Sunday, April 26, 2009

Book Report: Animal Spirits - How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

Another econ book, guess I can't get enough of them these days. Due to Shiller's involvement I had high hopes, but found it pretty disappointing. I didn't get the sense that the authors really thought through who their audience might be. It seemed far too light for economists (even armchair ones) and maybe too advanced for a mainstream audience (though we'll have to watch the sales figures). 

The basic premise is that the core models on which we've long built macro economic theories are far too simplistic and therefore wrong. Markets of all types are influenced dramatically by "animal spirits" (aka human psychology) and we need to find ways to successfully incorporate this new understanding. The authors suggest that theirs is a unique insight and as a result we can finally understand why our macro econ models are so broken: "Our theory of animal spirits provides an answer to a conundrum: Why did most of us utterly fail to foresee the current economic crisis?"  I found this statement a bit too bold, shouldn't behavioral economics pioneers like Daniel Kahneman and Vernon Smith share in the credit? Also beyond a light weight discussion of their theory and it's grand implications there isn't much depth to back up their claims (though I'm not saying the ideas are wrong). Further research is left as an exercise to the reader or the current crop of grad students...

If you haven't been following the latest economic thinking since undergrad (and you went to undergrad 10+ years ago) you might find this book illuminating, otherwise I'd probably skip it.

Sunday, April 12, 2009

Book Report: The Rise and Decline of Nations

Finally finished this one, eek that took a while. Rise and Decline of Nations was dry as matzoh, but it did leave me with some ideas to chew on...

The basic theme is wonderfully simple: special-interest groups (aka distributional coalitions) are bad. Through influencing government policy and collective action (price fixing, etc) over time they manage to tax each of us, thereby reducing our wealth while increasing theirs (in an extremely inefficient way). 

One key takeaway for me was when Olson explained why consumers (like you and me) don't defend themselves against these groups...

Olson provides 9 implications of having special interest groups operate in a stable society over time (paraphrased more or less here): 

1. No country will obtain an optimal economic outcome through competition between groups since only those with something significant to gain by organizing (distributional coalition) are represented. 

2. Older stable societies have more special interest groups.

3. Small groups can organize easier and have more power in a newly formed societies.

4. Special interest groups on balance reduce economic efficiency and make political life divisive. 

5. Very large groups (encompassing) have some incentive to do what is best for society and are less damaging. 

6. Groups make decisions far more slowly than individuals.

7. Groups slow down society's ability to adjust to changing conditions and technologies, reducing economic growth. 

8. Once successful, a group seeks to limit diversity of incomes and values. They also work to restrict membership (to protect the value of the benefits obtained for each existing member).

9. More groups means more regulation and government involvement.