Saturday, August 28, 2010

playing in bourgeois ideology's sandbox -- pedagogical reflections

Fellow UMass Econ blogger Mark Silverman discusses the important features of capitalism in this post. His premise is a capitalist propaganda video from 1948.
If you watch the video, you'll see that it consists of a (mock) portrait of a terribly earnest and engaged discussion among high school students about the definition of "capitalism." They use, as an example, a visit to Mr. Brown's grocery store to buy "weenies" for the class weenie roast. After arguing vigorously (and letting us see their visit to his store) they come up with the following list of defining features of "capitalism":
(1) Private Property
(2) Profit motive
(3) Competition
(4) Freedom of contract
(5) Government-enacted laws granting rights (including certain Constitutional rights) to items #1 and #4

And, they conclude, that (1)-(5) adds up to (6) "Free Enterprise" (which, of course, is a much more attractive sounding term than "capitalism.") (Incidentally, #5 is a rather sophisticated observation-- at least relative to what most economists generally discuss. Certainly they failed to recall it when administering so-called "shock therapy" to the former Soviet Union.)

After playing this video in my class, I listed these features on the blackboard. I asked my students: Is there anything else you'd add? Or does this seem like an extensive, and exhaustive, list?
I confine my comments to Mark's use of this video in teaching his history of thought class.

I have purposely never addressed the issue of defining capitalism in my teaching. You may think that's odd given that I've taught a course in American economic history, but in that course I found it much more helpful to instead pose different accounts of the rise or success of capitalism and then debate the rigor of the various arguments. In this way, for example, we were able to poke holes in both leftist accounts of proletarianization, as well as rightist accounts of the rise of a liberal democratic society in the U.S. by the early 1800s.

Basically, in the quote above I think Mark goes too far in assuming some of the traits presented in the video as given. Competition, for example, is not a cornerstone of all "free enterprise systems," as Schumpeter pointed out and of course many before him (Schumpeter's is the account I am most familiar with in detail). But, whatever -- debating whether capitalist institutions really are efficient is not the point of my argument. I assert that there is a much larger point to be made about assumptions, other than the apparent inconsistency between what ideology says is capitalism, and what it really is. The larger point to be made is in how Mark relates propaganda's discussion of capitalism to how capitalism is defined by others.

We need to consider two related points. First, bourgeois ideology has its own definition of capitalism. Second, many academics (left and right) also have their own definition of capitalism. What does it all mean for teaching what capitalism is? By playing in bourgeois ideology's sandbox, Mark's "lesson on capitalism" implicitly accepts the first point and disregards the second, which compromises the strength of the lesson learned. Surely the students still get the main point that the propaganda is "biased" by not discussing wage labor as a central institution of capitalism -- but biased against what? The simple inclusion of wage labor, alongside the other 5 properties of capitalism or a free enterprise system? Is that the model Mark adopts? Mark does not tell us, but it seems implied that this reference point is precisely the one chosen by him.

I argue that the failure to coherently present an alternative model when attacking the mainstream one is one of the biggest weaknesses of heterodox teaching. I might be going too far in grilling Mark here -- and I hope he calls me out for doing so -- but as teachers, it seems like the best we can do is get out of bourgeois ideology's sandbox and start levelling critiques from the standpoint of the rigor of all definitions and arguments concerning capitalism. Doing so will poke holes in all the arguments, but it will also allow the students to gain familiarity with various perspectives, allowing students to judge for themselves.

This is not a "bias-free" method -- each instructor will nevertheless be more difficult on certain positions that are against his or her political leanings. But I think that recognizing that there are many different definitions of capitalism is an important first step at deconstructing "dominant" paradigms.

One final point. It appears that toward the end of his post, Mark does begin to discuss some of the historical origins of wage labor, and how unnatural it is. He remarks that Polanyi discusses wage labor as an absurd condition of modern society. Is this the alternative model of capitalism Mark has in mind?

Thursday, August 26, 2010

modernism and modern politics

(Please note: this post is only meant to be a brief sketch of some ideas -- hopefully we can discuss and develop them further in later posts.)

A recent string of posts from around the blogosphere, including some compelling ones by my fellow UMass colleagues Mark Silverman and James Miehls, have sought to sort out the presence and importance of conservative trends in various contemporary leftist critiques of capitalism. The main question of these posts seems to be, "are there elements of arguments on the political right to be found in various leftist arguments against capitalism, and if so, what should we do about them -- engage and incorporate, or make the rightists play by our own rules?"

I recently found a piece posted originally on 3 Quarks Daily titled "Why Conservatives Should Read Marx," which I think does a good job of focusing on where the debates spurred by Mark and James can and cannot find resolve. How do arguments on the left intersect with some conservative arguments?

