Tag Archives: review

Futurology: more sense, less bollocks

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I’m not a fan of futurology. There’s something about the genre that demands a breathless writing style and over-confident future-bollocks. However, I’ve just been looking at a book that isn’t nearly as bad as the typical example. It’s [amazon_link id=”1781254974″ target=”_blank” ]The Future of (almost) Everything: the global changes that will affect every business and all our lives[/amazon_link] by Patrick Dixon.

[amazon_image id=”1781254974″ link=”true” target=”_blank” size=”medium” ]The Future of Almost Everything: The global changes that will affect every business and all our lives[/amazon_image]

The breathlessness is there – after all, it fits all of (almost) everything affecting everybody into 350 pages. It has lots of words CAPITALIZED and loads of headings and bullet points. The chapters are titled according to the acronym: Fast; Urban; Tribal; Universal; Radical; Ethical – geddit? Having harumphed, there is also some perfectly sensible trend extrapolation. Even so, there is an early demonstration of the fickleness of the future when it arrives. In a long list early in the book of “highly predictable” long term trends comes “rapid growth in global trade”. Well, maybe, but that’s not looking so good at the moment.

Apart from the stylistic tics – which are obviously popular given how well such books sell – my main problem with futurology is the absence of broader social scientific analysis. Take as an example the section in [amazon_link id=”B00V6R4MZ0″ target=”_blank” ]The Future of (almost) Everything[/amazon_link] on big data. It makes some obvious-to-reasonable points about the benefits of personalisation, and the costs to privacy or in increased cyber-crime. But there is no discussion about, say, who owns the data and benefits from the likely gains in exploiting it; or whether it will cause insurance markets to collapse (because they require a pooling of risk which will be subverted by the personalisation of risk premia); or what legal framework will be required to assign big data property rights and rein in the massive corporate invasions or privacy, or indeed the eating up of mobile data allowances by ads and cookies.

Still, having grumbled, if you want a futurology read, the ratio of common sense to future-bollocks in this book is high, it gives a broad survey of current global trends such as demographic change , urbanisation and environmental pressures, and it would nicely fill a plane journey.

Sorting out short-termism

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Reforming finance and corporate governance have been a bit of a theme in my recent reading. There was John Kay’s outstanding [amazon_link id=”1781254435″ target=”_blank” ]Other People’s Money[/amazon_link], which I reviewed here a few days ago. I’ve read the proof copy of Adair Turner’s impressive new book, [amazon_link id=”0691169640″ target=”_blank” ]Between Debt and the Devil[/amazon_link], although am not allowed to post a review until it’s out in November.

[amazon_image id=”1781254435″ link=”true” target=”_blank” size=”medium” ]Other People’s Money: Masters of the Universe or Servants of the People?[/amazon_image]  [amazon_image id=”0691169640″ link=”true” target=”_blank” size=”medium” ]Between Debt and the Devil: Money, Credit, and Fixing Global Finance[/amazon_image]

Meanwhile, I’ve read a short new book by Laurie Fitzjohn-Sykes, formerly a City analyst and now working for the think tank Tomorrow’s Company. It’s called [amazon_link id=”1845408349″ target=”_blank” ]Playing the Long Game: How to Save the West from Short Termism[/amazon_link], and is well worth a read.

[amazon_image id=”1845408349″ link=”true” target=”_blank” size=”medium” ]Playing the Long Game: How to Save the West from Short-Termism (Societas)[/amazon_image]

The book starts with a vignette of the annual general meeting of Softbank in Japan, in which Masayashi Son gave a 2 hour speech setting out his 30 year and 300 year vision. He must be doing something right. Softbank’s latest product, Pepper the companion robot, has sold out its first two batches of 1000 within a minute of launch.

