Monthly Archives: October 2014

Hume, Keynes and wisdom

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What’s not to like about a book that starts with [amazon_link id=”0199540306″ target=”_blank” ]David Hume’s[/amazon_link] contribution to economics. In [amazon_link id=”026202831X” target=”_blank” ]Keynes: Useful Economics for the World Economy[/amazon_link] by Peter Temin and David Vines begins with a chapter on Hume’s essay ‘Of the Balance of Trade’. They argue that not only was economics born in 18th century Britain, but so too was the first economic model with Hume’s price-specie flow mechanism. This classical tradition of thinking in terms of internal and external imbalance formed the background to Keynes’s thinking about global imbalances – and, this book argues, is an essential prism on today’s global economy.

This short book (and I like a short book) aims to re-introduce the Keynes who thought with such clarity about international links to a modern audience. It includes the historical context, including Keynes’s membership of the Macmillan Committee in 1930-31 and his early thinking about the gold standard, as well as (relatively brief) mention of Bretton Woods. It goes on to walk through the basics of Keynesian international macroeconomics – the IS-LM framework, the Swan diagram showing schedules of internal and external balance, and aggregate demand and supply. There is a final chapter on ‘An International Paradox of Thrift’ which argues there is a parallel between 2014 and the fag end of the gold standard in the 1920s-30s, with too many countries trying to increase savings.

What would Keynes recommend now, they ask, answering that all of Germany, China, the US and UK should expand their domestic economies. Of course, there’s nothing novel about suggesting that Germany and China need to acknowledge the harm their ever-increasing export surpluses have been causing – I’m more surprised by the advice to the US and UK to expand their external deficits further. The book justifies this on the basis that both countries have significant stocks of overseas assets and low interest rates.

This would be a useful book for students starting out on their international macro – it’s a very clear exposition of the basic models. I’m sceptical that one can find all of the wisdom needed to solve today’s problems in re-readings of Keynes, not least because of his trite remark that “in the long run we are all dead.” We’re in Keynes’s long run now, and the flaws with a framework that has looked only at flows (GDP) and not assets (natural, physical capital) are all too plain. Still, the international Keynes is more relevant to today than the domestic Keynes, and the pre-2008 global imbalances problem is still a problem today.

[amazon_image id=”026202831X” link=”true” target=”_blank” size=”medium” ]Keynes: Useful Economics for the World Economy[/amazon_image]   [amazon_image id=”0199540306″ link=”true” target=”_blank” size=”medium” ]Selected Essays (Oxford World’s Classics)[/amazon_image]

Update: I’ve been reprimanded on Twitter for misrepresenting Keynes. It’s true that his “long run” comment was a reference to how useless it is to think about equilibrium outcomes when the world never gets to equilibrium. However, whenever I’ve seen it quoted, it has been in the sense of there being no need to worry about long-run consequences of a favoured action. Still, to be accurate, I should indeed have attributed the triteness not to Keynes but to subsequent uses of the remark.

The logic of failure

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At the talk he gave last week, Cass Sunstein warmly recommended [amazon_link id=”0201479486″ target=”_blank” ]The Logic of Failure: Recognizing and Avoiding Error in Complex Situations [/amazon_link]by Dietrich Dörner. So warmly that I bought a copy and read it on my train journeys yesterday. It’s a very good account of what goes wrong with decision-making in complex situations – including any economic context – although I wouldn’t be quite as glowing in my praise as Prof Sunstein was. Still, definitely one to read, along with [amazon_link id=”0300144709″ target=”_blank” ]Nudge[/amazon_link], [amazon_link id=”0007256531″ target=”_blank” ]Predictably Irrational[/amazon_link], [amazon_link id=”000731731X” target=”_blank” ]The Invisible Gorilla[/amazon_link], [amazon_link id=”1846144744″ target=”_blank” ]Risk Savvy[/amazon_link], [amazon_link id=”0141015918″ target=”_blank” ]Gut Feelings [/amazon_link] etc etc., if the issue of decision-making is of interest to you.

[amazon_image id=”0201479486″ link=”true” target=”_blank” size=”medium” ]The Logic of Failure: Recognizing and Avoiding Error in Complex Situations[/amazon_image]

Some of the psychological territory it covers is familiar from the now-ample behavioural economics literature. This includes the difficulty of making calculations, the salience of recent events or things we just happen to have noticed, the problem of limited attention. However, less familiar was the diagnosis of how hard many people find it to take account, not only of interactions between variables, but also dynamics – it seems almost impossible for many people not to extrapolate in straight lines, and not to be too impatient to wait for feedback.

The book uses the results of lab experiments to illustrate the point over and over, including very simple challenges like including a time delay between setting a regulator dial and achieving the target temperature. The relationship between dial and degrees C is simple and linear in this example, but only one participant is patient enough to wait for the response to her first moves of the dial before finding the right setting. This inability to wait is obviously a near-universal characteristic. Certainly, my husband has this issue with every shower he gets into despite my calmly explaining it to him many times, and ends up with the totally predictable oscillating temperatures as he over-reacts to short-term feedback. (Of course, he does have the patience to be married to an economist.)

The book concludes that people can learn to be better decision makers but concludes with a very long list of the traits that we need to acquire to achieve good outcomes in non-linear dynamic and complex contexts with limited information i.e. the world. I finished reading it feeling more pessimistic. There are many examples given of participants in experiments who concluded that it was efficient to have inflicted a famine on a country on the computer, or that a bad outcome was the result of a conspiracy (by the computer!) against them. As the world is ever more replete with instant feedback, what are the chances of getting a more patient and psychologically sophisticated politics?

