Tag Archives: review

Finance made funny

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I’m in New York to do a talk at NYU on Tuesday. My plane reading was [amazon_link id=”0241146666″ target=”_blank” ]The Mark and the Void[/amazon_link] by Paul Murray, author of the hilarious and tragic [amazon_link id=”0141009950″ target=”_blank” ]Skippy Dies.[/amazon_link] His new novel is set in Dublin’s financial centre at some stage after the financial crisis has struck and before it has ended (not that it has, really). It is extremely funny – I particularly liked the character of Jurgen, the protagonist’s immediate boss. It also seems to me a pretty accurate representation of the rotteness of the system and the helplessness of many perfectly decent people (if eccentric, at least in this tale) trapped inside it. Actually, for readers who haven’t ploughed through the many, many booksabout different aspects of the crisis, [amazon_link id=”0241146666″ target=”_blank” ]The Mark and the Void[/amazon_link] would be a decent introduction. But I recommend it for the out-loud laughs as well. (And apologies to the lady next to me on the plane who must have thought she had a nutter next to her.)

[amazon_image id=”0241146666″ link=”true” target=”_blank” size=”medium” ]The Mark and the Void[/amazon_image]

Thinking, learning and doing

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James Bessen’s book [amazon_link id=”0300195664″ target=”_blank” ]Learning By Doing: The Real Connection between Innovation, Wages and Wealth[/amazon_link] is excellent. It strikes a balance between meaty analysis and description of historical episodes of technical change, and is at the same time very accessible.

[amazon_image id=”0300195664″ link=”true” target=”_blank” size=”medium” ]Learning by Doing: The Real Connection Between Innovation, Wages, and Wealth[/amazon_image]

The book argues that it is important to distinguish between ideas, which can be codified and transmitted and know-how attached to workers, which takes experience to accumulate. This is familiar – Paul Romer recently blogged about the role played by this distinction in his famous model. But Bessen adds that the distinction makes it important to consider the incentives for workers to invest in new skills so that new technologies can be implemented – and the part played by these incentives is usually overlooked and yet crucial for forming views about the “future of work” when there are ubiquitous robots.

He uses the historical examples to demonstrate that in the early stages of implementation of a technology, returns to workers with generally high skills will rise. They are able to make the adjustments and minor additional innovations that get the big innovation to work. During that period, the wages of ordinary workers stagnate – as in the famous Engels’ Pause (pdf). However, when the technology is thoroughly bedded in and the technical knowledge needed to work with it is standardised, ordinary workers have the incentive to invest in in gaining skills and experience. A thick labour market develops. Workers are able to threaten credibly to switch jobs. Their real wages rise and the high-level skill premium narrows.

“The specific skills associated with a major new technology are not standardized at first, which limits the market. Initially, these skills are always limited to specific employers.'”

He emphasises the need for the necessary technical knowledge to be standardised too – the example he uses is the periodic table’s invention, standardising the chemical knowledge workers in the growing industry needed, and making it easier to teach.

Bessen then uses some new examples to demonstrate that with digital technologies, this standardisation of technology, tasks and skills has not yet happened. His example is digital publishing, where the specifics of the technology are still changing, and so do the specific technical knowledge and experience needed.

In addition to the development of a standardised know-how labour market on demand and supply sides, Bessen points out that new technologies can also raise demand and employment in existing work. His example here is the continuing increase in the number of bank tellers (still going on) even as the number of ATMs grew rapidly, with the humans’ tasks changing to focus on customer relations, and the number of bank branches and transactions increasing. This is not the case with all technologies – the job market for people making oil lanterns is tiny – but the book suggests it happens more often than one would think.

The book ends with policy reflections, of which the most interesting concerns education. The reasoning about standardised knowledge, and the importance of experience, as a technology matures points to the need for skills-focused education rather than piling as many young people as possible through conventional academic tertiary education. Bessen argues that demands to make vocational jobs such as nursing or medical assistants require a university degree represent a form of job protectionism. He also – along with many other scholars – points to the dysfunctional nature of the patent/copyright system as it operates now, especially in the US.

This is a very US-focused book, but none the less interesting for that. This review has skimmed over the top of the argument; I’d strongly recommend the book to anyone interested in the automation/inequality/employment issues. It is a broadly optimistic perspective but does underline the length of the transition and the likely impact on individuals. All the more reason to pay attention to the policy implications.

Thinking and writing

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It was one of 20 minutes gaps between appointments, and of course I spent the time in a bookshop. I escaped with just one paperback, Steven Pinker’s [amazon_link id=”0241957710″ target=”_blank” ]The Sense of Style: The Thinking Person’s Guide to Writing in the 21st Century[/amazon_link]. To be honest, it was the cover image that sold it to me: I’m a sucker for monochrome photographs.

