“Populism” or “Neo-Fascism”?: Rectification of Names Blogging

The highlight of last week’s JEF-APARC Conference at Stanford https://www.jef.or.jp for me was getting to sit next to Frank Fukuyama https://fukuyama.stanford.edu, whom I had never met before.

Frank is a former Deputy Director of Policy planning at the State Department, author of the extremely good books on political order The Origins of Political Order: From Prehuman Times to the French Revolution http://amzn.to/2sEt4AI and Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy http://amzn.to/2sU0WZP, and a very sharp guy.

He has also been smart and lucky enough to have a truly singular achievement in his career. Prince Otto von Bismarck said that the highest excellence of a statesman “is to hear God’s footsteps marching through history, and to try and catch on to His coattails as He marches past…” For an intellectual, there is an equivalent and analogous excellence: to recognize what the powerful historical forces of the next generation will be, to grab onto their coattails, and so write an article that provides an incisive and valuable interpretive framework that makes sense not of the generation past so much as of the generation to come.

John Maynard Keynes, I think, accomplished this in 1919 with his Economic Consequences of the Peace http://amzn.to/2sTZdn7. George Orwell’s Road http://amzn.to/2sgiUZO and Homage http://amzn.to/2s4RK8h, I think, accomplished this in the mid-1930s. George Kennan’s “Long Telegram”—published as “Sources of Soviet Conduct” http://nsarchive.gwu.edu/coldwar/documents/episode-1/kennan.htm certainly ccomplished this in 1946. Perhaps Karl Polanyi accomplished this with his brilliant but annoyingly flawed 1944 The Great Transformation http://amzn.to/2rMsPDq. I really cannot think of anybody else.

And, of course, Frank Fukuyama accomplished this with his 1989 article: “The End of History?” http://www.wesjones.com/eoh.htm. (If you doubt that, go read the brilliant Ralf Dahrendorf’s brutal commentary on Fukuyama in his Reflections on the Revolution in Europe http://amzn.to/2sTXfTE: Fukuyama definitely struck a powerful nerve, and Dahrendorf’s animus springs not from Fukuyama’s shortcomings but rather from his insights.)

This is, for an intellectual, something that requires extreme luck and extreme intelligence. It is a righteously awesome accomplishment. And Frank Fukuyama did it.

I spent my time sitting next to Frank attempting to irritate him with respect to what he and many others call “populism”, for I do not like to hear it called “populism”.

The original American populists were reality-based small farmers and others, who accurately saw railroad monopolies, agricultural price deflation, and high interest rates as crippling their ability to lead the good life. They sought policies—sensible, rational policies in the main—to neutralize these three historical forces. They were not Volkisch nativists distracted from a politics that would have made their lives better by the shiny gewgaws of ethnic hatred and nativism The rise of those forces—of Jim Crowe and the renewed and anti-Catholic Ku Klux Klan and so forth—were not the expression of but rather the breaking of populism in America.

The post-WWII Latin American populists were also people who correctly thought that their ability to lead the good life was being sharply hindered by a system rigged against him. The problem with post-WWII Latin American populism was that the policies that it was offered by its political leaders were—while materially beneficial for the base in the short run—economic disasters in the long: price controls, fiscal expansion ending in unsustainable that burdens, and high tariffs were especially poisonous and false remedies because it could look, for the first five or so years, before they crash came, like they were working.

But what is going on today, whatever it is properly called, is not offering sensible policies people oppressed by monopolies and by a creditor friendly and unemployment causing monetary system. It is not even offering them policy cures that are apparently efficacious in the short run even though disastrous in the long. What Lech and Jarosław Kaczyński, Viktor Orban, Marine Le Pen, Teresa May, and Donald Trump have to offer is (a) redistribution of wealth to family and friends, (b) a further upward leap in income and wealth inequality via cutbacks in social insurance programs coupled with further erosion of progressive taxation, and, most of all, (c) the permission to hate people who look different from you—plus permission to hate rootless cosmopolites who are, somehow, against all principles of natural justice, both doing better than you and offering you insufficient respect.

That is neither the post-WWII Latin American nor the pre-WWI North American form of “populism”. I do not think we are well served by naming it such.

What should we name it instead?

There is an obvious candidate, after all.

When Fukuyama wrote his “The End of History?”—note the question mark at the end—his principal aims were twofold:

  1. To advance a Hegelian, or a Kojeveian reinterpretation of Hegelianism, as pointing out that history was ultimately driven by the evolution of ideas of what a good society would be like and consequent attempts to realize them: through Republican, Imperial, Christian, feudal, Renaissance, Enlightenment, rule of law, democratic, socialist, and fascist formulations, the world’s conceptions of a good society unfold and develop.

