Category Archive for: History of Thought [Return to Main]

Thursday, June 09, 2016

The Problem With Inequality, According to Adam Smith

Dennis Rasmussen at ​The Atlantic

The Problem With Inequality, According to Adam Smith, by Dennis C. Rasmussen, ​The Atlantic: ...Many a scholar has made a career, in recent decades, by pointing out that this view of Smith is a gross caricature. ...
What has received little attention, even by those who approach Smith’s thought from the contemporary left, is that he also identified some deep problems with economic inequality. ... When people worry about inequality today, they generally worry that it inhibits economic growth, prevents social mobility, impairs democracy, or runs afoul of some standard of fairness. ...
None of these problems, however, were Smith’s chief concern—that economic inequality distorts people’s sympathies, leading them to admire and emulate the very rich and to neglect and even scorn the poor. Smith used the term “sympathy” ... to denote the process of imaginatively projecting oneself into the situation of another person, or of putting oneself into another’s shoes. ... And he claimed that, due to a quirk of human nature, people generally find it easier to sympathize with joy than with sorrow, or at least with what they perceive to be joy and sorrow. ...
What’s more, Smith saw this distortion of people’s sympathies as having profound consequences: It undermines both morality and happiness. First, morality. Smith saw the widespread admiration of the rich as morally problematic because he did not believe that the rich in fact tend to be terribly admirable people. On the contrary, he portrayed the “superior stations” of society as suffused with “vice and folly,” “presumption and vanity,” “flattery and falsehood,” “proud ambition and ostentatious avidity.” In Smith’s view, the reason why the rich generally do not behave admirably is, ironically, that they are widely admired anyway...
Smith also believed that the tendency to sympathize with the rich more easily than the poor makes people less happy. ...Smith’s writings ... associated happiness with tranquility—a lack of internal discord—and insisted not only that money can’t buy happiness but also that the pursuit of riches generally detracts from one’s happiness. ... Happiness consists largely of tranquility, and there is little tranquility to be found in a life of toiling and striving to keep up with the Joneses. ...

[See the full article for more, e.g. Smith's ideas on the alleviation of poverty.]

Monday, May 02, 2016

The Legacy of Joan Robinson

This is by Barkley Rosser (I left quite a bit out, including the connections to the Sander's campaign):

The Legacy of Joan Robinson: ... Joan Violet Maurice Robinson (1903-1983) was without doubt the most important woman economist born before 1930 and maybe still the most important woman economist ever. ...

While she nearly got a Nobel Prize, and certainly deserved one, she suffered professionally from being a woman. She was only appointed a Lecturer at Cambridge in 1937, well after she had already published several highly innovative and influential works. She was only made a Full Professor at Girton College at Cambridge University (which she had attended) in 1965, the year her husband retired from his professorship. Rumor has it that she came closest to receiving the Nobel Prize in 1975, the year Kantorovich and Koopmans got it for linear programming (which created a major stink among mathematicians who said that at a minimum George Dantzig should have shared it). I do not know if she was thought of as a possible third for them or a replacement for them, perhaps with Piero Sraffa sharing, who also never got one while arguably deserving it, who could have shared it credibly with Leontief in 1973 for input-output analysis. The Encyclopedia Britannica reports that her leftwing political views may have played a role in her not getting it. I also heard it from a primary source that Assar Lindbeck, the committee's dominant figure then, once said that if either Joan Robinson or James Buchanan got it, it would be over his dead body, although Buchanan did get it in 1986, with Lindbeck still on the committee and not dead, although Joan Robinson had been dead for three years by then.

As evidence that she was clearly in contention in the mid-70s, I shall report something I observed on an elevator in the New York Hilton during the 1973 AEA meetings (the first I ever attended). Lionel McKenzie, another who never got the prize but should have, was talking to somebody else. McKenzie told this other person that "they are going to give it to Joan Robinson next for her Economics of Imperfect Competition, but she will refuse it." As it was, she never got the chance to do so.

Speaking of that 1933 book, that was her first major publication and remains one of her most important, indeed worthy of a trip to Stockholm in and of itself. Among other things in it, she invented the word "monopsony." While she later wrote less about monopolistic competition, one can see that it remained very much on her mind if one reads her excellent 1977 article in the JEL, "What are the Questions?" a good overview of how she viewed economics near the end of her life. She spends quite a bit of it going on about the issue of monopoly power and its importance. I note that this is one area where her concerns are very relevant to current economics, with many now posing that increased monopoly power in the US economy may be playing a role in secular stagnation.

She was indeed a core Keynesian, one of the three people thanked by Keynes himself in the Preface to his 1936 General Theory. She also supported Kalecki, whom Keynes had in to Cambridge, but by all accounts did not like. In 1937 she wrote her influential essay on "Beggar thy neighbour policies," which made the concept associated with competitive devaluations widely known, although the term had appeared before previously, used once by Adam Smith and also by a British economist named Gower in 1932.

In 1941 she published her famous Essay on Marxian Economics, in which she rejected the labor theory of value and basically supported redoing Marx along Keynesian and Sraffian lines. She would indeed later praise both Maoist China and North Korea, but saw China in particular as possibly offering another way of modifying Marx along useful lines. However, Robinson was always known for her pithy remarks, and one from that era was "There is only one thing worse than being exploited, and that is not being exploited" (that is, unemployed).

The 1950s may have seen the high water mark of her work. She set off the Cambridge capital theory debates with her 1954 paper in the Review of Economic Studies, "The production function and the theory of capital," in which she took apart the idea of aggregate capital, with Paul Samuelson in 1966 agreeing that she was right. The first time I ever met Samuelson (in the early 70s) I gave him a hard time about this issue, and he just completely agreed with her and said that capital must be modeled as being heterogeneous. One of the more hidden but very important roles she played in the 1950s was to work on Piero Sraffa to finally complete his short, but important, 1960 book, Production of Commodities by Commodities: A Prelude to a Critique of Economic Theory. He had been working on it for 35 years, but it was still only a prelude to a critique, not a critique itself. Samuelson claimed that if he had published it in 1930, he would indeed have shared the Nobel Prize with Leontief.

In 1956 she published what is probably her magnum opus, although now widely ignored, The Accumulation of Capital, which in contrast to her later critiques of analytical equilibrium analysis in favor of looking at "historical time," was in fact a study of various equilibrium growth models, many of which she provided amusing names for such as "bastard golden age" and "creeping platinum age." She did not generally use formal equations but rather favored figures and graphs backed up by clear verbal descriptions and discussions. Apparently in 1949 Koopmans asked her to be on the board of the Econometric Society, but she refused on the grounds that she did not want to be part of something that produced things she could not read. After 1960 her work increasingly moved towards more methodological issues, such as her 1962 Economic Philosophy, as well as work looking at development issues, especially in India, but also her highly controversial work on China and North Korea. ...

The final, and maybe most important, influence of Joan Robinson today is on Post Keynesian economics, or post-Keynesian economics...
Joan Robinson's thought and career are both relevant and currently influencing many economists today, including many who have never heard of her through some of her ideas simply entering into basic textbooks, such as "monopsony."

Thursday, March 24, 2016

Ideas Wrongly Attributed to Irving Fisher and David Ricardo

From VoxEU:

Misnomers, by Thorvaldur Gylfason, Helgi Tomasson, Gylfi Zoega: In economics, as in other disciplines, it is common practice to name models, theorems, and empirical results after their originators. In macroeconomics, we have the Phillips curve, an empirical relationship between inflation and unemployment first documented for the UK by A W Phillips, an engineer from New Zealand. And we have Okun’s law, an empirical relationship between unemployment and the gap between actual and potential output first laid out for the US by Arthur M. Okun at Yale. Moreover, we have the Solow model that bears the name of Nobel laureate Robert M Solow at MIT, who presented his seminal growth model in 1956. The list also includes the Heckscher-Ohlin and Stolper-Samuelson theorems in trade theory, the Baumol-Tobin and Modigliani-Miller theorems in monetary theory, the Mundell-Fleming model in international finance, and even the relatively recent Taylor and Giudotti-Greenspan rules of monetary policy.

The pattern is pretty clear – you make a discovery (or perhaps you just make a point!) and it may become irretrievably associated with your name.

Or it may not.

Or something completely different can happen. Just ask David Ricardo and Irving Fisher.

Ricardian equivalence: When you cross it

Innocent readers may be excused for thinking that David Ricardo (1772-1823) originated the idea that it makes no difference whether government expenditures are financed by taxation or by borrowing, on the grounds that taxpayers anticipate the increased future tax burden that arises from increased borrowing today, making them indifferent between the two. This simple idea requires you to think that ordinary taxpayers reduce their consumption today to prepare for a heavier tax burden decades from now. If true, this proposition greatly reduces the efficacy of fiscal policy.

The attribution of this proposition to Ricardo is unfair to him because, even if he exposited the logic behind it, he found the proposition unconvincing. In the words of Ricardo (1817): “… it must not be inferred that I consider the system of borrowing as the best calculated to defray the extraordinary expenses of the State. It is a system which tends to make us less thrifty – to blind us to our real situation”. Like modern behavioural economists, Ricardo understood that in their daily lives most people abide by the old saying, "worry about that bridge when you cross it".

Here is how three modern macroeconomics textbooks handle Ricardo:

  • N Gregory Mankiw (2013) writes: “Hence, financing the government by debt is equivalent to financing it by taxes. This view is called Ricardian equivalence after the famous nineteenth-century economist David Ricardo because he first noticed the theoretical argument”.
  • Olivier Blanchard (2006) writes: “One extreme view is that once the government budget constraint is taken into account, neither deficits nor debt have an effect on economic activity. This argument is known as the Ricardian equivalence proposition. David Ricardo, a nineteenth-century English economist, was the first to articulate its logic. His argument was further developed and given prominence in the 1970s by Robert Barro, then at Chicago, now at Harvard University. For this reason, the argument is also known as the Ricardo-Barro proposition”.
  • J Bradford DeLong and Martha L Olney (2006) get it right: “this alternative view of the long-run (and also the short-run) effects of debt and deficits is called ‘Ricardian equivalence’, after David Ricardo, who does not seem to have held the view; it should be called ‘Barrovian equivalence’, after its most effective and powerful advocate, Harvard macroeconomist Robert Barro” (see Barro 1974).

The Fisher effect: When contracts are made in unstable money

Many writers continue to attribute to Irving Fisher the idea that real interest rates are insensitive to changes in inflation and to suggest that Fisher regarded such insensitivity as somehow natural. For example, Okun (1981) states: “As Fisher saw it, an extra 1 percentage point of expected inflation raises the nominal expected rate of return on real capital assets by 1 percentage point and induces a parallel increase of 1 percentage point in bond and bill yields to keep expected returns in balance”. Further, using quarterly US data for 1954-1969, Feldstein and Eckstein (1970, 366) write: “the data thus confirm the two basic Fisherian hypotheses: (1) in the long run, the real rate of interest is (approximately) unaffected by the rate of inflation, but (2) in the short run, the real rate of interest falls as the rate of inflation increases”. If true, this proposition reduces the effectiveness of both monetary and fiscal policy by making real interest rates and hence also investment, saving, and other macroeconomic aggregates immune to changes in inflation via real interest, at least in the short run.

Here is how the three textbooks cited above handle Fisher.

  • Mankiw (2013) writes: “The one-for-one relation between the inflation rate and the nominal interest rate is called the Fisher effect… In data from the late nineteenth and early twentieth centuries, high nominal interest rates did not accompany high inflation. The apparent absence of any Fisher effect during this time puzzled Irving Fisher. He suggested that inflation ‘caught merchants napping’”.
  • Blanchard (2006) writes: “The result that, in the medium run, the nominal interest rate increases one for one with inflation is known as the Fisher effect, or the Fisher hypothesis, after Irving Fisher, an economist at Yale University, who first stated it and its logic at the beginning of the twentieth century”.
  • DeLong and Olney (2006) write: “Thus when the expected inflation rate rises, we would expect in the long run to see the nominal interest rate rise with it, point-for-point. This theoretical prediction – and rough empirical regularity – is called the Fisher effect”.

The Fisher effect, if described as an empirical relationship, is a misnomer because Fisher’s (1930) own data on interest rates and inflation covering New York, London (see Figure 1), Paris, Berlin, Calcutta, and Tokyo from 1825 to 1927 suggest that nominal interest rates do not come close to mirroring the movements in inflation, as Mankiw (2013) points out, even in the long run. As shown by Gylfason (2016), all of Fisher’s data show interest rates to evolve less rapidly than inflation and to change less than inflation. The assumption of a common dynamic structure in Fisher’s six cities suggests inflation cycles of about six years, cycles that do not show up in the interest rate series. The failure of nominal interest rates to imitate the inflation cycles underlines the lack of sensitivity of nominal interest rates to inflation. The Fisher effect, defined as a point-for-point effect of inflation on nominal interest rates, is a misnomer as an empirical result and must rather be understood as a theoretical possibility that is not supported by Fisher´s data.

Figure 1. Irving Fisher’s data: Nominal interest rates and inflation, London, 1825-1927

In Fisher’s time, as Figure 1 shows, while inflation did not hesitate to move into negative territory, nominal interest rates did not follow. In London, wholesale prices rose merely by 9% from 1820 to 1927, while in New York they remained unchanged from 1867 to 1926, as they did in Berlin from 1866 to 1911; in Paris, wholesale prices fell by 18% from 1872 to 1914 (Fisher 1930). In Fisher’s data, deflation was nearly as common as inflation, reaffirming his inference that deflation makes both real interest rates and debt burdens rise, leading to distrust, distress selling, bankruptcies, bank runs, reduced output and trade, and unemployment (Fisher 1896, 1933). There can be no controversy about deflation making real interest rates rise when nominal interest rates refuse to go below zero, as was the case in Fisher’s data. It may have been natural in those days to expect nominal interest not to follow inflation because bouts of inflation were often followed by deflation, since inflation expectations were well anchored by the gold standard.
These results are consistent with those of Fisher himself. As Tobin (1987) and Dimand (1999), among others, point out, both Fisher’s theory of interest and his reading of the historical record suggested to him that real interest rates varied inversely with inflation, and that the adjustment of nominal interest rates to changes in inflation took a very long time (Fisher 1896). In Fisher’s (1930) words: “… when prices are rising, the rate of interest tends to be high but not so high as it should be to compensate for the rise; and when prices are falling, the rate of interest tends to be low, but not so low as it should be to compensate for the fall”. Fisher (1930) describes the relationship between interest rates and inflation also thus: “When the price level falls, the rate of interest nominally falls slightly, but really rises greatly and when the price level rises, the rate of interest nominally rises slightly, but really falls greatly”. Here Fisher means the rate of change of the price level even if he says only “price level”. Fisher (1907) made a clear distinction between the two: “Falling prices are as different from low prices as a waterfall is from sea level.”
There is a lot in a name. Irving Fisher has suffered similar treatment as David Ricardo when different authors have attached his name to an empirical relationship that he rejected. The prestigious names of Ricardo and Fisher have been used to justify inattentive fiscal and monetary policies. Fisher’s (1930) view was that “… men are unable or unwilling to adjust at all accurately or promptly the money interest rates to changed price levels. Negative real interest rates could scarcely occur if contracts were made in a composite commodity standard. The erratic behaviour of real interest is evidently a trick played on the money market by the ‘money illusion’ when contracts are made in unstable money”. A few pages earlier, Fisher (1930) had written:  “Most people are subject to what may be called “the money illusion,” and think instinctively of money as constant and incapable of appreciation or depreciation”. Fisher understood that under certain circumstances, including perfect foresight, real interest rates might be immune to changes in inflation, at least over the long haul, but he rejected the premises needed to erect such a theory.
References ...

Sunday, February 14, 2016

'Economic History is Dead; Long Live Economic History?'

In graduate school, we were required to take a history of economic thought course and there were two courses on US economic history (and we faced a core exam in the history of thought if we got less than a certain grade). Requirements like that have faded over time in most graduate schools, in part to make room for the expanded technical training needed to understand the modern literature. But there needs to be room for history too:

Economic history is dead; long live economic history?, The Economist: Two years ago, in a very interesting paper, Peter Temin bemoaned the decline of economic history as a research topic at universities. ...
But is economic history really dead? Last weekend, Britain's Economic History Society hosted its annual three-day conference in Telford, attempting to show the subject was still alive and kicking. The economic historians present at the gathering were bullish about the future. ... One reason for this may be that, as we pointed out in 2013, it is widely believed amongst scholars, policy makers and the public that a better understanding of economic history would have helped to avoid the worst of the recent crisis.
However, renewed vigor can be most clearly seen in the debates economists are now having with each other. ...
In order to investigate ... the historical claims of economists over issues as varied as the impact of high public debt and the causes of inequality, the contribution of historians—who have in fact mostly stayed away from these debates—is desperately needed. Economic history may well be dead as a subject studied in independent academic departments, as it was at universities in the 1970s. But as a subject that is needed as part of the study of economics and the making of public policy, economic history is—and should be—very much alive. 

Sunday, October 18, 2015

'Everything You Need to Know about Laissez-Faire Economics'

A few excerpts from a much longer interview of Alan Kirman (it was in yesterday's links)

Everything You Need to Know about Laissez-Faire Economics: ... DSW: I’m so happy to talk with you about the concept of laissez faire, all the way back to its origin, which as I understand it is during the Enlightenment. ...
AK: I think the basic story that really interests us is that with the Enlightenment and with people like Adam Smith and David Hume, people had this idea that somehow intrinsically people should be left to their own devices and this would lead society to a state that was satisfactory in some sense for everybody, with some limits of course–law and order and so on. That’s the idea that is underlying our whole social and philosophical position ever since. ... I think what happened was on the one hand people became obsessed with proving there was some sort of socially satisfactory situation that corresponded to markets in equilibrium, and on the other hand, there was a lot of effort made, right up to the 1950’s, to try to show that a market or an economy would converge on that. But we gave up on that in the 70’s when there were results that showed that essentially we couldn’t prove it. So the theoreticians gave up but the underlying economic content and all of the ideology behind it has just kept going. We are in a strange situation where on the one hand we say we should leave markets to themselves because if they operate correctly and we get to an equilibrium this will be a socially satisfactory state. On the other hand, since we can’t show that it gets there, we talk about economies that are in equilibrium but that’s a contradiction because the invisible hand suggests that there is a mechanism that gets us there. And that’s what we’re lacking–a mechanism.  ...
DSW: ...This has been a wonderful conversation, by the way. Nowadays, you hear all the time about how neoliberal ideology and thought is invading European countries and is undoing forms of governance that are actually working quite well. I work a lot in Norway and Scandinavia and there you hear all the time that Nordic model works and at the same time it is being corrupted by the neoliberal ideology, which is being spread in some sort of cancerous fashion. Please comment on that—Current neoliberalism. What justifies it? Is it spreading? Is that a good thing or a bad thing? Anything you would like to say on that topic.
AK: I think that one obsession that economists have is with efficiency. We’re always, always, worrying about efficiency. People like to say that this is efficient or not efficient. The argument is, we know that if you free up markets you get a more efficient allocation of resources. That obsession with efficiency has led us to say that we must remove some of these restraints and restrictions and this sort of social aid that is built into the Scandinavian model. I think that’s without thinking carefully about the consequences. ...
I think what has happened is, because of this mythology about totally free markets being efficient, we push for that all the time and in so doing, we started to do things like—for example, we hear all the time that we have to reform labor markets in Europe. Why do we want to reform them? Because then they’ll be more competitive. You can reduce unit labor costs, which usually means reducing wages. But that has all sorts of consequences, which are not perceived. In model that is more complex, that sort of arrangement wouldn’t necessarily be one that in your terms would be selected for. When you do that, you make many people temporary workers. You have complete ease in hiring and firing so that people are shifting jobs all the time. When they do that, we know that employers then invest nothing in their human capital. ... We’re reducing the overall human capital in society by having an arrangement like that. ... Again, the idea that people who are out of work have chosen to be out of work and by giving them a social cushion you induce them to be out of work—that simply doesn’t fit with the facts. I think that all the ramification of these measures—the side effects and external effects—all of that gets left out and we have this very simple framework that says “to be competitive, you just have to free everything up.” That’s what undermining the European system. European and Scandinavian systems work pretty well. ... The last remark I would make is that to say “you’ve got to get rid of all those rules and regulations you have”—in general, those rules and regulations are there for a reason. Again, to use an evolutionary argument, they didn’t just appear, they got selected for. We put them in place because there was some problem, so just to remove them without thinking about why they are there doesn’t make a lot of sense. ...
DSW: There’s no invisible hand to save the day.
AK: (laughs). Joe Stiglitz used to say that we also need a visible hand. The visible hand is sometimes pretty useful. For example in the financial sector I think you really need a visible hand and not an invisible hand. ...

