Category Archives: Economics

The Economic Consequences of the Peace – John Maynard Keynes

“The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable – abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe.”

Keynes wrote the Economic Consequences in 1919, and it played a critical role in turning public opinion against the Treaty of Versailles as too harsh and unfair to Germany. In it, he argues that France’s desire to punish Germany and unwillingness to raise taxes to pay for the war has led to reparations wildly beyond Germany’s ability to pay, and worries about the future of Europe after a crippling peace treaty and continuing instability.

Keynes is fun to read because he’s ridiculously clever, and this book is no exception. He’s witty, he’s insightful, and he’s entertaining. Conveniently, history has also judged him right, with the punitive terms of the Versailles Treaty contributing to the outbreak of World War 2. Being Keynes, though, he also had opinions on a wide variety of other topics.

On History

“The great events of history are often due to secular changes in the growth of population and other fundamental economic causes, which, escaping by their gradual character the notice of contemporary observers, are attributed to the follies of statesmen or the fanaticism of atheists.

On Poverty and Inequality

“Men will not always die quietly, for starvation, which brings to some lethargy and a helpless despair, drives other temperaments to the nervous instability of hysteria and to a mad despair. And these in their distress may overturn the remnants of organization, and submerge civilization itself in their attempts to satisfy desperately the overwhelming needs of the individual.”

“Then a man shakes himself, and the bonds of custom are loosed. The power of ideas is sovereign, and he listens to whatever instruction of hope, illusion, or revenge is carried to him on the air.”

On inflation

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.”

On the Modern World

“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep…The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life.”

Flashboys – Michael Lewis

“The world clings to its old mental picture of the stock market because it’s comforting; because it’s so hard to draw a picture of what has replaced it; and because the few people able to draw it for you have no interest in doing so.”

In 2009, a 300 million dollar secret fiber optic line was built, so secret that workers were kept in small groups and prevented from meeting, so secret they were never told the purpose of the line or where it was going, so secret they were asked to report anyone asking questions or digging near the line. Many thought they were on a top secret government project. In truth, they were building a line from New Jersey to Chicago that would shave 1.5 milliseconds off the time data takes to flow between the two points, bringing it down to 13 milliseconds, a privilege for which banks and traders were asked to pay as much as 10 million dollars apiece. It takes, by the way, 100 milliseconds to blink your eyes.

Michael Lewis is one of my favourite financial authors: I think his coverage of the financial crisis in The Big Short was masterful, quite possibly the best book on the subject, and he’s also well known for Liar’s Poker and Moneyball. He uses individual stories to explain complex issues, and in Flashboys, he describes the new world of stock markets, a world in which the markets are black boxes in high security buildings in New Jersey and Chicago, and it’s worth millions of dollars to have your computer two feet closer to that box. Every inch counts when signals only go at 186,000 miles per second. It’s also a world with predators and prey, and Lewis is sharply critical of many of the predators, especially dark pools and high frequency traders, those who trade in a millisecond time frame.

The book has been controversial: in essence, one side argues that though high frequency trading is not implicitly bad, many of the strategies used are essentially robbery: they gather more information than others and then use their advantage to take money that would otherwise have gone to the investor. On the other side, as an ex-Goldman Sachs employee I spoke with a few days ago argued, supporters suggest that such traders play the same role traders have always played, helping bring together sellers and buyers and adding liquidity to the market. Where Lewis is weakest, in justice, is that as with any story he needs a villain, and high frequency takes the role. In truth, however, many of the problems are systematic, and a systemic change is needed, as indeed one of the protagonists attempts to do by setting up his own, fair, stock exchange.

I personally tend to find the mugging side of things more apt, but that’s up the reader. Regardless of what you decide, I can recommend Flashboys as a phenomenal way to understand the modern stock market. Lewis has made a subject few of us understand clear and entertaining, and for anyone interested in flash crashes, hedge funds, algorithmic trading, or just the financial world in general, it’s essential reading. It’s a book on finance that sold 130,000 copies in its first week, is already being turned into a film, and has spawned thousands of articles, interviews, and responses. I highly recommend it.

You can get a copy here, or just read the Amazon reviews.

