Tag Archives: review

How economists think

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Elizabeth Popp Berman’s Thinking Like an Economist: How Efficiency Replaced Equality in US Public Policy, is a historical account of how a broad spectrum of policies set in Washington DC became – from the 1960s – increasingly determined by the criterion of economic efficiency. As she points out (& as I do in Cogs & Monsters), this notion of efficiency is far from value-free, although many economists (and others) insist that it is.

One distinctive aspect of the book’s account is its focus on the centre and left as the source of this economic thinking. Often the dominance of economics in policy decisions is attributed to the Chicago School, or neoliberals, or the Reagan/Thatcher administrations with their emphasis on markets everywhere. I think the book makes a convincing case that the economics turn started earlier, and gained important momentum from the drive to use government programmes to address social problems. The book focuses therefore on microeconomic issues – competition policy, cost benefit anaylsis – rather than the macro battle of monetarists vs Keynesians.

The transition it is interested in is the shift from pre-1960, indeed pre-war, institutionalist economics: “Institutionalism emphasized the collection of quantitative data, but with an inductive, historical approach in mind.” It avoided formalism, and tended to be progressive. Post-war, however, the institutionalists in Washington lost influence over time to two groups highlighted in the book: economists from RAND’s economics division and from new schools or programmes of public policy that trained a growing number of officials in “RAND-lite” formal modelling approaches; and anti-trust and I/O economists who – even before the full flowering of the Chicago School – brought neoclassical economic analysis emphasizing the role of markets in allocative efficiency in place of earlier structuralist approaches. The former group grew at pace during the Great Society years, along with more policy institutes evaluating social programmes. The Reagan years cemented the role of economic thinking by adding more cost benefit analysis of government interventions, favoured by business to limit ‘interference’ in their actions.

As the concluding chapter points out, there emerged a divergence on partisan lines in terms of the embrace of economic thinking: Democrats consistently embraced it and “allowed the economic style to define the boundaries of legitimate policy debate.” But Republicans “continued to use the economic style strategically and fleixbly, embracing it where it helped advance their goals and rejecting it when it conflicted with more fundamental values.” I wonder if there is a less on here for the centre-left now?

The book is entirely US-focused; it would have been interesting to read some reflections on how the economic style spread internationally. The other element I missed was the interaction between economic thinking in government, and how economics itself changed over the postwar period. How did the role of economists in policy-shaping contribute either to the rational epectations era of the late 70s/early 80s, or the later applied turn? Having said that, it’s a nice study of how ideas work in policy, and the key point about the consistent embrace of economic-style thinking by the left contrasted with the intellectual flexibility (cynicism?) of the right is very interesting.

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From citizen to subject in cyberspace

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Vili Lehdonvirta’s Cloud Empires is a terrific book. As the title suggests (and the fashionably chatty subtitle spells out just in case), the subject is the political power of large/gatekeeper digital platforms and specifically how in their essential rule-making capacity they are steadily taking on more activities of the state – but doing so without a public service motive (profit instead) and without accountability: “The internet was supposed to free us from powerful institutions. … Then they delivered something different – something that looks a lot like government again, except that this time we didn’t get to vote.”

The book starts with the origins of the internet and digital platforms, including the early libertarian hopes. The first section concerns platforms as economic institutions. One focus is the operation of online labour markets, including mTurk, but also using oWork/Upworker as a case study; the platform become increasingly internally regulated as it grew, among other things setting a minimum wage – of $3 an hour, reflecting the globalisation of online labour. Another chapter concerns privacy, and its complete erosion as platforms increasingly grappled with the need to enforce social order online at massive scale.

The theme through this first section is the transition from libertarian optimism about the absence of control to a non-territorial but nevertheless tightly regulated series of platform domains, with platforms setting their own rules within their own jurisdictions – with the only accountability being people’s ability to leave. You might put it that Albert Hirschman’s ‘exit’ is the only option as neither voice not loyalty have any traction, and even that is limited by the power of network effects. Exit would have to be collective to be effective.

