Paul Krugman the academic, Martin Wolf the economic journalist: Bottom line – read Wolf’s great new book

MartinWolf2011ByDaphneBorowski.pngPaul KrugmanI’m a big, though not uncritical admirer of Paul Krugman – of his straightforwardness and his aggression in what is almost always a worthy cause. And yet, reading Martin Wolf’s magnificent book rather inauspiciously titled The Shifts and the Shocks: What We’ve Learned-and Have Still to Learn-from the Financial Crisis, I’m struck by how modest Krugman’s achievement is.

Before his decisive turn with the coming of George Bush’s presidency and what Krugman saw as the rampant dishonesty of the campaigning and discourse of the right, Krugman styled himself as an aggressive defender of centrism, puncturing the fallacies of the heroes of the right and left. As he put it, he liked to catch them with their hands in the intellectual cookie jar and expose them in his pieces. Thus in his attacks on the ‘policy entrepreneurs’ of the Clinton era and before, like Lester Thurow and Robert Reich, he’d frequently ‘catch’ each of them not paying sufficient respect to the subtleties of comparative advantage and allegedly committing themselves to various other alleged intellectual fallacies.

While I was quite sympathetic to the points he was making on policy – these guys were often somewhere between little and a lot too slick in the way they presented their stuff - I didn’t really think that Krugman had demonstrated that they had in fact committed themselves to those fallacies. If you tried to read them ‘with’ the grain as it were, to get what they were trying to say – knowing also that they’re trying to communicate with people who are not steeped in economics – it wasn’t clear they were mistaken logically whether or not you ultimately agreed with them.

By contrast on the right we had all sorts of hijinks – massive tax cuts that paid for themselves, full Ricardian equivalence, modelling the Great Depression as a spontaneous holiday and various other grand themes thrown together with the flimsiest of evidence. In any event since Krugman has self-identified as a fighting Liberal, he’s been fantastically good at skewering his opponents – almost always when they need skewering, and at the same time he’s kept producing interesting academic(ish) papers. And in economics where models should be used to test, train and illustrate economic intuition and shouldn’t take over the show, academic(ish) papers are usually better than academic papers. Yet there’s been something missing. Continue reading

How the aged crowd out the young, and how it’s inefficient

This paper is pretty interesting. The last generation has seen the triumph of the baby boomers in attracting resources to themselves, at the cost of other generations, most obviously illustrated in throwing off the shackles of university fees (so other generations and the uneducated could pay for their university education) and then returning to ramp up fees on the oncoming generations. Ditto for the pension – which they’ll enjoy but get later generations to self-fund. Ditto all the tax breaks for self-funded boomers and on it goes though quite possibly the effect of house prices may be as or more important than all that.

Meanwhile think how those who rise to a certain position in the workforce tend to stay there, regardless of merit. This is not so true at the very top of large companies any more that seem to turn over their CEOs pretty quickly and ruthlessly (thought the terms of separation show a great deal of ruth). So economists tend to think of firms as making efficient decisions to survive competition, but they’re full of humangoes, and humangoes, just like mangoes have soft squishy bits that tend to do pretty much what they’re going to do whatever the state of competition is.

Demographics and Entrepreneurship

: by James Liang, Hui Wang, Edward P. Lazear – #20506 (IO LS)

Abstract: Entrepreneurship requires creativity and business acumen. Creativity may decline with age, but business skills increase with experience in high level positions. Having too many older workers in society slows entrepreneurship. Not only are older workers less innovative, but more significant is that when older workers occupy key positions they block younger workers from acquiring business skills. A formal theoretical structure is presented and tested using the Global Entrepreneurship Monitor data. The results imply that a one-standard deviation decrease in the median age of a country increases the rate of new business formation by 2.5 percentage points, which is about forty percent of the mean rate. Furthermore, older societies have lower rates of entrepreneurship at every age.

Managers wresting control from owners: it’s nothing new …

Contractual Freedom and the Evolution of Corporate Control in Britain, 1862 to 1929
by Timothy W. Guinnane, Ron Harris, Naomi R. Lamoreaux – #20481 (DAE)

Abstract:British general incorporation law granted companies an extraordinary degree of contractual freedom to craft their own governance rules. In this paper we study the uses to which this flexibility was put by examining the articles of association written by three samples of companies from the late nineteenth and early twentieth centuries. We find that incorporators consistently wrote rules that shifted power from shareholders to directors, that the extent of this shift became greater over time, and that Parliament made little effort to restrain it. Although large firms were less likely to enact the most extreme provisions, such as entrenching specific directors for life, they too wrote articles that gave managers essentially unchecked power. These findings have implications for the literature on corporate control, for the “law-and-finance” argument that the common law was more conducive to financial development than the code-based systems of civil law countries, and for the debate on entrepreneurial failure in Britain during the late nineteenth and early twentieth centuries.

