Tag Archives: capitalism

Robert Shiller, Dr Jekyll and Mr Hyde, and Karl Marx

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I’ve been lucky enough to have met two of this year’s three economics Nobel winners, Gene Fama and Bob Shiller – my only contact with Lars Peter Hansen was the excitement of learning about Generalized Method of Moments estimates in their early days, while I was mid-way through my PhD. Both Profs Fama and Shiller were a pleasure to meet.

I interviewed the former for The Times in the relatively early days of the financial crisis (I can’t find the archived article but it was linked to his Onassis Prize lecture at the Cass Business School), and he was unmoved in defending the efficient market hypothesis, as the lecture shows.

Prof Shiller is somebody I’ve met a few times, and you couldn’t hope to meet a kinder or more charming person, or one who lives up better to the absent-minded academic label. His best-known book is of course [amazon_link id=”0691123357″ target=”_blank” ]Irrational Exuberance[/amazon_link], perfectly timed before the (first) crash of 2001, followed by [amazon_link id=”069114592X” target=”_blank” ]Animal Spirits[/amazon_link] co-authored with George Akerlof. Both books are appreciated by those who believe financial markets to have become a dangerous excrescence of capitalism and illustration of the dangers of markets in general.

However, Shiller has also in between written [amazon_link id=”0691120110″ target=”_blank” ]The New Financial Order[/amazon_link], [amazon_link id=”0691154880″ target=”_blank” ]Finance and the Good Society[/amazon_link] and [amazon_link id=”0691139296″ target=”_blank” ]The Subprime Solution[/amazon_link], books promoting the greater use of financial markets, or extending markets to areas where there are currently none – such as sovereign insurance against natural disasters. Many commentators have pointed out the apparent paradox of the Nobel committee rewarding both Shiller and Fama for their work on financial markets, but fewer the apparent [amazon_link id=”149228856X” target=”_blank” ]Jekyll and Hyde[/amazon_link] character of Prof Shiller’s own work.

[amazon_image id=”0691123357″ link=”true” target=”_blank” size=”medium” ]Irrational Exuberance: (Second Edition)[/amazon_image]

Speaking of anti-capitalism, this article about the 2008 crash leading to a revival of Marxism among the young reminded me of this 1997 John Cassidy article on – The Return of Karl Marx – sixteen years ago this week. [amazon_link id=”0199535701″ target=”_blank” ]Capital[/amazon_link] is pretty unreadable in my view, but Marx wrote about technology, inequality, power struggles and the disequilibrium dynamism of the economy, and will always look attractive as long as mainstream economics ignores these un-ignorable aspects of the world.

[amazon_image id=”1840226994″ link=”true” target=”_blank” size=”medium” ]Capital: Volumes One and Two (Wordsworth Classics of World Literature)[/amazon_image]

We’re all Coasians now

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Of course there has been a lot written about Ronald Coase this week, marking his death at the age of 102. I thought Joshua Gans was very good, and this short paper by Herbert Hovenkamp usefully sets Coase in the context of the economic debates of the times. Justin Wolfers linked to this terrific (pdf) Deirdre McCloskey note on the Coase Theorem from 1998. There’s a lot of commentary, though, and it’s interesting to see how many different perspectives on his work there are – truly, there is a Coase for everyone.

As it happened, Tim Harford wrote last weekend (FT) about one of the intellectual heirs of the Coasian tradition of institutional economics, Elinor Ostrom, in an article contrasting her richness of thought with the catchy but shallower work of Garrett Hardin on the ‘tragedy of the commons’. Ostrom had researched how disputes over water rights in and around Los Angeles had been resolved by negotation, Harford writes:

“She knew of other examples, too, in which common resources had been managed sustainably without Hardin’s black-or-white solutions.

The problem with Hardin’s logic was the very first step: the assumption that communally owned land was a free-for-all. It wasn’t. The commons were owned by a community. They were managed by a community. These people were neighbours. They lived next door to each other. In many cases, they set their own rules and policed those rules.”