  2. To point out that it now appears—or appeared in 1989—that this Hegelian process of conceptual development had come to an end with the liberal democratic capitalist state and economy: private property rights and market exchange guaranteed by a government controlled by one person-one vote now had no serious challengers, and so this process of historical development—what Fukuyama called History-with-a-capital-H—had come to an end.

Most of Fukuyama’s “The End of History” is concerned with the crashing and burning of the idea that the Marxist diagnosis that private property was an inescapably poisoned institution implemented by a Leninist cadre that then set up a Stalinist command economy offered a possible way forward toward a good and free society of associated producers—an alternative to the system that was the reinforcing institutional triad of liberalism, democracy, and capitalism. But there was another challenger for much of the twentieth century: fascism. In Fukuyama’s words:

[Fascism] saw the political weakness, materialism, anomie, and lack of community of the West as fundamental contradictions in liberal societies that could only be resolved by a strong state that forged a new ‘people’ on the basis of national exclusiveness… [an] organized ultra nationalist movement with universalistic pretensions… with regard to the movement’s belief in its right to rule other people…

And, in Fukuyama’s judgment, fascism:

was destroyed as a living ideology by World War II. This was a defeat, of course, on a very material level, but it amounted to a defeat of the idea as well…

But is the current International—that of Kaczyński, Orban, Le Pen, May, and Trump—usefully conceptualized as “fascist”. Perhaps we should say “neo-fascist”, to be politically correct. It certainly believes in the right of its Volkisch core to rule other people within the boundaries of the nation state—or to expel them. It certainly believes that international politics is overwhelmingly a zero-sum contest with winners and losers. It has negative tolerance for rootless cosmopolites and others who see an international community of win-win interactions. A strong leader and a strong state who will tell people what to do? Check. An ethnic nation of blood-and-soil rather than an elected nation of those who choose to live within its boundaries and pledge their allegiance to it? Check. Denunciations of lack of community, anomie, and weakness? Check. The only things missing are (a) denunciations of materialism, and (b) commitments to imperial expansion.

Fukuyama made it clear last week that he greatly prefers “populism” to “neo-fascism” as a term describing what is going on. A fascist movement, he wrote back in 1989, has to be expansionist rather than simply seeking the advantage of the Volkisch national community. There have to be:

universalistic pretensions… with regard to the movement’s belief in its right to rule other people. Hence Imperial Japan would qualify as fascist while former strongman Stoessner’s Paraguay or Pinochet’s Chile would not…

And this test is one that Kaczyński, Orban, Le Pen, May, and Trump’s International fails.

But is Fukuyama right? I am unconvinced. I suspect that calling the movement “populist”—whether with reference either to the pre-WWI United States or post-WWII Latin America—misleads it. I suspect that conceptualizing it as “neo-fascist” might well lead to insights…

A Plea for Some Sympathy for Repentant Left Neoliberals…


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.

In Which I Call for Academic Scribblers and Funct Economists to Enter into Utopian Frenzy with Respect to the Institutional Design of the Eurozone

Long Term Government Bond Yields 10 year Main Including Benchmark for Germany© FRED St Louis Fed

Must-Read: From my perspective, this piece at Vox.eu makes many too many bows to conventional-wisdom idols with not just feet but bodies and heads of clay. Thus I cannot sign on to it.

Eleven observations:

  1. The situation is dire. The Eurozone as currently constituted has been a macroeconomic disaster.

  2. The forecast that the authors make is that on the current policy path “economic health will eventually be restored, unemployment will decrease, and the periphery countries will regain competitiveness” is not a real forecast. I think that this is not a real forecast: if it were a real forecast, it would have a date attached, no?

  3. Thus the framing of needed policy changes as things needed to improve “resiliency” just in case things do not “go as forecast” substantially underplays the seriousness of the problem. Fewer readers will pick up on the “things rarely go as forecast” to understand that the forecast is not a forecast.

  4. The first and most obvious feature of the Eurozone is that its interest rates are at the zero lower bound and its economy lacks aggregate demand. A depressed economy at the zero lower bound needs fiscal expansion. If for some reason normal fiscal expansion is feared to be unwise by some holding veto points, the economy needs helicopter drops–backed up by strong commitments by central banks to raise reserve requirements to curb the velocity of outside money should it suddenly become higher rather than lower than desirable.

