The Economics of Dr. King

From Where Do We Go From Here: Chaos or Community? (1968), by Dr. Martin Luther King Jr.:

The contemporary tendency in our society is to base our distribution on scarcity, which has vanished, and to compress our abundance into the overfed mouths of the middle and upper classes until they gag with superfluity. If democracy is to have breadth of meaning, it is necessary to adjust this inequity. It is not only moral, but it is also intelligent. We are wasting and degrading human life by clinging to archaic thinking.

The curse of poverty has no justification in our age. It is socially as cruel and blind as the practice of cannibalism at the dawn of civilization, when men ate each other because they had not yet learned to take food from the soil or to consume the abundant animal life around them. The time has come for us to civilize ourselves by the total, direct and immediate abolition of poverty.

...There is nothing new about poverty. What is new, however, is that we now have the resources to get rid of it... Today, therefore, the question on the agenda must read: why should there be hunger and privation in any land, in any city, at any table, when man has the resources and the scientific know-how to provide all mankind with the basic necessities of life?... There is no deficit in human resources; the deficit is in human will.

...All men are interdependent. Every nation is an heir of a vast treasure of ideas and labor to which both the living and the dead of all nations have contributed. Whether we realize it or not, each of us lives eternally "in the red." We are everlasting debtors to known and unknown men and women.

...Economic expansion cannot alone do the job of improving the employment situation of the Negroes. It provides the base for improvement but other things must be constructed upon it, especially if the tragic situation of youth is to be solved. In a booming economy Negro youth are afflicted with unemployment as though in an economic crisis. They are the explosive outsiders of the American expansion.

The insistence on educational credentials and certificates for skilled and semi-skilled jobs is keeping Negroes out of both the private business sector and government employment. Negro exclusion is not the purpose of the insistence upon credentials, but it is its inevitable consequence today. The orientation of personnel offices should be "Jobs First, Training Later." Unfortunately, the job policy of the federal programs has largely been the reverse, with the result that people are being trained for nonexistent jobs.

"Training" becomes a way of avoiding the issue of employment, for it does not ask the employer to change his policies and job structures. Instead of training for uncertain jobs, the policy of the government should be to subsidize American business to employ individuals whose education is limited. This policy may be considered a bribe by some, but it is a step consonant with reality. We require a vast expansion of present programs of on-the-job training in which training costs are absorbed by the government; at another level, employers could be granted reduced taxes if they employed difficult to place workers.

...The Freedom Budget of A.P. Randolph is important because it provides a basis for common action with labor and other groups in utilizing the economic growth of this nation to benefit the poor as well as the rich. It raises the possibility of rebuilding America so that private affluence is not accompanied by public squalor of slums and distress.

UPDATE: I apologize for closing comments. I just wanted to share a little of Martin Luther King's thoughts on economics. Some of it I disagree with, some of it I agree with, all of it I think was coming from the right frame of mind. The comment section turned into an argument over whether Progressives are to blame for segregation and Jim Crow legislation. It's not the sort of thing that seems appropriate on this anniversary. I wish we could have comments - but, well, we can't. Sorry.

Benjamin Franklin on Property

From Queries and Remarks Respecting Alterations in the Constitution of Pennsylvania (1789):




*****

One day I want to write a book called Jeffersonian Political Economy and American Keynesianism: 1729-1947, tracing the American tradition in economic thought back to its early days, and demonstrating how that formed the basis of an approach to the economy that made the ground fertile for the thorough adoption of Keynesianism in the 1930s and 1940s. Franklin figures prominently in that early story (not for this piece specifically - but for another paper he wrote even earlier), along with Jefferson, of course. I've been thinking about this for a while, but of course it's not something that you just sit down and write. Some day, though...

Thoughts on The Metaphysical Club

I just finished The Metaphysical Club, by Louis Menand. I can't recommend it highly enough - a truly enjoyable book. It is an intellectual history of American Pragmatism, written as a biography of four men: Oliver Wendell Holmes Jr., William James, C.S. Peirce, and John Dewey. There is a considerable amount of history in it too - Boston abolitionism, the Civil War, the coming of Darwinism to America, the Pullman Strike, and a big chunk of the history of American higher education. This made for a very engaging read - part intellectual history, part biography, and part history. I would like to write a book like this one day.

I've had a sympathy with American Pragmatism for a while. Kate had the book John Dewey: The Political Writings from a political philosophy class back at William and Mary, and I've effectively appropriated it and browsed through it for years now. I've always been attracted to Dewey. I never knew as much about the others, though. This book both firmed up and raised questions about my relationship to Pragmatism. There's a lot I like and a lot I don't like in each of these figures. I've also started to try to familiarize myself with Rorty. I take him much the same way I take Peirce (although Rorty himself preferred James). Rorty strikes me as technically being closer to right than the others, but I do see why people consider him a nihilist. He asks the question "well who is interested in truth anyway?" to which I want to respond "I'm interested in truth, even if I agree with you it's elusive!". Where Peirce gets the contingency of our insights right, but then is too optimistic about where all that leads, I think Rorty gets the contingency of our insights right, and then is too pessimistic (even if he insists he isn't). Rorty did not come up at all in the book, which was interesting - even in the epilogue where the author discussed the role of Pragmatism in the post-war period. I suppose that would have opened up a whole other can of worms.

I should say the other thing that I like about Rorty is that he brings in two others that I've always admired - Foucault and Heidegger. I've been marginally familiar with and generally impressed with Foucault since my time studying sociology at William and Mary. Heidegger has been of more recent interest, and I can credit Evan with introducing me to him (Evan also gave me this book, btw). I just recently found out Rorty explicitly connects Foucault and Dewey on rights and coercion. That was tremendous to learn, because I've made that connection myself for a while now, but I've never been especially sure about it. It's good to know that a celebrated philosopher came to the same conclusion. Rorty is also nice because he accepts a late logical-positivism (as long as it is sufficiently chastized about its own limitations). He sees value in the logical positivists who were more introspective in that sense (just as he sees value in Heidegger for doing the same with phenomenology). I have always enjoyed Bertrand Russell, so that's nice to see in Rorty (even though he's obviously abandoned analytic philosophy in important ways too). Ultimately, philosophically I'm still floating about, but I definitely see a coalescence with the Pragmatists.

There are absolutely unmistakable connections between the Pragmastists and Keynes in terms of action under uncertainty. I checked A Treatise on Probability (1921), and Keynes cites Peirce a few times. Gladys Parker Foster writes about the compatibility of Keynes and Dewey here. I've recently become very interested in Foster and her late husband - he especially wrote a lot about the American contribution to economic thought, and while I haven't gotten a great grasp of his views yet, he seems to suggest there was a lot in American thought that paved the way for a broad acceptance of Keynes. What's even more exciting is that he's identified many of the points I remark on - Jeffersonianism, the frontier, etc.

I'm not sure what I'm reading next - I'll decide by tonight. Possibly The Road to Serfdom, although I'm not sure I'm in the mood. Maybe The State and Economic Knowledge, which has been tempting me for a while. Maybe Forged Consensus which has also been tempting me for a while. Maybe Cycles of Unemployment, a short book by William Berridge from 1923 on the causes of unemployment. Maybe The Eerie Silence, about detecting extraterrestrial life - just for a lighter read. I feel somewhat adrift... not sure what it will be.

