Tag Archives: review

Antifragile, pro and anti

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[amazon_link id=”0141038225″ target=”_blank” ]Antifragile: Things that Gain from Disorder[/amazon_link], the latest tract from Nassim Nicholas Taleb, left me with mixed feelings. It’s interesting, and I find a lot of his argument intuitively appealing. On the other hand, it really needed a thorough edit – the train of the argument is convoluted and there are horribly self-indulgent passages. It could have been significantly shorter, too. On balance, it’s worth a go but lacks the punch of [amazon_link id=”0141034599″ target=”_blank” ]The Black Swan[/amazon_link] or [amazon_link id=”0141031484″ target=”_blank” ]Fooled by Randomness[/amazon_link].

[amazon_image id=”0141038225″ link=”true” target=”_blank” size=”medium” ]Antifragile: Things that Gain from Disorder[/amazon_image]

Which is a pity, because it would be good for the key ideas in [amazon_link id=”0141038225″ target=”_blank” ]Antifragile[/amazon_link] acquired the same traction in popular thought as the importance of fat tailed distributions (hence the frequency of Black Swans) and the fact that basic probability means luck plays a much bigger role in life than we think. Taleb’s main argument is that just as small tremors release tension along a geological faultline, averting a big earthquake, small setbacks play a useful role in economic and social contexts. It is a good thing for the economy as a whole that some firms fail; the policy manipulation that gave us the Great Moderation (the Greenspan ‘put’ of cutting interest rates whenever the markets declined) built up the imbalances that led to the Great Crash. The book gives many examples of contexts in which small stresses play a healthy, error-correcting role, and over-regulating creates the conditions for big errors.

Along the way, Taleb has many swipes at economics, mainly for its insistence on linear models and normal distributions – and I’m someone who thinks that’s a fair cop. The world is self-evidently non-linear, and it’s alarming that so many policymakers cling to the illusion of control they get from linear thinking – pull this policy lever, and that desirable consequence will follow.

There is one cracking story in the book, where Taleb recounts giving a lecture to Société Générale’s top executives on risk, warning them that the bank was taking massively greater risks than they imagined. The reception was hostile, he reports. Weeks later, SocGen had to liquidate $70bn of assets in a fire sale to cover the losses caused by the trades of Jerome Kerviel. At the talk, Taleb says, he had been “heckled relentlessly by Kerviell’s boss and his colleague, the head of risk management.”

There are some general lessons from observing anti-fragility, Taleb concludes. There are three kinds of context – the fragile (negative feedbacks or concavity), robustness (no feedbacks), and antifragility (positive feedbacks or convexity). Be aware of whether you are in a situation where the distribution of outcomes is curtailed at one end – travel times, for example, have little scope to be shorter than expected and much scope to be far, far longer than expected. Is there more upside than downside? How quickly do the outcomes change – does the time taken to drive from A to B increase by a lot more when you add a second hundred extra vehicles on the road than it did for the first hundred extra vehicles? Guard yourself by following what Taleb calls ‘barbell’ strategies – he means dual strategies avoiding the middle way – put your money 90% into safe assets and 10% into very risky ones, so limit your downside risk and create large upside, but don’t put 100% into medium risk assets which could lose you everything if you miscalculated the risk. But he extends the idea. So also, if you want to be a writer, work in a boring job and leave your free hours for writing, rather than taking a job as a creative writing academic, which will suck out your creative marrow with teaching and admin.

This extension points to one of the book’s weaknesses, which is that it extends arguments that make complete sense at the level of probability and asset prices to other areas, from macroeconomics to the rest of life, where they have intuitive appeal but would probably not convince an unsympathetic reader. So I agree with Taleb that there is too much effort to squeeze the variability out of various contexts, with ultimately damaging consequences, but then I thought that anyway without the paraphernalia of anti-fragility to get me there. I enjoyed reading [amazon_link id=”0141038225″ target=”_blank” ]Antifragile[/amazon_link] despite its bagginess, and other Taleb fans will enjoy it too, but I doubt it will have the wider impact of his previous books.

Walls, visible and invisible

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[amazon_link id=”1908526335″ target=”_blank” ]Walls: Travels along the barricades[/amazon_link] by Canadian writer Marcello Di Cintio is an excellent work of reportage from several of the world’s most intrusive physical barricades. His travels took him from Belfast to the West Bank, the US-Mexico border to that between Bangladesh and India, and others too – Cyprus, the Western Sahara, Ceuta and Melilla. It is very well written and like any good reporting, takes the reader to unknown places and makes them real.

