It would take an economist with the credentials of Erik Brynjolfsson, and his co-author Andrew McAfee, to get me to read another e-book (on the Kindle App for my iPad, a little better than having to read on an actual Kindle). I’m glad I did grit my teeth and download their new book [amazon_link id=”B005WTR4ZI” target=”_blank” ]Race Against the Machine[/amazon_link], which is a stimulating read.

Each recession, and the early stage of the subsequent recovery, seems to bring an understandable wave of concern about jobs. In 1992 the ‘jobless recovery’ led many to talk of ‘[amazon_link id=”0812928504″ target=”_blank” ]The Downsizing of America[/amazon_link]’. However, this new book is more than a predictable cyclical lament. Its concern is the effect of information and communication technologies, a General Purpose Technology in the jargon, on the long-term trend in employment and income distribution, and hence ultimately on political stability and economic growth.

Their hypothesis is the opposite of Tyler Cowen’s in his e-book [amazon_link id=”0525952713″ target=”_blank” ]The Great Stagnation[/amazon_link]. Cowen argued that the days of rapid productivity growth driven by technology are over. Brynjolfsson and McAfee believe it is accelerating. We are in the steep upward part of the exponential curve of Moore’s law, they say, so the speed with which computers can do new tasks is jaw-dropping. One example is the driverless car, only a few years ago (in 2004) consigned to the distant future but last year already successfully piloted (forgive the pun) by Google.

“We don’t believe in the coming obsolescence of all human workers. In fact some human skills are more valuable than ever, even in an age of incredibly powerful and capable digital technologies. But other skills have become worthless, and people who hold the wrong ones now find that they have little to offer employers. They’re losing the race against the machine.” (Location 157)

One section explains why we should remain upbeat about productivity. Much digital output – such as Facebook or YouTube – is invisible to official productivity statistics because it is free. Quality and variety, customer service and timeliness, are hard-to-measure aspects of output and so understated. Nevertheless, US productivity growth in the decade to 2009 was the highest of any decade since the 1960s.

However, there has been no uplift – notoriously – in median incomes. Those with higher skills who can work with computers, those in ‘superstar’ or winner-take-all industries, and the owners of capital seeing a return on all that investment in computers, have done very well, however. The book sets out the depressing detail of how badly middle America has fared (the statistics in the book are all for the US).

All is not gloom, though. The authors point out though that many “low skill” jobs such as plumbing and nursing are so difficult that computers are not in sight of fulfilling them. Climbing stairs, empathy, jokes – there are plenty of things computers still can’t do. Yet the jobs market is being hollowed out along the (cognitive) skill scale, with those at either end doing far better than those in the middle whose skills have turned out to be easier to routinize for computers to take over.

The authors argue that the best, highest productivity, outcomes will depend on people and machines working in harmony – they cite an interesting example of a freestyle chess tournament where the teams who did best combined computers, good processes or rules, and humans – better than a computer alone, and better than a strong human player with a weaker machine process (Location 794). The book ends with a list of practical policy suggestions, including investing in education, patent reform, and a number of others that seem perfectly sensible albeit not obviously related to the technology arguments.

Missing for me was some further reflection on how the US and other western economies can undertake the redistribution of benefits that occurs when some sectors of the economy become rapidly much more productive than others. When this occurred in agriculture and then basic manufacturing, the majority benefited from greatly reduced prices for food and goods such as washing machines and cars. Education equipped many more workers for higher skill jobs. Institutions such as unions and labour laws, progressive taxation and public spending programmes ensured that most people saw rising living standards even if they were working in the relatively less productive service sectors.

The absence of such institutions now accounts for the rise in inequality. Brynjolfsson and McAfee highlight the need for institutions to catch up to the speed of technological innovation but I wish they had said more about this, especially given the richness of their other work on the organizational changes brought about by the introduction of ICTs. Still, it’s always good to end a book wishing for more rather than less, and I commend this short, pithy contribution to the debate about jobs and fairness.

