The impulse to tell (false) stories (by Pedja dell’Arno)

In several books on behavioral economics (such as “Animal Spirits”, by Akerloff and Shiller, and “Thinking, Fast and Slow” by Daniel Kahneman, or the books by Nassim Taleb), scholars explain the tendency of human beings, especially essayists and commentators, to construct stories that “explain” realities that are mostly random by nature. I have seen one example in a very successful book that was published a few years ago: “How Soccer Explains the World. An Unlikely Theory of Globalization”, by Franklin Foer. It is an interesting book, precisely because it tells plausible and suggestive “stories”. In one of them, he praises his favourite team (also mine), FC Barcelona, because it is an example of a “civilized” club that integrates foreigners and it expresses nationalism in a civilized way. It praises that the club never resorted to publicity in the T-shirt. Well, a few years after the book being published, the club has publicity from a Foundation dependent on a non-democratic government. Its maximum officials have been involved in corruption cases and some players accused of racist abuse, like any other team in the world. Before the book being published, FC Barcelona fans routinely threw eggs and potatoes to RCD Espanyol fans, the rivals in the city. The supposed pundit, as an example of the integration of foreign players, says that Johan Cruyff gave the Catalan name Jordi to his son, and that it probably was the first person after the Franco dictatorship that gave a Catalan name to his son. Too nice to be true.  Is the rest of the book (on topics I know much less about) as rigorous as this one?

Two Days in a BRIC (by Francesc Trillas)

I just spent two days in Sao Paulo (Brazil). Of course this is not enough time to know a city well, much less a country. I would have liked to spend more time there, and hopefully in the future I will be able to do so. It doesn’t help that we don’t know many people there, so we didn’t have a local guide in our visit, although I had a productive meeting with professors in the Getulio Vargas Foundation. In the short time that we spent there, my impression was that it is a relatively rich and lively city. Apparently, it is a safe city, at least in the daylight and in the commercial center. The Avenida Paulista, the main business street, does not look different from other big avenues in capitals of developed nations. We spent a few hours in a big park (Ibirapuera) that contains several museums, and that reminds one of Central Park. We also spent time in a shopping street called Oscar Freire, which reminds one of Rodeo Drive in Beverly Hills. One thing I didn’t like: if you go to Sao Paulo, avoid the Linson Suites Hotel. One thing that didn’t surprise me: when we woke up to catch our flight in the last day, at 6 am there were still many groups of young people partying in the streets, not differently from many Spanish cities. And yes, the Brazilians are crazy with football, and they fed the illusion that they were on a par with FC Barcelona the days prior to the Clubs World Cup final. The taxi driver that drove us to the airport in our departure was a Santos fan, and (hypocritically) I wished him luck when he dropped us. The rest is history.

Bad news for European anglophiles (by Pedja dell'Arno)

The decision by Prime Minister David Cameron to veto the new European fiscal arrangements and the subsequent marginalization of the UK from the new agreement is bad news for many European anglophiles. Although Britain is still a member of the European Union, and we still benefit from easy access to the British labour market and easy communication with London, if this marks a new era in which London and Europe will be gradually more separated, it is hard to see how this could be good news. Most probably, it is good news for fiscal policy and in the short run it may be good to stop the euro crisis. But from a cultural point of view, if this is a first step to a gradual de-integration, this may mean in the future less links between continental and British universities, less contacts between executives and workers, less relationships between artists and cultural elites. London is an intrinsic part of Europe and Europe without London is less Europe. The continent needs the reminder that there is a big multi-cultural city accross the channel that is one of the cultural capitals of the world. It is hard to see how this would have happenned under a Labour government.

