Economics may be dismal, but it is not a science

Financial Times, 13 April 2010

A remarkably distinguished group of economists gathered last weekend for the inaugural conference of the Institute for New Economic Thinking, an initiative of George Soros. They were soul searching over the failures of economics in the recent crisis. Such failures are most evident in two areas: the inadequacies of the efficient market hypothesis, the bedrock of modern financial economics, and the irrelevance of recent macroeconomic theory.

The central idea of the efficient market hypothesis is that prices represent the best estimate of the underlying value of assets. This thesis has recently taken a battering. The boom and bust in the money markets was precipitated by a US housing bubble. That bubble followed the New Economy fiasco and was preceded by the near-failure of Long Term Capital Management, a hedge fund designed to showcase sophisticated financial economics.

The macroeconomics taught in advanced economics today is largely based on analysis labelled dynamic stochastic general equilibrium. The unappealing title gives the game away: the theorists are mostly talking to themselves. Their theories proved virtually useless in anticipating the crisis, analysing its development and recommending measures to deal with it.

Recent economic policy debates have not only largely ignored DSGE, but have also been remarkably similar to the economic policy debates of the 1930s, although they have been resolved differently. The economists quoted most often are John Maynard Keynes and Hyman Minsky, both of whom are dead.

Both the efficient market hypothesis and DSGE are associated with the idea of rational expectations – which might be described as the idea that households and companies make economic decisions as if they had available to them all the information about the world that might be available. If you wonder why such an implausible notion has won wide acceptance, part of the explanation lies in its conservative implications. Under rational expectations, not only do firms and households know already as much as policymakers, but they also anticipate what the government itself will do, so the best thing government can do is to remain predictable. Most economic policy is futile.

So is most interference in free markets. There is no room for the notion that people bought subprime mortgages or securitised products based on them because they knew less than the people who sold them. When the men and women of Goldman Sachs perform “God’s work”, the profits they make come not from information advantages, but from the value of their services. The economic role of government is to keep markets working.

These theories have appeal beyond the ranks of the rich and conservative for a deeper reason. If there were a simple, single, universal theory of economic behaviour, then the suite of arguments comprising rational expectations, efficient markets and DSEG would be that theory. Any other way of describing the world would have to recognise that what people do depends on their fallible beliefs and perceptions, would have to acknowledge uncertainty, and would accommodate the dependence of actions on changing social and cultural norms. Models could not then be universal: they would have to be specific to contexts.

The standard approach has the appearance of science in its ability to generate clear predictions from a small number of axioms. But only the appearance, since these predictions are mostly false. The environment actually faced by investors and economic policymakers is one in which actions do depend on beliefs and perceptions, must deal with uncertainty and are the product of a social context. There is no universal economic theory, and new economic thinking must necessarily be eclectic. That insight is Keynes’s greatest legacy.

John Kay is a member of the advisory board of the Institute for New Economic Thinking

The Mind Business

Financial Times, 24 August 2012

Yoga, meditation, ‘mindfulness’ – why some of the west’s biggest companies are embracing eastern spirituality

©Paul Shambroom

General Mills, the company behind Cheerios cereal and Häagen-Dazs ice cream, is headquartered on a leafy expanse outside Minneapolis, Minnesota. Enclosed walkways connect a network of modernist buildings, protecting Midwestern workers from heat and humidity in the summer, and bitter cold and towering snowdrifts in the winter. Inside the halls, some 3,000 people work on everything from product development and marketing to litigation, regulation and mergers and acquisitions. The employee base is generally reflective of middle America – predominantly white, casually dressed and possessing a genial, if hard-working, disposition.

Yet there are signs that in some significant ways, General Mills has a distinctly unusual corporate culture. Open the right door on a Tuesday morning and you might find a few dozen team leaders and executives meditating silently together on cushions, steeling their minds for the work week ahead. Enter a conference room later that afternoon and witness more than 50 senior employees from across the organisation standing on one leg in the tree pose as they practise yoga. Note that in every building on the General Mills campus there is a meditation room, equipped with a few zafus – or cushions for sitting practice – and yoga mats where, day after day, employees duck in to grab a few minutes of equanimity in between their meetings. These are the most obvious signs that, as an organisation, General Mills has something resembling a collective spiritual life.

This isn’t some passing fad sweeping middle management, or a pilot programme dreamed up by human resources. For seven years now, a growing number of General Mills workers have been practising meditation, yoga and so-called “mindfulness” in the workplace. And what began as a side project by one executive has transformed the culture of a Fortune 200 multinational.

“It’s about training our minds to be more focused, to see with clarity, to have spaciousness for creativity and to feel connected,” says Janice Marturano, General Mills’ deputy general counsel, who founded the programme. “That compassion to ourselves, to everyone around us – our colleagues, customers – that’s what the training of mindfulness is really about.”

The General Mills initiative is at the vanguard of a movement that is quietly reshaping certain corners of the corporate world. With meditation, yoga and “mindfulness”, the foundational tenets of Buddhism, Hinduism and other pan-Asian philosophies have infiltrated the upper echelons of some of the biggest companies on earth.

William George, a current Goldman Sachs board member and a former chief executive of the healthcare giant Medtronic, started meditating in 1974 and never stopped. Today, he is one of the main advocates for bringing meditation into corporate life, writing articles on the subject for the Harvard Business Review. “The main business case for meditation is that if you’re fully present on the job, you will be more effective as a leader, you will make better decisions and you will work better with other people,” he tells me. “I tend to live a very busy life. This keeps me focused on what’s important.”

Though the combination of mysticism and capitalism may seem incongruous, this interplay has found fertile ground at some of the best-known companies in the US and Europe. It is a mash-up of ancient insights and modern-day management theory, and it is happening at Target, Google and First Direct, among others. Today, in organisations large and small, eastern wisdom is changing western business.

