Tag: Economic History

Must-read: Izabella Kaminska: “Bob Gordon’s Not Getting in Your Driverless Car”

Posted on by Brad DeLong

Must-Read: Izabella Kaminska: Bob Gordon’s Not Getting in Your Driverless Car: “Reading Coyle’s review it’s clear Gordon uses the book to expand in more detail…

…on some of the ideas presented in his October 2015 paper “Secular Stagnation on the Supply Side: U.S. Productivity Growth in the Long Run”… that the days of miracle growth are long gone and that slower growth lies ahead…. There is something different about information-fuelled growth compared to technique-fuelled growth. The former’s advantage for some reason stales more quickly than the latter’s…. Think of it this way: when you had a Blackberry and nobody else did, the competitive advantage associated with having that blackberry felt incredibly beneficial to you. Now that everyone has a smartphone, however, that advantage (namely, being able to work on the go, at home or from your bed) has diminished entirely. What was once an information advantage has in some cases become an information burden because people’s expectations about when, how and where it is appropriate to work have changed entirely…. Fundamentally, Gordon’s core point doesn’t seem to rest on whether we’ve stopped innovating or not, but rather whether innovation is happening fast enough to counter the diminishing returns of past innovation as well as to create entirely new types of returns.

Over at Project Syndicate: “Piketty vs. Piketty”

Posted on by Brad DeLong

Over at Project Syndicate: Piketty vs. Piketty: BERKELEY – In Capital in the Twenty-First Century, the French economist Thomas Piketty highlights the striking contrasts in North America and Europe between the Gilded Age that preceded World War I and the decades following World War II. In the first period, economic growth was sluggish, wealth was predominantly inherited, the rich dominated politics, and economic (as well as race and gender) inequality was extreme… READ MOAR over at Project Syndicate

Today’s economic history: Did the classical liberals believe in constructive statecraft?

Posted on by Brad DeLong

Today’s Economic History: Abbott Payson Usher (1934): A Liberal Theory of Constructive Statecraft: Presidential address delivered at the Forty-sixth Annual Meeting of the American Economic Association, Philadelphia, Pennsylvania, December 27, 1933:

Classical and neo-classical economic theory is commonly associated with a form of liberalism that was more largely directed toward the repeal of old laws and regulations than to the constructive development of institutions to meet new social problems. In the past the chief emphasis has been laid upon these destructive accomplishments of economic liberalism. It has therefore been easy to overlook the actual constructive accomplishments of the early nineteenth century, and many are disposed to believe that these positive achievements were inconsistent with the primary postulates of classical and neo-classical theory.

It must be confessed that there is confusion of thought in the writings of the early nineteenth century economists; but a positive theory of constructive statecraft is implicit in the basic liberal concepts. The most characteristic features of classical theory lead directly toward a broad concept of the task of the state.

Classical theory was based upon the concept of an orderly and rational system of nature, and the concept of a contractual society. We need not concern ourselves here with the precise forms in which these concepts were held by the economists of the nineteenth century, because it is more important to direct our attention to the full content of these ideas than to the imperfect and incomplete formulations that have prevented liberal views from achieving their full development.

As people probably told my Great-Great-Uncle Abbott, “most characteristic” is in the eye of the beholder. However, he is certainly right as far as Hume, Smith, Ricardo, Tocqueville… even Bastiat are concerned. With Senior and subsequent epigones, however, “most characteristic” becomes debatable: the parody of classical liberalism comes close to reality–and today we have sub-epigones at Heritage and Cato denouncing Bastiat and Hayek, as Ludwig von Mises did Milton Friedman, as “Communists. You’re just Communists…”

Today’s economic history: Writing is (and other things are) not “naturally” human

Posted on by Brad DeLong

Today’s Economic History: For Homer and his audience, writing is unnatural and un-human: “many deadly signs on a folded tablet…”.

