Diane Coyle's Reading List

"This is a fantastic book. It deserves the word magisterial — it’s a big book and it’s going to be one of the reference books about American economic history. The first half is the history. It’s a survey of late 19th century America onwards and is absolutely peerless as an analysis, focusing on innovation, structural change and the political and social changes that go alongside that. It’s also a fantastic read, so the pages zip by. The second half takes what you learn from the history and applies it to thinking about what’s happening now and in the future. Get the weekly Five Books newsletter Robert Gordon is well known as one of the proponents of ‘secular stagnation.’ This is the idea that we’ve already enjoyed the best fruits of technological innovations and growth. He points to things like electricity, the arrival of mass entertainment, public health, improvements in the way houses were built and clean water in the home as being so fundamental that we’re never going to get those same kinds of welfare gains again. That’s behind us, and we’ve got to face up to much slower growth in future. The innovations he talks about happening now are frivolous things: Think about Pokémon Go — is that really a life-changing innovation? Obviously not. This is where I part company with him. It’s obviously true that you’re never going to get those public health gains again. That is clearly absolutely transformative. But I think he underestimates the potential of some new technologies to be transformative as well. If we have properly personalized cancer medications, or Alzheimer’s treatments, for example. That’s perhaps not going to change life expectancy, but the quality of life at the end of life, which would be amazing. If there is really the possibility of clean, low carbon emission energy coming along, that will transform our potential on this planet. So I think he underestimates those sorts of opportunities from technology. “There have been households where people have either not been working or in horrible jobs for two to three generations now.” Having said that, there are obviously headwinds: demographic change and addressing these distributional issues that have cropped up in votes on both sides of the Atlantic. I don’t want to say, ‘What nonsense! There’s going to be massive growth, let’s be techno-optimists about it!’ — because the social challenges of technology are huge. But the fact that it’s different and that you can’t repeat the old doesn’t mean you aren’t going to get amazing things still happening in the future. It’s using history as a way of thinking about the present and about these big-picture structural changes. The other great thing about this book is that Robert Gordon is a brilliant, technical economist. To see someone of that stature in the profession saying, ‘You know what, economic history is really important’ is very healthy for economics. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . When I was a graduate student, we had compulsory economic history courses. But I’m old and that dropped out of graduate programmes soon after. It really ought to get back in there. A good thing about technological revolutions is that, as in any long-term trends, you have to look back at history. Yes, not anchoring it to the real world in some way. Economics is like many other historical sciences. Like geology or evolutionary biology, it’s hard to do experiments. You’re always looking at historical evidence to provide those experiments for you, especially in macroeconomics that’s about these aggregates and where you’ve got very little information to go on — because you can’t replay history over and over again, as you can in a chemistry lab. Yes, you can do them for small things. You can do them for what health intervention will make mothers get their children vaccinated, or, ‘Is it better to spend your money on mosquito nets or on some other bit of aid spending?’ That’s where they have started to be used quite substantially. “You can’t rerun recessions to see what happens if you do something differently.”” Or in bits of social policy in all kinds of countries. You can do experiments with different groups to see which kind of intervention might work, or you can do it for a short period of time for a particular policy. They are being used much, much more in economics. But for the macroeconomy, you can’t rerun recessions to see what happens if you do something differently…"

"Sam Bowles is somebody who has got a reputation, I suppose, for being an ‘outsider’ economist. He’s been at UMass Amherst for a long time, which has always had a radical economics department. He’s done a lot of work on understanding economic history, institutions and how things actually work in factories — but also thinking about complexity approaches to economics, because he’s also at the Santa Fe Institute. They do complexity science, which is about the interactions between very large numbers of entities, with non-linear relationships where they affect each other. So the economy is a really good example of what you might think of as a complex system. He’s got a really unconventional way of thinking about economics, but also, as the title of the book suggests, he thinks of it as a social science. It’s about human relationships, it’s about social institutions, it’s about politics. “What kind of moral universe does the global economy operate in? And how on earth would you change that from the one we’ve had that creates all those terrible losers from globalization and technology?” So he’s got this very interesting combination of an unconventional, technical modeling approach and a very humane sensibility. Both of those are non-mainstream. But I sense that his time has come: because of all these issues we’ve been talking about, because of this sense that economics had become unrooted from the real world. This interdisciplinarity, this openness to new modeling approaches, and, above all, this awareness of the importance of moral values, which is what this book is about. In a way, it’s the same territory as Michael Sandel’s book about the limits of markets. Economists do what we do, we think about incentives and how those affect people’s decision-making. Bowles’s argument, in this book, is that this is not really enough when you’re thinking about economic policy. People don’t only make decisions on the basis of economic incentives, and you shouldn’t be expecting them to and analyzing the economy in that way. If you think about the morality of it, your conclusions for economic policy might be very different. Because they thought they were purchasing the extra time. It’s a really interesting illustration and a great example of the fact that the analysis in terms of incentives was wrong in both senses: it was wrong morally and it was wrong factually, as it turned out. I’ve always been intrigued by the fact that small changes can sometimes have small consequences and sometimes really big consequences. We don’t know which it will be. Another example I like is the introduction of broadband. I said to someone—who is now an economist at the University of Oxford—that this was going to be amazing, that it would absolutely transform the way we do things. He said it wouldn’t, since we’d already got the internet. Broadband was just going to make it a little bit faster, so there’s a very small change in transactions cost, and that’s not going to change anything. But of course that very small change in the transactions cost—the 3 seconds extra between dialup and broadband—had a huge effect on people’s behaviour. It’s another illustration of the way that simple-minded thinking about incentives can really lead you astray. He doesn’t have an ABC of how to do policy this better way. It’s quite hard to do that, because it’s so context-dependent. Values will vary from time to time and society to society. So you probably can’t analytically define when you use which kind of approach. But I think the lesson to take away from it is that economic analysis is really powerful and important, but we shouldn’t repeat the mistake of thinking that only what we do is important. I see it as a reminder of the importance of interdisciplinarity and broadening public policy, of thinking about values and about what’s right. It’s really old-fashioned, but Aristotelian virtue ethics… And wouldn’t it be nice if we had some Aristotelian politicians around at the moment…"

"This is a fascinating book. Brooke Harrington is a sociologist, not an economist. She spent some years getting the qualification to become an asset manager and immersing herself in their world, travelling around the world and talking to clients and other asset managers. So this is real immersive academic research of a kind that is very rare. It takes so much time—you’re only going to get your one article out of it or your one book—while the incentives among academics are to do lots of little articles to get promotion and recognition. It’s an absolutely fabulous piece of scholarly research. The insight into how private wealth managers think is completely fascinating. They think it’s really immoral for governments to take their money. They see themselves as guardians of the assets that they have acquired, from rapacious governments who want to tax them. This massive global wealth has obviously been enabled by globalization, by policy changes, and tax changes. They don’t see there is anything immoral at all about what they’re doing. “The global rich cannot avoid all contact with society, and at some stage, it all collapses. It would be nice if it didn’t collapse in a cataclysmic way, but I’m not sure that we’re not heading for cataclysm.” The clash of worldviews that this book illustrated was a complete eye-opener for me. And it makes you wonder how on earth it’s going to be possible to tackle it, because it is global. This money moves around really quickly, it’s very hard to think about how you would control that without some kind of global regulatory structure. And there’s no sign of that happening, or being discussed. She talks about the example of one country, Israel, which has apparently done something to tackle this footloose money and tax it properly. But, it seems to me, that it will take a sea change in moral worldview, not only among the global rich themselves, but also among people in general. I suppose we’ve always thought, ‘Well they’re very rich, but we’ve got other problems to worry about.’ It takes me back to that point about Aristotelian virtue ethics. What’s your moral universe? What kind of moral universe does the global economy operate in? And how on earth would you change that from the one we’ve had that creates all those terrible losers from globalization and technology? And this attitude that if you’ve got money, not only do you deserve it, but you’ve got a duty to safeguard it from contributing to the societies around which you’re flitting? I don’t know how we make that transition. There’s a self-reinforcing influence on economic policy. They can change the regulations that govern how the economy works. You see it more directly in the corporate sector, where very powerful companies—in tech, in banking, in the oil industry—have much greater access to policymakers. They pay lobbyists and shape regulatory structures in ways that have made Western economies much more concentrated, in terms of market power, than they were 20-25 years ago. The latest report from the Council of Economic Advisers in the US suggested that that concentration and loss of competition in markets was one of the explanations for the much lower productivity growth than in the past. You get an increasingly parasitic economy, and what Acemoglu and Robinson would call ‘extractive institutions.’ There have been efforts, led by the OECD and others, to plug the gaps in the global system, but there only needs to be one holdout — a holdout tolerated by the big powers. If the Americans had been more gung-ho about it, then that process of cracking down would have gone much further. But it is, in the end, going to fall down. Because if there’s no tax base, and you don’t have public services and you don’t have infrastructure, then you get the kind of political reaction that we’ve been seeing. You get roads and airports that don’t work. The global rich cannot avoid all contact with society, and at some stage, it all collapses. It would be nice if it didn’t collapse in a cataclysmic way, but I’m not sure that we’re not heading for cataclysm. But the book is all about the really clever lawyers and accountants they have. It’s just very easy to avoid taxes. These very clever people—people in the parasitic professions of law and accountancy—help it happen. As a part-time academic, if anybody accuses me of being ‘elite’ I think, ‘Have a look at my bank account please!’"

