Hey Presto, A Lump of Boilerplate!

Gosh, I guess there are only so many words to go round!

Those FT monkeys, covered in banknotes, "The short working week that holds France back," Financial Times, May 28, 2015:

Introduced in the late 1990s by the Jospin government with that cool disregard for the “lump of labour” fallacy that only those educated at top French universities can contrive, this sought to cut unemployment by reducing the number of hours each individual worked. Do that and, hey presto, the idea was that there would be more jobs to go round. 

Ruth Lea, "Personal view: It's time to break the Government's web of tax fallacies," The Telegraph, Feb. 20, 2006,

My second fallacy is the "lump of public services fallacy". This is based on the idea that there is an immutable relationship between public spending and public services output. Spend the money, which the Chancellor will insist on calling "investment", and, hey presto, there will be a "lump" of "high quality" services.

The Economist: Economics: An A-Z Guide, 2003:

One of the best-known fallacies in ECONOMICS is the notion that there is a fixed amount of work to be done - a lump of LABOUR — which can be shared out in different ways to create fewer or more jobs. For instance, suppose that everybody worked 10% fewer hours. FIRMS would need to hire more workers. Hey presto, UNEMPLOYMENT would shrink.

What explains this remarkable coincidence of terminology?

The key is to exploit journalists’ incredible laziness. If you lay out the information just right, you can shape the story that emerges in the media almost like you were writing those stories yourself. In fact, that’s literally what you’re doing, since many reporters just copied and pasted our text.

Meanwhile, over at Jacobin there is a nice little non-boilerplate, non-plagiarized, non-bullshit essay by Michel Husson and Stephanie Treillet, Liberation Through Vacation: "Reducing working hours is more than a path to full employment. It could help millions live more fulfilling lives.":

Reducing forced labor time opens up various prospects for human and social emancipation. The possibility of emancipating ourselves from forced labor cannot be dissociated from the possibility of reducing exploitation in forced labor. This is the meaning of Simone Weil’s sentence: “No one would accept to be a slave for two hours; to be accepted, daily slavery must last long enough to break something in a human.”

Unpuzzling the Politics of Growth and Redistribution: What hath growth wrought?

"If there is a future for cosmopolitanism in Europe, it needs a credible politics of growth and redistribution." -- Peter Dorman, "Europe, Where Two Rights Make a Wrong"

Sandwichman wonders how such a politics would differ from the "ostensible socialist" wing of the neoliberal coalition. First, it would help to have a credible definition of what it is that is supposed to be growing. "Growth" sounds good... as long as you don't have to pin it down. But what supposedly grows -- national income and product accounts -- is an incomplete, monetized aggregate of disparate things, some of which are double counted, and "more" of which could mean just about anything or nothing. 

It is wishful thinking to assume that more of "whatever" will inevitably be better than a well-specified less.

Barkley Rosser took Sandwichman to task for suggesting that the mix of empirical information, speculation and wishful thinking about the relationship between economic growth and income inequality has probably worsened since Simon Kuznets 1954 estimate of "5 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking":

But the hard fact is that there is lots more data out there on many aspects of economics, including the precise issues that Kuznets was studying when he made his complaint about "speculation."

Barkley is right about there being more data and empirical work out there, although it is unnerving that the example he cited as a sign of the empirical work -- Thomas Piketty's work -- doesn't support the complacent conventional wisdom regarding the unquestionable beneficence of economic growth. I would like to add another source that supports Barkley's claim about empirical work but contradicts the dominant complacency about growth: François Bourguignon and Christian Morrisson's widely-cited "Inequality among World Citizens: 1820-1992":

To summarize, this analysis shows that world income inequality worsened dramatically over the past two centuries. ... Changes in inequality within countries were important in some periods, most notably the drop in inequality within European countries and their offshoots in America and in the Pacific during the first half of the 20th century. In the long run, however, the increase in inequality across countries was the leading factor in the evolution of the world distribution of income. ... World inequality seems to have fallen since 1950 as a result of the pronounced drop in international disparities in life expectancy. But now that disparities in life expectancy are back to the levels before the big divergence of the 19th century, this source of convergence has lost its influence.

Bourguignon and Morrisson's empirical analysis -- along with Piketty's -- controverts that initial, tentative summary of long-term trends that puzzled Simon Kuznets:

...a long-term constancy, let alone reduction, of inequality in the secular income structure is a puzzle. For there are at least two groups of forces in the long-term operation of developed countries that make for increasing inequality in the distribution of income before taxes and excluding contributions by governments. ... What is particularly important is that the inequality in distribution of savings is greater than that in the distribution of property incomes, and hence of assets. ... Other conditions being equal, the cumulative effect of such inequality in savings would be the concentration of an increasing proportion of income-yielding assets in the hands of the upper groups -- a basis for larger income shares of these groups and their descendants.

