Talking Past Each Other: A Prediction for the Near Future

Quick - don't scroll down and read anything in this post. Answer this question in your head: did government spending make up a large or small share of GDP growth in the impressive 5.9% annualized growth rate for the fourth quarter of 2009?

Did you say it made up a large share? Sure - that seems to make sense. We have a liberal in office now. Keynes is cool again (yes he is - I don't care what you say about my extracurricular interests!). We have hundreds of billions in that stimulus package and over a trillion dollars in deficits. Any growth we see is because the government is running the printing presses 24/7 and kicking the can down the road for dealing with our real problems, right?

Wrong. Government spending growth in the fourth quarter was basically zero - actually slightly negative. What's going on here? What's happened is that Americans have systematically forgotten that they live in a federal republic, where a great deal of the work of government is done at the state and local government. While the federal government has been hanging lose, state governments have been tightening up. Keynes may be popular again, but Keynesian policy is for all intents and purposes non-existent. Any attempt at Keynesian fiscal policy is being neutralized by the state governments. That doesn't mean the federal stimulus is bad. We'd be in much, much worse shape without the stimulus. But taken as a whole, the American polity isn't doing any public stimulus right now.

Does that sound weird to you? That's exactly what I'm worried about. When people start arguing over whether fiscal stimulus works or not, and about how macroeconomic policy should be done in the future they're going to point to the easiest number - the federal deficit - and declare that it is largely impotent, not even considering that the federal government is not the only game in town. And in the rare instances that state budgets are discussed, the catchy phrase "fifty Herbert Hoovers" will inevitably be brought up, and inevitably the argument will get redirected toward "well Hoover was actually a closet Keynesian - Amity Shlaes told me so", etc. etc. - and it will turn into a revisionist history debate about Hoover and not the issue at hand: namely, that there is effectively no fiscal policy going on in the United States right now.

Stephen Gordon (HT: Mark Thoma) provides this comparison of the breakdown of Canadian GDP growth and American GDP growth for the fourth quarter of 2009:

As you can see in the second blue bar from the right, most of our GDP growth in the fourth quarter came from restocking inventories. In other words, in early 2009 when businesses were scared of the future, they just sold off their inventories instead of actually producing new goods. That's why output dropped then and so many people were thrown out of work (you don't need that many employees just to sell off inventory). Pretty soon, the inventories are spend down and need to be replenished - that's what happened in the fourth quarter. This is still very good - it still puts people to work - but as Gordon notes, it's a very unbalanced way to grow. What happens in mid 2010 when the inventories are restocked but demand is still tepid? A double-dip recession, that's what. There has been a lot of talk recently about a double-dip recession and this is why (this and the fact that the fiscal stimulus that does exist is going to begin to peter out then).

A stronger stimulus could balance this growth and generate a virtuous cycle of self-sustaining growth. If we had some infrastructure or public works projects, money would go into the hands of workers (consumption) and business (investment) for actual purchases that they have preferences for and place value on. Right now that's not what we're spending on - the people doing the spending right now are store owners who are replenishing their shelves, not business making new machines or households buying new goods. Just store owners stocking empty shelves. That's fine, but nobody seems to be buying anything off those shelves, so what happens next?

At the heart of all of this is the states - specifically the states' ridiculous proclivity for balanced budgets and aversion to borrowing. This is literally a nineteenth century budgeting outlook transposed onto fifty sovereign governments that make up the early 21st century's sole superpower. It's absolutely shameful. What's even more shameful is that I think we're largely oblivious to this. We're going to be judging how macroeconomic policy fared without even giving the states a second thought, and all these budget troubles at the state level are only going to convince state governments to be more tight-fisted in the future. What they should be doing is recognizing that there is no point in having a AAA bond rating if you impose borrowing limits on yourself. The market will impose that limit on you. If the market is starting to get nervous about the soundness of your finances, your bond rating will slip, the interest you'll have to pay will increase, or both. Far from taking a responsible, market oriented approach, state governments are willfully ignoring market signals, specifically credit market signals.