"This is my bit of economics, and to me, this is what economists do. When I hear the critiques of economics I think, ‘But no! We do really interesting, insightful, real world studies! You just don’t know what it is that we’re really doing.’ So I love this book for explaining, so clearly, a really important area of economics where there has been huge progress in the past 20 years or so. There was a book that came out in the 1980s—called Reinventing the Bazaar , by John McMillan—which is a wonderful description of how different kinds of markets work, from the Dutch flower markets to what happens in bazaar negotiations. I see this book as a successor to that work, looking at more modern applications of understanding market structures, how the competition process works, how you can design markets so you get better outcomes out of them. It’s really well written, really clear, completely understandable to the non-economist and a beautiful description of a really important and radically advanced area of economics. The Al Roth kidney exchange is one that leaps to mind. There’s an area called ‘market design.’ It’s used a lot in designing online marketplaces now, but this came about from the work of Al Roth — another Nobel prize winner. He started looking at what he called ‘repugnant’ markets, where you don’t want to use money. Selling human organs, for example, we think of as inappropriate and immoral. Morality and the yuck factor come into it, we don’t think it should happen — even if we would get more economically efficient outcomes out of it. You’d get people who really need the money, and people who really need the kidneys. Roth said, ‘Can we do this without the money? Can we use a market process to get a better match without using money?’ And he designed the New England kidney exchange programme. His algorithm, in effect, works out better ways to match people in need of kidneys with people who have one to donate, without involving any money. By creating these matching chains, he has increased, by quite a large number, the number of kidney transplants. So it’s using the power of markets to convey information about what’s needed and what’s available and what kind of exchange rate you would need to get those transactions to happen: without being immoral about it, because there’s no monetary incentive distorting the ethical imperatives that are involved. That matching process has now become widely used, and you can think of many more applications for it. It’s used to match applicants to universities or medical schools to the schools they want to go to. There’s a very nice example of how dating websites can use this kind of thing. It’s incredibly powerful. Markets are really about information, not about money. People think economics is all about money and it’s not, actually. We use money as unit of account to compare things, but it could be owls or happy smiles. It doesn’t matter that it’s money. These sorts of markets and approaches to markets take the money out of the picture. You can think about what information is needed, and how that information flows."

"This is related, because these multi-sided platforms and how we understand them rely very much on market design mechanisms and the work of Jean Tirole. By platforms we mean things like Uber and AirBnB. But there are lots of other examples emerging as well. It’s becoming a very popular business model to try. The one thing that was needed was almost always internet access, so smartphones were very important. The other thing is the matching algorithms, because rather than being a traditional business—where you have suppliers at one end, you buy the components and do something to them and then sell them to the customers at the other end—they act like an exchange, matching the suppliers on the one hand and the customers on the other. They capture what are called ‘network externalities,’ where, if you are a supplier, the more customers there are, the happier you are, and if you are a customer, the more variety there is to choose from, the happier you are. “Obviously there are all kinds of issues raised by these platforms, but there’s a sort of hysteria on both sides about them which is, I think, unhelpful.” So if you can bring those together, you create a lot of value. You create value for the suppliers because they’ve got more demand to meet and you create value for the customers because they’ve got much better choice and much better prices, there’s more competition. And you create a profit for the platform as well. So they’re incredible value creation machines when they work well. But they’re very hard to get off the ground, because you’ve got to keep your supply and demand in balance. That’s quite tricky. You don’t want to sign up too many people on one side, if you don’t have enough people to buy from them and vice versa. So they all have this really difficult period, where it doesn’t look like very much is happening. Then, they get to a critical point and they can grow extremely quickly. Then, of course, they become really high profile and unpopular. It’s really obvious that they’re fantastic for consumers and the fact they have millions of consumers speaks to that. All the concerns about ‘Is this really a good deal for the suppliers on the other side?’ — you have to think about the counterfactual. What would be happening to those suppliers otherwise? People don’t have to drive for Uber, so how good the deal is for them depends on what outside options they have. In the UK, most Uber drivers switched from other minicab companies. They’ve got a minicab license and they could switch back. So, as long as they’re willing to drive, it seems to me they’re getting value out of it. Obviously there are all kinds of issues raised by these platforms, but there’s a sort of hysteria on both sides about them which is, I think, unhelpful. But there are more and more of them. It’s a very successful business model when it works. There are real challenges for non-US companies because when you’re going through that period—before which you can tell whether you’re going to be successful—you eat money. And only the US has had finance of scale to turn these into very large businesses. If you can get to be big enough, you can become global, because there are huge economies of scale in this. So there’s a challenge for companies in any other country in getting to the scale in which they can compete with the American titans. I think it’s the finance — because you can enter other markets globally. The only successful competitors have been in China, so the scale of the home market is obviously important, but they’ve also had some deep pockets behind them. In the UK, Deliveroo has been the most successful in terms of raising finance and profile. They raised something like GBP150 million, whereas Uber has raised billions of dollars. So Matchmakers is a nice business-economics book. It describes how the business model works, it gives lots of examples, it talks about the challenges in terms of regulation and competition. If you want to start to understand the issues raised by these kinds of businesses, it’s a really good, clear place to start. It’s all new, and that’s what Jean Tirole’s work was all about. If you use your basic Econ 101 intuition, you’ll misunderstand what’s happening in the market. For example, most often, these companies have asymmetric pricing: so the suppliers will pay the platform and the consumers will get it free. That looks like you might be doing predatory pricing, or the kind of cross-subsidy that would make competition regulators really worry in conventional markets. But it might well be that the platform, as a whole, is very competitive and it’s just got this asymmetric pricing structure. So how you think about market definition and the signs of competition or lack of competition is different."

"Jean Tirole wrote this book after he won his Nobel Prize in 2014 because, he said, people kept coming up to him and saying, ‘ Tell us what it’s all about!’ For the first time, he felt that he ought to write a book that was accessible to people who wanted to learn from him. His own specialty is industrial organisation in either regulated markets (like electricity) or digital markets (like the digital platforms). But the book ranges much more widely than that. The first half of the book is about what economists do, the state of the subject, what kinds of things we do know about and what kinds of things we need to be cautious in claiming anything about. It describes how you do economic research and how he’s done his own research; the sort of structures—so that people can get a bit of an understanding about how reward systems in universities work and therefore why people do the kind of research they do. The second half of the book is topics. He discusses everything from the Euro crisis, climate change and environmental economics to the issues close to his own heart like how you regulate better and how the electricity market works. Yes, it would be. It would be very good for students. It’s a book that you can dip into as well. In fact, he recommends that because it’s quite a dense book to just read through from beginning to end. It is quite long and I’ve read it in chunks as well, so I think that’s probably the best way to do it—to read the first half properly as a book and then to dip into the topics in the second half as they interest you or in different segments. That’s right, anything to do with market structures and how markets operate and, in particular, the kinds of markets where it’s very difficult to get competition working effectively. That includes things like the natural monopolies and it also includes these new digital markets, where there are such big economies of scale that it’s very difficult to have many different competitors. So, if you think about it, we’ve got one Google search. We’ve got one Amazon that dominates online retail. We’ve got one social media company, Facebook, that’s incredibly dominant. The book reminds me of one of my all time favourite books in economics, which is Reinventing the Bazaar by John McMillan, which I think I’ve recommended to you in the past. Nobody has cast iron solutions for these digital markets yet. It’s an area of very active research in competition economics. But he’s got some thoughts about it. When it comes to the more familiar kinds of markets, he’s worked very closely with policy makers, with the French authorities, to come up with practical solutions."

"Dani Rodrik is somebody who, for a long time, has been cautioning about the very gung-ho attitude many economists had towards liberalising trade, including financial flows. For a long time, certainly up until the financial crisis and for a bit afterwards, he was a bit of an outlier among economists because, for most economists, more free trade is without question better. I think now a lot more people would take that point of view. I think I, for one, was much too relaxed about the effects of globalisation and how quickly it was happening and what effects that might have on the economy and people’s livelihoods. It’s not that I’ve changed my mind about it being a good thing—but I’ve become much more cautious about how quickly change happens and the need to be much more nuanced rather than just saying, ‘More trade is better.’ “Dani Rodrik is somebody who, for a long time, has been cautioning about the very gung-ho attitude many economists had towards liberalising trade, including financial flows” So he’s gone from being a bit of a maverick to being a really very influential voice in this debate. The book is a summary of a lot of things that he has said in the past about that and then the new context of a more protectionist world, post-financial crisis, but also post-Trump and post-Brexit, where the political mood has certainly changed. It’s largely about trade and for anybody who has read his academic papers, a lot of it will be quite familiar. There’s also quite a bit, again, about what economists do and what economists can validly say—you know, where we should be more humble than we have been in the past. So it’s another book that’s a little bit about the state of economics itself. About trade but particularly about finance and the financialization of the world economy that happened post-1980, really. Capital flows, in particular, he would single out as being an area where we ought to be incredibly cautious in saying, ‘This is a good thing for the economy.’ Yes, he has a famous ‘trilemma,’ which is about not being able to get everything you want at the same time in international economics—something has to give. Yes, it’s a great introduction. He is another really clear writer, so it’s very accessible. He’s probably still a bit outside the mainstream in his views about this, but he’s somebody who has been much more ‘right’ than many other economists and should absolutely be taken seriously about this."

