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Economics, general equilibrium and the Cold War

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I’m well into [amazon_link id=”0691156646″ target=”_blank” ]Finding Equilibrium[/amazon_link] by Till Düppe and E Roy Weintraub, about the parallel proof of existence of general equilibrium by Arrow and Debreu and separately by the less well-known and unacknowledged Lionel McKenzie. OK, it’s a special interest subject, but I’m enjoying the book, which isn’t at all inaccessible or technical.

[amazon_image id=”0691156646″ link=”true” target=”_blank” size=”medium” ]Finding Equilibrium: Arrow, Debreu, McKenzie and the Problem of Scientific Credit[/amazon_image]

Its subject is the allocation of scientific credit. McKenzie’s proof paper was published first, but he did not win the Nobel and is not recognized now as the first person to prove existence using a fixed point theorem. The book also traces in both the personal stories of the three men and the intellectual history of the time (the 1930s and 1940s) the mathematization of economics. None of the men whose histories are described here started out interested in economics – they were mathematicians (Arrow, Debreu) or physicists (McKenzie). The latter seems to have regretted ever after that he didn’t stick with physics.

I’ll do a proper review when I’ve finished. Meanwhile, it’s interesting to note the role John Hicks’s [amazon_link id=”0198282699″ target=”_blank” ]Value and Capital [/amazon_link]played in stimulating the work of at least two of the three subjects of this book. I have a copy on my shelves, bought in 1981, but it has left no trace of having made any impression on me either in my memory or in the form of margin notes. I must confess also that the bits of graduate micro where we had to plough through the general equilibrium proofs left me absolutely cold, and I had the best possible teachers (Frank Hahn and Andreu Mas-Colell). Although the point that the economy is a connected system is clearly important, the mathematical formalism seemed to me then and now worse than irrelevant – possibly dangerous.

My other first impression of this book is how much more persuasive it is in its account of the role of the Cowles Commission than the earlier work by Philip Mirowski (in [amazon_link id=”0521775264″ target=”_blank” ]Machine Dreams: Economics Becomes a Cyborg Science[/amazon_link]).  Duppe and Weintraub reject Mirowski’s argument that the Bourbaki-influenced group of economists at Cowles were inspired by their work for the US military at RAND corporation, although some (including Arrow) certainly spent their summers at RAND in Santa Monica.

Instead, they suggest that the mainly European emigré, mainly socialist scholars at Cowles (then located in Chicago) needed to prove they were not politically motivated. This was in the context of the House Un-American Activities Committee getting into full swing. There was also a wider tension in American universities between the independence of research funded by peer-allocated competitive mechanisms and doing research at other institutes in the national interest. The ambition to stay out of politics was all the more relevant given the formal equivalence of a general equilibrium solution describing a competitive market economy and a centrally planned economy (with full information, of course). There is no better description of this equivalence than Francis Spufford’s marvellous book from a few years ago, [amazon_link id=”0571225241″ target=”_blank” ]Red Plenty[/amazon_link].

[amazon_image id=”0571225241″ link=”true” target=”_blank” size=”medium” ]Red Plenty[/amazon_image]

Anyway, to say the economists needed to avoid trouble by depoliticising their work is miles away from the Mirowski claim that the economics profession, directed by the military, became an active Cold War combatant, a claim Düppe and Weintraub describe as “a mish-mash of political pre-conceptions and historical confusions.”

This is a sub-plot in [amazon_link id=”0691156646″ target=”_blank” ]Finding Equilibrium[/amazon_link], with the main storyline being about the allocation of scientific credit. I’ll do a proper review when I’ve finished.

Order and disorder

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I’ve been looking for the first time in some years at Douglass North’s short book [amazon_link id=”0691145954″ target=”_blank” ]Understanding the Process of Economic Change[/amazon_link]. North won his Nobel for the application of institutional economics to economic history, or in other words at the role played in the shaping of institutions and hence events by transactions costs and property rights.

This book is about how different societies arrive at their set of institutions. In particular, what enabled the historically rare success of the United States in the 20th century in establishing an orderly and thriving society, able to adapt even in the face of conflicts and technological change? And why has this kind of success been so rare in history, given that order seems clearly preferable to disorder?

[amazon_image id=”0691145954″ link=”true” target=”_blank” size=”medium” ]Understanding the Process of Economic Change (The Princeton Economic History of the Western World)[/amazon_image]

His answer lies in the beliefs members of a society hold, especially their beliefs in the legitimacy of their economic and political institutions. The book identifies four conditions for a society to produce order in the face of change. They are:

– citizens have rights that imply limits to the behaviour of officials and politicians;

– there is a constitutional framework that limits the decision-making power of the government;

– property and personal rights are well-defined and legally protected;

– the state credibly commits to upholding these rights, protecting citizens against expropriation by public officials.

This isn’t dissimilar to the conditions set out by Acemoglu and Robinson in [amazon_link id=”1846684307″ target=”_blank” ]Why Nations Fail[/amazon_link] for institutions to be ‘non-extractive’ – and indeed, their book cites North’s work quite extensively.

[amazon_image id=”1846684307″ link=”true” target=”_blank” size=”medium” ]Why Nations Fail: The Origins of Power, Prosperity and Poverty[/amazon_image]

Much of North’s focus here is on how to improve the institutional framework in developing economies, but his criteria are clearly more general. But he ends with a word about the United States: “All societies throughout history have eventually decayed and disappeared. … There is no guarantee that the [US’s] flexible, adaptively efficient institutional structure will persist in the ever more complex novel world we are creating.” I wouldn’t want to forecast anything, but it isn’t obvious at present that order has the upper hand over disorder.