Two Updates on Popular Historians

There were two things I saw recently that I thought were worth noting about two popular historians - one that made me laugh a little, and one that sounded interesting.

First was this review of Ron Chernow's new Washington biography in The New Republic. The author writes:

"Modern biographers have sought to rescue George Washington from his monumental stature by revealing a lively and conflicted man within. In the latest and best of these recent attempts to humanize the great man, Ron Chernow offers a “real, credible, and charismatic,” a “vivid and immediate,” and, best of all, a “hot-blooded” Washington. Chernow insists that the father of our country began as a “deeply emotional young man who feared the fatal vehemence of his own feelings” and struggled to “conceal the welter of stormy emotions inside him.” Earthy, passionate, and ambitious, Washington even told an occasional lie."

Now granted, I don't know exactly what he means when he says "modern". Sometimes that means "recent". Sometimes that mean "everything since the 1500s". But what's interesting is how long we've been "humanizing" the founding fathers and "debunking" their monumental stature. All of this - every humanizing detail they mention in Chernow - is center stage in, for example, Douglas Southall Freeman. I used to be a big Washington fan (I've been more into Jefferson lately), and got around to reading a few biographies including several volumes of Freeman's authoritative work. I haven't read anything earlier than that - I haven't read Washington Irving's for example. But I really can't help but feeling like everything written about Washington is essentially a footnote to Freeman. What would be new and different and an interesting to read is one that actually tries to recapture a "Great Man Theory" sort of conceit for him.

The second interesting thing I saw was this report that David McCollough is coming out with an intellectual history of American intellectuals and artists in Paris from 1830-1900. I've come to like intellectual histories. I'm still reading The Metaphysical Club - a great intellectual history of pragmatism. I'm into John Dewey - finally moving along at a reasonable clip. Recently I finished the first volume of Joseph Dorfman's The Economic Mind in American Civilization. Waiting for me is Amy Sue Bix's Inventing Ourselves Out of Jobs? America's Debate over Technological Unemployment 1929-1981. Intellectual histories are nice because they give you a broad selection view of the import of primary source material that would take a lot longer to absorb independently. It's also a very illuminating way to learn history. You understand what happened much better if you interrogate what people thought was happening as your subject. You also learn to sympathize with the views of others when you really get into the question of why they thought what they thought.

Reading some W.E.B. DuBois this morning...

...this was good:

"Thus the shadow of hunger, in a world which never needs to be hungry, drives us to war and murder and hate. But why does hunger shadow so vast a mass of men? Manifestly because in the great organizing of men for work a few of the participants come out with more wealth than they can possibly use, while a vast number emerge with less than can decently support life. In earlier economic stages we defended this as the reward of Thrift and Sacrifice, and as the punishment of Ignorance and Crime. To this the answer is sharp: Sacrifice calls for no such reward and Ignorance deserves no such punishment. The chief meaning of our present thinking is that the disproportion between wealth and poverty today cannot be adequately accounted for by the thrift and ignorance of the rich and the poor."

From "Darkwater: Voices from Within the Veil" (1920). Earlier in the text he gives a very good account of the war-time inflation, its relationship to the increase in labor turmoil, and the relationship between the labor turmoil and worsening race relations.

This particular line seemed like it could have come right out of Keynes. It gets even more Keynesian further down in this selection. He talks about interest as the "price paid for waste" (that sounds like a liquidity preference theory of interest to me), and profit as the "price paid for chance".

Skidelsky and Caldwell on Hayek and Kenyes

Robert Skidelsky and Bruce Caldwell on Hayek and Keynes in the Depression. These are lectures from Soros's new Institute for New Economic Thinking organization.

Skidelsky says something interesting - he says we should embrace theories that accept the possibility that depressions happen, and that it is the Austrian and Keynesian theories that do so and they need to be the "building blocks" for theory as we go forward.

New article in History of Political Thought

My most recent article, "Melchizedek as Exemplar for Kingship in Twelfth-Century Political Thought", is now published in the latest issue of History of Political Thought.  Following is the abstract:

This article examines the use of Melchizedek as an exemplar for kingship in the twelfth century, considering interpretations offered in the Norman Anonymous, Bernard of Clairvaux’s de Consideratione and John of Salisbury’s Policraticus. While the Norman Anonymous provides a Christological and royalist reading of Melchizedek’s roles as king and priest, de Consideratione offers a more nuanced explanation of papal power without significant regard for disputes of secular and ecclesiastical liberties. The Policraticus, on the other hand, advances a theory of divinely elected, non-hereditary kingship on the basis of Melchizedek’s being ‘without genealogy’. The interpretation of the Policraticus stands in tension with a prominent rabbinic teaching that Melchizedek is identical to Shem, the son of Noah, and so possessive of a lineage that raises interesting (though not insurmountable) challenges for the non-hereditary kingship theory advanced in the Policraticus.

Please email me if I can help you by sending a PDF of the article.



Also published in this issue is an article by Vasileios Syros, "Linguistic Contextualism and Medieval Political Thought: Quentin Skinner on Marsilius of Padua".  I wrote my Melchizedek article for a seminar with Prof. Syros in 2009, and at the time Prof. Syros was working on this article.  I had the opportunity to read a draft and offer some thoughts on it, and he's kindly acknowledged me in the published version.

Krugman and Boudreaux on Overproductionism

Don Boudreaux manages to take a swipe at Krugman in the midst of a post praising an old Slate article of his that takes the logic of overproductionism and the crisis of capitalism to task. This is, of course, related to the overproductionism post I had the other day.

Of course, Krugman is right here. So why do I post semi-favorably on overproductionists and treat them with kid-gloves when Boudreaux and Krugman are more harsh? There are several reasons:

1. Overproductionism as a permanent crisis of capitalism is different from overproductionism as a reason for temporary dips in the economy. The latter is fairly respectable - the inventory cycle is nothing if not an overproductionist theory, and everybody believe the inventory cycle exists. We also live in a world where Diamond, Pissarides, and Mortensen all have Nobel prizes so we have no excuse to not take search and matching frictions seriously. When technological development increases manufacturing productivity it can seriously screw up mid-Western factory towns. Dislocation matters, particularly if you're the one being dislocated. This is all fine. What's not fine is the sort of "crisis of capitalism" overproductionism that says we're going to invent ourselves out of jobs and the owners of capital are going to become plutocrats and workers will starve. Economies do adjust - but that doesn't mean frictions, dips, and cycles don't happen along the way.

2. Overproductionism is a path to underconsumptionism for the layman. Non-economists have tendency to view self-interest with embarrassment or disgust, so they have a hard time either seeing a lack of demand as even possible, much less a problem if it occurs. They have an easier time understanding "the boss has no work for me", so in the lay literature you see a lot more overproductionism than underconsumptionism. But the thoughtful ones find their way to underconsumptionism, money demand, liquidity preference, and all that - and that's very good. A layman expressing overproductionism has an inherent sense that general gluts are real. That insight alone goes a long way in separating the good economists from the bad, so when I see it in people I'm a little more forgiving - and if I see it without the apocalyptic doom and gloom, I'm even more encouraged that they're putting real thought into this.

