Tag Archives: review

Putting people in economic theory

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Some books are hard to judge. I can’t decide whether [amazon_link id=”1107678943″ target=”_blank” ]An Economic Theory of Greed, Love, Groups and Networks[/amazon_link] by Paul Frijters with Gigi Foster is brilliant or barking. It looks appealing, an attempt to combine the good aspects of the theoretical rigour of choice theory based on self-interest with the realities of human emotions. Of course love and group identity shape our choices! The book has endorsements on the back from economists I greatly respect. Andrew Oswald calls it, “The most remarkable book I have read in the last decade…. a book that is intellectually taxing but unforgettable.” Jeffrey Williamson and Bruno Frey love it too. So embarking on reading this, I thought it was going to be in the rich tradition of the Adam Smith of [amazon_link id=”0143105922″ target=”_blank” ]Moral Sentiments[/amazon_link].

[amazon_image id=”1107678943″ link=”true” target=”_blank” size=”medium” ]An Economic Theory of Greed, Love, Groups, and Networks[/amazon_image]

Instead, it’s a more difficult and theoretical read. It’s best explained in a blog post by Paul Fritjers, who says:

“[W]e take the stance of aliens looking at humans as just another species, with love merely one behavioural strategy available to that species. Blasphemous as this may sound, our goal is to apply the scientific method to the realm of the heart.

At the most basic level, we contend that love is a submission strategy aimed at producing an implicit exchange. Someone who starts to love begins by desiring something from some outside entity. This entity can be a potential sexual partner, a parent, “society”, a god, or any other person or abstract notion.From a position of relative weakness, the loving person tries to gain control over this entity.”

In fact, there are four core concepts, including the fundamental one of self-interested choice (‘greed’), in this alternative decision theory. They are love, groups (and power relations) and networks. These concepts are selected from all the other possibilities social scientists have suggested as important in shaping economic choices, such as social norms, freedom, identity, institutions and so on. How they are selected is not fully explained; the author says it follows much work on the explanatory power of each as a potential core concept but I am puzzled about the selection and the mix of categories – emotions, social structures, descriptors of status. Nor did I ever really understand how ‘explanatory power’ was tested. One could say that any of these concepts is self-evidently important in some way in individual choices and social outcomes.

A large chunk of the book sets out this rather odd idea that love is a generalised ‘Stockholm syndrome’ (as Andrew Oswald describes it on the back), a means of getting something from a more powerful person or entity. Apparently, neuroscience says love is not an emotion and nobody is pre-programmed to love anything: “A child needs to be stimulated to develop the ability to love… Unlike many animals, humans do not necessarily love forever what  they bonded with in childhood.” So the book goes on to explain the ‘evolutionary advantage of the love program’, and fits love into the mould of power relations. This takes the book onto a discussion of groups and power, and from groups to networks and markets. These sections touch on other, familiar areas of sociology and network theory.

Somewhere in the necessarily quite dense chapters on this wide-ranging material, I lost track of how the four core concepts lead us to a new choice theory. The final section of the book does look at how the new theory applies in familiar economic contexts. I focused on competition policy, and was disappointed to find that the consequence is to add not much to mainstream economic theory: “The view at which this book arrives regarding competition regulation is thus very close to the standard mainstream view in terms of the merits of any individual case. What is added is an understanding of who the regulator actually are and why they are there, what keeps them honest, where their power comes from, and what language affected parties will use in their appeals to regulators.” But how weird to add an understanding of the regulator and yet not an understanding of how big companies accumulate power and lobby regulators and politicians.

I think the book wants to rescue the fundamental assumption in economics of self-interested choice and make it relevant given all that we’ve learned about evolution, neuroscience and psychology in recent times. I thoroughly applaud this aim, because it is consistent with the evidence from evolutionary biology. Finding out how all this material across the disciplines can be married in a theory of decision making, on which economic models can build, is an important research agenda. This book is an ambitious effort to do so. It didn’t work for me, but now I’d like a lot of other people to read it and say what they think.