Denmark eliminates the independent regulator (by Francesc Trillas)

Denmark has decided to eliminate its telecommunications national regulatory authority. The few existing official details are in http://en.itst.dk.  Telecommunications expert William H. Melody, Guest Professor at Aalborg University in Copenhagen tells me that his best guess is that the top staff in the Ministries were jealous of the success of the regulatory agency, which has been regarded as one of the leaders in the EU since its inception in 1994, and the Director who has been there the entire time, and they took advantage of the ignorance and naivete of the new government about these matters.  This would also have been supported by the private equity owners of TDC, the incumbent, who are bleeding the company financially and seeking weaker regulation. I would like to know more about this issue, but it seems interesting and intriguing to me that a country that has been for long at the top of telecommunications rankings in Europe, has decided to eliminate its independent national regulatory authority (a requirement of EU rules) after a political change. Something similar has been happening for many years in Chile, a country that is often mentioned as a paragon of virtue in terms of liberalization and performance: Chile's regulatory agency is part of a ministry. Independent regulators may under some conditions contribute expertise and alleviate time inconsistency problems. But they have advantages and inconvenients, and they are vunerable, despite being a typical recommendation of international institutions. They seem to be no panacea, and they are neither a necessary nor a sufficient condition for good performance.

Monti and the technocrats (by Pedja dell’Arno)

There have been several very interesting articles in La Repubblica by Eugenio Scalfari defending the democratic and political nature of the government presided by Mario Monti. The prime minister is not a party politician, but he has a political past insofar as he was European Commissioner and he made important contributions to the political debate in Europe such as the Monti Report. Scalfari argues that the Monti government is also the Napolitano government, in the sense that the President of the Republic has been directly involved in its composition. The former editor of the newspaper La Repubblica argues that a government that is appointed by the President of the Republic with the support of a majority of the Parliament, but without being negotiated in its details with the party leaders, is as democratic as any other government, and may even eliminate from Italian politics some of the features that have tarnished its reputation in the recent decades. Although a verdict will have to wait, the Monti government looks more promising than its counterpart in Greece, but it also has its dark spots. Paolo Flores d’Arcais recently criticized that the only Minister that Berlusconi managed to negotiate with and impose to Monti was the Justice Minister, and that the government had more than a fair share of officials linked to the Vatican. Last week The Economist argued that technocratic governments should be in office only under exceptional reasons and for a short period of time. Experts and lay persons should share the government of collective affairs in combinations that must be fine-tuned depending on place and time. But at the end, the citizens should be in control.

The Mankiw walk-out and my reading list (by Francesc Trillas)

Robin Wells presents her point of view about the recent walk out by some students at a class by Gregory Mankiw in Harvard University. While suggesting that staging a walk out is perhaps not the ideal method to engage in a civilized discussion, she also acknowledges that the incident should be taken as a starting point of a debate on how we teach economics. She suggests that economics should be more modest, and more balanced in terms of acknowledging real market failures and inequalities. I don't have much to add to the debate, except to suggest a possible reading list that tries to be balanced (my reading list in the course on Public Economics in the Master in Economics and Business Administration in the Autonomous University of Barcelona):

WEEK 1: Stern, Nicholas (2009), Imperfections In The Economics Of Public Policy, Imperfections In Markets, And Climate Change, Journal of the European economic Association, 8(2-3): 253-288, http://onlinelibrary.wiley.com/doi/10.1111/j.1542-4774.2010.tb00504.x/pdf

WEEK 2: Bowles, Samuel; Gintis, Herbert (2002), The Inheritance of Inequality, Journal of Economic Perspectives, 16(3): 3-30. http://www.ingentaconnect.com/content/aea/jep/2002/00000016/00000003/art00001

WEEK 3: Andersen, Torben M., et al. (2007), The Nordic Model, Chapter 8, http://www.svrez.gov.si/fileadmin/svez.gov.si/pageuploads/docs/Strategija_razvoja_Slovenije/The_Nordic_Model.PDF

WEEK 4: The Economist (2011), The Future of the State, Special Report, March 19th 2011, http://www.economist.com/specialreports?page=2

WEEK 5: Ostrom, Elinor (2009), Beyond Markets and States: Polycentric Governance of Complex Economic Systems, Nobel Prize Lecture. http://www.nobelprize.org/nobel_prizes/economics/laureates/2009/ostrom_lecture.pdf

Homage to Italy (by Pedja dell'Arno)

