My good friends at Princeton University Press have sent me what looks like a fascinating book, Codes of the Underworld by Diego Gambetta. The author is a sociologist at Oxford whose previous work includes a study of the Sicilian Mafia. The question he addresses here is how a group maintains the trust essential to its economic success when it consists of criminals. The subtitle is 'How Criminals Communicate' and just paging through reveals plenty of gleaming nuggets. For example, I'm looking forward to the section about the superb acting skills of mobsters. As the blurb says:

“People planning crimes can't freely advertise their goods and
services, nor can they rely on formal institutions to settle disputes
and certify quality. They face uniquely intense dilemmas as they
grapple with the basic problems of whom to trust, how to make
themselves trusted, and how to handle information without being
detected by rivals or police… …. [Gambetta] uncovers the logic of the often bizarre
ways in which inveterate and occasional criminals solve their dilemmas,
such as why the tattoos and scars etched on a criminal's body function
as lines on a professional résumé, why inmates resort to violence to
establish their position in the prison pecking order, and why mobsters
are partial to nicknames and imitate the behavior they see in mafia
movies. Even deliberate self-harm and the disclosure of their crimes
are strategically employed by criminals to convey important messages.”

Oh, and I love the cover, which features a painting by Michael Crawford.

The ever-excellent Boston Review has in its current issue an essay on this subject by Eliot Spitzer, with a number of  responses. I hope and expect this will be turned into one of its book series, with a few more contributions perhaps.

Spitzer addresses three questions:

• What are the parameters of
government intervention in the marketplace? What rules should we use in
deciding when the government should act, and when it should let the
market take its course?

• Has our response to the immediate
crisis been successful?

• How might we restore an effective
structure for corporate governance? The failures of corporate governance
account for much of our economic troubles over the past 30 years.
Getting out of the current mess will require addressing these underlying
failures.

There are several responses and the whole adds up to an immensely thoughtful debate on the difficulty of achieving anything, and especially anything good, in public policy. Too rich to sum up in a blog post – read the whole issue. Highly recommended.

The most recent in the Boston Review books series (published by MIT Press) is Dean Baker's Taking Economics Seriously. Baker is one of the respondents to Spitzer's essay. As the cover blurb puts it:

Modern markets are highly regulated, although
intrusive regulations such as copyright and patents are rarely viewed
as regulatory devices. If we admit the extent to which the economy is
and will be regulated, we have many more options in designing policy
and deciding who benefits from it.

Review of Joyce Appleby's  The Relentless Revolution

by Bill Allen

Economists become much
too readily obsessed with the products of abstract reasoning – models,
theories, principles and so on. They can learn a lot by studying what has actually
happened in real life, or in other words by studying history. It has to be
accepted that it is often not all that clear what actually did happen in real
life, particularly in the economic sphere, but it would be a terrible mistake
to confine one’s interest in economic history to the very short period for
which comprehensive numerical economic data are available.

There is therefore
much to be learned from ‘The Relentless Revolution’, by Joyce Appleby, who is
Professor Emerita of History at UCLA. The Relentless Revolution is a history
of capitalism. The author defines capitalism as “a cultural system rooted in
economic practices that rotate around the imperative of private investors to
turn a profit,” and comments that:

Capitalist practices represented
a radical departure from ancient usages when they appeared on the scene in the
seventeenth century. Because they assaulted the mores of men and women in
traditional society, it took a very favourable environment for them to gain a
footing. After that, the capacity of new capitalist ways to create wealth
induced imitation.

Perhaps the biggest
question that economic theory has been unable to answer definitively is why economies grow.
There has been no generally accepted explanation of why the Industrial
Revolution (or ‘Industrial Evolution’, as Professor Appleby would prefer it to
be called) began when and where it did, or of why some economies grow while
others don’t. Professor Appleby has some interesting ideas of her own.

