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The Road to Recovery: How and Why Economic Policy Must Change
The Road to Recovery: How and Why Economic Policy Must Change
by Andrew Smithers
Edition: Hardcover
Price: 12.72

6 of 7 people found the following review helpful
5.0 out of 5 stars Very Impressive Arguments Throughout, Including an Insider's View of the Damage Being Done By Bonus Culture, 19 Oct 2013
This is a heavyweight book discussing technical economic points and also employing academic language in places, therefore be warned. However if you are really into these questions, and especially if you earn your living in related areas, this book seems to me to be absolutely indispensable and the best of its kind I have read. The author's other job is as the head of a City financial investment consultancy, which is reflected in the data centred and due diligence kind of style and approach.

Although this book is accessible and entertaining in places, other parts are quite challenging. But the reader is rewarded for his or her effort by a rather impressive and coherent set of ideas and arguments. The relationships between the different parts of the book is not spoon fed to the reader, and to me was not obvious at first, but the parts and the arguments do hang together quite well on reflection.

Being fool hardy, I will attempt to summarise the main arguments made (corrections welcome):

* The author is intent on emphasising the importance of data, and he argues that the popular and accessible 'balance sheet recession' analysis of the recent problems in our and other economies, is disputed by the actual evidence. The data, the author maintains, points to businesses not using historically high returns to pay down their debts and improving their balance sheets, as the popular theory would suggests, but in fact the opposite action of equity 'buy back' has instead been surprisingly popular, which increases rather than reduces leverage. (p77).

* Although companies are not seeking to improve their 'balance sheets' as that theory would suggest, the balance sheet recession analysis is correct in asserting that the relevant macro-economic 'identities' mean that the perpetuation of corporate net saving instead of investing sucks the counter balancing government borrowing into existence. Consequently the lack of desire or action towards improving the business investment situation, also means bad news for the government debt situation. The author argues that both issues should therefore be considered as possessing a worrying structural (bonus culture / incentives) nature, rather than cyclical (animal spirits / balance sheet repair) nature. In other words he presents a pessimistic stance, as we should not expect this lack of business investment issue to automatically disappear with the natural passing of the recessionary period.

* He argues that as well as the trend for shorter periods in senior management positions, the remuneration policies of large companies, which were supposedly designed to align managers incentives with shareholders interests, have had the unintended consequence of encouraging other undesirable incentives in terms of things like higher leverage and lack of investment. Because these bonus contracts are inherently asymmetric, they therefore reward volatile rather than simply high profit returns, which the author shows has indeed been the outcome. Managers are incentivised to create cycles of reported profit write downs followed by optimistic reported overshoots. (Good chart on p157 illustrating the nature of this overshooting). Using this device to overpay shareholders and managements, he asserts has been happening for decades, and is masked by habitually over stated company profits on average over time. (chart on p13).

* He therefore concludes that large companies are on the whole investing less and rewarding their management and shareholders more than would otherwise be expected or desirable. Under current incentives, businesses in the US and UK are tending to be milked for short term reward, while long term objectives such as investment to gain future market share and future competitiveness are neglected.

* This has he notes the perverse positive side effect of aiding the present reduction in unemployment, as short term extra labour rather than long term extra labour-saving capital equipment is employed by short-termist company managements.

* The author's understanding of the causes of a financial crisis are based on there being a combination of two factors. A crash in certain asset prices is usually the trigger, but this has to be overlaid upon a background where the conditions are ripe, such as high leverage levels and unsustainable high debts. The author details reasons why both of these components to a crisis are still higher than many people appreciate. He notes that theories surrounding the efficient market hypothesis still continue to infect behaviours and attitudes in the financial world, blinding many to impending dangers, even though such theories have been largely discredited by recent events and research. Debt levels are still high and debt still attractive to company managements, not helped by debt interest's favourable tax treatment in many countries. The author also notes quantitative easing as contributing to a worsening risk of bloated asset prices, making the potential for a bubble more likely.

* The author, resuming again the role of Cassandra, voices the possibility that monetary authorities may be forced to bring to an end our unprecedented low interest rates before economies are healthy enough to withstand such a change. He notes that raising interest rates are the accepted response to a high inflation expectations or a stagflation scenario, and subsequently worries that: "As today we have high debt levels and asset prices, I fear that a sharp rise in interest rates would precipitate another financial crisis." p195.

In his central arguments and conclusions, the author gives thought through reasons for real concern regarding the general economic outlook in Britain and the US. This summary has of course missed out a great deal of related issues discussed. These include points the author makes regarding Japan's unique situation. He mentions the too big to fail issue and spells out its connection to the 'law of large numbers' as well. The Eurozone is given quite a left wing anti austerity treatment. He argues controversially that there is: "no necessary connection between fiscal deficits and inflation. Nor, as can be seen in the case of the US ... has there been any apparent relationship between national debt and inflation." p197. He also includes (p72) the kind of insights I think Keynes would have also noted were he alive, concerning the broader picture of which countries have been doing the heavy lifting in terms of government stimulus / deficit spending, (UK, US, Japan) verses who should be doing more of it, (Germany and China in case you did not guess). In a world that is becoming more globalised, this common good and free rider dimension to government stimulus can only become more prominent. He returns to this subject on p207, where he interestingly considers the radical idea of moving currency exchange rates to help to shift the government deficits between countries.

