political economy Archives

Can This Capitalism Be Saved?

Posted on July 28, 2016July 28, 2016 by Brad DeLong

Robert reich saving capitalism Google Search

Here is piece of mine left on the cutting room floor elsewhere. So I might as well throw it up here.

Reviewing: Robert Reich: Saving Capitalism: For the Many, Not the Few http://amzn.to/29Viz6w

Robert Reich’s Saving Capitalism: For the Many, Not the Few http://amzn.to/29Viz6w is an excellent book. It powerfully argues that America needs once again—as it truthfully reminds us that we did four times in the past—restructure its institutions to build both private and public countervailing power against the monopolists and their political servants in order to right the distribution of income and boost the pace of economic growth.

Reich wants to remind us Americans of our strong record of “expanding the circle of prosperity when capitalism gets off track.” We have in our past no fewer than four times built up countervailing power to curb the ability of those controlling last generation’s wealth and this generation’s politics to tune institutions, property rights, and policy to their station. This repeated, deliberate construction of countervailing power kept America a high-wage economy—the world’s highest-wage economy, in fact—for ordinary (white, male) guys.

Until now.

Thus Reich wants us here in America to fix our future by recalling our past.

The first piece of our past Reich wants us to remember is Andrew Jackson’s Age: the period starting in 1828 when America removed:

accrued unwarranted privileges… [keeping] average citizens… [from] gain[ing] ground…. The Jacksonians sought to abolish property requirements for voting and allow business firms to incorporate without specific acts of the legislature, and they opposed the Second Bank of the United States, which they believed would be controlled by financial elites. They did not reject capitalism; they rejected aristocracy. They sought a capitalism that would improve the lot of ordinary people rather than merely the elites…

In what may be the only favorable citation of Roger B. Taney I will see in this decade, Reich remembers not the Supreme Court Chief Justice of the late 1850s but the Attorney General of the early 1830s. He remembers the Taney of:

It is a fixed principle of our political institutions to guard against the unnecessary accumulation of power over persons and property in any hands. And no hands are less worthy to be trusted with it than those of a moneyed corporation…

Yes, Reich says, that Taney shared the same body with the Taney who wrote the opinion in Dred Scott vs. Sanford: Jacksonians believed that no laws that endowed the Cherokee or other native Americans with any property whatsoever should be enforced, and that no African American—slave or free—had any “rights which the white man was bound to respect” at all. But in Reich’s the Jacksonian Revolution prevented America’s drift toward a more English form of political-economic organization, in which restrictions on westward migration coupled with political grants of economic monopoly rights lead to a lower-wage economy.

Of course, that drift came after the Civil War, with the coming of the Gilded Age and then of the second piece of history that Reich wants us to remember: the 1901-1916 Progressive Era of Teddy Roosevelt and Woodrow Wilson as a response to Gilded Age inequality and political corruption of the system. The response to the Great Depression took the form of Franklin Delano Roosevelt’s 1933-1939 New Deal and the partial construction of the great arch of American social democracy, which was then extended with Lyndon Johnson’s 1964-1966 three-part legislative program of the 1964 Civil Rights Act, the 1965 Voting Rights Act, and the 1965 Medicare Act.

All of these, Reich argues, show that:

We need not be victims of impersonal “market forces” over which we have no control. The market is a human creation… based on rules that human beings devise. The central question is who shapes those rules and for what purpose…. The coming challenge is not to technology or to economics. It is a challenge to democracy. The critical debate for the future is not about the size of government; it is about whom government is for. The central choice is not between the “free market” and government; it is between a market organized for broadly based prosperity and one designed to deliver almost all the gains to a few at the top… how to design the rules of the market so that the economy generates what most people would consider a fair distribution on its own, without necessitating large redistributions after the fact…

The key for Reich is the proper construction of institutions that provide, in a phrase he borrows from John Kenneth Galbraith, countervailing power to that power over political-economic arrangements provided by the oligarchic inheritance of last generation’s wealth and the oligarchic building up of political influence.

