Speculation cannot affect prices very much.
Fear about future troubles in oil producing countries add to the price of oil.
How can these two ideas be reconciled?
Saturday, May 31, 2008
Debunking Skill-biased Technical Change
David Card, who always does excellent work, and John DiNardo published a nice work on the subject. Here is their conclusion:
133-40: "Since the late 1980s, a consensus has emerged that the decline in real wages for low-skilled workers in the early 1980s and the subsequent slow recovery of these wage levels are explained by skill-biased technological change. In this chapter, we have argued that the evidence underlying this consensus is remarkably frail. Much of the evidence takes the form of "proof by residual." After accounting for changes in relative supply and (in some cases) making a modest list of other factors, proponents of this consensus note that the decline in the relative wages of low-skilled labor remains unexplained. Skill-biased technological change is then left as the only plausible explanation for the facts. Given the state of knowledge about how labor markets work, we find this line of argument unconvincing. Moreover, the evidence that emerges from such an exercise is highly model-specific. Depending on how the data for different groups are organized, the degree of substitution that is allowed between workers of different genders or ages, and the list of other job characteristics that are included in the decomposition, the results can suggest that rising inequality was either an ubiquitous phenomenon affecting virtually all workers over the past three decades or a trend that mainly affected young workers in the early 1980s."
Card, David and John DiNardo. 2006. "The Impact of Technological Change on Low-Wage Workers: A Review." In Rebecca M. Blank, Sheldon H. Danziger, and Robert F. Schoeni, editors. Working and Poor: How Economic and Policy Changes Are Affecting Low-Wage Workers (New York: Russell Sage Foundation): pp. 113-140.
133-40: "Since the late 1980s, a consensus has emerged that the decline in real wages for low-skilled workers in the early 1980s and the subsequent slow recovery of these wage levels are explained by skill-biased technological change. In this chapter, we have argued that the evidence underlying this consensus is remarkably frail. Much of the evidence takes the form of "proof by residual." After accounting for changes in relative supply and (in some cases) making a modest list of other factors, proponents of this consensus note that the decline in the relative wages of low-skilled labor remains unexplained. Skill-biased technological change is then left as the only plausible explanation for the facts. Given the state of knowledge about how labor markets work, we find this line of argument unconvincing. Moreover, the evidence that emerges from such an exercise is highly model-specific. Depending on how the data for different groups are organized, the degree of substitution that is allowed between workers of different genders or ages, and the list of other job characteristics that are included in the decomposition, the results can suggest that rising inequality was either an ubiquitous phenomenon affecting virtually all workers over the past three decades or a trend that mainly affected young workers in the early 1980s."
Card, David and John DiNardo. 2006. "The Impact of Technological Change on Low-Wage Workers: A Review." In Rebecca M. Blank, Sheldon H. Danziger, and Robert F. Schoeni, editors. Working and Poor: How Economic and Policy Changes Are Affecting Low-Wage Workers (New York: Russell Sage Foundation): pp. 113-140.
Wednesday, May 28, 2008
My new book project -- revised again
I have rewritten the introduction for my new book again, although the first chapter is unchanged. I think that the focus is much stronger. Thanks to Jim Kirby and the others for their suggestions. Any more comments would be appreciated.
http://michaelperelman.wordpress.com/files/2008/06/ch-1.doc
http://michaelperelman.wordpress.com/files/2008/06/ch-1.doc
Wall Street Journal Evidence That Speculators Are Responsible for the Run Up in Oil?
The Journal article does not discuss oil, but chocolate. Even so, the article is of interest because it dismisses the idea that fundamentals are responsible for a rapid increase in prices.
The only speculator quoted responded that speculation can only cause higher prices in the short run because farmers can plant more trees. How long does a tree take to mature.
Patrick, Aaron O. 2008. "Candy Companies Blame Higher Prices On Hedge Funds' Chocolate Cravings." Wall Street Journal (28 May): p. C 1.
The only speculator quoted responded that speculation can only cause higher prices in the short run because farmers can plant more trees. How long does a tree take to mature.
Patrick, Aaron O. 2008. "Candy Companies Blame Higher Prices On Hedge Funds' Chocolate Cravings." Wall Street Journal (28 May): p. C 1.
Soaring cocoa prices are driving up the cost of chocolate around the world. The chocolate industry points its finger at speculative buying by professional investors, especially hedge funds.
"They definitely influence the market and the prices," says Bernd Rossler, a spokesman for August Storck KG, one of Germany's bigger chocolate makers. "There is a lot of money invested in [cocoa], and it is coming from hedge funds."
Shipped around the world as a powder, paste, liquor or butter, cocoa sells for about $2,600 a metric ton on New York's Intercontinental Exchange, up from $1,700 at the beginning of 2007.
Cocoa investors acknowledge that they can affect prices but say their influence is strictly short term. Any increase in prices should lead to farmers growing more cacao trees, which produce cocoa beans, driving prices down again, they say.
One of the puzzles behind the cocoa-price increase is that it doesn't appear to reflect an imbalance between supply and demand. In the year ending in September, there will be almost enough cocoa grown to meet the world's needs, according to the International Cocoa Organization, a trade group. The expected 51,000-metric-ton shortfall isn't particularly large and can easily be covered by existing stock, the group says. "The fundamentals do not justify this price, and I haven't heard of any other explanation other than [investment] funds," says Hagen Streichert, a German government official and the spokesman for cocoa-buying countries on the International Cocoa Council.
Really Bad Carbon Emissions Plan #91: Personal Emissions Trading
If there were any doubt that old fashioned Tory moralism is alive and well in (temporarily) Labor England, this crazy idea should dispel it. It plays on the “personal responsibility” trope at the expense of any hope of getting the job done fairly and efficiently. To wit:
1. If you have a national cap, you have a national cap. Enforce it and people’s carbon emissions have to fall in line according the laws of arithmetic.
2. How on earth are you going to put carbon prices on each and every personal decision, especially if you take life-cycle and indirect effects into account? After all those years of Maggie channeling Hayek you’d think the basic lessons of the socialist calculation debate would have rubbed off.
3. The more upstream the cap, the more flexible and efficient the system will be. Capping each individual’s consumption is as downstream as you can go. Upstream capping means that the advantages of shifting the economy across sectors, technologies and the like would be transparent and seamless: if the higher cost of carbon results in an investment in rail transport being more productive than one in highways, you can transfer the resources and adjust in a lower-cost way to the cap. If you have separate caps for separate activities this visibility and flexibility is lost.
4. And the whole scheme is based on the misperception that an economy-wide carbon tax—or even better, an economy-wide cap—bleeds households. Yes, of course, taking money from households would do this, and the tax/cap would function much like a regressive sales tax. But wait: the money has to go somewhere. The simple solution is to give it back on an equal per capita basis. This reimburses the public and turns a regressive transfer into a highly progressive one. Much more sensible, I would say, than moralism run amok.
1. If you have a national cap, you have a national cap. Enforce it and people’s carbon emissions have to fall in line according the laws of arithmetic.
2. How on earth are you going to put carbon prices on each and every personal decision, especially if you take life-cycle and indirect effects into account? After all those years of Maggie channeling Hayek you’d think the basic lessons of the socialist calculation debate would have rubbed off.
3. The more upstream the cap, the more flexible and efficient the system will be. Capping each individual’s consumption is as downstream as you can go. Upstream capping means that the advantages of shifting the economy across sectors, technologies and the like would be transparent and seamless: if the higher cost of carbon results in an investment in rail transport being more productive than one in highways, you can transfer the resources and adjust in a lower-cost way to the cap. If you have separate caps for separate activities this visibility and flexibility is lost.
