Sunday, June 29, 2014

"Say's Law sank without trace."

Money: Whence It Came, Where It Went, J. K. Galbraith (1975), pp. 218-220:
The belief that the economy would find its equilibrium at full employment depended partly on what had long been called Say's Law — for J. B. Say, the French counterpart and interpreter of Adam Smith — and partly on the corrective movement of wages, prices and interest rates when there was unemployment. Say's Law, not a thing of startling complexity, held that, from the proceeds of every sale of goods, there was paid out to someone somewhere in wages, salaries, interest, rent or profit (or there was taken from the man who absorbed a loss) the wherewithal to buy that item. As with one item, so with all. This being so, there could not be a shortage of purchasing power in the economy. Movements in prices, wages and interest rates then validated J. B. Say and also ensured that the fundamental tendency of the economy would be to operation at full employment. People and firms saved from their income, and this saving had, obviously, to be spent. This happened when it was invested in housing, plant, capital equipment. If people saved more than was invested, the surplus of savings would bring down interest rates. Investment would thus be stimulated and saving (at least in theory) discouraged. So the excess of savings would be eliminated and Say sustained. Prices of goods would also fall in consequence of any short-fall in purchasing power that resulted from an excess of savings. This would encourage buying and, by reducing the income from which savings were made, also reduce savings. Again Say was sustained. Until Keynes, Say's Law had ruled in economics for more than a century. And the rule was no casual thing; to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots. Until late in the '30s no candidate for a Ph.D. at a major American university who spoke seriously of a shortage of purchasing power as a cause of depression could be passed. He was a man who saw only the surface of things, was unworthy of the company of scholars. Say's Law stands as the most distinguished example of the stability of economic ideas, including when they are wrong. 
Supplementing Say, as noted, were the forces that kept the economy at full employment. These too were relatively straightforward. Were there unemployment, the competition for jobs would bring a fall in wage rates. Prices would be less immediately affected by the unemployment. The relationship of prices to costs would thus be made more attractive — real wages would fall — and workers whose employment was previously unprofitable to employers would now be hired. The fall in wages would not affect purchasing power; because of Say, that was always sufficient. Employment would continue to expand until the approach to full employment raised wage costs and arrested the hiring. Thus did the economy find its equilibrium at or very near full employment. From this also came the one decisive recommendation of the orthodox economists for ending unemployment. Do nothing to interfere with the reduction of wages in a depression. Resist all siren voices, including that of Herbert Hoover, who, it will be recalled, urged against wage cuts. On no matter was compassion so softheaded, for to keep up wages merely perpetuated the sorrow of unemployment and the sorrows of the unemployed. This was the doctrine, perhaps more accurately the theology, that Keynes brought to an end. There are numerous points of entry on his argument; perhaps the easiest is by way of the rate of interest. Interest, he held, was not the price people were paid to save. Rather it was what they got for keeping their assets in plant, machinery or similarly unliquid forms of investment — in his language, what was paid to overcome their liquidity preference. Accordingly, a fall in interest rates might not discourage savings, encourage investment, ensure that all savings would be used. It might cause investors to retreat into cash or its equivalent. So interest rates no longer came to the support of Say's Law to ensure that savings would be spent. And if Say's Law was no longer a reliable axiom of life, the notion of a shortage of purchasing power could no longer be excluded from calculation. It might, among other things, be the consequence of a reduction in wages. 
What people sought to save, in Keynes's view, had still to be brought to equal what they wanted to invest. But the adjustment mechanism, he argued, was not the rate of interest but the total output of the economy. If efforts to save exceeded the desire to invest, the resulting shortage of purchasing power or demand caused output to fall. And it kept falling until employment and income had been so reduced that savings were also reduced or made negative. In this fashion savings were brought into line with investment — which also, meanwhile, would have fallen but by not so much. The economic equilibrium so established, it will be evident, was now one in which there was not full employment but unemployment. Thus unemployment for Keynes was a natural condition of the economy. There was much else. And not all of Keynes's argument survived. The liquidity-preference theory of interest, for example, though it served Keynes's argument, did not gain permanent acceptance as a description of reality. But on two things Keynes was immediately influential. Say's Law sank without trace. There could, it was henceforth agreed, be oversaving. And there could, as its counterpart, be a shortage of effective demand for what was being produced. And the notion that the economy could find its equilibrium with unemployment — a thought admirably reinforced by the everyday evidence of the '30s — was also almost immediately influential.






Saturday, June 28, 2014

Supply Creates Its Own Demon II: You Don't, Say!

