Francesca Trivellato on The Promise and Peril of Credit

The Promise and Peril of Credit takes an incisive look at pivotal episodes in the West’s centuries-long struggle to define the place of private finance in the social and political order. It does so through the lens of a persistent legend about Jews and money that reflected the anxieties surrounding the rise of impersonal credit markets.

What are the promises and the perils of credit?

This is a book about the distant past, but to understand its import, we may think about the fallout of the 2008 financial crisis. After the collapse of Lehman Brothers and the foreclosure crisis, a few radical voices called for an end to capitalism. But most people, in one way or another, demanded a fairer capitalism in which Main Street gains as much as Wall Street, and in which ever more intricate financial instruments provide for all and not just for savvy and well-connected insiders. The problem is that we cannot agree on what constitutes fair capitalism. Variations of this ideological and regulatory struggle have existed in Europe since the year 1000, when the Commercial Revolution of the Middle Ages set in motion the first sustained period of demographic and economic expansion on the continent after the fall of the Roman empire. The more people participated in market exchanges, the more difficult it became to distinguish reliable from bad borrowers, trustworthy from shady bankers.

What is the legend that the books uncovers?

The legend tells the story of Jews fleeing the kingdom of France sometime between the seventh and the fourteenth centuries who invented marine insurance and bills of exchange in order to salvage whatever they could of their assets. The legend is false: Jews did not invent marine insurance and bills of exchange, though they were chased from France multiple times during the Middle Ages and every expulsion was accompanied by confiscation of goods. The first rendition of the legend appeared in print in 1647 in a collection of maritime laws.

What are bills of exchange?

Marine insurance at the time worked in the same way as modern insurance works, but bills of exchange are no longer in use. They were at once a credit instrument and a way of transmitting money abroad in a foreign currency. Picture MoneyGram meets a personal check. Materially, they were slips of papers even smaller than a modern check, scribbled in code (details can be gleaned on the book cover). Bills of exchange allowed merchants to transfer funds rather than risk the theft or the loss at sea of their silver coins. In the hands of the most experienced merchants, they were used to conduct complex speculative financial transactions that were entirely divorced from the purchase and sale of material goods. Bills of exchange symbolized all that was abstract, intangible, arcane, helpful but also potentially dangerous in the growing credit economy of early modern Europe. They were the derivatives of their time.

Why should we care about the legend that attributed to medieval Jews the invention of bills of exchange?

Because it was a preferred way in which until a hundred years ago writers discussed a question that is central to the history of the West: how can we expand the number and range of people who enter the marketplace but control their good behavior? The impersonality of the market is both appealing and threatening. Before and after Adam Smith, the invisible hand was only one of the idealized solutions to the problem of oligopolies. Many writers resorted to Jewish usury as a metaphor to denounce the asymmetries of powers that plagued the market. In this they were assisted by stockpiles of anti-Jewish prejudice images. In its original formulation the legend I discuss adapts this arsenal of anti-Jewish sentiments to denounce the dark forces that could led good Christian borrowers to loose small and large fortunes. Jews were a universal symbol of financial malpractice, to attribute the invention of Europe’s key credit instruments to Jews did not mean that Christians could not put those instruments to good use, but it meant that marine insurance and bills of exchange were tainted by usury as their original sin.

If the legend is as important as you claim, why does no one knows about it?

There are several reasons the legend is forgotten. Bills of exchange have fallen out of use and we have ceased to wonder where they came from. Moreover, economic historians now tend to search for the origins of those financial institutions that have survived into the present, notably the stock market, which developed in 1600 but affected many fewer people than the hundred thousands who handled marine insurance and bills of exchange. There is also a tendency to assume that Jews, both real and imaginary, mattered to European economic thought only in the Middle Ages, before the emergence of a secular “science of commerce” emerged. This is simply not true. Religious language continued to inform most economic writing in the early modern period. To accuse a Christian merchant of being “Jewish” was a way of equating their behavior to that of Jews, who supposedly wished to rob Christians of their wealth.

How did Jews react to the circulation of this legend?

I wish I knew what Jews told each other about a story that some of them surely heard in one version or another. Some Jewish writers did engage with the legend in writing, especially in the nineteenth century. To my knowledge, the first to do so was the father of British prime minister Benjamin Disraeli, who had his children baptized, making his son’s political career possible. In some quarters, the legend was a source of Jewish pride and fed the genre known as Jewish-contributions-to-civilization by touting Jewish financial prowess. Other Jewish authors firmly rejected a legend that they saw as mobilizing insidious stereotypes.

