Category Archives: Main Page

Oh so happy….

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Maybe the universe is trying to send me a message. Last week I read a self-help book (about how to solve problems) that I’d been sent, [amazon_link id=”1250042038″ target=”_blank” ]It’s Not About the Shark[/amazon_link] by David Niven. This past couple of days I’ve read Paul Dolan’s [amazon_link id=”0141977531″ target=”_blank” ]Happiness by Design: Finding pleasure and purpose in everyday life[/amazon_link]. Although somewhat sceptical about happiness economics, I’d heard him talk about his work and thought it sounded interesting. Well, the first half of the book is indeed interesting – more below – but the second half is a self-help manual. Who knows what it says about me, but I’m just not interested. As far as I can tell, not having read many of them, it seems thoroughly sensible.

[amazon_image id=”0141977531″ link=”true” target=”_blank” size=”medium” ]Happiness by Design: Finding Pleasure and Purpose in Everyday Life[/amazon_image]

Back to the first half of the book. There are several things about Dolan’s approach that make it far more plausible than the conventional approach to happiness. One is that he defines ‘happiness’ as the combination of pleasure and a sense of purpose, and not just the first of these as is standard. This must surely be right; and he argues that the evidence indicates people need a mix of both. You then have to read the rest of the book remembering that ‘happiness’ is not just ‘pleasure’.

Another is that he distinguishes people’s retrospective evaluation of their ‘happiness’ from their experience through time, and argues – again, I think convincingly – that the latter is more reliable for empirical research. He therefore prefers the data collected from the day reconstruction method as coming closer to experienced ‘happiness’ rather than the surveys that ask people to evaluate their state: “overall, would you say on a scale of one to six that ….” The evidence suggests that: “The circumstances of your life (income, marital status, age etc) matter much more to your evaluating self, and what you do matters more to your experiencing self.” So for example, unemployment clearly leads to lower evaluations of happiness but makes little difference to people’s DRM responses because mostly being at work is not a pleasurable experience (although it does give people a sense of purpose).

The third point he makes is that: “Your happiness is determined by how you allocate your attention.” Attention is a scarce resource. In place of the conventional approach which seeks to relate inputs (income, health, sunshine, marriage) to the final output, happiness, Dolan sees these inputs as stimuli in competition for your attention, with attention determining how they affect your ‘happiness’. The same inputs (income, health, sunshine, marriage) can lead to a different output depending on your attentional ‘production function’. He suggests that you can change your production function by directing your attention differently (and in the second half offers advice about how to do it). As he notes: “There are surprisingly few researchers who think about happiness in terms of your time use.” But time is the ultimate scarce resource.

This seems plausible, although I don’t know enough of the psychology literature – dating back to [amazon_link id=”1604590661″ target=”_blank” ]William James[/amazon_link] – to really evaluate it. It strikes a chord with me though since attending a couple of years ago a fascinating workshop in Toulouse on the attention question, when it was clear from the way the cognitive scientists and psychologists talked that a standard economics model of competition subject to a budget constraint (brain energy) could offer real insight into thinking about attention.

Books, glorious books

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Book sales have been flattish in the past 12 months, according to various figures reported in the FT. Physical books, that is. The rate of growth of sales of e-books seems to have declined, and e-readers too. Encouragingly, the article reports:

“A recent survey by Nielsen found teenagers prefer print books, with fewer of those aged 13 to 17 buying ebooks than their older peers. It suggested that parents’ preference, or teens’ lack of credit cards for online shopping, could be responsible. “But another explanation may be teens’ penchant for borrowing and sharing books rather than purchasing them, which is easier to do in print,” Nielsen said.”

A better bellwether could be Mark Zuckerberg declaring 2015 the year of the book, sending sales of his first choice, Moses Naim’s [amazon_link id=”0465065694″ target=”_blank” ]The End of Power[/amazon_link], rocketing. His comment on his Facebook page says, as if he’s only just noticed: “Books allow you to fully explore a topic and immerse yourself in a deeper way than most media today.” The book club page has nearly a quarter of a million likes. One hopes they all read most of the titles Zuckerberg chooses – it will be 26 altogether, “with an emphasis on learning about different cultures, beliefs, histories and technologies.”

