How economists think

Elizabeth Popp Berman’s Thinking Like an Economist: How Efficiency Replaced Equality in US Public Policy, is a historical account of how a broad spectrum of policies set in Washington DC became – from the 1960s – increasingly determined by the criterion of economic efficiency. As she points out (& as I do in Cogs & Monsters), this notion of efficiency is far from value-free, although many economists (and others) insist that it is.

One distinctive aspect of the book’s account is its focus on the centre and left as the source of this economic thinking. Often the dominance of economics in policy decisions is attributed to the Chicago School, or neoliberals, or the Reagan/Thatcher administrations with their emphasis on markets everywhere. I think the book makes a convincing case that the economics turn started earlier, and gained important momentum from the drive to use government programmes to address social problems. The book focuses therefore on microeconomic issues – competition policy, cost benefit anaylsis – rather than the macro battle of monetarists vs Keynesians.

The transition it is interested in is the shift from pre-1960, indeed pre-war, institutionalist economics: “Institutionalism emphasized the collection of quantitative data, but with an inductive, historical approach in mind.” It avoided formalism, and tended to be progressive. Post-war, however, the institutionalists in Washington lost influence over time to two groups highlighted in the book: economists from RAND’s economics division and from new schools or programmes of public policy that trained a growing number of officials in “RAND-lite” formal modelling approaches; and anti-trust and I/O economists who – even before the full flowering of the Chicago School – brought neoclassical economic analysis emphasizing the role of markets in allocative efficiency in place of earlier structuralist approaches. The former group grew at pace during the Great Society years, along with more policy institutes evaluating social programmes. The Reagan years cemented the role of economic thinking by adding more cost benefit analysis of government interventions, favoured by business to limit ‘interference’ in their actions.

As the concluding chapter points out, there emerged a divergence on partisan lines in terms of the embrace of economic thinking: Democrats consistently embraced it and “allowed the economic style to define the boundaries of legitimate policy debate.” But Republicans “continued to use the economic style strategically and fleixbly, embracing it where it helped advance their goals and rejecting it when it conflicted with more fundamental values.” I wonder if there is a less on here for the centre-left now?

The book is entirely US-focused; it would have been interesting to read some reflections on how the economic style spread internationally. The other element I missed was the interaction between economic thinking in government, and how economics itself changed over the postwar period. How did the role of economists in policy-shaping contribute either to the rational epectations era of the late 70s/early 80s, or the later applied turn? Having said that, it’s a nice study of how ideas work in policy, and the key point about the consistent embrace of economic-style thinking by the left contrasted with the intellectual flexibility (cynicism?) of the right is very interesting.



From citizen to subject in cyberspace

Vili Lehdonvirta’s Cloud Empires is a terrific book. As the title suggests (and the fashionably chatty subtitle spells out just in case), the subject is the political power of large/gatekeeper digital platforms and specifically how in their essential rule-making capacity they are steadily taking on more activities of the state – but doing so without a public service motive (profit instead) and without accountability: “The internet was supposed to free us from powerful institutions. … Then they delivered something different – something that looks a lot like government again, except that this time we didn’t get to vote.”

The book starts with the origins of the internet and digital platforms, including the early libertarian hopes. The first section concerns platforms as economic institutions. One focus is the operation of online labour markets, including mTurk, but also using oWork/Upworker as a case study; the platform become increasingly internally regulated as it grew, among other things setting a minimum wage – of $3 an hour, reflecting the globalisation of online labour. Another chapter concerns privacy, and its complete erosion as platforms increasingly grappled with the need to enforce social order online at massive scale.

The theme through this first section is the transition from libertarian optimism about the absence of control to a non-territorial but nevertheless tightly regulated series of platform domains, with platforms setting their own rules within their own jurisdictions – with the only accountability being people’s ability to leave. You might put it that Albert Hirschman’s ‘exit’ is the only option as neither voice not loyalty have any traction, and even that is limited by the power of network effects. Exit would have to be collective to be effective.

The second section concerns the political power of the platforms. It starts with a wonderfully astute chapter on crypto-currencies, making the point (it has always seemed clear to me but seemingly not to others) that these are not ‘trustless’ but simply relocate trust. And yet many or most are inherently untrustworthy (to use Onora O’Neill’s framing). “The crypto elite who run these organisations are, if anything, less accountable to people than conventional financial and regulatory elites.” The founders may be entirely sincere and nice, and they may even seem to give their communities voice, but in writing the take-it-or-leave-it code, they impose dictatorship. (And have clearly read none of the vast literature on incomplete contracts….) Other authors such as Lawrence Lessig have drawn the comparison between code and law, but I found the social science perspective here very helpful.

