I’ve just written a review (for the next issue of The Business Economist) of Robert Frank’s new book, [amazon_link id=”0691153191″ target=”_blank” ]The Darwin Economy: Liberty, Competition and the Common Good[/amazon_link]. Much of its argument concerns the role of government in managing markets when positional goods play an important part in the economy. These are goods whose utility to the individual depends on their relative, rather than their absolute, scarcity. I want a fancy house in Mayfair, or a designer handbag, mainly because to have them will display my high status. So their consumption imposes an externality – you are worse off if I buy such an item, because you will want one too even if your own preferences would lead you to spend your money on other things, or even not make so much money in the first place.

The term positional goods is from Fred Hirsch’s [amazon_link id=”1583485996″ target=”_blank” ]Social Limits to Growth[/amazon_link], although the concept dates back at least as far as Veblen’s ‘conspicuous consumption’ in [amazon_link id=”0199552584″ target=”_blank” ]The Theory of the Leisure Class[/amazon_link], and beyond. There are more of them that you’d first imagine. For example, a degree has some intrinsic value for people who love to learn, and who are made more productive by their studies, but part of the value also lies in the fact that a degree is a signal to distinguish its holder from other people competing for jobs.

Professor Frank has wanted to stop conspicuous consumption for a while – his earlier book [amazon_link id=”0691146934″ target=”_blank” ]Luxury Fever[/amazon_link] was on the same topic. The new book sets the issues in the context of the Tea Party movement and rampant libertarianism in the US – he hopes to win the argument for having a government that taxes and spends, and sets out the case eloquently. You’d have thought the Tea Party’s supporters would like the idea of nature red in tooth and claw, at least in its Social Darwinist guise. Hard, though –  given their bizarre issue with natural selection (but why not plate tectonics, as someone asked this weekend) – to see many Tea Party-ites picking up, still less being persuaded, by any book that has ‘Darwin’ in the title.

[amazon_image id=”0691153191″ link=”true” target=”_blank” size=”medium” ]The Darwin Economy: Liberty, Competition, and the Common Good[/amazon_image]

The excellent Gilliant Tett uses her Financial Times column today to review a new book by an anthropologist about debt. It’s David Graeber’s [amazon_link id=”B00513DGIO” target=”_blank” ]Debt: The First Five Thousand Years[/amazon_link], and one of the reasons it sounds so enticing is that Gillian – an anthropologist by training – cites some of my favourite authors on money.

One of them is Keith Hart, whose 1999 book [amazon_link id=”1861972083″ target=”_blank” ]The Memory Bank: Money in an Unequal World[/amazon_link] is a brilliant sociological perspective on the interaction between money, technology and power. He is the originator of the concept of the informal economy, dating from his early fieldwork in Africa. I loved The Memory Bank so much when I first read it that I got in touch with Keith, who like me hails from Manchester although he lives now in Paris, and we have met from time to time – most recently at Dave Birch’s annual and unmissable Digital Money Forum.

Another sociologist Gillian mentions is Marcel Mauss, whose interesting work is on gift exchange. His classic, [amazon_link id=”0415267498″ target=”_blank” ]The Gift[/amazon_link], also concerns the links between exchange and power – every gift brings its corresponding debt –  although I have to confess that I found it heavy going and I love him more for his name than for his writing style. (My husband had hysterics when I mentioned on holiday this year that Marcel Mauss was one of my favourite economic sociologists.)

Finally, Gillian cites Karl Polanyi. I didn’t like his famous [amazon_link id=”0807056790″ target=”_blank” ]The Great Transformation[/amazon_link], which falls into the romantic trap of rose-tinted nostalgia about pre-capitalist society, and is convoluted and pompous compared to Ruskin’s brilliant rant [amazon_link id=”1599868059″ target=”_blank” ]Unto This Last[/amazon_link].

The point is that at this time of crisis, the normally submerged but fundamental links between the financial system and the power structure of society has been brutally exposed. Brutal because it is not pretty. We’ve had a generation of rapacious exploitation of the many by the moneyed elite. It’s revealed in the unsustainable inequality of incomes in countries like the UK and US, as Raghuram Rajan spelled out in [amazon_link id=”0691146837″ target=”_blank” ]Fault Lines[/amazon_link], and in the many monopoly markets which enable the very wealthy to extract vast economic rents, whether they are East European oligarchs, Premier League footballers, holders of long-lived patents or ludicrously extended copyright terms, or investment bankers.

