It's taken me some time to work through Kaushik Basu's Beyond the Invisible Hand: Groundwork for a New Economics. The book has a lot of game theory examples, which I always find rather hard going, especially as the basic strategic insights often seem straightforward. It's quite a philosophical work as well. But the argument is clear enough.

Basu says that the methodological individualism of economics is flawed – and hence the invisible hand doesn't exist. Instead, he argues, people often behave according to social and cultural norms and beliefs, and not according to their rational self-interest. Furthermore, he argues that taking due account of the importance of custom and culture makes it more likely that inequality can be reduced than would be the case if the economy did consist of selfish individuals. He writes: “A fundamental step in broadening the scope of economics is to recognize that the feasible set of actions open to individuals is much larger than our models make it out to be.” (p27) What's more, the feasible set evolves over time.

For example, it's custom that means most of us do not steal other people's wallets when we have the opportunity to do so, or break the traffic laws when there is no policeman around. But the accepted norms can and do change. Most people most of the time do not act as a literal interpretation of rational individualism might suggest.

To emphasize the importance of custom and trust, Basu paints a picture of what an economy actually based on individual selfishness would look like – the nightmare of Kafka's The Trial. “[Kafka] concurs with Smith about the forces that can be unleashed through atomistic individual actions, with no centralized authority, but broadens our canvas of understanding by making us aware that while these can be forces of efficiency, organization and benevolence, they can equally be those of oppression and malignancy.” (p56)

It's an effective way of giving trust its due in the way we think about the economy. But I would make two observations about Basu's argument. One is that the point is by now rather familiar and many economists – maybe even most – would not dispute it. (It really came home for me on reading the 2000 paper by Ed Glaeser and Jose Scheinkman, Non-Market Interactions.) Nevertheless, models based on rational self-interest remain an extremely useful tool. Not only is it illuminating to try to understand departures from their predictions but in fact they often have strong predictive power, for in many circumstances people do behave in the way the conventional models assume.

The second is that Basu is chief economic adviser to India's Ministry of Finance. My experience of and reading about India suggests to me that it is a country very far from suffering from the excesses of deregulated markets under the influence of a conservative economic ideology. On the contrary, India still seems to have an excess of custom and convention rather than an excess of 'free' markets. So I suppose this book is aimed at Anglo-Saxon orthodox economists to try to persuade them, using their own techniques such as game theory, of the error of their ways. But in which case, the book is probably pushing at an open door, as many mainstream economists are already sympathetic to the general point even though remaining unconvinced of the need to ditch completely conventional models. You can hardly pick up a mainstream journal now without finding an article about trust or culture.

So this is another book pitched as an attack on mainstream neoclassical economics that, although far more sophisticated than many in the genre, fails to acknowledge the way the mainstream has developed or the breadth of views within it. Professor Basu obviously doesn't share the political views of some orthodox economists but that doesn't mean we need a new economics.

Rather, what economists need to do is to keep on chipping away at the huge areas of our ignorance about the economy, and especially the macro-economy and financial markets. When economists can disagree so fundamentally, about the deficit for example, we are obviously not in the realm of hard science. For me, that's a situation that cries out for more work, and more data, and, sure, some new modelling approaches. But please can we get over the obsession with overturning all of existing economics before getting on with it?

Tony Judt's final book, The Memory Chalet, is a wonderful and poignant memoir by a member of what looks like one of the luckiest generations ever.

The poignancy stems, of course, from his personal bad luck, the disease which steadily robbed him of all movement including, in the end, the ability to speak. The introduction to the book explains the memory chalet as the device he used to compose these essays alone at night, imprisoned in a quadriplegic body, by linking the words to remembered details of a Swiss hotel where he had spent family holidays in the late 1950s.

The circumstances of its composition, by a man who knew he was dying and would be unable ever again to visit the places he was describing, by themselves would give the book an elegaic tone. This is reinforced by his historian's perspective on the times in which he had lived; the viewpoint of the dying author of Postwar, a wonderful and extraordinary history of the whole of 20th century Europe, must be unique.

I particularly enjoyed the early chapters about growing up in post-war London, the pleasure of spending days wandering around discovering and observing the lie of the land and other people, and the joy of learning instilled by an inspirational teacher. Although Judt was born more than a decade before me, and grew up in a different place, I recognised all of this from my own experience (East Lancashire – see Fay Godwin's and Ted Hughes' Remains of Elmet for those landscapes – and the 60s/70s rather than the 50s, but the same freedom to explore and observe, and the same gift of a place at a direct grant grammar school).

There's little of either economics or history in The Memory Chalet, which is an intensely personal book, although it casts clear light on the good fortune of the baby boom generation through the prism of one man's experiences.

But there is one thought about markets well worth picking up on. Judt says:

“'The market' – like 'dialectical materialism' – is just an abstraction: at once ultra-rational (its argument trumps all) and the acme of unreason (it is not open to question)…… The thrall in which an ideology holds a people is best measured by their collective inability to imagine alternatives.” (p179)

He goes on to compare directly neoliberal ideology about markets with communism, both seen as historically determined inevitabilities in their time and place.

