Tag Archives: review

‘Free’ markets

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I read recently The Illusion of Free Markets by Bernard Harcourt (date), on the recommendation of an esteemed colleague. The bulk of the book is about state discipline – Bentham’s Panopticon, Foucault, the American penitentiary state. The bit that really appealed to me was the opening section on French grain markets in the 18th century, compared with Chicago commodities markets in the late 20th century.

The book opens with great detail about how intensively regulated markets were in early 18th century France, with even trivial breaches of the rules in theory liable to punishment, imposed by the police des grains. Harcourt then draws the comparison with what we think of as a model of free market capitalism, the open outcry pit of the Chicago Board of Trade (I visited once  – an amazing experience). As he convincingly establishes, there os no sharp contrast, as the modern market rules are in fact just as detailed as the 18th century version.

Why then do we contrast ‘free markets’ as today’s ideal with the over-regulated past? The book attributes the turn to the Physiocrats, and “that contested moment in the 18th century when notions of natural order were beginning to take shape.” The argument is that they shaped a sharp dichotomy between “the economy as the realm of natural order” and everything else which was thereby in the sphere of being policed by the state. “In other words, the market is efficient, and within that space there is no need for government intervention. What is criminalized and punished is behaviour outside the sphere of the orderly market.” The government can legitimately penalize non-market behaviours.

But of course, the dichotomy is a false one. The state is present in all markets, and often in just as much detail as the C18th police des grains. The rhetoric of ‘free markets’ is misleading.

I certainly agree with this last point, as does anybody who (like me) has spent some time as an economic regulator (the UK Competition Commission in my case). Modern economies are highly regulated, and that goes for the Anglo-Saxons as much as anyone else. I don’t know nearly enough about the C18th or the literature on punishment to evaluate those parts of Harcourt’s book. But it certainly offers food for thought.

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Getting a grip on intangibles

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One of the missing parts of the picture when it comes to measuring and understanding the economy consists of intangibles. This is a big gap, given that services make up four fifths of the UK economy, and that firms invest so much in intangibles, which account for the great majority of their stockmarket valuation. Yet it is so hard to get a grip of the implications of changes we find hard to visualize and do not measure.

A big contribution to starting to fill this gap comes from a new book by Jonathan Haskel and Stian Westlake, Capitalism Without Capital: The Rise of the Intangible Economy. It starts with a description of what the intangible economy is and how we do (currently) and could (in future) measure it. The characteristics of intangible investment are captured in four Ss: intangible assets are more likely than tangible ones to be scalable; they involve higher sunk costs; they are likely to involve spillover effects or externalities; and they exhibit synergies with each other.

Scalability comes about largely because of the non-rival character of intangible goods. Sunk costs are the result of the need for high upfront investment – with software or databases or movies for instance – and then very low marginal cost. Spillovers are present in knowledge-based goods, again due to non-rivalry – the famous Thomas Jefferson quotation, “He who receives an idea from me receives intstruction himself without lessening mine.” This is the fundamental point in endogenous growth theory. Finally, the synergies reflect the need for complementary investments (tangible ones too) to embody ideas in useful outputs.

Having set the scene, the book goes on to consider the implications of the intangible economy in a number of areas: the productivity puzzle; inequality; finance; business management; and public policy. These are explored through the lens of the four Ss. For example, does the public goods characteristic of non-rivalry imply that a greater proportion of the total investment will need to be publicly funded? Should governments encourage a switch from debt to equity financing of investment through changes to the tax system? (This chapter is set up as a series of essentially rhetorical questions – the answers are yes and yes!)

The key message is that the economy has changed and is changing its character fundamentally, yet businesses and governments have hardly begun to get to grips with the implications. After all, we are not even measuring intangibles properly. In both the winning Indigo Prize essays fixing this was one of the key recommendations – it is hardly surprising the essays included this as mine was co-authored with the head of Australia’s intellectual property agency and the other co-authored by Jonathan Haskel, but my point is that the distinguished panel of judges saw this as important.

There are some other books emphasising intangibles, such as Baruch Lev’s work on accounting, The End of Accounting being the most recent. For an introduction, though, it would be hard to do better than Capitalism without Capital, which is clear and lively and raises – without having all the answers – the relevant questions.

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What do software developers really do?

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When talking to my students about the difficulty of monitoring effort, and therefore how information asymmetries shape the operation of markets (or policies), an example I often use is hiring a software consultant or coder. Someone who is not a software developer, and perhaps even someone who is, will not be able to tell whether the employee or consultant is working hard, or what the quality of their output is – certainly not until it is finished and maybe not even then.

So I was intrigued by a new book that arrived here, Working With Coders: A guide to software development for the perplexed non-techie, by Patrick Gleeson. The author has worked as a software developer and is designed for people who are hiring or contracting people like him. I’ve never had to do this so can’t contribute any personal experience. Still, this seems like a really useful book for anyone in such a position. It explains some of the basics, demystifies jargon, explains how to set up the development process to ensure quality standards, describes the warning signals that a project is going wrong and finally offers some thoughts about what to do when it has gone wrong. There are some example bits of code but no prior knowledge on the part of the reader is assumed.

