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Kirk Houghton

Author of The Dividing Lines and Bad Things to Good People

Kirk's Book Reviews

Kirk's Book Reviews

Here's where I like to review contemporary and classic books in the fields of Literary Fiction, Economics, Politics and History. I also use this forum to post regular articles and announce updates on current projects, so keep checking it on a regular basis!

Like other writers, I'm passionate about discussing books that have enthralled me or changed my perspective on something.

Is there anything better than a good read?

Kirk Houghton

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Review of The End of Alchemy: Banking, the Global Economy and the Future of Money by Sir Mervyn King

Posted on March 15, 2016 at 3:40 PM Comments comments (0)

The End of Alchemy: Banking, the Global Economy and the Future of MoneyThe End of Alchemy: Banking, the Global Economy and the Future of Money by Mervyn King

My rating: 4 of 5 stars

As ex-Governor of the Bank of England during the 2008-09 world recession, Sir Mervyn King is better placed than anyone to give an inside account of the financial storm that nearly brought the western world to its knees.
Thankfully, he is happy to let others do that and has no intention of writing a special plea to the Bar of History for a sympathetic hearing. Instead, The End of Alchemy is an ambitious attempt to bring the theoretical world of banking to the educated man on the street without alienating the armchair economist.
At the core of King’s study is the very essence of banking, which, as we (should) know, is a confidence trick. Banks borrow short and lend long, a process known as ‘maturity transformation.’ In other words the £500 I deposit in a current account with HSBC (a liability for the bank) is transformed into a product with a higher yield in the form of a loan to somebody else (an asset). The problem is liabilities can be withdrawn at any time, whereas assets are often illiquid, long-term and risky. Those occasions when depositors panic about the value of a bank’s assets result in the dreaded ‘run’ that has characterised commerce since medieval times. As we saw in 2008 during the run on Northern Rock, the rational desire to withdraw money results in a stampede and a potential liquidity crisis that can affect the whole of the banking system. But is the government right to act as a Lender of Last Resort (LOLS) or should the implicit tax-payer subsidy (or bailout) be reformed?
Of course, nobody but traders in securities, derivatives and futures believe the taxpayer should be on the hook for reckless gambling, and King is interested in developing a system where central banks will act as Pawnbroker for All Seasons (PFAS) to bring sanity back to the finance sector. The policy of forcing banks to insure their assets with an agreed ‘haircut’ to value risk sounds good in theory. In this hypothetical scenario an investment bank selling dubious CDO-type securities would have to accept a haircut between 90 and 100% on defaults, meaning investors could see how much a bank is loaded with risky, illiquid assets. All parties would understand the percentage of the assets insured under PFAS and would accept the loss dictated by the haircut agreement. This scrutiny should force banks to keep more equity capital and stay clear of loading their balance sheet with obscure financial products at the expense of other more liquid (and sane) investments. LOLS would be a thing of the past.
The theory is sound, but this book is much more than a guide to the future and is just as commendable for its rich history and economical writing. Everything from the definition of money to the difference between ‘money interest’ and ‘real interest rates’ are explained in a concise language that escaped the author during his interrogations on the House of Commons Treasury Select Committee. Indeed, for some this may come as the greatest surprise, for King was often a man of few words in public. But underneath the text is a latent desire for posterity with many epic quotes underpinning the tone of the book. The European Union’s calamitous mismanagement and lack of political union to support a common monetary policy is a case in point: ‘The tragedy of monetary union in Europe is not that it might collapse but that, given the degree of political commitment among the leaders of Europe, it might continue, bringing economic stagnation to the largest currency bloc in the world and holding back recovery of the wider world economy.’ Clearly no fan of German intransigence on the issue of Greek repayments via austerity, King is right to remind the reader of the Allied Powers’ generous write-down of its WWI debt of 132 billion gold marks. By the 1932 Lausanne Conference, Germany had paid only 21 billion marks ‘most of which was financed by overseas borrowing on which Germany subsequently defaulted.’
Indeed, the European Union’s attempt at Economic and Monetary Union (EMU) is the one subject where the ex-Governor of the Bank of England is keen to predict the future. As the most ambitious currency bloc in the history of the world, the Eurozone is a shoddy compromise between political ideals and half-baked integration. Greece is the best example of how this incongruous state of affairs is storing up trouble for the future. In King’s view, ‘The real challenge is not the state of the public finances but a country’s external competitiveness.’ He gives the German Government four choices, all of which are political suicide:
1. Wait for unemployment in Greece to continue until wages and prices are depressed enough to restore competitiveness
2. Allow inflation to make headway in Germany in combination with option #1. This would see the value of the Euro plummet in the wake of an export-led recovery.
3. Abandon the internal devaluation in options #1 & 2 and declare a transfer union where the rich northern states subsidise the weaker southern states to plug full employment deficits
4. Accept a partial or total break-up of the Eurozone
Add in the current migration crisis enveloping Europe and the future looks like a toxic combination of high unemployment, persistent deflation and a return to nationalist demagoguery. No wonder the author is quick to remind us that Capitalism – far from perfect, but better than anything else - is ‘not an answer to problems that require collective solutions, nor does it lead to an equal distribution of income or wealth.’
So, should we all start hoarding gold? Current solutions are short-term in scope, and the reliance on ultra-low interest rates and quantitative easing has run its course in stimulating the recovery post-2009. King is keen to stress the problem cannot be solved by constantly injecting liquidity into a fragile market fighting against deflation. Instead we need to concentrate on raising future productivity and encouraging relative prices to move in a more sustainable direction.
He’s not wrong there, but the alternative suggestions for a way forward are the usual mix of supply-side reforms we hear at every Conservative convention – less regulation, a reduction of monopolies, policies to encourage entrepreneurship, less distortion in the tax system. This is perhaps the most disappointing aspect of the book and the main factor preventing a five-star review. How many times have these platitudes been recycled in the same meaningless language?
Furthermore, the rebalancing of the global economy will take monumental co-operation. The G8 countries can keep advising China to move away from export-led growth in favour of boosting domestic demand, but can any nation force this proud Confucianist civilisation to reverse centuries of cultural tradition? King’s insistence on restoring floating exchange rates is more realistic, but, again, will take a huge collective effort. These policy recommendations are not original, but sensible. We all know what needs to be done, but don’t know how to achieve the means to this ideal end.
As a former Governor of the second-oldest Central Bank in the world, Sir Mervyn King is also prone to forget the awful record of his contemporaries, especially the US Federal Reserve, where a lot of his personal friends have worked over the years. Yet as James Rickards points out in his excellent book, Currency Wars (2012), the Fed has failed to fulfil its basic mandates. Since 1913 the Dollar has lost over 95% of its value; it allowed up to ten thousand banks to close or be taken over during the Great Depression while bank assets dropped by almost 30 percent; it bailed out many insolvent banks during the 2008-09 crisis, ignoring the Bagehot principles of taking strong collateral for high-interest loans; and it has failed to get anywhere near its 1983 target of achieving 3 percent unemployment. Yet none of this gets a mention for understandable reasons, as the back-cover of the book comes with praise from Paul Volcker and Alan Greenspan – not the type of people you want to criticise when searching for endorsements to propel your work to number one on the Current Affairs chart.
The End of Alchemy may not be a perfect work or have the same impact as John Maynard Keynes’ The General Theory of Employment, Interest and Money (1936), but that is to misread the author’s intention. King is not addressing fellow economists, but the educated masses that turn out to vote in democratic elections across the world. There is something for everyone here, whether it be Chapter Four as an introduction to the workings of high finance (‘Radical Uncertainty: The Purpose of Financial Markets’;); a history of monetary policy from early modern times (anybody remember the Latin Monetary Union of the nineteenth century?); or a concise summary of key macroeconomic topics that may have stayed on your shelf since undergraduate days.
Those disappointed by King’s refusal to write a personal account of the financial meltdown of 2008-09 should not be discouraged. This is not a cop-out, but an academic response from one of the key agents in the most recent financial crisis of modern capitalism. Historians will give a better analysis of his policies twenty years from now, but today we have an intellectual tour de force on our laps, and it would be myopic not to enjoy it.



