Category: Equitablog

Live at Project Syndicate: Uncertainty at the Federal Reserve

Posted on by Brad DeLong

Live at Project Syndicate: Uncertainty at the Federal Reserve: I find myself increasingly believing that the side of the scale that says the Federal Reserve is in the process of losing its credibility is the heavier. And this past week added another weight to that side of the scale. Over at Bloomberg View the very sharp Narayana Kocherlakota, former President of the Federal Reserve Bank of Minneapolis, writes:

Narayana Kocherlakota: Ending an Unhealthy Obsession With the Fed: “The obsession with the Fed…

…Outsiders are seeking clues to the central bank’s broader goals…. The Fed’s stated aim… [is] inflation at 2 percent… but its actions send a different signal… [they] removed stimulus… even as inflation and inflation expectations have slipped downward… [their] economic projections… suggest that they don’t see getting inflation back up to target quickly as a primary determinant of monetary policy…. The Fed is balancing the pursuit of its inflation target with other objectives… [that they fear] low interest rates are causing risks and distortions… [that they] don’t want the unemployment rate to fall to an unsustainably low level… [that] raising rates at every meeting… could be too much of a shock…. It’s hard to know which objectives will dominate policy in the longer run. Hence, markets are parsing the June decision for whatever information they can get. This kind of uncertainty… is not healthy…

Narayana is correct. But I think he leaves unstated a good deal of the problem, for we face more than simply uncertainty about Federal Reserve policy objectives. Read MOAR at Project Syndicate:

Must-Read: John Quiggin: Look What They’ve Done to My Song, Ma

Posted on by Brad DeLong

Must-Read: John Quiggin: Look what they’ve done to my song, Ma: “My discussion of intellectual property inevitably raised questions about my argument that property rights are not natural rights…

…The ‘moral rights’ of artists over their creative works has been raised as a suggested counterexample. In fact, this example reinforces my original argument…. In France and other European countries, artists have inalienable moral rights over their work… not a property right, but a constraint on property rights…. [If] recognised after the fact, they constitute a taking from the purchaser…. [If] recognised when artists sell rights… they (like any restriction on alienation of property) represent a constraint on the property rights of the artist…. Property rights and (perceived/socially accepted) natural rights… coincide in some ways and conflict in others… both [are] associated with the general feeling of rightful possession, so that a system of property rights is more stable when it coincides with natural rights. On the other hand, natural rights are mostly perceived as inalienable and indivisible…

Manu Saadia’s Trekonomics Is Out!

Posted on by Brad DeLong
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“Live Long and Prosper” Blogging…: Manu Saadia: Trekonomics http://amzn.to/20ZqMdG (San Francisco: Piper Text: 941758754): Forward by J. Bradford DeLong:

‘Live long and prosper.’

‘The needs of the many outweigh the needs of the few, or the one.’

‘Fascinating.’

‘Make it so.’

‘Logic is the beginning of wisdom, not the end.’

‘I’m a doctor, not a bricklayer.’

‘Highly illogical.’

‘You can stop it!’ ‘Stop it? I’m counting on it!’

Over the past century Star Trek has woven itself into our socio-cultural DNA. It provides a set of cultural reference points to powerful ideas, striking ideas, beneficial ideas that help us here in our civilization think better–even those of us who are economists.

Why should the imaginary dreams of science fiction help us think better? Let me get at this by telling you some very short stories–some true, some false. True: Back in 1759 when the man who was to be the first economist, young Adam Smith, Scottish moral philosopher on the make, told his readers something false: of:

a stranger to human nature [seeing] the indifference of men about the misery of their inferiors… [concludes that] pain must be more agonizing, and the convulsions of death more terrible to persons of higher rank, than to those of meaner stations…

You see what he did there?

There is no–not that we know of–such alien stranger.

Smith is telling us a very short science-fiction story.

Why? Because we love to tell one another false stories–to incessantly gossip about our imaginary friends. It is, like saving 15% or more on car insurance, what we do. If an alien intellect, vast and cool and unsympathetic (or vast and warm and sympathetic), were to scrutinize us from afar it would inevitably conclude that telling each other false stories is a major part of what we are, and it would wonder why we communicate–or miscommunicate–in this way.

You see what I did there?

The next Sigmund Freud–not an individual but a social psychologist–will say that our fictions are, collectively, the dream-work of the reasoning by the organism that is the anthology intelligence that is humanity. Everyone gossips about their imaginary friends. And we dream these dreams to amuse ourselves, but also so that we will be more sane when we awake.

