Holiday reading

I haven’t posted much recently because I’ve been either on holiday or head down trying to (a) proof read my book Markets, State and People: Economics for Public Policy (out in early 2020!) or (b) catch up on writing various papers.

41tDMjIpEQL._SX329_BO1,204,203,200_But I have read *a lot*. Some excellent mysteries/thrillers: Mick Herron’s Joe Country, The Way of All Flesh by Ambrose Parry, The Divinities by Parker Bilal, Into the Woods by Tana French. Also the Sebastian Faulks novel Paris Echo.

Non-fiction: Last Witnesses by the incomparable Svetlana Alexeivich, Notes to Self by Emily Pine, Map of Another Town and Consider the Oyster by MFK Fisher, Why be Happy When You Could be Normal by Jeanette Winterson, Greetings from Bury Park by Sarfraz Manzoor, Chernobyl by Serhii Plokhy, Range by David Epstein and Extreme Economies by Richard Davies. I’ll review the last two here this week.

Finally I’ve read Capitalism, Alone by Brako Milanovic and Measuring What Counts by Joe Stiglitz, Jean-Paul Fitoussi and Martine Durand. I’ve been commissioned to review these along with the new book by George Soros.

And I have another week of holiday to come so have a pile of paperbacks (below) to take. But meanwhile am reading George Packer’s Our Man, which has started brilliantly.IMG_0540

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The politics of depoliticisation

A while ago I had one of those brilliant dinners when you sit next to someone new and strike up a fascinating conversation. The occasion was the dinner celebrating honorary graduands of Bristol University (a boast – I had the honour of being awarded an honorary degree there this year), and Prof Paddy Ireland, my neighbour at the table, recommended in the course of a fab two-hour conversation, Globalists: The end of empire and the birth of neoliberalism by Quinn Slobodian.

It is indeed a deeply interesting book, a history of what Slobodian terms the Geneva neoliberals – those, including Hayek, who were globalists avant la lettre because they looked back with nostalgia to their youth in the Austro-Hungarian Empire. I hadn’t known that these folks, many based at the Graduate Institute in Geneva, named themselves neoliberals (at the Walter Lippmann Colloque in Paris in 1938) (although this makes it seem all the more absurd to me that some people now apply the n-term to  *all* economists.)

Slobodian emphasises that this school of neoliberals were by no means against a government role in the economy, seeing it however as a matter of setting the framework for a globalised economy. In particular, private property across borders was to be held sacred. The domain of the global economy had to triumph over the domain of national politics. Geneva neoliberalism was a “project of politics and law”, as the ambition was to create a system of governance that would “encase and protect the space of the world economy”. Individual rights, particular investors’ rights, would gain the protection of the courts against potential expropriation.”The ongoing depoliticization of the economic was a continual legal struggle, one that required continual innovation in the creation of institutions capable of safeguarding the space of competition.”

What I found particularly enlightening about this account is the way this particular strand of thought eventually got embedded in world trade rules in the form of the steady expansion of investment protections and third party arbitration. Economists tend to find, not necessarily the arguments against such aspects of trade agreements, but the emotion they arouse, a little hard to understand. I think the historical context helps us.

Another fascinating section covers Hayek’s interest in cybernetics – not so surprising when you think about his views on the role of markets as information-processing devices. Slobodian writes: “Radical in its own right, the neoliberals’ own dream of a new international economic order was a world economy of signals – a vast space of information transmitted in prices and laws.” It reminded me of Chile’s Project Cybersyn in the Allende years (described by Eden Medina in Cybernetic Revolutionaries), the same systemic vision from the left.

As Globalists makes clear, depoliticization – what I’ve termed in another context the ‘separation protocol’ – is a political project too. Its fortunes, having flourished during the mid-80s to mid-2000s, are clearly waning now. Politics is baaaaack, bigtime.

51kcoHzJqyL._SX329_BO1,204,203,200_Globalists: The End of Empire and the Birth of Neoliberalism

And for amusement, me in robes…..EAQsyhCXYAcgXcZ

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The end of capitalism as people knew it

After a week on holiday reading detective fiction, I’ve devoured 1931: Debt, Crisis and the Rise of Hitler by Tobias Straumann. I’d never picked out 1931 as a particularly significant year, knowing nothing about the German banking crisis that year. Yet, the book argues, what hapened “is a story of almost biblical proportions, demonstrating how quickly a situation that seems manageable at first can spin out of control.” Greek tragedy was the comparison that came to my mind: every person doing exactly what they inevitably had to, ending in disaster because of the situation.

The book, which is highly readable, starts with an economist I’d never heard of, ‘The Raven of Zurich’, Felix Somary, the Cassandra who warned of disaster staring as early as January 1930. It didn’t happen for another 18 months, with the collapse of German banks after the Credit Anstalt collapse, so Somary was mocked. But had seen the inevitable consequences of the combination of the Depression, the burden of reparations on Germany, the international imbalances that resulted from the country seeking short term foreign capital, and the efects of consequent repeated rounds of austerity on German politics.

The circumstances were of course highly specific, yet throughout the book, there are alarming parallels with the post-GFC west. Take the Smoot-Hawley tariffs, signed into law by President Hoover despite the fact that over 1000 American economists warned him against doing so. In Germany itself, the parliamentary processes of the already weak Weimar republic were increasingly debased by extremists. The latter, prominently the Nazi party, welcomed the chaos.

