Monday, July 25, 2011

Stiglitz at his best (by Francesc Trillas)

The Nobel Prize Joseph Stiglitz happened to be in Madrid, and he attended the Forum organized by the 15-M protesters. He said that "bad ideas cannot be replaced by the absence of ideas, but must be changed by good ideas. To integrate them in the public debate requires organization and leadership. It's going to be a difficult struggle, because those bad ideas are well established in the dominant economic discourse, but now we have a great opportunity to unite economic science with social commitment and justice and thus achieve a new economy. I wish you the best of luck."

Sunday, July 24, 2011

Are there shortcuts to a better democracy? (by Pedja dell'Arno)

In the previous post by my colleague Francesc Trillas, he mentioned Dani Rodrik's criticism of the idea, usually promoted by many economists, of delegating into depoliticized agencies to solve many problems. One of these agencies is the central bank. By strategically delegating into conservative central bankers, the latter could avoid short term pressures to expand the economy, and focus on the narrow objective of keeping inflation low. The idea has been exported to other areas, such as product market regulation, lender of last resort, fiscal policies and others. The worry is that if everything is delegated into depoliticized agencies, what will be the scope of democracy?

Even the idea of central bank independence has been the object of what is called the Posen critique, by which it is doubted that central bank independence causes low inflation, as it was argued by several empirical studies. It could well be that countries with a historically developed preference for low inflation, like Germany, tend to have both low inflation and the institutions that facilitate it, but it is the preferences, and the interest groups that structure them, the key issue. Recent work in behavioral economics on expert judgement places many question marks on the working of expert agencies. Fear of ostracism, herd behaviour, confirmation bias are just a fraction of the systematic problems that plague these agencies just on efficiency grunds, let alone on legitimacy grounds. Independence and expert commissions, nevetheless, are answers to deeply rooted problems that plague democracies, in terms of commitment, complexity, and stability. But delegating into agencies that are separated from the political process creates problems of coordination and leadership that makes many think that the solution to those problems has yet to be found.
Philip Tetlock wrote in 2005 the wonderful book "Expert political judgment: how good is it? how can we know?" The answer to the first question is that it is bad. Experts make frequent and systematic mistakes. One example of these mistakes is the tendency to overestimate benefits and underestimate costs in many mega-projects, both public and private, as explained by the Danish scholar Bengt Flyjbjerg. Advancing towards a better democracy is a difficult and necessary process, and one that has no shortcuts.

Saturday, July 16, 2011

Global Markets and Democracy (by Francesc Trillas)

In 2007 Dani Rodrik published “One Economics. Many Recipes”. A commentary of that book was requested to me more than one year ago and the delays in journal publication have conspired to make that review appear in print (forthcoming in Spanish in Revista de Historia Industrial) after the publication of a new book by the same author. The new book responds to many question marks that were raised in the previous commentary. Immediately after the 2007 book was published, the global financial crisis of 2008 exploded and one was left with the question of how that book would have changed if it had been published two years later. Now we have the answer, in the new 2011 book “The Globalization Paradox.”

