Friday, September 4, 2015

A Very Short Introduction to Economics

Partha Dasgupta's A Very Short Introduction to Economics packs a lot into a few pages. Though incomplete and selective, it does a great job of guiding the reader through the intersections of economics and history, development, sociology and ecology.

The book is framed by contrasting the lives and prospects of two children, one in the suburban US, the other in rural Ethiopia, analyzing the factors of economic development that make the difference between communal subsistence agriculture and highly-specialized developed markets. Touching on a bit of game theory, Dasgupta shows how trust arises from mutual benefit and breaks down in the presence of uncertainty. Communities help to stabilize and safeguard trust, but in developed economies institutions increasingly ensure trust between parties who never meet.

Institutions like markets, courts and governments come easily to mind, but science and technology are two institutions of primary importance to economic development, a fact that Dasgupta crystallizes: "What Europe achieved during the Age of Enlightenment was [...] It created institutions that enabled the production, dissemination, and use of knowledge – in effect, the entire knowledge industry – to be transferred from small elites to the public at large, a transfer that so sharpened the analytic-empirical mode of reasoning that it became routine." (p99)

Science and technology are examined as institutions and economic inputs. The book sketches the unusual landscape of incentives that animate science in which highly speculative bets placed by research funders reward the successful scientist in terms of primacy and honors rather than cash and pay off for society in terms of knowledge as a public good. Dasgupta captures the tense relationship between science and technology like so:

"Increasingly though, the taste for those social contrivances has to compete against the pecuniary rewards available in Technology. If the pecuniary rewards increase – and they have increased greatly in recent years – the taste for the mores in Science becomes more and more of a luxury to the research worker. Science embodies a set of cultural values in need of constant protection from the threat posed by its rival, Technology. That threat has proved to be so real, that in recent decades the two institutions have begun to blur into each other. Scientists increasingly behave like technologists, while technologists enjoy both the pecuniary rewards of Technology and the medals and scrolls that Science has to offer." (p98)

Patents are covered but without mention of their central conflict, which the Economist expressed recently this way: "Patents are protected by governments because they are held to promote innovation. But there is plenty of evidence that they do not."

Sustainability is one of the most intractable issues of our time. Natural resources serve as economic inputs. Moreover, ecosystems provide economic services whose value escapes conventional economic analysis. Going further still, one may consider the entire human economy as a subsidiary of the earth's ecosystem. It'll strike some as a bit on the fringe to think of economics as a subsystem of nature or dwell on their deep similarities in terms of competition, adaptation, and exchanges of material and energy, but there's a very rich intellectual history behind these ideas.

Robert Frank calls Charles Darwin the father of economics as well as evolution. Turning that the other direction, economic concepts such as pareto optimality can inform the study of evolution. The central role of competition is explored in Geerat Vermeij's book, Nature: An Economic History. Organisms or organizations compete for resources, especially energy - the energy to go capture more resources. Looking at energy as the primary economic input goes at least as far back as 1921 to an address given by Frederick Soddy called Cartesian Economics. In terms of thermodynamics, it's the flow of free energy from the sun that drives local increases in order on our little planet. This is true in living systems as well as economic ones. On this topic, I'm looking forward to diving into Why Information Grows By Cesar Hidalgo. On the other hand, Mark Sagoff's essay, The Rise and Fall of Ecological Economics is critical of this line of thinking.

Those expecting A Very Short Introduction to Economics to follow a traditional economics curriculum will be disappointed. Many key economic concepts - opportunity cost, comparative advantage, elasticity are mentioned in passing or merely alluded to without naming them. Even supply and demand curves are relegated to a middle chapter. If you don't like the social-science side of economics, this is not the book for you. Also, the book is not mathy, which should be apparent from the concept of the VSI series.

One of my personal favorite ideas only gets a paragraph (p78) - Hayek's beautiful insight into the role of markets and price signals as parsimonious integrators of distributed information. Distributed computing teaches us is that coordination - transferring information, reaching agreement - is hard and expensive. The nifty trick of markets is that they tend towards efficient resource allocations while keeping down the cost of coordination. Of course, technology is good at spreading information around:

Despite the selectivity, it might be inevitable that I would like this little book since it connects several of my obsessive interests - economics, science and specifically life science. Both economics and biology are, at heart, the study of complex adaptive systems. Or in Venkatesh Rao's view, they are "soft technologies". Rao says, "Software has the same relationship to any specific sort of computing hardware as money does to coins or credit cards or writing to clay tablets and paper books." Likewise, I'd add, DNA codes living systems that run on the substrate of the cell.

