What is Your Parenting Style?

ParentingParents everywhere want their children to be happy and do well. Yet how parents seek to achieve this ambition varies enormously. For instance, American and Chinese parents are increasingly authoritative and authoritarian, whereas Scandinavian parents tend to be more permissive. Why? Love, Money, and Parenting investigates how economic forces and growing inequality shape how parents raise their children. From medieval times to the present, and from the United States, the United Kingdom, Germany, Italy, Spain, and Sweden to China and Japan, Matthias Doepke and Fabrizio Zilibotti look at how economic incentives and constraints—such as money, knowledge, and time—influence parenting practices and what is considered good parenting in different countries.

How does your parenting compare? Are you more authoritarian, authoritative, or permissive? Find out by taking this quiz! 

Your 17-year-old daughter would like to go on a week-long camping trip with her 19-year-old boyfriend of two months. What do you do?

Your son’s primary school teacher recommends that parents enroll their children in violin classes offered by the school, arguing that this will improve focus and concentration. Your child shows no enthusiasm. He would rather join a soccer team. What do you do?

Your 15-year-old son has a curfew of 11pm, but arrives home at 1am. How do you react?

You have some guests at your place. Your 6-year-old daughter refuses to sit quietly at the table and is generally being disruptive. How do you handle it?

Your 5-year-old son has pushed his 3-year-old friend in the playground. The smaller child has fallen and hit his head. Fortunately, it is nothing serious. However, the parents of the smaller child are upset. How do you handle the situation?

You are on a picnic with your son and some family friends. Your son gets bored and starts nagging. He wants to go home and play video games. What do you do?

You discover condoms in your 15-year-old daughter’s bag. How do you react?

Your 10-year-old boy is getting below average grades in school. According to his teacher, he is smart but does not work hard enough. What do you do?

Your child spends long hours watching TV and playing video games.

Your daughter is ambitious and achievement-oriented. Her teacher, however, thinks that she is trying too hard. Rather than encouraging and supporting her drive for excellence, he gives her lessons about taking it easy and being balanced. Your daughter is frustrated. How do you react?

Your child is a good student. However, he is dependent on his parents. He is leaving for college in another city and you are worried that he may not easily cope with the new situation. How do you react?

Your child is an enthusiastic basketball player, but she is neglecting the academic side of school and her grades are mediocre.

Your preschooler has poor eating habits. He only seems to want junk food and eschews anything healthy.

Your teenager has shown a great aptitude for mathematics, but she is not passionate about STEM. Instead, she wants to enroll in a specialized school for cartoon and graphic arts.

Matthias Doepke is professor of economics at Northwestern University. He lives in Evanston, Illinois. Fabrizio Zilibotti is the Tuntex Professor of International and Development Economics at Yale University. He lives in New Haven, Connecticut.

An Interview with the Authors of Dark Matter Credit

Imagine a world without banks. Because there are no credit cards, you have to pay cash for everything, and there’s no way to borrow either. How do you buy car or a house, or start a new business? You hide cash under your mattress. Such a world would be desperately poor, or so research in economics teaches us. Yet someone Europe managed to become rich long before banks spread across the continent. How was that possible?

Dark Matter Credit by Philip T. Hoffman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal solves the mystery. Using data on 250,000 loans from France, the authors found that credit abounded in Europe well before banks opened their doors, thanks to a huge shadow credit system whose importance no one has ever measured before. The system let nearly a third of French families borrow way back in 1740, and by 1840 it funded as much mortgage debt as the 1950s US banking system. And when banks finally appeared, it out-competed them, helping people to borrow, save, and even make payments. It thrived right up to World War I, not just in France but Britain, Germany, and the United States, only to be killed off by government intervention after 1918.

According to the authors, their discovery overturns standard arguments about banks and economic growth and reveals a shadow system made up of thousands of loans between individuals, as in modern peer to peer lending.  Dark Matter Credit sheds light on the problems peer to peer lending will face as it spreads and suggests how those problems can be solved.

What led you to uncover a huge and unknown shadow banking system?

We knew that people were borrowing and lending long before banks existed, because thousands of loan contracts survived in the French archives. We wanted to know how that was possible without banks. How did the lenders know that the borrowers would repay? After all, there was no such thing as a credit score or even an easy way to tell if property had been mortgaged, and potential lenders had for centuries been worried about the risk of default. Could lenders only make loans to family members or close friends? Was that how credit markets worked? If so, lending would have been severely limited.  Early investigations suggested, though, that lending was not so small, and not as local as previous scholars had thought. We suspected that informal intermediaries were matching borrowers and lenders and increasing the level of confidence in the market. To get at what had actually happened, we set out to measure all this lending across France and to analyze what made it possible.

How much lending was there?

Well in 1840, outstanding mortgage debt came to 27 percent of GDP. That was almost as much as in the United States during the housing boom in the 1950s, when there were numerous banks, savings and loans, and government backed mortgages, but all the lending in France was done without any bank involvement, and without any of the government support that stimulated housing construction in the United States. Even way back in 1740, the credit system in France allowed a third of all families to borrow and lend. And the system was incredibly persistent: it was only killed off by government intervention after 1918, but even as late as 1931, it was still providing 90 percent of all borrowers with their loans

How did it work?

The loans, it turns out, were arranged by notaries, who had been drawing up legal documents and preserving official copies of records since the Middle Ages. Over time, they began serving as real estate brokers and providing legal and financial advice, and since they knew who had money to lend and who was creditworthy, they were soon matching lenders up with borrowers who had good collateral and were likely repay. And if they couldn’t find a match among their own clients, they referred borrowers and lenders to one another. One notary might send a good borrower off to another notary, or he might receive a lender from yet another notary. That allowed loans to be made when the borrowers and lenders didn’t know one another. The loans didn’t pass through banks at all—they were all loans between individuals, as in modern, web based peer to peer lending, but all without the web obviously.

Did it do anything else?

The notaries also helped people make payments and manage their savings. And their loan business continued to thrive after banks opened their doors. There were in fact more banks in France than anyone imagined (we know—we counted them), but it took them nearly a century to make any serious inroads into mortgage lending. We also discovered that notaries and bankers actually cooperated with one another to devise a new way for peasants to pay their bills at a time when doing so was difficult outside of cities. This sort of innovation is surprising because it runs counter to an influential argument that financial markets should have been stifled by the legal system prevailing in France and many other parts of the world—so called civil law, which was supposedly less favorable to financial development than British and American common law. That argument is also contradicted by the fact that the notaries themselves were thriving loan brokers, because the notaries kept the written records that were at the heart of the civil law.

How did you measure all the lending?

We visited a lot of archives! We had to because we started in a period before there were any government statistics about lending. So we assembled loan information from original contracts and fiscal sources. Of course, reading a quarter of a million loan contracts would have been impossible, but we also knew that summaries of the loans survived in French tax archives from the early eighteenth century up through the 1900s. The tax records plus some ingenious sampling allowed us to gather the data on our quarter of a million loans and to estimate what was happening in the credit market for France as whole across two centuries. With the sample, we could analyze the impact of urbanization, economic growth, financial crises, and enormous institutional changes during the French Revolution and the nineteenth century.   We also investigated the spread of banking in France and the interaction between bankers and notaries, and we compared French banking with banking in Britain. The comparison suggested that Britain probably lacked as strong a peer to peer lending system as in France, although it did have one. Evidence from other countries implies that similar systems operated in Germany, and the United States in 1900. They too had big peer to peer lending systems that have yet to be explored. And one has recently cropped up in China, but it has caused massive losses and triggered protests, because of problems that the French system avoided.

