Economics and its soul

I picked up Yuval Yonay’s The Struggle Over the Soul of Economics: Institutionalist and Neoclassical Economists in America Between the Wars in a 2nd hand bookshop, the wonderful Westwood Books in Sedbergh. How could I, the author of The Soulful Science, resist such a title? It’s quite interesting, although you do have to be pretty interested in the history of thought and methodology of economics to read it (cough). It was published in 1998, which I’d say was past the peak of the rational expectations/RBC takeover of economics. Still, there was still plenty of that kind of economic modelling around.

Yonay uses ‘Actor Network Analysis’ to describe the way that particular neoclassical mainstream – which started to take deep root with Samuelson after WW2 – had ousted the institutionalist school in the US. He argues that this latter had remained reasonably strong in the interwar period. (The actor network approach, which is obviously well-known in sociology although not well known to me, is a superior alternative to either Kuhnian or Lakatosian approaches to intellectual history he argues – I leave this to people better qualified than I am.)

I’m not completely convinced by the argument mainly because the book gathers so many people under the umbrella of ‘institutionalist’. Veblen, of course, John Commons and Wesley Mitchell his successors. Both of these were obviously highly influential. Yonay then lists a number of others around the same time whose names were new to me, such as Charles Cooley and Robert Hoxie. He also identifies a later wave of institutionalists, one branch pursuing issues of industrial organisation and labour relations, another the questions of measurement and business cycles: John Maurice Clark, Gardiner Means, Arthur Burns, Simon Kuznets. This category, it seems to me, could be labelled ‘anybody not solely theoretical’.

While it’s certainly true that the status of theory (of a particular kind) in the economics profession grew and grew in the post-war decades, the empirical approaches informed by a deep knowledge of institutional reality were always there, even through the height of the rational expectations, real business cycle revolution. The proportion of top journal articles that were purely theoretical increased until probably around the time Yonay published this book, and has since declined considerably. Institutions now feature big time in economics, economic history and geography are expanding sub-fields, behavioural economics is altering the choice assumptions in economic models, information asymmetries and transactions costs are everywhere. These were the kinds of developments I described in The Soulful Science. Even economic measurement is baaaack now.

Perhaps it will turn out with hindsight 10 years from now that the period from about 1975-1995 was the aberration in economics. It had deeper roots of course – Lionel Robbins gave forceful expression to the ‘neoclassical’ individualist and reductionist approach in 1932 – and it lingers on too, in Chicago and elsewhere. But it would be interesting to see an update of the detailed sociological approach Yonay takes in The Struggle over the Soul of Economics  – as opposed to the usual mud-slinging by some sociology critics of economics who don’t read what most economists themselves do, but assume the bowdlerised version of 1980s and 90s economics still dominant in the policy world remains the intellectual mainstream. Anybody who doubts me should just look at the programmes for the Royal Economic Society or American Economic Association conferences this year. I still contend economics has (regained) its soul.

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The French and their money

The first chapter of The Wisdom of Money by Pascal Bruckner nearly put me off as it’s all theology, but I stuck with it and ended up really enjoying the book. It’s vairrrry French, which is a good thing in my eyes; I spent my teenage years planning to grow up to be a philsopher living in Paris and sitting in cafes all day. (And if only I’d written Sarah Bakewell’s wonderful At the Existentialist Cafe….)

But back to money. After the unpromising theological start, The Wisdom of Money picked up by pointing out what a commercially-minded entity the (Christian) Church has always been, from the Catholic sale of forgiveness or time off purgatory to the Calvinist thumbs up to the acquistion of riches through work. Then the rest of the book is a series of essays reflecting on different aspects of money and economics. There is a (to me) pleasing scepticism about varieties of idealism and unrealism concerning money: that happiness matters more, that degrowth is feasible etc. I liked the quotation from French presidential candidate Mélenchon on financiers: “Throw the bums out! I am calling for a citizens’ revolution in France to take power back from the oligarchy…” – next line: Mélenchon gets a salary of 350,000 Euros a year.