Looking in from outside the financial world, his points regarding the short comings of business behaviour and the malign influence of the bonus culture are very potent and cutting. Furthermore they are written by an insider of that world in their own native language. The concerns he raises will therefore be hard for business culture and right of centre thinkers to shrug off and dismiss as just anti capitalist lefty rhetoric.

For me, there are too many charts in this book, but certainly some illustrate very effectively the points made. But whenever I perceive a stress on data I always remember what Eric D. Beinhocker wrote about in "The Origin of Wealth" regarding "Availability Biases" and "looking for your lost keys under the lamppost, because that is where the light is best." The most potent data for me was Chart 99 in the last quarter of the book, which illustrates the difference in affordability between housing in the US, where prices dropped during the recession, and in the UK where they did not much. Given this chart and the authors stress on the role of crashing asset prices in combination with a highly indebted environment as the terrible twin causes of crisis, it is a good job the government is not making this situation any worse with any of its recent policies. ...

Favourite quote which the author includes when discussing the conservatism of academia holding onto its invested ideas and theories: "Science advances obituary by obituary". p141.
Comment Comments (3) | Permalink | Most recent comment: Oct 25, 2013 10:51 AM BST


Europe's Deadlock: How the Euro Crisis Could be Solved - and Why it Won't Happen
Europe's Deadlock: How the Euro Crisis Could be Solved - and Why it Won't Happen
by David Marsh
Edition: Paperback
Price: 6.19

4 of 4 people found the following review helpful
5.0 out of 5 stars A Realistic and Pessimistic Description of the Many Knots and Dilemmas, 16 Sep 2013
This book is a good read and short at around five hours reading. As the title suggests, this book is not a polemic putting forward a particular criticism or solution, but more like an exasperated insiders view of the messy reality. The book reflects in a very realistic and believable way, almost to the point of being jaded, the fudge and compromise nature of the way the Euro zone is holding together. The author reveals how the reality is very messy, with political imperatives impinging upon economic decisions. A strength of this book is that Germany's role is put firmly centre stage, which makes David Marsh well placed to tell the story. His snippets on what certain key actors in the drama have said and thought adds atmosphere to the dry bones of the story.

He describes very well what seems to be the central knot of the matter; that, in being inside the Euro zone, Germany benefits from a weaker currency than its own imports and exports would dictate, therefore exaggerating its creditor position. The opposite is true of the southern European states experiencing difficulties. Overlaying an American United States model would suggest that the surplus countries should allow strong wage and price inflation at home and also send out transfer payments, to diffuse this disequilibrium. But Germany's history and understandable reluctance to subsidise spendthrift foreigners further makes this unattractive. So the disequilibrium remains and a series of fudges and incremental crisis solutions keep kicking the can down the road. The book hints at how this disequilibrium is instead dissipated (as well as from the more obvious official rescue packages) through German banks buying assets and bonds in the southern countries. This was one area where I would have liked more detail.

An important dimension to the Euro zone story the author discusses is the behaviour of Germany in the early period of the Euro. During this time Germany was battling through her own issues of reunification and a drive to improve the flexibility of her labour markets. The author alleges that the German establishment neglected to challenge the profligacy (which partly took the form of buying German cars etc.) of southern Euro countries while it was happening. The conflict between the moral tone Germans are prone to take towards their less prudent and industrious neighbours, and the benefits Germany gains, through obvious and less obvious devices, from her neighbours imprudence, is a theme which comes across well in this book.

All in all the title and the book provide a depressingly believable account of what is likely to happen and not happen in the Euro zone. For those well up to date with the subject, this book will be little more than revision. For the rest of us it is an efficient guide to an important subject.


The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Council on Foreign Relations Books (Princeton University Press))
The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Council on Foreign Relations Books (Princeton University Press))
by Benn Steil
Edition: Hardcover
Price: 16.17

18 of 19 people found the following review helpful
5.0 out of 5 stars A Fascinatingly Sharp and Revealing Exposition, Shattering Preconceptions, 13 April 2013
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Do you ever get the feeling that great historical events rarely happened how you initially presumed that they did? This book certainly exploded a few fundamental preconceptions I had about Bretton Woods, and Keynes' role in it. A must read for all interested in international economics and currency issues.

The Bretton Woods conference during the end of WWII is frequently referenced by progressive economists in reverential tones, and often held up as a useful example to be followed of forward looking international economic cooperation. The conference supposedly marks the point when the dark days of selfish 1930s national competitive deflation policies and destructive national trade balancing policies were overcome, and the enlightened path towards the international economic common good was set out. But, like good books should, the author Benn Steil challenges some of these lazy generalisations:

* While Keynes undoubtedly influenced the overarching economic theory regarding the benefits of international cooperation to boost and stabilise aggregate demand, much of the outcome of BW, especially the future centrality of the American dollar, hinges on the determined power brokering, deal-crafting and deft underhand conference managing of Mr Harry Dexter White. An interesting and dubious character as Steil reveals.

