Monthly Archives: August 2018

My damp Scandinavian view of the world

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It’s the last full day of our holiday in Sweden and the weather has turned a bit wet, so in between the detective novels (the latest – Jill Paton Walsh’s Dorothy Sayers update, Thrones, Dominations) I read Robert Peston’s WTF. It’s as well-informed and full of insight about the present state of the world as you’d expect from such a distinguished journalist (although written in a slightly matey style which didn’t appeal to me). The book is mainly about Brexity UK – with a brilliant chapter on our last general election and the respective characters of Mrs May and Mr Corbyn – though it touches on parallel trends in Trumpland. I agree with his diagnosis that the issues contributing to the anti-establishment anger date back well before the financial crisis, to the deindustrialisation of the 80s and 90s, and the chasm between London/SE and the rest of the country. The book’s fundamental point is that the economy stopped working for an ever-growing number of voters, vast numbers of whom have seen no significant rise in living standards for well over a decade, and even longer for too many.

Interestingly, in the light of the current fashion for saying the big economic problem is all about concentration and the exploitation of market power, Peston instead pins the blame for a dclining labour share of national income on the Reagan-Thatcher-led attack on union power from the mid-70s on. The press reports of the Jackson Hole discussions this year noted that debate there focused on the issue of concentration. When I expressed some doubt on Twitter that this was anything other than a US phenomenon (as the UK labour share looked from eyeballing an ONS chart to have been fairly stable), a couple of replies insisted I was wrong (one arguing I was looking at the wrong data, and the other claiming the IMF said it was a global phenomenon). Well, after my years on the Competition Commission, I’m a big fan of tough competition policy, and agree it has been lax in the US for some time. The US also has an issue with creeping occupation licensing as the Obama CEA pointed out. But, reading up on the IMF’s recent work on trends in the labour share makes plain the great diversity of national experiences – and indeed, they say the UK labour share has increased.

Well, whenever a phenomenon is so varied across countries, it tells you institutions are playing a big part. Combined with the fact that across countries the big decline in the labour share occurred from the mid-1970s to around 2000, surely labour market institutions played a key part – for all that it’s right to be concerned about concentration in some countries/sectors now. (And the IMF data goes only to 2014, so perhaps there has been a dramatic decline in the latest 3 years of data…)

Anyway, looking out at the rain, on now to proofs of the forthcoming book by Alan Greenspan and Adrian Wooldridge, which I’m going to be reviewing in due course – a history of capitalism in America, which is going to be fascinating, as I’m anticipating a defence. There has also on Twitter been some discussion about what books to put on the syllabus for a history of capitalism course (really, a history of thought course), in which I didn’t participate (& can’t find now), but noted with interest that all the books were critiques, from The Great Transformation on. Maybe the Greenspan/Wooldridge book could balance it out.

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Holiday reading

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I’m on holiday & luxuriating in the reading time, mostly non-work books. I did, though, read AIQ: How Artificial Intelligence Works and etc etc (am fed up now with these super-long subtitles) by Nick Polson and James Scott. If you read about AI already then this won’t add anything new. However, it’s a very nice, accessible and balanced introduction to AI for those who aren’t semi-immersed already, which is most people of course. The book explains the basics, and gives lots of examples of what ML and AI are already doing, and what they might be capable of in future – while also explaining what the potential risks are. It’s an enjoyable read, too, with lots of stories and real world examples. It isn’t Pollyannaish exactly, but it is nice to read something on this subject that isn’t all gloom and doom. AI beginners should start here.

One thing I particularly appreciated was the way the authors highlight the role of female scientific pioneers: astronomer Henrietta Leavitt (no, I’d never heard of her either), Grace Hopper, and Florence Nightingale. I learnt some new things: that real time data monitoring is already a thing in Formula 1 racing and starting now in basketball, for instance. There’s also a nice section on health explaining that the barriers to using AI and health data are not technological but social and economic – which will make it extremely hard to use data for the benefit of individual patients, even as massive data sets enable research on populations.