Another chapter considers the way the platforms have undermined the traditional public institutions providing health care and education. Neither platforms nor gig workers have an incentive to invest in training or a long-term relationship, and in the US at least that casualised workforce has to rely on GoFundMe campaigns to cover medical bills. “Internet empires are undermining industrial society’s mechanisms of building and maintaining human capital.” What will the essential social safety net look like in the platform economy?

The concluding chapter pulls the threads together in the argument that platforms are usurping the traditional nation state. “Silicon Valley technologists reinvented the economy only in the sense that through trial and error they rediscovered much of what states already knew. Instead of revolutionizing our social order, they reimplemented it with computer code.” Algorithms are bureaucracy. (And indeed, a lot of traditional statecraft depended on technology – including classifying and collecting data, monitoring behaviour). The book argues that states simply gave up some of their former territory of control through outsourcing, or ceasing to collect data in house. In addition, the digital platforms have advantages – they are fast and efficient, and in (narrow) ways provide a great service.

So what to do about it? The book makes the case for an online bourgeois revolution to develop collective action power that will make digital platforms accountable. I must say that the prior chapters don’t give me any optimism that might provide effective. My prescription would be for democratic states to regain the lost territory through a combination of rule-making over online activity and improved efficiency of traditional bureaucratic states. Though I’m not too optimistic about that either.

All of which makes the book an essential read. I have some quibbles (for example, I’d disagree that platforms are effective central planners), but perhaps I’m wrong. The book is firmly rooted in Vili’s own work and the wider literature on digital platforms, spanning economics, sociology and political science, while being very readable with lots of examples and case studies. A strong recommend.




The slouch of history

Like many people, I’ve been eagerly anticipating Brad Delong’s Slouching Towards Utopia: An Economic History of the 20th Century, and it doesn’t disappoint. Brad was a couple of years behind me in the Harvard graduate economics programme, was an early adopter of blogging, and has been a prominent online presence ever since. So his argument in one sense is no surprise, but it comes together as an unmissable book, even for a devoted reader of his tweets.

The book starts by framing the central point: the economy, and people’s lives, have been utterly transformed by the long 20th century of 1870ish to around 2010 in a continuous tide of change both ‘marvelous and terrible’. During that long 140 year century, the average economic growth rate (we are US/west focused here) was just over 2% a year, before and since, below 0.5% a year. Income levels doubled every 33 years during that period: “A revolutionized economy every generation cannot but revolutionize society and politics, and a government trying to cope with such repeated revolutions cannot but be stressed in its attempts to manage and provide for its people in the storms.” We’re now back down to doubling about every 150 years, which actually seems just as stressful for governments given the expectations of the previous four or five generations.

The structure of the book is then (unsurprisingly) chronological. It begins with the first era of globalization, between 1870 and 1914, when the key global flow was people: a hundred million people migrated across national borders. Governments embraced openness of all kinds, though, and there were revolutionary declines in transport costs. The 1870 launch of RMS Oceanic, an iron-hulled steam-powered passenger ship, cut travel time across the atlantic from a month to nine days and 3rd class fares opened the journey to all but the very poorest Europeans. The vast waves of migration helped make the US the dominant economic power of the 20th century.

The book moves on to the economy of empires in the first part of the 20th century. The mechanization of industry in the imperial North turned the colonized South into an economic periphery, exporting raw commodities and importing manufactures. These were, “Unable to build communities of engineering practice that might provide a path to greater, industrial, riches.” Their labour force was not literate in sufficient numbers, there wasn’t enough financial capital to invest in factories.

World War I and the Depression follow, and the narrative traces two currents of thought shaping post-1918 outcomes. During this period there was no hegemon – only the US could have been, given the weakness of post-war Britain, and it rejected that role as provider of global public goods such as financial stability for all. So the ideas of a return to an 1870-1914 liberal market order competed with ideas focused on social rights and relationships. Economists broadly fell into camps – this was the era of the socialist calculation debate – but policy elites in the West doubled down on austerity.