The second section concerns the political power of the platforms. It starts with a wonderfully astute chapter on crypto-currencies, making the point (it has always seemed clear to me but seemingly not to others) that these are not ‘trustless’ but simply relocate trust. And yet many or most are inherently untrustworthy (to use Onora O’Neill’s framing). “The crypto elite who run these organisations are, if anything, less accountable to people than conventional financial and regulatory elites.” The founders may be entirely sincere and nice, and they may even seem to give their communities voice, but in writing the take-it-or-leave-it code, they impose dictatorship. (And have clearly read none of the vast literature on incomplete contracts….) Other authors such as Lawrence Lessig have drawn the comparison between code and law, but I found the social science perspective here very helpful.

Another chapter considers the way the platforms have undermined the traditional public institutions providing health care and education. Neither platforms nor gig workers have an incentive to invest in training or a long-term relationship, and in the US at least that casualised workforce has to rely on GoFundMe campaigns to cover medical bills. “Internet empires are undermining industrial society’s mechanisms of building and maintaining human capital.” What will the essential social safety net look like in the platform economy?

The concluding chapter pulls the threads together in the argument that platforms are usurping the traditional nation state. “Silicon Valley technologists reinvented the economy only in the sense that through trial and error they rediscovered much of what states already knew. Instead of revolutionizing our social order, they reimplemented it with computer code.” Algorithms are bureaucracy. (And indeed, a lot of traditional statecraft depended on technology – including classifying and collecting data, monitoring behaviour). The book argues that states simply gave up some of their former territory of control through outsourcing, or ceasing to collect data in house. In addition, the digital platforms have advantages – they are fast and efficient, and in (narrow) ways provide a great service.

So what to do about it? The book makes the case for an online bourgeois revolution to develop collective action power that will make digital platforms accountable. I must say that the prior chapters don’t give me any optimism that might provide effective. My prescription would be for democratic states to regain the lost territory through a combination of rule-making over online activity and improved efficiency of traditional bureaucratic states. Though I’m not too optimistic about that either.

All of which makes the book an essential read. I have some quibbles (for example, I’d disagree that platforms are effective central planners), but perhaps I’m wrong. The book is firmly rooted in Vili’s own work and the wider literature on digital platforms, spanning economics, sociology and political science, while being very readable with lots of examples and case studies. A strong recommend.

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Regiments of Women Economists

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The unattractive word ‘herstory’ always makes me grit my teeth but of course I had to read A Herstory of Economics by Edith Kuiper. Nobody with any interest in economics can have failed to notice the welcome discussions of what a male-dominated profession it is, and how distorting that is. Not much has changed yet as a result (in terms of proportion of women, or selection of research questions, or indeed sometimes-toxic culture) but at least there is an awareness and a plan on the part of the professional associations.

One key thing I learned from Kuiper’s book is that there have been many more female economists than I ever realised. As well as some (now-)familiar names – Joan Robinson, Sadie Alexander, Rosa Luxemburg, Elinor Ostrom – the list at the front has many names I didn’t know, and also some I did know but had never considered to be economists. But the book makes a persuasive argument that this reflects the exclusion of women from universities until well into the 20th century, and writers on economics outside academia should therefore be included. The list is almost three pages long, for the period up to around the mid-20th century. Even then it has some omissions – Phyllis Deane for instance, or Edith Penrose. (Maybe the latter is a bit too late for this history, but then Ostrom is included.)

The book is ordered in broadly thematic rather than chronological chapters, after an introductory chapter about the origins of political economy, covering subjects like property rights, education, production, consumption and wealth/finance. The final two chapters cover government policies and then the role of feminist economics. While this organisation makes sense – a chronology would not have worked – it does mean there are some sharp corner turns as a chapter jumps from, say, an analysis of labour in the household to Ida Tarbell’s expose of Standard Oil, in the chapter on production.

Nevertheless, the book describes the important contributions of women to economics over more than a century, and in doing so illustrates the kinds of questions and social reality generally ignored by the male mainstream. It ends with a focus on the need for feminist economics to expand. I’ve never myself been interested in the separate arena of feminist economics because all of economics and economists should be feminist. The AER should be covering the kinds of questions that feature more often in Feminist Economics: the macroeconomics of gender and care (the topic of the current special issue)? Absolutely.

Still, that’s mostly about tactics. A Herstory of Economics gives a voice to some of the pioneers never included in the standard intellectual histories of the subject.