"This is a somewhat tougher read, although it’s not technical. Anybody who is interested in finance or has worked in the financial markets will be interested in it. It’s a very ambitious book. It’s trying to bring together what we know about human behaviour and psychology and what we know about some of evolutionary theory and how that might operate in the economy and transferring that to financial markets. As well as being a finance professor, Andrew Lo is somebody who has actually run a fund and been active in the financial markets. So in both ways, he knows what he’s talking about. It’s getting away from the Efficient Market Hypothesis of ill repute, which I think has been broadly discredited now. It’s a much more sophisticated and nuanced approach to thinking about financial markets. I think almost. It’s not quite there as a synthesis, but I like the ambition of saying that what we say about economics needs to be consistent with the other human sciences. So if you’re doing economics you ought to be thinking about whether your theories and evidence are consistent with what we know from cognitive science and psychology and biology. I think that’s really important because it’s about the status of economics. There are critics who would say economics is just like I don’t know—history or literary criticism, where you have different schools of thought. Ultimately, you’re going to be a member of one school or another. I just don’t believe that. I believe economics is much more like one of the historical sciences—like geology, like evolutionary biology. We will never have the same kind of evidence as an experimental science (although we’re doing more experiments) but we need to think about society and the economy as part of that human construct in the natural world. We are part of the natural world and we need to be much more aware of that than typically we have been. So I really liked that ambition. I don’t think it’s quite the grand synthesis, but in the specific context of financial markets, it gets quite a long way. I don’t remember, but I’m sure it’s an allusion to Charles Darwin’s insight that came from visiting the Galapagos, where he saw that the finches had evolved slightly different beaks as soon as they couldn’t travel and were separated by the ocean between the islands. That’s what gave him the insight to come out with the theory of evolution by natural selection."

"This is a slightly quirky book, which I really enjoyed reading. It’s about getting over some messages about financial markets using stories. The idea of storytelling and economics is gaining ground. Robert Shiller , the Nobel Prize winner, is doing a book now about narratives. I think this is partly because economists have come to realise, in the past few years, that the way we talk to people analytically doesn’t resonate with many of them. Almost all economists said Brexit was going to be really bad for the economy and that message didn’t get through at all. It didn’t speak to people. So, for a number of reasons, I think this idea of narrative has become more salient. This is just a very nice book that uses different kinds of stories to make points to students. It started as a lecture course—a single lecture even—just to make some points to students about how the financial markets operate and how people who work in them ought to behave. So it’s a somewhat moralistic book as well—about doing good finance and not bad finance. It’s just an incredibly, incredibly enjoyable read. Again, finance isn’t my area so I couldn’t comment with expertise on how good he is at financial economics, but I really enjoyed reading the book. That really bugs me. I put a lot of effort into trying to communicate clearly about economics in ways that will speak to people. But just like it’s okay to say ‘I’m no good at maths’ it seems to be okay to say, ‘I don’t understand finance.’ But it shouldn’t be okay. It’s bad enough when it’s the general public and it matters to them personally. It’s even worse when it’s other social scientists. Remarkably few sociologists or anthropologists have looked at financial markets. I can think of a few books, but there haven’t been all that many. These really basic explanations are incredibly important to people. I do think this is a very good book for that. It’s up there with the John Lanchester book a few years ago, Whoops!, which I thought was another great, complete introduction to what had happened in the financial crisis. Definitely this one. The Andrew Lo one does assume much more knowledge about financial markets."

"This is a very different kind of book. I suppose you would put it alongside a number of more general books about what’s been happening to the working and middle classes in America of late. It’s a repeat of a study that was done—I think it was in South Africa and India some years ago—where they spent a lot of time with families to understand where their money comes from and how they use it and how they save; the sort of everyday mechanics of what people do. What they learned from doing this in America was that even people who had what looked like quite a high level of income on average experienced great uncertainty—because of the way their jobs worked or because they don’t have health insurance or some big bill to do with their car landed and they had to have their car for work. So it’s about that kind of vulnerability and how extensive that is in American life. I thought it was a much more interesting insight than saying, ‘There are some very poor people in poor communities,’ which is part of this genre, because of the detail and because of the fact that it does go so far up the income scale. It’s an incredibly sympathetically written book. The researchers actually went and spent a lot of time with the families. You get a very detailed and sympathetic perspective on how they cope. It looks a bit at whether there would be ways of developing financial products to suit people—savings vehicles and the way that the credit market operates, more than policy. Because I think the policy questions about that take you to some very big social contract kinds of decisions. To any European, it’s just astonishing that the US health insurance market operates the way it does. But that’s the kind of question that gets raised by it, I think. It also takes you to all of the concerns about gig work and zero-hour contracts, which are not really to do with the digital companies. They’re to do with the fact that that’s the way the American labour market has been going for a long time. There’s been a lot of contingent work. It’s nothing to do with digital. It’s an epidemic of uncertainty and it goes a long way to explaining the politics of the US. Or the European countries where there has been populism, for that matter. I suppose, in a way, it links back to Dani Rodrik’s arguments about the price we’ve paid for having ignored the transition costs of the free trade, globalised, financialized world."

"It’s not a way to turn a book into a bestseller, is it? To have law and economics in the subtitle. What I like about this book is that it addresses an issue that I’ve pondered a long time in thinking about economic policy, which is that policymakers often think about themselves as outside of the society that they’re trying to act upon. “It’s like a snake eating its own tail. You’ve got to complete the circle to understand how economic policy is going to operate” If you think about it in game theory terms—and Kaushik Basu is a game theorist—then the person making the laws, making the policies, isn’t part of the game. What he argues is that this makes no sense. We know that in some societies, laws and social norms operate very well, and in others, they don’t. That must be something to do with the structure of the game itself. It’s like a snake eating its own tail. You’ve got to complete the circle to understand how economic policy is going to operate. He makes the law enforcers and the lawmakers part of the ‘game’ of society, and I think that’s an incredibly important insight. It’s an egalitarian approach, if you like, because it brings the policymaker off the pedestal and puts them on the same basis as everybody else in society. It means that you think about policy and law in a different way, too. You don’t think, ‘Here I am, omniscient, figuring out the best thing to do for society.’ You think, ‘I have to figure out what I want to achieve but also what everybody else wants to achieve and how they’re going to react.’ So policy will often be about creating what game theorists call a ‘focal point’—a politician might call it a vision—that will align people towards certain common objectives. One of the big questions in economics is what distinguishes poor economies from rich ones. The answer seems to be that it’s about the institutional structures and the legal frameworks. Is there corruption or not? Can you rely on other people or not? Kaushik Basu’s approach is a way of thinking about what incentives judges and policemen in a developing country or a country like Italy have, and what it is that makes them act corruptly. When you start to think about their incentives too, you get a better handle on how you might switch from one kind of country into another. Yes, and the words game theory shouldn’t put people off, because it’s very accessible. He actually does a really good job of explaining game theory. So it’s not only a good book for policy people and general readers, but if you’re an undergraduate trying to understand game theory, it’s good book for that too. It’s as much as anybody needs on game theory. Yes, the law and economics toolset does normally get applied in that kind of context. So I think it’s really interesting to extend it to these much broader questions as he is doing in the book. Yes. When academics can write accessibly, I think those are the best economics books. Many academics are terrible writers, as you know. And there are plenty of really good, popular books about economics written by journalists. I was a journalist myself for a long time, so I don’t disparage them at all. But when you get an academic writing about the area on which they have spent years of research and thinking and they can do that in a way that the general public can understand, then that’s going to be a very powerful book."

"The Community of Advantage addresses the same kind of unease I have about economic policy that made me like my first choice—this idea that the policymaker knows better than everybody else. The policymaker stands outside and figures out what to do and then applies the policy to make things better for everybody else. That raises a lot of questions, such as, ‘Well, how do you know what’s better for everybody else?’ And ‘Who are you to say this is the way things should be?’ Rather than game theory, this book looks at behavioural economics . It’s an area that’s become incredibly popular in recent years, and policymakers are trying to adopt behavioural economists’ policies. In a way, that’s even worse than applying the conventional kind of economics, because it’s derived from Skinner’s behaviourist psychology and operant conditioning. It’s been doctored by advertising and marketing people over the years and it’s trying to manipulate people. I’m uncomfortable about saying that not only do policymakers know better, but also that everybody else has these quirky, behavioural biases which mean they make bad decisions for themselves—so we’re going to manipulate them to make them do what’s right for them. “When you get an academic writing about the area on which they have spent years of research and thinking and they can do that in a way that the general public can understand, then that’s going to be a very powerful book” What Sugden is arguing is that of course behavioural economists are onto something. There are many contexts in which people make decisions that are not like the rational, calculating homo economicus myth. But we need to think about that in a way that’s not paternalistic and manipulative, as so many behavioural economists do. His approach is in the spirit of someone like Thomas Schelling, who urges us to think about ways of approaching policy. We know it’s in the interests of people to act in their own interest. This is why I link it to the Kaushik Basu book, because you can very easily frame that in a game theoretical way. You’re trying to figure out what happens when everybody looks out for their own interests, but also responds to what they think everybody else is going to do."

