I came across two interesting links discussing the history of economic thought this morning that I thought might be worth sharing.
The first, from Mark Thoma, covers Adam Smith's version of laissez-faire. Everyone knows Smith was an ardent foe of mercantilism and a proponent of free trade, but for some reason that gets leveraged into the claim that Smith was some sort of proto-libertarian (as if libertarians are the only people that support free trade). That's not really true. Smith advocates things that I defend against modern libertarians, and he was active in the 18th century! Usually I give leeway to earlier writers. In a traditional agricultural economy I would probably be more libertarian too. I understand that when circumstances change so does the proper role of government. But even back then, Smith had a very modern view of the role of government, the importance of externalities and public goods, etc. It is a very classically liberal view of government - there is no fetishization of the state. But it's not a libertarian view. Mark Thoma channels Gavin Kennedy on these issues here.
The second link is from Brad DeLong, who extensively catalogue's Thomas Robert Malthus's views on "general gluts", or depressions. Malthus is most famous for his theory of population dynamics, which heavily influenced Charles Darwin. But he wrote more traditional works of political economy as well, including a protracted debate over the possibility of a "general glut". Most economists in Malthus's time believed that the economy naturally operated at a full employment level. Any economic downturns could be attributed to frictions or temporary miscalculations. Malthus (along with Sismondi and a few others) argued that economies could stay depressed for a very long time, operating in a sub-optimal equilibrium rather than simply struggling through a temporary friction. Of course, for this reason, Malthus is considered the premier proto-Keynesian. And during his lifetime, Keynes made it quite clear that Malthus was one of his inspirations. I would also recommend Lawrence Klein's discussion of all the "proto-Keynesians" in his book The Keynesian Revolution, which I am almost done reading. He does a good job not just explaining what the early theorists of general gluts thought, but how they fit into the Keynesian schema (i.e. - what parts of the Keynesian system they were missing that prevented them from producing a full model of underemployment).
And this seems as good a time as any to highlight the New School for Social Research's history of economic thought site, which is quite simply the most comprehensive and most in depth resource on the history of economic thought available on the internet today. It's like Wikipedia on steroids specifically geared towards the history of economic thought: not something I would ever cite, but it provides tremendous detail and background and it provides excellent links and source material for further study.
.jpg)
The Rev. Thomas Robert Malthus
Posts
If you're interested in a libertarian's critique of Adam Smith, I would suggest reading Murray Rothbard's: http://mises.org/daily/2012
ReplyDeleteInteresting - thanks Jonathan. And welcome to the site.
ReplyDeleteI love Rothbard's detailed attention to the history of economic thought. Haven't read too much of it, but I appreciate his interest.
Thomas Malthus is particularly infamous in the history of economic thought, and for good reason. He put forth three of the greatest economic fallacies known to date. (1) The belief that too much wealth can cause depressed business activity. That is, that there can be a general over production of goods and services (ignoring scarcity). This fallacy was quickly remedied by Jean-Baptiste Say. (2) The argument that savings must cause depressed business activity (closely tied with fallacy 1). This confusion was remedied by the likes of David Ricardo, who demonstrated that savings are consumed by businesses and governments in the form of investment. And finally, (3) his most well-known fallacy (the Malthusian trap) which claimed that human beings are like rats, who mindlessly and uncontrollably multiply in the face of new food supplies, assuring perpetual poverty and strife. Unfortunately, history has shown that food production and technological advances grow at exponential rates, and that people actually have less children the wealthier they become.
ReplyDeleteHi anonymous - welcome to the blog -
ReplyDeleteA little uncharitable, I think. Starting with the last one - yes, a simple juxtaposition of arithmetic and geometric growth was a little crude and certainly a fallacy. But I'd hardly call a thorough treatment of resource competition and population pressure a "fallacy". It just needed to be developed and parameterized. It got people thinking and it has been improved upon. Welcome to science.
I'm not aware of your number one - do you have a citation for that? It's not that I don't believe it I'm just not aware of it.
As for your second "fallacy" - you seem to think that Malthus or other proponents of general gluts don't understand the investment-savings identity. They do. They always have. But when either the investment or savings schedules shifts, the very process of equalizing savings and investment that you admirably describe can depress output. If the investment schedule shifts to the left, output has to decline for savings to equal investment. With a given production function, this means that employment declines as well. Thus, it is possible to have an economy in equilibrium with savings equal to investment, and still have depressed output. Ricardo has committed the fallacy, not Malthus (although certainly Malthus needed some cleaning up).
"welcome to the blog"
ReplyDeleteThank you.
"I'm not aware of your number one - do you have a citation for that? It's not that I don't believe it I'm just not aware of it."