Ostrom’s co-winner of the Nobel Prize was Oliver Williamson, who took the Coasian tradition in a different direction, equally fascinating. He studied the structure and activity of businesses, taking forward Coase’s original research questions – why do firms exist? What explains why a large firm can succeed whereas a planned economy like the Soviet Union runs into trouble? I always think Williamson’s brilliant books [amazon_link id=”068486374X” target=”_blank” ]The Economic Institutions of Capitalism[/amazon_link] and [amazon_link id=”0195083563″ target=”_blank” ]The Nature of the Firm[/amazon_link] should be read alongside Herbert Simon’s [amazon_link id=”0684835827″ target=”_blank” ]Administrative Behaviour[/amazon_link]. Simon brings another perspective to understanding business organisations and the institutions of capitalism, introducing the wrinkles of actual human decision-making. As Simon famously observed, an alien landing in a capitalist economy would note that the domain of administered organisations including firms would far exceed the domain of market transactions.

[amazon_image id=”068486374X” link=”true” target=”_blank” size=”medium” ]The Economic Institutions of Capitalism[/amazon_image]

[amazon_image id=”0684835827″ link=”true” target=”_blank” size=”medium” ]Administrative Behavior: A Study of Decision-making Processes in Administrative Organizations: A Study of Decision-making Processes in Administrative Organisations[/amazon_image]

There is a terrific recent guide to using economic theory, including transaction cost and information economics, to the world of modern business in [amazon_link id=”1455525200″ target=”_blank” ]The Org: The Underlying Logic of the Office[/amazon_link] by Ray Fisman and Tim Sullivan – I reviewed it here.

[amazon_image id=”1455525200″ link=”true” target=”_blank” size=”medium” ]The Org: The Underlying Logic of the Office[/amazon_image]

Predatory capitalism

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Isn’t all capitalism predatory, some contemporary critics might well ask, looking at the post-crisis economic landscape? Geoff Mulgan, chief exec of NESTA, is more optimistic in his recent book [amazon_link id=”0691146969″ target=”_blank” ]The Locust and the Bee: Predators and Creators in Capitalism’s Future[/amazon_link]. He foresees the possibility of sustainable economic growth built on relationships, with productive health and social care sectors, green innovation and social enterprise.

[amazon_image id=”0691146969″ link=”true” target=”_blank” size=”medium” ]The Locust and the Bee: Predators and Creators in Capitalism’s Future[/amazon_image]

It won’t be business as usual; instead we’ll see “concentrations of capital guided by social and environmental goals as well as commercial ones; circular production systems; the civil and social economy; the ever-growing social industries providing health care, education and support; the collaborations of cyberspace and new tools for collective intelligence; the household reasserting itself as a place of production; the worlds of parallel exchange systems, collaborative consumption and time accounts.”

This lovely vision of ‘creative capitalism’ is some distance from the ‘predatory capitalism’ that brought us the crash, and continues to serve up poor service at high prices to support executive pay packets. The book makes a good case that the dysfunction we’re all too aware of now is itself the dynamic that will change the character of the capitalism mixed economies we live in. Mulgan draws on the literature on technology-driven long waves to explain how cycles of change come about: every crisis contains the seeds of its own destruction, as it were. Of course there are forces of reaction, but he has a fundamental belief in the power of innovation and human creativity to overcome them. The chapters on these dynamics form the core of the book, and set out the dynamics very clearly.

This is cheering, but I’m not so sure. The book is excellent on the economic dynamics of innovation, but oddly quiet – certainly for such a politically-aware author – on the politics of changing ‘the system’. It discusses, and dismisses, the utopianism of anti-capitalist protest, but does not cover the forces of cynicism and inertia. Mancur Olson’s classic work on rent seeking and the political economy of elite predation (for example in [amazon_link id=”0674537513″ target=”_blank” ]The Logic of Collective Action[/amazon_link]) is cited briefly; this theme is underplayed. The predators are in a strong position. They are defended by a barricade of legislation, ways of doing business and social norms.