"I picked this book up by chance. It had been sent to me by a publisher and it was just one of those random things, because it’s not my field at all. I found it absolutely compelling. She’s a former management consultant who has gone to the management records of the big slave plantations in the West Indies and the American South. She realised that they started as quite small enterprises, but grew into very large enterprises over time. They professionalized management practice and recorded what they did. This professionalization, in fact, preceded and guided American manufacturing, which is where we normally think Taylorist approaches to management and standardization came from. So that in itself is quite interesting—that those techniques came out of this morally reprehensible set of businesses and then got adapted elsewhere in the economy. But the book is also really interesting because it speaks to my own interest in understanding what we measure in the economy: how what we think of as data, things that are given, are not natural objects at all, but categories constructed by social practice and power in a society. So take this idea of people as assets, as capital stock. In economics, everybody talks about ‘human capital.’ We think it’s very positive, because if you use the concept of an asset, you can think about investing in your own future. But it’s sobering to realize that actually, that concept was used in a very different context—a very disturbing one. She has a great line: Reckoning with the ways planters accounted for slavery should encourage us to rethink the kinds of data we record and how we use it. Quantitative records can help us see farther, but only if we remember what the numbers make visible and what they erase. I think that’s a very powerful statement. Yes, and children dying is depreciation. Just the level of detail is incredible—for example, that businesses that started selling record books with pre-printed pages so that you could keep better records. Originally, planters moved. But then, as the merger of the plantations happened and they grew, it became a professionalized business. There is also a lot of recent work looking at the implications of this for the development of the British financial markets, because many slave owners were British. The investments people made in the plantations helped expand and create the markets for financial instruments in the UK."

"Edith Penrose was an American economist who spent most of her career in the United Kingdom and then in France. She was a business economist who researched how companies are organized. Her work was on multinationals and the oil industry in particular. She’s the sort of name I had vaguely heard of before, but again, this was a book I picked up slightly at random. It’s a really compelling life story. What’s interesting is that she’s almost faded out of economics. She was much better known in the 1970s because of the oil crisis and the development of multinationals. People knew her work then, but it has completely vanished and dropped off the radar. I think that’s partly because she was a female economist, and it’s always been a very male-dominated profession. Get the weekly Five Books newsletter But it’s partly also because her approach was not very algebraic. She was working at a time when that became the thing that you did to be counted as a brilliant economist. She set up the economics department at SOAS, part of the University of London, but she ended up working in business schools rather than economics departments. More recently, economists have been rediscovering a lot of the things that she had found—in a non-mathematized way—about the organization of very large companies that operate across national boundaries. There’s not much about her economics in this particular book, but it sent me to her own book, which was called The Theory of the Growth of the Firm . This theorizing about why companies turn from normal, small companies into large conglomerates is what she was thinking about. I’ve been pondering this and did a talk about it here in Bristol last year. I think the really distinctive thing about economics—and maybe one or two other subjects, like philosophy and computer science—is that there’s a very narrow concept of what makes somebody brilliant. It’s about showy intellectual games of a certain kind and if you don’t do that, you don’t count. And I don’t think women can be asked to do that. It’s just stupid stuff, isn’t it? The insight you get from reading Edith Penrose’s book about the dynamic of firm growth is that it’s just as good as the later algebraic versions of the same thing. I guess it would be people like Oliver Williamson and that institutional tradition. He did some fantastic work and he deserved his Nobel Prize for it, but it’s not an enormous leap from what she was doing. That era was obviously diabolically bad for women academics. We complain now, but looking back, we shouldn’t. It’s a little better. You’re not expected to stop working when you get married. That’s progress."

"It appealed to me because of the title. I love the title. I’d seen some random reference saying it was a brilliant book and when I’m really busy, a nice little treat is to buy a book (although then, often, I’ve got no time to read it). So I bought it and I found it a really good read. I don’t know much about the Vienna Circle, or logical positivism, or mathematics or quantum physics, and a lot of it’s about that. But what I liked about it is that it’s one of those intellectual histories that tells you the story of a time and place, and relates that context to why the ideas turned out the way they did. This was obviously Vienna between the wars—a particularly fragile time, looking back at it. Hence, I suppose, ‘demented’ in the title. Logical positivism does have some link to economics. Obviously it affected philosophy and gave us that linguistic turn in philosophy which always made me so impatient because I thought, ‘Why on earth are they debating these trivial differences in meaning when it’s perfectly clear what it means? Just pull yourself together!’ But it also affected economics, through Lionel Robbins in particular. Robbins wrote a book in 1932 called An Essay on the Significance of Economic Science and he was much influenced by logical positivism. His argument was that you could separate the positive and the normative aspects of economics. In other words, you could separate means and ends. It wasn’t the job of economists to talk about the ends of public policy or the management of the economy. That was for politicians or the people to debate and was about moral values. It had nothing to do with the economist who was a technocrat looking at positive means to the end that had been determined somewhere else. This was a complete break with tradition in welfare economics. Pigou had explicitly said that you can’t separate the values from the recommendations that you make. Though it’s not in the book, there is this link to economics, which is why it’s worth understanding logical positivism. There’s also some nice stuff in the book about early visualizations. One of the members of the Vienna Circle was called Otto Neurath and he invented data visualization. He set up an institute for pictorial statistics and they came up with these pictures of little human figures that you see so much in data visualizations these days. He had a whole museum in Vienna devoted to data visualizations of the economy and society. I feel we should know about it in general, yes. The other issue it raised for me was thinking about the times. We live in demented times as well, don’t we? I’ve been finding it very troubling reading writers from that era. Another is Stefan Zweig, who wrote a fantastic book called The World of Yesterday . He and his wife fled Austria before the Nazis started imprisoning Jews. He talked about that boiling-the-frog phenomenon. People carried on living their normal lives and things got worse little bit by little bit. And by the time they realized it had changed a lot it was too late. So most of them didn’t escape. It’s that sense of the fragility of all this brilliance in demented times that I found quite poignant about this book."

"Sen is a really important and inspirational thinker. He is known for advocating the capabilities approach in economics. Conventional economics is based on the idea that people maximize their utility or maximize their profits. It’s one dimensional. Sen has advocated this much richer capabilities approach, where you try to take account of the many different kinds of things or dimensions that would affect people’s well-being. It’s been incredibly influential in development economics and, increasingly, in other areas of the subject, because of a new appreciation of the importance of the environment or of unpaid care, for example. This memoir is really fascinating. It’s beautifully written, a really good read. It’s all about his intellectual formation, growing up in Bengal in British India—which became part of Bangladesh—in a school established by Rabindranath Tagore and the philosophy of education that instilled in him. I suppose the fact that he received such a different intellectual formation, from such a different background, made it possible for him to challenge the conventional approach to economics that he would later be taught. He was a poet and creative writer, but also a philosopher, statesman, and a very influential thinker. As an account of someone’s intellectual formation, I think it’s an absolutely fascinating book. The questions Sen raises are of growing importance in how we think about what it is that economics is supposed to be all about. If you think of a person giving policy advice on the basis of economics and asking, ‘What am I doing to make things better?’ you really ought to be interrogating what you mean by ‘making things better’—for whom and in what ways. Like all conventional economists I’ve been trained in a very uni-dimensional social-planner way of thinking about doing things, so I really enjoyed reading the book. It was a bit more complicated. The book goes up to the period where he has been a student at Cambridge and he’s got his first job in academia, in the United States. He was obviously an incredibly able student in terms of conventional economics. But one interesting thing about his background is the way that the mode of education in his school was to question. So there are passages in the Cambridge section where he talks about how much he enjoyed the conversations he had with senior figures, but also the disagreements he had with them. I don’t think he was being a rebel, particularly. It was just this ingrained habit, through his early education, of questioning."

"Yes, it’s about the impact of the pandemic. Adam Tooze is an economic historian so he brings a historical perspective to the way he writes this first draft of history. It’s not a piece of journalism, but it’s very much addressing something that’s still happening to us. It’s this instant analysis of what happened. Get the weekly Five Books newsletter There are some other excellent books about the science of the pandemic, like the book by Sarah Gilbert and Catherine Green, Vaxxers , on the vaccine development, and Spike by Jeremy Farrar on the epidemiology and policy. But for an economist, what’s interesting about Adam Tooze’s book is the integration of economic policymaking alongside the unfolding events of the pandemic. It’s mainly focused on the US but does touch on global events too. His previous book, Crashed , was about the great financial crisis. What that very clearly established was the important role that the Federal Reserve Board played in maintaining world systemic economic stability. That, in effect, happened again in 2020. The actions the Fed took to make sure that we didn’t have an even bigger economic crisis—through financial markets seizing up and panicking—were important. The book is a ripping yarn of events, month by month. You feel that you’re plunged into that decision-making and it was economic aspects of the decisions that I found particularly interesting. In the US, the discussion has been about the size of the fiscal stimulus needed, so there has been some debate, and there’s also a debate around modern monetary theory and how much you should worry about ‘printing money.’ But I think you’re right to suggest that policy has actually succeeded incredibly well. As a result, the economic debate has been lacking a tempestuous quality, I suppose. When this all started, it was an unprecedented event in modern history, that economies were shut down by governments. It was remarkable that governments could do that at all, given that we had got so used to thinking about how limited and ineffective they are compared to market organisations. The fact was that, despite this, there wasn’t a massive recession. If you cast your mind back to March and April 2020, the Bank of England , for instance, was saying that we would have the worst recession in 300 years. Measures of GDP absolutely plunged. Obviously, there are many people who were worse off as a result, but it wasn’t a complete disaster. In that sense, the economic policy response has been very successful. There’s also, in a more subterranean way, integration going on between the epidemiology and the more detailed economics—trying to understand better people’s own personal responses to the news about the virus in terms of their economic activity. Previously, these two kinds of modelling had gone on parallel tracks. Over time, once the pandemic started, they became more integrated with each other. I think so. That’s certainly what Adam Tooze argues. I find it very persuasive. And, of course, it was relatively recent in the scale of economic history."