[amazon_image id=”0241957710″ link=”true” target=”_blank” size=”medium” ]The Sense of Style: The Thinking Person’s Guide to Writing in the 21st Century[/amazon_image]

Normally I don’t read how-to-write books. After all, I’ve been writing for aeons: school essays, 2 essays a week at university, a PhD dissertation (economics, but still, it had words), policy notes, client reports, magazine and newspaper articles, books. Just recently, though, I’ve read two excellent ones (the other being Oliver Kamm’s [amazon_link id=”0297871935″ target=”_blank” ]Accidence Will Happen[/amazon_link]).

[amazon_image id=”0297871935″ link=”true” target=”_blank” size=”medium” ]Accidence Will Happen: The Non-Pedantic Guide to English Usage[/amazon_image]

Pinker’s book is of course written with even more than his usual clarity and elegance. He makes it quite funny, too. The aspect I found most useful was the advice on writing to accommodate how our brains process language. This pertains to sentence structure, and also to the structure of longer pieces of text. Structure is absolutely the hardest aspect of any long piece of writing – the longer, the harder. This is because thinking is hard too. Clarity of thought and clarity of writing are strongly positively correlated.

[amazon_link id=”0241957710″ target=”_blank” ]The Sense of Style[/amazon_link] also has a long final section which runs through the usual questions: when to use ‘I’ or ‘me’; can you put prepositions at the end of sentences or start with a ‘but’ or ‘and’? I enjoyed the advice about the subjunctive mood because I had never known the difference between that and the use of ‘were’ (“If I were a rich man, dah di dah di dah di dah di dah di dah di dah di dah…”), the latter being in fact called ‘irrealis’. If that doesn’t entice you to buy the book, nothing will.

Slightly scary AI

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On the whole I haven’t been among the most pessimistic people about the likely impact of a potential Artificial Intelligence revolution on the economy and life – although not blithely optimistic either about the scale of the adjustment that will be needed in labour markets and education. But [amazon_link id=”0300213557″ target=”_blank” ]Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence[/amazon_link] by Jerry Kaplan has made me more apprehensive. This is not because of anything he writes about the economy, which is standard fare, but rather because of something he says about AI in the first half of the book (quite a short and very readable volume).

[amazon_image id=”0300213557″ link=”true” target=”_blank” size=”medium” ]Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence[/amazon_image]

It starts with an account of high frequency trading and the Flash Crash of 2010. This will be familiar to anybody who has read Michael Lewis’s very entertaining [amazon_link id=”0241003636″ target=”_blank” ]Flash Boys[/amazon_link]. It seems pretty clear to me that financial regulators need to rein in HFT – not that they are showing any sign of interest in doing so – and there is even a proposed solution recommended in Al Roth’s terrific book about market structure, [amazon_link id=”000752076X” target=”_blank” ]Who Gets What and Why[/amazon_link], as well as in this volume. That is to regulate to allow computer trading to occur only once every second. This would re-create liquidity in the markets (which are illiquid at the milli- or nano-second timescale) and stop the speed arms race.

However, what Kaplan points out is that other AI applications will have undesirable consequences because they will look like the swarms of computers trading in financial markets, and doing it super-well with no application of judgment. One example is the use of AI to personalize the offers made to shoppers online, which will become so efficient that the synthetic intelligence will be able to price discriminate perfectly, extract all the consumer surplus in each market, and undo the hope that online retailing would lead to less rather than more price dispersion. Nobody will be forced to buy, of course. “But while you may exercise freedom as an individual, collectively we will not. Synthetic intellects are fully capable of managing the behaviour of groups to a fine statistical precision while permitting individuals to roam in whatever direction their predictable little hearts desire.”

The book asks many other thought-provoking questions about social norms and ethics. Will my personal robot be allowed to stand in a queue for me? Or repark my car to avoid tickets all day? How can we ensure robots understand what are the moral boundaries on their actions when they’ve been programmed to fulfil a certain kind of task?

It also has one interesting policy suggestion, the “job mortgage”, a means of allowing people to train and retrain without being tied to one specific employer: the government loans people money and is repaid from their subsequent earnings. This would replace the existing student loan schemes and apprenticeships, which Kaplan sees as too restrictive for the period of upheaval ahead.

There seem to be lots of books on this subject out now, but I thought this one worth a read, especially for an economist like me, as the author’s background is a technical one and he explains the technology trends very clearly.

