Other people’s money

Catching up with post-holiday stuff has slowed me down, but I finished John Kay’s new book, Other People’s Money: Masters of the Universe or Servants of the People? on a flight back from his native Edinburgh yesterday. It is characteristically excellent, drawing the main threads out of the complexities of modern financial history and the post-crisis consequences, and writing with beautiful clarity and style. It’s up there  with John Lanchester’s Whoops! as a guide to understanding what has happened in finance. I agreed with every word. I don’t suppose he’d want the job, but it would be marvellous if we could put John in as Chancellor to sort things out.

The book tells the story of the financialisation of the British and global economies in its first section, and the transition from relationship-based financial services focused on customers and the real economy to transactional and trading-based financial entities.This progressive shift in behaviour, values and institutions affected the whole of the corporate sector. The book offers a telling contrast between the 1987 and 1994 annual reports of ICI:

“ICI aims to be the world’s leading chemical company, servicing customers internationally through the innovative and responsible application of chemistry and related science. Through achievement of our aim we will enhance the wealth and well-being of our shareholders, our employees, our customers and the communities which we serve and in which we operate.”


“Our objective is to maximise value for our shareholders by focusing on businesses where we have market leadership, a technological edge and a world competitive cost base.”

This has happened across the whole of the business sector throughout the west. It’s tragic. Risk taking at the expense of others, bonus culture, income inequality, short termism, declining business investment, overly-detailed regulation having utterly adverse consequences, and the taxpayer still in line to prop up the whole edifice if – or rather when – the financial sector gets hit by another tail risk it can’t cope with. As Kay underlines, and as Admati and Hellwig pointed out so clearly, and even Alan Greenspan now admits, the banks have far, far too little equity capital and too much leverage. The summary here of Deutsche Bank’s balance sheet is terrifying.

The book is particularly clear about the inadequacy of banks’ current levels of shareholder capital vs debt on their balance sheets, and the nonsense of the Basel risk weightings, and banks’ claiming they can achieve 15% return on equity – always done by reducing the amount of equity in the denominator. Kay writes: “Return on equity is an inappropriate performance metric for any company, but especially for a bank; and it is bizarre that its use should have been championed by people who profess particular expertise in financial and risk management.” Bizarre, or perhaps just cynical.

So what to do about it? Especially as financial markets start displaying the kind of declines that could, potentially, wipe out a frail bank’s mimimal equity? The book has good answers. Kay starts with a set of principles for reform, including shorter chains of intermediation before the final customers, more focused and specialist financial institutions, a prioritisation and demonstration that the financial institution has its clients’ interests at heart (hello, Goldman Sachs), criminal and civil penalities applied to individuals (not fines on institutions), simpler regulation. Above all, politicians should abandon the illusion that the finance sector is special compared to other sectors of business. After all, the numbers don’t make sense; it has certainly not contributed as much to the economy as is claimed, and is not financing industry or serving the needs of investors.

In detail, the book favours structural remedies, not more and more regulation of behaviour – that is an arms race between banks and regulators that the former, with their ability to extract vast rents and hire lawyers/lobbyists will always win. Kay sees ring fencing of retail activities from investment banking as a ‘first step’. I agree: the too-big-to-fail-subsidy will always be too big for as long as there are any links. There needs to be a structural separation, and deposit guarantees only for utility retail/small business banking. He also puts great weight on individual civil and criminal responsibility.

Towards the end of the book comes one of many eye-popping quotations from Goldmans executives:

Sen C Levin (D, Michigan): When you heard that your employees in these emails and looking at these deals said, “God, what a shitty deal!)… do you feel anything?

Mr D.A.Viniar (CFO, Goldman Sachs): I think that is very unfortunate to have on email.

No wonder Kay concludes: “The finance sector of modern western economies is too large.” Spot on. It takes too many of the best graduates, distorts pay across the corporate sector, fails to innovate on behalf of its customers, and exposes taxpayers to unsupportable risks. Financial conglomerates need to be broken up, banks need to hold much higher levels of equity capital.

