FT 23/11
denmark is a widely used metaphor for the task of transforming countries into prosperous, stable, well-governed, law-abiding, democratic and free societies. In their latest book, MIT’s Daron Acemoglu and the University of Chicago’s James Robinson, authors of the highly influential Why Nations Fail, provide a framework in which to address the question of how to get there. Their simple answer is: it is hard. Their deep answer is: “Liberty originates from a delicate balance of power between state and society.”
Liberty is neither granted by the state, nor seized from a state’s dead hand. It is the product of contestation and co-operation between state and society. Following Lewis Carroll, the authors describe this relationship as a “Red Queen” race, in which state and society must run at equal speed if they are to stay where they are.
Crucially and rightly, the book does not see freedom as merely the absence of state oppression. Quite as corrosive of freedom are oppression of women by men, workers by bosses, or the poor by the rich. In the vein of the political philosopher Philip Pettit, the authors argue that “the fundamental tenet of a fulfilling life is . . . freedom from dominance, fear and extreme insecurity”.
Their analytical starting point is the Leviathan of the 17th-century English political philosopher Thomas Hobbes. To Hobbes the enemy was “Warre”, or unending conflict. To provide security against lives “solitary, poore, nasty, brutish, and short”, he argued, we require an all-powerful state, the Leviathan. This book calls such a Hobbesian state the “Despotic Leviathan”.
The opposite to the Despotic Leviathan is the “Absent Leviathan”. In some cases, a stateless society is indeed a war of all against all, as Hobbes feared, with the vendetta acting in place of the rule of law. In such societies, blood-feuds may stretch over generations.
Yet there is an alternative form of the Absent Leviathan: a cage that uses social sanctions to force people to behave in accordance with norms. The norms appropriate to one’s place in a caste structure are an example. Such a “cage of norms” may also be oppressive. By definition, it is also almost impossible to loosen the cage, since there exists no legislature to do so. That requires a state.
In the Despotic Leviathan, there is too much state and too little society. In the Absent Leviathan, there is too much society and too little state. In between lies a corridor, where things are neither too hot nor too cold. Here alone, the state and society balance each other. As the one becomes more potent, so does the other. Thus, argue the authors, “for liberty to emerge and flourish, both state and society must be strong”.
Denmark has a strong state and a strong society. Contrary to Friedrich Hayek’s fears, the emergence of a state with high taxes and generous welfare has not led to the fate described in The Road to Serfdom. It was instead the road to widely shared freedom and prosperity.
This is what Acemoglu and Robinson call a Shackled Leviathan. Their thesis is that neither an inevitable nor a simple path towards such a state exists. It is contingent: it depends on the norms and institutions with which a society starts the journey, on the nature of economic opportunities and on accidents.
In western Europe, they argue, progress towards a Shackled Leviathan began with the collapse of the Roman empire, which bequeathed institutional memories and the Church. But it also began with the deliberative assemblies of the Germanic tribes that had conquered Rome. These were the “two blades of the European scissors”.
The more confidence people have in their state, the argument goes, the more they demand of it and so the more effective it becomes. Trust, not fear, is the foundation of a strong state. So, paradoxically, a Despotic Leviathan is less able to act consistently and effectively than a Shackled one.
China is, historically, the world’s most significant Despotic Leviathan. It has struggled between two conceptions of such a state: Legalism, which imposes oppression on the people, and Confucianism, which emphasises obligations of rulers to the ruled. Yet the unconstrained Chinese state can never guarantee protection against its own changing whims. Its economic success was, accordingly, necessarily limited.
Historical legacies explain, for example, the divergent experience of post-Soviet societies. Russia has gone back to despotism because society was inert. Vladimir Putin could reimpose the Despotic Leviathan quite easily. Poland, however, with its relatively mobilised society, made great progress towards a Shackled Leviathan. But nothing is certain. Today, it appears, Poland is on its way back towards the Despotic Leviathan, together with Hungary.
One of the book’s big themes is the role of predatory elites in preventing the emergence of a Shackled Leviathan. It highlights the contrast between Costa Rica and Guatemala, the former a success in moving in that direction, the latter an enduring catastrophe of predatory elites. The driving force behind Guatemala’s failure to develop a Shackled State was the need of the elite to coerce labour. Exactly the same was true, of course, of the American South.
The more confidence people have in their state, the more they demand of it and the more effective it is
For the citizens, Acemoglu and Robinson suggest, the Paper Leviathan, which manages to be both oppressive and ineffective, may be the worst of both worlds: Such “states are still pretty despotic — they get very little input from [citizens] and continue to be unresponsive to them, and then don’t have many scruples about repressing or murdering them.” An example is Argentina. But much of Latin America and sub-Saharan Africa falls into this category.
The Paper Leviathan is a blend of the Despotic with the Absent Leviathan. The book offers two reasons for the survival of such Paper Leviathans: one is that those in power do not want the state to mobilise the people; the other is that they wish to exploit clientelist relations. Either way, they do not wish the state to be neutral and effective, but rather partial and ineffective.
This book is more original and exciting than its predecessor. It has gone beyond the focus on institutions to one on how a state really works. It shows that getting to and sustaining a Shackled Leviathan is hard. It is easier to move from a Despotic Leviathan to an Absent or Paper Leviathan than to a Shackled one: Iraq is a recent example. When Saddam Hussein fell, the state disintegrated, albeit with US assistance.
