Author Archives: Diane Coyle

The future of capitalism?

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The Future of Capitalism, Paul Collier’s new book, is not a small subject. In fact, the first half of the book is largely retrospective, looking at how capitalism got into today’s mess. There is a particular focus on the loss of moral compass in the organising structures of collective life – the family, the firm, the state. This echoes a number of authors identifying growing individualism, fed by the ideology of ‘the market’, as a corrosive force progressively undermining the conditions that enable it – Bell’s phrase ‘the cultural contradictions of capitalism‘ encapsulates it neatly.

Collier – a distinguished economist whose career has centred on developing economies –  expresses this critique with eloquence and conviction. He has a particular focus on the role of economic theory in validating self-serving behaviours such as bosses paying themselves hundreds of times more than their workers, and sketches an alternative approach to economics which embeds social norms and social influences on preferences. He blames the utilitarian and Rawlsian approaches to ethics, and advocates the communitarian alternative. I’m not persuaded by communitarianism, but surely you have to be pretty obtuse – a banker, maybe – to disagree with the diagnosis. Nobody thinks capitalism is doing just great at the moment.

It is of course harder to address the challenges than to diagnose them, and in a short book like this you can’t expect a detailed policy agenda. The book identifies three divides to be tackled: between successful global cities and ‘left behind’ places (although he deoesn’t use this term); between the skilled, well-paid, globe-trotting elite and the rest; between the rich and poor countries. It ends with the observation that capitalism is the only economic order capable of creating mass prosperity, but that it has not worked to do so since the 1945-70 period. This skates over the evident failings of postwar capitalism, which created the conditions for the ideological turn of the 1970s: inflation, shoddy nationalised industries, insider-outside labour markets and so on. Still, the suggestion here is that what’s needed is a combination of a rediscovery of ethics by political leaders (I’m not holding my breath on this front) and the shaping of identity around a shared sense of belonging to a place (rather than the more abstract ‘nation’ or identity-politics groupings).

This left me feeling a bit depressed. I can’t shake the feeling, despite only listening to the news while hiding behind the sofa these days, that it will take some cataclysmic event to reset current political dynamics. Another aspect of the turn to individualism in the 1970s was the existence of an intellectual framework on which to hang the political transformation, and I don’t see as yet a sufficiently broad and consistent alternative to the isolated individual, self-interested, rational choice model. Something for us economists to work on – as indeed Collier and others have started to do.

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Lionel Robbins on economics

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I just re-read the famous Lionel Robbins Essay on the Nature and Significance of Economic Science. Every time one reads a book, it’s with new preoccupations and interests. So this time, here’s what jumped out at me:

“Value is a relationship, not a measurment. … It follows that the addition of prices or incomes to form social aggregates is an operation with a very limited meaning.”

“The idea of precise ‘correction’ of price changes over time is illusory.”

For Robbins, economics is essentially price theory. He wrote the essay of course in 1932, just before the development and subsequent rise to prominence of aggregate economic measures and price indices. But I think he was right to underline the pervasiveness of relative price changes and the consequences for aggregation.

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The Enlightened Economist Prize 2018 – the winner

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It’s been a tough decision this year – the longlist was both long and excellent. So it has taken me a while to select a winner. But it is…

Republic of Beliefs – Kaushik Basu (my review here)

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The punchline, as summarized in my review, is: “Outcomes can come about either through formal legislation or through informal social sanctions, although the law might help bring about the self-sustaining edifice of beliefs more readily. But laws that do not direct the economy to one of many possible equilibrium points will not be observed. Hence in societies where there is a good deal of corruption, the law is trying to enforce behaviour among law enforcers that is not in their interests, and so will fail.” It’s a compelling and important book, and very readable.

I can’t resist adding tthree runners up, not least because they probably won’t feature in the usual annual round-ups of books.

Exact Thinking in Demented Times – Karl Sigmund (my review here) – about the intellectual ferment of logical positivism in Vienna, an absorbing intellectual history of a time and place, whose legacy is with us still.

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No Ordinary Woman – Angela Penrose (my review here)

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I knew too little about Edith Penrose before I read this excellent biography. It sent me to reading some of her work for the first time.

Accounting for Slavery – Caitlin Rosenthal (my review here)

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A book I picked up by chance, really, and a fascinating – if disturbing – account of the accounts of the US slaveowning economy, and how the large scale plantations paved the way for manufacturing to operate at scale in the US as well.

A behavioural economics primer

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There are so many books about behavioural economics, including bestsellers like Kahneman’s Thinking Fast and Slow, Thaler’s Misbehaving, Ariely’s Predictably Irrational, and the original Sunstein and Thaler Nudge, you might wonder if we need another. It turns out the answer is yes. Behavioral Economics: Moving Forward by Fabrizio Ghisellini and Beryl Chang is aimed at students rather than a more general audience – it even has a few equations. Its real contribution though is to explain the distinction between the ‘American’ approach, which lists many psychological ‘biases’ and frames them as deviations from the standard rational model, and the ‘German’ approach (ie. Gerd Gigerenzer) which accounts for the well-known ‘behavioural’ behaviours as rational satisficing given a limited attention and brain energy budget.

The first half of the book discusses the shortcomings of the standard rational maximising approach (a bit overdone for my tastes), and explains the behavioural alternative, especially the ‘German’ version, which is presented here in the light of Herbert Simon’s work on satisficing and attention. The second half consists of seven open questions for behavioural research, including how to make sense of the proliferation of apparent ‘biases’, how to deal with time preference, the tensions in ‘libertarian paternalism’ and biased nudgers, and the formation of expectations.

So having started with the same question the authors use to open the book – do we really need another one – I’d agree with them that there is a gap to fill. This is a really useful book for introducing students to behavioural economics and the key research questions in the field, far more so than the pop behavioural literature, excellent as some of it is. Unfortunately, it won’t get widely used given the shocking pricing by the publisher (Palgrave Macmillan) – it must be so frustrating for authors to have a publisher who sets prices only libraries will ever pay (and decreasingly often at that).

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A hymn to expertise

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How often could you say a book about the workings of government departments, even including a Department of Agriculture org chart, is as gripping as a thriller? Michael Lewis is such a teeth-gnashingly good writer that he’s pulled this off with The Fifth Risk. Ostensibly about the chaos the Trump ‘administration’ is bringing to government as it expropriates whatever it can for personal financial benefit, the book is fundamentally a description of and hymn to the vital role of expertise in modern societies.

Expertise, and a strong sense of public service mission. It does so through interviews with a range of experts who have recently left government service – experts on nuclear weapon safety (managed by the Department of Energy), child nutrition (USDA), meteorology (the NOAA in the Commerce Department) and even social science (also in the NOAA, because what was the point of ever more accurate tornado warnings if people didn’t respond to them by evacuating their homes?)

It is, therefore, fundamentally a terrifying book. All these dedicated scientists waited for the new Trump administration to contact them after the election. And waited. And waited some more. Nothing. No interest in governing, in detail, for instance in why a small town storing nuclear waste might poison vast areas of the western United States and the Colorado River if the DoE didn’t spend billions a year on remediating and containing the problem. And of course, the ‘Administration’ gets away with it because so many voters had no interest either. This is where we are.

Anyway, a brilliant book. Do read it.

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