These influences have been at work for decades. A generation exposed to “Beat” culture, hippies and eastern mysticism produced a flock of business leaders, including George and one Steve Jobs. Apple’s founder and former chief executive was a Zen Buddhist and spoke openly about how his time meditating in India shaped his world view and, ultimately, Apple’s product design.

“If you just sit and observe, you will see how restless your mind is,” Jobs told his biographer, Walter Isaacson. “If you try to calm it, it only makes it worse, but over time it does calm, and when it does, there’s room to hear more subtle things – that’s when your intuition starts to blossom and you start to see things more clearly and be in the present more. Your mind just slows down, and you see a tremendous expanse in the moment. You see so much more than you could see before. It’s a discipline; you have to practise it.”

There are no reliable statistics on how many companies offer meditation in the workplace, but a quarter of large US employers have launched “stress reduction” initiatives, according to the HR and outsourcing consultancy Aon Hewitt, and that number is growing steadily.

Here I must disclose an interest. I began meditating more than a decade ago. What began as an academic pursuit in college led me to spend a year studying in India, sitting with meditation teachers from the Tibetan, Zen and south-east Asian traditions. While I haven’t achieved any higher states of consciousness as a result, meditation and mindfulness come in handy on a near-daily basis, helping me maintain equanimity in a high-stress job. Moreover, in the course of reporting on technology, media and mergers and acquisitions, I’ve found like-minded meditators at a surprising range of companies.

Google’s “Search Inside Yourself” programme has introduced mindfulness to more than 1,000 employees. Pioneered by Chade-Meng Tan, an early Google employee, its popularity has been buoyed by Tan’s book of the same title. Tan turned to General Mills for inspiration when he began Search Inside Yourself in 2007, and is now bringing the training to other technology companies.

Indeed, Silicon Valley is a hotbed for mindfulness at work. An annual conference called Wisdom 2.0 draws together thousands of spiritually minded technologists from, among others, Facebook, Twitter and LinkedIn, who trade tips on how to stay calm in the digital age.

Aetna, one of the largest healthcare benefits companies in the US, began rolling out mindfulness and yoga programmes to its employees in 2010. The initiative was dreamed up by Aetna CEO Mark Bertolini, himself a meditator. After attracting 3,500 employees, Aetna this year began offering workplace meditation and yoga as a service it sells to customers. “Every morning I get up and I do my asana, pranayama, meditation and Vedic chanting before work,” Bertolini told Yoga Journal. “That’s my wellness programme. It’s helped me be more centred, more present.”

At the retail giant Target, based, like General Mills, in Minneapolis, a group called “Meditating Merchants” was set up in 2010. The training is open to all employees and has so far attracted 500 participants, who meditate once a week at lunch time. Mikisha Nation, a 33-year-old Jamaican woman who works in human resources, helped pioneer the Target group and says the practice complements her own work. “Happy, healthy, engaged team members create an environment that is a great place to work,” she says, “even though it might seem weird to sit on a mat in the middle of a conference room.”

Green Mountain Coffee Roasters offers monthly day-long retreats to employees, their family and friends and the community at large. Led by Shinzen Young, an American Buddhist teacher, the sessions are held inside Green Mountain’s engineering offices in Waterbury, Vermont. And in London, James Muthana runsYogaAt.com, a company that teaches yoga and meditation to corporate clients including First Direct, Taj Hotels and West Ham United football club. Muthana, a former banker who left the City after 10 years, says his practice is growing. “There’s a lot of uncertainty in the world today,” he tells me. “Our clients are aware that it’s not enough to attract talent – you’ve got to retain and look after that talent.”

Within this growing constellation of mindful businesses, General Mills has one of the most sophisticated programmes, with compelling, if nascent, research behind it.

©Paul Shambroom

Known as Mindful Leadership, the General Mills programme uses a mix of sitting meditation based on Buddhist practice, gentle yoga and dialogue to settle the mind. The idea is that calmer workers will be less stressed, more productive and even become better leaders, thereby benefiting the entire organisation.

Mindfulness can sound deceptively easy. Practitioners sit in a comfortable position, close their eyes and simply notice the physical sensations in their body and the swirling thoughts in their brain. Using moment-to-moment, non-judgmental awareness, the aim is to observe these sensations without reacting to them. By doing so, meditators gradually recognise the fleeting nature of sensations, including pain, anger and frustration. In time, this allows practitioners to quiet the mind. If it all works as intended, this results in individuals who are less agitated, more focused and easier to work with.

This may sound like New Age mumbo-jumbo, but a growing body of academic research provides a scientific explanation. Meditation is shown to reduce levels of cortisol, a hormone related to stress. When cortisol levels drop, the mind grows calmer and gains the stability to become more focused. “Mindfulness is an idea whose time has come,” says Google’s Tan. “For a long time practitioners knew, but the science wasn’t there. Now the science has caught up.”

That the practice delivers consistent results has led to its popularity not only with spiritual seekers, but also with psychoanalysts, health and now business professionals. At General Mills, several hundred executives have taken part in the programme, which has gained national renown and is being exported to other multinational companies. But to understand how a company with $17bn in revenues underwent a spiritual revolution involves examining the personal transformation experienced by one General Mills employee – who in turn became the company’s de facto guru.

Janice Marturano joined General Mills in 1996 as part of the company’s in-house legal team. A compact and quiet woman with a bob of black hair, Marturano had an impeccable résumé when she arrived. After graduating from New York University’s School of Law she was taken on by Curtis, Mallet-Prevost, Colt & Mosle LLP, a New York firm specialising in corporate work. In 1984 she joined the in-house team at Panasonic and then undertook a similar role at Nabisco.