Inside shipping

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I’ve loved reading [amazon_link id=”1846272998″ target=”_blank” ]Deep Sea and Foreign Going[/amazon_link] by Rose George. It’s been out a while – this was the new paperback. It’s a superb piece of reportage by somebody who is obviously a very thorough and careful researcher. The shipping industry fascinates me – it has at least since I read the now-classic [amazon_link id=”0691136408″ target=”_blank” ]The Box[/amazon_link] when it was first published, and realised how interesting and complicated this industry, the circulatory system of the global economy, actually is. As this book’s subtitle puts it, it’s the invisible industry that brings you 90% of everything.

[amazon_image id=”1846272998″ link=”true” target=”_blank” size=”medium” ]Deep Sea and Foreign Going: Inside Shipping, the Invisible Industry That Brings You 90% of Everything[/amazon_image]    [amazon_image id=”0691136408″ link=”true” target=”_blank” size=”medium” ]The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger[/amazon_image]

George covers issues ranging from the economics of freight shipping in general, the flagging out system, the race to the bottom in the workers’ pay and conditions, the surge in piracy in the Indian Ocean and its economics, the damage done to sea life especially whales by the big ships, the rubbish in the oceans,the the carbon footprint of the shipping industry, and more.The piracy chapter is particularly fascinating as a piece of economic analysis, including the bargaining that goes on over hostages – and there are many more of these than you realise, it’s just that a high proportion are Chinese or Indian seafarers.

It includes masses of detail, the sign of a true observer. Why is it still a tradition to knit woolly hats for seamen’s missions? What do marines do on the naval vessels patrolling the Indian Ocean when they’re not doing fighting stuff? How do you spend empty days at sea out of range of mobile masts and the internet? Who needs bribing with what as the vessel makes its way through the Suez Canal? What languages are used in on-board announcements when the crew is as globalised as can be?

Highly recommended, especially as a holiday read, and even more so if you’re off on a boat somewhere.

Well-being and development

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Yesterday I attended the London launch of the annual UNDP Human Development Report – the title this year is [amazon_link id=”9211263689″ target=”_blank” ]Sustaining Human Progress: Reducing vulnerabilities and building resilience[/amazon_link]. The report notes the combination of advances in human development over the years – for most people in most countries – with a strong sense of precariousness in many places. This is not only because of economic uncertainty but also the risk of natural disasters, violence, corruption, ill health, industrial accidents. Poverty leaves people ill-equipped to respond to any of these shocks, and some groups such as the very old or young, or women or minorities, are particularly vulnerable.

One of the panellists was Richard Layard, talking about his new co-authored book [amazon_link id=”1846146054″ target=”_blank” ]Thrive[/amazon_link], which emphasises mental health as an over-looked but vital issue for people’s well-being. In his comments he said mental ill-health was responsible for more misery than unemployment or poverty in the rich countries, and possibly in poor countries too (although I think they are correlated). He described [amazon_link id=”1614271747″ target=”_blank” ]Maslow’s hierarchy of needs[/amazon_link] as “an appalling concept”: a sense of meaning in life is more fundamental than material needs, according to Lord Layard.

He went on to claim that recent well-being research in China shows that the least happy people are those who move from countryside to town, and seemed to be saying this should call into question China’s emphasis on economic growth. While China has certainly paid a high environmental price for industrial growth, and is characterised by great inequality and authoritarian politics, I would certainly challenge the Layard argument at this point. As Khalid Malik, the Director of the HDR pointed out, those discontents who move from countryside to town, to those grim-seeming jobs in factories, don’t want to return to the village.

What’s more, traditional rural societies usually have a gender hierarchy that makes towns far more attractive for women. This point emerged in the recent thoughtful BBC2 programme on garment manufacture in Bangladesh, Clothes to DIe For. Despite the Rana Plaza tragedy, young women still wanted factory jobs.

So why the higher self-reported dissatisfaction by Chinese urban migrants? I don’t know whether the research was able to rule out causality issues like whether the individuals were more dissatisfied and restless to start with, or whether there is something subtle going on with their answers to survey questions.

Of course one of the key attractions of the HDR is that the Human Development Index is exactly a measure that reduces the focus on GDP in favour of an indicator based on [amazon_link id=”0192893300″ target=”_blank” ]Amartya Sen’s concept of ‘capabilities'[/amazon_link], the resources and attributes needed to live a fulfilling life. The top five countries this year are Norway, Australia, Switzerland, Netherlands and the US. If you adjust for income inequality, the US slips 23 places and Germany becomes number 5. The expected quintet of sub-Saharan African countries (Niger, DRC, CAR, Chad and Sierra Leone) are ranked bottom. (Somalia, South Sudan and North Korea would be down there if there were data available.)

Mathematical economics

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An intriguing-looking book has just arrived: [amazon_link id=”0691156646″ target=”_blank” ]Finding Equilibrium: Arrow, Debreu, McKenzie and the problem of scientific credit[/amazon_link] by Till Düppe and Roy Weintraub.

[amazon_image id=”0691156646″ link=”true” target=”_blank” size=”medium” ]Finding Equilibrium: Arrow, Debreu, McKenzie and the Problem of Scientific Credit[/amazon_image]

OK, this is a specialist interest, but it’s about the history of the mathematisation of economics via general equilibrium theory from the mid-20th century. The book looks blessedly free of equations too. I did somewhere write a review of Roy Weintraub’s 2002 book, [amazon_link id=”0822328712″ target=”_blank” ]How Economics Became a Mathematical Science[/amazon_link] and got a rather severe note from him pointing out that I’d made a mistake, so I’m slightly trepidatious about tackling this new one. But the mathematical turn in economics is important to understand. I’m in favour of using mathematical models in economics – indeed, some of the interesting new approaches such as the application if complexity science in macroeconomics would involve more rather than less of it –  but not in favour of only using maths and ignoring institutional and historical detail.