Friday, October 16, 2015

'Economics and the Modern Economic Historian'

This surprised me. I was under the impression that things are moving in the opposite direction:

Economics and the Modern Economic Historian, by Ran Abramitzky, NBER Working Paper No. 21636, October 2015: Abstract I reflect on the role of modern economic history in economics. I document a substantial increase in the percentage of papers devoted to economic history in the top-5 economic journals over the last few decades. I discuss how the study of the past has contributed to economics by providing ground to test economic theory, improve economic policy, understand economic mechanisms, and answer big economic questions. Recent graduates in economic history appear to have roughly similar prospects to those of other economists in the economics job market. I speculate how the increase in availability of high quality micro level historical data, the decline in costs of digitizing data, and the use of computationally intensive methods to convert large-scale qualitative information into quantitative data might transform economic history in the future.

From the introduction to the paper:

... This sense that economists “believe history to be of small and diminishing interest” was made clear ... in 1976, when McCloskey wrote in defense of economic history a paper entitled “Does the past have useful economics?”. McCloskey concluded that the average American economist answers “no”. McCloskey showed a sharp decline in the publication of economic history papers in the top economic journals (AER, QJE, JPE). It was clear that “…this older generation of American economists did not persuade many of the younger that history is essential to economics.” ...

Today, thirty years later, economic history is far from being marginalized and overlooked by economists. To be sure, economic history remains a small field within economics, but the average economist today would answer a “yes” to the question of whether the past has useful economics. Economists increasingly recognize that historical events shape current economic development, and that current modern economies were once upon a time developing and their experience might be relevant for current developing countries. Recent debates in the US and Europe about immigration policies renewed interest in historical migration episodes. Most notably, the Great Recession of 2007-08 reminded economists of the Great Depression and other historic financial crises. Macroeconomic historian Christina Romer, a Great Depression expert, became the chief advisor of president Obama.3 Indeed, Barry Eichengreen, himself an expert on financial crises in history, started his 2011 presidential address by saying that “this has been a good crisis for economic history.”

 That economic history today is more respected and appreciated by the average economist is also reflected by an increase in economic history publications in the top-5 economic journals. The decline in economic history in the top-3 journals that McCloskey documented has been reversed...

Sunday, September 06, 2015

'The Thirty-Year Boom'

Part of an essay by David Warsh:

... For the old lions, Paul Samuelson and Milton Friedman, the ’80s meant a bittersweet departure from the center stage of economics after forty years of dominating the scene. The two had entered their sixties; neither was out of steam. But the leaders of the next generation had become apparent:  Lucas, in macroeconomics; Kenneth Arrow in nearly everything else.

The election of Ronald Reagan was a triumph for Friedman; they had known each other since Friedman spent a quarter at the University of California at Los Angeles, shortly after Reagan had been elected Governor of California.He was invited to lecture in China. And the international success of Free to Choose kept Friedman in the public eye.

But Paul Volcker took a different approach to monetary policy from the one Friedman advocated, and Friedman’s forecasts became markedly worse. The editorial page of The Wall Street Journal adopted as its champion Friedman’s long-time rival in currency matters, Robert Mundell, now teaching at Columbia University, and went all in for Mundell’s young associate, consultant Arthur Laffer. A research appointment at the Federal Reserve Bank of San Francisco was not the same platform as the University of Chicago.  Friedman still had his membership on the President’s Economic Policy Board, but after he  “savaged” Volcker to his face before the president in a meeting in 1983, both men lost influence. Pointing a finger at Volcker, Friedman said (according to Newsweek’s account), “because of the policies of the Fed under that man we have had an inflationary surge in the money supply that is going to have to be corrected.” Volcker was not reappointed. Edward Nelson, of the Federal Reserve Bank of St. Louis is writing a scientific biography of Friedman. It will make interesting reading when it is done.

In March 1981, Friedman wrote his Newsweek column in the form of a letter to Philip Handler, president of the National Academy of Sciences, advocating major cuts in the budget of the National Science Foundation, as a step towards the abolition of the NSF.  The Reagan administration had proposed sharp cuts in the economics program.  Friedman argued the government shouldn’t pay for any scientific research. True, the NSF had funded much good science; but it had paid for much bad science, too, including, he wrote, overmuch mathematical economics. The great scientists of the past had done without NSF funding. Einstein did his work in a government patent office; general relativity might never have made  it past a peer-review panel. “The innovative ideas that have stirred controversy in economics since NSF funding of economics began two decades ago owe little or nothing to NSF funding,” he wrote.

Thus did Friedman dismiss the agency that Paul Samuelson had brought to life in 1945.  Perhaps more important, by extension he dismissed the program of government fellowships, awarded by competitive exam,  that had sent Samuelson to graduate school in 1935, all expenses paid – and countless others  since, many of them as impecunious as Friedman had been in 1932.  The NSF ran similar programs in mathematics and many ciences, and the principle had been extended, by Sen. Jacob Javits (R-NY) to humanities.  NSF research grants funding had helped build the Massachusetts Institute of Technology into a powerhouse to rival Harvard, and played a similar role at many other public and private universities.

No Samuelson column followed Friedman’s. Samuelson never wrote again for Newsweek . He resigned the column he written for fifteen years. When, many years later, I asked him about his timing, he firmly denied that it had anything to do with Friedman’s column, and wrote me a letter for the file the next day repeating what he had said. I have always wondered if he sought to defuse the matter out of habit. That he and Friedman had remained on civil terms for seventy-five years was clearly a source of pride, though privately he  grew less tolerant of his rival after 1980.

Samuelson, too, was in mild recession in the ’80s. Keynesian economics hadn’t yet rebounded from the biting criticism of the New Classicals in the ’70s. Tensions were growing within the MIT department over appointments and the direction of future research.  Samuelson formally retired in 1985, at 70, to make room for others. He had plenty to engage his professional attention.  Commodities Corp., which had discovered such natural traders as Paul Tudor Jones and Bruce Kovner, was winding down, but Samuelson’s interest in Warren Buffet’s Berkshire Hathaway was gearing up. The Vanguard Group, whose godfather he had been ever since founder John Bogle introduced the first index fund, was thriving.  Samuelson’s friends and colleagues James Tobin, Franco Modigliani, and Robert Solow received Nobel Prizes.

Young Lions at Large   

To the young lions of Keynesian economics in the ’80s, rational- expectations macroeconomics and real business cycle theory posed a considerable bar. To work in the new traditions required a considerable investment in new tools and mathematical techniques, and, even fully teched-up, didn’t seem to speak very directly to policy. A strong corps of economists went to work to fashion a “new Keynesian” version of the latest general equilibrium economics. But gradually one rising star of saltwater economics after another left academia for a policy job.

Martin Feldstein, of Harvard University, was the first. As something of an acolyte of Milton Friedman, Feldstein was never very high in salinity, but he demonstrated plenty of professional backbone as Chairman of the Council of Economic Advisers under Ronald Reagan for two years in the early days of the controversies over deficits before returning in 1984 to Harvard and his position as  president of the National Bureau of Economic Research. Stanley Fischer, of MIT, was next, wrapping up a highly successful research career in order to serve as chief economist of the World Bank (a path that led to leadership positions in the International Monetary Fund, governor of the Bank of Israel and, currently, vice chairman of the Fed).   Lawrence Summers, Feldstein’s student, served as campaign economist to Democratic candidate Michael Dukakis in the 1988 presidential campaign and succeeded Fischer at the World Bank before joining the Clinton administration, where he advanced to Secretary of the Treasury.

Soon the flood was on:  Jeffrey Sachs, Joseph Stiglitz, Olivier Blanchard, Kenneth Rogoff, Gregory Mankiw, Glen Hubbard, and Christina Romer were among those MIT- or Harvard-trained economists who served in  government jobs or NGO positions.  Paul Krugman retooled as a journalist. Lists of MIT and Harvard graduates in high positions in European, South American, and Asian governments were even longer.  Did this differ in kind, and not degree, from the trajectory of academic economists dating back to to the New Frontier, if not the New Deal?  I think so.

In 2006, Harvard’s Mankiw, in an article for the Journal of Economic Perspectives argued, as I did in a book, that the differences in interests among economists were best understood as being similar to those between scientists and engineers. The early macroeconomists, led by Samuelson and Friedman, had resembled engineers seeking to solve practical problems, Mankiw wrote;  macroeconomists of the past several decades, led by Tjalling Koopmans, Jacob Marschak, Kenneth Arrow, and others had been more interested in developing analytic tools and establishing theoretical principles. Their students the ’80s had joined teams along similar lines. “Recently Paul Romer, of New York University, introduced a different distinction to elucidate some of the controversies in present-day macro – between bench science and clinical medicine. Both analogies will get plenty of elaboration in future years, for this is what changed in kind in the ’80s: economics developed a clinical/engineering wing.

A Fabulous Decade?

In 2001, Alan Blinder and Janet Yellen published The Fabulous Decade: Macroeconomic Lessons from the 1990s. They had in mind mainly the policies of the Clinton administration, a combination of modest tax increases and monetary easing that led to rapid income growth and low inflation in the second half of the decade and to a US budget surplus by its end. Soon economists had begun calling it “the Great Moderation”   But the ’90s were fabulous in other ways as well.

After China’s entry into the world market system had become clear, the hold of the Soviet Union on its European satellites had become shaky.  Poland was the first, followed by Czechoslovakia, Hungary, and, in 1989, East Germany. The Tiananmen Square protests of 1989 checked the spread of democracy in China, but by 1991 the Soviet Union was on the verge of collapse.  It dissolved at the end of the year. Rapid global growth ensued, punctuated by financial crises in Scandinavia, Mexico, Asia, and Russia.  There was often desperate trouble in the Balkans throughout.

The ’90s saw the rise of the Internet. What had been a military network with around 60 nodes, or points of connection, in 1977, was turned over to the National Science Foundation in the ‘80s and to private businesses in the ‘90s. Once the World Wide Web was established, in 1991, and the first browsers installed on personal computers, after 1993, the Web became a highway of commerce, so quickly populated that the second half of the decade saw a boom, a mania, and a crash.

Finance, too, raced ahead. After the scare of 1987, when the Dow Jones Industrial Average dropped by near 25 percent in a single day, a whole new roster of firms appeared to take the other side of increasingly complex deals.  A savings and loan crisis in the United States stimulated a new wave of interest among economists in banking. Deregulation accelerated; Albert Wojnilower, a Wall Street economist, compared the “decompartmentalization” of the US financial industry to letting the animals of a well-ordered zoo out of their cages. By the end of the decade, the  Glass-Steagall and McFadden Acts had been superseded by the Financial Services Modernization Act of 1999.

You know the rest:  there was a mild recession, a housing boom, a saving glut, an invasion of Afghanistan and Iraq, and, in 2004, a Nobel Prize for real business cycles to Edward Prescott and Finn Kydland. ...

Sunday, July 26, 2015

'The F Story about the Great Inflation'

Simon Wren-Lewis:

The F story about the Great Inflation: Here F could stand for folk. The story that is often told by economists to their students goes as follows. After Phillips discovered his curve, which relates inflation to unemployment, Samuelson and Solow in 1960 suggested this implied a trade-off that policymakers could use. They could permanently have a bit less unemployment at the cost of a bit more inflation. Policymakers took up that option, but then could not understand why inflation didn’t just go up a bit, but kept on going up and up. Along came Milton Friedman to the rescue, who in a 1968 presidential address argued that inflation also depended on inflation expectations, which meant the long run Phillips curve was vertical and there was no permanent inflation unemployment trade-off. Policymakers then saw the light, and the steady rise in inflation seen in the 1960s and 1970s came to an end.
This is a neat little story, particularly if you like the idea that all great macroeconomic disasters stem from errors in mainstream macroeconomics. However even a half awake student should spot one small difficulty with this tale. Why did it take over 10 years for Friedman’s wisdom to be adopted by policymakers, while Samuelson and Solow’s alleged mistake seems to have been adopted quickly? Even if you think that the inflation problem only really started in the 1970s that imparts a 10 year lag into the knowledge transmission mechanism, which is a little strange.
However none of that matters, because this folk story is simply untrue. There has been some discussion of this in blogs (by Robert Waldmann in particular - see Mark Thoma here), and the best source on this is another F: James Forder. There are papers (e.g. here), but the most comprehensive source is now his book, which presents an exhaustive study of this folk story. It is, he argues, untrue in every respect. Not only did Samuelson and Solow not argue that there was a permanent inflation unemployment trade-off that policymakers could exploit, policymakers never believed there was such a trade-off. So how did this folk story arise? Quite simply from another F: Friedman himself, in his Nobel Prize lecture in 1977.
Forder discusses much else in his book, including the extent to which Friedman’s 1968 emphasis on the importance of expectations was particularly original (it wasn’t). He also describes how and why he thinks Friedman’s story became so embedded that it became folklore....

Thursday, April 09, 2015

'Economic History is Dead; Long Live Economic History?'

I really hope The Economist is right about this, but I'm a bit more pessimistic:

Economic history is dead; long live economic history?: Two years ago, in a very interesting paper, Peter Temin bemoaned the decline of economic history as a research topic at universities. He took the example of what happened at the Massachusetts Institute of Technology (MIT) to prove his point. There, the subject reached its peak in the 1970s, when three members of the faculty taught economic history. But from then it declined until economic history vanished both from the faculty and the graduate programme around 2010.
But is economic history really dead? Last weekend, Britain's Economic History Society hosted its annual three-day conference in Telford, attempting to show the subject was still alive and kicking. The economic historians present at the gathering were bullish about the future. Although the subject's woes at MIT have been echoed across research universities in both America and Europe, since the financial crisis there has been something of a minor revival.

What revival does the article have in mind?:

renewed vigour can be most clearly seen in the debates economists are now having with each other

The conclusion:

Economic history may well be dead as a subject studied in independent academic departments, as it was at universities in the 1970s. But as a subject that is needed as part of the study of economics and the making of public policy, economic history is—and should be—very much alive.

Wednesday, November 19, 2014

'On Mark Thoma: Marginalism, Marx etc'

Branko Milanovic has a very nice follow-up to my column yesterday:

On Mark Thoma: marginalism, Marx etc: Mark Thoma has written a very nice blog on how Piketty’s work is transforming economics by bringing it closer too it political economy roots. I found the post excellent, and wanted just to point out one thing which I think is very pertinently argued by Thoma and another where he somewhat simplifies the matter. ...[continue]...

Friday, November 14, 2014

'Why Keynes is Important Today'

Peter Temin and David Vines:

Why Keynes is important today, Vox EU: The current debate on the efficacy of Keynesian stimulus mirrors the resistance Keynes met with when initially advocating his theory. This column explains the original controversy and casts today’s policy debate in that context. Now that concepts of Ricardian equivalence and the fiscal multiplier are  formally defined, we are better able to frame the arguments. The authors argue that a simple model of the short-run economy can substantiate the argument for stimulus.
Macroeconomists have largely failed in explaining and recommending policies since the Global Financial Crisis of 2008.  Today when thinking about fiscal policy they cite Ricardian Equivalence to deny the efficacy of Keynesian analysis (which was abandoned in the turbulent 1970s that signaled the end of rapid growth).  They seem unaware that they have revived the views of Montagu Norman, Governor of the Bank of England, in 1930.
Ricardian Equivalence is a theory that concludes that any expansion of public spending will be offset by an equal and opposite decline in private spending.  The theory is based on a few important assumptions. It assumes forward-looking consumers who adjust their current spending in anticipation of future taxes to pay for the spending.  Under these conditions, any increase in current spending leads consumers to anticipate a rise in future taxes and decrease their current spending to save for this.
This theory dominates current macroeconomic discussion.  It fits into the form of current macroeconomics that assumes not just forward-looking consumers, but flexible prices as well. And if a Keynesian suggests fiscal policy in current conditions, a modern economist is likely to invoke Ricardian Equivalence.
Remembering the past
Keynes faced exactly this opposition in 1930.  He was a member of the Macmillan Committee convened by the British government to analyze the worsening economic conditions of that time.  His recommendation for increased government spending – what we now call expansive fiscal policy – was opposed by Norman and other representatives from the Bank of England.  They did not invoke Ricardian Equivalence because it had not yet been formulated; instead they simply denied that increased government spending would have any beneficial effect.
Keynes opposed this view, but he did not have an alternate theory with which to refute it.  The result was confusion in which Keynes was unable to convince a single other member of the Macmillan Committee to support his conclusions.  It took five years for Keynes to formulate what we now call Keynesian economics and publish it in what he called The General Theory.
He based his new theory on several assumptions, two of which are relevant here.  He assumed that consumers are only forward-looking part of the time, being restrained by a lack of income at other times, and that many prices are not flexible in the short run wages in particular are ‘sticky’.  These assumptions give rise to involuntary (Keynesian) unemployment which expansive fiscal policy can decrease.
Which theory is relevant today?  We know that wages are sticky – countries in Southern Europe have found it impossible to implement requests from their creditors that they reduce wages swiftly.  And we know that not all private actors in the economy are forward-looking.  Before the crisis, borrowing and spending increased in ways that could not be sustained;  now consumers are not spending and business firms are not investing even though interest rates are close to zero. 
Those are the conditions described by Keynes in which expansive fiscal policy works well.  They also are the conditions in which monetary policy does not, even though modern macroeconomic policymakers came to rely entirely on monetary policy for stabilization.  There is a disconnect between the needs of current economies and theories of current macroeconomists.
Doomed to repeat it?
What to do?  In many applied disciplines, like medicine, practitioners go back to basics when the facts change.  If their current practice fails to produce the desired result, they search their armamentarium for others.  If their assumptions prove wrong, they look for more appropriate ones.  But not modern macroeconomists – they say we must simply endure what they call secular stagnation. 
This is an unhappy prediction.  Monetary policy does not work today; instead, this is the perfect time for fiscal policy.  There are immediate needs to repair roads and bridges, rebuild energy grids, and modernize other means of travel.  Expansive Keynesian fiscal policy will benefit the economy in both the short and long run.
We argue in our new book, Keynes, Useful Economics for the World Economy, that these recommendations can be seen as inferences from a simple and effective model of the short-run economy.  We show how hard it was for Keynes to break away from previous theories that work well for individual people and companies – and even for the economy as a whole in the long run – to define the short run in which we all live.  We also stress Keynes’ interest in the world economy, not just in isolated economies.  After all, the IMF is perhaps the most enduring remnant of Keynesian thought left today.
Authors' note: Peter Temin is Elisha Gray II Professor Emeritus of Economics at MIT and the author of "Lessons from the Great Depression" (MIT Press) and other books.  David Vines is Professor of Economics and Fellow of Balliol College at the University of Oxford, and joint editor of a number of books on global economic governance.
Editor's note: Temin and Vines are coauthors of "The Leaderless Economy: Why the World Economic System Fell Apart and How to Fix It".
Lucas, R (2009), “Why a Second Look Matters”, Council on Foreign Relations, March 30.
Krugman, P (2011), “A Note on the Ricardian Equivalence Argument Against the Stimulus (Slightly Wonkish)”, Krugman blog, The New York Times, December 26.
Barro, R (1974), “Are Government Bonds Net Wealth?”, Journal of Political Economy.
Barro, R “On the Determinants of the Public Debt”, Journal of Political Economy.
Poterba, J M and L H Summers (1987), “Finite Lifetimes and the Effects of Budget Deficits on National Savings”, Journal of Monetary Economics.
Carroll C and L H Summers (1987), “Why Have the Private Savings Rates in the United States and Canada Diverged?”, Journal of Monetary Economics.

