Tag Archives: review

When preferences change

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One of the assumptions an economics student is quickly socialised into accepting is that people’s preferences are fixed – those indifference curve diagrams mapping one’s trade-off of apples for bananas. Of course at the back of your mind you know it isn’t true, but fixed preferences are a key building block of most of the subsequent economics one learns. At every stage we assume that people maximise their utility subject to budget constraints, and if preferences are not fixed that becomes a task like nailing jelly to the wall. How do you do a welfare evaluation in that case?

Well, it’s a key question for economists to tackle, not only on principle but because this is an age of saturated traditional media and social media aimed exactly at changing people’s preferences. So I was delighted to see David Kreps, a game theorist, tackling this in a book of lectures, Arguing About Tastes: Modeling How Context and Experience Change Economic Preferences. As Joe Stiglitz points out in his commentary in the book, there is a long and now growing literature on endogenous preferences, much of it linking with other areas such as social psychology or cultural evolution. What this short book does is formalize other-regarding preferences (which indeed date back to Adam Smith and Moral Sentiments) and changing preferences, with a focus on intrinsic versus extrinsic motivation in areas such as work effort. As the other commentary, by Alessandra Casella notes, the next step is to take this to social choice theory.

I couldn’t agree more. Recently I argued (with distinguished co-authors) for a reboot of welfare economics – applied social choice theory. Among the many reasons for this are the pressing collective action problems facing humanity (climate, biodiversity) amd the automation of a growing number of decisions in modern life using algorithms implicitly encoding social welfare functions. Arguing About Tastes is a technical book (for non-economists – fairly straightforward for those habituated to Max(U)) but a useful contribution to the challenge.

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Institutions, finance – and war

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Perhaps it was because I read the book in several stages, but I found it hard to take away a single line of argument from Geoffrey Hodgson’s The Wealth of a Nation: Institutional Foundations of English Capitalism. There is plenty of interest in the book but the chapters seem unconnected. One of the comments on the back, from my former colleague Sheilagh Ogilvie, makes a virtue of this, praising it for steering clear of monocausal explanations, which is true. But the book is also making an argument about the mode of economic analysis as well as about causes of the Industrial Revolution.

Anyway, here is what I took from my read:

  1. Other accounts of the origins of the Industrial Revolution and capitalism in England get something wrong: Marx, McCloskey, Mokyr, Allen, Weber, Uncle Tom Cobbley and all.
  2. This is because they do not employ the framework of evolutionary economics.
  3. Economics goes wrong big time in mixing up capital as in physical capital goods and capital as financial capital, starting with Adam Smith.
  4. Economic development is a process of the creation and changing of both technical and institutional rules.
  5. The distinctiveness of capitalism lies in the development of financial instruments and markets, especially mortgages lent against collateral: “Developed financial institutions make capitalism historically specific.”
  6. The Industrial Revolution was due to institutional evolution – mostly gradual but with some big moments of dramatic change such as the deal that brought about the 1688 accession of William and Mary.
  7. But the impact of external shocks – especially war – in bringing about economic development is under-appreciated.

I liked this observation about institutions: “They function as information registries of what is produced and owned, and of rules governing their use and allocation.” Hodgson cites Shannon and Weaver’s definition of information – something whose receipt can cause an action. This metaphor of units of information underlies the evolutionary approach, as I understood this chapter. Hodgson here and elsewhere has strongly argued the case for a paradigm shift in economics away from its still-extant physical production function framework to the evolutionary framework. (I do see the crumbling of the old paradigm in some respects but we’re far from a new one taking its place.)

The book ends, to my surprise, with a chapter about Japan’s economic development. I think the point here is that: “Major institutional changes in the fundamental areas that matter for economic development typically depend on exogenous shocks.” For Japan these were the Meiji restoration, then loss and occupation in 1945/6.

All in all, an interesting read, but it made me think I’d get more from reading one of Prof Hodgson’s earlier books on evolutionary economics.

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Pricing the priceless

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Paula DiPerna’s Pricing the Priceless is an excellent general introduction to the questions of measuring the value of nature, and the use of economic instruments to improve the sustainability of economic activity. The author has been involved in environmental campaigning ‘at the forefront of finance and climate policy’, as the blurb puts it.This included a pioneering privately-created carbon market in the US. Her aim is to persuade those concerned about the environment – and I take this as her target audience – that better outcomes will result from pricing nature, even accepting its intrinsic value.

The first chapter covers the flaws in the use of GDP as the metric of economic success – familiar territory. It’s somewhat unfairly dismissive of the efforts that have gone into the Sytem of Environmental Economic Accounting, that will bear fruit in the 2025 revision of the way GDP statistics are defined and measured. But as the chapter points out, the efforts to measure digital intangibles have helped parallel efforts to measure nature and ecosystem services.

