Postcapitalism, postsocialism and/or postdemocracy?

Old books for the new economy: a reading list

Do I believe capitalism has reached the end of the rope? Not really, but there are clear signs the things we have been doing for the last 30+ years are starting to crumble under their own weight. Let’s put it differently: economies of scale have reached their breaking point, and if we’re lucky we can replace them with economies of scope.

A couple of decades back, during World War 2, Joseph Schumpeter felt the need to update Karl Marx’s prediction on how capitalism would come to an end. He wasn’t too far off — indeed one might think he predicted a President Bernie Sanders — but regardless, it seems about time someone goes ahead and updates Schumpeter.

The following list is rundown of books (and a few articles) that have shaped my thinking over the last 20 years on the two questions: how do ideas become successful, and what role does technology play in it. The bulk are economics texts, but in selecting them I tried to make sure they are heavy on prose and light on mathematics — and some of them might even be entertaining…

I put an emphasis on institutional economics and economic history for three reasons. For one, they tend to be the most readable books, for two the are especially relevant as we watch the instutions of democratic capitalism crumble around us. And finally, for the relevance they have today they are still underappreciated.

Joseph A. Schumpeter: Capitalism, Socialism and Democracy (1942)

The starting point for any inquiry into the end of capitalism (one chapter is entitled “Crumbling Walls”), this book is famous mostly for the few pages that describe the nature and work of the entrepreneur and his aim to achieve “creative destruction”. The book has a much wider scope though, in particular to both honor and contradict Karl Marx. Schumpeter was an arch-capitalist who considered the Great Depression “a cold douche”, and his writing is suffused with his massive ego, but it is still a tour de force and worth repeated readings.

Strangely enough Schumpeter predicted that capitalism would collapse under the mindnumbing crunch of routine work, by automating the world the entrepreneur would make himself (sic) superfluous. The end of capitalism would herald an age of efficient machine socialism. Good luck with that!

Robert Heilbroner: The Worldly Philosophers (1953)

To correct myself already: this should be the starting point into any economic inquiry. Heilbroner’s heralded and hugely entertaining history of economic thought features portraits of some of the most important economists listed here, and a few more. Knowing about Veblen’s dissolute housekeeping (Greek: oikonomia) and Schumpeter’s predilection for teaching in his riding habit provides some much needed context and levity before one dives into reading their books in the original.

Thomas Kuhn: The Structure of Scientific Revolutions (1962)

As the saying goes, academic progress happens one funeral at a time. Kuhn’s classic book was both itself revolutionary in showing that scientific (and technological, and social) progress does not follow a smooth curve but arrives at its finding in fits and spurts, often held back by vested interests in the old paradigms. Indeed if we speak of “paradigms” and “disruptive” ideas today, we are going all the way back to Kuhn.

Thomas Schelling: Micromotives and Macrobehavior (1978)

To most, Schelling’s major contribution is his first book, The Strategy of Conflict, and under the given geopolitical circumstances I’m inclined to agree. But this is still a subjective list, so I am offering the book that has most deeply influenced me to write about collective decision making in networks, except far more mathematically, and far less entertaining than Schelling’s anecdotes about the choices and consequences of human behavior in social settings.

When Schelling won the Nobel Prize in 2007 he got major flak for writing in a lucid, entertaining, non-mathematical way about his research (a common theme in this list). Maybe that’s the reason the Nobel committee felt compelled to pair him with the ultra-mathematical game theorist Robert Aumann.

Mancur Olson: The Logic of Collective Action (1965)

While Schelling’s subjects often interacted in structured environments like theater seats (jumpstarting the cottage industry of agent-based modeling), Olson was more interested in how groups made decisions as a collective, especially how group size and group structure shaped the outcomes. In the first he influenced Katz & Shapiro’s major work on network externalities, in the latter he had a direct influence on my own work — combined with Schelling — on how group decisions emerge out of a network structure.

Elinor Ostrom: Governing the Commons (1990)

When Lin Ostrom won the Nobel in 2009 (along with Oliver Williamson), the general response in the economic community was “Yay, a woman Laureate, but honestly, we don’t know who she is or what she does.” This is more than a little embarrassing, because Ostrom took the tragedy of the commons seriously and turned it into an enlightening and relevant research topic.

Her topic, public goods, is not only relevant in the areas where she did her research, which often involved fieldwork to understand how indigenous tribes solved their water access problems. Public goods and commons are among the most relevant topics in the new economy, something we should all know at least since the days of Napster.

Oliver Williamson: The Economic Institutions of Capitalism (1985)

I have a bit of a personal stake in this because Olly was the person who called me up to tell me that I got accepted into Berkeley — except at that point I had never even heard of him… I quickly made up for that lapse and thus the summer of 1997 became the inflection point that completely changed my outlook on basically everything.

Even though Williamson uses almost no math in his work, this book makes for very dense reading, and it is at times hard to understand what “hostage exchanges” have to do with modern business. But his core argument is quite simple: economic arrangements that minimize transaction costs tend to win out.

