Review of [amazon_link id=”B007GE9KPO” target=”_blank” ]In Gold We Trust—The future of money in an age of uncertainty[/amazon_link]
By Dave Birch

Just as I put down this enjoyable read by Matthew Bishop, American Business Editor of The Economist, and the economist Michael Green, I saw that the Indian government has doubled the import duty on gold (to 4%) having already doubled it at the beginning of the year. Why? Because massive gold imports have led to widening current account deficits as money flows out of the country to pay for them. It seems that gold’s ability to bend the trajectory of money remains, pun intended, unalloyed.

The authors say at one point that money is “a technology invented by humans to help us to get things done.” Absolutely. It’s a technology: the Bank of England and £20 notes are not laws of nature! This is why it is so important to develop the debate around the future of money. We are about to undergo a seismic shift in the nature of money, possibly triggered by a near-future euroquake. Money’s foundations will crumble, its walls will fall. And then it will be time to rebuild for the post-industrial economy just as it was for the industrial economy. Then we saw the invention of the central bank, paper money, industrial coinage and the gold standard. What will we see a generation from now?

The current version of the technology (Money 4.0, by my reckoning) is fiat national currency. It’s showing signs of failure and is surely due a refresh soon. Which means that, while it’s reasonable to observe that new technologies do take some time to percolate through society, a generation now money will look as different to us as the money of 1717 did to the people of 1687. I couldn’t agree with Bishop and Green more that money is subject to the same “rules” of innovation as any other technology (including our welcome friend, the law of unintended consequences) and this makes it very hard for them to make specific predictions, but it doesn’t stop them from asking important questions. Will new forms of money be invented? If they are, will they be better than gold or “traditional” fiat currency? And what does “better” mean in this context anyway?

One thing that “better” might mean is “more reliable store of value” and therefore “efficient mechanism for deferred payment”. In which case, as the authors show, gold isn’t quite the technology that the “gold bugs” proclaim. In their brisk and informative history of the gold standard from Newton to Nixon they make it clear that the history of this particular mechanism for managing international monetary affairs is not one of undeviating stability and prosperity. So better doesn’t mean gold. Perhaps an alternative technology might be acquired through innovation.

The focus of Silicon Valley-style innovation to date has been on the mechanisms for storing and transport fiat currency (apart from some early experiments with Beenz and Flooz and the like) but perhaps the focus is now shifting. A great many potential moneyers will have read Facebook’s S1 declaration with interest, noting that they saw more than half a billion dollars revenue from Facebook Credits last year. Google may well have shelved “Google Bucks” for the time being, but they and others will be back, because just as English thinkers wanted a currency capable of supporting the nascent English industrial revolution so Mark Zuckerberg, Sergei Brin and other internet revolutionaries want currency capable of supporting the next wave of commerce, trade and prosperity, money founded not on central control and paper but mobile phones, the internet and competition. (Whether Mark Zuckerberg might be the John Locke or the John Law of post-industrial money it is impossible to say!)

We have the technology to reinvent money, certainly. But if it’s not going to be electronic fiat currency, then what will this new money look like? The authors say that “as we try to understand how to improve money in the 21st century, the ideas of these two rival 20th century intellectual giants are a great place to start on a journey that could end at a range of destinations from a recommendation to buy gold to the use of an algorithm to build an entirely new virtual currency”.

They are, of course, talking about Keynes and Hayek.  Keynes saw no need for a return to the gold standard after the war and he was implacably opposed to Churchill’s insistence on deploying the weapon of mass deflation. The authors seemed to me to agree that whereas his alternative (the synthetic global currency) might make sense on paper and in an ideal world, Hayek’s prescription for competing private currencies might afford a better prognosis in this one. I think I detect a slight tilt toward Hayek – I share the authors’ animal sentiments here – and while in the book the authors only really look at gold and Bitcoin in detail, I support their observation that (as Hayek thought) we might reasonably expect many forms of private currency to develop in the post-fiat world and there is no reason to imagine that only a single alternative will emerge.

Personally, I think that some of the hankering for the single alternative of gold, while well-founded in its suspicion of government management of fiat currency, is tinged with a misplaced nostalgia for a simpler time. The renewed interest in a gold standard is therefore both a reflection on uncertain economic times and the first step on a path of monetary innovation. We might not know where that path will take us, the authors argue, but we do know that it will take us away from the technology of government-controlled fiat currency.

