Samuel Brittan (1980): Hayek, the New Right, and the Crisis of Social Democracy: Weekend Reading

This—written forty years ago—is still the best short summary of left-neoliberalism I have every seen. Indeed, I think meditating on it, while walking up Drury Lane between the LSE and Bloomsbury in the summer of 1982, was how I became a card-carrying left-neoliberal in the first place:

School of Athens

Samuel Brittan (1980): Hayek, the New Right, and the Crisis of Social Democracy: “SINCE THE PUBLICATION of his Road to Serfdom in 1944, Friedrich Hayek has been cursed by sneerers, who dismiss everything he has to say without giving it a hearing, and even more by admirers, who agree with it before they have studied it, and regard it mainly as a highbrow stick with which to beat the Left. Yet there are many reasons for trying to come to terms with what he has been saying. The completion of The Political Order of a Free People, the third and last volume of his Law, Legislation and Liberty, provides a suitable opportunity for an interim assessment…

…The emergence of what has been called “the New Right”, symbolised by events such as the victory of the tax-cutting Proposition 13 in the Californian Referendum and of Mrs Thatcher in the UK general election of 1979, makes it topical to do so. So, of course, do the retreat from Keynesian economics and the collapse of post-War full employment policies in one country after another, which Hayek has been warning would happen since the time when these policies existed only as aspirations in wartime White Papers.

Although Hayek’s teachings are by no means identical with those of “the New Right”, and can indeed be used to provide an effective critique of it, there is clearly something in common. It can hardly be a coincidence that Hayek was cited far more frequently than any other author in the list of favourite books published by “Aims of Industry” for its “Freedom Book Fair” of 1979. Some of the items that appear puzzling in the doctrines and practices of “the New Right” are also to be found in Hayek’s writings; and it is more interesting to make the effort of understanding through the works of a major thinker than by examining the contradictions of political practitioners or their journalistic apologists.

Most important for all, there is a great deal to be learned from Hayek’s teachings, even by—or especially by—people who do not consider themselves either Hayekians or members of “the New Right.” Hayek himself has not made it any easier for them by his explicit assumption in writings over three-and-a-half decades that something called “Socialism”, which includes the doctrines of Social Democrats—and indeed of non-Thatcherite Conservatives—is the intellectual and political enemy. If Hayek believes, as he does, that socialists and their pale pink imitators in other parties are guilty of “scientific error” (he never doubts their moral goodwill), liable to usher in an age of barbarism, it has been his duty to say so and not to shelter, as so many academics do, behind a bogus impartiality. Nevertheless, in my own view, “Collectivism” would be a more accurate name than socialism for the evils which Hayek has diagnosed, and would indicate more clearly that its practitioners extend throughout the political spectrum.

Another obstacle is the elusiveness of much of Hayek’s writings and the lack of examples. The clarity of The Road to Serfdom is, alas, not typical of his other work; although it is only fair to add that his obscurities are far more worth pondering than most of the trivia with which other economists regale us and which are forgotten within a very short time.

THE TASK OF ASSESSMENT is further compounded by the fact that Hayek’s writings cover many subjects ranging from (to take a few examples) the philosophy of perception and social biology to jurisprudence and currency competition. They are not in water-tight compartments. The author sees important links between them. But they have developed over the years and are thus to be found scattered over many different works. Indeed the newcomer might do well to look at Norman Barry’s study Hayek’s Social and Economic Philosophy before reading the original work. Barry lists the main ideas with exemplary clarity. He also puts them in the context of mainstream doctrines with which the reader is more likely to be familiar. While essentially sympathetic, Barry lists the major difficulties and contradictions. The main shortcoming—if it is that—is that he does not express a view on the relative importance of Hayek’s various doctrines or give an overall judgment of his own on the whole philosophy.

At a more technical level, Barry overstresses the relevance of Hayek’s subjectivist and axiomatic philosophy of social science, before he came under the influence of Sir Karl Popper, important though this phase was for Hayek’s own intellectual development. Hayek’s later critique of bogus quantification based on the complexity of the phenomena studied has more to tell us now. His essential point is that we cannot count on the good fortune of being able to discover by direct observation simple quantitative regularities between economic variables—but it is still possible and worthwhile to formulate general rules. For instance, economic theory can tell us that we cannot maintain a fixed rate of exchange and at the same time maintain an independent monetary policy with a national price level objective. But this does not mean that we can predict where the exchange rate will go if the latter option is chosen. The breakdown of one supposed numerical relationship after another in macroeconomics in the last decade has made this view far less eccentric than it appeared in the heyday of econometric predictions. Keynesian-type relations between consumption and income, and monetarist predictions of “the demand for money” have alike failed to give even rough enough approximations of use for policy. Writers themselves reared in the quantita- tive tradition have recently begun to stress that the relationships in their equations (“parameters”, to use this word for once in its correct sense) are not stable, and depend on such forces as the climate of expectations and the policies that the authorities are believed to be following. Much of the discredit into which economics has fallen would fail to surprise readers of Hayek’s methodological papers of the late 1950s and early 1960s.

In this essay I can only touch on a few themes, starting in areas where Hayek seems to me to be misguided, but still illuminating, and then passing on to areas of greater agreement. The reader is warned that the space devoted to each topic has nothing to do with its relative importance.


1. The New Right

THE NEW RIGHT places a good deal of emphasis, alien to many market economists, on a return to “the old values.” The less clearly one tries to define the phrase “old values” the more accurate one will be. But it clearly covers a belief in patriotism, authority of the traditional kind centering round the family, the school, the business manager, and, above all, the police and army. These are felt to be legitimate in contrast to bureaucrats and tax inspectors, who are regarded as ersatz authority figures, all too ready to act as subversives themselves. It has always been an intellectual paradox that the non-Muscovite Left favours freedom in everything but economics, while the Right is sympathetic to freedom only in the economic sphere. The evolution of the New Left and the New Right has not dissolved the paradox created by their old parents.

Where apparently contrasting attributes are found among practising politicians, or bodies of electors, one can do little but note the paradox and pass on. A vast number of different permutations of beliefs on different subjects have at one time or another been grouped together. Among some ascetic religious sects “plain living” has been linked, with apparent logic, to an abhorrence of technical progress. Among others such progress has been highly prized, for apparently equally cogent reasons. Nor is it surprising that middle-class Conservative voters should favour market forces for pay differentials, but advocate state intervention to reduce the cost of home mortgages. It is always a possibility to create a distinction between such cases and thus rationalise an apparent anomaly, if only one thinks hard enough.


2. Evolution and Liberty

YET WHEN HAYEK himself combines libertarian economic beliefs with authoritarian inclinations in other directions, it is time to sit up and take notice. I may claim to have contributed in a mild way to the revival of interest in Hayek with my own Capitalism and the Permissive Society (1973), which came out in favour of both of these things. The first page of the first chapter of Hayek’s classic Constitution of Liberty (1960) starts with the sentence:

We are concerned in this book with that condition of men in which coercion of some by others is reduced as much as possible.

He contrasts his idea of freedom with Ignatius Loyola’s ideal of the Jesuit who should be “as soft wax” in the hands of his superior, putting all his fervour into “executing zealously and exactly what he is ordered.”

Yet familiarity with Hayek’s work makes it clear that he himself could not possibly regard a title endorsing the “permissive society” as anything but a distortion of his message. Indeed the Epilogue of the final volume of his last major work, Law, Legislation and Liberty, includes a fierce denunc ation of permissiveness in general and educational permissiveness in particular. “Permissive education” has become a cant slogan covering a wide range of different practices. Y et it is remarkable that someone who wishes to reduce the role of coercion in human affairs should express unqualified hostility, although not in as crude a way as Patrick Cormack, to those who wish to reduce the role of coercion in the bringing-up of young people.

Nor is this a unique example from a late phase of Hayek’s writing. In The Constitution of Liberty itself there are passages endorsing peacetime conscription—in striking contrast to Milton Friedman’s personal lobbying against the US draft. Indeed, in a much earlier essay, Individualism and Economic Order (1948), Hayek praises the conformism of the inter-War British public school student, in contrast to the personal diversities cultivated by their Continental counterparts.


3. Evolutionary Values

THE MOST REVEALING PART of Hayek’s new trilogy is the Appendix to the third volume entitled “The Three Sources of Human Values.” The source which Hayek wants to emphasise is evolved social institutions. Not every part of behaviour is either hereditary or the result of deliberate intention. It can also result from traditions, rules, and institutions, which are the product of a social rather than a biological evolution, and are thus the result of human action, but not of conscious human intention.

In contrast to libertarians, such as Milton Friedman, who take liberty as an absolute value, Hayek is quite ruthless in saying that the test of evolutionary rules is the simple one of success, identified, in turn, with progress. Resistance to the commercialisation and repressions of modern civilisation, whether from the romantic Right or the libertarian Left, arises from our tribal inheritance and impossible longings to get back. Hence Hayek’s deep-seated opposition to the teachings of Freud and their attempt to bring into the open instinctive or unconscious longings and desires.

To those of us brought up on Hayek’s definition of freedom as the absence of coercion, his condemnation of permissiveness comes as a shock. What he really dislikes about educational or social permissiveness, and has frequently condemned in the Bloomsbury of Keynes’s day, is the notion that rules which cannot be rationally explained do not have to be observed; or that people of any age should “reason why ” before accepting rules—conventional as well as legal. The argument, familiar from earlier writings, stems from the belief that conventional rules embody more inherited knowledge and experience than any individual could be capable of ascertaining himself.

Thus while Hayek’s ultimate values are those of the radical apostle of human progress, his ethical philosophy is highly conservative. He faces the question of how rules should change; and maintains that w e break them at our peril. Innovators may experiment with new rules or practices, but always at their own risk. The test is whether they can get away with them. Moreover, the pioneer of new rules can proceed on only one or two fronts at a time. The condition of his success is his acceptance of the great bulk of other rules which, like his fellows, he follows blindly.

This looks like pretty standard conservative philosophy with which Edmund Burke would have felt at home. But there are important ways in which Hayekian social biology is very different from old conservatism. First, he actually welcomes the disturbance and change of the last two centuries. These have, he believes, been brought about by individual effort and initiative within a known framework of rules. Gradual changes in the rules themselves will, Hayek believes, further progress so long as they are spontaneous. But frequent deliberate tampering with the rules by over-ambitious reformers will, he fears, put an end to the whole development that began with the Renaissance and received a new lease of life from the Industrial Revolution.

The interesting question about this blend of radical evolutionary fervour and conservative insistence on rule observance is why someone holding it should regard himself as a libertarian, which Hayek undoubtedly does. Not only that, but he is recognised as such by a number of others whose entitlement to the label cannot be questioned.

The libertarian element is injected into Hayek’s philosophy by the assumption that rules which have evolved through custom or common law will in practice allow a large amount of individual freedom. Certain courses of action and behaviour will be forbidden; but, apart from those, people will really be free to “do their own thing.” Granted the premise that evolution is towards libertarian rules, then all the arguments about not seeking to impose a conscious, artificial pattern on our inheritance point in a libertarian direction. But liberty is, in the last analysis, an instrumental value in the service not of happiness or welfare, but of progress— material and intellectual—seen as an end in itself.


4. Towards a Critique

How ACCEPTABLE is this outlook? Hayek’s ultimate criterion is open to serious question. By “progress” he basically means movement and increase of complexity (in the biological sense). This is not a self-evident ethical yardstick. There are more important things (e.g. happiness) than “the evolution of the human race”, even assuming that we can identify it unambiguously when we see it. Advance may be for the bad; and it is not a sufficient condemnation of intervention in the rules, of even a highly liberal society, to say that it may “hold up progress.”

Utilitarianism is a more plausible and attractive alternative starting point, although also incomplete as a social philosophy. It can be interpreted, as Jeremy Bentham originally did, as “the greatest happiness for the greatest number.” Or it can be interpreted as the maximum satisfaction of individual preferences—letting as many people as possible have as much as possible of whatever it is that they want.

Of course utilitarianism has its problems. “The greatest number” of Bentham’s formula can hardly be taken literally. To increase satisfaction by increasing population is not a very attractive aim. Even if it is interpreted to mean “the maximisation of welfare per head”, there are obstinate problems. It is not only the average satisfaction in a community that matters but its distribution. A high average level of satisfaction is insufficient compensation for the existence of an oppressed or destitute minority. (On top of this are the well-known problems of interpersonal comparisons and the meaning to be attached to want satisfaction with a changing population and changing tastes.)

Nevertheless, utilitarianism does at least have the virtue of taking as its ultimate criterion the individual and his needs, wants, or desires, as expressed in his behaviour. Evolutionism has at least as many difficulties of definition and formulation, but has a less humane starting point.

But it is not merely the outside critic who has difficulties with Hayek’s rule-bound Evolutionism. Hayek has difficulty himself. If there is an inbred wisdom, not apparent to the naked eye, in the evolution of common law or common custom, why deny this hidden wisdom to more interventionist or authoritarian structures? After all, institutions such as rent control, price control, a large nationalised sector, and heavy progressive taxation have existed in many countries for generations and have often evolved gradually. Might they not contain their own wisdom, not obvious to Hayek when writing as an economist? And will not, say, the abolition of rent control in Britain—let alone the reproduction of capitalism, or free elections, in the Soviet Union—set in train all sorts of events not foreseeable by the simple-minded democrat or free-market economist who looks only at immediate consequences? Indeed are not Hayek’s own economic arguments for free markets as superior ways of disseminating information and coordinating activity put into jeopardy by Hayek’s philosophical insistence on our invincible ignorance of longer-term consequences? The introduction of a free market—say in the transmission of television programmes—can have remote effects on values, tastes, and behaviour never suspected by the economist who thinks in terms of satisfying existing consumer preferences.

Indeed, nothing could smack more of social engineering and be less respectful of slowly emerging rules and practices than Hayek’s two most recent policy suggestions. One is for the competitive circulation of rival privately-issued currencies. The other is for two parliamentary assemblies, elected in highly novel ways: the first concerned with the passing of laws and the second with supervising the policy and administration of the government of the day.

These contradictions can be resolved in a formal way by saying that, normally, spontaneous social evolution is the best way to change society. But occasionally social organisms, like natural ones, develop diseases, and drastic surgery may then be necessary. The problem then is to say who is to be entrusted with the diagnosis. (It is rather similar to the problem with the Marxist system, under which human beliefs are determined entirely by class status. But Marx and his disciples have somehow managed to escape from this class determination, nation, and they alone are able to analyse society “objectively.”)

It is more fruitful to avoid such artificial reconciliations and to accept that Hayek is attracted t o t w o different political philosophies: classical liberalism (based on limited government, free markets, and the rule of law) and a conservative philosophy which stresses tradition and the hidden wisdom of existing institutions. When in some golden age—say Gladstonian England, as seen through nostalgic spectacles—the prevailing tradition was itself that of classical liberalism the two systems of Hayek might seem in harmony. When prevailing constitutions are authoritarian or collectivist, there is tension between the two ideals.


5. Alternative Approaches

WHAT ARE THE MAIN alternatives for those who find the Hayekian outlook, so far from displaying the anarchism of which it is accused by ignorant critics, too authoritarian in many elements? Even if the evolutionary ethics are removed, individual freedom is left to depend on Hayek’s writing on “the Rule of Law”—by which he means the generality of rules. This is a necessary but not a sufficient condition for a free society.

One alternative is the thoroughgoing libertarianism of certain Americans. Some young libertarians (including Milton Friedman’s son, David) call themselves “anarcho-capitalists” and believe that personal safety a n d property c a n b e secured by private armies and police forces; and that the way to choose between rival rules of law is competition, including competition between courts, in which the better system will gain adherents and used are often ingenious and subtle. But the reality which corresponds to such proposals is too much like the warring private armies of Renaissance Italy, or the feuding factions of the Mafia and the Red Brigade in the Italy of today. These are potentially even more oppressive than many authoritarian governments—and hardly a model for reformers.

Those libertarians who wisely retain the idea of state authority would confine it to “night watchmen” activities, mainly law and order, and defence. Such writers are far more clear-cut in their policy views than Hayek. But they achieve this clarity by advocating thorough going laissez-faire. There would certainly be no conscription, no anti-drugs legislation, and no interference in private sexual behaviour. But there would also be no social security—not even the provision of the barest minimum—and nothing remotely resembling a health service. There would be no place for town-and-country planning rules. Attempts to limit the spillover effect of one man’s use of space on his neighbours would be confined to what could be achieved by a suitable framework of property rights with a wider concept of damages than exists at present.

On most issues of permissiveness versus authority I find myself on the side of the American-style libertarians. But when it comes to the redistribution of income to those at the lower end of the income and property scale, I would go further than Hayek himself, or most middle-of-the-road politicians, in the direction of a negative income tax or social dividend. The libertarians are not necessarily lacking in personal compassion; but their system is. Redistribution in any democratic society depends on altruism or solidarity on the part of the more fortunate citizens. But whether one thinks of the relief of poverty or (more ambitiously) of income redistribution, personal charity is not enough—for reasons of economic logic. Redistribution is, like defence, a “public good.” This means that there is little incentive for the individual to provide it. I might be—indeed would be—willing to pay a voluntary contribution to transfer some of my income to the poor as part of a compact with millions of others. But it would not be rational for me to do so, to the same extent, on my own. The benefit to the income of the poor would be negligible, and the loss of my own income and welfare substantial. (These very elementary considerations are discussed in contemporary economic literature in off-puttingly technical articles about “Pareto-optimal redistribution.”)

SIMILAR ARGUMENTS about public goods apply to support for the Arts. There is a great deal of contemporary music which I, along with many other concert-goers and record-buyers, am quite unable to appreciate. But I accept the arguments for supporting it, and I will pay my share if other taxpayers will do the same; passing round the hat is not a substitute. There will be other activities which I would be unwilling to support on a club basis, but other taxpayers would not be. A lot of state activity can be understood as a substitute for a network of large-scale contracts, which it would be prohibitively expensive to negotiate privately, both because of transaction costs and because of the incentive to act as a free rider and leave others to finance the activities of which one privately approves.

The argument against state intervention and subsidies is not that they should not take place at all; but that, for reasons endemic to the political process, much real-world intervention impairs rather than improves the unaided market, and the redistributions effected are inefficient, largely self- cancelling, taken at the behest of interest groups, and justified by no ethical principles whatsoever.

Moreover, the “equality” which is professed as an ideal by even quite “right-wing” Social Democrats—it was Roy Jenkins who said in 1952 “Socialism is about Equality”, Tony Crosland continued to believe this to the end, and it is also assumed without question in many current academic works—is an ambiguous and dangerous goal. Equality owes its popularity to the widespread sentiment in favour of “levelling-up” the incomes of the poor. But considered as an arithmetical goal the “levelling-down” of the better-off, or the removal of opportunities to rise, also counts as a contribution to equality—even if it actually makes the poor worse-off because of its effects on incentives, and thus on state revenues available for redistribution.

Thus, because of its ambiguity and the range of policies it justifies, “equality” has too often become a respectable pretext for envy, malice, and jealousy, as well as for compassion. It should be dropped as a social objective in favour of more explicit statements of redistributive goals.


