Clothing for the 21st Century (the folly of mass production)

With the new clothing of the 21st century human labour will out-compete the machine because:

Human life and wellbeing will be safeguarded
** Ample land, water and other critical resources will be available for essential food production;
** People will not be poisoned by industrial processes;
** There'll be less superfluous consumption and production and therefore more leisure time;
** We'll be more satisfied with our products because we will design and make them;
** The monotony and drudgery of mass production will be reduced;
** Local production will result in the decentralisation of power and wealth in society.
** The imperative to condition us with advertising and 'education' will no longer exist.

Do you know who made this extravagant campaign promise?

"We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poor-house is vanishing from among us. We have not yet reached the goal, but, given a chance to go forward with the policies of the last eight years, we shall soon with the help of God be in sight of the day when poverty will be banished from this nation."




Hoover, Herbert. 1952. The Memoirs of Herbert Hoover: The Cabinet and the Presidency, 1920-1933 (New York: Macmillan): p. 184: while running for the Republican presidential nomination in 1928.

This, of course, compares with George Bush's promise of a humble foreign policy.

The Folly of Offshore Oil Drilling

The idea that the oil companies need to get permission to drill offshore is ridiculous. The majors are more intent in using their funds to buy back their stocks to raise the share price to help boost their bonuses. Here are my notes from an interesting study from the James A. Baker III Institute for Public Policy.

Jaffe, Amy Myers and Ronald Soligo. 2007. "The International Oil Companies." Working Paper #20. Study on the Role of National Oil Companies in International Energy Markets. James A. Baker III Institute for Public Policy, Rice University.
http://www.bakerinstitute.org/publications/NOC_IOCs_Jaffe-Soligo.pdf




The idea that the oil companies need to get permission to drill offshore is ridiculous. The majors are more intent in using their funds to buy back their stocks to raise the share price to help boost their bonuses. Here are my notes from an interesting study from the James A. Baker III Institute for Public Policy.

Jaffe, Amy Myers and Ronald Soligo. 2007. "The International Oil Companies." Working Paper #20. Study on the Role of National Oil Companies in International Energy Markets. James A. Baker III Institute for Public Policy, Rice University.
http://www.bakerinstitute.org/publications/NOC_IOCs_Jaffe-Soligo.pdf

This study looks at the outlays of the big five or companies, BP, Chevron, Conoco Phillips, Exxon Mobil, and Royal Dutch Shell, which had $120.8 billion in profits in 2006 with 9.7 million barrels a day of oil production. The next 20 largest firms had 31.2 billion in profits with 2.1 million barrels per day of production. In terms of operating cash flow, the big five registered $155 billion in 2006, compared to only 50 billion for the next 20 largest American oil firms.

"Cash flow is a better measure of the discretionary resources available to firms than profits. For the Big Five IOCs, operating cash flow, shown in Figure 2, was slightly more than two and a half times higher in 2006 than the average levels prevailing in the 1996-99 period, rising from roughly $60 billion in the late 1990s to $154.9 billion in 2005."

"But while prices, profits, and cash flow have risen dramatically, investment in exploration has not -- especially by the largest IOCs."

They look at outlays of the Big Five firms among the following categories: share buybacks, reserve acquisitions from other firms, exploration expenditures, development outlays, and dividend payments.

"Development expenditures reflect investments in fields that have already been discovered and are the easiest (most cost-effective) way to boost output in the short run. Nonetheless, it is investment in the exploration of new fields that will assure the long-term viability of these firms."

"Share buybacks (equity repurchases) have absorbed a growing share of these outlays, rising from only 1% in 1993 to 37.1% in 2006, while expenditures on exploration account for a decreasing proportion, declining from 13.8% in 1993 to only 5.8% in 2006. It is interesting to note that, despite an almost 50% increase in exploration expenditures from 2005 to 2006, these expenditures as a share of the total increased from 5.3% to only 5.8%."
"The data for the "next 20" firms reveals a pattern of expenditures that is quite different from that of the Big Five. Outlays for exploration have increased significantly in absolute terms, although not as a share of total outlays. Dividends account for a much smaller proportion of outlays while acquiring reserves from other firms is larger. Development expenditures have increased more than three-fold since 1999. However, as a percentage of these outlays, development expenditure has increased from 33.5 % to 47.3%."

"smaller firms are more aggressive in spending for reserves additions than the Big Five-through growing exploration outlays and through acquisitions from other firms."