Philip T. Hoffman is the Rea A. and Lela G. Axline Professor of Business Economics and History at the California Institute of Technology. Co-author Gilles Postel-Vinay is professor emeritus at the Paris School of Economics, and co-author Jean-Laurent Rosenthal is the Rea A. and Lela G. Axline Professor of Business Economics and the Ronald and Maxine Linde Leadership Chair in the Division of the Humanities and Social Sciences at the California Institute of Technology.

Browse our 2019 Economics Catalog

Our new Economics catalog includes a candid assessment of why the job market is not as healthy we think, an engaging and enlightening account of why American health care is so expensive—and why it doesn’t have to be, and an international and historical look at how parenting choices change in the face of economic inequality.

If you’re attending the Allied Social Science Associations meeting in Atlanta this weekend, you can stop by Booth 405-407 to check out our economics titles! We’ll be celebrating the new titles on January 5 at a reception at the booth from 10 to 11 a.m.

 

Uwe Reinhardt was a towering figure and moral conscience of health-care policy in the United States and beyond. In Priced Out, Reinhardt offers an engaging and enlightening account of today’s U.S. health-care system, explaining why it costs so much more and delivers so much less than the systems of every other advanced country, why the situation is morally indefensible, and how we might improve it.

 

Blanchflower_Not Working book cover

Don’t trust low unemployment numbers as proof that the labor market is doing fine—it isn’t. In Not Working, David Blanchflower shows how many workers are underemployed or have simply given up trying to find a well-paying job, how wage growth has not returned to prerecession levels despite rosy employment indicators, and how general prosperity has not returned since the crash of 2008. Blanchflower draws on his acclaimed work in the economics of labor and well-being to explain why today’s postrecession economy is vastly different from what came before.

 

Doepke, Zilibotti, Love, Money, and Parenting book cover

Parents everywhere want their children to be happy and do well. Yet how parents seek to achieve this ambition varies enormously. For instance, American and Chinese parents are increasingly authoritative and authoritarian, whereas Scandinavian parents tend to be more permissive. Why? Love, Money, and Parenting investigates how economic forces and growing inequality influence parenting practices and what is considered good parenting in different countries.

Dave Colander: Where Economics Went Wrong

Economics

Milton Friedman once predicted that advances in scientific economics would resolve debates about whether raising the minimum wage is good policy. Decades later, Friedman’s prediction has not come true. In Where Economics Went Wrong, David Colander and Craig Freedman argue that it never will. Why? Because economic policy, when done correctly, is an art and a craft. It is not, and cannot be, a science. The authors explain why classical liberal economists understood this essential difference, why modern economists abandoned it, and why now is the time for the profession to return to its classical liberal roots. Contending that the division between science and prescription needs to be restored, Where Economics Went Wrong makes the case for a more nuanced and self-aware policy analysis by economists.

Where Economics Went Wrong is a somewhat audacious title. Can you briefly tell us what’s wrong with economics?

Why have a firewall? The firewall discourages applied policy economists from trying to be too scientific, and economic scientists from worrying too much about policy implications of their work. The firewall is necessitated by the values inherently applied policy analysis. Scientific methodology isn’t designed to resolve differences in values. If a theorist is thinking about policy, the theory won’t be as creative as it can be. And if applied policy economics is too related to current theory, it won’t be as creative as it can be. Applied policy work requires that scientific methodology be integrated with more open and discursive engineering and philosophical methodologies that are designed to narrow differences in values and sensibilities and arrive at solutions to policy problems.

Our central argument is that scientific work and applied policy work are best done when there is a firewall between science and policy. Classical liberal economists had such a firewall, and we are calling for a return to Classical liberal methodology.

There are a lot of books out there criticizing economics; how does your critique differ?

The biggest difference is that we aren’t criticizing all of economics, but only one aspect of it—how economics relates theory to policy. We see ourselves as friendly critics, critiquing from the inside the economics profession, rather than from outside. In our view most of the outside critiques of economics miss their mark—they don’t convey the way top economists see themselves doing economics, which leads top economists to discount the critiques. Our critique is focused narrowly on economists’ blending of economic science and economic policy methodology.

 How does the subtitle of the book, Chicago’s Abandonment of Classical Liberalism, fit into your story?

Chicago is a useful case study for us because it was the last bastion of Classical liberalism in U.S. economics. It was Classical liberalism’s Alamo. Classical liberalism included both a methodology and a set of policy recommendations. The methodology involved keeping a firewall between economics science and policy for the protection of both science and policy. Classical liberals argued that if scientific researchers had policy views, those policy views would influence their science and their science would be tainted. If economists used scientific justifications for policy, which didn’t make clear that policy had to have a value component, policy would be tainted. It was a broad tent, not a narrow tent, methodology, and it reached its high point with the work of John Stuart Mill.

In the 1930s that changed; Classical liberalism was abandoned and was replaced with a new semi-scientific Pigovian welfare economics that blended science and policy into one field. Solutions to policy problems were to be found in better science, not in reasoned discourse.

The applied policy revolution started outside Chicago—at schools such as MIT and Harvard,and was quite pro-government interventionist. It seemed as if economic science was directing government to intervene in the economy. Chicago economists, led by Frank Knight, objected to both the change in methodology and the interventionist nature of the policy recommendations.

With the advent of the Chicago school of economics, the intellectual leadership of Chicago economics moved from Knight to Milton Friedman and George Stigler. They gave up Knight’s methodological fight, and concentrated on objecting to the interventionist nature of the new policy approach. They developed a pro-market scientific economic theory based on the Coase Theorem that led to the policy results they wanted. They presented it as a scientific alternative to the newly developed government interventionist scientific economics theory. In doing so they abandoned Classical liberal methodology, which held that science did not lead to policy recommendations. So the Chicago case study nicely highlights where economics went wrong.

What’s your solution to what’s wrong with economics?

Our solution is to bring back the firewall between science and policy. Using the Classical liberal approach, economic science includes only those aspects of economic reasoning and thinking that all economists agree can be scientifically determined. By design, there should be almost no debate about scientific economic theory. If there is serious debate about the theory, then the theory hasn’t reached the level of scientific theory; it is simply an hypothesis that needs further empirical study. Policy analysis uses economic science, but it also uses any other insights and analysis that the policy economist finds useful to arrive at policy conclusions.

The approach we are advocating for applied policy has much in common with engineering methodology. It is much looser and more open than scientific methodology. Engineering methodology is designed to solve problems, not to find truth. For an applied policy economist a scientific theory is simply a useful heuristics, to be used when useful. Engineering methodology specifically allows for the integration of values and does not present itself as infallible. It invites challenges and discursive exploration. Using an engineering methodology will make values in economics more transparent, and more subject to philosophical debate that can clear up some of the value and sensibility differences.

Can you be more explicit about how an engineering methodology differs from a scientific methodology?

Adopting an engineering methodology involves a change in how economists think about theory and policy. For an applied policy economist, theory becomes simply a useful heuristic.Debates about science are reduced enormously because the domain of economic science is reduced. In policy analysis a much broader pluralistic methodology is used. Scientific methodology is designed to discover truth, which means it must be very precise. Engineering methodology is designed to solve problems in the least cost fashion. It is far less precise because precision is costly.

