Enlightened banking

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Adam Smith had firm views about the banking industry. He believed that services in general were unproductive, and would clearly have taken a dim view of claims about the contribution of banking to GDP (see my forthcoming Feb 2014 book, [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief and Affectionate History[/amazon_link]).

[amazon_image id=”0691156794″ link=”true” target=”_blank” size=”medium” ]GDP: A Brief but Affectionate History[/amazon_image]

I was just looking at the new [amazon_link id=”0199605068″ target=”_blank” ]Oxford Handbook of Adam Smith[/amazon_link] (editors Christopher Berry, Maria Pia Paganelli and Craig Smith) as I prepare for a panel session on banking at the Festival of Economics in Bristol later this month.

[amazon_image id=”0199605068″ link=”true” target=”_blank” size=”medium” ]The Oxford Handbook of Adam Smith (Oxford Handbooks in Economics)[/amazon_image]

The essays in the section on money, banking and prices underline Smith’s caution. It describes a metaphor in The Wealth of Nations (I didn’t remember it) comparing banking to a wagon road through the air – immensely useful in helping business expand beyond its earth-bound confines, but in danger of melting if it gets too close to the sun. He was explicitly opposed to banks investing in real estate, and his descriptions of what they should be lending for are exactly the kind of provision of working capital to business that modern banks hardly do at all – it amounts to just 3% of UK banks’ total lending. A figure worth bearing in mind when the banks claim that higher equity capital requirements would restrict their ability to lend to business, as a small decline in next to nothing is less than next to nothing….

The Handbook, by the way, is a great resource for Smith-ites. I’ve dipped into it, and found some great chapters, including those on his Enlightenment context and (by Amartya Sen) on his contemporary relevance. One part covers economics; others are on the entire range of his work – for example on history, civil society, moral society. I also liked the introduction from Nicholas Phillipson, who write an excellent biography of Smith, [amazon_link id=”0713993960″ target=”_blank” ]Adam Smith: An Enlightened Life[/amazon_link] (which I reviewed for the New Statesman).

[amazon_image id=”0713993960″ link=”true” target=”_blank” size=”medium” ]Adam Smith: An Enlightened Life[/amazon_image]

How to criticise economics

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Aditya Chakrabortty wrote a characteristically acute and provocative column in yesterday’s Guardian about the sorry state of economics. Often I agree with him wholeheartedly, but not this time, not entirely.

There is certainly a need to reform the economics curriculum, as demanded by the wonderfully engaged students in the University of Manchester’s Post-Crash Economics group or in Rethinking Economics. This is why I’m enthusiastically helping Professor Wendy Carlin of UCL in her newly-launched project to develop a wholly new undergraduate curriculum – the launch workshop is taking place next Monday. I’ve been advocating curriculum reform since before the crisis – in [amazon_link id=”0691143161″ target=”_blank” ]The Soulful Science[/amazon_link] – because students have not been taught much or any of the most important recent developments in economics, from behavioural models to randomised control trial methodology. What’s more, as Michael Joffe of Imperial College points out in an article in the current Royal Economic Society newsletter, undergraduate textbooks often contain factual inaccuracies – he picks on the conventional model of the ‘U-shaped’ average cost curve. No serious subject allows textbooks to be just wrong.

[amazon_image id=”B00D0DF252″ link=”true” target=”_blank” size=”medium” ](THE SOULFUL SCIENCE: WHAT ECONOMISTS REALLY DO AND WHY IT MATTERS (REVISED EDITION) (REVISED) ) BY COYLE, DIANE{AUTHOR}Paperback[/amazon_image]

There is also a strong whiff of denialism among some economists – mainly, I would say, in American universities and right-wing think tanks. There are people who do not see the crisis as any reason to reflect on how they believe the economy works. This is hard to understand – it calls for a psychologist, perhaps, or needs explaining in terms of the defence of institutional privilege. But the denialists are a minority, even though buttressed by the huge institutional inertia in the academic world, which rewards people for doing what they’ve always done and allows them to pat each other on the back for being so similar to themselves.

Where I part company with Aditya’s column and other similar responses is in the turn to the heterodox, the people for whom the mainstream will always be wrong. The column, and a list of its anti-economics economics books Verso put out in response, both highlight Philip Mirowski’s new book [amazon_link id=”1781680795″ target=”_blank” ]Never Let A Serious Crisis Go To Waste[/amazon_link]. I’ve got a review coming out in Antipode soon – for now, I’ll just say it’s a polemic, not a work of serious scholarship. It doesn’t have anything interesting to say about the state of economics.

[amazon_image id=”1781680795″ link=”true” target=”_blank” size=”medium” ]Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown[/amazon_image]

Chris Dillow as always is a must-read on this question of how to be critical of economics without jumping the shark. Noah Smith earlier this year blogged in a similar vein – his target was the cult of Steve Keen, rather than Philip Mirowski. Alex Marsh has a new response to Chris Auld on this same question – what distinguishes good from bad criticism of economics? Interestingly, he suggests that internal critique is palatable while external critique is not – the old business about who is allowed to make the jokes. I’m sure there’s some of that, and have been introspecting for evidence of defensiveness. However, I don’t think that’s all it is.

The problem with so many critiques of economics is that they have the same flaw they see in the mainstream, namely abstraction. The critics have a different mental model of the world. They want economics to adopt their worldview. What it really needs, instead, is to move away from abstraction and engage deeply with evidence – both in terms of data collection and econometrics, and non-quantitative evidence in the shape of history and context. The future for a revived economics will be in becoming a deeply, genuinely empirical subject, not a playground for competing political philosophies.

 

How brave a new world for publishing?

