"Say's Law sank without trace."

Money: Whence It Came, Where It Went, J. K. Galbraith (1975), pp. 218-220:

The belief that the economy would find its equilibrium at full employment depended partly on what had long been called Say's Law — for J. B. Say, the French counterpart and interpreter of Adam Smith — and partly on the corrective movement of wages, prices and interest rates when there was unemployment. Say's Law, not a thing of startling complexity, held that, from the proceeds of every sale of goods, there was paid out to someone somewhere in wages, salaries, interest, rent or profit (or there was taken from the man who absorbed a loss) the wherewithal to buy that item. As with one item, so with all. This being so, there could not be a shortage of purchasing power in the economy. Movements in prices, wages and interest rates then validated J. B. Say and also ensured that the fundamental tendency of the economy would be to operation at full employment. People and firms saved from their income, and this saving had, obviously, to be spent. This happened when it was invested in housing, plant, capital equipment. If people saved more than was invested, the surplus of savings would bring down interest rates. Investment would thus be stimulated and saving (at least in theory) discouraged. So the excess of savings would be eliminated and Say sustained. Prices of goods would also fall in consequence of any short-fall in purchasing power that resulted from an excess of savings. This would encourage buying and, by reducing the income from which savings were made, also reduce savings. Again Say was sustained. Until Keynes, Say's Law had ruled in economics for more than a century. And the rule was no casual thing; to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots. Until late in the '30s no candidate for a Ph.D. at a major American university who spoke seriously of a shortage of purchasing power as a cause of depression could be passed. He was a man who saw only the surface of things, was unworthy of the company of scholars. Say's Law stands as the most distinguished example of the stability of economic ideas, including when they are wrong. 

Supplementing Say, as noted, were the forces that kept the economy at full employment. These too were relatively straightforward. Were there unemployment, the competition for jobs would bring a fall in wage rates. Prices would be less immediately affected by the unemployment. The relationship of prices to costs would thus be made more attractive — real wages would fall — and workers whose employment was previously unprofitable to employers would now be hired. The fall in wages would not affect purchasing power; because of Say, that was always sufficient. Employment would continue to expand until the approach to full employment raised wage costs and arrested the hiring. Thus did the economy find its equilibrium at or very near full employment. From this also came the one decisive recommendation of the orthodox economists for ending unemployment. Do nothing to interfere with the reduction of wages in a depression. Resist all siren voices, including that of Herbert Hoover, who, it will be recalled, urged against wage cuts. On no matter was compassion so softheaded, for to keep up wages merely perpetuated the sorrow of unemployment and the sorrows of the unemployed. This was the doctrine, perhaps more accurately the theology, that Keynes brought to an end. There are numerous points of entry on his argument; perhaps the easiest is by way of the rate of interest. Interest, he held, was not the price people were paid to save. Rather it was what they got for keeping their assets in plant, machinery or similarly unliquid forms of investment — in his language, what was paid to overcome their liquidity preference. Accordingly, a fall in interest rates might not discourage savings, encourage investment, ensure that all savings would be used. It might cause investors to retreat into cash or its equivalent. So interest rates no longer came to the support of Say's Law to ensure that savings would be spent. And if Say's Law was no longer a reliable axiom of life, the notion of a shortage of purchasing power could no longer be excluded from calculation. It might, among other things, be the consequence of a reduction in wages. 

What people sought to save, in Keynes's view, had still to be brought to equal what they wanted to invest. But the adjustment mechanism, he argued, was not the rate of interest but the total output of the economy. If efforts to save exceeded the desire to invest, the resulting shortage of purchasing power or demand caused output to fall. And it kept falling until employment and income had been so reduced that savings were also reduced or made negative. In this fashion savings were brought into line with investment — which also, meanwhile, would have fallen but by not so much. The economic equilibrium so established, it will be evident, was now one in which there was not full employment but unemployment. Thus unemployment for Keynes was a natural condition of the economy. There was much else. And not all of Keynes's argument survived. The liquidity-preference theory of interest, for example, though it served Keynes's argument, did not gain permanent acceptance as a description of reality. But on two things Keynes was immediately influential. Say's Law sank without trace. There could, it was henceforth agreed, be oversaving. And there could, as its counterpart, be a shortage of effective demand for what was being produced. And the notion that the economy could find its equilibrium with unemployment — a thought admirably reinforced by the everyday evidence of the '30s — was also almost immediately influential.

