Tim Harford's Reading List

"Yes. Charles Perrow is still going strong: I think he is now in his eighties. He is a sociologist, but got very interested in unintended consequences, and from looking at those, got very interested in technological disasters. For him, at the time he published the first edition of this book, Three Mile Island [the nuclear core meltdown in Pennsylvania in 1979] was the definitive one. It prefigured Chernobyl . And then he revisits the subject at the end of the 1990s. The book goes through awful accidents in complex systems and explores why they happened – the human failings that go into them, the systemic consequences, the fact you could have a very small error that propagates and propagates. It’s quite a technical book, but it’s wonderful and completely compelling. I originally read the book because I wanted to write about a particular accident. My sister is a qualified safety engineer, and she gave me a bunch of safety engineering books. But as I read Perrow’s book, I realised that it could have been written about the financial crisis. That was really shocking to me – this realisation that these banks and their interconnections were, in many ways, the same kind of system as a nuclear reactor, or at least had very important similarities. Perrow is, in many ways, a pessimist. He says that if the system is too complicated, you will have accidents. There’s nothing you can do about it. Looking back at the history of financial crises, that’s probably appropriate. But one thing that comes out of the book is the idea that we tend to make systems more complex by adding safety systems on top of them, and that the safety systems themselves create new ways for things to go wrong. That was a key problem in the financial crisis. A lot of banks were taking bets and then insuring themselves with credit default swaps (CDS). Credit default swaps were, basically, insurance contracts that banks wrote, often with [the big insurance company] AIG. Or banks were repackaging sub-prime mortgages into vehicles that were supposed to make risky loans safe. These two innovations – the packages of sub-prime loans and the credit default swaps – were both safety systems. But they were both absolutely crucial in explaining why the system blew up. I think that’s a central and really useful idea, that these safety systems are probably not helpful – and even when they are helpful, they will have unintended consequences. That is one of the things they do. In the case of credit default swaps, they were specifically designed to allow banks to take more risks, with the approval of regulators. The entire point was to allow more risks to be taken. So yes, absolutely, that is part of the problem. But also, just by virtue of making the system more complex, they introduce new ways for things to go wrong. That was very much the case with Three Mile Island. Three Mile Island was a nuclear accident triggered by a safety system. In the case of the financial crisis, credit default swaps introduced unexpected links in the financial system. You have small banks with what appear to be perfectly safe packages of loans, insured with credit default swaps. But those insurance contracts turned out to be links to risks elsewhere in the system. It’s a bit like climbing a mountain. You’re roped together, and you think the rope is making you all safer. Then, suddenly, a couple of people fall off. You realise that it’s the rope that’s dragging you all off the cliff – even people who were never in trouble themselves."

"Yes. The author, Cory Doctorow, is a really interesting guy. He is one of the founders of the blog and former magazine Boing Boing . He’s a campaigner for internet freedom and fair dealing in intellectual property rights. And he’s also an author – writing these young adult novels. I read this book because I was writing a column about the economies inside computer games – because these games are now so complex they do have their own economies. I read the novel for background, but I really grew to admire it. It is for young adults – it’s an adventure-action story, it’s not that complicated. But it’s very well done and conveys a lot of really interesting economic ideas very well. For instance there’s the impact of globalisation, the possibility of bubbles occurring in economic systems, the idea of the race to the bottom, of sweatshops and the role of unionisation. Really key economic ideas. Of course there are a lot of economic ideas that are not in the book. I would also say that Cory is well to the left of where I am. He thinks trade unions are incredibly important – I’m not so sure. But I was very impressed by the way he could take this novel and convey all these economic ideas without slowing the action down. There have been people who have tried to create works of fiction with an economic message – notably Ayn Rand, who has just had a film made about her work – but Cory has really done it very well. It’s a tremendous and very admirable achievement. Like all good young adult fiction it’s about protagonists of about the same age as the reader getting things done and taking control. These are 16-to-18-year-old kids across the world who are expert computer game players and able to make money playing computer games. They have to deal with thugs and crimelords and the Chinese state trying to shut them down in various ways. In the end, it becomes something bigger than just trying to make money by playing games. It’s about rights for the workers who are playing these games and are being exploited. But it’s not an economics lesson, it’s an adventure story."