Take one small example of the ability to resist change: today’s FT reports that the drive to increase the proportion of women in the boardroom of FTSE companies has ground to a halt, might in fact be going into reverse. The reason is almost certainly that the method of recruitment remains the old boys’ network: incumbents and headhunters will say, with sincerity, they’d love to appoint more women, they make huge efforts to shortlist women, but there aren’t enough suitable candidates. But ‘suitable’ means known to them and with the same career path as a male candidate. Of course, nothing will change without a legal quota. What are the odds on getting that legislation? Indeed.

Now pan out, and think about the legal and regulatory changes needed to open large swathes of the economy – banking, transport, pharmaceuticals, farming & agricultural trading – to the innovative start-ups that are indeed, as the book suggests, all around.

So although I like the vision set out in [amazon_link id=”0691146969″ target=”_blank” ]The Locust and the Bee[/amazon_link], and like Geoff Mulgan am encouraged by the opportunity offered by the crisis and inherent dynamics, it’s time to plunge into the legal and political nuts and bolts of turning predation into creation.

Robot wars – the prequel

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[amazon_link id=”B00BIOFLWE” target=”_blank” ]America’s Assembly Line[/amazon_link] by David Nye is fascinating. It’s a history of the origins of the assembly line and mass production, with a strong focus on the motor industry, and traces the spread of mass production through other manufacturing and non-manufacturing sectors (such as housebuilding). The organisation of the line evolved over time, and varied in different places. The imperative of wartime production was an important driver. Post-war, the cybernetics revolution led to far greater automation. On the other hand, the Toyota lean production system brought in greater flexibility for workers on the line.

[amazon_image id=”B00BIOFLWE” link=”true” target=”_blank” size=”medium” ]America’s Assembly Line[/amazon_image]

The public loved the product of the assembly line, affordable mass-produced consumer goods. “In a typical American town, a working class family that couldn’t afford both a bathtub and a car was more likely to opt for a car,” Nye writes of the 1920s. (There’s a parallel with the well known factoid about the greater prevalence of mobile phones than toilets in Indian households now – any kind of means of communication seems peculiarly compelling.) Access to assembly line products, alongside the growth of a suburban middle class, spread far faster in the US than in Europe.

The relationship between machines and workers is an important theme in the book. Although Henry Ford famously paid $5 a day, double the going rate, many workers left before they qualified for it, so hard was the work. The unions had to fight hard to get recognition in the industry. The factories were notorious for robbing workers of any autonomy, and for speeding up the line to extract greater effort. Although 1927 had even brought a symphony to the Model T (premiered by the Boston Symphony Orchestra) he pressure of the assembly line soon became a frequent theme in films, songs and TV – Charlie Chaplin’s Modern Times being a prominent example.

The monotony and conformity of mass production also meant it was slow to spread in Europe, where the markets were anyway far smaller and therefore less able to sustain huge volumes. And there was a culture clash: “British workmen regularly stopped the assembly line for tea breaks.” More importantly, though, “No European nation could develop an American style production system unless it also embraced mass consumption.” None did before the war – the Soviet Union was most interested in Ford’s methods, but could not provide the workers capable of doing the jobs.

Through the post-war era, opinion divided between the welcome given to consumer products and welfare capitalism – Ford also offered savings plans, medical care in the factory, educational programmes – and the cultural distrust of conformity and the alienation of labour on the assembly line. The latter was, again, most pronounced in Europe. And yet European consumers were just as keen on cheap goods. Vice President Richard Nixon famously showed Nikita Kruschev around a model home at the American National Fair exhibition in Moscow in 1959 – Francis Spufford’ superb book [amazon_link id=”0571225241″ target=”_blank” ]Red Plenty[/amazon_link] brings this scene to life. Nixon presented Kruschev with a nice paradox about the benefits of mass produced goods and homes, in that American consumers had a vast choice: “We do not wish to have decisions made at the top by government officials who say all homes should be built in the same way.”

“Commodity fetishism meant that there was a widespread desire for what the assembly line produced but an equally widespread disdain for the work involved,” writes Nye. At the same time, concern began to grow – in line with automation – that the jobs involved were vanishing anyway. The fear of robots eliminating the need for humans emerged around this time.