4. And the whole scheme is based on the misperception that an economy-wide carbon tax—or even better, an economy-wide cap—bleeds households. Yes, of course, taking money from households would do this, and the tax/cap would function much like a regressive sales tax. But wait: the money has to go somewhere. The simple solution is to give it back on an equal per capita basis. This reimburses the public and turns a regressive transfer into a highly progressive one. Much more sensible, I would say, than moralism run amok.
Monday, May 26, 2008
David Warsh on the JMU economic complexity conference: "A Brave Army of Heretics"
David Warsh has posted an 8-page discussion of the conference held on May 17 at James Madison University in Harrisonburg, VA that John Horgan has also discussed ("chaoplexity," not my "chaoplexology"). Warsh discusses broader issues of complexity, but also declares that when he came to the conference he was "slightly surprised at the real progress that had been made..." His article is available in the latest issue of the independent weekly, Economic Principals, under the title of "A Brave Army of Heretics" (which comes from a passage in Keynes's General Theory).
Warsh's posting has also been linked on Economist's View run by Mark Thoma. I have to thank Dave for his kind remarks about me and Mark for giving the whole thing more publicity. Warsh's post provides lots of links, including to my earlier post here and John Horgan's post.
Warsh's posting has also been linked on Economist's View run by Mark Thoma. I have to thank Dave for his kind remarks about me and Mark for giving the whole thing more publicity. Warsh's post provides lots of links, including to my earlier post here and John Horgan's post.
Saturday, May 24, 2008
Further Decline of the Washington Post
In Friday's (May 23) Washington Post Business section there was a story by Frank Ahrens, "More Than 100 Post Journalists Take Buyout," the third round of these, which will reduce the staff from about 780 to around 700. This is in response to declininig circulation, which peaked at 832,232 in 1993 and is now down to 638,300. Among those taking these early retirements and not being replaced are Pulitzer Prize winning foreign correspondent Thomas Ricks, even better in my view foreign correspondent Nora Boustany, Pulitzer Prize winning movie critic Steven Hunter, music critic Tim Page, and Maralee Schwartz and Tony Reid from the Business section. The most prominent retiree will be the increasingly blovious David Broder, although he will still lurk about "on contract." Brad Delong may crow about the "death spiral" of the Post (and the NY Times), but I am not at all. This will be a severe loss as Americans will be further cut off from independent reporting of foreign news events. The coverage of such events in the American media is already about as limited and distorted as what one used to get if one lived in the USSR.
I am someone who gets WaPo delivered to my door in Harrisonburg, VA. If it were to go the alternatives would be the Washington Times and the Harrisonburg Daily News-Record. The latter is quite reasonably moving towards covering mostly local news. While its editorial page writer has gone off the deep end, putting himself far to the right of George W. Bush on global warming, among other things, at least the DNR has an array of views presented in the columnists who appear there, whereas the WT is so uniform in its columnists it makes Fox News look like Le Monde Diplomatique. As it is, I fear that WaPo has decided to become a local Washington newspaper, which at least means there might still be good coverage of national political news from there, even if its global and other coverage deteriorates further.
I note another issue of relevance to Brad Delong and bloggers. There is this idea in the blogosphere that it will replace the print media. However, I note that much of what appears in blogs ultimately comes from the print media. I was made all too aware of this several years ago when on maxspeak I broke the story of the mistreatment by federal prosecutors of the Harrisonburg Kurds. This blew all over the world, but many, such as the Volokh Conspiracy, questioned whether it was even happening. Was I lying? It was not until we could find a small back page story from the Harrisonburg Daily News-Record confirming that there was a prosecution of Kurds (and which totally reflected the prosecution's view), that the blogosphere accepted that this was really going on, and in the end the blowback from the blogosphere then played a role in bringing print media attention in Harrisonburg and elsewhere to what was going on, eventually leading to a much more favorable outcome in the courts.
I am someone who gets WaPo delivered to my door in Harrisonburg, VA. If it were to go the alternatives would be the Washington Times and the Harrisonburg Daily News-Record. The latter is quite reasonably moving towards covering mostly local news. While its editorial page writer has gone off the deep end, putting himself far to the right of George W. Bush on global warming, among other things, at least the DNR has an array of views presented in the columnists who appear there, whereas the WT is so uniform in its columnists it makes Fox News look like Le Monde Diplomatique. As it is, I fear that WaPo has decided to become a local Washington newspaper, which at least means there might still be good coverage of national political news from there, even if its global and other coverage deteriorates further.
I note another issue of relevance to Brad Delong and bloggers. There is this idea in the blogosphere that it will replace the print media. However, I note that much of what appears in blogs ultimately comes from the print media. I was made all too aware of this several years ago when on maxspeak I broke the story of the mistreatment by federal prosecutors of the Harrisonburg Kurds. This blew all over the world, but many, such as the Volokh Conspiracy, questioned whether it was even happening. Was I lying? It was not until we could find a small back page story from the Harrisonburg Daily News-Record confirming that there was a prosecution of Kurds (and which totally reflected the prosecution's view), that the blogosphere accepted that this was really going on, and in the end the blowback from the blogosphere then played a role in bringing print media attention in Harrisonburg and elsewhere to what was going on, eventually leading to a much more favorable outcome in the courts.
Could Someone Explain Stolper-Samuelson to James Surowiecki?
And why does Greg Mankiw endorse this stuff?
The candidates are trying to win the favor of unions and blue-collar voters in states like Ohio and West Virginia, of course, but their positions also reflect a widespread belief that free trade with developing countries, and with China in particular, is a kind of scam perpetrated by the wealthy, who reap the benefits while ordinary Americans bear the cost. It’s an understandable view: how, after all, can it be a good thing for American workers to have to compete with people who get paid seventy cents an hour? As it happens, the negative effect of trade on American wages isn’t that easy to document. The economist Paul Krugman, for instance, believes that the effect is significant, though in a recent academic paper he concluded that it was impossible to quantify. But it’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries. The reason for this is simple: free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers—a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods—clothes, shoes, and the like—whose prices are often directly affected by free trade.
Yes, it seems we have another edition of free trade benefits everyone through lower prices. Dani Rodrik addressed this argument directly over a one year ago:
And since Surowiecki mentioned Paul Krugman, let’s see what he had to say:
Hard to quantify is not the same thing as nearly zero. Of course, the Stolper-Samuelson theorem states:
In fact, as the price of apparel declines from free trade with China, the wages of apparel workers fall by more than the prices of apparel so the real wages of apparel works decline. Somehow it seems that James Surowiecki never grasped this proposition.
The candidates are trying to win the favor of unions and blue-collar voters in states like Ohio and West Virginia, of course, but their positions also reflect a widespread belief that free trade with developing countries, and with China in particular, is a kind of scam perpetrated by the wealthy, who reap the benefits while ordinary Americans bear the cost. It’s an understandable view: how, after all, can it be a good thing for American workers to have to compete with people who get paid seventy cents an hour? As it happens, the negative effect of trade on American wages isn’t that easy to document. The economist Paul Krugman, for instance, believes that the effect is significant, though in a recent academic paper he concluded that it was impossible to quantify. But it’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries. The reason for this is simple: free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers—a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods—clothes, shoes, and the like—whose prices are often directly affected by free trade.
Yes, it seems we have another edition of free trade benefits everyone through lower prices. Dani Rodrik addressed this argument directly over a one year ago:
Advocates of globalization love to argue that free trade lowers prices, and the argument seems sensible enough. Think of all the cheap goods from China that we can buy at Wal-Mart. But anyone who understands comparative advantage knows that free trade affects relative prices, not the price level (the latter being the province of macro and monetary factors). When a country opens up to trade (or liberalizes its trade), it is the relative price of imports that comes down; by necessity, the relative prices of its exports must go up! Consumers are better off to the extent that their consumption basket is weighted towards importables, but we cannot always rely on this to be the case.
