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My brilliant holiday reading

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Cormac O Grada’s [amazon_link id=”0691165351″ target=”_blank” ]Eating People Is Wrong (and other essays on famine) [/amazon_link]proved a good antidote to seasonal over-indulgence. It’s a – perhaps surprisingly – compelling read. I have a proof copy, so will save a review until closer to publication date in April.

[amazon_image id=”0691165351″ link=”true” target=”_blank” size=”medium” ]Eating People Is Wrong, and Other Essays on Famine, Its Past, and Its Future[/amazon_image]

My other holiday read was Elena Ferrante’s [amazon_link id=”1609450787″ target=”_blank” ]My Brilliant Friend[/amazon_link]. I’d never heard of the author until a newspaper feature on her books appeared a few weeks ago, and happened to pick up a copy because it was on the table at the front of Daunts, one of my favourite bookshops. It’s one of the best novels I’ve read. It’s about the specifics of two girls growing up in a tough, violent working class community in mid-20th century Naples. But also, as with all great novels, about the generalities of human life: friendship between girls (even better than Margaret Atwood’s [amazon_link id=”1853811262″ target=”_blank” ]Cat’s Eye[/amazon_link]); relations between men and women; economic and social forces changing the fabric of life; education as a ladder out of poverty and the resulting deracination. [amazon_link id=”1609450787″ target=”_blank” ]My Brilliant Friend[/amazon_link] is the first of a quartet, and the author has three previous novels, so that’s my fiction for 2015 sorted.

[amazon_image id=”1609450787″ link=”true” target=”_blank” size=”medium” ]My Brilliant Friend[/amazon_image]

Rogues and capitalists

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“The whole life I place before myself is money, money, money and what money can make of life,” says Bella in Dickens’ [amazon_link id=”B00ES25UCY” target=”_blank” ]Our Mutual Friend[/amazon_link]. The Victorian novelists wrote a lot about money, not just Dickens, but Mrs Gaskell (remember the bank failure in [amazon_link id=”0199558302″ target=”_blank” ]Cranford[/amazon_link], the exigencies of factory life in [amazon_link id=”0141199725″ target=”_blank” ]Mary Barton[/amazon_link]), George Gissing ([amazon_link id=”0141199938″ target=”_blank” ]New Grub Street[/amazon_link], [amazon_link id=”1491261005″ target=”_blank” ]The Whirlpool[/amazon_link]), Trollope ([amazon_link id=”1853262552″ target=”_blank” ]The Way We Live Now[/amazon_link]) and, across the Channel, [amazon_link id=”0140440178″ target=”_blank” ]Balzac[/amazon_link] (famously referred to by Thomas [amazon_link id=”B00I2WNYJW” target=”_blank” ]Piketty[/amazon_link]), [amazon_link id=”0140444300″ target=”_blank” ]Hugo[/amazon_link], [amazon_link id=”0199538697″ target=”_blank” ]Zola[/amazon_link].

Bella’s line is quoted in Ian Klaus’s [amazon_link id=”0300181949″ target=”_blank” ]Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Capitalism[/amazon_link]. An irresistible title. The book gives an account of the essential role played by trust as capitalist markets developed through the century:

“Here is a fundamental point about free market capitalism and trust within it: without social exclusion or extensive processes of verification, trust is hard to come by. Whereas other risks could be hedged or managed through new assets or new types of insurance, the risk of fraud became more prevalent as the market expanded. Simply put, trust was sometimes a market inadequacy but always a market necessity.”

[amazon_image id=”0300181949″ link=”true” target=”_blank” size=”medium” ]Forging Capitalism: Rogues, Swindlers, Frauds and the Rise of Modern Finance (Yale Series in Economic and Financial History)[/amazon_image]

This central argument is illustrated through a series of brilliant stories about both the evolution of new assets and commercial relationships but also about a series of colourful rogues and swindlers. They played on the importance of reputation to pull off their confidence tricks; in a kind of arms race, new methods of verifying information were devised, such as audits, or detailed prospectuses –  and new audacities were developed by the rogue fraternity. We ended with the modern system of ‘a series of overlapping institutions’ authenticating transactions.

The book starts with Adam Smith’s [amazon_link id=”0140432086″ target=”_blank” ]Wealth of Nations[/amazon_link], noting its pairing with the [amazon_link id=”0143105922″ target=”_blank” ]Theory of Moral Sentiments[/amazon_link]. It ends with Friedrich Hayek’s [amazon_link id=”0415253896″ target=”_blank” ]The Road to Serfdom[/amazon_link], a hymn of praise to markets, arguing that it has to be read alongside [amazon_link id=”041540424X” target=”_blank” ]The Constitution of Liberty[/amazon_link]. Klaus writes: “The greatest intellectual salesmen of free market capitalism all supposed the market would be buttressed by morality. You could not possibly unleash the power of the one without the support of the other.” Unfortunately, of course, that’s just what happened in every period of turbulence in capitalism’s history, including our most recent. Now, just as in the early Victorian era, reputation is everything – because morality and institutions have let us down.

