Joseph Stiglitz
Freefall: Free Markets and the Sinking of the Global Economy
Allen Lane, 2010
400 Pages
£25
ISBN 978-1846142796

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With the proliferation of esoteric financial instruments, a shift toward massive private and public sector leveraging, and the slow emergence of enormous real estate bubbles, the finance sector was primed for a meltdown. Predictably, the hidden spread of risk in financial instruments like derivatives and collateralised debt obligations, combined with a diffuse over-investment in toxic sub-prime mortgages and mortgage-backed securities, led to the now infamous crisis of September 2008 and unprecedented government intervention. The many looming signs of catastrophe that appeared during the heady years after the 2000 dot-com technology bust were ignored by many free market ideologues in the financial community, but the near collapse did not come as a surprise to everyone. A few prescient analysts, including famed New York Times columnist Paul Krugman and billionaire currency trader George Soros, had publicly voiced their concerns repeatedly by noting the dangerous confluence of flawed corporate governance, inadequate regulatory oversight, and myopic asset risk management.

Few commentators, however, were as consistently outspoken as Joseph Stiglitz, a visionary Nobel laureate in economic sciences from Columbia University and former chief economist for the World Bank. Stiglitz, a political centrist and neo-Keynesian economist who worked extensively in previous Democratic administrations, warned policy makers repeatedly that the United States was headed toward a deep, painful recession if pre-emptive interventions were not made. But Fed Chairman Alan Greenspan had a close relationship with the private sector and saw no reason to reverse long-cherished beliefs in rolling back government oversight and keeping interest rates low—until it was too late.

As a result, Stiglitz’s latest writings are rife with righteous indignation. He spares no one—not even President Obama—in the absorbing, fast-paced Freefall: Free Markets and the Sinking of the Global Economy, a work that engrosses the reader and brings to life even the dullest of economic concepts. As he systemically confronts heavyweights like Obama’s chief economic advisor (and former Harvard president) Larry Summers, George W. Bush, and the CEOs of major investment banks from around the world, Stiglitz critically assesses the current state of everything from the euphemistically titled American Recovery and Reinvestment Act (i.e., the stimulus package) to the role of the Federal Reserve and  the policy responses of developing countries in the immediate aftermath of the crisis. His fast-paced prose reads like a thriller and his thoroughly researched insights are packed into an illuminating 297 pages as he scathingly separates fact from fiction, dogma from truth, and economic theory from hard and inconvenient realities.

Throughout the book, Stiglitz emphasises the borderline-jingoistic mentality that pervades much of the financial community. Emboldened by the sense of being “too big to fail”, banks engaged in increasingly risky activities and predatory lending practices. To support these activities, bankers initiated a multi-decade push for deregulation and significantly reduced government involvement in the financial sector. With hundreds of millions of dollars in political contributions, the banking sector was able to wield considerable influence in the political sphere—often at the expense of average citizens. Once the 2008 collapse occurred, bankers were only too happy to reap the rewards of their political “investment” in the form of taxpayer-subsidised bailouts and hefty bonuses. Indeed, Stiglitz deadpans that “a country [i.e., the United States] in which socialism is often treated as an anathema has socialised risk and intervened in markets in unprecedented ways.”

Of course, with their combination of astounding potential rewards, excessive risk-taking, and aggressive virility, major Wall Street finance firms have a tendency to attract and encourage the ethically challenged—the kind of people who are willing to take risks with the assets of others and show little regard to the final outcome. Stiglitz argues that we should not be surprised when markets function in a suboptimal manner; indeed, individuals acting only in their own self-interest are likely to ignore the negative effects of their actions. It should be made clear that Stiglitz is not “anti-capitalist”—far from it. He makes it apparent, however, that we cannot assume that markets will be self-correcting in the absence of a progressive regulatory regime.

Interestingly, Stiglitz is particularly vehement in his criticism of President Barack Obama. He sees little  change from the Republican, far-right days of Obama’s predecessor, the justifiably vilified George W. Bush. Although Obama was elected on the promise of “hope” and “change” and was forced into the midst of an economic crisis from his first days in office, Stiglitz claims that he has taken little restorative action beyond placating Wall Street and maintaining the status quo of the troubled global financial system. He describes how the Obama administration has shown a disturbing ongoing complacency toward bankers and an unambiguous willingness to accede to Wall Street’s increasingly brazen requests. By failing to rein in rogue banking practices, Obama has allowed a resumption of, among other things, high-frequency, high-risk transactions and a culture of outsized bonuses. Additionally, Stiglitz notes that Obama missed a historic opportunity for reform by maintaining a holdover of many of Bush’s core team of advisors, raising questions surrounding the feasibility for change under the new president.

Stiglitz lucidly outlines the painful outcomes of the recession and demonstrates that the symptoms still show only limited signs of abating. The stimulus appears to be having some material effect, although it was likely too small and included too many tax cuts and transfer payments. Unemployment, often seen as a lingering indicator of economic stability, is still hovering around 10 percent.  Although investment portfolios have recovered substantially from the lows of late 2008 and early 2009, many have still lost cherished retirement and educational savings. Furthermore, university graduates find themselves lost in the current economic climate, with entry-level jobs becoming increasingly scarce as employers tighten their belts and become increasingly reluctant to assume new salary obligations.

Perhaps most alarmingly (especially for American readers), it appears that many developed countries have squandered the opportunity to secure their long-term financial future. Stiglitz describes the well-supported contention that there has been a gradual capital outflow from developed countries to developing countries from around the world.  Oil-exporting countries, flush with cash from America’s estimated $1.4 billion in oil imports per day, have set up sovereign wealth funds that run into the hundreds of billions of dollars (Abu Dhabi alone is estimated to have over $650 billion). In addition, emerging export-based countries like China have begun to assume an increasingly activist role in international economic policy. Through actions like purchasing enormous amounts of U.S. debt in the form of T-bills and treasury issuances, the Chinese have helped to maintain artificially low interest rates and the accompanying American debt-driven consumption patterns.

Leafing through the pages of Freefall, it becomes clear that the deeply engrained neo-conservative theories of the efficient, self-regulating nature of economies are hopelessly outdated. We have seen first-hand the economic, social, and environmental devastation wrought by an over-reliance on these economic models. Stiglitz argues that the developed world needs a reformed financial system that will perform the two core functions of a sound banking system; namely, providing an efficient payments mechanism while assessing and managing risk for loans.

In addition, Stiglitz makes clear that the inherent nature of economics has fostered  a lack of responsibility in the financial sector. If we hope to overcome the embedded propensity towards amorality and, indeed, immorality, tough choices will need to be made and tougher questions will need to be asked. Citizens, policymakers, government leaders, and the private sector itself might even need to (re-)consider how we value outputs in our economy.

Stiglitz is willing to ask these big picture questions. Are employees at hedge funds, arbitrage organisations, and aggressive private equity firms really worth their big bonuses and lucrative salaries? Shouldn’t we be looking to better reward those who bring tangible assets and innovation to the economy—the entrepreneurs, the developers, the innovators? What steps can be taken to make the financial system more equitable in the short-term, more stable in the mid-term, and more sustainable in the long-term? Whether we will be able to craft an economic regime that takes into consideration a broader set of stakeholder interests and concern is up for debate.  However, one thing is certain; if decisive action is not taken soon, it sure seems unlikely.

Joel Krupa is reading for an MSc in Environmental Policy at Mansfield College, Oxford.

Joyce Appleby
The Relentless Revolution: A History of Capitalism
W.W. Norton, 2010
494 Pages
£19.99
ISBN 978-0393068948

Joel Mokyr
The Enlightened Economy: An Economic History of Britain
Yale University Press, 2009
550 Pages
£30.00
ISBN 978-0300124552

Richard Bronk
The Romantic Economist: Imagination in Economics
Cambridge University Press, 2009
400 Pages
£17.99
ISBN 978-0521735155

The financial crisis goes back to the mid-20th century, when “I like Ike” echoed through a million American homes and TV adverts suddenly became the most important factor in election campaigns. “The expense of TV spots threw officeholders and their challengers into the arms of business interests.” Politicians began collaborating in a long process of deregulation that would shift the role of government from looking after citizens to fostering the growth of corporations. “The free market ideology dominating public discourse gave cover to those in government”, convincing voters they were doing the right thing. The conditions for collapse evolved from there.

This explanation is characteristic of Joyce Appleby’s book, The Relentless Revolution. Appleby seeks to bring out the connectedness of culture, politics, technology, and the economy. Indeed, each of the books under review here make a variation on the same point: understanding economic history, and economic crises, is more than a numbers game. Taken together, these books can be read as a critique of institutionalised economics based on mathematical modelling. On a meta-level, they help to reveal the cultural assumptions that have defined the modern practice of the “dismal science”.

For Appleby, “it can’t be stressed too much that capitalism is as much a cultural as an economic system.” So she discusses not just how the growth of England’s agricultural production in the 16th century created the potential for investment in new forms of manufacturing, but how “the intensification of trade triggered a public discussion that led to fresh ways to imagine the economy.” Ideas and imagination had a real effect on economic structures; at the same time, capitalism itself generated new ideas about progress and equality while undermining older values, good and bad.

