Austerity, algebra and theology

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Florian Schui’s [amazon_link id=”0300203934″ target=”_blank” ]Austerity: The Great Failure[/amazon_link] is a readable book, which has seen me through my Tube journeys this week, but an odd one. He presents thinking about austerity through the ages as seen through two prisms: the religious and moral strand of thought in western tradition about the inherent virtue of modest living and thrift; and the sensible economic perspective, reaching its pinnacle in Keynesian thought, that analyses consumer spending and fiscal expansion as the source of prosperity. Modern austerity, from Thatcherism and its Hayekian emphasis on the small state, to the post-crisis argument for austerity, is therefore described as essentially theological.

[amazon_image id=”0300203934″ link=”true” target=”_blank” size=”medium” ]Austerity: The Great Failure[/amazon_image]

“Today, there is general agreement that growing consumption is a pre-condition for economic growth and the satisfaction of potentially unlimited material wants is accepted as one of the principal objectives of economic activity,” Schui writes. The environmental movement is portrayed as a quasi-religious movement descended from the 19th century Romantics. Yet the final chapter of the book is an assessment of the ‘good life’, in much the same vein as in [amazon_link id=”0241953898″ target=”_blank” ]How Much is Enough?[/amazon_link] by Edward and Robert Skidelsky. It’s a pretty sudden corner turn right at the end.

Another oddity is that the book hardly mentions debt (as I noted on glancing through the index). Given that today’s case for austerity – and indeed previous versions – rest heavily on debt-related arguments, this is a glaring omission. I think it makes David Graeber’s [amazon_link id=”1612191290″ target=”_blank” ]Debt: The First 5000 Years[/amazon_link], for all that it is a flawed book, a far more credible critique of austerity measures.

A third strange bit of the argument here comes in the discussion of why Keynesianism fell out of favour because of stagflation in the 1970s, to be succeeded by Thatcherism. Schui argues that the true cure for stagflation was not the Hayek-inspired effort to shrink the state that we got (and that had great popular support, given the massively disruptive public sector strikes as unions tried to win higher pay rises), but instead more government spending and indeed an extension of central planning as practiced in the Soviet bloc. This is a boldly contrarian argument to say the least.

A final complaint is that the book claims economics can explain how to maximise growth but can not answer the question, do we need more growth? I think it’s exactly the other way round. Economics says, yes we need more growth – very few of the world’s people enjoy the good life of a distinguished western European academic; and as many economists – including for example Joel Mokyr in [amazon_link id=”0691120137″ target=”_blank” ]The Gifts of Athena[/amazon_link] (and me too in [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief but Affectionate History[/amazon_link]) – point out, growth is the name we give to the constant process of innovation that has improved our health, life expectancy, and quality of life so massively.

What we don’t know is how to increase growth, the elusive gold of our kind of alchemy. If we did, nobody would see austerity as a dilemma. Faster growth would remove any need to worry about debt. Without it, rescheduling/default or inflation are the more troubling options. This is algebra, not theology.

 

An austere week

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Another hectic week looms – I’m doing book-related interviews and events including this at the CSFI in London tomorrow – and at the moment feel like climbing back under the duvet to read. So to steel myself, I’ve packed Florian Schui’s [amazon_link id=”0300203934″ target=”_blank” ]Austerity: The Great Failure[/amazon_link] into my bag. It will be interesting to see how it compares/contrasts with Mark Blyth’s [amazon_link id=”019982830X” target=”_blank” ]Austerity: The History of A Dangerous Idea.[/amazon_link] The summary and subtitle make it clear it comes to the same conclusion. And the index makes equally little reference to debt, which seems to me an important variable when comparing austerity episodes, and indeed in concluding as the back cover does: “There are no convincing economic arguments for austerity policies in their current form and there is no compelling moral or political case for them either.” So there must as a matter of logic be some explicit or implicit moral and economic arguments here about alternative means of decreasing debt burdens.

