Going to extremes

Richard Davies obviously made the kind of road trip many of us only dream of to write Extreme Economies: from Akita in Japan to Santiago in Chile, from Glasgow to Kinshasa. The locations he chose illustrate one of three characteristics – survival (refugee camps in Jordan, post-tsunami Aceh, a US prison in Louisiana), failure (Panama’s Darien Gap, Kinshasa in DRC, and post-industrial Glasgow), and the future (ageing Japan, digital Estonia, unequal Chile. As the book sums it up: “The year 2030, for most people on earth, will be a cocktail of these three cities: an urban society that is old, technologically advanced, and economically unequal.”

The book is a great read – I tore through it. An economist who can write so well while at the same time explaining the economic principles so clearly is always a joy. I will admit to being rather envious of the opportunity he had to visit all these places. Getting out and visiting should be required for all economists, whether they are writing about development and progress as Davies is, or about industrial organisation or education. You always learn something not only relevant but also important. One of the things I did love about this book was the painless administering of some substantial chunks of economic research – it’s an ideal read for eager 6th form students or undergraduates. It might encourage them to appreciate that economics is not only important but also exciting.

The book also includes some important threads. One is the environment as an economic as well as intrinsically valuable asset. Darien’s economy depends on extraction from the jungle, living now on its future potential: “The puzzle is why, in a region where everyone knows the environment is being degraded, the people of Darien can’t manage the economy in a way that stops it happening.” This segues into a discussion of the ‘tragedy of the commons’. Later, though, it’s Glasgow’s social capital, another overlooked asset, that’s pinpointed as one source of failure: “When an economic force is shared, unseen and hard to measure, you will do too little to protect it.” I couldn’t agree more. Social capital features in all the examples here, either as a source of resilience or a cause of failure. It isn’t a sufficient explanation of economic outcomes – for example, in the chapter on refugee camps in Jordan, one thrives and the other fails because of external forces shaping the structure of the camps and their economic potential – but it is a necessary element.

Davies picks this up in the conclusion: “The biggest gap in economics is the way it completely ignores social capital.” This is why our Bennett Institute Wealth Economy team is exploring the measurement of social capital. Economics doesn’t entirely ignore it – it gets lables such as ‘institutions’ or ‘goodwill’ – but is treated as a black box at best. So I agree with the book that economics will have more to offer the world if we measure and understand better the “subtler and more human aspects of income and wealth.”

Meanwhile, I recommend enjoying the tour through the rebuilt Aceh, refugee camps in Jordan, the market in Kinshasa, Lousiana’s Angola prison and all the other economies featured here. And I hope some TV producer will pick up the book and take its author round the world all over again to film it.



Once upon a time

It’s very interesting the way interest in narratives is popping up in so many places. The Royal Society has been looking at narratives in AI and in science more generally. Now Robert Shiller of Irrational Exuberance (and Nobel Prize) fame has a new book called Narrative Economics: How Stories Go Viral and Drive Major Economic Events. The book builds on a lecture he gave a couple of years ago. It begins: “This book offers the beginnings of a new theory of economic change that introduces an important new element to the usual list of economic factors: contagious popular stories that spread through word of mouth, the news media and social media.”

As the preface notes, the idea isn’t new; the 1894 Palgrave’s Dictionary of Political Economy mentions narrative economics. Robert Merton’s well-known concept of self-fulfilling (or self-averting) prophecies covers much of the territory of narrative dynamics. But perhaps today’s economy is more vulnerable than ever to contagion. An early chart in the book illustrates the surge in the proportion of articles across several socal science and humanities disciplines that contain the word ‘narrative’. Economics and finance are well behind history (of course) but also anthropology, sociology and political science.

Anyway, the book is about how narrative contagion affects economic events. It has in mind epidemic models, as well as – well, narratives. Each chapter focuses on a number of examples. The first section starts with Bitcoin as an example of how narrative affected behaviour and outcomes, then introduces some of the concepts concerning how narratives ‘go viral’ and the psychology of contagion. Part 2 is a brief section setting out ‘seven propositions of narrative economics’ (including ‘truth is not enough to stop false narratives’. Quite.) Part 3 describes recurring economic narratives such as financial boom and bust, or automation and jobs. The final part of the book sets out questions for research.

The book is always interesting, but somewhat bitty, one example after another, lacking a grand theory of narrative framework. However, as Shiller points out in the final section, there is plenty of scope for quantitative approaches to understanding the economic role of narratives, particularly using recent text analysis tools. A cynic might paint this emphasis on narrative – also recently explored by George Akerlof and Dennis Snower – as classic economic imperialism. After all, she might say, sociology and anthropology have been onto this for years. Some economists might on the other hand dismiss the emphasis on narratives as a source of dynamics as woolly nonsense, merely anecdotal. But both responses would be too negative.