What is natural to humans–what we were back in the environment of evolutionary adaptation when we were in biological equilibrium–is grunting bands of 50 or so making their way across the Horn of Africa with their stone tools. Since then, the language Singularity, the agriculture Singularity, the writing Singularity, and perhaps now a fourth have changed human life in many ways beyond all recognition. “What is natural to humans” almost invariably means “what I expect to happen”, which is roughly the same as “what I learned about how things were, were done, and ‘ought’ to be done back when I was a child”.

Homer: Iliad: “Proetus’ wife, the fair Anteia…

…longed madly for Bellerephon, and begged him to lie with her in secret, but wise Bellerephon was a righteous man and could not be persuaded. So she wove a web of deceit, and said to King Proetus: ‘Kill this Bellerephon, who tried to take me by force, or die in the doing of it.’

The king was angered by her words. He would not kill Bellerephon, as his heart shrank from murder, but he packed him off to Lycia, and scratching many deadly signs on a folded tablet, gave him that fatal token, and told him to hand it to the Lycian king, his father-in-law, so to engineer his death.

Bellerephon went to Lycia escorted by peerless gods, and when he reached the streams of Xanthus the king of great Lycia welcomed him with honour, entertaining him for nine days, and sacrificing nine oxen. But when rosy-fingered Dawn lit the tenth day his host questioned him, and asked what token he brought him from his son-in-law Proetus…

The melting away of North Atlantic social democracy

Posted on by Brad DeLong

Over at Talking Points Memo: The Melting Away of North Atlantic Social Democracy: Hotshot French economist Thomas Piketty, of the Paris School of Economics, looked at the major democracies with North Atlantic coastlines over the past couple of centuries. He saw five striking facts:

  • First, ownership of private wealth—with its power to command resources, dictate where and how people would work, and shape politics—was always highly concentrated.
  • Second, 150 years—six generations—ago, the ratio of a country’s total private wealth to its total annual income was about six.
  • Third, 50 years—two generations—ago, that capital-income ratio was about three.
  • Fourth, over the past two generations that capital-income ratio has been rising rapidly.
  • Fifth, the flow of income to the owner of the dollar capital did not rise when capital was relatively scarce, but plodded along at a typical net rate of profit of about 5% per year generation after generation.

He wondered what these facts predicted for the shape of the major North Atlantic economies in the 21st century. And so he wrote a big book, Capital in the Twenty-First Century **READ MOAR at Talking Points Memo

Version with annotations, references, and deleted scenes: https://fold.cm/read/delong/the-melting-away-of-north-atlantic-social-democracy-Fdf2BEBZ

Photo of Thomas Piketty in Sweden, June 30, 2014. (AP Photo/Janerik Henriksson)

Must-Watch: Rob Johnson et al.: Connecting American Foreign Policy to Economic Policy

Posted on by Brad DeLong

Must-Watch: Robert Johnson, Brad DeLong, Linda Bilmes, and Steve Clemons: Connecting American Foreign Policy to Economic Policy: “How might a reimagined American foreign policy both bolster the domestic economy…

…and help build a 21st-century global economy that works for everyone?… The flaws and deficiencies of the free enterprise system, including economic inequality, market failure, and the chronic instability of the business cycle… remain… [and] have the potential to cause catastrophic disruptions of both the global economy and modern society…. This roundtable looked at how America could evolve its economic and foreign policy to better work together and make a more positive impact on the world… [as well as] at how foreign policy could more positively impact the domestic American economy…

Robert Johnson, Brad DeLong, Linda Bilmes, and Steve Clemons: Connecting American Foreign Policy to Economic Policy (Roundtable):

Must-Read: Branko Milanovic, Peter H. Lindert, and Jeffrey G. Williamson: Pre-Industrial Inequality

Posted on by Brad DeLong

Must-Read: And the ‘winner’ for all time–in terms of success at extracting as much wealth from the workers as possible given resources, population, and technology–is Mughal India in 1750!