The puzzle is solved because there isn't "a long-term constancy, let alone reduction, of inequality in the secular income structure" after all. This is not to say that the relationship between economic growth and inequality is an uncomplicated one, wholly determined by the disproportion of savings between people in different income groups. But it does fundamentally undermine the conclusions of cross-country regressions, "on the basis of which," as Bourguignon put it, "it would be tempting to conclude that 'growth (of any nature) is good for the poor'."

But what about a politics of economic growth (of any nature?) and redistribution? It might work -- just as a politics of general copulation could reduce the birth rate if combined with effective measures of contraception. Long live the revolution, indeed!

On the other hand, why make redistribution conditional on achieving growth targets in the first place? In bargaining parlance, that is what's known as a fall-back position. You don't present your fall-back position in your opening proposal. That's called "giving away the farm."

A few days ago, Sandwichman promised to expound on why the perpetual fallacy mantra even matters. Here is why. Those FT monkeys (covered in banknotes) would simply prefer to rhetorically prohibit the only opening gambit that could force real concessions from the folks who have champagne and brandy on tap. That effective initial offer would be a demand that doesn't stupidly assume, but actively pursues a "fixed amount of work" with a more equitable distribution. The only "credible politics of growth and distribution" would put distribution first and leave it to the owners of a disproportionate share of income-yielding assets to offer a growth and redistribution compromise in their counter-proposal.

But, alas, those FT monkeys' strategy seems to be working. They think about nothing but screwing growing their income-yielding assets and we are the ones who get screwed yielded.

The Del Mar Inn, Vancouver, B.C.: "UNLIMITED GROWTH INCREASES THE DIVIDE"

Artist Statement (from "The Interventions of Kathryn Walter" by Bill Jeffries, Contemporary Art Gallery, Vancouver, 1990):

"The strategy behind 'Unlimited Growth...' is direct. It is directed at those who operate our free-market economy in their own interests, while excluding those interests that would be 'responsive to the needs of the community'. The subtext to 'Unlimited Growth...' relates to several aspects of public art including the need to address the use of site-specific work as a way of intervening in local issues, and in this instance, acting as a marker of resistance by the economically marginalized, as represented by a parallel gallery and a hotel providing affordable housing. Walter raises questions related to the systems underlying the transactions and power-plays that constitute normal business in the world of real estate development. In Walter's art the museum without walls is also a museum OF walls, walls new and old, as well as those walls that perpetuate economic class distinctions. Her text on the façade of the Del-Mar Hotel will stand as a witness to the various power-plays, including the threat to move B.C. Hydro's head office to the suburb of Burnaby, that led to the development surrounding 553-555 Hamilton Street." 

On Missing Minsky

Yes, we miss the late Hy Minsky, especially those of us who knew him, although I cannot claim to be one who knew him very well.  But I knew him well enough to have experienced his wry wit and unique perspective.  Quite aside from that, it would have been great to have had him around these last few years to comment on what has gone on, with so many invoking his name, even as they have in the end largely ended up studiously ignoring him and relegating him back into an intellectual dustbin of history, or tried to.

So, Paul Krugman has a post entitled "The Case of the Missing Minsky," which in turn comments on comments by Mark Thoma on comments by Gavyn Davis on discussions at a recent IMF conference on macroeconomic policy in light of the events of recent years, with Mark linkhttp://economistsview.typepad.com/economistsview/2015/06/the-case-of-the-missing-minsky.htmling to Krugman's post.  He notes that there seem to be three periods of note: a Minsky period of increasing vulnerability of the financial system to crash before the crash, a Bagehot period during the crash, and a Keynes period after the crash.  Krugman argues that, despite a lot of floundering by the IMF economists, we supposedly understand the second two, with his preferred neo-ISLM approach properly explaining the final Keynes period of insufficiently strong recovery due to insufficiently strong aggregate demand stimulus, especially relying on fiscal policy (and while I do not fully buy his neo-ISLM approach, I think he is mostly right about the policy bottom line on this, as would the missing Minsky, I think).  He also says that looking at 1960s Diamond-Dybvig models of bank panics sufficiently explain the Bagehot period, and they probably do, given the application to the shadow banking system.  However, he grants that existing official models do not sufficiently explain the Minsky period, the runup, how things got so fragile that they could collapse so badly.