"The gap [in absolute dollar terms" between the exploration expenditures of the Big Five and the smaller companies has closed, with the next top 20 firms now spending in absolute amounts roughly the same as the Big Five. This is especially telling when one considers the huge differences in operating cash flow between the two groups, where the Big Five registered $155 billion in 2006 against only $50 billion in operating cash flow for these next 20 oil independents."

"The Big Five are gradually depleting their reserves with an average replacement ratio of only 82% in the period since 1999, as compared with 147% for the next 20.8."

"To some extent the decline for the Big Five is attributable to the downward restatement of reserves, especially by Royal Dutch Shell."

"The oil production of the five largest oil companies has declined since the mid-1990s. Oil production for the five largest oil companies fell from 10.25 million b/d in 1996 to 9.45 million b/d in 2005 before rebounding to 9.7 million b/d in 2006. By contrast, for the next 20 U.S. independent oil firms, their oil production has risen since 1996, from 1.55 million b/d in 1996 to about 2.13 million b/d in 2005 and 2006."

"Increasingly, the IOCs have become more like general contractors, coordinating the operation of a number of suppliers who themselves are the ones who undertake seismic work, analyze data, provide drilling rigs and crews and a host of oil field services. The larger IOCs also serve the function of bankers, providing the vast amount of financial resources required to mount greenfield projects in increasingly unfavorable and difficult environments. They also provide the management, organizational skills, and oversight that these large projects require."

"The question is whether NOCs will find this role increasingly useful or whether they believe that such operational planning functions can either be performed by themselves or be farmed out to a service company under a fee-for-service structure. The fact that IOCs have had a poor record in recent years avoiding giant cost overruns on mega projects in Kazakhstan, the Sakhalin Islands, and the Middle East means that NOCs might be skeptical of the benefits being offered by IOCs. Moreover, investors are also questioning whether there is a continued role for the largest firms in a world where the average size of new finds is declining. Smaller E&P firms have lower costs than the large bureaucratic IOCs. They might have an advantage in finding and developing the remaining reserves that are available to private firms. Stock markets reflect these perceptions, with the shares of NOCs and American independents generally performing better than IOC shares."

"Let the Games Be Doped"

In his recent (8/12/08) New York TIMES article titled "Let the Games Be Doped," John Tierney argues that we should let athletes take any drugs -- or use any artificial means they want -- in athletic contests. I was going to write a letter to the TIMES, but got lazy and/or busy. Now, in today's "Science" section, there are two particularly anemic letters criticizing Tierney's perspective. So I'm provoked to write.

Of course, there are obvious questions. If all artificial means are OK, why can't Olympic swimmers use flippers? or why not weapons? Take THAT, Michael Phelps!

But that's not my point (see also my Valentine's Day card on EconoSpeak this year at http://econospeak.blogspot.com/2008/02/next-steroids.html). Tierney comes at the issue from a "libertarian" angle, arguing essentially that it's up to the individual to decide on whether or not the costs of steroids (or whatever) outweigh benefits. The problem is (as is often ignored by so-called "libertarians") there are external costs. In this case, athlete A imposes costs on athlete B without the latter's consent.

In plainer prose, if athlete A uses steroids, that gives him a competitive advantage. So, if athlete B wants to win, she has to take them too (or compensate for her disadvantage in some other way). With a bunch of athletes in the same event, it's unlikely that the relative rankings will change a lot due to steroid use. The external costs would push them all to use steroids -- and they'll all end up pretty much where they started. Since steroids have bad side-effects, it's a kind of self-destructive competition.

Robert Frank and Philip Cook call for an "arms control" agreement in this situation. All of the athletes in an event are prevented from using steroids, then we prevent the self-destructive competition. That's what anti-doping rules are all about.

Further, the Olympics involve what Frank and Cook call a "winner-take-all" competition (in their book THE WINNER-TAKE-ALL SOCIETY). That means that if someone wins a gold medal (in a TV-popular event) it means big bucks, along with a lot of non-financial rewards. But if you win "only" a silver or a bronze medal, the rewards are nil. This creates a massive incentive to engage in self-destructive competition.

What to do? We could split athletics into two completely separate "tracks." On the one hand, there would be dope-free track, where athletes must voluntarily participate in drug tests. On the other, there would be the "Tierney track," where all artificial means are allowed. Saturday Night Live had a skit about Tierney's idea a long time ago, back when Dennis Miller was funny (see http://www.hulu.com/watch/4090/saturday-night-live-weekend-update-all-drug-olympics).