[amazon_image id=”0140432086″ link=”true” target=”_blank” size=”medium” ]The Wealth of Nations: Books I-III[/amazon_image]  [amazon_image id=”0143105922″ link=”true” target=”_blank” size=”medium” ]The Theory of Moral Sentiments (Penguin Classics)[/amazon_image]  [amazon_image id=”0415253896″ link=”true” target=”_blank” size=”medium” ]The Road to Serfdom (Routledge Classics)[/amazon_image]  [amazon_image id=”041540424X” link=”true” target=”_blank” size=”medium” ]The Constitution of Liberty (Routledge Classics)[/amazon_image]

One final thought: will new technologies help bridge the gap? Dave Birch’s [amazon_link id=”1907994122″ target=”_blank” ]Identity is the New Money[/amazon_link] suggests the combination of ubiquitous mobile and social media means they might. Social connection, perhaps asset ownership and provenance, can in principle be verified now in a way the Victorians couldn’t have dreamed of.

[amazon_image id=”1907994122″ link=”true” target=”_blank” size=”medium” ]Identity Is the New Money (Perspectives)[/amazon_image]

Fast and slow thoughts about extended warranties

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Dozing through the early business news this morning, I heard that extended warranties are back in the frame for offering consumers a bad deal (I’ll add the link when the programme is up on the iPlayer). It brought back memories. More than ten years ago (in 2002-3), I was a member of a Competition Commission inquiry into the UK extended warranties market.

For the great majority of consumers, these service or insurance contracts on domestic electrical goods are never a good deal. Appliances are well covered against malfunction by manufacturers’ warranties and UK consumer law, and often against accidental damage by normal domestic insurance policies too; and are anyway not all that prone to breaking down these days. The expected cost of repair bills or replacement is sufficiently low that most people are better off self-insuring (i.e. using their savings). A small number of cash-constrained (i.e. poor) people will benefit from paying for an extended warranty when they have the money upfront, but that’s about it.

At the time on the Competition Commission, we debated whether or not we should ban the sale of the warranties in-store. It was a close call – we decided instead to insist that stores display the warranty price alongside the price of the item so customers had a bit of time to think about it rather than (as was then the norm) being pressed to buy one when paying at the till.

With hindsight, I think we should have banned their sale in stores. Knowing what we now do about behavioural insights – especially how bad people are at assessing probabilities and expected values – would have tipped the decision, I think. The OFT looked at the market again in 2011, and the ombudsman is still saying the market isn’t working well for consumers. Oxera has a nice report about behavioural insights for these products. The right behavioural remedy it alludes to in the conclusion is probably to stop people having to decide under any pressure at all whether or not to buy one – they should do so at home, at leisure, and stores could always send them home with a form or email them a link. Maybe a copy of Kahneman’s [amazon_link id=”0141033576″ target=”_blank” ]Thinking, Fast and Slow[/amazon_link] as well?

[amazon_image id=”0141033576″ link=”true” target=”_blank” size=”medium” ]Thinking, Fast and Slow[/amazon_image]

Eating people is wrong

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A proof copy of Cormac Ó Gráda’s [amazon_link id=”0691165351″ target=”_blank” ]Eating People is Wrong (& other essays on famine, its past and its future)[/amazon_link] has arrived in the post, and it all looks terrific. I’ve skimmed the title essay, the point being that not all famines result in cannibalism, raising the question – why not? What cultural shifts or social norms might account for the different experiences concerning “one of the human race’s darkest secrets.”

[amazon_image id=”0691165351″ link=”true” target=”_blank” size=”medium” ]Eating People Is Wrong, and Other Essays on Famine, Its Past, and Its Future[/amazon_image]

The book ends with a reflection on Amartya Sen’s observation in his famous book [amazon_link id=”0198284632″ target=”_blank” ]Poverty and Famines[/amazon_link] (and again in [amazon_link id=”0192893300″ target=”_blank” ]Development as Freedom[/amazon_link]) that eliminating famine is ‘easy’, but eliminating hunger is not, and we shouldn’t pretend it is so. The task is “constrained by vested interests, by power politics, by poverty, by ignorance, by cynicism and by false analysis.”

Can’t wait to read the bits in the middle. Probably not right after our Christmas lunch.

Inequality, economics and politics – Thomas Piketty at the Bank of England

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On Friday I attended an excellent conference at the Bank of England (organised by the Centre for Economic Policy Research) at which four speakers – Peter Lindert, Jaume Ventura, Orazio Attanasio and Tim Besley – gave presentations on aspects of [amazon_link id=”067443000X” target=”_blank” ]Capital in the 21st Century[/amazon_link], and Thomas Piketty responded to their comments and critiques. The presentations are due to go on the Bank’s website at some stage, although aren’t there yet.