Karl Marx could hardly bring himself to utter the name of J. B. Say without affixing to it some contemptuous description or sarcastic remark:
"Say’s earth-shaking discovery…" 
"…adopted by Ricardo from the tedious Say (and to which we shall return when we discuss that miserable individual)…" 
"…his authority, Say, is playing a trick on him here... " 
"…we shall criticise Say’s theories later, when we deal with this humbug himself." 
"The constant recurrence of crises has in fact reduced the rigmarole of Say and others to a phraseology which is now only used in times of prosperity but is cast aside in times of crises." 
"This is the childish babble of a Say…" 
"Say, who tries to hide his dull superficiality by repeating in absolute general phrases Smith’s inconsistencies and blunders…" 
"Storch says of this trash of Say’s… 
"After Garnier appeared the inane Jean-Baptiste Say’s Trait√© d’√©conomie politique." 
"This is his kind of originality, his kind of productivity and way of making discoveries, And with his customary logic, he refutes himself again…" 
"Say replies with his characteristic profundity…"  
"…the absurdity of J. B. Say, who pretends to account…" 
"…as it does to J. B. Say in the vulgarisation of Adam Smith." 
"The result he arrives at, is precisely that proposition of Ricardo that he aimed at disproving. After this mighty effort of thought, he triumphantly apostrophises Malthus…" 
"A disciple of Ricardo, in reply to the insipid nonsense uttered by J. B. Say…"
Curiously, in "The compensation theory, with regard to the workers displaced by machinery," Section 6, Chapter 15, Volume 1 of Capital, Marx performed the ultimate insult by snubbing Say, almost entirely. The first sentence includes "James Mill, McCulloch, Torrens, Senior and John Stuart Mill" among those bourgeois political economists claiming that machinery sets free enough capital to reabsorb the workers displaced by it. Say is relegated to a footnote citing the anonymous pamphlet in which the author refutes "the insipid nonsense uttered by J. B. Say" by pointing out:
Where division of labour is well developed, the skill of the labourer is available only in that particular branch in which it has been acquired; he himself is a sort of machine. It does not therefore help matters one jot, to repeat in parrot fashion, that things have a tendency to find their level. On looking around us we cannot but see, that they are unable to find their level for a long time; and that when they do find it, the level is always lower than at the commencement of the process.
Thus, the anonymous author of An Inquiry into Those Principles Respecting the Nature of Demand, and the Necessity of Consumption, Lately Advocated by Mr. Malthus, neatly summed up in a paragraph the rebuttal to the so-called compensation theory. This succinct reply makes a mystery of Marx's exclusion of Say from his listing, at the start of the section, of bourgeois political economists.

The mystery is solved in Chapter 20 of Theories of Surplus Value, "Disintegration of the Ricardian School," where Marx discussed the pamphlet he described as "one of the best of the polemical works of the decade." "What the author writes about Say is very true," Marx observed. Following a quotation from the pamphlet about the hazard arising from the difference in timing between consumption by workers and their production, Marx exclaimed that this was, "indeed the secret basis of glut." Several paragraphs later, Marx concluded:
Over-production, the credit system, etc., are means by which capitalist production seeks to break through its own barriers and to produce over and above its own limits. Capitalist production, on the one hand, has this driving force; on the other hand, it only tolerates production commensurate with the profitable employment of existing capital.

Friday, June 27, 2014

An Inquiry into those Principles, respecting the Nature of Demand and the Necessity of Consumption, &c.


"Up to this time, things passed off without any noise; and, thank Heaven! nobody kicked against my prescriptions: — but, however excellent is the practice of a physician, somebody or other is always sure to find fault with it." This was the sage remark of that very learned professor of medicine, Gil Blas, after his quarrel with the fiery little doctor Cuchillo. They had both been called to visit a grocer's son in the last stage of dropsy; Gil Blas, on the authority of his great master, the illustrious Sangrado, prescribed copious bleedings, and immeasurable draughts of hot water; while Cuchillo quoted Celsus in favour of abstinence from liquids under this disorder, and called Sangrado a fool. Gil Blas returned the civility with interest; and the two doctors, forgetful of their dying patient, soon came to fisty-cuffs by his bed-side, so that it was not an easy matter for the grocer, with the assistance of his shopman, to separate them.

To see the country sinking under a chronic disorder which is daily exhibiting more aggravated and alarming symptoms, while the attendant physicians, both in and out of parliament, are quarrelling about the nature of it, and about the efficacy of their respective prescriptions, may well remind us of the disputes between Gil Blas and Cuchillo. One set of doctors attributes the present disease of the country to deficient consumption; a second, to excessive production; while a third calls them both fools, and contends that there can be no such thing as excess of production or deficiency of consumption, because the one is of necessity a measure of the other, since production, M. Say asserts, always opens a market for production. When there is a glut of commodities, the way to cure it is to produce more; when you are dropsical, drink, drink: "chaque produit cree est un debouche ouvert, et chaque produit detruit ou consomme est un debouche ferme." — "Tout ce qui petit se produire peut trouver des consommateurs!"

The question, which is the more immediate subject of investigation in the pamphlet before us, has already been introduced in our notice of Mr. Malthus's work on political economy in a preceding portion of this Number; where we stated, briefly, but we trust with tolerable correctness, his views of the nature of demand and supply, and the opposite ideas of M. Say. We cannot spare room to renew the discussion; and indeed the market is so glutted with publications on political economy, that, notwithstanding M. Say's notion that consumption always keeps pace with production, we should anticipate the nausea of a surfeit in devoting a larger portion of our pages to these interminable disputes. Any person, however, who is disposed to fathom the question, will do well to read the present Inquiry, which is written with considerable ability and acuteness; and we must say that the inference which Mr. Malthus has chosen to draw from his view of it, so convenient and acceptable to the "powers that be," (namely, that taxation and the maintenance of unproductive consumers are conducive to the progress of wealth,) is here refuted with great precision and force of argument.

