Best Economics Books of 2017

Just starting with a general question about this list of the best economics books of 2017: are they accessible for someone who’s trying to learn more about economics, who maybe isn’t an economist?

Yes. They’re all books I’ve reviewed on my blog and they’re deliberately not technical. The books are always accessible to general readers.

So your blog is a good place to find out more about these and other economics books?

Anything that I read, no matter when it was published, if it’s not a technical book I’ll do a review. So, I don’t know how many I do a year but it’s more than these five.

What kind of books are you looking for when you’re reviewing economics books?

It’s a little bit random. Some of the publishers send me books they think I’ll be interested in. Some are things I pick up myself. Some are things I find in second-hand shops. They tend to be around my own interests. I’m not a macroeconomist, so I look at very few books about general things like, ‘Where’s the world economy going?’ ‘What causes financial crises?’ That’s just not my territory. They’re much more about markets and technology and all the more applied issues.

Where, some people would argue, economics, as a subject, is at its strongest.

Well, I’m one of those people. I don’t think we know very much about macroeconomics, really. I think this is a growing consensus, because the ESRC for example, the Economics and Social Research Council, has funded what’s called a Rebuilding Macroeconomics network to try to bring in some completely different kinds of ideas into macroeconomics. This is all partly the legacy of the financial crisis, when it was the macro people who were in the firing line for not having predicted what was going to happen.

But I think even before that, many people like me felt that macro—that big picture stuff about how the economy works—had backed itself into a dead end. It was very much based on extremely unrealistic, what they call ‘microfounded’ models. So you make some assumptions about rational behaviour by individuals and aggregate that up. That seems to iron out all the actual features of real economies.

“I believe economics is much more like one of the historical sciences—like geology, like evolutionary biology”

So, before the crisis, very few macro models included banks or still less, shadow banks and hedge funds. Clearly you can’t understand the financialized modern economy without looking at that kind of thing.

So let’s go through these books you’ve chosen as the best economics books of 2017. Let’s start with your favourite, the one that ultimately won the 2017 Enlightened Economics Prize. This is by the French economist and Nobel Prize winner Jean Tirole, and it’s called Economics for the Common Good.

Jean Tirole wrote this book after he won his Nobel Prize in 2014 because, he said, people kept coming up to him and saying, ‘ Tell us what it’s all about!’ For the first time, he felt that he ought to write a book that was accessible to people who wanted to learn from him. His own specialty is industrial organisation in either regulated markets (like electricity) or digital markets (like the digital platforms). But the book ranges much more widely than that.

The first half of the book is about what economists do, the state of the subject, what kinds of things we do know about and what kinds of things we need to be cautious in claiming anything about. It describes how you do economic research and how he’s done his own research; the sort of structures—so that people can get a bit of an understanding about how reward systems in universities work and therefore why people do the kind of research they do.

The second half of the book is topics. He discusses everything from the Euro crisis, climate change and environmental economics to the issues close to his own heart like how you regulate better and how the electricity market works.

So is this a good book for somebody to read if they’re thinking about studying economics? An insight into what it’s like to be an economist?

Yes, it would be. It would be very good for students. It’s a book that you can dip into as well. In fact, he recommends that because it’s quite a dense book to just read through from beginning to end.

Yes, it’s quite long.

It is quite long and I’ve read it in chunks as well, so I think that’s probably the best way to do it—to read the first half properly as a book and then to dip into the topics in the second half as they interest you or in different segments.

I’d understood that Jean Tirole worked on oligopolies and anti-trust stuff, which seems to be very, very important at the moment.

That’s right, anything to do with market structures and how markets operate and, in particular, the kinds of markets where it’s very difficult to get competition working effectively. That includes things like the natural monopolies and it also includes these new digital markets, where there are such big economies of scale that it’s very difficult to have many different competitors. So, if you think about it, we’ve got one Google search. We’ve got one Amazon that dominates online retail. We’ve got one social media company, Facebook, that’s incredibly dominant.

The book reminds me of one of my all time favourite books in economics, which is Reinventing the Bazaar by John McMillan, which I think I’ve recommended to you in the past.

Does he have practical solutions about how to deal with Facebook and Google? Because the book is partly about economists making themselves more useful—I mean I know some academic economists felt, in the wake of the crisis, that maybe they needed to play a more active role in policymaking rather than just doing their economics.