When she joined General Mills 10 years later, Marturano was the liaison to the Food and Drug Administration, heading up policy work around trade regulation. She worked with the Securities and Exchange Commission and focused on anti-trust work, a role that ultimately led her down a spiritual path.

In 2000, General Mills sought to acquire Pillsbury, the baked-goods company known for its iconic Doughboy mascot, for $10.5bn. The deal was set to create the fourth-largest food company in the world, but was delayed by regulators. Approval dragged on for 18 months, and Marturano became mired in contentious antitrust policy.

©Paul Shambroom

General Mills’ Janice Marturano, who created the company’s 'Mindful Leadership' programme

As if those pressures weren’t enough, during that same year-and-a-half both Marturano’s parents died. The combination of events left her emotionally and intellectually drained. “I thought I’d bounce back. I’d been through deals before,” she says. “But I didn’t. My mental resilience had become so depleted.”

Marturano was still at this low ebb when she was offered the chance to join a retreat taught by Jon Kabat-Zinn, a psychologist who has helped popularise meditation as the author of Wherever You Go, There You Are: Mindfulness Meditation in Everyday Life. Though it was unlike anything she had done before, Marturano was in need of a shock to the system, so she headed to Miraval, a resort near Tucson, Arizona, for six days.

She was unprepared for the rigorous demands of mindfulness meditation when she arrived. “At the very beginning, Jon said: ‘Ok, we’re going to meditate for about an hour,’” Marturano recalls. “And I thought: What, are you out of mind? We’re going to do what for an hour?’” But six days later, on the last day of the retreat, Marturano found herself walking into the desert at 6am and slipping into a deep meditation. By the time the retreat was over, she didn’t want to leave.

She continued meditating daily back home in Minneapolis and noticed some marked improvements in her quality of life. She was more emotionally resilient and more focused at work. But after a few years, she was no longer content to live a dual life. “I was a closet meditator,” she says. It felt unnatural to practise meditation on the side, and go about work just as she always had. She wanted to find a way to fuse the two.

Marturano began sounding out potential converts, asking if they too might be interested in discovering ways to train their mind. When Marturano had a critical mass she called up Saki Santorelli, an associate professor at the University of Massachusetts Medical School, who had worked with Kabat-Zinn and others on the physiological effects of meditation.

Together Marturano and Santorelli developed a draft curriculum, and in early 2006 they took 13 General Mills executives to a small bed and breakfast in Spicer, Minnesota, for a five-day retreat. Those first 13 students came back to General Mills transformed. “There was quite a buzz when that first group went through,” recalls Beth Gunderson, General Mills’ director of organisation effectiveness. “Everybody wanted it. It started to take on a life of its own.”

To date, more than 400 General Mills employees have received the training, as have 250 executives and entrepreneurs from other companies. Marturano has also founded the Institute for Mindful Leadership, a non-profit organisation that aims to train executives from diverse professions. After more than 15 years at General Mills, Marturano will shortly depart to work at the institute full-time, though she still remains deeply involved at General Mills, often returning to campus in her continued attempt to remake an entire company’s culture.

On a hot Tuesday in June, I travelled to Minneapolis to see General Mills’ Mindful Leadership programme in action. Hearing about hundreds of executives meditating and practising yoga is one thing, but seeing the barefooted, mat-toting senior managers walking from their offices with contented grins is another altogether.

The two-hour extended session was scheduled to begin at 4pm in a large conference room off the main lobby. As people arrived, many hugged one another and I noticed some tears. General Mills had recently announced its first round of mass layoffs in decades – some attendees were having to fire members of their team, while others were losing their jobs. As participants trickled in, they sought out Marturano and greeted her like an old friend.

A circle of 50 or so meditation cushions was already set up, and people gradually settled down, sitting cross-legged or kneeling. They wore loose-fitting clothing and many sported T-shirts featuring General Mills products, including one woman in a bright yellow Cheerios getup. Once the group was seated, Marturano, also sitting in the Lotus position, rang a set of Tibetan prayer bells three times. “Take a posture that for you in this moment embodies dignity and strength,” she said in a slow, sonorous voice. “Allow the body to rest, to step out of busyness, bringing attention to the sensation of each breath.”

©Paul Shambroom

Sighs rippled through the silence as highly stressed execs let the work day fall away. Marturano instructed the group to keep attention focused on the breath, the first step in basic meditation. The group sat obediently, focusing on the sensation of air going in and out of their nostrils. After a few minutes, she invited them to expand their awareness to the sensations throughout the body.

After 30 minutes Marturano rang the bells again. The group stood in unison, moved the cushions to the side of the room and spread yoga mats across the conference room floor. For half an hour Marturano led the room through a series of gentle yoga poses, imploring her audience to focus on the sensations they were experiencing in their bodies.

Seated once more, Marturano gave the group an impromptu talk that wove together mindfulness practice, a poem and some General Mills shop talk. Marturano also spoke about the layoffs. “When we’re in any kind of transition in our lives it’s so easy to get into the swirl and get lost,” she told them. “Use this practice to gain stability in the mind. It’s a lonely time, but it’s also a hopeful time.”

General Mills has embraced the Mindful Leadership programme at an institutional level, an unusual but significant move for a very mainstream multinational. Since then, the company’s reputation as a proving ground for corporate leaders has only grown in stature. Leadership Excellence Magazine ranked it the best for developing leaders in 2011, up from 14th in 2010.

The company has even begun research into its efficacy, and the early results are striking. After one of Marturano’s seven-week courses, 83 per cent of participants said they were “taking time each day to optimise my personal productivity” – up from 23 per cent before the course. Eighty-two per cent said they now make time to eliminate tasks with limited productivity value – up from 32 per cent before the course. And among senior executives who took the course, 80 per cent reported a positive change in their ability to make better decisions, while 89 per cent said they became better listeners.

