Monthly Archives: January 2013

Naked bankers?

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I started reading the proofs of a book due out in March, [amazon_link id=”0691156840″ target=”_blank” ]The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About It [/amazon_link] by Anat Admati and Martin Hellwig. The title refers of course to the Hans Christian Anderson fairy tale, The Emperor’s New Clothes, in which the emperor is revealed to be naked by a seemingly naive question.

Just a few pages in to the introduction, I can tell I’m going to love it. Sample quotation:

“A major reason for the success of bank lobbying is that banking has a certain mystique. … Many of the claims made by leading bankers and banking experts actually have as much substance as the emperor’s new clothes in Andersen’s fairy story. But most people do not challenge these claims, and the claims have an impact on policy.”

And:

“Politicians seem to be taken in by the lobbying. For all the outrage that expressed about the crisis, they have done little to address the issues involved.”

Not just politicians – I refer to the Financial Times (print edition) headline earlier this week on the weakened liquidity rules accepted by the BIS: “Years of lobbying pay off for banks” (watered down subsequently online to ‘Basel bends on liquidity rules’).

More on the naked bankers when I review the book in due course.

[amazon_image id=”0691156840″ link=”true” target=”_blank” size=”medium” ]The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It[/amazon_image]

What’s the internet? Start here

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It’s more than 16 years since I started writing about the economic and social effects of digital technologies, and some technical knowledge has stuck as well. It was always obvious to me that the internet was going to have – eventually – a revolutionary impact on society. But I do remember discussing my first or second book with a Very Eminent Economist who said that the internet was nothing more than a reduction in transactions costs, and as good economic models already included those, we didn’t need to bother thinking any further about it.

Anyway, despite knowing some things about matters digital, I’ve just devoured John Naughton’s [amazon_link id=”0857384252″ target=”_blank” ]What You Really Need to Know About the Internet: From Gutenberg to Zuckerberg[/amazon_link]. Although it covered some ground that I found familiar, there was plenty of new insight and information too, all written in his characteristically clear style. So for example, if you’re not sure about the difference between the World Wide Web and the Internet (and that’s lots of people, no shame in it), you’ll learn loads from this book.

It gives a terrific overview of a wide range of the business, economic and social trends resulting from the internet and its uses (including the Web). There is both historical context and reflection about future trends. The chapter on the flaws of the copyright regime is excellent, a really useful short introduction to the main issues.

One quibble I would have is that John concludes that economics has little to offer as a perspective on the digital world because it is the science of allocating scarce resources. Apart from the fact that time and attention are the new scarce resources, economics has a lot to offer in thinking about the structure of network markets. (My Very Eminent Economist of the 1990s will have changed his mind by now.) Having said that, I agree with the book’s contention that ecosystem thinking is particularly fruitful.

There were also some lovely details. I enjoyed the quotation from George Miller of ‘The Magical Number Seven Plus or Minus Two’ fame: “My problem is that I have been persecuted by an integer.” And I loved it that the reference to Douglas Adams’ [amazon_link id=”0434003484″ target=”_blank” ]The Hitchhiker’s Guide to the Galaxy[/amazon_link] was footnote 42. What else?

[amazon_image id=”0857384252″ link=”true” target=”_blank” size=”medium” ]From Gutenberg to Zuckerberg: What You Really Need to Know About the Internet[/amazon_image]

The vital role of the informal economy

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I’ve just read Robert Neuwirth’s 2011 book [amazon_link id=”0307279987″ target=”_blank” ]The Stealth of Nations: The Global Rise of the Informal Economy[/amazon_link]. It’s an enjoyable read about the two years the author spent visiting street market vendors and smugglers in Lagos, Guangzhou, Saõ Paolo and Ciudad del Este. His aim is to make us appreciate the entrepreneurialism of the informal economy, which he labels ‘System D’ (rather than use Keith Hart’s original terminology), in order to distinguish it from the informal economy of organised crime with its dealing in illegal drugs, arms and exploited women.

If you like learning about how different markets work (and what true economist doesn’t?), then you’ll find lots to interest you in the book. There were also some terrific facts – for example that the poet Arthur Rimbaud gave up literature to become a trader of this and that in North Africa (p70); or that Nietzsche had written about the role of trust in the economy (p181):

“The fact of credit, of the whole of world trade, of the means of transport – in all of this a tremendous, mild trust in man finds expression.”