Financialisation has even damaged unfairly the standing of the role of markets (and economics): “The intellectual misconception behind the thought that prosperity might be enhanced by trade in baseball cards has been associated with an economic model that misunderstands the (important) role that markets play in enabling complex modern economies to manage information,” Kay writes. Prices are important signals – just not the prices on the trading room screens.

Shrinking the finance sector takes the book in its final pages to the influence of money and lobbying on politics. Which politicians are going to serve the people instead of the masters of the universe? Unfortunately I haven’t heard even the Labour leadership candidate my Tory best friend has renamed “The Gift that Keeps on Giving” addressing this. As for the American system, utterly bought by big money, beyond hope.

Meanwhile, I hope lots of people will read Other People’s Money and then send it on to their elected representative with suitable passages highlighted, saying – if you want my vote next time, act on this.



History and imagination

The last of my holiday reads, albeit finished this week, was Sapiens: A Brief History of Humankind by Yuval Noah Harari. I was a bit disappointed, as it had absolutely glowing reviews. After reading Ian Morris’s Why The West Rules For Now and his more recent Farmers, Foragers and Fossil Fuels, and Jared Diamond’s Guns, Germs and Steel, and his later Collapse, not to mention Joseph Tainter and Walter Russell Mead, I suppose it’s hard to describe anything completely new looking through the long lens on the history of civilisation. It’s quite a crowded terrain.

That isn’t to say I didn’t enjoy reading Sapiens. It’s eloquently written. I liked the emphasis on human social agency, and absence of technological or ecological determinism: “The ability to create an imagined reality out of words enabled large numbers of strangers to co-operate effectively.”

He writes of ‘imagined order’ (echose of Benedict Anderson): “We believe in a particular order not because it is objectively true but because believing in it enables us to coperate effectively and forge a better society.” He has a nice example using Peugeot, the car company. It doesn’t consist in the cars it makes, or its assets, or the people working for it – it has an existence beyind any of them, and a longevity too, kept in existence by the imagined order of the French legal system, the French state, the idea of nation states, and so on. The ‘rules of the game’ as an institutional economist might put it, are a set of Russian dolls.

It drove home for me the point that for individuals the agricultural revolution was an adverse development, although it was great for spreading Homo Sapiens genes. I liked the discussion of natural and unnatural – a distinction that pre-supposes the existence of a higher purpose, and since evolution has no purpose it is a distinction that comes from religion.

I very much enjoyed the contrasting portraits of Louis XIV of France and Barack Obama: “Dominant men have never looked so dreary as they do today. What happened to the wig, stockings, high heels?”

The book tails off a bit towards the end – the economics chapters seemed weak to me, although perhaps they wouldn’t to a non-economist. They cram the whole history of world economics with an emphasis on credit (Graeber-style) into three chapters.

Anyway, that’s it for summer paperbacks. Back to the serious reading now. Next up is John Kay’s Other People’s Money. Four pages in, and I think it’s fabulous.

Accounts and holding to account

This is the last of my posts drafted on holiday last week, and is particularly timely despite being retrospective because my review of Jane Gleeson-White’s Six Capitals, or Can Accountants Save the Planet is published in the new issue of Foreign Affairs today.

I *loved* Jacob Soll’s The Reckoning: Financial Accountability and the Making and Breaking of Nations. It gives a long historical perspective on accountancy – no, wait – and particularly its importance in literally holding leaders and politicians to account. It is also extremely well written and lively. I got much joy from learning of the 1604 book Accounting for Princes, and that there was a real Musketeer called Captain D’Artagnan, he isn’t just a creature of fiction. That Jacques Necker’s Compte Rendu sold more than 100,000 copies in one year, 1781, alone. And this description of Josiah Wedgwood’s legacy: “Sound industrial management and tableware for the middling sort.”