My guess is that the drug-free track would have much greater prestige. In terms of "libertarian" notions, I'd bet that it would pass the "market test" with flying colors. The Tierney track would go the way of the late unlamented XFL.

Note that I am not against new technology (cyborgs in athletic events, etc.) Go for it: if you want to abuse your body, it's your right as an American! (Why not heroin?) Nor am I saying that Big Brother should dictate to all athletes. But there should be a minimal-technology or "clean" track in athletics. If people don't want to participate, they don't have to.

On top of that, some effort should be made to get rid of the "winner-take-all" element. For example, take the money out of sports. This is less likely to happen. But I think we can all do something as individuals: shun "big league" sports and watch "minor league" or amateurs ones. Here in L.A., forget the Kings and watch the Long Beach Ice Dogs. Even better, instead of watching sports, participate in them. Among other things, it's actually good for one's health. And feel free to use advanced technology, like a Wii.

-- Jim Devine

Forecasting Crises: MBA Students and Skyscrapers

Economic models are notoriously poor at forecasting severe downturns. Here are some studies that identify the kind of behavior that suggest that a crisis might be around the corner.

Broughton, Philip Delves. 2008. Ahead of the Curve: Two Years at Harvard Business School (New York: Penguin Group).

272-3: "The job statistics for our class showed that 42% went into financial services, ranging from investment banking to private equity, venture capital, and commercial banking. 21% went into consulting. There was then a steep drop to technology and telecommunications, with 6%. Pharmaceuticals, consumer products, retail, and other manufacturing each drew less than 5%. Nonprofit and government accounted for less than 5%, half of whom were part of an HBS program to place students in nonprofit and government jobs and subsidize their salaries to bring them in range of the for-profit sector. 80% of the class took jobs in the United States. The total compensation for my class in its first year out was $138,125. Ray Soifer, a graduate of the class of 1965 and a banking analyst, had been keeping track of the relationship between the condition of the American equity market and the percentage of Harvard MBA graduates choosing careers in financial services. 10% or less was a long-term buy signal. 30% or more was a long-term sell. The choices of the class of 2006 told you the markets were soon to crash."




Michael Lewis seemed to have stumbled on the model earlier.

Lewis, Michael. 1989. Liar's Poker: Rising Through the Wreckage on Wall Street (NY: W.W. Norton).

24: "Forty percent of the thirteen hundred members of Yale's graduating class of 1986 applied to one investment bank, First Boston."

Poor, Meredith. 1998. "Twin Towers: Letter to the Editor." Scientific American (April).

The skyscrapers of the 1930s (the Chrysler Building and the Empire State Building) were built just as the Great Depression took hold of the U.S. economy. The World Trade Center and Sears Tower were also leading indicators of the economic malaise of the 1970s. And just as Malaysia completes its showpiece, the Petronas Twin Towers ["The World's Tallest Buildings," by Cesar Pelli, Charles Thornton and Leonard Joseph, December 1997], the economy of the region dives into disaster. In retrospect, this should be no surprise; during these periods, symbolism took great precedence over substance.

Soon picked up by Business Week

Koretz, Gene. 1999. "Do Towers Rise Before a Crash?" Business Week (17 May): p. 26.

Andrew Lawrence of Dresdner Kleinwort Bensen in Hong Kong found a close relationship between the construction of grandiose high rise buildings (reflecting excessive optimism) and subsequent crashes.

A Speech for Obama on Energy Prices

My fellow Americans,

In the last year the price of energy, and especially gas at the pump, has gone way up. While it has come down a little in recent weeks, it is still much higher than before, and it is squeezing the budgets of families all across the country. This expense is all the more difficult to bear at a time when the economy is sputtering and paychecks are stagnating. People are looking for answers.

What I am going to say today will surprise you – but I will get to that later. First, I want to clear up the issue that everyone is talking about right now, offshore oil drilling. What’s my position on that?



If you listen to the energy experts, they all agree that drilling for more oil off our coasts will have little effect on the prices we pay for gasoline and other energy products. First, it will take many years before exploration uncovers productive oil fields, and more years to build the platforms and transportation systems to bring this oil to the market. So no matter what we do about this issue today, it will not have an effect on today’s prices. But the experts also say that the potential output of these fields, compared with global supply and demand, is simply not enough to move prices more than one or two percent. If we had another Saudi Arabia lying off our coast it would make a big difference, but we don’t. So, while I wish there were a simple decision we could take that would bring immediate and substantial relief to families struggling with energy costs, I don’t think offshore drilling is the answer.

