Not learning lessons from the past

You would expect a book about the 2008 financial crisis by three of the key policymakers dealing with it to aim to explain and justify the actions they took throughout the crisis. Firefighting: The financial crisis and its lessons by Ben Bernanke, Tim Geithner and Hank Paulson does this. But it doesn’t come across as being particularly self-serving. Obviously they make their case in arguing that the counterfactual world would have been far worse. But they also acknowledge the role of luck, both good and bad, and do a good job of explaining the political and institutional/legal constraints on policy responses, and the complexity, speed and chaos of the situation.

The book, which is short, with an interesting series of charts at the back, is a chronological account running from the pre-crisis boom and the relaxation of regulatory constraints on the financial sector all the way to the post-crisis… relaxation of regulatory constraints on the financial sector. It ends up being a pretty uncomfortable read as they authors think the whole shebang could happen again, but with less ability for their successors to handle it. “Somehow,” they conclude, “Washington needs to muster the courage to restock the emergency arsenal with the tools that helped end the crisis iof 2008.”

“Somehow.”

This is a US focused account, and is not trying to be a comprehensive account of the crisis. It zooms out to describe the outlines of events and the policy debates and processes. Major steps – such as the Fed becoming lender of last resort for the world through extending repo lines to foreign central banks (rightly empahsized in Adam Tooze’s Crashed as a significant step) get a sentence. There are some insider nuggets. I hadn’t known that Paulson’s brother had a senior role at Lehman just before it went under, for instance. AIG shareholders and executives do not come out of it well. It is surprisingly well-written for a book jointly authored by three senior economic policy guys.

I guess the hoped-for audience is Congress. The overwhelming message I took away is that the firefighting policy response was massively hindered by a fragmented regulatory landscape and a zeitgeist of not getting in the way of the markets. It is hard to know when the situation is moving from normal if large correction to crisis, but when that point is identified the government has to act swiftly and decisively. Many of the mis-steps identified at the time and withhindsight were due to legal limitations on the power of the Fed or Treasury to act.

Leverage has diminished somewhat (not nearly enough) since the crisis. But as we’re back in a context of a “prevailing mood” of light enforcement, and ‘regulatory arbitrage’ by the finance sector to evade what regulation there is, no greater cohesion among financial regulators in the US than before, and a long expansion with lax credit conditions – oh, and less scope for monetary and fiscal relaxation – this is all pretty alarming. Will it take another financial firestorm for the “prevailing mood” to change. Read Firefighting and worry.

Firefighting: The Financial Crisis and its Lessons

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Amartya Sen

My colleague Lawrence Hamilton has written a terrific summary of the work of Amartya Sen, in a book in Polity’s Key Contemporary Thinkers series, just called Amartya Sen. It’s a fantastic introduction to the oeuvre written in a very accessible manner. I’ve read Sen’s books most relevant to my own discipline, and his work on social choice is of course pretty technical; nevertheless, it is clearly explained here.

The deep interest all economists ought to have in Sen lies in his profound – and successful –  challenge to utilitarianism, the philosophical foundation on which economic theory has been constructed. Much of what I do now is motivated by the need to rethink the practicalities of economic policy given that the social welfare standard we think we use to compare different policy outcomes is so flawed. So for example, our Bennett Institute Wealth Economy project looking at people’s access to certain types of asset is one attempt to find a set of economic statistics to measure progress that speak to the idea of Sen’s capabilities and functionings – just as GDP growth speaks to utility.

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Having said that all economists ought to be interested, relatively few are. When I once wrote an op ed along these lines, a very distinguished senior economist emailed me to say if I wasn’t a utilitarian, I wasn’t an economist. Another very distinguished economist couldn’t see the disjuncture between Paretian welfare economics and the fact that policy economists make social welfare judgements all the time in cost benefit analysis, competition assessments, evaluations of tax policy etc. We are socialised so early and thoroughly into utility-thinking that it’s hard to step outside it.

Lawrence’s book introduces Sen’s key ideas in social choice and his concept of capabilities. I found very helpful the way it highlights the importance of incompleteness of information in turning Arrow’s work into a possibility rather than an impossibility theorem.  It also very elegantly critiques Sen’s work, largely its failure to address the practical political and institutional realities, and undue optimism about people – for instance, in Sen’s emphasis on deliberative processes. What is the role of expertise? How does political power as it is distributed in reality affect the process of deliberation? Very topical challenges, to which Sen’s work does not offer answers. As the book says, “Theories of social choice have tended to assume that people’s preferences are given, but it is a fact of life in democratic politics that on a lot of issues people do not have clear preferences.

This is an issue for economics too: the construction of the deflators used to turn nominal pound or dollar GDP into ‘real’ GDP, on which so much policy hangs, relies on a theory of constant, known preferences which determine the utility of consumption, and yet modern economic growth is all about creating wants for new goods and services for which preferences have to be created. So at a time of rapid innovation it is not at all clear what the deflators and ‘real’ GDP measures are measuring.

What is nevertheless compelling about Sen’s approach is its focus on human agency, which “Drives [Sen’s] major conceptual innovation or development but also for assessment of standards of living in all contexts: his capability approach.” It isn’t the goods that matter but what people can do with them.

In short, all economists ouht to read Sen’s major works, but if they haven’t definitely ought to read this introduction. Excellent for students too, and for people in the policy world who would like an overview.

Amartya Sen (Key Contemporary Thinkers)

 

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Everything we don’t know

Michael Blastland’s new book, The Hidden Half: How the World Conceals its Secrets, starts with a tale of marmokrebs. You might well ask. These are a species of crayfish, which appeared out of nowhere, and consist only of females who reproduce, solo, producing genetically identical offspring. But their parthenogenesis isn’t the surprising thing about them. It’s that when genetically identical marmokrebs are reared in carefully controlled identical laboratory environments, they turn out to be – completely different from each other, in physical size and markings and also behaviourally.