This is my prediction for the near future: that we are going to be talking past each other very, very soon. Soon the inventory cycle will run its course and growth will stall again. Unemployment might even increase again, and people are going to be blaming the Obama administration for their big-spending ways. State governors are going to make stump speeches in the fall for Republican candidates declaring how they tightened their belts through all this while Washington acted irresponsibly, so the Democrats must go. They're not even going to realize that macroeconomic fiscal stimulus was virtually non-existent this year, precisely because those state governments tightened their belts. Keynesian fiscal policy will not have been proven a failure - although many people will claim that it was. Yet again, Keynesian fiscal policy will not have been proven a failure because it will never have been tried.

History of Economic Thought - New Books!

A recent post on the history of economic thought has generated a lot of comments, so I feel that our readership won't begrudge my excited sharing of a new book acquisition along the same lines, a brief plug for the store, and a few more links.

Yesterday I picked up a first edition of A.C. Pigou's "Industrial Fluctuations" (1926) - his massive tome on the business cycle. It sells on Amazon for $180, I got it in very good shape for $40. Not too shabby! Pigou was a contemporary of Keynes at Cambridge, and unfortunately was treated very ignobly by Keynes in the General Theory, although they were close personal friends. Pigou is sort of a New Keynesian in a lot of ways - his views on recessions are hardly "Classical" or non-chalant, but he places a great deal more emphasis on frictions and cyclical factors. I think this is perfectly consistent with the Keynesian system, and the appropriate emphasis really depends on the economic environment. Keynes presented a new way at looking at savings and investment decisions that introduced the possibility of a stable state of underemployment. The Keynesian system didn't have to tend towards underemployment, but it certainly could. As far as an over-arching framework goes, the Keynesian system was and is far superior to an assumption that markets always and everywhere clear. However - markets still have tendancies to clear, even in a Keynesian system - and there's no reason why frictions and cyclical factors can't contribute to downturns in such an environment. I'm with Keynes on the prospect of underemployment, but still think Pigou (and others - his modern incarnation, Greg Mankiw, for example) have a lot of important things to say about what produces any given recession.

I also purchased a second edition of Sir John Hicks's "Value and Capital" (1939) for only $9. Hicks is famous for providing a formal model for the Keynesian system. Others have modified and adjusted it over the years, but he set the ball rolling. Hicks also worked a lot with the idea of a liquidity trap - something that Keynes briefly alluded to in the General Theory, but never spent that much time on. I don't expect to read Pigou's book all the way through any time soon - but I think I might try and read "Value and Capital" in the very near future.

I got both of these books at Second Story Books in Dupont Circle in Washington, D.C.. It's a really great used bookstore, and I recommend that anyone in the area drop by. Usually I just go there for history books - they have a great European and American history section. Good history of science, and a good military section. Their section on economics is very sparse, and they do the Barnes and Noble thing, where personal finance and business books get mixed in with economics books. Recently, however, that section has doubled in size and I found these two great books. I don't know if they just acquired someone's collection or if they're responding to a strong demand for economics books - but the economics section might be getting more respectable. Anyway - make sure you drop by.

Finally, I don't know why he's had this recent interest, but Brad DeLong has been churning out posts on the history of economic thought recently. Here are some recent ones:

- J.S. Mill on inflation targeting, anticipating Michael Mussa's position.

- J.S. Mill on why bad ideas won't die (take, for example, a recent commenter's embrace of Jean-Baptiste Say). This is a great line from Mill: "a perpetual principle of resucitation in slain absurdity".

- Mill on Say's Law

- Hayek anticipating Eugene Fama (featuring an appearance by Kahn and Robinson)

- Tracing Fama back through Hazlitt, Friedman, Say, Bastiat, and Hawtrey

- And Marx opposing monetary stimulus. One of the many things that Marxists and other deduction based mega-projects like Austrian economics and libertarianism have in common (and yes, they have quite a bit not in common as well, but that's less interesting to highlight and think about).

Technological Singularities and Measuring Value

This week I came across this fascinating presentation by Robin Hanson, of the George Mason University Economics Department, on technological singularities and the possibility of experiencing another one by mid-century. He specifically considers the role of nanotech and AI in this singularity.

