Book Fact Friday – GDP

From chapter 5 of The Little Big Number:

Economic policy was not always so heavily influenced by the concept of Gross Domestic Product. Policymaking at the federal level began to be premised on the concept of GDP in earnest following the Great Depression—Franklin Delano Roosevelt exerted his influence to propel these policies forward.

The Little Big Number: How GDP Came to Rule the World and What to Do about It
Dirk Philipsen
Introduction

k10420

 

 

 

 

 

 

 

In one lifetime, GDP, or Gross Domestic Product, has ballooned from a narrow economic tool into a global article of faith. It is our universal yardstick of progress. As The Little Big Number demonstrates, this spells trouble. While economies and cultures measure their performance by it, GDP ignores central facts such as quality, costs, or purpose. It only measures output: more cars, more accidents; more lawyers, more trials; more extraction, more pollution—all count as success. Sustainability and quality of life are overlooked. Losses don’t count. GDP promotes a form of stupid growth and ignores real development.

How and why did we get to this point? Dirk Philipsen uncovers a submerged history dating back to the 1600s, climaxing with the Great Depression and World War II, when the first version of GDP arrived at the forefront of politics. Transcending ideologies and national differences, GDP was subsequently transformed from a narrow metric to the purpose of economic activity. Today, increasing GDP is the highest goal of politics. In accessible and compelling prose, Philipsen shows how it affects all of us.

But the world can no longer afford GDP rule. A finite planet cannot sustain blind and indefinite expansion. If we consider future generations equal to our own, replacing the GDP regime is the ethical imperative of our times. More is not better. As Philipsen demonstrates, the history of GDP reveals unique opportunities to fashion smarter goals and measures. The Little Big Number explores a possible roadmap for a future that advances quality of life rather than indiscriminate growth.

What are Wall Street’s smartest people reading? Lasse Pedersen’s EFFICIENTLY INEFFICIENT

Pedersen jacketLasse Pedersen’s new book, Efficiently Inefficient, a look at the key trading strategies used by hedge funds, just made two lists of top investment books. The Wall Street Journal included it in a list of “the books Wall Street’s smartest people think you should read this summer”, where it was recommended by Torsten Slok, ‎chief international economist at Deutsche Bank. ETF.com also gave the book a shout out, naming it one of the “must read books for serious investors”.

Lasse Pedersen, a finance professor at Copenhagen Business School and New York University’s Stern School of Business, and a principal at AQR Capital Management, is determined to show how markets really work in a world where they are neither perfectly efficient nor completely inefficient. So what exactly does he mean by the contradiction in terms “efficiently inefficient”? From ETF.com:

Imperfectly Efficient

Regarding the book’s title, Pedersen explains: “Markets cannot be perfectly efficient and always reflect all information. If they were perfect, no one would have any incentive to collect information and trade on it, and then how could markets become efficient in the first place? Markets also cannot be so inefficient that making money is very easy because, in that case, hedge funds and other active investors would have an incentive to trade more and more.”

Efficiently Inefficient includes an array of interviews with leading hedge fund managers, including Lee Ainslie, Cliff Asness, Jim Chanos, Ken Griffin, David Harding, John Paulson, Myron Scholes, and George Soros. Free problem sets are available online on Pedersen’s website. The introduction is available for download here.

Lauren Rivera, author of PEDIGREE, on the trouble with “cultural fit” in hiring

Rivera jacketLauren Rivera, associate professor of management and organizations at Northwestern University’s Kellogg School of Management and author of the new book Pedigree: How Elite Students get Elite Jobs, has an important op ed on class bias in the Sunday New York Times. In “Guess Who Doesn’t Fit in at Work” she argues that even in a hiring culture that emphasizes diversity, the idea of “cultural fit” has ‘gone rogue’, and interviewers at prestigious organizations practice a little-recognized form of discrimination in which they are “primarily interested in new hires whose hobbies, hometowns and biographies [match] their own.” From her piece:

ACROSS cultures and industries, managers strongly prize “cultural fit” — the idea that the best employees are like-minded. One recent survey found that more than 80 percent of employers worldwide named cultural fit as a top hiring priority.