  5. The bank regulatory system needs responsibility for banks’ rescue to be transferred from national governments to the ESM now. Without that transfer, nation-level governments will continue to make the political calculation that letting supervisory and regulatory standards slide is the more attractive course. It may be true “this is the kind of political step that seems unlikely to be feasible in the near term”. But that does not keep it from being needed now. The purpose of a document like this is to set out what is needed–not to reassure people by claiming that whatever is not politically possible now is not needed now.

  6. Public debt is too high if and only if market interest rates now and forecast for the foreseeable future are about to undergo a rapid and massive jump upward. Right now g > r–which means that public debt is not too high but too low.

  7. How governments should hedge against interest rate increases in a world where g > r is an interesting research question. The obvious route is simply to sell consols. Then, when the real consol rate is higher than the societal return on additional government expenditures, we can talk about what the target debt-to-GDP ratio should be and how to get there. But those who are unwilling to advocate the sale of consols as the obvious way to manage public debt risk have, as long as g > r, no standing to complain that public debts are too high–let alone to set out the proposition that public debt is too high as a self-evident truth.

  8. A massively-underfunded ESM is not “the right institution to deal with [government debt] default”. It is the wrong institution. It is worse than no institution at all, because it allows people to claim that there is a backstop when there is, in fact, no backstop.

  9. The “structural reform” agenda is more-or-less orthogonal to the macroeconomic institution redesign agenda. To even hint that energy that would otherwise be devoted to macroeconomic institution design should be diverted to lobby for structural reform is in its essence a call to do less on macroeconomic institution redesign. And that strikes me as unhealthy.

  10. Now I think that I do understand why the economists below–who are, by and large, among the best economists in the world in their wisdom and in their understanding of the European situation–have made the rhetorical choices that they have. They want to appeal to practical men, who believe they are exempt from any trace of utopian frenzy.

  11. But if the Eurozone is to be a good thing for Europe rather than a millstone around the neck of the continent, I think that utopian frenzy is needed.

Here is the vox.eu column:

Richard Baldwin, Charlie Bean, Thorsten Beck, Agnès Bénassy-Quéré, Olivier Blanchard, Peter Bofinger, Paul De Grauwe, Wouter den Haan, Barry Eichengreen, Lars Feld, Marcel Fratzscher, Francesco Giavazzi, Pierre-Olivier Gourinchas, Daniel Gros, Patrick Honohan, Sebnem Kalemli-Ozcan, Tommaso Monacelli, Elias Papaioannou, Paolo Pesenti, Christopher Pissarides, Guido Tabellini, Beatrice Weder di Mauro, Guntram Wolf, and Charles Wyplosz.: Making the Eurozone more resilient: What is needed now and what can wait?: “Britain voted to leave the EU. This is terrible news for the UK…

…but it is also bad news for the Eurozone. Brexit opens the door to all sorts of shocks, and dangerous political snowball effects. Now is the time to shore up the Eurozone’s resiliency. The situation is not yet dire, but prompt action is needed. This VoxEU column – which is signed by a wide range of leading economists – identifies what needs to be done soon, and what should also be done but can probably wait if markets are patient.

The UK’s choice to leave the EU was, we believe, a historic mistake. But the choice was made; we must now turn to damage control – especially when it comes to the euro.

The Eurozone is growing, albeit slowly. If all goes as forecast, economic health will eventually be restored, unemployment will decrease, and the periphery countries will regain competitiveness.

But things rarely go as forecast – as we were so forcefully reminded last week. Brexit was the latest – but certainly not the last – shock that will challenge the monetary union.

The question is: Is the Eurozone resilient enough to withstand the bad shocks that it is likely to face in the months and years to come?

For many observers, the answer is ‘no’. To survive the next bad shock, they argue, Europe’s monetary union needs major reform and deeper political integration. As such deeper integration is extremely difficult in today’s political climate, pessimism is the order of the day.

We do not share this pessimism. The Eurozone’s construction has surely followed a convoluted process, but the fundamental architecture is now in place. Yes, some measures are needed to strengthen this architecture. And yes, more ambitious steps would improve resilience further, but these will have to wait for a political breakthrough.

The purpose of this essay is to identify what needs to be done soon, and what would be good to do but can probably wait. To avoid the mind-numbing details that often cloud discussions of Eurozone reform, we paint our arguments with a broad brush. (We will follow up with further documents with much greater detail on specific reform proposals.)

