I've been trying to educate myself on the recent economic slide, and was given for my birthday two books that have received a lot of notice: John Lanchester's I.O.U.: Why Everyone Owes Everyone and No One Can Pay [amazon], and Joseph E. Stiglitz's Freefall: America, Free Markets, and the Sinking of the World Economy [amazon]. Both came out at the beginning of 2010.
I'm no economist, but I am (I hope) a non-stupid reader of the news and someone who tries to pay attention. So as an everyday educated reader, I think I can plausibly assess these books for other similar readers. Basically, I can recommend Lanchester's I.O.U., and I have a couple of things to say about Stiglitz, but can't really recommend it.
Lanchester's also a novelist, and boy can he tell a story. Each chapter has villians (mostly) and heroes (some), and a bit of a plot, especially in the first half and the last chapter (the middle sections flag a bit). The best parts of the book come in the first half where Lanchester provides humble parables that get to what such instruments as "credit default swaps" are all about. Here and there are little gaffes (I remember a mistake about statistics somewhere in there), but for the most part, it's compelling. Having read around in Stiglitz (who is a Nobel winner), who has a similar account but more aimed at policy, it would seem that for the most part Lanchester is telling the truth. His overall conclusion about the state of the economy is extremely dire, and in the last chapter he goes a bit berserk, explaining our doom. Basically as a society we Americans have shot our credit cards. Now we have to pay. And it's going to take decades. Sorry. Now really is the time to move to Canada.
Stiglitz's book is more about policy, with a heavy dose of "I told you so." It is highly repetitive. The basic message seems to be that the rewards structure in the American/European economies massively over-rewards finance, and especially short-term gain. Stiglitz firmly believe that the way out is to make massive investment in people via the educational system and other mechanisms. He likes to point out that for all of the praise of market-self-regulation and privatization, all of the best universities and colleges in the United States are not-for-profit. He uses this fact as a counter-argument about the merits of unfettered profit-driven capitalism.
Here's the bit I want to pick out: One interesting aspect of the book is that for Stiglitz, a real culprit in the overall imbalance in capitalistic rewards is the underpricing of natural resources. Infuriatingly, this point does not seem to be broken out as a separate section, and the book has no index (!). But here's a representative bit:
[We need a new economic model] -- sustainability will require less emphasis on material goods for those who are overconsuming and a shift in the direction of innovative activity. At a global level, too much of the world's innovation has been directed at saving labor and too little at saving natural resources and protecting the environment -- hardly surprising given that prices do not reflect the scarcity of these natural resources. There has been so much success at saving labor that in much of the world there is a problem of persistent unemployment. But there has been so little success at saving natural resources that we are risking environmental collapse. (p. 192)
The other place where this comes up is in a remarkable section called "What You Measure is What You Value, and Vice Versa" (pp. 283-285) which takes square aim at the inability of GDP to measure what is really important about the health of economies (in Stiglitz's view, it would be a measure of sustainability or even "happiness"). Here he talks more about the depletion of the natural resources, but the point about prices is to say that GDP is too high because the real costs of energy aren't taken into consideration.
I would love to read a review of Stiglitz that breaks out his position on energy more schematically.
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