And since Surowiecki mentioned Paul Krugman, let’s see what he had to say:
What all this comes down to is that it’s no longer safe to assert, as we could a dozen years ago, that the effects of trade on income distribution in wealthy countries are fairly minor. There’s now a good case that they are quite big, and getting bigger.
Hard to quantify is not the same thing as nearly zero. Of course, the Stolper-Samuelson theorem states:
An increase in the price of a good will cause an increase in the price of the factor used intensively in that industry and a decrease in the price of the other factor.
In fact, as the price of apparel declines from free trade with China, the wages of apparel workers fall by more than the prices of apparel so the real wages of apparel works decline. Somehow it seems that James Surowiecki never grasped this proposition.
Friday, May 23, 2008
War For Oil, Or Oil For War?
The Wall Street Journal has an article suggesting that the military consumes 340,000 barrels of oil a day, compared to Iraq's 2.4 million; and that the Defense Department paid $13.6 billion for energy in 2006. I suspect that these figures would be what uniformed personnel consumed. Maybe somebody here knows, but I feel fairly confident that contractors in Iraq -- even contractors carrying out military missions -- consume oil that escapes these estimates.
Wasting oil is nothing compared to wasting lives, but even so I can think of better uses for 340,000 barrels of oil a day.
Dreazen, Yochi J. 2008. "U.S. Military Launches Alternative-Fuel Push Dependence on Oil." Wall Street Journal (21 May): p A 1.
Wasting oil is nothing compared to wasting lives, but even so I can think of better uses for 340,000 barrels of oil a day.
Dreazen, Yochi J. 2008. "U.S. Military Launches Alternative-Fuel Push Dependence on Oil." Wall Street Journal (21 May): p A 1.
U.S. military consumes 340,000 barrels of oil a day, or 1.5% of all of the oil used in the country. The Defense Department's overall energy bill was $13.6 billion in 2006, the latest figure available -- almost 25% higher than the year before. The Air Force's bill for jet fuel alone has tripled in the past four years. When the White House submitted its latest budget request for the wars in Iraq and Afghanistan, it tacked on a $2 billion surcharge for rising fuel costs.
Just as important, the military is increasingly concerned that its dependence on oil represents a strategic threat. U.S. forces in Iraq alone consume 40,000 barrels of oil a day trucked in from neighboring countries.
The Air Force wants to be able to purchase 400 million gallons of synthetic jet fuel a year by 2016, an amount equal to 25% of its total fuel needs for missions in the continental U.S. This year, it expects to buy slightly more than 300,000 gallons.
Wednesday, May 21, 2008
Textbook Lore versus George Gunton's Economic Theory of the Eight-Hour System
by the Sandwichman
Economics textbooks throughout the first half of the 20th century -- right up to and including Paul Samuelson's widely-adopted textbook of the 1950s and 60s -- repeatedly stressed the fallacy of union "theories" underlying their agitation for shorter hours. According to those textbooks, the fallacious union rationale for shorter working time was based on the assumption (the "lump-of-labor fallacy") there was only a fixed amount of work to go around and that if each worker did less of it, more could be employed.
Where did this alleged "union theory" come from?
The most likely suspect would appear to be the writings of George Gunton. Gunton, a disciple of shorter hours pioneer Ira Steward, was commissioned in 1889 by Samuel Gompers of the American Federation of Labor to write a pamphlet, "The Economic and Social Importance of the Eight-Hour Movement," outlining his theory of the eight-hour system. Gunton's pamphlet was thus the authorized statement of union reasoning behind their eight-hour campaign. Furthermore, in his pamphlet, Gunton claimed that if the eight-hour system were generally adopted in the US, the demand for workers would be increased by an amount approximately equal to the number of hours withdrawn from the market by currently-employed workers. This claim was soon rebutted by John Rae who pointed out that the redistribution of hours of work was "not a simple sum in arithmetic."
Even conceding that Gunton's claim does indeed look suspiciously like a theoretically-naive "simple sum in arithmetic," it is, nevertheless, more of a digression from Gunton's overall argument than its culmination and conclusion. What Rae did, in his retort to Gunton, was to ignore Gunton's own argument and retrofit a correspondingly simplistic argument to the obviously simplistic claim. Subsequent textbook authors followed suit, albeit with even less attention to the integrity of the original source. If we were to assume that textbook authors knew what they were doing in passing along the lump-of-labor claim, it would most accurately be described as dissembling and propaganda. However, it is more likely that the episode is simply one of arrogant prejudice swallowing its own tale.
Despite his lapse of making a sweeping and perhaps preposterous claim about the immediate results of the general adoption of the eight-hour system, Gunton's economic argument for the eight-hour system is actually rather sophisticated and dynamic -- much more so than what came to be the standard textbook treatment of the issue of shorter working time.
What was Gunton's argument, then? Briefly, Gunton argued that it is final demand that ultimately determines the amount of goods that can be profitably produced and sold and that the benefits of increased use of capital equipment derive from increasing returns to scale of production. Proceeding from those principles, it followed in Gunton's argument that higher wages and expanded employment would result in increased consumption which, in turn, would enable intensified use of machinery and thus a lower per-unit cost of production. As a consequence, under Gunton's assumptions, it is not necessary that the higher wages infringe on profitability.
Whether or not Gunton's assumptions hold up under rigorous scrutiny, they are unmistakably dynamic assumptions rather than static ones. The charges that they assume a fixed amount of economic activity, exhibit antipathy to technological improvement or call for restriction of output by workers are 180 degrees wide of the mark. And, remember, this is the official statement issued by the leading national organization of trade unions of the theory behind their eight-hour day campaign.
To credibly attribute some other motive or theory to unions would require -- at the very least -- either the citation of some other supposedly authoritative source or an explication of the discrepency between the trade unions’ stated rationale and their actual theory as demonstrated by practice. Do the textbooks do this? No. In fact, most accounts go no farther than to refer to the lump-of-labor theory/fallacy as if it were an uncontested fact that unions subscribed to it. In other words, whilst Gunton’s theory is at least plausible, the textbook accounts of the lump-of-labor are utterly unfounded. It is the legacy of that unfounded hearsay that continues to echo, uncorrected and generally unquestioned, in mainstream analyses of policies for the reduction of working time.
Economics textbooks throughout the first half of the 20th century -- right up to and including Paul Samuelson's widely-adopted textbook of the 1950s and 60s -- repeatedly stressed the fallacy of union "theories" underlying their agitation for shorter hours. According to those textbooks, the fallacious union rationale for shorter working time was based on the assumption (the "lump-of-labor fallacy") there was only a fixed amount of work to go around and that if each worker did less of it, more could be employed.
Where did this alleged "union theory" come from?
The most likely suspect would appear to be the writings of George Gunton. Gunton, a disciple of shorter hours pioneer Ira Steward, was commissioned in 1889 by Samuel Gompers of the American Federation of Labor to write a pamphlet, "The Economic and Social Importance of the Eight-Hour Movement," outlining his theory of the eight-hour system. Gunton's pamphlet was thus the authorized statement of union reasoning behind their eight-hour campaign. Furthermore, in his pamphlet, Gunton claimed that if the eight-hour system were generally adopted in the US, the demand for workers would be increased by an amount approximately equal to the number of hours withdrawn from the market by currently-employed workers. This claim was soon rebutted by John Rae who pointed out that the redistribution of hours of work was "not a simple sum in arithmetic."
Even conceding that Gunton's claim does indeed look suspiciously like a theoretically-naive "simple sum in arithmetic," it is, nevertheless, more of a digression from Gunton's overall argument than its culmination and conclusion. What Rae did, in his retort to Gunton, was to ignore Gunton's own argument and retrofit a correspondingly simplistic argument to the obviously simplistic claim. Subsequent textbook authors followed suit, albeit with even less attention to the integrity of the original source. If we were to assume that textbook authors knew what they were doing in passing along the lump-of-labor claim, it would most accurately be described as dissembling and propaganda. However, it is more likely that the episode is simply one of arrogant prejudice swallowing its own tale.