"This is by Yoram Bauman, who is perhaps better known as the stand-up economist. He sprang to fame because of this lecture – you can see it on YouTube – which was a stand-up comedy routine, based on a parody of one of the most famous economics textbooks, Greg Mankiw’s Principles of Economics . Bauman has a PhD in economics, so he knows a lot of economics, and there’s actually quite a lot of wisdom woven into the comedy routine, but he just lays into economics. Then he decided that the next thing he wanted to do was write this cartoon introduction to economics. And, just to be clear, this is a textbook. It’s not a comic book with some economic messages, it’s a textbook in the form of a cartoon. But it’s quite sophisticated and it’s very nicely done. So far the only edition to be out is the microeconomics version, but the macroeconomics is coming soon. For anybody who is genuinely interested in economics, who really wants to learn the jargon, or anyone who is starting out studying an economics course, this is just a brilliant source. It really is rigorous, but it’s also a lot of fun to read. He basically plays it straight, but he’s not averse to poking a little fun when it’s deserved, so there’s this subversive undercurrent. One of my favourite running jokes is every time an economist wins a Nobel Prize, the King of Sweden pops up and says, “Congratulations! You’ve won the Nobel Prize!” Of course, every time it seems to be for an incredibly banal insight, so it’s quite a nice running gag – these people making really obvious points and then suddenly the King of Sweden pops up. It’s true. But I suppose you could say the same thing for the winners of the Nobel Prize for literature . Economics studies the human economic system, which is a tremendously broad and deep field of study. In any modern economy, like London or New York, there are probably about 10 billion different types of products in service – not numbers of products, but separate types of thing that a stock-keeping system would give a different code number to. These products are often incredibly complicated, like the telephone I am talking to you on. It’s an incredibly sophisticated piece of kit. But even the notebook I’ve got in front of me, I couldn’t make that. I couldn’t twist the wire and produce the paper. These are terribly, terribly complex systems and they can be understood at the really macro level – booms and busts – and they can be understood in terms of human behaviour inside these systems, how we respond to prices, and the decisions that we make. It’s a fascinating, rich subject, so it’s not surprising it means different things to different people. In terms of how economics needs to change in light of the crisis, where I would put my emphasis is not so much in behavioural economics, though I have no problem with it – it’s a very interesting area and it’s producing really important insights – but I think it’s more about engaging with the world, and the institutions of the world as it is. Economists got too used to reasoning in fairly abstract ways, without looking at the details of what was actually going on.If, as an economist, you’d looked at the way sub-prime loans were being sold, and the kinds of contracts that were being written and the financial instruments that were being created, you don’t need any mysterious appeal to psychology to explain the disaster. You just need to have been paying attention. That’s not to write off behavioural economics – but it’s just not true that behavioural economics was the single thing that was missing, that if only we’d had it, there would have been no crisis. If you look at some of the behavioural economics books that were published before the crisis, they’re very good, but there’s nothing in them that successfully warns of the crisis to come. They’re focused on things like consumer protection and writing better credit card contracts. They’re not saying, “Look, there’s this huge systemic problem that’s about to blow up in our faces…”"

"This is probably the most popular book on my list, and many people will already have read it. It really is a masterful book. Lewis is an amazing storyteller, but what I loved about this book is that he really tries hard to understand how this system went wrong. Then he explains it, all the complexities, and he just makes it look so effortless. You feel really smart when you’re reading this book. It all becomes obvious. Of course it wasn’t obvious at the time, and it isn’t obvious until a master storyteller like Lewis gets his hands on it. This book should be required reading, and, because it’s a pleasure to read, that’s not a very onerous requirement. Yes. There are some other very good books on the crisis, but this would probably be the one. If I had any criticism of the book, it’s that he makes it seem too obvious. It becomes mysterious how anyone could have been confused. I think they probably are, for a couple of reasons. One is that reality is starting to produce really good data. Previously, data was something that would be collected by a government statistical department. You’d have data on unemployment, inflation, GDP growth and not much else. Now data is just thrown off in huge quantities by the likes of Google and all these computerised business processes. That means that if you want to do good empirical work, you need to start engaging with businesses. That is one thing that is changing. Another thing that is changing is if you look at the awards that are now being given to economists. A few weeks ago, Jonathan Levin was given the John Bates Clark medal, which is awarded to an American economist under the age of 40. It’s basically a forerunner for the Nobel: most Bates Clark medallists who stay in the profession have gone on to win the Nobel Prize – people like Paul Krugman, Gary Becker, Joe Stiglitz and much earlier, Paul Samuelson. Larry Summers probably isn’t going to win the Nobel Prize, but he was a Bates Clark medallist as well. So it’s a really serious award. Jonathan Levin is one of a new breed of economists who mixes very sophisticated economic theory with quite detailed empirical study. It used to be that economics was entirely theory driven. Yes, and then Steve Levitt came along. He won the Bates Clark medal in 2003. He’s the author of Freakonomics , he is a brilliant empiricist, a data guy, but not really much in the way of theory. He would say that himself – he’s just looking for patterns in the numbers. What’s happened more recently is there’s been this marriage of classical economic theory and careful empirical data collection. Levin won this year, last year it was Esther Duflo, who is also a brilliant empiricist. The year before it was Emmanuel Saez, who is famous for his very careful studies of inequality. The year before that it was Susan Athey, who is a co-author with Jonathan Levin. These are people who are really getting their hands dirty with the data. I think that is a change in economics. You can’t just produce theoretical models. There’s so much good data now that you can’t get away without doing some of it. It’s a book that’s made and broken reputations, so there is still some jockeying for position. I believe that somebody is suing Michael Lewis. He emphasised certain characters, and he could have looked at other stories. But I’m not aware of any consensus that Lewis made some awful, terrible mistakes in the book."