The book also raises big questions about the future. Its view, for example, is that China’s Despotic Leviathan will ultimately fail to move this country to the forefront of the world economy. Similarly, the authors suggest that India’s cage of caste norms will continue to hamper its success severely.
Another important question is whether the “Will to Power” can be contained forever, even in established Shackled Leviathans. This is becoming a question in the US. The answer is to create a more effective state that is willing to act against the predatory few or the would-be despotic one. Society must mobilise once again. But will it?
Progress towards the Shackled Leviathan requires a mobilised society and a responsive state. That combination is far from inevitable. On the contrary, it is very hard to attain or sustain. Yet it is possible. Those of us lucky enough to live under such a state and in such a society are duty bound to defend it.
The Narrow Corridor: States, Societies, and the Fate of Liberty, by Daron Acemoglu and James A Robinson, Viking, RRP£25/Penguin, RRP$32, 560 pages
allow me to itemise all the burdens that I bear. I have to obey the criminal law of the US and the UK. I am contracted to perform certain duties for the FT. After that, well, some people insist on a reply text these days, but really, in all candour, that is it. The world asks almost nothing of me. What with my talent for saying No (I am what you might call a people-displeaser) I don’t even feel informal pressure to serve this or that cause, live this or that life. I and the millions like me are CS Lewis’s “men without chests”. As much as our hard-to-target lower pecs need tightening, this is in fact a slight at our listlessness. We are all desire and reason with no higher calling. Francis Fukuyama cribs the phrase in The End of History, which has displaced Das Kapital and perhaps even The Origin of Species as the most invoked book that nobody reads. Among the consequent misunderstandings is that Fukuyama relished the triumph of liberalism as the end-state of humankind. He didn’t. He thought it would induce in us a dangerous ennui. To break it, people might devote themselves to all kinds of cockamamie ideas, just to feel a part of something larger. Three years after populism broke through, we have come to the end of one explanation for it. The notion of anger has been analysed beyond usefulness. It is indispensable but not quite enough. It explains why the poor in deindustrialised places rebelled. It does not account for the better-off who made up the decisive numbers. The most under-discussed feeling in the modern world is boredom. Anger is given more than its due. Depression gets an airing. What we find much harder to credit is that, for some, the problem with modernity is not that it is too hard, but that it is too easy. Nothing in the way of duty or sacrifice is asked of them. They might have parents or grandparents who spent themselves in a larger cause, and feel somehow not quite alive next to them. There are women like this but, as the psephologists will testify, there are many more men. The nostalgia for the Blitz spirit among Englishmen who were born circa 1960 is an increasingly weird case in point. The supposed crisis of masculinity always evokes a Springsteenian wasteland of shuttered steel plants. But it can be a much tonier affliction than that. It covers the outwardly successful men who want “something more” than sterile comfort and low stakes. Nietzsche was on to the emasculating effects of modernity in the late 1800s, and Lewis in the mid 1900s. And that was when conscription, ideological struggle and religion were still around to make a guy feel connected to the epic. Now he has to find it in some passing blowhard who asks for his vote. Populism is the closest thing to an outlet. Populism is the closest thing to an outlet for the guy wanting to feel a connection to the epic This is why there is something ersatz to me about today’s version: a slightly performative element that distinguishes it from the all-too-sincere 1930s populism. I sense that, while many voters really mean it, some are just restless and want to feel their juices bubble. I have known (and stopped knowing) lots of once-temperate people who have been carried off on the giddy ride in recent years. Their dopamine hit seems to come from the drama itself, not the content of the creed. The trouble is that it is no less dangerous for that. I do not pretend to feel even a trace of boredom or modernity-fatigue. I am not one of your duty-and-sacrifice merchants. I savour the chestless life. But those who do feel this way are a much more potent threat to liberalism, and therefore to my way of life, than the angry. Anger is fixable. It can be assuaged through redistribution and other policies, as it has been in the past. What, though, is the fix for ennui? It exists because the system is doing its job of securing (at least for some) comfort. We cannot just retrofit Homeric struggle and moral grandeur into it. My profession has tormented enough Ohio factory towns with camera crews and essayistic reporters. Time to fathom the boredom of the prosperous dissenter.
Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found here.
