Should-Read: You really cannot do the history of economic thought without being willing to do counterfactuals! Now it is true that many times the counterfactual will be “somebody else would have done exactly this same work five or fifteen years later: it was immanent in the structure of the theory and in the empirical data being fed to the profession by the world”. But not always: John Maynard Keynes: Essays In Biography: “If only Malthus, instead of Ricardo, had been the parent stem from which nineteenth-century economics proceeded, what a much wiser and richer place the world would be to-day!…

…We have laboriously to rediscover and force through the obscuring envelopes of our misguided education what should never have ceased to be obvious…. Malthus proceeded to apply these principles “to the Distresses of the Labouring Classes since 1815.” He points out that the trouble was due to the diversion of resources, previously devoted to war, to the accumulation of savings; that in such circumstances deficiency of savings could not possibly be the cause, and saving, though a private virtue, had ceased to be a public duty; and that public works and expenditure by landlords and persons of property was the appropriate remedy….

The whole problem of the balance between Saving and Investment had been posed in the Preface to the book, as follows:

Adam Smith has stated, that capitals are increased by parsimony, that every frugal man is a public benefactor, and that the increase of wealth depends upon the balance of produce above consumption. That these propositions are true to a great extent is perfectly unquestionable…. But it is quite obvious that they are not true to an indefinite extent, and that the principles of saving, pushed to excess, would destroy the motive to production. If every person were satisfied with the simplest food, the poorest clothing, and the meanest houses, it is certain that no other sort of food, clothing, and lodging would be in existence….

The two extremes are obvious; and it follows that there must be some intermediate point, though the resources of political economy may not be able to ascertain it, where, taking into consideration both the power to produce and the will to consume, the encouragement to the increase of wealth is the greatest…

Surely it was a great fault in Ricardo to fail entirely to see any significance in this line of thought…

John Maynard Keynes: The General Theory of Employment, Interest and Money: “The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics…

…which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed.

The great puzzle of effective demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

But although the doctrine itself has remained unquestioned by orthodox economists up to a late date, its signal failure for purposes of scientific prediction has greatly impaired, in the course of time, the prestige of its practitioners. For professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;¾a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other groups of scientists whose theoretical results are confirmed by observation when they are applied to the facts.

The celebrated optimism of traditional economic theory, which has led to economists being looked upon as Candides, who, having left this world for the cultivation of their gardens, teach that all is for the best in the best of all possible worlds provided we will let well alone, is also to be traced, I think, to their having neglected to take account of the drag on prosperity which can be exercised by an insufficiency of effective demand. For there would obviously be a natural tendency towards the optimum employment of resources in a society which was functioning after the manner of the classical postulates. It may well be that the classical theory represents the way in which we should like our economy to behave. But to assume that it actually does so is to assume our difficulties away…

Should-Read: I think the very smart Jeffrey Friedman gets this… not quite right. The case for the empirical benefits of capitalism is very strong—but only if one is willing to remove libertarian blinders and focus on eliminating the market failures (in distributions, in aggregate demand, in externalities, in information, etc.) that keep the function the market maximizes from being a good proxy for societal well-being. And once one has the market properly supported and disciplined, the philosophical discussion can commence: Jeffrey Friedman: What’s Wrong with Libertarianism: “Libertarian arguments about the empirical benefits of capitalism are, as yet, inadequate…

…to convince anyone who lacks libertarian philosophical convictions. Yet “philosophical” libertarianism founders on internal contradictions that render it unfit to make libertarians out of anyone who does not have strong consequentialist reasons for libertarian belief. The joint failure of these two approaches to libertarianism explains why they are both present in orthodox libertarianism they hide each other’s weaknesses, thereby perpetuating them. Libertarianism retains significant potential for illuminating the modern world because of its distance from mainstream intellectual assumptions. But this potential will remain unfulfilled until its ideological superstructure is dismantled…

Thus John Maynard Keynes was not the enemy but, indeed, about the best and only friend of the True Friends of Liberty: John Maynard Keynes (1936): General Theory: Chapter 24: “In some other respects the foregoing theory is moderately conservative…

…It indicates the vital importance of establishing certain central controls…. The State will have to exercise a guiding influence on the propensity to consume…. 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… if the State is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary….

If our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again…. When 9,000,000 men are employed out of 10,000,000 willing and able to work… the complaint… is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000…. 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 if it is to realise the full potentialities of production….

