Must-Watch: Robert Skidelsky et al.: Too Much Maths, Too Little History: The Problem of Economics

Must-Watch: Robert Skidelsky et al.: Too Much Maths, Too Little History: The Problem of Economics: “The debate hosted by the LSE Economic History Department…

…in collaboration with the LSESU Economic History Society and the LSESU Economics Society. . Speakers: Lord Robert Skidelsky & Dr. Ha-Joon Chang; Prof. Steve Pisckhe & Prof. Francesco Caselli. Chair – Professor James Foreman-Peck:

The LSE is currently the only institution to have a separate EH department. We want to encourage students and academics alike to rethink the methodologies used to explain how our world works.

Do we use the theoretical and econometrical method to create models with assumptions to distil the complexities of human nature and produce measurable results? Or do we use the historical process of considering all factors to provide a more holistic explanation? More importantly, which method should be adopted to better understand increasingly complex economic phenomena in the future?

We are striving to provide our students breadth that exceeds their current theoretical studies. Hence, whilst we recognise the importance of economic history in allowing us to become closer to the truth and produce more intricate portrayal of events, the significance of models and mathematics remains to be emphasised.

Indeed, we wish to have this controversially named debate in order to both highlight the tension between the two disciplines and to produce a more nuanced overview in defence of the future of Economics.

Must-Read: Dietrich Vollrath: The Persistence of “Technology”

Must-Read: If you have not been reading Dietrich Vollrath’s weblog on economic growth, you should. He has been teaching the world a masterclass in understanding the patterns and determinants of economies’ long-run growth trajectories:

The Persistence of Technology Dietrich Vollrath

Dietrich Vollrath: The Persistence of “Technology”: “Diego Comin, Bill Easterly, and Erick Gong… ‘Was the Wealth of Nations Determined in 1000BC?…

…there is a surprising amount of explanatory power in technology measures from 1500AD….

CEG document… that technology levels are incredibly persistent…. CEG… pull out binary measures of technological use for different ethnic/cultural groups. Did your group use wheeled wagons in 1500? Yes? You get a 1. Did you use paper? No? You get a zero. Did you produce steel? No? You get a zero. Average these 0/1 measures across the different measures of technology, and you get an overall score…. Their Figure 2 gives you essentially the whole thrust of the paper. They use the ethnic group technology measures, assign each country a technology level based on the highest scoring ethnic group in their country, and then adjust the country level scores based on the fact that country populations are different in 2002 from in 1500…. They regress 2002 current income per capita on technology levels in past years, they find significant effects. This holds for technology in 1000BC, 0AD, and 1500AD…. Take the 1500AD result in column (3)…. If the technology index goes from 0[.5] ([half] technologies) to 1 ([three fifths of] the original technologies), log income per capita goes up by 2 log points, or by 3…. Also notice the R-squared, which is 50% for the 1500AD results….

CEG… establish that old technology levels have predictive power for current income per capita. They are not looking for explanatory power…. Ultimately, you might want to argue that we want strict causal explanations for why some countries are rich in 2002. But an explanatory paper like this is valuable…. Knowing that anything in 1500AD has strong predictive power for incomes today is informative. It tells us that we have to look back to 1500AD for at least some of those causal forces…. It isn’t the technology in 1500AD per se that matters…. This is an indicator of some kind of variation in culture or institutions (or something else?) that matters… [and] is telling us to something about how powerful those cultural/institutional factors are.

Must-Read: John Tang: The Engine and the Reaper: Industrialization and Mortality in Early Modern Japan

Must-Read: John Tang: The Engine and the Reaper: Industrialization and Mortality in Early Modern Japan: “Economic development leads to improved health over time due to increased access to medical treatment, sanitation, and income…

…but in the short run the relationship may be negative given disease exposure from market integration. Using a panel dataset of vital statistics for Meiji Japan, I find mortality rates increased during the country’s early industrialization, with railroad access accounting for over five percent of average mortality between 1886 and 1893. Estimates from a triple-differences framework indicate that communicable disease mortality accounts for 91 percent of the additional incidence, which suggests that improved transport may have operated as a vector for transmission.

