Must-Read: Kostadis J. Papaioannou: “Hunger Makes a Thief of Any Man”: Poverty and Crime in British Colonial Asia

Must-Read: Kostadis J. Papaioannou: “Hunger Makes a Thief of Any Man”: Poverty and Crime in British Colonial Asia: “Extreme rainfall, both droughts and floods, lead to a large increase in property crimes (such as robbery, petty theft and cattle raiding)…

…but not to an increase in interpersonal violent crimes (such as murder, homicides and assault)…. We offer evidence that loss of agricultural income is one of the main causal channels leading to property crime. Additional historical information on food shortages, poverty and crime is used to explore the connection in greater detail…

Today’s Economic History: John Maynard Keynes (1931): Unemployment as a World Problem

Unemployment as a World Problem


I. We are today in the middle of the greatest economic catastrophe—the greatest catastrophe due almost entirely to economic causes—of the modern world. I am told that the view is held in Moscow that this is the last, the culminating crisis of capitalism and that our existing order of society will not survive it. Wishes are fathers to thoughts. But there is, I think, a possibility—I will not put it higher than that—that when this crisis is looked back upon by the economic historian of the future it will be seen to mark one of the major turning-points. For it is a possibility that the duration of the slump may be much more prolonged than most people are expecting and that much will be changed, both in our ideas and in our methods, before we emerge. Not, of course, the duration of the acute phase of the slump, but that of the long, dragging conditions of semislump, or at least sub-normal prosperity which may be expected to succeed the acute phase. Not more than a possibility, however. For I believe that our destiny is in our own hands and that we can emerge from it if only we choose—or rather if those choose who are in authority in the world.

My main theme is to be an attempt to analyze the originating causes of the slump. For unless we understand these—unless our diagnosis is correct—I do not see how we can hope to find the cure. I shall make use of my own theories of monetary causation and therefore I may, perhaps, assume implicitly some measure of familiarity with them; but I shall try not to assume so much as to embarrass those who are not acquainted with them.

I see no reason to be in the slightest degree doubtful about the initiating causes of the slump. Let us consider a brief history of events beginning about 1924 or 1925. By that time or shortly afterward the perturbations which had, perhaps inevitably, ensued on the war and the treaty of peace and the readjustments of economic relations between different countries seemed to have about run their course. Confidence was more or less restored; the mechanism of international lending was functioning freely; and while several European countries still had serious difficulties to overcome, for the world as a whole conditions seemed to be set fair.

It was widely believed that the general restoration of the gold standard would complete the edifice of prosperity and that an indefinitely long period of ever increasing economic well-being was in front of the progressive industrial nations of the world. So, apart from certain local domestic troubles in Great Britain (and I am not dealing except incidentallv with the British problem), was indeed the case for some four or five years. Now what was the leading characteristic of this period? Where and how were the seeds of subsequent trouble being sown?

The leading characteristic was an extraordinary willingness to borrow money for the purposes of new real investment at very high rates of interest—rates of interest which were extravagantly high on pre-war standards, rates of interest which have never in the history of the world been earned, I should say, over a period of years over the average of enterprise as a whole. This was a phenomenon which was apparent not, indeed, over the whole world but over a very large part of it.

Let us consider the United States first, because the United States has held throughout the key position. The investment activity in this country was something prodigious and incredible. In the four years 1925-28 the total value of new construction in the United States amounted to some $38,000,000,000. This was—if you can credit it—at an average rate of $800,000,000 a month for forty-eight months consecutively. It was more than double the amount of construction in the four years 1919-22, and, I may add, much more than double the amount that is going on now.

Nor was this the whole of the American story. The growth of the instalment system, which represents a sort of semi-investment, was going on pari passu. And, more important still, the United States was a free purchaser of all kinds of foreign bonds, good, bad, and indifferent—a free lender for investment purposes,that is to say, to the rest of the world. To an important extent the United States was acting, in this generous foreign-loan policy, as a conduit pipe for the savings of the more cautious Europeans, who had less confidence in their own prosperity than America had; so that the foreign-bond issues were often largely financed out of short- term funds which the rest of the world was, for considerations of safety or liquidity, depositing in New York.

But Great Britain was also lending on a substantial scale. Altogether it is estimated that in 1925 the net foreign lending of capital-exporting countries amounted to about $2,300,000,000. Naturally the result was to facilitate investment schemes over a wide area, especially in South America. All the countries of South America found themselves in a position to finance every kind of scheme, good or bad.

A comparatively small country like the republic of Colombia, to give an example, found itself able to borrow—I forget the exact figure—something approaching $200,000,000 in New York within a brief space of time. Rates of interest were high indeed. But the lender was willing and so was the borrower. Germany, as we all know, was another country that was both able and willing to borrow on a gigantic scale; indeed, in 1925 she alone borrowed sums approaching $1,000,000,000.

This free borrowing was duly accompanied by capital expansion programs. In France there was long-continued building activity; in Germany industry was reconstructed and municipal enterprise was conducted on an extravagant scale; in Spain the dictatorship embarked on enormous public works; indeed, in almost every European country a large force of labor and plant was being employed on construction, thus consuming, but not producing, consumption goods. The same was true over the whole of South America and in Australia. Even in China the prolonged civil war involved great expenditures otherwise than on producing consumption goods—which, so long as it is going on, is analytically identical with investment, even though its future fruits are less than nothing. In Russia, at the same time, immense efforts were being made to direct an unusually large proportion of the national forces to works of capital construction.

There was really only one important partial exception, namely, Great Britain. In that country investment continued throughout on a somewhat moderate scale. Road development and housing programs did something to keep up investment. But the return to the gold standard and the relative decline of the British staple export trades seriously cut down her ability to carry on foreign investment up to anything like the same proportion of her savings as had been the case from 1900 to 1914; and for various reasons home investment was not on a sufficient scale to absorb the whole of the balance. This, I am sure, is the fundamental reason why we in Great Britain were feeling depression before the rest of the world. We were not participating in the enormous investment boom which the rest of the world was enjoying. Our savings were almost certainly in excess of our investment. In short, we were suffering a deflation.

While some part of the investment which was going on in the world at large was doubtless ill-judged and unfruitful, there can, I think, be no doubt that the world was enormously enriched by the constructions of the quinquennium from 1925 to 1929; its wealth increased in these five years by as much as in any other ten or twenty years of its history. The expansion centered round building, the electrification of the world, and the associated enterprises of roads and motor cars. In those five years an appreciable change was effected in the housing, the power plant, and the transport system of a large part of the world.

But it was not unduly specialized. Almost every department of capital development took its share. The capacity of the world to produce most of the staple food-stuffs and raw materials was greatly expanded; machinery and new techniques directed by science greatly increased the output of all the metals, rubber, sugar, the chief cereals, etc. The economic section of the League of Nations has published the figures. In the three years 1925-28 the output of foodstuffs and raw materials in the world as a whole increased by no less than 8 per cent and the output of manufactured goods rose by 9 per cent, that is to say, at least as fast as that of raw materials. Progress was especially rapid in Europe where the increase in output was probably greater than even in North America.

Doubtless, as was inevitable in a period of such rapid change, the rate of growth of some individual commodities could not always be in just the appropriate relation to that of others. But, Onthe whole, I see little sign of any serious want of balance such as is alleged by some authorities. The rates of growth of construction capital such as houses, of capital for manufacturing production, and of capital for raw material production; or again those of foodstuffs, of raw materials, of manufactures, of activities demanding personal services seem to me, looking back, to have been in as good a balance as one could have expected them to be. A very few more quinquennia of equal activity might, indeed, have brought us near to the economic Eldorado where all our reasonable economic needs would be satisfied.

It is not necessary for my present purpose to decide exactly how far this investment boom was inflationary in the special sense which I have given to that term—whether, in other words, it was balanced by saving or whether it was financed by surplus profits obtained by selling output at a price which was inflated above the normal costs of production. I am inclined to the view that the part played by inflation was surprisingly small, and that savings kept pace with investment to a remarkable degree. In fact, there was very little rise in the price of the commodities covered by index numbers.

This does not prove that there was no inflation: first, because we have no proper consumption index numbers, so that these might, if we had them, show a different result; second, because the period was one of rapidly increasing efficiency, and it may be that while the price of many commodities was unchanged, too small a proportion of the increasing product was accruing to the factors of production and too much to the entrepreneurs, which would, according to my definition, be inflationary. Probably in some places and at some dates inflation was definitely present. But I think that the evidence suggests that savings were in fact abundantly available and were adequate to finance a very large part of the investment which was going on. This conclusion, if it is correct, will be important in the sequel.

What was it, then, that brought all this fruitful activity to a sudden termination? This brings me to the second part of my discourse.

II. It seems an extraordinary imbecility that this wonderful outburst of productive energy should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man’s speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a “prolonged liquidation” to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

I do not take this view. I find the explanation of the current business losses, of the reduction of output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity, except in so far as it may, by some lucky chance, clear the boards for the recovery of investment.

I suggest to you, therefore, that the questions to which we have to bend our intelligences are the causes of the collapse of investment and the means of reviving investment. We cannot hope either to prophesy or to limit the duration of the slump except as the result of our understanding of these phenomena.

Looking back, it is now clear that the decline of investment began early in 1929, that it preceded (and, according to my theory, was the cause of) the decline in business profits, and that it had gathered considerable momentum prior to the Wall Street slump in the autumn of 1929.

Why did investment fall away? Probably it was due to a complex of causes:

1.Too high a rate of interest was being paid. Experience was beginning to show that borrowers could not really hope to earn on new investment the rates which they had been paying.

  1. Even if some new investment could earn these high rates, in the course of time all the best propositions had got taken up, and the cream was off the business. In other words, as one would expect, the increased supply of capital goods meant that the rate of interest was due for a fall if further expansion was to be possible.
  2. But just at this moment, so far from falling, the rate of interest was rising. The efforts of the Federal Reserve banks to check the boom on Wall Street was making borrowing exceedingly dear to all kinds of borrowers.
  3. A further consequence of the very dear money in the United States was to exercise a drag on the gold of the rest of the world and hence to cause a credit contraction everywhere.
  4. And a third consequence was the unwillingness of American investors to buy foreign bonds since they found speculation in their own common stocks much more exciting. In 1929 net purchases of this character by the United States fell to about a quarter of what they had been in the previous year, and in 1930 they fell so low as to be negligible.

I need hardly remind you how much fixed investment fell away in the United States. If we take the familiar Dodge figures for 1925 as our index of 100, we find a fall to 88 in 1929 and to 64 in 1930, while at the present time the figures are still lower. But this falling-away of fixed investment, while most marked, perhaps, in the United States, was not confined to that country. The complex of circumstances which I have outlined combined to cause a very marked diminution in the rate of investment all over the world.

Once this decline was started on a significant scale, it is exceedingly easy to see (on my way of looking at the matter) how the mere fact of a decline precipitated a further decline, for the high level of profits began to fall away, the prices of commodities inevitably declined, and these things brought with them a series of further consequences:

  1. The decline in output brought a disinvestment in working capital. In the United States this was on a huge scale.
  2. The decline in profit diminished the attractions of all kinds of investment.
  3. The fall in prices and the cessation of lending destroyed the credit of overseas borrowers, and made borrowing dearer for them just at the moment when they needed cheaper loans if they were to continue.

This decline has continued down to the present time, and so far as fixed investment is concerned, the volume of new investment must be today, taking the world as a whole, at the lowest figure for very many years.

Here I find—and I find without any doubts or reserves whatsoever—the whole of the explanation of the present state of affairs. But there is, I am afraid you may say, one very serious gap in my argument. I have been making all through a tacit assumption. And for those who do not accept this assumption, the conclusions must be unconvincing.

My assumption is this: I have taken it for granted so far that if investment falls off, then of necessity the level of business profits falls away also. Grant me this and the rest, I think, follows. Now I believe this to be true, and I have set forth in detail the reasons for my belief in the first volume of my recently published Treatise on Money. But the argument is not easy, and I cannot claim that it is yet part of the accepted body of economic thought.

It will be my duty, therefore, to endeavor in my next lecture to give you an outline of this reasoning in terms as well adapted as I can find for the medium of oral exposition. I shall then, in the light of this, pass on to what I have to say of a constructive character.


I have said that it is easy on my theory of the causation of these things to see why a severe decline in the volume of investment should have produced the results that we see around us in the world today. This theory, however, will not be familiar to many of you; and I must, if my argument is to be complete and intelligible, endeavor to set forth for you at least an outline of it. You must, therefore, forgive me a somewhat abstract discussion. Those who may wish to pursue the matter further I must refer to my Treatise on Money. But I will try, though it be at the risk of straining your attention, to put the gist of the matter very briefly as follows.

Entrepreneurs pay out in salaries, wages, rents, and interest certain sums to the factors of production which I shall call their “costs of production.” Some of these entrepreneurs are producing capital goods, some of them are producing consumption goods. These sums, these costs of production, represent in the aggregate the incomes of the individuals who own or are the factors of production.

These individuals in their capacity of consumers expend part of these incomes on buying consumption goods from the entrepreneurs; and another part of their incomes, which part we shall call their savings, they put back, as we may express it, into the financial machine—that is to say, they deposit it with their banks or buy stock-exchange securities or real estate or repay instalments in respect of purchases previously made or the like.

At the same time the financial machine will be enabling a different set of people to order and pay for various kinds of currently produced capital goods from the entrepreneurs who produce this class of goods, such as buildings, factories, machines, equipment for transport, and public-utility enterprises and the like; and the aggregate of expenditures of this kind I find it convenient to call the “value of current investment.”

Thus there are two streams of money flowing back to the entrepreneurs, namely, that part of their incomes which the public spend on consumption and those expenditures on the purchases of capital goods which I have called the value of current investment. These two amounts added together make up the receipts or sale proceeds of the entreprqneurs.

Now the profitableness of business as a whole depends, and can depend, on nothing but the difference between the sale proceeds of the entrepreneurs and their costs of production. If more comes back to them as sale proceeds than they have expended in costs of production, it follows that they must be making a profit. And, equally, if less comes back to them than they have paid out, they must be making a loss. I am speaking all the time, remember, of entrepreneurs as a whole. As between individual entrepreneurs, some will at all times be doing better than the average and some worse.

Now for my equation, a very simple one, which gives, to my thinking, the clue to the whole business:

The costs of production of the entrepreneurs are equal to the incomes of the public. Now the incomes of the public are, obviously, equal to the sum of what they spend and of what they save. On the other hand, the sale proceeds of the entrepreneurs are equal to the sum of what the public spend on current consumption and what the financial machine is causing to be spent on current investment.

Thus the costs of the entrepreneurs are equal to what the public spend plus what they save; while the receipts of the entrepreneurs are equal to what the public spend plus the value of current investment. It follows, if you have been able to catch what I am saying, that when the value of current investment is greater than the savings of the public, the receipts of the entrepreneurs are greater than their costs, so that they make a profit; and when, on the other hand, the value of current investment is less than the savings of the public, the receipts of the entrepreneurs will be less than their costs, so that they make a loss.

That is my secret, the clue to the scientific explanation of booms and slumps (and of much else, as I should claim) which I offer you. For you will perceive that when the rate of current investment increases (without a corresponding change in the rate of savings) business profits increase. Moreover,the affair is cumulative. For when business profits are high, the financial machine facilitates increased orders for and purchases of capital goods, that is, it stimulates investment still further; which means that business profits are still greater; and soon. In short, a boom is in full progress. And contrariwise when investment falls off. For unless savings fall equally, which is not likely to be the case, the necessary result is that the profits of the business world fall away. This in turn reacts unfavorably on the volume of new investment; which causes a further decline in business profits. In short, a slump is upon us.

The whole matter may be summed up by saying that a boom is generated when investment exceeds saving and a slump is generated when saving exceeds investment. But behind this simplicity there lie, I am only too well aware, many complexities, many pitfalls, many opportunities for misunderstanding. You must excuse me if I slide over these, for it would take me weeks to expound them fully.

Indeed, let me simplify further, for I should like for a moment to leave the variations in saving out of my argument. I shall assume that saving either varies in the wrong direction (which may, in fact, occur, especially in the early stages of the slump, since the fall in stock-exchange values as compared with the boom may by depreciating the value of people’s past savings increase their desire to add to them) or is substantially unchanged, or if it varies in the right direction, so as partly to compensate changes in investment, varies insufficiently (which is likely to be the case except perhaps when the community is, toward the end of a slump, very greatly impoverished indeed). That is to say, I shall concentrate on the variability of the rate of investment. For that is, in fact, the element in the economic situation which is capable of sudden and violent change. In the actual circumstances of the present hour that is the element which, according to common observation, has indeed suffered a sudden and violent change. And nothing, obviously, can restore employment which does not first restore business profits. Yet nothing, in my judgment, can restore business profits which does not first restore the volume of investment, that is to say (in other words), the volume of orders for new capital goods. (For the only theoretical alternative would be a large increase of expenditures by the public at the expense of their savings, an extravagance campaign, which at a time when everyone is nervous and uncertain and sees the value of his stocks and shares depreciating is most unlikely to occur, whether it is desirable or not.)

In the past it has been usual to believe that there was some preordained harmony by which saving and investment were necessarily equal. If we intrusted our savings to a bank, it used to be said, the bank will of course make use of them, and they will duly find their way into industry and investment. But unfortunately this is not so. I venture to say with certainty that it is not so. And it is out of the disequilibriums of savings and investment, and out of nothing else, that the fluctuations of profits, of output, and of employment are generated.

What sorts of circumstances are capable of occurring which would be of a tendency to bring the slump to an end?

It is important to notice that so long as output is declining, the effect of any decline of fixed investment is aggravated by disinvestment in working capital. Rut this continues only so long as output continues to decline. It ceases as soon as output ceases to decline further even though the level at which output is steady is a very low one. And as soon as output begins to recover, even though it still remains at a very low level, the tide is turned and the decline in fixed investment is partly offset by increased investment in working capital.

Now there is a reason for expecting an equilibrium point of decline to be reached. A given deficiency of investment causes a given decline of profit. A given decline of profit causes a given decline of output. Unless there is a constantly increasing deficiency of investment, there is eventually reached, therefore, a sufficiently low level of output which represents a kind of spurious equilibrium.

There is also another reason for expecting the decline to reach a stopping-point. For I must now qualify my simplifying assumption that only the rate of investment changes and that the rate of saving remains constant. At first, as I have said, the nervousness engendered by the slump may actually tend to increase saving. For saving is often effected as a guide against insecurity. Thus savings may decrease when stock markets are soaring and increase when they are slumping. Moreover, for the salaried and fixed-income class of the community the fall of prices will increase their margin available for saving. But as soon as output has declined heavily, strong forces will be brought into play in the direction of reducing the net volume of saving.

For one thing the unemployed will, in their effort not to allow too great a decline in their established standard of life, not only cease to save but will probably be responsible for much negative saving by living on their own previous savings and those of their friends and relations. Much more important, however, than this is likely to be the emergence of negative saving on the part of the government, whether by diminished payments to sinking funds or by actual borrowing, as is now the case in the United States. In Great Britain, for example, the dole to the unemployed, largely financed by borrowing, is now at the rate of $500,000,000 a year—equal to about a quarter of the country’s estimated rate of saving in good times.

In the United States the Treasury deficit to be financed by borrowing is put at $1,000,000,000. These expenditures are just as good in their immediate effects on the situation as would be an equal expenditure on capital works; the only difference—and an important one enough—is that in the former cases we have nothing to show for it afterwards.

Let me illustrate this by figures for the United States which are intended to be purely illustrative, though I have chosen them so as to be, perhaps, not too remote from the facts. Let us suppose that at the end of 1928 American investment was at the rate of $10,000,000,000 a year, while the national savings were $9,000,000,000. This meant, as my fundamental analysis shows, abnormal profits to American business at the rate of $1,000,000,000. Now let us suppose a decline in investment to $9,000,000,000. The exceptional profits are now obliterated. Next a further fall to$5,000,000,000. This means that the exceptional profits are not only obliterated, but that their place is taken by very large abnormal losses, namely, $4,000,000,000, so long as savings continue at $9,000,000,000. These developments naturally cause a steady decline in output, which aggravates the loss by bringing with it a disinvestment in working capital.

Let us suppose that the disinvestment in working capital is at the rate of $1,500,000,000 a year. As long as this is going on, the rate of net investment may fall as low as $3,500,000,000. This means (or would mean if other factors remained unchanged) business receipts (including agriculture, of course) of $5,500,000,000 below normal, and output will settle down to the level which just shows a margin over prime cost even when aggregate receipts are this much short of normal profits. But by this time the situation itself will have bred up some remedial factors. Let us suppose that a government deficit of $1,000,000,000 has developed and that saving by the public has fallen off by $1,000,000,000.

Moreover, as soon as output ceases to fall further, disinvestment in working capital will cease. Thus the falling-off in business receipts below normal will no longer be $5,500,000,000 but only $2,000,000,000 ($1,000,000,000 relief from government deficit, $1,000,000,000 from diminished saving, and $1,500,000,000 from the cessation of disinvestment in working capital). This means that output is below what is justified by the new level of business receipts. Consequently it rises again. This rise means reinvestment in working capital, and business receipts may, for a time and so long as this reinvestment is going on, recover almost to normal.

Nevertheless, if the nation’s savings stand at $9,000,000,000, granted a normal level of output and employment, then, so long as the rate of long-term interest in conjunction with other factors is too high to allow of more than $5,000,000,000 expenditure on fixed investment, a recovery staged along the foregoing lines is bound to be an illusion and a disappointment. For after it has proceeded a certain length, there is bound to be reaction and a renewed slump. Indeed, the figures accurately appropriate to the illustration may be such that the extent of the recovery will be comparatively slight.

