The Debate over Student Loans: The Issue Is Not the Issue

I am not a specialist in the economics of education, and I don’t have the evidence to back up what I’m about to say—but I’m pretty sure I'm right.

The ongoing debate about student debt is simply insane.  Of course, we can argue for decades over how much and what forms of public subsidies students should get for the immense financial expense of higher education, and in a narrow sense the nuances matter.  But surely the big picture is missing here, isn't it?

Once upon a time, when I was young, there was a two-tiered system in the US, with expensive private colleges and universities for those who could afford them and nearly-free public education for everyone else.  Then decisions were made.  The US has a mostly decentralized structure in which the provision and financing of public higher education occurs at the state level, but somehow, miraculously, every state in the union simultaneously began a process of shifting costs from taxpayers to students and their families.

I would dearly like to know who made these decisions and how they were disseminated to all the state-level boards, commissions and legislatures.  Here’s my uninformed speculation on why this happened:

1. Evidence accumulated that college graduates were earning a lot more than high school grads.  It seemed unfair to make everyone pay for something that primarily benefited just a few.  This was especially the case since college attendance is strongly correlated with class.  To shift the cost of public higher ed to tuition seemed to be in line with “fairness”.

2. Private schools chafed at the subsidized competition.  They have a lot of pull, since their graduates are everywhere, and they lobbied for higher public tuitions.  This could be justified through arguments about the virtues of competition, a level playing-field, etc.

3. Greater labor mobility undermined the economic growth case for public subsidy.  Any individual state could choose to make higher ed more expensive and then import qualified workers from other states.  (My own state of Washington has the second lowest per-student expenditure for higher ed in the country but also a thriving high-tech sector, which draws in workers from everywhere else.)  At the national level the US has been able to attract as many foreign-trained engineers, doctors and other specialists as it needs.

4. Connected to item 1, elite thinking began to frame education at all levels as a consumer good, and schools as businesses with customers.  Once you begin to think this way, there are lots of reasons why consumers should be charged the marginal cost.

Of course, by withdrawing public support for higher education, tuition skyrocketed—a feature, not a bug.  This in turn called for new public policies to facilitate lending to students so they could pay these costs, since, as you learn in introductory economics, a problem with human capital is that it can’t be collateralized.  And the upshot of all this is an explosion of student debt, which brings us back to our starting point.

Meanwhile, higher education itself has been devastated by these developments.  The US, which was once a world-leader in the proportion of its students who completed a BA, is now behind the global peloton.  Students take on part-time jobs, not to mention multiple and full-time jobs, to finance their education even as they try to keep up with their studies.  I often see heads bobbing, fighting off sleep, from students I know are putting in 20 or more hours per week at work.  This in turn has led to a reduction in the amount of outside assignments, such as reading and papers, faculty can require without feeling like sadists.  And now there is a powerful trend to restore the two-tiered system, but by cheapening the public product rather than elevating the private one.  This is where “disruptive” online instruction is headed—depersonalized, rigid, “competency”-based learning for the many and the traditional classroom model, which can be rich, intensive and transformative, for the affluent few.

Note however that this is not a universal trend.  It is furthest advanced in the US, with England and Australia beginning to catch up.  Canada has not gone this route, and it has barely begun to have an impact in continental Europe.  (Germany tried to introduce a modest tuition at its public universities and students rebelled; the government backed down.)  The conversion of higher education to a consumer good is not inevitable.

So here’s what I'd like to know: who exactly made the decisions to eradicate free public higher education in the US?  Why was there no debate?  Why here and not everywhere else?  Why is this question still off the table in the US even as “access” remains a key political issue?  And what would it take for this country to make a second decision to reverse the first one?

Is The Neo-Zengist DAEESH State Really A Wannabe Caliphate?

OK, since I have no answers about what to do about the situation in Iraq, I am going to once again engage in my usual obfuscating putdown of nearly all commentators who exhibit ignorance about the situation over there.  About all I can say is that it looks like maybe the Obama people are not quite as ignorant as the Bush people were, and maybe a bit more cautious.

Anyway, again I have to thank the intrepid Juan Cole for producing a map from the early 1100s that shows a configuration of states that somewhat resembles what exists now on the ground de facto in the area of Syria and Iraq.  There was no unified Iranian state, but much of what is now eastern Turkey was ruled already by the Seljuq Turks (western part by the Byzantines), Syria minus its northern part was ruled by the Atabeg dynasty; approximately what is now Israel was the Crusader Kingdom of Jerusalem; southern Iraq plus Kuwait and some more was the Abbasid Caliphate, and the area approximating what is now controlled by DAEESH (or ISIS or ISIL, if you prefer, a bit more on that in a minute) was a non-very-long-lasting state ruled by Imad al-din Zengi, hence the name "neo-Zengist," including what is now northern Syria and most of what is now northwestern Iraq.  The only thing that would come of out of this state of any importance was Saladdin, who retook Jerusalem from the Crusaders, and the province in modern Iraq now ruled by DAEESH, Salahuddin, was named for him using his Arabic name (he was actually Kurdish).

So, more obscuranta.  DAEESH is the most widely used transliteration of the Arabic name for the group, usually called either ISIS or ISIL.  The latter is really silly, as the "L" stands for "Levant," a completely anachronistic and Orientalist name for what was known in Turkey as "Greater Syria," which included Syria plus Lebanon, Israel, Palestine, and Jordan, more or less.  In Arabic the name for this, which gives the "SH" at the end of "DAEESH," is "al-Sham," which is indeed a much older name for the area, dating back at least to the Ummayyad Caliphate, 661-750, which had its capital in Damascus, the current capital of what is left of Syria.  So, "ISIS" is better than "ISIL," as it can stand for "Islamic State of Iraq and al-Sham."

So, I do want to disabuse two more distorted ideas floating around, namely that this state ist a nascent "Caliphate," something that is being widely repeated, including in two front page stories today in the Washington Post, and that it was thrown out of al Qaeda for being more violent than al Qaeda's leadership approves of.  The latter is easily dismissed.  Zawahiri disowned DAEESH because he backs another Islamist opposition group in Syria, Nushrat, and is angry that DAEESH has defeated them and is now the main group and is not following his orders.  It had nothing to do with them being more violent than the group he backs or any other group he backs, pretty much all of which are violent.  It is simply a matter of turf and control, and the leader of DAEESH, the somewhat mysterious Abu Bakr al-Baghdadi, does not take orders from him.

BTW, just for the record, DAEESH is clearly very violent and also very fundamentalist, although I have not heard that they forbid women from driving as is done in our ally, Saudi  Arabia.

But let us deal with this matter of whether or not this neo-Zengist state is a "wannabe Caliphate."  Now, I cannot prove that it is not.  But the evidence that it is turns out to be mostly coming from flamingly neocon sources.  If one pushes into Arab sources, there is no evidence of this, and the most one can do is make inferences from scattered pieces of evidence.  Officially, al-Baghdadi has been "Amir al-Hakim," Ruling Emir, the same title that Mullah Omar had in the Taliban regime, which may be more of a model.  A Ruling Emir does have authority over religious matters, but is far from being a Caliph, or Khalifa (with a Caliphate being a Khilafa).  Now, al-Baghdadi has just turned this over to another person, so maybe he is about to declare himself Khalifa, but he most definitely has not done so up until now, so most of the discussion of this in the western media is wildly wrong.  The strongest argument that he might do so is that this name he took, which is a nom de guerre, includes "Abu Bakr," who was the first Caliph.  So, maybe, but not yet.