https://www.ft.com/content/39d5bd82-0bf5-11ea-bb52-34c8d9dc6d84
Liberty originates from a delicate balance of power between state and society,” write the authors of Why Nations Fail. A successful society needs a powerful state — what the English political philosopher Thomas Hobbes called Leviathan. But his Leviathan was despotic. The opposite is an Absent Leviathan, which is either an anarchy or a cage of oppressive social norms. In the Despotic Leviathan, there is too little state. In the Absent Leviathan, there is too much. In between lies a corridor, where state and society are in balance. That is also where we need to be. Schism: China, America and the Fracturing of the Global Trading System, by Paul Blustein, Centre for International Governance Innovation, RRP$35 Today, the US is suffering extreme buyer’s regret over China’s accession to the World Trade Organization in 2001. This book provides a deeply-researched corrective. No, it would not have been better to have left China dangling outside the WTO, and no, China did not systematically break its commitments. Above all, Blustein argues, the WTO “remains the best way of inducing China to play by the rules”. Amen. The AI Economy: Work, Wealth and Welfare in the Robot Age, by Roger Bootle, Nicholas Brearley, RRP£20 Bootle, chairman of Capital Economics, argues that the economic effects of artificial intelligence may not be as different from those of previous technological transformations as many suppose; that the speed with which the changes occur may not be all that fast; and that, in all probability, piecemeal changes in policy, rather than a radical shift towards universal basic income, are the right response. We need to hear his arguments. Unbound: How Inequality Constricts Our Economy and What We Can Do about It, by Heather Boushey, Harvard University Press, RRP£22.95/$27.95 For a long time, the argument over inequality was about whether it was the price that had to be paid for a dynamic economy. In this outstanding book, Heather Boushey of the Washington Center for Equitable Growth turns this upside down. She shows that, beyond a point, inequality damages the economy by limiting the quantity and quality of human capital and skills, blocking access to opportunity, underfunding public services, facilitating predatory rent-seeking, weakening aggregate demand and increasing reliance on unsustainable credit. Open: The Progressive Case for Free Trade, Immigration, and Global Capital, by Kimberly Clausing, Harvard University Press, RRP£22.95/$27.95 The one thing the American right and left increasingly agree on is that trade, capital flows and immigration damage many if not most Americans. On the contrary, Professor Clausing of Reed College argues, openness to the world economy is a source of substantial gain. Neither liberal trade nor technological change is the enemy, it is foolish, even malevolent, policies that fail to help people and places to adjust to change and exploit new opportunities. Extreme Economies: Survival, Failure, Future — Lessons from the World’s Limits, by Richard Davies, Bantam Press, RRP£20 Exploring what economies and economics look like in extreme conditions, Davies shows in this original book that “trade and exchange sprang up quickly in tsunami-ravaged Aceh, in the Zaatari refugee camp and even in Louisiana’s highest-security penitentiaries”. Markets are both natural and indispensable. But they can create huge problems, too. An excess of individualism is ultimately corrosive; we need a strong sense of mutual responsibility, too. A Better Planet: Forty Big Ideas for a Sustainable Future, edited by Daniel Esty, Yale University Press, RRP$30 Our species can only thrive if our activities are in balance with our natural environment. Yet many opponents of environmental policies are “hostile to science, unwilling to look at data, and inattentive to the long-term environmental consequences of certain industrial activities”, writes Esty, a professor at Yale. The book provides excellent ideas on what can and should be done. The question remains whether the dialogue on these vital topics can cease to be one with the persistently deaf. Winners Take All: The Elite Charade of Changing the World, by Anand Giridharadas, Allen Lane, RRP£12.99/Vintage, RRP$16 Can the rich save the world or is their philanthropy an elaborate charade? The author of this thought-provoking book has no doubts about the answer: it is indeed a charade, in which the rich seek to justify their wealth by how they use it to improve the world. In the right hands, philanthropy can indeed be valuable. But only politics can tackle the big problems. To suggest otherwise, Giridharadas concludes, is fraudulent. Capitalism, Alone: The Future of the System That Rules the World, by Branko Milanovic, Belknap Press, RRP£23.95/$29.95 Capitalism has won, argues Milanovic, author of the brilliant Global Inequality, but which capitalism? A distinction needs to be drawn between “liberal capitalism” (which I would call “democratic capitalism”) and “political capitalism” (or “despotic capitalism”). As Milanovic notes, democratic capitalism offers not only political and personal freedom, but also political correction without mass violence. Despotic capitalism can only secure legitimacy through superior efficiency, even though unaccountable power tends towards corruption. Democratic capitalism ought to win this contest. I hope it does. The Great Reversal: How America Gave up on Free Markets, by Thomas Philippon, Belknap Press, RRP$23.95/$29.95 In this seminal book, economist Philippon uses detailed evidence to argue that, far from being the home of free-market competition, the US today has less competition than the much-maligned EU, particularly in its product markets, which are riddled with monopoly and monopsony. This is not the result of natural forces, but of deliberate policy. Declining competition has raised profits, depressed wages, weakened investment and undermined productivity growth. The US needs a reinvigoration of antitrust.
The Code of Capital: How the Law Creates Wealth and Inequality, by Katharina Pistor, Princeton University Press, RRP$29.95/£25 “Capital rules, and it rules by law,” argues Pistor in this fascinating book. “It owes its capacity to create wealth to the modules of a legal code that is backed by state power; and its resilience in times of crisis can be attributed to a combination of legal asset-shielding devices and the state’s willingness to extend a helping hand to capital to preserve not only capitalism but social stability, and by implication, the state itself.” The law has created capitalism — and so lawyers rule. Escape from Rome: The Failure of Empire and the Road to Prosperity, by Walter Scheidel, Princeton University Press, RRP£30/$35 The scientific and industrial revolutions were the most significant events in human history, since the slow birth of agriculture. So why did they start in Europe? The answer, argues Scheidel, author of The Great Leveler, was that “the Roman empire made modern development possible by going away and never coming back”. Europe’s “enduring polycentrism” replaced the ossification of empire with innovation, overseas expansion and the triumph of bourgeois values. The thesis is not new. But the evidence is compelling. The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, by Emmanuel Saez and Gabriel Zucman, WW Norton, RRP£21.99/£27.95 Saez and Zucman are leading figures in the detailed empirical analysis of inequality. In this important book, they document the perverse characteristics of the US tax system, which is now “a giant flat tax [that becomes] regressive at the top”. According to their figures, the 400 richest families in the US pay a lower average tax rate than any other income group, including the bottom 10 per cent of the income distribution. The US has become a plutocracy. The book shows in detail how this has happened. Narrative Economics: How Stories Go Viral and Drive Major Economic Events, by Robert J Shiller, Princeton University Press, RRP£20/$27.95 Nobel-laureate Shiller is one of the world’s most original economists. In this book, he starts from the obvious fact that the economy is the product “of conscious living people, who view their actions in light of stories with emotions and ideas attached”. Stories allow human beings to make sense of an uncertain world. But they also drive economies into booms and busts. Armed with this understanding, we gain a far richer understanding of how economies behave. 99%: Mass Impoverishment And How We Can End It, by Mark E Thomas, Head of Zeus, RRP£14.99 A call to arms, this book makes three main arguments. First, the middle class is under extreme pressure and may vanish. Second, many of the constraints on purposive action in response, such as presumed fiscal limits or the view that taxes should never be raised, are myths. Finally, the needed reset is possible without revolutionary change. We can ensure a growing economy from which everybody benefits. The time for assessing such arguments has now arrived. They matter.