The modern classical theory has itself called attention to various conditions in which the free play of economic forces may need to be curbed or guided. But 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 efficiency¾the advantages of decentralisation and of the play of self-interest.
• The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far.
• But, 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…

Should-Read: Murat Iyigun, Nathan Nunn, and Nancy Qian: The Long-run Effects of Agricultural Productivity on Conflict, 1400-1900: “A newly digitized and geo-referenced dataset of battles…

…in Europe, the Near East and North Africa covering the period between 1400 and 1900 CE. For variation in permanent improvements in agricultural productivity, we exploit the introduction of potatoes from the Americas to the Old World after the Columbian Exchange. We find that the introduction of potatoes permanently reduced conflict for roughly two centuries. The results are driven by a reduction in civil conflicts…

Should-Read: Noah Smith: How Affordable Urban Housing Stays Affordable: “San Francisco’s black population has declined… Hispanic population has… fallen in some historically Hispanic neighborhoods like the Mission District…

…The obvious explanation is economic: Rents in San Francisco have gone way up. Despite measures like rent control designed to shield existing occupants, rising rents put inexorable pressure on low-income residents to move out—they increase local prices for food and other goods, and they give landlords an incentive to evict rent-controlled tenants by any means they can find. Higher rents also discourage new low-income tenants from moving into the city.

How can rising rents be checked? One way is… an economic slump, possibly severe. A safer approach would be to build more housing… worth trying, for anyone worried about the exodus of low-income residents and disadvantaged minorities from the city. That’s why it’s so puzzling to see progressive activists fighting tooth and nail against the idea of allowing more housing development….

Zelda Bronstein… falls back on the old argument that new apartments in expensive cities are expensive:

Private developers don’t take advantage of permissive zoning or incentives to build affordable housing, because doing so doesn’t yield the profits that they and their investors demand…Because affordable housing doesn’t yield acceptable profits to real estate investors, the only way a substantial amount of it is going to get built is if it’s publicly funded.

Bronstein’s notion that housing is only affordable if government builds “affordable housing” is a common fallacy. The affordability of an apartment doesn’t depend solely on the inherent value of its roof and walls; it depends on the market. There are plenty of rentals in San Francisco that used to be affordable housing, and now are luxury units. Conversely, if prices go down, existing luxury units might morph into affordable housing…. We shouldn’t let suspicion of developers override rational consideration of the economics of housing…

Must-Read: If you are neither a plutocrat nor an activist seeking validation of your ethno-cultural grievances, you are not of concern to today’s Republican Party. We’re looking at you, the entrepreneurial and enterprising white upper-middle class who were both Teddy Roosevelt and Ronald Reagan’s core supporters: Laura J Keller, Ben Steverman, and Charles Stein: Inside Wall Street’s Towers, Traders Grouse Over Trump Tax Plan: “Many are figuring out greater benefits will go to billionaires. One, sipping a Bloody Mary, vows to quit the Republican party…

…Wall Street traders who rake in hundreds of thousands of dollars a year or more eagerly awaited a Republican overhaul of the U.S. tax code. Now, many are huddling with accountants and concluding the real gains will go to billionaires and other captains of the industry. Those in trenches—the merely wealthy—are grousing. Atop their list of worries: New limits on deductions for mortgage interest and state and local taxes… will cost them thousands of dollars annually while depressing the value of their homes… chop local tax revenues and erode the quality of schools and other amenities…. Most spoke on the condition they not be named. Many were self-aware enough to realize they won’t garner sympathy. One trader, sipping a Bloody Mary on a morning flight to somewhere more tropical, said he’s going to stop registering as a Republican. En route, he sent more than a dozen text messages ripping the tax bill. A pair of hedge fund managers said they’ll stop donating to Republicans they’ve long supported. One of them said he spent weeks berating a politician who’s taken his money, arguing the tax bill is too tilted toward corporations, rather than individuals who should get more relief.

“My clients are hard-working young professionals on Wall Street. I don’t have a lot of good news for them,” said Douglas Boneparth, a financial adviser in lower Manhattan who counsels people throughout the industry. Most are coming to terms with it. “I don’t think anyone is going to be surprised by the economic reality.”… The biggest source of pain in the tax bill is its limits on deductions. It eliminates the deduction for unreimbursed employee expenses, for example, and caps at $10,000 the deduction for local and state taxes. Homeowners can still deduct mortgage interest, but the cap for new loans would be $750,000, down from $1 million. The median asking price for a resale home in Manhattan is almost $1 million….