Despite his lapse of making a sweeping and perhaps preposterous claim about the immediate results of the general adoption of the eight-hour system, Gunton's economic argument for the eight-hour system is actually rather sophisticated and dynamic -- much more so than what came to be the standard textbook treatment of the issue of shorter working time.
What was Gunton's argument, then? Briefly, Gunton argued that it is final demand that ultimately determines the amount of goods that can be profitably produced and sold and that the benefits of increased use of capital equipment derive from increasing returns to scale of production. Proceeding from those principles, it followed in Gunton's argument that higher wages and expanded employment would result in increased consumption which, in turn, would enable intensified use of machinery and thus a lower per-unit cost of production. As a consequence, under Gunton's assumptions, it is not necessary that the higher wages infringe on profitability.
Whether or not Gunton's assumptions hold up under rigorous scrutiny, they are unmistakably dynamic assumptions rather than static ones. The charges that they assume a fixed amount of economic activity, exhibit antipathy to technological improvement or call for restriction of output by workers are 180 degrees wide of the mark. And, remember, this is the official statement issued by the leading national organization of trade unions of the theory behind their eight-hour day campaign.
To credibly attribute some other motive or theory to unions would require -- at the very least -- either the citation of some other supposedly authoritative source or an explication of the discrepency between the trade unions’ stated rationale and their actual theory as demonstrated by practice. Do the textbooks do this? No. In fact, most accounts go no farther than to refer to the lump-of-labor theory/fallacy as if it were an uncontested fact that unions subscribed to it. In other words, whilst Gunton’s theory is at least plausible, the textbook accounts of the lump-of-labor are utterly unfounded. It is the legacy of that unfounded hearsay that continues to echo, uncorrected and generally unquestioned, in mainstream analyses of policies for the reduction of working time.
Tuesday, May 20, 2008
John Horgan on "Can Chaoplexology Save Economics?"
Attending the conference I hosted at JMU over the weekend was the former Scientific American editor, John Horgan, who also wrote the bestselling _The End of Science_ a bit over a decade ago. Among the things he blasted in that book was what he called "chaoplexology," or what most of us would call complexity, including in economics, although more broadly. Anyway, I invited him to attend "Transdisciplinary Perspectives on Economic Complexity," and he did, providing a lively and interesting gadfly role. For those who are curious, he has reiterated his skepticism along with a lively report of the conference on his blog. He is currently a professor of scientific communication at the Stevens Institute of Technology.
Monday, May 19, 2008
Peter Albin Academic Memorial, May 20 4 PM
Tomorrow (May 20) there will be a memorial at 4 PM at the John Jay College of Criminal Justice in New York at 899 Tenth Avenue (west side of Tenth Avenue between 58th and 59th Streets), Room 630. He was a longtime member of the economics department there who died on Feb. 20, although he had been seriously incapacitated since a stroke in 1991. Duncan Foley and James Galbraith will be among the speakers, and there will be an open mike at 5 PM for people to speak on "Peter as we knew him."
Duncan Foley put together a set of his papers that were published in 1998 by Princeton University Press as _Barriers and Bounds to Rationality: Essays on Economic Complexity and Dynamics in Interactive Systems_. Below the fold I put a summary of some remarks about Peter that I have asked Duncan to make on my behalf as I shall not be present.
This is a shortened version of my remarks to be presented.
I note that I always found him to be a warm and genuine person of great principle, thoughtfulness, and kindness.
I then note three innovative contributions to economics he made.
1) His 1975 paper in Kyklos, "Reswitching: An Empirical Observation, A Theoretical Note, and an Environmental Conjecture," in which he showed he was the first to propose an empirical example of capital theoretic paradoxes and how they could relate to environmental issues, an application that may be made to the global warming debate.
2) His 1982 paper in Mathematical Social Sciences, "The Metalogic of Economic Predictions, Calculations, and Propositions," which was the first to study the implications for economic analysis and its limits of the Goedel Incompleteness and Inconsistency theorems. This was a foundational paper for the analysis of computational complexity in the economy.
3) His 1983 paper with Farrokh Hormozi in Mathematical Social Sciences, "Theoretical Reconciliation of Equilibrium and Structural Approaches," that was one of the first to apply cellular automata to studying economics, focusing on the coevolution of technology and institituions with catastrophe theory playing a role at critical points of discontinuos change in the evolution.
I shall also note here that I hosted a conference on May 17 on my campus on "Transdisciplinary Perspectives on Economic Complexity," which dealt with many of these themes, and which Duncan Foley participated in.
Duncan Foley put together a set of his papers that were published in 1998 by Princeton University Press as _Barriers and Bounds to Rationality: Essays on Economic Complexity and Dynamics in Interactive Systems_. Below the fold I put a summary of some remarks about Peter that I have asked Duncan to make on my behalf as I shall not be present.
This is a shortened version of my remarks to be presented.
I note that I always found him to be a warm and genuine person of great principle, thoughtfulness, and kindness.
I then note three innovative contributions to economics he made.
1) His 1975 paper in Kyklos, "Reswitching: An Empirical Observation, A Theoretical Note, and an Environmental Conjecture," in which he showed he was the first to propose an empirical example of capital theoretic paradoxes and how they could relate to environmental issues, an application that may be made to the global warming debate.
2) His 1982 paper in Mathematical Social Sciences, "The Metalogic of Economic Predictions, Calculations, and Propositions," which was the first to study the implications for economic analysis and its limits of the Goedel Incompleteness and Inconsistency theorems. This was a foundational paper for the analysis of computational complexity in the economy.
3) His 1983 paper with Farrokh Hormozi in Mathematical Social Sciences, "Theoretical Reconciliation of Equilibrium and Structural Approaches," that was one of the first to apply cellular automata to studying economics, focusing on the coevolution of technology and institituions with catastrophe theory playing a role at critical points of discontinuos change in the evolution.
I shall also note here that I hosted a conference on May 17 on my campus on "Transdisciplinary Perspectives on Economic Complexity," which dealt with many of these themes, and which Duncan Foley participated in.
Diamonds Are Forever, Wars Are Not: Is Conflict Bad for Private Firms?
Every once in a while The American Economic Review publishes something interesting. A recent article gave pretty solid evidence that the Civil War promoted by Jonas Savimbi raised profits for the diamond industry.
A long-standing theory in economics is that peaceful development is in the interests of business. 18th century theorists use to write about "sweet commerce." But Savimbi offered business the opportunity for an alternative government to bid against the Angolan government, thereby converting government rents into profits.
Once peace broke out, the levels profits subsided.
Here are my notes from the article:
Guidolin, Massimo and Eliana La Ferrara. 2007. "Diamonds Are Forever, Wars Are Not: Is Conflict Bad for Private Firms?" American Economic Review, 97:5 (December): pp. 1978-1993.
1978: "... the Angolan civil war suddenly ended with the death of the rebels' leader, Jonas Savimbi, on February 22, 2002. This allows us to conduct an event study to assess investors' reactions to an exogenous conflict-related event, and one in which one party gained an unambiguous victory over the other. Restricting our analysis to the diamond mining sector is useful because, unlike oil production sites, which are located offshore and were removed from the fighting in the mainland, the activities of diamond extracting firms were located in areas very much at the heart of the conflict. A priori, one would therefore expect the (negative) impact of the war to be maximal for these firms."