There can, therefore, I argue, be no secure basis for a return to an equilibrium of prosperity except a recovery of fixed investment to a level commensurate with that of the national savings in prosperous times.


I. Whether or not my confidence is justified, I feel, then, no serious doubt or hesitation whatever as to the causes of the world-slump. I trace it wholly to the breakdown of investment throughout the world. After being held by a variety of factors at a fairly high level during most of the post-war period, the volume of this investment has during the past two and a half years suffered an enormous decline—a decline not fully compensated as yet by diminished savings or by government deficits.

The problem of recovery is, therefore, a problem of re-establishing the volume of investment. The solution of this problem has two sides to it: on the one hand, a fall in the l long-term rate of interest so as to bring a new range of propositions within the practical sphere; and, on the other hand, a return of confidence to the business world so as to incline them to borrow on the basis of normal expectations of the future. But the two aspects are by no means disconnected. For business confidence will not revive except with the experience of improving business profits. And, if I am right, business profits will not recovery except with an increase of investment. Nevertheless the mere reaction from the bottom and the feeling that it may be no longer prudent to wait for a further fall will be likely, perhaps in the near future, to bring about some modest recovery of confidence. We need, therefore, to work meanwhile for a drastic fall in the long-term rate of interest so that full advantage may be taken of any recovery of confidence.

The problem of recovery is also, in my judgment, indissolubly bound up with the restoration of prices to a higher level, although if my theory is correct this is merely another aspect of the same phenomenon. The same events which lead to a recovery in the volume of investment will inevitably tend at the same time toward a revival of the price level. But inasmuch as the raising of prices is an essential ingredient in my policy I had better pause perhaps to offer some justification of this before I proceed
to consider the ways and means by which the volume of investment and at the same time the level of prices can be raised.

Unfortunately there is not complete unanimity among the economic doctors as to the desirability of raising the general price level at this phase of the cycle. Dr. Sprague, for example, in an address made recently in London which attracted much attention, declared it to be preferable that:

manufactured costs and prices should come down to equilibrium level with agricultural prices rather than that we should try to get agricultural prices up to an equilibrium level with the higher prices of manufactured goods.

For my own part, however, I dissent very strongly from this view and I should like, if I could, to provoke vehement controversy—a real discussion of the problem—in the hope’ that out of the clash of minds something useful might emerge. Until we have definitely decided whether or not we should wish prices to rise we are drifting without clear intentions in a rudderless vessel.

Do we, then, want prices to rise back to a parity with what, a few months ago, we considered to be the established levels of our salaries, wages, andincome generally? Or do we want to reduce our incomes to a parity with the existing level of the wholesale prices of raw commodities? Please notice that I emphasize the word “want,” for we shall confuse the argument unless we keep distinct what we want from what we think we can get. My own conclusion is that there are certain fundamental reasons of overwhelming force, quite distinct from the technical considerations tending in the same direction, which I have already indicated and to which I shall return later, for wishing prices to rise.

The first reason is on grounds of social stability and concord. Will not the social resistance to a drastic downward readjustment of salaries and wages be an ugly and a dangerous thing? I am told sometimes that these changes present comparatively little difficulty in a country such as the United States where economic rigidity has not yet set in. I find it difficult to believe this. But it is for you, not me, to say. I know that in my own country a really large cut of many wages, a cut at all of the same order of magnitude as the fall in wholesale prices, is simply an impossibility. To attempt it would be to shake the social order to its foundation. There is scarcely one responsible person in Great Britain prepared to recommend it openly. And if, for the world as a whole, such a thing could be accomplished, we should be no farther forward than if we had sought a return to equilibrium by the path of raising prices. If, under the pressure of compelling reason, we are to launch all our efforts on a crusade of unpopular public duty, let it be for larger results than this.

I have said that we should be no farther forward. But in fact even when we had accomplished the reduction of salaries and wages, we should be far worse off, for the second reason for wishing prices to rise is on grounds of social justice and expediency which have regard to the burden of indebtedness fixed in terms of money. If we reach a new equilibrium by lowering the level of salaries and wages, we increase proportionately the burden of monetary indebtedness. In doing this we should be striking at the sanctity of contract. For the burden of monetary indebtedness in the world is already so heavy that any material addition would render it intolerable. This burden takes different forms in different countries. In my own country it is the national debt raised for the purposes of the war which bulks largest. In Germany it is the weight of reparation payments fixed in terms of money. For creditor and debtor countries there is the risk of rendering the charges on the debtor countries so insupportable that they abandon a hopeless task and walk the pathway of general default. In the United States the main problem would be, I suppose, the mortgages of the farmer and loans on real estate generally. There is, in fact what, in an instructive essay, Professor Alvin Johnson has called the “farmers’ indemnity.” The notion that you solve the farmers’ problem by bringing down manufacturing costs so that their own produce will exchange for the same quantity of manufactured goods as formerly is to mistake the situation altogether, for you would at the same time have increased the farmers’ burden of mortgages which was already too high. Or take another case—loans against buildings. If the cost of new building were to fall to a parity with the price of raw materials, what would become of the security for existing loans?

Thus national debts, war debts, obligations between the creditor and debtor nations, farm mortgages, real estate mortgages—all this financial structure would be deranged by the adoption of Dr. Sprague’s proposal. A widespread bankruptcy, default, and repudiation of bonds would necessarily ensue. Banks would be in jeopardy. I need not continue the catalogue. And what would be the advantage of having caused so much ruin? I do not know. Dr. Sprague did not tell us that.

Moreover, over and above these compelling reasons there is also the technical reason, the validity of which is not so generally recognized, which I have endeavored to elucidate in my previous lecture. If our object is to remedy unemployment it is obvious that we must first of all make business more profitable. In other words, the problem is to cause business receipts to rise relatively to business costs. But I have already endeavored to show that the same train of events which will lead to this desired result is also part and parcel of the causation of higher prices, and that any Policy which at this stage of the credit cycle is not directed to raising prices also fails in the object of improving business profits.

The cumulative argument for wishing prices to rise appears to me, therefore, to be overwhelming, as I hope it does to you. Fortunately many if not most people agree with this view. You may feel that I have been wasting time in emphasizing it. But I do not think that I have been wasting time, for while most people probably accept this view, I doubt if they feel it with sufficient intensity. I wish to take precautions beforehand against anyone asking—when I come to the second and constructive part of my argument—whether, after all, it is so essential that prices should rise. Is it not better that liquidation should take its course? Should we not be, then, all the healthier for liquidation, which is their polite phrase for general bankruptcy, when it is complete?

II. Let us now return to our main theme. The cure of unemployment involves improving business profits. The improvement of business profits can come about only by an improvement in new investment relative to saving. An increase of investment relative to saving must also, as an inevitable by-product, bring about a rise of prices, thus ameliorating the burdens arising out of monetary indebtedness. The problem resolves itself, therefore, into the question as to what means we can adopt to increase the volume of investment, which you will remember means in my terminology the expenditure of money on the output of new capital goods of whatever kind.

When I have said this, I have, strictly speaking, said all that an economist as such is entitled to say. What remains is essentially a technical banking problem. The practical means by which investment can be increased is, or ought to be, the bankers’ business, and pre-eminently the business of the central banker. But you will not consider that I have completed my task unless I give some indication of the methods which are open to the banker.

There are, in short, three lines of approach:

The first line of approach is the restoration of confidence both to the lender and to the borrower. The lender must have sufficient confidence in the credit and solvency of the borrower so as not to wish to charge him a crushing addition to the pure interest charge in order to cover risk. The borrower, on the other hand, must have sufficient confidence in the business prospects to believe that he has a reasonable prospect of earning sufficient return from a new investment proposition to recover with a margin the interest which he has to bind himself to pay to the lender. Failing the restoration of confidence, we may easily have a vicious circle set up in which the rate of interest which the lender requires to cover what he considers the risks of the situation represents a higher rate than the borrower believes he can earn.

Nevertheless, there is perhaps not a great deal that can be done deliberately to restore confidence. The turning-point may come in part from some chance and unpredictable event. But it is capable, of course, of being greatly affected by favorable international developments, as for example, an alleviation of the war debts such as Mr. Hoover has lately proposed; though if he goes no farther than he has promised to go at present, the shock to confidence, long before his year of grace is out, may come perhaps just at the moment when it will interfere most with an incipient revival. In the main, however, restoration of confidence must be based, not on the vague expectations or hopes of the business world, but on a real improvement in fundamentals; in other words, on a breaking of the vicious circle. Thus if results can be achieved along the two remaining lines of approach which I have yet to mention, these favorable effects may be magnified bv their reaction on the state of confidence.

The second line of approach consists in new construction programs under the direct auspices of the government or other public authorities. Theoretically, it seems to me, there is everything to be said for action along these lines. For the government can borrow cheaply and need not be deterred by overnice calculations as to the prospective return. I have been a strong advocate of such measures in Great Britain, and I believe that they can play an extremely valuable part in breaking the vicious circle everywhere. For a government program is calculated to improve the level of business profits and hence to increase the likelihood of private enterprise again lifting up its head. The difficulty about government programs seems to me to be essentially a practical one. It is not easy to devise at short notice schemes which are wisely and efficiently conceived and which can be put rapidly into operation on a really large scale. Thus I applaud the idea and only hesitate to depend too much in practice on this method alone unaided by others. I am not sure that as time goes by we may not have to attempt to organize methods of direct government action along these lines more deliberately than hitherto, and that such action may play an increasingly important part in the economic life of the community.

The third line of approach consists in a reduction in the long-term rate of interest. It may be that when confidence is at its lowest ebb the rate of interest plays a comparatively small part. It may also be true that, in so far as manufacturing plants are concerned, the rate of interest is never the dominating factor. But, after all, the main volume of investment always takes the forms of housing, of public utilities and of transportation. Within these spheres the rate of interest plays, I am convinced, a predominant part. 1 am ready to believe that a small change in the rate of interest may not be sufficient. That, indeed, is why I am pessimistic as to an early return to normal prosperity. I am ready enough to admit that it may be extremely difficult both to restore confidence adequately and to reduce interest rates adequately. There will be no need to be surprised, therefore, if a long time elapses before we have a recovery all the way back to normal.

Nevertheless, a sufficient change in the rate of interest must surely bring within the horizon all kinds of projects which are out of the question at the present rate of interest. Let me quote an example from my own country. No one believes that it will pay to electrify the railway system of Great Britain on the basis of borrowing at 5 per cent. At 4 1/2 per cent the enthusiasts believe that it will be worth while; at 4 per cent everyone agrees it is an open question; at 3 per cent it is impossible to dispute that it will be worth while. So it must be with endless other technical projects. Every fall in the rate of interest will bring a new range of projects within a practical sphere. Moreover, if it be true—as it probably is—that the demand for house room is elastic, every significant fall in the rate of interest, by reducing the rent which has to be charged, brings with it an additional demand for house room.

As I look at it, indeed, the task of adjusting the long-term rate of interest to the technical possibilities of our age so that the demand for new capital is as nearly as possible equal to the community’s current volume of savings must be the prime object of financial statesmanship. It may not be easy and a large change may be needed, but there is no other way out.

Finally, how is the banking system to affect the long-term rate of interest? For prima facie the banking system is concerned with the short-term rate of interest rather than with the long.

In course of time I see no insuperable difficultv. There is a normal relation between the short-term rate of interest and the long-term, and in the long run the banking system can affect the long-term rate by obstinately adhering to the correct policy in regard to the short-term rate. But there may also be devices for hastening the effect of the short-term rate on the long-term rate. A reduction of the long-term rate of interest amounts to the same thing as raising the price of bonds. The price of bonds amounts to the same thing as the price of non-liquid assets in terms of liquid assets. I suggest to you that there are three ways in which it is reasonable to hope to exercise an influence in this direction.

The first method is to increase the quantity of liquid assets—in other words, to increase the basis of credit by means of open-market operations, as they are usually called, on the part of the central bank. I know that this involves technical questions of some difficulty with which I must not burden this lecture. I should, however, rely confidently in due course on influencing the price of bonds by steadily supplying the market with a greater quantity of liquid assets than the market felt itself to require so that there would be a constant pressure to transform liquid assets into the more profitable non-liquid assets.

The second course is to diminish the attractions of liquid assets by lowering the rate of deposit interest. In such circumstances as the present it seems to me that the rate of interest allowed on liquid assets should be reduced as nearly as possible to the vanishing-point.

The third method is to increase the attractions of non-liquid assets, which, however, brings us back again in effect to our first remedy, namely, methods of increasing confidence.

For my own part, I should have thought it desirable to advance along all three fronts simultaneously. But the central idea that I wish to leave with you is the vital necessity for a society living in the phase in which we are living today, to bring down the long-term rate of interest at a pace appropriate to the underlying facts. As houses and equipment of every kind increase in quantity we ought to be growing richer on the principle of compound interest. As technological changes make possible a given output of goods of every description with a diminishing quantity of human effort, again we ought to be forever increasing our level of economic well-being. But the worst of these developments is that they bring us to what may be called the dilemma of a rich country, namely, that they make it more and more difficult to find an outlet for our savings. Thus we need to pay constant conscious attention to the long-term rate of interest for fear that our vast resources may be running to waste through a failure to direct our savings into constructive uses and that this running to waste may interfere with that beneficent operation of compound interest which should, if everything was proceeding smoothly in a well-governed society, lead us within a few generations to the complete abolition of oppressive economic want.

Hoisted from the Archives: Me Reviewing Robert Skidelsky on John Maynard Keynes

J. Bradford DeLong(2001): Review of Robert Skidelsky, John Maynard Keynes: Hopes Betrayed and The Economist as Saviour: Robert Skidelsky (1983), John Maynard Keynes: Hopes Betrayed (London: Macmillan: 033357379x). Robert Skidelsky (1992), John Maynard Keynes: The Economist as Saviour (London: Macmillan: 0333584996). And my review of volume 3: Fighting for Britain.

A couple of months ago I wrote a less-than-totally-enthusiastic review of the third volume of Robert Skidelsky’s Keynes biography–Robert Skidelsky (2000), John Maynard Keynes: Fighting for Britain (London: Macmillan: 0333604563). I wrote that I was disappointed: that:

I was expecting this to be a great book: as stunning as the first two volumes…. But it was not. Do not get me wrong: it is still a good book, well worth reading. Anyone who loved Skidelsky’s first two volumes will like this one…

Now let me repair the damage by writing a totally enthusiastic, totally adulatory review of Skidelsky’s first two volumes. He gives us John Maynard Keynes’s life, entire. And he does so with wit, charm, control, scope, and enthusiasm. You read these books and you know Keynes–who he was, what he did, and why it was so important.

The place to start is with the observation that John Maynard Keynes appeared to live more lives than any of the rest of us are granted.

Keynes was an academic, but also a popular author. His books were read much more widely outside of academia than within it. Keynes was a politician–trying to advance the chances of Britain’s Liberal Party between the wars–but also a bureaucrat: at times a key civil servant in the British Treasury. He was a speculator, trying to make his fortune on the stock market, but also at the core of the ‘Bloomsbury Group’ of artists and intellectuals that did so much to shape interwar culture.

For the litterati it is Keynes of Bloomsbury–his loves, enthusiasms, acts of patronage, and wit–who is the most interesting. For economists like myself, it is Keynes the academic who is the real Keynes: he was the founder of the half-science half-witchcraft discipline of macroeconomics. For those interested in the political and economic history of the twentieth century, it is Keynes the author and politician who is primary. In either case, John Maynard Keynes is the man who has the best claim to be the architect of our modern world–whether it is how our central banks think about economic policy, what our governments believe that they must try to do, the institutions through which they work, or the habit of thought that views the economy not as Adam Smith’s ‘system of natural liberty’ but as a complicated machine that needs adjustment and governance, all of these trace large parts of their roots to the words and deeds of John Maynard Keynes.

How did this man come to be?

That is the question answered by the first volume of Skidelsky’s biography: it is a bildungsroman, a story of growth and development. Skidelsky writes the best narrative interpretation of growing up as a smart and privileged children of academics in late Victorian Britain than I can ever conceive of being written. He writes of how Keynes was one of a relatively small number of brilliant students thrust as a leaven into the mass of Britain’s upper class at Eton, and thus became part of ‘an intellectual elite thrust into the heart of a social elite’ (HB, page 77). An entire cohort of Britain’s upper class thus learned before they were twenty that Keynes could be very smart, very witty, very entertaining–and very helpful if there was a hard problem to be thought through or something to be done.

Skidelsky then writes of Keynes at Cambridge, his joining the secret society of the Apostles, and his eager grasping with both hands of the philosophy of the aesthete common among the students of the philosopher G.E. Moore. As Keynes put it in 1938, he believed that one should arrange one’s life to achieve the most good, where ‘good’ was nothing more or less than:

states of mind… states of mind… not associated with action or achievement or with consequences [but]… timeless, passionate states of contemplation and communion…. a beloved person, beauty, and truth.

Thus Keynes left Cambridge convinced that:

one’s prime objects in life were love, the creation and enjoyment of aesthetic experience, and the pursuit of knowledge. Of these love came a long way first… (HB, page 141).

This embrace of aestheticism was and remained the key to the ‘Bloomsbury’ avatar of John Maynard Keynes, for whom the lodestars were to ‘be in love with one’s friends, with beauty, with knowledge’ and who was and remained an enthusiastic member of the Bloomsbury group, sharing ‘its intellectual values and its artistic enthusiasms,’ and participating ‘in its wild fancy dress parties’ (HB, page 234). Keynes was a man who could celebrate this appointment to the British Treasury with:

…a party for seventeen… at the Café Royale…. Afterwards they went back to 46 Gordon Square for Clive [Bell]’s and Vanessa [Bell, the sister of Virgina Woolf]’s party. There they listened to a Mozart trio… and went upstairs for the last scene of a Racine play performed by three puppets made by Duncan [Grant], with words spoken by the weird-voiced Stracheys. ‘The evening ended with Gerald Shove enthroned in the center of the room, crowned with roses…’ (HB, page 300).

But at the same time Keynes’s pursuit of knowledge was shading over into politics and policy as well. For Keynes it was never enough to pursue knowledge in order to achieve a good state of mind, one had also to be sure to cause the knowledge to be applied to make the world a better place. And how one could act in politics and policy was greatly constrained by the limits of our knowledge. One argument from Edmund Burke, especially resonated with Keynes. As he wrote:

Burke ever held, and held rightly, that it can seldom be right… to sacrifice a present benefit for a doubtful advantage in the future…. It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear… We can never know enough to make the chance worth taking… (ES, page 62).

Keynes’s industry and intelligence thus made him a trusted and effective member of Britain’s intellectual and administrative elite well before the eve of World War I. Sir Edwin Montagu, especially, pushed him forward both before and during the war. Before the war Keynes decided that he wanted the life of an academic rather than of an administrator: Cambridge rather than the India Office or the Treasury. Yet he kept a strong presence in both worlds, writing his practical and policy-oriented book Indian Currency and Finance in spare moments as he worked on the deeper and philosophical project that was his Treatise on Probability.

Thus it was no surprise that Keynes found an important and powerful job at the Treasury during the national emergency that was World War I. How do you mobilize the financial resources of Britain to support the war effort? How large a war effort could the British economy stand? How could an international trade system geared to consumer satisfaction be harnessed as an instrument of national power? These are all deep and complicated questions. These are what Keynes worked on. But as the death toll from World War I mounted up toward ten million, Keynes became angrier and angrier at this monstrous botch of human lives and social energy that was World War I–and angrier and angrier at the politicians who could see no way forward other than mixing more blood with mud at Paaschendale.

Keynes’s friend David Garnett wrote him a letter condemning his work for the government, calling Keynes:

an intelligence they need in their extremity…. A genie taken incautiously out… by savages to serve them faithfully for their savage ends, and then–back you go into the bottle…. Oh… our savages are better than other savages…. But don’t believe in the profane abomination.

The interesting thing was that Keynes ‘agreed that there was a great deal of truth in what I had said…’ (HB, page 321). And then the whole project of post-World War I reconstruction went wrong at Versailles–when the new German government was treated as a foe rather than a democratic ally, when the object seemed to be to extract as much in plunder and reparations from Germany as possible (‘until the pips squeak’).

Skidelsky quotes South African politician Jan Christian Smuts on the atmosphere at Versailles:

Poor Keynes often sits with me at night after a good dinner and we rail against the world and the coming flood. And I tell him that this is the time for Grigua’s prayer (the Lord to come himself and not to send his Son, as this is not a time for children). And then we laugh, and behind the laughter is [Herbert] Hoover’s horrible picture of thirty million people who must die unless there is some great intervention. But then again we think that things are never really as bad as that; and something will turn up, and the worst will never be. And somehow all these phases of feeling are true and right in some sense… (HB, page 373).

Keynes exploded with a book called The Economic Consequences of the Peace. It condemned the political maneuvering of Versailles and the treaty that resulted in the strongest possible terms. He excoriated short-sighted politicians who were interested in victory rather than peace. He outlined his alternative proposals for peace:

German damages limited to £2000m; cancellation of inter-Ally debts; creation of a European free trade area… an international loan to stabilize the exchanges…

And he prophesied doom–if the treaty were carried out and Germany kept poor for a generation:

If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for long that final civil war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing, and which will destroy… the civilization and progress of our generation… (HB, page 391).