Stories matter. It’s a truism for journalists, but not so much for economists. Robert Shiller, the Yale professor and Nobel laureate who predicted the housing crisis and also put behavioural economics on the map, aims to change that in a book dedicated to the thriving field of narrative economics. While many economists are still busy creating mathematical formulas to decode and contextualise our supposedly “rational” behaviour, people’s actions are more often based on human interest stories than hard data. “When we are asleep at night,” he points out, “narratives appear to us in the form of dreams. We do not dream of equations or geometric figures without some human element.” The idea that human behaviour can exert its own influence in the market is something that most traders would buy into (investor George Soros turned it into a theory that he called “reflexivity”). But in Narrative Economics, Shiller goes much broader and deeper, looking at how the stories we tell ourselves about the world drive our behaviour — and thus the world itself if enough people buy into them. Economists, he argues, need to study this if they are to have any hope of doing a better job than they have in the past of predicting major events — such as recessions or asset bubbles — and how people react to them. Consider, for example, the fall in stock prices that began after Austria-Hungary declared war on Serbia on July 28, 1914. New York and the major European exchanges reacted by closing their doors. That only increased panic, contributing to activities such as the shipping of large quantities of gold from the US to Europe, which in turn increased the danger on major transatlantic shipping routes. This itself was driven by a narrative that took hold among jittery Europeans around the Panic of 1907, which many held up as proof that America was unstable and they should get their money out as fast as possible. Given all this, why did markets not close after Britain declared war on Germany on September 3, 1939? In part because of a widely shared story that the first world war had ultimately proved to be very profitable for investors who had kept their US assets, and thus were able to make money selling supplies to Europeans during the war. One result of this narrative was that the S&P index gained 9.6 per cent after war was declared. All this seems so fuzzy — how can we sift through any of the millions of narratives floating around at any particular moment, particularly in our world of high-speed data, and find those that have meaning and will go viral? (Like diseases, narratives must spread widely in order to be economically relevant.) It turns out that there is some connective tissue in terms of what spreads. Novelty often catches on — Shiller explains how the “Happy Birthday” song, which used the same tune as an earlier piece of music, was much more successful because it allows us to place our own name in the lyrics. There are also several timeless narratives that seem to come back again and again, mutating for each new era. Fear and hope around technology are both common, as are moral narratives such as the need for thriftiness, which Shiller believes helped prolong the Great Depression, or stories based on strong emotions such as anger against interest groups that are perceived to be selfish or out of touch — like corrupt unions in the past, or rich people today. These stories, says Shiller, shape policy. In 1957, for example, a 3.7 per cent rise in inflation from the year before — significant in today’s terms but nothing like the 23.6 per cent rise in 1920 — created a strong crackdown by central bankers in the US and elsewhere, thanks in part to an LA Times editorial that detailed the misdeeds of selfish union bosses. Allan Sproul, the recently retired president of the Fed at that time, lamented that the “Federal Reserve System finds itself in the position of having to validate, however reluctantly, public folly and private greed by supporting increased costs and prices”. One might write a narrative of the past 10 years involving desperate central bankers trying to paper over the misdeeds of selfish and myopic politicians by keeping rates low and unwittingly brewing up a huge asset bubble and higher inequality. But can we actually quantify the effect of narrative economics? Not easily, says Shiller. He calls for more data — in the form of interviews that question people about the stories they tell each other and themselves, and a database of sermons that capture the most important passion plays of the day. Believing that easy money will soon give way to a market crash is certainly one. If Shiller is right, the more we believe it, the more likely it will be.
