Category Archives: Main Page

Reality versus belief about corporate success

Posted on by

Frank Koller, the author of [amazon_link id=”1610390539″ target=”_blank” ]Spark: How Old Fashioned Values Drive a Twenty-First Century Corporation[/amazon_link], emailed me this week in response to reading (on VoxEU) about the book I edited on the teaching of economics, [amazon_link id=”1907994041″ target=”_blank” ]What’s The Use of Economics? Teaching the Dismal Science After the Crisis[/amazon_link].

Frank’s book is about businesses with no-layoff employment policies, and particularly about a company called Lincoln Electric – I’d never heard of it but it’s the global number one in arc welding. Lincoln has a formal guaranteed employment programme as well as rewarding employees with bonuses and incentives. The company history sets out its longstanding (since 1895) commitment to employees and customers as well as shareholders. According to its latest results, published last week, employees got an average bonus of $33,915, the 79th annual bonus in a row, a bonus pool of $99.3m (the pool normally represents 32% of pre-tax profits).

[amazon_image id=”1610390539″ link=”true” target=”_blank” size=”medium” ]Spark[/amazon_image]

Spark has sold very well but the depressing news is that Lincoln’s CEO John Stropki told Frank that not a single other senior US executive has asked him the secret of the firm’s combination of phenomenal financial success with employment practices so good they sound like something out of a fairy tale. Why the lack of interest? Maybe – and this is where economics comes in – it’s because the reality demonstrated by Lincoln and the handful of other companies with such a strong commitment to what by now seem to be extraordinarily good employment practices is inconsistent with the belief system so many people hold about the way business works and the imperative of free markets. If so, the charge sheet against the narrow version of economics grows even longer.

[amazon_image id=”1907994041″ link=”true” target=”_blank” size=”medium” ]What’s the Use of Economics?: Teaching the Dismal Science After the Crisis[/amazon_image]

Wealth and the dark ages

Posted on by

As my last big book before turning to a beckoning pile of thrillers for the Christmas holiday next week, I started Peter Brown’s [amazon_link id=”069115290X” target=”_blank” ]Through The Eye of a Needle: Wealth, the Fall of Rome and the Making of Christianity in the West, 350-550 AD[/amazon_link]. I know, I know. But it was strongly recommended to me and anyway is a beautifully produced book. I thought, too, that changing attitudes towards the wealthy on the eve of the Dark Ages could turn out to be an unexpectedly topical subject.

[amazon_image id=”069115290X” link=”true” target=”_blank” size=”medium” ]Through the Eye of a Needle: Wealth, the Fall of Rome, and the Making of Christianity in the West, 350-550 AD[/amazon_image]

I must say, though, that Chapter 1 has started in a comically school-masterly way: “In this chapter we will start with general considerations. We will deal first with the distinctive manner in which wealth and social status came together in Roman society. Then we will look at the way in which wealth was taken from the land. After this we will focus on a single century. We will attempt to sketch, inevitably briefly, the structure of upper class society in the Latin West in the fourth century AD….”

That ‘inevitably briefly’ did make me laugh out loud – this is a 759 page book. I will report back in due course. Meanwhile, one of my favourite novels ever evokes the post-Roman west brilliantly, Iain Pears’ [amazon_link id=”0099284588″ target=”_blank” ]The Dream of Scipio[/amazon_link]. His[amazon_link id=”009975181X” target=”_blank” ] An Instance of the Finger Post[/amazon_link] is better-known, but Dream of Scipio is absolutely superb.

[amazon_image id=”0099284588″ link=”true” target=”_blank” size=”medium” ]The Dream Of Scipio[/amazon_image]

Freaks of Fortune

Posted on by

Jonathan Levy’s [amazon_link id=”B00AFS6LXW” target=”_blank” ]Freaks of Fortune: The Emerging World of Capitalism and Risk in America [/amazon_link]is a fascinating book. It is a history of the commodification of risk, the development of life insurance and, in time, the growth of wider markets for risk. Professor Levy, a Princeton historian, portrays the modern risk-based finance industry as the counterpart of the freedom of individuals in a capitalist society to manage their own lives. That responsibility of individuals for their own destiny meant the growth of institutions offering them the tools to do so, and the translation of highly individual risks into standard types of policy or financial instrument.

The early chapters start with the origins of risk management in marine insurance, and how those specific origins shaped early legal precedent in considering whether insurance policies should pay out. A cargo of slaves was considered insurable property whereas a working man who had taken out a policy could not successfully claim against his employer after being badly injured in an accident, because he had voluntarily taken the job, which paid a premium because of the dangers. The book’s descriptions of the historical examples are the best thing about it, revealing as they do patterns of thought so different from our own. It is particularly interesting about the link made between emancipation and the assumption of personal responsibility for risk – including by slave owners making the opposite argument, that slaves need never worry about their future as owners bore all the risks! – although I’m sure there is room for different interpretations of the historical record. (I’m a long way out of my areas of expertise here.)

There is also an interesting section on the early opposition to a secondary market in life assurance policies in the US – one existed then in the UK – and for the same kind of moral arguments that Michael Sandel raises in [amazon_link id=”184614471X” target=”_blank” ]What Money Can’t Buy[/amazon_link]. The need for policy holders to be able to gain some value from their policies (otherwise, why would they not just save money?) led to the early application of actuarial science to calculate surrender values. Indeed, early on most life policies taken out by farmers would benefit their creditors – they were used to raise working capital.The book goes on to trace the shift from a mass of small insurance companies starting up in the 19th century to the machinations of the big trusts at the turn of the century.