The Prime Directive of ‘Star Trek: TOS’ is primarily a way to process America’s 1960s misadventure in Vietnam. Would that more generals and chickenhawks dreamed dreams that taught them of the limits of foresight and calculation, the surprising nature of war, and the unlikelihood of success if you start by breaking things! I first recognized that ‘Star Trek’ was a very different kind of show back in the 1960s when, at the end of the episode ‘Arena’, Kirk neither kills nor civilizes the Gorn, but lets him go to make his own destiny.

Gene Roddenberry mostly wanted to find a way to get people to pay him to make up stories, so that we wouldn’t have to take a job that required a lot of heavy lifting. But he also wanted to tell particular stories. The stories he wanted to tell were those that would be the dreamwork for a better future:

  • He wanted to tell stories of a progressive humanity.
  • He wanted to tell stories about people in a better future in which governmental institutions were smart enough to stay out of Vietnam and people weren’t obsessed with leaky roofs and food shortages.
  • He wanted to tell stories in which racial prejudice was as silly and stupid as it, in fact, is.
  • He wanted to tell stories in which it would be normal for a woman to be if not #1 at least #2 as first officer of a starship.
  • He wanted to tell stories in which everyone–even the Red Shirts–was an officer, a trained and well-educated professional treated with dignity and respect by their peers and superiors.

And Gene Roddenberry’s successors as showrunners, writers, actors, set designers, and all the rest took on the same project: do the dreamwork of a better future. North Atlantic civilization bobbled the historical opportunity that was the collapse of the Soviet Empire. Star Trek VI: The Undiscovered Country and Deep Space 9 point to better directions. Gene Roddenberry put into Star Trek DNA making it, in large part, a collective dreaming about a better future, and not just a western or a medieval romance with spectacular elements in the form of whooshing spaceships and exploding planets bolted onto it.

But ‘economics’?

Today in our restricted bubble the public health problems related to food are no longer predominantly problems of malnutrition and calorie-scarcity but of overabundance: dealing with salt, triglycerides, and carbohydrate overload. This is a new thing for humanity. 400 years ago, in almost all human societies, if you weren’t rich you were malnourished: not getting the nutrients for your immune system to function well, or the calories to reliably ovulate, probably losing a tooth with every baby. 400 years ago, in almost all human societies, if you weren’t rich you were short. The orphans sent to sea by the charity that was the Marine Society were seven inches shorter than the aristocrats’ sons sent to Sandhurst to become army officers. And it is not just in food that those of us in the bubble have abundance: we look around and want, not more stuff, but rather less stuff that is the right particular stuff for us. The dreams that are Roddenberry’s ‘Star Trek’ are part of thinking through what it would be like to have a society of abundance, of logic and reason, and of inclusion–one in which the Gorn might really be the good guy from his perspective, and in which, as Ayelborne forecasts in ‘Errand of Mercy’: ‘You and the Klingons will become fast friends. You will work together…’

For those of us who are fans, it has been and is a wild nearly fifty-year ride. And even those of us who are dedicated fans need, by now, a road map.

So with enthusiasm and admiration, I present to you Manu Saadia, and Trekonomics.

Must-Reads: May 31, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Michael Woodford: Quantitative Easing and Financial Stability

Posted on by Brad DeLong

Must-Read: The extremely sharp Michael Woodford makes the obvious point about quantitative easing and financial stability: by increasing the supply and thus reducing the premium on safe liquid assets, it should–if demand and supply curves slope the normal way–not increase but reduce the risks of the banking sector.

It is very, very nice indeed to see Mike doing the work to demonstrate that I was not stupid when I made this argument in partial equilibrium:

J. Bradford DeLong (January 17, 2014): “Beer Goggles”, Forward Guidance, Quantitative Easing, and the Risks from Expansionary Monetary Policy: When the Federal Reserve undertakes quantitative easing, it enters the market and takes some risk off the table, buying up some of the risky assets issued by the U.S. government and its tame mortgage GSEs and selling safe assets in exchange. The demand curve for risk-bearing capacity seen by the private market thus shifts inward, to the left: a bunch of risky Treasuries and GSEs are no longer out there, as the government is no longer in the business of soaking-up as much of the private-sector’s risk-bearing capacity:

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And this leftward shift in the net demand to the rest of the market for risk-bearing capacity causes the price of risk to fall, and the quantity of risk-bearing capacity supplied to fall as well. Yes, financial intermediaries that had held Treasuries and thus carried duration risk take some of the cash they received by selling their risky long-term Treasuries to the Fed and go out and buy other risky stuff. But the net effect of quantitative easing is to leave investors and financial intermediaries holding less risky portfolios because they are supplying less risk-bearing capacity…

