Milton Friedman and JM Keynes and some of
their best quotations.

Each chapter ends with a further reading
section and a one-paragraph section on the “one thing” you should take away
from that section.

While aiming to be clear and easy to
understand, it does not shy away from technical issues. The chapter on
inflation includes a section on demand-pull versus cost-push inflation with
line graphs that would not look out of place in an Economics 101 textbook.

The writing is clear, as one would expect
from the authors: Buckley is chief UK economist at Deutsche Bank while Desai is
an economics commentator who used to be chief UK economic correspondent at
Reuters. But is not simplistic and is happy to explain complex concepts in a
straightforward way. This is a great addition to the library of
books aiming to bring economics to non-economists  – and perhaps comes at the time
it is needed most.

A PS from Diane: previous posts on this blog have discussed popular economics books – see this one or search for 'popular economics'.

Charles Kenny talked at the Overseas Development Institute today about his book Getting Better, with a capacity crowd and more watching online. Listening to an author speak is a great way of getting an accurate summary of the book, so here is the potted version of his argument.

We don't know what makes economies grow rich, apart from two key things:
– it helps to be rich to start with (i.e. economic fortunes change slowly for the most part)
– and governments should avoid acting like Robert Mugabe

On the other hand, there are two equally key pieces of good news:
– there is no 'Malthusian trap', or in other words there's no link between population growth and real GDP per capita growth, so poor countries can raise living standards
– and on almost every indicator apart from GDP per capita, the performance of poor countries has been converging with that of rich ones.

On indicators of health, education, democracy, violence, life expectancy etc, developing countries have all (except for Zimbabwe and Zambia) been recording great improvements even when their GDP per capita has declined. Today 80% of infants in the world are immunised. Simple messages like 'wash your hands' improve health dramatically. The conclusion? “It's a story of technology and ideas.” Kenny singled out TV, which has led to dramatic improvements in attitudes to women, for example. (He wrote about this specific point in Foreign Policy magazine.) And ended with a question for the audience of development types: Is it not time to celebrate some successes?

I was particularly struck, in the light of my review of Getting Better, by a question from someone from Engineers Against Poverty (an organisation I hadn't heard of before, looks like they do some terrific stuff). He asked isn't the problem that the development community has lost confidence in the idea of progress, and become 'deeply conservative'?

There's a special forum in the new edition of the Boston Review about the role of experiments in  development policy, with an essay by Michael Kremer and Rachel Glennester and responses from a number of people (including me). Not yet online but I'll add the link when it is.

I've greatly enjoyed Getting Better: Why Global Development Is Succeeding by Charles Kenny. (By the way, he's in London talking about the book at the ODI on Thursday 10th – webcast too.) The general message is that there's certainly inequality and poverty but nevertheless there have been huge improvements in the quality of life in poor countries. Life expectancy, health, education – in important areas of life, the past generation or two have seen tremendous advances even in countries where GDP per capita has barely increased at all.

The book starts with a survey of the phenomenon of 'divergence, big time' rather than convergence in GDP per capita, along with economists' lack of understanding of the process of economic growth. There's an amusing chapter about the way pretty much every silver bullet theory of economic development has cycled in and out of fashion ever since the 18th century – Jeff Sachs as Montesquieu redux. (Mischievously, Kenny also points out that although Sachs now sees geography as destiny, more or less, he had argued in 1996 that with better policies Africa would have grown 4.6% a year faster than it actually did.)

The early chapters also, though, note some of patterns with which any theory must be consistent. For example, that head starts matter, or wealth breeds wealth. Bill Gates's parents were in the top 1% of the global household income distribution, and if you can't be born to rich parents in a rich country, you should at least move to a rich country (this is Mancur Olson's 'Big Bills Left on the Sidewalk' (pdf) point – immigrants from Haiti to the US become more productive overnight). In other words there is an important stickiness to prosperity, over time and between people.

Kenny also makes the forceful point that to the extent that environmental concerns pose limits to growth (and he, like most economists is a bit sceptical), then:

(a) it's not population but consumption that's the limit. In 1679 Antoni van Leeuwenhoek calculated the Earth's carrying capacity at a population of 13.4 billion people, a figure that still seems correct;

(b) the absolute poor need more consumption so if there's any sacrifice to be made it must be made by the rich. “Sterilize the world's billionaires first and then move to a one-child policy for Switzerland, Luxembourg and the United States.” Doubling the incomes of the 650 million poorest people would amount to the same as a 1% income loss for the 650 million richest (pp67-68)

The book is also optimistic about the spread of education, of democracy – and it was published before people in North Africa and the Middle East started to demand political freedoms – and a long-term trend towards the unacceptability of violence. (This latter was a theme of Paul Seabright's terrific The Company of Strangers – or here's a video of his talk on the book).

