I’m part way through proofs of a very interesting book, [amazon_link id=”0691151571″ target=”_blank” ]Masters of the Universe: Hayek, Friedman and the Birth of Neoliberal Politics[/amazon_link], by Daniel Stedman Jones. Most visitors to this blog will be familiar with the famous quotation from Keynes (from The General Theory) about practical men being “the slaves of some defunct economist …. some academic scribbler of a few years back.” The point is that when people attain positions of power, they are 25 or 30 years on from the stage at which their intellects and ideas were formed, and pretty much fixed into place.

This new book by Daniel Stedman Jones is about the influence of Hayek, along with Karl Popper and Ludwig von Mises, followed by Milton Friedman and the Chicago School, on the triumph of free market ‘neoliberalism’ from the 1980s on. Although Keynes certainly seemed to have beaten their ideas with his own from the 1940s to mid-70s, they had at least as great an influence as he did from then until the current financial crisis. The author sets out two types of influence by these ‘scribblers’ of the 30s and 40s. The first is the ideas themselves, and the key books: The Road to Serfdom, The Open Society and Its Enemies, Bureaucracy. The second influence is the importance of practical organisation for political impact, through the Mont Pelerin society, think tanks, and political activity. I’ve not yet got to that part of the book.

A full review will follow when it’s closer to publication (in October). But it was interesting to reflect on what founding texts for a new dominant political philosophy have been published recently. I can think of some candidates, although none overwhelming – maybe that’s because one can only identify the key thinkers with hindsight, after the political organisation has proven successful.

Any suggestions for the key texts of the unknown movement that will replace ‘neoliberalism’?

[amazon_image id=”0691151571″ link=”true” target=”_blank” size=”medium” ]Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics[/amazon_image]

Economics is a late starter in the popularisation stakes, but there is a growing abundance of popular economics books now, in the wake of science, mathematics and history. About time, in my view, as economists claim such an important role in public policy, making public understanding of what we are saying vital for legitimacy. And there’s still a long way to go. So the new revised issue of David Smith’s [amazon_link id=”1781250111″ target=”_blank” ]Free Lunch: Easily Digestible Economics[/amazon_link] is very welcome.

It is really clear and accessible, as you would expect from one of the UK’s most distinguished economics journalists. This new edition incorporates issues that have become more pressing since the onset of the financial crisis (although it’s impossible to keep up with events  – Libor hasn’t made it in here). I particularly like the ‘Arguing over Coffee’ section, which looks at controversies in economics and is useful to help readers understand the reasons economists so vigorously disagree with each other on issues such as the effects of taxes, or globalisation.

There are now enough popular economics books that the Journal of Economic Methodology has a forthcoming special issue on them. We will all have our favourites. Tim Harford’s [amazon_link id=”0349119856″ target=”_blank” ]The Undercover Economist[/amazon_link] turned my eldest son into an economist – he is being turned loose on the world of economic consultancy in September. It would be remiss of me not to mention my own [amazon_link id=”1587991470″ target=”_blank” ]Sex, Drugs and Economics [/amazon_link]and [amazon_link id=”0691143161″ target=”_blank” ]The Soulful Science[/amazon_link]. New additions to the catalogue are always welcome, to spread the word, and keep things up to date. Free Lunch is terrific and as Jeff Randall highlights in his comment on it, it “cuts through the mind-numbing waffle” of much economic commentary. Highly recommended for students and general readers.

[amazon_image id=”1781250111″ link=”true” target=”_blank” size=”medium” ]Free Lunch: Easily Digestible Economics[/amazon_image]

As a young financial journalist in the late 1980s, I went to visit the Chicago Board of Trade when it remained an entirely open outcry market. The impact of the noise when trading began after the opening bell, a physical reaction in the pit of the stomach, has stayed with me all these years. In those days, of course, the computer revolution was in its infancy, and all the major markets were open outcry. I don’t think many people outside the financial world appreciate how minor a role humans now play in the financial markets.

Computers do about three-quarters of the trading on US stock markets, a quarter in Europe, and rapidly growing proportions in other asset markets, with this algorithmic trading occurring at intervals of fractions of a second  – so fast that the speed of light is a material barrier to trade, and high frequency traders co-locate their computer servers in the same building as the servers of the exchanges. Asset prices display extreme volatility. The ‘Flash Crash’ was one, but research suggests there are thousands of them, just so fast we don’t notice. The average holding period for shares has dropped from about 4 years in the 1950s to 22 seconds now. The number of companies listing on US stock markets has declined from 530 a year in the 1990s to 126 a year by the late 2000s, and the number of listed companies has fallen from 8,200 in 1997 to about 4,000 by the end of 2010.

[amazon_link id=”1847940978″ target=”_blank” ]Dark Pools[/amazon_link] by Scott Patterson tells the story of the rise of algorithmic trading, and it’s both a fascinating and a completely terrifying tale. The development of computerised trading began as a sort of revenge of the nerds and mavericks against the insiders of the NYSE and Nasdaq, albeit seasoned with the classic greed of the financial markets. The book describes the motivation of Josh Levine, the developer of one of the key early electronic trading systems, as a classic hacker desire for transparency and information. He wanted a fairer, freer market, and the rise of the algorithmic traders was indeed greatly assisted by anti-trust actions against the main markets.