Tuesday, September 16, 2014

'Making the Case for Keynes'

Peter Temin and David Vines have a new book:

Making the case for Keynes, by Peter Dizikes, MIT News Office: In 1919, when the victors of World War I were concluding their settlement against Germany — in the form of the Treaty of Versailles — one of the leading British representatives at the negotiations angrily resigned his position, believing the debt imposed on the losers would be too harsh. The official, John Maynard Keynes, argued that because Britain had benefitted from export-driven growth, forcing the Germans to spend their money paying back debt rather than buying British products would be counterproductive for everyone, and slow global growth.
Keynes’ argument, outlined in his popular 1919 book, “The Economic Consequences of the Peace,” proved prescient. But Keynes is not primarily regarded as a theorist of international economics: His most influential work, “The General Theory of Employment, Interest, and Money,” published in 1936, uses the framework of a single country with a closed economy. From that model, Keynes arrived at his famous conclusion that government spending can reduce unemployment by boosting aggregate demand.
But in reality, says Peter Temin, an MIT economic historian, Keynes’ conclusions about demand and employment were long intertwined with his examination of international trade; Keynes was thinking globally, even when modeling locally.
“Keynes was interested in the world economy, not just in a single national economy,” Temin says. Now he is co-author of a new book on the subject, “Keynes: Useful Economics for the World Economy,” written with David Vines, a professor of economics at Oxford University, published this month by MIT Press.
In their book, Temin and Vines make the case that Keynesian deficit spending by governments is necessary to reignite the levels of growth that Europe and the world had come to expect prior to the economic downturn of 2008. But in a historical reversal, they believe that today’s Germany is being unduly harsh toward the debtor states of Europe, forcing other countries to pay off debts made worse by the 2008 crash — and, in turn, preventing them from spending productively, slowing growth and inhibiting a larger continental recovery.
“If you have secular [long-term] stagnation, what you need is expansionary fiscal policy,” says Temin, who is the Elisha Gray II Professor Emeritus of Economics at MIT.
Additional government spending is distinctly not the approach that Europe (and, to a lesser extent, the U.S.) has pursued over the last six years, as political leaders have imposed a wide range of spending cuts — the pursuit of “austerity” as a response to hard times. But Temin thinks it is time for the terms of the spending debate to shift.  
“The hope David and I have is that our simple little book might change people’s minds,” Temin says.
“Sticky” wages were the sticking point
In an effort to do so, the authors outline an intellectual trajectory for Keynes in which he was highly concerned with international, trade-based growth from the early stages of his career until his death in 1946, and in which the single-country policy framework of his “General Theory” was a necessary simplification that actually fits neatly with this global vision.
As Temin and Vines see it, Keynes, from early in his career, and certainly by 1919, had developed an explanation of growth in which technical progress leads to greater productive capacity. This leads businesses in advanced countries to search for international markets in which to sell products; encourages foreign lending of capital; and, eventually, produces greater growth by other countries as well.
“Clearly, Keynes knew that domestic prosperity was critically determined by external conditions,” Temin and Vines write.
Yet as they see it, Keynes had to overcome a crucial sticking point in his thought: As late as 1930, when Keynes served on a major British commission investigating the economy, he was still using an older, neoclassical idea in which all markets reached a sort of equilibrium. 
This notion implies that when jobs were relatively scarce, wages would decline to the point where more people would be employed. Yet this doesn’t quite seem to happen: As economists now recognize, and as Keynes came to realize, wages could be “sticky,” and remain at set levels, for various psychological or political reasons. In order to arrive at the conclusions of the “General Theory,” then, Keynes had to drop the assumption that wages would fluctuate greatly.
“The issue for Keynes was that he knew that if prices were flexible, then if all prices [including wages] could change, then you eventually get back to full employment,” Temin says. “So in order to avoid that, he assumed away all price changes.”
But if wages will not drop, how can we increase employment? For Keynes, the answer was that the whole economy had to grow: There needed to be an increase in aggregate demand, one of the famous conclusions of the “General Theory.” And if private employers cannot or will not spend more money on workers, Keynes thought, then the government should step in and spend.
“Keynes is very common-sense,” Temin says, in “that if you put people to work building roads and bridges, then those people spend money, and that promotes aggregate demand.”
Today, opponents of Keynes argue that such public spending will offset private-sector spending without changing overall demand. But Temin contends that private-sector spending “won’t be offset if those people were going to be unemployed, and would not be spending anything. Given jobs, he notes, “They would spend money, because now they would have money.”
Keynes’ interest in international trade and international economics never vanished, as Temin and Vines see it. Indeed, in the late stages of World War II, Keynes was busy working out proposals that could spur postwar growth within this same intellectual framework — and the International Monetary Fund is one outgrowth of this effort.
History repeating?
“Keynes: Useful Economics for the World Economy” has received advance praise from some prominent scholars. ... Nonetheless, Temin is guarded about the prospect of changing the contemporary austerity paradigm.
“I can’t predict what policy is going to do in the next couple of years,” Temin says. And in the meantime, he thinks, history may be repeating itself, as debtor countries are unable to make capital investments while paying off debt.
Germany has “decided that they are not willing to take any of the capital loss that happened during the crisis,” Temin adds. “The [other] European countries don’t have the resources to pay off these bonds. They’ve had to cut their spending to get the resources to pay off the bonds. If you read the press, you know this hasn’t been working very well.”

Wednesday, July 09, 2014

Adam Smith as Malthusian: 'The Surplus Population'

Brad DeLong quotes Adam Smith:

Adam Smith as Malthusian: “The Surplus Population”, by Brad DeLong: ...Adam Smith: Smith: Wealth of Nations, Book I, Chapter 8: “Is this improvement in the circumstances of the lower ranks of the people…

…to be regarded as an advantage or as an inconveniency to the society? The answer seems ... abundantly plain. Servants, abourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged.

Poverty… seems even to be avourable to generation. A half-starved Highland woman frequently bears more than twenty children…. Luxury in the fair sex, while it enflames perhaps the passion for enjoyment, seems always to weaken and frequently to destroy altogether, the powers of generation. But poverty… is extremely unfavourable to the rearing of children…. It is not uncommon… in the Highlands… for a mother who has borne twenty children not to have two alive…. In civilized society it is only among the inferior ranks of people that the scantiness of subsistence can set limits to the further multiplication of the human species… by destroying a great part of the children which their fruitful marriages produce. The liberal reward of labour, by enabling them to provide better for their children, and consequently to bring up a greater number, naturally tends to widen and extend those limits…. The liberal reward of labour, therefore, as it is the effect of increasing wealth, so it is the cause of increasing population. To complain of it, is to lament over the necessary effect and cause of the greatest public prosperity.

ItIt deserves to be remarked, perhaps, that it is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining melancholy…

And then Brad remarks:

Two things are worth noting here:

The first is that even as early as 1776 economics had already acquired the utilitarian bias toward an equal distribution of income: feeding, clothing, and lodging the working class “tolerably well” contributed much more to the flourishing and happiness of society then would devoting the same resources to further increasing the luxury of the rich. We are in the world of Jeremy Bentham, where any claim that we cannot make interpersonal comparisons of utility between rich and poor is dismissed with a laugh.

The second is that Adam Smith is, in the longest run and in the last analysis, a Malthusian: economies are headed for a stationary–or, worse, a declining–state, and that stationary state is not a good one: “the condition of the… great body of the people… is hard in the stationary, and miserable in the declining state…” But there is no sense that we should not grab for the boom as long as we can, and as long as we are in the boom period, Adam Smith says, we should not complain about population growth

The liberal reward of labour… is the effect of increasing wealth… [and] the cause of increasing population. To complain… is to lament over the necessary effect and cause of the greatest public prosperity…

Monday, March 31, 2014

Inequality: Echoes of the Past

This sounds familiar:

Should we care about inequality?, by David Stasavage, Monkey Cage, Washington Post: ...As a firm believer that commercial societies would witness an inexorable increase in inequality, [Jean-Jacques] Rousseau in his “Discourse on Political Economy” wrote of the corrupting influence of inequality and “luxury” and of the need to levy taxes on the rich to curb the problem. ...
Rousseau’s text was originally published in Denis Diderot’s famous Encyclopedia as the entry for “Political Economy.” ... Jean-François de Saint-Lambert was commissioned by Diderot to write the article on “Luxury” for the encyclopedia. The interest of such a text was obvious; at the time the pundits of the day were fiercely debating the virtues and vices of “luxury” and its potentially corrupting effect on nations. Take our 21st century debates, substitute the word “inequality” for “luxury,” and you get a sense of the tone.
Saint-Lambert was among the first to move the debate in a new direction. He suggested that luxury itself was not the problem; what mattered was how luxury was generated. If luxury was earned thanks to institutionalized privilege, or by those who had gamed the system, then it would inevitably have a corrupting influence. The effects for the nation would be disastrous. ...
Now in cases where luxury is instead acquired through industriousness, Saint-Lambert argued that it would not have these nefarious effects. ...

Monday, January 06, 2014

'On Respect and Income Equality'

Tim Duy:

On Respect and Income Equality, by Tim Duy: Noah Smith laments the days of yore, hypothesising that what we need is not a redistribution of income, but of respect:

I want this to change. I want to move back toward a society where the hard work of an unskilled laborer is considered worthwhile in social interactions, regardless of how many dollars it brings home. I want to move back toward a society where being a good parent or a friendly neighbor earns as much respect as making a hundred million dollars on Wall Street.

In other words, I want our "democracy" back. We need to redistribute respect.

My first thought was "Did such a world ever exist?" Perhaps someone with a little more vintage than me can add to that conversation, but I worry that such an idyllic view of the past is what one gets watching sitcoms of the 1950's that leave out inconvenient issues like apartheid in the American South.

My second thought was that if respect was more equally distributed in the past, this was almost certainly because incomes were more equally distributed. Chris Dillow at Stumbling and Mumbling latches onto the theme:

...I fear that Noah is under-estimating the extent to which inequality of respect is endogenous. It arises out of the forces that generate and sustain inequalities of power and wealth.

My third thought was that this is not exactly a new topic. The underlying tendency to treat the poor with contempt has been around a long, long time. Indeed, it seems like an opportunity to curl up with an old friend, Adam Smith's Theory of Moral Sentiments. Smith recognized that inequality of incomes would result in inequality of respect:

This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages.

Adam Smith continues in a paragraph so beautiful it can be read time and time again:

We desire both to be respectable and to be respected. We dread both to be contemptible and to be contemned. But, upon coming into the world, we soon find that wisdom and virtue are by no means the sole objects of respect; nor vice and folly, of contempt. We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent. To deserve, to acquire, and to enjoy the respect and admiration of mankind, are the great objects of ambition and emulation. Two different roads are presented to us, equally leading to the attainment of this so much desired object; the one, by the study of wisdom and the practice of virtue; the other, by the acquisition of wealth and greatness. Two different characters are presented to our emulation; the one, of proud ambition and ostentatious avidity. the other, of humble modesty and equitable justice. Two different models, two different pictures, are held out to us, according to which we may fashion our own character and behaviour; the one more gaudy and glittering in its colouring; the other more correct and more exquisitely beautiful in its outline: the one forcing itself upon the notice of every wandering eye; the other, attracting the attention of scarce any body but the most studious and careful observer. They are the wise and the virtuous chiefly, a select, though, I am afraid, but a small party, who are the real and steady admirers of wisdom and virtue. The great mob of mankind are the admirers and worshippers, and, what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness.

I think the tendency to equate poverty with "vice and folly" is a long-standing tradition. What may have changed is this:

In equal degrees of merit there is scarce any man who does not respect more the rich and the great, than the poor and the humble. With most men the presumption and vanity of the former are much more admired, than the real and solid merit of the latter. It is scarce agreeable to good morals, or even to good language, perhaps, to say, that mere wealth and greatness, abstracted from merit and virtue, deserve our respect. We must acknowledge, however, that they almost constantly obtain it; and that they may, therefore, be considered as, in some respects, the natural objects of it.

I am not sure that it is now considered "scarce agreeable to good morals" to openly proclaim that wealth and greatness by themselves deserve respect. Or worse, that poverty alone deserves our contempt. Indeed, the "War on the Poor" seems now to be pretty much out in the open. This I think is a result of ever greater income inequality and the need of the wealthy to justify that inequality. One such justification is that which Adam Smith lamented: Wealth must be an indication of moral superiority, luck doesn't have anything to do with it.

Moreover, Noah Smith points to the 1980's as the time respect disappeared from the public discourse:

I feel like the America I grew up in could learn a thing or two from Japan in this regard. I don't know if the word "loser" was a common insult before the 1980s, but in recent decades it has become ubiquitous. People who work in the service industry almost always seem ashamed when they tell me what they do for a living. Low-skilled workers are treated in a peremptory way, constantly reminded that they are "losers".

It shouldn't be a surprise that disrespect toward the poor grows beginning in the 1980s - that is also when inequality starts to explode. It doesn't take long for the rich/poor theme to appear in popular culture. I just watched "Trading Places," a 1983 movie that leverages off the disrespect for the poor on the part of the rich. That theme is also critical to the 1986 movie "Pretty in Pink." A memorable scene, after Blane attempts to take the "girl from the wrong side of the tracks" Andie to the rich Steff's party:

Steff: Look, that was very uncool of you last night, Blane.
Blane: What?
Steff: [mockingly] What?
Blane: You mean Andie?
Steff: Yeah, I mean Andie.
Blane: What's the big deal? I like her. Matter of fact, I was pissed off at you guys for being so nasty to her.
Steff: It was way out of order for you to force her on the party.
Blane: [disbelievingly] Steff, do you hear yourself? Do you hear the same asshole shit I hear?
Steff: What, do I have to spell it out for you?
Blane: [pissed off] I guess so.
Steff: Nobody appreciates your sense of humor, you know. As a matter of fact, everyone's just about to puke from you. If you've got a hard-on for trash, don't take care of it around us.

The social pressure becomes too much for Blane:

Blane: What do you want to hear?
Andie: Tell me!
Blane: What?
Andie: You're ashamed to be seen with me.
Blane: No, I am not!
Andie: You're ashamed to go out with me. You're terrified that you're goddamn rich friends won't approve.
[Andie hits Blane]
Andie: Just say it!
[Andie hits him again]
Andie: Just tell me the truth!
Blane: You don't understand that it has nothing at all do with you.
[Andie runs away]
Blane: [wipes a tear] Andie!

As movies often conclude, Blane comes to see Adam Smith's point that he should not automatically equate wealth and greatness with virtue and wisdom:

Blane: You couldn't buy her, though, that's what's killing you, isn't it? Stef? That's it, Stef. She thinks you're shit. And deep down, you know she's right.

Since, 1986, however, income inequality has only grown, and with it contempt for the poor. Life rarely ends in the way of a John Hughes movie.

So while I agree with Noah Smith that we should seek equality of respect, I think, like Chris Dillow, that this will come only after greater equality of incomes. Greater income equality would reduce the ability to make moral comparisons against one another on the basis of income alone. It forces us to look toward other factors ("... real and solid professional abilities, joined to prudent, just, firm, and temperate conduct...") as a basis for respect.


Addendum I: In the past, my students were required to use "Pretty in Pink" to explain Marx. The obviously well-trained students soon revolted, pointing out that it was a much better fit with Smith.

Addendum II: I now dutifully await the smackdown to be delivered by Gavin Kennedy for what will be shown to be a questionable understanding of Adam Smith.

Wednesday, November 13, 2013

'Thorstein Veblen's Critique of the American System of Business'

Dan Little:

Thorstein Veblen's critique of the American system of business, by Dan Little: Thorstein Veblen was certainly a heterodox observer of modern capitalism. He was trained in the late nineteenth-century iteration of neoclassical economics, but he was more impressed by the irrationality of what he observed than the optimizing rationality that is postulated by the neoclassicals. He was also an intelligent observer and analyst of contemporary economic and sociological trends — not in theory but in the concrete forms that turn-of-the-century capitalism was taking in the United States and Europe. It is interesting, therefore, to examine his analysis of the business firm in The Theory of Business Enterprise, published in 1904. (I examined his critique of American universities in The Higher Learning in America in an earlier post.)

Here is how he describes his approach to the topic of American business:

In respect to its point of departure, the following inquiry into the nature, causes, utility, and further drift of business enterprise differs from other discussions of the same general range of facts. Any unfamiliar conclusions are due to this choice of a point of view, rather than to any peculiarity in the facts, articles of theory, or method of argument employed. The point of view is that given by the business man's work, -- the aims, motives, and means that condition current business traffic. This choice of a point of view is itself given by the current economic situation, in that the situation plainly is primarily a business situation. (Preface)

Veblen is sometimes credited with being one of the originators of institutional economics. This is due, in large part, to his effort to discover some of the institutional dynamics created for the modern industrial system by the incentives and constraints created for the owners and managers of firms.

One of the central impressions that emerges from reading The Theory of Business Enterprise is this: the modern American industrial economy is a coordinated system that requires many things to happen in sync with each other; but the owners of the components of this system often have strategic interests that lead them to take actions leading to de-synchronization and short-term crisis. There is a serious conflict of interest that exists between the interests of the owner and the needs of the system -- and the public's interests are primarily served by a smoothly functioning system. So owners are in conflict with the broader interests of the public.

So who is the primary actor, the "business man", in Veblen's account, and what are his or her motives?

The business man, especially the business man of wide and authoritative discretion, has become a controlling force in industry, because, through the mechanism of investments and markets, he controls the plants and processes, and these set the pace and determine the direction of movement for the rest. (Chap. 1)

The motive of business is pecuniary gain, the method is essentially purchase and sale. The aim and usual outcome is an accumulation of wealth. Men whose aim is not increase of possessions do not go into business, particularly not on an independent footing. (Chapter 3)So the owners and managers of businesses have a great deal of power in organizing and coordinating economic activity, and their goal is to maximize individual financial gain. Does this work to further the interests of society as a whole? Veblen does not adopt Adam Smith's notion that the pursuit of self-interest leads naturally to the expansion of the common good, and that the hidden hand guides this economy towards optimal outcomes and uses of available resources:

The outcome of this management of industrial affairs through pecuniary transactions, therefore, has been to dissociate the interests of those men who exercise the discretion from the interests of the community.... Broadly, this class of business men, in so far as they have no ulterior strategic ends to serve, have an interest in making the disturbances of the system large and frequent, since it is in the conjunctures of change that their gain emerges.... It is, as a business proposition, a matter of indifference to the man of large affairs whether the disturbances which his transactions set up in the industrial system help or hinder the system at large. (7%)

Here Veblen seems to be making an interesting and unorthodox point: that the strategic actions of the owners of capital in a modern economy are oriented towards disequilibrium as often as they are towards equilibrium. The comment seems uncannily apt with regard to the financial crisis of 2008.

The end of his endeavors is, not simply to effect an industrially advantageous consolidation, but to effect it under such circumstances of ownership as will give him control of large business forces or bring him the largest possible gain. (8%)

Veblen appears to have in mind the consolidations and strategic actions involved in the railroad industry at the turn of the century. But this comment also has resonance with respect to the past two decades of recent history in the software industry, with companies jockeying for advantage on the desktop of users for their operating systems and applications.