3. Who knows - maybe one day we will invent ourselves out of work! Honestly, my faith in what Boudreaux and Krugman are saying here is largely an empirical faith rather than a theoretical faith. It's entirely plausible that one day we'll say "I'm sated now - I'm going to just kick back and read on the beach, be happy with my current state of wealth, and increase my leisure". Demand may not keep up with production. It's possible - why not? But history tells us that it's highly improbable. Every time someone has suggested this outcome their hopes/fears have been dashed. But there's nothing inherent in the economy or in human nature that I know of that says it can't happen, and if it ever were to happen, maybe it would be nice! Who knows. I don't think I ever will because I don't expect it to happen in my lifetime, if it ever does.

Carl Menger: Keynesian?

We'll never know. He died in 1921. But a commenter on a fantastic post by Nick Rowe (see my next blog post) points out that Menger was very tapped into the idea of liquidity preference:

"But the fact that different goods cannot be exchanged for each other with equal facility was given only scant attention until now. Yet the obvious differences in the marketability of commodities is a phenomenon of such far-reaching practical importance, the success of the economic activity of producers and merchants depending to a very great extent on a correct understanding of the influences here operative, that science cannot, in the long run, avoid an exact investigation of its nature and causes."

That screams "effective demand" of course. Would it have lead him all the way to a liquidity preference theory of the interest rate? If he didn't find his way there himself, it certainly seems like he would have liked a lot of what Keynes had to say.

New Project: Monetary History, Populism, and Technological Unemployment

I just got the paperwork through for a new project I'll be working on this fall - I'll be writing short articles for an upcoming volume on American populism. I'll be reading this stuff, so it may show up in my posting too.

There will be heavy emphasis on the late nineteenth century populist movement, but all varieties of populism will be covered - from the colonial period to the modern Tea Party movement.

I'm writing on five topics:

1. The International Monetary Conference

2. "Coin's Financial School"

3. The National Monetary Commission

4. The Quantity Theory of Money, and

5. Technological Unemployment

Working on this will help to fill in my understanding of American monetary history from the 1860s or so to the creation of the Federal Reserve. The first three are going to be fairly historical pieces. I should be able to be more creative with the last two. In my piece on the Quantity Theory of Money I want to relate basic monetary mechanics to the shifting relationship between monetary policy and populism over time. Basic quantity theory arguments were of course originally used to support accomodative monetary policy, and now the same arguments are often used to oppose it in populist circles. I don't think I'll be able to get in too much detail on why that shift occurred, but I think it will be important to note it, especially because I don't think these issues will be on the radar of a lot of the other contributors.

I'll have a lot of room to play with the Technological Unemployment article. The point, for me, is that as a local phenomenon technological unemployment has been very real for certain populations, and it has tied together populist thought from the Luddites to modern concerns with "deindustrialization" in the Reagan years. But we repeatedly find and conclude that it is not a substantial global phenomenon. The total benefits seem to outweigh the total costs pretty decisively. The question is, as a polity how do we sort out the very real costs involved with technological development.

This is a picture I liked from Coin's Financial School:

Two econ posts...

Greg Mankiw criticizes "extreme Keynesians" - basically people who he says think that aggregate demand explains everything. I couldn't agree more. Indeed, this is the argument I make in my paper on the 1920-21 depression. Although there I critique Powell (2009), Woods (2009), and Murphy (2009) for acting like this "extreme Keynesianism" is "Keynesianism" and for pretending that a Keynesian's response to every downturn is fiscal and monetary stimulus (it's quite clearly not but that didn't get through to them).

So from a theoretical/rhetorical perspective I agree with Mankiw completely. From a nuts-and-bolts perspective I think there are some problems with what he uses to critique the demand-side view in this recession. He writes:

"University of Chicago economist Casey Mulligan offers a challenge to that view. Casey points out that there is a regular surge in teenage employment during the summer months because more teenagers are available to work (that is, the supply of their labor has increased). That is no surprise: It is normal supply and demand in action. But if aggregate demand were the main constraint on employment, this increase in supply should not translate into higher employment during deep recessions such as this one. But it does!"

I'm not sure Mulligan was really reading Eggerston's point about the "paradox of toil" very closely. What is the mechanism through which increased labor supply negatively impacts unemployment? Eggerston says that: "Higher short-run supply may create deflationary expectations and increase the real interest rate. This lowers aggregate demand, since aggregate demand depends on the real interest rate." Isn't that precisely what we've seen this summer - the return of deflation risks? The impact of that higher [real] interest rate on demand and employment will unfold in the coming months. This whole "paradox of toil" thing, which I honestly haven't looked into that closely, doesn't say that supply and demand don't work anymore. An increase in the supply of labor still impacts employment like it always has, it just sets in motion mechanisms that might also counter-act that increase. But you have to consider these mechanisms carefully. How would we expect the specific mechanism Eggerston identifies to effect employment? We would (1.) not expect it to do anything to normal supply-and-demand relationships, but (2.) set in motion a reduction of demand for labor with some sort of lag.

So anyway - click through the links to look at the stuff yourself, but I don't see how Mulligan really proves what he sets out to prove unless he completely misunderstands what Eggerston and Krugman have been saying on this. I should note that Greg Mankiw indicates he thinks Mulligan's claims are too strong as well.

Anyway, this gets me to a post by Peter Boettke on the Higgsian uncertainty point. It's all good, but I would make the same critique of Boettke that Mankiw makes of unnamed "extreme Keynesians". How do you attribute the weight that you do to policy regime uncertainty? Your logic is impeccable - I buy the logic. How important is that logic to the functioning of the economy right now? This is my beef with a lot of macroeconomics. Some people try to frame macroeconomics as "ex post story telling" with lots of theories floating around, and that it's unscientific because it has lots of theories floating around. The problem is, very few of these theories contradict each other. There is no reason to think that we aren't going through an industrial restructuring (a la Kling), a rebalancing of malinvestments (a la the Austrians), a deficiency of demand (a la Keynes), and some important supply shocks (a la RBCT). All these things can happen at the same time. I could throw in Jonathan Catalan's recent post contrasting Kling and the Austrians here too.

Mankiw ends with a really great anecdote that I can identify with:

"I am reminded of a response I once gave to a reporter who asked whether I was a supply-sider or a Keynesian. "I am neither a supply-side economist nor a demand-side economist," I said. "I am a supply-and-demand economist.""

I think we all should be supply-and-demand economists. Isn't that kind of what you learn on day one? Understanding all these theories and trying to figure out how they work together would go a long way towards making us less ridiculous when we fight over stuff that isn't even mutually exclusive. Or put it this way - if it is mutually exclusive it's because we've unnecessarily defined it that way when what we should be doing is identifying processes that describe the way the world works.

UPDATE: Now that I think about it, a funny irony is that many of the economists who only tell demand stories are the same economists that can't seem to get through their heads what the impact of a demand shock like a mandate will do!

Keynes on Newton

Keynes was one of many dignitaries selected to speak about Isaac Newton on the 300th anniversary of his birth, in 1942, I'm assuming because of his painstaking efforts to track down and reacquire Newton's papers and return them to Cambridge. Keynes read through and reflected on these papers, and in many cases he was the first to have read them since Newton himself. The war delayed the event, and by the time it was held in the summer of 1946, Keynes had passed away. However, he did leave the speech he was intending to deliver, entitled "Newton, the Man".

Yesterday's exchange on science reminded me of it because of one line in the piece that I was familiar with, that "Newton was not the first of the age of reason. He was the last of the magicians." So last night I read it - it's a very interesting read. Here are some good passages:

*****

"In the eighteenth century and since, Newton came to be thought of as the first and greatest of the modern age of scientists, a rationalist, one who taught us to think on the lines of cold and untinctured reason.

