‘The Trinity College VIII’ – amusing book on rowing

Getting away from economics and with my interest in rowing, I can recommend a very entertaining book written by my brother-in-law David Hickey. David was a member of the Trinity College (part of Dublin University) VIII that won the Ladies Plate at the Henley Royal Regatta in 1977 – the Ladies Plate is seen as the World Championships for University VIII’s.

One of the 1977 Ladies Plate crew members has written a lighthearted account of the crew’s three year campaign to try to win the event. While it deals amusingly with some of their outrageous non rowing adventures, the sections on the changes within Trinity College during those years, and especially the descriptions of rowing in general, and racing in particular, are dealt with in a far more serious vein.

Below is an interview with David about the book on the Rowing Chat podcast.

You can purchase the book from the Dublin University Boat Club website which means that they get to keep 50% of the proceeds which they can then put towards their boat funding needs.

https://duboatclub.com/book/

If you are in New Zealand just email me – m.johnston@kingscollege.school.nz – and I can arrange for delivery. You will therefore save on significant postage costs.

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Holiday reading 2021

That time of year when we hopefully head to the beach in NZ and out of internet range. Here are some books that have had very good reviews. We do live in uncertain times and one doesn’t know what might be around the corner – stay safe.

The Box (Second Edition) – Marc Levinson. The Box tells the dramatic story of the container’s creation, the decade of struggle before it was widely adopted, and the sweeping economic consequences of the sharp fall in transportation costs that containerization brought about.

Anthro-Vision – How Anthropology Can Explain Business and Life – Gillian Test (FT). how anthropology can make sense of people’s behaviour, in business and beyond. She outlines how anthropology helps explain consumer habits – revealing the ‘webs of meaning’ that underpin how we shop, and unpicking the subtle cultural shifts driving the rise of green investment.

Economics in One Virus – An Introduction to Economic Reasoning through COVID-19 – Ryan Borne. answers all these pandemic‐ related questions and many more, drawing on the dramatic events of 2020 to bring to life some of the most important principles of economic thought.

The Vietnam War – Geoffrey Ward and Kenneth Burns. This book is based on the acclaimed documentary by PBS in the US. It is a fresh and insightful account of the long and brutal conflict that reunited Vietnam while dividing the United States as nothing else had since the Civil War.

Value(s) – Building a Better World for All – Mark Carney. Former Bank of England Governor draws on a truly international perspective to our greatest problems, this book sets out a framework for the change needed for an economic and social renaissance in a post-Covid world.

Those left behind and the attacks on US Congress

Been reading an excellent book by Martin Sandbu (FT) entitled ‘The Economics of Belonging’. In it he addresses the problem that when an economy moves to more efficient ways of production new methods are established and old ones decline. For some who have been part of the old methods of doing things, the economic system has passed them by. He explains four ways how this has happened.

The plight of the uneducated. Economic value is now derived from cognitive skills and knowledge. The competitive nature of the global economy demands increased productivity which has streamlined production using technology and is cognitively demanding for the labour force. This results in the diminishing use of blue collar (manual) workers which tend to use little knowledge or initiative. As a result manual labour is not demanded like before and if there is any demand the wage is does not equate to what they received 10-20 years ago. As Sandbu states: If the world today offers much less than it once did to routine workers with only basic schooling or training, it is because they are less useful to the modern economy.

The triumph of cities. In most western economies poorer areas grew faster than richer ones therefore they were catching-up with the big cities. However at the start of the Thatcher and Reagan era the richer urban areas have pulled away from their rural counterparts. Deindustrialisation, especially in the UK, with the move from manufacturing to the service sector favouring urban areas where there is a concentration of people today’s most valuable skills and talent. If urban and rural areas go about different economic direction for long enough, inequality will increase as well as cultural separation which is turn leads to political separation. Sandbu points out that the strongest support of antiestablishment movements is found in the regions that have lost out in the competition to attract capital and skill.

The cost of staying put. If you stay in an area that is ‘the wrong side of the train tracks’ moving away from home will increase your chances of success. In the last 40 years those that have moved have reaped the benefits of higher incomes. One thinks about the UK and the North South divide with the migration flows south in search of opportunity. Regional inequality favours those who actually move, but also those capable of moving. Mobility reflects risk taking and a tolerance for what is new, different and uncomfortable whilst staying put comes with greater economic disadvantage than it did 40 years ago. From the 2016 US election: White Americans who still lived in the community where they were raised supported Donald Trump by 57% against only 31% for Hillary Clinton. Even those who lived two hours’ drive away preferred Trump. Among those who had moved further away, however, more supported Clinton.