Another incentive that owners of industries have, according to Veblen, is to insulate themselves from competition -- to create partial or complete monopolies in the fields they occupy. And Veblen looks at advertising as one of the tools that businesses use to secure a partial monopoly.

The endeavor of all such enterprises that look to a permanent continuance of their business is to establish as much of a monopoly as may be. (12%)

So Veblen's organizing view of modern industry (circa 1900, anyway) is that it is dispositionally inclined towards being anti-competitive -- to finding means of sheltering its production methods and prices from competition from other firms.

In the end Veblen does not believe that these practices turn the balance sheet negative against this form of economic organization. But he believes that the wastefulness associated with these strategic efforts at short-term advantage with regard to competitors is only compensated for due to the pressure that this system creates on the direct producers -- workers, engineers, architects, and service providers -- to be as productive during their working hours as possible. Owners and managers have an incentive to destabilize their competitors; but they also have an interest in optimizing their own uses of resources.

While it is in the nature of things unavoidable that the management of industry by modern business methods should involve a large misdirection of effort and a very large waste of goods and services, it is also true that the aims and ideals to which this manner of economic life gives effect act forcibly to offset all this incidental futility. These pecuniary aims and ideals have a very great effect, for instance, in making men work hard and unremittingly, so that on this ground alone the business system probably compensates for any wastes involved in its working. There seems, therefore, to be no tenable ground for thinking that the working of the modern business system involves a curtailment of the community's livelihood. It makes up for its wastefulness by the added strain which it throws upon those engaged in the productive work. (14%)

One reason I particularly enjoy re-reading thinkers like Veblen is that they do a good job of challenging our current assumptions. Veblen was looking at a functioning economy with important similarities to our own, consisting of visibly distinct groups of actors (owners, engineers, workers, advertising execs, ...), and he was in a position to notice some of the dysfunctional features of this system that are still with us today but that are no longer so visible.

(Here is an earlier post about Charles Perrow's treatment of corporations during much the same time period; link.)

Monday, October 28, 2013

Adam Smith Never Believed That "Greed is Good"

Gavin Kennedy is tired of hearing people mischaracterize Adam Smith's views:

... There are daily reports across the media and throughout academe of direct statements [that greed is good] from mainstream neoclassical economics, complete with endorsements of this mistaken theory allegedly based upon the writings of Adam Smith in Wealth Of Nations. The "Greed is Good" theme played well until recently and gave legitimacy to this tendentious and immoral, view of economics, even though credit as the source for such ideas belongs to Ayn Rand, and not to anything written by Adam Smith. ...
The ... is manifestly unwarranted and is not supported by anything that he wrote in any edition of “Moral Sentiments” (1759) or in “Wealth Of Nations” (1776).  If you think you know differently, please feel free to post a comment to that affect.
The claim that Adam Smith ever said anything in praise of “selfishness”, even in a pragmatic and regretful acceptance of it, is wholly unwarranted.  Unfortunately such notions are widespread in US academe...

Thursday, October 24, 2013

'Physiocracy and Robots'

Yet another travel day, can't remember the last weekend I was home (no complaints though), so one more from Brad DeLong and that's it for awhile:

Physiocracy and Robots, by Brad DeLong: The physiocrats saw France as having four kinds of jobs:

  • Farmers
  • Skilled artisans
  • Flunkies
  • Landowning aristocrats

Farmers, they thought, produced the net value in the economy--the net product. Their labor combined with water, soil, and sun grew the food they and others ate. Artisans, the physiocrats thought, were best seen not as creators but as transformers of wealth--transformers of wealth in the form of food into wealth in the form of manufactures. Aristocrats collected this net product--agricultural production in excess of farmers' subsistence needs--and spent it buying manufactured goods and, when they got sated with manufactured goods, employing flunkies.

In this framework, the key economic variables are:

  • the fraction f who are farmers.
  • the net product per farmer n.
  • the fraction who can be set to work making manufactured goods that aristocrats can consume before becoming sated m.

The key equilibrium quantity in this system is:

(nf-m)/(1-f-m) = W

This gives the standard of living of the typical flunky--say, a runner for His Grace the Cardinal. The numerator is the amount of resources on which flunkies can subsist. The denominator is the number of flunkies. If this quantity W is low, the country is poor: flunkies are ill-paid, begging and thievery are rampant, and the reserve army of potential unemployed puts downward pressure on artisan and farmer living standards as well. If this quantity is high, the country is prosperous.

The physiocrats saw a France undergoing a secular decline in the farmer share f, and they worried. A fall in f produced a sharper decline in W. Therefore they called for:

  • Scientific farming to boost n and so boost the net product nf.
  • A reallocation of the tax burden to make it less onerous to be a farmer--and so boost the farmer share f and so boost the net product nf.

With the unquestioned assumption that there were limits on how high the net product per farmer n could be pushed, the physiocrats would have forecast that France of today, with only 5% of the population farmers, would be a hellhole: huge numbers of ill-paid flunkies sucking up to the aristocratic landlords.

Well, the physiocrats were wrong about the decline of the agricultural share of the labor force. And let us hope that the techno-pessimists are similarly wrong about the rise of the robots.

Wednesday, August 14, 2013

'Never Channel the Ghosts of Dead Economists as a Substitute for Analysis'

 Nick Rowe checks in with David Laidler:

David Laidler goes meta on "What would Milton have said?": I tried to persuade David Laidler to join us in the econoblogosphere, especially given recent arguments about Milton Friedman. I have not yet succeeded, but David did say I could use these two paragraphs from his email:

However - re. the "what Milton would have said" debate  - When I was just getting started in the UK, I got thoroughly fed up with being told "what Maynard [Keynes] would have said" -- always apparently that the arguments of people like me were nonsense and therefore didn't have to be addressed in substance. I took a vow then never to channel the ghosts of dead economists as a substitute for analysis, and still regard it as binding!
MF was a big supporter of QE for Japan at the end of the '90s. I know that, because one of his clearest expressions of the view was in response to a question I put to him on a video link at a BofC conference. But so was Allan Meltzer at that time, and he is now  (a) virulently opposed to QE for the US and (b) on the record (New York Times, Nov. 4th 2010 "Milton Friedman vs. the Fed.")  as being sure that Milton would have agreed with him. In my personal view (a) demonstrates that even as wise an economist as Meltzer can sometimes give dangerous policy advice, and (b) shows that he knows how to deploy pure speculation to make a rhetorical splash when he does so. Who could possibly know what Milton would have said?  He isn't here.

David Laidler is probably the person best qualified to answer the question "What would Milton have said?", and that's his answer.

Speaking of Meltzer and substitutes for analysis, his last op-ed warns yet again about inflation. Mike Konczal responds:

Denialism and Bad Faith in Policy Arguments, by Mike Konczal: Here’s the thing about Allan Meltzer: he knows. Or at least he should know. It’s tough to remember that he knows when he writes editorials like his latest, "When Inflation Doves Cry." This is a mess of an editorial, a confused argument about why huge inflation is around the corner. “Instead of continuing along this futile path, the Fed should end its open-ended QE3 now... Those who believe that inflation will remain low should look more thoroughly and think more clearly. ”
But he knows. Because here’s Meltzer in 1999 with "A Policy for Japanese Recovery": “Monetary expansion and devaluation is a much better solution. An announcement by the Bank of Japan and the government that the aim of policy is to prevent deflation and restore growth by providing enough money to raise asset prices would change beliefs and anticipations.”
He knows that there’s an actual debate, with people who are “thinking clearly,” about monetary policy at the zero lower bound as a result of Japan. He participated in it. So he must have been aware of Ben Bernanke, Paul Krugman, Milton Friedman, Michael Woodford, and Lars Svensson all also debating it at the same time. But now he’s forgotten it. In fact, his arguments for Japan are the exact opposite of what they are now for the United States. ...
The problem here isn’t that Meltzer may have changed his mind on his advice for Japan. If that’s the case, I’d love to read about what led to that change. The problem is one of denialism, where the person refuses to acknowledge the actually existing debate, and instead pantomimes a debate with a shadow. It involves the idea of a straw man, but sometimes it’s simply not engaging at all. For Meltzer, the extensive debate about monetary policy at the zero lower bound is simply excised from the conversation, and people who only read him will have no clue that it was ever there.
There’s also another dimension that I think is even more important, which is whether or not the argument, conclusions, or suggestions are in good faith. ...

Tuesday, August 13, 2013

Friedman's Legacy: The New Monetarist's View

I guess we should give the New Monetarists a chance to weigh in on Milton Friedman's legacy and influence (their name -- New Monetarists -- should give you some idea where this is headed...I cut the specific arguments short, but they can be found at the original post):

Friedman's Legacy, by Stephen Williamson, New Monetarist Economics: I'm not sure why, but there has been a lot of blogosphere writing on Milton Friedman recently... Randy Wright once convinced me that we should call ourselves New Monetarists, and we wrote a couple of papers (this one, and this one) in which we try to get a grip on what that means. As New Monetarists, we think we have something to say about Friedman.

We can find plenty of faults in Friedman's ideas, but those ideas - reflected in Friedman's theoretical and empirical work - are deeply embedded in much of what we do as economists in the 21st century. By modern standards, Friedman was a crude economic theorist, but he used the simple tools he had available to develop deep ideas that were later fleshed out in fully-articulated economic models. His empirical work was highly influential and serves as a key reference point for some sub-fields in economics. Some examples:

1. Permanent Income Theory...

2. The Friedman rule: Don't confuse this with the constant money growth rule, which comes from "The Role for Monetary Policy." The "Friedman rule" is the policy rule in the "Optimum Quantity of Money" essay. Basically, the nominal interest rate reflects a distortion. Eliminating that distortion requires reducing the nominal interest rate to zero in all states of the world, and that's what monetary policy should be aimed at doing... We can think of plenty of good reasons why optimal monetary policy could take us away from the Friedman rule in practice, but whenever someone makes an argument for some monetary policy rule, we have to first ask the question: why isn't that rule the Friedman rule? The Friedman rule is fundamental in monetary theory.

3. Monetary history: Friedman and Schwartz's "Monetary History of the United States" was monumental. ...

4. Policy rules: The rule that Friedman wanted central banks to follow was not the Friedman rule, but a constant-money-growth rule... Friedman was successful in getting the rule adopted by central banks in the 1970s and 1980s, but the rule was a practical failure, for reasons that are well-understood. But Friedman got macroeconomists and policymakers thinking about policy rules and how they work. Out of that thinking came ideas about central bank commitment, Taylor rules, inflation targeting, nominal GDP targeting, thresholds, etc., that form the basis for modern analysis of central bank policy.

5. Money and Inflation: ... Friedman played a key role in convincing economists and policymakers that central banks could, and should, control inflation. That seems as natural today as saying that rain falls from the sky, and that's part of Friedman's influence.

6. Narrow banking: I tend to think this was one of Friedman's bad ideas, but it's been very influential. Friedman advocated a 100% reserve requirement in "A Program for Monetary Stability." ...

6. Counterpoint to Keynesian economics: Some people seem to think that Friedman was actually a Keynesian at heart, but he sure got on Tobin's nerves. Criticism is important - it helps to prevent and root out lazy science. Old Keynesian economics was probably much better - e.g. there would have been no "neoclassical synthesis" - because of Friedman.

If anyone wants to argue that Friedman is now unimportant for modern economics, that's like saying Bob Dylan is unimportant for modern music. Today, Bob Dylan is quite willing to climb on a stage and perform with a world-class group of musicians - but it's truly pathetic. Nevertheless, Bob Dylan doesn't get booed off the stage today, because people recognize his importance. In the 1960s, he got people riled up, everyone paid attention, and the world is much different today than it would have been if he had not done the work he did.

Wednesday, July 24, 2013

'Why Economics Needs Economic History'

Kevin O'Rourke on the need for economic history:

Why economics needs economic history, by Kevin H O’Rourke: The current economic and financial crisis has given rise to a vigorous debate about the state of economics, and the training which graduate and undergraduates economics students are receiving. Importantly, among those arguing most strongly for a change in the way that young economists are trained are the ultimate employers of these students, in both the private and the public sector. Employers are increasingly complaining that young economists don’t understand how the financial system actually works, and are ill-prepared to think about appropriate policies at a time of crisis.

Strikingly, many employers and policymakers are also arguing that knowledge of economic history might be particularly useful.

  • Stephen King, Group Chief Economist at HSBC, argues that: “Too few economists newly arriving in the financial world have any real knowledge of events that, while sometimes in the distant past, may have tremendous relevance for current affairs…The global financial crisis can be more easily interpreted and understood by someone who has prior knowledge about the 1929 crash, the Great Depression and, for that matter, the 1907 crash” (Coyle 2012).
  • Andrew Haldane, Executive Director for Financial Stability at the Bank of England, has written that “financial history should have caused us to take credit cycles seriously,” and that the disappearance of subfields such as economic and financial history, as well as money, banking and finance, from the core curriculum contributed to the neglect of such factors among policymakers, a mistake that “now needs to be corrected” (Coyle 2012, pp).
  • In a recent Humanitas Lecture in Oxford, Stan Fischer said that “I think I’ve learned as much from studying the history of central banking as I have from knowing the theory of central banking and I advise all of you who want to be central bankers to read the history books” (2013).

The benefits of trying to understand economic history

  • Knowledge of economic and financial history is crucial in thinking about the economy in several ways.

Most obviously, it forces students to recognise that major discontinuities in economic performance and economic policy regimes have occurred many times in the past, and may therefor occur again in the future. These discontinuities have often coincided with economic and financial crises, which therefore cannot be assumed away as theoretically impossible. A historical training would immunise students from the complacency that characterised the “Great Moderation”. Zoom out, and that swan may not seem so black after all.

  • A second, related point is that economic history teaches students the importance of context.

As Robert Solow points out, “the proper choice of a model depends on the institutional context” (Solow 1985, p. 329), and this is also true of the proper choice of policies. Furthermore, the 'right' institution may itself depend on context. History is replete with examples of institutions which developed to solve the problems of one era, but which later became problems in their own right.

  • Third, economic history is an unapologetically empirical field, exclusively dedicated to understanding the real world.

Doing economic history forces students to add to the technical rigor of their programs an extra dimension of rigor: asking whether their explanations for historical events actually fit the facts or not. Which emphatically does not mean cherry-picking selected facts that fit your thesis and ignoring all the ones that don't: the world is a complicated place, and economists should be trained to recognise this. An exposure to economic history leads to an empirical frame of mind, and a willingness to admit that one’s particular theoretical framework may not always work in explaining the real world. These are essential mental habits for young economists wishing to apply their skills in the work environment, and, one hopes, in academia as well.

  • Fourth, economic history is a rich source of informal theorising about the real world, which can help motivate more formal theoretical work later on (Wren-Lewis 2013).

Habakkuk (1962) and Abramowitz (1986) are two examples that immediately spring to mind, but there are many others.

  • Fifth, even once the current economic and financial crisis has passed, the major long run challenges facing the world will still remain.

Among these is the question of how to rescue billions of our fellow human beings from poverty that would seem intolerable to those of us living in the OECD. And yet such poverty has been the lot of the vast majority of mankind over the vast majority of history: what is surprising is not the fact that 'they are so poor', but the fact that 'we are so rich'. In order to understand the latter puzzle, we have to turn to the historical record. What gave rise to modern economic growth is the question that prompted the birth of economic history in the first place, and it remains as relevant today as it was in the late nineteenth century. Apart from issues such as the rise of Asia and the relative decline of the West, other long run issues that would benefit from being framed in a long-term perspective include global warming, the future of globalisation, and the question of how rapidly we can expect the technological frontier to advance in the decades ahead.

  • Sixth, economic theory itself has been emphasising – for well over 20 years now – that path dependence is ubiquitous (David 1985).
  • Finally, and perhaps most importantly from the perspective of an undergraduate economics instructor, economic history is a great way of convincing undergraduates that the theory they are learning in their micro and macro classes is useful in helping them make sense of the real world.

Far from being seen as a 'soft' alternative to theory, economic history should be seen as an essential pedagogical complement. There is nothing as satisfying as seeing undergraduates realise that a little bit of simple theory can help them understand complicated real world phenomena. Think of Obstfeld and Taylor’s use of the Mundell-Fleming trilemma to frame students’ understanding of the history of international capital market integration over the last 150 years; or Ronald Rogowski’s use of Heckscher-Ohlin theory to discuss political cleavages the world around in the late nineteenth century; or the Domar thesis, referred to in Temin (2013), which is a great way to talk to students about what drives diminishing returns to labour. Economic history is replete with such opportunities for instructors trying to motivate their students.


Abramovitz, M (1986), “Catching Up, Forging Ahead, and Falling Behind,” Journal of Economic History 46, 385-406.

Coyle, D (2012), What’s the Use of Economics?: Teaching the Dismal Science After the Crisis, London Publishing Partnership.

David, P A (1985), "Clio and the Economics of QWERTY." The American Economic Review (Papers and Proceedings) 75, 332-37.

Fischer, S (2013), video, quotation begins at 43.48, available online at

Habakkuk, H J (1962), American and British Technology in the Nineteenth Century, Cambridge University Press.

Solow, R (1985), “Economic History and Economics,” The American Economic Review 75, 328-31

Temin, P (2013), “The Rise and Fall of Economic History at MIT,” MIT Department of Economics Working Paper 13-11 (June).

Wren-Lewis, S (2013), “Economic History and Krugman’s Crib Sheet”.

Saturday, July 13, 2013

Ricardo and Malthus on Wage Rigidity

In Letters of David Ricardo to Thomas Robert Malthus 1810-1823 (published in 1887), Ricardo argues against Malthus' contention that wage rigidity is a source of unemployment:

You say, 'We know from repeated experience that the money price of labour never falls till many workmen have been for some time out of work.' I know no such thing; and, if wages were previously high, I can see no reason whatever why they should not fall before many labourers are thrown out of work. All general reasoning, I apprehend, is in favour of my view of this question, for why should some agree to go without any wages while others were most liberally rewarded? Once more I must say that a sudden and diminished demand for labour in this case must mean a diminished reward to the labourer, and not a diminished employment of him; he will work at least as much as before, but will have a less proportion of the produce of his work, and this will be so in order that his employer may have an adequate motive for employing him at all, which he certainly would not have if his share of the produce were reduced so low as to make increased production an evil rather than a benefit to him.

Sunday, July 07, 2013

'Adam Smith's Conceptual Sleight-of-Hand'

Jeff Weintraub:

Adam Smith's conceptual sleight-of-hand on exchange, cooperation, and the foundations of social order: This was a response to one section of a post by Brad DeLong containing Snippets: Smith, Marx, Solow: Shoebox for Econ 210a Spring 2014. My attention was caught by the first snippet in this compilation. It posed the question "Exchange and its vicissitudes as fundamental to human psychology and society?" and followed that with a justly famous quotation from Adam Smith's Wealth of Nations. As usual, Brad's question zeroed in on some crucial issues. I was provoked to start writing a message about some of those issues, which I thought would run a few lines ... but it turned out to be a little longer, so I might as well share it. ... [much. much more] ...

Friday, May 17, 2013

'What about Marx?'


Dan Little:

What about Marx?, by Dan Little: At various points since the death of Karl Marx in 1883 his work has been regarded as a dead issue -- no longer relevant, too ideological, methodologically flawed, too rooted in the nineteenth century. And yet each of these periods of extinction has been followed by a resurgence of interest in Marx's ideas, as new generations try to make sense of the tough and often cruel social conditions in which they find themselves. What are the important dimensions of theory that Marx presented through his writings? And how can any of these be considered valuable in trying to come to grips with the global, capitalist, turbulent, unequal, violent world that we now inhabit?

We might say that there are a small handful of key theoretical frameworks that Marx advocated.