A move to extend the use of qualitative approaches in economics should be welcomed, and an extension of the also-welcome revival of economic history. Narrative Economics joins a couple of other recent books, such as Morson and Schapiro’s Cents and Sensibility and Uncertain Futures edited by Jens Beckert and Richard Bronk in restoring the humanity to economics.



Better economic forecasting

The heading of this post is not an invitation for the usual jokes about economic forecasts. It’s clear that most people think forecasting is what economists do, by and large, and that they do it badly. Indeed, some forecasts are a tissue of nonsense – pretty much any UK economcy & trade forecast from Patrick Minford these days for example, although 20 or 30 years ago he was a serious forecaster. I spent a few years myself in the mid/late 1980s doing macro forecasts for the UK and a few other countries, and later, as Economics Editor of the Independent, awarded an annual Golden Guru trophy for the UK forecast of key macro variables closest to the published figures at the time of the award – a necessary qualification because many macroeconomic statistics, especially GDP, are significantly revised over a period of years.

The revisions are with us still, but the techniques of forecasting have greatly improved since then, although of course there is a wide quality range among economic forecasters. For a non-technical guide to economic forecasting, there could be nothing better than Forecasting: An Essential Introduction by Jennifer Castle, Michael Clements and David Hendry. It is a crystal clear and intuitive explanation of what macroeconomic forecasts can and can’t do. It explains the inherent difficulties in trying to forecast the future of a complex non- linear, non-stationary system in which behaviour can be affected by forecasts themselves, all from a limited amount of past data. Better still, it explains the empirical techniques this ace team have devised to tackle some of the challenges.

My only complaint about the book is that the charts are a bit too small for my middle-aged eyesight. Although non-technical, there are lots of charts and it probably won’t make the bestseller list. However, it should be read by any student about to do a time series economietrics course, and to anybody about to start a job as a forecaster. Economics students are proficient in all the relevant software, have ploughed through the statistical theory in their econometrics courses, but anybody starting out as a forecaster naturally lacks the wisdom that comes with the experience of handling the data and seeing your lovingly estimated model produce some dreadful out-of-sample forecasts.

This book represents a treasure trove of crystallised wisdom. It offers up practical insights in clear prose. For example: “This principle of differencing is a method to remove the deterministic components of a forecasting model, by which we mean intercepts and trends. Deterministic terms capture the underlying equilbrium and growth rate of a variable of interest, so are fundamental to modeling, but can be catastrophic for forecasting when either component changes. The differencng principle can be applied to any model with an inherent equilibrium to which it corrects. … But…. if the object needing to be forecast is the level, a good performance forecasting the differences is not necessarily sufficient, as cumulating those differences may lead to an increasing divergence from the level.”

The book ends with some reflections on the limits to forecasting. Some things are inherently unpredictable – including events like the financial crisis which hinged not only on prior macroeconomic trends able to be captured in a macroeconometric model but also on unexpected policy decisions like letting Lehman Brothers go bust. But  the book notes that the forecasting process is not just about numbers but also about the narrative, at least in any macro policy context. Hendry coined the term ‘forediction’ to capture this.

No doubt the public at large will continue to mock economists and their forecasts, but they will always be needed, and in that case should be as good as economists can make them.

41cwRNu7q7LForecasting: An Essential Introduction


An Adam Smith for our times

Jesse Norman is one of the most thoughtful of the UK’s MPs, a principled Conservative, and has followed up his earlier biography of his hero Edmund Burke with Adam Smith: What He Thought and Why It Matters. It’s an excellent overview of Smith’s life and work. It would make a terrific read for economics students but also has much to interest those who’ve read every book about Adam Smith going. Like many recent books about Adam Smith (such as Emma Rothschild’s Economic Sentiments and Nicholas Phillipson’s biography An Enlightened Life), it reclaims the Theory of Moral Sentiments as having equal importance to The Wealth of Nations.

Part of Jesse Norman’s aim is to dissociate Smith from the ‘free market’, invisible hand caricature of many conservative economists and thinkers. The first part of the book is a pretty standard biography, nicely done. The second part is a history of how neoclassical economics came to hijack Adam Smith, stripping away from his thinking much of its richness and depth, not only in terms of human behaviour (not narrowly self-interested in Smith) but also in terms of institutional context (dynamic, contingent, evolutionary). The book has a nice section on Vernon Smith, whose experimental work in the 1980s was an early critique of the assumptions of neoclassical general equilibrium theory. In effect, it argues, much of modern neoclassical economics as it peaked in the late 20th century was foreign to Smith’s approach. What Smith did do was: “Set out the field of political economy with markets at its centre,” but in a way that makes institutions and historical sensibility equally central.