One of them is that
Industrial Revolutions have to be preceded by Agricultural Revolutions. Before
the Agricultural Revolution of the sixteenth and seventeenth centuries, in the
‘world of scarcity’, roughly 80% of the labour force had to be employed in
agriculture in order to produce enough food for the whole population. Not
enough labour was left over for secondary or tertiary industries to develop and
grow.  The Agricultural Revolution,
according to Professor Appleby, was caused by rising grain prices which “created a powerful incentive to find ways to get bigger yields.” Rising grain
prices were not a new phenomenon, but this time, for some reason, they led to
sustained increases in productivity.

Another of Professor
Appleby’s interesting ideas is that England in the seventeenth century was fertile
ground for fundamental change. The religious conflicts of that century,
including the Civil War, undermined the effectiveness of the forces of
established authority, which were the natural source of resistance to change.
There was censorship, but in the prevailing chaos, it was weakly enforced.
After the Glorious Revolution and the Bill of Rights, censorship lapsed anyway;
the Bank of England was founded; and “a new upper class with a mainly
progressive attitude towards economic development solidified its power.”

The view that weak
government left scope for original thought and innovation seems highly
plausible. There is surely an inherent and unbridgeable conflict between maintaining
the capacity for original thought and innovation and maintaining firm rule,
including rule over matters of doctrine and belief. This conflict has echoes in
the present day, in which the rise of managerialism and the insistent and overbearing
demands of PR for simple and clear ‘messages’ mean that the chaotic process of original
thinking is often regarded as too dangerous to be allowed by many public and
private institutions.

Once the capitalist
cat was out of the bag in England, it was inevitable that other countries would
follow. Much of Professor Appleby’s book is an account of how that happened and
what the consequences were – good, like prosperity, and evil, like slavery. One
of the most important developments was the institution of incorporation of
enterprises with limited liability for the owners. It seems pretty obvious that
limited liability, by its very nature, entails moral hazard, which economic theorists
regard as dangerous. Professor Appleby doesn’t address moral hazard directly
but simply describes the advent of limited liability companies and comments
that “a great deal of attention has been given to the excellence of the English
and American corporation as a vehicle for capitalist expansion.” In any
cost-benefit analysis of limited liability, the benefits of increased growth
would presumably exceed the costs of moral hazard.

In spite of that, it
is quite surprising that there has been so little debate in the wake of the
financial crisis about whether limited liability is desirable for some kinds of
financial companies. Professor Appleby has some harsh things to say about the
origins of the crisis, but not about limited liability. The question is nevertheless
a real one. Moral hazard has clearly done very serious damage in the past decade
in the financial industry. The governments of the world seem to have decided
that the way to reform the industry is to make official regulation tighter, but
tighter regulation may not be unsustainable. Who can tell at precisely what
point the marginal benefits to stability of tighter official regulation are
exceeded by the marginal costs of under-used capital, excessive caution and
lost opportunities for growth? Advocates of tighter official regulation
generally lost the argument during the boom years leading up to the credit
crisis, and I think they are always likely to lose the argument when times are
good. Would some restriction of limited liability for financial companies lead
to better private supervision by shareholders and be an alternative and more
productive means of reform? Such a change would probably mean that large complex
financial institutions generally would become smaller, and that their brand
power would diminish, but it might also deliver a more stable financial
industry.

Notwithstanding its
current travails, in the final analysis Professor Appleby is optimistic about
the durability of capitalism. In Capitalism, Socialism and Democracy, written
in the early 1940s, Joseph Schumpeter suggested that capitalism would not
survive because it would be undermined by the intellectuals whose lifestyles it
made possible. Professor Appleby doesn’t agree. “People do learn from their
mistakes. There is no reason to think that societies won’t continue to modify
and monitor their economies in pursuit of shared goals.” Let’s hope she is
right.

The questions that
Professor Appleby addresses are much bigger than the ones that economists
routinely address in their everyday lives. Her book is all the more interesting
for that.

