Wanting to change

Anybody who reads Duncan Green’s excellent blog, From Poverty to Power, won’t be entirely surprised by the approach he takes in his equally excellent new book, How Change Happens. It is based on two pillars. One is Amartya Sen’s capabilities approach to human development (‘the freedoms to do and to be’), and I’ve always thought that when you appreciate its ethical and practical merits, it’s hard to take any other approach. The other is the need for systems thinking when it comes to considering economic policies or other interventions – in any context, really, but certainly in the case of development.

“Change in complex systems occurs in slow steady processes such as demographic shifts, and in sudden, unforseeable jumps,” Green writes. Mostly, change is extremely, painfully slow. It turns out to be impossible to do one thing because another, linked thing gets in the way. Events and crises open the way for the big shifts – being an economist, I think of this in terms of what it takes to move a co-operative game to a new focal point. But even then, the direction of the jump is contingent, messy, unpredictable. It anyway depends on the prevailing climate of ideas and norms – so part of the challenge is to be ready to take advantage of a crisis by having done all the contextual spade work, all the while getting on with the day job of trying to bring about incremental changes in the previous state of affairs.

Needless to say, this does not make for a concise ten-point plan in the final chapter (although it does try to sum up the whole in a ‘power and systems approach’ in the final few pages). The book has some interesting practical ideas, however. I like the principle of looking for ‘positive deviance’ – look for examples of people or activities that succeed against enormous odds, for outliers, and use them as ‘social proof’ so others copy whatever it is. This is exactly the way new technological innovations spread: the ideas are there, a few people try, and others imitate them. There are loads of examples of advocacy and development organisations and initiatives that have been able to implement responsive, adaptable changes (many of these brought Tim Harford’s Adapt to mind). Other suggestions are harder to see how to implement. The book argues that principled leadership matters. I agree. But where is it? How do donors encourage it?

Green concludes that many organisations in the aid world, including his own, need to move away from linear thinking and get wiser to context and the whole complex environment (actual and political) in which they operate. I hope they follow his advice and this book is certainly well worth anyone working in this world reading. The one element missing, though, seems to be the meta-analysis of the development agency ecosystem itself, and the prevailing ideas. For example, how do you get social innovation akin to technological innovation in a world of impact assessment and RCTs? Or indeed combine fleetness of foot with a genuine need to understand ‘what works’? Understanding one’s own cognitive biases or limitations is a tall order. What’s more, the aid world has incentive structures built in that will discourage change. In a variation on the old lightbulb joke (How many psyhologists does it take to change a lightbulb? Only one, but the lightbulb has to really want to change), how change happens is that a lot of people have to want change to happen.

Anyway, there’s no excuse for not reading the book, as it’s also published as an open access pdf. I hope lots of activists read and digest and change their approach, but suspect it will prove difficult for many.

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The world of yesterday

I’ve ben indulging in a non-econ book again, Stefan Zweig’s The World of Yesterday. Beautifully written, unsurprisingly dark, and – knowing his end – poignant. 51sqimqxfolThis paragraph describes life in post-WW1, chaotic, hyper-inflating Austria:

“The will for life to go on proved stronger than the instability of the currency.  … The baker made bread, the cobbler made boots,the writer wrote books, the farmer cultivated the land, trains ran regularly, the newspaper lay outside your door every morning at the usual time, and the places of entertainment, in particular the bars and the theatre, were full to overflowing. For with the daily loss of the value of money, once the most stable aspect of life, people came to appreciate true values such as work, love, friendship, art and nature all the more, and in the midst of the disaster the nation as a whole live more intensely than before, strung to a higher pitch.”

The other message of the book is how quickly societies can change, how almost overnight one normality vanishes, to be replaced by another. This was also the lesson of one of the most powerful books I’ve read, Richard Overy’s Interrogations, a study of the documents related to the interviews conducted with the accused in the Nuremberg Trials. He concluded that the moral universe in which people live can, similarly, change almost instantaneously, so powerful are the forces of conformity that create and sustain social norms. These norms are very strong – until they’re not. This is the lesson too from Joseph Tainter’s work. So – for those of us who live in stable and prosperous places – the message is: never forget that underlying capacity of social order to crumble very quickly.