In summary, an enjoyable read with thought-through conclusions that helped me to clarify my thinking on an important topic. The only uninteresting section of the book is the chapter on whether to invest in gold or not, which seemed oddly out of place and doesn’t add to the narrative.

[amazon_image id=”B007GE9KPO” link=”true” target=”_blank” size=”medium” ]In Gold We Trust? The Future of Money in an Age of Uncertainty (Kindle Single)[/amazon_image]

From time to time I relax with detective fiction or a thriller, and yesterday polished off a bit of enjoyable hokum from Raphael Cardetti, [amazon_link id=”0349122555″ target=”_blank” ]Death in the Latin Quarter[/amazon_link] (in French it has the much more sophisticated title[amazon_link id=”2266196308″ target=”_blank” ] Le Paradoxe de Vasalis[/amazon_link]). The author is a Professor of Italian history and Renaissance specialist, and so although the novel is of the Dan Brown ilk (precious mediaeval manuscripts, secret wisdom, thugs with guns and car chases through Paris), it has a whiff of realism about what universities are like. Even better, the protagonists are not very successful as scholars, and poor to boot. What struck a particular chord was that the book at the heart of a mystery is a palimpsest – just after I had written here about palimpsests!

But it also reminded me of my own long-standing ambition to write a thriller. This will revolve around the international merry-go-round of summit meetings, the IMF and World Bank ones, the G7 and G20, and so on, which I used to cover as a reporter. It has the financial crisis to provide the intrigue, the glamorous locations, the nexus of power and money, and of course an intrepid journalist as a heroine. I have a store of incidents. The leading regulator who drowned a cat in Venice, the senior journalist who had a temper meltdown in a Washington hotel lobby, the press officer who let slip to a taxi driver the results of a secret investigation – you know who you are, and you will all one day find yourself immortalised (anonymously, naturally) in my blockbuster novel, Summit!

[amazon_image id=”0349122555″ link=”true” target=”_blank” size=”medium” ]Death in the Latin Quarter[/amazon_image]

[amazon_image id=”2266196308″ link=”true” target=”_blank” size=”medium” ]Le paradoxe de Vasalis[/amazon_image]

To anybody other than an experienced and expensively-trained macroeconomist, it is pretty obvious that conventional modern macroeconomics has been torpedoed by the financial crisis and its aftermath. If we needed any reminder about the limitations of the dynamic stochastic general equilibrium model of the economy built by aggregating the behaviour of individually rational individuals, this rapidly-going-viral public resignation letter by former Goldman Sachs executive Greg Smith underlines the role of institutions, culture, morals, and all those intrinsically human characteristics.

However, one of the challenges in dethroning standard macro – because events are never enough, ideas have to follow suit – is the absence of any obvious alternative. Although it might take a while to develop the workhorse models and teaching tools, one candidate will definitely be complexity theory and network economics. I’ve just read [amazon_link id=”0415594243″ target=”_blank” ]Complex Economics: Individual and Collective Rationality[/amazon_link] by Alan Kirman, which is a moderately technical but clear explanation of how complexity/network models can be applied to economics.

Given as a series of lectures, the chapters cover specifics such as network structures, segregation models, bubbles and herding behaviour, co-ordination problems in public goods, and – my favourite – the way co-ordinated behaviour emerges in the aggregate from all sorts of individual behaviours in the fish market in Marseille. Any applied economist who has looked at actual markets (as I did for 8 years on the Competition Commission) will know that the ‘free market’ model of textbooks is a non-existent abstraction. Markets are institutions which take a variety of forms and include a mix of personal and impersonal relationships. Economists (not just [amazon_link id=”0330508601″ target=”_blank” ]Douglas Adams[/amazon_link]) like fish because they are traded in markets where there is a catch sold every day – no need to worry about inventory decisions, and lots of movement of prices and quantities.