The common theme is the walls or fences proclaimed as security measures in fact create and deepen divisions between the people on either side. The walls once built create the need to maintain them as distrust grows, inevitably, because social contacts between the people on either side are severed. It is hard to draw any conclusion other than that they should never go up in the first place.

[amazon_image id=”1908526335″ link=”true” target=”_blank” size=”medium” ]Walls: Travels Along the Barricades[/amazon_image]

These barricaded borders are an extreme example of the social and economic effects of any border. Economic activity is reduced around any line on the map. I’ve always been fascinated by the invisible borders that characterise every city. There is no built structure separating Tower Hamlets from the City of London but there could hardly be a sharper or less permeable division between two social groups than between the global elite working in the finance sector and the inhabitants of one of London’s and the UK’s poorest boroughs. And of the cities I know, London is one of the least geographically segregated.

Getting people to meet and spend time with people who are different – in all kinds of ways but including in the amount of money they have – is the only way any walls, visible of invisible, will ever come down. Reading about them is a start, I suppose, taking that first step of sympathetic imagination.

Learning economic lessons from Asia

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I’ve nearly finished reading Joe Studwell’s excellent book, [amazon_link id=”1846682428″ target=”_blank” ]How Asia Works: Success and Failure in the World’s Most Dynamic Region[/amazon_link]. Both Tyler Cowen and Cardiff Garcia praised it in our recent Alphaville podcast conversation about economics books, so I obviously had to catch up.

[amazon_image id=”1846682428″ link=”true” target=”_blank” size=”medium” ]How Asia Works: Success and Failure in the World’s Most Dynamic Region[/amazon_image]

It is indeed worth reading, building on obviously highly detailed knowledge about the countries of East Asia to theorise about the policies that successfully encourage economic development and rising living standards. The book contrasts the development success of the northern economies of East Asia (Japan, South Korea, Taiwan, China) and the southern ones (Thailand, Indonesia, Malaysia, the Philippines). The compare and contrast approach leads Studwell to conclude that successful economic development takes the following path:

1. An initial land reform that breaks up plantation-style estates and redistributes land from  landlords to tenants. Perhaps counter-intuitively, the application of a great deal of family-based labour on small farms has proven a far better footing than greater use of capital equipment at large scale for improving productivity. The evidence is that yields on the small plots of countries that did undertake land reform exceeded yields on large farms. In addition, the increased incomes of largely rural populations are vital for growing the domestic market for manufactures over time. However, land reform is politically difficult – the examples in Asia stemmed from great crisis. The redistribution also needs to be accompanied by a suite of policies to support agriculture, including extension support, rural credit and infrastructure investment.

2. The next stage is to grow domestic manufacturing. Studwell describes this as “protectionism”, whereas I would call what he depicts in the successful economies “industrial policy”. He rehearses the often-made argument that just as European economies and the US relied on tariff barriers to protect their infant industries in the 19th century, so the successful Asian economies built their manufacturing sectors behind protectionist walls in the 20th century. However, what he describes in the country detail is a policy much subtler than the use of trade barriers. Reading the examples, it seemed to me that the key elements were: (i) a willingness to use government funding to support domestic manufacturers until they reached a scale that would make them globally competitive – importantly, testing their competitiveness by making investment or subsidies depend on export volumes; (ii) opening domestic markets to imports of key inputs for exporters even at the expense of other domestic industries – in other words, not protection against imports so much as support including export subsidy for strategic sectors. One example is Japan’s decision to open the market to imported cotton, which did for its own cotton growers.

Now, it is true to say that the free-market philosophy driving economic policy since the 1980s means governments in the UK at least have self-amputated their ability to support manufacturing in this strategic way. Interestingly, Harold Wilson’s famous “White Heat of Technology” speech (link available on the Ballots and Bullets blog), 50 years old this week, reads as exactly the kind of long-term, market-tested intervention Studwell describes. Mariana Mazzucato has recently been beating the drum for a rediscovery of industrial policy with her very interesting book [amazon_link id=”0857282522″ target=”_blank” ]The Entrepreneurial State[/amazon_link]. It seems a no-brainer to me (to use the technical economics jargon). Maybe others hesitate because of the association with protectionism that helps lame-duck industries limp along, the picking of winners which turn out to be losers, but this is not what Studwell describes – and it’s why I think he is wrong to use the term “protection”. Setting aside the issue of the label, we need to (re-)learn this lesson from the Asian success stories.