The book’s message is that there is a constant tension between the increasing sophistication of methods of accounting to hold to account, literally, kings or powerful companies or political leaders and the scope that sophistication creates for new ways of defrauding the people or the shareholders. So the methods of accountancy need to be embedded in a culture of honest dealing. Soll concludes that we lack that now: “Accountants have become separated from everyday culture. … All countries, rich and poor, hide the true costs of their pension benefits and health care as well as of infrastructure, off their balance sheets.” But there is no public outcry about bad public accounting, while deceitful bankers and financiers have not been held to account for the crisis. (One of my arguments in The Economics of Enough was that this situation is seriously unsustainable.)

Soll cites the proposal by Timothy Irwin of the IMF that governments should publish 50 year ahead balance sheets, but queries whether it is possible. “By separating finance into its own sphere, we have lowered our financial and political aspirations.” The numbers should be an integral part of society but are not: “If there is any historical lesson to be learned here, it is that those societies that managed to harness accounting as part of their general cultures flourished.” These have been rare – Renaissance Italian city states, the early American republic, Britain of the Glorious Revolution or for a time in the Industrial Revolution. They have been brief: Charles Davenant, one of the earliest national income accountants, tried to calculate the public finances after 1689 but by the time his Discourses on the Publick Revenues was published complained that information was being withheld.

My sole regret (as the author of GDP) about Soll’s book is that he does not cover economic statistics more generally, but rather public finances. They too matter for political accountability and are no longer doing that job (as I argue in my recent working paper). Still, it’s good to want more of a book rather than less. I highly commend The Reckoning.

Final couple of days of holiday now. I have Sarah Bakewell’s How To Live: A Life of Montaigne in one question and twenty attempts at an answer; and Sapiens: A brief history of humankind left to read.

Robots for the people

In between Lionel Davidson’s cracking 1994 thriller – recently reissued – Kolymsky Heights and Colum McCann’s moving novel Let the Great World Spin, I read (at last) Martin Ford’s Rise of the Robots: Technology and the Threat of a Jobless Future. It’s good to see it made the FT Business Book Prize long list, amid terrific company.

As one of the economists Ford has a go at in the book, I don’t believe the challenge is one of the total number of jobs jobs. These periodic waves of concern about where all the jobs are going to come from tend to prefigure a wave of job creation. It happened in the 1960s, following publication in 1964 of the ‘Triple Revolution’ report in the US, and it happened again in the 1990s after the ‘Downsizing of America’ report in 1992. This time might be different, as Ford and so many others argue, but repeatedly over 250 years capitalist economies have shown their capacity for creating new forms of work when old forms become redundant for technological or other reasons.

Indeed, at present in the US and UK there is little sign of any direct impact of automation at all. Employment rates are high, and low labour and total factor productivity signal the absence of a significant technological impact on growth and jobs. We have too few robots, not too many. There are some significant data issues here, but that includes the question of measuring jobs in the digital economy – as often noted, Google has far fewer employees than GM, but Mike Mandel has pointed out that the statistics are not counting the extent of job creation in smaller businesses.

That’s not to say there are no challenges from robotisation. Almost as often as they have adapted, capitalist economies have proven themselves bad at the process of transition. The huge wave of automation in manufacturing in the 1980s and 1990s, the deindustrialisation and globalisation, destroyed communities and left successive generations out of work, in poverty, and scarred by the nexus of social problems experienced by so many former mill or mining towns. There is also the question of income distribution. As Ford points out, Thomas Piketty’s tome on inequality hardly mentioned technology amid its quotations from Balzac and Austen, but it did plant this issue firmly at the centre of policy debates. Tony Atkinson’s impressive book Inequality had a detailed list of policy responses. The winners from technology will need to share the benefits if our societies are to thrive.

So I certainly don’t dismiss techno-fears, but I do think “we’re all going to be unemployed” is the wrong way to frame the problems. Having said that, Rise of the Robots is a thorough review of the impact of digital technologies on a number of areas. It covers the likely breakthroughs such as AI and driverless vehicles, going over the exponential pattern as Brynjolfsson and McAfee do in their book The Second Machine Age. Ford has chapters on industries such as health and higher education, where the impact of digital disruption has yet to be experienced.