The history of capitalism, then, quickly becomes global history, as the history of countries and communities becomes inseparable from that of economic change. For stretches, Appleby repeats a rather familiar tale of the rise of the West, focusing on Germany and the United States as they began to take the lead from England in the 19th century. But to the well-understood concept of globalisation, she adds a key insight: capitalism manifested differently in different places and cultures. This is particularly well observed in her accounts of India and China: here the politics of totalitarian communism and democratic pluralism have led to very different forms of integration into global markets. Regarding China, Appleby raises important doubts about whether the free market will, as many have hoped, lead the country on the road to a free politics.

Appleby is no evangelist for capitalism. She celebrates its wealth-generating effects, and links it with the rise of women’s rights, but does not miss the “wrenching social and moral pain” or the environmental damage it can cause. “The two faces of eighteenth-century capitalism” were the wonders of the machine revolution, with its brilliant entrepreneurs and rags-to-riches success stories, and the cruelties of the slave trade, as investment in human property “twisted relations among the races in a particularly ugly way”. Her aim is neither to attack nor glorify the system she describes, but to help reveal “the roles of contingency, culture, and coercion” in the history of its emergence.

Both Joel Mokyr and Richard Bronk make similar points in books published last year. The Enlightened Economy is narrower in place and time than The Relentless Revolution, and more rigorously scholarly in its approach, but it too argues that “the beginnings of modern economic growth depended a great deal on what people knew and believed, and how those beliefs affected their economic behaviour.” The question Mokyr sets himself to answering is, why did the Industrial Revolution happen first in England? His answer is of course not simple, but as well as the textbook explanations like coal and enclosures, he points to an ideology of the Enlightenment: “the drive to expand the accumulation of useful knowledge and direct it toward practical use.”

Mokyr establishes a number of different but related links between the economic transformation taking place in Britain from the mid-18th to mid-19th-century and the cultural and intellectual programme of the Enlightenment. The “formation and dissemination of useful knowledge” is perhaps the most important. He notes, for example, that standardised machine parts would have been impossible without the “rationalisation and coordination of weights and measures”. The Enlightenment’s emphasis on human rationality meant ordinary people could be relied on to make economic decisions in a free market. It promised not only the advancement of science but also the perfectibility of all aspects of human life.

But the Enlightenment was no monolithic set of ideas, nor was it confined to Britain. Mokyr sees the “great irony of European history” in the fact that the French Revolution—inspired by Enlightenment goals—led to a restriction of trade in Europe just as free trade principles, as championed by Adam Smith, were becoming dominant. In any case, Enlightenment-Age individuals soon came to recognise the dangers of the free market. Revelations that commercial bakers were using deadly chemicals in their bread “was an early example of the realization…that free and unfettered markets can at times produce socially undesirable and even dangerous results.” As Mokyr concludes, the Enlightenment influenced economic change in many sometimes contradictory ways, but it was “indispensable” to how that change worked, and it cannot be left out of the story.

If the Enlightenment provides one way of looking at the culture of capitalism, the ideas of the romantics are another. Like Appleby and Mokyr, Bronk is keen in The Romantic Economist to appreciate “the role of national institutions and cultures in determining economic outcomes”. His is not a history book, but a manifesto for a new approach to economics as a discipline. The basis of his challenge is that “creativity, imagination, and organic interdependence of people—all emphasised by romantics—have become as central to our future prosperity and happiness as the rational optimisation of trading possibilities and efficiency highlighted by standard economic theory.”

The lessons Bronk wants to be learned threaten some of the dearly held tenets of the dismal science. Most importantly, his aim would be “to explain actual outcomes after the event but not to [try to] predict them with any precision.” This would allow economists to move beyond mathematical models of human behaviour. They would acquire a new reverence for individuality, contingency, and culture. In fact their output would be very much like the economic histories I have discussed already. Both Bronk and Mokyr note their debt to Douglas North, who has been pioneering work on how “beliefs, modes of thought, and even our preferences are socially and culturally formed by our interaction with others and by institutional conditioning.” Perhaps the romantic economist is here already, in the guise of economic historian.

Most of the work on these three books was done before the economic meltdown of the last two years, though Appleby includes a closing chapter, “Of Crises and Critics”. Nonetheless, they very clearly represent a shared outlook that is alive to weaknesses, injustices, and blind spots in our economic system. They are the products of an era that had already long outgrown the triumphalism of free-market advocates who hailed “the end of history” when the Berlin Wall fell. Even before the crash, capitalism and its intellectual assumptions were increasingly vulnerable to nuanced critique.

These books are very far from prophecy or polemic. But in their emphasis on the contingent, unpredictable, and simply human factors that pervade our economic structures, they do serve as a warning to those who would put their faith in market forces or in rational, mathematical analysis of human action. Both capitalists—that is, the investment bankers, the hedge-fund managers, and the rest—and the economists who study them would have done well to heed the warning, had it only come in time. Had things been different, no doubt these books would have been read differently. Another historical contingency.

Tom Cutterham is reading for an MSt in United States History at St Hugh’s College, Oxford.

John Lanchester
Whoops!: Why Everyone Owes Everyone and No One Can Pay
Allen Lane, 2010
240 Pages
£20
ISBN 978-1846142857

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If it is possible for anyone to have benefited from the global financial crisis, then book publishers may have a stronger claim than most. Understanding the crisis as it unfolded was almost impossible, given the speed with which a series of monumental events occurred, the amount of new terminology that suddenly sprang up, and the fact that not even those in the stricken banks, building societies, and insurers (never mind the industry regulators and their respective governments) seemed to have a clue what was going on.

In the 18 months since the crisis reached its peak, canny publishers have bailed out befuddled readers with a plethora of new books on the subject, ranging in tone from the sardonic (F.I.A.S.C.O.—note the sardonic use of acronyms) to the self-flagellating (Confessions of a Sub-Prime Lender). Given the number of titles, choosing the right tour guide to pick through the debris of the ruined financial landscape can seem an onerous task. It makes sense to choose one of the (surprisingly few) commentators who suggested that such a catastrophe was possible. As such, Financial Times columnist Gillian Tett has emerged from the crisis with her reputation enhanced, and her book, Fool’s Gold, has become the set text on the subprime crisis.

However, another less obvious figure can also claim to have seen what was coming. A novelist by trade, John Lanchester was drawn to the City as a possible setting for a new piece of fiction. Instead, struck by the lack of understanding of modern finance (he describes the City as equivalent to “a far-off country of which we know little”), he dug a bit deeper. He discovered how a combination of mathematical ingenuity and blind-eyed regulation had resulted in the widespread use of financial instruments that were capable of delinking bankers from the risk inherent in their investments. In an essay for the London Review of Books in January 2008 he showed how this moral hazard led to the run on Northern Rock, and concluded that “if our laws are not extended to control the new kinds of super-powerful, super-complex and potentially super-risky investment vehicles, they will one day cause a financial disaster of global-systemic proportions.”

Within nine months, Lanchester enjoyed the dubious pleasure of being proved right. His latest book, Whoops!, extends the argument of his original essay, plotting the entire course of the crisis, from its origins (which he locates, contentiously, in the collapse of communism in Europe at the end of the 1980s) to the range of unhappy options we face in financing the cost of the bailouts and stimulus. Within 200 pages he manages to cover the behaviour of bankers, governments, regulators, consumers, and even money itself, each of which, he argues, was an important factor in the crisis. Lanchester’s position as a City outsider enables him to adopt the pose of an outraged everyman, as aghast at the more sensational elements of the crisis as his imagined reader, the average taxpayer on the street.

Whoops! aims to break down the complicated elements of the crisis so they can be understood by everyone. Lanchester’s description of the mystery of the City also hints at another, loftier aim: that of making the country’s financial centre less obscure, in the hope that bankers will then be made to be more accountable. To make the economics less daunting, however, Lanchester fills the book with heavy-handed references to pop culture. It seems a stretch to link the financial crisis to The Wire, The Simpsons, and Zoo and Heat magazines, and so it proves. This is a shame, because Lanchester is not only capable of explaining complex financial operations, he excels at it. His coverage of derivatives, an instrument so misunderstood that it broke the entire banking system, is cleverly explained in terms of personal finance, and is delivered with such clarity that it should be photocopied and stuck to the desks of every new investment banker.

Yet this is not to suggest that Whoops! is a dry read. Lanchester’s incredulous response to the crisis is most effective and entertaining when he comes across moments of true absurdity; moments when it seemed that the whole industry had become so focused on maximising profits and divorcing itself from risk that it threatened to separate from reality entirely and float off into space. There are plenty of these moments, but three stand out. First, Lanchester describes how in 2000 the US Congress was so seduced by the country’s banking sector that it passed legislation to exempt credit-default swaps (CDSs, contracts whereby the buyer assumes the risk of the seller defaulting on its debt in exchange for a fee) from the kind of regulation that is applied to other, similar instruments, such as options and futures. It also guaranteed that CDSs could continue to be traded over the counter, rather than through a monitored exchange. The result was the Commodity Futures Modernisation Act, “a law that actually banned legislation”.