Materialism as a methodology for social science. Social change is driven by material circumstances, the forces and relations of production. This encompasses the property system and the ensemble of technologies present in a given level of society. Materialism denies that ideas and thought drive social change; so religion, patriotism, nationalism, and ideologies of patriarchy are epiphenomena rather than originating causes.

Emphasis on the primacy of property and class. Sociologists and historians want to explain processes of social change. Marx puts it forward that the economic interests created by the property system in a given society create powerful foundations for collective social action.  Those who occupy positions of advantage within a given set of property relations want to do what they can to preserve those relations; and those who are disadvantaged by the property relations have a latent interest in mobilizing to change those relations. Persons who share a location in the property system constitute a class, and their interests are systematically different from those in other such positions.

A sketch of a theory of consciousness and culture. Institutions of consciousness and culture play a role in stabilizing and attacking the most important relations of domination in a society. Educational institutions, it is argued, prepare young people for their specific roles in society -- workers, managers, elites, sub-proletarians. So struggles over the content and form of the institutions of enculturation can be expected to be polarized along class lines. Less directly, Marxists like Gramsci have postulated that worldviews reflect life experiences; so elites create cultural worlds that are quite distinct from those imagined by subordinate groups.

A diagnosis of social ills including exploitation, alienation, and dehumanization of social relations. Exploitation has to do with the flow of wealth and material goods through the property system from producers to property-owners. Alienation has to do with the loss of autonomy and self-control that individuals have within a capitalist structure. Marx's distinctive addition to this idea is that this loss of autonomy has psychic consequences -- disaffection, lack of self-respect, depression. The dehumanization of social relations follows from the structure of the capitalist workplace -- workers and bosses, each related to the other through the workings of a command system. Wittgentstein got it right when he described the "slab" language game: the boss says "slab", and the worker produces a slab. There is nothing "I-thou" about this relation (Buber, I and Thou).

A theory of several distinct modes of production. Marx believes that history takes the form of a succession of separable and structurally distinct modes of production: ancient slavery, feudalism, and capitalism differ by the structure of the production system, the property system, and the technologies that each embodied. Marx's most extensive analysis of social formations is his treatment of the capitalist mode of production in Capital: Volume 1: A Critique of Political Economy and the writings that were posthumously edited and published as volumes 2 and 3 of Capital.

A common thread through these framing ideas is the perspective of critique: a critical intelligence trying to understand why modern society produces such human misery. But even from the perspective of critique -- the perspective that tries to diagnose and understand the systemic flaws of contemporary society -- Marxism leaves quite a bit of terrain untouched: gender relations, racism, nationalism, and religious hatred, for example. Marxism doesn't do a good job of explaining a regime of sexual violence (rape in India); it doesn't have much to contribute to the rise of fascism; it doesn't have resources for understanding Islamo-phobia and hatred.  So Marxism is not a comprehensive theory of modern social failings; and we might say that its emphasis on economic conflict eclipses other forms of domination in ways that are actually harmful to our ability to improve our social relations.

Geoff Boucher takes up the issue of the continuing relevance of Marx in the contemporary world in Understanding Marxism. Here is how he opens the book:

Today, radical thinking about social alternatives stands under prohibition. According to defenders of the neoliberal transformation of every facet of human existence into a market, Marxism has failed…. Marx is dead; Marxism is finished -- and it must stay that way. (1)

But Boucher rejects this neoliberal consensus.

Marxism as an intellectual movement has been one of the most important and fertile contributions to twentieth-century thought. The influence of Marxism has been felt in every discipline, in the social sciences and interpretive humanities, from philosophy, through sociology and history, to literature. (2)

Here are the core reasons that Boucher offers for thinking that Marxism is still relevant in the twenty-first century:
  1. Marxism is the most serious normative social-theoretical challenge to liberal forms of freedom that does not at the same time reject the modern world.

  2. Marxism is the most sustained effort so far to think the present historically and to reflexively grasp thought itself within its socio-historical context. (2)

And later:

Marxism is a distinctively historical theory that normatively challenges liberalism in a way no other modern theory does. (3)

Much of Boucher's book contributes to one of two intellectual aims: to give a clear exposition of the most important of Marx's theoretical ideas; and to explicate the several "Marxisms" that followed in the twentieth century. The successive Marxisms take up the bulk of the book, with chapters on Classical Marxism, Hegelian Marxism, The Frankfurt School, Structural Marxism, Analytical Marxism, Critical Theory, and Post-Marxism. So the book provides very extensive explication of the theoretical ideas and developments that have grown out of the Marxist tradition.

What Boucher doesn't really provide is a clear rationale, based on contemporary sociology and history, for the conclusions he wants us to share about the continuing utility of Marxism as a framework for understanding the present and future. We don't get the reasoning that would support the affirmative ideas expressed above. The best rebuttal to the neoliberal triumphalism mentioned above is a compelling collection of sociological studies grounded in the perspectives mentioned above. Michael Burawoy's sociology of factories is a good example (e.g. Manufacturing Consent: Changes in the Labor Process Under Monopoly Capitalism). But this isn't an approach that Boucher chooses to pursue.

So what about it? Is Marxism relevant today? Yes, if we can avoid the dogmatism and rigidity that were often associated with the tradition. Power, exploitation, class, structures of production and distribution, property relations, workplace hierarchy -- these features certainly continue to be an important part of our social world. We need to think of Marx's corpus as a multiple source of hypotheses and interpretations about how capitalism works. And we need to recognize fully that no theoretical framework captures the whole of history or society. Marxism is not a comprehensive theory of social organization and change. But it does provide a useful set of hypotheses about how some of the key social mechanisms work in a class-divided society. Seen from that perspective, Marxist thought serves as a sort of proto-paradigm or mental framework in terms of which to pursue more specific social and historical investigations.

Saturday, May 04, 2013

'Keynes, Keynesians, the Long Run, and Fiscal Policy'

Paul Krugman on how to tell when someone is "pretending to be an authority on economics":

Keynes, Keynesians, the Long Run, and Fiscal Policy: One dead giveaway that someone pretending to be an authority on economics is in fact faking it is misuse of the famous Keynes line about the long run. Here’s the actual quote:

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

As I’ve written before, Keynes’s point here is that economic models are incomplete, suspect, and not much use if they can’t explain what happens year to year, but can only tell you where things will supposedly end up after a lot of time has passed. It’s an appeal for better analysis, not for ignoring the future; and anyone who tries to make it into some kind of moral indictment of Keynesian thought has forfeited any right to be taken seriously. ...

I thought the target of these remarks had forfeited any right to be taken seriously long ago (except, of course and unfortunately, by Very Serious People). [Krugman goes on to tackle several other topics.]

Saturday, March 16, 2013

Why Should We Care about Economic History?

While I search around for stuff to post, a reminder of why it was a mistake to eliminate economic history from many economic programs:

Why Should We Care?: Saturday Twentieth Century Economic History Weblogging, by Brad DeLong: Why should you care about how our history and the history of our parents and grandparents and great-grandparents--the history of the long twentieth century, 1870-2010--will appear to people five and more centuries into the future?
First of all, it makes a very good story. ... We are gossiping animals. ... And the best stories to tell and listen to are the real stories, about real people: they have a depth and an import that fiction cannot reach.
Second, you never know what parts of history may turn out to be useful and very important. Ten years ago I thought that my curiosity about and interest in the Great Depression was an antiquarian diversion from my day job of understanding the interaction of economic institutions, economic policies, and economic outcomes. The fact that we had gone through the Great Depression, had learned lessons from it, and had incorporated those lessons into our institutions and policy processes meant that there was little practical use to going over it once again. Boy, was I wrong. History may not repeat itself, but it certainly does rhyme—and nothing made an economist better-prepared and better-positioned to understand what happened to the world economy between 2007 and 2013 than a deep and comprehensive knowledge of the history of the Great Depression.
And there are likely to be other nuggets in the economic history of the past that will turn out to be vitally important for understanding the future, we just do not know which nuggets they will be. So it is best to be prepared ... by studying as many nuggets as possible.
Third, you should focus on economic history not just because it is the key axis of the twentieth century in particular but because economic history is the real history. ...
And, fourth, we do need to search for and keep searching for the “lessons” of the past for the present. Today, at least where I write, our principal concerns are with the creation and maintenance of liberty and prosperity, and with understanding what our (comparative) liberty and (relative) prosperity has transformed us. Other audiences in other places and other times have had different concerns...
Yet the major theme has to be that the history of the twentieth century was—all in all—glorious. The history has an extremely depressing middle, but the ending is much more happy than tragic. Certainly this is the case when we use a relative yardstick, and compare the end of the twentieth century to all previous centuries. Yes, forms of religious strife and terror that we thought we had left behind several centuries ago are back. Yes, failures of economic policy that land countries in depression that we thought we had learned how to resolve decades ago are back. Yes, nuclear weapons and global warming pose dangers for the future of a magnitude that humanity has never before confronted. Nevertheless, all in all the North Atlantic today is a (relatively) free and prosperous region, and the rest of the world is if not free and prosperous at least closer to being so than at any time in the past.
Of course, the explosion of material wealth and liberty we have seen in the twentieth century has not solved our human problems is obvious. That the likely spread of ample material plenty and, if we are lucky, increasing democracy and freedom to much of the rest of the globe that the twenty-first century may see will not solve our human problems is obvious as well. We have little confidence today that we know how to achieve successful economic development in the world... The twenty-first century problems of global environmental management have not yet been addressed. Wars of religion are, if not back, on the horizon. And modern North Atlantic liberal democracy is not the end of history. And there is the fact that the utopia toward which we have seemed to be progressing—a prosperous, liberal, democratic one—is not to everyone’s taste, as the terror-bombers who destroyed the World Trade Center and killed 3000 people on September 11, 2001 and subsequent military-political attempts to spread or contain a new set of wars of religion have made clear.
A naive individual of a century or two ago would wonder at the events, patterns, and problems that brought the twentieth century to its end. The world at the end of the twentieth century has enough wealth to give everyone on the globe what they would regard as a rich upper-middle class style of life. Why does such a rich and powerful world still have problems? It is not at all clear that we will recognize our destination when we arrive at it, or that many of us will like it when we get there.
We must remember that we are, at best, but slouching towards utopia. ...

I'll just add that if you don't know where you've been, it's a lot harder to figure out where you are going. Economic history helps you understand why some issues come to prominence while others are ignored, and the likely direction that society will go in pursuit of solutions. Can we fully understand macroeconomic policy in Europe today, or give the best indication of where it will be tomorrow, the next day, and the day after that without understanding the economic ghosts (e.g. hyperinflation) that haunt the discussions of economic policy?

Friday, February 08, 2013

Fed Watch: Would Rather Be Blogging

One more note from Tim Duy (he's teaching the History of Economic Thought this quarter):

Would Rather Be Blogging, by Tim Duy: I am still trying, and still failing, to keep up on blogging, this term. This morning I see that Mark is traveling, which is usually an extra incentive for me to post (hence a few posts). But, truth be told, I am simply procrastinating on the second half of grading papers on the topic:

Analyze the 1942 film Casablanca as an analogy to the moral framework detailed in Adam Smith's The Theory of Moral Sentiments.

At this point all I can think about is why didn't the Nazis just kill Victor Laszlo when they found him in Casablanca? It is not like they were known for their subtly. As least, they are not particularly subtle in the Indiana Jones movies.

Saturday, September 29, 2012

'Economy and Economics of Ancient Greece and Ancient China'

We had our first seminar of the year today. It was by Professor Takeshi Amemiya of Stanford. Takeshi is best known for his econometric research on a wide range of topics, including a series of highly influential theoretical papers in the 1970s and 1980s. His more recent research has been in a very different area -- the economics of ancient Greece. The title of his talk was:

"Economy and Economics of Ancient Greece and Ancient China"

One of the things I took from the talk was how many of the ideas in Adam Smith's Wealth of Nations can be found in these ancient texts, concepts such as the division of labor, supply and demand, the role of prices, monopoly power, wealth accumulation, and so on.

But it was also interesting to see echoes of so many modern debates, e.g. about wealth inequality, taxes, etc., from so long ago. Here are a few quotes from the section "Economic Thoughts" in his slides (there is a timeline in the slides showing when each of the people quoted below lived):

...Economic Thoughts
(1) Warriors, Farmers, Craftsmen, and Merchants
In Athens from the 7th to the 6th century BC, the middle and lower class, which engaged in commerce and industry, gradually gained its status, becoming a threat to the aristocrats who depended on farming. Also in China there was a deep-rooted idea that agriculture is primary and commerce and industry are secondary. ... Contempt for commerce and industry, as in Greece, started ... when commerce and industry started growing.
It is noteworthy, however, that in China scholars who defended commerce and industry also emerged. Actually it is surprising that such scholars are not known in Greece. ...
 A. Confucius
Confucius argued for income equality: “I hear that the man who governs a nation and the man who governs home are more concerned with inequality than scarcity, more concerned with anxiety than poverty.”
B. Guan Zhong
Guan Zhong was a financial adviser to Lord Huan of Qi (?—643). Scholars belonging to the Guan Zhong school kept publishing works in the name of Guan Zi up to the days of Emperor Wu of Early Han.
Guan Zhong believed the four classes should live in separate areas, warriors near the army, farmers near the farm, craftsmen near the government agencies, and merchants near the market. He also believed the four classes should be hereditary in principle, although he would allow an exceptionally stout farmer to be a warrior. ...
He feared the antagonism between the rich and the poor: “When the income inequality exceeds a limit, everything is lost.” (“Five Aids”). Plato said a similar thing in The Laws (744D). Guan Zhong tried to solve this problem by the government’s direct buying selling and its price policy. He encouraged trade across nations. “Show hospitality to the surrounding nations.” (“Book of Questions”) “Please build guest houses for foreign merchants.” (“Gravity Part B”).
 C. Mo Zi
“When the lower class works hard, public finance prospers.” (“Heaven’s Will” Part B). He criticized li and yue (morals and music) emphasized by Confucianism as luxury and extravagance. “We should give food to the hungry, clothes to the cold, rest to the laborer, and peace to the disorderly.” (“Against Fate” Part C).
“Therefore the ancient sage kings in their governance appointed the virtuous people for high positions and valued the wise. They appointed even people from the lower three classes as long as they were able and promoted them to peerage, gave them high salaries, and gave them the right to make important political decisions.” (”Merit of Wisdom” Part A) ...
 D. Meng Zi
“Those who exert mind rule others, those who exert body are ruled, the ruled feed the rulers, the rulers govern the ruled, and this is universal truth.” (“Lord Wen of Teng Part A”). ...
“There was an ignoble man, who would climb to a high place, look around, and if he finds a place where he is likely to make a profit, goes there and monopolizes the profit. Everyone despised this man, and the government started imposing the merchant tax.” (Gong Sun Chou Part B”).
 E. Xun Zi
“A son of a craftsman always succeeds his father’s profession.” (“Influence of a Great Scholar”).
“Man by nature cannot live without forming a group. If a group does not have classes, people quarrel. If people quarrel, they become disordered, and if they are disordered, they fall into trouble. Therefore, life without classes brings the greatest harm, and that with classes brings the greatest benefit.” (“National Wealth”)
“The best way to repair disorder and eliminate harm is to establish classes and group people accordingly.” (“National Wealth”).
“If the descendants of lords and aristocrats do not make an effort to observe morality, they should be relegated to the rank of commoners, and if the descendants of commoners enhance culture and scholarship, adhere to right conduct, and strive for moral life, they should be elevated to the rank of aristocrats and ministers.” (“Kingdom”).
“We should lower the farm tax, unify the market and import-export taxes, minimize recruiting farmers for nonfarm work so that farmers can concentrate on farming, then the wealth of a nation will increase.” (“National Wealth”)
F. Sima Qian (“Biography of Millionaires”)
“Many commoners without a rank, without meddling with politics, without interfering with the lives of people, increased wealth by trading at the right moment. Intelligent people can learn from this.”
“Therefore, farmers provide food, forest guards supply mountain resources, and merchants distribute these goods. The government did not order the collection of the goods. It was done because each person did what he could best and wanted to get what he needed. When the prices are high, that is a sign they will soon become low. Everybody diligently attends to his task and enjoys doing it just as water flows to a lower place. He keeps working days and nights, comes even if he is not called, and supplies goods even if they are not demanded. This stands to reason and is the way it should be.”
After mentioning how various millionaires obtained their fortunes, he concludes, “These people did not get rich because they were given land by the government, nor did they thwart law or did evil things. They observed the law of nature and found the right moment to act and make a profit. They made a fortune by the secondary occupation (commerce) and preserved it by the primary occupation (agriculture). What they got by force, they kept it by civility. As the world changed, they reacted with moderation. That is why it is worthwhile mentioning them.”
 G. Sang Hongyang
Sang Hongyang (152BC – 80BC) was the finance minister of Emperor Wu and in 120BC became the officer in charge of salt and iron monopoly. “Salt Iron Debate” is a record of the debate between Sang Hongyang versus the Learned and the Wise chosen from the public regarding the pros and cons of the monopoly of salt and iron, which took place in 81BC and 30 years later recorded by Huan Kuan.
“Wealth is obtained by strategy, and not by labor. Profit comes from power, and not from tillage.” (Salt and Iron Debate “distribution”).
“Xian Gao contributes by selling cattle to Zhou, Wu Gu by lending vehicles in Qin, Gong Shuzi by making use of compasses and measures, and Ou Ye by smelting. Craftsmen perform their tasks in the shops and farmers and merchants trade and benefit each other.” (Ibid.) And yet, in order to convince the Learned, he argues that the monopoly of salt and iron has the benefit of suppressing the avarice of the big merchants.
4 Theory of Prices
Guan Zhong was well aware of the fact that a price is determined by supply and demand, and conversely, supply and demand respond to price (which he calls Theory of Light and Heavy).
“The market determined the level of prices. … By observing the market one can tell whether the nation is orderly or disorderly, whether the supply of goods is sufficient or deficient. But the market itself cannot determine the supply.” (“Riding Horses”). ...
Xenophone states, “An increase in the number of coppersmiths, for example, produces a fall in the price of copper work, and the coppersmiths retire from business. The same thing happens in the iron trade. Again, when corn and wine are abundant, the crops are cheap, and the profit derived from growing them disappears, so that many give up farming and set up as merchants or shopkeepers or money-lenders.”(Ways and Means iv 6). ...

Thursday, September 20, 2012

On the 'Austrian' Hatred of Fractional Reserve Banking

Brad Delong on Ludwig von Mises:

...whenever I see something like:

Ludwig von Mises: Attempts to carry out economic reforms from the monetary side can never amount to anything but an artificial stimulation of economic activity by an expansion of the circulation, and this, as must constantly be emphasized, must necessarily lead to crisis and depression. Recurring economic crises are nothing but the consequence of attempts, despite all the teachings of experience and all the warnings of the economists, to stimulate economic activity by means of additional credit...

I find myself under a mysterious but inexorable and irresistible compulsion to waste what would otherwise be productive work time trying to make some kind of sense of it--to at least understand wherein lies the error, and how somebody trying very hard to understand the economy (never mind that he is a big fan of the political leadership of Benito Mussolini) can go so pathetically wrong.

It is, of course, not the case that every expansion of the circulation is an "artificial" (and unnatural) "stimulation of economic activity" that must "necessarily lead to crisis an depression". So why does Ludwig von Mises think that it must?

Here is my current guess as to where von Mises is coming from:

Let us start out with a world of publicly-known technology and constant returns to scale in everything. People happily make things and trade them. And everything sells at its resource cost.

One of the things people make is little disks of gold, usually decorated with pictures of bearded men on one side and allegorical female figures on the other, with lettering saying things like: "Fecund Augustae" or "Concordia Militum" or "Fides Exercituum" on them. These little gold disks trade--like everything else--at their cost of production: the cost of digging the ore out of the ground, extracting the metal from the ore, and stamping the disk into the right shape.

