Economics 493/593 - History of Economic Thought

Lecture 17 Video - Fall 2007

Covers:

Modern Macroeconomic Thought (ch. 15) pgs. 414-434

Alternate: Google video - click to launch

Lecture 17 (Windows Media File)

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Class Materials for Lecture 17

Brief Outline of Topics Covered in Lecture 17:

Modern Macroeconomic Thought (ch. 15) pgs. 414-434

Video:

Lecture 17 [Media Player] - Fall 2007
Lecture 17 [Google video] - Fall 2007

 

Economics 493 Lecture 17

Review Questions for Lecture 16 (also added to the Review Questions - Material after Midterm 2 below):

1. How have views on government intervention to promote full employment changed since the Mercantilists? Be sure to summarize Mercantilist thought, the response of the Physiocrats and Smith to the Mercantilists, the Ricardo-Malthus debate, Say's law, Keynes and the Keynesians, and the views based upon the New Classical model, Real Business Cycle models, and the New Keynesian model.

John Maynard Keynes (right) and Harry Dexter White at the Bretton Woods Conference

Additional Reading:

A colleague who was believed to be the last surviving U.S. economist involved in the Bretton-Woods negotiations, Ray Mikesell:

UO professor, Bretton Woods economist, dies at age 93, by Rebecca Nolan, The Register-Guard: A University of Oregon professor, believed to be the last surviving economist from the 1944 Bretton Woods conference that led to the creation of the World Bank and the International Monetary Fund, died Tuesday at his home in Eugene. Raymond Mikesell died of age-related causes. He was 93. ...

Toward the end of World War II, he became an adviser to Assistant Treasury Secretary Harry Dexter White, who led U.S. efforts to shape the world's economy after the war. Mikesell was present at the Bretton Woods conference, where White and the British economist John Maynard Keynes negotiated the design of the World Bank, the IMF and the General Agreement on Tariffs and Trade. The institutions funded the European recovery and laid the foundation for the postwar economic expansion.

Mikesell provided data for White to use against Keynes' attempts to preserve British interests. ... [Update: NY Times story]

Among all countries involved in the Bretton Woods negotiations the last surviving economist is, as far as I'm aware, Dr. Jacques J. Polak who was a member of the Netherlands delegation. He is 92, lives in Washington, D.C., and maintains an office at the IMF where he continues to write.

One of Ray's many books, Foreign Adventures of an Economist written in 2000, gives details of his experiences in all sorts of negotiations and advisory capacities.  One part of the book details his experiences at Bretton Woods and it's a history worth preserving. Ray's main lasting contribution at the conference was to determine the IMF and World Bank formula used to set quotas:

This exercise required many calculations with a 1940s-style calculator, using a number of variables and weights for each country. If I had had access to a modern computer, I could probably have come up with a better formula. ... My formula was ... used as a basis for determining the IMF and World Bank quotas at Bretton Woods for most member countries represented at the conference. Thereafter, it was used in a somewhat revised form for new members joining the Fund. In fact, the formula is still used, but with special adjustments for individual countries. I take no pride in having authored the formula and sometimes apologize for it as my claim to infamy! It has continued to be used in large part because the Fund wanted to apply the same conditions in determining quotas for new members as were applied to the original members.

The book has a lot of interesting detail and insider information on the negotiations, and I've included the pdf's for the chapters on Bretton-Woods below for anyone who is interested. Here's one small section:

A Note on Personalities
John Maynard Keynes

As a young academic who had studied and taught both The Treatise on Money and The General Theory I was awed by Keynes and grateful that I could sit in meetings with him. Although he fought hard for positions he regarded as important for Britain's welfare, his economic arguments were academic and dispassionate. Keynes could accept philosophically the economic advantages of multilateral trade while continuing to defend a discriminatory sterling area in terms of Britain's national interest.

There was a sharp contrast between the literary quality of Keynes's ICU proposal and the legalistic formulation of the July 1943 version of the White plan. Keynes displayed arrogance in the elegant language of an educated British lord. He disliked the style and format of the Fund's Articles of Agreement. He said they were written in Cherokee, and he blamed the language on the Treasury Department's lawyers. Keynes frequently complained that Americans were too dependent on attorneys, and once suggested that "when the Mayflower sailed from Plymouth, it must have been entirely filled with lawyers."

