VC and employment

New research from Dr Horst Feldmann at the University of Bath on relations between the availability of venture capital in various industrial countries, and employment statistics:
The study estimates that if venture capital availability in Italy, where it was most difficult to obtain during the sample period, had matched the United States, where it was in best supply, Italy’s unemployment rate might have been 1.8 percentage points lower; its long-term unemployment share 9.0 percentage points lower; and its employment rate 2.7 percentage points higher.
On average over the sample period, venture capital availability was rated 3.1 in Italy and 5.8 in the United States on a scale of 1 to 7. The United Kingdom was rated at 5.3.

The exact methodology may be questionable - data on the availability of VC is taken from surveys of business executives (the World Economic Forum’s annual ExecutiveOpinion Surveys), so seems likely to have some subjective element. Feldmann does say, in the full paper (published in Kyklos) that the survey data can 'permit better coverage of the various facets of venture capital financing than hard data'. But, when tested against data on 'venture capital investment as per mil of average GDP', the correlation coefficient is just 0.29.

That aside, it's an interesting paper that will doubtless be welcomed by BVCA, EVCA, et al, as they argue against extra regulation.

Prosperity without growth

In this iciest of new years, you might as well curl up with a good book and hope for sunnier times. A good candidate, if you're at all interested in some of the economics ideas occasionally aired here, would be Tim Jackson's Prosperity without Growth: Economics for a Finite Planet (thanks to publishers Earthscan for the review copy).
Based closely on Jackson's report for the Sustainable Development Commission (published in March last year, and freely available from the SDC site), the book is a painless introduction to the case against that impossible totem of conventional theory, endless economic growth.
Jackson begins with a sketch of ecological limits - it is a small world, after all - and overview of the most unsustainable aspects of our current global economy, addressing the usual objections about the necessity of eternally growing GDPs. Bracingly, Jackson debunks the familiar calls for a 'decoupling' of economic growth and ecological cost - the basic numbers just can't add up.
A broader reconsideration of some of the fundamentals of society is needed, Jackson reckons, particularly what he calls, pace Weber, 'the iron cage of consumerism'. The book argues the case for the now-familiar if ever elusive Keynesian 'green new deal', as well as a new form of ecological macro-economics which relaxes that old presumption of perpetual consumption growth as a prerequisite for stability.
It's all presented as plainly as is possible for such an inevitably complex topic - a little handwavey at times, but there's abundant references for anyone who wants to dig deeper. The arguments are sound but, in the depths of this post-Copenhagen winter, it's too easy to doubt whether they'll ever be usefully heard.

No nonsense?

I recently read The No-Nonsense Guide to Global Finance, courtesy of the publishers at New Internationalist. As you'd expect from the title, it's a very digestible overview of the international finance system, starting from what 'money' actually is, through the increasingly weird and wonderful activities of banks, to the root causes and effects of the recent mess. As such, it's a great introduction, very clearly written, and spiced with some fascinating historical nuggets - it's a rare treat to have such lucid accounts of both the origins of money itself, and the origins of the credit crunch.

And as you'd expect from the publishers of New Internationalist (a venerable magazine on international development issues, originally sponsored by Oxfam and Christian Aid), it takes a deeply sceptical line on the pre-crash orthodoxy. Simultaneously explaining and critiquing something as complex as the global financial system is a tricky task, but author Peter Stalker generally pulls it off.

Some parts do grate a little - the chapter on the role of the World Bank and IMF is titled 'The ugly sisters', a judgmental epithet that does rather beg the question -and there is a vague sense of preaching to the converted. Anyone committed to the old economic models will find some of the conclusions easy to dismiss - but then, anyone still wedded to the old certainties has enough problems of their own.

It's certainly not an entirely objective book, but so ingrained are the ideologies in global finance, and so emotive the effects, that it's questionable whether objectivity would be possible or desirable. It is a lucid and engaging book, and there's few readers - especially among its target audience - who won't come away with something new.

Tobin redux, and what the L?

Interesting to see Adair Turner apparently considering a Tobin tax to curb destablising speculative currency trades, in an interview with Prospect Magazine. As reported in the Guardian:
He told Prospect: "If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit. Higher capital requirements against trading activities will be our most powerful tool to eliminate excessive activity and profits.
"And if increased capital requirements are insufficient I am happy to consider taxes on financial transactions – Tobin taxes."

The paper's Larry Elliot embraces the comment:
Lord Turner's championing today of a levy on financial dealings to curb the power of the City marks a breakthrough in the long struggle to have the neglected brainchild of American economist James Tobin become a practical policy proposition.

But it does seem like fairly weak support, really. It's not a great advance on his views in his Just Capital (Macmillan 2001), in which he notes that there are 'at least theoretical attractions' in the tax - 'The key arguments against it are therefore not theoretical but simply the impracticality of enforcing it and deciding on division of revenues in a world of multiple nations and government.'
Those arguments remain.

And here's a puzzling little recession-related thing. The Guardian again relays the wise words of an advertising chap on the likely shape of recovery:
Martin Sorrell, WPP chief executive, gave the City little to cheer about as he used his trademark skill with metaphors to suggest the recession would be "L-shaped" – an italic capital L, to be exact. He said that while chief executives and marketing managers may have recently begun to feel slightly more positive about the global economy, that was not yet translating into actual spending.
Now, here's an italic capital L:
L
How the hell does that fit onto a graph of any economic indicator against time?

So has Taleb gone nuts?

Last evening, I caught a rather bemused-seeming Nassim Nicholas Taleb appearing at the end of Newsnight, apparently following some kind of meeting with David Cameron. When he could get a few words in between Kirsty Wark and some chap from the Times talking about Cameron's intellectual credentials (such as they are), Taleb was making his usual points about risk in the economy and other areas. Here's something he said:
"We have to be more conservative with some classes of risk, like the climate - we have to be more worried about the climate than people traditionally have."

So it's slightly puzzling to read this morning's papers and see Taleb presented as a climate change denier (see the Scotsman, for instance - although it is strangely satisfying to see even the Sun portraying denialism as the hallmark of a crank).

The implication is that Taleb (and by extension, Cameron, who shared a platform with him at the RSA event) has joined that weird lobby of evidence-denying dishonest do-nothings. From what I've read of his work, that seems rather unlikely.

For example, there's this from an essay on the Edge:
Correspondents keep asking me if the climate worriers are basing their claims on shoddy science and whether, owing to nonlinearities, their forecasts are marred with such a possible error that we should ignore them. Now, even if I agreed that it was shoddy science; even if I agreed with the statement that the climate folks were most probably wrong, I would still opt for the most ecologically conservative stance. Leave Planet Earth the way we found it. Consider the consequences of the very remote possibility that they may be right—or, worse, the even more remote possibility that they may be extremely right.

Here's what he reportedly said at the RSA, as per the London Evening Standard:
"I'm a hyper-conservative ecologically. I don't want to mess with Mother Nature. I don't believe that carbon thing is necessarily anthropogenic"

[EDIT, 20/8: Having now listened to the recording of the meeting, available from the RSA page linked above, it's clear that what Taleb actually says is "Even if I don't believe that carbon thing is necessarily anthropogenic, I just don't want to mess with Mother Nature." Which is obviously quite different. Shame on the Standard.]

It's grossly unfair to paint Taleb as part of the denial lobby, when his message is that even if you don't accept the evidence, we should be doing all we can to reduce greenhouse emissions because the potential cost of not doing so will be devastating. That's a long way from the do-nowt bleating of the fossil fuel industry shills and the genuine fruitloop fringe.

I strongly suspect Labour party briefings are behind this morning's stories. That not only seems deeply unfair on Taleb (but then, if you lie down with dogs, etc), but also rather unnecessary, as you really don't need this kind of spin to suggest that Cameron's a bit of a twat.

Rushkoff on economic disconnection

From Reality Sandwich, an entertaining interview with author Douglas Rushkoff about his new book Life Inc, a historical critique/polemic on the developing role of corporations in Western culture, touching on many topics of interest:

An over-arching theme I found in the book is how the common-sense stuff of our reality, the economy and money and shopping and working, is really science fiction; we don't live inside a "natural" economic structure -- we made it up.

It gets very much like Baudrillard in a way. We lived in a real world where we created value, and understood the value that we created as individuals and groups for one another. Then we systematically disconnected from the real world: from ourselves, from one another, and from the value we create, and reconnected to an artificial landscape of derivative value of working for corporations and false gods and all that. It is in some sense Baudrillard's three steps of life in the simulacra.

So by now, as Borges would say, we've mistaken the map for the territory. We've mistaken our jobs for work. We've mistaken our bank accounts for savings. We've mistaken our 401k investments for our future. We've mistaken our property for assets, and our assets for the world. We have these places where we live, then they become property that we own, then they become mortgages that we owe, then they become mortgage-backed loans that our pensions finance, then they become packages of debt, and so on and so on. We've been living in a world where the further up the chain of abstraction you operate, the wealthier you are.

Ecocomics

Here's the most entertaining economics blog I've seen for a while - Ecocomics, applying economic theory to problems raised in superhero comics. How do super-villains pay for their dastardly schemes (all those minions!), what kind of insurance structure could pay for all that downtown devastation, the challenges of establishing an intergalactic union and monetary fund. That kind of thing. The latest entries focus on game theory as applied to super-villain team-ups - amazingly, the Joker isn't always being rational when he collaborates with the other inmates of Arkham Asylum.

A cognitive theory of the firm

I've been reading A cognitive theory of the firm: learning, governance and dynamic capabilities by Bart Nooteboom*, professor of innovation policy at Tilburg University (with thanks to publishers Edward Elgar for the review copy)

Nooteboom's core question is: what are the sources of innovation in firms? That's an important issue for a lot of people - managers and entrepreneurs, regulators and policy-makers, as well as economists. To address it, Nooteboom looks to concepts of cognition - a broad category of mental and social processes from rational inference and knowledge, through to value judgments and perception. It's an intriguing subject, though this isn't an easy introduction to it.

The main concepts are taken from social cognitive theory, a model of learning in which individuals learn through interactions with and from observation of others. Nooteboom takes a constructivist 'embodied cognition' view, as in the cognitive work of economist Friedrich Hayek, rather than the computational view currently popular in AI-focused cognitive science.

From the economic perspective, the theory draws on Joseph Schumpeter's proposal that innovation comes from novel combinations of resources. As per Hayek, the elements for these innovative combinations emerge from markets: the firm acting as an entrepreneurial vehicle for turning this innovation into marketable products or services, as per Edith Penrose.

The dilemma for innovative companies is thus between exploration and exploitation - whether to concentrate on developing new innovations, or on selling what you've already got. Exploration must derive from exploitation, Nooteboom argues, and be based on observations of how existing techologies are received by the market.

Nooteboom's key idea, also derived from Schumpeter, is that the firm develops a particular cognitive focus which distinguishes it from other firms or agents, and gives it a particular niche in the market. That can apply to one-man firms, but Nooteboom also considers the role of larger organisations in narrowing the cognitive distance between individual managers and employees (the managerial-speak version of this, I guess, would be 'singing from the same hymnsheet').

That's the nub of the theory, which the book sets out in much more detail. Disappointingly, for me at least, the detail is long on the theory but very short on actual practical applications. Over 100 pages pass before there's even a brief real-world example to illustrate what's being talked about. There's a sprinkling of other illustrative examples in later chapters on relationships between firms (including network and cluster effects), and the evolution of firms and industries, which do help illuminate the often abstract-seeming theory. More would have been very welcome.

The book is very much a resource for theorists working in the same area (and, to be fair, primarily intended as such). Getting the most from it will probably require more rather more specialised background knowledge than I've got - although some of the ideas here might prove valuable resources for further research, I suspect the book won't offer much directly to those people working at the sharp end of innovation.


* - intriguingly, Nooteboom is also working on a philosophical tome Transhumanism: How to affirm life and be a good person without help from God; a reply to Nietzsche.

On the futility of carbon trading

The New Scientist has a provocative comment piece on the shortcomings of carbon trading from Andrew Simms of the New Economics Foundation:

Unless the parameters for carbon markets are set tightly in line with what science tells us is necessary to preventing runaway warming, they cannot work. That palpably did not happen with the ETS, which initially issued more permits to pollute than there were emissions and now, in the recession, is trading emissions that don't exist - so-called hot air.
Carbon markets cannot save us unless they operate within a global carbon cap sufficient to prevent a rise of more than 2 °C above pre-industrial temperatures.
Governments are there to compensate for market failure but seem to have a blind spot about carbon markets. They could counteract the impact of low carbon prices by spending on renewable energy as part of their economic stimulus packages, yet they have not done so. The UK, for example, has spent nearly 20 per cent of its GDP to prop up the financial sector, but just 0.0083 per cent in new money on green economic stimulus.
Price mechanisms alone are unable to do the vital job of reducing carbon emissions. They are too vague, imperfect, and frequently socially unjust.

It's more than just a criticism of current trading schemes, it's pretty much a broadside against a large portion of environmental economics. I await the response, not least from these guys.

Without the hot air

Inspired by the glowing review in the Economist, I've just been reading David MacKay's Sustainable Energy - without the hot air (available as a book through the usual sources, or as a free download under a Creative Commons licence). Like the Economist, I'd strongly recommend the book for anyone interested in sustainable energy.

MacKay might seem like an unlikely person to write such a book - a physics professor from Cambridge, he's primarily a specialist in information theory, with a sideline in international development. It's maybe that off-centre viewpoint that allows him to use some simple tools from physics and maths to address the most basic question - can renewable (or, at least, sustainable) sources replace fossil fuels for the UK?

Along the way, he demolishes some of the wilder, waftier claims of industry boosters and environmental campaigners, as well as many of the tedious objections of the climate change deniers and do-nothings.

It's mostly to do with totting up the energy consumption and potential renewable resources for the UK, based on pretty basic material considerations. There's very little about what would usually be considered as the economics of the problem - the marginal costs, externalities, public preferences, game theories, discounted cost-benefit analyses, etc - but the book is, at heart, pure economics: how we can make best use of limited resources to achieve a social goal.

I've written a longer review over at Clean Ventures.

Child psychology

A different take on the roots of the financial crisis from Peter Totterdell, of Sheffield Uni's Institute of Work Psychology, who's profiled in today's Education Guardian:

Look at the causes of the credit crunch and you can see clear evidence of what happens when emotion regulation goes wrong, says Totterdell.
"In the financial sector, you've got a situation where people were on an upward spiral," he says. "They are being successful in their speculations. This fuels them into feeling good. They want to maintain that feeling, so they do more of it. They start to ignore the risks, or package up the risks, or push the risks on to somebody else, and there is nothing to stop them. In fact, they are encouraged to do it by the others around them."
He is struck by the similarities between what has happened recently to the banking system and two areas of the research programme. One is mood disorders, such as bipolar disorder, "when people go on these upward spirals and sometimes they think they're invincible, that nothing they can do is wrong, everyone around them is wrong, and their mood spirals upwards, they start taking much greater risks". The other is children, and the way that when they get overexcited, parents have to step in to calm them down, or remind them that if they persist it will end in tears.

Although he's coming at it from a different angle, it's not far from some areas of behavioural economics.

Economics 2.0

I've just been reading (courtesy of a review copy from Palgrave Macmillan) Economics 2.0: what the best minds in economics can teach you about business and life. Written by Norbert Häring and Olaf Storbeck, both economics journalists on the German Handelsblatt newspaper, and elegantly translated by Jutta Scherer, it's a very accessible scamper over some popular areas of economic study - education and employment, stock market success, the roots of the credit crunch, CEO and sports star pay, things like that.

It's undoubtedly part of that post-Freakonomics wave of pop economics books, but it's one of the better ones. It's very clearly written and translated, albeit with the occasional literal. The European origin offers up a few less familiar subjects and perspectives, and the authors also seem refreshingly free of the ideological bent apparent in some such similar books. Indeed, the authors spend the final chapter offering warnings about the effects of political prejudice (and other hazards) among professional economists.

It does take a rather scattergun approach, but the main theme is research which helps close that often overwhelming gap between economic theory and reality. Much of the work is drawn from experimental and behavioural studies, and much of it is very recent though there are some interesting historical cases. References are given after each chapter, though these are not comprehensive - to take a glaring example, Ferguson and Voth's fascinating Betting on Hitler (Quarterly Journal of Economics 2008 - pre-press pdf here) is discussed over several pages in chapter 13, but doesn't appear in the references.

The book gives a very good overview of a lot of interesting work, and should be of interest to economic novices and experts alike. The breadth of the topics means that even the most experienced professionals are likely to find something they didn't know as well as plenty of ammunition for arguments. The less experienced should get a good sense of what economics is really about and why, despite the conspicuous failures of models and ideologies in recent times, the subject is still relevant.

Real-world treats

As ever, there's plenty to chew on in the latest Real-world Economics Review (formerly the Post-Autistic Economics Review). Unsurprisingly, it's a financial crisis special, with three papers each on responding to the crisis itself, and on what it means for the study and teaching of economics. No less inevitably, there's a certain element of 'We told you so...'

The punchiest paper is from JP Bouchaud of Capital Fund Management, who's done some seminal work on the failures of standard market models (eg, "An Introduction to Statistical Finance", Physica A, 313, 1, 238-251). Here, in an expanded version of a short paper first published in Nature in October, Bouchaud outlines the fundamental case for a more scientific approach to financial economics -
Of course, modelling the madness of people is more difficult than the motion of planets, as Newton once said. But the goal here is to describe the behaviour of large populations, for which statistical regularities should emerge, just as the law of ideal gases emerge from the incredibly chaotic motion of individual molecules. To me, the crucial difference between physical sciences and economics or financial mathematics is rather the relative role of concepts, equations and empirical data. Classical economics is built on very strong assumptions that quickly become axioms: the rationality of economic agents, the invisible hand and market efficiency, etc. An economist once told me, to my bewilderment: These concepts are so strong that they supersede any empirical observation. As Robert Nelson argued in his book, Economics as Religion, the marketplace has been deified.
[JP Bouchaud, “Economics needs a scientific revolution”, real-world economics review, issue no. 48, 6 December 2008, pp. 290 - 291, http://www.paecon.net/PAEReview/issue48/Bouchaud48.pdf]

Elsewhere, there's an intriguing paper by David George of LaSalle University, in which he studies the changing meaning of the words 'competition', 'monopoly' and their variants from 1900 to date -
Paradoxically enough, the firm that manages to become the only seller (an economist’s “monopolist”) or the firm that manages to be one of just a few sellers (an economist’s “oligopolist”) now qualifies for the title of “very competitive firm” since it’s the only one (or one of a few) that managed to survive the competitive struggle. Amazingly, the firm that is least able to be described as “competitive” by the old definition (a single firm in a sea of many firms) now is most able to be described as “competitive” by the new definition (a “victorious” or “most able” firm). This is a coup d’état writ large.
[David George, “On being ‘competitive’: the evolution of a word, ” real-world economics review, issue no. 48, 6 December 2008, pp. 319-334, http://www.paecon.net/PAEReview/issue48/George48.pdf]

To download the entire issue (530KB PDF), click here.