Another is the development of securitisation, which enables swaps that contain different levels of risk to be grouped together and sold. By interspersing high-risk investments with safer ones, the sting is supposedly taken out. The result was a whole new market for lenders, as investments that were previously considered too risky to touch could now be reconsidered. Suddenly, the age-old relationship between lender and borrower was reversed. Potential homeowners no longer went to the bank for a mortgage, the bank came to them, and it came in the hope of signing them up to unusually high interest rates so that the debt that they had created could be pooled and sold on. That there was no accounting for what might happen if the new owners couldn’t pay leaves Lanchester “reeling with incredulity”.

The third moment was a change in the way that ratings agencies were funded. Before the mid-1970s, ratings that assessed the riskiness of different types of debt were accessed through a subscription service. However, the US regulator, the Securities and Exchange Commission, decided that the debt-issuer should pay the agency for its ratings. This meant that the more ratings the agency produced, the more it earned. In addition, agencies were paid three times as much for assessing mortgage-backed securities as for regular corporate bonds. Furthermore, “the banks were not shy about saying that if an agency would not give them the rating they wanted, they would go shopping elsewhere.” Unsurprisingly, this led to the highest grades being awarded to the riskiest debt, a complete perversion of the rating system.

Lanchester’s pose as an outraged taxpayer enables him to examine the crisis from almost every angle, but he is weaker on possible macroeconomic factors. The idea that sub-prime mortgages were only made possible thanks to a prolonged spell of low US interest rates, which in turn was enabled by the purchase of enormous amounts of US government debt by China, is dismissed in a couple of paragraphs, although he does confess that the China-US relationship “gives me the willies”. In fact, part of the trap that befell US house buyers is that low interest rates caused house prices to rise, which meant that buyers not only had to take on bigger mortgages, but also that property came to be regarded as a risk-free investment. Both of these are among the many factors responsible for the crisis. To lay the blame, however, at the door of Asian central bankers for failing to encourage consumption instead of saving would run counter to Lanchester’s argument. For him, the crisis is an indication of the need to re-examine Western ideology and to learn to recognise when we have had ‘enough’. The motivation to do this is provided by this concise but stirring account of the crisis.

Mike Jakeman graduated in 2006 with a BA in English from Keble College, Oxford. He now works for The Economist.

A cloud looms over Adam Smith’s legacy. The 18th-century scholar is best known as an unalloyed extoller of the market and an apologist for self-interest, a reputation stemming from two centuries’ mischaracterisation of his thought. In the last 50-odd years, this interpretation has been given new credence by economists of the Chicago School (George Stigler famously described his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, as “a stupendous palace erected on the granite of self-interest”), by libertarian champions like Margaret Thatcher and Ronald Reagan, and by myriad others who associate him solely with free-market capitalism and self-interest.

The narrow popular perception of Smith hides a simple truth: the putative father of modern economics had a complex understanding of human nature. Indeed, sympathy and societal relations, not rational self-interest, lie at the heart of a work Smith himself considered “much superior” to Wealth of Nations: his Theory of Moral Sentiments.

Smith has been misrepresented for so long that the mere range of his writings often comes as a surprise. After his education at Glasgow and Oxford, he lectured and wrote on subjects from rhetoric to logic to astronomy. But it is his moral philosophy, as articulated in Theory of Moral Sentiments, that presents the greatest challenge to traditionally myopic interpretations of his thought. Published almost two decades prior to Wealth of Nations, Theory of Moral Sentiments celebrated its 250th birthday last year. In recognition of this occasion, and perhaps hoping to restore Theory of Moral Sentiments to the glory of its better-known cousin, Penguin Classics is releasing a special anniversary edition of Smith’s forgotten treatise, featuring an introduction by the modern-day economist-cum-public intellectual Amartya Sen.

Based on lectures Smith delivered during his time as Chair of Moral Philosophy at the University of Glasgow, Theory of Moral Sentiments is the bedrock of Smith’s intellectual project. Unlike Wealth of Nations, with its oft-quoted passage about the role of self-interest in commercial transactions, Theory of Moral Sentiments attempts to explain the motivations of human behavior, broadly construed. In characteristically lucid prose, Smith writes of people as inherently social creatures with a propensity for sympathizing with their brethren (a sharp break from the vision of mankind expounded by Hobbes, or even Rousseau, whom Smith admired). This natural human disposition leads to the formation of a moral sense: we approve of a person’s behavior to the degree that we sympathize with him.

Imagine, Smith writes, that we come upon a downcast man in the street. We hear that his father has died, picture ourselves in his shoes, sympathise with his pain, and thus approve of his actions. But imagine now we see this same man behaving jovially. The dissonance caused by our perception of what his behavior should be and what his behavior actually is produces an unpleasant feeling for us, and we disapprove of his actions.

Moral decision-making becomes more complicated when the number of actors increases (when watching two individuals quarreling, for example), or, better yet, when it’s our own behavior that we must evaluate. In the case of the latter, we must invoke what Smith calls an “impartial spectator”—the “great judge” and “man within the breast”. We divide ourselves into two people: the impartial spectator, or examiner, and our self, the examinee. Imagination is crucial here. Without it, we would never be able to figuratively “step back” and dispassionately view our own behavior to determine whether it is right or wrong.

Where, then, does self-interest enter the story? This was the question German scholars asked in the 19th century, when they began debating the so-called “Adam Smith problem”. The argument went something like this: how could the same man write Wealth of Nations, a paean to self-interest, and Theory of Moral Sentiments, which emphasises qualities such as humanity and generosity? This “problem” has pervaded Smith scholarship until relatively recently, owing in part to the fragmentation of academia. Philosophers tend to examine Theory of Moral Sentiments while economists focus on Wealth of Nations.

Yet there is much evidence to suggest that Smith himself saw Wealth of Nations as but one installment in his intellectual project, albeit one of great importance. Written after his departure from academic life, to “pass away the time” (according to a letter to his friend and fellow countryman David Hume) for some 12 years of his life, Wealth of Nations presents Smith’s vision of a commercial society, where economic thought is inseparable from that of ethics, politics, and justice. Wealth of Nations does acknowledge the role of self-interest in motivating behavior, especially in economic life, which supports Smith’s assertion in Theory of Moral Sentiments that self-preservation is a virtue (a belief which sets him apart from his mentor, Francis Hutcheson, who stressed benevolence as the purest good). But Smith also highlights the destructiveness of pure selfishness, upon which it would be impossible to erect institutions such as rule of law or government. He therefore praises self-denial and prudence, as well as the Christian law of loving one’s neighbor as oneself, in Theory of Moral Sentiments.

Other aspects of Smith’s thought, such as his views on education, also become clearer after reading Theory of Moral Sentiments and Wealth of Nations together. While division of labour greatly increases productivity, the repetition of mundane tasks hundreds of times a day inevitably dulls workers’ senses. Education improves the general quality of peoples’ lives, but more importantly, it livens the imagination, without which people would be hard-pressed to call upon the impartial spectator to make moral decisions. The topic of education is certainly conspicuous in Wealth of Nations, which includes discourses on a number of government policies, from establishing district-based schools to providing monetary rewards to high-performing students, to ensure the general public receives “the most essential parts of education”.

Theory of Moral Sentiments also throws suspicion on Smith’s use of the “invisible hand”, which has been generally interpreted as an omniscient market force. But Smith uses the phrase three different ways in his works. In History of Astronomy, where he traces the origins of philosophy, Smith ridicules polytheistic societies for attributing irregular natural events to mythological forces like the “invisible hand of Jupiter”. In Wealth of Nations, the context becomes international trade: merchants, looking after their own interests, invest in domestic rather than foreign industry and thus benefit society. The reference in Theory of Moral Sentiments is the most complicated. As Smith observes, even wealthy, selfish, rapacious individuals end up benefiting the poor, particularly because they employ labourers to produce their luxury goods. The “invisible hand” thus leads them to distribute goods and resources of the same magnitude “had the earth been divided into equal portions among all its inhabitants”. In this case, as in Wealth of Nations, the unintended consequences of selfish actions yield benefits.

But whereas Smith shows admiration for the ingenious merchants, he disdains the wealthy for their “vain and insatiable desires”. In this instance, he likely uses the “invisible hand” sardonically to show that even an unequal society operates well enough to further the “multiplication of the species”.

Reading Wealth of Nations in the context of Theory of Moral Sentiments does more than dispel popular misconceptions of Smith; it clarifies the reasons for Smith’s insistence on commercial society. After all, men toiling furiously and acting on their instincts to “truck, barter, and exchange” may generate the wealth of nations, but as Theory of Moral Sentiments tells us, wealth does not lead to happiness. Borrowing the language of Cicero and the Stoics, Smith writes that desiring more, and refusing to be content with one’s life position, is the main cause of personal and societal dissatisfaction. According to Smith, wealthy nations provide individuals with something as important as happiness—freedom. Freedom comes from having a system of justice that protects security, property, and dignity. Freedom also depends on having enough resources to stave off widespread destitution.