[amazon_image id=”B00IXQQ6GU” link=”true” target=”_blank” size=”medium” ]The End of Power[/amazon_image]

Gillian Tett says in her column this weekend that 5 million Americans belong to book clubs, and there are 50,000 book clubs in the UK. As I’ve banged on about before, I think publishing has adapted better to the challenge of new technologies than some of the other affected ‘content’ industries, by innovating far more in response to customer demand. There are issues about the supply side of the market. Some entry barriers are clearly lower because of digital technologies, but there is a question about the market power of Amazon and the big publishers (Joshua Gans is the go-to economist on this – here’s his most recent post); and the health (or lack of) of book stores; and also about long-term prospects for earning money as an author – although I’m not sure there was ever a golden age for writers.

Still, the demand side is more than encouraging. The demand for books, in whatever format, is a sign of the desire for understanding in our disordered times. There is a huge demand for understanding, evident in attendance at economics festivals and public lectures and debates, the vitality of online magazines and blogs, and even the appetite to read serious, non-fiction books. Richard Overy’s wonderful book about the 1930s, [amazon_link id=”0141003251″ target=”_blank” ]The Morbid Age[/amazon_link], noted the same phenomenon then.

[amazon_image id=”0141003251″ link=”true” target=”_blank” size=”medium” ]The Morbid Age: Britain and the Crisis of Civilisation, 1919 – 1939[/amazon_image]

The top 1%

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John Kay’s column in the FT on 6 January 2015 is headed: “Rise in US and UK inequality principally due to financialisation and executive pay.” He says: “The rise in inequality in some western countries is principally the result of two interrelated causes: the growth of the finance sector; and the explosion of the remuneration of senior executives. The people who ran big companies were always relatively well paid, but the meaning of “relatively well paid” is now altogether different.” (John’s new book, Other People’s Money, will be published by Profile later this year.)

This is from Ralph Milliband in [amazon_link id=”0850366887″ target=”_blank” ]The State in Capitalist Society[/amazon_link] (1973):

“The most important political fact about advanced capitalist societies…is the continued existence in them of private and ever more concentrated economic power. As a result of that power, the men –owners and controllers –in whose hands it lies enjoy a massive preponderance in society, in the political system, and in the determination of the state’s policy and actions.”

[amazon_image id=”0850366887″ link=”true” target=”_blank” size=”medium” ]The State in Capitalist Society[/amazon_image]

As Orazio Attanasio said at the recent CEPR/Bank of England conference on [amazon_link id=”B00I2WNYJW” target=”_blank” ]Thomas Piketty’s book[/amazon_link], there are two inequality problems, the bottom 10% and the top 1%. The latter are mainly the bankers and CEOs.

Impossibility and elections

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I’ve now read a few more of the essays in [amazon_link id=”1137383585″ target=”_blank” ]Economics for the Curious[/amazon_link], the collection of essays for young economists by the Lindau lecturers. Eric Maskin’s chapter, How Should We Elect Our Leaders, is the most accessible explanation I’ve read of Arrow’s Impossibility theorem in the context of elections, and is particularly interesting reading for anybody in the UK as we face the likelihood of an election outcome even more hung in 2015 than it was in 2010.

[amazon_image id=”1137383585″ link=”true” target=”_blank” size=”medium” ]Economics for the Curious: Inside the Minds of 12 Nobel Laureates[/amazon_image]

The chapter describes Maskin’s work with Partha Dasgupta looking at what voting system best satisfies the other Arrow conditions when the ‘unrestricted domain’ condition is removed by taking account of the fact that voters’ preferences are limited in plausible ways – for example, a left-wing voter will prefer candidates of the left to any candidates of the right. (Sen of course long ago identified the unrestricted domain condition as the least necessary of the Arrow conditions.) In this case, Maskin and Dasgupta prove that majority voting is clearly the best system.

As Maskin concludes here: “Majority rule is used by virtually every democratic legislature in the world for enacting laws. … It is interesting that there is a precise way in which majority rule does a better job than every other electoral method in embodying what we want out of a voting system. So, perhaps the next time your legislature votes in favour of an absurd law,, you can take consolation from the fact that … they at least used the correct method for voting!”

Guest post on the (changing) state of economics

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Bringing About Debate and Change in Economics.

By Peter Smith

The financial crisis has raised serious questions about the validity of mainstream economics and whether it addresses some important aspects of reality. This does suggest that at least some radical changes are needed in the core economic models of ‘how the world really is’. I’d like to suggest that outsiders can have a useful role when change of such a radical kind is needed; at the very least, we may have tools and approaches that economists are not familiar with. History is on my side here: some of Thomas Kuhn’s famous paradigm shifts described in his [amazon_link id=”0226458121″ target=”_blank” ]Structure of Scientific Revolutions[/amazon_link] arose from just this sort of cross-fertilization.

