Tag: political economy

Must-read: Wolfgang Munchau: “The Revenge of Globalisation’s Losers”

Posted on by Brad DeLong

Must-Read: Wolfgang Munchau: The Revenge of Globalisation’s Losers: “A process once hailed for delivering universal benefit now faces a political backlash…

…The establishment view, in Europe at least, is that states have neglected to forge the economic reforms necessary to make us more competitive globally. I would like to offer an alternative view. The failure of globalisation in the west is in fact down to democracies failure to cope with the economic shocks that inevitably result from globalisation, such as the stagnation of real average incomes for two decades. Another shock has been the global financial crisis–a consequence of globalisation–and its permanent impact on long-term economic growth….

Voters’ insurrection is neither shocking nor irrational. Why should French voters cheer labour market reforms if it could result in the loss of their jobs, with no hope of a new one?… Germany’s acclaimed labour market reforms in 2003 succeeded in the short term because they raised the country’s cost competitiveness through lower wages relative to other advanced countries. The reforms produced a state of near full employment only because no other country did the same. If others had followed, there would have been no net gain. The reforms had a big downside. They reduced relative prices in Germany and pushed up net exports in turn generating massive savings outflows, the deep cause of the imbalances that led to the eurozone crisis. Reforms such as these can hardly be the recipe for how advanced nations should address the problem of globalisation….

Globalisation has overwhelmed western societies politically and technically. There is no way we can, or should, hide from it. But we have to manage the change. This means accepting that the optimal moment for the next trade agreement, or market liberalisation, may not be right now.

Must-read: Adam Smith (1776): “As if by an Invisible Hand…”

Posted on by Brad DeLong

Must-Read: Adam Smith’s “Invisible Hand” argument. It’s not “markets are good”. It is, instead, two moves:

  1. Complicated processes involving the interactions of large numbers of humans have emergent properties and produce outcomes that often are not and cannot be understand as intended by any one of the humans whose actions led to the outcome.

  2. Sometimes (often?) the emergent properties are those that we want to nurture and develop: as Bernard Mandeville first noted, one of the tasks of the clever statesman is to structure things so that the satisfaction of private vices does in fact yield public benefits.

Note that in this particular example, it is the (a) psychological home bias of merchants combined with (b) increasing returns in the agglomeration of economic activity that leads to the good outcome–and it is a good outcome for Amsterdam, not for Lisbon or Königsberg…

Adam Smith (1776): Wealth of Nations, Book IV, Chapter 2: “The capital which an Amsterdam merchant employs in carrying corn from Konigsberg to Lisbon…

…and fruit and wine from Lisbon to Königsberg, must generally be the one half of it at Königsberg and the other half at Lisbon. No part of it need ever come to Amsterdam. The natural residence of such a merchant should either be at Konigsberg or Lisbon, and it can only be some very particular circumstances which can make him prefer the residence of Amsterdam. The uneasiness… which he feels at being separated so far from his capital generally determines him to bring part… of the… goods… to Amsterdam… though this necessarily subjects him to a double charge of loading and unloading, as well as to the payment of some duties and customs, yet for the sake of having some part of his capital always under his own view and command, he willingly submits…. In this manner that every country which has any considerable share of the carrying trade becomes always the emporium, or general market, for the goods of all the different countries whose trade it carries on….

A capital employed in the home-trade… necessarily puts into motion a greater quantity of domestic industry, and gives revenue and employment to a greater number of the inhabitants of the country…. Upon equal, or only nearly equal profits, therefore, every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give revenue and employment to the greatest number of people of his own country….

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it…

Must-See: Omer Moav: Geography, Transparency, and Institutions

Posted on by Brad DeLong

Must-See: Omer Moav: Geography, Transparency, and Institutions: “April 25 | 4:10-5:30 p.m. | 639 Evans Hall…

…We propose a theory by which geographic variations explain cross-regional institutional differ- ences in: (1) the scale of the state, (2) the distribution of power in the state hierarchy, and (3) farmers’ property rights over land. The mechanism underlying our theory is based on the effect of geography on transparency of farming, which in turn determines the state’s extractive capacity. We apply our theory to explain differences in the institutions of Egypt, Southern Mesopotamia and Northern Mesopotamia in antiquity.