Bye, bye Berlusconi, and please don't come back. Today has finished one of the paradoxes that has characterized Italy in the recent times. The country of Claudio Magris, Roberto Benigni, Umberto Eco, some of the greatest economists, scientists and philosophers. The country where people are articulate and educated, where people read and talk about politics. But also the country of the Vatican, the Mafia, and Berlusconi. That country has just decided in favour of decency. More than two decades ago, when the political system that he was trying to buy collapsed, he decided to perform one of the clearest examples of political vertical integration that could be seen. Instead of buying political parties, he decided to create his own. He managed to become prime minister, and during his rule he kept the ownership of his media firms, his football club, and spent most of his political time and capital trying to protect himself from judicial action derived from his implication in all sorts of corruption scandals. In the last days, the events have accelerated, but perhaps it is time to draw a few lessons:
-Although external pressure has been a key accelerator, the organized pressure from ordinary citizens and from the left were there to help make evident to anyone that Berlusconi was not a necessity.
-A President that emerged from decades of left-wing politics, Giorgio Napolitano, has been key to show that democratic institutions could show a way forward.
-Markets have been in this instance a force for good (that's what economics shows us, right? that markets may be good under some conditions...), and a technocrat will lead the solution, but the responsibility and seriousness of the center-left will make it possible that Italy (and from it the rest of Europe) has a future.

Shared Capitalism (by Francesc Trillas)

It may be a surprise to many that most firms even in the US are not like the traditional text-book capitalist firm. That was uncovered some time ago in the book "Shared Capitalism" (see the introduction here). This book was mentioned today in Bellaterra (where my university is located) by Prof. Vicente Salas, one of the best economists in Spain. The quotation was in the context of a presentation on firms and competitiveness. Salas has argued that one should be very careful to distinguish between a firm's competitiveness and a country's competitiveness. Strengthening the competitive position of a firm may be achieved by increasing profits without increasing productivity, thanks for example to market power or other market failures (like generating negative externalities), that may be contradictory with whatever it is to increase a country's competitiveness. A firm that shares not only its profits, but also its decision-making process, with workers and communities, may be much better towards contributing to a country's welfare. What apparently was a modest reference in business economics, was actually a call to a better society. If that call had been heeded some years ago, perhaps some countries like Spain would have had a different growth model, and today we would be facing a different scenario.

Perception of fairness (by Pedja dell'Arno)

Nicholas Stern, in his excellent  presidential address to the European Economic Association in 2009, said that a big problem in global negotiations to stop or alleviate the consequences of climate change, was that developing countries should perceive as fair the offers by rich countries to reach an agreement. The idea is based on a very simple interaction called the Ultimatum Game, very well known by many social scientists. In this game, a proposer suggests a deal to some subordinate agent. The deal can be to split a given resource in a fair way (say, fifty-fifty) or to split it unequally (say, ten per cent versus ninety per cent). If the second agents accepts the deal, the resource gets splitted as suggested. Otherwise, the resource disappears (as would life in the planet if nothing is done to stop climate change). Given the alternative, the purely rational reaction of the second player should be to accept any deal. However, in practice, as seen in thousands of experiments, the second player almost never accepts utterly unfair proposals. The game has come to my mind after reading one after another article by many economists stressing the need for structural reforms, without saying much or anything about any suggestion to accompany them by a plan to make these proposals acceptable by those who may be the losers from such reforms, and may well be expecting some perceived fairness from the proposers.

The impact of the 2004 election on Spanish firms (by Francesc Trillas)

The academic journal SERIEs has accepted a paper by Pau Castells (now at the UK Government Economic Service and PhD candidate at the Autonomous University of Barcelona) and myself on the impact of the March 2004 general election on large Spanish firms. As it is well known, in the last days of the electoral campaign for the 2004 general election in Spain, on Thursday March 11^th 2004, a series of simultaneous terror attacks caused the death of 191 persons in commuting trains in the capital Madrid. Four days later, the opposition party PSOE won the election, against all predictions that were made prior to the terror attacks. This change in expectations presents a unique opportunity to take advantage of event study techniques (which measure the impact of surprise events on the stock market) to test some politico-economic hypotheses. One of the problems of many event studies is that long event windows run the risk of including effects of events other than those under analysis; the fact that in this case the election result could not have been predicted four days before the election greatly reduces the meaningful length of the event window and hence the potential for event contamination, except for the potential confusion between the attacks themselves and political change. But we isolate the effect of the attacks themselves by looking at the effects on the stock prices of specific economic sectors (such as tourism) on the day of the attacks and the day after, that were more affected by the attacks than by the elections. We use data for 87 firms in Madrid’s continuous market. We use daily returns data from Infomercados, a financial web site specialized in Spanish equity markets.