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Alone and together in the economy

There is an interesting new summary of the work of the Systemic Risk Centre, whose theme is the idea of endogenous risk: risk created by the interaction of participants in a market or economy, and amplified through feedback loops. The pamphlet opens with a statement from Milton Friedman: “The great mistake everyone makes is to confuse what is true for the individual with what is true for society as a whole…. Almost any interesting economic problem has the following characteristic: what is true for the individual is the opposite of what is true for everybody together.”

It also, of course, quotes : “Nobody can be a great economist who is only an economist – and I am even tempted to add that the economist who is only an economist is likely to become a nusiance if not a positive danger.”

The centre focuses on finance. The summary is particularly good on the paradoxes: that making each individual market participant behave prudently will destabilise the whole financial system, in a real fallacy of composition; that many regulations amplify pro-cyclical feedback loops; that the Tobin tax on transactions would amplify market volatility; and so on. The work sounds like a terrific addition to the points made in Ian Goldin’s book , which has a chapter on finance. Adair Turner’s forthcoming also looks at some of these issues.

[amazon_image id=”0691169640″ link=”true” target=”_blank” size=”medium” ]Between Debt and the Devil: Money, Credit, and Fixing Global Finance[/amazon_image]

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On Seeing Like A State

A tweet by @sclopit (Stefano Bertolo), exclaiming that

sclopit
in other news, I recently spent a couple of days with a large group of budding policy makers who had never heard of http://t.co/vX6k4IxxNE
06/09/2015 07:16

sent me to my bookshelf to have a look through by James Scott again. The subtitle describes at one level the book’s subject: “How Certain Schemes to Improve the Human Condition Have Failed.” It looks in some detail at a range of idealistic state schemes, from the ujamaa villages in Nyerere’s Tanzania and the city planning of Le Corbusier quasi-implemented in Brasilia – as opposed to the organic unplanned living cities celebrated by – to Soviet collectivization.

[amazon_image id=”0300078153″ link=”true” target=”_blank” size=”medium” ]Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed (The Institution for Social and Policy Studies)[/amazon_image]

The book then draws together its themes from analysing each specific kind of failure, each an example of the failure of ‘high modernism’ in its over-abstraction from detailed contextual understanding. By high modernism, he means: “A strong, one might even say muscle-bound, version of the self confidence in scientific and technical progress, the expansion of production, the growing satisfaction of human needs, the mastery of nature (including human nature) and above all the rational design of social order commensurate with scientific understanding of natural laws.” Step forward the least attractive, most hubristic version of 20th century economics.

“We have repeatedly observed the natual and social failures of thin, formulaic simplifications imposed through the agency of state power,” Scott writes. To blame: “utilitarian commercial and fiscal logic.” Large-scale social processes are too complicated to plan for. Scott celebrates practical, local knowledge, improvisation.

He does not, however, advocate abandoning the idealism that drove such projects, or leaving everything to “the market”. His advice is summed up in four rules of thumb:

Take small steps

Favour reversibility

Plan on surprises

Rely on human inventiveness

Above all, policymaker, do not think that you are all-knowing while your subjects are know-nothings. Don’t plan for abstract citizens, all uniform. Remember that context is everything.

Since was published in 1998 there have been a number of other reminders of the messy complexity of reality. One good recent one was Colander and Kupers in . And of  course the theme is an old on, dating at least to Hayek’s 1945 AER paper The Use of Knowledge in Society, its theme brilliantly dramatized in Francis Spufford’s .

But if you’ve never had chance to read , I, like Stefano, think it is an essential book.

PS Speaking of economics in this context, I am itching to write my review of Dani Rodrik’s , on 21st century economics, and see people have started to comment on it. But the letter with the proof says not before 13 October so I’ll hold out at least a little longer.

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The information economy

I very much enjoyed reading Cesar Hidalgo’s . It’s a very original perspective on the process of secular economic growth, bringing together not only several strands of the economics literature – growth theory, institutional economics, social capital etc – but also physics, biology and information theory. So it’s certainly ambitious, and I found it largely persuasive.