With respect to the general distress which prevails in this kingdom, if a rapid depreciation of the products of the earth may be fairly considered as one of the proximate causes of it, we must look to other and more remote sources for its origin. All climates and countries have their own peculiar productions, and the industry of every people shoots out in its own favourite and peculiar directions. The consequence is that all possess a superabundance of certain articles of product and manufacture, which they are glad to exchange for other articles that they want. All Europe, and indeed the whole civilized world, is thus supplied: the deficiencies of some countries being remedied by the superfluities of others; and the wants and the consumption of each encouraging the productions of all others, as well as of its own. Any long-continued obstruction, therefore, must derange this salutary circulation, this beneficial system of interchange and reciprocal accommodation. During the last unhappy war, not only was every link in the commercial chain which had previously connected together the various nations of Europe, even during their hostilities, snapped asunder, but the intercourse also of Europe with America was violently interrupted. The ball which we fired at the enemy rebounded,

"And, like a devilish engine, back recoiled
Upon ourselves."

Before that time, neutral bottoms always made neutral goods: but, in our impolitic zeal to destroy the entire commerce of France by means of our maritime superiority, we assumed the right of search; and, after having annihilated the fleets of our enemy, we refused to allow any European neutral nation to hold commerce with France, or even to suffer America to carry on the commerce between that country and her own West-Indian colonies. If, however, we were omnipotent at sea, France was equally powerful on land; and Bonaparte, turning our own weapons against us, endeavoured hermetically to close every market on the Continent against British manufactures. Even this was not all: our measures drove America to war with us, and the consequence was that we lost one of the largest outlets for our commodities.

Peace came at last: but hitherto it has afforded us only "a death-like silence and a dread repose;" a melancholy leisure for contemplating, in all its extent and horror, the devastation of war. While the hurricane rages, the mind is absorbed in a state of tumult and agitation between hope and fear; — it is in the calm of evening, and when the contending elements are hushed, that we walk abroad and mourn over the desolation around us, the shattered forest, the uprooted canes, the ripened ears of corn, cut from their brittle stems, and lying on the earth,

"Thick as autumnal leaves, that strew the brooks
in Valambrosa."

It must be evident, observed the Marquess of Lansdown in his motion for the appointment of a committee on foreign-trade, that when, for a number of years, twenty or thirty millions (or whatever the amount might be, but always a large sum) had been taken from the capital of the country to be used in the expenditure of the government, a great additional demand must necessarily be created. The natural consequence of that demand was to cause an increased supply, which would be still farther augmented by the consumption of those individuals who would derive a great part of their support, indirectly, from that increased expenditure. When this enlarged expenditure ceased, it was followed of course by a great decrease of demand, and a proportionate diminution of consumption; while, by bringing back the standard to its original value, the amount of taxation pressed more heavily on the diminished means of the community. The only remedy, therefore, for the distress thus occasioned, is to be found in economy, and retrenchment of the public expenditure. Economy, however, is a foe to patronage; and patronage, being a first favourite at court, keeps its enemy at a distance.

Monday, June 23, 2014

"And galvanism has set some corpses grinning..."

From Andrew Ure's article "Galvanism" in his Dictionary of Chemistry:
These general physiological views will serve, I hope, as no inappropriate introduction to the detail of the galvanic phenomena exhibited here, on the 4th of November, in the body of the murderer Clydesdale; and they may probably guide us to some valuable practical inferences. 
The subject of these experiments was a middle-sized, athletic, and extremely muscular man, about thirty years of age. He was suspended from the gallows nearly an hour, and made no convulsive struggle after he dropped; while a thief, executed along with him, was violently agitated for a considerable time. He was brought to the anatomical theatre of our university in about ten minutes after he was cut down. His face had a perfectly natural aspect, being neither livid nor tumefied; and there was no dislocation of his neck. 

Raising the Dead

Roger Lewis reviews Raising the Dead by Andy Dougan
In 1818, the year Mary Shelley's Victor Frankenstein was in the lab throwing switches and checking gauges amid the lightning flashes, similar actual experiments were underway in a Scottish university. 
Professor Andrew Ure connected a tube to a battery and shoved it up a corpse's nose. "The tongue moved out to his lips," it was reported. "His eyes opened widely. His head, arms and legs moved." 
Apparently the body stood up unaided, laborious breathing commenced, and the assembled students screamed out in horror, as well they might. 
Professor Ure had to stab the creature in the jugular vein to calm it down.
Yes, THAT Professor Ure.