One of the hypotheses that we test is that political parties tend to converge in the centre of the ideological spectrum (Median Voter Theorem), implying that there are no differences in practice in policy terms. The other is that politicians and managers collude, for example through the presence of former politicians in the Board of Directors of firms. Convergence theories prove quite resilient in our study as, jointly, on average quoted firms were not significantly affected by the election outcome. We find that, in spite of rhetoric, investors did not expect significant differences between both major Spanish political parties. The expectation was that the degree of convergence in policies affecting the average profits of firms in the overall market would be high. The overall results are consistent with no partisanship (so no effect on expected macro policies such as fiscal policy, inflation, public expenditure or unemployment policies that may affect the market as a whole). Parties may indeed diverge in non-economic policy dimensions, such as social, religious and cultural norms, foreign policy, or the degree of institutional decentralization. But the profit expectations of the stock market as a whole remained unaffected.

The results on the impact on politically connected companies and particular economic sectors, however, suggest that particular industries and businesses may be affected by the political structure of Spain and the nature of its business-politicians networks. A number of companies were indeed affected by the election results analysed in this article, and the empirical results provide some support to the hypothesis that the degree of political connectedness of such businesses is at the core of explaining the impact of the surprise election results on their financial returns.  Of the 87 firms analyzed, 46 were politically connected, in the sense of having some former politician or a person clearly linked to a political party in the Board of Directors. We find only weak evidence that politically connected firms on average were affected by the surprise results. But firms that were connected to the Popular Party were significantly affected by the result. Interestingly, the impact could be positive or negative. It was negative in the case of Endesa but it was positive for example in the case of Telefónica or Iberia. Firms in the energy sector could be affected by partisan effects beyond those related to political connections, because the sector was in the middle of a merger wave about which political parties held different opinions. The fact that firms linked to the PP could have a positive effect from the Socialist Party victory can be interpreted as the collusion between managers and PP politicians being damaging for shareholders.

Our interpretation of these results is that the impact of one party or another governing in Spain is not that there will be big changes in general economic policies, but that the value of collusive agreements between politicians and firms changes.

Three great pieces (by Pedja dell'Arno)

The debate about the "Occupy" and related movements is attracting the best minds. No matter what you thing about the particular details of what the participants are demanding, this is a good sign. Yesterday, in Newsnight (BBC2) Jeremy Paxman interviewed Michael Moore, and the interview reflected both the great potential and the limits of the movement. On Sunday, Eugenio Sclafari in La Repubblica urged the participants in these movements to get organized and influential in the political arena. "The Economist" did something similar when comparing the "Occupiers" with the Tea Party. In Italian, from Scalfari, it sounds much better:

Gli "indignati" sono indignati perché tutto ciò manca e il futuro gli è stato rubato. Sono d'accordo con loro anche perché a me e a quelli della mia generazione è stato rubato il presente e la memoria del passato e vi assicuro che non si tratta d'un furto da poco. Ma so che non è con l'utopia che si risolve il problema.
L'utopia è una fuga in avanti alla quale subentra ben presto l'indifferenza.

Il vostro entusiasmo è sacrosanto come la vostra pacifica ribellione, ma dovete utilizzarlo per la progettazione concreta del futuro, altrimenti da indignati finirete in rottamatori e quando tutto sarà stato rottamato - il malfatto insieme al benfatto - sarete diventati "vecchi e tardi" come i compagni di Ulisse quando varcarono le Colonne d'Ercole e subito dopo naufragarono.

Independence and the ratchet effect (by Francesc Trillas)

Last Thursday, I presented at my university a paper on independence and the ratchet effect, co-authored with Joanne Evans, Neil Rickman and Paul Levine. The paper can be found here. In words, the ratchet effect is the tendency of evaluators to "penalize" efficient behaviour by setting higher standards for future evaluations. In the relationship between a regulator and a firm, if a firm is efficient, the regulator may demand more effort in future periods. Anticipating this, the firm may be tempted not to behave as efficiently as it could in the first place. This could be alleviated if the regulator could commit not to "penalize" the firm. One way that this could be done would be to delegate into a type of regulator that is not bothered about the firm enjoying efficiency rents. Of course, the solution implies that the political system is able to commit to respecting the independence of this regulator, something that many countries have found difficult to do. If committing to the institution is possible, then governments should find a regulator with exactly the "right" preferences. This is because a regulator could be too pro-firm, and then allow regulated firms to enjoy too high rents from a social welfare point of view. An interesting result of the paper, although it is established by simulations and not analytically, is that pro-firm (conservative) governments have more to gain from delegation than pro-consumer egalitarian governments, because the latter will resent more the relatively high rents enjoyed by firms. And the paper further discusses the recent never ending "independence debate".