Gillian Tett Irrational economics human touch
On June 24 2016, the day after Britain’s Brexit referendum, hedge fund manager Richard Robb went jogging around Hyde Park in London. “Normally I find jogging excruciating and count down the minutes until the torture will end,” he admits in a new book, Willful: How We Choose What We Do. But that day, “I didn’t even notice. My pain was crowded out by the looming horror.” Robb’s fund faced a potential crisis because its trades were vulnerable to the shock waves sent through financial markets by the surprise result. He feared a scenario where “the stain on our reputation would be long-lasting”, he recalls. In the event, his terror was not justified. He averted disaster by drawing on skills honed while working for the Japanese Dai-Ichi Kangyo Bank (DKB) during the 1997-98 Asian crisis and, later, steering his fund through the 2008 Lehman Brothers collapse. He looks back on the incident today with relief at the way his team worked to overcome the predicament. However, the experience also sparked something else. Robb is now on a crusade to correct the economics profession’s obsession with “rational choice” — the idea that humans always make logical decisions and seek to maximise self-interest. He points out that it does not necessarily seem “rational” for a wealthy former banker — as Robb was when he left DKB — to set up a hedge fund that involves risking money and reputation, and being exposed to events such as Brexit. “In reality, starting a business put my nest egg in jeopardy,” he admits. The reason he went ahead was because he was bored by early retirement and sought the exhilaration of work that challenged him. Robb had spent the first part of his career doing a PhD at Chicago University, home to the “Chicago school” of economics, which promoted the idea that free markets and rational actors would ensure the perfect allocation of resources. His subsequent working life, however, showed him a world full of people pursuing jobs and activities that could not easily be explained by this model. He concluded that we need a rethink. Sometimes we make purposeful choices to maximise self-interest; but often we just pursue an activity “for itself”, because it supports our identity, gives psychic satisfaction and so on. “Acknowledging the for-itself gives us licence to embrace specific conduct that we can’t credibly explain to ourselves or others in terms of purposeful choice,” he writes. When I first read the book, I must admit that I was tempted to roll my eyes and say, “Well, duh!” Yes, many economists and central bankers used to be in thrall to the Chicago school. But behavioural economists have long scoffed at its ideas. As Robb notes, Daniel Kahneman, Richard Thaler and Cass Sunstein, to name but a few, have shown that mental biases and short cuts make humans anything but “rational” agents most of the time. There is an academic discipline known as “economic anthropology”, which tries to frame economics within a broader social and cultural context. For example, it looks at economics in terms of the widest possible definition of social and economic “exchanges” and values, rather than just monetary transactions. Sadly, few mainstream economists have much idea that economic anthropology exists, least of all those trained in the Chicago school. That is partly due to the inward-looking nature of sections of the anthropology community, as well as the arrogance of some economists. However, others, such as Robert Shiller, are starting to draw on anthropology — check out his excellent new work Narrative Economics for an example of this. I hope that more will follow. Robb’s snappy little book opens the path to a more comprehensive dialogue. The book is also important in other ways. The fact that a former devotee of Chicagoan economics has explained why he rethought his views symbolises a larger shift in the paradigm. And it is relevant in terms of public policy. These days, we tend to debate employment using narrow economic criteria: hours worked, wages earned, household consumption, labour-market mobility and so on. Fair enough: most of us need a wage to survive (unless we’re wealthy former bankers). However, as Edmund Phelps, the Nobel Prize-winning economist — and someone who partly inspired Robb’s rethink — has long argued, we also need to find a way to create a more human-centric vision of economics. We need, say, to recognise the sense of dignity and community created by jobs that cannot be captured by numbers. This is, of course, fiendishly difficult. Chicago-style economics produces charts, equations and predictions that seem reassuringly precise, so they are easy for investors and policymakers to use. The big drawback of behavioural finance — and economic anthropology — is that it often seems so vague that creating strategy from it can feel like chasing soap in the bath. Robb, to his credit, tries to sketch out a decision tree to help investors, policymakers, business executives and his own economics students to decide when to use a rational model of economics, and when not. It is rudimentary, but provides a platform for an overdue debate; particularly at a time when Brexit and the rise of populism have shown that it is foolish to predict voter passions purely in terms of economic incentives and numbers.
allow me to itemise all the burdens that I bear. I have to obey the criminal law of the US and the UK. I am contracted to perform certain duties for the FT. After that, well, some people insist on a reply text these days, but really, in all candour, that is it. The world asks almost nothing of me. What with my talent for saying No (I am what you might call a people-displeaser) I don’t even feel informal pressure to serve this or that cause, live this or that life. I and the millions like me are CS Lewis’s “men without chests”. As much as our hard-to-target lower pecs need tightening, this is in fact a slight at our listlessness. We are all desire and reason with no higher calling. Francis Fukuyama cribs the phrase in The End of History, which has displaced Das Kapital and perhaps even The Origin of Species as the most invoked book that nobody reads. Among the consequent misunderstandings is that Fukuyama relished the triumph of liberalism as the end-state of humankind. He didn’t. He thought it would induce in us a dangerous ennui. To break it, people might devote themselves to all kinds of cockamamie ideas, just to feel a part of something larger. Three years after populism broke through, we have come to the end of one explanation for it. The notion of anger has been analysed beyond usefulness. It is indispensable but not quite enough. It explains why the poor in deindustrialised places rebelled. It does not account for the better-off who made up the decisive numbers. The most under-discussed feeling in the modern world is boredom. Anger is given more than its due. Depression gets an airing. What we find much harder to credit is that, for some, the problem with modernity is not that it is too hard, but that it is too easy. Nothing in the way of duty or sacrifice is asked of them. They might have parents or grandparents who spent themselves in a larger cause, and feel somehow not quite alive next to them. There are women like this but, as the psephologists will testify, there are many more men. The nostalgia for the Blitz spirit among Englishmen who were born circa 1960 is an increasingly weird case in point. The supposed crisis of masculinity always evokes a Springsteenian wasteland of shuttered steel plants. But it can be a much tonier affliction than that. It covers the outwardly successful men who want “something more” than sterile comfort and low stakes. Nietzsche was on to the emasculating effects of modernity in the late 1800s, and Lewis in the mid 1900s. And that was when conscription, ideological struggle and religion were still around to make a guy feel connected to the epic. Now he has to find it in some passing blowhard who asks for his vote. Populism is the closest thing to an outlet. Populism is the closest thing to an outlet for the guy wanting to feel a connection to the epic This is why there is something ersatz to me about today’s version: a slightly performative element that distinguishes it from the all-too-sincere 1930s populism. I sense that, while many voters really mean it, some are just restless and want to feel their juices bubble. I have known (and stopped knowing) lots of once-temperate people who have been carried off on the giddy ride in recent years. Their dopamine hit seems to come from the drama itself, not the content of the creed. The trouble is that it is no less dangerous for that. I do not pretend to feel even a trace of boredom or modernity-fatigue. I am not one of your duty-and-sacrifice merchants. I savour the chestless life. But those who do feel this way are a much more potent threat to liberalism, and therefore to my way of life, than the angry. Anger is fixable. It can be assuaged through redistribution and other policies, as it has been in the past. What, though, is the fix for ennui? It exists because the system is doing its job of securing (at least for some) comfort. We cannot just retrofit Homeric struggle and moral grandeur into it. My profession has tormented enough Ohio factory towns with camera crews and essayistic reporters. Time to fathom the boredom of the prosperous dissenter.
Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found here.
https://www.ft.com/content/39d5bd82-0bf5-11ea-bb52-34c8d9dc6d84
Liberty originates from a delicate balance of power between state and society,” write the authors of Why Nations Fail. A successful society needs a powerful state — what the English political philosopher Thomas Hobbes called Leviathan. But his Leviathan was despotic. The opposite is an Absent Leviathan, which is either an anarchy or a cage of oppressive social norms. In the Despotic Leviathan, there is too little state. In the Absent Leviathan, there is too much. In between lies a corridor, where state and society are in balance. That is also where we need to be. Schism: China, America and the Fracturing of the Global Trading System, by Paul Blustein, Centre for International Governance Innovation, RRP$35 Today, the US is suffering extreme buyer’s regret over China’s accession to the World Trade Organization in 2001. This book provides a deeply-researched corrective. No, it would not have been better to have left China dangling outside the WTO, and no, China did not systematically break its commitments. Above all, Blustein argues, the WTO “remains the best way of inducing China to play by the rules”. Amen. The AI Economy: Work, Wealth and Welfare in the Robot Age, by Roger Bootle, Nicholas Brearley, RRP£20 Bootle, chairman of Capital Economics, argues that the economic effects of artificial intelligence may not be as different from those of previous technological transformations as many suppose; that the speed with which the changes occur may not be all that fast; and that, in all probability, piecemeal changes in policy, rather than a radical shift towards universal basic income, are the right response. We need to hear his arguments. Unbound: How Inequality Constricts Our Economy and What We Can Do about It, by Heather Boushey, Harvard University Press, RRP£22.95/$27.95 For a long time, the argument over inequality was about whether it was the price that had to be paid for a dynamic economy. In this outstanding book, Heather Boushey of the Washington Center for Equitable Growth turns this upside down. She shows that, beyond a point, inequality damages the economy by limiting the quantity and quality of human capital and skills, blocking access to opportunity, underfunding public services, facilitating predatory rent-seeking, weakening aggregate demand and increasing reliance on unsustainable credit. Open: The Progressive Case for Free Trade, Immigration, and Global Capital, by Kimberly Clausing, Harvard University Press, RRP£22.95/$27.95 The one thing the American right and left increasingly agree on is that trade, capital flows and immigration damage many if not most Americans. On the contrary, Professor Clausing of Reed College argues, openness to the world economy is a source of substantial gain. Neither liberal trade nor technological change is the enemy, it is foolish, even malevolent, policies that fail to help people and places to adjust to change and exploit new opportunities. Extreme Economies: Survival, Failure, Future — Lessons from the World’s Limits, by Richard Davies, Bantam Press, RRP£20 Exploring what economies and economics look like in extreme conditions, Davies shows in this original book that “trade and exchange sprang up quickly in tsunami-ravaged Aceh, in the Zaatari refugee camp and even in Louisiana’s highest-security penitentiaries”. Markets are both natural and indispensable. But they can create huge problems, too. An excess of individualism is ultimately corrosive; we need a strong sense of mutual responsibility, too. A Better Planet: Forty Big Ideas for a Sustainable Future, edited by Daniel Esty, Yale University Press, RRP$30 Our species can only thrive if our activities are in balance with our natural environment. Yet many opponents of environmental policies are “hostile to science, unwilling to look at data, and inattentive to the long-term environmental consequences of certain industrial activities”, writes Esty, a professor at Yale. The book provides excellent ideas on what can and should be done. The question remains whether the dialogue on these vital topics can cease to be one with the persistently deaf. Winners Take All: The Elite Charade of Changing the World, by Anand Giridharadas, Allen Lane, RRP£12.99/Vintage, RRP$16 Can the rich save the world or is their philanthropy an elaborate charade? The author of this thought-provoking book has no doubts about the answer: it is indeed a charade, in which the rich seek to justify their wealth by how they use it to improve the world. In the right hands, philanthropy can indeed be valuable. But only politics can tackle the big problems. To suggest otherwise, Giridharadas concludes, is fraudulent. Capitalism, Alone: The Future of the System That Rules the World, by Branko Milanovic, Belknap Press, RRP£23.95/$29.95 Capitalism has won, argues Milanovic, author of the brilliant Global Inequality, but which capitalism? A distinction needs to be drawn between “liberal capitalism” (which I would call “democratic capitalism”) and “political capitalism” (or “despotic capitalism”). As Milanovic notes, democratic capitalism offers not only political and personal freedom, but also political correction without mass violence. Despotic capitalism can only secure legitimacy through superior efficiency, even though unaccountable power tends towards corruption. Democratic capitalism ought to win this contest. I hope it does. The Great Reversal: How America Gave up on Free Markets, by Thomas Philippon, Belknap Press, RRP$23.95/$29.95 In this seminal book, economist Philippon uses detailed evidence to argue that, far from being the home of free-market competition, the US today has less competition than the much-maligned EU, particularly in its product markets, which are riddled with monopoly and monopsony. This is not the result of natural forces, but of deliberate policy. Declining competition has raised profits, depressed wages, weakened investment and undermined productivity growth. The US needs a reinvigoration of antitrust.