 

Lessons from the past

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My Tube reading lately has been chapters from an excellent new book edited by Nick Crafts and Peter Fearon, [amazon_link id=”0199663181″ target=”_blank” ]The Great Depression of the 1930s: Lessons for Today[/amazon_link]. The comparison between the present day and the 30s has made frequent appearances in post-crisis commentary, so work by economic historians investigating the similarities and differences in forensic empirical detail is most welcome. The cast list of contributors for this book is impressive too, including Charles Calomiris, Timothy Hatton, Barry Eichengreen and other econ history stars.

[amazon_image id=”0199663181″ link=”true” target=”_blank” size=”medium” ]The Great Depression of the 1930s: Lessons for Today[/amazon_image]

In the first two chapters, the editors first give an overview of international experience in the 1930s, and then what lessons that might hold for the present day. They would serve as a stand-alone overview of the issues. The big headline is that among all the causes of the Depression in the 30s, the constraint imposed by the gold standard combined with US and French accumulation of gold stands out for its causal role. The collapse in trade is presented here as a consequence, albeit one that quickly fed into the vicious downward spiral.

For today, that means the monetary response emerges the most important policy difference, a lesson truly learned and applied by the likes of Ben Bernanke and other central bankers. And for all that some groups in some countries are currently experiencing dreadful rates of unemployment, the cost in loss of jobs and human misery has been nothing like as great now as it was then. It is really encouraging to read that policymakers have not in fact been condemned to repeat the same mistakes as their forbears.

This raises the question about the Eurozone, however, the subject of the book’s final chapter by Barry Eichengreen and Peter Temin. Its conclusions are far more depressing. The authors see little room for optimism about any possible route out of the crisis – leaving the Euro is difficult and will cause turmoil, staying in is difficult and will cause political and economic instability. The only possible hope is for European governments to deliver on policies that might stimulate growth. The preceding chapter by Kris James Mitchener and Joseph Mason is somewhat sobering too, as it asks, having avoided earlier policy mistakes, how do countries now exit from their expansionary policies without disrupting the economy too much? They suggest that exit from the policies responding to the Great Depression did not occur until the 1950s; the implication is that we should be thinking on a similar timescale now.

There is much fascinating material in between these early and late chapters – this is a super collection.

I’d like to have read more about France in the 30s, as I hadn’t before realised that its gold hoarding had been larger in scale than America’s – most accounts focus on US policy. The section on the Nazis’ economic appeal is rather sobering, emphasising their ability to prioritise reducing unemployment, introduce large-scale public works, and at the same time keep wage pressure down by abolishing unions and collective bargaining.

The other country that brought unemployment down relatively quickly and realtively far in the 1930s was Britain, via a housebuilding programme – housebuilders then were able to respond quickly to low interest rates, unhampered by mad planning laws, in contrast to today. Another key difference between countries lay in the banking system, with the UK’s then in a much healthier state than the US’s. That balance has reversed now, and it is Britain’s banks that are failing to lend for new investment.

All in all, and continuing one of the themes of yesterday’s post on global governance, this book is an excellent advertisement for the relevance of economic history.

The unfinished business of global governance

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Yesterday I finished Mark Mazower’s [amazon_link id=”0141011939″ target=”_blank” ]Governing the World: The History of an Idea[/amazon_link]. It’s an excellent overview of global governance, ideal for students new to the subject as well as readers with a general interest. The book starts with the Concert of Europe and ends with the implications of the financial crisis for the EU. It has a western perspective, but then, as it argues, global governance has been a western and specifically American construct.

[amazon_image id=”0141011939″ link=”true” target=”_blank” size=”medium” ]Governing the World: The History of an Idea[/amazon_image]

Given its scope, the sections covering the parts I know best, namely the post-1990 globalisation debate and role of the IMF, World Bank, WTO etc, feels quite concise. Reassuringly, though, it also gets to the essence of the issues.There are also some interesting perspectives – for instance, on the problematic status of NGOs, many of which started specifically as instruments of the Cold War. “The broad term ‘NGO’ hids as much as it reveals'” writes Mazower. He introduced me to the acronym GONGO, government-organised non-governmental organisation.