* Part of the accepted conventional wisdom has always been that Keynes went into the conference with a weak hand, and America had from the start wanted to use the war to replace British Imperialism with American led free trade. However the impression provided by this book is that Keynes was to a certain extent not beaten, but duped in these negotiations, though when the extent of White's slight of hand finally was revealed, Keynes surprisingly does not draw much attention to this central blunder, as if to limit the damage to his own reputation. There are also a few other examples in the book where Keynes seems to insist on spinning a private capitulation into a public victory. It pains me very much to say it, but with the picture Steil paints, it is possible to imagine someone with less prestigious baggage and less of a towering reputation at stake, as being a better negotiator for Britain than Keynes. (But this does not take away the credit that must go to Keynes for setting the background macroeconomic theory foundations which fathered the conference).

* Interestingly Steil reveals that, at this point when Britain was on her knees financially, there was in fact a no strings private loan being offered by New York bankers, as an alternative to the US Treasury BW route. As Steil notes, this non Treasury option was still compatible with the possibility of returning to a progressive BW type of international meeting at a later date, when a less grossly uneven balance in negotiating power would have existed.

* Left wing commentators hold up Bretton Woods as ushering in a quarter of a century of prosperity, but the reality Steil partly reveals is that:- Many of its tenants were dwarfed by the more progressive and Communist threat motivated Marshall plan a few years later; Making the dollar central to the worlds financial system quickly ran into trouble; Some of the dimensions of BW only came fully operational in 1961, therefore 10 not 25years could be interpreted as its true reign:

"The quarter-century period from 1945-1971 is typically referred to as 'the Bretton Woods era,' yet the monetary regime called for in the agreements could not be said to have become operative until 1961, the year in which the first nine European countries, plus Peru and Saudi Arabia, formally adopted the convertibility commitments required by IMF Article VIII ..." p 332.

* On a few aspects, arguably Keynes was right and BW was wrong. As America quickly found, there was an inherent conflict between a country's national currency being both the worlds reserve currency and freely convertible for gold, which, in a modern expanding world, the country in question had to buy more and more of to keep in reserve to back up this pledge. (Triffin dilemma, p333) The current US - China dynamic, which Steil refers to towards the end of the book, is the obvious significance for today, and, with China not having a viable international currency, the bancor and clearing union idea now get renewed interest. Also the foundational principle Keynes held, that creditor countries should be made to shoulder the effort of maintaining international equilibrium, is something the Americans have, as Steil notes, come around to agreeing with, now the creditor is the other party.

Being a massive fan and avid reader of Keynes, I was on a certain level upset to understand how he was cajoled and out manoeuvred. In conceiving the great forces acting on his self identity and sense of legacy, (given that he was still only human and his previous success and public notoriety had built him up to such a massive extent), I could almost feel the tumultuous personal conflict and strain delivered upon him, ... which eventually of course helped to kill him aged just 62. Knowing that he was to die soon after, for me gave the book a feeling of pathos and empathy. Most great economists are never placed in a position where they have to get their hands so dirty with the real world to such an extent. An analogy could be to compare the Bretton Woods conference to the making of a Hollywood film. Keynes not only came up with the concept for the film and co-wrote it, but also starred in it. Like a famous actor who had fulfilled all three roles, it is no wonder he would have been emotionally invested in its success, a bit blind to its flaws, and defensive and sensitive to any criticism of his baby. But he had been relatively powerless to control key parts of the final edit, because in the end, Harry White was in the Director's chair and it was an American movie. The deft exercise of national power undercover of seeming international legitimacy practised by White is a key theme the book coveys well, and parallels with the WTO or the Washington consensus of the 1990s came strongly to mind for me. I suppose as they say, you should; 'start as you mean to go on.'

As Bretton Woods is referred to so often and is such a key point in economic history, this book is invaluable in pointing out what it was, and what it was not. Timely is an over used word in book reviews, but this book does draw timely attention to THE big international China - US imbalance issue, which one could imagine Keynes would also have wished to highlight were he alive today. A highly recommended serious read.

Update October 2013

Since reading more about Keynes' contributions during this period, I have changed my mind a bit. There was never any question that anyone else but Keynes would have headed the British negotiations, as even if someone else was inserted as the figurehead, his towering abilities and status would have ran the British side from behind the scenes anyway. I still rate this book highly, but I now think Steil exaggerates the weaknesses of Keynes against his favour. Like many people who throw seemingly uncontrollable tantrums, Keynes did so with an instinctive awareness of when he had the goodwill, influence and power to carry it off. I also think Steil miss emphasises a bit what part of Britain's disadvantage was down to the personalities involved, and what was down to the clearly asymmetric power relationship between the two countries. Keynes was, it seems to me, on the whole more of a knowing realistic and pragmatic good loser, rather than being a temperamental and naive liability.

The extract below contains two comments from his BW delegation colleagues which the editors of Keynes' collected works, (volume XXVI, p112) chose to include:

"Keynes's role during the Conference was the subject of comments from two members of the Delegation. Professor Robbins recorded in his dairy:

At the end Keynes capped the proceedings by one of his most felicitous speeches, and the Delegates paid tribute by rising and applauding again and again. In a way, this is one of the greatest triumphs of his life. Scrupulously obedient to his instructions, battling against fatigue and weakness, he has thoroughly dominated the Conference...