The Economic Consequences of the Peace made Keynes famous. His horror at the terms of the peace treaty won him friends like Felix Frankfurter, a powerful molder of opinion in the United States. In his book, propelled by ‘passion and despair,’ Keynes ‘spoke like an angel with the knowledge of an expert’ and showed an extraordinary mastery not just of economics but also of the words that were needed to make economics persuasive. Before The Economic Consequences of the Peace Keynes was primarily an academic (with some government experience) with a lot of influential literary friends. Afterwards he was a celebrity. He was not only the private Keynes: ‘the Cambridge don selling economics by the hour, the lover of clever, attractive, unworldly young men, the intimate of Bloomsbury.’ He was also–because of what he had done with his pen after Versailles–‘the monetary reformer, the adviser of governments, the City magnate, the feared journalist whose pronouncements caused bankers and currencies to tremble… conferences jostled with holidays, intimacy merged into patronage. In 1925 the world-famous economist would marry a world-famous ballerina in a blaze of publicity…’ (HB, page 400).

So after World War I Keynes used what power he had to–don’t laugh–try to restore civilization. In Skidelsky’s–powerful and I believe correct–interpretation, Keynes before 1914:

believed (against much evidence, to be sure) that a new age of reason had dawned. The brutality of the closure applied in 1914 helps explain Keynes’s reading of the interwar years, and the nature of his mature efforts… to restore the expectation of stability and progress in a world cut adrift from its nineteenth-century moorings… (ES, page xv).

Skidelsky’s narrative of the mature Keynes–Keynes in the 1920s–is far from being a one-note recounting of the brave but losing struggle against the approaching Great Depression, against political insanity, and against the Nazi Party’s attempted revenge for the German defeat in World War I. Bloomsbury takes up a good chunk of the narrative. Skidelsky’s book includes love letters from Keynes to his future wife Lydia Lopokova:

In my bath today I considered your virtues—how great they are. As usual I wondered how you could be so wise. You must have spent much time eating apples and talking to the serpent! But I also thought that you combined all ages—a very old woman, matron, a debutante, a girl, a child, an infant; so that you are universal. What defence can you make against such praises? (page 181).

But when he tries to paint a picture of what it was like to be a member of the Bloomsbury culture group in the 1920s, Skidelsky’s words fail him. Instead, he resorts to the imaginings of one of the characters of novelist Anthony Powell, who thinks that Bloomsbury must have been:

…every house stuffed with Moderns from cellar to garret. High-pitched voices adumbrating absolute values, rational statse of mind, intellectual integrity, civilized personal relationships, significant form…. The Fitzroy Street Barbera is uncorked. Le Sacre du Printemps turned on, a hand slides up a leg…. All are at one now, values and lovers (page 11).

Virginia Woolf had a different, less happy and romantic view. She wrote of her:

vivid sight of Maynard by lamplight—like a gorged seal, double chin, ledge of red lip, little eyes, sensual, brutal, unimaginate. One of those visions that come from a chance attitude, lost as soon as he turned his head. I suppose though it illustrates something I feel about him. He’s read neither of my books… (page 15)

There is a clear lesson: if your circle includes novelists with wicked pens, read their books and praise them as often as possible.

The bulk of this second volume–The Economist as Saviour–is however devoted to Keynes’s political and intellectual struggle for stable money and full employment, and against deflation, overvalued exchange rates, and the sacrifice of the happiness of today’s populations in the hopes of regaining the imagined benefits of the classical gold standard at some time in the distant future. Keynes spent more than a decade arguing against central bankers who ‘think it more important to raise the dollar exchange a few points than to encourage flagging trade.’ He tried to prevent Britain’s return to the gold standard in 1925 at an overvalued exchange rate, for by overvaluing the exchange rate Britain’s Treasury Minister, Winston Churchill, was willing:

… the deliberate intensification of unemployment. The object of credit restriction, in such a case, is to withdraw from employers the financial means to employ labor at the existing level of prices and wages. This policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction in money wages under the pressure of hard facts…. Deflation does not reduce wages ‘automatically.’ It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a Depression! (page 203).

But in the end Keynes failed.

He was unable to persuade British governments that economic policy should be decided upon by rational thought rather than by obedience to old poorly-understood verities. He failed to achieve any material easing of the terms of the Versailles treaty. He failed to prevent deflation and high unemployment in Britain. He failed to convince people that the Great Depression was a man-made catastrophe that could be cured relatively easily. His pen–though strong–was not strong enough. His allies were too few. And among central bankers and cabinet ministers understanding of the situation in which they were embedded was rare.

So the 1930s saw a change of emphasis. Fewer short polemical articles were written. Instead, Keynes concentrated his attention on writing a book, a book which he thought:

…will largely revolutionize–not, I suppose, at once but in the course of the next ten years–the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the upshot will be in its effects on actions and affairs. But there will be a great change…’ (pages 520-521). And he was right.

His General Theory of Employment, Interest, and Money did change the world.

It ends with a bold claim for the importance of ideas rather than interests that, in context, has to be read not as a considered judgment but as his desperate hope:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas…. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil… (page 570).

The extraordinary thing is that Keynes was right.

The other extraordinary thing is that Skidelsky has told the story so well.

So buy these books. Read these books. These are great books. Time spent with them is time well-spent. Robert Skidelsky deserves great honors for having devoted so much of his life to writing down the story of John Maynard Keynes, and writing it down so well.

Are there any problems with the books? A very few–usually caused by the fact that Skidelsky is not a technically-trained economist.

For example, Skidelsky seems frustrated at the apparent appearance and disappearance of the quantity theory of money from Keynes’s thought (and from economic thought in general). He writes that:

In his youthful exuberance Keynes claimed that adherence to [the quantity theory] was a test of scientific competence…. A few years later he cheerfully jettisoned it; in the 1970s back it popped…. If economics were really like physics, it would be impossible for ideas fundamental to the subject to disappear one moment and reappear the next… (HB, page xviii).

To an economist this sounds simply silly. In the Marshallian tradition in which Keynes was trained, it was always clear that the constant-velocity quantity theory of money was just a first approximation–and indeed Keynes’s General Theory is very clear about just how he intends to get a better, second approximation that reduces to the constant-velocity quantity theory when velocity is indeed constant. The quantity theory may have ‘popped back’ into the sights of economic journalists like Skidelsky in the 1970s; but it had always been present in economists’ models under the guise of the LM curve.

And Skidelsky does not seem to be able to clearly set out what Keynes was trying to achieve in his Treatise on Probability. This is no crime: Keynes was not able to set it out clearly either. We today can because we have the mathematical tools–information sets and expected values taken with respect to them–that make Keynes’s objections to what he took to be ’empirical’ theories of probability both cogent and obvious.

Strangest of all–and this I really do not understand–is Skidelsky’s apparent belief that Keynes’s despair in the immediate aftermath of World War I was an echo of ‘the Victorian fear of a godless society.’ Skidelsky thinks that the rise of atheism ‘severely depleted’ the ‘moral capital which sustained the accumulation of economic capital…’ (HB, pages 401-2). As if everyone would have been optimistic after the Versailles peace conference if only everyone had still gone to church on Sundays! The existential crisis of people seeking meaning for their lives when they can no longer find it in transcendental sanction is one thing. The slaughter of Verdun, the panic of hyperinflation, the social waste of high unemployment, and the (temporary) end of economic progress in Europe is quite another.

No one needed the Death of God to cause despair when they looked around them after World War I, and contrasted the world they saw with the world as they had seen it only six years earlier.

Social Credit and “Neutral” Monetary Policies: A Rant on “Helicopter Money” and “Monetary Neutrality”

Must-Read: Badly-intentioned or incompetent policymakers can mess up any system of macroeconomic regulation. And we now have two centuries of history of demand-driven business cycles in industrial and post-industrial economies to teach us that there is no perfect, automatic self-regulating way to organize the economy at the macroeconomic level.

Over and over again, the grifters, charlatans, and cranks ask: “Why doesn’t the central bank simply adopt the rule of setting a “neutral” monetary policy? In fact, why not replace the central bank completely with an automatic system that would do the job?”

Over the decades many have promised easy definitions of “neutrality”, along with rules-of-thumb for maintaining it. All had their day:

  • advocates of the gold standard,
  • believers in a stable monetary base,
  • devotees of a constant growth rate for the (narrowly defined) supply of money;
  • believers in a constant growth rate for broad money and credit aggregates;
  • various “Taylor rules”.

And the answer, of course, is that by now centuries of painful experience have taught central bankers one thing: All advocates, wittingly or unwittingly, were simply selling snake oil. All such “automatic” rules and systems have been tried and found wanting.

It is a fact that all such rule-based central bank policies and all such so-called automatic systems have fallen down on the job. They have failed to properly manage “the” interest rate to set aggregate demand equal to potential output and balance the supply of whatever at that moment counts as “money”, in whatever the operative sense of “money” is at that moment, to the demand for it.

Nudging interest rates to the level at which investment equals savings at full employment is what a properly “neutral” monetary policy really is.

Things are complicated, most importantly, by the fact that the business-cycle patterns of one generation are never likely to apply to the next. Consider: At any moment in the past century, the macroeconomic rules-of-thumb and models of economies’ business-cycle behavior that had dominated forty, thirty, even twenty years before–the ones taught then to undergraduates, assumed as the background for op-eds, and including in the talking points of politicians whose aides wanted them to sound intelligent in answer to the first question and fuzz the answer to the follow-up before ducking away. We can now see that, for fifteen years now, central banks have been well behind the curve in their failure to recognize that the business-cycle pattern of the first post-World War II generations has definitely come to an end. The models and approaches developed to understand the small size of the post-WWII generation’s cycle and its bias toward moderate inflation are wrong today–and are worse than useless because they propagate error.

And this should not come as a surprise. Before World War I there were the truths of the gold standard and its positive effect on “confidence”–the ability of that monetary system to, as Alfred and Mary Marshall put it back in 1885, induce:

confidence [to] return, touch all industries with her magic wand, and make them continue their production and their demand for the wares of others…

and so restore prosperity.

Yet those doctrines proved unhelpful and destructive to economies trying to deal with the environment of the 1920s and 1930s.

Those scarred by the 1970s have, ever since, been always certain that another outbreak of inflation was on the way. They have been certain that central bankers need to be, first of all, hard-nosed men. And so those scarred missed the great tech and stock booms of the end of the first millennium. Their advice was bad then. It is bad now.

More recently, there were those who drew the lesson from the twenty years starting in the mid-1980s that central bankers had finally learned enough to be able to manage an economy to keep the business cycle small–the so-called “Great Moderation”. They were completely unready for 2007-9. And they have had little or nothing useful to say since. Their advice was bad then. It is bad now.

And looking back at this history, right now the odds must be heavy indeed that people are barking up the wrong tree when they, today, fixate on the need for higher interest rates to fight the growth of bubbles. Or when they, today, talk about the danger that central bankers will be unable to resist pressure from elected governments to finance substantial government expenditures via the inflation tax.

The cross-era successes of macroeconomic theory as relevant to policy have been very limited. The principles that have managed to remain true enough to be useful across eras take the form of principles of modesty:

  1. There is the Mill-Fisher insight: We should look closely at the demand for and supply of liquid cash money, because a large excess demand for cash is likely to trigger a large demand shortfall of currently-produced goods and services. But Milton Friedman and others’ attempts to turn this into a rigid mechanical forecasting rule and a rigid mechanical k%/year money-growth policy recommendation blew up in their face.

  2. There is the Wicksell-Keynes insight: We should look closely at the supply of savings and the demand for finance to fund investment. But, again, Walter Heller’s and others’ attempts to turn this into a model that could then be used to guide fine tunings of policy blew up in their face.

  3. There are the Bagehot-Minsky insights: The insights about leverage, debt, and the macro economic consequences of sudden psychological phase transitions of assets from from rock-solid to highly-risky. But so far nobody in the Bagehot-Minsky tradition has even tried to construct a counterpart to the mechanical Keynesianism of the 1960s or the mechanical monetarism of the 1980s.

And by now this has become far too long to be a mere introduction to one of today’s must-reads: the very sharp Adair Turner:

Adair Turner: The Helicopter Money Drop Demands Balance: “Eight years after the 2008 financial crisis…

…the global economy is still stuck…. Money-financed fiscal deficits — more popularly labelled ‘helicopter money’ — seems one of the few policy options left…. The important question is political: can we design rules and responsibilities that ensure monetary finance is only used in appropriate circumstances and quantities?… In the real world… most money is… created… by the banking system… initial stimulus… can be multiplied later by commercial bank credit and money creation… [or] offset by imposing reserve requirements….

The crucial political issue is the danger that once the taboo against monetary finance is broken, governments will print money to support favoured political constituencies, or to overstimulate the economy ahead of elections. But as Ben Bernanke, former chairman of the US Federal Reserve, argued recently, this risk could be controlled by giving independent central banks the authority to determine the maximum quantity of monetary finance….

Can we design a regime that will guard against future excess, and that households, companies and financial markets believe will do so? The answer may turn out to be no: and if so we may be stuck for many more years facing low growth, inflation below target, and rising debt levels. But we should at least debate…

Adair Turner is very sharp. But this is, I think, more-or-less completely wrong: There is no set of institutions that can leap the hurdle that he has set–there never was, and there never will be. But it is madness to say: “Since we cannot find institutions that will guarantee that we follow the right policies, we must keep our particular institutions and policies that force us to adopt the wrong ones.” Sufficient unto the day is the evil thereof. Fix that evil now–with an eye on the future, yes. But don’t tolerate evils today out of fear of the shadows of future evils that are unlikely to come to pass.

Must-Read: Jeremiah Dittmar and Ralf R Meisenzahl: The Protestant Reformation, Economic Institutions, and Development

Must-Read: Jeremiah Dittmar and Ralf R Meisenzahl: The Protestant Reformation, Economic Institutions, and Development: “Origins of growth: How state institutions forged during the Protestant Reformation drove development…

…Throughout history, most states have functioned as kleptocracies and not as providers of public goods. This column analyses the diffusion of legal institutions that established Europe’s first large-scale experiments in mass public education. These institutions originated in Germany during the Protestant Reformation due to popular political mobilisation, but only in around half of Protestant cities. Cities that formalised these institutions grew faster over the next 200 years, both by attracting and by producing more highly skilled residents.

The state can be a rent-extracting institution or a provider of public goods. What happens when the state becomes the provider of public goods?

Recent research suggests that where states have greater capacity to provide public goods, economic outcomes may be superior (Besley and Persson 2009, 2010, Acemoglu et al. 2015). The economics literature has emphasised expansions of state capacity that emerged for geostrategic and military reasons in European history ‘from above’.

In a recent paper (Dittmar and Meisenzahl 2016), we study a unique experiment that shifted legal institutions at the local level – the institutional public goods programme of the Protestant Reformation in Germany.

The institutions that we study were city-level laws that established Europe’s first large-scale experiments with mass public education and significantly expanded the social welfare bureaucracies and state capacities of cities. These legal institutions established a fundamental innovation in funding and oversight for municipal activities – the ‘common chest’, a literal box of funds used to support public services. Significantly, the adoption of these institutions reflected popular political mobilisation.

In our research, we study the local variation in institutions and answer three interrelated questions:

  1. How did these innovations shape development?
  2. Why did some but not all cities adopt these institutions?
  3. What was the political process driving these transformations in German society?

Mapping an institutional upheaval: The local adoption of these new legal institutions was highly variable. In fact, fewer than 55% of cities that adopted Protestantism established legal institutions to support the provision of public goods. We observe variation across neighbouring cities in the same territory, subject to the same territorial lord.

The Protestant Reformation economic institutions and development VOX CEPR s Policy Portal

The impact of institutions on long-run development: We test the hypothesis that cities with city-level Reformation laws by 1600 subsequently grew relatively quickly. Our first finding is that cities that adopted the Reformation institutions grew to be at least 25% larger in 1800 than observably similar cities. In contrast, we find no variation in growth associated with Protestant religion conditional on public goods institutions.

Historical evidence suggests that migration drove city growth in pre-industrial Europe (de Vries 1986, Bairoch 1991, Reith 2008). Existing quantitative evidence on migration is limited. We collect novel microdata on the migration and local formation upper tail human capital (Mokyr 1999, Squicciarini and Voigtlander 2015). Our data, drawn from the Deutsche Biographie, comprise thousands of the most important cultural and economic figures in German history between 1300 and 1800 – jurists, merchants, writers, artists, composers, and educators. We use the data to document the human capital response to institutional change.

Figure 2 shows how migration responded to institutional change by plotting the number of upper tail human capital migrants observed in cities that adopted public goods laws, cities that became Protestant but did not formalise public goods provision, and Catholic cities. These cities were attracting similarly small numbers of migrants before the Reformation, which is marked by the vertical line at 1518. A large shift in migration towards cities with public goods institutions appears in the 1520s, as legal reforms were passed. This gap persisted over the next 200 years and notably was driven by differences in migration from small towns to cities, not by a ‘brain drain’ from less to more desirable cities.

The Protestant Reformation economic institutions and development VOX CEPR s Policy Portal

We similarly find that cities with public goods institutions began producing more upper tail human capital starting after 1520. We find no differences in the local formation of upper tail human capital before the Reformation and 50-200% higher formation of upper tail human capital after the Reformation when we compare cities with laws supporting public goods provision to cities without these institutions.

Why not all cities adopted public goods institutions: The Protestant Reformation was both a religious revival movement and an anti-corruption movement with an institutional agenda. The institutional agenda was designed to expand the provision of public services.

Popular political mobilisation drove the Protestant Reformation. Local elites and city councils initially resisted the introduction of Protestantism (Cameron 1991, Dickens 1979). Civil disobedience and unrest pushed policymakers to meet citizen demands and pass laws establishing the public goods institutions of the Reformation. Differences in institutional outcomes across municipalities reflected differences in local preferences and in political mobilisation, which varied across cities even within the same territory.

How plague outbreaks shifted politics and institutions:The very features that led some communities to welcome religious innovation and to mobilise in support of institutional change may have had independent implications for economic development.

To untangle cause and effect, we study how plague outbreaks in the critical juncture of the early 1500s shifted local politics and pushed otherwise similar cities towards institutional change.

During plague outbreaks incumbent wealthy elites typically fled their home cities or died, reducing their political power (Dinges 1995). Following plague outbreaks, migration into cities increased, changing the composition and politics of the population (Isenmann 2012). During these periods, suffering was acute and civic order could break down. Before the Reformation, plagues led to religious innovations within Catholicism – such as the development of penitential rituals and marches and the construction of church altars to ‘plague saints.’

During the Reformation – with the introduction of political and religious competition – plagues suddenly operated as institutional shifters. Plagues operated as institutional shifters not only because they caused extreme suffering, but specifically because Protestants and Catholics were differentiated in the market for religion in their institutional programme and teachings regarding the plague.

We study local plague outbreaks in the early 1500s as a source of plausibly random variation in institutional change. The intuition is that plagues that hit the generation in place when the Reformation broke across German cities were random, conditional on long-run levels and trends. In the data, we find that an additional plague in the early 1500s increased the probability of adopting the new legal institutions by 10-25%.

To illustrate the research design, Figure 3 shows the timing of plague outbreaks in select cities. In Figure 3, we highlight the period 1500 to 1522, which serves as the baseline period that we use to study the implications of the plague for institutional change.

The Protestant Reformation economic institutions and development VOX CEPR s Policy Portal

To document the unique relationship between plagues in the early 1500s, institutions, and growth, we study plague outbreaks across the entire period from 1400 to 1600. Figure 4 plots the point estimates from rolling instrumental variable (IV) regressions that study log city population in 1800 as the outcome. We estimate these regressions shifting the time period, which we use as the plague exposure IV for institutional change year-by-year. There is no significant relationship between plagues across the 1400s and subsequent institutional change and the 2SLS estimates of the population growth impact of induced variation in institutions are insignificant. In the early 1500s, these relationships change. With the introduction of religious and political competition, we see plague exposure being activated as an institutional shifter with development consequences in the early 1500s.

The Protestant Reformation economic institutions and development VOX CEPR s Policy Portal

Conclusion: During the Protestant Reformation, some but not all German cities adopted new municipal legal institutions. These institutions expanded state capacity and established public schooling. The cities that adopted these institutions grew faster over the next 200 years. These cities attracted and produced more upper tail human capital individuals and embarked on more dynamic development trajectories. Cities that adopted Protestantism but did not formalise public goods institutions in law had no similar advantage.

Our results strongly suggest that human capital was not dormant, waiting to be ‘activated’ during the Industrial Revolution – it was instead a fundamental driver of growth over the early modern period. More broadly, our findings suggest that the Protestant Reformation was a canonical model of the emergence and implications of state capacity driven by political movements that challenge elites.

Authors’ note: The opinions expressed here are those of the authors and do not necessarily reflect the view of the Board of Governors of the Federal Reserve System.


Acemoglu, D, C Garcia-Jimeno and J Robinson (2015) ‘State capacity and economic development: A network approach’, American Economic Review, 105: 2364-2409.

Bairoch, P (1991) Cities and economic development: From the dawn of history to the present, University of Chicago Press.

Besley, T and T Persson (2009) ‘The origins of state capacity: Property rights, taxation, and politics’, American Economic Review, 99: 1218-44.

Besley, T and T Persson (2010) ‘State capacity, conflict, and development’, Econometrica, 78: 1-34.

Cameron, E (1991) The European Reformation, History Reference Center, Clarendon Press.

De Vries, J (2006) European Urbanization, 1500-1800, Routledge.

Dickens, A (1979) ‘Intellectual and social forces in the German Reformation’, in Mommsen, W (ed), Stadtburgertum und Adel in der Reformation, Ernst Klett.

Dinges, M (1995) ‘Pest und Staat: Von der Institutionengeschichte zur Sozialen Konstruktion?‘, in Dinges, M and T Schilch (eds) Neue Wege in der Seuchengeschichte, Franz Steiner, Stuttgart.