Other companies have found that such programmes can generate both health benefits and cost savings. Aetna, partnering with Duke University School of Medicine, found that one hour of yoga a week decreased stress levels in employees by a third, reducing healthcare costs by an average of $2,000 a year.

Mike Martiny, General Mills’ chief information officer, began practising with Marturano in 2007 on the recommendation of a team member. He continues to this day, sitting for 30 minutes to an hour, three to four times a week. Martiny says his meditation has enabled him to focus his attention more effectively. “The premise is to be open to what is happening right now,” he says. “There isn’t such a thing as multitasking. What people call multitasking is really shifting attention back and forth between activities very fast.” By choosing what to focus his attention on, and devoting himself to it fully, Martiny’s work has improved. Mindfulness practice has also helped Martiny become more present when spending time with his wife and four teenage children. “If I’m at family event and I’m looking at my phone, I might as well not be there,” he says. “It’s more honest to not be there.”

Like almost every executive I talked to, Martiny said he didn’t consider himself a Buddhist. (The one exception was Tan at Google, but even he says Search Inside Yourself is not religious. “Everything can be completely secular,” he says. “There is no religion associated with bringing attention to the breath. Anyone can learn this.”) Marturano is adamant that she, herself, is not a Buddhist. Nor is she troubled by any apparent contradiction around using compassion to breed better capitalists. The goal, she says, is to help each individual live healthier, more productive and peaceful lives, and make them less-stressed workers and better leaders.

Yet Marturano acknowledges the roots of her teachings. “I’ve learned a great deal from studying with some wonderful Buddhist teachers over the years,” she says. “I’m very careful to retain the integrity of mindfulness itself. I am certainly not reinventing the wheel.” Nor are General Mills, Google, Aetna or Target trying to convert their employees to some new religion. Instead, it seems that eastern wisdom – stripped of its religiosity and backed by scientific research – is becoming an accepted part of the corporate mainstream.

The trend looks set to continue. In addition to Marturano’s institute, Tan from Google has founded the Search Inside Yourself Leadership Institute, which is also looking to bring the training to other companies. Meanwhile, people such as Muthana from YogaAt.com will continue taking on new clients, including the advertising group Omnicom and the electronics maker NEC.

These contradictions – Buddhist teachers who aren’t Buddhists, corporations with spiritual communities, capitalism embracing traditions that shun materialism – are perhaps unsurprising in the modern age. Just as General Mills products are sold around the globe, feeding people from India to Indiana, so too the fundamental tenets of the world’s great religions are freely traded in every corner of the earth. The result is that the people who work hard to make high-margin, low-calorie breakfast cereals are at the same time striving to improve their spiritual equilibrium and even get a taste of enlightenment. “There is no work-life balance,” Marturano says. “We have one life. What’s most important is that you be awake for it.”

The Sun King at the Bank of England

Stephen Fay

Dan Conaghan
THE BANK
Inside the Bank of England
324pp. Biteback. £18.99 (US $30).
978 1 84954 287 6

Times Literary Supplement, 4 July 2012

Being Governor of the Bank of England can give a man a fine opinion of himself. In the mid-1980s, Gordon Richardson could say without a hint of irony: “I do think [the office of Governor] commands a certain amount of respect and goodwill. It’s true of Prime Ministers and Popes, isn’t it?”. His successors, Robin Leigh-Pemberton and Eddie George, were not imperial figures, but the tradition has been fully restored by the present incumbent, Sir Mervyn King. Alistair Darling, Labour’s last Chancellor, describes him “as some sort of Sun King”. King has worked at the Bank of England for twenty-two years, nine as Governor, long enough for Dan Conaghan to make a credible preliminary judgement on his role during a turbulent period in the Bank’s history, when the Governor had his way. An unintended consequence of his power play was to signal the end of the reign of Sun Kings.

King is an academic governor: initially, he interpreted his role narrowly, using the freedom granted by the new Chancellor of the Exchequer Gordon Brown in 1997 to set interest rates and concentrating on controlling inflation to the exclusion of other responsibilities. But after the horrors of the banking crisis between 2007 and 2009 there was a dramatic change in direction. Instead of shedding powers, King insisted that the Bank should once more play a leading role in bank regulation and economic intelligence.

Eddie liked argument. With Mervyn, absolutely not

Conaghan, a former journalist who now works in the City, is no economist (no use looking here for an analysis of quantitative easing). His grasp of the history of the Bank before King is sometimes uncertain. He tells the story of an influential Governor and gives him a mixed review. He suggests that since the credit crunch and the bail-out of the Royal Bank of Scotland and the Bank of Scotland, the Bank’s mystique, which it has always cultivated so carefully, has been reinterpreted as arrogance. Conaghan quotes a revealing though anonymous judgement by a former colleague: “Eddie liked argument. With Mervyn, absolutely not. If you argued against him you were cast out like a naughty boy . . . . A colleague recalls how a young analyst making a presentation on the Spanish banking system was asked impatiently ‘how is this relevant?’ He could make someone feel pretty stupid”. (King has since appreciated the relevance of Spanish banking.) Conaghan is not the first to peer behind Sir John Soane’s curtain wall on Threadneedle Street and observe King’s personality and politics. Howard Davies and David Green’s Banking in the Future delicately exposed some of King’s failings: “He is not, perhaps, a natural manager”, they wrote. But King’s most stinging critic is the Labour Government’s last Chancellor. Alistair Darling is not an impartial witness by any means, but in his memoir Back from the Brink, he provides Conaghan with damning evidence of King’s stubbornness and uncompromising attitudes. Recently, long and unflattering profiles of King have appeared in the Financial Times and The Times. They seemed slightly shocking, like acts of lèse-majesté. What is perhaps more surprising is that the academic Governor has proved to be a ruthless opportunist. When the Financial Services Bill is enacted at the end of 2012, the Bank’s imperial reach will embrace more authority in banking and finance than it has had at any time since its foundation in 1694.