1978-9: "Our main finding is that the cumulative abnormal returns of "Angolan" stocks experienced a significant drop in correspondence to the end of the conflict, while those of a control portfolio made of otherwise similar diamond mining companies not holding concessions in Angola did not. In other words, international stock markets perceived Savimbi's death (and later the ceasefire) as "bad news" for the companies operating in Angola, but not for others. On the event date, the abnormal returns of the "Angolan" portfolio declined by 4 percentage points, and the difference between "Angolan" and control abnormal returns was 27 percentage points. This suggests that, no matter how high the costs to be borne by diamond mining firms in Angola during the conflict, the war appears to have generated some counterbalancing "benefits" that in the eye of investors more than outweighed these costs. Although our result is based on a small sample of seven firms that were operating in Angola and were also listed on major international stock exchanges, this is a (sad and) striking result which suggests that much of the wisdom on the incentives of the private sector to end conflict may need closer scrutiny. We offer a number of interpretations for our finding, including the fact that during the conflict: (a) entry barriers for new diamond producers were higher; (b) the bargaining power of Angolan authorities was lower, hence licensing (and rent-seeking) costs for incumbent firms were lower; and (c) the lower transparency standards permitted by the ongoing war allowed for relatively profitable unofficial dealings."
1979: "The second branch of literature concerns the role of natural resources in civil wars. This literature, started by the work of Paul Collier and Anke Hoeffler [Collier, Paul, and Anke Hoeffler. 1998. "On Economic Causes of Civil War." Oxford Economic Papers, 50(4): 563-73.], investigates whether natural resource abundance increases the likelihood of conflict onset, as well as conflict duration."
see also Ross, Michael L. 2004. "What Do We Know about Natural Resources and Civil War?" Journal of Peace Research, 41(3): 337-56; and Miguel, Edward, Shanker Satyanath, and Ernest Sergenti. 2004. "Economic Shocks and Civil Conflict: An Instrumental Variables Approach." Journal of Political Economy, 112(4), 725-53.
1979-80: "Following its independence from Portugal in 1974, Angola was plagued by a long and cruel civil war between the Movimento Popular de Liberta‡ao de Angola (MPLA) and the Uniao Nacional para a Independencia Total de Angola (UNITA). In September 1992, national elections were held and Jos‚ Eduardo dos Santos, leader of the MPLA, won by a slight margin. This victory was never recognized by UNITA's leader, Jonas Savimbi, who initiated a civil war that was perceived by many as driven by his own desire of political power as much as by ideology. Throughout the war, UNITA's military strategy was aimed at occupying the areas of highest concentration of diamond mines and at using diamond sales to finance weapons purchases. The MPLA relied mostly on oil for financing its military operations through the Fuerzas Armadas de Angola (FAA), while also earning money from official diamond concessions. As part of the Lusaka Peace Protocol, in 1994, UNITA was given legal rights to mine and to form partnerships with foreign companies. The peace process collapsed in the summer of 1998, however, when the rebels returned to massive attacks against the military and civilians. The years between 1998 and February 2002 marked the last phase of the Angolan conflict and constitute the sample period on which our empirical analysis focuses. During these years, many commentators talked about a "military stalemate" between government and rebel forces. On February 22, however, Jonas Savimbi died in an ambush 100 kilometers from the Zambian border. Six weeks later, on April 4, the cease-fire was signed."
1980: "Since the beginning of the war, there was a close link between conflict and the diamond industry in Angola. Angolan diamonds have traditionally been mined in alluvial deposits, where capital investments take the form of light machinery and river diversions, and production was relatively easy to control by rebel forces. The key role of diamond sales in financing UNITA's operations has brought the problem of "conflict diamonds" to the attention of the public. To give an idea of the importance of the sector, Angola is the fourth largest diamond producer by value in the world, largely because most of its production is of gem quality. Angolan diamond sales in 2000 reached $1.1 billion, i.e., 15 percent of the world production of rough diamonds. This amount was almost equally split between official industrial production, official artisanal production, and illegal production. It is estimated that between 1992 and 1997, when UNITA controlled most deposits in the Cuango valley, the rebel movement supplied between 8 and 10 percent by value of the rough diamonds on the world market (Tony Hodges 2004, 174-77).
1980: "Diamond production and marketing in Angola have traditionally been controlled by the stateowned company Endiama through joint ventures. The diamond law passed in 1994 established that in order to obtain mining rights, foreign companies had to form a partnership with Endiama and with at least one other Angolan company, and get approval of the Ministry of Geology and Mines. This led to the proliferation of local mining companies owned by well-connected Angolans, who obtained concession rights for nominal fees and then sought lucrative partnerships with foreign companies. Many army generals also benefited from the situation by establishing private security firms that were contracted by the mining company being awarded the concession, sometimes as an implicit part of the deal. These high hidden costs restricted participation in diamond mining in Angola to a relatively small number of industrial companies and a large number of artisanal miners (garimpeiros)."
1980: "Between December 1999 and February 2000, the Angolan diamond industry underwent further restructuring. First, the government created a marketing monopoly in which all Angolan diamond production would be bought and resold by the Angola Selling Corporation (Ascorp). This was a joint venture between the state-owned Sodiam (51 percent) and two foreign companies with strong political connections, Welox and Tais. The creation of Ascorp was perceived as a serious blow to major international companies operating in Angola, primarily to De Beers. Another reform in early 2000 suspended all contracts that had been signed between Endiama and other mining companies and expropriated prospecting concessions exceeding 3,000 square kilometers. Needless to say, these reforms were not welcomed by existing companies, which saw their contracts unilaterally renegotiated. Since the end of the war, the situation has not changed significantly. Partnerships with local companies remain a cornerstone of the Angolan diamond industry, and the government has established a security body that has been seen by many as an attempt to centralize control of diamond production under domestic intelligence services."
1986: ""Mining companies are condemned to operating wherever they find minerals. They can consequently find themselves in the middle of conflicts that have erupted around them. In some instances they also deliberately enter conflict zones as part of a high risk-high profit strategy to exploit areas lacking competitors, or to gain a toehold before competitors arrive." (Oxford Analytica, Congo-Kinshasa: Resource sector brings political risks, 20 July 2005)."
1986: "A concise quote from a local source is possibly more explicit: "The end of the war in Angola means that right now the main institution in the country is corruption." Quote by Rafael Marques, a dissident journalist from Luanda. Reported by Tim Butcher in "As guerrilla war ends, corruption now bleeds Angola to death." www.telegraph.co.uk, 30 July 2002.
1986: The civil war created "a price war between the government and UNITA over the concession of mining rights. The length of the conflict, and the withdrawal of the external funding that had helped both sides during the Cold War, put increasing pressure on the two parties to obtain immediate revenue. This is likely to have shifted bargaining power in favor of firms and allowed them to strike better deals. This was particularly true in the case of UNITA after the imposition of UN sanctions that rendered dealing with rebel forces illegal and forced them to do business on terms very favorable to the buyers. Indeed, industry sources suggest that working under UNITA protection was a particularly cheap way to extract diamonds: "According to one former garimpeiro who worked in the twilight zone between UNITA and government control, foreign dealers paid $250 to UNITA for prospecting rights" (Justin Pearce 2004, 4). The end of the war would dramatically decrease the demand for weapons (and for immediate revenue) by the two parties and thus increase firms' licensing costs. Through this channel, company profits would have decreased after Savimbi's death even if the extent of regulation and rent extraction by the government had not changed."
A long-standing theory in economics is that peaceful development is in the interests of business. 18th century theorists use to write about "sweet commerce." But Savimbi offered business the opportunity for an alternative government to bid against the Angolan government, thereby converting government rents into profits.
Once peace broke out, the levels profits subsided.
Here are my notes from the article:
Guidolin, Massimo and Eliana La Ferrara. 2007. "Diamonds Are Forever, Wars Are Not: Is Conflict Bad for Private Firms?" American Economic Review, 97:5 (December): pp. 1978-1993.