It is reassuring that I was not stupid–that there is nothing important in general equilibrium that I had missed:

Michael Woodford: Quantitative Easing and Financial Stability: “Conventional interest-rate policy, increases in the central bank’s supply of safe (monetary) liabilities, and macroprudential policy…

…are logically independent dimensions of variation in policy… [that] jointly determine financial conditions, aggregate demand, and the severity of the risks associated with a funding crisis in the banking sector…. If one thinks that the [risk] premia that exist when market pricing is not “distorted” by the central bank’s intervention provide an important signal of the degree of risk that exists in the marketplace, one might fear that central-bank actions that suppress this signal–not by actually reducing the underlying risks, but only by preventing them from being reflected so fully in market prices–run the danger of distorting perceptions of risk in a way that will encourage excessive risk-taking. The present paper… argues… that the concerns just raised are of little merit….

Quantitative easing policies can indeed effectively relax financial conditions…. Risks to financial stability are an appropriate concern of monetary policy deliberations…. Nonetheless… quantitative easing policies should not increase risks to financial stability, and should instead tend to reduce them…. Investors are attracted to the short-term safe liabilities created by banks or other financial intermediaries because assets with a value that is completely certain are more widely accepted as a means of payment. If an insufficient quantity of such safe assets are supplied by the government (through means that we discuss further below), investors will pay a “money premium” for privately-issued short-term safe instruments with this feature, as documented by Greenwood et al. (2010), Krishnamurthy and Vissing-Jorgensen (2012), and Carlson et al. (2014). This provides banks with an incentive to obtain a larger fraction of their financing in this way… choose an excessive amount of this kind of financing… because each individual bank fails to internalize the effects of their collective financing decisions on the degree to which asset prices will be depressed in the event of a “fire sale.” This gives rise to a pecuniary externality, as a result of which excessive risk is taken in equilibrium (Lorenzoni, 2008; Jeanne and Korinek, 2010; Stein, 2012)….

Cut[ting] short-term nominal interest rates in response to an aggregate demand shortfall can arguably exacerbate this problem, as low market yields on short-term safe instruments will further increase the incentive for private issuance of liabilities of this kind (Adrian and Shin, 2010; Giavazzi and Giovannini, 2012)…. Quantitative easing policies lower the equilibrium real yield on longer-term and risky government liabilities, just as a cut in the central bank’s target for the short-term riskless rate will, and this relaxation of financial conditions has a similar expansionary effect on aggregate demand in both cases. Nonetheless, the consequences for financial stability are not the same…. Conventional monetary policy[‘s] reduction in the riskless rate lowers the equilibrium yield on risky assets… [by] provid[ing] an increased incentive for maturity and liquidity transformation on the part of banks…. In the case of quantitative easing, instead, the equilibrium return on risky assets is reduced… through a reduction rather than an increase in the spread…. The idea that quantitative easing policies, when pursued as an additional means of stimulus when the risk-free rate is at the zero lower bound, should increase risks to financial stability because they are analogous to an expansionary policy that relaxes reserve requirements on private issuers of money-like liabilities is also based on a flawed analogy…. In the model presented here, quantitative easing is effective at the zero lower bound… because an increase in the supply of safe assets… reduces the equilibrium “money premium”… [which reduces] banks’ issuance of short-term safe liabilities… so that financial stability risk should if anything be reduced….

[This] paper develops these points in the context of an explicit intertemporal monetary equilibrium model, in which it is possible to clearly trace the general-equilibrium determinants of risk premia, the way in which they are affected by both interest-rate policy and the central bank’s balance sheet, and the consequences for the endogenous capital structure decisions of banks…

What happened to America’s dynamism?

Posted on by Bridget Ansel
In today’s economy, workers are less likely to move across state lines, Americans are less likely to start new business, and those businesses are less likely to grow quickly.

The United States is a less economically dynamic place than it was decades ago. That may seem like an outrageous statement to make in the era of unicorn startups, increasing revitalization of major cities, and those pesky job-hopping millennials. But the data show that on a number of fronts, the U.S. economy is more ossified. Workers are less likely to move across state lines. Americans are less likely to start new business. And those businesses are less likely to grow quickly. These trends aren’t just minor concerns for the economy. They are likely deeply entangled with the declining rates of productivity growth in the United States. A less dynamic economy is likely to be a less productive economy. If declining dynamism is a symptom of underlying economic problems, then what ails the U.S. economy?