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Submission by Michel Houellebecq

Posted on January 2, 2016 at 8:45 AM Comments comments (0)

SubmissionSubmission by Michel Houellebecq

My rating: 5 of 5 stars

It should come as no surprise that France has produced in Michel Houellebecq the foremost critic of Moral Relativism. This is the country, after all, that produced the 1968 generation and made anti-authoritarian and secular humanist concerns part of the establishment. A compromise between capital and labour, gay and straight, Christian and Muslim, male and female and just about every other competing ideal is the flimsy basis on which we now live.
Yet the contradictions are hard to square: the liberal democracy that has taken the place of religion on the political Left is tolerated on the Right for its ability to enrich people and divert their energies into consumerism. Nobody would call this heroic or romantic, and as a system that encourages little public spirit in its quest to uphold the sovereignty of the individual, the modern western democracy has plenty of detractors. Indeed, the tolerance that underpins the intellectual basis of democracy acts both as the motor and the wrecking ball of the system’s strength.
The anxiety of living in a declining civilisation is compounded by the facts. Our populations are aging, multi-racial societies are now the norm, budget deficits are ballooning, welfare bills are growing out of proportion and our national identities are becoming more transient. The biggest challenge in the future will come from the continent’s young Muslim population, numbering more than 10 million people and now given an injection of life by Germany’s astonishing decision to allow 1 million refugees to settle in the heartland of Europe. With Fascism, Communism and Nationalism long dead, Islam is perhaps the only civilisation capable of offering a viable alternative to liberal democracy, even if the latter brings material comforts and scientific achievements unparalleled in any former age.
Demographic projections for the future will only embolden this idea, and no one understands this better than Michel Houellebecq, the writer who’s done more than anyone to bring Nietzsche’s criticism of the modern man into the pantheon of Contemporary Literature.
Set in France in 2022, ‘Submission’ is the story of Michel, a middle-aged Professor of Literature at the Paris Sorbonne, who’s spent the best part of his life studying the works of Joris-Karl Huysmans and lamenting the unfulfilled promise of sexual relationships with a catalogue of women. In the backdrop to his personal crisis, the French nation is paralysed by a divide between Front National and an intransigent Socialist party. Into the fold steps Muhammed Ben Abbes of the Muslim Brotherhood, a party that gains over 30% of the election vote and is invited by the Socialists and UMP to take the presidency in a bid to block the far right from power. The price is allowing the Brotherhood control over Education and use of state subsidies to encourage women to leave the workforce.
But these developments are only the beginning: polygamy is legalised, state funding for education is cut by two-thirds and France’s subsidised industries are descaled in the hope of ending salaried employment. Furthermore, the much-maligned nuclear family is restored to its pre-industrial mode of extended kinship, and the Welfare State is slowly dismantled. With generous funding flooding in from Saudi Arabia and Qatar, it soon becomes clear any parent with ambition will have to send their children to an Islamic school for the best-funded education. In a strange way, life goes on without an insurgency or civil war, even when the Islamic Crescent flies over the Paris Sorbonne University.
Yet despite this gloomy outlook, ‘Submission’ is not a dystopian novel or shallow excuse to disguise the author’s anxieties through the medium of fiction. Nobody (other than Haruki Murakami) portrays the noble loneliness of the individual like Houellebecq. Free from cynicism, prone to suicidal thoughts, propped up by nihilism, yet appalled by the worship of money and democracy, Michel ought to be just another ‘Jude the Obscure’ fighting for the dignity of recognition. Instead, he realises the new regime may provide opportunities for greater happiness. Polygamy will give him the comfort and gratification he craves, and perhaps the deep yearning for life to have a clear meaning can be answered in Islam. With the religion’s rise now accepted as a fait accompli, why bother with dead concepts like Nationalism? The future belongs to the civilisation that prioritises high birth rates as a geo-political goal. Capitalist societies, with their love of science and contraception, their distaste for authority, and attachment to reason and desire will never win this contest. Their Welfare States have removed the last economic reason for adults to have children as insurance against old age.
Though the themes are familiar in his earlier works, this is satire at its best. The vicious sense of humour running throughout the book is on a par with Nietzsche’s aphorisms in ‘Beyond Good and Evil,’ and nobody can expect Houellebecq to stop writing about the emptiness of living in a consumer society, just as nobody expected Charles Dickens to ignore urban poverty in his novels. His left-wing critics will line up to take a pop at the man rather than his writing, and the usual accusations of sleaze and gratuitous pornography that precede Houllebecq’s reputation will re-appear. Perhaps he’s laughing all the way to the bank as the sales increase with each controversy.
Nevertheless, Houellebecq is more of a sniper than a fighter pilot when it comes to attacking the taboos of modern society. Our present day obsession with democratic debate and reason is attacked with gusto: ‘The existence of political debate, however facetious, is necessary to the smooth functioning of the media – and, perhaps, also, to keep people feeling that they live, at least technically, in a democracy.’ Indeed, the sanctimonious media are pilloried for creating the conditions for Islam to thrive in France with their determination to keep the white middle-aged man out of politics. Their collusion with the Left has made criticism of the Muslim President almost impossible on grounds of politically-correct ideology. By 2022 the pro-immigrant wing of the Socialist party would rather avoid accusations of hypocrisy than object to Muhammed Ben Abbe’s Islamification of public life.
The real criticism at the heart of this book is reserved for the mainstream Left-Right divide that has run France since the Second World War. Houellebecq’s prediction that the Socialists would rather have an Islamic party instead of a Nationalist one elected to the Presidency may be exaggerated, but the recent fervour following Front National’s resounding win in the first round of regional elections in December 2015 suggests mainstream parties will form uncomfortable alliances to keep them out. A system that frustrates the will of 33% of its population will come under more strain in the future, and something will have to give.
Of course, nobody expects Houellebecq’s scenario to come into fruition anytime soon, yet ‘Submission’ is not a crude piece of scare-mongering. The contradictions and weaknesses of liberal democracy are the author’s ‘Platform’ to attack an ‘Atomised’ society that is still haunted by the dark twentieth century. With identity politics still in the ascendancy, these internal conflicts will not be resolved any time soon, and it seems Europe will need to accept Islam as a minor part of everyday life alongside gay rights, positive discrimination and the vigorous prosecution of hate crime laws.


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Review of In The Miso Soup by Ryu Murakami

Posted on October 19, 2015 at 8:00 PM Comments comments (104)