Keynes was capable of displaying temper and once threw one of White's drafts to the floor, but he usually expressed his anger through sarcasm. He always had an air of dignity and did not join the revelry at the Bretton Woods nightclub. I never saw him in sport clothes. Nevertheless, he was approachable. Junior members, such as myself, were able to talk privately with him, and I always found him willing to answer my questions. If we took too much time, however, Lady Keynes would tiptoe over to protect him from becoming too tired. Those of us who were privileged to shake his limp hand on the train from Savannah to Washington following a light heart attack were left with the memory of saying farewell to a truly noble man.

Harry White

Personalities played an important role in the Bretton Woods debates and in the final outcome. I saw White in numerous meetings and on dozens of other occasions when we talked alone in his Treasury Department office. His Monetary Research staff was largely composed of former academicians, and many of us returned to universities after the war. The staff was intensely loyal to White, and he respected us as scholars and strongly supported us even when he thought we had made mistakes. I do not recall White's embarrassing any staff member by dressing him down, but he showed another side when he was involved in negotiations outside the Treasury Department. He was often brusque, even crude, in his meetings with Keynes and the British delegation.

When annoyed, he sometimes cynically addressed Keynes as "Your Royal Highness" or "Your Lordship." Lord Robbins, who participated in many of the pre-Bretton Woods meetings but was not close to White, described White well in his book Autobiography of an Economist:

It is true that White was not a very beautiful character. He was brash, truculent, and, I suspect, somewhat unscrupulous where his own interests were concerned. In his younger days he had been the victim of academic unemployment, possibly due to the discreditable anti-Semitism which at that time tended to affect the policies of the great university with which he had been associated; and I am fairly clear that he was determined that henceforth Harry White should not be worsted in the struggle for survival-- or eminence. But that he was in any way associated with the groups in the United States who actively wished harm or wished to exploit our [Britain's] position of weakness will not stand up to examination for a moment. (Robbins, 1971).

White often expressed to his staff his hostility toward the State Department, with which he frequently struggled for power within the U.S. government. Like Morgenthau, he wanted the Treasury Department to be the center of postwar economic policy and planning. This helps to explain the comprehensive nature of the original White plan. International financial institutions were not a high priority in the State Department; without White's zeal, there probably would not have been a Fund or a Bank. The Bretton Woods institutions might not have come into being if they had not been well advanced before the end of the war, since by then there was a plethora of immediate economic problems that these institutions were not equipped to handle.

White sought to conduct his own foreign policy independently of the State Department. He dealt directly with foreign officials in Washington, and members of the Monetary Research staff in American embassies in Allied countries, including myself, secretly reported directly to White without going through their embassies. White sometimes used the press to promote his policies that were in opposition to those of the State Department. On one occasion, while I was alone with him in his office, he dictated over the phone a long, top-secret State Department statement to a reporter. I do not know the reasons for White's antipathy toward the State Department, but it was not directed at individuals since he had close relations with some of them. I believe it was a reaction to the State Department's traditional insistence that it have commanding responsibility over foreign policy.

White believed that the U.S. government should have sought closer cooperation with the Russians. Through certain members of his staff, he provided information to and discussed policy with Soviet embassy officials. These relations were later discovered by the FBI and led to White's dismissal from the government, but they were not known to most of us in Monetary Research.

Many people have asked me if White was a Communist. I am convinced that he was not. White believed in free markets and capitalism and devoted his energies to planning for a postwar world with free and nondiscriminatory trade and payments. He was, however, quite willing to deal with Communist officials to achieve his objectives. The Soviet Union shared his political objectives regarding postwar Germany, and he believed that Soviet officials would support the Fund and the Bank proposals. He did not share the pervasive fear that the Communist ideology would spread to the rest of the world, or that the Soviet Union might dominate the world by military conquest. He believed that a Communist state could operate under a system of nondiscriminatory trade rules, abiding by the trade and exchange obligations of his plan.

White's associates who were later accused of being spies for the Soviet Union -- Sol Adler, Frank Coe, and Harold Glasser -- never indicated to me that they were not completely loyal to the United States or that they did not believe in a democratic capitalist society. I knew them so well personally that it is difficult for me to believe they could have concealed communist ideology from me. Although they may have had some association with the American Communist movement in their youth, as did many of my college acquaintances in the 1930s, I believe that the accusations directed against them arose from White's propensity to carry on direct relations with the Soviet government outside regular diplomatic channels. If these same activities had been carried on with the British or Canadians, they would have been acceptable. White and his closest associates simply ran their own foreign ministry.