In Smith’s opinion, commercial society is the last stage in human development, the farthest cry from the primitive world of warlike savages. Wealth of Nations offers a road map for sovereigns to ensure their countries reach this final phase. This includes adopting policies based on division of labour and international trade over those advocated by the physiocrats, with their focus on agriculture, and by the mercantilists, with their money obsession. Smith was convinced that the society he promoted, with its international trade, smart government, and strong institutions, had a far better chance of peace and prosperity than those he saw around him.

Given the importance of both Theory of Moral Sentiments and Wealth of Nations to Smith’s thought, it might seem odd that the books are rarely read together. If so, the problem lies with us, not with Smith, who saw moral philosophy and economics as inextricably linked. Since his time, both disciplines, among others, have increasingly been taught and treated as separate and unrelated, making it that much easier for Smith’s name to be co-opted by those who have only read fragments of his work—a development that the Scottish polymath would have surely deplored. The anniversary publication of Theory of Moral Sentiments is one step toward setting the record straight.

Nita Colaco is reading for an MPhil in Economic and Social History at Lady Margaret Hall, Oxford.

Photograph © Ibrahim Foundation

David Hancock
Oceans of Wine: Madeira and the Emergence of
American Trade and Taste
Yale University Press, 2009
680 Pages
£40.00
ISBN 978-0300136050

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Madeira wine is indelibly linked with the American story. Its medicinal and anaesthetic qualities earned it a place at the side of George Washington’s deathbed. Its value as a commodity created the dispute over duties that led to the seizure of John Hancock’s boat and to rioting in Boston. It was with a glass of Madeira that the Founding Fathers toasted the signing of the Declaration of Independence. And if David Hancock is right, trends in contemporary American commerce developed from Americans’ desire to fill their glasses with this robust wine from tiny Madeira, an island not much larger than the Isle of Man.

Tracing the story of Madeira from its beginning at humble farms to its place at Chief Justice John Marshall’s dinner table, Oceans of Wine situates wine at the centre of the Atlantic dynamic which spurred the economic ascendancy of the Americas. While Hancock’s entertaining narrative engages the reader, the real power of this book rests in its capacity to demonstrate how economic networks and individual ties came to define not only a new culture of consumption, but also a nation.

Not unlike the improbable birth of the United States, Hancock reveals Madeira’s emergence as a trade borne of convenience. The island was a key stopping point on trans-Atlantic journeys sailing with the brisk northeast trade winds and Canary current from Europe. This fortuitous location fueled and fulfilled consumer demands, transforming the wine from a simple, cheap, and easily preserved cargo into a varied and refined drink. Madeira’s success was immense: from 1700 to 1775, it comprised just over three-quarters of Anglo-American wine imports, with British North America consuming a quarter of the global trade. Small but significant quantities were even shipped as far as India. With the help of a small island, America thus took its first steps toward becoming a leading power in the new and truly global economy of the modern world.

Hancock’s book provides an excellent exploration of the effects that such expansive trade had on all aspects of life, from culture to politics. We learn, for example, that Madeira was a touchstone of international contention for nearly two centuries. Originally, politics favoured the island, with periodic boycotts, legal restrictions, and seizure by privateers keeping French and Spanish wines from the American palate. This reversed in the late 18th century, however, as Madeira was caught in the increasingly hostile relations between Britain and her North American colonies. Portugal sided with the British and closed the island’s ports to American ships, forcing those merchants to turn to France, precipitating a growing taste for the wines of continental Europe, and ultimately stunting the Portuguese economy. Both in boom and in bust, then, the story of Madeira constitutes a case for Jeffersonian pragmatism: “commerce with all nations; alliance with none”.

Hancock’s simultaneously leisurely and intensely factual style deftly reveals the connections between such grand geopolitical movements and the individuals behind Madeira’s journey from grape to glass. He introduces the reader to the methods of Madeira production along with the vintners who produced it, the merchants who moved and sold it, and the consumers who drank it. Culling a vast array of primary sources, he also shows how consumer opinion influenced prices and production methods thousands of miles away—and in turn, how the dynamic Madeira trade influenced the economic fortunes of nations around the Atlantic.

Connecting this economic picture to the texture of “consumer culture” is Hancock’s forte. He neatly outlines early trends in wine consumption, links them to shifts in American domestic life, and then—in perhaps his most interesting move—suggests a genealogy from 18th-century consumerism to our own. At the start of this story, the growth in Madeira trade improved knowledge of wine and its production, storage, and maturation. This prompted a string of responses: cellars were built on the advice of importers; buyers learned the benefits of decanting; vendors obliged with a profusion of decanter styles; and drinkers wishing to pour increasingly special Madeira into complementary glassware drove demand for a vast array of wine glasses, often beautifully etched. The Madeira trade had knock-on effects in other areas too, stimulating not only wine consumption, but also naval construction, crystal production, and glassware.

And from all this activity, as with the Greeks, Romans, French, and Italians before them, Americans were creating a culture around the social drink. With its elegant paraphernalia, Madeira quickly became a status barometer. In a letter evocative of contemporary drink etiquette, for instance, George Washington advised his daughter to give her finest Madeiras only to “particular and intimate acquaintances” and “persons of distinction”. Trade in Madeira also stimulated demand for other wines, contributing to a cultural expansion beyond high society. Academia was a notable recipient of this spread: disapproving reports of the time complained that “scholars…unnecessarily frequent Taverns”, whilst the second president and former Harvard law student John Adams wistfully reminisced about “the free use of Cider and the very moderate Use of wine and ardent Spirits”.

Complaints of the period notwithstanding, the development of the social drink was part and parcel of the founders’ vision of a country cohered by distinctly American culture. Foreshadowing the emergence of Napa and Sonoma nearly two centuries later, Thomas Jefferson expressed a desire for America to develop its own wine culture on the model of his beloved France. According to Hancock, it was Madeira that allowed this dream to become a reality—and it was Maderia that bound this reality to a particular brand of consumerism. Wine became the drink of hospitality and was marketed as such, with distributors advertising that their wine was served at the table of Alexander Hamilton, that President Madison or President Monroe was their customer. Madeira thus led to the development of contemporary marketing strategies, and to an American culture of consumption.

While the story of the founding of the American nation has been told many times, telling it through a glass of Madeira wine brings new life to what can too easily be inaccessible history. Hancock’s book reveals Madeira’s unique ability to shed light on the connections — both humble and grand — between wine, economics, politics, and the very human biographies of individuals who are too often made remote by their small part in a history long past. Therefore, when next uncorking a bottle of wine, it would not be out of place to consider raising a toast to Madeira for its compelling role in a history which still shapes our world.

James Moxness is reading for an MPhil in Classical Archaeology at Merton College, Oxford.

Cormac Ó Gráda
Famine: A Short History
Princeton University Press, 2009
344 Pages
£16.95
ISBN 978-0691122373

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In the 20th century alone, an estimated 70 million people perished from famine. To name a few of the most disastrous incidents: during World War II, the Bengal Famine claimed 8 million lives; in the aftermath of the Great Leap Forward, famine took over 30 million lives; and in the mid-1980s, famines in Ethiopia threatened over 8 million people with starvation.

While famine has commonly been attributed to bad harvests, recent scholarship has shifted focus from natural disasters to government failures. Cormac O’Grada’s new book, Famine: A Short History, is no exception. A professor of economics at University College Dublin, O’Grada examines the complex relationship between famine, politics, and public action. Famine’s strength derives from O’Grada’s mining of the historical record, using extensive empirical data to explore the causes and consequences of this fatal phenomenon. Ultimately, O’Grada boldly claims that the “onward march of accountable government will rid the world’s last vulnerable regions of the scourge of famine.” The book, however, grazes the surface of various complex and unresolved policy debates about the end of famine without exploring these issues in depth. Fair enough, for a general history of famine, but this passing investigation makes his bold claim seem somewhat over-optimistic and specious.

The direct relationship to death is what distinguishes famine from chronic malnutrition, in which lack of food adversely affects people’s health but does not directly lead to fatality. Accordingly, O’Grada defines famine as “a shortage of food or purchasing power that leads directly to excess mortality from starvation or hunger-induced diseases.” He goes on to explore the history of thought behind what causes such dire food scarcity. As O’Grada notes, Thomas Malthus was one of the most recognized figures to theorize on this subject. Famously, in 1798, he grimly hypothesized that the world’s population would grow too large for the earth’s productive capacity and that absolute food shortages would cause famine: “The power of population is indefinitely greater than the power in the earth to produce subsistence for man.” This was, perhaps, a plausible claim at the time. But Malthus failed to foresee the technological advances that would ultimately enhance the earth’s productive potential.

