The communication theme has also been on my mind as I prepare to give the Tanner Lectures (pdf) in Oxford on May 18th and 19th. The title is ‘The Public Responsibilities of the Economist’ and I’m finding that – as always – I need to explain that most economists do not do what everyone else thinks. People think economists go on the news/Twitter and pronounce confidently (albeit differently) about growth, austerity, the Euro etc, whereas although macroeconomics is an important function, most working economists are herbivores who spend their days looking at specific markets.

One of my conclusions is that economists need to take far more seriously the responsibility to communicate their subject – we are slow to do so, compared to scientists. As it happened, a column by Michael Burda about the Euro zone sent me today to David Hume’s Essays Moral, Political and Literary (online here). In his essay On Essay Writing, he divides people into two categories, the learned and the conversible – academics and the chattering classes. And he says:

“‘Tis with great Pleasure I observe, That Men of Letters, in this Age, have lost, in a great Measure, that Shyness and Bashfulness of Temper, which kept them at a Distance from Mankind; and, at the same Time, That Men of the World are proud of borrowing from Books their most agreeable Topics of Conversation. ‘Tis to be hop’d, that this League betwixt the learned and conversible Worlds, which is so happily begun, will be still farther improv’d to their mutual Advantage; and to that End, I know nothing more advantageous than such Essays as these with which I endeavour to entertain the Public. In this View, I cannot but consider myself as a Kind of Resident or Ambassador from the Dominions of Learning to those of Conversation; and shall think it my constant Duty to promote a good Correspondence betwixt these two States, which have so great a Dependence on each other. I shall give Intelligence to the Learned of whatever passes in Company, and shall endeavour to import into Company whatever Commodities I find in my native Country proper for their Use and Entertainment.”

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Looking at their conclusions on managing out of a debt crisis, however, it’s hard to escape the sinking feeling that the scale of the challenge this time around *is* absolutely unprecedented. They note:

1. It is vital to have a full picture of all government indebtedness, not just external, and include the contingent liabilities such as future pensions. (Has anybody done this for Spain or Italy with their rapidly ageing and shrinking populations?)

2. We must remember that very, very few economies grow their way out of a debt crisis, and the realisation that this hope is delusional often brings about a sudden halt to all capital inflows.

3. “Many governments have succumbed to the temptation to inflate away domestic debt.”

4. Banking crises are protracted.

I’m not a macroeconomist, and have been watching the tennis match between pro-stimulus and pro-austerity macro people with the same bemusement as the general population. So although I appreciate that very eminent economists insist there is no danger of inflation given the current weakness of growth, and that it is naive to say QE will result in inflation, I’m still going to turn my thoughts to index-linked and real assets when it comes to pension planning. I suspect I’ll be competing with all those Greeks, Italians, Spaniards and Portuguese looking to park their savings outside their own economies.

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As the book says, “E-money is flying around the country, over the heads of lions and elephants.” Kenya, like other low income countries, is a cash-based economy. This presents special problems for poor people. They are highly vulnerable to theft, can’t save easily – banks and ATMs are few in number and too expensive for small transactions. There are problems I’d never thought of – rats eating notes stashed under a mattress; the temptation of bars passed on the way home with a bit of cash in hand. M-PESA has changed all that. It had 8 million subscribers by the end of 2009 and 15 million – nearly 70% of the adult population – by the start of 2012. Although 60% of Kenya’s electronic transactions are through M-PESA, they account for only 2.5% of the total value, and the balance in all M-PESA accounts combined is just 0.2% of total bank deposits. The system generates millions of very small transactions. It is, as the book says, “A financial tool for the masses.”

This is amazing. Exclusion from formal financial services is one of the barriers keeping people in poverty – they can’t save, can’t keep money securely, have to spend a lot of time and risk a lot of money in making transactions. (See one of the best books on this, Portfolios of the Poor.) The authors of Money, Real Quick write: “Maybe the formal financial sector will never provide what the poor need; maybe they will craft their own quasi-formal, technology-based, shadow banking system.”

The book describes some of the effects of M-PESA in expanding people’s opportunities. There is a living to be made as an agent for the scheme. Small businesses are able to develop a financial track record that qualifies them for loans or working capital. Farmers can pay into a savings scheme to acquire specific types of irrigation equipment. There is even a scheme allowing people in Kibera, the notorious slum, to invest in the stock market via a mutual fund. There is an M-PESA based pension scheme. It is hard to be sure how far the effects of M-PESA reach, but the book suggests they go quite a long way to explaining the economy’s recent success and the burst of innovation and entrepreneurship around Nairobi and other cities.