The Road to Huddersfield

Sometimes, a good poke around a secondhand bookshop will turn up something that just leaps off the shelf at you. So it was with 'The Road to Huddersfield: A Journey to Five Continents'. A book commissioned by the World Bank from Guardian journalist James (later Jan) Morris in the early 1960s, with a delightfully Yorkshire-centric title - what's not to like?

Huddersfield here is posited as the exemplar of industrialised society, the epitome of 20th century civilisation, the very birthplace of the modern world, whose 'horny, stocky, taciturn people were the first to live by chemical energies, by steam, cogs, iron and engine grease, and the first in modern times to demonstrate the dynamism of the human condition'. Aye, that's right enough.

The assigned task of the World Bank was then (and, more or less, is now) to help those less advanced nations advance along the titular road to Huddersfield - to fund those infrastructure projects which, according to theory, will speed those economies towards the wealth and freedom from want of industrial society, that very state of Huddersfieldness.

After a visit to the World Bank HQ, under the idiosyncratic rule of Eugene Black, Morris travels through some of the recipients of the Bank's aid - Ethiopia, Siam, southern Italy, Colombia, and the Indian-Pakistani borders - in an elegant and picturesque odyssey. Given that the book was commissioned by the Bank, Morris stays remarkably ambiguous about the effects and efficacy of its work - a lot kinder than many of its latter-day (or even contemporary) critics, but no apologist for its occasional incompetence or amorality.

Some 45 years on, some of the descriptions of the countries visited strike a little odd. 'Nobody is starving' in Ethopia, though that country 'is still a long, long way from Huddersfield'. Further East, 'it is no coincidence that Burma, that gilded stronghold of Buddhism, is perhaps the only country on earth that shows no eagerness at all to take the Huddersfield Road." On the other hand, the chapter detailing political and ethnic tensions in the Indus basin seems ever relevant - though some might see a certain irony as Morris notes of Pakistan, 'never did a country seem to need her Huddersfield more.'

It all makes for an intriguing slice of political and economic history. Although it seems slightly unfair that the book's thin section of photographic plates does not show the titular Yorkshire town, but rather its neighbour Halifax - a view from Beacon Hill of a near-unrecognisable forest of belching chimneys. Were it not for the dark satanic smog, now long gone, you might just see my house from there.

Flawed analysis

Some new research from Newcastle Business School leads to an obvious objection.

Accountancy reader Richard Slack surveyed mainstream financial analysts, and found that they pay no attention to the social and environmental disclosures in the annual reports of UK banks. This, he says, 'will trigger fears over capital market analysts’ understanding of the broader challenges facing business and their attitudes to issues such as climate change'.

Mr Slack said the study, conducted jointly with Newcastle University, left question marks over analysts’ attitudes to the environmental challenges facing business. “Social and environmental reporting was universally considered irrelevant and incapable of influencing a financial forecast,” he revealed. “There was total dismissal of the importance of environmental issues in taking decisions such as giving loans to potential polluters, for example, and I would suggest that analysts are not taking potential climate change and environmental impact seriously enough.”
Mr Slack continued: “Our findings show that analysts are dismissive of anything other than financial metrics, and they deem large sections of voluntary narrative reporting as useless or worse. Analysts have been shown up to be narrow in their approach, often formulaic and rules-driven, and highly unlikely to be a source of change in respect of social and environmental issues. Their approach should be a major concern to wider market participants given analysts’ crucial role in the information supply chain.”

While, there's little doubt that analysts can be too focused on narrow metrics of questionable relevance to anything resembling real market conditions, it might be unfair to blame them for ignoring environmental and CSR reporting. Repeated studies by academics and pressure groups have shown that such reporting efforts are often meaningless, and little more than greenwash. Obviously there's exceptions to that, but ignoring the stuff that runs closer to self-promotion than to disclosure is hardly damnable behaviour. Still, it's never a bad idea to look beyond the analysts for information...

Bish bash HBOS

A worrying time for my home town of Halifax, with a significant number of local jobs sure to disappear in the wake of Lloyds' white knight takeover of HBOS. Exact numbers have yet to be announced, but I'd guess at least a thousand in the town - maybe more.

Lloyds has said that preserving jobs in Scotland will be a priority - job losses there were also small when the Halifax acquired the Bank of Scotland back in 2001, with most of the limited cutting then done at lower levels, and Edinburgh also had the honour of hosting the head office at the BoS's historic HQ on the Mound. So saving jobs there seems fair enough - the Guardian reports that the group has 6,459 employees in Edinburgh, a fairly significant chunk of well-paid employment in a city of 450,000.

But what's worrying is that nothing's been said about jobs in the Halifax' eponymous home. HBOS also employs around 6,500 in and around Halifax - and this is a town of just 90,000, with far fewer other major industries than the Scottish capital.

There are obvious political motives for favouring Scotland, which will put Labour into even more disfavour locally. Fair enough, most will say.

But the potential economic impact on the town and the surrounding area is likely to be terrible. The presence of the bank here - its head office until the BoS takeover and, after, the base of the expanded retail operations - has been the main factor in protecting the town from the worst of the industrial decline and saved it from being quite as bad as, say, Burnley. Any major reduction of HBOS employment would, alongside the general downturn, easily make it as bad as, say, Barnsley when the mines were closed. Not a happy prospect.

It might not be that bad, of course. There's inevitably going to be swingeing cuts at the common operations of the two merged groups, but it's a question of deciding how that's going to be split between Lloyds and HBOS. I'm less familiar with Lloyds' operations, but I'd guess the bulk of their operations are in London. It might then be an attractive option for them to cut jobs in that more expensive employment market, and keep them in the more cost-effective West Riding.

But even if that happens, I'd guess that in Halifax they'll be cutting from the top; and in London, from the bottom. Fewer well-paid, professional jobs here in finance, IT, management and so forth, but we'll likely still get the minimum-wage call centre and data input end. Not a great deal.

More generally, it's been fun to see the scrabbling for scapegoats to blame for the deeply shite state of the banking markets, and the faux outrage over the antics of the short-sellers and speculators who we are shocked (shocked!) to find are inclined towards amoral profit-seeking based on some rather unrealistic financial models. At least, I hope it's faux - surely no one who's been keeping the vaguest of eyes on the financial markets and the economic orthodoxy can honestly be remotely surprised?

As per the title of this blog (borrowed from Galbraith, of course), it looks like reality has caught up with its would-be escapees.

Phantastic phinance

It's hardly a secret that the rational agent hypothesis of neoclassical economics is, at best, an idealisation; and, at worst, a dangerous myth. It's much the same for the rational investor of finance theory, as backed up by a host of behavioural studies.

You don't need to have experienced many investment bubbles, crazes and panics to appreciate that. Some diehards have claimed that bubbles can be understood as rational phenomena, but that always seems like stretching the definition a little too far.

It's interesting then to get the psychoanalytic point of view on a question that has been dominated by economists. David Tuckett of UCL and Richard Taffler of Edinburgh Uni have a paper in the new International Journal of Psychoanalysis with the delectable title Phantastic objects and the financial market’s sense of reality: A psychoanalytic contribution to the understanding of stock market instability.

Tuckett lays it out in the UCL press briefing:
“Feelings and unconscious ‘phantasies’ are important; it is not simply a question of being rational when trading. The market is dominated by rational and intelligent professionals, but the most attractive investments involve guesses about an uncertain future and uncertainty creates feelings. When there are exciting new investments whose outcome is unsure, the most professional investors can get caught up in the ‘everybody else is doing it, so should I’ wave which leads first to underestimating, and then after panic and the burst of a bubble, to overestimating the risks of an investment.

“Market investors’ relationships to their assets and shares are akin to love-hate relationships with our partners. Just as in a relationship where the future is unexpected, as the market fluctuates you have to be prepared to suffer uncertainty and anxiety and go through good times and bad times with your shares. You can adopt one of two frames of mind. In one, the depressive, individuals can be aware of their love and hate and gradually learn to trust and bear anxiety. In the other, the paranoid schizoid, the anxiety is not tolerated and has to be detached, so the object of love is idealised while its potential for disappointment is ‘split’ off and made unconscious.

“What happens in a bubble is that investors detach themselves from anxiety and lose touch with being cautious. More or less rationalised wishful thinking then allows them to take on much more risk than they actually realise, something about which they feel ashamed and persecuted, but rarely genuinely guilty, when a bubble bursts. Again, like falling in idealised love, at first you notice only the best qualities of your beloved, but when everything becomes real you become deflated and it is the flaws and problems that persecute you and which you blame.

“Lack of understanding of the vital role of emotion in decision-making, and the typical practices of financial institutions, make it difficult to contain emotional inflation and excessive risk-taking, particularly if it is innovative. Those who join a new and growing venture are rewarded and those who stay out are punished. Institutions and individuals don’t want to miss out and regulators are wary of stifling innovation. If other investors are doing it, clients might say ‘why aren’t you doing it too, because they’re making more money than we are’.”

That last point seems to bring us into the realm of situational psychology. I've recently been reading Phil Zimbardo's The Lucifer Effect on that area - an interesting and disturbing read. Most of the behavioural finance studies I've read (or, at least, read about) concentrate on the personal biases and heuristics that affect individual decisions - the effects of peer pressure and groupthink on economic decision-making seems a fruitful area for further study.

Of balls and busts

It's not often that neuroscience/economics research hits the headlines, but a paper in this week's PNAS, concerning hormonal influences on the behaviour of individual stock traders, has sired prominent stories in many of today's organs - see, for instance, the Guardian or BBC.

The research is be John Coates and Joe Herbert of Cambridge uni. Their abstract sums it up nicely:
Little is known about the role of the endocrine system in financial risk taking. Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader's morning testosterone level predicts his day's profitability. We also found that a trader's cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk. Our results point to a further possibility: testosterone and cortisol are known to have cognitive and behavioral effects, so if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader's ability to engage in rational choice.

It's not a new concept, of course - I wrote about a related behavioural economics study two years ago (a post that, because of the title, is actually one of my most frequently accessed items by people coming to this blog via search engines - I suspect most of them will be disappointed).

And it doesn't take a genius to spot why this is now a lot more newsworthy - boom and bust economics seems to be on people's minds...

PE prognosis

Many private equity players are (quite rightly) criticised for doing all they can to avoid publicity. That's not a complaint you could make about Alchemy Partners' John Moulton - I fondly remember his Ali G impersonation, back in the Venturedome days ('Ali G' was a popular TV comedy character of the time), while interviewing himself about his much-reviled bid for MG Rover.

Anyway, he's back in the news, raising hackles with a gloomy speech at the more usually bullish 'Super Return' conference in Munich. As the FT reports:
"The industry needs to prepare for bad news," warned John Moulton, founder of Alchemy Partners, in his opening address as a handful of trade unionists waved "locust" placards and distributed anti-buy-out leaflets outside Munich's MOC centre.
"Parts of our industry were behaving just like the US subprime mortgage lenders," said Mr Moulton, a renowned industry doomsday forecaster.
"The quality of what we were doing went down, there was no checking and we used false numbers," he said [...]
"We really ought to expect returns of the industry to tumble," said Mr Moulton.

Gloomy, but hardly unrealistic. It'd be hard to argue that the top end of the private equity market hasn't been building itself a bubble in recent years, fuelled by cheap debt and the weight of new money pouring into the class. The cheap debt's gone now, slamming the brakes on new deals and leaving many over-leveraged existing investments in deep lumber.

The weight of money coming in is still there, though, and it's still looking for a home. I've recently been writing a couple of articles on the European mid-market for Private Equity International, and the folk in that market are a lot more optimistic. There's some problems from the credit crunch, but not nearly as bad as at the big LBO end. And everyone's claiming they were aware of the risks of the recent debt bubble, of course - the head of buyouts at 3i described the generous conditions as "beyond the levels of common sense... a dangerous place for a banking market to be". Many partners are seeing potentially rich pickings in the more troubled economic times ahead, and those out raising new funds over the crunch period say there was no loss of appetite from their own investors.

At the venture end, things are looking shakier. 3i's announcement that it's pulling out of earlyish deals (reported here at Real Business) is hardly unexpected, but might be symptomatic of a wider shift. The rate of new deals in the very-recently-hot areas of clean technology, which I've been tracking over on my Clean Ventures blog, certainly seem to be slowing.

Interesting times ahead...

Ape traders

There's an entertaining piece of research just published in PLoS which claims to be the first study to examine the circumstances under which chimpanzees will trade commodities - specifically, apples for grapes.

Such trades are assumed to have played a key stage in our own evolution towards Homo economicus. Previous studies involved training chimps to trade tokens for food - a less realistic model, given that apes tend not to carry round purses of tokens in the wild.

The researchers found that chimps do not spontaneously trade their food, but can be trained to do so. With training, they're willing to swap a less-liked food such as carrots for tastier fruit, but remained reluctant to engage in near-comparable trades such as apples for grapes. Lead author Mark Grady of UCLA’s Center for Law and Economics reckons this reflects the lack of ownership rights among our primate cousins.

Still, this must raise the possibility that apes could be trained to take over some roles in the mainstream markets. There might be initial problems with all the screeching, scratching and fighting for alpha-male dominance, but I'm sure the chimps could get used to it.

And, bearing in mind the old theorem about monkeys writing Shakespeare, how many chimps on how many trading desks would it take to fuck up as spectacularly as some human traders?

Graduation day

Here's me just officially graduated with the MA in Economics and Finance, with Distinction, at the University of Sheffield. (Photo by the wife, on a rather dingy day.)

I was quite proud to share the stage with Nicholas Stern, who was receiving an honorary doctorate for his work in development and environmental economics. The 2006 Stern Review on the Economics of Climate Change played a large part in my own dissertation.

$100 shenanigans

A good start to the year for the rational agent hypothesis, with the oil price hitting the $100 benchmark as a result of what appears to be a less than entirely rational act of self-aggrandisement.

As the Guardian reports:
Richie Arens, an independent trader who runs a brokerage called ABS, bought 1,000 barrels for $100 on Wednesday at a time when the prevailing price was $99.53. The price instantly settled back, although it jumped over $100 again yesterday, hitting $100.09 during the day before settling to end at $99.18.
Wednesday's trade appears to have made an instant loss of at least $500 - but market watchers believe Arens was motivated simply by being the first person to buy at more than $100. His actions have attracted criticism from experts who say that it risked artificially triggering automatic "stop orders" placed by others in the event that the price hit $100.
Stephen Schork, editor of the Schork Report market intelligence service, said: "This could have triggered a massive artificial rally. It creates a doubt that these kind of shenanigans could be commonplace - you begin to question the validity of prices and to ask 'are these markets really working?'"

OK. so one could argue that it can be rational to incur a financial cost in return for an enhanced reputation, but I'd love to see the utility function that could codify this. More generally, it really doesn't seem entirely rational that such attention should be paid to a price or index hitting any particular number - psychology aside, $100 isn't any more significant that $98.75 or any other price. Reminds me of other apparently paradigm-changing round-figure events, such as the Nasdaq hitting 5000 back in the day.

The Economist meanwhile looks at the broader implications of the $100 barrel. It ain't pretty. Happy new year, all.

Of fat-tailed catastrophes

Estimating the long-term costs of climate change has become something of a stumbling block in determining what we should be doing now to mitigate the worse effects. There's continuing debate about whether the short-term costs of mitigation outweigh the uncertain long-term costs of doing nowt - something complicated by questions about what the appropriate discount rate should be, as noted below. In the US, industry lobby groups have deployed cost-benefit analysis (CBA) to argue that it's just not cost-effective to do anything to reduce emissions now - given the long time horizons, it'll be better to deal with any problems if and when they happen, even if the cost is many times that of acting now. Basically, prevention isn't better than treatment.

Martin Weitzman, of Harvard's economics department, has now countered that device with a paper considering the possibility (however low) of a genuinely catastrophic event resulting from a failure to act now. Such events are usually ignored in standard CBA, mainly because they're a bit difficult to work with. Weitzman's model does include the possibility of extreme events (which he terms 'fat-tailed catastrophes'), and the results significantly shift the balance of costs. When applied to the current knowledge relating to climate change and emissions, Weitzman's analysis shows that mitigation investment makes a hell of a lot of sense in minimising expected future costs.

As Weitzman concludes:
Even just acknowledging more openly the incredible magnitude of the uncertainties that are involved in climate-change analysis - and explaining better to policy makers that the artificial crispness conveyed by conventional IAM-based CBAs here is especially and unusually misleading compared with more-ordinary non-climate-change CBA situations - would in my opinion go a long way towards elevating the level of a reality-based public discourse concerning what to do about global warming.

The fairly technical paper is available in draft as a PDF here. For the less technically inclined, New Scientist gives a good summary.

Good news is no news

More interesting research from Erasmus University Rotterdam, with econometrics professor Dick van Dijk presenting new work on the impact of news events on stock prices (broadly the area I covered in my dissertation).

van Dijk studied short-term price movements on the New York stock exchange in response to unexpected interest rate announcements. He found an interesting asymmetry: good news (ie, a rate cut) leads to a response which depends on the weight of the news (the amount by which interest rates are cut; bad news (a rate increase) creates a response that does not reflect the magnitude of the change. As theory predicts, expected rate change announcements create no significant response.

By tracking price movements on a minute-by-minute basis, van Dijk also identifies the speed with which prices can move in response to unexpected news: an unexpected interest rate adjustment of 0.25% leads to a return of more than 1% within five minutes.

Mark of distinction

Just received word from Sheffield Uni - my dissertation on a possible clean energy bubble, as outlined below, got a First Class grade. Which means I get the MA in Economics and Finance with Distinction. Which is nice.

