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Reasons to be cheerful – even if American

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A few days ago I reviewed Josef Joffe’s new book, [amazon_link id=”0871404494″ target=”_blank” ]The Myth of America’s Decline[/amazon_link]. It’s partly a history of declinism in the US and partly an argument about the near future based on a compare and contrast between the US and (mainly) China. The new insight I took from it was about the way the threat of decline is used as a promise of political redemption in election campaigns.

In a mildly random way, I followed it up with Charles Kenny’s [amazon_link id=”0465064736″ target=”_blank” ]The Upside of Down: Why the Rise of the Rest is Good for the West[/amazon_link]. I thoroughly enjoyed his previous book, [amazon_link id=”0465020151″ target=”_blank” ]Getting Better[/amazon_link], a cheerful survey of the many ways and many places things (life expectancy, incomes, access to technologies, women’s emancipation….) have improved in many countries in recent decades. There is a similar chapter in the new book, and it made for equally uplifting reading.

[amazon_image id=”0465064736″ link=”true” target=”_blank” size=”medium” ]Upside of Down[/amazon_image]

One of the most telling sections looks at the Democratic Republic of Congo. As Kenny reminds us, it was the setting for Conrad’s [amazon_link id=”1853262404″ target=”_blank” ]Heart of Darkness[/amazon_link], having suffered the depredations of Belgian colonial rule (now there’s a real example of decline from imperial might!). DRC suffered through Mobutu’s rule and a decade-long civil war that killed millions of people. Rape was rife, HIV infection ran amok. This is not a good news story. Even in DRC, though, infant and maternal mortality rates of declined, as has the prevalence of HIV. Two-thirds of children have been vaccinated against diptheria, pertussis and tetanus, and about 40% with symptoms of malaria or pneumonia get medication. School enrollment has risen to match the 1980s level in Kuwait or Honduras. All this on public spending on health and education of $9 per person per year.

The rest of the book moves from the evidence of progress around the world to consider its implications, especially for “us” in the old west. Kenny wants to persuade others that the march of progress is a positive sum game, not least because of the self-fulfilling nature of global economic relations – the belief that flows of goods, capital and people are mutually beneficial is part of what makes them so. I for one agree that we need to think about the global economy in this dynamic, interlinked, increasing returns, non-linear manner, where the choice is broadly speaking between joint contraction and joint expansion over time. So it wasn’t hard for the book to persuade me that western economies will benefit from growth in emerging markets or BRICs, or of the “Folly of Fortress Thinking”, to cite one chapter title. No doubt other readers will be nore inclined to stick with the global race metaphor, where your country is a winner or loser.

I had the most doubts about the chapter on the environmental impact of global growth. The conclusion is upbeat: “With bold but plausible and affordable action, the planet can enjoy continued global growth, convergence in living standards, and two billion more people, all while preserving the global commons.” The chapter ticks off one by one potential environmental limits, and some are less worrying than others. The depletion of minerals for instance, or the scope for agricultural productivity gains and cutting meat consumption. But, thinking back to Mark Lynas’s [amazon_link id=”0007375220″ target=”_blank” ]The God Species[/amazon_link], I think Kenny skates over the question of water too quickly, and is just a bit too cheerful about climate change risks. Of all the environmental questions economics needs to address, the interaction between energy and growth is surely the key one. One aspect of this chapter I did enjoy, though, was the mischievous characterisation of environmentalists: “Once you’ve convinced yourself that the world is on an inevitable course to disaster if … India builds another car factory, then the only logical thing to do … is to sit back, put your TOMS-shod feet up on the couch, and drink microbrewed herbal tea until civilisation collapses.” Fun – but maybe too dismissive of some genuine concern.

Will either this book or Joffe’s persuade Americans and other westerners not to be pessimistic? Doubtful. The emotional power of the narrative, and perhaps its political usefulness as Joffe argues, will sustain the declinists. I’m sure people will read [amazon_link id=”0465064736″ target=”_blank” ]The Upside of Down[/amazon_link] but often to argue with it – the narrative of Anglo-Saxon cheerfulness when the dynamism in the world has moved to Asia has an uphill struggle.

