The economic classics

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One of the constants in calls to reform economics, and how it’s taught, is the demand for more history of thought. The most contact students have with the history of economics itself is probably Robert Heilbroner’s [amazon_link id=”068486214X” target=”_blank” ]The Worldly Philosophers[/amazon_link]. I really liked Agnar Sandmo’s [amazon_link id=”0691148422″ target=”_blank” ]Economics Evolving: A History of Economic Thought[/amazon_link], because it links how economists thought to changes in the economic context. Economics is, like geology or evolutionary biology, an historical science – the specifics of time and place are fundamental to what happens.

However, even if they read a survey like one of these books, economists hardly ever read the originals, not even [amazon_link id=”1451522851″ target=”_blank” ]Adam Smith[/amazon_link] or [amazon_link id=”9650060251″ target=”_blank” ]Maynard Keynes[/amazon_link]. Still, it was intriguing to get the announcement of the launch of a new series of republished (minor) classics by Vernon Press – the titles include some better known ones like Friedrich List’s [amazon_link id=”1622730100″ target=”_blank” ]The National System of Political Economy[/amazon_link], [amazon_link id=”1622730097″ target=”_blank” ]The Great Illusion[/amazon_link] by Norman Angell; and some hardly known at all ones – [amazon_link id=”1622730003″ target=”_blank” ]Women in Industry[/amazon_link] by Edith Abbott anyone? Or perhaps Daniel Defoe’s [amazon_link id=”1622730011″ target=”_blank” ]A Plan of the English Commerce[/amazon_link]. New to me.

[amazon_image id=”1622730003″ link=”true” target=”_blank” size=”medium” ]Women in Industry: A Study in American Economic History (Vernon Series in Economic Methodology)[/amazon_image]   [amazon_image id=”1622730011″ link=”true” target=”_blank” size=”medium” ]A Plan of the English Commerce (Vernon Series in Economic History)[/amazon_image]

The Game of Bank Bargains

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My progress through [amazon_link id=”0691155240″ target=”_blank” ]Fragile by Design: the political origins of banking crises and scarce credit [/amazon_link] by Charles Calomiris and Stephen Haber is ever so slow (partly because of the distraction of Chimamanda Ngozi Adichie’s wonderful novel [amazon_link id=”000735634X” target=”_blank” ]Americanah[/amazon_link]), but I’m enjoying it a lot.

[amazon_image id=”0691155240″ link=”true” target=”_blank” size=”medium” ]Fragile by Design: The Political Origins of Banking Crises and Scarce Credit (The Princeton Economic History of the Western World)[/amazon_image]   [amazon_image id=”000735634X” link=”true” target=”_blank” size=”medium” ]Americanah[/amazon_image]

Take these two quotations from Chapter One, ‘If stable and efficient banks are such a good idea, why are they so rare?’:

“Banking systems are susceptible to collapse only when banks both expose themselves to high risk in making loans and investments and have inadequate capital on their balance sheets to absorb the losses associated with those risky loans and investments. If a bank makes only solid loans to solid borrowers, there is little chance that its loan portfolio will suddenly become non-performing. If a bank makes riskier loans to less solid borrowers but sets aside capital to cover the possibility that its loans will not be repaid, its shareholders will suffer a loss but it will not become insolvent. These basic facts about banking crises are known.”

So the question about system instability is why are banks allowed to take risks without adequate levels of equity? Of course, Adam Admati and Martin Hellwig asked the same question in their brilliant book [amazon_link id=”0691162387″ target=”_blank” ]The Bankers’ New Clothes[/amazon_link].

[amazon_image id=”1480577006″ link=”true” target=”_blank” size=”medium” ]The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It[/amazon_image]

The chapter concludes:

“The fact that the property rights system underpinning banking systems is an outcome of political deal making means there are no fully ‘private’ banking systems; modern banking is best thought of as a partnership between the government and a group of bankers, a partnership that is shaped by the institutions that govern the distribution of power in the political system…. We call this process of deal making the Game of Bank Bargains.”

Exhibit number one is the stability of the Canadian banking system (zero systemic crises since 1840) versus the instability of the US (12 crises). In this light, it was interesting to read Edward Luce’s strongly worded article on finance and US democracy in this morning’s Financial Times.

Book retailing

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Ever since I was on the 2006 Competition Commission inquiry into the takeover of bookstore chain Ottakars by Waterstones, I’ve been interested in the book retailing business. This week brought news that Penguin Random House have created an online store, My Independent Bookshop, to compete with Amazon. A small proportion of every sale goes to a nominated independent bookshop.

The site hasn’t yet launched so it isn’t possible to compare prices or efficiency of delivery. It will be hard to match Amazon not only on price but also on range, logistics, and the attractions of Prime membership (albeit less attractive since the huge price rise) and the associates programme.

The ironic thing about this venture by the publishers is that when the takeover of Ottakars was under debate, they argued vociferously to us that we should not allow the removal of one physical retail chain on the high street, given the fact that Amazon was destroying the livelihood of the independent stores. What I never fully understood was the publishers’ own short-termism: they told us they wouldn’t accept a lower margin on their sales to the independent stores – which are more costly to deliver books to. So they themselves helped bring about the large online price advantage. If they had seen a lower margin as an investment in their future shop windows, we might not have lost so many small retailers.The Publlishers Association representatives who attended the hearing – I can see the row of dignitaries in my mind’s eye – didn’t understand the point we were trying to make about them facing a strategic choice. We gave the merger the go-ahead.