Now I do not strongly disagree with most of this, but I shall make a few further points.  The first is that in effect Minsky provided a model and discussion of all three stages, although his model of the Keynes stage is not really all that distinctive and is really just Keynes.  But he probably did a better job of discussing the Bagehot stage than did Bagehot, and more detailed, if less formal, than Diamond and Dybvig.  I suspect that Bagehot got dragged in by the IMF people because he is so respectable and influential regarding central bank policymaking, given his important 1873 Lombard Street, and I am certainly not going to dismiss the importance of that work.  But the essentials of what go on in a panic and crash were well understood and discussed prior to 1873, with Minsky, and Kindlegerger drawing on Minsky in his 1978 Manias, Panics, and Crashes, quoting in particular a completely modern discussion from 1848 by John Stuart Mill (I am tempted to produce the quotation here, but it is rather long; I do so on p. 59 of my 1991 From Catastrophe to Chaos: A General Theory of Economic Discontinuities), which clearly delineates the mechanics and patterns of the crash, using the colorful language of "panic" and "revulsion" along the way.  Others preceding Bagehot include the inimitable MacKay in 1852 in his Madness of Crowds book and Marx in Vol. III of Capital, although admittedly that was not published until well after Bagehot's book. 

One can even find such discussions in Cantillon early in the 1700s discussing what went on in the Mississippi and South Sea bubbles, from which he made a lot of money, and then, good old Adam Smith in 1776 in WoN (pp. 703-704), who in regard to the South Sea bubble and the managers of the South Sea company declared, "They had an immense capital dividend among an immense number of proprietors.  It was naturally to be expected, therefore, that folly, negligence, and profusion should prevail in the whole management of their affairs. The knavery and extravagance of their stock-jobbing operations are sufficiently known [as are] the negligence, profusion and malversation of the servants of the company."

It must be admitted that this quote from Smith does not have the sort of detailed analysis of the crash itself that one finds in Mill or Bagehot, much less Minsky or Diamond and Dybvig.  But there is another reason of interest now to note these inflammatory remarks by Smith.  David Warsh in his Economic Principals has posted in the last few days on "Just before the lights went up," also linked to by the inimitable Mark Thoma.  Warsh discusses recent work on Smith's role in the bailout of the Ayr Bank of Scotland, whose crash in 1772 created macroeconomic instability and layoffs, with Smith apparently playing a role in getting the British parliament to bail out the bank, with its main owners, Lord Buccleuch and the Duke of Queensbury, paying Smith off with a job as Commissioner of Customs afterwards.  I had always thought that it was ironic that free trader Smith ended his career in this position, but had not previously known how he got it.  As it is, Warsh points out that the debate over bubbles and what the role of government should be in dealing with them was a difference between Smith and his fellow Scottish rival, Sir James Steuart, whose earlier book provided an alternative overview of political economy, now largely forgotten by most (An Inquiry into the Principles of Political Oeconomy, 1767).

I conclude this by noting that part of the problem for Krugman and also the IMF crowd with Minsky is that it is indeed hard to fit his view into a nice formal model, with various folks (including Mark Thoma) wishing it were to be done and noting that it probably involves invoking the dread behavioral economics that does not provide nice neat models.  I also suspect that some of these folks, including Krugman, do not like some of the purveyors of formal models based on Minsky, notably Steve Keen, who has been very noisy in his criticism of these folks, leading even such observers as Noah Smith, who might be open to such things, to denounce Keen for his general naughtiness and to dismiss his work while slapping his hands.  But, aside from what Keen has done, I note that there are other ways to model the missing Minsky more formally, including using agent-based models, if one really wants to, these do not involve putting financial frictions into DSGE models, which indeed do not successfully model the missing Minsky.

Barkley Rosser

Update: Correction from comments is that the Ayr Bank was not bailed out.  It failed.  However, the two dukes who were its main owners were effectively bailed out, see comments or the original Warsh piece for details.  It remains the case that Adam Smith helped out with that and was rewarded with the post of Commissioner of Customs in Scotland.

Europe, Where Two Rights Make a Wrong

The New York Times has an article this morning describing the turn towards anti-immigration populism in France, inspired by the renaming of the Gaullist opposition party as The Republicans.  This is seen as an attempt to attract voters who have gone over to Marine Le Pen’s National Front, an overtly chauvinist party with a semi-fascist past.  The article points to the rise of similar movements in other countries; most worrying is Finland, a country in which the extreme right has played a major political role at key times during the past century, and where a nativist party is now part of the governing coalition.

The irony is that the nativists themselves, in order to expand, have had to move to the left on economic issues.  This has been widely noticed with the National Front, whose base was once small entrepreneurs.  Nativistis now claim to be the staunchest defenders of the welfare state and the interests of the working class.  The steady erosion of social protections and living standards, they say, can be halted only by ending immigration, especially from the “incorrigible” populations of the Middle East and North Africa—i.e. Muslims.  The name change in France makes a subtle play for this attitude by claiming the anti-clerical mantle of the French Revolution, now seen as a weapon against the influence of Islam.  Yet it also implies a leftward orientation on social and economic matters, since Republicanism has historically meant identification with the goals of the Revolution, as against the conservative, clerical and aristocratic opposition.  It perfectly captures the current moment: embracing the nativist Right while pretending to be more Left on other matters.