R.H. Brand wrote to Sir Richard Hopkins:

I hope you will think the Conference was a success. I must tell you that Keynes was without doubt quite the dominant figure. He certainly is an astonishing man. Frail in body but will-power and mental brilliance and flexibility enough for 10. I feel like the stupid boy in school in his company. He got thro' much more real work than any of us."
Comment Comments (3) | Permalink | Most recent comment: Jun 12, 2013 2:08 PM BST


John Maynard Keynes
John Maynard Keynes
by Hyman P. Minsky
Edition: Paperback
Price: 15.99

1 of 1 people found the following review helpful
5.0 out of 5 stars Reinstating the Role Keynes gave to: "Uncertainty, Speculation and Finance", in Causing Boom and Bust Cycles, 4 Mar 2013
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This review is from: John Maynard Keynes (Paperback)
This book presents a convincing case that important aspects of Keynes' thinking has been neglected or omitted from the neoclassical synthesis. During an atypical period of financial stability in the post WWII decades, when: "The banking system came out of the war with a portfolio heavily weighted with government debt" (p127) and when memories of the 1929 crash held a stabilizing influence over finance in western countries, the neoclassical synthesis assumed away Keynes' focus on the destabilising role of investment sentiment and leveraged finance. Minsky effectively argues that Keynes' focus on uncertainty and the inherent instability caused by runaway 'animal spirits' was neglected by the so called Keynesian's. "Thus The General Theory is a theory of investment and why it is so prone to fluctuate. The glib assumption made by Professor Hicks in his exposition of Keynes' contribution ... is a caricature of Keynes' theory of investment" p92. "Keynes without uncertainty is something like Hamlet without the Prince" p55.

Most of us remember from Keynes that his key focus was on aggregate demand in maintaining economic activity and growth. Of the components of this aggregate demand, consumption is a factor which is influenced in a self referencing way by the level of economic activity itself (endogenous in economics speak). As Keynes emphasises and Minsky re-emphasises, it is the cyclical swing in speculative appetites for risk and leverage found in the investment component of aggregate demand, which best explain booms and slumps. Booms provide the conditions for the formation of financial crisis by increasing the toleration and necessity for leverage and risk, partly in order to maintain profit levels. Once the system has predictably engorged itself full of leverage and risk during the good times, after a while any potential 'shock' or bad news can trigger the deleveraging crisis stage. Each stage causes the next, while the triggers or economic shocks are often incidental:

"A boom once started lives a precarious life. It depends upon realization of optimistic expectations about yields, ..."p112. "Thus an increase in confidence and in the state of credit is equivalent in its effect upon the potential for debt-financing of investment to an improvement in current yield. Even if operating firms do not react to such changed views about the appropriate liability structure, an increase in leveraging can take place. Owners and prospective owners of shares can view the debt-financing of share ownership as an alternative to the debt-financing by the owning organisation, ... Thus with a fixed supply of shares, the market prices of shares increase." p119. "in a boom the ingenuity of bankers is directed at turning every possible source of temporarily idle cash into a source of financing for either real operations or financial position making."p140.

The solution which Keynes arrived at all those years ago was the 'socialisation of investment'. In other words, government controlling a main portion of the unstable investment function in the economy:

"To do better it is first necessary to constrain the liability structures of business firms. Debt-financing of investment and of positions in the stock of capital will have to be regulated, especially for large-scale organisations."p165. "As socialization of the towering heights is fully compatible with a large, growing, and prosperous private sector, this high-consumption synthesis might well be conducive to greater freedom for entrepreneurial ability and daring than is our present structure."p164.

This later point seems an outdated solution, and opposite to the direction in which economies and economics have been travelling since this book was written. But even if the proposed answer here is questionable, that does not take away from the impressive predictive power contained within his analysis of the problem.

As other reviews have noted, this is a technical book including much algebra etc., so not for everyone. But I skipped past all the algebra pages and still got a lot from it, and also found it to be a good partial guide to Keynes' 'The General Theory', which is arguably even more technical and impenetrable in places. The comments made by Minsky regarding the weak points or unfinished business of 'The General Theory' seem very valid to me. I sympathise with his opinion that events (1937 heart attack, WWII, early death) prevented Keynes from adequately fine tuning and directing the shape and course of Keynesian thought. Many economists and theories have attempted to be acknowledged as continuing the furrow which the brilliance of Keynes started, but Minsky seems to me to have taken over the mantle most sincerely in the right spirit.

Although this book was written in 1975, as the extracts above illustrate, it feels very very modern in places, and its message certainly rings very loud and true since 2007. The many allusions Minsky makes to speculation, refinancing and "experimentation with liability structures" seem to explain the sub-prime securitisation crisis in a nutshell, and shine a critical light on the growth of derivatives markets etc. It also provides a convincing narrative for the inflation and other problems of the 1970's which I had not heard before.

As the popular 'Minsky moment' term illustrates, the all important judgement of history accords a great deal of credibility to Minsky's analysis regarding the instability of capitalism. A credibility which free market thinkers have conclusively lost. All in all not an easy read, but well worth the effort for a book which is only going to grow in recognition.