A few weeks before White's death, he and I were speakers at a conference of the American Academy of Political and Social Science in Philadelphia. After the evening meeting on April 19, 1947, I spent a couple of hours with him in the lobby of the Benjamin Franklin Hotel. He was in a reflective mood, and we reminisced about the events leading to the creation of the Bretton Woods institutions. White had already been compelled to give up his position as the U.S. executive director of the Fund. He had been working as a consultant to the Chilean government and had recently returned from Santiago. He was scheduled to testify before the House Committee on Un-American Activities, but he spoke very confidently of being able to disprove the charges against him and appeared to look forward to the opportunity. White was charged with providing confidential information to the Soviet Union, but I have never believed he gave any information that was harmful to U.S. national interests. White did speak of his heart condition and, when we parted, he apologized for taking the elevator rather than walking the two flights to where both of our rooms were located. Some say he committed suicide to avoid testifying before the House committee. I do not believe it.

Something different, an excerpt from a book on Karl Marx:

Marx's 'Das Kapital' Lives On in Capitalist Age, NPR
[Listen Now]: ...Excerpt: 'Marx's Das Kapital: A Biography' by Francis Wheen: Chapter 1: Gestation ... Marx's earliest ambitions were literary. As a law student at the University of Berlin he wrote a book of poetry, a verse drama and even a novel, Scorpion and Felix, which was dashed off in a fit of intoxicated whimsy while under the spell of Laurence Sterne's Tristram Shandy. After these experiments, he admitted defeat: 'Suddenly, as if by a magic touch - oh, the touch was at first a shattering blow - I caught sight of the distant realm of true poetry like a distant fairy palace, and all my creations crumbled into nothing… A curtain had fallen, my holy of holies was rent asunder, and new gods had to be installed.' Suffering some kind of breakdown, he was ordered by his doctor to retreat to the countryside for a long rest - whereupon he at last succumbed to the siren voice of G. W. F. ...

After gaining his doctorate [Marx] thought of becoming a philosophy lecturer, but then decided that daily proximity to professors would be intolerable. 'Who would want to have to talk always with intellectual skunks, with people who study only for the purpose of finding new dead ends in every corner of the world!' Besides, since leaving university Marx had been turning his thoughts from idealism to materialism, from the abstract to the actual. 'Since every true philosophy is the intellectual quintessence of its time,' he wrote in 1842, 'the time must come when philosophy not only internally by its content, but also externally through its form, comes into contact and interaction with the real world of its day.' That spring he began writing for a new liberal newspaper in Cologne, the Rheinische Zeitung; within six months he had been appointed editor.

Marx's journalism is characterized by a reckless belligerence which explains why he spent most of his adult life in exile and political isolation. His very first article for the Rheinische Zeitung was a lacerating assault on both the intolerance of Prussian absolutism and the feeble-mindedness of its liberal opponents. Not content with making enemies of the government and opposition simultaneously, he turned against his own comrades as well, denouncing the Young Hegelians for 'rowdiness and blackguardism'. Only two months after Marx's assumption of editorial responsibility, the provincial governor asked the censorship ministers in Berlin to prosecute him for 'impudent and disrespectful criticism'.

No less a figure than Tsar Nicholas of Russia also begged the Prussian king to suppress the Rheinische Zeitung, having taken umbrage at an anti-Russian diatribe. The paper was duly closed in March 1843: at the age of twenty-four, Marx was already wielding a pen that could terrify and infuriate the crowned heads of Europe. ...

Here is a page from an archive of his writing, with more here.

Lecture 16 Video - Fall 2007

Covers:

Walras (ch. 11) pgs. 305-319

Alternate: Google video - click to launch

Lecture 16 (Windows Media File)

Download Lecture 16

Class Materials for Lecture 16

Brief Outline of Topics Covered in Lecture 16:

Walras (ch. 11) pgs. 305-319

Video:

Lecture 16 [Media Player] - Fall 2007
Lecture 16 [Google video] - Fall 2007

 

Economics 493 Lecture 16

Review Questions for Lecture 16 (also added to the Review Questions - Material after Midterm 2 below):

1. What is general equilibrium theory? How does it compare with partial equilibrium models?

2. What did Walras contribute to general equilibrium theory? What does this imply about how values are determined, i.e. the direction of causality between input prices and output prices?

