Author Archives: Diane Coyle

Interest rate mysteries

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The Price of Time: The Real Story of Interest by Edward Chancellor has generally been very well reviewed (see here and here for example) but sadly didn’t grip me. It has one message, hammered home in every chapter (which are organised more or less chronologically): that too low an interest rate (below the natural rate) is damaging. As a microeconomist, looking at the consequences of massive QE in recent times, this seems a persuasive argument. The case is handily set out in a section discussing John Locke’s view (p43 – I paraphrase a bit):

  • financiers benefit at the expense of ‘widows and orphans’
  • there is redistribution of wealth from savers to borrowers
  • There is inadequate reward for taking risk
  • bankers will hoard rather than lend
  • Too much debt will be incurred
  • money will seek higher returns elsewhere
  • asset price inflation will enrich the rich
  • low rates won’t revive the economy anyway

As someone who has been surprised by the macroeconomics argument that an unnaturally reduced price will make credit markets work better, these points make sense to me. The bulk of the book consists of illustrations of these various points using examples from past and present. It is a polemic: it asserts that low real rates have caused weak growth, asset price bubbles, high debt and financial fragility.

But I don’t think the book really grapples with how to reconcile the micro (interest rates as a market price) vs macro (interest rates for demand management) dilemma. Keynes is described as an unbeliever in a natural rate of interest and dismissed as somebody who never missed an opportunity to argue for lower rates. Nor does the book explain why real interest rates (and so presumably the natural rate) have trended lower for centuries, millennia even (see this Bank of England working paper).  Nor did it help me think about how to reconcile the short-term market clearing role of interest rates with the long term Ramsey formula that would give us now a low social rate of interest (if you take it seriously, zero rate of time preference to respect moral equivalence of future generations, plus an elasticity times a close to zero long-run growth rate).

So, while I largely agreed from the start with the point about monetary policy being too loose for too long post-2008, I ended this feeling like I’d been bludgeoned, and still with some unanswered questions about the interest rate. But it must be me, given the uniformly glowing reviews.

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Insecurity, Disenchantment – and Hope?

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A World of Insecurity: Democratic Disenchantment in Rich and Poor Countries by Pranab Bardhan covers territory that will be largely familiar to those of us suckers for punishment who have read books like How Democracies Die or How Democracy Ends. It points out the cynicism of populist leaders who, themselves part of the elite, and busy “conniv[ing] at some pruning of the welfare state” and stacking economic regulation in their own favour, nevertheless blame “elites” for the consequences of their own decisions. It notes the “trampl[ing] of due process and the rules and institutions of representative government.” But it also argues that there has been a growing cultural chasm between liberal professions and blue collar workers, facilitating the blame game played by populists. And observes the massive distributional consequences of massive amounts of QE.

The distinctive aspect of the book is looking at rich and poor countries through the same lens, Modi and India in particular. In all cases, he argues, the way to think about the role of the state is its special role “in pooling and underwriting risk for the masses of people” – a task in which most states have recently failed in the face of immense shocks – with more to come as people go cold and hungry this autumn and winter.

In the context of incompetent populist governments, it’s hard to see how the state will step up to the task. Bardhan places his hopes in labour unions and community organistions. The book ends with a plea not to despair, although it’s a gloomy read. The last sentence is a quotation from the last speech by Rabindranath Tagore: “As I look around I see the crumbling ruins of a proud civilization strewn like a vast heap of futility. And yet I shall not commit the grievous sin of losing faith in Man.”

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Books at a conference

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This past week I attended the excellent conference of the International Association for Research in Income and Wealth – 75 years old this year, founded and launched by national income luminaries such as Simon Kuznets, Richard Stone and Milton Gilbert. The papers are well worth a browse by all interested in economic measurement. It’s always interesting to hear what books are referred to at a conference, so here are all the references I picked up, dominated by economic measurement but broader in range than you might expect:

Thinking Fast and Slow – Daniel Kahneman

How to Make the World Add Up – Tim Harford

Trust in Numbers – Theodore Porter

Unto This Last – John Ruskin

Man’s Search for Meaning – Victor Frankl

The Power of a Single Number – Philipp Lepenies

GDP: A Brief but Affectionate History – Diane Coyle

A Brief History of Equality – Thomas Piketty

The Stasi Poetry Circle – Philip Oltermann

A History of National Accounting – André Vanoli

Measuring Social Welfare (1997) and Productivity: Information Technology and the American Growht Resurgence (2005) – Dale Jorgenson

 

Too complicated for tragedy

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George Demartino kicks off The Tragic Science: How economists cause harm (even as they aspire to do good) with the strong accusation that, “The economics profession is culpable in the contemporary backlash against democratic governance, civic obligation, and racial and other forms of equality. It is equally culpable in inducing the social conditions that promote the widespread rejection of expertise in policy-making.” He describes economists as ‘harm accountants’ while asserting that the profession ignores many of the harms caused by its advice. What to make of this set of charges?