Pepper, the robot Softbank proposes as your companion - photographed by Rory Cellan-Jones at Innorobo this year

Pepper, the robot Softbank proposes as your companion – photographed by Rory Cellan-Jones at Innorobo this year

The author contrasts this of course with the quarterly results obsession in UK and US business, with the under-investment in the west compared with Asia, and stockmarket churn. It touches on one issue I think is highly damaging, the link between executive remuneration and share prices – as does Andrew Smithers in his excellent book [amazon_link id=”B00EMVHKR4″ target=”_blank” ]The Road to Recovery[/amazon_link].

[amazon_image id=”B00EMVHKR4″ link=”true” target=”_blank” size=”medium” ]The Road to Recovery: How and Why Economic Policy Must Change[/amazon_image]

Fitzjohn-Sykes’ conclusions focus on exactly the need to change management incentives through corporate governance reform and taxation of the damaging pay structures. He also recommends using the tax system to link fund managers’ pay to the long term performance of their funds rather than quarterly outperformance, and introducing minimum stock holding periods for pension funds. In such a short book these recommendations are short on detail but surely in the right territory. Interestingly, he advocates requiring all market research to be conducted by 3rd parties – this focus on the problem of sell-side research is worth considering, along with putting the spotlight on the fund management industry as well as the investment banks and the companies themselves.

At 115 pages, this book is a concise introduction to the short-termism problem, and I’m sure some of the solutions it advocates will prove necessary. However, the problem is well-known and many people have suggested reforms; the question remains why they have so little political traction?

Designing markets

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One of the (many) things I like about market design is the name. It’s a reminder that markets are social institutions too, and that there is a wide spectrum of ways of organising the allocation of resources. So often only the two extremes are discussed: ‘free’ markets (dependent only on property law and contract enforcement – oh, and social norms and culture, and infrastructure, and standards and…. but I digress); and ‘the state’ (with its benign and omniscient ability to analyse market failures and tell people what to do so they are fixed…. oh, wait).

Al Roth’s new book describing his career’s worth of market design, culminating in his Nobel prize with Lloyd Shapley, is a truly excellent overview of the subject. [amazon_link id=”000752076X” target=”_blank” ]Who Gets What and Why: the hidden world of matchmaking and market design[/amazon_link] is a very clear and non-technical description of what can cause markets to malfunction, and how to make them do a better job of matching up supply and demand. It includes the work for which he is most famous, on designing an exchange  to enable the matching of kidney donors and recipients, where no money changes hands in the market-like process.

[amazon_image id=”000752076X” link=”true” target=”_blank” size=”medium” ]Who Gets What – And Why: The Hidden World of Matchmaking and Market Design[/amazon_image]

The first section is a warm-up describing the pervasiveness and importance of markets, and some of the problems market design addresses. The second and third sections are the meat in the sandwich. Roth first of all explains why some markets will collapse, with many examples. The fundamental need is for a ‘thick’ market with plenty of buyers and sellers, in which people have enough time to make their decision, but neither the need nor the opportunity to act strategically. The problems are therefore: incentives to jump the gun ahead of most people in the market – which causes everyone to try & do so once somebody does; trades that occur too fast so people on the slower side of the market cannot make good decisions; rules that cause people to have to devise strategies other than expressing their true preferences; and ‘goldilocks’ communications between participants, not too fast/frequent and not too slow. The following section sets out market design solutions to each kind of problem.

For example, the ‘too soon’ problem featured in the market for first jobs for junior doctors in the US, as 2nd tier hospitals would make earlier and earlier binding and exploding offers to medical students – exploding meaning the candidate had as little as half an hour to say yes before the offer expired. They wanted to make sure they had the best students, but the good students faced the dilemma of a sure job versus the chance of a job at a competitive but better hospital. Attempts to reform the system always foundered on a lack of trust between hospitals. The solution was the famous ‘deferred acceptance’ algorithm run by a central clearing house: it ensures offers can be held until it is clear each student will not get a better one. Every hospital and every student gets their best possible match given everyone’s preferences.

The ‘too fast’ example is high frequency trading, where the millisecond speed means the market is actually thin at each moment. The proposed solution – not yet adopted by regulators – is to insist that all trades occur together once every second.