But the issue won’t go away. This is an election year, and the polling companies are working overtime to tell us what the public thinks about every topic. And if we can believe their numbers, a large majority of Americans think that we should give offshore drilling a try anyway, on the principle that if you have a problem you should do everything you can.

We live in a democracy. If a substantial majority favors a policy, and if the policy does no harm, we should respect the will of the people. So, even though I’m not optimistic about what more drilling can do, I’m willing to reverse the ban we’ve had in recent decades.

Democrats in the House and Senate are preparing legislation along these lines. To keep to the requirement of “do no harm”, this legislation will see to it that any offshore oil production adheres to strict environmental standards, so that we don’t have oil spills fouling our beaches — the problem that led to the ban in the first place. We will also have controls on the ability of big oil companies to reap windfall profits from these finds: their oversized profits are part of the problem and cannot be part of the solution. Together, these stipulations will guarantee that a change in policy on offshore drilling, whatever its benefits, will not impose significant costs. If Republicans agree to a careful, responsible shift in regulation we can move forward quickly.

But as I said, whether we drill a little more or a little less will not have much impact on sky-high energy costs. If we are serious about addressing this issue, we must move beyond the debate over drilling and address the underlying causes. That is my real purpose today.

We should begin with a sobering fact: while energy prices will continue to fluctuate unpredictably, in the long run they are headed up, up, up. In part this is because the supply of scarce resources like petroleum is starting to reach its limit. Experts disagree about just when this peak supply will occur, but they agree that the day is not far off. In the meantime, the demand for oil and other energy products is rising quickly in countries like China and India. We are happy to see anyone anywhere move out of poverty and into a more comfortable lifestyle, but we should also recognize that this means they will be able to afford to buy more cars, heat their houses to a more comfortable temperature and in general use more energy. Between a plateau of supply and a rising curve of demand, we are facing a future of scarce and expensive energy.

But there is another side to energy prices. In previous speeches I have talked about the urgent necessity of weaning America from its dependence on oil and other fossil fuels. Avoiding conflict over oil supplies is central to our national security, whether it is about getting drawn into battles in oil-producing countries like Iraq and Iran, or finding a way to end warfare where oil fields and oil pipelines are at stake, as is now the case in the conflict between Russia and Georgia. The less reliant we are on these supplies, the more we can focus on the true threats to our security, like groups that would commit wanton acts of terror against our population. The fixation on oil is distorting our priorities and fomenting violence around the world.

Just as urgent is the demand to prevent catastrophic climate change. Already the concentration of carbon in the earth’s atmosphere is entering the danger zone, and every day our factories, power plants and automobiles are pushing that number up higher and higher. No one knows where the tipping point is, the level of greenhouse gases that can trigger a process of self-reinforcing climate change that we will be powerless to stop. We must drastically reduce our consumption of fossil fuels, and quickly, if we are to keep faith with future generations that will inherit whatever world we leave them. And there is little we can do as a country that would more restore our standing in the world than to shoulder our share of the burden in preserving a liveable planet.

For all these reasons, we have to kick the fossil fuel habit. And this will mean higher prices, much higher than today. So, not only are we unable to repeal the law of supply and demand to bring down these costs, in fact we need higher prices to achieve our core national objectives. What then can we do?

Here is where I will ask you to think outside the box. What I will propose to you today is that the problem is not the price of oil and other energy products as such, but where the money goes. When you pay four dollars or more at the pump for a gallon of gas, your hard-earned money is on its way to a foreign country or a fabulously profitable oil company. It’s gone: you will never see it again.

But suppose we did something different. Instead of paying high prices to far-off governments or oil profiteers, suppose we paid it to ourselves, so that we could actually get it back. This is what I’m going to suggest.

The way to do this is by actually raising the price of oil. You could do it through a tax. The way I’ve proposed, in my climate change plan, is to have a limited number of permits for bringing fossil fuels into the economy, and to make energy companies pay for every one of these permits. Of course, they will pass this cost along to you, the consumer. This is how a market economy works. It will lead to innovation, as businesses and households find new ways to conserve energy. But the bottom-line result is that, to kick the fossil fuel habit, we will be paying a lot more for whatever we continue to use.