"I have to disclose, first of all, that this is by a colleague of mine here at the Bennett Institute , Sam Gilbert. It’s a very healthy counterbalance to the ‘surveillance capitalism’ trope that has become so popular. The underlying reality is that there are pros and cons of this new digital data economy in which we find ourselves. There’s a genuine trade-off between the degree of privacy that we might want in an ideal world and the goods and services that can be created for us using the information based on data. Sam Gilbert was one of the co-founders of a very successful online insurance company and was responsible for a lot of the use of data in marketing that they deployed. He’s done a lot of subsequent research. The point about data is that it’s not useful in itself, it’s useful for the information it gives us that we can act on, or that allows us to do things differently, in order to give us better outcomes. Quite often things that are useful require different sources of data to be brought together. To give you a pandemic related example, if I take my temperature, it’s only useful information to me if I know what the population average is, so I know what’s normal. In current circumstances, if I have a temperature that might also be useful information for other people. So there are these positive spillovers of data. At the same time, I’ve got reasonable expectations of privacy. Completely understandably, I might not want people to know many details about my health. These are the kinds of trade-offs that we’re trying to navigate in this world and yet the surveillance capitalism idea has made a lot of people just think it’s terrible that we’re sharing data at all. “The point about data is that it’s not useful in itself, it’s useful for the information it gives us that we can act on” If you think back to the start of the pandemic, there was a fuss about whether the NHS app to track people’s contacts, could actually have private information centralised and shared in the government database. That’s incredibly useful if you want to do a track and trace operation, and it’s what the physical track and trace operation does: it asks people about their personal contacts and follows them up. But because the data privacy debate has got to where it has in terms of surveillance, the government was not able to do that on the app and had to use the Google and Apple version, with embedded privacy. It’s all very decentralised. You alone will know if you’ve been near somebody who’s tested positive and they’ve reported it. But that’s much more limited in use when it comes to containing a pandemic, which is all about spillovers between people. So you can reasonably debate whether we got to the right point in that trade-off. That’s what the book is about. It’s about opening up that debate and saying it’s not all one-sided. Using data in all kinds of ways can help address either public policy problems or business problems, or help businesses come up with new ideas. The potential is very wide. But, if we’re going to tap into that potential, we need to have a clear set of protocols about what data could be used when and by whom. There are certainly examples, like children in so-called ‘troubled families.’ If you can join up health data, school data, police data and social services data effectively, you can see that might help address all kinds of problems—social problems, inequalities—and help children at risk. But, equally understandably, there would be concern about anybody who got tagged with that label. Who would know that about them? How long would it follow them as they lived through their lives? Would that be a permanent digital fingerprint or could it be forgotten? There’s a lot of quite intricate policy detail to discuss. I find the surveillance capitalism argument very unsophisticated: it ignores the detail. That’s the argument. I’m a bit less confident because it depends very much on the governance arrangements that we set in place, and they’re just not there yet. We’re only just starting this debate."

"This is a fantastic account, absolutely gripping, by two of the principals involved in the development of the Oxford/AstraZeneca vaccine. There are all kinds of really interesting insights. One thing that interested me was how early people in the epidemiology community spotted the warning signs of the coming pandemic—well before it hit the headlines, and well before it came to the attention of people in Whitehall who are responsible for spotting trouble ahead. A bit like the financial crisis, there were some people who saw it coming well in advance, but it didn’t permeate through into the public consciousness or the policy consciousness as quickly as you might have hoped. “One thing that interested me was how early people in the epidemiology community spotted the warning signs of the coming pandemic” And—for somebody who’s in research—there’s a lot of very interesting material about how research gets funded and how hard it is actually to get the money for what might turn out to be fundamentally important research. You have to spend so much of your time writing proposals for short-term or relatively small pots of money, that it’s very difficult to sustain fundamental strands of research. So, kudos to the University of Oxford: they stumped up the money at their own risk for the vaccine development work to continue, before it was clear that it would get funded through the normal kinds of research channels. There’s also great material in the book about how to scale up, how to work alongside manufacturers, because the research facilities were quite small-scale and we needed millions, billions, of doses of vaccine eventually. So the discussions about how it got commercialised, how AstraZeneca came to be part of it and, actually, how well they come out of it in the sense of not taking a profit during the crisis, is all very interesting. Then, at the human level, these are mothers juggling responsibilities of what are busy jobs at the best of times, and the sheer pressure of working at pace and this intensity on something of such fundamental importance. It’s a description of science in action, of how important research is, and raises questions about the kinds of structures of work and research funding that we have in place. Quite apart from this current pandemic, it leaves those as open questions for the future and for other areas. This gets glossed in different ways. The science is clearly amazing, the vaccine development happening so quickly. I do remember back in March 2020 people talking about vaccines, and thinking, ‘but they take years and years to develop and get through clinical trials, how on Earth is that going to happen so quickly?’ So there is that fundamental awe at what the scientists have been able to do. But there are other structures that made it happen at such speed. There was a very interesting lecture by Kate Bingham, who headed the UK government’s Vaccine Taskforce , a couple of weeks ago. It was about how many barriers there were to getting things done that quickly and effectively, in terms of usual government procedures, and the battles she had to fight to overcome the risk aversion of civil servants, who wanted to go through lengthy procurement processes, and the lack of joining up across different departments in government."

"I like reading history because when you’re researching technological change and innovation, as I do, there’s not a lot of non-historical data to go on. You have to look at the examples that we have from the past. This is a biography of Josiah Wedgwood. What’s interesting about it is the way it illustrates how you integrate basic research into manufacturing. He did lots of experiments about how glazes worked, what temperatures were needed, what kinds of clay gave you which different kinds of effects and so on. There are some beautiful illustrations of the kind of samples he created. It was basic research, but the book also shows the way that interacts with the manufacturing process, understanding the skills of the people who are actually loading the kilns and handling the pots. Then, further, the integration of what he could produce using these new techniques and styles with marketing. Marketing led to the importance of the designs of the different tea services and vases that he was creating. He sent free gifts to famous people, to influencers such as royalty, who would then help create the middle-class market for his goods. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . It was clearly a time when the Industrial Revolution was making a lot of middle-class people better off and they could start to think about affording luxuries, like a different tea service with a new pattern. But it’s that whole process of vertical integration—from basic research and digging up different kinds of clay on expeditions, through to a real attention to the detail of the design and the marketing and how you created that mass market—that has been taken out of a lot of modern manufacturing by global supply chains. Different stages get done in different places now. There are lots of companies that have outsourced manufacturing to Southeast Asian countries or are trying to. With hindsight, that looks like a mistake in terms of national policy. It might be fine for the companies themselves if they save money in the short-term. But that deep knowledge of how you innovate in the light of the manufacturing techniques you’re going to have to use—I think that’s something really valuable that’s been lost, and it was one of the things that really leapt out of this book. Since the 1980s, when globalisation started to take off. Trade liberalisation made it possible and information and communication technologies made it seem easy to have these very extended global supply chains. So it’s been relatively recent. But a lot of British companies lost their way with spending on R&D earlier. We’re not very innovative. The number of companies that say they do R&D in the UK is pretty low. I remember a TV series called Troubleshooter , presented by Sir John Harvey-Jones. He was a famous businessman, very successful. He used to go to failing businesses to ask them what was going wrong. Could he help give them some advice? And he actually went to one of the pottery companies in Stoke-on-Trent. They had, in effect, stopped spending on the design part, the R&D, to cut costs in the face of overseas competition. So they had lost that magic source that made Wedgwood and other British pottery companies so successful in the first place. That was, essentially, his diagnosis in the TV programme. The book illustrates how important the research and innovation was."

"This is really remarkable if you think about humanity’s evolutionary origins: very tight-knit social circles, where if somebody wasn’t a member of your immediate family or kinship group, you’d probably kill them as soon as you saw them. So this extension of trust to millions of other people who make products and services that we depend on every day is really quite extraordinary. The book is about how miraculous this is – and we normally don’t think about it in those terms very much. Also, how fragile that makes the economy in some ways. The new edition looks in particular at the global financial crisis as a demonstration of the kind of fragility that comes about through those interconnections. Paul Seabright isn’t hugely pessimistic: he’s not one of the people who are saying that civilisation is bound to collapse because it’s become overextended and overcomplicated. There are some books that do that – Jared Diamond’s Collapse is a good example of a book that is pretty pessimistic about our ability to sustain the kind of global economy and society that we’ve developed. But in The Company of Strangers Paul Seabright says we need to think about the way human beings relate to each other. We need to think about what we can learn, as economists, from anthropology and sociology, in order to understand how better to govern what we’ve created. Because if you think about it, there are lots of examples of how we don’t have very good rules and systems for making sure that the world economy is well related between countries. It’s still a very nation-state based system. “Although I think the insights of economics are essential, actually, good economists have never thought economics was enough.” This is something that people had started to say about globalisation anyway. If you look, for example, at what’s been happening at the Foxconn factory in China…when we think about the standards that those kinds of factories have, compared to the standards in our own country. What do we think about international trade rules that mean that we import things from low cost countries? What kind of intellectual property rules do we have between different countries, where what a US court decides about an American company, in the Google Books case, for example, has implications for writers and artists around the world? So the argument of the book is the need to think about how to do it better and how to draw on psychology and anthropology to allow us to do it better. That’s right, and although I think the insights of economics are essential, actually, good economists have never thought economics was enough. There’s a kind of caricature about economics, that it’s all about the false assumption that people are rational, calculating machines who don’t care about anybody else. That’s never been true. There was a high tide of economics that was like that in the Thatcher and Reagan era, but that was well over 20 years ago now. For the past generation economists have moved very far away from that kind of caricature. And good economists always drew on history , they drew on mathematics , they understood psychology (even if they didn’t incorporate psychology formally in their models), they were interested in political science and political decision-making. It’s always been a subject that’s been at the cusp of a lot of other disciplines, and I think that interdisciplinary strength has been revived recently and is very much to the fore in a book like Paul Seabright’s."