Why don’t you ever mention Shylock in a book about Jews and credit?

Some historians have tried to pin down the sources of Shakespeare’s imagination by establishing whether one Jewish merchant or another living in the Venice ghetto in the 1590s may have served as a model for the great English writer. I regard such efforts as futile: literary imagination is not more or less compelling because it is based on identifiable facts. But if we want to judge one of the masterpieces of Renaissance theater by its empirical validity, then The Merchant of Venice would fail the test. The pound of flesh is only one of the dubious references in the play. Shylock would have lent money to Antonio by means of a bill of exchange. Only poor Christians had to deposit a pledge to borrow a small sum in the ghetto. A patrician like Antonio could borrow by using his reputation as collateral. After 1589, when international Jewish merchants hailing from Iberia found a safe haven in Venice, Antonio would have found Jewish merchants able and willing to issue him a bill of exchange. The figure of Shylock really tells us that the Jewish usurer, one of the most long-lasting figments of the Western imagination, was a protean symbol that encompassed stereotypes of both the parasitic Jewish poor and the rapacious Jewish capitalist.

Francesca Trivellato is professor in the School of Historical Studies at the Institute for Advanced Study in Princeton. She is the author of The Familiarity of Strangers: The Sephardic Diaspora, Livorno, and Cross-Cultural Trade in the Early Modern Period.

Alberto Alesina, Carlo Favero and Francesco Giavazzi on Austerity

AusterityFiscal austerity is hugely controversial. Opponents argue that it can trigger downward growth spirals and become self-defeating. Supporters argue that budget deficits have to be tackled aggressively at all times and at all costs. In this masterful book, three of today’s leading policy experts cut through the political noise to demonstrate that there is not one type of austerity but many. Bringing needed clarity to one of today’s most challenging subjects, Austerity charts a sensible approach based on data analysis rather than ideology.

What is controversial about fiscal austerity?

The term austerity indicates a policy geared toward the sizeable reduction of government deficits and stabilization of government debt achieved by means of spending cuts or tax increases. Discussions about the relative benefits and costs of austerity policies have been toxic, often taking a very ideological, harsh tone. The anti-austerity front argues that austerity is counterproductive: it results in increases—rather than reductions—in the debt-over-GDP ratio since it generates reductions in the denominator of this ratio which more than offset the gains in the numerator. The pro-austerity front emphasizes the impact of expectations and confidence on government debt. Imagine a situation in which an economy is on an unsustainable path with an exploding public debt. Sooner or later a fiscal stabilization has to occur. The longer this is postponed, the higher the taxes that will need to be raised or the spending to be cut in the future. When the stabilization occurs it removes the uncertainty about further delays which would increase the costs of stabilization.

Why did you write this book?

The contentious discussion on the effects of austerity has distracted commentators and policymakers from meaningful discussion on the enormous difference, on average, between expenditure-based and tax-based austerity plans. This book discusses the theory and the evidence needed to better assess the consequences of the different types of austerity. 

What are the differences in the impact of tax-based measures versus expenditure-based measures?

Spending-based austerity plans are remarkably less costly than tax-based plans. Spending-based plans have, on average, a close to zero effect on output and lead to a reduction of the debt over GDP ratio. Tax-based plans have the opposite effect: they cause large and long lasting recessions and do not lead to the stabilization of the debt to GDP ratio. Two recent examples are the consolidations carried out by Ireland and Spain in response to the Eurozone crisis. The Spanish correction, which featured a larger share of tax hikes, markedly slowed the real GDP growth and did not result in a decline in the debt ratio. Contrast that with Ireland, where the spending-based correction had little output costs and led to a sharp decline in debt.

How should we change our thinking about austerity in order to assess its effectiveness properly?