King was an ambitious and energetic young economist who preferred to work on the real economy than debate among the left-wingers in the Cambridge economics faculty. At thirty-six, he became Professor of Economics at the LSE, where he took an interest in the City. When he was seconded to the Bank of England in 1991, as its chief economist, he joined an organization that had prided itself on not hiring economists. King was determined to alter that: he wanted economics to be the language of the Bank. Arriving during a severe crisis he influenced the decision to make the Bank’s principal objective the control of inflation. After five years, he contemplated his return to academia.

Gordon Brown caused him to change his mind. He conferred independence on the central bank and established the Monetary Policy Committee. Conaghan reports that when Eddie George asked King to organize the Monetary Policy Committee he said: “So you can’t leave now, can you?” Promoted to Deputy Governor, King became George’s obvious successor, taking on the role in 2003.

King described what followed as a period of “unusual serenity”, though by the summer of 2007 he had begun to notice that banks were making more money by taking greater risks. However, on August 6, the day the credit crunch started, King was at the Oval watching England piling on runs against India (he really loves cricket). He reacted crossly when he was disturbed by his worried staff, who wanted to tell him of crisis measures taken by the Federal Reserve and the European Central Bank.

It was not King’s finest hour. Darling was anxious to provide Northern Rock with the liquidity to see it through the crisis. When King obstinately disagreed with the Chancellor’s diagnosis, Darling discovered that the Treasury was not empowered to command the Bank to do as he wished. When RBS and the Bank of Scotland turned into disaster, Conaghan says that King accepted that there was a crisis but that he wanted it to be “a small crisis”. A very expensive deal was eventually cobbled together, but the Tripartite system of regulation, dividing responsibility among the Financial Services Authority, the Treasury and the Bank, had badly flunked its first great test.

King, reluctantly given a second five-year term by Darling, deftly demolished the Tripartite agreement at the Mansion House in 2009: “The Bank finds itself in a position rather like a church whose congregation attends weddings and burials but ignores the sermons in between”, he said. Conaghan recalls Darling’s anger. “I felt Mervyn had decided that, because of the Government’s weakness, he had licence to roam in a way he would never have done if he had thought he would still have to deal with us after the next election . . . dangerous territory for any Bank Governor.”

King had sensed that a new government would create another opportunity for the Bank. When the new Chancellor, George Osborne, made his own Mansion House speech in 2010, he argued that, if an independent central bank was to make monetary policy, it needed to have a more general influence over banking and finance. Conaghan describes this as a moment of no less significance than Brown’s reforms in 1997.

The Bank will require a shift in culture

The Bank had no leisure for self-congratulation. The reaction to its sweeping new powers was a wave of discontented criticism. The principal objection made by various Parliamentary committees concerned the Bank’s lack of accountability. In the Lords debate, King was described as “an overmighty subject”. One proposal to transform the Bank’s passive Court into an active supervisory body was brushed aside. But it was King’s refusal to initiate a rigorous internal inquiry into its role in the crisis, as the Treasury and the FSA had done, that focused attention on the Bank’s habitual reluctance to respond to criticism. The Treasury’s own inquiry quotes an anonymous Treasury official who said: “The Bank will require a shift in culture”.

King did not have it all his own way. One significant new rule was a direct consequence of the run on Northern Rock. Under the Financial Services Bill, ultimate responsibility for dealing with another banking disaster that involves spending public money will no longer rest with the Governor, but with the Chancellor. The new Financial Monetary Committee has been given a wider remit than King might have liked. Moreover, the man chosen to run banking supervision, Hector Sants of the FSA, decided he would rather not. In May 2012 the Bank grudgingly, without a hint of remorse, announced that three separate inquiries would judge whether it had anything to learn from the experience.

King’s opportunistic expansion of the Bank’s power and influence comes at a cost to the office of Governor, however. His successor will need to be as skilled a manager as a policy-maker. The necessary change in its culture makes it unlikely that Mervyn King’s successor will be chosen from within the Bank. Conaghan’s is the story of an influential autocrat who will be the last of his line. It is hard to imagine the next Governor sitting in the light, airy office overlooking a garden court and thinking of himself as a Sun King or a Pope – or having time to do so.

Stephen Fay’s books include Portrait of an Old Lady: Turmoil at the Bank of England, 1988, and The Collapse of Barings, 1996.

Your E-Book Is Reading You

Digital-book publishers and retailers now know more about their readers than ever before. How that's changing the experience of reading.

Wall Street Journal, 28 June 2012

By ALEXANDRA ALTER

It takes the average reader just seven hours to read the final book in Suzanne Collins's "Hunger Games" trilogy on the Kobo e-reader—about 57 pages an hour. Nearly 18,000 Kindle readers have highlighted the same line from the second book in the series: "Because sometimes things happen to people and they're not equipped to deal with them." And on Barnes & Noble's Nook, the first thing that most readers do upon finishing the first "Hunger Games" book is to download the next one.

In the past, publishers and authors had no way of knowing what happens when a reader sits down with a book. Does the reader quit after three pages, or finish it in a single sitting? Do most readers skip over the introduction, or read it closely, underlining passages and scrawling notes in the margins? Now, e-books are providing a glimpse into the story behind the sales figures, revealing not only how many people buy particular books, but how intensely they read them.

For centuries, reading has largely been a solitary and private act, an intimate exchange between the reader and the words on the page. But the rise of digital books has prompted a profound shift in the way we read, transforming the activity into something measurable and quasi-public.

