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Economists and refractory wild beasts

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This morning I was grazing through [amazon_link id=”B000UWHGDM” target=”_blank” ]The New Economics: Keynes’ Influence on Theory and Public Policy[/amazon_link] edited by Seymour Harris, a collection of essays published shortly after Keynes’s death giving an early evaluation of the great man’s influence.

[amazon_image id=”B0012UV96Q” link=”true” target=”_blank” size=”medium” ]The new economics ~ Keynes’ influence on theory and public policy[/amazon_image]

The biographical essay by Joseph Schumpeter has this marvellous line:

“He had no taste for politics, but he had less than no taste for patient routine work and for breaking in, by gentle arts, that refractory wild beast, the politician.”

(I also like Schumpeter’s further description of him as: “A formidable controversialist whom nobody could overlook, everybody respected, and some liked.”)

By coincidence, I used a Keynes quotation recently in a presentation myself:

“There is nothing a government hates more than to be well-informed; for it makes the process of arriving at decisions much more complicated and difficult.”

No doubt he would have hated our present combination of electoral uncertainty and social media hyperbole.

Shouting back at your books

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I’ve been very much enjoying [amazon_link id=”190555964X” target=”_blank” ]The House of Twenty Thousand Books[/amazon_link] by Sasha Abramsky. It’s a memoir of his grandfather Chimen Abramsky, the son of a famous Lithuanian rabbi, who ended up in North London as one of the social centres of post-war left-wing intellectual life. Chimen was a book dealer and seller, as well as a noted historian of socialist and Jewish history. Although he had no degree himself, he became a professor of Jewish studies at UCL and an expert on rare documents for Sotheby’s.

[amazon_image id=”190555964X” link=”true” target=”_blank” size=”medium” ]The House of Twenty Thousand Books[/amazon_image]

The book conveys a wonderful atmosphere of emotional warmth and practical chaos, sociable meals and long, late-night discussions of ideas. It made me try to estimate how many books there are in my house – fewer than 3,000 I reckon, and I’ve been thinking I need to do a big clear-out this holiday.

Still, it underlines again the importance of physical books – 20,000 on a Kindle would be meaningless. You couldn’t have read the notes Karl Marx wrote in the margins of his reading material if he’d been a Kindle-user. Needless to say, I was delighted to read yesterday this fabulous article by Tim Parks on why you need to read a paper book with a pen in hand to scribble on it – it makes it more likely that you will engage with the words, the ideas, if you interact physically with the book. It’s like shouting back at the radio: you have to have a book in your hand to shout at.

 

Times are bad and getting badder?

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The crash of 1921. I certainly didn’t know about it before reading James Grant’s most enjoyable new book, [amazon_link id=”1451686455″ target=”_blank” ]The Forgotten Depression: The Crash That Cured Itself[/amazon_link]. It sent Harry Truman’s haberdashery store in Kansas City into bankruptcy, among many other businesses. It was bad enough that there was even a song about it, Ain’t We Got Fun?: “Times are bad and getting badder/ Still we have fun.”

[amazon_image id=”1451686455″ link=”true” target=”_blank” size=”medium” ]The Forgotten Depression: 1921: The Crash That Cured Itself[/amazon_image]

It is certainly not received wisdom that the downturn of 1921 classes as a depression – and, as the book notes, people were not yet speaking about ‘the economy’, although the terms inflation and deflation were in use. Yet GNP fell 24% in nominal terms in 1921, 9% in real terms. Industrial production fell twice as much in 1920-21 as it did in 2007-9. As an aside, I love the Oskar Morgenstern description here of the aggregate economic statistics as “an opinion in quantitative form.” (I’ve made a note to read Morgenstern’s [amazon_link id=”B00177CAI0″ target=”_blank” ]On The Accuracy of Economic Observations[/amazon_link], which sounds a corker just from the title.)

I learned a lot from [amazon_link id=”1451686455″ target=”_blank” ]The Forgotten Depression[/amazon_link]. The early 1920s are a lacuna, in my knowledge and I think generally in historical overviews, as the period is understandably overshadowed by the Great War and its immediate aftermath beforehand, and the crash of 1929 and the Great Depression afterwards. This book is an excellent supplement from the US perspective of the monetary and central banking pre-history to the period covered in Liaquat Ahamed’s [amazon_link id=”009949308X” target=”_blank” ]Lords of Finance[/amazon_link] about the 1930s. The early history of the Federal Reserve system, the move away from a strict gold standard, and the development of monetary policy – intensely debated – are described here in just the right amount of detail.

As the subtitle makes plain, James Grant (famous of course for his Interest Rate Observer) argues that the absence of any economic stimulus policy in 1921 meant the forgotten depression was acute but brief. It corrected itself in about a year, through the price mechanism – lower prices for goods and labour moved output and employment back up within a relatively short time. The federal budget was balanced. The Federal Reserve raised interest rates rather than lowering them. By contrast in 1929 the government piled in with policies to prevent wages falling and introduced deficit spending – and, as we know, that was anything but a shortlived depression. The reader is clearly meant to carry over the lesson to our own context.

