A behavioural economics primer

There are so many books about behavioural economics, including bestsellers like Kahneman’s Thinking Fast and Slow, Thaler’s Misbehaving, Ariely’s Predictably Irrational, and the original Sunstein and Thaler Nudge, you might wonder if we need another. It turns out the answer is yes. Behavioral Economics: Moving Forward by Fabrizio Ghisellini and Beryl Chang is aimed at students rather than a more general audience – it even has a few equations. Its real contribution though is to explain the distinction between the ‘American’ approach, which lists many psychological ‘biases’ and frames them as deviations from the standard rational model, and the ‘German’ approach (ie. Gerd Gigerenzer) which accounts for the well-known ‘behavioural’ behaviours as rational satisficing given a limited attention and brain energy budget.

The first half of the book discusses the shortcomings of the standard rational maximising approach (a bit overdone for my tastes), and explains the behavioural alternative, especially the ‘German’ version, which is presented here in the light of Herbert Simon’s work on satisficing and attention. The second half consists of seven open questions for behavioural research, including how to make sense of the proliferation of apparent ‘biases’, how to deal with time preference, the tensions in ‘libertarian paternalism’ and biased nudgers, and the formation of expectations.

So having started with the same question the authors use to open the book – do we really need another one – I’d agree with them that there is a gap to fill. This is a really useful book for introducing students to behavioural economics and the key research questions in the field, far more so than the pop behavioural literature, excellent as some of it is. Unfortunately, it won’t get widely used given the shocking pricing by the publisher (Palgrave Macmillan) – it must be so frustrating for authors to have a publisher who sets prices only libraries will ever pay (and decreasingly often at that).

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A hymn to expertise

How often could you say a book about the workings of government departments, even including a Department of Agriculture org chart, is as gripping as a thriller? Michael Lewis is such a teeth-gnashingly good writer that he’s pulled this off with The Fifth Risk. Ostensibly about the chaos the Trump ‘administration’ is bringing to government as it expropriates whatever it can for personal financial benefit, the book is fundamentally a description of and hymn to the vital role of expertise in modern societies.

Expertise, and a strong sense of public service mission. It does so through interviews with a range of experts who have recently left government service – experts on nuclear weapon safety (managed by the Department of Energy), child nutrition (USDA), meteorology (the NOAA in the Commerce Department) and even social science (also in the NOAA, because what was the point of ever more accurate tornado warnings if people didn’t respond to them by evacuating their homes?)

It is, therefore, fundamentally a terrifying book. All these dedicated scientists waited for the new Trump administration to contact them after the election. And waited. And waited some more. Nothing. No interest in governing, in detail, for instance in why a small town storing nuclear waste might poison vast areas of the western United States and the Colorado River if the DoE didn’t spend billions a year on remediating and containing the problem. And of course, the ‘Administration’ gets away with it because so many voters had no interest either. This is where we are.

Anyway, a brilliant book. Do read it.

 

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The joy of (economic) geography

I once met the late Doreen Massey, before knowing who she was. It was after the publication of my first book, The Weightless World (intangibles avant la lettre), which she had read and had interesting questions about. It was therefore long before I had anything to do with the academic world. I was a nobody, in other words, and she a highly respected economic geographer. She was open minded enough, and kind enough, nevertheless to have read my book and been willing to talk to me about it.

She died in 2016 and two recent books honour her work. One is the Doreen Massey Reader (editors Brett Christophers, Rebecca Lave, Jamie Peck and Marion Werner) and Doreen Massey: Critical Dialogues (same editors, different priority ordering). I’ve read most of the former and  dipped into the latter. The first thing to note about them is that they reflect the energy in economic geography these days, indeed often far more energy about major economic issues than you find in some economics departments. Massey is one of the people who has made a major contribution to the intellectual strength and curiosity in the discipline.

Now, as I’m not a geographer but an economist, most of the cited literature is unfamiliar, and the language can be a bit of a struggle. So it’s with diffidence that I comment on these books at all. Most interesting to me is the section in the Reader on regional economies, a subject far too much overlooked in mainstream economics, given the regional inequalities in all major western economies including London-centric UK.

For example, in a 1973 essay on industrial location theory Massey pointed out the inadequacy of an economics discipline that was then – certainly pre-Krugman and the revival in economics of economic geography – both (comparative) static and a-spatial. As she noted, it’s hard to understand industrial concentration in space if (a) you ignore location and (b) you’re not interested in dynamic forces. Agglomeration economics – which now dominates this area of research in econ – is, she argues, a narrow lens on the question. If the focus is on the firm’s decision to locate in a place where there are agglomeration externalities, it is all too easy to miss the system effects and the input-output system of the regional or local economy as a whole. The externalities are everything. This too is starting to percolate through business economics at least, in the shape of ‘ecosystems’. Massey got there a generation ago.

