Tag Archives: review

Making economic miracles

Posted on by

I’ve always really liked Michael Best’s 2001 book The New Competitive Advantage, and his latest, How Growth Really Happens: The Making of economic miracles through production, governance, and skills is a worthy successor. Best, who has vast experience of visiting businesses and learning in detail how they produce their goods and services, centres his account on the idea of a ‘capability triad’. Growth requires success in three linked domains: skills, a production system and a business model. Note how largely intangible these capabilities are – this is not a matter of investing in capital equipment or even inventing molecules or gadgets. Policies should aim at ensuring businesses can access or develop these capabilities, broadly understood, rather than taxes and subsidies.

The book has a number of examples, historical and more recent, illustrating the concepts, ranging from the wartime transformation of the US economy to modern Greater Boston’s reinvention to the present loss of production capabilities and skills in the US; from the UK’s postwar relative decline to Japan and China’s more recent experience.

There is also a chapter looking at the tradition of thinking about production systems and capabilities in the history of economic thought. Smith is there but also some names too often overlooked in modern economics: Charles Babbage; work on increasing returns models by Thomas Schelling and Paul Krugman, following in the footsteps of Alfred Marshall and Allyn Young (author of a 1928 article ‘Increasing Returns and Economic Progress’; and above all Edith Penrose. I knew too little about her work until a fine biography by Angela Penrose, No Ordinary Woman, sent me to it earlier this year. Given the obvious prevalence of increasing returns in modern economies, it’s high time to revisit this tradition.

The book ends with some reflections about the links between the productivity slowdown of the past 10 years and diminishing capabilities in the affected economies it mainly looks at the US here. Like a growing number of others (see for instance this article by Gregory Tassey), Best argues that the worst long-term consequence of offshoring has been the loss of know-how embedded in production systems and skills. The way to address this? A policy framework aimed at strategic economic development, something that has been lost from the vocabulary of policy for a generation, although tacitly recognised perhaps in the UK’s debates about an industrial strategy.

There’s a mass of interesting detail in the book – perhaps too much compared to the more reflective sections, but then the ideas do pick up on Best’s earlier work where there is much more on the conceptual framework. How Growth Really Happens is well worth a read, along with the earlier book – so much so it’s on the Enlightened Economist Prize 2018 longlist.

[amazon_link asins=’0691179255′ template=’ProductAd’ store=’enlighteconom-21′ marketplace=’UK’ link_id=’0e553587-c6dc-11e8-ab99-f981b7e88680′]

Once upon a time in the British Economy

Posted on by

Managing the Economy, Managing the People: Narratives of Economic Life in Britain from Beveridge to Brexit by Jim Tomlinson is an interesting economic history of modern Britain. It appealed to me from the first page, where Tomlinson talks about the absence of a fixed meaning for the term ‘the economy’. The book therefore focuses: “[O]n the ways in which successive governments, in seeking to manage the economy, have sought simultaneously to manage popular understanding of economic issues.” In other words, to manage the economy is to tell a persuasive story about it – to have a narrative in other words.

[amazon_link asins=’0198786093′ template=’ProductAd’ store=’enlighteconom-21′ marketplace=’UK’ link_id=’11d3f19d-c6db-11e8-9056-d1f811c67156′]

This is not, as many economists’ first instinct will tell them, woolly nonsense. It is because there are many possible self-fulfilling (or self-averting) outcomes, given the role of both expectations about the future and interactions between individuals. In different ways many fine economists are starting to incorporate such insights, from Roger Farmer in macroeconomics to Robert Shiller, George Akerlof and Dennis Snower, Kaushik Basu, and George Akerlof and Rachel Kranton.

Anyway, as Tomlinson points out, talking about the electorate misunderstanding economic reality is therefore missing the point that economic outcomes are to some degree always constructed (and besides, it backfires – people don’t like to be told they’re stupid and should listen to clever folk). The body of the book therefore traces the ebb and flow of these political and policy acts of construction, and the interplay of ideas, ideologies, and events. The first part considers some of the key narratives, broadly chronologically – “You’ve never had it so good,” “rolling back the state,” etc. The second part looks at the period through the lens of key macroeconomic indicators, and why some are more salient at specific times due to the way they feature in public debate.