Although in the 30 years since Reagan and Thatcher there has certainly been a strong ideological drive behind the politics of market deregulation, I think we need to distinguish this 'marketism' from the way practising economists think about markets.

For example, the starting point of competition analysis is that every market is different, depending on the specifics of the products and services sold, the businesses engaged in it, their business strategies and even personalities involved, the regulatory framework and so on. To applied economists in consultancies and government, the idea of a 'free market' is certainly an abstraction. This is true also of academic economists in most branches of the discipline. All economists would also insist that there are very many circumstances in which markets do far better than any alternative type of social institution in co-ordinating the needs, preferences and choices of very many individual people, through the information transmitted by prices and quantities – although there would be disagreement about exactly which circumstances.

In other words, 'market' has come to have a political and rhetorical meaning which differs from its economic meaning, and this has turned into a source of tremendous confusion.

There was much else in The Memory Chalet which prompts reflection and remembering. I highly commend it. Here are some other reviews: Peter Preston in The Guardian; Jane Shilling in The Telegraph; Diana Athill in The Literary Review; John Gray in The Daily Beast; John Broening in The Denver Post.

I've just written a review of Deirdre McCloskey's new book Bourgeois Dignity: Why Economics Can't Explain the World for the New Statesman – I'll post the link when it's published. I enjoyed the book, the second of a planned six on the Bourgeois Era. Suffice it to say for now that McCloskey (a) is not as wholly dismissive of economics as the subtitle suggests and (b) would have us rediscover the bourgeois virtues and mindset. Hear, hear.

She did remind me in an early chapter of the nice passage in Frederic Bastiat's Economic Sophisms, the section on  A Negative Railroad, a clever spoof of protectionism. The fact that Bastiat is so beloved of every ultra-free marketeer shouldn't put people with other views off reading him; he's a clear and even witty writer with some very sensible views especially when read in the context of the mercantilism of his own times.

The city of Bordeaux demanded the planned Paris-Madrid line break there to 'create jobs' for porters and hoteliers. Bastiat made the reductio ad absurdum argument that every village along the line should have its own Gare du Nord and Gare du Sud, generating income from the many breaks in the line so created.

“But if Bordeaux has a right to profit from a break in the tracks, and
if this profit is consistent with the public interest, then Angoulême,
Poitiers, Tours, Orléans, and, in fact, all the intermediate points,
including Ruffec, Châtellerault, etc., etc., ought also to demand breaks
in the tracks, on the ground of the general interest—in the interest,
that is, of domestic industry—for the more there are of these breaks in
the line, the greater will be the amount paid for storage, porters, and
cartage at every point along the way. By this means, we shall end by
having a railroad composed of a whole series of breaks in the tracks,
i.e., a negative railroad.

Whatever the protectionists may say, it is no less certain that the
basic principle of restriction is the same as the basic principle of
breaks in the tracks: the sacrifice of the consumer to the producer, of
the end to the means.”

As 2011 approaches, it's time to take stock of what has proven most popular on this blog in 2010, and an eclectic mix it is.

Statistically, two types of post make it to the top 10 (for which the threshold is 1106 unique readers). There are those which gather enough readers in the first few days, and those which have a steady readership month after month. Those which make it onto the list in the former category all date from the later months of the year, as this blog's traffic has grown significantly in 2010. Some of the most popular came as a real surprise and are either gaining traffic from other popular sites or, in one or two cases, must have been recommended for students.

So here they are, most popular first.

1. The economics of bookselling (4354)

2. Sense and nonsense about happiness (3976)

3. Open source industrial organisation (3760)

4. The best five economics books (2693)

5. Review of The Enlightened Economy by Joel Mokyr (2607)

6. The Enlightened Economist's Books of the Year (2551)

7. Review of Losing Control by Stephen King (1861)

8. Economics Made Fun (1513)

9. Review of Fault Lines by Raghuram Rajan (1504)

10. The Well-read Young Economist (1106)

Needless to say, I would never have predicted the top ten. So in 2011 I shall carry on with the random approach to posting here – books that arrive serendipitously from publishers, books that I buy on impulse, those I spot through reviews elsewhere, those I read for my own work, some reflections on the economics of the books business – and in particular in the early part of the year, some tastes of my own forthcoming book The Economics of Enough: How to run the economy as if the future matters. (The Facebook page for it is up but pretty empty at the moment – same link for later, though.)

I'll start on that in the New Year. For now, though, the theme of safeguarding the future and having an eye to our legacy is one worth reflecting on as we celebrate the start of 2011.

I'm winding down by browsing some blogs I haven't visited for a while, and found this very helpful review on the Understanding Society blog of a new book by Marc Blaug and Peter Lloyd, Famous Figures and Diagrams in Economics. Confession time: I find diagrams hard to follow and struggled with them – can't read graphic novels either – although I love graphs and data visualisations. But for those whose understanding is aided by diagrams, the Blaug and Lloyd book sounds excellent.

Time now to make mince pies. Merry Christmas to all!