Saturday, February 27, 2016

"Bishop Berkeley wrote some of the shrewdest essays on these subjects [politico-economic ideas] available in his time." -- J.M. Keynes
Or ever?

Friday, February 26, 2016


The first I heard of Friedman's numbers, I ignored them as a rosy scenario projection of trends-with-benefits: add up all the best outcomes of the positives and ignore any potential negatives. This kind of promotional rhetoric happens all the time in economics -- not just GOP/Laffer/voodoo economics, either.

Case in point the built-in mechanism in Robert Solow's 1973 "Is the End of the World at Hand" takedown of the Limits to Growth argument. I mention that one because I prescribe it as a reading for my Labour and the Environment course. It exemplifies the "oh, never mind those externalities -- they are incidental, we'll just internalize 'em" view that predominates in mainstream environmental economics. "Internalizing the externalities" is shorthand for "then a miracle occurs" step two in the famous New Yorker cartoon. Nothing new here.

It is the Mutual Assured Destruction response of Krugman and the Gang of Four that interests me. That wasn't about Friedman's pollyanna analysis; it was about intimidating and silencing those who are not authorized to commit the kind of "then a miracle occurs" step that the accredited authorities take as a matter of privilege.

"How DARE someone commit that SIN without OUR permission!"

When the same kinds of criticisms are directed at mainstream economics by so-called heterodox critics, they are ignored, brushed off with an "all models are wrong" shrug or responded to with a shitstorm of ad hominem derision aimed at the unqualified simpletons raising the objections.

One possible positive outcome of the Friedman/Krugman Gang of Four affair is that it brings out in the open the partisan hypocrisy that revolves around who has license to use the then-a-miracle-occurs step and who doesn't.
The authoritative word demands that we acknowledge it, that we make it our own; it binds us, quite independent of any power it might have to persuade us internally; we encounter it with its authority already fused to it. The authoritative word is located in a distanced zone, organically connected with a past that is felt to be hierarchically higher. It is, so to speak, the word of the fathers. Its authority was already acknowledged in the past. It is a prior discourse. It is therefore not a question of choosing it from among other possible discourses that are its equal. It is given (it sounds) in lofty spheres, not those of familiar contact. Its language is a special (as it were, hieratic) language. It can be profaned. It is akin to taboo, i.e., a name that must not be taken in vain. -- Mikhail Bakhtin, The Dialogic Imagination

Monday, February 22, 2016

Krugman, the Gang of Four and the NAIRU Straitjacket

G. Friedman v. M. Friedman

Krugman and the CEA Gang of Four former chairs don't come right out and say it but G. Friedman's projections are implausible because... "NAIRU!"

um... um... um...

Two points on that.

First is Dean Baker's post about the latest Economic Report of the President's "insight into the question of how fast the economy can grow, and more importantly how low the unemployment rate can go."
Economists have long held the view that lower rates of unemployment would be associated with rising rates of inflation and vice versa. When the Federal Reserve Board decides to raise interest rates to slow the economy it is based on the belief that unemployment is falling to a level that would be associated with a rising rate of inflation. 
Most economists now put the unemployment rate at which inflation starts to rise somewhere near the current 4.9 percent rate. (This is called the non-accelerating inflation rate of unemployment or NAIRU.) So does the ERP. But its analysis suggests a somewhat different story.
Second is Jamie Galbraith's 1997 -- that's almost 20 years ago -- Journal of Economic Perspectives article, "Time to ditch the NAIRU"
First, the theoretical case for the natural rate is not compelling. Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial.
G. Friedman's projections may well be wrong. But the argument that they are "implausible" is based on uncompelling theory, weak empirical evidence, embarrassing estimates and "a guide to policy [that] has major costs and negligible benefits."

But, hey, you can't criticize the top wonks if the they don't come right out and say it.

UPDATE: John T. Harvey writes, at Forbes:
In the words of Christina Romer, former chair of the Council of Economic Advisors under Barack Obama: 
"Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment*, at which the economy could stay forever."
*Often referred to as full employment? War is Peace. Freedom is Slavery. Ignorance is Strength. NAIRU is full employment.

Saturday, February 20, 2016

First they ignore you. Then they ridicule you...

And then they attack you and want to burn you. 
And last they forget you and attribute what you said to Gandhi, Stalin, Hitler, Abe Lincoln or Mark Twain.