In a piece for The Atlantic, Derek Thompson tries to weave together the evidence on what’s causing these trends. Dynamism presents itself in a number of ways in the economy, so Thompson’s piece focuses on two specific aspects. First, Americans are far less likely to move around the country than they were before. Even after the closing of the frontier, Americans moved from state to state quite a bit. But that trend has been on the decline since the 1980s. Thompson runs through a number of potential reasons for the decline in geographic mobility—the Great Recession at the end of the last decade, regional-specific trends, technology—and finds them all wanting. What he hones in on is the increase in housing costs in high-productivity cities.

Thompson points to research that shows expensive housing in metropolitan areas with high productivity is keeping middle and lower-income workers out of those areas. To borrow the title of a book with a similar argument, our most productive cities have become gated cities. These few cities, among them San Francisco, New York, Boston, account for the vast majority of venture capital funding. Thompson argues that restricting access to these entrepreneurial cities is pushing down business start-up rates as fewer people have access to these areas.

He may be onto something, yet Thompson’s argument about this specific aspect of dynamism depends on the direction of geographic mobility and not necessarily on its level. Some long-distance moves might not happen because the higher housing prices reduces a worker’s disposable income, but there’s evidence that most moves are over very short distances. Research by economists Raven Molloy and Christopher Smith at the Federal Reserve and Abigail Wozniak at the University of Notre Dame shows that not only are long distance moves on the decline, but so are shorter moves within counties. It’s hard to see how higher housing prices in coastal cities affect those moves.

Instead, Molly, Smith, and Wozniak point to changes in the labor market. Geographic moves are mostly about moves to jobs, as surveys cited by the three economists show. At the same time, they find that job-to-job and geographic changes are highly correlated. There’s some suggestive evidence from their work that the gains from moving jobs is lower than it once was. One interpretation of this finding might be that workers don’t have the skills needed to move to a newer, higher paying firm. But there’s a more convincing argument, laid out by Byron Auguste in his interview with Equitable Growth’s Heather Boushey, that the problems stem from employers looking at the labor market in the wrong way.

This decline in job mobility has serious consequences. In a New York Times story about declining mobility, economist Betsey Stevenson at the University of Michigan points out that in an era of low mobility and job moving, losing your job has a huge effect. “It’s like a game of musical chairs where only half the people get up,” she says. This cruel game of musical chairs could mean more workers are locked out of the labor market and resulting in a less inclusive and productive economy.

 

Must-Read: Matt Levine: People Are Worried About Unicorns

Posted on by Brad DeLong

Must-Read: Matt Levine: People Are Worried About Unicorns: “There was a time when my big question about the Theranos story was…

Jeffrey J Cohen on Twitter If grilling unicorn over long weekend for safety s sake ensure internal temperature reaches 165 degrees b4 eating https t co Cq7ZUJAVrG

…is it a revolutionary company with a great technology that is being unfairly nitpicked, or is it a company whose technology has big serious problems?… Now my big question is… a story of smart well-meaning people who are working on a great idea… who got a bit over their skis, or… darker? It is silly, so late in the game, to fixate on one Theranos detail and say ‘that’s weird,’ but here is a story about Theranos’s relationship with Walgreens, and this is really weird:

While Theranos didn’t provide a device to Hopkins, Walgreens got a prototype, and members of Dr. Rosan’s team set it up in a cubicle. The prototype came with kits to perform esoteric tests that other labs and test makers apparently didn’t offer, producing results such as ‘low’ and ‘high’ rather than numeric values. As a result, Walgreens couldn’t compare results from the Theranos machine to any commercially available tests.

I will leave it as an exercise for the reader to think of an innocent explanation for that…. Here is a unicorn being barbecued in what looks like a medieval manuscript that I will just assume prophesies the coming of Theranos:

And lo, a Unicorne shall come among ye, and ye shall call it by the name Theranos, or in the Old Tongues, Elasmotherium Haimatos. And it shall take your Bloode, but only a lyttle bit of your Bloode, and it shall do strange Magick upon said Bloode, and tell ye many Things. But then it shall come to pass that its Magick was [makes ‘so-so’ hand gesture], and that those Things were mostly not true. And ye shall barbecue that Unicorne.

Must-Read: Alan Shipman: Iceland’s Economy Miracle

Posted on by Brad DeLong

Must-Read: Alan Shipman: Iceland’s Economy Miracle: “The country that suffered proportionally the world’s biggest financial collapse in 2008 is now set to boom again…

…Its overgrown banks were one of the causes of the global financial crisis, Iceland responded to their meltdown… allowed its currency to fall in value… nationalised the big banks… rescuing only the fraction that served the domestic economy. It imposed capital controls… tightened monetary policy… allowed fiscal policy to take the economic and social strain. In particular, public money was used to relieve households of the debt that would otherwise stop any spending recovery….

