Tag Archives: political economy

Political bubbles

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The Adelman biography of Albert Hirschman, [amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher[/amazon_link], is great but too big to carry around so I’m reading it at home, and on the tube I’m reading [amazon_link id=”0691145016″ target=”_blank” ]Political Bubbles[/amazon_link] by Nolan McCarty, Keith Poole and Howard Rosenthal, & have almost finished.

[amazon_image id=”0691145016″ link=”true” target=”_blank” size=”medium” ]Political Bubbles: Financial Crises and the Failure of American Democracy[/amazon_image]

It’s long been my view that history is over-determined, looked at from today (under-determined of course, if you’re trying to predict events.) These three political scientists have another causal explanation to add to the list of explanatory factors for the Great Crash of 2008. As well as greed and fraud, toxic financial innovation, global imbalances, fiscal irresponsibility, gigantism in banking and all the other contributors, there is the political dimension.

The charge is that a combination of three political factors created the conditions for all those other contributors to financial meltdown to develop. The first is ideology, the pure belief that markets are good and government regulation bad; the second is the array of special interests hoping for an endless boom, especially in housing – the lenders, the realtors, the people getting cheap loans; the third is the American institutional framework, expressly designed to stop things happening rapidly, in the context of ultra-rapid developments in financial markets. The three interact in a pro-cyclical way, the book argues, hence the terminology of the ‘political bubble’.

Nobody in the political elite, on the executive or the legislative side, comes out of this book well. The authors even trace some of the rot as far back as the now-saintly-seeming Jimmy Carter – after all, the savings and loan debacle of the early 1980s had its root in his presidency. The book is equally scathing about the ideologically free market Republicans, Reagan and the two Bushes, and the differently ideologically free market economics team of the Bill Clinton years.

The focus is solely on the United States. This means there is more political detail than many non-American readers will either want or be fully able to interpret.

With that caveat, I found the argument persuasive. After all, there are plenty of other mature democracies that have experienced that combination of housing bubbles, Franken-finance, and political incapacity. The US financial markets have also hugely influenced global markets. It would be interesting to work through the same kind of argument in other countries. One might even add another layer of political sclerosis in the international context, adding a fourth ‘i’ for ‘international incompetence’ to the three ‘i’s making up the book’s hypothesis.

Technocracy vs democracy

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Ever since I read Daniel Bell’s [amazon_link id=”0465097138″ target=”_blank” ]The Coming of Post-Industrial Society[/amazon_link], I’ve been struck by how prescient it was about the tension between technocracy and democracy. Bell argued that as societies become more complex and require technical expertise in areas ranging from healthcare and engineering to economics, there will be increasing conflict with the populism engendered by democracy. What would he make of Twitter-based political dynamics?! The technocratic government in Italy, post-crisis, was a vivid illustration of Bell’s dilemma in action.I spoke recently about the trade-off again in my recent Pro Bono Economics lecture, the likely conflicts between the “what works” agenda in public policy and political populism. Crises or slow growth make the trade-off worse because they encourage populism and because there is no additional output to compensate losers – it’s zero sum.

[amazon_image id=”0465097138″ link=”true” target=”_blank” size=”medium” ]The Coming Of Post-industrial Society (Harper Colophon Books)[/amazon_image]

In the fascinating Mark Mazower book I’ve now almost finished, [amazon_link id=”0141011939″ target=”_blank” ]Governing the World: The History of an Idea[/amazon_link], he cites Hans Morgenthau’s 1946 [amazon_link id=”B0007DKTKQ” target=”_blank” ]Scientific Man versus Power Politics[/amazon_link], which from the title touches on the same theme. Mazower says the book attacks the naivety of technocrats and the Saint Simonian tradition of belief in rational universalism. So it seems like this is a constant theme, played out in every era.

As a footnote, the Mazower book has given me another technocratic hero, the Australian Robert Jackson who ran the logistics for the Allies in the Middle East during World War II, having first helped organise the defence of Malta while in his 20s, then helped run UNRRA after the war. There is a biography by James Gibson, [amazon_link id=”0955396808″ target=”_blank” ]Jacko, Where Are You Now?[/amazon_link]

Positive, normative and provocative economics

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Last night it was my privilege to give the annual Pro Bono Economics lecture. I’d be delighted to hear people’s comments on it. (It would be even more pleasing if you’d look at the website and consider making a donation to their work.)

Many people in the audience have been enthusiastic, but one macroeconomist has taken great offence at my criticism of macro. I daresay I was too provocative – Dave Ramsden of the Treasury, chairing the evening, diplomatically described it as ‘challenging’ – but it does simply amaze me that so many (but not all) macroeconomists don’t think anything much needs to change in their area. Anyway, views welcome.

In the chat afterwards, somebody recommended to me [amazon_link id=”0521033888″ target=”_blank” ]Rational Economic Man[/amazon_link] by Martin Hollis and Edward Nell. The blurb says:

“Economics is probably the most subtle, precise and powerful of the social sciences and its theories have deep philosophical import. Yet the dominant alliance between economics and philosophy has long been cheerfully simple. This is the textbook alliance of neo-Classicism and Positivism, so crucial to the defence of orthodox economics against by now familiar objections. This is an unusual book and a deliberately controversial one. The authors cast doubt on assumptions which neo-Classicists often find too obvious to defend or, indeed, to mention. They set out to disturb an influential consensus and to champion an unpopular cause. Although they go deeper into both philosophy and economics than is usual in interdisciplinary works, they start from first principles and the text is provokingly clear. This will be a stimulating book for all economic theorists and philosophers interested in the philosophy of science and social science.”