Pluralist economics review

Here's a useful new site/newsletter thing - the Pluralist Economics Review, promising 'the best of free-access economics'. It's a collection of links to unorthodox economics papers, articles, news stories and blogs. The site's run by Edward Fullbrook, editor of the Post-Autistic Economics Review, which has been referenced here many times before.

A Stern response to the bubble question

One year ago, the UK Treasury published the Stern Review on the Economics of Climate Change to intense media interest. Unlike previous surveys or popular accounts of climate change, Stern put a financial cost on both action and inaction in cutting emissions of greenhouse gases and moving to a low-carbon economy.

The work was of obvious relevance to the clean energy industry, which can't always convince potential customers that its products and services make economic sense, and generally hailed as good news. Specialist financial information provider New Energy Finance welcomed the Review as "good news for investors in the renewable energy and low carbon technologies sectors", highlighting Stern's calls for a stronger price signal for carbon emissions, greater international cooperation, and increased funding for low carbon R&D, "all of which will boost clean technology companies". Stock tippers on personal investment websites also saw the Review as positive news, posting 'Buy' recommendations on selected clean energy stocks.

At the time, there were concerns about a speculative investment bubble in the sector, manifest in both venture capital activity and in the valuations of publicly listed companies. Such concerns continue to date. While some bubble-like behaviour is hardly unexpected in an emerging and potentially revolutionary sector, a bubble and burst would be likely to cause medium-term financial problems that could seriously damage the prospects of clean energy companies.

From an economics point of view, it's virtually impossible to say whether a market is actually in a bubble situation until some time after it's burst - not a very useful situation for current investors. Previous bubbles have however demonstrated the role played by the media in feeding 'irrational exuberance' and inflating bubbles, with stock prices moving in an irrational fashion in response to high-strength but low-weight news events.

The release of Stern Review can be considered as such an event. The Review did not contain any new information about the nature of the climate change problem or related policy or technological issues. Despite the NEF's comments, it also contained nothing that could meaningfully affect the prospects of individual companies or the clean energy sector as a whole.

So could the stock price response of listed clean energy companies to the Stern Review and its accompanying media hype shed any light on the much-debated clean energy bubble?

That's the question I addressed in some recent research (completed as my dissertation for a Master's degree in Economics & Finance), using event study methodology to test the reaction of a portfolio of AIM-listed clean energy companies.

The findings were largely negative, which is fairly encouraging. A small minority of clean energy firms (notably those dealing in carbon trading) did show abnormal returns around the release of the Stern Review, but there was no significant portfolio-wide response that would indicate irrational exuberance among investors. There is no indication of a runaway bubble of the kind seen in the dotcom era, a period to which the current cleantech boom is sometimes compared.

Although the research methodology can't claim to be conclusive (and is relatively untested in its application to a non-company-specific event such as this), its conclusions are encouraging for the sector. Investor interest in clean energy, and the broader cleantech sector, appears to be rational and reasonable. That can only be good for its longer-term prospects.

The dissertation, 'Evidence for a speculative bubble in the clean energy sector: an event study', is available as a 1.2Mb PDF here.

For the latest news on clean energy and cleantech VC, see my Clean Ventures blog.

Bubble, bubble

Further speculation and comment on possible bubbles in a couple of tech areas -
The Guardian worries about another dotcom bubble with VCs searching for the next Facebook or Myspace. There's particularly tutting over the apparent focus on very young entrepreneurs:
With millions of pounds once again being poured into companies run by young entrepreneurs, some experts are warning that too much emphasis on youth could help reinflate the dotcom bubble.
"People like Mark Zuckerberg [of Facebook] show that there is great talent out there ... but there's a world of difference between a teenager and a young entrepreneur," said Sayula Kirby of Index Ventures, which has backed a large number of European internet startups. "I wouldn't say we are in a bubble yet, but we are getting closer to the point where the froth begins."

Meanwhile, in the specialist media, Rob Day of the Cleantech Investing blog meanwhile revisits the continuing concern about a cleantech bubble, this time focusing on solar:
As for the verdict, solar VC bubble or not, it’s too tough to say. That’s a different answer than I would have given just a few months ago, when a “no” would have been the simple answer, but the crowded marketplace and rising valuations and deal sizes is worrisome. Also worrisome is seeing VCs get out of their tech-focused comfort zones to invest in unfamiliar business models. And when you hear stories about unworried investors and entrepreneurs who haven’t done their homework, that’s got to raise some eyebrows.
Are there a lot of reasons to be very optimistic about solar markets and the prospects for solar investments long-term these days? Absolutely. But could we be due for a bit of a break in the hyper-activity? Quite possibly, but maybe not quite yet.

As noted below, last week I handed in the final draft of my dissertation on evidence for a bubble in the AIM-listed clean energy sector. The event study methodology I used didn't provide any significant evidence of speculative bubble-like behaviour, but some of the data is certainly suggestive. I should be submitting the finalised paper later this week, subject to my supervisor's comments, and will put up a PDF of it here.

A herd of VCs

Interesting research from Ward van den Berg at Erasmus University Rotterdam, on herding behaviour among private equity and venture capital investors. Cyclical behaviour and investment waves are well known among such investors, a phenomenon that van den Berg ascribes to incomplete information between rival firms.

According to the university's press release:
Van den Berg uses three models to describe how acquisitions seem to prompt each other. The announcement of a takeover and the initial bid awake the interest of a second party, and this already can drive the price up to a point that stops this second party from taking part in a bidding war. An investment in a buyout can also unveil information that other financiers use in their own investment decisions. This attentiveness to the behaviour of others can lead to a wave of private equity investments. Finally in the consolidation of a branch of business the value of every successive takeover candidate increases, to the extent that more companies have been bought up. This too leads to a new wave of investments.

In short, VCs see other investors chasing a new technology or market opportunity, look harder for companies in the same area, and valuations spiral. That certainly seems to fit some observed behaviour - arguably, we've been seeing something similar in the clean energy sector in the past couple of years.

There's more information on van den Berg's work at his university site.

Prisoners of Bali

Interesting new paper from New Energy Finance on the lessons of game theory for international emissions-reduction agreements. It's an easy introduction to the problem of international cooperation considered as the familiar form of the Prisoner's Dilemma - basically, individual countries can not bother to cut their own emissions in the faith that other countries will do enough to avert the worst effects of climate change. The problem, obviously, is that if everyone does that, nowt gets done.

The NEF paper quite sensibly points out that the real world situation isn't a one-off game, as in the classic case, but a repeated game - a player who acts selfishly in one round can find himself punished in subsequent rounds. Back in the '80s, US political scientist Robert Axelrod showed this tit-for-tat strategy could reach a sustainable equilibrium, and boiled it down to four rules, with clear equivalents in the emissions-cutting game:
Be nice (start by cooperating - cut your emissions unilaterally);
Be retaliatory (if another player isn't nice, punish the bastard - sanctions, tariffs or other economic hurt);
Be forgiving (if he mends his ways, restore cooperation - help them with tech transfer if appropriate); and
Be clear (make sure your oppo knows what you're doing, so he knows what he has to do - the UN may have a role in education and communication here).

As the big global players get ready to head to Bali to knock out the successor to the not-entirely-successful Kyoto Protocol, their lessons according to this analysis are clear: the US needs to be nice; Europe needs to be retaliatory; the developing world needs to forgive the developed's past sins; and everyone needs a good deal more clarity.

The NEF paper is available as a PDF here.

The application of simple game theory models like the Prisoner's Dilemma to such problems of international cooperation isn't new, of course. The problems of coordination and free-riding become more acute as the number of participants increases, a particular problem for sumnative technologies such as carbon emissions. Still, there's some optimistic findings in the economic literature - this 2006 paper from Manfred Milinski et al finds that individuals can behave altruistically to help protect the global climate, with the basic level of altruistic behaviour increasing if the decision-makers are given expert information on climate research, and if they gain social standing by so doing. Let's see how that plays out in Bali.

A Stern response

I've just caught up (via the Environmental Economics blog) with an interesting paper from the good chaps at Resources for the Future responding to some of the more considered criticisms to the Stern Review on the economics of climate change.

Thomas Sterner and U. Martin Persson focus on the criticism raised by William Nordhaus (who I've mentioned before) on Stern's assumption of a near-zero discount rate when considering the future costs of long-term climate change (this is a common economist's device based on the principle that a pound today is preferred to a pound tomorrow). I've not been convinced by Nordhaus' argument - while a significant discount rate is certainly applicable in cold financial decisions, it's less so when considering wider social criteria. If someone argues that we shouldn't invest now to try and reduce potentially catastrophic climate change because the current costs of doing so outweigh the discounted future costs of not doing so, then there's an obvious question to ask them: what generation of your own descendents are you willing to sacrifice for your own current comfort? By revealed preference, that should give some idea of their real social discount rate.

Anyway, Sterner and Persson use a few well established bits of economic theory to argue that, even if one takes a higher discount rate than Stern, the same conclusions are still justified.
We argue that nonmarket damages from climate change are probably underestimated and that future scarcities that will be induced by the changing composition of the economy and climate change should lead to rising relative prices for certain goods and services, raising the estimated damage of climate change and counteracting the effect of discounting.

The moderately technical paper can be downloaded as a PDF here.

Fabulist economist

Breaking news from this week's Nature on a very naughty economist:
A 63-year-old German economist has for decades falsely claimed an affiliation with the University of Maastricht, in the Netherlands, according to an article in tomorrow’s issue of Nature. The economist, Hans-Werner Gottinger, also appears to be a serial plagiarist, according to Nature’s report.
Mr. Gottinger’s deceptions began to unravel two months ago, after an attentive reader noticed that a paper he published in the journal Research Policy in 1993 had pilfered a string of complex equations from a 1980 issue of another journal. The editors of Research Policy started to sniff around — and their plagiarism investigation eventually turned into something much larger. When they contacted Mr. Gottinger’s ostensible employers in Maastricht, they learned that he had never worked there.

Inevitably, Gottinger has published on social ethics.

Environmental economics blog

Here's a good blog, simply called Environmental Economics, by a couple of economics profs who get their teeth into many of the issues I've been nibbling at recently - not least the relative merits of carbon trading versus carbon taxes. A good overview of recent developments is here:
I really don't get the debate by economists between a carbon tax and marketable carbon permits. At the first level, as economists, we've won! We've convinced nearly everyone that regulation using economic incentive-based policies is a preferred approach. The squabbling amongst us over the best economic incentive-based policy can't help get one of these policies implemented.
I understand the squabbling by others ... since there is a lot of money at stake.

Sustainable chaos

Interesting short paper by Jacques Nihoul of the University of Liège on the role of chaos theory in models of sustainable development, which ties in with a number of subjects recently mentioned here. From the journal press release:

Current approaches to sustainable development do not fully involve complete methods and techniques for using, recycling, and replacing natural resources. Moreover, they do not take into consideration the effects of ongoing economic policies and fluctuating human populations. This is where the butterfly effect of chaos theory fame must be resurrected, says Nihoul [...]
Chaos theory is a major component of the computer models used by climatologists and weather forecasters as well as economists seeking patterns in the rise and fall of stock market values. However, Nihoul explains that while these models can provide useful information to feed into a global sustainable development policy, they must also take into account those butterflies on the periphery too. "Models of sustainable development on the ten-year and century-long timescales, must take into account both the diversity and the ‘turbulence’, the fluctuations on much shorter and more local scales," explains Nihoul.
Nihoul has developed a new modelling approach to climate, resources, economics, and policy, that sees the world system as interconnected local happenings rather than taking the smoothed global view favoured in much simpler studies. The earth cannot be modelled as a whole, he says, but rather as a mosaic of different systems, each with its own network of smaller systems and so on. Such an approach recognises the importance of global effects but also of the tiny deviations, the exquisite flapping wing of a butterfly as having a potentially enormous effect, chaotically speaking.

Ref:
Jacques C.J. Nihoul, "Chaos, diversity, turbulence and sustainable
development", Int. J. Computing Science and Mathematics, 2007, Vol. 1, No. 1, pp 107-114
available here.

The burning world

"The difference between science and economics is that science attempts to understand the behaviour of nature, while economics attempts to understand the behaviour of models. And many of these models have no relation to any state of nature that has ever existed on this planet."

That, in a nutshell, is the message of Thomas Legendre's remarkable novel The Burning, recently published in paperback in the UK. It's a campus novel which embeds an unorthodox economic polemic inside the usual academic and sexual shenanigans. Apart from some intrusive stylistic tics, it's a much more engaging and well-written story than one initially expects from the introduction of the protagonist:
His name was Logan Smith and he had just earned a Ph.D. in Economics at the University of Pennsylvania and he wasn't going to sleep in his hotel room tonight.

But it's this embedded critique of the neo-classical orthodoxy that distinguishes the book (although, perhaps unsurprisingly, its cover and blurb obscure this major aspect of the work). Legendre draws on the work of Nicholas Georgescu-Roegen to argue that energy and entropy considerations impose fundamental limits on models of economic growth. Coming from a physics background, that does indeed seem obvious (I've often thought the same myself, at least), but it's not something you'll see acknowledged in mainstream economics in any significant way.

Legendre, via his fictional economics and astrophysics PhDs, focuses on energy constraints, but there's also increasing awareness - among materials scientists and geologists, if not among economists - about constraints imposed by specific limited resources. Research published in this week's New Scientist details the rapid consumption of limited resources of metals - from rare elements like gallium and indium, to commonplace materials like copper and silver. Ironically, this places severe limitations on the spread of clean technologies such as solar panels and fuel cells, as well as many other growth technologies:
as [Tom Graedel of Yale University] points out in a paper published last year (Proceedings of the National Academy of Sciences, vol 103, p 1209), "Virgin stocks of several metals appear inadequate to sustain the modern 'developed world' quality of life for all of Earth's people under contemporary technology." And when resources run short, conflict is often not far behind.

Of course, economics has its supply-and-demand models for this sort of thing, but the nice clean orthodox theories generally don't consider the implications for macro growth, or the possibility of technological limitations, or the general human mess of it all. In a real ashes-to-ashes detail, researchers are looking at reclaiming platinum, emitted in trace quantities from vehicle catalytic converters, from the dust accumulating in road-sweepers.

Less scrupulous operators are already responding to scarcity-driven price rises for some common metals through some creative reclamation. In another detail that would fit nicely into a moderately apocalyptic novel, the Guardian today reports that copper thieves, stealing cables and pipes for scrap value, are causing havoc for railway operators and other infrastructure providers, and are even being blamed for a gas explosion that destroyed a house in Bradford. The metal's likely destination is China, as that colossal country invests in its own infrastructure in a bid to reach US levels of production and consumption. At this rate, we're going to need a bigger planet.

Ride a black swan

I've just been reading Nassim Nicholas Taleb's long-awaited new book, The Black Swan: The Impact of the Highly Improbable (I say long-awaited - New Scientist was plugging it as imminent nearly a year ago, and Taleb manages to get an apology for lateness into the text itself).

As the follow-up to Taleb's landmark Fooled By Randomness (a book whose ideas are sadly more widely referenced than acted on), it's been getting plenty of press - for example, this by Oliver Burkeman in the Guardian - so I don't need to repeat its arguments here (basically it's all to do with non-normal distributions for many events and phenomena, not least asset price movements). It covers more ground than the earlier book and is perhaps a bit less coherent, but it's still a pretty great read with a much-needed message. Remarkably for a 300-page polemic about statistics and orthodoxies, it's never dull. Actually, I'm wondering whether I should be worried that I found the closing technical section - which Taleb recommends that most readers can happily skip - the most interesting and provocative.

Taleb firmly places his chips with Benoit Mandelbrot, to whom the book is dedicated, and his work on scaleable distributions. For more on this and Mandelbrot's other work in economics, see my interview with the man himself from 2003.

Carbon politics, and alternative introductions

As always, some interesting papers in the new issue of the Post-Autistic Economics Review.

Donald MacKenzie of the University of Edinburgh discusses (in a paper originally published in the London Review of Books) the political economy of emissions trading, a subject I discussed immediately below. It's an interesting look at the political machinations behind the introduction and implementation of such schemes, notably the US sulphur-dioxide programme and the more recent European Emissions Trading Scheme. He doesn't spend much time on the pros and cons of trading versus the alternative approach of taxation, apart from noting the greater political difficulties of the latter:
What pushed Europe towards trading rather than the initially preferred carbon tax is in good part an idiosyncratic feature of the political procedures of the European Union. Tax measures require unanimity: a single dissenting country can block them. Emissions trading, in contrast, counts as an environmental, not a tax matter. That takes it into the terrain of ‘qualified majority voting’ [...] A plan for a Europe-wide carbon tax had foundered in the early 1990s in the face of vehement opposition from industry and from particular member states (notably the UK), and its advocates knew that if they tried to revive it the unanimity rule meant they were unlikely to succeed.

MacKenzie also addresses some of the instinctive objections to emissions trading:
many people, especially on the political left, have an instinctive dislike of the idea of emissions trading. Amongst its roots is a variant of what the economic sociologist Viviana Zelizer calls the ‘hostile worlds’ doctrine. She’s concerned with the worlds of economic relations and of intimacy. There, the ‘hostile worlds’ doctrine is that the intrusion of economic considerations corrupts intimacy, and conversely that kinship and other intimate relations need to be stopped from corrupting what should be impersonal economic transactions [...] In my view, Zelizer’s open-mindedness should also be applied to emissions trading. Just as economic relations and intimacy aren’t necessarily at odds, we shouldn’t assume a priori that market pricing is detrimental to environmental stewardship.

Meanwhile, the PAER leads with an update from Arjo Klamer, Deirdre McCloskey and Stephen Ziliak on their alternative introductory textbook for economics, The Economic Conversation:
We want to produce a book that reflects the actual conversation of economics, Samuelsonian to Post-Autistic. Our web site intends to nurture an already worldwide community of teachers and students who believe there's more than one way to skin an intellectual cat - and that a fair and public hearing of the alternatives is crucial to the health of the economic conversation.
We don't expect to be the next Samuelson. Market share would be nice - we openly admit to a profit motive! - but it’s not our main goal. After all, that's one of the leading points in the Post-Autistic movement, that human goals are multiple and cannot be reduced in most cases to Prudence Only or to Mr. Max U or to any of the other formulas for sociopathy recommended by the Samuelsonians.

Sounds like exactly the kind of introductory text I wanted not too long ago.