What does it mean to be Khalifa?  The term means a lot of things, including Successor, Servant, Viceroy, and some others.  Traditionally a Caliph is supposed to be the Successor to the Prophet Muhammed as the spiritual and political leader of the Ummah, the world Islamic community (the word "Umm" means "mother").  Following the Prophet's death, he was succeeded by four such Caliphs, his uncle Abu Bakr, Umar, Uthmann, and Ali, his son-in-law, these known as the "Rashidun" or "righteous" Caliphs.  After Ali's death came the Sunni-Shi'i split with the Shi'is supporting Hasan, Ali's son by Fatima, the daughter of the Prophet, but Muawiyah of the family of Uthmann defeated and killed him and became the next Caliph, establisling the Ummayyad Caliphate that would rule from Damascus until 750.  During this period it expanded control from Spain to Central Asia.  It would be succeeded by the Abbasid Caliphate, that ruled mostly from Baghdad from 751 until being overthrown by the Mongols in 1258.  There was a rival Fatimid Shi'i Caliph in Cairo from about 900-1100, one of whom burned the Church of the Holy Sepulchre in Jerusalem, providing the official cause d'etre of the Crusades.  There was a "Shadow Caliphate" run by Abbasids in Cairo after the fall of Baghdad, but then the Caliphate was taken over by the Sultans of the Ottoman Empire after the fall of Constantinople in 1453, who would hold it until it was abolished in 1924 by Ataturk.  There was a brief effort to claim it then by Sharif Hussein a-Hashim, the traditional ruler of Mecca and a descendant of of the Prophet, but in 1925, King Abdul-aziz (aka "Ibn Sa'ud") roared out of the desert from Riyadh and threw him out for being a total sinner.  He did not take the title, which has remained unclaimed except by occasional oddballs, although the Saudi kings are most proud of being "Protectors of the Holy Cities," meaning Mecca and Medina.  The British would reward the Hashemite Sharif for his loss by making his sons kings of Jordan (Abdullah I) and of Iraq (Faisal I) respectively, with that family still ruling Jordan under Abdullah II.

I note that the word shows up in other places. So there are regional officials in Morocco who carry the title of "Khalifa," but there it means "viceroy" or "governor."  The Shi'a have mostly substituted "Imam" for  it, but the 7-Imam Shi'i, the Zaydi, of northern Yemen, called their leaders by the title until 1962.  And the royal family of Bahrain, Sunnis ruling over a Shi'i majority, happen to be named "al-Khalifa."

Anyway, certainly DAEESH or ISIS or whatever is a nasty violent bunch pushing a hardline version of the Shari'a and would like to conquer at least Iraq, or at least Baghdad.  But there is little evidence that they are a "wannabe Caliph" from serious sources, with this mostly a neocon myth perpetrated successfully in the gullible and ignorant western media, although it cannot be ruled out that Abu-Bakr al-Baghdadi might just declare himself this title.  But he has not done so yet, contrary to widespread impressions.

Barkley Rosser

Raising the Dead

Roger Lewis reviews Raising the Dead by Andy Dougan

In 1818, the year Mary Shelley's Victor Frankenstein was in the lab throwing switches and checking gauges amid the lightning flashes, similar actual experiments were underway in a Scottish university. 

Professor Andrew Ure connected a tube to a battery and shoved it up a corpse's nose. "The tongue moved out to his lips," it was reported. "His eyes opened widely. His head, arms and legs moved." 

Apparently the body stood up unaided, laborious breathing commenced, and the assembled students screamed out in horror, as well they might. 

Professor Ure had to stab the creature in the jugular vein to calm it down.

Yes, THAT Professor Ure.

Supply Creates Its Own Demon: Marc Andreessen and "Textbook Luddism"

Marc Andreessen has a column in the Financial Times with the headline, "Robots will not eat the jobs but will unleash our creativity." Here are the first two paragraphs:

A growing number of people seem to fear that robots will eat all the jobs. Their worry boils down to this: computers can increasingly replace human labour thus displacing jobs and creating unemployment. Your job, and every job, will go to a machine. 

It is textbook Luddism, relying on a “lump of labour” fallacy – the idea that there is a fixed amount of work to be done in the world by humans. The counterargument comes from economists such as Milton Friedman, who believe that human wants and needs are infinite, which means there is always more to do.

Mr. Andreessen knows as much about Luddites and the lump-of-labour fallacy as I do about programming browsers. Ordinarily, it might suffice to cite the ONLY published scholarly articles on the history of the phony fallacy: "Why economists dislike a lump of labor" and "The'lump of labor'case against work-sharing: Populist fallacy or marginalist throwback?" both by a fellow named Tom Walker. But Andreessen's timing has caught me in the midst of a research/writing project that attempts to make sense of what Joan Robinson identified as "mumpsimus": the persistence of discredited arguments in the face of overwhelming evidence.

I'm about 20 pages along in my new piece, Supply Creates Its Own Demon. The demon in the title refers to Maxwell's demon and, by association, the chess-playing automaton (an elaborate hoax) built in the late 18th century by Baron Ludwig von Kempelen. I've just gotten to the section where I discuss Andrew Ure's 1835 The Philosophy of Manufactures. Ure's book contains a discussion of automatons, which includes the chess-player but doesn't mention its imposture. 

The third section of Philosophy of Manufactures, "Moral Economy of the Factory System," relies heavily on Edward Carleton Tufnell's supplementary report for the Royal Commission on the Employment of Children in Factories, which is one of the most sustained anti-union diatribes in English literature. Tufnell went on to write Character, Object and Effects of Trades' Unions. I have credited Tufnell's diatribe with "putting legs" on the bogus fallacy claim -- I could amend that to say Ure's appropriation of Tufnell's claim put wheels on it.

An article by Steve Edwards, "Factory and Fantasy in Andrew Ure," makes a convincing case for the influence of Ure's Utopian analysis of the factory on Marx's analysis of "real subsumption of labor" in the originally unpublished "chapter six" of Capital, "The Results of the Immediate Process of Production." Marx's analysis is, in a sense, an "immanent critique" in that it uses insights from Ure's text to highlight incongruities and contradictions in his argument.

Briefly, Ure argued both that workers delayed technological progress that would have benefited them through collective action and that collective action by workers accelerates technological advance, to the detriment of the workers. Or more simply: strikes delay and accelerate technological progress that helps and hurts workers. This is a "nice knock-down argument" to be sure but it couldn't be more arbitrary. 

Coming back to Marc Andreessen's column, his argument is a pale shadow of Ure's. For all its overt hostility to workers and unions, I prefer the original Philosophy of Manufactures because in its fantastic exposition it laid bare the essential incoherence of its premises.

Mankiw: Let’s Really Piss Off Those Liberals

No one in the econ blogosphere has gone after Greg Mankiw, who did his best to provoke outrage with his latest New York Times column.  “Debunking” Piketty, Mankiw says that rich people save because they are altruistic toward their unfortunate kids, who, because of regression to the mean, won’t be as financially successful as they are.  But the unintended consequence of all this saving is that the capital-labor ratio changes, and the principle of diminishing marginal productivity means that the rate of profit will fall and wages will rise.  Hence Piketty’s patrimonial capitalism is good for the workers!

But let’s put it in Mankiw's inimitable words:

Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less. And because increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers.

The bottom line is that inherited wealth is not an economic threat. Those who have earned extraordinary incomes naturally want to share their good fortune with their descendants. Those of us not lucky enough to be born into one of these families benefit as well, as their accumulation of capital raises our productivity, wages and living standards.