Branko Milanovic, Peter H. Lindert, and Jeffrey G. Williamson: Pre-Industrial Inequality: “Is inequality largely the result of the Industrial Revolution?…

…Or were pre-industrial incomes as unequal as they are today? This article infers inequality across individuals within each of the 28 pre-industrial societies, for which data were available, using what are known as social tables. It applies two new concepts: the inequality possibility frontier and the inequality extraction ratio. They compare the observed income inequality to the maximum feasible inequality that, at a given level of income, might have been ‘extracted’ by those in power. The results give new insights into the connection between inequality and economic development in the very long run.

Ye Olde Inæqualitee Shoppe Pseudoerasmus Https pseudoerasmus files wordpress com 2014 09 blwpg263 pdf

Today’s Economic History: Steve Roth: Did Money Evolve? You Might (Not) Be Surprised

Posted on by Brad DeLong

Today’s Economic History: Roth is very good on “money” defined as a unit of account.

But there are, of course, other perfectly-fine definitions of “money”: “means of payment”, “medium of exchange”, “that which you need to hold to take advantage of or avoid suffering from market disequilibrium”, “even store of value”.

To say that the definition attached to how you use the word “money” is the only correct definition and that everyone with a different definition is doing it wrong–well, that’s just doing it wrong yourself…

Steve Roth: Did Money Evolve? You Might (Not) Be Surprised: “The earliest uses of money in recorded civilization were not coins…

…or anything like them. They were tallies of credits and debits (gives and takes), assets and liabilities (rights and responsibilities, ownership and obligations), quantified in numbers. Accounting. (In technical terms: sign-value notation.)

Tally sticks go back twenty-five or thirty thousand years. More sophisticated systems emerged six to seven thousand years ago (Sumerian clay tablets and their strings-of-beads predecessors). The first coins weren’t minted until circa 700 BCE — thousands or tens of thousands of years after the invention of ‘money.’

These tally systems give us our first clue to the nature of this elusive ‘social construct’ called money: it’s an accounting construct. The earliest human recording systems we know of — proto-writing — were all used for accounting.* So the need for social accounting may even explain the invention of writing.

This ‘accounting’ invention is a human manifestation of, and mechanism for, reciprocity instincts whose origins long predate humanity. It’s an invented technique to do the counting that is at least somewhat, at least implicitly, necessary to reciprocal, tit-for-tat social relationships. It’s even been suggested that the arduous work of social accounting — keeping track of all those social relationships with all those people — may have been the primary impetus for the rapid evolutionary expansion of the human brain. ‘Money’ allowed humans to outsource some of that arduous mental recording onto tally sheets.

None of this is to suggest that explicit accounting is necessary for social relationships. That would be silly. Small tribal cultures are mostly dominated by ‘gift economies’ based on unquantified exchanges. And even in modern societies, much or most of the ‘value’ we exchange — among family, friends, and even business associates — is not accounted for explicitly or numerically. But money, by any useful definition, is so accounted for. Money simply doesn’t exist without accounting.

Coins and other pieces of physical currency are, in an important sense, an extra step removed from money itself. They’re conveniently exchangeable physical tokens of accounting relationships, allowing people to shift the tallies of rights and responsibilities without editing tally sheets. But the tally sheets, even if they are only implicit, are where the money resides.

This is of course contrary to everyday usage. A dollar bill is ‘money,’ right? But that is often true of technical terms of art. This confusion of physical tokens and other currency-like things (viz, economists’ monetary aggregates, and Wray’s ‘money things’) with money itself make it difficult or impossible to discuss money coherently.

What may surprise you: all of this historical and anthropological information and understanding is esoteric, rare knowledge among economists. It’s pretty much absent from Econ 101 teaching, and beyond. Economists’ discomfort with the discipline’s status as a true ‘social science,’ employing the methodologies and epistemological constructs of social science — their ‘physics envy’ — ironically leaves them bereft of a definition for what is arguably the most fundamental construct in their discipline. Likewise for other crucial and constantly-employed economic terms: assets, capital, savings, wealth, and others.