Until now, critics had one powerful riposte to this improbable ray of Nordic sunshine. They said it was a false dawn…. When the controls lift, the whole fairy-tale escape story will unravel…. Iceland’s currency (the kronur) will plunge as foreign funds flee, never to return. Interest rates will rise even higher to rescue the exchange rate, choking-off investment, without stopping the runaway inflation sparked by imports getting more expensive. The weaker kronur will leave the country struggling to service its remaining foreign debt, despite its recent reduction….

[But] the current account surpluses permitted by the devaluation, and the nationalised bank assets that regained value… have enabled the repayment of so much foreign debt that the rest will be manageable…. It’s a stark contrast to the eurozone and especially Greece, which had to ask its creditors for debt relief that will not begin until 2018. The chances of a kronur crash have diminished because the current account is back in surplus… foreign investors are again being attracted… [by] high interest rates, growth prospects and investment opportunities…. A remote island with a population of 300,000 and unique natural resources could be dismissed as a special case, Iceland’s remarkable renaissance make its remedies a serious challenge to the orthodoxy…

Populist Backlash and Political Economy

Posted on by Brad DeLong

Live from High Above the Former Iron Curtain: The very sharp Dani Rodrik:

Dani Rodrik: The Politics of Anger: “Perhaps the only surprising thing about the populist backlash that has overwhelmed the politics of many advanced democracies…

…is that it has taken so long…. Politicians’ unwillingness to offer remedies for the insecurities and inequalities of our hyper-globalized age… create[s] political space for demagogues with easy solutions… Ross Perot… Patrick Buchanan… Donald Trump, Marine Le Pen, and sundry others…. [In] the first era of globalization… mainstream political actors had to downplay social reform and national identity because they gave priority to international economic ties. The response… [was] fatal…. Socialists and communists chose social reform, while fascists chose national assertion. Both paths led away from globalization to economic closure (and far worse). Today’s backlash most likely will not go quite so far….

Still, the conflicts between a hyper-globalized economy and social cohesion are real, and mainstream political elites ignore them at their peril…. The internationalization of markets for goods, services, and capital drives a wedge between the cosmopolitan, professional, skilled groups that are able to take advantage of it and the rest of society… an identity cleavage, revolving around nationhood, ethnicity, or religion, and an income cleavage, revolving around social class. Populists derive their appeal from one or the other…. You can barely make ends meet? It is the Chinese who have been stealing your jobs. Upset by crime? It is the Mexicans…. Terrorism? Why, Muslims…. Political corruption? What do you expect… [from] big banks?… Establishment politicians are compromised… by their central narrative… [of] helplessness… [which] puts the blame… on technological forces… and globalization… as inexorable…. Mainstream politicians… [must] offer serious solutions…. The New Deal, the welfare state, and controlled globalization (under the Bretton Woods regime)… gave market-oriented societies a new lease on life… not tinkering and minor modification of existing policies that produced these achievements, but radical institutional engineering…

I find it alarming that here we are, more than one a half decades into the twenty-first century, and the wisdom and true knowledge that is state-of-the-art as far as political economy is concerned is still to be found in the writings of John Maynard Keynes and Karl Polanyi…

(1) Keynes taught that rich, free, capitalist societies could not survive without full employment–without giving everyone a useful, dignified, and prosperous economic role in society:

Inflation is unjust and Deflation is inexpedient…. It is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned. The Individualist Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual entrepreneur, presumes a stable measuring-rod of value, and cannot be efficient—perhaps cannot survive—without one. For these grave causes we must free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of… matters… settled by natural causes… the resultant of the separate action of many individuals acting independently, or require a Revolution to change them…

(2) Keynes taught that rich, free, capitalist societies could not survive without promising stability in the rules-of-the-game–that the wealth and income you earned by following the rules would be yours, and not taken away by sinister economic processes you could not understand that did things like, for example, debauch the currency:

The problem of the re-inauguration of the perpetual circle of production and exchange in foreign trade leads me to a necessary digression on the currency situation of Europe. Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens… not only confiscate, but… confiscate arbitrarily…. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution…. The real value of the currency fluctuates wildly from month to month, [and] all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. In the latter stages of [World War I] all the belligerent governments practised, from necessity or incompetence, what a Bolshevist might have done from design…

(3) Keynes taught that proper government policy could attain those two ends–full employment and price stability–with only minor tinkering and adjustment to make sure that the automobile that was the economy actually would start when you turned the key: all that was required was proper monetary policy, with (probably) a somewhat comprehensive socialization of public and private investment:

The foregoing theory is moderately conservative in its implications…. The State will have to exercise a guiding influence on the propensity to consume… through… taxation… fixing the rate of interest, and… other ways…. It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative. But beyond this no obvious case is made out for a system of State Socialism…

(4) Keynes taught that if those conditions were satisfied, the task of guiding economic destinies could be confidently and safely left to a sober bourgeoisie interested in accumulation:

If we have dealt otherwise with the problem of thrift, there is no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively… no more reason to socialise economic life than there was before… no reason to suppose that the existing system seriously misemploys the factors of production which are in use…. Thus I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires…. There will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good.

Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency–the advantages of decentralisation and of the play of self-interest… even greater, perhaps, than the nineteenth century supposed…. Above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.

Whilst, therefore, the enlargement of… government… in… adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it… as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative…

(5) whose efforts would redound to the benefit of all:

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(6) and that there was little need to fear an extravagant plutocracy of aristocratic parasites:

There is, however, a second, much more fundamental inference from our argument which has a bearing on the future of inequalities of wealth; namely, our theory of the rate of interest. The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment.

There can be no doubt that this criterion will lead to a much lower rate of interest than has ruled hitherto; and, so far as one can guess at the schedules of the marginal efficiency of capital corresponding to increasing amounts of capital, the rate of interest is likely to fall steadily, if it should be practicable to maintain conditions of more or less continuous full employment unless, indeed, there is an excessive change in the aggregate propensity to consume (including the State).

I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward…

(7) Rather, instead, in a century or so, the economic problem would be largely solved:

I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not-if we look into the future-the permanent problem of the human race.

Why, you may ask, is this so startling? It is startling because-if, instead of looking into the future, we look into the past-we find that the economic problem, the struggle for subsistence, always has been hitherto the primary, most pressing problem of the human race-not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most primitive forms. Thus we have been expressly evolved by nature-with all our impulses and deepest instincts-for the purpose of solving the economic problem. If the economic problem is solved, mankind will be deprived of its traditional purpose. Will this be a benefit? If one believes at all in the real values of life, the prospect at least opens up the possibility of benefit. Yet I think with dread of the readjustment of the habits and instincts of the ordinary man, bred into him for countless generations, which he may be asked to discard within a few decades…. Thus for the first time since his creation man will be faced with his real, his permanent problem-how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well…. I feel sure that with a little more experience we shall use the new-found bounty of nature quite differently from the way in which the rich use it to-day, and will map out for ourselves a plan of life quite otherwise than theirs….

When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession -as distinguished from the love of money as a means to the enjoyments and realities of life -will be recognised for what it is, a somewhat disgusting morbidity, one of those semicriminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard….

We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.

But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight…

Polanyi’s teaching was less hopeful, less practical, and less visionary–and not quite parallel to Keynes’s. It was that there were three things, land, labor, and finance, that should not be turned into “commodities” and thus subjected to allocation by the laws of the self-regulating market economy. And, Polanyi argued, if they were turned into “commodities” and thus subjected to allocation by the laws of the self-regulating market economy, the result would be disastrous:

Labor is only another name for a human activity which goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanism of banking or state finance…

(1) Finance could not, in Polanyi’s view, be allowed to be the plaything of the self-regulating market for what were essentially Keynesian reasons–the system could not be stable:

The market administration of purchasing power would periodically liquidate business enterprise, for shortages and surfeits of money would prove as disastrous to business as floods and droughts were in primitive society…

And:

Even capitalist business itself had to be sheltered from the unrestricted working of the market mechanism. This should dispose of the suspicion which the very term “man” and “nature” sometimes awaken in sophisticated minds, who tend to denounce all talk about protecting labor and land as the product of antiquated ideas if not as a mere camouflaging of vested interests. Actually, in the case of productive enterprise as in that of man and nature the peril was real and objective.

The need for protection arose on account of the manner in which the supply of money was organized under a market system. Modern central banking, in effect, was essentially a device developed for the purpose of offering protection without which the market would have destroyed its own children, the business enterprises of all kinds…. If profits depend upon prices, then the monetary arrangements upon which prices depend must be vital to the functioning of any system motivated by profits…. If the price level was falling for monetary reasons over a considerable time, business would be in danger of liquidation accompanied by the dissolution of productive organization and massive destruction of capital. Not low prices, but falling prices were the trouble. Hume became the founder of the quantity theory of money with his discovery that business remains unaffected if the amount of money is halved since prices will simply adjust to half their former level. He forgot that business might be destroyed in the process….