Still, I wish the new site well – more competition  for Amazon would be good. (The links on this blog are all to the Amazon site because of the associates programme. It brings in £30-50 a month which helps buy other books and pay the occasional guest reviewer.)

The trouble with economics, part 92

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I’ve had a busy week, to say the least. So I’ve only been inching my way very slowly through the very interesting [amazon_link id=”0691155240″ target=”_blank” ]Fragile By Design[/amazon_link] by Charles Calomiris and Stephen Haber.

On Monday at the OECD Forum, though, as well as talking about my own book, [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link], I had a very interesting debate with Marie-Laure Djelic and Yves Flückiger about economics and economics education. They were both critical of economics, for familiar reasons – many of which I agree with.

However, Marie-Laure made one really interesting point I hadn’t thought of before. She was talking about Michael Sandel’s [amazon_link id=”0241954487″ target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_link]. A weakness of the book, in my view, was its failure to answer the question about where those limits lie. Sandel criticises the fact that people pay other people to stand in line for them to pick up free tickets for plays in Central Park. But why is that worse than paying people for their time in other ways, like babysitting? Marie-Laure argued that he should not have tried to specify the limits of the market, however – she sees it as a collective, political decision, not a question to which there can be a technocratic answer.

[amazon_image id=”0241954487″ link=”true” target=”_blank” size=”medium” ]What Money Can’t Buy[/amazon_image]

I only partly agree with that. Of course political imperatives should be able to override a market – think of the civic need for rationing during wartime even though it fuels a “black market”. However, it seems clear to me that instincts or political outcomes should be tested from the perspective of what a market outcome would look like. Take the example of emissions markets: there are people, maybe many people, who think markets and the environment shouldn’t mix at all, but that’s just perverse if a market process can lead to a better environmental outcome. And if there is a strong moral instinct not to allow payment for queuing, the moral philosophers should try to explain why it does differ from other forms of payment for labour time.

 

Stories of the crisis

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This week I’ve spent two enjoyable days at the OECD Forum and among other sessions listened to Faisal Islam talk about his book [amazon_link id=”1781854106″ target=”_blank” ]The Default Line[/amazon_link].

[amazon_image id=”1781854106″ link=”true” target=”_blank” size=”medium” ]The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge[/amazon_image]

He started by asking what should journalists – along with policy makers and economists – have asked or said before the crisis, when the good times were rolling? And have we learned the lessons since? He wanted to tell the human stories of the crisis as a way of shedding light on these questions. For example, the experience of one man in China to work in a factory in Guandong is a microcosm of the development of the global imbalances that grew so large in the mid-2000s – or so Faisal thought. But the man they chose by the time they got there had quit his factory job and become a punk hairdresser. So the story was also one of the nascent consumerism of China, and also the vulnerability of mobile labourers with their wheelie suitcases and hukou cards, and the downturn in factory employment in 2009 and 2010. The story of the crisis is one of a complex and interlocking series of currents around the world, he said. The stories help us understand them.

The book visits Greece too – the book opens with a cargo plane chartered to fly euro notes into Greece at the peak of its crisis because the share of bank notes in GDP rose from 6 to 25 per cent. People were taking cash out of their accounts. (I don’t blame them – I did the same on 2008.) meeting the demand was an amazing logistical exercise by the Bank of Greece – the country had only had the plates to print 10 euro notes in Greece; apparently only German-speaking countries have the plates for higher denomination notes.

Cyprus was on the itinerary too. It had its own plane full of notes flown in from Germany too. In contrast to the Greeks! who tried to keep it secret! the Cypriot authorities made it very public. Perhaps as a result, people didn’t feel the same need to take out cash because they knew there was enough there.

There’s Britain too, and the mortgage boom that had people buying houses on loans they couldn’t really afford, funded by wholesale money the banks and building societies had raised to fuel the bubble. Northern Rock was raising funds in Africa to fund 125% mortgages in the North of England. The book also takes in a Czech mathematician who dropped out of finance to become a Californian hippy. Iceland. The ECB and its focus on pizza prices.

All this and more. It sounds a rattling good read, which I have now bought.

The OECD forum had several Meet the Author sessions:
[amazon_link id=”1452603685″ target=”_blank” ]Average is Over[/amazon_link] by Tyler Cowen
[amazon_link id=”0241953898″ target=”_blank” ]How Much is Enough[/amazon_link] by Robert Skidelsky
[amazon_link id=”B00GOH7YZ2″ target=”_blank” ]The Entrepreneurial State[/amazon_link] by Mariana Mazzucato
[amazon_link id=”0399159967″ target=”_blank” ]Hacking Your Education[/amazon_link] by Dale Stephens
[amazon_link id=”1846142245″ target=”_blank” ]Exodus[/amazon_link]by Paul Collier
[amazon_link id=”1610395050″ target=”_blank” ]Frugal Innovation [/amazon_link] by Navi Radjou
[amazon_link id=”1846146895″ target=”_blank” ]The Last Vote [/amazon_link]by Philip Coggan

And last but not least

[amazon_link id=”B00GMSUUWM” target=”_blank” ]GDP: A Brief but Affectionate History [/amazon_link] by Diane Coyle