There is a lot to interest economists in these books, albeit most will find – as I did – that they are far more overtly political than is the norm in our discipline. No doubt the geographers would argue that economics is covertly political. Anyway, these books contain critiques of capitalism in general, whereas we make our critiques of capitalism specific. It certainly seems odd to criticize economics for being too abstract when critical disciplines such as this are equally so, only in words rather than algebra; there are abstract nouns galore in these two books.  Nevertheless, we economists should be concerned that some of the liveliest work on key economic issues is going on in geography departments. And maybe ‘agglomeration’ isn’t the only approach to issues of economic location?

All the more reason, perhaps, to be as open minded as this important, interdisciplinary scholar was herself.

A PS One of the editors, Brett Christophers, has a new book out soon about the privatisation of public land in Britain, The New Enclosure: The apprpriation of public land in neoliberal Britain. Despite the ‘neoliberal’ in the subtitle, it looks a must-read. His 2013 Banking Across Boundaries was a terrific analysis of the globalisation of finance and lifted the veil on the FISIM issue in the construction of GDP, since cited by me, and recently by Mariana Mazzucato.

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Making economic miracles

I’ve always really liked Michael Best’s 2001 book The New Competitive Advantage, and his latest, How Growth Really Happens: The Making of economic miracles through production, governance, and skills is a worthy successor. Best, who has vast experience of visiting businesses and learning in detail how they produce their goods and services, centres his account on the idea of a ‘capability triad’. Growth requires success in three linked domains: skills, a production system and a business model. Note how largely intangible these capabilities are – this is not a matter of investing in capital equipment or even inventing molecules or gadgets. Policies should aim at ensuring businesses can access or develop these capabilities, broadly understood, rather than taxes and subsidies.

The book has a number of examples, historical and more recent, illustrating the concepts, ranging from the wartime transformation of the US economy to modern Greater Boston’s reinvention to the present loss of production capabilities and skills in the US; from the UK’s postwar relative decline to Japan and China’s more recent experience.

There is also a chapter looking at the tradition of thinking about production systems and capabilities in the history of economic thought. Smith is there but also some names too often overlooked in modern economics: Charles Babbage; work on increasing returns models by Thomas Schelling and Paul Krugman, following in the footsteps of Alfred Marshall and Allyn Young (author of a 1928 article ‘Increasing Returns and Economic Progress’; and above all Edith Penrose. I knew too little about her work until a fine biography by Angela Penrose, No Ordinary Woman, sent me to it earlier this year. Given the obvious prevalence of increasing returns in modern economies, it’s high time to revisit this tradition.

The book ends with some reflections about the links between the productivity slowdown of the past 10 years and diminishing capabilities in the affected economies it mainly looks at the US here. Like a growing number of others (see for instance this article by Gregory Tassey), Best argues that the worst long-term consequence of offshoring has been the loss of know-how embedded in production systems and skills. The way to address this? A policy framework aimed at strategic economic development, something that has been lost from the vocabulary of policy for a generation, although tacitly recognised perhaps in the UK’s debates about an industrial strategy.

There’s a mass of interesting detail in the book – perhaps too much compared to the more reflective sections, but then the ideas do pick up on Best’s earlier work where there is much more on the conceptual framework. How Growth Really Happens is well worth a read, along with the earlier book – so much so it’s on the Enlightened Economist Prize 2018 longlist.

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Once upon a time in the British Economy

Managing the Economy, Managing the People: Narratives of Economic Life in Britain from Beveridge to Brexit by Jim Tomlinson is an interesting economic history of modern Britain. It appealed to me from the first page, where Tomlinson talks about the absence of a fixed meaning for the term ‘the economy’. The book therefore focuses: “[O]n the ways in which successive governments, in seeking to manage the economy, have sought simultaneously to manage popular understanding of economic issues.” In other words, to manage the economy is to tell a persuasive story about it – to have a narrative in other words.

This is not, as many economists’ first instinct will tell them, woolly nonsense. It is because there are many possible self-fulfilling (or self-averting) outcomes, given the role of both expectations about the future and interactions between individuals. In different ways many fine economists are starting to incorporate such insights, from Roger Farmer in macroeconomics to Robert Shiller, George Akerlof and Dennis Snower, Kaushik Basu, and George Akerlof and Rachel Kranton.

Anyway, as Tomlinson points out, talking about the electorate misunderstanding economic reality is therefore missing the point that economic outcomes are to some degree always constructed (and besides, it backfires – people don’t like to be told they’re stupid and should listen to clever folk). The body of the book therefore traces the ebb and flow of these political and policy acts of construction, and the interplay of ideas, ideologies, and events. The first part considers some of the key narratives, broadly chronologically – “You’ve never had it so good,” “rolling back the state,” etc. The second part looks at the period through the lens of key macroeconomic indicators, and why some are more salient at specific times due to the way they feature in public debate.

An interesting conclusion considers two broader narratives’: the rise of neoliberalism; and deindustrialisation. Tomlinson argues that while academics (outside economics) focus on the former, the latter – having had a briefl flurry of scholarly interest in the late 1970s – is more significant in understanding the trajectory of people’s lives in postwar Britain. The book comes to a rather sudden halt, and it is by no means a vanilla economic history of Britain, but it’s a stimulating read.

 

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