The Corporation That Changed the World: How the East India Company Shaped the Modern Multinational
The Corporation That Changed the World: How the East India Company Shaped the Modern Multinational
by Nick Robins
Edition: Paperback
Price: 12.59

4 of 4 people found the following review helpful
5.0 out of 5 stars If You Do Not Know About the EIC, You Cannot Fully Understand World Economic History, 10 Jan 2013
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I am reliably informed that school kids nowadays are taught in detail about this important and fascinating subject. Certainly in China and India, the way the East India Company "Changed the World" has for decades informed part of their self identity and their economic history narratives. But for the rest of you, who may feel like me that this subject was under represented in our education, this excellent book is the best way to to make amends.

And what a story it is. All economic life is here. I started to make a list (in alphabetical order) of the facets and issues which the company's history throws up; Agency / principle issues, Boston tea party, business ethics, capture of the political system, corruption, drug dealing, economies of scale, exploitation, famine, government bail-outs, gunboat diplomacy, imperialism, insider dealing, military conflict, monopoly, outsourcing of government services, protectionism, racism, regulation, speculation, terms of trade. And I am sure you will find more! Also notable figures from history crop up in connection; Adam Smith, Duke of Wellington, Edmund Burke, John Stuart Mill, Karl Marx, Thomas Malthus.

So why did this company change the world? The answer is that it did so in many small ways, but the big central point is this; 300 years ago, both China and large parts of what is now India were in all practical ways, more economically accomplished and well placed than Europe. They had thriving production in goods that Europe soon fell in love with, like spices, cotton clothes, porcelain and later tea. Europe and Britain on the other hand produced nothing that caused such consumer desire in these oriental countries, and therefore gold and silver had to flow in the opposite direction. The nub of the later part of the story of the EIC is how it reversed this dynamic, essentially through quite controversial means; military, political and dodgy deal shenanigans in India, and facilitating the dealing of Indian grown opium in China. It is therefore completely justified for the title to claim that the East India Company was; "The Corporation that Changed the World".

Like me, you may have had an education which emphasised the inventiveness of the plucky British industrialist, which missed out this sharper, darker history, full of greed and plunder. The reasons for the former neglect of this subject, (and the lack of visible reminders of this massive company in London), are perhaps a mixture of slight national shame and a poor fit with the inventiveness and free market narratives that have since been adopted to explain British economic success. But things are changing for the better.

With a history background and a City related job, Nick Robins is obviously the right person to contribute to this enlightenment. His rich, broad approach spans the company's diverse story. The business dimension such as the company's fluctuating share price and its original and innovative financial arrangements are included, of interest perhaps to today's city guys who hustle a living on the same London streets. Also included are the more literary and cultural references of interest to history junkies, which also link notable people and events of that time to the story.

Besides the big point regarding the pivoting of the international economic upper hand in favour of Britain, there are many smaller things to take away from this epic saga. The company's activities have links with many of the notable events and issues in the history of the last 400 years, and one could imagine that the study of the not that "Honourable Company" would be a good vehicle for a complete education in politics, economics and moral philosophy / business ethics. As I said earlier, all life is here. ...

Imagine a long overdue BBC Four documentary series covering the different periods of the company's history. All those old ships and reconstructions of historical events, ... mmm pure bliss for a Sunday night!
Comment Comments (3) | Permalink | Most recent comment: Jun 19, 2013 11:30 AM BST


The New Protectionism: Protecting the Future Against Free Trade
The New Protectionism: Protecting the Future Against Free Trade
by Colin Hines
Edition: Paperback

1 of 1 people found the following review helpful
4.0 out of 5 stars A Very Appealing Core Message, But in Danger of Setting a Country Adrift in a Sea of Infinite Possibilities, 15 Sep 2012
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As a strong supporter of protectionism I can be expected to be a sympathetic reader of this interesting book from nearly two decades ago. Indeed the core concept of this book of using protectionism to improve "economy, environment and equity"(p125) is for me very close to home.

However in reading this book, I am reminded what a perilous undertaking it is for a country to set out upon a protectionist course, and why many economists are so wary of it. Free trade, for all it's faults, of which I am more ready than most to point out, is at least a coherent destination and organising principle for any countries economy. Even if your economic ship makes a few diversionary port calls and is blown off course a few times, having free trade as a final destination will sort and dictate many of your economic issues and decision making systems. Issues at the heart of economics such as the division of labour and claims on money and resources inherently generate conflict, which free markets resolve in a disinterested, impersonal and automatic way. If you take away this system, beware of the consequences. Once you abandon free trade as your nominal destination, you can easily become adrift in a sea of infinite contestable possibilities.

Oscar Wilde once commented than he was put off socialism because "it took up too many evenings". In a related theme I once watched a documentary about a 1970's commune where a number of the ex-members all commented disparagingly about the volume of discussion and debate and conflict generated by the basic economic issue of who should do what within the commune. In the everyday outside world, the capitalist market 'worked out' what jobs were required to be done by the population for the population, and each individual was faced with a disinterested 'job market', and left to compete to pursue their own best options. In a commune this automation was removed, and it was now someone's or some group's role to allocate the tasks required to satisfy the needs of the communes' population. The silent and sometimes cruelly coercive nature of the invisible hand was not completely wiped away, but partly replaced by an all too visible one, being the self appointed 'leadership'. Human nature being what it is, understandably the communes found they contained an abundance of natural leaders and strategic thinkers, alongside a dearth of cleaners and labourers.