Now to be fair: a definition of money will never be simple and straightforward. Physicists’ definition of ‘energy’ certainly isn’t. But physicists don’t completely talk past each other when they use the word and its associated concepts. Economists do when they talk about money. Constantly.

Physicists’ definition of energy is useful because it’s part of a mutually coherent complex of other carefully defined terms and understandings — things like ‘work,’ ‘force,’ ‘inertia,’ and ‘momentum.’ Money, as a (necessarily ‘social’) accounting construct, requires a similar complex of carefully defined, associated accounting terms — all of which themselves are about social-accounting relationships.

At this point you’re probably drumming your fingers impatiently: ‘So give: what is money?’ Here, a bloodless and technical term-of-art definition:

The value of assets, as designated in a unit of account.

Which raises the obvious questions: What do you mean by ‘assets’ and ‘unit of account’? Those are the kind of associated definitions that are necessary to any useful definition of money. Hint: assets are pure accounting, balance-sheet entities, numeric representations of the value of goods (or of claims on goods, or claims on claims on…).

Must-Read: Jeffry Frieden: ‘The Money Makers,’ by Eric Rauchway

Posted on by Brad DeLong

Must-Read: Few people today realize the extent to which the New Deal was not ideological or theoretical but rather their opposites: pragmatic. And where the New Deal was ideological or theoretical, it tended to be the least successful–witness Thurman Arnold and utilities, or Roosevelt’s austerian turn in 1937-1938:

Jeffry Frieden: ‘The Money Makers,’ by Eric Rauchway: “In 2008, the international economy came within weeks of catastrophic collapse…

…Concerted action by the world’s monetary authorities staved off disaster. Although stagnation continues to plague much of the globe, especially Europe, a major depression was avoided. The world was not so lucky in 1929…. The policies of the world’s major governments helped turn the recession that began in 1929 into a full-fledged depression…. [But[ the sooner countries left the gold standard in the 1930s, the more quickly their economies rebounded. Britain went off gold in September 1931, followed by most of the rest of the world. America’s path out of the Depression was slowed by the Hoover administration’s gold-standard orthodoxy. When Roosevelt took office in 1933, he almost immediately took the United States off gold and devalued the dollar. The result, as Rauchway shows, was a robust recovery. By 1936, the world had left gold behind. For the next 10 years, even as war clouds gathered and then as war raged, American and British policy makers, led by John Maynard Keynes and the United States Treasury official Harry Dexter White, planned a new international monetary order…. Rauchway tells this important story with passion, intelligence and style….

The major players come alive in ‘The Money Makers.’ Rauchway’s archival research gives depth to Roosevelt and Treasury Secretary Henry Morgenthau Jr., showing that both men understood the economic and political implications of their monetary policies, even if they were uninterested in the theoretical foundations for them that Keynes and others were building. The book also gives great detail about the practical involvement of the two principal economists involved, Keynes and White. Rauchway places the political context front and center, especially in addressing the issue of White’s contacts with Soviet agents…. Perhaps today’s policy makers — especially contemporary advocates of orthodox austerity sitting in Berlin — can learn something from the story Eric Rauchway tells so well.”

Why Not the Gold Standard? Hoisted from the Archives from 1996

Posted on by Brad DeLong
Witwatersrand mines Google Search

From 1996: Why Not the Gold Standard? Talking Points on the Likely Consequences of Re-Establishment of a Gold Standard:

Consequences for the Magnitude of Business Cycles:

Loss of control over economic policy: If the U.S. and a substantial number of other industrial economies adopted a gold standard, the U.S. would lose the ability to tune its economic policies to fit domestic conditions.

  • For example, in the spring of 1995 the dollar weakened against the yen. Under a gold standard, such a decline in the dollar would not have been allowed: instead the Federal Reserve would have raised interest rates considerably in order to keep the value of the dollar fixed at its gold parity, and a recession would probably have followed.

Recessionary bias: Under a gold standard, the burden of adjustment is always placed on the ‘weak currency’ country.

