Tag Archives: markets

Simple is difficult

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I’ve been mulling over the question I posed a few days ago, about how to reconcile Andy Haldane’s superb Jackson Hole paper (The Dog and the Frisbee) arguing the case for simpler financial regulation with Cesar Hidalgo‘s equally persuasive arguments for using the capacity of Big Data to give us much more useful detail. It sent me back to one of my all-time favourite economics books, Thomas Schelling’s [amazon_link id=”0393090094″ target=”_blank” ]Micromotives and Macrobehaviour[/amazon_link], which is all about the aggregation of individual decisions. (Coincidentally, Sebastian Mallaby wrote about the same question in the FT yesterday.)

It hasn’t answered my question, but what struck me this time was how difficult it is to come up with the compelling reasons for individuals to align their behaviour in the common interest. There is the traffic light example, but Chapter 3 gives a few examples of effective rules and norms, and many other examples of problems – free-riding, collective action problems, lemons etc. I conclude that simple is difficult – you have to find the right simple rule for the context and it has to create strong self-interest in abiding by it. Still, Schelling is optimistic. He writes:

“These problems often do have solutions. The solutions depend on some kind of social organization, whether that organization is contrived or spontaneous, permanent or ad hoc, voluntary or disciplined….. What we are dealing with is the frequent divergence between what people are individually motivated to do and what they might like to accomplish together.”

And there are many ways to make the collective bargain stick, he argues. I’m in an optimistic mood this morning, and will go with the argument that between social norms, morals, institutions and even regulations can change, and make a big difference to collective outcomes.

[amazon_image id=”0393090094″ link=”true” target=”_blank” size=”medium” ]Micromotives and Macrobehaviour (Fels Lectures on Public Policy Analysis)[/amazon_image]

Was Alan Greenspan a founding member of ‘Occupy’?

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This morning, through one of those chains of mental connections that would take too long to explain, I picked up Alan Greenspan’s 2007 book [amazon_link id=”0713999829″ target=”_blank” ]The Age of Turbulence[/amazon_link]. I was expecting to mock his triumphalism and complacency, not having read it since it was published. It was a surprise to find, along with a confidence about the lasting effects of new technologies on productivity growth, a real sense of the fragility of the globalized, financialised economy of which he had been an important architect:

“The impact that fixing our school system would have on our future level of economic activity may not be easy to measure, but unless we do so and begin to reverse a quarter century of increases in income inequality, the cultural ties that bond our society could become undone. Disaffection, breakdowns of authority, even large-scale violence could ensue.” (Extraordinary, this one – Alan Greenspan as a founder member of the Occupy movement!)

“The dysfunctional state of American Politics does not give me great confidence.”

“History has not dealt kindly with the aftermath of protracted periods of low-risk premiums….. Value is what people perceive it to be. Hence liquidity can come and go with the appearance of a new idea or fear.” … A financial crisis was “brewing”, he wrote.

“Markets have become too huge, complex and fast-moving to be subject to 20th century supervision and regulation…. For over 18 years my Board colleagues and I presided over much of this process at the Fed. Only belatedly did I … come to realize that the power to regulate administratively was fading.”

His conclusion remained, in mid-2007, that markets would therefore best be left to regulate themselves. The overall tone of the book is very firmly that of the Alan Greenspan we all have in mind – pro-market and anti-intervention, optimistic about globalisation and technology, far more concerned about inflation than deflation. But reading the introduction and conclusions again with the benefit of hindsight, those notes of caution are intriguing.

[amazon_image id=”0713999829″ link=”true” target=”_blank” size=”medium” ]The Age of Turbulence: Adventures in a New World[/amazon_image]