Yet here is the key point: the extra cost you will pay will not go to a foreign government or an oil company. It will come right back to you. Specifically, I am proposing to put all of these revenues from higher energy prices into a big pot, and then pay out the money in equal amounts to every American citizen. This is the simplest and fairest solution. I want to be very clear: this money will not be kept by the government. It is yours. I promise, here and before all of you, that at least 95 cents of every dollar collected in selling fossil fuel permits will be given back to the people, quickly, efficiently, fairly. Economists who have studied this idea estimate that the amount each of us would receive would be something like $1000 per year. Any additional public programs for energy research or conservation would be financed out of tax revenues as they are, or more accurately as they should be, today. The extra money you pay for energy would be earmarked, virtually all of it, to return to you.

This plan has many benefits. It will do more for our national security than any other single step we can take. It will restore America’s leadership role in the fight against climate change. It will be an added benefit for the most vulnerable Americans, those who are at the bottom of the economic ladder and use the least energy already: they will get back much more than they pay. But what I want to emphasize is that this is the only meaningful long run solution to the problem of runaway energy costs. Energy costs will rise, and in some respects we even need them to rise. But the problem is that, under the current system, every dollar we pay for energy is a dollar lost. The solution is to change the system so that we get this money back, literally, every one of us. It is the responsibility of government to set up this system and then get out of the way, so that the money can return to the public in the simplest, fairest and most direct manner. On the international front, if we can convince enough other countries to take a similar stand, and I think we can, the overall effect will be to bring down global demand substantially, so that much less of our energy bill ends up in foreign or corporate hands.

Unlike offshore drilling, the proposal I’ve just outlined is not in the news. The pollsters aren’t asking you what your position is on it. But, also unlike offshore drilling, it gets to the heart of the problem. We can’t legislate energy prices down and we shouldn’t try. But we can protect the budgets of our families and our economic health as a nation by turning Americans into recipients of energy money as well as payers of it. So this is my answer to out-of-control energy costs: let’s get this money back. Let’s take control of our energy problems and protect our standard of living at the same time. Let’s have a future in which, when you read headlines about higher energy prices you think, “That’s more money in the bank, for me.” Let’s get the energy money back.

Irrational Exuberance of Economists?

Stephen Mihm's article on Roubini said:

"A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later."

Does anybody know the reference for this study?

Away with Education!

Charles Murray has an incredible proposal in Wednesday's Wall Street Journal. He wants to do away with most undergraduate education. This idea seems quite popular at the time -- at least Murray's time. One of his colleagues, had a similar idea:

"Can there be any thing more ridiculous, than that a father should waste his own money, and his son's time, in setting him to learn the Roman language, when, at the same time, he designs him for a trade, wherein he, having no use of Latin, fails not to forget that little which he brought from school."

Locke, John. 1690. Some Thoughts Concerning Education in John Locke, The Works of John Locke in Ten Volumes (London): ix, pp. 1- 205, p. 153.

The core of Murray's idea is that the purpose of education is to compare people for the workplace. Employers would be better served if prospective employees would just take tests to prove their competency. Here is what Murray has to say:




"Outside a handful of majors -- engineering and some of the sciences -- a bachelor's degree tells an employer nothing except that the applicant has a certain amount of intellectual ability and perseverance. Even a degree in a vocational major like business administration can mean anything from a solid base of knowledge to four years of barely remembered gut courses."

"The solution is not better degrees, but no degrees. Young people entering the job market should have a known, trusted measure of their qualifications they can carry into job interviews. That measure should express what they know, not where they learned it or how long it took them. They need a certification, not a degree."

I agree with Murray than many people are in college to earn a credential, which will have few benefits on the job. Some people with this kind of motivation will not get much out of college, but some will. And in the process, they might become richer (not necessarily in an economic sense), fuller people.

John Locke was correct that in education just restricted to Latin and Greek doesn't make sense. Many people during in the decades that followed Locke were leery of giving education to people without proper backgrounds, who might get too high an opinion of themselves -- or even become dangerous.

I certainly agree with Murray that college education has many deficiencies, a good number of which have to do with making education into providing business with good employees. Murray would certainly not appreciate that particular critique.

One measure of a decent educational system would be that the majority of graduates with be able to act as informed citizens with the result that they would get a government that would serve people's real needs.

