Hail and Farewell

It is always good to learn that some new citizen has joined the ranks of economic journalism, or, alternatively, that one who seemed to have gone away has produced a fine new piece of work — especially in view of the fact that someone is always permanently leaving the scene.

Naturally I rejoice as well at the appearance of a new generation of explicators. The most recent recruit is Tim Harford, author of The Undercover Economist.  He joins Stephen Dubner and Steven Levitt (Freakonomics), John McMillan (Reinventing the Bazaar), and Charles Wheelan (The Naked Economist). Each of these books is a reader-friendly gloss on a standard economics text, approached from one angle or another. All are good books, but for the kind of person who reads Economic Principals, McMillan’s is still the best.

But insiders, even insiders who write for outsiders, don’t see the world the same way as do outsiders who look in. Journalists haven’t been schooled in the discipline; they haven’t acquired whatever “trained incapacities”: may be imparted thereby. These blindspots can be pretty big; the system of incentives within the profession pretty pervasive. There’s a reason we look to civilian reporters to cover the military.

There is a special place in my heart, therefore, for those who don’t take the truth as entailed by the theory, but start from observation and work backwards to ask what the theory has to say. Perhaps the finest economic journalist of the 20th century was the social critic Jane Jacobs, who died last week at 89.  More of her in a minute.

First, however, consider four new specimens of economic journalism. It was a happy day, for example, when Aaron Brown turned up in my mailbox.

The Poker Face of Wall Street hasn’t received the attention it deserves, perhaps because the book is something of a hybrid. The author is a jack of many trades: high school baseball umpire, finance professor, Wall Street trader, risk architect, big-time poker player and original thinker.

Mostly, though, Brown is a born storyteller. Paul Wilmott describes him as “the Damon Runyon for a technological age in which you need psychology, game theory and mathematics in place of the suit, the spats and the diamond stickpin.” (Wilmott, a celebrated mathematician and textbook writer, employs Brown as one of the columnists for his eponymous magazine.)

Me, I’m reminded less of Runyon than of George J.W. Goodman, the former magazine editor and money manager who, under the nom de plume “Adam Smith,” wrote a couple of bestsellers in the 1960s and 1970s, The Money Game and SuperMoney (and also four novels, one of which became the rather funny film “The Wheeler Dealers”), followed by several more books  and a television show. A look back at those classics, which introduced to the reading public Odd-Lot Robert and the futures markets, shows how much has changed in markets — and how little in journalism.

Brown covers a lot of territory in Poker Face. He teaches the rules of the poker family, their shared hand ranks and betting rules, present-day favorites such as Texas Hold ‘Em and Omaha, as well more familiar stud and draw versions. He’s not really writing about card players, he explains, though there are plenty of them in the stories he tells, but rather about people “who gamble for serious economic reasons.”  There are among us many gamblers of the latter sort, and some of them, he notes, master the basic techniques by playing poker.

Kirk Kerkorian bought an airline with his poker winnings; H.L. Hunt won his first oil well; Bill Gates, John Kluge, Clint Murchison and Carl Icahn all played high-stakes poker before they got rich. Richard Nixon funded his first political campaign with poker winnings. The standard economic view of gambling — that it is a zero-sum game, adding nothing of value — is simply mistaken, Brown says. In fact, it has much in common with modern finance.

The centerpiece of Brown’s book is an extensive riff on John Law and Fischer Black.  “Everything I’ve ever found useful in economics I’ve read in two books,” he writes:  Law’s 1705 tract Money and Trade Considered with a Proposal for Supplying the Nation with Money and Fischer Black’s posthumous Exploring General Equilibrium, in 1995. In the intervening three centuries, he writes, “…[Y]ou will find some brilliant writing and clever reasoning, but nothing I have personally been able to apply with a profit. This isn’t a point I care to argue. If someone else finds practical guidance in the work of Adam Smith or Karl Marx or John Maynard Keynes, I’m happy for them.”

According to Brown, the discipline of modern finance — the by-now staggeringly complex edifice of dimly-perceived (and perhaps still imperfectly understood) financial engineering structures that underpin the global economy of today — had its beginnings in the area drained by the Mississippi River in the interval between the time steamships opened the area to extensive trade around 1800 and the completion of the railroad network less than a century later.  A river network calls forth a more flexible and dynamic economic system than one dominated by roads and ports, says Brown. And the financial system that emerged in the agricultural South and Midwest was built by tinkerers in the Mississippi delta.