There are some challenges. The banks were, unsurprisingly, alarmed although the Kenyan authorities seem to have responded to their lobbying with a robust evidence-based assessment, and dismissed the claim that M-PESA had an unfair advantage. But its operator, Safaricom, has a very high market share and there are competition issues – other entrants are now active in the market. This includes other big multinationals. A deeper challenge is the question of what will move low income countries beyond cash – and whether m-transactions schemes can work as well in other countries.

I worked on a report on mobile transactions in general commissioned by Vodafone at the time of M-PESA’s commercial launch, The Transformational Potential of M-Transactions – it can be downloaded here (scroll all the way down to Paper number 6) and I think is still a good overview of the challenges and potential. Dave Birch of Consult Hyperion was involved in the early days too. Money, real quick, is another area of mobile where an important business model innovation has come from Africa (the first and most important was the idea of pre-paid cards). Kenya is way ahead of the UK and US here. The story is an amazing one, well worth reading if you don’t know it.

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It set me to wondering why there hasn’t been more discussion about exactly what the terms of the bailout cover, and why. Because it was a shock to learn – via Paul Seabright’s recent Princeton in Europe lecture – that by 2008 Greece had become the world’s fifth biggest arms importer (pdf), and the second and third biggest customer for German and French arms exporters respectively, presumably in deals financed by German and French banks. Even in 2011, Greece’s defence spending amounted to 3.2% of GDP, the highest in Europe as a share of GDP,  and $1230 per Greek citizen.

(Parochial note – the UK is the world’s 5th biggest arms exporter, Europe’s 3rd behind France and Germany, and our biggest customers by 2008 were the US, India and Chile.)

Stopping the purchases would make a handy dent in the 9% of GDP budget deficit. So surely would ending interest payments – even defaulting – on those loans that financed the earlier arms build-up. If German and French banks were encouraged to extend them by their governments for geopolitical reasons, then those governments should take responsibility and face their own taxpayers, rather than placing the whole burden on Greek taxpayers.

This obviously isn’t the whole story. After all, not that many Greeks are taxpayers (only just over half, it seems), so there is definitely a need for Greece to face up to its own responsibilities too. But I find it odd that the story about Greece’s astonishing military build-up isn’t better known. All I could find is one Guardian article that mentioned it.

The data source is the highly-regarded SIPRI Yearbook. This is one of the shadowy areas of the global economy that economists don’t discuss enough, along with the outright illegal economy – as I touched on at the weekend with a little rant about the vampire cephalopods of the global economy.

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“Pound for pound, more menhaden are pulled from the sea than any other fish species in the continental United States, and 80 percent of the menhaden netted from the Atlantic are the property of a single company.”

The fish are used for feed pellets, cosmetics, fertilizer and many other products, including now Omega-3 fish oil for foods, so they are factory-fished. The business is more or less a monopoly – the company fishing menhaden out of the Atlantic is Omega Protein, coincidentally a significant donor to political campaigns.

The menhaden story isn’t new to me. In 2007 I read a marvellous and terrifying book about their decline, The Most Important Fish in the Sea by H Bruce Franklin.

Omega Protein is a renamed and merged corporate descendant of Zapata Oil, founded in 1952 by the future President George H.W. Bush – conspiracy theory material about it abounds. Omega Protein’s website mentions just a little about conservation of the fish stocks in its sustainability section. It claims:

“STATEMENT: Both the Atlantic and Gulf menhaden populations are overfished.
FICTON: Though this statement is often heard, it is not true. Both the Atlantic and Gulf menhaden are subject to regular stock assessments (a method to estimate the status of the population) conducted by the National Marine Fisheries Service. The most recent assessments (2010 for the Atlantic and 2006 for the Gulf) show that menhaden are not overfished and overfishing is not occurring.”

The Washington Monthly article is about exactly these official stock assessments – it’s well worth a read, as is the book.

Just like the banking industry, the story is one of how monopoly always subverts effective regulation (market power always turns into political political power); competition is important for multiple reasons. It’s also always illuminating to see how complex the modern economy is. One of the zillions of components of everyday products turns out to be an unimpressive fish you’ve never heard of.

Most importantly, with menhaden, as with other resources, having accurate data on the stocks is essential to make sure we are using enough – but not too much – to improve our own prosperity and leave at least as much for the next generation.