How do you see such a change coming about?

Slowly, but surely. We see it more as an evolutionary change than revolutionary change. The change is already occurring. Many top economists are already following the Classical liberal methodology we advocate—they just don’t call it that. So one of the goals of the book is   to highlight their work and encourage young economists to use it as a role model. In the last chapter of the book we consider the work of six top economists who do quite different types of economics—they include theorists,empirical economists, and applied policy economists—who are all currently following what we call a classical liberal methodology. We show how that methodology influences the work they do and the interpretation they give to their work.

Our advice to other economists is to follow their lead. That means that:

  • in policy work, economists should be far less worried about carefully following scientific methodological guidelines; they should replace those scientific guidelines with educated common sense engineering guidelines designed to answer the type policy questions they are dealing with.
  • in theoretical work economists should stop worrying about relating theory to policy and let their imagination roam without concern about policy. They should go where few economists have gone before.
  • in blended theoretical and empirical work, economists should be more creative and less concerned about dotting i’s and crossing t’s. Leave that for the theoretical clean-up crew.
  • in econometric work, economists should use all the evidence that sheds light on the issue, not just the limited evidence that meets the profession’s current version of scientific rigor.

Our advice is for economists to free themselves from historically determined methodological scientific conventions and replace those conventions with pragmatic state-of-the-art conventions that take advantage of technological computational and analytic advances.

David Colander is Distinguished College Professor at Middlebury College. His many books include The Making of an Economist, Redux and Complexity and the Art of Public Policy (both Princeton). Craig Freedman is the author of Chicago Fundamentalism and In Search of the Two-Handed Economist.

Hassan Malik on Bankers and Bolsheviks

In a year that has seen emerging markets, including Argentina and Turkey, experience major market crashes, Hassan Malik’s Bankers and Bolsheviks is a timely reminder of the long history of emerging market booms and busts. Bankers and Bolsheviks charts the story of the foreign investment surge that made Russia the largest net international borrower in the global bond market, and the collapse which culminated in the largest default in history in the aftermath of the Bolshevik Revolution. Based on research in government and banking archives in four countries and three languages, the story is truly global. It focuses on the leading gatekeepers of international finance in Europe and the United States, showing their thinking about the most significant emerging market of the age through some of the most important events in world history.

Many scholars, writers and filmmakers have engaged with the period you chose to write about. What in particular attracted you to it?

I was always struck by how frequently financial history surveys focus on a few set stories and episodes – the Dutch Tulipmania of the seventeenth century, the hyperinflation in Weimar Germany, or the 1929 stock market crash – but how rarely they mention Russia, especially given the scale of the Russian borrowing binge in the late nineteenth and early twentieth centuries. As a banker living and working in Moscow during mid 2000s, I was constantly walking by pre-revolutionary buildings that had once housed banks. These vestiges of a previous Russian boom piqued my interest in the role of finance during the revolutionary period and inspired me to approach the subject through the archives and writings of key individual players in this drama. The Russian case was particularly interesting given that all the major players in global finance were able to participate in Russian markets. Unlike other emerging markets that were dominated by a single country or bank, the Russian story featured a diverse group of actors, and so provided an ideal vantage point from which to write about global finance during the first modern age of globalization.

What are the parallels with today’s standoff between Ukraine and Russia over sovereign debt?

Central to the book is the notion of “odious debt” – the idea that a population cannot be held liable for the debts contracted on its behalf but without its consent by an illegitimate regime. The Bolshevik default of 1918 was remarkable for reasons other than sheer magnitude. Unlike Argentina in 2001 or Greece in 2012, the Bolsheviks not only defaulted but repudiated the debts contracted by pre-revolutionary governments. It is notable that the Bolsheviks were not outliers in this respect – moderate liberals in Russia also objected to debts the Tsarist government in particular raised in international bond markets.

Fully 100 years on, the Ukrainian government is fighting Russian claims on a similar basis with respect to a bilateral loan structured as a $3bn Eurobond contracted by the government of Viktor Yanukovych in December 2013, shortly before it was overthrown in the 2014 uprising. The Ukrainian government ultimately defaulted on the loan in 2015. Like the Bolsheviks in 1918, the current Ukrainian government claims that Yanukovych was a dictator ruling without the consent of his people, and that therefore, they should not be held accountable for debts contracted by his government. Like the Bolsheviks and liberal opponents to the Tsarist regime in the early twentieth century, the present Ukrainian government is also claiming that the creditor in question actively sought to undermine and control the debtor country.

What lessons does the book hold for investors in emerging market bonds today?

Another of the book’s central messages is that investment in emerging markets does not happen in a vacuum. Politics matter, on several levels. Most obviously, managing and hedging against geopolitical risk remains very important. Global politics also influenced thinking about Russia, even amongst ostensibly clear-eyed investors. Fears of an ascendant Germany during the time period discussed in the book are mirrored in present-day apprehension about the rise of China and relative decline of “the West.” More specifically, such fears can generate biases and influence investment decisions. The strategic decisions of the first National City Bank of New York – one of the largest in the world at the time, and a forerunner to Citigroup – were heavily influenced, for example, by the wartime context, and led to a remarkable expansion of the bank’s operations in Russia on the eve of the Bolshevik revolution.

Politics also operate on a subtler level. The case of Russia, for example, demonstrates how the act of investing itself became a political act–when investors enter an emerging market, they often are aligning themselves with a particular set of political forces. Bankers in Russia at the time failed to appreciate the degree to which they were becoming entwined in domestic politics – and with the Tsarist regime in particular. Today, a similar theme is evident along the New Silk Road that China is developing across Eurasia, Africa, and the Indian Ocean as part of President Xi Jingping’s Belt and Road Initiative.

What are the implications for China’s Belt and Road Initiative?

The investment wave Russia witnessed during the first modern age of globalization was inextricably intertwined with contemporary geopolitics. While notionally private French, British, and American banks were key gatekeepers channeling capital into Russia, they did so in a particular geopolitical context. The French and Russian authorities in particular cooperated to a significant degree in channeling French savings to Russian markets. The French, however, frequently failed to persuade Russia to direct industrial orders to French firms, which often lost out to their German rivals.

In this respect, China’s Belt and Road Initiative is markedly different from the Franco-Russian financial ties of the Belle Époque. Under the BRI, China extends loans largely to developing countries for infrastructure projects built primarily by Chinese workers employed by Chinese engineering firms, using mainly Chinese equipment and materials. At a time when Chinese economic growth is slowing and there are signs of excess capacity in areas such as the construction industry, the BRI holds significant promise for China, not least since it diversifies the country’s trade routes away from contested territory such as the South China Sea. The benefit to countries receiving BRI funds is less clear. While there is little doubt that infrastructure is being built, the utility of some projects is arguable; and crucially, there is little transparency with regard to the commercial terms of the deals, to say nothing of contracting processes.

Several cases of questionable China-related deals are already evident. Before the formal launch of the BRI in 2013, Sri Lanka infamously signed a deal for a Chinese port of dubious feasibility and under terms that saw Sri Lanka’s debt balloon. When a new government faced difficulties in making payments, the Chinese ultimately took control of the strategic asset via a 99-year lease. More recently, erstwhile Malaysian premier Najib Razak signed major Chinese investment deals under the BRI. His successor has attacked the deals as shady and wasteful, and has already announced their cancellation in the amount of at least $22bn.