Now let’s just make a list of the assumptions you have to make in order to accept Mankiw's argument (none of which he mentions himself):

1. All resources are fully employed, and the economy is on its production possibility frontier.

2. A decision to save, by lowering the cost of capital, increases the quantity of investment.

3. Financial and real capital are identical, and the return to the first is the return to the second.

4. All savings and investment occur in the same economy; rich people do not earn income from investments elsewhere.

5. All prices represent true social costs and benefits.  There are no profits to be made except by increasing the net wealth of the community.  For instance, transfers and uncompensated externalities play no role whatsoever in profits.

6. There are no monopoly profits, with the exception of self-extinguishing temporary monopolies associated with wealth-creating innovations.

7. But, in partial contradiction to (6), there is no technological change at all, since it would alter the marginal productivities of labor and capital.

8. Production sets are convex everywhere; there are no increasing returns or interactions between resources or activities that would give rise to nonconvexities and multiple equilibria.

On top of all this, it should be pointed out that, if Mankiw is right, the rate of profit—Piketty's r—should fall as the capital-income ratio rises.  But a central argument in Piketty's book is that r is remarkably consistent through relative capital accumulations and decumulations, a steady 4-5%.  There isn't a single dollop of data in Mankiw's little piece that challenges Piketty's finding.

Putting all of this together, it doesn't sound like the sweeping conclusion at the end of Mankiw's column is justified, does it?

But Greg’s a smart guy!  He doesn't really think that his op-ed is summing up the state of scientific knowledge.  He knows everything I've written above.  Some of it is even in his textbook.  Clearly his goal is not to make a defensible economic argument.

To take him seriously is to miss the point.  When he wrote this column Greg had a twinkle in his eye.  He’s thinking to himself, “This is really going to annoy the liberals!”  That’s what the central message of microeconomics is about, after all, once you put aside all the caveats and unlikely assumptions: self-interest is good for everyone, a free market is the optimal form of economic organization, and there is no conflict of interest between the rich and the rest.  In real economics these propositions are hypotheses to be examined and quite often rejected, but in ideological economics they are ammunition to attack the left.

When Mankiw teaches Econ 10 at Harvard, he has many kinds of students scattered through the auditorium.  Some are bored.  Some are intrigued but have lots of questions that intro econ can’t answer.  Some walk out.  But you can be sure there are a few whose eye’s light up when they hear about the virtues of free markets and self interest.  They're the ones who are thinking, “Wow, that must really annoy the liberals!”  A significant chunk of them will decide to become econ majors and then go on to get PhD’s and teach their own Econ 10's.

Of course, most economists aren't like this.  I think a majority are fairly centrist in their politics and moderately skeptical of ideologies that rest on a raft of assumptions and a paucity of data.  But every econ department at a college or university seems to have at least one of the Mankiw spawn, whose greatest pleasure is piss off the do-gooders.  When they populate recruitment committees and journal editorial boards the twinkle becomes a scowl, and ideological rigidity becomes a filter for the rest of the profession.

It’s not all in fun.

Net Savings and Trade: Krugman is Simply Wrong

I was going to let Paul Krugman’s aside about the trade deficit being “determined” by net national savings pass, but Dean Baker has unintentionally prodded me into action.

It’s actually worse than what Dean says.  The sum of a country’s domestic budgets, private and public, is not “equal” to its current account (mostly trade) position; it is the current account position.  The two are the same thing.  It’s as if my team played your team and you won while we lost.  Your victory didn't “determine” our defeat or vice versa: they are one and the same.  It’s such a simple idea, but top flight economists like Krugman (who knows trade and open economy macro about as well as anyone on the planet) mess it up just as readily as my introductory students.  I've wondered why this is, but it is.  (You can read some speculation about why economists don’t distinguish between identity and equality here; see p. 169.)

Imagine if you will an economy in which people are earning income, borrowing, saving, generating income for one another by buying domestically produced goods and selling exports, and withdrawing income by buying imports.  To contribute to a trade deficit is identically to increase expenditures relative to incomes.  Neither determines the other.

It is, of course, a reasonable question to ask what causes domestic budgets and the current account to have the configuration they have.  It’s a bit like asking, did your team play great or did mine play lousy?  We don’t have a language for this sort of distinction in economics.  In the article I wrote on this topic I used the phraseology “active” and “passive” and argued that trade decisions are more likely to be active.  Actually, I’m not sure about this, either the active-passive frame or the bias toward “trade did it”.

Let me give a real world example, Germany.  Germany has a persistent current account (trade) surplus.  In fact, its economy is brilliantly organized to generate surpluses.  But it is also a country in which saving is practically a sacrament.  Germany is currently freaked out that the ECB will charge interest on reserves, which puts even more downward pressure on non-policy interest rates.  How horrible to punish virtuous savers like this!  So there you have it: a big external surplus and lots of domestic savings.  Does either “determine” the other?  No, they are identically the same thing.  If Germans ran out and spent their money on imports, they wouldn't save and they wouldn't have a trade surplus.  (If they spent their money on domestic goods only, with no ripple effects on imports, they’d have exactly that much more money so the impact on savings would cancel out.)  If they decided this summer to forego their beloved Frisian and Baltic islands and all go for vacations in the Mediterranean, their external surplus would fall, they would generate less domestic income, and their savings would be down equivalently.  The accounting identities simply reflect the fact that, when you add up the two sides of the ledger, you have two measures of the same thing.

To move the discussion back to the US, our situation can be described in terms of our awful trade performance (which Krugman acknowledges) and the willingness of borrowers to borrow and lenders to lend to finance consumption as income fails to keep up with expenditure (as it will if there is current account leakage).  All of this is part of the same, single, identical story.

You all played better and we all played worse.

UPDATE:  Why does it matter?  Is this whole business just pedantry, taking a small point, the difference between an equality and an identity, and making a big deal out of it?  No.  The argument that net national savings “determines” the trade balance has enormous practical consequences.  It means that trade policy can simply ignore issues of trade surpluses and deficits.  Trade agreements, offshoring, global regulatory arbitrage, industrial policy—all of this, by theoretical edict, is allowed to affect only the composition of trade, not its balance.  Meanwhile, for a country like the United States, with a chronic and obviously debilitating current account deficit, the remedy is said to be save, save, save.  So fiscal austerity, cuts in Social Security, defined contribution pension plans and anything else that seems to contribute to net savings rises to the top of the policy agenda.

To his credit, Krugman himself has not been a part of the savings mob, at least not since 2008.  But why give credence to the erroneous reasoning that fuels it?

UPDATE II:  And another thing: the claim that the trade balance is “determined” by net saving, which in turn is the result of other stuff that have nothing to do with trade, is the basis for the assumption of fixed balances that underlies the entire microeconomic edifice of trade theory.  All those lovely theorems simply assume that a given change in trade policy, or technology or whatever leads to perfectly offsetting changes in the value of imports and exports.  Drop the assumption—allow the trade balance to change when policy or some other factor changes—and you’re in a different world, one where the comforting strictures of comparative advantage theory no longer apply.

Mainstream trade theory has two separate steps.  First net savings determines the trade balance, then the various micro and policy forces determine trade composition.  If you recognize the identity between net savings and the current account, however, any two-step process is a fundamental conceptual error.  One thing, one step.

The Ideological Fraud of Adam Smith, beginning with the pin factory.