Slides For: The Confidence Fairy in Historical Perspective

History of Economics Society :: June 17, 2016 :: Geneen Auditorium, Fuqua School of Business, Duke University, Durham, NC: |

NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage NewImage

Why Not Up the Mississippi?: Outtake from Cohen and DeLong, Concrete Economics

Preview of Why Not Up the Mississippi Outtake from Cohen and DeLong Concrete Economics

The conventional–pioneer–wisdom in American history is, still, that independent, entrepreneurial people settled the continent in small farms and established this civilization, pulling themselves up by their own bootstraps and building things through their own energy and enterprise, aided by democracy and the legal infrastructure of the free market.

This, of course, misses three big and immediate things:

  • First, the Amerindians who had been 12000 years in residence rightly objected–both to the plagues the European settlers brought that decimated their populations and then to the form the civilization being built took. Behind small-farm settlement stood conquest–and conquest requires governments and armies, not free-market association and catallaxy.

  • Second, a great deal of the surplus generated by the American economy–and used to finance its development–up to and beyond 1865 came from slavery–once again, not a free-market institution by any means.

  • Third, conquest and slavery do not by themselves build a prosperous economy, let alone an economy as prosperous as that of America today. Behind small-farm settlement stands an enormous public-sector governmental framework of institutions, infrastructure, and incentives necessary for an economy to be truly developmental.

As we have argued elsewhere, to a truly remarkable degree all United States citizens today owe that framework to the one single individual who may have made a significant difference in American political economic history, Alexander Hamilton—although even he needed his followers and successors to make a durable impact.

But, before there was a Hamilton, before there was a United States of America, there were earlier deliberate shapings of the economy of North America-to-be. These shaping were carried out by the colonial powers who ruled North American: Spain, France and Britain–and, in the end, especially by the British politicians who decided on the form that the British colonizing effort in the Americas would take.. Their plans and powers resulted in a pre-revolutionary American economy that was quite different in where it was located and how it was organized from what nature–also known as economic geography—-would appear to have intended.

Back in the 17th century the British government made the decision that its colonial policy would be to bet on populating the Atlantic seaboard–at least the Atlantic seaboard north of Virginia–with colonies based on staple agriculture and yeoman settlement, rather than with colonies based on treasure theft, on forced-labor mining, on slave-plantation agriculture, or on long-distance trade:

  • To some degree, this was a matter of necessity: Britain being late to the American colonial enterprise, It had to take what was left over.

  • To some degree, this was because the British government was not an absolutist one with Bastilles available, and it seemed wise to try to diminish domestic tensions by subsidizing the emigration of especially-vocal malcontents–whether Puritan, Quaker, or Catholic.

  • But mostly this was a matter of policy: from the days of Francis Drake on British expeditions to the Americas carried colonists rather than plantation owners and conquistadores, or rather than missionaries and coureurs du bois.

Thus Spanish and French, governments largely ignored their potential colonists outside the forts, ports, and trading posts they established–St. Augustine, Mobile, New Orleans, etc. They largely eschewed support for yeoman settlement and staple small-farm agriculture. They pushed for resource exploitation via long-distance trade, treasure-theft, extractive and exploitative plantation agriculture, and mining. And these industries were accompanied by extractive political-economic institutions. They were tuned to maximize the short-run financial flow to the metropole and the chances of proconsuls being able to return to the European capital with their fortunes in a decade or less. This did not provide a large incentive for French and Spanish subjects to migrate and large numbers. This did not provide a large incentive for those who did migrate to stay.

The English governments, by contrast, provided a very visible hand in support of colonial settlement–and, of course, provided a mailed fist directed against the North American continent’s Amerindian inhabitants. This mattered enormously.