Carbon trading - not all that great

The Guardian reports on Blair-backed proposals for a new generation of international carbon trading schemes to help reduce greenhouse gas emissions. Even Dubya's close to getting on side on this one, apparently:
The plan would involve setting up a network of carbon trading schemes and is one of five main proposals drawn up by the Germans and British ahead of the G8 summit next month[...]
Under the new trading plans, China and India would not face binding targets; instead they would be allowed to continue their extraordinary economic growth in exchange for a commitment to establish national cap and trade schemes to cover some of their most heavily polluting industrial sectors, such as metals processing and cement manufacturing.
Companies in these sectors would be granted permits to emit carbon dioxide and other gases, in the hope they would rather reduce pollution than pay for permits. The idea is based on a scheme covering power generators and heavy industry that operates in Europe under Kyoto.
Further cap and trade schemes - this time with binding targets and penalties for non-compliance - would be set up to cover carbon pollution in developed countries, including the US and Australia, which have refused to sign up to Kyoto. These could be along national, regional or sectorial lines, officials said, with carbon credits eventually traded between different schemes using exchange rates similar to currency conversions, with the goal of placing a global price tag on pollution.

Last week's Economist also had a favourable story on carbon trading schemes, based on a recent World Bank report:
The benefit of this approach over regulation is that the businesses which can reduce their emissions at the lowest cost do the bulk of the adjustment. Perverse incentives that can often hamper environmental regulations may also be avoided.
These schemes are large, and growing. Last year, carbon-trading markets grew to $30 billion, three times bigger than the previous year. Trading was dominated by permits issued under Europe’s emissions trading scheme but a voluntary private market worth $100m has also evolved.

Funnily enough, many economists (primarily in the US) are arguing that such a Coasian rights-based approach isn't actually all that suitable for tackling global greenhouse gas emissions, largely because of the size and complexity of the market. More attention is again being paid to straight taxation on carbon dioxide and the other GHGs, in something closer to the classic Pigovian approach.

William Nordhaus of Yale University, for instance, argues in this discussion paper that the structure of costs and benefits of the climate change problem innately favour a price-based approach - a combination of non-linearities in emission reductions, costs and benefits, and remaining (and probably unavoidable) uncertainties means that trading schemes are likely to create much more undesirable volatility in carbon pricing, reducing the effectiveness of any international scheme. Nordhaus rather advocates a harmonised carbon tax, "a dynamically efficient Pigovian tax that balances the discounted social marginal costs and marginal benefits of additional emissions". Such a tax would increase real carbon prices by between two and four per cent per annum, he estimates.

Inevitably, politics rears its head here. A globally harmonised carbon tax is likely to be resisted by governments protective of their national powers - given a choice between a carbon tax and a less efficient market scheme, policy-makers may opt for the latter as there is less obvious cost to the electorate. And in general, national policy-makers are likely to be deterred by the potential costs of implementing any pricing scheme if the benefits are unlikely to be felt before the next electoral cycle – or indeed in the next generation.

Meanwhile, carbon trading has been embraced by corporates who've figured that with a little lobbying resulting in less than perfect market design, as with the early European emissions trading scheme, it can be a nice little earner without actually requiring much work to clean up their act. And now it seems the White House is putting its weight behind such schemes. If I can be excused a touch of cynicism, it doesn't exactly inspire confidence in achieving the necessary reductions, does it?

Gamesmanship theory

Intriguing paper by Stuart Macdonald of the University of Sheffield and Jacqueline Kam of Bristol on the politics of journal publication in their own field of Management Studies. Shockingly, they find the whole area rife with gamesmanship, with who publishes what where apparently more important than the actual content.

From their abstract:
Pressure to publish in [quality] journals and the triumph of managerialism over professionalism in the modern university have undermined peer review. In consequence, the same old hands are publishing the same old ideas in the same old journals. Quality journals must be taken much less seriously if there is ever to be any real enthusiasm for new ideas from new blood in Management Studies[...] Cunning and calculation now support scholarship in Management Studies. Gamesmanship will remain common until the rewards for publishing attach to the content of papers, to what is published rather than where it is published. We propose a Tinkerbell Solution: without belief in the value of a paper in a quality journal, the game is no longer worth playing.
[Stuart Macdonald and Jacqueline Kam, 'Ring a Ring o' Roses: Quality Journals and Gamesmanship in Management Studies', Journal of Management Studies, 44, 4, 2007, pp.640-655]

Still, such gamesmanship doesn't seem entirely alien to the practice of Management. And of course, such practices couldn't possibly be so dominant in other fields - could they?

Bulls in the China shop

Report from the Economist on the makings of a likely stock market bubble in China:
WOULD-BE share punters, keen for a piece of China's booming stockmarket, are queuing to open accounts at a Beijing branch of China Merchants Securities. A busy manager, handing out application forms, says he is taking on 100 new clients a day, perhaps five times as many as a year ago. Bunches of small investors, ranging from students to pensioners, crowd around computer terminals to carry out their trades, keeping an eye on the prices as they flicker across big electronic screens. China's biggest-ever stockmarket boom may be turning into a bubble—and the country's leaders are getting worried.
...
Some economists fret that share prices are moving far ahead of companies' earnings, to a degree scarily reminiscent of Japan in the late 1980s just before its crash. With the help of new share listings, the combined market value of the Shanghai and Shenzhen exchanges has risen to some 15 trillion yuan ($1.8 trillion), 87% more than at the end of last year and surpassing that of Hong Kong.
The growing involvement of low-income groups such as students and pensioners, who were more cautious during the last bull run, could make a crash more painful.
...
Twice this year—on February 27th and April 19th—the markets have wobbled alarmingly amid rumours of tougher measures to control the flow of cash. The latest upset was caused by figures showing the economy growing even faster than expected: in the first quarter of this year, output was up 11.1% on the same period of last year. But the bulls have quickly returned. Outside the China Merchants Securities branch, a group of investors debates the market's prospects. “It's like a casino set up by the Communist Party,” says one. Another says only fools are still investing. But none has any plans to cash out.

Certainly looks to be exhibiting many of the classic bubble characteristics, fuelled (as was the late-90s bubble in the West) by the widening adoption of online trading:
A big difference between this bull market and the last is the penetration of the internet and mobile telephony... The widespread installation of broadband in homes over the past four years has made it easier for pensioners and housewives to join in.

Tax attraction

A counter-intuitive (or maybe just counter-doctrinal) finding on the effects of corporate taxation on inward investment, from a team at the Universities of Nottingham and Dundee. The countries which attract the most investment turn out to be the ones with higher taxes and levels of public spending - the opposite to what most neo-liberal economists would claim.

Holger Görg of Nottingham's Globalisation and Economic Policy Centre comments:
“Most economists have always argued that globalisation leads to a 'race-to-the-bottom' as countries compete to cut tax rates in the hope of attracting multinational investment and the jobs that come with it. The traditional theory is that this then leads to a shrinking of tax revenues and undermines the welfare state.

“But our evidence shows that overall effective corporate tax burdens do not appear to have fallen in response to capital and trade liberalisation, that countries aren't competing to cut taxes and actually, when investing abroad, firms find countries with higher taxes attractive because they associate them with a happy, stable workforce.”

One possible explanation is that multinationals are able to shift book profits between locations, so that the bulk of their taxes aren't necessarily paid in the locations where they have their main profit-generating operations. That may, in turn, further weaken the case for national or regional government bodies to pimp themselves out to potential inward investors by proffering subsidies or favourable treatment for investment which, in some cases, last only as long as the bungs. And it certainly makes a nonsense of much of the rhetoric of 'regional competitiveness'.

Full press release from Nottingham here.

The invisible hand disappears

Today sees the release of the new Bank of England £20 notes, featuring Adam Smith. Smith is of course inextricably linked with the 'invisible hand', that magical concept, often invoked to justify free market ideology, which (to borrow the Wikipedia definition) illustrates how those who seek wealth by following their individual self-interest, inadvertently stimulate the economy and assist society as a whole.

That's something of a distortion. The phrase occurs exactly once in Smith's most invoked work, The Weath of Nations. It appears in Book IV, Chapter II:
Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home, in the specific context of merchants choosing domestic products over imports:
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
This is hardly a major part of the text. Many editions, including the Pelican Classics edition on my own shelf, omit it entirely. And it's highly questionable whether such buy-British behaviour is now a significant phenomenon, if ever it was.

The phrase also occurs once in Smith's other key work, The Theory of Moral Sentiments, in a passage proposing that wealth naturally spreads from a few rich to the mass of poor:
The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.
More recent economic and demographic work on income distributions tends not to support this charming proposition.

The vast majority of Smith's writings runs counter to the instincts of many of his loudest invokers, as set out at length in Iain McLean's recent Adam Smith, Radical and Egalitarian. Personally, I've found that anyone invoking Adam Smith and his Invisible Hand almost certainly doesn't really know what the hell they're talking about.

Option on an option on an option

John Kay weighs into the current private equity debate (or to be precise, the large leveraged buyout debate) in his Financial Times column. Rather than following the union criticisms on asset stripping and job losses, he goes for the financial engineering aspect:

Sitting on my desk is a prospectus for a fund of private equity funds. It offers me some of the best names – Blackstone, Permira etc. I have just received a large cheque for my holding in Equity Office Properties and, if a similar bidding war for Sainsbury’s takes place, I will have a lot of cash to reinvest.
But wait a moment. Was it not Blackstone that just bought Equity Office and are not the names in the frame at J Sainsbury almost exactly those in my fund of funds? The prospectus invites me to buy Equity Office Properties and Sainsbury from myself, at prices around twice what I recently paid.
...
If management and business operations remain much the same, as does the underlying ownership structure once you drill down through the layers of fee-collecting intermediaries, it is hard to see where value is being added. If financial engineering of the business is not the explanation, can the answer lie in financial engineering among investors?
The private equity promoters propose layer upon layer of debt, leveraged by non-recourse finance. What I get is an option on an option on an option. But the same finance theory also tells us that you do not increase the value of an investment portfolio by increasing gearing: once again the greater risk exactly matches the greater prospect of return.
...
Perhaps the sophistication of modern financial structures means that the distribution of risks and the design of governance structures can be finely tuned to the needs of individual investors and the businesses they fund. Or perhaps there is a miasma of complexity and confusion in which everyone persuades themselves that the uncertainties of business have been landed on someone else. Make up your own mind: but I have decided to keep my cheque book in my pocket.

Given the recent research suggesting that LBO fund performance is no better, allowing for gearing and cheap borrowing, than the public markets, it's a valid question.

Galbraith's legacy

Good article in the latest Post-Autistic Economics Review by Richard Parker of Harvard asking Does John Kenneth Galbraith have a legacy? (Galbraith, of course, quite innocently provided the title for this blog.)

Human beings, Galbraith insisted from his own observation and experience, were subject to all sorts of “irrationalities” – passions, miscalculations, misunderstandings, pressures to conform and pressures to obey – that made our models (especially when too tightly drawn) unstable, and our predictions prone to error.
We needed, he said, to understand that in large groups – especially nations – human beings acted out of collective beliefs (“conventional wisdoms,” he called them) that reflected and reenforced both the unequal distributions of power and wealth that everywhere and always exist, and the ideological justifications that groups – especially dominant groups – impose on the rest of a society and era.
That made for a “softer” sort of economics than my generation was being taught at the time – and made it child’s play for us to sneer and dismiss Galbraith then. In middle age, however, I’ve had to rethink (as all of us should, but not all of us do) my youthful confidences. And in that process, I’ve come to believe that Galbraith has proved, in many absolutely important ways, ultimately “wiser” than the “smarter” and “harder-minded” economics inscribed in rigorously-mathematical models – especially when those models treat government and the politics behind governance either as exogenous to primary models of the market, or simply as a beneficent, wise and evenhanded helpmates in realizing the market’s genius, as many of his Keynesian colleagues did, thinking themselves perfectly able to manipulate aggregate demand in order to achieve permanent growth as the solution to ancient problems of inequality.
...
Today, after thirty post-Golden Age years, it is fair to say that while there is still some agreement about methodologies in economics, larger agreements still elude us about purposes and goals and visions. And that is a tragedy for the world because it has helped validate a kind of new fundamentalism that Keynes, and Galbraith, and Samuelson (and Solow and Arrow and a host of other heroes of my teachers’ generation) rightly tried to destroy.
We see that new fundamentalism everywhere around us – in shape and size of Washington’s most recent tax cuts, in our military actions in the Middle East and South Asia, in the angry assertions that “the market” – whatever that truly might be – “always knows best,” and that those who would interfere with “the market” are uselessly acting to hold back the natural tide. And not least in the censorious rebukes hurled at those who would challenge these “new” truths. Times columnist Tom Friedman has a pungent phrase to describe the “market as god” core (as Harvey Cox has put it) of this view – but is more sympathetic than Cox. Friedman argues that we live in a world of “golden handcuffs” and ought to get used to it, and indeed celebrate our gilt shackles because of the ever more comfortable world to which they are leading us.
Galbraith doesn’t think so, and neither did Keynes – and in a world today where the economics “Nobel” was given recently to a psychologist, for god’s sake, for investigating the behavioral irrationalities that trump the antique idea of rational maximizing agents, when the promise of game theory has proved greater in nuclear war planning than explaining the ways of markets, when most computer-based forecasting is good for a matter of weeks and months rather than years, and when econometrics, in the words of Lawrence Summers, has never been decisive in settling any economic question of consequence, we ought to at least give pause to think back to the ways in which Prof. Galbraith’s work anticipated every one of these facts that have been discovered in the last 20 years about limits of his and my beloved profession.

Full PDF of the article here.

Brass numbers

Some peculiar spin on a new Barclays "white paper" on the national distribution of the wealthiest individuals. The document notes:
We can also examine wealth on an aggregated county level, which again shows that London reigns supreme as the hub of the UK’s wealth. However, the list of the top 10 counties still presents a couple of surprises, including Yorkshire where people are better known for taking caution with their money.

Newspaper reports tended to follow that line, with the Yorkshire Post, for example, reckoning:
areas traditionally seen as less affluent have also made it into the map's top 10, with Yorkshire in third place at 6.1 per cent and Lancashire in sixth (3.8 per cent) behind home counties Surrey (5.8 per cent) and Middlesex (4.8 per cent).

While the Guardian today asks:
Why is Yorkshire so wealthy?
There is a branch of Greggs the bakers at Leeds-Bradford airport. The very presence of competitively priced sandwiches and pies in the vicinity of international flights carries a powerful subtext: "Four-quid sarnies and little boxes of sushi may be all right for them flash buggers flying from Manchester, but here in Yorkshire we like to look after our brass."
...
Ask any of the paupers in Surrey, Middlesex and Lancashire, lorded over by Yorkshire in the wealth league table, and they will undoubtedly say it is because Yorkshire people never spend any of the damn stuff.

Such stereotyped comment may or may not be entirely fair (I'll keep my penn'orth on that safe in my pocket), but the Barclays statistics hardly require such ponderings. Yorkshire is a big bloody county - in all, about 5 million people, 8.3% of the total UK population, about the same as Scotland. With just 6.1% of the "country's wealthiest people", we're actually punching below our weight in rich buggers. Not so much of a story there, really.

The real question isn't so much "Why is Yorkshire so wealthy?", but 'Why do the critical faculties of so many journalists fall apart when faced with some basic statistics?"

Kenyan bubble

Good report from the Guardian on the new and booming stock market in Kenya, which is showing all the symptoms of a bubble:

Kenya has gone share crazy. The incredible performance of the Nairobi Stock Exchange (NSE) - which is next to the public auditorium and provides the live share-price feed - is the talk of the country. From 2002 to 2007, the main NSE index rose 787% in dollar terms, according to Standard & Poor's, the investment research firm, making it one of the world's best-performing markets[...]
Stories of overnight wealth creation have created a huge frenzy for shares from people who have never invested in the stock market before. When KenGen, the state's biggest electricity company, listed its shares last year, there were queues at brokerages all over the country. Local media reported how small-scale farmers were selling their cattle to buy the shares. Banks suddenly offered "share loans" to people who had been considered unworthy of credit[...]
The Kenya Association of Stockbrokers said the success of the new listings meant that close to a million Kenyans now owned shares. Amish Gupta, chairman of the association, said: "Suddenly we have got the mass market buying stocks, not just the elite." Most new investors today are aged between 22 and 40, he added. "Savvy men and women looking for quick returns."

The bubble seems to be driven not so much by a loosening of credit, as is often the case, but by the abandonment of traditional saving methods, as well as remittances by expats:
vast sums of money have poured in from the diaspora; not just to sustain families, as before, but also to invest, helping the NSE index burst through 6,000 points for the first time.[...]
Historically, most people with spare cash kept it under the mattress. Wealthier individuals bought livestock, opened a stall selling clothes or mobile phones, bought a matatu minivan taxi or, most popular of all, purchased property.

When the bubble bursts, as it will, it'll hit hard, with the potential for serious political upset.

On a vageuly related note of investment trends and political worries (and not worth a post of its own), the Guardian also has a vaguely handwringing full-page feature on 'The rise and rise of private equity', something it takes as synonymous with big take-private deals. Take-privates have come in and out of fashion for many years now, and I've lost count of the number of times I've been told all the low-hanging fruit on the public markets have already been picked off. The current trend for big deals just reflects the weight of money held by the PE houses - whether the economic effects are good or bad remains to be seen.

Tailoring microfinance

Interesting research on microfinancing schemes in Uganda from doctoral researcher Alfred Lakwo, with support of the Dutch NWO, who argues that such schemes must be more closely tailored to local circumstances. According to the NWO release:
Lakwo discovered that microfinancing gave the women concerned more money and knowledge, but no real independence. However, the benefit gained is nothing compared to the material progress made by other women because, for example, they gained access to more ground, cattle or (agricultural) machinery.
...
Lakwo states that microfinancing makes a clear contribution to the emancipation of women when it comes to acquiring comparable positions and rights to men, within a marriage relationship or emancipation at an individual level. According to him, policy makers should realise that this is not the same as creating independent 'macho' women, a western outlook on the emancipation of women. They also need to match microcredit programmes to the local situation and needs. This would enable a good infrastructure for microfinancing to be built up and the target group would become involved in the policy. At present that scarcely happens.

