Tag Archives: review

The logic of failure

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At the talk he gave last week, Cass Sunstein warmly recommended [amazon_link id=”0201479486″ target=”_blank” ]The Logic of Failure: Recognizing and Avoiding Error in Complex Situations [/amazon_link]by Dietrich Dörner. So warmly that I bought a copy and read it on my train journeys yesterday. It’s a very good account of what goes wrong with decision-making in complex situations – including any economic context – although I wouldn’t be quite as glowing in my praise as Prof Sunstein was. Still, definitely one to read, along with [amazon_link id=”0300144709″ target=”_blank” ]Nudge[/amazon_link], [amazon_link id=”0007256531″ target=”_blank” ]Predictably Irrational[/amazon_link], [amazon_link id=”000731731X” target=”_blank” ]The Invisible Gorilla[/amazon_link], [amazon_link id=”1846144744″ target=”_blank” ]Risk Savvy[/amazon_link], [amazon_link id=”0141015918″ target=”_blank” ]Gut Feelings [/amazon_link] etc etc., if the issue of decision-making is of interest to you.

[amazon_image id=”0201479486″ link=”true” target=”_blank” size=”medium” ]The Logic of Failure: Recognizing and Avoiding Error in Complex Situations[/amazon_image]

Some of the psychological territory it covers is familiar from the now-ample behavioural economics literature. This includes the difficulty of making calculations, the salience of recent events or things we just happen to have noticed, the problem of limited attention. However, less familiar was the diagnosis of how hard many people find it to take account, not only of interactions between variables, but also dynamics – it seems almost impossible for many people not to extrapolate in straight lines, and not to be too impatient to wait for feedback.

The book uses the results of lab experiments to illustrate the point over and over, including very simple challenges like including a time delay between setting a regulator dial and achieving the target temperature. The relationship between dial and degrees C is simple and linear in this example, but only one participant is patient enough to wait for the response to her first moves of the dial before finding the right setting. This inability to wait is obviously a near-universal characteristic. Certainly, my husband has this issue with every shower he gets into despite my calmly explaining it to him many times, and ends up with the totally predictable oscillating temperatures as he over-reacts to short-term feedback. (Of course, he does have the patience to be married to an economist.)

The book concludes that people can learn to be better decision makers but concludes with a very long list of the traits that we need to acquire to achieve good outcomes in non-linear dynamic and complex contexts with limited information i.e. the world. I finished reading it feeling more pessimistic. There are many examples given of participants in experiments who concluded that it was efficient to have inflicted a famine on a country on the computer, or that a bad outcome was the result of a conspiracy (by the computer!) against them. As the world is ever more replete with instant feedback, what are the chances of getting a more patient and psychologically sophisticated politics?

Who owns the future? Not you

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It’s taken me a while to get through Jaron Lanier’s [amazon_link id=”0241957214″ target=”_blank” ]Who Owns the Future?[/amazon_link] It was highly recommended to me and I found it an interesting read. But as it’s a book about digital economics by a non-economist, and therefore written in a language foreign to the way I think about the issues, it was a surprisingly difficult read. I don’t think normal people would have the same difficulty.

[amazon_image id=”0241957214″ link=”true” target=”_blank” size=”medium” ]Who Owns The Future?[/amazon_image]

The theme of the book is that the economy has developed in ways that enable what Lanier calls ‘Siren Servers’ to appropriate the past and present labour of many other people for themselves, and thereby hollow out the middle classes. This situation is the result of the way the Siren Servers – he means Amazon, Facebook, Google etc – have used the presumption that “information is free”, specifically the data they all gather about all of us and by all of us, but advertising is paid for. Lanier quite rightly points out that the customers of these titans are the advertisers, not the individual users. Lengthy user agreements that nobody reads means the corporations take no risks, only revenues.

Lanier seems to believe that eventually this economic structure will become unsustainable because it is destroying normal middle class livelihoods and there will be nobody to buy the products being advertised. The Siren Servers become so big that they eat their environment (just as the financial markets did).

His proposed solution is nano-payments attached to information generated by individuals, whether that’s their ‘data’ or their creative or digital products. “If the system remembers where information originally came from, then the people who are the sources of information can be paid for it.” He points out that HTML, although marvellously convenient, only links one way, while Ted Nelson, an early thinker about linking, argued for two-way links. This is less convenient because of the additional updating required. In fact, the book left me completely unclear how two way linking to enable nano-payments would work in practice. However, Lanier argues: “This is the only way that democracy and capitalism can be in alignment.” Without greater symmetry between supplier and acquirer of information, the information economy will collapse.

I have an instinctive sympathy with the book’s argument, but do not think the unsustainability in capitalism we all can see at present boils down to the absence of micro-payments implemented via two-way hypertext linking. One question is Jean Tirole’s: will new digital giants benefiting from network effects come along and displace Google et al? If that hasn’t happened within, say, a decade, then the time would come to regulate these vital utilities to ensure they serve the public interest. More generally, I would look at beefing up competition policy as one of the levers to loosen the political power acquired by ‘Siren Servers’ – in which category I’d include the financial sector as well as the ICT sector.

