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Frankenstein’s monster at large

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The possibility that economic theory is ‘performative’ – that the theory creates the reality – has long fascinated me. I talked about it in my Tanner Lectures earlier this year. Donald Mackenzie of Edinburgh University has long related the concept to the financial markets. It was with what I thought was some dramatic hyperbole that I described financial economics as [amazon_link id=”0140623329″ target=”_blank” ]Frankenstein’s Monster[/amazon_link], on the rampage still despite the crisis. Melodramatic because at that time – although I had read Mackenzie’s [amazon_link id=”0262633671″ target=”_blank” ]An Engine Not A Camera: How Financial Models Shape Markets[/amazon_link] and [amazon_link id=”0691138494″ target=”_blank” ]Do Economists Make Markets?[/amazon_link], Robert Harris’s thriller [amazon_link id=”B005EWDAFQ” target=”_blank” ]The Fear Index[/amazon_link], and a few articles about the 2010 Flash Crash, including this one also in Wired, not to mention some regulatory reports and specialist algo trading publications – even so, high frequency trading hasn’t been dominating the headlines.

Now we have had, of course, the Knight Capital meltdown. I’ve also come across some other things well worth reading, among them Scott Patterson’s excellent [amazon_link id=”1847940978″ target=”_blank” ]Dark Pools[/amazon_link] (which I reviewed here),a new Wired feature, Raging Bulls, and among several by Felix Salmon this blog post with an astounding animation showing the growth of high frequency trading. On my list too is Sal Arnuk’s [amazon_link id=”B0085AQS3A” target=”_blank” ]Broken Markets[/amazon_link].

[amazon_image id=”B0085AQS3A” link=”true” target=”_blank” size=”medium” ]Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio[/amazon_image]

I do sincerely hope financial regulators are not too busy fretting about their failures to limit the credit boom to pay attention to the next financial disaster. Algo trading is how it’s going to happen. Besides, as Patterson’s book makes clear, there is no efficiency gain here; this is a zero sum game in which algo traders win and investors (you and me) lose.

[amazon_image id=”1847940978″ link=”true” target=”_blank” size=”medium” ]Dark Pools: The rise of A.I. trading machines and the looming threat to Wall Street[/amazon_image]

Woolly complexity

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It has taken me a while to get round to reading Stuart Kauffman’s [amazon_link id=”0465018882″ target=”_blank” ]Reinventing the Sacred: A New View of Science, Reason and Religion[/amazon_link]. Although I was looking forward to reading one of the gurus of complexity expound on the meaning of life, culture and technology, the mention of religion in the title must have rung some kind of subconscious warning bell. For I found the book an infuriating mix of interesting reflections on complexity – particularly why it should warn us against being too reductive, or locked into interdisciplinary silos – and woolly philosophy. Actually, it’s a book about why science is not only compatible with spirituality but should drive us to spirituality and belief in God. While perfectly happy for anybody else to worry about reconciling science and the sacred, I’m just not that interested in it.

There is a chapter on the economy that skates over the application of evolutionary theory and complexity to economics. This is brief and may be a handy introduction for anyone who knows nothing about this subject. If you do, it will be very familiar. Inevitably for a book with extremely broad scope, it lacks depth.

In terms of the underlying hypothesis about the dangers of being reductive, this book suffers by comparison with another one I’m currently reading, [amazon_link id=”0300188374″ target=”_blank” ]The Master and His Emissary [/amazon_link]by Iain McGilchrist. By contrast to Reinventing the Sacred, it’s a real doorstop of a book, and goes in depth into the human brain as well as many aspects of human culture. It’s a shame – I enjoyed Kauffman’s other book [amazon_link id=”0195095995″ target=”_blank” ]At Home in the Universe: The Search for Laws of Self-Organization and Complexity[/amazon_link], and he has obviously been a massively influential thinker in introducing these ideas to the way we analyse social as well as biological phenomena.

[amazon_image id=”0465018882″ link=”true” target=”_blank” size=”medium” ]Reinventing the Sacred[/amazon_image]

Best economics books – The Enlightened Economist Prize

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The announcement of the shortlist for the FT’s Business Book of the Year is always interesting – tellingly, the article about it in yesterday’s paper had the headline A reading list to reflect loss of faith in capitalism. As ever, I’ve read some, but not all, of the titles, so it adds some interesting new ones to my reading list. Of the shortlist, I’ve reviewed Why Nations Fail, Paper Promises and What Money Can’t Buy.

I’ve gone back through the months since January 2012 to pick out my own longish shortlist for The Enlightened Economist Prize (the criterion is that I happened to read them in the past 12 months, and my non-economics reading is excluded).