I read Beyond Business, the autobiography by the former CEO of BP, alongside the frank diaries of the Labour politician Chris Mullins (A View From the Foothills) and during a week in which my own work was swamped by various public service activities. The contrast between the private and public sectors therefore impressed itself upon me. Of course, Lord Browne is one of the most impressive business leaders we've seen in the UK in recent times, and BP one of our leading companies. Even so, the chasm between the world of multinational business and the world of the public sector – in terms of strategic foresight, long-termism and even actually the sense of public service – is staggering. For the sake of complete clarity, it is big business which emerges favourably from the comparison.

Other readers will come to Beyond Business without this somewhat jaundiced perspective, however. Anybody who is interested in the oil industry, in BP itself, or in the role and responsibilities of large multinationals in the globalized economy will find this a fascinating account. One aspect that I particularly enjoyed is the demonstration in this book of an outstanding executive focusing on fundamental strategic questions. It made me think that two key requirements for a top CEO are the ability to think with clarity about long-term strategy and endless energy. After all, in the oil business, the long term is very long, a decades. Few of us really need to consider in our work the consequences of our decisions 20 years on.

Another fascinating aspect of John Browne's tenure in charge of BP is the emergence of activism against oil companies and other multinationals by NGOs and environmental campaigners. A lesson he learnt from BP's early encounters with protests and political difficulties in Alaska and Colombia was that constructive engagement with campaigners, in the form of extensive conversations and responding to well-founded concerns, made good business sense. Although the campaigners could be shrill and unreasonable, often they were amplifying a genuine underlying issue. He writes:

“Oil is a long-term business, requiring investment over a 30 to 40 year horizon. Enlightened companies recognise that, if they are to benefit from any society, they have to contribute to its well-being. That contribution to society needs to be more than just philanthropy. It needs to be about capacity building and governance.” (p118)

This is also a personal memoir, ranging from a childhood in Iran (John Browne's father worked there for the predecessor company to BP) through to the difficult year – for both personal and business reasons –  at the end of his tenure as BP's CEO. It travels the world and features an eye-opening number of colourful and even dangerous characters with whom oil executives need to do business. It sheds light on the organisation and management of a very big company spanning many borders. It highlights the very political nature of oil, not that readers will need much reminder of that. All in all, this is both an admirable and a very enjoyable book.

Other reviewers also enjoyed it on the whole. Here are the reviews from the Telegraph and the Economist, the former more favourable than the latter. The Economist's reviewer would have liked more personal revelation to make it a livelier read, but I myself don't have that kind of curiosity and for myself am more interested in the business insight.

Earlier this week I heard John Makinson, the Chief Executive of Penguin, speak on the future of publishing at a Financial Times conference on digital media. He was an optimist, a pleasant change at any conference for people in businesses being turned upside down by the internet and mobile technologies. There is an opportunity for publishers to sell more content of different kinds in different ways, he said, insisting that physical book would continue to be an important and profitable line of business.

His argument was that there are three big challenges facing publishers: the threat of copyright violation, disintermediation and the challenge of finding a pricing and business model which can be sustained. On the first, he noted that piracy has long existed in publishing and while constant vigilance is needed now, it can be managed. On the second, his view is that retailers are indeed being disintermediated but publishers of appealing content are not even though they are no longer the exclusive filter between authors and audiences.

On pricing and business models, Makinson argued that publishers must go through a period of trial and error. The two challenges to be navigated are how to respond to business models which offer free content as a pathway to charging for something else, and how to respond to those who offer cheap content as a loss leader – the latter perhaps the most difficult as the cost of physical production accounts for under 10% of the cost of producing a book.

On the other hand, he said, the iPhone and iPad have made charging for e-books easier because of the psychology of paid-for apps they're creating. Asked specifically about Apple's so-called agency policy whereby publishers set the price and Apple takes a commission (in contrast to Amazon's loss-leading flat price for e-books), Makinson said wryly that Apple needed the content and should be paying publishers, but added: “We tried to argue this with Apple but not with great success.”

In sum, I took his comments to point to good news for readers, authors and Apple, bad news for retailers, and some experimentation before publishers find their own margin in the middle. We'll soon see – the iPad's launch will speed up the process.