The book also lacks in this section more analysis of how the policy needs to adapt to the world of extended supply chains of increasingly complex manufactured products. It is much harder for a poor country to find a role in global industries now than it was for Japan to reverse engineer washing machines in the 1960s.

3. The third stage extending the role of financial services, while keeping finance on a short leash. With hindsight, it is clear that the globalisation of the 1990s and 2000s over-liberalised high finance while not bringing necessary ‘low’ finance to billions of people with low incomes and no access to the formal banking and credit sector. Any economist who thought globalisation was a turbulent but broadly good thing (this includes me) surely has to accept that there was too much liberalisation of cross-border portfolio flows, and that emerging economies should keep the ability to control these flows in their policy armoury.

The book ends with a chapter on China that hedges its bets on the country’s prospects, pointing out the obvious institutional and structural challenges ahead. It also left me feeling pretty cautious about the prospects for sustained development in the region’s still-emerging economies such as the Philippines, Indonesia and Thailand – not much political prospect of land reform or reigning in the elites in those countries.

This is definitely one of the best books I’ve read on the region, and on economic development in general. It’s a model of tying together historical knowledge, empirical evidence and analysis. It is also a good complement to Justin Yifu Lin’s [amazon_link id=”0691155895″ target=”_blank” ]The Quest for Prosperity: How Developing Economies Can Take Off[/amazon_link], which sets out a Chinese policy maker’s perspective on the same questions regarding manufacturing.

Beyond GDP

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[amazon_link id=”019976719X” target=”_blank” ]Beyond GDP: Measuring Welfare and Assessing Sustainability[/amazon_link] by Marc Fleurbaey and Didier Blanchet is a technical book on the profoundly important question of how we measure “the economy”. The authors are two distinguished economists/statisticians who were respectively a member and rapporteur for the Sen-Stiglitz commission appointed by the then French President to consider whether there is a better kind of metric than GDP. This is of course a subject about which there has been considerable debate over the years. Although this is a technical book, the algebra should not defeat a professional economist, and the explanations are very clear. The introduction is well worth a read by anybody interested in this debate.

[amazon_image id=”019976719X” link=”true” target=”_blank” size=”medium” ]Beyond GDP: Measuring Welfare and Assessing Sustainability[/amazon_image]

The book’s concludes that we should be talking about “GDP and Beyond”, because GDP is adequate for measuring production and income. However, when it comes to the ‘beyond’, the authors convincingly show that a number of commonly-proposed alternatives have significant flaws in theoretical terms.The alternatives take one of two forms: a composite index that adjusts GDP in some way, either by subtracting some elements or weighting it with other kinds of indicator; or measuring well-being directly via surveys.

On the composite indices, the book points out that they are arbitrary and lack analytical foundations. They make implicit assumptions about substitution possibilities between their components. They aggregate together inputs, intermediate products and outcomes. There is almost no informational gain from these ‘corrected’ GDP alternatives. They are, to sum up, a dog’s breakfast.

The authors are no more impressed by measures of well-being or happiness. They disagree that happiness is the right or ultimate goal. “Taking happiness as the ultimate goal in life is far from normal and popular.” Indeed, normal views of morality tend to regard hedonism as a negative, not a positive. As for the ‘Easterlin paradox’, they note that subjective well-being indicators fail to account for the way people calibrate their expectations depending on what they are used to; it is simply implausible to think people do not have a strong preference for, say, the greater longevity normal now compared to 50 or 100 years ago, but they answer surveys in ways calibrated to their experience of how things are now. Not only is GDP not bounded, while surveys are answered on a 1-10 scale, but “People are induced to reason in relative terms when they must describe an open-ended object, their lives, on a closed scale.”

As the book points out, measuring current welfare is one thing, but measuring sustainability is another – and much harder. It is a separate challenge, although they are often merged. The reason for the intrinsic difficulty is that it isn’t possible to compare present consumption or activity to as ‘sustainable’ level without taking a view about the future – and not just one specific future but the entire possibility set taking account of uncertainties about how the world is now and how it may change as people’s behaviour and preferences change. “It is illusory to believe that all the information we need about the future is already present in current observations.”