Prof Kirman shows that prices paid for specific types of fish by different people on different days can follow all kinds of patterns, not remotely corresponding to the assumptions on preferences made in an economists’s model which aggregates from individual consumer choice to a market demand curve. Yet even so taking all the data in the aggregate reveals the standard downward-sloping relationship between quantity demanded and price. The chapter concludes that there is no simple link between individual and aggregate behaviour, although simulations that give ‘agents’ simple rules of thumb to follow in their choices do conform to the downward sloping demand curve and the real life pattern of fish market prices.

This is intriguing but it called to mind a number of studies suggesting that other creatures such as pigeons and capuchin monkeys act like rational, self-interested homo economicus in some circumstances. It would be odd to claim that real humans do not act in accordance with rational choice theory but pigeons do. Prof Kirman argues that the experiments teach the pigeons rational choice by their set up. However, I was very struck by listening to cognitive scientists at a conference in Toulouse (pdf) last autumn explain that neurons in the brain act like homo economicus in a constrained optimisation model, competing for energy as they process perceptual inputs and turn them into the things ‘we’ (our conscious mind) notice.

I don’t know how all this will add up to a new microfoundations for macroeconomics, if it ever will.  Complex Economics gives us proof-of-concept for the role this type of model can play in several areas of economics, and  think we can’t be too far away from having tractable models and programmes for applied economists and students. There’s still quite a gap between market models of this kind and a way of thinking about the economy as a whole. Meanwhile, it seems obvious to me that macroeconomists need to be eclectic and combine the complexity approach of this book, the time series macroeconometric approach of [amazon_link id=”0198283164″ target=”_blank” ]David Hendry[/amazon_link] and others, a dash of Keynesian sauce in the short run (with a laser-like focus on jobs), and plenty of history.

[amazon_image id=”0415594243″ link=”true” target=”_blank” size=”medium” ]Complex Economics: Individual and Collective Rationality (The Graz Schumpeter Lectures)[/amazon_image]

[amazon_link id=”0099541726″ target=”_blank” ]Treasure Islands[/amazon_link] – it sounds rather upbeat and enticing, but the subtitle of this bestseller by Nicholas Shaxson sets us right: Tax Havens and the Men Who Stole the World. It was published last year but I’ve just read the paperback. The central message of the book is this:

“The offshore world is not a bunch of independent states exercising their sovereign rights to set laws and tax systems as they see fit. It is a set of networks of power and influence controlled by the world’s major powers, notably Britain and the United States.” (p20)

The book sets out to establish this claim by describing the evolution of tax havens ranging from the Turks and Caicos or Caymans to Jersey, Hong Kong, Switzerland, Liechtenstein, and the US and UK themselves. It links the development of offshore finance such as the Eurobond market with the arms race towards ever-lower corporate tax rates and financial secrecy. There is an impressive amount of detail in the book. Personally, I would have preferred footnotes that did not rely so heavily on secondary sources, other books about this subject, and there is the odd tendentious assertion that strays away from the factual into the political, which weakens the impact. Having said that, I don’t want to quibble with the details.

The reason is that for many years, since I wrote a couple of chapters in Sex, Drugs and Economics (pdf file) about the illicit underground economy, the scale of this activity has appalled me. But so too has the fact that it is never discussed – with a few exceptions such as Misha Glenny’s [amazon_link id=”0099481251″ target=”_blank” ]McMafia: Seriously Organised Crime[/amazon_link]. One missing dimension from Treasure Islands is that it never quite makes the link between the large-scale global economic activity of major criminals (be they Latin American or Afghani drugs firms or the Russian or Italian mafias) and the “offshore” finance industry.

Because the criminal multinationals are operating at such a scale that, even though suitcases stuffed with large-denomination bills still abound (as Dave Birch has repeatedly pointed out, see this for example), they must as a matter of logic be accessing the formal financial system as well. From time to time the authorities force banks to freeze the assets of a particularly dreadful dictator, but most of the time the anti-money laundering rules merely stop unemployed people from opening bank accounts. They do not seem sufficiently powerful to stop funds from multinational criminals and tax evaders and avoiders finding their way into the formal financial system.

‘Offshore’ also helps explain the downward ratchet in corporate taxation (although there are other contributing factors). We are often told that corporate taxes must be kept low because capital is so mobile and will go elsewhere otherwise. The ‘elsewhere’ it will go is offshore – just look at the structure of holding companies in the Virgin Islands, Bahamas and so on set out in the accounts of virtually all major listed companies. That this kind of tax reducing structure has become so much taken for granted was illuminated when Barclays recently expressed just mild surprise that the Treasury was going to prevent its avoidance of £500m in tax.