[amazon_image id=”0521033888″ link=”true” target=”_blank” size=”medium” ]Rational Economic Man[/amazon_image]

I’d like it to have been a bit more specific about the authors’ doubts, but it sounds intriguing.

Richard Davies of The Economist (@RD_Economist on Twitter) has recommended [amazon_link id=”0631194355″ target=”_blank” ]Three Methods of Ethics[/amazon_link] by Marcia Baron et al.

[amazon_image id=”0631194355″ link=”true” target=”_blank” size=”medium” ]Three Methods of Ethics: A Debate (Great Debates in Philosophy)[/amazon_image]

I can see I’m going to have to improve my philosophy to continue in the vein of the Pro Bono lecture.

UPDATE: Paul Kelleher (@kelleher_) recommends [amazon_link id=”041588117X” target=”_blank” ]Philosophy of Economics[/amazon_link] by Julian Reiss

[amazon_image id=”041588117X” link=”true” target=”_blank” size=”medium” ]Philosophy of Economics: A Contemporary Introduction (Routledge Contemporary Introductions to Philosophy)[/amazon_image]

Economics vs politics

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Malcolm Gladwell has written a very positive review of Jerry Adelman’s Albert Hirschman bio, [amazon_link id=”0691155674″ target=”_blank” ]Worldly Philosopher[/amazon_link]. The review also offers a superb thumbnail sketch of Hirschman’s character and philosophy. I’m looking forward to reading the book myself.

[amazon_image id=”0691155674″ link=”true” target=”_blank” size=”medium” ]Worldly Philosopher: The Odyssey of Albert O. Hirschman[/amazon_image]

Meanwhile it sent me back to thumb through [amazon_link id=”0674276604″ target=”_blank” ]Exit, Voice and Loyalty[/amazon_link], and I found this paragraph that speaks to my current preoccupations:

“Exit and voice, that is market and non-market forces, that is economic and political mechanisms, have been introduced as two principal actors of strictly equal rank and importance. … I hope to demonstrate to political scientists the usefulness of economic concepts and to economists the usefulness of political concepts. This reciprocity has been lacking in recent interdisciplinary work as economists have claimed that the concepts developed for the purpose of analyzing phenomena of scarcity and resource allocation can be successfully used for explaining political phenomena as diverse as power, democracy and nationalism. They have thus succeeded in occupying large portions of the neighbouring discipline.”

[amazon_image id=”0674276604″ link=”true” target=”_blank” size=”medium” ]Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations and States[/amazon_image]

He hoped the book would restore the balance, but the succeeding decades were to be characterised by the primacy of market mechanisms in political decisions. Perhaps that’s just starting to change now.

Economists, spies and imperialists

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Many of you will have noticed already that I’m an anorak about economics, and I’ve read a lot of books about economics, not to mention history and politics. So I started Benn Steil’s [amazon_link id=”0691149097″ target=”_blank” ]The Battle of Bretton Woods[/amazon_link] expecting to find a re-telling of a familiar story. In fact, it’s not only full of things I hadn’t already known, but also serves as a great overview of the analytical issues in international monetary arrangements. The book works as a very well-written history, with lively personalities – even though many of them, especially the protagonists John Maynard Keynes and Harry Dexter White, come across as rather unlikeable in their arrogance. It also works as an excellent introduction (for students and others) to the specific history of the era and the general economic principles of the international monetary system.

[amazon_image id=”0691149097″ link=”true” target=”_blank” size=”medium” ]The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Council on Foreign Relations Books (Princeton University Press))[/amazon_image]

One prominent sub-plot is, of course, White’s spying for the Soviet Union. He was questioned by J Edgar Hoover’s HUAC, but confirmation of his espionage came late, in the 1990s with the [amazon_link id=”0002570009″ target=”_blank” ]Venona[/amazon_link] and [amazon_link id=”0140284877″ target=”_blank” ]Mitrokhin[/amazon_link] archives. I hadn’t before realised that the FBI had not informed the President of the extent of they evidence they held on White by 1946, in order not to let the spy ring know its cover had been blown. Hence White continued to play such a prominent role in the new World Bank until his death. However, the FBI did ensure he wasn’t appointed as Managing Director of the IMF, as President Truman originally planned, this being the origin of the tradition that a European holds that post.

Nor had I appreciated how badly Keynes went down with the Americans before, during and after the war. Steil makes a strong case that Britain would have done better out of both Lend-Lease and the post-war arrangements if its government had sent somebody else as the British negotiator. Most of the Americans couldn’t abide his intellectual arrogance and smartypants manner. However, nobody in Britain could bring themselves to believe that the Americans didn’t have an innate loyalty to them, whereas the reality was that many on the US side were actively determined to bring about the end of the British Empire and the role of sterling. As this became a reality after the war, Ernest Bevin said plaintively to the US Ambassador, Lew Douglas, surely Britain should not be “lumped in” as if it were “merely another European country?”

The book ends with an interesting Epilogue on China. Although a surplus country, it is not in the same position as America in 1945, as an architect facing a blank page. Chinese officials are also aware – as White was not – of Triffin’s dilemma: the issuer of a reserve currency “cannot pursue different domestic and international objectives at the same time,” as central bank governor Zhou Xiaochuan expressed it. Still, the US-China trade imbalance has brewed monetary trouble and we can’t yet be sure that monetary nationalism won’t be the consequence. How does that old Chinese proverb go?