Here, in full, is the address of Nicholas Klein to the third biennial convention of the Amalgamated Clothing Workers of America, May 15, 1918 (if you're in a hurry you can skip to the penultimate paragraph for the punch line):
Mr. President and Friends: I did not expect to be called upon at this very moment, at least, because of the presence of my good friend and colleague, who has just come to you from the City of Washington, with a message of encouragement,  I have no doubt. But I was asked when I approached the platform to say some few words of encouragement to the Schloss Brothers strikers of Baltimore. I can only say this, that much more than I could say this morning has already been demonstrated here on this platform and in this hall. The marching around of the men and the women this morning, and the standing up of the groups of delegates from the various cities, was indeed an inspiring spectacle to my mind. 
I believe that they have been on strike for five consecutive weeks. The strikers now realize what war means. And they also realize no doubt what Sherman said about war, because, my friends, a strike is a war, the two contending forces fighting like separate armies, each for its share of the spoils in this world today. 
The speaker this morning, the Chairman or the co-worker of Baltimore, said that a settlement was about to be had, and he expected to announce before the adjournment of your convention a settlement of this strike. My friends, I hope that is true. I hope that the Schloss Brothers strikers are going to win a splendid victory! (Applause.) 
There never has been such a wonderful opportunity for labor as presents itself this very moment. But, my friends, I have in mind this, and I say this to the strikers and I say this to the delegates. Labor just now is in the flower of its manhood. Just like this beautiful spring day, when the buds are beginning to open, so labor is coming into its own. But, my friends, that is due in great measure not so much to your stand either as workingmen or working-women, but to the peculiar economic status which has been brought about by the war. And I say to you, my friends, that perhaps after this war— and that is not so far off—a chance will come to you strikers, and to you workers, to show not by applause, but by action, how much per cent. you feel for organized labor. Because, my friends, after this war there will be a great unemployment problem. The munition plants will be closed and useless, and millions of munition workers will be thrown out upon the market. And then the time will come to show whether you strikers and you workers believe one hundred per cent. for organized labor or only 35 per cent., because, my friends, my good friend is he who is with me when the storms are beating, when I am hungry, when I have no money, when everybody is spitting on me, when I am in jail; and then, when a man comes to me and says, "I am with you; have courage; I'm your friend!" that man is my brother—that man is two hundred per cent., because that man is not a sunshine friend. Sunshine friends organized labor can get now. Sunshine friends organized labor can get when it is victorious, when it is on top. But the true test will come to you, strikers, and to you workers, in just a short time. To you strikers, who have been holding out five weeks, I may say a word of courage, and that is this: When you go into the Amalgamated Clothing Workers of America, you are going into a real organized Union, not a bosses' union. You are going into a union made up of those who have ideals, of those who believe in you, of those who are working for you, of those who are using every energy and every effort, not for politics, but to make it better for you in the shop, not because of a label, but because you are workers and you produce all the wealth.  
And I say to you, stick to that Union. That Union means just what it says. It is a Union of organized forces in America in the needle trades. 
So, my friends, without taking up any more time, let me say to you, and without being pessimistic, that there will be evil days coming. And they are not so far off. I wonder how many of the membership of New York and Chicago and all over the country are so solidified and will stick to the Union, to the Amalgamated, when the time comes— when the call comes, and you are put to the test. Will you be a real soldier in a grand army of labor, or will you be one of those stragglers who only come in to get two dollars or more wages per week? That is going to be the great problem. 
And the education of your membership now, the solidifying of your forces now, the making of your lines strong now, my friends, is the big, big question. and it can be done—anything can be done if a Union of one hundred thousand members can be organized in three years like has been so wonderfully done here by your leaders and by your officers and your membership, my friends, anything is possible. Education is possible, and the winning of strikes is possible. 
Let me close just now by giving you a little story that I have given you once before. I close by telling you the story, because I think it explains better than anything else, at this time, the great possibilities which can come to labor. There is a story told about the making of the first railway. There was an old man, it is said, whose name was Stevenson [sic: should be Stephenson], who made the first locomotive. You know, just like in the labor movement they said locomotives were impossible. You had to have horses or cattle to pull a train; that nothing would go without something being attached to it. There would be no locomotion. 
And when old man Stevenson proposed a train—something to be run without the aid of horses or oxen, he was ridiculed. One day a test was made, and they laid two pieces of wood and upon these two pieces of wood they placed some thin sheets of metal, and upon that crude arrangement was placed the first locomotive. 
And it is said in this story that thousands of people were out to see the first test of that locomotive, and of course the people all shouted, and pointed to their heads, and said the man was crazy, and they said the locomotive was out of question; it was impossible, and the crowd yelled out: “You old foggy fool! You can‘t do it! You can‘t do it!” And the same everywhere. The old man was in the cab, and somebody fired a pistol and the signal was given. He pulled the throttle open and the engine shot out. and in their amazement the crowd, not knowing how to answer to that argument, yelled out: “ You old fool! You can’t stop it! You can't stop it! You can't stop it!" (Applause.) 
And my friends, in this story you have a history of this entire movement. First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you. And that is what is going to happen to the Amalgamated Clothing Workers at America. . . . . . . 
And I say, courage to the strikers, and courage to the delegates, because great times are coming, stressful days are here, and I hope your hearts will be strong, and I hope you will be one hundred per cent. union when it comes! (Great applause.) 