Subsequent chapters take specific contexts and types of instrument – carbon markets, water markets, rhino bonds, carbon offsets and so on. They make for interesting reading. The chapter on China’s interest in carbon markets was particularly interesting. I hadn’t realised that it measures carbon intensity (per unit of eocnomic output) rather than the aboslute amount of CO2-equivalent.

For people who are already persuaded of the need for tools such as markets and payments for ecosystem services to improve the chances of a sustainable path to prosperity, the attraction of the book is in the vivid detail. The author has quite a florid writing style, but has a lot of insights and interesting detail, and it’s quite fun to read about her audience with the Pope (who was converted to the carbon markets idea). For the unpersuaded, the ecologists and environmentalists who find this approach repugnant (in the sense of Roth’s repugnant markets as well as the normal sense), I don’t know if the book will change their minds. I hope so.

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Politics and economics

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There’s a sentence I underlined twice in Ben Ansell’s Why Politics Fails: “Politics makes growth.” This is my main takeaway from editing a series of policy essays from my colleagues in the Productivity Institute, which will be out at the end of November for National Productivity Week. If you ask people what are the two main causes of the UK’s dismal productivity in recent times they will pick what’s close to their own interests – various skills policies (the madness of the student loan system, the dreadful FE system, the madness of tearing up painstakingly-agreed T-levels for a new system…), R&D policies and the lack of institutions to enable the commercialisation of innovations, low investment levels because of a gazillion tax changes and low saving. But every essay circles back to politics: the politics of ‘announceables’, of over-centralisation, of silos, and so on.

Anyway, Why Politics Fails is an excellent introduction that does what it says in the title: it analyses political failures through the lens of five traps or, more accurately, trade-offs. The first chapter is about the tension in democracy between honouring majority preferences and protecting minorities. The equality trap is the trade-off between equal rights and equal outcomes. The third chapter is about solidarity, manifested only in situations of individual need. The security trap is the  balance between (too much) anarchy and (too much) order. And the prosperity trap concerns the short-run economic (and electoral) gains looking more attractive than long-run decision-making that will enable prosperity over time.

The book has lots of examples, contemporary and historical. It would make an excellent additional read for students, as well as being accessible to the general readership (and Reith Lectures audience). I liked its emphasis on the delicate role played by a country’s institutions – for example, the book suggests an argument against UBI is its institutional fragility, compared to making improvements in existing, well-established welfare states. And the prosperity chapter rightly points to the importance of institutions as bulwarks against short-termism. It occupied me for a trans-atlantic flight & I enjoyed reading it.

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A woman economist in charge

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It has been a bit of a week, trying to get my dear husband the right medical care after he fell and smashed his elbow in the rain and darkness just over a week ago. Although he’s, thankfully, patched up with mesh, sellotape etc now, my concentration hasn’t been terrific. So mainly I’ve been reading detective novels. However, I did notice that Rachel Reeves’s book, The Women Who Made Modern Economics, has been published. I read a proof copy a little while ago, and would recommend it.

There are really two books combined here. One is a straightforward account of the work of important and often overlooked women economists, such as Beatrice Webb and Mary Paley Marshall via academics like Joan Robinson and Esther Duflo, all the way through to influential policy economists Christine Lagarde and Janet Yellen. As well as being mini-histories, these sections aim to show why and how being female influenced for the better the economics, by bringing to bear a different kind of experience or understanding of the context in which policies operate. They are nicely written, and I wholeheartedly agree on the importance of diverse experience to improve economic analysis, but the biographical details are not novel.

The second element is more interesting in the present political context, namely the picture the book paints of Reeves’s own framework for thinking about economic policy, which she grounds in her own life experience and in the ideas of the economists she writes about. Given that this highly impressive politician looks increasingly likely to be the UK’s next Chancellor, this is of real interest. I think the book paints a pretty coherent picture of a strategic approach to the supply side of the economy, combined with a clear-eyed view about the importance of macroeconomic stability, and the strong sense of social justice you would hope for from a senior Labour figure. Reeves rejects simplistic ‘free marketism’ while being obviously in favour of businesses succeeding. She emphasises the importance of taking into account unpaid care, still typically women’s work. She attacks the continuing gender pay gap and Britain’s retreat from overseas aid.

Reeves is of course an economist by training and by work experience (Bank of England and the banking sector). There are specifics I might disagree with her about – but her economic philosophy as set out here is consistent and credible. Of course, all the good sense on display in her analysis will be needed, given the legacy being left by the present government for its successor.

Folks, we might be in line for a Chancellor with a sound grasp of economics beyond the textbook (or the blackboard, to use Coase’s term) and an interesting hinterland. The two strands of The Women Who Made Modern Economics don’t, in my view, sit together comfortably; the ‘lessons’ drawn from the historical figures for some aspect of modern policy, to link the strands together, are a bit strained. But the sense and coherence of Reeves’s personal manifesto for the economy makes it well worth a read.

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