Supply Creates Its Own Demon: Marc Andreessen and "Textbook Luddism"

Marc Andreessen has a column in the Financial Times with the headline, "Robots will not eat the jobs but will unleash our creativity." Here are the first two paragraphs:
A growing number of people seem to fear that robots will eat all the jobs. Their worry boils down to this: computers can increasingly replace human labour thus displacing jobs and creating unemployment. Your job, and every job, will go to a machine. 
It is textbook Luddism, relying on a “lump of labour” fallacy – the idea that there is a fixed amount of work to be done in the world by humans. The counterargument comes from economists such as Milton Friedman, who believe that human wants and needs are infinite, which means there is always more to do.
Mr. Andreessen knows as much about Luddites and the lump-of-labour fallacy as I do about programming browsers. Ordinarily, it might suffice to cite the ONLY published scholarly articles on the history of the phony fallacy: "Why economists dislike a lump of labor" and "The'lump of labor'case against work-sharing: Populist fallacy or marginalist throwback?" both by a fellow named Tom Walker. But Andreessen's timing has caught me in the midst of a research/writing project that attempts to make sense of what Joan Robinson identified as "mumpsimus": the persistence of discredited arguments in the face of overwhelming evidence.

I'm about 20 pages along in my new piece, Supply Creates Its Own Demon. The demon in the title refers to Maxwell's demon and, by association, the chess-playing automaton (an elaborate hoax) built in the late 18th century by Baron Ludwig von Kempelen. I've just gotten to the section where I discuss Andrew Ure's 1835 The Philosophy of Manufactures. Ure's book contains a discussion of automatons, which includes the chess-player but doesn't mention its imposture. 

The third section of Philosophy of Manufactures, "Moral Economy of the Factory System," relies heavily on Edward Carleton Tufnell's supplementary report for the Royal Commission on the Employment of Children in Factories, which is one of the most sustained anti-union diatribes in English literature. Tufnell went on to write Character, Object and Effects of Trades' Unions. I have credited Tufnell's diatribe with "putting legs" on the bogus fallacy claim -- I could amend that to say Ure's appropriation of Tufnell's claim put wheels on it.

An article by Steve Edwards, "Factory and Fantasy in Andrew Ure," makes a convincing case for the influence of Ure's Utopian analysis of the factory on Marx's analysis of "real subsumption of labor" in the originally unpublished "chapter six" of Capital, "The Results of the Immediate Process of Production." Marx's analysis is, in a sense, an "immanent critique" in that it uses insights from Ure's text to highlight incongruities and contradictions in his argument.

Briefly, Ure argued both that workers delayed technological progress that would have benefited them through collective action and that collective action by workers accelerates technological advance, to the detriment of the workers. Or more simply: strikes delay and accelerate technological progress that helps and hurts workers. This is a "nice knock-down argument" to be sure but it couldn't be more arbitrary. 

Coming back to Marc Andreessen's column, his argument is a pale shadow of Ure's. For all its overt hostility to workers and unions, I prefer the original Philosophy of Manufactures because in its fantastic exposition it laid bare the essential incoherence of its premises.

Friday, June 13, 2014

War is the Health of the GDP

The headline of Tyler Cowen's Upshot piece, "The Lack of Major Wars May Be Hurting Economic Growth" is calculated to provoke controversy. Cowen's point, though, isn't that we need a war to boost the economy. As he concludes:
"Living in a largely peaceful world with 2 percent G.D.P. growth has some big advantages that you don't get with 4 percent growth and many more war deaths."
But there is an underlying logic to Cowen's reductio ad absurdum that I'm not sure he grasps completely. The national income accounts were designed with the idea of paying for war in mind. That actually might make sense during a time of war when you're trying to figure out how to pay for it. But it embeds a social accounting protocol that is incompatible with the absence of war. The predictable results are policies such as the Cold War rearmament based on the premise that arms spending will pay for itself by siphoning off revenues from the additional growth that the spending will stimulate. The Latin term for it is inflatio. Time to recycle a piece from three years ago:

Siphoning Off a Part of the Annual Increment of GNP

The lessons drawn from World War II by US policy makers and their advisers stand in stark contrast to those drawn from World War I by Stephen Leacock and prescribed by Keynes during the war. Where Leacock had seen the maintenance of industrial output despite vast withdrawals of manpower from the labor force as a sign of the redundancy of much of that labor force, Leon Keyserling, chairman of the Council of Economic Advisers under President Truman, viewed massive spending on armaments as a tonic to stimulate the expansion of economic activity. Keyserling went even further in his calculation of the economic benefits of the preparations for war. In his view, the increased economic activity could produce a "growth dividend" that could be "siphoned off" to pay for the arms. Rearmament would thus be a free lunch that would not only pay for itself but make a down payment on a bargain dinner. This reasoning underpinned National Security Council memorandum, NSC-68, written in 1950 by State Department analyst Paul Nitze. Keyserling supplied the economic vision underlying NSC-68, which represented a "a serious effort to develop a coherent strategy" in response to two distinct but interrelated problems: first, the obstacles to rebuilding an open system of world trade in which the US could sell its exports and second, containment of the Soviet military and political threat.

"With a high level of economic activity," the report assured, "the United States could soon attain a gross national product of $300 billion per year… Progress in this direction would permit, and might itself be aided by, a build up of the economic and military strength of the United States and the free world." The deficit financing of this military build up and subsequent effect of that spending on economic growth meant, in its author's opinion, that the rearmament could occur, "without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product."

