Essays by the worldly philosopher

[amazon_link id=”0691159904″ target=”_blank” ]The Essential Hirschman[/amazon_link] edited by his prize-winning biographer Jeremy Adelman ([amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher)[/amazon_link] is a collection of essays well worth reading by anbody who, like me, was not very familiar with Hirschman’s work. The book is divided into three sections covering Hirschman’s work on development economics, essays on market societies, and essays on democracy including his thinking on political rhetoric.

[amazon_image id=”0691159904″ link=”true” target=”_blank” size=”medium” ]The Essential Hirschman[/amazon_image]

I particularly like the combination of economic analysis (rarely expressed mathematically, but nonetheless rigorous) with an awareness of the difficulties of implementation, of political constraints, and of the role of the emotions in people’s decisions. For example, the first essay, ‘Political Economics and Possibilism’, looks specifically at the role of optimism and political leadership in bringing about change, and the scope for the same economic policies to have vastly different outcomes depending on political characteristics of the society in which they are introduced. For example, trade-offs that are possible in a relatively homogeneous society may not be feasible in one divided on religious or ethnic grounds, of might even lead to civil war. As Adelman puts it in his excellent introduction, “It is rare to find a writer in our times so at ease with the modern tools of the social scientist and yet so concerned with the complexity of the human condition that he or she can bring to life the frictions and tensions that come from looking at our world at the junctions of political, economic and emotional life.”

Hirschman, it is evident from this book and Adelman’s superb biography, Worldly Philosopher, was increasingly out of tune with the economics of his times. The subject became increasingly abstract and generalised, and inclined to require mathematical rigour everywhere. Hirschman was focused on the specifics of each situation. In ‘Search for Paradigms’, he argues that the highly analytical, paradigm-seeking frame of mind led either to undue conservatism about the prospects for things to improve, or its opposite, a revolutionary bias. In the essay on possibilism, he wrote: “Most social scientists conceive it as their exclusive task to discover and stress regularities, stable relationships and uniform sequences. This is obviously an essential search, one in which no thinking person can refrain from participating. But in social sciences there is a special room for the opposite type of endeavour: to underline the multiplicity and creative disorder of the human adventure, to bring out the uniqueness of a certain occurrence, and to perceive a new way of turning a historical corner.” And it is this last that makes him such an optimistic, encouraging thinker too.

I least enjoyed, however, a couple of the essays on development, which may well be because I am entirely unfamiliar with his theory of linkages – these essays didn’t mean much to me out of context. Still, even in those, the emphasis on tensions and conflicts as motors of change, and the inevitable messiness of the process, is clear.

The book also has a nice evaluation of Hirschman by Emma Rothschild and Amartya Sen as an afterword. They say his work cannot be neatly mapped onto any of the normal distinctions we tend to make, between orthodox and heterodox, between theoretical and empirical, between state and market – “he aspired to both and embraced the conflict between them,” they conclude. It is well worth reading some of Hirschman’s classic books such as [amazon_link id=”0674276604″ target=”_blank” ]Exit, Voice and Loyalty[/amazon_link] of course, but this book of essays is a terrific overview of his work.

 

Point, counterpoint

I’ve been travelling a lot this week and have read quite a lot of [amazon_link id=”0691159904″ target=”_blank” ]The Essential Hirschman[/amazon_link], a collection of Albert Hirschman’s essays – no doubt the success of Jeremy Adelman’s terrific biography, [amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher,[/amazon_link] has stimulated interest in his work.

[amazon_image id=”0691159904″ link=”true” target=”_blank” size=”medium” ]The Essential Hirschman[/amazon_image]

I’ll review it soon, but meanwhile was amused to find this observation in an essay on Arthur Lewis:

“Whereas in the natural or medical sciences Nobel prizes are often shared by two persons who have collaborated in or deserve joint credit for a given scientific advance, in economics the prize is often split between one person who has helped develop a certain thesis and another who has laboured mightily to prove it wrong.”