The point I am trying to make is that once you leave the organising rules of free trade, you can be in danger of transforming your country into a giant version of this particular commune dynamic. Those on the left may warm to this idea of a giant commune, but the danger is that, like the communes, which did not always produce the harmony they envisaged, you are opening up the economic and political system to an avalanche of debate and interest group jostling. And again, human nature being what it is, you will find many who wish to move up a notch, and few who will want to remain on the lowest level if they can help it.

This book advocates protectionism, which is great, but it does so in a worryingly obtuse way. It is hard to disagree with many of the issues and objectives the authors wish protectionism to tackle. Indeed now, 19 years later, the authors must be commended for noting international economic issues which have mostly become even more potent and central. But without more strict guiding principles regarding what protectionist policies should effect and where they should leave well alone, I would worry about presenting such a Pandora's box to a disgruntled, entitlement ethos society such as ours. In their intentions there are too many 'oughts' and 'shoulds', each of which needs subjective input and disinterested decision makers to interpret and enforce. To have simple one dimensional remits such as to increase local supply of currently imported goods, without any counter balancing appreciation or recognition of the scale and scope required to support efficient local production, is a serious omission. The authors have correctly identified what I agree to be the strong potential of protectionism to kill a number of economic birds with one stone, but in my opinion they have left their recommendations too open ended, and left out any precautionary constraints which would be needed to protect a level of basic economic efficiency which plays such a huge role in making us in the West so rich and productive compared to the past.


Finance and the Good Society
Finance and the Good Society
by Robert J. Shiller
Edition: Hardcover
Price: 11.53

4.0 out of 5 stars Wide Ranging and Philosophical, 8 Aug 2012
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This book is a wide ranging and at times a very philosophical survey of the financial industry, dealing with a wide selection of moral and psychological questions relating to finance.

The first half of the book is a list of job titles within the financial industry and provides a perhaps sympathetic interpretation of what they do and how they do it. This part would be useful to someone thinking of entering the industry.

The second half draws from the authors wide ranging knowledge in this and other areas, to approach a number of issues relating to finance and the way it interacts with wider social objectives.

On the whole I found the book to be informative and a pleasant eclectic read, with a few nuggets of interest, but lacking clear strong focus on memorable big ideas which I could get excited about.

A few ideas ideas which did stick out: Firstly the idea that pension entitlements or debt (Greek debt?) should be promised in a metric which reflects GDP change over time, and other ideas like this for new metrics. I liked the idea of "odious debt" which could be ascribed to some forms of lending, making future collection less enforceable and therefore warning off unscrupulous lenders. E.g. this label of odious debt could be ascribed to home buyers who clearly should not be buying or dictators in Third World countries, which would make new lenders think twice. He interestingly mentions concerns about the shift away from the partnership form of businesses in the financial services industry which may induce more risk taking. Also some good criticism of the efficient market theory and how it was at the root of many recent mistakes. But I found the author to be a little too forgiving of recent mistakes, and a bit too enamoured of financial complexity like mortgage securitisation which I think has been tarnished?

Favourite bits:

"The convenient opportunity the bubble gave to politicians to make use of the 'let them eat credit' strategy (to use a term coined by Raghuram Rajan after the collapse of the economy) to deal with worldwide rumblings of discontent resulting from increasing social inequality." p114

(Citation from Walter Bagehot 1896, then the editor The Economist ) "Credit-the disposition of one man to trust another-is singularly varying. In England after a great calamity, everybody is suspicious of everybody; as soon as that calamity is forgotten, everybody again confides in everybody." p112.


The End of Growth: Adapting to Our New Economic Reality
The End of Growth: Adapting to Our New Economic Reality
by Richard Heinberg
Edition: Paperback
Price: 12.74

16 of 17 people found the following review helpful
5.0 out of 5 stars The End of Growth: and Why Keynesian Government Debt is "The Bridge to Nowhere"!, 14 July 2012
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This is a very economically authoritative book which convincingly argues a profound environmentalist, paradigm changing point. The author is a key member of the 'Post Carbon Institute' and in this book he explains why the fundamental economic truth of our time is that we are travelling beyond the period where cheap carbon based fossil fuels can foster perpetual economic growth. The arguments in this book could also be perceived as opening up a third side in the government debt verses austerity debate. Keynesian economists, such as Paul Krugman, may have to recognise that they now have to engage on two fronts, with the unlikely pairing of right wing conservatives, and now these green type groups, both pitted against them. Although in agreement with many of the anti free markets views of Krugman and others regarding the causes of the recession, Heinberg characterises government stimulus as "The Bridge to Nowhere", in that energy and non renewable resource scarcity will prevent a return to long term economic growth.