Carbon and Climate in the Very Long Run

Before taking up today’s topic, let’s begin with the ground rules.  Scientists like to be precise and comprehensive.  They want to get the details right.  For them, it’s important to know exactly how evidence was acquired and how reliable it is.  It’s also important to use scientific terminology, since the words embody the conceptual structures that define and contextualize them.

I’m not going to do science.  My goal is much more limited, to summarize the main themes as they relate to the nature of the carbon problem and possible solutions to it.  This wouldn’t be enough if we wanted to get concrete and quantitative—for instance, if we wanted to calculate potential impacts of various policies in parts per million (ppm) carbon concentrations or warming effects in fractions of a degree Celsius.  As you’ll see, the objectives this time around are much more limited.

With that behind us, let’s consider how carbon in the atmosphere, on land and water, and under the surface of the earth have interacted over the long haul.

The earth is about 4.5 billion years old.  (This would be a lot of birthdays if we knew what day it came into being.)  Picture the scene 8/9 of the way to the present, about 500 million years ago.  There was a lot of carbon in the atmosphere, about 25 times the level of 200 years ago, before humans started playing around with it.

This carbon has the now-famous greenhouse effect of refracting the sun’s light so that infrared radiation can’t bounce back off the earth as fully as it comes streaming in.  The result is that our atmosphere traps heat, and with so much more carbon the long ago earth was a much warmer place.  That was useful, however, since the sun was also a weaker energy-source back then, sending about 4% less our way compared to today.  Nevertheless, overall average temperatures were way higher than today.  (Even just 50 million years ago there were alligators in the arctic.)

It was at this time that complex forms of life began to appear on this planet.  What is life?  Life as we know it (a Trekkie-ism) is built on molecules whose core is made up of carbon bonded with hydrogen and oxygen.  The growth of organic matter depends on photosynthesis, which looks like this:

Through this process, carbon from the atmosphere makes its way into plant tissue and the tissue of organisms that feed on plants directly or indirectly, which is all of us.  Of course, where there’s life there’s death, and dead tissue decomposes, releasing its carbon.  The familiar smell of methane signals a gas (CH4) that returns organic carbon to the atmosphere.

So with the emergence of life, carbon starts to go back and forth between living organisms and the atmosphere.  In itself this should not alter atmospheric carbon concentration, except for one detail: every now and then, rather than releasing its carbon back into the environment, a decomposing organism will get buried in sediment, and sometimes these carbon-rich sediments get pushed down into the earth’s crust as tectonic plates do their bumping and grinding act.  (In addition, as we’ll see later, some of the methane created by decomposition gets smothered or frozen and doesn’t escape back to the atmosphere either.)

In short, most carbon cycles back and forth, but a tiny bit doesn’t: it gets sequestered.  Give this process a few hundred million years, and it can add up to something.  Here is the picture of atmospheric carbon in the very long run:

The red line is atmospheric carbon concentration as a multiple of its level 200 years ago.  The black line is the percentage of oxygen in the atmosphere, which has varied inversely, more or less, with carbon.  (Nitrogen makes up the rest.)  In case you're wondering, planet Earth today is at 2x baseline carbon, another 1 is probably baked in, and 4 or more is guaranteed unless we change course.  But I'm getting ahead.

To be sure, it’s not a simple, predictable downward trend, since there are lots of other factors at work, which we will gloss over.  The main point, however, is that, across the many ups and downs, the conversion of atmospheric carbon into living tissue and the sequestration of a portion of that tissue has had a systematic effect.  It’s given us an earth today that is quite different from the one multicell organisms encountered half a billion years ago.

So where did this carbon go?  Some of it can be found in carbon-based minerals, but most was either buried in the earth’s crust or in sequestered methane.  The pressurized underground stuff is what we call fossil fuels—coal, petroleum and natural gas.  These deposits were formed over millions, even hundreds of millions, of years, and the carbon they embody is what was once in the atmosphere when the world was younger and a whole lot hotter.