Echoing the evidence presented by other scholars of famine, O’Grada posits that in the modern era, famine is no longer the result of absolute shortages of food. In absolute terms, worldwide food production is enough to feed the world’s population. And presumably, advances in communication and transportation technologies should aid in getting food wherever it is needed. So why does famine persist?

Borrowing from Nobel Prize-winning economist Amartya Sen, O’Grada argues that famine is a social phenomenon. For Sen, famine marks “the inability of large groups of people to establish command over food in the society in which they live.” Even if the proximate cause of a local food shortage is natural disaster or a bad harvest, the extent to which human life is affected by such shocks depends on the way that society is organized. This line of reasoning holds true for recent disasters: Hurricane Katrina, for instance, could have been less devastating if the government had been more organized, or more concerned.

Until relatively recently, the most aid that famine victims could hope for was local relief, either from the public or private sector. As O’Grada demonstrates, elites have long accepted moral obligations to relieve the worst effects of famine. In ancient Egypt, Greece, and Rome, the wealthy would often intervene to prevent food crises from becoming famines. But there are limits to private citizen action. As O’Grada puts it, “Private charity may do much to alleviate individual suffering, but the relief of hundreds for an indefinite period comes only within the means of governments.”

Sen argues that only democratic governments are consistently moved to prevent major disasters affecting the populace. Yet, despite agreeing with Sen’s argument, O’Grada fails to explore its implications for famine management in non-democratic or weak states.
In doing so, O’Grada sidesteps the vital and highly contentious debates over the meaning of “accountable governance” as applied to both sovereign nations and international organisations. If all national governments were somehow organized so as to be accountable to their citizens, then famine might be a rarity. However, accountable governance across all states is a reality yet to be realised. The crucial point here is that the end of famine, in the near future, has to do with responsive international governance and its tenuous and complicated relationship with issues of national sovereignty and development.

Mobilising international efforts to address famine is at times a Sisyphean exercise. How can we get the global public invested and interested in famine? The mechanism of primary importance, within democratic states, is the media. In a democracy, a free press with transparent lines of communication should spread both information and criticism. Governments failing to avert excess mortality, due to famine, would be penalized by their citizenry. However, as O’Grada points out, while this may be the case domestically within democratic governments, the extent to which the international press can garner the same effect on famines occurring on foreign territory is questionable. In his words, “the attention span of the international media—and their readership—is too fleeting to monitor famines from start to finish.” NGOs working to prevent famine have to mobilize the concern of an international public—and this often requires the use of devastating images that only become available after a major problem has begun.

O’Grada cautions us that overemphasis on the existence of corrupt governments, and their role in allowing famines to persist, allows the international community to justify their inaction. There are some donors, however, who have chosen to deal with what they see as corruption in other ways. In February 2009, for example, donors informed President Kibaki of Kenya that they would not channel food aid through the government until the issues of corruption and mismanagement in his administration had been addressed. Rather, the donors insisted upon channeling aid through the World Food Programme. This response raises two questions. First, are donors in a position to judge the level of corruption in a foreign government? After all, what qualifies as corrupt in one country may be a standard transaction in another. Second, to whom are international NGOs accountable?

The issue of NGO accountability is greatly contested within the development literature. Generally, international NGOs are not accountable to the people to whom they provide services, but rather to their donors, some who may know relatively little about effective program implementation within a developing country. If an international NGO fails to avert a famine, it rarely suffers any consequences.

Additionally, there is the issue of creating dependency. It has been argued, with some empirical evidence, that the influx of foreign food aid can hurt domestic markets by undercutting domestic producers and driving them out of business. O’Grada notes that the 1999 Food Aid Convention stipulates that food aid be “culturally acceptable” and, where possible, not interfere with indigenous food markets. But in situations that require immediate action and in which local governments, private producers, and NGOs have little in the way of effective communication or cooperation, this sort of stipulation is impractical. Furthermore, the line between non-interference in domestic markets and allowing people to starve is blurred, and erring on the side of caution to prevent deaths seems prudent. These issues are extremely difficult to address and thus make the international prevention of famine an arduous task.

Furthermore, the extent to which foreign governments forward their own agendas in offering food aid is a controversial issue. Without a comprehensive and legitimate system governing international famine prevention, foreign governments are also not held accountable for the ways in which they offer or fail to offer aid. O’Grada notes that foreign aid is rarely disinterested. He quotes US Senator Hubert Humphrey as saying “Food is power!” in reference to US foreign assistance. He further cites the 1974 example of the United States holding back aid to Bangladesh until it ceased exporting jute to Cuba. When American food arrived it was “too late for famine victims”.

The eventual elimination of famine is dependent on the continued economic and political development of impoverished nations. National governments, which can be held accountable by their constituents, have incentives to prevent such disasters. The problem for the time being, however, is how the international aid regime should address food crises. O’Grada’s book, while briefly laying out these issues, does little to help the reader puzzle through their complex implications. If international NGOs and foreign aid remain the major avenues for famine relief, we must recognise the inherently political nature of those organisations, their intentions, and their accountability. This accountability should not run from the NGO director to the foreign donor, as it currently does. Rather, donors and NGOs should be accountable to famine victims, the very people they are trying to help.

Amreeta Mathai is reading for an MPhil in Development Studies at St. Anne’s College, Oxford. She is a contributing editor of the Oxonian Review.

Pia Riggirozzi
Advancing Governance in the South: What are the Roles for
International Financial Institutions in Developing States?
Palgrave MacMillan, December 2008
213 pages
£50.00
ISBN 978-0230220119

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Two years ago, the International Monetary Fund’s loan portfolio was a mere $13 billion—down 87% from 2003. In the spring of 2007, a Washington think tank hosted a debate entitled, “Is the IMF Obsolete?” In September of that year, the new managing director of the IMF, Dominique Strauss-Kahn, said that the “very existence” of the IMF was in question. The “two main issues” facing the fund, according to Strauss-Kahn, were “relevance and legitimacy”.

The IMF’s relevance is no longer in question. Since the start of the global financial crisis this past fall, the IMF has lent $50 billion to Eastern European countries, Iceland, Pakistan and El Salvador—and it received a $500 billion boost at the G-20 summit in London this month. Its sibling organization, the World Bank, is on a lending spree as well. However, the legitimacy of these Bretton Woods brethren remains hotly contested, as the enormous protests taking place today in Washington demonstrates. In the post-crisis world, the crucial question is not if the international financial institutions (IFIs) have a role to play, but how the IFIs should approach their roles.

The title of Maria Pia Riggirozzi’s new book promises to answer that question from a global perspective. In its catalogue, publisher Palgrave Macmillan promises to answer the question on a “regional scale”. But the book actually asks the question from a national perspective—specifically, an Argentine one. The mismatch between the country-specific contents and the global aspirations of the title actually provides an ironic (and unintentional) commentary on the state of scholarship on IFIs. Scholars berate the IMF and World Bank for applying one-size-fits-all solutions to development challenges. Yet most scholarship on the IFIs is marketed under the same assumption: that the conclusions from one country are applicable to all others.

Amid the current global economic drama, Riggirozzi’s careful study of the power relations between IFIs and a single country is more important than ever. The core of IFI action lies in the individual relationships between IFI staff and national policymakers, and those dynamics determine if an IFI has the legitimacy it needs to be effective. Riggirozzi argues that in the case of Argentina, the IMF’s top-down model of power imposition led “not only to a loss of legitimacy, but in turn to the disempowerment of the institution”. In her analysis, the success or failure of IFI intervention is determined by how policy is made: is it a top-down imposition and conveyance of money and ideas, or is a consultation with local experts to broker policies? Riggirozzi identifies IFI staff doing both in her case study of Argentina in the aftermath of the 2001 crisis. She differentiates between divisions of the World Bank and shows the most successful IFI teams acted as sensitive, nimble “brokers” of policy ideas, not as “conveyors” or “imposers” of global best practice. Although sharply critical, Riggirozzi does not see IFI action in Argentina as an unmitigated disaster: she is more interested in understanding policy-making mechanisms than placing blame.

Riggirozzi’s analysis shows the enormous insights gained from approaching IFI interactions as specific encounters embedded in a local context. However, the generalisation in the title of the book assumes that one country’s relationship to a single IFI can serve as a description of all countries in the ‘South’ and their relationships to all IFIs. This “global” approach to IFIs encourages imprecise terminology, trivializes local political-economic dynamics and discourages inquiry into specific local grievances. It lumps all anti-IFI discourses into a single globalised bundle of discontent. But globalisation has many discontents, and each one is worth exploring individually.

Generalisations seem endemic to international political economy as a discipline, but imprecise terms are particularly prevalent in less academic discussions of international finance. The terms “international financial institution” and “global South” are commonly used (as in Riggirozzi’s title), but rarely are their exact meanings explored or questioned. This is unfortunate for many reasons, not least because this casual use helps perpetuate stylised critiques of the IFIs, which discredit them simply by referring to a pervasive stereotype that they are all part of some monolithic neo-liberal monster.