Why ‘how to’ guides on innovation are of limited use: An ‘untheory’ of innovation

Looking for a graphic for this blogpost, it was amazing how many of the pictures were of besuited men looking anything but innovative. Not a woman or unbesuited person for miles around. But I digress …

Thinking about how to write a fairly substantial review of knowledge and innovation in the urban water industry, I listed all the things that need to go well for innovation to thrive. What began as a kind of memo to self turned into a kind of unmanifesto, which is to say an explanation for why theorising about innovation can’t be taken very far (or, to be more circumspect, perhaps it can, but I’ve never found it very useful.) In fact there’s lots of writing about innovation – far too much – but most of it – including the best of it – is incredibly light on theory and is in fact storytelling. This is a complement to it, not a criticism. If there’s not much point to theory, The thing is, so many things have to work well together that that is the secret of innovation. And this challenge of ‘alignment’ – of purposes, of people of populations (I meant systems, but it didn’t start with ‘P’ and I’m going for memorability here!) – will be particular to particular projects. There’s little of a general nature that can be said about them. Anyway, what began as a memo to self is now an important part of the way I think about this stuff. A theory of the non-theorisable. The things that must be finessed for innovation – doing things in new and better ways – to thrive in an industry or wider system are many and varied. Just listing them gives an indication of the difficulty of the task owing to its complexity and many faceted nature.

From creation to implementation
  • Innovation must be initiated either by those with a problem to solve or an opportunity to seize or elsewhere within the system. Where this is not spontaneous, it may require careful cultivation and the application of financial and other resources.
  • Once innovations are generated, they must become known to those who can use them beneficially including in some situations, those who are unaware of any specific problems, but who nevertheless can use such innovations to advantage.
  • Those who become aware of new knowledge must understand how to implement it to advantage.
Governance of innovation
  • A specific innovation may solve problems for some levels of a system but it may involve new routines, higher costs, inconvenience or disruption elsewhere. There will often (generally?) be no well-accepted means of determining priorities between the various considerations arising. Continue reading

Time for the ‘reform’ mantra to be modernised: My AFR column of yesterday

The Hawke LegacyBy the time economic reform matured as a political project – let’s date it from Paul Keating’s announcement about its popularity with the resident galah in every pet shop – it was already on the slide into the kind of ideological formula of mercantilism that Ken Henry so powerfully critiqued earlier this week.

Australia was a standard-bearer in areas like trade and agricultural protection, the two airline policy and shopping hours. There, with the stroke of a pen, we swept away the detritus of a century’s ad hoc political favouritism. And unlike our peers in the Anglosphere, we also expanded funding for the safety net – bolstering equity.

But beyond that, as we’ve learned (or have we?), considering policy alternatives against a criterion as crude as how ‘free market’ they are doesn’t work so well. In infrastructure, utility and financial reform, where monopoly and asymmetric information problems abound, regulation remains inevitable and new rent seeking political pathologies lie in wait for those unpicking the old ones. Here our reform efforts brought forth excessively priced toll-ways, desalination plants and airports with the political and official insiders championing the changes parachuting into lucrative careers with the corporate beneficiaries of their reforms to lobby their successors. We’ve seen massive over-investment in electricity transmission and under-investment in other infrastructure.

And yet our policy elite speak as if ‘reform’ is well articulated and will take us back to the glory days of the 1990s Australian ‘reform boom’ that preceded the subsequent resources boom. “Gary Banks’ List” assembled by the former Productivity Commission (PC) chairman – is a canonical PC endorsed reform ‘to do’ list. It was – tellingly enough – cobbled together some months after Glenn Stevens assured a Parliamentary Committee of its existence. John Edwards recently suggested, only slightly exaggerating, that its adoption wouldn’t make a measureable difference to growth.

With national income falling in the most recent national accounts, here are some contemporary challenges and opportunities absent from the list – all of which escape prevailing reform formulas: Continue reading

Scottish independence: a good idea or a bad idea?