When done carefully, selecting new workers this way can make organizations more productive and profitable. But cultural fit has morphed into a far more nebulous and potentially dangerous concept. It has shifted from systematic analysis of who will thrive in a given workplace to snap judgments by managers about who they’d rather hang out with. In the process, fit has become a catchall used to justify hiring people who are similar to decision makers and rejecting people who are not.

Rivera explains that “fit” can be used productively in the hiring process, but that it should emphasize behaviors associated with performance and not personal similarity. She outlines a better approach:

First, communicate a clear and consistent idea of what the organization’s culture is (and is not) to potential employees. Second, make sure the definition of cultural fit is closely aligned with business goals. Ideally, fit should be based on data-driven analysis of what types of values, traits and behaviors actually predict on-the-job success. Third, create formal procedures like checklists for measuring fit, so that assessment is not left up to the eyes (and extracurriculars) of the beholder.

Read the rest of her New York Times piece here, as well as her recent Q&A in Inside Higher Ed.

Chapter 1 is available here.

An interview with Josiah Ober, author of The Rise and Fall of Classical Greece

The period considered classical Greece (roughly the 4th through 5th century BC) had a profound effect on Western civilization, forming the foundations of politics and philosophy, as well as artistic and scientific thought. Why did Greece experience such economic and cultural growth—and why was it limited to this 200-year period? Josiah Ober, Professor of Political Science and Classics at Stanford University and author of The Rise and Fall of Classical Greece, took the time to explain the reasons behind Greece’s flourishing, and what its economic rise and political fall can tell us about our own world.

The Rise and Fall of Classical GreeceWhat was the rise of classical Greece and when and why did it happen?

JO: Basically, sustained economic growth lead to the rise of Ancient Greek civilization.

At the Early Iron Age nadir, in ca. 1000 BCE, the Greek world was sparsely populated and consumption rates hovered near subsistence. Some 650 years later, in the age of Aristotle, the population of the Greek world had increased at least twenty-fold. During that same period, per capita consumption probably doubled.

That rate of growth is far short of modern rates, but it equals the growth rate of the two standout societies of early modern Europe: Holland and England in the 16th to 18th centuries. Historians had long thought that the Greek world was impoverished and its economy overall static – which of course made Greek culture (art, philosophy, drama, and so on) seem that much more “miraculous.” But, thanks to the recent availability and quantification of a huge mass of data, drawn from both documentary and archaeological sources, we can now trace the amazing growth of the Greek economy, both in its extent (how many people, how much urbanization, and so on), and in terms of per capita consumption (how well people lived).

So the rise of the Greek world was predicated on sustained economic growth, but why did the Greek economy grow so robustly for so long?

JO: In the 12th century BCE, the palace-centered civilization of Bronze Age Greece collapsed, utterly destroying political and social hierarchies. Surviving Greeks lived in tiny communities, where no one was rich or very powerful. As Greece slowly recovered, some communities rejected attempts by local elites to install themselves as rulers. Instead, ordinary men established fair rules (fair, that is, for themselves) and governed themselves collectively, as political equals. Women and slaves were, of course, a very different story. But because these emerging citizen-centered states often out-competed elite-dominated rivals, militarily and economically, citizenship proved to be adaptive. Because participatory citizenship was not scalable, Greek states stayed small as they became increasingly democratic. Under conditions of increasingly fair rules, individuals and states rationally invested in human capital, leading to increased specialization and exchange. The spread of fair rules and a shared culture across an expanding Greek world of independent city-states drove down transaction costs. Meanwhile competition encouraged continuous institutional and technological innovation. The result was 700+ years of of world-class efflorescence, marked by exceptional demographic and per capita growth, and by immensely influential ideas, literature, art, and science. But, unlike the more familiar story of ancient empires, no one was in running the show: Greece remained a decentralized ecology of small states.

So what about the fall?