“It combined the insights of John Law, a Scottish gambler turned French banker [who is ordinarily credited with being the force behind the Mississippi Bubble] with an extraordinary economic system based on dynamic self-organizing networks used by Native Americans in the region, catalyzed by some innovations imported with natives of the Congo River and the Niger River economies. The first person to publish an explanation in mathematical terms was the finance professor and banker Fischer Black….”

“The American economic miracle was born in the futures exchanges of the West, not in the banks and stock exchanges of the East.  It is no coincidence that poker was invented in the same time and place,” writes Brown. The essence of each has to do with the management of risk.

Suffice it to say that this is not the ordinary story of economics as the study of how people deal with scarcity. “I’m not anti-economist,” writes Brown. “Some of my best friends are economists. Professional economists are often very smart people who ask interesting questions and can come up with good answers.”  But their fundamental theory is “wrong,” he says, and, “If you look to economics for the theoretical clarity that will help you get rich, or manage a nation’s economy, or predict the outcomes of various actions, I think you will be as disappointed as if you had consulted a horoscope.  Anyway, I was.”

Bold talk, but very much, I think, in the same vein as Jane Jacobs. Brown’s book is a marvelous jambalaya of great stories, blunt talk, shrewd insights, and sage advice. (“There’s a lot of competition to exploit suckers, so you should be thinking about where the competition is, not where the suckers are.”) It is too early to guess where Brown eventually may fit into the journalistic landscape. For now his book is one more artifact of the great intellectual collision that has been taking place over the last fifty years between two ways of technically looking at the world — between game theory and general equilibrium economics.

(By now, well-informed readers will be wondering whatever happened to Economic Principals’ discussion of William Poundstone’s book about  Edward Thorpe, Fortune’s Formula: The Untold Story of the Scientific Betting System that Beat the Casinos and Wall Street, and Perry Mehrling’s biography, Fischer Black and the Revolutionary Idea of Finance. The answer is it’s coming this summer, when Donald MacKenzie’s An Engine, Not a Camera: How Financial Models Shape Markets will appear.)

But anyone tempted to think that it’s all over but the explaining, or that good skeptical journalism died last week with Jane Jacobs, will do well to peer into The Poker Face of Wall Street.  Aaron Brown’s book certainly won’t accomplish the same miracles as The Death and Life of Great American Cities. But it’s a salutary reminder of a dictum that John Stuart Mill stated in the first paragraph of Principles of Political Economy: “In every department of human affairs, Practice long Precedes Science: systematic enquiry into the modes of action of the powers of nature, is the tardy product of a long course of efforts to use those powers for practical ends.”  Shakespeare put it even more generally: “We know what we are, but know not what we may be.”

The same lesson can be absorbed, on a much more intimate scale, from Marc Levinson’s The Box: How the Shipping Container Made the World Smaller and the Economy Bigger. Levinson can hardly be called a newcomer to economic journalism. Before leaving for a job on Wall Street, he had been economics editor of The Economist; a writer at Newsweek; and editorial director of the Journal of Commerce. An earlier book, Beyond Free Markets: The Revival of Activist Economics, was just a little ahead of its time.

But the story of how a trucking visionary named Malcolm McLean commenced to transform his industry in 1956 by piling fifty-eight aluminum boxes onto a ship in Newark (just fifty years ago last week) and sailing them to Houston, where fifty-eight trucks waited to haul them to their destinations, is a perfect illustration of how an idiosyncratic entrepreneur brings something new into the world, and a wonderful example of how business history can be made to sing.

Levinson shows how the path from McClean’s first design to the modern shipping container was littered with mistakes. Standardization proved to be an elusive goal. Volatile fuel prices played hock both with the economics of ocean shipping and patterns of world trade. McLean himself bet the company twice, first at SeaLand in 1968, when he ordered fast new freighters, only to be clobbered by the OPEC price increases of 1973; then in the 1980s, when, as head of United States Lines, he bought big slow ships, only to be surprised again, this time by falling oil prices. (He could have used a good economist.)

Unions resisted containerization. So did railroads. A fancy consulting firm concluded in 1967 that no more than five containerships would be required to handle the trade between the US and Great Britain. No one, including McClean himself, foresaw the huge impact that sharply lower shipping costs would have on the international division of labor and the sheer volume of world trade. Looking backwards, New York University economist William Baumol ventures “The adoption of the modern shipping container may be a close second to the Internet in the way it has changed our lives.”  Looking forward, however, in the early 1950s, there was only the obsessively cost-conscious proprietor of a North Carolina trucking company.  When McLean died at 87, in 2001, container ships around the world blew their whistles in his honor on the morning of his funeral.