Must-read: Noah Smith: “Policy Recommendations and Wishful Thinking”

Posted on by Brad DeLong

Must-Read: I must say I am getting more than a whiff of the disastrous trope that “it is the duty of an organic intellectual to support the Movement” here.

The technocratic view is that there will be a bunch of competing ideological views and material interests pulling and hauling, and that by always wading in and joining the tug-of-war side that has the better policy idea at the moment in the issue under dispute one will get better governance and higher societal well-being. The opposite view is: There is a Movement, the Movement is good because the Movement is supported by the class whose interest is the general interest and by Correct Ideological Thought, and all progressives must support the movement.

That is a disastrous pattern of thought. I am 100% with Noah Smith here:

Noah Smith: Policy Recommendations and Wishful Thinking: “There was a bit of a blow-up earlier this year over Gerald Friedman’s analysis of Bernie Sanders’ economic plans…

…To me, it seemed that the coup-de-grace was delivered by Justin Wolfers…. Friedman admits he made a mistake and then says that his conclusion was right anyway, because we can go find some alternative assumptions that make his original conclusion hold. To me this is transparently assuming the conclusion. That’s a big no-no, and while a lot of macroeconomists probably do this, it looks really bad to admit to it! (I’m also starting to realize that ‘Joan Robinson’ is a sort of an invincible rhetorical refuge for lefty macro types, the way ‘Friedrich Hayek’ is for righty macro types.)….

The fracas quieted down, but now it’s back. Friedman and allies are no longer saying that their analysis is ‘just standard economics’, since they had to switch to non-standard economics to make the conclusions come out the way they wanted. The line now is that Krugman, the Romers, et al. are just a bunch of pessimists, who are unintentionally playing into the hands of conservatives…. Krugman was not happy about this, and blogger ProGrowthLiberal was pretty mad:

The claim that economists like Christina and David Romer bought into the New Classical revolution is both absurd and dishonest…[W]e critics do admit we are below full employment and we have been calling for fiscal stimulus. On this score, the latest from J.W. Mason is even more dishonest than the latest from Gerald Friedman. Guys–you do not win a debate by lying about the other side’s position….

I don’t like what Friedman and Mason are doing. I think economists have a duty to look at the facts as objectively as they can, regardless of their emotions and desires. You shouldn’t prefer Model B over Model A just because one leads to ‘hope’ and the other to ‘hopelessness’…. Friedman and Mason seem to be arguing that our belief about the facts should be driven, at least in part, by our desire to avoid a feeling of powerlessness. They also seem to be saying that if the facts seem to support conservative policies, even a tiny bit, we should reinterpret the facts. I don’t like this approach. It seems anti-rationalist to me, and I think that if wonks behave this way, they’ll end up recommending lots of bad policies.

Cf. Henry Farrell’s 2011 attack on Matt Yglesias:

Henry Farrell (2011): The Limits of Left Neo-Liberalism: “[Doug Henwood is] wrong in the particulars…

…But… Doug is onto something significant…. Left neo-liberalism in the US… have always lacked a good theory of politics… tend[s] to favor a combination of market mechanisms and technocratic solutions to solve social problems. But… politics… requires strong collective actors…. I see Doug and others as arguing that successful political change requires large scale organized collective action, and that this in turn requires the correction of major power imbalances (e.g. between labor and capital). They’re also arguing that neo-liberal policies at best tend not to help correct these imbalances, and they seem to me to have a pretty good case…. It’s hard for me to see how left-leaning neo-liberalism can generate any self-sustaining politics. I’m sure that critics can point to political blind spots among lefties (e.g. the difficulties in figuring out what is a necessary compromise, and what is a blatant sell-out), but these don’t seem to me to be potentially crippling, in the way that the absence of a neo-liberal theory of politics (who are the organized interest groups and collective actors who will push consistently for technocratic efficiency?) is…

People should say that policies are good if they tend to do good things–to make people freer and richer. People should not say that policies are good if they tend to build the Movement, for there is neither Correct Ideological Thought nor a universal class whose interests are identical to the general interest. And people should, especially, not misrepresent what policies are likely to do in the interest of building the Movement.

