Equilibrium and Information Literacy

"Everybody except Joan Robinson agrees about capital theory." -- Robert Solow (as paraphrased by Robinson)

An essential text in my researches on mercantilism, usury and bills of exchange is Raymond de Roover's Gresham on Foreign Exchange, which just happens to be stored in part of SFU's library that is under construction and thus inaccessible. The immediate unavailability of that book, however, led to a fortuitous discovery.

I browsed in the call number section of the library's general collection where de Roover's book would have been and Robert Leeson's Ideology and the International Economy caught my eye. I flipped through the book and noticed on page 19 the delicious quote from Joan Robinson that, "the free-trade doctrine is just a more subtle form of mercantilism."

The quote is from a 1966 lecture, "The New Mercantilism" that is included in a collection of essays, Contributions to Modern Economics, which also contains "Capital Theory Up-to-Date," a 1970 review of C. E. Ferguson's The Neoclassical Theory of Production and Distribution, in which Robinson reprises her parody of neo-Walrasian, neo-neoclassical capital "leets." Leets is steel spelled backward and makes its debut in "Equilibrium Growth Models," Robinson's 1961 review of James Meade's Neo-Classical Theory of Economic Growth.

This allegedly ectoplasmic representation of capital is, in a nutshell, the crux of the "Cambridge capital controversy," which Robinson launched with her 1952 challenge, "I leave it to those who draw production functions to say what marginal productivity and the elasticity of substitution mean when labour and capital are the factors of production." Looking back, in 1978, on her 1952 essays and the "long struggle to escape... habitual modes of thought and expression," Robinson stressed that "it was precisely from the concept of equilibrium that Keynes was struggling to escape..." Contrarily, though:

"...textbook teaching in the department of so-called macro theory was an attempt to push Keynes into short-term equilibrium. ... The grand neoclassical synthesis (now known as bastard Keynesianism) was a more ambitious attempt to reduce the General Theory to a system of equilibrium."

In responding to Robinson's leets critique, Robert Solow began by acknowledging "much truth" to the objection that "the usual production functions, allowing for more or less substitutability between capital and  labor, attribute to 'capital' a degree of malleability which contradicts common observation." He then distinguished between the "econometrically-minded person" who would view the overly malleable capital as a "specification error" and others -- presumably including Robinson -- who judge it to be "a doctrinal error; and its consequence is a kind of Fall from Grace." Seven years later, Robinson had this to say about "doctrinal disputes":

Many economists, nowadays, who are interested in practical questions are impatient of doctrinal disputes. What does it matter, they are inclined to say, let him have his leets, what harm does it do? But the harm that the neo-neoclassicals have done is, precisely, to block off economic theory from any discussion of practical questions.

If one is concerned about actual unemployment in an actual economy, Robinson later explained, one "has to discuss it in terms of processes taking place in actual history. The concept of equilibrium is incompatible with history. It is a metaphor based on movements in space applied to processes taking place in time." In other words, it is not just some kind of ethereal affectation to object to the concept of equilibrium -- it is an argument with irrevocable real-world consequences.

The failure of what Robinson dismissed as "bastard Keynesianism" also had real-world doctrinal consequences. "In the era of stagflation, this notion [that equilibrium growth can be achieved through fiscal and monetary 'fine tuning'] has been discredited and the quantity theory of money is blossoming afresh amongst its ruins." This 'blossoming,' incidentally, was not something Robinson welcomed.

Well, my interlibrary loan of de Roover's Gresham on Foreign Exchange has arrived, so I'm off up the hill to pick it up. To be continued...

How Many Ways Can Niall Ferguson Contradict Himself on Economics?