As for David Graeber, I think this sounds a must-read. It seems to chime with the argument I make in [amazon_link id=”0691145180″ target=”_blank” ]The Economics of Enough[/amazon_link] that the social underpinning of the economy is currently unsustainable. Gillian’s review concludes that the west must now start thinking about widespread debt forgiveness – wiping the slate clean, as literally occurred in ancient Mesopotamia. She writes: “Those debts keep piling up in the west, creating social strains – and there is no real solution in sight. Looking back to the future – even 5,000 years – may not be as crazy as it seems. Not least because it reminds us that debt is fundamentally a social construct, not a cold number; even when it relates to your post-holiday credit card bill.”

[amazon_image id=”B00513DGIO” link=”true” target=”_blank” size=”medium” ]Debt: The First 5,000 Years[/amazon_image]

A new book on house prices has reached my desk, [amazon_link id=”1907994017″ target=”_blank” ]Safe as Houses: A Historical Analysis of Property Prices[/amazon_link] by Neil Monnery. It looks worth having for this chart alone (with apologies for the wonky scan but it is Friday afternoon):

UK real house prices since 1900

Obviously, the striking thing about this is the discontinuity of the historical experience since 1980. The book argues that, looking around the world over many years, real house price growth is typically around 1%. Certainly, one would not expect it to exceed the real growth rate of the economy for long periods, at least in a country like the UK with essentially a fixed supply of land and tight planning restrictions. However, the real growth rate in the UK has been 5% a year since 1995 even with the recent dip. If that trend were to continue, the average age of a first time buyer would rise from 37 now (it was 27 in 1995) to over 50 by 2025.

What are the implications? I’ll have to read the whole book to find out, but a period of zero to negative real house price growth seems very likely, with significant effects on home-owners’ wealth and on wealth transfers between generations. What’s more, in the UK mortgage debt is about 100% of GDP; have our banks really considered the risks attached to their mortgage portfolio? Given the events of recent years, it seems unlikely that the banks have been all that prescient.

Anyway, there is loads more interesting data in the book, including several countries and long time series.

[amazon_image id=”1907994017″ link=”true” target=”_blank” size=”medium” ]Safe As Houses? A Historical Analysis of Property Prices[/amazon_image]

This has been a hectic ‘back to school’ week, with many people wanting to hold the first meetings since before the summer holidays. It’s an evocative season anyway. With them mental imprint so many years as a student behind me, nervously buying crisp new notebooks and sharpening pencils, not to mention the autumnal weather here in London, no wonder I’ve been feeling rather reflective. And of course the 10th anniversary of the New York terror attacks makes this a poignant anniversary year as well.

Much has been published on the lasting effects of 9/11, and on the Middle East more widely, to coincide with the anniversary. Jason Burke’s [amazon_link id=”1846142741″ target=”_blank” ]The 9/11 Wars[/amazon_link] has been particularly well reviewed. There have also been favourable reviews of Johnny West’s [amazon_link id=”0857389947″ target=”_blank” ]Karama! Journeys Through the Arab Spring[/amazon_link] (not to mention an excellent BBC programme on this subject by Mishal Husain). There were round-ups last weekend (eg in The Guardian) and no doubt more to come this weekend. Much more tangentially, I just happened to be reading a recent book of essays by Alberto Manguel, [amazon_link id=”0300172087″ target=”_blank” ]A Reader on Reading[/amazon_link]. One of the essays, The Perseverance of Truth, is about the ultimate inability of terror to silence truth.

The essay – which takes as its staring point the 2007 murder by an extremist nationalist of Turkish-Armenian journalist Hrant Dink in Istanbul – discusses the ‘perseverance of memory’, a psychological phenomenon whereby the force of hearing certain information is so strong that we continue to believe it even when confronted with evidence that it is untrue. It sounds like the concept of ‘false consciousness’, a collective phenomenon. The psychology of terrorists must involve some similar inability to see the world from a different perspective. Conrad’s [amazon_link id=”019953635X” target=”_blank” ]The Secret Agent [/amazon_link] surely remains the best exploration of the way an individual becomes trapped in a particular, deformed world-view.