As the Malaysian case shows, the Chinese government – like foreign investors in Tsarist Russia – is willing to sign deals with leaders of contested legitimacy. The latter, in turn, are incentivized to seek BRI funding given the relatively higher degree of scrutiny and conditionality imposed by more traditional lenders such as the World Bank or individual developed countries. As both the Malaysian and Russian cases show, however, such an approach carries the risk that new regimes – whether they arrive through revolution or the ballot box – can question, push to renegotiate, or outright repudiate debts contracted by their predecessors.

Have emerging markets evolved, or have they repeated cycles of boom and bust that are fundamentally the same, with only superficial changes in context? Are the mistakes of the past vis-à-vis emerging markets destined to be repeated?

It would be simplistic to say that history repeats itself in emerging markets, but at the same time, financial history can be useful in thinking about historical analogs to current market conditions and potential future scenarios. Of course, government and businesses in emerging markets have evolved both over the centuries, as well as in the last several decades that witnessed the growth of “emerging markets” as a specific institutional asset class. For instance, macroeconomic management has shifted dramatically over the last 20 years in markets from Argentina to Russia, not least through the abandonment of fixed exchange rate regimes that contributed to past crises. At the same time, macroeconomic prescriptions directed at emerging markets from institutions such as the IMF, academia, and the investment community have themselves changed as investors and economists learn and re-learn lessons from the major EM crises of recent years.

Emerging markets have changed in other respects, too. Tsarist Russia attracted investors in part due to its relatively large population and resource base. Today, Russia’s demographics are seen as a handicap by investors, as is the economy’s dependence on commodity exports. Of course, even high-growth Asian economies have become victims of their success, with improvements in living standards and life expectancies contributing to ageing populations in major emerging markets such as China and India.

Nevertheless, there are strong continuities. The political dimension in particular remains very real in emerging markets, as seen in the major market moves surrounding regime changes in places such as Argentina, Brazil, India, and Malaysia in recent years. In this respect, there are strong parallels between emerging markets today and in the past.

Hassan Malik is an investment strategist and financial historian. He earned a PhD at Harvard University and was a postdoctoral fellow at the European University Institute in Florence and the Institute for Advanced Study in Toulouse. He lives and works in London.

 

 

Şevket Pamuk discusses the first comprehensive history of the Turkish economy

The population and economy of the area within the present-day borders of Turkey has consistently been among the largest in the developing world, yet there has been no authoritative economic history of Turkey until now. In Uneven Centuries, Şevket Pamuk examines the economic growth and human development of Turkey over the past two hundred years.

Taking a comparative global perspective, Pamuk investigates Turkey’s economic history through four periods: the open economy during the nineteenth-century Ottoman era, the transition from empire to nation-state that spanned the two world wars and the Great Depression, the continued protectionism and import-substituting industrialization after World War II, and the neoliberal policies and the opening of the economy after 1980. Making use of indices of GDP per capita, trade, wages, health, and education, Pamuk argues that Turkey’s long-term economic trends cannot be explained only by immediate causes such as economic policies, rates of investment, productivity growth, and structural change.

What did you try to do in this book ? / What does this book try to do?

This book examines economic growth and human development in Turkey during the last two centuries from a comparative global perspective. It establishes in both absolute and relative terms Turkey’s record in economic growth and human development and evaluates both the proximate and deeper causes of this record.

Why did you choose to focus on the last two centuries?

The Industrial Revolution that began in Great Britain in the second half of the eighteenth century had far reaching consequences not only for Western Europe but also for the rest of the world. During the next two centuries, along with industrial capitalism, modern economic growth spread unevenly across the globe. Most of the patterns of development as well as the disparities we observe around the world today have emerged during the last two centuries.

What is your main argument?

After studying the case of Turkey, I came to the conclusion that economic variables are necessary for understanding long term economic development but they do not tell the whole story. Long term economic development cannot be fully understood without taking into account the social and political environment as well as the historical causes.

What relevance does the book have for those interested in the developing countries and the economic history of developing countries?

Turkey is one of the larger developing countries. Like other developing countries, Turkey’s institutions and economy have received their share of influences from the outside. In each of the four historical periods I examine in the book, governments in Turkey pursued economic policies similar to those of other developing countries. Moreover, Turkey’s long term economic performance has been close to both the world and developing country averages during the last two centuries. For these reasons and in contrast to the more successful developing countries, Turkey is a more representative case and offers more insights into the experiences of other developing countries. Yet, in contrast to the more successful cases, Turkey’s long term economic development has not been studied well. An economic history of Turkey during the last two centuries has not previously been available in any language.

What are Turkey’s special features, in your opinion?

As is the case of other developing countries, Turkey’s institutions and economy have certainly been influenced by global forces and institutions. One of the special features of Turkey is that it has not experienced colonial rule in history. The area within the present borders of Turkey was part of a large multi-ethnic empire until the end of World War I and modern Turkey emerged as one of the successor states after the end of the Ottoman Empire. As a result, Turkey’s institutions during the last two centuries were shaped, in addition to the global influences, by the interaction between the new institutions shaped by the elites of the new nation state and those that existed, including the Islamic-Ottoman institutions of the earlier era.

Şevket Pamuk is professor of economics and economics history at Bogaziçi University in Istanbul. His books include A Monetary History of the Ottoman Empire and The Ottoman Empire and European Capitalism, 1820–1913.

 

 

 

 

 

 

 

 

Ten years on from the collapse of Lehman Brothers: A Reading List

Gennaioli & ShleiferA Crisis of Beliefs by Nicola Gennaioli and Andrei Shleifer makes us rethink the financial crisis and the nature of economic risk. In this authoritative and comprehensive book, two of today’s most insightful economists reveal how our beliefs shape financial markets, lead to expansions of credit and leverage, and expose the economy to major risks. They present a new theory of belief formation that explains why the financial crisis came as such a shock to so many people—and how financial and economic instability persist.

To mark the 10th anniversary of the collapse of Lehman Brothers on September 15, 2008, these books shed light on the causes and effects of the financial crisis, and make suggestions for where we should go from here. 

 

 

Sandbu

Europe’s Orphan: The Future of the Euro and the Politics of Debt – New Edition
Martin Sandbu

brunnermeier

The Euro and the Battle of Ideas
Markus K. Brunnermeier, Harold James & Jean-Pierre Landau

Acharya

Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance
Viral V. Acharya, Matthew Richardson, Stijn Van Nieuwerburgh & Lawrence J. White

Admati

The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It – Updated Edition
Anat Admati & Martin Hellwig

Akerlof

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
George A. Akerlof & Robert J. Shiller

Bernanke

The Federal Reserve and the Financial Crisis
Ben S. Bernanke

Cochrane

The Squam Lake Report: Fixing the Financial System
Kenneth R. French, Martin N. Baily, John Y. Campbell, John H. Cochrane, Douglas W. Diamond, Darrell Duffie, Anil K Kashyap, Frederic S. Mishkin, Raghuram G. Rajan, David S. Scharfstein, Robert J. Shiller, Hyun Song Shin, Matthew J. Slaughter, Jeremy C. Stein, and René M. Stulz

Rajan

Fault Lines: How Hidden Fractures Still Threaten the World Economy
Raghuram G. Rajan

Reinhart

This Time Is Different: Eight Centuries of Financial Folly
Carmen M. Reinhart & Kenneth S. Rogoff

Shiller

Irrational Exuberance: Revised and Expanded Third Edition
Robert J. Shiller

Shiller

The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It
Robert J. Shiller

Turner

Between Debt and the Devil: Money, Credit, and Fixing Global Finance
Adair Turner

Against metrics: how measuring performance by numbers backfires

by Jerry Muller

More and more companies, government agencies, educational institutions and philanthropic organisations are today in the grip of a new phenomenon. I’ve termed it ‘metric fixation’. The key components of metric fixation are the belief that it is possible – and desirable – to replace professional judgment (acquired through personal experience and talent) with numerical indicators of comparative performance based upon standardised data (metrics); and that the best way to motivate people within these organisations is by attaching rewards and penalties to their measured performance. 