This sets the theme for the book, which is about the limits of knowledge, and hence the need for caution in acting on knowledge. Successive chapters look at the replication crisis in science (bound to hit economics eventually), the limitations of medical treatments, the way reasonable, intelligent people can draw opposite conclusions from the same set of undisputed facts – in short, it’s a mediation on expertise and its role in decisions. The message from the multiple examples is that expertise isn’t all experts claim it to be.

This couldn’t be more timely, of course, and the book is a terrific read with many examples from different domains of research and policy. It’s a model of clarity of exposition. But I shoudn’t give the impression that it has a Gove-ian mission (that’s Michael “We’ve had enough of experts” Gove). Expertise has limitations but rejection of expertise has more. So the book ends with some advice for plying expertise responsibly: experiment and adapt if need be; triangulate between different sources and types of evidence; don’t leap to conclusions; accept the uncertainty and be sure to explain it; avoid mechanical metaphors (there’s no such thing as a policy ‘lever’ for example.

All very sensible advice. Like all sensible advice, so hard to apply. Modern hyper-democratic politics hardly lends itself to policy experiments and their reversal if need be, or the communication of nuance. But The Hidden Half should make researchers – especially those aiming for causal inference – to be modest in the extreme about what we ‘know’ and to reflect carefully on any policy advice we offer. It’s an essential read, especially for those who don’t think they need to bother reading it. It’s out this week and Michael Blastland has a blog on the book.

The Hidden Half: How the World Conceals its Secrets

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Globalization 1.0 and 2.0

When I was a moody teenager living in a Lancashire mill town, the nearest bookshop was three bus rides away among the bright lights of Manchester. I’d ready pretty much everything of interest in the local library and school library (and thank heavens for those).

Luckily, the newsagent tucked away – on the bottom shelf in the far corner – some cheap paperback editions of classics. It seemed a more or less random selection but it did mean I devoured almost every novel ever written by Joseph Conrad. So I pounced on the paperback of Maya Jasanoff’s The Dawn Watch: Joseph Conrad in a Global World when I spotted it recently. It’s brilliant. Her basic argument is that Conrad is a novelist of globalisation – his novels: “meditate on how to behave in a globalizing world, where old rulebooks are becoming obsolete not nobody’s yet written new ones.” The term globalization dates from the 1980s but there was a late 19th and early 20th century version.

The Dawn Watch is so well written itself. One example: “History is like therapy for the present: it makes it talk about its parents.” The biographical tale zips along, interspersed with Jasanoff’s own travel adventures in Conrad’s footsteps – her trip to DRC and up the Congo, rereading Heart of Darkness bookends the biography. Jasanoff reflects on Chinua Achebe’s critique of Conrad’s novel as imperialist fiction, agreeing that it is a non-valid window on modern Africa. But she ends by concluding that while indeed the 21st century is not the 19th, the challenges of globalization are fundamentally the same as those Conrad identified: “The heirs of Conrad’s technologically displaced sailors are to be found in the industries disrupted by digitization. The analogues to his anarchists are to be found in Internet chat rooms or terrorist cells.”

I like this observation by Conrad himself, about fiction versus history: “Fiction is history, human history, or it is nothing. But it is also more than that; it stands on firmer ground, being based on the reality of forms and the observation of social phenomena, whereas history is based on documents … on second hand impressions.”

As it happened, I’d recently read Sven Lindqvist’s Exterminate All the Brutes, a quotation of course from Heart of Darkness. That’s an impassioned reflection on the legacy of European imperialism.

The other book I polished off this week was Peter Frankopan’s The New Silk Roads, the sequel to his best seller. Rather than a history, it’s a very readable account of the current context of the Belt and Road Initiative. Given that every day seems to bring some news about China’s initiative and projection of economic power, this is a timely book. I enjoyed its predecessor, The Silk Roads, more as I knew so little about the history of the region. But even if The New Silk Roads covers more familiar material, its Asian and China centric lens makes it well worth a read.

 

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The Human Network

I’ve been thinking about social capital recently, so was eager to read Matthew Jackson’s The Human Network: How We’re Connected and Why it Matters. This is the version of his terrific work on networks and social capital (for example Social and Economic Networks (2010)) aimed at a general readership. Although the book starts with some of the concepts of network theory, it uses diagrams rather than equations to explain. (Anyone wanting a slightly more technical introduction to network theory needs to go elsewhere. Perhaps Barabasi’s Linked, as a still reasonably accessible read.)

Above all, The Human Network motivates the use of the network lens on economic and social questions, from epidemics to the diffusion of technology to financial crises to social immobility. Why did one long-discredited individual who made up his results for a 1998 article manage to trigger an anti-vaccination movement which is still leading to epidemics of infectious disease? What is the difference between a financial system that diversifies risk and one that concentrates it? Why are social media influencers a thing?

The Human Network is a very engaging and worthwhile read. I was for the most part familiar with the material it covers, but nevertheless enjoyed reading it, and also gained some insights about the different ways information can cascade through a network, either amplifying a single (possibly incorrect) piece of information, or pooling different sources of information for a more accurate picture. Given that our societies are highly interconnected in vast networks, and saturated with sources of information through online media, understanding the way networks function seems essential. One would hope at least public health authorities (to deal with epidemics) and financial regulators (to monitor the risk of systemic crisis) have their network diagrams at the ready. One of the messages I came away with is how easy it is for epidemics, real or metaphorical, to spread in the modern world of six degrees (or fewer) of separation.

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