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Ways of seeing?

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James Poskett’s Horizons: A Global History of Science is concerned with the role played in scientific discovery by non-white, non-European people (mainly men….). The book starts with Aztec and Inca knowledge particularly about natural history, medicine and astronomy. The European voyages of the early modern period made it so clear that Aristotle and Plato in fact hadn’t known everything that they helped overturn scholasticism. The book proceeds through the subsequent centuries but also, centrally, across space. People outside NW Europe (and later N America) knew stuff.

I was particularly interested in the section on non-Linnaean classifications in Africa and Asia (being a classification nerd); and also those about the impact of Einstein’s theories on confidence in measurement (being a measurement nerd too). And one other thought – not particularly made by the author, whose concern is acknowedging previously overlooked contributions by people around the world – that it left me with is the role of people who knit together bodies of disparate knowledge in a new world view. After all, Newton acknowledged the shoulders he stood on; but a different metaphor might be that he shook the kaleidoscope and created a new pattern of seeing.

I enjoyed this book, learning a lot. I must say it was slightly marred for me by the continual repetition of the point about needing to acknowledge non-European contributions – the material makes the case so effectively itself that additional polemic isn’t needed. But it is of course an important point, and the book is a nice introduction to some of the sources of knowledge from other parts of the world.

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Goliaths everywhere

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James Bessen’s The New Goliaths is one of my books of the year so far (with a fashionably chatty subtitle). Indeed, I’d been looking forward to it because I liked his previous one, Learning By Doing, so much. Based on his impressive research on technology over a number of years, and on his prior experience as the founder of a successful early digital startup, the core of the argument is that a small number of (generally) large companies have built IT systems that can manage immense complexity in their operations. Sophisticated software and massive flows of data enable them to co-ordinate in previously unimaginable ways, delegating decisions to where the information can go. The complexity – say of a new model of software-laden car or a major retailer’s logistics system – increases the cost of entry for potential competitors. The Goliaths are to be found not just in ‘Big Tech’, but in many sectors of the economy.

What’s more, “The investment in software is only part of the total investment in these systems. The entire technology investment that firms make in these proprietary systems goes well beyond software code to include data, workforce skills and investments in alternative organizational structures.” An example used throughout the book is Walmart – which McKinsey found accounted for a substantial proportion of the US 1990s productivity boost. Somewhat counter-intuitively, at least for those who see Big Tech as the main competition problem, Bessen sees Walmart as the unassailable incumbent in US retail, whereas Amazon is the one example of successful entry, and one offering a platform to other retailers.

This dynamic, of superstar firms in many industries from retail to autos to finance with a widening productivity advantage, has consequences for income inequality: the workers in those firms are paid more because they gain invaluable experience simple by working in the superstar companies, so wages are dispersing within sectors. The skills are scarce because you have to work for a big, sophisticated complex firm to get the skills, which are thus in short supply. It has led to less dynamism – fewer entries and exits in many markets. Small firms simply can’t match the spending on R&D of the big ones: one example given is voice recognition software, where pioneer Nuance was a massive commercial success, but still couldn’t match the spending of big firms: Amazon (again) has more than 10,000 engineers working on Alexa products, more than ten times the number Nuance had at its peak. “Proprietary information technology is exacerbating economic and social devisions. It is widening the gaps between the pay of workers at different firms. It is leading to greater segregation of skill groups across firms and cities.”

The complexity dynamic has implications too for competion policy – which becomes challenging, because after all the superstars generally offer great services – and regulation more broadly – because the information asymmetry between company and regulator grows ever wider.

So what to do? The book advocates for mandating open standards, morecompulsory licensing, and for reforming IP law to tilt the incentives for big companies to do more voluntary unbundling of their services, clamping down on worker non-compete agreements to spread skills. All excellent, and ultimately inevitable policies, as the inequalities are socially and politically unsustainable. But there’s much devil in the detail, and there will be massive lobbying against change. So this is a political struggle rather than a technocratic one.

But that’s to wander off into the future. I highly recommend The New Goliaths. It synthesizes a growing body of research into how firms use technology, how that interacts with organisational structures and markets,  and what the consequences are. It’s also really well-written, with lots of examples and a grounded understanding of the realities and limits of technology policy.

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