Certainly the IFIs themselves deserve some of the blame. Their geographic concentration in Washington does nothing to dispel the notion that they are agents of American hegemony. The persistent mission creep of the IMF and World Bank onto the turfs of one another makes it difficult for anyone to tell them apart. Worse yet, instances of “cross-conditionality” in which the World Bank and IMF demand the same concessions from borrowers reinforce perceptions of a singular IFI agenda.

But that agenda appears to be changing or, at the very least, evolving in the current financial crisis. In March, the IMF approved a new Flexible Credit Line framework that guarantees emergency funding—without preconditions—for emerging-market economies with “very strong track records”. The program has provided a $47 billion line of credit to Mexico. IMF officials have indicated that Poland and Colombia will receive “no-strings-attached” guarantees in the near future as well. As the IMF shows signs of greater flexibility, the question remains: will academics and activists cling to their rigid stereotyping of international financial institutions?

The idea of a unitary “global South” is even more of a leap from reality than the idea of a unitary international financial institution. To begin with, it is factually incorrect to split the world into a “rich North” and “poor South” (Moldova, meet New Zealand). Not only does the term “global south” implicitly equate poverty with geography, it assumes similarities and solidarities between nations that do not exist. For example, Riggirozzi argues that the IFIs need to empower local experts. Her choice of Argentina, with its sophisticated domestic think tanks, helps her make this case. If she had chosen Guinea-Bissau, by contrast, she might be less convincing.

If the title was her choice and a global perspective really her goal, Riggirozzi could have chosen from a variety of similar middle-income countries to underscore her conclusions beyond Argentina. Not only would a comparison of countries highlight how context-specific politics and personalities can drive international financial policy-making, it would also raise interesting questions about the degree to which IFIs are seen as “patrons” or as “partners” in different regions. Why, precisely, is it that Poland and other Eastern European countries still broadly trust and rely on the IMF? And why, as Argentina’s Economy Ministry questions the competence of IMF officials, does the leader of neighbouring Brazil say that he is “proud” to lend to the fund?

Understanding that each country’s relationship with the Bretton Woods institutions has its own distinctive flavour is critical for national and international policy responses to the financial crisis. The success of potential policies depends on their domestic palatability, which varies according to country-specific historical and political legacies. In Peru, the IMF may forever be associated with the repressive regime of Alberto Fujimori. In the Czech Republic, the IMF may eternally be intertwined with the image of Vaclav Havel, who left behind a happier, but still complicated legacy. In Argentina, as Riggirozzi’s work illustrates, what the IMF approached as “technocratic reforms” were implemented alongside ugly and unethical local political actions—such as President Carlos Menem packing the Supreme Court—and it may take many decades for the fund can live this down. In that respect, Riggirozzi delivers an important message, even if her title obscures it: whatever the role of IFIs, success depends on sensitivity to local politics—from academics, activists and the institutions themselves.

Taylor St. John is a DPhil student in Development Studies at St. Antony’s College, Oxford. Her research deals with World Bank-sponsored arbitration of water disputes in Latin America.

Peter Singer
The Life You Can Save: Acting Now to End World Poverty
Picador, 2009
214 pages
£14.99
ISBN 978-0330454582

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Peter Singer and Jimmy Cayne are not natural allies. Singer is an Oxford-educated philosopher, a vocal vegetarian and an anti-poverty crusader. Cayne is a high school dropout who, until recently, feasted on bacon, salmon and red wine before beginning his workday as CEO of Bear Stearns. Yet in Singer’s new book, The Life You Can Save: Acting Now to End World Poverty, Cayne makes a cameo appearance—not as a villain, but as a good corporate citizen.

Singer heaps praise upon Cayne’s company: “Bear Stearns—before its sale to JPMorgan Chase during the 2008 crisis—made sure that neither apathy nor selfishness prevented its leaders from doing the right thing.” Such a pronouncement would be considered lavish praise for any corporation—but especially for Bear Stearns. When the investment bank collapsed in March 2008, one industry insider called it “payback” for a “firm that seemed to be overly selfish and overly interested in their own gains”. But for Singer, Bear is a beau ideal of benevolence. The firm required all of its senior managing directors to donate 4 percent of their salaries and bonuses to charity, and it checked their tax returns to make sure they complied. In 2006, according to Cayne, the firm’s senior managing directors donated more than $45 million (£32 million) combined. “As far as I know, we are the only company that has this type of policy,” Cayne said.

To be sure, Singer and Cayne do not entirely see eye-to-eye on all matters of philanthropy. Cayne’s charitable giving goes to museums and private prep schools, among other causes. By contrast, Singer believes that “philanthropy for the arts or for cultural activities is, in a world like this one, morally dubious”. He chastises the Metropolitan Museum of Art for paying $45 million for a single Duccio panel painting when the same amount of money could have funded 900,000 cataract operations for people in developing countries “who can’t see anything at all, let alone a painting”. Singer donates 25% of his income to anti-poverty groups each year. (All royalties from The Life You Can Save will go to Oxfam.) Comparatively, Cayne is much less generous: in 2006, his charitable trust gave gifts amounting to 7 percent of his CEO compensation. By Singer’s personal standards, Cayne is still a scrooge.

Nevertheless, Singer sees enormous potential in the Bear Stearns model of employee giving—albeit, with important modifications. Singer suggests that employers withhold 1 percent of every employee’s paycheck, which would then go to an anti-poverty organisation of the employee’s choice. Workers could opt out of the program, but the default would be to donate (and, specifically, to donate to an organisation that fights global poverty rather than a posh prep school, ornate opera house or other “dubious” cause). If major corporations, universities, and other employers adopted Singer’s suggestions, it “would yield billions more for combating poverty”.

For those who are familiar with Singer’s philosophy, the employee giving proposal will stand out as one of the more innovative elements of The Life You Can Save. To a large extent, the book rehashes arguments that Singer has already made elsewhere—starting with his 1972 essay “Famine, Affluence, and Morality”. Singer argued then—as he does now—that from a financial perspective, it is relatively easy to save a life in the developing world. He cites a statistic from William Easterly—a New York University economist who is famously skeptical about the effectiveness of third-world aid. Easterly acknowledges that the World Health Organization’s efforts against malaria, diarrhea, respiratory infections and measles save approximately one child’s life for every $300 (£210) spent. That is roughly the price of a new wool single-breasted suit from Marks and Spencer, or dinner for two with a fine champagne at Brasserie Blanc. When we spend our money on fine clothes or fine food, Singer says, we are valuing frivolous fun above the lives of real human beings.

Yet if every £210 suit is another child’s life, then every £21 hardcover book is a tenth of a child’s life and every £2.10 latte is one-hundredth. Does Singer’s argument imply that all luxury spending is problematic? Yes, but he does not ask us to become bare-bones ascetics. Rather, he sets out specific standards for charitable giving based on income level, and he asks his readers to abide by them. Everyone should strive to donate at least 1 percent of their income to anti-poverty efforts, he says, but someone like Jimmy Cayne should be giving close to 30 percent. (The full set of standards is posted online here.)

More than one thousand people, from China to Chile, have logged onto Singer’s website and pledged to abide by his percentage-of-income standards. Tim Harford—the Financial Times columnist who once penned an “economic case against philanthropy”—now says that Singer’s book has motivated him to donate to Oxfam. William Easterly, writing in the Wall Street Journal, is less persuaded. According to Easterly, “Mr. Singer argues from a small number of… examples that it is relatively easy to do good things for the poor,” even though much aid is wasted due to corruption and incompetence.

But Singer only needs “a small number of examples” to prove his point. Even Easterly would have to acknowledge that some aid organisations are effective. For example, the Addis Ababa Fistula Hospital treats women who suffered debilitating injuries in childbirth that cause them to leak urine and feces continuously; for as little as £100 per surgery, the hospital can cure the condition with a 93 percent success rate. (Singer’s Australian publisher is giving 5 percent of its proceeds to the hospital.) As long as well-run organisations like this exist, and until they are fully funded, donors can be reasonably confident that their charitable donations are going to good use.

Granted, this is not a message that many will want to hear during a deep economic recession. As reviewer Katha Pollitt wrote in the Nation, “the gods of publishing must have had a good laugh” when they arranged for Singer’s book to come out when “so many are broke”. Yet in some sense, The Life You Can Save has appeared at the perfect moment. As a result of the financial crisis, the world has a rare opportunity to put Singer’s ideas into action.

Barack Obama has already imposed a $500,000 (£360,000) compensation cap on bank executives who receive bailout money. Gordon Brown is calling for a global code on bankers’ pay. The public is demanding some sort of change in the way that top executives are remunerated. But as one executive compensation consultant told the Los Angeles Times recently, people in his industry are “pretty damn smart” and will come up with ways to skirt the caps. Companies will compensate their CEOs with restricted shares instead of providing stock options or cash bonuses. They will offer their CEOs new perquisites that do not count toward the $500,000 cap. CEOs might be breakfasting on red wine, bacon, and salmon once again—this time, on their companies’ tabs.