However, the strength of detailed reporting is paired with a weakness of analysis. It doesn’t help that Neuwirth has an odd idea about economics and economists. “Economists hate System D,” he claims (p130). He describes the people working in a Lagos street market and writes: “In economic terms, these multiple jobs are wasteful and redundant.” The language introduces value judgements that economists do not typically make, although politicians might.

An economist might point out that System D is low productivity. Or that reducing frictions (such as high import tariffs, or excessive regulations for registering and running a business, for example) would change the cost-benefit calculation for entrepreneurs and bring more of them into the formal economy. Although they (or their customers or workers) would pay more tax, they would have more scope to grow and their employees would have to formal benefits such as protection in employment legislation. But these observations don’t warrant the description given in the book.

I do agree with Neuwirth that the informal economy should be more widely studied and appreciated. The IMF/Schneider figures on the informal economy do indicate that it has been growing in size relative to GDP over time, and the current economic crisis is bound to be accelerating its growth. As the book points out, those people who do argue for stamping out what they would see as unacceptable intellectual property piracy or tax evasion are wrong to assume that the money that goes into the informal market would all be switched to the formal economy. Shoppers who will buy a £20 ‘Louis Vuitton’ handbag are not lost customers for the real £1600 Louis Vuitton version. (Indeed, there are Chinese factories making both the ‘real’ and the ‘fake versions of some items, in different shifts.) Not everybody who will buy a product will buy it with the extra 20% sales tax.

One other point the book makes, that I’d have liked to see developed further, is the capacity of the informal economy to regulate itself collectively. There’s a brief discussion of a dispute-resolution court set up by a market traders’ association in one of the Lagos markets. This example of collective self-regulation in the absence of an effective state is fascinating.

So overall, there are some frustrating aspects of this book, but it’s a lively read about an important and fascinating subject.

[amazon_image id=”0307279987″ link=”true” target=”_blank” size=”medium” ]Stealth of Nations: The Global Rise of the Informal Economy[/amazon_image]

More forthcoming economics books in 2013

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A few days ago I highlighted some forthcoming titles from major university presses. Here are some tempting forthcoming books from other publishers. Again, this is certainly not exhaustive and if any publishers or authors want to notify me of books they have coming out in either half of this year, I’ll gladly do another post on what’s in the offing. The selection also reflects my own interests, of course.

From WW Norton I picked out:

[amazon_link id=”0393081109″ target=”_blank” ]Full Upright and Locked Position: Not-So-Comfortable Truths about Air Travel Today[/amazon_link] By Mark Gerchick. “Sit back, relax and enjoy the flight”, pilots intone but the reality of commercial air travel—a business obsessed with efficiency and the bottom line—has little to do with soaring serenely above the clouds.”
[amazon_image id=”0393081109″ link=”true” target=”_blank” size=”medium” ]Full Upright and Locked Position: Not-So-Comfortable Truths About Air Travel Today[/amazon_image]
[amazon_link id=”0393073777″ target=”_blank” ]The Bonobo and the Atheist: In Search of Humanism Among the Primates[/amazon_link] By Frans de Waal – a new book from the leading primatologist. He has written very thoughtfully before about what lessons primatology holds for how we should understand human decisions.
[amazon_image id=”0393073777″ link=”true” target=”_blank” size=”medium” ]The Bonobo and the Atheist: In Search of Humanism Among the Primates[/amazon_image]
[amazon_link id=”0030818524″ target=”_blank” ]The Second Arab Awakening: Revolution, Democracy, and the Islamist Challenge from Tunis to Damascus[/amazon_link] By Adeed Dawisha – on a subject I certainly know too little about.
Wiley has some promising political economy titles coming out. I read in draft
[amazon_link id=”1444338285″ target=”_blank” ]Banking Across Boundaries: Placing Finance in Capitalism[/amazon_link] By Brett Christophers, which is a fascinating history of the parallel evolution of the banking industry both in geography and in our conception of what matters in the economy. Real food for thought, post-crisis.
[amazon_image id=”1444338285″ link=”true” target=”_blank” size=”medium” ]Banking Across Boundaries: Placing Finance in Capitalism (Antipode Book Series)[/amazon_image]
[amazon_link id=”0745661637″ target=”_blank” ]Africa Emerges: Consummate Challenges, Abundant Opportunities[/amazon_link] by Robert Rotberg looks promising and catches the current mood about Africa.
[amazon_image id=”0745661637″ link=”true” target=”_blank” size=”medium” ]Africa Emerges: Consummate Challenges, Abundant Opportunities[/amazon_image]
[amazon_link id=”0745661696″ target=”_blank” ]Politics in the Age of Austerity[/amazon_link] by Wolfgang Streeck and Armin Schafer – the blurb says:
“With the need to consolidate budgets and to accommodate financial markets, the responsiveness of governments to voters declines. However, democracy depends on choice. Citizens must be able to influence the course of government through elections and if a change in government cannot translate into different policies, democracy is incapacitated.”