We’ll end this little review with our first takeaway: the problem of climate change stems from the exceptional cleverness of human beings, who have developed sophisticated methods to locate and extract fossil fuels.  These are fantastic energy sources, dense and versatile.  But in less than two centuries, humans have begun making noticeable progress toward undoing the last half-billion years of earth history.  As you might expect, that could have consequences.

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Back to School on the Quality of American Higher Education

Today’s New York Times carries an op-ed piece by Kevin Carey about the sorry state of America’s colleges and universities.  Carey is the head of the Education Policy Program at the New American Foundation, which, in conjunction with the Gates Foundation and others, wants to restructure higher ed along the lines of market and market-like incentives.  The evidence he offers is indirect: adults in the US who graduated from four-year institutions of higher education perform worse on a standardized exam, the Program for the International Assessment of Adult Competencies or PIAAC, than did similar adults in other countries.

Of course, the US scores poorly at lower grade levels, as we know from the PISA comparisons.  Presumably the students who enter college in the US come in with worse preparation than students elsewhere.  The proper indirect test of higher ed quality, then, would be whether the US relative standing for students who attend college rises, falls or remains about the same between when they enter and after they leave.  Indeed, if college grads in the US are less behind their peers in other countries post- compared to pre-college, that’s a gold star for American higher ed.  You can’t tell if this is the case from Carey’s piece because his reporting on PISA doesn’t separate out college-bound students; he just gives averages for the entire population taking the test.

If Carey ever decides to return to the shabby institutions of higher education he describes in his column, I’ll invite him to study economics with me.  He can learn about an obscure concept called “value added”.

The Road from Carbonville: A New Series on the Misconceptions Surrounding Climate Policy and How to Avoid Them

This post begins a new series on policies to combat climate change, with an emphasis on clearing away the misconceptions that have grown up around the subject and now practically strangle it.  While it would take a much bigger effort—a book really—to develop and document all the ideas to come, I’ll do what I can with a series of short, bite-size mini-essays.  Given the format, they will sidestep most of the scholarly detail to make their case in the simplest, most direct possible way.  I'd love to do a longer-form version of this series: maybe later.

Here is the plan:

First, any discussion of carbon and the climate has to begin with the scientific basis of the problem, covering the minimum of geology, chemistry and biology necessary to understand why we face a climate crisis and what its potential dimensions may be.  Of course, in a presentation as brief as this it's necessary to cut lots of corners; be forewarned.  For the science read:

Carbon and Climate in the Very Long Run

In the Future, All Spell-Checkers Will Recognize Biogeochemical Cycling (Part II of Climate Science)

Climate Change: Why Fatalism Could Be Fatal (Part III of Climate Science)
After this come the misconceptions:

1. Climate change is a pollution problem.
2. We need to set an emission target for 2030/2040/some other year to limit climate change.
3. Measures that reduce our dependence on fossil fuels mitigate climate change.
4. Reforestation can play a big role in combating climate change.
5. Personal change will solve the climate problem.
6. People who drive SUV’s are causing climate change; people who drive electric cars are the ones helping to solve the problem.
7. The goal is for every organization to become carbon neutral.
8. Local direct action against carbon-emitting projects will stop climate change.
9. Investing in clean technologies will solve the climate problem.
10. To set the proper climate policy we need to know the social cost of carbon.
11. Done right, climate policy can be nearly costless.
12. Economic growth is the underlying problem behind climate change.
13. Population growth is the underlying problem behind climate change.
14. Greedy oil companies are preventing action on climate change.
15. Carbon permits will just be a new source of financial speculation.
16. Carbon taxes are so much better than carbon permits as a basis for climate action.
17. Carbon taxes are a great way to raise money for green projects.
18. All we need to do is put a price carbon; the rest of the problems will take care of themselves.
19. Unless all countries agree to act on climate change, any national action is useless.

At the end, it’s necessary to go beyond criticizing other views and stake out my own, what I modestly refer to as a non-misconceived agenda for combating climate change.

Why am I doing this?  Because no one else has.  I'd love to be able to recommend a book that covers this terrain to friends, colleagues, students, and especially climate activists, but it doesn't exist.  A series of blog posts is the easiest way for me to put these arguments in play, pending something weightier and more comprehensive.