And where the Movement is good, the policies that advance it will also be the policies that make technocratic sense…

Must-read: Guenther Roth: “The Near-Death of Liberal Capitalism: Perceptions from the Weber to the Polanyi Brothers”

Posted on by Brad DeLong

Must-Read: Guenther Roth: The Near-Death of Liberal Capitalism: Perceptions from the Weber to the Polanyi Brothers: “Karl Polanyi and Max Weber held radically different views of liberal capitalism…

…[Weber] poured most of his energies into… the “Sociological Categories of Economic Action” (chap. 2)… because with the war’s end radical political and economic changes were occurring or seemed possible…. He opposed… efforts to socialize key industries primarily because Germany needed to attract foreign capital and secondarily because nationalized industries could be more easily seized by the Allies. He wanted to see the war economy end quickly and the currency stabilized… [via] the reintroduction of a functioning gold standard. In Economy and Society Weber warned:

It is only with the greatest caution that the results and methods of the war economy can be used for the critique of the substantive rationality of other forms of economic organization. The war economy is in principle oriented to a single clear goal and can use powers that in peacetime are available only in the case of “state-run slavery.” Furthermore, it is an economy with an inherent attitude of “going for broke.”… Hence, however illuminating the wartime and immediate postwar experiences are for recognizing the range of economic possibilities, it is unwise to draw conclusions from wartime in-kind accounting for its suitability in a peacetime economy with its long-run concerns.

Weber and Schumpeter… had their famous falling-out in a Viennese coffeehouse in 1918. Weber, “who took nothing lightly,” and Schumpeter, who “took nothing hard,” recalled Somary who witnessed the scene, clashed over the Russian Revolution. Schumpeter welcomed it as a laboratory experiment… for Weber it was going to be “a laboratory heaped with human corpses.” When an enraged Weber stormed out, a smiling Schumpeter remarked: “How can someone carry on like that in a coffeehouse?”–the proper place for irony, never seriousness.

The Austro-Hungarian economists were, however, not primarily coffeehouse intellectuals. Most had business experience…. Gustav Stolper narrowly missed becoming Austrian deputy minister in the Empire’s final hours and Republican minister of finance in 1921. Schumpeter succeeded in 1919 but quickly failed…. Karl Polanyi’s call, still made in The Great Transformation, for taking land, labor, and money out of the market was at the time frequently heard from the left and right. But many liberal economists too recognized that massive state intervention was inevitable…. Stolper believed that the institution of soviets, of works councils, was here to stay. In… central and eastern Europe a new state, new tax system, new currency, and new economy had to be established under the most difficult of conditions, which proved frustrating to liberals and socialists alike….

In the early postwar period many emigrants and many of those who claimed to have been “spiritual migrants” (innere Emigranten) hoped for some mode of socialist reconstruction, Christian or secular, of western Europe between Soviet Communism and American capitalism…. Karl Mannheim, more social philosopher than economist, pleaded for… “planning freedom.” Alfred Weber… embraced “free socialism and democracy”…. Karl Polanyi could not but find himself disappointed about the resurrection of liberal capitalism…. It is true that Western Europe developed a range of mixed economies, but few contemporaries anticipated the restoration of a capitalist world economy on the scale that became visible from the sixties on…

More musings on the fall of the house of Uncle Milton…

Posted on by Brad DeLong

This, from Paul Krugman, strikes me as… inadequate:

Paul Krugman: Why Monetarism Failed: “Right-wingers insisted–Friedman taught them to insist–that government intervention was always bad, always made things worse…

…Monetarism added the clause, ‘except for monetary expansion to fight recessions.’ Sooner or later gold bugs and Austrians, with their pure message, were going to write that escape clause out of the acceptable doctrine. So we have the most likely non-Trump GOP nominee calling for a gold standard, and the chairman of Ways and Means demanding that the Fed abandon its concerns about unemployment and focus only on controlling the never-materializing threat of inflation.