The Code of Capital: How the Law Creates Wealth and Inequality, by Katharina Pistor, Princeton University Press, RRP$29.95/£25 “Capital rules, and it rules by law,” argues Pistor in this fascinating book. “It owes its capacity to create wealth to the modules of a legal code that is backed by state power; and its resilience in times of crisis can be attributed to a combination of legal asset-shielding devices and the state’s willingness to extend a helping hand to capital to preserve not only capitalism but social stability, and by implication, the state itself.” The law has created capitalism — and so lawyers rule. Escape from Rome: The Failure of Empire and the Road to Prosperity, by Walter Scheidel, Princeton University Press, RRP£30/$35 The scientific and industrial revolutions were the most significant events in human history, since the slow birth of agriculture. So why did they start in Europe? The answer, argues Scheidel, author of The Great Leveler, was that “the Roman empire made modern development possible by going away and never coming back”. Europe’s “enduring polycentrism” replaced the ossification of empire with innovation, overseas expansion and the triumph of bourgeois values. The thesis is not new. But the evidence is compelling. The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, by Emmanuel Saez and Gabriel Zucman, WW Norton, RRP£21.99/£27.95 Saez and Zucman are leading figures in the detailed empirical analysis of inequality. In this important book, they document the perverse characteristics of the US tax system, which is now “a giant flat tax [that becomes] regressive at the top”. According to their figures, the 400 richest families in the US pay a lower average tax rate than any other income group, including the bottom 10 per cent of the income distribution. The US has become a plutocracy. The book shows in detail how this has happened. Narrative Economics: How Stories Go Viral and Drive Major Economic Events, by Robert J Shiller, Princeton University Press, RRP£20/$27.95 Nobel-laureate Shiller is one of the world’s most original economists. In this book, he starts from the obvious fact that the economy is the product “of conscious living people, who view their actions in light of stories with emotions and ideas attached”. Stories allow human beings to make sense of an uncertain world. But they also drive economies into booms and busts. Armed with this understanding, we gain a far richer understanding of how economies behave. 99%: Mass Impoverishment And How We Can End It, by Mark E Thomas, Head of Zeus, RRP£14.99 A call to arms, this book makes three main arguments. First, the middle class is under extreme pressure and may vanish. Second, many of the constraints on purposive action in response, such as presumed fiscal limits or the view that taxes should never be raised, are myths. Finally, the needed reset is possible without revolutionary change. We can ensure a growing economy from which everybody benefits. The time for assessing such arguments has now arrived. They matter.
Stories matter. It’s a truism for journalists, but not so much for economists. Robert Shiller, the Yale professor and Nobel laureate who predicted the housing crisis and also put behavioural economics on the map, aims to change that in a book dedicated to the thriving field of narrative economics. While many economists are still busy creating mathematical formulas to decode and contextualise our supposedly “rational” behaviour, people’s actions are more often based on human interest stories than hard data. “When we are asleep at night,” he points out, “narratives appear to us in the form of dreams. We do not dream of equations or geometric figures without some human element.” The idea that human behaviour can exert its own influence in the market is something that most traders would buy into (investor George Soros turned it into a theory that he called “reflexivity”). But in Narrative Economics, Shiller goes much broader and deeper, looking at how the stories we tell ourselves about the world drive our behaviour — and thus the world itself if enough people buy into them. Economists, he argues, need to study this if they are to have any hope of doing a better job than they have in the past of predicting major events — such as recessions or asset bubbles — and how people react to them. Consider, for example, the fall in stock prices that began after Austria-Hungary declared war on Serbia on July 28, 1914. New York and the major European exchanges reacted by closing their doors. That only increased panic, contributing to activities such as the shipping of large quantities of gold from the US to Europe, which in turn increased the danger on major transatlantic shipping routes. This itself was driven by a narrative that took hold among jittery Europeans around the Panic of 1907, which many held up as proof that America was unstable and they should get their money out as fast as possible. Given all this, why did markets not close after Britain declared war on Germany on September 3, 1939? In part because of a widely shared story that the first world war had ultimately proved to be very profitable for investors who had kept their US assets, and thus were able to make money selling supplies to Europeans during the war. One result of this narrative was that the S&P index gained 9.6 per cent after war was declared. All this seems so fuzzy — how can we sift through any of the millions of narratives floating around at any particular moment, particularly in our world of high-speed data, and find those that have meaning and will go viral? (Like diseases, narratives must spread widely in order to be economically relevant.) It turns out that there is some connective tissue in terms of what spreads. Novelty often catches on — Shiller explains how the “Happy Birthday” song, which used the same tune as an earlier piece of music, was much more successful because it allows us to place our own name in the lyrics. There are also several timeless narratives that seem to come back again and again, mutating for each new era. Fear and hope around technology are both common, as are moral narratives such as the need for thriftiness, which Shiller believes helped prolong the Great Depression, or stories based on strong emotions such as anger against interest groups that are perceived to be selfish or out of touch — like corrupt unions in the past, or rich people today. These stories, says Shiller, shape policy. In 1957, for example, a 3.7 per cent rise in inflation from the year before — significant in today’s terms but nothing like the 23.6 per cent rise in 1920 — created a strong crackdown by central bankers in the US and elsewhere, thanks in part to an LA Times editorial that detailed the misdeeds of selfish union bosses. Allan Sproul, the recently retired president of the Fed at that time, lamented that the “Federal Reserve System finds itself in the position of having to validate, however reluctantly, public folly and private greed by supporting increased costs and prices”. One might write a narrative of the past 10 years involving desperate central bankers trying to paper over the misdeeds of selfish and myopic politicians by keeping rates low and unwittingly brewing up a huge asset bubble and higher inequality. But can we actually quantify the effect of narrative economics? Not easily, says Shiller. He calls for more data — in the form of interviews that question people about the stories they tell each other and themselves, and a database of sermons that capture the most important passion plays of the day. Believing that easy money will soon give way to a market crash is certainly one. If Shiller is right, the more we believe it, the more likely it will be.