Imagine, however, if Obama and Brown—instead of imposing quixotic compensation caps—forced banks to adopt Bear Stearns-style policies for top executives. Banks might implement an “opt-out” 1 percent plan for the rest of their employees. Unlike compensation caps, bankers might actually embrace such an approach. (Cayne says that most executives found that charitable giving was “incredibly gratifying”.) And unlike compensation caps, society might actually benefit as a result.

Inevitably, some senior executives will object to Singer’s stipulation that their donations go to anti-poverty efforts. They will fight for the right to donate to museums, musical groups and other organisations that Singer deems “dubious”. And whereas Singer believes that developing-world aid is almost always more cost-effective (from a life-saving perspective) than domestic aid, an argument he makes forcefully in One World (2002), it seems unlikely that Singer’s suggestion will garner support unless it allows for gifts to local causes. Even so, a plan that raises the quantity of charitable giving—regardless of which charity—is preferable to a plan that raises the quality of the executive dining room menu, and Singer’s proposal would do more than that. The £32 million from Bear executives alone in 2006 could have funded, by one estimate, 45 million meningitis or measles vaccinations in the world’s poorest places.

Of course, there still is one problem with the “Bear Stearns Plan”: there are few brands that are as associated with ignominy (though “Bernard L. Madoff Securities LLC “and “Stanford Financial Group” give “Bear Stearns” a run for its money). We might call it the “one percent doctrine ”, except that Dick Cheney has already dragged that moniker through the mud. The Bear Stearns Plan is an idea whose time has come—but whose name has yet to arrive.

Daniel Hemel, an MPhil candidate in International Relations at New College, Oxford, is writing a thesis on global financial regulation. He is a Senior Editor of the Oxonian Review.

Dambisa Moyo
Dead Aid: Why Aid is Not Working and
How there is Another Way for Africa
Allen Lane, 2009
288 pages
£14.99
ISBN 978-1846140068

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At Harvard in the mid-1990s, a young Zambian graduate student listened rapturously to Professor Jeffrey Sachs’s prescriptions to bring prosperity to developing countries through the free market. Sachs later abandoned many of his free-market prescriptions in favour of large-scale aid flows from the West to the developing world—and Dambisa Moyo, the former student in Sachs’s auditorium, felt deceived.

“It’s completely hypocritical and it was a great disappointment,” Moyo said at a recent event in Oxford. “I think he’s very dishonest… To me, as an African, the fact that he would dole out the prescriptions he does to other people [in Latin America, Poland and Russia] but doesn’t when it comes to Africa suggests to me he thinks we’re different.”

It is this sense of betrayal, not just by Sachs but by the larger international community, that fuels Moyo’s repudiation of aid as the solution to African poverty. It is the subject of her new book, Dead Aid, which makes a controversial anti-aid argument that should be read, if only to ignite discussion and force aid advocates to justify the status quo.

After setting out to debunk the “myth” that aid works, Dead Aid calls for an end to massive governmental and multilateral aid flows to Africa within five years, including all grants and heavily subsidised loans. Moyo’s claim is that turning off the aid tap will shock African governments into accountability by forcing them to innovate and find non-aid fundraising mechanisms. She spends most of the book describing the multitude of alternatives to “free money”, offering an exhaustive menu of free-market mechanisms that range from collective regional bonds and international debt markets, to small-scale development through domestic savings and microfinance. While she makes a strong argument for private sector strategies, she fails to explain how they can improve governance without the complementary emergence of viable democratic institutions and checks on executive power.

Moyo is the first to point out her argument is not new. Although it fails to engage with previous development theories and critiques, Dead Aid offers a fusion of classic dependency theory (blaming Africa’s underdevelopment on Western policies, namely aid) and free trade advocacy (promoting local growth through international trade and foreign investment). Though her ideas are clearly influenced by the tutelage of (a younger) Sachs and Oxford economist Paul Collier, Moyo dedicates her book to Peter Bauer, aligning herself with a martyr of classical liberalism, long maligned for his staunch criticisms of aid.

Despite her adept polemical positioning, Moyo’s actual diagnosis of aid’s ills remains painfully weak. In the preface, Moyo writes, “This book is a consequence of my thoughts and deliberations over the years.” Indeed, the book relies heavily on personal thoughts and deliberations rather than in-depth, or even cursory research. The first section rejects a litany of possible explanations for African poverty, leaving aid as the sole possible culprit of underdevelopment.

Instead of making a compelling empirical case for the detrimental effects of aid, Moyo launches a haphazard assault on alternative explanations for the continent’s economic stagnation. Without names or sources, she swiftly dismisses longstanding, well-researched arguments that have variously attributed Africa’s economic failures to the continent’s geography, climate change, colonial history, ethnic diversity, civil conflict and weak institutions. The reader is hardly convinced. For example, in order to shunt aside “historical factors, such as colonialism”, she proffers but a single paragraph (four sentences ending with a maddening footnote that cites the Wikipedia entry on the 1885 Berlin Conference).

Moyo repeatedly simplifies the complex challenges facing African countries today in order to overemphasise the extent to which aid is inhibiting economic growth. Ultimately, in bypassing context and the nuances of specific challenges, she weakens her own anti-aid argument. She decries aid for enabling corruption, engendering “laziness”, creating dependency, inciting civil wars and hamstringing civil society. These are important allegations, and familiar topics of conversation for any observer of Africa and development issues—but they are not grounded in evidence.

Throughout Dead Aid, Moyo insists on referring generally to the whole of Africa, and occasionally “Africans”, all the while describing Aid amorphously with a capital “A”. One cannot help but wonder what particular contexts and aid programmes Moyo has in mind, when the only “country” that appears in any detail in her narrative is an imaginary development hell-hole named Dongo, and when the only specific aid project she references is hypothetical, a malaria-net distribution scheme. Notably, this recurring hypothetical anecdote seems unlikely to fit Moyo’s own definition of “Aid”, as most “large-scale multilateral aid packages”, which go to governments, do not involve bed net handouts in rural areas. (The reference may refer to Sachs’s tireless advocacy for free bed nets throughout Africa.)

Despite serious shortcomings in Moyo’s dogmatic diagnosis, the book makes a compelling case for diversifying development funding by exploring private sector options. The list of free-market mechanisms Moyo recommends for financing growth is impressive, moving from the global to the individual scale. For example, she urges individuals to lend directly to African entrepreneurs through Kiva.org. Her big-ticket item for making the cycle stop is the international debt market, where African countries can work their way into investment viability.

Whether African countries can in the near future afford the sorts of loans that would create viable investment markets is unclear, particularly given the economic crisis that has dried up available credit across the globe. Yet Moyo reminds the reader that millions of dollars already sit on the continent in savings, money that could be invested at home, were attractive markets to emerge.

Once Western governments buy the argument that aid does not work, Moyo suggests they look to China for a development model that promotes growth. Moyo’s claim that, “in the last sixty years, no country has made as big an impact on the political, economic, and social fabric of Africa,” is dubious. But she is more focused on applauding China’s public and private “investment assault” than shoring up any sort of historical argument. Protectionists who detest the flood of cheap Chinese goods into African markets and human rights advocates who abhor China’s contentious non-interference policy will hardly be placated by Moyo’s somewhat bizarre presentation of opinion poll data, which is supposed to confirm that China’s presence is good rather than exploitative for Africans. (They may also be interested to know that Moyo was recently proposed as a board member of Lundin Petroleum, one of the Western oil companies active in Southern Sudan.)

As contentious as her arguments are, Moyo herself looks poised to become a lightning rod for debate. She vociferously decries the “glamour aid” culture, faulting it for disenfranchising African politicians and their constituencies. Yet the hubbub surrounding the release of Dead Aid reveals the irony of the book’s endeavour: if Moyo hopes to persuade Western donors and African recipients to abandon aid, she can succeed only by catapulting herself into the heart of the glamour-aid fray she so fervently condemns. So far, the former Goldman Sachs investment banker seems to be doing just that; the society pages of the Guardian recently attended one of Moyo’s book launches at the (glamorous) Hôtel Balzac on the Champs-Elysées.

At her recent book talk in Oxford, Moyo said that Dead Aid was “designed to open up dialogue”. To this end, the book is already a great success. But a “clarion call for change” Dead Aid is not. Lacking evidence and specificity, and completely disregarding the disparate, though uniformly difficult political realities of Africa’s countries, Dead Aid is neither prescription nor plan. Readers excited by the free-market optimism and private sector solutions presented in Dead Aid are left wondering just how to get involved in the apocalyptic and opaque Africa the book describes. Add the challenge brought by the global financial crisis, and surely Moyo has plenty of fodder for her next book contract (publication set for 2010).

Zoe Marks is reading for a DPhil in Politics at St. Cross College, Oxford.