He raises some interesting questions. For example: “Should the population at large have some sort of claim on [the] accumulated technological balance?” Meaning the vast social and public investment in research and innovation, on which the new digital fortunes are piggybacking. The answer to that is surely yes. There is also the implication of the machines’ greater ability to know what we know: no human an be aware of all research, past or present, but something like IBM Watson can be.

There is a great example in the book of two almost simultaneous cases of patients presenting themselves at different hospitals with mysterious diseases. One almost died during a heart operation, the doctors puzzled as to the diagnosis. Another was correctly diagnosed and treated because the doctor happened to have seen the same mystery symptoms on the TV series House. A smart enough computer would have known without having to have serendipitously watched the right TV programme. Ford seems to see this as a threat, but surely there is only benefit in this ability to pool past human knowledge? And I’m not persuaded that computers are yet anywhere near creating new knowledge however magical they are at collating and making sense of past knowledge. They are standing on the shoulders of human giants, absorbing humanity’s existing intellectual assets.

Well, maybe I’m delusionally optimistic. Ford ends the book with figures from the BLS. Between 1998 and 2013, there was a 42% real increase in US GDP, but no increase in the total hours worked. He thinks that’s a bad thing. I think it’s a good one – with the huge proviso that the benefits of growth must be widely shared. They haven’t been. We don’t have the people’s robots. That’s the real problem.

Painting by numbers

Back in the land of broadband, here is my holiday reading instalment number four. It was Duveen: The Story of the Most Spectacular Art Dealer of all Time by S.N.Behrman. This book was originally a series of New Yorker articles and then published as a book in 1951, and republished last year by Daunt Books – interesting, as I know them as my favourite bookstores and hadn’t realised they also published books.

 I’d never heard of Joseph Duveen, and it turns out to be a compelling story, wonderfully written. He bought masterpieces, mainly of the Italian Renaissance and sold them to many of the great American industrialists, Frick, Mellon, Bache, Kress and the like. But this is not a tale of a successful dealer; rather, it is how the modern art market was created. For Duveen invented the self-fulfilling character of value in art. He paid huge fortunes for pictures, sold them for more, bought them back for more again when the original purchaser died. A high price reflected the scarcity value of positional goods of course – these plutocrat buyers were the originals about whom Veblen wrote when he invented the notion of conspicuous consumption. But there are lots of high prices, and Duveen intended for them to reach for the sky. He would bid against himself in auctions to make sure the floor was never too low.

Scarcity mattered of course. Duveen didn’t buy post-1800 paintings because there were too many of them. He cornered the market in Old Masters. He borrowed huge amounts, buying collections on credit, because he was confident that once they were his the value of his assets far exceeded the debts.

The book describes a debate between Duveen and Bernard Berenson: “He [Duveen] was convinced that a masterpiece must be sold only through him, that any rival was a poacher on his special preserve. Berenson argued with Duveen that if other professionals bought and sold great pictures, they would in the end help Duveen, for they would expand the market.”

Berenson did not change Duveen’s mind. In the end, the growth in the art market in the early 20th century proved to be a generational phenomenon to some degree, as the plutocrats died, leaving a successor generation neither rich enough nor serious enough to amass the same kind of collection. The trusts were busted. The tax man caught up too, especially with inheritance tax. Duveen then persuaded his customers to leave their collections as bequests to the nation, starting with Mellon and his funding and opening donation to the National Gallery in Washington. The story thus has a pleasing arc, the wealth created through monopoly power over the people resulting in assets donated to the people.

So as well as a terrific read, this is a great introduction to the economics of the art market – alongside the latest Marshall Jevons novel, Murder at the Margin, Boggs: A Comedy of Values by Lawrence Weschler, and also this on Simon De Pury. Duveen he ain’t.