First, you need to establish the tradition of markets as well as other institutions. It is well known, for example, that the development of markets is bound in a history of moral and political restraints. Whether the rules of market competition are guided by a preservation of communal norms (as in this paper by Jason Opal) or by religious values, market society is not naturally equated with financial derivatives and international price-cutting strategies. Thakkar makes the point nicely here:
If they want to be consistent, conservatives ought really to be anti-capitalist. This may be a little surprising, but in point of fact conservatism has always been flexible as far as particular policies are concerned. In the U.S. conservatives oppose universal healthcare as an attack on freedom; in the U.K. they defend it as a national tradition. Both positions count as conservative because, as Samuel Huntington argues, conservatism is a “situational” ideology which necessarily varies from place to place and time to time: “The essence of conservatism is the passionate affirmation of the value of existing institutions.”
In other words, modern conservatism is not entirely engaged with the view that markets, everywhere and in any circumstance, are a good thing. However, there is a subset, a newer world view, which we should be engaged with: the neoclassical, neoliberal world view. The real point of leftist resistance to neoclassical economics in particular should be against these economists' aims of applying a specific framework for understanding economic behavior without regard to context -- history, culture, and so on. It is a forward-looking view, a modernism which extends itself blindingly into various political debates, such as the financial system -- without remembering why and how markets were created in the first place.

I really do think it is a kind of sick version of modernism that plagues a subset of the modern rightist and also, to a degree, modern leftist political views on the market. However, I don't really know enough about modernism to make this claim forcefully.

I can only appeal to some of my literary heroes -- Kafka, Eliot -- for their own critiques of modernism. Kafka, of course, rails on bureaucracy are beautifully expressed. And I think there is much for Leftists and conservatives alike to take away from Eliot's depressing commentary on progressivism and the decay of modern society. For an example, I end this post with an excerpt from Eliot's last work, Four Quartets ("East Coker"). Emphasis my own:
.... There is, it seems to us,
At best, only a limited value
In the knowledge derived from experience.
The knowledge imposes a pattern, and falsifies,
For the pattern is new in every moment
And every moment is a new and shocking
Valuation of all we have been. We are only undeceived
Of that which, deceiving, could no longer harm.
In the middle, not only in the middle of the way
But all the way, in a dark wood, in a bramble,
On the edge of a grimpen, where is no secure foothold,
And menaced by monsters, fancy lights,
Risking enchantment. Do not let me hear
Of the wisdom of old men, but rather of their folly,
Their fear of fear and frenzy, their fear of possession,
Of belonging to another, or to others, or to God.
The only wisdom we can hope to acquire
Is the wisdom of humility: humility is endless.

Sunday, August 22, 2010

deserves another post

My recent comments on the difference between industrialization and proletarianization in U.S. economic history have garnered close to 20 comments at this point, making it the second-most commented-on post I've ever written (behind Anti-Mankiw, of course).

Go weigh in your thoughts. If you read this through a reader or RSS feed, here's the link:

Saturday, August 21, 2010

assassin's creed II - first impressions

I've had an "on or off" relationship with platforming games over the years. I first started playing them seriously when I had a Sony Playstation, which seems odd since it's not a system usually associated with good platforming games. But I really enjoyed the Crash Bandicoot games, Gex, and my personal favorite -- Spyro the Dragon. I remember playing the first and second ones a countless amount of times. Even the third one was pretty good, but definitely not as good as the first two.

The reason for this reminiscence is because when I first started playing Assassin's Creed II (hereafter, "AC 2") I was reminded of a certain feeling I had when I played the second Spyro game. I loved that Spyro game, "Spyro 2: Ripto's Rage" because of how it set up rewards for hard work. Basically, the core "currency" in Spyro is gems, and collecting more and more gems led to the ability to "buy" new levels, or new abilities, or new points of interactivity in existing levels. I just love this setup so much, because it uses in-game rewards for the player's hard work. The reward system was a sharp change from the first game (and actually, it is different from most platformers), where the "reward" for hours of treasure hunting is usually just bragging rights, or the ability to claim that elusive "100% mark" in games. The alternative system, in contrast, basically creates a feeling that the game is more than just a platformer, pushing it closer to action/adventure games such as Zelda, or even (gasp!) an open-ended RPG! In these games, work is certainly rewarded through better abilities, better weapons, or more interesting environments to explore -- all with a great story.

But AC 2 is certainly not a platformer. It is an action game. But the in-game rewards for hard work make it a significant improvement over its predecessor in this category and lends some more depth to the gameplay. In the first AC, no matter how many of the little sidequests you did, your work didn't really pay off in a way that made it worthwhile to continue collecting -- in the end, it basically led to useless trophy/achievement hunting.