The major new players in e-book publishing—Amazon, Apple and Google—can easily track how far readers are getting in books, how long they spend reading them and which search terms they use to find books. Book apps for tablets like the iPad, Kindle Fire and Nook record how many times readers open the app and how much time they spend reading. Retailers and some publishers are beginning to sift through the data, gaining unprecedented insight into how people engage with books.

Publishing has lagged far behind the rest of the entertainment industry when it comes to measuring consumers' tastes and habits. TV producers relentlessly test new shows through focus groups; movie studios run films through a battery of tests and retool them based on viewers' reactions. But in publishing, reader satisfaction has largely been gauged by sales data and reviews—metrics that offer a postmortem measure of success but can't shape or predict a hit. That's beginning to change as publishers and booksellers start to embrace big data, and more tech companies turn their sights on publishing.

Barnes & Noble, which accounts for 25% to 30% of the e-book market through its Nook e-reader, has recently started studying customers' digital reading behavior. Data collected from Nooks reveals, for example, how far readers get in particular books, how quickly they read and how readers of particular genres engage with books. Jim Hilt, the company's vice president of e-books, says the company is starting to share their insights with publishers to help them create books that better hold people's attention.

The stakes are high for the company as it seeks a greater share of the e-book market. Sales of Nook devices rose 45% this past fiscal year, and e-book sales for the Nook rose 119%. Overall, Nook devices and e-books generated $1.3 billion, compared to $880 million the previous year. Microsoft recently invested $300 million for a 17.6% stake of the Nook.

Mr. Hilt says that the company is still in "the earliest stages of deep analytics" and is sifting through "more data than we can use." But the data—which focuses on groups of readers, not individuals—has already yielded some useful insights into how people read particular genres. Some of the findings confirm what retailers already know by glancing at the best-seller lists. For example, Nook users who buy the first book in a popular series like "Fifty Shades of Grey" or "Divergent," a young-adult series by Veronica Roth, tend to tear through all the books in the series, almost as if they were reading a single novel.

Barnes & Noble has determined, through analyzing Nook data, that nonfiction books tend to be read in fits and starts, while novels are generally read straight through, and that nonfiction books, particularly long ones, tend to get dropped earlier. Science-fiction, romance and crime-fiction fans often read more books more quickly than readers of literary fiction do, and finish most of the books they start. Readers of literary fiction quit books more often and tend skip around between books.

Those insights are already shaping the types of books that Barnes & Noble sells on its Nook. Mr. Hilt says that when the data showed that Nook readers routinely quit long works of nonfiction, the company began looking for ways to engage readers in nonfiction and long-form journalism. They decided to launch "Nook Snaps," short works on topics ranging from weight loss and religion to the Occupy Wall Street movement.

Pinpointing the moment when readers get bored could also help publishers create splashier digital editions by adding a video, a Web link or other multimedia features, Mr. Hilt says. Publishers might be able to determine when interest in a fiction series is flagging if readers who bought and finished the first two books quickly suddenly slow down or quit reading later books in the series.

"The bigger trend we're trying to unearth is where are those drop-offs in certain kinds of books, and what can we do with publishers to prevent that?" Mr. Hilt says. "If we can help authors create even better books than they create today, it's a win for everybody."

Some authors welcome the prospect. Novelist Scott Turow says he's long been frustrated by the industry's failure to study its customer base. "I once had an argument with one of my publishers when I said, 'I've been publishing with you for a long time and you still don't know who buys my books,' and he said, 'Well, nobody in publishing knows that,' " says Mr. Turow, president of the Authors Guild. "If you can find out that a book is too long and you've got to be more rigorous in cutting, personally I'd love to get the information."

Others worry that a data-driven approach could hinder the kinds of creative risks that produce great literature. "The thing about a book is that it can be eccentric, it can be the length it needs to be, and that is something the reader shouldn't have anything to do with," says Jonathan Galassi, president and publisher of Farrar, Straus & Giroux. "We're not going to shorten 'War and Peace' because someone didn't finish it."

Publishers are only just beginning to mull over the potential uses for e-reading data. Many are skeptical that analytics can aid in the industry's ongoing battle to woo consumers who are increasingly distracted by games and social media. But at a time when traditional publishers are losing ground to tech giants like Amazon and Apple, better analytics seem to offer tantalizing possibilities.

Amazon, in particular, has an advantage in this field—it's both a retailer and a publisher, which puts the company in a unique position to use the data it gathers on its customers' reading habits. It's no secret that Amazon and other digital book retailers track and store consumer information detailing what books are purchased and read. Kindle users sign an agreement granting the company permission to store information from the device—including the last page you've read, plus your bookmarks, highlights, notes and annotations—in its data servers.

Amazon can identify which passages of digital books are popular with readers, and shares some of this data publicly on its website through features such as its "most highlighted passages" list. Readers digitally "highlight" selections using a button on the Kindle; they can also opt to see the lines commonly highlighted by other readers as they read a book. Amazon aggregates these selections to see what gets underlined the most. Topping the list is the line from the "Hunger Games" trilogy. It is followed by the opening sentence of "Pride and Prejudice."

"We think of it as the collective intelligence of all the people reading on Kindle," says Amazon spokeswoman Kinley Pearsall.

Some privacy watchdogs argue that e-book users should be protected from having their digital reading habits recorded. "There's a societal ideal that what you read is nobody else's business," says Cindy Cohn, legal director for the Electronic Frontier Foundation, a nonprofit group that advocates for consumer rights and privacy. "Right now, there's no way for you to tell Amazon, I want to buy your books, but I don't want you to track what I'm reading."

Amazon declined to comment on how it analyzes and uses the Kindle data it gathers.