[amazon_image id=”B00I2WNYJW” link=”true” target=”_blank” size=”medium” ]Capital in the Twenty-First Century[/amazon_image]

Peter Lindert drew on material from his forthcoming book with Jeffrey Williamson (and also has a working paper on the Piketty book), to characterise the long-run trends in inequality as the result of ‘lucky’ historical accidents that wipe out concentrations of wealth, combined with policies that help the society stay equal. The period 1910 to the 1970s was the ‘great levelling’, due to wars, and there has subsequently been a fanning out in countries’ experience but in many cases a rise in top incomes. In this, he agrees with Piketty’s book; but disagrees with the famous ‘r>g means rising inequality’ prediction. Demography, technology and politics (mainly education and inheritance tax) – with a role for geography in the case of frontier societies – are his favoured explanations. South Korea, for example, has an inheritance tax of 50%: in principle the heirs of the ailing Lee Kun-Hee of Samsung will be due to pay £4bn in tax when he dies.

Jaume Ventura focussed on the dynamics of economic growth that might explain inequality trends: a u-shaped long-run evolution in the capital-income ratio; the changing components of wealth, with land playing a decreasing part; a not-quite-u-shaped evolution in capital-labour shares (the capital share has risen but is not back to its historic highs); and a stable return to capital of 4-5%. Like Prof Lindert, Prof Ventura does not think the model implied in [amazon_link id=”B00I2WNYJW” target=”_blank” ]Capital in the 21st Century[/amazon_link], and the r>g inequality, stacks up. He argued that the assumptions in the book imply a world of multiple equilibria and cycles or chaotic dynamics, and also that the growth model ignores all the lessons of endogenous growth. He said: “There has been a change in the deep structure of capital in the 21st century.” Bubble-like capital gains now play a large part.

The two final papers moved on from diagnosis to solutions. Orazio Attanasio described the recent research confirming the importance of people’s early years, before the age of 3 and certainly before 10, for their lifetime earnings. Parents’ status and income is important but works through the early effects on a child’s cognitive and non-cognitive abilities. Early experiences even have epigenetic effects. He concluded that the biggest policy problem is the bottom 10% in society, not the top 1%. But also – optimistically – that individuals’ life outcomes can be changed by appropriate early interventions.Prof Attanasio also discussed the optimal level of the top tax rate – recent estimates range from 42% to 86% as the rate that would maximise revenue – to which Thomas Piketty replied that top tax rates should be seen as pollution taxes, the aim being to stop behaviour imposing an externality rather than maximising revenue. However, as 25% of UK income tax comes from the richest 1% (54% from the richest 10%), it would be a bold government that ignored tax revenues.

Tim Besley gave a fascinating talk about the political economy of inequality, referring to his most recent book with Torsten Persson, [amazon_link id=”0691158150″ target=”_blank” ]Pillars of Prosperity[/amazon_link]. He asked, does inequality undermine effective governance? In democracies there is normally thought to be a compact where the rich trade some redistribution in return for security of their property rights. But people don’t mind some kinds of high incomes – footballers vs bankers. And there is no link (looking across countries) between either top (marginal) tax rates and inequality. Quoting Lenin’s [amazon_link id=”014018435X” target=”_blank” ]The State and Revolution[/amazon_link], Prof Besley said there is no empirical support for the frequent claim that the median voter is decisive in political choices: “Democracy for an insignificant minority, democracy for the rich – that is the democracy of capitalist society.” He went on to show evidence that inequality limits the demands for social action, which over time reduces the capacity of the state to act – its legal capacity, fiscal capacity, and capacity to deliver public goods. Finally, he said, there is also evidence that from time to time the values of citizens shift markedly – after the war, for instance, in the overwhelming support for the NHS and welfare state. I couldn’t agree more with his final comment that there are three kinds of economics – the positive, the normative, and political economy.

When I read [amazon_link id=”B00I2WNYJW” target=”_blank” ]Capital in the 21st Century[/amazon_link], I found it hard to work out the growth model implicit in the book, so was reassured that much cleverer economists than me found fault with them. However, as several of the speakers said, that doesn’t make it any less important a book. It has changed the public debate and climate of opinion about inequality, in large part through the long years of hard work giving us the first ever (open) data base of historical figures, the World Top Incomes Database. Jaume Ventura said his advanced macro students have to read it, along with Angus Maddison’s [amazon_link id=”9264022619″ target=”_blank” ]The World Economy: A Millennial Perspective.[/amazon_link] I was also most impressed by Prof Piketty’s openness to the critiques: “Every conclusion in the book is a temporary conclusion, and subject to discussion,” he said.

[amazon_image id=”9264022619″ link=”true” target=”_blank” size=”medium” ]Development Centre Studies The World Economy: Volume 1: A Millennial Perspective and Volume 2: Historical Statistics: v. 1 & 2 combined[/amazon_image]