Economic genre fiction

Interesting radio piece by Rick Kleffel for NPR in the US on a perceived trend for 'genre fiction' (SF, horror, etc) to draw on economics and finance. From the NPR blurb:
During the Cold War, science-fiction tales of alien invasion mirrored society's fear of Communism, and monsters from Frankenstein to Godzilla have tapped into our unease about the boundaries of science.
But a new type of genre fiction has plots centering around business and economics. A book by T. C. Boyle takes the subject of identity theft and treats it like a horror story.
Several other writers are also turning their attention to our preoccupation with finances and business, and finding fertile ground.
More here.

I'm not convinced by the claim that this is anything new (economics in SF goes back to Wells at least) and the focus here is very much on micro or personal finance issues rather than anything broader, but it's an interesting listen.

An exciting time

The latest edition of the Post-Autistic Economics Review features a couple of articles reprinted and expanded from the Financial Times.
In the first, Philip Ball (whose book Critical Mass I reviewed for the other FT) offers a painless overview of the discontents of modern economics -

It is easy to mock economic theory. Any fool can see that the world of neoclassical economics, which dominates the academic field today, is a gross caricature in which every trader or company acts in the same self-interested way with cool, omniscient rationality. The theory fails the basic requirement of a science that it can explain or predict the real world, and has evidently failed to make that world any fairer or more pleasant.
The usual defence is that you have to start somewhere. But mainstream economists no longer appear to consider their core theory to be a ‘start’ at all. The tenets of neoclassical economics are now so firmly embedded that economists who think it is time to move beyond them are cold-shouldered. These ideas have hardened into a rigid dogma, and to challenge them is to invite blank stares of incomprehension – you might as well be telling a physicist that gravity doesn’t exist.
...
There is no other ‘science’ in such a peculiar state, where a demonstrably false conceptual core is sustained by inertia alone. This core, appropriately known as the Citadel, remains impregnable while those inside fashion an increasingly baroque fantasy. But as Alan Kirman, a progressive economist, has said, “no amount of attention to the walls will prevent the Citadel from being empty.”

In the second, Paul Ormerod responds to the "strong criticism on the letters page" apparently attracted by Ball's piece. While he agrees with most of Ball's criticisms, he notes the contributions of researchers such as Daniel Kahneman and Vernon Smith (who I interviewed a few years ago) in introducing the first cracks into the old dogma -

They created, almost on their own, the discipline of experimental economics. Standard economics merely assumes that people act in a particular way. Mr Kahneman and Mr Smith tested how people really do behave.
Their conclusions are a devastating blow to the postulates of the rational decisionmaker. In general, people gather limited information, reason poorly and act intuitively rather than rationally.

Encouragingly for someone approaching the end of their advanced Economics studies, Ormerod notes:
The challenge of reconstructing economic theory virtually from scratch makes it an exciting time to be an economist. It is attracting eminent researchers from other disciplines, such as mathematical sociology, computer science and statistical physics. One from the last of these, Doyne Farmer of the Santa Fe Institute, has a model that replicates many of the subtle features of prices on the London Stock Exchange. But far from assuming that traders are rational, he postulates that they have literally zero intelligence. Yet the model works very well.
The problem, and it is a very big one, is that most economists continue to act as if very little has changed and that the rational agent postulate remains generally valid.

Student distribution

Geneticist Johnjoe McFadden writes in the Guardian on some experimental economics research which suggests that thinking about money makes people more self-sufficient but also more selfish and less sociable.

McFadden notes:
Most student allocators proposed a fairly even split, keeping an average $5.44; but students majoring in economics tended to be greedier, proposing to keep an average $6.15. Conversely, when they were on the other side of the table, the economists tended to accept less, as little as $1.70 (compared to $2.44), before throwing their arms up in outrage. It seems that studying money makes you less generous, or perhaps the discipline attracts less generous people who give less and expect less in return.

The worrying thing here is that economics students make up the largest part of subjects for economic experiments - they're the closest and most available pool for university researchers, and they're most likely to be willing to take part (especially if there's some money involved), as I did last year. But if economic students are distinct from the general population, then would this not introduce a significant bias into the whole field of experimental economics?

Betts off for urban economies

The Star also reports on Sheffield MP Clive Betts' response to a new report from the government's Communities and Local Government quango:
Academics say despite massive amounts of public funding to improve business, productivity and earnings in the north, it has only managed to make things worse.
They said no city north of Derby has an economy that is performing better than the national average, according to the report which was commissioned by the Government.
And Sheffield is in the bottom five places when it comes to recording new patents - a measure of inventions and breakthroughs in industry.
But Sheffield Attercliffe MP Clive Betts rejected the report and said business was booming.
"Go around Sheffield and look at the new private sector investment going on. There's new businesses in the Lower Don Valley, new residential accommodation in the city centre and the New Retail Quarter which are massive private investments.
"Look at companies in my constituency such as Forge Masters, which has taken on 42 new apprentices and expansions at the business park at the airport," he added.

Can't help feeling that Betts is being a wee bit daft. Wonder if he's actually read the report, 'The Competitive Economic Performance of English Cities' (downloadable here)?

(Actually, I doubt the Star journalist read it, as all the factoids are recycled from a typically idiosyncratic story in Daily Mail. By 'idiosyncratic', I mean either massively dishonest or stupid. The Mail says:
The damning report - commissioned by the Government - suggests public spending at levels once associated with the Soviet bloc have done more harm than good. It told ministers: "The overt policies followed so far and the unintended consequences of others have either failed to close this gap or actually made it worse"
which omits the crucial qualifier from the report for many decades - ie, the problem long predates the current Labour government, contrary to the Mail's implication. The problem is lack of investment, particularly from the private sector, not too much public investment. Utter bullshit from the Mail, and sloppy idle journalism from the Star.)

The report itself is a solid investigation into various aspects of city and regional economic development, with a wealth of info and ideas for anyone interested in such (which we all are, right?), and touching on a lot of issues I've written about previously. The report takes Sheffield as a case study alongside Cambridge, Derby and London. While it's not beyond criticism, the stats which Betts objects to are fairly unarguable, even if the brief summaries given in the Star story are less than entirely helpful (the report said 31 out of 56 cities lagged behind the rest, apparently. What?)

The report's introduction notes:
Sheffield provides an example of a traditional manufacturing based economy that has suffered from de-industrialisation. Although there have been some improvements over the last ten years, the city’s economy is still locked into past economic forms that can be seen as hindering its competitive advantage.
The local economy has traditionally been dominated by manufacturing industry, specialised in a restricted number of sectors, primarily related to the steel industry. [...] there is still a dominance of manufacturing industry, and some local opposition to diversification, identified as a force for continuity. Other barriers identified include few entrepreneurs to take forward ideas, the limited markets served by the city, and a lack of willingness on the part of the private sector to push for diversification.
[...] there are still concerns over the predominance of a risk-averse culture within Sheffield, and a lack of entrepreneurial skills which may hamper the development of this competitiveness driver and so prevent upgrading of the urban economy in the future.
As a result of these issues the data for Sheffield’s key economic indicators paint a difficult picture in terms of competitiveness and economic performance. Sheffield’s industrial heritage has left deep scars in terms of the economic structure of the city, which has been slow to adjust to new economic and technological forms. Local strategic decision-makers are keen to encourage new institutional and economic forms. Despite this the history of the pathdependent nature of the local economy cannot be ignored, and the fortunes of the city cannot be turned around overnight.
which seems fair to me.

The section specifically looking at Sheffield, as a case study of a 'de-industrialised' city, introduces a number of initiatives I've written at length about before, such as AMP, Finningley and the city centre redevelopment. A comment about the fine line between Sheffield's much-praised 'villagey' feel and a parochial susceptibility to negativity sounds about right, as does this about the city's manufacturing elders:
It should also be noted that in a city such as Sheffield, where manufacturing industry has traditionally been strong, the industrial elites associated with traditional manufacturing sectors are perceived as having a powerful role and considerable influence, particularly through the Cutler’s Company. Respondents suggested that their culture and background do not always sit harmoniously with the innovating new sectors that are contributing to drive the city’s economy; this can be a constraining factor for innovation in the city, as a force making for continuity, and not embracing change.

Overall, it's realistic and pretty positive about Sheff and its prospects. There's still plenty to be done, but the report is in no way as negative as Betts' soundbites would suggest.

More generally, the report points to the lopsided distribution of venture capital firm head offices (243 in London, 42 in Manc, 36 in Leeds and 35 in Brum, apparently) as an indicator of the failings of the knowledge-based economy outside the South East: There is therefore a distinct regional and urban dimension to the equity gap, in those small and new firms in the regions and cities outside the [South East] that find it difficult to access finance for investment, including venture capital. However, as I've written previously, there's mounting evidence that the equity gap no longer persists. (As I explore in a recent article in Corporate Financier, the gap may now be in corporate finance advice rather than funding per se.)

There's also some interesting findings re economic health and general quality of life, which run counter to some claims:
The concept of quality of life is a much abused idea. It has often been used for political purposes with scant regard to its clear and consistent definition or the available empirical research that seeks to clarify what it means to citizens. All too often it has become one of the promotional tools employed by city agencies with the main aim of making their particular location attractive to global capital [...but] there is no necessary connection between the standard of living enjoyed by residents of a city and the economic performance of its economy.

Cambridge, meanwhile, is generally seen as an exemplar of a knowledge-based cluster, but it faces some of the same problems (which I wrote about a few years ago here) as Sheffield -
Tough containment policies are seen to limit potential investment and economic growth in both Cambridge and Sheffield. In both cases restrictions on the land and building available for high-tech and other forms of knowledge intensive industries has hampered their development. This has restricted rates of change.

Equal work, equal pay

Research news to gladden the heart of a trade unionist, or anyone concerned with workplace equity. Experimental economists at the University of Innsbruck have found that standardised employment contracts based on the "equal work, equal pay" principle increase worker performance and market efficiency boost motivation. There is a clear increase in performance levels and market efficiency, compared to individually negotiated contracts.

From the press release:
Their research has proved for the first time that employers draw clear benefits from standardised salaries because, if a market only issues incomplete contracts, employee responsibilities become difficult to pin down. In other words, standardisation does not simply increase salaries, it also generates economic advantages in the shape of better performance and greater market efficiency.

Research leader Prof. Matthias Sutter notes:
"Our observations revealed that, compared to individual agreements, salaries related to standardised contracts are 30 percent higher. However, performance is also higher in these cases - by 29 percent. Faced with these results, it comes as no surprise that salary standardisation also increases market efficiency by almost a quarter. Standardised contracts, the economic advantages of which have never before been investigated, are now becoming increasingly attractive thanks to these results."

The results appear to depend on a cyclical effect - employers who wish to reward individual employees must also reward other workers, encouraging everyone to work harder and thus increasing market efficiency. By contrast, individual and collective responsibilities are difficult to specify in individually negotiated contracts. I'd guess there's also other behavioural effects in less equitable workplaces, though that's not directly addressed here.

There's a clear lesson for many employers, Sutter concludes:
"Particularly in the university system, employees who essentially have the same job description are remunerated on very different scales. This is due to the rapidly changing employment conditions in the public service sector. As a result, lecturers and professors get different contracts with different salary and pension rights. Our data now suggests that this could have a negative impact on performance."

Milton Friedman RIP

Samuel Brittain in the Financial Times has a full obituary of Milton Friedman - one of the few economists who could justifiably be called a household name (perhaps the only, following the death of JK Galbraith earlier this year.

I've not read a great deal of Friedman, perhaps in large part because I've been put off him by some of his most ardent (and/or Thatcherite) advocates or associates. But by Brittain's account, there was far more to him than the public image suggested:
Those who wanted to write him off as a right-wing Republican were disabused by the variety of radical causes he championed. I was not impressed in my own student years by the claims to a belief in personal freedom of the pro-market British economists whom I first encountered. It was not until I came across Friedman, and learned that he had spent more time in lobbying against the US “draft” than on any other policy issue, that I began to take seriously the wider philosophic protestations of the pro-market economists.
Friedman's iconoclasm endured. He regarded the anti-drugs laws as virtually a government subsidy for organised crime. Even in the financial sphere, he espoused causes such as indexed contracts and taxes as a way of mitigating the harm done by inflation which did not endear him to natural conservatives.
...
Friedman's direct influence on Margaret Thatcher was much less than often supposed. Although they got on together at a private dinner before the 1979 election, the two did not know each other well and Friedman is only mentioned en passant in the former prime minister's memoirs. Her own inspiration, as she relates, came from Hayek[...] On a broader front, however, without Friedman's writings and television expositions, the Thatcher government would not have enjoyed even that very limited degree of approval that it did among a minority of the intellectual elite.

Happy thoughts

A few months ago, I referred to Charles Kenny's fascinating paper 'Were People in the Past Poor and Miserable?'.
Kenny recently dropped me a line to say that he's just had a book published expanding on many of the themes of that paper.

Life, Liberty and the Pursuit of Utility: Happiness in philosophical and economic thought is co-authored by Charles and his father, the noted philosopher Anthony Kenny. Charles' own blog summarises the book:
Life, Liberty and the Pursuit of Utility relates age-old philosophical discussions of the nature of a worth-while life to the recent growth of interest among economists in criteria for quality of life. Reflection on the philosophical tradition suggests that there are three key elements in the notion of a good life: welfare, contentment, and dignity. Welfare is capable of objective measurement in terms of such elements as food intake, disease level, expectation of life and so on. Contentment is also measurable, to a more controversial degree, by means of questionnaires eliciting self-ascriptions of subjective well being. Dignity is the most difficult of all the elements of well-being to determine and quantify, but it is related to measures of civil rights, economic and gender equality and measures of the quality of employment. The book discusses what philosophers and economists have had to say about the nature and causes of welfare, dignity and contentment. On the basis of this analysis we draw conclusions for national and international policies.

The blog includes a detailed precis for each chapter, with plenty of links to other work on the subject. There's also an equally detailed introduction to Kenny's other new book (busy chap!), Overselling the Web? Development and the Internet, which touches on everything from the implications of Microsoft's increasingly bloated Word software for developing economies to the infamous Nigerian email scams as a source of economic convergence, while debunking many of the sillier claims about ICT revolutionising the lives of the global poor. Kenny, it's probably safe to say, isn't a big fan of Thomas Friedman.

Market environmentalism

The Observer has an interesting interview with James Cameron of specialist investor Climate Change Capital. This comes in the wake of the Stern report on the economics of climate change which, even if it didn't exactly tell us anything new, seems more likely to get the message across to those who are more susceptible to economic than scientific argument -

If [Cameron] and his team at CCC, which invests in building green energy facilities to reduce greenhouse gas emissions, succeed they will, he says, 'show we can reduce emissions, and prove that money can be made from doing that'.
It sounds very grand, and this tall 44-year-old sometimes says things that sound overblown. But who doesn't when they're talking about the environment? At least he's honest. On the one hand, he says that he could change the world. On the other, he says: 'I have no interest in putting on a hair shirt. I don't want to be told I can't live well.'
Cameron's insight is that environmental damage is behavioural and the best way of changing behaviour is not by regulating people but by offering individuals the chance to win and lose through their own decisions.
...
'Stern is absolutely critical in terms of the necessary shift in consciousness in the upper echelons of political and business decision-making,' he says.
Excuses for inaction from politicians and businessmen exasperate him, as do those who say the UK produces only 2 per cent of global emissions, and that the developing world, particularly India and China, is not listening to Stern or anyone else. 'One persistent lie is that China and India are not part of Kyoto. They are, but their response is differentiated. They have hundreds of millions of people living on less than a dollar a day.'
...
He is haunted by the possibility of failure, but the fact that big money has arrived has given him confidence that he is no longer in the wilderness. He is not a boastful man, but does have an air of vindication about the compromises he has made to bring environmentalism and capitalism together.
As he puts it: 'The tree-huggers were right. We have to tip our hats to them and get on with the solution, which frankly we would not trust them to implement.'

Middle class crimes

Fascinating criminological/economic research with a Ballardian tinge, suggesting that the 'respectable middle section' of society is actively and widely involved in deviant activity as a response to their perceived unfairness of market practices.

The inevitable press release notes:
Professor Susanne Karstedt and Dr. Stephen Farrall [of Keele University] analysed survey results from nearly 4,500 people aged 25-65 living in England and Wales, the former Western Germany, and former Eastern Germany in 2002. In this economically active group of respectable citizens they found what they described as ‘crimes of everyday life’ to be commonplace. They argue that such illegal and immoral activity is so easily engaged in and widely accepted that the idea of the law-abiding majority needs to be challenged. Indeed they suggest it is a chimera. What they instead found to be widespread are cynical attitudes towards rules and laws, and the endorsement of selfishness.

Karstedt and Farrall examined middle class subjects' perceptions of 'victimisation' stemming from neo-liberal economic reform, and participation in various white-collar crimes, frauds and naughtiness. They found two broad connections -
The first is what consumers and citizens perceive to be unrestrained and unfair commercial practices that ‘rip-off’ people, with the perpetrators unpunished by law or even encouraged by government policies. The unrestrained pursuit of profit in these market economies is perceived as being unacceptable by citizens. Simultaneously they are urged to look after their own self-interest in all realms of life. As a result, citizens feel perfectly justified in behaving in a similar fashion, and pursuing their own self-interest even with illegal and morally dubious strategies. The second is the impact of market anomie on traditionally restraining influences such as belief in the law, trust in one’s fellow citizen and business, and a sense of security in the market place that one will get a fair deal.

The authors conclude:
‘Markets are not in permanent state of anomie per se, and neither is the moral economy immoral by definition. However, permanent encouragement of entrepreneurial comportment and pursuit of self-interest has its price in terms of market anomie which shows itself in the centre of society, not at its margins. The law abiding majority which politicians like to address is a chimera.’

PDF of the full paper from The British Journal of Criminology here.

Bubble 2.0

It's front page news in at least one mainstream paper that Google is lining up to buy YouTube for up to $1.6 billlion

And yesterday, the news came through that MySpace founder Brad Greenspan is having a hissy fit about having sold his company to the Murdoch empire for only $580 million, as it's clearly going to be worth $20 billion in a year or two.

The signs are becoming ever clearer that we're already some way into a second internet bubble. Like last time, all the justifying blether is of targeted advertising and eyeballs. The sense of deja vu is further heightened by the fact that MySpace, say, resembles nothing so much as the web circa 1994, with lots of horribly designed personal sites linking to and copying content off each other. The market might be bigger, but it's still crap.

It's not just the valuations being paid for these nebulous businesses. It's that the deals are being judged as front page news (on a Saturday too). Fingers will be burned, once more.

UPDATE, 10/10/06 - here's a feature from BBC News explaining how This Time It's Different.