His latest:

To see why Trump is gaining on Clinton, despite his numerous flaws as a candidate, just compare their economic policy proposals. With Clinton you get more of the same: more spending (approximately $1.5 trillion over the next decade)—a large proportion of it on infrastructure—paid for by higher taxes on richer households, plus more regulation, especially of banks and pharmaceutical companies. Call it Obama+: the trains go round in circles, the government keeps on growing, but the economy as a whole limps along at 2% a year. By comparison, Trump offers acceleration along a new track, albeit at the risk of derailment. This is true even when he is on his best, scripted behavior, as he was on Thursday at the Economic Club of New York. Much of this speech was red meat for the Republican establishment he needs to keep on board: tax simplification and tax cuts, increased spending on defense and border security and deep cuts in environmental and consumer-protection regulation. Ironically, the Keynesian economists who support Clinton are on the wrong side, because even the Trump campaign admits his tax cuts would cost $4.4 trillion over the decade. He, not Clinton, is the true candidate of stimulus, as his budgets would only come close to balancing if growth went up to 3.5 percent a year. And on top of all that are Trump’s earlier pledges to restrict immigration, free trade and offshoring, pledges that are especially appealing to those Americans who feel most pessimistic about the future.

So Clinton’s proposals are going around in circles because they offer fiscal stimulus but Trump’s proposals will accelerate economic growth because they offer fiscal stimulus? In what model do large increases in defense spending lead to more economic growth that increases in infrastructure investment? Or is Niall touting the Laugher Curve nonsense that lower tax rates and deregulation of the financial and other sectors will lead to an economic miracle ala the Cochrane removing the weeds from the garden thesis? Oh wait – Trump is also calling for restrictions on trade and immigration. So is it that some aspects of deregulation promote growth whereas free trade restricts growth? Can we see Niall Ferguson’s economic model that quantifies the economic growth from the Trump proposals?

One Man's Profit is Another's Loss

There is this fixed quantity of whatever it is and if you get more, I get less. One man's profit is another's loss.

This dogma was already advanced by some ancient authors. Among modern writers Montaigne was the first to restate it; we may fairly call it the Montaigne dogma. It was the quintessence of the doctrines of Mercantilism, old and new. -- Ludwig von Mises

Add "the Montaigne dogma" to the collection of pejorative phantoms: mercantilism and Malthusianisme, image of limited good, zero-sum fallacy, Luddite fallacy, fixed Work-fund and the theory of the lump of (labor, labour, work, jobs, output).

Except... it really ought to be the Seneca dogma since Seneca was the ancient author whose de Beneficiis Montaigne faithfully borrowed from for 'his' essay (find "Demades"). Even Seneca was elaborating on an older maxim by Publilius.

Is it ever true that one man's profit is another's loss? You bet! I just gave an example -- gambling and other contests of skill or luck are typically zero sum. Your loss is my gain. Our loss is the house's gain.

But there is a more historically-pertinent operation of the zero-sum game: bills of exchange. As I remarked in that earlier post, one of the prime motivations for early modern merchant bankers to adopt the novel and challenging technique of double-entry bookkeeping was to "prove an alibi" against suspicions of usury. The way that bills of exchange were accounted for made them one of the favorite financial instruments for avoiding an appearance of usury. Raymond de Roover explained:

As a result of the usury prohibition, bills [of exchange] were never discounted but were bought at a rate of exchange which fluctuated up and down according to the conditions prevailing in the money market. There is no doubt that interest was received by the banker who invested his money in the purchase of bills, for a hidden interest was included in the rate of exchange. Because of this subterfuge, the structure of the money market was such that exchange fluctuations were caused either by a change in the rate of interest or by a change in the terms of international trade.

Interest was thus concealed in the exchange rate charged by the banker. As a consequence, the profit on any given transaction was uncertain. A banker, however, could rely on his long-run observation of the fluctuations in the terms of international trade to achieve a high degree of predictability covering a large number of transactions.

By the middle of the 16th century, the use of bills of exchange had become common enough in trade between England and the Low Countries to raise suspicions about manipulation of exchange rates by bankers. This suspicion was articulated in the memorandum prepared for the 1564 Royal Commission on the Exchange, which noted the 'usurious' undercurrents of different exchange rates prevailing simultaneously in London and Antwerp:

…when the English pound is paid for a month before hand [in London], then the price thereof in reason ought to be the less; and when the English pound is not paid for in Flemish money until a month after hand [in Antwerp], then the price in reason ought to be the more. But here you may perceive that this necessary and fair name Exchange might be truly termed by the odious name of buying and selling of money for time, otherwise called usury.