M. Aoki, much more than a business economist (by Pedja dell'Arno)

I thought of Masahiko Aoki as a Japanese economist trained in the US that was expert in the corporate governance of Japanese firms. Now that I am reading his book "Towards a Comparative Institutional Analysis" (The MIT Press, 2001), I see that he is much more than that. In his analysis, he explains how different domains of social life (economic, political, socio-cultural) interact to sustain stable socio-political arrangements. For example, he sees the co-determination of German firms as complementary of what he calls social-compact corporatist states. Beyond particular examples, he sees institutions as equilibria of social games that constrain the behavior of agents in other games. Then reform proposals in particular societies have to be made in reference to these equilibria. It is useless to recommend policy changes that are not equilibria of any game. Institutions, preferences and beliefs coevolve and the role of policy is to advise on how is it possible to coordinate on equilibria that are both fairer and more efficient.

SAMUEL BOWLES (by Francesc Trillas)

(Presentation of the Inaugural Lecture at the Department of Applied Economics, UAB, 26 September 2011)

It as a great pleasure and honour to have Sam Bowles from the Santa Fe Institute and the University of Siena to give this Inaugural Lecture, which marks the start of our academic year in the Research Master and the Doctorate in Applied Economics.

When we asked Samuel Bowles about the topic of his lecture, he gave us four or five options, among them the evolution of inequality for the last 20000 years or the emergence of property rights some 10000 years ago. We chose the relationship between economic incentives and social preferences because we thought it would be more closely related to the policy-oriented preferences of our faculty and students, and because it integrates theory and evidence from experiments and from the field. But any of the other topics was very tempting, and shows the ambition and breadth of interests of our speaker.

He may not know that I know that he is also the auhtor of a theater play entitled “My Dinner Party with Karl, Leon and Maynard:  A Play in 1 Act and 7 Scenes”. I am sure you can guess who Karl, Leon and Maynard are.

Samuel Bowles is one of the most interesting economists and social scientists of our times. His book “Microeconomics”, a very unusual microeconomics book, is one of the best, probably the best, economics book I have ever read. He has just published another book, with Herbert Gintis, “A Cooperative Species” and has a long list of journal publications in a variety of fields.

I encourage all of you to read his work. Reading parts of it has taught at least me a few lessons. Challenging the orthodoxy implies respecting it and knowing it well. It also implies using more, not less, complex and mathematically demanding methods than orthodoxy.

SB is an example of openness to other disciplines, not as an imperial venture or as a superficial show of wisdom, but as a profound endeavour to improve our knowledge of human societies using the scientific method.

If you want to know about exciting fields such as behavioral and evolutionary economics, or the role of institutions, you can find all of this in Sam Bowles’ books. You will learn about the difficulties of separating equity from efficiency, or the importance of how to achieve cooperation and coordination in social dilemmas, or the explanatory power of economic power and social classes.

Microeconomists off the hook (maybe) (by Pedja dell'Arno)

Paul Krugman delivered a speech at the Eastern Economic Association where he reflected on the role of economists in the current crisis. He said "maybe I can let microeconomists off the hook. But macroeconomics is, above all, about understanding and preventing or at least mitigating economic downturns". I wonder if that is true. I mean, it is probably true about macroeconomists, but micro people should perhaps also share at least part of the blame, since modern macro, if I am not mistaken, has been based on microfoundations. Perhaps these microfoundations were not that sound after all. If the microfoundations  of macro have been based only on the micro of 30 years ago, before the irruption of behavioral, institutional and evolutionary economics, probably they lack some of the most interesting issues that microeconomics has to say. Still, even with the recent contributions, microeconomics is just a methodological guide to ask scientific questions about social reality, who knows if rich and sophisticated enough to help answer the big questions of our time.