Feminism is good for your wallet. The old blue collar work whether it be on production lines, oil rigs, truck driving, farming etc. were traditionally done by men. There was a macho image portrayed in these jobs but the new jobs were focused on the skills that create value in the new service and knowledge economy. It is estimated in the US that one in four jobs in the next decade are expected come in health care, social assistance, and education which tend to come with low status and lower pay. This means that more men (particularly unskilled) must be prepared to work in the service sector in jobs that are traditionally done by women. Soft skills are now increasingly rewarded and traditional manual work (mainly done by men) no longer attract much pay in the job market. Job roles must adapt in parallel with changing cultural expectations of gender roles in the home. Trump’s make America great again was a call to bring back the blue collar jobs but this was never going to happen with globalisation.

Sandbu points out that the one group which has been particularly effected by these four changes is low-skilled white men in small rural communities and subscribe to traditional cultural attitudes. Often blamed on globalisation, these consequences are the result of how we now produce output which has been driven by labour saving technology. Sandbu states that:

But we should recognise that much else of value was lost with jobs, and the dissatisfaction from these structural changes goes far beyond the financial.

It is only to be expected that these groups have become more visible within the populist insurgency and fresh in our memory is the attack on the US Congress on 6th January.

Source: The Economics of Belonging – Martin Sandbu 2020

Holiday reading for the beach

We are very fortunate in New Zealand to have a semblance of normality when compared to the rest of world. Whilst at the beach for a couple of weeks here are some books (reviews from Amazon) that I will endeavour to get through. I should be back on the blog around 11th January – have a good Christmas and New Year wherever you are and stay safe.

The Narrow Corridor – By the authors of the international bestseller Why Nations Fail, based on decades of research, this powerful new big-picture framework explains how some countries develop towards and provide liberty while others fall to despotism, anarchy or asphyxiating norms – and explains how liberty can thrive despite new threats.

The Economics of Belonging – argues that we should step back and take a fresh look at the root causes of our current challenges. In this original, engaging book, Martin Sandbu argues that economics remains at the heart of our widening inequality and it is only by focusing on the right policies that we can address it. He proposes a detailed, radical plan for creating a just economy where everyone can belong.

The Ostrich Paradox – Our ability to foresee and protect against natural catastrophes has never been greater; yet, we consistently fail to heed the warnings and protect ourselves and our communities, with devastating consequences. What explains this contradiction?

Holiday reading for the beach

That time of year when I take off to the beach out of internet range – here are some economics books that I recommend. I should be back on the blog on Monday 8th January – have a good Christmas and New Year. Reviews are from Amazon.

Economism: an ideology that distorts the valid principles and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists, clueless politicians, and ignorant pundits.

In order to illuminate the fallacies of economism, James Kwak first offers a primer on supply and demand, market equilibrium, and social welfare: the underpinnings of most popular economic arguments. Then he provides a historical account of how economism became a prevalent mode of thought in the United States—focusing on the people who packaged Econ 101 into sound bites that were then repeated until they took on the aura of truth. He shows us how issues of moment in contemporary American society—labor markets, taxes, finance, health care, and international trade, among others—are shaped by economism, demonstrating in each case with clarity and élan how, because of its failure to reflect the complexities of our world, economism has had a deleterious influence on policies that affect hundreds of millions of Americans.
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The Great Leveler. Are mass violence and catastrophes the only forces that can seriously decrease economic inequality? To judge by thousands of years of history, the answer is yes. Tracing the global history of inequality from the Stone Age to today, Walter Scheidel shows that inequality never dies peacefully. Inequality declines when carnage and disaster strike and increases when peace and stability return. The Great Leveler is the first book to chart the crucial role of violent shocks in reducing inequality over the full sweep of human history around the world.

