Should-Read: Nancy Folbre: Why current definitions of family income are misleading, and why this matters for measures of inequality: “Researchers studying income distribution in the United States seem reluctant to acknowledge the family as an important unit of production and distribution… https://equitablegrowth.org/research-analysis/why-current-definitions-of-family-income-are-misleading-and-why-this-matters-for-measures-of-inequality/

…Incomplete definitions of both family and income either obscure or render invisible transfers between and within households, including the value of housework and family care. Evidence from specialized surveys—such as the Health and Retirement Survey, the Panel Survey of Income Dynamics, the Survey of Income and Program Participation, and the American Time Use Survey—clearly demonstrate the quantitative relevance of these omissions….

Overall, such transfers may have an equalizing effect because they generally flow from those with more market income to those with less. But young white adults are more likely to receive transfers from relatively affluent parents, while young black adults are more likely to transfer income to those closer to the bottom of distribution….

Changes in the family economy of the United States have probably had only small effects on the relative income of the top 1 percent or the top 5 percent. They have larger implications for both the reality and the perception of relative income among households with divergent patterns of female labor-force participation and family responsibility…

Should-Read: John Maynard Keynes (1924): Obituary for Alfred Marshall: “The study of economics does not seem to require any specialised gifts of an unusually high order… https://todayinsci.com/K/Keynes_John/KeynesJohn-Quotations.htm

…Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician…

Must-Read: John Maynard Keynes (1938): On Tinbergen. To Harrod http://economia.unipv.it/harrod/edition/editionstuff/rfh.34a.htm: “My dear Roy…

…I think we are a little bit at cross purposes. There is really nothing in your letter with which I disagree at all. Quite the contrary. I think it most important, for example, to investigate statistically the order of magnitude of the Multiplier, and to discover the relative importance of the various facts which are theoretically possible.

My point against Tinbergen is a different one. In chemistry and physics and other natural sciences the object of experiment is to fill in the actual values of the various quantities and factors appearing in an equation or a formula; and the work when done is once and for all. In economics that is not the case, and to convert a model into a quantitative formula is to destroy its usefulness as an instrument of thought. Tinbergen endeavours to work out the variable quantities in a particular case, or perhaps in the average of several particular cases, and he then suggests that the quantitative formula so obtained has general validity. Yet in fact, by filling in figures, which one can be quite sure will not apply next time, so far from increasing the value of his instrument, he has destroyed it. All the statisticians tend that way. Colin, for example, has recently persuaded himself that the propensity to consume in terms of money is constant at all phases of the credit cycle. He works out a figure for it and proposes to predict by using the result, regardless of the fact that his own investigations clearly show that it is not constant, in addition to the strong a priori reasons for regarding it as most unlikely that it can be so.

The point needs emphasising because the art of thinking in terms of models is a difficult–largely because it is an unaccustomed–practice. The pseudo-analogy with the physical sciences leads directly counter to the habit of mind which is most important for an economist proper to acquire.

I also want to emphasise strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values.[3] I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous in the same way that the material of the other sciences, in spite of its complexity, is constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worth while falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth.

But do not be reluctant to soil your hands, as you call it. I think it is most important. The specialist in the manufacture of models will not be successful unless he is constantly correcting his judgment by intimate and messy acquaintance with the facts to which his model has to be applied.

I have every intention of writing my paper for Cambridge,[4] but whether I shall turn up to read it in person is very much more doubtful. As regards your own address,[5] I would strongly urge on you that it would be a much better plan to read a curtailed version and leave the audience to study a complete text of it later, than to recite the printed version at a great pace, relying on the audience to follow in the text. In fact audiences do not follow in the text, if only for the reason that reading pace is quite different from speaking pace, even when the latter is accelerated. You want to catch the attention of the audience to the impact of your own personality on the text. The details of the latter they can pick up much more satisfactorily and completely when they get home[a].

Yours ever,

J M Keynes

Notes:

[1] The letter (misdated 16 July 1938 in Keynes’s Collected Writings) was only received by Harrod two weeks later: see letter 799.

[2] C. Clark, “Determination of the Multiplier from National Income Statistics”, Economic Journal XLVIII, September 1938, pp. 435-48.

[3] Letter 787.

[4] “The Policy of Government Storage of Foodstuffs and Raw Materials” (1938), which was eventually read by G. Shove (see letter 812 ). Keynes had originally suggested a different topic: see letter 749.

[5] Harrod, “Scope and Method of Economics” (1938:15).

[a] TLS with autograph corrections, four pages on four leaves numbered from the second, in HP II-79. Further copy, marked “CO/15” at the top of the page, in HP II-200. CcI in JMK CO/11/277-80. The letter is printed in Keynes, Collected Writings, vol. XIV, pp. 299-301. Reproduced by kind permission of the Provost and Scholars, King’s College, Cambridge.

Should-Read: Is this right? Certainly before 1800 we do not see a banking crisis produce a collapse of the circulating medium and a large excess demand for cash and thus a large excess supply of pretty much anything—a banking crisis-driven general glut. And certainly before 1800 we do not see an economy-wide shortage of investment opportunities producing a Wicksellian real neutral rate below the market rate. And certainly before 1800 we do not see a virulent debt-deflation collapse cycles—if Antonio the merchant of Venice goes bankrupt, his goods are sold at market on the Rialto rather than his factories standing idle, and the chance that his creditors are also caught up in a bankruptcy chain is much less.