On we go to Russia and socialism in practice, and the brutality of Leninist and Stalinist economics: “Of the 1800 delegates to the 17th Congress in 1934, fewer than one in 10 went on to be delegates to the 18th Congress in 1939.” The rest were dead or in Siberia, while forced collectivization spread famine and death. Fascism and Nazism deformed much of the rest of Europe in the 1930s, and then came the catclysm of the second world war and Holocaust. As the chapter points out, not everyone shed their opposition to the bundle of policies that could be characterized as fascist. Some Hayekians in the 1980s, such as supporters of Pinochet, found their contrast with socialism appealing. (Mrs Thatcher gets a favourable passing mention as a firm opponent of the methods, even as she approved of the libertarian economics.)

World War II gives way to the Cold War in this sobering march of 20th century history, while the spillovers from Cold War led to many false developmental starts in the Global South – alongside the amazing successes of development in some East Asian countries. The book sees the contrast as one between the aim of self-sufficiency in Latin America and countries in the Soviet orbit versus the assumption of the need to survive in export markets in East Asia – the latter had no great powers pouring in resources, or interfering and advising.

The only bright spot in this long century appears to be les trentes glorieuses, the three post-war decades of social democracy. What was their magic? A high rate of investment. Full employment but no upward wage pressure as there remained (in most of Europe) and under-employed agricultural labour force to pull in. Steady growth in industries that reached their technological maturity in that era, enabling the location of industrial production to spread to more places.

But it didn’t last. The redistribution of social democracies came into increasing tension with the conditions for innovation and growth. The logic of how governments operate differs from the logic of efficient production, so nationalized industries became wasteful and ineffective. Sometimes only moderate efficiency is fine, or indeed welcome, but there are limits. In 1979 we saw the neoliberal turn. Why so? “In my view the greatest cause was the extraordinary pace of rising prosperity during the Thiry Glorious Years, which raised the bar that a political-economic order had to surpass in order to generate broad acceptance.” people had come to expect rapidly rising incomes and broad equality of outcome, and high employment and low inflation. If this stability stumbled, the order had to change.

So the book ends with the political success of the neoliberal order – winning the Cold War – and its economic failure. And here we are. We haven’t reached utopia but living standards are massively higher than in 1870. It hasn’t been a smooth course – far from it – a slouch rather than a march. But people are so much better off than the mass of humanity before the long 20th century.

The strength of the book – as well as its immense scope and depth (more than 500 pages) is that it’s a work of political economy, braiding the different strands of ideas, Hayek, Polanyi and Keynes. Although what it ignores (and fair enough) is the series of technologica revolutions. In addition, there are plenty of pleasing asides and details. Humans love narratives, so, “The secret weapon of the economist is the ability to count.” Or, “Contests and gift exchanges have more psychological resonance. It is more satisfying to receive (or give) a present or to win a prize than to buy the exact same thing…. By ignoring and trying to suppress these dimensions – to require that everything pass through a cash nexus – the market society dehumanizes much of life.” I like that it doesn’t claim there are easy lessons from the history, but insists that there are indeed subtler lessons. Definitely one to read – or pre-order: out on 15 September.



Fitting economics into a theory of justice?

I spent a relaxing week at the Welsh coast doing only light reading, but have a few posts to catch up on about books I read before the holidays – including a couple out in September, Brad Delong’s Slouching Towards Utopia and Jacob Soll’s Free Market: The History of an Idea. First up, though, some thoughts prompted by A Political Economy of Justice, a collection of essays edited by Danielle Allen, Yochai Benkler, Leah Downey, Rebecca Henderson and Josh Simons. That’s a wonderful line-up of editors, and the chapters emerged from a seminar series at Harvard. As with all essay collections, they are variable in quality and cover a wide range of subjects – from ‘Beyond GDP’ to theories of change in a democracy to the US ‘prison industrial complex’. Nevertheless, the book is well worth it for the introduction alone.

The intro makes the case for considering capitalism as a multi-level system whose economy is institutionally embedded, reflects power relations, depends on social norms and instantiates certain values. It thus argues that neoliberalism as an economic ideology ignores these contextual aspects, claiming an impossible universalism (although the book isn’t particularly interested in the varieties of capitalism literature). The editors also argue strongly for the discussion of social justice and the values of the capitalist economy to focus on the organization of production as well as – or rather than – the distribution of income and consumption. They want economic analysis to rediscover politics and to make explicit issues of justice such as race and gender, or corporate purpose and sustainability.