Not only do the sidequests mean more in AC 2 (you are helping build a new town, buy better armor for yourself, and so on), but they are significantly more varied when compared to AC 1. This makes it easier to go treasure hunting, exploring the extremely detailed Italian Renaissance cities along the way (complete with architecture, political figures, language, and art all historically accurate, or so I'm told).

The game, in short, is really really good. It is certainly one of the best games I've played in a while. The sidequests are varied and interesting, the graphics will make your eyes water, the story is somewhat interesting so far, and the level of detail is astounding.

I have two main criticisms at this point: the game is very easy and the sidequests are overwhelming.


The player can enhance armor very early in the game (helped by a rapid accumulation of money, for various reasons), making damage reduction minimal and boss fights a breeze. Health is extremely easy to come by -- for two reasons. First, it's cheap and you basically never have to worry about money. Second, the medium pouch you can buy early on (the one I had within a few hours of playing) will allow you to hold 10 medicines which restore a good amount of health, giving you practically infinite life during boss fights.

Boss fights, and killing in general, are significantly more open, i.e. less discreet, than any game titled "asssassin's creed" should be. I've messed up on secrecy in a few boss battles and barely "paid" at all for these mistakes. It's much easier to escape from guards here than in the first game. This drives it as much more of a loud action game than its predecessor. Some will find fault with this, but it's a tricky issue in my book. Unless controls are darn-near perfect, spy-themed games can be extremely frustrating for the player. Metal Gear Solid has been very successful with its control schemes, but you can tell early on that AC 2 is going for something different. Which is fine in my view, but it depends on what you are expecting. There is a small exception to the "easy and loud kills" trend: some sidequests can be quite challenging in how they ask you to fulfill the mission (killing guards a certain way, or without being caught, etc.).

I will have much more to say about this issue in the full review.

Overwhelming sidequests

I've put a lot of time into the game and I'm barely halfway through the story. Each town I've been in (Florence, Tuscany/San Gimignano) has tons of treasure chests and challenges (races, courier jobs, assassination requests, codex pages, and assassin's tombs). So much to do! It is a blessing and a curse, and after a while you definitely get sick of some of the errand running. Luckily, as I said above, there is much more variation to each type of quest in this game (and much more interesting stories behind them), but it will be hard to invest the time to get everything in it.

Well, since this was only meant to be a "first impression", I will stop here. But I assure you, this is a must-own game for PS3 or XBox 360!

Wednesday, August 18, 2010

proletarianization or industrialization? we need a new melody

A common challenge I face when explaining my work to anyone is this: how do I discuss the significance of my findings to social and economic historians alike, when each uses a different set of tools and questions? I blame this on a glaring divide in the research on economic and social history of the first half of the nineteenth century U.S. -- a divide that is not easily bridged. The problem boils down to a fundamental disagreement on the relevant terms to use when describing key events such as the rise of the factory system and industry in the northeast.

On the one hand, you have the economic history approach, which is to label this period as industrialization. Under this framework, technological growth and factor endowments (such as the relative unavailability of land coupled with a surplus of laborers) are the primary variables of interest. For example, Alex Field asks a very simple question: "why did the North begin to industrialize at all?" in "Sectoral Shift in Antebellum Massachusetts: A Reconsideration" (Explorations in Economic History Vol. 15, 1978, pp. 146-71) Field explains industrialization as primarily the result of: 1. technology and available capital (technology initially imported from England, financed by wealthy northeast merchants); and 2. labor surplus (he explains that while agriculture was a more fruitful pursuit outside of the rocky soil of New England, labor mobility in this period suffered important barriers which kept the poor country bumpkins stuck in their villages).

On the other hand, the social history approach uses terms like proletarianization and "industrial order" to describe the exact same period and, at times, the exact same events! First, proletarianization is a concept borrowed from influences on social theory by Marxist thought. Proletarianization describes the processes by which individuals become part of the capitalist social system. In the orthodox approach, for example, proletarianization is a consequence of the increased mechanization of production. This forces workers out of their homes and farms, and "middle class" masters, apprentices, and journeymen out of their shops, into centralized facilities of production (factories). More recent approaches have modified this framework to take into account the variations on this idea, but maintaining the central point that this is a coercive process of integration into a new system -- for example, the fact that workers, while still proletarians, largely did not come from a shrinking middle class. Rather, they were either women and children coming from a household which was still significantly influenced by traditional norms and institutions, or immigrants escaping religious persecution or other types of political or economic oppression in their home countries.

The divide is very significant for understanding the rise of capitalism. It needs to be bridged.

How can we get each side to talk about industrialization or proletarianization using the same terms? The lazy answer would be, "integrate the higher-quality aspects of both!" -- something like a quantitative study of social relations or social transformation, synthesizing the great strides made by the economic historians in establishing the data sets with the more holistic and contextual approach of the social historians.