From Penguin, a handful that look interesting. I like tales of companies or industries, so this caught my eye. [amazon_link id=”1846145686″ target=”_blank” ]Buttoned up[/amazon_link], Fantastic Man: “Gert Jonkers and Jop van Bennekom are the creators of Fantastic Man, a singular modern men’s style journal. Here they use the history of the button-down shirt to tell the story of contemporary London’s cutting-edge fashion, design and people.”

John Cassidy has a new edition out of [amazon_link id=”0141036516″ target=”_blank” ]How Markets Fail: The Logic of Economic Calamities[/amazon_link].

[amazon_link id=”0670919411″ target=”_blank” ]Start It Up: Why Running Your Own Business is Easier Than You Think [/amazon_link]by Luke Johnson, a self-explanatory offer from the famous entrepreneur and FT columnist.

[amazon_link id=”1844882772″ target=”_blank” ]The Untouchables The people who helped wreck Ireland – and are still running the show[/amazon_link] by Shane Ross, also self-explanatory.

[amazon_image id=”1844882772″ link=”true” target=”_blank” size=”medium” ]The Untouchables: The people who helped wreck Ireland – and are still running the show[/amazon_image]

And for everyone who liked [amazon_link id=”1612191819″ target=”_blank” ]Debt: The First 5000 Years [/amazon_link](a fascinating although flawed tome), [amazon_link id=”1846146631″ target=”_blank” ]The Democracy Project: A History, a Crisis, a Movement [/amazon_link]David Graeber. They obviously can’t settle on the title as the blurb says: “Future Possible not only tells the story of Occupy Wall Street’s origins but, more importantly, explains how the movement works and how readers can replicate its method in their own communities.”

[amazon_image id=”1846146631″ link=”true” target=”_blank” size=”medium” ]The Democracy Project: A History, a Crisis, a Movement[/amazon_image]

Profile Books doesn’t seem to have any upcoming economics or business books, but I liked the look of [amazon_link id=”1846684781″ target=”_blank” ]Underground, Overground: A Passengers History of the Tube [/amazon_link] by Andrew Martin – the 150th aniversary of London Underground is almost on us – and [amazon_link id=”1846684021″ target=”_blank” ]Invisible Romans[/amazon_link] by Robert C Knapp, about the lives of working Romans.

[amazon_image id=”1846684781″ link=”true” target=”_blank” size=”medium” ]Underground, Overground: A Passenger’s History of the Tube[/amazon_image]

Finally, one of my Twitter correspondents, Dr Dave O’Brien has this out from Routledge later in the year: [amazon_link id=”0415817595″ target=”_blank” ]Cultural Policy: Management, Value and Modernity in the Creative Industries.[/amazon_link]

The Great Rebalancing – whether we like it or not

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This is a book that should be read by: (a) politicians, central bankers and anybody else involved in macroeconomic policy; (b) all economists; (c) all students of economics; and (d) everybody else.

[amazon_link id=”0691158681″ target=”_blank” ]The Great Rebalancing: Trade, Conflict and the Perilous Road Ahead for the World Economy [/amazon_link]by Michael Pettis is as sharp and clear as a cut diamond in its analysis of the continuing global imbalances. The author brings logic, accounting identities and clarity of thought and language to bear on the issue of prospects for the global economy, putting most other commentators into the shade.

He also provides a small but fundamental shift in perspective: the questions of balance of payments and capital flows are approached in terms of global general equilibrium – in other words, everything is connected. Thus Greece’s problems are not only caused by Greek tax avoidance or low productivity, but by German domestic policy choices too. Pettis writes: “I extend our basic knowledge of open economies and apply it to the global economy as a single closed system in order to show the many surprising ways policies and conditions are related.” Every country affects all others through the capital and current accounts. And the balance of payments balance – a large current account surplus requires large capital exports to a large current account deficit (group of) countries. A large gap between domestic savings and investment, or correspondingly between GDP growth and consumption growth, will result in a current account gap.