You probably haven't heard of the menhaden

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If only it were as easy as the kind of people who go into politics deciding they have to act in the public interest. That’s a good start, obviously. However, the book has just one sentence that touches on oligarchy and doesn’t mention the illegal economy at all. New estimates suggest the shadow economy ranges in size from 18% of GDP on average in the EU to 40% in Sub-Saharan Africa, 35% in the post-socialist economies. That’s £1 in every £5 or £3 respectively generated outside the law and the tax system. Activity on this huge scale must be facilitated by both the banking system and by law enforcement turning a blind eye.

And then there are the legal ‘vampire squids’, to apply Matt Taibbi’s brilliant image to the still-in-denial banking industry. The world economy is ententacled by vampire cephalopods, whether operating inside or outside the law. Of course social norms must change, but I fear that won’t be enough.

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Today I turned to the description of 1945′s How To Solve It: A New Aspect of Mathematical Method by George Polya. Apparently it shows how to use the mathematical method to tackle non-mathematical problems, and has never been out of print. I like his advice: “In order to solve this differential equation, you look at it until a solution occurs to you.” Sounds like it would indeed be applicable in many contexts.

Another one that found me was on The Edge of Objectivity: An Essay in the History of Scientific Ideas by Charles Coulston Gillespie, a 1960 volume on the history of science. It seems the author argues that science is the ‘progressive development of more objective, detached, mathematical ways of viewing the world.’

I wonder what he would have made of this interesting article on the tyranny of narratives? In discussion on Twitter yesterday, I think we concluded that one could try to stand outside a specific narrative but it would require empathy rather than reason.

Anyway, peering at the economic and political catastrophe out there in the world, I’ll stay inside the tower of books, at least until my foot gets better.

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Posner makes two arguments about the depression. First, that’s capitalism for you: “The depression is the result of normal business activity in a laissez faire economic regime.” Secondly, the government couldn’t have fixed it: “Laissez faire capitalism failed us, but government allowed the preconditions of depression to develop and wreak havoc with the economy.” But although he argues that the government over-regulated hedge funds, he doesn’t believe they could have averted the crisis and depression.

This is all a bit despairing. Posner’s final line is that problems and uncertainty will hang over the economy for many years to come. I agree that working through the gargantuan debt overhang will be a long and difficult process but – maybe it’s just my natural sunny optimism – find hope in the bits of the economy that don’t fall in to the ‘governments versus markets’ frame. As I often say, the idea of a ‘free’ market is a meaningless abstraction. A market is a process not a thing, and it occurs in a specific institutional setting. There are lots of economic institutions, all kinds of businesses with a range of legal frameworks, social enterprises, mutuals and co-ops, and these will, albeit by necessity, grow over the devastated landscape of the economy. If you want to be cheered, read about this encouraging example of social and institutional innovation in Hebden Bridge and Todmorden. There is a ton of innovation taking place, both the conventional kind and – like this example – the unconventional.

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“I recall telling the Queen, the one person to whom I could unburden myself in complete confidence, during my usual pre-Budget audience with her… that I thought the 1988 Budget would be my last, because the Prime Minister was making the conduct of policy impossible.” (p799)

When he was Chancellor, Alastair Darling, from afar (I’ve not met him in person), seemed nice, obviously competent, but dull. He had obviously been dealt a rough hand in having to deal with the combination of Gordon Brown as his PM and the onset of the financial crisis. A few chapters in to his memoir, Back from the Brink, my respect for him has increased enormously. Despite its rather measured tone, the book has some jaw-dropping material. I quite liked the scene with Fred Goodwin turning up at Mr Darling’s constituency home just before Christmas 2007, bearing a gift-wrapped panettone and a warning about RBS’s need for liquidity.

But most extraordinary (so far) is what happened when Mervyn King told the Treasury Select Committee in 2009 that further fiscal stimulus could not be afforded. Mr Darling, watching it live on TV from his office, was – not surprisingly – furious. Gordon Brown was so apoplectic, however, that he phoned: “He asked me what I was going to do about it and suggested that I should go in and stop him there and then.” One can’t begin to imagine the scene, and the results, mid-financial crisis, had the Chancellor of the Exchequer stormed into a select committee hearing with the Governor of the Bank of England, as it was being televised, to stop proceedings. What would the Queen have said?

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“I don’t believe in panicking before it’s absolutely necessary but I came close to considering it on the morning of 7 October 2008.”

I wonder how the various European presidents, premiers and finance ministers are feeling right now? You know, thinking about the brink they are all peering over the edge of this week, I’m feeling a much greater sense of equanimity about my own challenges.

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