I, however, have a different proposal. The gap is driven by economists and social historians too focused on the standard models of their respective disciplines. If you read my above clarifications carefully, you'll note that both sides are essentially discussing the history of the early nineteenth century U.S. in terms of slight "variations on a theme".

We need a new melody. While the rhetoric of the rising capitalist class was centered on economic variables like capital accumulation and productivity, laborers sung to a different tune based on control over the pace of work and the rules under which new markets would be governed. In the meantime, the state thundered a baseline centered on a large amount of bureaucratic control influenced by, but also tempering, both traditional aristocratic models of governance (residue from the colonial period) and new liberal models of state intervention appropriate for a republican democracy.

This is not a chaotic model. Each institution has specific goals, and the relevant conflicts and complementarities between them may be sorted out, with reference to the data. The point is then to tell a story which incorporates these goals with the primary evidence in question. The result is an explanation of change which eschews particular definitional requirements in favor of a general model of change.

While I'd like to think something like this -- essentially, the ideas on which my dissertation are based -- will catch on, I'm not holding my breath. For now, I will continue to use either "industrialization" or "proletarianization", depending on the specific questions I am asking and the the specific audience I am targeting. But when it comes to debate, I will open up the field to consider the musical score as a whole. Only then can I work through the language to establish a more appropriate understanding of this period.

Monday, August 16, 2010

an experiment

I've seen this tried a few times on other blogs (blogs with, admittedly, a much much larger readership), so I thought I'd test it out here. Are you, the reader, interested in seeing anything particular on Imagining History in the coming weeks or months? Any threads I may have dropped or paid less attention to? Any new economic history topics which are of particular contemporary relevance? Anything?!!

Leave a comment! :)

Sunday, August 15, 2010

jared diamond on economics and sustainability

This is a bit old but I recently returned to it for some reason I can't remember. Link is here, enjoy!
'There is a parallel based on the same fundamental mechanisms of the economic collapse that we’re seeing now and the collapse of past civilisations such as the Maya,' he continues. 'The message is that when you have a large society that consumes lots of resources, that society is likely to collapse once it hits its peak.'

He helps himself to a mouthful of vegetables, bought from the supermarket but as fresh-tasting as if he had dug them from the garden. Chewing slowly, he continues: 'The Maya collapse began in the late 700s, and then simply the most advanced society in the New World collapsed over the course of several decades. They were mostly gone a century later,' he says wistfully. 'When a complex structure like that starts collapsing, you are pulling out dominoes in the whole structure.'

Friday, August 13, 2010

conditions of capitalist development -- supply, demand, or both? interesting new research

One popular and compelling explanation for the Industrial Revolution has framed it in terms of a rapid series technological innovations leading to fundamental social change. Machines and factories, built by those with the money and other resources necessary for large capital investments, were utilized to spur the rapid accumulation of profits. At the same time, these machines and factories changed the most basic aspects of people's lives, leading not only to new social roles for women and children and a new method of organizing work, but also to an increasing role for markets and market behavior, as profits and businesses sought to saturate emerging markets.

The above story speaks essentially of a supply-led phenomenon where technological forces promote changes in demand (i.e., consumption and market demand). It is also a view held by some Marxist historians. In their view, technology growth is a product of class conflict -- that is, a product of conflicting interests in society. As businesses gain power and assert their interests more forcefully, they seek out new markets for the primary purpose of extracting profits in the production process. And thus, markets (and the individual behaviors which compose them) are once again the consequence of forces outside the immediate control of market participants. Notice the chain of logic in the above explanation, because a recent alternative explanation gaining a lot of attention seeks to reverse it.

Proponents of an Industrious Revolution have attempted to show how individuals embraced market forces, making them active participants, rather than passive responders, in the Industrial Revolution. Early on, by working hard and reallocating their time to participate in consumption-led activities (rather than, say, producing at home or bartering for goods they don't produce), individuals' efficient market decisions promoted the efficiency of the broader system of industrial expansion. In buying up all the trinkets, sugar and other "luxury" market consumables, between 1650 and 1800 these consumers became a world within themselves, actively accepting and using the fruits of the market to improve their lives. One of the more well-known proponents of this view is Jan deVries, who studies the Industrious Revolution in Britain, in Industrious Revolution: Consumer Behavior and the Household Economy, 1650 to the Present (Cambridge: Cambridge University Press, 2008).

Even if DeVries isn't seeking to "reverse" the chain of causation and rather only add to the voluminous research on supply-side factors by considering the other side of the market, at the very least, the theoretical framework that DeVries is working under (a combination of Beckerian-style household decision making theory and rational expectations/rational actor models) ought to be considered as an historically appropriate model. In other words, we need to know more about the nature of supposed "Industrious Revolutions" in other contexts before generalization is made.

