Monthly Archives: December 2014

Monday morning market fundamentalism

Posted on by

Easing myself into the week with a bit of browsing, this review by Michael McCarthy in The Boston Review of a new book about Karl Polanyi piqued my interest. The book is [amazon_link id=”0674050711″ target=”_blank” ]The Power of Market Fundamentalism: Karl Polanyi’s Critique[/amazon_link] by Fred Block and Margaret Somers.

[amazon_image id=”0674050711″ link=”true” target=”_blank” size=”medium” ]The Power of Market Fundamentalism: Karl Polanyi’s Critique[/amazon_image]

As stated in the review, I wholeheartedly agree with the Polanyi perspective on markets: “Polanyi’s key work, [amazon_link id=”080705643X” target=”_blank” ]The Great Transformation[/amazon_link], demonstrates that markets and states are not separate entities, which each have their own unique and endogenous dynamics, but instead are inescapably intertwined and mutually constitutive.” Yet when I first read[amazon_link id=”080705643X” target=”_blank” ]The Great Transformation[/amazon_link] – some time in the mid-1980s – it irritated me enormously. I can’t remember why, and my brief notes on the book give no clue, but I do remember the emotion. So I’ve hauled it off my bookshelf and will have to re-read it, to find out why and whether it still has the same effect.

The review of the Block and Somers book, alluding to Albert Hirschman’s [amazon_link id=”067476868X” target=”_blank” ]The Rhetoric of Reaction[/amazon_link], makes it sound as though they are in effect arguing that there is a performative aspect to ‘free markets’: “Block and Somers’s unique contribution is to argue that these public narratives about the economy are key drivers of regulatory policy…. markets are not only embedded socially and politically; markets are also embedded in ideas.” Again, something I would agree with. One of the quotations I jotted down in my brief notes from [amazon_link id=”080705643X” target=”_blank” ]The Great Transformation[/amazon_link] is: “The introduction of free markets, far from doing away with the need for control, regulation and intervention, enormously increased their range.”

[amazon_image id=”080705643X” link=”true” target=”_blank” size=”medium” ]The Great Transformation: The Political and Economic Origins of Our Time[/amazon_image]   [amazon_image id=”067476868X” link=”true” target=”_blank” size=”medium” ]The Rhetoric of Reaction: Perversity, Futility, Jeopardy[/amazon_image]

Institutions and droughts

Posted on by

Reading about the Californian drought in today’s Observer, I wondered what Elinor Ostrom would have made of it. The drying up of bore holes used in the agricultural lands of central California is discussed as a problem of simple over-use, along of course with the absence of adequate rains. Ostrom would have pointed out, though, that it is also an institutional problem. Her dissertation was on collective arrangements for managing scarce water supplies in California, and she did much subsequent work on irrigation and water management arrangements. I don’t know anything about the current institutions managing water supply, but am willing to bet they have changed a lot since the late 1940s and 50s.

Ostrom’s second main area of study was the policing of metropolitan America, something else much in the news lately that could have done with her insight. She overturned the prevailing wisdom that large, centralised police departments were most efficient. “For patrolling, if you don’t know the neighborhood, you can’t spot the early signs of problems, and if you have five or six layers of supervision, the police chief doesn’t know what’s occurring on the street,” she said. But centralisation in areas of policing like dispatch or forensic laboratories made sense to take advantage of economies of scale. Again, it would have been good to hear her analysis of what has gone wrong in those police departments that enter neighbourhoods as if they’re an occupying force.

[amazon_image id=”0521405998″ link=”true” target=”_blank” size=”medium” ]Governing the Commons: The Evolution of Institutions for Collective Action (Political Economy of Institutions and Decisions)[/amazon_image]   [amazon_image id=”0691122385″ link=”true” target=”_blank” size=”medium” ]Understanding Institutional Diversity (Princeton Paperbacks)[/amazon_image]   [amazon_image id=”1558151680″ link=”true” target=”_blank” size=”medium” ]Crafting Institutions for Self-governing Irrigation Systems[/amazon_image]

Anybody who still thinks the importance of institutions is exaggerated should consider access to electricity: a late 19th and early 20th century technology still not available to all in many countries – even some countries that electrified many decades ago can regress in the availability of power, as power cuts and brownouts in places from California to Italy demonstrate.

Economists and refractory wild beasts

Posted on by

This morning I was grazing through [amazon_link id=”B000UWHGDM” target=”_blank” ]The New Economics: Keynes’ Influence on Theory and Public Policy[/amazon_link] edited by Seymour Harris, a collection of essays published shortly after Keynes’s death giving an early evaluation of the great man’s influence.

[amazon_image id=”B0012UV96Q” link=”true” target=”_blank” size=”medium” ]The new economics ~ Keynes’ influence on theory and public policy[/amazon_image]

The biographical essay by Joseph Schumpeter has this marvellous line:

“He had no taste for politics, but he had less than no taste for patient routine work and for breaking in, by gentle arts, that refractory wild beast, the politician.”

(I also like Schumpeter’s further description of him as: “A formidable controversialist whom nobody could overlook, everybody respected, and some liked.”)

By coincidence, I used a Keynes quotation recently in a presentation myself:

“There is nothing a government hates more than to be well-informed; for it makes the process of arriving at decisions much more complicated and difficult.”

No doubt he would have hated our present combination of electoral uncertainty and social media hyperbole.