Hanson highlights four previous technological singularities: (1.) the evolution of brains, (2.) hunting, (3.) farming, and (4.) the industrial revolution. He charts out how estimated global production per capita grew tremendously at each stage, and then plateaued as the technological innovation fully defused and the prospect of exponential growth moderated. Hanson argues that it's possible we might go through another technological singularity - a prospect that seems all the more reasonable when past singularities are charted out on a log-time scale. As readers of this blog know, I'm quite optimistic about our development as a species and the break-throughs we'll have in the far (and not so far) future. Nevertheless, I do have one major reservation about Hanson's presentation, and it primarily has to do with his data.

The obvious criticism is that we only really have good data on global production after the last singularity - the industrial revolution - and for quite a bit of that period, the data is shady at best. It's not until the last half of the twentieth century that you have good data even on the developed world. Now, we have convincing proxies for earlier periods, and the task is made easier by the fact that they simply didn't produce as much back then (agricultural production accounts for the bulk of it, and knowing something about cultivation methods makes that relatively easy to estimate). But the criticism still stands.

But that's not my primary criticism. My primary criticism isn't methodological, it's conceptual. The biggest blind spot in Hanson's data work is that the way we conceive of value production now is not the way it has always been conceived. If we only count commodities that we consider commodities now, we're going to necessarily make earlier periods look more impoverished than they actually were. Value is subjective. We can conclusively demonstrate that the market economy made humanity more materially better off. And that is a very good thing. What's much harder to demonstrate is that it created more value. My guess is it did create more value, but probably less than Hanson's presentation might suggest. I'll let a selection from Keynes's General Theory explain what I mean:

"Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the "financial" burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to "enrich" an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time" (p. 131).

We see the period between the advent of farming and the advent of the industrial revolution as being an impoverished period. But what we really mean is that they were materially impoverished. In many ways, past ages may have been wealthier than us, in the sense that they produced more value, utility, or welfare per capita because of the way that their values were structured. We live in a world of diminishing returns. Some of these diminishing returns are technological and inescapable in any age: you will have to put in increased effort to produce more and more crops on a given plot of land, holding all else constant, no matter what age you live in. But some of these diminishing returns are psychological and self-imposed.

My wife is leaving for Brussels today for a conference. While she's there she's going to be visiting a few palaces and cathedrals. Tourist attractions like these bring in millions every year. How often are such attractions built today? When we build buildings today how often do we think of them as monuments for the ages? How often do we weigh the benefits that they will produce centuries into the future against the costs of building them now? Rarely. Occasionally, but rarely. That strikes me as a necessarily impoverishing attitude. Granted, not everyone in ancient Egypt and Rome made their investment decisions based on the benefits that would accrue to future epochs. Material poverty was so desperate that such decision making was reserved for an elite few: an elite that often relied on slave labor and confiscatory taxation to build their monuments. I'm not yearning for some idyllic past that never existed. But what I am doing is pointing out that the time horizon that we use to think about what is valuable and the sheer imagination that we bring to the question of what is valuable has been, in many ways, severely curtailed, both as a result of what Marx called the "fetishization of commodities", and because of our secularization, which removed one of the primary motivations for building monuments to the ages (the prospect of eternal life). It doesn't mean that the modern market society is bad. I'm a big fan.

What it means is that it will probably have to change if we want to maintain lasting value. At some point, as a species, we need to build for the ages again. And that doesn't mean some wealthy philanthropist looking a century into the future. That means a visionary looking a thousand years into the future, and dreaming about what human society will look like then, and investing in that.

I've gone far afield from Robin Hanson. I think his talk is very good. It lays out the technical interpretation of technological change from an economist's perspective, which I enjoyed. And I appreciate his optimism about the future. I think he has a very characteristically modern understanding of value creation (at least in this presentation) which could probably be augmented. But all in all, it's an excellent piece.

Some History of Economic Thought Links

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.

The Rev. Thomas Robert Malthus

Collection of Posts on Socialism

I've seen several posts and sources - both new and old - on socialism recently which I thought were worth sharing collectively. What I like about these pieces is that they move beyond the Marxist-Leninist-Soviet socialism that a lot of Americans instinctively think of when they hear the word.