"The Keynesians still see the world through the lens of the Great Depression. During the 1930s, industrialised countries were in the early stages of their shift from an agrarian, coal-based, rural economy to an electrified, oil-based, urban economy--a shift that required enormous infrastructure investments (in new highways, airports, dams, and power lines) that would ultimately pay off handsomely for a nation on the verge of realising a consumer utopia. All that was needed to initiate the building of that infrastructure was credit--grease for the wheels of commerce. Government got those wheels rolling by taking on debt, with private companies increasingly taking the lead after World War II. The expansion that occurred from the 1950s through 2000, as that infrastructure was built and put to use, easily justified the government pump-priming that initiated the process. Future payments of interest on the government debt could be ensured through growth of the tax base. Now its different. . . . both the U.S. and the world has a whole have passed a fundamental crossroads characterised by increasing scarcity of energy and minerals. Because of this, strategies of growth that worked reliably in the mid-to-late 20th century-via various forms of business and technological development-have reached a point of diminishing returns. Thus the Keynesian spending bridge today leads nowhere. . . . the Keynesian remedy does not cure the ailment but merely extends the suffering (while increasing government debt to truly toxic levels) . . . There is no "silver bullet," no magic solution that will turn back the clock to an era of abundant resources and easy growth. For now, all that governments can do is buy time through further deficit spending- ideally, using that time to build infrastructure that will continue to function in the coming era of reduced flows of energy and resources." p100-102

The early parts of the book present a background critique of how mainstream economics has omitted to value natures finite capital and non renewable resources. Then Heinberg is obliged to detail the well documented flaws and extravagances which led up to the credit crunch / recession. He seems to recognise that many of these ideas, though essential to his narrative, are already familiar to us, and therefore trots through them nimbly, while of course placing extra emphasis on energy and resource issues. One quality of this book, which adds to its already authoritative feel, is that many good data sources and graphs of the sub-prime crisis / debt / government stimulus are provided.

The mid part presents the data and discusses the trends regarding the core issues of finite cheap energy and non-renewable resources. Then the various contemporary arguments which down play these constraining factors are dealt with. Some frightening statistics regarding China's growing energy and resource consumption are presented, which although not proving that net world economic growth is ending, do illustrate that economic growth for the rest of us will probably get harder.

One small gripe I have is that in a section titled "Currency Wars", Heinberg includes a citation which points out: " It's inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money" p207. But surely it is a question of degree? The final conclusion as to who is the biggest offender must hinge on whose currency is actually the most under-valued, and China still easily comes top on this measure.

The latter part of the book is more recognisably a 'green' read. There is a comprehensive list of stances and suggestions which include many that most would regard as sensible, and a few that some would regard as perhaps idealistic or ineffectual.

Although Heinberg arguably could be over egging the present effects of energy and resource shortages, the questions of environmental depletion and non-renewable resources in the long term easily trump all other considerations, especially in view of developing countries like China being able to consume more and more due to their manufacturing and exporting prowess. Therefore it is hard not to strongly agree with the central thesis of this book.

But if elites in the West are going to abort a Keynesian style return to consumer led growth as the author seems to wish, and instead settle for an austere non-growth economy, I believe they have to offer the low income working population / unemployed more than a chance to grow their own food, join co-ops, and do odd jobs in return for local currency as a consolation prize! This is an incomplete caricature of the suggestions Heinberg puts forward, but it does illustrate a point. As we are now all too aware, austerity does not fall evenly upon the population, and a weakness of this green approach to the future is that in their ideas there is some, but not enough, consolation for the less skilled working person, who is and will bear the brunt of austerity.

This is why I believe a certain kind of protectionism will inevitably make its way into rich country politics in the near future, to square this circle and tighten lower end labour markets within non-growing rich countries. (Although to be fair Heinberg does mention tariffs in a limited context "The adoption of a system of tariffs that would allow countries that implement sustainable policies to remain competitive in the global market place with countries that don't" p252). It should not be technologically ambitious protectionism which provokes resentment from other countries, and it should consider carefully questions of maintaining industry competition in relation to factors of scale and scope.
Comment Comments (3) | Permalink | Most recent comment: Aug 23, 2012 3:09 PM BST


Thinking in Systems: A Primer
Thinking in Systems: A Primer
by Diana Wright
Edition: Paperback

5.0 out of 5 stars A Smooth High Quality Primer, 30 Jun 2012
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As the title suggests, this book is written as a 'primer' into the subject, and it fulfils this function with ease and grace. It has the confident feel and logical evolved structure of a book written by someone who had completely mastered her subject and was well used to introducing these key ideas to her university students.

There is a strong emphasis within the book on economic and environmental issues, which suited me well. I presume that the late author held quite progressive environmental views anyway, but systems thinking engenders and illuminates environmental concerns better than any other approach I can think of. The sections on resource depletion are both fascinating and frighteningly realistic. Although the issues and underlying thinking was not necessarily always original to systems thinking, the language (labelling of terms) and often counter-intuitive approach of systems modelling has got a lot to give in these two subjects.

Concepts introduced such as information hierarchies and resilience, are both common sense and useful intellectual tools at the same time.

"I think of resilience as a plateau upon which the system can play, performing its normal functions in safety. A resilient system has a big plateau, a lot of space over which it can wonder, with gentle, elastic walls that will bounce it back, if it comes near a dangerous edge. As a system loses its resilience, its plateau shrinks, and its protective walls become lower and more rigid, until the system is operating on a knife edge, likely to fall off in one direction or another whenever it makes a move. Loss of resilience can come as a surprise, because the system usually is paying much more attention to its play than to its playing space. One day it does something it has done a hundred times before and crashes."p78

Looking back through it, the structure of this book is also very good as I have mentioned. It progresses in a logical way from the practicalities of systems thinking through to their implications and ends with some quite philosophical themes and advice. As another reviewer has mentioned, the appendix is actually useful in this book for a change, and seems in parts like a list of the key points of the book in a type of student revision notes form.