In The Miso SoupIn The Miso Soup by Ryū Murakami

My rating: 5 of 5 stars

The year 1997 represents a prolific time in Ryu Murakami’s career. In The Miso Soup and Audition both emerged to widespread praise, the latter making it to the cinema screens as a critically-acclaimed film two years later. Yet why In The Miso Soup has not been picked up at the box office remains a mystery.
Skip to 2015 and Murakami’s discourse on his country’s fascination with American culture and instinctive rejection of the Gaijin (foreigner) is as poignant as ever. Still mired in two decades of deflation and an economy that is yet to recover from the stock market crash of 1995, Japan’s job-for-life security in the Zaibatsu is in tatters. Even worse the lavish consumer spending that characterised the 1980s looks like a distant past. Japan's citizens are being asked to spend more, yet are unwilling to open their wallets, even with the Central Bank pushing a deliberate policy of inflation. The country is as rich as any Western democracy, crime levels are the lowest in the developed world, education levels up there with the best in the G20, and the country’s artists and intellectuals admired on a global scale and in the best universities. So why do Japan’s famous salarymen work themselves to death? And what motivates rich high school girls to enter the world of ‘compensated dating’ (e.g. prostitution)?
Ryu Murakami is determined to tackle these themes in this excellent novel, but doesn’t forget the ingredients to a good story – a succinct first-person narrative, a likeable protagonist, exquisite descriptions of Tokyo’s Kabukichō red light district, and, of course, a rhythm that takes suspense levels to new heights of terror. In this book gratuitous violence and depravity mix with the philosophical and the adolescent. The passing of one generation to another looms like a befuddled instruction, sending out contradictory messages. Establishment types warn of a corruptible age, yet remain blind to their own hypocrisy and obsession with material wealth. Perhaps only a psychopathic American sex tourist can diagnose the Japanese nation’s problems.
The eighteen-year-old narrator, Kenji, is a smart guy. Recognising how Japan’s tolerance of foreign sex tourists has bottomed out in the aftermath of AIDS, he ditches school and sets himself up as a guide for the Gaijin looking to score in the best clubs in Tokyo. It beats sitting in an office cubicle for the rest of his life, and allows him to rent a semi-decent apartment and take his girlfriend out for Korean barbecues on a regular basis. Though accustomed to working for Americans, he’s taken aback by the mysterious Frank, a shabby, overweight pervert who looks more like a stockbroker than a rugged blue-collar character from a Hollywood movie. What is it about this compulsive liar that persuades Kenji this man might be responsible for a shocking murder committed only two days ago in Tokyo’s red light district?
We, the reader, know there’s something wrong with Frank. The grimace on his face when something infuriates him; the over-friendly appreciation of the touts; the Darwinian hatred he has for the homeless bums on the street; his generosity in handing out blood-stained 10,000 Yen bills – there’s something sinister about his superficial self. But we still can’t guess what he’s capable of doing. Like most psychopathic individuals, his intelligence is above average, he has neurological problems, and he sees the world in terms of power, humiliation and revenge. Frank wants to get inside Kenji’s head and persuade him they’re not too different: ‘Is it possible,’ he asks, ‘that somewhere in this world there are people who, if they sat next to a homeless fellow they’d get an urge to snuggle up to him, but if they sat next to a baby they’d get an urge to kill it?’
Whether Kenji is going to be coerced into an act of violence by his American client is always at the back of the reader’s mind. Will he give in to peer pressure; will he find something in Frank he agrees with? His contempt for the childless women that inhabit Omai bars out of loneliness rather than necessity bubbles to the surface on a couple of occasions, and his respect for the migrant Peruvian whores that ply their trade to feed their families in Latin America suggests he might not be too far from Frank’s way of thinking. There is no simple good or evil, but plenty of repression and frustration.
Like any great novel, the author is not scared to throw in a few hilarious passages of mutual incomprehension between the Japanese and the Gaijin. This is, after all, a story about cultural differences. Frank’s well-intended bow to a passing policeman is ‘endearingly clumsy’ and says in a stereotypical way, ‘I respect your culture and traditions.’ A restaurant owner smiles at Kenji when he sees Frank taking so long with his zaru soba: ‘Gaijin will be Gaijin,’ he jokes. Yet as the narrator surmises about his country, ‘Japan is fundamentally uninterested in foreigners, which is why the knee-jerk response to any trouble is simply to shut them all out.’
Though only 180 pages in length and easy to devour in one night, In The Miso Soup is not the type of book you can read on auto-pilot – and that’s not a bad thing. The writing is economic and the sentences clear and crisp, and you know after 10 pages this is going to be a classic, even though the content is often malevolent and relentless in its promise of terror. Imagine Ian McEwan’s The Comfort of Strangers, and multiply the sinister by ten. Your first instinct (if you’ve got the stomach) will be to re-read it and imagine how good it would be on screen.
I wonder if Lars Von Trier has been taking notes for a screen-play…


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Review of Colorless Tsukuru Tazaki and His Years of Pilgrimage by Haruki Murakami

Posted on October 11, 2015 at 9:15 AM Comments comments (0)

Colorless Tsukuru Tazaki and His Years of PilgrimageColorless Tsukuru Tazaki and His Years of Pilgrimage by Haruki Murakami

My rating: 3 of 5 stars

Murakami’s last three novels have sold millions all over the world, yet perhaps his best work in the last fifteen years has been his least ambitious. The 2004 urban thriller, After Dark, marked a departure from his previous exploits and concentrated more on a film noir-type setting in Tokyo’s 24-hour metropolis. Now largely forgotten at the expense of Kafka on the Shore (2002) and IQ84 (2009), After Dark has a sinister backdrop of violence brimming through every page, and concentrates on themes of jealousy and neurosis instead of the author’s usual preoccupation with isolation and the melancholy nature of existence.
Unfortunately, those hoping for a return to this setting may be disappointed with Colorless Tsukuru Tazaki and his Years of Pilgrimage, but there’s still plenty to like. If anything, this new offering feels like a return to his classic 1992 novel South of the Border, West of the Sun. The main protagonist makes few friends in his adult life; spends his time reading and studying; laments the passing of decades; buries the distant past; and has the occasional relationship with a woman before it fades away like a sunset over the Nagoya horizon. ‘There’s nothing to cling to. I still have that fear, even now – that suddenly my very existence will be denied and, through no fault of my own, I’ll be hurled into the night sea once more. Maybe that’s why I haven’t been able to form deep relationships with people,’ Tsukuru admits.
Like all Murakami’s main characters, Tsukuru is not prone to self-pity, but devoted to a more austere form of reflection that accepts the imperfections of the world. Nevertheless, his story is shaped by a traumatic event in his first year at University, when his four friends – the only friends he ever had – banish him without explanation. Life for the next sixteen years is like a void, interspersed with episodes of meditation on the totality of death and punctured by alarming thoughts that maybe he will continue to live like this, on the periphery of life, never complaining, but always succumbing to the comfort of isolation.
What follows is a stunning revelation that catches Tsukuru by surprise and only confirms his ineptitude in reading other people. How could he not know that one of the group was in love with him? Or that the two male friends in the quintet relied on him to keep the harmony? Too obsessed with his own perceived mediocrity, perhaps too ashamed of his inability to relate to his family and those around him, Tsukuru, it seems, has more to offer than he imagined.
All the ingredients are here for a four-star review, but it might just be that Haruki Murakami is becoming predictable. The disappearance of Tsukuru’s sole college friend without trace comes as no surprise; nor does the revelation that his current girlfriend is seeing another man. Anybody familiar with the great man’s literary output has come to expect the unexpected; no explanation will be offered, random events will never be rationalised, people are capable of doing evil without knowing why. In a debut novel this would be a welcome addition to Contemporary Literature, but we are talking about the greatest writer in the world here. A Haruki Murakami novel is supposed to change your life and force you to see the world in a different perspective – part escapism, part solitude, part adventure.
But you cannot shake the feeling that certain passages in this book are stalling when they should be enlivening the reader. The last section feels like an overdue compensation for four consecutive chapters of character dialogue. And talk of people with empty shells who live as refugees from the humdrum existence of modern life is now starting to sound a bit too much of a cliché, albeit one Murakami helped to create with his own originality. To put it another way: there are times when this novel reads like somebody imitating a Murakami classic.
That does not mean, however, that this book is worth passing over. The author’s research into his characters’ identities is better than ever. Aka, the former rugby player and car salesman will make you want to buy a Lexus Hyrbid when you hear his description of the car’s gear changes; Ao, the gifted academic who makes a fortune as a business guru gives a remarkable spiel on how to motivate a company and reach out to the 70 percent of the workforce that want to do nothing but follow instructions.
The female characters are even more commendable – anyone who says men cannot create believable female protagonists will need to think again. Kuro and Shiro, the two girls in the quintet, are by far the most interesting cast members. Tsukuru is astonished to learn how Shiro developed an eating disorder to eliminate her regular periods, and is equally perplexed when Kuro admits she was in love with him. As he later finds out when confronting the group sixteen years later, perhaps he didn’t even know himself at this time.
The usual praise must also go to Philip Gabriel, whose translation from the Japanese captures the simple, mellifluous rhythm of Murakami’s writing with some wonderful passages. Tsukuru’s experience listening to Franz Liszt’s Years of Pilgrimage is, ‘Like the mysterious outline of microorganisms swimming across the circular vision of a microscope.’ The description of rush hour at Shinjuku station, where an estimated 3.5 million people pass through on a daily basis, is poignant: ‘Everyone is scurrying to get to where they need to be, to punch their time clock, and no one’s in a great mood.’ A few biting criticisms of contemporary Japan are also buried beneath the noise, but come through, nonetheless. The bourgeois Japanese women that devote their entire lives to getting their children in to the most expensive private colleges do not escape Murakami’s disdain; nor does the competitive nature of the Japanese secondary education system, with its emphasis on after-school ‘cramming.’
But perhaps the most notable aspect of this book is the author’s continuing fascination with violence and rape, themes that have been present in every book since his 1994 opus, The Wind-up Bird Chronicle. Indeed, it seems impossible to pick up a contemporary Japanese novel that isn’t obsessed with these issues if the likes of Hitomi Kanehara and Ryu Murakami are anything to go by. Though a question for sociologists, it would be interesting to know why such a low-crime, orderly society is so fascinated by violence. Maybe Haruki Murakami might want to answer this in a non-fiction study, just like in his masterful thesis on the 1995 Aum Shinrikyo terrorist attack on the Tokyo underground.
It’s hard to say where Murakami goes from here, but let’s hope this is not his last novel. The capitalist world needs Japan’s greatest author more than it needs paracetamol, Viagra, cocaine and internet dating. Indeed, nobody can convey the loneliness of the affluent society like Murakami, even when he’s not at his magisterial best.


