The state of economics

I just started reading The Nobel Factor: The prize in economics, social democracy and the market turn by Avner Offer and Gabriel Soderberg. I thought it was going to be more or less a history of the economics Nobel prize – which pedants always want spelled out as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Judging from the introduction and 1st chapter, it is more about the role awarding the Nobel prize played in the increasing orientation of economics as a subject toward the free market version emphasising deregulation and individualism. The book points out that “abstract theory peaked in the 1980s” – but the legacy of the deliberate ideological use of rational expectations/real business cycle economics has lingered in the policy and political worlds to this day. The book’s first chapter demolishes these macro models, rooted in ‘microfounded’ general equilibrium models, describing them as ‘surreal’ and ‘lacking respect for reality’. What I’m interested to find out is how the authors argue the Nobel Prize assisted this turn, for many of the recipients were somewhat maverick, working against the tide – think of Herb Simon, or Danny Kahneman, James Tobin and Robert Solow. Anyway, it looks like a good companion to Daniel Stedman-Jones’s account of the Mont Pelerin Society and its acolytes in right wing think tanks, Masters of the Universe.

The Nobel Factor might have caught the moment. Paul Romer’s excellent paper about the state of macroeconomics has made waves. Simon Wren-Lewis has made some interesting points about it. There is an excellent Beatrice Cherrier tweetstorm about rational expectations, well worth looking up. The ESRC is looking to create a macroeconomics network encompassing non-mainstream approaches. Eight years after the crisis, the moment for this debate has arrived.


What next?

All of a sudden a wave of enticing-looking books has arrived. I’ve read the proofs of Tim Harford’s new one, Messy – not allowed to review that until closer to publication date in early November, but it’s terrific of course. I need to hold off on Richard Baldwin’s The Great Convergence, which I’m desperate to read, because it also isn’t published until November. But all of these others look tempting too. Which to pack in my bag today?


Humans need not apply

As one would of course expect from the economics correspondent of The Economist, Ryan Avent has written a very clear account of the way digital technologies, and the globalisation driven in part by technology, is changing the ways people can earn a living. The Wealth of Humans: Work and its Absence in the 21st Century brings together the debate about robots destroying jobs, arguments about the ‘death of distance’ and literature on the re-emergence of cities as economic hubs, the issue of inequality, and the more recent discussion of whether or not the world is in for an era of ‘secular stagnation’. The focus is on three related trends: automation, globalization, and the enhanced productivity of a highly skilled minority of people.


It ends up being a rather pessimistic synthesis. The starting point is unarguable: “Society must go through a period of wrenching political change before it can agree on a broadly acceptable social system for sharing the fruits of this new technological world.” A few years ago this would have seemed hyperbole, but no more. And yet the rest of the book tends to suggest that this political change cannot happen. Essentially, Avent does not believe enough people can become educated or skilled enough to share the benefits of automation and globalisation with those happy few whose cognitive skills have made their incomes increase. He does not think as many as 50% can complete tertiary education. “The proportion of highly educated workers to less educated workers is no longer going to grow in the growth-boosting, inequality-dampening way it once did.”

Part of this, I’d take issue with. I don’t agree that skill upgrading has ‘run out of steam’. The character of tertiary education clearly needs to change; we are in a stage like the persistence of classical education in the late 19th century. The educational establishment is slow to change – but it will, or it will be disrupted. But I’m much more persuaded by James Bessen’s argument (in Learning by Doing) that in the later stages of the technological transformation of production, the necessary skills are steadily standardised and thus able to be codified and taught. And, while addressing the ‘lump of labour’ fallacy, Avent nevertheless argues that, “The problem is the sheer abundance of labour.” Yet he also sees technology replacing ‘expensive’ labour. Surely labour=people=knowledge, pretty key in an endogenous growth, knowledge-based economy. It seems more likely that ‘work’ will be redefined, with a role for appropriately skilled humans, as it has been so many times before.

There are some very nice details indeed in the book. I didn’t know that Robert Gordon used to ask audiences whether they would rather give up post-2000 technology or indoor plumbing – the answer used to be the former, until smartphones came along. And indeed in the developing world, people would clearly rather have their phones and the internet. (An aside: indoor plumbing is a great example of why technology is social more than it’s technological. It’s a simple and well-known technology, yet one many countries are unable to make work for them.) Arvind Subramanian’s term ‘fluff not stuff’ for weightlessness (cf The Weightless World) was new to me, although perhaps a little too derogatory-sounding for the source of most of the value-added in developed economies.