  • Countries seeing downward market pressure on the values of their currencies are forced to contract their economies and raise unemployment.
  • The gold standard imposes no equivalent adjustment burden on countries seeing upward market pressure on currency values.
  • Hence a deflationary bias, which makes it likely that a gold standard regime will see a higher average unemployment rate than an alternative managed regime.

The gold standard and the Great Depression: The current judgment of economic historians (see, for example, Barry J. Eichengreen, Golden Fetters is that attachment to the gold standard played a major part in keeping governments from fighting the Great Depression, and was a major factor turning the recession of 1929-1931 into the Great Depression of 1931-1941.

  • Countries that were not on the gold standard in 1929–or that quickly abandoned the gold standard–by and large escaped the Great Depression
  • Countries that abandoned the gold standard in 1930 and 1931 suffered from the Great Depression, but escaped its worst ravages.
  • Countries that held to the gold standard through 1933 (like the United States) or 1936 (like France) suffered the worst from the Great Depression
  • Commitment to the gold standard prevented Federal Reserve action to expand the money supply in 1930 and 1931–and forced President Hoover into destructive attempts at budget-balancing in order to avoid a gold standard-generated run on the dollar.
  • Commitment to the gold standard left countries vulnerable to ‘runs’ on their currencies–Mexico in January of 1995 writ very, very large. Such a run, and even the fear that there might be a future run, boosted unemployment and amplified business cycles during the gold standard era.
  • The standard interpretation of the Depression, dating back to Milton Friedman and Anna Schwartz’s Monetary History of the United States, is that the Federal Reserve could have, but for some mysterious reason did not, boost the money supply to cure the Depression; but Friedman and Schwartz do not stress the role played by the gold standard in tieing the Federal Reserve’s hands–the ‘golden fetters’ of Eichengreen.
  • Friedman was and is aware of the role played by the gold standard–hence his long time advocacy of floating exchange rates, the antithesis of the gold standard.

Consequences for the Long-Run Average Rate of Inflation:

Average inflation determined by gold mining: Under a gold standard, the long-run trajectory of the price level is determined by the pace at which gold is mined in South Africa and Russia.

  • For example, the discovery and exploitation of large gold reserves near present-day Johannesburg at the end of the nineteenth century was responsible for a four percentage point per year shift in the worldwide rate of inflation–from a deflation of roughly two percent per year before 1896 to an inflation of roughly two percent per year after 1896. In the election of 1896, William Jennings Bryan’s Democrats called for free coinage of silver as a way to end the then-current deflation and stop the transfer of wealth away from indebted farmers. The concurrent gold discoveries in South Africa changed the rate of drift of the price level, and accomplished more than the writers of the Democratic platform could have dreamed, without any change in the U.S. coinage.
  • Thus any political factors that interrupted the pace of gold mining would have major effects on the long-run trend of the price level–send us into an era of slow deflation, with high unemployment. Conversely, significant advances in gold mining technology could provide a significant boost to the average rate of inflation over decades. Under the gold standard, the average rate of inflation or deflation over decades ceases to be under the control of the government or the central bank, and becomes the result of the balance between growing world production and the pace of gold mining.

Why Do Some Still Advocate a Gold Standard?

  • A belief that governments and central banks should not control the average rate of inflation over decades, and that the world will be better off if the long-run drift of the price level is determined ‘automatically.’
  • A belief that bondholders and investors will be reassured by a government committed to a gold standard, will be confident that inflation rates will be low, and so will bid down nominal interest rates.
  • Of course, if you do not trust a central bank to keep inflation low, why should you trust it to remain on the gold standard for generations? This large hole in the supposed case for a gold standard is not addressed.
  • Failure to recognize the role played by the gold standard in amplifying and propagating the Great Depression.
  • Failure to recognize that the international monetary system functions best when the burden-of-adjustment is spread between balance-of-payments ‘surplus’ and ‘deficit’ countries, rather than being loaded exclusively onto ‘deficit’ countries.
  • Failure to recognize how gold convertibility increases the likelihood of a run on the currency, and thus amplifies recessions.