Monthly Archives: May 2012

A cure for economic catastrophe and sore feet

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I’m feeling glum because I’ve hurt my foot – this is a bad thing, as I dance, a lot. So I reached for some comfort reading this morning, and picked up an old favourite, [amazon_link id=”069112292X” target=”_blank” ]A Century in Books[/amazon_link], a 2005 celebration of the centenary of Princeton University Press. It picks a book a year to describe in a page or so, illustrating both the intellectual contribution and the range of titles published over the years (I should add, this is my publisher so I may be biased). Just leafing through it makes one feel better educated, even as a dabbler in the great world of scholarship.

[amazon_image id=”069112292X” link=”true” target=”_blank” size=”medium” ]A Century in Books: Princeton University Press 1905-2005[/amazon_image]

Today I turned to the description of 1945’s [amazon_link id=”0140124993″ target=”_blank” ]How To Solve It: A New Aspect of Mathematical Method[/amazon_link] by George Polya. Apparently it shows how to use the mathematical method to tackle non-mathematical problems, and has never been out of print. I like his advice: “In order to solve this differential equation, you look at it until a solution occurs to you.” Sounds like it would indeed be applicable in many contexts.

[amazon_image id=”0691023565″ link=”true” target=”_blank” size=”medium” ]How to Solve It: A New Aspect of Mathematical Method (Princeton Paperbacks, No. 246)[/amazon_image]

Another one that found me was on [amazon_link id=”B0049N1H3S” target=”_blank” ]The Edge of Objectivity: An Essay in the History of Scientific Ideas[/amazon_link] by Charles Coulston Gillespie, a 1960 volume on the history of science. It seems the author argues that science is the ‘progressive development of more objective, detached, mathematical ways of viewing the world.’

I wonder what he would have made of this interesting article on the tyranny of narratives? In discussion on Twitter yesterday, I think we concluded that one could try to stand outside a specific narrative but it would require empathy rather than reason.

Anyway, peering at the economic and political catastrophe out there in the world, I’ll stay inside the tower of books, at least until my foot gets better.

Rays of sunshine in a devastated economic landscape?

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There’s a certain masochistic pleasure to be had in reading critiques of economics, and the latest I picked up is a book published in 2009, Richard Posner’s [amazon_link id=”0674060393″ target=”_blank” ]A Failure of Capitalism[/amazon_link]. He deserves credit for being so clear then that there is an economic depression – I think a majority of people then were still expecting a reasonably prompt recovery rather than a lost decade. At least Posner, unlike many econo-critics, understands that macroeconomics is not the whole of economics. He points out of macroeconomics that: “The very existence of warring schools within a field is a clue that the field is weak, however brilliant its practitioners.” (p265) The macroeconomists I’ve been trying this line on disagree, but it seems incontrovertible to me.

Posner makes two arguments about the depression. First, that’s capitalism for you: “The depression is the result of normal business activity in a laissez faire economic regime.” Secondly, the government couldn’t have fixed it: “Laissez faire capitalism failed us, but government allowed the preconditions of depression to develop and wreak havoc with the economy.” But although he argues that the government over-regulated hedge funds, he doesn’t believe they could have averted the crisis and depression.

[amazon_image id=”0674060393″ link=”true” target=”_blank” size=”medium” ]A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression[/amazon_image]

This is all a bit despairing. Posner’s final line is that problems and uncertainty will hang over the economy for many years to come. I agree that working through the gargantuan debt overhang will be a long and difficult process but – maybe it’s just my natural sunny optimism – find hope in the bits of the economy that don’t fall in to the ‘governments versus markets’ frame. As I often say, the idea of a ‘free’ market is a meaningless abstraction. A market is a process not a thing, and it occurs in a specific institutional setting. There are lots of economic institutions, all kinds of businesses with a range of legal frameworks, social enterprises, mutuals and co-ops, and these will, albeit by necessity, grow over the devastated landscape of the economy. If you want to be cheered, read about this encouraging example of social and institutional innovation in Hebden Bridge and Todmorden. There is a ton of innovation taking place, both the conventional kind and – like this example – the unconventional.

