David Smith, the distinguished economics editor of The Sunday Times, completed this overview of the financial crisis – The Age of Instability – at the end of 2009. This means he can't give his verdict on the lasting effects of the crisis. But then neither can we, in late 2010, as fears of a double dip recession ebb and flow and every so often signs of strain erupt somewhere or other in the global financial system. What's more, it means the book does cover the most dramatic of the events in the markets, including the run on Northern Rock, the rescue of Bear Stearns, the collapse of Lehman Brothers. To read it is to be reminded what an extraordinary period we lived through in mid-2007 to late 2008.

Smith does a great job of providing the context for these events, starting with the monetary framework set up after the 1987 stockmarket crash, the Asian financial crisis of 1997-98, the 'New Economy' hype and dot com crash in 2000-2001. He gives us enough of the historical policy context to understand that the Great Crisis gained its scale from pent up pressures accumulated over more than a decade. For example, the 'glut' of Asian savings which funded American credit and spending before 2007 had its roots in the determination of the Chinese and other Asian governments never again to be caught short of reserves and humiliated by the IMF, as they had been in the late 90s.

Perhaps I'm frivolous, but the parts of the book I most enjoyed were those which took us into the policy debates and personalities in the eye of the storm. The book is better on the UK than the US, nor surprising given its author's terrific access to the key players. We await still a detailed memoir of how the crisis played out at the heart of the Treasury and Bank of England but there's a flavour of it here.

Smith is somewhat critical of Bank of England Governor Mervyn King, portraying him as too concerned with the 'academic' preoccupation about moral hazard and therefore too slow to rescue Northern Rock. I don't share this assessment. Post-mega-bailouts, moral hazard remains a huge problem swept under the rug by policymakers. What's more, my admiration for Mervyn King is increased by reading here that he once told George Soros that his book would “add nothing to the world's stock of intellectual knowledge.” Most people are too much in awe of Mr Soros's wealth to tell him his writings are banal.

The most gobsmacking detail in the book for me was reading that the Financial Services Authority had been worried about Northern Rock's viability from as early as 2004 and had been directly warned about it in 2006 by the Bank of England, but had taken no action. It wasn't until July 2007 that it wrote formally to the lender to ask how it would cope with adverse circumstances. Indeed, the FSA had even allowed Northern Rock a waiver from adhering to the international capital standards. Extraordinary.

All in all, The Age of Instability is a terrific compact overview of the events of that wholly extraordinary year. It sets them in longer-term context and provides some analysis without plunging one way or another in some of the bitter debates about the implications of the crisis for economic policy, so is great for the open-minded and non-expert reader. It's a lively read too, with enough of the personal detail to give a flavour of the combined terror and excitement that must have characterised the inner policy circles as events unfolded.

It also highlights the scary reality that nothing has really changed. Being reminded about what happened and why makes it all too plain that policymakers and regulators have hardly started to tackle the behaviours and structures that took the world financial system literally to the edge of collapse. The new Basel standards are a start (as the BBC's Robert Peston argues in his blog), but with a new bonus season looming, it's all too clear that bankers (and other fat cats) have reverted to business as usual. And that's why I'm with Mervyn King on the moral hazard problem.

Briefly, I considered heading this post 'Economic Methodology', but it would have drawn fewer readers. The titans in question, slugging it out over the methodological validity of economics are Tim Harford and Gideon Rachman, two eminent Financial Times columnists.

Gideon Rachman started the battle with a diatribe titled “Swipe Economists Off Their Thrones”. (The FT has a paywall but I believe you can still access a small number of articles by registering.) He argued that economists have physics envy, that the failure of macro forecasts means the entire subject is flawed, that it can't possibly make any claims to the scientific method, and all in all, it's better to study history. We can learn everything we need to know from study of the Tudors. OK, I exaggerate mildly, but here's his conclusion:

Rather than seeking to ape physicists, however, perhaps it is time
for economists to learn a few lessons from history, or more precisely
from historians. …. This way of
looking at the world is less obviously useful to practical men, seeking
to make decisions. But maybe it is time for an alternative to the brash
certainties, peddled by those pseudo-scientists, otherwise known as
economists.

The reply came a few days later from Tim Harford in “Models tell us more than hindsight.” Not very catchy, but it captures the essential point about social sciences, that they try to reduce the amount of detail to focus on some essential elements of human society for analysis, whereas history is all about the detail. Tim pointed out that many sciences use models and methods similar to those used in economics, and dissimilar to the formal experiments of classical physics – geology, for example, is an historical science, or evolution for that matter.