Shouting back at your books

Posted on by

I’ve been very much enjoying [amazon_link id=”190555964X” target=”_blank” ]The House of Twenty Thousand Books[/amazon_link] by Sasha Abramsky. It’s a memoir of his grandfather Chimen Abramsky, the son of a famous Lithuanian rabbi, who ended up in North London as one of the social centres of post-war left-wing intellectual life. Chimen was a book dealer and seller, as well as a noted historian of socialist and Jewish history. Although he had no degree himself, he became a professor of Jewish studies at UCL and an expert on rare documents for Sotheby’s.

[amazon_image id=”190555964X” link=”true” target=”_blank” size=”medium” ]The House of Twenty Thousand Books[/amazon_image]

The book conveys a wonderful atmosphere of emotional warmth and practical chaos, sociable meals and long, late-night discussions of ideas. It made me try to estimate how many books there are in my house – fewer than 3,000 I reckon, and I’ve been thinking I need to do a big clear-out this holiday.

Still, it underlines again the importance of physical books – 20,000 on a Kindle would be meaningless. You couldn’t have read the notes Karl Marx wrote in the margins of his reading material if he’d been a Kindle-user. Needless to say, I was delighted to read yesterday this fabulous article by Tim Parks on why you need to read a paper book with a pen in hand to scribble on it – it makes it more likely that you will engage with the words, the ideas, if you interact physically with the book. It’s like shouting back at the radio: you have to have a book in your hand to shout at.

 

Times are bad and getting badder?

Posted on by

The crash of 1921. I certainly didn’t know about it before reading James Grant’s most enjoyable new book, [amazon_link id=”1451686455″ target=”_blank” ]The Forgotten Depression: The Crash That Cured Itself[/amazon_link]. It sent Harry Truman’s haberdashery store in Kansas City into bankruptcy, among many other businesses. It was bad enough that there was even a song about it, Ain’t We Got Fun?: “Times are bad and getting badder/ Still we have fun.”

[amazon_image id=”1451686455″ link=”true” target=”_blank” size=”medium” ]The Forgotten Depression: 1921: The Crash That Cured Itself[/amazon_image]

It is certainly not received wisdom that the downturn of 1921 classes as a depression – and, as the book notes, people were not yet speaking about ‘the economy’, although the terms inflation and deflation were in use. Yet GNP fell 24% in nominal terms in 1921, 9% in real terms. Industrial production fell twice as much in 1920-21 as it did in 2007-9. As an aside, I love the Oskar Morgenstern description here of the aggregate economic statistics as “an opinion in quantitative form.” (I’ve made a note to read Morgenstern’s [amazon_link id=”B00177CAI0″ target=”_blank” ]On The Accuracy of Economic Observations[/amazon_link], which sounds a corker just from the title.)

I learned a lot from [amazon_link id=”1451686455″ target=”_blank” ]The Forgotten Depression[/amazon_link]. The early 1920s are a lacuna, in my knowledge and I think generally in historical overviews, as the period is understandably overshadowed by the Great War and its immediate aftermath beforehand, and the crash of 1929 and the Great Depression afterwards. This book is an excellent supplement from the US perspective of the monetary and central banking pre-history to the period covered in Liaquat Ahamed’s [amazon_link id=”009949308X” target=”_blank” ]Lords of Finance[/amazon_link] about the 1930s. The early history of the Federal Reserve system, the move away from a strict gold standard, and the development of monetary policy – intensely debated – are described here in just the right amount of detail.

As the subtitle makes plain, James Grant (famous of course for his Interest Rate Observer) argues that the absence of any economic stimulus policy in 1921 meant the forgotten depression was acute but brief. It corrected itself in about a year, through the price mechanism – lower prices for goods and labour moved output and employment back up within a relatively short time. The federal budget was balanced. The Federal Reserve raised interest rates rather than lowering them. By contrast in 1929 the government piled in with policies to prevent wages falling and introduced deficit spending – and, as we know, that was anything but a shortlived depression. The reader is clearly meant to carry over the lesson to our own context.

I doubt the argument will change minds, given the entrenched positions people have at present over the contribution of stimulus versus austerity in explaining the paths different economies have taken since 2008. Reading [amazon_link id=”1451686455″ target=”_blank” ]The Forgotten Depression[/amazon_link] made me reflect on the impossibility of identifying empirically cause and effect at the macro level: it is simply impossible to isolate the contributions of specific policies and timings, given not only Milton Friedman’s “long and variable” lags in the effect of monetary (and fiscal) policy but also the importance of initial conditions, specific contextual events, different economic structures, and the sheer complexity of a modern economy (especially compared to that of the 1920s). For example, I’m sure a macroeconomist of a different disposition could make the opposite case to Mr Grant’s, and argue that the hike in interest rates in January 1920 (a 1.25% point rise in one go, to counter the post-war inflationary surge) turned a mild slowdown into a serious downturn.

There is an awful lot to be said for governments not trying to fine tune (or even approximately tune) the economy, given the general sea of uncertainty; equally the possibility of low-activity traps is evidently non-trivial, and it takes co-ordinated action to get out of them. The debt and financial market context in 2008 was so very different from that of 1920-21 that I’m not persuaded there are clear lessons for today from the forgotten depression. As the book concludes: “There are no controlled experiments in economics.”

But that does not mean we have nothing to learn from history – on the contrary, it is only history that teaches proper humility about the limits of economic knowledge and tools. I strongly recommend reading [amazon_link id=”1451686455″ target=”_blank” ]The Forgotten Depression [/amazon_link]- with an open mind – and thinking about its central point about that markets are (sometimes) a highly effective self-correcting process.