The empirical analysis of the macroeconomic effect of different types of austerity is crucial. To this end one should start from the data. The book documents in detail close to 200 austerity plans carried out in 16 OECD economies from the late 1970s to 2014. To reconstruct these plans we have consulted original documents (some produced by national authorities, and some produced by organizations such as the OECD, the IMF or the European Commission) concerning about 3,500 individual fiscal measures. The second step is the proper modelling of fiscal actions. When legislatures decide to launch a fiscal consolidation program, this rarely consists of isolated shifts in this or that tax, or in this or that spending item; instead, what is adopted is typically a multi-year plan with the objective of reducing the budget deficit by a certain amount every year. To the extent that expectations matter for the planning of consumers and investors, the multi-year nature of a fiscal adjustment, and the announcements that come with it, impact their economic effects. Third, the effect of different plans on the economy should be assessed. We document a sharp difference between adjustment plans based mostly on tax increases and plans based mostly on expenditure reductions. This finding suggests that there is no “austerity” as such: the effects of austerity policies are sharply different depending on the way they are implemented.

In assessing the empirical evidence we needed to overcome three major obstacles.

The first is the so-called “endogeneity” problem, or the interaction between fiscal policy and output growth. Suppose you observe a reduction in the government deficit and an economic boom. It would be highly questionable to conclude that policies that reduced deficits have generated growth, as it could easily be the other way around. We address the endogeneity problem by considering only policy changes not motivated by the state of the business cycle but rather by a desire to reduce deficits.  

Second, once exogenous fiscal adjustments episodes have been identified, then the calculation of their impact on the economy requires the specification of an empirical model. An important tradeoff emerges here: the simpler the model the easier to calculate the multipliers, but the more likely that important relations among variables are missed. We adopt several models in this book to assess the robustness of our empirical results. 

Third, major episodes of austerity often are accompanied by changes in other policies: monetary policy; exchange rate movements; labor market reforms; regulation or deregulation of various product markets; tax reforms; and so on. In addition, austerity is sometimes adopted at times of crisis due to runaway debts, not in periods of business as usual. We assess explicitly the role of accompanying policies in the determination of the impact of austerity to conclude that the heterogenous effects of tax-based and expenditure-based plans does not depend on different accompanying policies.

In cases where austerity has “gone wrong,” what accounted for that? What should have been done differently?

During 2010-11 the collapse of confidence in sovereign European debt and the explosion of interest rates on government bonds in some countries (Italy, Spain, Greece, Portugal) led to a situation that was close to a debt-induced financial crisis. Could the governments of these countries have waited, postponing austerity to when the recession was over? Hard to say. We do not know what would have happened without austerity. What we can say, however, is that even in these cases, namely when austerity policies are implemented during a recession, the differences between the two types of austerity is very relevant: tax-based austerity plans have been much more costly than spending-based plans.

Can you give an example of a government that had the right idea about austerity?

In the 1990s Canada implemented a successful package of large government cuts which, coupled with accommodating monetary policy and structural reforms, was expansionary. In the book we document how since the 1993 elections almost all the contending parties accepted the need for such a reduction in government debt and deficit. In 2010, the Coalition government led by David Cameron in the UK responded to unsustainable and growing deficits with a program of large budget cuts. After this correction, the UK economy grew at respectable rates compared to the other major economies and proved the IMF predictions of a major recession wrong. Finally, and maybe most interestingly, the Irish government in its December 2009 Stability Programme Update was clear in acknowledging the unsuccessful effects of tax-based austerity. This in turn justified the adoption of a package of significant expenditure cuts.

What do you hope readers will take away from this book?

Talking about “austerity” without defining how austerity is implemented does not make any sense. The composition of austerity plans is crucial to understanding their effects on growth and fiscal sustainability. The data on 16 OECD countries over the period 1978-2014 show that a spending reduction plan and tax-based plans of the same dimension have different effects on growth. Tax-based plans lead to deep and prolonged recessions, lasting several years. Expenditure-based plans on average exhaust their very mild recessionary effect within two years after a plan is introduced. The component of aggregate demand which mostly drives the heterogeneity between tax-based and expenditure-based austerity is private investment. The effects of fiscal plans on the debt to GDP ratio depend on the initial level of the debt. In the high-debt high-cost of debt scenario, an expenditure-based plan has a stabilizing effect on the debt dynamics while a tax-based plan has a destabilizing effect; in a low-debt low-cost scenario the expenditure-based adjustment remains stabilizing, while the effect of a tax-based plan becomes neutral. The main goal of our work is to explain the evidence and the theory which underlies these results. To this end we discuss the theory; we construct a new data set; we propose to analyze fiscal plans to take the empirical modelling of fiscal policy closer to the real-life process of its implementation; and we consider case-studies and econometric evidence. We also study the role of accompanying policies: devaluations, monetary policy and structural reforms in the goods and labor markets. We devote special attention to the recent round of austerity plans implemented after the financial and Eurozone crises. Finally, we ask the political economy question of whether austerity is the kiss of death for the governments that implement it, concluding that the answer is much less obvious than the popular debate would seem to suggest.

