Monthly Archives: June 2009

Playing the Markets: the BBC tackles business issues in radio drama

In the last few weeks, I have listened to three plays the BBC has broadcast about business and economics. (They may have broadcast more which I didn’t hear!) The first was the Great Hargeisa Goat Bubble by Julian Gough. Then, yesterday and today were two plays about the collapse of Enron, Power Play 1 and Power Play 2 – Wilful Blindness, both by Margaret Heffernan.

The Great Hargeisa Goat Bubble, which you can read as a short story on Gough’s website, is a parable of markets – in this case, goats in (you guessed it) Hargeisa – the evolution of derivatives and a bubble, leading to a crash. It was told in a surreal fashion, was simultaneous humorous and educational – a pretty successful combination. It is rare that economics makes one laugh.

The two pieces about Enron were very different. The first was a complex sound collage, with the narrative about a trader joining the trading desk following deregulation of the Californian energy market being played out besides excerpts from Enron’s annual reports, statements to Congressional committees and news reports. This complex structure made it quite hard to follow the issues – this may have been deliberate, since the Enron story was complex and hard to follow itself. The second had a more linear narrative, imagining a meeting between former CEO Kenneth Lay and a former Enron employee on 4 July 2005 – the day before Lay’s death, after he had been found guilty of fraud but before he had been sentenced. Neither of the plays about Enron worked well for me – the first because it seemed to elide complicated issues in a simplistic fashion, the second because it painted Lay as wilfully naïve.

Both the Enron and the goat bubble plays investigate the sometimes absurd ways in which financial markets can operate, and all three plays tackle difficult, complex subjects – the economics of markets, the creation and use of derivatives, the ability to rig markets, the importance of regulation and the ethics of business abuse. It is interesting – and commendable – that the BBC is using the medium of plays to broadcast about these topics. The breadth of Power Play 1 made it the more difficult play; in contrast, the simplicity of Power Play 2 – a three-handed, “typical” radio drama, concentrating on the ethical dimension – enabled it to explore more. But I think the Hargeisa Goat Bubble worked best – distilling a complex field with great humour and warmth.

Niall Ferguson on an evolutionary approach to financial history

Niall Ferguson gave the Gresham annual special lecture yesterday in the grand surroundings of the Guildhall, which marked the publication in paperback of his latest book, “The Ascent of Money”. (It was also the title of a Channel4 series earlier in the year.)

This was the title of his talk, too; it was subtitled “an evolutionary approach to financial history”, which means it covered two of my interests – evolution, and finance and economics. Indeed, I have just finished reading a comparison of the evolutionary ideas of Richard Dawkins and Stephen Jay Gould – both of whom Ferguson name-checked in the first couple of minutes. This year is the 200th anniversary of Darwin’s birth, and the 150th anniversary of the publication of The Origin of Species, so it was an apposite subject.

Ferguson said that he took a Darwinian view of economics, and he admitted this wasn’t necessarily an original stance: US Assistant Secretary for Financial Markets Tony Ryan said to the Congress in September 2007 “Just as some species become extinct in nature, some new financing techniques may prove to be less successful than others”; the Economist recently described the “Darwinian world” of hedge funds and business start ups.

Ferguson described how Darwin was influenced by the economists of the industrial revolution, notably Malthus, whose ideas of resource constraints lead Darwin to develop his ideas on natural selection through competition. (Competition remains a constant metaphor in business.) Darwin in turn influenced economists. Thorstein Veblen asked “Why Is Economics Not An Evolutionary Science?” in 1898; Joseph Schumpeter envisaged an evolutionary quality to economic life [PDF], using the term “industrial mutation” to describe innovation; and Nelson and Winter wrote An Evolutionary Theory of Economic Change in 1982. More recently, Andrew Lo of MIT published “ The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective [PDF]” in 2004.

Evolution through natural selection is of course only an analogy for the changes in the economy, industry and finance; but it is one that fits quite well. Ferguson was able to identify

  • mutation, as financial companies innovate and create new products and business processes
  • competition for customers and staff – the innovators – in a crowded market place
  • selection of financial companies, and their products, as they merge or fail, producing differential survival
  • speciation, as new business models are created (such as internet banks)
  • extinction, as other business models disappear disappear.

Ferguson went further, suggesting that the employees of financial firms acts as the genes or (in Dawkin’s definition) memes, the agents of cultural inheritance in organisation.

