Monthly Archives: April 2013

Literary economists

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It’s the London Book Fair and my esteemed publisher, Peter Dougherty of Princeton University Press, is in town. Among the many interesting things I learned from him over lunch yesterday is that economists are the most avid writers and readers of books.

This certainly seems consistent with the surge of interest in ‘pop’ economics (about which I and others wrote for the September 2012 ‘Economics Made Fun’ issue of the Journal of Economic Methodology). There are lots of good and lots of accessible (overlapping but not identical sets) economics books around. Of course, the state of the economy at present generates its own interest.

And the least-read academic genre? Literary criticism of course – a discipline which has moved as far away from ‘pop’, accessible and the joy of reading as it’s possible to get.

London Book Fair

Does economics need *more* physics envy?

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It’s often said by critics of economics that the problem is economists have physics envy: they want to describe the economy using models that are over-complicated in the mathematics, mimicking classical physics, and under-sophisticated in its understanding of how humans actually make choices. But in [amazon_link id=”1408827379″ target=”_blank” ]Forecast: What Physics, Meteorology and the Natural Sciences Can Teach Us About Economics[/amazon_link] by Mark Buchanan argues that economists haven’t been paying enough attention to physical.

[amazon_image id=”1408827379″ link=”true” target=”_blank” size=”medium” ]Forecast: What Physics, Meteorology, and the Natural Sciences Can Teach Us About Economics[/amazon_image]

He makes the argument in the context of financial economics and its discrediting by the financial crisis. I find it a wholly persuasive thesis. Rational choice theorising just cannot account for the data on financial markets – the numerous self-reinforcing large price movements without specific causes, the long persistence in the absolute size of price movements, the fractal character of the movements on annual, monthly, daily, hourly, nano-secondly timescales. However, models from statistical physics can do so. The empirics of financial markets are similar to those of earthquakes, for example, well described by power laws. Economists should be using these tools as their starting point for theorising rather than starting with theories that fit the data about as well as Cinderella’s glass slipper fits the feet of the Ugly Sisters. It astonishes me that so many economists are so resistant to believing the evidence of the data – as I wrote describing here last autumn’s ESRC symposium on macroeconomics and the reception physicist J.P.Bouchaud got from some of the other participants.

Forecast is a useful and very accessible guide to the physics models, although this is not untrodden territory in pop science. For example, Philip Ball’s [amazon_link id=”0099457865″ target=”_blank” ]Critical Mass[/amazon_link] covers it too. There were a few points when I felt it over-claimed. For example, Mr Buchanan compares events in California’s electricity market in summer 2000 to the financial market events of 1998 or 2008, when it turned out later that Enron traders were manipulating the market. From this he concludes: “Blind faith in the benefits of privatization has had negative social consequences, including the deterioration of overall social trust, the dissolution of traditional non-market relations based on social norms and the replacement of cultural incentives to ‘do a good job’ with purely monetary incentives.” This is a perfectly valid line of argument, made by many other people – [amazon_link id=”0374533652″ target=”_blank” ]Michael Sandel[/amazon_link] most prominently of late – but it is a different argument entirely from the rest of the book, and I think isn’t supported here. There are one or two other points where the book canters through a separate area – such as behavioural economics and fast versus slow thinking – interesting but not related to the main argument.

For the main point here is about the prevalence of disequilibrium in economies, and the consequent inappropriateness of equilibrium as the starting point for economic modelling; the inadequacy of comparative statics in a dynamic world; and the role of social influence in markets. There is a very interesting section on the way the ‘wisdom of crowds’ is valid for independent decisions but destroyed when people know what others think, when it is replaced by the ‘unwarranted confidence of crowds’.

The most intriguing point the book raised for me concerned the predictability of financial market prices. Markets seem to have two phases of behaviour, like water versus ice, and the transition from one to the other is particularly interesting. “When the number of participants is smaller than a certain threshold… the market always has some predictability in its movements,” Buchanan writes of some experimental research (by Yi-Cheng Zhang and Damian Challet, written up in the book [amazon_link id=”0198566409″ target=”_blank” ]Minority Games: Interacting Agents In Financial Systems[/amazon_link]). Beyond a threshold number of people, the predictability vanishes. The number is related to the amount of history participants take into account in their expectations of the future – beyond that “the space of strategies becomes effectively covered or crowded.” There will be somebody in the market who will pounce on any predictable pattern to arbitrage it, and any predictability vanishes.