Then somebody has a bright idea: Because these little metal disks are valuable and easy to carry, they are subject to theft. I will offer to perform a service: I will keep everybody's little metal disks in my stronghouse, and let's write out signed, notarized declarations that people have little metal disks in my stronghouse and they can trade those rather than the disks directly. And--as long as 100% of the circulating medium is backed by gold--everything goes on as before, with everything selling for its cost of production.

Then somebody else has a bright idea: They write out a whole bunch of signed declarations that they have little metal disks in the stronghouse, even though they actually do not have any such. They then buy things with these pieces of the circulating medium that they have written out.

These people, Ludwig von Mises says, are thieves: thieves pure and simple:

They have bought useful things.

They have claimed that they have done so by trading (claims to) valuable little metal disks (in the warehouse) for useful commodities.

But they have lied.

They did not have any valuable little metal disks for trade.

And, Ludwig von Mises would say, these lying thieves come in three forms:

  • governments that print dollar bills without having 100% gold bullion backing for them in Fort Knox.
  • banks that issue bank notes.
  • banks that allow depositors to write checks in amounts that exceed the specie reserves they the banks have in their vaults.

The problem, I think Ludwig von Mises would say, is that the wealth of society is the amount of work has gone into creating the commodities in the economy: the food, the clothing, the houses, the little gold disks. The sum of past work crystalized in commodities is society's wealth. The food is wealth, the housing is wealth, the clothing is wealth, and the little gold disks are wealth. Then add unbacked fiat money and bank credit--either public or private, it doesn't matter--to the mix. The fiat money and the bank credit are counted as wealth, as if they were claims to little gold disks that took sweat and tears to create, but they are not wealth at all. They are fictions: false promises that there is somewhere some valuable gold that you have title to.

And, Ludwig von Mises would say, the larger the unbacked circulating medium the bigger the lie and the theft. It is all guaranteed to end in tears. Whenever society thinks that it is richer than it is, plans will be inconsistent and unattainable. When that unattainability becomes manifest, that will trigger the crash and the depression.

That is, I think, where von Mises is coming from.

And, of course, this is wrong--so so so so so so so so so unbelievably wrong.

It is simply not the case that we can cheaply and easily buy things with money because it is valuable. It is, instead, the case that money is valuable because we can cheaply and easily buy things with it.

One way into the tangle of understanding why it is wrong is to ask each of us: Why are you happy accepting money in exchange when we sell useful commodities?

Hint: It's not because we are looking forward to going down to the bank, exchanging our bank notes for the little disks of gold usually decorated with pictures of bearded men on one side and allegorical female figures on the other with lettering saying things like "Fecund Augustae" or "Concordia Militum" or "Fides Exercituum" on them, taking our little disks home, and feeling happy looking at them.

That's not why we accept money.

We accept money because if we don't have any money we have to buy commodities with other commodities, and when we do so we are unlikely to receive the cost of production for what we sell. Have you ever tried to buy a latte at Peets with a copy of Ludwig von Mises's Money and Credit? It does not go well.

The fact is that your wealth is only worth its cost of production if you are liquid--if you can wait to sell until somebody willing to pay full cost of production comes along, which is not every minute. The use-value of money is that it allows you to time your other transactions so that you can realize the full exchange value of what you sell, rather than having to sell it at a discount.

Thus there is no paradox: no sense in which the existence of fiat money creates a situation in which society must necessarily think that it is richer than it is, with claims to total wealth valued at more than the value of total wealth itself. You think--correctly--that your fiat money has value, and that value is just equal to the discount from its cost of production that your other wealth incurs because it is illiquid. But what if the government prints more fiat money than the illiquidity gap in your other wealth? Well, then people will say: "I don't need to hold all this extra money. I would be liquid enough with less." Everybody will try to run down their money balances, and so the price level will rise until the real money stock is just what people think covers the illiquidity gap between their other wealth and its cost of production.

What von Mises misses completely is that the size of this illiquidity gap can and does change suddenly and drastically--and it is the business of the central bank and of the government to alter the quantity of money to keep such changes from disrupting the real economy. ...

Sunday, September 16, 2012

David Ricardo 'On Machinery'

David Ricardo, in the third edition of his Principles (this is from chapter 31, "On Machinery," 1821), reconsiders how the invention of new machinery affects labor:

Ever since I first turned my attention to questions of political economy, I have been of opinion, that such an application of machinery to any branch of production, as should have the effect of saving labour, was a general good, accompanied only with that portion of inconvenience which in most cases attends the removal of capital and labour from one employment to another. It appeared to me, that provided the landlords had the same money rents, they would be benefited by the reduction in the prices of some of the commodities on which those rents were expended, and which reduction of price could not fail to be the consequence of the employment of machinery. The capitalist, I thought, was eventually benefited precisely in the same manner. He, indeed, who made the discovery of the machine, or who first usefully applied it, would enjoy an additional advantage, by making great profits for a time; but, in proportion as the machine came into general use, the price of the commodity produced, would, from the effects of competition, sink to its cost of production, when the capitalist would get the same money profits as before, and he would only participate in the general advantage, as a consumer, by being enabled, with the same money revenue, to command an additional quantity of comforts and enjoyments. The class of labourers also, I thought, was equally benefited by the use of machinery, as they would have the means of buying more commodities with the same money wages, and I thought that no reduction of wages would take place, because the capitalist would have the power of demanding and employing the same quantity of labour as before, although he might be under the necessity of employing it in the production of a new, or at any rate of a different commodity. ...
These were my opinions, and they continue unaltered, as far as regards the landlord and the capitalist; but I am convinced, that the substitution of machinery for human labour, is often very injurious to the interests of the class of labourers.
My mistake arose from the supposition, that whenever the net income of a society increased, its gross income would also increase; I now, however, see reason to be satisfied that the one fund, from which landlords and capitalists derive their revenue, may increase, while the other, that upon which the labouring class mainly depend, may diminish, and therefore it follows, if I am right, that the same cause which may increase the net revenue of the country, may at the same time render the population redundant, and deteriorate the condition of the labourer. ...
That the opinion entertained by the labouring class, that the employment of machinery is frequently detrimental to their interests, is not founded on prejudice and error, but is conformable to the correct principles of political economy.

However, he goes on to say that this shouldn't be viewed as a call to discourage machinery:

The statements which I have made will not, I hope, lead to the inference that machinery should not be encouraged.  ... The employment of machinery could never be safely discouraged in a State, for if a capital is not allowed to get the greatest net revenue that the use of machinery will afford here, it will be carried abroad, and this must be a much more serious discouragement to the demand for labour, than the most extensive employment of machinery; for, while a capital is employed in this country, it must create a demand for some labour; machinery cannot be worked without the assistance of men, it cannot be made but with the contribution of their labour. By investing part of a capital in improved machinery, there will be a diminution in the progressive demand for labour; by exporting it to another country, the demand will be wholly annihilated.

So, in Ricardo's view, it is a choice between the potential for detrimental effects on labor from the use of new machinery versus even worse effects if the machinery is not used at all. His argument can certainly be questioned, at least in some places, but this is not the positive "lift all boats" theory of growth that is often attributed to Ricardo.

Thursday, June 21, 2012

Hope for the History of Economic Thought?

Via Open Economics, "An interview with Amartya Sen":

...The history of economic thought has been woefully neglected by the profession in the last decades. This has been one of the major mistakes of the profession. One of the earliest reminders that we are going in the wrong direction has come from Kenneth Arrow about 30 years ago when he said: These days, I get surprised when I find the students don’t seem to know any economics that was written 25 or 30 years ago.

Is there any hope that this trend can be reversed?

Yes, I’m quite optimistic in this regard. I get the impression that this seems to be getting corrected right now. I’m particularly delighted that the corrective has come to a great extent from student interest. I’m very struck by the fact that at the university where I teach – Harvard – the demand for more history of economic thought has mostly come from students. As a result there is a lot more attempt by the department of economics as well as history and government to look for the history of political economy. Last year, along with my wife Emma Rothschild, I offered a course on Adam Smith’s philosophy and political economy. It drew a lot of interest and we got some of the finest students at Harvard.

Saturday, June 09, 2012

"Adam Smith and the Myth of Laissez Faire"

Gavin Kennedy continues to fight against cartoonish mis-representations of what Adam Smith actually said and believed:

Adam Smith and the Myth of Laissez Faire, by Gavin Kennedy: ...Let us be clear: Adam Smith did not use the words “Laissez-faire” in anything that he wrote, published in his lifetime or posthumous, or in any student notes that have so far been found, or in any reports of his lectures by those who attended them (John Millar, James Woodrow, Lord Buchan, John Stuart, etc.,) or by those who knew him intimately (such as Dugald Stewart, whose father was a student at Glasgow with Smith). ...
We know that Smith knew of the use and meaning of laissez-faire from his close association with the Physiocratic circle around Quesnay during his visits to Paris (1764-67). The fact is that laissez-faire never entered his vocabulary. Nor did an English translation. This has not prevented many commentators from seeking to use Smith’s use of Natural Liberty as a synonym for laissez-faire. It was not the same thing.
Natural Liberty was a philosophical concept based on Natural Law theories as expressed by Grotius and Pufendorf... The originator of laissez-faire was a ‘plain spoken’ French merchant, M. le Gendre, a deputy of commerce, who responded to the question put to them by Colbert, the French minister, what he could do for them at a meeting that Colbert convened: “lassez nous faire’ le Gendre replied in 1690. Those who quote the phrase today often miss these details. Note that it was a merchant who favoured laissez faire. Consumers were not asked but are supposed to be the main beneficiaries of laissez-faire. Smith remained suspicious of merchants who from Elizabethan times had monopolised who could practise their trade and where, in the infamous Town Guilds. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation sends in a conspiracy against the public, or in some contrivance to raise prices” (WN I.x.c.27: 145). Laissez-faire was of dubious benefit, given its claimants hence Smith never advocated it.
He believed that consumption was the sole end of production and competition was the antidote to open and secret monopolies. Far from leaving merchants alone, he wanted them under the pressure of free competition of consumer choice. Colbert typified state regulations of trade and France was a prime example where government regulations abounded, with numerous officious Inspectors of French street markets and fairs inspecting every detail, not to ensure open competition, but to ensure the State’s passion for order. Absent these regulated orders, enforced by the Inspectors ,the merchants would have imposed their own orders, and their likely behaviours, if free to do so, would not have worked for the best interests of their captive customers. Trade guilds, legal or unofficial, under the cloak of laissez-faire worked for the interests of merchants, not consumers.
So where did cries by merchants and manufacturers for ‘laissez faire come from throughout the 19th century? Two French economists, Say and Bastiat, were prominent in cries for laissez-faire, using Adam Smith’s name as cover for its popularity among politicians and merchant campaigners against the ‘Corn Laws’ and the newly passed but limited Factory Acts. ...

This is a point I've made in another context. Free, unregulated markets -- those absent government oversight of any kind -- are not the same as the ideal competitive markets found in textbooks, those that produce optimal outcomes. In a free market, producers are free to organize, for example, "in some contrivance to raise prices," and this takes us away from the optimal outcome free market enthusiasts are trying to defend. Government oversight and regulation are needed to stop producers from engaging in behavior that is harmful to consumers, excessive market power and the associated political power that come with it are both problematic, a point Smith's so-called disciples ought to take to heart.

Saturday, April 14, 2012

Is INET Evolving?

During last years' INET conference at Bretton Woods I wrote:

Re-Kindleberger: I've learned that new economic thinking means reading old books.

Okay, that's not quite fair, but one of the themes of the Institute for New Economic Thinking conference I'm at has been to reintroduce economic history into the undergraduate and graduate programs. I think that's a good idea, as I've said many times, and not just a course on the history of economic thought. There's also a lot we can learn from studying the economic history of the US and other countries. ...

Update: Brad DeLong adds:

Actually, it is not not quite fair, it is fully fair.

This year I'm trying to understand how the attempt to introduce "new economic thinking" into the profession has evolved over the last three years. One new innovation this year is to invite students to the conference, and as explained here the response was much larger than expected.

I think this is a step in the right direction. Change won't come from the older, established economists who comprise most of the audience -- gray hair is in excess supply here -- change will come from the younger generation. One of them will come up with a new idea, a new model -- something that pushes the established lines in a way that creates momentum as others join in to push the model forward. I don't mean that older economists who are here won't try to change the world, or that they can't provide the spark that generates the new idea. It's also entirely possible that an established economist will come up with the foresight needed to push the frontier.

But I believe that change will come from the young, not the old who are mostly set in their ways and mostly adhere to boundaries defined by the models they already know. You can teach an old dog new ticks, surely, but the established economists are mostly set in their ways and will continue to pursue the familiar and the safe. Starting over with a brand new research agenda when you are in your 40s or 50s is possible I suppose, and I'm sure there are examples of this, but for most it would be too hard and too risky.

Similar risks exist for the young. Setting out in a new direction is hazardous, and if it doesn't pan out tenure will not be granted. It is much easier to contribute to existing knowledge than to create brand new knowledge, and it's much easier to publish as well. So even for the young the established path is very attractive.

That's why bringing students here is important. All these names they've heard, some that they are in awe of -- Nobel prize winners and the like -- are here and they are sending the younger economists an important message. They are signaling that there are are established economists in the very best departments who play key editorial roles in important journals who are receptive to good ideas. When Joe Stiglitz, Amartya Sen, James Heckman and many more names like that stand up and endorse the push to think about economics in a new way, it could give a student with a new idea, and the understandable hesitation that comes with it, the confidence to carry it through. If it works out, there's a good chance some very well-known and respected economists will help to push the idea forward, or at the very least be open-minded, and that provides important motivation to those who might discover something new.

But we have to be careful too. If we push students to try new ideas rather than the established path, and the ideas go nowhere in the end that could do harm to the individual's career. So what we also need to do -- and I admit that I'm not quite sure how to do this -- is to teach the students, as best we can anyway, what a good idea looks like. What makes a new idea more likely to be successful? What makes it more likely to be received by important journals? How can a student know whether to push forward or to back off?

I think the answer is mentorship of the type that exists between a Ph.D. candidate and their advisor, at least a good one. Part of that process is to help the students ask the right questions about their research, how to find the potential holes and fill them, and so on. So all of us who are pushing the profession to investigate new ideas and new directions need to be willing to talk to students about their ideas, ask them the questions they ought to ask themselves, read preliminary drafts that come by email out of the blue, and help in other ways as we can. We need to provide guidance and at the same time not inhibit the search for new and better paths forward, a somewhat delicate task.

It would be better, of course, if older, established economists did this. They have tenure, and that protects them if things don't work out in the end. They won't be given a terminal year and shoved out the door. But, again, I just don't think that's where change will come from. Instead, it's up to the young. The best we can do is to provide guidance freely, encourage the good ideas and redirect the lesser ones, provide motivation, and to the extent possible shield them from those who are only out to protect their own traditional research from new ideas that challenge their research programs.

Finally, for the conference in the future, it would help if the students were better integrated into the general conference instead of being housed in a separate location, watching a live feed of the conference, and visiting for 10 or 15 minutes with the well-known economists who are willing to come over and visit. Allowing students to attend was a last minute innovation, and I'm told this was the best they could do under the circumstances, but hopefully this will change in the future.

Wednesday, March 07, 2012

"Energetic Libertarian Nuts"

Via Yann Giraud:

...Paul Samuelson had written to his friend Alvin Hansen a couple of years before, in the midst of the Phillips curve controversy, the following sentence: "Milton F. is a bloody nuisance. In the end he is not right in his provocative stands, but it takes valuable time rebutting his arguments." He even added: "Having just returned from UCLA where (as in Virginia and Washington) the place is jumping with energetic libertarian nuts, I realize that so much of one's scientific life has to be occupied in sterile debate."...

More here.

Thursday, August 25, 2011

Warren Samuels on the "Invisible Hand"

Gavin Kennedy has been trying to extinguish the invisible hand myth for some time now:

Warren Samuels on the "Invisible Hand," Adam Smith's Lost Legacy: More good news on Warren Samuels new book in the publisher’s blurb, posted in the Coordinating Problem Blog (here):

The post, “Warren Samuels (1933-2011)”, is by Peter Boettke of George Mason University, Fairfax, Virginia, and the academic home of my friendly sparing partner on the “invisible hand”, Daniel Klein.

Regular readers will see immediately why I am so excited to read an outline of its main theme and one of its concluding assertions: that ‘no such thing as an invisible hand exists’. Yes, it was a metaphor.

This conclusion is from a most highly respected source in the history of economic thought.

The scholarly profession will sit up and note what Warren Samuels says, even if it has not responded positively yet to the six-year campaign of Lost Legacy to alert it to the errors of the modern myths about Adam Smith’s use of the invisible hand metaphor.

“Erasing the Invisible Hand” (Cambridge, 2011) is described by the publisher as follows:

This book examines the use, principally in economics, of the concept of the invisible hand, centering on Adam Smith. It interprets the concept as ideology, knowledge and a linguistic phenomenon. It shows how the principal Chicago School interpretation misperceives and distorts what Smith believed on the economic role of government. The essays further show how Smith was silent as to his intended meaning, using the term to set minds at rest; how the claim that the invisible hand is the foundational concept of economics is repudiated by numerous leading economic theorists; that several dozen identities given the invisible hand renders the term ambiguous and inconclusive; that no such thing as an invisible hand exists; and that calling something an invisible hand adds nothing to knowledge. Finally, the essays show that the leading doctrines purporting to claim an invisible hand for the case for capitalism cannot invoke the term but that other non-normative invisible hand processes are still useful tools.”

Review copies are circulating - but none has come this way.

Tuesday, May 03, 2011

"Those Pesky Postwar Recessions"

Barkley Rosser has a follow-up to his post on Keynes:

Those Pesky Postwar Recessions, by Barkley Rosser: Well, the debate over my post on Keynes on central planning has gone viral... I ... want to comment further on a point raised ... by one of the makers of the video in question, John Papola. This has to do with ... the point being made in the video that unlike what lots of Keynesians supposedly said (Samuelson being provided in the debates as an example in 1943, although not Keynes himself), we did not go into a deep depression after WW II, even though there was ... a sharp drop in government spending...
OTOH, some of those making a big fuss about that recession somehow fail to notice that in fact there was a post-WW-II recession... It occurred in 1945 with the sharpest decline in wartime spending, although not much remembered. However, the official stats have US declining in GDP by a whopping -12.7% in that year, although that number must be taken with some grains of salt due to all kinds of measurement issues and restructurings. Some say this exaggerates things as the unemployment rate only went from 1.5% to about 3.6%, a rise, but not all that much to get worked up about.
Two points. The first is that this latter event does not account for the massive decline in female labor force participation that occurred in 1945, from about 38% to about 30%. We all know (or should) that those withdrawing from the labor force do not count in the unemployment rate. That not very large increase in the UR does not disprove that there was a sharp (if short) decline in GDP. (Rosie the Riveter went home to boom out those babies, and to buy houses to be built, given that basically none had been for about 15 years in the US).
The other point, which is perhaps more cogent for the debates here, involves monetary policy. ...[T]he very loose monetary policy of WW II basically continued during the immediate postwar years, only finally ended with the Fed-Treasury Accord of 1951 in the face of rising inflation tied to the Korean War. So, it may well have been that the Fed was listening to Samuelson and was slow to tighten monetary policy, thereby helping to ease that postwar transition...

Friday, April 29, 2011

Did Keynes Support Having a "Central Plan"

Barkley Rosser:

Did Keynes Support Having a "Central Plan"?, EconoSpeak: That he did is charged by "Hayek" in the freshly released "Keynes versus Hayek: Round 2"... However, I ... find it disturbing that increasingly Austrians and some others have taken to charging Keynes with having supported "central planning"... Is this correct? I think that the answer is largely "no," with it certainly being that answer if one means by that command central planning of the Soviet type that Hayek criticized in his Road to Serfdom (which Keynes praised, btw, when it first came out).

