China, not Europe

Yesterday – the morning after the Brexit vote – it was too painful to think about what had happened. I’m horrified by the outcome. At least for my train journal I had a completely absorbing book to read. It’s Rob Schmitz’s Street of Eternal Happiness: Big city dreams along a Shanghai road. Schmitz is the China correspondent for Marketplace, a speaker of Mandarin and has spent many years living in the country.

The book uses stories about different characters living on or near the street to illustrate some broader themes. The owner of a not-very-successful sandwich bar opens up the aspirations and culture of young people whose life experience has been so different from that of their parents, who suffered the Cultural Revolution, grew up with siblings, above all conformed. A flower seller has lived the rural-urban migration to work in a factory story, before setting up her small business and bringing her sons to Shanghai. An elderly couple scraping by on pension and a street food stall are victims of a fraudulent pyramid scheme.

The themes are familiar, but here are woven into the fabric of everyday life, and made human. I’ve only been to China once (Beijing) & would love to return, although am not at all sure I’d want to live there as Rob Schmitz has. It’s pretty clear now that America is in its post-imperial decline, the European dream is disintegrating, and the next century will be the Chinese one. Anyway, I really enjoyed reading Street of Eternal Happiness and if it could keep me from brooding over the UK’s historical (not in a good way) decision, that’s real testament to how interesting it is.

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Early modern finance, central planning and technology

Self-indulgently, I read *another* novel this week, Francis Spufford’s Golden Hill. It has some relevance to this blog, with fascinating insight into early modern (18th century London-New York) finance. Unlike his brilliant Red Plenty, however – which was about the formal equivalence of a centrally planned economy and a decentralised competitive general equilibrium (under certain assumptions, naturally) – Golden Hill is only tangentially about economics, to be transparent about it. It is, though, a rattling good read, highly recommended, and impossible to say more about without spoilers.

Anybody who hasn’t yet read Red Plenty should make it a priority. I also adore Spufford’s Backroom Boys, a hymn to the otherwise unsung heroes of British engineering. And his volume with Jenny Uglow, Cultural Babbage: Technology, Time and Invention.

The platform era

The economics of digital platforms, including the sharing economy, has become a hot topic – not only among researchers but also with several new books for the non-specialist reader. Yesterday I took part in the Digital Forum organised by the Toulouse School of Economics – home of Nobel Laureate Jean Tirole, one of the first economists to analyse platforms (or two-sided or multi-sided markets). It was a packed event with some fascinating contributions. And on the train to and from Paris, I read Matchmakers by David Evans and Richard Schmalensee. This follows on from Platform Revolution by Geoffrey Parker, Marshall Van Alstyne and Sangeet Paul Choudary (which I reviewed here), and The Sharing Economy by Arun Sundararajan (here).

All three are well worth reading – they all clearly explain the economic characteristics of digital platforms, with lots of examples. Inevitably there is some overlap but in fact the books complement each other nicely and also include different examples. Platform Revolution takes more of a business design perspective, while The Sharing Economy is specifically focused on peer-to-peer markets. Matchmakers has more about the economic analysis and public policy questions including competition – David Evans’ earlier book, a collection of papers, Platform Economics, was quite heavily focussed on the competition issues.

Some of the examples in Matchmakers are very nice. I particularly liked the case of the US trucking industry. There’s also a chapter on M-Pesa, which I know a bit about; it is a nice description of how it worked in Kenya, although I’d have been interested to read about why mobile money platforms have failed in so may unbanked countries – regulatory barriers in my view. One of the questions about platforms’ success or failure is the extent to which they take advantage of opportunities for regulatory arbitrage on the one hand and can be killed by hostile regulation on the other hand.

Marshall Van Alstyne was one of the participants in the Toulouse School of Economics event and gave a great talk including this chart; he and I agreed that there is a huge research agenda on this subject as we’re entering the era of platforms. I have an issues paper out soonish, sketching some of the questions.

Marshall Van Alstyne at the TSE Digital Forum 16/6/2016

Marshall Van Alstyne at the TSE Digital Forum 16/6/2016

The N word

Neoliberalism. I’ve been dipping into Prisoners of Reason: Game Theory and Neoliberal Political Economy by S.M.Amadae. This book argues that game theory (and particularly the Prisoner’s Dilemma) has been a key organising principle and political weapon of neoliberalism. That public policy sees all social and economic relations through the lens of strategic (non-co-operative) interaction by rationally maximising individuals. That Dr Strangelove won the cold war, and won the battle of domestic politics too, shaping modern capitalist society in his own image. The book draws a line from nuclear strategy to thinking about global warming and everything in between.