I just posted the paper I will give tomorrow at the History of Economics meetings.  The Ideological Fraud of Adam Smith, beginning with the pin factory.  I hope you enjoy reading what a fraud he was.

http://michaelperelman.wordpress.com/2014/06/20/the-ideological-fraud-of-adam-smith-beginning-with-the-pin-factory-2/

Here is the start:

On March 28, 1763, while he was explaining to his Glasgow students the importance of the law and government:

    They maintain the rich in the possession of their wealth against the violence and rapacity of the poor, and by that means preserve that useful inequality in the fortunes of mankind which naturally and necessarily arises from the various degrees of capacity, industry, and diligence in the different individuals. [Smith 1762 1766, p. 338]

In order to justify this inequality, Smith told his students that “an ordinary day labourer … has more of the conveniences and luxuries than an Indian [presumably Native American] prince at the head of 1,000 naked savages” (Smith 1762 1766, p. 339). But then the next day, Smith suddenly shifted gears, almost seeming to side with the violent and rapacious poor:

    The labour and time of the poor is in civilized countries sacrificed to the maintaining of the rich in ease and luxury. The landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his exactions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full enjoyment of the fruits of his own labours; there are no landlords, no usurers, no tax gatherers …. [T]he poor labourer … has all the inconveniences of the soil and season to struggle with, is continually exposed to the inclemency of the weather and the most severe labour at the same time. Thus he who as it were supports the whole frame of society and furnishes the means of the convenience and ease of all the rest is himself possessed of a very small share and is buried in obscurity. He bears on his shoulders the whole of mankind, and unable to sustain the weight of it is thrust down into the lowest parts of the earth from whence he supports the rest. In what manner then shall we account for the great share he and the lowest persons have of the conveniences of life? [Smith 1762 1766, pp. 340 41]

Smith’s train of thought is confusing. First, the law is needed to constrain the fury of the poor; then the market provides for the poor very well; followed by the wretched state of the people who worked on the land the least fortunate of the workers. For his grand finale, after decrying the “small share” of the poor, Smith curiously veers off to ask what accounts for “the great share” that these same people have. His answer should come as no surprise to a modern reader of Adam Smith “The division of labour amongst different hands can alone account for this” (Smith 1762 1766, p. 341).

By March 30, Smith was confident enough about his success in finessing the challenge of class conflict that he became uncharacteristically unguarded in openly taking notice of the importance of workers’ knowledge:

    But if we go into the work house of any manufacturer in the new works at Sheffield, Manchester, or Birmingham, or even some towns in Scotland, and enquire concerning the machines, they will tell you that such or such an one was invented by some common workman. [Smith 1762 1766, p. 351]

Smith was too careful an ideologue to include such material in his published work without any hand wringing about inequities and the importance of workers’ knowledge. Instead, he introduced readers of The Wealth of Nations to his delightful picture of the division of labor in his simple pin factory:

    … a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty eight thousand pins in a day. Each person, therefore, making a tenth part of forty eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations. [Smith 1789, I.i.3, pp. 14 15]

Today, few people would recognize Smith’s pin making operation as a factory. It was simply a small workshop that would not have been much out of place in Smith’s imaginary village. Smith himself referred to the pin factory as a “frivolous example” and later as “a very trifling manufacture.” (Smith 1762 1766, vi.34, p. 343; Smith 1789, I.i.3, pp. 14 15).

But now, with the magic of the division of labor, Smith could portray society as a harmonious system of voluntary, commercial transactions. Because the economy could produce more, workers could consume more, and perhaps one day even have their own trifling enterprise.

The mere rearrangement of work created a great leap of productivity. Smith told his students that a worker might have been able to produce something between one and twenty pins per day, but with the division of labor, the output per capita soared to two thousand. By the time he published The Wealth of Nations, the number more than doubled to 4,800 pins (Peaucelle 2006, p. 494; Smith 1789, I.i.3, pp. 14 15).

Granted that the division of labor can improve productivity, how was such dramatic productivity possible? It wasn’t. An early draft of The Wealth of Nations explains the secret of this jump in productivity. There, Smith began his description of pin production with “if the same person was to dig the metal out of the mine, separate it from the ore, forge it, split it into small rods, then spin these rods into wire … ” (Smith 1759, p. 564). Aha! In his later estimates, the workers’ tasks began with wire already in their hands. No wonder they could produce so much more. Much of their work had already been completed before they began.

Even if the division of labor was responsible for a significant part of this increased productivity, further dramatic advances were unlikely to come from rearranging workers’ tasks. And other than his earlier statement that “The division of labour amongst different hands can alone account for this,” Smith never directly made the assertion that the division of labor alone was responsible for all technical progress. However, the absence of any other explanation (as well as his silence regarding modern technology) gives the impression he still held that belief.

The economic historian, John H. Clapham, once lamented, “It is a pity that Adam Smith did not go a few miles from Kirkcaldy to the Carron works, to see them turning and boring their cannonades, instead of to his silly pin factory which was only a factory in the old sense of the word” (Clapham 1913, p. 401).

Smith never took notice of the Carron Works in his great book, even though Kirkaldy was within easy walking distance from the great factory. True, he would have needed a short ferry ride to cross a river for his walk, but this factory was one of the most famous, and perhaps the largest, industrial plant in the world, remembered today mostly for its cannons that helped the British navy create and maintain a great empire. The Company maintained a major warehouse in Kirkcaldy proper to hold the iron rods and receive the nails in return from the busy local nail makers.

In 1772, a few years before The Wealth of Nations appeared, Smith’s close friend, the philosopher, David Hume, wrote to Smith, inquiring about how the precarious financial situation of the Carron works would affect his book:

    The Carron Company is reeling which is one of the greatest Calamities of the whole; as they gave Employment to near 10.000 People. Do these Events any wise affect your Theory? Or will it occasion the Revisal of any Chapters?” [Hume 1772]

However, the closest Smith came to mentioning the Carron works occurred in a brief reference to a recent increase in employment in Scotland, where Carron was one of the three towns mentioned (Smith 1789, I.viii, p. 94).

Smith’s contemporaries understood that the world was rapidly changing. Yet scholars who have studied Adam Smith have expressed puzzlement that the prophet of modern capitalism had so little to say about the technological developments taking hold around him. Early in the book, Smith did mention in passing “the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many” (Smith 1789, I.i.5, p. 17), but he avoided any further discussion of the modern industry that was emerging around him.

Smith was not unworldly at all. He was engaged in the construction of a sophisticated ideological structure. Nothing is more revealing about this project than his famous pin factory.

Reviewing Noah's Review Of Big Ideas In Macroeconomics

Noah Smith has put up in five installments and now as a whole a review of _Big Ideas in Macroeconomics_  by Kartik Athreya.  He had previously blogged on the book without reading it, which led to criticism, arguing that mainstream macro people are attracted to the field because they like the sorts of models and techniques currently used in "modern macro," aka mostly DSGE models (dynamic stochastic general equilibrium).  Now he has read the book and gives his extensive review.