Another very interesting section covers the momentousness of the UK requesting IMF assistance to deal with its balance of payments crisis in 1976. The book focuses on the internal Labour Party debate between the Atlanticists, among them Prime Minister Jim Callaghan and Chancellor Denis Healey, and the left-wingers who favoured a radical turn towards nationalisation, capital controls etc. When the former prevailed, Mazower writes, “It was much more than a defeat for the British Left, the unions and the working class. It was the first step in the capitalist reconstruction of the West.” He argues that the moment marked the turn away from post-war social corporatism and enabled the construction of the financialized ‘free market’ economy of the late 20th and early 21st centuries.

The book goes on to finger the role of economists in this process, and specifically its turn away from history and institutions into the realms of abstraction. “Most of the economists in the IMF had little interest in history, nor in the other social sciences. Its staffers were mostly male, and almost entirely economists trained in American and English universities. Entering the IMF and the World Bank in the 1980s, they were rational-expectations revolutionaries who based their prescriptions on in-house templates couched in the language of highly formalized mathematical models…. they existed in a state of more or less total ignorance of the cultures, languages, or institutions of the countries they had been told to cure, having been trained, as many economists still are, to believe that this ignorance did not matter.” Anybody who quibbles about this should read Kevin O’Rourke’s marvellous post on why history matters in economics.

Mazower’s book ends with some thoughts or questions about where a  system of global governance shaped fundamentally by America goes next, in a world of European crisis and Chinese power. There seems little doubt it will be different – think only of the contrasting Western and Chinese attitudes to conditionality for loans to Africa these days. (Deborah Brautigam’s book [amazon_link id=”0199606293″ target=”_blank” ]The Dragon’s Gift[/amazon_link] is fascinating on the Chinese perspective.)

Mazower is a skeptic about the current emphasis on human rights as a justification for intervention in internal conflicts: “A world in which violations of human rights trump the sanctity of borders may turn out to produce more wars, more massacres and more instability.” Reading a history of the past two centuries of debate makes it clear that the dilemmas are constant, however. There are always powerful and less powerful countries. Governance is built around rights and responsibilities, but whose rights – the nation, the minority group or the individual? The balance changes as events move on. Technology progresses and social complexity increases, so there is a constant dilemma between technocracy and participation or politics. It is impossible to embed the good judgement these dilemmas require into a perpetual institutional framework; global governance will always be unfinished business.

 

Town and country

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This week I read [amazon_link id=”1444723391″ target=”_blank” ]Scarp[/amazon_link] by Nick Papadimitriou. I was expecting something like Richard Mabey’s [amazon_link id=”0956254551″ target=”_blank” ]The Unofficial Countryside[/amazon_link] or [amazon_link id=”0099539772″ target=”_blank” ]Edgelands [/amazon_link]by Michael Symmons Roberts and Paul Farley, or perhaps Iain Sinclair’s [amazon_link id=”0141014741″ target=”_blank” ]London Orbital[/amazon_link]. Scarp is set in my part of the world, the northern and western fringes of London. And I love these books about the way the countryside invades the city – the buddleias in railway sidings, the rampant ivy over a tumbledown garage, the supposedly rare but actually common as muck newts on every building site, the red kites hovering over the A40 and so on.

Also, we can’t be reminded often enough that the UK is a mainly rural country; as Kate Barker’s reports set out (see the 2006 Interim Report on Land Use Planning), only 8.3% of the land in England is urban, less still in the other three nations.

[amazon_image id=”1444723391″ link=”true” target=”_blank” size=”medium” ]Scarp[/amazon_image]

I enjoyed Scarp but it’s stranger and ultimately more moving than the other books listed above. It’s also a memoir, in effect, of an unloving, lonely and poor London childhood. I don’t know if it’s strictly autobiographical, but it strikes me as an authentic account of the experience of all too many children. Beautifully written, almost magical realist in some passages, odd, revealing.

