Monthly Archives: June 2014

The case for militantly moderate incrementalism

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I’ve started on [amazon_link id=”0691161623″ target=”_blank” ]Why Government Fails So Often (and how it can do better)[/amazon_link] by Peter Schuck.

[amazon_image id=”0691161623″ link=”true” target=”_blank” size=”medium” ]Why Government Fails So Often: And How It Can Do Better[/amazon_image]

He argues for ‘melioristic realism’ – modest practical improvements in outcomes – which are nevertheless ‘militantly moderate’ given the usual assumption in much policy debate that change must be sweeping and radical. “Policy makers have at best severely limited knowledge of the opaque, complex, social world that they seek to change, and meager tools for changing it.” There is a ‘remorseless’ law of unintended consequences. Incrementalism is therefore the only wise and honourable approach, Schuck argues. Indeed, it’s the only approach that increasingly cynical and distrustful voters will now accept, he thinks.

The book describes what he calls ‘moral hazard’, which is far wider than the usual definition of risk-taking behaviour in financial or insurance markets induced by the fact that somebody else bears the cost. Schuck extends it to all kinds of behaviour whose cost is partly borne by somebody else (i.e. taxpayers) – hence also welfare “dependency”, or crop subsidies, or corporate welfare dependency in sectors such as aerospace and defence sector.

I’ll review it properly when I’ve finished. It’s a US-focused book – here is the Boston Globe and an article by Peter Schuck on the Huffington Post site.

Taking information seriously in economic policy

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Earlier this month I wrote about Joe Stiglitz’s Jean-Jacques Laffont speech at the Tiger Forum, which was based on his new book with Bruce Greenwald, [amazon_link id=”0231152140″ target=”_blank” ]Creating A Learning Society: a new approach to growth, development and social progress[/amazon_link].

[amazon_image id=”0231152140″ link=”true” target=”_blank” size=”medium” ]Creating a Learning Society: A New Approach to Growth, Development, and Social Progress (Kenneth Arrow Lecture Series) (Kenneth J. Arrow Lecture Series)[/amazon_image]

Stiglitz won his Nobel Prize for his massively important work on asymmetric and missing information – how this shapes institutional structures, including markets. His Nobel Lecture is well worth the read.

This book builds on the information-based approach, and links it to other work on endogenous growth theory, which sees the process of growth as a cumulative process in which knowledge builds on earlier knowledge. This makes ideas (including those formalized as ‘intellectual property’) and people (to whom ideas are attached) the key to economic development. Stiglitz and Greenwald introduce industrial policy to endogenous growth models. They cover, among other areas, trade policy, intellectual property regimes, industrial strategy, and competition policy. It’s a somewhat technical book – there are quite a few equations and models at I would say advanced undergraduate level –  although one could skip those bits and still follow the argument.

I agree with the authors’ motivation for this book. They write: “Everyone today speaks of the innovation economy or the knowledge economy, and there have been important advances in the analysis of, say, patents and patent races, and network externalities, to take but two examples. But the full implications …. for the neoclassical model have still not been taken on board. And the implications for policy have been even less absorbed into mainstream thinking.” They go on to point out that it is 40 years since Stiglitz’s work on information questioned fundamentally standard economics results such as the existence of equilibrium, or the uniqueness of equlibrium, but little has changed in the standard approach. I doubt that any ‘mainstream’ economist would challenge the importance of the results on asymmetric information, non-linearities in growth and so on, so it is a puzzle that so few have taken the implications seriously. No doubt the answer lies in the sociology of the profession and academic incentive structures. My sense is that this is now changing.

This book takes the implications of information externalities forward into specific policy areas. It argues that not only can we not presume that a market economy is efficient, but also that industrial and trade policies can demonstrably increase social welfare. “Learning externalities are pervasive and it is a mistake not to take them into account.”

While not agreeing with every specific policy prescription they make, information, knowledge, learning – whatever you want to call it – definitely does change the prism for assessing structural economic policies. Maybe Prof Stiglitz will next write the popular book that makes this shift in perspective accessible to the policy world.

Prof Stiglitz and me at the TSE TIGER Forum

The financial crisis and post-structuralism

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It’s been a busy week but on the train to and from York yesterday I finished Hugh Pym’s [amazon_link id=”1472902874″ target=”_blank” ]Inside the Banking Crisis: The Untold Story[/amazon_link] and started [amazon_link id=”140398655X” target=”_blank” ]The Birth of Biopolitics[/amazon_link] by Michel Foucault.

[amazon_image id=”1472902874″ link=”true” target=”_blank” size=”medium” ]Inside the Banking Crisis: The Untold Story[/amazon_image]

Now, Hugh is a friend and colleague of my husband’s at the BBC, so anybody reading this might want to aim off for the personal contact. Having said that, I’ve got no hesitation in recommending his account of what went on inside the Treasury and the Bank of England during that extraordinary period from late 2007 to 2009. It’s a very well-informed description of the to-ing and fro-ing, the agonised discussions and negotiations, the hair’s breadth escape from a collapse of the everyday payments systems – which could have brought, it was feared, a breakdown of social order. The events were so dramatic that even in calm retrospect reading the book set the hairs on the back of my neck on end again – for I had thought at the time it was well worth having enough cash in the house for a few weeks’ worth of groceries and other necessities.