The memorandum then went on to describe "how private gains may be made when the Exchange goeth too low" and "how the bankers do cunningly fall [or raise] the exchange at Antwerp." Among the remedies proposed for such manipulation of exchange rates was to "govern this realm by good policy" such that would "temper and forbear the superfluous delicacies" of imported goods and cause English exports "to be wrought to the best value before they are vented." The resulting trade surplus would raise and maintain the value of the English pound.

Of course not every country can run a trade surplus all the time. For the world as a whole, the balance of trade is indeed a zero-sum game.

There are, however, not one but three issues bound up together in the memorandum on exchange. The first is usury and its concealment in the exchange instrument. The second is the effect of exchange fluctuations on the profits and losses of bankers and merchants. And the third is the manipulation of exchange rates, either by bankers for the private gain or by government to counter the cunning tricks of bankers.

Nowadays, we no longer have to worry about fraud by bankers. The old superstitious prejudices against usury have been supplanted by an enlightened embrace of the unequivocal blessings of credit and debt. Comparative advantage has proven that it is economically illiterate to question the universal benefit of globalization.

Verily, we can embrace the von Mise-erly wisdom that "There are in the market economy no conflicts between the interests of the buyers and sellers." One man's gain is clearly the alleviation of another's pain.

---

This post is the second in a series of three posts. See also "Nine Spades are a Lump of Leets."

On the Research Front: Dolphins Let Each Other Finish Their Sentences

Researchers at the Karadag Nature Reserve, in Feodosia, Ukraine, recorded two Black Sea bottlenose dolphins, called Yasha and Yana, talking to each other in a pool. They found that each dolphin would listen to a sentence of pulses without interruption, before replying.

Amazing.  But I wonder if dolphins in New York would do this.

(Hat tip, Yves Smith.)

It Is Monday, And The Washington Post Is Saying Dumb Things About Foreign Policy As Well As Economics

(Well, Monday is now over, but... ) Yes, Robert J. Samuelson has a column about the Fed that ignores austerity fiscal  policies and other matters. But Dean Baker has done a good job tearing him and that to shreds over on Beat the Press (sorry, no link, too lazy), so I shall stick to the foreign policy side.

That  comes from Jackson Diehl, whom I have never figured out why he has ever had any credibility with anybody, although I guess he talks to the usual set of neoconnish VSPs that lurk  about Washington repeating increasingly empty and silly bromides to each other.  In this case it is about Syria,  with Diehl spouting stuff that Hillary apparently somewhat believed and supported when she was SecState, but appears to  have moved beyond to be closer to  the Obama admin's positions.  However, it may be that the point of this column is precisely to drag her back to things she once believed and supported, even as they are lying in tatters on the floor.

Diehl argues that Putin has taught Obama a "lesson" by upping his bombing and other military activities somewhat successfully in favor of the Assad government.  This supposedly shows that Obama was wrong to resist requests for more use of air power  that came from Kerry, Clinton, Petraeus, and Panetta, that unrealisticallly wimpy non-VSP prez.  If we had used more air power or otherwise "supported rebels" with no-fly zones more back in 2012 or so, we could have maybe attained a "political settlement favorable  to the United States and its allies."  This nonsense raises so many red flags, one almost does not know where to begin, but so we must.

Of course, one place to start is precisely that we have been supporting "the rebels," those favored by this group being some based mostly in northwestern Syria whom we have claimed were  "democratic moderates," but who have  long ceased to be that and to be dominated by al Qaeda-related groups. That has not kept us from supporting them, even if we never  instituted the no-fly zone this gang wanted, and that Hillary has quite recently claimed to still support (ugh). These folks  argue that if we had done this  back then, those virtuous democratic forces, supposedly derived from the original peaceful  anti-Assad demonstraters during the beginning of the 2011 Arab Spring, whom he crushed by attacking them with bombs and other military stuff, they would have just done peachy keen and taken power or something.  Anyway, supporting these mostly Sunni fundamentalist anti-Assad groups would please our "allies"(presumably Turkey and Saudi  Arabia, both of whom have become oppressive and engaging in unwise actions we should not support).  But the important thing has been to  overthrow Assad and put in place one or another of these groups, apparently not all that worried that they might be al Qaeda affiliated.