Who is nudging whom?

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Cass Sunstein has been visiting the UK and last week I attended a breakfast at which both he and the LSE’s Paul Dolan spoke. Prof Sunstein’s latest book (which I have read) is [amazon_link id=”1476726620″ target=”_blank” ]Why Nudge?[/amazon_link], and Prof Dolan’s (which I haven’t yet) is [amazon_link id=”0241003105″ target=”_blank” ]Happiness by Design[/amazon_link].

 [amazon_image id=”0300197861″ link=”true” target=”_blank” size=”medium” ]Why Nudge?: The Politics of Libertarian Paternalism (The Storrs Lectures)[/amazon_image]    [amazon_image id=”0241003105″ link=”true” target=”_blank” size=”medium” ]Happiness by Design: Finding Pleasure and Purpose in Everyday Life[/amazon_image]

As ever, the evidence about the effectiveness of various nudges is impressive. Nor is there any answer to the point that some choice architecture is inevitable, the only issue is whether you want it to be the status quo or something that can achieve better outcomes. But neither speaker could answer the question I have about the legitimacy of nudging: who decides what is ‘better’? Is it the (largely) white, male, middle class experts who work in the policy world? What will the wider consequences be of adopting nudges that get ordinary people to pay more income tax and cheat less on benefits, without looking for nudges that get bankers to pay themselves lower bonuses or extract more corporate tax revenues from big companies?

Both speakers made some interesting points, though, about the research agenda. There are conflicting behavioural findings to be somehow reconciled, more needs to be understood about how context makes a difference to outcomes, and there is a straightforward need for much more evidence from RCTs.

Fascinating stuff. Surely the fact that we can’t not nudge in some way makes the legitimacy question all the more urgent.

The Enlightened Economist Prize, 2014

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A month ago I announced the shortlist for the Enlightened Economist Prize this year – as a reminder, the rules are that any book I happened to read during the previous 12 months is eligible, and the choice is entirely mine. The prize is the offer of dinner to the winner.

It has been a tough choice this year as I enjoyed all the books and there was no obvious standout. So it has taken much deliberation for me to decide to award the prize this year to [amazon_link id=”0691152098″ target=”_blank” ]Complexity and the Art of Public Policy[/amazon_link] by David Colander and Roland Kupers. It wasn’t the easiest read on the shortlist, but is a thought-provoking book from which I learned a lot. Here is my review of the book. Congratulations to the authors, and if they should be visiting London, dinner is on me!

[amazon_image id=”0691152098″ link=”true” target=”_blank” size=”medium” ]Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up[/amazon_image]

 

Who owns the future? Not you

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It’s taken me a while to get through Jaron Lanier’s [amazon_link id=”0241957214″ target=”_blank” ]Who Owns the Future?[/amazon_link] It was highly recommended to me and I found it an interesting read. But as it’s a book about digital economics by a non-economist, and therefore written in a language foreign to the way I think about the issues, it was a surprisingly difficult read. I don’t think normal people would have the same difficulty.

[amazon_image id=”0241957214″ link=”true” target=”_blank” size=”medium” ]Who Owns The Future?[/amazon_image]

The theme of the book is that the economy has developed in ways that enable what Lanier calls ‘Siren Servers’ to appropriate the past and present labour of many other people for themselves, and thereby hollow out the middle classes. This situation is the result of the way the Siren Servers – he means Amazon, Facebook, Google etc – have used the presumption that “information is free”, specifically the data they all gather about all of us and by all of us, but advertising is paid for. Lanier quite rightly points out that the customers of these titans are the advertisers, not the individual users. Lengthy user agreements that nobody reads means the corporations take no risks, only revenues.

Lanier seems to believe that eventually this economic structure will become unsustainable because it is destroying normal middle class livelihoods and there will be nobody to buy the products being advertised. The Siren Servers become so big that they eat their environment (just as the financial markets did).

His proposed solution is nano-payments attached to information generated by individuals, whether that’s their ‘data’ or their creative or digital products. “If the system remembers where information originally came from, then the people who are the sources of information can be paid for it.” He points out that HTML, although marvellously convenient, only links one way, while Ted Nelson, an early thinker about linking, argued for two-way links. This is less convenient because of the additional updating required. In fact, the book left me completely unclear how two way linking to enable nano-payments would work in practice. However, Lanier argues: “This is the only way that democracy and capitalism can be in alignment.” Without greater symmetry between supplier and acquirer of information, the information economy will collapse.

I have an instinctive sympathy with the book’s argument, but do not think the unsustainability in capitalism we all can see at present boils down to the absence of micro-payments implemented via two-way hypertext linking. One question is Jean Tirole’s: will new digital giants benefiting from network effects come along and displace Google et al? If that hasn’t happened within, say, a decade, then the time would come to regulate these vital utilities to ensure they serve the public interest. More generally, I would look at beefing up competition policy as one of the levers to loosen the political power acquired by ‘Siren Servers’ – in which category I’d include the financial sector as well as the ICT sector.

The question of distributing productivity gains to the population as a whole is not confined to the digital economy either. While it’s right to be concerned about the jobbing musicians and journalists whose jobs are being destroyed by “free” online content, there are lots of other standard middle class jobs seeing living standards decline, so the economic and political issues go far beyond what’s covered in [amazon_link id=”0241957214″ target=”_blank” ]Who Owns the Future?[/amazon_link] For of course this started some time ago with blue collar jobs. However, it’s an interesting book, and it’s always worthwhile to hear what experts in other fields have to say about economic issues, for their different perspective. I think Lanier’s diagnosis and solution will have quite wide appeal.