Ever since humans began to farm, herd livestock, and pass on their assets to future generations, economic inequality has been a defining feature of civilization. Over thousands of years, only violent events have significantly lessened inequality. The “Four Horsemen” of leveling―mass-mobilization warfare, transformative revolutions, state collapse, and catastrophic plagues―have repeatedly destroyed the fortunes of the rich. Scheidel identifies and examines these processes, from the crises of the earliest civilizations to the cataclysmic world wars and communist revolutions of the twentieth century. Today, the violence that reduced inequality in the past seems to have diminished, and that is a good thing. But it casts serious doubt on the prospects for a more equal future.
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Straight Talk On Trade. Not so long ago the nation-state seemed to be on its deathbed, condemned to irrelevance by the forces of globalization and technology. Now it is back with a vengeance, propelled by a groundswell of populists around the world. In Straight Talk on Trade, Dani Rodrik, an early and outspoken critic of economic globalization taken too far, goes beyond the populist backlash and offers a more reasoned explanation for why our elites and technocrats obsession with hyper-globalization made it more difficult for nations to achieve legitimate economic and social objectives at home: economic prosperity, financial stability, and equity.

Rodrik takes globalization’s cheerleaders to task, not for emphasizing economics over other values, but for practicing bad economics and ignoring the discipline’s own nuances that should have called for caution. He makes a case for a pluralist world economy where nation-states retain sufficient autonomy to fashion their own social contracts and develop economic strategies tailored to their needs. Rather than calling for closed borders or defending protectionists, Rodrik shows how we can restore a sensible balance between national and global governance. Ranging over the recent experiences of advanced countries, the eurozone, and developing nations, Rodrik charts a way forward with new ideas about how to reconcile today’s inequitable economic and technological trends with liberal democracy and social inclusion.

Economics – Holiday Reading.

I will be disappearing for a couple of weeks to the beach where there is no internet access. Therefore here are some books that might be worthwhile reading over the festive season – reviews are from amazon.com. I will be back again on 10th January – have a great xmas and new year.

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

Eight years on from the biggest market meltdown since the Great Depression, the key lessons of the crisis of 2008 still remain unlearned—and our financial system is just as vulnerable as ever. Many of us know that our government failed to fix the banking system after the subprime mortgage crisis. But what few of us realize is how the misguided financial practices and philosophies that nearly toppled the global financial system have come to infiltrate ALL American businesses, putting us on a collision course for another cataclysmic meltdown.

 

 

Circus Maximus: The Economic Gamble Behind Hosting the Olympics and the World Cup by Andrew Zimbalist

The numbers are staggering: China spent $40 billion to host the 2008 Summer Olympic Games in Beijing and Russia spent $50 billion for the 2014 Sochi Winter Games. Brazil’s total expenditures are thought to have been as much as $20 billion for the World Cup this summer and Qatar, which will be the site of the 2022 World Cup, is estimating that it will spend $200 billion. How did we get here? And is it worth it? Both the Olympics and the World Cup are touted as major economic boons for the countries that host them, and the competition is fierce to win hosting rights. Developing countries especially see the events as a chance to stand in the world’s spotlight. This book is also reviewed here by Michael Cameron on his blog Sex, Drugs and Economics.

 

 

Global Inequality: A New Approach for the Age of Globalization by Branko Milanovic

This is a scholarly book about global inequality, that is, ‘income inequality among citizens of the world’. It is, as Milanovic explains, ‘the sum of all national inequalities plus the sum of all gaps in mean incomes among countries’.

In his study, Milanovic focusses on the Kuznets hypothesis – that in industrialized countries, inequality will initially increase and then decrease, resulting in an inverted U-shaped curve. In recent times, inequality seems to be rising when all the factors indicate that it should have followed the Kuznets curve. Milanovic explains why the projected pattern did not materialise. One can point to ‘the hollowing of the middle class and the rising political importance of the rich’, but there are other factors. Milanovic explains the phenomenon through the historical data of the Kuznets curve in countries across the world.

This is a learned, but dry and technical treatise on a subject that seems to evade comprehension even by renowned economists and political scientists. That is not to say that Milanovic is a boring writer. This book will be appealing to economic and political science students, but the general reader may find Milanovic’s 2011 book, ‘The Haves and the Have-nots’ more interesting and palatable.

Inequality: What can be done? review by Thomas Piketty in NYR

I recently read another piece from the New York Review of Books – a review by Thomas Piketty (‘Capital in the Twenty-first Century’ fame) of the new book ‘Inequality: What can be done?’ by Anthony Atkinson. He is innovative in his ideas and shows that alternatives still exist. He proposes the following:

• Universal family benefits by progressive taxation policies
• Guaranteed public sector jobs as a minimum wage for the unemployed
• Democratisation of access to property via an innovative national savings system with guaranteed returns for depositors
• Inheritance for all with a capital endowment at age18 financed by an estate tax

