Investing in electric dreams

I’ve got some way into Bernard Carlson’s book Tesla: Inventor of the Electrical Age, which is out in paperback now. It’s very interesting, although the physics washes over me. The difference between a rotor, a stator, a transformer and a conductor? It just doesn’t stick. It must be like this for non-economists reading about economics. Anyway, the terms make sense once if you concentrate really hard but then just evaporate from the mind.

On the other hand, I’m finding the depiction of the early electrical industry in the US and Europe very interesting – the fierce competition, patenting of different approaches, seriously risky capital investment, the uncertainty over what would emerge as an industry standard, the dastardliness of some rich investors, the works.

One chapter describes Tesla’s early investors and how they got interested in electricity. One had started with a telegraph line between Washington DC and Chicago: “Peck discovered that there were banks and merchants who were interested in leasing dedicated wires in order to conduct their business securely.” So, as now, the finance industry was a big customer of the new technologies.

I also liked this parallel with modern times: Tesla persuaded his investors to provide more funds with a demo involving spinning an egg on its pointy end on a wooden table thanks to some electrical whatevs underneath. They loved it. “This episode taught Tesla that invention would require a degree of showmanship in order to create the right illusions about his creations. People do not invest in inventions built out of tin cans; they invest in projects that capture their imagination.”

And, to my delight in these early chapters, Tesla turns out to have got his start at the Ganz electrical works in Budapest. I visited the factory in early 1990, when it took immediate advantage of the collapse of communism to look for western investors, and hired a stockbroker from London who took some journalists (including me) on a trip. It was fascinating. The managing director’s secretary had the only key to the cupboard in which the toilet paper was kept so she knew exactly when everybody in the party had to go – clearly a powerful woman in the enterprise. The factory itself was ginormous and took in steel, ore and coal at one end and turned out trams and ligh bulbs at the other end. Spectacular. Monstroously inefficient.

I’m 4 chapters in. Have always loved this image of Tesla.

Nikola Tesla

Nikola Tesla


Inequality in 90 pages?

A small book has just arrived, On Inequality, by Harry G Frankfurt of On Bullshit fame. On first glance it looks like a provocative argument that inequality shouldn’t bother us, the moral challenge is the reduction of poverty. On a closer read, the essay argues: “Our basic focus should be on reducing both poverty and excessive affluence. But the reduction of inequality cannot itself be our most essential ambition.”

Well, I agree, but think this takes the argument for “reducing inequality” too literally – surely most people use it as a short-hand for addressing the extremes of the distribution, poverty because a civilized society cares about its weakest members, wealth because its excess has anti-democratic political consequences and undermines cohesion. I think arguing for a stronger version of equalising than this is not so often advocated.

Meanwhile, the best arguments about why strong version equality of incomes is unattainable and undesirable remain Milton Friedman’s in chapter 10 of Capitalism and Freedom.

Frankfurt concludes: “The pursuit of egalitarian goals often has very substantial utility in promoting a variety of compelling political and social ideals. But the widespread conviction that equality itself and as such has some basic value as an independently important moral ideal is not only mistaken; it is an impediment to the identification of what is truly of fundamental moral and social worth.” That thing being respect. Well yes, but the argument underplays our strong fairness instinct, perhaps.

I like the essay format, so although On Inequality isn’t really as provocative a book as it seems, it’s a lively – and a short – read.

Weightlessness redux

There is a wave of interest in dematerialization – I spotted it this past weekend thanks to Justin Fox, and his article has been picked up elsewhere. I therefore can’t resist bigging up my own book, The Weightless World (pdf), published in the UK in 1996 and US in 1997.

Although it shows its age, it was (I’m pretty sure) one of the first to pick up on this physical manifestation of the structural and technological changes under way. (And I now regret that it didn’t consider energy use in the weightless economy.)

Here are the ONS charts that triggered the use of weightlessness as a prism for understanding the structural change in the economy. They show for the 1980s then the 1990s the level of real GDP and the material flows for the economy for the two decades. Around the mid or late 1980s, the link broke, and while real GDP continued to rise, the ‘weight’ of the economy stayed roughly level.

