A handy review of modern economic thought from Adam Smith, particularly useful in placing post-Keynesian thought in context. The most interesting chapters regard David Ricardo (comparative advantage and rent), Alfred Marshall (marginalism), and monetarism (including the recently passed Milton Friedman, which asserts that government’s best lever is the supply of capital in circulation). The public choice and rational expectations schools are presented as devoid of greater moral purpose. A bit too droll, but otherwise an excellent primer.
Economics
17. Bernanke, 21st Century Monetary Policy (25 August 2023)
Charts the course of the US Federal Reserve since the 1970s, highlight refinements prompted by the difficulties of operating at the lower bound of interest rates. Bernanke underlines the benefits of signaling and also macroprudential policy to address systemic instability. The celebrated economist seems not to have considered that his own successes may not be repeated by successors. Further, there is no principled assessment of where technocracy stops and democratic accountability takes over.
The Fed exists largely as founded in 1913 and reformed in 1935; it had failed to address the monetary side of financial stability, worsening the Depression. (Bernanke does not address Roosevelt’s fiscal policies). The 1951 Treasury-Fed Accord freed the latter of any financing responsibilities). The heart of the book focuses on inflation as it relates to unemployment (i.e., the Phillips curve), long-term decline in normal rate of interest (there is no natural rate of inflation since it reflects fiscal policy), and increased systemic instability.
In the 1970s, the Phillips curve was refined to segregate supply and demand shocks. Inflations having been tamed in the 1980s, financial disruption has since caused the major downturns, with credit-market failures generally worse than stock-market collapses.
Greenspan succeeded in risk management but was too involved in fiscal policy. The Global Financial Crisis was a classic bubble: a buildup in risky lending; loss of investor confidence in loans; runs on lenders by short-term funders; fire sales of trouble assets; and procyclical insolvencies. The difficulties of working at the lower bound of interest rates – a 1% reduction in the 10-year yield is equivalent to a 3% reduction in the Federal funds rate, thereby magnifying its stimulus – prompted the Fed to become lender of last resort: asset purchasing (quantitative easing) and related maneuvers.
Bernanke adjudges his own term as successful for introducing transparency and steerage (i.e., communications), paying closer attention to systemic stability, and introducing new policy tools (e.g., apart from purchasing assets, the need for ample lending reserves). The US entered the 2020 pandemic better prepared than 2008. Somewhat blithely, he rates Yellen highly.
The final quarter is given to emerging policy tools as well as the threats of populism (i.e., Trump), inequality, and so on. Apropos of the Fed’s cherished independence, Congressional oversight is hazing even though elsewhere the Fed is said to work for Congress and the president –mainly Trump – is the institution’s foe. Modern Monetary Theory is problematic not because ‘deficits aren’t important’ but as government spending crowds out private use of productive resources, productivity being limited: fiscal policy is responsive to politics whereas monetary policy, though blunt, is better insulated. Does risk taking always migrates to the least regulated part of the system?