He wrote:

No doubt economists can learn from historians, but the search for
economic regularities should not be abandoned. It is not limited to
traditional economic approaches. We know much more about economics
thanks to the work of Robert Axtell (computer scientist), Cesar Hidalgo
(physicist), Duncan Watts (sociologist), Esther Duflo (an economist who
runs the kind of controlled experiments which, according to Gideon,
don’t happen in economics) and Daniel Kahneman (psychologist). All of
them use those pesky “models and equations”. Are mainstream economists
receptive enough to such invaders? The best ones are. The majority are
not, but that is a fact about academia, not economics.

No prizes for guessing which side of the argument I support, for all my love of history – and of course, the two subjects are complements, not substitutes. But it set me pondering the absence of many good books about economic methodology.

My own The Soulful Science is the best (ahem). It describes a lot of recent work in economics to try to dent the stereotype of macro forecasters to which Gideon Rachman clearly subscribes. There's one chapter about economics as a subject. But not much else in support of economists, although Partha Dasgupta has written some good papers.

There are lots of generally terrible books which are anti-economics. The most thoughtful critiques come from excellent economists. I'd single out anything by the marvellous Deirdre McCloskey, such as How To Be An Economist Although Human. There's also The Dismal Science by Steve Marglin, though it made me a bit cross. They shine out, however, in the midst of a sea of books and articles by non-economists and 'heterodox' economists who clearly don't know what 'orthodox' economists really do.

So Tim, I think here is your next challenge!

Chris Jackson has written a thought-provoking column in The Atlantic about the strange invisibility of women writers to male readers and critics alike. It's well worth trying his own thought-experiment:

“When was the last time you read fiction by a woman?” 

And he goes on:

“And I honestly couldn't come up with anything for a few minutes.  It
was a pretty shameful moment.”

The column goes on to ponder the internal censorship that works against women authors. Extend the thought to economics and business books and it becomes even harder to think of books by women because the proportion of women economists is so low. Looking back through this blog, I've read books by Linda Polman and Dambisa Moyo. Carmen Reinhardt is a co-author of This Time is Different, and Kate Pickett  of The Spirit Level.

Maybe I missed some but even so this is a low tally. So here's a question: let me know which economics and business books by women you've read recently. I'd like to make sure the imbalance on this blog is a supply problem and not – as Chris Jackson so honestly admits – a demand problem.

A while ago I reviewed Amar Bhide's interesting book The Venturesome Economy. He has a new one out, A Call for Judgment: Sensible Finance for a Dynamic Economy, which looks equally of interest. I've sent it to somebody else to review for a forthcoming edition of The Business Economist.

Meanwhile, the Harvard Business Review has this article by Bhide as a taster. He says some very wise things.

Ha-Joon Chang's new book, 23 Things They Don't Tell You About Capitalism, has been widely reviewed – the latest by James Crabtree in today's Financial Times (needs a subscription to access) and also by John Gray in The Observer. I haven't read the book yet, but my interest was aroused by the FT review.

James Crabtree focuses on two arguments (presumably out of 23) – the first that manufacturing is still important to the leading economies despite the growth of services, the second that emerging economies should follow the path of active industrial policy practised by the rich economies in their own past. James writes of the author:

“He has shown in particular that western countries
who preach free trade and competitive markets commonly protected their
own industries during earlier periods of growth.

He admits that
attempts to back native industries — from the Concorde to the Indonesian
aircraft manufacturing industry — have often been expensive flops. But
he says developing countries need to improve their “batting average” of
winners versus losers, although he neither explains exactly how this
might be done, nor whether it is possible for all developing countries
to do so simultaneously.”

I have some sympathy with the need to rehabilitate industrial policy after the swing of the policy pendulum so far away from government engagement with industry. For anti-activism ends up being an industrial policy by default, with the most powerful lobbyists shaping policy in their interests – the financial sector springs to mind.

Having said that, there's a world of difference between an intelligent awareness on the part of government that the economy has some comparative strengths which should be encouraged, and that infrastructure investment and public spending need to be guided by strategic priorities, and any industrial policy which thinks about actively helping 'winners' beat the competition from other nations. This older flavour of policy is still likely to end in expensive disaster, and encourage some governments to aim for the impossible.  What's more, the challenge is greater now because the technology frontier has moved so much since South Korea in the 1970s decided to build steelmakers from scratch. The opportunity for catch-up is negligible in some advanced sectors – but what are the odds of governments being sensibly realistic rather than fashionably ambitious?

Still, I'll keep an open mind and perhaps see if the book can persuade me.