Tag Archives: review

What’s the internet? Start here

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It’s more than 16 years since I started writing about the economic and social effects of digital technologies, and some technical knowledge has stuck as well. It was always obvious to me that the internet was going to have – eventually – a revolutionary impact on society. But I do remember discussing my first or second book with a Very Eminent Economist who said that the internet was nothing more than a reduction in transactions costs, and as good economic models already included those, we didn’t need to bother thinking any further about it.

Anyway, despite knowing some things about matters digital, I’ve just devoured John Naughton’s [amazon_link id=”0857384252″ target=”_blank” ]What You Really Need to Know About the Internet: From Gutenberg to Zuckerberg[/amazon_link]. Although it covered some ground that I found familiar, there was plenty of new insight and information too, all written in his characteristically clear style. So for example, if you’re not sure about the difference between the World Wide Web and the Internet (and that’s lots of people, no shame in it), you’ll learn loads from this book.

It gives a terrific overview of a wide range of the business, economic and social trends resulting from the internet and its uses (including the Web). There is both historical context and reflection about future trends. The chapter on the flaws of the copyright regime is excellent, a really useful short introduction to the main issues.

One quibble I would have is that John concludes that economics has little to offer as a perspective on the digital world because it is the science of allocating scarce resources. Apart from the fact that time and attention are the new scarce resources, economics has a lot to offer in thinking about the structure of network markets. (My Very Eminent Economist of the 1990s will have changed his mind by now.) Having said that, I agree with the book’s contention that ecosystem thinking is particularly fruitful.

There were also some lovely details. I enjoyed the quotation from George Miller of ‘The Magical Number Seven Plus or Minus Two’ fame: “My problem is that I have been persecuted by an integer.” And I loved it that the reference to Douglas Adams’ [amazon_link id=”0434003484″ target=”_blank” ]The Hitchhiker’s Guide to the Galaxy[/amazon_link] was footnote 42. What else?

[amazon_image id=”0857384252″ link=”true” target=”_blank” size=”medium” ]From Gutenberg to Zuckerberg: What You Really Need to Know About the Internet[/amazon_image]

The vital role of the informal economy

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I’ve just read Robert Neuwirth’s 2011 book [amazon_link id=”0307279987″ target=”_blank” ]The Stealth of Nations: The Global Rise of the Informal Economy[/amazon_link]. It’s an enjoyable read about the two years the author spent visiting street market vendors and smugglers in Lagos, Guangzhou, Saõ Paolo and Ciudad del Este. His aim is to make us appreciate the entrepreneurialism of the informal economy, which he labels ‘System D’ (rather than use Keith Hart’s original terminology), in order to distinguish it from the informal economy of organised crime with its dealing in illegal drugs, arms and exploited women.

If you like learning about how different markets work (and what true economist doesn’t?), then you’ll find lots to interest you in the book. There were also some terrific facts – for example that the poet Arthur Rimbaud gave up literature to become a trader of this and that in North Africa (p70); or that Nietzsche had written about the role of trust in the economy (p181):

“The fact of credit, of the whole of world trade, of the means of transport – in all of this a tremendous, mild trust in man finds expression.”

However, the strength of detailed reporting is paired with a weakness of analysis. It doesn’t help that Neuwirth has an odd idea about economics and economists. “Economists hate System D,” he claims (p130). He describes the people working in a Lagos street market and writes: “In economic terms, these multiple jobs are wasteful and redundant.” The language introduces value judgements that economists do not typically make, although politicians might.

An economist might point out that System D is low productivity. Or that reducing frictions (such as high import tariffs, or excessive regulations for registering and running a business, for example) would change the cost-benefit calculation for entrepreneurs and bring more of them into the formal economy. Although they (or their customers or workers) would pay more tax, they would have more scope to grow and their employees would have to formal benefits such as protection in employment legislation. But these observations don’t warrant the description given in the book.

I do agree with Neuwirth that the informal economy should be more widely studied and appreciated. The IMF/Schneider figures on the informal economy do indicate that it has been growing in size relative to GDP over time, and the current economic crisis is bound to be accelerating its growth. As the book points out, those people who do argue for stamping out what they would see as unacceptable intellectual property piracy or tax evasion are wrong to assume that the money that goes into the informal market would all be switched to the formal economy. Shoppers who will buy a £20 ‘Louis Vuitton’ handbag are not lost customers for the real £1600 Louis Vuitton version. (Indeed, there are Chinese factories making both the ‘real’ and the ‘fake versions of some items, in different shifts.) Not everybody who will buy a product will buy it with the extra 20% sales tax.

One other point the book makes, that I’d have liked to see developed further, is the capacity of the informal economy to regulate itself collectively. There’s a brief discussion of a dispute-resolution court set up by a market traders’ association in one of the Lagos markets. This example of collective self-regulation in the absence of an effective state is fascinating.