Approved months before the outbreak of the Korean War, NSC-68 recommended a massive rearmament program for the U.S. and Western Europe. "Leon Keyserling was very helpful when we wrote NSC-68," author Nitze admitted in a 1986 interview, "He was my principal adviser on the economic parts." Not only did Keyserling advise on the writing of document, but President Truman's special counsel, Charles Murphy called upon him to evaluate the document's economic feasibility. It is unclear whether either Murphy or Truman, were aware of Keyserling's dual role as both advocate and judge of the strategy. Never one to underestimate his own importance, Keyserling described his role as "the one who had introduced the fundamental new factor of the dynamics of economic growth. Now, as I say, I started this circa 1947…"

Because of limits to domestic purchasing power imposed by the market, stabilizing the U.S. economy in the post-war period required the expansion of foreign trade. Although the two goals of economic stabilization and Soviet containment were acknowledged as distinct in NSC-68, the document's rhetoric elevated the political-military conflict to top billing. The memorandum's drafters believed that rearmament could solve both problems while also being easier to sell politically. The economic dilemma arose out of Western Europe's fragile financial condition in the immediate post war period. Wartime devastation of productive capacity in Europe left in its wake immense inflationary pressures, as pent-up demand for goods could not be met by the constricted supply. Europe's international payments position was also weakened, giving rise to exchange controls and other barriers to international transactions in an effort to prevent capital flight.

Meanwhile, widespread conservative and protectionist political sentiment in the U.S. blocked a wholesale expansion of a Marshall Plan-type arrangement of foreign aid and easy credit. The Marshall Plan itself had been a brilliant success in providing a temporary solution to the dollar shortage in Europe. But European restructuring to new patterns of world trade required a long-term continuation of the effort. Changes were needed in European business practices, new institutions for investment planning, regional integration and co-ordination and overcoming of protectionist sentiment in the U.S.

NSC-68 was not based on a compelling analysis of the long-term needs of US capitalism. Instead, it produced politically marketable palliatives to several immediate and pressing problems. The document evaded the hard issues of the inherent weaknesses of liberal capitalism and the difficulty of establishing an open world economy. Instead, it opportunistically projected Western economic frailties onto Soviet military strength. That rhetoric, in Fred Block's opinion, was a short term expedient whose success in overcoming the structural economic problems would presumably render continued use of the Soviet bugbear unnecessary. While it may have made sense as an expedient, it was flawed in that it created an enduring institutional bias in favour of ongoing militarization of U.S. foreign policy. According to Block, "Rearmament became official policy largely because of the absence of coherent alternatives." But the strategy's success in the early 1950s cannot explain the continuing appeal and dominance of its rhetoric. Block argued that the implementation of NSC-68 established or reinforced three institutional structures – NATO, the military-industrial complex and political McCarthyism – that subsequently made it difficult for US policy makers to stray from the logic of militarization.

If the politics of NSC-68 were dubious, the theoretical status of its economic rationale was even more so. During World War II, as mentioned in a previous chapter, John Maynard Keynes had written to T.S. Eliot describing the full-employment policy by means of investment as first aid. It was, he explained, only one application of an intellectual theorem that also included wise consumption and working less. Keyserling's growth economics, however, abandoned any pretence to theory in favor of boosterism of growth, growth and more growth fueled by wasteful consumption and wasteful investment. Economic stimulus through rearmament strategy is best understood as a response to the political difficulties inherent in adopting a genuine full-employment policy, as they had been analyzed by Michal Kalecki in a 1942 Cambridge lecture published the following year as "Political Aspects of Full Employment."

Kalecki had argued that the economic feasibility of maintaining full employment through a policy of government spending was widely accepted by economists, with the exception of "'economic experts' closely connected with banking and industry." As long as there remained unused capacity of labor, production facilities and raw materials, government spending financed by borrowing could proceed without triggering inflation. The reasons for political opposition to a full employment policy, however, are three-fold. First, industrialists dislike government interference in the area of employment because it blunts the political threat – used to indirectly dictate government policy – of warning that one or another policy opposed by business will "undermine business confidence." Second, the scope for government investment is initially narrow – restricted to such facilities as schools, roads and hospitals – but continued pursuit of the policy of government spending would create pressure to expand government involvement into industries like transportation and public utilities that are currently the preserve of private investment. Subsidizing mass consumption is even more strongly scorned because it violates the fundamental moral principle, "that 'you shall earn your bread in sweat' – unless you happen to have private means." The long-term maintenance of full employment is most politically objectionable because it would lead to social and political changes in which the threat of dismissal from employment would cease to be an effective disciplinary measure. Thus, although a full employment strategy could increase profits, its undermining of factory discipline and political stability make it unpalatable to bankers and industrialists.

An exception to this rule of big business opposition to full employment occurs under fascism, where, "the state machinery is under the direct control of a partnership of big business with fascism" and "dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditures on armaments." Although this second aspect suggests parallels with NSC-68, there are fundamental differences between fascism and the economic rationale behind the Truman administration's Cold War rearmament strategy. As Kalecki pointed out, "in a democracy, one does not know what the next government will be like. Under fascism there is no next government." This clearly was not the case with NSC-68. Although the memorandum itself remained classified until 1975, its implementation following the outbreak of the Korean War revealed a policy logic that was clear enough to critics of the Truman administration.