1908’s – UK and US income tax rate reductions

Atkinson does mention the reduction in income tax rates that were instigated by the Thatcher government. The top marginal rate was reduced to 40% – the rate was 83% when Thatcher’s conservative government first came to power in 1979. A conservative MP got quite excited by this and is reported to have said ‘he did not have enough zeroes on his calculator’ to measure the size of his tax cut that he helped to endorse. This break with a half-century of progressive tax policy in the UK was Thatcherism’s distinctive accomplishment. Across the Atlantic US President Ronald Reagan was also in a tax cutting mood and reduced the top marginal tax rate to 28%. Succeeding governments in the UK under Tony Blair (Labour) and in the US under Bill Clinton (Democrats) didn’t change the tax policy that was left by both the Conservatives and the Republicans respectively. This lowering of the top marginal income tax rates contributed to the increase in inequality since the 1980’s.

A more progressive tax rate

Atkinson proposes top rates of income tax in the UK of 55% for annual income above 100,000  and 65% for annual income above £200,000, as well as a hike in the cap on contributions to national insurance. This will allow for a significant expansion of the UK social security and income redistribution system – family benefits and unemployment benefits. According to Atkinson if these taxes were implemented the level of inequality would be reduced significantly.

New rights for those with fewest rights

Atkinson proposes include guaranteed minimum-wage public jobs for the unemployed, new rights for organized labour, public regulation of technological change, and democratisation of access to capital. Piketty alludes to two of Atkinson’s innovative suggestions:

1. The establishment of a national savings program allowing each depositor to receive a guaranteed return on her capital. Given the drastic inequality of access to fair financial returns, particularly as a consequence of the scale of the investment with which one begins (a situation that has in all likelihood been aggravated by the financial deregulation of the last few decades), this proposal is particularly sound

1. The establishment an “inheritance for all” program. This would take the form of a capital endowment assigned to each young citizen as he or she reached adulthood, at the age of eighteen. All such endowments would be financed by estate taxes and a more progressive tax structure. He calls for a far-reaching reform of the system of inheritance taxation, and especially for greater progressivity with regard to the larger estates. (He proposes an upper rate of 65 percent, as with the income tax.) These reforms would make it possible to finance a capital endowment on the order of £10,000 per young adult.

A Wealth Tax

He also proposes a progressive tax system on real estate and eventually on net wealth. Stamp duty, which is a tax on real estate transactions, would be implemented as follows:

• 0% tax if property worth less than 125,000
• 1% tax if property worth between £125,000 and £250,000
• 3% tax if property between £250,000 and £500,000
• 5% tax between one and two million pounds (a new rate introduced in 2011)
• 7% tax on properties worth more than two million pounds (introduced in 2012)

Many have called into question the financing of the British welfare state (especially the National Health Service) through taxes. This was seen as an unacceptable form of competition by those countries where the cost of the welfare state rested on employers. A substantial proportion of the British left at the time saw in Europe and its obsession with “pure and perfect” competition a force that was hostile to social justice and the politics of equality.

Interview with Shamubeel Eaqub – Generation Rent

Below is a link to an interview with Shamubeel Eaqub on National Radio’s Sunday Morning programme. NZ Institute of Economic Research principal economist on the the country’s evolving rental market, the basis of his new book ‘Generation Rent – Rethinking New Zealand’s Priorities’.

House prices may boom or bust but the long-term trend is clear: for more New Zealanders than ever, home ownership is out of reach. Incomes simply have not kept pace with skyrocketing property prices.‘Generation Rent’ calls into question priorities at the heart of New Zealand’s identity.

In this BWB Text, Shamubeel and Selena Eaqub investigate how we ended up here, and what can be done to ensure all New Zealanders – home owners and renters alike – live in affordable and secure housing.

RNZ Interview – Shamubeel Eaqub

High-Frequency Trading (HFT) – Speed Kills

James Surowiecki (writer in the New Yorker) wrote a very informative review (in the New York Review of Books) of Michael Lewis’ book ‘Flash Boys’ about the rise of high-frequency trading (HFT) on Wall Street. As the name suggests, high-frequency traders buy and sell in large volumes and at an extraordinary fast pace, trading thousands of times a second. The decisions of the trader are driven by complex algorithms which are designed to follow a defined set of instructions in order to generate profits at a speed and frequency that is impossible for a human trader. The defined sets of rules are based on timing, price, quantity or any mathematical model.

It is estimated that 70% of trading in US stocks is done using. Lewis notes that:

By the summer of 2013, the world’s financial markets were designed to maximize the number of collisions between ordinary investors and high-frequency traders – at the expense of ordinary investors, and for the benefit of high-frequency traders, exchanges, Wall Street banks, and online brokerage firms.