No matter. Consumerist capitalism was even more heavily criticised by the counter-culture of the 1960s, culminating in 1968. And by the 1970s the far greater flexibility of the Toyota system was outperforming the rigidity of Fordism. By 1990, Volvo was advertising its abandonment of the assembly line. It had small teams assembling an entire vehicle. It took 4 months to train a Volvo worker, compared to 4 hours on a conventional line, but worker turnover was low and productivity high, and problems solved by individual teams with no spillover to the rest of the plant.

Yet the effect of automation on jobs remained a constant. The western economies ‘deindustrialised’. Detroit started its gothic decline – so well captured by photographers Yves Marchand and Romain Meffre in their book [amazon_link id=”3869300426″ target=”_blank” ]The Ruins of Detroit[/amazon_link]. and by the incomparable Bruce Springsteen, voice of blue collar America. Nye concludes: “Americans accepted mass production as though it were part of the natural order, with its subdivision of work, its interchangeable parts, and its organization of everyday life in terms of efficiency and productivity. Year after year they expected higher wages, more consumer goods and a general acceleration of experience. By 2013, however, this was an outdated and unsustainable economic order. The classic assembly line had been based on a large semi-skilled working class, not on robots and outsourcing.”

[amazon_image id=”3869300426″ link=”true” target=”_blank” size=”medium” ]The Ruins of Detroit[/amazon_image]

Robots, in short, don’t buy washing machines and fridges, and all the skills of the Mad Men won’t change that.

This book is an excellent companion read to the current robot debate – nicely summed up in this Economist article.

The unknown robber barons

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In today’s Financial Times, Edward Luce points out that the US – creator of the internet – has dropped from top in the late 1990s to 16th now in the OECD league for average internet speeds, and has some of the highest prices too. He notes that South Koreans speak of trips to the US as ‘internet holidays’, so unfavourably does the experience compare with online access back home. Given the rise of Samsung – which spends more than twice as much proportionately on R&D as Apple (5.7% vs 2.2% of revenues respectively) – it can only be a matter of time before online leadership migrates decisively to Asia.

The article is clear about the problem – the Comcast monopoly, and the donations the company makes to Barack Obama, along with its enormous lobbying effort. Comcast’s senior VP David Cohen is apparently one of the US President’s biggest fundraisers. Comcast spent more than $14m on lobbying in 2011, making it the ninth biggest spender in the US.

This only confirms the argument of Susan Crawford’s book [amazon_link id=”0300153139″ target=”_blank” ]Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age[/amazon_link], which directly compares Comcast to the giant trusts of the late 19th century, broken finally by the struggle to implement the 1890 Sherman Anti-Trust Act. I have to say the book isn’t the most exciting read in the world – not as enthralling as Tim Wu’s [amazon_link id=”1848879865″ target=”_blank” ]The Master Switch[/amazon_link] – but nevertheless it does a superb job of depicting Comcast’s strategy. It emerges as a superbly well-run business in strategic terms – although not, it seems, for customer service.

The company has been particularly astute about its engagement with Congress and regulators, and in judging the technological trajectory of the industry. However, the book also explains why and how the FCC made the decisions that now look mistaken, and is therefore a rare instance of insight into the complexities and compromises of the official and political world. This is much more useful than playing the blame game. So though there may be more US-centric detail than the general reader wants, this is an essential book for anyone interested in communications markets and digital convergence. I have to admit I’d heard of Comcast, but not at all of its controlling and founding family, the Roberts pere et fils, the unknown “robber barons” of the new gilded age.

[amazon_image id=”0300153139″ link=”true” target=”_blank” size=”medium” ]Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age[/amazon_image]

Apparently Susan Crawford is a candidate for the post of next head of the FCC, but the book attacking the Comcast monopoly is seen to have damaged her chances. On the other hand, President Obama doesn’t need re-electing, so maybe he will be brave and nominate a candidate with the interests of American consumers at heart – I was staggered to read in Crawford’s book that the average user pays $143 a month for their high-speed internet and cable bundles.

For here is another example of the way big business has bought political power, and therefore the freedom to make still more money and buy still more power, in America. That subversion of social welfare in the interests of the rich affects the rest of the west too, not to mention cementing the future economic and geo-political strength of Asia.