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Betting on ideas: Wars, invention, inflation
Book rev~,ws
163
productivity can have no role in the firm's decision making'.) At a number of places, the challenges to technical economic theory seem overstated and even glib. One is unlikely to learn much from t~:is book. Most of the arguments in their verbal form have been stated many times before, and none of them ~re supported here by either carefully developed theory or by any data. Many of Kaldor's propositions might be developed into useful and interesting models, while others might well prove to be extremely difficult to formulate into a logically consistent theory, but at this level it is difficult to know which is which. Obviously the questions are controversial, and those who already agree with Kaldor's conclusions are as likely to be pleased with this book as are those who do not agree likely to be hostile. Unfortunately, there is very little material here that will serve to change anyone's mind. John G. Cross University of Michigan, Ann Arbor, MI USA Reuven Brenner, Betting on Ideas: Wars, Invention, Inflation (The University of Chicago Press, Chicago and London, 1985) pp. xxii+247, $32.00. In Betting on Ideas Reuven Brenner extends the insights into human behavior under uncertainty he first put forth in History - The H u m a n Gamble (1983) by applying his theory to war, inflation, creativity and the history of French inheritance laws (the latter two topics in collaboration with GabrieUe B~.~nner). Having found the first book to be ingenious and fascin~ ring, yet terribly frustrating, I can now report that the second work is equall3 • ingenious and fascinating, and at least as frustrating. In both works the core of Brenner's analysis derives from his answer to the question: 'Why do people gamble?' or more accurately, 'Why do people participate in lotteries whose expected return is lower than ~:,:. :icket cost?' He dismisses the standard economic explanations of risk-loving behavior stemming from an oddly-shaped utility function of money as being both silly and inconsistent with the f~ct that people who gamble often also hold insurance. Jettisoning the assumption of selfish individuals, Brenner (rather like Duesenberry) argues that people care about their absolute and relative levels of wealth. He models the latter feature by directly entering the proportion of the population that is richer the.. oneself as an argun,ent in the utility function. It is then easy to see why there are conditions under which a small sum of money which makes no appreciable change (to a first-order approximation) in one's status is worth risking for a large sum that significantly changes both one's absolute and relative wealth. This insight is simple, neat and generally overlooked by most economists, who distrust what tl'._~yview as ad
164
Book reviews
hoc behavioral assumptions. (It is noteworthy that one of the most prominent exceptions to this statement, Duesenberry's relative income hypothesis, is relegated to also-ran status in standard macro~oaomic textbooks, partly for its reliance on non-standard behavioral assumptions). However, things begin to get sticky when Brenner tries to develop his argument. Brenner sees this insight as the central hypothesis in a grand, unified theory of human behavior under risk that accounts for innovation, group as well as individual risk-taking, creativity, war and inflation, among many others. The point is that all risk-taking behavior is some sort of a gamble occasioned by abrupt changes in people's relative status and expectations. Because of the way he has set up his model, population growth automatically shifts the distribution of wealth and serves as a major exogenous determinant of innovation. Brenner supports his analysis by demonstrating that his ideas can be shown to be compatible with much existing theory in the analysis of war or inflation, or changes in French inheritance law. He warns us in the foreword that his synthesis may involvq yers~mplification, but argues that such simplification is needed to clariflO~he issues. Where his method falls short is in showing the applicability of his theory through the creation of numerous plausible scenarios that can be tied to his risk-taking explanation. The book presents us with a whole set of hypotheses about a wide range of issues that may or may not be fully consistent with Brenner's main ideas. It is not particularly clear, however, that these hypotheses uniquely derive from his theory. Brenner thinks it is sufficient to argue that at least the examples chosen do not contradict his theory. He reasons that there does not exist an alternative (economic) thesis that seeks to explain so wide a range of phenomena. But to argue in this fashion is to misperceive the difficulties involved in making his case. For while the examples chosen by Brenner are certainly interesting and his explanations ingenious, they are a long way from being convincing. Too often he sidesteps the problems of distinguishing between his thesis and other existing hypotheses designed to explain the scientific illustrative cases he has chosen. Moreover, too much of his discussion concerns itself with linking his ~3rk to other scholars' ideas that are 'similar' to his. The existence of interdependent utility functions and the relevance of measures of relative income is not in itself a novel idea. The a priori plausibility of such "deas in explaining a great many social phenomena is not in doubt. But Brenner must establish the value of his formulation of interdependent utility functions by distinguishing it from the variety of i,formal, wen-defined alternatives that exist. It is not enough to say that other people's theories sound like his, because the similarities are readily apparent. What needs to be stressed are the differences, thus enabling us to judge both the soundness and the applicability of his theory.