Advocates of HFT will tell you that HFT provides liquidity and this means that the market has a lot of buyers and sellers which suggests that you can make trades without moving the price too much. A liquid market means that people will be more likely to invest. However there are those that worry about the liquidity of HFT as it could be illusory as it could disappear very quickly if stock prices collapse. Andrew Haldane of the Bank of England put it – the fear about this liquidity is that ‘in wartime, it disappears’. Furthermore, HFT has also produced huge swings in stock prices. On 6th May 2010 – know as the ‘Flash Crash of 2.45pm’ – the DJIA fell 9% in 5 minutes but then recovered most of that loss in the subsequent few minutes. But what is most worrying is that nobody can agree what happened because nobody had any control over it. It seems that we are writing things (algorithms) that we can no longer read. We should be worried about HFT as it reduces the amount of the quantity of real and valuable information in the stock market system. It make the system as a whole less stable and more risky. And it devotes an enormous amount of resources to an arms race that is of dubious value.

HFT and the real economy
A recent study of the commodity market found that up to 70% of all price movements in those markets didn’t correlate to events in the global economy. The price movements were driven by algorithms reacting to internal action in the market. This not only makes the market dumber but also a lot more unstable as humans find it impossible to oversee it – e.g Flash Crash of 2.45pm. If HFT traders add liquidity to the market then when the market crashed on 6th May they should have stepped in by buying falling prices of stocks. Turmoil in the markets is nothing new but the speed that it happens today makes trading harder to control raising systemic risk. Some companies will go to get great lengths to improve the speed of trades. In July 2010 a one-inch cable was completed to send a signal from Chicago to New Jersey at a cost of US$300 million. The improvements brought down the estimated roundtrip time of the signal from 13.1 milliseconds to 12.98 milliseconds. But when you are an algorithm 0.3 milliseconds is a long time. The billions of dollars that have been put into HFT over the last 6 years have only had a small impact on the ordinary investor. HFT looks like an arms race as it consumes an enormous amount of resource but generates very little social value and damages the market in the process.

Economics – Holiday reading

I will be disappearing for a couple of weeks to the beach where there is no internet access. Therefore here are some books that might be worthwhile reading over the festive season – reviews are from Amazon.com. I will be back again on 5th Januray – have a great xmas and new year.

Flash Boys: A Wall Street Revolt
by Michael Lewis
Flash Boys is about a small group of Wall Street guys who figure out that the U.S. stock market has been rigged for the benefit of insiders and that, post–financial crisis, the markets have become not more free but less, and more controlled by the big Wall Street banks. Working at different firms, they come to this realization separately; but after they discover one another, the flash boys band together and set out to reform the financial markets. This they do by creating an exchange in which high-frequency trading—source of the most intractable problems—will have no advantage whatsoever.

GDP: A Brief but Affectionate History
by Diane Coyle
Why did the size of the U.S. economy increase by 3 percent on one day in mid-2013–or Ghana’s balloon by 60 percent overnight in 2010? Why did the U.K. financial industry show its fastest expansion ever at the end of 2008–just as the world’s financial system went into meltdown? And why was Greece’s chief statistician charged with treason in 2013 for apparently doing nothing more than trying to accurately report the size of his country’s economy? The answers to all these questions lie in the way we define and measure national economies around the world: Gross Domestic Product. This entertaining and informative book tells the story of GDP, making sense of a statistic that appears constantly in the news, business, and politics, and that seems to rule our lives–but that hardly anyone actually understands.

How to Speak Money: What the Money People Say–And What It Really Means
By John Lanchester
To those who don’t speak it, the language of money can seem impenetrable and its ideas too complex to grasp. In How to Speak Money, John Lanchester — author of the New York Times best-selling book on the financial crisis, I.O.U.—bridges the gap between the money people and the rest of us. With characteristic wit and candor, Lanchester reveals how the world of finance really works: from the terms and conditions of your personal checking account to the evasions of bankers appearing in front of Congress. As Lanchester writes, we need to understand what the money people are talking about so that those who speak the language don’t just write the rules for themselves.

Why Nudge?: The Politics of Libertarian Paternalism
by Cass R. Sunstein
Based on a series of pathbreaking lectures given at Yale University in 2012, this powerful, thought-provoking work by national best-selling author Cass R. Sunstein combines legal theory with behavioral economics to make a fresh argument about the legitimate scope of government, bearing on obesity, smoking, distracted driving, health care, food safety, and other highly volatile, high-profile public issues.