I do not see him in this light. I do not think that any one who has pored over the contents of that box which he packed up when he finally left Cambridge in 1696 and which, though partly dispersed, have come down to us, can see him like that. Newton was not the first of the age of reason. He was the last of the magicians, the last of the Babylonians and Sumerians, the last great mind which looked out on the visible and intellectual world with the same eyes as those who began to build our intellectual inheritance rather less than 10,000 years ago. Isaac Newton, a posthumous child bom with no father on Christmas Day, 1642, was the last wonderchild to whom the Magi could do sincere and appropriate homage."

*****

"I believe that the clue to his mind is to be found in his unusual powers of continuous concentrated introspection. A case can be made out, as it also can with Descartes, for regarding him as an accomplished experimentalist. Nothing can be more charming than the tales of his mechanical contrivances when he was a boy. There are his telescopes and his optical experiments, These were essential accomplishments, part of his unequalled all-round technique, but not, I am sure, his peculiar gift, especially amongst his contemporaries. His peculiar gift was the power of holding continuously in his mind a purely mental problem until he had seen straight through it. I fancy his pre-eminence is due to his muscles of intuition being the strongest and most enduring with which a man has ever been gifted."

*****

"There is the story of how he informed Halley of one of his most fundamental discoveries of planetary motion. 'Yes,' replied Halley, 'but how do you know that? Have you proved it?' Newton was taken aback - 'Why, I've known it for years', he replied. 'If you'll give me a few days, I'll certainly find you a proof of it' - as in due course he did."

*****

"His experiments were always, I suspect, a means, not of discovery, but always of verifying what he knew already.

Why do I call him a magician? Because he looked on the whole universe and all that is in it as a riddle, as a secret which could be read by applying pure thought to certain evidence, certain mystic clues which God had laid about the world to allow a sort of philosopher's treasure hunt to the esoteric brotherhood. He believed that these clues were to be found partly in the evidence of the heavens and in the constitution of elements (and that is what gives the false suggestion of his being an experimental natural philosopher), but also partly in certain papers and traditions handed down by the brethren in an unbroken chain back to the original cryptic revelation in Babylonia. He regarded the universe as a cryptogram set by the Almighty - just as he himself wrapt the discovery of the calculus in a cryptogram when he communicated with Leibniz. By pure thought, by concentration of mind, the riddle, he believed, would be revealed to the initiate.
He did read the riddle of the heavens. And he believed that by the same powers of his introspective imagination he would read the riddle of the Godhead, the riddle of past and future events divinely fore-ordained, the riddle of the elements and their constitution from an original undifferentiated first matter, the riddle of health and of immortality. All would be revealed to him if only he could persevere to the end, uninterrupted, by himself, no one coming into the room, reading, copying, testing-all by himself, no interruption for God's sake, no disclosure, no discordant breakings in or criticism, with fear and shrinking as he assailed these half-ordained, half-forbidden things, creeping back into the bosom of the Godhead as into his mother's womb. 'Voyaging through strange seas of thought alone', not as Charles Lamb 'a fellow who believed nothing unless it was as clear as the three sides of a triangle'."

*****

"As one broods over these queer collections, it seems easier to understand - with an understanding which is not, I hope, distorted in the other direction - this strange spirit, who was tempted by the Devil to believe at the time when within these walls he was solving so much, that he could reach all the secrets of God and Nature by the pure power of mind Copernicus and Faustus in one."

*****

I suggest reading the piece in full. I think it's fairly common knowledge that Newton dabbled a lot in alchemy. Evan, you'll be interested in knowing that he also put a lot effort into thinking through theological points, eventually coming to a personal Arianism and other assorted heresies. He is a very interesting and conflicted guy, and it makes sense really. He lived in the seventeenth century, after all. What's truly remarkable is the coexistence of all these currents in Newton.

More on the owls...

In this post critiquing Davidson, Galbraith, and Skidelsky's passivity with respect to the long-term debt, I got several interesting responses from post-Keynesian commenters. A lot of it was resources on the "deficit owl" perspective. I spent a little time looking through each, and doing a cursory review of what they call "Modern Monetary Theory" and has also been called Chartalism (really not a strategically developed name, which I'm guessing has more than a little to do with the newer MMT designation!).

Most of the emphases of this school of thought are right on target. They specifically highlight the implications of sovereignty for the federal debt. A sovereign debt crisis in the U.S. is not a risk the way it is in Greece because we have the freedom to monetize our debt. Of course these guys also talk about functional finance, stabilization policy, and liquidity preference. This is all very good - it can be hard to get a New Keynesian to talk about liquidity preference sometimes! So the real sticking point seems to be the debt. We agree debt monetization removes the risk of a sovereign debt crisis - this is quite standard analysis and not anything that really distinguishes Galbraith, Davidson, and Skidelsky from Reich, Stiglitz, and Krugman. I think the Krugman point (recently, in a disagreement with Galbraith) is the important point to make - debt monetization provides budgetary flexibility (on top of the already substantial flexibility provided by our credit rating and the nature of sovereign governments), but it ultimately just kicks the can down the road. Problems emerge later in terms of inflation and interest rates, but more importantly real growth rates. Janos Kornai's famous observation that governments face "soft budget constraints" doesn't mean that they face no budget constraints. I read and buy into Keynes, Minsky, and Lerner - but I also read and buy into Reinhart and Rogoff (and, well, Keynes!) on the risks involved.

One intriguing option raised by Joe Firestone in the comment section of the last post is to stop issuing debt instruments and just start crediting bank accounts. He provides this link to that option, and L. Randall Wray discusses it further here. They essentially want to cut out the middle man of the Federal Reserve. I don't know enough about the implications of this, and I'd love to hear more discussion in the comment section, but two thoughts immediately come to mind. First, this would bring an end to independence in monetary policy, which is not a pleasant prospect for most economists. Second, as James Macdonald argues, public debt has historically been an essential element in restraining government. Hoarded treasure (aside from being macroeconomically inefficient) ensures that sovereigns are unaccountable to their citizens. Citizen creditors ensure that their government stays accountable. Cutting out this debt instrument gives a sovereign all the revenue-raising power of government bonds, without any of the risk of nervous creditors restraining policy. Perhaps a robust republic can be maintained in such an environment, but if the Macdonald point is right, the chance of abuses are very real.

OK, enough talk. Time for some links. Thanks to Joe Firestone for sharing most of these:

- New Economic Perspectives is a post-Keynesian blog I've followed for a little while now.

- Warren Mosler's blog

- This is Bill Mitchell's blog. Mitchell is at the University of Newcastle's Centre for Full Employment and Equity.

- Here is an interview of Randall Wray and Bill Mitchell, talking about MMT. This is the first one, there are several more that follow.

- Firedoglake and Corrente post regularly on Modern Monetary Theory. I've pulled the MMT tagged posts here (FDL) and here (Corrente) for your convenience.

- Recently these guys had a "fiscal sustainability teach-in" at my alma-mater, The George Washington University. The website for that event is here. I know a guy that was involved in this (Alex Lawson - big activist/advocate if any readers know of him), so I heard updates from it. It did a lot of important work I think - trying to educate people on why Social Security isn't the big risk a lot of people think it is. Of course, as my comments above suggest, I also think they down played more genuine risks.