6. Dilemmas of Freedom

ALTHOUGH MY SYMPATHIES are on the side of liberty when it clashes with equality (e.g. the right to spend income on private medical treatment or on first-class travel tickets), the treatment of liberty in the classical liberal texts has come to worry me increasingly. The mistake of classical liberals and, even more, of the New Right conservatives is to equate all authority with state authority. Oppression in an Old People’s or Children’s Home, or even in the family, can be just as great.

As John Stuart Mill pointed out, conformism and the intolerance of individual divergence in small local communities can in practice be the greatest obstacles to individual liberty. The option of “voting with one’s feet” and finding elsewhere a community to one’s own taste, on which many modern free-market writers base their preference for local over central government, exists mainly for prime-age adult males, who make up a minority of the total population. Hayek’s ideal of abstract impersonal law is more likely to be applied—admittedly, at some bureaucratic cost—in centrally-administered federal or national services than at a local government or community level. The trouble there is that everybody knows everyone else; and although it is easier to take account of particular circumstances, it also becomes easier to bend general principles in favour of those who matter locally and against those considered a nuisance.

Libertarian doctrine applies most convincingly either to “ageless” isolated individuals or adult heads-of-family. It is much less convincing for the many people who are too young, or too old, or too dependent, or too muddled to “stand on their own feet”, and to take out their own insurance against the vicissitudes of life.

The difficulty of the modern libertarian is to find a way of combining the Christian-socialist awareness that we are most of us very vulnerable and terribly dependent on the help and sympathy of others, with the equally important insight that the attempt to coerce someone into being a tool or instrument of another is a great evil.

Mill’s distinction between “self-regarding” and “other-regarding” action is an essential protection against public interference with private behaviour among consenting adults. But by itself it is insufficient. Almost anything that anyone does is liable to “affect others” unless in an enclosed space behind curtains. Is liberty to make offensive gestures to others in the streets, or to fornicate in public, or to be smelly or unsightly in crowded places, a basic human right? Do I have to enlist to fight for these things because I find the military sadism shown in Chips with Everything, the public-school horrors of If, or the use of the closed shop to bar people from a chosen profession equally offensive?

A DISPOSITION TOWARDS personal freedom, both as an end in itself and as a means to other ends, does not imply that it should be the only political value. There may at times have to be a trade-off between freedom and other goals. The heavy (and arbitrarily enforced) penalties on all soft drugs in most countries, when people are rightly allowed to drink and smoke at their own risk, reflect mainly intolerance and prejudice. But a recognition of this does not commit one to legalising heroin; nor to adopting on such matters a completely a priori attitude towards the law which would treat all research findings with disdain.

What label, then, is to be attached to someone who is attracted to both freedom and to utilitarian ideals, who accepts redistribution but not equality, who sees a case for a good deal of state intervention and subsidy, but finds nearly all the interventions of the last decade or so (and a good deal of the earlier type, such as rent control) pernicious and misguided?

In the end I can think of no better label than “social democrat”, but a social democrat of an oddball variety, who believes that neither the man in Whitehall nor the local social worker necessarily knows best, yet also does not find “leaving other people to go to hell in their own way” an attractive social morality. A rational social democrat will, on many economic issues, have more sympathy with Margaret Thatcher or Raymond Barre or William Simon than with their critics (or rather with what these “right-wing radicals” would do if they really had the convictions they were supposed t o have, a s well as the courage and political strength to follow them). Indeed my criticism of Mrs Thatcher’s intellectual mentor, Sir Keith Joseph, would be that he is cutting too few subsidies rather than too many—although I would use some of the resulting savings to relieve the pressure on the health and other personal social services rather than just reduce the basic rate of tax.

That kind of social democracy finds no market in any wing of the British Labour Party, and is practised rather than preached by Helmut Schmidt’s German Social Democrats. The fact that this position should seem so eccentric in English-speaking or Latin countries, and so out-of-keeping with what political practitioners in “the centre” are actually saying, has some bearing on the crisis through which social democracy is passing. It is a crisis on which Hayek’s writings shed a great deal of light, whether one is a fully-fledged Hayekian or not.


7. Market Signals

THE FIRST CONTRIBUTION of Hayek that I want to stress is his treatment of economics as a social science rather than as an exercise in the optimum allocation of resources. For a long time he was almost alone among market economists in being concerned with the effect of the market system on the evolution and stability of society. Whereas most economists, whether of the Left or of the Right, concentrate on mathematical exercises (sometimes verbal mathematics), trying to work out “solutions” in given conditions, Hayek has been interested in Markets as examples of human institutions, like Language or Law, which have evolved without any conscious plan on anyone’s part.

For several decades, Hayek has stressed that markets are means of disseminating information diffused among millions of human beings (who will not be conscious of all the information they possess). This information is transmitted in the form of signals—price changes in flexible markets, but also shortages and surpluses where price changes are delayed by habit or law. They also provide an incentive to meet unsatisfied needs and to move resources from where they are no longer required. Wants, techniques, and resources are not given, but are constantly changing—in part due to the activities of entrepreneurs who suggest possibilities, (whether digital recordings or cheap stand-by transatlantic flights) which people did not know existed before. T h e market system is a “discovery technique” rather than a way of allocating known resources among known wants with known techniques. The latter problem could, in principle at least, be solved by computers on the entirely libertarian principles that people’s preferences should be satisfied to the maximum possible extent for any given distribution of income. No computer can predict, however, the emergence of new knowledge, original ideas, or commercial innovations—and people’s reactions to them.

Over and above this, the market provides a method of coordinating the activities of millions of people and of solving problems without a vast apparatus of political decision and of governmental enforcement. The very existence of this self-regulating system is quite unsuspected by 99% of the population, who (to the extent that they think about these matters at all) assume that we must have a national or international “policy” for energy, jobs, productivity, or whatever other problem hits the newspaper headlines.

THIS VIEW OF MARKETS as a discovery procedure and coordinating mechanism is now common property to many economists, especially in the United States (away from the Eastern seaboard). But it is still “Double Dutch” to large numbers of Oxbridge graduates who have been brought up to suppose that they have only to diagnose a departure from some theoretical optimum (so-called perfect competition) in a market to believe they have made a case for government intervention—without asking whether the human beings who will have to carry out that intervention have the knowledge or the motivation actually to improve matters. Too often the defects of real world markets are compared with the hypothetical action of a benevolent and omniscient dictator (as frequently—in t h e more technical writings—for reasons of mathematical convenience as from any deeply-held convictions).

Here, as elsewhere, the Hayekian approach opens up rather than solves problems. Hayek sees trie market network as a gradually evolving social system rather than as a mathematical solution to the problem of resource allocation on the basis of known, certain, and unchanging information. But just like Language and Law—those other products of social evolution with which Hayek makes explicit comparison—the transmission and incen- tive mechanisms of the Market can be improved. So shifting attention from the static allocation of resources to “the market as a discovery procedure” does not remove the issue of intervention. Unfortunately, much of recent government intervention does not make any sort of sense in terms of improving the market, either in the textbook sense as an instrument of allocation, or in the Hayekian sense of a signalling system. The roots of such intervention lie in the defects of the political system. The economic rationalisations given make no sense at all, and they seem to come from people who, far from wanting to improve markets, have never even heard that they exist, and feel they must rush in with a physical and collectivist “solution” to any “problem.”

Examples range from the supposed importance of Exports to the assumed necessity for an Energy policy. Included in the list would be the encouragement of savings as a patriotic virtue, the post-War cult of boasting about “how many houses” governments of differing political parties have “built”, the encouragement of home ownership, and indeed the need for a Housing policy at all. It would encompass “the Importance of the Farmer”, so dear even to the most free-market of Tory Governments.

The list of conventional policies to be condemned can be made to sound heretical, far-out, or downright bizarre. But it is based on very elementary textbook economics as interpreted by iconoclasts who prefer to turn their iconoclasm against the world rather than the textbooks. One does not in the least have to be on the radical Right to accept such a critique. This critique would be compatible with support for a much higher degree of redistribution of income and wealth than we now have, which could only be at the expense of the large mass of voters in the middle. It would also be compatible with much collective action to provide genuine public goods or to discourage anti-social spillovers. (Examples range from the protection of City Centres and spending on the Arts, to improvements of the Health Service, and better state- financed technical training.)

It is instructive to contrast the knee-jerk hostility to markets of many Western social democrats with the Communist economic reformers who are thoroughly disillusioned with “central planning” and are trying to bring in price- and profit-incentives. Tempting though it is to say that Communist economists in Hungary and Poland have a better understanding of market forces than Heathite members of a Conservative Government, one should go slowly at this point. To publish a set of rules asking the managers of state enterprises to behave “as if” they were profit-maximising entrepreneurs in competitive private industry ignores the actual personal motivations faced by these men; and this approach became badly unstuck in the British nationalised industries. You do not make a horse into a zebra merely by painting stripes on its back.

HAYEK LONG AGO pointed out that “Market Socialism” among state enterprises might provide a few mechanical rules such as “Invest where the expected return exceeds a market rule of interest plus a risk premium.” But it would not tell us whether to believe the estimates of return made by state managers. Nor would it help to decide who should be allowed to bid for the available funds, or how new entrants with completely different ideas about techniques, products, and return were to be accommodated. The benefits of the market system can be combined with a considerable state sector and a good deal of redistribution. But they cannot be as easily divorced from “capitalism” as some academics (who do not want to arouse the hostility provoked by this word) would like. Above all, one should avoid the trap of supposing that the copying of a few Western textbook rules (such as marginal cost pricing) would eliminate the Gulag Archipelago. By all means, encourage Communist countries to try to make their economic systems more efficient and humane. But there is a limit to what can be achieved by economic liberalisation alone; and I suspect that many Eastern European economists would be shouting this from the housetops were they but free to do so.

The frequent fallacy of, for instance, radical playwrights in the West is not that they expose hypocrisy, shallowness, and double standards of society. It is that they jump from the demonstration (many things are wrong) to the inference (evils are due to “capitalism” rather than to authority in general). To decide whether the capitalist elements increase the abuse of authority or act as a check on it requires considerable penetration of economic issues. Writers who are avowedly bored by economic analysis should not be encouraged to pronounce on them. Their attempt to do so discredits the exposure of evils which are very real, though wrongly attributed to “capitalism.”

UNFORTUNATELY, MANY WESTERN social democratic politicians have reacted to recent strains in their mixed economies by retreating towards an anti-intellectual interventionism. The Bad Godesberg programme, under which the German Social Democrats (in 1959) formally dropped the demand for a centrally-directed economy, has become less and less typical of the approach of Social Democrats or even middle-of-the-roaders in other political parties. As a result economists wanting to make intelligent use of the market place are likely to find their most sympathetic audiences on the New Right, especially in the English-speaking countries.

But this should make them particularly on the look-out for underlying divergencies. Professional economists who are sympathetic to market forces put the emphasis on the price mechanism (e.g. letting gas prices or mortgage prices rise in order to ration demand and stimulate supply) and on the profitability test (which is also valid for state industry or workers’ co-ops). By contrast, New Right politicians put the emphasis on reduced taxes and government spending cuts, without too many fine nuances about marginal and average rates.

We might note that marketplace economics conflict much less with conservative political values when the emphasis is placed on the-carrot-and-the-stick (especially the latter) than when it is founded primarily on a belief in individual freedom and the realisation that there is a strong affinity between “capitalism” and “the permissive society.” The carrot-and-stick man will be quite happy to talk of “the punishment fitting the crime.” The permissive free-market economist feels uneasy about talk of responsibility and punishment; he prefers to say that people should pay for the social costs of their actions, and he would design institutions and laws to that end. Such differences may seem one of language, but language is important. On crucial, unforeseeable occasions the differences between Conservative Gradgrindism and the more libertarian Marketeer will come to the surface.


8. Rule of Law

CONTRARY TO POPULAR BELIEF Friedrich Hayek has not provided any easily recognisable economic criteria for recognising state intervention of the harmful type. Some commentators suppose that he thinks the slightest move from laissez-faire will take us irrevocably along the road to serfdom, while others find that he is, if anything, too pragmatic.

The free market arguments in The Road to Serfdom were based on the incompatibility of central planning with personal liberty. But in subsequent years Hayek has approached the issue indirectly. He has argued, especially in The Constitution of Liberty (probably his magnum opus), that the main condition for a free society is what he calls “the rule of law.” He certainly does not mean by that that the mere observance by rulers of constitutionally enacted laws is enough. On the contrary he would condemn many perfectly valid legislative acts for being arbitrary, discriminatory, and giving far too much discretion to politicians and officials. It is less misleading if we translate “the rule of law” to mean a presumption in favour of general rules and against discretionary power. Hayek attempts to derive not only the fundamental political and legal basis, but also the economic policies, of a free society from this conception.

“The rule of law” may not, however, rule out everything that Hayek would like it to rule out. Many of the economic doctrines flow better simply from assertions that, if one believes in free personal choice, the direction of economic activity must be decided by the consumer, saver, investor, and worker. This is a straightforward economic deduction, made in The Road to Serfdom but accepted— with qualifications about imperfections and externalities—by many mainstream economists.

Nevertheless, Hayek has performed a very great service by bringing back on to the agendas of discussion the idea of the rule of impartial general laws, as something different from the mere constitutional enactment of the policies of elected leaders. This is a theme which has recently become fashionable—but, alas, only in Conservative circles, and then only when the party is in opposition—under the theme of “elective dictatorship.”

Unfortunately neither Hayek nor anyone els has been able to give a statement of the doctrine of the rule of general laws which will make clear what it implies in particular cases. To say that “laws must not single out named individuals” would not be controversial even among collectivists, and would not be enough to protect us against a great deal of arbitrary legislation. On the other hand general rules must mention categories: traffic laws deal with motor-cars, sales taxes make traders liable and so on. Once this is admitted, it is very difficult to see how rules can be prevented from singling out occupations or industries. Nor is it necessarily always desirable that they should be prevented from so doing. But once we have gone along this road a supposedly general law may well pick out for especially severe treatment a group or even a single individual.

A further restriction is required, but is extremely difficult to formulate. Hayek’s proposal—that a general rule should be acceptable to a majority of both those whom it benefits and those whom it harms—is much too strong. For it gives a veto to any minority in any circumstances—for instance, to the Mafia in a proposal for a new law against banditry. And Hayek’s illustration of progressive taxation as contrary to the rule of law, because it is not acceptable to high-rate payers, hardly helps his case. There are many arguments against high marginal tax rates; but the objections of those who pay them are hardly conclusive.

A MORE PROIMSING APPROACH is the veil of ignorance,” proposed by John Rawls. This is that a rule should be acceptable to someone who has not the slightest idea how he or she, personally, is likely to be affected. Rawls would actually like his reader to suppose that he or she is ignorant of his own personal position in society (and indeed, in some statements, even of the society or century to which he belongs). The use of the veil of ignorance requires a large imaginative effort, even in its less rigorous conception. Moreover, the vast literature generated by John Rawls’ work suggests that it is not enough to provide determinate substantive conclusions on which all who accept the basic idea would agree. Personal attitudes towards risk (e.g. the risk of being one of the unlucky ones) and the value attached to the small chance of a large prize will affect a person’s attitude to the distribution of property rights, taxes, and transfers.

If it came to laws against fast driving, an individual would either express his own personal trade-off between safety and speed, or in true Rawlsian style try to imagine what he would think if he were ignorant of his own personal temperament. But to deprive someone of one attribute after another in quest of “the veil of ignorance” is to come near to asking him to imagine himself divested of all attributes, in which case he would hardly be a person able to engage in discourse on just rules.

The quest for a foolproof definition of just general rules is most unlikely to succeed. This is not an argument for throwing out the notion. The basic concepts of mathematics, formal logic, and even physics are far from easy to define, but this does not make them useless. (“What is electricity?” said the examiner to the hopeless pupil. “I don’t know” was the reply. “Good”, said the examiner, “that makes two of us. You pass with honours.”) The Rawls veil of ignorance does supply a criterion of disinterestedness, and helps to narrow down the alternative possibilities.

ONCE THE IDEAL of just general rules has been outlined, however hazily, we know well enough that many of the items of the criminal code are as close to impersonal general rules as we can hope to get, just as the Star Chamber and the Press Gang are at the other extreme. We know too, if we are frank, that a piece of legislation which defines an illegal monopoly or restrictive practice, even if only in prima facie terms, is closer to the ideal than one which leaves everything to the discretion of the minister or some official commission.

General rules are desirable for their own sake. The limitations of the law are more akin to the constraints imposed by nature than are the unpredictable discretionary orders and prohibitions of public officials, and as such are more acceptable to anyone with self-respect.

There are also many cases in which general rules are more likely t o b e successful in achieving the professed objectives of governments than discretionary policies. Freely floating exchange rates, permanently fixed rates of a gold-standard type, rules about the Budget balance (which can be fairly subtle a n d allow for deficits in specified circumstances laid down in advance) are all examples of general rules. Discretionary monetary and fiscal policies, “dirty floating”, and “fixed but adjustable exchange rates” are all examples of the alternative approach. A s anyone familiar with these instances will confirm, the general rules cannot be engraved once-and-for-all on tablets of stone but require continuing interpretation, evolution, and improvement.

Hayek is right to emphasise that general rules are an important protection—perhaps the most important single protection for freedom. If those making a law do not know to whom it will apply and cannot adjust it for the benefit even of themselves or their friends, the laws are less likely to be oppressive. Hayek, however, often argues as if general laws are a sufficient condition for a free society; and this is mistaken. Many policies involving a high degree of coercion can be imposed by general rules—not only the Scottish Sabbath conceded by Hayek, but for instance a ban on foreign travel (to which the exceptions such as business and official travel could be stated quite impersonally). There is no one philosopher’s stone for minimising coercion in society. We should applaud Hayek’s resurrection of the ideal of “a government of laws rather than men ” without expecting that it will always be unambiguous or a sufficient guarantee against oppression.


9. The Myth ofJust Reward

THE MOST RADICAL of Hayek’s contributions is the denial that it is possible to assess a just reward for people’s services and pay them accordingly. This strikes at the most cherished illusion on the Right as well as on the Left. Not merely does Hayek deny that there are ethical or scientific principles for determining, say, a socially just “incomes policy.” He also denies that there is any moral merit attaching to the rewards people can obtain in the market-place. Many conservatives, including some who regard themselves as Hayekians, say that the market price for a person’s services reflects their marginal value to society and is, therefore, just.

But Hayek is right to insist that, although the first proposition may be true, the inference does not follow. It is expedient that “pay relativities” should reflect market valuations in order to steer resources towards where they are most needed. Moreover, to attempt to override market relativities in the name of “reward according to merit” presupposes that some outside authority can assess how much pain and effort a task has cost (which will, in any case, vary enormously between individuals in the same occupation), and whether people have made as much of their opportunities as they should, and “how much of their achievement is due to circumstances.” This is an impossible undertaking, and the attempt to undertake it involves hubris of a frightening extent.