An interesting conclusion considers two broader narratives’: the rise of neoliberalism; and deindustrialisation. Tomlinson argues that while academics (outside economics) focus on the former, the latter – having had a briefl flurry of scholarly interest in the late 1970s – is more significant in understanding the trajectory of people’s lives in postwar Britain. The book comes to a rather sudden halt, and it is by no means a vanilla economic history of Britain, but it’s a stimulating read.

 

Cost benefit analysis – don’t get over-excited

Posted on by

Cass Sunstein’s new book, The Cost Benefit Revolution, almost managed to achieve the opposite of its aim, which is to persuade me of the merits of ubiquitous use of this tool for assessing social welfare so beloved by economists. I’m an economist so I think CBA is pretty useful but the book’s just so Panglossian about its ability to apply objective reason to regulatory decision making. “In a nutshell, quantitative cost benefit analysis is the best available method for assessing the effects of regulation on social welfare,” he writes (his italics). Except it doesn’t. He isn’t alone in thinking this. I once said to a Very Distinguished British economist that economics needed to take social welfare far more seriously. “Oh but it already does,” he replied. “We use CBA all the time.”

But the point is – as Sunstein does sort of concede in accepting that there are what he calls Hard Cases – it ignores (and the Pareto criterion ignores too) one of the key points about social welfare, namely distribution. Whose costs and whose benefits? It also – as has always been known in the literature, reiterated recently, and always ignored in practice – is a linear approximation suitable for use to assess the net effects of small changes. It furthermore has no validity in assessing any intervention that might change the path of growth or productivity or have any non-marginal effect.

Economists do think of CBA as one of the practical contributions of the field to policy, and I’m in favour of doing the CBA exercise as a source of information about decisions. In practice, for big decisions, that’s exactly what happens. Politics takes over, not least for the distributional reasons. After all, if CBA had been in use in the 19th century, Bazalgette would never have built London 150 years worth of sewerage capacity, and we would lack the magnificent town halls of cities like Manchester and Leeds.

Elsewhere in the book, in the excellent historical sections describing the (non-partisan) spread of CBA in US government, Sunstein gives some persuasive examples of how to use CBA well. (One of the poignant sections describes how an analysis changed Ronald Reagan’s mind – a Republican president open to reason.) There are nice, classroom friendly, examples of using CBA in different domains of policy and is actually more nuanced than the general enthusiasm would suggest about how to use CBA in the context of environmental science, especially when risk attitudes and discount rates differ greatly between groups of voters. All in all, it’s worth the read for anyone interested in the role of reason in policy making. Just don’t drink the same Kool Aid.

[amazon_link asins=’0262038145′ template=’ProductAd’ store=’enlighteconom-21′ marketplace=’UK’ link_id=’523730e9-baac-11e8-b2f1-a30fca2b301b’]

PS Tim Harford reviewed the book today and is a bit more enthusiastic.

My damp Scandinavian view of the world

Posted on by

It’s the last full day of our holiday in Sweden and the weather has turned a bit wet, so in between the detective novels (the latest – Jill Paton Walsh’s Dorothy Sayers update, Thrones, Dominations) I read Robert Peston’s WTF. It’s as well-informed and full of insight about the present state of the world as you’d expect from such a distinguished journalist (although written in a slightly matey style which didn’t appeal to me). The book is mainly about Brexity UK – with a brilliant chapter on our last general election and the respective characters of Mrs May and Mr Corbyn – though it touches on parallel trends in Trumpland. I agree with his diagnosis that the issues contributing to the anti-establishment anger date back well before the financial crisis, to the deindustrialisation of the 80s and 90s, and the chasm between London/SE and the rest of the country. The book’s fundamental point is that the economy stopped working for an ever-growing number of voters, vast numbers of whom have seen no significant rise in living standards for well over a decade, and even longer for too many.

Interestingly, in the light of the current fashion for saying the big economic problem is all about concentration and the exploitation of market power, Peston instead pins the blame for a dclining labour share of national income on the Reagan-Thatcher-led attack on union power from the mid-70s on. The press reports of the Jackson Hole discussions this year noted that debate there focused on the issue of concentration. When I expressed some doubt on Twitter that this was anything other than a US phenomenon (as the UK labour share looked from eyeballing an ONS chart to have been fairly stable), a couple of replies insisted I was wrong (one arguing I was looking at the wrong data, and the other claiming the IMF said it was a global phenomenon). Well, after my years on the Competition Commission, I’m a big fan of tough competition policy, and agree it has been lax in the US for some time. The US also has an issue with creeping occupation licensing as the Obama CEA pointed out. But, reading up on the IMF’s recent work on trends in the labour share makes plain the great diversity of national experiences – and indeed, they say the UK labour share has increased.