How to Speak Money – a new book from John Lanchester

Will Self called John Lanchester’s previous book on money and banking – the bestselling ‘Whoops!’ – as ‘the routemap to the crazed world of contemporary finance we’ve all been waiting for’. If ‘Whoops!’ was the routemap, then his new book ‘How to Speak Money’ is the phrasebook. It shows you that it’s possible to learn to speak the language of money. Possible, desirable and perhaps even necessary if we’re to avoid feelings of complete helplessness and bafflement when confronted with the big financial forces that shape our lives.

Diane Coyle – Keynote Address

Just attending the New Zealand Association of Economists 55th Annual Conference and it was great to hear Diane Coyle present as one of the Keynote speakers. I was originally alerted to her work by Geoff Riley – an economics teacher at Eton College and co-founder of the Tutor2u website – while I was on a Fellowship. He recommended her book ‘The Soulful Science’ back in 2007. The book aims to show how the discipline of economics has changed over the last decade and brings together economic growth and human behaviour.

Her talk was based on the research into her new book GDP: A Brief but Affectionate History. She goes right back to the Domesday Book which was a manuscript record of how much each landholder in England and Wales had in land and livestock, and what it was worth. This was completed in 1086 on orders of William the Conqueror. Further mentions of Adam Smith and Karl Marx and what they tended to focus on as an economic indicator. Interesting to note that Holland has included prostitution in its GDP calculations and that the Italian statistical body recently announced that it will include prostitution, drug trafficking, and alcohol-and-tobacco in its calculation of GDP. However Italy is just complying with international accounting standards and reporting illegal economically productive activity is required under European Union rules. But as it is part of the informal economy how do you actually measure drug deals, prostitution etc and therefore its contribution to a country’s GDP?

There is also the intangible economy – how do you measure the output of Vodafone v Skype? Also how are sustainability, variety and innovation measured? If her talk was anything to go by her book seems well worth it.

Diane Coyle in Auckland

This year the annual conference of the New Zealand Association of Economisst takes place at the Auckland University of Technology from the 2nd – 4th July. One of the keynote speakers is Diane Coyle from the UK who runs the consultancy Enlightenment Economics. She also has a great website called ‘The Enlightened Economist’ in which she reviews economics and business books. She is the author of several books, including recently:

GDP: A Brief and Affectionate History (Princeton University Press, 2014 forthcoming),
The Economics of Enough (Princeton University Press 2011)
The Soulful Science (2007),

She also edited ‘What’s the Use of Economics: Teaching the Dismal Science after the Crisis’ self-questions economics by economists of a discipline that did not anticipate the crisis and has barely changed since despite its self-evident shortcomings.She was previously Economics Editor of The Independent and before that worked at the Treasury and in the private sector as an economist. She has a PhD from Harvard.

Below is a link to the conference website:

NZAE Annual Conference

Flash Boys – Michael Lewis’ new book

Here is a video from a PBS interview with Michael Lewis talking about his new book “Flash Boys: A Wall Street Revolt.” Much of the stock market trading that occurs today is done with computer servers, completing hundreds of millions of orders in a system known as high-frequency trading. Author Michael Lewis has made this practice the subject of his latest book.

Click below to view an adaptation from The New York Times magazine.
The Wolf Hunters of Wall Street

Diane Coyle in Auckland

This year the annual conference of the New Zealand Association of Economisst takes place at the Auckland University of Technology from the 2nd – 4th July. One of the keynote speakers is Diane Coyle from the UK who runs the consultancy Enlightenment Economics. She also has a great website called ‘The Enlightened Economist’ in which she reviews economics and business books. She is the author of several books, including recently:

GDP: A Brief and Affectionate History (Princeton University Press, 2014 forthcoming),
The Economics of Enough (Princeton University Press 2011)
The Soulful Science (2007),

She also edited ‘What’s the Use of Economics: Teaching the Dismal Science after the Crisis’ self-questions economics by economists of a discipline that did not anticipate the crisis and has barely changed since despite its self-evident shortcomings.She was previously Economics Editor of The Independent and before that worked at the Treasury and in the private sector as an economist. She has a PhD from Harvard.