Meanwhile, the real Right can be found in the halls of power in every major European country.  This Right is socially liberal but against exactly the things the populists are trying to preserve: equality, improvement in living standards and generous social protection.  The political isolation of Greece within the eurozone, for instance, demonstrates how rentier ideology has completely triumphed over Keynesian and social democratic perspectives throughout the continent.  The ostensible socialists are as much a part of this conservative coalition as the official conservatives.

Is it any surprise, under these circumstances, that nativism has taken wing?  A large part of the European working class has concluded that scarcity and stagnation are permanent, and that the promises of the Left can’t be trusted any more.  All that remains is the politics of exclusion, making sure you have yours by locking the others out.  So high unemployment is the new normal?  Then the jobs belong to us.  Can’t afford the welfare state any more?  Send immigrants from poor countries back home.  On a gut level it makes perfect sense.

If there is a future for cosmopolitanism in Europe, it needs a credible politics of growth and redistribution.

FT monkeys' false fallacy eruption

The Sandwichman has been out of town since last Wednesday and the Financial Times (those FT monkeys) has seized the opportunity to publish not one but two articles foisting the farcical lump of labour fallacy fable on an unsuspecting public. This is evidence of a complete lack of journalistic ethics. A simple fact check would reveal that the fallacy claim is bogus.

Some time later this week I expounded on why this even matters.

Trade, Bribes and Yardsticks

In the conclusion to their 1941 article "Protection and Real Wages," Wolfgang Stolper and Paul Samuelson wrote:

...it has been shown that the harm which free trade inflicts upon- one factor of production is necessarily less than the gain to the other. Hence, it is always possible to bribe the suffering factor by subsidy or other redistributive devices so as to leave all factors better off as a result of trade.

This is an instance of the infamous Kaldor-Hicks compensation criterion, which David Ellerman has shown to be a "same yardstick" fallacy. Ironically, Ellerman took the same yardstick analogy from another paper by Samuelson and elsewhere Samuelson is dismissive of the Kaldor-Hicks criterion.

Ian Little described the K-H criterion as unacceptable nonsense. But, hey, let's fast-track the TPP and maybe one of those winners will toss us a bribe!

 

The Fundamentals are Sound!

Uh oh.

My bottom line on the economy is: The fundamentals are sound. The underlying momentum in job growth remains solid. I expect wage growth to continue to rise and consumer confidence to continue to pick up steam. Monetary policy will remain highly accommodative—regardless of what may or may not happen with rates this year—which will spur spending. -- John C. Williams

As Sandwichman always says, when they're telling you "the fundamentals are sound," they are unloading.

Piketty Did Not Endorse Social Security Fraud

Kevin Williamson takes us back to some dishonesty we saw a decade ago:

The Left’s favorite economist of the moment, Thomas Piketty, organizes his argument in Capital in the Twenty-First Century around the statement r > g, where r is the rate of return on capital and g is the rate of economic growth ... r > g is a stronger argument for privatizing Social Security than it is for a global capital tax.

After telling workers what they put into the Social Security Fund, he jots off this lie:

That money is not invested, so there is no return on it.

The Trust Fund does put these funds into government bonds which earn the real return to government bonds but I interrupted Williamson’s parade of lies:

Professor Piketty estimates that the return on capital over the coming decades will be between 4 percent and 5 percent; historical returns to equity investments run about 7 percent, but let’s be conservative and split Professor Piketty’s estimate, assuming a 4.5 percent return.

So many rates of return, so little insight. What is at stake here? Let’s assume the risk-free real return is 3 percent and add a 4 percent premium if someone chooses to hold risky stocks instead of government bonds. And let’s also assume some worker was able to accumulate $1 million under Williamson’s preferred world of privatization. Even if this worker was able to avoid the bad advice and huge fees from the financial advisors that Williamson is lobbying for, he is likely to get a 5 percent return if he chooses to put half of his portfolio into stocks and the other half into bonds. After all, this worker knows stocks are risky. I sometimes wonder if the champions of privatization do as their writings seem to suggest they don’t get Finance 101. So back to Williamson’s complaint about our current system:

You pay, officially, 6.2 percent of income up to $117,000 a year for Social Security. Your employer pays another 6.2 percent, and many economists and nine out of ten people who were born at night but not last night assume that you really pay that part, too, in the form of lower wages.

