Monthly Archives: November 2012

The other squeezed middle

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It’s been a busy week of dawn to dusk meetings, but I did manage to finish Jack Rakove’s [amazon_link id=”0099551861″ target=”_blank” ]Revolutionaries: Inventing An American Nation[/amazon_link] on election night (before going to sleep, secure in my eldest son’s confidence in Nate Silver). For a British reader like me, this bit of history is unfamiliar – I can’t imagine why, but it tends to be glossed over in the curriculum in our schools. However, even for American readers, the approach is probably quite fresh – not strictly chronological but thematic essays, each of which uses some key characters as the narrative driver. And for anybody, of course, it’s interesting to consider the dysfunctionality of modern American politics in the light of this foundational period.

Consider, for example, this passage:

“To be a political moderate during this final crisis [1776] meant something more than holding a middle ground between radicals like the Adamses and future turncoats like Joseph Galloway [who he?]. Moderation did not mean keeping an open mind about rival claims or seeking to balance clashing points of view. Nor were moderates the 18th century version of undecided voters, unsure of their own views or trimming their sails to any passing political breeze. Moderation is better considered as a political position in its own right …. the moderate political leaders … did possess a distinct set of attitudes.”

Surely this is just as true of today’s ‘disenfranchised’ middle? Of course, the 18th century moderates got squeezed out by events that fed extreme views. That’s the trouble with turbulent times.

I was also very struck by the sections on George Washington and the advantage he gained from thinking strategically – that is, more than one move ahead – especially when pitted against wishful thinking on the other side. As noted in my recent post, (Strategic) thinking is hard to do, this is a vanishingly rare skill, so obviously something that our human nature doesn’t equip us for. In contrast to wishful thinking – for a prize example of which, see Jon Stewart on the Fox News coverage on Tuesday night.

[amazon_image id=”0099551861″ link=”true” target=”_blank” size=”medium” ]Revolutionaries: Inventing an American Nation[/amazon_image]

Random penguins and platforms

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In an interesting article about the Random Penguin publishing merger, John Naughton describes the dynamic of gigantism in publishing that paved the way for the clash of the Titans between publishers and Amazon. High street book retailers consolidated, causing publishers in turn to develop mass market blockbusters, which prompted agents to seek mega-advances for star writers, such that the publishers and retailers had to sweat those expensive assets….

As Naughton writes: “Thus publishing turned into an industry that was inordinately reliant on blockbuster products to deliver the results that Wall Street demanded. The result was a market characterised by what statisticians call a power law distribution – ie one in which a relatively small number of products sell in enormous volume while a “long tail” of other products sell in relatively modest quantities. The physical world of high street shops can’t handle a long tail for the simple reason that shelf-space costs money. Every book has to earn its rent. But internet outfits such as Amazon don’t have any problem handling the long tail; in fact, the company probably makes more from selling non-bestsellers than it does from blockbusters.”

He cites [amazon_link id=”0745661068″ target=”_blank” ]Merchants of Culture[/amazon_link] by John Thompson as a good sociological description of how publishing and bookselling have changed.

[amazon_image id=”0745661068″ link=”true” target=”_blank” size=”medium” ]Merchants of Culture[/amazon_image]

As I noted in a previous post about the publishing merger, though, Amazon is also interesting as a platform for smaller publishers, who would never be able to get shelf space in a high street store. I’m no fan of the Kindle, including because – as John Naughton and others have pointed out – you’re only renting the book. No doubt other already big publishers will also start to discuss mergers, so it will be intriguing to see whether Amazon does become a genuine platform for small publishers. Platforms are inherently few in number, so the acid test will be the terms on which it continues to deal with them will be the acid test, and one the competition authorities will no doubt be thinking about.

Books I want to read

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Yesterday I was unwell and made good progress on [amazon_link id=”0099551861″ target=”_blank” ]Revolutionaries: Inventing An American Nation[/amazon_link] by Jack Rakove. Naturally, I’ll be trying to finish it on Tuesday

[amazon_image id=”0099551861″ link=”true” target=”_blank” size=”medium” ]Revolutionaries: Inventing an American Nation[/amazon_image]

Meanwhile, the list of other books I want to read is growing. Here are some new additions.

There’s [amazon_link id=”1743311435″ target=”_blank” ]Double Entry: How the Merchants of Venice Created Modern Finance[/amazon_link] by Jane Gleeson-White, which featured recently on NPR’s Planet Money episode, The Accountant Who Changed The World.