I have not read the book (just as I have not read Piketty yet, so no comments from me on it, yet), so I am not going to comment on it directly.  But, I will comment on his review, which after making a number of critical remarks, most of which look like they might be reasonable, he in the end comes down defending mainstream macro basically on the grounds that Margaret Thatcher used to put out for capitalism: There Is No Alternative ("TINA").  He declares that after spending time around heterodox economists he finds "much less evil" in the mainstream models.  He lists Austrians, Post Keynesians, and MMT people, and charges all with being "too political" and makes somewhat more disparaging specific remarks about each, although he is less harsh on the Post Keynesians (although the MMT approach is generally viewed as a sub-category of Post Keynesianism).  He says nothing in his review about Agent-Based Models (ABM), and I suspect this reflects Athreya saying nothing, or little, about them.  In comments he expresses sympathy for ABM, but says it has not yet delivered.  He recognizes that the mainstream macro has a tendency to be a closed shop ignoring outsiders, but in the end says, "if it's going to be reformed, it's going to be reformed from the inside," noting the rush by the insiders to develop DSGE models with all kinds of financial market formulations, and with Athreya admitting that the mainstream did not do  well  modeling the crisis, with weaknesses in modeling "household finances" and "interfirm financial contracts" as problems.

I will make only three further comments, beyond noting that Noah finds the book not to be very well written and probably hard to understand for anybody who is not already well versed in mainstream macro, even though apparently Athreya has sought a wider audience for his defense of mainstream macro. 

1)  In a discussion of what makes a theory scientific, apparently Athreya argues that it must be mathematical.  Noah does not really disagree with this, although he notes that ideas or theories may be initiated without explicit math.  Where I have a problem is with Noah earlier in his review where he identifies groups that might have trouble with reading Athreya because they are insufficiently mathematical.  He lists these as those who learned their macro from "literary" texts, particularly by Keynes, Hayek, and Minsky.  Well, excuse me.  OK, there were some usual types basically making him look right about this, going on about one or another of these and attacking math modeling in general in econ.  However, I think it should be made clear that for all of these, although perhaps more for some than others, there are people working strongly in one or another of those traditions, let me name Minsky in particular, who are using mathematical models.  Indeed, I would note that some of the tougher criticisms of DSGE come from those who say its math is bad (apparently Athreya worries about chaos theory some, and fights back against the importance of the Sonnenschein-Mantel-Debreu arguments).

2) Following up on that last point, a core part of the review, and I guess the book as well, is how Arrow-Debreu-MacKenzie (ADM, I give Athreya credit for giving MacKenzie credit) fits in to  all this.  According to Noah, Athreya argues that it is the centerpiece of the microfoundations of DSGE macro (the GE part indeed).  The world is assumed to be in general equilibrium, and that is that.  A first defense provided, although I am a bit uncertain if this is Noah himself or Athreya, is to point to experiments in which subjects are able to get to equilibria quickly in certain settings.  The most famous such experiments were done initially by Vernon Smith over a half century ago, and involve double auctions settings.  I note that not all markets have such settings in the real world, and I also note that experiments on multiple market setups have been rare and very limited in their scope.  This is a thin reed to jump to concluding that general equilibrium not only holds, but the stronger point that it is unique and stable, which apparently Athreya spends a lot of time defending, although on this matter Noah is more critical, saying that DSGEers should face up to the possibility of multiple equilibria more readily (and I agree).  Curiously, apparently Athreya refers to GE as an "emergent" idea, which is definitely a complexity argument that some ABMers make.

3)  They use assumptions of agent rationality to rule out speculative bubbles, and bubbles are there in the real world and create serious problems for the existence, or at least uniqueness and stability of general equilibria.  Indeed, starting with work by Vernon Smith but since widely supported, experiments find bubbles to be ubiquitous in many market settings, including ones with fairly short time horizons and where agents are fully informed.  Apparently Athreya does spend some time in one chapter sort of admitting that there might be problems with this, that there might be bubbles and heterogeneous expectations (meaning some not strictly rational).  But in the end, this gets swept aside in the glory of general equilibrium, not to mention the supposed "evil" of the alternatives.  The law of one price also gets dragged into this discussion.

There is much more in the review, which is quite interesting, whether or not the book is as interesting as the review may well be quite another matter, and on that, well Noah says it is not very well written or organized or very clear.  Oh well.

Barkley Rosser

Sykes-Picot Reaffirmed By ISIS/ISIL, Not "Dissolved"

So, everybody in the media, including in today's WaPo the usually super-well-informed, David Ignatius, has been declaring that the invasion of northern Iraq by ISIS/ISIL from Syria, and their widely reported opening of the border between the two nations (or "erasure" of it, if you prefer)  constitutes "dissolving the Sykes-Picot Agreement of 1916."  This makes for an appearance of historical profundity on the part of the commentator, but not if one actually knows the facts.

So, this agreement, initially exposed to public attention by the Bolsheviks in 1917 after they found reports of it (a secret agreement) in the Russian diplomatic files when they seized power in their revolution (and trumpeted accurately as an example of western imperialist machinations in WW I), involved British diplomant, Sykes, and French diplomat, Picot, carving up former Ottoman territories in the Middle East between them.  The general account one sees has been that France got what would become Syria and Lebanon (itself carved out for the Christians, who later got outnumbered by Muslims), with the British getting what is now Iraq as well as what are now Israel, Jordan,and the Palestinian territories.  (BTW, in the film Lawrence of Arabia, the hero is depicted as knowing nothing of this until late in the film, with the mythical character,  "Dryden," played by Claude Rains, explaining it to him; when in reality "Dryden" was Sykes himself who initially hired Lawrence to do his thing and who was fully aware of the agreement from the start).

So, why are all these people wrong?  In the original agreement, France was supposed to get what is now the Ottoman province whose capital was Mosul, now officially northern Iraq. But they did not get it? Why not?  It was already known that oil was there, and the British already had their troops on the ground there, partly thanks to Lawrence.  So, they simply said, "tough luck, it is ours," and later it became Iraq's, with British oil companies getting the contracts on all that oil near Mosul.  So, having northern Iraq fall under the control of an entity coming out of formerly French-ruled Syria amounts to finally actually affirming the original agreement as it was set, but not implemented.

Oh, and the character played by Alec Guinness in "Lawrence of Arabia," Prince Faisal, a Hashemite (whose brother, Abdullah, would be made King of Jordan by the Brits, with his great grandson, Adbullah II currently in power), would be set up as King Faisal I of Iraq after Gertrude Bell got Iraq set up with borders and all after WW I, with the support of Lawrence and Winston Churchill.  His son, Faisal II, would be killed when he was overthrown by a military coup in 1958 after he hosted and signed the anti-Soviet 1955 Baghdad Pact, on the behest of the US and UK, two years after those two nations overthrew Mossadegh in neighboring Iran and reinstalled the Pahlavi Shah, who also signed that pact.

Barkley Rosser

Richard Cohen Neoconning On Iraq (Again)

The drumbeat of old neocons neoconning again in the face of the victories by ISIS/ISIL in Iraq.  It is Richard Cohen's turn today to bloviate on the ed pages of WaPo, "A do-nothing disaster."  Yeah, looks pretty bad for  Barack, all those ISIS/ISIL forces swarming all over Iraq.  Obviously he could have and should have stopped it.

Two points, beyond noting that Cohen was quicker than many of those supporting the Iraq war to realize it was a big mistake.

1)  On chemical weapons in Syria, Cohen says, "He wanted Bashar al-Assad to cease using chemical weapons.  His language was strong, nearly warlike... What happened next?  Virtually nothing."  Really?  Because in his final paragraph he says, "Obama settled for a victory jog around the political infield after getting Assad to give up most of his chemical weapons."  This is "virtually nothing"?  Cohen does not even seem to proofread what he writes before sending it out.

