Author Archives: Diane Coyle

The globalization scorecard

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This is not a cheering time for economists – most of us – who favour trade as a means (a technology, if you like) for improving standards of living over time. For the first time in the life time of a middle-aged economist, trade wars at scale have replaced the progressively more open trading environment we grew up with. (And as Rebecca Harding and Jack Harding have written, trade literally seen as a weapon.) An obvious question is whether this political environment is an empirically reasonable backlash against globalization: has globalization – in the form of trade with lower income economies, or offshoring, or a labour replacing direction of technical change – caused income inequality within the western economies to an extent that made it ultimately politically unviable?

This is the question addressed by a short and accessible overview of the empirical literature by Elhanan Helpman, Globalization and Inequality. He surveys the work to date on each of these channels through which globalization might have led to (internal) inequality. (As Branko Milanovic, Francois Bourguignon and others have observed, globalization reduced inequality at the global level. It is the OECD income distribution that was skewed, especially in the US, and elsewhere especially in the 1980s.)

The conclusion is that at the aggregate level, none of the empirical studies can attribute much of the change in income distribution to the forces of globalization: “the surprising result is that rising inequality in recent decades has been predominantly driven by forces other than globalization.” As Helpman notes, aggregates are no comfort to individuals, and there have certainly been trade-related shocks to the jobs and incomes of certain groups of people and places. These localized shocks have contributed to the current political context. The book also ends with the unanswered questions: work to date has looked at the various channels separately, but what is their combined effect? what happens if you include also the effects of international migration, and capital flows? Such interactions might make the whole more than the sum of the parts.

Finally, there is the question of what policy lessons to draw from a vast amount of research? Different countries have responded to globalization shocks in different ways. Trade wars will immiserize everyone, but are there better responses and if so, what? How does the best response vary with context?

Inevitably, there is a lot the book doesn’t cover, including specific thorny issues in recent trade negotations (such as TRIPS, contentious areas of services etc). It sets itself a more tightly defined challenge, and it’s a nice, compact overview of what is and is not known, about the effect of globalization on inequality at the macro level within OECD countries, and the role of economic theory in understanding those processes.

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Imagining the economy

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This week I’ve been reading Uncertain Futures: Imaginaries, Narratives and Calculation in the Economy, edited by Jens Beckert and Richard Bronk. The editors are the authors respectively of Imagined Futures: Fictional Expectations and Capitalist Dynamics and The Romantic Economist: Imagination in Economics, so this essay collection builds on their interest in how the ideas people have about the economy shape the economy. This preoccupation touches on the performativity literature, best exemplified in economics by Donald Mackenzie’s An Engine, not a Camera (although it seems to me the case for performativity is far more compelling in the financial markets than in other domains). Also on some classic works about how we discuss the economy – Deirdre McCloskey’s The Rhetoric of Economics and Albert Hirschman’s The Rhetoric of Reaction.

The majority of contributors to Uncertain Futures are not economists, bringing to bear perspectives from sociology, anthropology, STS, psychology. The economists who contribute are known for their creative thinking – Andrew Haldane is one, with a chapter on agent based modeling at the Bank of England. I fear this means the book won’t get a wide readership among economists. This is a pity. Although the chapters are a mixed bag, I found the section on the role of imagination versus techniques such as net present value appraisals in innovation very interesting, for instance. Innovators and entrepreneurs are hardly homo economicus examplars.

There are signs of interest among more mainstream economists in this territory of ideas. In economic history one can think of the varying perspectives of McCloskey and Joel Mokyr. Narrative economics is becoming a thing, advocated by Robert Shiller and by George Akerlof and Dennis Snower, and there is Akerlof and Rachel Kranton‘s work on identity economics, and Morton and Schapiro’s recent plea to let the humanities inform economics, Cents and Sensibility. I would add also Kaushik Basu’s recent fabulous book The Republic of Beliefs. The eminent Paul Collier has described this emerging body of work as Behavioural Economics 2.0. Where version 1.0 explored fixed behavioural patterns, the frontier now is the social and personal dynamics of collective economic choices.