Gillian Tett Irrational economics human touch
On June 24 2016, the day after Britain’s Brexit referendum, hedge fund manager Richard Robb went jogging around Hyde Park in London. “Normally I find jogging excruciating and count down the minutes until the torture will end,” he admits in a new book, Willful: How We Choose What We Do. But that day, “I didn’t even notice. My pain was crowded out by the looming horror.” Robb’s fund faced a potential crisis because its trades were vulnerable to the shock waves sent through financial markets by the surprise result. He feared a scenario where “the stain on our reputation would be long-lasting”, he recalls. In the event, his terror was not justified. He averted disaster by drawing on skills honed while working for the Japanese Dai-Ichi Kangyo Bank (DKB) during the 1997-98 Asian crisis and, later, steering his fund through the 2008 Lehman Brothers collapse. He looks back on the incident today with relief at the way his team worked to overcome the predicament. However, the experience also sparked something else. Robb is now on a crusade to correct the economics profession’s obsession with “rational choice” — the idea that humans always make logical decisions and seek to maximise self-interest. He points out that it does not necessarily seem “rational” for a wealthy former banker — as Robb was when he left DKB — to set up a hedge fund that involves risking money and reputation, and being exposed to events such as Brexit. “In reality, starting a business put my nest egg in jeopardy,” he admits. The reason he went ahead was because he was bored by early retirement and sought the exhilaration of work that challenged him. Robb had spent the first part of his career doing a PhD at Chicago University, home to the “Chicago school” of economics, which promoted the idea that free markets and rational actors would ensure the perfect allocation of resources. His subsequent working life, however, showed him a world full of people pursuing jobs and activities that could not easily be explained by this model. He concluded that we need a rethink. Sometimes we make purposeful choices to maximise self-interest; but often we just pursue an activity “for itself”, because it supports our identity, gives psychic satisfaction and so on. “Acknowledging the for-itself gives us licence to embrace specific conduct that we can’t credibly explain to ourselves or others in terms of purposeful choice,” he writes. When I first read the book, I must admit that I was tempted to roll my eyes and say, “Well, duh!” Yes, many economists and central bankers used to be in thrall to the Chicago school. But behavioural economists have long scoffed at its ideas. As Robb notes, Daniel Kahneman, Richard Thaler and Cass Sunstein, to name but a few, have shown that mental biases and short cuts make humans anything but “rational” agents most of the time. There is an academic discipline known as “economic anthropology”, which tries to frame economics within a broader social and cultural context. For example, it looks at economics in terms of the widest possible definition of social and economic “exchanges” and values, rather than just monetary transactions. Sadly, few mainstream economists have much idea that economic anthropology exists, least of all those trained in the Chicago school. That is partly due to the inward-looking nature of sections of the anthropology community, as well as the arrogance of some economists. However, others, such as Robert Shiller, are starting to draw on anthropology — check out his excellent new work Narrative Economics for an example of this. I hope that more will follow. Robb’s snappy little book opens the path to a more comprehensive dialogue. The book is also important in other ways. The fact that a former devotee of Chicagoan economics has explained why he rethought his views symbolises a larger shift in the paradigm. And it is relevant in terms of public policy. These days, we tend to debate employment using narrow economic criteria: hours worked, wages earned, household consumption, labour-market mobility and so on. Fair enough: most of us need a wage to survive (unless we’re wealthy former bankers). However, as Edmund Phelps, the Nobel Prize-winning economist — and someone who partly inspired Robb’s rethink — has long argued, we also need to find a way to create a more human-centric vision of economics. We need, say, to recognise the sense of dignity and community created by jobs that cannot be captured by numbers. This is, of course, fiendishly difficult. Chicago-style economics produces charts, equations and predictions that seem reassuringly precise, so they are easy for investors and policymakers to use. The big drawback of behavioural finance — and economic anthropology — is that it often seems so vague that creating strategy from it can feel like chasing soap in the bath. Robb, to his credit, tries to sketch out a decision tree to help investors, policymakers, business executives and his own economics students to decide when to use a rational model of economics, and when not. It is rudimentary, but provides a platform for an overdue debate; particularly at a time when Brexit and the rise of populism have shown that it is foolish to predict voter passions purely in terms of economic incentives and numbers.
Comments
Post a Comment