Reading this makes it all the more remarkable that there are a few signs of a replay – continuing international imbalances, the asset price bubbles, the complex and unmonitorable risk-taking by banks. Maybe all financial regulators and economic policy folk should read Hugh’s book to remind themselves of what needs to be avoided. One of the conclusions that emerges from the book is in one sense how well the UK’s policymakers – politicians and officials – dealt with an extraordinary emergency, for all that one can argue about specific judgements or criticise the policies that allowed it all to happen in the first place. The system did not collapse. Decisions were taken at great speed, in a normally slow and cautious environment. It underlines David Runciman’s argument in [amazon_link id=”0691148686″ target=”_blank” ]The Confidence Trap[/amazon_link], that democracies are slow and bumbling when it comes to normal problems but able to achieve cohesive actions in a real crisis.

By contrast, the [amazon_link id=”140398655X” target=”_blank” ]Foucault essays[/amazon_link] sent me to sleep on the way back to London from York – it was Friday evening after all. So far, I’ve grasped that the book will aim for the shift in perspective for mainstream economics that Foucault gave us for punishment and madness, or in other words exploring the consequences of seeing what we regard as natural categories (madness, market forces) as socially constructed instead. It’s enough to make one wish Foucault had still been around for the financial crisis. I can’t remember who recommended the book to me except that it was somebody one would not regard as a natural follower of post-structuralist French philosophy, so despite the snooze I’ve got high hopes.

[amazon_image id=”140398655X” link=”true” target=”_blank” size=”medium” ]The Birth of Biopolitics: Lectures at the Collège de France, 1978-1979: Lectures at the College De France, 1978-1979 (Michel Foucault: Lectures at the Collège de France)[/amazon_image]

Resources on complexity economics

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Following my posts last week on complexity and economics, Professor Leigh Tesfatsion of Iowa State University sent me this very useful website with links to loads of resources on the subject – including an introductory self-study course.

Prof Tesfatsion wrote to me that the complexity approach has real momentum but added: “In macroeconomics, however, bitter resistance has been encountered, particularly from those who have devoted themselves to mastering DSGE modeling.” However, there is also some work on agent-based macroeconomics.

One general book I spotted in this list, one I’ve not read, is Mark Buchanan’s [amazon_link id=”1408827379″ target=”_blank” ]Forecast: What Physics, Meteorology, and the Natural Sciences can Teach Us About Economics[/amazon_link]. Nate Silver’s [amazon_link id=”0141975652″ target=”_blank” ]The Signal and the Noise[/amazon_link] doesn’t feature agent-based modelling but does talk about the macroeconomy as a complex (non-linear multivariate dynamic) system.

[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]

People, robots and sustainability

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I’ve been sorting through the book pile and have started reading Hugh Pym’s [amazon_link id=”1472902874″ target=”_blank” ]Inside the Banking Crisis: The Untold Story[/amazon_link], which so far is a very vivid account of the decision-making in the Treasury and Bank of England. It’s intriguing to get his more rounded perspective, having heard through my own contacts just a few strands of the story.

[amazon_image id=”B00JRYI4JE” link=”true” target=”_blank” size=”medium” ]Inside the Banking Crisis: The Untold Story[/amazon_image]

I’m also taken by the look of [amazon_link id=”0262027437″ target=”_blank” ]The Bubble Economy: Is Sustainable Growth Possible? [/amazon_link]by Robert Ayers, an INSEAD-based economist and physicist. It’s partly about energy and decarbonisation, and partly about financial bubbles and sustainability too, which is intriguing because (apart from my own interest in the links in [amazon_link id=”0691156298″ target=”_blank” ]The Economics of Enough[/amazon_link]) relatively few people see the different aspects of unsustainability as related to each other. The link, as far as I can tell from just paging through, is discouraging financial speculation in favour of the financing of investment in green technologies that will generate real returns.

[amazon_image id=”0262027437″ link=”true” target=”_blank” size=”medium” ]The Bubble Economy: Is Sustainable Growth Possible?[/amazon_image]

Standard modern economics notoriously ignores energy use and has been criticised for this since at least Nicholas Georgescu-Roegen wrote [amazon_link id=”0674281640″ target=”_blank” ]The Entropy Law and the Economic Process[/amazon_link] – an almost unreadable tome, so it’s no surprise it had so little impact. What’s odder is that standard economics ignores resources in general and land in particular, despite its prominence in classical economics. Landlords were villains in all the classical versions, according to Thomas Sowell’s [amazon_link id=”0300126069″ target=”_blank” ]On Classical Economics[/amazon_link]. In [amazon_link id=”0486434613″ target=”_blank” ]Ricardo[/amazon_link], as in [amazon_link id=”067443000X” target=”_blank” ]Piketty[/amazon_link], landlords were “the passive beneficiaries of progress,” as the share of rental income in national income would inexorably rise.

I’m not sure why the postwar mainstream dropped land from economic models – was it really because they could only do the algebra with two factor-models? Whatever the explanation, there’s no excuse for omitting resources from thinking about the economy, alongside labour and capital. And what do we think about [amazon_link id=”0984725113″ target=”_blank” ]the race against the machines[/amazon_link] when we need to think about energy consumption too? Is a robot economy a sustainable one?