[amazon_image id=”0226458121″ link=”true” target=”_blank” size=”medium” ]The Structure of Scientific Revolutions: 50th Anniversary Edition[/amazon_image]

Getting a productive debate going may not be so easy, however, given the mutual suspicion and hostility between (some) external critics and (some) mainstream economists. The latter have perpetrated some appalling examples of arrogance. Lionel Robbins, in [amazon_link id=”0333370392″ target=”_blank” ]the essay[/amazon_link] that defined (mainstream) economics, claimed it was: “A body of generalizations whose substantial accuracy are open to question only by the ignorant or the perverse.” Much more recently, Robert Skidelsky’s description of economics as ‘a branch of logic’ shows that this tradition of disdain for critics is alive and kicking. (Skidelsky seems to hold the mistaken belief that you cannot arrive at erroneous conclusions using logic.)

In the opposite direction, though, external critics perceive a theme (about the need to reduce the size and role of the state) that runs from undergraduate textbooks and teaching, right through to the formulation of public policy. It appears to unify the discipline and all its members around a body of theory that provides politically-convenient support for laissez-faire – despite having a number of serious flaws that have persisted, un-mended, for many decades (such as the lack of any realistic model of how buyers and sellers get to know the ‘true’ price). What is really going on here?

Our critical instinct is to go into even the earliest stages of contact with academic economists eager to trash this set of ideas – totally missing the point that not all economists are tarred with the same brush. If we, the external critics, imply that all economists are engaged in a conspiracy to suppress our criticism, we brand ourselves as ignorant, and thereby lose potential allies within the profession. (I’m using ‘we’ because my home discipline is management – not sure quite where I belong now.)

In reality, there are many senior academics who have long held deep reservations about the power of markets to optimise anything, and do not subscribe to the old easy certainties about laissez-faire. (Curiously, [amazon_link id=”1907994041″ target=”_blank” ]these reservations[/amazon_link] are almost entirely absent from undergraduate teaching and textbooks.) The profession is still deeply-divided, though, and other eminent academics do still adhere to the old certainties. In an article in The Economist, Robert Lucas claimed that the post-2007 crisis should not be taken as evidence of deep-seated flaws in mainstream economics, because the Efficient Market Hypothesis (EMH) showed that such crises were inherently unforeseeable – this despite the considerable body of evidence against the EMH. (There is a summary of this in Robert Shiller’s [amazon_link id=”0691166269″ target=”_blank” ]Irrational Exuberance[/amazon_link].) At the very least, we are able to see when we are entering a period of great potential instability – the case studies of earlier crises in Paul Krugman’s [amazon_link id=”1846142393″ target=”_blank” ]Return of Depression Economics[/amazon_link] identify some interesting indicators.

[amazon_image id=”0691166269″ link=”true” target=”_blank” size=”medium” ]Irrational Exuberance[/amazon_image]   [amazon_image id=”1846142393″ link=”true” target=”_blank” size=”medium” ]The Return of Depression Economics[/amazon_image]

The profession also includes those who studied economics, years or decades back. They were taught that (mainstream) economics is indeed ‘a body of generalizations whose substantial accuracy are open to question only by the ignorant or the perverse’. A lot of my old colleagues in the major international development organizations belong to this group. With few exceptions, they certainly subscribe to the belief that mainstream economics has got it just about right – as do many economic commentators, notably The Times columnist, Daniel Finkelstein. I am thinking particularly of his encomium (14th Dec 2014) on the late Gary Becker. (Becker was probably the most over-confident advocate of extending mainstream economic principles to cover much of human non-market behaviour.)

Finally, there are politicians who want to use the simple messages about the beneficence of market forces to promote an agenda of ‘rolling back the state’ – some from sincere conviction, some in cynical pursuit of personal or factional interests.

Mainstream economics isn’t a single, monolithic body of experts and expertise. Rather than attacking this mirage, we all – meaning internal and external critics alike – should be thinking about a radical review of the mainstream paradigm, and seeking more realistic alternatives. (One thing that my particular school of outsiders can contribute is skills and approaches for managing that process.) That, however, is a much bigger story, one for another day.

Peter blogs as EconomicsEye. Since starting out in the natural sciences, he has worked in project management, and the management of R&D and innovation.