1978: "... the Angolan civil war suddenly ended with the death of the rebels' leader, Jonas Savimbi, on February 22, 2002. This allows us to conduct an event study to assess investors' reactions to an exogenous conflict-related event, and one in which one party gained an unambiguous victory over the other. Restricting our analysis to the diamond mining sector is useful because, unlike oil production sites, which are located offshore and were removed from the fighting in the mainland, the activities of diamond extracting firms were located in areas very much at the heart of the conflict. A priori, one would therefore expect the (negative) impact of the war to be maximal for these firms."
1978-9: "Our main finding is that the cumulative abnormal returns of "Angolan" stocks experienced a significant drop in correspondence to the end of the conflict, while those of a control portfolio made of otherwise similar diamond mining companies not holding concessions in Angola did not. In other words, international stock markets perceived Savimbi's death (and later the ceasefire) as "bad news" for the companies operating in Angola, but not for others. On the event date, the abnormal returns of the "Angolan" portfolio declined by 4 percentage points, and the difference between "Angolan" and control abnormal returns was 27 percentage points. This suggests that, no matter how high the costs to be borne by diamond mining firms in Angola during the conflict, the war appears to have generated some counterbalancing "benefits" that in the eye of investors more than outweighed these costs. Although our result is based on a small sample of seven firms that were operating in Angola and were also listed on major international stock exchanges, this is a (sad and) striking result which suggests that much of the wisdom on the incentives of the private sector to end conflict may need closer scrutiny. We offer a number of interpretations for our finding, including the fact that during the conflict: (a) entry barriers for new diamond producers were higher; (b) the bargaining power of Angolan authorities was lower, hence licensing (and rent-seeking) costs for incumbent firms were lower; and (c) the lower transparency standards permitted by the ongoing war allowed for relatively profitable unofficial dealings."
1979: "The second branch of literature concerns the role of natural resources in civil wars. This literature, started by the work of Paul Collier and Anke Hoeffler [Collier, Paul, and Anke Hoeffler. 1998. "On Economic Causes of Civil War." Oxford Economic Papers, 50(4): 563-73.], investigates whether natural resource abundance increases the likelihood of conflict onset, as well as conflict duration."
see also Ross, Michael L. 2004. "What Do We Know about Natural Resources and Civil War?" Journal of Peace Research, 41(3): 337-56; and Miguel, Edward, Shanker Satyanath, and Ernest Sergenti. 2004. "Economic Shocks and Civil Conflict: An Instrumental Variables Approach." Journal of Political Economy, 112(4), 725-53.
1979-80: "Following its independence from Portugal in 1974, Angola was plagued by a long and cruel civil war between the Movimento Popular de Liberta‡ao de Angola (MPLA) and the Uniao Nacional para a Independencia Total de Angola (UNITA). In September 1992, national elections were held and Jos‚ Eduardo dos Santos, leader of the MPLA, won by a slight margin. This victory was never recognized by UNITA's leader, Jonas Savimbi, who initiated a civil war that was perceived by many as driven by his own desire of political power as much as by ideology. Throughout the war, UNITA's military strategy was aimed at occupying the areas of highest concentration of diamond mines and at using diamond sales to finance weapons purchases. The MPLA relied mostly on oil for financing its military operations through the Fuerzas Armadas de Angola (FAA), while also earning money from official diamond concessions. As part of the Lusaka Peace Protocol, in 1994, UNITA was given legal rights to mine and to form partnerships with foreign companies. The peace process collapsed in the summer of 1998, however, when the rebels returned to massive attacks against the military and civilians. The years between 1998 and February 2002 marked the last phase of the Angolan conflict and constitute the sample period on which our empirical analysis focuses. During these years, many commentators talked about a "military stalemate" between government and rebel forces. On February 22, however, Jonas Savimbi died in an ambush 100 kilometers from the Zambian border. Six weeks later, on April 4, the cease-fire was signed."
1980: "Since the beginning of the war, there was a close link between conflict and the diamond industry in Angola. Angolan diamonds have traditionally been mined in alluvial deposits, where capital investments take the form of light machinery and river diversions, and production was relatively easy to control by rebel forces. The key role of diamond sales in financing UNITA's operations has brought the problem of "conflict diamonds" to the attention of the public. To give an idea of the importance of the sector, Angola is the fourth largest diamond producer by value in the world, largely because most of its production is of gem quality. Angolan diamond sales in 2000 reached $1.1 billion, i.e., 15 percent of the world production of rough diamonds. This amount was almost equally split between official industrial production, official artisanal production, and illegal production. It is estimated that between 1992 and 1997, when UNITA controlled most deposits in the Cuango valley, the rebel movement supplied between 8 and 10 percent by value of the rough diamonds on the world market (Tony Hodges 2004, 174-77).
1980: "Diamond production and marketing in Angola have traditionally been controlled by the stateowned company Endiama through joint ventures. The diamond law passed in 1994 established that in order to obtain mining rights, foreign companies had to form a partnership with Endiama and with at least one other Angolan company, and get approval of the Ministry of Geology and Mines. This led to the proliferation of local mining companies owned by well-connected Angolans, who obtained concession rights for nominal fees and then sought lucrative partnerships with foreign companies. Many army generals also benefited from the situation by establishing private security firms that were contracted by the mining company being awarded the concession, sometimes as an implicit part of the deal. These high hidden costs restricted participation in diamond mining in Angola to a relatively small number of industrial companies and a large number of artisanal miners (garimpeiros)."
1980: "Between December 1999 and February 2000, the Angolan diamond industry underwent further restructuring. First, the government created a marketing monopoly in which all Angolan diamond production would be bought and resold by the Angola Selling Corporation (Ascorp). This was a joint venture between the state-owned Sodiam (51 percent) and two foreign companies with strong political connections, Welox and Tais. The creation of Ascorp was perceived as a serious blow to major international companies operating in Angola, primarily to De Beers. Another reform in early 2000 suspended all contracts that had been signed between Endiama and other mining companies and expropriated prospecting concessions exceeding 3,000 square kilometers. Needless to say, these reforms were not welcomed by existing companies, which saw their contracts unilaterally renegotiated. Since the end of the war, the situation has not changed significantly. Partnerships with local companies remain a cornerstone of the Angolan diamond industry, and the government has established a security body that has been seen by many as an attempt to centralize control of diamond production under domestic intelligence services."
1986: ""Mining companies are condemned to operating wherever they find minerals. They can consequently find themselves in the middle of conflicts that have erupted around them. In some instances they also deliberately enter conflict zones as part of a high risk-high profit strategy to exploit areas lacking competitors, or to gain a toehold before competitors arrive." (Oxford Analytica, Congo-Kinshasa: Resource sector brings political risks, 20 July 2005)."
1986: "A concise quote from a local source is possibly more explicit: "The end of the war in Angola means that right now the main institution in the country is corruption." Quote by Rafael Marques, a dissident journalist from Luanda. Reported by Tim Butcher in "As guerrilla war ends, corruption now bleeds Angola to death." www.telegraph.co.uk, 30 July 2002.
1986: The civil war created "a price war between the government and UNITA over the concession of mining rights. The length of the conflict, and the withdrawal of the external funding that had helped both sides during the Cold War, put increasing pressure on the two parties to obtain immediate revenue. This is likely to have shifted bargaining power in favor of firms and allowed them to strike better deals. This was particularly true in the case of UNITA after the imposition of UN sanctions that rendered dealing with rebel forces illegal and forced them to do business on terms very favorable to the buyers. Indeed, industry sources suggest that working under UNITA protection was a particularly cheap way to extract diamonds: "According to one former garimpeiro who worked in the twilight zone between UNITA and government control, foreign dealers paid $250 to UNITA for prospecting rights" (Justin Pearce 2004, 4). The end of the war would dramatically decrease the demand for weapons (and for immediate revenue) by the two parties and thus increase firms' licensing costs. Through this channel, company profits would have decreased after Savimbi's death even if the extent of regulation and rent extraction by the government had not changed."