2)  And, of course, we have "A civil war that might have been stopped in its tracks was allowed to fester.  The Syrian dictatorship survived, and the war spilled over into Iraq."  Unfortunately Cohen never says how this might have been achieved.  The favorite explanation of most neocons, and he does  not even bother bringing it up as did Fred Hiatt yesterday, would have been to have provided heavier arms to the "moderate opposition."  But as those who have looked at it really closely realize, including apparently Obama's advisers, it was clear  from early on that they were never strong enough to defeat either the Islamist radicals or the Assad  regime, with it more likely that those heavy arms would have ended up in the hands of ISIS/ISIL.  But Cohen does not bother addressing that, indeed, does not even attempt to say how Obama might have achieved the stopping in its tracks of the civil war, which all of us would have welcomed (hint: maybe by having supported Assad, despite his awfulness).

Barkley Rosser

Neocons Freaking Out Over Iraq: Fred Hiatt Version

Ah yes, good old Washington Post editorial page editor, Fred Hiatt, is at it again, all over President Obama for his unwillingness to run around after neocon fantasies about the world, just as he seems not to be all that taken by Hiatt's role as a leader of the anti-social security Very Serious People.  In today's WaPo has another column actually under his name, "The threat from being a bystander," all about how what is happening in Iraq is clearly due to Obama withdrawing troops from there rather than the initial  invasion that installed a Shi'i dominating rule, Nuri al-Maliki, who has oppressed the Sunni minority while demanding that US troops leave.  That the Sunni minority has welcomed the invasion from Syria of the Islamic State of Iraq and Syria (or Levant), ISIS(L) with open arms is not surprising under the circumstances.

Now, it must be admitted that at one point Hiatt recognizes that, "Iraq's politicians are to blame. But if the United States had maintained a presence, it might have steered Iraqi politics in a more constructive way."   Really?  From the time Bush was president, al-Maliki had been demanding the complete withdrawl of US troops and refused to give legal protection to any of our troops who just managed to stay on too long.  What does Hiatt have to say about that?  Well, "I think if Obama had really wanted an agreement, and been willing to offer more than a few thousand soldiers, he could have negotiated one."  Really?  But al-Maliki had been consistently and repeatedly without a shred of any wavering demanding that we remove all our troops.  Why on earth would offering "more than a few thousand soldiers" that he explicitly did not want change his mind?  Fred Hiatt is in full fantasyland denial on this at this point.  He somehow does not remotely get it that he and his neocon pals just totally messed it up when we invaded, and they wanted us out, period.

 There is more.  Of course he is back to pounding the drum about how all would (or at least might) have been well if only Obama had not "rejected the advice of top aides to support the moderate rebels in Syria."  There he goes again with another fantasy.  Those moderate never were and never have been particularly powerful, even if the Turks support them and were the main advocates of us massively arming them.  But the main reason reportedly that Obama resisted this was fear that the already very effective Islamists would end up getting the arms.  As it is, a lot of the arms that ISIS(L) has been picking up on its run through northern Iraq have been US ones sent there, well...

Then we have another serious whopper.  "If only Libya, Syria and Iraq were only human rights catastrophes - as each assuredly is - the Minimalists [Obama and his allies] might hold firm."  Human rights catastrophes?  OK, Syria is indeed a human rights catastrophe and much worse, with thousands dead and millions displaced, somewhat reminiscent of what happened in Iraq after we invaded.  Syria is indeed a horror show.  But it remains completely unclear what should be done about it.  But, increasingly it is clear that attempting to arm the "moderate opposition" who were(are) supposed to both overthrow Assad's government, fully backed and armed by the Russians who have a naval base in Syria, as well as hold off and defeat ISIS(L), looks to be just a total fantasy.  Frankly, we should have figured out some time ago that indeed the real threat were the Islamist radicals and have supported Assad against them, even though those moderate oppositionists seem so nice.

Hiatt has Iraq on his list, but I am not sure what he is talking about.  Is he talking about what happened during Saddam's regime, or after Saddam fell, or more recent human rights misconduct by al-Maliki's government since we withdrew our forces, or things that have gone on in areas conquered by ISIS(L)?  This is completely unclear, but while I worry about what will happen in those ISIS(L) ruled territories, most reports have the locals in Mosul welcoming them as "liberators" from a corrupt and oppressive al-Maliki regime.  And while they promise to be highly fundamentalist, it is not obvious that they will be any stricter or harsher in their application of Shari'a than our ally Saudi Arabia is, where women cannot drive, thieves have their hands cut off, and murderers are beheaded.

Finally, I really am mystified by his inclusion of Libya on this list of supposed "human rights catastrophes."  Here he really is almost beyond being in fantasyland.  I checked Human Rights Watch latest report, and not all is perfect there.  Several thousand people are apparently still detained in camps and prisons as a result of the recent war, and some are not treated well, with some even dying, atlhough not clearly due to active policies of their captors.  The country is clearly not politically unified and on the verge of a civil war.  But there are no reports of any torture or systematic executions.  This is in sharp contrast to what went on during the 40 years of Gaddafi's rule.  He executed thousands of opponents, did not have elections in contrast to the current government, and tortured people regularly.  At his fall 10,000 people were  released from his prisons, and many of those had suffered torture.  Hiatt simply seems to have no idea what no idea what is going on in Libya, none at all.

I could go on, but this will do.

Barkley Rosser

Later addition:  So, have heard that Obama is sending in 276 troops.  Sounds like a joke, but I guess this is for protecting the embassy, just like the residual amount he wants to keep in Afghanistan.  Certainly will not make much of a difference, although it might excite ISIS(L) that they really are fighting against The Great Satan, just as Iran may be about to ally with that same Great Satan.

U.S. Health Care System Underperforms Despite High Costs

The Commonwealth Fund released its latest report noting that the U.S. spends more per capita on its health care system but underperforms in may categories relative to other major nations. The authors note that their findings were compiled before much of the Affordable Care Act provisions took effect. This June 2014 analysis updated their analysis released in 2010. Let’s just hope we keep making progress so the authors, which the authors can document in their next report.

The SEC Investigation of the Port Authority and Christie’s Fiscal Record

Whether Governor Christie was behind the closing of the George Washington Bridge has taken a back seat to some local reporting on a Security and Exchange Commission inquiry as to certain decisions made by the Port Authority. One of the recent stories notes:

The SEC investigation is looking at the Port Authority’s justification for diverting $1.8 billion to pay for New Jersey road repair projects at the urging of the Christie administration, people familiar with the matter said. The largest of those projects is the $1 billion upgrade to the Pulaski Skyway, a state-owned bridge that connects Newark and Jersey City and is not operated or maintained by the Port Authority. “The Port Authority has... been advised that the Securities and Exchange Commission is conducting a parallel investigation,” stated a preliminary official statement issued on Thursday, ahead of a $400 million bond offering to pay for ongoing building and maintenance projects. Port Authority attorneys for months resisted funding the Pulaski and other road project on legal grounds in late 2010 and early 2011, The Record reported in March. But the Christie administration continued to pressure agency officials and Port Authority lawyers came up with a creative legal justification, getting around state laws that require the agency to spend money only on its own facilities unless it gets approval from lawmakers in New Jersey and New York. The Port Authority claimed the roadways were access roads to the Lincoln Tunnel, even though they are miles from the tunnel and do not connect to it directly. The SEC is positioned to investigate whether the Port Authority misled investors and bondholders when it stated in official documents that the project was authorized and was connected to one of its facilities. The Manhattan District Attorney’s Office is also investigating whether there was any criminal conduct.