Opposition to the rearmament as economic stimulus policy was readily forthcoming during the 1952 presidential election campaign. On the evening of September 23, 1952, General Dwight D. Eisenhower, the Republican nominee for President of the United States, was scheduled to deliver a campaign speech in Cleveland, Ohio. That night however, his running mate, Richard M. Nixon, gave his famous "Checkers" speech defending himself from charges that a political campaign fund established for him was improper. Instead of his originally scheduled address, whose topic was inflation and "false prosperity", Eisenhower substituted his reaction to Nixon's televised appearance. The text of Ike's unspoken speech, however, was published the next day in the Washington Post.

Eisenhower's speech was a sustained polemic expressly directed at the Truman administration policies conceived by Keyserling. Although Ike didn't name the economic policy's architect in the speech, he did the next best thing. He cited with regret the resignation of the Edwin G. Nourse, whom Keyserling succeeded as Chairman of the Council of Economic Advisors. To anyone familiar with Keyserling's conceptual role with regard to the economics of NSC-68, several passages in Ike's speech stand out as virtual indictments.
"The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism... The point and purpose of this policy I have already indicated: to fool the people with a deceptive prosperity. The method is very simple: to give more people more money that is worth less..."
Furthermore Eisenhower identified the mainspring of that inflationary policy as the production of armaments:
"There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduction in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression."
In contrast to the scorned Truman administration policy, Eisenhower cited Thomas Jefferson's praise of governmental frugality: "If we can prevent government from wasting the labors of the people under the pretense of taking care of them, they must become happy."

Wednesday, June 11, 2014

"Luddite" Larry and the Downward Ramp of Opportunity

"...unless one regards envy as a virtue," writes Lawrence H. Summers in a column at the Financial Times, "the primary reason for concern about inequality is that lower- and middle-income workers have too little – not that the rich have too much."

Back in the days of Pope Gregory and Dante Alighieri, there were seven deadly sins, not one. Avarice, gluttony and pride were among them. Might we not have as much condescending solicitude for the souls of the rich as for those of the poor and middle class?

Summers argues that the policy impacts which matter most have more to do with health and opportunity for children than with income or wealth inequality. The subheading of his column is "The differences between the rich and everyone else are about health and opportunity." Along the way, though, he quietly substitutes educational achievement for opportunity and concludes:
It would be a tragedy if this new focus on inequality and on great fortunes diverted attention from the most fundamental tasks of any democratic society – supporting the health and education of all its citizens.
Who could be against health or education?

Than depends. Is educational achievement really the same as opportunity for children? Not according to research highlighted by Thomas Edsall in an Op-Ed, The Downward Ramp, at the NYT:
...evidence produced by Paul Beaudry and David A. Green of the University of British Columbia, and Ben Sand of York University, demonstrates that the collapse, between 1980 and 2000, of mid-level, mid-pay jobs — gutted by automation or foreign competition (and often both) — has now spread to the high-skill labor market. 
The U-shaped pattern of job growth characteristic of recent decades – strong at the top and bottom, but weak throughout the middle — has now become “a bit more like a downward ramp,” according to David Autor, an economist at M.I.T. who documented the decline in mid-level jobs in the 1980s and 1990s. 
...
"Many higher skilled workers have moved down the occupation ladder and accepted less challenging employment," Beaudry wrote in an emailed response to my inquiry about this development. "This movement down has been very detrimental to the low skilled, as higher skilled workers have taken many of 'their' jobs."
Not to worry, though. Allister Heath cheerily reassures us in a column at The Telegraph, "Capitalism is a process of creative destruction... It's scary but it works."
The faster the mechanisation process, the more likely we are to see productivity – the amount of output each worker generates – starting to grow again and, with it, wages. A greater use of artificial intelligence throughout the economy will benefit, not hurt, the overall workforce. ...it will be vital to help individuals displaced by the new technologies to find work in new areas. Better education and training will become even more vital. 
The lump of labour fallacy is the oldest myth in economics. There is no fixed stock of jobs; in a dynamic economy, millions of new ones are created every year to replace the equally large numbers that are lost. The luddites are as wrong today as they were two centuries ago.
One reader asks, though:
Given that technology has replaced so many jobs the obvious question is why we are still working such long hours? We don't seem to have taken advantage of technology in the ways predicted by nineteenth century thinkers.
As fate will have, Summers addressed both Luddites and long hours last July in his 2013 Martin Feldstein* Lecture, "Economic Possibilities for Our Children."
When I was an MIT undergraduate in the early 1970s, a young economics student was exposed to the debate about automation. There were two factions in those debates. There were the stupid Luddite people, who mostly were outside of economics departments, and there were the smart progressive people, who at that time were personified by Bob Solow. The stupid people thought that automation was going to make all the jobs go away and there wasn't going to be any work to do. And the smart people understood that when more was produced, there would be more income and therefore there would be more demand. It wasn't possible that all the jobs would go away, so automation was a blessing. I was taught that the smart people were right. Until a few years ago, I didn't think this was a very complicated subject; the Luddites were wrong and the believers in technology and technological progress were right. I'm not so completely certain now.
One might quibble that it's more than a matter of "changing sides" in the debate about automation as framed by the economics departments. This was no debate but a set piece demolition by the "smart people" of straw man arguments that had little to do with the real issues. Incidentally, the smart people at MIT -- presumably Keynesian Synthesists like "Uncle Paul" Samuelson -- appear to have been teaching the vulgar version of Say's Law, "supply creates its own demand," that Keynes repudiated.