The English settled the wrong, eastern, Atlantic coast. Ships probing upward along the rivers soon encountered rapids, and beyond the rapids came the mountains: the great Appalachian Range. The Spanish and French built their port-forts on the proper, southern, Gulf coast of America. From that base broad navigable rivers allowed rapid, cheap, and easy movement inland; culminating, of course, in the unique Mississippi-Missouri-Ohio River. Spain had, of course, known about the Mississippi Valley since Hernando de Soto’s thousand-man expedition of 1540.

Gulf of Mexico-based settlement provided a major advantage. The settler agricultural economies possible in the seventeenth, eighteenth, and nineteenth centuries were far from self-sufficient. Their spearheads required the weight of full spearshafts behind them, in the form of a steady supply of largely hand-made manufactured goods–high-tech for their time–from Europe.

Thus the southern, water road to the most fertile and valuable parts of agricultural America was the obvious and optimal one. A simple glance at the map of where U.S. agriculture is today tells the story. America’s prime agricultural resources are in the watersheds of the St. Lawrence, Mississippi-Missouri-Ohio, Sacramento-San Joaquin, and Columbia Rivers–not east of the Appalachians:


Expansion up the Mississippi from the south seemed natural. Expansion from the east across the Appalachians seemed not. And those who crossed the Appalachians would do so without a sound logistical tail. And without secure transport links behind them, such migrants could be, at best, itinerant trappers and woodsmen–not agricultural settlers.

However, the Spanish authorities in charge along the coast of the Gulf of Mexico in the sixteenth, seventeenth, and second half of the eighteenth centuries, and the French authorities in charge in the first half of the eighteenth century, did not design a settler economy. Thus the initial British governmental decisions to design their version of colonial America by yeoman settlement made New York City rather than New Orleans or St. Louis the economic capital of America. It changed the destiny of the continent. Government trumped geography. And government trumped geography because the British colonial government made it so, while the French and Spanish colonial governments did not.

The British deciders in the thirteen colonies and their successors in the United States believed in and acted to make Manifest Destiny via agricultural settlement a reality. The Spanish and French deciders who controlled the mouth of the Mississippi up to 1803 did not. Thus while the logic of geography strongly suggests that the largest city of colonial America really ought to have been New Orleans, that was not the way it happened. Better agricultural land and better water transportation than was available east of the Appalachians did not lead to mass settlement: New Orleans in 1800 did have 10,000 people, but St. Louis had only 1000, Chicago did not exist, and Cincinnati, Pittsburgh, and Nashville were then villages being settled not from the southwest but from the east by people trecking over the Alleghany Mountains and through the Cumberland Gap.

By contrast, New York in 1800 had 80,000 people, Philadelphia 40,000, Boston 25,000, and Charleston, SC 20,000: 165,000 people in cities of 10,000 or more east of the Appalachians, and so (then) cut off from what was to become America’s productive heartland, with only 10,000 people in cities with easy access to what would become the farmbelt. The overall population mix disparity was the same: 1800 saw 5.0 million people of recent European and African descent settled in the original thirteen states, with only 300,000 in the Missouri-Mississippi-Ohio Valleys.

As of 1800, the European colonization and settlement of North America had, from the perspective of matching colonists to where the resources and the logistic and transportation avenues were, completely wrong.

Agriculture the Worst Mistake in the History of the Human Race?: Today’s Economic History

Egypt tribute Google Search

Consider Jared Diamond’s 1987 paean to hunter gatherers. While I find his article provocative and insightful, I also find it annoying. It seems to me that it mostly misses the most important parts of the story.

For one thing, it misses the importance of the dominant Malthusian mechanisms. The invention of agriculture and the domestication of animals provide an enormous technological boost to humanity both in terms of the number of calories that can be harvested by an hour of work and in terms of the ability of a society to make durable investments of all kinds that further boost its productivity. It is an absolute living-standard bonanza for the generations that discover it, and the generations that come after.