For Beckert and Bronk, the focus is on the future. In their introduction to the book they are interested in the future orientation of capitalism and how the relentless search for innovations, for new markets, requires an act of imagination. This may be based on evidence and reasoning, but – given the unavoidable uncertainty about the future – requires a mental leap simply not addressed in everyday macroeconomics and finance. “If the expectaions of those operating in innovative markets cannot be based on the rational calculation of probabilities based on past data, how do they form the expectations and beliefs on which their consequential decisions depend? And if we live in a world of radical uncertainty and hence are unable to gravitate to a uniquely rational set of expectations, how do we co-ordinate our actions with one another?”

One means of co-ordination, ironically, is the use of techniques such as NPV or CBA calculations, even though they are presented as ‘objective’. Another means, which some political leaders know instinctively, is the narrative – the moonshot, the glory of the nation or the city. And being future-oriented is fundamental to growth – there’s a very nice, lesser known Paul Krugman paper on the need for expectations about the future to weigh more heavily than habits from the past to deliver growth outcomes.

Anyway, I commend this perspective to economists. This is exciting intellectual territory and seems to me rather important at a time when uncertainty about the future seems more uncertain than ever.

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The long arc of UK productivity

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Nick Crafts has a compact book – based on a series of lectures – about the trajectory of the British economy from the Industrial Revolution to the present. Forging Aahead, Falling Behind and Fighting Back: British Economic Growth from the Industrial Revolution to the Financial Crisis is a very nice and pretty up-to-date summary of the state of knowledge in economic history, combined with Nick’s somewhat idiosyncratic – but highly plausible – view that the seeds of the country’s post-world war 2 relative decline were sown in the institutions that enabled it to perform so well during the 19th century.

The chapters look at successive eras: the 1st Industrial Revolution, the US overtaking in the late 19th century, the Interwar years, the Golden Age, and the recent past. The trends in GDP, labour productivity and total factor productivity growth are set out, comparing Britain to a number of outher countries (mainly the US and Germany). The lens is modern endogenous growth theory, considering the expected returns to innovation and agency problems, and also – importantly for the US part of the story – the importance of market size. The book also makes use of the Hall and Soskice framework of comparative political economy. The argument is that being caught up by other countries was no shame, but being overtaken in absolute income per capita levels by all other comparator countries in the second half of the 20th century reflected significant policy failures.

The policy failures, in Nick’s view, date to the emergence of liberal market economy institutions in the early phases of the Industrial Revolution.  Although understandable at the time – notably the development of equity financing with dispersed shareholdings, rather than bank financing, and decentralized strong craft unions due to the importance of skilled labour for the young technologies – their persistence into the 20th century meant Britain lacked the ‘social capability’ that would have enabled it to take productive advantage of 2nd and 3rd Industrial Revolution technologies. The continental co-ordinated market economies fared better.

The other key policy failure underlined in the book is the weakness of competition policy in the domestic market, combined with the slow removal of barriers to competition from imports due to delayed entry into the European Economic Community (as it was). Postwar British governments protected has-been industries (not growing frontier ones, as some economists would support). And, having long been a leading free trader, this policy leadership was ceded, at least within Europe.

It’s a persuasive account. The one bit of economic history debate I’m aware of that’s not reflected here is the very recent debate between Jane Humphries and Robert Allen about how high real wages actually were during the Industrial Revolution (Allen arguing that high labour costs and cheap coal – ie factor prices – in the UK played a key role at that stage). So the book is a very nice survey of the state of knowledge about productivity and growth. It even ends on a mildly optimistic note that British institutions may be better suited to the distributed digital technologies, albeit pessimism about the prospect of leaving a large scale low barrier competitive market would surely outweigh this. And the bottom line is that the level of productivity and incomes in the UK compared to other leading economies leaves us with plenty of catching up to do.