In his reflections on his undergraduate education, Summers didn't connect the dots between the Luddite mythology and what Keynes supposedly "got wrong" in his "Economic Possibilities for our Grandchildren." Instead he offered the following anachronism:
But Keynes also got some things wrong. He predicted that as incomes rose eightfold, the workweek would fall to 15 or 20 hours. The reason he got that wrong is something that I hadn’t previously reflected on. 
When I took introductory economics, a big feature of the textbook was the backward bending labor supply curve, where it was explained that past a certain point, the income effect took over from the substitution effect and so the labor supply curve bent backwards. This does not get much attention in textbooks today. The reason is that people with higher wages now work more hours than people with lower wages. The time series tracks the cross section. Over time, as we have all gotten richer, the number of hours worked for many people has risen.
That backward-bending labor supply curve was indeed a big feature of the textbook when Summers took introductory economics. It wasn't in 1930, when the essay was first published, nor in 1928 when it was delivered as a talk to the Political Economy Club at Cambridge.

The confluence of mythology and anachronism in Larry Summers's education has more than pedantic relevance. As his casual reference to the platitude that Summers may not have even recognized as Say's Law suggests, his miseducation (or myth-education) on history of economic thought has theoretical consequences. And of course, Summers is not alone in his "delightful abundance of aberrations."

The creature that emerges from this anachronistic, mythological bend-over-backward Luddite lump-of-labor supply swamp is not "modern economics" any more than George Washington cutting down a cherry tree with a laser beam is "American history" It is that hoary old "magazine of untruth" masquerading as economics.

*Marty FeldSTEIN -- not to be confused with Marty FeldMAN as Igor ("it's pronounced eye-gore") in "Young FrankenSTEIN" -- was Larry Summers's mentor.

Thursday, June 5, 2014

Learning about Learning about "New Keynesianism"

Mark Thoma links to Joseph Stiglitz's TIGER Forum 2014 lecture on "Creating a Learning Society":



Is our society learning if what we are taught is "false and misleading?"

May 30, 2014

Dear Professor Stiglitz,

I am conducting historical research on Alfred Marshall's conception of the efficiency wage and how it relates to the contemporary sense of the term. In the course of my research, I have come across a claim that you made in 1984 that I wonder if you could clarify. You wrote, in "Theories of Wage Rigidity" (1984): "It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." In contrast, in chapter 19 of the General Theory, Keynes wrote, "[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…"

It seems clear from the discussion in chapter 19 as a whole that Keynes rejected the hypothesis that rigid money wages were to blame for persistent unemployment. It would be possible to parse your sentence as ambiguous on the question of whether it was the assumption or the rejection of the assumption that "is central to Keynes' explanation." But of course the context of your article and of contemporary efficiency wage theory in general would seem to resolve any ambiguity. Was it your position, in 1984, that Keynes's explanation relied on the assumption that wage rigidity was to blame for the persistence of unemployment? If it was, is that still your position? If it wasn't your position -- or if your position has changed since then -- have you clarified that in any subsequent article? I thank you for any information you can provide on this matter.

Cheers,

Tom Walker
"It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." Joseph E. Stiglitz 1984.

"[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…" John Maynard Keynes 1936.
O. F. Hamouda writes:
"Given the enormous literature on Keynes and Keynesianism and the flippant way in economics in which consensuses are formed to become the truth, there is need for a concordance to be undertaken to compare, in the light of this book, what was said at the source, what was ascribed first-hand as having been said, and then what was made second-hand of those accounts, multiplied over and over. There is a delightful abundance of aberrations… …it is not claimed that everyone, everytime, everywhere should always run back to the sources nor, as Hicks once said, that the source should be taken as divine, but when a claim is made, it must be able to stand, as few presently do."
One of the aberrations Hamouda cites is:
"It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." Joseph E. Stiglitz 1984.
Paul Davidson also pointed out the New Keynesian reversal of Keynes's position in "Would Keynes be a New Keynesian?" Eastern Economic Journal, Vol. 18, No. 4 (Fall, 1992), pp. 449-463.
"The principle of a truth in labeling law that protects consumers from false and misleading claims is often violated by economics textbooks. Under the truth in labeling law, a minimum quantity of beef is required in a patty before society permits anyone to sell it as a hamburger. Similarly some minimum quantity of Keynes's logical analysis should be an essential ingredient in any theory sold as Keynesian, especially in textbooks to yet uneducated consumers.