What about the reformicons, who pushed for neo-monetarism? We can sum up their fate in two words: Marco Rubio. There is no home for the kind of return to realism they were seeking…. The monetarist idea no longer serves any useful purpose, intellectually or politically. Hicksian macro–IS-LM or something like it–remains an extremely useful tool of both analysis and policy formulation; that tool is not helped by trying to state it in terms of monetary velocity and all that. And if you want macro policy that isn’t dictated by Ayn Rand logic, you have to turn to a Democrat; on the other side, there’s nobody rational to talk to.

Sad!

This is an issue I have worried at like a dog at a worn-out glove for a decade now. So let me worry at it again:

There were gold bugs and Austrians in the 1950s, 1960s, 1970s, and even 1980s too. But Arthur Burns, Milton Friedman, Alan Greenspan and company kicked them up and down the street with gay abandon. And the Ordoliberal Germans would, when you cornered them, would admit that somebody else had to take on the job of stabilizing aggregate demand for the North Atlantic economy as a whole for their doctrines to work.

But in 2009 the Lucases and the Prescotts and the Cochranes and the Famas and the Boldrins and the Levines and the Steils and the Taylors and all the others and even the Zingaleses (but we can excuse Luigi on the grounds that if you are (a) Italian and (b) view Berlusconi as the modal politician a certain reluctance to engage in fiscal policy is understandable)–crawled out from their caves and stood in the light of day. And the few remaining students of Milton Friedman got as little respect as the Stewards of Gondor gave to the leaders of the Dunedain.

Yes, there is an intellectual tension between believing in laissez faire as a rule and believing in activist monetary management to set the market interest rate equal to the Wicksellian neutral interest rate. But why is that tension unsustainable? Once you have swallowed a government that assigns property rights, sustains contracts, and enforces weights and measures, why is this extra step a bridge too far?

Must-read: Megan McArdle: “Listen to the Victims of the Free Market”

Posted on by Brad DeLong

Must-Read: For the most part, an excellent piece by Megan McArdle. But…

McMegan: There is a lot of good reason to think that the elasticity of labor demand at the low end is about -0.2! That higher minimum wages of the magnitude we are talking about throw not a lot but a few people out of work–that the actual low-wage household societal welfare gain is roughly 80% of the naive estimate.

And maternity leave makes even not-good jobs much better…

And the point is not to send everyone to a four-year college, but to send enough people to a four-year college to reduce the four-year college wage premium from its current 90% back to the 30% or so it was in the 1970s…

Otherwise: perfect:

Megan McArdle: Listen to the Victims of the Free Market: “The arguments for market liberalism are bound to sound a lot less convincing…

…when they invariably issue from the folks who aren’t expected to take one for the team–who are, in fact, being made better off, thanks to skills… prize… and thanks to trade, automation and immigration…. Academic economists and policy analysts are among the knowledge workers who have benefited greatly from liberalization…. Let’s look at something that elites consistently fail to talk about in any meaningful way: good jobs…. We talk around those things… about inequality… paid leave… education… ritual obeisances toward the necessity of decent work, promising that some policy laughably inadequate to the task…. But neither party has any meaningful policy to foster good work…. The closest either party comes is the $15-an-hour minimum wage, a policy with the slight drawback that it may throw a lot of people out of work….

Elites of both parties focus on the things they want for themselves. Republicans offer tax cuts and deregulation, as if everyone in America were going to become an entrepreneur. Democrats offer free college tuition and paid maternity leave, as if these things were a great benefit to people who don’t have the ability, preparation or inclination to sit through four years of college, and as a result, can’t find a decent job from which to take their leave…. The implicit assumption of elites in both parties is that the solution for the rest of the country is to become more like us, either through education or entrepreneurship. Rarely does anyone discuss how we might build an economy that works for people who aren’t like us and don’t want to turn into us….