JO: There are two “falls” – one political and one economic. The economic fall is the decline of the Greek economy from its very high level in the age of Aristotle to a “premodern Greek normal” of low population and near-subsistence consumption levels with the disintegration of the Roman empire. That low normal had pertained before the rise of the city-state ecology. After the fall, it persisted until the 20th century. But we also need to explain an earlier political fall. Why, just when the ancient Greek economy was nearing its peak, were Philip II and Alexander (“the Great”) of Macedon able to conquer the Greek world? And then there is another puzzle: Why were so many Greek city-states able to maintain independence and flourishing economies in the face of Macedonian hegemony? The city-states were overtaken by the Macedonians in part because human-capital investments created a class of skilled and mobile experts in state finance and military organization. Hired Greek experts provided Philip and Alexander with the technical skills they needed to build a world-class army. But meanwhile, deep investments by city-states in infrastructure and training made fortified cities expensive to besiege. As a result, after the Macedonian conquest, royal taxes on Greek cities were negotiated rather than simply imposed. That ensured enough independence for the Greek cities to sustain economic growth until the Roman conquest.

What does the economic rise and political fall of classical Greece have to tell us about our own world?

JO: The new data allows us to test the robustness of contemporary theories of political and economic development. In the classical Greek world, political development was a primary driver of economic growth; democracy appears to be a cause rather than simply an effect of prosperity. The steep rise and long duration of the city-state ecology offers a challenge to neo-Hobbesian centralization theories of state formation, which hold that advanced economic and political development requires the consolidation of centralized state power. The comparatively low rate of ancient Greek income inequality, along with the high rate of economic growth, suggests that the negative correlation of sustained growth with extreme inequality, observed in some recent societies, is not a unique product of modernity. Finally, the history of the ancient Greek world can be read as a cautionary tale about the unanticipated consequences of growth and human capital investment: It reveals how innovative institutions and technologies, originally developed in the open-access, fair-rules context of democratic states, can be borrowed by ambitious autocrats and redeployed to further their own, non-democratic purposes.

How did you get interested in the topic of rise and fall – was it just a matter of “Edward Gibbon envy”?

JO: Gibbon is amazing, as a prose stylist and historian. But the origin of my project actually goes back to a quip by a senior colleague at the very beginning of my career: “The puzzle is not why the Greek world fell, it is why it lasted more than 20 minutes.” Twenty-five years ago (and fifteen years after my colleague’s quip), the historical sociologist W.G. Runciman claimed that classical Greece was “doomed to extinction” because the Greek city-states were, “without exception, far too democratic.” True enough: the classical Greek world eventually went extinct. But then, so did all other ancient societies, democratic or otherwise. The Greek city-state culture lasted for the better part of a millennium; much longer than most ancient empires. I’ve long felt that I owed my colleague a solution to his puzzle. This book is an attempt to pay that debt.

Josiah Ober is the Mitsotakis Professor of Political Science and Classics at Stanford University. His books include Democracy and Knowledge, Political Dissent in Democratic Athens, The Athenian Revolution, and Mass and Elite in Democratic Athens (all Princeton). He lives in Palo Alto, California.

 

A Q&A with Cormac Ó Gráda, author of Eating People is Wrong

Cormac Ó Gráda’s new collection of essays on famine—which range in focus from from the economic history to the psychological toll—begins with a taboo topic. Ó Gráda argues that cannibalism, while by no means a universal feature of these calamities, has probably occurred more frequently than previously recognized. Recently he answered some questions on his book, Eating People is Wrong, and Other Essays on Famine, Its Past, and Its Future, its somber title, and his early interest in The Great Irish Famine.

O'Grada jacketWhy did you write this book?

CÓG: When Famine: A Short History (Princeton, 2009) came out, I wanted it to be my last book on the subject. So Eating People is Wrong was not a question of ‘what will I do next?’ I just realized a few years later that I had still had ideas to contribute on topics that would make for a new, different kind of book on famine. These topics ranged from famine cannibalism to the Great Leap Forward, and from market failure to famine in the 21st century; the challenge was to merge the different perspectives that they offered into what would become this new book.  The idyllic résidence I spent in the south of France courtesy of the Fondation des Treilles in the autumn of 2013 was when the different parts came together. By the end of that stay, I had a book draft ready.

What inspired you to get into your field?

CÓG: It is so long ago that I am bound to invent the answer… But I have always had an amateur interest in history—as lots of Irish people tend to have—whereas my academic training was in economics. Economic history seemed a good way of marrying the two, and that has been my chosen field since my time as a graduate student in the 1970s. I began as a kind of jack-of-all-trades economic historian of Ireland, focusing on topics as different as inheritance patterns and famine, or migration and banking. This work culminated in a big economic history of Ireland in 1994. My interest in the Great Irish Famine of the 1840s goes back to my teens, but that interest was sharpened after getting to know Joel Mokyr (also a PUP author) in the late 1970s. Economics taught me to think of the Irish in comparative terms, and that led eventually to the study of famines elsewhere. My books have all been solo efforts, but I have very lucky and privileged to write papers with some great co-authors, and some of these papers influenced the books.