25. Wapshott, Keynes and Hayek (3 Dec 2017)
The preeminent argument of 20th-century economics, regarding the political utility of marco- and microeconomics, took shape in the interwar rivalry between John Maynard Keynes and Friedrich Hayek. Keynes, a Cambridge don and Bloomsbury intimate, was a ‘public intellectual’ wile Hayek, an Austrian emigre who found a home at the London School of Economics, was a theorist who only later turned to polemics. Keynes held the economy could be managed, primarily on the demand side, and rejected conventional belief in the necessity for equilibrium between savings and investment. The 1936 publication his General Theory of Employment, Interest and Money transformed Western economic and political consensus, predominating through ~ 1980. Surprisingly, his rival made no reply, in contrast to his dogged challenges to Keynes’ earlier works. Hayek, defending the laissez-faire view of Alfred Marshall and Ludwig von Mises, contended that to manage demand is to manage prices, which is the individual’s role, and thus to court either inflation or contraction; further, when the stimulus is removed, increased consumption will collapse. The amount of money and speed of its movement is key to understanding an economic system. Yet improved ability to measure and calculate did not substitute for qualitative understanding: individual decisions can never be anticipated or planned. (In this respect, he agreed with Keynes that the economy rarely comes to rest, the classical equilibrium.) Keynes, later accused of being a socialist fellow traveler — not unfairly due to his Fabian associates — shrugged off planning as the route to totalitarianism, contending tyranny results from collective sociopolitical choice. Keynes began to recover ground with the 1949 founding of the libertarian Mount Pelerin society and his decamping for America. More important, at the University of Chicago, economists led by Milton Friedman, though accepting the macroeconomic premise of laissez-faire as an inadequate policy, embraced prices as core to understanding. Subsequent ‘freshwater’ economists determined inflation to be the main objective of public policy (unlike the ‘saltwater’ view of unemployment as paramount) and gave rise to supply-side economics embraced by Margaret Thatcher and Ronald Reagan. Moving faster than in the years of the Keynes-Hayek rivalry, the author sketches the decline of Keynesian economics over 1970-2000s. Ultimately, however, Wapshott’s history of ideas is a polemic in its own right: the Bush administration’s response to the Global Financial Crisis is portrayed as necessarily Keynesian, rather than the preliminary moves of an outgoing administration, and the last word is given by the Keynesian John Kenneth Galbraith against the now straw-man Hayek, without reference to the supply siders.
21. Kennedy, Rise and Fall of Great Powers (13 Dec 2018)
The rise and fall of leading nation-states is determined by the interplay of economics, technology, and military prowess. Expanding nations more easily support ever-rising costs of warfare; declining countries have to make fateful strategic choices. In the author’s multipolar framework, changes in trade patterns presage the outcomes of strategic conflicts, and so foreshadow the next political order. Individual leadership is less important because imperatives and choices are made in the context of Bismarck’s ‘stream of time’: strengths are relative. The outcome of warfare over 1450-1950 confirmed long-term economic shifts, often borne of new technology. Revised territorial order reflected redistribution, but peace did not freeze socioeconomic conditions.
Global powers tend to overspend on defense and underinvest in growth. Japan became a financial power (i.e., leading creditor nation) following its industrial rise: evidence – or the author – suggests the Asian country is most likely to supplant the ‘overstretched’ USA. The challenge to American longevity lies in defense commitments to overseas position obtained when it had a higher share of global GDP, a better balance of payments, and less debt. The most serious threat hegemons face is failure to adjust to change.
In the 15th century, European states trailed the Asian dynasties. War shaped its rising powers; distributed economic growth made it impossible to suppress all of them; the key economic development was the long-range ship. Within Europe itself, states were always spending to overpower another. Spain lacked manpower, grew slowly (aside from New World bullion), and suffered precarious finances. It was overstretched. French aspirations were checked by the balance of power, most importantly by result of the War of Spanish Succession, and backward finance. Following the Diplomatic Revolution of 1753, which crystallized England’s balance of power strategy, British mercantile prowess and ability to borrow fueled its win in the Seven Years War (one of seven with France over 1689-1815), and thus hegemony to 1945.
In the Victorian era, Britain’s industrial might was less oriented to the military than any era since the Stuarts. Further, it had no appetite for Continental interventions. Its power owed to its navy and colonies – productive investments – as well as the City of London. Despite the rise of late 19th-century US and Germany industry as well as Prussian military reform, the UK’s position circa 1914 was not so weak as often portrayed. Alliance diplomacy encouraged the drift to World War I, and prevented a quick resolution. The series of UK diplomatic concessions to the US (e.g., fisheries, the Panama Canal, Alaska) overturned conventional expectations of ‘natural’ Anglo-American hostility, and so won the UK a vital ally.
