Humanising economists

Cents and Sensibility: What Economics Can Learn From The Humanities, by Gary Saul Morson and Morton Schapiro, made me groan slightly, inwardly, when it arrived at Enlightenment Towers. Did I really want to read another book criticising economics, having just tackled two other recent arrivals in the econ-bashing genre?

In fact, it’s rather a nice argument for economists paying more attention to stories. It also softened me up by starting out by pointing out, quite rightly, that the humanities (‘dehumanities’, the book calls them) have to a large extent brought their decline on themselves by devaluing the idea of great literature, teaching bowdlerised politics and sociology, and generally disappearing down the rabbit hole of critical studies.

Broadly, I agree wholeheartedly with the view that economics, narrowly understood as modelling and empirics, needs to be supplemented by careful attention to history, ideas and culture. This matters because important variables are unquantifiable; because people do not only take decisions on ‘economic’ grounds; and because causes simply can never be identified by looking at macro data, which need narrative to make sense of the numbers. It also matters in a meta way. As this book argues, empathy is vital so researchers understand that some people think differently from them and are not bad or stupid for doing so: “The narrower the set of values entertained and entertainable by our major educational institutions, the less empathetic they become to the population at large, and the more they wind up turning themselves into trainng grounds for one social gruop to maintain its pre-eminence.” A vital message for the academy in our times.

The bulk of the book is devoted to examples of economists who fail to understand the importance of stories and humanity (eg Gary Becker) and those who completely get it (eg Joel Mokyr). I would challenge some of the details or interpretations. For instance, the authors criticise the use of ‘QALYs’ (quality adjusted life years) to evaluate the selection of patients for costly treatments by the UK’s NHS, seemingly imagining that hospitals look at individual patients and take account of their earning potential before deciding to treat them or not. This is an absurd projection of the practices and mores of the US health market on the UK’s non-market system. Still, elsewhere the book makes the very good point that cost benefit analysis is widely tainted by the use of market values only to evaluate benefits – the example is spending to eliminate the parasitic disease of river blindness in sub-Saharan Africa, prevalent in poor areas where people do not earn much – meaning the value of the project hard to demonstrate to donors.

The moral of the book, for economists, is read more history, or novels even. For researchers in the humanities – well, maybe that’s their next book, but the advice probably isn’t to become more like economists.

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Is it really curtains for globalisation?

Finbarr Livesey’s From Global to Local: The Making of Things and the End of Globalisation is a terrific read, although I’m not completely persuaded by the argument that the transformation of production by global supply chains will be reversed. In fact, the book gives a nuanced and highly informative account of why firms manufacture what they do where they do – making, too, the entirely valid point that the political context is highly uncertain and we could be seeing not only a retreat from hyper-globalisation but a full-blown canter toward nationalism and protectionism. The world has seen such unwindings before.

The first part of the book describes how the increasing specialisation of manufacturing, enabled by technology and declining transaction costs, led to the development of long cross-border supply chains. It then goes on to roll forward the evolution of both transport/transactions costs and automation, covering issues such as containerisation and shipping costs, the oil price, the move to regional trade deals, and agglomeration economies. These are some of my favourite subjects, and these chapters give a very nice synopsis of the economic issues.

However, one of my queries about the argument arises in the section on agglomeration. The suggestion here is that the economic forces of agglomeration apply to cities in developed economies but perhaps not so much in the emerging markets. “One of the open questions is whether the massive collection of companies making so many things in southern China has become a self-reinforcing cluster, a location with its own internal gravity binding manufacturers to it for a significant time into the future. …. [G]iven the rise of automation and the desire of leading firms to retain design and intellectual property control over their products, some of the clustering forces for places like Guangzhou and Shenzhen may not be as strong as thought at first glance.” My guess – no more than that – is that while automation will lead to some ‘reshoring’, as Livesey suggests, the Chinese manufacturing centres do in fact have some distinctive capabilities: the ability to manufacture to consistent standards on a large scale; unparalleled logistical expertise; and growing R&D/design capabilities in a number of products from clothes design to renewables.

Having said that, the book is very strong in describing the complexity of the production decisions facing manufacturers now, and there is loads of interesting detail. One chapter covers environmental issues, including the now widespread drive to reuse and recycle (IKEA is a nice example here). Another looks at trade policy and politics, and the importance of proximity (hello, Brexiteers!), leading some companies to switch their focus from exporting to markets to owning production assets in those markets: “Government regulations on foreign ownership will become the new trade barrier,” as otherwise companies may not be able to access certain markets at all. There is a chapter about automation and additive manufacturing, and the implications of smaller factories, with lower retooling costs, becoming economically viable. Labour costs will become steadily less decisive as a reason for locating production in an emerging economy (although I think that reason has been over-stated sometimes.)

All in all, Livesey predicts: “[I]t is likely we will see anything from a 20-30% fall in global merchandise trade (services are not affected the same way) over the coming decade.” This is quite a bold prediction, implying a big restructuring of production and diminution in importance of cross-border supply chains, given how much of merchandise trade now consists of components rather than finished products. I’m not sure about this, yet do agree with that the technological, political and economic conditions that shaped the world of global supply chains are changing substantially.