Number one is the overproduction fallacy, which, as I've mentioned, is closely tied to fallacy number two. Malthus, in his debate with Say, claimed that too much production lead to depressed business activity, as demand cannot absorb the goods at remunerative prices. In his debate with Say, he provides examples of depressed trade between the U.K. and its colonies. The former could not remuneratively exchange with the latter in many situations. Say explained that the colonies have not produced enough themselves in order to engage in mutually profitable exchange, and not because they didn't demand English products.
Productions can only be purchased by productions. That is, in the truest sense, goods are never exchanged for money or for labor, but for other goods. Furthermore, Say explained that the demand for goods and services, in the general sense, can never be entirely satiated. Thus, general overproduction's are impossible, but relative overproduction's (at the expense of other, more warranted employments) are not. The latter condition is remedied by price alterations/adjustments (both in input and output prices).
Ironically enough, it was a Keynesian, Mr. Paul Krugman, who revived Say's Law ("new" trade theory), at least in the international sphere, but took credit for himself.
"As each of us can only purchase the productions of others with his own productions—-as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase." Thence follows the other conclusion, which you refuse to admit; that if certain goods remain unsold, it is because other goods are not produced; and that it is production alone which opens markets to produce."(Letters to Mr. Malthus).
"you seem to think that Malthus or other proponents of general gluts don't understand the investment-savings identity. They do. They always have. But when either the investment or savings schedules shifts, the very process of equalizing savings and investment that you admirably describe can depress output."
ReplyDeleteFirst, there is no investment-savings identity. Keynes' has obfuscated the matter at hand by simultaneously attacking and defending this misnomer. The ratio between savings and investment is equalized by the interest rate(the same way that all exchanges are equalized by various price mechanisms). But, this does not mean that we should ever expect the interest rate to be at the equilibrium rate--not in a world with perpetual inflation and price rigidities. Equilibrium (which is purely a theoretical construct), is only attained when the market rate is at the natural equilibrium position. Divergence between the two causes inter-temporal instability (as production is a temporal process); when the market rate exceeds the natural rate (rate at which the supply of, and demand for capital are equalized) you will have depressed business activity; conversely, when the market rate is below the natural rate, you will have relative overproduction's (economy functioning off the PPF).
Early Keynes (pre-general theory) understood this concept. Unfortunately for the world, Hayek obliterated his "Treatise on Money," and Keynes retreated from many of his previous positions, but held onto circular flow, and the use of pure aggregation.
"Thus, it is possible to have an economy in equilibrium with savings equal to investment, and still have depressed output. Ricardo has committed the fallacy, not Malthus (although certainly Malthus needed some cleaning up)."
Underemployment equilibrium's are as self-contradictory as triangular squares. Equilibrium, a notion stolen from the natural sciences, implies a stable condition, a harmony. In the world of economic theory, such a condition is only possible when prices are not allowed to adjust. Of course, Keynes knew this, but claimed that in the long run, "we're all dead" (which is just his way of avoiding this argument).
Ricardo's name remains untarnished, at least when it comes to this very question.
Aha - yes, I'm familiar with Malthus's overproduction point. I was confused because you said that wealth can cause depression.
ReplyDeleteWell once again, I think it's pretty clear that fallacy was with Say (although I don't want to be too hard on him - people have turned him into a straw man in the past, most famously Keynes himself, and you seem to be turning him into a straw man here even though you seem to like him!). You're making the assumption that products have to even be sold. If there isn't a buyer, if a producer has miscalculated, overproduction can just sit in inventory. Nothing guarantees that supply creates it's own demand. Supply can also just sit around. You're also not even talking about production, which is the important point in a discussion of depressions. Yes, in the long run perhaps "overproduction" will always create it's own demand (I have doubts about this even, but I can concede it for the sake of the argument). That doesn't guarantee that in the short run gluts won't depress production.
As for Krugman - nobody, not even Keynes, denies Say or Say's Law. What they say is that Say's law is a special case, not a general case.
"Equilibrium, a notion stolen from the natural sciences, implies a stable condition, a harmony."
ReplyDeleteNo it doesn't - see your own first paragraph. It was a beautiful treatment temporal adjustments to equilibrium. Even in the natural sciences, "equilibrium" isn't just a stable harmonious condition - as it is used in economics, equilibrium is a stable state that actual states approach, adjust to, oscillate around, etc. - perhaps temporarily achieve but nobody really expects that. Your first paragraph description is fantastic - I completely agree - but it suggests that you're more interested in operating on what someone told you Keynesians thought than what they actually think.
"Ricardo's name remains untarnished"
Certainly his name is untarnished. I have great respect for the man. It doesn't make him always accurate.
I respect your anonymity, but may I ask how you came across our blog? Was it through mises.org, cafe hayek, coordination problem, something like that? I only ask because we've been having trouble getting traffic on here - I'm glad to see people are starting to comment more.