Damned Stiglitz

Good interview with noted economist Joseph Stiglitz in the current Management Today. It covers a good range of topics, including Stiglitz's experiences of the dominant orthodoxy at the IMF -
As he explains in Globalisation and its Discontents, Stiglitz discovered that it was going to be difficult for him to work in the way he wanted to. There was a crucial discussion to be had about the direction of global economic policy, but the IMF did not seem interested in having it. 'It was very difficult to generate an open, public debate with the IMF,' he says. 'They would say: "We can have a debate, but it has to be closed".
'In 1997 the IMF decided to change its charter to push capital market liberalisation. And I said, where is the evidence this is going to be good for developing countries? Why haven't you produced some research showing it was going to be good? They said: we don't need research; we know it's true. They didn't say it in precisely those words, but clearly they took it as religion.'

And what happens if you challenge such orthodoxy? You get damned -
When the IMF finally consented to debate these issues in the summer of 2002, Stiglitz was bushwhacked. The meeting was off the record, but the IMF immediately released its statement to the press - the Rogoff 'snake oil' slur quoted above. 'They had clearly planned this as an ambush,' Stiglitz says. 'It clearly backfired.'
Had he been expecting such a violent, ad hominem attack? There is a pause, a sheepish grin. 'No, no, I wasn't,' he says. 'I probably should have been. My wife warned me to expect it, but I didn't.'
Has this made him cynical about politics and what happens to academics who get involved? The question provokes another long pause, the longest in our time together. 'It obviously made me think a great deal about what was going on,' Stiglitz says. 'But they couldn't discredit the arguments. The arguments were correct - there was evidence and analysis.
'What do you do when you can't win an argument? Well, in the Middle Ages you had the Inquisition, you executed the person - but we can't do that. So what you do is you try and discredit the person.
'And it was clearly an attempt. There was a mantra. They'd say: "Oh well, he's a very bright person" - it always begins with that - "but he has a political agenda, he doesn't understand policy, he should have stuck with academia..." It is an attempt to discredit, to say that academia has nothing to do with the policy, and the policy is flawed, or that the policy is motivated by a personal agenda or a political agenda. The interesting thing is that it became almost a ritual. A recent New York Times book review had nothing to do with the book at all...
'What they didn't realise was that the policy positions I took were very strongly based on my academic work. I view the work as seamless. Predictions about why the policies in East Asia failed were based on my theoretical papers. So in a way they were a vindication of the theories, and that the old theories of perfect information were flawed. I had talked about this effect.
'There is now a rearguard action from a lot of economists who still want to believe in unfettered markets. And because they can't attack the economics, they have become political scientists, in a way. Their answer is not that markets work perfectly, but that government works more imperfectly. So, yes, markets don't work, but trying to do anything about it is likely to be worse.'

I've not read Stiglitz's latest pop-econ book, Making Globalisation Work, yet, but his earlier Globalisation and its Discontents and The Roaring Nineties (along with his hugely important papers on information asymmetry, of course) are highly recommended.

Pull the string

Provocative (and rather ironic) review in the Economist (subscription only) of two books criticising the dominance of string theory in modern physics. String theory, it is argued, is simply bad science - there's too many different versions of the core theory from which theorists can pick and choose according to circumstance, it's over-dependent on mathematics rather than experimentation or observation, it's too easily retro-engineered to fit new discoveries but has little or no predictive power, and it's just plain unfalsifiable, putting it closer to metaphysics than actual physics.

However, the biggest problem, both authors believe, is that string theorists have promoted their subject aggressively, often taking the best jobs in universities and blocking the advancement of physicists who would seek to use other means to unify the laws of physics. As string theory involves intricate mathematics, the barrier to entry into its community is high. The very difficulty in overcoming this barrier makes it hard for those who have gained entry to leave. The self-interest of string theorists is thus stifling physics.
...
[Lee] Smolin argues that the insularity of the theoretical physics community leaves it vulnerable to “groupthink”, a term coined to explain how many intelligent like-minded people can nevertheless be catastrophically wrong.

So where's the irony? It's that all these accusations could, with very little modification, be levelled at academic and applied economics, and the dominance of econometric-heavy neo-classical theory (and its pretensions towards the status of science). Except in that field, the good old Economist seems a lot less sceptical.

Fibonacci cobblers

The Independent reports new research from Roy Batchelor, professor of banking and finance at City University's Cass Business School, into the belief, apparently widespread among highly-paid stock analysts, that aspects of the behaviour of stock price movements obey occult rules derived from the well-known Fibonacci sequence and the Golden Mean, all mixed up with the surprisingly persistent Elliot Wave hypothesis ('theory' would be too kind a word). To no one's great surprise, this does indeed turn out to be bollocks -

He and the Cass researcher, Richard Ramyar, concluded that, contrary to beliefs held by many technical analysts, markets do not reverse at levels indicated by Fibonacci ratios.
Professor Batchelor said: "Nowadays, we think that most short-term movements in prices in financial markets are random. However, it is a natural human characteristic to look for patterns even in random data, and traders are under added pressure to rationalise their actions and display expertise.
"Theories of stock-market waves are manifestations of this illusion of control, the instinct that makes the dice harder when we want a high number."

As Julia Finch in the Guardian notes:
So will the nonsense now stop? No chance, [Batchelor] says, because the chart community needs every possible straw to grasp at - even if it is utter cobblers.

The Accidentals

There's a big write-up in the business pages of today's Guardian for a new insider look at the investment banking game - The Accidental Investment Banker by Jonathan Knee, a former swinging dick at Goldman Sachs and Morgan Stanley, now with his own boutique -
Investment banks promote themselves as sources of wise, experienced and loyal counsel for longstanding clients. Disillusioned with the profession's culture, Knee argues that large banks have moved away from the tradition of building long-term relationships of trust. He says they have become "financial supermarkets", riddled with conflicts of interest.
Bankers, with an eye on bonuses, tout deals to every company prepared to listen. At the same time, he says, banks invest heavily on their own account - which can put them at cross purposes with their clients. "The line between how much relationship and how much transactional work you have has been crossed," Knee told the Guardian.
...
Explaining the top-of-the-head approach to deal-making that he ended up despising, Knee points to one of his earliest pitches to a food company from his days at Bankers Trust in London. He says he was given a few days to read up on the poultry industry and choose a chicken company suitable for acquisition. "I might not know anything about valuation or accounting or, if truth be told, chickens," he recalls, "but I had been a maths major." He constructed a line graph of the lowest-valued chicken processing firms and Bankers Trust presented it as "very innovative thinking".
Tricks of the trade within banks include league tables engineered to inflate their track record. Knee says banks can pick any time period, measure by volume or by financial size, exclude large or small transactions and separate stand-out deals. "Many an analyst has spent many a sleepless night cutting and re-cutting the data to come up with the least ridiculous ways to demonstrate number one market share."
Staff are rewarded with extraordinarily generous pay which, at Goldman Sachs, typically goes up by $100,000 a year, says Knee. "It is hard, with a straight face, to conclude, in the best of all possible worlds, that bankers should be making so much money."

Sounds like an entertaining companion to Philip Augar's The Greed Merchants (discusssed below).

Stone Age Economics

Just been reading the intriguingly-titled Stone Age Economics by Marshall Sahlins. This one's been sat on my shelf for a year or two since I picked it up at a Fortean Times Unconvention, but I was finally spurred to read the damned thing after it was referenced in Clifford Conner's excellent A People's History of Science.

It's not as wacky as it might sound (as someone asked at the Uncon - 'What's that about, exchange rates for pebbles?'). My copy is a first British edition from 1974, but it appears to still be in print.

It's more a work of anthropology and sociology than economics, though. The opening chapter, 'The Original Affluent Society' (a slightly different version of which is available on various websites like this one), riffs on Galbraith to argue that the hunter-gatherer lifestyle was more than adequate to meet all the needs of its members with just a few hours' labour a day. It's an obviously appealing idea as a riposte to the work-hard/spend-hard ethos of late capitalism.

Vernon Smith, the Nobel-winning experimental economist who I interviewed a few years ago, has written on prehistoric and hunter-gatherer economics, and also concluded that they generally enjoyed plentiful food and a far-from-Hobbesian life. I've also found a recent paper by Charles Kenny of the World Bank (available as a pdf from the Brookings Institution) which asks "Were People in the Past Poor and Miserable?" - Kenny concludes they generally weren't any more miserable than people today (and maybe less so), and suggests a re-examination of the economic doctrines that rising incomes mean more happiness (or 'utility' as economists call that nice warm feeling you get from satisfying your wants). It's another angle to current interest in the economics of happiness, something I've touched on before.

Back to the Sahlins book - the following chapters argue that 'primitive' economies operated at far below their production possibilities to meet their own needs, though production intensifies to meet the extra demands of a tribal chief when such arises. There's also a lengthy exegesis about gifts and exchanges in a pre-monetary society, derived from Mauss' 'Essay on the Gift' - this is all rather steeped in 60s sociology-speak, and didn't quite hold my interest. Throughout, contemporary 'primitive' and hunter-gatherer societies are used as a proxy for prehistoric ones (something Conner also does in the early parts of his history) - I don't know how valid this actually is, but there's some fascinating notes on the traditions and practices of various tribes. The book ends with a briefer consideration of primitive trade, and the emergence of exchange rates for pigs, pots, axes and spears (if not pebbles).

Creed, greed and hubris

I've recently been reading Philip Augar's The Greed Merchants. Augar, previously a top name at NatWest and Schroders, gives an inside view of the investment banking game. Despite the rather sensationalist title, it's a solid, sober look at how the 'bulge bracket' banks work, where they make their money, and why they generally don't do what they're supposed to.

The main problem, Augar argues, is that the integration of the big firms means that the Chinese walls between activities that should be mutually incompatible - most notably, equity research and corporate finance advisory work - have been gradually eroded. It's hardly an original complaint, most especially after the inquest on the excesses of the dotcom boom, but it's well explained and analysed.

The end effect is that the big banks are able to put their own interests - both the interests of the bank as an entity, and the interests of the individual bankers - and those of their pet corporate clients (in the hope of winning further lucrative commissions) well above the interests of smaller clients. The bottom line is an estimated $180 billion of value transferred from shareholders (including pension funds, of course) to the bankers.

Unlike some critics, Augar doesn't claim that the bankers are necessarily fully conscious evildoers (not even the ones that enabled Enron's misdeeds, necessarily). Instead, he blames a combination of creed, greed and narcissism for creating an insitutional bentness: an ideological commitment to the supremacy of capitalism and the 'free market'; the aggressively competitive mindset required to pursue a career on Wall Street; and the sense of power fed by the banks' own internal and external rhetoric (where there's very small difference between bullish and bullshit).

Augar's proposal is a separation of powers - basically, a reversal of many of the changes bemoaned in his previous book, The Death of Gentlemanly Capitalism. That would probably be a sensible move but, as another sceptical insider, Edmond Warner, noted in the Guardian last year, one that's highly unlikely to happen.

In investment banking, as in many other areas of endeavour, expect no decline in creed, greed and hubris.

The trouble with models

Well-researched feature in the Economist on the limitations of macro-scale economic models. In particular, the computable general equilibrium (CGE) models deployed by governments and macro-players like the IMF to demonstrate the economic benefits of whatever measures they're proposing. Unsurprisingly, as even the Economist accepts, the results depend heavily on the presuppositions of their authors:
Most empirical exercises confront theory with numbers—they test theories against the data; sometimes they even reject them. CGE models, by contrast, put numbers to theory. If the modeller believes that trade raises productivity and growth, for example, then the model's results will mechanically confirm this. They cannot do otherwise. In another context, Robert Solow, a Nobel prize-winner, has noted the tendency of economists to congratulate themselves for retrieving juicy plums that they themselves planted in the pudding.
In a recent article, Roberta Piermartini and Robert Teh, two economists at the WTO, urge modellers to “demystify” their creations, making it clear to their audience what makes their models tick. A failure to do this, they argue, “risks bringing a useful analytical tool into disrepute and may even induce unwarranted cynicism about the economic case for open trade.”

An interesting read, if still weighted by the paper's usual doctrinal bent: In countries not cursed by socialism or war, the market is left to decide what to produce and in what proportions...
I'm still slightly confused as to how such a nebulous thing as 'the market' can exist and dominate when, as this feature repeats, there's not even such a thing as 'society'.

Fehr and loathing

Interesting research from Ernst Fehr at Zurich University's Institute for Empirical Economic Research, as presented this week at the Forum of European Neuroscience in Vienna.

Fehr claims to have found a neurological basis for compliance with economic and social norms. His research started with a simple economic game in which players chose to share an initial pot of money with an anonymous partner. In a repeat game, the second partner could punish the first if he felt he'd been cheated. Unsurprisingly, the first player chose to share more money if he knew the second could punish him.

The change in a handful of players was more marked, however. On average, people would give 10 units from their pot of 100 without the fear of punishment, and 40 with. A few players gave nothing in the first game, and almost half in the second.

MRI scans of the players showed strong activity in the parts of the forebrain that deal with punishment stimuli and impulse control, as expected. But Fehr also found strong activity in the nucleus caudatus, part of the brain that deals with rewards systems, when the players faced punishment. The greater the activity here, the greater the change in behaviour between the first game and the second. Fehr says this shows that economic decision-making is much more driven by the emotions than the 'rational man' model of conventional economics claims. Emotional engagement with social norms also play a major role.

Earlier work by Fehr showed that the prospect of being able to punish unfair players in a similar game also activates the nucleus caudatus. This could explain why people are often prepared to accept personal disadvantages to punish others - enforcing the social norms by punishing perceived cheats just feels good.

The implications obviously go beyond economics.

On experts

Another fun wee column from John Kay in the Financial Times, summarising Philip Tetlock’s new book Expert Political Judgment -

Isaiah Berlin, historian of ideas, made a distinction between the intelligence of the hedgehog – which knows one big thing – and the intelligence of the fox – which knows many little things. Hedgehogs fit what they learn into a world view. Foxes improvise explanations case by case. The world needs both but today it needs fewer hedgehogs and more foxes. Berlin’s terms are used to describe styles of reasoning by the American psychologist Philip Tetlock, who has spent 20 years asking pundits to predict who will win elections, what countries will acquire nuclear weapons or enter the European Union and how the first Gulf war would end. He has tested 30,000 predictions from 300 experts against outcomes.
Mr Tetlock finds that his respondents are not very good. They do better than a chimp who answers at random, but not much, and worse than simple forecasting rules based on extrapolation. But some pundits are better than others. A little knowledge is helpful. Dilettantes – people with the information you will acquire from diligent reading of this newspaper – do much better than undergraduates who based their judgment on a one-page summary of the issues. But experts have little advantage over dilettantes. The reputation of the experts is a guide to which are worth following. But not in the way you might expect. Bad forecasters are consulted more frequently than good ones. The more famous the expert, the worse his prognostications.

Kay's own new book on business strategy, The Hare and the Tortoise, is also recently published. Must remember to seek out and buy.

Occult rich of Cameroon

Another piece of African economic research sponsored by NWO in the Netherlands.

PhD researcher Basile Ndjio has examined the so-called Feymen of Cameroon, young men from a poor immigrant background who have grown rich through tantalisingly unspecified 'occult' methods of swindling. According to the NWO press release:
Swindlers in Cameroon, with expensive cars and flashy clothes, are the embodiment of occult economies. These nouveau rich mostly come from poor backgrounds with few prospects. 'Feymania', as the Cameroonians refer to the swindling practices, are often interpreted in terms of magic and witchcraft. And as they are so rich many hold them in awe, to the extent that the new generation has even adopted them as role models.

More here, from the University of Amsterdam:
Ndjio concludes firstly that the popularization of feymania-related activities as well as the idealization of feymen as role models is the result of the lack of employment perspectives for urban youths, the marginalization of the youth by state power, people’s disenchantment with the democratization process of the early 1990s, and the steady loss of social prestige of the évolués-fonctionnaires (civil servants, and educated elites at large).
Secondly, both the vilification of feymen as mokoagne men (rich sorcerers) and the depreciation of their extraordinary riches as a mokoagne moni (occult or magic money) are informed by moralizing discourses that condemn asocial modes of wealth accumulation and consumption that do not correspond to accepted patterns of self-realisation and social norms.

Intriguing from both an economic and a fortean point of view.

The dismal science gets happy

A couple of interviews from the Guardian with people working on the economics of happiness. With opportunistic politicos like David Cameron calling for measures of wellbeing and personal fulfillment to be included alongside GDP and all the other macro indicators, it seems an idea of the moment. But will there be any lasting impact?

From today's Education section, a profile of Andrew Oswald of the University of Warwick -
Oswald's long-held view that advanced western economies should concentrate less on growth and more on the wellbeing of their citizens has captured the zeitgeist.
"Why else would the BBC be putting out programmes like that in more or less prime time?" he asks. "Hardly a day passes when I don't get a call from a journalist somewhere in the world."
The Tory leader, David Cameron, has been saying recently that it is time we concentrated not just on GDP (gross domestic product), but on GWB (general wellbeing). So is Oswald beginning to take calls from politicians as well as journalists? He shuffles his feet around, looking rather embarrassed, before confirming that he does. "I'd prefer not to go into names," he says. And before I ask, no, he says, he has not been approached by Cameron.
The defining variables are, as might be expected, relative rather than absolute -
"Before we can tell how happy we are, we have to keep comparing ourselves with the neighbours. To keep up with the Joneses, we spend a vast proportion of our income on things we don't need. It's the way human beings are. But, collectively, we can't all be ahead of the average. That's the key factor in why the continued emphasis on economic growth doesn't work for the whole of society."

Last week, John Sutherland had a similarly-themed chat with Richard Reeves of thunktank the Intelligence Agency -
Is happiness, then, something that society should be aiming at as an end in itself?
"I think it is. Happiness is one of the things that we really should be directing ourselves to, as a society. There's a lovely quote from John Maynard Keynes, writing in the 1930s about 'the economic prospects for our grandchildren'. Keynes predicted that 'there will come a time when we've solved the economic problems - at which point we shall be faced with the permanent problem of mankind: how to live wisely, agreeably and well. It will be those societies which cultivate the arts of life who will best be able to enjoy the abundance when it comes.'
"In my view, Keynes was entirely right in his prediction. And it's fascinating that an economist should concede that economics is only useful until it reaches its own point of diminishing returns. We are at that point now. So the Keynesian question is, 'Are we enjoying the fruits of our abundance?', 'Are we living wisely, agreeably, and well?' My answer would be, 'Not as much as we could do'."
...
"I don't think it would make electoral sense for Blair, Cameron or Campbell to say, 'We're the happiness party, and we're going to make you happy.' None the less, I firmly believe that politicians should take seriously people's sense of their own wellbeing, and of the wellbeing of society generally, and see that as an important policy goal. It should not be something that is giggled out of court".