I think the strongest evidence for Keynes supporting central planning comes from two sources, which I shall quote. The first comes from his 1920s essay, "The End of Laissez-Faire," which has been identified as the inspiration for the movement for indicative (non-command) planning that was seen after WW II in such countries as France, Japan, India, South Korea, and some other places, although not UK or US.

After noting that uncertainty can lead to inequality of wealth and the unemployment of labor, he states: "I believe that the cure for these things is partly to be sought in the deliberate control of the currency and of credit by a central institution, and partly in the collection and dissemination on a great scale of data relating to the business situation, including the full publicity, by law if necessary, of all business facts which it is useful to know. These measures would involve Society in exercising directive intelligence through some appropriate organ of action over many of the inner intricacies of private business, yet it would leave private initiative and enterprise unhindered." (p. 318 from Essays in Persuasion)

One can argue that Keynes is offering a hopeless contradiction when calling for this "directive intelligence," probably the closest he came anywhere to command, with his simultaneous limit on that regarding leaving "private initiative and enterprise unhindered," this latter certainly not fitting with the full-blown command socialist model at all.

Regarding the information gathering, well, of course that is now generally done in most higher income economies, and many have argued that this was the essence of the indicative planning operations carried out in many countries, when they worked at their best, as some claim was the case in France in the 1950s, when businesspeople needed some sort of external push to revive their animal spirits, to use Keynesian language, and that seeing projections of demands by others helped provide this.

The other passage that some have pointed to as possibly suggesting a central planner tendency by Keynes comes from the final chapter of the General Theory, p. 378:

"Furthermore, it seems unlikely that the influence of of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community."

One can argue again here that Keynes is setting himself up for some sort of impossible contradiction, and Hayek may well have argued that such control of investment would lead to his road to serfdom slippery slope. However, it is clear from later passages that what Keynes had in mind was ultimately the control of the aggregate of investment rather than of its specific forms or details.

These almost certainly provide the strongest evidence for Keynes supposedly supporting there being a "central plan." But it looks at most, putting the two together, like one that involves lots of provision of information and data along with some sort of control of aggregate investment, while leaving most of the decisions up to "private initiative." This hardly constitutes a "central plan," and certainly not one of the sort that the actually existing Hayek criticized. ...

Sunday, April 10, 2011


I've learned that new economic thinking means reading old books.

Okay, that's not quite fair, but one of the themes of the Institute for New Economic Thinking conference I'm at has been to reintroduce economic history into the undergraduate and graduate programs. As I've noted here many times in the past, I think that's a good idea, and not just a course on the history of economic thought. There's also a lot to learn from studying the economic history of the US and other countries.

Update: Brad DeLong adds:

Actually, it is not not quite fair, it is fully fair. Take, say, yesterday morning's panel with Carmen Reinhart and Richard Koo--both were making arguments the logical structure and framework of which seemed to me to be straight out of Walter Bagehot's Lombard Street. And Lombard Street was published in 1873.

Richard argued that--just as in Japan in the 1990s--the collapse of asset values had created a world desperately short of financial assets, in this particular case savings vehicles of moderate and long duration. The impairment of balance sheets thus left households and businesses anxious to cut back on their spending in order to rebuild their balance sheets. Since the interest rate could not fall any further to clear the market for savings vehicles, recession followed. The recession would, he said, last until and unless the supply of financial assets to serve as savings vehicles rose to levels consistent with financial-market demand. And government could materially accelerate this process if it stood up while the private sector was standing down: if it spent, invested, and borrowed in order to boost the market supply of savings vehicles.

Carmen by contrast argued that the world was desperately short not of savings vehicles but rather, due to overleverage, of safe financial assets. We had an excess supply of risky and leveraged financial assets and an excess demand for safe financial assets. Hence households and businesses cut back on their spending to try, in vain, to build up their holdings of safe financial assets that just were not there. Hence recession.

What did Carmen say could be done? Nothing. The privates cannot accelerate the deleveraging process because nothing they do can transform risky into safe assets right now. And if the government tries to do so it will crack its status as a safe debtor and we will have a bigger sovereign debt crisis on our hands which will make the recession worse, Basically, we are all Austria and it is 1931.

Of course, financial markets do not think we are all Austria and it is 1931. They think that Iceland, Ireland, Greece, Portugal, and Spain are Austria in 1931--and they are right.

My view is that Richard Koo is right, and economic core governments should be frantically engaging in expansionary fiscal policy right now until the wake-up call from financial markets comes, and then they should stop.

The main takeaway point, however, is that this is all the macroeconomics of 1873.

Friday, March 25, 2011

DeLong: Is Adam Smith Partly an Economist, or Wholly a Moral Philosopher?

Since I posted Tiago's criticism of Robert Shiller, I should be fair and post Brad DeLong's response:

Is Adam Smith Partly an Economist, or Wholly a Moral Philosopher?, by Brad DeLong: Tiago at History of Economics Playground reacted very negatively to an AEA Annual Meeting presentation by Robert Shiller and Virginia Shiller:

Bad job « History of Economics Playground: Imagine I write a paper on Behavioral Macroeconomics making off the cuff observations about the latest financial products and how my bank manager frames that information, and noting my friends and neighbors’ flight to safety or to risk on the flimsiest of whims. Imagine I make no reference to secondary literature, or to methodology as I approach the questions. Were I then to submit this piece to general appreciation, say get Robert Shiller to referee it. How do you think he would assess my effort?

I am sure we would be fast and dirty in telling me to do something else with my time.

I have not written a paper on Behavioral Macroeconomics and have no intention of doing so. But Shiller has written a working paper, kind of on the history of economics (Cowles Foundation Discussion Paper No. 1788 – Economists as Worldly Philosophers). There is no thread to the argument, no understanding of context, and zero references to the vast body of work by historians on his subject. The working paper, I am sure, will get plenty of readers, downloads and comments. But were I ever to referee it, I would be fast and dirty in telling him to do something else with his time.

I read this as Tiago policing the subdisciplinary boundaries: nobody working in the history of economic thought has any business writing about finance or behavioral macro, and nobody working in finance or behavioral macro has any business talking about how looking at the history of economic thought informs what the future of economics should be.

So I asked:

So what is it in the working paper by Robert Shiller and Virginia Shiller that you think is wrong?

Tiago responded:

You want me to referee it? Someone missed the point of my post.

Economics appears somehow ready formed and fully bounded from the beginning. Take this: “Adam Smith was a professor, not of economics but of moral philosophy. His The Theory of Moral Sentiments, first published in 1759, was a mixture of philosophy, psychology, and economics.” — the anachronism of the statement makes me cringe.

A reference to a Baltimore Sun article to announce the emergence of economics departments? What about saying something about the importation of the German Research University or the context of the Progressive Era shaping standards of expertise and advocacy and trust in numbers.

And then the whole thesis is pants. Economists never stopped being “worldy philosophers” even if the public sphere has changed and become less accepting of certain brands of generalists — vide a forthcoming conference and special issue of History of Political Economy on Public Intellectuals in Economics (shameless self-plug).

I could go on ad nauseum. Nearly sentence by sentence.

I think this deserves some additional reflection. First, start with Tiago's:

You want me to referee it? Someone missed the point of my post.

He is talking to me. But he is wrong. I am not stupid. I did not miss the point of your post.

I do maintain that if Tiago dislikes Shiller and Shiller enough to trash the piece, he owe people who inquire an explanation of why he dislikes it--rather than a further policing of subdisciplinary boundaries. Moreover, I think that when Tiago does try to lay out his complaints about Shiller and Shiller he does not do particularly well. The first thing he complains about is Shiller and Shiller's claim that:

Continue reading "DeLong: Is Adam Smith Partly an Economist, or Wholly a Moral Philosopher?" »

Monday, March 21, 2011

Imagining a Rejection

This is from Tiago Mata at History of Economics Playground. I don't think he likes Robert Shiller's paper on "Economists as Worldly Philosophers," nor the intrusion on historian's turf:

Bad job, by Tiago: Imagine I write a paper on Behavioral Macroeconomics making off the cuff observations about the latest financial products and how my bank manager frames that information, and noting my friends and neighbors’ flight to safety or to risk on the flimsiest of whims. Imagine I make no reference to secondary literature, or to methodology as I approach the questions.
Were I then to submit this piece to general appreciation, say get Robert Shiller to referee it. How do you think he would assess my effort?
I am sure we would be fast and dirty in telling me to do something else with my time.
I have not written a paper on Behavioral Macroeconomics and have no intention of doing so. But Shiller has written a working paper, kind of on the history of economics (Cowles Foundation Discussion Paper No. 1788 – Economists as Worldly Philosophers). There is no thread to the argument, no understanding of context, and zero references to the vast body of work by historians on his subject. The working paper, I am sure, will get plenty of readers, downloads and comments. But were I ever to referee it, I would be fast and dirty in telling him to do something else with his time.

Sunday, January 16, 2011

Response to "Was Adam Smith Wrong on Rising Real Wages And the Spread of 'Opulence'?"

Yesterday, I reposted Gavin Kennedy's response to Jeff Weintraub's comments on Adam Smith. Via email, here is Jeff Weintraub's counter-response (the email was sent to Gavin Kennedy and cc'ed to me -- I asked if it was okay to post):

Dear Gavin Kennedy,
I just happened to notice your two-part response to my blog post about the theoretical puzzle posed by Adam Smith's theory of wages and "universal opulence":

(Most of your second post was then re-posted, with a bit of further commentary, by Mark Thoma in his Economist's View blog... and someone forwarded that to me.)

I appreciate the friendly and gracious character of your response to my post, which includes many interesting and intelligent points.

Continue reading "Response to "Was Adam Smith Wrong on Rising Real Wages And the Spread of 'Opulence'?"" »

Friday, November 05, 2010

"An Open Letter to the President"

Michael Perelman:

An Open Letter to the President, by Michael Perelman: This letter was sent to the President, who failed to heed the warning, which turned out to be correct.

You have made yourself the Trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out. But if you succeed, new and bolder methods will be tried everywhere, and we may date the first chapter of a new economic era from your accession to office.

I wish I had the foresight to have written this letter, but it was sent to the new president in 1933. The author was John Maynard Keynes. Although the letter is old, it is absolutely on target in predicting, “If you fail, rational change will be gravely prejudiced throughout the world.”
Wake up Obama before you do more damage by imagining that cooperation with the Right rather than leadership is the way forward.
By the way, in 1938 Keynes also warned the president that because of the 1937 austerity, “the present slump could have been predicted with absolute certainty.” Brad DeLong reprinted that letter.

Here's a shortened version of the letter from the first link above. The letter is organized by numbered points. I found point 18 interesting in light of recent calls to use quantitative easing to bring down the long end of the yield curve. Keynes is talking about changing the average maturity of the Fed's bond holdings by trading short-term for long-term bonds rather than purchasing long-term bonds through an expansion of the Fed's balance sheet, so he isn't calling for quantitative easing. But he does "attach great importance" to movement at the long end of the yield curve. I also found point 8 interesting since World War II -- which came after this letter -- is generally credited with validating Keynes' ideas:

An Open Letter to President Roosevelt
By John Maynard Keynes

Dear Mr President,
1. You have made yourself the Trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out. But if you succeed, new and bolder methods will be tried everywhere, and we may date the first chapter of a new economic era from your accession to office. This is a sufficient reason why I should venture to lay my reflections before you, though under the disadvantages of distance and partial knowledge.
2. At the moment your sympathisers in England are nervous and sometimes despondent. We wonder whether the order of different urgencies is rightly understood...
3. You are engaged on a double task, Recovery and Reform;--recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement. It will be through raising high the prestige of your administration by success in short-range Recovery, that you will have the driving force to accomplish long-range Reform. On the other hand, even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place. It may over-task your bureaucratic machine, which the traditional individualism of the United States and the old "spoils system" have left none too strong. And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once.
4. Now I am not clear, looking back over the last nine months, that the order of urgency between measures of Recovery and measures of Reform has been duly observed, or that the latter has not sometimes been mistaken for the former. ...
5. My second reflection relates to the technique of Recovery itself. The object of recovery is to increase the national output and put more men to work. In the economic system of the modern world, output is primarily produced for sale; and the volume of output depends on the amount of purchasing power... Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out o their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse. ...
8. Thus as the prime mover in the first stage of the technique of recovery I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by Loans and not by taxing present incomes. Nothing else counts in comparison with this. In a ... slump governmental Loan expenditure is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity. In the past orthodox finance has regarded a war as the only legitimate excuse for creating employment by governmental expenditure. You, Mr President, having cast off such fetters, are free to engage in the interests of peace and prosperity the technique which hitherto has only been allowed to serve the purposes of war and destruction. ...
10. I am not surprised that so little has been spent up-to-date. Our own experience has shown how difficult it is to improvise useful Loan-expenditures at short notice. There are many obstacle to be patiently overcome, if waste, inefficiency and corruption are to be avoided. There are many factors, which I need not stop to enumerate, which render especially difficult in the United States the rapid improvisation of a vast programme of public works. I do not blame Mr Ickes for being cautious and careful. But the risks of less speed must be weighed against those of more haste. He must get across the crevasses before it is dark.
11. The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor. ...
15. If you were to ask me what I would suggest in concrete terms for the immediate future, I would reply thus.
16. In the field of gold-devaluation and exchange policy the time has come when uncertainty should be ended. ...
17. In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of Loan-expenditures under Government auspices. It is beyond my province to choose particular objects of expenditure. But preference should be given to those which can be made to mature quickly on a large scale, as for example the rehabilitation of the physical condition of the railroads. The object is to start the ball rolling. The United States is ready to roll towards prosperity, if a good hard shove can be given in the next six months. ... You can at least feel sure that the country will be better enriched by such projects than by the involuntary idleness of millions.
18. I put in the second place the maintenance of cheap and abundant credit and in particular the reduction of the long-term rates of interest. The turn of the tide in great Britain is largely attributable to the reduction in the long-term rate of interest which ensued on the success of the conversion of the War Loan. This was deliberately engineered by means of the open-market policy of the Bank of England. I see no reason why you should not reduce the rate of interest on your long-term Government Bonds to 2½ per cent or less with favourable repercussions on the whole bond market, if only the Federal Reserve System would replace its present holdings of short-dated Treasury issues by purchasing long-dated issues in exchange. Such a policy might become effective in the course of a few months, and I attach great importance to it.
19. With these adaptations or enlargements of your existing policies, I should expect a successful outcome with great confidence. How much that would mean, not only to the material prosperity of the United States and the whole World, but in comfort to men's minds through a restoration of their faith in the wisdom and the power of Government!

With great respect,

Your obedient servant
J M Keynes

Thursday, November 04, 2010

"How Selfish Soever Man May be Supposed..."

Richard Green:

I comfort myself with the opening of Adam Smith's Theory of Moral Sentiments:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.

Friday, August 20, 2010

"Public Debt and National Income"

Earlier today a colleague, Peter Lambert, gave me a book containing the first 8 volumes of a series called "Postwar Economic Studies." The volumes, which as Peter says are "more like extended pamphlets," were published individually between August 1945 and November 1947 and then assembled into this collection.

I haven't read much of the book yet, but this part sounds familiar (it's from the third volume, "Public Finance and Full Employment," and this article is by Evsey D. Domar, published in December, 1945):

Public Debt and National Income, by Evsey D. Domar, Division of Research and Statistics, Board of Governors: On November 30, 1945 the Federal debt reached 265 billion dollars, a magnitude without precedent in the history of this country. With the present interest rate structure, it involves an annual service charge of more than 5 billion dollars, an amount exceeded by only two peacetime Federal budgets until 1934.[1] It is quite understandable that a debt of this magnitude should cause considerable apprehension, and that a policy of repaying at least a part of it should be advocated so often.
It is true that our economy would be better off without so large a debt. But this does not mean that our position can be always improved by reducing the debt.

Continue reading ""Public Debt and National Income"" »

Thursday, June 10, 2010

"21st Century Regress"

Maxine Udall:

21st Century Regress, by Maxine Udall: Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it. BP continues to obliterate the Gulf of BP (as far as I'm concerned, they broke it, they now own all of it), the party of personal accountability and small government somehow thinks the buck for this private sector fiasco stops at President Obama, and as far as I can tell President Obama seems to have drunk this convenient kool-aid, too, with a little nudging from the furies on both sides of the MSM. (I know, I know, it was the guvmint regulators' fault, so it was Obama's fault AND we should stop trying to regulate anything. Convenient, that.) Meanwhile, our lawmakers in Washington appear to be beating a hasty retreat from anything that would pass as fair and just for the unemployed...[list of problems continues]...

Sometimes it's just too much to take in and process and I'm left feeling a tad out of sorts. So this week I did what has become my usual strategy when the 21st century overwhelms me: I retreat to the 18th century.

I don't really want to go back to the 18th century. For one thing, as far as I can tell there were no girl economists and certainly no blogs then. Also, I like to vote and own property and I especially like it that I am not property, my husband's or my father's. And I suspect they're both glad about that, too.

What I want to retrieve from the 18th century are men (and there must have been some women) like Adam Smith. I want to retrieve not just his ideas. I want to retrieve his way of thinking, his world view (except anchoring everything to feudalism as the standard for comparison, although maybe in time that will become relevant again), and most of all I want to retrieve his way of expressing himself. He is eloquent, clear if not always concise, thoughtful, and seems motivated in most things by a kind and generous heart. He seems the perfect balance justice, prudence, and beneficence as he examines both our evolution as moral beings and the evolution of the wealth of nations.

Continue reading ""21st Century Regress"" »

Saturday, May 29, 2010

"A Missing Macroeconomic Playbook?"

Brad DeLong gives an example of what economic historians and economic history has to contribute to the understanding of and response to financial crises:

A Missing Macroeconomic Playbook?, by Brad DeLong: I am reminded of the extraordinary gulf between economics as I see it and economics as at least some others see it when I read things like Narayana Kocherlakota's opening paragraph:

Modern Macroeconomic Models as Tools for Economic Policy: I believe that during the last financial crisis, macroeconomists (and I include myself among them) failed the country, and indeed the world. In September 2008, central bankers were in desperate need of a playbook that offered a systematic plan of attack to deal with fast-evolving circumstances. Macroeconomics should have been able to provide that playbook. It could not. Of course, from a longer view, macroeconomists let policymakers down much earlier, because they did not provide policymakers with rules to avoid the circumstances that led to the global financial meltdown...

My reaction to this is the old one: "Huh?!"

For "macroeconomics" did and does have a playbook that offered a systematic plan of attack to deal with fast-evolving circumstances. The playbook was first drafted back in 1825, during the bursting of Britain's canal bubble.

Let me briefly set out what the macro playbook is, and how it has been developed by economists and policymakers over the past 185 years. Start with Say's or Walras's Law: the circular flow principle that everybody's expenditure is someone else's income--ands everyone's income is somebody else's expenditure. It has to be that way...

How, then, can you have a depression--a "general glut," a situation in which there is excess supply of not one or a few but all commodity goods and services? How can you have a situation in which workers laid off from shrinking industries where demand is less than was expected and thus less than supply are not rapidly hired into industries where demand is more than was expected and hence more than supply?

Moral philosopher, libertarian, colonial bureaucrat, feminist, public intellectual, and economist John Stuart Mill put his finger on the answer in a piece he published in 1844:

[T]hose who have... affirmed that there was an excess of all commodities, never pretended that money was one of these commodities.... [P]ersons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute. In extreme cases, money is collected in masses, and hoarded; in the milder cases, people merely defer parting with their money, or coming under any new engagements to part with it. But the result is, that all commodities fall in price, or become unsaleable...

Mill was thus explicitly refuting the older French economist Jean-Baptiste Say. ... In 1821 Say published his Letters to Mr. Malthus, in which he argued that the very idea of a "general glut" was self-contradictory, for the very fact that commodities had been produced meant that there was sufficient demand in aggregate to buy them...