That is precisely the point of entry for a new article in the Journal of Economic History by Sheilagh Ogilvie, titled "Consumption, Social Capital, and the 'Industrious Revolution' in Early Modern Germany" (JEH, 70:2 June 2010). Ogilvie sets out to show how market behavior was significantly curtailed by social norms and local government (under the traditional notion of police -- a topic discussed elsewhere on this blog) in early modern Germany (roughly the 17th, 18th, and early 19th centuries). In a thorough search of court and town records, she uncovers evidence of significant political control over emerging markets, leading to the conclusion that markets were embraced but not without significant regulations imposed by traditional institutions.

The implications are fundamental to understanding the nature of the Industrial and Industrious Revolutions. In terms of the latter, we gain a richer view of the processes underlying economic development -- a view that discounts the necessity for free, unregulated markets and nuclear households. It "cast[s] doubt on the broader logic of the Industrious and Consumer Revolutions -- the idea that reallocating time and consumption from household to market prepares the way for modern economic growth. Alternatively, late-developing economies may not even have had an Industrious Revolution because it was stifled by institutional constraints" (35).

In other words, traditional institutions matter to the trajectory various Industrial Revolutions took and, in turn, to our understanding of modern economic growth. The fact that traditional institutions may have had a greater impact in the case of early modern Germany, relative to Britain, might say something about long run stability or performance of these economies. Did entrenched interests slow rapid capital accumulation and, further, the evils associated with it, similar to traditional histories of French development?

But there is something even more significant about Ogilivie's suggestions in terms of the former of the above ideas, i.e., the broader literature on the Industrial Revolution. Let's step back and see the Industrial Revolution as a grand social transformation -- encompassing changes in work organization, capital accumulation, familial roles, market integration, and the list of course goes on. Any social transformation is fundamentally about different sets of interests wresting for power -- if it were "so easy" to see it going one way, then why not see it going a different way, such as Germany or France? The political constituencies vying for economic and political power in these areas seems to explain modern Germany pretty well, and there are even elements of this in American economic history.

Well, to address this composition of social transformations, why not consider these traditional institutions as one element of any transformation -- in Britain, early modern Germany, the U.S.? Then the story is not about demand or supply forces working their way through toward social change. Rather, the Industrial Revolution is about how the environment was composed of power interests and how those interests played themselves out in all kinds of institutions central to the development of capitalism -- the market, the legal system, the state more generally, or firms themselves.

And perhaps this is a convincing unification of the supply and demand forces, at least an attempt to solve the either/or view suggested above. The environment, however, is not some market where supply and demand rests in market equilibrium -- it is a contested terrain where change signifies much more than higher wages and a higher standard of living.

A non-gated version of the paper can be found here: Enjoy!

Thursday, August 12, 2010


It isn't even the long run yet.

This is my last Keynes post ever. Unlike Jay-Z I won't bring him back on a later blog post, even as a "feat.".

I'm sick of writing about him and I'm sick of this love-hate relationship. I'm laying all my opinions of him out here, fully exposed. I'm wrapping up what has truly been an unbelievably numerous and verbose series of posts with him, extending back to what I still think is my best post on him here, on the mathematical appreciation of his methodology in the context of the history of economic thought. Later attempts introduced the nuanced view of him that I've always had, but nothing was ever resolved. That's what I'm doing here: being explicit about all of the suggestions made in earlier posts.


Keynes' theory is significant for how he proposed to solve the unemployment problem -- by the end of the General Theory it is clear that the policy implications are that the state should maintain investment levels as well as decisions to change those levels when it is deemed appropriate. These are seemingly-radical conclusions that are, nevertheless, perfectly supported by his analysis of investment behavior in capital markets. They are stated toward the end of the General Theory.

What these conclusions give rise to is a feudal state, the main job of which is to maintain full employment and direct resources across the economy as it sees fit, in the interests of optimizing total wealth and employment growth. There is nothing in Keynes' model about shifting political control to workers, or other more fundamental ways of changing social relations in the economy. We are primarily concerned with the changing actions of the state. The only other noteworthy change is the minor point that unions would undoubtedly play a more central role in such an economy. Unions would act as representatives for labor in making decisions about wage and employment levels and so on, communicating issues from the ground level similar to how peasants would set up villages on parts of the lord's estate in feudalism. In other words, this is not an active labor movement.

This is the fundamental contribution of Keynes to understanding the macroeconomy: solving the unemployment problem, pushing for full employment, through state control of investment. This policy proposal links the core findings of his investment theory to the real economy (i.e., resource allocation among the factors of production -- labor, capital, land, entrepreneurship). Now, what about all the other parts of Keynes, such as the Keynes mostly everyone talks about? In order to address those points we turn to the practical and then theoretical implications of the General Theory.