First is Bryan Caplan at Econlog on the Baader-Meinhoff gang, a decidedly Marxist-Leninist group operating in West Germany in the last quarter of the 20th century.

I also enjoyed Matthew Yglesias's discussion of George Orwell's socialism - an anti-totalitarian, anti-Leninist brand of socialism associated with the New Left in the post-war period. Yglesias's most salient point is the deep misunderstanding of Orwell's socialism by American conservatives.

And of course, no consideration of Orwell is complete without Christopher Hitchens, who discusses 1984 here and here. Listen to the very end - at the end he has an interesting discussion about which dystopian future is more likely: that of 1984 or Brave New World.

One of my favorite discussions of socialism is that provided in Keynes's The End of Laissez-Faire, available in it's entirety here. I like to think of this short book as a genealogy of liberalism. It does a very good job outlining how classical liberalism split into an individualistic and a communitarian branch. He goes into great detail on pre-Marxian socialism, and the sense in which modern (at the time of the writing, in 1926) laissez-faire and modern Marxist socialism in many ways bastardized the liberal tradition from which they both emerged.

Brad DeLong has a quick, interesting discussion of what about Marx is still important for modern, neoclassical economists to acknoweldge and respect.

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Finally, I recommend this discussion between Bryan Magee and Herbert Marcuse, about The Frankfurt School and Marcuse's socialism (Part 1, Part 2, Part 3, Part 4, and Part 5). Marcuse is one of the foremost socialist critics of Marxism. If "anti-Marxist socialism" sounds like an oxymoron to you, I suggest you listen to this series.

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For probably obvious reasons, I have a great deal more respect for the New Left and the anti-Marxist socialists than I do for Marxists, but I still have to offer this to you as well.

Big Numbers, Whaling, and Atmospheric Carbon

Whales in the atmosphere?!?!?

We have a hard time conceptualizing big numbers. Often, we simply have no frame of reference. A recent example has been a mind-boggling multi-trillion dollar federal deficit. I can't even really get my head around that, even though I hear these trillions and hundreds of billions quoted at work all the time. You'd think we were headed towards disaster, but actually it's not the current trillion dollar deficits that worry budget experts at all. Recently, a new $15 billion stimulus bill was passed. Did you have sticker-shock when you read about that? Well don't - the bill was less than 2% of last year's stimulus. That's a rounding error in Washington. These gigantic numbers can be an obstacle to an informed public precisely because we find it so hard to process what they mean.

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A good example from BBC News this morning is a report that over the last century, whaling may have released 100 million tons of carbon (from their rotting bodies and burned blubber) into the atmosphere. Scandalous isn't it? Not only can we have moral outrage at the inhumanity of killing whales - we can now be mad about the role of whalers in climate change! Well I had no idea how much 100 million tons of carbon was, so I did a little sleuthing.

First, let's annualize this. 100 million tons over a century of whaling is a million tons of carbon released a year. Apparently, in 2006, humans released 8.4 gigatons of carbon into the atmosphere. Apparently, the Earth can successfully recycle three of those gigatons, leaving 5.4 gigatons released by humans into the atmosphere every year (or at least that much from 2006 on) that stays in the atmosphere. So:

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Whaling contributes: 1,000,000 tons a year

All human activity contributes an additional: 5,400,000,000 tons a year

So whaling increases net additional human carbon emissions by 0.0185%. And that's probably a very high estimate for what is emitted by whaling today. I imagine most of the million tons of carbon from whaling in the last century was released much earlier, when we relied more heavily on whale oil and whaling methods were more crude.

I'm not a climate change skeptic - I think it's a very big problem. I just think it's interesting what makes the front page of the newspaper sometimes, and how easily we gloss over big numbers without really trying to understand how big they are. In fact, far from being callous about climate change by minimizing this whaling statistic, I'm actually trying to make a point that while this is an interesting study to report, BBC would probably better serve the public by detailing the source of the other 99.9815% of carbon that humans add to the atmosphere each year.

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*Note - I googled all these numbers very quickly. If there's anything inaccurate in what I've written I'd be really interested in hearing about it!