"I’m one of those economists who love reading history books . I think we can learn an incredible amount from past episodes, because while I do think that economics is a science, it’s a science of a historical kind. It’s a bit like geology, where you have to understand past processes through the bits of evidence that you can see in the rocks around you. You can’t carry out experiments in geology, and you can’t really carry out experiments very widely in economics, though there are special cases. So history books are really important source material for economists. As well as historical data, we need all the additional detail and colour you get from reading history. The Wealth And Poverty of Nations is one of several really fantastic economic history books of recent times that address the big question, the main question in economics, which is: ‘What makes people prosperous? What makes an economy grow?’ And we have to be humble and say we don’t actually have a very good answer to that question… We’re still searching for what the right answer is. Different historians emphasise different aspects. Landes’s book emphasises the importance of culture in economic history, and there are other economic historians, like Joel Mokyr, who would emphasise the same kind of thing. So the idea people have about the economy, and how society ought to work, will affect economic growth and how it turns out. “While I do think that economics is a science, it’s a science of a historical kind.” There’s a fantastic example that’s always stuck with me. It’s about Jacob Rothschild, who died of an infected abscess. He died through want of an antibiotic that would cost $10 these days. He was the wealthiest man of his era, but he couldn’t be cured of a simple infection because innovation just hadn’t taken us to that point yet. It’s a really powerful example for me, because it points out that the thing about capitalist economic growth that makes people better off isn’t more stuff – it’s different stuff. It’s the innovation and it’s the variety, and it’s the new products. Another terrific example was a television series that was on in 1999, ahead of the millennium, called The 1900 House . A family was asked to live their lives as if they were living in 1900 and not 1999, down to every last detail. And the thing that nearly made the mother want to give up the experiment was that she didn’t have shampoo and she couldn’t get her hair properly clean. When you think of the new, fantastic high-tech innovations there have been, like cars and computers and so on, they didn’t matter to her. She could live without those, but she could not live without shampoo. And those apparently minor innovations actually make a fantastic difference to people’s wellbeing and their prosperity. That is what economic growth is all about – understanding, over time, the conditions that allow people to have new ideas and to innovate. That’s what’s fundamental and that’s what The Wealth and Poverty of Nations is all about. I think it means the conditions in a society that determine how people think. Is it possible to have new ideas, or will you be regarded as a dangerously subversive heretic for having new ideas or doing things differently? Are there certain ways for women to behave that mean it’s very difficult to increase the general level of education in the society? Are there belief systems that people have that mean things have to be done one way, and not another? So that’s how I think about it. Another aspect I suppose is the social capital dimension of culture, how much people trust each other, because trust is fundamental to any economic exchange. Unless you’re handing over one item for another in a face-to-face barter, then you’re depending on trust. So the level of social capital is very important – how tight-knit the community is, how much people in the society will trust strangers, can you transact with people outside your own village, outside your own town, or in a different country? Globalisation actually places huge demand on the level of trust in the world economy – you really have to have confidence that if you place your order on the internet, somebody in the factory in China is going to deliver the product so that it will eventually turn up on your doorstep."

"Butterfly Economics is by an economist who is very critical of most other economists. Paul Ormerod might classify himself as a heterodox economist, outside the mainstream. But actually I think his approach is one that mainstream economists ought to take very seriously. He doesn’t adopt the model of rational economic man, he doesn’t believe that people make rational calculations based on wonderful information – he believes that they influence each other. It’s that aspect – of people influencing each other – that is missing from a lot of macroeconomics, when people think about how the economy as a whole behaves. Most economists would assume that I make my choices about what to buy in my own mind, and it doesn’t depend on a program I watch on television, where I see somebody else wearing something and that makes me want to go and buy the same dress. So Paul Ormerod looks explicitly at how we influence each other in taking economic decisions. And I think it’s a much more fruitful way of thinking about a recession, for example, as a kind of collective failure of confidence in what the future is going to bring. If someone starts to feel pessimistic then they don’t invest in their firm as they might otherwise have done, and if they’re not investing then someone else starts to feel pessimistic about their prospects too. And it’s almost a kind of contagious disease, where a recession becomes a self-fulfilling phenomenon. Get the weekly Five Books newsletter Financial market bubbles are another good example of how one person having the confidence that the price of an asset is going to carry on going up will make other people have that same confidence, and it will make itself come true. So Butterfly Economics is about that – the title refers to the famous statement in mathematics of complexity theory, where the flapping of a butterfly’s wings in Brazil can cause a hurricane on the other side of the world – because those interconnections, even if they seem minor from one to the next, actually can have major implications for how the system as a whole turns out. In the book there are lots of terrific examples about how you need to think differently about economic growth and recessions and financial markets, if you are thinking about the influence that we definitely do have on each other. One of the interesting implications is how we do economic policy. If you think about how the governments of the Western world are dealing with the financial crisis and its aftermath, they think of it very much in terms of, ‘We’ve got the lever of monetary policy, and we can loosen that a bit to help stimulate the economy,’ or, ‘We’ve got the lever of fiscal policy, and we can equally use that to try and stimulate the economy.’ It’s a very mechanistic way of thinking: that if you do x then y will follow. But one of the implications of the self-fulfilling economy model is that it’s actually extremely hard to turn around one of these spiral or avalanche processes, and we only have the illusion that governments can control the economy in this very mechanical way. There’s a chapter in the book called, ‘The illusion of control’. It’s a fantastic contrast to the conventional way of thinking, which dates back to the 1950s when a well-known New Zealand economist called Bill Phillips actually devised a machine (which now sits in the Science Museum in London) where he built a physical representation of the economy as a model with lots of valves and tubes and reservoirs, and if you poured a bit of liquid in, the level of the economy would go up. It was an incredibly mechanical and reductionist version of how to do the economy. I think they have become part of the mainstream, especially in financial markets, where economists like Bob Shiller have made very much the same point, and in the behavioural economics literature . But that doesn’t stop a lot of people who are critics of economics pretending that they haven’t. You still read a lot of newspaper articles and even quite learned journal articles in other social sciences criticising economists for not doing exactly the kind of work that so many of them are doing now. I find it extraordinary. I’ve written a whole book, The Soulful Science , which says, ‘These are the terrific things economists have been doing for a couple of decades!’ It still doesn’t stop this rather ill-informed criticism. And I’ve even now come across people saying, ‘Well, economists are only pretending to change the way they think about things when they talk about behavioural economics and psychology. They’re still not really understanding the world the way they ought to.’ I don’t know what you can do, apart from carry on saying, ‘Here’s all the good stuff.’ It’s a fancy way of saying it’s mathematics that looks at non-linear relationships over time. Economics has tended to use linear relationships, because they’re easy to solve. This is a new kind of maths that dates back to the 70s or thereabouts, and has been used in the physical sciences and biology, and is now being adopted in economics. He’s a highly mathematical economist."

"The Free Market Innovation Machine is by Will Baumol, one of the most fruitful and creative economists of our time. He wrote my textbook when I was an undergraduate – which was a very long time ago. This is a book about how companies do research, put it into practice and develop new products and services. The real insight in it, which hadn’t really been documented so carefully before, is that big companies and small companies do very different types of innovation. The small ones are much more likely to come up with really radical and disruptive innovations, whereas big ones, with their huge corporate R&D departments, are much more likely to make incremental improvements of existing products. It ties in with the literature in business economics and at business schools, such as the innovator’s dilemma, which argues that it’s very difficult for an established company to do something that will really disrupt its existing, profitable business model. It’s much easier for someone small and new to be disruptive. So Will Baumol looks at examples of the kinds of innovations small companies have introduced compared to the improvements that the big ones do. You need them both. You need the completely new product that will overturn things, but you also do need the constant, decade’s worth of steady improvements as well, because the first version of something that comes along usually isn’t very good, and you need the deep pockets and research efforts of a major company to bring along the successive improvements that will make it acceptable and accessible to the great mass of consumers and become a mass-market product. This book launched an entire literature looking at the detail of innovation, and what different companies actually do, in much greater detail than had been brought together before. For all the great virtues of economists, many tend to generalise about business without looking at the detail – and the terrific thing about Will Baumol is that he’s an economist who really is interested in the detail of how companies and markets work. Yes, and since it was published it’s become much more widely studied. People have become much more interested in innovation as a whole, because the impact of the computer and biomedical technologies on overall productivity growth has been quite widely recognised since just after 2000. In the early days of the new economy, there were quite a lot of sceptics about whether it was having any impact on the economy as a whole, and the long-term growth rate. But by 2002, when this book was published, this was coming to be much more widely accepted. It’s something we really need to understand because we have ageing societies. We’ve had a long period of pretty low productivity growth in many Western countries, and if we want to be able to sustain living standards with an ageing and declining population, we have to put much more effort into increasing productivity."

