Economics Rules by Dani Rodrik

 

This is a great book, and given the post financial crisis criticisms of mainstream economics it is relevant and timely. It is also accessible and easy to read for anyone interested in how economists actually think and work, rather than the stereotypes of unrealistic assumptions and ideological biases typically found. Most of the topics would be understood by interested non-economists, and be particularly useful for people who are unclear about how economics progresses by developing new models that generally complement, not replace, older ones.

The first part of the book explains economic thinking, and the role of the models that economists use. The basic idea is that there are many valid models, and the challenge is to know which is applicable to a specific problem or issue. This is the main point of the book and is a message worth repeating: different models have different applications, there are no wrong models, only badly and inappropriately applied models. Rodrik thus regards contemporary economics as a collection of models, not as single grand theory (or a quest for one). The economist’s craft lies in knowing which model is appropriate to the task at hand.

Another important point is that all the big, ultimate answer type models have proved to be disappointing when confronted with economic conditions they do not incorporate. Thus Keynesian models didn’t work in the 1970s with stagflation, and new classical models led to the 2007 financial crises and had little to contribute to policy responses. It is not necessary to discard these models, but there are others that are more appropriate for the circumstances. There are a number of good examples of how this works in practice.

Rodrik’s writing style explains things in a way that is both illuminating and sensible. There were moments when I found myself seeing economics from a new perspective, something that does not happen often, and there were many new ideas I hadn’t come across before. Also, there was nothing I disagreed with, despite the book’s wide scope and the range of topics covered. I recommend it to anyone interested in economic policy, or economic theory.

Rodrik’s blog page is at http://rodrik.typepad.com/dani_rodriks_weblog/

A video of him presenting the ideas in Economics Rules is at https://www.youtube.com/watch?feature=youtu.be&t=29m&v=Yxbcb7hxZP0&app=desktop

Procurement case study: Westminster 1837

The Building of Westminster

At the beginning of the 19^th century in England, the building industry was undergoing major changes. For many years, even centuries before, building had been done by independent craftsmen belonging to guilds, or Companies, who usually worked directly for a client. The end of the 1700s, however, was the time of transition from these old, established ways to what eventually became known as the ‘modern system’ of contract labour and measuring to determine costs.

There were two key characteristics of this new procurement system. First was the use of detailed drawings and design, completed before the work began. The second was the preparation of cost estimates for the project, on the basis of the design drawings. The two significant outcomes of these characteristics, that became the foundations of the modern system, were the shift to competitive tendering and the emergence of the professions of architects, engineers, surveyors and contractors during the rebuilding of London after the Great Fire of 1666.

In the 1800s the general contractor emerged as a new type of firm, winning projects through competition, responsible for organising the building process, and employing craftsmen to undertake work directly or as subcontractors. By the middle of the 19^th century large contracting businesses had taken on the form that in many ways we still see today, and procurement and contracting was using a recognizably similar system.

The construction of Westminster from 1837 was one of the first major buildings to be done using the ‘modern system’ of procurement and contracting, with detailed drawings from the architect and a bill of quantities (BQ) with full estimates based on them. Under the earlier system of measure and value, costs had been determined on completion by a measurer, originally a tradesman, and over time this became a specialised task done by surveyors.

The story of the building of the New Palace of Westminster (the British Houses of Parliament) in the mid-nineteenth century is instructive. As told by Kingsford in Builders and Building Workers, the project used new engineering techniques and machinery, the skills of hundreds of traditional craftsmen and a huge work force managed by some of the largest contractors. There were between 400 and 1,400 men employed on the project at any one time in 1848, 776 were on site, 120 in quarries and 335 in the contractor’s workshop. The project was expected to take six years and cost £700,000, but actually took almost 30 years and cost over £2 million (well over £500 million or $1 billion in today’s money).

There were disputes between the architect who won the design competition, Charles Barry, and pretty much everyone else involved, starting before construction began. There were arguments over the initial design, over the estimates and the architect’s fees, there were disputes over contract prices and supply problems with the materials. The designer of the heating and ventilation system fell out with Barry and the two became enemies. The masons went on strike for 30 weeks after a foreman swore at them.