EFF has pressed for legislation to prevent digital book retailers from handing over information about individuals' reading habits as evidence to law enforcement agencies without a court's approval. Earlier this year, California instituted the "reader privacy act," which makes it more difficult for law-enforcement groups to gain access to consumers' digital reading records. Under the new law, agencies must get a court order before they can require digital booksellers to turn over information revealing which books their customers have browsed, purchased, read and underlined. The American Civil Liberties Union and EFF, which partnered with Google and other organizations to push for the legislation, are now seeking to enact similar laws in other states.

Bruce Schneier, a cyber-security expert and author, worries that readers may steer clear of digital books on sensitive subjects such as health, sexuality and security—including his own works—out of fear that their reading is being tracked. "There are a gazillion things that we read that we want to read in private," Mr. Schneier says.

There are some 40 million e-readers and 65 million tablets in use in the U.S., according to analysts at Forrester Research. In the first quarter of 2012, e-books generated $282 million in sales, compared to $230 million for print, the Association of American Publishers recently found.

Meanwhile, the shift to digital books has fueled an arms race among digital start-ups seeking to cash in on the massive pool of data collected by e-reading devices and reading apps. New e-reading services, which allow readers to purchase and store books in a digital library and read them on different devices, have some of the most sophisticated reader tracking software. The digital reading platform Copia, which has 50,000 subscribers, collects detailed demographic and reading data—including the age, gender and school affiliation of people who bought particular titles, as well as how many times the books were downloaded, opened and read—and shares its findings with publishers. Copia aggregates the data, so that individual users aren't identifiable, and shares that information with publishers that request it.

Kobo, which makes digital reading devices and operates an e-reading service that stocks 2.5 million books and has more than eight million users, has recently started looking at how readers as a whole engage with particular books and genres. The company tracks how many hours readers spend on particular titles and how far they get. Kobo recently found, for example, that most readers who started George R.R. Martin's fantasy novel "A Dance With Dragons" finished the book, and spent an average of 20 hours reading it, a relatively fast read for a 1,040-page novel.

William Duke

Some publishers are already beginning to market test books digitally, before releasing a print edition. Earlier this year, Sourcebooks, which publishes 250 titles a year, began experimenting with a new model of serial, online publishing. Sourcebooks has released early online editions for half a dozen titles, ranging from romance to young adult to nonfiction books, and has solicited questions and suggestions from readers. Eventually, readers' feedback will be incorporated into the print version.

Scholastic, which publishes popular young-adult fiction such as Harry Potter and "The Hunger Games," created online message boards and interactive games connected to its popular series "39 Clues." The online game and message board, which has 1.9 million registered users, allows the publisher to track which story lines and characters are resonating with young readers. David Levithan, Scholastic's publisher and editorial director, says the online feedback has shaped the ongoing "39 Clues" series and helped to turn it into a global franchise with more than 15 million copies in print.

"You very rarely get a glimpse into the reader's mind," he says. "With a printed book, there's no such thing as an analytic. You can't tell which pages are dog-eared."

Few publishers have taken the experiment as far as Coliloquy, a digital publishing company that was created earlier this year by Waynn Lue, a computer scientist and former Google engineer, and Lisa Rutherford, a venture capitalist and former president of Twofish, a gaming-analytics firm.

Coliloquy's digital books, which are available on Kindle, Nook and Android e-readers, have a "choose-your-own-adventure"-style format, allowing readers to customize characters and plot lines. The company's engineers aggregate and pool the data gleaned from readers' selections and send it to the authors, who can adjust story lines in their next books to reflect popular choices.

"Data and analytics, we've seen how it revolutionized certain industries like mobile apps and gaming," says Mr. Lue. "With reading, we don't yet have that engagement data, and we wanted to provide a feedback mechanism that didn't exist before between authors and readers."

Coliloquy developed its software through Amazon's Kindle data developer program, which allows outside companies to create interactive content for Kindle. Their proprietary data platform draws on complex algorithms, similar to gaming software, that lets readers choose from different narrative pathways.

The company hired six editors and five technology and product developers and began recruiting authors from a range of genres, including romance, nonfiction, young adult fantasy and erotica. Since launching this past January, the company has released eight titles, and is expanding into crime fiction, legal thrillers and experimental fiction. Mr. Lue and Ms. Rutherford declined to provide sales figures for Coliloquy's titles, citing a nondisclosure agreement with Amazon. But they say more than 90% of readers who buy Colloquy's books, which range from $2.99 to $7.99, finish reading them, and 67% reread the books.

In "Parish Mail," Kira Snyder's young adult mystery series set in New Orleans, readers can decide whether the teenage protagonist solves crimes by using magic or by teaming up with a police detective's cute teenage son. Readers of "Great Escapes," an erotic romance series co-written by Linda Wisdom and Lynda K. Scott, can customize the hero's appearance and the intensity of the love scenes. A recent report from Coliloquy showed that the ideal hero for "Great Escapes" readers is tall with black hair and green eyes, a rugged, burly build and a moderately but not overly hairy chest.

In Tawna Fenske's romantic caper "Getting Dumped"—which centers on a young woman who finds work at a landfill after getting laid off from her high-profile job at the county's public relations office—readers can choose which of three suitors they want the heroine to pursue. The most recent batch of statistics showed that 53.3% chose Collin, a Hugh Grant type; 16.8% chose Pete, the handsome but unavailable co-worker; and 29.7% of readers liked Daniel, the heroine's emotionally distant boyfriend.

Ms. Fenske originally planned to get rid of Daniel by sending him to prison and writing him out of the series. Then she saw the statistics. She decided 29.7 % was too big a chunk of her audience to ignore.