In fact, having started by saying this is a very French book, it’s very un-French in taking an utterly pragmatic approach to markets and capitalism, in contrast to the utter romanticism of so many French texts on matters economic. Bruckner is not in this long French tradition. (Although he’s not totally alone – here is Jean Tirole in the FT today offering some pragmatic thoughts about the economy in the context of the election.) He observes caustically: “Since a signiifcant number of our compatriots no longer have enough to live on decently, they will be told that prosperity is degrading, that true wealth is found in relationships not goods.”

There are quite interesting thoughts about the persistence of cash; the political vacuum at the heart of the Euro, the contrast between French and American attitudes to money, the strong support among economists for the abolition of slavery, the passive consumerism embedded in the idea of a Universal Basic Income, the scandal of superstratospheric executive pay and tax avoidance by the rich, and much more – appealing to all my prejudices at least. Very enjoyable, and the perfect length for a train ride or flight.

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The big picture – and it isn’t pretty

It’s no easy task to write a reasonably concise (about 200 pp), highly readable, well-informed synopsis of the big trends in global economic history, along with an assessment of how these are likely to play out in the near future. Stephen King, HSBC’s Senior Economic Adviser, has given us such a book in Grave New World: The End of Globalization and the Return of History. As the title indicates, it isn’t an optimistic book. But more of that in a moment.

The book starts with an extract from a speech by Joseph Chamberlain as Secretary of State for the Colonies in 1897. It was an ‘end of history’ speech: in ruling the Empire, he sdai, “[W]e are fulfilling what I believe to be our national mission, and we are finding scope for the exercise of those faculties and qualities which have made us a great governing race….” The Introduction segues into the inevitability that empires that rise subsequently fall. The Whig interpretation of history is still wrong.

The remainder of the book is similarly ambitious and wide-ranging, although consequently covering vast events in a page or two; this can inevitably feel breathless. But this is a worthwhile price to pay for the breadth of reference. For instance, few books by financial market economists about global trends manage to include reference to the work of development economist Arthur Lewis (although I’d like to mildly complain that he’s referred to here as the first black academic at the LSE; he was the first black professor appointed in the UK, and that was by the University of Manchester, where my office is in the Arthur Lewis Building).

The other merit of a wide-ranging book of course is that you learn some things you didn’t know. For me, it was the detail about China’s extension of its economic and political reach in Asia and beyond. For all that China’s path will be turbulent (see Martin Wolf in the FT today), there can be no doubt about where the centre of gravity of the world economy is moving.

The final part of Grave New World is titled ‘Globalization in Crisis’. It describes the multiple weaknesses of existing global institutions but concludes there’s nothing better around than sticking with, and improving, the WTO, the EU, NATO etc. I think one has to forgive the un-stirring conclusion – I certainly have no better ideas, although in glum moments (there are may, watching the news) I rather fear that events in the near future will destroy the existing institutional landscape leaving no option but to go back to the drawing board.

The book ends even more pessimistically than me, however, with an imagined Ivanka Trump Inauguration speech in 2044. Oh my, history is definitely baaack.71coBmyck4L

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How can financial services serve?

A 2010 book, Portfolios of the Poor, made a big impression on me because the researchers had taken great care to ask poor people (in Bangladesh, India and South Africa) in great detail how they managed their money and what their financial needs were. The answer was different from the enthusiasm at the time for micro-credit schemes. It turned out people with not much income need secure vehicles for saving and transactions; borrowing was a low priority, and few people will become entrepreneurs, micro or otherwise.

Jonathan Morduch, one of that team (with Daryl Collins), has now co-authored (with Rachel Schneider) a book taking a similar, detailed look at the finances of American families. They investigated (using the same method of detailed diary-keeping and interviews over an extended period) families in several parts of the country who ranged from single mothers living in poverty to nuclear families a notch or two above median income for their area. One could call them the ‘left behinds’. The results, written up in The Financial Diaries: how American families cope in a world of uncertainty, is just as illuminating.