This all sounds rather negative. If the conventionally-proposed alternatives are so flawed, and sustainability is intrinsically hard, is there any better alternative?

The book goes part way to an answer. It recommends looking at a version of ‘adjusted net savings’ to measure sustainability. This involves looking at changes in the stocks of relevant assets, whether physical, human or natural capital. The authors recommend a carefully-structured dashboard of indicators of over-consumption or dissaving, with the ‘Goldilocks’ aim of being neither too aggregated to be meaningful nor too disaggregated to be easily understood. On current social welfare, they recommend the ‘equivalent income’ of non-market activities or outputs, that is the income that would give the same utility as non-market dimensions of welfare such as health, the environment or social connection. This is a well-known bit of the economics toolkit, asking people how much they would need to give up something. This is better, the book argues, than making the a priori assumptions involved in present composite indicators. And it gives a clear metric for assessment, namely money: “Whatever one does, aggregation implies putting relative values on very different items, and doing so in monetary units is no less respectable than the apparently dimensionless valuations implicit in composite indexes.”

I think this carefully-argued book is very persuasive – this is not an easy challenge, and the analytical issues are set out here with great clarity. It did not give me a clear idea of how the preferred methods would be put into practice, but no doubt statisticians are working on this. The effort is certainly worthwhile, and after all, calculating GDP is itself a complex and time-consuming business. The one point on which I’d disagree with them is the throwaway line that GDP itself is ok and should be left alone. I certainly think we need GDP but it will itself need reconsidering as it might not be the best way to measure an increasingly intangible, service-based, economy with a huge proliferation of variety and complexity. More on that in my new book GDP: A brief and affectionate history, out early next year!

Economists, doctors and quacks

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The news of the death of Ronald Coase sent me to his key papers, of course (all listed here), but also to a collection of essays I hadn’t read before, [amazon_link id=”0226111032″ target=”_blank” ]Essays on Economics and Economists[/amazon_link]. He makes some very interesting points about the role of economics in public policy, expanding on the question of how limited government intervention to correct market failures ought to be. Essentially, Coase argued that this is an empirical question. The existence of significant transactions costs means market arrangements can lead to inefficient outcomes, but government interventions are often flawed too. He approves of George Stigler’s work on the political ‘market’, with the firms affected by regulations likely to be the highest ‘bidders’, therefore able to shape regulation in their own interests. (If this seems cynical, think about banking regulation.)

[amazon_image id=”0226111032″ link=”true” target=”_blank” size=”medium” ]Essays on Economics and Economists[/amazon_image]

In ‘Economists and Public Policy’, Coase turns to economists: “The problem is that economists seem willing to give advice on questions about which we know very little and on which our judgements are likely to be fallible, while what we have to say that is important and true is quite simple – so simple that little or no economics is required to understand it.” However, the simple truths are highly unwelcome. The essay goes on to discuss the political and popular resistance to economic arguments against, say, price controls after a bad harvest. “History indicates that these are simple truths which people find it easy to reject or ignore.” The essay is not entirely pessimistic – Coase believed that when the counter-productive effects of policies became too large, the policies would be reversed.

Coase is also trenchant on the character of economics. It is clear he disapproved of the ‘imperialism’ of economics, the Chicago-originated move into subject areas such as family life, previously the terrain of other social sciences. He cannot have been a fan of [amazon_link id=”0141019018″ target=”_blank” ]Freakonomics[/amazon_link]. However, he is pretty scathing, in the essay ‘Economics and Contiguous Disciplines’, about the failure of other social sciences to raise their game in their techniques and attention to evidence – he sees as particular strengths of economics the recognition of general equilibrium effects (everything is connected) and the relevance of economic incentives in other decisions, too often simply denied by other social scientists. Finally, the essay argues that economists need to study contiguous social sciences, “because it is necessary if they are to understand the working of the economic system itself.” He concluded: “We may expect the scope of economics to be permanently enlarged to include studies in other social sciences. But the purpose will be to enable us to understand better the working of the economic system.” His own work, of course, laid the foundations for institutional economics.

There are a couple of interesting essays on Marshall in the book too. Coase likes Marshall’s insistence on the need for both theory and evidence, deductive and inductive reasoning in economics. He obviously found modern economics far too much on the theoretical, deductive (or reductive) side.