If you find problems with any of the arguments I make or the way I make them, let me know!  I've been continually learning about these issues over the years, and I don't assume that I'm “all learned up” today.  And if you think what I'm trying to do is worth doing, encourage me!  It's easier to make an effort like this if you get the message that it's appreciated.

Two concluding notes: First, the tone of most of these posts is pretty negative: they are about criticizing other people's thinking, after all.  I'm not happy with this, especially since many of those who may feel under assault by what I'm writing are, for the most part, on the same side I'm on.  Perhaps the tone is exacerbated by the agonistic culture of blogging.  But to some extent it's the unavoidable result of adopting a format based on identifying and critiquing misconceptions.  I've adopted this approach because it gets right to the point.

Second, I'll admit to a certain amount of exaggeration in the way I've characterized these misconceptions.  They're presented in an extreme form, without the nuance, qualification or context that usually accompany them.  That's because I want to set them in relief and simplify the rebuttals.  In real life, people usually hold more complicated views, but I hope that the logic behind the arguments I'm going to make will still be useful.

UPDATE: This post has been significantly revised to reflect how the series has evolved.

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Supply Creates Its Own Demon II: You Don't, Say!

Karl Marx could hardly bring himself to utter the name of J. B. Say without affixing to it some contemptuous description or sarcastic remark:

"Say’s earth-shaking discovery…" 

"…adopted by Ricardo from the tedious Say (and to which we shall return when we discuss that miserable individual)…" 

"…his authority, Say, is playing a trick on him here... " 

"…we shall criticise Say’s theories later, when we deal with this humbug himself." 

"The constant recurrence of crises has in fact reduced the rigmarole of Say and others to a phraseology which is now only used in times of prosperity but is cast aside in times of crises." 

"This is the childish babble of a Say…" 

"Say, who tries to hide his dull superficiality by repeating in absolute general phrases Smith’s inconsistencies and blunders…" 

"Storch says of this trash of Say’s… 

"After Garnier appeared the inane Jean-Baptiste Say’s Traité d’économie politique." 

"This is his kind of originality, his kind of productivity and way of making discoveries, And with his customary logic, he refutes himself again…" 

"Say replies with his characteristic profundity…"  

"…the absurdity of J. B. Say, who pretends to account…" 

"…as it does to J. B. Say in the vulgarisation of Adam Smith." 

"The result he arrives at, is precisely that proposition of Ricardo that he aimed at disproving. After this mighty effort of thought, he triumphantly apostrophises Malthus…" 

"A disciple of Ricardo, in reply to the insipid nonsense uttered by J. B. Say…"

Curiously, in "The compensation theory, with regard to the workers displaced by machinery," Section 6, Chapter 15, Volume 1 of Capital, Marx performed the ultimate insult by snubbing Say, almost entirely. The first sentence includes "James Mill, McCulloch, Torrens, Senior and John Stuart Mill" among those bourgeois political economists claiming that machinery sets free enough capital to reabsorb the workers displaced by it. Say is relegated to a footnote citing the anonymous pamphlet in which the author refutes "the insipid nonsense uttered by J. B. Say" by pointing out:

Where division of labour is well developed, the skill of the labourer is available only in that particular branch in which it has been acquired; he himself is a sort of machine. It does not therefore help matters one jot, to repeat in parrot fashion, that things have a tendency to find their level. On looking around us we cannot but see, that they are unable to find their level for a long time; and that when they do find it, the level is always lower than at the commencement of the process.

Thus, the anonymous author of An Inquiry into Those Principles Respecting the Nature of Demand, and the Necessity of Consumption, Lately Advocated by Mr. Malthus, neatly summed up in a paragraph the rebuttal to the so-called compensation theory. This succinct reply makes a mystery of Marx's exclusion of Say from his listing, at the start of the section, of bourgeois political economists.

