Tag Archives: review

Capital and its morals

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[amazon_link id=”0674743806″ target=”_blank” ]Capital Without Borders: Wealth Managers and the One Percent[/amazon_link] by Brooke Harrington, a sociologist at Copenhagen Business School is utterly fascinating. Harrington trained as a wealth manager over a two year period and then conducted 65 interviews around the world with other wealth managers – mainly white middle aged men, mainly from fairly well-off backgrounds themselves. This is a rare window into their world – I’ve often wanted to see more sociology or anthropology looking at the financial markets, and here is exactly such a study.

[amazon_image id=”B01INP11GU” link=”true” target=”_blank” size=”medium” ]Capital without Borders[/amazon_image]

One intriguing aspect is the way families are the organising social structures managing the staggering wealth of the one percent. Harrington notes that the wealth managers’ main role is ensuring assets stay within the family over generations, but adds: “In some cases the fortune that holds the family together may also destroy it.” The wealth managers find themselves arranging payments for mistresses, negotiating divorces, dealing with siblings at war – protecting the family assets in spite of the family.

The book starts with a history of the emergence of the role of the trustee in mediaeval and later English common law – the trust being the main vehicle still for wealth management, with innovations from the likes of the British Virgin Islands. Wealth managers are often lawyers trained in the Anglo-Saxon legal tradition because of this heritage. The history of the role lies in a knightly tradition of loyalty and chivalry, rather bizarrely; certainly, the interviewees emphasise service and loyalty to their ‘clients’. They are far less well paid than many other roles in financial services.

The character of the business is changing, however, with the emergence of so many ‘ultra-ultra-high net worth individuals’ from Asia, who are far less comfortable than, say, traditional British rich families with the idea of handing over control of their assets to a trust structure. As one interviewee comments of the ‘new rich’: “It takes them a while to grasp the idea that it’s not their money once they put it in trust.” They enjoy the fruits but the assets themselves are to be safeguarded for the family and the future. I must say I find this idea that one can control the future strange indeed, but it clearly motivates many of the very wealthy.

The other part of the one percent world view that shines out of the interviews is their absolute belief in the injustice of any claims on their wealth – taxes of course, thieving governments, but also any creditors. The book cites Gabriel Zucman’s excellent [amazon_link id=”B018SQABD8″ target=”_blank” ]The Hidden Wealth of Nations[/amazon_link] on the scale of the tax losses. Harrington writes: “For ultra-high net worth clients, it seems, being obliged to honor their debts, pay the costs of government, and otherwise obey the laws of the land are offenses to liberty.” She adds that this fear of governments, laws, taxes, makes the business of wealth management one of safeguarding assets, rather than growing them. It is a profoundly un-productive business – the parable of the talents comes to mind. By freezing wealth on this scale, productive economic growth is diminished.

London and the British Virgin Islands (a UK territory) are the main hubs of this secretive wealth management business. One wealth manager says Asian clients refer to offshore corporations in general as ‘BVIs’. But there is competition from the up and coming Cook Islands, a speck in the middle of the Pacific – twice blacklisted by the Financial Action Taskforce and criticised by the EU as an ‘unco-operative jurisdiction’. They don’t care: the business now accounts for 10-15% of GDP. The Caymans also get a special mention for creating the Special Trusts Alternative Regime, which can last for ever and in total secrecy. The STAR trusts allow the ultra-ultras their wish to guarantee the continuation of the family’s assets for generations to come, paying no tax, in total secrecy, and with an unusual degree of control.

Harrington asks interviewees about their ethical perspective, given the context of concern about inequality. After all, their training teaches them that discretion is more important than reporting illegal activities by their clients. So, she asks them, are they not concerned about the erosion of the tax base and hence public services, or the growing inequality? Not much, is the answer. Indeed, the wealth managers’ key skill is regulatory and tax arbitrage between different nation states, so how could they agree? Shockingly, a London-based wealth manager she interviews, ‘Drew’, based in a law firm, boasts that his firm employs a significant number of the UK’s 14 Parliamentary Agents. I didn’t know about this role: these are the only non-MPs allowed to address Parliament and the critique draft legislation. They are fixed, hereditary positions. Harrington points out: “It actually gives an institutionalized voice, at the highest levels of government, to the representatives of the richest members of society. While that once meant representing the railroad barons and landed gentry of the United Kingdom, the Parliamentary Agents at Drew’s firm – and others – now typically act as a voice for the interests of high net worth individuals from outside the country.”