By the way, whatever happened about the conservative demands to teach students about Shakespeare and great American literature?

Traitors to the Cause

by the Sandwichman

The phrase, cited by Michael, "traitors to the cause of economics as a whole" has a farcical ring to it -- like "traitors to the cause of the phone company billing department" or "traitors to the noble cause of bureaucracy". No doubt the note of laconic derision was intentional on Card's part. But it captures the peculiarly regimental loyalty and zeal that clings to the latter-day proponents of price doctrine.

If the contemporary exorcism of labor from economics seems tragic, it needs to be remembered that it isn't the first time. Setting aside Marx as beyond-the-neoclassical-pale, there is the case of William Thomas Thornton's On Labour: it's wrongful claims and rightful dues its actual present and possible future. Thornton's critique of price doctrine hinged on the phenomenon of 'higgling' or what we might today call negotiation. As Michael V. White explained in "'That God-forgotten Thornton', Exorcising Higgling after On Labour." "With equilibrium thus assumed rather than explained, Thornton's critique was dissolved by exorcising higgling from the domain of the 'science of political economy'." (page 151)

Depending on one's theological vantage point (or cynicism), the liquidation of Thornton's critique looms as either the Original Sin or the Immaculate Conception of marginalist thought.

The Exclusion of Labor, cont.

Here is the last paragraph of what I posted earlier, plus some text that goes into more detail about the subject. Any suggestions would be appreciated.

Most economists are dismissive of any theory not built on what they consider to be solid micro-foundations -- economists' jargon for this patently unrealistic model. Mainstream economists feel threatened by the suggestion that work, workers, or working conditions could be a legitimate subject of economic inquiry. As a result, any challenges to their theoretical position get treated to a hostile reception.

In one famous case, in 1944 Richard Lester published an article questioning whether labor markets actually operated in the manner that mainstream economics suggested. Lester had extensive experience in industry after having recently served as chair of the Southern Textile Commission of the National War Labor Board. Using government data, as well as surveys of industry leaders, Lester found evidence at odds with the assumptions of mainstream economic theory (Lester 1944). For example, his results suggested that an increase in the minimum wage would have little or no effect on employment, a conclusion that infuriated major defenders of the faith, led by George Stigler, later a leader of the Chicago school of economics and a Nobel laureate (see Prasch 2007).




Exactly a half century later, using an entirely different approach, Alan Krueger of Princeton and David Card of the University of California, Berkeley walked back into the same hornet's nest (Card and Krueger 1994). As might be expected, they too met with hostile criticism from fellow economists, some sponsored by the fast food industry. Card and Krueger were both distinguished economists. In fact, Card had won the John Bates Clark award from the American Economic Association given to the outstanding economist under the age of 40. In the face of the controversy, Card eventually dropped this line of research because of the personal costs of challenging the discipline. He explained:


I've subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole. [Clement 2006]

Lester and Card did not fail to convince their fellow economists because of errors in their work. Economists either ignored their results or, worse yet, rejected them out of hand because they conflicted with economists cherished beliefs. As Stigler's colleague, Milton Friedman, once wrote: "Nothing is harder than for men to face facts that threaten to undermine strongly held beliefs, to change views arrived at over a long period. And there are no such things as unambiguous facts" (Friedman 1968, p. 14; cited in Diesing 1985, p. 61).

Yet, Chicago economics is famous for rejecting empirical evidence. Dierdre McCloskey, a former Chicago faculty member, recounts how people who used data that called the theory into question would "be met by choruses of "I can't believe it" or "It doesn't make sense." Milton Friedman's own Money Workshop at Chicago in the late 1960s and the early 1970s was a case in point" (McCloskey 1985, p. 140).

Melvin Reder, another Chicago faculty member, offered further insight in the way that Chicago refuses to give ground in the face of evidence that calls the micro-foundations into question:

Chicago economists tend strongly to appraise their own research and that of others by a standard that requires [inter alia] that the findings of empirical research be consistent with the implications of standard price theory .... The major objective is to convert non economists to their way of thinking .... However imaginative, answers that violate any maintained hypothesis of the paradigm, are penalized as evincing failure to absorb training. [Reder 1982, pp. 13, 18, and 19]

Economists regard this stubborn resistance to be good science. Predictably, the troubling questions raised by Lester and Card had no effect. Economists' beloved micro-foundations and their faith in market efficiency remained invulnerable -- so much so that economists today rarely even bother to publish research about the core of economic theory. In this environment, economists can continue to use their transaction-based theory without the inconvenience of dealing with work, workers, or working conditions. But by removing work, workers, and working conditions from their theory, economists blind themselves to the kind of inefficiencies that this book shows, especially in Chapter 9.