Getting Better ends with a call for 'realistic optimism'. As he notes, it's odd that it's currently people on the right wing of politics who are optimists, at least relative to the dystopian, anti-trade and anti-globalisation left. After all, he argues, if you're not optimistic about the possibility of progress, how can you make any case for aid? There's certainly something odd and dispiriting about the fashion for despair about the possibility of improvement among so many so-called 'progressives'.

I myself am more of an aid sceptic than Kenny seems to be – only last night I met a woman who'd worked in Afghanistan for four years only to conclude that western governments are pouring in so much aid money that it's embedded corruption and destroyed all other economic activity. It's not wasting money on a rent-seeking aid industry that matters so much as examples like this of aid proving actively counter-productive. But that's a different story.

However, I do agree with Kenny's conclusion. GDP is a useful indicator but not one that tells the whole story. A wider view of what constitutes the good life – something for which we can turn to philosophers through the ages – gives us a wider perspective on progress. And the prospect of progress is something well worth believing in.

My attention was caught by an article in the Financial Times this morning about the experimental French rock band Chevreuil.

Yes, this is an unexpected sentence. The reason for the FT's interest is that the musicians have released their latest compositions online for others to download and use as they wish. The project is called The Pirate Organisation. The funding comes from royalties on a book of the same title by Rodolphe Durand and Jean-Philippe Vergne, two business profs (currently only in French, English translation on its way). It tells “the story of capitalism from the perspective of pirates.” Sounds terrific.

The article has an intriguing description of their work looking at the public interest and the relationship between private and public interest – and, in the case of Prof Vergne's PhD thesis, 18th century pirates.

I've long been trying to understand the implications of the way online technologies blur the distinction between private and public. James Boyle's The Public Domain is still the best thing I've read on these issues. But of course there are many other works on piracy both literal and metaphorical, including Peter Leeson's The Invisible Hook (about the economics of actual high seas piracy). Other recommendations?

PS First recommendation, from Max Nathan, is The Pirate's Dilemma by Matt Mason.

The efficient markets hypothesis has so few defenders these days that in a sense Roman Frydman and Michael Goldberg score an easy goal in their new book, Beyond Mechanical Markets. However, their ambition is not just to knock down a hypothesis many people already find implausible, but rather to make a deeper point about the nature of financial markets. This is that no conventional modelling approach can describe how markets behave, including the newly fashionable behavioural models.

The reason lies in our imperfect knowledge. Uncertainty about the assets being traded is profound. Nobody has any idea if a new tech product will succeed or flop, so there is no 'fundamental' share price to be captured by stockmarket trades. Investors and traders are constantly evaluating new pieces of information and trying to make sense of their implications, impossible as this is in a complex and changing world. “Who in the late 1970s could have predicted the phenomenal rise of the personal computer and the internet,” they ask (p179)?

The book does a thorough job, nevertheless, of demolishing what could be described as a hardline rational expectations approach to financial markets. This is the idea that financial markets capture the reality of the world which is thus reflected in prices, give or take random events. I enjoyed their discussion (in Chapter 4) of its logical inconsistencies. If everybody in the market knows the underlying 'truth' there could be no trades; and if you assume that traders hold different views in order for the model to have any trading, then how can they be rational? Some of them must be wrong.

I'm less convinced that Frydman and Goldberg account for the empirical evidence that fund managers never beat the market and that price anomalies are quickly arbitraged away, evidence which implies the truth of a weaker version of rational self-interest. No doubt this was me being slow, but I couldn't see how to fit that evidence with their framework.

The authors then go on to explain that formal behavioural economics models make a similar error, however. These models adopt predictable rules of thumb about investor behaviour when the point is that seriously imperfect information makes financial markets inherently unpredictable. They link this back to Keynes's famous comments on the psychology of markets, his comparison of investing in shares to predicting the popular winner of a beauty contest. Although there's no question that Keynes had some thoughtful things to say about markets, I don't think Frydman and Goldberg's line of argument needs this validation – referring back to the sayings of 'the master' (as per Robert Skidelsky's latest book Keynes: The Return of the Master) is becoming more of a political than an intellectual badge. More interesting are their references to Frank Knight's distinction between risk and 'radical uncertainty (in Risk, Uncertainty and Profit, 1921), and I wish they had made a bit more of this, and its relevance to a non-stationary world – and also of the links between their ideas and Hayek, a creative thinker about the role of information, who is too often ignored because of his kidnapping by one political tendency.

The book ends with some intriguing speculation about imperfect knowledge models and macroeconomics. Macro is, heaven knows, in a sorry state, and I hope the authors will turn their attention to it next.