Real UK GDP and weight of economy, 1980s

Real UK GDP and weight of economy, 1980s

Real UK GDP and 'weight' of economy, 1990s

Real UK GDP and ‘weight’ of economy, 1990s

Update: Here is the latest ONS data, also based to 1990.

GDP vs 'weight' of economy up to 2011

Let cities borrow to build new infrastructure

The blurb introducing The Public Wealth of Nations by Dag Detter and Stefan Folster begins: “We have spent the last three decades engaged in a pointless and irrelevant debate about the relative merits of privatization or nationalization.” Yup. And that futile framing of the issues could intensify now that Labour Party members have elected Jeremy Corbyn, a cheerleader for old-style nationalization, as their leader. Which is a shame, because this book makes a persuasive argument that it is not the ownership of assets that determines how well they perform, but instead how they are managed.

Specifically, the authors argue for the creation of sovereign wealth funds or holding corporations, with independent, non-partisan governance structures, to manage public assets. As Dag Detter used to run the Swedish government’s holding company, he has some direct experience of how such structures might operate and there is plenty of practical advice in the book. It focuses on publicly-held commercial assets, and argues for the state holding them (as opposed to privatizating them) but with independent management protected from short-term politics, and delivering a reasonable commercial return to the government. The role of politicians is to act as advocates for the public interest.

A short final chapter turns to infrastructure, and argues for state entities investing in infrastructure projects, but it does still presume that these should all be expected to deliver a commercial rate of return. So the book omits altogether the public good case for non-commercially viable state activity, which seems an odd – and large – gap.

It’s hard to argue with the general thrust of the argument for professionalising the management of sovereign wealth funds or state corporations, and shielding them from political short-termism; but the privatization/nationalization debate is not merely about commercial efficiency but also about the purpose of the entities involved and how they serve the broader public interest. The authors write: “Public wealth should aim to yield financial returns similar to comparable assets in the private sector.” Well, sometimes, perhaps even often, but not always – especially when the reason they are in the public sector is that there are not comparable market assets. Nor does the book tackle any political economy questions about how to move toward such a different kind of governance structure for public assets.

Lots of economists would like to see more infrastructure investment, with the real interest rate the government would have to pay to borrow the money so low. (Few think paying for it by ‘printing money’ or so-called ‘people’s QE’ makes any sense; if not financed by borrowing, then raise taxes.) However, it seems unlikely to happen unless either the Conservative government has a change of heart, and separates out capital spending from its deficit targets; or the borrowing and investment decisions for some infrastructure investment are devolved to the newly empowered city regions.

I can’t see any problem at all with experimenting on a modest scale with municipal bonds, and surely Manchester would leap at the chance to pilot this to go ahead with the upgrade of the trans-Pennine rail route, and much more. Clearly national politics has become a circus, but perhaps city politics will be relatively unaffected by the national Punch and Judy show. Let’s hope so. But the new political context means transparency, accountability and professionalism in investing in and managing public assets will be all the more vital. For all its narrow market efficiency pespective, the point the book makes about the sound management and independent governance of any new or existing public investments is an important one.

(Im)moral markets

A snippet from Dani Rodrik’s Economics Rules:

“As Albert Hirschman reminds us in his magisterial book The Passions and the Interests, the thinkers of the late 17th and early 18th centuries reasoned that the proft-seeking motive would countervail baser human motivations such as the urge for violence and domination over other men. The term ‘doux’ (sweet) was often appended to ‘commerce’ to suggest commercial activities promoted gentle and peaceful interactions. …. These early philosophers [eg Montesquieu] encouraged the spread of markets, not for reasons of efficiency or for the expanson of material resources but because they thought it would promote a more harmonious, more ethical society. It is ironic that thre centuries later markets have come to be associated in the eyes of many with moral corruption.”

Shades of Deirdre McCloskey’s The Bourgeois Virtues: Ethics for an Age of Commerce.?