Nor is the aim sensible. As Hayek writes, it is more rational for people “to achieve a minimum of pain and sacrifice and therefore a minimum of merit.” Perhaps the single most attractive feature of a reasonably free Market Economy is that a person’s livelihood does not depend on persuading a public official, or a trade union, or a workers’ cooperative of his merit. It is sufficient that he should be able to perform some service for which his fellow-men express a demand, irrespective of whether they like him or not. It is, incidentally, worth observing that “reward according to merit” is quite incompatible with egalitarianism, and is indeed a completely contrary idea.

BUT ALL THIS IS A FAR CRY from saying that the rich, the poor, and the in-between deserve their respective places in society, or would do so if hereditary wealth were eliminated and opportunities more evenly distributed. It is expedient to relate relative pay to market demand and supply; to attempt to substitute a different scale of relative importance would produce horrendous results for more reasons than can be given here. Nevertheless, actual rewards will depend on an unpredictable mixture of effort, ability, and luck. The ability to sing the Liebestod, having a nose for commercial opportunities, sporting an attractive appearance or personality are matters of luck not merit. Nor is it a demerit to have trained for an occupation for which the supply has increased (academic teaching) or the demand fallen off (such as steel workers).

This aspect of Hayek’s teaching is the most difficult for many of his conservative supporters to accept. Irving Kristol, for instance, complains in a 12 well-known critique that there are deep-seated yearnings for a moral or theological justification of differences in well-being or position; and that the rational arguments for accepting a system which does not even claim to bring a just distribution of rewards are too abstract to accept. This may be true psychologically. But Hayek is still abundantly justified in warning that a defence of the market system on the grounds that it offers just rewards is bound to fail.

A true Hayekian has no more sympathy than any member of the left-wing Tribune Group with the white-collar worker who dislikes being overtaken by blue-collar workers, or with professional men who complain that truck-drivers are now earning more than they are. (A reader of Adam Smith’s teachings on “equality of net advantages” among people of comparable abilities and opportunities would expect something like this to happen sooner or later.)

Hayek’s denial of the doctrine of just reward is especially attractive because it undermines so much “conventional wisdom.” It is the complete opposite of what most Conservative and Republican politicians and most middle-class voters wish to believe. These all feel much better if they can suppose that their relative affluence of former years and any advantages they still retain have been and are rewards for conspicuous merit.

BUT, CHARACTERISTICALLY, HAYEK SPOILS a splendid and heretical contribution to understanding by extending the denial of just occupational reward to the much more sweeping assertion that there is no such thing as “social justice.” The value, or otherwise, of distinguishing a special kind of justice from justice in general is not the issue. And it is a semantic problem whether people’s ethical views on the distribution of wealth and income should come under “justice” or under some other heading. The substantive point is that Hayek (in striking contrast to John Rawls) insists that any public policy towards the distribution of income and property (beyond the provision of a basic social-security minimum) is incompatible with a free society and the rule of law. (I have already mentioned his objection to progressive taxation.) In this he performs a disservice to market economists, who have tried for generations to convey to uncomprehending politicians that it is quite possible to change the distribution of wealth without interfering with market relativities. A combined progressive and negative income tax reduces absolute rewards at the top and increases them at the bottom, without attempting job or merit evaluation and without interfering with market rankings.

An ideal shape of an income or property distribution can be expressed in perfectly general mathematical terms without any mention of merit, occupation, or individuals. Its instruments can be taxes, positive and negative, or the law of property. (For instance, a Capital Transfer Tax could be levied progressively on the beneficiaries rather than on the donors). There could, in addition, be a continuing distribution of rights to dividend income which would dilute the share of existing owners, and even bring in new cohorts as a young generation comes of age. We might begin with a North Sea equity.

To be sure, no conclusion is likely to the debate on the optimal pattern of property rights and tax progression. But this does not mean that nothing sensible can be said. Even the most loyal Hayekian might hesitate to recommend inaction (beyond, say, a small social-security topping-up) if 0.01 per cent of citizens had 99.99 per cent of a country’s income and wealth. The fact that they do not do so (and most headline estimates of property concentration are wild exaggerations) is a fortunate fact of economic life. But the logic of Hayek’s position is that, if the facts were otherwise, some profound principle of human freedom would or should prevent legislation from interfering. T h e difference between reward according to merit (or spurious job evaluation) and generalised action to affect distributional patterns is a subtle one for the non-economist to grasp. It is a pity that Hayek’s deeply-felt dislike of both has helped to obscure the distinction.


10. The Interest-Group Threat

HAYEK’S MOST RECENT warnings are no longer about the overambitious centralised planning of The Road to Serfdom (closely paralleled, incidentally, by George Orwell’s 1984), but about the threat posed by the domination of rival interest-groups. This is leading, not to a single centralised tyranny, but to shifting pockets of anarchy and petty dictatorship, occurring simultaneously in different areas. The relative stability of expectations about the political and economic framework— which allows individuals to make long-term plans with some stability of expectations about the social rules—is under threat.

The main theme of the third and final volume of Law, Legislation and Liberty is that democracy has degenerated into an unprincipled auction to satisfy rival organised groups who can never in the long run be appeased, because their demands are mutually incompatible. His main contribution to the discussion of contemporary “stagflation”, i.e. the combination of high inflation and high unemployment, is through his analysis of interest-group politics. This is not to under rate his reopening of key issues in monetary theory glossed over by most monetarists, the obstacles to appropriate monetary policies for containing inflation and to labour market policies for containing unemployment lie in the political sphere.

Hayek goes along with the American-inspired economic theory of politics, which analyses the political market in terms of competitive bidding for the Citizen’s Vote, just as commercial businesses compete for the Citizen’s Pound or Dollar. But, unlike these theorists, he regards unprincipled vote competition a n d competitive lobbying as not merely defective—in the way that commercial markets can be only more so—but inherently objectionable because they have nothing to do with justice. He sees them as simply the sharing-out of spoils which people take from their fellow-citizens. The non-specialist who remembers that Volume 2 was devoted to undermining the idea of “social justice” may feel confused by the enormous emphasis on some other sort of justice in Volume 3; and I believe that this dichotomy is unhelpful and unnecessary.

But the matter is too important to be dismissed because of infelicities of presentation. It is surely an achievement for a writer, in his 80th year when the volume was published, t o have been able to shift so far from his earlier diagnosis and point to the real threats of the closing decades of the 20th century.

FOR ANYONE WITH EYES TO SEE, the unprincipled vote competition of modern elections is both immoral and ultimately a threat to democracy itself. A universal experience of journalists who have done any doorstep work at elections is hearing the cynical “What will they do for me?… I know them…. All promises and talk.” It is not the cynicism that is worrying, but the assumption behind it—that good, honest, uncorrupt govern- is concerned with giving things to people. It is not. It is concerned with laying down laws or deciding which services should be financed collectively from taxation rather than individually through the market. Both methods and provisions have to be paid for by the citizens themselves. Governments have nothing to give.

Many political theorists, including the American pluralists, have long taken it for granted that politics is and can only be about the accommodation of rival interest-groups, and that if a fair compromise is reached between them we have nothing to worry about. It has been natural for people brought u p o n this false common sense t o claim that what we need is to extend the process further into economic policy. They advocate institutions such as “a national pay forum” and expansion of the NEDC, in which employers meet trade unionists and government representatives, to a point where there can be real horse-trading.

It must be admitted that the harm done by interest-group accommodation has not been spelt out very fully by economists, whether in technical writings or in public explanations. It is, rather, a working assumption shared by most economists and a few “common interest” political theorists, but hardly anyone else. Hayek, for instance, refers readers to Mancur Olson’s Logic of Collective Action for an explanation. But it is mostly concer- ned with how interest-groups come into beingand are cemented together. The explanation of the damage done is concentrated in a long footnote.

Here too, I can give only a rough sketch of why horse-trading between groups is unlikely to produce a satisfactory economic result. Each party to the bargain is likely to be given some concession which is only mildly damaging to the rest of the community. One group may be granted a tariff on foreign imports; another a protection from the threat of new domestic entrants; a third a delay in the introduction of new methods or deliberate overmanning (called “work sharing”) to keep up employment. One group may receive an injection of public money to finance a wage increase unavailable in the market; another large section will receive rent controls and subsidies, thus leading to permanent housing shortage; a n d another large group “mortgage concessions” leading to overinvestment in dwellings. But the harm done by the sum total of these restrictive practices and special deals is very far from mild. Each of us suffers from the concession to the groups to which we do not belong. We would all be better off in the not-so-long term if we could achieve the only horse-trading worth doing, i.e. an agreement by every group to relinquish its special privileges on the understanding that other groups did the same.

IT SHOULD BE STRESSED that the appointment of spokesmen for wide-ranging groups such as Consumers or Home-owners makes matters worse rather than better. Such spokesmen are all too inclined to press for policies such as “price controls” or “mortgage-rate subsidies” which are in the end detrimental to the welfare of the community and thus to the people they claim to represent. The best way to promote the consumer interest is to encourage competition to serve it in the market- place, aided perhaps by generalised policies of a non-interest-group kind (such as subsidising consumer information services… or making sure that people are legally liable for adverse spillovers, such as dumping noxious substances in rivers).

Of course politics have always had a large element of “pork barrel” and “feeding trough” about them. This w as especially true in the USA where “pluralist” (i.e. interest-group) political theory and free-market economics developed, side by side, in splendid isolation. The “pork barrel” in fact does little harm when government activities and aspirations and popular expectations of their results are modest. The defects of politics viewed as an accommodation of interest-groups are thus not probed until it is too late.

The damage done by interest-groups to economic efficiency or growth is, however, the least of the harm. Far more important is that by insisting on real rewards above market-clearing levels for their members they price out of jobs people who may be forced to choose between inferior work (which does not pay them much above the dole) and the dole itself. As Hayek puts it:

The chief power of the trades unions rests today entirely on their being allowed to use power to prevent other workers from doing work they would wish to do.

But the phenomenon is broader than the coercive power of trade union monopolies in the labour market. Similar “pricing out ” results may be achieved by minimum-wage legislation or “employment protection” laws which destroy employment by raising real labour-costs; and by many other measures. Nor is this the end of the affair. For governments have tended to respond to the unemployment created by interest-groups by attempting to spend their way out of it, thus generating rapid and runaway inflation, which can neither be allowed to continue nor be checked without an unpleasant transitional recession. Other responses are attempts at employment creation by protection against imports, which can only transfer the shocks to other people’s economies. With most countries behaving in this way, the result is likely to be still more unemployment, thus aggravating the original problem.

BUT WORSE EVEN THAN the unemployment problem is the problem of stability. There is no “invisible hand” which harmonises, however imperfectly, the rivalry of groups on distribution from individual self-interest. The relative position of different interest-groups in both the political and commercial markets is not rooted in anything firm, and it is easily upset if a raid is organised to improve the relative position of one group. If such raids are frequent, the pattern of market-clearing wages is likely to change disconcertingly as groups jostle for position.

This both raises the minimum unemployment level—thus encouraging governments to protect and inflate—and is a direct cause of social tension and disaffection from democratic regimes.

Hayek sees the source of interest-group domination in what h e calls majoritarian or unlimited democracy. This is known more popularly as “the Mandate doctrine”—the belief that a government elected by a majority of voters (usually a plurality) should be able to enact what it likes without any check. These excessive pretensions can only destroy the real value of democracy as the best way we know of changing the government without force and making rulers accountable to their citizens.

“Majoritarian democracy” is not the only source of interest-group pressure. Such pressure is experienced in Communist Europe, although the interest-groups may be different. But the great expansion of the political sphere (and the crumbling of restraints and inhibitions on what governments may attempt) has increased both the pressures by organised interests on governments and the responsiveness of political leaders to these pressures. There is also the uncomfortable thought that the liberal as well as the majoritarian aspects of democracy may make it unable to deal with interest-group privileges. Most Western politicians and their advisers suppose that thoroughgoing measures to undermine labour-market monopolies would lead to violent resistance which could only be overcome, if at all, by an extreme use of state violence. In the words of Henry Simons, writing over 30 years ago:

Democracy cannot live with tight occupational monopolies; and it cannot destroy them, once they gain great power, without destroying itself.

WE FACE A REAL, not a bogus dilemma. There is a crucial connection between personal and political freedom, on the one hand, and economic freedom on the other, as The Road to Serfdom clearly established. In the three-and-a-half decades since it appeared there has not been a single example of a fully collectivist economy retaining basic freedoms. Yet the only societies which seem able to protect a market economy from erosion by interest-groups are certain Pacific Basin countries in which either political freedom or democracy, or both, are absent.

If, as I believe, this authoritarian cure is worse than the disease, what reforms are possible in liberal democracy itself? The dilemma is that we need authority to prevent people tearing each other to pieces a n d t o safeguard a t least some personal liberty. But how can we prevent this authority from becoming a source of oppression itself?


11. The Separation of Powers

HAYEK DOES NOT ANALYSE the question of how legislatures could tackle entrenched interest- group powers without undermining liberal principles in the methods used. It may be that the problem was exaggerated both by Simons in the early 1940s and by those who spoke about the “ungovernability” of Britain in the 1970s. One does not have to apologise for agnosticism on this issue.

The proposals of Hayek are related to the other problem: the protection of the legislative body from interest-group pressure. H e proposes two entirely different parliamentary bodies, elected in entirely different ways: one concerned with “the general rules of just conduct” or the Legislature in the true sense; and the other a Governmental Assembly concerned with supervising the managerial decisions of the elected rulers, who would be acting within the framework of basic law developed by the legislative assembly.

This is not as strange as it sounds. The distinction has roots in both political theory and practice; and it is very similar to the distinction which Michael Oakeshott makes between politics (which is discussion about the framework of law in which individuals should pursue their aims) and ruling (the activity of people who occupy certain offices). It is even more to be distinguished from the management of an enterprise association, such as a company or a church or club, which has agreed common purposes. What Oakeshott calls “civil association” has no purposes. It provides the rules under which individuals seek to fulfil their own aims.

Oakeshott is too fastidious to recommend anything. He is ostensibly just discussing what “civil association” really is, although his own convictions do slip out when he remarks that:

caring for the condition of a civil assocation… calls for so exact a focus of attention and so uncommon a self-restraint that one is not astonished to find this mode of human relationship to be as rare as it is excellent.

Hayek, unlike Oakeshott, tries to find some mechanical means for restoring the conditions of civil association, although he has no illusions that his ideas stand a chance until there has been a great change in the climate of opinion. His Governmental Assembly would be elected much as at present and would provide a majority for the government of the day. The other, Legislative, Assembly, in which his real interest clearly lies, would be elected in yearly cohorts and consist of people aged 45 to 60, sitting for fifteen years. Each elector would vote only once in his life for his legislative representative; and there are other ingenious proposals to protect electors and elected from interest-group pressures.

IT IS ALL TOO EASY to raise an eyebrow at the bizarre mechanics and at the way in which an upholder of the slow organic evolution of rules and practices has emerged as a wildly Benthamite constitutional engineer. But such sneers are as pointless as they are wrong. There are many other ways in which the Legislature might be chosen so that it contained, for instance, both younger and older people. The essential point is that there should be an element of continuity, and of protection from cruder interest-group appeals, in the selection of legislators who would put some limits on the activities of government and the Governmental Assembly. Moreover, the recognition of the need for deliberation and conscious choice in the rules we follow is an improvement on Hayek’s position in his more theoretical works, where he puts excessive stress on tradition and evolution.

The real grounds for misgiving are different. Hayek’s legislators bear some resemblance to the members of the US Supreme Court, with the difference that they would be openly making law instead of doing so by stealth. The Supreme Court is in many ways a third assembly, additional to Congress and the Senate. The combination of Presidential selection a n d long periods o f office provides just that combination of stability and responsiveness to prevailing open government for which Hayek is aiming. But Hayek could not claim that the Supreme Court has protected the USA from interest-group pressures.

More than that, it is far from certain that a legislative assembly whose members had a long tenure would in fact enact only the very general non-discretionary rules Hayek favours. They may be a little less nakedly open to highly specific interest-group pressures; but it is all too easy to see them establishing tribunals for the Regulation of Wages and Prices “on the merits of the case” and allocating subsidies or establishing tariffs in a similar spirit. Not only is it extremely unlikely that they would accept Hayek’s argument against progressive income tax; it is far from certain that they would even prevent arbitrary distortions of that progression through inflation. They might conceivably establish an independent central bank, with a clear-cut responsibility to limit the money supply to a non-inflationary amount. But this is hardly to be relied upon, as attitudes here are likely to vary with prevailing trends and fashions.

The biggest weakness of Hayek’s proposals for a Legislative Assembly is not the method of selection but the lack of even a vague picture of how it would operate in practice in relation to the Governmental Assembly. He is explicit that the Budget must be considered by the latter body. But the majority party in that assembly would not have unlimited freedom to make any budgetary provisions it liked, or the whole point of the arrangement would go. Would it set rates within a tax structure designed by the legislators? Where would the boundary be? Would there be any limits to tax progression, or for that matter any guarantees for social security beneficiaries? Here we are merely told that the principles of public finance would have to be rethought.

It is certainly worth trying to elaborate and improve the Hayekian idea for two assemblies—which might in Britain seem less “way out” if tied in with proposals to reform the House of Lords and for setting up a Constitutional Court. Whether in the end it will prove possible to separate law-making from government policy sufficiently to protect democracy from interest-groups, or whether some other route will turn out more feasible, 1 do not pretend to know. Hayek may be a shade too scathing about the case for lesser reforms (e.g. proportional representation); but it would be idle to pretend that they do more than scratch the surface.

WHAT DOES SEEM INCONTROVERTIBLE is that political auctioneering, interest-group pressure, and the combination of excessive expectations from collective action with excessive contempt for governmental and legal institutions are a threat not merely to some pure imaginary laissez-faire dream, but also to a functioning “mixed” or “corrected” market economy—and for that reason a threat to individual freedom and popular government. If we are ever to reconstruct our politics, some of the key Hayekian doctrines—such as preference for rules over discretionary authority; the non-divine right of a temporary majority; the connection between markets and freedom; the realisation that rewards in this world neither can nor should reflect merit; and that a healthy political system is not a horse-trough at which interest-groups drink—will have to come into their own.

Conservatives may pay lip-service to some of these ideas; and even follow a few of them partially and erratically. But it is progressives and radicals, now looking for new directions, who have most to learn from them—if only they could shed a few prejudices and illusions.

#weekendreading #moralphilosophy #politicaleconomy #neoliberalism

May 10, 2019: Weekly Forecasting Update: Little Change

Real final sales to domestic purchasers FRED St Louis Fed

Federal Reserve Bank of New York: Nowcasting Report: “The New York Fed Staff Nowcast stands at 2.2% for 2019:Q2. News from the JOLTS, CPI, PPI, and international trade releases left the nowcast for 2019:Q2 broadly unchanged…

Key Points:

The right response to almost all economic data releases is: Nothing has changed—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways.

What has changed in the past week is: The falling-apart of Trump’s trade negotiating strategy with China will harm Americans and may disrupt value chains, but the effects are unlikely to be clearly visible in the data flow.

It is still the case that U.S. potential economic growth continues to be around 2%/year, that inflation is unthreatening, and tha trhe donomy is closing in but not yet at full employment.