Apart from that, it’s been a diet of detective novels – Mick Herron’s Dead Lions (love this series), Abir Mukherjee’s A Rising Man – and also Stanislaw Lem’s The Cyberiad (clever but an acquired taste). And now, the great Swedish outdoors beckons.

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What numbers make visible & what they erase

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That I read Caitlin Rosenthal’s Accounting for Slavery: Masters and Management was a bit random – we’re going away for a week and I didn’t want to start a holiday book, so pulled this bound proof the publisher had sent me off the pile. I’m glad I did. It’s a terrifically interesting book. It’s in effect a business history of slavery in the Caribbean and the American south, using the detailed management records that remain to understand how plantations were run – just as business historians would later use similar documentary evidence to trace the practices of management in industry. As she writes, “Scale required structure.” The sugar and cotton plantations were sometimes very large scale indeed. And the science of management emerged in this context before any manufactories grew to the same kind of scale.

There is a particularly illuminating section on the standardisation of record keeping: “Preprinted forms were an important and overlooked technology in organizing plantation labor.” Early records were hand written and ruled, with documents often sent to absentee owners in England – this was, Rosenthal points out, also one of the earliest instances of the separation of ownership and control, as large plantations were often run by professional managers. (The role of earnings from slavery in fuelling the growth of financial instruments and the City in England are the subject of this UCL research project, Legacies of British Slave-ownership) The availability of standard forms helped spread the ‘scientific management’ techniques – again, ahead of Taylor’s famous introduction of scientific management in industry. (This reminded me of Donald Mackenzie’s brilliant essay on how the commercial availability of options prices calculated by computers helped grow derivatives markets.)

Rosenthal also covers the role of slaves as, literally, human capital. Plantation managers kept inventory records and appied several different valuation techniques. As she observes, this was fundamentally an issue about property and therefore about power and politics, property being something defined by law. (And property in the form of people is more political than most.) By the eve of the Civil War, the total value of enslaved human capital was over $3 billion. (Before anyone takes this particularly noxious version of human capital as an opportunity to knock economics, economists were prominent in the abolition campaign, and historian Thomas Carlyle named economics the ‘dismal science’ for not respecting the property rights of slave owners.)

Rosenthal (formerly a management consultant) ends by pointing out that labor conditions for many people in the world still leave much to be desired: “Confronting plantation account books can remind us how easy it is to overlook the conditions of production from the comfort of a counting house or safety of a computer screen. Reckoning with the ways planters accounted for slavery should encourage us to rethink the kinds of data we record and how we use it. Quantitative records can help us to see farther, but only if we remember what the numbers make visible and what they erase.”

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The globalization scorecard

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This is not a cheering time for economists – most of us – who favour trade as a means (a technology, if you like) for improving standards of living over time. For the first time in the life time of a middle-aged economist, trade wars at scale have replaced the progressively more open trading environment we grew up with. (And as Rebecca Harding and Jack Harding have written, trade literally seen as a weapon.) An obvious question is whether this political environment is an empirically reasonable backlash against globalization: has globalization – in the form of trade with lower income economies, or offshoring, or a labour replacing direction of technical change – caused income inequality within the western economies to an extent that made it ultimately politically unviable?

This is the question addressed by a short and accessible overview of the empirical literature by Elhanan Helpman, Globalization and Inequality. He surveys the work to date on each of these channels through which globalization might have led to (internal) inequality. (As Branko Milanovic, Francois Bourguignon and others have observed, globalization reduced inequality at the global level. It is the OECD income distribution that was skewed, especially in the US, and elsewhere especially in the 1980s.)

The conclusion is that at the aggregate level, none of the empirical studies can attribute much of the change in income distribution to the forces of globalization: “the surprising result is that rising inequality in recent decades has been predominantly driven by forces other than globalization.” As Helpman notes, aggregates are no comfort to individuals, and there have certainly been trade-related shocks to the jobs and incomes of certain groups of people and places. These localized shocks have contributed to the current political context. The book also ends with the unanswered questions: work to date has looked at the various channels separately, but what is their combined effect? what happens if you include also the effects of international migration, and capital flows? Such interactions might make the whole more than the sum of the parts.