 

Financial crisis management – what would the Queen have said?

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It’s always worth reading the memoirs of a former Chancellor of the Exchequer if you are interested in how policy works outside the textbooks, particularly for the way the political pressures and economic analysis interact. It is usually the economics that loses any contest, of course. Nigel Lawson’s tome, [amazon_link id=”0593022181″ target=”_blank” ]The View From Number 11[/amazon_link], is a terrific read, partly because of the sheer interest of the radical approach the Thatcher government took to economic policy, and partly because the account of his clashes with Mrs T and her adviser Alan Walters is gripping. One of the best lines is:

“I recall telling the Queen, the one person to whom I could unburden myself in complete confidence, during my usual pre-Budget audience with her… that I thought the 1988 Budget would be my last, because the Prime Minister was making the conduct of policy impossible.” (p799)

[amazon_image id=”0593022181″ link=”true” target=”_blank” size=”medium” ]The View from No.11: Memoirs of a Tory Radical[/amazon_image]

When he was Chancellor, Alastair Darling, from afar (I’ve not met him in person), seemed nice, obviously competent, but dull. He had obviously been dealt a rough hand in having to deal with the combination of Gordon Brown as his PM and the onset of the financial crisis. A few chapters in to his memoir, [amazon_link id=”B005JZD3YQ” target=”_blank” ]Back from the Brink[/amazon_link], my respect for him has increased enormously. Despite its rather measured tone, the book has some jaw-dropping material. I quite liked the scene with Fred Goodwin turning up at Mr Darling’s constituency home just before Christmas 2007, bearing a gift-wrapped panettone and a warning about RBS’s need for liquidity.

But most extraordinary (so far) is what happened when Mervyn King told the Treasury Select Committee in 2009 that further fiscal stimulus could not be afforded. Mr Darling, watching it live on TV from his office, was – not surprisingly – furious. Gordon Brown was so apoplectic, however, that he phoned: “He asked me what I was going to do about it and suggested that I should go in and stop him there and then.” One can’t begin to imagine the scene, and the results, mid-financial crisis, had the Chancellor of the Exchequer stormed into a select committee hearing with the Governor of the Bank of England, as it was being televised, to stop proceedings. What would the Queen have said?

[amazon_image id=”B005JZD3YQ” link=”true” target=”_blank” size=”medium” ]Back from the Brink: 1000 Days at Number 11[/amazon_image]

 

Back to the brink

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For various reasons – related to the dog, the weather, and unreasonable demands being made by colleagues – I’m in a grumpy mood today. What a good thing I’m reading Alastair Darling’s [amazon_link id=”B005JZD3YQ” target=”_blank” ]Back From the Brink[/amazon_link], his account of being Gordon Brown’s Chancellor of the Exchequer through the first phase of the financial crisis. Talk about unreasonable demands of the job! It certainly helps restore one’s perspective. The book starts:

“I don’t believe in panicking before it’s absolutely necessary but I came close to considering it on the morning of 7 October 2008.”

I wonder how the various European presidents, premiers and finance ministers are feeling right now? You know, thinking about the brink they are all peering over the edge of this week, I’m feeling a much greater sense of equanimity about my own challenges.

[amazon_image id=”B005JZD3YQ” link=”true” target=”_blank” size=”medium” ]Back from the Brink: 1000 Days at Number 11[/amazon_image]

Made in everywhere

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Building Boeing’s Dreamliner used 16,000 gigabytes-worth of information, equivalent to a library of 16 million books, according to Peter Marsh’s new book [amazon_link id=”0300117779″ target=”_blank” ]The New Industrial Revolution: Consumers, Globalization and the End of Mass Production[/amazon_link]. He quotes one historian’s comment about the original Industrial Revolution: “About 1760, a wave of gadgets swept over England.” A wave of gadgets is now sweeping over the world. The general purpose technology of the microprocessor and the other innovations it has enabled has launched us into another industrial revolution – indeed, the history of capitalism is one damn technological revolution after another.