The underlying theme of the book is that, if we don’t put our faith in Providence, or rely on a master (whether a Feudal lord, or a slave owner, or indeed a husband), then we will of course seek other means of mitigating life’s risks. Some of these are a constant, such as storms or illness, and financial services have replaced a combination of fatalism and community support. Other risks are inherent to capitalism – “an economic system that thrives of radical uncertainty”, as the author describes it. Mitigating these means capitalism is inherently financial. However, individual responsibility for risks arising from personal choices will always have to be supplemented by collective responsibility, at a minimum by regulation of the financial services industry.

The epilogue points out that there was an era when risk seemed to have been tamed, in the 1960s, and the previously common phrase ‘freaks of fortune’, meaning the unexpected events that cause upheaval in every life, dropped out of use. The phrase lies dormant still, but that moment of stability in capitalism has passed. It is certainly obvious, post-crisis, that the state is the “risk manager of last resort”.

So it’s a fascinating story. I must say that the book was heavy-going despite the masses of terrific stories it tells – I think it’s because one has to chew quite a lot to extract the marrow of the argument, and my brief summary has no doubt not done it justice. Still, it’s worth perservering, with so much food for thought, and the stories are great. I would never have imagined finding a history of life insurance at all interesting, and it turns out to be very much so.

[amazon_image id=”B00AFS6LXW” link=”true” target=”_blank” size=”medium” ]Freaks of Fortune: The Emerging World of Capitalism and Risk in America[/amazon_image]

Culture and capitalism

Posted on by

The obituaries of Albert Hirschman (like this obit in the FT) pointed me to some of his other books, in addition to [amazon_link id=”0674276604″ target=”_blank” ]Exit, Voice and Loyalty[/amazon_link]. I’ll be ordering [amazon_link id=”0691015988″ target=”_blank” ]The Passions and the Interests: Political Arguments for Capitalism Before Its Triumph[/amazon_link], of which the blurb says:

“In this volume, Albert Hirschman reconstructs the intellectual climate of the seventeenth and eighteenth centuries to illuminate the intricate ideological transformation that occurred, wherein the pursuit of material interests –so long condemned as the deadly sin of avarice –was assigned the role of containing the unruly and destructive passions of man”

[amazon_image id=”0691015988″ link=”true” target=”_blank” size=”medium” ]The Passions and the Interests: Political Arguments for Capitalism before Its Triumph[/amazon_image]

More importantly, Deirdre McCloskey cites it in her marvellous book [amazon_link id=”0226556743″ target=”_blank” ]Bourgeois Dignity: Why Economics Can’t Explain the Modern World[/amazon_link], in a section describing the emergence in the 18th century of “the emergence of the economy as an explicit object of concern,” the separation of the economic or commercial sphere from the political and social. Although capitalism is as out of fashion as it has been in a generation, it’s salutary to remember its origins as a positive social and political trend incorporating personal freedom, cultural innovation and material prosperity. As McCloskey put it in her previous book, capitalism is founded on [amazon_link id=”0226556646″ target=”_blank” ]The Bourgeois Virtues[/amazon_link]. Our current problems stem from the severing of market economics from its social roots.

McCloskey’s book has a Ferdinand Bol portrait of late 17th century Dutch wine merchants on the cover. I think I’ll need to go downstairs to ferret out Simon Schama’s [amazon_link id=”0006861369″ target=”_blank” ]The Embarrassment of Riches: An Interpretation of Dutch Culture in the Golden Age[/amazon_link], which I’ve not looked at for ages.

[amazon_image id=”0226556743″ link=”true” target=”_blank” size=”medium” ]Bourgeois Dignity: Why Economics Can’t Explain the Modern World[/amazon_image]

[amazon_image id=”0006861369″ link=”true” target=”_blank” size=”medium” ]The Embarrassment of Riches: An Interpretation of Dutch Culture in the Golden Age[/amazon_image]

Hirschman and the economists

Posted on by

Naturally, the news of Albert Hirschman’s death sent me back to [amazon_link id=”0674276604″ target=”_blank” ]Exit, Voice and Loyalty[/amazon_link].

[amazon_image id=”0674276604″ link=”true” target=”_blank” size=”medium” ]Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations and States[/amazon_image]

The book anticipates why Hirschman was so neglected by mainstream economists over the decades after it was published in 1970. He writes that, first, economists assume rational behaviour, so a firm might start to fail for exogenous reasons, and nothing can be done about that. The ‘agents’ are simply maximising in less favourable circumstances. Secondly, in economic models, it doesn’t matter if a firm fails because of tough competition; individual firms or ‘agents’ have no intrinsic value or status. So economists focus almost entirely on the ‘exit’ mechanism. Yet, as Hirschman writes:

“In a whole gamut of human institutions, from the state to the family, voice, however cumbrous, is all their members normally have to work with.”

Mind you, he noted that in politics too the exit mechanism is also often the focus of debate. As Alex Tabarrok noted on Marginal Revolution yesterday, often voice and exit operate together, rather than as alternatives. And Justin Fox on the HBR blog suggested one reason for neglect of Hirschman’s work is perhaps that the answer to the question, what’s the right balance of exit and voice is ‘it depends on the circumstances.’

Although more than 40 years old now, Exit, Voice and Loyalty is well worth a read. Hirschman was a brilliant economist who, along with others like Herbert Simon, never commanded the attention they deserved from the rest of the profession. He was, as the title of Jerry Adelman’s forthcoming biography puts it, truly a [amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher[/amazon_link].

[amazon_image id=”0691155674″ link=”true” target=”_blank” size=”medium” ]Worldly Philosopher: The Odyssey of Albert O. Hirschman[/amazon_image]