Finally, there is the question of what policy lessons to draw from a vast amount of research? Different countries have responded to globalization shocks in different ways. Trade wars will immiserize everyone, but are there better responses and if so, what? How does the best response vary with context?

Inevitably, there is a lot the book doesn’t cover, including specific thorny issues in recent trade negotations (such as TRIPS, contentious areas of services etc). It sets itself a more tightly defined challenge, and it’s a nice, compact overview of what is and is not known, about the effect of globalization on inequality at the macro level within OECD countries, and the role of economic theory in understanding those processes.

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Imagining the economy

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This week I’ve been reading Uncertain Futures: Imaginaries, Narratives and Calculation in the Economy, edited by Jens Beckert and Richard Bronk. The editors are the authors respectively of Imagined Futures: Fictional Expectations and Capitalist Dynamics and The Romantic Economist: Imagination in Economics, so this essay collection builds on their interest in how the ideas people have about the economy shape the economy. This preoccupation touches on the performativity literature, best exemplified in economics by Donald Mackenzie’s An Engine, not a Camera (although it seems to me the case for performativity is far more compelling in the financial markets than in other domains). Also on some classic works about how we discuss the economy – Deirdre McCloskey’s The Rhetoric of Economics and Albert Hirschman’s The Rhetoric of Reaction.

The majority of contributors to Uncertain Futures are not economists, bringing to bear perspectives from sociology, anthropology, STS, psychology. The economists who contribute are known for their creative thinking – Andrew Haldane is one, with a chapter on agent based modeling at the Bank of England. I fear this means the book won’t get a wide readership among economists. This is a pity. Although the chapters are a mixed bag, I found the section on the role of imagination versus techniques such as net present value appraisals in innovation very interesting, for instance. Innovators and entrepreneurs are hardly homo economicus examplars.

There are signs of interest among more mainstream economists in this territory of ideas. In economic history one can think of the varying perspectives of McCloskey and Joel Mokyr. Narrative economics is becoming a thing, advocated by Robert Shiller and by George Akerlof and Dennis Snower, and there is Akerlof and Rachel Kranton‘s work on identity economics, and Morton and Schapiro’s recent plea to let the humanities inform economics, Cents and Sensibility. I would add also Kaushik Basu’s recent fabulous book The Republic of Beliefs. The eminent Paul Collier has described this emerging body of work as Behavioural Economics 2.0. Where version 1.0 explored fixed behavioural patterns, the frontier now is the social and personal dynamics of collective economic choices.

For Beckert and Bronk, the focus is on the future. In their introduction to the book they are interested in the future orientation of capitalism and how the relentless search for innovations, for new markets, requires an act of imagination. This may be based on evidence and reasoning, but – given the unavoidable uncertainty about the future – requires a mental leap simply not addressed in everyday macroeconomics and finance. “If the expectaions of those operating in innovative markets cannot be based on the rational calculation of probabilities based on past data, how do they form the expectations and beliefs on which their consequential decisions depend? And if we live in a world of radical uncertainty and hence are unable to gravitate to a uniquely rational set of expectations, how do we co-ordinate our actions with one another?”

One means of co-ordination, ironically, is the use of techniques such as NPV or CBA calculations, even though they are presented as ‘objective’. Another means, which some political leaders know instinctively, is the narrative – the moonshot, the glory of the nation or the city. And being future-oriented is fundamental to growth – there’s a very nice, lesser known Paul Krugman paper on the need for expectations about the future to weigh more heavily than habits from the past to deliver growth outcomes.

Anyway, I commend this perspective to economists. This is exciting intellectual territory and seems to me rather important at a time when uncertainty about the future seems more uncertain than ever.

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