My one frustration with the book is that Harrington does not offer any potential solutions – and why should she? However, there is a passing comment that Israel has created incentives for its wealth managers to co-operate with the tax authorities – but she does not explain how this happened or how it works. I’d have liked to know because all national governments clearly need to do the same, and especially the UK’s government, having created the giant maw of illegal finance in London.

 

Google and growth

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I was disappointed by Douglas Rushkoff’s [amazon_link id=”0241004411″ target=”_blank” ]Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity[/amazon_link], in the sense that my expectations were high and it didn’t live up to them. To start with the positives, it’s a  good read, and I share Rushkoff’s concerns about aspects of the ever-more-digital economy. There’s the inequality at self-destructive levels in many OECD countries. The obscene amounts of money many corporate execs pay themselves. The determination of some of the digital titans to entrench their monopoly power and indeed extend it to more markets. The intrusiveness of online surveillance for profit. The undermining of content creation in news and the creative sector as Google and Facebook vacuum up a large and growing proportion of the advertising revenue. All of that, yes.

[amazon_image id=”1617230170″ link=”true” target=”_blank” size=”medium” ]Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity[/amazon_image]

It is, though, all familiar and Rushkoff doesn’t offer much that seems either new or practical to combat it. In terms of policies, he advocates a sub-40 hour work week and a universal basic income. Both have supporters, both are problematic. He also advocates new, community currencies, enabled by blockchain. Technology might be making it more feasible (although I’m a blockchain sceptic because of the energy requirement), but people have been writing about local and community currenies for decades.

Above all, though, Rushkoff wants companies to change their behaviour, treat workers well, and focus less on ‘growth’. And this was my biggest frustration with the book. He makes no distinction between financial ‘growth’ in the sense of short term profits and share price (so VCs can get their money out, shareholders get their returns and execs cash in their options), and economic growth in the sense of goods and services, often innovative, valued by consumers. Heaven knows, that needs to be sustainable too. But there is a difference between, say, changing corporate law to ban quarterly reporting or share option schemes, and limit financial short termism, and the changes in behavior and policy that would ensure sustainable economic growth. Of course they are linked, including throuhg corporate behaviour. But while bringing about an end to the financialisation would be desirable indeed, bringing about an end to economic growth would be very undesirable. After all, for many people in the western economies, there hasn’t been any economic growth for a decade or so, and the results are not pretty.

I also disagree on one other key point. Rushkoff writes: “The economy is less like a forest or weather system than it is like a technology or a medium. It was created not by God but by people.” Leaving aside divine agency, I’d argue the economy is both – both a natural system of creatures (us) acting in accord with our biological nature, and a system we have some ability to change. It is therefore incredibly complex (in both normal and technical senses). While possible to change its course, this is not as straightforward as saying ‘we’ need to do this or that – adopt the blockchain, introduce a minimum income, report on long term rather than short term profits – and all will be well. Google’s monopoly power is a good place to start, but I’d place more of my hopes on Margarethe Vestager’s use of competition powers than on Google’s executives following this book’s advice to act sustainably.

So in short, a book whose heart is in the right place, but too garbled in its analysis to appeal to me.

Trains and apple pie

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Everybody is in favour of more infrastructure spending now – it seems to be one of the most motherhood-and-apple-pie issues around at the moment. I’m certainly in favour of it. It’s my belief that the UK has under-invested in infrastructure for years, and where it has invested, has done so in such a way as to reinforce the reliance of the economy on one engine, London. I say belief, however, because there isn’t as much evidence as one might wish. The comparisons with other countries are complicated by the differing reliance on public and private investment, as well as assets crossing the public-private boundary at different times. There’s decent macro evidence that economic growth and infrastructure investment are correlated but delineating the causal relationship is much harder, for obvious econometric reasons. Above all, the methods for appraising infrastructure schemes are inadequate. The workhorse tool, cost-benefit analysis, is a methodology for looking at incremental changes, not at big projects that might change behaviour significantly, or involve non-linear effects (such as network effects in a transport or communications network).