Avent concludes that the reason to be pessimistic is that there is ‘no-one in control’, able to pilot society wisely through the upheaval. Looking back over the past 200 years, someone thinking they are ‘in control’ seems a pretty bad idea to me. But, to get back to the starting point, the politics, I’d agree that this is the territory for pessimism. Where leadership to generate a sense of progress and confidence would be desirable (because expectations matter no end for the economy), we have politicians reacting to people’s fears. It’s understandable, but it isn’t what we need.

Public policy reading

Frederico Mollet on Twitter set me a good challenge: some general reading for someone about to start a masters in public policy. Here is a list of suggestions, ten books*, accessibly written, with a bias towards economics and the rationale for economic policy. As ever, more ideas will be welcome.  I’m particularly keen to hear recommendations of this kind of book by female authors – this is a shockingly male list.

The first three are my all-time favourites and I think everybody ought to read them.

Seeing Like A State James Scott

Reinventing the Bazaar John McMillan

Micromotives and Macrobehaviour Thomas Schelling

Who Gets What and Why Alvin Roth

What Money Can’t Buy: The Moral Limits of Markets Michael Sandel

Economics Rules Dani Rodrik

Madmen, Intellectuals and Economic Scribblers: The Economic Engine of Political Change Edward Lopez and Wayne Leighton

Poor Economics Esther Duflo and Abhijit Banerjee

The Idea of Justice Amartya Sen

Other People’s Money John Kay

Economic fables Ariel Rubinstein

The Blunders of Our Governments Anthony King and Ivor Crewe (UK examples only, pretty funny)

PS * approximately 10 as I kept having ideas


1989 and all that

One of the most brilliant history books I’ve ever read is the late Tony Judt’s Postwar: A History of Europe since 1945. It was revelatory, not just because he was a brilliant writer, but also because of that framing of modern history on this side of the Atlantic as a story of all of Europe. The Iron Curtain turned out to have been an internalised barrier too. So Judt was able to reveal the epochal importance of German reunification and membership of the EU for other central and Eastern European countries. For many of us ‘Remainers’, the failure of the official campaign in the UK’s disastrous EU referendum to remind voters about how hard won modern Europe has been was inexplicable.

I’ve just finished Europe Since 1989: A History by Philipp Ther (a translation from the German original). While not on the same scale, Ther acknowledges his debt to the way Judt framed the continent as a whole. Having said that, this is a book focusing largely on the experience of the former Soviet bloc, and exploring the reasons for the different outcomes for different countries. One message is how much earlier history influences the present, for example in the differing cultural and social attitudes to entrepreneurship, or conformism. Another is the extent to which east Germany (and Berlin until relatively recently) suffered from what Ther describes as “the most radical shock therapy in postcommunist Europe.”

I found the detail interesting – Ther is obviously familiar in great depth with many of the former planned economies. I had one big frustration, which is that the entire post-1989 history is interpreted through the prism of ‘neoliberalism’. I agree with my colleague Colin Talbot that this is largely used as a generic term of abuse, one often aimed at economists in general. Ironic, really, when applied in the context of the dramatic economic collapse of the non-market economies. Ther isn’t as bad as many users of the term, in that he does appreciate that there was a specific ideological project – spearheaded by Reagan and Thatcher, supported by a group of economists. However, while talking freely about ‘neoliberal hegemony’, he also writes: “The political practice of reform in eastern Europe always diverged from pure theory,” and “Brussels’ agenda was not strictly neoliberal,” (writing about transfers of funds to the former communist countries amounting to many times the amount of Marshall Aid). He continues: “Overall, European integration and its attendant programms were a tremendous success.”

So one ends up with the impression that the first neoliberal wave was Jeff Sachs with his ‘shock therapy’ theory, and the second was Vaclav Klaus. It’s a bit thin, although of course the ‘shock therapies’ were simplistic and indeed quickly disowned by many economists. So although at least this book doesn’t claim all of economics, the mere idea of economic reform in a disintegrated planned economy, is neoliberal, it’s an analytical frame that hinders rather than helping understanding of post-1989 Europe.