However, Manguel argues that every person has a responsibility to truth:

“Every decision we make, every opinion we give as private citizens, has political consequences. Politics is, by definition, a political activity in which a few occupy the seats of power and the rest of us the remaining myriad roles. No citizen is dispensable, no voice useless, in the continuing struggle to render our societies less false in their pretences and more true to themselves.”

So he concludes that what he calls the ‘perseverance of truth’ is equally powerful. Although at great cost – often death – to some individuals, Manguel writes: “Even though the seeker of truth may be silenced, his sincerity (from the Latin sincerus meaning ‘clean’ or ‘pure’) will eventually do away with the lie.”

The more troubled the times – whether the geopolitics or the economic situation – the greater the onus on each of us to reflect on the true state of the world. And this is certainly the week for doing it.

[amazon_image id=”0300172087″ link=”true” target=”_blank” size=”medium” ]A Reader on Reading[/amazon_image]

A Guest Review of Dani Rodrik’s [amazon_link id=”0199603332″ target=”_blank” ]The Globalisation Paradox: why global markets, states and democracy can’t coexist[/amazon_link]

By Nooman Haque

There is, wrote David Glasner of the FTC recently, ”No other proposition in economics that students hate or find harder to reconcile with their notions of common sense”.  Paul Krugman remarked that it’s the closest thing the profession has to a sacred tenet and affirming it would be part of an Economist’s Creed. Others liken adherence to it as a Masonic rite, to be betrayed on pain of death. It is the profession’s sole technical achievement to unite economists of all political hues.

The proposition is, of course, the theory of Comparative Advantage; economics’ most elegant model whose engagingly simple mathematics blend seamlessly to a moral argument for freedom, free trade and globalisation. If the theory were a sport, journalists would call it “Total Economics” and ruminate wistfully about how they don’t have Theories like that any more. It IS the jewel in the crown so it’s no surprise that economists unite against the Barbarian horde to protect this citadel of their profession. And no surprise that even the most minimal departures in public invite accusations of heresy.

Dani Rodrik of Harvard University plays the part of Luther, questioning whether the reality of free trade can really be as beautiful as the creed would have us believe. In his latest book he champions a “second-best” approach to globalisation to present an argument for a feasible free trade model that allows efficiency gains without the subordinating national politics. Given the stakes, he also challenges his colleagues to come clean about the complexity of the theory. It is an important book, made more relevant in the light of continuing high unemployment in the US and the ongoing debate about offshoring jobs.

The theory of comparative advantage imparts a Zen-like profundity to those that (finally) get it, yet even seasoned professionals call fall prey to its apparent impossibility. It is worth stating the simple proposition here:

Even if a country is less productive than other countries in producing every single product that it produces, it would still have a lower cost of production in at least one of those products, and could profitably export that product in sufficient amounts to pay for its imports of other products

Did you find “stubborn popular prejudices”, as Krugman called them, taking over? You are not alone. But we know Comparative Advantage to be impeccably logical, so any persuasive argument to NOT have free trade seems impossible, yet Rodrik draws on history and empirical work to dissect previous eras of apparent “free-trade” showing how protectionism was rife; efficiency gains occurred and trade was the servant of national politics. Moreover he asserts that a “hyperglobalisation” as preferred by some, is flawed because the institutions that make the case for free trade within national borders logical, simply don’t exist at a global level. The point being that such hyperglobalisation is likely to fall into this governance gap creating a trilemma:  we must choose between two of national democratic politics, hyperglobalisation or nation states.

Rodrik makes his own position clear: global governance is myth, and models like the Eurozone expose the problems of achieving such integration when countries share a common heritage. So if we still want hyperglobalisation and nation states to exist, then we have to subordinate national politics in the pursuit of the global interest. The Gold Standard era is consistent with such a position but Rodrik argues that its demise showed again how national priorities will trump attempts at global governance.  The solution, he argues, is a Bretton Woods compromise, that preserves local democracies and nation states, whilst leaving plenty of room for non-absolute form of trade.

The design of Bretton Woods and GATT in fact, clearly illustrates his point. Bretton Woods bought much needed international stability and cooperation yet gave countries breathing room and encouraged trade as economies grew in response to their specific local environment. Yet even Bretton Woods collapsed when US national interests took precedence over international objectives. Similarly GATT at the outset never had the objective of forcing free trade, but gave countries local policy space to develop their own versions of capitalism; hyperglobalisation took a back seat. As GATT gave way to the WTO, and especially the elimination of capital controls, hot money flows created havoc, the ultimate result of which was to force the medicine of the Washington Consensus onto countries, subordinating local policies and preferences. Rodrik further argues that other WTO initiatives such as global intellectual property agreements also suffer from a one size fits all approach, and in particular protect developed nations at the expense of others.