Dittmar, J and R Meisenzahl (2016) ‘State capacity and public goods: Institutional change, human capital, and growth in early modern Germany’, Working paper, LSE Centre for Economic Performance and Federal Reserve Board.

Isenmann, E (2012) Die Deutsche Stadt im Mittelalter 1150-1550, Bohlau.

Mokyr, J (2009) The enlightened economy: An economic history of Britain, 1700-1850, New Economic History of Britain, Yale University Press.

Reith, R (2008) ‘Circulation of skilled labour in late medieval Central Europe’, in Epstein, S and M Prak (eds) Guilds, Innovation and the European Economy, 1400-1800, Cambridge University Press, Cambridge.

Squicciarini, M and N Voigtlander (2015) ‘Human capital and industrialization: Evidence from the age of Enlightenment’, Quarterly Journal of Economics, 130: 1825-83.”

What can the state see? Or, the extraordinary power of the night-watchman state

Hoisted from 2010: James Scott, “Legibility,” Flavius Apion, Anoup, the Emperor Justinian, Robin of Locksley, Rebecca Daughter of Mordecai, King Richard, and Others..: Cato Unbound: James Scott: The Trouble with the View from Above.: A comment:

In 542 AD the late Roman (early Byzantine?) Emperor Justinian I wrote to his Praetorian Prefect concerning the army–trained and equipped and paid for by the Roman State to control the barbarians and to ‘increase the state.’ Justinian was, Peter Sarris reports in his Economy and Society in the Age of Justinian, upset that:

certain individuals had been daring to draw away soldiers and foederati from their duties, occupying such troops entirely with their own private business…. The emperor… prohibit[ed] such individuals from drawing to themselves or diverting troops… having them in their household… on their property or estates…. [A]ny individual who, after thirty days, continues to employ soldiers to meet his private needs and does not return them to their units will face confiscation of property… ‘and those soldiers and fioderati who remain in paramonar attendance upon them… will not only be deprived of their rank, but also undergo punishments up to and including capital punishment.’

Justinian is worried because what is going on in the country he rules is not legible to him. Soldiers–soldiers whom he has trained, equipped, and paid for–have been hired away from their frontier duties by the great landlords of the Empire and employed on their estates and in the areas they dominate as bully-boys. One such great landlord was Justinian’s own sometime Praefectus Praetorio per Orientem Flavius Apion, to whom one of Flavius’s tenants and debtors, one Anoup, wrote:

No injustice or wickedness has ever attached to the glorious household of my kind lord, but it is ever full of mercy and overflowing to supply the needs of others. On account of this I, the wretched slave of my good lord, wish to bring it to your lordship’s knowledge by this present entreaty for mercy that I serve my kind lord as my fathers and forefathers did before me and pay the taxes every year. And by the will of God… my cattle died, and I borrowed the not inconsiderable amount of 15 solidi…. Yet when I approached my kind lord and asked for pity in my straits, those belonging to my lord refused to do my lord’s bidding. For unless your pity extends to me, my lord, I cannot stay on my ktema and fulfill my services with regard to the properties of the estate. But I beseech and urge your lordship to command that mercy be shown to me because of the disaster that has overtaken me…

The late Roman Empire as Justinian wished it to be would consist of (a) slaves, (b) free Roman citizens (some of whom owned a lot of land), (c) soldiers, (d) bureaucrats, and (e) an emperor. The slaves would work for their masters. Slaves along with their citizen masters and non-slaveholding citizens would farm the empire (some of the citizens owning their land; some renting it). All would be prosperous and pay their taxes. And the emperor would use the taxes to pay the soldiers who dealt with the Persians, the Huns, the Goths, and the Vandals; to fund the building of Hagia Sophia and other works of architecture in Constantinople; and to promote the true faith and extirpate heresy. If the countryside were legible to him, that is how things would be–slaves and citizens in their places, landlords and tenants in their mutually-beneficial contractual relationships, all prosperous and all paying their taxes to support the empire.

But Justinian knows very well that the countryside is not legible to him. The contracts that Flavius Apion makes with his tenants are made under the shadow of the threat that if Flavius Apion does not like the way things are going he will send a bucellarius to beat you up. Anoup is not pointing out to Flavius Apion that their landlord-tenant relationship is a good thing and that keeping him as a tenant rather than throwing him off the land for failure to pay the rent is in both their interests. Instead, Anoup is calling himself a slave (which he is not). Anoup is calling Flavius Apion a lord (which he is not supposed to be). Anoup is appealing to a long family history of dependence of himself and his ancestors on the various Flavii Apionoi and Flavii Strategioi of past generations. Justinian thinks that things would be better served if the countryside were properly legible to him and he could enforce reality to correspond to the legal order of slaves and citizens, tenants and landlords interacting through contract, and taxpayers. Flavius Apion would prefer that the order be one of proto-feudalism: that all the Anoups know and understand that they are at his mercy, and that the emperor is far, far away. And we don’t know what Anoup thinks. We do know thait does not sound as though he experiences the lack of legibility of the countryside to the emperor and his state as a full and complete liberation. And we do know that the Emperor Justinian was gravely concerned about the transformation of his soldiers into bucellarii, into the dependent bully-boys of the landlords–both because it meant that they were not on the borders where they belonged and because it disturbed what he saw as the proper balance of power in the countryside and what he saw as the emperor’s justice.

Justinian’s big (and to him insoluble) problem was that the Flavius Apion whose bully-boys beat up his tenants when they displeased was the same Flavius Apion who headed Justinian’s own bureaucracy.

Thus when James Scott speaks of how local knowledge and local arrangements having the ability to protect the people of civil society from an overmighty, blundering state, I say ‘perhaps’ and I say ‘sometimes.’

It is certainly the case that the fact that Sherwood Forest is illegible to the Sheriff of Nottingham allows Robin of Locksley and Maid Marian to survive. But that is just a stopgap. In the final reel of Ivanhoe the fair Rebecca must be rescued from the unworthy rogue Templar Sir Brian de Bois-Guilbert (and packed offstage to marry some young banker or rabbi), the Sheriff of Nottingham and Sir Guy of Gisborne must receive their comeuppance, the proper property order of Nottinghamshire must be restored, and Wilfred must marry the fair Rowena–and all this is accomplished by making Sherwood Forest and Nottinghamshire legible to the true king, Richard I ‘Lionheart’ Plantagenet, and then through his justice and good lordship.

A state that makes civil society legible to itself cannot protect us from its own fits of ideological terror, or even clumsy thumb-fingeredness. A state to which civil society is illegible cannot help curb roving bandits or local notables. And neither type of state has proved terribly effective at constraining its own functionaries.

In some ways, the ‘night watchman’ state–the state that enables civil society to develop and function without distortions imposed by roving bandits, local notables, and its own functionaries, but that also is content to simply sit back and watch civil society–is the most powerful and unlikely state of all.

AlphaChat: Underappreciated Moments in Economic History

Underappreciated Moments in Economic History

Cardiff Garcia: Welcome to AlphaChat, the business and economics podcast of the Financial Times. I’m Cardiff Garcia….

First up on the show is Brad DeLong, an economist and economic historian at the University of California at Berkeley. He is also the coauthor of the New Book: Concrete Economics: The Hamilton Approach to Economic Growth and Policy. We are going to be discussing this book in a forthcoming episode of Alphachat-Terbox, our long-form sister podcast segment. But for this I have asked Brad to choose three under appreciated moments in economic history, and to give us the lessons we should learn from those events. I do not know what Brad’s chosen. I will be learning along with you.

Brad: Thanks for common on AlphaChat.

Brad DeLong: Thank you very much.

Cardiff Garcia: So what is first on the agenda? What is the first underappreciated event in economic history that you want to share with us?

Brad DeLong: The first is the bursting of the 1825 canal bubble in Britain, centered on London finance. It is the first time we have a business cycle that is truly triggered not by the embarrassment of some dominant banking house and not by some government default–like Charles II Stuart’s Stop of the Exchequer or the financial manipulations of Felipe II Habsburg of Spain, whom his bankers called “the borrower from Hell”.

Instead, it is the first time we have a wave of enthusiasm in high-tech investment–i.e., canals–leading to lots of overinvestment due to overoptimism (and to the failure of one set of canal builders to realize how much the market for their canal’s services would be eroded by the construction of other canals). We then have the crash. And there follows the spillover of the crash to manufacturing as a whole. 1826 sees the first year in which mechanized cotton production falls, ever, by 30%.

It also had powerful consequences for both economic theory and economic policy practice.

Jean-Baptiste Say.

He was the originator of Says’ Law. He was the first person to ever say that a general glut–a short-of-demand-driven business cycle that led to mass unemployment was not something we had to worry about. Why not? Because, Say argued, nobody made something to sell unless they planned to then use the money to buy, and so while you could certainly have excess supply in some industries that would be matched by excess demand in other industries. Thus people would shift from demand-short to demand-surplus industries quickly: the market would do its job of reallocating resources and tuning the economy to maximum productivity.

1825-26 in Britain convinced Say that he had been wrong.

His subsequent writings do not dismiss general gluts–short-of-demand-driven business cycles–as impossible, but recognize them.

1825-26 was also the first time that central banks engaged in lender-of-last-resort activities in response to a tech crash. The banking house of Pole, Thornton, and Co. was one that had made among the most canal loans and was among those most likely to be highly embarrassed. E.M. Forster’s great-aunt’s nephew, the very young Henry Thornton, then 25 or so, appears to have been the only non-somnolent partner of the bank in London in December 1825 when the crisis hit. He went to the Bank of England. He lied. He said: “We are solvent but illiquid.” And the Bank of England agreed to support him.

That weekend, Sunday morning before dawn, the Governor and Deputy Governor of the Bank of England counted out banknotes (to preserve secrecy) and then wheeled them through the pre-dawn streets of London in the December gloom so that when the bank opened the following Monday morning they could show huge piles of banknotes behind the tellers to suggest that they were in fact well-capitalized.

It tells us a number of things. We see a major move in economic theory, as the patron saint of the austerity point-of-view, Jean-Baptiste Say, abandons the positions he had been pushing since 1803. It shows the origins of large-scale lender-of-last-resort activities in response to a financial crisis produced by a large-scale bursting of a high-tech or other speculative investment bubble.

And it also shows the first case of the bankers successfully manipulating the central bank–inducing it to come to their rescue and so emerge from the crisis whole and even enriched via government support, even though the were the ones whose rash, risky, and inappropriate lending had caused it.

Cardiff Garcia: A fantastic example. I often lament that when we talk about bubbles we tend to stay with modern examples. We tend to get into comparisons between the housing bubble and the dot-com bubble and we talk about the remnants of those bubbles and the damage left behind by them. A lot of the time we ignore the fact that bubbles are as old as many and credit. There are great lessons to be learned.

Brad DeLong: As soon as you have large-scale credit where the borrower no longer knows the lender–where the fact that borrowings have been good for so long that you think you do not need to check whether borrower is in fact good for it–the value of being able to borrow in the future is so high that who would risk their reputation? When everyone stops checking the quality of the debts they own, and when the debts they own circulate as money, as assets widely perceived to be safe, then you are looking for a crisis. At some point it will become clear that things you thought were safe really were not safe at all. After all, the debts of Felipe II Habsburg of Spain–Master of the New World, owner of all the gold of the Aztecs and the Incas, proprietor of the mountain of silver that was Pitosi in Peru–how could he possibly get himself embarrassed? Well, he gave away enough land grants and pensions to the nobles of Spain, and he spent so much on the Wars of the Counterreformation in their attempt to suppress the insurgency of the fundamentalist religious terrorist fanatics who were the sixteenth-century Dutch–Protestant religious fanatics then–that he managed to get himself bankrupt.

Cardiff Garcia: Wonderfully insightful. What is your second example?

Brad DeLong: My second example is something I just learned about this week. One of our Berkeley graduate student, Gillian Brunet, is studying World War II for her dissertation.

World War II in the U.S. has always been of great interest as it sees the rapid movement of an economy from a depression-economics economy with lots of slack to an inflation-economics economy with excess demand pressure.

First Franklin Roosevelt gets worried about Nazi Germany. He starts trying to assemble alliances. He fails miserably.

France and Britain draw a line in the sand, saying: “We will declare war on you if you attack Poland!” Hitler responds: “What could you do about it? Poland is on the other side of us Germans from you. Don’t make empty threats.” So Hitler attacks Poland. Behold! He finds that–contrary to all the canons of game theory–Britain and France actually meant it. This is unusual. Until 1944, when it was clear that the United Nations had the war won, France and Britain were the only countries that ever declared war on Nazi Germany. Other countries waited until the Nazi tanks had actually crossed their border–or, very rarely, until the Nazis had declared war on them–to enter the conflict. France was the only country that shared a land border with Nazi Germany that ever dared make the decision not to try to hide but rather to take the fight to the Nazis and put their country in harm’s way.

Thus after World War II in Europe starts in September 1939, Franklin Roosevelt wants to build as much military hardware as he can and send as much as he can to aid France and Britain in their fight. But it is not until the end of 1941, the Japanese attack on Pearl Harbor, and Hitler’s declaration of war on the U.S. that total mobilization begins.

Starting in 1942, therefore, the U.S. was a war economy: dedicated to defeating Hitler and Tojo no matter what.

The question is: how did this transformation take place? How do you go from a slack economy to an inflation economy? And what happens to standard macroeconomic patterns and correlations as you do?

It turns out–and this is the thing I learned this week–that only a little bit of central planning allows you to do an enormous amount to redirect economic activity without having runaway inflation and your price level quadruple as you try to send the market very strong price signals that war material is now very highly valued. All the federal government had to do was send an executive order shutting down the civilian uses of those assembly lines capable of producing tanks and airplanes and trucks. Demanding that they be redirected to military vehicles. In the aftermath, a huge chunk of industrial capacity switched over effectively immediately to serve the needs of the Pentagon-to-be. And the funding emerged as well without extraordinary inflation, for everyone who would have bought a car in 1942 or 1943 saved the money instead and loaned it to the government by buying war bonds. Thus the same money flowed from consumers to factory workers–but through the government, and directing the workers to build tanks instead of cars.

You thus managed to switch a lot of production over very quickly without much inflation by just using the right teeny amount of central planning. Possible applications to what we may decide to do in the next decade or two with respect to global warming–if something very bad happens, and it becomes the moral equivalent of war for us rather than something to simply leave as a mess for future generations.

Cardiff Garcia: And your final example of an under appreciated event from economic history?

Brad DeLong: Let me–I know we will do this next time–talk about Steve Cohen’s and my book, Concrete Economics: The Hamilton Approach to Economic Growth and Policy. That subtitle is there because Alexander Hamilton is perhaps the only American who has, personally, made a real difference. That subtitle is also there because we are trying to sail as close as possible to the Lin-Manuel Miranda “Hamilton” boom in order to sell books, without ourselves becoming an intellectual-property misappropriation test case.

Our big overall thesis is that American economic policy has been remarkably good over the past two centuries–up until something happens around 1980. After that, the U.S. as a whole begins investing in the wrong industries: Health-care administration bureaucrats, financiers making lots of money by encouraging small investors to trade and then benefiting from the price pressure, people using quirks in the capital-structure fact that pension beneficiaries have cash-flow but not control rights to expropriate pension funds and then put the remaining obligations to the underfunded PBGC, the focus on sharply raising income inequality because our extremely-valuable overclass has been so underpaid since 1929 and won’t do their managerial and entrepreneurial jobs properly unless much more highly recompensed. These are not the industries of the future in any good sense. But these are the industries that America has been investing in increasingly since 1980.

Before 1980, we invested in other things: aerospace, computers, highways and suburbs, high-tech manufacturing of whatever day–electric power, internal combustion engines, machine tools, interchangeable parts, high-pressure steam engines. We invested in producing a comparative advantage in resource-intensive technological-frontier manufacturing, even though the British Empire’s Navigation Acts had left us with a strong comparative disadvantage in such industries. And so even back before the Civil War the British Parliament is sending over Commissions of Inquiry to ask: just how is it that New England productivity in these sectors of manufacturing has gotten so damned high? How did they accomplish this leap-frogging in machine-tool and even some aspects of textile technology?

The answer is precisely that Americans were not terribly ideological back before 1980 where the economic policy rubber hit the road. People back then overwhelmingly believed that the world was a mixed and complicated place where circumstances altered cases. What you need was to look down, around, up: to ask what was most likely to work out well now on the ground, rather than what conforms to some simplistic overarching ideological view of the world which explains everything in terms of some small set of simple principles you can count without taking off your shoes. An ideology allows you to live your life confident and smug. But it is also probably wrong.

Back around 1790 or so the ideologists were the Jeffersonians. The Jeffersonians believed that small yeoman farmers were good–ahem, Monticello?–and the only guarantee of middle-class prosperity and political liberty as well. Manufacturing, banking, urbanization, commerce in excess, a government investing in what was then high-tech–those are sources of corruption and very dangerous threats to freedom. Jefferson, at the end of the eighteenth century, said: Look at London, that corrupt resource-extracting machine, it’s taking the British down the road that in ancient Rome led to the collapse of the Roman Republic and to rise of tyrants like Julius Caesar. Our only chance is to cut ourselves off and to make our politics and our economic organization as far from Britain’s as we can.

Hamilton said: Hey, wait a minute. What works? Let’s see what industries are actually producing jobs for workers that pay high wages. Let’s see what are the opportunities for economic development here. Let’s see where there is a possibility for the government to exert a helpful nudge. And when Jefferson’s successors got into office and had to deal with the realities of power–well, they followed Hamiltonian policies: because they worked.

James Madison in opposition had argued very eloquently that the First Bank of the United States had been unconstitutional.

James Madison as president enthusiastically signed the bill creating and then had his attorney general aggressively defend the rights and powers of the Second Bank of the United States.

Cardiff Garcia: One of the themes of the book is that the debates of those early years about the country’s foundational economics have reappeared again. Brad, thanks for being on AlphaChat. We are going to be discussing Brad DeLong’s book with Steve Cohen, Concrete Economics: The Hamilton Approach to Economic Growth and Policy, on an forthcoming episode of Alphachat-Terbox, our long-form sister podcast.

But before we let you go, Brad, can you give us a longform recommendation?

Brad DeLong: Two books I am recommending right now are Martin Wolf’s The Shifts and the Shocks and Barry Eichengreen’s Hall of Mirrors. I think that if you read these two books you know what you need to know and more than 99.9% of the world knows about the current pickle that we are in: how we might get out of it, and why should be depressed (unless you are both already rich and willing to bear substantial risks in order to grab for returns).

FT Alphaville: Brad DeLong on Hamiltonian economics and U.S. economic history

Alphachatterbox: Podcast: Brad DeLong on Hamiltonian economics and US economic history

: DeLong Garcia Alphachatterbox Transcript: Brad DeLong on Hamiltonian economics

[Cardiff Garcia] Hey everyone, welcome to Alphachatterbox, the long form business economics and tech podcast of the Financial Times.

I’m Cardiff Garcia, and our guest today is Brad DeLong, an economist and economic historian at the University of California Berkeley. He also writes a popular blog, and he’s the co-author, along with Steven Cohen, of a new book called Concrete Economics: The Hamilton Approach to Economic Growth and Policy, and that is the topic of this edition of Alphachatterbox.
Brad DeLong, welcome back.

[Brad DeLong] Yes, yes. Thank you very much. Very glad to be here, wherever here is, in some metaphysical kind of sense.

[Cardiff Garcia] The metaphysical audio space. I’m excited to talk about this book. It seems to me that this book is mostly an effort to overturn some of the misguided but conventional wisdom about the foundational economic principles of the United States, but also of other economies that have experienced rapid growth in the past.

So why don’t we start by looking at the subtitle: the Hamilton Approach to Economic Growth and Policy. Why don’t you lay out for us the competing economic approaches of Thomas Jefferson and Alexander Hamilton, the two main characters in the first part of your book, and then we’ll go from there.

[Brad DeLong] Well let’s start with Jefferson. Let’s start with Jefferson the ideologue, Jefferson the agrarian, Jefferson the person who above else was scared of corrupt imperial monarchical authoritarian autocratic London.

Jefferson was a very smart guy, was a very forward looking guy.

Jefferson also tended to believe his teachers, and his teachers had taught him a particular version of ancient history – call it the republican virtue tradition, right, that once upon a time there had been a Roman republic, and it was virtuous because it was composed of small farmers who ploughed their own land, and lived simply and ate porridge and loved freedom and would rebel against kings or foreigners or anyone else who tried to take control of their lives.

And as long as the basis of Rome was the small farmer, who really didn’t want to be in government, say Cincinnatus – if you named Cincinnatus to be dictator to command the armies of Rome, he would come, and he would command the armies of Rome in their wars against their foes because he loved the republic. But as soon as he possibly could he would abandon Rome itself and go back to his farm and go back to his plough.

That’s what he really wanted to do. And indeed, there’s no doubt that this had a huge influence on America in the generation of the founding.

We have a city called Cincinnati, for heaven’s sake. We had a Society of the Cincinnati, made up of George Washington’s army officers during the Revolutionary War.

Against this, against this belief that the only way to have a virtuous republic in which people were free was to have small holding farmers dominate, against this, in Jeffersonians’ imaginations, was imperial Rome or imperial London. The Rome that had conquered the Mediterranean Basin, in the process acquired millions of slaves, handed out those slaves to the politically powerful oligarchs of Rome who then got their enormous estates on which they lived lives of luxury.
As they lived lives of luxury they lost their concern with the republic, they lost their republican virtue, they lost their ability to stand up to foreigners and to would-be kings. And the whole system comes crashing down with the wars of the first Century BC, and then with the ascent of first Julius Caesar and then the Emperor Augustus who stabilises the situation, who keeps Rome powerful, who keeps Rome rich — but who makes Rome not free.