Nobody has cast iron solutions for these digital markets yet. It’s an area of very active research in competition economics. But he’s got some thoughts about it. When it comes to the more familiar kinds of markets, he’s worked very closely with policy makers, with the French authorities, to come up with practical solutions.

Let’s go on to your second book, Straight Talk on Trade, by Dani Rodrik, who is a professor at Harvard. What is his straight talk on trade?

Dani Rodrik is somebody who, for a long time, has been cautioning about the very gung-ho attitude many economists had towards liberalising trade, including financial flows. For a long time, certainly up until the financial crisis and for a bit afterwards, he was a bit of an outlier among economists because, for most economists, more free trade is without question better.

I think now a lot more people would take that point of view. I think I, for one, was much too relaxed about the effects of globalisation and how quickly it was happening and what effects that might have on the economy and people’s livelihoods. It’s not that I’ve changed my mind about it being a good thing—but I’ve become much more cautious about how quickly change happens and the need to be much more nuanced rather than just saying, ‘More trade is better.’

“Dani Rodrik is somebody who, for a long time, has been cautioning about the very gung-ho attitude many economists had towards liberalising trade, including financial flows”

So he’s gone from being a bit of a maverick to being a really very influential voice in this debate. The book is a summary of a lot of things that he has said in the past about that and then the new context of a more protectionist world, post-financial crisis, but also post-Trump and post-Brexit, where the political mood has certainly changed.

It’s largely about trade and for anybody who has read his academic papers, a lot of it will be quite familiar. There’s also quite a bit, again, about what economists do and what economists can validly say—you know, where we should be more humble than we have been in the past. So it’s another book that’s a little bit about the state of economics itself.

And about what should economists be more humble, in his view?

About trade but particularly about finance and the financialization of the world economy that happened post-1980, really. Capital flows, in particular, he would single out as being an area where we ought to be incredibly cautious in saying, ‘This is a good thing for the economy.’

When he argues that trade isn’t always a good thing: I can see that free trade has political implications, which might be bad. But is he also saying it’s not necessarily a good thing from an economic point of view?

Yes, he has a famous ‘trilemma,’ which is about not being able to get everything you want at the same time in international economics—something has to give.

So is this book a good way of becoming familiar with his work?

Yes, it’s a great introduction. He is another really clear writer, so it’s very accessible. He’s probably still a bit outside the mainstream in his views about this, but he’s somebody who has been much more ‘right’ than many other economists and should absolutely be taken seriously about this.

Shall we go on to book number 3? This is Andrew Lo’s Adaptive Markets, which is all about financial markets.

This is a somewhat tougher read, although it’s not technical. Anybody who is interested in finance or has worked in the financial markets will be interested in it. It’s a very ambitious book. It’s trying to bring together what we know about human behaviour and psychology and what we know about some of evolutionary theory and how that might operate in the economy and transferring that to financial markets.

As well as being a finance professor, Andrew Lo is somebody who has actually run a fund and been active in the financial markets. So in both ways, he knows what he’s talking about. It’s getting away from the Efficient Market Hypothesis of ill repute, which I think has been broadly discredited now. It’s a much more sophisticated and nuanced approach to thinking about financial markets.

He’s come up with an ‘Adaptive Market Hypothesis’ to replace the ‘Efficient Market Hypothesis.’ Do you think he succeeds in that?

I think almost. It’s not quite there as a synthesis, but I like the ambition of saying that what we say about economics needs to be consistent with the other human sciences. So if you’re doing economics you ought to be thinking about whether your theories and evidence are consistent with what we know from cognitive science and psychology and biology. I think that’s really important because it’s about the status of economics.

There are critics who would say economics is just like I don’t know—history or literary criticism, where you have different schools of thought. Ultimately, you’re going to be a member of one school or another. I just don’t believe that. I believe economics is much more like one of the historical sciences—like geology, like evolutionary biology. We will never have the same kind of evidence as an experimental science (although we’re doing more experiments) but we need to think about society and the economy as part of that human construct in the natural world. We are part of the natural world and we need to be much more aware of that than typically we have been.

So I really liked that ambition. I don’t think it’s quite the grand synthesis, but in the specific context of financial markets, it gets quite a long way.

The books mentions hedge funds being the Galapagos Islands of finance. What’s that referring to? It sounded quite intriguing.