Friday, February 19, 2016

Alan Krueger and the "Environmental Kuznets Curve."

In 1994 Krueger -- one of the former CEA chairs who signed the Sanders letter -- and Gene Grossman published a paper titled "Economic Growth and the Environment." They studied four kinds of environment pollution and the countries' per capita income. They found "no evidence that environmental quality deteriorates steadily with economic growth. Rather, for most indicators, economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement."

This finding subsequently became known as the "Environmental Kuznets Curve" by analogy with the Simon Kuznets's finding, once upon a time, of income inequality first rising with economic growth and then subsequently decreasing as growth continues. Ask Thomas Piketty about the robustness of that empirical theory.

A couple of years later, David Stern and associates published a critique of the Environmental Kuznets Curve theory. They pointed out that the inverted U shape relationship between environmental degradation and economic growth depends on the unrealistic assumptions that there is "no feedback from the quality of the environment to production possibilities" and "trade has a neutral effect on environmental degradation." Furthermore, the inference from some studies "that further development will reduce environmental degradation is dependent on the assumption that world per capita income is normally distributed when in fact median income is far below mean income."

This is not to disparage Krueger and Grossman's research or their findings but to point out that the implications of those findings were subsequently blown out of proportion by people who ignored the study's limitations. That enthusiasm has fostered an industry of unwarranted EKC optimism. Again, ask Piketty how that Kuznets Curve thing is working out.

There does appear to be an inverted U curve for SOME pollutants. Other pollutants get exported by rich countries to poor countries -- see the infamous 1991 Summers/Lant Pritchett  memo on toxic waste for a sarcastic commentary on that potential. And, last but not least there is no Environmental Kuznets Curve for global greenhouse gas concentrations.

Nevertheless, wishful thinking based on the EKC concept perennially fuels optimism about the prospects for "decoupling" GHG emissions from economic growth. Some of the boosters of decoupling even talk about "stabilizing" GHG emissions at current levels while growth continues. The decoupling fantasy sidesteps the reality that massive reductions in emissions -- not just stabilization -- are required to stop the continued increase in atmospheric GHG concentrations.

Now Go Do That Voodoo That You Do So Well, Dr. Krugman

Varieties of Voodoo, by Paul Krugman, Commentary, NY Times:
America’s two big political parties are very different from each other... Republicans routinely engage in deep voodoo, making outlandish claims about the positive effects of tax cuts for the rich. Democrats tend to be cautious and careful about promising too much...
Sorry, but there’s just no way to justify this stuff.
It would do well to recall that it was Democrats who first parlayed vulgar Keynesianism into the voodoo of weaponized growthmanship. NSC-68 set out "economic growth" rationale for tripling arms spending, conceived by Truman's Council of Economic Advisers chair, Leon Keyserling:
...the necessary build-up could be accomplished without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product.
Of course that was two-thirds of a century ago. Nobody believes in such trickle-down arms build-up voodoo any more these days, do they? Except Paul Krugman:
Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks.
The day after he wrote the above, Professor Krugman welcomed Republicans' fondness for weaponized Keynesianism on the grounds that it would expose the hypocrisy of Wall Street's complaints that government spending undermines business confidence:
Once you concede that the government can act directly to create jobs, however, that whining loses much of its persuasive power -- so Keynesian economics must be rejected, except in those cases where it’s being used to defend lucrative contracts. 
So I welcome the sudden upsurge in weaponized Keynesianism, which is revealing the reality behind our political debates.

Wednesday, February 17, 2016

Post Post Work Post

"Automation may mean a post-work society but we shouldn't be afraid," writes Paul Mason at the Guardian. Mason writes, "to properly unleash the automation revolution we will probably need a combination of a universal basic income, paid out of taxation, and an aggressive reduction of the official working day."

Don't get me wrong. The Sandwichman is all for aggressive reduction of working time. But not because magical robots are going to usher in a Utopian (or dystopian) post-work society.