Whilst he didn’t use the phrase, he also described one of the drivers of Gould’s theories, mass extinction: the number of hedge funds has been greatly reduced in the past couple of years, as a result of the credit crunch – Reuters anticipates a reduction of 50% in the number of funds this year alone.

I think one can take the metaphor too far though. Companies are neither species or organisms, but institutions comprised of individuals. Ferguson accepted that innovation isn’t mutation – it is a directed process. The ideas that come out of innovation can be copied freely, without sex between institutions (copyright allowing). The intervention by governments, regulators and central bankers can stop businesses going bust (RBS, HBoS and Northern Rock in the UK) and force others into the arms of competitors (Bradford & Bingley, Alliance & Leicester, Dunfermline BS, and others) – Ferguson thought this was akin to very un-Darwinian intelligent design (although he questioned its intelligence!).

He was sceptical about sense of keeping ailing institutions going, worrying about the trouble that keeping these dinosaurs going would lock into the financial system. Better, he thought, to allow them to go bust, opening up new niches for more competitive institutions – more diverse, smaller, more nimble, and perhaps more innovative. We won’t know if he’s right until the credit crunch, and its long term effects as a result of the vast sums spent throughout the world on fiscal stimulus and capital injected into banks, insurance companies and other institutions, have worked their way through the economy and the business cycle: more boom and bust, perhaps.

Andrew Lansley on the NHS and improving health outcomes for all

Never having been to the RSA before, I found myself there three times last week. This wasn’t wholly co-incidence – I had arranged to meet someone in the building, and that prompted me to go to a couple of events there.

One of these was the opportunity to hear Andrew Lansley, the Shadow Secretary of State for Health, talk about the Conservative Party’s plans for the National Health Service. (Audio download and a PDF of the speech are available.)

Unlike many of the audience, I do not have experience of working in health – I was sandwiched between two doctors. Nor am I a Tory supporter – but since they may well form the next Government, I wanted to take the opportunity to hear what Mr Lansley had to say.

What he said made sense, but perhaps understandably it lacked detail: he said what the Tories would aim for, but not how they would actually do it. It all made sense, but I couldn’t work out if it would actually happen. Lansley specifically stated that it should be cost neutral.

The Conservatives’ focus would be on the outcomes of health care, providing local autonomy and decision making at several levels.

In essence, Lansley wants to empower local services – remove central government “management-by-targets”, reduce bureaucracy, make GPs responsible for the patients’ “pathway to care” including owning the commissioning budgets for healthcare, provide “real patient choice” (I’m not too sure about this one – choice means many things to many people – choice of hospital, doctor in a hospital, a voice in the treatment offered, and so on) including opening up health provision to new providers (did someone say “privatisation” just there?) and so on.

I liked his views on devolving health decisions to local – even GP – management: devolving relevant decisions at as local a level as possible makes sense, and I completely agree with removing central government targets, which produced such perverse incentives as those seen in Stafford Hospital. But GPs should be providing primary health care: are they really the people to be managing health budgets?

Local decision making and autonomy could also mean that what is known as “the postcode lottery” – that favourite of headline writers – becomes more acute: treatments available in one area may not be available in another. Will health ministers be happy to live with that when they are questioned by the media?

For local health trusts to be really accountable, would they be elected? In which case, might there not be an increase rather than a decrease in bureaucracy, as functions were duplicated as they are decentralised?

Managing stakeholders in a change such as this would be difficult, too: keeping health workers and other service providers on board would be essential.

Whilst I think many of the ideas are good, I therefore doubt they will be put into practice: changing the system might just be too hard. (Although the alternative – let it fail and start again – is not a pleasant thought.) This is why the details are important: why actions as well as aims need to be understood.

I’ll wait and see. And maybe take out health insurance, just in case…

Things I talked about at Tuttle last week

I have written about Tuttle recently. I was there again last Friday, and whilst I spoke with few people, I was once more amazed and pleased at the breadth of topics people were discussing.

So, mostly as an aide memoire for me rather than a full blown blogpost, I wanted to keep track of the topics of conversations at Tuttle.

On Friday, I had conversations about:

  • debt management and the recession
  • social media and marketing
  • green energy production
  • sound environments and installations for children
  • political transparency and activism in Northern Ireland
  • new media strategies in government departments and quangos
  • the nature of social enterprises
  • innovation and what governments and universities can do to promote it

and a couple of other things that I meant to scribble down but didn’t.

Variety, as they say, is the spice of life!