The list is:

[amazon_link id=”1612191819″ target=”_blank” ]Debt: The First 5000 Years[/amazon_link] David Graeber

[amazon_link id=”0674057759″ target=”_blank” ]Capitalist Revolutionary: John Maynard Keynes[/amazon_link] Roger Backhouse and Bradley Bateman

[amazon_link id=”0141033576″ target=”_blank” ]Thinking, Fast and Slow[/amazon_link] Daniel Kahneman

[amazon_link id=”0393077489″ target=”_blank” ]Keynes-Hayek: The Clash that Defined Modern Economics[/amazon_link] Nicholas Wapshott

[amazon_link id=”0306818833″ target=”_blank” ]The End of Money [/amazon_link]David Wolman

[amazon_link id=”0099541726″ target=”_blank” ]Treasure Islands: Tax Havens and the Men Who Stole the World[/amazon_link] Nicholas Shaxson

[amazon_link id=”1846684293″ target=”_blank” ]Why Nations Fail: The Origins of Power, Prosperity and Poverty[/amazon_link] Daron Acemoglu and James Robinson

[amazon_link id=”0199794642″ target=”_blank” ]Working Hard, Working Poor: A Global Journey[/amazon_link] Gary Fields

[amazon_link id=”0691147566″ target=”_blank” ]The Long Divergence: How Islamic Law Held Back the Middle East[/amazon_link] Timur Kuran

[amazon_link id=”0300117779″ target=”_blank” ]The New Industrial Revolution: Consumers, Globalization and the End of Mass Production [/amazon_link]Peter Marsh

[amazon_link id=”1906924775″ target=”_blank” ]Economic Fables[/amazon_link] Ariel Rubinstein

[amazon_link id=”0571279201″ target=”_blank” ]Positive Linking: How Networks Can Revolutionise the World[/amazon_link] Paul Ormerod

[amazon_link id=”1847940978″ target=”_blank” ]Dark Pools: The rise of AI trading machines and the looming threat to Wall Street [/amazon_link]Scott Patterson

[amazon_link id=”0691155895″ target=”_blank” ]The Quest for Prosperity; How Developing Economies Can Take Off[/amazon_link] Justin Yifu Lin

The winner of The Enlightened Economist economics book of 2012 will also be announced in September. I can’t offer a cash prize but will be delighted to offer a nice dinner in London to the winning author(s).

The prize – dinner’s on me

More on women and economics

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Recently I posted (Do Women and Economics Mix?) about a new initiative to mentor young women in the world of academic economics. This week Karen Schucan-Bird wrote about her research into women in the social sciences, including economics, on the LSE Impact Blog. She found that in the ‘masculine’ social sciences including economics, women published articles relevant to the REF less than in proportion to their representation:

“Whilst women made up 24 per cent of political scientists in the UK, they only contributed 8 per cent of the articles sampled. In economics women constituted 22 per cent of academics whilst writing 13 per cent of the sampled articles.”

She adds that the gap in economics was not statistically significant, but I assume this reflects the small sample size – as [amazon_link id=”0472067443″ target=”_blank” ]Deirdre McCloskey says[/amazon_link], there’s statistical significance and real significance.

The pattern did not hold in psychology and social policy, where more than 40% of the academics are female, and around the same proportion of the papers in the sample were female-authored.

The fact that there are pronounced differences between different social sciences in this respect suggests that the explanation cannot lie in general academic structures but in features specific to economics and political science. The possible explanations for a lower proportion of women in those fields in the first place seem to be either the intellectual character of the subject, and/or the sociology of the subject and in particular peer effects and promotion channels; while the under-achievement of women in terms of publication surely is the result of the specifics of the REF for those subjects and the way the featured journals are edited? Peer review seems to me as an outsider a seriously flawed process.

Having said all this, I’ve not worked in academia and would be interested in better informed perspectives.

In two minds

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I’m part-way into a book that’s going to take me ages to read – 460 pages of detailed argument in a hardback so heavy that I can only read it in bed resting on a pile of cushions. But I can tell it’s going to be worth the effort. The book is Iain McGilchrist’s [amazon_link id=”0300188374″ target=”_blank” ]The Master and His Emissary: The Divided Brain and the Making of the Western World[/amazon_link]. This is an interim report. (It is out in paperback this autumn, and I might need to get that and return the borrowed hardback – I say this even as a devotee of the physical artefact!)

The book is both heavy-going (because of all the scientific detail) and fascinating. What could be more fascinating than the way the human brain affects what we think and say and do, the way we organise our lives and societies, our culture? The author is a former consultant psychiatrist and expert on neuroimaging, and has also taught English at Oxford. This range of expertise is apt for the theme of the book, the entirely different perspectives and approaches of the two separate hemispheres of the brain. The left is focused, intent on detail, literal, unintuitive and so on, the right looks at the whole, is alert to what is new, looks at the broad rather than the narrow. This contrast is well-known in the popular understanding of brain science, although perhaps over-simplified.

The interesting argument made here is that increasingly in western culture the two halves are fighting each other, rather than working together as they need to. The left hemisphere is winning, moreover, to the detriment of culture and nature. I am still on the first, brain-focused, half of the book, and not yet the second culture-focused, second half. I’m therefore not in a position yet to assess the argument. It is an important one, though. To quote the introduction:

“An increasingly mechanistic, fragmented, decontextualised world, marked by unwarranted optimism mixed with paranoia and a feeling of emptiness has come about, reflecting, I believe, the unopposed action of a dysfunctional left hemisphere.”

And I’m also interested to see if Prof McGilchrist thinks we can help our right hemispheres fight back. An interestingly self-referential task.

[amazon_image id=”0300188374″ link=”true” target=”_blank” size=”medium” ]The Master and His Emissary: The Divided Brain and the Making of the Western World[/amazon_image]