"So much of the time, it's an editor and agent and publisher telling you, 'This is what readers want,' but this is hands-on reader data," says Ms. Fenske, 37, who lives in Bend, Ore. "I've always wondered, did that person buy it and stop after the first three pages? Now I can see they bought it and read it in the first week."

Of the 1%, by the 1%, for the 1%

Americans have been watching protests against oppressive regimes that concentrate massive wealth in the hands of an elite few. Yet in our own democracy, 1 percent of the people take nearly a quarter of the nation’s income—an inequality even the wealthy will come to regret.

By Joseph E. StiglitzIllustration by Stephen Doyle

Vanity Fair, May 2011

THE FAT AND THE FURIOUS The top 1 percent may have the best houses, educations, and lifestyles, says the author, but "their fate is bound up with how the other 99 percent live.”

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called “marginal-productivity theory.” In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin. The corporate executives who helped bring on the recession of the past three years—whose contribution to our society, and to their own companies, has been massively negative—went on to receive large bonuses. In some cases, companies were so embarrassed about calling such rewards “performance bonuses” that they felt compelled to change the name to “retention bonuses” (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin.

Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong. An economy in which mostcitizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul. There are several reasons for this.

First, growing inequality is the flip side of something else: shrinking opportunity. Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets—our people—in the most productive way possible. Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.

Third, and perhaps most important, a modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology. The United States and the world have benefited greatly from government-sponsored research that led to the Internet, to advances in public health, and so on. But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.

None of this should come as a surprise—it is simply what happens when a society’s wealth distribution becomes lopsided. The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had. They also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes.

Economists are not sure how to fully explain the growing inequality in America. The ordinary dynamics of supply and demand have certainly played a role: laborsaving technologies have reduced the demand for many “good” middle-class, blue-collar jobs. Globalization has created a worldwide marketplace, pitting expensive unskilled workers in America against cheap unskilled workers overseas. Social changes have also played a role—for instance, the decline of unions, which once represented a third of American workers and now represent about 12 percent.

But one big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end. Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement—we started way behind the pack, but now we’re doing inequality on a world-class level. And it looks as if we’ll be building on this achievement for years to come, because what made it possible is self-reinforcing. Wealth begets power, which begets more wealth. During the savings-and-loan scandal of the 1980s—a scandal whose dimensions, by today’s standards, seem almost quaint—the banker Charles Keating was asked by a congressional committee whether the $1.5 million he had spread among a few key elected officials could actually buy influence. “I certainly hope so,” he replied. The Supreme Court, in its recent Citizens United case, has enshrined the right of corporations to buy government, by removing limitations on campaign spending. The personal and the political are today in perfect alignment. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office. By and large, the key executive-branch policymakers on trade and economic policy also come from the top 1 percent. When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

America’s inequality distorts our society in every conceivable way. There is, for one thing, a well-documented lifestyle effect—people outside the top 1 percent increasingly live beyond their means. Trickle-down economics may be a chimera, but trickle-down behaviorism is very real. Inequality massively distorts our foreign policy. The top 1 percent rarely serve in the military—the reality is that the “all-volunteer” army does not pay enough to attract their sons and daughters, and patriotism goes only so far. Plus, the wealthiest class feels no pinch from higher taxes when the nation goes to war: borrowed money will pay for all that. Foreign policy, by definition, is about the balancing of national interests and national resources. With the top 1 percent in charge, and paying no price, the notion of balance and restraint goes out the window. There is no limit to the adventures we can undertake; corporations and contractors stand only to gain. The rules of economic globalization are likewise designed to benefit the rich: they encourage competition among countries for business, which drives down taxes on corporations, weakens health and environmental protections, and undermines what used to be viewed as the “core” labor rights, which include the right to collective bargaining. Imagine what the world might look like if the rules were designed instead to encourage competition among countries forworkers. Governments would compete in providing economic security, low taxes on ordinary wage earners, good education, and a clean environment—things workers care about. But the top 1 percent don’t need to care.

Or, more accurately, they think they don’t. Of all the costs imposed on our society by the top 1 percent, perhaps the greatest is this: the erosion of our sense of identity, in which fair play, equality of opportunity, and a sense of community are so important. America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe. The cards are stacked against them. It is this sense of an unjust system without opportunity that has given rise to the conflagrations in the Middle East: rising food prices and growing and persistent youth unemployment simply served as kindling. With youth unemployment in America at around 20 percent (and in some locations, and among some socio-demographic groups, at twice that); with one out of six Americans desiring a full-time job not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from “food insecurity”)—given all this, there is ample evidence that something has blocked the vaunted “trickling down” from the top 1 percent to everyone else. All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

In recent weeks we have watched people taking to the streets by the millions to protest political, economic, and social conditions in the oppressive societies they inhabit. Governments have been toppled in Egypt and Tunisia. Protests have erupted in Libya, Yemen, and Bahrain. The ruling families elsewhere in the region look on nervously from their air-conditioned penthouses—will they be next? They are right to worry. These are societies where a minuscule fraction of the population—less than 1 percent—controls the lion’s share of the wealth; where wealth is a main determinant of power; where entrenched corruption of one sort or another is a way of life; and where the wealthiest often stand actively in the way of policies that would improve life for people in general.

As we gaze out at the popular fervor in the streets, one question to ask ourselves is this: When will it come to America? In important ways, our own country has become like one of these distant, troubled places.

Alexis de Tocqueville once described what he saw as a chief part of the peculiar genius of American society—something he called “self-interest properly understood.” The last two words were the key. Everyone possesses self-interest in a narrow sense: I want what’s good for me right now! Self-interest “properly understood” is different. It means appreciating that paying attention to everyone else’s self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being. Tocqueville was not suggesting that there was anything noble or idealistic about this outlook—in fact, he was suggesting the opposite. It was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul—it’s good for business.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.