The Tyranny of Experts – William Easterly

“Development seems to be almost exclusively about the fate of nations rather than the fate of individuals. We seem to care more about Zambia than about Zambians.”

In the 4th century BC, Plato sailed to Sicily in order to help educate the tyrant Dionysius the Younger, the leader of the city of Syracuse. He believed he could turn him into a philosopher-king, the perfect leader of a country, despite his tyrannical tendencies. It did not turn out well. Plato would end up banished (though it could have been worse: the tyrant’s father had sold Plato into slavery when they disagreed) and the tyrant was bad as ever until he was overthrown in a coup.

Though he doesn’t mention Plato, Easterly worries about a similar modern problem. He points to the World Bank-supported theft of land from farmers in Uganda for a British company’s forestry project, about which the World Bank refused to conduct an investigation, or their support for development policies which resulted in the forced displacement at gunpoint of around 1.5 million farmers in Ethiopia so land could be leased to foreign investors, for which UK aid is now being sued. The development industry, he argues, has a nasty habit of accepting or supporting dictators and human rights abuses in its quest for development, accepting a false bargain of material development in exchange for overlooking human rights.

Development experts get all excited about their favourite policies, and then find that the democratic process to enact those policies is messy and slow. With the best of intentions, some turn to autocracies and let the end justify the means. This, Easterly argues, is not only immoral but also ineffective. In the short run, supporting an autocrat who rewards loyalists and punishes everyone else eliminates incentives for growth: in the long run, it leaves a legacy of poverty and poor human rights for generations (see Why Nations Fail for more on this).

As befits a book that emphasizes local context, each chapter begins with the specifics of an individual or region developing, from the Mouride Brotherhood, an Islamic order based in Senegal that produces wildly successful international traders, to Hyundai in South Korea. I was disappointed that, as Easterly himself admits, the data to decide whether autocracies are bad for growth just doesn’t exist, and the book is not really convincing in either direction, though there are certainly reasons for skepticism. Readers hoping to be convinced that China is bad or good for growth will be disappointed. Well taken, however, are his moral and long run criticisms: he rightly points out that in the absence of statistical fact about whether autocracies boost growth, the burden of proof surely lies with the side that violates human rights.

Disclosure: I read The Tyranny of Experts as a free advance reader copy – it is released on March 4th. You can get it here (or in the UK or Canada). I’ve also had the opportunity to see Easterly speak in person about one of his previous books; he’s an excellent speaker, for what it’s worth.

Abundance – Peter Diamandis and Stever Kotler

“When seen through the lens of technology, few resources are truly scarce; they’re mainly inaccessible. Yet the threat of scarcity still dominates our worldview…Imagine a world of nine billion people with clean water, nutritious food, affordable housing, personalized education, top-tier medical care, and nonpolluting, ubiquitous energy. Building this better world is humanity’s grandest challenge.”

Abundance suggests we have the wrong worldview. We shouldn’t be trying to inch our way along, making marginal gains; instead, we should be trying to achieve those dramatic improvements that can really make life better for everyone. 97.3% of the world’s water is salty, and another 2% is in polar ice: bickering over the remaining .5%, the authors argue, will never lead to abundance for all.

They have some great stats. Americans, for example, spend enough time to write Wikipedia anew watching ads on TV every weekend. Microchips take 35 gallons of water to produce. And 500x more solar energy falls on the earth than the total energy consumed by humanity each year. For them the answer, as befits a book co-authored by the CEO of the X-Prize foundation, is technology. Not just to become more efficient, though that’s a good thing, but to truly make human happiness and wealth abundant. Technology, they argue, can not just alleviate our problems but actually render them irrelevant, as when the introduction of the car made the problem of horse manure in New York City an irrelevancy.

The book is a whirlwind tour of the exciting new areas of technology and research in water, food, energy (backyard nuclear devices, anyone?), health, education, and freedom: progress in waste management, organ supplies, AI, nanomaterials, synthetic biology, and more. In some ways, it doesn’t add much to what’s already known – it’s a survey, not a contribution. If this is a field you’re interested in getting an overview of, though, the book is hard to beat. My only objection is their sheer optimism; it’s a book meant to be optimistic, and though I don’t in principle object, sometimes their treatment of the other side can feel superficial at best. If you’ve already read in the field, particularly Matt Ridley’s Rational Optimist, then you may also have heard much of it before. Still, the book remains a light but engaging read, and an important reminder that there is reason for optimism in what is often a pessimistic world.