The flip side of all this technological change is taken up by Louis Uchitelle in The Disposable American:  Layoffs and Their Consequences. Uchitelle left economic journalism only for a little while — long enough for a sabbatical at the Russell Sage Foundation.to turn a landmark 1996 series of articles in The York Times  for which he had been the lead reporter (“The Downsizing of America”) into a book that was truly his own. Uchitelle is the old-fashioned kind of newspaper reporter.  He turns shoe-leather into illumination of unexplored nooks and crannies.

He traces the decline of Stanley Works, a well-known tool company in New Britain, Conn., as it is besieged by Asian imports, and follows the fortunes of its laid-off employees and its retired chief executive. He describes the sense of job security that he acquired when he first went to work for the Associated Press in 1957, towards the end of “a truly remarkable ninety-year period in American history,” in which the great majority of Americans came to feel entitled to steady jobs. He explores the various explanations, rationales and doctrines that were produced when that golden age came to an end.

Uchitelle is weakest on the mechanisms of how this kind of creative destruction works to raise average incomes and so dampen worker discontent.  But then that’s not his job. He is terrific on the human cost.  It’s not possible to do justice here to the cumulative effect that this kind of reporting has on political sentiment — any more than to recall the visceral impact on readers of the internal bank instructions to managers on how to structure “exit interviews” that Uchitelle produced in 1996. Suffice it to say that the wheels of change are still turning, that the issues that he raises of fundamental fairness are still quite unresolved, and that new and better ways of dealing with the hurtful consequences of the growth of knowledge are being devised in consequence of his journalism.

In this connection, I cannot forbear to mention a fourth specimen of economic journalism that will appeal to certain readers. It is my own. Knowledge and the Wealth of Nations is finally making its appearance in the book stores next month, after nearly a dozen years in the works.  KWoN, as the book has become known among its friends, is a large part of my life. In order to avoid distorting the attempt that Economic Principals makes to see economics relatively whole, I have established a second website for the book.  When I have something to say about its topics, I will say it at www.kwonbook.com and, as warranted, link to it here. I’ll place a link to it in the left rail as well. The new site even contains a blog!) 

KWoN is the story of how a handful of young economists, including one in particular, Paul Romer, now of the Graduate School of Business at Stanford University, succeeded in the 1980s and early 1990s in writing formal models of the aggregate economy in which new knowledge is deliberately produced, not just gratefully incorporated as a side-effect of growing older. In due course, they are persuading the rest of the field to see the fundamental factors of production as being, not the traditional land, labor and capital, but rather people, ideas and things.

This is the literature of “new” or endogenous growth, and it is slowly transforming the way economics understands itself — no longer simply a discipline whose study is the allocation of scarce resources among competing needs, but intimately concerned as well with the circumstances of the growth of knowledge. Not just business fluctuations but economic growth. Not just scarcity, but scarcity and the wellsprings of abundance.

But that brings me back to Jane Jacobs, who died after a long and happy life during which she wrote seven books. The one that will be remembered longest is the first, The Death and Life of Great American Cities, in which argued that the dogma on which city planning had been based in the years since World War I was a “hoax” and that its dicta were “all in the same stage of elaborately learned superstition as medical science was early in the [nineteenth] century. … As in the pseudoscience of blood-letting, just so in the pseudoscience of city rebuilding and planning, years of learning and a plethora of subtle dogma have arisen on a foundation of nonsense.”

But Jane was no simple scold. So in her second book, The Economy of Cities, she made a clear and good-hearted attempt to spell out what she thought were the key points at which economists had taken their wrong turn.  It didn’t take: she didn’t write in math; most economists didn’t read much English. But she regarded it as one of the greatest compliments she ever received when the University of Chicago’s Robert Lucas wrote, in a celebrated essay (“On the Mechanics of Economic Development”) that would become the pivot upon which turned the eventual triumph of the “new” growth economics, “…I want to spend some time thinking where the answer may be found. In doing so, I will be following very closely the lead of Jane Jacobs, whose remarkable book, The Economy of Cities, seems to me mainly and convincingly concerned (although she does not use this terminology) with the external effect of humans capital.”   

As it turned out, the answer wasn’t simply human capital spillovers. What goes on in cities has to do with human capital plus a steady stream of new ideas — that is, with the growth of knowledge.  But then Jane Jacobs already knew that. She knew, too, that Practice precedes Science, but that, sooner or later, Science catches up, and, at least in narrowly-demarcated areas, eventually runs ahead.

That didn’t worry Jacobs.  She was the ultimate civilian, which is to say citizen, in the polity of knowledge.  She had no doubts about the polity’s future, knowing that others like her will continue to come along.