- Joe Firestone shares this New Deal 2.0 post with me to "address some of the concerns" about the long-term debt. Of course nothing Wray writes in here is new to me or controversial to me, nor does it address the concerns I have. I'm not worried about our ability to pay back our debt. I understand why public debt is different from private debt. And regular readers can attest to the fact that I'm not shy about running up deficits. The bigger concern for me is the impact on real growth rates. And that, of course, is precisely the point that this blog post ignores. Anyway, I have two other reasons for highlighting this: (1.) New Deal 2.0 is another good site worth following, and (2.) an interesting historical point they make. The only time we've ever retired the debt was in 1835. In 1837 we had a severe depression. Does anyone know if these two events are related? I imagine at the time the federal budget was too small to make this sort of macroeconomic difference, but it's possible. Nothing says "liquidity preference" quite like a sinking fund. Anyway - just a query. Joe also provides, this, this, this, this, and this to "address my concerns".

- I'll also share once again the Levy Institute's website. This group does a lot of work with Minsky's theories, and also has strong post-Keynesian influences. This is their program on Monetary Policy, and this is an interesting recent working paper from them outlining what "fiscal responsibility" should mean. I thought this was an especially good passage. It highlights the MMT argument, and it provides an interesting philosophical justification and explanation of the role of government:

"If the government acts not as a self-interested individual, but in order to allow citizens to achieve their intended expenditure decisions, it must engage in policies that support private sector decisions in such a way that they lead to public good. It should act to coordinate and offset the incompatible combination of firms’ and households’ intentions. If households follow the rule of virtue and seek to save too much, then the government should run a fiscal deficit that is just equal to the shortfall between households’ desires to save and firms’ expectations of profits. By doing so it can allow each individual to achieve his desired objective. But, it also avoids the loss in income that would result from the mismatch. Here the government can intervene to make private vices into public virtue by encouraging prodigality when the private sector desires to be frugal. Government prodigality is the equivalent of supporting public virtue! This is the fiscal policy of a responsible government, responsible to insure that private sector decisions can be achieved rather thwarted by the law of unintended consequences."

On Inequality

...feels like Friday here in the office so one more post. I'm just jotting down some thinking I've done recently.


So I've been thinking through more of Lovecraft's thoughts on political economy, and inequality features prominently in his discussion of it. I've also been looking into the writings of his contemporaries writing on inequality, particularly contemporary economists. It seems to me there are four basic ways to approach inequality:


1. From a rights perspective: people have a right to what they earn, differences in wealth or inequality are merely differences in ability and effort exercised and monetize through contract and property rights. From a contractarian perspective, then inequality is largely acceptable. Inherited wealth, while justifiable from a rights perspective, can also be challenged from this perspective.


2. From an incentive perspective: this is almost a consequentialist approach to inequality. Inequality is good because it motivates effort and improvement. It also directs people to socially beneficial activities (if there are more profits in one industry than there are in another, people will have the incentive to enter that industry). I often like to reference Bernoulli's law - it is inequality that provides lift. Keynes largely comes from this consequentialist angle when he explains why he is fine with economic inequality. Lovecraft has a consequentialist approach to inequality too, but it is very different from this incentives explanation - it is more of an aesthetic and cultural justification for inequality.


3. From a human dignity perspective: this is more of a humanitarian approach. Concepts of human worth suggest that people deserve a certain standard of living, simply in the interest of human dignity. You could approach dignity as a question of relative outcomes as well. Lovecraft also expresses some of this humanitarian vision, which is somewhat ironic given his very well articulated Neitzscheism (no matter - foolish consistency is the hobgoblin of small minds).


4. From an opportunity perspective: this is the "equality of opportunity" approach, as opposed to the "equality of outcomes" approach in point #3. It can be thought of as the democratic perspective. The unequal circumstances we are born into stack the deck in favor of people whose parents (or grandparents, or great-grandparents, or...) were more successful. From this angle, it is pointed out that the contractarian approach can be naive by ignoring endowment effects.


Are there any other ways to think about inequality? I have sympathy for all four of these - I think most people do. Others, of course, lean heavily on only one or two of them. I personally don't think from an ethical standard it's clear what to do with inequality (or put it this way - if it is clear it's because you've come at the question with a very detailed ethical outlook to begin with). I'm not going to think about inequality this abstractly or broadly in what I write about Lovecraft's views on the issue, but the issue itself is a major part of his political economy.

Edgar Allan Poe and the Horrid Laws of Political Economy

So by way of introduction, I have to mention a fun little research project I’ve been working on, something I’m titling “Miskatonik Economics: The Political Economy of H.P. Lovecraft”. In addition to the thematically significant references to economic issues in Lovecraft’s weird tales, I’ve found that he actually held quite definitive views on economics that never made it into his stories, but were shared in letters, articles, and essays. Since Lovecraft has generally been approached either from a literary or a philosophical angle, these economic insights haven’t gotten very thorough treatment – which is what I’m trying to remedy. His thoughts are fascinating. A lot of it is borderline (when not explicitly) fascist. A lot of it is based on the idea of “technological unemployment”. He has interesting theories of inequality and property as well that all weave together. And finally, a some of it foreshadows what Keynes had to say. All in all, there’s a lot of material to work with, and even where it is distasteful it is clearly something he thought through in a methodical way, which is interesting coming from a horror writer.

Lovecraft’s single most important literary influence was obviously Edgar Allan Poe, so I was curious about whether Poe had ever written anything on the economy. Classical political economy had been very firmly established by Poe’s heyday, and he was a very well educated guy, so it seemed quite plausible. Lovecraft never mentions Poe’s economic, social, or political thought in his writing on those issues, and I doubt it was an explicit influence, but it still seemed like anything that I could find would be nice to add.

Poe is famous for allegedly sketching out the basic idea of the Big Bang eighty years before scientists had zeroed in on it. It seems like he may also have struck on the fundamental insight of the Marginal Revolution in economics thirty years before the marginalists!

The context is the so called “paradox of value”. A diamond has virtually no utility, but water has a great deal of utility. Why, then, does a diamond cost so much more than water? It seems like a paradox. Prices and values seem to be all out of whack! The early economists, including Adam Smith, “solved” the paradox by appealing to the labor theory of value. Value derives from the work that it takes to produce a product. It takes more work to produce a diamond than water, so it costs more.

Decades later, the marginalists corrected this view and instead argued that it was the marginal benefit and marginal cost of an extra unit of a good that determined its price. They demonstrated that when marginal benefit and marginal cost were set equal to each other with the price, utility would be optimized. It turns out Poe stumbled on the idea in a discussion of the value of water three decades earlier, in a review of one of Dickens’ works*. He writes:

“The brilliancies on any one page of Lalla Rookh would have sufficed to establish that very reputation which has been in a great measure self-dimmed by the galaxied lustre of the entire book. It seems that the horrid laws of political economy cannot be evaded even by the inspired, and that a perfect versification, a vigorous style, and a never-tiring fancy, may, like the water we drink and die without, yet despise, be so plentifully set forth as to be absolutely of no value at all.”

In other words: Dickens is a great writer, but there is a diminishing marginal return in literature and he writes too damned much! The point is not whether a given unit of Charles Dickens is a benefit or not – the point is the marginal benefit of another unit of Charles Dickens! Marginalism!