From Global to Local makes a great combination read with Richard Baldwin’s The Great Convergence published earlier this year. They offer two different sets of lenses on the organisation of the world of production. One could add Stephen King’s Grave New World, a pessimistic, big picture perspective on global political economy.

Reflecting on these three recent books, they need to be combined with looking at implications for employment and incomes. As David Autor pointed out in his IFS lecture last week, trade has contributed enormously to the biggest decline in poverty recorded in human history as China has grown – and the loss of jobs, income and status among some (not very numerous) groups of people in the west, a narrow but deep cost of technology & globalisation. We surely need to think much harder about the social and economic welfare implications of current trends, including whose welfare, given how badly prepared economists and politicans were for the implications of past developments. Globalisation and automation started to eat western livelihoods around 1980, and the failure to make sure those who lost out were properly compensated with appropriate policies goes quite a long way to explain today’s politics.

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Some very old truths in economics

I’ve just read through a facsimile edition of William Petty’s Political Arithmetick. Previously I’d dipped into bits and somehow never read through. What’s interesting is how clearly Petty foreshadows some key ideas about economic growth. One is agglomeration economies, which I always assume Marshall was the first to articulate. But no, before 1690 Petty was insisting on the benefits of dense populations, for reasons of economies of scale and specialisation. He writes about the importance of clear title to property, duly enforced by the courts. He is an ardent advocate too for the importance of trade (and hence the need to invest in shipping and naval skills). All this in the context of comparing Britain favourably with France and unfavourably with Holland. Fascinating.

A highlight of my visit to Chetham’s library in Manchester was being able to hold the copy of Political Arithmetick Marx and Engels had read during their period studying there in 1846.

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The past and future of money

I’m very excited about Dave Birch’s new book, Before Babylon, Beyond Bitcoin, for two reasons. One is that it’s full of brilliantly thoughtful (and witty) insights into the way the technology of money plays into social interactions. As Andy Haldane writes in his foreword, “The most interesting issues in economics arise from the intersection – sometimes the collision- between technology and society.”

Dave’s argument is that digital technologies will take us back to the future, using multiple monies in different communities or contexts. I don’t think there’s anyone who knows more than him about the technology of money, including the famous blockchain. And probably nobody either with a better eye for the oddities of monetary history; if you want to learn about Aztec exchange rates, why the Bank of England was still using mediaeval tally sticks in 1826, or the link between Diners’ Club cards and The Exorcist, this is the book for you. The book takes us ‘from money that we understand to money that understands us,’ as the subtitle puts it.

The second reason for excitement is that I commissioned and edited the book in our Perspectives series, but in a new departure it’s a full length rather than a short book. It is of course a follow up to Dave’s previous, bestselling Perspective title, Identity is the New Money.

Two reasons I think Before Babylon, Beyond Bitcoin is a must-purchase! You can read an extract and also order it here.

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Wise and foolish finance

I’ve thoroughly enjoyed reading The Wisdom of Finance by Mihir Desai. It aims to humanise finance in two ways. One is by pointing out to non-finance folk that finance is dealing with inescapable aspects of the human condition: risk and uncertainty, asymmetric information, values, stewardship for the future. The other is by pointing out to finance folk how finance can and should serve society.

The approach is to draw examples from literature and history – and films and TV shows – demonstrating the way financial techniques absolutely permeate life. The cultural references range from The Simpsons to Jane Austen, Euripides to Bob Dylan, linked to recent events in business and the financial markets. The book starts with the fundamentals: insurance against risk, opening with The Maltese Falcon. It goes on to discuss options, valuation, leverage, and M&A.These chapters have lots of examples that could prove useful in the classroom, as well as being an enjoyable read.

The latter part of the book takes a more philosophical turn, and rather than explaining finance to the uninitiated reflects more on the character of the financial sector and the motivations of those who work in it. What drives people to lead highly leveraged personal existences rather than opting for simplicity (taking leverage broadly to mean building interdependence with other people in order to benefit from their skills or resources – and correspondingly owe them commitments in return)? Is it always possible to identify the ‘right’ course of action in a context such as financial failure or takeovers? Here the book quotes Martha Nussbaum:

“To be a good human being is to have a kind of openness to the world, an ability to trust uncertain things beyond your own control that can lead you to be shattered in extreme circumstances, in circumstances for which you are not yourself to blame. And I think that says something very important about the condition of the ethical life. That it is based on a trust in the uncertain, a willingness to be exposed.”

Needless to say, this almost existential openness is not what comes to mind when we think of finance, of Enron, Madoff, the sub-prime frauds. So Desai ends by pondering – without reaching a firm conclusion  –  what makes so many people in the financial markets so unethical, or at least driven by selfishness and greed. He also gives us a wonderful model of an ethical financier. It is Alexandra Bergson in Willa Cather’s O Pioneers!, the homesteader who borrows to invest and brings the land to life. What a great example. I devoured Willa Cather’s books some 30 years ago and had forgotten about them. It sin’t finance that’s good or bad, it’s people.

The Wisdom of Finance ends with a nice afterword pleading for inter-disciplinary alertness, citing C.P.Snow’s famous The Two Cultures and E.O.Wilson’s Conscilience, both excellent books.

All in all, highly recommended, for those who already know a lot about finance, and those who don’t.

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