Manhattan’s army of salaried financial professionals are in a niche where the benefits thin out. They’ll still get goodies such as a higher threshold for the alternative minimum tax, and a drop in the top marginal rate to 37 percent from 39.6 percent. But, along with losing key deductions, they’re explicitly barred from a new 20 percent tax deduction aimed at business owners. Like doctors, lawyers and other service professionals, they can only get the full pass-through break if they own their own firm and earn less than $315,000 for a married couple, and half that for single taxpayers…

Must-Read: Martin Wolf writes a better version of my appeals than I have managed to: Martin Wolf: Inequality is a threat to our democracies: “Between 1980 and 2016, the top 1 per cent captured 28 per cent of the aggregate increase in real incomes in the US, Canada and western Europe, while the bottom 50 per cent captured just 9 per cent of it…

…But these aggregates conceal huge differences: in western Europe, the top 1 per cent captured “only” as much as the bottom 51 per cent. In North America, however, the top 1 per cent captured as much as the bottom 88 per cent….

After agriculture (and the agrarian state) was invented, elites were amazingly successful in extracting all the surplus the economy created. The limit on predation was set by the need to let the producers survive. Remarkably, many desperately poor agrarian societies approached this limit….

In the 20th century… when revolutionary regimes softened (or collapsed) or the exigencies of war faded from memory, quite similar processes to those of the old agrarian states took hold. Vastly wealthy new elites emerged, gained political power, and again used it for their own ends. Those who doubt this should look closely at the politics and economics of the tax bill now going through the US Congress. The implication of this parallel would be that, barring some catastrophic event, we are now on the way back to ever-rising inequality….

The big question,,, is whether the pressures for inequality will go on rising and the willingness to offset them generally decline. On the former, it is quite hard to be optimistic. The market value of the work of relatively unskilled people in high-income countries seems very unlikely to rise. On the latter, one can point, optimistically, to a desire to enjoy some degree of social harmony and the material abundance of modern economies, as reasons to believe the wealthy might be prepared to share their abundance…. [But] elites may become more determined to seize whatever they can for themselves. If so, that would augur badly, not just for social peace, but even for the survival of the stable universal-suffrage democracies that emerged in today’s high-income countries in the 19th and 20th centuries… “plutocratic populism”….

Mr Scheidel suggests that inequality is sure to rise. We must prove him wrong. If we fail to do so, soaring inequality might slay democracy, too, in the end.

Should-Read: Thomas Robert Malthus: Principles of Political Economy Considered with a View to Their Practical Application: “We cannot too highly respect and venerate that admirable rule of Newton, not to admit more causes than are necessary… but the rule itself implies, that those which really are necessary must be admitted…

…Before the shrine of truth, as discovered by facts and experience, the fairest theories and the most beautiful classifications must fall. The chemist of thirty years ago may be allowed to regret, that new discoveries in the science should disturb and confound his previous systems and arrangements; but he is not entitled to the rank of philosopher, if he does not give them up without a struggle, as soon as the experiments which refute them are fully established…. There are many important propositions in political economy which absolutely require limitations and exceptions…. The frequent combination of complicated causes, the action and reaction of cause and effect on each other, and the necessity of limitations and exceptions in a considerable number of important propositions, form the main difficulties of the science, and occasion those frequent mistakes which it must be allowed are made in the prediction of results.

To explain myself by an instance. Adam Smith has stated, that capitals are increased by parsimony, that every frugal man is a public benefactor, and that the increase of wealth depends upon the balance of produce above consumption. That these propositions are true to a great extent is perfectly unquestionable. No considerable and continued increase of wealth could possibly take place without that degree of frugality which occasions, annually, the conversion of some revenue into capital, and creates a balance of produce above consumption; but it is quite obvious that they are not true to an indefinite extent, and that the principle of saving, pushed to excess, would destroy the motive to production.

If every person were satisfied with the simplest food, the poorest clothing, and the meanest houses, it is certain that no other sort of food, clothing, and lodging would be in existence; and as there would be no adequate motive to the proprietors of land to cultivate well, not only the wealth derived from conveniences and luxuries would be quite at an end, but if the same divisions of land continued, the production of food would be prematurely checked, and population would come to a stand long before the soil had been well cultivated. If consumption exceed production, the capital of the country must be diminished, and its wealth must be gradually destroyed from its want of power to produce; if production be in a great excess above consumption, the motive to accumulate and produce must cease from the want of an effectual demand in those who have the principal means of purchasing.

The two extremes are obvious; and it follows that there must be some intermediate point, though the resources of political economy may not be able to ascertain it, where, taking into consideration both the power to produce and the will to consume, the encouragement to the increase of wealth is the greatest…