Other accounts wonder if Christie’s insistence that the project to have another tunnel from New Jersey to New York City – something that is both desperately needed and part of the Port Authority reach – be shelved in favor of rebuilding this Pulaski Skyway. I have no doubt that the Pulaski Skyway should be rebuilt but the point seems to be that this project should be funded out of the State of New Jersey’s budgets. Perhaps the best story on this comes from a few weeks ago. The blog does not allow me to cut and paste from it so please read how it allowed the Governor to spend more on New Jersey roads without raising gasoline taxes to replenish the “depleted coffers” of New Jersey’s transportation fund. Governor Christie fancies himself an old fashion supply-sider. I agree as much of the supply-side spin is really accounting fraud at best if not downright theft.

War is the Health of the GDP

The headline of Tyler Cowen's Upshot piece, "The Lack of Major Wars May Be Hurting Economic Growth" is calculated to provoke controversy. Cowen's point, though, isn't that we need a war to boost the economy. As he concludes:

"Living in a largely peaceful world with 2 percent G.D.P. growth has some big advantages that you don't get with 4 percent growth and many more war deaths."

But there is an underlying logic to Cowen's reductio ad absurdum that I'm not sure he grasps completely. The national income accounts were designed with the idea of paying for war in mind. That actually might make sense during a time of war when you're trying to figure out how to pay for it. But it embeds a social accounting protocol that is incompatible with the absence of war. The predictable results are policies such as the Cold War rearmament based on the premise that arms spending will pay for itself by siphoning off revenues from the additional growth that the spending will stimulate. The Latin term for it is inflatio. Time to recycle a piece from three years ago:

Siphoning Off a Part of the Annual Increment of GNP

The lessons drawn from World War II by US policy makers and their advisers stand in stark contrast to those drawn from World War I by Stephen Leacock and prescribed by Keynes during the war. Where Leacock had seen the maintenance of industrial output despite vast withdrawals of manpower from the labor force as a sign of the redundancy of much of that labor force, Leon Keyserling, chairman of the Council of Economic Advisers under President Truman, viewed massive spending on armaments as a tonic to stimulate the expansion of economic activity. Keyserling went even further in his calculation of the economic benefits of the preparations for war. In his view, the increased economic activity could produce a "growth dividend" that could be "siphoned off" to pay for the arms. Rearmament would thus be a free lunch that would not only pay for itself but make a down payment on a bargain dinner. This reasoning underpinned National Security Council memorandum, NSC-68, written in 1950 by State Department analyst Paul Nitze. Keyserling supplied the economic vision underlying NSC-68, which represented a "a serious effort to develop a coherent strategy" in response to two distinct but interrelated problems: first, the obstacles to rebuilding an open system of world trade in which the US could sell its exports and second, containment of the Soviet military and political threat.

"With a high level of economic activity," the report assured, "the United States could soon attain a gross national product of $300 billion per year… Progress in this direction would permit, and might itself be aided by, a build up of the economic and military strength of the United States and the free world." The deficit financing of this military build up and subsequent effect of that spending on economic growth meant, in its author's opinion, that the rearmament could occur, "without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product."

Approved months before the outbreak of the Korean War, NSC-68 recommended a massive rearmament program for the U.S. and Western Europe. "Leon Keyserling was very helpful when we wrote NSC-68," author Nitze admitted in a 1986 interview, "He was my principal adviser on the economic parts." Not only did Keyserling advise on the writing of document, but President Truman's special counsel, Charles Murphy called upon him to evaluate the document's economic feasibility. It is unclear whether either Murphy or Truman, were aware of Keyserling's dual role as both advocate and judge of the strategy. Never one to underestimate his own importance, Keyserling described his role as "the one who had introduced the fundamental new factor of the dynamics of economic growth. Now, as I say, I started this circa 1947…"

Because of limits to domestic purchasing power imposed by the market, stabilizing the U.S. economy in the post-war period required the expansion of foreign trade. Although the two goals of economic stabilization and Soviet containment were acknowledged as distinct in NSC-68, the document's rhetoric elevated the political-military conflict to top billing. The memorandum's drafters believed that rearmament could solve both problems while also being easier to sell politically. The economic dilemma arose out of Western Europe's fragile financial condition in the immediate post war period. Wartime devastation of productive capacity in Europe left in its wake immense inflationary pressures, as pent-up demand for goods could not be met by the constricted supply. Europe's international payments position was also weakened, giving rise to exchange controls and other barriers to international transactions in an effort to prevent capital flight.

Meanwhile, widespread conservative and protectionist political sentiment in the U.S. blocked a wholesale expansion of a Marshall Plan-type arrangement of foreign aid and easy credit. The Marshall Plan itself had been a brilliant success in providing a temporary solution to the dollar shortage in Europe. But European restructuring to new patterns of world trade required a long-term continuation of the effort. Changes were needed in European business practices, new institutions for investment planning, regional integration and co-ordination and overcoming of protectionist sentiment in the U.S.

NSC-68 was not based on a compelling analysis of the long-term needs of US capitalism. Instead, it produced politically marketable palliatives to several immediate and pressing problems. The document evaded the hard issues of the inherent weaknesses of liberal capitalism and the difficulty of establishing an open world economy. Instead, it opportunistically projected Western economic frailties onto Soviet military strength. That rhetoric, in Fred Block's opinion, was a short term expedient whose success in overcoming the structural economic problems would presumably render continued use of the Soviet bugbear unnecessary. While it may have made sense as an expedient, it was flawed in that it created an enduring institutional bias in favour of ongoing militarization of U.S. foreign policy. According to Block, "Rearmament became official policy largely because of the absence of coherent alternatives." But the strategy's success in the early 1950s cannot explain the continuing appeal and dominance of its rhetoric. Block argued that the implementation of NSC-68 established or reinforced three institutional structures – NATO, the military-industrial complex and political McCarthyism – that subsequently made it difficult for US policy makers to stray from the logic of militarization.

If the politics of NSC-68 were dubious, the theoretical status of its economic rationale was even more so. During World War II, as mentioned in a previous chapter, John Maynard Keynes had written to T.S. Eliot describing the full-employment policy by means of investment as first aid. It was, he explained, only one application of an intellectual theorem that also included wise consumption and working less. Keyserling's growth economics, however, abandoned any pretence to theory in favor of boosterism of growth, growth and more growth fueled by wasteful consumption and wasteful investment. Economic stimulus through rearmament strategy is best understood as a response to the political difficulties inherent in adopting a genuine full-employment policy, as they had been analyzed by Michal Kalecki in a 1942 Cambridge lecture published the following year as "Political Aspects of Full Employment."

Kalecki had argued that the economic feasibility of maintaining full employment through a policy of government spending was widely accepted by economists, with the exception of "'economic experts' closely connected with banking and industry." As long as there remained unused capacity of labor, production facilities and raw materials, government spending financed by borrowing could proceed without triggering inflation. The reasons for political opposition to a full employment policy, however, are three-fold. First, industrialists dislike government interference in the area of employment because it blunts the political threat – used to indirectly dictate government policy – of warning that one or another policy opposed by business will "undermine business confidence." Second, the scope for government investment is initially narrow – restricted to such facilities as schools, roads and hospitals – but continued pursuit of the policy of government spending would create pressure to expand government involvement into industries like transportation and public utilities that are currently the preserve of private investment. Subsidizing mass consumption is even more strongly scorned because it violates the fundamental moral principle, "that 'you shall earn your bread in sweat' – unless you happen to have private means." The long-term maintenance of full employment is most politically objectionable because it would lead to social and political changes in which the threat of dismissal from employment would cease to be an effective disciplinary measure. Thus, although a full employment strategy could increase profits, its undermining of factory discipline and political stability make it unpalatable to bankers and industrialists.