As it is, we have for some time in fact been both heavily bombing Syria and putting troops on the ground there more recently than 2012, namely against the group we have for several years considered to  be our Number One enemy in the world, Daesh/ISIL/ISIS/IS, whose caliphate's capital, al-Raqqa, is in eastern Syria. Our bombings have been directed against them and in support of Kurds of the leftist YPG, with whom around 300 US special forces are supposedly embedded, some of them reportedly wearing hammers and sickles on their uniforms.  This group had until very recently been advancing well and taking territory, with Obama and others reasonably arguing that they seemed to be the only group around interested in actually fighting Daesh.  Somehow, Diehl makes zero mention of any of this, although this clearly very important, especially now.  But they were poised to move on al Raqqa.

So where does Diehl get his argument about Putin?  Yes, Putin has increased aerial bombardments on various fronts, especially in the northwest against some of these al Qaeda linked groups we continue to  support (apparently mostly through the CIA, although I do not know that for sure).  Turkey was supporting these groups, while it does not like the Kurdish groups, whom it sees as allied with troublesome Kurdish groups in southeastern Turkey. In various parts of Syria, this bombing has worked to help Assad forces gain back territory and solidify its hold on power. These VSPs all of course think this is awful, and certainly Assad has been awful, supposedly killing up to half a million people.  But his regime does practice religious tolerance and support of the many ethnic minorities in Syria against a possible dictatorship by extremist Sunni Arabs, even if once there were some "moderates" and "democrats" in their midst.  Of course Diehl is right about Putin, and he goes on to say that Putin has done this  without "getting into a quagmire."  How nice.

But there is this minor detail  that he  fails to mention: Russia and the USSR before  have had a naval  base in Syria at Tartus since 1971.  They have been deeply involved in Syria for a long time and preserving that strategic hold has been a top priority for nearly half a century.  They also have an air base, so it is not surprising that they can easily increase use of air power in Syria without getting into  a quagmire  beyond their long historical presence, which we do not have at all.  Our situations are completely and totally different, and we are not  in alliance with the government in power  either, as they are.  That this might make comparing what Putin does with what Obama does completely irrelevant and ridiculous does not cross the consciousness of  Diehl.

Of course the more recent situation has indeed become completely absurd, which Diehl  does not discuss at all either.  He makes it seem we have not  supported those "moderates" in the northwest, (whom we should have supported more!),  But, they have morphed into the Syrian Free Army, whom ironically have come to be supported  not only by the US CIA but by Turkey and Russia.  Just as the US-Pentagon-backed Kurds were about to make their  move on al Raqqa, ah ha! Daesh gets saved by our CIA backed cavalry, the Syrian Free Army, which has swept in to block them and take territory from them, with the backing of  Turkey especially important who wants to block the Kurds and who has newly made friends again with Putin, thus accepting that maybe it  is OK to let the Assad regime survive.  So we have reached a  situation where we have US backed forces fighting US backed forces, but Diehl and his sources think  we should have gotten in even more deeply than we are.  I mean, heck, this is no quagmire...

Barkley Rosser

Nine Spades Are a Lump of Leets

The section on capital from Joan Robinson's 1970 review of Charles Ferguson's The Neoclassical Theory of Production and Distribution employs the "lump of leets" motif to highlight a key issue in the Cambridge critique of neoclassical capital theory. Robinson's substantive lump-of-leets critique offers an instructive contrast to the abject flimsiness of the proverbial lump-of-labor fallacy claims.

For some years they remained cooped up in this position, repelling all attacks with blank misunderstanding. Then, growing bold, they descended to the plains and tried to prove Sraffa wrong. ...

Why Are the Big Banks Not Safer?

Larry Summers and Natasha Sarin report:

Since the financial crisis, there have been major changes in the regulation of large financial institutions directed at reducing their risk. Measures of regulatory capital have substantially increased; leverage ratios have been reduced; and stress testing has sought to further assure safety by raising levels of capital and reducing risk taking. Standard financial theories would predict that such changes would lead to substantial declines in financial market measures of risk. For major institutions in the United States and around the world and midsized institutions in the United States, we test this proposition using information on stock price volatility, option-based estimates of future volatility, beta, credit default swaps, earnings-price ratios, and preferred stock yields. To our surprise, we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased. This does not make a case against the regulatory approaches that have been pursued, but does caution against complacency.