[amazon_image id=”B005WTR4ZI” link=”true” target=”_blank” size=”medium” ]Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy[/amazon_image]

A nice essay by Roger Backhouse and Bradley Bateman in today’s New York Times (Wanted: Worldly Philosophers) has prompted a last thought on Lionel Robbins, having now finished his[amazon_link id=”0814773893″ target=”_blank” ] Essay on the Nature and Significance of Economic Science[/amazon_link]. Backhouse and Bateman (who have a new book out, [amazon_link id=”0674057759″ target=”_blank” ]Capitalist Revolutionary: John Maynard Keynes[/amazon_link]) criticise economists for failing to think enough about the economic system as a whole. This is why economists are unable to engage with the ‘Occupy’ protestors, they suggest – unfairly, as there are lots of economists engaging in that debate, online and outside St Paul’s Cathedral & elsewhere. But we’ll allow the exaggeration for the sake of polemic.

In the days of communism (the good old days?), they argue, understanding comparative economic systems was taught in universities. But now the subject has become disastrously unhistorical, its new graduates unschooled in thinking about the big picture. It is obviously true that economic history has dropped out of the university curriculum, and that this has been an adverse development. One element of the curriculum reform needed now is to restore it. However, this point should not be confused with the separate argument that economics needs to become more ‘heterodox’. For some years now, even before the crisis, there has been a heterodox movement (it used to be called ‘post-autistic’) railing against economic orthodoxy. I always thought these critics underestimated the willingness of mainstream economists to change their methodology – it was one of the reasons I wrote [amazon_link id=”0691143161″ target=”_blank” ]The Soulful Science[/amazon_link]. The orthodox mainstream certainly settles on a mental model – that’s why it’s a mainstream – but that changes with events. Mainstream economists have been hugely interested in behavioural psychology, as noted in this recent post.

So it was cheering in a way to find Robbins making the same point in his 1935 essay:

“The procedure of ‘orthodoxy’ has always been essentially catholic. The attacks, the attempts to exclude, have always come from the other side.” (Chapter 5 Section 4)

Economic analysis, he goes on to say, is intrinsically dependent on empirical evidence which changes all the time as the course of history rolls on. Economic generalisations are bound to be contingent. No doubt the critics will say it’s about time, but the mainstream always has changed and is changing now.

[amazon_image id=”0674057759″ link=”true” target=”_blank” size=”medium” ]Capitalist Revolutionary: John Maynard Keynes[/amazon_image]

The books that made it to the FT Business Book of the Year Shortlist were all worthy candidates, and the winner, [amazon_link id=”1586487981″ target=”_blank” ]Poor Economics[/amazon_link] by Abhijit Banerjee and Esther Duflo, is a superb read. I reviewed it here when it first came out.

There have been loads of terrific books on development recently. Also worthwhile are [amazon_link id=”052595189X” target=”_blank” ]More Than Good Intentions[/amazon_link], [amazon_link id=”0465020151″ target=”_blank” ]Getting Better[/amazon_link], [amazon_link id=”0199603332″ target=”_blank” ]The Globalization Paradox[/amazon_link], and that’s just the most recent. A healthy combination of scientific progress in the subject and the engagement of the best economists in this field with public policy.

[amazon_image id=”1586487981″ link=”true” target=”_blank” size=”medium” ]Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty[/amazon_image]

Herbert Simon, prescient in this as in so many things, was one of the first people to highlight the attention scarcity problem:

“…in an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious: it consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.”

From Designing Organizations for an Information-Rich World, in Martin Greenberger, [amazon_link id=”080181135X” target=”_blank” ]Computers, Communication, and the Public Interest [/amazon_link](1971 pp. 40–41).