An experiment in trust

Shortly before christmas last year, I took part in an economics experiment run by Paul Mosley and Pamela Lenton at the University of Sheffield. An interesting experience - a few years ago I'd interviewed Vernon Smith, who won a Nobel for basically inventing this kind of classroom experimental economics - and a rewarding one, as I ended up with 50-odd quid (and some fair-trade chocolate coins).

Mosley and Lenton were basically looking at interpersonal trust in economic exchanges - how personal background, attitudes and experience might affect your behaviour in a series of standard economic games, in which players have the option to invest in other players. The other players were anonymous in some rounds, while other rounds were played face-to-face. Players were given the real money they won during the games, so there was a real incentive to maximise your profits (especially just before xmas).

They've now released their preliminary paper on the research. Some interesting results - while actual trusting behaviour isn't correlated with how trusting people say they are (a well-established result, apparently), it is with various social and personal factors. In general, the higher income and more social engagement (with university clubs, etc), the more trusting you are. Also, the more politically 'progressive' you are (ie, the less conservative, or even Conservative, you are), the more trusting - notably, those who say they oppose tougher controls on immigration and support higher spending on health have a particular predisposition to be more trusting. Mosley and Lenton's interpretation is that "people's already formed political attitudes have an influence on their predisposition to be trusting of other individuals which is independent of other elements in the 'social history'... interpersonal trust does not just derive from interpersonal experience but from attitudes formed in other domains." That seems an important distinction - people aren't less trusting or more conservative because they've learned better, as some cynically claim.

Also, people were generally more trusting and trustworthy in the face-to-face or publicly conducted games than in the anonymous ones. Or to put it the other way, people are more likely to be nasty if they think no one's looking.

So, people with progressive attitutudes in a generally open society are more trusting and have more of what economists like to call 'social capital'. Or on the other hand, that might just make them easier to take advantage of... and as the researchers note, trust is easier to lose than to regain.

Entrepreneurial gambling

The Dutch research body NWO has issued a release about an intriguing-sounding study by PhD student Joost Beuving. Beuving studied the behaviour of entrepreneurial second-hand car dealers in West Africa, following an influx of European cars in the late 1990s:

According to Beuving the entrepreneurship of the car dealers was more important than free trade for the rapid growth of the West African second-hand car market. The car traders invested in the trade, even though they were making less profit, the prices were falling and there were increasingly more bankruptcies.
[...]
The business world of the second-hand car trade was characterised by a strong and widely held belief in an unexpected business jackpot.
In addition to this the social relationships in this world were found to be brief and unharmonious. As a result of this it was difficult for the dealers to obtain reliable market information. Therefore the business decisions made resembled a gamble in which capital was frequently invested in an 'all or nothing' attempt. This regularly led to large losses.

There's potentially interesting implications for studies of entrepreneurship in more 'developed' economies, not all of which involve as careful a weighing of risk as economic theory assumes. Beuven compares the West African situation to the behaviour of the gold diggers of the Klondike - might there also be parallels in the more recent goldrush of the dotcom bubble, or the currently faddishly hot areas of tech?

JK Galbraith RIP

The Guardian has a nice little tribute to JK Galbraith, whose writings I greatly admired, and from whom I took the title of this blog:

In this column a month ago the new Italian premier Romano Prodi was described "as uninspiring as only an economics professor can be." Readers may have taken this to imply that economics professors were, ex officio, boring. That this is not so was overwhelmingly and energetically demonstrated until his death on Saturday at the age of 97 by the continuing presence of John Kenneth Galbraith, professor of economics at Harvard for more than 25 years and emeritus professor thereafter.
Not that Professor Galbraith exonerated his calling. "Economics," he wrote "is a subject profoundly conducive to cliche, resonant with boredom." Yet Galbraith was the living refutation of that. Consistently in his lectures and writings he put great themes into the language, themes which lit up the study of economics for those who had never been taught it. The most compelling of these, which even a cursory daily look displays, was the co-existence of private affluence with public squalor.
A second, no less abundantly evident in this age of "must have", was the manufacture by producers of desires which consumers then dutifully come to believe are real needs. A third was the convenient view, so entrenched in the 1980s, that while the rich ought to be given more to make them work harder, giving more to the worst-off would only make them work less. Hypocrisy will sleep more sweetly tonight for the knowledge that Galbraith is no longer around to look down from his very great height and skewer it.

Yesterday's obituary is also an excellent introduction to the man who popularised that damning phrase, 'the conventional wisdom'.
His contribution to our understanding of the contemporary world was substantial. The degree of hostility he aroused was eloquent testimony to the uncomfortable nature of the truths he told, and kept on telling, about the workings of advanced industrial economies. He was not alone in believing that his intellectual stature matched his physical one. The world will be the poorer for his passing.

In the same paper, Oliver James is quick to annoint a successor: Avner Offer, professor of economic history at Oxford University and author of the recent The Challenge of Affluence. I've not had a chance to read that yet, but the Economist's sniffy review suggests that it's irritating the conventional wisdom in the right way:
The book fails to convince, however, both in its challenge to mainstream economics and in its interpretation of the historical evidence. Choices may multiply with the growth of affluence, but there is nothing new in the tension between impatience and prudence. Behavioural economics is now helping to explain the common tendency to procrastinate over decisions such as joining retirement-saving plans that would be in individuals' long-term interest. However, this body of work is best understood as a set of exceptions that modifies but leaves intact the canonical model of rational choice...
Epicycles, anyone?

After Objective One

The IPPR has released a new report on what the UK should be doing with the next generation of European Structural Funding, once the current Objective One programme ends. South Yorkshire has had the (yet to be fully quantified) benefit of Objective One since 2000, as has Merseyside (for the second consecutive time), and some of the Celtic fringes. From 2007, South Yorkshire and Merseyside will lose the bulk of their funding, thanks in part to European expansion since the last round. The expansion also means that there's unlikely to be further ESF money for the wealthy UK after this round, so this is, as the IPPR says, 'last orders'.

From the IPPR press release, the new funding for 2007-2013 breaks down thus:
Total UK share of the EU Structural Funds: £6.5 billion.
Convergence objective: £1.8 billion: replaces Objective 1. Only Cornwall and the Isles of Scilly; West Wales and the Valleys; and Scotland’s Highlands and Islands are eligible. No major urban area will benefit – a change from 2000-2006, when both Merseyside and South Yorkshire had Objective 1 status.
Competitiveness and Employment programmes: £4.3 billion. This covers all other areas of the UK, replacing the old Objectives 2 and 3. Merseyside and South Yorkshire will receive ring-fenced funding of £310m and £275m, about one-third of their 2000-2006 EU allocations. The distribution of the remaining £3.5 billion has not yet been decided.
Co-operation programmes: £0.4 billion. This covers cross-border collaboration.
These funds will be spread over seven years, equivalent to around £900 million each year for the whole of the UK. Domestic spending on enterprise and economic development alone amounted to £4.7 billion in 2004-05 (HM Treasury, 2005).

The IPPR's Centre for Cities recommends that the uncommited £3.5 billion be concentrated on city-regions, particularly those away from the affluent (on aggregate) and over-developed South East -
it is the big city-regions outside London – Birmingham, Manchester, Leeds, Tyneside and Glasgow – that can most effectively use limited EU resources to deliver a step-change in economic growth. investment, enterprise, innovation, skills and employment.

Sensible enough, even though the idea of city-regions has yet to win many admirers in the regions rather than the cities - such as Halifax and Calderdale, where the councillors seem to bristle at being made to seem subordinate to Leeds. And given the IPPR's traditional closeness to New Labour, I wouldn't be surprised to see these recommendations being carried through to some greater or lesser extent.

A pdf of the full IPPR report can be downloaded here.

Daddies' boys

More economic research from Robin Naylor at the University of Warwick on intergenerational social mobility. He finds that Western societies show a strong correlation between the earnings of a father and his son, implying low social mobility - and the effect is strongest in the supposedly classless US.

Despite the commonly-perceived view of the US as an 'open' society with ready opportunities for individuals to rise from poverty to affluence (from 'rags to riches'), the evidence shows that the opposite is true. On average, a son's earnings are more closely related to his father's earnings in the United States than in any of the other countries.
In the UK, the connection between sons' earnings and fathers' earnings is weaker than in the United States, but stronger than in the Nordic countries. There is substantial earnings 'persistence' across the generations in all countries.

So, discounting any (very faintly) possible genetic factors, all the blether about the 'land of opportunity' over there or the 'meritocracy' here is exactly that. Unsurprising, but nice to have the confirmation.

Another finding:
In all of the countries, intergenerational earnings persistence is most pronounced in the 'tails' of the distributions. In other words, the likelihood of a son having earnings similar to his father's is greater for those born into particularly poor or particularly affluent backgrounds.
What this implies is that in the long term, the middle classes between these two extremes will bifurcate between the very rich and the very poor, as social mobility out of the middle is greater than mobility out of the extremes. This then implies an increasingly polarised society, as can be seen to some extent in the US and UK. The long term prospects for stability (and thus for continued growth) are not bright.

Big swinging dicks

Some fun (if not entirely surprising) research in behavioural economics reported in the Guardian - men with high testosterone are more likely to make bad financial decisions when they're sexually distracted.

Bram van den Bergh and Siegfried Dewitte at the University of Leuven in Belgium set 44 student volunteers aged 18 to 28 a financial game to test how they reacted to fair play. The game required the students to split into pairs and before half of the games, one of each pair was shown images of a sexy woman or asked to rate how much they liked a variety of lingerie.
The results showed that men exposed to what the researchers call "sexual cues" accepted unfair play far more than men who were not. The researchers later ranked the men according to their testosterone levels and found that the more testosterone a man had the worse he fared in the tests, they report in the journal, Proceedings of the Royal Society B.

The implications for the macho, 'big swinging dick' world of the City and Wall Street demand to be explored. Maybe the investment houses should start slipping bromide into the trading floor watercoolers - or at least, crack down on corporate junkets to Spearmint Rhino.

Mandelbrot's telescope

I'm currently rereading Benoit Mandelbrot's The (Mis)Behaviour of Markets, as preparation for an essay on the option-pricing implications of non-normal distributions of stock prices (ripping stuff, I assure you).

Mandelbrot's basic argument here is that stock price movements don't have the log-normal distribution assumed by the conventional theory underpinning the Black-Scholes-Merton option pricing formulae, but rather a power-law distribution, as the evidence appears to bear out. This means that much of modern finance theory is based on assumptions that are demonstrably wrong. As Mandelbrot (and/or his co-author Richard Hudson) puts in, an a passage I found rather endearing -

If this were astronomy, the argument would have ended long ago. Imagine observatories suddenly finding a new planet where, the standard theory says, none should be. And then another, and another and another. Astronomers, after checking their instruments, would not ignore the data; they would question their understanding of celestial mechanics and a new and fruitful episode in astronomy would dawn. But it does not work that way in economics, even though the equivalent of countless new planetary systems have been recorded.

Fair comment on the reluctance of economists to change their paradigms (although it does seem as though power-law distributions are now well established in the statistical finance field). But I do think he's being rather generous in his assessment of astronomers...

I interviewed Mandelbrot about his financial work a few years ago. He's probably the most egotistical person I've ever interviewed, but I guess he's entitled to be. And I'll always treasure his explanation of why his work is like a beautiful woman.

Reality sometimes overflows

A great philosophical quote from an unlikely source:
"No matter how rigorous our analysis and guidance, reality sometimes overflows the contours that we have defined for it."
- AXA Investment Managers, as reported in the Guardian's City Diary.

The psychopathy of the new capitalism

I've recently been reading The Culture of the New Capitalism, the latest slim tome from sociologist Richard Sennett. It's based on lectures he gave at Yale in 2004, looking, as the blurb has it, at the major differences between earlier forms of industrial capitalism and the more global, more febrile, ever more mutable version of capitalism that is taking its place.

Sennett picks out several themes from his studies of a particular kind of cutting-edge, new-economy corporate culture, as found in high technology, global finance and new service firms of at least 3000 employees. The key idea is the different cultural environment in these new capitalist entities. Gone is the heirarchical nature of the old corporation which, for all its operational shortcomings, provided everyone involved with a definite sense of purpose and belonging. In its place comes an amorphous structure characterised by casualisation, delayering and nonlinear sequencing - what Sennett rather modishly calls the MP3 player model:
The MP3 machine can be programmed to play only a few bands from its repertoire; similarly, the flexible organisation can select and perform only a few of its many possible functions at any given time [...] Linear development is replaced by a mind-set willing to jump around.

The unintended effect of this, Sennett argues, is an increasing inequality between a small nucleus of core managers and executives (the CPU of the MP3, if you will) and the surrounding nebula of dissociated flexible workers suffering from increasing stress and anxiety. The corporation meanwhile loses the long-term views and institutional knowledge engendered by the old rigid structure.

Only a certain kind of person can prosper in these fragmented institutions, Sennett says:
the culture of the new capitalism demands an ideal self oriented to the short term, focused on potential ability rather than accomplishment, willing to discount or abandon past experience.

It seems only slightly mischevious to suggest that the ideal character traits for this new economy are not entirely dissimilar to what would usually be regarded as a psychopathic personality: a complete disregard for any sense of social obligation [...] lacking insight and any sense of responsibility or consequence [...] incapable of forming lasting relationships...

The idea will be rather familiar to anyone who's also read much JG Ballard - particularly his 2000 novel, Super-Cannes, in which the corporate elite of a vast ultra-modern business park indulge in carefully managed recreational violence and perversion as a natural part of their working lives.

That's not the only parallel. Sennett considers the 'specter of uselessness' haunting the professional middle class, who can no longer rely on securing a comfortable niche in the corporate entity. Compare with Ballard's Millennium People, where residents of a bourgeois London enclave stage a meaningless revolt against the erosion of their privileged position.

Sennett also ponders the political implications of this socio-economic insecurity in a consumerist culture: Do people shop for politicians in the way they shop at Wal-Mart? [...] The culture of the new capitalism is attunded to singular events, one-off transactions, interventions....
Ballard's latest novel - Kingdom Come, published this autumn - promises to ask whether consumerism can turn into fascism. Or, as his sociopathic psychiatrist in Super-Cannes had it: "The Adolf Hitlers and Pol Pots of the future won't walk out of the desert. They'll emerge from shopping malls and corporate business parks."

To be fair, I've very selectively quoted from Sennett here to support my own Ballard obsession - it's certainly not as mad as I might have made it sound, but it's still a provocative book that's well worth reading for anyone interested in how corporate culture affects the wider world.

Economics as language

Another intriguing paper in the Post-Autistic Economics Review, looking at the idea that economics (like Lacan's unconscious), is structured like a language.

William Kaye-Blake, of Lincoln University, New Zealand, uses Tony Lawson's Reorienting Economics as a springboard. That book argued that the mathematical and deductive ontology of mainstream economics is fundamentally inappropriate for the complexity of human factors in any actual economy, and recommends critical realism as an alternative (a field in which, unsurprisingly, Lawson specialises).

Kaye-Blake extends this with reference to postmodern linguistic theory, where meaning is produced only by the differences between signifiers:
Every day, people use language to communicate even though the meaning of their utterances cannot be fixed until the end of time. We manage in spite of this linguistic indeterminacy. It is the same in economic behaviour: the value of the products one buys or the goods one produces is contingent. The product might not perform as advertised, it could break, it could be superseded tomorrow by something that works better and costs less. The goods produced might not command a high enough price to cover the cost of production, or demand could exceed projections and profits would be less than they could have been. Certainly, economic tools have been developed to deal with these uncertainties, such as demand management and insurance. However, economics is fundamentally open because the future is unknown; it could surprise us.

The basic argument, if I understand it right underneath the postmodern jargon, seems fairly obvious - that value, in the economic sense, is not fixed nor obvious nor entirely rational, and that there's a big difference between value and price. Unlike mainstream microeconomics, where a transaction is a definitive act, here it is like a brief conversation where the words just ain't enough:
the value of what consumers buy or producers create or traders exchange is not fixed in the present. Certainly, the moment of exchange establishes a price, but the value of goods and services in terms of utility or satisfaction or future profit streams is unknown until the future happens.

Interesting stuff. Not least because of the inclusion of a rather surprising reference while discussing postmodern views of 'openness':
They reflect complexity: multiple forces acting either on the surface of society or surging up from its depths; they are still deterministic. These forces, many though they be, determine the present phenomena. They are thus in fact closed, although complex. The methodological solution for social scientist is to develop better models that account for all the variables and forces, not to respect some notion of openness. This was the problem that Heinlein grappled with in The Moon is a Harsh Mistress: if a computer could gather up more information and make more calculations of potential futures than mere humans could, it could plot a lunar rebellion much more effectively and be better prepared for contingencies. Predicting a complex system of forces requires more information, but it is in theory no different from predicting a simple system.

Robert A Heinlein as postmodern economic theorist? Don't recall that from Starship Troopers, though some of his fans seem to have found some other hidden depths.

New Deal or no go?

Another of the government's many schemes to boost the economy in the parts the market doesn't reach is coming up for evaluation. The New Deal for Communities, a ten-year, £2 billion regeneration programme aimed at the most deprived parts of England, is to be judged by a consortium led by Sheffield Hallam University, according to a press release from that uni.

Professor Paul Lawless, from Hallam's Centre for Economic and Social Research at Sheffield Hallam University: “This is a real chance to evaluate fully how areas benefit from sustained neighbourhood renewal. NDC puts regeneration into the hands of the communities who will benefit and this study will help us to see how and why partnerships have been able to transform their localities.”

An admirable aim, so be interesting to see how it's all panning out. It would of course be cynical to suggest that the £9 million research funding from the scheme's architects at the ODPM might sway the conclusions.

For a more informal look at another government scheme to fix perceived market failures, see this recent article on the progress so far of the Regional Venture Capital Funds.