[amazon_image id=”B00R3C1V0Q” link=”true” target=”_blank” size=”medium” ]Why Information Grows: The Evolution of Order, from Atoms to Economies[/amazon_image]

Hidalgo’s first point is that we are misled by thinking of the information economy as ‘weightless’ (a term I think I coined, or at least popularised, in my 1996 book The Weightless World) into forgetting that information is nevertheless physical. “Information is not a thing; rather, it is the arrangement of physical things. It is physical order.” He links the order of the economy to the order of the universe that can exist in pockets despite entropy. Economic order comes about through information embodied in things (‘crystallised imagination’) and in the way people organise themselves to apply knowledge and know-how. The first section is rather poetic. Hidalgo describes a tree as a computer powered by sunlight. “A tree processes the information that is available in its environment.” He describes a colleague at MIT who lost both his legs to frostbite while mountaineering, and built his own prosthetics: “He is walking on solidified pieces of his own imagination.”

The book goes on to consider products imported and exported by countries in terms of ‘crystallised imagination’, which requires “an enormous amount of knowledge and know-how.” Knowledge is the set of instructions – a book describing how to play a guitar – and know-how is the practical experience enabling application – the process of learning and practising playing to produce lovely music. Hidalgo introduces the concept of a ‘personbyte’ – the limit to the knowledge and know-how that can be embodied in one individual. For an economy to go beyond that requires collective organisation. He argues against the normal economic argument that economic development is the process of acquiring the ability to consumer more goods and services. “Economic development is based not on the ability of a pocket of the economy to consumer but on the ability of people to turn their dreams into reality.” (This part doesn’t wholly convince me – it’s an appealing case but surely consumption matters too.)

The book then turns to the idea of the economy as a social and technological system for amplifying knowledge and know-how, and looks at institutional economics and the role of social capital in growth in this context. Conveying know-how is difficult, and becoming more so as time goes by and the economy becomes more diverse and complex. The “computational capacity” of the economy needs to grow, but it is constrained by the ability for knowledge and know-how to be embodied in networks of people – hence the value of trust, as it makes that easier.

Hidalgo’s work on the enters here: there is a strong positive correlation between a complexity index and long term growth (over 10 years). The falling cost of communications and the emergence of standards have increased the number of long-distance market links (instead of transactions within single firms), and this know-how transfer is made far easier by high trust, which enables larger networks. Low trust economies are often characterised by more family firms and rely more on the state to spread knowledge and know-how through its support for industries.

There is a very nice analogy of the economy as a jigsaw. “Moving a complex industry is like trying to move a jigsaw puzzle from one table to another. The more pieces in the puzzle, the harder it will be to move it, as the puzzle falls apart when we fail to move all the pieces at the same time.” It is easier to move just a few pieces to another table that already has part of the puzzle in place. Thus economies mostly grow out from their earlier set of products, which embody the know-how they already have – they already have some of the pieces. The description of this process would very much appeal to evolutionary economists.

A final point that very much intrigues me is measuring growth. Hidalgo makes the same point as the final chapter of my  book, that in adding things up in terms of their monetary value we are not capturing the value of diversity: three spoons are not as valuable as a knife, fork and spoon. He says that using market price denomination to aggregate implicitly assumes there is friction-free trading; but this is often not possible, especially with stock variables. He advocates looking at the disaggregated economy via input-output tables.  “The mix of products exported by a region’s industries represents a fingerprint of its productive capacities that does not suppress the identity of the economic elements involved.”

So a highly recommended read for anyone interested in economic growth and development. The insistence on the embodied-ness of knowledge and know-how is surely correct, and also a useful corrective to overly-abstract accounts of economic development, including quite a lot of the newer institutional literature (as argues, this often amounts to the advice to poorer countries to “be more like Denmark”, ignoring the trajectory from here to there). It’s also a pleasure to read such a well-written economics book; from now on I’ll be envisioning the economy in terms of crystals of imagination.

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