The Signal and the Noise – Nate Silver

“Distinguishing the signal from the noise requires both scientific knowledge and self-knowledge: the serenity to accept the things we cannot predict, the courage to predict the things we can, and the wisdom to know the difference.”

The Signal and the Noise got a lot of hype when it was released, partly because Nate Silver correctly predicted 49 of the 50 states in the American presidential election, again. The book itself is wide-ranging, covering not just politics but financial crises, baseball, the weather, economics, flu, chess, poker, global warming, and a host of other issues. In all of them, Silver examines the state of the industry in terms of its use of data and its ability to predict the future. His broadest lesson, though, is that the modern world is flooded with data, almost overwhelmed with it. As he correctly points out:

“The number of meaningful relationships in the data – those that speak to causality rather than correlation and testify to how the world works – is orders of magnitude smaller. Nor is it likely to be increasing at nearly so fast a rate as the information itself; there isn’t any more truth in the world than there was before the Internet or the printing press. Most of the data is just noise, as most of the universe is filled with empty space.”

At the core, his solution is humility about what we can predict and what we can understand about the world, no matter how much data we have. More formally, he argues for Bayesian thinking – when we make a prediction, he suggests, it should never be a single value, but instead a probability weighting of various outcomes. It is not possible, he argues, to make predictions with data abstracted from context: we must understand how the data works, not just observe it, as stock market quants might argue.

Statistics is not exactly a mass-market topic, and Silver has done an admirable job making his book accessible to the general public. I flipped through the chapter on baseball, but I imagine other readers might well do the same to the chapter on economic forecasting: to each their own. Generally, however, his examples are great fun, whether on how people predict (or don’t) earthquakes, how poker players calculate opponents hands, or the development of chaos theory by Lorenz as he sought to predict the weather. He is also a dab hand at phrasing, and there are almost too many good lines to pick one to quote. Even if you don’t directly work with data, your life is affected by it in a myriad of ways, and it’s worth understanding the limitations of our knowledge.

The Price of Civilization – Jeffrey Sachs

“In our crowded and unstable world of 7 billion people, we need to dial down the propaganda and relentless shrieking of the mass media and reconnect with more basic human values. We need…to refocus our attention as individuals, consumers, and virtuous citizens, to what is most important in bringing us economic fulfillment and well-being.”

Disclosure first: I find Jeffrey Sachs somewhat frustrating. To my mind, his Millennium Villages project is an embarrassment – there’s no shame in starting a project that doesn’t work, but to refuse to release data to try to prevent others from finding out and continuing to support it damages the entire development movement (See Freakonomics blog, Wikipedia, etc.). It perhaps makes me unfairly cynical when he calls for government transparency and reform, so keep that in mind.

With that preamble, I found his book disappointing. I picked it up because the thesis sounded great, that the cause of America’s woes was a moral failure in its elites. I think this is an underdiscussed topic: the change in moral norms over the past 50 years means what once would be socially unacceptable, such as accepting an enormous salary and spending it entirely consumption, is now routine. In Ancient Rome, the wealthy were expected to spend most of their fortunes on public works, and did so because that was the norm. In some ways I like that model of the world: I think contributing to our communities is enormously important. I don’t know how to get there from here though: increasing taxes coerces contributions, which may be useful but is I think different from people wanting to contribute on their own. Anyway, despite Sach’s thesis statement, that’s not what the book is about.

The book focuses on ideas Sachs has introduced before. If this is your introduction to the subject, this or his earlier books are useful: he’s left wing but not partisan, believing both democrats and republicans are terrible. If you’ve spent a while thinking about the issues or read his other books though, there’s not much new here. He lists the classic problems facing the US, economic, political, social, and psychological, and then possible solutions, with a focus on increased taxes on the wealthy and mindfulness by citizens, and people engaging with the process. He has some suggestions I really enjoy, like requiring the US President to spend a few minutes every State of the Union outlining how the policies he’s mentioned will affect Americans 50 years from now, but most feel well-worn.