I don’t remember, but I’m sure it’s an allusion to Charles Darwin’s insight that came from visiting the Galapagos, where he saw that the finches had evolved slightly different beaks as soon as they couldn’t travel and were separated by the ocean between the islands. That’s what gave him the insight to come out with the theory of evolution by natural selection.

Let’s talk about book number four on your list, which is called The Wisdom of Finance, by a finance professor at Harvard Business School, Mihir Desai.

This is a slightly quirky book, which I really enjoyed reading. It’s about getting over some messages about financial markets using stories. The idea of storytelling and economics is gaining ground. Robert Shiller, the Nobel Prize winner, is doing a book now about narratives. I think this is partly because economists have come to realise, in the past few years, that the way we talk to people analytically doesn’t resonate with many of them. Almost all economists said Brexit was going to be really bad for the economy and that message didn’t get through at all. It didn’t speak to people.

So, for a number of reasons, I think this idea of narrative has become more salient. This is just a very nice book that uses different kinds of stories to make points to students. It started as a lecture course—a single lecture even—just to make some points to students about how the financial markets operate and how people who work in them ought to behave. So it’s a somewhat moralistic book as well—about doing good finance and not bad finance.

It’s just an incredibly, incredibly enjoyable read. Again, finance isn’t my area so I couldn’t comment with expertise on how good he is at financial economics, but I really enjoyed reading the book.

Is it a good starting point for understanding finance? Because there is a lot of work to do in terms of broadening the number of people who do. I notice that even academics in other subjects admit to knowing nothing about finance and think that’s fine—even though it’s so woven into our daily lives.

That really bugs me. I put a lot of effort into trying to communicate clearly about economics in ways that will speak to people. But just like it’s okay to say ‘I’m no good at maths’ it seems to be okay to say, ‘I don’t understand finance.’ But it shouldn’t be okay. It’s bad enough when it’s the general public and it matters to them personally. It’s even worse when it’s other social scientists. Remarkably few sociologists or anthropologists have looked at financial markets. I can think of a few books, but there haven’t been all that many.

These really basic explanations are incredibly important to people. I do think this is a very good book for that. It’s up there with the John Lanchester book a few years ago, Whoops!, which I thought was another great, complete introduction to what had happened in the financial crisis.

So if you were just starting out and didn’t know much about finance, which of these books should you read first, do you reckon?

Definitely this one. The Andrew Lo one does assume much more knowledge about financial markets.

Finally, let’s talk about book number 5 on your list, The Financial Diaries: How American Families Cope in a World of Uncertainty.

This is a very different kind of book. I suppose you would put it alongside a number of more general books about what’s been happening to the working and middle classes in America of late. It’s a repeat of a study that was done—I think it was in South Africa and India some years ago—where they spent a lot of time with families to understand where their money comes from and how they use it and how they save; the sort of everyday mechanics of what people do.

What they learned from doing this in America was that even people who had what looked like quite a high level of income on average experienced great uncertainty—because of the way their jobs worked or because they don’t have health insurance or some big bill to do with their car landed and they had to have their car for work. So it’s about that kind of vulnerability and how extensive that is in American life.

I thought it was a much more interesting insight than saying, ‘There are some very poor people in poor communities,’ which is part of this genre, because of the detail and because of the fact that it does go so far up the income scale. It’s an incredibly sympathetically written book. The researchers actually went and spent a lot of time with the families. You get a very detailed and sympathetic perspective on how they cope.

It’s probably not in the scope of the book to find solutions—or does it look at possible policy changes, etc?

It looks a bit at whether there would be ways of developing financial products to suit people—savings vehicles and the way that the credit market operates, more than policy. Because I think the policy questions about that take you to some very big social contract kinds of decisions.

To any European, it’s just astonishing that the US health insurance market operates the way it does. But that’s the kind of question that gets raised by it, I think. It also takes you to all of the concerns about gig work and zero-hour contracts, which are not really to do with the digital companies. They’re to do with the fact that that’s the way the American labour market has been going for a long time. There’s been a lot of contingent work. It’s nothing to do with digital.

In one of the bits of blurb that I was reading about the book it mentioned that there are now more small credit and payday loan stores in the US than McDonald’s and Starbucks combined, which sounds incredible.

It’s an epidemic of uncertainty and it goes a long way to explaining the politics of the US. Or the European countries where there has been populism, for that matter. I suppose, in a way, it links back to Dani Rodrik’s arguments about the price we’ve paid for having ignored the transition costs of the free trade, globalised, financialized world.