How to be a good economist

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It has been difficult to resist writing about Dani Rodrik’s new book, [amazon_link id=”0393246418″ target=”_blank” ]Economics Rules: The Rights and Wrongs of the Dismal Science[/amazon_link], before the embargo date, but at last I’m free to say how terrific it is. Rodrik is of course one of the most eminent public intellectual economists, engaged with policy and the ‘real world’, and a natural communicator. I’m completely in sympathy with his dual aim of aiming the correct criticisms at economics while defending it others: “I have long been critical of my fellow economists for being narrow minded, taking their models too literally and paying inadequate attention to social processes. But I felt that many of the criticisms coming from outside the field missed the point.” This might sound defensive but it matters to get the criticisms right: some of the old chestnuts (too mathematical, all about selfishness etc) give economists a free pass because they allow them to ignore the more troubling issues.

[amazon_image id=”0393246418″ link=”true” target=”_blank” size=”medium” ]Economics Rules: The Rights and Wrongs of the Dismal Science[/amazon_image]

What are these? Rodrik supports the mathematical nature of economics as bringing clarity of meaning, and argues that the subject is far more applied and empirical than its detractors realise. But he criticises large-scale macro models and time series regressions. “I cannot think of an important economic insight that has come out of such models,” he writes. He also flags up the lack of testability of many economic models: they purport to be deductions from theoretical principles, but as they are ‘deduced’ to explain a particular phenomenon (credit rationing, say), then that phenomenon cannot be used to test the model. “Very few of the models that economists work with have ever been rejected so decisively that the profession discarded them as clearly false.”

Another consequences is that there are huge waves of fashion in economic models. Almost the opposite problem is the use of models that *are* built up from 1st principles and have no relationship with reality – prime culprits being macro DSGE models.

Finally, Rodrik writes, “The profession values smarts over judgment, being interesting over being right – so its fads and fashions do not self-correct.” I would suggest (Rodrik does not note this) that this helps account for the male dominance of economics (like philosophy); young women are very strongly socialised out of this kind of showy intellectual display.

So what, then, does the book argue is good about economics? Rodrik portrays the version of the discipline done well as highly empirical, using inductive and deductive methods, sensitive to context – historical, social, conjunctural – and eclectic in its selection of models. It’s horses for courses. We should think of models as a kind of library of diagnostic texts.

Towards the end of the book, he addresses the kind of challenge exemplified by Michael Sandel’s [amazon_link id=”0241954487″ target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_link]. Sandel writes: “Putting a price on the good things in life can corrupt them. That’s because markets don’t only allocate goods, they express and promote certain attitudes toward the goods being exchanged.” Rodrik acknowledges that economists could do with a “richer paradigm” of human behaviour but defends the economic efficiency lens, the analysis of the efficient allocation of resources. Efficiency is a good thing, an important consideration. If carbon trading will reduce emissions, and you believe that to be vital, why would you reject the market approach as immoral? This section ends: “The early philosophers encouraged the spread of markets not for reasons of efficiency or for the expansion of material resources, but because they thought it would produce a more ethical, more harmonious society. It is ironic that, three centuries later, markets have come to be associated in the eyes of many with moral corruption. Just as today’s advocates of markets overlook the limits of efficiency, perhaps the critics neglect some of the ways in which markets contribute to a spirit of co-operation.”

The main message I hope non-economist and economist readers alike will take away from this book is the importance of specific contexts for economic analysis and policy. The book ends with Jean Tirole explaining how frustrating it was for many people, when he won his Nobel Prize, that it was impossible to summarize his work in a brief statement. “It is industry-specific,” Tirole said. “The way you regulate payment cards has nothing to do with the way your regulate intellectual property or railroads.”

The final couple of pages have Rodrik’s Ten Commandments for Economists. Numbers one and two are: Economics is a collection of models; It’s a model, not the model. And also Ten Commandments for Non-Economists, which include: maths is useful; economists are not all alike; economists typically do understand how markets work.

I’m not sure how much traction any book trying to bridge the gap between the best of economics and the subject’s critics can gain (having tried myself in a different way by explaining some areas of economics on the research frontier in [amazon_link id=”B012HTWE7S” target=”_blank” ]The Soulful Science[/amazon_link].) The fact that there are plenty of economists doing the version Rodrik criticises in the book doesn’t help our cause; just turn on the TV or read social media and you find oodles of economists making strong, universal claims about macroeconomic policy or trade policy. But I hope open-minded critics of economics will read [amazon_link id=”0393246418″ target=”_blank” ]Economics Rules[/amazon_link] to learn how the best of economists approach the subject, and how important their work is.

By the way, Dani Rodrik is speaking at the LSE on 7 October.