"Paraphrasing a famous slogan of the 1988 Democratic presidential primary, 'Where's the Keynesian beef in New Keynesian economics"? This paper demonstrates that (1) New Keynesian Economics (hereafter NKE) does not contain any of Keynes's logical building blocks, and (2) NKE leads to policies that are the opposite of what Keynes advocated as solutions to the major problems facing real world economies."
---
"...Keynes specifically denied that fixed nominal wages and prices were a necessary condition for underemployment equilibrium. One complete chapter of The General Theory demonstrates why the existence of instantaneously flexible money wages can not assure full employment - even if no coordination failures exist. 'For the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on the assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment ...My difference from this theory is primarily a difference of analysis'. In the fourth section, it will be shown that Keynes's use of wage units to measure his aggregate functions brings to the foreground this "difference of analysis" by requiring the feedback effects of flexible wages be traced on components of aggregate demand. These feedback effects had nothing to do with coordination failures!

"Keynes's chapter 19 analysis demonstrates that complete wage (or price) flexibility was neither a necessary nor a sufficient condition for full-employment equilibrium. Keynes's two major conclusions regarding the effect of instantaneously flexible money wages - even in condition of purely competitive supply - are that "there is, therefore, no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment" and that "to suppose that a flexible wage policy is a right and proper adjunct of a system which on the whole is one of laissez-faire, is the opposite of the truth".

"Consequently, anyone selling New Keynesian theoretical patties, in which the fixity of nominal wages or prices is the main ingredient, to students (or uneducated policy makers) would not get a franchise to use his name from the originator of Keynesian economics."

Monday, June 2, 2014

Artificial Scarcity and the Lopsided Economist

Jared Bernstein has launched a vital conversation around the question, "why is capital so much stronger than labor?" In his first post, Jared reflects,
...my experience as a policy wonk and economist in government has led me to believe that economics, as currently practiced, is part of the problem. Not the discipline itself, which historically has been flexible enough to offer wide ranging and useful tools for analyzing and solving economic problems. I’m talking instead about the way it interacts with wealth and power today to support capital and hamstring labor.
Part 2 of "why is capital so much stronger than labor?" is titled r > g meets c > l
Sandwichman comments on c > l as follows:

I'd like to propose substituting for the word "inequality," the word "lopsided." Inequality is their word and it carries with it a customary whiff of distinction, justified by merit. The connotation is undeserved but has been instituted through sheer repetition and amplification. Wealth and income are not merely unequal, they are literally lopsided: one side has been lopped off.

One side of economic analysis has been lopped off, too. It is the side that deals with the inherent imbalance, the lopsidedness. A lopsided economics makes a lopsided economy even more so.

But let me be more specific. As John R. Commons, pointed out, efficiency and scarcity are complements as well as substitutes. Lionel Robbins's famous definition of economics as "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses" implicitly (albeit ambiguously) posits the scarcity of the means as given and thus evades the crucial complication of artificial scarcity.

There has been in economics a long-lasting and lopsided preoccupation with one kind of artificial scarcity: the restriction of output by workers. Every once in a while a renegade economist such as Veblen looks directly into this lopsidedness and debunks it but the prejudice trundles on as if nothing had happened. As Warren Samuels noted 20 years ago, the contemporary "efficiency wage" literature is rife with pejorative anti-worker bias. Google scholar shows 10 results for Samuels's critique (four of them in articles by David Spencer) compared to 4589 results for Shapiro and Stiglitz's article on "shirking" and efficiency wages.

And just what IS a wage anyway? It is a ratio. It is a rate of remuneration PER period of time or unit of output. By far the most common form of wages today are time wages. What would one think of an analysis of capital that analyzed the return without reference to the principal? Yet contemporary economics treats the supply of hours of labor as unproblematically generated by workers' preferences for leisure or income. There is NO theoretical foundation for this treatment. There is NO empirical foundation for it. The "leisure device" has been shown to be utterly unfounded and yet it forms the basis of the systematic exclusion from contemporary economic theorizing of the question of the efficiency of the given hours of work.

Again, the "New Keynesian" efficiency wage hypothesis literature provides a stark illustration of this lopsided exclusion. Bob LaJeunesse's 1999 Challenge article on the efficiency week garnered ONE citation and even that by an author who declined to pursue the analysis.

Concern with the efficiency of the hours of labor, as well as the rate of pay for those hours is not just some quaint institutionalist (or Marxist) hobby horse. Marshall's neoclassical analysis of an "efficiency wage" and that of his star pupils, Pigou and Chapman, was influenced both directly and indirectly by Thomas Brassey's Work and Wages, which focused explicitly on the productivity effects of variations in the hours of labor. The neo-Walrasian, mathematical modelers have opted for a pre-marginalist doctrine, in effect resurrecting on the "revealed preference" supply side the defunct wages-fund doctrine that was long ago discredited and disavowed as an explanation of the demand for labor.

In conclusion, lopsided outcomes in income and wealth are hardly a surprise in an economic system in which the power to restrict output and thus to maintain a profitable advantage through artificial scarcity is itself lopsided. A lopsided economics that treats the entrepreneur as the epitome of efficiency and workers as shirkers is unlikely to disclose the sources of income and wealth lopsidedness. The lopsided treatment of the wage as somehow immune to operations on the divisor side of the ratio is equally unlikely to consider the full range of appropriate remedies for the lopsidedness of income and wealth.