Matching students to schools is the example of a system that forced strategic behaviour under the old rules in New York and Boston, where Roth’s solutions have been implemented. Parents had to decide disguise their real preferences to reflect the fact that certain schools would only take pupils who had put them as first choice, and that some were so popular that the 2nd or 3rd choice had to reflect a realistic ‘insurance’ option. The deferred acceptance algorithm, with adjustments to reflect policies such as a sibling rule, was again the solution, making it safe to express true preferences.

The later chapters of the book cover other issues, among them signalling, and repugnant markets. Roth also emphasises two important factors: the role of culture in shaping how markets work (gastroenterologists vs orthopedic surgeons have sufficiently different professional cultures that their matching markets needed to be set up differently); and the need to work alongside politicians who might not take every bit of the economists’ advice. The context changes too, calling for redesigns – for example, the medical student matching market needed to be updated when more couples started looking for jobs in the same city.

[amazon_link id=”000752076X” target=”_blank” ]Who Gets What and Why[/amazon_link] has jumped to near the top of my list of books to recommend to students and non-economists to help explain (a) what a lot of economists actually do when they get involved in public policy and (b) why the standard political debate about ‘free markets versus government intervention’ is so utterly inadequate and misleading. Highly recommended.

Other people’s money

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Catching up with post-holiday stuff has slowed me down, but I finished John Kay’s new book, [amazon_link id=”B00UJD8AS2″ target=”_blank” ]Other People’s Money: Masters of the Universe or Servants of the People?[/amazon_link] 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 [amazon_link id=”014104571X” target=”_blank” ]Whoops![/amazon_link] 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.

[amazon_image id=”B00UJD8AS2″ link=”true” target=”_blank” size=”medium” ]Other People’s Money: Masters of the Universe or Servants of the People?[/amazon_image]

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.”

versus

“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 [amazon_link id=”B00HZ634AU” target=”_blank” ]Admati and Hellwig[/amazon_link] 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 [amazon_link id=”B00UJD8AS2″ target=”_blank” ]Other People’s Money[/amazon_link] 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

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The last of my holiday reads, albeit finished this week, was [amazon_link id=”0099590085″ target=”_blank” ]Sapiens: A Brief History of Humankind[/amazon_link] by Yuval Noah Harari. I was a bit disappointed, as it had absolutely glowing reviews. After reading Ian Morris’s [amazon_link id=”1846682088″ target=”_blank” ]Why The West Rules For Now[/amazon_link] and his more recent [amazon_link id=”0691160392″ target=”_blank” ]Farmers, Foragers and Fossil Fuels[/amazon_link], and Jared Diamond’s [amazon_link id=”0099302780″ target=”_blank” ]Guns, Germs and Steel[/amazon_link], and his later [amazon_link id=”0241958687″ target=”_blank” ]Collapse[/amazon_link], not to mention [amazon_link id=”052138673X” target=”_blank” ]Joseph Tainter[/amazon_link] and [amazon_link id=”1843547252″ target=”_blank” ]Walter Russell Mead[/amazon_link], 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.

[amazon_image id=”0099590085″ link=”true” target=”_blank” size=”medium” ]Sapiens: A Brief History of Humankind[/amazon_image]

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 [amazon_link id=”1844670864″ target=”_blank” ]Benedict Anderson[/amazon_link]): “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 ([amazon_link id=”1612194192″ target=”_blank” ]Graeber[/amazon_link]-style) into three chapters.

Anyway, that’s it for summer paperbacks. Back to the serious reading now. Next up is John Kay’s [amazon_link id=”B00UJD8AS2″ target=”_blank” ]Other People’s Money.[/amazon_link] Four pages in, and I think it’s fabulous.

[amazon_image id=”B00UJD8AS2″ link=”true” target=”_blank” size=”medium” ]Other People’s Money: Masters of the Universe or Servants of the People?[/amazon_image]