Today the people residing in Scotland can decide whether they want to see an independent Scotland or to have Scotland remain in the UK. The betting markets concur with the opinion polls and favour the status quo: the markets give roughly 20% chance that the ‘yes’ vote will win and that Scotland will become independent.

The majority of economists talking about the referendum have focused on whether or not the Scots would be financially better off with their own country, debating things like North Sea oil revenues and currency unions. I think that is a distraction: looking at small and large countries in Europe, you would have to say there is no noticeable advantage or disadvantage to being a small country and that the Scots are hence unlikely to be materially affected in the long run by independence.
Independence is more about self-image and identity than it is about money. Even though the push for independence might well come from politicians and bureaucracies that gain prestige and income if they ruled an independent country, the population deciding on the vote will probably vote on emotional grounds, not economic. Young male Scots appear overwhelmingly in favour of independence; females and old people prefer to keep things the way they are. The latter groups are bigger and are expected to sway the day.

Personally, I have two related reasons to oppose the breaking up of larger countries in Europe into smaller ethnically defined states, not just Scotland, but also Catalonia, the Basque region, the Frisian province, Bavaria, and all the other regions of Europe:

  1. These independence movements are ethnic and hence by definition exclusionary. This is a big concern: large nation states have slowly moved away from the story that they exist for people of the ‘right’ bloodlines and with ancestors who lived in the ‘right’ place. The UK, the US, France, Australia, and even Germany and Spain have moved towards an identity based on stories about what it means to be British, American, French, Australian, etc., rather than a ‘blood and earth’ ethnic nation state story. Speaking tongue-in-cheek, the Brits have an upper lip story, the Americans have an exceptionalism story, the French have been convinced they like reading Proust, the new Australians are told in their citizenship exams that they believe in a fair go, etc. These stories contain treasured national stereotypes, complete with imagined histories. The key thing is that are inclusive, ie any newcomer from another place can participate in such stories. The Australian national anthem is a beautiful example of this super-inclusive attitude as it, almost uniquely, mentions neither ethnicity nor religion as a basis for being Australian. The ethnic stories of the independence movements are, in contrast, exclusionary and hence harmful to the self-image of any migrant. It is a move to a past that we have little reason to be proud of, as it marginalises current and future migrants. The story surrounding Scottish independence is thus not that the Scots are people who like to wear kilts and enjoy haggis, but that they make up the people who have suffered 700 years of oppression by the English. What is a recent newcomer from, say, Poland to do with such a self-image but conclude that they do not really belong there? Continue reading

On the cost of foreign exchange: Scottish independence edition

artiste_207Well gentle readers, it’s come to this. Scottish independence is going down to the wire. It is hanging by a thread, though if you are concerned that I am mixing my metaphors, I think you’re flogging a dead horse after it’s bolted.

In any event, in the question of Scottish independence the question of what currency it will use is the elephant in the room – the sporran on the kilt. If you’ve not been paying attention, the Scottish separatists have been insisting that they can pick up someone else’s currency – the Euro or the Pound – and otherwise enjoy independence.

Paul Krugman is horrified that so soon after the debacle of the Euro the Scots could contemplate this. He’s studiedly agnostic as to whether it might be worthwhile if they had their own currency and focuses on the prospect that they might repeat the disaster of the Euro, or imaging that a monetary union might be a Good Idea outside of a political union. I’m in broad agreement though I think he might be overdoing it a bit.

Meanwhile Joe Stiglitz fancies the idea of Scottish independence if it can help carve out of the British Isles a more egalitarian nation leading him to rather downplay the significance of leaving a political union without also leaving its monetary union. I’m sympathetic to his deprecation of economies of scale as being a big part of the decision. Firstly if you want to be a nation, if you incur a few costs in doing so, that shouldn’t be a big deal in your decision. Further, quite a lot of Scottish governance is already different to British governance so the costs are already there. (As Adam Smith thought in the area of education, some Scottish governance may well be superior. When I was in law school my Evidence teacher was very much enamoured of the Scottish legal institution of the Procurator Fiscal [which is nothing to do with fiscal policy by the way]. But I digress.)

Anyway, one thought that seems largely absent from the debate is that, in this age of the internet, it might well be possible to run a separate currency at a tiny fraction of its current economic cost at least as far as access to foreign exchange (FX) in the spot market is concerned. Continue reading