As for the stimulus policies I've discussed recently -- they represent the most relevant mainstream perspective on Keynes' system. In order to appreciate this, I take one of the main ideas which economists of the time took away from the General Theory: his theory of labor markets. Consider the following small (but significant, as it was the first) exchange between Leontief and Keynes in the Quarterly Journal of Economics. In Leontief's review of the General Theory, he identifies the homogeneity postulate as the target of Keynes' alternative system. It is formally stated by Leontief as follows.

All supply and demand functions, with prices taken as independent variables and quantity as a dependent one, are homogeneous functions of the zero degree ("The Fundamental Assumption of Mr. Keynes' Monetary Theory of Unemployment," QJE 51: 1 (1936): pg. 193)

In order to gain a sense of this postulate, envision an economy composed of 2 markets: apples and oranges. You have $40 in your pocket. Apples cost $2, oranges cost $4, and so you decide to buy 10 apples and 5 oranges. Now, suppose both prices as well as your income doubles. Then You have $80, apples are $4 and oranges $8. The homogeneity postulate says that you will still buy 10 apples and 5 oranges. Now, what Keynes said -- his critique of the homogeneity postulate -- is that there is at least one market where things don't go this way. Suppose for some reason when the price of apples increases to $4, you only buy 8 instead of 10, even when your income increases and all the market forces are telling you to buy the same amount of each. Something structurally is wrong with that market, and the entire system is now misallocated. For example, you might buy a little more oranges (or something else, if we admit a third market into our economy) with the $8 you have left over after skipping out on two apples.

The same, of course, may be true in the reverse way: if income goes down from $40 to $20 and prices decrease to $1 for an apple and $2 for an orange, you may want 12 apples instead of what the market forces tell you to demand -- i.e., 10. In Keynes' model, he thought such things can happen in the labor market. Say you have two markets now, but one of them is a labor market and the other is apples. Start again with initial income of $40. Your wage is $2, apples are $4. If income declines to $20, wages decline to $1 and apples to $2, Keynes believed that you will want to work more than 10 hours in this scenario. This, of course, would then cause a misallocation in the demand for apples. A decline in your income and all of your wages will not have you wanting the same hours of labor(apples) that you did before -- for whatever reason, you will probably want more hours at that lower wage. Maybe you are trying to maintain a standard of living or maybe the union is supporting a higher wage, or maybe the actual money which caused the price decrease or increase is now a factor determining your wage (for example, maybe there is a misallocation in some other market which is in turn affecting how business respond in the labor market). But the result, of course, is that there is a fundamental misallocation once again.

So of course, it is the labor supply function which interests Keynes the most as an exception to this homogeneity postulate -- nevertheless, the fact that at least one of the functions is non-homogeneous means the whole system explodes, with monetary neutrality completely absent from the system. ("Monetary neutrality" would be what we saw in the first apples-oranges example -- demand for either didn't change when all prices and income doubled or halved.)

Now, recall the point made above: this idea is one of the mainstream's central focus points on the General Theory. It remains to show how to translate this idea into policy. Since labor markets could be an important example of non-homogeneity, it leaves a key problem for policy makers: what determines supply and demand of labor, and the resulting wage rate? Well, whatever determines it, it is clear that the resulting misallocations, described above, could affect essential aspects of the product market as well as other areas of the economy, leading to widespread crisis. Therefore, it makes perfect sense to stimulate the economy with boosting incomes, leading to less of a misallocation of labor, ideally so that the misallocations are minimized. And there you have it: the central mainstream critique (Leontief's, one year after the release of the General Theory) is converted into a fiscal policy tool still debated over today.

But there is one other point I want to bring up, aside from demonstrating one of the key ideas behind the Keynesian model (as presented in the General Theory) and its relationship to policy.

It is clear that while the stimulus policy was first seen in practice in FDR's early policies (pre-General Theory), and while the stimulus has been viewed as Keynesian, contemporary news reports show that Roosevelt's policies were primarily being driven for other reasons. One is the idea of a corporatist welfare state, a philosophy where the government plays a big role in the economy in order to sustain capitalism. Keynes was a corporatist, but not the Keynes most talked about in the literature. Another reason is the political pressure from labor, which was much stronger at that time than it is today. Union policies and strike threats were central to some of the key institutional changes of the Great Depression.

In other words, the stimulus policy as we know it today is more in line with the orthodox critique, and overall understanding, of Keynes' General Theory. The New Deal was of course Keynesian and was influenced by many of his ideas, but I would still maintain that there were other, more pressing political and economic forces which gave rise to New Deal policy.