By mid-1931, wages and pensions had been cut, unemployment was high and rising, there was no prospect of relief from the burden of reparations or indeed further short term financing to help Germany meet those payment – and then the main banks started to topple and experienced massive bank runs. “It felt like the end of capitalism as people knew it.” Arnold Toynbee wrote that “men and women all over the world were seriously contemplating and frankly discussing that the western system of society might break down and cease to work.” In important ways they were right.

It’s a relatively short book that reads like a thriller, and – as Straumann concludes – illustrates the fundamental point that “Only when domestic electorates are prepared to accept a loss of sovereignity for the benefit of cross-border co-operation can international institutions and agreements have a chance of working effectively.” When a debt crisis makes sustained growth difficult and  leads to repeated austerity measures, electorates start to wonder what the point is.

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Better economic forecasting

The heading of this post is not an invitation for the usual jokes about economic forecasts. It’s clear that most people think forecasting is what economists do, by and large, and that they do it badly. Indeed, some forecasts are a tissue of nonsense – pretty much any UK economcy & trade forecast from Patrick Minford these days for example, although 20 or 30 years ago he was a serious forecaster. I spent a few years myself in the mid/late 1980s doing macro forecasts for the UK and a few other countries, and later, as Economics Editor of the Independent, awarded an annual Golden Guru trophy for the UK forecast of key macro variables closest to the published figures at the time of the award – a necessary qualification because many macroeconomic statistics, especially GDP, are significantly revised over a period of years.

The revisions are with us still, but the techniques of forecasting have greatly improved since then, although of course there is a wide quality range among economic forecasters. For a non-technical guide to economic forecasting, there could be nothing better than Forecasting: An Essential Introduction by Jennifer Castle, Michael Clements and David Hendry. It is a crystal clear and intuitive explanation of what macroeconomic forecasts can and can’t do. It explains the inherent difficulties in trying to forecast the future of a complex non- linear, non-stationary system in which behaviour can be affected by forecasts themselves, all from a limited amount of past data. Better still, it explains the empirical techniques this ace team have devised to tackle some of the challenges.

My only complaint about the book is that the charts are a bit too small for my middle-aged eyesight. Although non-technical, there are lots of charts and it probably won’t make the bestseller list. However, it should be read by any student about to do a time series economietrics course, and to anybody about to start a job as a forecaster. Economics students are proficient in all the relevant software, have ploughed through the statistical theory in their econometrics courses, but anybody starting out as a forecaster naturally lacks the wisdom that comes with the experience of handling the data and seeing your lovingly estimated model produce some dreadful out-of-sample forecasts.

This book represents a treasure trove of crystallised wisdom. It offers up practical insights in clear prose. For example: “This principle of differencing is a method to remove the deterministic components of a forecasting model, by which we mean intercepts and trends. Deterministic terms capture the underlying equilbrium and growth rate of a variable of interest, so are fundamental to modeling, but can be catastrophic for forecasting when either component changes. The differencng principle can be applied to any model with an inherent equilibrium to which it corrects. … But…. if the object needing to be forecast is the level, a good performance forecasting the differences is not necessarily sufficient, as cumulating those differences may lead to an increasing divergence from the level.”

The book ends with some reflections on the limits to forecasting. Some things are inherently unpredictable – including events like the financial crisis which hinged not only on prior macroeconomic trends able to be captured in a macroeconometric model but also on unexpected policy decisions like letting Lehman Brothers go bust. But  the book notes that the forecasting process is not just about numbers but also about the narrative, at least in any macro policy context. Hendry coined the term ‘forediction’ to capture this.

No doubt the public at large will continue to mock economists and their forecasts, but they will always be needed, and in that case should be as good as economists can make them.

41cwRNu7q7LForecasting: An Essential Introduction

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Not all automation is equal

Democratic Capitalism at the Crossroads: Technological change and the future of politics by Carles Boix is a good complement to the widely reviewed The Technology Trap by Carl Frey. It takes a political science perspective on the same deep trends in technology, and even uses the same geographic shorthand for the succession of technological/economic paradigms: Manchester, Detroit and Silicon Valley.

Coming from a different perspective, Boix provides new-to-me insights, and particularly about similarities between the sucessive technological revolutions. For example, in an 1835 book, The Philosophy of Manufactures, Andrew Ure described the factory as “a vast automaton composed of various mechanical and intellectual organs, acting in uninterrupted concert for the production of a common object, all of them being subordinate to a self-regulated moving force.” Echoes of cybernetic visions – see for example Eden Medina’s fantastically interesting Cybernetic Revolutionaries on Project CyberSyn. Or a 1934 book, The Mechanization of Industry by Harry Jerome, which estimated that almost half the labour productivity gains in the first 30 years of the 20th century resulted from “the mechanization of the handling systems”. Echoes of the role of logistics now, for example set out in the McKinsey’s study into US productivity in the late 1990s – Walmart and wholesaling.

After the historical section, Boix goes on to the implications for politics today, and particularly the increased vote for extremist parties – the highest since the 1930s. Writing this on the day “Boris”Johnson is expected to become the UK’s prime minister, with Donald Trump beginning extra-judicial deportations from the US, and strongmen on the march in other countries, it is hard to be optimistic. However, Boix, like Frey, implicity raises one question without addressing it: what made the production paradigm of the mid-20th century. which also led to massive automation, able to deliver widely shared gains, and why is the direction of the earlier and later technological revolutions so different? I haven’t seen a persuasive answer.

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