It's been one of those days when trains of thought have taken me to unexpected places, no doubt due to having spent much time in meetings and travelling recently. On the actual (not metaphorical) train today, I was reading Thomas Levenson's marvellous Newton and the Counterfeiter. It prompted a vague memory of an essay by Keynes on Isaac Newton. Browsing on my shelf at home I found there was indeed, in Essays in Persuasion, called 'Newton The Man'. Keynes wrote:

“Newton was not the first of the age of reason. He was the last of the magicians, … the last great mind which looked out on the visible and intellectual world with the same eyes as those which began to build our intellectual inheritance rather less than 10,000 years ago. “

My goodness, my metaphorical train proceeded, was Keynes the last of the economists who could write? He certainly had a cultured hinterland. After all, he was the founding chairman of the Arts Council, married to a ballet dancer.

The next stop on the journey was pondering what this Keynes would have thought of the spending cuts likely to be announced by the coalition government next month. I don't mind the loss or savaging of specific funding organisations, but public spending on the arts – and of course the sciences – goes to the question of both civility and long-term investment in areas of activity whose social return exceeds the private return. The Arts Council was founded in 1946 when Britain was even more bankrupt than we are today.

I'm not a retro-Keynesian who thinks all spending cuts now are bound to end in disaster. The deficit is too big, the debt burden we'll bequeath future taxpayers is unacceptable, the welfare state is ineffective and possibly harmful to some of its supposed beneficiaries, and parts of the public sector are sclerotic and inefficient. One can debate the speed of the cuts – and I don't believe macroeconomists who claim certainty on this front – but not the necessity.

What worries me though is not having any criteria for swinging the Osborne Axe (as it should be called, in a parallel with the similarly savage Geddes Axe). I wish that, like Keynes, we had thought properly about the long-term returns and social returns to public expenditure. This is a preoccupation of my next book, of which more in due course.

Meanwhile, I think I'll escape back to Essays in Persuasion.

I read From Poverty to Prosperity: Intangible Assets, Hidden Liabilities and the Lasting Triumph Over Scarcity, by Arnold Kling and Nick Schulz on a weekend trip to Venice. There could hardly be a better place than La Serenissima to reflect on the tides of economic history, given its trajectory from trading capital of the western world through sad decline post-Napoleonic conquest, to today's playground for affluent tourists.

The subtitle of the book indicates the breadth of ideas its authors aim to capture, and although I don't think they bring it off as a synthesis, it's an interesting read and I enjoyed it.

The thrust of their argument is that government interventions are often the worst way to respond to market failures, especially in places where the quality of government is low, such as poor countries. They emphasize the importance of economic institutions for development and growth outcomes. Institutional quality, or perhaps social capital, is essentially what they mean by the intangible assets of the subtitle. They are advocates of Austrian economics and the work of Friedrich Hayek. Their account of economic development rightly emphasizes innovation, entrepreneurship and the barriers which prevent the creation of new products and services.

The book makes the arguments about the evolutionary or emergent nature of economic outcomes, and the importance of markets rather than planning, in a clear and readable way. I particularly enjoyed the series of interviews with a number of sympathetic economists: Robert Vogel, Bob Solow, Paul Romer, Joel Mokyr, Douglass North, Bill Easterly, Edmund Phelps, Amar Bhide, William Lewis and Will Baumol – albeit that they print verbatim transcripts which read a little oddly. The work of these economists does point to a coherent account of economic development.

What doesn't work so well is their description of this story as 'Economics 2.0', a radical departure from boring old Economics 1.0 which by implication most economists do. They use the metaphor of the economy as a computer system consisting of hardware, software and operating systems protocols, which for me simply confuses matters. The book isn't about economics per se so the attempt to dip into the debate about economic methodology is a diversion. Nevertheless, this book is a useful overview of the institutionally-rich and historically-rooted version of economic development which is actually shared by many economists now.

The FT has announced the shortlist for its 2010 Business Book of the Year. The titles are:

Sheena Iyengar’s The Art of
Choosing
David Kirkpatrick The Facebook Effect
Michael Lewis The Big Short
Sebastian Mallaby More Money than God
Raghuram Rajan Fault Lines
Andrew Ross Sorkin Too Big To Fail

Only two of these reviewed on this blog so far – Fault Lines and The Facebook Effect. So I have some reading to do! The forthcoming issue of The Business Economist will have a review of The Big Short.

But meanwhile, I'm off to a conference this weekend so will pick a book from the current pile in my office to write about next week.

