Fact and fiction

With a brief holiday after my NZAE conference and then 24 hours of travel back from Australia to the UK, I managed to read two chunky books as well as the others described in my last post.

One was The Pike by Lucy Hughes-Hallett, the biography of the extraordinary Gabriele D’Annunzio. It educated me about the Italian role in the First World War – something unsurprisingly not much covered in the centenary materials here in the UK – and the way the aftermath paved the way for Mussolini. I’d known next to nothing about D’Annunzio before reading this prize-winning biography. He was an extraordinary character, and the story is supremely well told in this book, which while clearly based on exhaustive historical research indeed reads like a novel.

The other was Donna Tartt’s epic novel, The Goldfinch, a nearly 900-page page-turner. It’s a novel with an economics lesson at its heart. The protagonist, Theo, goes into the antiques trade. He observes: “I also learned a lesson; a lesson which sifted down to me only by degrees but which was in fact the truest thing at the heart of the business. It was the secret no-one told you, that in the antiques trade there was really no such thing as a ‘correct’ price. Objective value – list value – was meaningless. … An object – any object – was worth whatever you could get somebody to pay for it.” An excellent lesson in applying behavioural insights to pricing antiques follows. The entire novel is about value, both market value (at its most brutal, in the criminal world as well as the antiques trade) and inherent or moral value.


The right kind of free markets

As I’m travelling, I’ve been doing a lot of frivolous reading – Altai by Wu Ming (fabulous), Secrecy by Rupert Thomson, John Le Carre’s A Delicate Truth (oh dear, he’s lost the use of shades of grey in character), and in non-fiction Mary Beard’s Confronting The Classics (very interesting and enjoyable), Italian Ways  by Tim Parks (funny, and all-too-plusible about Italy) and, just finished, Jesse Norman’s Edmund Burke.

I’ve found this very interesting, especially the last chapter on what light reading Burke can shed on the philosophy shaping modern political debate, namely liberal (UK sense) individualism and its counterpart in economics, the neoclassical free market model. The book argues that the assumptions of self-interest and individualism in economic models have spilled outside their proper domain of technical economic analysis: “What starts with an economist’s assumption ends up as a deep cultural pathology.” There is furthermore the loss of the basic trust uniting the generations, Burke’s famous point about the “partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.” Those who are to be born, in particular, cannot participate in the free market,

The book concludes: “Burke offers a profound critique of the market fundamentalism now prevalent in modern society. But he does so not from the left of the political spectrum but from the right. … Understood conservatively, markets are not idolized but treated as cultural artefacts mediated by trust and tradition. Capitalism becomes, not a one size fits all ideology of consumption but a spectrum of different models to be evaluated on their own merits. Burke would note the extraordinary greed and self-dealing seen over the past decade by the modern nabobs of banking and finance in a series of cartels disguised as markets…”

I haven’t read much by Burke, and that little over 30 years ago. I rather suspect he’s an author one approaches differently with age and experience. Anyway, Jesse Norman’s book was a great (re-)introduction.

Women’s work

This morning I gave my talk on “What we mean when we talk about ‘the economy’” at the NZAE conference. One of the issues I touched on was the production boundary (also discussed in GDP: A Brief But Affectionate History).

This was also discussed at one of the parallel sessions yesterday in the description by Caroline Sanders of Marilyn Waring’s 1988 book Counting for Nothing: what men value and what women are worth - retitled If Women Counted for the more sensitive US market. I hadn’t been aware of Waring’s book previously but it evidently covers the production boundary question when it comes to domestic work and also the services derived from natural resources. Caroline and co-author Paul Dalziel have a new e-book of their own out, inspired by Waring, Well-being Economics.

Another book suggestion on the measurement question, recommended by Professor John Creedy, is Paul Syudednski’s history of GDP, The Income of Nations. – apparently rather rare.

Inequality and value judgements

I’m attending the annual conference of the New Zealand Association of Economists, and the first keynote was a terrific presentation by Professor John Creedy on inequality, or to be precise the history of economic thought on inequality and the light that sheds on the current resurgence of interest in distribution.

His starting point was the classic Tony Atkinson paper, On The Measurement of inequality. It was published in 1970, another time when inequality was a salient issue, and the talk moved onto Rawls and Sen as well. The theme was that any measure of inequality – income or wealth? Individuals or households? Gini coefficient or Atkinson’s own measure, or the simple 10/90 ratio? – incorporates some implicit value judgements. For example, do you care about individual well-being because of a principle of anonymity – who you are shouldnt matter to evaluating your distributional status? If so, then the Gini isn’t an appropriate measure because it depends on rankings of individuals relative to others. If you look at the 10/90 ratio, as Piketty does, you’re saying the middle four fifths of the distribution isn’t relevant.

Prof Creedy ended cited Lionel Robbins’ famous Essay on the Nature and Signifiance of Economic Science, to the effect that economics can’t avoid making value judgements but its contribution is to shed a clear light on what the judgements are. Or at least, ought to be, but too rarely is. The word of caution about understanding the value judgements embedded in specific measures of inequality is timely given the fact that everybody from New Zealand to New York is talking about it now.

Economists and humanity

Peter Smith sent me his new book The Reform of Economics: How the complex systems approach is building a realistic and humane alternative to laissez-faire. In a letter accompanying it, he said he has two motivations. One is to get economics out of the trap of over-simplifying so that models can use linear algebra and thus be made ‘tractable’. This is one of the things that makes complexity economics and agent-based modelling appealing; virtual economies run on a computer do not need to be solved algebraically.

The other aim is to make economic methodology something more like normal scientific methodology. Economic method consists of choosing some basic postulates and making deductions from them. The deductions can then be tested against data. Normal science involves both induction and deduction. Careful empirical observation will shape theory.

The book dates the choice of the purely deductive path to Lionel Robbins and his 1935 essay The Nature and Significance of Economic Science. He defined economics as the science of constrained choice, which, “Not only excludes uncertainty, but it also excludes from the scope of economics both institutions and the medium-term evolution of economic systems.” This isolates economics from the institutional framework of the economy, and hence from what determines the availability of resources over time – it makes economics an inherently static subject.

Natural scientists do regard economics as bizarrely non-empirical – I’ve been in multi-disciplinary conferences about both macroeconomics and behavioural choice at which biologists exclaim about how rarely economists discuss data, for all that they might go away and test hypotheses. One of the joys of being on the Competition Commission for eight years was how profoundly evidence-based the process is, and hence a real insight for an economist used to generalising about how companies behave. There aren’t many business people who think about marginal cost curves and production functions.

The Reform of Economics is a game of two parts (not halves). It is mostly a critique of economic methodology but also has a useful introduction to agent based modelling. It ends on an upbeat note I very much like:

“Economics is becoming a much more interesting area in which to work and learn; and we have every hope that a more realistic and effective reformed science of economics will also be a more humane one. For, ultimately, economics is about the well-being of humanity.”