He ends with the idea that it will all sort itself out because the Millennial generation is socially liberal (in the American sense) and ethnically diverse.  He may well be right in that, and he’s certainly right on some of the other issues, but I’m not sure I got much out of the book. It all felt just a bit too standard for my taste.

The Economic Naturalist – Robert H Frank

“Mathematical formalism has been an enormously important source of intellectual progress in economics, but it has not proved an effective vehicle for introducing newcomers to our subject.”

The Economic Naturalist is one of the many pop-economics books out there, perhaps the most famous of which is Freakonomics. It’s one of the ones I haven’t read though, so I thought I’d pick it up, and I was pleasantly surprised. Frank used to instruct his students each year to find a seeming puzzle in the world and explain it with economics, the best of which have been collected here. If somewhat basic, it is at least entertaining.

Frank opens by worrying that economics students rarely remember what they are taught: associating economics with math and diagrams, they can’t actually apply it to the real world. Seeing as how this is a current subject of debate in the profession (see the Economist), I can hardly argue. Econ provides basic concepts of considerable value, and if students don’t leave with some understanding of opportunity cost, comparative advantage, etc., then I’m not sure it matters how good they are at calculus.

The entire book, then, is questions asked by his students and answers in response to them, often based on the original essay the student wrote. Questions vary from why drive-through ATMs have braille on them (cheaper not to produce different ATMs for drive-throughs )  to why milk is sold in square containers and pop in round ones (milk requires refrigerated shelf space, and so needs to be packed on shelves as efficiently as possible: pop is carbonated, and round shapes are more solid).

The essays are fun and in some cases enlightening, and are organized around key economic concepts, to illustrate their application in the real world. After the first half or so though, it all gets a bit wearing. To be fair, I suspect that’s because I already know the concepts; for a newcomer in the field, it might be considerably more entertaining. Still, I’m not sure it competes with the like of Tim Harford’s Undercover Economist, or Freakonomics for that matter. An entertaining read, but I think I’d rather read more about economics education directly. For those with less background in economics though, it might be a fun introduction to the field.

You can get a copy here (or in the UK or Canada). Or, just sign up for the Subtle Illumination email list and get social science delivered to your door!

The Wealth and Poverty of Nations – David Landes

“The Industrial Revolution brought the world closer together, making it smaller and more homogenous. But the same revolution fragmented the globe by estranging winners and losers. It begat multiple worlds.”

If I had been asked what I thought 100 pages in, I would have been quite negative, I think. Landes attempts to write an economic history of the world, and in his first hundred pages or so he covers pre-industrial revolution. It felt disorganized: he has vast knowledge of the subject, but the interjections and tangents were overwhelming, and I am dubious about the accuracy of some of them.

Once he got onto the era of the Industrial Revolution though, he began to shine. His chapters on Japan (he argues that had Europeans not intervened, they might well have had an industrial revolution of their own – I had no idea that because early Japan guaranteed riparian cultivator rights so strongly, they actually built boat-mounted waterwheels!) are fascinating, and he does well to focus on finding the reasons why things happen, instead of ascribing historical events to chance. His studies of colonial powers are equally interesting, highlighting differences between the different powers and their influences in a comprehensive way that is not done enough. Where else can one learn that early England was mostly about privateers and piracy rather than colonies, and as a result the crown issued sailor uniforms without pockets so they couldn’t steal things from the captured ships before the crown got its share?

In some ways it’s a good but weaker precursor to Why Nations Fail: Landes too emphasizes institutions, though he also gives credit to geography, culture, and other factors. His knowledge, however, is considerably more comprehensive, and flipping to any point in the book can reveal an enormous depth of knowledge on the subject at hand (Galileo was in trouble for the same reason inexpensive pornography used to be banned in Italy: such things were fine for those with refined tastes, but not appropriate for the masses. Galileo published in Italian, not Latin). That can be both fascinating and frustrating, but it’s certainly impressive.

Overall, then, I’m impressed. I might skip the first few chapters and the last few, but the middle is well worth the read. Whether that means the book is worth reading overall, I suppose, depends on how much of a hurry you’re in: I’d suggest Why Nations Fail as a speedier, but less comprehensive and content-rich, alternative.