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Review of Keynes Hayek:The Clash that Defined Modern Economics by Nicholas Wapshott

Posted on September 30, 2015 at 8:40 AM Comments comments (0)

Keynes Hayek: The Clash that Defined Modern EconomicsKeynes Hayek: The Clash that Defined Modern Economics by Nicholas Wapshott

My rating: 4 of 5 stars

John Maynard Keynes was the heavyweight economist of the twentieth century – a Cambridge professor, Paris Peace Conference negotiator, architect of the post-war Bretton Woods system of fixed currencies, one of the brains behind the World Bank, best-selling author, and the inventor of Macro-Economics. As a member of the Bloomsbury group of ‘progressive’ intellectuals, he also made a fortune speculating on the commodity markets, and in 1936 produced the most influential economic study of the last 150 years. It is no exaggeration to say Keynes was Britain’s seminal intellectual, perhaps the last great thinker to emerge from these shores with a truly global reach.
Friedrich Von Hayek, an Austrian who secured a Professorship at the London School of Economics (LSE) in the 1930s, is better known as the most articulate critic of socialism and its inability to plan an economy, not to mention its unwitting tendencies to erode individual freedoms as the state takes over most aspects of our lives. Hayek remained an outsider throughout his life and Prices and Production (1931) and The Pure Theory of Capital (1941), his two main contributions to pure economics, remain unread by most. Even those who admire his philosophical works, such as Milton Friedman, remain unconvinced by his writings on the dismal science, yet eulogise about his influence on Neo-Liberalism (especially his epic study, The Constitution of Liberty, said to be Margaret Thatcher’s secular Bible).
Nicholas Wapshott presents us here with an impressive study of how a Micro-Economic debate between Cambridge University and the LSE in the late 1920s concerning the equilibrium between savings and investment eventually cascaded into the wider world until, by 1976, the future of capitalism seemed dependent on which side of the Keynes-Hayek camp you belonged to. And if it wasn’t for the stagflation of the 1970s, we would still be voting for parties that support aggregate demand policies and promote state investment in the economy in times of impending deflation. Keynes would be King and Hayek unread.
Summarising the difference of opinion between these two great intellectual behemoths is no easy task, and Wapshott does a marvellous job of framing both sides of the debate in a concise, intelligible language that often eludes economists. Having read this book in one go and then revisited selected chapters, the core message is that Keynes had one lifelong obsession: how do you counter high unemployment at the bottom end of the business cycle? Hayek’s message was even more succinct: government investment in public works would eventually lead to inflation and distortion of the economy if you tried to avoid recession by boosting demand through taxation, borrowing or tax cuts (or a combination of any two from three).
There is no doubt that some of Keynes innovations in thinking have now been discredited, yet plenty of his theories are still correct. Outside the socialist and Fabian camps, nobody did more to challenge Classical Economics than Keynes, and some of his most iconoclastic theories are still intriguing. An economy will never reach full employment when savings and investment are in balance; self-interest does not promote the general interest; governments should lower interest rates at the bottom end of the business cycle and raise them to cool the boom times – these were radical ideas at the time when Alfred Marshall, Adam Smith and David Ricardo dominated economic thinking. But his most influential policy recommendations are to be seen in The General Theory of Employment, Interest and Money (1936), including his most innovative interpretation of interest rates. According to Keynes, the notion that the natural rate of interest is produced by an equilibrium between savings and investment is absurd. Why? Because banks base their lending criteria on the ratio of their cash reserves against their money liabilities and have no consideration for the classical equilibrium. Furthermore, people often keep their savings as a ‘liquidity preference’ e.g. Banks have to offer them unnaturally high rates of interest to get them to part with their money. This divergence makes the equilibrium theory even more unattainable.
The most famous term associated with Keynes is ‘deficit financing,’ again an innovation that sent shockwaves around the world. For the first time Governments re-building after the Second World War, with the prolonged depression and high unemployment of the 1930s still haunting them, knew one thing – they could not go back to Laissez Faire. No wonder the idea you can lower taxes without a corresponding public expenditure cut had wide appeal in the late 1940s. As Keynes pointed out, offsetting tax cuts with reductions in expenditure would simply redistribute rather than produce a net increase in national spending power. And every industrialised nation lapped it up from 1950 to 1975, while Hayek looked like a hopeless relic preaching a nineteenth-century creed.
Perhaps the one criticism of this excellent book, is that not enough time is devoted to conveying how the stagflation of the 1970s shattered the Keynesian consensus. All Governments had assumed that unemployment would go down when interest rates rise; instead they got the worst of all worlds in 1974 – more joblessness, higher inflation, and a slump in demand. Economists had no explanation, and politicians had nothing else to fall back on in Macro-Economic theory.
Most of us know Hayek’s remedies through his supply side economic recommendations of later years (when he was no longer writing as an economist). In other words, the market could produce a recovery if most levers of government control were dismantled and competition was restored to the system. Today, Conservatives in all developed liberal democracies base their entire economic policy on ensuring Hayek and Milton Friedman’s small-government, market-orientated solutions remain undisturbed – in effect they remain gatekeepers against the Keynesian social democrats that want a return to aggregate demand.
However, it is pure Schadenfreude to say Hayek has won the duel with Keynes in the aftermath of the 2008/09 world recession. When confronted with deflation and a deep recession, western governments everywhere opted for ultra-low interest rates, quantitative easing, and government spending cuts – they had no time for Hayek’s recommendation to ride out the recession until the natural rate of interest is restored and savings and investment are in equilibrium. Barak Obama even returned to a Keynesian policy with a bungled attempt to restore aggregate demand via public works programmes. One look at the new economic language emanating from Jeremy Corbyn’s hard-left Labour Party in 2015 shows how his epithets on growing the economy are pure Keynesian in their attempt to boost demand using the great man’s ‘multiplier effect’ theory.
Ironically, some of the most interesting (and obscure) arguments between the two camps are to be found in Micro-Economics, although these will not be settled or understood in the public arena of politics. Will anyone outside academia really care if Hayek believes there is no correlation between consumer demand and the level of employment? Or if Keynes’ attack on the idea that saving is better than spending is a dagger at the heart of Classical Economics?
But this isn’t just a rehearsal of both sides of a debate by an introverted economics scholar. Wapshott’s research is meticulous and revealing – just as important it delves into the personalities between the two antagonists. Lionel Robbins, the LSE Professor who brought Hayek to England, would later desert him over the way he treated his Austrian wife; even worse, like Nicholas Kaldor (Hayek’s English translator and former pupil) he defected to the Keynes camp in 1960. This was one of the reason why Hayek fell into a deep depression in the early 60s, especially after the commercial disappointment of his 1959 masterpiece, The Constitution of Liberty (now, of course, a bestseller).
Keynes meanwhile was Britain’s foremost intellectual celebrity. Which other economist could get a personal invite from Roosevelt to see him at the White House or have just about every one of his articles from The Daily Mail and The Times published in serial form and later collected into best-selling works? Yet for a man who often didn’t rise until noon (spending most of the morning in bed placing trades with his broker), Keynes output and work schedule was impressive. Indeed, Wapshott believes one of the reason Keynes ended the duel with Hayek in the academic journals was because he had bigger fish to fry and was dealing with the burden of saving the world from mass unemployment – a task he assigned to himself and truly believed in accomplishing. And as the superstar economist responsible for more inferiority complexes than anyone from his generation, Keynes looks like somebody straight from centre stage. Wapshott notes how he would bludgeon his opponent with a mixture of playful sarcasm and theoretical onslaught, sometimes even changing his beliefs along the way when the facts changed; Hayek was more rigid and stuck to his core beliefs, leading the charge with a systemic attack on the smaller details of his opponent’s theories. Arthur Pigou (the distinguished Cambridge Professor) was not alone in calling for a more gentlemanly argument between the two, with Keynes, especially, venturing into more personal territory in his first response to Hayek’s harsh review of A Treatise on Money (1930).
The greatest tragedy is that the Keynes vs Hayek battle presented the western world with a terrible dilemma in the 1970s and early 80s – more inflation or unemployment. In Britain, the Conservatives took control under Margaret Thatcher and opted to defeat the first by allowing the latter to rise above 3 million. For this reason Hayek is a figure of loathing in leftish circles, whereas Keynes still retains admirers from all sides of the political spectrum, excluding the neo-Liberals (remember the Right in the Anglo-Saxon world is far different to the Centre-Right in France, where Keynes still has headway). As Hayek, himself acknowledged, his policy prescriptions are not exactly appealing compared with Keynes ambitious and monumental attempts to provide intellectual justification for government intervention in the economy. This may be why he would later become disillusioned with his 1944 classic anti-Socialist polemic, The Road to Serfdom, still a big-seller in America to this day.
But perhaps the best referee in the Keynes-Hayek clash is Milton Friedman, the Nobel Laurette who is most associated with the free-market resurgence of the 1980s. A committed follower of Hayek’s philosophical works on the need for small government and free market competition, he had no time for Hayek’s economics and lauded Keynes as the greatest economist of the twentieth century. As Friedman admits, most of Keynes’ insights into Macro-Economics remain valid today, even if his ‘multiplier effect’ and ‘aggregate demand’ policies have proven to be a failure in sustaining growth and smoothing out the business cycle.
We might well call the contest a draw, although I suspect the author is more sympathetic to Hayek than the great Keynes. And who knows what the next big debate will be in the world of economics. With climate change, ageing populations and finance sectors too big to fail (but prone to future meltdowns), the question of state intervention and bigger or smaller government might be superseded by something even more important in the future.