That was how Jefferson was taught Roman history had gone, and Jefferson’s teachers said that’s what’s happening to imperial Britain in his day, in the late 18th Century. That’s what’s going on in London now, as trade grows and commerce grows and manufacturing grows and corruption grows and aristocracy grows, and the wealth of the elite grows.

And the remnants of political freedom that still remain are, Jefferson and company thought, about to be stomped into oblivion. That’s why Jefferson and company made the America Revolution, in response to insults and exactions from the British mother country that were quite small relative to the size of the American economy of the day, or indeed that were quite small relative to the taxes that other people had to pay in other countries.

But they thought it was a matter of life and death to get out from under this growing imperial structure.

And then no sooner do they win independence but Jefferson turns around, looks at New York, Philadelphia, looks at Hamilton, and says by heaven’s sake, they’re trying to do the same thing to us here. If Hamilton has his way, Philadelphia and New York will be the new London, and we’ll have done the revolution for absolutely nothing.

So that’s Jefferson. He has a very simple vision of how the world works. It reassures him. It allows him to think that he understands things, and can to some degree be in control of them.

And it leads to very strong conclusions.

Like the conclusion that the British mercantile system, the idea that America should simply produce primary products and ship them to Britain, while London handled all the commerce, all the banking, all the manufacturing — that that was actually a very good thing for America, because it kept America free.
That to grab for a share of the manufacturing, the commercial, the banking business, would be to make America richer, but at the process of endangering its liberty. That the growth of finance, and especially the growth of banks, were an enormous danger. That the growth of manufacturing, that urban workers who weren’t out on the farm breathing healthy air, working largely for themselves, but were instead concentrated in cities working for masters — that that was a great danger as well.

With that set of principles as his lodestone, Jefferson knew exactly what to do in response to every single political question that came up, which is to exalt the yeoman farmer, and make sure that people who might challenge the dominance of yeoman farmers over American politics, and indeed in the American economy, should be discouraged and stomped as fast as possible.

That’s why Jefferson was so opposed to Hamilton’s assumption of the debt, to Hamilton’s national bank, to Hamilton’s encouragement of manufactures, to Hamilton’s plans for an army large enough to defend the United States from a Britain coming down from Canada…00:07:30

[Cardiff Garcia] Brad, can you flesh each of those out a little bit? When you say Hamilton’s assumption of the debt, you mean the central government assuming the debts of the states.

[Brad DeLong] The central government saying that all of these states paid to fight the Revolutionary War for the country as a whole, and incurred large debts as a result of it.
And that it’s not fair either that the creditors of the states, who bought the bonds, in large part as a result, as an exercise of patriotic duty during the Revolutionary War, should suffer by not having their bonds repaid. And not fair that those who bought the bonds from the original purchasers, when the original purchasers found themselves strapped for cash, who were also in a way aiding the republic, should not get paid.

And not fair that the taxpayers of those states that stood up and actually did their duty during the revolution should have to pay taxes to repay the debt that had redoubted to everyone’s benefit, when the taxpayers of states that had welshed, or had not taken out debts at all, did not.

For Hamilton, it was a burden sharing, it was a fair burden sharing principle, coupled with the fact that if the Federal Government demonstrated that it would take on the debts that had been incurred for the country, even if there was no fundamental legal principle saying that it had to, that there was nothing you could do better to reassure investors in the United States and elsewhere that the United States was a serious country that took its obligations profoundly seriously, and that it would be a good place to invest, because it was a place where the government and the country stood by their promises, both explicit and implicit.

[Cardiff Garcia] It also, as you detail in the book, incentivised the holders of that debt to have an interest in the economic outcomes of the country as a whole.

[Brad DeLong] Yes, yes. That if you think that the upper class of New York is kind of wondering whether it might not be better to be subjects of the Hanoverian dynasty in London than in this American democratic uncertain uneasy political scrum, if the rich of New York have a lot of their wealth in US government debt, that is the first thing that the British government is going to repudiate if the king comes back, that’s a way of making New York’s largely Tory elite into the most aggressively solid advocates of American independence possible.

[Cardiff Garcia] Okay. And Hamilton’s favouritism towards manufacturing, his belief that we should have high tariffs to protect the infant manufacturing industry in the US, can you take us through his argument for why that was a good idea in the early years of the Republic?

[Brad DeLong] Well, his idea was simply that it seemed to work, right? That if you looked around at the world, you found that it was not the case that all virtue came from the countryside, from the yeoman farmers of the countryside, even leaving Monticello and other large scale slave plantations to one side.
That all virtue did not come from the countryside, and furthermore that there was an enormous amount of value created by the manufacturing and the commercial operations that he saw in London, that he saw growing in Manchester, that he saw elsewhere.

It’s simply that if you want to have a good country, you want to have a prosperous country, and if you want to have a prosperous country, people have to be making stuff in a productive way.

People have to be making the stuff that is valuable, and so he looked around and he looked at what are people doing in the world, not just in the United States, that seems to be very valuable. And quite probably more valuable than growing corn and raising pigs on their own farms.

And Hamilton came up with the idea that rich countries, that productive countries all seemed to have a substantial manufacturing sector.

Secondarily that powerful countries were countries that needed to be able to make their own industrial age weapons, that you needed to have iron foundries if you were going to actually make any guns, and you needed guns.

And that as a result you should look around and say, is there a way to encourage Americans to enter these particular lines of business that appear to be very profitable, and to do so in such a way that they’ll succeed. That government money spent on encouraging manufacturing, on encouraging banking and commerce will actually pay off, instead of being poured down some rat hole where it goes to the friends of the politically powerful and then is embezzled away.

And Hamilton’s conclusion was yes, that there were strategic interventions the government could make that would definitely very much pass the benefit/cost test. 00:12:38

[Cardiff Garcia] Okay. I think that’s a great set up to start discussing all that’s happened in the time since. One the one hand you have the philosophy of Thomas Jefferson that I think is often associated with the more free-market ideology, with the free-trade principles associated with Adam Smith. On the other hand you have Alexander Hamilton, who is pursing a more – I guess you could call it interventionist policy, one of industrial policy, higher tariffs, higher manufacturing.
Interestingly, and what was forgotten for a very long time, is that Hamilton’s approach is what prevailed, well into the 19th Century, and for some time even after that. So why don’t we talk about the events of the 19th Century, what happened roughly in the time between the establishment of the First National Bank, and Hamilton’s sort of approach to the economy winning out, and why it’s relevant still today. 00:13:30

[Brad DeLong] So by 1816, certainly, you have the party of Hamilton, the Federalist Party, essentially gone from the American scene. You have the Jeffersonian party, the Democratic Republicans, in near complete ascendancy, with in fact uncontested presidential elections up until Andrew Jackson shows up in the late 1820s to try to contest power. But even though the clients and the intellectual descendants, and in fact the elders of, Jeffersonianism are in control, the policies they’re following are Hamiltonian policies.

The Bank remains, at least until Andrew Jackson comes in, internal improvements to knit the country together, expensive internal improvements as a single economic entity, stay in and are expanded. The support to manufacturing continues, both through the Federal Government’s tuning of its defence purchases in order to encourage invention and high tech development, and through the tariff – which greatly taxes southern planters in order to benefit northern manufactures, and which was the secession, the potential secession flashpoint of the 1820s and the 1830s.

That long before the Civil War the state of South Carolina was threatening to secede, or at least to nullify the operations of federal laws it did not like within its borders.

The Jeffersonian politicians, who had been raised on small government principles, disagreed, and disagreed quite strongly. Even where Jeffersonian politicians do follow some pieces of the Jeffersonian platform – Andrew Jackson hated the Second National Bank, and in fact extirpated it – they are very Hamiltonian in others.

Andrew Jackson was very much in favour of having federal law control everywhere, and in favour of keeping taxes if not quite as high as John Quincy Adams, his predecessor, had liked, still of keeping tariffs quite high and keeping internal improvements going – so much so that I believe he threatened to hang his own Vice President on the White House lawn if said Vice President continued in his treasonous advocacy of South Carolina’s right to nullify federal laws within its boundaries.

And this process rolled forward, one in which the pragmatic realities of power, and the desire for a richer and stronger and more developed country, pushed the United States into the developmental state policies that Hamilton pioneered, those of support for manufacturing, support for invention and innovation, support for the development of communities of engineering practice and excellence. Discouragement of elite consumption, especially of elite consumption of luxuries from abroad.
That what imports you import ought to be directed at building up your industrial and technological capabilities, and your infant industries need to be provided with protection against those industries elsewhere that actually have a comparative advantage, until they can develop a comparative advantage of their own.

And why is this a good policy? Why did Hamiltonian development strategy succeed?

Well, first of all, sometimes they didn’t.

Argentina is the extraordinary – not the typical case, but is the polar case of a country that tried to follow a semi-Hamiltonian, we’re going to move out of our specialisation in exporting beef, leather, hides and grain, and into manufacturing and become rich, and finding that it’s absolutely catastrophic. Because the firms to which Argentina directs its subsidies are those which are mostly characterised by the fact that their executives are married to the niece of the Vice Minister of Finance, rather than that encouraging them will lead to the development of some kind of community of engineering excellence.

Say Brazil’s attempt to jump-start its ability to make computers in the 1960s and 1970s was another total disaster, because what Brazil found itself trying to do was trying to compete with building hardware as good as IBM’s. And it could never get there. And in the process of trying to build hardware and prohibiting the import of IBM computers into Brazil, what it actually did was it robbed an entire generation of Brazilian programmers of the ability to learn how to actually do their jobs.

And so by the end of the process, Brazil’s computer directed industrial policy had created a computer hardware industry in Brazil that had one tenth the productivity of America’s hardware industry, and had managed to destroy Brazil’s software computer programmer population completely.

[Cardiff Garcia] Brad, stay with me in the 19th Century for a second, though. We’re definitely going to bring it forward in a bit. I should note that in addition to the high tariffs and to the emphasis on manufacturing in the US, that wasn’t taking place everywhere. You note, and you have a quote, you call the “economies of temperate European settlement”, Australia and Canada chief among them, these are economies that emphasise only the comparative advantages that only existed at the turn of the 19th Century, and consequently they did not have the kind of development that the United States did.

[Brad DeLong] No, but they were quite rich, right? Canada was always a nice place to live. New Zealand too. Australia’s a very nice place to live, for most of the 19th Century, if you accept the two to one male to female ratio that it developed because of Britain’s use of it as a dumping ground for convicts. But eventually natural increase saw the Australian sex ratio normalised, and Australia turned out to be a wonderful place for raising sheep, at least before the drought of the 1890s.

And Australia became the sheep-raising OPEC of the late 19th Century, plausibly the richest place in the world for 20 years or so. But they didn’t develop the communities of engineering practice, they didn’t develop the patterns of investment and of large scale manufacturing firms that the United States did
And so when the technologies of the second industrial revolution arrived, the United States with its cotton and wide market, and its rich natural resources, and its communities of engineering excellence, was able to leap ahead – and in fact greatly surpass Britain in manufacturing productivity pretty much everywhere.
So that the 20th Century became an American century, rather than a second British century, in large part because of the bets Hamilton had induced the United States to make on not simply following comparative advantage.

[Cardiff Garcia] Yes, a long lag in between payoffs is always something that comes up in your book. It didn’t just apply to Hamilton’s policies leading to the 20th Century being the American century, you also get into it later with the policies of Eisenhower in the 50s, leading to a big payoff in the digital age.

But I think that’s a great place to start talking about the turn of the 20th Century, and what happened under Teddy Roosevelt. You say that pragmatic experimentalism is what has worked for the US in the past, and this includes shifting course sometimes.

So we saw by the time that Teddy gets put in office that there had been a strong concentration in a small number of firms, and that applied across a few industries. He got in there and he started shaking things up. Talk about the importance of what he did, and how it represented a change in course.

[Brad DeLong] Yes, the Hamilton playbook is a wonderful playbook for a follower country that can manage to pursue it competently rather than corruptly.

You don’t just have the United States, you have Germany in the late 19th Century following the Hamiltonian playbook. And if I can look forward to the 20th Century for a sheer second, it’s what Japan does, it’s what Korea and Taiwan do. It’s what western Europe south of the channel did in the 30 years after World War II. It’s what China is doing now with great success.
But it’s not the ultimate, it’s not the only, it’s not the best development strategy, especially after you’ve ceased to be a follower country. After you’ve become a leader country, then all of a sudden issues of distribution come to the fore. You are no longer so interested in having simply more produced without worrying about who’s getting the lion’s share of it. 00:23:21

[Cardiff Garcia] Brad, for our listeners, when you say a follower and a leader country, you mean a leader country is a country that is at the edge of the technological frontier, [while] a follower country is one that’s trying to catch up to them.

[Brad DeLong] Yes, well, a leader country is one that has the industrial structure and productivity levels that pretty much everyone is heading to and wants to head to as fast as possible. A follower country is following along in their footsteps.
And so the problems for a potential leader country, for one that becomes part of what I think we’re now supposed to call the Global North, are different than those of the rapid development of cultures of engineering practice that you know can be built, and that you know exist, and you know are highly productive, because you can look abroad at other countries and see them.

The problems of a leader country are problems of distribution, are problems of building capital, both human and physical, and are problems of figuring out what the best industries of the future are going to be.

And so starting, I guess, after the Civil War, as the United States is now a leader country, as the pragmatic problems the economy faces change, the pragmatic economic policy response changes as well.

They are the problems of how do you manage to knit the country together as a single economic entity to take advantage of economies of scale. And the answer is to throw money at railroads, in a highly corrupt but very effective way: to get a dense network of railroads built across the country, after which the problem is you’ve now enriched these railroad barons. And they have substantial monopoly power.

Well, the pragmatic response is all of a sudden to forget that they are simply exercising the property rights that you gave them, and instead to establish an anti-trust policy. To break up monopolies that you yourself have created in rails, and also to adopt rate regulation. To establish an inter-state commerce commission so that the small farmer trying to bargain with a monopolistic railroad has the government on their side to some degree.

There’s a belief that you should democratise the ownership of property, so instead of selling off the land not given away to the railroads to the highest bidder, the Republicans under Lincoln and his successors developed the Homestead Act – a very Jeffersonian tack for a party in the late 19th Century. That maybe Jefferson was wrong in saying that yeoman farmers are the only potential source of virtue, but still creating a society in which lots of people have lots of forms of property, and lots of potential independence, is a very good policy if you’re worrying about distribution now, rather than just about growing production.

Hence the way that the prairies were settled.

And then for those of us who aren’t going to live on the prairies, well, we have land grant universities. Up until Clark Kerr left the chancellorship, presidency of the University of California in the 1970s, when he was, as he said, fired with enthusiasm, just as he had originally taken the job two decades before, when he had been fired with enthusiasm to take it in a different sense, up until the end of Clark Kerr’s tenure, the idea in California and throughout the United States was that the government should provide you with as much education as you could stand and as you could benefit from for free, as far as tuition was concerned.

That we wanted people to build their human capital. We thought that yes, if they build their human capital they’ll get richer, but they will also be a benefit to their fellow citizens, and we also want there to be powerful and easy roads to upward mobility, as opposed to smart but poor people having to graduate from college with current debt loads in the six figures, which they cannot discharge no matter how bankrupt they happen to be in the moment.

And a second course correction does indeed come with Teddy Roosevelt, who is very worried about the uses to which wealth is being put.

So we get not only the denunciations of malefactors of great wealth, and Teddy Roosevelt’s aggressive pursuit of the anti-trust case that breaks up the largest corporation in America, the Standard Oil company.

We also get the establishment of America’s national parks, we’re at the beginning of environmentalism, and very powerful good government movements in the cities, to try to greatly upgrade the quality of local government that Americans are getting.

And this is even before the crisis of the Great Depression casts the whole system into doubt, and makes people think maybe the market economy with private property has had its day.
And in response, it’s Teddy Roosevelt’s cousin Franklin who winds up, almost by accident, in the President’s seat in 1933 – that, had the politics of the 1920s gone somewhat differently, suspicion is maybe Franklin Roosevelt would have been President in 1928, and we’d now regard him as Herbert Hoover: as the person who fumbled the Depression.

But when Franklin came in in 1933 he saw that what Hoover had tried to do had by and large failed – that Hoover, after all, had focused on restoring business confidence, had adopted what Tim Geithner will probably not forgive me for calling a Geithneresque view of the economy, basically that the bankers and the businessmen have the rest of us by the plums. And only if the bankers and businessmen are confident in the future will there be the flows of money through finance and the spending by business on building capacity needed to support full employment.
And that that is the only way you can effectively get out of a depression, to somehow restore business confidence, which requires not running huge deficits, that businessmen fear won’t be repaid, or will be repaid only by taxing them, requires not throwing businessmen and bankers in jail, it requires saying that prosperity is around the corner and the fundamentals of the economy are sound in such a way as to get you mercilessly mocked.

That was what Hoover wanted to do, and Hoover was not… 00:30:30

[Cardiff Garcia] Brad, before we talk about FDR, I just want to quickly interrupt the discussion of history to ask I guess what you might call a more philosophical question.

How do I phrase this? One of the points in the book is that the traditional framework of thinking of how government steers the economy, or doesn’t steer it, or how government is involved in the economy or is not involved, is wrong – because government can’t help but play a role in shaping the economy. Even the decision not to regulate, not to investment, not to sponsor ideas, and not to partner with companies is itself an active choice.

I guess I just want to ask if that is your fundamental view of the government’s proper role in the economy, and if that’s what is guiding your own understanding of US economic history.

[Brad DeLong] Well, I think the way that Laura Tyson and Bob Reich like to put it to their freshmen is that government can interfere with markets, but government also creates markets, and government also has to complement and correct markets.

That for a start, the property rights that you need for market exchange don’t come from nowhere. They are things that are strongly established by the government. Without the government you don’t have property, or you don’t have property that’s other than the ability of the strongest to take what they like.
And even when you do have governments, we find ourselves devoting an awful lot of attention and energy to making sure that the government is strong enough to actually enforce the property rights it collects, or it generates. And then you get into contract law, right, that every market economy requires a very strong fundamental underpinning of property and contract which doesn’t simply emerge on its own out of humans’ natural sociability.

People may be naturally social to some extent, but your confidence that what’s yours is yours, and your confidence that your counterparties are actually going to deliver is something – that collapses very rapidly and almost completely unless you have a government there to back up property and contract with people in long black robes who control your destiny, with judges.

And then beyond that, weights and measures. The idea that the government has to take a lot of aggressive steps to make sure that contracts actually mean what they mean, that the weights that people are using on their balances in the marketplace are actually real one-ounce and one-pound weights. That the stuff that is being sold as milk is actually milk, rather than half milk combined with half water and a little chalk added into it.
When Milton Friedman wrote his Free to Choose, he has a long song and dance about how people say that the fact of the Great Depression came proves that the market economy is not perfect. Actually, Milton Friedman says that’s wrong. It’s simply that the government has an obligation not only to provide property rights and contract laws, but also to provide the proper macro-economic policy that produces a stable framework of full employment in which people can operate.

And a government that fails to do that is as much falling down on its job as one that fails to enforce contracts or to enforce property rights.

That in Milton Friedman’s view, a market economy requires not just property law and contract rights, but it also requires a monetary policy that preserves full employment. And it requires an intellectual property system on top of the normal property system, creating these special strange rights to very intangible things that govern people’s behaviour, that is properly tuned in order to properly reward invention and innovation.

And by the time you’ve agreed that government has to do property, contract, conduct successful macro-economic policy in order to provide full employment with price stability, and also provide proper incentives for technological innovation, well, you’re all of a sudden very far away from something that you would call a minimal state, from something that you’d call laissez-faire.

That the idea that the state should basically be a nightwatchman, to simply keep people from stealing your stuff while you sleep – that’s so very far away from even Milton Friedman’s conception of the government that I think if you take a pragmatic look at what’s going on, you say that laissez-faire can’t be a defensible position at all.

Even Friedman comes out with huge numbers of substantive exceptions, based on the fact that he’s decided this is the set of stuff that’s pragmatically beneficial, rather than that the government is best that governs least. The government that governs least is Somalia.

[Cardiff Garcia] I actually want to fast forward a little bit through FDR, certainly not because…

[Brad DeLong] Oh, and I have this very nice rant about how FDR wasn’t an ideologue at all. How he basically tried everything.

[Cardiff Garcia] That took up a considerable part of the book, and it is very important. You also make the very interesting point that FDR was maybe the one example in the book of a President or government that wasn’t trying to introduce new industries, rather it was just trying to get the economy to start working again, which distinguishes it as well.

It’s actually just because I’m a bit mindful of time, but if you want to give us a quick spiel on why FDR was not at all an ideologue, but rather a pragmatist, go for it.

[Brad DeLong] We now regard FDR as the founder of modern American liberalism, and the New Deal policies as the epitome of American liberalism, that Bernie Sanders, when he says he’s a Socialist, then goes, comma, by that I mean a New Deal liberal.

And it’s those policies, they are the core of liberalism, but they didn’t start out that way.

They are the core of modern American liberalism because by and large they worked in the 1930s and 1940s, and when Franklin Delano Roosevelt tried them he tried them not because he was in the business of trying policies that were liberal, or even because those policies were thought of as exceptionally liberal back then.

He tried absolutely everything.