It seems to me that a large part of S.M.Amadae’s objection is to the idea of ‘rational’ self-interested agents at all, not just to the assumption made in game theory models (and for my tastes the book should have been more careful about distinguishing co-operative from non-co-operative games). She clearly objects to ‘neoliberalism’. My heart leapt, briefly, when I saw a section titled ‘Defining neoliberalism’. It says: “Neoliberalism has a number of agreed-upon facets. All value is commodified and financialized. Work and gradual wealth accumulation are replaced with speculation, risk management and casino finance. …. Experts denounce the possibility for collective actions. … ” This is such a straw man that it didn’t help me at all. Sure, financial markets ran amok, and many – most? – economists identify regulatory, political and ethical failures behind that. Still, there are hardly any of us who think collective action to address climate change is impossible, still less undesirable. Yet it does not seem to me to make us neoliberal if we argue that it’s hard to achieve, that game theory can help us understand why, that we should use market incentives to reduce emissions when possible etc. Yet I suspect Amadae believes we are all neoliberals.

She also seems to believe Richard Dawkins’ The Selfish Gene is a key building block of neoliberalism, giving an evolutionary justification to the use of a game theoretic approach. It wasn’t clear to me what she actually thinks about evolutionary theory per se – is it only the Dawkins version she rejects? –  or whether or not it’s a good idea for economics and social science to be consistent with evolutionary biology. She certainly doesn’t like it that evolutionary biologists use game theory, which is quixotic. This chapter ends: “In game theory, norms are Nash equilibria to games in which actors’ preferences and strategies are encoded to result in regularized patterns of play. The only ways to modify the outcomes are to apply incentives or to shock the system such that possibly another stable mutual-best-reply equilibrium could emerge.” The second of these sentences is not correct. Incentives won’t modify the outcomes – that’s the point about a Nash equilibrium. And shock is not the only way to change things. Co-operation to create a new focal point – or changing the rules of the game, the preferences, another, as Kaushik Basu for one has discussed.

Perhaps we economists ought to stop using £ or $ as a unit of measurement in some areas of our work. It seems to me that at least some of the anger about ‘financialization’ and ‘marketization’ in ‘neoliberalism’ stems from the habit of converting all figures in the trade-offs being considered into monetary terms. Opportunity cost could be measured in butterflies, or bitcoin. It isn’t marketization; it’s physics and logic to point out that the same resource, time or land or oil, can’t be used twice. Economists certainly ought to be more willing to talk about social influences and about what forms preferences and about power. But – as ever – I find the N-word, neoliberalism, obscures more than it clarifies. Amadae cites Philip Mirowski’s Machine Dreams, which I thought a highly ideological book. For me, Paul Strathern’s Doctor Strangelove’s Game is a straighter account of the role of game theory – not at all uncritical – and E Roy Weintraub’s Toward a History of Game Theory a detailed historical study of its importance in economics.

War, peace and economics

I finally read Margaret MacMillan’s magnificent The War That Ended Peace (a book big enough that I waited for the paperback).

For obvious reasons, looking at the rise of nationalism and populism now, people are doing comparisons between the 1930s and now, but this book makes it clear there are some parallels as well with the first decade or so of the 20th century. Differences too – thankfully, we have the opposite of a military spending arms race at the moment. But MacMillan underlines the lack of comfort to be derived from the argument that nationalism is too costly in economic terms to get out of hand: “Trade and investment between many of the belligerents were increasing in the year before 1914. Britain and Germany indeed were each other’s largest trading partner. … Bankers and businessmen involved in exports and imports generally looked at the prospect of a major war with dismay; it would bring high taxes, disrupt trade, and cause them severe losses.” Few thought it would come to that. As Keynes famously wrote, in The Economic Consequences of the Peace:

“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.”

The War That Ended Peace is a wonderful book. Although there were many places and times at which people could have made different choices, it shows the first world war to have been a true tragedy, a disaster almost bound to happen given the history and context of Europe at the dawn of the 20th century, even though almost all Europeans found it hard to believe a generalised armed conflict would happen.

Historical parallels can and are overdone, but they are still important because every statement, every choice, made about Europe and its nations is shaping the history and context of the future. I am one of the 90% of economists believing Brexit would be damaging for the UK economy, for years. But it isn’t all about the economy, unfortunately.