Let me tell you a secret: although machines are used to produce things, they are not about producing things. They are about power -- the power of one human being with a will over other human beings with wills. Exchange value is a manifestation of this power relationship.

Twenty years ago, George Caffentzis explained "Why Machines Cannot Create Value." His essay began, "Thirty years ago... generation was told by economists, sociologists, and futurologists to expect a society in which machines had taken over most repetitive and stressful tasks and the working day would be so reduced by mechanization that our existential problem would not be how to suffer through the working day but rather how to fill our leisure time.
Twenty years plus thirty years makes fifty years. It might as well be a hundred years or a hundred and fifty. Perhaps fifty years from now some thinker will be predicting that some as yet unheard of technology is about to usher in a post-work society. Don't believe it.

And no, it's not because supply creates its own demand or because technology creates more jobs than it destroys.
Why did the most sophisticated analysts of the last generation go wrong and why is there a still continual stream of texts to this day like Rifkin’s The End of Work, which see in technological innovations the promise of a new era of workerless production?
Caffentzis asked in his essay.

And why twenty years later does Paul Mason regurgitate the Rifkinesque fantasy? Caffentzis answers his own question with an examination and defense of "Marx's original claim that machines cannot produce value" and an update of that claim from the perspective of the late twentieth century. The essay is reprinted in In Letters of Blood and Fire, a 2013 anthology of Caffentzis's essays.

Caffentzis's explanation is erudite and probably redundant. Those who have misinterpreted Marx's argument by viewing it through an economistic lens, will presumably do the same to Caffentzis's defence of Marx.

That is, when someone insists that wealth refers to a vault full of gold coins and/or a warehouse full of useful stuff, that person will no doubt presume that a labor theory of value refers to some sort of ratio between the coins and the stuff. Thus the critics attribute to Marx the position that Marx fundamentally critiqued. Kill the messenger.

Set aside the coins and the stuff, please. Wealth refers to, on the one hand, disposable time and on the other hand, command over the labor of other people. That is to say wealth expresses a power relationship between people -- always a precarious balance between autonomy and coercion. Precarious because "total power" over the other terminates the relationship by murdering the other.

Robots do what they do without autonomy or coercion. They do not desire time off from work "to seek recreation... to enjoy life... to improve the mind." That which they do not possess -- and do not want to possess -- cannot be taken from them. Robots are already dead. Thus they cannot create value in the sense of giving up a portion of their autonomy.

This perspective is difficult to grasp not because of any inherent complexity but because it lies outside the distorting frame in which wealth and value are conventionally viewed. But it bears repeating:

Machines cannot creates value because they are already dead.

Monday, February 15, 2016

Ted Cruz's Mendacity and Calumny are Breathtaking

Sunday, on Meet the Press, Senator Cruz had this to say:
By the way, the Senate's duty is to advise and consent. You know what? The Senate is advising right now. We're advising that a lame-duck president in an election year is not going to be able to tip the balance of the Supreme Court. 
That we're going to have an election, and if liberals are so confident that the American people want unlimited abortion on demand, want religious liberty torn down, want the Second Amendment taken away, want veterans' memorials torn down, want the crosses and stars of David sandblasted off of the tombstones of our fallen veterans, then go and make the case to the people. [emphasis added]
I don't think the American people want that. I'm very happy to take that case directly to Hillary Clinton, directly to Bernie Sanders. And I would note, look, how do we know Donald Trump's record on this is going to be bad? He has supported liberals for four decades: Jimmy Carter, John Kerry, Hillary Clinton, Chuck Schumer, Harry Reid. 
Anyone who cares about judges would not be supporting Harry Reid and Chuck Schumer and John Kerry and Hillary Clinton. And the consequence is, if either Hillary or Bernie or Donald Trump is the president, we will see the Second Amendment written out of the constitution. This is a basic question, who will defend our liberties?
That business about sandblasting crosses and stars of David off the tombstones of veterans may sound like just some crazy piece of paranoid fantasy rhetoric but it is worse than that. R. Ted Cruz was one of the petitioners in Salazar v. Buono, a case argued before the Supreme Court in October 2009. Elena Kagan, Solicitor General, was counsel on behalf of the petitioners.

Got that? The Obama administration was on R. Ted Cruz's side, seeking to NOT tear down a veteran's memorial in accordance with a lower court injunction that the Bush administration had not appealed.

The life cycle of the T. cruzi parasite 

Sunday, February 14, 2016

What Will Humans Do?