Sunday, May 18, 2008
The Oppression of Saudi Arabian Women
I have a student -- a young woman -- from Saudi Arabia. The first day she showed up in class wearing traditional headdress. Then I never noticed her again, because she changed her style of dress.
She showed up in my office after missing the first midterm, telling me a horrible story. I had trouble understanding everything, so I probably have some of the facts mixed up.
She had been missing class because some of the young Saudi men had been harassing her. She explained that she had won a scholarship. Apparently, she committed a grave crime. She was not allowed to come to this country without a male guardian. Her father gave him permission, but the government told him that that was not his choice. Her brothers did not want to accompany her, but she came anyway.
She did not come from a wealthy family and felt like she had earned her scholarship.
On the campus, from what I understand, many of the young Saudi men like to party, but uphold strict moral standards for women. Because my student did something unthinkable, they harassed her, threatened to cause trouble for her family, and reported her to the Saudi government -- which demanded that she return to her homeland.
We have a wonderful new Pakistani professor to whom I introduced my student, suggesting that the professor would be more understanding of her situation and knowing that she could open up more easily to a woman. Afterwards, the professor asked me if I knew what was happening to the student. I replied that I was aware of the harassment. She shook her head and said, "Oh, no." Even before as anything, she explained that she could not tell me the specifics but they were more troubling than what I had known.
Toward the end of the semester, she told me that her father was coming to retrieve her before the end of classes. She explained that she was going to be put into some sort of institution to reform her unreligious behavior.
I put her in touch with her congressman, Wally Herger, a nice guy, but ultraconservative. Surprisingly, his office seem to have registered a complaint that made it to the Saudi government, leading to a letter telling a student should not have to return right away.
Again, I repeat that I may not have all the facts correct.
She showed up in my office after missing the first midterm, telling me a horrible story. I had trouble understanding everything, so I probably have some of the facts mixed up.
She had been missing class because some of the young Saudi men had been harassing her. She explained that she had won a scholarship. Apparently, she committed a grave crime. She was not allowed to come to this country without a male guardian. Her father gave him permission, but the government told him that that was not his choice. Her brothers did not want to accompany her, but she came anyway.
She did not come from a wealthy family and felt like she had earned her scholarship.
On the campus, from what I understand, many of the young Saudi men like to party, but uphold strict moral standards for women. Because my student did something unthinkable, they harassed her, threatened to cause trouble for her family, and reported her to the Saudi government -- which demanded that she return to her homeland.
We have a wonderful new Pakistani professor to whom I introduced my student, suggesting that the professor would be more understanding of her situation and knowing that she could open up more easily to a woman. Afterwards, the professor asked me if I knew what was happening to the student. I replied that I was aware of the harassment. She shook her head and said, "Oh, no." Even before as anything, she explained that she could not tell me the specifics but they were more troubling than what I had known.
Toward the end of the semester, she told me that her father was coming to retrieve her before the end of classes. She explained that she was going to be put into some sort of institution to reform her unreligious behavior.
I put her in touch with her congressman, Wally Herger, a nice guy, but ultraconservative. Surprisingly, his office seem to have registered a complaint that made it to the Saudi government, leading to a letter telling a student should not have to return right away.
Again, I repeat that I may not have all the facts correct.
Friday, May 16, 2008
Two Degrees of Separation: Reflections on Stolper and Schumpeter
A few months ago, I was asked to write an article about my experiences as an undergraduate student of Wolfgang Stolper, probably based on a conversation that I had with Mike Scherer. After I submitted it, the editors told me that they wanted details about Stolper’s relationship with Schumpeter, when my conversation with Mike had concerned my lack of any real knowledge of the subject — as the following note will prove.
Two Degrees of Separation: Reflections on Stolper and Schumpeter
First of all, I am flattered to be even vaguely associated with such world-class intellectuals as Mark Perlman, Wolfgang Stolper, and Joseph Schumpeter.
I learned about the relationship between Wolfgang Stolper and Joseph Schumpeter as a very young, naïve, and certainly unpromising student. I switched majors every year, a symptom of both my entirely unsystematic manner of learning and my hunger for new ideas.
I only took one international economics class with Professor Stolper in 1959. The course was the most unique educational experience of my life. More often than not he would begin class by handing out papers, explaining that if he were actually going to talk about economics, this is what you would say today. Instead, he would tell us about an upcoming event on campus, whether it was E. Power Biggs, who was going to play Bach on the great organ, or Paul Tillich, who was going to lecture on theology. The rest of the class would be devoted to alerting us to the fine points of the forthcoming presentation ‑‑ its context, its importance, and most important what to look for while attending.
Someone told us that Professor Stolper had made his living for awhile writing Ph.D. theses for wealthy students in various disciplines. I have no idea if this story was true, but judging from his performance, I would not doubt it for a minute. In any case, this class was ideally suited for an enthusiastic student like me.
Needless to say, virtually everything in his lectures was over our heads, yet we were keenly interested in what he said, realizing that it was significant. Although I was not a bashful student by any means and I found his information fascinating, for some reason the idea never entered my head to approach him to ask for elaboration or clarification of any of his classes. I do not recall any of the other students talking with him after class either.
Perhaps, he just seemed to be too important to be approachable, even though he never projected any Old World standoffishness. Months later, and sometimes even after years, students from the class would encounter each other with the greeting, “I finally figured out what Stolper was saying about X.”
However, one recurrent theme in the class is etched in my memory. Professor Stolper often spoke of one person of great importance about whom none of us had ever heard. He probably wrongly assumed that students educated enough to be admitted to the University of Michigan would certainly be familiar with the name Joseph Schumpeter. Of course, we were not. I have no recollection of any theoretical analysis of Schumpeter ‑‑ only that he was a denizen of Old Europe who led a remarkable life.
Professor Stolper told us riveting anecdotes about Schumpeter, including his three great ambitions to be the greatest economist, the greatest horseman, and the greatest lover. Something that sounded so outlandish was sure to capture undergraduates’ attention. One particular story that was firmly imprinted in my mind concerned Professor Stolper’s departure from Europe with Schumpeter. He told us that when Schumpeter was about to depart for Harvard, a man limped up to embrace him, telling him something like, “I can never thank you enough Professor Schumpeter. You, a captain in the cavalry, were willing to duel with me, only a lieutenant in the infantry.” Professor Stolper explained that Schumpeter had made some disparaging remarks about the service that the librarian had given his students, so the librarian challenged him to a duel.
I later read accounts of the duel, but nothing about either the wound or the final embrace. Maybe Professor Stolper embellished a bit, but it was certainly an excellent teaching technique to make students take an interest in more important matters. I suspect all the other students in the class would also still have a strong memory of the story.
If you were to ask me what, in particular, we learned in the class, I would not be able to offer you much. Yet I feel confident that like other fellow students I benefited by unconsciously soaking up ideas, without any recollection of their source.
For example, I have absolutely no recollection about any of Schumpeter’s theories being discussed in class. Yet, decades later, I found strong parallels between Schumpeter’s way of looking at the world and my own.
For example, I became fascinated by the way that the leading economists in the United States analyzed railroads, and other capital-intensive industry. Afterwards, I realized that their analysis was almost identical to that of Schumpeter, especially the Schumpeter of Capitalism, Socialism, and Democracy ‑‑ so much so that I was led to believe that they may have been an unacknowledged source of his work. Of course, both Schumpeter and the American economists were well schooled in the work of the German historical school, which may just as well explain the commonality.