Alberto Alesina is the Nathaniel Ropes Professor of Political Economy at Harvard University. He is the author, with Francesco Giavazzi, of The Future of Europe: Reform or DeclineCarlo Favero is the Deutsche Bank Chair in Quantitative Finance and Asset Pricing at Bocconi University in Italy. He is the author of Applied MacroeconometricsFrancesco Giavazzi is professor of economics at Bocconi University.

Matthias Doepke and Fabrizio Zilibotti on Love, Money, and Parenting

Doepke & ZilibottiParents 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. Love, Money, and Parenting presents an engrossing look at the economics of the family in the modern world.

What led you to write this book?

Everything started when we realized that two of our experiences had crossed paths: as researchers and as parents. As economists we have always been interested in inequality and human capital formation. Our work studies how the economy influences the transmission of values, preferences, and skills within families. The way in which parents interact with their children is a focal point of our recent research.

We have dealt with the same issues in our own families. We grew up in Italy and Germany, but our academic careers have brought us to live in several other countries. Fabrizio’s daughter was born in Stockholm, and has lived in Sweden, the UK, Italy, and Switzerland. Her parents are now in the US and she often visits Spain (her mother is Spanish). Matthias had his three sons in the US, but his family spends a lot of time in Germany and currently lives in Spain. We both have also frequent contacts with East Asian cultures, especially China and Japan.

We have been struck by the differences in parenting practices across countries and over time, such as the contrast between the liberal parenting that we experienced as children in Europe compared to the high-pressure parenting culture in the US today. At some point, we realized that the differences we observed in our own lives line up well with broader patterns in the data for many countries and time periods, and that all of this variation conforms surprisingly well with the predictions of our own economic theories. So, we decided to focus on parenting through the double lens of parents and social scientists. Having published most of our earlier work in academic journals that only few experts read, we felt the urge to communicate our findings and ideas to a larger public. We believe we have something novel to tell to parents and general readers.

How do you account for the difference in parenting between European, American and Chinese parents as exemplified in books like Battle Hymn of the Tiger Mother?

We love Amy Chua’s book. It is fun to read, well-written, full of self-irony—we recommend it. But our book takes a different tack. We do not believe that the main explanation for differences in parenting styles is limited to cultural factors. For instance, we do not think that Chinese parents are different just because they are Chinese or because of the Confucian heritage. Rather, we think that parents in different parts of the world behave differently because they respond to different economic incentives.

In today’s China, children grow up under enormous pressure to achieve at the highest level in academics. Grades determine which university they can attend, and Chinese universities vary widely in quality of education. Making it into Peking University or Tsinghua or Fudan is a ticket to a brilliant future. For those who fail, life can instead be tough. The US is less extreme, but also has large quality differences across schools and high income inequality. In both countries, parents emphasize the importance of children working hard and becoming achievers; even more so in China than in the US, because getting good grades and doing well in exams is even more important in China.

European countries (especially Scandinavian countries) are in comparison much less unequal. There, parents can afford to be more relaxed and let their children discover the world at their own speed and according to their own inclination. Excelling at school is less important; there are many second opportunities to do well in life, and safety nets are more robust. It is interesting to observe that parents in Japan (a country that has closer historical and cultural ties with China than with Western Europe) report some parenting values that are similar to those of parents in the Netherlands. What do the Dutch and the Japanese have in common? Culturally, very little, but they both have low income inequality. Amy Chua also emphasizes that the experience of being an immigrant has an impact on parenting. In our view, there are good economic reasons for that. Immigrants typically lack strong local connections that can help with getting ahead. So, school achievement is the best strategy for success.

Does your research lead you to draw value judgments on certain kinds of parenting over others? Or is it more the case that the type of parenting that is directly related to economic conditions is best suited to those very conditions?