How did you come up with the title or jacket?

CÓG: The title is an ironic nod to Malcolm Bradbury’s eponymous novel (which most people seem ignorant of). A friend suggested it to me over a pint in a Dublin bar. One of the themes of the chapter on famine cannibalism, to which the title refers, is the need to realize that famines not only do terrible things to people, but that people do terrible things to one other in times of famine. Peter Dougherty and his team at PUP came up with jacket. The image is graphic and somber without being sensationalist, which is what I had hoped for.

What is your next project?

CÓG: There is no single all-consuming project. A lot of my research in recent years has been collaborative work on British economic history with UCD colleague Morgan Kelly. So far the results of that work have appeared—when we are lucky—in academic journals rather than in books. We have plans to continue on this basis, but we are also involved in an interesting piece of research with Joel Mokyr on the origins of the Industrial Revolution, and that may eventually yield a monograph by the three of us. I also want to revise several unpublished papers in Irish economic history and to get them published singly or, perhaps, as a monograph. Finally, Guido Alfani of Bocconi University in Milan and I are editing a book on the history of famine in Europe. This is coming along well. The end product will consist of nine specialist country chapters, a cross-country analysis of the famines of World War II, and an overview by Alfani and me.

What are you currently reading?

CÓG: I am at page 630 (so another hundred or so pages to go) of Stephen Kotkin’s Stalin, vol. 1 (Penguin, 2014), which brings the story of Iosif Vissarionovich only as far as 1928. I have been interested in Soviet economic history since the late Alexander Erlich introduced me to the topic in Columbia in the 1970s, and this is what attracted me to Kotkin’s riveting tome—which, however, turns out to rather uninterested in the economic issues! I am also reading Maureen Murphy’s Compassionate Stranger: Asenath Nicholson and the Great Irish Famine (Syracuse, 2015), an account of an eccentric but appealing American evangelist who toured Ireland, mostly on foot, in the years leading up to and during the Great Hunger. I was familiar with Nicholson’s own published accounts of her travels, but knew very little about her otherwise, so Murphy’s book is a revelation.   My current bedtime reading is Henning Mankell’s The Man from Beijing (2010).

Cormac Ó Gráda is professor emeritus of economics at University College Dublin. His books include Famine: A Short History and Black ’47 and Beyond: The Great Irish Famine in History, Economy, and Memory (both Princeton).

Lasse Pedersen, author of Efficiently Inefficient, interviewed on Money Life

Lasse Pederson, author of Efficiently Inefficient: How Smart Money Invests and Market Prices are Determinedwas interviewed by Chuck Jaffe, a columnist for MarketWatch and host of the Money Life radio show. Listen to the interview here.

pedersen

Efficiently Inefficient describes the key trading strategies used by hedge funds and demystifies the secret world of active investing. Jeremy Stein from Harvard University writes, “Lasse Pedersen is a gifted financial market theorist who understands that theory is most satisfying when it is combined with a deep practical understanding of institutional detail and market frictions. This terrific book showcases his strengths in all of these dimensions.”

George Akerlof and Robert Shiller pose with their new book jacket

Nobel Prize winners Robert Shiller and George Akerlof got the chance to pose with the phenomenal cover for their forthcoming book, Phishing for Phools, the lead title on our Fall 2015 list (stay tuned for the posting of our new seasonal catalog!)  The drawing on the cover is an original by New Yorker cartoonist Edward Koren, and the jacket design is by our own Jason Alejandro. You can catch George talking about the book, which is a fascinating look at the central role of manipulation in economics, at this lecture at Duke University.

Akerloff and Shiller

 

Michael Chwe explains common knowledge, and why it matters to Mark Zuckerberg

Michael Chwe for UCOMM - 130321Michael Chwe, whose book, Rational Ritual: Culture, Coordination, and Common Knowledge has, in his words, “made its way out of the backwaters of course syllabi” to catch the attention of Mark Zuckerberg, had a terrific piece on the Monkey Cage blog of the Washington Post explaining exactly what common knowledge is, and why it’s so important. According to Chwe, common knowledge is generated by large scale social media platforms like Facebook, and this matters because of the many ways it can be leveraged, among them, stopping violence against women, and helping to foster collective political action.

