Taking information seriously in economic policy

Earlier this month I wrote about Joe Stiglitz’s Jean-Jacques Laffont speech at the Tiger Forum, which was based on his new book with Bruce Greenwald,


[amazon_image id=”0231152140″ link=”true” target=”_blank” size=”medium” ]Creating a Learning Society: A New Approach to Growth, Development, and Social Progress (Kenneth Arrow Lecture Series) (Kenneth J. Arrow Lecture Series)[/amazon_image]

Stiglitz won his Nobel Prize for his massively important work on asymmetric and missing information – how this shapes institutional structures, including markets. His Nobel Lecture is well worth the read.

This book builds on the information-based approach, and links it to other work on endogenous growth theory, which sees the process of growth as a cumulative process in which knowledge builds on earlier knowledge. This makes ideas (including those formalized as ‘intellectual property’) and people (to whom ideas are attached) the key to economic development. Stiglitz and Greenwald introduce industrial policy to endogenous growth models. They cover, among other areas, trade policy, intellectual property regimes, industrial strategy, and competition policy. It’s a somewhat technical book – there are quite a few equations and models at I would say advanced undergraduate level –  although one could skip those bits and still follow the argument.

I agree with the authors’ motivation for this book. They write: “Everyone today speaks of the innovation economy or the knowledge economy, and there have been important advances in the analysis of, say, patents and patent races, and network externalities, to take but two examples. But the full implications …. for the neoclassical model have still not been taken on board. And the implications for policy have been even less absorbed into mainstream thinking.” They go on to point out that it is 40 years since Stiglitz’s work on information questioned fundamentally standard economics results such as the existence of equilibrium, or the uniqueness of equlibrium, but little has changed in the standard approach. I doubt that any ‘mainstream’ economist would challenge the importance of the results on asymmetric information, non-linearities in growth and so on, so it is a puzzle that so few have taken the implications seriously. No doubt the answer lies in the sociology of the profession and academic incentive structures. My sense is that this is now changing.

This book takes the implications of information externalities forward into specific policy areas. It argues that not only can we not presume that a market economy is efficient, but also that industrial and trade policies can demonstrably increase social welfare. “Learning externalities are pervasive and it is a mistake not to take them into account.”

While not agreeing with every specific policy prescription they make, information, knowledge, learning – whatever you want to call it – definitely does change the prism for assessing structural economic policies. Maybe Prof Stiglitz will next write the popular book that makes this shift in perspective accessible to the policy world.

Prof Stiglitz and me at the TSE TIGER Forum


Information underload

In his classic book

, Daniel Dennett said: “A scholar is just a library’s way of making another library.” I’ve always loved that inversion of conventional thinking about causality, and sometimes even muse that as friendly bacteria in the gut are to humans, we humans are becoming to computers or the internet.

[amazon_image id=”014016734X” link=”true” target=”_blank” size=”medium” ]Darwin’s Dangerous Idea: Evolution and the Meanings of Life (Penguin Science)[/amazon_image]

The line from Dennett is quoted in James Gleick’s

. It’s been a very enjoyable read, covering some of my favourite territory in a well-written way. This includes the long-run effects of the  telegraph, Charles Babbage and Ada Lovelace, Alan Turing’s codebreaking work, Norbert Wiener and cybernetics, Claude Shannon’s information theory. The book had some angles that were new and quirky – for example, I like the point that lots of newspapers named themselves The Telegraph, following on from The Bugle, but none chose The Telephone. I liked it that Turing and Shannon had met in 1943, one devising codes and the other breaking them, but because of wartime secrecy had been unable to discuss their work. There’s a good section on Godel’s incompleteness theorem and why this relates to computation, although drawing quite a lot on Douglas Hofstadter’s 

Overall, though, there was little that’s new here (at least if you share my obsessions and have read so many other books on this territory, from Tom Standage’s 

to George Dyson’s
), and I could not find really find a line of argument. There’s a general theme that everything is about information, right down to genetic code and the meaning of life; that information is the fundamental idea that should shape how we think about the physical universe and all of life, rather than energy. Maybe. There’s a long section on entropy that tries to underpin this thought. But I think that just as our forbears saw everything via mechanical metaphors, information is the framing metaphor of our times.

So, an enjoyable, meandering read, ideal for a flight. But not, for me, living up to the praise heaped on it by other reviews such as this in The Guardian or this (rather more tempered) one in The New York Times. And of course it won the Royal Society Winton Prize, a major achievement. So maybe it’s just me. I wouldn’t discourage anybody from trying it.

[amazon_image id=”0007225741″ link=”true” target=”_blank” size=”medium” ]The Information: A History, A Theory, A Flood[/amazon_image]


The tough life of the corner office

 by Ray Fisman and Tim Sullivan has a subtitle that many people might consider to be a contradiction in terms: The Underlying Logic of The Office. A majority of us work in offices, and we know it isn’t logic so much as emotion or perhaps just habit that drives things. Often, indeed, the emotions of the kindergarten playground.