He tried getting businesses in an industry together to set prices and quantities, with the National Industrial Recovery Administration. He tried, with a very aggressive anti-trust policy late in his term, to break up industry cartels and introduce competition.

He tried budget balancing in 1936 and ‘37 to restore business confidence. He tried deficit spending in ‘33 and ‘34 to get the economy moving again.

He tried boosting farm prices directly by having the government buy up stuff. He tried abandoning the gold standard.

He tried negotiating with foreign countries to set a particular parity for the dollar.

He tried mass relief, simply writing cheques to people who were without jobs. He tried government work programmes.

He tried paying people only if they showed up to the Works Progress Administration or the Civilian Conservation Corp.

He tried boosting existing businesses, he tried starting hybrid government private business enterprises like the Tennessee Valley Authority, to do tasks the private sector didn’t seem to have started.

If it was an idea, and if someone had it, and if someone could get past the secretaries into his office, Roosevelt was willing to try it. And then he reinforced what seemed to be working, and ruthlessly pruned what seemed to be not.

And at the end of all, you had a country that did not recover from the Great Depression incredibly rapidly, but also one that wasn’t a laggard, and had a set of policies that seemed to work.
The country that recovered best from the Great Depression, in terms of employment and production, was of course Nazi Germany, where Adolf Hitler was in the business of let me put people back to work and build up as big a military as fast as possible. And so simply loaded up both the fiscal and monetary policy expansionist tools and used them massively and aggressively, in order to get Germany working again, and get Germany prepared for World War Two. And it is to the world’s sorrow that those policies worked as well as they did.

The New Deal did okay, it didn’t do great, but it landed the United States with kind of an institutional configuration that worked quite well.

And then after the New Deal, after Truman, Eisenhower comes in as the Republican Party’s last chance and great white hope, a relatively conservative guy from the Kansas prairie, someone who successfully managed a very large organisation of very vain competing people with different power bases during World War Two, as the Commander of the European Field of Operations (the most perfect job for a future president except possibly having been a large state governor, you can imagine).

And [Eisenhower] took a look around, he believed in small government and free enterprise. He also believed much more strongly in what worked, right, and took a look at the Great Depression era and what had followed and said these New Deal programmes work; I’m going to make them somewhat more conservative, I’m going to make them significantly more efficient, I’m going to boost them by making the important investments that America, I think, needs to make.

Coming into power at the height of the Cold War he very much wanted a strong military and he wanted a technologically advanced military which meant doubling and tripling down on government support of high technology.

Having tried to drive across the country for the army in the middle of the 1920s he very much thought we needed a superhighway system for the post-rail transportation age, and invested a fortune in that as well.

And he believed, along with so many other people, that having individuals have a stake in the country was an important thing. It was well past the time when you could hand out farmland to people, no-one really wanted a farm, the educational system was there, the Land Grant University System was there and was rapidly growing, universal high school was coming. What he could offer to people was the opportunity to buy a house.

The idea that Americans should not live in apartment buildings they didn’t own but in houses that they did, in suburbs where they could commute to their jobs by the Interstate highway system, was one that Eisenhower pushed quite strongly, and his administration pushed quite strongly.

And it created what some people would call the premature and other people would call the mistaken suburbanisation of America but it was a configuration that Americans liked very, very much, at least until the two child per household millennials showed 00:43:24

[Cardiff Garcia] Let’s talk about that a little more because I think this is a good example, or rather you just mentioned a couple of examples of policies under Eisenhower, one of which had I think unalloyed benefits for the country – so the policy of pursuing higher tech, the involvement of universities, later on the digitisation of the economy; you can draw kind of a straight line between policies that began under Eisenhower to all these great benefits.

Suburbanisation has maybe a little bit more of a mixed record. It might be true that at the time Americans liked it but we know now that there are so many benefits of living in density, city life. At the time, also, the suburbanisation led to quite a bit of urban decay because so many people fled the cities, they tended to be upper class and upper middle class people who could newly afford to buy homes, and it left the cities in fairly bad shape at the time.

How should we think about the sort of inevitability of some mistakes being made when we’re discussing industrial policy, or whatever other name you want to give to it, versus the fact that in many cases, maybe in most cases, they’ll be outweighed by the benefits?

[Brad DeLong] Well, tell me about it. As you know right now I’m here in Kansas City, which was the place where residential segregation was invented by JC Nicholls early in the 20th century.

The very first neighbourhoods that had restrictive racial covenants on them were, I think, pioneered here.

My former student, Treven Logan, at Ohio State University has a wonderful series of economic history papers about how in the 19th century lots of Americans had lots of neighbours of different race, and how this changed in the 20th century – first with restricted covenants on new developments, then with red-lining, definite colour lines within metropolitan areas, even for existing development, for the existing housing stock. You know, Troost Boulevard in Kansas City runs north to south throughout the city, it was, starting in the early 20th century, supposed to be white to the west of Troost, black to the east.

This is in some sense ground zero for white flight. And moreover white flight was actually significantly worse, I think, in Kansas City because the flight was not just out of the city itself, out from contact with potential urban problems of crime, and not just out from the city’s tax jurisdiction, but the flight was primarily to another state, across the state line into Kansas. That the rich parts – Kansas City, Kansas itself is quite poor, Wyandott County in Kansas is a relatively poor county for Kansas City – but Overland Park and Johnson City in Kansas, it’s the rich guys in greater Kansas City, most of the poor guys are over here on the Missouri side.

Yes, I mean there are going to be big mistakes made, there are going to be interests that aren’t taken into account when you try to pursue economic policy pragmatically. But if you’re doing it pragmatically, you’re at least looking at the situation as opposed to knowing before you even take a look at the situation that yeoman farmers are good, or that central planning is good, or that let’s say immigrants are almost certainly a bad thing, or that the divine right of kings leads to the best outcomes, or that those who have Y chromosomes which indicate their ancestors were ex-Vikings that came over from Normandy after 1066 are better at ruling than people whose Y chromosomes indicate that their male ancestors came over from Saxony in the sixth century.

Any of these high ideological beliefs that the world is very simple, from laissez-faire to any of the others, are ones that Steve and I think guarantee that you will have a much greater mistake proportion than if you’re willing to look at the evidence and to plan pragmatically. 00:48:23

[Cardiff Garcia] And I guess the pragmatic approach, assuming it is sustained, also allows you to adjust quickly if you catch a mistake early.

[Brad DeLong] Or to adjust more quickly, yes.

[Cardiff Garcia] More quickly, yeah. Okay, let’s talk about something that worked a little bit better. You chronicle in your book the extent to which the Defence Department, for instance, not only seeded a lot of the innovations that led to what we now consider Silicon Valley and the high-tech market. But it was also for a time the biggest customer, in other words it was sort of sponsoring these ideas from both sides; can you just take us through some of the big ones and their influence on the development of high-tech industry?

[Brad DeLong] Indeed, that when the IBM president Thomas Watson said he thought there was a use for maybe five computers in the world, he was not being a stupid man. That computers were very good at doing lots of calculations one after the other, but when did you ever want to do huge numbers of calculations one after the other on a very large scale?

Maybe you wanted a computer then the Department of Health, Education, and Welfare to put in its social security administration, to keep track of all the people who were receiving social security. You have a punch card, or several punch cards, for each person, you feed them into the card reader, they come out, it’s a way of keeping track of what benefits you owe people and what contributions they’ve made.

Similarly, insurance companies might want to use a computer. The Defence Department wants to use a computer for calculating where its shells and missiles are going to go. And you definitely need a computer if you’re going to be building atomic bombs because testing an atomic bomb is a rather destructive exercise.
In fact back in the 1940s, when people say that Richard Feynman, while working for the Manhattan Project, was the boss of 50 computers, what they mean is he ran a section in which he had 50 women working for him who did his additions and multiplications for him on mechanical adding machines, and then produced the paper tape results which were then aggregated.

Those were tasks that needed to be done but needed to be done in only a very few places in the economy in the late 1940s. But the Defence Department is out there, the Defence Department is looking for missions. The Eisenhower era government is feeding it with enormous amounts of money. Defence spending had gone down after World War Two from its peak of 40 per cent of GDP down to two per cent of GDP, and it looked like it was going to sit at two per cent of GDP until the Korean War came along.

And after the Korean War it was all of a sudden up to ten per cent of GDP, because we needed a navy to control the seas against the Soviets, we needed an air force to not just guard ourselves against Soviet bombers but to deliver our own A bombs to Moscow if it proved to be needed, and we needed an army large enough so that we would be fighting the Soviet Union somewhere in West Germany near the Fulda Gap rather than fighting the Soviet Union on Long Island, or even worse, in New Jersey, let alone Ohio.

Those things are expensive, that’s ten per cent of GDP. And so the air force especially was looking for missions – and one obvious mission would be maybe we can use computers to control our air defence so we can send our fighters to intercept their bombers a lot more quickly and a lot more effectively than happened back in the Battle of Britain, when you had radar signals coming up, and people in underground bunkers pushing little wooden blocks over a map of England and the Channel and the North Sea showing the Nazi bombers approaching.

So the Sage Air Defence system, which never produced a single usable line of software running on any piece of hardware – we spent more on the Sage Air Defence System than we did on the entire Manhattan Project. And it was in one sense the ultimate government Defence Department boondoggle. But on the other hand it trained a whole generation of computer programmers at a time when very little else was useful that computer programmers could exercise their skills on.

And by the time the 1960s rolled around we not only… the fact that Sage had almost worked provided, say, American Airlines with the idea that maybe they should do a computer-driven reservations system for their air travel, which I think was the next big Manhattan Project scale computer programming project.
And as that moved on the computer programmers began finding more and more things to do, especially after IBM developed its System/360.

And we were off and running. We were off and running on a trajectory that has brought us now to a place in which our information technologies are extraordinarily unbelievable relative to what anyone would have imagined, even in the post-World War Two days when Tom Watson of IBM is saying that maybe the world will need five computers.

Elsewhere we have high-tech but we have high-tech without the information technology; it’s something that from the perspective even of 60 years ago has come out of left field completely. We wanted our flying cars, we have the ability to compose messages in 140 characters and broadcast to the world, and so insult a great many people we have never heard of, but we have many more things along with that as well and it has caused our society to take a generation, to take a shift in a direction no-one envisioned. And that certainly Eisenhower and company did not envision when the Defence Department started Sage. 00:55:08

[Cardiff Garcia] Okay, we’ve got time for one last topic. It is the topic of the closing chapters of your book, and that is the rise of high finance in the…

[Brad DeLong] What went wrong!

[Cardiff Garcia] Let me set this up for you for a second. Because in the 1970s, as you note, there was de-regulatory fervour in several different sectors of the economy. And in some of those sectors it was totally warranted, right, I think transportation might be the most prominent example. In finance, though, you argue that the de-regulation was driven more by ideology than by pragmatism. Why don’t you start by telling us how we know that and then telling us what happened? 00:55:47

[Brad DeLong] Well let me back up, right, to the 1970s.
The 1970s have stagflation, which means what we then thought of as chronic unemployment bouncing around between five and ten per cent in the United States, which was annoying.

In Britain you may remember, you probably don’t remember, in 1979 Margaret Thatcher running for Prime Minister on the slogan “Labour isn’t working”, because the numbers of unemployed people in Britain has just crossed a million, never mind that Thatcher was going to push it to three million after she got into office, says there is no alternative, she is not for turning.
But high unemployment, very slow wage growth, rampant inflation reaching at the United States a peak of 14 per cent a year. Clearly the Eisenhower/Roosevelt post- World War Two social democratic model had broken down and we needed new policies.

And what should those new policies be? Well there had always been an alternative government in exile, right, the kind of technocracy over the water, in a sense, that held that we’d gone too far and that really the New Deal had been a mistake, the economy needed a lot more laissez-faire.

And in the 1970s that appeared more plausible, especially after successes at energy and trucking and airplane travel de-regulation seemed to create a great deal of increased economic efficiency and a great deal of more and happier consumers.
When you de-controlled oil prices and so shocks to the oil market no longer created gas lines. When you de-regulated air travel so that all of a sudden there were scrappy airlines showing up, promising you not a catered lunch on a tray but instead just a bag of peanuts but a plane that would take off and land quickly. When you had not the railroads protected from competition via the trucking industry by a requirement that trucks charge a fortune for truck delivery, which led among other things to a very good lifestyle by the members of the Teamsters Union who drove the trucks, and also by the Mafia Dons who got their hands on its pension fund. (The de-regulation of trucking at the Interstate Commerce Commission seemed also to be a big win.)

And then the recession of 1980 comes in, Reagan wins the election in 1981, Thatcher wins it in 1979. There is the belief that it is time for a laissez-faire turn.

And so over the next generation we do a whole bunch of things.
One of them is the United States insists there has to be a role for private insurance in health care. And so since 1980 the United States’ healthcare expenditures, which were pretty close to those of other countries back in those 1980 days when healthcare was only six per cent of GDP – in the United States it’s now 18 per cent of GDP and six per cent of that is in administration, and as a guy I ran into at the coffee shop was saying, he goes to the doctor and there’s one doctor but there are six secretaries fighting with the insurance companies, and on the insurance company side there are six administrators fighting with the secretaries as well – all because in health insurance you make your most money by figuring out how to craft an insurance policy that’s unattractive for sick people to buy but attractive for healthy people to buy.

There’s a huge chunk of GDP, $700 billion a year, Princeton Professor Uwe Reinhardt says, wasted in kind of excess health insurance administrative costs in the United States. So we bet on healthcare administration.

We also bet that our top 0.01 per cent, which were receiving one per cent of national income in 1979, that what they really need is they need massively lower tax rates. And now we’re paying our top 0.01 per cent four per cent of GDP instead of one per cent of GDP for the managerial services they provide the rest of us. Are we getting better decisions out of this? I doubt it.

But matching those two, and equal to them, is the enormous growth of finance, the fact that back in the 1960s we had about three per cent of GDP in financial assets, and in total the rest of the economy paid finance one per cent a year to manage those assets, and now we have four years’ worth of GDP in financial assets, and we pay two and a quarter per cent of asset value each year to finance. Much less in commissions, much more in the trading profits of finance, and so nine per cent of GDP goes to finance in America today.

Yet finance is really an intermediate service provided to the rest of us. It helps us make sure we pay our bills on time and smooth out our spending so that we aren’t embarrassed by bouncing cheques. It helps businesses choose which CEOs to have and which directions to pursue and provides mechanisms for getting rid of executives who aren’t doing their jobs. It helps allocate capital across different sectors so we can invest in places where profits are high.

And it’s supposed to provide for risk bearing so that people can undertake enterprises that are individually risky without having to pay absolute fortunes for capital, and also to create a situation in which society’s risks as a whole are spread out over the economy as a whole, so that an unfortunate crisis, like say the investment of an extra $500 billion that you shouldn’t in building houses in the desert between Los Angeles and Albuquerque, a fundamental investment of $500 billion that goes wrong, doesn’t cause great economic distress throughout the country as a whole.

And you look at our financial system, now eating nine per cent of GDP for performing the societal tasks its predecessor just needed three per cent of GDP to perform, and you say are the rest of us getting anything for this, and the answer really has to be no.

In fact something like the 2008 to 2010 crash, in which a mis-investment of $500 billion, $500 billion in a 15 trillion economy, that’s a mis-investment of three per cent of GDP. That’s a big thing, but that shouldn’t take down the entire world economy. It’s only three per cent of GDP for one year. It’s less than half of one per cent of all the financial assets in the world. Only if you have modern finance and the ability of derivatives to concentrate risk and a financial superstructure that creates enormous incentives to concentrate risks in places where if something goes wrong you can walk away, but if something goes right you make an absolute fortune, could possibly have created a system that was as vulnerable as our economy was in 2008 and 2009.

So somehow, starting in the 1980s America’s bets on what sectors should the government provide support for, what are the real industries of the future, broadly went right. Since 1980, with the exception of Silicon Valley, they’ve broadly gone wrong.

[Cardiff Garcia] Okay, my final question is this. I certainly don’t want to pretend that nobody was warning early on that de-regulation…

[Brad DeLong] I wasn’t.

[Cardiff Garcia] So some people were warning early on that de-regulating finance might be dangerous. Paul Volcker was one of them, Hyman Minsky was another. But I can understand why at the time emphasising the rise of finance must have been seductive – especially going on through the 1990s and the 2000s, when there was more globalisation, finance did seem like a comparative advantage for the US, and all of these entrepreneurial ideas must have seemed really appealing.

And of course now we know that a lot of these innovations in the financial sector ended up concealing and adding to, rather than mitigating, the build-up of risk in the system. But we missed it at the time.
And so my final question is this. I really like this idea in the book of using an experimental and pragmatic approach versus one that’s ideological, but at any given moment, something that is ideological seems pragmatic to an ideologue. I guess I want to ask how should we defend against this? What should be the considerations that we look at when trying to decide whether an idea is driven by pragmatic versus ideological considerations?

[Brad DeLong] Well, you look back in time and you look across countries to start with. That if you have a long record looking back in time and a large willingness to look across countries at how institutions are working elsewhere, that helps protect you.
The other thing I think is you definitely need to watch out for what Paul Krugman calls now-more-than-everism, right, that if your response to the crisis of the day is to say well, now more than ever it’s important for us to undertake the policies I was recommending five years ago, you’re almost surely dealing with an ideologue rather than someone who’s pragmatic, rather than someone who is willing to mark their beliefs to market.

Look, the financial de-regulation back in the 1990s, at the Treasury I was part of a team that thought derivatives were actually an intriguing thing to try, because we looked at financial markets that we seemed to see were outsized risk premiums. That financial markets were having a very hard time mobilising risk bearing capacity, and so people trying to undertake risky investments had to pay an exaggerated premium in order to borrow money. And derivatives promised to allow you to slice and dice the set of risks in a sophisticated way so that if you could find someone who was willing to take a particular set of risks, or who definitely wanted to avoid a particular set of risks, you could create a security that they would like, and so increase the numbers of people from whom you could draw risk bearing capacity.

Analogously, the idea that we should get rid of Glass-Steagall and allow investment banks to become corporations – well, the view was that things like Morgan Stanley and JP Morga, and Goldman Sachs, they seemed to have a lock on the investment banking business because they understood the SEC, and they seemed to be earning greatly outsized commissions on not just initial public offerings but on the offerings of seasoned companies that really shouldn’t have to pay a fortune to investment banks to issue a bond issue. And the feeling was they were a cosy, cooperative oligopoly. And if only you let Bank of America, Chase, Citibank, and Travellers Insurance into the investment banking business, they had deep enough pockets that they could fund groups of investment bankers to actually take the guys on.

And so the coming of the corporate form meant the elimination of Glass-Steagall; the lowering of those barriers to entry were supposed to create a smaller, leaner, lower profit investment banking industry that would provide less of a tax and a lower cost of capital to American industry.

Now all of those bets went totally, completely, 100 per cent wrong. The corporate form, deep pockets, no Glass-Steagall, large amounts of compensation paid out immediately to investment bankers, who you feel you have to bid away from their competitors because they have a hot hands system of finance that we developed with very low commissions, seems to have created a world in which, for complicated behavioural economics reasons, people are willing to pay much more in price pressure as they trade to have their money managed implicitly by Wall Street than they were back when commissions were high.

And it managed to create systemic risks of a magnitude that would have astonished even Hyman Minsky, that it went largely and catastrophically wrong. But the distressing thing is say that the opposition to common sense reforms like Dodd Frank goes so strong and so deep, and that lots of people who are only in business now because the government was there to backstop them in 2008, are still saying the thing we most need is the de-regulation of finance and the return to a laissez-faire financial system. 01:10:00

[Cardiff Garcia] Okay, well this has been a great chat, a sweeping view of US economic history. To our listeners, if you want to learn more about all these ideas and see them fleshed out a bit the book is called Concrete Economics: The Hamilton Approach to Economic Growth and Policy by Stephen Cohen and BRAD DELONG. Brad has been our guest on Alphachatterbox. Brad, thanks for being here.

[Brad DeLong] Thank you very much, it’s been a great pleasure.

[Cardiff Garcia] Thanks again for listening. Send us an email, tell us what you thought, at Or you can give us a call and leave a message at 917-551-5012.

Don’t forget to leave a review and rate the show on iTunes, it helps other people find us, or you can Tweet me directly, @cardiffgarcia, you can go to FT Alphaville for the show notes and the transcript of my chat with Brad. Thanks as always to the amazing Aimee Keane for producing and editing the show, and thanks to our listeners one last time. We’ll see you again here for another episode of Alphachatterbox within the next couple of weeks.

Must-read: John Maynard Keynes (1923): “A Tract on Monetary Reform”

Must-Read: John Maynard Keynes (1923): A Tract on Monetary Reform: “One is often warned that a scientific treatment of currency questions…

…is possible because the banking world is intellectually incapable of understanding its own problems…. I do not believe it…. If the new ideas… are sound and right, I do not doubt that sooner or later they will prevail. I dedicate this book, humbly and without permission, to the Governors and Court of the Bank of England, who now and for there future has a much more difficult and anxious task entrusted to them than in former days…


It is not safe or fair to combine the social organization developed during the nineteenth century (and still retained) with a laisser-faire policy towards the value of money…. we must make it a prime object of deliberate State policy that the standard of value… be kept stale… adjusting in other ways the redistribution of the national wealth if… inheritance and… accumulation have drained too great a proportion… into the spending control of the inactive….