"This is a very different kind of book: it’s by a journalist, not an economist. It explains the work of John Nash, who was one of the leading lights of game theory. I chose it because game theory is such an important technique in economics and other sciences as well, particularly biology. But books about game theory tend to be pretty heavy going. This is a terrific book for just saying something about what game theory helps to do without plunging you into all the complicated mathematics of how to do it in practice. Game theory is a really powerful technique for understanding the way people respond to each other’s behaviour – for thinking about what incentives they have to do things. What is something likely to make them do? And if they’re going to do that, then what does that imply for what I need to do to get the outcome that I want? It sounds terribly simple, but once you start thinking about it and taking that approach to how people decide anything, then you realise that it’s a tool for thinking about any kind of institution or decision-making context. Game theory was devised and applied originally in the context of making strategic decisions about warfare and the Cold War and nuclear weapons. But you can think about voting behaviour and political choices, you can think about economic decisions, you can think about business strategy. Pretty much any context, you can think about in terms of game theory: If he does this, then what do I do? What’s my strategy? Absolutely. If you’re running a business, or you want to run for office in your local school district, it’s a good way of thinking about how to be successful. And there are, to be fair, some books ­– Barry Nalebuff’s is one that comes to mind – that do try to tell people how to apply it in practice, but A Beautiful Mind is a good read, and a good introduction as to how important it is and why John Nash deserved his Nobel Prize . Also, it’s an absolutely extraordinary human story – as anyone who saw the film will know."

"Carl’s work is about what the impact of this new wave of technology and automation is going to be on everybody’s jobs and standards of living. He does that by taking a historical perspective and looking at the Industrial Revolution. The fact is that for quite a long period there wasn’t any increase in average standards of living and indeed, as we know from literature, there was a period of great misery for lots of people as they moved from the countryside to work in the mills and so on. The question he’s asking is, ‘Is it going to be the same this time? Is history going to repeat itself?’ and ‘Are there things we can try and think about in terms of policy that will stop history repeating itself?’ It has to be said that this is all quite uncertain, because although people fear what automation is going to do—that wave of robots coming and taking jobs—it hasn’t happened yet. That’s probably not the strongest part of the book, but that’s because there’s no simple solution, no silver bullet that can take on that challenge. We know from the waves of automation of the 1980s and 1990s that what we did then wasn’t particularly effective. A lot of the problems of the Rust Belt in the US and in the north of England, for example, are a result of the fact that we didn’t handle those job losses particularly well. Unemployment and poverty were embedded in those kinds of places and now we’re seeing the political backlash. “We’ve got to the point where there’s very widespread questioning of the ways we’ve been doing things and how things have turned out” The book underlines the urgency of dealing with this, but also shows that it’s really quite difficult to think about. How do you rearrange the whole of a society to stop the disruption that comes with technological innovation? I wouldn’t go that far back, because the institutions and the government frameworks are too different, but you would hope that we can improve over time, that we can learn in some ways. We saw that that’s possible, actually, during the financial crisis. Central banks clearly had learned the lessons of the Great Depression . Today, I think we can learn the lessons, not perhaps from the Industrial Revolution, but from the 1980s and 1990s. We need to think about things that have been allowed to atrophy, like job guarantees and a proper welfare state. I don’t think it will get that bad. We start as a much richer society and with much more effective social and government institutions, so I certainly don’t think it will be directly comparable. Also, when you’re comparing any particular outcomes, you have to remember the counterfactual. Life as a poor person in the English countryside in 1800 was no picnic either. I think it is, because that’s the politics of backlash that we see now. To the extent you think technology helps to explain inequality in the modern world—and I think it does—then, of course, it can be stopped. The moves towards protectionism you can see are part of that, because one of the things technology has done is create global supply chains and all the logistics that go along with that, including trade barriers coming down. If they go back up, that will reorganize production again."

"I’ve been thinking a lot about AI and working with computer science colleagues to try and understand the implications for public policy, so I’ve read a lot of AI books. Actually, just as we were saying about economics books, there’s a whole clutch of AI books because, again, the interest is there. People want to understand what’s going on. Human Compatible is a really clearly written one. It explains enough about how AI works, but also what some of the challenges are. The particular challenge the book focuses on is how to program AI systems so they do what we really want them to do, rather than just what we write down in the code that they then implement. It’s actually very difficult. Think about the effects of setting targets for public services, and how easily they got gamed. When you give a hospital a minimum amount of time before they admit people, they will do things like park patients in the waiting room or on trolleys so that the clock doesn’t start ticking too quickly. Or if you give an ambulance service a certain amount of time to get to patients, they will game it so they get there in time to meet their targets. It’s the same with AI. If you set them an explicit objective—which you have to do because how else are you going to get them to do something—how do you stop them gaming things in that way and delivering something that you don’t really want? Get the weekly Five Books newsletter One example is image recognition. AIs are potentially really good at recognizing tumours and rogue cells, but they’re often trained on images of tumours where doctors have put little rulers in to show how big the tumour is. Some developers found that they had trained ruler recognition systems rather than tumour recognition systems. You’ve just got to think very carefully about what objective you’re coding into the AI. So this book is about that problem, as well as a potential solution, which is making the system uncertain about what it is the humans really want. This is at a really early stage of research in the AI community, but it’s a very important question for policymakers who are thinking about using AI in public policy. Yes, he doesn’t believe they’re going to kill all the humans to produce the maximum number of paper clips, to use the famous Nick Bostrom example . He’s not a pessimist of that kind. He’s more saying that if we’re not careful, we’ll get some adverse outcomes that we don’t really like. Because some of the areas where AI systems are being used are things like criminal justice, policing and making decisions about social care. The consequences of getting it wrong on people’s lives are just huge so we shouldn’t be making mistakes."

"Yes, it’s a historical book about the origins of what people have come to call ‘neoliberalism’, which I find a somewhat irritating as it’s a very vague term. Often it’s used to mean all of economics, which is just absurd, as if the most conservative free-market economist was the same as someone like Paul Krugman. This book is about the philosophical origins of neoliberalism in 1930s Vienna and logical positivism and how it spread globally, particularly into Anglo-Saxon and American universities, and also about the way it underpinned the philosophy of globalization that we have seen take over the world since the 1980s. It’s really interesting to understand that the ideas that we think of as ‘natural’ actually have very specific historic and cultural origins. They spread through actual social networks and institutions. The book therefore also offers insight into how you can change that public philosophy. I don’t think neoliberalism has a universal definition. I’m much more persuaded by this account, which says, ‘there’s a historical school of thought that you can accurately call neoliberalism and here’s how it evolved.’ Obviously there is this idea of unfettered markets, which is an abstraction that doesn’t make any sense. I spent many years on the UK Competition Commission, whose aim is to make markets as competitive as possible. What you quickly learn is that every market has a particular set of institutional characteristics. They’re social institutions. Companies are social institutions. The idea that there is this magic free-market realm is an absurdity. The motivations and how it came to be so influential. The idea is that they were advocating globalization as a means of enabling companies to be unfettered by government policy within a particular nation. So the idea of globalization and its inevitability stopped national governments regulating and limiting the things that companies wanted to do. That’s the historical context in which he places it. “I don’t know whether you can have economic growth with a shrinking population” Because of the Depression, the demand for the government to intervene in the economy grew. You saw the New Deal in the United States and interventions elsewhere as governments responded to it. As a result, those who were on the side of big business became advocates of free movement of goods and capital globally, as a countervailing argument to government intervention at the national level."

"This book is a series of rip-roaring tales about what you might classify as ‘informal’ economies in different contexts and the way that some of them work really well and some of them work really badly. The compare and contrast gives you real insights into what perhaps makes a formal, official economy work very well or very badly. Richard Davies spent many months travelling around the world to visit all these different places. For example, he goes to two refugee camps for Syrians, one of which is a thriving economy and the other of which isn’t, and looks at what the difference is between them. I was also really gripped by the chapter on Angola, the prison in the southern United States, and how, despite the constraints on the inmates, they manage to make some kind of economy function that allows them to satisfy certain needs. It’s in one sense not a very helpful takehome, but equally a very important one, which is that sometimes government is the solution and sometimes government is the problem. What that tells you is that it’s really hard to get government policies and regulations right. It isn’t the kind of takehome that you can go away and apply quickly. That’s a very good lesson for economists: that the specific, cultural and historical context really matters for the kinds of policies you might want to prescribe. We’re heading into uncharted waters, because economic growth has always gone hand-in-hand with population growth. And, of course, there’s been per capita growth too. I don’t know whether you can have economic growth with a shrinking population. Modern economic growth theory suggests you can’t, because the role of people in spreading and sharing ideas is such an important driver of what we think of as growth. I find that quite a sobering chapter, because there’s nothing obvious you can do about it. I would also say about Extreme Economies that it’s a great book for students as an insight into the interesting questions to ask about any economic environment, about how markets work and how policies work. It’s a great introduction."