I also happened to read this weekend Jamie Whyte’s pamphlet for the Institute of Economic Affairs, [amazon_link id=”0255366736″ target=”_blank” ]Quack Policy: Abusing Science in the Cause of Paternalism[/amazon_link]. There was a brief to-do online about this, with critics noting that it was hardly surprising the free-market IEA had published a pamphlet arguing against government interventions, and how could anyone argue against evidence-based policy? Whyte wrote some years ago an excellent and funny book, [amazon_link id=”0954325532″ target=”_blank” ]Bad Thoughts: A Guide to Clear Thinking[/amazon_link], about the absence of logic and sense in much public debate. The pamphlet looks at several different areas of policy and asks about the standards of evidence underpinning them. It’s obvious where it’s coming from, but it makes a number of sound points.

[amazon_image id=”0255366736″ link=”true” target=”_blank” size=”medium” ]QUACK SCIENCE & PUBLIC POLICY[/amazon_image]

The first two examples are health-related: proposals for minimum alcohol pricing and the ban on ‘passive’ smoking. Any health-related subjects are awash with political correctness and the abuse of statistics; medical people are strongly resistant to the relevance of any economic considerations at all, which one might take more seriously if they were more statistically-adept. In these two chapters Whyte argues that:

(a) a cost-benefit analysis must take account of the costs of outlawing something, and this is rarely done in health matters – NICE guidelines seemingly explicitly rule out consumer welfare considerations (p35);

(b) the incremental risks of the target behaviour are such that these costs can be very small (although he seems to me to underestimate them in the alcohol example); and

(c) the policies ought not to be economically perverse.

Actually, I think he misses the strongest case against a minimum alcohol price, which is that it increases the profits of big retailers by enforcing the kind of retail price maintenance long outlawed by competition authorities. If the government decides alcohol should be dearer, it should raise the rate of duty. This would not, however, be so pleasing to the sellers of alcohol as taxpayers would then benefit, not retailers – see Coase’s essay, above.

Whyte has a chapter on global warming that goes through the debate about how much we should weigh future against current welfare, including the likelihood that future generations will be richer, and that technological progress will occur, in trying to calculate the costs and benefits of action against global warming. (I think he’s sceptical about whether it’s occurring but that isn’t the main point here.) This is the same debate that occurred among economists like Partha Dasgupta, William Nordhaus and Nick Stern when the [amazon_link id=”0521700809″ target=”_blank” ]Stern Review[/amazon_link] was published. It’s a perfectly respectable argument to set out. Then he turns to what he describes as ‘happiness engineering’, where my sympathies are with him entirely. Government attempts to make people ‘happier’ are either obvious – ensure there are plenty of jobs, keep inflation modest – or intrusively paternalistic.

There’s a final chapter, which is too cursory, about the problem of using ‘scientific authority’ as the basis for public policy. “Experts are natural supporters of policies that draw on their expertise and thus naturally inclined to overstate the credibility and importance of their ideas,” he writes. Of course. But is not using expertise really better? Of course we would like policy to be genuinely evidence-based, and it is difficult to assess the epistemological status of proclaimed expertise. However, Coase’s pragmatism is more attractive than Whyte’s all-out scepticism, for all that Quack Policy flags up some good reasons for concern about how ‘evidence’ is used in actual policy-making.

This was a theme of another book I read recently, [amazon_link id=”0815793898″ target=”_blank” ]Government Failure versus Market Failure[/amazon_link] by Clifford Winston, which in this post I compared and contrasted with Hirschman’s writing on [amazon_link id=”067476868X” target=”_blank” ]The Rhetoric of Reaction[/amazon_link]. How you devise and implement welfare-enhancing, effective government policies in complex societies with a wide range of interests bearing on politicians – it’s what we’re all about as economists (and other social scientists).

A new book reviewed by Peter Wilby in The Guardian this weekend looks highly relevant too: [amazon_link id=”1780742665″ target=”_blank” ]The Blunders of Our Governments[/amazon_link] by Anthony King and Ivor Crewe.

[amazon_image id=”1780742665″ link=”true” target=”_blank” size=”medium” ]The Blunders of Our Governments[/amazon_image]

I’m sceptical about a lot of government interventions and also sceptical about leaving everything to the mythical market; it seems the only evidence-based possibility. We should demonstrate due humility by avoiding overclaiming either way.