It is also the case that:

  • There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating.
  • There are still no signs of interest rate normalization: secular stagnation continues to reign.
  • There are still no signs the the U.S. is at “overfull employment” in any meaningful sense.
  • The Trump-McConnell-Ryan tax cut delivered a substantial short-Term demand-side fiscal stimulus to growth that has now ebbed.
    • (A 3.2%/year rate of growth of final sales to domestic purchasers over the seven quarters starting in January 2017, pushing the level of Gross National Income up by 2.1% from this demand-side stimulus.)
  • The Trump-McConnell-Ryan tax cut has been a complete failure at boosting the supply side through increased investment, and a complete success at making America more unequal.

  • A change from 3 months ago: The Federal Reserve’s abandonment of its focus on policies that are likely to keep PCE chain inflation at 2%/year or lower does not mean that it is preparing to do anything to avoid or moderate the next recession.
  • A change from 1 month ago: The U.S. grew at 3.2%/year in the first quarter of 2019—1.6%-points higher than had been nowcast—but the growth number you want to put in your head in assessing the strength of the economy is the 1.6%/year number that had been nowcast.
  • A change from 1 week ago: The falling-apart of Trump’s trade negotiating strategy with China will harm Americans and may disrupt value chains, but the effects are unlikely to be clearly visible in the data flow.

#macro #forecasting 

It Was Political Decisions, Not Trade or even Technology, That Done It…

Economics Identity and the Democratic Recession YouTube

Note to Self: From Council on Foreign Relations: The Future of Democracy Symposium: Session Two: Economics, Identity, and the Democratic Recession: Over 2001—2008 the furniture workers who had lost their jobs because of NAFTA and the China shock were getting new and better jobs in construction, building up Raleigh and Durham. Few unhappy about the economic transformation of the Carolinas until late 2008. Then, all of a sudden, it turned out that a great many securities rated AAA by Moody’s and Standard & Poor’s in fact had no business being sold to anyone at any price at all; the Democrats did not prioritize a return to full employment; and the Republicans prioritized a non-return to full employment in the hope of weakening a Democratic president. Economic anxiety producing racial cleavage, yes. But it was political decisions, not trade or even technology that done it.

#notetoself #politicaleconomy #orangehariedbaboons #globalization #technology #fascism 

Fairly Recently: Must- and Should-Reads, and Writings… (May 6, 2019)


  1. Fasces

  2. George Orwell* (1937): The Road to Wigan Pier

  3. This Time It Is Not Different: Walter Bagehot and the Persistent Concerns of Financial Macroeconomics: Origins of Central Banking: E.M. Forster’s Great Aunt Marianne

  4. Peter Temin (1990): _Soviet and Nazi Economic Planning in the 1930s

  5. Hans-Peter Ullmann: Organization of War Economies

  6. EMB Numbers: Why are Red and Purple “Next to Each Other”?: “I make colored paint by starting with white and adding varying amounts of pigments from my three buckets, CMY. To see ‘purple’ I add pigment only from the magenta bucket…. I add cyan to magenta to get blue. I add yellow to magenta to get red. Therefore, it makes sense for red and blue to be adjacent on opposite sides of magenta…

  7. Adolf Hitler (1941): Top 10 Quotes from World War II: “You only have to kick in the door and the whole rotten structure will come crashing down…

  8. Online Etymology Dictionary: Nazi

  9. John Maynard Keynes (1936): The General Theory of Employment, Interest and Money: Concluding Notes on the Social Philosophy Towards Which the General Theory Might Lead: “If effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards. Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough…

  10. John Maynard Keynes (1936): The General Theory of Employment, Interest and Money: Concluding Notes on the Social Philosophy Towards Which the General Theory Might Lead: “Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative…

  11. John Maynard Keynes (1936): The General Theory of Employment, Interest and Money: Concluding Notes on the Social Philosophy Towards Which the General Theory Might Lead: “The result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires… There will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good…. These advantages are… partly advantages of efficiency… decentralisation and of the play of self-interest…. Above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future…

  12. Jacob Viner (1937): Mr. Keynes on the Causes of Unemployment: “In a world organizedin accordance with Keynes’ specifications there would be a constant race between the printing press and the business agents of the trade unions, with the problem of unemployment largely solved if the printing press could maintain a constant lead and if only volume of employment, irrespective of quality, is considered important…

  13. J.R. Vernon: Unemployment Rates in Postbellum America: 1869-1899

  14. Julia Carrie Wong: ‘I See Any Dinosaur, I Buy It’: At Home with the Embattled Owner of the Flintstone House: “Florence Fang’s colorful home is a landmark for many in California’s Bay Area. But the town of Hillsborough is suing her, declaring the property a ‘public nuisance’…

  1. From Carole Cadwalladr as she uses TED to try to hold Silicon Valley to account—to get the social media companies to thin of themselves as information utilities rather than misinformation utilities: Carole Cadwalladr: My TED Talk: How I Took on the Tech Titans in Their Lair: “The world needs all kinds of brains. But in the situation we are in… not these…. If they’re not sick to their stomach about what has happened in Myanmar or overwhelmed by guilt about how their platforms were used by Russian intelligence to subvert their own country’s democracy, or sickened by their own role in what happened in New Zealand, they’re not fit to hold these jobs…. I don’t think they set out to enable massacres to be live-streamed. Or massive electoral fraud in a once-in-a-lifetime, knife-edge vote. But they did. If they don’t feel guilt, shame and remorse, if they don’t have a burning desire to make amends, their boards, shareholders, investors, employees and family members need to get them out. We can see the iceberg. We know it’s coming. That’s the lesson of TED 2019. We all know it. There are only five people in the room who apparently don’t…

  2. Yes, it is time for the center-left to pass the baton to those further left for the next lap in the race for equitable growth. But what does that mean, concretely, for policies. Paul Krugman gives his opinion: Paul Krugman: “A few thoughts inspired by @delong’s ‘I am no longer a neoliberal’ piece. Brad is really saying two things: [1] there is no center-right, so centrists must deal with the left; and [2] market-oriented policies don’t work as well as thought. I’ve been there on both fronts for a while (although I have been fairly left of center for many years). But I think it’s useful to ask what it means for policy proposals in different areas…

  3. Go watch Michael Kades testify on Capitol Hill on Thursday March 7: Michael Kades: To Combat Rising U.S. Prescription Drug Prices, Let’s Try Competition: “Look at the variety of problems with anti-competitive practices engaged in by U.S. pharmaceutical companies. Take ViroPharma Inc. When faced with the possibility that the U.S. Food and Drug Administration would approve generic versions of its Vancocin product (a drug to treat a potentially life-threatening gastrointestinal infection), the company filed 43 petitions to delay or prevent generic approval. Although none were successful on the merits, it took years before the FDA approved any generic competitors. The Federal Trade Commission alleged the strategy increased costs by hundreds of millions of dollars…

  4. How did I miss this before? Kate Bahn about how it really is the case that holders of H-1 and H-2 visas really are close to indentured servants—and suffer for it: Kate Bahn: The Search for and Hiring of Guest Workers in the United States Displays the Complexity of Market Concentration and Monopsony Power: “Eric M. Gibbons… Allie Greenman… Peter Norlander… and Todd Sorensen… monopsonistic effects for workers who are employed under guest worker visas such as H-1 and H-2… review lawsuits against employers of guest workers and confirm widely held beliefs about wage theft and abusive employment… The four researchers exploit the application process to the U.S. Department of Labor for guest worker visas to estimate employer concentration for guest workers and how this affects wages…. Guest workers are in a more concentrated set of occupations than the overall U.S. labor market, with more than a third of them working in computer and mathematical occupations on H-1B visas and nearly half working in building, grounds cleaning, and maintenance on H-2B visas… Herfindahl-Hirschman Index…is sufficiently high to warrant U.S. Department of Justice scrutiny of mergers in these sectors of the U.S. economy…

  5. The Story of China’s Economy as Told Through the World’s Biggest Building: Economist: The Story of China’s Economy as Told Through the World’s Biggest Building: The Global Centre: “The world’s biggest building got off to a bad start. On the eve of its opening, Deng Hong, the man who built the mall-and-office complex, disappeared… swept up in a corruption investigation just before the building’s doors opened in 2013. The media focus shifted to his hubris and his wasteful, pharaonic venture. Inside, it had a massive waterpark with an artificial beach, an ice rink, a 15-screen cinema, a 1,000-room hotel, offices galore, two supersized malls and its own fire brigade, but just a smattering of businesses and shoppers. It became a parable for the economy’s excesses and over-reliance on debt. Today, more than five years on, the story has taken a series of surprising turns. For one, the building is not a disaster. During the summer, the waterpark is crowded. The mall has come to life, a testament to the rise of the middle class. The offices are a cauldron of activity: 30,000 people work there in every industry imaginable, from app design to veterinary care. Mr Deng has been released and is back in business, declaring last summer that he had a clean slate…

  6. Equitable Growth alumnus Nick Bunker sends us to the always-valuable Brookings Hamilton Project on how the post-2000 prime-age female labor-force participation define was not due to anything other than a weak economy in which it was hard to get well-paying jobs: Trends in Women’s Labor Force Participation: “much like 2000 is now recognized as a pivotal year for the U.S. labor market, 2015 is beginning to look like another turning point. In part due to the ongoing strengthening of the labor market, both prime-age women’s labor force participation and prime-age men’s participation have increased sharply from 2015 through the beginning of 2019. Figure 1 shows that prime-age women now participate at higher levels than prior to the Great Recession and have now made up 70 percent of their January 2000–September 2015 decline…

  7. I confess I do not understand why Jeff Miron and Dean Baker disagree with our Fearless Leader Heather Boushey’s tame observation that more information relevant to societal well-being is better than less: Emily Stewart: GDP: Democrats Want to Know Who’s Benefiting from the Economy’s Growth: “Democrats are pushing for is for the BEA to produce a new metric, the ‘income growth indicator’, to be reported quarterly and annually with GDP numbers starting in 2020 that would show who is and isn’t benefiting from economic growth…

  8. Jonathan Bernstein: 2020 Elections: Far Left Won’t Take Over the Democratic Party: “Questions of Democratic pragmatism have a relevant history, too, going back to efforts to reform the party’s image after it lost five of six presidential elections through 1988. The Democratic Leadership Council of that era was split, I always thought, between those such as Arizona Governor Bruce Babbitt who favored traditional liberal goals but believed market-oriented means were the best way to achieve them, and those such as Georgia Senator Sam Nunn who believed the Democratic Party had become too liberal and who wanted to preserve a large place in the party for conservatives…

  9. Has David Brooks ever before put himself on the line in support of any policy that would make African-Americans’ lives better? Asking for a friend: David Brooks: The Case for Reparations: “All sorts of practical objections leapt to mind. What about the recent African immigrants? What about the poor whites who have nothing of what you would call privilege? Do we pay Oprah and LeBron? But I have had so many experiences over the past year—sitting, for example, with an elderly black woman in South Carolina shaking in rage because the kids in her neighborhood face greater challenges than she did growing up in 1953—that suggest we are at another moment of make-or-break racial reckoning…

  10. Leo Strauss (1933): To Karl Lowith: “I will also spend my second year in Paris…. I have major ‘competition’: the entire German-Jewish intellectual proletariat is assembled here. It’s terrible-I’d rather just run back to Germany. But here’s the catch…. I see no acceptable possibility of living under the swastika, i.e., under a symbol that says nothing more to me than: you and your ilk, you are physei subhumans and therefore justly pariahs. There is in this case just one solution. We must repeat: we, “men of science,”-as our predecessors in the Arab Middle Ages called themselves-non habemus locum manentem, sed quaerimus.… And, what concerns this matter: the fact that the new right-wing Germany does not tolerate us says nothing against the principles of the right. To the contrary: only from the principles of the right, that is from fascist, authoritarian and imperial principles, is it possible with seemliness, that is, without resort to the ludicrous and despicable appeal to the droits imprescriptibles de l’homme to protest against the shabby abomination…

  11. What is the status of this Adolf Hitler quote? It is reported by Hermann Rauschning, whom as I recall is not the most reliable of sources: Adolf Hitler: We Socialize Human Beings: “”The people about us are unaware of what is really happening to them. They gaze fascinated at one or two familiar superficialities, such as possessions and income and rank and other outworn conceptions. As long as these are kept intact, they are quite satisfied. But in the meantime they have entered a new relation; a powerful social force has caught them up. They themselves are changed. What are ownership and income to that? Why need we trouble to socialize banks and factories? We socialize human beings…

  12. Jeet Heer: The historian John Lukacs (1924-2019), whose death at age 95 has just been announced…. In 1975… predicting that a post-Soviet Russia would be dominated by a criminal underworld…. Lukacs was born in Hungary in 1924…. Lukacs was a conservative… of a type that is virtually extinct…. a traditionalist wary of mass politics based on nationalism and scapegoating of minorities. He was for that reason properly scornful of American conservative movement. Lukacs’ scorn for right-wing populism surfaced in the early 1950s. As a refugee from Hungary he was anti-communist, but still quick to detect and denounce the dangers of demagogues like Joseph McCarthy, who he feared would destablize society and incite war…. Lukacs’s anti-populist conservatism… proved prophetic…. He long feared that populist-nationalist-authoritarian demagoguery was the wave of the future…. He once dismissed movement conservatives’ worldview as… ‘narrow enough to be ignorant, broad enough to be flat’…. Aside from his valuable critiques of nationalist populism, Lukacs was an eloquent defender of historical consciousness as a distinct & valuable form of thinking, with his own work exemplifying how being steeped in history can help illuminate the present and future…

  1. Wikipedia: Ogden L. Mills

  2. Google Maps: Hotel Cristal Mar Resort & Club

  3. Historical Nonfarm Unemployment Statistics

  4. Margaret Thatcher (1982): Letter to Friedrich Hayek: “Some of the measures adopted in Chile are quite unacceptable…. I am certain we shall achieve our reforms in our own way and in our own time…

  5. Dictatorships and Double Standards: Jeet Heer Has a Ludwig Von Mises Quote…: “Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history…

  6. Wikipedia: Hermann Rauschning

  7. Wikipedia: Thule Society

  8. Spartacus Educational: Anton Drexler

  9. Wikipedia: Karl Mayr

  10. Historical Nonfarm Unemployment Statistics

  11. Markus K. Brunnermeier: ECO529: Financial and Monetary Economics

  12. Chris Lu: “On the one-year anniversary of #BeBest, former staffer to Melania Trump announces that she’s ‘been cooperating since last fall with federal prosecutors in Manhattan investigating the [inaugural] committee’s spending and fund-raising’…

  13. Paul Krugman: “This chart… GOP-enforced austerity had a huge impact in retarding the recovery. If they’d been willing to tolerate the kind of deficits they’re happy with now, the Obama years would have looked much better…

#noted #weblogs 

Historical Nonfarm Unemployment Statistics

An updated graph that Claudia Goldin had me make two and a half decades ago. The nonfarm unemployment rate since 1890. Then it was 1890-1990, now it is 1869-2015.

2016 04 05 Historical Nonfarm Unemployment Estimates numbers

Thanks to:

with spreadsheet at:

The assumption behind focusing on this chart—which is very debateable—is that “unemployment” is not a farm thing: that in the rural south or in the midwest or on the prairie you can always find a place of some sort as a hired hand, and that “unemployment” is a town- and city-based nonfarm phenomenon.

I confess I do not understand how anyone can look at this series and think that calculating stable and unchanging autocorrelations and innovation variances is a reasonable first-cut thing to do.

#economichistory #unemployment #macro #labormarket 

The Great Depression: An Intake from “Slouching Towards Utopia?: An Economic History of the Long Twentieth Century 1870-2016”

This is the current draft of chapter 10 of Slouching Towards Utopia?. I am, again, of several minds with respect to it. I think it says what really needs to be said. I am not sure it says it in the right length. And I am not sure that I have successfully assembled the puzzle pieces in the right way…

So tell me what you think of it:

The road to Wigan Pier 75 years on Books The Guardian

X. The Great Depression

George Orwell (1937): The Road to Wigan Pier:

Presently the train hove in sight. With a wild yell a hundred men dashed down the slope to catch her as she rounded the bend. Even at the bend the train was making twenty miles an hour. The men hurled themselves upon it, caught hold of the rings at the rear of the trucks and hoisted themselves up by way of the bumpers, five or ten of them on each truck. The driver took no notice. He drove up to the top of the slag-heap, uncoupled the trucks, and ran the engine back to the pit, presently returning with a fresh string of trucks. There was the same wild rush of ragged figures as before. In the end only about fifty men had failed to get on to either train.

We walked up to the top of the slag-heap. The men were shovelling the dirt out of the trucks, while down below their wives and children were kneeling, swiftly scrabbling with their hands in the damp dirt and picking out lumps of coal the size of an egg or smaller. You would see a woman pounce on a tiny fragment of stuff, wipe it on her apron, scrutinize it to make sure it was coal, and pop it jealously into her sack.


10.1: Understanding the Business Cycle

10.1.1: Say’s Law

When market economies emerged, there was great worry that things would not necessarily fit together: Might not the farmers be unable to sell the crops they grew to the artisans because the artisans could not sell the products they made to the merchants who would be unable to make money carrying artisans products to the farmers because the farmers would not purchase anything? Back at the beginning of economics it was Jean-Baptiste Say who wrote that such an idea of a “general glut”—of economy-wide “overproduction” and consequent mass unemployment—was incoherent. Nobody, Say argued, would ever produce anything for sale unless they expected to use the money they earned in order to buy something else. Thus, “by a metaphysical necessity”, as subsequent-generation economist John Stuart Mill outlined Say’s argument in 1829, there can be no imbalance between the aggregate value of planned production-for-sale, the aggregate value of planned sales, and the aggregate value of planned purchases. This is “Say’s Law”.

Producers could certainly guess wrong about what consumers wanted—an economy could easily have an excess of washing machines and a shortage of yoga classes, if producers had mistaken what consumers wanted and so assembled white goods rather than learning how to do the Downward-Facing Dog. Excess demand for and high profits in making commodities in short supply and excess supply of and losses in making commodities in surplus was not a bug but a feature: the market gave incentives to quickly shift resources to erase such imbalances. But an excess supply of well-nigh everything? That, Say said, was impossible. But what if you wanted to buy before you had sold—if the artisan wanted to buy food before the merchant had come around to buy the textiles? That, said Say, was what banks and trade credit were for: “merchants know well enough how to find substitutes for the product serving as the medium of exchange”.


10.1.2: The Panic of 1825

Karl Marx dismissed this as the “childish babbling of a Say”. One did not just sell in order to buy: one might be forced to sell in order to pay off an old debt if credit that had been extended by some bank was withdrawn. In that case, the demand for goods was in the past, and could not in the present balance out your supply. If everyone was trying to sell in order to pay off old debts, there would indeed be a “general glut”. And if those who were calling in loans saw businesses collapsing into bankruptcy around them, they would be unlikely to be wiling to provide “substitutes for the product serving as the medium of exchange”.

As John Stuart Mill put it:

Those who have… affirmed… [the possibility of] an excess of all commodities, never pretended that money was one…. Persons in general, at that particular time… liked better to possess money than any other commodity. Money, consequently, was in request, and all other commodities were in comparative disrepute…. There would seem… no particular impropriety in saying that there is a superabundance of all or most commodities, when all or most of them are in this same predicament.