The book and Williamson’s research are steeped in old economy examples (no surprise given that the book is from 1985), and the general reaction upon him winning the Nobel was that transaction cost economics was kinda a buzz topic in the 1990s but not really relevant anymore. But over the last few years, not only since the emergence of the gig economy and the sharing economy, his research has become the most relevant model to understand Uber, AirBnB and the blockchain. Except that very few people — especially mainstream economists — have noticed so far.

Douglass North: Structure and Change in Economic History (1981)

Going from the micro to the macro, North gives the sweeping overview of how institutions shaped the course of history. Structure and Change is a bit more technical — for a more historical view I recommend North & Thomas’s The Rise of the Western World — but page one also contains the most important footnote in economics, about private vs. social returns. If our governments understood better what it says we could live in a much better world.

Thorstein Veblen: The Theory of the Leisure Class (1900)

To get it out of the way: Veblen was a crazy mofo, and this might be the hardest book to read among the ones on this list due to Veblen’s convoluted prose. At the time it was released people weren’t sure if what he wrote about was economics or satire. And there certainly aren’t many books which can claim that distinction.

It is also still relevant today because Veblen’s major contribution was to show that underneath the civilized veneer we are still barbarians living in a tribal world. And what could be more current than that?

Albert Hirschman: Exit, Voice, and Loyalty (1970)

Subtitled Responses to Decline in Firms, Organizations, and States, this very short treatise discusses three individual strategies in crises: moving to Canada (exit), saying “That’s it, I’m moving to Canada!” (voice), or shouting “Good riddance you traitor!” after them (loyalty).

I actually don’t remember much of the content — for the most part Hirschmann tries to establish that his three basic responses to institutions in crises apply all over the place. But once in a while it’s nice when all you need to know is the title of a book…

Charles Kindleberger: Manias, Panics, and Crashes (1978)

You don’t need to know the subtitle to understand the book is a history of financial crises. Of course we had a bunch of banking crises since the book came out, and it’s worthwhile reading Bob Shiller’s work or some of the many insider accounts on LTCM, Lehman Brothers and Bear Stearns, but this is still the grandmother of them all, and learning about the string of financial crises in the 1800s is especially enlightening now that we are about to move back to the golden age of robber barons.

Francis Spufford: Red Plenty (2010)

Spufford is not an economist, and this is not an economics book. Instead it is a book about …mathematics, and arguably the most wealth-creating mathematical formula in history.

Ostensibly it is about the short moment in time, ca. late 1950s, when the Soviet Union under Stalin was beating the United States in the economics game. On a deeper level it is the history of mathematical optimization, the thing that underpins everything from economic theory to industrial automation and even machine learning.

To unlock this story, pay attention to the guy in the streetcar pondering problems about cutting plywood. He is Leonid Kantorovich, the only Russian economics Nobelist and also the only one who also won the Stalin Prize.

For a while the Soviet Union tried to implement his way of cybernetic resource planning but soon ran into the twin problems of too few computers and too much bureaucracy. It took others like Tjallung Koopmans and George Dantzig to make the (extremely successful) transition to the Western World.

A few life-changing lunchtime reads

Human progress happens in fits and spurts, or more precisely in exponential growth process laid on top of each other. When revenues outrun expenditures we have the hockeystick, when reality catches up with lofty expectations, the hype-disappointment cycle. In adoption cycles network benefits outrun risk aversion. And when consumption growth overtakes growth of production, we run into the Malthusian catastrophe. Which, it seems, is where we are now.

[Note from 2020: The person to read on Commons is Ostrom, not Hardin.] One of the people who saw this coming was Garrett Hardin who wrote about the Tragedy of the Commons (1968). Earlier, and a bit more economically soundly, Ronald Coase had made a similar point in The Problem of Social Cost (1960).

Coase’s two biggest contributions to economic theory were to point out that without transaction costs, we would have no need for firms, and without transaction costs, we would have no need for the legal system. Social Cost tackles the latter, and much to Coase’s chagrin readers often come away with the idea that without transaction costs we don’t need the legal system, just clearly defined property rights. Coase spent much of his later career trying to defuse that interpretation, with little success.

A topic that did not get a lot of coverage in this list is information, more precisely information asymmetry. I have proposed Tom Standage’s The Victorian Internet (1998) before on how new communication technologies shape human interaction. But the key text on information is still George Akerlof’s The Market for Lemons (1970). Rejected multiple times for “not being formal enough” it eventually won Akerlof the Nobel Prize and revolutionized economic thinking.

Looking at a typical modern economic textbook we find information maybe in chapter 8, externalities (the “social costs”: the harmful side effects of our doings on others) somewhere around chapter 13 and transaction costs around chapter 21, if at all. Which is a pity, because we could tackle our problems much more systematically if we understood these things better.

The old saying that the Achilles heel of Socialism is supply and the Achilles heel of Capitalism is demand is only half true. As Douglass North pointed out, social wealth creation is private wealth creation minus their effects on others, and the role of the sovereign is to align the two. So a world in which we allow a select few to privatize the gains and socialize the losses is not a stable world, and also not a sustainable one. The Achilles heel of Capitalism is externalities under transaction costs. Let’s hope we learn these lessons quickly.

I write about how technology shapes the world we live in.