(2) Land could not, in Polanyi’s view, be allowed to be the plaything of the self-regulating market for essentially sociological reasons: where people lived determined who they were, and a self-regulating market that told people they could no longer afford to live in the community where they thought they belonged would trigger such a strong sense of communal injustice to spark the chaos of revolution:

Commercialization of the soil was only another name for the liquidation of feudalism which started in Western urban centers as well as in England in the fourteenth century and was concluded some five hundred years later in the course of the European revolutions, when the remnants of villeinage were abolished. To detach man from the soil meant the dissolution of the body economic into its elements so that each element could fit into that part of the system where it was most useful….

Some of this was achieved by individual force and violence, some by revolution from above or below, some by war and conquest, some by legislative action, some by administrative pressure, some by spontaneous small-scale action of private persons over long stretches of time. Whether the dislocation was swiftly healed or whether it caused an open wound in the body social depended primarily on the measures taken to regulate the process….

The inertia of the common law was now deliberately enhanced by statutes expressly passed in order to protect the habitations and occupations of the rural classes against the effects of freedom of contract. A comprehensive effort was launched to ensure some degree of health and salubrity in the housing of the poor, providing them with allotments, giving them a chance to escape from the slums and to breathe the fresh air of nature, the “gentleman’s park.” Wretched Irish tenants and London slum-dwellers were rescued from the grip of the laws of the market by legislative acts designed to protect their habitation against the juggernaut, improvement. On the Continent it was mainly statute law and administrative action that saved the tenant, the peasant, the agricultural laborer from the most violent effects of urbanization. Prussian conservatives such as Rodbertus, whose Junker socialism influenced Marx, were blood brothers to the Tory-Democrats of England…

(3) Labor could not, in Polanyi’s view, be allowed to be the plaything of the self-regulating market for the same essentially psychological reasons for which Keynes condemned inflation: a self-regulating market that told people they could no longer afford to practice the occupations they thought were theirs belonged would trigger such a strong sense of personal injustice–the same injustice Keynes saw as produced by wealth-confiscation-via-inflation–that it, too, would spark the chaos of revolution:

To allow the market mechanism to be the sole director of the fate of human beings… would result in the demolition of society. For the alleged commodity “labor power” cannot be shoved about, used indiscriminately, or even left unused without affecting the human being who happens to be [its] bearer…. In disposing of a man’s labor power the system would, incidentally, dispose of the physical, psychological, and moral entity “man” attached to the tag. Robbed of the protective covering of cultural institutions, human beings would perish from the effects of social exposure [and] social dislocation…

Polanyi calls the fixing of these problems generated by utopian and impractical attempts to turn over all authority to a self-regulating market by the name “socialism”:

Socialism is, essentially, the tendency inherent in an industrial civilization to transcend the self-regulating market by consciously subordinating it to a democratic society. It is the solution natural to industrial workers who see no reason why production should not be regulated directly and why markets should be more than a useful but subordinate trait in a free society. From the point of view of the community as a whole, socialism is merely the continuation of that endeavor to make society a distinctively human relationship of persons…

For both Keynes and Polanyi, social insurance in the form of progressive taxes, a universal basic income, and government provision of public goods plus private necessities would help, but that would not be enough to do the job. Also essential are: first, useful employment and the resulting honorable and dignified role in society; second, justice in the sense that playing by the rules of the economic game calls forth the expected rewards; and, third, communal stability in the sense that should people’s lives be transformed in place, community, and occupation it is by being pulled out of old ruts by brilliant opportunities locating in other places, living in other communities, and practicing other occupations–not being pushed out by regional or sectoral economic collapse, or perhaps by having one’s community transformed too rapidly around one.

There is a pronounced particularistic-cosmopolitan tension here. We economists do not like it at all when the opportunities for upward mobility for those who chose to be born in the wrong country or to the wrong parents are hobbled by restrictions on migration and trade. We economists do not like those who try to mobilize particularistic and nationalistic energies to the service of what look like negative-sum policies. This has been true for a long time. We economists, after all, looked at American labor’s early-1990s opposition to NAFTA’s hoped-for expansion of economic opportunity in NAFTA–the opposition that arose not because people thought NAFTA would be bad but because they thought it would be good for the working class of Mexico–and felt the same disgust then as Dani Rodrik does now when he looks at today’s “Donald Trump, Marine Le Pen, and sundry others…” But Dani Rodrik wisely warns us Rootless Cosmopolites that we dare not come down entirely on the cosmopolitan side. Let me repeat him:

Establishment politicians are compromised… by their central narrative… [of] helplessness… [which] puts the blame… on technological forces… and globalization… as inexorable…. Mainstream politicians… [must] offer serious solutions… not tinkering and minor modification… but radical institutional engineering…

But what engineering? To create what institutions?