[amazon_image id=”0300203934″ link=”true” target=”_blank” size=”medium” ]Austerity: The Great Failure[/amazon_image]  [amazon_image id=”019982830X” link=”true” target=”_blank” size=”medium” ]Austerity: The History of a Dangerous Idea[/amazon_image]

 

Welcoming the overlords

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[amazon_link id=”023116856X” target=”_blank” ]Smart Machines: IBM’s Watson and the Era of Cognitive Computing[/amazon_link] is by a couple of IBM-ers, Director of Research John Kelly, and Steve Hamm. It shows. This short book is all about the promise of current massive increases in computers’ abilities rather than the disruption it will cause. It mentions Brynjolfsson and McAfee’s [amazon_link id=”0984725113″ target=”_blank” ]Race Against the Machine[/amazon_link], but it would be good to read this book alongside their new one, [amazon_link id=”0393239357″ target=”_blank” ]The Second Machine Age[/amazon_link]. With that caveat, it’s interesting to read this short book about what the insiders think is likely to happen.

[amazon_image id=”023116856X” link=”true” target=”_blank” size=”medium” ]Smart Machines: IBM’s Watson and the Era of Cognitive Computing (Columbia Business School Publishing)[/amazon_image]

The book starts with the famous victory by IBM’s Watson over two humans in the TV game show Jeopardy. One of the defeated men, Ken Jennings, famously said afterwards: “I for one welcome our new computer overlords.” The introductory section explains the key difference with the next generation of very powerful computers, the move away from the Von Neumann architecture – with its key bottleneck of moving data to and fro between CPU and memory – and instead having more parallel calculations with memory and processing more closely integrated. This will increase the machines’ capacity and enable them to go beyond specific programmes for specific tasks. They will be able to learn. Having just read Gerd Gigerenzer’s [amazon_link id=”0141015918″ target=”_blank” ]Gut Feelings[/amazon_link], though, I now feel a bit more optimistic about the complementarity between humans and robots – it’s hard to see how even smart machines can be taught or can acquire intuition given the way logic is integral to their structure and programming.

Later chapters of the book look at big data, at the new physics of computing – what future microchips could be like – and specifically at cities and the potential for cognitive computers to make them better places for their inhabitants. A key issue, given both the tendency for political power to shift from nation state to city level and the continuing move by humanity into cities. I suspect computer experts will be familiar with the material in this book, but I didn’t and it was an enjoyable travel read.

Enoughness

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Yesterday I attended a very interesting symposium at Christ Church, Oxford on the 2012 book by Robert and Edward Skidelsky, [amazon_link id=”0241953898″ target=”_blank” ]How Much Is Enough? Money and the Good Life[/amazon_link]. I think my own [amazon_link id=”0691156298″ target=”_blank” ]The Economics of Enough [/amazon_link]was my passport to the event.

[amazon_image id=”0241953898″ link=”true” target=”_blank” size=”medium” ]How Much is Enough?: Money and the Good Life[/amazon_image]

The Skidelskys’ book is a good and provocative read. It starts with the question posed by the famous Keynes essay, [amazon_link id=”1441492267″ target=”_blank” ]Economic Possibilities for our Grandchildren[/amazon_link]: why are we not now enjoying much more leisure, given that Keynes was right in his prediction about the degree of technological progress. One aspect I very much agreed with is their point that it is important to keep the ideas of economic growth and well-being or social welfare distinct – this is one of the themes of my new book, [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link] as well. GDP growth is a means to an end, reasonably highly correlated with well-being, but not an end in itself.

However, in other ways I strongly disagreed with their book. They argue for stopping growth and stopping technological progress, including, Lord Skidelsky explained yesterday, stopping or slowing down further automation of work by taxing the use of robots. To my mind, that completely misses the point about economic growth, which is not to have more and more of the same things, but to have more variety and new things. Innovation is the source of improvements in well-being, from trivial innovations to life-changing medicines or major technologies such as the internet and mobiles. GDP growth is the set of footprints left by innovation, although it fails to count the increase in welfare caused by new goods and services. At one point the Skidelskys write: “The material conditions for the good life already exist,” and say nothing has improved since 1974. This is absurd. Since 1974, UK life expectancy at birth has increased by 9 years to 81, the web has been invented, and we’ve moved from almost nobody having central heating to almost all of us having it – its lack is now taken as a poverty indicator.