It's eight years since Carlota Perez published Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. Only recently, however, has the book become better known and Perez herself somewhat feted for her analysis. There are two reasons for this. One is, of course, timing. There's nothing like a Great Crash for arousing interest in theories of the dynamics of capitalism, so Perez's book, like the late Hyman Minsky's Stabilizing and Unstable Economy, found its time. The other is that Edward Elgar finally cut the price – the reason I've only just read it is that it was prices so high even second hand copies were prohibitively expensive, even for a bibliophile.

Reading Technological Revolutions has been both interesting and odd. I'll start with the interesting. The book presents a 'long wave' or Kondratiev cycle view of dynamics, where successive waves of technological innovation drive the 50 or 60 year cycles. The first batch of chapters present a (verbal) model of five waves in capitalist industry, starting with the Industrial Revolution kicking off in Britain in the late 18th century. Each wave is broken down into two periods – 'installation' and 'deployment' – the first the introduction and early spread of new technologies, the second the adjustment of the wider economy and social institutions to the new technology. Each half in turn is divided into two sub-periods.

I've always been tatntalised by Kondratiev cycles – here's a diagram in one of my old notebooks, copied from I know not where in as I was on my book tour for Paradoxes of Prosperity.

There are two aspects of Perez's approach which distinguish it from other accounts I've read. One is her emphasis on what she terms the 'techno-economic paradigm', or in other words the institutional and organizational framework corresponding to a particular key technology such as steam or microchips. The other is her overlay of financial cycles onto technological and business cycles. At the present time, this is indeed an interesting approach.

But now onto the odd aspect of the book. Perez identifies firmly with 'heterodox' approaches to economics. I'd call myself mainstream but share some of the heterodox interests. As it happens, there is an entirely parallel and separate mainstream literature on the elements of Technological Revolutions, albeit not gathered together in the same kind of synoptic approach.

So for example, the 'techno-economic paradigm' is the same as what industrial economists would call an innovation or production system – Michael Best's The New Competitive Advantage is one example. Economic historians, notably Paul David but also Brad DeLong or Joel Mokyr in his Gifts of Athena, have detailed the way a technology's full impacts are not experienced until the social, institutional and cultural context have adapted. In growth theory, the idea of a general purpose technology which transforms – slowly – the whole of the economy is well established. Elhanan Helpman's edited volume General Purpose Technologies and Economic Growth set this out clearly. Many economists have looked at the process by which technologies spread through the economy, from Zvi Griliches' pioneering 1957 paper on the diffusion of hybrid corn onwards. Paul Geroski's The Evolution of New Markets is an accessible summary stuffed with examples.

Having absorbed this mainstream literature, I found Perez's book therefore interesting but essentially familiar, and lacking much of the applied detail contained in the extensive mainstream literature. It's clear from the absence of references to any of this work that she has followed a parallel and non-touching heteredox route.

Its most novel aspect to me was therefore the analysis of how finance interacts with technological innovation. Although the economic historians have highlighted the fact that hot new technologies lead to stockmarket booms and busts, as in the railway mania of the mid-19th century, Perez offers a more systematic argument about the phases of investment through a long technological cycle. The interaction between finance and the diffusion of innovation, and the wider economic and social context, has previously been overlooked.

In short, if you enjoy grand unified theories of capitalism and Kondratiev cycles, you'll enjoy reading this book. If you're unfamiliar with the large economics literature on technology, there will also be much of interest. But for me the later chapters on financial cycles are the freshest and also the timeliest part of the book.

One final note. The book has an essentially very upbeat message. For if Perez's categorization of long cycles is correct, then once we're out of the current crisis phase, the global capitalist economy is in for a golden age as the surge of micro-chip linked technologies become widespread. Fingers crossed that Kondratiev cycles work!

There is an outstanding article, The Trouble With The View From Above, about the names we give places – and the way this process reflects the governance of society – by James C Scott in the current Cato Unbound. (Thanks to Tim Harford for alerting me to it via Twitter, where he's @timharford and I'm @diane1859). I can't recommend it highly enough.

If you read it and appreciate it, but haven't yet read Scott's book, Seeing Like A State, you have a treat in store. It's hard to imagine a more thorough and damning critique of social engineering.

The book, first published in 1998 – in other words, less than a decade after the collapse of the social engineering scheme that was state communism – explores why grandiose plans go awry. High modernism was a deadly dead end, he concludes. Liberal democracy and the common law have flaws but are rarely murderous. Scott's message is that we nevertheless undervalue the practice of civic engagement and participation in every day institutions that will safeguard the liberal democratic social order.

His conclusion: “use it or lose it.” A decently liberal version of “Aux armes, citoyens!”