In our example suppose that this has taken $400,000 of our worker’s portfolio and put that into government bonds earning 3 percent. Our worker – who we are assuming knows more finance that apparently Williamson does – redoes his portfolio optimization putting $100,000 of his $600,000 into bonds and the rest into stocks. The basic message is that his retirement income is exactly the same. This is basic finance and maybe I’m being unfair. Maybe Williamson knows all of this. If so, then he has chosen to lie to his National Review readers hoping they are this stupid.

John Nash As Cryptanalyst

Rakesh Vohra of the Game Theory Society reports that not only was John Nash returning from the airport after returning from Norway to receive the Abel Prize in mathematics, its equivalent of the Nobel (the Fields medal is the equivalent of the John Bates Clark award, given for those under 40), which he got for his embedding theorem, which he always viewed as more important than his Nobel prize winning game theory equilibrium, which he considered to be mathematically trivial, despite its wide applicability in economics and other disciplines, but it has only recently been revealed that he had a third major intellectual breakthrough that has only become public since 2012 when the National Security Agency declassified a letter Nash initially wrote in 1950 to its predecessor, the NSA not becoming officially organized until 1952.

In this letter Nash proposed a form of possible encryption used decades later by the NSA based on computational complexity theory, particularly the distinction between P, or polynomial length programs, and NP, or non-deteriministic polynomial (exponential and greater) length programs, relative to the key.  While declaring this to be a true distinction, he foresaw the later problem that it might be impossible to prove, and so far it has not been, becoming the greatest unsolved problem of computational complexity theory.  Nevertheless Nash used this as the key to hardening encryption code systems, with his thoughts on this far ahead of any of the thinking at that time, although it took those he wrote to a long time to realize it and follow up on his advice.

This makes me understand a bit more a famous incident in 1958 reported in Sylvia Nasar's book, A Beautiful Mind, although it did not turn up in the movie version.  A. Adrian Albert, chair of the math department at the University of  Chicago, then one of the top in the world, offered Nash a position, with him then in the MIT department.  He turned down the offer on the grounds that he was expecting to shortly be appointed "Emperor of Antactica."  In fact, this was one of the first signs of his developing mental illness, although at the time Albert dismissed this as mere eccentricity, which many brilliant mathematicians exhibit.

What makes this new report from Vohra interesing in light of this is that this secret letter may have been the key to Albert's invitation.  The reason for this was a little known fact even now, that during World War II Adrian Albert was almost certainly the top cryptanalyst in the US, with some of his work remaining classified for decades as well.  Under the circumstances, it is highly likely that Albert was one of the few people who was privy to Nash's letter at the time and understood its significance.  I have no confirmation of this, but the facts about Albert are fairly clear if one googles him properly, with his role in these matters in the US publicly, but not widely, known (I provide a link to his Wiki entry, which is both sparse and contains at least one mistake).  He remains a relatively obscure mathematician, but one , whose importance far outweighs his reputation.

Update:  So, there is more about the Albert-Nash link that I have been thinking about, with a further speculation completely unprovable regarding why it was this year that Nash (with Nirenberg) got the Abel Prize.   First let me note that Abel's work is closely linked to that of Albert, with Abelian groups being a central  focus of Albert's study and linked to the algebraic forms he used in his cryptanalytic (or cryptographic) work.  I also suspect that while officially Nash received the prize for his embedding theorem, the revelation of his letter on computational complexity to the NSA (sent in 1955, closer to the year Albert made his job offer to Nash, with that even more evidence that the secret letter was crucial to that rejected job offer),  The revelation of this letter  may well have provided a tipping point for finally giving the award to Nash, although he had almost certainly been on the list for a long time for the embedding theorem, as he himself considered it his most important work, at least in his public comments, having kept quiet about this letter until its public revelation.

The further wiggle on this is the appearance and success during the past year of the movie about fellow cryptanalyst, Alan Turing, The Imitation Game.  Again, I do not know, but my speculation is that this could not have hurt.  Both Nash and Turing were the prime subjects of popular movies that depicted both their sufferings and their classified work, although in the movie about Nash it did not show his most serious classified work, but rather depicted it as the central part of his fantasy, and his fantasies did involve matters of international peace and war, with himself both the victim of red-tie wearing communist agents as well as thinking he was an international messianic figure who would achieve world peace between the superpowers.  Indeed, the matter of his thinking he would become the Emperor of Antarctica, the ostensible reason he rejected Adrian Albert's job offer, was tied to such fantasies, 1958 being the Internatinal Geophysical Year of Antarctica, when the US and the USSR and 10 other nations signed a treaty to mutually  manage Antarctica.