The Guardian asks "Would you bet against sex robots? AI 'could leave half of world unemployed'":
Machines could put more than half the world’s population out of a job in the next 30 years, according to a computer scientist who said on Saturday that artificial intelligence’s threat to the economy should not be understated. 
Expert Moshe Vardi told the American Association for the Advancement of Science (AAAS): "We are approaching a time when machines will be able to outperform humans at almost any task. 
"I believe that society needs to confront this question before it is upon us: if machines are capable of doing almost any work humans can do, what will humans do?"
Given the article's salacious headline, one can well imagine what the humans would be doing. While half the humans are kept busy servicing the sex robots, economists will be fully employed reassuring the other half that supply creates its own demand, technology creates more jobs than it destroys and there is not a fixed amount of work to be done.

The amount of work to be done is admittedly not fixed but supply does not "create its own demand." Say's Law is neither Say's nor is it a law. Meanwhile, there is only so much cheap and cheerful energy to go around and a certain quantity of atmosphere to accumulate carbon dioxide in.

Fifteen years before Jean-Baptiste Say's birth, in Reflections on the Expediency of a Law for the Naturalization of Foreign Protestants, Josiah Tucker, Rector of St. Stephen's in Bristol and Chaplain to the Right Reverend the Lord Bishop of Bristol, asked:
Whether Sir Josiah Child did not call it a VULGAR ERROR to say, We have more Hands than we can employ? Whether he was a Judge of Trade? And Whether it is not an infallible Maxim, That one Man's Labour creates Employment for another?"
The relentless questioning of the "Important Queries occasioned by The Rejection of the late Naturalization Bill," in Tucker's Reflections, made the tract unusual but not unique in eighteenth century writings on political economy. In 1736, George Berkeley published the 895-question tract, The Querist. The significance of this interrogative genre was noted in an intriguing analysis by George Caffentzis, "Querying the Querist," in his Exciting the Industry of Mankind: George Berkeley’s Philosophy of Money.

Caffentzis points out that Berkeley was a master of elenchus, which he practiced daily. In a footnote, Caffentzis cites Peter Walmsley's discussion of elenchus in Berkeley's work. Walmsley offers the following explanation of the exercise:
For the ancients, elenchus was primarily an exercise for students in logic and definition. Its technique was developed in the teaching practices of Socrates and the sophists, and its rules were later laid down by Aristotle at the Academy. These are, briefly, as follows. One student, who accepts the role of answerer, states a thesis. Another then attempts to refute this thesis, not by direct argument or evidence, but by asking a series of simple questions. To each question the answerer may only reply 'yes' or 'no'. The questioner's aim is to force the answerer to contradict his initial statement. This idiosyncratic form of debate entails several constraints. The initial thesis must be of a form that permits analysis: a maxim or a definition rather than a plain statement of fact. … Similarly, the progress of elenctic dialogue depends on the answerer's ability to resist the temptation to qualify his answers. In the Protagoras, for example, Socrates strives in vain to convince the sophist that short answers are called for. Finally, it is essential to successful elenchus that the answerer speak his mind. Plato shows how the dispute can become mired when an evasive answerer, such as Euthydemus, pretends to hold ridiculous but consistent views, rather than admit self-contradiction. In the eyes of Plato and Aristotle such dishonest thinkers played not elenchus, but eristic, which term seemed to designate nothing but the disputants' failure to commit themselves to the pursuit of truth.
Is there a fixed Amount of Work to be done? Does Technology create more Jobs than it destroys? Does Supply create its own Demand? Is it not an infallible Maxim, That one Man's Labour creates Employment for another? The surprising answer to these questions -- or about them -- is that they are not stand-alone questions with stand-alone, indubitable answers. They function as elements in a sequence of questions, the purpose of which is to encourage the questioning of popular prejudices, not to impose the dogma of received wisdom.

The answers to the various questions are not uniformly positive or negative. Thus the phrasing, "is it not an infallible Maxim," can only be approached with suspicion.