We see… rising prices and falling prices each have their characteristic disadvantage…. Inflation… means Injustice to individuals… particularly to investors: and is therefore unfavorable to saving [and investment in capital]…. Deflation… is… disastrous to employment…. Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because 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 Individualistic Capitalism of to-day, precisely because it entrusts saving to the individual investor and production to the individual employer, 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

The economist as…?: The public square and economists

My paper for the Notre Dame conference on “public intellectualism” is finally making its way through the publication process…

I. The Salience Today of the Economic

Sit down some evening and watch the news on the TV, or scan the magazine covers in the supermarket, or simply immerse yourself in modern America…


A. Elements of Public-Square Gossip

If you are like me, you will be struck by the extent to which our collective public conversation focuses on seven topic areas:

  1. The personal doings of the beautiful, the powerful, and the rich – and how to become more like them.
  2. The weather.
  3. Local threats and dangers, especially to children.
  4. Amusements – usually gossip about the past or about our imaginary friends, frenemies, etc. (it is amazing how many people I know who have strong opinions about Daenerys Stormborn of House Targaryen1 – many more than have any opinions at all about her creator George R.R. Martin, author of the Song of Ice and Fire novels on which “Game of Thrones”2 is based).
  5. How to best procure necessities and conveniences.
  6. Large scale dangers (and, rarely, opportunities): plagues, wars and rumors of wars, the fall and rise of dynasties, etc.
  7. “The economy”: unemployment, spending, inflation, construction, stock market values, and bond market interest rates.

Now out of these seven topic areas, the first six are found not just in our but in other societies as far back as we have records. They are common in human history as far back as we have been writing things down, or singing long story-songs to one another around the campfire.

What, after all, is the story of Akhilleus, Hektor, and Agamemnon in Homer’s Iliad but a combination of (1), (4), and (6)?3

In April 2014, by a strange chance, the internet led me to a passage from the lost Biographies of third-century B.C.E. philosopher Hermippos of Smyrna. The passage was about a fourth-century B.C.E. Athenian, Phryne, who may or may not have been a model for the sculptor Praxiteles of Athens’s lost Aphrodite Knidia and the painter Apelles of Kos’s lost Aphrodite Anadyomene. Hermippos of Smyrna wrote of “the dazzling Phryne, who:

at the great festival of the Eleusina and that of the Posidonia in full sight of a crowd that had gathered from all over Greece, she removed her cloak and let loose her hair before stepping into the sea.

This provided the Athenians and the tourists with a rare opportunity to see her nude. Otherwise you had to be satisfied with art: “it was from her that Apelles painted his likeness of Aphrodite coming out of the sea.”4

That made me think: was the occupation “philosopher” in the third-century B.C.E. some weird mixture of what we would call a “philosopher” and what we would call a “writer for People magazine”? It appears so. Surely Hermippos of Smyrna’s agent would have welcomed a booking on “Oprah”.5

Six of these seven topics of public-square conversation are recognizably common across societies and across history. But we have a seventh. It is somewhat different. And it is what I want to focus on: that our collective public-sphere concern about the economy is unusual in historical perspective. Past society’s public squares have dealt with issues we would call economic: the local price of food is always of general interest as is the supply and demand of traded goods of interest to merchants. The wealth or lack thereof of individuals and cities of interest is always of interest to money-lenders.


B. The Rise of the Economy

But the economy?

There really wasn’t such a thing before 1700. We only begin to even see the word in the eighteenth century, as the phrase “home economics” – teaching how to cook, how to sew, how to clean, and how to budget – finds its first word replaced by “political”.6 Then “political economy” becomes a study of how the government managers should do for the state the things that a household manager does for a household. And then, in the late nineteenth and early twentieth century, the “political” gets dropped, and the “-y” gets replaced by an “-ics”. Why? As part of a movement to make the subject less, well, political – less partisan. It was a semi-deliberate move by those who were political economists and seek to become economists to claim a mantle for their discipline as more than an objective branch of knowledge that can at least aspire to the prestige of a true natural science and the respect given to its advice possessed by a technocratic what-works discipline like engineering.

So why does “the economy” and its study – “economics” – become a concept that needs a label in the eighteenth century? Why do we today watch it on the TV and read about it in the newspaper instead of learning more normal things – like Phryne’s fashion secrets, or Odysseus’s most-tricky battle strategems, or Akhilleus’s favorite strength-building recipes?

I believe that there is a simple answer. When we look into the deep past, the evidence – especially the skeletal evidence that finds adult humans around the year 1 little more than five feet tall7 – strongly suggests that, save for a small upper class, and save for lucky generations born into times of temporary land abundance (from technological changes like the invention of the wet-rice paddy or the horse collar, or from previous plague) the bulk of human populations saw very little economic change. Most people lived for the most part close to subsistence in the years between the invention of agriculture and 1500 or so. We can guess at what their material standard of living was like, and we can guess that their income level would strike us in today’s dollars as something less than $1000 per person per year.8 We do see substantial population growth: we guess that there were about 5 million humans in 8000 B.C.E., and 500 million in 1500, for we had much better agricultural and herding “technology” in 1500 than we did in 8000 B.C.E. But all or nearly all of better technologies between 8000 B.C.E. and 1500 showed up in Malthusian fashion as increasing population rather than increasing living standards.9 Crunch these guesstimates, and find a worldwide economic growth rate of 0.05%/year. That is not five percent per year – that is five percent every hundred years.

Thus what might have been called “the economy” was pretty much an unchanging backdrop back before 1500 from the standpoint of any individual year, or, indeed, from the standpoint of any individual’s lifetime – plagues, war and rumors of war, and their economic consequences aside. Substantial transformations of what might have been called the economic would have been visible only if one stepped back and looked across multiple centuries at what Fernand Braudel called the Longue Durée10 – the analytical perspective from which the long and gradual four-century long spread of the Merino-breed sheep across Mediterranean and then northwest Europe truly was a really big deal. Thus in any previous era the idea that one should pay attention to somebody called “an economist” – that there would even be a subject called economics that could be thought of as significant – would have been a strange one indeed.


C. The Centrality Today of the Economic

Compare that to the years since 1900 in which worldwide average real GDP growth was 3.5% per year. Compare that to the years from 1990-2007: worldwide average real GDP growth of 4.5%/year.11 And compare that to what happened in 2008-9: an eight-percent fall in total economic production in the United States and a six percent fall in employment driven purely by the monetary-financial derangement of our economy as a system, and not by any change in our knowledge or our technological capabilities or in the rest of the natural world.12

The fact is that we today see roughly 100 times as much economic growth and change in any given period – for good and for ill – than our pre-1500 ancestors did. Today economic change is a very big deal that determines what kind of job you will have, and if you will have a job, and how you will live ten or twenty years from now – if not tomorrow. Is it any wonder, given this ramping up of the pace of change, that the economy is salient today? Ours is an era in which, in our consciousness, issues like the filioque clause and the vicissitudes of the Bush or Habsburg dynasties appear to us to be in relative terms less salient, and the economy much more so. In such an age it is natural that the public square has a desire to listen to economists – for they claim to have knowledge about what is an important, newsworthy, and changing aspect of our civilization. And it is natural that economists will seek to speak today in the public square as public intellectuals.

II. Analyzing Emergent Properties of Systems of Decentralized Exchange

So what do economists have to say when they speak as public intellectuals in the public square? As I see it, economists have six things to teach:

  1. the deep roots of markets in human psychology and society,
  2. the extraordinary power of markets as decentralized mechanisms for getting large groups of humans to work broadly together rather than at cross-purposes,
  3. the ways in which markets can powerfully reinforce and amplify the harm done by domination and oppression,
  4. the manifold other ways in which the market can go wrong because it is somewhat paradoxically so effective, and
  5. how the market needs the state to underpin and manage it on the “micro” level.


A. The Five “Micro” Things Economists Have to Say

At the level of the “micro” – of how individuals act, and of their well-being as they try to make their way in the world – economists really have five things to say when they enter the public square as public intellectuals:

First, the Deep Roots of Markets: Probably most importantly, at some deep level human sociability is built on gift-exchange – I give you this, you give me that, and rough balance is achieved, but in some sense we both still owe each other and still are under some kind of mutual obligation to do things to further repay each other. Wherever we look in human societies across space or across time we find such overlapping networks of gift-exchange and resulting reciprocal obligation to be an important share of the social glue that holds us humans together.13 On top of this deep gift-exchange sociability, we economists say, we humans have built an economic system of decentralized market exchange. Today a great many of our gift-exchange relationships are not long-term relationships over time with people we come to know well, but rather one-shot exchanges with people we do not necessarily expect to ever see again. These exchanges are mediated by tokens called “money” that are acceptable to each of us as payment or repayment because they are acceptable to all of us. And this great enhancement of our potential network of those with whom we can exchange is what allows us to have a wide and productive rather than a cramped and penurious social distribution of labor.

This part of what economists have to say has been very clear since Adam Smith in 1776 published the first edition of his Inquiry into the Nature and Causes of the Wealth of Nations.14 Because humans have a “natural propensity to truck, barter, and exchange,” we can build markets of wide extent. Because “the division of labor depends on the extent of the market,” our extensive markets allow a detailed and sophisticated division of labor. And Adam Smith saw the detailed and sophisticated division of labor of eighteenth-century Britain as the principal cause of its relative productivity and prosperity. It is, perhaps, the most important thing that economists have to say as public intellectuals in the public square.

Second, the Extraordinary Power of Markets: Perhaps next in importance, organizing a great deal of our societal distribution of labor around market exchange mediated by tokens called “money” is more than something that works with the grain of the crooked timber of humanity. It is also something that turns out to be extraordinarily powerful and effective. The market system works amazingly, remarkably well as a decentralized societal calculating mechanism for determining what is to be collectively produced, how it is to be produced, and for whom it is to be produced. Take market exchange, add private property in things, and the proviso that people can get together and form smaller hierarchical or cooperative forms of economic organization within the matrix of the market economy when they think best, add the proviso that there is a government to enforce its conventions about property rights and contract obligations, and you find that you have a system that as a whole has marvelous advantages.

First of all, it happens that the great bulk of commodities in this world are what economists call rival in use – if I am making use of it, you cannot be. Thus one person’s enjoyment and use of a particular item reduces the available options of others. It thus makes sense for a rational and efficient social system to make a person who decides to feel the effect of their actions on the opportunities and choices of others. It turns out that if you (a) assign exclusive property rights to use to someone, and (b) require a person to pay a market price for the privilege of transferring those rights, then you have (c) a marvelously effective way of making each feel the effect of their decisions on the well-being of all. This is quite a coincidence. Nineteenth-century economist Richard Whately – the only person ever to have been in rapid succession Professor of Political Economy at Oxford and Archbishop of Dublin – detected the hand of Providence in this truly divine coincidence.15

Second of all, it just turns out to be the great bulk of decisions about what is the best economic use of resources in the world are best made at the local level, by individuals who actually know what is going on. It is not good to make them in some centralized Kremlin or GOSPLAN office.16 And, again by coincidence, it turns out that exclusive and transferable private property is a good way of making decisions take place where the information is at the periphery, rather than at the center where the information is not. And, as Ronald Coase pointed out, one of the geniuses of our market system is that it allows for islands of centralized hierarchy wherever and whenever people decide that there is stuff to be gained by centralized hierarchical planning and coordination, or by some other mode of coordination and collective decision-making other than decentralized market exchange.

That extraordinary power of markets that just happens to fit our world of largely rival commodities in which decision-making is largely better decentralized is, perhaps, the second most important thing that economists have to say as public intellectuals in the public square – along with noting that what has been true in the agrarian age in which Adam Smith lived that ended with the eighteenth century and in the industrial age of the nineteenth and twentieth centuries may not be true in whatever kind of age the twenty-first century turns out to be.

Third, Market Systems Reinforce and Amplify the Harms of Domination: Next, however, comes the serpent in the garden: that market systems can and do amplify the harm done by power imbalances: slavery in the context of the American South’s cotton plantations was a much worse thing than slavery in the context of West African households precisely because the first were embedded in a market economy and so there was a great deal of money to be made by whipping slaves to work until they dropped. Market systems are at the bottom very good ways of getting people to respond to incentives. Power imbalances create situations in which we would rather that people not have more reason to use their power.

Such power imbalances can cause enormous misery in the context of a market economy even in the absence of incentives to behave with affirmative cruelty, for power imbalances turn into wealth imbalances, and a market economy’s underlying calculus is a calculus of doing what wealth wants rather than what people need. Wealth imbalances alone produce a situation in which we do not like the pattern of incentives that the market system provides to individuals, and in which market systems go horribly, dreadfully, diabolically wrong.

Consider the Bengal famine of of the middle of the last century.17 In Bengal, in 1942, because of the interruption of world trade, those whose sole wealth was their labor in the jute plantations found their wealth valued at zero – nobody wanted to hire rural workers then because nobody thought it worthwhile to grow jute that would then have to be shipped out through the Indian Ocean as long as there was a chance that the aircraft carriers of Japanese Admiral Nagumo’s Kido Butai might be prowling the ocean. Moreover, the large logistical demands of supporting the armies of the United Nations in Burma pushed up urban food prices, and rural food prices as well. Without wages to earn, the ex-jute workers of Bengal had no wealth and no money to pay. With no money to pay, the market provided those in other parts of India who had food with no incentive to move the food to Bengal and sell it to the ex-jute workers. Two million people died, even though there was ample food in India for the population as a whole.

And the British state that ruled India, and was responsible for checking to see whether the incentives the market system was providing really were the incentives that people were responding to. Prime Minister Winston Churchill sent a telegram, asking: if it were really true that there was famine in India, why was Mohandas Gandhi still alive?18

Such behavior by the British Empire was not exceptional. My Gallagher ancestors knew well the earlier failure of the British state to take appropriate action to rebalance the distribution of wealth and prevent mass starvation in 1846-8, similarly in the midst of ample food nearby and plenty of resources to transport it.

Fourth, Other Ways in Which the Market Can Go Wrong: Moreover, even when the distribution of wealth is right, modes of “market failure” are many. The market system can and does wrong and provide the wrong incentives for behavior in myriad ways. The brilliant Ronald Coase of the University of Chicago – who remained productively at work as an economist a decade into the twenty-first century, even though his age had reached three figures – was interpreted to have argued that pretty much any arrangement of property rights will do about as well as any other and the government should simply step back.19 The canonical case adduced was the locomotive that occasionally throws off sparks that burn the nearby farmer’s crops. If the railroad has a duty of care not to burn the crops, Coase said, the railroad will attach spark-catchers if it is cheap and makes sense to do so – and the railroad will pay damages and settle in order to avoid being hauled into court on a tort claim if it is expensive and doesn’t make sense to do so. If the railroad has no duty of care, Coase said, then the farmer will offer to pay the railroad to install spark-catchers – and spark-catchers will be installed if the potential damage to the crops is greater than the cost of the spark-catcher and it makes sense to do so, and spark-catchers will not be installed if the damage to the crops is less than the cost.

Thus the same decisions will be made whatever the property rights – as long as there are settled property rights. If there are not settled property rights, then the crops burn and lawyers grow fat. But as long as there are property rights, the market will work fine. Maybe the widows and orphans who own railroad shares will be wealthier under one setup and maybe the farmers will be wealthier under the other, but that is rarely a matter of great public concern.

Now this argument has always seemed to me to be wrong. If there is no duty of care on the part of the railroad, it has an incentive not just to threaten not to install a spark-catcher, but to design and build the most spark-throwing engine imaginable – to make sure that the firebox is also a veritable flamethrower – and then to demand that the farmer bribe it not to set the fields on fire. What economists call “externalities” are rife, and call for the government to levy taxes and pay bounties over wide shares of the economy in order to make the incentives offered by the tax-and-bounty-augmented market the incentives that it is good for society that decision-making individuals have. Cutting property rights “at the joints” to reduce externalities is important. But it will never be efficient: what economists call Pigovian taxes and bounties make up a major and essential part of the business of government.

Fifth, the Market Needs the State: Last, the market needs the state. For the market system to work well and produce a good outcome, outcomes need to be dictated not by inequalities of wealth or power but by genuine win-win exchanges. This means that the government has to set out and maintain its laws of property and contract, so that what is yours stays yours and what is promised is delivered at good weight. In the absence of a properly-regulating government, what is yours is not yours, what is promised will not be delivered, and weight will not be good: instead, either roving bandits, local notables with bully boys functioning as barely-better stationary bandits, or the government’s own functionaries abusing its powers will decide that what was yours is now theirs. And having a government powerful enough to set out and enforce laws of property and contract that does not then turn around and become the largest and most destructive stationary bandit of all is perhaps the most difficult of all problems of political economy, for a government is, as the philosopher Ibn Khaldun wrote,20 at its foundation an organization that prevents all injustices save for those it commits itself.

Those five points and their application to the issues of today are what economists have to say about “micro” topics when they don the mantles of public intellectuals and speak in the public square. Moreover, it is economists’ task to speak about how much the technical details matter, and the technical details do matter – would you have thought ex ante that it would be important whether the property rights of the farmer were boosted by a requirement that anybody running machinery nearby have a duty of care? Economists are worth listening to – and hopefully paying – to the extent that they can combine their knowledge of the basic principles with sufficient institutional knowledge to understand just what small differences in regulatory institutions and organizations will mean for the distribution of wealth, and for the on-the-ground incentives provided to humans.

Economics in the public sphere is thus a difficult, important, and subtle discipline. It is concerned with what are the emergent properties of basing a great deal of the construction of our collective social division of labor on a decentralized system of money-mediated market exchange. Many of these emergent properties are not obvious and not well understood. And the devil is often in the details. That is why I looked forward in my twenties to making a comfortable living as an economist – as a speaker in the public square, as someone pushing forward we economists’ collective understanding of these emergent properties, and as someone teaching non-economists how to listen when we do speak in the public square. So far I have not been disappointed.


B. Macroeconomics in the Public Square

But: I lied back when I said that economists really have five things to say when they enter the public square. They actually have six:

(6) How the market needs the state to underpin and manage it on the “macro” level.

Sometimes the entire market system appears to go awry in some puzzling way. Sometimes when you go to the market, you find the money prices that you have to pay higher than you expected – perhaps 10% higher than you expected last year when you made your plans. It seems that, somehow, there is too much spending money chasing too few goods. How is it that this happens? And what should the government do to make sure that it does not happen?

Conversely, we can have the opposite problem – not a glut of money relative to goods, but what early-nineteenth century economists used to call a “general glut” of unsold commodities, idle factories and workshops, and idle workers all across the economy. Economists have important things to say about how to try to prevent these episodes and what to do when they happen to cure them.

And this sixth role of economists as public intellectuals in the public square is worth going into in more depth.

Back in the 1820s, the question of whether the circular flow of economic activity as mediated by the market system could break down and the economy become afflicted by a “general glut” of commodities was a live theoretical question. Everybody agreed that there could be particular gluts. Consider what happens should households decide that they want to spend less on electricity to power large-screen video- and audio- entertainment systems, and more on yoga lessons to seek inner peace. The immediate consequence – within the “market day,” as late-nineteenth century British economist Alfred Marshall would have put it21 – of this shift in preferences is excess demand for yoga instructors and excess supply of electric power. Prices of electricity (and of large-screen TVs, and of audio systems) fall as unsold inventories pile up in stores and as generators spin down and stand idle. Yoga instructors, by contrast, find themselves overscheduled, working ten-hour days, and stressed out – and find the prices they can charge for their lessons going through the roof. Workers in electric power distribution and in video and audio production and sales find that they must either accept lower wages or find themselves out on the street without jobs.

Over time the market system provides individuals with changing incentives that resolve the excess-supply excess-demand disequilibrium. Seeing the fortunes to be earned by teaching yoga, more young people learn to properly regulate their svadisthana chakra and teach others to do so. Seeing unemployment and stagnant wages in electrical engineering, fewer people major in Electrical Engineering/computer Sciences (EECS). The supply of yoga instructors grows. The supply of electrical engineers shrinks. Wages of yoga instructors fall back towards normal. Wages of electrical engineers rise. And balanced equilibrium is restored. Thus we understand how there can be a glut of a particular commodity – in this case, electric power. And we understand that it is matched by an excess demand for another commodity – in this case, yoga instructor services to properly align your svadisthana chakra.

But can there be a general glut, a glut of everything?

Some economists early in the nineteenth century said yes. Others said that the idea of a “general glut” was logically incoherent. Jean Baptiste Say, for example:

Letters to Mr. Malthus: I shall not attempt, Sir, to add… in pointing out the just and ingenious observations in your book; the undertaking would be too laborious…. [And] I should be sorry to annoy either you or the public with dull and unprofitable disputes. But, I regret to say, that I find in your doctrines some fundamental principles which… would occasion a retrograde movement in a science of which your extensive information and great talents are so well calculated to assist the progress….

What is the cause of the general glut of all the markets in the world, to which merchandize is incessantly carried to be sold at a loss?… Since the time of Adam Smith, political economists have agreed that we do not in reality buy the objects we consume, with the money or circulating coin which we pay for them. We must in the first place have bought this money itself by the sale of productions of our own. To the proprietor of the mines whence this money is obtained, it is a production with which he purchases such commodities as he may have occasion for…. From these premises I had drawn a conclusion… “that if certain goods remain unsold, it is because other goods are not produced; and that it is production alone which opens markets to produce.”…

[W]henever there is a glut, a superabundance, [an excess supply] of several sorts of merchandize, it is because other articles [in excess demand] are not produced in sufficient quantities… if those who produce the latter could provide more… the former would then find the vent which they required…22

Yet Say changed his mind. By 1829, in his analysis of the British financial panic and recession of 1825-6, Jean-Baptiste Say was writing that there could indeed be such a thing as a general glut of commodities after all: “every type of merchandise had sunk below its costs of production, a multitude of workers were without work. Many bankruptcies were declared…” The general glut, Say wrote in 1829, had been triggered by a panicked financial flight to quality in financial markets. What was going on? The answer was nailed by John Stuart Mill:

Those who have… affirmed that there was an excess of all commodities, never pretended that money was one of these commodities…. What it amounted to was, that persons in general, at that particular time, from a general expectation of being called upon to meet sudden demands, liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute….