Three parts of the jigsaw

Three unconnected pieces in today's Guardian on themes of economic growth and policy -

First up, Nicolas Watt from Sweden, with a sceptical look at the economy now being mooted as the model for a social democratic Europe.
Britain, the champion of flexible Europe, and Jacques Chirac, an opponent of the "Anglo-Saxon" economic approach, believe Scandinavia combines the best of both worlds: relatively low unemployment, at 5.8%, and generous social provision.[...] But even admirers of the system in Sweden, where the top tax rate is 55%, have their doubts. The country has the highest absentee rate of any in the developed world, with 14% of the working population on sick leave or disability benefit at any time. Critics say this contributes to a "hidden unemployed" figure of about 20%.
The criticisms are the usual orthodox ones. But as Joakim Palme, author of a recent EU paper on the Nordic model, concludes: "We should take the criticisms seriously. But the alternatives are not necessarily better."

Next to West Bengal, where Randeep Ramesh reports on the local Communist government's new enthusiasm for foreign investment and privatisation.
The ruthless purge of inefficient industries is unheard of in India, where bloated public companies swallow a fifth of the country's revenue. Economists say that the reasons for such industrial failure lie mainly with the country's ill-conceived pursuit of economic self-sufficiency in the 1970s. When an industry was rendered sick, it was taken over by the government to protect jobs, not so much to contribute to the economy. West Bengal, with powerful communist unions, ensured that the situation was made much worse here than anywhere else.
It's a principled restructuring however, according to chief minister Buddhadeb Bhattacharjee: "I met with Wal-Mart. They wanted to set up a big shopping mall here in Calcutta but I said that we have farmers, fishermen, consumers and lots of small vegetable markets in the city. All would be out of business if Wal-Mart came in." Instead the state will allow the German company Metro to set up shop to provide wholesale produce to five-star hotels and haute cuisine restaurants. "We are not categorically against retail investment but we need to build up a market mechanism. We have to be selective."

Finally, op-ed from Timothy Garton Ash on human rights in the emerging economic superpowers. It's an area rich with ironies:
A perfect example of the wrong way to approach it was given recently by Sir John Bond, the chairman of HSBC, in an interview for Radio 4's Today programme. He made an apologia for the Chinese communist regime worthy of Sidney and Beatrice Webb's whitewashing of Stalinist Russia. China, he said, would probably remain under "one-party leadership" for longer than most commentators expected. He had worked under all sorts of regimes, and he'd seen economies thrive under a one-party system. So much for democracy. As for human rights: if you had a Chinese leader here, observed Sir John, he would probably say that they had first to fulfil the basic human right of people being clothed and fed, before going on to more advanced, western-style human rights. HSBC for communism!

Three angles, or parts of the jigsaw, on one of the big questions of the time. As ever, no easy answers.

History vs. theory

Provocative piece in the Guardian from economics editor Larry Elliott, in the run-up to the WTO talks in Hong Kong. With the rich companies, backed up by the heavyweights of neoclassical economics, demanding further liberalisation of trade, Elliott follows Harvard economist Dani Rodrik's comparative study of Mexico and Vietnam:

One has a long border with the richest country in the world and has had a free-trade agreement with its neighbour across the Rio Grande. It receives oodles of inward investment and sends its workers across the border in droves. It is fully plugged in to the global economy. The other was the subject of a US trade embargo until 1994 and suffered from trade restrictions for years after that. Unlike Mexico, Vietnam is not even a member of the WTO.
So which of the two has the better recent economic record? The question should be a no-brainer if all the free-trade theories are right - Mexico should be streets ahead of Vietnam. In fact, the opposite is true. Since Mexico signed the Nafta (North American Free Trade Agreement) deal with the US and Canada in 1992, its annual per capita growth rate has barely been above 1%. Vietnam has grown by around 5% a year for the past two decades. Poverty in Vietnam has come down dramatically: real wages in Mexico have fallen.
Rodrik doesn't buy the argument that the key to rapid development for poor countries is their willingness to liberalise trade. Nor, for that matter, does he think boosting aid makes much difference either. Looking around the world, he looks in vain for the success stories of three decades of neo-liberal orthodoxy: nations that have really made it after taking the advice - willingly or not - of the IMF and the World Bank.
Rather, the countries that have achieved rapid economic take-off in the past 50 years have done so as a result of policies tailored to their own domestic needs. Vietnam shows that what you do at home is far more important than access to foreign markets. There is little evidence that trade barriers are an impediment to growth for those countries following the right domestic policies.

National specifics trump theoretical generalisations each time, it seems. Who'd have thought it.

Another even more sceptical (if less reasoned) view in the same paper, from Gary Younge in Jamaica:

Little wonder that, according to a Christian Aid poll, two-thirds of African trade delegations questioned said that their economies would suffer if they accept what is currently on offer, while more than half said they would halt the negotiations if they didn't like what was on offer. They should follow their instincts, and other less developed nations and progressive NGOs should follow their lead. When the only thing on the menu is going to make you sick, it is time to walk away from the table.

Religio-economics, revelation and reality

Intriguing paper in the latest PAE Review by Mohamed Aslam Haneef of the International Islamic University Malaysia - Can There Be an Economics Based on Religion? The Case of Islamic Economics.

What Haneef discusses goes well beyond the now-familiar area of Islamic banking and finance, the design and study of various instruments that avoid riba (the paying or collecting of interest) and other forbidden acts. It's more to do with a new methodology for economics, based on the Islamic worldview and Islamic law (though the arguments are extensible to other religions and cultures).

It'd be easy to dismiss this as being on a par with Soviet (Lysenkoist) or Christian (Creationist) biology, but there's a clearer case for a culture-specific economics than for a culture-specific version of one of your actual sciences. At the simplest level, religious or social beliefs do affect behaviour, something overlooked in the neoclassical fetish of the rational agent - it's likely more than a matter of just re-bending the indifference curves.

More specifically and intriguingly, there's the question of 'revelation' as a source of economic knowledge, which could prove difficult to the western mindset. Haneef:
Revelation, being a legitimate source of knowledge, will certainly be a source of this vision and of modifying the vision. What revelation has to say about economic behavior and concepts including those related to man, nature, man’s relationship to nature and other humans, as well as those relating to consumption, production, distribution, finance etc. will form a preliminary conceptual framework of Islamic economics. This framework will have to be ‘systematized’ into principles, postulates, hypotheses, precepts and assumptions that will be investigated and validated or otherwise.
[...]
For religious based economics’, sense experience does not provide the absolute proof for “truth.” In Islamic methodology, facts must be distinguished from truth. While “proofs” from sense experience have certain authority, in Islamic epistemology, secondary sources cannot escape the criteria and proofs from revelation. ‘Reality’ will include revelation.

There's some tricky issues here, but Haneef aligns the case for a religious economics with the broader arguments in the West for an 'ethical' economics and a more pluralist approach to what can be easily painted as a doctrine-laden secular religion. But as he concludes:
While we hope that this paper has tried to show that there can be a religious based economics, whether or not there should be a religious based economics is another, potentially more sensitive question that I leave to another occasion.

Imperial empiricals

A feature by Philip Ball in the Guardian on ecologist Peter Turchin's theory of cliodynamics, a mathematical model of history:

Turchin believes that history can indeed be a science, with laws as inexorable as the law of gravity. He claims to have found the general mechanisms that cause empires to wax and wane - laws as true today as they were during the Roman or Ottoman Empires. According to this view, the world order is in a state of perpetual change and the global powers today will inevitably be replaced in the coming centuries.
[...]
For example, Turchin argues that the fluctuations in population of pre-industrial societies can be linked to periods of political instability and civil war. His theory shows how population growth caused by increased prosperity can itself trigger such social instability, thus sowing the seeds of its own decline. This, says Turchin, is how civilisations and empires collapse.

Fascinating stuff, if only for giving a new statistical gloss to some old ideas of cyclic or mechanical history, but I suspect cliodynamics will remain a reductionist oddity, much like the other areas of 'social physics' explored by Ball in his book Critical Mass. Still, it's nice to see that in this new article, Ball finally gives credit to that notable fictional precedent for the field, the psychohistory of Asimov's Foundation novels.

Hub trouble

Recent research from Luis Amaral's team at Northwestern University in the US, given new relevance by the strike by ground staff working for British Airways. Cancelled flights at Heathrow have caused delays at airports across the world, a ripple effect exacerbated by the industry's reliance on hubs in a far from ideal network:

The worldwide air transportation network is responsible for the mobility of millions of people every day. Almost 700 million passengers fly each year, maintaining the air transportation system ever so close to the brink of failure. For example, US and foreign airlines schedule about 2,700 daily flights in and out of O'Hare alone, more than 10% of the total commercial flights in the continental US, and more than the airport could handle even during a perfect "blue-sky" day. Low clouds, for example, can lower landing rates at O'Hare from 100 an hour to just 72 an hour, resulting in delays and flight cancellations across the country. The failures and inefficiencies of the air transportation system have large economic costs; flight delays cost European countries 150 to 200 billion Euro in 1999 alone.
These staggering numbers prompt several questions: What has led the system this close to the brink of failure? Why haven't planners designed a better system? In order to answer these questions, it is crucial to characterize the structure of the world-wide air transportation network and the mechanisms responsible for its evolution. This problem is, however, far from simple. The structure of the air transportation network is mostly determined by the concurrent actions of airline companies – both private and national – that try, in principle, to maximize their immediate profit. However, the structure of the network is also the outcome of numerous historical "accidents" arising from geographical, political, and economic factors.

Ten useful lessons

A comment piece in the Observer from John Llewellyn, chief economist at Lehman Brothers, summing up the 10 most important things he's learnt in 35 years as a professional economist. Not all seem that surprising, except perhaps to the overly dogmatised economist. In short:
1. Economic events seldom produce just one consequence.
2. Good economic policies do not guarantee good economic performanc, but bad economic policies inevitably result in bad performance.
3. Structural, not demand-side, policies most influence economic performance over the long term.
4. People respond powerfully to economic incentives, even without realising it.
5. Economic and social policies have to be considered as a whole.
6. Competition is one of the most powerful forces for finding more efficient ways of doing things; it also makes companies' lives more demanding.
7. History seldom, if ever, repeats itself precisely.
8. Complicated economic policies whose rationale is hard to explain usually fail.
9. Some of the biggest, and most important, economic issues remain unresolved.
10. Perhaps most importantly - just because professional economists don't always have a confident answer, it does not follow that all proffered solutions have equal validity.

The dating game theory

Fun research from Peter Sozou and Robert Seymour at UCL on the economics of dating. From the press release:

Reporting in the journal Proceedings of the Royal Society of London B they analysed the function of a courtship gift and what the characteristics of a ‘good’ gift are.
They show that gifts can act as a signal of a man’s intention. Offering an expensive gift may signal a long-term commitment but the man must be wary of being exploited by a gold-digger who intends to dump him once she gets the gift.
By modelling courtship as a sequential game, they show that an extravagant gift, which is costly to the man but worthless to the woman, may solve the problem.
A costly gift signals the man has long-term intentions but by being worthless to the woman, gold-diggers are deterred.[...]
The researchers constructed two versions of the game with different biological assumptions based on whether the male is involved with parental care.
Attractiveness is relevant to human courtship (model 1). Male condition and female receptiveness are the deciding factors in non-parental care species (model 2). In both cases these were represented as binary variables.
Factors in the game such as whether the male and female found each other attractive were given a probability and the possible outcomes of the interaction, either positive or negative for each player, were given scores to represent the consequences of their decisions.[...]
They considered the ‘fitness’ consequences based on a single courtship encounter involving a male and female. Despite the different biological assumptions, the two models had the same underlying mathematical structure, with both yielding equilibrium solutions in which males predominantly offer costly but worthless gifts as a prelude to mating.

Ref:
Journal: Proceedings of the Royal Society of London B
Date 27/07/05
Title: ‘Costly but worthless gifts facilitate courtship’
Authors: Peter Sozou, Robert Seymour
UCL’s Centre for Mathematics and Physics in the Life Sciences and Experimental Biology, University College London, Gower Street, London, WC1E 6BT

The nuts game

An oldie but a goodie, mentioned by its creator, Julian Edney, in the latest PAE newsletter. It's a simple economic game, illustrating the exploitation of scarce resources:

"A small number of subjects (three or more) sit around a shallow, nonbreakable, open bowl which initially contains 10 hardware hexagonal nuts. An experimenter sits with the group and introduces the exercise as one where the player's goal is to get as many of the nuts as possible. Players can take nuts from the bowl at any time and in any quantities after the start of the trial. The experimenter also explains that the number of nuts remaining in the bowl after each 10-second interval is automatically doubled from an outside source (operated by the experimenter, who manually replenishes the nuts from a separate container next to him). This replenishment cycle continues until either an arbitrary time limit is reached or the bowl is emptied by the players. The experimenter can also set a ceiling to the number of nuts in the bowl throughout the trial (10 is convenient). Subjects can be asked not to communicate.
"To maximize their individual 'harvests' of nuts, one would expect that each subject would restrain himself to taking one or two nuts out of the bowl each 10-second period: this allows the replenishment cycles to continue for some time (a typical game runs 2 minutes) and each subject eventually would end up with a sizeable score. In pilot work I have found that approximately 65% of groups never in practice reach the first replenishment stage because they exhaust the pool by taking all the nuts out in the first few moments of the game."

More here, including some working solutions arising from discussion between the players:

"So far, results have suggested two main types of solution: (a) those involving numbers (such as the group which decides systematically to take only 'one' or 'two' nuts per person per 10-second interval; this type of solution is quite effective in preserving the pool) and (b) nonnumerical solutions. An interesting illustration of the latter was a group which decided deliberately to use a rather complicated system of harvesting. Each player had to hook each nut out of the bowl with a pencil, place it on his nose, walk over to a nearby chalkboard, and deposit the nut in the tray before returning for another nut. Harvesting was thus slowed down enough to prevent pool depletion, increasing individual scores, and incidentally making the game more entertaining to players. The evolution of both kinds of solutions can be regarded as analogs to community-generated laws and practices for direct and indirect governance and management of resources in real-world situations."

No great shock

New ESRC-backed research from Michael Kitson and David Primost, comparing the reactions to macroeconomic shocks in the technology and research-intensive biotech and aerospace industries. For the younger biotech sector, it's no surprise to anyone who's been following the VC market over the past few years:
'To generate new finance, many biotechnology firms tried to increase revenues streams, improve efficiency and many altered their business models. Venture capitalists were, however, stymied by a lack of exit routes for their investments so they only continued to finance firms with technologies in the later stages of development - and therefore closer to market. This caused some firms to drop technology in its early stages - technology that could in the longer term have made a significant contribution to economic growth.'

The more mature aerospace industry meanwhile shows more resilience:
'There was a strong awareness of business cycles and macroeconomic changes. To avoid vulnerability, portfolios of activities driven by different business cycles were developed, and risks were reduced by changing sources of revenue from high value equipment, to an emphasis on after market service and sales. Many made a ‘virtue of necessity’ in response to world events and pushed through organisational changes such as, reducing excess capacity post 9/11. In addition, the global crisis in aviation was used as an opportunity to implement process improvements and rationalise supply chains.'

Full press release here.

Pennies in the wind

Interesting report from the New Economics Foundation on renewable energy sources. Advocates have often claimed that all the world's energy needs can potentially be sourced from renewable sources - wind, solar, geothermal, etc. The UK is particularly well placed for wind power, both offshore and on. Small wind farms are an established feature of the Pennines along the Yorkshire-Lancs border, a graceful addition to the moorland landscape of old mills and viaducts. I use a renewables electricity suppler at home, so it's fair to say that all my writing is wind-powered (including the odd feature on this very subject).

The NEF report largely focuses on micro-generation - household or community scale generation, such as small wind or solar projects, or CHP boilers. Key to the spread of these technologies is the simple fact that they can pay for themselves in a few years, and then be cash-generative as you sell excess generation back to the grid.

The case is charmingly illustrated by the islanders of Gigha, who bought their island in 2002 and have now installed three second-hand wind turbines named Faith, Hope and Charity. The Guardian report quotes the no-less-charmingly named spokesman, Willie McSporran: "You just hear a little swish as the blade passes overhead. You can speak beside them as you would normally ... . When you hear the noise, it's saying pennies, pennies. It's making money for the community all the time."

Another day, another masterplan

The Northern Way, a joint project between the three RDAs covering the North of England, has just published its three-year masterplan. At first look, it's much what you'd expect - plans to promote innovation and enterprise in science and tech; improving transport infrastructure; marketing the region to grockles and investors - all under the seal of big John Prescott. The aim is, over the next 20 years, to narrow the estimated £30 billion output gap between the North and the average for England.
It's very easy to be cynical about all this, especially as Whitehall is already spending £60 billion in the North. This latest punnet of plans is backed by an extra £100 million growth fund, though of course it's difficult to say how new this new money really is.
One interesting feature is the focus on the North as a network of eight 'City Regions'. I think that's broadly a good approach, though some of these designated sub-regions (Leeds, Liverpool, Manchester, Sheffield) fit that title better than others (Central Lancashire, Tees Valley). Successful regeneration efforts elsewhere have seemed to have been focused on an urban core, with the benefits spreading out by degrees. It can also be important psychologically - people identify better with Liverpool or Newcastle than with compass-point regions like the North West or North East (Yorkshire being the exception as ever, even with the addition of the Humber). It's also good, of course, to see the development agencies in those three regions working together - the situation is often one of more or less friendly competition, especially when it comes to attracting the big inward investors.
Next step: action.

The impact of inequality

A new book from Prof. Richard Wilkinson, a social epidemiologist at the University of Nottingham, promises to introduce some new data into an old argument:

"Professor Wilkinson's research shows that if Britain changed from being one of the most unequal of European countries to being among the most equal, the result would be radical. Average life expectancy would increase, homicide rates and levels of violence would fall, people would trust each other more, and community life would be revitalised. As such, the benefits of greater equality would be seen across all sectors of society [...] Wider income differences lead to bigger social distances and increased discrimination. They lead to slower social mobility and increased residential segregation of rich and poor. People become less involved in community life, suffer more violence, and are much less likely to trust each other [...]
"Professor Wilkinson also looks at what nations, communities and employers can do to create a healthy social environment. He points out that because the data he uses comes primarily from existing market democracies, it shows that even the small differences in inequality between them matter, and that there are numerous practical policies that would improve the quality of life for all of us. As well as the more conventional methods of redistribution, he suggests extending democracy into economic institutions and workplaces."
Full press release here.