I honestly know 20th century history of economic thought better than I know 19th century history of economic thought. Maybe the fundamental points of marginalism were made by 1841. Does anyone know? And really, this doesn’t amount to marginalism strictly speaking anyway. Supply and demand were certainly understood long before the marginalist, even if marginal cost and marginal benefit wasn’t. Either way, it was a very interesting passage to come across, and it clearly avoids the more common "solution" of the labor theory of value.

By the way – there’s a good reason (from an economist’s perspective) why Dickens wrote such long books. Despite Poe’s complaints, Dickens was most definitely responding to market forces. I’m sure many of you know what I’m referring to – feel free to share in the comment section.

* - I'm actually not exactly clear on this. From what I can gather, Lalla Rookh was a romance which was not authored by Dickens, but this passage is identified as being from a review of Dickens. It's possible Poe is comparing a shorter work to Dickens' longer works? It's not clear to me - it doesn't change the fundamental point, though.

Keynes's Foreword to the German Edition of the General Theory

Lurking in the cracks between what one school of thought considers worth talking about and what its critics feel is worth engaging with are a few niche nuggets that critics latch on to with particular ferocity and impunity. Facing few, if any, counter-arguments from an unintrigued opponent, the critical interpretations of these nuggets become ferrell and fertile, spreading very quickly, practically unbeknownst to anyone else. Such is the fate of the foreword to the German edition of The General Theory of Employment, Interest, and Money. For many, it is proof-positive that Keynes is a thinly veiled fascist. For virtually anyone else, it isn't even on the radar screen. Many that may come across the reference and the critics' interpretation of it are likely to be dismissive. It's so patently absurd that a champion of British liberalism would embrace Nazism in the way that it is asserted that these interpretations of the foreword are dismissed as ravings, rather than analysis. What Keynesian is going to waste their time delving into the issue to prove the obvious point that Keynes was not a Nazi?

That's unfortunate, because while it may be particularly bad analysis, these are analyses nonetheless - not ravings. Meeting them is the surest way of curing them. I am going to review the foreword in its entirety here.

In September, 1936, a few months after the initial release of the General Theory, Keynes penned a foreword for the new German translation of the book. The foreword made clear (as was made clear in the introduction to the book itself), that his audience was primarily economists. He began with a history of thought, reviewing the underemphasis of Marshall's (his teacher and mentor at Cambridge) macroeconomic thought:

"Alfred Marshall, on whose Principles of Economics the education of all contemporary English economists has been based, took particular pains to call special attention to the relationship of his thought to that of Ricardo. His work consisted for the most part in stuffing the law of limited use [Grenznutzen] and the law of substitution into the Ricardo tradition, and his theory of production and of consumption as a whole—contrary to his theory of producing and distributing a given production—has never been laid open. I am not certain whether he himself ever perceived the need for such a theory, but his immediate successors and disciples surely have abandoned it and evidently never perceived its absence. I was educated in this atmosphere. I have taught these doctrines myself and it was only in the course of the last decade that I became aware of their inadequacy. In my own thought and development, this book, therefore, presents a reaction, a transition and a disengagement from the classical English (or orthodox) tradition. How I have stressed this and the points in which I deviate from the recognized doctrine has been regarded by certain circles in England as extremely controversial. But how could someone educated in English economic orthodoxy, who was even once a priest of that faith, avoid some controversial emphasis, if he becomes a protestant for the first time?"

Here, Keynes sets himself up against the classics, as he does in the General Theory itself. He's careful to show his debt to the classics, though, again as he does in several places in the main work. But what do Germans get out of this? He goes on,

"I can, however, imagine that all this may concern the German readers somewhat differently. The orthodox tradition which reigned in the England of the 19th century never had such a strong influence on German thought. In Germany there have always been important schools of economics which strongly questioned the adequacy of classical theory for the analysis of contemporary events. The Manchester School as well as Marxism, have, after all, stemmed from Ricardo—a conclusion that need cause surprise only when superficially considered. But in Germany there has always been a majority of opinion which adhered neither to one school nor the other."

Keynes is still engaging German economists and now goes on to precisely what German economic thought consists of:

However, it can hardly be contended that this school of thought ever established a theoretical counter-structure, nor did it ever attempt to do this. It has been skeptical and realistic, satisfied with historical and empirical methods and results which reject a formal analysis. The most important unorthodox discussion on the theoretical level has been that of Wicksell. His books (until recently not available in English) were available in the German language; one of his most important was in fact written in German. His successors, however, were mainly Swedes and Austrians; the latter linked his ideas in with a substantially Austrian theory, and thus in reality actually brought them back to the classical tradition. Germany thus has—in contrast to her custom in most fields of science—contented herself for a whole century without a dominant and generally recognized formal theory of economics."

The "skeptical and realistic" approach, "satisfied with historical and empirical methods and results which reject a formal analysis" is, of course, the German Historical School, best known through the work of Gustav Schmoller. Max Weber is also often counted among the ranks of later German historicists, but Weber never had the zeal or intransigence of Schmoller. The community most responsible for diminishing the historicists was, of course, the Austrian School under Carl Menger and his disciples during the Methodenstreit episode in the 1880s, which is very well documented in von Mises's short piece The Historical Setting of Austrian Economics. Keynes is highlighting here that German economics and British economics are quite different. The long-dominant historicists banished classicism from Germany for quite a while, and the neoclassicism that at least partially displaced this school was Swedish and Austrian in origin. A Marshallian wave - the tradition that was so resistant to reformation by one of its own prize pupils in 1936 - never really swept over Germany in the first place. That is the setting for this foreword. Keynes goes on, with quite a bit of optimism,

"I may, therefore, perhaps expect to meet with less resistance on the part of German readers than from English, when I submit to them a theory of employment and production as a whole which deviates in important particulars from the orthodox tradition. But could I hope to overcome the economic agnosticism of Germany? Could I convince German economists that methods of formal analysis constitute an important contribution to the interpretation of contemporary events and to the shaping of contemporary policy? It is, after all, a feature of German character to find satisfaction in a theory. How hungry and thirsty German economists must feel having lived all these years without one! It is certainly worthwhile for me to make the effort. And if I can contribute a single morsel to a full meal prepared by German economists, particularly adjusted to German conditions, I will be satisfied. For I must confess that much in the following book has been mainly set forth and illustrated in relation to conditions in the Anglo-Saxon countries."

Here, Keynes seems to be operating off the assumption that most German economists are still of some historicist persuasion at this point. I don't know enough about the history of German economic thought to evaluate this assumption. So far, the purpose and the audience of the foreword strikes me as being uncontestable. Keynes is discussing his theory as it relates to classical and neoclassical theory - of the Marshallian variety, particularly. He is opposing himself to British orthodoxy (not a particularly surprising move on his part), and he is telling German economists why that should be of interest to them. With this backdrop, Keynes moves on to the sentences that are most commonly highlighted by modern critics:

The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory. Since it is based on fewer hypotheses than the orthodox theory, it can accommodate itself all the easier to a wider field of varying conditions. Although I have, after all, worked it out with a view to the conditions prevailing in the Anglo-Saxon countries where a large degree of laissez-faire still prevails, nevertheless it remains applicable to situations in which state management is more pronounced. For the theory of psychological laws which bring consumption and saving into relationship with each other, the influence of loan expenditures on prices, and real wages, the role played by the rate of interest—all these basic ideas also remain under such conditions necessary parts of our plan of thought.