On banks and the financial system: Think of a good financial architecture for the Eurozone as achieving two main objectives in coping with another bad shock: 1) reducing the risk of bank defaults; and 2) containing the broader economic effects when defaults do occur.

This architecture is largely built. Both supervision and regulation are now largely centralised. Supervision is improving and stress tests are becoming more credible with each iteration. The Single Resolution Mechanism is in place and private-sector bail-in rules have been defined. The Single Resolution Fund can provide some recapitalisation funds if and when needed. If they turn out not to be enough, the European Stability Mechanism (ESM) can, within the context of a macroeconomic adjustment programme, add more. In the longer term, a euro-wide deposit insurance scheme could improve resiliency, but this will take time.

So what more needs to be done soon?: Mostly to make sure that the rules in place can be enforced. Italy provides two cases in point. First, non-performing loans have steadily increased and are carried on the books at prices substantially above market prices. Second, the Italian government has proven very reluctant to apply the bail-in rules. The credibility of the rules is at stake. Either they have to be applied, or credibly modified.

What are the measures that would be good to take, but can probably wait?: Diversifying the portfolios of banks so that there are more resilient to domestic shocks would clearly be desirable. The focus has been on decreasing the proportion of domestic sovereign bonds in banks’ portfolios. This would be good, but domestic sovereign bonds represent a relatively small proportion of banks’ portfolios. Decreasing banks’ overexposure to domestic loans would also be an important step towards boosting resiliency. A different approach would be to transfer the responsibility for banks’ rescue from national governments to the ESM. But this is the kind of political step that seems unlikely to be feasible in the near term.

On public finances: Public debt is high, even if, for the time being, low interest rates imply a manageable debt service. Just as for the financial system, a resilient public finance architecture needs to:  1) reduce the risk of default; and 2) contain the adverse effects of default, if it were to occur nevertheless.

On both counts, much remains to be done: Reducing the risk of default is best achieved through a combination of good rules and market discipline. Neither is really in place. The accumulation of rules has made them unwieldy, unenforceable, and open to too many exceptions. They can and should be simplified. In most countries, the level of expenditure – rather than the deficit – is the main problem. High expenditure makes it difficult to raise taxes and balance the budget, leading to dangerous debt dynamics. Thus, a focus on expenditure rules, linking expenditure reduction to debt levels, appears to be one of the most promising routes. Market discipline, on the other hand, will not work if the holders of the debt do not know what will happen if and when default takes place. This takes us to the second objective.

The Eurozone has put in place the right institution to deal with default, namely the ESM. Like the IMF, the ESM can, under a programme, help a country adjust. In its current form however, the ESM falls short of what is needed. First, the ESM’s ‘firepower’ is too small compared to the sort of shock-absorbing operations it may be called on to undertake in the case of a large Eurozone nation getting into debt trouble. Second, given its current decision-making procedures, markets cannot be sure that action will be taken promptly. Higher funding or higher leverage, and changes in governance such as replacing the requirement of unanimity by a more flexible one, are needed to make the ESM able to respond quickly and fully to a country in trouble. Third, the current structure is silent on who should negotiate a public debt restructuring in the extreme case where one was needed. Putting an explicit process in place should be a priority; the ESM is the natural place for it.

What other measures which would be good to have, but can probably wait?: Initiatives to address the legacy of high public debt would bolster Eurozone resiliency and thus would be very useful. However, as low interest rates are likely for some time to come, debt service is manageable, and debt forecasts show that debt-to-GDP ratios will slowly decline (absent a bad shock). Since proposals for dealing with legacy national debts would require the sort of political willpower that seems in short supply for now, such plans cannot be realistically put on the ‘do now’ menu, even if they are may be necessary in the future.

Another set of measures would implement stronger risk sharing, and transfer schemes to further reduce the impact of domestic shocks on their own economy. Proposals run from euro bonds to fiscal transfer schemes for countries subject to bad shocks. These measures would make the Eurozone more resilient and thus may be desirable. But, equally clearly, they would require more fiscal and political integration than is realistic to assume at this point. We believe that the Eurozone can probably function without tighter fiscal integration at least for some time.

We end with two sets of remarks:

Solvency and liquidity: Whether it is with respect to banks or states, the two issues facing policymakers are how to deal with solvency and liquidity problems. We have argued that, when solvency is an issue, the ESM is the right structure to address it (assuming a public debt restructuring procedure is in place). With respect to liquidity, we believe that, in addition to the liquidity facilities of the ECB, which can address sudden stops on banks, the Outright Monetary Transactions (OMT) is the right structure to address sudden stops facing states. One step that could be taken soon is a clearer articulation of how to combine the two. This would clarify the role of the ECB, and eliminate a source of criticism about the allocation of roles between the ECB and other Eurozone structures such as the ESM. The resulting clarity would make it easier for markets and investors to be assured that Europe’s monetary union could deal effectively with any future shocks.