I doubt the argument will change minds, given the entrenched positions people have at present over the contribution of stimulus versus austerity in explaining the paths different economies have taken since 2008. Reading [amazon_link id=”1451686455″ target=”_blank” ]The Forgotten Depression[/amazon_link] made me reflect on the impossibility of identifying empirically cause and effect at the macro level: it is simply impossible to isolate the contributions of specific policies and timings, given not only Milton Friedman’s “long and variable” lags in the effect of monetary (and fiscal) policy but also the importance of initial conditions, specific contextual events, different economic structures, and the sheer complexity of a modern economy (especially compared to that of the 1920s). For example, I’m sure a macroeconomist of a different disposition could make the opposite case to Mr Grant’s, and argue that the hike in interest rates in January 1920 (a 1.25% point rise in one go, to counter the post-war inflationary surge) turned a mild slowdown into a serious downturn.

There is an awful lot to be said for governments not trying to fine tune (or even approximately tune) the economy, given the general sea of uncertainty; equally the possibility of low-activity traps is evidently non-trivial, and it takes co-ordinated action to get out of them. The debt and financial market context in 2008 was so very different from that of 1920-21 that I’m not persuaded there are clear lessons for today from the forgotten depression. As the book concludes: “There are no controlled experiments in economics.”

But that does not mean we have nothing to learn from history – on the contrary, it is only history that teaches proper humility about the limits of economic knowledge and tools. I strongly recommend reading [amazon_link id=”1451686455″ target=”_blank” ]The Forgotten Depression [/amazon_link]- with an open mind – and thinking about its central point about that markets are (sometimes) a highly effective self-correcting process.

Unknown knowns about financial markets

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Robert Shiller’s point, in the new edition of Irrational Exuberance, about the lack of attention paid to the warning signals of bubbles, has been preoccupying me. The attention problem was the theme of a conference at the Toulouse School of Economics a couple of years ago, as well as books like [amazon_link id=”000731731X” target=”_blank” ]The Invisible Gorilla[/amazon_link] by Chris Chabris and Dan Simons.

[amazon_image id=”0691166269″ link=”true” target=”_blank” size=”medium” ]Irrational Exuberance[/amazon_image]   [amazon_image id=”000731731X” link=”true” target=”_blank” size=”medium” ]The Invisible Gorilla[/amazon_image]

Of course, this isn’t just an issue in financial markets. One of the interesting essays in Rebecca Solnit’s [amazon_link id=”1595341986″ target=”_blank” ]Encyclopedia of Trouble and Spaciousness[/amazon_link], which I read recently, riffs on [amazon_link id=”074325239X” target=”_blank” ]Donald Rumsfeld’s[/amazon_link] famous known knowns, known unknowns, and unknown unknowns, adding a fourth category (which she attributes to Slavoj Zizek) of unknown knowns. In her essay, the context is the scale of the US economy and policy devoted to military resources. In the financial markets, it is the existence of bubbles or stresses that exist in the data – in the world – but are not seen.

[amazon_image id=”1595341986″ link=”true” target=”_blank” size=”medium” ]The Encyclopedia of Trouble and Spaciousness[/amazon_image]

Or seen, but not allowed to rise to conscious thought and action. In the year or two before the 2008 crisis, the signals were (with hindsight) very clear – an inverted yield curve, and super-high PE ratios and house price-earnings ratios. Few people paid attention, however. But it’s extraordinarily hard to be just about the only person paying attention to unknown knowns. The Office of Financial Research was intended to be a post-crisis solution to this problem, gathering data and developing visualisations or effective methods of monitoring the markets. I don’t think it has the hoped-for impact.

Next year’s reading

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At the end of the year I’ll do my usual round-up of forthcoming economics and business books, but I can’t resist mentioning a few tantalising titles my own publisher, Princeton University Press, is bringing out next spring. As the author of [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link], I will have to read Dirk Philipsen’s [amazon_link id=”0691166528″ target=”_blank” ]The Little Big Number: How GDP Came to Rule the World and What to Do About It[/amazon_link]. Francois Bourguignon has [amazon_link id=”069116052X” target=”_blank” ]The Globalization of Inequality[/amazon_link] out in June. Ian Morris – author of the fabulous Why the West Rules – For Now – has a new book, [amazon_link id=”0691160392″ target=”_blank” ]Foragers, Farmers and Fossil Fuels: How human values evolve[/amazon_link].

[amazon_image id=”0691166528″ link=”true” target=”_blank” size=”medium” ]The Little Big Number: How GDP Came to Rule the World and What to Do about It[/amazon_image]   [amazon_image id=”0691156794″ link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image]

[amazon_image id=”0691160392″ link=”true” target=”_blank” size=”medium” ]Foragers, Farmers, and Fossil Fuels: How Human Values Evolve (The University Center for Human Values Series)[/amazon_image][amazon_image id=”069116052X” link=”true” target=”_blank” size=”medium” ]The Globalization of Inequality[/amazon_image]

There are many more, in a terrific list, but I also can’t resist mentioning two new books on Benford’s Law, [amazon_link id=”0691163065″ target=”_blank” ]An Introduction to Benford’s Law[/amazon_link] by Arno Berger and Theodore Hill, and Benford’s Law: Theory and Applications edited by Steven Miller. Benford’s Law says the first digits of data sets (such as economic statistics) are not uniformly distributed from one to nine – it helped reveal the fact that Greek economic statistics prior to the crisis were not accurate.