This week’s Nobel for Fama, Shiller and Hansen actually doesn’t fall into this category as the citation makes clear (and also this excellent Crooked Timber post http://crookedtimber.org/2013/10/15/sveriges-riksbank-prize-actually-blah-blah-blah/) – it is for the empirical of studying asset prices. Still, the efficient versus irrational markets notion has taken hold and would fit Hirschman’s observation.

Antifragile, pro and anti

[amazon_link id=”0141038225″ target=”_blank” ]Antifragile: Things that Gain from Disorder[/amazon_link], the latest tract from Nassim Nicholas Taleb, left me with mixed feelings. It’s interesting, and I find a lot of his argument intuitively appealing. On the other hand, it really needed a thorough edit – the train of the argument is convoluted and there are horribly self-indulgent passages. It could have been significantly shorter, too. On balance, it’s worth a go but lacks the punch of [amazon_link id=”0141034599″ target=”_blank” ]The Black Swan[/amazon_link] or [amazon_link id=”0141031484″ target=”_blank” ]Fooled by Randomness[/amazon_link].

[amazon_image id=”0141038225″ link=”true” target=”_blank” size=”medium” ]Antifragile: Things that Gain from Disorder[/amazon_image]

Which is a pity, because it would be good for the key ideas in [amazon_link id=”0141038225″ target=”_blank” ]Antifragile[/amazon_link] acquired the same traction in popular thought as the importance of fat tailed distributions (hence the frequency of Black Swans) and the fact that basic probability means luck plays a much bigger role in life than we think. Taleb’s main argument is that just as small tremors release tension along a geological faultline, averting a big earthquake, small setbacks play a useful role in economic and social contexts. It is a good thing for the economy as a whole that some firms fail; the policy manipulation that gave us the Great Moderation (the Greenspan ‘put’ of cutting interest rates whenever the markets declined) built up the imbalances that led to the Great Crash. The book gives many examples of contexts in which small stresses play a healthy, error-correcting role, and over-regulating creates the conditions for big errors.

Along the way, Taleb has many swipes at economics, mainly for its insistence on linear models and normal distributions – and I’m someone who thinks that’s a fair cop. The world is self-evidently non-linear, and it’s alarming that so many policymakers cling to the illusion of control they get from linear thinking – pull this policy lever, and that desirable consequence will follow.

There is one cracking story in the book, where Taleb recounts giving a lecture to Société Générale’s top executives on risk, warning them that the bank was taking massively greater risks than they imagined. The reception was hostile, he reports. Weeks later, SocGen had to liquidate $70bn of assets in a fire sale to cover the losses caused by the trades of Jerome Kerviel. At the talk, Taleb says, he had been “heckled relentlessly by Kerviell’s boss and his colleague, the head of risk management.”

There are some general lessons from observing anti-fragility, Taleb concludes. There are three kinds of context – the fragile (negative feedbacks or concavity), robustness (no feedbacks), and antifragility (positive feedbacks or convexity). Be aware of whether you are in a situation where the distribution of outcomes is curtailed at one end – travel times, for example, have little scope to be shorter than expected and much scope to be far, far longer than expected. Is there more upside than downside? How quickly do the outcomes change – does the time taken to drive from A to B increase by a lot more when you add a second hundred extra vehicles on the road than it did for the first hundred extra vehicles? Guard yourself by following what Taleb calls ‘barbell’ strategies – he means dual strategies avoiding the middle way – put your money 90% into safe assets and 10% into very risky ones, so limit your downside risk and create large upside, but don’t put 100% into medium risk assets which could lose you everything if you miscalculated the risk. But he extends the idea. So also, if you want to be a writer, work in a boring job and leave your free hours for writing, rather than taking a job as a creative writing academic, which will suck out your creative marrow with teaching and admin.

This extension points to one of the book’s weaknesses, which is that it extends arguments that make complete sense at the level of probability and asset prices to other areas, from macroeconomics to the rest of life, where they have intuitive appeal but would probably not convince an unsympathetic reader. So I agree with Taleb that there is too much effort to squeeze the variability out of various contexts, with ultimately damaging consequences, but then I thought that anyway without the paraphernalia of anti-fragility to get me there. I enjoyed reading [amazon_link id=”0141038225″ target=”_blank” ]Antifragile[/amazon_link] despite its bagginess, and other Taleb fans will enjoy it too, but I doubt it will have the wider impact of his previous books.