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Review of The Fourth Revolution: The Global Race to Reinvent the State by John Micklethwait and Adrian Wooldridge

Posted on September 29, 2015 at 3:05 AM Comments comments (0)

The Fourth Revolution: The Global Race to Reinvent the StateThe Fourth Revolution: The Global Race to Reinvent the State by John Micklethwait

My rating: 3 of 5 stars

Discussions on the efficiency of the state in the Anglo-Saxon world are known for their one-dimensional viewpoints. The Left excoriate the Neo-Liberal parties that want to trim Leviathan and subordinate it to the private sector; the Right decry the tendencies of the Social Democrats that want to fix every solution with more government spending. You will not find any political party in Britain that want to discuss how to make government better and more responsive; it’s either a necessary evil or a vehicle for social engineering and re-distribution. In America the debate is even more intransigent depending on what side you’re on.
In this study John Micklethwait and Adrian Wooldridge are determined to show how the West has been leading the world on how to govern since Thomas Hobbes’ seventeenth-century masterpiece, Leviathan, right through to John Stuart Mill’s ‘night watchman’ government and Beatrice Webb’s crusade for the Welfare State in the early 1900s. Rather than play catch-up to the engines of science, industrialisation and mass consumption, efficient government in the western world is actually a story of innovation, (modest) meritocracy and adaptability. But now, for the first time, the developing world is looking to tiny Singapore, the best run country on the planet, for inspiration. With the devastating failure of free-market capitalism in the 2008/09 global credit crunch, China is now more enamoured with Lee Kwan Yew’s authoritarianism and small-government efficiency rather than the west’s bloated ‘all you can eat’ welfare state that is facing a monumental crisis of funding by 2050. As the authors point out: ‘The main political challenge of the next decade will be fixing government.’ (p.5)
The main contention is that the modern Western state is run like General Motors in the age of Google. State bureaucracies still believe in doing everything in-house; decision-making is too centralised; administration is paralysed by the idea it should be as uniform as possible; and there is a persistent fear of change. These are not new criticisms, indeed using words like ‘Revolution’ in the title of this book might disappoint some readers. Strip it down to its core elements and you will realise that these are standard complaints known to most people who’ve worked in or had dealings with the public sector.
However, the authors are on better ground when discussing one of the taboos of our age: could mass democracy be part of the problem? Nobody wants to abolish the cherished freedoms that come with democracy, but the general election cycle produces the worst kind of contest between political parties hoping to please competing factions of lobbyists and interest groups. An ever-increasing expansion of the state follows and leads to ruinous expectations about what governments can achieve. Yet one look at Europe’s aging populations and higher life expectancy levels makes it clear that future administrations will have to do more with less. And more borrowing is not the answer, with the authors reminding us that ‘By March 2012 there were some $43 trillion of government bonds in issue, compared with only $11 trillion at the end of 2001.’ (p.14) No wonder the developing nations are looking outside the West for new ideas on how to modernise and accommodate their growing middle classes. (NB: Entitlements benefit the middle class more than the poor in America and Europe – complete anathema in Singapore, where state funds are targeted at those that need them).
The future revolution, it seems, is already happening in Sweden, and this is where the authors want western governments to turn their attention. This means education vouchers for parents to send their children to the best-performing schools, perhaps the next logical step in Britain where the Academy system allows parents to set up their own schools. Swedish Health Care is even more innovative and entails paying private-sector companies to run a proportion of hospitals for profit, their results published in a central registry so patients can identify the best ones to use. And why not ask all users to pay a nominal fee for each visit so nobody abuses the system? These are all good suggestions and are clearly working in the Nordic countries where budget deficits and public debt levels are way below Britain, France and the US; but these are hardly new ideas. Tony Blair embraced some of these policies in his second term in office from 2001, and one read of The Economist, will remind you that these proposals have been around for the last 20 years. Is this really a revolution?
Perhaps the real revolution is occurring in the opportunities we have to harness technology in the information age. The authors are keen to stress this is the main area where government needs to adapt: ‘The current centralised state has been shaped by the idea that information is in short supply: It derives its power from the fact that it knows lots of things ordinary people do not. But information is now one of the world’s most abundant resources…’ (p.210)
Numerous contemporary studies explore ‘The New Digital Age’ and ‘The Networked State’ and it’s clear the state can use information better, to do more with less, while giving citizens greater power to hold their elected representatives to account. Everything from Fixmystreet.com to San Francisco’s SFPark app are also giving citizens that chance to use technology rather than rely on government departments to solve daily problems. In fact, the future of innovation is now being spurred on by the state as well as the market: Washington DC Mayor, Vincent Grey, was delighted when his call for ‘new apps for democracy’ produced more than 47 apps in thirty days. Imagine if Sir Robert Peel’s government of 1840s Britain had called for more technological innovations in the textile industry, in an era when inventors didn’t even need state inducements to drive improvements.
Ultimately, those expecting this book to be a seminal manifesto on how to fix the state and shift the debate to what government is for will enjoy reading The Fourth Revolution, even if it doesn’t quite live up to its title. The research is impeccable (‘In America almost half the people in the richest 1 percent are medical specialists,’), the surveys of Hobbes and J.S. Mill are succinct in their intellectual appraisals, and each chapter bursts with ideas. Yet those ideas themselves are not exactly new, and the result is this book feels more like a copy-and-paste manifesto from their favourite authors rather than a pioneering study.
Nonetheless, the future is blond – the future is Sweden, if we are to take the authors’ advice. Yet we will need a major shift in political discourse in Britain and America if this is to happen. Will the Scottish National Party ever countenance a National Health Service where users pay a nominal fee to stop the system being abused? Can you imagine America’s powerful teaching unions putting education standards before solidarity with the weakest-performing teachers? What kind of strikes would we see in France if a government copied Sweden and hiked up the retirement age and indexed it to future life-expectancy levels?
If nothing, else Micklethwait and Wooldridge give us a glimpse of the political issues that we will have to face over the next thirty years. Our aging populations, national debts and expectations of more entitlements will, once again, lead us to ask, “What is the state for?”
Perhaps a consensus on this question will be the fourth revolution.