We today see a much gloomier future–at least a much gloomier economic future than the one 2006 seemed to offer us. Lower asset returns and lower profit opportunities. Greater “headwinds”. Slowed technological progress. Slower growth in living standards. More income and wealth inequality. A political economy chained by ideological propaganda in which making good win-win policies has gone out the window.

Reich sees this context, and so he writes to remind us that we have successfully dealt with the problems of creating institutions to support equitable and inclusive growth before. But his book seems more cheerleading than sober assessment. It feels to me like an optimism of the will. But when I look around me, the reality I see seems to weigh heavily on the side of a pessimism of the intellect–in economic affairs, at least.

What Thinkers Will Define Our Future?: No Longer Fresh at Project Syndicate

Posted on July 25, 2016 by Brad DeLong

Over at Project Syndicate: Which Thinkers Will Define Our Future?: BERKELEY – Several years ago, it occurred to me that social scientists today are all standing on the shoulders of giants like Niccolo Machiavelli, John Locke, Adam Smith, Alexis de Tocqueville, Max Weber, and Émile Durkheim.

One thing they all have in common is that their primary focus was on the social, political, and economic makeup of the Western European world between 1450 and 1900. Which is to say, they provide an intellectual toolkit for looking at, say, the Western world of 1840, but not necessarily the Western world of 2016. What will be taught in the social theory courses of, say, 2070? What canon – written today or still forthcoming – will those who end their careers in the 2070s wish that they had used when they started them in the late 2010s? Read MOAR at Project Syndicate

Several years ago I had a thought: it seemed to me that the social sciences we’re still standing on the shoulders of giants—thinkers like Niccolo Machiavelli, John Locke, Adam Smith, Alexis de Tocqueville, Max Weber, Emile Durkheim, and company. You can indeed see far when you stand on the shoulders of a giant. But, unless you adopt a twisty and undignified posture , you see best only in the direction that the giant is looking. And the giants of social science were all looking at the Western European world from 1450 to 1900–looking at its orders and disorders, its structures and changes, and its problems and proposed solutions.

We will very shortly be trying to understand the world of the second fifth of the 21st century. Attempting to do so using an intellectual toolkit that is really focused on 1840 or so seems hazardous. So I asked myself: what will be taught in the social theory courses of, say, 2070? What authors and what toolkits–written today or still unwritten—will those who will end their careers in the 2070s wish that they had focused on when they started their careers in the late 2010s? I started a file folder: “The Social Theory of the Late 21st Century”. I filled it with things when I found something I thought had purchase on something likely to be an important problem over the next couple of generations. I put things in. I took things out. I looked at the folder again last week. The bulk of it consisted of the writings of three people: Alexis to Tocqueville, who wrote in the 1830s and 1840s; John Maynard Keynes, who wrote in the 1920s and 1930s; and Karl Polanyi, who wrote in the 1930s and 1940s.

Now the fact that I appear to think that the cutting-edge social theory of the 2070s will then be composed of books between 125 (Polanyi’s The Great Transformation) and 235 (Tocqueville’s Democracy in America) may simply be a consequence of my own stupidities and biases. But maybe, just maybe, there is something more here.

John Maynard Keynes’s central concerns as he wrote in the 1920s and 1930s were five:

The fragility of our collective prosperity.
The grave tensions between the demons of nationalism and the rootless cosmopolite attitudes needed to support a peaceful and prosperous global society.
The need to figure out how to organize our lives and utilize our prosperity to create a world fit for humans to live good lives in.
The bankruptcy of the ideological nostrums—laissez-faire, spontaneous order, collective cooperation, socialist command-and-control—with which his world was faced.
The delicate and technocratic problems of running a prosperous economy—and the economic, moral, and political disasters that would follow from failing to do so.

But after World War II the problems that had spurred Keynes’s concerns faded into the background. The Thirty Glorious Years after World War II allowed some to believe that they were permanently—rather than temporarily—solved. The subsequent inflation of the 1970s could be blamed on social democratic overreach, and the claim that the Thatcher-Reagan correction had been salutary and effective was highly credible to the moneyed classes that prospered thereafter, and to their tame ideologists who dominated the 1980-2010 public sphere.