The book looks at two broad sets of imbalances, US-China and Germany-Eurozone periphery. “Very large persistent surpluses and deficits are almost always the result of distorted policies in one or more countries.” The distortions he identifies are the investment-driven focus of Chinese policy, at the expense of domestic consumers, brought about by ultra-low interest rates on savings in domestic banks (there being no alternative investment opportunities for most Chinese people). In Germany, rather than this Chinese-style direct financial repression, the distortion has been ever since reunification in 1990 constraining wages and consumption growth in order to favour employment and exports, with production growing faster than consumption.

Pettis is keen to point out that to analyse the Euro crisis in terms of thrifty and productive Germans versus idle, spendthrift Spaniards or Greeks is nonsense. The references to culture and morals in trying to explain what has happened in the global economy are misplaced. Given a persisting German savings surplus, perforce exported, the Euro periphery countries have only four options: 1. use German capital exports to fund investment, paid for by debt; 2. let consumer borrowing rise to spend more; 3. devalue or impose trade restrictions – both ruled out by Euro and EU membership; 4. engineer a recession to cut domestic production. When the debt levels required by opting for (1) and (2) got too high, only (4) remained available, as (3) has seemed unthinkable. But the book goes on to argue that unless the Germans will accept that the burden of adjustment must fall on their domestic policy, default and the break-up of the Euro are inevitable. “It is impossible to expect Spain to repay its debt to Germany unless Germany runs a trade deficit and Spain a trade surplus.” The echoes of the 1930s (when France played the role of Germany today, complacent about its economic strength until the strains reached breaking point) are horribly clear.

Pettis is a little more optimistic about the prospect of a policy adjustment in China. A renminbi revaluation would help ordinary households at the expense of the central bank and the very wealthy. Slower GDP growth and lower exports would actually enable faster consumption growth, and would make for greater social stability. Combined with a slow but effective rebalancing of US policy, this part of the global imbalance could be worked out in a reasonably orderly way.

However, the book ends with some gloomy predictions. Pettis concludes that there has been hardly any adjustment, post-crisis, in the global economy. Unless Germany and China, as well as the US and Euro periphery, adjust their policies, then:

– German growth will slow sharply and its banks will suffer large losses

– much of peripheral Europe will both default and abandon the Euro

– China could adjust still but is running out of time, and unless it writes down bad bank debts and transfers some state and corporate wealth to households it will end up with a ‘lost decade’

– the world economy will be weak for many years

– trade tensions will increase

– but, one way or another, the world economy will rebalance.

“Major imbalances are unsustainable and will always eventually reverse, but there are worse ways and better ways they can do so…..Any policy that does not clearly result in a reversal of the deep debt, trade and capital imbalances of the past decade is a policy that cannot be sustained.”  Unfortunately, he ends, that isn’t what’s happening.

There is one idea buried away here that seems to me to hold out a spark of hope. Given that the persistent surplus countries seem determined not to reverse their anti-consumptionist policies, and to continue running current account surpluses, it is inevitable that something will erode the value of the Euro periphery assets held by German banks – default, devaluation, inflation in the periphery. Alternatively, Germany could grant assets to the struggling countries – something akin to the Marshall Plan, Pettis suggests. Given the deeply-held worldview Germans clearly hold about the superiority of their approach to the economy, maybe the idea of a Marshall Plan to save the Euro is the one idea that could catch on there?

It will be obvious that I think this is an excellent book, albeit very gloomy indeed. Its logic seems irrefutable: the unsustainable is not sustained. The only question is how the global rebalancing will come about, and it doesn’t look a pretty prospect.

I’d not come across Michael Pettis before, but looking him up now find that his previous book, [amazon_link id=”0195143302″ target=”_blank” ]The Volatility Machine[/amazon_link], analysing emerging market financial crises, also attracted rave reviews. He was previously at Bear Stearns and Columbia University and is now a professor at Peking University – he blogs on China’s economy. His work obviously deserves to be widely read and above all, please, in policy circles.

[amazon_image id=”0691158681″ link=”true” target=”_blank” size=”medium” ]The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy[/amazon_image]