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Review of Postcapitalism: A Guide to our Future by Paul Mason

Posted on September 13, 2015 at 8:00 PM Comments comments (75)

Postcapitalism: A Guide to Our FuturePostcapitalism: A Guide to Our Future by Paul Mason

My rating: 4 of 5 stars

Left-wing politics has lost all credibility in economic science since the victory of Free-Market Capitalism post-1989. Turning their attention to environmentalism, human rights, social justice and anti-austerity, socialists of today do not question the basic premise that private property and a market system for the distribution of goods are indispensable to economic growth; the only question is to what extent the state should temper its excesses. But in the last year distinguished economists have started to question the future of Neo-Liberalism, and, in Thomas Piketty and Paul Mason, the left have found strident voices armed with an impressive understanding of economic theory. It seems the first anti-orthodox economists have finally emerged after the shock of the 2008/09 global recession.
Mason is perhaps the most articulate prophet of doom since the credit crunch exposed the hideous excesses of the finance sector and destroyed the idea of the efficient market hypotheses. In his view Neo-Liberalism (aka Free-Market Capitalism) as we know it is in decline and cannot survive in its current guise. No matter what your views this book is superbly written, unimaginable in its scope, and unwilling to contemplate anything but the complete breakdown of a socio-economic system that is now synonymous with democracy and has come to symbolise meritocracy, consumer power and competition (which is, of course, disputed by Capitalism’s critics).
So what has changed in the last 10 years? The first point is that IT has reduced the need for work. Furthermore, Information goods are harming the market’s ability to price goods, and monopolies are clinging to profit by deliberately under-utilising information via intellectual property rights and patents. Even more important, spontaneous collaborative production is rising up unlike anything before. As Mason points out: ‘The biggest information product in the world – Wikipedia – is made by 27,000 volunteers, for free, abolishing the encyclopaedia business and depriving the advertising industry of an estimated $3 billion a year in revenue.’ To put it more bluntly, ‘The main contradiction today is between the possibility of free, abundant goods and information and a system of monopolies, banks and governments trying to keep things private, scarce and commercial.’
Yet, according to Mason, there is way out for Neo-Liberalism. Developed nations need to end ‘Financialization’ of the economy by an orderly exit from QE and avoid eroding the real value of government debt with inflation. They must also suppress the dominance of high finance, and use interest rate rises to mitigate early signs of a bubble (a clear criticism of Alan Greenspan). This will be no easy task in the democratic age, but is nothing compared to the level of international co-operation required to save capitalism. At the heart of this is the necessity of stabilising fiat currencies and smoothing out global imbalances, preferably with a new global currency managed by the IMF and with the Chinese Yuan as a fully tradable reserve currency. Yet this could prove impossible because, as Mason forecasts, ‘The currencies of surplus countries would rise, and China, India and the rest would have to give up their cheap labour advantage.’ The most likely outcome is a complete breakdown of globalisation and a race to the bottom as nations try to de-globalise quicker than their rivals.
But what will post-Capitalism look like and how will the transition be managed? The author is on more dubious ground here and is less clear about the future. If anything, his conclusions are extreme left-wing. Having re-read the book to summarise the arguments, I am still not convinced the iPod generation from Silicon Valley and Shoreditch, with their ultra-liberal views on sexuality and refusal to pay for information goods, are the gravediggers of capitalism. You can feel yourself cringing when Mason advises us that ‘we need to be unashamed utopians.’ Take his idea for ending the low-wage workforce in the service sector that Neo-Liberalism has managed to create: Can anybody conceive of a time when the British government gives 51 million adults a basic income of £6,000 for simply being of working age? Of course it will be paid for out of general taxation, in addition to a guaranteed minimum wage of £18,000 per annum. The author’s belief that such an extreme re-distribution will force innovation and spur entrepreneurship by challenging the most intellectually-adept to collaborate for the end goal of a fully-automated production economy is a bit like a developing African country wishing it shared porous borders with aggressive adversaries in the hope it will force them to carve out a world class military.
Aside from the lunacy of such proposals, Mason is right to identify the three biggest threats facing Neo-Liberalism today: global warming, an ageing population and migration. It’s clear allowing industrial companies to trade carbon permits will not solve the need to lower carbon emissions. The author’s solution is heavier taxation followed by the nationalisation of the entire carbon-polluting sector if no progress is made by 2050. This is not a new idea, and to most people will look like a retrograde policy, although given the severity of the global warming threat, nationalisation might be the best (or least worse) option to force corrective behaviour on polluters. But anybody can see that China and India will defend their position as developing nations to moderate their climate change policies. Has the author considered this possibility? One look at the sclerotic European Union shows how hard it is for countries to co-ordinate policy amongst advanced democracies and new nation states, and it provides no hope that global co-operation will converge on an agreed plan to cut carbon emissions other than through the usual treaties that produce a lot of goodwill and a lack of meaningful progress.
What is noticeable throughout this book is Mason’s reluctance to acknowledge the possibility of internecine strife (possibly even civil war) in his vision for the end of capitalism. Consider his argument for writing off debt in the developed world. The author proposes nationalising all central banks and keeping interest rates below the level of inflation to erode the real value of government debt. Apart from being an irresponsible policy it will also corrode trust in the international markets between investors and governments. Would anybody want to buy British gilt-edged securities (aka bonds) if the government of the day announced its intention to cheat in paying back the debt? A further scrutiny shows how Mason is also keen to go back to the mixed-economy of the 1948-1967 era when the Bretton-Woods system of international currency exchange provided fixed rates and strong controls on cross-border capital. In other words, he would prefer the de-globalisation that comes with forcing citizens to invest only in their nation’s debt. The balance of payments would become the most important focus of macro-economics and holidaymakers would be limited in the amount of foreign currency they could take out of the country. These might be benign examples, but the encroachment of the state would put individual liberty under threat once again. Mason clearly believes that the state should provide freedom from poverty and want in addition to guaranteeing our negative freedoms – a classic socialist argument that downplays the importance of individual autonomy in the face of the all-knowing, benevolent state. However impressive his progressive views, the sovereignty of the individual does not come high on the author’s agenda.
Yet some of Mason’s extreme suggestions are understandable when you consider the ageing population in the developed world. By 2050 sixty percent of developed nations could be on the verge of bankruptcy, with pension funds being most at risk in their search for an acceptable yield. Faced with minimal returns on government debt, there’s no reason to doubt they’ll be victims of the next bubble. Likewise, the flood of migration from the third world will continue at pace, putting more pressure on scarce resources. The reality is that two-thirds of the world’s population are living in ‘Non-Marxian’ poverty e.g. location is responsible for their plight rather than lack of amenities. Whatever the future, is certainly looks more violent and less rosy for democracy. Introducing a basic income of £6,000 for all working-age people will encourage even more impoverished Muslims to queue at Calais in the hope of entering a country that pays them for simply existing. Imagine the tension this will create: Modern European history shows quite clearly that the electorate in countries under severe social strain tend to vote for extreme right or extreme left parties (mainly the former instead of the latter). Perhaps capitalism, for all its flaws and unwillingness to promote itself as a utopian or even morally superior system might just be the best option to keep the peace, even if that means slow growth and stagnation for decades to come.
Whether we ever move to the Wiki State or ‘ban intellectual property’ becomes a new slogan for the iPod generation is hard to say, but Mason sees the future through the prism of the past, with the state taking back the power it lost during the Conservative revolutions of the 1980s. His gleeful prediction of the demise of the 1% in the last few pages might be a bit premature, but you can guarantee there will be individuals sharpening their knives for the fall of capitalism. Yet, unlike the author, I cannot see this happening in a peaceful way, nor can I imagine the leaders of his revolution resisting the temptation to govern in the name of an enlightened dictatorship for the ‘common good.’
Nevertheless, this is the probably the most important book written this year and will stimulate your cognitive thinking for days on end. Whether you’re an avowed capitalist or nostalgic communist, the debate has shifted. And despite his extreme left suggestions, Mason has fired a warning shot to neo-Liberals everywhere. This is certainly not the end of history, but the beginning of a new battle between competing ideologies, even if it’s yet to be identified by the masses and those who govern in our name.