The mystery is solved in Chapter 20 of Theories of Surplus Value, "Disintegration of the Ricardian School," where Marx discussed the pamphlet he described as "one of the best of the polemical works of the decade." "What the author writes about Say is very true," Marx observed. Following a quotation from the pamphlet about the hazard arising from the difference in timing between consumption by workers and their production, Marx exclaimed that this was, "indeed the secret basis of glut." Several paragraphs later, Marx concluded:

Over-production, the credit system, etc., are means by which capitalist production seeks to break through its own barriers and to produce over and above its own limits. Capitalist production, on the one hand, has this driving force; on the other hand, it only tolerates production commensurate with the profitable employment of existing capital.

Medtronic’s Effective Tax Rate

The Citizens for Tax Justice were kind enough to let me know of their new blog:

Already facing criticism for its plans to become an Irish company to avoid U.S. taxes, Medtronic, the Minnesota-based medical device maker, disclosed this week that it pays very little in taxes in the foreign countries where it claims to have profits.

Medtronic plans to merge with Covidien which is tax domiciled in Ireland. Covidien was a spin-off of Tyco, which has been battling with the IRS since it went offshore. But I should stop interrupting:

In Medtronic’s just-released annual financial report, the fine print reveals that the company’s total “permanently reinvested” foreign profits—that is, income they have said they have no intention of bringing back to the U.S.—rose from $18.1 to $20.5 billion in the past year. And the total amount of cash and cash equivalents that the company holds abroad rose abruptly from $10.9 to $13.9 billion in just one year.

Over half of Medtronics income is reported overseas which is a combination of the fact that over half of its activities occur overseas and very low royalty rates paid back to the U.S. parent for the use of intangible assets. It turns out that the IRS has challenged these low royalty rates with a trial set in early 2015. But again, I’ve interrupted:

We’re willing to bet that just like Medtronic the other profit-shifting U.S. multinational companies know exactly how much it will cost to repatriate those earnings, but don’t want to let the public know of their tax-dodging ways.

Actually, this should be no mystery for anyone who wants to go here and type in the company name (Medtronic in our case). In the financial footnotes under income taxes, one can see how much of Medtronic’s income was sourced abroad as well as how much they provided for foreign taxes. Foreign taxes relative to foreign income was about 10 percent, which is why Medtronic is able to report effective tax rates near 18 percent.

Nortel Bankruptcy and Transfer Pricing

Michael Lewis reports on what is emerging to be a complex issue over who gets the value from the sale of certain assets from the now bankrupt Nortel:

Claims on proceeds from a lucrative patent auction dominated opening arguments Monday in the bankruptcy trial of former tech giant Nortel Networks. The proceeding follows mediation and other failed attempts to divvy up remaining assets of the Ontario-based telecom that have rang up more than $1 billion (U.S.) in professional fees so far ... Nortel, once North America’s largest telecom equipment maker, filed for protection from creditors in the U.S. and Europe after an acquisition spree built debt and in the wake of an accounting scandal and financial restatements. At its peak Nortel posted $30 billion in annual revenue, a stock market value of $250 billion (U.S.) and had more than 90,000 employees. But the fallen tech giant left tens of thousands of pensioners fighting for a share of its assets, with retirees pitted against hedge funds, governments, former suppliers and other creditors in Europe, the U.S., Africa and the Middle East. Before dealing with claims from pensioners and other creditors, however, the courts must decide on how to divide assets among debtors, referring to the company’s former head office in Canada and its subsidiaries around the world. Canadian creditors argued in depositions filed with the courts that the Canadian Nortel operation legally owned the patents and is therefore entitled to the bulk of the sale proceeds. U.S. bondholders say U.S. businesses held licenses for the patents and are thus entitled to a fair share, while lawyers for Nortel’s European units argued in court that the patents covering technologies for mobile phones and tablet PCs were largely developed in Europe and sale revenue should accrue where it was produced.

Nortel was a Canadian based multinational with operations in the U.S. and Europe. It had complex and confusing transfer pricing arrangements which could be questioned in terms of whether they were arm’s length. Professional fees here mean the cost of lawyers and expert witnesses who are debating how much of the value of $7.3 billion in assets should accrue to Canada versus the U.S. versus Europe. Alas the professionals get rich “while the debtors fight like jackals over the carcass.”