So what goes wrong with quality of life among agriculturalists? Well, without rapid technological progress and before the demographic transition, human populations and living standards tend to settle at a point where, given nutrients, hazards of life, and societal institutions, every mother has on average one daughter who herself reproduces. The standard of living will be whatever standard of living makes that happen. And, for agriculturalists–without the hazards to adults of travel and hunting, and without the hazards a mobile lifestyle imposes on the very young–that standard of living is a lot lower than among hunter-gatherers. Lifespan looks about the same looking across hunter-gatherers and agriculturalists. Biomedical and fitness indicators are much much higher for hunter-gatherers.

Whether this is a “disaster” or not depends on the answer to the old utilitarian conundrum of whether it is better to have a few people who live very well or a lot of people who live very poorly. This is an open question in philosophy, but Diamond appears to think that it is a closed one. And Diamond ignores the important consideration that only the density of population that comes with agriculture can generate enough human brains thinking to allow us to–quite possibly–transcend our Malthusian limits and create a truly human world in the long run.

As to inequality… violence… domination… In my view it is difficult to say on net. Certainly the agricultural epoch has many many more people reaping where they did not sow and gathering where they did not scatter. Nevertheless, taking all three together, I cannot judge whether there was either a positive or a negative change across the boundary of the Neolithic Revolution. More inequality and domination, certainly. But you also have many more interactions between humans that are not one-shot interactions: people have fixed addresses, after all. If we know anything about humans, it is that human males have a tendency to resort to violence–perhaps not as great a tendency as chimps or gorillas, but a tendency, and we make more deadly weapons. It is not at all clear to me that the hunter-gatherer epoch had less murder, rape, kidnapping and enslavement of women, and so forth than did the agricultural epoch.

The hunter-gatherer age was not a kumbaya-singing age. Where, after all, are the Neanderthals today?

Jared Diamond (1987): The Worst Mistake in the History of the Human Race: Discover (May), pp. 64-66: “Archaeology is demolishing another sacred belief: that human history over the past million years has been a long tale of progress…

…The adoption of agriculture, supposedly our most decisive step toward a better life, was in many ways a catastrophe from which we have never recovered. With agriculture came the gross social and sexual inequality, the disease and despotism, that curse our existence…. For most of our history we supported ourselves by hunting and gathering: we hunted wild animals and foraged for wild plants. It’s a life that philosophers have traditionally regarded as nasty, brutish, and short…. Our escape from this misery was facilitated only 10,000 years ago, when in different parts of the world people began to domesticate plants and animals. The agricultural revolution spread until today it’s nearly universal and few tribes of hunter-gatherers survive…. Planted crops yield far more tons per acre than roots and berries. Just imagine a band of savages, exhausted from searching for nuts or chasing wild animals, suddenly grazing for the first time at a fruit-laden orchard or a pasture full of sheep. How many milliseconds do you think it would take them to appreciate the advantages of agriculture?…. The progressivist party line sometimes even goes so far as to credit agriculture with the remarkable flowering of art…. Agriculture gave us free time that hunter-gatherers never had. Thus it was agriculture that enabled us to build the Parthenon and compose the B-minor Mass….

While farmers concentrate on high-carbohydrate crops like rice and potatoes, the mix of wild plants and animals in the diets of surviving hunter-gatherers provides more protein and a better balance of other nutrients…. The lives of at least the surviving hunter-gatherers aren’t nasty and brutish, even though farmers have pushed them into some of the world’s worst real estate…. The progressivist view is really making a claim about the distant past: that the lives of primitive people improved when they switched from gathering to farming. Archaeologists can date that switch by distinguishing remains of wild plants and animals from those of domesticated ones in prehistoric garbage dumps….