This matter of the letter was not in Sylvia Nasar's book, but he did work for RAND, although probably not on this openly, with most of his more known work there being on game theory, with him becoming upset there by the Dresher-Flood experiments on the repeated prisoner's dilemma showing agents not using the Nash equilibrium but cooperating a lot in the experiments, including even the very rationalistic, Armen Alchian.  This upset him so much that it would lead him to abandon game theory work, leaving the naming of the prisoner's dilemma game to his major professor, the late Albert W. Tucker.  But, in the end , the more fantastical version in the movie may have been closer to reality, with his close link to the also suffering and highly secret Alan Turing possibly a key to  his eventual  receipt of this prestigious award, clearly the culmination of his life.  It was indeed "going out at the top" that happened in this particular case of a husband-wife death, for better or worse (with their schizophrenic son, Johnny, the clear victim of this situation)..

Further update:  The error that I am aware of in Adrian Albert's Wiki entry is the claim that in 1961-62, he was  the first director of the Communications Research Division of the Institute for Defense Analysis, located in John von Neumann Hall on the Princeton campus, an NSA front research group.  He was the second such director, not the first. (One can find a discussion of Princeton's IDA/CRD unit, no longer on the campus, in James Bamford's seminal book on the NSA, The Puzzle Palace.)

Barkley Rosser

Further Update, 5/38/16: I thank Dan Weber and "Jake," commenters on Marginal Revolution for noting errors in my original post, with Dan catching the especially elementary (and egregious) one that polynomial length programs are "P," not "N," duh.  I have corrected the text to fix the points raised (Jake's were more esoteric but valid about the nature of NP).

Gnash Equilibrium

Philip Mirowski, Machine Dreams

The mathematical price of demonstrating that every game had a fixed value was the unloading of all analytical ambiguity onto the very definition of the game. Far from being daunted at a game without determinate bounds, Nash was already quite prepared to relinquish any fetters upon the a priori specification of the structure of the game, given that the entire action was already confined within the consciousness of the isolated strategic thinker. The game becomes whatever you think it is. He dispensed with dummies, exiled the automata, and rendered the opponent superfluous. This was solipsism with a vengeance.

Yanis Varoufakis, "The Dance of the Meta-Axioms":

In game theory itself, questions were raised about the plausibility of presuming that rational agents must always select behaviour consistent with Nash’s (1951) equilibrium. In the context of static games it became apparent that disequilibrium behaviour could be fully rationalised and rendered consistent with infinite order common knowledge rationality. Similarly, it transpired that out-of-equilibrium behaviour could be just as rational in finite dynamic games as the equilibrium path proposed by Nash and his disciples.  As for indefinite horizon games, the devastating force of indeterminacy was felt in the form of the so-called Folk Theorem which shows that, in interactions that last for an unspecified period, anything goes. And yet, all applications of game theory, from theories of Central Bank behaviour to industrial organisation, labour economics and voting models, ignore these challenges, assuming that behaviour will remain on the equilibrium path.

John Nash and Ideal Money

I was not aware of this proposal from John Nash:

Nash’s lecture, “Ideal Money and Asymptotically Ideal Money,” centered on the connection between fluctuation in inflation and exchange rates and the perceived long-term value of money. “Good money,” he argued, is money that is expected to maintain its value over time. “Bad money” is expected to lose value over time, as under conditions of inflation … Nash argued that the emphasis on stabilizing the value of currency should extend to the international level, where exchange rates represent currencies’ value relative to each other. He proposed that international exchange rates be fixed by pegging the value of each currency to a standardized basket of commodities, called the “industrial consumption price index.” Such a policy would curtail the ability of central banks to make monetary policy…After World War II, international exchange rates were fixed, with currencies’ value first pegged to gold and later fixed at set ratios. That regime was abandoned in the early 1970s, when increasing inflation forced the United States to devalue the dollar. Nash said his system would be more stable and sustainable than the gold standard because exchange rates would not be seriously affected by fluctuations in any one commodity….Nash responded with caution to the suggestion from an audience member that a system of currencies approaching perfect stability would ultimately produce a system with only one world currency. “There’s nothing wrong with it,” Nash said. But he added, “In practice, I’m a little distrustful of the politicians at the level of the United Nations and elsewhere,” who would be in charge of administering a world currency.

Nash’s lecture was in 2005. While the U.S. did endure the Great Inflation but from 1983 to 2007, we enjoyed the Great Moderation without pegging the dollar to any basket of commodities. But let’s also consider the case of Italy and the EU experiment with a common currency. Over the 26 year period where the Italian lire was free to devalue, Italy’ consumer price index rose by more than a factor of 11, which translates into an average inflation rate of 9.7 percent per year. Since 1999, Italy’s average inflation rate has been only 2 percent. In 2005, things seems to be working well. Of course, we know that the EU experiment has been a disaster during the Great Recession as noted by Barry Eichengreen and Peter Temin:

We describe in this essay why the gold standard and the euro are extreme forms of fixed exchange rates, and how these policies had their most potent effects in the worst peaceful economic periods in modern times. While we are lucky to have avoided another catastrophe like the Great Depression in 2008-9, mainly by virtue of policy makers' aggressive use of monetary and fiscal stimuli, the world economy still is experiencing many difficulties. As in the Great Depression, this second round of problems stems from the prevalence of fixed exchange rates. Fixed exchange rates facilitate business and communication in good times but intensify problems when times are bad.