From dead-end to dynamism

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I’ve been reading an interesting, and non-technical, overview of complexity theory as applied to economics, [amazon_link id=”1781951969″ target=”_blank” ]The Rediscovery of Classical Economics: Adaptation, Complexity and Growth[/amazon_link] by David Simpson. As the title indicates, the book looks through the complexity lens – the economy as an evolving, self-organising system –  at classical (as distinct from neoclassical) economics and at ‘Austrian’ business cycle theory. By classical he means not the specific body of thought of the 19th century, but rather the general perspective on the economy as dynamic and in disequilibrium.

[amazon_image id=”1781951969″ link=”true” target=”_blank” size=”medium” ]The Rediscovery of Classical Economics: Adaptation, Complexity and Growth (New Thinking in Political Economy Series)[/amazon_image]

The introduction states:

“Equilibrium theory has focused the attention of academic economists on issues surrounding the efficient allocation of a given set of resources among a number of competing uses at a single moment in time. While such questions have engaged the best brains of at least two generations in a number of intellectual conundrums, it has diverted them from an analysis of those features of a market economy that have impressed themselves on human history.”

Or in other words, the mainstream of economics, with its focus on the moment of equilibrium, along with the assumption of a common stock of knowledge and rational choice, has bypassed the most striking characteristics of actual economies – growth, uncertainty, and human unpredictability.

There are a few other books that serve as good introductions to complexity in economics, such as Paul Ormerod’s very accessible [amazon_link id=”0571197264″ target=”_blank” ]Butterfly Economics[/amazon_link] and Alan Kirman’s [amazon_link id=”0415594243″ target=”_blank” ]Complex Economics[/amazon_link]. The contribution of David Simpson’s book is to link the tools of complexity thinking to a particular tradition in economic thought that has always emphasised growth, uncertainty and the problem of knowledge. Even the thickest-skinned of mainstream economists is probably aware of Hayek’s work on knowledge, or rather the impossibility of knowing everything, and of [amazon_link id=”0415567890″ target=”_blank” ]Schumpeter’s ‘creative destruction'[/amazon_link]. One chapter quotes Paul Krugman saying: “Is the economy a self-organising system? Of course it is!” The problem is that most economists, even if they acknowledge the general point, haven’t been doing that kind of economics – Krugman’s macroeconomics is back-to-the-sixties Keynesian analysis, and happens in a different part of his brain from his 1996 book [amazon_link id=”1557866988″ target=”_blank” ]The Self-Organizing Economy[/amazon_link].

[amazon_image id=”1557866996″ link=”true” target=”_blank” size=”medium” ]The Self Organizing Economy[/amazon_image]

Simpson brings in Austrian economics to consider the business cycle and particularly the present recession. I’m not at all familiar with the Austrian approach, so can’t really evaluate how well it fits into the complexity/uncertainty framework; but the narrative here emphasises the role of technology as the initial trigger, credit expansion in the boom, and the financial causes of the crisis. Simpson writes: “The business cycle carries many of the characteristic signatures of a complex process.” The economy self-organises then self-disorganises.

He concludes: “The marginal revolution of the last quarter of the 19th century had focused attention on the theory of value at the expense of the theory of growth. …. The end result of assuming away so many important aspects of reality is that the theory is not operational. It is impossible to relate equilibrium theory to the empirical processes of an actual market economy. …. Equilibrium theory has reached a dead end.”

My sense is that mainstream economists were already waking up to the irrelevance of much of the post-war work in the subject even before the Crisis. The collapse of the communist regimes, the dramatic impact of technology and globalisation, the steady adoption of behavioural research were all contributing to a shift in the mainstream back towards reality. Events since 2008 have accelerated the move, for all that many economists remain in denial, to the point that curriculum reform is now well under way, as I’ve noted before.

David Simpson’s book is a clear and readable introduction to complexity in the specific context of the history of economic thought, and can thus fill a gap in far too many economists’ knowledge of their own subject. It’s unfortunately a pricey Edward Elgar book, so most readers will need to order it from their library.