The rewards can be monetary, in the form of pay for performance, say, or reputational, in the form of college rankings, hospital ratings, surgical report cards and so on. But the most dramatic negative effect of metric fixation is its propensity to incentivise gaming: that is, encouraging professionals to maximise the metrics in ways that are at odds with the larger purpose of the organisation. If the rate of major crimes in a district becomes the metric according to which police officers are promoted, then some officers will respond by simply not recording crimes or downgrading them from major offences to misdemeanours. Or take the case of surgeons. When the metrics of success and failure are made public – affecting their reputation and income – some surgeons will improve their metric scores by refusing to operate on patients with more complex problems, whose surgical outcomes are more likely to be negative. Who suffers? The patients who don’t get operated upon.

When reward is tied to measured performance, metric fixation invites just this sort of gaming. But metric fixation also leads to a variety of more subtle unintended negative consequences. These include goal displacement, which comes in many varieties: when performance is judged by a few measures, and the stakes are high (keeping one’s job, getting a pay rise or raising the stock price at the time that stock options are vested), people focus on satisfying those measures – often at the expense of other, more important organisational goals that are not measured. The best-known example is ‘teaching to the test’, a widespread phenomenon that has distorted primary and secondary education in the United States since the adoption of the No Child Left Behind Act of 2001.

Short-termism is another negative. Measured performance encourages what the US sociologist Robert K Merton in 1936 called ‘the imperious immediacy of interests … where the actor’s paramount concern with the foreseen immediate consequences excludes consideration of further or other consequences’. In short, advancing short-term goals at the expense of long-range considerations. This problem is endemic to publicly traded corporations that sacrifice long-term research and development, and the development of their staff, to the perceived imperatives of the quarterly report.

To the debit side of the ledger must also be added the transactional costs of metrics: the expenditure of employee time by those tasked with compiling and processing the metrics in the first place – not to mention the time required to actually read them. As the heterodox management consultants Yves Morieux and Peter Tollman note in Six Simple Rules (2014), employees end up working longer and harder at activities that add little to the real productiveness of their organisation, while sapping their enthusiasm. In an attempt to staunch the flow of faulty metrics through gaming, cheating and goal diversion, organisations often institute a cascade of rules, even as complying with them further slows down the institution’s functioning and diminishes its efficiency.

Contrary to commonsense belief, attempts to measure productivity through performance metrics discourage initiative, innovation and risk-taking. The intelligence analysts who ultimately located Osama bin Laden worked on the problem for years. If measured at any point, the productivity of those analysts would have been zero. Month after month, their failure rate was 100 per cent, until they achieved success. From the perspective of the superiors, allowing the analysts to work on the project for years involved a high degree of risk: the investment in time might not pan out. Yet really great achievements often depend on such risks.

The source of the trouble is that when people are judged by performance metrics they are incentivised to do what the metrics measure, and what the metrics measure will be some established goal. But that impedes innovation, which means doing something not yet established, indeed that hasn’t even been tried out. Innovation involves experimentation. And experimentation includes the possibility, perhaps probability, of failure. At the same time, rewarding individuals for measured performance diminishes a sense of common purpose, as well as the social relationships that motivate co-operation and effectiveness. Instead, such rewards promote competition.

Compelling people in an organisation to focus their efforts on a narrow range of measurable features degrades the experience of work. Subject to performance metrics, people are forced to focus on limited goals, imposed by others who might not understand the work that they do. Mental stimulation is dulled when people don’t decide the problems to be solved or how to solve them, and there is no excitement of venturing into the unknown because the unknown is beyond the measureable. The entrepreneurial element of human nature is stifled by metric fixation.

Organisations in thrall to metrics end up motivating those members of staff with greater initiative to move out of the mainstream, where the culture of accountable performance prevails. Teachers move out of public schools to private and charter schools. Engineers move out of large corporations to boutique firms. Enterprising government employees become consultants. There is a healthy element to this, of course. But surely the large-scale organisations of our society are the poorer for driving out staff most likely to innovate and initiate. The more that work becomes a matter of filling in the boxes by which performance is to be measured and rewarded, the more it will repel those who think outside the box.

Economists such as Dale Jorgenson of Harvard University, who specialise in measuring economic productivity, report that in recent years the only increase in total-factor productivity in the US economy has been in the information technology-producing industries. The question that ought to be asked next, then, is to what extent the culture of metrics – with its costs in employee time, morale and initiative, and its promotion of short-termism – has itself contributed to economic stagnation?Aeon counter – do not remove

Jerry Z. Muller is the author of many books, including The Tyranny of Metrics. His writing has appeared in the New York Times, the Wall Street Journal, the Times Literary Supplement, and Foreign Affairs, among other publications. He is professor of history at the Catholic University of America in Washington, D.C., and lives in Silver Spring, Maryland.

 

This article was originally published at Aeon and has been republished under Creative Commons.

Matthias Doepke & Fabrizio Zilibotti: The economics of motherhood

EconomicsIn times of heightened economic anxiety, for many American families the celebration of Mother’s Day this weekend will provide a welcome respite from the stress of everyday life. At least for this one day, love and the close bond between mothers and their children take center stage, and worries about money, careers, and other economic concerns are put on hold. Indeed, one reason that there is a special celebration for mothers is precisely that motherhood lacks the formal recognition that the market economy bestows on other activities: mothers do not draw official salaries, acquire fancy job titles, or advance within a corporate hierarchy. Instead, motherhood is an unpaid “labor of love,” and hence a phenomenon where the laws of economics seemingly do not apply.

Yet on closer inspection, even motherhood does have an undeniable economic dimension. To start, there is the economic impact of the celebration of Mother’s Day itself. Florists, greeting card companies, and restaurants serving brunch will do brisk business, and many consider the holiday at risk of becoming overly commercialized.

But the economic roots of motherhood go much deeper than that. Economic forces helped shape the role of motherhood in society, and are in large part responsible for two major transformations in how Western society conceives of the meaning and importance of motherhood.

The first of these transformations started with the Industrial Revolution, and continued throughout the nineteenth and early twentieth centuries. Mothers always had a special role in nurturing children, particularly so for the infants who needed to be breastfed. However, in earlier times the separation between the roles of mothers and fathers was less sharp than later on. Work and home life played out in the same place, say, the family’s farm or artisanal workshop, and children grew up in close proximity to both parents and other family members. Children also started to work from a young age, so that especially boys soon spent more time with their fathers than their mothers.