The question of distributing productivity gains to the population as a whole is not confined to the digital economy either. While it’s right to be concerned about the jobbing musicians and journalists whose jobs are being destroyed by “free” online content, there are lots of other standard middle class jobs seeing living standards decline, so the economic and political issues go far beyond what’s covered in [amazon_link id=”0241957214″ target=”_blank” ]Who Owns the Future?[/amazon_link] For of course this started some time ago with blue collar jobs. However, it’s an interesting book, and it’s always worthwhile to hear what experts in other fields have to say about economic issues, for their different perspective. I think Lanier’s diagnosis and solution will have quite wide appeal.

Money as a process, not a thing

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Nigel Dodd’s [amazon_link id=”0691141428″ target=”_blank” ]The Social Life of Money[/amazon_link] is fascinating. I’ve never understood money and don’t think I do yet. One of the signs of its abstraction as a concept is the way people bring their own interpretations to it, perfectly plausibly.

[amazon_image id=”0691141428″ link=”true” target=”_blank” size=”medium” ]The Social Life of Money[/amazon_image]

In my first ever job, in the Treasury in the mid-1980s, I had the task of looking at the properties of different linear combinations of deposits, all corresponding to different definitions of money – not that I over-thought it at the time. Economics textbooks over the years have blithely carried a completely fictional, institution-free account of the money multiplier, and give us probably the least plausible explanation, typically – and unhistorically – claiming money emerged from barter trade.

Information scientist Jaron Lanier’s book [amazon_link id=”0241957214″ target=”_blank” ]Who Owns The Future[/amazon_link], which I’m currently reading, says, “Money is simply another information system.” Digital identity and currency guru Dave Birch tells us [amazon_link id=”1907994122″ target=”_blank” ]Identity is the New Money[/amazon_link]. This echoes Keith Hart in his classic [amazon_link id=”1861972083″ target=”_blank” ]The Memory Bank[/amazon_link]: “The two great memory banks are language and money. Exchange of meanings through language and of objects through money are now converging in a single network of communication, the internet.” Another anthropologist David Graeber in his tome [amazon_link id=”1612191290″ target=”_blank” ]Debt: The First 5000 Years[/amazon_link] rooted money in group cultures. Nigel Dodd is a sociologist so he gives us the sociological perspective.

[amazon_image id=”1861972083″ link=”true” target=”_blank” size=”medium” ]The Memory Bank: Money in an Unequal World[/amazon_image]  [amazon_image id=”1612191290″ link=”true” target=”_blank” size=”medium” ]Debt: The First 5,000 Years[/amazon_image]  [amazon_image id=”1907994122″ link=”true” target=”_blank” size=”medium” ]Identity Is the New Money (Perspectives)[/amazon_image]  [amazon_image id=”0241957214″ link=”true” target=”_blank” size=”medium” ]Who Owns The Future?[/amazon_image]

Dodd’s book starts by looking at the various origin myths and links each to current (sociological) monetary theories. It then takes money by theme: capital, debt, guilt, waste, territory, culture and utopia. The chapter covering the terrain most familiar to economists is that on debt, but it takes an entirely different perspective, with Keynes and Minsky the principal economists named here. The chapter’s conclusion gives its flavour: “A monetary system that i defined by an over-arching orientation toward the interest of creditors is inimical to democracy. …. Democracy, or society, now appears to be in open conflict with the needs of finance. Debt is no longer facilitating capitalism, it is driving it.”

In a way, I found this book very heavy going because it is written in the language of sociology, and with lots of references unfamiliar to me. But it’s good for any of us to look through the lens of a different discipline. I find Dodd’s conclusion persuasive – that money is not a thing but a social process. This tallies with Dave Birch’s argument that the combination of ubiquitous mobiles and their record of a dense social graph means digital identity is fast becoming the latest manifestation of money.

Dodd also presents the paradox that money is both outside the realm of values it describes, as the means of measurement, and inside it as a particular commodity with a value – he quotes [amazon_link id=”0415610117″ target=”_blank” ]Georg Simmel[/amazon_link] as saying money is both the measure and measured. And he links this self-referential character to the capacity for financial bubbles and crises to inflate themselves. True value lies in the social life of money, in the activities of human societies.

[amazon_image id=”B0092JLXJW” link=”true” target=”_blank” size=”medium” ]ThePhilosophy of Money by Simmel, Georg ( Author ) ON Apr-01-2011, Paperback[/amazon_image]

What this means for monetary policy is another matter entirely, and Nigel Dodd’s forays into economics are far less persuasive – not that there seems to be a more compelling approach to money on offer from the macroeconomists either at the moment. Sticking a bit of ‘institutional’ friction into DSGE models to represent the banking and shadow banking sectors can only be a sticking plaster until monetary economists start to take seriously the insights to be drawn from sociologists and others.