Economists who have already read about complexity economics – say in Paul Ormerod’s [amazon_link id=”0571279201″ target=”_blank” ]Positive Linking[/amazon_link] or his older [amazon_link id=”0465053564″ target=”_blank” ]Butterfly Economics[/amazon_link], or Alan Kirman’s [amazon_link id=”0415594243″ target=”_blank” ]Complex Economics[/amazon_link] or Benoit Mandelbrot’s [amazon_link id=”1846682622″ target=”_blank” ]The Misbehaviour of Markets[/amazon_link] – will find much of the material in Forecast familiar. But even they will find some new insights. Economists who haven’t paid much attention to these areas should read this book and apply some of our profession’s (supposed) newly-found humility to its argument. And this is a very accessible book for non-economists (and indeed for non-physicists), who will find it interesting and wonder why on earth some economists resist learning across the disciplinary boundary.

What will the robots do for us?

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The social and economic aspects of new technologies have been my abiding interest for years, naturally from the perspective of my training as an economist.[amazon_link id=”0262018624″ target=”_blank” ] Robot Futures [/amazon_link]by Illah Reza Nourbakhsh has the same interest from the perspective of a Professor of Robotics, and director of the Community Robotics, Education, Technology and Empowerment Lab at Carnegie Mellon. It’s an eye-opening book (and a short, clearly written one).

[amazon_image id=”0262018624″ link=”true” target=”_blank” size=”medium” ]Robot Futures[/amazon_image]

There are two key messages I took from the book. First, we’ve already gone a long way towards weaving robots into everyday life without realising it. The advances in the physical manifestations of robots (which Prof Nourbakhsh divides into perception, cognition and action) will before long join up with recent innovations online, in the pooling of information including from social media. The issues we’re grappling with such as online privacy and identity will move off the screen onto the pavement. We might soon meet robots on the street who know everything about us. Already due to smartphones, he writes: “Nothing is transient because everything can be captured and shared. Expectations of privacy have to shift….. As robots decide automatically just what to record and publish, so our sense of internet identity will have to change. We humans will no longer be the only species that records events and publishes them online…. When you run into a well-connected robot, it will be unclear from first impressions whether the robot knows everything about your day….”

Or, to take another example, prosthetics and robotics are merging already; how far should that merger go? Science fiction ([amazon_link id=”0586057242″ target=”_blank” ]I, Robot[/amazon_link] and on) is stepping into life, and there are countless emotional, ethical and other issues.

The second message is about the economic and political issues, and is that unless there is a public debate about advances in robotics, their development will be commercial. As the book puts it, the early adopters are business and the military. Prof Nourbakhsh writes: “I have served on funding boards and I have seen technical content dwarf social impact in the eyes of nearly all the reviewers in the room. This needs to change; broader impact must become an authentic criterion for funding.” His lab specializes in socially focused robotics development, but I don’t imagine there are many others, or much social science thinking about the issues yet. There needs to be – it will be upon us soon.

The book has a useful summary of the state of robotics research, which has been uneven. Batteries/energy are still a big hurdle. It opened my eyes to the diversity of machines gathered under the term, including industrial robots, those innovative joints restoring movement to injured or disabled people, drones, household devices and so on. It touches on the ethics of how robots should be treated: “Never before have we had the chance to dehumanize socially agile non-humans. If this happens, then we face the odd technological side-effect that, as we dehumanize our relationships with robots, so we may incidentally dehumanize our relationships with people.”

In short, a lot of food for thought in 130 pages (albeit somewhat steeply priced).

These robots are nice but dim…

The economics of open access publishing

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Nature has a long and interesting article about the costs of open access scientific journals, exploring both the difference in publication costs between different journals, and the allocation of costs between funders/institutions employing scientists, researchers publishing papers, and subscribers. It’s well worth reading for the figures on costs and charges alone – I’d not seen them gathered together before. Coincidentally, I also met up this week with a friend who publishes journals for one of the big publishers (not Elsevier).