The authors highlight the equity betas for Bank of America, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, and Wells Fargo which averaged 1.23 in 2015 and averaged only 1.18 before the crisis. If these banks were holding more equity relative to assets, we would expect a decline in these betas. But the authors also note that the average equity to asset ratio fell from 13% to 10%. Let’s break this out into leverage risk (which appears to have increased) and operational risk by estimating the average unlevered beta coefficient which appears to have fallen from around 0.15 before the crisis to 0.12 now. So is the real issue here that we are not requiring the big banks to hold more equity? Yes I know that these banks will protest that higher capital requirements will allegedly increase the cost of capital but this claim is inconsistent with basic finance as Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, and Paul Pfleiderer note:

Whereas equity, because it is riskier, has a higher required return than debt, it does not follow that the use of more equity in the funding mix increases the overall funding cost of banks. Using more equity in the mix lowers the riskiness of the equity (and perhaps also of debt or other securities that are used in the mix). Unless securities are mispriced, simply rearranging how risk is borne by different investors does not by itself affect funding costs. These observations constitute some of the most basic insights in corporate finance.

Racism Cancellation

Here is a metaphor to think about.  One common response to the problem of racism is to call for colorblind language and policy.  Don’t even think about race, much less talk about it.  Eliminate all programs that call attention to it.  Move immediately into a post-racial world by treating everyone without regard for race.

So think of racism as a kind of noise, a kind we want to get rid of.  How do you get rid of actual, nonmetaphorical noise with a set of headphones?  You can try to use isolation alone, blocking out all external sounds.  This could work, maybe, but it’s extremely difficult to do, especially if external noises are loud, and it’s impractical because there are also sounds out there we want to hear.  So we might use noise-cancelling headphones.  These work not simply by blocking sounds but also deliberately offsetting them, generating corrections that are out of phase with the noise we want to eliminate.

Racism cancelling works the same way.  It uses policies that take note of race but which are out of phase; where the racism “wave” crests, deliberately give it a trough.  Give extra consideration to candidates who typically get less because of racial bias.  Give extra resources to individuals who, because of racial inequality, have fewer.  Pay more attention to the views of people whose views have historically been less listened to.  And so on.

This also works for other types of inequality, like gender.  Don’t ignore it, cancel it.

Whither Agent-Based Macroeconomic Modeling?

Last week at this time I participated in a conference called "Economics, Economic Policies, Sustainable Economics in View of the Crisis." which took place at the Universita della Polytechnic in Ancona, Italy.  The main host was Mauro Gallegati, a prominent agent-based modeler, econophysicist, and more general complexity economist (also a sometime coauthor of mine).  It went on for three days with parallel session and most of the participants from Italy, although also from across Europe, including Russia, and beyond to such places as India and Australia.  The more well-known plenary speakers were Duncan Foley, Bruce Greenwald, Alan Kirman, David Colander, and me.  While there were papers on many subjects, including a bunch on ecological economics and sustainability, a very main focus was about macro modeling and how agent-based modeling (ABM)  relates to other kinds such as DSGE, VAR, and old reduced form many equation ISLM models, these latter three reportedly what get looked at seriously at the Fed and most other central banks.  A big question was given the problems with those and the hopes for ABMs, why are they not getting adopted as a fourth model in those settings or even a replacement for one of the others?

A conference in Italy is an especially appropriate place to raise these questions as it has been perhaps the world's center of ABMs, especially for macroeconomics, as well also being a major center for econphysics and complexity economics more generally.  Gallegati runs a group and his students have spread all over the country.  There is a major group in Milan led by Domenico Delli Gatti that often works with Gallegati's group (when they coauthor it is the "Gattis," with Gatti meaning "cat").  There is another group in Pisa, led by Giovanni Dosi, and another in Genoa led by Silvano Cincotti, with reps from all these groups (and some others from other countries) all there.