But today the problems that had spurred Keynes’s concerns are back.

Karl Polanyi’s central concerns writing in the 1930s and 1940s was that a market society could indeed produce a great deal of material prosperity, but it did so by making people and the fabric of their lives puppets and playthings of mindless market forces, and that people really did not like that. The task was to grasp the prosperity that came with a market economy without suffering the risks of poverty, the destructions of enterprise, and the erosion of community and expectations that came with a market society. If the modern bourgeois order failed at this task, Polanyi warned, fascist and communist authoritarian or totalitarian forces would benefit.

Like Keynes’s problems, Polanyi’s closely-related problems faded into the background for the Thirty Glorious Years immediately after World War II. And in the subsequent Neoliberal Age the argument that the prosperity of a market society was great and worth the price paid was, again, highly credible to the moneyed class and to their tame ideologists.

But today the problems that had spurred Polanyi’s concerns are back.

Alexis de Tocqueville’s central concerns writing in the 1930s and 1940s were about the consequences of the destruction of caste—the big castes of supposedly Frankish nobles of the sword and supposedly Gallo-Roman villeins, bourgeois, and nobles of the robe; and all the little castes with all their little privileges and liberties that gave them autonomy and a measure of control over their lives—and that came, of course, with obligations attached that grew as social status declined. Tocqueville saw this ordered world of societal orders being replaced by societal democracy and formal social equality—in which everyone would be equally free, but would also be at the mercy of society. No privileges or liberties would protect you if you failed to find a counterparty in the market, or ran afoul of the tyranny of the majority, or simply sought some form of direction as you tried to decide who you were supposed to be.

Tocqueville’s concerns never went away. But in Tocqueville’s world the destruction of caste was partial only: Tocqueville wrote for white men who knew their nationality, knew what those caste memberships meant, and knew what privileges they brought. Now, however, the destruction of caste and caste privilege is taking another step forward. Who, we all now ask, are the inhabitants of Birmingham? And we are trying to deal with it and grasp the opportunities for human betterment thereby created.

So my answer is: No, we have not resolved the concerns that spurred Tocqueville, Keynes, and Polanyi to think and write. We and our successors face their problems and opportunities in a transformed and reshaped form. Mark Twain said that history rhymes. And right now it looks as though the rhyme scheme is very strict.

Must-Read: Noel D. Johnsony and Mark Koyamaz: States and Economic Growth: Capacity and Constraints

Posted on July 13, 2016 by Brad DeLong

Must-Read: Noel D. Johnsony and Mark Koyamaz: States and Economic Growth: Capacity and Constraints: “In this survey we review the contributions of economic history to the study of state capacity…

…Economic history makes an important contribution to understanding how state capacity developed by ‘decompressing’ the historical coevolution of fiscal capacity, legal capacity, and rule of law. We emphasize the heterogeneity in the experiences of the countries which have eventually achieved rule of law states. We present two lessons drawn from historical research. The first is that institutions which respect the rule of law are unlikely to be robust unless a state has first adopted intermediate fiscal and political institutions which create incentives for,first elites, and eventually the rest of the population, to support them. Second, we emphasize the difficulties associated with disentangling the role of public-order and private-order institutions in generating support for growth-enhancing institutions. We argue that, in fact, both have played vital roles in the creation of institutions which support the rule of law in modern states.

A Plea for Some Sympathy for Repentant Left Neoliberals…

Posted on July 11, 2016July 11, 2016 by Brad DeLong

As always, when the extremely sharp Danny Rodrick stuffs a book-length argument into an 800-word op-ed column, phrases acti as gestures toward what are properly chapter-long arguments. So there is lots to talk about.

