Tag Archives: review

Economists and humanity

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Peter Smith sent me his new book T[amazon_link id=”0957069707″ target=”_blank” ]he Reform of Economics: How the complex systems approach is building a realistic and humane alternative to laissez-faire[/amazon_link]. In a letter accompanying it, he said he has two motivations. One is to get economics out of the trap of over-simplifying so that models can use linear algebra and thus be made ‘tractable’. This is one of the things that makes complexity economics and agent-based modelling appealing; virtual economies run on a computer do not need to be solved algebraically.

[amazon_image id=”0957069707″ link=”true” target=”_blank” size=”medium” ]The Reform of Economics[/amazon_image]

The other aim is to make economic methodology something more like normal scientific methodology. Economic method consists of choosing some basic postulates and making deductions from them. The deductions can then be tested against data. Normal science involves both induction and deduction. Careful empirical observation will shape theory.

The book dates the choice of the purely deductive path to Lionel Robbins and his 1935 essay [amazon_link id=”B001037AGS” target=”_blank” ]The Nature and Significance of Economic Science[/amazon_link]. He defined economics as the science of constrained choice, which, “Not only excludes uncertainty, but it also excludes from the scope of economics both institutions and the medium-term evolution of economic systems.” This isolates economics from the institutional framework of the economy, and hence from what determines the availability of resources over time – it makes economics an inherently static subject.

Natural scientists do regard economics as bizarrely non-empirical – I’ve been in multi-disciplinary conferences about both macroeconomics and behavioural choice at which biologists exclaim about how rarely economists discuss data, for all that they might go away and test hypotheses. One of the joys of being on the Competition Commission for eight years was how profoundly evidence-based the process is, and hence a real insight for an economist used to generalising about how companies behave. There aren’t many business people who think about marginal cost curves and production functions.

[amazon_link id=”0957069707″ target=”_blank” ]The Reform of Economics[/amazon_link] is a game of two parts (not halves). It is mostly a critique of economic methodology but also has a useful introduction to agent based modelling. It ends on an upbeat note I very much like:

“Economics is becoming a much more interesting area in which to work and learn; and we have every hope that a more realistic and effective reformed science of economics will also be a more humane one. For, ultimately, economics is about the well-being of humanity.”

Cautious giant leaps

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The argument of [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails So Often and How It Can Do Better[/amazon_link] by Peter Schuck is set out wonderfully succinctly in the title, and the book does an excellent job of telling half of the story about the role of governments and markets in delivering economic outcomes.

[amazon_image id=”0691161623″ link=”true” target=”_blank” size=”medium” ]Why Government Fails So Often: And How It Can Do Better[/amazon_image]

The chapters cover a range of reasons for ‘government failure’. To list them, they are: incentives not aligned with the policy’s aims; non-rational choice; lack of information; lack of flexibility in delivering outcomes when circumstances change or things don’t work out; lack of government credibility so essential co-operation is not forthcoming; mismanagement including fraud and abuse. Schuck argues that these barriers to policy success have a “deep, structural, endemic nature.”

The book has many examples of policy failure – it’s an American and to be honest far less amusing version of [amazon_link id=”1780744056″ target=”_blank” ]The Blunders of Our Governments[/amazon_link] by Anthony King and Ivor Crewe. It’s hard to argue with the examples. This book cites also Clifford Winston’s [amazon_link id=”B00D0DIABU” target=”_blank” ]Government Failure versus Market Failure[/amazon_link], which has many more. indeed, there have been loads of policy failures, in all kinds of places and contexts.

An aspect of the argument here that I strongly agree with is the failure of policy analysts to build themselves into their ‘impact analysis’ or whatever framework they use for assessing the likely success of the initiative. In other words, the incentives the policy will create for the people affected to change their behaviour are hardly ever incorporated. Economists often think of themselves as being ‘outside’ the society, in a benign deus ex machina role.Yet all policies alter people’s behaviour and have many side-effects.

Schuck’s book does end with a chapter on policy successes – in fact it finds nine, including Airline Deregulation in 1978, the 1975 Earned Income Tax Credit, the food stamp program, the interstate highway system and the 1965 Voting Rights Act. However, it concludes: “It is hard to know for sure why these (and other) policies have succeeded when so many others have failed. Low costs, simple implementation, strong public good characteristics, and replacing far worse policies are all given as potential explanations. However, Schuck also concludes: “To succeed, the programs needed to engage the actors’ self-interest; they did not need to create new values or transform behaviors.” But he believes that the ‘low hanging fruit’ has gone.