Observations on Jena, former East Germany

So, last week I gave some lectures at the Max Planck Institute for Economics in Jena, a city in the Lander of Thuringia in the former East Germany. This city was touted in the latest Economist Country Survey of Germany as doing as well as any in this former nation. Its university is also very renowned. Founded in 1558, it had Goethe as an administrator and faculty that included Shiller, Hegel, Fichte, Herder, Haeckel, and Frege, with both Robert Schumann and Karl Marx as students. The major business in town (it is only about 90,000 population) is the Carl Zeiss Optical Works, which dates to the 19th century, and was one of the most successful of enterprises even during the period of socialist rule, and is doing well now, part of why The Economist could tout the place. Its unemployment rate is about the same as the German average, which is much better than most of the former East Germany, where some parts still have such rates exceeding 20%.

The city is a more extreme than usual example of mixing the old and the replacing bomb-damaged-new in Germany. The old Market Square, with its Rathaus dating to the 14th century survived bombing that hit the Eichplatz next to it. That area was rebuilt during the socialist period, partly with an open square, and partly with a tall and round skyscraper. This structure represented the "Kombinate" approach of the former East Germans, which involved lots of horizontal and vertical integration of activities, with, in this case. everything in Jena coming under a single administrative entity. This skyscraper effectively represented this approach, with much of the university on several of its floors in that era.

On the one hand life seems not too bad. Buildings look OK, and people do not look poor. Students seem to have adapted to the new regime, although they were completely unacquainted with Post Keynesian economics, which I lectured on in one of my talks. However, in talking to some of them, they do not see prospects as good there. Most plan to look for jobs in "the old states" (of the West) or even outside of Germany, these being economics grad students. I also observed very little construction going on, with some of what is going on still being fixups of WW II bomb damage.

A curious point is that while hard science faculty survived mostly the transition, all the social science faculties were purged at the time. The current economics profs are all from the West. None of them live in Jena permanently, having apartments there, but going back home to the West on the weekends, if not more frequently. One of them told me that he did move his family in the late 1990s to Weimar near Jena, but they moved back west after three years, there being too much hostility from the locals. However, the students say this is gradually dying out.

The US and the Former USSR Compared

In 1959 C Wright Mills wrote of the basic trend then apparent that was making the US and USSR increasingly alike. He mentioned quite a long list of observations to support his claim:

-- "each had amalgamated on a continental domain great varieties of peoples and cultures";

-- "both had expanded their territory and power significantly;"

-- the political order is enlarged and centralised (becoming less political and more bureuacratic). In neither are there any "nationally responsible parties" that "debate openly and clearly the issues which the world now so rigidly confronts. The two-party state is without programmatic focus and without organisational basis for it." Neither nation has a civil service independent of corporate interest (US) or party dictation (USSR). "The classic conditions of democracy and democratic institutions do not flourish" in their power structures. "History-making decisions and lack of decisions are virtually monopolised by elites."


-- the power of both depended on technological developments that had ben made into a "cultural and social fetish";

-- the organisation of all life is increasingly adapted to industrial technologies. (As it turns out life hasn't adapted that well after all!)

-- work is alienated from people and consumption is culturally exploitative;

-- education and religion tends to be shaped by major economic, military and political forces. "They do not originate. They adapt." Mass eduction has evolved to "educated illiteracy".

-- the media is one of mass distraction. "they do not often communicate; they do not connect public issues with private troubles...they trivialise issues.."

-- the goal of the "self-cultivating" person has declined. "It is the specialist who is ascendant in both Russia and America."

The list goes on. Perhaps the most telling line in Mill's essay is when he asks "to what extent [is] the continuation of freedom [in the US] due to the fact that it is not being exercised?"

I think that was answered about 10 years later when peaceful civil protest resulted in students being shot dead, the US Army began (and probably continues to) spy on its citizens, news reporters began to be jailed for failing to reveal their sources and numerous assassinations occurred against civilian leaders.

Not that things are (or were) that much different in Australia.

'The Decline of the Left'. Lecture on the British Broadcasting Company. 1959. From 'Power, Politics and People - the collected essays of C Wright Mills'. Edited by Irving Louis Horowitz. Oxford University Press. 1963.