Wednesday, February 10, 2016

War is the Health of the GDP

The headline of Tyler Cowen's Upshot piece, "The Lack of Major Wars May Be Hurting Economic Growth" is calculated to provoke controversy. Cowen's point, though, isn't that we need a war to boost the economy. As he concludes:
"Living in a largely peaceful world with 2 percent G.D.P. growth has some big advantages that you don't get with 4 percent growth and many more war deaths."
But there is an underlying logic to Cowen's reductio ad absurdum that I'm not sure he grasps completely. The national income accounts were designed with the idea of paying for war in mind. That actually might make sense during a time of war when you're trying to figure out how to pay for it. But it embeds a social accounting protocol that is incompatible with the absence of war. The predictable results are policies such as the Cold War rearmament based on the premise that arms spending will pay for itself by siphoning off revenues from the additional growth that the spending will stimulate. The Latin term for it is inflatio. Time to recycle a piece from three years ago:

Siphoning Off a Part of the Annual Increment of GNP

The lessons drawn from World War II by US policy makers and their advisers stand in stark contrast to those drawn from World War I by Stephen Leacock and prescribed by Keynes during the war. Where Leacock had seen the maintenance of industrial output despite vast withdrawals of manpower from the labor force as a sign of the redundancy of much of that labor force, Leon Keyserling, chairman of the Council of Economic Advisers under President Truman, viewed massive spending on armaments as a tonic to stimulate the expansion of economic activity. Keyserling went even further in his calculation of the economic benefits of the preparations for war. In his view, the increased economic activity could produce a "growth dividend" that could be "siphoned off" to pay for the arms. Rearmament would thus be a free lunch that would not only pay for itself but make a down payment on a bargain dinner. This reasoning underpinned National Security Council memorandum, NSC-68, written in 1950 by State Department analyst Paul Nitze. Keyserling supplied the economic vision underlying NSC-68, which represented a "a serious effort to develop a coherent strategy" in response to two distinct but interrelated problems: first, the obstacles to rebuilding an open system of world trade in which the US could sell its exports and second, containment of the Soviet military and political threat.

"With a high level of economic activity," the report assured, "the United States could soon attain a gross national product of $300 billion per year… Progress in this direction would permit, and might itself be aided by, a build up of the economic and military strength of the United States and the free world." The deficit financing of this military build up and subsequent effect of that spending on economic growth meant, in its author's opinion, that the rearmament could occur, "without a decrease in the national standard of living because the required resources could be obtained by siphoning off a part of the annual increment in the gross national product."

Approved months before the outbreak of the Korean War, NSC-68 recommended a massive rearmament program for the U.S. and Western Europe. "Leon Keyserling was very helpful when we wrote NSC-68," author Nitze admitted in a 1986 interview, "He was my principal adviser on the economic parts." Not only did Keyserling advise on the writing of document, but President Truman's special counsel, Charles Murphy called upon him to evaluate the document's economic feasibility. It is unclear whether either Murphy or Truman, were aware of Keyserling's dual role as both advocate and judge of the strategy. Never one to underestimate his own importance, Keyserling described his role as "the one who had introduced the fundamental new factor of the dynamics of economic growth. Now, as I say, I started this circa 1947…"

Because of limits to domestic purchasing power imposed by the market, stabilizing the U.S. economy in the post-war period required the expansion of foreign trade. Although the two goals of economic stabilization and Soviet containment were acknowledged as distinct in NSC-68, the document's rhetoric elevated the political-military conflict to top billing. The memorandum's drafters believed that rearmament could solve both problems while also being easier to sell politically. The economic dilemma arose out of Western Europe's fragile financial condition in the immediate post war period. Wartime devastation of productive capacity in Europe left in its wake immense inflationary pressures, as pent-up demand for goods could not be met by the constricted supply. Europe's international payments position was also weakened, giving rise to exchange controls and other barriers to international transactions in an effort to prevent capital flight.

Meanwhile, widespread conservative and protectionist political sentiment in the U.S. blocked a wholesale expansion of a Marshall Plan-type arrangement of foreign aid and easy credit. The Marshall Plan itself had been a brilliant success in providing a temporary solution to the dollar shortage in Europe. But European restructuring to new patterns of world trade required a long-term continuation of the effort. Changes were needed in European business practices, new institutions for investment planning, regional integration and co-ordination and overcoming of protectionist sentiment in the U.S.

NSC-68 was not based on a compelling analysis of the long-term needs of US capitalism. Instead, it produced politically marketable palliatives to several immediate and pressing problems. The document evaded the hard issues of the inherent weaknesses of liberal capitalism and the difficulty of establishing an open world economy. Instead, it opportunistically projected Western economic frailties onto Soviet military strength. That rhetoric, in Fred Block's opinion, was a short term expedient whose success in overcoming the structural economic problems would presumably render continued use of the Soviet bugbear unnecessary. While it may have made sense as an expedient, it was flawed in that it created an enduring institutional bias in favour of ongoing militarization of U.S. foreign policy. According to Block, "Rearmament became official policy largely because of the absence of coherent alternatives." But the strategy's success in the early 1950s cannot explain the continuing appeal and dominance of its rhetoric. Block argued that the implementation of NSC-68 established or reinforced three institutional structures – NATO, the military-industrial complex and political McCarthyism – that subsequently made it difficult for US policy makers to stray from the logic of militarization.