Say was thus the first of a long line of economists to argue that the fact that something that appeared to exist in reality could not really be there because it was inconsistent with his theory.

In a normal microeconomic case of market adjustment--excess supply of one good and excess demand for another--it is clear how adjustment proceeds. Those entrepreneurs making the good in excess supply find themselves selling for less than their costs and so losing money. They cut back on the wages they pay and dismiss workers. But this is not a tragedy, because the profits they have lost have gone into the pockets of entrepreneurs in expanding industries, who are eager to expand production, raise wages, and hire more workers. After a short time the structure of production is better-suited to make what people want, and wages and profits in total are higher than if the structure of production had remained frozen in its old pattern.

But what if there is a general glut of commodities? What if the excess supply is for pretty much all goods and services, and the excess demand is for liquid cash or for safe investments that will not lose their value no matter what? How do you expand labor employed in the liquid cash-creating or in the AAA asset-creating businesses to make more of such assets?

One possibility is to rely on the private sector, saying: risky assets are at a discount and safe assets a premium? Good!

Make the profits from creating safe assets large enough, and Goldman Sachs and company will find a way. ... They will hire people to shuffle the papers. They will finance enterprises, and then slice and dice the cash flows from those enterprises in order to create lots of AAA-rated securities. And when they do, the excess demand for safe assets will be satisfied...


You say nobody trusts Goldman Sachs or Standard and Poor's when they say: "we know we lied last time when we warranted that the assets we were selling were AAA, but this time for sure!!"? Well, how about investing abroad? There are still lots of AAA assets out there in the wider world. Suppose everybody devalues, puts people to work in newly-competitive export industries, and thus runs an export surplus and, in exchange, imports AAA assets from abroad for our savers and investors to hold.


I see. Everybody can't devalue at once. Greece can run an export surplus only if Germany is willing to run an import surplus. The United States can boost its net exports only if China shrinks its own.

Maybe we could ship millions of our citizens to South Africa equipped with picks and shovels and put them to work as gastarbeiteren mining the gold of the Witwatersrand?

I know! Let's cut the price of every good and service by 25%! Then our same stock of nominal AAA assets will meet a 33% larger demand for real AAA assets, and there will be no excess demand for safe assets, and thus no excess supply of goods and services! The problem with this "solution" is that "money" is not just a medium of exchange and a store of value, it is also a unit of account. ... A lot of people have debts denominated in money and were counting on selling their goods and their labor at something like their previous prices to pay off their mortgages, their loans, and their bonds. A whole bunch of assets that were AAA before the decline in the price level are no longer AAA. You haven't fixed the imbalance. Each nominal AAA asset does indeed satisfy a larger slice of demand for real AAA assets as a result of the price-level decline. But the price level decline has shrunk the (nominal) supply of AAA assets just as it has shrunk the (nominal) demand for them. And how have you managed to reduce nominal wages and prices? By years if not decades of idle capacity and high unemployment.


So now--drumroll--it is time to pull the rabbit out of the hat. The solution is... the government! The government has the power to tax! And so the government can make AAA assets when nobody else can!

Or the government can until and unless the assets that it has created for others to hold--which are its debts--rise to the point where people begin to get nervous about whether the government's taxing power will actually be deployed in the end to repay those debts--and we in the United States are still very far from that point (although we in Greece are not).

The first and easiest way for the government to create more safe assets is for the central bank to create them by buying up risky assets for safe ones via open-market operations or lending cash and taking other, riskier assets as its sole security. As Walter Bagehot wrote about the Panic of 1825:

The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. 'We lent it,' said Mr. Harman... [one of the Directors] of the Bank of England:

by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power...

Since the fall of 2007 the central banks and the Treasuries of the world have been following this playbook. They have expanded the supply of safe assets via open-market operations... They have topped up bank capital. They have guaranteed private-sector loans. They have swapped in risky private-sector debt in exchange for government bonds. They have--via expansionary fiscal policy--printed up huge honking additional tranches of government bonds and used the money raised to pull forward government spending and push back taxes.

Now it may be that we are creeping up on the point at which government debts are rising to the limits of politically-limited debt capacity. But that does not mean that the playbook comes to an end. Indeed, Ricardo Caballero is writing a new chapter about how even now governments can go on:

expanding the real supply of AAA assets.... [So far] governments in safe-asset-producing countries [have] produce[d] a lot more of them.... [We could also] let the private sector create the AAA assets... [with] governments... absorb[ing]... risk the private sector cannot handle... Currently the focus (implicitly) is [still] on the former strategy. ... However... at some point it will make sense to decouple fiscal deficits from asset production.... The US Treasury... [could] start buying riskier private assets rather than running fiscal deficits as the counterpart for its supply of Treasuries to the market.... [A] sounder medium-term strategy than the purely public approach... [is to use] the securitisation industry... [I]f the government only provides an explicit insurance against systemic events to the micro-AAA assets produced by the private sector, we could have a significant expansion in the supply of safe assets without the corresponding expansion of public debt...

by formalizing and making explicit what Charles Kindleberger always called their commitment to act as lender of last resort when systemic risk came calling.

The playbook is old and well-established, and has been put to effective use.

That Narayana Kocherlakota and company did not know it existed--that he and his circle had never studied Kindleberger and Minsky, let alone Fisher and Bagehot and Mill, and knew Keynes and Hicks only as straw men to be ritually denounced as sources of error rather than smart people to be listened to--will doubtless appear to future generations as an interesting episode in the history of political economy. But nobody should confuse the failure of Kocherlakota's branch of macroeconomics with the failure of macroeconomics in general.

It's interesting that as we add the appropriate tweaks to modern models and then ask them these questions, in most cases the old wisdom emerges as the answer.

I'm not sure that, in general, people were as unaware of this work as Brad implies. In some cases that was true, certainly, particularly given the fading attention to economic history within economics programs. But some programs still emphasize economic history, e.g. Berkeley,, and I'd hope Brad's students have been made aware of this work.

So it wasn't complete ignorance. But those who did know about this work discounted it. They found a way to argue that we had moved on from old models for good reason, that taking such advice from the past would be a step backwards. It was the arrogance that the present had nothing to learn from the past as much as ignorance of what the past had to say that caused policymakers to respond to the crisis with a deer in the headlights, "oh no my models have nothing to say about this," manner. After all, if the proponents of modern macro had thought there was something to be learned from the Kindlebergers and Bagehots of the past, then those who were ignorant of what they had to say would have already read and absorbed this work. The fact that they didn't gives an indication of the value they thought it had. Hopefully that assessment has changed.

Wednesday, May 26, 2010

John Maynard Keynes: National Self-Sufficiency

Frank Barry at the Irish Economy Blog:

Keynes in Ireland, by Frank Barry, Irish Economy Blog: Keynes’ famous lecture on economic experimentation, delivered at UCD in April 1933, has recently become available online.

If you can't access that copy -- I couldn't -- it turns out it was already online elsewhere. It's an interesting essay:

John Maynard Keynes, "National Self-Sufficiency," The Yale Review, Vol. 22, no. 4 (June 1933), pp. 755-769: I was brought up, like most Englishmen, to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt, but almost as a part of the moral law. I regarded ordinary departures from it as being at the same time an imbecility and an outrage. I thought England's unshakable free trade convictions, maintained for nearly a hundred years, to be both the explanation before man and the justification before Heaven of her economic supremacy. As lately as 1923 I was writing that free trade was based on fundamental "truths" which, stated with their due qualifications, no one can dispute who is capable of understanding the meaning of the words."

Looking again to-day at the statements of these fundamental truths which I then gave, I do not find myself disputing them. Yet the orientation of my mind is changed; and I share this change of mind with many others. Partly, indeed my background of economic theory is modified; I should not charge Mr. Baldwin, as I did then, with being "a victim of the Protectionist fallacy in its crudest form" because he believed that, in the existing conditions, a tariff might do something to diminish British unemployment. But mainly I attribute my change of outlook to something else--to my hopes and fears and preoccupations, along with those of many or most, I believe, of this generation throughout the world, being different from what they were. It is a long business to shuffle out of the mental habits of the prewar nineteenth-century world. It is astonishing what a bundle of obsolete habiliments one's mind drags round even after the center of consciousness has been shifted. But to-day at last, one-third of the way through the twentieth century, we are most of us escaping from the nineteenth; and by the time we reach its mid point, it may be that our habits of mind and what we care about will be as different from nineteenth-century methods and values as each other century's has been from its predecessor's.

It may be useful, therefore, to attempt some sort of a stocktaking, of an analysis, of a diagnosis to discover in what this change of mind essentially consists, and finally to inquire whether, in the confusion of mind which still envelops this new-found enthusiasm of change, we may not be running an unnecessary risk of pouring out with the slops and the swill some pearls of characteristic nineteenth century wisdom.

What did the nineteenth-century free traders, who were among the most idealistic and disinterested of men, believe that they were accomplishing? ...[continue reading]...

Saturday, April 24, 2010

Amartya Sen: The Economist Manifesto

This is by Amartya Sen (several additional ideas are developed in the full essay, e.g. Smith's belief "that there are good ethical and practical grounds for encouraging motives other than self-interest"):

The economist manifesto, by Amartya Sen, Commentary, New Statesman: The 18th-century philosopher Adam Smith wasn’t the free-market fundamentalist he is thought to have been. It’s time we realized the relevance of his ideas to today’s financial crisis.

The Theory of Moral Sentiments, Adam Smith's first book, was published in early 1759. Smith, then a young professor at the University of Glasgow, had some understandable anxiety about the public reception of the book, which was based on his quite progressive lectures. On 12 April, Smith heard from his friend David Hume in London about how the book was doing. If Smith was, Hume told him, prepared for "the worst", then he must now be given "the melancholy news" that unfortunately "the public seem disposed to applaud [your book] extremely". ... After its immediate success, Moral Sentiments went into something of an eclipse from the beginning of the 19th century... The neglect of Moral Sentiments, which lasted through the 19th and 20th centuries, has had ... rather unfortunate effects. ...

... The nature of the present economic crisis illustrates very clearly the need for departures from unmitigated and unrestrained self-seeking in order to have a decent society. Even John McCain ... complained constantly in his campaign speeches of "the greed of Wall Street". Smith had a diagnosis for this: he called such promoters of excessive risk in search of profits "prodigals and projectors" - which, by the way, is quite a good description of many of the entrepreneurs of credit swap insurances and sub-prime mortgages in the recent past.
The term "projector" is used by Smith not in the neutral sense of "one who forms a project", but in the pejorative sense, apparently common from 1616..., meaning, among other things, "a promoter of bubble companies; a speculator; a cheat". Indeed, Jonathan Swift's unflattering portrait of "projectors" in Gulliver's Travels, published in 1726 (50 years before The Wealth of Nations), corresponds closely to what Smith seems to have had in mind. Relying entirely on an unregulated market economy can result in a dire predicament in which, as Smith writes, "a great part of the capital of the country" is "kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it".
The spirited attempt to see Smith as an advocate of pure capitalism, with complete reliance on the market mechanism guided by pure profit motive, is altogether misconceived. ...
... One of the striking features of Smith's personality is his inclination to be as inclusive as possible, not only locally but also globally. He does acknowledge that we may have special obligations to our neighbors, but the reach of our concern must ultimately transcend that confinement. ... There is something quite remarkable in the ease with which Smith rides over barriers of class, gender, race and nationality to see human beings with a presumed equality of potential, and without any innate difference in talents and abilities.

He emphasized the class-related neglect of human talents through the lack of education and the unimaginative nature of the work that many members of the working classes are forced to do by economic circumstances. Class divisions, Smith argued, reflect this inequality of opportunity, rather than indicating differences of inborn talents and abilities. ...

The global reach of Smith's moral and political reasoning is quite a distinctive feature of his thought, but it is strongly supplemented by his belief that all human beings are born with similar potential and, most importantly for policymaking, that the inequalities in the world reflect socially generated, rather than natural, disparities.

There is a vision here that has a remarkably current ring. The continuing global relevance of Smith's ideas is quite astonishing, and it is a tribute to the power of his mind that this global vision is so forcefully presented by someone who, a quarter of a millennium ago, lived most of his life in considerable seclusion in a tiny coastal Scottish town. Smith's analyses and explorations are of critical importance for any society in the world in which issues of morals, politics and economics receive attention. The Theory of Moral Sentiments is a global manifesto of profound significance to the interdependent world in which we live.

Thursday, April 08, 2010

Keynes and Hayek

Just got back from this session:

1930 and the Challenge of the Depression for Economic Thinking: Friedrich Hayek versus John Maynard Keynes
Moderator: Philip Mirowski, Carl Koch Professor of Economics and the History of Science at the University of Notre Dame
Robert Skidelsky, Emeritus Professor of Political Economy at the University of Warwick, England.
Speaker Papers
Bruce Caldwell, Editor of The Collected Works of F. A. Hayek, History of Economic Thought, Economic Methodology Professor, Duke University
Speaker Papers

It's late, the session ended after 11, and I haven't slept since who knows when, so let me just add two things.

First, after hearing the talk tonight on Hayek from Bruce Caldwell, I think someone should write "Hayek and the Hayekians" (Axel Leijonhufvud -- see the link-- is participating in the session I'm moderating tomorrow. I asked him how to pronounce his name tonight, and he was very gracious in coaching me, it means "lion's head" and it helps to break it up that way, but I'll probably blow it. I'll try listening to this.)

Second, walking back I wondered what macroeconomic theory would be like today if Keynes had never lived? How important was one person in the development of an alternative theoretical paradigm, one that found acceptance due top the Great Depression (though the competition between the ideas of Keynes and Hayek was more intense than I realized).If it's overly dependent on the existence of one person -- Keynes -- what does that say about the chances of a new theoretical paradigm emerging after this crisis (something many people at this conference believe is needed).

There was a tour today of Keyne's office and the archives with his original manuscripts, Hayek's manuscripts too, but I missed it because my plane was stuck on the ground in Denver with a maintenance issue for 1-2 hours, that'll cheer you up before a long flight to London, then the bus from London to Cambridge was way slower than promised...

Hadn't been here before -- interesting place.

"Public Health Estimates in Marx's Capital"

Daniel Little:

Public health estimates in Marx's Capital, by Daniel Little: Long stretches of Marx's Capital take the form of an effort at developing and defending an economic model of capitalism, based on the theories of value and surplus value.  But there are also recurring efforts at providing a descriptive sociology of capitalism: the forms of day-to-day life that British economic relations imposed upon the working class.  This dimension of the book is descriptive and detailed; it has much in common with Engels's approach in The Condition of the Working Class in England.
Marx was very interested in these descriptive investigations -- Dr. Simon, Dr. Julian Hunter, Mr. Smith, Dr. Bell, and the inquiries and Acts of Parliament in the 1860s that shed light on the depth of English poverty.  The index for Capital includes a section, "Parliamentary Reports and Other Official Publications," which includes references to over a hundred reports on factories, poverty, nutrition, and health.  These range from a Report of Select Committee, London, 1855, on "Adulteration of Bread", to "Reports of the Medical Officer of the Privy Council on Public Health" (1861-66).  And these reports constitute the core of empirical evidence that Marx brings to bear for his economic assertions throughout the work.  In fact, we might describe some parts of Capital as a sort of "meta-study" of current investigations of the public health status of England's cities.
This interest is particularly evident late in Capital where Marx turns to the topic of "The General Law of Capitalist Accumulation."  Consider one fairly detailed section, "The Badly Paid Strata of the British Industrial Class" (link).  Here Marx is offering the best information available, at the household level, concerning the standard of living of this stratum of the British working class.   Consider this passage:
During the cotton famine of 1862, Dr. Smith was charged by the Privy Council with an inquiry into the conditions of nourishment of the distressed operatives in Lancashire and Cheshire. His observations during many preceding years had led him to the conclusion that “to avert starvation diseases,” the daily food of an average woman ought to contain at least 3,900 grains of carbon with 180 grains of nitrogen; the daily food of an average man, at least 4,300 grains of carbon with 200 grains of nitrogen; for women, about the same quantity of nutritive elements as are contained in 2 lbs. of good wheaten bread, for men 1/9 more; for the weekly average of adult men and women, at least 28,600 grains of carbon and 1,330 grains of nitrogen. His calculation was practically confirmed in a surprising manner by its agreement with the miserable quantity of nourishment to which want had forced down the consumption of the cotton operatives. This was, in December, 1862, 29,211 grains of carbon, and 1,295 grains of nitrogen weekly.
Marx then quotes a Privy Council inquiry in 1863, which finds that
"in only one of the examined classes of in-door operatives did the average nitrogen-supply just exceed, while in another it nearly reached, the estimated standard of bare sufficiency [i.e., sufficient to avert starvation diseases], and that in two classes there was defect — in one, a very large defect — of both nitrogen and carbon. Moreover, as regards the examined families of the agricultural population, it appeared that more than a fifth were with less than the estimated sufficiency of carbonaceous food, that more than one-third were with less than the estimated sufficiency of nitrogenous food, and that in three counties (Berkshire, Oxfordshire, and Somersetshire), insufficiency of nitrogenous food was the average local diet.”
In other words, the Privy Council finds that important segments of the English working class were undernourished by the prevailing scientific standard of the day.  This official report is fundamentally damning of the current economic system; it led to conditions of near-starvation for its workers.
Marx goes on to describe other components of the standard of living -- housing, crowding, sanitation, and clothing, for which the working class are seriously deprived.  And in each case he believes that independent, disinterested observers have documented the conditions of misery in which the working class lived in England in the 1860s.
Consider another interesting example, Marx's use of the Select Committee's report on the adulteration of bread.  This occurs in an extended footnote in Chapter VI, "The Buying and Selling of Labour-Power."
In London there are two sorts of bakers, the "full priced," who sell bread at its full value, and the "undersellers," who sell it under its value.  The latter class comprises more than three-fourths of the total number of bakers....  The undersellers, almost without exception, sell bread adulterated with alum, soap, pearl ashes, chalk, Derbyshire stonedust, and such like agreeable nourishing and wholesome ingredients. (note 3) 
Marx goes on to describe in a little bit of detail the specific timing of the payment of wages, demonstrating the economic coercion that leads workers to agree to buy this adulterated bread.  
Or we might notice that Marx's index refers to a series of Parliamentary reports on child labor, and then consider the use that Marx makes of these reports.  Here is one example of his use of the child labor reports in the chapter on "The Working-Day":
The potteries of Staffordshire have, during the last 22 years, been the subject of three parliamentary inquiries....  For my purpose it is enough to take, from the reports of 1860 and 1863, some depositions of the exploited children themselves.  ... William Wood, 9 years old, was 7 years and 10 months when he began to work.  He "ran moulds" (carried ready-moulded articles into the drying-room, afterwards bringing back the empty mould) from the beginning.  He came to work every day in the week at 6 a.m., and left off about 9 p.m. "I work till 9 o'clock at night six days in the week." (Capital I, chap 7, sect. 3)
What is of special interest in these passages is the way that Marx's mind seems to have worked on these questions.  He was genuinely interested, it would seem, in the concrete details of the conditions of the English working class; and he was fortunate that there was something of an explosion of official and non-official interest in the same set of questions, including especially Parliamentary Blue Books.  These inquiries fall in the category of what we would today call the field of public health, and Marx was plainly an avid reader of the reports that resulted from these investigations.

It is not accident that brings Marx's detailed discussion of the nutritional status of the industrial poor into Part VII of Capital, "Accumulation."  It is Marx's view that the production of surplus value, and the accumulation  of wealth that it enables, is directly related to the production of the poverty of the worker.  So the circumstances that Marx describes in this section do not constitute simply an unfortunate current reality; they are the apotheosis of a system of production that was working well.

[Still on the road - this should post automatically.]