Usually the only human remains available for study are skeletons, but they permit a surprising number of deductions…. keletons from Greece and Turkey show that the average height of hunger-gatherers toward the end of the ice ages was a generous 5’9″ for men, 5’5″ for women. With the adoption of agriculture, height crashed, and by 3000 B. C. had reached a low of only 5’3″ for men, 5′ for women. By classical times heights were very slowly on the rise again, but modern Greeks and Turks have still not regained the average height of their distant ancestors…. Burial mounds in the Illinois and Ohio river valleys… a hunter-gatherer culture gave way to intensive maize farming around A. D. 1150…. These early farmers paid a price for their new-found livelihood. Compared to the hunter-gatherers who preceded them, the farmers had a nearly 50 per cent increase in enamel defects indicative of malnutrition, a fourfold increase in iron-deficiency anemia (evidenced by a bone condition called porotic hyperostosis), a theefold rise in bone lesions reflecting infectious disease in general, and an increase in degenerative conditions of the spine, probably reflecting a lot of hard physical labor. ‘Life expectancy at birth in the pre-agricultural community was bout twenty-six years,’ says Armelagos, ‘but in the post-agricultural community it was nineteen years. So these episodes of nutritional stress and infectious disease were seriously affecting their ability to survive.’ The evidence suggests that the Indians at Dickson Mounds, like many other primitive peoples, took up farming not by choice but from necessity in order to feed their constantly growing numbers. ‘I don’t think most hunger-gatherers farmed until they had to, and when they switched to farming they traded quality for quantity,’ says Mark Cohen of the State University of New York at Plattsburgh, co-editor with Armelagos, of one of the seminal books in the field, Paleopathology at the Origins of Agriculture. ‘When I first started making that argument ten years ago, not many people agreed with me. Now it’s become a respectable, albeit controversial, side of the debate.’

There are at least three sets of reasons to explain the findings that agriculture was bad for health… a varied diet… [vs] one or a few starchy crops. The farmers gained cheap calories at the cost of poor nutrition…. Because of dependence on a limited number of crops, farmers ran the risk of starvation if one crop failed. Finally, the mere fact that agriculture encouraged people to clump together… led to the spread of parasites and infectious disease….

Besides malnutrition, starvation, and epidemic diseases, farming helped bring another curse upon humanity: deep class divisions. Hunter-gatherers have little or no stored food, and no concentrated food sources, like an orchard or a herd of cows: they live off the wild plants and animals they obtain each day. Therefore, there can be no kings, no class of social parasites who grow fat on food seized from others. Only in a farming population could a healthy, non-producing elite set itself above the disease-ridden masses. Skeletons from Greek tombs at Mycenae c. 1500 B. C. suggest that royals enjoyed a better diet than commoners, since the royal skeletons were two or three inches taller and had better teeth (on the average, one instead of six cavities or missing teeth). Among Chilean mummies from c. A. D. 1000, the elite were distinguished not only by ornaments and gold hair clips but also by a fourfold lower rate of bone lesions caused by disease…. Farming may have encouraged inequality between the sexes, as well. Freed from the need to transport their babies during a nomadic existence, and under pressure to produce more hands to till the fields, farming women tended to have more frequent pregnancies than their hunter-gatherer counterparts — with consequent drains on their health….

Thus with the advent of agriculture and elite became better off, but most people became worse off. Instead of swallowing the progressivist party line that we chose agriculture because it was good for us, we must ask how we got trapped by it despite its pitfalls. One answer boils down to the adage ‘Might makes right.’ Farming could support many more people than hunting, albeit with a poorer quality of life. (Population densities of hunter-gatherers are rarely over on person per ten square miles, while farmers average 100 times that.)… As population densities of hunter-gatherers slowly rose at the end of the ice ages, bands had to choose between feeding more mouths by taking the first steps toward agriculture, or else finding ways to limit growth. Some bands chose the former solution… outbred and then drove off or killed the bands that chose to remain hunter-gatherers, because a hundred malnourished farmers can still outfight one healthy hunter….

Hunter-gatherers practiced the most successful and longest-lasting life style in human history. In contrast, we’re still struggling with the mess into which agriculture has tumbled us, and it’s unclear whether we can solve it. Suppose that an archaeologist who had visited from outer space were trying to explain human history to his fellow spacelings. He might illustrate the results of his digs by a 24-hour clock on which one hour represents 100,000 years of real past time. If the history of the human race began at midnight, then we would now be almost at the end of our first day. We lived as hunter-gatherers for nearly the whole of that day, from midnight through dawn, noon, and sunset. Finally, at 11:54 p. m. we adopted agriculture. As our second midnight approaches, will the plight of famine-stricken peasants gradually spread to engulf us all? Or will we somehow achieve those seductive blessings that we imagine behind agriculture’s glittering facade, and that have so far eluded us?