Robert Shiller, Dr Jekyll and Mr Hyde, and Karl Marx

I’ve been lucky enough to have met two of this year’s three economics Nobel winners, Gene Fama and Bob Shiller – my only contact with Lars Peter Hansen was the excitement of learning about Generalized Method of Moments estimates in their early days, while I was mid-way through my PhD. Both Profs Fama and Shiller were a pleasure to meet.

I interviewed the former for The Times in the relatively early days of the financial crisis (I can’t find the archived article but it was linked to his Onassis Prize lecture at the Cass Business School), and he was unmoved in defending the efficient market hypothesis, as the lecture shows.

Prof Shiller is somebody I’ve met a few times, and you couldn’t hope to meet a kinder or more charming person, or one who lives up better to the absent-minded academic label. His best-known book is of course [amazon_link id=”0691123357″ target=”_blank” ]Irrational Exuberance[/amazon_link], perfectly timed before the (first) crash of 2001, followed by [amazon_link id=”069114592X” target=”_blank” ]Animal Spirits[/amazon_link] co-authored with George Akerlof. Both books are appreciated by those who believe financial markets to have become a dangerous excrescence of capitalism and illustration of the dangers of markets in general.

However, Shiller has also in between written [amazon_link id=”0691120110″ target=”_blank” ]The New Financial Order[/amazon_link], [amazon_link id=”0691154880″ target=”_blank” ]Finance and the Good Society[/amazon_link] and [amazon_link id=”0691139296″ target=”_blank” ]The Subprime Solution[/amazon_link], books promoting the greater use of financial markets, or extending markets to areas where there are currently none – such as sovereign insurance against natural disasters. Many commentators have pointed out the apparent paradox of the Nobel committee rewarding both Shiller and Fama for their work on financial markets, but fewer the apparent [amazon_link id=”149228856X” target=”_blank” ]Jekyll and Hyde[/amazon_link] character of Prof Shiller’s own work.

[amazon_image id=”0691123357″ link=”true” target=”_blank” size=”medium” ]Irrational Exuberance: (Second Edition)[/amazon_image]

Speaking of anti-capitalism, this article about the 2008 crash leading to a revival of Marxism among the young reminded me of this 1997 John Cassidy article on – The Return of Karl Marx – sixteen years ago this week. [amazon_link id=”0199535701″ target=”_blank” ]Capital[/amazon_link] is pretty unreadable in my view, but Marx wrote about technology, inequality, power struggles and the disequilibrium dynamism of the economy, and will always look attractive as long as mainstream economics ignores these un-ignorable aspects of the world.

[amazon_image id=”1840226994″ link=”true” target=”_blank” size=”medium” ]Capital: Volumes One and Two (Wordsworth Classics of World Literature)[/amazon_image]

Imperfect Labor Markets

It isn’t my normal practice to review technical books or textbooks on this blog, so here I’m just flagging up new edition of [amazon_link id=”0691158932″ target=”_blank” ]The Economics of Imperfect Labor Markets[/amazon_link] by Tito Boeri and Jan van Ours. My PhD thesis many years ago was about the macroeconomic applicability (or not) of various labour market models, and whether there were meaningful links between the market analysis and the aggregate, so I was interested in this book.

[amazon_image id=”0691158932″ link=”true” target=”_blank” size=”medium” ]The Economics of Imperfect Labor Markets: Second Edition[/amazon_image]

While I haven’t read it from cover to cover of course, it looks like a fantastic resources for labour market economics courses. It weaves together data and theory, and the presentation is grounded in actual labour market institutions and policies – minimum wages, unions, anti-discrimination laws, active labour market policies, returns to training. There is a lot of cross-country comparison, a welcome changed from mainly US-centric books. The new edition updates the empirical sections. The book ends with a summary of available data. Really well worth a look if you are teaching or studying this field.