The attention problem seems all the more acute post-financial crisis – why, when so many warning signals were available, and so much information about financial markets, did so few people foresee the crash? Not surprisingly, all thoughtful economists are now re-evaluating the standard assumptions about how people make economic decisions, in the light of what we can learn from psychologists and cognitive scientists. (This includes me, despite my blast in the previous post against the fashionable adoption of behavioural economics by anti-economists.)

The lessons look set to be fascinating, as this summary (pdf) of a recent workshop held at the Toulouse School of Economics shows. It’s well worth a look if you’re interested in this overlap between cognitive science and economics.

The researchers described the phenomenon of ‘inattentional blindness’, whereby people looking at a scene fail to see the obvious (the best-known example is the ‘invisible gorilla’ referenced in the title, and in a recent book called [amazon_link id=”000731731X” target=”_blank” ]The Invisible Gorilla[/amazon_link] by Chris Chabris and Dan Simons). ‘Seeing’ is not a matter of looking at an internal representation of the outside world, but rather depends on an active cognitive process of paying attention to certain things. The structure of the brain, whereby neurons at different levels compete with each other to move up to higher levels of the brain, determines what we pay attention to.

The Invisible Gorilla (courtesy of Chris Chabris)

I’m still reading Lionel Robbins’ classic [amazon_link id=”B0006DEH7I” target=”_blank” ]An Essay on the Nature and Significance of Economic Science[/amazon_link]. His definition of economics remains widely used: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” (Chapter 1, Section 3)

Later in the book, he asks whether the resulting focus on relative valuations depends on particular psychological assumptions. The answer is a firm ‘no’:

“The borderlands of Economics are the happy hunting ground of minds averse to the effort of exact thought, and in these ambiguous regions, in recent years, endless time has been devoted to attacks on the alleged psychological assumptions of Economic Science. … Economics needs ‘rewriting from the foundations up’. As might be expected, the opportunity has not been neglected.” (Chapter 4, section 4)

This of course brought the present interest in behavioural economics to mind. There’s no shortage of people now claiming that economics needs rewriting utterly. Now, I’m as interested as the next economist in Daniel Kahneman’s new book, [amazon_link id=”1846140552″ target=”_blank” ]Thinking, Fast and Slow[/amazon_link]. Recently, I attended a fascinating workshop at the Toulouse School of Economics which brought together psychologists/cognitive scientists and economists precisely because the economic crisis has underlined the need for us to evaluate the compatibility of the assumptions we make in economics with the ever-growing knowledge of how the brain works (a summary of this workshop will be published soon & I’ll link to it then). Any economist who works, as I did for 8 years, on competition inquiries will know that the rules of thumb emerging from behavioural economics do reflect behaviour in some markets better than the standard rational choice models.

However, the Robbins challenge is a good one. There are some big issues about behavioural economics and the psychological experiments on which it is based, and these shouldn’t be overlooked in the current enthusiasm. One is that sometimes behavioural models are empirically more robust, but sometimes absolutely orthodox models do better with the data – why, and when? A related point is that the behavioural rules of thumb are no less arbitrary that the conventional assumptions about aspects of psychology, an argument made forcefully by Roman Frydman and Michael Goldberg in their recent book, [amazon_link id=”0691145776″ target=”_blank” ]Beyond Mechanical Markets[/amazon_link].

Equally, some of the phenomena described in every book on behavioural economics may not be as empirically robust as supposed, as so many reflect relatively small scale experiments among groups of US college students. For example, the results of the famous ultimatum game seem to vary from culture to culture, albeit in none does homo economicus reign.

So Robbins is too sweeping in his denunciation of fashionable psychology – indeed, he sets out some psychological assumptions in the book without appearing to be aware that they are assumptions that could potentially be disproved. But those quotable lines are a useful reminder not to get to carried away by fashion.

[amazon_image id=”1846140552″ link=”true” target=”_blank” size=”medium” ]Thinking, Fast and Slow[/amazon_image]

[amazon_image id=”0691145776″ link=”true” target=”_blank” size=”medium” ]Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State[/amazon_image]