Is There a Middle Way Economic System: Janos Kornai Speaks

Among the things I did while out of town for the last two weeks was to interview the 80-year old, Janos Kornai, for a forthcoming book. For those who do not know who he is, he is probably the best known economist in Eastern Europe, and in my opinion deserves the Nobel Prize in economics, if for nothing else, for his development of the concept of the "soft budget constraint," originally to analyze the problems of market socialist economies, but which is clearly relevant to many economies, as the current problems of financial institutions and their relationships with governments in many countries during the past year indicate. Kornai has had a fascinating personal life as well as career, having barely survived the Nazi occupation of Hungary, then at least partly in reaction to that becoming a supporter of Stalinist socialism, which he turned against after Stalin's death as he learned of human rights abuses, then his involvement in the 1956 revolution and later turning to mathematical economics and linear programming, to become a critic of neoclassical economics in his book, Anti-Equilibrium from 1971, and then on to forecast the fall of socialism in Hungary with his later work and his broader analysis of the nature and history of the socialist economies. For those not wishing to wait for our interview to be published, his fascinating memoirs are available from MIT Press.

In any case, I wish to note an unresolved issue in our discussion. In the late 1980s Kornai argued that ultimately "there is no third way" between command socialism and market capitalism, that the soft budget constraint and related political issues would force every country either to go to a hard line command socialist position like North Korea's or move towards some form of market capitalism as did most of Eastern Europe eventually. During our discussion he brought up in a favorable way the late West German economist, Walter Eucken, who has been little translated into English. He was the inventor of the concept of the "social market economy," (sozialmarktwirtschaften), which has been the official ideology, more or less, of the Bundes Republik of Germany since the late 1940s, and which I think the social democracies of the Nordic countries are more or less examples of as well. Now it can be argued, and Kornai does, that these countries are all just special cases, if involving some "hybrid" elements, of market capitalism. And it is certainly true that they all have mostly private ownership of the means of production with little central planning. However, Sweden in particular has long advertised itself as representing a Middle Way, with its advanced welfare state and high environmental and other public goods concerns. I, for one, think that Kornai should be a bit more willing to grant such status to such economies.

Speaking of Child Labor

If you want to hear what I have to say about child labor, here’s a link to Against the Grain, a KPFA (Berkeley) radio show that interviewed me today. CS, the show’s host, really does his homework; he’s great at cutting through the distractions and getting to the point. In another life I used to do what he does now (for WORT in Madison) and can appreciate what it takes to do it well.

Who Are the Ossetians?

The current war between Russia and Georgia is over South Ossetia, an autonomous region of Georgia that won de facto independence on the ground back in 1993, with some assistance from the Russians, who have had peacekeeper troops there since. There are some odd ironies to this war, including that one of the places most ferociously bombed in Georgia in the current campaign has been Gori, birthplace of Josef Dzhugashvilii, better known to the world as "Stalin." While he is usually thought of as being Georgian, and certainly mostly was, there has long been a rumor that he had Ossetian ancestry, even though during his rule, Osip Mandelstam was accused of "anti-Soviet slander" for mentioning this rumor (apparently initially spread by anti-Stalin Georgian nationalist emigres). The basis of it is that a paternal great grandfather apparently did come originally from a thoroughly Ossetian village, Geri. Of course it was Stalin who initially split Ossetia into two halves, making the northern part an autonomous region in the Republic of Russia and the southern one an autonomous region in the Republic of Georgia, within the broader Union of Soviet Socialist Republics.

Another matter of some controversy involves the origin and identify of the Ossetians, who would like to have their own country (and while Russia helps them in the south, there is now way that help will extend to the north). Their language is clearly of the Iranian branch of Indo-European, related to Farsi/Persian, as well as such languages as Kurdish, Peshto, and Tajik, among others. They are also clearly descended from the Alans, who ran a medieval kingdom in the region for several centuries, only coming to an end with the Mongol invasions of Chingiz Khan. The bigger controversy has to do with the origins of the Alans, with the official Soviet view being (and the most widely held one now) that they were either descended from or closely related to the ancient Scythians of the golden grave mounds. While this view became widely accepted after the beginning of the 19th century, it overturned a competing view that has had some recent advocates pushing for it that the Scythians were of Turkish origin. That view was originally expressed by Herodotus.