Here Keynes is clearly talking about his "theory of aggregate production" - namely, the macroeconomic theorizing that he lead the foreword with, of which he said earlier that Marshall's students "surely have abandoned it and evidently never perceived its absence". This is the crux of the counter-argument, so this is where people should raise issues with my reading of the foreward if they have any. It was his theory of output, of aggregate output and aggregate demand, and not his brief review of a possible policy response - that "can be much easier adapted to the conditions of a totalitarian state". If there is any lingering doubt about this, he goes on to explain that his theory is dependent on fewer assumptions than British orthodoxy. Since totalitarian Germany departs so regularly from the assumptions made by British orthodoxy, such a theory is of little use to German economists. But a general theory may be of greater use. This, at least, is the argument. I see no reference in any part of this foreword to what has been understood as a Keynesian policy response. I see only references to Keynesian economic theory. And I see no defense of totalitarianism, what I see is Keynes selling a theory that he thinks is most appropriate for explaining the operation of a totalitarian economy. For a German historicist interested in case-specific idiosyncrasies, this could be very attractive.

The concluding paragraph of the foreword is equally instructive:

"I would like to take this opportunity to thank my translator, Mr. Waeger, for his excellent effort (I hope that his vocabulary at the end of this book will prove useful beyond its immediate purpose), as well as my publishers, Messrs. Duncker & Humblot, whose enterprising spirit ever since the days sixteen years ago when they published my Economic Consequences of the Peace has made it possible for me to maintain my contact with German readers."

Here he mentions the success of his Economic Consequences of the Peace, where Keynes wrote that "If we aim deliberately at the impoverishment of Central Europe, vengence, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the force of Reaction and the despairing convulsions of Revolution, before the horrors of the late German war will fade into nothing, and which will destory, whoever is the victor, the civilization and the progress of our generation. Even though the result disappoint us, must we not base our actions on better expectations, and believe that the prosperity and happiness of one country promotes that of others, that the solidarity of man is not a fiction, and that nations can still afford to treat other nations as fellow-creatures?" It was this assessment in the Economic Consequences of the Peace that earned Keynes such a following in Germany - the idea that Germany must be supported to prevent the rise of either the powers of Reaction or Revolution in the country (and elsewhere in the book he raises the prospect of Revolution, rather than Reaction.

What sense would it make to embrace fascism in a foreward to a book which itself criticizes fascism, particularly in its concluding chapter? What sense would it make to embrace fascism in a foreward that cites the popularity of an earlier book written to stave off the rise of reactionaries in Central Europe? It makes no sense at all, before even reading the content of the foreward itself. And the content of the foreward is clearly methodological, referencing the history of German economic thought and citing reasons why Keynesian theory might be more useful to Germans than other British theories.

So believe what you will about the German foreward to the General Theory. I think its meaning is quite clear and quite benign, and any other interpretation not only fails to account for the text of the foreward itself - it also fails to account for the stark incongruity between the less charitable interpretations and Keynes's own character and values.

Rizzo with a Keynes and Hayek (and others) letter

Mario Rizzo reposts a fascinating pair of letters from Keynes and Pigou (and others), and Hayek and Robbins (and others) from 1932.

UPDATE: [Coordination Problem and Taking Hayek Seriously pick this up as well. The commentary on Taking Hayek Seriously is a little much (there are references to binging, spending on "any and every projects they might imagine", and similar characterizations I can't place or make sense of)... lot's of straw men without a single quote from the Cambridge letter. Coordination Problem is characteristically classier. I have my disagreements, but it is what it is.]

UPDATE 2: [It's really a shame Mario Rizzo isn't a Keynesian - he'd make a damn fine one. Oh well. In the comment section to his post he includes this source as well, highlighting how counter-cyclical spending and Keynesianism are related. Anyone who has read any economics from the 1920s knows that while there's a lot of common ground between advocates of counter-cyclical spending and Keynesianism, Keynesianism (i.e. - The General Theory and work that built on it) by no means originated it, nor was it defined by it. The paper Mario links to explains the different paths that the Chicago School and the Keynesians took from a common, initial support for counter-cyclical fiscal policy. The paper seems to focus on Keynes's thoughts on government budgeting - needless to say there are also additional theoretical departures from the early counter-cyclical spending literature that justify Keynes's practical advice on budgeting]

The Cambridge crew writes:

"when a man economizes in consumption, and lets the fruit of his economy pile up in bank balances or even in the purchase of existing securities, the released real resources to not find a new home waiting for them. In present conditions their entry into investment is blocked by lack of confidence. Moreover, private economy intensifies the block. For it further discourages all those forms of investment - factories, machinery, and so on -- whose ultimate purpose is to make consumption goods. Consequently, in present conditions, private economy dos not transfer from consumption to investment part of an unchanged national real income. On the contrary, it cuts down the national income by nearly as much as it cuts down consumption. Instead of enabling labour-power, machine-power and shipping-power to be turned to a different and more important use, it throws them into idleness."

Before this statement, they noted that frugality in World War I did not have these problems because resources were directed towards what they call "an insatiable war machine". They follow this point by highlighting that the same effective demand logic applies to government that applies to individuals.

Rizzo highlights two critiques from Hayek, Robbins et al.. The first is a critique of Keynes, Pigou et al. on their hesitation in the purchase of existing securities. The LSE crowd contends that purchase of these existing securities is necessary for the issuance of new security and investment and so is a good thing. I really agree with both Cambridge and LSE on this, and I think to a certain extent they're just talking past each other. I don't think the Cambridge letter is saying that there is anything inherently destructive about the investment in existing securities themselves. Their point is more that such investments in existing securities, as well as deposits, are symptomatic of the reduced demand for consumption and investment - and that reduced demand is problematic. I would agree with that. Robbins and Hayek seem to miss that and treat it like Keynes and Pigou are arguing that investment in existing securities is the problem in and of itself - and not a symptom of the problem. The Hayek/Robbins solution is essentially saying "let's satisfy this demand for liquidity so the economy can get back on its feet - let's buy those existing securities". To which I think the Keynesian response would be "fair enough - but there are better ways to do that than waiting for the demand for liquidity to be satisfied - particularly since we think that this liquidity preference is artificial in the first place". In other words, I think they're talking past each other on this point - which provides a marvelous precedent for the modern debate as well!

I think Rizzo fails to quote what I think is the most interesting part of the Hayek and Robbins letter. He references this point I mentioned above on existing securities, as well as an additional concern about public debt. So far that's just (1.) talking past Keynes and Pigou on securities, and (2.) a standard Reinhart-Rogoff position on being careful about public debt. Rizzo doesn't quote the part where Hayek and Robbins's Austrian bona fides really stand out. They write:

"They appear to hold that it is a matter of indifference as regards the prospects of revival whether money is spent on consumption or real investment. We, on the contrary, believe that one of the main difficulties of the world to-day is a deficiency of investment -- a depression of the industries making for capital extension, &c., rather than of the industries making directly for consumption. Hence we regard a revival of investment as peculiarly desirable."

I always find this to be an interesting point. A Keynesian generally says that the market works fine, but the level of demand is not always consistent with full employment. If we place value on full employment, we should boost demand for capital, goods, and services relative to demand for money. Keynesians value both consumption and investment, and aside from perhaps some social initiatives (i.e. - spending on the poor and/or unemployed because... well because they're poor and/or unemployed), they don't really want to dictate where it goes. More direct spending is more efficacious of course in terms of the multiplier - but they don't place a higher priority on consumption relative to investment generally. As Hayek and Robbins say "they [Keynes and Pigou] appear to hold that it is a matter of indifference... whether money is spent on consumption or real investment". Indeed they do. Here, the LSE writers are of the opinion that what you really need is more investment.