From his piece on the Washington Post:

When Facebook’s Mark Zuckerberg chose my book “Rational Ritual” last week for his “A Year of Books” book club, I was surprised. “Rational Ritual” came out in 2001, and has somehow slowly made its way out of the backwaters of course syllabi into the elevated spheres of technology companies. This is gratifying to me, because even though it is a scholarly book published by a university press, “Rational Ritual” is essentially a popularization.

“Rational Ritual” tries to popularize the concept of “common knowledge” as defined by the philosopher David Lewis and the sociologist Morris Friedell in 1969. A fact or event is common knowledge among a group of people if everyone knows it, everyone knows that everyone knows it, everyone knows that everyone knows that everyone knows it, and so on.

When I was a graduate student in economics in the late 1980s, most people considered common knowledge as an idea of only theoretical interest. People who thought about collective action (and its flip side, political repression) were mostly interested in the problem of free riding, rather than how people communicate. But social change isn’t just about tackling incentives to free ride – it’s also a problem of coordination.

Read the rest here.

Recently, Michael Chwe, a master of interdisciplinary applications for otherwise “rarified mathematical theories” has been particularly active in exploring how game theory can help curb sexual violence. Check out his piece on the topic on the PBS Newshour blog here. His recent Q&A with Facebook Books is up here.

Math Drives Careers: Author Ignacio Palacios-Huerta

Logical thinking, analytical skills, and the ability to recognize patterns are crucial in an array of fields that overlap with mathematics, including economics. But what does math (or economics, for that matter) have to do with the world’s most popular sport? Economist Ignacio Palacios-Huerta’s recent book, Beautiful Game Theory: How Soccer Can Help Economics  made a splash during the last World Cup, showing how universal economic principles can be understood through soccer. Read on for his thoughts on why the language of modern economics, including behavioral economics, is mathematics.

The Role of Mathematics in my Life as an Economist

To describe the role of mathematics in my life as an economist, I first need to explain what, to me, Economics is all about. So let me take you to one of my favorite books, A Treatise of Human Nature, written almost 300 years ago by David Hume.

Beautiful Game TheoryIn the introduction Hume writes, “‘Tis evident that all the sciences have a relation, more or less, to human nature … Even Mathematics, Natural Philosophy, and Natural Religion, are in some measure dependent on the science of Man, [which is] the only solid foundation for the other sciences”. By the science of man Hume means the understanding of all facets of human nature, including preferences, senses, passions, imagination, morality, justice, and society. This science applies wherever men are making decisions, be it running public institutions or countries, as employees in firms, or as individuals investing in education, taking risks in financial markets, or making family decisions. This science of man is thus what one may initially be tempted to call Economics for, as George Bernard Shaw puts it in my favorite definition, “Economy is the art of making the most of life”.

But of course this definition is incomplete because other social sciences (e.g., sociology, history, psychology, political science) are also concerned with human behavior. So what makes Economics “different”? Here is the difference: the difference is not the subject matter but the approach. The approach is totally different, and a very mathematical one. As such, mathematics plays a critical role in the life of any economist.

Let me elaborate. Continuing with Hume, it turns out that he also anticipated our methodological approach in modern Economics: observation and logical arguments. Which can be translated as: data and data analysis (what we call econometrics), and mathematics, for mathematics is, after all, the language of logic. So in Economics, as in physics, we write down our ideas and theories in mathematical terms to make logical arguments, and then we use more math (statistical, econometrics, etc) to check whether the data appear to be consistent with the theoretical arguments. If they are, the evidence can be said to support the theory; if they aren’t, the theory needs to be refined or discarded. Yes, lots of math and related techniques provide what is our distinct “economics approach to human behavior.” It is not the subject matter but the approach that is different, and it heavily relies on mathematics.

To economists and other social scientists, mathematics has many methodological virtues: it can lend precision to theories, can uncover inconsistencies, can generate hypothesis, can enable concision and promote intelligibility, and can sort out complex interactions, while statistical and econometric analysis can organize and carefully interpret voluminous data.