Must-Read: Dani Rodrik: The Abdication of the Left: “This backlash was predictable…

…Hyper-globalization in trade and finance, intended to create seamlessly integrated world markets, tore domestic societies apart. The bigger surprise is the decidedly right-wing tilt the political reaction has taken. In Europe, it is predominantly nationalists and nativist populists that have risen to prominence, with the left advancing only in a few places such as Greece and Spain…. As an emerging new establishment consensus grudgingly concedes, globalization accentuates class divisions between those who have the skills and resources to take advantage of global markets and those who don’t. Income and class cleavages, in contrast to identity cleavages based on race, ethnicity, or religion, have traditionally strengthened the political left. So why has the left been unable to mount a significant political challenge to globalization?

I think that this paragraph above is largely wrong.

As the very sharp Patrick Iber tweeted somewhere, the usual response to economic distress in democracies with broad franchises is: “Throw the bastards out!” Consider the Great Depression: Labour collapses in Britain in 1931. The Republicans collapse in the U.S. in 1932. And in Germany… shudder. And it is now 1 2/3 centuries since Alexis de Tocqueville wrote:

Alexis de Tocqueville: Recollections: “I woke very early in the morning…

…I heard a sharp, metallic sound, which shook the window-panes and immediately died out amid the silence of Paris. ‘What is that?’ I asked. My wife replied, ‘It is the cannon; I have heard it for over an hour, but would not wake you, for I knew you would want your strength during the day.’ I dressed hurriedly….

Thousands of men were hastening to our aid from every part of France, and entering the city by all the roads not commanded by the insurgents. Thanks to the railroads, some had already come from fifty leagues’ distance, although the fighting had only begun the night before. On the next and the subsequent days, they came from distances of a hundred and two hundred leagues. These men belonged indiscriminately to every class of society; among them were many peasants, many shopkeepers, many landlords and nobles, all mingled together in the same ranks. They were armed in an irregular and insufficient manner, but they rushed into Paris with unequalled ardour: a spectacle as strange and unprecedented in our revolutionary annals as that offered by the insurrection itself. It was evident from that moment that we should end by gaining the day, for the insurgents received no reinforcements, whereas we had all France for reserves.

On the Place Louis XV, I met, surrounded by the armed inhabitants of his canton, my kinsman Lepelletier d’Aunay, who was Vice-President of the Chamber of Deputies during the last days of the Monarchy. He wore neither uniform nor musket, but only a little silver-hilted sword which he had slung at his side over his coat by a narrow white linen bandolier. I was touched to tears on seeing this venerable white-haired man thus accoutred. ‘Won’t you come and dine with us this evening?’ ‘No, no,’ he replied; ‘what would these good folk who are with me, and who know that I have more to lose than they by the victory of the insurrection—what would they say if they saw me leaving them to take it easy? No, I will share their repast and sleep here at their bivouac. The only thing I would beg you is, if possible, to hurry the despatch of the provision of bread promised us, for we have had no food since morning’…

It was in June 1849 that the depression-driven insurrection of the urban craftworker proletariat of Paris was suppressed—bloodily suppressed—by a largely spontaneous mass mobilization of those of the Ile de France who thought that they had something to lose from further revolution. They might see what little property they had confiscated and redistributed to the unemployed slackers of the city—to the urban “dangerous classes”. They might be taxed to pay for the reopening of the National Workshops that were to provide a guarantee of employment for those who could not find other jobs. They might see worse—their friends arrested for insufficient enthusiasm for revolution, or their priests and their hope of heaven taken away. For all these reasons they shifted rightward, voted for a firm nationalist authoritarian hand on the government, and voted for Louis Bonaparte first as President of the Second French Republic and then as Emperor Napoleon III of the Second French Empire.