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This morning’s Financial Times reports a study saying the number of insolvencies among publishers in the UK has been trending upwards, to 98 in the 12 months to August 2013, from 69 and 36 in the preceding two years. The suggestion is that although entry barriers in publishing have declined and it’s easier to reach customers thanks to digital technologies, margins have been squeezed. After all, in 2012 there were 2,450 books per million people published, which is apparently more per capita than any other country.

I’m a moderate optimist about publishing, which has been more innovative and responsive to customers than some of the other industries, swimming with the digital tides rather than paddling furiously against them. Indeed, I’m sufficiently optimistic to dabble a bit myself with Perspectives.

The FT story does note that many of the insolvencies concern magazine publishers, facing full-on competition from online and often free content. It quotes Richard Mollet of The Publishers Association (they omitted the apostrophe, not me) saying the biggest threat comes to very small publishers from self-publishing. I’m not sure that distinction makes much sense any more – it’s all competitive fringe to the bigger publishers. It isn’t entirely clear from the PA figures, but it looks to me like margins have been increasing for the book sector as a whole – sales values rose 4% in 2012 and volumes declined by 1%. And e-book margins are surely much higher than those for physical books, given the pricing points that have been so successfully established for e-books. Sales of digital books in the UK rose by 66% in 2012.

The really good news about the effects of the technological changes is that people have much greater access to things to read, and greater voice if they want to engage in the debate. So we have the paradox of an increasingly vibrant, engaged public conversation online at the same time that conventional political debate in many countries is becoming increasingly impoverished and ritualised. The public space is reverberating with informed debate – you just wouldn’t know it if you stuck to the conventional channels.

Tigers and snakes in the global economy

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The other serious book I read among my holiday reading ([amazon_link id=”0718159209″ target=”_blank” ]The Collini Case[/amazon_link], [amazon_link id=”0340994150″ target=”_blank” ]Breakdown[/amazon_link]) was Jonathan Fenby’s [amazon_link id=”1847394116″ target=”_blank” ]Tiger Head, Snake Tails[/amazon_link], which is a pleasing combination of high-level overview and complex detail. Pleasing because – as he points out in the introduction – there is a tendency in books by US and UK authors to either over-hype the marvellousness of China’s prospects or over-emphasise the pitfalls and difficulties the country will face in continuing its growth. The title Tiger Head, Snake Tails captures Fenby’s theme: the amazing promise combined with the multitude of problems and challenges being created by such rapid growth and change. I’ll write a review when I’ve finished it. Meanwhile, I’m learning a lot. And as a longtime journalist the author certainly knows how to keep the reader paying attention.

[amazon_image id=”1847394116″ link=”true” target=”_blank” size=”medium” ]Tiger Head, Snake Tails: China Today, How it Got There and Why it Has to Change[/amazon_image]

Actually, it has been a good year for my reading on China. I thought Michael Pettis was terrific on its role in the global economy, and how its domestic policy affects global imbalances, in [amazon_link id=”0691158681″ target=”_blank” ]The Great Rebalancing[/amazon_link]. Joe Studwell’s [amazon_link id=”1846682428″ target=”_blank” ]How Asia Works[/amazon_link] was excellent, although relatively little of it is about China. While I’m mentioning the forthcoming Perspectives series, one of the titles is by Jim O’Neill, [amazon_link id=”1907994130″ target=”_blank” ]The BRIC Road to Growth[/amazon_link]. He is more nuanced about China’s prospects than often assumed, acknowledging that its growth rate will slow compared with the recent past, but argues that even so the institutions of global economic governance urgently need to find a place for the large BRIC countries. I think Michael Pettis would agree.

Poverty, fear and loathing

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One of the books I read on holiday this past week was Alan Johnson’s memoir, [amazon_link id=”0593069641″ target=”_blank” ]This Boy.[/amazon_link] It’s a very moving testament of love to his mother, who was abandoned by her feckless husband and died young, and his older sister, who subsequently brought him up despite being just a teenager herself. Born in 1950, he grew up in extreme poverty in wast London. Few people who experience that kind of deprivation – cold, damp, cramped rented housing, hunger, constant debt, second hand clothes, lack of hot water, power being cut off – write about it or are paid any attention if they do so. It was Mr Johnson’s success, via his union, in politics that gave him a voice and an audience. His story is both a great family saga, both sad and uplifting, and an unusually authentic account of being brought up in material poverty. It is especially revealing to see how hard it is for anybody – even someone as hardworking and determined as his mother Lily – to safeguard children from their circumstances. It must be heartbreaking for parents not to be able to stop their children being hungry, not to be able to protect them from the everyday violence of the streets.

[amazon_image id=”0593069641″ link=”true” target=”_blank” size=”medium” ]This Boy[/amazon_image]

It would be a mistake to think that this kind of poverty is history. Conditions are somewhat better than in the 1950s and 60s, but it is still hard for most of us to appreciate the lives of people on low incomes. This column by food blogger Jack Monroe recounts how scarily easy it is, too, to become poor – as she points out forcefully here, she did not fall in to any of the usual tabloid blame categories. Julia Unwin, Chief Executive of the Joseph Rowntree Foundation, has written a marvellous book, [amazon_link id=”1907994165″ target=”_blank” ]Why Fight Poverty[/amazon_link], out soon in a new series I’ve been editing, in which she highlights both the standard failure of imagination about poverty, and the fear that either makes us unwilling to think about the lives of people who do not have enough money, or turns into loathing and blame.

[amazon_image id=”1907994165″ link=”true” target=”_blank” size=”medium” ]Why Fight Poverty?: And Why it is So Hard (Perspectives)[/amazon_image]

I think she’s right to draw our attention to the emotional baggage we bring to the subject, and the barriers to tackling poverty created by our unacknowledged fear. I do recommend reading [amazon_link id=”0593069641″ target=”_blank” ]This Boy[/amazon_link].