Diamond is broadly right in what he says:

Carles Boix and Frances Rosenbluth: Bones of Contention: The Political Economy of Height Inequalty: “Human osteological data provide a rich, unmined source of information…

…about the distribution of nutrition, and by extension, the distribution of political power and economic wealth, in societies of long ago. On the basis of data we have collected and analyzed, we find that the shift from a hunter–gatherer to a labor-intensive agriculture opened up inequalities that had discernible effects on human health and stature. But we also find that political institutions intervene decisively in affecting the distribution of resources within societies. Political institutions appear to be shaped not only by economic factors but also by military technology and vulnerability to invasion, leaving important questions for additional exploration.

Must-Read: Carles Boix and Frances Rosenbluth: Bones of Contention: The Political Economy of Height Inequality

Must-Read: Carles Boix and Frances Rosenbluth: Bones of Contention: The Political Economy of Height Inequality: “Human osteological data provide a rich, unmined source of information…

…about the distribution of nutrition, and by extension, the distribution of political power and economic wealth, in societies of long ago. On the basis of data we have collected and analyzed, we find that the shift from a hunter–gatherer to a labor-intensive agriculture opened up inequalities that had discernible effects on human health and stature. But we also find that political institutions intervene decisively in affecting the distribution of resources within societies. Political institutions appear to be shaped not only by economic factors but also by military technology and vulnerability to invasion, leaving important questions for additional exploration.

Must-Read: Noah Smith: Finding Better Ideas to Rebuild America

Hamilton Google Search

Must-Read: Noah Smith: Finding Better Ideas to Rebuild America: “‘Concrete Economics,’ by University of California-Berkeley professors Brad DeLong and Stephen S. Cohen, needs an expanded sequel…

…900 pages long, with charts, data, theory and an exhaustive list of historical case studies. That book would become the Bible of the New Industrialist movement that is just beginning to grope its way out of the ashes of the neoliberal free-market consensus. Perhaps that tome will get written. But DeLong and Cohen couldn’t wait to write it, because we need new ideas now, and they decided they had to put a sketch of those new ideas into people’s heads very quickly. And I agree with their decision. If you’re at all concerned about economic policy, this is a book you need to read. It will take you only a couple of hours, and the time will be well-spent….

The peril of this sort of historical analysis is that it’s always easy to make the past fit some pattern after the fact. Sometimes policy causes big economic shifts, and sometimes it’s just along for the ride. A cautionary tale is provided by Japan’s experience, which DeLong and Cohen extol. Although Japan’s government certainly did try to pick winners — and still does — this probably stopped working around the late 1970s. For a good primer on how Japan’s industrial policy petered out, see ‘Can Japan Compete?,’ by Michael Porter, Hirotaka Takeuchi and Mariko Sakakibara. Nor have South Korea and China, for all their fast growth, yet managed to reach the income levels of the finance-ridden U.S….

DeLong and Cohen are absolutely right — the American mind has been far too captured by the beguilingly simple and powerful theory of free-market dogma. That theory was oversold, and we need a corrective…. DeLong and Cohen don’t focus on elevating… theories…. DeLong and Cohen propose to frame economic policy programs in terms of simple, tangible, objectives. Build railroads across the West. Break up monopolies. Fund Big Science…. This short, almost casually sketched book is really the opening shot in a long campaign… to build a New Industrialism–an approach to economic policy that respects the power of the private sector but isn’t afraid of an activist government. No one quite knows what New Industrialism is going to be yet. ‘Concrete Economics’ is meant to get people thinking about what it ought to be.

Populist Backlash and Political Economy

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:


(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…


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](

Why No Byzantine Road to Modernity?

Fall of constantinople 22 jpg 400×311 pixels

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?