And if all or nearly all goods and services save money are at one moment in excess supply, factories will be shut and workers will be jobless—and the fact that shareholders then have no dividends, lenders have no interest payments, and workers have no wages will further widen the gap between the aggregate-supply productive potential of the economy and the current level of aggregate demand.

Say came to recognize that Marx and Mill were correct.

After the British Canal Panic of 1825, Say changed his mind. Led by the Bank of England, the banks and merchants of England decided in late 1825 that they had made too many loans to too many counterparties whose investments were not turning out well. Therefore they ceased to be willing to discount as many bills—to advance cash in return for being given title to promises to pay that merchants had received from customers. Thus, Say wrote: “commerce found itself deprived at a stroke of the advances on which it had counted, be it to create new businesses, or to give a lease of life to the old.” And the consequence, Say wrote, was financial and economic collapse: a true “general glut”: “Businessmen… finding no more advances from the bankers… use[d] up all the resources at his disposal. They sold goods for half what they had cost… a multitude of workers were without work… bankruptcies… among merchants and among bankers… individuals… bankrupt…”

What of Say’s 1803 declaration that when there is a shortage of money in an economy, merchants “know well enough how to find substitutes for the product serving as the medium of exchange”? Money and credit are, in the last analysis, liquid trust. And if there is not trust that your counterparty is solvent, the money and credit will not be there.


10.1.3: Central Banking and Other Expedients

There is one organization that always—or almost always—is trusted to be good for the money. The government accepts the money that it itself issues as payment for taxes, and so everybody who owes taxes will be willing to sell what they have in return for the money the government has printed up. Whenever the economy freezes up due to a shortage of demand and of income, the government can fix it—as long as its own finances are trusted over the long term—by boosting the amount of government-issued cash in the hands of the public. People who then needed to buy but could not afford to buy because they would not sell will be able to buy. Their purchases then become extra income for others. Those others will then be able to scale up their purchases. And so the economy will unwedge itself.

What if the government’s finances are not trusted over the long term? Then the government itself may need a financial rescue: that is what we have an International Monetary Fund to do. As long as there is one entity somewhere in the world that is trusted to be good for the money, that entity can issue the cash and provide the credit needed for the economy to bootstrap itself out of a “general glut” and back to a normal circular flow of economic activity: production, sales, and then purchases.

There are a number of ways the government can get extra purchasing power into the hands of the public to cure a depression:

  1. It can have its functionaries throw bundles of cash out of helicopters—an arresting image coined originally by Milton Friedman, a reference to which earned former U.S. Federal Reserve Chair Ben Bernanke his nickname of “Helicopter Ben”.
  2. The government can hire people, set them to work, and pay them.
  3. The government can simply buy useful stuff.
  4. The government can have an arm—a central bank—that trades financial assets for cash.

This last is the dominant expedient. A central bank buys financial assets for cash when it believes that the flow of purchasing power through the economy is too slow for a proper level of employment and economic activity and is risking depression, and that sells financial assets and so pulls cash out of the economy when it believes that the flow of purchasing power through the economy is too rapid for a proper level of employment and economic activity and is risking unwantedly-high inflation.

In making its judgments, central banks are always guided by what the levels of interest rates are in the economy: Are interest rates above the current guess of the “neutral” rate—the rate that would prevail if issues of trust and potential bankruptcy other were not disturbing incentives and willingness to lead and invest? Then the economy needs more cash or there will be pointless high unemployment, and the central bank should provide the cash. Are interest rates below the current guess of the “neutral” rate? Then some people and institutions in the economy have purchasing power that is not backed by realistic expectations of the value of their undertakings, and unless the cash is pulled out there will be either inflation—as the unexpectedly-low quantity of goods that are produced are sold for the higher money values that had been anticipated—or bankruptcies, or both.

In response to the Canal Crisis of 1825, the Bank of England took major steps to boost the cash holdings—and thus the spending—of the banks, businesses, and individuals of England, trying to relieve the “general glut”. As Jeremiah Harman, then one of the Directors of the Bank of England, wrote: “We lent [cash] by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power…”

There was a depression: 16% less cotton was spun into yarn in England in 1826 than had been in 1825. But the depression was short: 1827 saw 30% more cotton spun into yarn than 1826 had. There is good reason to fear that the downturn would have been considerably worse had the Bank of England behaved like the U.S. Treasury and Federal Reserve were going to behave in the early 1930s, and washed their hands of the situation.


10.2: Managing the Business Cycle Before 1929

10.2.1: The Bank of England Robert Peel and the 1844 Recharter: The actions that the Bank of England had undertaken in its own in 1825 had been at the behest of the British government. In the runup to the crisis, the Chancellor of the Exchequer—the Finance Minister—had warned banks that in his opinion they were extending loans to shaky and overspeculative enterprises, and they should not expect to be bailed out by the Treasury: they should not think that they could play the game of “heads we profit, tails the government bails us out”. But, of course, when the commercial crisis came and the prospect of many bankruptcies, large scale unemployment, and riots against the government on the streets of London threatened, the Chancellor gave his blessing to the Bank of England’s stepping in to do what the Chancellor had promised and threatened that the Exchequer had not.

In 1844 the time came around to reexamine and recharter the Bank of England. The British Parliament took a look at the system of central-bank support for the economy in a financial crisis that the Bank of England’s intervention in 1825 had created a precedent for. In the end, the conclusion of the debate led by Prime Minister Robert Peel and the subsequent 1844 Bank of England Recharter was twofold:

  1. The Bank of England should definitely not be authorized by Parliament to print unlimited amounts of money to support the banking system in a financial crisis—in fact, it should be illegal for the Bank of England to print extra banknotes in a crisis. Bankers should be on notice that they should not expect a bailout—for that would create too great a risk of substantial losses from “moral hazard”, as the game of heads-we-profit-tails-the-government-bails-us-out was just too tempting to expect bankers to resist.

  2. In the event of a real financial emergency, the government could and would request that the Bank of England print as many banknotes as needed to fix the financial crisis.

The reason for (1) was very clear to the Parliamentary debaters back in 1844. Any confident expectation on the part of the financial community that the Bank of England did stand behind them and would intervene to prevent large-scale bankruptcy in a financial crisis would greatly amplify the chances of such a crisis by removing fear and caution. Bankers confident that in the last analysis they were gambling with the public’s money would do what bankers tend to do in such situations: the only question, as financier Bill Janeway of Warburg Pincus likes to say, is against which wall bankers will do it. Hence, Robert Peel and his majority in the Parliament thought, it was very important to establish the principle that the Bank of England could not be relied upon to bail out the banking system. And, Peel thought, the best way to establish that principle would be to make it illegal for The Bank of England to do so. “Moral Hazard” and the “Lender of Last Resort”: But the mere fact that the Act had made what Charlie Kindleberger calls lender-of-last-resort operations in a financial crisis illegal did not mean that they should not or would not be undertaken. As Peel wrote: “We have taken all the Precautions which legislation can prudently take up against the Recurrence of a pecuniary Crisis. It may occur… and if it be necessary to assume a grave responsibility for the purpose of meeting it, I dare say men will be found willing to assume such a responsibility. I would rather trust to this than impair… those measures by which one hopes to control evil tendencies in their beginning.”

As Kindleberger puts it: “if the market is sure that a lender of last resort exists, its self-reliance is weakened”, and hence it is needed more often, and the real resources thrown down the toilet in the course of what are speculations on a future bailout are increased. This led Kindleberger to the conclusion that: “The lender of last resort… should exist… but his presence should be doubted…. This is a neat trick: always come to the rescue in order to prevent needless deflation, but always leave it uncertain whether rescue will arrive in time or at all, so as to instill caution in other speculators, banks, cities, or countries…. some sleight of hand, some trick with mirrors… [because market] fundamentalism has such unhappy consequences for the economic system.” Suspension Letters: Peel’s expectations of how the British government would act in what was his future if what he called a “grave responsibility” came to rest on the Governor and Court of the Bank of England were correct. Men at the Bank of England were found willing to act ultra vires—beyond their [legitimate] strength—under the principle that in the end—salus populi suprema lex—the well-being of the people is the highest law. But they would not print cash and so expand their balance sheet beyond its legal limit purely on their own initiative. They required a blessing from the government of the day.

The blessing took the form of a “suspension letter” written by the Chancellor of the Exchequer. First in 1847 and then in 1857 and then in 1866, the Chancellor would write a letter to the Governor of the Bank of England stating that he was suspending for the duration of the financial crisis those provisions of the 1844 Bank Recharter Act of 1844 that restricted the Bank of England’s ability to expand its balance sheet. Nothing in the black-letter law or in previous custom gave the Chancellor any such power to at his will suspend provisions of a corporation charter and grant the corporation extra privileges and powers above those Parliament had granted it. Successive Chancellors did so anyway.


10.2.2: Karl Marx’s View

Karl Marx loathed Robert Peel: “Peel himself has been apotheosized in the most exaggerated fashion… his speeches… consist of a massive accumulation of commonplaces, skillfully interspersed with a large amount of statistical data”. He loathed him not least for the Bank Recharter: “Sir Robert Peel’s much vaunted Bank law… adds in difficult times a monetary panic created by law to the monetary panic resulting from the commercial crisis; and… must be suspended by Government interference.” And how he did rage! He asked, how it could dare be that:

the Committee has contrived to simultaneously vindicate the perpetuity of the law and the periodical recurrence of its infraction? Laws have usually been designed to circumscribe the discretionary power of Government. Here, on the contrary, the law seems only continued in order to continue to the Executive the discretionary power of overruling it. The Government letter, authorizing the Bank of England to meet the demands for discount and advances upon approved securities beyond the limits of the circulation prescribed by the Act of 1844, was issued on Nov. 12.

Marx did not understand that the suspension was the point—that what was needed for the avoidance of deep depressions was Kindleberger’s “neat trick… sleight of hand… trick with mirrors” that made it possible for the “lender of last resort… [to] exist… but [for] his presence [ex ante] to be doubted”: “come to the rescue [always] in order to prevent needless deflation, but always leave it uncertain whether rescue will arrive in time or at all, so as to instill caution.”


10.2.3: The Magnitude of the Cycle Pre-Great Depression A Chronic Malady Never Completely Cured: Monetary management was not the only way that governments managed the business cycle. Many governments undertook, and many economists including libertarian stalwart Frederic Bastiat approved direct employment of the unemployed on public-works programs, which “as a temporary measure in a time of crisis… [has] good effects… as insurance…. [It] takes labor and wages from ordinary times and doles them out… in difficult times.” That governments could always print money and purchase stuff to put lots more people to work was sufficiently demonstrated by observing that unemployment was never high in a serious war.

The business cycle in industrial economies was never cured. Ever since 1825, at least, industrial market economies have been subject to the recurrence of this particular kind of macroeconomic epileptic seizure. Central banks could and did dampen, but not eliminate the cycles.

It may be that you can see this difference looking across the Atlantic Ocean from Britain to the United States. Britain had a central bank: the Bank of England. Until 1913, when the Federal Reserve was established, the United States did not. Indeed, the sharp depression of 1907 was the trigger for the creation of the Federal Reserve.

Before World War II, the typical economic recession in Britain would last for a year or two, and see a perhaps three to six percent decline in national income and a perhaps five to ten percent decline in industrial production—until the severe downturn of 1918-1921 which carried national income per capita down by 21%. British national income per capita did not recovery to its 1914 level until 1929, and then it immediately dropped again, recovering for good only in 1934.

The United States had no central bank to lean against the wind and try to smooth out monetary conditions. At best, it has a few emergency expedients by a U.S. Treasury shipping gold out of its vaults to provide an emergency boost to the money stock, and occasional pick-up committees of the wealthiest and soundest major New York bankers taking coordinated collective action to try to do for New York finance what the Bank of England had done for London finance in 1825. That is quite possibly why, while a typical economic recession in the United States would also last for a year or two, it would see a larger of perhaps five to ten percent decline in national income and a perhaps eight to fifteen percent decline in industrial production—until the catastrophic Great Depression of 1929-1933, which carried American national income per capita down by 29%. Why Wasn’t the Cycle Better Managed?: Ideology: Why was monetary and other tools of macroeconomic management not able to flatten out but only to damp business cycles? A first reason was the dominance in the public sphere of the economic doctrine of laissez faire: that the government should establish private property rights, markets, courts to enforce contracts, and otherwise let the market economy run itself—that that would be the best: “to the philosophical doctrine that the government has no right to interfere, and the divine that it has no need to interfere, there is added a scientific proof that its interference is inexpedient”. This was always much more what journalists and politicians said professional economists taught than what professional economists actually taught.

Ideology was reinforced by experience. As Keynes noted:

The corruption and incompetence of eighteenth-century government…. Almost everything which the State did in the eighteenth century in excess of its minimum functions was, or seemed, injurious or unsuccessful. [And] on the other hand, material progress between 1750 and 1850 came from individual initiative.

Why should the business cycle be any different?

The market giveth, the market taketh away: blessed be the name of the market. That central banks and relief agencies had the role they did was due to much uphill rolling of the boulder against a strong intellectual and ideological gradient. Why Wasn’t the Cycle Better Managed?: Instability: A second reason is that demand for cash was and is very unstable. People talk to each other, and communicate their hopes and fears. Investors’, managers’, entrepreneurs’, and financiers’ tolerance for bearing risk, expectations of future profits, and knowledge of opportunities shifted substantially and randomly in waves. With these shifts came rises and falls in how much of their wealth they wish to hold in cash. The central bank’s task was to match the economy-wide supply of money to this fluctuating economy-wide demand. When it succeeded, aggregate demand is matched to the potential to produce aggregate supply: Say’s Law—that the potential to supply creates its own demand—was then true in practice, even though it remained false in theory.

When they failed on one side, and there was an excess demand for money, the flip side of that excess demand for money was an excess supply of pretty much all goods and services: a “general glut”, a depression. When they failed on the other side, there was unexpected inflation. And so the capitalist market economy lurched forward, subject to this chronic and horrible but not catastrophically debilitating malady—until 1929, and the coming of the Great Depression.


10.3: The Slide into the Great Depression

10.3.1: 1929-1933 The Initial Trigger: It is straightforward to narrate the slide of the world into the Great Depression. The 1920s saw a stock market boom in the U.S. as the result of general optimism: businessmen and economists believed that the newly-born Federal Reserve would stabilize the economy, and that the pace of technological progress guaranteed rapidly rising living standards and expanding markets. The U.S. Federal Reserve feared continued stock speculation would produce a huge number of overleveraged financial institutions that would go bankrupt at the slightest touch of an asset price drop. Such a wave of bankruptcies would then produce an enormous increase in fear, a huge flight to cash, and the excess demand for cash that is the flip side of a “general glut”.

The U.S. Federal Reserve decided that it needed to curb the stock market bubble to prevent the growth of such speculative overleverage that would provide a trigger for a depression. And it overdid it. The Federal Reserve’s attempts in 1928 and 1929 to raise interest rates to discourage stock speculation shrunk the money stock, created the first excess demand for cash, and so brought on an initial downturn in demand.

Caught by surprise with production in excess of demand, firms cut back their own plans for further purchase of producer-durable goods; firms making producer durables cut back production; out-of-work consumers and those who feared they might soon be out of work cut back purchases of consumer durables; and firms making consumer durables faced falling demand as well. The Federal Reserve’s attempt to head off a depression in the future had brought one on in the present. Vicious Cycles: Falls in prices—deflation—during the Depression set in motion bankruptcies which set in motion further contractions in production, which triggered additional falls in prices. With prices falling at ten percent per year, investors could calculate that they would earn less profit investing now than delaying investment until next year when their dollars would stretch ten percent further: excess demand for cash went up even more, and excess supply of goods and services. Banking panics and the collapse of the world monetary system cast doubt on everyone’s credit, and reinforced the belief that now was a time to watch and wait. The slide into the Depression, with increasing unemployment, falling production, and falling prices, continued throughout then newly-elected Herbert Hoover’s Presidential term.

At its nadir, the Depression was collective insanity. Workers were idle because firms would not hire them to work their machines; firms would not hire workers to work machines because they saw no market for goods; and there was no market for goods because workers had no incomes to spend. Orwell’s account of the Great Depression in Britain, The Road to Wigan Pier, speaks of “…several hundred men risk[ing] their lives and several hundred women scrabbl[ing] in the mud for hours… searching eagerly for tiny chips of coal” in slagheaps so they could heat their homes. For them, this arduously-gained “free” coal was “more important almost than food.” All around them the machinery they had previously used to mine in five minutes more than they could gather in a day stood idle. Why so Large?: There is no fully satisfactory explanation of why the huge Depression happened when it did. If such huge depressions were always a possibility in an unregulated capitalist economy, why weren’t there two, three, many Great Depressions in the years before World War II? Milton Friedman and Anna Schwartz argued that the Depression was the consequence of an incredible sequence of blunders in monetary policy. But those controlling policy during the early 1930s thought they were following the same gold-standard rules of conduct as their predecessors. Were they wrong? If they were wrong, why did they think they were following in the footsteps of their predecessors? If they were not wrong, why was the Great Depression the only Great Depression?

The Great Depression has central place in twentieth century economic history. In its shadow, all other depressions are insignificant. Whether assessed by the relative shortfall of production from trend, by the duration of slack production, or by the product-depth times duration-of these two measures, the Great Depression is an order of magnitude larger than other depressions: it is off the scale. All other depressions and recessions are from an aggregate perspective (although not from the perspective of those left unemployed or bankrupt) little more than ripples on the tide of ongoing economic growth. The Great Depression cast the survival of the economic system, and the political order, into serious doubt.


10.3.2: The Stock Market Crash A “Permanent and High Plateau”: The U.S. stock market had boomed in the 1920s. Prices had reached levels, measured as a multiple of corporate dividends or corporate earnings, that made no sense in terms of traditional patterns and rules of thumb for valuation. A range of evidence suggests that at the market peak in September 1929 something like forty percent of stock market values were pure air: prices above fundamental values for no reason other than that a wide cross-section of investors thought that the stock market would go up because it had gone up.

By 1928 and 1929 the Federal Reserve was worried about the high level of the stock market. It feared that the “bubble” component of stock prices might burst suddenly. When it did burst, pieces of the financial system might be suddenly revealed to be insolvent, the network of financial intermediation might well be damaged, investment might fall, and recession might result. It seemed better to the Federal Reserve in 1928 and 1929 to try to cool off the market by making borrowing money for stock speculation difficult and costly by raising interest rates. They accepted the risk that the increase in interest rates might bring on the recession that they hoped could be avoided if the market could be “cooled off”: all policy options seemed to have possible unfavorable consequences.

In later years some, Austrian economist Friedrich Hayek for one, were to claim that the Federal Reserve had created the stock market boom, the subsequent crash, and the Great Depression through “easy money” policies:

Up to 1927 I should have expected that the subsequent depression would be very mild. But in that year an entirely unprecedented action was taken by the American monetary authorities [who] succeeded, by means of an easy-money policy, inaugurated as soon as the symptoms of an impending reaction were noticed, in prolonging the boom for two years beyond what would otherwise have been its natural end. And when the crisis finally occurred, deliberate attempts were made to prevent, by all conceivable means, the normal process of liquidation.

