Media, people, stock market and academics can’t they work together?. No

In my last post of 2008, about the consumer confidence and the economic crisis in the press. I kept wondering what happened in 1998, when the consumer confidence indicators went down and all the press started talking about the economic crisis, something like what happened in 2008. The thing is that I did not remember anything significant in 2008, I kept wondering until today.

If you look back now for example at the Dow Jones (not very good to economic research is better the S&P), the biggest stock market.

Dow Jones 1997-2009

You say… 1998?… the what?… How come that for the media and consumers the “economic crisis” was something as big as now. You just think people and media went ballistic. Then you look a little bit more back and compare. Another quick look at google finance:

Dow Jones 1995-1998

Then you say, oh! ok, I see. Understandable, now I know why people and media could be worried in 1998.

I don’t like too much the stock market thing, although once I was in an university competition number 5 out of 200. But I had it clear that I would only put real money on the stock market if I never need that money, and so far I’ve never had “enough” money. Which I’m happy to have done looking at the last chart. I’d rather use it for businesses I’ve created. Which by the way they have always gone great (remembering my last post about the intrapreneur beliefs, I have to admit that I had always had the luck to be around the right people).

Anyways; people feelings, media reports and the stock market, seem close subjects but just so impossible to study them for academic purposes. That is to try to find the truth out there.

The Intrapreneur Manifesto.

This is slide show is by Saranyan. I like him a lot for various reasons, but basically he’s one of the greatest bloggers on intrapreneurship, he’s from Asia where according to the internet is THE place of entrepreneurship, he also studied a PhD, he has very good points and he makes very good presentations! I have been with him since his “begininings”

Check this presentation. The only thing I would change it’s about starting a coffee, as I don’t feel it’s good for me. I guess I can do it with an apple.

The economic crisis: When will it finish and how it started.

This week I went to the library of the Danish language center. I went to return some books (for learners) and had a little conversation with the librarian in Danish. Then we switched to English, as many Danes do when they see you’re struggling. Then he asked me: “So, you study economy, when do you think the crisis is going to finish?” I thought a second and said: “5 years to really recover”. He replied back: “5 years!, that’s long time, uh?!. Is that what you really think?”. I said something like. “Some say now is the lowest point of the economy. Others say in three months things will start recovering. Other 2 years and others… more. So let’s say 2014 to really see the improvement.”
While I was saying that a mix of articles at nyt, financialtimes, intereconomia, the coming of Obama, commercials or American realtors, the economic crisis/consumer confidence graph, and few other things, quickly run over my head. I followed, “You know, the economy comes in cycles, so things will improve. When? Nobody knows. But perhaps we will not see in a very long time the kind of live many people had before”. Then I remembered the Cities of Jane Jacobs, and her worst economic dream: “Having all the main cities stagnate at the same time, and little by little all loosing their skills”.

A few months ago in the birthday party of Bram, many recent graduates (economists, mastered in businesses, etc.) and young academics were talking about the upcoming of the financial crisis, and how the cousins from Island just got quite screwed. Some pointed out the housing market, but I showed my skepticism towards the importance of the housing, after all if you add the price of all foreclosure and related in the US, that was only around 200 billion. Which is peanuts compared with the amounts of billions that were being lost. I have always been more inclined to point suspect about the artificial low interest rate in the U.S., the debt, the high military expenses (the 3 are strongly connected), I guess this is Krugman’s and influence. That day, I even said that this was the death of the theories of the National Innovation System, something that made all the IKE guys around quite shocked. Not that I don’t love those theories, but I doubted of the extreme relevance of the “National System” term, when the Global seemed to be the dominant. To ease the feelings and the high probabilities for me to be wrong, I said I was exaggerating.

But going back where I wanted to go, now I think that I underestimated the role of the housing. Of course this is connected with the ability of money by the artificial low interest rate. But here come my moment of light.

I was talking with my wise grandma in Christmas. She’s 75 and she’s very intelligent, however because of the situation in Spain when she grew up, she did not even finish primary education. I asked her: Why do we have this crisis?. She replied without any doubt: “Because everyone wanted to get a bigger house, or a second or a third one. Have you seen how many houses they have built? And the prices kept increasing to a ridiculous level! If people would have stayed where they lived, the economy would have been ok. Look at your cousin*, she sold her old apartment, for 30 million (of pesetas) when she bought it for 12. She bought her new house for 40 and wanted to sell it for 75. Cash the money and get another house for 50. Her neighbor was lucky and sold a similar house for 75, but that was just crazy! But in the first place, why did she need a bigger house? You sleep in one room, you cook in another, you don’t need anything else! She should have stated in the first apartment and everything would be just fine. Because they make good money, and they would have been happy, now they are just worried. This is her case, because I know it, but thousands are like that.”