So overall, there are some frustrating aspects of this book, but it’s a lively read about an important and fascinating subject.

[amazon_image id=”0307279987″ link=”true” target=”_blank” size=”medium” ]Stealth of Nations: The Global Rise of the Informal Economy[/amazon_image]

The Great Rebalancing – whether we like it or not

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This is a book that should be read by: (a) politicians, central bankers and anybody else involved in macroeconomic policy; (b) all economists; (c) all students of economics; and (d) everybody else.

[amazon_link id=”0691158681″ target=”_blank” ]The Great Rebalancing: Trade, Conflict and the Perilous Road Ahead for the World Economy [/amazon_link]by Michael Pettis is as sharp and clear as a cut diamond in its analysis of the continuing global imbalances. The author brings logic, accounting identities and clarity of thought and language to bear on the issue of prospects for the global economy, putting most other commentators into the shade.

He also provides a small but fundamental shift in perspective: the questions of balance of payments and capital flows are approached in terms of global general equilibrium – in other words, everything is connected. Thus Greece’s problems are not only caused by Greek tax avoidance or low productivity, but by German domestic policy choices too. Pettis writes: “I extend our basic knowledge of open economies and apply it to the global economy as a single closed system in order to show the many surprising ways policies and conditions are related.” Every country affects all others through the capital and current accounts. And the balance of payments balance – a large current account surplus requires large capital exports to a large current account deficit (group of) countries. A large gap between domestic savings and investment, or correspondingly between GDP growth and consumption growth, will result in a current account gap.

The book looks at two broad sets of imbalances, US-China and Germany-Eurozone periphery. “Very large persistent surpluses and deficits are almost always the result of distorted policies in one or more countries.” The distortions he identifies are the investment-driven focus of Chinese policy, at the expense of domestic consumers, brought about by ultra-low interest rates on savings in domestic banks (there being no alternative investment opportunities for most Chinese people). In Germany, rather than this Chinese-style direct financial repression, the distortion has been ever since reunification in 1990 constraining wages and consumption growth in order to favour employment and exports, with production growing faster than consumption.

Pettis is keen to point out that to analyse the Euro crisis in terms of thrifty and productive Germans versus idle, spendthrift Spaniards or Greeks is nonsense. The references to culture and morals in trying to explain what has happened in the global economy are misplaced. Given a persisting German savings surplus, perforce exported, the Euro periphery countries have only four options: 1. use German capital exports to fund investment, paid for by debt; 2. let consumer borrowing rise to spend more; 3. devalue or impose trade restrictions – both ruled out by Euro and EU membership; 4. engineer a recession to cut domestic production. When the debt levels required by opting for (1) and (2) got too high, only (4) remained available, as (3) has seemed unthinkable. But the book goes on to argue that unless the Germans will accept that the burden of adjustment must fall on their domestic policy, default and the break-up of the Euro are inevitable. “It is impossible to expect Spain to repay its debt to Germany unless Germany runs a trade deficit and Spain a trade surplus.” The echoes of the 1930s (when France played the role of Germany today, complacent about its economic strength until the strains reached breaking point) are horribly clear.

Pettis is a little more optimistic about the prospect of a policy adjustment in China. A renminbi revaluation would help ordinary households at the expense of the central bank and the very wealthy. Slower GDP growth and lower exports would actually enable faster consumption growth, and would make for greater social stability. Combined with a slow but effective rebalancing of US policy, this part of the global imbalance could be worked out in a reasonably orderly way.

However, the book ends with some gloomy predictions. Pettis concludes that there has been hardly any adjustment, post-crisis, in the global economy. Unless Germany and China, as well as the US and Euro periphery, adjust their policies, then:

– German growth will slow sharply and its banks will suffer large losses

– much of peripheral Europe will both default and abandon the Euro

– China could adjust still but is running out of time, and unless it writes down bad bank debts and transfers some state and corporate wealth to households it will end up with a ‘lost decade’

– the world economy will be weak for many years

– trade tensions will increase

– but, one way or another, the world economy will rebalance.

“Major imbalances are unsustainable and will always eventually reverse, but there are worse ways and better ways they can do so…..Any policy that does not clearly result in a reversal of the deep debt, trade and capital imbalances of the past decade is a policy that cannot be sustained.”  Unfortunately, he ends, that isn’t what’s happening.