Well, the blame game for contemporary ills is not a straightforward one. I’d share it around – with politicians, with financiers, with crooks – while agreeing that economics has significantly helped create the intellectual weather enabling others’ actions. I also agree with two key building blocks in Demartino’s argument. One is that economists are entirely wrong to insist that the positive and normative elements of their analysis are separable (see Cogs and Monsters): the concept of economic ‘efficiency’ is absolutely value-laden, and in an undesirable way. The other is that welfare economics needs rebooting (we will hopefully have a symposium out on this soon), and in particular to highlight the central dilemma of irreconcilably multiple dimensions (incomes and jobs but also community and culture) in evaluating policy choices at the same time that decisions are unidimensional (does the government sign the trade treaty or not?) Elizabeth Anderson is my go-to reference on this.

Having said that, I thought the book over-does the anti-econ rhetoric. Cost benefit analysis (CBA) is indeed highly flawed, and does indeed aim to come up with a single number weighing all costs and benefits against the same kind of metric, and with moral assumptions shovelled into its discount rate. But “morally reckless”? The limitations of CBA are well-rehearsed, especially by economists (including me but also titans like Nick Stern and Partha Dasgupta). The alternative to using CBA is – not using it. And then what? What decision making procedure is better? I was surprised the book didn’t make more of the arguments for participatory processes, for procedural justice, in trying to ease the many dimensions versus one dimension dilemma. Sen in particular emphasises this, and it’s a feature of public value approaches, which extend CBA to incorporate non-monetary dimensions of the choice, in a reasoned and evidenced framework.

I wasn’t particularly wowed either by the book’s alternative calculus of harms, a page-long list setting out a taxonomy in which economic harms form a minority group. The list seems to be top-down, and it isn’t clear what the principles of categorisation are. Nor does it help address fundamental questions. For instance, many of the examples of the harms done by economists consist of trade liberalisation treaties. There’s no doubt these harm certain groups of producers and workers, to which the standard economics response is compensation schemes – which never happen adequately. Many economists have rowed back from the view that trade liberalisation is always and everywhere a good thing. And yet increasing trade has – equally without doubt – underpinned post-war rises in living standards in many countries, and the Asian export-based miracle economies. Saying, ‘but the China shock in the Midwest, but Brazil,’ doesn’t imply trade liberalisation is always bad, which seems to be the assertion here.

(Personal gripe – the book also ignores Scitovszky’s 1941 refutation of the Hicks-Kaldor compensation argument. Which in my view restates the existence of fundamental dilemmas in policy choices…. the welfare evaluation all depends whose perspective you look at it from.)

So, is economics too reductionist? Yes. Are economists over-confident in their ability to solve problems? Often, yes. Is economics too paternalistic, assuming a god’s-eye view it cannot possibly have? Indeed. Was the shock therapy approach to post-1989 Russia a disaster? Yes! I agree with all of this. And yet I think it’s much more complicated than this book claims. 71vagYXe2KL._AC_UY436_QL65_

The slouch of history

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Like many people, I’ve been eagerly anticipating Brad Delong’s Slouching Towards Utopia: An Economic History of the 20th Century, and it doesn’t disappoint. Brad was a couple of years behind me in the Harvard graduate economics programme, was an early adopter of blogging, and has been a prominent online presence ever since. So his argument in one sense is no surprise, but it comes together as an unmissable book, even for a devoted reader of his tweets.

The book starts by framing the central point: the economy, and people’s lives, have been utterly transformed by the long 20th century of 1870ish to around 2010 in a continuous tide of change both ‘marvelous and terrible’. During that long 140 year century, the average economic growth rate (we are US/west focused here) was just over 2% a year, before and since, below 0.5% a year. Income levels doubled every 33 years during that period: “A revolutionized economy every generation cannot but revolutionize society and politics, and a government trying to cope with such repeated revolutions cannot but be stressed in its attempts to manage and provide for its people in the storms.” We’re now back down to doubling about every 150 years, which actually seems just as stressful for governments given the expectations of the previous four or five generations.