The Industrial Revolution sharpened the division between mothers’ and fathers’ roles in the family. The introduction of factories and the rise of commuting that followed the spread of railways and streetcars separated the work and home spheres. While men were pushed into the role of exclusive economic provider, women were expected to focus on the home. In addition, as the industrial economy created demand for workers who could read and write, providing children with a proper education became an important aim for most families, and the responsibility for this fell squarely on the mothers. The result was what historians term the “Cult of Domesticity,” a new value system that emphasized the role of women as mothers and educators and discouraged working outside the home.

While motherhood was idolized, mothers were also pushed out of the labor force. In addition to the new cultural norms against working mothers, outright discrimination such as the “marriage bars” that excluded married women from many professions also contributed to defining women more exclusively through their role as mothers. By the early twentieth century, it had become rare for married women with children to be working. It was in this era of idealized motherhood but also strictly separated roles for women and men that the current incarnation of the Mother’s Day holiday in the United States was created.

The second economic transformation of motherhood started with World War II and is still ongoing today. During the war, millions of mothers joined the labor force to support the war effort while the men were fighting overseas. The women of this “Rosie the Riveter” generation demonstrated that women’s contributions do not have to be limited to the home, and many of them found enjoyment and fulfillment in being in the labor force and gaining more independence.

After the war, the traditional division of labor was reestablished to some extent. But over time, more and more women decided to continue working even after marrying and having children, and by today most women, and most mothers, are in the labor force.

In large part, this transformation in the labor market was driven by technological change. Over time, the economy shifted from agriculture and manufacturing to services, eroding men’s traditional advantage in work that rewarded physical strength. Technological change also transformed the household: modern household appliances and market alternatives to home-produced goods such as day care centers and restaurants have reduced the time required to run the household and freed up time for work.

Today, motherhood is no longer defined exclusively through caring for children, but much more so through the “having it all” challenge of combining careers and family life. Nevertheless, the impact of the older role models and cultural norms can still be felt. Notably, time use data show that women continue to bear a disproportionate share of child care work and household chores.

Hence, despite the transformed meaning of motherhood in society, there are still good reasons for a special celebration of mothers. In addition to buying flowers and chocolates, men could do even better by expressing their gratitude through putting in equal time in child care and household chores, and not just on holidays.

By familiarizing themselves with the dishwasher, diapers, and their children’s clothing needs, men could prove to be truly ahead of their time. Economic trends will continue to shape the meaning of motherhood, and fatherhood, for the next generation. Women now graduate in much larger numbers from college than men do, and in today’s knowledge economy that gives them an advantage. Women will soon be the main earners in a large fraction of families. Over time, cultural norms will adjust to this change. The current model of mothers doing most of the household work in exchange for a once-a-year celebration will gradually fade into memory, which is something to look forward to this Mother’s Day.

Matthias Doepke is professor of economics at Northwestern University. He lives in Evanston, Illinois. Fabrizio Zilibotti is the Tuntex Professor of International and Development Economics at Yale University. He lives in New Haven, Connecticut. Their new book, Love, Money, and Parenting: How Economics Explains the Way We Raise Our Kids is forthcoming from Princeton University Press in February 2019. 

Exploring the Black Experience through Economics

For hundreds of years, the American and global economies have been built on the backs of Black people. In each era, new forms of marginalization—enslavement, segregation, exclusion—have been devised to limit Black economic success. Still, Black dreams and Black resilience have created space for Black people’s hard-won economic gains. As workers, scholars, migrants, and emissaries of empire, Black people have shaped the American and global economies in crucial ways.

From industrial migration to economic colonization, and from unfunded neighborhoods to elite business schools, these four books from PUP’s catalog highlight different aspects of Black Americans’ experiences at the center, the margins, and the cutting edge of the formal economy.

From 1940 to 1970, nearly four million black migrants left the American rural South to settle in the industrial cities of the North and West. Competition in the Promised Land provides a comprehensive account of the long-lasting effects of the influx of black workers on labor markets and urban space in receiving areas.

Employing historical census data and state-of-the-art econometric methods, Competition in the Promised Land revises our understanding of the Great Black Migration and its role in the transformation of American society.

In 1901, the Tuskegee Institute, founded by Booker T. Washington, sent an expedition to the German colony of Togo in West Africa, with the purpose of transforming the region into a cotton economy similar to that of the post-Reconstruction American South. Alabama in Africa explores the politics of labor, sexuality, and race behind this endeavor, and the economic, political, and intellectual links connecting Germany, Africa, and the southern United States. The cross-fertilization of histories and practices led to the emergence of a global South, reproduced social inequities on both sides of the Atlantic, and pushed the American South and the German Empire to the forefront of modern colonialism.

Tracking the intertwined histories of Europe, Africa, and the Americas at the turn of the century, Alabama in Africa shows how the politics and economics of the segregated American South significantly reshaped other areas of the world.

Baltimore was once a vibrant manufacturing town, but today, with factory closings and steady job loss since the 1970s, it is home to some of the most impoverished neighborhoods in America. The Hero’s Fight provides an intimate look at the effects of deindustrialization on the lives of Baltimore’s urban poor, and sheds critical light on the unintended consequences of welfare policy on our most vulnerable communities.

Blending compelling portraits with in-depth scholarly analysis, The Hero’s Fight explores how the welfare state contributes to the perpetuation of urban poverty in America.

For nearly three decades, English has been the lingua franca of cross-border organizations, yet studies on corporate language strategies and their importance for globalization have been scarce. In The Language of Global Success, Tsedal Neeley provides an in-depth look at a single organization—the high-tech giant Rakuten—in the five years following its English lingua franca mandate. Neeley’s behind-the-scenes account explores how language shapes the ways in which employees who work in global organizations communicate and negotiate linguistic and cultural differences.

Examining the strategic use of language by one international corporation, The Language of Global Success uncovers how all organizations might integrate language effectively to tap into the promise of globalization.

Tim Rogan: What’s Wrong with the Critique of Capitalism Now

RoganWhat’s wrong with capitalism? Answers to that question today focus on material inequality. Led by economists and conducted in utilitarian terms, the critique of capitalism in the twenty-first century is primarily concerned with disparities in income and wealth. It was not always so. In The Moral Economists, Tim Rogan reconstructs another critical tradition, developed across the twentieth century in Britain, in which material deprivation was less important than moral or spiritual desolation. Examining the moral cornerstones of a twentieth-century critique of capitalism, The Moral Economists explains why this critique fell into disuse, and how it might be reformulated for the twenty-first century. Read on to learn more about these moral economists and their critiques of capitalism.

You begin by asking, ‘What’s wrong with capitalism?’ Shouldn’t we start by acknowledging capitalism’s great benefits?

Yes, absolutely. This was a plan for the reform of capitalism, not a prayer for its collapse or a pitch for its overthrow. These moral economists sought in some sense to save capitalism from certain of its enthusiasts—that has always been the project of the socialist tradition out of which these writers emerged. But our question about capitalism—as about every aspect of our social system, every means by which we reconcile individual preferences to arrive at collective decisions—should always be ‘What’s wrong with this?;’ ‘How can we improve this?;’ ‘What could we do better?’ And precisely how we ask those questions, the terms in which we conduct those debates, matters. My argument in this book is that our way of asking the question ‘What’s wrong with capitalism?’ has become too narrow, too focused on material inequality, insufficiently interested in some of the deeper problems of liberty and solidarity which the statistics recording disparities of wealth and income conceal.

Was this critique of capitalism also a critique of economics, and if so what do these critics add to the usual complaints against economics—about unrealistic assumptions, otherworldly models, indifference to historical developments such as financial crises, etc?