(There is also a section on Smith’s strong, principled opposition to the slave trade. It can never be said often enough that economics got the label ‘the dismal science’ from Carlyle because economists were prominent campaigners against slavery.)41Rqw3Bgi4L._SX324_BO1,204,203,200_The book ends with a section on ‘why it matters’ and what a Smithian perspective would be on the economy now. Norman notes the tyranny of the arid mainstream perspective in policy economics right up to the financial crisis (although academic economics had by then already started to move decisively away from free marketism): “What is so striking about that crisis in retrospect is not, even, the egregious self-enrichment of the previous decade, or the specific failures of policy, law and enforcement involved. It is the intellectual grip which the language of free markets held on almost all the parties concerned, regardless of the often very different reality.” Indeed, free marketism still has a strong grip on policy, given that so many policymakers were trained in their economics when it was still at its peak.

What is to be done about this. “We need a new master narrative for our times,” Norman writes (italics his). The book calls for political renewal too. Who could disagree? (Although that makes it disappointing that Jesse Norman declared himself a supporter of Mr Johnson in the current Conservative leadership campaign.) It concludes, of course, that returning to the true Adam Smith can help shape the new narrative with markets still central to economic life but understood in the context of a political economy in which institutions, historical context and human nature play their proper role.



Economics and philosophy

UPDATE 2 – I’ve now done some sorting of the list. OK, the categorisation is inevitably arbitrary but it seemed helpful as the list got so long. More suggestions in the comments. And huge thanks to all who contributed.


Econtwitter is wonderful. Yesterday, an undergraduate emailed me to ask for book recommendations about the overlap between economics and philosophy. I recommended:

Agnar Sandmo Economics Evolving 
D M Hausman and M S McPherson and D Satz Economic analysis, moral philosophy, and public policy 

Then I asked Twitter, and here is the resulting, much longer, list. I won’t editorialise about them, although some are not good undergraduate intros in my view. One striking thing is how few recent overviews there are, however (as @esamjones also pointed out on Twitter). Huge thanks to all who made suggestions. This is a fantastic collective list.

UPDATE Now even more added – but this goes far beyond the original brief for an introduction for an undergraduate. There’s also a bias in the recommendations toward books critical of economics (or at least its ‘mainstream’) and, again, I think for an economics undergraduate a more neutral intro would be a better starting point. Anyway, I leave this here as a list, not a curriculum.


The Worldly Philosophers, Robert Heilbroner

Jon Elster’s Nuts and bolts for the social sciences

General philosophy

Julian Reiss, Philosophy of Economics

Frank Hahn and Martin Hollis’s Philosophy and Economic Theory

Joan Robinson, Economic Philosophy

Harold Kincaid, Don Ross Oxford Handbook of Philosophy of Economics

Cartwright & Montuschi Philosophy of Social Science

Ethics/markets/justice/social choice

Nozick Anarchy State and Utopia

Rawls A Theory of Justice

Contested Commodities – Margaret Reading

The Value of Nothing Raj Patel

Several books by Martha Nussbaum

Ken Binmore’s Playing Fair, Just Playing, or Natural Justice

Tomas Sedlacek’s The Economics of Good and Evil

Hausman & McPherson’s Economic analysis & moral philosophy

Emma Rothschild, Economic Sentiments

Jerry Muller, The Mind and the Market: Capitalism in Modern European Thought

L’Enfer Des Choses Dupuy & Dumouchel

The Moral Economy Sam Bowles

John Brooms Weighing Goods

Debra Satz Why Some Things Should Not Be For Sale

Ben Friedman The Moral Consequences of Economic Growth

Jesse Norman, Adam Smith: What He Thought & Why It Matters, chapters 6-10

Will MacAskill Doing Good Better

Anything by Toby Ord

If You’re an Egalitarian How Come You’re So Rich G A Cohen

M White The Oxford Handbook of Ethics and Economics


Deirdre McCloskey The Rhetoric of Economics

Kenneth Boulding Economics as a Science

Francesco Guala’s work, eg Methodology of Experimental Economics, then Understanding Institutions

Explanation and Human Action by A R Louch

Tony Lawson Reorienting Economics

Sheila Dow Foundations for New Economic Thinking

Wade Hands Reflection without Rules

Better ways of doing economics

Albert Hirschman, Exit, Voice & Loyalty

The Social Limits to Growth, Fred Hirsch

Thomas Schelling Micromotives and Macrobehaviour

Mahbub-al-Haq. The Poverty Curtain

Paul Seabright The Company of Strangers

Robert Sugden The Community of Advantage

Kaushik Basu The Republic of Beliefs

Dani Rodrik Economics Rules

Other classics

Adam Smith Theory of Moral Sentiments

Michel Foucault Birth of Biopolitics

F Hayek The Market and Other Orders