The structure of the book is then (unsurprisingly) chronological. It begins with the first era of globalization, between 1870 and 1914, when the key global flow was people: a hundred million people migrated across national borders. Governments embraced openness of all kinds, though, and there were revolutionary declines in transport costs. The 1870 launch of RMS Oceanic, an iron-hulled steam-powered passenger ship, cut travel time across the atlantic from a month to nine days and 3rd class fares opened the journey to all but the very poorest Europeans. The vast waves of migration helped make the US the dominant economic power of the 20th century.

The book moves on to the economy of empires in the first part of the 20th century. The mechanization of industry in the imperial North turned the colonized South into an economic periphery, exporting raw commodities and importing manufactures. These were, “Unable to build communities of engineering practice that might provide a path to greater, industrial, riches.” Their labour force was not literate in sufficient numbers, there wasn’t enough financial capital to invest in factories.

World War I and the Depression follow, and the narrative traces two currents of thought shaping post-1918 outcomes. During this period there was no hegemon – only the US could have been, given the weakness of post-war Britain, and it rejected that role as provider of global public goods such as financial stability for all. So the ideas of a return to an 1870-1914 liberal market order competed with ideas focused on social rights and relationships. Economists broadly fell into camps – this was the era of the socialist calculation debate – but policy elites in the West doubled down on austerity.

On we go to Russia and socialism in practice, and the brutality of Leninist and Stalinist economics: “Of the 1800 delegates to the 17th Congress in 1934, fewer than one in 10 went on to be delegates to the 18th Congress in 1939.” The rest were dead or in Siberia, while forced collectivization spread famine and death. Fascism and Nazism deformed much of the rest of Europe in the 1930s, and then came the catclysm of the second world war and Holocaust. As the chapter points out, not everyone shed their opposition to the bundle of policies that could be characterized as fascist. Some Hayekians in the 1980s, such as supporters of Pinochet, found their contrast with socialism appealing. (Mrs Thatcher gets a favourable passing mention as a firm opponent of the methods, even as she approved of the libertarian economics.)

World War II gives way to the Cold War in this sobering march of 20th century history, while the spillovers from Cold War led to many false developmental starts in the Global South – alongside the amazing successes of development in some East Asian countries. The book sees the contrast as one between the aim of self-sufficiency in Latin America and countries in the Soviet orbit versus the assumption of the need to survive in export markets in East Asia – the latter had no great powers pouring in resources, or interfering and advising.

The only bright spot in this long century appears to be les trentes glorieuses, the three post-war decades of social democracy. What was their magic? A high rate of investment. Full employment but no upward wage pressure as there remained (in most of Europe) and under-employed agricultural labour force to pull in. Steady growth in industries that reached their technological maturity in that era, enabling the location of industrial production to spread to more places.

But it didn’t last. The redistribution of social democracies came into increasing tension with the conditions for innovation and growth. The logic of how governments operate differs from the logic of efficient production, so nationalized industries became wasteful and ineffective. Sometimes only moderate efficiency is fine, or indeed welcome, but there are limits. In 1979 we saw the neoliberal turn. Why so? “In my view the greatest cause was the extraordinary pace of rising prosperity during the Thiry Glorious Years, which raised the bar that a political-economic order had to surpass in order to generate broad acceptance.” people had come to expect rapidly rising incomes and broad equality of outcome, and high employment and low inflation. If this stability stumbled, the order had to change.

So the book ends with the political success of the neoliberal order – winning the Cold War – and its economic failure. And here we are. We haven’t reached utopia but living standards are massively higher than in 1870. It hasn’t been a smooth course – far from it – a slouch rather than a march. But people are so much better off than the mass of humanity before the long 20th century.

The strength of the book – as well as its immense scope and depth (more than 500 pages) is that it’s a work of political economy, braiding the different strands of ideas, Hayek, Polanyi and Keynes. Although what it ignores (and fair enough) is the series of technologica revolutions. In addition, there are plenty of pleasing asides and details. Humans love narratives, so, “The secret weapon of the economist is the ability to count.” Or, “Contests and gift exchanges have more psychological resonance. It is more satisfying to receive (or give) a present or to win a prize than to buy the exact same thing…. By ignoring and trying to suppress these dimensions – to require that everything pass through a cash nexus – the market society dehumanizes much of life.” I like that it doesn’t claim there are easy lessons from the history, but insists that there are indeed subtler lessons. Definitely one to read – or pre-order: out on 15 September.

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