Yes, the moral economists were critical of economics. But although their criticisms might sound like variations on the familiar charge that economists make unreal assumptions about the capacities and proclivities of individual human beings, the moral economists’ challenge to mainstream economics was different. The most influential innovators in economics since the Second World War have been behavioral scientists pointing out that our capacity to make utilitarian calculations is not as high as economists once took it to be. Part of what the success of this series of innovations is that the ideal of reducing every decision to a calculation of utility retains its allure, even as we come to realize how fallible our real-time calculations are. Behavioral economists have found our capacity to think like rational utilitarian agents wanting. But when did the capacity to think like a rational utilitarian agent become the measure of our humanity? This is the question moral economists have been asking since the 1920s. Initiated by historians determined to open up means of thinking outside economic orthodoxy, since joined by mathematically-trained economists concerned to get a more realistic handle on the relationship between individual values and social choice, the moral economists’ enterprise promises a far more profound reconstitution of political economy than behavioral economics has ever contemplated.

Doesn’t the profile of these writers—dead, male, English, or Anglophile, writing about a variety of capitalism long since superseded—limit their contemporary relevance?

No. Their main concern was to discover and render articulate forms of social solidarity which the dominant economic discourse concealed. They found these on the outskirts of ‘Red Vienna’, on railroads under construction in post-war Yugoslavia, but most of all in the north of England. They believed that these inarticulate solidarities were what really held the country together—the secret ingredients of the English constitution. Though they belonged to a tradition of social thought in Britain that was skeptical towards Empire and supportive of the push for self-determination in India and elsewhere, they raised the prospect that the same dynamics had developed in countries to which British institutions had been exported—explaining the relative cohesion of Indian and Ghanaian democracies, for instance. More broadly E. P. Thompson in particular argued that factoring these incipient solidarities into constitutional thinking generated a more nuanced understanding of the rule of law than nineteenth-century liberalism entailed: in Thompson’s hand the rule of law became a more tensile creed, more capable of accommodating the personal particularities of the law’s subjects, more adept at mitigating the rigors of rational system to effect justice in specific cases. The profiles of the late-twentieth century commentators who continue the critical tradition Tawney, Polanyi and Thompson developed—especially Amartya Sen—underscore that tradition’s wider relevance.

Aren’t these writers simply nostalgists wishing we could return to a simpler way of life?

No. Tawney especially is often seen as remembering a time of social cohesion before the Reformation and before the advent of international trade and wishing for its return. This perception misunderstands his purpose.

Religion and the Rise of Capitalism draws sharp contrasts between two distinct iterations of European society – the late medieval and the modern. But this was a means of dramatizing a disparity between different societies developing in contemporary England—the society he encountered working at Toynbee Hall in London’s East End, where social atomization left people demoralized beyond relief, on the one hand; the society he encountered when he moved to Manchester to teach in provincial towns in Lancashire and Staffordshire, where life under capitalism was different, where the displacement of older solidarities was offset by the generation of new forms of cohesion, where many people were poor but where the social fabric was still intact.

The demoralized East End was the product of laissez faire capitalism—of the attempt to organize society on the basis that each individual was self-sufficient, profit-minded, unaffected by other human sentiments. The political crisis into which Britain was pitched in the late Edwardian period underlined how untenable this settlement was: without a sense of what more than the appetite for wealth motivated people, there could be no ‘background of mutual understanding’ against which to resolve disputes. At the same time the answer was not simply stronger government, a bigger state. The latent solidarities Tawney discovered in the north of England carried new possibilities: the facility of market exchange and the security of an effective state could be supplemented by informal solidarities making everyday life more human than the impersonal mechanisms of market and government allowed.

Polanyi and Thompson brought their historical settings forward into the nineteenth century, making their writings feel more contemporary. But they were both engaged in much the same exercise as Tawney—using history to dramatize disparities between different possibilities developing within contemporary society. They too had come into contact with forms of solidarity indicating that there was more than calculations of utility and the logic of state power at work in fostering social order.  Polanyi and then especially Thompson advanced their common project significantly when he found a new terminology with which to describe these incipient solidarities. Tawney had talked of ‘tradition’ and ‘convention’ and ‘custom,’ and Polanyi had followed Tawney in this—refusing to associate himself with Ferdinand Tonnies concept of Gemeinschaft and Henry Maine’s system of ‘status’ when pressed to, but offering no cogent concept through which to reckon with these forms of solidarity himself. Thompson’s concept of the ‘moral economy’ made the kinds of solidarities upon which they had all focused more compelling.

Does subscribing to a moral critique of capitalism mean buying into one of the prescriptive belief systems out of which that critique materialized? Do you need to believe in God or Karl Marx in order to advance a moral critique of capitalism without embarrassment?

No. Part of the reason that this critique of capitalism went out of commission was because the belief systems which underpinned it—which, more specifically, provided the conceptions of what a person is which falsified reductive concepts of ‘economic man’—went into decline. Neither Tawney nor Thompson was able to adapt to the attenuation of Christian belief and Marxian conviction respectively from which their iterations of the critique had drawn strength. Polanyi’s case was different: he was able to move beyond both God and Marx, envisaging a basis upon which a moral critique of capitalism could be sustained without relying on either belief system. That basis was furnished by the writings of Adam Smith, which adumbrated an account of political economy which never doubted but that economic transactions are embedded in moral worlds.

This was a very different understanding of Adam Smith’s significance to that with which most people to whom that name means something now have been inculcated. But it is an account of Adam Smith’s significance which grows increasingly recognizable to us now—thanks to the work of Donald Winch, Emma Rothschild and Istvan Hont, among others, facilitated by the end of Cold War hostilities and the renewal of interest in alternatives to state- or market-based principles of social order.

In other words there are ways of re-integrating economics into the wider moral matrices of human society without reverting to a Christian or Marxian belief system. There is nothing extreme or zealous about insisting that the moral significance of economic transactions be recognized. What was zealous and extreme was the determination to divorce economics from broader moral considerations. This moral critique of capitalism represented a recognition that the time for such extremity and zeal had passed. As the critique fell into disuse in the 1970s and 1980s, some of that zeal returned, and the last two decades now look to have been a period of especially pronounced ‘economism.’ The relevance of these writings now, then, is that they help us to put the last two decades and the last two centuries in perspective, revealing just how risky the experiment has been, urging us to settle back in now to a more sustainable pattern of economic thought.

You find that this moral critique of capitalism fell into disuse in the 1970s and 1980s. Bernie Sanders declared in April 2016 that instituting a ‘truly moral economy’ is ‘no longer beyond us.’ Was he right?

Yes and no. Sanders’ made this declaration at the Vatican, contemplating the great papal encyclicals of Rerum Novarum and Centesimus Annus. The discrepancies between what Sanders said and what Popes Leo XIII and Pope John Paul II before him said about capitalism is instructive. The encyclicals have always focussed on the ignominy of approaching a person as a bundle of economic appetites, on the apostasy of abstracting everything else that makes us human out of our economic thinking. Sanders sought to accede to that tradition of social thought—a tradition long since expanded to encompass perspectives at variance with Catholic theology, to include accounts of what a person is which originate outside the Christian tradition. But Sanders’s speech issued no challenge to the reduction of persons to economic actors. In designating material inequality the ‘great issue of our time,’ Sanders reinforced that reductive tendency: the implication is that all we care about is the satisfaction of our material needs, as if redistribution alone would solve all our problems.