Book reviews
! ~3
To give just one example: In discussing the political economy of inflation, Brenner sees Keynes' concerns with the habitual and the unexpected as being given new precision through the use of his model. But what matters here is not so much the relative wealth of an individual in relation to society, but how his realized wealth may deviate from his expected wealth. What is central to the discussion is a theory of how expectations are formed and how people react to failed expectations. In this ease, the~i, what we must do is successfully distinguish Brenner's work from other models which incorporate expectations and expectation-forming mechanisms. Authors as diverse as Lueas, Hirschman, Scitovsky, Cross, and Nelson and Winter have elaborated models that address the issue of how expectations are formed and the implications of their hypotheses on macroeconomic behavior. But how are we supposed to know whether Keynes' concerns with disequilibrium and adjustment are more compatible with models of regret (Hirschman) c r adaptive economic behavior (Cross) or the political economic analysis of irJlation (Weitzman or Keynes' own 'animal spirits')? Though these works have much that overlaps with Brenner, the differences are significant enough to make a more elaborate analysis of Brenner's thesis worth waiting for. Its flaws notwithstanding this is an interesting book that deserves to be read. It will generate much heated discussion, and in some circles, irritation. I look forward to work that will go further in dealing with the issues this stimulating book raises.
Reference Brenne: Reuven, 1983, His:ory - The Human Gamble (University of Chicago Press, Chicago and ".ondon).
John Nye Washington University, St. Louis, MO, USA
Gunnar Eliasson, The Firm and Financial Markets in the Swedish Micro-toMacro Model - Theory, Model and Verification (The Industrial Institute for Economic and Social Research, Distributed by Almquist and WiksellInternational, Stockholm, 1986) pp. 419. The wide ranging scope of this book is suggested by th,~ titles of its eight chapters: I. Project Background, II. Overview of the MOSES economy, III. The investment Financing Decision in a MOSES firm, IV. Money in the MOSES Economy - The Determination of the Interest rate, V. The Endogenous Growth Cycle - Mathematical Summary of Theory, Vi. Growth in the MOSES Economy - The Real Side, Vii. Equilibrium, Coordination
163
productivity can have no role in the firm's decision making'.) At a number of places, the challenges to technical economic theory seem overstated and even glib. One is unlikely to learn much from t~:is book. Most of the arguments in their verbal form have been stated many times before, and none of them ~re supported here by either carefully developed theory or by any data. Many of Kaldor's propositions might be developed into useful and interesting models, while others might well prove to be extremely difficult to formulate into a logically consistent theory, but at this level it is difficult to know which is which. Obviously the questions are controversial, and those who already agree with Kaldor's conclusions are as likely to be pleased with this book as are those who do not agree likely to be hostile. Unfortunately, there is very little material here that will serve to change anyone's mind. John G. Cross University of Michigan, Ann Arbor, MI USA Reuven Brenner, Betting on Ideas: Wars, Invention, Inflation (The University of Chicago Press, Chicago and London, 1985) pp. xxii+247, $32.00. In Betting on Ideas Reuven Brenner extends the insights into human behavior under uncertainty he first put forth in History - The H u m a n Gamble (1983) by applying his theory to war, inflation, creativity and the history of French inheritance laws (the latter two topics in collaboration with GabrieUe B~.~nner). Having found the first book to be ingenious and fascin~ ring, yet terribly frustrating, I can now report that the second work is equall3 • ingenious and fascinating, and at least as frustrating. In both works the core of Brenner's analysis derives from his answer to the question: 'Why do people gamble?' or more accurately, 'Why do people participate in lotteries whose expected return is lower than ~:,:. :icket cost?' He dismisses the standard economic explanations of risk-loving behavior stemming from an oddly-shaped utility function of money as being both silly and inconsistent with the f~ct that people who gamble often also hold insurance. Jettisoning the assumption of selfish individuals, Brenner (rather like Duesenberry) argues that people care about their absolute and relative levels of wealth. He models the latter feature by directly entering the proportion of the population that is richer the.. oneself as an argun,ent in the utility function. It is then easy to see why there are conditions under which a small sum of money which makes no appreciable change (to a first-order approximation) in one's status is worth risking for a large sum that significantly changes both one's absolute and relative wealth. This insight is simple, neat and generally overlooked by most economists, who distrust what tl'._~yview as ad
164
Book reviews