Those making such claims for over-easy policy appear to have spent no time looking at the evidence. Weight of opinion and evidence on the other side: the Federal Reserve’s fear of excessive speculation led it into a far too deflationary policy in the late 1920s: destroying the village in order to save it.

The U.S. economy was already past the peak of the business cycle when the stock market crashed in October of 1929. So it looks as though the Federal Reserve did overdo it—did raise interest rates too much, and bring on the recession that they had hoped to avoid. Popping the Bubble: The stock market did crash in October of 1929. “Black Tuesday,” October 29, 1929, saw American common stocks lose something like a tenth of their value. That it was ripe for a bursting of the bubble is well known; the exact reasons why the bubble burst then are unknowable; more important are the consequences of the bursting of the bubble.

The stock market crash of 1929 greatly added to economic uncertainty: no one at the time knew what its consequences were going to be. The natural thing to do when something that you do not understand has happened is to pause and wait until the situation becomes clearer. Thus firms cut back their own plans for further purchase of producer durable goods. Consumers cut back purchases of consumer durables. The increase in uncertainty caused by the stock market crash amplified the magnitude of the initial recession.


10.3.3: Making Things Worse: Even a Panic Is Not Altogether a Bad Thing: The first instinct of governments and central banks faced with this gathering Depression began was to do nothing. Businessmen, economists, and politicians (memorably Secretary of the Treasury Mellon) expected the recession of 1929-1930 to be self-limiting. Earlier recessions had come to an end when the gap between actual and trend production was as large as in 1930. They expected workers with idle hands and capitalists with idle machines to try to undersell their still at-work peers. Prices would fall. When prices fell enough, entrepreneurs would gamble that even with slack demand production would be profitable at the new, lower wages. Production would then resume.

Throughout the decline—which carried production per worker down to a level 40 percent below that which it had attained in 1929, and which saw the unemployment rise to take in more than a quarter of the labor force—the government did not try to prop up aggregate demand. The Federal Reserve did not use open market operations to keep the money supply from falling. Instead the only significant systematic use of open market operations was in the other direction: to raise interest rates and discourage gold outflows after the United Kingdom abandoned the gold standard in the fall of 1931. The Federal Reserve thought it knew what it was doing: it was letting the private sector handle the Depression in its own fashion. It saw the private sector’s task as the “liquidation” of the American economy. And it feared that expansionary monetary policy or fiscal spending and the resulting deficits would impede the necessary private-sector process of readjustment. Hoover Wished His Administration Had Listened to Him: Contemplating the wreck of his country’s economy and his own political career, Herbert Hoover wrote bitterly in retrospect about those in his administration who had advised inaction during the downslide:

The “leave-it-alone liquidationists” headed by Secretary of the Treasury Mellon felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate”. He held that even panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

But Hoover had been one of the most enthusiastic proponents of “liquidationism” during the Great Depression. And it had been a common meme in the public sphere. Eminent Economists Were “Liquidationists”:The unwillingness to use policy to prop up the economy during the slide into the Depression was backed by a large chorus, and approved by (some of) the most eminent economists around.

For example, from Harvard Joseph Schumpeter argued that there was a “presumption against remedial measures which work through money and credit. Policies of this class are particularly apt to produce additional trouble for the future.” From Schumpeter’s perspective, “depressions are not simply evils, which we might attempt to suppress, butforms of something which has to be done, namely, adjustment to change.” This socially productive function of depressions creates “the chief difficulty” faced by economic policy makers. For “most of what would be effective in remedying a depression would be equally effective in preventing this adjustment.”

From London, Friedrich Hayek found it:

still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production.If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed.The only way permanently to “mobilise” all available resources is, therefore to leave it to time to effect a permanent cure by the slow process of adapting the structure of production.

Hayek and company believed that enterprises were gambles which sometimes fail: a future came to pass in which certain investments should not have been made. The best that could be done in such circumstances is to shut down those production processes that turned out to have been based on assumptions about future demands that did not come to pass. The liquidation of such investments and businesses releases factors of production from unprofitable uses; they can then be redeployed in other sectors of the technologically dynamic economy. Without the initial liquidation the redeployment cannot take place. And, said Hayek, depressions are this process of liquidation and preparation for the redeployment of resources.

As Schumpeter put it, policy does not allow a choice between depression and no depression, but between depression now and a worse depression later:

Inflation pushed far enough [would] undoubtedly turn depression into the sham prosperity so familiar from European postwar experience, [and]… would, in the end, lead to a collapse worse than the one it was called in to remedy.


recovery is sound only if it does come of itself.… Any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another [worse] crisis ahead. This Was Bats—: This doctrine—that in the long run the Great Depression would turn out to have been good medicine for the economy, and that proponents of stimulative policies were shortsighted enemies of the public welfare—was, to put it bluntly, complete bats—. John Stuart Mill had nailed the analytical point back in 1829: an excess demand for money was what would produced a “general glut”, and if the economy’s money supply were matched to money demand, there would be no depression. Practical central bankers had developed a playbook for what to do. Yet it was not followed.

Why was it not followed? One reason was that a depression so deep showed itself as a new configuration of asset prices. In previous downturns the excess demand for money had triggered a scramble for liquidity: people desperate to have more cash they could spend immediately dumped other assets onto the market, including the government bonds they held; as government bonds fell in price the interest rates they paid rose; central bankers saw such sharp spikes in government bond interest rates as a signal that the economy needed more cash. In this downturn the excess demand for money was so broad and fear was so great that it triggered a scramble for safety: people were desperate not just for more cash now but for assets that they would be able to easily turn into cash in the future, for it seemed likely that the troubles would last for quite a while; so they dumped other assets on the market and scrambled for both cash and government bonds. With the government-bond interest-rate spike absent, central bankers were not sure what was going on.

But a second reason was that, somehow, the “liquidationists” had established a degree of intellectual dominance in the public sphere. Against “Liquidationism”: This doctrine—that in the long run the Great Depression would turn out to have been good medicine for the economy, and that proponents of stimulative policies were shortsighted enemies of the public welfare—drew anguished cries of dissent from those less hindered by their theoretical blinders.

British economist Ralph Hawtrey scorned those who, like Robbins and Hayek, wrote at the nadir of the Great Depression that the greatest danger the economy faced was inflation. It was, Hawtrey said, the equivalent of “Crying, ‘Fire! Fire!’ in Noah’s flood.” John Maynard Keynes also tried to bury the liquidationists in ridicule.

Later on Milton Friedman would recall that at the Chicago where he went to graduate school such dangerous nonsense was not taught—but that he understood why at Harvard-where such nonsense was taught-bright young economists might rebel, reject their teachers’ macroeconomics, and become followers of Keynes. Friedman thought that Keynesianism was wrong—but not crazy.

However, the “liquidationist” view carried the day. Even governments that had unrestricted international freedom of action—like France and the United States with their massive gold reserves—tended not to pursue expansionary monetary and fiscal policies on the grounds that such would reduce investor “confidence” and hinder the process of liquidation, reallocation, and the resumption of private investment. But sure the “liquidationists” believed that something could be done: what? To restore confidence by balancing the government’s budget.


10.4 Debt and Deflation

10.4.1: Waves of Financial Crises Budget Balance and Deflation: Thus governments strained their muscles to balance their budgets—thus further depressing demand—and to reduce wages and prices—in order to restore competitiveness and balance to their economies. In Germany the Chancellor—the Prime Minister—Heinrich Bruening decreed a ten percent cut in prices, and a ten to fifteen percent cut in wages. But every step taken in pursuit of financial orthodoxy made matters worse.

For once the declines in wages and prices in the Great Depression had passed some critical value, they knocked the economy out of its normal business-cycle pattern. Severe deflation had consequences that were much me than an amplification of the modest five to ten percent falls in prices that had been seen in past depressions.

When banks made loans, they allowed beforehand for some measure of fluctuation in the value of the assets pledged as security for their loans: even some diminuation of the value of their collateral would not cause banks to panic, because if the borrower defaulted they would still be able to recover their loan principal, as long as the decline in the value of the collateral were not too high.

But what happens when deflation reached the previously never seen amount of thirty, forty, or fifty percent—as it did in the Great Depression? Banks became keenly aware that their loan principal was no longer safe: that if the borrower defaulted, they no longer had recourse to sufficient collateral to recover their loan principal. Others knew this. Thus borrower defaults became a signal for bank depositors that it was time for them to withdraw their deposits. In that case the bank would collapse. Hence the banks needed to act first to collect what they could. Liquidity and Safety: As Keynes had written, once banks realize that deflation had significantly impaired the value of their collateral:

They become particularly anxious that the remainder of their assets should be as liquid and as free from risk as it is possible to make them. This reacts in all sorts of silent and unobserved ways on new enterprise. for it means that banks are less willing than they would normally be to finance any project.

In looking at the tracks of interest rates in the Great Depression, you can see a steady widening of the gap between safe interest rates on government securities and the interest rates that borrowing companies had to pay. Even though credit understood as liquidity was ample—in the sense that borrowers with perfect and unimpaired collateral could obtain loans at extremely low interest rates—the businesses in the economy (few of which had perfect and unimpaired collateral) found it next to impossible to obtain capital to finance investment.

Thus the banking system freezes up. It no longer performs its social function of channeling purchasing power from savers to investors. As a result private investment collapses; falling investment produces more unemployment, excess capacity, futher falls in prices, and more deflation; and further deflation renders the banking system even more insolvent.

Morever, not only past deflation but also expected future deflation depressed investment. Why invest now if you expect deflation, so that everything you might buy this year would be ten percent cheaper next year?

In the end the spiral of deflation continued to depress the economy until something was done to restore solvency to the banking system, and broke the anticipations of further falls in prices. A few economists understood this process at work during the Great Depression—Irving Fisher, John Maynard Keynes, R.G. Hawtrey. But they did not walk the corridors of power at the nadir.


10.5: Global Issues

10.5.1: Golden Fetters

Countries without massive gold reserves did not have the luxury of even attempting to expand their economies, at least not until they abandoned the gold standard, let their exchange rates float freely, and so cast off their “golden fetters.” A government that wished to stimulate demand in the Great Depression would seek to inject credit and bring down interest rates to encourage investment. But additional credit would mean higher imports, and lower interest rates would encourage domestic investors to invest abroad. The result would be a balance-of-payments gap: economic expansion at home was inconsistent with gold convertibility. And few countries wished to abandon the gold standard at the start of the Great Depression.

There were exceptions that proved the rule. Scandinavian countries cast off their golden fetters at the start of the Great Depression, pursued policies of stabilizing nominal demand under the intellectual influence of the Stockholm School of economists, and did relatively well. In Japan fiscal orthodoxy and budget balance were abandoned in 1931, when Korekiyo Takahashi became Minister of Finance. Industrial production in Japan in 1936 was half again as much as it had been in 1928; in Japan the Great Depression was over by 1932.

But these were unusual exceptions.

Before World War I the major industrial economies might have had some freedom of action. Before the war major industrial countries’ commitment to the gold standard was unquestioned. Whenever an exchange rate fell to the lowest “gold point”, the bottom of the band and the point at which it was profitable to begin shipping gold out of the country, capital would flow in betting on the future recovery of the exchange rate to the mid-point of its band, making the central bank’s task of maintaining convertibility easy.

In the 1920s, with governments under greater pressure from newly expande electorates to generate prosperity, it was not clear that the country was committed to the gold standard. Speculators, instead, began to pull their capital out of a country facing a balance-of-payments deficit, on the principal that the loss they would suffer should the currency recovery would be dwarfed by their profits if they could take advantage of a full-fledged devaluation.

With the growth of concern about currencies, central bankers wondered if the gold-exchange standard—by which they kept their reserves in sterling or in dollars—was wise. What if the pound or the dollar devalued? As the Great Depression gathered force, central banks fell back on gold as their principal reserve, increasing strains on the system.

One might have thought that those countries that had restored their pre-World War I parities would be immune from destabilizing speculation. Had not Britain returned to the gold standard at the pre-World War I parity precisely to give investors confidence that its commitment to the gold standard was absolute? But governments like Britain and the United States that had maintained pre-World War I parities found themselves lacking credibility. Because they had not experienced the 1920s as a decade of inflation, they lacked the tacit political consensus that inflation was to be avoided at all costs. By contrast countries that had undergone inflation in the 1970s found for the most part that they had high credibility, and that their exchange rates came under little speculative attack.


10.5.2: The Credit-Anstalt

Austria’s major bank, the Credit-Anstalt, was revealed to be bankrupt in May 1931. Its deposits were so large that freezing them while bankruptcy was carried through would have destroyed the Austrian economy, hence the government stepped in to guarantee deposits. The resulting expansion of the currency was inconsistent with gold-standard discipline. Savers liquidated their deposits and began to transfer funds out of the country in order to avoid the capital losses that would have been associated with a devaluation.

In order to keep its banking system from collapsing and in order to defend the gold standard, the Austrian central bank needed more gold to serve as an internal reserve to keep payments flowing and an external reserve to meet the demand triggered by incipient capital flight. The Bank for International Settlements began to host negotiations to coordinate international financial cooperation.

It is possible that rapid and successful conclusion of these negotiations might have stopped the spread of the Great Depression in mid-1931. Austria was a small country with a population well under ten million. There was not that much capital to flee. A sizable international loan to Austria’s central bank would have allowed it to prop up its internal banking system and maintain convertibility. A month later those whose capital had fled would realize that the crisis was over, and that they had lost a percent of two of their wealth in fees and exchange costs in the capital flight. Other speculators would observe that the world’s governments were serious in their commitment to the gold standard, that the potential foreign exchange reserves of any one country were the world’s, and thus that the likelihood of a speculative attack succeeding in inducing a devaluation was small.

Perhaps investors would then have begun returning gold to central banks in exchange for interest-bearing assets, would have begun to shrink down their demand for liquidity, and would have begun to boost worldwide investment. The Economist’s Berlin correspondent thought that it might well have done the job:

It was clear from the beginning… that such an institution [as the Credit-Anstalt] could not collapse without the most serious consequences, but the fire might have been localized if the fire brigade had arrived quickly enough on the scene. It was the delay of several weeks in rendering effective international assistance to the Credit Anstalt which allowed the fire to spread so widely. 
We do not know because it was not tried. The substantial loan to Austria was not made. Speculators continued to bet on devaluation, investors continued to hoard gold, the preference for liqidity continued to rise, and investment continued to fall.

The substantial loan to Austria was not made because French internal politics entered the picture. At the beginning of his political career French Premier Pierre Laval had styled himself a politician of the left: the Clarence Darrow of France. But by the early 1930s he was shifting to the position of a strong nationalist. He blocked the proposed international support package for Austria, insisting that if France was to contribute France had to get something out of it. The price that Laval demanded was made up of a series of diplomatic concessions, most important of which was the renunciation of a prospective customs union with Germany. To Laval, playing the nationalist card in French politics, nothing that benefited Germany could be allowed by France.

The Austrian government refused to make the required political concessions fast enough for negotiations to be completed in time to be of use. Austria lost: the support package collapsed, and the Austrian economy abandoned the gold standard and went into recession. In the long run France lost too: what might have been a chance to moderate the Great Depression was lost. The ultimate consequences for France were dire. The rise of Adolf Hitler in Germany is inconceivable in the absence of the Great Depression.

Nine years after the Credit-Anstalt crisis the French government surrendered to the Nazis. Pierre Laval was not greatly inconvenienced at first by the Nazi conquest of Europe. He discovered that he was not a leftist at all, but a fascist. He became the second most powerful figure, and the true focus of decision making, in France’s wartime Nazi-collaborationist Vichy government.

He was executed for treason for having given aid and comfort to the Nazis after the end of World War II.


10.5.3: At the Nadir

Back in 1931, speculators observed that the international financial community did not support currencies that came under pressure. They wondered which country would be next to devalue—and thus which country to pull their money out of fast if they did not want to lose the thirty percent or so of gold value that would be lost in a devaluation. The wave of bear speculation moved on to Hungary, Germany, and Britain. By the fall of 1931 Britain had abandoned the gold standard.

Thus international capital flows—in this case driven by fear of being caught in a devaluation—triggered devaluations and brought down the interwar gold standard. In a well-functioning gold standard, such impulses would have been damped by the credibility of the commitment to gold and by international cooperation. But in the early 1930s the commitment to gold had no credibility. And there was no international cooperation.

In the absence of international cooperation, the legacy of the gold standard was to make it impossible for any country to fight the Depression within its borders. Stimulative monetary and fiscal policies were inconsistent with the gold standard. And efforts to contain domestic banking crises were thwarted and rendered counterproductive because of the fear that rescuing the banking system or lowering interest rates was the prelude to devaluation.


10.5.4: The Absent Hegemon

As Eichengreen has pointed out, once countries had cast off the golden fetters of the interwar gold standard, the crisis was transformed into an opportunity. Policies to expand demand and production no longer required international cooperation once the gold standard framework had been abandoned. But as he has also pointed out, “liquidationism”—and fears of financial and political chaos—kept governments from beginning to fight the Depression in a serious manner for much of the 1930s.

The Great Depression is the greatest case of self-inflicted economic catastrophe in the twentieth century. As Keynes wrote at its very start, in 1930, the world was:

as capable as before of affording for every one a high standard of life…. But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.

Keynes feared that “the slump” that he saw in 1930 “may pass over into a depression, accompanied by a sagging price level, which might last for years with untold damage to the material wealth and to the social stability of every country alike.” He called for resolute, coordinated monetary expansion by the major industrial economies to “restore confidence in the international long-term bond market… restore [raise] prices and profits, so that in due course the wheels of the world’s commerce would go round again.”

Charles Kindleberger has pointed out that such action never emerges from committees, or from international meetings. Before World War I the international gold standard was kept on track because there was a single, obvious, dominant power in the world economy: Britain. Everybody knew that Britain was the “hegemon”, and so everyone adjusted their behavior to conform with the rules of the game and the expectations of behavior laid down in London. Similarly, after World War II the “hegemon” for more than a full generation was the United States. And once again, the existence of a dominant power in international finance—a power that had the capability to take effective action to shape the pattern of international finance all by itself if it wished—led to a relatively stable and well-functioning system.

But during the interwar period there was no hegemon: no power could shape the international economic environment through its own actions alone. Britain tried, attempting to restore confidence in the gold standard by the restoration of sterling, and failed. America might have succeeded had it tried—but successful policy requires that the hegemon recognize its leading position, which the interwar U.S. did not do. Thus “resolute, coordinated” action to expand demand and halt the depression did not emerge from the leading industrial power. And it was very unlikely to be generated by any committee operating via consensus.

So the action was not forthcoming. And Keynes’s fears came to pass.


10.6: The Persistence of the Great Depression

10.6.1: Toward the Keynesian Revolution

In response to the high persistence of unemployment in the interwar years, economists abandoned the idea that business cycles were the economy’s best feasible response to inevitable shocks to present circumstances and expectations about the future, and that the Great Depression had been generated by the largest such shock ever seen. Instead, they turned to alternative—Keynesian—approaches to explain the persistence of high unemployment.