Individual chapters focus on specific issues and proposals – there’s a clear progressive slant to all, however. Interestingly, the editors note that one area on which they could not reach consensus was the question of effective freedom and property rights in a market economy: does ownership inevitably imply unequal power relations?

There’s also some discussion – interesting to me! – of the implications of economic measurement, the definitions and metrics particularly GDP, for social justice: “Contemporary theories of justice have given these questions little sustained attention.” The introduction takes it as a given that the specific aim of growth in GDP should not guide a fair society. The chapter on this issue (by Julie Rose) takes the perspective of a history of thought about idea of the stationary state, invoking Mill, Keynes and Rawls. It argues for an alternative aim: “To fairly and reliably expand people’s opportunities,” and paints GDP growth as a subsidiary aim. Fine as far as it goes, but not actionable – although I must say I’d expected a traditional ‘degrowth’ argument and was relieved to find Rose doesn’t fall in to that trap. Although an analysis of the argument from a social justice perspective would be telling. Throughout, the book assumes the inadequacy of GDP growth but is vague about alternative metrics, while clearly sympathetic to the capabilities approach.

This and much more. While the focus on institutional specifics is welcome, it means the book is almost wholly US-focused. There’s also an inevitable tension between acknowledging the specificities of time and place and articulating a reasonably universal theoretical framework. The book goes heavily for “historically grounded explanations” involving “socialized or embedded individuals”, and with power and conflict central to economic relations. “There is no Archimedean point on which to perch microfoundational agents….” I tend to agree that economic analysis needs far more history, social relations and politics – but take it too far and ‘political economy’ loses the economics part.



Casting off the digital chains

The joy of travel to conferences – conversations with people you wouldn’t set up a Zoom to chat to, hearing new research you wouldn’t dial in to a webinar to hear, and the travel time for reading. It definitely (still) outweighs the aggravation of checking in. My recent Eurostar journeys saw me through Jamie Susskind’s The Digital Republic: On Freedom and Democracy in the 21st Century.

We held a workshop on a first draft of the book at the Bennett Institute, where Jamie is an affiliated researcher, so I suppose I’m bound to look kindly on it. It’s an ambitious and largely persuasive diagnosis of the political problems caused by the power of big tech, and a set of proposed solutions. It’s thoroughly argued – as you’d expect from a skilled lawyer –  and avoids the sweeping generalisations and analytical wooliness of some well-known attacks on the digital giants.

The book has many parts. It starts by setting out the fact of digital power and why this is a significant political problem – and one created by law: “There is nothing natural about the power of modern business corporations. They accrue power because the law allows them to.”  It follows this with an analysis of the more granular problems, such as dark patterns, the coding of significant ethical decisions, the pretence that ticking the T&C box is meaningful consent (“When we click ‘I agree’ we are usually surrendering, not agreeing”), and so on.

The book then moves on to set out four republican principles (NB not in the US party sense of the word, but in the engaged, free citizen sense):

  • the preservation principle: democracy must be protected
  • the domination principle: no power can be unaccountable
  • the democracy principle: powerful tech should reflect the moral and civic values of those it affects
  • the parsimony principle: governments shouldn’t constrain companies more than they have to.

All seem perfectly reasonable, at least in the abstract. Then, refreshingly for a book about the need for countervailing power to big tech, Jamie has a lot of proposals. Among them are:

  • deliberation and mini-publics to determine the limits of digital behaviours
  • tribunals to hear complaints about treatment by big tech
  • professional certification of software and ML engineers
  • an inspectorate of algorithmic decision making
  • a duty of openness on tech companies
  • more appropriate anti-trust policies
  • minimum standards for social media platforms eg to prevent harassment, foreign interference in elections etc

I don’t agree with all of the suggestions – some (eg compulsory licensing for anyone who codes software) seem to fall foul of the parsimony principle – but that isn’t the point; the point is that governments are not powerless in the face of digital power. Indeed there is an awful lot they could be doing to tackle the ills while recognising the great benefits the tech titans have brought.

Anyway, I enjoyed reading the book, and relished its can-do approach. I agree about the need for constraint on unaccountable digital power. Was I wholly persuaded? No, and mainly because there’s an assumption of beneficent governments doing all this on our behalf. It’s reasonable to doubt either their goodwill or their competence. More on this in my next post after I’ve finished reading Deirdre McCloskey’s latest offering.

61pyJfOI4FL._AC_UY436_QL65_Other reviews: Joahn Naughton in The Guardian, Andrew Lilico in The Telegraph….