The belief that economic distress leads democratic politics to shift left is, I think, in general wrong. It leads democratic politics to shift away from the establishment, whatever the establishment is. It can move left—as in FDR’s America and in France with Leon Blum and the Front Populaire. It can move right—as in France in 1849 and in the early stages of the Great Depression, as in Britain in 1931 and 2010, as in the U.S. in 2010, and as in, ahem, Germany…

Dani continues:

One answer is that immigration has overshadowed other globalization ‘shocks.’… Latin American democracies provide a telling contrast. These countries experienced globalization mostly as a trade and foreign-investment shock, rather than as an immigration shock. Globalization became synonymous with so-called Washington Consensus policies and financial opening. Immigration from the Middle East or Africa remained limited and had little political salience. So the populist backlash in Latin America—in Brazil, Bolivia, Ecuador, and, most disastrously, Venezuela – took a left-wing form…

Well, no: as I said, a form that was primarily antiestablishment. In Latin America, the establishment had bought into the relatively center-right Washington Consensus. In Europe, the establishment had bought into the relatively center-left continent-wide social market. Only where, as Dani says, the European establishment comes to be perceived as centered around Berlin’s ordoliberalism rather than around Brussel’s social market is their space for distress to push politics left.

Then, I think, Dani firmly grasps the correct thread:

A greater weakness of the left [is] the absence of a clear program to refashion capitalism and globalization for the twenty-first century…. The left has failed to come up with ideas that are economically sound and politically popular, beyond ameliorative policies such as income transfers. Economists and technocrats on the left bear a large part of the blame. Instead of contributing to such a program, they abdicated too easily to market fundamentalism and bought in to its central tenets.

In retrospect, who can disagree? We misjudged the proper balance between state and market, between command-and-control and market-incentive roads to social democratic ends.

But then I must, again, dissent in part. Dani:

Worse still, [Economists and technocrats on the left] led the hyper-globalization movement at crucial junctures. The enthroning of free capital mobility—especially of the short-term kind—as a policy norm by the European Union, the Organization for Economic Cooperation and Development, and the IMF was arguably the most fateful decision for the global economy in recent decades. As Harvard Business School professor Rawi Abdelal has shown, this effort was spearheaded in the late 1980s and early 1990s not by free-market ideologues, but by French technocrats such as Jacques Delors (at the European Commission) and Henri Chavranski (at the OECD), who were closely associated with the Socialist Party in France. Similarly, in the US, it was technocrats associated with the more Keynesian Democratic Party, such as Lawrence Summers, who led the charge for financial deregulation. France’s Socialist technocrats appear to have concluded from the failed Mitterrand experiment with Keynesianism in the early 1980s that domestic economic management was no longer possible, and that there was no real alternative to financial globalization. The best that could be done was to enact Europe-wide and global rules, instead of allowing powerful countries like Germany or the US to impose their own.

And here I whimper.

Financial globalization was intended to take down barriers to capital inflows erected by rent-seekers in developing countries, and so speed growth in economies that had been starved of capital while also equalizing incomes. Financial deregulation was supposed to break up the cozy investment banking and other oligarchies of Wall Street and diminish their private-sector tax on the American economy. Financial deregulation was supposed to provide the poorer half of America with the access to fairly priced credit that it lacked and with the opportunity to invest in assets that would yield equity-class returns, which it also lacked. And, in a world in which central banks had the powers and the will to successfully stabilize aggregate demand, there seemed little downside to letting people who could not put together a 20% down payment buy a house, to forcing Morgan Stanley and Goldman Sachs to deal with competition from Citigroup and Bank of America, and to allow entrepreneurs in Mexico to raise funds not just from a cozy oligarchy of Mexico City banks but on the global capital market.

And France’s socialist technocrats were right: in highly-open economies the task of managing aggregate demand has to be a global, or at least a North Atlantic-wide, or at least a continent-wide exercise. In a good world, large exchange rate changes should only take place in response to persistent fundamental disequilibria rather than being used as first-line tools for demand management.

It all did go horribly wrong. But the restriction of the ECB to an inflation-control mandate alone was never a policy plank of the left—and all on the left assumed that the technocrats of the ECB were not stupid enough to take the single mandate as more than cheap talk to reassure bond markets in good times. And the decision by money-center banks to use derivative markets not to diversify but to concentrate housing-price risk on their own balance sheets did not happen on our watch.