Dasgupta clearly gets the perspective of the economy as a complex system made up of densely interconnected parts - households, firms and institutions - deeply linked to social and political systems and embedded in the natural world. With this encompassing breadth, the reader is well prepared to pick up a more traditional economics text with the big picture firmly in mind.

Saturday, May 16, 2015

Economist on Dynasties

"The enduring power of families in business and politics should trouble believers in meritocracy," says the Economist in a piece titled The power of families Dynasties from the April 18, 2015 issue. They draw parallels between the likely upcoming Bush-Clinton election and the Rothschild and Wallenberg families of Europe and the eminence of family businesses in most of the developing world, especially India and East Asia. "Family companies are not just surviving but flourishing"

Visions of modernity often discount the family and economic theorists concentrate on the public company. But 90% of companies in general and 40% of large companies are family businesses. Family and tribe loom large in human nature. Anglo-saxon capitalism is something of an exception in the prevalence of publicly held companies.

Family companies address two big defects at the core of capitalism: short-term focus and the conflict of interest between managers and owners known as the agency problem. Family companies, as a vehicle for the transfer of wealth across generations, have a longer term outlook and a deeper sense of ownership. They tend to underperform during booms but outperform during busts. Families can instill values and internal culture that inspires greater loyalty. Trust plays a big role, especially in the low-trust environments of many developing countries.

Problems arise in the handoff from one generation to the next. Succession battles and infighting can be big problems given the limited pool from which to draw candidates for top positions. "The third generation ruins the house." To access capital while maintain voting majorities, families often turn to complicated pyramids of holding companies and privileged share classes that separate control from income.

The ability of some of these families to keep managing those handoffs successfully and maintain control sometimes over hundreds of years is fascinating. Marginalized minorities (Jews, overseas chinese, mormons) can show great ingenuity in building business empires.

Further Reading

  • David Landes "Dynasties"
  • What You Can Learn from Family Business by Nicolas Kachaner, George Stalk and Alain Bloch, Harvard Business Review November 2012
  • Ronald Coase "Theory of the firm"
  • The Modern Corporation and Private Property, by Adolf A. Berle Jr. and Gardiner C. Means
  • The Family Business Map: Assets and Roadblocks in Long Term Planning, by Morten Bennedsen and Joseph P.H. Fan

Saturday, April 4, 2015

The Eleventh Hour

Austrian troops marching up Mt. Zion in Jerusalem, 1916. CREDIT: The Library of Congress

We live in a perilous time. According to Charles M. Sennott, veteran journalist and founder of The Global Post and the ground truth project, there are ominous parallels to the years leading up to World War I. Sennott gave a thoughtful talk at the Carnegie Council titled The Eleventh Hour: The Legacy and the Lessons of World War I video.

Sennott spent decades reporting on the Balkans and the Middle East, regions whose borders were shaped by the Sykes-Picot agreement in which France and Britain carved up the former territories of the Ottoman Empire. He begins his story on the bridge in Sarajevo where on June 28th, 1914 a 19-year-old Serbian nationalist, Gavrilo Princip, assassinated Archduke Ferdinand sparking World War I. On the same day last year, Sennott read live tweets from ISIS under the hashtag #sykespicotover.

In the middle east, the legacy of colonialism feeds never-ending conflict. Israel was at war with the Arabs upon its founding in 1948, again in the Six-Day War of 1967 and the Yom Kippur War in 1973. At various times, Israel has occupied Palestine, Lebanon and the Sinai. The Iran–Iraq War of the 80's killed something like a million people. Civil wars have raged in Lebanon, Yemen and Syria. The Kurds have fought for independence in Turkey, Iran and Iraq. America fought two gulf wars. Sennot advises thinking about the middle east "like a bomb squad; you can't defuse it without knowing how it was built."

In his series of essays, The Eleventh Hour: The unlearned lessons of World War I Sennott seeks to understand how the war to end all wars became the peace to end all peace, asking, "How can peace processes fail and trigger more war?"

Colonial legacy and religion interact with geography. For example, the violent extremist group Boko Haram emerged in Nigeria as the drying of the sahel pushed nomadic muslim herders up against the territory of southern christian farmers - a taste of the destablizing effects of climate change.