Below is a link to the conference website:

NZAE Annual Conference

Smarter Spending

A recently released book that I read in the holidays entitled “Happy Money” provides new research into the science of spending. The authors (Liz Dunn and Mike Norton) explain how you can get more happiness for your money by following five principles:

1. Buy Experiences

Owning material things from expensive homes to luxurious cars turn out to provide less happiness than holidays, concerts and special occasions.

An exercise that they suggest is to think of purchases you’ve made to increase your happiness. Consider one purchase that was a tangible object that you could keep – iPhone, clothes etc. Then think of a purchase you made that gave you a life experience – holiday, concert or a meal out. Remembering the experience brings to mind friends and family, sights etc. Which of these purchases made you happier?

2. Make it a Treat

For residents in a city with famous tourist sites there is the inclination to never visit them as they are always there. When something is always there people are less likely to appreciate it. However limiting our access to something may renew our capacity for pleasure. Rather than giving up something completely the authors advocate turning our favourite things into treats – afternoon Cappuccino. This also applies to driving a luxury car – research has shown that driving a luxury car provides no more happiness than an economy model.

3. Buy Time

By getting other people to do those dreaded tasks money can transform the way we spend our time, freeing us to pursue our passions. A lot of people fail to use their money to buy themselves a happier time. When people focus on thier time rather than their money, they act like scientists of happiness, choosing activities that promote well-being. For companies this principle entails thinking about compensation in a broader way, rewarding employees not only with money, but with time.

4. Pay Now, Consume Later

Today with the availability of credit access to goods is instantaneous. However by putting this powerful principle in reverse – paying first and taking delivery later – you can buy more happiness as delaying consumption allows spenders to reap the pleasures of anticipation without a short period of happiness. Holidays provide more happiness before they actually occur. Research shows that waiting for something – a chocolate – makes it taste better when we get it.

5. Invest in Others

Bill Gates and Warren Buffet pledged the majority of their wealth to charity and they are very happy with that decision. New research shows that spending on others provides a bigger happiness boost than spending on yourself. Investing in others can make individuals feel healthier and wealthier.

A2 – Developing Economies and the Global Financial Crisis.

Just completing the Unit 6 of the A2 course and updating my notes on the current issue of debt hangover from the Global Financial Crisis. The FT recently reported that there are worrying signs of private sector credit in emerging economies.

Turkey Brazil Russia – private sector credit in year to April 2012 up 20%.
China – private sector credit in year to April 2012 up 15%.
Poland – private sector credit to GDP 49%

This is seen as inevitable if an economy is going to grow but there needs to be investment in capital which will ultimately increase a country’s productive capacity and long-term development. However a lot of this borrowing has gone into consumer goods rather than capital infrastructure projects. This is especially worrying in Brazil as the transport system needs a major overhaul if it is going to cope with the demands of the Olympic Games in 2016. According to the FT misdirected credit can produce two damaging consequences:

1. When too much money is directed into the housing market bubbles can occur – subprime for instance and more recently China.
2. Poor credit allocation can harm economic growth, both in the short and in the long term.

Although China and Brazil has loosened monetary policy this needs to be accompanied by a process that ensures it is directed to where it is most needed. Jeffrey Sachs in his book “End of Poverty” talked about how a country needs six major kinds of capital:

1. Human capital: health, nutrition, and skills needed for each person to be economically productive

2. Business capital: the machinery, facilities, motorized transport used in agriculture, industry, and services

3. Infrastructure: roads, power, water and sanitation, airports and seaports, and telecommunications systems, that are critical in-puts into business productivity

4. Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society

5. Public institutional capital: the commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labor

6. Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital

Figure 1 shows the basic mechanics of saving, capital accumulation, and growth. We start on the left-hand side with a typical household. The household divides its income into consumption, taxation, and household savings. The government, in turn, divides its tax revenues into current spending and government investment. The economy’s capital stock is raised by both household savings and by government investment. A higher capital stock leads to economic growth, which in turn raises household income through the feedback arrow from growth to income. We show in the figure that population growth and depreciation also negatively affect the accumulation of capital. In a “normal” economy, things proceed smoothly toward rising incomes, as household savings and government investments are able to keep ahead of depreciation and population growth.
Source: The End of Poverty: How we can make it happen in our lifetime by Jeffrey Sachs (2005).

The Fear Index – if you’re a Wall Street algorithm and you’re five microseconds behind, you’re a loser.