In addition, it is hard to take into account externalities and the methods for doing so seem inadequate too. The Department of Transport’s top schemes always seem to be road schemes and I find it hard to believe the pollution externalities are fully accounted for. But the Department’s cost-benefit case for HS2, the new high speed west coast line, has been greatly criticised for delivering the politically-mandated rather than economically sensible answer. I’m an advocate for HS2, as I think it will bring about substantial behaviour change, to the benefit of Manchester as the second (potential) engine of the UK economy, and might also have system-wide benefits if we ever get HS3. But again, this is hard to demonstrate.

Into this foggy context of appraisal comes the latest book in our Perspectives series, David Metz’s [amazon_link id=”1907994599″ target=”_blank” ]Travel Fast or Smart? A Manifesto for an Intelligent Transport Policy[/amazon_link]. David starts, mildly provocatively, “Conventional transport economics has reached a dead end.” He homes in on the appraisal question, saying the normal method looks at benefits such as time saved by individual travellers, whereas it ought to be assessing the prospective contribution to economic development as transport connections change land use. Far less spending on roads, much more on commuter rail and digital management of transport are his recommendations. I don’t agree with everything David says, but think his fundamental argument about the methods is spot on. A must-read for all interested in transport policy – alongside our previous Perspectives title, [amazon_link id=”1907994564″ target=”_blank” ]Are Trams Socialist? Why Britain Has No Transport Policy[/amazon_link] by Christian Wolmar.

[amazon_image id=”1907994599″ link=”true” target=”_blank” size=”medium” ]Travel Fast or Smart? A Manifesto for an Intelligent Transport Policy (Perspectives)[/amazon_image]  [amazon_image id=”B01EYRKJFK” link=”true” target=”_blank” size=”medium” ]Are Trams Socialist?: Why Britain Has No Transport Policy (Perspectives)[/amazon_image]

National wellbeing

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I just read [amazon_link id=”1118489578″ target=”_blank” ]The Wellbeing of Nations[/amazon_link] by Paul Allin and David Hand, a very nice overview of the issues in going ‘Beyond GDP’. It came out in 2014, about the same time as my [amazon_link id=”0691169853″ target=”_blank” ]GDP: A Brief but Affectionate History[/amazon_link], so unfortunately I’d not had chance to read it before writing mine. In the couple of years since, the momentum behind the agenda to go ‘beyond’ has certainly increased. This book is a very clear, and rigorous but non-technical explanation of the scope of the issues, and the state of play. As Allin and Hand describe, there has been a good deal of work on looking at alternative ways of defining and measuring ‘wellbeing’ directly, and at wider approaches to assessing whether or not society is progressing.

[amazon_image id=”1118489578″ link=”true” target=”_blank” size=”medium” ]The Wellbeing of Nations: Meaning, Motive and Measurement[/amazon_image]

I am more cautious than they are about any survey-based direct measurement of wellbeing. There seems to be a lot still to understand about the psychology, and about how people’s judgements are formed. After all, we don’t just introspect, we’re also influenced by social context – have we just read an upbeat book about progress? or rather, just read the execrable Daily Express? I’m more with the programme when the book looks at how to (greatly) improve what we do now. For instance, report net national income per capita, not total GDP. Include income distribution and environmental measures. As they note, there are already statistics on many indicators that would give a richer picture of economic welfare. Jones and Klenow have a very nice recent paper on a single summary measure of aggregate economic welfare rooted in economic theory: it calculates a consumption equivalent measure combining income/leisure, distribution and life expectancy. This omits questions of environmental sustainability but good progress is being made on environmental ‘satellite’ accounts and natural capital measurement.

There are some important questions not addressed by Allin and Hand. They describe a proliferation of approaches to measuring wellbeing and indeed call for a thousand flowers to bloom. In my view, if there is no narrowing down of the options, the existing standard of GDP and the conventional national accounts will be far harder to dislodge. A new focal point is needed. (I have a paper on this out soon. Others – like Ehsan Masood in [amazon_link id=”1681771373″ target=”_blank” ]The Great Invention[/amazon_link] – call for a single index for this reason although for different single indices.)  The reason is not tidy-mindedness, but rather the role that official economic statistics play in holding governments to account.

The other question ignored by all of what you could describe as the pro-wellbeing literature (not that I’m against well-being) is innovation. In disparaging GDP growth as a metric, they overlook the fact that GDP growth is not mainly about more shoes, food and vehicles of the same kind, it is mainly the introduction of innovations, from small changes in variety to profound new technologies like the smartphone or the personalised cancer treatment. GDP doesn’t measure these well, and there is a fuzziness as between quality change potentially reflected in prices and real growth, and unmeasurable consumer surplus. But innovation is a huge contributor to wellbeing and people will continue to like ‘growth’. No-growth is a non-starter outside authoritarian and autarkic polities.