Perhaps these alternative approaches were not so much theories of business cycles as policy recommendations accompanied by promises that supporting theories would be constructed later. Certainly the rearguard of “liquidationists” so argued. But for a while the idea that “even a panic is not altogether a bad thing” appeared dead, and staked.


10.6.2: Structural Unemployment in the Depression How Well Did Equilibrium Restore Itself in the Long Run?

Neoclassical economists have faith in market economies’ abilities to eventually cure depressions, even in the presence of unsound economic policies. Depressions and high unemployment arise when markets malfunction, or fail to find the correct equilibrium. But excess supply of labor and excess supply of goods should eventually register.

How well did these “natural” full employment equilibrium-restoring forces work in the Great Depression?

The answer is: not at all well.

Some nations—Scandinavian countries that abandoned the gold standard early—experienced the Great Depression as little more than an ordinary recession, albeit in some cases beginning from a position of relatively high unemployment in 1929. The collapse of international trade in the 1930s idled resources in specialized export industries, but for countries that had abandoned the gold standard early domestic manufacturing took up the slack and returned GNP and employment to relatively high levels by the middle of the decade. These fortunate nations experienced the Great Depression as more-or-less another episode of normal cyclical unemployment in response to a large shock, in this case the world market’s signal that export sectors were too large. 

Other countries—largely nations like the United States and France that remained on the gold standard beyond 1930-31—were not so fortunate. Their unemployment rose to and remained at levels that seemed too high to square with the normal mechanisms of standard business cycles. Their experience was a key factor leading economists away from monetary overinvestment theories and toward underemployment semi-equilibrium theories. 

Even granted that policies to fight the Great Depression were not forthcoming, the persistence of the Depression still comes as a shock. In a normal pre-Great Depression business cycle, the economy the economy closes 97% of the gap back to usual employment in three years. But the Depression shows a different picture: the economy closed only half of the gap back to full employment in three years. Blame the Government: Britain: It is helpful to group the explanations for why Depression-era unemployment was so high and lasted so long along two axes: there are two candidates to take the blame for the persistence of unemployment during the Depression: the government, and the market.

In some sense government-generated unemployment was widespread. In Britain some unemployment (although a small share during the peak unemployment years of the early 1930s) was surely generated by the government’s unemployment insurance system.

Thomas attributes some unemployment among secondary workers and unskilled young men with large families to the “OXO” system, in which firms would systematically rotate two platoons of workers between time at work and time receiving unemployment benefit, thus turning unemployment insurance into a highly-subsidized work sharing scheme. In Britain, men receiving the standard unemployment benefit in February 1931 had on average experienced 8.6 different spells of employment during the past year, working an average of 151 days.

Given such rapid turnover it is not at all implausible to argue that the availability of unemployment benefit, even with relatively low replacement rates, allowed workers to remain in labor market positions in which they were employed only half the time instead of migrating to some other industry. Thus it is possible that an underlying four or five percent of excess British unemployment may well have been maintained by the government’s social policy.

But that social policy of unemployment relief and been created for a reason: from 1920 on there had been few jobs in places like Wigan Pier. Blame the Government: America: In the United States even at the very end of the Depression unemployment was high. In the 1940 census some 11.1% of U.S. heads of household were counted as unemployed, of whom almost half—4.9% of all heads of household—held relief jobs.

Michael Darby has argued that the government had managed to create a situation in which those on relief found themselves with little incentive to register their labor supply on the private-sector job market, and yet were doing little socially productive work. Relief jobs were attractive to many, in spite of their low levels of relief wages relative to average private sector wages. Relief jobs were secure and required little skill. The risk-averse or the lesser-skilled might well have found that their best option was to stay on relief jobs, and be counted as unemployed, rather than take even an immediately available private sector job. 

In each of these cases there is no clear alternative way of organizing the unemployment insurance system that would have been a clearly better policy. A good society should offer support to those blocked from earning their wages in the market. And a well-functioning economy should create incentives for the unemployed to strongly register their excess supply of labor in the market. These two goals are inevitably in tension. The inescapable problem was that relief payments were too high for the short-term and too low for the long-term unemployed, and that there was no good way to structure relief programs to tell these two groups apart ex ante.

William Beveridge was among the first to lay out the policy dilemma: the long-term unemployed “need… more money rather than less than those who have had short periods of unemployment. Yet they can hardly be given more money without… [creating an incentive] to settle down into permanent unemployment.” Moreover, few of the long-term unemployed “escape physical and psychological deterioration through long idleness.” Blame the Market: Nevertheless, a large part of the puzzle remains: roughly half of Depression unemployment was concentrated among long-term unemployed who could not take advantage of subsidized relief-work schemes.

This form of unemployment, principally long-term and somewhat of a residual category is, the key to the persistence of the Depression. Long-term unemployment was strongly present in those countries that suffered worst from the Depression, including non-European nations like Australia, Canada, and the United States and European nations like Britain, Germany, Italy, and the gold block nations of France and Belgium. Of these only Germany achieved a strong recovery from the Depression in the 1930s.

Long-term unemployment means that the burden of economic dislocation is unequally borne. Since the prices workers must pay often fall faster than wages, the welfare of those who remain employed frequently rises in a depression. Those who become and stay unemployed bear far more than their share of the burden of a depression. Moreover the reintegration of the unemployed into even a smoothly-functioning market economy may prove difficult, for what employer would not prefer a fresh entrant into the labor force to someone out of work for years? The simple fact that an economy has recently undergone a period of mass unemployment may make it difficult to attain levels of employment and boom that a luckier economy attains as a matter of course.

Once an economy had fallen deeply into the Great Depression, devalued exchange rates, prudent and moderate government budget deficits (as opposed to the deficits involved in fighting major wars), and the passage of time all appeared equally ineffective ways of dealing with long-term unemployment. Highly centralized and unionized labor markets like Australia’s and decentralized and laissez-faire labor markets like that of the United States did equally poorly in dealing with long-term unemployment. Fascist “solutions” were equally unsuccessful, as the case of Italy shows, unless accompanied by rapid rearmament as in Germany.

Should we be surprised that the long-term unemployed do not register their labor supply proportionately strongly? No, we should not. They might accurately suspect that they will be at the end of every selection queue. In the end it was the coming of World War II and its associated demand for military goods that made private sector employers wish to hire the long-term unemployed at wages they would accept.

At first the unemployed had searched eagerly and diligently for alternative sources of work. But if four months or so passed without successful reemployment, the unemployed tended to become discouraged and distraught. After eight months of continuous unemployment, the typical unemployed worker still searches for a job, but in a desultory fashion and without much hope. And within a year of becoming unemployed the worker is out of the labor market for all practical purposes: a job must arrive at his or her door, grab him or her by the scruff of the neck, and through him or her back into the nine-to-five routine if he or she is to be employed again.

This is the pattern of the long-term unemployed in the Great Depression; this is the pattern of the long-term unemployed in western Europe in the 1990s. It nearly always takes an extraordinarily high-pressure labor market—like that of World War II—to successfully reemploy the long-term unemployed.

#highlighted #economichistory #slouchingtowardsutopia #highlighted #greatdepression #macro #monetaryeconomics

Fairly Recently: Must- and Should-Reads, and Writings… (May 3, 2019)


  1. John Maynard Keynes (1919): The Economic Consequences of the Peace

  2. Jérémie Cohen-Setton, Egor Gornostay, and Colombe Ladreit:: The Aggregate Effects of Budget Stimulus: Evidence From the Large Fiscal Expansions Database: “Large, persistent, and positive effects of fiscal stimulus on GDP with a decrease in net exports that only partly offsets the increase in private domestic demand…. suggestive evidence that fiscal policy is more effective in a slump than in a boom…

  3. Noah Smith: Why Macroeconomist Emi Nakamura Deserves John Bates Clark Medal – Bloomberg: “The John Clark Bates Medal almost never goes to a macroeconomist. Emi Nakamura is a worthy exception…

  4. Greg Ip: For Lower-Paid Workers, the Robot Overlords Have Arrived: “Software and algorithms are used to screen, hire, assign and now terminate workers…

  5. Jessica M. Goldstein: Behind the Scenes with Alexandria Ocasio-Cortez Before Anyone Knew Her Name: “Rachel Lears’ documentary ‘Knock Down the House’ captures a political phenom on the rise—and three other women running for office for the first time…

  6. Jason Kottke: Grace Hopper Explains a Nanosecond: “In this short clip from 1983, legendary computer scientist Grace Hopper uses a short length of wire to explain what a nanosecond is…

  7. Steve M.: The Rot In The Republican Party Started Long Before Fox ‘News’ And Trump: “Sorry James Comey, but William Barr didn’t need to spend time with Donald Trump to become who he is now…

  8. byu/cil3x: MacBook Pro Keyboard Failures: Why Apples dust excuse is bullshit! [Teardown + Explanations] : apple: “What the actual cause is, honestly I don’t know. My suspicion is that the metal dome experiences metal fatigue and slowly begin to lose connection, or that that little U-shaped cutout in the centre of the dome weakens and starts to easily bounce when pressed, making contact 2+ times…. Always have AppleCare, even if paying extra to cover a flaw that should be properly dealt with is morally questionable and a shitty thing to do…

  9. John Maynard Keynes: Obituary for Alfred Marshall: “Economics does not seem to require any specialised gifts of an unusually high order…. An easy subject, at which very few excel!…

  10. Forrest Capie: Money and Business Cycles in Britain, 1870–1913

  11. Joseph Schumpeter (1927): The Explanation of the Business Cycle

  12. Matthew Yglesias (2011): Demand Denialism: “Frédéric Bastiat… his ‘What Is Seen And What Is Not Seen’, which I’ve seen a lot of people cite as the foundation for their opposition to stimulus policies. It’s an extremely insightful essay, but I think the correct way to understand it is as precisely laying down the theoretical conditions in which stimulative policies do work…

  13. Deficit Denialism: Frederic Bastiat Actually Favored Expansionary Fiscal Policy in Recessions Edition: It has always seemed to me that very, very, very few of the people who cite Frederic Bastiat have actually read him. Most have not even read all of “What Is Seen and Unseen”. For example: “There is an article in the Constitution which states: ‘Society assists and encourages the development of labor…. through the establishment by the state, the departments, and the municipalities, of appropriate public works to employ idle hands’. As a temporary measure in a time of crisis… this intervention… could have good effects… as insurance. It… takes labor and wages from ordinary times and doles them out, at a loss it is true, in difficult times…

  14. Why Can’t More People Actually Read Frederic Bastiat?: John Holbo’s jaw drops as he reads Alex Tabarrok praise the carried interest rule…. Indeed, Alex Tabarrok does crawl out on a limb and applaud all tax loopholes as islands of freedom on the road to serfdom…. I would say that, in a democracy, one pays a progressive share of one’s income to fund the many useful and convenient services and actions the government undertakes…. Methinks Frederic Bastiat would have agreed with me: “Often, nearly always if you will, the government official renders an equivalent service to John Goodfellow. In this case there is… only an exchange…. I say this: If you wish to create a government office, prove its usefulness.”… Frederic Bastiat. I wonder how many people really read him these days?…

  15. Karl Marx (1857): The Bank Act of 1844 and the Monetary Crisis in England

  16. This Time It Is Not Different: Walter Bagehot and the Persistent Concerns of Financial Macroeconomics: Origins of Central Banking: E.M. Forster’s Great Aunt Marianne

  1. Ben Thompson: Apple’s Earnings, Google’s Earnings, Amazon Earnings: “Available evidence strongly suggests that iPhone demand in China is very elastic: if the iPhone is cheaper, Apple sells more; if it is more expensive, Apple sells less. This is, of course, unsurprising, at least for a commodity, and right there is Apple’s issue in China: the iPhone is simply less differentiated in China than it is elsewhere, leaving it more sensitive to factors like new designs and price than it is elsewhere…

  2. It’s not a disconnect between utility and happiness, its a disconnect between revealed preference and happiness. And a disconnect between revealed preference and happiness is properly solved via educating people to become their best selves—I do not think it poses grave philosophical conundrums: Noah Smith: What We Want Doesn’t Always Make Us Happy: “Facebook users in order to get them to deactivate the Facebook app for one or two months. They found that the median amount was $100, and the average was $180 (the latter being larger because a few users really loved Facebook). This suggests that Facebook, which is free to use, generates a huge amount of utility—more than $370 billion a year in consumer surplus in the U.S. alone. This bolsters the argument of those who believe that free digital services have added a lot of unmeasured output to the global economy. But Allcott et al. also found that the people who deactivated Facebook as part of the experiment were happier afterward…

  3. Half of the opening paragraphs of War and Peace are in French: Leo Tolstoy: War and Peace: “Еh bien, mon prince. Genes et Lucques ne sont plus que des apanages, des поместья, de la famille Buonaparte. Non, je vous previens, que si vous ne me dites pas, que nous avons la guerre, si vous vous permettez encore de pallier toutes les infamies, toutes les atrocites de cet Antichrist (ma parole, j’y crois)—je ne vous connais plus, vous n’etes plus mon ami, vous n’etes plus мой верный раб, comme vous dites. Ну, здравствуйте, здравствуйте. Je vois que je vous fais peur, садитесь и рассказывайте…

  4. In the absence of global warming such a 95%-ile cyclone would have a maximum windspeed at landfall of 220 km/hr rather than 240: Hilzoy: “‘With winds expected to be 240 kilometers per hour (150 mph) at landfall,: Tropical Cyclone Fani would be the strongest storm to hit the region since a similar system struck Odisha in 1999, resulting in at least 10,000 deaths…. A storm surge in excess of 6.5 feet is likely to occur in some locations, with the surge affecting millions in low-lying areas. The Bay of Bengal is notorious for allowing storms like this one to pile huge amounts of water into highly populated areas’…

  5. Professional Republican economists against Moore: Mankiw. Professional Republicans for Moore: Lindsey, Siegel, Taylor (secondhand). Staying silent on Moore was, I think, a damaging vice signal—and a lot of people were willing to send it. Opposing Moore was not a virtue signal or even an exercise of virtue but rather a no-brainer: only Mankiw would do it: Reuters: Moore Withdraws for Consideration from Fed Post: Trump – Reuters: “U.S. President Donald Trump’s pick to fill a seat on the Federal Reserve has withdrawn from consideration… Trump said on Twitter…. Just hours earlier, Moore had told Bloomberg TV that he was “all in” and that he expected to be nominated within three weeks…

  6. Dan Drezner: Let’s Grade the State Department’s Director of Policy Planning on Her Grand Strategy Musings!: “Once upon a time, the director of policy planning for the State Department was a pretty prestigious job…. Brian Hook, the director of policy planning under Rex Tillerson, was granted a tremendous amount of authority but stumbled badly. He was a relative neophyte attempting to counsel a complete neophyte on the ins and outs of the job. He did… poorly. When Mike Pompeo came on, he hired Kiron Skinner…. She has thought about this stuff for a while. She has the academic credentials and publishing record…. Since coming on in September of last year, however, Skinner has made some odd statements…

  7. Sam Bell recalls this from two years ago. The Bernanke and the Yellen Feds are, I think, going to be judged as harshly as the Burns Fed of the 1970s for assuming that they knew the state and structure of the economy. The more tentative, more willing to gather information Greenspan Fed of the 1990s looks much much better in retrospect: Sam Fleming: Is It Finally Time For a Pay Rise for American Workers?: “John Williams… San Francisco Fed president, says that while inflation may have been weak recently, this should not detract from the bigger picture. “It’s not like inflation is moving in the wrong direction or is out of sync with what you’d expect for where the economy is,” he said last month. ‘We have gotten rid of all the slack’…

  8. From Carole Cadwalladr as she uses TED to try to hold Silicon Valley to account—to get the social media companies to thin of themselves as informaiton utilities rather than misinformation utilities: Carole Cadwalladr: My TED Talk: How I Took on the Tech Titans in Their Lair: “Jack Dorsey, the co-founder of Twitter… saying that Nazism was ‘hard to define’…. They needed to go ‘deep’…. Anderson gave credit to Dorsey for actually showing up. And it’s true he did. He showed guts for doing what Zuckerberg and Sandberg would not. But… what came across… was the complete absence of emotion–any emotion–in Dorsey’s face…. Dorsey appeared–and I can’t think of any other way of saying this–insentient…. Dorsey can see the iceberg but doesn’t seem to feel our terror. Or understand it. In an interview last summer, US journalist Kara Swisher, repeatedly asked Zuckerberg how he felt about Facebook’s role in inciting genocide in Myanmar–as established by the UN–and he couldn’t or wouldn’t answer…

  9. Paul Krugman: The Zombie Style in American Politics: “Russia didn’t help Donald Trump’s presidential campaign. O.K., it did help him, but the campaign itself wasn’t involved. O.K., the campaign had a lot of Russian contacts and knowingly received information from the Russians, but that was perfectly fine…. We’re not even talking about an ever-shifting party line; new excuses keep emerging, but old excuses are never abandoned…

  10. Chye-Ching Huang: Fundamentally Flawed 2017 Tax Law Largely Leaves Low- and Moderate-Income Americans Behind: “The fundamental flaws of the 2017 tax law: 1) it ignores the stagnation of working-class wages and exacerbates inequality; 2) it weakens revenues when the nation needs to raise more; and 3) it encourages rampant tax avoidance and gaming that will undermine the integrity of tax code…. The 2017 tax law largely left behind low- and moderate-income Americans—and in many ways hurts them…. A restructuring of the law can fix these flaws…

  11. Robert Waldmann: “I think their contributions to thought about methodology would be worth zero if correctly assessed, but are worth much less due to their influence. This is more true of Prescott, but I think I explain how Lucas’s efforts are worth less than nothing here

  1. Wikipedia: Russian Conquest of Central Asia

  2. Wikipedia: Russian Nobility

  3. Measuring Worth: Logarithm of US Real GDP Per Capita (2012 Dollars)

  4. Measuring Worth: Logarithm of UK Real GDP Per Capita (2013 Pounds)

  5. A. K. Cairncross: Review of “Business Cycles in the United Kingdom, 1870-1914” by J. Tinbergen

  6. NIESR: The UK Business Cycle–Dating and Implications

  7. Historical Nonfarm Unemployment Statistics: An updated graph that Claudia Goldin had me make two and a half decades ago. The nonfarm unemployment rate since 1890…

8, Joshua Yaffa: Putin’s Russia Wrestles with the Meaning of Trotsky and Revolution

  1. Wikipedia: New Economic Policy

  2. Fasces

#noted #weblogs 

Weekend Reading: John Maynard Keynes: from The End of Laissez-Faire (1926)

School of Athens

John Maynard Keynes (1926): The End of Laissez-Faire (1926): “Suppose that by the working of natural laws individuals pursuing their own interests with enlightenment in condition of freedom always tend to promote the general interest at the same time! Our philosophical difficulties are resolved-at least for the practical man, who can then concentrate his efforts on securing the necessary conditions of freedom. To the philosophical doctrine that the government has no right to interfere, and the divine that it has no need to interfere, there is added a scientific proof that its interference is inexpedient. This is the third current of thought, just discoverable in Adam Smith, who was ready in the main to allow the public good to rest on ‘the natural effort of every individual to better his own condition’, but not fully and self-consciously developed until the nineteenth century begins. The principle of laissez-faire had arrived to harmonise individualism and socialism, and to make at one Hume’s egoism with the greatest good of the greatest number. The political philosopher could retire in favour of the business man—for the latter could attain the philosopher’s summum bonum by just pursuing his own private profit…

…Yet some other ingredients were needed to complete the pudding. First the corruption and incompetence of eighteenth-century government, many legacies of which survived into the nineteenth. The individualism of the political philosophers pointed to laissez-faire. The divine or scientific harmony (as the case might be) between private interest and public advantage pointed to laissez-faire. But above all, the ineptitude of public administrators strongly prejudiced the practical man in favour of laissez-faire – a sentiment which has by no means disappeared. Almost everything which the State did in the eighteenth century in excess of its minimum functions was, or seemed, injurious or unsuccessful.

