NOW

Now.

Greece on the Brink

I'm reposting here my comment on Naked Capitalism this morning:

I think there are rather simple, uncomplicated explanations for what is going on.

1. Tsipras and his Syriza allies really oppose the creditors’ terms.  The current situation of Greece is intolerable, and there is no way out through the “bailout” deal on offer.  It only prolongs the depression and leads to the next round of fruitless negotiations, and the next.  The Greek government is not following a game-theoretic strategy.  It has reached the limit of what it can put on the table, period.  Arguably, as Yves and others here have said, their limit was too broad.

2. The creditors believe, with some justification, they have a grip on Greece that extends beyond the current set of arrangements.  A “default” is not the same as a writedown, at least not in this case.  Greece can miss payments, and the ECB can force them out of the eurozone, as I think likely.  But Greece’s economy is so enmeshed with the rest of Europe’s that repayment conditions can be attached to a neverending list of rights and privileges: citizen movement, access to electronic fund transfers and clearing, tariff exemptions and trade access, regulatory approvals, you name it.  There will be permanent pressure to repay.  Under these circumstances, from a strictly repayment perspective, it makes no sense to give a centimeter.

3. The eurozone is also a political vehicle to facilitate the disembedding of capital, a project that is infeasible at the national level in most European countries where durable social bargains have been struck.  This is what the end of national capitalism means in Europe, and why reform always translates to liberalization.  Consider the current strike of pharmacists in Greece, resisting the removal of laws that prevented pharmaceuticals from being sold only in pharmacies.  This could not have been achieved without strong supranational pressure.  And it isn’t happening (yet) in Germany, precisely because no such pressure has been applied.  If the demand to liberalize on all fronts can be rejected by a government as exposed to pressure as Greece’s, what’s the point of the entire project?

4. Despite the handwringing I hear, I have no doubt that finance officials in Greece have prepared a rapid transition to a parallel currency which may or may not be the drachma, complete with transitional capital controls.  Obviously they cannot publicize this in advance.

5. Default and the introduction of a new currency will be accompanied by at least several months of economic and political chaos.  The middle class, whose need for liquidity prevented them from simply squirreling away their assets to a safe location north of the Alps, will be hit hard.  There will be intense political polarization, with demonstrations and counterdemonstrations.  But no elections are scheduled.  (Incidentally, this is one reason why it makes sense for Syriza to hold the line and face the crisis now rather than delay for a year or two.)  In the absence of a coup, and assuming that the economic situation stabilizes later this year, Syriza has an excellent chance to emerge from the transition even stronger than before.

6. The only murky point for me has to do with the possibility of a coup.  In a period of extreme polarization, it is always possible to make a military invention appear to be a step toward calm, reasonableness and the restoration of democracy.  It’s not as though we haven’t seen a number of such coups in the past few years, in places like Honduras, Egypt and Thailand.  The question is whether there is a faction willing and able to step in and assume this role.  I have absolutely no idea.  But if there is, it cannot act without getting a preliminary nod from Europe.  Is it conceivable that support for a coup could be part of the punishment meted out by Europe in retaliation for the “irresponsible” behavior of Syriza?

TPP will give you six-pack abs without diet or exercise!

"After all, an export is more than just an item we are shipping overseas. It is also a product of the values of the people who created it, which it represents."

Also will grow thick new hair on your bald head and give you a younger wife. What else?

Exterminate the Brutes!

The liberty-loving wit and wisdom of Herr Ludwig von Mises:

The vain arrogance of the literati and Bohemian artists dismisses the activities of the businessmen as unintellectual moneymaking. The truth is that the entrepreneurs and promoters display more intellectual faculties and intuition than the average writer and painter. The inferiority of many self-styled intellectuals manifests itself precisely in the fact that they fail to recognize what capacity and reasoning power are required to operate successfully a business enterprise. 

The emergence of a numerous class of such frivolous intellectuals is one of the least welcome phenomena of the age of modern capitalism. Their obtrusive stir repels discriminating people. They are a nuisance. It would not directly harm anybody if something would be done to curb their bustle or, even better, to wipe out entirely their cliques and coteries.

Inequality, Growth and Leisure

In response to musings by Paul Krugman on inequality and growth, Dean Baker asks whether taking more of the benefits in leisure time might skew the appearance of the data. That is to say if the value of leisure wasn't excluded from GDP, those countries that took more leisure -- and, incidentally, are relatively more equal -- would have higher growth rates.