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Crashed

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Adam Tooze’s much-praised history of global political economy from the period just before the Great Financial Crisis to the present – Crashed: How a Decade of Financial Crises Changed the World – is indeed a terrific read. It’s a detailed (600+ pages) synoptic account of the political forces that enabled a few dozen banks to entwine the world’s economies in an interlinked web of credit at massive scale, and the political reactions to and consequences of the crisis. One might quibble that some parts of the story are sketchier than others, but then it’s always a good sign to be hankering after more of a book rather than less. Making the parts into a convincing whole is a major achievement.

There are several central points the book emphasises. One is the extent to which the dollar underpinned the whole global financial market construct – and consequently the extent to which the Fed bailed out the whole world after the crisis. Another is busting the myth that the crisis was Anglo-Saxon: the continental European banks were in it up to their eyeballs, with equally ineffective regulatory oversight, such that they too had massive maturity mismatches (like the US banks) and also massive currency mismatches (whereas it was all dollars for the US banks). Tooze is also forensically critical of the lack of a coherent European policy response – both the ECB (especially under Trichet) and the German political establishment come in for particular fire. The policy response to the Greek crisis in particular was abysmal – as was clear at the time. It was always apparent, certainly by 2012, that debt restructuring was essential, and that the bailout was for German and French banks more than for Greece.

The book explores the interplay between the financial crisis and geopolitics, particularly the desire of both China and Russia to ensure the transition – already heralded but revealed by the role of the dollar to be exaggerated – from a unipolar to a multipolar world. Above all, it draws the lines from the possibility of the crisis, and the crisis response, to the current political situation: “Though it is hardly a secret that we inhabit a world dominated by business oligopolies, during the crisis and its aftermath this reality and its implications for the priorities of government stood nakedly exposed. It is an unpalatable and explosive truth that democratic politics on both sides of the Atlantic has choked on.”

Quite so. Here in Brexit Britain, those working in the City have by and large continued to draw their large bonuses, retire early, holiday in exotic places, while post-crisis ‘austerity’ due to the way the crisis torpedoed public finances means many fellow citizens need to use food banks and are seeing local services like social care and libraries starved. Whatever you think about the consequences, the anti-establishment protest vote, in the UK and elsewhere, is entirely understandable. I’ve been completely gobsmacked by how little consequence of the crisis there has been for the financial sector and those working in it. The same went for the rest of Europe, creating “the sense that Europe’s welfare state was being subjected to a relentless program of rollback driven by the demands of bankers and bond markets.”

So too in the US. Tooze describes the election of Trump as the “most disorienting event experienced by the American political class in generations.” It seems likely to me to be even more damaging for the United States than Brexit will be for Britain. Disorienting, but really hardly surprising. It isn’t only the lasting, scarring financial, emotional, health costs the crisis inflicted on millions of Americans (“The grief and distress caused by the crisis were forces to be reckoned with”) but also the way the Fed’s crisis response and the Obama administration programs contributed to polarising American politics. This happened elsewhere, too. Inevitably perhaps, during the firefighting technocratic responses took priority over democratic legitimacy. We see the lasting consequences in the (slightly abstract) disdain for ‘experts’.

Nobody comes out of Tooze’s account particularly well, although some fare less badly than others (eg Bernanke vis a vis Trichet). Some readers will disagree with the economic diagnosis – for there are people who believe the austerity was essential, the fiscal bomb having been detonated by the crisis. There is more sympathy for the Syriza government than many of its interlocutors in Brussels, Berlin and Paris would share. There will be too much detail for some readers – it helps to know what haircuts and CDOs and repos are. Nevertheless, ten years on, Crashed is an essential read to understand the state of the world, and a troubling read, thinking ahead to the next ten years.