Robert Harris’ latest book, “The Fear Index,” stars a hedge fund driven by an algorithm run wild. In researching his book he went to observe a hedge fund in London. Basically it was a room full of computers and in the course of 20 minutes he watched one computer made $1.5m by itself. The interview below with Paul Solman of PBS is quite revealing when you consider the lengths that some will go to get a competitive edge on their opponents. In the book they develop an algorithm that can predict the markets by analysing the incidence of fear-related words on the Internet, trends on Facebook, Twitter, the sense of a mood. Although Harris thought that this was original he subsequently found out it has been going on for sometime. Bloomberg News feeds are digitalized and go straight into the machine, and buzzwords are picked out, “panic, rumor, fear, slump.” A few milliseconds could be the difference between success and failure in the markets.

The extent that these traders will go to in extreme. In the U.S., high-frequency firms represent only 2 percent of the 20,000 or so trading firms operating today. But they now account for nearly three-quarters of all trades. And the average time a stock investment is held these days is 22 seconds. If time is money, microseconds are now millions. In a recent TED talk on cutting-edge technology, tech whiz Kevin Slavin wowed the audience by describing buildings now being hollowed out in Lower Manhattan. Why? So that high-frequency trading firms can move in and get as close as possible to New York’s point of entry for the Internet at a so-called carrier hotel in Tribeca. You can view his complete TED Talk by clicking here. A great quote that he made was as follows:

Just to give you a sense of what microseconds are, it takes you 500,000 microseconds just to click a mouse. But if you’re a Wall Street algorithm and you’re five microseconds behind, you’re a loser.

Keynes 1926 pamphlet could have been written today.

Diane Coyle runs a blog called “The Enlightened Economist” which is very good for reviews of recently published economics books. One of her recent posts talked of the republished 1926 pamphlet by John Maynard Keynes – ‘The End of Laissez Faire’. Though Keynes states that an economy should be free of government intervention he suggests that government can play a constructive role in protecting individuals from the worst harms of capitalism’s cycles, especially concerns about levels of unemployment. Diane Coyle produces a quote (see below) from the book which is ironically similar to what is the anti-capitalist sentiment today. She also suggests that we need to go beyond the state versus market debate and recongize that the two type of systems need to work together to alleviate problems such unemployment, externalities, uncertainty, well-being etc.

“Many of the greatest economic evils of our time are the fruits of risk, uncertainty, and ignorance. It is because particular individuals, fortunate in situation or in abilities, are able to take advantage of uncertainty and ignorance, and also because for the same reason big business is often a lottery, that great inequalities of wealth come about; and these same factors are also the cause of the unemployment of labour, or the disappointment of reasonable business expectations, and of the impairment of efficiency and production. Yet the cure lies outside the operations of individuals; it may even be to the interest of individuals to aggravate the disease.”

He then goes on to say

“I believe that the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution, and partly in the collection and dissemination on a great scale of data relating to the business situation, including the full publicity, by law if necessary, of all business facts which it is useful to know. These measures would involve society in exercising directive intelligence through some appropriate organ of action over many of the inner intricacies of private business, yet it would leave private initiative and enterprise unhindered. Even if these measures prove insufficient, nevertheless, they will furnish us with better knowledge than we have now for taking the next step.”

Holiday reading

Here are some books that might be of interest for the holiday period. I am off to the beach and out of internet range for 3 weeks. Will resume normal service on 15th January. Have a merry xmas and a happy new year.
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This Time Is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart & Kenneth Rogoff

This Time Is Different presents a comprehensive look at the varieties of financial crises, and guides us through eight astonishing centuries of government defaults, banking panics, and inflationary spikes–from medieval currency debasements to today’s subprime catastrophe.

The Darwin Economy: Liberty, Competition, and the Common Good by Robert H. Frank

Who was the greater economist–Adam Smith or Charles Darwin? The question seems absurd. Darwin, after all, was a naturalist, not an economist. But Robert Frank, New York Times economics columnist and best-selling author of The Economic Naturalist, predicts that within the next century Darwin will unseat Smith as the intellectual founder of economics.

The Price of Civilization: Economics and Ethics After the Fall by Jeffrey Sachs

The world economy remains in a precarious state after the recent global recession – where quick fixes were implemented instead of sustainable solutions to systemic problems. Jeffrey Sachs argues powerfully for a new co-operative, common-sense political economy, one that stresses practical partnership between government and the private sector, demands competence in both arenas and occasionally insists on carefully chosen public and private sacrifices. In this new era of global capitalism, Sachs believes that we have to forget partisanship and solve these enormous problems together, clinically and holistically, just as one would approach the eradication of a disease.