Ironically, Dean doesn't have the time just now to check that one out. Sandwichman has time but not Dean's virtuosity with data.

As Krugman argues, "there just isn't a striking, simple relationship between inequality and growth; all the results depend on doing fairly elaborate data massaging..." There isn't a striking result to be had from the data for a good reason. There isn't a single relationship in the underlying reality. The results are also constrained by what questions are being asked.

The presumptive question seems to be whether inequality is good or bad for growth. Is that the only question worth asking? Is it the best question? Dean framed his question about leisure as a supplement. He remarks, mock apologetically, "there is nothing wrong with taking the benefits of higher productivity in the form of leisure rather than income."

Wanna bet?

There must indeed be "something wrong" with taking the benefits of higher productivity as leisure. Otherwise, why would economists echo, decade after decade, the lump-of-labor refrain against the "fallacy" of reducing working time? If there really was nothing wrong with taking the benefits of productivity as leisure, then, hey presto, that boilerplate injunction would be superfluous -- inappropriate, even.

Are economists ignoring the obvious?

Sixty years ago, Simon Kuznets -- who won the Sveriges Bank ("Nobel") Prize for his pioneering work in national income accounting -- was puzzled by his finding that for a limited sample of industrially-advanced countries, inequality didn't increase with growth. He was puzzled, in part, because ceteris paribus, "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." This was the famous inverted "U"-shaped Kuznets curve. Subsequent research by Thomas Piketty has shown the curve to be an anomalous statistical artifact of the periodization and country selection.

There are a multitude of factors that could explain the Kuznets curve anomaly and it is doubtful that knot could ever be untangled. But let me suggest a factor candidate. The period in which the Kuznets curve prevailed was the period in which the eight-hour day became standardized in the industrially-advanced countries. Instead of looking exclusively at the relationship between growth and inequality, might there not be greater insight gained from investigating the triad of growth, inequality and leisure?

A New/Old Theory of the Firm, Put to Use

There are two dominant theories of the firm in modern economics, one centered on transaction costs, the other viewing the firm as a nexus of contracts.  Both are premised on the notion that, absent any frictions, and especially those due to incentive problems, market coordination would always be superior to the coordination supplied by firms.  Hence firms are anomalies, and in the benchmark utopia of competitive general equilibrium they don’t exist at all except as accounting units.

There is a longstanding tradition that attempts to explain the existence and extent of firms according to their efficiencies rather than flaws in the market.  Such a view is implicit in Schumpeter, for whom entrepreneurship was a creative force that could not arise in markets composed of infinitely small players.  Chandler similarly tried to argue for efficiencies in coordination, especially in continuous process systems.  Neither succeeded in providing a formal explanation of what it was about the mechanisms that concerned them that indicated that firms rather than markets would house them, and their views have been largely banished from economic theorizing.  Nonetheless, the field of management, where questions of firm capacity and strategy are paramount, continues to draw on a conception of the firm in which administrative organization is capable of coordination that markets cannot supply.

In fact, there is a theory of the firm based on a single and, once it is laid out, rather obvious concept that provides a formal underpinning for management-centered approaches: the role of interactive nonconvexity in production systems.  Here are two explanations, one formal, the other intuitive.

Formal: The mono-equilibrium property of decentralized allocative methods depends on (quasi-) convex preference and production sets.  There are two potential sources of nonconvexity.  One is “wrongly” signed elements along the principal diagonal of matrices of cross-partial derivatives, especially as resulting from increasing returns in production.  The other is the presence of off-diagonal elements whose absolute value is sufficiently large to offset the effect of principal diagonal elements in determining the sign of the matrix of cross-partials.  The number of equilibria (local optima of an objective function encompassing this structure) is given by the degree of the underlying function.  Firms are instruments for selecting among (local) optima by direct specification of detailed quantities or processes.

Intuitive: Markets proceed through an adding-up process, where the collective result is the sum of many small transactions undertaken separately.  There exist situations, however, in which the outcome of taking an action depends on the action taken by others—this is the central problem in cooperative game theory, for instance.  Markets accommodate just one such interaction effect, the role that cumulative offers (demand and supply) plays in determining prices.  But there are many other types of interactions that markets are unable to coordinate.  Many arise in production, the effect that one person’s productive activity has on the productivity of another.  It is because of such interaction effects that it is necessary to draw up and implement a plan, a set of coordinated activities.  The firm is the organizational structure with the capacity to do this.