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Review of Capitalism: Money, Morals and Markets by John Plender

Posted on September 5, 2015 at 8:35 AM Comments comments (71)

Capitalism: Money, Morals and MarketsCapitalism: Money, Morals and Markets by John Plender

My rating: 4 of 5 stars

The title might mislead you into thinking this is an epistemological study of Capitalism, but John Plender’s reflections on the civilisation that has lifted millions out of poverty is an enjoyable read. Though more likely to inform debate in the convivial atmosphere of the Middle Common Room rather than in a Postgraduate Economics Seminar, this book has a lot to offer both the layman and the scholar.
Taking a specific theme in twelve different chapters from a discourse on the money ‘as the root of all evil’ to the public perception and economic function of the entrepreneur, Plender’s work has the feel of a loose collection of essays rather than a monumental study into the dynamics of capitalism in the mould of Joseph Schumpeter. Nonetheless, this does not detract from the quality of the writing and imagination of the source material, with Plender using a multitude of literary passages to illustrate the workings of the ‘dismal science’ through the eyes of Dickens, Zola, John Steinbeck and many others.
Perhaps the best sections of this book focus on the world of banking, namely its purpose, the persistence of moral failings since the nineteenth-century, and its extraordinary capacity to survive despite being a gigantic confidence trick. Plender reminds us that banks are inherently unstable because they perform a paradoxical function of taking deposits from customers (and guaranteeing their withdrawal at a moment’s notice) and lending them to debtors at interest. In effect both depositor and borrower have claims to the same money and the whole system could collapse if the former decided to withdraw their savings. This explains why banking is usually accepted as a necessary evil. Though a bank run can damage the wider economy and even imperil the solvency of a nation state, most people accept that a modern economy relies on the availability of credit for commerce and industry – without it economic growth would stagnate.
The turning point where banks became riskier enterprises is traced to the nineteenth-century when many banking partnerships became limited liability ventures. This protected shareholders from incurring losses beyond the amount they put in and prevented creditors from making a claim on their personal assets. The potential for enormous gains remained, yet the exposure to losses diminished. Naturally, this encouraged bigger risk-taking.
Despite being pro-capitalism and pro-business Plender is keen to stress how banks have imperilled the moral standing of the capitalist system. Ethics have sunken to a new low with bankers continuing to award themselves exorbitant bonuses in the aftermath of the devastating global recession of 2008/09. The recklessness is best embodied in his observation that some of the major banks had capital cushions of just 2% in 2007. This is surely related to America’s repeal of the Glass-Steagall Act in 1999, which allowed banks to expand their balance sheet four-fold and do away with the ring-fencing of retail and investment banking that had been in place since 1933. As the author laments, ‘To put it crudely, capitalism has been hijacked by the banks. That is not how it is meant to work. The only question is how long it will take before the system blows up again.’
Nevertheless, Plender is right to analyse other forces that motivated the insane leveraging before the 2008 crash. The Basel II accord of 2004 is not without blame. This regulatory agreement for central banking rules did more harm than good and encouraged banks to bump up their mortgage lending operations because of the low risk status accorded to these products. Likewise, Basel II also exacerbated imbalances between northern and southern nations in the EU by awarding privileged status to sovereign debt holdings (e.g. Greek bonds) while removing capital buffer requirements. No wonder German investors bought up so many Greek bonds and have been quick to remind Chancellor Merkel that a Greek default will imperil their own banking system (and leave them with huge losses).
Of course, no discussion about capitalism can be complete without a discourse on manufacturing, and Plender is keen to tackle one of the persistent anxieties of the modern Anglo-American age – the correlation between deindustrialisation and national decline. Yet as the author shows, there’s no reason why a shrinkage of the manufacturing sector as a proportion of the national economy will lead to a fall in living standards in the twenty-first century. In fact, the decline of manufacturing as a percentage of the workforce can be seen as a good thing as it usually means productivity gains are freeing up labour for other sectors of the economy. Output can go up if industry is shrinking, and even China has passed its late 1990s peak of manufacturing, where 33% of the workforce now toil behind machines.
The main danger is when the financial sector becomes disproportionately large in relation to the economy and is too remote from servicing industry and commerce. This is the dilemma Britain faces, but the likes of Labour’s Jeremy Corbyn are in cloud cuckoo land if they think wide-scale manufacturing can return to these shores without a massive depreciation of wages to keep up with Chinese competition. Plender does not predict what types of service jobs can attract rocket scientists and engineering graduates away from high-finance and back into productive enterprises, but this book is more a work of History than Economics, and historians are not expected to predict the future. Therefore, the balance between manufacturing and the service sector remains one of the questions of our age.
Like any general survey, Capitalism: Money, Morals and Markets relies on prescient observation and myth-busting to retain your attention. Perhaps the most challenging aspect of this is Plender’s reflections on speculation in the market place. His view that speculators taking up long positions on agricultural commodities ‘bring real resources more closely into line with the future balance between supply and demand’ still sounds hollow and unconvincing in its merits. That said, his defence of short-selling is more articulate, and he’s right to say there’s nothing wrong with an investor buying up the IOUs of a financially-stressed company while hedging the investment with a short position on the company's shares. And, of course, short-sellers played a positive role in the demise of Enron, the most notorious example of corporate fraud in the modern age.
One major surprise of this book is the downbeat conclusion. Though capitalism has raised living standards and fostered unimaginable scientific and technological developments, the tendency of boom and bust has become entrenched into the system and leads to cyclical depression and bouts of widespread misery. Accepting this as a necessary evil is hard enough, but future recessions are likely to be even more damaging because of the changing dynamic between nation states and banks. Where once medieval monarchs used to destroy banks by defaulting, the opposite is now true. Now it’s the government, using taxpayers’ money, that props up the institutions that are too big to fail. But productivity and innovation in the western world has slowed since 1970 and the governments that maintain generous welfare states, pensions and education budgets are struggling to meet the cost of provision based on overly-optimistic forecasts of forty years ago. No one doubts the banks will have a useful role to perform in keeping consumer spending at acceptable levels, not to mention a key role in expanding credit to tomorrow’s entrepreneurs. Which makes it all the more likely that governments penalised with higher borrowing costs on the international bond markets will resort to inflation to erode the real value of their debts. Something will have to give, and price stability may come under threat.
The only thing militating against a 5-star review is the tempo of the book. Yes, it’s easy to read and commendable for its clarity and recourse to classical antiquity when needed, but it feels more like an easy-going chat with a professor at a high-table dinner rather than a lecture from a superstar academic. Plender is a journalist at The Financial Times, so that’s understandable, but those expecting something similar to a Francis Fukuyama book may be disappointed. That being the case, let me assure you this is still worth a read and may be a good precursor to Schumpeter’s Capitalism, Socialism and Democracy.



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Review of Hear the Wind Sing & Pinball, 1973 by Haruki Murakami

Posted on September 2, 2015 at 4:20 PM Comments comments (0)