Levine, though, has left finance now. For the titans of the financial markets did what they do when upstarts begin to make headway against them: bought them out. The NYSE and Nasdaq, and major banks like Goldmans and Credit Suisse, acquired the most successful of the computerised traders.

What’s more, as the book explains, successful algorithms trade so well that either they engage in an arms race among themselves for minuscule advantage, or they need to be fed a constant diet of less successful traders from whom they can profit. That would be me and you, either as retail investors or through our pension and mutual funds. The rules of the market enable computers to jump to the head of the queue for trading a particular stock; so if a big investor has placed an order, the algorithmic investor will see it and take advantage of its pre-cognition. The computerised traders are also paid ‘make’ fees by exchanges for providing liquidity, while the ‘takers’ (i.e. you and me again) pay for it. The computers can finally jump around from exchange to exchange, the result of well-intentioned regulation, and use their unique speed to their advantage as well.

In short, this is a rigged market, ineptly regulated, in which the owners of the main electronic trading systems steadily milk money from savers. And algo trading is spreading from stock markets to other assets. There is some evidence (although it is challenged) that the creation of commodity indices traded electronically has contributed to spiking food prices. Today’s FT suggests Goldmans and other mega-banks now want to play an active role in the oil market. I hope the regulators turn them down, but expect they won’t.

There is a fundamental problem of trying to achieve information transparency in an asset market, inherently characterised by at least an asymmetry of perception and probably  often an actual asymmetry of information. It makes the competitive structure of the market all the more important, and [amazon_link id=”1847940978″ target=”_blank” ]Dark Pools[/amazon_link] suggests to me that the anti-trust authorities need to step in again. But that is a slow and uncertain process, and meanwhile the financial system is just not pooling savings to place into productive investments, which will generate a return for savers. On the contrary, it has become a global video game, Final Fantasy Finance, with unfortunate real life side effects. The best bet may be, as Andrew Haldane hinted in one of his recent speeches, to work around the dysfunctional financial ‘markets’ and build new financial institutions such as the peer-to-peer lenders. It will be very important for regulators not to strangle these by throwing up impossible barriers to their growth.

Meanwhile, I highly recommend [amazon_link id=”1847940978″ target=”_blank” ]Dark Pools[/amazon_link]. It is a terrific read, both for a history of high frequency trading well told, and for a different kind of perspective on what’s gone so wrong with finance. If you really want to scare yourself, pair it with Robert Harris’s [amazon_link id=”0099553260″ target=”_blank” ]The Fear Index[/amazon_link], and to think about what to do, turn to the speeches of the Bank of England’s Andrew Haldane and Robert Jenkins.

[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]

A cold has turned my brain to cotton wool over the weekend, but I have been paging through a pamphlet that turned up courtesy of Abe Books, [amazon_link id=”B001OVBYXG” target=”_blank” ]National Income and Expenditure[/amazon_link] by J.E.Meade and Richard Stone. (I’ve got the 4th, 1957 edition; it was first published in 1944.) This is research for my next book, which is about GDP – contain your excitement. Modern national accounts manuals run to hundreds of dense pages. This first, crystal clear, description is 44 pages long.

It is startling, too, to be reminded how much the economy has changed. In 1954, personal consumer expenditure on food amounted to 21% of GNP at market prices, spending on communication services 0.45%. The percentages in 2011 were 5.5% and 1.3% respectively. Spending on clothing is down as a share, spending on entertainment up. We are living in difficult times, but these changed patterns are the measure of prosperity since the first systematic work on national accounts. It’s just as well that what might turn out to be a decade of GDP going backward came after a half-century going forward.

Meade and Stone

I’ve been looking through a book that arrived here yesterday, [amazon_link id=”B008AU9LZM” target=”_blank” ]Affluence & Influence: Economic Inequality and Political Power in America[/amazon_link] by Martin Gilens, a Princeton political scientist. Although I haven’t read it at all carefully, paging through makes it clear that there is important evidence here that in the United States public policies have increasingly been shaped in the interests of the top 1% (not even the 10%) of the income distribution. There does not appear to be any ranting at all, not a vampire squid in sight. This is serious, empirical social science and lots of it, careful multivariate regression analysis.

The conclusion: “The patterns of responsiveness found in previous chapters often corresponded more closely to a plutocracy than a democracy.”

The influence of the rich is sometimes tempered a little by a closely divided Congress and legislative gridlock, and by an approaching Presidential election. Otherwise, the very rich have bought policies, literally – campaign donations prove be the main channel of influence. Professor Gilens is not optimistic about the prospects for campaign finance reform. Yet as he warns:

“Further concentration of political influence among the country’s affluent threatens both the perception and the reality of a shared political community so central to the health of even the modestly democratic republic we currently enjoy.”

So this rather dense-looking work of political science has a sobering message for the United States, and for all of us non-Americans who used to greatly admired what was, once, the world’s leading example of democracy and opportunity.

[amazon_image id=”B008AU9LZM” link=”true” target=”_blank” size=”medium” ]Affluence and Influence: Economic Inequality and Political Power in America[/amazon_image]