Private and public value

Mariana Mazzucato’s The Value of Everything: Making and Taking in the Global Economy was my Bank Holiday weekend reading. I’m entirely sympathetic to her underlying argument that a well-functioning and growing economy requires both state and market institutions to be effective; and that the opposition between the meddling state and the ‘free’ market is a bogus dichotomy. While some on the political right still see state and market as inevitably in opposition, the tide of opinion has surely decisively turned against this high-1980s trope? After all, in the UK the Conservatives too see the need for an industrial strategy, with a clear role for the government in investing and co-ordinating.

The book has four stages. The first is a summary of the history of economic thought concerning the creation of value in the economy, from mercantilism through the physiocrats to the classical economists (Smith and Marx) and then the marginalist revolution and neoclassical economics. The importance of the final step, Robbins and positivism, gets a mention but is underplayed perhaps. This section sets the scene for arguing that there is nothing inevitable about our current framing of what creates economic value.

The second stage is a summary of the history of the development of GDP as the measure of economic progress, including the treatment of finance in the national accounts. This is all well-known to me for obvious reasons, but I think also to others, given there have been a dozen or so books about economic measurement/GDP in the past few years (including mine, and most recently David Pilling with The Growth Delusion (2018)). Mazzucato makes great play of the way the definition of the financial sector has become ever more expansive to make finance look increasingly important to the economy; the authoritative work on this, including the now-notorious ‘FISIM’ definition, is Banking Across Boundaries (2013) by Brett Christophers. Mazzucato then segues into a section on the financialisation of the economy, including the pernicious effects of the ‘shareholder value’ doctrine and stock option schemes for executives.

Finally, she reprises her arguments in The Entrepreneurial State about the role of the state in innovation, the need for taxpayers to get a bigger share in the returns, and a wider riff about the growth of monopoly rents due to excessive intellectual property protection (Exhibit A is the pharmaceutical industry) and market power (the digital giants). In these contexts, she argues, more state intervention would make markets work better. In an echo of the wider debate about economic institutions, she argues that the Anglo-Saxon structures have become extractive or exploitative, rather than value-creating. I was briefly excited by her use of the term ‘public value’, with the BBC as an example; but she does not reference the political science literature on public value or that the BBC actually implemented formal public value processes. The book instead links the term to Elinor Ostrom’s work on collective decisions (wonderful as it is).

I have a few quibbles. For example, Mazzucato several times refers to GDP as a measure of legal marketed activities; the formal definition now includes illegal marketed activities. It would have reinforced her argument had she pointed out the absurdity of GDP including prostitution while excluding childcare in the home. I found aspects of her description of the production boundary confusing (and it features prominently through the book as an expository device), no doubt because my mind is shaped by the current formal definition in the SNA. This is GDP-nerd territory.

Overall, The Value of Everything is a powerful contribution to the public debate about the kind of economy and society we want. The argument that the political/financial system has become exploitative  will strike a chord with many readers. Mazzucato does not give practical policy advice here. But I’m sure this book by such an influential economist will have a big impact in contributing to the shaping of a different, and more productive, climate of opinion about government and markets.


AIs, humans and chess

Garry Kasparov’s Deep Thinking is a compelling read. Timed for the 20th anniversary (last year) of his famous defeat by the chess computer Deep Blue, it’s a combination of the tale of his engagements with computers through the course of his chess career (including his view about IBM’s bad behaviour in the famous contest) with reflections on computers and human intelligence. Chess is of course a great lens for these reflections, being in many ways emblematic of intellectual skills.

Kasparov convincingly portrays himself as an optimist about technology, including AI. He sees it as an other tool used by humans, albeit one we haven’t yet figured out to use. He points out also that when some application becomes very familiar, we stop calling it AI and start calling it, oh, Siri. After all, we don’t call our fancy new washing machine a robot, but it is. Anyway, although not a chess afficionado, I enjoyed reading the book and agree with its call for some deep thinking about how to use these amazing, human-invented, new technologies.


Power and legitimacy

Paul Tucker’s book Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State is a significant contribution to the literature about the trade-off between participatory democratic influence over policy decisions and the technical complexity of much policy and regulatory activity. The focus is on central banking, not surprisingly given the author’s long experience at the Bank of England. However, the book also dips into competition policy. This is my territory, having spent 8 years on the Competition Commission. I’m not entirely convinced by the argument here.

Tucker’s conclusion is that when politicians delegate policy decisions to independent, technocratic bodies, they need to do so in accordance with some key ‘principles of delegation’. To date, they have not done so, and hence the crisis of legitimacy, at least as far as it applies to economic institutions. There are five design principles: there should be a clear statement of the body’s purposes, objectives and powers, to stop mission creep; its operating procedures should be set out; so should its operating principles – how will it go about conducting its delegated policies; there should be sufficient transparency that the institution can be monitored and held to accunt by elected politicians; and there should be some rules for how it can respond to emergencies.

These seem on the face of it perfectly reasonable. But pause on the third – central banks and independent competition authorities should have the way they implement policy set out for them. Thus, Tucker argues, a competition authority’s remit might be set in broad terms as ensuring markets are competitive, or ensuring there is no abuse of dominance; but it should not be left to the competition authorities themselves to turn this into operational rules. He notes that there have been significant changes in competition policy in the US and EU over time, shifting from the older institutionalist tradition to a focus on consumer welfare. As the book notes, this reflected developments in economic theory, adding: “The significance of these momentous changes is not whether they were grounded in good economics but that each occurred without any amendments to the governing legislation.” Thus, “This gives us a glimpse of why the public might not be clear about the pupose and objectives of antitrust regimes.”