 

 

 

Picturing economic complexity

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People often talk about the greater complexity of modern economies in a descriptive sense. Underlying this is the increased diversity of types of goods and services produced in an economy, and the increasing specialization of production.

Some economists, a growing number perhaps, are using formal complexity models to simulate the behaviour of the economy. I’ve always enjoyed looking at the online Observatory of Economic Complexity, where Ricardo Hausmann and Cesar Hidalgo and their colleagues measure complexity. They have been assembling statistics on the diversity of the production base of many economies, and on the trade, or links, between different national economies.

A physical version of the [amazon_link id=”0262525429″ target=”_blank” ]Atlas of Economic Complexity[/amazon_link] arrived at the weekend and it’s tremendously interesting. “The secret of modernity is that we collectively use large volumes of knowledge, while each one of us only holds bits of it. Society functions because its members form webs that allow them to specialize and share their knowledge with others,” the introduction states. The Atlas measures complexity by counting the range of products countries can make.

Often online data sources are preferable because of the timeliness of their data; but the measurements of interest here will not vary quickly, and it is just as easy to page to a country of interest as to click through. This is a beautiful book, too. It will give me many happy hours of browsing.

[amazon_image id=”0262525429″ link=”true” target=”_blank” size=”medium” ]The Atlas of Economic Complexity: Mapping Paths to Prosperity[/amazon_image]

Life satisfaction, GDP and sense

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Normally, I’m a sunny-natured optimist but every so often I get grumpy. A recent post on Vox made me grumpy – it’s about life satisfaction and GDP. At first I thought I’d ignore it. But this morning I was dipping into A Century in Books, the little volume from 2005 celebrating the centenary of Princeton University Press, and it fell open at the page on Clive Granger’s 1964 book, Spectral Analysis of Economic Time Series. My PhD used a lot of time series econometrics – Mark Watson, now at Princeton, was one of my supervisors. I did my PhD so long ago that it’s now Once Upon A Time, and it is simply depressing that a generation after time series econometrics matured so many economists fail to think about the statistical properties of different kinds of time series data –  like GDP and reported life satisfaction.

(Actually – this is a rant for another time – it’s depressing that so many economists aren’t interested in data and statistics at all, but just expect to be able to download data files and run them through packages that churn out impressive-looking test statistics, without ever pausing to think about how the statistics are constructed or what the regressions might really mean. See Deirdre McCloskey eg [amazon_link id=”1843761742″ target=”_blank” ]Measurement and Meaning in Economics[/amazon_link].)

One of the first things you learn about in time series econometrics is the importance of understanding whether your data have the property of stationarity or not. (It’s on page 3 of my antique textbook, Granger and Newbold’s [amazon_link id=”0199587159″ target=”_blank” ]Forecasting Economic Time Series [/amazon_link] and no doubt equally early in [amazon_link id=”0521634806″ target=”_blank” ]Hendry and Clements[/amazon_link].) In other words, does the series drift over time far away from where it started? If so, it is non-stationary. GDP is like this; it is an analytic construct with no theoretical upper limit. Life satisfaction, however, is a stationary time series – in the World Values Survey it is measured on a scale of 1 to 10 – so it can never go above 10 over time.

So you don’t need to do any fancy econometrics at all to know that the correlation between GDP and life satisfaction over time is zero. You just need to plot the two separately on a chart over time. One is an almost flat line, one goes up a lot.

Or just engage the brain a bit. Over the course of many decades, average height in most developed countries has increased, thanks to better nutrition, healthier mothers, public health measures etc, all the fruit of economic prosperity. There is certainly a link between GDP and height – but you would not expect average height to have increased in proportion with GDP or we’d all be many metres tall; our average height in the UK would have roughly trebled since 1955. Life satisfaction is similarly an organic kind of characteristic and there is no reason at all to expect it to increase proportionately with GDP. That does no mean economic prosperity has no bearing on happiness.

Think of it another way. There has been next to no growth – indeed, falling GDP in some cases – since 2008. Has this really not diminished life satisfaction?