When the Oxonian Review sat down with Paul Collier in his office at Oxford’s Centre for the Study of African Economies, he had just returned from a visit with the US State Department, where he had briefed top American policy makers on his rescue plan for the world’s poorest countries. With the publication of his first book, The Bottom Billion (2007), Paul Collier established himself as a premier authority on international development, presenting aid solutions for the world’s poorest billion inhabitants. In his newest book, Wars, Guns and Votes, Collier moves into the contentious realm of policymaking. Collier anticipates controversy. He writes in Wars, Guns and Votes: “I am aware that I walk on a tightrope.” And he is. Wars, Guns and Votes came out in the UK last week.

A major theme of your book is that democracy can be dangerous if elections are installed without providing the critical public good of security. You propose a game plan that involves installing peacekeepers to the bottom billion countries for at least a decade. This calls for long term intervention by the international community. Could you clarify your criteria for when national sovereignty should be breached?

I think national sovereignty being breached is a melodramatic way of putting it, but there are two distinct contexts that concern us. One is post-conflict situations. Obviously, in conflict situations, when they begin, something has gone terribly wrong with the poverty; you’ve had a civil war. The record of these post-conflict periods is not very happy… about 40 percent of these countries go back into conflict within a decade, and they are responsible for about half of the civil wars that have happened. So we should be able to, as an international community, do much better than that record.

The international community has a big responsibility to the whole neighbourhood because if these situations go wrong, it is the whole neighbourhood that bears the responsibility, not just the country itself.  This is one reason why there is a case for limiting sovereignty or sharing sovereignty on behalf of the legitimate interest of the neighbourhood. The international community is providing peace through the peacekeepers and the money for reconstruction and that gives it both the power and the legitimacy to make sure that the recovery works. […]

There are three key actors and there are no quick fixes. There is the Security Council which is providing the peacekeepers. There are the donors who are providing the money. And there’s the post-conflict government which is setting the policies and also determining how accountable they are to the people. So what I propose is a contract between these three parties and to recognise the interdependence.

But what about the third actor? The local government? Don’t you think that your game plan gives Mugabe the exact propaganda he needs to say: “Look, Western policemen are taking over Africa?”

Of course he will. You can hear him say it. You have to use your brain and say who has actually got the interest of these societies? Is it Mugabe with his fine record or is it mine? The truth is that there is no appetite for a new bout of colonialism. On the contrary, the main problem is that the appetite for concern is so low, and the prevailing sentiment is: “Just wash your hands of it and do things that are decorative.” So, the difficulty is not trying to restrain a voraciously powerful West that wants to restore colonialism, it’s trying to persuade a West that is [complacent]. I was on Capitol Hill just recently and the sentiment that was expressed to me, in the case of Somalia, was: “Build a fence around it and walk by.”

And what a lot of the bottom billion countries have is not national sovereignty; it’s presidential sovereignty. Presidents won’t share power with their own citizens. It’s grotesque that Mugabe is still in power, and certainly not thanks to the endorsement of [Zimbabwe’s] people. Nor will they pool power with their neighbouring government. […]

Presidents are clinging onto power vis-a-vis their own populations and vis-a-vis their neighbours. The result is that their states are not capable of supplying key public goods, so they’ll have to be supplied internationally.

Just now, you mentioned that you went to Washington to convince people to buy into your plan. And in the book, you put yourself in the shoes of a rational dictator weighing pros and cons of allowing international intervention. If you were in front of Mugabe now and had the ear of Obama, how would you persuade them both to sign onto your plan?

I was in the State Department on Monday and talking through these issues. Clearly, the Administration has a lot of legitimacy in Africa. If there were a fair election in Zimbabwe between Mugabe and Obama, Obama would win it easily. So in terms of who is the most legitimate actor, it is clearly Obama. So the issue with America is not legitimacy but overload. It’s whether they see sufficient interest to move. And the argument has to be a combination of an ethical argument based on compassion (here are people socially integrated into the world but economically completely marginalised; they cannot provide the key public goods themselves, so we have to help them to back out of the cul-de-sac they’re in), and a degree of enlightened self-interest—that it is actually foolish to leave societies so precarious that some of them become Somalias. The strategy of building a fence around Somalia and hoping that it disappears seems to me, really, an ostrich-line strategy.

The muddle over American intervention or non-intervention has been so extreme, ranging from total non-intervention (Somalia) to total intervention (Iraq), and a new discourse coming out of Hilary Clinton is “smart power”. That’s a hopeful discourse because what she means is a minimal use of hard power aligned with an intelligent use of soft power. And that seems to me to be the right approach because we haven’t got much appetite for hard power, but […] we can show that the minimum of hard power aligned with an intelligent use of soft power (money, international standards, legitimacy of Obama) can make a difference.

How was your dual argument for ethical compassion and enlightened self-interest received when you actually talked about this to Washington? Did they buy it?

Oh, absolutely. There’s a lot of buy in. I’ve been amazed ever since the publication of The Bottom Billion, there’s been a huge interest on the part of government to align with the agenda. Obviously, not people like Mugabe… they’re a part of the problem.

So the State Department got on board with this?

Well, you have to ask the State Department. But they invited me, and yes, I think there’s a lot of interest both in Europe and in America.

What were their objections?

I think… one strand of opinion would be basically pessimistic and say we’ve failed and failed, there is no point in trying anymore. So there’s a lot of fatigue and despair. And the other sentiment is the sort of, “build a fence and ignore it”…

So the White House didn’t object to your plan based on shortage of resources?

No. And of course, my approach is not just saying that all we need is twice as much money as you’d ever thought of. It’s a matter of marrying money with other policy interventions such as trade, governance, security. For example, I am having a discourse with the American administration on Haiti at the moment. They’ve already done the trade deal with Haiti. So now, the thing to do is to provide the rather modest amount of money that would make it feasible to export on the basis of that trade deal.

The US government has been involved in several coups of democratically elected leaders. Given that track record, do you think it’s really plausible for African dictators to buy into your proposed bait of offering to help them put down possible coups?

What I would like to see military intervention to be used for is to discourage coup d’états. There have been three coups in West Africa in this past week. I’m sure at this very moment, African presidents really are lying awake at night worrying about coup d’états. And the tragedy of coup d’états is that they displace democratic governments just as much as bad governments. Now, I don’t think we should try and prevent all coup d’états… the international community should use its military force to restore democratically elected governments—I don’t see any ethical issue in that. It would actually be disgraceful to do anything else. We already did it in Sierra Leone and nobody accused the international community of neo-colonialism in doing that. So there is a legitimate role for force, serious force in protecting democratic governments.

Now, the neat twist to that is that once you’ve got an undertaking to protect democratic governments, there has to be one condition at least, which is that the government conducts a democratic election. If it cheats, it should not be protected. So I propose an international standard that governments could undertake to adopt on the conduct of elections. And if they adopted that standard, they would be protected, as long as they conducted the election properly. If they then subsequently cheated on an election, that cover against the coup would be withdrawn, and the withdrawal would be a signal. Knowing that, presidents would be much more weary of cheating on elections…

What I was asking was not a normative question of whether or not the US and the international community should intervene to install democratic elections. I am saying that sometimes, the US government actually intervenes to put down democratically governments. Given this track record, how can they be trusted to safeguard democracy?

That’s why it is so important to have clear rules of engagement. When is it legitimate to use military force and when is it not? America’s got a force AFRICOM and that force needs clear rules of engagement because otherwise, as you say, it is going to be treated with a lot of suspicion. But the right rule of engagement is not “never intervene”. If there were a coup in Ghana tomorrow, the right rule of engagement would be to fly in and restore the legitimate government. If there were a coup in Zimbabwe tomorrow, the right rule of engagement would not be to fly in and restore Mugabe—and so we need clear rules to delineate that.

You propose a ten-year period of peacekeeping, during which the economy of the [post-conflict] country is supposed to double. If the economy doesn’t double, what do you propose then?

First of all, there’s already a lot of peacekeepers in there, there are over 100,000 of them now, so this is the future, like it or not. So, the question is really complementary strategies to peacekeeping. Precisely because these economies go so far down during the conflict, it’s relatively easy to get strong growth post-conflict, as long as you’ve got some restoration of reasonable policies, a guarantee of security and flows of aid. So it’s not difficult to get rapid growth. If you don’t get growth, then it’s true, quite possibly you haven’t got a viable exit strategy. Then you’ve got some hard choices, but the world doesn’t come in nice easy boxes.

What are some of those choices?

Well, do you pull the troops out anyway? Or, do you say: “This is harder than we thought, this is longer than we thought.” So, take a country like Liberia or Sierra Leone, or Haiti. So far, economic recovery hasn’t been that great. So does the international community just say: “Time’s up, bye-bye?”

Personally, I think that would be very foolish. Post-conflict is often messy, so the right thing to do is to do what it takes to get recovery… the US left over 100,000 troops in Europe for 40 years to get recovery, and it was a good strategy…it was the right thing to do.

Diana Fu is reading for a DPhil in Politics at Linacre College, Oxford, and is Politics Editor of the Oxonian Review. Amreeta Mathai is reading for an MPhil in Development Studies at St. Anne’s College, Oxford.

Photograph courtesy of Paul Collier