The book sets out these successive waves, but its interest lies in the mass of examples Marsh gives to illustrate the thesis of a new revolution. He has been covering manufacturing around the world for many years as a Financial Times journalist, and has a more or less unrivalled range of experience. One of his supplementary arguments is that manufacturing is of vital importance for economic growth because it is the route for innovation to enter everyday life. His description of the specifics of how companies actually innovate is very interesting. The organisation of the manufacturing process is one key, and one chapter looks at the Toyota Production System in some detail. Not only did this famously introduce the concepts of just-in-time and constant improvement, it also enabled huge variety by the switching of standard components – Marsh calculates that out of 8.6 million units made by the company in one year, there are 1.7 million variants.

Another element is specialisation in specific gatekeeper technologies. Industrial clustering is as old as industry, and Marshall famously described the role of know-how in explaining clusters. However, many older clusters are explained by the location of resources or by transport. Knowledge clusters are the new norm. Marsh’s example is Poole in Dorset, which turns out – who knew? – to be the world centre for the manufacture of air spindles. These are small electric motors whose shaft rotates on an air bearing rather than a metal bearing. They are essential for making circuit boards. In 2010, two firms in Poole accounted for 80% of the world’s supply. One has a factory in China as well as Dorset, but the other does not, and both have their R&D in their southern English home. We tend to talk down UK manufacturing and, heaven knows, we need more of it; but this story chimes with my own experience of there being many uniquely innovative and productive specialist manufacturers in the UK. Here, as another example, is a encouraging tale about the revival of the Lancashire cotton industry – my parents and aunties and uncles worked in the old version;  Lancashire Cotton 2.0 is a remarkable story.

Between 2006 and 2010 the UK slipped from 5th to 10th in the world league table of manufacturing nations. It wasn’t alone in this slide – China, S Korea, Brazil and India have also pushed France down the rankings with us. But Italy is hanging on with a slightly larger share of world manufacturing output, and apart from the US, Japan and Germany have substantial shares. What lessons do the success stories hold? Marsh highlights scientific and technical education, R&D spending, the accumulation of specialist knowledge – including practical know-how –  in niche areas (a highly effective barrier to entry by new competitors), added-value activities such as design or customer support surrounding the manufacturing, and strategic thinking about supply chains.

The redrawing of the manufacturing map into complex global supply chains is another interesting part of his account. Indeed, one of the main messages I took away was the massive interdependence of the various countries’ manufacturing industries. You can see its visible expression in the marvellous atlas of economic complexity. Marsh does not go on to consider the implications of this interdependence, which – for all the industrial upheaval and job losses –  has been the source of huge gains in productivity and prosperity over the decades. On the other hand, it is also a vulnerability. China needs those two factories in Poole to continue improving living standards there. We need other factories sited outside Bangkok or in Shenzen just as much. There has been less of a move to protectionism than one might have feared in the aftermath of the Great Financial Crisis, but if we do now see a turning away from globalization, the implosion of living standards around the world will be absolutely catastrophic.

The book does not go in for this kind of analysis, however. It is a book of reportage, stuffed with interesting examples that illustrate the history of manufacturing and its present, globalised state. I love the kinds of facts it offers – in 2010, six out of every 10 large crawler excavators of the kind needed for big construction projects went to Chinese customers (they are made by Komatsu of Japan and Caterpillar of the US but these manufacture them in China). There’s more on every page. This book is a great companion to [amazon_link id=”0349123780″ target=”_blank” ]Made in Britain[/amazon_link] by Evan Davis. Wearing global rather than national spectacles, it offers the same policy lessons for the UK or for any country needing to ensure the long term health of manufacturing industry.

[amazon_image id=”0300117779″ link=”true” target=”_blank” size=”medium” ]The New Industrial Revolution: Consumers, Globalization and the End of Mass Production[/amazon_image]