And then I must dissent again. Dani’s penultimate paragraph is, I think, much too optimistic:

The good news is that the intellectual vacuum on the left is being filled, and there is no longer any reason to believe in the tyranny of ‘no alternatives.’ Politicians on the left have less and less reason not to draw on ‘respectable’ academic firepower in economics…. Anat Admati and Simon Johnson have advocated radical banking reforms; Thomas Piketty and Tony Atkinson have proposed a rich menu of policies to deal with inequality at the national level; Mariana Mazzucato and Ha-Joon Chang have written insightfully on how to deploy the public sector to foster inclusive innovation; Joseph Stiglitz and José Antonio Ocampo have proposed global reforms; Brad DeLong, Jeffrey Sachs, and Lawrence Summers (the very same!) have argued for long-term public investment in infrastructure and the green economy. There are enough elements here for building a programmatic economic response from the left.

Here I agree, rather, with something Keynes wrote in 1933:

John Maynard Keynes (1933): On Trotsky: “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…. No one has a gospel. The next move is with the head…

The problem is that our current policy agenda is too much “do it again!”, where “it” is “Keynesianism, social democracy, the welfare state.” And I believe we need more I think Dani gets it right when he notes:

The right thrives on deepening divisions in society—‘us’ versus ‘them’—while the left, when successful, overcomes these cleavages through reforms that bridge them…

But when he says:

Earlier waves of reforms from the left—Keynesianism, social democracy, the welfare state—both saved capitalism from itself and effectively rendered themselves superfluous…

he is both right and wrong: the earlier waves did save capitalism from itself, but they only rendered themselves apparently superfluous during the Years of Global Convergence and the Years of the Great Moderation. They are not superfluous. We need them. And we need more. For Dani is right to close:

Absent such a response again, the field will be left wide open for populists and far-right groups, who will lead the world—as they always have—to deeper division and more frequent conflict.

Must-Read: Dani Rodrik: The Abdication of the Left

Posted on July 11, 2016 by Brad DeLong

Must-Read: Dani Rodrik is very sharp indeed. But I think that this is mostly wrong. However, it remains a must-read:

Dani Rodrik: The Abdication of the Left: “This backlash was predictable…

…Hyper-globalization in trade and finance, intended to create seamlessly integrated world markets, tore domestic societies apart. The bigger surprise is the decidedly right-wing tilt the political reaction has taken. In Europe, it is predominantly nationalists and nativist populists that have risen to prominence…. As an emerging new establishment consensus grudgingly concedes, globalization accentuates class divisions between those who have the skills and resources to take advantage of global markets and those who don’t. Income and class cleavages, in contrast to identity cleavages based on race, ethnicity, or religion, have traditionally strengthened the political left. So why has the left been unable to mount a significant political challenge to globalization?

One answer is that immigration has overshadowed other globalization ‘shocks.’… Latin American democracies provide a telling contrast. These countries experienced globalization mostly as a trade and foreign-investment shock, rather than as an immigration shock. Globalization became synonymous with so-called Washington Consensus policies and financial opening…. So the populist backlash in Latin America – in Brazil, Bolivia, Ecuador, and, most disastrously, Venezuela – took a left-wing form….

The enthroning of free capital mobility – especially of the short-term kind – as a policy norm by the European Union, the Organization for Economic Cooperation and Development, and the IMF was arguably the most fateful decision for the global economy in recent decades. As Harvard Business School professor Rawi Abdelal has shown, this effort was spearheaded in the late 1980s and early 1990s not by free-market ideologues, but by French technocrats such as Jacques Delors (at the European Commission) and Henri Chavranski (at the OECD), who were closely associated with the Socialist Party in France. Similarly, in the US, it was technocrats associated with the more Keynesian Democratic Party, such as Lawrence Summers, who led the charge for financial deregulation….