If the politics of NSC-68 were dubious, the theoretical status of its economic rationale was even more so. During World War II, as mentioned in a previous chapter, John Maynard Keynes had written to T.S. Eliot describing the full-employment policy by means of investment as first aid. It was, he explained, only one application of an intellectual theorem that also included wise consumption and working less. Keyserling's growth economics, however, abandoned any pretence to theory in favor of boosterism of growth, growth and more growth fueled by wasteful consumption and wasteful investment. Economic stimulus through rearmament strategy is best understood as a response to the political difficulties inherent in adopting a genuine full-employment policy, as they had been analyzed by Michal Kalecki in a 1942 Cambridge lecture published the following year as "Political Aspects of Full Employment."

Kalecki had argued that the economic feasibility of maintaining full employment through a policy of government spending was widely accepted by economists, with the exception of "'economic experts' closely connected with banking and industry." As long as there remained unused capacity of labor, production facilities and raw materials, government spending financed by borrowing could proceed without triggering inflation. The reasons for political opposition to a full employment policy, however, are three-fold. First, industrialists dislike government interference in the area of employment because it blunts the political threat – used to indirectly dictate government policy – of warning that one or another policy opposed by business will "undermine business confidence." Second, the scope for government investment is initially narrow – restricted to such facilities as schools, roads and hospitals – but continued pursuit of the policy of government spending would create pressure to expand government involvement into industries like transportation and public utilities that are currently the preserve of private investment. Subsidizing mass consumption is even more strongly scorned because it violates the fundamental moral principle, "that 'you shall earn your bread in sweat' – unless you happen to have private means." The long-term maintenance of full employment is most politically objectionable because it would lead to social and political changes in which the threat of dismissal from employment would cease to be an effective disciplinary measure. Thus, although a full employment strategy could increase profits, its undermining of factory discipline and political stability make it unpalatable to bankers and industrialists.

An exception to this rule of big business opposition to full employment occurs under fascism, where, "the state machinery is under the direct control of a partnership of big business with fascism" and "dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditures on armaments." Although this second aspect suggests parallels with NSC-68, there are fundamental differences between fascism and the economic rationale behind the Truman administration's Cold War rearmament strategy. As Kalecki pointed out, "in a democracy, one does not know what the next government will be like. Under fascism there is no next government." This clearly was not the case with NSC-68. Although the memorandum itself remained classified until 1975, its implementation following the outbreak of the Korean War revealed a policy logic that was clear enough to critics of the Truman administration.

Opposition to the rearmament as economic stimulus policy was readily forthcoming during the 1952 presidential election campaign. On the evening of September 23, 1952, General Dwight D. Eisenhower, the Republican nominee for President of the United States, was scheduled to deliver a campaign speech in Cleveland, Ohio. That night however, his running mate, Richard M. Nixon, gave his famous "Checkers" speech defending himself from charges that a political campaign fund established for him was improper. Instead of his originally scheduled address, whose topic was inflation and "false prosperity", Eisenhower substituted his reaction to Nixon's televised appearance. The text of Ike's unspoken speech, however, was published the next day in the Washington Post.

Eisenhower's speech was a sustained polemic expressly directed at the Truman administration policies conceived by Keyserling. Although Ike didn't name the economic policy's architect in the speech, he did the next best thing. He cited with regret the resignation of the Edwin G. Nourse, whom Keyserling succeeded as Chairman of the Council of Economic Advisors. To anyone familiar with Keyserling's conceptual role with regard to the economics of NSC-68, several passages in Ike's speech stand out as virtual indictments.
"The inflation we suffer is not an accident; it is a policy. It is not, as the Administration would have us believe some queer and deadly kind of economic bacteria breathed into the atmosphere by Soviet communism... The point and purpose of this policy I have already indicated: to fool the people with a deceptive prosperity. The method is very simple: to give more people more money that is worth less..."
Furthermore Eisenhower identified the mainspring of that inflationary policy as the production of armaments:
"There is in certain quarters the view that national prosperity depends on the production of armaments and that any reduction in arms output might bring on another recession. Does this mean, then that the continued failure of our foreign policy is the only way to pay for the failure of our fiscal policy? According to this way of thinking, the success of our foreign policy would mean a depression."
In contrast to the scorned Truman administration policy, Eisenhower cited Thomas Jefferson's praise of governmental frugality: "If we can prevent government from wasting the labors of the people under the pretense of taking care of them, they must become happy."