These caveats aside, I really liked the book and it is well worth a read if you’re interested in this territory. As many people are – statistics is the new rock and roll.

A rant about markets

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Harvey Cox’s [amazon_link id=”0674659686″ target=”_blank” ]The Market As God[/amazon_link], published in a couple of weeks, drove me nuts. I alternated between scribbling ‘X’s and ‘?!’s in the margin, and skipping over long chunks about Christian theology, in which I have zero interest. The book is built out from the notion of orthodoxy and heterodoxy in economics. Of course, ‘orthodox’ economists would use an adjective like ‘mainstream’ to describe themselves, which I guess (self-described) heterodox economists would say is the point. These debates always seem to me more relevant (or rather less irrelevant) to macro than to the empirical applied micro-economics so many of us do; I never know which label to wear myself.

[amazon_image id=”0674659686″ link=”true” target=”_blank” size=”medium” ]The Market as God[/amazon_image]

Anyway, back to the book. The conclusion sums up the message: “First, the Godlike role The Market now exercises is misplaced, and the web of values, narratives and institutions it anchors needs to be critically re-examined. Second, precisely because The Market, despite its disavowals, does operate as a surrogate religion, the kind of rethinking that is needed has been deflected and discouraged.”

Many people will agree with this. I’d guess the ever-thoughtful Branko Milanovic would – he and I had a brief debate here, here and here on ‘commodification’ (ie the status of the market) recently. There are some truly interesting ethical questions in this territory.

Not in this book, however. One of my problems with Cox’s account is the assumption that there is substantial overlap between people who worship The Market and economists, because isn’t that what economics is all about? Given that I teach a whole course exploring the subtleties of the relationship between state and market in public policy, this is personally irritating. It’s also factually incorrect: many economists work on how government/collective intervention can fruitfully bring about higher economic welfare, including by influencing markets. Sure, economists are perhaps more likely than Ms Average to believe markets operate in beneficial ways (or than Mr Average when he is a businessman running a large, dominant company), but that’s far from religious faith in markets.

Market-worship was always more of a political than an economic project, although certainly there was a tide in economics of free-market rational expectations modelling – a tide at its height in the mid to late 1980s. Even the politics seems to be changing. This book comes just as here in the UK we’ve seen the new Conservative Prime Minister pronouncing the need for an industrial policy, while the system shock of the Brexit vote/Trump propularity has alerted the political classes in both the UK and US to the fact that we’re not in libertarian free market-land any more.

There were also minor irritations in the book. For instance, it paints Adam Smith as the ‘saint’ of modern economics, “the patron of the unfettered free market.” This overlooks a raft of recent work highlighting the importance of [amazon_link id=”0143105922″ target=”_blank” ]The Theory of Moral Sentiments[/amazon_link] to any interpretation of Smith – from Emma Rothschild’s [amazon_link id=”B00BNRMO08″ target=”_blank” ]Economic Sentiments[/amazon_link], Nicholas Phillipson’s biography [amazon_link id=”B003VTZRR8″ target=”_blank” ]Adam Smith: An Enlightened Life[/amazon_link], through [amazon_link id=”B01K3PL3FC” target=”_blank” ]Roger Backhouse’s history of economics[/amazon_link] to Russ Roberts’ [amazon_link id=”0241003202″ target=”_blank” ][amazon_link id=”1469029758″ target=”_blank” ]How Adam Smith Can Change Your Life[/amazon_link][/amazon_link].

Anyway, it will be clear that The Market As God falls foul of my regular gripe that it would be great if critics of economics from outside the discipline had more of an idea of what economists actually do. It would have been far more interesting if Cox had addressed, say [amazon_link id=”0007520778″ target=”_blank” ]Al Roth[/amazon_link]’s question about repugnant markets, kidney exchanges etc. Or maybe the questions raised by behavioural economics about when humans are more or less rational than pigeons or capucin monkeys. Still, if you enjoyed Michael Sandel’s What Money Can’t Buy: The Moral Limits of Markets[amazon_link id=”B00BW8NBMS” target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets by Sandel, Michael on 26/04/2012 unknown edition[/amazon_link] (which also irritated me hugely), you might well like this book too.