The open access case is intuitive: research is funded publicly by taxpayers, so it should be free to read. The Nature article shows that the charges open access science journals make to researchers vary widely, as do the cost bases and profit margins of the different journals. The publication fees are also the only revenue stream, in most cases. Not surprisingly, existing journal publishers see it differently, arguing that they provide other services – peer review, editorial judgement, curation, marketing and the delivery of attention to articles, hosting technology, and no doubt more. There are counter-arguments to some of these points. For example, peer review and editorial work is normally done by other researchers, who are not paid for these tasks – again, taxpayers fund the work via their financing of academic salaries.

It’s clear that journal publishers were, like other traditional media providers, slow to adapt their offer to the online world and one or two well-known ones have tried to hang on to excessive monopoly profits. But the average profit margins cited by Nature for the scientific journals don’t seem outlandish, and it is very likely that some traditional journals are hampered by a higher cost base than newer online journals, hence a partial reason for high subscription charges.

Still, there does seem to me to be a need for clarity about the bundle of services being discussed in this debate. It is not just a question of providing an online platform for researchers to report on their work, the bit that is taxpayer funded. If academics only needed to get their work out there, they could publish it on their own websites – as many do. But journals obviously do play an important role in organising peer review to give research a kite mark, in selecting and curating papers, and in marketing to draw attention to research. The importance of editorial objectivity in these services makes me tilt slightly towards preferring the old-fashioned subscription model, especially now non-academics like me can legitimately access research via JSTOR. If only the old model hadn’t been discredited by the greedy minority of publishers hiking subscription charges so much, or lumbered with its inherited high cost base.

It’s probably too late, even though there are, ironically, signs that the subscription model may be starting to function for other online publications. The new RCUK open access policy came into effect this month, & states: “Free and open access to publicly-funded research offers significant social and economic benefits. The Government, in line with its overarching commitment to transparency and open data, is committed to ensuring that such research should be freely accessible. As major bodies charged with investing public money in research, the Research Councils take very seriously their responsibilities in making the outputs from this research publicly available – not just to other researchers, but also to potential users in business, charitable and public sectors, and to the general public.” RCUK will in future fund eligible research institutes and universities to pay submission fees to open access journals.

My friend is bitter about the Government casually torpedoing the commercial business model, and predicts that academic journals of the future will increasingly be hosted and part-funded by universities, research funders and learned societies, as the business is becoming decreasingly attractive for commercial publishers. I’m not sure the future landscape for the publication of academic research is at all predictable.

Demography as destiny?

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There was an intriguing short letter in the Financial Times this morning, urging that more attention be paid to the problem of a low birth rate and the adverse demography of an ageing society.  The writer evidently believes the welfare system should be encouraging people to have more children, rather than penalising them for large families. He cites a 1947 book, [amazon_link id=”B00195GT00″ target=”_blank” ]The Population of Britain[/amazon_link] by Eva Hubback.

[amazon_image id=”B00195GT00″ link=”true” target=”_blank” size=”medium” ]The Population of Great Britain[/amazon_image]

Looking her up, Wikpipedia tells me Eva Hubback was a suffragist, head of economics at Newnham and Girton during the First World War, and advocate of birth control and eugenics. However, her book clearly advocates the national benefits of population growth. This is an intriguing combination of beliefs, very much of its time.

It has long seemed to me that economics doesn’t pay enough attention to demography. Obviously, people studying pensions and the fiscal implications do put the ageing trend at centre stage, and relative demographic trends crop up in work on international migration. But demography is surely fundamental for growth as well. One question is whether an older (on average) population will be as productive and innovative as a younger one. And if so, what does this imply for, say, predictions of Chinese economic power?

Another is simply the numbers game. Endogenous growth models imply that the growth rate is increasing in population, at an accelerating rate because of their increasing returns feature. Ideas live in people’s heads, and the combinatorial arithmetic makes more people generate many more ideas. This is something modern economists (although clearly not Eva Hubback) seem to gloss over with mild embarrassment.

The best book I’ve read including demography, although in a broader context than economic growth, was Emmanuel Todd’s 2001 [amazon_link id=”1845290585″ target=”_blank” ]After the Empire[/amazon_link]. He was looking ahead to the multipolar world. But I’d be interested to hear other recommendations.

[amazon_image id=”1845290585″ link=”true” target=”_blank” size=”medium” ]After the Empire[/amazon_image]