Not "what", but "how" (by Francesc Trillas)

In many social and economic problems, sometimes it is quite clear "what" has to be done. It is less clear "how" to do it. Also for more personal problems: it is easy to advise an obese person to eat less and exercise, it is more difficult to tell him "how" to manage to achieve it in a sustained way. Three (related) examples come to my mind:
-Many claim that some decisions should be left to experts, and not to amateur politicians. However, it is less clear how in a democratic society, the majority will delegate their decision making powers on élites that may not share their distributive preferences.
-Competition and merit should play a larger role in the allocation of resources. However, there are losers from competitive processes, and the losers will make their voices be heard in a democratic polity.
-The selection of politicians should be focused on looking for the best citizens and the reform of political parties should focus on improving the quality of policy-makers. However, politics is labour-intensive and some citizens invest their human capital in this career, and will not easily accept to be replaced by part time well trained elites.
Perhaps, as Bowles reminds us in his book "Microeconomics", the problem is that any efficiency-enhancing reform is accompanied by distributional changes. In European countries, it is very common to suggest (allegedly) efficiency-enhancing reforms without proposing ways to alleviate the distributive tensions that accompany them.

Reading on institutional economics (by Pedja dell'Arno)

I missed a critique (Journal of Economic Literature, 2007) by economic historian Gregory Clark of the 2006 book by Avner Greif on "Institutions and the Path to the Modern Economy." Now I managed to read it and it is an excellent article. This critique is one of the recently appeared pieces that criticize the alleged over-ambitious project of the New Institutional Economics, which tries to present market preserving institutions as the main driver of economic development, following the work of Ronald Coase and Douglas North. Other authors that have pieces (or sometimes paragraphs) containing criticisms of NIE are Samuel Bowles, Pranab Bardhan and Ha-Joon Chang.
These criticisms sometimes focus on aspects of the economics of institutions that some authors would not acknowledge as central to the whole enterprise, like the necessary survival of efficent institutions, or the recommendation of a limited role of government.
In my view, perhaps there are inherent problems in trying to institutionalize institutional economics. One of the lessons of this school, precisely, is that institutions do not travel well, and that attempts to sustain collective action are time and space-dependent.
Still, the best contribution of the economic analysis of institutions in the recent past is to emphasize the role of rules and organizations (of different nature) and transaction costs in modern economies, as practiced for example by Avinash Dixit. Elinor Olmstrom and Oliver Williamson were given the Nobel Prize for this reason.

On Central Bank Independence (by Francesc Trillas)

An article in El País by José García Montalvo raises the issue of the danger of jeopardizing Central Bank Independence (CBI) in the current crisis. Montalvo is an economist that usually writes very sensible arguments on housing economics and other topics. This time, however, I respectfully disagree with him. CBI can certainly play a role in normal times and when the role of the central banker is focused on a very narrow set of dimensions, one if possible (like setting an interest rate). However, in periods of severe crisis, and when the role of the institution has expanded to include issues of financial regulation, the case for independence is much weaker. This is because in a severe crisis distributive issues become much more important, and because in a multi-dimensional context, things are much more difficult to measure, and hence, monitoring the role of the central banker by the public opinion becomes very problematic. And in a democracy, monitoring is very important if society grants independence and discretion to a non-elected institution. This is well known by the authors who first proposed the idea of central bank independence, so it is no surprise that a reasonable conservative economist, such as Kenneth Rogoff, now argues that the idea of a conservative independent central banker only focused on delivering very low inflation is of second order compared to trying to fight a crisis that is being suffered by the most vulnerable sectors of society.

Two interesting economists (by Pedja dell’Arno)

Browsing the Internet for research purposes one sometimes finds scholars that one should have come across long ago. Here are two examples:

Ajit Singh

http://www.econ.cam.ac.uk/faculty/singh/select.htm

and Ha-Joon Chang

http://www.hajoonchang.net/

Both are from Cambridge University and of Asian origin.

Both are development economists that, using mostly mainstream economics, point out standard market failures that justify policies that depart from laissez-faire. Not very original, but very necessary. Since it is common to blame economists for the evils of the current economic and financial crisis, here are two interesting economists that should not be blamed.

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."

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.

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.

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)