A crucial difference between the right and the left is that the right thrives on deepening divisions in society – ‘us’ versus ‘them’ – while the left, when successful, overcomes these cleavages through reforms that bridge them. Hence the paradox that earlier waves of reforms from the left – Keynesianism, social democracy, the welfare state – both saved capitalism from itself and effectively rendered themselves superfluous. Absent such a response again, the field will be left wide open for populists and far-right groups, who will lead the world – as they always have – to deeper division and more frequent conflict.

Must-Read: Pseudoerasmus: Did Inequality Cause the First World War? Contra Hobson-Lenin-Milanovic

Posted on July 6, 2016 by Brad DeLong

Must-Read: Pseudoerasmus: Did Inequality Cause the First World War? Contra Hobson-Lenin-Milanovic: “In a small section in his new book, Branko Milanovic argues that the First World War…

…was ultimately caused by income & wealth inequality within the belligerent countries… John A. Hobson, Rosa Luxemburg, and Lenin…. High domestic inequality => ‘underconsumption’ by the masses & ‘surplus’ savings by the elites => capital exports, i.e., search for overseas outlets for investment => the ‘scramble for colonies’ & imperialism => (a major cause of the) WAR…. But… Ferguson’s The Pity of War has many problems, but one thing he’s very right about is the war that never broke out in the late 19th century between Britain and France, or between Britain and Russia…. Annoyingly, the Great Powers kept on resolving colonial disputes peacefully… too much European compromise and cooperation….

Furthermore, the ‘financier parasites’ of Hobson and Lenin had simply the wrong interest… feared rivalry… for the very good and rational reason that they had everything to lose from it…. The colonial disputes which Britain took most seriously and was willing to go to war over–Egypt (Fashoda), South Africa (German tensions over Transvaal), Afghanistan (Russian relations)–were all related in some way to monopolising maritime access, and eliminating all traces of threat, to India…. All else… was largely open to negotiation. Except, of course, for the naval rivalry in the North Sea. What actually soured Anglo-German relations was that Germany’s naval programme was perceived as an existential threat…. German dreadnoughts just a ‘few hours from the English coast’ were somewhat more important than Samoa or the Caprivi Strip….

Germany’s rulers believed the country’s political standing and national prestige was incommensurate with its sudden and dramatic rise as an economic superpower…. Imagine the chafing if Taiwan, and not the PRC, still represented China on the UN Security Council…. Who actually took the decision to go to war in Germany[?]… ‘Structural factors’ still require some kind of mechanism exerting pressure on the actual actors…. Mark Harrison…. “No country went to war for commercial advantage. Business interests favoured peace in all countries. Public opinion was considered mainly when the leading actors worried about the legitimacy of actions they had already decided on. If capital and labour had been represented in the Austrian, German, and Russian cabinets, there would have been no war.”

The capitalist bourgeoisie did not have the final power in Germany (let alone Austria or Russia). And the small and specific group of decision-makers is identifiable…. Fritz Fischer… [argued] that Germany had already taken the decision to go to war in 1912, based on a high-level meeting that year which seemed eerily to reflect much of German behaviour in July 1914…. In all three [of] Germany, Austria, and Russia, a feudal-agrarian-military elite governed over an increasingly bourgeois-industrial society (but especially in Germany). Those decision-makers held the unilateral power to go to war. And they took the decision unaccountably. When it came to matters of war, it’s not even clear that the East-Elbian Prussian Junker class really cared about the opinions of the country’s industrial and banking magnates.

I must confess I am considerably more sympathetic to Hobson (if not to Luxemburg and Lenin). As I read Hobson, his argument goes thus: (1) Income inequality leads to underconsumption–which means that investment and government purchases must be high share of national income in order for anything like full employment to be maintained. (2) Governments that do not maintain near-full employment most of the time are likely to fall. (3) Governments that do maintain near-full employment most of the time are likely to persist in office. (4) Imperialist governments that spend public money on overseas wars for vent-for-surplus colonies are likely to have higher shares of exports, investment, and government purchases in national income. (5) Militaristic governments that seek military advantage over other European powers are likely to have even higher shares of government purchases in national income. (6) Thus the political-economic logic of underconsumption puts pressure on the political system to produce more high politicians in office who like to build, play with, and ultimately use their military toys.