An exception to this rule of big business opposition to full employment occurs under fascism, where, "the state machinery is under the direct control of a partnership of big business with fascism" and "dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditures on armaments." Although this second aspect suggests parallels with NSC-68, there are fundamental differences between fascism and the economic rationale behind the Truman administration's Cold War rearmament strategy. As Kalecki pointed out, "in a democracy, one does not know what the next government will be like. Under fascism there is no next government." This clearly was not the case with NSC-68. Although the memorandum itself remained classified until 1975, its implementation following the outbreak of the Korean War revealed a policy logic that was clear enough to critics of the Truman administration.

Opposition to the rearmament as economic stimulus policy was readily forthcoming during the 1952 presidential election campaign. On the evening of September 23, 1952, General Dwight D. Eisenhower, the Republican nominee for President of the United States, was scheduled to deliver a campaign speech in Cleveland, Ohio. That night however, his running mate, Richard M. Nixon, gave his famous "Checkers" speech defending himself from charges that a political campaign fund established for him was improper. Instead of his originally scheduled address, whose topic was inflation and "false prosperity", Eisenhower substituted his reaction to Nixon's televised appearance. The text of Ike's unspoken speech, however, was published the next day in the Washington Post.

Eisenhower's speech was a sustained polemic expressly directed at the Truman administration policies conceived by Keyserling. Although Ike didn't name the economic policy's architect in the speech, he did the next best thing. He cited with regret the resignation of the Edwin G. Nourse, whom Keyserling succeeded as Chairman of the Council of Economic Advisors. To anyone familiar with Keyserling's conceptual role with regard to the economics of NSC-68, several passages in Ike's speech stand out as virtual indictments.

"The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism... The point and purpose of this policy I have already indicated: to fool the people with a deceptive prosperity. The method is very simple: to give more people more money that is worth less..."

Furthermore Eisenhower identified the mainspring of that inflationary policy as the production of armaments:

"There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduction in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression."

In contrast to the scorned Truman administration policy, Eisenhower cited Thomas Jefferson's praise of governmental frugality: "If we can prevent government from wasting the labors of the people under the pretense of taking care of them, they must become happy."

Brat And The Path Of The Virginia (And National) Republican Party

Today in the Washington Post, George Will began his column remarking on how Congressman Robert Goodlatte (R-VA) said in the wake of David Brat upsetting Eric Cantor in their primary, that the House Republicans need "to take a stop and a deep breath until we find out how everyone reacts to this."  Now, Goodlatte, aside from being my Congressman (and I have met him on several occasions) is not just some random House member.  He is Chair of the House Judiciary Committee that has jurisdiction over immigration reform.  Goodlatte in his law career in the past has actually helped out immigrants in legal trouble, and he has been making noises about working out some sort of limited immigration reform.  But all this taking a deep breath after Brat's win running on a strongly anti-immigration reform platform is likely to lead Goodlatte to decide that nothing will be done on this issue, at least in this Congress.  There is more to this, and this will follow up on a post I put up last fall before the election about the history of the GOP in Virginia.


So, this gets personal for Goodlatte.  Our district, the Sixth, is not only adjacent to the Seventh, where Brat just upended the supposedly safe Cantor, but is also probably its rival for being "the most Republican district in the state," as I described the Sixth in a post yesterday on Brat's economics.  Like Cantor, Goodlatte's greatest potential electoral threat is not from some Democratic opponent, but from a Tea Party supported candidate on the right, and indeed in the last few days certain prominent local tea party types have made loud noises on local talk radio shows about how awful Goodlatte is and how he should follow Cantor out the door because of his playing along with possible immigration reform.  He has good reason to be looking over his shoulder, although as I argued earlier, the Shenandoah Valley is perhaps not quite as bad on such matters as the eastern parts of Cantor's district down in the old racist Byrd Machine Tidewater, given the old history here of being pro-civil rights and of moderate Mountain Valley Republicanism, now nearly dead, if still sputtering in a few corners (although Emmet Hanger's effort to come up with a compromise to extend Medicaid here looks to be about dead).

In any case, this current situation highlights again the historic shift from being pro-civil rights (and anti-slavery in the days of Mr. Lincoln, from which period the Republicanness of the Shenandoah Valley dated) to being the racists in today's politics, and I shall make no bones about the fact that I consider anti-immigrant attitudes to be at bottom racist, accepting the studies I have seen that immigration is good for the economy and even for wages and employment of lower paid and skilled workers, contrary to widely held opinion (so, right, not everybody anti-immigrant is racist, but the real fury of those going out to vote on this is).  Here is how this shift has gone down around here.

If we go back 40 years, we find that the occupant of Congressman Goodlatte's seat was a good Mountain Valley Republican, M. Caldwell Butler of Roanoke.  At that time Butler became well known for serving on the House Judiciary Committee when he became one of the first Republican members of the committee to support impeaching Richard Nixon for Watergate.  Prior to retiring from his seat in 1983, Butler would support some civil rights legislation, including one about diversity in the judiciary.  This was appropriate stuff for a classic old style Mountain Valley Republican congressman.

When Butler retired, he made clear that he supported as his successor in the 1982 election then state Senator Ray Garland, another moderate Mountain Valley type, also from Roanoke.  However, Harrisonburg (where I live) had been moved into the district, and a strong supporter of more conservative Ronald Reagan decided he would oppose this laying on of hands by Butler of Garland.  This person was a friend of mine, a now-retired Accounting professor from JMU, Kevin Miller.  Miller managed to get the nomination, thereby alienating the Butler/Roanoke Republicans.  This opened the door to an actual victory by a Dem in the district, retired GE VP, the late Jim Olin, whom I also knew, with 82 a bad year for the GOP electionwise.  Part of his support came from the Roanoke business community, many of whom knew him and were angry about this conservative upstart from Harrisonburg pushing their guy aside.  Olin served three terms before stepping down (health problems that did him in), only to be succeeded by Goodlatte, who is of Roanoke, thus re-establishing the old rule, although moving more to the right than Butler was.

Kevin Miller would later get himself elected as state Senator from Harrisonburg.  While he was a Reagan Republican and not really a Mountain Valley one, he was not a racist and also knew how to count, being a former Accounting professor.  He would end up on the state Senate Finance Committee, and when GOP Governor James Gilmore began to listen to Grover Norquist and wanted to cut taxes without cutting spending, Miller would be one of those on the Senate finance committee who would resist Gilmore's budgets and stymied him.  This group were attacked by Gilmore's supporters as being "liberals high taxers" and so on and so forth.  Kevin Miller could count, and his becoming "the enemy" is a sign indeed that if Ronald Reagan was around now, he would get purged from the Republican Party.

When Kevin Miller stepped down from his Senate seat, he would be replaced by Mark Obenshain, considerably more conservative than he, who would be the GOP nominee for governor last year.  But, even though he was to the right of Miller, he was to the left of his running mates, all of whom lost last fall, although Obenshain is still around in the state Senate.  Obanschain has not been a friend of immingration reform.

Which is all parallel and prelude to what has just happened, with an established Republican who was playing as a leader at the national level of tea party types in the House of Representatives simply not being racist enough or pure enough to avoid getting wiped by the purer.  So, Goodlatte, along with many others of his colleagues are taking deep breaths preparing to react by doing nothing on immigration reform, nothing at all.  No more Mountain Valley Republicans here!

Barkley Rosser