None of this is obvious when you begin studying Economics (“Why should I take all this math, statistics and econometrics? Why all this pain?”). But I think most of us soon learn to appreciate that the language of modern economics is mathematics, and that it is rightly so. And this is not math for the sake of math (as in pure mathematics), but math with a purpose: modeling human behavior.

Let me conclude by saying that since the economic approach is applicable to all human behavior, any type of data about human activity can be useful to evaluate economic theories. This includes, why not, sports data, which in many ways can be just perfect for testing economic theories: the data are abundant, the goals of the participants are clear, the outcomes are easy to observe, the stakes are high, and the subjects are professionals with experience. If a theory is “correct”, sport is a good setting to check it.

So just as data involving falling stones and apples were useful to Galileo Galilei and  Isaac Newton to test for the first time theories that were important in physics, data from sports can be useful in Economics to do exactly the same. As such in some of my contributions to Economics I have used math to develop theoretical models, and further mathematical tools applied to this type of data to test them.

Spotlight on…Public Intellectuals

Worldly Philosopher, by Jeremy Adelman

Worldly Philosopher
by Jeremy Adelman

The title of Jeremy Adelman’s biography of Albert O. Hirschman, Worldly Philosopher, concisely sums up the character of many public intellectuals of the twentieth century. In battles that overflowed the geopolitical arena to encompass culture, the arts, and political theory, intellectuals frequently found themselves where history was being made.

Born in Berlin in 1915, Hirschman left Germany in 1933 when the Nazis announced the expulsion of Jews from the universities. He fought in the Spanish Civil War, and later guided escapees across the Pyrenean mountain passes between Vichy France and Spain. He worked in Algiers as a translator for the OSS (precursor to the CIA), in Europe for the Federal Reserve Board on the Marshall Plan, and in Colombia for the World Bank. His experiences in Europe and Colombia influenced his thinking on economics and development: Hirschman realized that the grand plans and idealized markets of his fellow economists were unworkable in the real world. Instead he proposed a strategy of improvisation and experimentation, responsive to local conditions and opportunities. Later works, including Exit, Voice and Loyalty and The Passions and the Interests, continued against the grain of conventional economic thinking and established Hirschman as one of the foremost intellectuals of his time.

Isaiah Berlin too was an emigrant: born in Riga in 1908 (now in Latvia, then part of Russia), he lived through the 1917 revolutions in St. Petersburg before his family moved to England in 1921. He found a home at Oxford University and, despite his Russian Jewish, roots rapidly found himself at the heart of the British establishment, working for the British Diplomatic service in the embassies at Washington and Moscow during the Second World War. His position, and his legendary brilliance as a conversationalist, gave him access to a veritable Who’s Who of politicians, intellectuals, writers and academics. He played a part (recently dissected by Frances Stonor Saunders) in the smuggling of the manuscript of Dr. Zhivago out of Russia. Personal Impressions, Berlin’s collection of biographical essays, draws on first-hand acquaintance with Boris Pasternak, alongside Winston Churchill, Albert Einstein, John Maynard Keynes, Virginia Woolf and many others.

Michael Lewis reads “Fortune Tellers” by Walter Friedman

Michael Lewis, author of The Blind Side & Flash Boys, was recently interviewed by The Boston Globe. To prepare for an upcoming TV pilot, Lewis read Fortune Tellers by Walter Friedman. Lewis said, “I read a book in a day on Saturday, which I haven’t done in ages – ‘Fortune Tellers’ by Walter Friedman…It’s a history of early 20th-century economic and stock market forecasting.” Read the rest of Michael Lewis’ interview, here. Be sure to check out the introduction to Fortune Tellers for free, here.


 

bookjacket

Fortune Tellers:
The Story of America’s First Economic Forecasters
Walter A. Friedman

Interview with Adam Levine, author of American Insecurity on MSNBC.com

Adam Levine talked with MSNBC co-host Krystall Ball on her popular vodcast Krystal Clear about his new book, American Insecurity: Why Our Economic Fears Lead to Political Inaction. Check out the first chapter of American Insecurity for free, here.


 

bookjacket American Insecurity:
Why Our Economic Fears Lead to Political Inaction

Adam Seth Levine