Let's switch gears a bit to Keynes' inherent conservatism from a theoretical standpoint. This is how Leontief describes the homogeneity postulate:

Let us modify the set-up of the frictionless, lagless and 'homoegeneous' economic system by assuming that one demand or one supply curve of any single household or enterprise is not homogeneous... A discrepancy would arise incompatible with conditions of general equilibrium. This shows that in a frictionless system with at least one or more non-homoegeneous elements, the quantity of money ceases to be a 'neutral' factor. On the contrary, the equilibrium amount of every commodity or service produced or purchased by any household or business unit must be now considered to be a function of this quantity. ("The Fundamental Assumption of Mr. Keynes' Monetary Theory of Unemployment," QJE 51: 1 (1936): pg. 194, emphasis in the original)

For good measure, this is Keynes' reaction:

"Mr. Leontief is right, I think, in the distinction he draws between my attitude and that of the 'orthodox' theory to what he calls the 'homogeneity postulate'." And as for Leontief's call for empirical disproof of this postulate (i.e., the claim that what is at work here is primarily an empirical verification or disproof of an orthodox conclusion), "I should have thought... that there was abundant evidence from experience to contradict this postulate" ("The General Theory of Employment," QJE 1937, pg. 209).

In other words, Keynes is quite explicit that he agrees with Leontief's framing of the issue. There are no big ideological fights to be had here.

Leontief makes the point near the end of this small piece that the assumptions of the classical system are untouched by Keynes (pg. 197) -- the homogeneity postulate is derived from the assumptions, and so really what Keynes is arguing is that the empirical basis for one of the conclusions of the classical model of the real economy is wrong.

And this is what I've been saying about the weakness of Keynes' approach in several recent posts. The fundamental system of Keynes' theory is classical in nature -- forget about morality differences – they don’t exist if you accept the fundamental conclusions of a system. Keynes accepts the basic model but is looking to link investment climate changes to real economy issues. The result for the system? A misallocation of resources. The policy prescription, from Keynes himself near the end of the General Theory? Government control of capital flows.


Tuesday, August 10, 2010

so, if christie romer is out, then...

A nice story about Larry Summers. Thanks to 3Qd for this amazing piece. Fitzgerald quotes in an article economics? My my.

Bucket shops were once operated in many large American cities. Outfitted with a New York Stock Exchange ticker, each shop would post quotations as they came in. Customers, rather than buy stocks, would bet on the tape—for example, 20 shares of sugar at $100—and the shop would take a commission. If the stock went down, the customer lost. Customers could also short a stock. Edwin Lefèvre’s 1923 book, Reminiscences of a Stock Operator, vividly describes the turn-of-the-century bucket shop. They were partially blamed for the Panic of 1907, and states outlawed them soon after that. The New York Stock Exchange, where customers bought the underlying assets, continued to be legal.

The “synthetic” collateralized debt obligation is a revival, 100 years later, of the bucket shop. Could anyone defend the return of gambling shops? Well, yes, President Obama’s principal economic adviser, Lawrence Summers, did. In July 1998, as deputy treasury secretary in the Clinton administration, he explained to Congress that the derivative market “in just a few short years” had become “highly lucrative” and a “magnet for derivative business from around the world.” The market, Summers continued, is developed “on the basis of complex and fragile legal and legislative understandings.” It was true, he said, that “questions have been raised as to whether the derivatives market could exacerbate a large, sudden market decline.” But he didn’t think so, noting that the derivatives supported “higher investment and growth in living standards in the United States and around the world.” There was no reason for concern, he said, since:

the parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies and most of which are already subject to basic safety and soundness regulation under existing banking and securities laws.

Summers explained that the market was based on an “implicit consensus that the OTC [over the counter] derivatives market should be allowed to grow and evolve without deciding” the legal issues—i.e., whether derivatives violated laws prohibiting bucket shops, gambling, and trading in unregistered securities, not to mention doing so outside the regulated options exchanges, such as the Chicago Mercantile Exchange. “At the heart of that consensus has been a recognition that ‘swap’ transactions should not be regulated . . . whether or not a plausible legal argument could be made” that the contracts are “illegal and unenforceable,” Summers said.

Sunday, August 8, 2010

money quote of the week

From "Everyman's Financial Meltdown" By Ron Chernow, 22 October 2009 NYTimes Op-Ed:

New Deal financial reformers were fortunate that the crash had followed the satisfying script of a morality play, with sin and repentance followed by redemption. The wicked ways of Wall Street in the ’20s could be comfortably told in a fireside chat. Franklin Roosevelt had a bunch of rich rascals to chastise — unscrupulous individuals rather than irresponsible institutions, as in our own recent decline. The blatant stock market abuses were comprehensible to ordinary citizens, quite unlike the exotic credit derivatives and mortgage-backed securities that baffle us today. And the Great Depression that followed the 1929 crash fostered a climate for reform that has proven hard to replicate.

However severe, our current predicament seems mild compared to the calamitous unemployment of the early 1930s. Hence, average Americans, mystified by the complexities of finance today, still await a new season of financial reform.