"This is really one of the best books I have ever read. It’s been hugely successful in the UK, and has now been published in the US as well. I thought it was just going to be Ben laying into silly tabloid newspaper stories about how everything in the world either cures cancer or causes it. And he does do that. But if you go through the book as a science writer, which I am (I’m writing about the science of economics, and what economists do) I started becoming increasingly ashamed of myself, at the standards that Ben holds up for writing about what’s going on in academia, versus the standards that I was holding myself up to. You read a paper, you understand a paper, you write a paper up. Ben is saying, “What about the contrary papers? What about the research that contradicts it? How is it that you found this particular piece of research? Have you looked widely enough? Have you thought about publication bias?” He is really thinking about all the different ways we can deceive ourselves that something is true when it really isn’t. Ben is just a master of that. It changed the way I thought about my own writing and it changed the way I thought about the world. It’s also become particularly relevant because economists have got much more interested in using the methodology of clinical trials. I mentioned Esther Duflo earlier, who is the author of a new book called Poor Economics . She won the Bates Clark medal for her use of randomised controlled trials in economics – the kind of trials doctors use to test new drugs. Economists are now using it to test different sorts of social policy. They’re tremendously inventive and I write about some of them in my new book, Adapt . For example, there is one trial currently going on to test the effectiveness of post-conflict reconstruction projects. There are two million people in the control group and two million in the treatment group. This project is being conducted in the Democratic Republic of Congo, in places that don’t exist on any map, that you have to wade up to your chest in swampy water for hours to reach. The ambition of some of these experiments is just incredible. It’s a really important change in the social sciences and reading Ben’s book is a real complement to it. It’s not enough just to run a randomised trial, you have to understand all the other stuff that is going on as well. That’s what makes medicine such an effective academic discipline. Ben is not defending the medical establishment against all comers. He’s explaining the scientific method and how it is used and where it falls short. When I talk to Ben about it, he says: “Whenever I look at how it works in other fields, I conclude that it’s bad in medicine, but it’s worse everywhere else.” Whether we’re talking about conflicts of interest policy, or trial registries, which make sure that trials with inconvenient results don’t just disappear, whatever we’re talking about, the doctors are ahead of the rest of us. But they haven’t got it entirely right. That’s one very important direction for economics. Also, reading Ben’s work made me think more deeply about a lot of the very cool results that are coming out of behavioural economics. You’ve got a good researcher who runs an experiment and produces a result and it’s published in a peer-reviewed paper. Previously I would have said, “OK, fine, that’s good enough for me.’’ But now I think, “Well, hang on, how many experiments have been done that didn’t get published? What’s the publication bias? What are the systems we have in place? What’s the bias in the media towards reporting the interesting results versus the boring results?” You do find the same few studies reported again and again in the media. They become iconic, when in fact they’re not really representative of what’s going on. Ben really got me to think hard about that process. I’m much more of a microeconomist, and all the books I’ve recommended are in some way related to microeconomic issues because I do feel microeconomics has made more progress in what is a very difficult field of study. But to defend the macroeconomists: you’re right they haven’t been able to give us a simple answer to the question, “Does fiscal stimulus work?” But the whole idea behind fiscal stimulus is to use the power of government to force unused resources into action. You simply cannot, in an abstract way, say whether it works or it doesn’t because so much depends on questions like, “What are the unused resources in the economy? What kind of sectors are they in? How open is the economy? Is it connected to other economies? Does it trade a lot? Does it not trade a lot? How deep is the recession? What kind of stimulus are we talking about? Is this writing cheques to people? Is it cutting taxes? Or launching spending programmes? What kind of spending programmes? Are we building roads or are we doing something else?” There are so many different ways it could be done. There will never be a single answer, because it will always depend on context. Also, whenever it’s been tried in the past, it’s been in a chaotic environment where lots and lots of other things are going on. You can’t create those experiments in a macro environment. I think they have made progress. You would have hoped they had made more, but you have to respect the difficulty of the question that is being asked. You said it’s a simple question. Sure it’s simple, in that it doesn’t involve that many words. But that doesn’t mean it’s easy to answer. Maybe you should just create a few economies, run some treatments and run some controls. Going back to Cory Doctorow’s book – and this is going to sound really, really weird and far out, but I believe it’s true – these online computer games are getting sophisticated enough now, and complex enough, with lots and lots of players, and real economies inside them, that you can start running experiments in these virtual economies to see how they work. That is something some economists are interested in doing. Maybe World of Warcraft will one day give us the answer to some of these questions you want answers to."