But I am not at all sure that the (real productivity-adjusted) wage flexibility we think we see in the later nineteenth century applied before. The Jacksonian economy was still in many of its aspects a pre-industrial economy—an agricultural, mercantile economy. And yet The Jacksonian Economy http://amzn.to/2sZE9vY definitely had a large, albeit policy driven cycle produced by a government policy shock. Did policy, war, and harvest shocks have similar effects earlier in economies? Probably not if wages were flexible. But were they?

Paul Krugman: Formerly True Theories (Wonkish and Self-Indulgent): “Are there other examples? The self-correcting economy… https://mobile.nytimes.com/blogs/krugman/2017/07/10/formerly-true-theories-wonkish-and-self-indulgent/

…in which unemployment leads to deflation, which increases the real money supply, and thus restores full employment—is another thing that probably did work for most of history, but began to fall apart as agrarian economies gave way to industrialized economies with less flexible prices. David Ricardo’s rejection of the possibility of demand shortfalls eventually turned out to be very wrong—and was surely already wrong in Britain by 1817—but had been true in the past…

Should-Read: Robert Solow: Improving the measurement and understanding of economic inequality in the United States: “There has long been interest in extending and improving the National Income and Product Accounts… https://equitablegrowth.org/research-analysis/improving-the-measurement-and-understanding-of-economic-inequality-in-the-united-states/

…The accounts, and the summary Gross Domestic Product number, were not initially intended as an indicator of welfare, but rather as a measure of economic activity—even misdirected activity such as the production of cigarettes. Even on that basis, there is room for improvement: Perhaps the most commonly suggested extension has been the explicit inclusion of environmental degradation and improvement, along with other instances of resource depletion. I would certainly be in favor. Nevertheless, I want to begin with a retrograde suggestion. Whatever is eventually done with NIPA and GDP, I hope it is done in such a way that it will always be possible easily to extract from the new NIPA most of the components of the old NIPA…. Having a fairly consistent quarterly time series going back to 1949 is a wonderful thing. Even with those data, it is a hard problem—without them, it would be hopeless. Another 65 years of compatible data would be more than welcome.

From the very beginning of national accounting, it has been understood that the focus on gross investment and gross product is a standing temptation to error…. Taking account of depreciation to yield net product—and correspondingly net national income—would provide a better measure…. Devote more resources to the improvement of depreciation (and depletion) accounting….

A useful and substantial extension of the standard statistical picture of the economy would be the regular publication of distributional information… well beyond the familiar Gini coefficient, which hides more than it reveals….

It would also be useful, in a different way, to have a serious accounting of the assets and liabilities of the public sector at all levels of government….

It hardly needs to be added that better and more complete tracking of the distribution of private wealth would also contribute to our understanding of economic welfare….

Finally, sticking close to familiar economic indicators, I would urge a major effort to collect more longitudinal data, especially on employment status, earnings, and income…

Should-Read: Ann Marie Marciarille: Let’s Make a Deal and the Better Care Reconciliation Act of 2017: A Car or A Goat?: “I am as mesmerized as anyone else by the repeated iterations of the Better Care Reconciliation Act of 2017… http://www.marciarille.com/2017/07/lets-make-a-deal-and-the-better-care-reconciliation-act-of-2017-a-car-or-a-goat.html

…The New York Times’s] astonishingly sports page-like coverage scoring of winners and losers for each version, and tales of back room sweeteners  (“Klondike Kickback” being my personal favorite coinage so far). But none of this… distracts me from the fact that it is all about persuading elected officials and the American public that what they have in hand (the Affordable Care Act) would be better surrendered for one of these myriad other offerings. And the offers do keep coming… with such frequency but with such slight variation from each other that I can’t help but wonder about that variation on the old Monty Hall Probability Problem  where, if the host is not required to make the offer to switch yet repeatedly does so, the player has to suspect malice and wonder if, in fact, the player has already chosen the car and that the host is merely trying to shake them loose from that choice….

The correct next move… turns on some assumptions about the host’s behavior…

Should-Read: Helene Rey: The Global Financial System, the Real Rate of Interest and a Long History of Boom-Bust Cycles: “Financial cycles strongly determine real short-term interest rates… http://www.bis.org/events/agm2017/sp170625_lecture.pdf

…Wealth increases rapidly during financial booms, faster than consumption itself. As a consequence, the consumption to wealth ratio declines, as happened in the “Roaring 20s” and the “Exuberant 2000s”. In the subsequent busts, savings increase and keep real interest rates low. The related global financial cycle constrains monetary policy independence, even for countries with flexible exchange rates, transforming the Mundellian trilemma into a dilemma. Tackling these issues calls for combinations of monetary and fiscal policy coordination, macro-prudential policies, and possibly capital controls. It also means considering the role of the US as a provider of safe assets, and asking whether a multipolar system would be advantageous…