In this book Rodrik presents his Globalization trilemma. He argues that it is impossible to have three things simultaneously: global integrated markets, national sovereignty and democracy. If we have two of them, we must sacrifice the other one. Greek citizens, among others, would clearly agree today. The author shows how international transactions restrict the margin of manoeuvre of national governments. One clear example is the race to the bottom in corporate taxation due to the threat of capital mobility, which prevents many national economies from reinforcing their welfare states. A similar topic is addressed in Europe by two important documents, the Monti Report and The Nordic Model, that try to find ways out of the trilemma for the specific case of European economies.
To reach this argument, the first part of the book is a history of globalization, from the chartered trading companies (such as the East India Company) of the mercantilist era to the demise of the Bretton Woods system. The description of the transaction costs reduction role of merchant companies reminds one of Holmstrom’s 1999 article “The Firm as a Subeconomy,” where it is argued that many firms' executives, even today, act as regulators of the transactions that happen inside their organizations. According to Rodrik, in the past firms promoted by European states assumed roles that today are carried out by the states.
Rodrik shows that markets have always needed an institutional infrastructure, as Bowles impressive 2004 book “Microeconomics” also shows.
The second part of the book is devoted to criticizing the state of affairs after the crisis of the Bretton Woods system some thirty years ago. To Rodrik, the 2008 financial crisis is just a natural consequence of the excessive deregulation of international flows that followed that reasonable system. Global governance lags today behind global markets integration. Rodrik’s contribution consists of arguing that trying to advance global governance so as to correct for this mismatch is overambitious and not even desirable. He makes his own proposal of an international system that is based on national democratic sovereignty, with “traffic lights” that mostly respect what diverse democratic nation-states decide.
Pushing for additional integration would achieve marginal efficiency gains, which is not necessarily desirable taking into account that too often efficiency gains from international integration go hand in hand with huge distribution effects. It is not always desirable to win one on average if the rich win 51 and the poor lose 50.
A particularly brilliant part of the author’s argument is the criticism of the typical reasoning by economists that many of the difficulties of global governance should be fixed by depoliticised technocrats. If the choice is between depoliticization or democracy, the latter is more legitimate and a better route to a sustainable state of affairs. This connects with an important literature on the convenience of independent regulatory institutions.
Many European societies (where even the notion of the nation-state is fuzzy) will probably not find solutions in this book, but they will find useful principles (democracy, distribution) that will help them evolve towards a better combination of markets and governance.

Friday, July 15, 2011

Sam Levine 1911-2011 (by David and Paul Levine)

Our father Sam Levine who has died aged 100 was a truly outstanding scientist.  Trained as a physicist, he worked in the specialized area of colloids which typically consist of particles immersed in solutions, everyday examples being milk, oil , blood and sauces.     In a research career spanning over 60 years Sam published close to 200 papers many of which were seminal contributions to the fundamental theory of colloidal solutions.
Sam was born in Toronto into a working-class Jewish family and attended Jarvis Collegiate Institute and then Toronto University.  By the time he graduated with a PhD in 1936, he had already written path-breaking papers on the stability of colloidal solutions; any keen cook trying to resurrect a sauce béarnaise will appreciate the importance of this phenomenon. Following graduation he held several post-doctoral research posts before becoming a lecturer in the Physics department in the University.
In 1934 he married our mother Mollie Rabinovitch and the two of them with our sister Judy spent the year 1938-1939 at the University of Cambridge.  Apart from his science, Sam was involved with Mollie in (left-wing) politics for most of his adult life and in Cambridge was active in the United Front campaign to stop Franco in the Spanish civil war.  After returning to Toronto the Levine family emigrated to Britain where Sam worked at Birkbeck College with John Desmond Bernal  (aka ‘The Sage’), before eventually settling in Manchester where he spent the rest of his UK career in the department of mathematics. 
After Sam `retired’ in 1978 he took up a research post in the University of British Columbia in Vancouver. The understanding of colloidal systems is fundamental to many areas of technology including the recovery of oil from tar sand.  In the late 1980s, when Sam was approaching his 80th birthday he worked with UBC colleagues for the Alberta Oil Sands Research and Technology Authority on this problem.  Returning with Mollie to the UK he continued his research into his 90s.
Sam was a devoted husband of Mollie and was totally devastated when she died in 1998 at the age of 85. Mollie was a `mature' postgraduate student embarking in at the age of 50 upon first an MSc then PhD in biochemistry at the University of Manchester. From 1974-1980 she held the post of Lecturer in biochemistry publishing many papers in this area, three of which were with Sam. Indeed one of these, an application of colloidal theory to biological cells, is one of Sam’s most highly cited papers.
Sam had a remarkable life. He collaborated with a large number of eminent scientists from countries ranging from the UK, Canada, the US to Australia.  He met many of the great physicists and mathematicians of all time, including Albert Einstein (who provided him with a reference), Paul Dirac, Werner Heisenberg, Richard Feynman and Alan Turing who was a colleague in Manchester.
Sam is survived by his daughter Judy, sons Paul and David, 5 grandchildren and 5 great grandchildren.

David and Paul Levine (Published in The Guardian, August 7h, 2011)