"Well, as I mentioned, I studied philosophy, politics, and economics, which is quite a common degree course for people who have no idea what they plan to do with their lives. I assumed I would drop economics and that philosophy and politics would be the things that would interest me. But, actually, economics slowly but surely got more and more intriguing. At first, it was easy rather than interesting. It was just maths problems that I didn’t find very difficult. Then, later, I started encountering ideas that I found genuinely fascinating. Dixit and Nalebuff’s book Thinking Strategically is full of them. It’s all about game theory and its practical, everyday applications. What game theory is is an attempt to try to represent competition and cooperation in a proper, formal analytic way. There’s the idea that people may be lying to you and that you can’t trust everybody. People may tie their own hands to improve their bargaining position—like Odysseus tying himself to the mast so, even though he could hear the Sirens singing, he couldn’t dive into the sea and swim towards them and his doom. “Game theory is an attempt to try to represent competition and cooperation in a proper, formal analytic way” It’s about bargaining or coordination problems—say where you’re trying to meet somebody. You don’t know exactly where to meet them. You haven’t got your phone with you. Where is the right place? You’ve arranged to meet them somewhere in town at noon. Where do you go? Where might they go? You’re thinking, too, what they might want. Game theory is full of surprising results and little paradoxes and things that you don’t, at first, appreciate about the world. All these very, very rich ideas in social science were originally expressed mathematically by John von Neumann, a great mathematician who also helped to invent the computer and the atomic bomb. He started by trying to analyse poker: “Real life consists of bluffing, of little tactics of deception, of asking yourself what is the other man going to think I mean to do. And that is what games are about in my theory.” Dixit and Nalebuff have basically taken this set of ideas, stripped away a lot of the mathematics—but kept a little bit—and illustrated it with everything from competition policy cases to sports decisions on the tennis court or yachting races. They really just brought it alive. I had the privilege, recently, of interviewing Garry Kasparov, the chess grandmaster—perhaps the greatest chess player ever to grace the world stage. (It was terrifying, by the way, to meet him.) We were talking about how he would prepare exhaustively for games with ‘novelties.’ When someone is playing a well-understood line of moves, a novelty is something that no one has ever tried before, but turns out to be a really good counterattack. Kasparov was famous for having this enormous database of novelties that he wouldn’t reveal to anybody. He’d memorised them all. He was explaining why that was useful. You would think, ‘Well, that’s useful because you can spring out one of these surprise moves and beat people at their strongest game.’ In fact, the main effect of the novelties was that people wouldn’t play their strongest game. They’d be thinking, ‘If I play this line of attack that I always play, Kasparov will have an answer, so I will have to do some other thing that I’m not nearly as familiar with. I’m not as comfortable with it, but at least I won’t have to deal with a Kasparov novelty.’ That’s a classic piece of game theory. This preparation that Kasparov did was very, very powerful—even though he never used it. It was just the knowledge that it was probably there that had an impact on the game. That can all be expressed in game theoretic terms. Equally, let’s say Rafael Nadal has an absolutely fantastic backhand, which I suspect he does. How does he make his backhand more effective and win more points on his backhand? The answer is to improve his forehand. If he improves his forehand, people won’t be so happy to hit to his forehand. They’ll hit more to his backhand and that means he gets to use his backhand more often. It’s that kind of analysis. No, you don’t need to mathematize it at all. I once heard somebody say, ‘The best argument for studying game theory is if you have a conversation with someone who has never studied any game theory and you realise the basic mistakes they are making in thinking about the world.’ Game theory can get very, very technical and very abstract and at certain points you start to go, ‘Well, I’m not sure this highly abstract representation of the world is really telling us anything.’ That’s what I like about Dixit and Nalebuff: they have a little bit of maths, but not a lot and, basically, the way they communicate is through these nice, simple examples. The definition they have in mind of ‘strategic’ is not necessarily the same as most people’s. By ‘strategic,’ they mean taking into account the incentives and likely moves of the other person. That’s what an economist typically means by strategic interaction. If I’m trying to figure out how to bet in a game of roulette, that’s a decision problem. It’s not a strategic problem because the roulette wheel isn’t counter-strategizing. In poker, it is a strategic problem because there are other people and I have to think about what they might do in certain circumstances. I have to think about confusing them and not becoming too predictable myself. Get the weekly Five Books newsletter There are all these strategic considerations. Strategy can be completely competitive—it could be about enemies. But strategic considerations also apply when you’re trying to coordinate with people. It may be silly, but a classic example is when you’re going out on a date with somebody and you both agree that you’d like to go out, but you differ about exactly where you’d prefer to go. Would you like to go to a restaurant or would you like to go to the movies? That’s a strategic interaction as well."

"This book is about the history, often the ancient history , of all sorts of financial innovations, from the limited liability company (Rome) to paper money (China) to accounts (ancient Mesopotamia) to the money transfer service (Europe during the Crusades, courtesy of the Knights Templar). It has been a fantastic source for my own book, 50 Things That Made the Modern Economy , which is how I discovered it. It’s a totally global perspective and you’re constantly encountering stuff you had no idea about. What I also like about it is that economics is often taught in a very ahistorical way. There is this thing called ‘the economy.’ We don’t need to bother with the details of where it came from or how it’s grown. We just need to understand how it works now. That’s fine, but the story of where it came from is fascinating. Yes, poor guy. There are a couple of tragic gems in the book. One of the things I really enjoyed about writing 50 Things was that you could smuggle in economic ideas—some of them quite deep and quite abstract—under the guise of ‘once upon a time there was this person who invented this thing and this is what it did to the world.’ The ‘and therefore this happened’ is classic economics, but putting the story at the beginning just makes it much easier to grasp. It makes it more concrete but also more human. So Goetzmann tells the story of Babylonian cuneiform and trying to figure out what was going on with that. By the way, that’s also discussed in Felix Martin’s book, Money (2013) , which is another good book. Cuneiform is writing on clay tablets discovered in ancient Mesopotamian cities. It’s about 4,000 years old—so older than any previous writing that had been discovered. It was very hard to decipher. The thinking had been that early writing was hieroglyphic, so pictograms, but cuneiform seems to be purely abstract. So it’s a really old form of writing and no one could figure out what was going on. The other mystery was that, along with the cuneiform tablets, there were all these beads and baubles that look almost like playing pieces of some child’s board game. Nobody could figure out what those were all about, either, because they’re not particularly ornamental and they don’t seem to have any value. Both puzzles were simultaneously solved by a French archaeologist called Denise Schmandt-Besserat. She realised that the little tokens are designed to count stuff. So if your maths isn’t very good and you’re trying to count 10 amphorae of olive oil you’ve got one bead here shaped like a vase. That’s one vase of olive oil and there’s another vase of olive oil so now I’ve got a second and now I’ve got another one, and another one, and another one. It’s called correspondence counting. Now, although I can’t really count, I have managed to count how many amphorae of olive oil have come into the temple as taxation or tribute or—we’re not sure exactly why they were coming in. Get the weekly Five Books newsletter Then she realises that the cuneiform is the imprint, in soft clay tablets, of these hard clay baubles. So you can print this one, which is a sheep. This one’s wheat. This one’s wine. They’re different shapes. So they are kind of pictograms, but they’re not pictures of sheep. They’re pictures of tokens that represent sheep. They’re not pictures of amphorae of olive oil. They’re pictures of tokens of amphorae of olive oil. There is that extra layer of abstraction and, very quickly, they start realising they can make the same marks with a stylus. So she solves the puzzle about what this is all about. It’s counting the flows and stocks of products. So this is the first maths and the first writing. It’s also the first accountancy. It’s all wrapped up together—dealing with the struggle of trying to manage these increasingly sophisticated urban economies. The city of Uruk would have held maybe 5,000 people. It’s not big, but big enough that you need to start keeping track of things. Because there are these agricultural economies attached to cities, you start having to plan ahead. It’s great fun. It’s big and thick and it’s got small print and lots of footnotes—it’s an academic book, but by the standards of most academic books it’s incredibly lively."