Structural reforms: In any country, at any point, some pro-growth structural and institutional reforms are desirable. Is there a particularly strong argument for them in the case of the Eurozone? To some extent, yes. The institutional problems of the euro are made worse by low growth, and demographic change. If the structural and institutional reforms delivered higher growth, this would be good by itself – ignoring distribution effects – and it would allow for faster improvement in bank and state balance sheets.

Those specific structural reforms which allow for faster adjustment of competitiveness, be it through faster cost adjustment or faster reallocation, would also improve the functioning of the monetary union. Implementing such reform is a slow and difficult process, but necessary nonetheless. The Eurozone will never be a well-functioning monetary union until it is much more of an economic union as well.

We have stressed that actions need to be taken soon, while others are more long term, but the long-term questions do need to be discussed without delay.

Do you support this view?: Starting next week, we will open this column to endorsement by economists. Details to be posted on Monday.

Must-Read: Jamelle Bouie: Is American Really in an Anti-Establishment Rage?

Must-Read: Jamelle Bouie: Is American Really in an Anti-Establishment Rage?: “The same people who disapprove of Congress will readily re-elect most members to the House and Senate…

…Just 24 percent of Americans described themselves as ‘angry’ about the federal government…. Forty-seven percent said they were dissatisfied, which is similarly low compared with previous surveys…. 85 percent of Americans said they were satisfied [with the economy]…. The number of Americans who say they are personally worse off has taken a sharp decline since the last presidential election…. Layoffs are down… job openings are up; earnings are up…. For all the talk of anger and dissatisfaction in the Democratic primary, it’s also true that a majority of Democrats back the establishment candidate…. And while there’s plenty of evidence for the case that Americans are angry with the political system—in a November survey from NBC News and the Wall Street Journal, 54 percent said the system was ‘stacked’ against them—this doesn’t jibe with the fact that most Democrats are fine with Hillary Clinton as their nominee or that—before Trump won—most Republicans were fine with a conventional candidate as theirs….

Despite this, Americans also insist they’re angry about the political system and dismayed at the country’s direction. And while primary electorates are far from representative of Americans at large, the obvious popularity of figures like Bernie Sanders and Donald Trump speaks to something…. Voters aren’t uniformly frustrated or frustrated in the same ways, and whatever anger and frustration they have doesn’t translate to broad support for either of the candidates who seek to harness it. What we should do, instead, is try to pinpoint the nature of the most salient kinds of anger and frustration. On the right, the most important dynamic is racial resentment and white status anxiety…. On the left, we’re looking at the rumblings of a generation hit hardest by the Great Recession caught in the winds of rising global inequality. And insofar as nonwhites are frustrated with their place in society, it likely owes to moments of highly visible and still consequential discrimination…. But even this complicates the question of discontent. Blacks and Latinos saw the worst of the recession and the recovery: Among Americans, they have the strongest case for disrupting the system. And yet they back Hillary Clinton, who is running for modest gains over the status quo…

Must-Read: Noah Smith: Don’t Give Up on Equality of Opportunity

Must-Read: Noah Smith: Don’t Give Up on Equality of Opportunity: “The purpose of an ideal of equality isn’t to serve as a blueprint for the creation of a utopia…

…but to nudge us in the direction of policies that will make society feel more fair. And it’s here that I think equality of opportunity shines. What the focus on opportunity has consistently led to is prioritizing children… more resources have been devoted to education, child-care assistance and childhood health. This has been good, because children’s mental and emotional plasticity means that their lives can be improved a lot with early intervention. Universal public education is one of government’s greatest successes, and it’s an institution that has been adopted in almost every society. Public health is certainly another. Nowadays, the emphasis on child care has led to policies like paid parental leave, which other developed countries have already adopted. Equality of opportunity also entails more government investment, instead of consumption…. Redistribution is important. But during the last two centuries, government has been at its most effective when it concentrated on investment and on children. Medicare and Social Security Disability payments have eased the suffering of many poor, elderly and ill people. But schools, roads, electrical grids, public health and research transformed the country…. Thus, let’s hold on to the notion of equality of opportunity. For all its faults, it has been very good at keeping the country pointed in the right policy directions.

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.

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

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

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.


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”

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

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