This seems to me to be not implausible, in contrast to the Lenin-Luxemburg version of the argument, which I agree is very implausible.

Must-Read: Duncan Weldon: Five Thoughts on Brexit

Posted on July 3, 2016 by Brad DeLong

Must-Read: Duncan Weldon: Five Thoughts on Brexit:

British politics now has a big dose of Syriza thinking. ‘Respect our democratic mandate’ doesn’t work when you’re dealing with 27 other democratically elected governments.

I have no idea what the final settlement looks like. No one does.

We won’t get any clarity in the next few months. The Tory leadership contest will at best give a small signal, but really it’s noise. The next PM will be selected by a membership of leave supporters and the candidates will pitch to that. All will offer a fantasy that the EU is unlikely to agree to.

British politics is in flux. The next Tory leader faces having to make a tough choice: disappoint the membership and traditional Tory voters or lose the City. The broad coalition of social conservatives and economic liberals that form the party may not be able to survive this choice. Labour faces similar pressures. Handled badly, this go see a UKIP surge – not into power but into a much stronger position in Parliament.

Finally – I think the UK’s actions will ultimately be good for EU unity. Others will be less inclined to follow our example if it is painful (and that’s without the additional problems of leaving Schengen or the euro). It isn’t hard to imagine the Eurozone doubling down now and building the kind of institutions that the zone needs to work.

Which Thinkers Will Define Our Future?: Live at Project Syndicate

Posted on June 28, 2016 by Brad DeLong

Monday DeLong Smackdown: Olivier Blanchard on How the Eurozone Can Be Strengthened After Brexit

Posted on June 27, 2016June 27, 2016 by Brad DeLong

A high-quality DeLong smackdown! Keep ’em coming, please…

Olivier Blanchard: How the Eurozone Can Be Strengthened After Brexit: “Brexit raises fundamental questions…. Meanwhile, Europe must continue to function…

…In this context that a large number of prominent economists from different European countries, ranging from those who desire more political integration to those who are more skeptical, have written what they see as the essential next steps to reinforce the architecture of the eurozone…. The purpose of the project, which started long before Brexit, was twofold. First, assess the nature of the challenges and the progress to date…. Second, assess the degree of agreement among ‘experts’ about the remaining challenges and solutions. If you look at the diversity of people on the list, the answer to the second question is that, in contrast to the often strident disagreements in the press, there is, indeed, surprisingly large agreement among experts….

The basic architecture is largely in place. Some strengthening is needed but does not require dramatic political steps. The most important set of measures to take is a strengthening of the European Stability Mechanism (ESM)…. The banking union is largely in place, and with it better tools to monitor and reduce financial risks…. More progress can be made without requiring much more political integration…. [In] public finances… fiscal rules have become too many, too messy, with too many loopholes…. In many countries, the issue is not so much deficits than the high level of expenditure, which in turn makes it difficult to balance budgets without resorting to excessive taxation…. Even under the best fiscal rules, current levels of debt together with low growth imply that sovereign debt default is not impossible. Defining responsibilities and the process for sovereign default is essential. This should and can be the role of the ESM…. States have to be willing to give up some control. Otherwise the ESM will not be able to do its job…. We have learned… that liquidity runs can… be very destructive. The European Central Bank (ECB) now has the tools to provide liquidity to banks…. It would be good if it could do the same to states….

Many would like to see more ambitious steps taken, from a common fiscal policy, to euro bonds, to euro-level deposit insurance, etc. And indeed, the line taken by some US commentators today (e.g., Bradford DeLong and Paul Krugman is that this is what our manifesto should have asked for…. Our goal was less ambitious and more realistic. It was to see if the eurozone could function and handle shocks without further political integration if political realities made it impossible for the time being. Our answer is a qualified yes, but it is surely not an endorsement of a do-nothing strategy.

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Tag: political economy