hoc behavioral assumptions. (It is noteworthy that one of the most prominent exceptions to this statement, Duesenberry's relative income hypothesis, is relegated to also-ran status in standard macro~oaomic textbooks, partly for its reliance on non-standard behavioral assumptions). However, things begin to get sticky when Brenner tries to develop his argument. Brenner sees this insight as the central hypothesis in a grand, unified theory of human behavior under risk that accounts for innovation, group as well as individual risk-taking, creativity, war and inflation, among many others. The point is that all risk-taking behavior is some sort of a gamble occasioned by abrupt changes in people's relative status and expectations. Because of the way he has set up his model, population growth automatically shifts the distribution of wealth and serves as a major exogenous determinant of innovation. Brenner supports his analysis by demonstrating that his ideas can be shown to be compatible with much existing theory in the analysis of war or inflation, or changes in French inheritance law. He warns us in the foreword that his synthesis may involvq yers~mplification, but argues that such simplification is needed to clariflO~he issues. Where his method falls short is in showing the applicability of his theory through the creation of numerous plausible scenarios that can be tied to his risk-taking explanation. The book presents us with a whole set of hypotheses about a wide range of issues that may or may not be fully consistent with Brenner's main ideas. It is not particularly clear, however, that these hypotheses uniquely derive from his theory. Brenner thinks it is sufficient to argue that at least the examples chosen do not contradict his theory. He reasons that there does not exist an alternative (economic) thesis that seeks to explain so wide a range of phenomena. But to argue in this fashion is to misperceive the difficulties involved in making his case. For while the examples chosen by Brenner are certainly interesting and his explanations ingenious, they are a long way from being convincing. Too often he sidesteps the problems of distinguishing between his thesis and other existing hypotheses designed to explain the scientific illustrative cases he has chosen. Moreover, too much of his discussion concerns itself with linking his ~3rk to other scholars' ideas that are 'similar' to his. The existence of interdependent utility functions and the relevance of measures of relative income is not in itself a novel idea. The a priori plausibility of such "deas in explaining a great many social phenomena is not in doubt. But Brenner must establish the value of his formulation of interdependent utility functions by distinguishing it from the variety of i,formal, wen-defined alternatives that exist. It is not enough to say that other people's theories sound like his, because the similarities are readily apparent. What needs to be stressed are the differences, thus enabling us to judge both the soundness and the applicability of his theory.
Book reviews
! ~3
To give just one example: In discussing the political economy of inflation, Brenner sees Keynes' concerns with the habitual and the unexpected as being given new precision through the use of his model. But what matters here is not so much the relative wealth of an individual in relation to society, but how his realized wealth may deviate from his expected wealth. What is central to the discussion is a theory of how expectations are formed and how people react to failed expectations. In this ease, the~i, what we must do is successfully distinguish Brenner's work from other models which incorporate expectations and expectation-forming mechanisms. Authors as diverse as Lueas, Hirschman, Scitovsky, Cross, and Nelson and Winter have elaborated models that address the issue of how expectations are formed and the implications of their hypotheses on macroeconomic behavior. But how are we supposed to know whether Keynes' concerns with disequilibrium and adjustment are more compatible with models of regret (Hirschman) c r adaptive economic behavior (Cross) or the political economic analysis of irJlation (Weitzman or Keynes' own 'animal spirits')? Though these works have much that overlaps with Brenner, the differences are significant enough to make a more elaborate analysis of Brenner's thesis worth waiting for. Its flaws notwithstanding this is an interesting book that deserves to be read. It will generate much heated discussion, and in some circles, irritation. I look forward to work that will go further in dealing with the issues this stimulating book raises.
Reference Brenne: Reuven, 1983, His:ory - The Human Gamble (University of Chicago Press, Chicago and ".ondon).
John Nye Washington University, St. Louis, MO, USA
Gunnar Eliasson, The Firm and Financial Markets in the Swedish Micro-toMacro Model - Theory, Model and Verification (The Industrial Institute for Economic and Social Research, Distributed by Almquist and WiksellInternational, Stockholm, 1986) pp. 419. The wide ranging scope of this book is suggested by th,~ titles of its eight chapters: I. Project Background, II. Overview of the MOSES economy, III. The investment Financing Decision in a MOSES firm, IV. Money in the MOSES Economy - The Determination of the Interest rate, V. The Endogenous Growth Cycle - Mathematical Summary of Theory, Vi. Growth in the MOSES Economy - The Real Side, Vii. Equilibrium, Coordination