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The Community of Advantage

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I very much enjoyed reading Robert Sugden’s The Community of Advantage: A Behavioural Economist’s Defence of the Market. It tackles the aspect of behavioural economics that has always troubled me: the presumption that there’s a wise policy-maker who somehow knows better than I do what’s good for me and will act like a government version of Mad Men to non-coercively get me to choose accordingly. In other words, libertarian paternalism is a contradiction in terms, and in reality. In fact, I’m torn because – like many other “experts” –  I do think economists (or doctors, or engineers, or farmers, or nuclear physicists etc) often do know better than most of us what makes for a better outcome. Even in less expert domains, such as the provision of news, it is surely better not to give people exactly what they want, if that’s bias-confirming news rather than impartial and accurate news.

However, Lord Reith and other paternalists didn’t pretend to be ensuring people got what they *really* want, rather than what’s good for them according to the paternalist. As Sugden points out early in this excellent book, most behavioural economics implicitly assumes it’s possible to discern a set of ‘true’ but latent individual preferences, undistorted by the various psychological mechanisms identified in the literature. It addresses policy prescriptions to a benevolent social planner, the policy maker – in other words it takes what’s referred to as “the view from nowhere”, an impartial spectator outside society. This enables a normative assessment of behavioural policies. It’s an appealing idea in many ways, and an admirable effort to take this impartial perspective. But it is of course open to the standard public choice critique and has led (as I argued in my Tanner Lectures some years ago) to bad economic policy choices. Sugden also criticises Sen’s alternative of finding impartiality in the ability of a proposition to withstand reasoned public debate; “I cannot see why I am morally required to justify my private choices by reasoned arguments and to expose those arguments to public scrutiny,” he writes.

Sugden advocates instead a contractarian approach, so rather than asking is aggregate welfare maximized, the question is: “is it in the interest of each individual to accept the rules of that institution, on the condition that everyone else does the same”. The behavioural challenge is devising economic institutions satisfying this condition with respect to individuals who do not know what their preferences are. To translate this into a normative criterion useful for policy, Sugden proposes that: “It is in each individual’s interest to have more opportunity rather than less.” In other words, there is an an analogue to the invisible hand theorem: “The guiding idea is that a well-ordered economy is an institutional framework that allows individuals to co-operate with one another in the pursuit of what they perceive as their common interests.” He traces the approach to Hume’s view of good institutions in a well-ordered society as self-reproducing and self-enforcing conventions – self-enforcing because of mutual advantage, albeit emerging in an evolutionary way in society. Moral reasoning is addressed to individuals rather than a nebulous ‘policymaker’ outside of society.

A couple of technical chapters demonstrate that the contractarian approach is a generalisation of the usual welfare theorems in an exchange economy. The book then turns to policy questions: what kind of regulation can be justified in normative terms if the criterion is expanding individual opportunity (rather than satisfying their ‘true’ latent preferences)? For example, what about someone choosing how much to save for their retirement, a well-known behavioural policy example. Sugden suggests: “Behavioural economists’ propensity to interpret context-dependent preferences [like the opt-out/in pattern] as evidence of self-control problems may be a side-effect of their commitment to the model of the inner rational agent.” He argues that the policy drive to increase personal retirement savings is driven by policy regimes in which pensions are privately provided – so the behavioural policy is there to serve the regime rather than the individual. “A contractarian solution to this problem may require some form of compulsory saving.” In short, the nudge is a fig leaf and the better policy (increasing individuals’ opportunity sets) would be a straightforward regulated contribution.

The term ‘community of advantage’ comes from Mill. Sugden is making an ardent liberal case, while recognising the realities of human psychology. I remain somewhat torn. To go back to Lord Reith, British TV viewers, when asked, are very clear that they prefer watching sport, comedy, movies and soap operas, but they also definitely want their licence fee to support the provision of impartial news, children’s programmes, educational material and other wholemeal stuff. Those preferences are not latent, but rather acknowledge explicitly the mutual as well as the individual benefit. However, Sugden’s approach is very attractive & I’d say The Community of Advantage is a must-read for those interested in behavioural and welfare economics.

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