The situation may be seen by the group in Genoa, where the group developed the EURACE model, which Cincotti spoke, on, perhaps the most widely studied and used macro ABM there is.  He used it to show how increasing the Basel Accord capital requirements on banks could increase financial fragility in the system, a good ABM kind of result not al that easy to get from other kinds of models and certainly very macro and central banky.  It involved agents moving into the shadow banking sector, with some unsurprising results.

The cynic in me says that they did that model to try to lobby against stricter EU requirements on the Italian banking system, which is very fragile and near collapse.  The borderline bank is Monte dei Paschi di Siena, the world's oldest bank, dating from the 1400s, which has a fabulous Renaissance art collection based on pieces given to them as collateral from debtors who failed. More generally the Italian economy seems to be stagnant, going along, without people looking miserable in the streets or whatever, although I noticed some places closed that used to be open in Ancona.  The most romantic is an old hotel, the Roma e Pace, which hired Joseph Stalin in around 1906 as a doorman, but then fired him for being "troppo timido," (too timid), what a hoot.  They had a newspaper article in their lobby on that, but cannot see it anymore.  Gallegati also said that Mussolini had an affair there at one point with a famous Italian actress.  Oh well.

Anyway, there are these pretty interesting ABMs out there that seem to be able to do interesting stuff, but somehow they are not being picked up by the central banks.  Furthermore, I heard rumors that funding from the EU and INET and some other places may be cut for this kind of research.  If this turns out to be the case, I think it will be too bad.  In the end, it may be that the rival that is holding it off is not DSGE, which everybody dumped on at the conference, but the much less visible but still used old ISLM ones. This might make Paul Krugman glad. Atheortical VARs just seem to be too useful for very short term forecasting to get kicked aside.

There were other interesting debates, between Foley and Kirman and me over general equilibrium theory (with an eye to DSGE applications) and between Colander and Kirman over spontaneous self-organization, this arising from the recent article in the JEL by Kirman about Colander's recent book on Complexity and Public Policy.  Kirman really slammed spontancous self-organization, much pushed by Hayekian Austrians, but Colander pushed back enough that Alan actually said, "Well, maybe I need to get reorganized."

Anyway, I think there is still potential for macro ABMs, so will be sad and frustrated if the flow of money to study these does get shut down.  It will look like a major triumph for the mainstream establishment after all the hullabaloo over the huge crash that happened eight years ago in just a few days.  We should have learned more.

Barkley Rosser

Trump’s Penny Plan Does Not Add Up

Donald Trump apparently spoke at the New York Economic Club. Since I was not there, I do appreciate this fact sheet. At the risk of being rude, can I challenge the end of this “fact sheet”?

“The “Penny Plan” would reduce non-defense, non-safety net spending by one percent of the previous year’s total each year. Over ten years, the plan will reduce spending (outlays) by almost $1 trillion without touching defense or entitlement spending.”

So on average, we would see a 5% reduction per year in Federal nondefense government purchases if I read this right and that is supposed to average $100 billion per year. Of course nondefense Federal purchases last year were just shy of $500 billion so I am calling Trump on his awful arithmetic. I’m also calling him on this claim:

The Trump campaign's economist estimates that the plan would conservatively boost growth to 3.5 percent per year on average, well above the 2 percent currently projected by government forecasters, with the potential to reach a 4% growth rate.

Who are those “economists” again and what economic model did they use to make this rosy forecast? I could challenge his claim that the middle class will get the largest tax cut and his employment forecasts and just everything else in this spin sheet. But I did not wish to appear rude.

Neel Kashkari’s Supply-Side Solution to Mostly a Demand-Side Problem

Neel Kashkari tries to explain the slow pace of the recovery from the Great Recession:

When accommodative monetary policies were coupled with expansionary fiscal policies, other experts had reasonably expected a strong recovery from the depths of the Great Recession. Going back decades, the U.S. economy has exhibited a remarkable ability to bounce back: The rule of thumb was the deeper the recession, the stronger the recovery. Yet, the U.S. economy has experienced the weakest recovery in the postwar period, despite unprecedented policy responses to a very deep recession. Why?