I replied. “Grandma, I have been thinking about it a lot, and I think you are right”.

Then I saw it was confirmed the death of the experience economy. Ok, I’m exaggerating.

* the identity of my family member has been changed.

Cities and the Wealth of the Nations. Principles of Economic Life. By Jane Jacobs (1984).

Since Richard Florida keeps quoting Jane Jacobs (1916-2006), and he even said several people thought she should have received the Nobel Prize in Economics, and on the local-regional development literature, she’s known for the Jacobian externalities. I habe been quite interested in her writings. Christmas seemed the perfect time to read one of her books. I wanted to read, her most famous book The Economy of Cities (1969), but there were not available copies in the library so I chose the next one, as authors usually repeat their ideas.

It was a pleasant reading. I’m used to read the most recent publications, so it’s really interesting read a whole book from 1984, with the fashion ideas of that time (such as the nuclear threat, the “French” European Economic Community, the stagnation of UK and USA or the amazing growth of Japan). Reading her planning and economic theories, one can better see in what perspective people in 25 years will be reading what we are writing now. Interesting enough, she takes her time to explain about the economic crisis and lack of development, which makes a perfect reading for early 2009.

 

Jacobs draws on an impressive amount of economic theories, not only the typical Anglo-Saxon; Adam Smith, Marx-Engels, Keynes, Fisher, Phillips, Marshall, but other such as the Arab, Ibn Khaldun (1332-1406), the French Cantillon (1730), Soviet B. N. Khomelyanski or Swedish Myrdal, among many others. Again, she does not only puts examples about American cities, but Egypt, Mexico, Tokyo, China, Uruguay, Taiwan and many European. It obviously called my attention the Danish and Spanish examples.

 

For her, the entrepreneurs, individuals by themselves, or any national system are in a second position. First are cities (City-Region Innovation System, anyone?). She does an outstanding job explaining the importance of the cities for the society and economy. More or less I had this notion clear, but it’s compelling reading her research on that. I have to say, it still surprises me so many educated people who give such a heavy importance only to the nation (specially when they’re not small, but fragmented), or many disdain the crucial role of the cities (I found this among many American).

 

There are 6 concepts and theories I would like to share, without order of relevance are.

1. How the Marshall Plan worked for Europe, but can’t work for other places. (I have recently browsed a 2007 book praising the Marshall Plan and how it should be used again… it never gets old?). 
2. The “backward” city-nation concept. When would we stop saying “developing country”? They’re not developing!! 
3. The pros of having a currency for every city, something that today looks even more weird, but how it would enable (and disable many things) a feedback for the economy of every city. I believe in the Euro, but I don’t think the German cities are that benefited to share the same currency with Southern Spain. But of course is better than Latin American cities using the US dollar 
4. The importance of the military subsidies, she puts historic and world some examples, but in rural USA (I think some Presidential candidates referred to them to the “real America”) this is blatant, funny thing is that they don’t even appreciate these subsidies come from the cities. (page. 106 about NYC historic tax yield). 
5. This is very connected to the finding of a Princeton think tank who researched on the reason to empires to fall. First heavy military expenses dependence (many agree that was the reason why in 1989 the U.R.S.S. finally collapsed), and second for increase political participation of the regions with linguistic or ethnic awareness. 
6. The necessity is not the mother of invention, she draws beautiful examples from “Aesthetic curiosity- The root of invention” by M.I.T. professor, C.S. Smith (1975).

 

Well, there are dozens of very interesting stuff, she would say I forgot the import-replacing theory. I highly recommend her reading. Sometimes her theories are fuzzy, and sometimes of course she had it wrong, but in many cases for so little. For example she talks about the importance of trade barriers to harm an economy. She identifies some problems that would make Japan stagnate, but does not talk about the trade barriers. In the late 80’s that happened with Japan, and was because of the trade barriers the U.S. put. (some say after Japan broke the unwritten contract and stop buying U.S. debt). Too bad we don’t have Jane Jacobs among us today, the Nobel Prize comitee, should have to wonder.