I would say that if you have any responsibility for software projects without any technical knowledge, and know even less than you would ever be prepared to admit, this book would be well worth your while. Given that one of the main reasons big software projects go wrong is that the executives or managers in charge have so little understanding, the cover price is a very reasonable investment in chipping away at the information asymmetry – alongside, of course, the classic (1975) The Mythical Man Month: Essays in software engineering by Frederick Brooks (“Adding manpower to a late software project makes it later.”)

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Economics for good

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Jean Tirole’s book Economics for the Common Good is out now and is highly recommended. As I had the privilege of helping prepare the English edition, I’ve read it with careful attention, and most appreciated Tirole’s ability to crystallise complicated issues in a straightforward way, combining surgical analysis with very clear explanation. This is too rare a skill among economists.

The first part of the book concerns the influence of economics and economists on society and the role of the market, followed by a section on what doing (good) economics involves, and also how economics is changing. There are then two chapters on organisation, the first on the relationship between state and market, the second on the role of business. These sections are in the same spirit as Dani Rodrik’s Economics Rules, although their experiences and examples differ. Here in Economics for the Common Good is an economist at the pinnacle of the profession (Tirole won the 2014 Nobel prize) giving a thoughtful, reflective account of what economics can properly contribute to – well, the common good. Although much of his work is highly technical, he has always been concerned with its application to practical challenges in organising society: “Academics must ..collectively aim to make the world a better place; consequently, they cannot refuse, as a matter of principle, to take some interest in public affairs.” If an economist has appropriate professional competence in some area, she has an obligation to take a position on it – while acknowledging that what is known changes and re-evaluation may always be necessary.

The final two sections of the book turn to applications of economics, big macroeconomic questions such as financial market stability or tackling climate change, and then applied microeconomic issues such as competition policy, digital platforms, intellectual property and the regulation of network industries. Given my own interests, this final section was riveting. No other individual economist has done more than Tirole to take forward the economic analysis of these kinds of areas, incorporating issues of asymmetric information, principal-agent problems, incentive compatibility, and so on. The final chapter, on sector regulation, is a must-read for anyone interested in this area. (I drew on it in a recent FT column.)

The book is non-technical, aimed at the general reader, and packed with examples. It does in parts require a careful read, but each sections and chapters stands being read alone, so one can dip into the book. There’s a nice publisher blog post in which Tirole explains his motivation for writing the book and what he hopes it can achieve.

It ends with an epilogue reflecting on the status of technical knowledge in a time of populism (the French edition was published early enoug in 2016 that it feels like a different era), and the even greater responsibility economists have to engage and communicate – “Economists must … with humility and conviction, harness economics for the common good.”

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The slow demise of a company town

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Amy Goldstein’s Janesville: An American Story is one of the books on the Financial Times business book of the year shortlist & I have quite enjoyed reading it. It consists of reportage over several years (2008-2013) of a small Wisconsin town whose prosperity had long depended on the well-paying jobs provided by a General Motors plant and its suppliers. When the GM plant is mothballed and later permanently closed, the economic fortunes of the town and its families spiral down. As people use up their unemployment benefits and savings, or scrape by with low-paid service sector jobs, families that were solidly middle class find they need to rely on charitable food handouts, or supplies a teacher at school collects for the kids – shampoo, jeans.

The portraits of the individuals are mainly sympathetic – perhaps least so the Republican-supporting bank manager, although the results of her role as a cheerleader for Janesville’s economic future without GM are acknowledged. It is always a shock to a Briton to be reminded that people in the US with no job have no access to healthcare, and that private philanthropy has to fulfil (inadequately) the role the welfare state plays here. The American healthcare debate is, like the gun control debate, absolutely unfathomable to Europeans. There are some interesting insights into the reasons what support there is for retraining fails to achieve its aims – bureaucratic constraints on access to funding and how it’s used. It was also a surprise to learn that the ex-auto workers who had opted for retraining were doing less well, five years later, than those who had just taken the first job they could find and stayed in the labour market. All in all, it’s a sobering tale of the heart being wrenched out of a company town.

Having said all this, I thought the book was less compelling than George Packer’s The Unwinding. The Janesville tales are not set in a wider context of progressive deindustrialisation and the prospects of automation. Janesville is also silent on race, and I can’t decode the names. Unless it’s an all-white town – surely not? – this must be one of the relevant aspects of how families cope after an economic shock? Or subsequent American politics? There was also less insight into family finance than in the recent detailed study of income uncertainty and its corrosive effects in The Financial Diaries: How Americans Cope in a World of Uncertainty, or in Lisa Servon’s The Unbanking of America: How the New Middle Class Survives. (I haven’t read Hillbilly Elegy – should I?)

This shouldn’t put off readers as Janesville is worthwhile, but I’d be slightly surprised if it emerges the winner of the FT prize.

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