Like a number of commentators on competition policy recently, Tucker believes – wrongly  – that the ‘Chicago School’ approach of using a consumer welfare criteria means competition authorities can only look at prices. On the contrary, although that has been the practice (because measuring prices is easier), they can take into account other aspects of economic welfare such as quality or range, or incentives to invest and innovate – this is set out in the CMA’s guidance documents, for instance. In the world of zero priced digital goods, that is exactly what they should do.

But that’s by the by. My hesitation about this principle is that the alternative – having operating rules set by elected politicians – would in reality defeat the purpose of giving economic regulators their independence. For what would stop legislators deciding that the economy is best served by preserving jobs at incumbent firms because they have the biggest economies of scale? This would be the pre-independence world of ministers deciding all mergers on public interest grounds. The time inconsistency problem common to so many regulatory contexts would return with a vengeance if legislatures can change the operating rules whenever they choose. Better to have these rules set by the technical experts, after wide public consultation. Sure, ideologies and tides in the realm of ideas would influence them, but less, it seems to me, than in the counterfactual world. Anyway, are elected politicians so respected now that they would reinject legitimacy back into economic governance? Opinion polling suggests they are among the groups the public trusts least.

Unelected Power engages an essential debate, however. There is a crisis of legitimacy in the western democracies. With QE, central banks have launched a radical change of policy with huge distributional consequences. The book has four sections: welfare, values, incentives and power are their headings. Although it touches on all the economic regulators, it is mainly about central banking, and on this is it authoritative. It will be an essential read for everybody involved in monetary policy, or researching it. It has a long bibliography; Tucker refers to legal and political science literatures as well as economics. One flaw is that it is heavy going in parts, surprsingly because he is a compelling speaker. Nevertheless, this is an important book.


Randomistas through the ages

A jolly history of the experimental in economics and social science, Randomistas: How radical researchers are changing our world by Andrew Leigh, is a good general introduction to the RCT method for readers unfamiliar with it. The book starts with a 1747 experiment to find a cure for scurvy, an affliction causing mass death and illness among sailors. Medicine was of course a pioneering arena for the experimental method as applied to ourselves. Subsequent chapters roam through psychology and education to more recent applications in ‘nudge’ policies, A/B testing by digital companies, and of course the famous ‘randomistas’ (so named by Angus Deaton) working in development economics.

The book is a jolly description of experimental discoveries in these domains ever since the scurvy experiment of ship’s surgeon James Lind. It notes that the randomista methods have their critics but doesn’t linger on the methodological debate. The author (an Australian MP and former economics professor), though well-informed and citing the extensive literature, is clearly an ardent enthusiast.

The final chapter, ‘Building A Better Feedback Loop’, indeed makes a strong case that it would make for better outcomes if policymakers and politicians were able to change course on the basis of evidence. One of the practical advantages of RCTs is perhaps that they leave open the decision – they can be described as pilot schemes in the policy context. There is far too little evaluation in policymaking – it can be too embarrassing, the decisions are water under the bridge –  so setting up an evaluation in advance by design, as it were, is attractive.

Experimental approaches are surely welcome as one more addition to the toolbox of policy evaluation, more useful in some contexts than others, vulnerable (like all empirical methods) to not being well carried out or interpreted. They can easily become a means of manipulating people – as in the behavioural testing done by online marketers – so should always be deployed with caution in the world of policy and politics. After all, people are wising up to the testing methods used by Facebook, Amazon, etc and not necessarily liking them. So I would be less of a randomista enthusiast than Andrew Leigh; other methods of evaluation are available.

Still, this is a very lively, well written book with lots of examples (some familiar like the Perry Preschool trial, others not). Experimental approaches are being more widely used, not least because of the spread of ‘nudge’ units (as pioneered by the UK’s Behavioural lnsights Team)  around the world.

And its basic point is essential: the scientific method should apply to the study of human society just as much as to the natural world. The more tools available, the better.


Basic income, debated

I’ve been dipping into a collection of essays on universal basic income, It’s Basic Income: The Global Debate, edited by Amy Downes and Stewart Lansley. There are nearly 40 short essays, mainly in favour but with a handful of opposing voices. The final section includes descriptions of pilot projects from North America to East Africa.

I’m a sceptic about universal basic income, an idea which revives every time there is a wave of concern about the prospect of technological mass unemployment – as in the 1960s and early 1990s. The opening essay is by robot apocalyst Martin Ford (The Rise of the Robots), making exactly this case. It seems to me an easy opt out for high tech types to absolve themselves of any responsibility for the consequences of their innovations by calling for a universal basic income, paid for by everybody else, a policy unlikely ever to be implemented.

However, others in the ‘pro’ camp deploy a wide range of arguments. There are contributors such as Anthony Painter, Ruth Lister and Caroline Lucas who have serious credibility as advocates for progressive policies.

The ‘anti’ arguments range from the cost to the likelihood that focus on universal basic income will divert energy and attention from higher priorities (universal services) and more feasible policies. My objections are that any feasible level of basic income will not help people improve their lot in life, in contrast to a high quality universal basic infrastructure (public transport, broadband, and health/education). Being handed an individual income is not going to solve collective challenges.

Still, pilot schemes are welcome; there isn’t much evidence about the effects discussed in the debate. I’m reasonably confident universal basic income at national scale will never happen, but if this discussion leads to a simpler and fairer benefit system with lower adverse work incentives, described as ‘incremental’ basic income, that would be great. And this book is a nice survey of the many arguments brought to bear on both sides of this debate.

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