Friday, August 6, 2010

economic possibilities for our great-great-great-grandchildren?

My jaw dropped when I read this Krugman post from earlier today:

Christie Romer is something of an expert on the Depression. She wrote her dissertation on it. Here is some insider info about the debates circling policy circles at the time of the ARRA, a quote from the above link I found particularly astounding. But really, anyone interested in the historical connections here needs to read the above link:
There were sound arguments why the $1.2-trillion figure was too high. First, Emanuel and the legislative-affairs team thought that it would be impossible to move legislation of that size, and dismissed the idea out of hand. Congress was “a big constraint,” Axelrod said. “If we asked for $1.2 trillion, it probably would have created such a case of sticker shock that the system would have locked up there.” He pointed east, toward Capitol Hill. “And the world was watching us, the market was watching us. If we failed to produce a stimulus bill, that in and of itself could have had deleterious effects.”
Really, really? Are we "all Keynesians now"? Or has something fundamental to American capitalism changed in the last 20 or 30 years to cause this sort of these baseless claims for "rapid reform" and "fiscal austerity", terrible politicking? And what about the simple fact that nobody thought to consider the historical evidence seriously? I guess I shouldn't be surprised on that point, but if an expert on the GD is telling you to do something...

NYTimes articles from the 1930s, speeches from Hoover and other naysayers. decried Roosevelt as a socialist, suggesting readers "look over to Russia" for a comparable figure of pro-government might. And the guy STILL had remarkable support, across the board, in all three depression-era elections.


Sunday, August 1, 2010

sunday morning economic history links

Robert Shiller, Yale research economist perhaps best known for his work on investment theory (more recently, his writings on the causes of the financial crisis), writes about historical inspirations for new jobs programs here. (Link thanks to Tyler Cowen MarginalRevolution.) In commenting on the article, Cowen references the Davis-Bacon Act: passed in 1931, Davis-Bacon ensured that government jobs programs use the prevailing market wage when establishing jobs projects in communities.

One particular quote I liked, the old "government can internalize externalities" argument:

Consider one of the most applauded of Roosevelt’s programs, the Civilian Conservation Corps, from 1933 to 1942. The program was open to young men, initially those 18 to 25, a group that was quite vulnerable economically. The C.C.C. emphasized labor-intensive projects like planting trees.

The public appreciated the tree planting because the projects addressed big problems that had been ignored. Major dust storms in and around Oklahoma raged from 1930 to 1936, denuding whole regions of agricultural land. The storms were vivid evidence of an externality that environmentalists had warned about for years, to little avail. Unregulated farming and lumbering had allowed pervasive soil erosion.

Aside from the environmental benefits, the C.C.C. encouraged a sense of camaraderie, taught young men new skills and gave its workers a sense of participation in something historic.

I don't know why jobs programs aren't simply passed right now. I don't know why, for instance, we just use tax credits for employers to hire. As Shiller suggests, the capital is certainly there, slowly rusting away. Job openings are apparently up. I guess we should remind ourselves that there were more "important" things to take care of -- bailing out the financial system (both with direct channeling of public funds as well as taking over the bad assets) being the most important. And now with midterm elections approaching, it's not likely anything will be passed for a while . In a recent speech, Christina Romer (Chair of the CEA) urged Congress to act on the "several" jobs bills currently floating around -- but it's not likely anyone is going to budge.

Moving toward a more relaxing (only because it's almost purely academic) issue, the Boston Globe Ideas blog discusses Michael Valeri's views on the historical origins of American capitalism. (This article is thanks to 3 Quarks Daily.)

Valeri is a church historian who studied how religious groups shifted toward a more positive view of the market in the late seventeenth century England as a means of maintaining community. I thought the quotes at the end are particularly relevant for economists. I'll end with them. Enjoy!

IDEAS: Your book comes out at an interesting moment for America’s relationship with free-market economics--to a lot of people, it looks like everyone in the financial markets has been behaving in defiance of the broader interests of the society.

VALERI: I asked a hedge fund manager I know if he had said to the traders described in [Michael Lewis’s] ”The Big Short,” ”What you’re doing will result in huge financial calamity, unemployment, people losing their homes--isn’t that socially irresponsible?”, what would they have said? He said, ”Their response would be, ’that doesn’t matter, that’s not my concern. My job is to make as much money as I possibly can.’”

My book shows the people who built the capitalist system did not think like that. The people who built the market economy had a whole cluster of deep collective loyalties and moral convictions.

IDEAS: How do economists react to your ideas?

VALERI: They basically say, ”Well that can’t be. People are motivated by rational interests.” My message to them is you’re lacking historical consciousness. You’re not being honest with the way the whole market was envisioned and created and put in place. You’re making a lot of false assumptions that the market is a natural order, when it is a cultural creation. Which explains why economic reality confounds economic theory.