The project was carried out through a series of successive contracts awarded through competitive tender or by recommendation by Barry. The first two contracts were let by the government department in charge. The third contract was put out for tender to eight firms recommended by Barry, and was won by one of the largest London contractors (Grissell and Peto) who were then given the following four contracts by negotiation without further competition.

In the third contract the prices were set by the builder and agreed to by the architect, however in the fourth contract prices were determined by the government department and set lower than prices arrived at through competition. The assumption was that the new industrial technology appearing on building sites, such as mechanical scaffolding and steam powered hoists and pumps, would reduce the costs. These contracts had detailed specifications on all aspects of the work and were priced in a form recognizably similar to a modern bill of quantities. The work of each trade was specified separately. The contractor later renegotiated a new set of prices as these were profitless contracts otherwise.

The 1844 contract for ‘finishings’ was on a unit price basis, reduced by 22 percent by the Office of Works and Public Buildings on the basis that the new machinery coming into use would save time and labour. As it turned out much of the carpentry work, although initially carved by new machines, had to be completed by hand at significant extra cost. Grissell terminated the contract in 1845 and the complex negotiations that followed went on over many years. Building agreements in those days did not include provision for claims and variations.

This was also a time a rapid technological innovation and development, both by and for contractors. Satoh has six chapters on 19^th century technical advances in his Building in Britain, covering stone, wood, bricks, components, pumps and lifting machinery. Like other industries the widespread availability of steam power was transformational in the application of new machinery and the use of mechanization on building sites slowly increased. There was also an ongoing transfer of site work into the contractors' workshops. For the largest firms these were huge, William Cubitt (contractor brother of property developer Thomas Cubitt) had 25 acres on the Isle of Dogs in 1845, complete with wharves, sawmills, cement kilns, an iron foundry, brickfields, a pottery and so on, linked by an internal railway and employing about 800 men. Westminster was also where many of these new technologies and innovations were used, some of them for the first time.

During the 19^th century general contractors, often winning projects in competitive tenders, became responsible for organising projects and employing workers. While there were recognizable elements of the old system still in use in the 19^th century, the building industry was becoming a complex and confusing conglomeration of businesses and individuals. Many of these characteristics of the industry, as the example of the building of Westminster shows, are still part of the building and construction industry today. The same can be said for issues in procurement and contracting.

Many major modern projects have the same or similar story arc, such as the Scottish Parliament building (initially budgeted for £40 million and three years construction but taking six years and costing over £400 million.) and Australia’s Parliament House. The Sydney Opera House is famous not only for its location and design but also for its probable world record cost blowout of 1,400%. Other famous cost overruns in recent years include the Boston Big Dig and Denver airport, and all these projects had problems recognizably similar to those found in the building of the Palace of Westminster.

Satoh closes his book with a series of quotes from opponents of the modern system from the mid-nineteenth century. These include: poor quality work due to low price bidding, or subcontracting; builders undercutting each other to win work under the new system of competitive tenders; the lack of provision for variations in fixed price contracts; unjustified claims by contractors; arbitrary decisions by superintendents and architects; non-payment by clients; and collusion between contractors. To address these issues the procurement and contracting system began to incorporate increasingly detailed drawings and specifications, and a schedule of prices was often attached for claims and variations. The unilateral nature of the contract led to the drafting of the Conditions of Contract.

In 1870 the terms of a document called the Heads of Conditions of Builders Contracts was agreed between the Royal Institute of British Architects and the Builders’ Society This established the basic outline and principles of the standard building contract which could then be varied to particular circumstances, and addressed the concern of builders who felt that previous contracts made no provision for variations in materials prices or the cost of extra work. Bills of quantities were introduced as part of the contract in 1902, after many revisions in the meantime, and this remained the basic form until 1931 when the Joint Contract Tribunal was set up and the standard forms of contract came into use. These are still the basis of the majority of building contracts in the UK today.

In procurement and contracting in the building and construction industry change happens slowly. This may, however, not be true of the 21^st century.

This is one in a series of procurement case studies. Other ones are on the building of the  the Scottish parliament house Holyrood Building in 1997 and Heathrow Terminal 5.


References 

Kingsford, P.W. 1973. Builders and Building Workers, London: Edward Arnold.

Satoh, A. 1995. Building in Britain: The Origins of a Modern Industry, London: Scholar Press.