"It is Milton Friedman’s son. So Milton won a Nobel Prize in economics and is a famous libertarian thinker arguing for small government. David Friedman took the libertarian project further and has done a lot of philosophical work on how a proper libertarian society could work. But alongside that he wrote this lovely book, Hidden Order . It’s sort of a textbook and sort of a popular introduction to economics—it hasn’t quite made up its mind which it is. It was published about the same time as Steven Landsburg’s The Armchair Economist , which is also a great book. Both are great introductions to what it means to think like an economist. A typical example: Friedman uses an economic lens to explain why marriage has become less popular. It’s simple: before the pill, the freezer, and antibiotics, women were kept busy full-time having babies and putting food on the table. With few marketable skills they had to stay married, no matter how miserable the relationship. Once women had more time and the ability to earn a living independently, there was far less reason to stay in an unhappy marriage—or to bother with marriage in the first place. I chose Hidden Order because it’s full of these intriguing economic insights into the way that the world works and the way the economic mode of reasoning can be powerful, but it also has a little bit of maths. So you can read this book—which is very, very readable—and, at the end of it, you have actually covered a basic microeconomics 101. I have to say, I don’t think the strengths and weaknesses of economics are best judged by whether the subject predicts banking crises. I’m not saying it’s not a problem. I’m not saying that economics doesn’t have things to think about. But the number of people in academic economics who were trying to predict banking crises was vanishingly small. Maybe that’s a problem in and of itself, but if you weren’t trying, you can hardly blame them for not succeeding. The distinction between microeconomics and macroeconomics is an interesting one. Microeconomics was always my enthusiasm. It’s trying to use mathematical logic to understand how people make choices, how they respond to different price incentives, how competition works. Increasingly, in modern times, through this new field of behavioural economics , it’s incorporated psychology as well. So, if you go to a supermarket and you’re trying to figure out these three-for-two offers, and why certain products are prominently displayed and others aren’t, all of that is microeconomics. “Microeconomics is trying to use mathematical logic to understand how people make choices, how they respond to different price incentives, how competition works” Macroeconomics is much more about, ‘Why are there recessions? Why is the unemployment rate 6% rather than 12%?’ Macro is just intrinsically a harder problem. You’ve got less data. You can’t run experiments very easily. Everything is connected to everything else. It’s just a hard problem to solve. I did write a book about macroeconomics, partly to teach myself macro… The Undercover Economist Strikes Back (2013) . By the end of writing that book, I was a little bit in love with macro. I thought, ‘Okay. I understand even though macroeconomists have made all these mistakes and even though the subject often seems highly mathematical and seems to have all these flaws, there is a reason why they do the things they do. It’s not just because they’re a bunch of crazy people. There is a logic and they do have some achievements, and there is a certain sort of beauty to the almost impossible task of trying to understand the macroeconomy.’ It’s very much micro. So let me give you one beautiful example of the way he thinks. Imagine a factory which has invented this amazing way of turning grain into automobiles. It’s like a Dr. Seuss invention, you just pour in the grain at one side and out the other side come these automobiles. It’s a Silicon Valley startup, on the coast of California. So people grow grain in Iowa and they send it to the factory, and out come cars. “Macro is just intrinsically a harder problem. You’ve got less data. You can’t run experiments very easily. Everything is connected to everything else” Then there is an investigative report by local journalists who break into the factory and discover that, actually, there is no factory. It’s just a dock. It’s a concealed dock and all they’re doing is they’re putting grain on ships that set sail for Japan and when the ships come back, they’ve got Toyotas on them. So it’s a trick. It’s not this new technology at all. Then Friedman says, ‘Okay. What’s the difference? Why does it matter that there isn’t actually a machine in the factory and that the machine is actually Japan?’ Japan is a machine for turning grain into automobiles. Should we feel differently about it? Now, whether it’s good or bad is a separate question that we can discuss and explore. But it was just a beautiful piece of reasoning that makes you understand that, fundamentally, there is an enormous amount of similarity between technological progress and just opening up trade with other countries. He then asks what the consequences would be. Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . One of the consequences, by the way, is that American grain farmers are in direct competition with American automobile manufacturers, because you can turn grain into automobiles via Japan. Therefore, if you want to protect American automobile manufacturers, you can do that by hammering American grain farmers, but is that what you want to do? Maybe. Maybe not. But you start to understand that things are connected not-at-all in the way that you thought they might have been. Friedman being Friedman, he’ll then take it further and say, ‘And therefore, free trade is great, et cetera, et cetera.’ But you don’t need to go all the way down that line to appreciate the power of that kind of reasoning. You mean like Thomas Piketty ? He’s really, really not right wing. There is a huge amount of political variability in economics. There are some very left-wing economists and some very right-wing economists, just as in any other profession. I’m not sure I would say that it’s neutral. It has certain biases to it and it leads to a certain way of perceiving the world. So I think economists do tend to the right on certain issues and to the left on others. We tend to be pro-choice. We are pro-immigration, generally, and pro-human freedom in all sorts of ways. These causes are often associated with the left. But we also tend to be pro-choice when it comes to buying from Amazon. That’s okay. You don’t have to feel embarrassed about it. So pro-market but also pro-freedom. So that often leads to economists being in rather strange political spaces. “There is a huge amount of political variability in economics” Right now in the UK, the leader of the Liberal Democrats is an economist, but both of the leaders of the main parties are very, very far away from positions that most economists would recognise as rational."

"John Kay has written many books but this one feels, to me, like his masterpiece. John is a very, very interesting thinker and an old mentor of mine. I used to work as a research assistant for him in the 1990s. He’s fascinating because he is a brilliant thinker. He has a really sharp grasp of all the classic economic ideas—everything from the economics of trade to the economics of price discrimination, and how markets work. He’s got all of that and he probably had all of that at the age of 19. Then he spent the rest of his life—so far—thinking about the extensions and the complications, and all the messy details. So one of the joys of David Friedman’s book is the way that he strips away all the complications to show you something really powerful about the basic way of reasoning about the economy. John Kay is the antithesis of that. He understands everything in Friedman’s book, but he’s saying, ‘Well, there’s this other consideration. There is this historical consideration. There is this psychological consideration. There is this political consideration or moral consideration.’ All of this stuff needs to be taken into account. Markets are not just a system of equilibrating equations. They have a historical context. They have a political context. They’re a lot messier than they might seem in a textbook. Yes, and whether it’s illuminating or not depends on whether you’re using it in the right context and in the right spirit. The basic idea of a model is to simplify, to strip away detail. That’s really, really powerful. But if you use it in the wrong way, you are going to lead yourself very badly astray. “Markets are not just a system of equilibrating equations. They have a historical context. They have a political context. They’re a lot messier than they might seem” There is this classic idea, in the social sciences, of foxes versus hedgehogs. A fox is going to see everything in all kinds of different ways, a little bit of everything, whereas a hedgehog has one big idea and sees the world through that lens. When the model does not actually apply, you can go incredibly badly astray with that sort of logic. John is a classic fox. That markets are a part of society. They are not this thing that exists in the abstract that either work or don’t work and that’s all there is to it. There is always history. There is always culture. There is always politics, and if you try to diagnose what’s wrong with the market or try to make a market work better and you’re ignoring the history and the politics, and the culture, you’re going to make very bad decisions. The very first column I researched for John would have been, probably, around the time of 1999’s Wimbledon. I said, ‘Oh, Wimbledon’s coming, John. We could write a column about ticket touts and how ticket touts are good for markets.’ He said, ‘Okay. Why don’t you set out your thinking?” This is classic. I’m in my mid-20s and full of the joys of economics. The Economist magazine used to write this sort of column every year, all about how the ticket tout is basically taking a ticket away from someone who doesn’t value it very much—because they pay them enough to persuade them to part with the ticket—and they then turn around and sell the ticket to someone who’s willing to pay more. It’s efficiency-enhancing and everyone’s better off. I sketched all this out for him. He then went and wrote a column about ticket touts, explaining how it all began with Thomas Aquinas and his concept of the just price. Prices are not just market clearing, they embody moral and cultural norms and if you don’t understand that, you don’t really understand anything about markets. I always remembered that. I’m not sure I agreed with him, but I was just astonished that an economist would write this piece that was so equivocal about ticket touts and, also, was talking about Thomas Aquinas. No, no, not at all. He’s