My question here is why did you frame this so poorly? We had some fiscal stimulus in 2009 but it was not sufficient and followed by the fiscal austerity after 2010. Going back decades as in periods when the Federal Reserve engineered inflation fighting recessions by raising interest rates. Does Kashkari not get the fact that interest rates over the past several years are not at levels we saw a quarter of a century ago? I will give him credit for noting some key facts but his supposed expert on these matters is Greg Mankiw as it turns to seven possible underlying factors. After much discussion, here’s his bottom line:

We have come up with seven diagnoses and, like Mankiw, we don’t know for sure which ones are right. But looking at the symptoms, both domestic and global, suggests to me that we are likely seeing a confluence of three fundamental causes all combining to slow the economic recovery: (1) challenging demographics, (2) psychological scarring from the crisis and (3) lackluster technological innovation. Unfortunately, these headwinds aren’t likely to reverse anytime soon on their own. The good news is that we, as a country, aren’t powerless to address these fundamental causes. We have identified a series of policy responses that could be effective over time and have little downside risk. An obvious way to spur innovation and entrepreneurial activity is to increase government funding of basic research. Another promising policy is immigration reform, especially for high-skilled workers. Over the longer term, policies that improve education, streamline regulations and make the tax code more efficient should allow the United States to retain its dynamism, creativity and willingness to take risks.

Is it all about the supply-side? He continues:

Given today’s low borrowing costs, there is a strong case for increased government spending on deferred maintenance of infrastructure that will be necessary to sustain our economy. However, I am skeptical that a large-scale expansion of government spending by itself is the best way forward, since larger fiscal deficits will lead to higher expected future taxes, which could further undermine private sector confidence. Chronically weak demand might have been an important part of the diagnosis for the U.S. economy in the depths of the recession, when many workers and factories were idled. By 2016, however, the labor market appears closer to normal, which limits how much can be achieved by boosting demand to increase employment further.

His 3rd diagnoses was entitled “Secular Stagnation” and did consider some of the Keynesian suggestions for raising aggregate demand. Alas his post strikes me as too dismissive of this view relying a bit too much on supply-side solutions. But then his expert is Greg Mankiw.

Branko's Lumps

In a post at his blog globalinequality today, Branko Milanovic claims that "Robotics leads us to face squarely three fallacies." He then proceeds to "debunk" technological unemployment, satiation of human needs and the environmental carrying capacity of the earth. He concludes his post with the assurance that "history teaches us" we have nothing to fear regarding limits to growth, exhaustion of natural resources and replacement of humans by machines.

A week ago, I posted Outlaws of Political Economy in which I documented the total absence of evidence for the alleged false belief in a fixed amount of work. The fallacy claim, I argued, is a negative projection that is compulsively repeated by economists.

In my post, I cited the entry on "Economic Law" from the 1893 Palgrave's Dictionary of Political Economy. In turn, the Palgrave's entry cited an 1892 article, in German, by J. Bonar that I was unable to locate [update: found it]. But the search for it led me to Bonar's 1893 book, Philosophy and Political Economy, described by Warren Samuels as "one of the most remarkable works in the history of economic thought." In that latter book, Bonar discussed Niccolo Machiavelli's notion of a "fixed quantity of happiness" and mentioned Francis Bacon's enunciation of the same basic idea -- that one person or country's gain is a another's loss. The rationale, in a nutshell, of mercantilism.

Following up on the Bacon quote, I discovered much the same sentiment had been earlier expressed by Michel de Montaigne and was expressed by the mime author, Publilius before the current era. In short, long before the fallacy became a "fallacy," it was a maxim that circulated among the most distinguished literati, Montaigne, Machiavelli, Bacon...

Publilius's maxim translates as "Profits in trade can be made only by another's loss." Montaigne's is "One man's profit is another's loss."

It just so happens that James Bonar also delivered a series of lectures in 1910 addressing the "subtle fallacies which are apt to invade the reasoning of trained economists in spite of learning and discipline." One of the sources of error that Bonar discussed in his first lecture was "the existence and prevalence" of "watchwords" or "maxims" that keep alive biases inconsistent with the economist's reasoning. A watchword is "a detached phrase that has taken the place of an argument" and may even become "a substitute for an argument."