The writing and citations in this book almost seem to suggest an air of bemused condescension on behalf of systems thinkers for their misdirected non systems thinking fellow man and the subsequent mistakes they make. Similar to the airy condescension of free market economists, but more justified and less disproved by recent events. There are many examples given which justify this air of superiority, and it seems to me to be an easy stance to buy into! Systems thinking does seem to contain the right tools for tackling the biggest contemporary problems.

Anyone suggest a suitable follow up book on systems thinking? ( preferably one biased towards economics)

Very accessible and recommended to all as an enjoyable introduction to this subject.


The road to long finance: A systems view of the credit scrunch
The road to long finance: A systems view of the credit scrunch
by Michael Mainelli
Edition: Pamphlet
Price: 19.21

1 of 1 people found the following review helpful
5.0 out of 5 stars A Systems View is the Right One, 15 Jun 2012
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As the other reviewer has mentioned, much has already been written about the causes and outcomes of the financial mess. But the "systems view" approach of this book I found does add something valuable. If there was ever an environment where systems thinking is required to untangle complexity and reduce perverse outcomes, then our ever evolving financial system is it.

Generally I am sure most readers are aware of the basic issues: the moral hazard caused by state support; the pro-cyclical leveraging then de-leveraging of banks etc; the lack of transparency of new complex financial instruments. But this book attempts to lead us beyond short sighted knee jerk calls for tighter regulation, suggesting that in fact regulation is often counter productive. The authors instead call for for greater competition in the industry; a more diverse ecosystem of financial actors and modes of behaviour, and a more healthy rate of financial organisation failure when mistakes are made, in contrast to the too big to fail phenomenon we have seen (and all paid for). This makes sense in a complex system where the actors habitually get around regulations and where they know far more than the regulators can hope to. The best prevention against actors in such a dauntingly complex environment taking reckless risks, is for them to privately and personally suffer the consequences. The crisis has tainted free market type approaches such as this, but lets not go from one narrow minded conventional wisdom extreme to another.

I recently read a book about the American Tea Party movement in which the only strong argument there in was that the American government had exacerbated the sub-prime fiasco by pushing policies aimed at increasing home ownership, at the expense of traditional notions of credit worthiness and economic viability. In the same vein, here the authors explain how state interference plus free market incentives can produce the worst of both worlds.

As this book argues, the problem with considering regulation as the answer is that "Omniscient super-regulators do not exist" p8. Indeed the way in which regulators capital reserve regulations interacted with the oligarchical state protected ratings agencies can be argued to have substantially encouraged banks, especially in the U.S., to buy up mortgage backed securities. The pro mortgage prejudice of regulators, who placed substantially lower reserve requirements on securitised mortgage assets than on normal business lending, was arguably an important part of the cause of the problem. Furthermore the over rating and then sharp, perhaps harsh, downward rating of mortgage backed assets by the ratings agencies also exaggerated the swing in their value, which was the impetus for the credit crunch. As alluded to below, in the lead up to the crisis, the inaccuracy of the ratings agencies alongside their low capital reserve requirement made mortgage backed securities an attractive trading opportunity:

"In effect, to beat their benchmark, investment managers want products that are riskier than the NRSRO rating implies. In a perverse twist, the more wrong the [ratings agencies] are, the better for the investment managers, up to a point" p13.

The authors argue that heterogeneous competition not regulation will provide greater systemic stability in the financial system. "Tick-the-box compliance keeps out new entrants by increasing entry costs, but it also means that existing players become more homogeneous because they are forced to follow the same strategies. Regulation does not, nor should it try to, stop bad decisions."p25. This last point may seem counter intuitive. But to regulate against bad decisions within a stock market would be like regulating that no team should be allowed to loose a football match. The regulators job is to ensure that the game is played within the rules, not abolish losers.

It is not isolated bad decisions that are harmful, but decisions induced by systematic herd behaviour, which are always bad because they are self perpetuating and therefore produce larger mistakes and eventually inevitably require larger corrections. As the authors emphasise, regulation can cause buying and selling patterns, and organisation's strategies in general, to synchronise, which is very bad for the functioning of a healthy financial market. The prevalence of market strategies driven by computer algorithms (in contrast to human intuition and/or long-term strategy) also leads to herd behaviour.

A key justification for the whole edifice of "The City" is to create and maintain liquidity in financial markets, (i.e. there will always be someone at the other end willing to buy in a falling market or sell in a rising market). This book highlights that, from a systems perspective, the combination of ratings agencies, uniform sources of financial information, proscriptive regulations, computer algorithms, all lead organisations to become and act more homogeneously, and therefore have the effect of making liquidity more fragile.

I have just dealt with the main point the book makes, but there are many others. On the whole it has something distinct to say and is well worth reading. The nature of the subject means that it is not suitable for every general interest reader, but it is fairly jargon free and readable.


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