Students familiar with Ricardo’s formulation, or Martyn’s analogy of trade being akin to technological progress will question whether trade liberalization is really to blame and if it is, then whether textbook policies such as compensation and non-restrictive measures might be better than protectionism. Rodrik also champions the traditional model also but shows how it is incomplete. Bringing a magnifying glass to the fine print, he explains how there is nothing in the theory that guarantees that, in the long-run, the necessary redistribution that is the hand-maiden of free trade will leave us all better off; some calculations suggest that for an extra dollar of efficiency gain from trade, there are $51 of redistribution. And as Rodrik explains, this is partly because we have almost free trade now and quite possible we’re into diminishing marginal returns (in the analogy with technology, that part is often missed out). Pushing further for ever more miniscule gains risks political and economic disruption that could portend, ironically, greater protectionism. Everywhere we turn, the trilemma rears its head.

And the case for some protectionism is apparently supported by the historical experiences of Taiwan, South Korea, India, Japan under the Meiji, as well as China. In these instances, an active government policy to develop a capability base sowed the seeds of future success. In the absence of these policies, Rodrik argues, their experiences may have been more like commodity exporters, focused on their comparative advantage but exposed to price swings and lacking an incentive to diversify the economy beyond commodities.

And this is Rodrik’s key point, that globalization, if it is like a technology, must surely leverage capabilities across national borders. The seductive charm of arguing that Portugal’s climate requires it to grow grapes doesn’t speak to the nuance that making wine and port requires a level of technical and management ability that the comparative advantage of ‘climate’ on its own won’t deliver.

Many will be irked by Rodrik’s views as they imply benign, forward-thinking technocrats not just in pursuit of the public interest, but capable of implementing it. Japan, China and Taiwan may have achieved stellar success, but their interventionist approach certainly didn’t guarantee it. Indeed China’s pathway to economic liberalism seems to have been dependent on a state-led catastrophe of earlier years. And that is a paradox not addressed adequately here: poor countries are poor not, primarily because they are forced to open their borders and compete with developed nations, but because they have poor institutions and feckless Governments. Rodrik would prefer to keep borders partly closed so the country can learn and develop capabilities that can be traded. But the sucker punch is that this requires a Government interested in this objective in the first place. Countries heavily reliant on commodity exports for example tend to be autocratic where revenues are seized by despots. It is hard to conclude that allowing these nations greater domestic policy space will advance development more than a more open trade policy.

But to unpick Rodrik’s argument with an extreme example would also be a demonstration of faith over reality. The point at which we become wedded to globalization because it IS a Creed, not a theory.

Ultimately the greater paradox is why the beauty of the market system and trade shouldn’t apply to capitalism itself? To argue otherwise is to argue that we know precisely what works in each and every situation. Therefore implementing forms of capitalism that respond to local cultures and traditions, whilst encouraging further integration in an evolutionary manner, is superior to, as Rodrik puts it, opening the window without a mosquito screen in place.

Perhaps then we need to stop and ask if, for example, modest infant industry protection really is a slippery slope to Smoot-Hawley. Perhaps we need to read the small print on the theory and ask if the necessary pre-conditions are in place. And perhaps measures like tariffs should be seen as the last transaction cost to be overcome, after countries have solved issues of intra-national labour mobility and institutional development that can at least give them the platform to compete globally when tariffs are reduced. But we also need to ask if the Governments we are protecting are in a position to do the right thing and to what extent we will countenance abject national policy failures that leave millions destitute and subjugated, or, in developed countries, play to the hands of powerful interests.

Rodrik presents a nuanced argument for globalisation in a political framework that lays bare the stark choices we must make. As a serious trade theorist sympathetic to globalisation in general, but also a pragmatist driven by evidence, his view deserves to be taken seriously.

[amazon_image id=”0199603332″ link=”true” target=”_blank” size=”medium” ]The Globalization Paradox: Why Global Markets, States, and Democracy Can’t Coexist[/amazon_image]