Kennedy observes the Versailles and peacetime politics were reshaped by ideology (Wilson and Lenin), one of the few nods to political ideas. The League didn’t deter aggressors but confused the democracies. Now comprising 27 countries, European consensus on colonies collapsed. Russia is seen as reactive instead of acquisitive in search of a ‘near abroad’ buffer. In the postwar era, the US rise was fueled by commanding share of world GDP, substantial tech innovation, a military proven in Europe and Asia, plus the atomic bomb. But Russia quickly erased the nuclear gap and America’s relative lead shrank after the 1960s: Vietnam, Iran, etc. indicate overstretch. The author applauds Kissinger for recognizing limits of American foreign policy; Nixon’s China overture changed the correlation of forces. Deng wisely recognized peace is necessary for the ‘four modernizations’: agriculture, industry, science, military. Kennedy sees less hope for Soviet Russia but suggests it will be hard to displace its Communist political system. Japanese central planning plus its lack of military commitments makes it the natural successor to the USA.
More like deterministic political science than long-view history, Kennedy’s work overlooks that power is a wasting asset, itself to be used as if an investment; that ideas have consequences, as fuel for socioeconomic events; and relative status is not a straight line – opportunities can be missed. Of course, he failed to anticipate two decades of Japanese stagnation due to real estate collapse, the fall of Soviet
23. Buchholz, New Ideas from Dead Economists (25 December 2021)
A laymen’s portraiture of the giants of classical economy, coming to dwell on Keynes’ 20th-century predominance. Since Smith, the field has sought for a Newtonian (i.e., physical or cause-and-effect) set of laws governing socioeconomic activity but instead settled on a more Darwinian (biological or dialectical) approach, premised on any number of phenomena.
• Ricardo: specialization is determined by whomever has the lowest opportunity cost. Therefore, prudential reshoring is simply a revaluation of cost – it cannot be left to agency bust must be principally viewed (but see also ‘transfer earnings’)
• Mill: positive economics describes (predicts) the world as it works, as it should normatively govern a set of morals or ethics. When otherwise, there is need for reform. Following Burke, he sought for equality of opportunity; equally so, it is government’s obligation to demonstrate the likelihood of an intervention’s improving matters.
• Marx: economic changes are cause-and-effect, social changes (in the so-called superstructure) are ideological and potentially revolutionary. The Marxist focus on labor value shortchanges capital including ideas (entrepreneurship) and delayed gratification, which are not free goods
• Marshall: marginalism asserts the past is over, what counts is what’s nest. Microeconomics hold actors take new steps only if benefits outweigh the costs: man is not a constant. Look at one factor at a time, impound the rest
• ‘Old’ institutionalists hold that large (private) firms belied marginalism. ‘New’ institutionalists use Marshall’s neoclassical tools to study how firms influence society. For example, does efficiency equate to justice? The latter also identified the principal agency problem
• Keynes: when consumers boost savings and investment, so will merchants, thus decelerating the economy in times of crisis. Say’s Law (production creates demand) is false. He was, however, a capitalist: not robber barons but national actors cause slumps. Keynes’ multiplier theory (government pump priming) is contemporary economic evidence of progressive belief in expertise.
• Monetarism holds velocity is more stable than in Keynes’ view, so money supply is government’s foremost tool. Government spending does not influence price unless money also changes. In the 1980s and afterward, saving reduced velocity, as did inflation’s fall. Friedman (not Hayek, who gets little attention) is emblematic
• Public choice: government too is self-interested. Keynes seemed to be aware progressivism undermines popular sovereignty but offered no answer to the principal-agency problem. Instead he felt the bureaucrats meant well.
• Feldstein, Boskin, Krugman, Summers et al focus on aggregate supply, coalescing around government and productivity, toward improved living standards, which requires investment, which entails tuning the tax regime
• Deduction seeks conclusion in incontrovertible laws; induction in recognizing more limited patterns and unprovable hypotheses that lead to predictive models. Put another way, the more or the more importance that can be attributed to law, the more deduction pertains; the less, the more induction holds. Relatedly, Friedman observed the test of a model is its predictive value not its ex ante accuracy
The author touches on ‘rational expectations’, a somewhat nihilist approach, and behavioralism; the book is too early for modern monetary theory. Using a droll style, large free of technical terms (and no charts), the author often projects a protagonist’s conclusions forward to the 1980s and 90s.