So although I would take issue with some of the arguments in Treasure Islands, including its portrayal of the Bank of England, I applaud the way it speaks out about these matters. Immoral globalisation is driving out the potential benefits of actual economic globalisation. There is a deeper problem, too. Legitimate governments need to retain their monopoly on violence, in order to provide an ordered society ruled by law, with a high level of trust and economic transactions underpinned by enforcable contracts. They are losing this: power follows money, and it is being enforced by violence that is a challenge to democratic states. I wish more people would talk about this.

[amazon_image id=”0099541726″ link=”true” target=”_blank” size=”medium” ]Treasure Islands: Tax Havens and the Men who Stole the World[/amazon_image]

There are so many tantalising new books out, I thought I’d round up some of the weekend reviews.

Paul Collier gives a glowing review to [amazon_link id=”1846684293″ target=”_blank” ]Why Nations Fail[/amazon_link] by Daron Acemoglu and James Robinson. The blog of the book is terrific.

[amazon_image id=”1846684293″ link=”true” target=”_blank” size=”medium” ]Why Nations Fail: The Origins of Power, Prosperity and Poverty[/amazon_image]

To understand Spain still requires reading about the Civil War. Paul Preston has published what sounds like an utterly harrowing but essential book, [amazon_link id=”0002556340″ target=”_blank” ]The Spanish Holocaust[/amazon_link], reviewed in the Telegraph, FT, The Independent,  Guardian, The Herald.

[amazon_image id=”0002556340″ link=”true” target=”_blank” size=”medium” ]The Spanish Holocaust: Inquisition and Extermination in Twentieth-Century Spain[/amazon_image]

John Lanchester’s [amazon_link id=”0571234607″ target=”_blank” ]Capital[/amazon_link] has been widely reviewed – and they have been mixed, I would say. Novelist Justin Cartwright gave it a more or less positive write-up in the Financial Times. It was reviewed last week in the New Statesman, Spectator, Guardian, Independent, Telegraph.

John Kay reviews David Rothkopf’s [amazon_link id=”0374151288″ target=”_blank” ]Power, Inc[/amazon_link], about the political power exercised by large global corporations. Kay backs the argument against the recent legal interpretation of the concept of corporate personality.

In today’s Observer, Robin McKie reviews three books about the evolution of co-operation: Mark Pagel’s [amazon_link id=”1846140153″ target=”_blank” ]Wired for Culture[/amazon_link] (also covered in The Telegraph and The Guardian); [amazon_link id=”0713998172″ target=”_blank” ]Beyond Human Nature[/amazon_link] by Jesse Prinz; and Richard Sennett’s [amazon_link id=”0713998741″ target=”_blank” ]Together[/amazon_link] (also reviewed in The Telegraph and by David Runciman in The Guardian).

[amazon_image id=”1846140153″ link=”true” target=”_blank” size=”medium” ]Wired for Culture: The Natural History of Human Cooperation[/amazon_image]

I rather like the sound of [amazon_link id=”B0076O2VXM” target=”_blank” ]Turing’s Cathedral [/amazon_link]by George Dyson. It was hard to tell what reviewer Francis Spufford really made of it.

[amazon_image id=”B0076O2VXM” link=”true” target=”_blank” size=”medium” ]Turing’s Cathedral: The Origins of the Digital Universe[/amazon_image]

Not reviews as such but well worth reading in the current New York Review of Books: William Nordhaus rebuts global warming skeptics and Jennifer Homans writes about the writing of the posthumous [amazon_link id=”0434017426″ target=”_blank” ]Thinking the Twentieth Century[/amazon_link] by her late husband Tony Judt.

[amazon_image id=”0434017426″ link=”true” target=”_blank” size=”medium” ]Thinking the Twentieth Century: Intellectuals and Politics in the Twentieth Century[/amazon_image]

Out in paperback now, [amazon_link id=”0852652496″ target=”_blank” ]Mafia State [/amazon_link]by Luke Harding,[amazon_link id=”0349121516″ target=”_blank” ] andAdapt[/amazon_link] by Tim Harford.