Gross National Happiness

Himalyan Happiness

The tiny state of Bhutan, wedged between India and China up in the Himalayas, is the only country in the world that rates its progress based on Gross National Happiness (GNH) rather than Gross National Product (GNP). Despite the UK's best efforts Bhutan is unique and its experiment is unlikely to catch on across the developed world, but there are more than a few people who think they may have a point.

Firstly there’s the question of what GNP is actually measuring and whether it’s the sort of thing we should be aiming to increase year on year. Secondly there’s the even more fundamental question: what’s the purpose of life? If the answer to that isn’t money then economists need to think very carefully before they start remodelling the world again.

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Credit Rating Agencies: A Market Failure?

Famine and Feast

Although the Credit Rating Agencies (CRAs) haven’t been blamed for world famine there isn’t much else that hasn’t been laid at their door. With good reason, for without the co-operation of the CRA’s the vast explosion of securitised loans which eventually imploded in 2008 couldn’t have occurred.

Unfortunately the rating agencies may be the least of all evils, and we can at least trace the paths through which their ratings were compromised. Free market believers, though, should look away now because the failure of the CRAs is another example of market failure. More competition led, not to better ratings, but to a race to the bottom of a very deep pit.

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MIA: The Invisible Hand

Fantasy Finance

Here’s a thought. What if all of modern finance is an elaborate hoax, a fantasy perpetrated on an unsuspecting world by an unscrupulous coalition of evil power brokers, determined to ensure that free market agendas are secured in their own interests?

Exaggeration this certainly is, but it contains the nub of an idea that’s been around for over a century. This is that modern finance is built on foundations that aren’t really secure. Laissez faire may be many things but it isn’t necessarily fair, and this isn’t an inevitable consequence of economics but a decision made by people. Perhaps the invisible hand is invisible because it doesn’t exist.

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Arbitraging Embeddedness

Society, Sublimely

Although the British Prime Minister Margaret Thatcher once opined that “there is no such thing as society”, society generally begs to disagree. Indeed British society, enraged by her insistence on an unrepresentative and unfair tax, combined to help force her from power. In reality we’re all sublimely swimming along in a swirling pool of social relationships, which drag us unwittingly in various directions, while we blithely assume we’re actually in charge of our lives.

This is what sociologists study and economic sociologists, as you might expect, are particularly interested in how these social forces drive financial markets. Self-interest being what it is, it’s perhaps not surprising that they suggest that the behaviour of markets is less driven by individual behavioural biases and more by social factors. What’s more, they may even be right.

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Twits, Butter and the Super Bowl Effect

Eclipse of the Twits

As we more or less know, the sheer randomness of the world makes predicting stockmarket movements not so much a fool’s game as Russian Roulette. If you believe you can outwit the markets on a day to day basis it’s only a matter of time before the hammer falls on a firing cap.

Despite this people keep trying, because it’s a basic human urge to try to make sense out of the nonsensical. The ancient Chinese believed a solar eclipse was caused by a celestial dragon munching up the Sun. At the time that counted as advanced thinking: indeed it still does in some parts of the world, but generally it’s a lot harder these days to believe that people could think stockmarket movements can be predicted, say, by something as random as the trivial ramblings of posters on Twitter. Can’t be right, can it?

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Economic Parasites

A Question of Intelligence

A question that’s oft-perplexed economists is why some countries are so much less successful, economically, than others. Huge reams of research have been generated developing a wide range of theories until eventually someone came up with the obvious answer. Poor countries are poor because their people are stupid.

Fortunately what’s the obvious answer to one set of researchers is the departure point for another group. It turns out that while the simple and straightforward answer has an element of truth about it, it’s only a small part of the story.

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Losing the Lender of Last Resort

Governments Aren't Risk Free

One of the carefully nurtured ideas that sits at the heart of most modern finance is the idea that there’s a risk-free asset that we can retreat to when we lose our nerve. This is the financial equivalent of the philosopher’s stone, capable of saving us when nothing else is.

Almost by definition the lender of last resort is the government and the risk-free asset usually ends up being government backed debt. The only slight fly in this magic ointment is that not only is government debt not risk-free but neither are governments themselves: it turns out they have a nasty habit of not being there exactly when you need them most.

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Risk, Reality and Richard Feynman

Rocks and Risk

One of the problems that lies behind many of the crises that have afflicted the financial sector over the past thirty years or so is that business managers seem to have difficulty relating the level of risks that they’re taking to something akin to reality. For various reasons, not entirely unrelated to the need to make business cases look reasonable, the potential risks in many transactions are downplayed to the point where they simply vanish.

This isn’t, however, a problem exclusive to the financial sector. Many other organisations face these problems as their managers are squeezed between rocks and hard places. As NASA, and its astronauts, have found to their cost.

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