This reminds me of The Rule of the Games by Ronald McKinnon in 1996:

The Rules of the Game brings together essays, written over the course of thirty years, by a major figure in the field that analyze and compare a wide variety of important international monetary regimes. These range from the establishment of the gold standard in the nineteenth century through Bretton Woods, the dollar standard, floating exchange rates, the European Monetary System, to current proposals for reforming world monetary arrangements.

Nash contributed immensely to game theory but I’m not sure he revisited the issue of international monetary regimes in light of the Great Recession.

Keynes "hadn't got round to it"

...all the difficulties and rigidities which go into modern Keynesian income analysis have been shunted aside. It is not my contention that these problems don’t exist, nor that they are of no significance in the long run... Robert M. Solow, "A Contribution to the Theory of Economic Growth," 1956.

...the shunting aside opened up the opportunity for real-business-cycle theorists such as Finn Kydland and Prescott to use Solow’s steady-state model... for their explanation of short-run fluctuations. Harald Hagemann, "Solow's 1956 Contribution in the Context of the Harrod-Domar Model," 2009.

Far too much has been shunted aside.

The aim of Harrod's and Domar's models, according to Hageman, was "to extend Keynes's analysis into the long run by considering under what conditions a growing economy could realize full-capacity utilization and full employment." As for "the modern type of dynamic [that is, 'growth'] theory," according to Sir Roy Harrod, Keynes "hadn't got round to it":

Mr.  Nicholas Dimsdale:  Why is there so little in the General Theory on the direction of principal determinants of economic growth (which has, of course, been very much the concern of economic policy in the post-war period), and particularly did Keynes see this as a natural extension of handling the problems of unemployment? 

Sir Roy Harrod: I think the answer is no. I think of the timetable of it. Here was Keynes giving all his brains to the General Theory which is not, though it is what you call macroeconomics, dynamic. It is a general theory of how incomes and employment are determined at a given point of time. Then, poor man, he gets ill, the war breaks out, he writes this little booklet of which Austin Robinson has spoken just now, and he is entirely immersed in the war. You see, the use of growth as a regular economic concept had hardly come in before the war:  it has all blossomed among various writers since the war. I don’t see how Keynes can have been expected to have systematic ideas on growth; his systematic ideas related to full employment. The modern type of dynamic theory about what happens through time - he just hadn't got round to it. I am sure that he would have got round to and dealt with it very well; but the timetable of his life and death did not give him an opportunity.

In a 1965 New York Times retrospective on the Keynesian "revolution," John Kenneth Galbraith credited Leon Keyserling as a "tireless exponent of the [Keynesian] ideas. And he saw at an early stage the importance of enlarging them to embrace not only the prevention of depression but the maintenance of an adequate rate of economic expansion." In a subsequent interview, Keyserling was less bashful about the magnitude of his contribution.

Coming over to economic growth in particular, everybody talks about the influence of Keynesian economics. The Keynesian economics is really a static economics. It doesn't deal with economic growth at all. Furthermore, it was developed at a time of worldwide depression. Even Ken Galbraith, in an article in the New York Times a couple of years ago, when he was talking about the influence of Keynesian economics, mentioned me specifically as the one who had introduced the fundamental new factor of the dynamics of economic growth.

Keyserling was a member of President Truman's Council of Economic Advisers, became acting chairman in 1949.and chairman in 1950. His influence can be seen in the evolution of "economic growth" in successive volumes of the Economic Report of the President. In the January 1947 annual report, the term "growth" did not occur. In the midyear report, "economic growth" appeared once. The January 1948 volume contained 17 references directly to economic growth and featured a cheerleading section titled "Our Ability to Grow."

All of this alleged "extending" and "enlarging" of Keynes's analysis had little to do with Keynes's analysis -- other than shunting it aside -- and nothing to do with Keynes's own views about the long term problem, as outlined in his 1943 Treasury memorandum, "The Long-Term Problem of Full Employment" and re-iterated in a 1945 letter to T.S. Eliot:

Not long ago I was at a Conference where the Australians urged that all the Powers in the world should sign an international compact in which each undertook to maintain full employment in their own country. I objected on the ground that this was promising to be 'not only good but clever'. Civis, like the Australians, takes exactly the opposite line. He thinks that we can reach the goal by promising to be 'not so much clever as good '. 