There is one idea buried away here that seems to me to hold out a spark of hope. Given that the persistent surplus countries seem determined not to reverse their anti-consumptionist policies, and to continue running current account surpluses, it is inevitable that something will erode the value of the Euro periphery assets held by German banks – default, devaluation, inflation in the periphery. Alternatively, Germany could grant assets to the struggling countries – something akin to the Marshall Plan, Pettis suggests. Given the deeply-held worldview Germans clearly hold about the superiority of their approach to the economy, maybe the idea of a Marshall Plan to save the Euro is the one idea that could catch on there?

It will be obvious that I think this is an excellent book, albeit very gloomy indeed. Its logic seems irrefutable: the unsustainable is not sustained. The only question is how the global rebalancing will come about, and it doesn’t look a pretty prospect.

I’d not come across Michael Pettis before, but looking him up now find that his previous book, [amazon_link id=”0195143302″ target=”_blank” ]The Volatility Machine[/amazon_link], analysing emerging market financial crises, also attracted rave reviews. He was previously at Bear Stearns and Columbia University and is now a professor at Peking University – he blogs on China’s economy. His work obviously deserves to be widely read and above all, please, in policy circles.

[amazon_image id=”0691158681″ link=”true” target=”_blank” size=”medium” ]The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy[/amazon_image]

The tough life of the corner office

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[amazon_link id=”0446571598″ target=”_blank” ]The Org[/amazon_link] by Ray Fisman and Tim Sullivan has a subtitle that many people might consider to be a contradiction in terms: The Underlying Logic of The Office. A majority of us work in offices, and we know it isn’t logic so much as emotion or perhaps just habit that drives things. Often, indeed, the emotions of the kindergarten playground.

Nevertheless, Fisman and Sullivan have achieved that rare feat of writing a book about management and organisation that offers genuine new insights, and is a good read as well. I thoroughly enjoyed it.

The key moment of illumination comes early in the book when they write: “Jobs that stay inside the org are the hard ones: hard to measure, hard to define and hard to do. If they were easy, we’d hire contractors to do them for us, and the market, with prices working their magic, would work just fine at getting the job done.” The way to understand orgs – and why so many are so badly run – is that the work people do in them is characterised by information asymmetries and transactions costs.

The book applies the principles of information economics to many examples of organisations ranging from the US Army and the Baltimore Police Department to Apple and Citigroup. It also covers issues such as organisational culture, rocketing executive pay, merger mania, innovation (they recommend the ‘skunkworks’ approach) and the like, bringing in other areas of economics as needed – game theory, economics of ‘superstars’, behavioural psychology.

For example, take the pay spiral. The chapter begins by recounting John Thain’s extravagance – $1,400 for a waste paper basket in an office remodelling that cost $1.2 million. It moves onto Henry Mintzberg and others documenting that what CEO’s do is get interrupted by people who want to talk to them, in between all the meetings. They have little time alone and certainly don’t spend time poring over data and documents to make a rational calculation about the best thing for the business to do. Decisions are based on the CEO’s judgements about information conveyed verbally by a selection of other people. The skill of the CEO is gathering and weighing soft information.

Relatively few do this well. After all, running an org is really difficult, as already described. So slightly greater skill in doing so is amplified into significantly greater pay: a good CEO decision will be really valuable financially to a big company. Just like Hollywood stars, a slight edge makes an individual executive a hot property in the CEO jobs market. The market rewards them correspondingly. Remuneration committees embed this upward spiral because they have interlocking memberships – not necessarily the same individuals, but connected in a social network. Besides, the Remcos believe that their guy is better than average – the Lake Woebegone effect – so deserves better than average CEO pay. And the spiral continues.  So this chapter uses various parts of the economics toolkit to explain the excessive pay phenomenon. CEOs are doing difficult work, are valuable to their orgs – and they’re still overpaid.

For, contrary to popular belief, management is in general a good thing. The authors cite evidence that better managers deliver better outcomes in the public sector, where administrators and managers tend to be reviled  – in terms of exam results in schools or survival rates in hospitals. One of the most striking bits of evidence is the massive increase in productivity in an Indian textiles firm given $250,000 of free consultancy advice by Accenture (49 firms turned down the offer, showing what they thought of management consultants). The key to the improvement was installing systems for tracking inventory and monitoring performance – reducing, in other words, the information asymmetries that had held back the business.

The book is packed with great examples. Fisman is Professor of Social Enterprise at Columbia Business School, and was the co-author of another terrific book, [amazon_link id=”0691144699″ target=”_blank” ]Economic Gangsters[/amazon_link] (with Ted Miguel). Sullivan is editorial director of Harvard Business School Press.

Their bottom line is that managing an organisation is intrinsically difficult. “If there’s one message to take away from this book, it’s that a glass half full may be the best you can hope for.” That is so much more plausible a conclusion than conventional management books that advocate one gimmick or another.

Even with this note of realism, though, the principles and examples set out in The Org will help anybody who manages anything think through the specifics of their own organisation, and maybe improve its management a little. And even small improvements are well worth having.