The seminar included a long discussion about the a-morality or immorality of conventional economics. The economists taking part were probably atypical, as we all agreed that economics does need some post-crisis rethinking. The philosophers present focused on questions of liberalism and paternalism. Professor Cecile Fabre was particularly strong on questioning the Skidelskys’ failure to identify the ‘good life’ with some of the key values of liberalism.

I left with another book the two Skidelskys have edited, [amazon_link id=”0954643089″ target=”_blank” ]Are Markets Moral?[/amazon_link] Glancing at the contents, I think its answer is ‘no’. But even to pose the question is to make markets overly-abstract. Markets are institutions in which people have social relations. The markets for tea bags, accountancy services, and radio spectrum have entirely different structures and characteristics. ‘Moral’ isn’t a description that can apply to abstract nouns at all. One can sensibly ask if bankers are moral, at risk of generalising, but not markets.

Goodbye to rational economic man

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A few weeks ago a Very Important Policymaker recommended Gerd Gigerenzer’s [amazon_link id=”0141015918″ target=”_blank” ]Gut Feelings[/amazon_link] to me. It’s a fascinating book, and fascinating to know as well that at least one important policy organisation is taking decision-making so very seriously.

[amazon_image id=”0141015918″ link=”true” target=”_blank” size=”medium” ]Gut Feelings: Short Cuts to Better Decision Making[/amazon_image]

At first glance, this book is in the vein of the many behavioural psychology books that have so interested economics in recent years – for me Daniel Kahneman’s [amazon_link id=”0141033576″ target=”_blank” ]Thinking, Fast and Slow [/amazon_link]is the best. Jan Zilinsky posted a great list of them on Quora. The book discusses some similar issues, such as biases and framing. However, it also poses a challenge to the behavioural consensus, which always presents actual decision-making as a departure from the ideal of rational calculation. The aim of ‘nudging’ is to make people choose in ways that mimic rational economic man. What Gigerenzer argues is that the reliance on intuitive (fast) decision-making is often optimal: it not only saves on the energy needed for calculation, it also produces better outcomes than rational calculation.

For example, if asked to say which of Detroit or Milwaukee has the bigger population, Americans will be more often wrong than Europeans who don’t know the answer but have probably heard of Detroit – they rely on a recognition rule-of-thumb (if you’ve heard of it, it’s more important), whereas Americans who recognise both try to figure it out from other knowledge they have about the two cities. In an uncertain environment, it is better not to have full information – complex detail is good for explaining with hindsight but not for prediction. Some lack of knowledge is optimal -to take advantage of the recognition heuristic.  “In an uncertain world a complex strategy can fail exactly becaue it explains too much in hindsight. Only part of the information is valuable for the future, and the art of intuition is to focus on that part and ignore the rest,” Gigerenezer writes.

He describes a number of rules of thumb based on ‘evolved capacities’ such as language, recognition, object tracking,  memory, and emotions. These have come about because of both natural selection and cultural transmission. Using a rule of thumb requires two processes – in this example, recognition followed by evaluation – should it be applied to the present situation. The book spends a good deal of time on the recognition heuristic, which it sees as being behind the prevalence of brand advertising. Strong brands cause the recognition rule of thumb to kick in. Gigerenzer argues that this means, “If consumers can only tell the difference between competing brands by name, then there is little economic justificaiton for the idea that more choice is always better.” I admit to being intuitively resistant to this idea, but it obviously deserves careful thought.

The book also insists that we can’t analyse behaviour only with reference to personality or psychology – environment matters too. They are the two blades of the pair of scissors. This means there is great variability in human behaviour, something social scientists certainly ought to embrace. However, much economics looks for universally and permanently valid models. Here, my intuition is with Gigerenzer; our analysis needs to become far more context specific, looking at history and geography, and the interplay between economics and politics.

Gut Feelings is very clearly written and thought-provoking. I commend it to anybody interested in decision making and behavioural economics.

i also recommend my plane reading earlier this week, a rip roaring thriller set in the dysfunctional capitalism of modern Russia, Martin Baker’s [amazon_link id=”1783520019″ target=”_blank” ]Version 13[/amazon_link]. I can see the movie  in my mind’s eye.

[amazon_image id=”1783520019″ link=”true” target=”_blank” size=”medium” ]Version Thirteen[/amazon_image]