The suggestion in Sanders speech was that his specific stance in the utilitarian debate over how best to organise the economy has now taken on moral force. There is an ‘individualist’ position which favors free enterprise and tolerates inequality as incidental to the enlargement of aggregate utility, and there is a ‘collectivist’ stance which enlists the state to limit freedom to ensure that inequality does not grow too wide, seeing inequality as inimical to the maximizing of aggregate utility. The ‘collectivists’ are claiming the moral high ground. But all they are really proposing is a different means to the agreed end of maximizing overall prosperity. The basis for their ‘moral’ claims seems to be that they have more people on their side—a development which would make Nietzsche smile, and should give all of us pause. There are similar overtones to the rallying of progressive forces around Jeremy Corbyn in the UK.

The kind of ‘moral economy’ Sanders had in mind—a big government geared towards maximizing utility—is not what these moral economists would have regarded as a ‘truly moral economy’. The kinds of checks upon economic license they had in mind were more spontaneous and informal—emanating out of everyday interactions, materializing as strictures against certain kinds of commercial practice in common law, inarticulate notions of what is done and what is not done, general conceptions of fairness, broad-based vigilance against excess of power. This kind of moral economy has never been beyond us. The solidarities out of which it arises were never eradicated, and are constantly regenerating.

Tim Rogan is a fellow of St. Catharine’s College, Cambridge, where he teaches history. He is the author of The Moral Economists: R. H. Tawney, Karl Polanyi, E. P. Thompson, and the Critique of Capitalism.

Jonathan Haskel & Stian Westlake on Capitalism without Capital

Early in the twenty-first century, a quiet revolution occurred. For the first time, the major developed economies began to invest more in intangible assets, like design, branding, R&D, and software, than in tangible assets, like machinery, buildings, and computers. For all sorts of businesses, from tech firms and pharma companies to coffee shops and gyms, the ability to deploy assets that one can neither see nor touch is increasingly the main source of long-term success. But this is not just a familiar story of the so-called new economy. Capitalism without Capital shows that the growing importance of intangible assets has also played a role in some of the big economic changes of the last decade.

What do you mean when you say we live in an age of Capitalism without Capital?

Our book is based on one big fact about the economy: that the nature of the investment that businesses do has fundamentally changed. Once businesses invested mainly in things you could touch or feel like buildings, machinery, and vehicles. But more and more investment now goes into things you can’t touch or feel: things like research and development, design, organizational development—“intangible’ investments. Today, in developed countries, businesses invest more each year intangible assets than in tangibles. But they’re often measured poorly or not at all in company accounts or national accounts. So there is still a lot of capital about, but it has done a sort of vanishing act, both physically and from the records that businesses and governments keep.

What difference does the rise of intangible investments make?

The rise of intangible investment matters because intangible assets tend to behave differently from tangible ones—they have different economic properties. In the book we call these properties the 4S’s—scalability, sunkenness, synergies, and spillovers. Intangibles can be used again and again, they’re hard to sell if a business fails, they’re especially good when you combine them, and the benefits of intangible investment often end up accruing to businesses other than the ones that make them. We argue that this change helps explain all sorts of important concerns people have about today’s economy, from why inequality has risen so much, to why productivity growth seems to have slowed down.

So is this another book about tech companies?

It’s much bigger than that. It’s true that some of the biggest tech companies have lots of very valuable intangibles, and few tangibles. Google’s search algorithms, software, and prodigious stores of data are intangibles; Apple’s design, brand, and supply chains are intangibles; Uber’s networks of drivers and users are intangible assets. Each of these intangibles is worth billions of dollars. But intangibles are everywhere. Even brick and mortar businesses like supermarkets or gyms rely on more and more intangible assets, such as software, codified operating procedures, or brands. And the rise of intangibles is a very long-term story: research by economists like Carol Corrado suggests that intangibles investment has been steadily growing since the early twentieth century, long before the first semiconductors, let alone the Internet.

Who will do well from this new intangible economy?

The intangible economy seems to be creating winners and losers. From a business point of view, we know that around the world, there’s a growing gap between the leading businesses in any given industry and the rest. We think this leader-laggard gap is partly caused by intangibles. Because intangibles are scalable and have synergies with one another, companies that have valuable intangibles will do better and better (and have more incentives to invest in more), while small and low performing companies won’t, and will lag ever further behind.

There is a personal dimension to this too. People who are good at combining ideas, and who are open to new ideas, will do better in an economy where there are lots of synergies between different assets. This will be a boon for educated, open-minded people, people with political, legal, and social connections, and for people who live in cities (where ideas tend to combine easily with one another). But others risk being left further behind.

Does this help explain the big political changes in recent years?

Yes—after the EU referendum in the UK and the 2016 presidential election in the US, a lot of pundits were asking why so many so-called “left behind” communities people voted for Brexit or Donald Trump. Some people thought they did so for cultural reasons, others argued the reasons were mainly economic. But we would argue that an intangible economy, these two reasons are linked: more connected, cosmopolitan places tend to do better economically in an intangible economy, while left-behind places suffer from an alienation that is both economic and cultural.

You mentioned that the rise of intangible investment might help explain why productivity growth is slowing. Why is that?

Many economists and policymakers worry about so-called secular stagnation: the puzzling fact that productivity growth and investment seems to have slowed down, even though interest rates are low and corporate profits are high, especially since 2009. We think the growing importance of intangibles can help explain this in a few ways.

  • There is certainly some under-measurement of investment going on—but as it happens this explains only a small part of the puzzle.
  • The rate of growth of intangible investment has slowed a bit since 2009. This seems to explain part of the slow-down in growth (and also helps explain why the slowdown has been manly concentrated in total factor productivity)
  • The gap between leading firms (with lots of intangibles) and laggard firms (with few) may have created a scenario where a few firms are investing in a lot of intangibles (think Google and Facebook) but for most others, it’s not worth it, since their more powerful competitors are likely to get the spillover benefits.

Does the intangible economy have consequences for investors?

Yes! Company accounts generally don’t record intangibles (except, haphazardly, as “goodwill” after an acquisition). This means that, as intangible assets become more important, corporate balance sheets tell investors less and less about the true value of a company. Much of what equity analysts spend their days doing is, in practice, trying to value intangibles.

And there’s lots of value to be had here: research suggests that equity markets undervalue intangibles like organizational development, and encourage public companies to underinvest in intangibles like R&D. But informed investors can take advantage of this—which can benefit both their own returns and the performance of the economy.

Jonathan, you’re an academic, and Stian, you are a policymaker. How did you come to write this book together?

We started working together in 2009 on the Nesta Innovation Index, which applied some of the techniques that Jonathan had worked on to measure intangibles to build an innovation measurement for the UK. The more we thought about, the clearer it became that intangibles helped explain all sorts of things. Ryan Avent from the Economist asked us to write a piece for their blog about one of these puzzles, and we enjoyed doing that so much we thought we would try writing a book. One of the most fun parts of writing the book was being able to combine the insights from academic economic research on intangibles and innovation with practical insights from innovation policy.

CapitalismJonathan Haskel is professor of economics at Imperial College Business School. Stian Westlake is a senior fellow at Nesta, the UK’s national foundation for innovation. Haskel and Westlake are cowinners of the 2017 Indigo Prize.