Stockman and the Austrians

And since the Austrian School has come up a couple times recently, I thought I'd mention something intriguing that I stumbled across:

David Stockman, Reagan OMB director, supply-side high priest, and all around budget badass recently came out of the closet...

...the Austrian school closet, that is. He's praising what he calls "the Austrian masters" and getting on board with the Austrian views about money and fiat currency. Thankfully, Austrian school economists haven't played a major role in public administration since Joseph Schumpeter ran the central bank of Austria in the 1920s (and Schumpeter isn't nearly as off the wall as the rest of them, anyway). I suppose the other close-call was the well known Ayn-Randian, Alan Greenspan. But he was effectively excommunicated from that odd little cult long go.

Anyway, I just thought that was interesting. My pile of books I want to read is already massive, and now I think I need to add Stockman's The Triumph of Politics to it. I should also read this. It's a famous expose of Stockman from a 1981 issue of The Atlantic. Stockman was, in his words, "taken to the woodshed" for the his loose lips with the author of the article. Interesting stuff. Depressions do strange things when it comes to ideological realignment and soul searching.

Trying to Get in Touch with My Inner Keynes

It's no secret that I'm a Keynesian. I feel like I have eclectic interests, an open mind, and great respect for many non-Keynesian thinkers, but I am decidedly in that camp and have only found myself more firmly under the sway of the old Cambridge don since the beginning of the Great Recession. Moreover, I personally feel like I was ahead of the curve. I first read his magnum opus, The General Theory of Employment, Interest, and Money (1936) in 2006 - way before it was cool. It was this reading that confirmed my earlier suspicions about my own affiliation.

But lately I've been doing quite a bit of introspection on the nature of my inner Keynes, namely: am I a Post-Keynesian or a New-Keynesian? Specifically, do I think that nominal wage cuts are effective at fighting depressionary conditions? It's the sort of school of thought sub-sub-classification internecine struggle that seems somewhat appropriate to this blog (particularly now that I know we have at least a couple economics-inclined readers). However, like most who engage in these internecine struggles, I'm personally convinced of the importance of the question. Millions of livelihoods and perhaps trillions of dollars are on the line, after all! Why haven't I decided!

Well, because it's a very tough question. Standard theory says that wage cuts should raise the employment level, and some very smart people have highlighted rigid or sub-optimally high wages as the source of involuntary unemployment. That's the New Keynesian position, and if pressed that's what I'd call myself. It's a safe and respectable default. The problem with that is, standard theory often breaks down in unstandard times - and we're living through very unstandard times in the economy right now. Markets are gumming up and failing to function normally all over the place. It's important to recognize that it's not just a hard period - things are not really working how they're supposed to work. The government borrows around a tenth of GDP and interest rates on short-term government debt are bumping around at 0%?!?!? The money supply shoots through the roof and we're seeing exceptionally low inflation?!?!? For an economist, this is the equivalent of a Salvador Dali painting. But we've been here before, and one of the most prescient thinkers on these problems the last time we were here was John Maynard Keynes. And Keynes (1936) said that nominal wage cuts in depressions would worsen depression.

So what motivated this blog post? What do I have to share with you besides my own soul-searching? Well, there has been quite a bit of chatter on other blogs over this very question that I wanted to share. Because some of the recent posts reference back to it, we can start with a year-old op-ed by Paul Krugman, arguing the classic Keynes position on the issue. Krugman is interesting - he's always been in the New-Keynesian camp, but he's been sounding a lot like a Post-Keynesian lately. Bryan Caplan responded at that time. A recent heated exchange between Brad DeLong (New Keynesian) and Steve Horwitz (Austrian School) over a somewhat different (but related) question turned up this comment by DeLong on David Henderson's (ummm... I guess Austrian School) blog. This is when the real nominal wage discussion begins.

Henderson responds to DeLong's comment. Menzie Chinn (I suppose also a New Keynesian) responds to Henderson's head scratcher of an attempt at ad hoc empiricism. Caplan responds to Henderson and DeLong. And as usual, Scott Sumner makes me wonder if I have everything wrong and should just become an unrepentant Monetarist. Then again, Scott Sumner is sort of out in left field... by which I mean the parking lot. I don't mean that as an insult at all - he just has a very different perspective on things from most people.