On the other hand, material progress between 1750 and 1850 came from individual initiative, and owed almost nothing to the directive influence of organised society as a whole. Thus practical experience reinforced a priori reasonings. The philosophers and the economists told us that for sundry deep reasons unfettered private enterprise would promote the greatest good of the whole. What could suit the business man better? And could a practical observer, looking about him, deny that the blessings of improvement which distinguished the age he lived in were traceable to the activities of individuals ‘on the make’?

Thus the ground was fertile for a doctrine that, whether on divine, natural, or scientific grounds, state action should be narrowly confined and economic life left, unregulated so far as may be, to the skill and good sense of individual citizens actuated by the admirable motive of trying to get on in the world.

By the time that the influence of Paley and his like was waning, the innovations of Darwin were shaking the foundations of belief. Nothing could seem more opposed than the old doctrine and the new-the doctrine which looked on the world as the work of the divine watchmaker and the doctrine which seemed to draw all things out of Chance, Chaos, and Old Time. But at this one point the new ideas bolstered up the old. The economists were teaching that wealth, commerce, and machinery were the children of free competition—that free competition built London. But the Darwinians could go one better than that—free competition had built man. The human eye was no longer the demonstration of design, miraculously contriving all things for the best; it was the supreme achievement of chance, operating under conditions of free competition and laissez-faire. The principle of the survival of the fittest could be regarded as a vast generalisation of the Ricardian economics. Socialist interferences became, in the light of this grander synthesis, not merely inexpedient, but impious, as calculated to retard the onward movement of the mighty process by which we ourselves had risen like Aphrodite out of the primeval slime of ocean.

Therefore I trace the peculiar unity of the everyday political philosophy of the nineteenth century to the success with which it harmonised diversified and warring schools and united all good things to a single end. Hume and Paley, Burke and Rousseau, Godwin and Malthus, Cobbett and Huskisson, Bentham and Coleridge, Darwin and the Bishop of Oxford, were all, it was discovered, preaching practically the same thing-individualism and laissez-faire. This was the Church of England and those her apostles, whilst the company of the economists were there to prove that the least deviation into impiety involved financial ruin…

#weekendreading #economics #history #publicsphere 

May 3, 2019: Weekly Forecasting Update: Little Change

Today: U.S. Bureau of Labor Statistics: Employment Situation Summary: “Total nonfarm payroll employment increased by 263,000 in April, and the unemployment rate declined to 3.6 percent…. Notable job gains… in professional
and business services, construction, health care, and social assistance…” Note that all of the decline in the unemployment rate is a shift of workers from “unemployed” to “out of the labor force”, which now stands 800,000 lower than it did in December. The unemployment rate is broken as an indicator of the business-cycle state of the labor market.

Today: Federal Reserve Bank of New York: Staff Nowcast: “May 03, 2019: The New York Fed Staff Nowcast stands at 2.1% for 2019:Q…” In the past week, good news about employment and personal consumption largely offset by bad news about manufacturing.


Key Points:

The right response to almost all economic data releases is: Nothing has changed—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. Specifically, it is still the case that:

  • U.S. potential economic growth continues to be around 2%/year.
  • There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating.
  • Thus there are till no signs that the U.S. has gone beyond or is even at “full employment”.
  • There are still no signs of interest rate normalization: secular stagnation continues to reign.
  • Printing money (and bonds) to increase the global supply of safe assets and using the proceeds to buy useful stuff continues to look like good business cycle-management policy.
  • The unemployment rate is broken as an indicator of the business-cycle store of the labor market.
  • The Trump-McConnell-Ryan tax cut:
    • To the extent that it was supposed to boost the American economy by boosting the supply side through increased investment in America, has been a complete failure.
    • To the extent that it was supposed to make America more unequal, has succeeded.
    • Delivered a substantial short-erm demand-side fiscal stimulus to growth that has now ebbed.
      • (A 3.2%/year rate of growth of final sales to domestic purchasers over the seven quarters starting in January 2017, pushing the level of Gross National Income up by 2.1% from this demand-side stimulus.)

  • A change from 3 months ago: The Federal Reserve’s abandonment of its focus on policies that are likely to keep PCE chain inflation at 2%/year or lower does not mean that it is preparing to do anything to avoid or moderate the next recession.
  • A change from 1 month ago: The U.S. grew at 3.2%/year in the first quarter of 2019—1.6%-points higher than had been nowcast—but the growth number you want to put in your head in assessing the strength of the economy is the 1.6%/year number that had been nowcast.
  • A change from 1 week ago: The disjunction between household- and establishment-survey views of the labor market continues to grow: since December seasonally-adjusted establishment payrolls have grown by an average of 210000 a month, while the CPS reports that the seasonally-adjusted number of workers with jobs has fallen by 80000 a month.

Table A 1 Employment status of the civilian population by sex and age

All Employees Total Nonfarm Payrolls FRED St Louis Fed

#highlighted #macro #forecasting

Fairly Recently: Must- and Should-Reads, and Writings… (May 1, 2019)


  1. Lindsey Graham: CNN New Day: “You Know How You Make America Great Again? Tell Donald Trump To Go To Hell”:n “Trump’s a Race-Baiting, Xenophobic, Religious Bigot. He Doesn’t Represent My Party. He Doesn’t Represent The Values That the Men And Women Who Wear the Uniform are Fighting For…

  2. Ben Thompson: Microsoft, Slack, Zoom, and the SaaS Opportunity: “For all of the disruption that the enterprise market has faced thanks to the rise of software-as-a-service (Saas), Microsoft was remarkably well-placed to take advantage of this new paradigm, if only they could get out of their own way…

  3. Charlie Stross: [Social Architecture and the House of Tomorrow( “The bedroom, wardrobe, bathroom, and some type of food storage/preparation area, aren’t going away. Other spaces will also be around, and social/spatial insulation will be in demand. At the high end, the elite (whoever they are) will try to ape the living arrangements of previous century’s elites, as a status signal if nothing else. What else is conceivable? What am I missing that should be as obvious as the multimodal shipping container in 1950, or photovoltaic panels on house rooftops in 1990?…

  4. Students who come to a country to study are one of the most important elements of any country’s soft power: they should be encouraged and cosseted. They become its friends. And God knows the Britain that Cameron and May have made will need lots of friends: Financial Times: British Universities and the Brexit Dimension: “Britain’s universities are a rare export success for its services-driven economy…. As well as the monetary benefits the UK gains soft power and ties of affection with future business leaders, technocrats and politicians. Whatever happens, Britain will need these friends…

  5. Neil Turok: The Astonishing Simplicity of Everything

  6. Amrita Chakrabarti Myers: The Erasure and Resurrection of Julia Chinn, U.S. Vice President Richard M. Johnson’s Black Wife

  7. David Mills: The Vice President and the Mulatto: “Race, sex and politics in 19th-Century America…. Brenda Gene Gordon, a 67-year-old white woman in Chandler, Ariz…. How on earth could Brenda Gordon not have known that her great-great-great-grandfather was Vice President Richard M. Johnson? Wasn’t this fact passed proudly from generation to generation inside her family? No, it was not…. Julia Chinn… was, by law, a Negro. And in Johnson’s time (not to mention since), this was scandalous. ‘I grew up never hearing the names Richard M. Johnson (even in Kentucky history classes) or Julia Chinn’, Mrs. Gordon wrote to me during a recent email exchange…

  8. Henry R. Robinson: An Affecting Scene in Kentucky

  9. Abigail Adams: Letter to John Adams, 31 March – 5 April 1776

  10. Wikipedia: Otto Bauer

  11. I would suggests to Senator Rick Scott—indeed, I would suggest to all the Republican senatorså—that this is sufficient reason to vote against Stephen Moore, unless this is the face the REpublican Party wants to put forward to minority voters for the next two generations: Margaret Hoover: Firing Line: “Stephen Moore explains his 2016 joke about Donald Trump moving into the White House and kicking ‘a black family out of public housing’. Moore says, ‘That is a joke I always made’, adding he didn’t mean it ‘like a black person’ lived there. ‘I shouldn’t have said it’, he says…

  12. Ella Nilsen: Infrastructure: Trump and Democrats’ maybe-doomed meeting on infrastructure, explained – Vox: “2 trillion in the nation’s roads, bridges, and rural broadband, according to Democratic leaders…. Democrats are thrilled with that number; Republicans likely won’t be. Trump himself admitted his plan ‘may not be typically Republican’, according to the source…

  13. Emily Stewart: How Occupy Wall Street Animated Bernie Sanders, AOC, and the Left: “Occupy Wall Street was seen as a failure when it ended in 2011. But it’s helped transform the American left…

  14. Nisha Gopalan: China’s Bay Area Plan Has Holes, Concerns for Hong Kong: “The plan gives scant detail on how Hong Kong and Macau will be integrated without eroding their special status…. Late Monday, the official Xinhua News Agency released details of the State Council’s Greater Bay Area plan—a project to knit together Hong Kong and Macau with nine mainland cities into a global innovation hub to rival California’s Silicon Valley. The trouble is, there’s little new on how authorities plan to make this grand vision into a reality…

  15. The Hoarse Whisperer: “The last time Barr engineered a cover-up, people didn’t have cellphones, e-mail or the internet. He’s the caveman of coverups. No wonder he’s so bad at it…

  16. Katherine Eriksson, Katheryn Russ, Jay C. Shambaugh, and Minfei Xu: Trade Shocks and the Shifting Landscape of U.S. Manufacturing

  1. This is… not right. Prospectively, Barro was modeling a permanent supply-side boost to the level of GDP driven by higher investment to the tune of an extra 800 billion dollars annually. Barro’s prospective model conclusion was not of a temporary demand-side boost. His shift to the demand side in his paper with Jason was a six-month-later climb-down. I know this. He knows this. I know he knows this. He knows I know he knows this. Why bother saying this? I think the point is to fuzz the issue: Barro made three assessments—one that the TCJA would boost output by 4% and it might achieve its full effect in 10 years, one that the TCJA would boost output by 7% with an 0.4% first-year effect, and a third with Jason Furman hat was not so much a model-based forecast of the impact but a reduced-form claim that if pst correlations held. It is this last that he now focuses on: Robert Barro: My Best Growth Forecast Ever: “America’s real GDP growth rate of 3.2% for the first quarter of this year is impressive, as was the 3% average growth in 2018 (measured from the fourth quarter of 2017 to the fourth quarter of 2018). Since the end of the Great Recession–from 2011 to 2017–the US economy grew by only 2.1% per year, on average. What accounts for the recent acceleration?…

  2. From Carole Cadwalladr as she uses TED to try to hold Silicon Valley to account—to get the social media companies to thin of themselves as informaiton utilities rather than misinformation utilities: Carole Cadwalladr: My TED Talk: How I Took on the Tech Titans in Their Lair: “Facebook had been ‘warned’ beforehand. And within minutes of stepping off stage, I was told that its press team had already lodged an official complaint… raised a serious challenge to the talk to claim ‘factual inaccuracies’…. What factual inaccuracies, we both wondered. ‘Let’s see what they come back with in the morning’, she said. Spoiler: they never did. That night, though, there was what was described to me as ‘an emergency dinner’ between Anderson and a cadre of senior Facebook executives. They were very angry, my spies told me. But Anderson, one of the most thoughtful people in tech, seemed unruffled. ‘There’s always been a strict church and state separation between sponsors and editorial’, he said. ‘And these are important conversations we need to have. There’s a lot of people here who are very upset about what has happened to the internet. They want to take it back and we have to start figuring out how’. At the end of my talk, he invited Zuckerberg or anyone else at Facebook to come and respond. Spoiler: they never did…

  3. An event coming on May 16: Preparing for the next recession is perhaps the most productive and urgent policy-analysis task op[en today: Equitable Growth: Preparing for the Next Recession: Policies to Reduce the Impact on the U.S. Economy – : “A Hamilton Project and Washington Center for Equitable Growth Policy Forum…. Historically, the U.S. has responded to recent recessions with a mix of monetary policy action and discretionary fiscal stimulus. However, since monetary policy options may be limited during the next recession, policymakers should consider adopting a range of fiscal policy measures now to help stabilize the economy when a future downturn inevitably occurs. This can be achieved with a range of fiscal policy responses aimed at expediting the next recovery through strengthening job creation and restoring confidence to businesses and households…

  4. It is difficult to understand Uber’s prospectus as anything other than “if we release information, we will scare off more potential buyers than we will attract”. That makes us wonder what such information would reveal. And it leads to a class-action of Uber’s IPO as a—in all likelihood very successful—attempt at affinity fraud: Rett Wallace: Uber’s Enormous, Vague IPO Prospectus Is an Outrage: “The 431-page updated prospectus was filled with lawyerly phrases and volumes of information on potential risks, but it left many serious professional investors wondering why a company that loses $3bn annually would be worth that much. The information that financial analysts would need simply wasn’t in there. A solicitation for so much money with so little information is an outrage, and a sign that something of central importance has gone wrong in US public markets in recent years…

  5. Bret Stephens’s claims that although “people” do, he would never never use an official position to retaliate against someone who had annoyed him are worth what you think they are. His promises are worthless because, somewhat paradoxically, his claim that people do retaliate is wrong. Most people, and sane people, have considerable tolerance for those who punch up. someone who claims people don’t is telling you who they are: Laura McGann: NYT Columnist Bret Stephens Inadvertently Explains Why Women Don’t Report Sexual Harassment: “In an exchange about the price of rude emails, Stephens confirms retaliation is real…. Stephens explains… if someone like Kalaf…. offends a person who is important or ends up important in the industry, he risks being blackballed from jobs and prizes—even years later…. ‘Imagine, for instance, that one day you are up for a big journalism award. Imagine, next, that someone you’ve insulted sits on the prize committee. Or suppose you apply for a dream job at a major publication, and your CV gets passed around. It’s fine to make unnecessary friends, but extremely unwise to make unnecessary enemies.’ Stephens writes in a postscript to Kalaf that he’s judged the Livingston Award and the Pulitzers, but he’s ethical and wouldn’t behave this way…

  6. It is very common to attribute the collapse of Roman Republican institutions and the rise of Imperial dictatorship to a loss of moral virtue on behalf of the Roman electorate—who are supposed to have fallen prey to demagogues and voted for bread-and-circuses as the underlying foundations of liberty collapsed underneath them. That story is not true. Here Sean Elling sends us to Edward Watts on the real story—recently enriched plutocracy breaking political norm after political norm in an attempt to disrupt what had been the normal grievance-redressing operation of the system: Sean Illing: Mortal Republic: Edward Watts on what America can learn from Rome’s collapse – Vox: “The Roman republic destroyed itself. Are we on a similar path?… Edward Watts, a historian at the University of California San Diego, has just published a new book titled Mortal Republic that carefully lays out what went wrong in ancient Rome — and how the lessons of its decline might help save fledgling republics like the United States today…

  7. The extremely sharp Josh Bevins correctly calls out as “remarkably stupid, even relative to my expectations baseline” a piece by former Trump Federal Reserve nominee Herman Cain. The 1980s and 1990s simply did not see a “stable dollar” in any sense those words might ever possibly mean: Herman Cain: The Fed and the Professor Standard: “The 1980s and 1990s brought prosperity across the board. This success was driven by a voting bloc of Fed governors, such as Wayne Angell and Manley Johnson, who favored a stable dollar and were able to swing the consensus. The dollar is a unit of measure—like the foot or the ounce—and keeping units of measure stable is critical to the functioning of a complex economy. The result of their stable-dollar policy was prosperity…

  8. Jonathan Gruber and Simon Johnson: Jump-Starting America:

  9. SEDAC: Population Estimation Tools:
    SEDAC s Population Estimation Tools

  10. Bay Area Book Festival: Festival Keynote: Enough Is Enough: Fighting Economic Injustice: “Anand Giridharadas, Robert Reich, and Kat Taylor…

  11. Sharon Reier: From Vienna to Harvard, A Life of Ups and Downs: “Schumpeter… establishment of the Austrian Republic… appointed finance minister…. A tangle with Austria’s foreign minister deprived him of support for taming… inflation…. His battle over the nationalization of a prominent company was the pretext for an enemy faction to force him out of office in 1919. Schumpeter’s next move, in 1921, was to help found and run the Biedermann Bank…. The bank collapsed in 1924 as Austrian inflation destroyed the value of the currency and therefore the value of the bank’s loans and investments…. It took many years to pay off his creditors. If his political and business life were turbulent, so were his private affairs. In 1912, Schumpeter fell in love with Annie Riesinger, the 12-year-old daughter of a building porter. He offered to pay for her education until she was old enough to marry him, and his proposition was accepted. In 1926, a year after she had become the second of his three wives, Annie died in childbirth at the age of 26, along with the couple’s infant son. In “The Life and Work of Joseph Schumpeter,” Schumpeter’s biographer, Robert Loring Allen, suggested that this personal tragedy triggered manic-depressive episodes. In 1937, he was married for the third time, to Elizabeth Boody, a fellow Harvard economist…

  1. Raka Ray

  2. Isha Ray

  3. UC Berkeley Sociology Department: Mara Loveman

  4. Alex Abad-Santos, Allegra Frank, and Alissa Wilkinson: Avengers: Endgame: Does the “Time Heist” Plan to Beat Thanos Make Sense?: “Endgame’s implausible “heist” plot could have ruined the movie. Instead, we loved it…

  5. Alex Abad-Santos, Allegra Frank, Todd VanDerWerff, and Alissa Wilkinson: Avengers: Endgame, Iron Man, and More: All 22 Marvel movies, Ranked: “Marvel has 11 years of superhero movies under its belt. But which ones are the best?…

  6. Richard H Thaler: “Love this solution to ordering the names of authors in economics, where alphabetical is the norm. Special symbol indicating certified randomization. Now endorsed by @AEAjournals…

  7. Roland Boer: That Hideous Pagan Idol: Marx, Fetishism and Graven Images

  8. Karl Marx: “The Secret of Primitive Accumulation”

  9. Karl Marx and Friedrich Engels (1848): Communist Manifesto

  10. Wikipedia: William Jennings Bryan: “Three presidential campaigns…

  11. Wikipedia: Benjamin N. Cardozo

  12. Wikipedia: Leon Czolgosz

#noted #weblogs