  • Patrick Iber and Mike Konczal: Karl Polanyi for President
  • John Maynard Keynes (1919): The Economic Consequences of the Peace
  • John Maynard Keynes (1924): A Tract on Monetary Reform
  • Karl Polanyi: [The Great Transformation
  • Dani Rodrik: The Politics of Anger](https://www.project-syndicate.org/commentary/the-politics-of-anger-by-dani-rodrik-2016-03)

Why No Byzantine Road to Modernity?

Posted on by Brad DeLong
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The extremely-sharp Branko Milanovic asks a very good question that I had never considered before:

Branko Minanovic: Economic Reflections on the Fall of Constantinople: This Sunday, May 29 marks the anniversary of the Fall of Constantinople in 1453…

…Thinking of… what is called (somewhat inaccurately) the Eastern Roman Empire, led me to two, I hope interesting, observations. First, why did the Industrial Revolution not happen in the Eastern Roman Empire?… There are many answers… from… ‘barbarians at the gate’… inability to incorporate lower classes… ‘dead hand’ of a rising military bureaucracy… slavery: cheap labor that provided no incentive for the use of labor-saving machines… [to] those who… thought, like Moses Finley and Karl Polanyi, that Roman institutions did not contain at all the seeds that could have led to capitalist development…. Constantinople become the capital in 330 AD… and that lasted for another 800 to 900 years with no interruption. (That is, if we want to date the end of the Roman Empire in 1204 when Byzantium was conquered by the Crusaders). Wasn’t there enough time to find out if ancient institutions could become capitalistic? Eight or nine centuries seems plenty.

Moreover, what, culturally and institutionally, better place to develop than the Eastern Empire: direct continuator of the larger Roman whole with an educated elite, same institutions, stable currency (solidus, ‘the dollar of the middle ages’), reasonable protection of property rights, people knowledgeable of Greek and Latin and thus able to read everything from Herodotus to Columella’s agricultural treatises without the intermediation of translation, with Roman laws codified and simplified by Justinian. Why did not there develop ‘bourgeois virtue’, ‘inclusive institutions’, Landes’ ‘culture’?  Or does it all have to do with ‘serendipity’ of having coal and expensive labor in one place? Yet despite all of these advantages, no one reading the history of the Eastern Roman Empire would come thinking that there was any chance of it developing in the capitalistic direction. It was as feudalistic as they come…. There is plenty of recent scholarly work on why China failed to become capitalist and start the Industrial Revolution… but it seems to me that equally revealing and rewarding would be to study why the  Eastern Roman Empire, seemingly full of all the necessary prerequisites, failed to do so….

It is a very good question. Why had I never considered it before? I have thought about Hellenistic and classical Greece, medieval India, the long history of China, the Aztecs and the Incas, Rome proper, the Mashriq late in the first millennium, medieval Japan, and the interesting time from 1400-1550 when the Ottoman, Safavid, and Mughal Empires are all on the march with what look like much more effective ways of mobilizing and directing resources than anyone else in the world. But I never thought about Byzantium.

Why not? I think in the back of my mind that I assumed that the Plague of Justinian landed it with a very top-heavy aristocracy that maintained control and was used to exacting much more in the way of resources out of the productive sectors of the economy that they could bear and still grow. And then the empire comes under severe military pressure from both Avars and Sassanids. Tiberius and Maurice hang on–and then with Maurice’s assassination everything goes to hell. From 602 on the empire is always under immense military pressure, and the need to scoop up every possible bezant and to make military mobilization primary precludes any relaxation of taxation or social control that could produce intensive economic growth.

There was a substantial military recovery under the Macedonian Dynasty–perhaps some succession-luck after Basil II the Bulgarian-Killer’s reestablishment of the Danube frontier in the west and conquest of Aleppo in the east could have created breathing-space for economic efflorescence. But, unfortunately, the Normans and the Turks then show up…

So I don’t think you ever get to the second-line question: How to develop governmental institutions that are developmental rather than extractive–to merchants rather than princes, as Andrei Shleifer and I like to put it? The military pressure is overwhelming (and, when it isn’t, inter- and intra-dynasty fratricide is).

And you definitely don’t get to the third line of questions: autocratic rule by emperors under immense land-focused military pressure is enough. And, unlike sea warfare (cf.: Athens, Venice, Genoa, Holland, England), land warfare is inevitably a resource sink rather than a resource source. You never get to the two questions of: How to invent a steam engine with very cheap labor and not-cheap coal? And is there an alternate road to produce enough productivity growth to set a virtuous circle in motion without a steam engine as a non-human power source?