To understand how to achieve peace in our own perilous time of rising and falling powers, Sennott calls on us to study up. His recommended reading includes:

  • Christopher Clark, The Sleepwalkers: How Europe Went to War in 1914
  • Scott Anderson, Lawrence in Arabia: War, Deceit, Imperial Folly and the Making of the Modern Middle East
  • Margaret MacMillan, Paris 1919
  • Wilson by Scott Berg

Monday, December 23, 2013

The Good Life

Edmund Phelps of Columbia University, Nobel Laureate in economics, and author of Mass Flourishing appeared on EconTalk. Here's what I took away from the conversation:

Modern values and grass roots innovation

Phelps argues "that it was the birth of modern values that provided the fuel for the modern economies in Britain and America, and later maybe less fuel but nevertheless it was there in Germany and France." The manifestation of this was "grass roots innovation", propelling the rapid rises in living standards over the past two centuries.

Phelps believes that real prosperity consists of: rising wealth emerging from an individual's efforts to improve himself, work that is interesting, exercising initiative. Also, that differences in job satisfaction between countries are the result of differences in dynamism.

Phelps attributes the decline in innovation in the US since 1970 - "a narrowing of innovation to fewer industries" - to a rise of materialism, "an obsession almost with money", a rise of anti-modern values, such as conformism, and "the culture of entitlement rather than feeling that you've got to earn it yourself", along with rampant rent-seeking.

The grass roots innovation that should be going on continually has narrowed to a point where "most of the innovating that we see is that brilliant stuff going on out in Silicon Valley. And really up and down the West Coast, a fairly thin sliver of land along the West Coast."

Phelps raises the question of what kind of economy we'd want to live in, one that's more at rest and stable versus one that's more dynamic.

The Good Life

People really need to be engaged in doing things, doing rewarding things, and having the excitement of striving.
Aristotle's idea is the good life is a life that we admire in others and would like to imitate for ourselves.
In the Renaissance, people started talking about how human beings have creativity and human beings can think for themselves and should think for themselves. And people should be independent; they should have their own bank accounts and make their own living.
The good life is a life of adventure and discovery and exploration and meeting problems, overcoming hurdles. And creating. Creating stuff. For me, that's a good life. I'm sold on that.

Why might innovation cost jobs? a rough approximation we can think of consumer goods as being produced mainly with capital. And capital goods are produced mainly with labor. Now, if the innovation is in the consumer goods sector, then that's driving the price of consumer goods down relative to money wages. So real wages are rising and that pulls up employment. And that's great.
But once you start having innovation in the production of the capital goods, then you've got two things going on. One, labor is physically more productive in making capital goods. But the capital goods that labor makes are now going to be cheaper, in terms of consumer goods. So that's a bummer. And that lowers real wages...

Thursday, November 21, 2013

Are we back to the 1930s again?

Great financial crises bring chaos, but they can also give capitalism a much-needed jolt

The crisis we're still living with resulted from too much predation and not enough creation – a vast extraction of value from the real economy by finance that coincided with a failure to feed new sources of growth in science, entrepreneurship and creativity.
The last great financial crisis, in the 1930s, unleashed war and chaos. But it also led to an extraordinary period of social creativity [...] This was one of the many moments when capitalism was remade, its energies channelled, tempered and constrained in new ways [...].
Always the crucial driver has been to prevent the worst abuses of the predators [...] while corralling the creative, productive power of capitalism to improve living standards.
Today's position is no different. [...] Perhaps it's only when everything has been tried, and has failed, that we'll be ready to try something genuinely new.

...from Are we back to the 1930s again? Here's why we shouldn't panic

Geoff Mulgan
The Guardian, Monday 18 March 2013

Tuesday, November 12, 2013

Secularizing the Tech Debate
By Geoff Shullenberger
Dissent magazine

...we must decide the future of network technology and our relation to it through reasoned collective deliberation.


[The idea] that technological “disruption” is progressive and unavoidable has served to stifle or limit debate about the social, economic, and political effects of such developments.


Internet evangelists help consolidate the technocratic capture of democratic institutions and legitimize the expansion of corporate and state surveillance.

Monday, August 19, 2013

Differences between stocks and the economy

Why do stocks sometimes rise when the economy is in the ditch? They're not as tightly coupled as you might think.

First, GDP is a trailing measurement whereas stock indices are a speculative leading indicator, with all the uncertainty that implies.

Secondly, the interests of the general US economy and those of largish corporations are imperfectly aligned at best, with a number of factors impacting each unequally and at times in opposite directions.

This comes from an excellent discussion on Quora: How does QE translate to all-time highs of equity indices?