This view of the firm is based on an understanding of the limits of markets, but not on a presumption of market failure, as that term is understood by economists.  Specifically, the presence of externalities (missing markets) is neither necessary nor sufficient for the presence of interactive nonconvexities.  Thus there is no policy fix that can render the coordination of activities by firms unnecessary.  Also, the make-or-buy decision, which is central to any theory of the firm, is not governed solely by efficiency but depends also on the advantages of implementing plans that cannot be accomplished through contracting externally.

The value of this theory is demonstrated in a practical application: how do we explain the difference in the roles played by worker problem-solving in different kinds of firms?  In a recent paper, written with my coauthor Heike Nolte, we show that arguments based on nonconvex profit sets, along with institutional factors that influence strategic choice, can do this.

The central idea that links our coordinated activity theory of the firm to strategic differentiation is the profit landscape, as seen here, with an arbitrary starting point A.

In fact, this kind of landscape is familiar from evolutionary biology, where it is commonplace.  In biology the horizontal axes represent two particular traits genetically available to an organism, while the vertical axis represents evolutionary fitness.  The point is that natural selection, being nonpurposive, optimizes only locally, and there is no guarantee that organisms can adapt successfully as the landscape changes.  In our context, however, the horizontal axes represent a pair of activities the firm might undertake, and the vertical axis is profit.  Of course, this three-dimensional landscape is an immense simplification of the large-dimensional relationships analyzed by biologists or students of business.

The firm can navigate its profit landscape purposively, but it does so under conditions of uncertainty: the true hills and valleys are not known and can only be inferred.  The core tradeoff is between strategies that emphasize the generation and use of local knowledge to move readily toward hills adjacent to the one currently occupied, versus strategies that seek to minimize encumbrances that might interfere with movements toward more distant hills, less knowable but potentially more profitable.  The first is flexible in its existing operations, the second in its ability to exit and enter different operations.

In categorizing firms, we use two related distinctions, between stakeholder and shareholder enterprise models and between coordinated and liberal market environments.  The polar cases are stakeholder/coordinated and shareholder/liberal, but we are also interested in hybrids.  Our key assumption is that the shareholder firm seeks to maximize the present value of its profit stream, while the stakeholder firm wishes to maximize the likelihood of being profitable over a given time horizon.  Logically, this means that the shareholder firm is a “prospector” in the profit landscape, willing to take greater risks in order to maximize potential returns.  It makes fewer commitments, including fewer commitments to its workforce, that might interfere with its freedom to shed existing assets and acquire new ones.  The stakeholder firm, for which profit outliers are of less value, prefers to specialize in its local production space, taking less risk and maintaining its viability through operational flexibility.  The liberal/coordinated market distinction enters by altering the costs or feasibility of pursuing one strategy or the other.

These imputed preferences have implications for the role of workers within the firm.  The shareholder firm in a liberal environment will tend to recruit less qualified workers for routine tasks, make fewer commitments to them, invest less in their acquisition of new skills, accord them less autonomy in workplace decision-making, and utilize monetary incentives for performance.  It acquires less value from the locally-specific learning of workers who have the capacity and freedom to investigate their own operations.  The stakeholder firm in a coordinated environment will tend to recruit more qualified workers on the basis of long-term commitments, provide opportunities for skill-upgrading, permit much greater decision-making autonomy (as well as greater scope for autonomy), while relying to a greater extent on normative approaches to motivation.  It will implement more micro-innovations which can form the basis for navigation to adjacent profit hills.  If this schema is correct, we should observe these proclivities in the role of worker problem-solving in these different types of firms.

We have thus far conducted three intensive case studies, one with a stakeholder firm in a coordinated environment (Germany), another with a stakeholder firm in a liberal environment (the US), and a third with a shareholder firm in a coordinated environment (Germany again).  What we found are the patterns in worker problem-solving suggested by our theory, and informants describe institutional features, motivations and activities to which our theoretical explanations seem to apply.

We intend to continue case study research in worker problem-solving at additional firms.  The theoretical apparatus also lends itself to many other questions in economics and business.

Why Sir Worthington Laming Worthington-Evans Wears a Top Hat

Why is it, then, that Sir Laming holds such very odd opinions? It is like asking me why he wears a top hat. He is a Conservative. The reasons are wrapped in the mists of history. But, roughly, I think I know them. He half understands an ancient theory, the premises of which he has forgotten. 