3. What are some of the problems associated with general equilibrium theory?

4. Give an overview of how the theory of gluts and the need for governments to intervene to maintain full employment starting with Malthus and Ricardo, continuing through the neoclassical economists, and ending with the contributions of Keynes.

Additional Reading mentioned in class: The Theory of Moral Neuroscience

Leon Walras

Lecture 15 Video - Fall 2007

Covers:

Marshall (ch. 10) pgs. 272-302

Alternate: Google video - click to launch

Lecture 15 (Windows Media File)

Download Lecture 15

Midterm 2

Midterm 2

Class Materials for Lecture 15

Brief Outline of Topics Covered in Lecture 15:

Marshall (ch. 10) pgs. 272-302

Video:

Lecture 15 [Google Video] - Fall 2007
Lecture 15 [Media Player] - Fall 2007

 

Economics 493 Lecture 15

Alfred Marshall

In 1906 Alfred Marshall wrote about his skepticism regarding the use of mathematics in economics:    

[I had] a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules - (1) Use mathematics as a shorthand language, rather than an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can't succeed in (4), burn (3). This last I did often.

Review Questions - Material after Midterm 2

Review Questions - Material after Midterm 2
[Through lecture 15 - more to follow. UPDATE: Questions now extend through Lecture 16 and 17.]

1. What was Jevons' main contribution to the theory of exchange?

2. Explain Jevons' determination of the length of the working day.

3. What is the water-diamond paradox? How does Jevons solve it?

4. Discuss and illustrate (using a table) Menger's ideas on total and marginal utility.

5. Compare and contrast Menger's and Jevon's views on total and marginal utility.

6. What are Menger's views on factor price determination? How can they be used to refute the labor theory of value?

7. Explain Clark's marginal productivity theory and how it was used to counter Marx's claim that labor is exploited under capitalism.

8. What was Edgeworth's main contribution to utility theory? Explain.

9. Explain the contributions made by Edgeworth to production theory.

10. Explain how classical economists used marginal productivity theory to develop a theory of employment. What was the key to maintaining full employment in this framework?

11. Explain why Marshall felt that economics is the most precise of all the social sciences.

12. Explain Marshall's views on consumer and producer surplus.

13. Show how Marshall used the idea of consumer surplus to analyze the welfare effects of taxes for the constant cost case. What did he conclude? Why does he believe we should tax decreasing cost industries and use the proceeds to subsidize increasing cost industries?

14. According to Marshall, what determines prices, supply or demand? Does the time period matter?

15. What factors, according to Marshall, cause firms to become more efficient as they grow? What determines whether they are increasing or decreasing cost industries? Why don't decreasing cost industries eventually become monopolized?

16. Explain Marshall's stability analysis for the supply and demand model. How does his analysis compare to modern treatments of stability?

Update: Questions from Lecture 16

1. What is general equilibrium theory? How does it compare with partial equilibrium models?

2. What did Walras contribute to general equilibrium theory? What does this imply about how values are determined, i.e. the direction of causality between input prices and output prices?

3. What are some of the problems associated with general equilibrium theory?

4. Give an overview of how the theory of gluts and the need for governments to intervene to maintain full employment starting with Malthus and Ricardo, continuing through the neoclassical economists, and ending with the contributions of Keynes.

Update: Questions from Lecture 17

1. How have views on government intervention to promote full employment changed since the Mercantilists? Be sure to summarize Mercantilist thought, the response of the Physiocrats and Smith to the Mercantilists, the Ricardo-Malthus debate, Say's law, Keynes and the Keynesians, and the views based upon the New Classical model, the Real Business Cycle model, and the New Keynesian model.

Lecture 14 Video - Fall 2007

Covers:

Edgeworth (ch. 9) pgs. 243-260
Marshall (ch. 10) pgs. 272-302

Alternate: Google video - click to launch

Lecture 14 (Windows Media File)

Download Lecture 14

Class Materials for Lecture 14

Brief Outline of Topics Covered in Lecture 14:

Edgeworth (ch. 9) pgs. 243-260
Marshall (ch. 10) pgs. 272-302

Video:

Lecture 14 [Google Video] - Fall 2007
Lecture 14 [Media Player] - Fall 2007

 

Economics 493 Lecture 14

Francis Ysidro Edgeworth