[amazon_image id=”1743311435″ link=”true” target=”_blank” size=”medium” ]Double Entry[/amazon_image]

Dieter Helm’s [amazon_link id=”0300186592″ target=”_blank” ]The Carbon Crunch: How We’re Getting Climate Change Wrong and How To Fix It[/amazon_link].

[amazon_image id=”0300186592″ link=”true” target=”_blank” size=”medium” ]The Carbon Crunch: How We’re Getting Climate Change Wrong – and How to Fix it[/amazon_image]

[amazon_link id=”184954400X” target=”_blank” ]Greekonomics: The Euro Crisis and Why Politicians Don’t Get It[/amazon_link] by Vicky Pryce – one of the speakers at the Festival of Economics in Bristol on 23-24 November – a few tickets left!

[amazon_image id=”184954400X” link=”true” target=”_blank” size=”medium” ]Greekonomics: The Euro crisis and why politicians don’t get it[/amazon_image]

A footnote, though, for publishers. Please can you stop these awful patronising book subtitles? I’ve done them myself, mea culpa, but I’m fed up with them now.

Monetary wisdom

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A 1695 book has been strongly recommended to me, [amazon_link id=”1402168403″ target=”_blank” ]A report containing an essay for the amendment of the silver coins[/amazon_link], by William Lowndes. There are free e-versions of the text available at Open Library. Lowndes proposed a solution to the critical shortage of coins at the time, but the Government instead followed advice from John Locke (on the basis that he had saved the life of the King’s uncle by operating successfully on an intestinal infection – an interesting reason for taking economic advice). This is the crisis covered by Thomas Levenson’s excellent book [amazon_link id=”057122993X” target=”_blank” ]Newton and the Counterfeiter[/amazon_link]. Isaac Newton took charge of the Royal Mint from 1699 to his death in 1727, and finally sorted out the coinage crisis.

[amazon_image id=”1402168403″ link=”true” target=”_blank” size=”medium” ]A Report Containing an Essay for the Amendment of the Silver Coins[/amazon_image]

It looks delightful: “In the most ancient times, when money was first coined within this island, it was made of Pure Gold and Silver, like the Moneys now currant in some other Nations, particuarly in Hungary and Barbary where they have Pieces of Gold called Ducats and Sultanelles; and in the Kingdom of Industan, where they have pieces of Silver called Rupees, which I have seen.”

Why a top monetary economist is wrong

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Yesterday I had lunch with an old friend who is a top monetary economist. We were discussing a conference on the state of macroeconomics that I attended recently. The conference seemed to me to reveal quite a deep division between those macroeconomists who thought their pre-crisis New Keynesian DSGE models were basically fine, although obviously in need of having a financial sector added to them, and other economists taking a wide range of approaches but pretty sure the pre-crisis mainstream approach is defunct. I’m in the latter category, with the caveat that it’s nearly 25 years since I’ve done any proper macroeconomics.

Alas, my dear friend is in the amended status quo camp. He said the tools a monetary economist needs can be found in the Michael Woodford tome [amazon_link id=”0691010498″ target=”_blank” ]Interest and Prices: Foundations of a Theory of Monetary Policy[/amazon_link]. His argument went like this. Any macro model makes simplifying assumptions. We macroeconomists could have assumed that prices and wages are perfectly flexible, which would make the models easier, but we didn’t. That was a correct call. We did make the simplifying assumption that the financial sector was a veil and we could ignore the incentives on bankers’ behaviour, and that was a misjudgment. But economists understand incentives, it’s straightforward to fix, and we’re putting the financial sector into the models now.

[amazon_image id=”0691010498″ link=”true” target=”_blank” size=”medium” ]Interest and Prices: Foundations of a Theory of Monetary Policy[/amazon_image]

This argument is on the face of it perfectly reasonable, but it reminds me of a conversation I had with another tleading economist in the mid-1990s, when I was working as a journalist reporting on technology and becoming enthused about the likely implications of the internet and World Wide Web for the economy. This economist argued that all the internet did was reduce transactions costs, and economists understand how to model transactions costs, so the new technologies would turn out not to be very interesting analytically. This was also true in a small way, and false in a much bigger way.

The moral is that the judgments reflected in simplifying assumptions are not a small technical matter. Transactions costs are not a side-show in economic analysis, they are the main attraction, driving the fundamental structures and institutions of the economy. So it is with the assumptions behind conventional macro models, which encapsulate a world-view about the nature of economic and political institutions  – the failure of pre-crisis DSGE models is not a question of small and easily corrected misjudgements but rather missing the main point.