"I first discovered Eric Klinenberg’s work through a book he wrote about a Heat Wave in Chicago. He looked at what are called ‘excess death rates’—the extent to which the death rate is above normal—and how they differed in different parts of the city during a very severe heat wave and how different social structures in Hispanic and African-American families helped explain the difference. It’s a really impressive piece of work. This is about what social scientists call ‘social capital’, so the social assets or strengths that any community has to draw on in delivering economic improvements or quality of life etc. It’s about libraries in particular, but also other social infrastructure that enables people to meet and understand each other and have safe and inviting ways to help each other. He talks about how these are being eroded through things like library closures or parks not being maintained, or just the design of public spaces in modern cities. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . I think this book is really powerful, because in economics we talk all the time about social assets as important drivers of economic outcomes. So in economic development, it’s about economic institutions, in corporate finance it’s about the value of the brand and reputation. We know that these social dimensions are important, but we don’t think about them enough. This book makes a fantastic case for provision of this kind of social infrastructure. It’s got to be embedded in particular places. The design of the building matters and how you get there, whether you can get on public transport. It all matters. Generally, I suppose I am. We’ve got to the point where there’s very widespread questioning of the ways we’ve been doing things and how things have turned out. That’s pretty evident. I don’t think we have got to the point of consensus about what to do about it, but at least people are talking about all these kinds of issues. We really have got away from, ‘We’ll just leave it to market forces to sort out.’ That really is dead in the water now. Both of the above. It’s billed as a textbook and it’s built on a course that I developed myself and have been teaching for some years. But it’s not technical and I hope is well enough written that anybody could enjoy reading it. So students for sure—undergraduates or MPP students—but also anybody working in public policy or in politics. What I try to do is demonstrate that there are some problems and some circumstances in which there isn’t a single right answer about how you do things, and there are choices and trade-offs to be made. Sometimes state ownership is the right way to go. Sometimes you want a market structure. Sometimes you want neither of those and you want to leave it to some kind of community structure or other sort of organization. We have loads of those: firms themselves, but also unions and mutual societies and playgroups and so on. There are a lot of self-organized entities. “A lot of the problems of the Rust Belt in the US and in the north of England…are a result of the fact that we didn’t handle those job losses particularly well” The book is trying to think through how you analyze the kinds of policy challenges that you face, to try to understand what to do about them. That might change at different periods of history or it might be different in different countries—or different sets of voters will just have different priorities. So it tries to be a very rounded book about how to select and implement public policies, while being really rooted in economic analysis. There was nothing that I could use to teach from. There’s the traditional approach to public economics, which does some macroeconomic stabilization policy, so tax and spend and monetary policy, and then does a lot about tax design and tax structures. What I wanted to think about was how you organize production and distribution and there wasn’t a book that answered that. The mission our original donor has set us is researching ways to address inequality and sustainability. So that’s our focus, but it’s a similar research-oriented, challenge-focused, interdisciplinary policy institute. As important civic institutions, universities need to start addressing big societal problems across disciplinary boundaries and engaging with the public and policymakers."

"It’s a really important book. It pulls together the work that they’ve been doing for a number of years now, looking at the fact that, for the first time, life expectancy in the US is falling, and falling very unequally. They have identified this phenomenon of white high-school dropouts who are falling victim to deaths of despair—suicides, opioids and other overdoses, and alcoholism. By bringing together all of this evidence, they have put a spotlight on the phenomenon. “The ‘beyond-GDP’ debate has definitely got an extra boost as a result of what’s been happening this year” It’s linked, obviously, to broader questions about the economic future of certain places in the United States, where the economic purpose seems to have evaporated as a result of all the changes in the economy. It’s also linked to the role of education and the way that the rewards to skills have continued going up, with skilled people congregating in big cities and the diverging fortunes of people in different places. There are lots of potential explanations for broad social trends like this. They don’t try to identify in any detail which ones in particular are the most important. But I think the key thing that they have highlighted that’s new is the education gap. If you’ve got a four-year college degree, things are getting better, and if you have dropped out of high school, things are getting worse, to the extent that such people are dying younger. US life expectancy has been diverging from other rich countries since the mid-1990s, but it’s only since 2015 that it’s actually been declining in absolute terms. For this to happen in an advanced country that claims to be one of the richest in the world is absolutely staggering. There aren’t easy solutions. Complex phenomena never admit of one simple thing that you can do. I think that takes us back to this broader debate about how to equip people for a massively changing economy, something that I think policymakers everywhere have failed in. And, because the US has no universal health care and people therefore fall between the gaps in terms of care, it manifests itself in this total failure of capitalism. If capitalism doesn’t give us progress over time, what’s the point of it?"

"This is a fantastic biography. Frank Ramsey was an extraordinary character, evidently brilliant from an early age. He made path-breaking advances in mathematics , philosophy and economics. In his spare time, he helped Keynes edit the Economic Journal. He translated Wittgenstein into English because nobody else could understand what Wittgenstein was saying. He was a larger-than-life character who hung out with the Bloomsbury Group and had an extraordinary life, and who then died tragically young at the age of 26. So, all of this he achieved between 18 and 26. Get the weekly Five Books newsletter The biography is a really interesting read, because he’s such an interesting character, and because he pushed forward the intellectual frontiers across this incredibly wide waterfront. It’s also a very good read about the Cambridge of the 1920s. I’m still relatively new to Cambridge, so I enjoyed learning about all of that. Then there are also inserts, where very distinguished people from maths, philosophy and economics explain some of Ramsey’s theories. So, for example, in economics, Misak has Partha Dasgupta explaining how Ramsey figured out what the right way to think about the social discount rate was. It’s broader, it’s intergenerational fairness in any context—investment, thinking about the environment. The Ramsey rule is widely used. The social rate should be lower than the private market rate. But exactly what it should be is much debated in economics even now, particularly in the environmental literature. But at least we know how to think about it and which bits we should be debating."

"It’s business history. It’s a history of one of the first companies to use computers in a systematic way to try to make forecasts. They started out doing political forecasting. Then they did some business forecasting. And they got incredibly ambitious, and tried to do things like forecast the outcome of the Vietnam War and how to affect that, and how to win the hearts and minds of the Vietnamese people. I’m very interested in efforts to use computers to understand society, because I think we’re going through that debate again, in talking about AI. Some of the visions that people have had for using AI to understand what’s going on now are just like the visions that were around in the 1960s, except with faster computers, and more data. So it’s a very good object lesson in why you should be cautious about any forecasts about the future. I’m thinking, in particular, about someone like Dominic Cummings , and the room he set up in the Cabinet Office to have screens full of data, taking the temperature of what’s going on in the economy, and the dangers that can lead you into. They did both, but a lot of their work was for the US government, or the Department of Defense. A lot of it was political consulting. We’re still very familiar with that kind of work, manipulating the data to try and work out which are the key states for deciding an election, and what the key issues to influence voters are. So it’s all around still—you might think about Cambridge Analytica as another parallel to the kind of work that they did. Jill Lepore is a brilliant writer. It’s a dream to read. It did. It went bankrupt, partly through over-ambition and not being very well-run, but also partly because more and more companies piled into the same markets. So you got, for example, all the Madison Avenue companies doing marketing forecasting, and a lot of other political consultants coming on the scene using the same techniques. It became a much more competitive market."

"It’s a very readable and systematic analysis of what drives booms and busts in financial markets. There are loads of books about financial bubbles and related issues, but what I like about this one is the way they have developed a framework for thinking about any bubble anywhere, anytime. It’s reasonably short and very well written, a really enjoyable read. So, if you want to learn something about why financial markets behave the way they do, it’s a great place to start. They do. And, not surprisingly, they promise us that there’ll be even more financial booms and busts to come in the future. The story is about the dynamics of things that come along that look like the best thing since sliced bread and the way that, in almost all business cycles, money goes chasing after those, and you get the boom and bust. It’s about the inevitable dynamics of financial markets."

"It is. The author is an economic geographer, who has written a lot of very interesting books about the structure of the economy and finance in particular. This is really about the way that, in lots of different areas of the economy, there is a concentration of power by people who have bought particular kinds of assets, and they’re extracting monopoly rents—in effect—through that ownership. It covers land, housing, private equity, and infrastructure ownership. And, when you see it all together, it’s quite a striking reminder of the way—in the UK economy, in this case—concentration of ownership has continued to increase in recent decades. People have observed this phenomenon in the US. Thomas Philippon had a book that came out last year that was very good about that US experience . This does the same sort of thing for the UK and flags the issue of why ownership of assets is something to worry about. “If capitalism doesn’t give us progress over time, what’s the point of it?” For a generation now, UK policymakers have said that it doesn’t matter who owns an asset as long as it’s well-run. And so, in a way, it harks back to the very old debates about whether the public sector should own natural monopolies and whether privatization is a good or a bad thing. I think he’s mainly advocating backing away from the kinds of policies that have made these trends possible. So, for example, private equity has been significantly encouraged by tax breaks and the privileging of debt finance over equity finance. That’s something that lots of economists over the years—for instance in the Mirrlees Review —have identified as something that significantly distorts the way that investments get funded. In my view, the solution to monopolies is that you take competition policy seriously and apply it in these kinds of contexts. No, he doesn’t. That’s my gloss on it. I do competition economics, so I see it as the solution to everything, I suppose! But there is an important question here about whether the issue is one of monopoly, or whether it’s the private ownership of assets. Each answer will take you to different solutions. If you think the problem is ownership per se , then you do have to start looking at the structures of ownership. Whereas, if it’s not just that, you’ve got a broader array of policy levers at your disposal. Yes, and it links to the kinds of income inequality and wealth inequality that we’ve seen emerging since the 1980s because the people who get their hands on these assets and extract the rents have become extremely wealthy. Often, they are asset stripping and keeping costs down as much as they can. And the people who work for them are often on low incomes, in precarious jobs or terrible conditions. Part of our best books of 2020 series."