This theory assumes that all the productive resources -- savings, labour and the gifts of nature -- which are at any time in existence are normally employed because, so the argument assumes, whenever they are unemployed they are ready to accept a lower rate of remuneration, and employment will always be forthcoming at a sufficiently low rate of wages. That is to say, the theory starts off by assuming the non-existence of the very phenomenon which is under investigation. -- J.M. Keynes, A Cure for Unemployment, April 19, 1929

The Chimerical Analogies of Growth and Distribution

Together with Simon Kuznets, Atkinson more or less single-handedly originated a new discipline within the social sciences and political economy: the study of historical trends in the distribution of income and property.... All subsequent work on historic trends in income and property inequality to a certain extent follow in the wake of Kuznets’s and Atkinson’s groundbreaking studies. -- Thomas Piketty,"A Practical Vision of a More Equal Society"

Note that word "historical" there. Simon Kuznets's 1947 essay on "Measurement of Economic Growth" outlined many of the biases and obstacles in the way of defining and measuring income and thus growth.

Growth is a concept whose proper domicile is the study of organic units, and the use of the concept in economics is an example of that prevalent employment of analogy the dangers of which have been so eloquently stressed recently by Sidney Hook.

The Sidney Hook reference is to a contribution by him to a slim volume on Theory and Practice in Historical Study, which sought to bring some coherence and consistency to historians' use of terminology. Recall that when economists are writing about historical trends they are practicing historiography. The following are some key passages from Hook's entry on the use of analogy in historiography:

An analogy is a comparison which, on the basis of certain points of resemblance between two cases, suggests the existence of some further resemblance selected because of its relevance to the purposes of the comparison. As a figure of speech it functions as a metaphor to enliven and enrich historical style, e.g , when a revolution is described as a "storm that shook the land" or as a "fever" through which society has passed. As an argument it is formally worthless and never logically compelling. An argument from analogy can be countered usually with another argument from analogy which leads to a diametrically opposed conclusion. E.g., when an analogy has been drawn between colonies and children to suggest the duty of accepting the rule of the mother country, it can be countered with an analogy between colonies and matured offspring whose subsequent growth depends upon independence of their parents.  

At best an analogy can only suggest a plausible conclusion whose validity must then be established on other grounds. The uncritical use of analogies is the bane of much historical writing, particularly when the resemblances lack clear definition or when they are blurred and presented as identities. The two most pervasive analogies in historiography are those drawn from biology and physics. For example, "cultures are organisms and world history is their collective biography" (Spengler). "This country will yet be viewed and reviewed as an organism of historic growth, developing from minute germs from the very protoplasm of state-life" (H. B. Adams). The belief that society is an organism is an old but fanciful notion. It can only be seriously entertained by closing the eye to all the respects in which a group of separate individuals differs from a system of connected cells, and by violently redefining terms like "birth," "reproduction," and "death." 

Although the proper domicile of the concept of "growth" may indeed be the study of organic units, as Kuznets observed, there is actually another, more crucial and more subtle, analogy being employed in the national income and product accounts. That is the analogy between the firm and the nation. To paraphrase Hook, the analogy between nation and firm is no less formally worthless and logically deficient as an argument than is the analogy between nation and organic unit.

As Hook pointed out, analogy as a figure of speech functions as a metaphor. In the case of "economic growth" (and consequently income distribution) this double analogy -- to firm and to organic unit -- is a decidedly mixed metaphor, which invites all kinds of interpretive mischief from conveniently switching back and forth between features of firms and the features of organisms.

Throw in the mathematical models whose "proper domicile" is neither the organic unit nor the profit-seeking firm but the machine and the historiographic study of economic growth and income inequality truly resembles a dog's breakfast of scientific incoherence.

The most helpful applications of mathematics to economics are those which are short and simple, which employ few symbols; and which aim at throwing a bright light on some small part of the great economic movement rather than at representing its endless complexities.  

Thus, then, dynamical solutions, in the physical sense, of economic problems are unattainable. -- Alfred Marshall, "Distribution and Exchange:"

But, as Egmont K-H asked, "Who said what to whom -- and does it matter?"

Well, if you really want to know what Kuznets meant about the dangers of analogy, you have to know what the text he was referencing said. Kuznets, as Piketty pointed out, was the originator of a discipline. He didn't reject analogies; he employed them, critically. Today, we use the analogies indiscriminately. This uncritical abuse of metaphor gets very close to (psst... this is an analogy) Gregory Bateson's description of schizophrenia:

...the ‘word salad' of schizophrenia can be described in terms of the patient’s failure to recognize the metaphoric nature of his fantasies. In what should be triadic constellations of messages, the frame-setting message (e.g., the phrase 'as if') is omitted, and the metaphor or fantasy is narrated and acted upon in a manner which would be appropriate if the fantasy were a message of the more direct kind. 