We stay away from value judgments. Our book does not tell parents that a particular parenting style is better than another. This sets our book apart from many existing parenting guides, where experts try to teach “good parenting.” Experts often disagree, and so the market offers titles for any taste; there are books praising achievement-oriented (authoritative, as we call it) parenting, and other books that make the case for “free-range” (permissive) parenting. In contrast, we take the view that parents, by and large, know what they are doing. And so we don’t come out of the ivory tower to teach a more enlightened way to be a parent.

Our goal is to explain how parents respond to the environment in which they and their children live. Going back to China, the Chinese parenting style is an adaptation to the incentives of that society. Parents push their children hard, because this is what it takes to do well in China. Switching to free-range parenting might be a bad idea for them. Conversely, helicopter parenting would not work well in Scandinavia. That society rewards independence and teamwork; rampant individualism is not viewed as an asset and is not even especially appreciated by employers.

To be clear, we are not saying that parents around the world sit down and consider the different options and tradeoffs with scientific precision. They just try to do what feels right to them, but exactly what this means inevitably depends on the economic environment. Many of these mechanisms are subconscious and become part of what we informally call the local culture or parenting norms. These norms change over time and adapt to evolving economic conditions, something we document in detail in the book. When we were children in the 1970s, inequality was far lower, and our parents were much more relaxed about our upbringing. With our own children, we have adopted a more intensive, achievement-oriented parenting style, and certainly not because we are better parents. Rather, because the economic conditions have changed.

How do money, knowledge, and time come together to influence parenting?

The first word in the title of the book is ‘love,’ because we believe love to be the main motive of parenting. First and foremost, parents want their children to be happy in life. This premise is important to understand our book, especially because people often perceive economists as being fixated on a restricted set of financial objectives. Having said that, we do believe that money matters for a happy life. This is not our bias: dozens of empirical studies on subjective well-being point at a strong correlation between economic success and self-reported happiness.  Our argument is that when inequality is low, economic success is less salient in parenting, because stakes are lower. In contrast, in more unequal societies, parents become more concerned with how their children do economically. Being a mediocre artist may be sad on its own, but it is much worse in a society without safety nets where professional failure can lead to poverty and social exclusion. At the same time, if nobody tries, no talented artist will ever emerge.

Knowledge (or education) matters too, for two reasons. First, it is a vehicle to economic and social success—so parents typically push their children to do well in school. Second, education is an asset for parents; it sharpens their tools to influence and motivate their children. This might explain why we observe that less educated parents are more often authoritarian and prone to punish their children rather than to motivate them. Time is a crucial ingredient because much of parenting is about interacting directly with the child. But time and money are not independent; for example, richer parents often pay other people for doing basic housework tasks (such as cleaning) to make room for “quality time” with their children. Others do not have the same luxury.

Is it possible to track changes in permissiveness in parents over decades and see that those changes correlate with economic forces?

Let us first clarify that we use the term ‘permissive’ without any negative connotation. We do not mean ‘indulgent’ or, worse, ‘disengaged.’ We could as well label this style liberal or even free-range parenting (We borrow the term ‘permissive’ from child psychology literature). With this clarification in mind, we see that parents were much more permissive in the 1960s and 1970s than they are today. They were altogether less obsessed with supervising and guiding their children, and spent many fewer hours per week (as we see from time diaries) interacting with them. American parents half a century ago were more similar to the Swedish parents of today than to the frantic generation of American helicopter parents of the 21st century. Why? Fifty years ago inequality reached a historical trough. In a more equal society, there was less of a need to push children hard.

Another interesting observation is that the permissive mood of the 1960s came together with the rejection of the authoritarian methods that had been prevalent for centuries both at home and in school. We argue that this is due to the combination of declining inequality and increasing social mobility. Until the early 20th century, a large proportion of families lived in rural areas, and many children inherited their parents’ occupation and position in society. Most learning and education took place within the family, and the past, present, and future looked very much alike. In this society, parents perceived it as their duty to guide their children, forcing them if necessary, in their own footsteps, pretty much in the fashion as their own parents had done with them.

Since then, society has changed. Children learn most of what is useful for their future professional activity in schools, where parents cannot easily monitor their effort. Parents must then motivate their children. In addition, technological change has increased occupational mobility and caused old jobs to disappear and new jobs to take their place. Being like your father or your mother is often not an option. The old-style traditional parenting has then lost its appeal. Now, children must make independent choices and the best parents can do is shape their attitudes.

How do more financially privileged parents respond to the same economic forces differently from less privileged parents?