Wind/Pinball: Two NovelsWind/Pinball: Two Novels by Haruki Murakami

My rating: 4 of 5 stars

Haruki Murakami fans have been waiting for three decades for English translations of his first two novels. If you’re anything like me, you probably feel deprived of a secret masterpiece, a bit like a Beatles fan who knows there’s a Lennon & McCartney recording out there not available to the masses. Part of this is to do with the author’s ambivalence about his early output; but Hear the Wind Sing and Pinball, 1973 are also predecessors to his 1982 masterpiece, A Wild Sheep Chase – no wonder his English-speaking admirers have been clamouring for an urgent print run.
The question is do these two ‘kitchen table novels’ (as the author calls them) have as much literary merit as his greatest works? I would not hesitate to say “yes.” Put it this way: Murakami’s minor novels are better than most modern masterpieces. The fact he now distances himself from these amateurish efforts only confirms my worst thought – I might as well pack up and stop writing if somebody can produce something as good as this without even trying. Either that or Murakami, like many of his characters, is a master of self-deprecation who’ll do anything to avoid the spotlight.
Hear the Wind Sing is an incongruous but brilliant reflection on life from the perspective of a narrator who spends an entire summer drinking beer at an obscure bar with his friend, The Rat. With nothing to do during the summer break from his Tokyo College, he finds himself dating a traumatised, manic depressive girl with nine-fingers and reminiscing about his three previous lovers. You could say nothing really happens, but that doesn’t stop this being such an enthralling read. Like all Murakami novels, the writing is stupendous in its clarity, catchy in its purpose, and Rock & Roll in its delivery. It’s no co-incidence that one of his characters is asked in his classic 1987 novel, Norwegian Wood, ‘are you trying to be that guy from Catcher in the Rye?’ Hear the Wind Sing is where Murakami first discovered his talent for creating the archetypal conformist-outsider, the man who prefers to spend the rest of his life listening to Jazz music and reading Classic Literature, even if he must also eke out a living and pay his taxes like everybody else.
The best features of any Murakami novels are the subtle humour and absurdist ‘Kafka-esque’ situations his characters encounter in their mundane lives. For this reason Pinball, 1973 is the better of the two books. Written as a direct sequel to Hear the Wind Sing, this time the narrator has created a modestly-successful translation company and is living with two beautiful twins that appear in his life without any explanation and disappear again with as much mystery (a common theme that seems to emerge in all later novels). Yet this time there’s a pang of melancholy in the narrator’s tone; everyone has a place to get to without knowing how or where. Instead of smoking a pack of Salem 100’s after sex, the girls are more likely to crawl back under the covers or leave behind a tattered garment in the bathroom. Thankfully, the six months spent racking up a six-figure score on a Pinball machine give the narrator a sense of purpose and structure to his life.
The Rat meanwhile is learning that he cannot live as a part of society. Yes, he’s rich (the son of a wealthy conman), has a carefree life of drinking and regular sex with the local women, but something is missing. If only he knew what. Everything is one hundred mile-an hour, just like Dean Moriarty in Jack Kerouac’s On the Road. Annoyed by his increasing introspection and impatient at the banality of life, The Rat recognises his own loneliness in the woman he’s dating. Could it be that his girlfriend’s magnetic pull is chaining him to the ordinary world he’s trying to escape?
Murakami has attracted criticism in his own country for being too westernised and ignorant of the idiosyncrasies of Japanese Literature. This makes sense in Japan, but not to an English or American audience. Though fortuitous in how he got here, Murakami is undoubtedly the voice of the sceptical undergraduate and spokesperson for those day-dreamers that are mature enough to understand you can be cool without being a rebel. An imperfect comparison would be a fusion of Jean Paul Sarte and William Burroughs, but comparisons don’t do justice to Murakami. As he explains in the preface: ‘To tell the truth, although I was reading all kinds of stuff – my favourite being nineteenth-century Russian novels and American hard-boiled detective stories – I had never taken a serious look at Contemporary Japanese fiction. Thus I had no idea what kind of Japanese novels were being written at the time, or how I should write fiction in the Japanese language.’
But whatever the origins of his unique writing style, Murakami has never doubted his ability to convey the loneliness of existence. The best analogy of the promise of life and its disappointing reality is described in one sentence at the beginning of Hear the Wind Sing. After meeting The Rat on a drunken night out and culminating in a beer-fuelled car crash, the two of them are too intoxicated to care about the damage done to the vehicle and carry on drinking lager. The euphoria makes them feel like they can run for sixty miles. ‘But what we had to do in reality was make payments over the next three years, with interest, to city hall for the cost of repairing damage to the park.’ This resignation to the norms of adult life haunt Murakami and have formed a sombre undertone to most of his work from the beginning. One day you’re putting up barricades during the 1969 Tokyo University uprising, the next you’re refurbishing your kitchen with a bank loan and paying for foreign holidays on a credit card. Hardly something to complain about, but not heroic, either.
Perhaps the biggest surprise is just how well these works fit into Murakami’s back catalogue. Though I’d recommend A Wild Sheep Chase or Dance, Dance, Dance for first-time readers, Hear the Wing Sing and Pinball, 1973 represent a good place to start for the curious amongst you. The writing is unpretentious, clear and filled with humour, yet still has an existential feel to it. For long-term fans it’s business as usual without getting stale; for the uninitiated these two short novels are the beginning of a new love affair with a great writer.
The remaining question is why has Murakami still not won the Nobel Prize for Literature?

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Review of Strange Weather in Tokyo by Hiromi Kawakami

Posted on August 29, 2015 at 10:40 AM Comments comments (0)

Strange Weather in TokyoStrange Weather in Tokyo by Hiromi Kawakami

My rating: 3 of 5 stars

Strange Weather in Tokyo is a book you can finish on a rare day off work. At only 176 pages and with no real storyline, other than an evolving relationship between two lonely individuals, the words are as clear as the Kanto Springs.
Kawakami’s writing is beautiful in its simplicity and elegance, the descriptive passages magisterial, the dialogue resplendent with apprehension and undeclared love. Yet there’s something underwhelming about it all. A bit like a Rock album with great musicianship and virtuosity that piques your attention for one listen before going back on the shelf for two years.
Let’s start with the positives: Allison Markin Powell’s translation is a stupendous achievement, bringing out the best in Kawakami’s illustrative writing. Imagine a palette of pastel colours mixed with cherry red and seaweed-green – this is the environment you inhabit. For example, the author’s description of a visit to a guest house by the sea transports you to the sound and smell of the bedroom overlooking the shore. ‘I went back to my room and opened the window, letting the night air rush in. The crashing of the waves sounded much louder now.’ Kawakami’s eye for capturing the scenery around her is a testament to the highest standards of Japanese Literature, whether it’s at a cherry-blossom picnic in the city or a trek through the Tokyo hills in search of mushrooms. This is best summarised in her constant preoccupation with food, which plays a big part of the social setting in this novel. ‘Thin, almost-transparent slices of octopus were submerged in a gently boiling pot of water, and then immediately plucked out with chopsticks when they rose to the surface. Dipped in ponzu sauce, the sweetness of the octopus melted in your mouth…’ You can imagine yourself in the restaurant, your taste buds salivating and your nostrils expanding at the waft of steam coming from the plate. Only Yoko Agawa writes with the same skill.
The two protagonists are more of a mystery. Tsukiko, the unmarried 40-year-old with a penchant for beer and Saké, cuts a frustrated figure, aware of her parents’ disappointment that she’s not made anything of her life. Not quite a loner, she has enough courage to drink in local bars and pass time in department stores shopping for shoes. Even she doesn’t quite know what she’s looking for in life. A vague reference to a former boyfriend and her inability to articulate her feelings go some way to explaining the manic depressive tendencies of her character. She likes nothing better than curling up in bed for three days without moving.
Her former school teacher, always referred to in the reverential as ‘Sensei’, is more in control of his emotions, but just as lonely. A man of routine and order, who always carries a briefcase and goes to the market on the 8th, 18th and 28th of every month, he has a taste for fine cuisine and Haiku, yet is just as happy watching baseball and supping beer. His ex-wife haunts him like an unwanted silhouette, and is often a barrier between him and Tsukiko. Yet the stability of his relationship with his ex-student relies on the maintenance of the teacher-pupil dynamic. Is Tsukiko looking for a father-figure, and he, the young mistress he never had?
Love is not rational, as we all know, and this idea is now one of the most common clichés in romantic discourse. The understanding that human beings can sacrifice their ego in pursuit of a higher purpose, to cherish and possess another person, to define themselves by the other, even submerge identities with them and crave them as an extra limb will always fascinate and inspire us with homilies and paeans to the uncontrollable forces of love. Kawakami captures this juggernaut rush of doubt and fear, juxtaposing the rational with the irrational. In Tsukiko’s case, how can she be falling in love with a man thirty years her senior, who used to be her teacher? A date with a former classmate makes her realise the hopelessness of her situation – she cannot function without the Sensei.
But Tsukiko is more than just a spectator on the periphery of life, and the Sensei is a master of understated humour. In one scene he tells a story about seeing his wife’s Doppelgänger, narrating for Tuskiko while doing a headstand on the beach. Another tale about the death of the family dog reveals a bizarre antagonism between his wife and son, with the former claiming the dog will be reincarnated as her. (‘For the rest of the meal, she continued to bark. Arf, arf, arf. Both our son and I lost our appetite and quickly got up from the table.’)
So what prevents this book from getting a four-star review? There’s a feeling the story could be longer, more layered, open to a wider cast of characters. Using the Rock Music metaphor again, it’s like a Progressive Metal Band demonstrating their superlative musicianship on an album of less than six songs.
Unlike good cuisine, a novel that leaves you insatiate will always be a minor disappointment, even if the writing is poetic. But there are enough reasons to read Strange Weather in Tokyo and admire the perspicacity of the author’s writing. And as a love story, you could argue the book mirrors the emotions of longing for that other person – you always crave more.



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