Nevertheless, Fisman and Sullivan have achieved that rare feat of writing a book about management and organisation that offers genuine new insights, and is a good read as well. I thoroughly enjoyed it.

The key moment of illumination comes early in the book when they write: “Jobs that stay inside the org are the hard ones: hard to measure, hard to define and hard to do. If they were easy, we’d hire contractors to do them for us, and the market, with prices working their magic, would work just fine at getting the job done.” The way to understand orgs – and why so many are so badly run – is that the work people do in them is characterised by information asymmetries and transactions costs.

The book applies the principles of information economics to many examples of organisations ranging from the US Army and the Baltimore Police Department to Apple and Citigroup. It also covers issues such as organisational culture, rocketing executive pay, merger mania, innovation (they recommend the ‘skunkworks’ approach) and the like, bringing in other areas of economics as needed – game theory, economics of ‘superstars’, behavioural psychology.

For example, take the pay spiral. The chapter begins by recounting John Thain’s extravagance – $1,400 for a waste paper basket in an office remodelling that cost $1.2 million. It moves onto Henry Mintzberg and others documenting that what CEO’s do is get interrupted by people who want to talk to them, in between all the meetings. They have little time alone and certainly don’t spend time poring over data and documents to make a rational calculation about the best thing for the business to do. Decisions are based on the CEO’s judgements about information conveyed verbally by a selection of other people. The skill of the CEO is gathering and weighing soft information.

Relatively few do this well. After all, running an org is really difficult, as already described. So slightly greater skill in doing so is amplified into significantly greater pay: a good CEO decision will be really valuable financially to a big company. Just like Hollywood stars, a slight edge makes an individual executive a hot property in the CEO jobs market. The market rewards them correspondingly. Remuneration committees embed this upward spiral because they have interlocking memberships – not necessarily the same individuals, but connected in a social network. Besides, the Remcos believe that their guy is better than average – the Lake Woebegone effect – so deserves better than average CEO pay. And the spiral continues.  So this chapter uses various parts of the economics toolkit to explain the excessive pay phenomenon. CEOs are doing difficult work, are valuable to their orgs – and they’re still overpaid.

For, contrary to popular belief, management is in general a good thing. The authors cite evidence that better managers deliver better outcomes in the public sector, where administrators and managers tend to be reviled  – in terms of exam results in schools or survival rates in hospitals. One of the most striking bits of evidence is the massive increase in productivity in an Indian textiles firm given $250,000 of free consultancy advice by Accenture (49 firms turned down the offer, showing what they thought of management consultants). The key to the improvement was installing systems for tracking inventory and monitoring performance – reducing, in other words, the information asymmetries that had held back the business.

The book is packed with great examples. Fisman is Professor of Social Enterprise at Columbia Business School, and was the co-author of another terrific book, 

(with Ted Miguel). Sullivan is editorial director of Harvard Business School Press.

Their bottom line is that managing an organisation is intrinsically difficult. “If there’s one message to take away from this book, it’s that a glass half full may be the best you can hope for.” That is so much more plausible a conclusion than conventional management books that advocate one gimmick or another.

Even with this note of realism, though, the principles and examples set out in The Org will help anybody who manages anything think through the specifics of their own organisation, and maybe improve its management a little. And even small improvements are well worth having.

[amazon_image id=”0446571598″ link=”true” target=”_blank” size=”medium” ]The Org: The Underlying Logic of the Office[/amazon_image]


The challenge of management

I’ve been reading a superb forthcoming book on management (yes, such a thing can and does exist), 

by Ray Fisman and Tim Sullivan. I’ll save my review for a bit closer to publication date in January.

[amazon_image id=”0446571598″ link=”true” target=”_blank” size=”medium” ]The Org: The Underlying Logic of the Office[/amazon_image]

But meanwhile, the discussion in the book on information flows within the Org reminded me of the brilliance of Edward Tufte on how information is presented. Most Orgs use Powerpoint of course. Tufte is a sworn enemy of Powerpoint. Here he is on how Powerpoint contributed to the Columbia disaster, while his brilliant book

has a powerful account of how a properly presented graph might have prevented the Challenger disaster. (All his books are brilliant.)

Tufte’s Challenger graph – extrapolate the line to the left to estimate roughly how much damage might be caused by the actual launch temperature

[amazon_image id=”0961392126″ link=”true” target=”_blank” size=”medium” ]Visual Explanations: Images and Quantities, Evidence and Narrative[/amazon_image]

Good management, like good decisions of any kind, depends on using information wisely. And that depends on how the flow of information is structured and then presented, given the limitations of our perception and reasoning abilities.