The result is, that all commodities fall in price, or become unsaleable…. [A]s there may be a temporary excess of any one article considered separately, so may there of commodities generally, not in consequence of over-production, but of a want of commercial confidence…23

Note that these financial-market excess demands can have any of a wide variety of causes: episodes of irrational panic, the restoration of realistic expectations after a period of irrational exuberance, bad news about future profits and technology, bad news about the solvency of government or of private corporations, bad government policy that inappropriately shrinks asset stocks, et cetera.

When the government does not create “enough” money and safe savings vehicles you have an excess demand for them, an excess supply of everything else, and high unemployment and idle factories.

It seems as if there is always or almost always something that the government can do to affect asset supplies and demands that promises a welfare improvement over, say, waiting for prolonged nominal deflation to raise the real stock of liquid money, of bonds, or of high-quality AAA assets. Monetary policy open market operations swap AAA bonds for money. Quantitative easing that raises expected inflation diminishes demand for money and for AAA assets by taxing them. Non-standard monetary policy interventions swap risky bonds for AAA bonds or money. Fiscal policy affects both demand for goods and labor and the supply of AAA assets – as long as fiscal policy does not crack the status of government debt as AAA and diminish rather than increasing the supply of AAA assets. Government guarantees transform risky bonds into AAA assets. Et cetera.

And the government’s proper task is made much more difficult by the fact that what is “enough” jumps around as the set of savers and investors do their behavioral-economics thing: the Kindlebergian cycles of displacement, profit, transformation, boom, speculation, enthusiasm, mania, crisis, panic, revulsion, and discredit.24

When the government creates “too much” money and safe savings vehicles, you have an excess supply of them and an excess demand for everything else–which means inflation. And what if there is a glut not of commodities but inflation? Simply apply the same policy tools in reverse.

Right now our economy is going badly wrong in this “macro” dimension, with a prime-age 25-54 adult employment-to-population ratio of barely 78% even as late as the spring of 2016, when in a healthy and well-functioning macroeconomy that number should north of 80%.25 The only excuse my friends in the Obama administration offer is that Europe is doing much worse.26

That is the last of the six things economists have to say in the public square: that the economy does not consistently balance itself at high employment with stable prices. The principle that it does economists have called Say’s Law – even though Say himself had abandoned it by 1829.27 And it is important for economists to say, loudly, that Say’s Law is not true in theory, and it takes delicate and proper technocratic management to make it work in practice.

So economists’ τεχνε (“art, skill, qualities of craftsmanship”) does have many powerful lessons for the public square. They are: (i) a bias toward freedom, choice, decentralization, and individual responsibility; (ii) knowledge that systems of decentralized market exchange have important emergent properties that depend on close knowledge of and careful reasoning from institutional details; (iii) a recognition that markets can amplify oppression as well as opportunity; (iv) a fear that getting those institutional details wrong produces horrible outcomes; (v) a recognition of the importance of government to get details right; and (vi) to act as a balance wheel when the set of savers and investors do their behavioral-economics thing.

III. Economics as a Vocation

That is how we economists try to sell ourselves, and also how we see ourselves. We as a species have made a choice to organize our very large – now seven-billion human wide – social division of labor largely through decentralized arms-length market exchange. Such a system has powerful advantages. Such a system also has lots of emergent properties, good and bad, that are non-obvious consequences of institutional and regulatory details. Economists are here to tell you what’s what, and how to do it.


A. John Maynard Keynes

The aim is, as John Maynard Keynes said at the start of the 1930s at the end of his talk about “Economic Possibilities for Our Grandchildren,” to be a profession that performs a very useful but not overwhelmingly important role in understanding the economy and how to treat it in a way analogous to the way that dentists perform a useful but not overwhelmingly important role in understanding teeth and how to treat them. People should not:

overestimate the importance of the economic problem, or sacrifice to its supposed necessities other matters of greater and more permanent significance. It should be a matter for specialists – like dentistry. If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid28

Yet was there ever a dentist who attempted to reshape, in the interest of dental hygiene, not just a single human mouth but rather the shape of human destiny in the way that Keynes in the interest of economic hygiene tried to do pretty much every day? Here is Keynes reviewing Leon Trotsky’s Where Is Britain Going:

A CONTEMPORARY reviewing this book says: “He stammers out platitudes in the voice of a phonograph with a scratched record.”… In its English dress it emerges in a turbid stream with a hectoring gurgle which is characteristic of modern revolutionary literature translated from the Russian. Its dogmatic tone about our affairs, where even the author’s flashes of insight are clouded by his inevitable ignorance of what he is talking about, cannot commend it to an English reader…. The book is, first of all, an attack on the official leaders of the British Labour Party because of their “religiosity”, and because they believe that it is useful to prepare for Socialism without preparing for Revolution…. “Together with theological literature, Fabianism is perhaps the most useless, and in any case the most boring form of verbal creation…. “ [T]hat is how the gentlemen who so much alarm Mr. Winston Churchill strike the real article….If only it was so easy! If only one could accomplish by roaring, whether roaring like a lion or like any sucking dove!…

[Trotsky] assumes that the moral and intellectual problems of the transformation of Society have been already solved – that a plan exists, and that nothing remains except to put it into operation…. [But] force would settle nothing…. We lack more than usual a coherent scheme of progress, a tangible ideal. All the political parties alike have their origins in past ideas and not in new ideas – and none more conspicuously so than the Marxists. It is not necessary to debate the subtleties of what justifies a man in promoting his gospel by force; for no one has a gospel. The next move is with the head, and fists must wait.29

Did ever, would ever any humble dentist ever write so?

On the one hand, Keynes claims to be asserting only a very minor kind of authority – that based on his expert knowledge of the emergent properties of systems of decentralized market exchange – and to be giving merely technical advice about adjustments needed to achieve self-evidence and obvious goals like full employment, price stability, and healthy increases in productivity. He claims to be performing the economic equivalent of the dentist saying: “you should brush your molars much longer in the morning” and “that tooth has to come out now or you will be in real trouble”.

On the other hand, Keynes then leverages his professedly limited technical and technocratic expertise to attempt to banish from participation in high politics entire schools of political and moral thought, entire mass movements with their utopian aspirations, and to silence via their exclusion from valid technocratic debate the prophets of those schools of thought and mass movements. Trotsky is indeed a prophet – as Edmund Wilson wrote in his To the Finland Station:

Here are some references [from Trotsky]…. “If the prince was not succeeding in peacefully regenerating the country, he was accomplishing with remarkable effectiveness the task of a more general order for which history had placed him at the head of the government: the destruction of the political illusions and the prejudices of the middle class.” “History used the fantastic plan of Gapon for the purpose of arriving at its ends.”… History, then, with its dialectical Trinity, had chosen Prince Svyatopolk-Mirsky to disillusion the middle class, had propounded revolutionary conclusions which it had compelled Father Gapon to bless…. These statements make no sense whatever, unless one substitutes for the words “history” and “dialectic of history” the words “Providence” and “God”…30

And it is not just Trotsky and his followers whom Keynes wishes to banish. He would apply the same to the stewards of Europe today, and to that part of President Barack Obama who speaks of how because the current Lesser Depression has compelled households to tighten their belts that the government needs to tighten its. As Keynes said back in 1931:

It seems an extraordinary imbecility that this wonderful outburst of productive energy [in the boom] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man’s speculative spirit. It would, they feel, be a victory for the mammon of unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy. We need, they say, what they politely call a ‘prolonged liquidation’ to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again. I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding [during the boom]… but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity…31

There is more than a little inconsistency and tension here…


B. Alasdair Macintyre

You can resolve this inconsistency and tension in one of several ways.

It is impossible to think about issues of history and moral philosophy, especially here at Notre Dame, without thinking of Alasdair Macintyre and his brilliant After Virtue32, surely one of the best and most important books in history and moral philosophy of the second half of the twentieth century. We economists seek to leverage a narrow claim to limited technical and technocratic expertise to banish and dispel the Trotskys and all his peers and all their works – for, in our view, they contain many false works and empty promises. Alasdair Macintyre, by contrast, seeks to banish and dispel all of us economists – for we are the archetypes of what he regards as one of the most unhealthy and poisonous diseases of modernity, the disease of “managerialism.” What MacIntyre sees as the vice of the manager – that he or she doesn’t tell you that you ought to do X or not to do X, only how to do X if you decide you should – we see as respect for autonomy, as granting people equal significance to us, and as the virtue of the economist: we are just supposed to tell you what is likely to happen if you do X.

Of course to provide someone with knowledge of the consequences may be simply to give them the kind of freedom that is necessity: the freedom to do what is the right thing. The old Cold War joke was of the strategist who would offer the president three possible options: immediate surrender to the Russians, total thermonuclear war, and his preferred policy.33 To the extent that there is no grave disagreement about what the good is and what the ends are, control is exercised not by the one who chooses the ends but rather the one who chooses how the means are evaluated.

It is still not completely clear to me what Macintyre’s root objection to economics in particular and “managerialism” more generally is. The possibilities are:

  • We economists say “our technical expertise tells you that if you do X the effects will be Y” when we should say “you need to do X”.

  • We economists say “our technical expertise tells you that if you do X the effects will be Y”, but we do so because we hold to moral values Z that we do not express, and are in fact harmful.

  • When we say “our technical expertise tells you that if you do X the effects will be Y” we refuse to stake an explicit claim as to what the moral order inscribed in the firmament is, and so we encourage nihilism by teaching not how to reach the good but how to reach whatever you take to be your good.

It is clear to me that John Maynard Keynes believed in second of these objections: that economics was good for the body but taught moral values that were bad for the soul, yet in a world as poor as the world Keynes saw the needs of the body took precedence. When the world becomes rich, Keynes wrote:

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 semi-criminal, 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…34

Briefly detouring into anti-semitism:

Perhaps it is not an accident that the race which did most to bring the promise of immortality into the heart and essence of our religions has also done most for the principle of compound interest and particularly loves this most purposive of human institutions.

And then calling for, someday, Kingdom Come: a rejection of “managerialism” and of economics as thorough as Macintyre could wish for:

I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue – that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. 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.35

From this viewpoint, the fundamental difference between Keynes, at least in his “Economic Possibilities for Our Grandchildren”, and Macintyre is that Keynes believes that the Kingdom is still a century off, while Macintyre believes that the Kingdom is at hand.

But Keynes’s century is now almost over. And there is no Kingdom at hand, or even within sight, here in this world.


C. Leon Trotsky and St. Benedict

But I believe that we can go further. Macintyre, at least in his After Virtue mode, believes that good civilizations are ones with moral consensus led by prophets, rather than ones with moral confusion managed by managers. It is Macintyre’s belief that we should hope for a civilization led by Trotskys (less preferred) or St. Benedicts (more preferred), but in either event it is to be preferred to managerial Keyneses.

If you step back, however, and inquire into the content of the this-world secular ideologies of the Trotskys, it then becomes very difficult to prefer the prophetic Trotskys to the managerial Keyneses. Trotsky’s gospel, it turns out, is in reality little more than a managerialist gospel. Trotsky says that History speaking through Marx and him knows how to build a Communist utopia. What is a Communist utopia? It is a society in which humans pull together and coordinate their activities. It is a society in which people are free to do what they want, within reason of what is not destructive for the community. It is a society in which people are prosperous: well-fed, well-clothed, well-housed, and well-entertained. Trotsky’s gospel is that Keynes’s market economy is incapable of even approaching such a utopia, while Marx and History have together told him how to accomplish it.

And here we have to bring in history: the regimes that accepted versions of Trotsky’s gospel in the twentieth century and tried to implement it range from Pol Pot’s to Fidel Castro’s, with Stalin’s and Mao’s regimes at the worst, and something like Erich Honeker’s Stasi-spies-on-everyone East Germany close to the best.

The whole point of saying that you would prefer Trotsky to Keynes is that Trotsky has a gospel which, if not true, is true enough to hold society together in moral consensus and produce a modicum of prosperity. But what if Keynes’s managerialism does better at fulfilling what Trotsky claims will be the accomplishments of Trotsky’s gospel more effectively than Trotsky does? It does. We can see that Keynes was totally correct in wanting to reduce the influence of a Trotsky in the public square, because a Trotsky’s ideas about good organization of the economy were seen immediately by Keynes as, and turned out to be a horrible disaster, even from the perspective of Trotsky’s values–especially from the perspective of Trotsky’s values.

In a similar fashion, many of the same conclusions follow if you step back and inquire into the content of the other-worldly gospels of the St. Benedicts. Their lodestones swing from following the ethical teachings of Rabbi Yeshua of Nazareth to worshipping the Anointed Λόγος that is of a higher order of reality than we, with a certain tension between them. But when Rabbi Yeshua spoke of what the Anointed Λόγος commanded his followers to do in this world, his followers were commanded to successfully attain managerial ends:

Then shall the king say to them that shall be on his right hand: “Come, ye blessed of my Father, possess you the kingdom prepared for you from the foundation of the world. For I was hungry, and you gave me to eat; I was thirsty, and you gave me to drink; I was a stranger, and you took me in: Naked, and you covered me: sick, and you visited me: I was in prison, and you came to me.”

Then shall the just answer him, saying: “Lord, when did we see thee hungry, and fed thee; thirsty, and gave thee drink? And when did we see thee a stranger, and took thee in? or naked, and covered thee? Or when did we see thee sick or in prison, and came to thee?” And the king answering, shall say to them: “Amen I say to you, as long as you did it to one of these my least brethren, you did it to me.”36

That is a very powerful statement that what is sought after is successful managerialism – a successful managerialism with a preferential option for the poor: one that feeds the hungry, clothes the naked, heals the sick, welcomes the immigrant, and visits the imprisoned. Right ritual, right moral orientation, right faith seem to be nowhere – at least in this part of Matthew.37

IV. We Dwell Not in the Republic of Plato But in the Sewer of Romulus

In the last days before the coming of the Roman Empire, Marcus Tullius Cicero in Rome wrote to his best correspondent Titus Pomponius Atticus in Athens:

You cannot love our dear [Marcus Porcius] Cato any more than I do; but the man – although employing the finest mind and possessing the greatest trustworthiness – sometimes harms the Republic. He speaks as if we were in the Republic of Plato, and not in the sewer of Romulus…38

Whatever you may think about economists’ desires to use their technical and technocratic expertise to reduce the influence of both the Trotskys and the St. Benedicts in the public square, there is the prior question of whether here and now – in this fallen sublunary sphere, among the filth of Romulus – they have and deploy any proper technical and technocratic expertise at all. And we seem to gain a new example of this every week.

The most salient relatively-recent example was provided by Carmen Reinhart and Kenneth Rogoff39 – brilliant, hard-working economists both, from whom I have learned immense amounts. Rogoff’s depth of thought and breadth of knowledge about how countries act and how economies respond in the arena of the international monetary system is a global treasure. Reinhart’s breadth and depth of knowledge about how governments have issued, financed, amortized, paid off, or not paid off their debts over the past two centuries is the greatest in the world.

Debt to GDP Ratio and Future Economic Growth pdf page 5 of 6

However, they believed that the best path forward for the developed economies – the U.S., Germany, Britain, and Japan – was for them to shrink their government deficits quickly and quickly halt the accumulation of and begin to pay down government debt. My faction, by contrast, believed that the best path forward for these economies was for them to expand their government deficits now and let the debt grow until either economies recover to normal levels of employment or until interest rates begin to rise significantly.

Why does my faction disagree with them? Let me, first, rely on the graph above that is the product of work by Berkeley graduate student Owen Zidar,40 plotting how economic growth in different industrialized countries in different eras has varied along with the amount of government debt that they had previously accumulated. And let me give the explanation of why I disagree with Reinhart and Rogoff that I was giving at seminars around the country in the early 2010s:

The argument [for fiscal contraction and against fiscal expansion in the short run] is now: never mind why, the costs of debt accumulation are very high. This is the argument made by Reinhart and Rogoff: when your debt to annual GDP ratio rises above 90%, your growth tends to be slow.
This is the most live argument today. So let me nibble away at it. And let me start by presenting the RRR case in the form of Owen Zidar’s graph.

First: note well: no cliff at 90%.

Second, RRR present a correlation – not a causal mechanism, and not a properly-instrumented regression. Their argument is a claim that high debt-to-GDP and slow subsequent growth go together, without answering the question of which way causation runs. Let us answer that question.

The third thing to note is how small the correlation is. Suppose that we consider two cases: a multiplier of 1.5 and a multiplier of 2.5, both with a marginal tax share of 1/3. Suppose the growth-depressing effect lasts for 10 years. Suppose that all of the correlation is causation running from high debt to slower future growth. And suppose that we boost government spending by 2% of GDP this year in the first case. Output this year then goes up by 3% of GDP. Debt goes up by 1% of GDP taking account of higher tax collections. This higher debt then reduces growth by… wait for it… 0.006% points per year. After 10 years GDP is lower than it would otherwise have been by 0.06%. 3% higher GDP this year and slower growth that leads to GDP lower by 0.06% in a decade. And this is supposed to be an argument against expansionary fiscal policy right now?

The 2.5 multiplier case is more so. Spend 2% of GDP over each of the next three years. Collect 15% of a year’s extra output in the short run. Taking account of higher tax revenues, debt goes up by 1% of GDP and we have the same ten-year depressing effect of 0.06% of GDP. 15% now. -0.06% in a decade. The first would be temporary, the second is permanent, but even so the costs are much less than the benefits as long as the economy is still at the zero lower bound.

And this isn’t the graph that you were looking for. You want the causal graph. That, worldwide, growth is slow for other reasons when debt is high for other reasons or where debt is high for other reasons is in this graph, and should not be. Control for country and era effects and Owen reports that the -0.06% becomes -0.03%. As Larry Summers never tires of pointing out, (a) debt-to-annual-GDP ratio has a numerator and a denominator, and (b) sometimes high-debt comes with high interest rates and we expect that to slow growth but that is not relevant to the North Atlantic right now. If the ratio is high because of the denominator, causation is already running the other way. We want to focus on cases of high debt and low interest rates. Do those two things and we are down to a -0.01% coefficient.

We are supposed to be scared of a government-spending program of between 2% and 6% of a year’s GDP because we see a causal mechanism at work that would also lower GDP in a decade by 0.01% of GDP? That does not seem to me to compute.

Now I have been nibbling the RRR result down. Presumably they are trying to see if it can legitimately be pushed up. This will be interesting to watch over the next several years, because RRR is the heart of the pro-austerity case right now.41

That ends what I would typically try to say.

And that is as concise and simple an explanation of why I disagree with Reinhart and Rogoff as I can give.

If you are not a professional economist and have managed to understand that, I salute you.

They disagree with me, first, they started with different prior beliefs – different assumptions about the relative weight to be given to different scenarios and the relative risks of different courses of action that lead them to read the evidence differently. Second, they made some data processing errors – although those are a relatively minor component of our differences – and are now dug in, anchored to the positions they originally took, and rationalizing that the data processing errors do not change the qualitative shape of the picture. Third, they have made different weighting decisions as to how to handle the data. Is Owen Zidar putting his thumb on the scales, and weighting the data because he knows that the effects of high debt in reducing growth are small? I don’t think so: his weighting scheme is simple, and he is too young to be dug in and have a dog in this fight. But I am, perhaps, not the best judge.

But when we venture out of data collection and statistics and the academy into policy advocacy in the public square the differences become very large indeed. Matthew O’Brien quotes Senator Tom Coburn’s report on Reinhart and Rogoff’s briefing of the Republican Congressional Caucus in April 2011:

Johnny Isakson, a Republican from Georgia and always a gentleman, stood up to ask his question: “Do we need to act this year? Is it better to act quickly?”

“Absolutely,” Rogoff said. “Not acting moves the risk closer,” he explained, because every year of not acting adds another year of debt accumulation. “You have very few levers at this point,” he warned us.

Reinhart echoed Conrad’s point and explained that countries rarely pass the 90 percent debt-to-GDP tipping point precisely because it is dangerous to let that much debt accumulate. She said, “If it is not risky to hit the 90 percent threshold, we would expect a higher incidence.”42

I think we have by far the better of the argument. Yet it is very clear that even today Reinhart and Rogoff – and allied points by economists like Alberto Alesina, Francesco Giavazzi, et al.,43 where I also think we have the better of the argument by far – have had a much greater impact on the public debate than my side has.

Thus, the key problem of knowledge: Since technical details matter, conclusions must be taken by non-economists on faith in economists’ expertise, by watching the development of a near-consensus of economists, and by consonance with observers’ overall world-view. But because political and moral commitments shape how we economists view the evidence, we economists will never reach conclusions with a near-consensus – even putting to one side those economists who trim their sails out of an unwarranted and excessive lust for high federal office. And note that neither Carmen Reinhart nor Kenneth Rogoff have such a lust.

We do not live in the Republic of Plato. We live in the Sewer of Romulus. In this fallen sublunary sphere, the gap between what economists should do and be and what they actually are and do is distressingly large, and uncloseable.

And this leaves you – those of you who must listen to we economists when we speak as public intellectuals in the public square – with a substantial problem.

V. Should You Pay Attention to Economists as Public Intellectuals in the Public Square?

You have to.

You have no choice.

You all have to listen.

But you have nearly no ability to evaluate what you hear. When we don’t reach a near-consensus, then Heaven help you. Unless you are willing make me intellectual dictator and philosopher-king, I cannot.44