Even if they are still consuming the same amount of stuff, even if their incomes are all right for the moment, if people feel that they cannot count on work, then they will feel helpless and frightened, and they will turn to politicians who can assuage those fears by pointing to specific enemies who can be vanquished to secure their safety. Democrats convinced that they have the answer to populism in the form of more social welfare programs are as gravely mistaken as the Republicans who focused on the same old pro-business program…. People are worried about their physical security and their ability to make a decent life for themselves. And ‘for themselves’ is the important phrase in that sentence…. There is no better example of the folly of the elites than the current fashion for a universal basic income among both liberals and libertarians…. I will give the universal basic income people this much; even if they aren’t really grappling with the need for work, at least they understand that there is a problem…. That’s more than you’d gather from the major speeches or the policy programs….

Start thinking about how to listen and talk to everyone else. Don’t answer every question about jobs with boilerplate about clean energy, or entrepreneurship, or… assum[ing] that the solution to our problems is to somehow arrange for everyone in America to get a four-year degree. Don’t assume that the rest of the country is full of Morlocks who do not need what you have for yourself: a stable job that connects you… gives you a sense of usefulness and security, and offers you some chance at an even better future…. That improved conversation is not an answer to either the political or the economic problems that Americans are facing. But at least it’s a start.

We are all Polanyiites now…

Must-read: Simon Wren-Lewis: “Can Central Banks Make Three Major Mistakes in a Row and Stay Independent?”

Posted on by Brad DeLong

Must-Read: Simon Wren-Lewis: Can Central Banks Make Three Major Mistakes in a Row and Stay Independent?: “Mistake 1: If you are going to blame anyone for not seeing the financial crisis coming…

…it would have to be central banks. They had the data that showed a massive increase in financial sector leverage. That should have rung alarm bells, but instead it produced at most muted notes of concern about attitudes to risk. It may have been an honest mistake, but a mistake it clearly was.

Mistake 2: Of course the main culprit for the slow recovery from the Great Recession was austerity, by which I mean premature fiscal consolidation. But the slow recovery also reflects a failure of monetary policy…. Monetary policy makers should have said very clearly… that fiscal stimulus would have helped them do that job….

What could be mistake 3: The third big mistake may be being made right now in the UK and US… supply side pessimism. Central bankers want to ‘normalise’ their situation… writing off the capacity that appears to have been lost as a result of the Great Recession…. In both cases the central bank is treating potential output as something that is independent of its own decisions and the level of actual output. In other words it is simply a coincidence that productivity growth slowed down significantly around the same time as the Great Recession. Or if it is not a coincidence, it represents an inevitable and permanent cost of a financial crisis. Perhaps that is correct, but there has to be a fair chance that it is not…. What central banks should be doing in these circumstances is allowing their economies to run hot for a time….

If we subsequently find out that their supply side pessimism was incorrect (perhaps because inflation continues to spend more time below than above target, or more optimistically growth in some countries exceed current estimates of supply without generating ever rising inflation), this could spell the end of central bank independence. Three counts and you are definitely out?

Must-read: Robert B. Reich: “Saving Capitalism: For the Many, Not the Few”

Posted on by Brad DeLong

Must-Read: Gene Smolensky says Bob Reich’s latest book is truly excellent:

Robert B. Reich: Saving Capitalism: For the Many, Not the Few: “The New Property…

The New Monopoly… The New Contracts… The New Bankruptcy… The Enforcement Mechanism… The Meritocratic Myth… The Hidden Mechanisms of CEO Pay… The Subterfuge of Wall Street Pay… The Declining Bargaining Power of the Middle… The Rise of the Working Poor… The Rise of the Non-Working Rich…

Saving Capitalism For the Many Not the Few Robert B Reich 2015385350570 Amazon com BooksSaving Capitalism For the Many Not the Few Robert B Reich 2015385350570 Amazon com BooksSaving Capitalism For the Many Not the Few Robert B Reich 2015385350570 Amazon com BooksSaving Capitalism For the Many Not the Few Robert B Reich 2015385350570 Amazon com Books