[amazon_image id=”0446571598″ link=”true” target=”_blank” size=”medium” ]The Org: The Underlying Logic of the Office[/amazon_image]

Class, housing and the economy

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Lynsey Hanley, author of [amazon_link id=”1847087027″ target=”_blank” ]Estates: An Intimate History[/amazon_link], was one of the speakers at the Festival of Economics in November. I just read her book, which is terrific. It restores to centre stage the key issue of class in understanding British society and the economy – and in thinking about the challenge of tackling embedded poverty, which is almost always located in these specific areas of housing we call estates. (Funny to think their name must have originally meant to evoke the arcadian idyll of country estates.)

[amazon_image id=”1847087027″ link=”true” target=”_blank” size=”medium” ]Estates: An Intimate History[/amazon_image]

I’ve long thought we talk too little about class in the policy debate. Take schooling, for example. Children at London’s schools on average now have higher attainment than the English average; but I’ve lost count of the number of middle-class London friends who claim to have opted for private schools for their children because they’re worried about their education. Nonsense (I think) – they’re actually more worried about the social contagion of mixing with working class children. Nobody is entitled to call themselves left-wing or progressive, in my view, if they opt out of their local state schools, that is opt out of their community. As Estates points out, they key failure of the education system has been the low expectations, on the part of teachers and politicians alike, of what children from low income families can achieve.

Lynsey is brilliant in writing about the effect of the physical environment of post-war council estates on their inhabitants. “It has insanity designed into it,” she writes of the example of the Wood estate in Birmingham, where she grew up. Estate inhabitants have worse health, including mental health, lower life-expectancy, higher risk of drug abuse and unemployment. The book describes the interaction of the dreadful design of the housing, using poor quality materials and not maintained, with the evolution of housing policy. In particular, the Thatcher era sale of council housing, with local authorities forbidden from using the proceeds to build new homes for rent, meant the rump of unattractive estates were quickly filled with the ‘problem’ families. They became isolated locations for one class only, the underclass. Their downward spiral was then inevitable – from the inner city slums of the Industrial Revolution to the ‘slums in the sky’ tower blocks, whose inhabitants above the 5th floor are likely to be on benefits and members of an ethnic minority.

As she notes, Thomas Sharp in his 1949 book [amazon_link id=”B0007JU6EY” target=”_blank” ]Town Planning[/amazon_link] was clear about the danger of one-class communities – he described them as “social concentration camps: places in which one social class is concentrated to the exclusion of all others.” Add in the absence of amenities – shops, pubs, parks, buses – and they became the exact opposite of the Jane Jacobs ideal of a vibrant urban community (in [amazon_link id=”067974195X” target=”_blank” ]The Death and Life of Great American Cities[/amazon_link]).

Of course, one challenge in post-war housing policy was the shortage of housing, given strong demand and planning restrictions. (I think that Lynsey en passant assumes too readily that all of the green belt has to stay sacrosanct – only 1.5% of the UK’s land area is built on, only 2.3% in England – see also Kate Barker’s excellent Review of Housing Supply and , and [amazon_link id=”0099539772″ target=”_blank” ]Edgelands[/amazon_link] by Paul Farley and Michael Symmons Roberts.) In the immediate post-war years the shortage was so acute that many returning servicemen had to live in prefabs – as my parents and aunties did for some years.

My auntie and uncle, cousin and big brother, outside the family prefab

The UK’s housing crisis is still acute, although now middle-class young people too cannot easily afford to buy a first home, and many middle-class as well as working-class families will struggle to pay their mortgage if interest rates ever go up. Despite the sluggish economy house prices in some areas have continued to rise, so pronounced is the shortage, while other areas have a surfeit of homes to buy and unmet demand to rent. This market does not work at all well. It also destabilizes the economy as a whole. One day, one of the political parties will see an opportunity in this. But it is a huge challenge too.

I highly recommend [amazon_link id=”1847087027″ target=”_blank” ]Estates[/amazon_link]. Good reading alongside Owen Hatherley’s [amazon_link id=”1844677001″ target=”_blank” ]A Guide to The New Ruins of Great Britain [/amazon_link](I’ve not yet read his latest, [amazon_link id=”1844678571″ target=”_blank” ]A New Kind of Bleak: Journeys Through Urban Britain[/amazon_link]), as well as the other books referred to above. And I just bought [amazon_link id=”1844678644″ target=”_blank” ]Chavs: The Demonisation of the Working Class[/amazon_link] by Owen Jones, another book about the neglected and disparaged working class.

[amazon_image id=”1844678644″ link=”true” target=”_blank” size=”medium” ]Chavs: The Demonization of the Working Class[/amazon_image]