Hence his main recommendation – be cautious. “Realistic meliorism” – make things a little bit better but keep your ambitions modest. The policy ‘doing better’ bit of the book’s title is doing far less.

I’m all for realism. There’s a missing half of the story here, though, which is how government actions unavoidably shape markets, so that to argue ‘don’t do much and just leave it to the market’ is in itself a policy. Collective choices are inevitable and government is how we make those choices. [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails So Often[/amazon_link] should be read alongside Colander and Kuper’s  recent book [amazon_link id=”0691152098″ target=”_blank” ]Complexity and the Art of Public Policy,[/amazon_link] which is about policy as determining the structure of a complex, and uncontrollable (in the old-fashioned policy sense) economy and society.

That approach is hard to get right too, but as it’s impossible not to have a structure within which markets operate, because here we are at a point in history where we have actually existing markets, it surely makes sense for governments to think about that structure. And while caution, in the face of the record of policies ranging from the inept to the horribly counter-productive, is surely sensible, thinking about structure does not automatically point to incrementalism.  Sometimes a cautious giant leap might be just the thing.

The real and the virtual converge

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What are virtual economies for? In their new book, [amazon_link id=”0262027259″ target=”_blank” ]Virtual Economies: Design and Analysis[/amazon_link], Vili Lehdonvirta and Edward Castronova focus on the answer: providing a viable business model for the operators of digital games. “Digital publishers are usually for-profit companies that aim to make money. Their specific approach to making money is providing digital content to consumers. On a very abstract level, their business consists of three processes: creating content, attracting users, and monetizing. Virtual economy design, like every other function in the company, must somehow contribute to these processes.” So the economy-design principles they set out in the rest of the book are intended to serve this profit-making aim.

[amazon_image id=”0262027259″ link=”true” target=”_blank” size=”medium” ]Virtual Economies: Design and Analysis (Information Policy): Design and Anaysis[/amazon_image]

But of course, as that quotation makes it clear, the same processes applies to digital companies other than those providing online games – they are also the main processes for music, books, newspapers, films, education providers. So the ‘games design’ principles described in the book have some interesting applications to other kinds of business, and it makes this an interesting complement to one of my all-time favourite digital business books, [amazon_link id=”087584863X” target=”_blank” ]Information Rules[/amazon_link] by Carl Shapiro and Hal Varian. There is more exchange and macroeconomics here than in [amazon_link id=”087584863X” target=”_blank” ]Information Rules[/amazon_link] because of the gaming context, but there is a lot of food for thought in this book for anybody in any ‘content’ business.

[amazon_link id=”0262027259″ target=”_blank” ]Virtual Economies[/amazon_link] serves a third function too: it is a terrific introduction to economics. In a clear and straightforward way it covers everything from consumer choice theory to macroeconomic demand management and money; and it combines both the conventional approach as it would be taught today and informed critique of the standard assumptions and approaches. For example, the chapter on consumer choice includes both rational choice and alternatives – bounded rationality, behavioural biases, social psychology. There is a whole chapter on institutions and non-market allocation. The final chapter touches on the role of economic institutions as ends in themselves as well as instruments. It concludes with some thoughts on ‘the end of materialism’: not only are large parts of the economy already virtual, but perhaps future growth will be increasingly virtual? This certainly appeals to me as the author of The Weightless World (pdf)!

Anyway, I could see using this as a textbook for an introductory economics course with the term’s collective task for the students being to set up an online economy. It would be unconventional but I can see it equipping students with a terrific basic understanding of trends in economics and business.

Edward Castronova has almost cornered the market in the economics of games – his previous book was [amazon_link id=”0226096270″ target=”_blank” ]Synthetic Worlds: The Business and Culture of Online Games[/amazon_link]. Vili Lehdonvirta is at the Oxford Internet Institute and has written some fascinating papers. Yannis Varoufakis is the economist for Valve but writes far more about the EU – here is one interesting paper he wrote on digital economies though. Hal Varian is of course at Google now. But this is a subject on which most conventional economists are strangely silent – I guess they think it’s a frivolous subject and haven’t noticed that the real world and the virtual worlds are converging. So hooray for this very interesting new book on the subject, highly recommended.

Living on the never never

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I’ve been looking through an interesting book by UBS economist Paul Donovan and Julie Hudson, [amazon_link id=”1849714142″ target=”_blank” ]From Red to Green: How the financial credit crunch could bankrupt the environment[/amazon_link]. It starts with the simple point that people were relying on credit in two ways, using both financial and environmental resources for current rather than future consumption. In some cases the credit-financed consumer boom before the crisis accelerated the consumption of environmental resources, and in other cases had positive environmental benefits. More consumption clearly uses more of some materials and more energy; but has also encouraged investment in additional infrastructure (to use water more efficiently, for example) or innovation. In either case it’s important to note that the two are related, when thinking about what the crunch after the crisis implies for financial and environmental sustainability.