Trains, planes and no automobiles

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On my planes and trains just recently I read Charlie LeDuff’s [amazon_link id=”0143124463″ target=”_blank” ]Detroit: An American Autopsy[/amazon_link]. No automobiles in my travels, and, as it happens, not much about the automobile left in Motor City either.

It’s a gripping read, in the same post-crisis-America genre as [amazon_link id=”0571251293″ target=”_blank” ]The Unwinding[/amazon_link] by George – another superb read that paints a depressingly realistic picture of life for so many people in the post-industrial US. [amazon_link id=”0143124463″ target=”_blank” ]Detroit [/amazon_link]is a rather gonzo journalism version – LeDuff used to report from war zones. As it turns out, that perspective seems all to appropriate when he returns to his home city.

[amazon_image id=”0143124463″ link=”true” target=”_blank” size=”medium” ]Detroit: An American Autopsy[/amazon_image]

One of the most depressing aspects is how quickly and comprehensively the polity and economy crumble when trust or social capital falls below some threshold. Everybody is afraid. Normal contact and transactions become impossible. There are, for example, no high street names left in the city of Detroit, none – the chain stores have all left. Politics had become – this was written before the official bankruptcy – absolutely venal with all the usual manifestations of corruption and incompetence that characterise poor countries with failed institutions.When LeDuff writes: “The entire country was being run into the ground by a generation infected with incompetence and greed,” he surely speaks for many of his fellow citizens. Among the most incompetent, as portrayed here, are the managers of the big auto companies, whose bailout by the Federal Government in 2009 did nothing to stem the tidal wave of job losses.

The book is interesting about the loss of this factory work. It doesn’t romanticise it at all, recognising how dull, dispiriting and disempowering it is. At the same time, LeDuff argues that it taught workers an important perspective on the world and – at least in the past – an understanding of the nobility of the hard grind. “Turning away from our birthright – our grandfather in the white socks – is the thing that ruined us,” he writes of his generations aversion to the discipline of hard graft that – at least – factory work gave earlier generations.

The collapse theme harks back to my last post here, about how essential trust is to a modern (any) economy. Detroit offers an example of the post-trust economy. Read this book and be afraid.

Market failures and government failures

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It’s lecture preparation time of week again, and the general theme for next week is the state as a producer: nationalisation and privatisation, PFIs and PPPs, contracting out and industrial policy.

This is one of those areas where there is a vast amount written, but much of it furiously ideological, or else at the wrong focal length for undergraduate students – far too specific or detailed. However, courtesy of Alex Marsh, I have found [amazon_link id=”0801487625″ target=”_blank” ]You Don’t Always Get What You Pay For: The Economics of Privatisation[/amazon_link] by Elliott Sclar.

[amazon_image id=”0801487625″ link=”true” target=”_blank” size=”medium” ]You Don’t Always Get What You Pay for: The Economics of Privatization (Century Foundation Book)[/amazon_image]

This refers to privatisation in the US meaning of contracting out, rather than the UK sense of the sale of state assets. It starts by situating the debate in the context of the shifting tides of political beliefs over the 20th century, towards planning and the role of government as an agent of social change, and then back towards “free” markets and individual action. It then has a few chapters on the basics of markets versus administered or planned services and market failures, and also the basics of writing contracts and how hard or easy it is to specify the service and level of quality to be provided. This part has some very good and clear examples about how difficult it can be to get the incentives right in such contracts – indeed, how often there are perverse incentives due to contract structure.

The book goes on to market structures and competition, and organisational theory – the distinction between exchange in a market and a continuing relationship between individuals or organisations. The book ends with a plea for a less ideological debate about the issue, in favour of one more informed by economic and institutional analysis, by the realities of information asymmetries, moral hazard, principal-agent problems and the like. I wholly sympathise, for of course markets and governments fail in the same places for similar reasons – and this is why [amazon_link id=”0521405998″ target=”_blank” ]Elinor Ostrom[/amazon_link]’s study of the idiosyncrasies of non-market, non-state collective institutions is so interesting. But am not optimistic about shedding the ideology.

There’s no doubt what Prof Sclar’s views about contracting out are, so this is in that sense a partisan book. However, it is carefully reasoned and the economic issues are set out clearly. The writing is lively with loads of examples (albeit all American), and the book is extremely clear – perhaps it helps that Prof Sclar is an urban planner rather than in an economics department!

It’s too long, and perhaps a bit too demanding, for 2nd year undergraduates though. (One of the things I’m learning in delivering my course is that my idea of a reading list is far longer than others like the look of.) If anybody knows of anything alternative (short-ish) readings that shed more light than heat, I’d be glad to know, especially UK-centric ones.