The headline is that the volatility of income is a bigger problem for most of those interviewed than their level of income. This volatility is closely linked to the way the labour market in the US has moved toward less stable conditions, with employers shifting risks steadily onto employees. “Over half of all income volatility was due to changes in income from the same job.” Even the higher income households in the sample experienced significant earnings volatility.

When income is uncertain, or even when it isn’t but is only slightly higher than regular outgoings, then emergency expenses – healthcare above all (this is the US!), but also car repairs when the car is essential for work – mean it is difficult for people to save steadily. The juggling involved in managing their finances, and the fragility of financial security, also occupies so much mental bandwidth (as per Scarcity) that people find it hard to get off the financial treadmill by any long-term planning. Clipping coupons seems a high priority compared with saving up to pay for college, albeit there are some exceptional focused individuals.

Perhaps it isn’t surprising to learn that financial services do not serve most of these households (up to and beyind the median) at all well. Much financial advice is geared at long-term questions like retirement saving, which is an unimaginable luxury for this 50%-plus. Few products a geared at saving for short-term goals – such as saving enough for a deposit to rent a new apartment – and certainly not with a combination of commitment devices to encourage the saving but enough access or control to make the money accessible in a real emergency.

The same bias to the long term financial needs of the well-off colours comment about pay day loans or check cashing services – payday loans have ultra-high APRs but their customers are often looking at per week costs over the short term. Lisa Servon’s The Unbanking of America: How the New Middle Class Survives, which includes her experience working in a check cashing service, is a great companion volume to The Financial Diaries. (There’s an excellent NPR program about it.)

Servon’s book also includes some descriptions of tech-based financial products aiming to serve low-income customers better, as does this one. None has been a stellar success yet. Morduch and Schneider suggest legal limits on the total amount a lender can recover from a borrower, enabling short term lending to take place without it turning into a permanent, even increasing, debt burden. They write: “By pushing more of the consequences of underwriting decisions on to lenders – in the form of losing their money – they [ie total loan recovery caps] make lenders more cautious and selective in how much and to whom they lend.”

The book underlines how common is the experience of being on the edge financially, citing large-scale surveys to complement their detailed work. The latest US Census showed less than 4% of the population below the poverty line for the whole of 2008-2011, but 90 million (nearly one third) experiencing poverty for two months or more of the three years. In 2011 alone, 8.3% were below the line all year but about a quarter for two or more months.

Both The Financial Diaries and The Unbanking of America are illuminating reads, above all, for paying attention to what people say, rather than just theorising about them. Even before reading the latest rash of stories about the absymal behaviour of the banks, one can only conclude that unbanking will be a good thing as long as entrepreneurs – and the regulators who make or break them – can deliver at long last on the ‘service’ part of financial services.

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Enlightenment and anti-Enlightenment

Expectations matter a great deal in the way the economy evolves. When, how and why did this come about? It must have been linked to the capitalist growth take-off, because why would the future be relevant if nothing much ever changed? Emily Nacol’s An Age of Risk: Politics and Economy in Early Modern Britain links it to the British Enlightenment – specifically to the philosophy of Hobbes, Locke, Hume and Smith. She argues that they presented the future as a territory of risk in order to support their arguments about the political and economic order. What’s more, the book says, there were two sides to this: risk as a source of threat to manage and risk as an opportunity for previously unexploited profits. “When the cautious citizen acts with the future in mind, he transforms his social world in the process, now and in the future,” she writes. Hobbes created the fear, Locke introduced the tools of probabilistic calculation, Hume argues for calculated and prudent risk-taking as a path to profitable opportunities which will pay off in the long term, and Smith analyses how institutional structures can manage and mitigate – or exacerbate – risk, in Nacol’s schema.

The book is quite short but does presuppose familiarity with the four philosophers – my wider reading of their work dates back to the late 1970s and PPE, although I dip in reasonably often, so it was a bit heavy going. Having said that, the key insight about the Enlightenment as the moment when thinking about risk, an orientation toward the future, became important is interesting. Especially at what sometimes feels like a moment of anti-Enlightenment when nostalgia for an imagined (and imaginary) past has overtaken us. Time to re-read Paul Krugman’s brilliant 1991 QJE paper on history versus expectations.

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