Making the World Safe for Usury

Thanks to John Halasz, this tidbit from "The Growth Delusion," a post on Anne Pettifor's blog, Debtonation:

There are limits. Not just to the lifespan of firms, markets and human lives, but above all to our ecosystem and planet. 

So why, when we apply this language to the economy do we assume ‘growth’ is limitless?

...snip...

...while there are clear limits to the growth of the real economy, there appears to be an infinite boom in the growth of credit.

Is that so hard to understand? Any impediment to "economic growth" is an impediment to the growth of credit and any impediment to the growth of credit is an impediment to the accumulation, and concentration of an increasing proportion of, income-yielding assets in the hands of the creditors. Otherwise, how could compound interest compound limitlessly?

Stephen Moore Declares a North Carolina Miracle

Stephen Moore has another silly parade of disinformation:

the unemployment rate started to decline rapidly and job growth climbed. Not just a little. Nearly 200,000 jobs have been added since 2013 and the unemployment rate has fallen to 5.5% from 7.9%. There is a debate about how many of North Carolina’s unemployed got jobs and how many dropped out of the workforce or moved to another state. But the job market is vastly improved and people didn’t go hungry in the streets.

Moore wants to claim employment has soared and he says there was a “debate” about how many people dropped out of the workforce. Paul Krugman addressed this last year:

because employment in North Carolina hasn’t actually shown any upward bump. Here’s employment in NC and the nation as a whole … There has been a sharp drop in the NC labor force, probably in large part because workers who could no longer get unemployment benefits — which require that you search actively for work — gave up on what they knew was a hopeless quest. The point is that to the extent that there has been a distinctive drop in North Carolina’s measured unemployment rate, it has to do with reduced job search rather than increased employment.

Krugman’s graph document the decline in the labor force after the reduction in unemployment insurance benefits. And Moore wants to say there was a debate? If we go back to February 2008 and graph employment in North Carolina, the net increase has only been 57 thousand not 200 thousand. So there has not been a miracle increase in North Carolina. Average hourly earnings of all employees in North Carolina has increased from $21 an hour in 2010 to $21.85 as of April 2015. A 4 percent nominal increase over a 5 year period is below what we have seen on a national level. This does not sound like an economic miracle at all. I guess the Wall Street Journal will publish even the dumbest of dishonesty.

Secular Stagnation vs. Global Warming

Who needs decoupling when we've already got maximum feasible disconnect? Is there a difference? Probably not.

"Decoupling" refers to the wishful thinking that GDP growth can be decoupled from greenhouse gas emissions. There are two problems with this pipe dream -- actually three problems. The first problem arises from the distinction between relative and absolute decoupling. Relative decoupling means that GHG emissions continue to rise, just not as fast as GDP growth. Relative decoupling happens.

Absolute decoupling requires that GHG emissions stop growing or decrease while GDP continues to grow. It has never happened.

The second problem is that mere absolute decoupling of GHG emissions from GDP growth is not enough. To stabilize or reduce atmospheric GHG concentration requires reducing GHG emissions to a level at or below the natural rate of absorption of GHG.

The third problem is that there doesn't appear to be the political will to even aim at mere absolute decoupling. The rhetoric of decoupling obscures the distinction between relative and absolute decoupling and celebrates the former as if it was a "sign of progress" toward the latter.

In contrast to the decoupling discourse, disconnect simply talks about restoring output growth to its "potential" without mentioning or considering the relationship between industrial activity and GHG emissions. In disconnect mode, there is no need to pretend that relative decoupling is a sign of progress toward absolute decoupling. That's another department.

But, really, since relative decoupling is inherent in the technological trend, anyway. It probably makes little difference whether one is ignoring the connection between industrial activity and GHG emissions or pretending that a worsening situation is a sign of progress toward improvement.

Those FT monkeys

Because... Marat/Sade.

Those FT monkeys covered in banknote
Have champagne and brandy on tap
They're up to their eyeballs in franc notes
We're up to our noses in crap
Those gorilla-mouthed fakers
Are longing to see us all rot
The gentry may lose a few acres
But we lose the little we've got
Revolution, it's more like a ruin
They're all stuffed with glorious food
They think about nothing but screwing
And we are the ones who get screwed

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.