In his fifth lecture, Bonar specifically addressed one of those tricky watchwords, "in the long run" and replied, 106 years before the fact, to one of Milanovic's key arguments about "the lessons of history":

It is not easy to show that the invention of new machines will tend to increase wages. This was the tendency first supposed by Ricardo; but he changed his mind and wrote: "The same cause which may increase the net revenue of the country may at the same time render the population redundant and deteriorate the condition of the labourer." It was this change of view that made McCulloch doubt the infallibility of Ricardo. The more orthodox position (if we allow that any position of Ricardo's could be heretical) was that machinery tends in the long run to employ more labour than it has displaced; this was to be the consolation of the hand-loom weaver, thrown out of work by the factory system. It was to be a sufficient vindication of an economic principle, that, if it did not fit the facts now, it would fit them at some time in the future. But in the case of machinery there were more economic principles asserted than one. One seems quite to fit the facts: that there is a tendency under the regime of machinery towards a greatly increased production at less cost. It was a different proposition that the increased product tends to be equally shared. The economist has no warrant for saying that any economic tendency exists which by itself brings about good distribution. The sharing of property was matter of law and political institutions, in some countries religious prejudices; and the conditions so established might prevent any such consummation. It does not seem true that economic tendencies are all made beneficial by length of time any more than a man is necessarily made better by growing old. There is no saving virtue in the ''long run."

An economist from the 1930s named John Maynard Keynes also took issue with the policy relevance of the legendary long run. Ironically, our old mime friend, Publilius also had something proverbial to say about the long run: "Patience is a remedy for every sorrow."

Maxim-izing Utility

Lucrum sine damno alterius fieri non potest. -- Publilius Syrus  

Le profit de l'un est dommage de l'autre. -- Michel de Montaigne  

Whatsoever is somewhere gotten is somewhere lost. -- Francis Bacon 

For some two hundred years both economic theorists and practical men did not doubt that there is a peculiar advantage to a country in a favourable balance of trade, and grave danger in an unfavourable balance, particularly if it results in an efflux of the precious metals. But for the past one hundred years there has been a remarkable divergence of opinion. The majority of statesmen and practical men in most countries, and nearly half of them even in great Britain, the home of the opposite view, have remained faithful to the ancient doctrine; whereas almost all economic theorists have held that anxiety concerning such matters is absolutely groundless except on a very short view, since the mechanism of foreign trade is self-adjusting and attempts to interfere with it are not only futile, but greatly impoverish those who practice them because they forfeit the advantages of the international division of labour. […] Nevertheless, as a contribution to statecraft, which is concerned with the economic system as a whole and with securing the optimum employment of the system’s entire resources, the methods of the early pioneers of economic thinking in the sixteenth and seventeenth centuries may have attained to fragments of practical wisdom which the unrealistic abstractions of Ricardo first forgot and then obliterated. -- John Maynard Keynes

Trade will find its own level. -- Dorning Rasbotham

The price of corn, like water, will find its own level. -- Benjamin Franklin

Dexar hazer a la naturaleza allí, y aquí a la moralidad. -- Baltasar Gracian

Patience is a remedy for every sorrow. -- Publilius Syrus

“Select All” Disallowed

Google has just announced that, beginning next month, its popular apps will no longer permit users to check a single “select all” box.  This means, for instance, that if you want to delete a long list of email or phone messages, you need to check the box for each one of them; there will no longer be an option at the top of the list to select the whole lot.

“We don’t want users to make general decisions about their important data,” said a Google spokesperson, who asked not to be identified.  “It’s too easy to select the box at the top, delete, and then lose something you’ll regret later.  We want the user to stop and think about each individual item.”

There is speculation that Google’s decision was influenced by similar thinking on the part of election officials.

Paul Baer

Word has just arrived that Paul Baer, an ecological economist and cofounder of EcoEquity, has died.  Paul helped put together the Greenhouse Development Rights model and was one of the most reliably thoughtful participants in discussions around climate policy.  He was also an exceptionally warm and wonderful person.  I will miss him.