Well, whenever a phenomenon is so varied across countries, it tells you institutions are playing a big part. Combined with the fact that across countries the big decline in the labour share occurred from the mid-1970s to around 2000, surely labour market institutions played a key part – for all that it’s right to be concerned about concentration in some countries/sectors now. (And the IMF data goes only to 2014, so perhaps there has been a dramatic decline in the latest 3 years of data…)

Anyway, looking out at the rain, on now to proofs of the forthcoming book by Alan Greenspan and Adrian Wooldridge, which I’m going to be reviewing in due course – a history of capitalism in America, which is going to be fascinating, as I’m anticipating a defence. There has also on Twitter been some discussion about what books to put on the syllabus for a history of capitalism course (really, a history of thought course), in which I didn’t participate (& can’t find now), but noted with interest that all the books were critiques, from The Great Transformation on. Maybe the Greenspan/Wooldridge book could balance it out.

[amazon_link asins=’1473661315′ template=’ProductAd’ store=’enlighteconom-21′ marketplace=’UK’ link_id=’88b22140-a9da-11e8-be19-8364b0a822af’]

[amazon_link asins=’B003OIB9YQ’ template=’ProductAd’ store=’enlighteconom-21′ marketplace=’UK’ link_id=’c2605d83-a9da-11e8-8242-3d8d171d819f’]

What numbers make visible & what they erase

Posted on by

That I read Caitlin Rosenthal’s Accounting for Slavery: Masters and Management was a bit random – we’re going away for a week and I didn’t want to start a holiday book, so pulled this bound proof the publisher had sent me off the pile. I’m glad I did. It’s a terrifically interesting book. It’s in effect a business history of slavery in the Caribbean and the American south, using the detailed management records that remain to understand how plantations were run – just as business historians would later use similar documentary evidence to trace the practices of management in industry. As she writes, “Scale required structure.” The sugar and cotton plantations were sometimes very large scale indeed. And the science of management emerged in this context before any manufactories grew to the same kind of scale.

There is a particularly illuminating section on the standardisation of record keeping: “Preprinted forms were an important and overlooked technology in organizing plantation labor.” Early records were hand written and ruled, with documents often sent to absentee owners in England – this was, Rosenthal points out, also one of the earliest instances of the separation of ownership and control, as large plantations were often run by professional managers. (The role of earnings from slavery in fuelling the growth of financial instruments and the City in England are the subject of this UCL research project, Legacies of British Slave-ownership) The availability of standard forms helped spread the ‘scientific management’ techniques – again, ahead of Taylor’s famous introduction of scientific management in industry. (This reminded me of Donald Mackenzie’s brilliant essay on how the commercial availability of options prices calculated by computers helped grow derivatives markets.)

Rosenthal also covers the role of slaves as, literally, human capital. Plantation managers kept inventory records and appied several different valuation techniques. As she observes, this was fundamentally an issue about property and therefore about power and politics, property being something defined by law. (And property in the form of people is more political than most.) By the eve of the Civil War, the total value of enslaved human capital was over $3 billion. (Before anyone takes this particularly noxious version of human capital as an opportunity to knock economics, economists were prominent in the abolition campaign, and historian Thomas Carlyle named economics the ‘dismal science’ for not respecting the property rights of slave owners.)

Rosenthal (formerly a management consultant) ends by pointing out that labor conditions for many people in the world still leave much to be desired: “Confronting plantation account books can remind us how easy it is to overlook the conditions of production from the comfort of a counting house or safety of a computer screen. Reckoning with the ways planters accounted for slavery should encourage us to rethink the kinds of data we record and how we use it. Quantitative records can help us to see farther, but only if we remember what the numbers make visible and what they erase.”

[amazon_link asins=’B07DGJPVLL’ template=’ProductAd’ store=’enlighteconom-21′ marketplace=’UK’ link_id=’e666d317-a2ec-11e8-8e39-6d39a48277d1′]