It may turn out, I suppose, that vested interests and personal selfishness may stand in the way. But the main task is producing first the intellectual conviction and then intellectually to devise the means. Insufficiency of cleverness, not of goodness, is the main trouble. And even resistance to change as such may have many motives besides selfishness. 

That is the first, ought-to-be-obvious, not-very-fundamental point. Next the full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less. Personally I regard the investment policy as first aid . In U.S. it almost certainly will not do the trick. Less work is the ultimate solution (a 35 hour week in U.S. would do the trick now). How you mix up the three ingredients of a cure is a matter of taste and experience, i.e. of morals and knowledge.

It would be anachronistic to fault growth theorist for ignoring Keynes views on the long term problem of full employment. Presumably, Keynes's memorandum and his letter to T.S. Eliot were not available to early "dynamic" theorists. They were published in 1980 in volume 27 of Keynes's Collected Writings. One might wonder, though, why modern growth theorists have subsequently shown no interest whatsoever in re-evaluating their theories in light of those documents.

More remarkable is the complete lack of connection between growth theory and growth as a policy slogan. No, this is not the difference between map and territory. The theoretical models are maps of an abstract territory in which some kinds of features have the same names as the kinds of features on the actual territory -- "labor", "income", "output," "capacity utilization" -- but those labels remain undefined in any way that would correspond to the real features with the same name.

At the other end of the theory/sloganeering spectrum -- in the targeting of increases in GNP/GDP -- the features are also not defined in a way that would enable a consistent and durable system of measurement. Simon Kuznets's 1947 essay on "Measurement of Economic Growth" outlined many of the biases and obstacles in the way of defining and measuring growth." In a subsequent review of the Commerce Department\s National Income and Product Accounts, Kuznets argued that problems of duplication and of ignoring non-market production had not been overcome. In its reply to Kuznets, the department's economists pointed out it would not have been feasible to meet several of his standards. They had a point. But non-feasibility of the alternative does not in itself affirm the adequacy of the status quo.

In conclusion, Keynes's analysis was not "extended" by modern dynamic growth theory nor was it "enlarged" by Leon Keyserling's siphoning off and his sloganeering growthmanship. The analysis was -- in Solow's apt phrase -- shunted aside for a tautological model, just as the policy goal of full employment was shunted aside for the indistinct slogan of "growth."

Who needs a Keynesian policy goal of full employment anyway when the neoclassical model can simply assume full employment?

More White Space and a Photo or Two...

Is formatting what it all comes down to? Let's keep the message upbeat, familiar and comfortable. A little bonding around a well-liked celebrity (or against a disliked one) and a platitude or two. Above all, NO NEGATIVITY! Keep it light, superficial and unthreatening.

Yeah, right.

AFTER MATHINESS

"These and many other mathematical statements don't remotely correspond to observable reality, nor do they have any evidence in support of them." -- Noah Smith,  How 'Mathiness' Made Me Jaded About Economics

Will anything change in the wake of the big mathiness dustup of 2015? Of course not. This is, after all, only a "technical discussion on cavalry tactics at the Battle of Austerlitz" not a searching inquiry into the identity and fundamental commitments of the economics political economy.

In his 1872 review of Thomas Brassey's Work and Wages, Frederic Harrison denounced political economy as a "magazine of untruth," specifying, "Political economy professes to be a science based on observation. But the bitter pedantry which often usurps that name usually assumes its facts, after it has rounded off dogmas to suit its clients."

Today's growth economics assumes the same facts and rounds off the same dogmas as did its magazine-of-untruth counterpart 143 years ago. Up until the 1870s, that dogma was called the wages-fund doctrine. Since the 1950s, it has borne the alias of economic growth. Same difference. The affiliated "fact" is that all blessings flow from the expansion of trade, therefore any impediment to that expansion is anathema.

The rest is rounding off.

Beware of Slogans

...the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience. -- JMK, GT 

The human perception system sees a checkerboard with a cylinder, while a basic SSR measurement [surface spectral reflectance] shows squares A and B read the same. “Illusion” implies that our system is fooled, but as far as useful information goes, the checkerboard interpretation is probably better. Try as they might, mathematicians can’t make the computers see the checkerboard. Rather than a demonstration of how easily fooled we are, optical illusions like this one are examples of the brain’s mysterious and irreplicable abilities. It interprets its environment with a sophistication that exceeds our ability to measure and reconstruct physical phenomena. The usual framing has it wrong: Despite A and B having the same SSR, humans are still able to see the checkerboard. -- Malcolm Harris, "Does color even exist?"

How you mix up the three ingredients of a cure is a matter of taste and experience, i.e. of morals and knowledge. -- JMK, Letter to T.S. Eliot