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Rizzo contends that the debate today is essentially the same, that everything ultimately boils down to a debate between Hayek and Keynes, and that everything else is a footnote. To a certain extent I agree with this - but I think he's discounting the extent to which these are differences of emphasis rather than opinion. He notes that Hayek comes out and says deflation is undesirable. I note here that they don't really disagree on the existing securities question - Hayek and Robbins confuse the fact that Keynes and Pigou are arguing that investment in existing securities is symptomatic of the problem rather than the problem itself. Hayek and Robbins also raise the Reinhart-Rogoff point about the debt - which essentially every economists agrees on, we just disagree on when it is really worrisome and when it isn't. So on all of these points, Hayek, Keynes, Robbins, and Pigou basically agree - they just place different emphases. I think the same is true today. There are lingering disagreements. They still don't see eye-to-eye on the unique importance of investments. They still don't see eye-to-eye on their theory of output. Those are very important issues. But they shouldn't obscure the fact that there is common ground. Indeed - the guy that coined that insight that all economic argument boil down to the disagreement between Keynes and Hayek (that would be J.R. Hicks) was a big fan of both Keynes and Hayek.

A Genealogy of Sticky Wages

In my post on sticky wages, Mattheus asks:

"Is the assumption of general wage and price rigidity a pillar of Keynesian economics? I always thought you had to assume wage stickiness to be a Keynesian, but I might be wrong"."

I think the short answer is “no, it is not a pillar of Keynesian economics, but yes, almost all modern Keynesians assume it in some form”.

It's a very odd story. Between Marshall and Keynes, economists had always highlighted wage stickiness as a reason for involuntary unemployment. The reason is obvious - if there can be no price adjustment, all the adjustment has to come through a shift in quantity. It's a very nice, very clean explanation with a lot of intuitive support (you simply don't see that much nominal wage cuts in real life - it's as if there's some sort of inherent psychological barrier to it).

In the General Theory, Keynes talks about wages in the chapter I linked. The chapter is specifically dedicated to what happens when nominal wages are cut, so there's clearly no blanket assumption of rigid wages there. One of the critiques he raises, though, is that in certain sectors wages are going to be more rigid than in other sectors (this is partly why he preferred modest inflation to reduce real wages than nominal wage cuts: inflation would fall on all workers relatively equally, and therefore avoid price distortions). In the General Theory, departure from full employment was driven entirely by liquidity preference and aggregate demand.

New Classical macroeconomics challenged Keynesianism from a microeconomic perspective, introducing "representative agents" with rational expectations in models that contradicted Keynesian findings. The Keynesian response had to be directed towards microfoundations (well, they thought it did at least). So guys like Stiglitz and Mankiw and Summers dreamed up all kinds of microeconomic frictions which, in representative agent models, would produce the same "Keynesian" results. Sticky wages came center stage again. Asymmetric information became very important. We had efficiency wages, insider-outsider models. Critiques of rationality assumptions aren’t exclusively tied to this literature, but they’re important for it. All of these frictions cobbled together is more or less what is known as “New Keynesian” economics, which is really the economics of just about everyone that calls themselves “Keynesian” today. You can think of it as what The General Theory might have been if it was written from a micro perspective rather than a macro perspective.

I think there’s a lot of good to say about a lot of New Keynesian economics. It has made economics considerably more realistic. Just the other day I was very favorably citing Stiglitz and Weiss’s credit rationing model, which has a distinctly New Keynesian flavor to it. I’ve blogged on efficiency wages in the past. And I think a lot of wages probably are pretty sticky. But I think people can legitimately call themselves “Keynesian” without a lot of this (people did for about three decades, after all!). Classical Keynesianism (that really feels oxymoronic to type!) has no need at all for sticky prices. The only people that need sticky prices are the ones who get their panties in a twist when guys like Lucas, Kyndland, and Prescott raise bogus (or at least weak) critiques. There’s a reason why Greg Mankiw is such a fan of A.C. Pigou. It’s because New Keynesianism is really New Marshallianism as much as it is anything else (and that’s fine – Keynes himself said of Marshall that he was “a true sage and master, outside criticism”).

Earlier I had said that New Keynesianism was what The General Theory might have looked like if Keynes has taken a microeconomic approach rather than a macroeconomic approach. I want to modify that a little. If Keynes had written from a microeconomic perspective, I think we would have gotten something more along the lines of the work of Edmund Phelps. Phelps worked on distinctly Keynesian themes: wage and price expectations at the microeconomic level, and uncertainty about future wage and price changes. I don’t know to what extent Phelps utilized sticky wages (his work was in the 1960s and 1970s, before sticky wages became a real staple), but it’s certainly never highlighted as essential to his work (I haven’t read any myself – I need to). I think if Keynes went the micro route, you would have seen something more like Phelps than Stiglitz – although I think Keynes (who always liked paradoxical conclusions) still would have liked and agreed with Stiglitz’s work especially, if not all the New Keynesians.

That’s my take on the intellectual history. It’s somewhat self-taught. My History of Economic Thought course (six years ago now!) stopped around Keynes, so this comes from what I’ve picked up since then. I’d be interested in hearing about any obvious mistakes, or even just differences of interpretation on all this.

Thoughts on Schumpeter

Richard Swedberg and Thorbjorn Knudsen use Schumpeter's ideas about combination and resistance to entrepreneurship as the basis of a new theory of entrepreneurship. Their ideas are presented in more detail in an earlier article here, in the journal Capitalism and Society. They suggest in the post that this theory of entrepreneurship can be developed into a business cycle theory, but they don't give much detail on how. I assume it's tied to the creative destruction associated with market innovation. For a policy-oriented Schumpterian perspective, see the Information Technology and Innovation Foundation, headed up by Rob Atkinson. I've been to a few of their events - it's a neat group. The group has one of those internet quizzes to figure out what kind of economist you are. The options are "supply-side economics, liberal neo-classical economics, Keynesian economics or innovation economics". I was "innovation economics" - the one they associate with Schumpeter. I imagine I fell out that way because what they call "Keynesian" was basically a mix of welfare-state liberalism and vulgar Keynesianism.

The Harmony of Economics

Don Boudreaux links to an interesting looking paper by Daniel Klein on musical analogies in Adam Smith's writing - specifically in the Theory of Moral Sentiments. Klein writes that:

"Adam Smith often used musical and synchronous figures of speech to convey
the notion of sympathy, as when our sentiments “keep time together.” In this
way Smith explored social cooperation or “harmony.”"

Smith was not alone in the use of this analogy, though. Two other cases immediately come to my mind - Bastiat's Economic Harmonies, and Carey's The Harmony of Interests, both of which remark on the point that interests that at first glance seem to conflict actually progress in harmony and are naturally complementary. I seem to remember this sort of language being applied to republican political philosophy in Drew McCoy's The Elusive Republic as well. Liberalism and republicanism are dispositions that have always emphasized the inherent harmony of society, despite the superficial chaos. The harmony is that much more impressive when we relaize that there is order to that chaos.

Does anyone else have any other examples of thinking about human society or political economy in terms of "harmony"? I'm sure there are many.