I did find that one of these economists, David A. Wells, a name well known at Harvard, did clearly anticipate the theory of creative destruction (see Perelman 1995, p. 192). For Wells, the measure of success of an invention is the extent to which it can destroy capital values. He offered as an example “[t]he notable destruction or great impairment in the value of ships consequent upon the opening of the [Suez] Canal” (Wells 1889, p. 30). Wells asserted that each generation of ships becomes obsolete in a decade. From here, he concluded, “nothing marks more clearly the rate of material progress than the rapidity with which that which is old and has been considered wealth is destroyed by the results of new inventions and discoveries” (Ibid., p. 31). Wells claimed no originality for his work, writing:
##by an economic law, which Mr. [Edward] Atkinson, of Boston, more than others, has recognized and formulated, all material progress is affected through the destruction of capital by invention and discovery, and the rapidity of such destruction is the best indicator of the rapidity of progress. [Wells 1885, p. 146; see also, p. 238; and Atkinson 1889]
Of course, Schumpeter may well have unconsciously assimilated Wells’s notions just as I have done with those of Schumpeter and Professor Stolper.
A few years ago, Professor Stolper stopped by the History of Economics Conference. I told him how inspiring his class was. He seemed a bit embarrassed, or even puzzled, telling me that my response was surprising because people had told him that his teaching was not very good. How wrong he was!
I like to imagine that if Stolper imbued the essence of Schumpeter, my brief and distant encounter with Stolper while sitting in the second or third row of a dingy room in Ann Arbor provided a vague and distant relationship with both great economists.
References
Atkinson, Edward. 1889. The Industrial Progress of the Nation: Consumption Limited, Production Unlimited (New York: G.P. Putnam; repr. New York: Arno Press, 1973).
Perelman, Michael. 1995. “Schumpeter, David Wells and Creative Destruction.” Journal of Economic Perspectives, Volume 8, No. 4 (Summer): pp. 189‑98.
Wells, David A. 1885. Practical Economics: A Collection of Essays Respecting Certain of the Recent Economic Experiences of the United States (G.C. Putnam; NY: Greenwood Publishers, 1968).
___. 1889. Recent Economic Changes, And Their Effect on the Production and Well‑Being of Society (NY: Da Capo Press, 1970).
Two Degrees of Separation: Reflections on Stolper and Schumpeter
First of all, I am flattered to be even vaguely associated with such world-class intellectuals as Mark Perlman, Wolfgang Stolper, and Joseph Schumpeter.
I learned about the relationship between Wolfgang Stolper and Joseph Schumpeter as a very young, naïve, and certainly unpromising student. I switched majors every year, a symptom of both my entirely unsystematic manner of learning and my hunger for new ideas.
I only took one international economics class with Professor Stolper in 1959. The course was the most unique educational experience of my life. More often than not he would begin class by handing out papers, explaining that if he were actually going to talk about economics, this is what you would say today. Instead, he would tell us about an upcoming event on campus, whether it was E. Power Biggs, who was going to play Bach on the great organ, or Paul Tillich, who was going to lecture on theology. The rest of the class would be devoted to alerting us to the fine points of the forthcoming presentation ‑‑ its context, its importance, and most important what to look for while attending.
Someone told us that Professor Stolper had made his living for awhile writing Ph.D. theses for wealthy students in various disciplines. I have no idea if this story was true, but judging from his performance, I would not doubt it for a minute. In any case, this class was ideally suited for an enthusiastic student like me.
Needless to say, virtually everything in his lectures was over our heads, yet we were keenly interested in what he said, realizing that it was significant. Although I was not a bashful student by any means and I found his information fascinating, for some reason the idea never entered my head to approach him to ask for elaboration or clarification of any of his classes. I do not recall any of the other students talking with him after class either.
Perhaps, he just seemed to be too important to be approachable, even though he never projected any Old World standoffishness. Months later, and sometimes even after years, students from the class would encounter each other with the greeting, “I finally figured out what Stolper was saying about X.”
However, one recurrent theme in the class is etched in my memory. Professor Stolper often spoke of one person of great importance about whom none of us had ever heard. He probably wrongly assumed that students educated enough to be admitted to the University of Michigan would certainly be familiar with the name Joseph Schumpeter. Of course, we were not. I have no recollection of any theoretical analysis of Schumpeter ‑‑ only that he was a denizen of Old Europe who led a remarkable life.
Professor Stolper told us riveting anecdotes about Schumpeter, including his three great ambitions to be the greatest economist, the greatest horseman, and the greatest lover. Something that sounded so outlandish was sure to capture undergraduates’ attention. One particular story that was firmly imprinted in my mind concerned Professor Stolper’s departure from Europe with Schumpeter. He told us that when Schumpeter was about to depart for Harvard, a man limped up to embrace him, telling him something like, “I can never thank you enough Professor Schumpeter. You, a captain in the cavalry, were willing to duel with me, only a lieutenant in the infantry.” Professor Stolper explained that Schumpeter had made some disparaging remarks about the service that the librarian had given his students, so the librarian challenged him to a duel.
I later read accounts of the duel, but nothing about either the wound or the final embrace. Maybe Professor Stolper embellished a bit, but it was certainly an excellent teaching technique to make students take an interest in more important matters. I suspect all the other students in the class would also still have a strong memory of the story.
If you were to ask me what, in particular, we learned in the class, I would not be able to offer you much. Yet I feel confident that like other fellow students I benefited by unconsciously soaking up ideas, without any recollection of their source.
For example, I have absolutely no recollection about any of Schumpeter’s theories being discussed in class. Yet, decades later, I found strong parallels between Schumpeter’s way of looking at the world and my own.
For example, I became fascinated by the way that the leading economists in the United States analyzed railroads, and other capital-intensive industry. Afterwards, I realized that their analysis was almost identical to that of Schumpeter, especially the Schumpeter of Capitalism, Socialism, and Democracy ‑‑ so much so that I was led to believe that they may have been an unacknowledged source of his work. Of course, both Schumpeter and the American economists were well schooled in the work of the German historical school, which may just as well explain the commonality.
I did find that one of these economists, David A. Wells, a name well known at Harvard, did clearly anticipate the theory of creative destruction (see Perelman 1995, p. 192). For Wells, the measure of success of an invention is the extent to which it can destroy capital values. He offered as an example “[t]he notable destruction or great impairment in the value of ships consequent upon the opening of the [Suez] Canal” (Wells 1889, p. 30). Wells asserted that each generation of ships becomes obsolete in a decade. From here, he concluded, “nothing marks more clearly the rate of material progress than the rapidity with which that which is old and has been considered wealth is destroyed by the results of new inventions and discoveries” (Ibid., p. 31). Wells claimed no originality for his work, writing:
##by an economic law, which Mr. [Edward] Atkinson, of Boston, more than others, has recognized and formulated, all material progress is affected through the destruction of capital by invention and discovery, and the rapidity of such destruction is the best indicator of the rapidity of progress. [Wells 1885, p. 146; see also, p. 238; and Atkinson 1889]
Of course, Schumpeter may well have unconsciously assimilated Wells’s notions just as I have done with those of Schumpeter and Professor Stolper.
A few years ago, Professor Stolper stopped by the History of Economics Conference. I told him how inspiring his class was. He seemed a bit embarrassed, or even puzzled, telling me that my response was surprising because people had told him that his teaching was not very good. How wrong he was!
I like to imagine that if Stolper imbued the essence of Schumpeter, my brief and distant encounter with Stolper while sitting in the second or third row of a dingy room in Ann Arbor provided a vague and distant relationship with both great economists.
References
Atkinson, Edward. 1889. The Industrial Progress of the Nation: Consumption Limited, Production Unlimited (New York: G.P. Putnam; repr. New York: Arno Press, 1973).
Perelman, Michael. 1995. “Schumpeter, David Wells and Creative Destruction.” Journal of Economic Perspectives, Volume 8, No. 4 (Summer): pp. 189‑98.
Wells, David A. 1885. Practical Economics: A Collection of Essays Respecting Certain of the Recent Economic Experiences of the United States (G.C. Putnam; NY: Greenwood Publishers, 1968).
___. 1889. Recent Economic Changes, And Their Effect on the Production and Well‑Being of Society (NY: Da Capo Press, 1970).
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