The Vox column gives the appearance of addressing some recent work challenging the idea of no links between GDP and life satisfaction – this by Stevenson and Wolfers is the best known but there are several papers – but it misrepresents them. The Vox authors write: “This last interpretation [ie the no-link interpretation] has been questioned by Deaton (2008) and Stevenson and Wolfers (2008), who claim that there is a positive relation between GDP and life satisfaction in developed countries.” In fact, this is exactly what they do not claim; they agree there is none. However, they find strong evidence for a positive relation between life satisfaction and GDP growth. GDP growth is a stationary time series (ranging between say -10 and +10 percentage points), so this positive correlation can be meaningful.

The psychology of adaptation might well help explain why the level of GDP has no relation to life satisfaction, which could be reflected in the statistical properties. There are equally strong psychological reasons for expecting the change in GDP to be positively associated with life satisfaction.

As Hobbes put it in [amazon_link id=”0199537283″ target=”_blank” ]Leviathan[/amazon_link]: “There is no such Finis Ultimus, no summum bonum as is spoken of in the books of the old Moral Philosophers. Nor can a Man any more live, whose desires are at an end, than he whose senses and Imaginations are at a stand. Felicity is a continual progress of the desire from one object to another.”

GDP is often thought of as just more of the same stuff, and of course how could having one more car or handbag or house make you happier once you already have a certain number? But this is to misunderstand fundamentally what GDP growth indicates (see my forthcoming [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief but Affectionate History[/amazon_link]) – which is in fact variety and innovation, new services and goods, from new medicines to graphene, or the internet, that speak to the fundamental human curiosity identified by the Enlightenment philosophers.

Shipping and statistics

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A link from Twitter this morning to these photos of the now-demolished Taoho Design Office and Studio appealed to my interest in shipping containers, which will be well-known to readers of this blog. The ur-text is of course Marc Levinson’s [amazon_link id=”0691136408″ target=”_blank” ]The Box[/amazon_link], published in 2007, but selected by Bill Gates as one of the best books he read in 2013.

[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]

Parenthetically, I thought the whole list was terrific  – I quite enjoyed William Rosen’s [amazon_link id=”1845951352″ target=”_blank” ]The Most Powerful Idea in the World[/amazon_link]. I’ve not read the others but they all sound interesting. I have read some papers preceding Morten Jerven’s [amazon_link id=”080147860X” target=”_blank” ]Poor Numbers[/amazon_link], although the book wasn’t out in time before I finished writing [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link]. It’s interesting – and encouraging – to see new interest in what the aim is in measuring ‘the economy’. It must be a good thing if the wider world is getting interested in shipping containers and statistics.

[amazon_image id=”1845951352″ link=”true” target=”_blank” size=”medium” ]The Most Powerful Idea in the World: A Story of Steam, Industry and Invention[/amazon_image]

urbanphoto_blog
Ahead of its time: HK architect Tao Ho built eco-friendly office from shipping containers… in 1989 http://t.co/pFufIZWwdy
10/01/2014 02:56

Charles Dickens on economics

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In Household Weekly, 1850:

“Political economy is a mere skeleton unless it has a little human covering, and filling out, a little human bloom upon it and a little human warmth in it.”

Courtesy of Sylvia Nasar’s [amazon_link id=”1841154563″ target=”_blank” ]Grand Pursuit: The story of the people who made modern economics[/amazon_link], which I’m finally reading now it’s out in paperback.

[amazon_image id=”1841154563″ link=”true” target=”_blank” size=”medium” ]Grand Pursuit: The Story of the People Who Made Modern Economics: A Story of Economic Genius[/amazon_image]

In last Saturday’s FT John Sutherland opted for [amazon_link id=”1853262374″ target=”_blank” ]George Eliot[/amazon_link], rather than [amazon_link id=”014143967X” target=”_blank” ]Dickens,[/amazon_link] as the Victorian author with the most to say about poverty and wealth. I’d go for [amazon_link id=”046087781X” target=”_blank” ]George Gissing[/amazon_link] or [amazon_link id=”014043464X” target=”_blank” ]Mrs Gaskell[/amazon_link] or [amazon_link id=”0199538697″ target=”_blank” ]Zola[/amazon_link] or [amazon_link id=”0140444300″ target=”_blank” ]Victor Hugo[/amazon_link] above either.