Both economic incentives and constraints matter. The rug rat race, namely the competition among frenetic parents in fostering their children’s success, imposes growing demands on families. Only some of them can live up to the daunting task. Driving children from music class to sports to an art exhibition requires lot of time and money. Many families cannot afford it. Take a single mother living in a disadvantaged area. She will have neither the time nor the financial resources to offer her children such luxuries. Moreover, her children will be around other children who suffer the same relative deprivation.

What’s worse, neighborhoods have become increasingly socially segregated. The result is that a large share of the population is excluded from the race. Helicopter parenting is the root of what we call a growing “parenting gap.” A gap between rich and poor families has of course always existed but it has been exacerbated by the intense overparenting of the upper middle class.

Blaming middle-class parents for overparenting is futile; they are simply responding to changing economic incentives. They try to be good parents in the competitive society in which their children live. This is why in the book we advocate policy interventions aimed at changing incentives and equalizing opportunities. We also discuss how the parenting gap can turn into a parenting trap, whereby disadvantaged families simply give up, and their children face ever-growing barriers to get out of poverty. This may be a channel behind the recent decline in social mobility in the lower echelons of society.   

What do you hope readers will take away from this book?

We are often asked which parenting style is the best. On that, we are happy to share our subjective experiences and beliefs as parents, but as social scientists we cannot give any definite answer. However, when it comes to the society as a whole, we are more assertive. We think that the overparenting frenzy is taking a toll on the happiness of families. Parents and children engage in a race with the main goal of getting ahead of others, rather than just building useful skills. Moreover, this frenzy is a barrier against equal opportunities.

Rather than educating parents about the virtue of free-range parenting, which will not work if economic incentives are unchanged, we advocate policies that change economic incentives, that reduce the stakes in parenting, and that open up new opportunities for disadvantaged families. Fabrizio’s daughter grew up in a free-range Swedish daycare with a mix of children from a wide range of social, economic, and ethnic backgrounds. When the family moved to London for one year, she attended a posh exclusive (and expensive) nursery school. She was a happier child in Stockholm than in London. Some wealthy parents may be skeptical that their children can be happier in a more inclusive society. We hope we can open some cracks in those views.

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.

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.

What is Your Parenting Style?
Permissive

According to Diana Baumrind, who coined the concept of a parenting style, a permissive parent “attempts to behave in a non-punitive, acceptant and affirmative manner towards the child's impulses, desires, and actions. … She makes few demands for household responsibility and orderly behavior. She presents herself to the child as a resource for him to use as he wishes, not as an ideal for him to emulate, nor as an active agent responsible for shaping or altering his ongoing or future behavior. She allows the child to regulate his own activities as much as possible, avoids the exercise of control, and does not encourage him to obey externally defined standards.”
Authoritative

You are an authoritative parent. You don’t think that children should have unlimited freedom, but neither do you expect blind obedience. Instead, you aim to guide your child through reasoning and persuasion. When you set limits you explain why you do so. According to Diana Baumrind, who coined the concept of a parenting style, an authoritative parent “attempts to direct the child's activities but in a rational, issue-oriented manner. She encourages verbal give and take, shares with the child the reasoning behind her policy, and solicits his objections when he refuses to conform. … She enforces her own perspective as an adult, but recognizes the child’s individual interests and special ways. The authoritative parent affirms the child's present qualities, but also sets standards for future conduct. She uses reason, power, and shaping by regime and reinforcement to achieve her objectives, and does not base her decisions on group consensus or the individual child’s desires.”
Authoritarian

You are an authoritarian parent. You believe it is best for children to obey the rules set for them by their parents. You monitor your child and are strict in enforcing rules. You don’t expect your child to understand the reasoning behind your decisions, and instead demand obedience as a matter of principle. According to Diana Baumrind, who coined the concept of a parenting style, an authoritarian parent “attempts to shape, control, and evaluate the behavior and attitudes of the child in accordance with a set standard of conduct, usually an absolute standard … She values obedience as a virtue and favors punitive, forceful measures to curb self-will at points where the child's actions or beliefs conflict with what she thinks is right conduct. She believes in keeping the child in his place, in restricting his autonomy, and in assigning household responsibilities in order to inculcate respect for work. She regards the preservation of order and traditional structure as a highly valued end in itself. She does not encourage verbal give and take, believing that the child should accept her word for what is right.”

Share your Results:

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.