Historical Butterflies: Richard Cohen Version

For once I am not going to be too critical of a column in the Washington Post, this one two days ago by the sometimes execrable Richard Cohen on The Lessons of World War I.  Indeed, I applaud his noticing that we are coming up on the centennial this Saturday of the assassination of Austrian Archduke Ferdinand by Gavrilo Princip in Sarajevo that touched off World War I and all the horrors that came out of it, including WW II.  I completely agree with him that this is as good an example in history of a butterfly that flapped its wings and caused a hurricane, as in the old Edward Lorenz story from climatic chaos theory that a butterfly flapping its wings in Brazil could cause a hurricane in Texas.  As an old chaotician, I like these sorts of analogies and simply remind everybody that this most famous of ideas associated with chaos theory is formally known as "sensitive dependence on initial conditions."

Of course, I do have some criticism, albeit mild this time around, more a matter of taste.  Cohen spends part of the column comparing that awful event to the current situation in the Middle East, particularly in light of the ISIS successes in Syria and especially Iraq, with it very unclear how far this will go, although I seriously doubt it will result in anything as ultimately destructive and awful as World War I.  My fuss  is with what he suggests is the equivalent "butterfly flapping its wings."  His candidate is the "uprising in Syria."  I beg to disagree and figure that this is just more neocon whining that Obama did not support the moderate opposition in 2012, although there is near zero reason to believe that his doing so would have led to either the overthrow of Assad or preventing the rise of ISIS in Syria.

As it is, I do think that there is a much more obvious butterfly flapper than that on two grounds, both on being much smaller and more buttefrly-like and also in terms of being more fundamental in terms of causation.  That butterfly flapper would be the self-immolation of the small vendor in Tunisia somewhat earlier (sorry, do not have his name).  This was really a small event, arguably smaller even than the assassination of Ferdinand.  But it set off the Arab Spring, and I think it is pretty straightforward that the uprising in Syria started out inspired by the Arab Spring, whatever one thinks of either the Arab Spring or the uprising in Syria.  As it is, the uprising in Syria is already a pretty big deal, not just some butterfly flapping its wings, it is already at least a substantial windstorm, if not a full-blown hurricane.

I remind that at least in Tunisia, where it started, the Arab Spring has turned out not so badly, with the corrupt dictatorship of Ben Ali overthrown, and after a period of rule by a moderate Islamist government now a largely secular democracy in place, just the sort of thing people in the US like.  I would also note that Tunisia is just about the only nation in the Arab world where this has been the outcome.

Barkley Rosser

An Easy Call: The Norwegian SWF Should Divest from Fossil Fuels

Forget about social responsibility.  It's a matter of simple risk diversification principles.  Norway's sovereign wealth fund should not invest at all in assets tied to fossil fuels.  If anything, it should lean toward assets that move in the opposite direction from fossil fuel prices.

This fund, of course, is entirely financed by Norway's North Sea oil royalties.  Its future revenues from this source, then, are dependent on oil prices.  These fluctuate with short run events like the pace of global economic growth (demand) and civil unrest in petrostates (supply).  The biggest long term factor, however, is whether there will be significant movement toward climate change mitigation.  At present next to nothing is being done.  The problem is immense, however, and there is an obvious risk, from the point of view of an oil producer like Norway, that new evidence of climate sensitivity will frighten governments into action before deposits are exhausted.  If there is a major intensification of policy, it will result in massive earnings reductions for oil and coal, and possibly also natural gas—of which Norway is also a significant exporter.  (Prices will shoot up, but this effect will be captured either by governments or by resource-using businesses if permits are given away.)  To put it differently, the point of mitigation measures is to leave fossil fuels in the ground, which would mean that resource owners like Norway would simply have to write off these assets.

Given that risk, the prudent thing to do is to avoid any investments whose returns are positively correlated with it.  That means divesting from Shell and any other fossil fuel companies.  A rational hedging strategy, on the other hand, would call for investments in companies whose prospects are tied to aggressive carbon policy, such as those in the renewables sector, public transportation, and whose products compete with fossil fuel-intensive goods.

Sometimes social responsibility points in one direction and sound finance in another; here they converge.  It’s remarkable there should be any debate at all.

Bacon Vodka

You may be tempted by the novelty.

Just don't.

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.