[amazon_image id=”1849714142″ link=”true” target=”_blank” size=”medium” ]From Red to Green?: How the Financial Credit Crunch Could Bankrupt the Environment[/amazon_image]

The bulk of the book looks in detail at different issues to explore the interactions between red and green credit. For example, a chapter on food discusses what actions could increase agricultural productivity while protecting biodiversity and soil quality, how the credit crunch is affecting the outlook, and also what changes in behaviour might be desirable . So declining real incomes could lead to reduced consumption of meat and less food waste, but these depend on changed consumer habits and changed practices in the food retailing business. On the other hand, there is less funding for R&D in agriculture and food production – unless the corporate sector concludes that it needs to do more to limit its exposure to supply chain risks like the horse meat scandal. Other chapters look at water, energy, infrastructure, housing, human health, and consumer goods.

The detail is all fascinating, and the book obviously covers a wide territory. It seems to offer a very practical and fruitful approach to turning the crisis to some longer term benefit by getting people to focus on specific actions to reduce the economy’s reliance on financial credit and at the same time economise on natural resource use and preserve natural assets. Ever since writing [amazon_link id=”B00GP1RV0U” target=”_blank” ]The Economics of Enough[/amazon_link] a few years ago I’ve been obsessed with the chronic short-termism of modern economies. So a book about what people can do right now to safeguard future living standards – written by a City economist too – was bound to appeal to me. Any investors who are genuinely interested in long-term returns rather than quarterly results will find it very interesting. However, although the advice in [amazon_link id=”1849714142″ target=”_blank” ]From Red to Green[/amazon_link] is practical and specific, it does highlight how much needs to be done by many people to lengthen the economic time horizon.

Handling policy on the ground

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Like all thinking economists, I’ve been fascinated by the transformation of China in our lifetimes and the implications of its emergence as a major economic power. Although no expert, I’ve read quite a lot of the popular books on the country and its economy. Many fall into the hype trap – either China will take over the world, or it will experience a terrible setback because of the many challenges of rapid development on a huge scale.

My favourites have been the books of reportage such as Leslie Chang’s [amazon_link id=”033044736X” target=”_blank” ]Factory Girls[/amazon_link] or Richard McGregor’s [amazon_link id=”0141975555″ target=”_blank” ]The Party[/amazon_link] or even Fuschia Dunlop’s [amazon_link id=”0091918324″ target=”_blank” ]Shark’s Fin and Sichuan Pepper[/amazon_link]. I’m also looking forward to Danny Quah’s forthcoming book on global economic hegemony in the post-US unipolar world  – he recently posted this online.

Meanwhile, this week I’ve read one of the best books so far about the drama of China’s journey – in my lifetime – from the brutality of the Cultural Revolution to the cultural and political as well as economic and social tensions of a society whose average living standards have doubled every seven years but very unevenly distributed. It’s Jianying Zha’s [amazon_link id=”1595588809″ target=”_blank” ]Tide Players: the movers and shakers of a rising China[/amazon_link].

[amazon_image id=”1595586202″ link=”true” target=”_blank” size=”medium” ]Tide Players[/amazon_image]

It’s a slim book, a series of essays focussing on certain individuals in the business and in the cultural worlds. Ms Zha has lived her adult life between China and the US, having grown up with a family sent to work on a farm out of Beijing during the Cultural Revolution, and having made her way out via university as soon as the climate began to change. The dual perspective is illuminating. I particularly enjoyed the chapter about economist Zhang Weiying’s proposals for reforming Beijing’s university – some of the description of the controversy could have been applied verbatim to the UK context. “Like a typical economist, he marches stridently by the logic of the market and tries to turn the university into an efficient production line, a lean and mean academic market. … He sees running the university essentially as a management affair, not a supple and subtle art which requires, among other things, tolerance and the ability to recognize idiosyncratic geniuses who don’t fit a cookie cutter plan.” Are there any universities even in the US that really march by the logic of the market?

The book also furnished me with a bunch of new-to-me Chinese proverbs. My favourite: “When there is policy from above, there is always a way of handling it on the ground.” Also: “Dropping a stone on someone’s head after he falls into a well.” (Equivalent obviously to kicking someone when he’s down.)

It’s beautifully written and illuminating about debates within China, rather than the western debate about China. Highly recommended.