If you do want that deep knowledge of how rich countries developed their wealth, you get can the book here (or in the UK or Canada). Or, just subscribe to the Subtle Illumination email list!

Good Strategy, Bad Strategy – Richard Rumelt

“The core of strategy work is always the same: discovering the critical factors in a situation and designing a way of coordinating and focusing actions to deal with those factors.”

John Kay (the British economist, not the guy who invented the flying shuttle) recently came out with his five book recommendations on economics in the real world. Since I hadn’t read it, I thought I’d pick up Good Strategy, Bad Strategy.

Overall, I’m impressed. Rumelt is an academic who studies strategy, and his clarity and insight does him credit. All he wants is structured thinking, and his book reads like a how-to tutorial: though he usually applies it in the context of business or national defense, it could equally relate to strategy in almost any field. CEOs often read things like Sun Tzu’s Art of War, and this book comes as close as any I’ve read to making that seem reasonable.

Rumelt is worried that much of what is done today is bad strategy, for which he has a specific definition. Bad strategy correlates with fluff, a failure to face core challenges, mistaking goals for strategy, and bad strategic objectives. Too many businesses, he points out, have a strategy of having 20% growth in sales for the next 5 years. That’s not a strategy – it’s at best a goal, and quite possibly wishful thinking.

Strategies are made up of three things. First, diagnose the problem. Second, come up with a guiding policy. And third, derive a set of coherent actions that allow you to implement that guiding policy. Too many organizations neglect the first and third steps, and are thus far too vague in doing the second. A doctor, in contrast, diagnoses a problem, chooses a therapeutic approach as a guiding policy, and then recommends specific medicines, diets, and therapy as a result of the guiding policy.  Action is the key to strategy: goals and theories are only part of the story.

A lot of the book feels straightforward, or at least not complicated. As Rumelt points out, however, in a world where we are often increasingly focused on the short term, there is value in forcing ourselves to think strategically. Consultants, he suggests, are not valuable because they suggest you write a checklist: they’re valuable because you actually write one when they suggest it, when otherwise you might never get around to it. I’m not sure I learned anything revolutionary while reading, but I did think deeply and in new ways about strategy and how we make decisions.

Both as a breakdown of how to think about strategy and a source of fun stories about business, Good Strategy, Bad Strategy does well. Perhaps a little too long and repetitive in parts, but it was well worth the read, and I suspect would be even more useful for someone directly involved in business.

If you want to pick up Good Strategy, Bad Strategy yourself, you can get it here (or in the UK or Canada). Or, join the subtle illumination email list and absorb strategy from reading!

Small is Beautiful – E.F. Schumacher

“Any intelligent fool can invent further complications, but it takes a genius to retain, or recapture, simplicity.”

Schumacher wrote extensively about natural capital consumption and his worry about the exhaustion natural resources, culminating in Small is Beautiful in the 70s. As a result, most of the ideas it presents do not feel new, largely because the ideas have been discussed widely since then. It remains, however, beautifully written.

I particularly liked his discussion of education, and found other chapters less compelling: I thought I’d share a few particularly good quotes, however;

 On Education

“The way in which we experience and interpret the world obviously depends very much indeed on the kind of ideas that fill our minds. If they are mainly small, weak, superficial, and incoherent, life will appear insipid, uninteresting, petty, and chaotic.”

“To do so, the task of education would be, first and foremost, the transmission of ideas of value, of what to do with our lives.”

“If the mind cannot bring to the world a set – or, shall we say, a tool-box – of powerful ideas, the world must appear to it as chaos, a mass of unrelated phenomena, of meaningless events.”

On Economics

“If we squander our fossil fuels, we threaten civilisation; but if we squander the capital represented by living nature around us, we threaten life itself.”

“We must study the economics of permanence.”

“A man is destroyed by the inner conviction of uselessness.”

“The modern world, shaped by modern technology, finds itself involved in three crises simultaneously. First, human nature revolts against inhuman technical, organisational, and political patterns, which it experiences as suffocating and debilitating; second, the living environment groans and gives sign of partial breakdown; and, third…the inroads being made into the world’s non-renewable resources, particularly those of fossil fuels, are such that serious bottlenecks and virtual exhaustion loom ahead.”