a brilliant economist. I think so, yes. He’s an amazing thinker. There is so much stuff out there that is anti-economics, all about how economists get this wrong and don’t understand that, and blah blah blah. Some of it is true or makes good points, but a lot of it is based on no understanding whatsoever of how economists actually think. John really does know, so when he criticises economists he really understands what he is criticizing. If you want somebody to give economics a kicking, it’s got to be somebody who understands how economists think. “The basic idea of a model is to simplify, to strip away detail. That’s really powerful. But if you use it in the wrong way, you are going to lead yourself very badly astray” The great thing about reading John is that he’ll be explaining how an economic idea works with tremendous clarity on one page and the next page he’ll be explaining how economists have made a terrible mistake. And it’s all there together, so he’s well worth the read. I’ve only skimmed it and haven’t studied their resources in great detail, but I’m very much in sympathy with what they’re doing, which is, first of all, to start with the concerns of students who show up interested in economics. What are students interested in economics actually interested in? Apparently, one of the main things they’re interested in is inequality . Well, inequality was not studied much in economics courses—certainly 25 years ago. It was studied, but in a quite theoretical way. So that’s front and centre in this course. It talks about the Industrial Revolution. It talks about the last 200 years of economic history . You’ve got the process of economic growth, you’ve got the process of growing inequality, you’ve got technological aspects of how the economy works, and you’ve got history—all in that opening salvo. They’ve been criticised by some people for not being heterodox enough. Fundamentally, it is all classic economics. They’re not bringing in Marxist or new institutional or feminist perspectives on economics. It is a straightforward economics textbook, just told in a much more human way—which actually is what we’ve been trying to do throughout this interview."

"Yes, Marx , Keynes , Fisher, Alfred Marshall—but also less well-known figures, like Beatrice Webb. I had no idea who Beatrice Webb was when I was studying economics, but she co-founded the London School of Economics and coined the term ‘collective bargaining.’ One of the things that’s interesting about Sylvia Nasar’s work is that she is trying to take some of the undisputed big players in economics and put them in a social context, describe how they’re related to each other but, also, focus the spotlight on less well-known thinkers. This book was very educational for me. As an undergraduate, I learnt economics as ahistorical, a kind of maths. This is a book that talks about the history of economic thought and makes it very personal. It talks about economic thinkers and their hopes and dreams and their personal failings. It also connects the thoughts they were having with the economic situation at the time. In the late 19th century, in the United States, people were starving to death because of the recession of 1897. Then there was the Great Depression . Then there was the post-war period and Bretton Woods. All these different experiences were shaping how economists thought about the world. It’s all in this book and I would say 99.9% of it was missing from at least my study as an undergraduate. So it was a great thing for me to read. I think knowing where these ideas come from makes you a better economist, but it’s also really interesting to read about people. Yes, Irving Fisher is the character who has captured me. He really was one of the founders of modern economic thought, but was basically completely disgraced by his failure to predict the Wall Street Crash of 1929. It was a very public failure because he was an enormously famous economic commentator and forecaster at the time. Not only that, but he was a multimillionaire and he lost everything—literally everything—in the crash. So he’s a fascinating and tragic figure. He was truly a genius and, yet, utterly failed in one of these central roles of what we expect from economists. John Kay says, ‘This stuff is nothing to do with economics,’ but for Fisher it was, definitely, to do with economics. He was very actively involved as an economic and financial forecaster and investor. What kind of economist were you if you couldn’t make profitable investments, and forecast economic fluctuations? As it turned out, he was the greatest economist on the planet, but he couldn’t forecast economic fluctuations, so there you go. Draw whatever modern-day lessons you like from that. “He was the greatest economist on the planet, but he couldn’t forecast economic fluctuations. Draw whatever modern-day lessons you like from that” People say Marx forecast the crisis of capitalism and Keynes was a successful investor so perhaps you’re not always doomed. It is. The early economists were also philosophers —people like Adam Smith and Karl Marx. Irving Fisher did the first ever PhD in economics at Yale. That was in the early 1890s. So just over a hundred years ago, the subject didn’t even exist. But I think it was Alfred Marshall who described economics as, “a study of mankind in the ordinary business of life.” Having said that economics defies easy definitions, you could do worse than that one."