So there's a bunch of links to wade through - and my guess is there will be more today. The other reason why I mention this is because the back-and-forth mentions the last time nominal wage cuts did decidedly lead us out of a recession: the 1920-21 Depression, to be exact. I'm currently about half to two thirds of the way through a paper critiquing the Austrian School interpretation of the 1920-21 Depression, so that caught my eye in a big way. Throughout the last year, several Austrians and libertarians have argued that the quick exit from the 1920-21 Depression vindicates the Austrian school and proves that active fiscal and monetary policy only makes depressions worse. I point out that the 1920-21 Depression was very unusual. It was a manufactured depression - the Federal Reserve created it. Moreover, they justified their quite deliberate actions with arguments that Keynes himself put forward in 1923. Depressionary conditions that necessitate a Keynesian response (liquidity trap, low interest rates, high savings, depressed aggregate demand) were not in force through 1920-21, so a Keynesian response was entirely unmerited. And the coverage the 1920-21 in the recent blog debate only drives home that point (which is nice... makes me more confident in my thesis) - if Keynesian depression conditions don't hold, then we shouldn't be surprised that wage cuts got us out of depression in that case. If Keynesian depression conditions did hold, then successful wage cuts would lead you to question Keynesian prescriptions. So anyway, as a result of this work I'm officially obsesssed with the 1920s now. It was a fascinating time. Perhaps look for more on that in the future.

By the way - I found a piece by F.A. Hayek on the 1920-21 depression and its aftermath that he wrote in 1925. If anyone knows of anything that Ludwig von Mises wrote about the post-war downturn, I would be very, very interested in hearing about it. I don't know von Mises very well.

Edmund Phelps Interview

Edmund Phelps, who is probably one of my favorite living economists, was recently interviewed on EconTalk by George Mason economist Russ Roberts. I admire Phelps because he really saved Keynes from the Keynesians when he provided an expectations-based explanation for the stagflation of the 1970s. Phelps's work on expectations and wage determination grew out of Keynes's very strong emphasis on uncertainty and expectations - an emphasis which was downplayed by many American Keynesians in the '50s and '60s. In this interview, Phelps mentions other economists - including Friedrich Hayek and Frank Knight - who also influenced his views on uncertainty and expectations. That's one of the most rewarding parts of this interview in particular: that it reveals the considerable common ground shared between the Austrian School and Keynes on these questions. It's unfortunate that the interviewer (Roberts) tries to highlight this as a Hayekian side of Phelps, but Phelps himself squarely acknowledges the influence of Keynes as well. Another important critique that Phelps makes of American Keynesians is that Keynesian economics doesn't not require a bloated public sector.

Many other interesting topics are covered in this interview. Two I would note are (1.) Phelps's anticipation of New Keynesian economics with his model of efficiency wages, and (2.) at the end of the interview he discusses recent work he has been doing on "the good life".

It was interesting to listen to this, having recently finished Keynes's Tract on Monetary Reform (1923) myself. As I was reading the Tract, I couldn't help but think "if Keynesians in the '50s and '60s had spent as much time reading this as they did reading Keynes's General Theory, Phelps probably wouldn't have had to make the innovations that he did in the '60s and '70s. And then, lo and behold, a week after finishing the book EconTalk interviews Phelps himself.

One other thing I'd like to point out about Phelps is that he is a strong proponent of job subsidies, something I have also taken great interest in recently. The Senate recently produced a new (smaller) stimulus bill that includes a small job subsidy that is roughly along the lines that Phelps suggests.

I should also note, for those of you that aren't aware, that Phelps was the recipient of 2006 Nobel Prize in Economics. His Nobel lecture can be found here.

Evolution and Economics

I wanted to share a series of three posts on evolution and economics, pointed out to me by a former professor.

It introduces evolutionary and behavioral economics, and discusses the resistance to these approaches. It also discusses the early behavioral foundations of Keynesian economics, and the continuation of this behavioral Keynesianism through guys like George Akerlof. It also discusses the reformalization of economics thanks to the New Classical school, and Milton Friedman's work on methodology.