Tuesday, February 9, 2016

Exit Strategy? plus half a dozen or so years

M. King Hubbert, 1940:
By the year 1937 industrial production was again approaching and in some instances exceeding the previous all-time high in 1929. At this stage the spokesmen of business, still imbued with the doctrines of the economists concerning the efficacy of 'confidence' and apparently unaware that the government spending was the only important source for making up the deficit in the business budget, set up a hue and cry for the government to balance its budget. Promises to balance the budget were made and the excess of government expenditures over receipts was reduced from 4.8 billions of dollars in 1936 to 2.8 in 1937. The immediate consequence of this was the most drastic curtailment of industrial production yet known. Between September, 1937 and January, 1938--but 4 months--the volume of industrial production dropped by an amount which in the 1929 'crash' required the 20 months from October, 1929 to July, 1931.

Monday, February 1, 2016

Ownership,Trade and Equilibrium: Locke, Graunt and Gracian

"It is impossible that the primary law of nature is such that its violation is unavoidable. Yet, if the private interest of each person is the basis of that law, the law will inevitably be broken..." -- John Locke, Essays on the Law of Nature
Baltasar Gracian's Oráculo manual y arte de prudencia (1647), John Graunt's Natural and Political Observations made upon the Bills of Mortality (1662) and John Locke's Essays on the Law of Nature (1664) all appeared within the span of 17 years in the middle of the 17th century. Gracian bequeathed to economic discourse the philosophical concept of laissez faire, Graunt laid the foundations for quantitative social science, Locke unambiguously defined the natural law constraint that he later alluded to in the famous fifth chapter of his Second Treatise on Government, "Of Property."

"Is every man's own interest the basis of the law of nature?" Locke asked in the title of his eighth essay on the law of nature. "No," was his emphatic answer.

Why not? Because...
...when any man snatches for himself as much as he can, he takes away from another man’s heap the amount he adds to his own, and it is impossible for anyone to grow rich except at the expense of someone else.
Is that a zero-sum game Locke was referring to? Yep, because...
...surely no gain falls to you which does not involve somebody else's loss.
Because taking more than one's share, is to rob others of their share, Locke reiterated in "Of Property."

Locke was not alone among his contemporaries in positing a zero-sum contest. Graunt -- with possibly an assist from William Petty -- argued that putting beggars to work would only take work away from non-beggars:
…if there be but a certain proportion of work to be done; and that the same be already done by the not-Beggars; then to employ the Beggars about it, will but transfer the want from one hand to another…
There is only a certain proportion of work to be done because, Graunt maintains, "there is but a certain proportion of trade in the world..."

This idea that there is only a certain proportion of work to be done or certain proportion of trade in the world would come in for rebuke from Dorning Rasbotham some 118 years later:
There is, say they, a certain quantity of labour to be performed. ... The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not hemmed in by great walls, beyond which it cannot go.
Those who have listened to Sandwichman's rant over the years will recognize the above as the locus classicus of the "fixed amount of work" fallacy claim that David Frederick Schloss would eventually dub "Theory of the Lump of Labour." What I want to call attention to, though, is that the proponents of this fallacious theory were not ignorant poor people, shifty trade union agitators or vitriolic Luddites. They were the forefathers of political economic thought: John Locke, John Graunt and William Petty.

The identity of these zero sum proponents is significant, not because it lends prestige to the idea that there is a fixed amount of work but because of the idea's inextricable entanglement with the other contributions of these worthy gentlemen. Locke's vindication of private ownership of property is founded on and legitimated by his natural law philosophy. Rejecting that philosophy renders the subsequent rationale incoherent. The case against the adoption of Gracian's laissez faire and equilibrium by subsequent authors is more indirect but implicates the same premise of a closed system that when rejected, invalidates the conclusion.

The "obverse" of the lump of labor -- Say's law of markets -- relies fundamentally on equilibrium of supply and demand and on the sanctity of private property. Both principles must be discarded if the zero-sum, fixed amount of work, closed system is to be rejected.

Awareness of a fundamental anomaly in orthodox political economy keeps recurring -- Mill's recantation of the wages-fund doctrine, Keynes's repudiation of the "supply creates its own demand" dogma (after which it was supposed to have "sunk without trace"). John R. Commons succinctly identified the anomaly with the incongruous attributes of wealth, as defined by economists:
Going back over the economists from John Locke to the orthodox school of the present day, I found they always had a conflicting meaning of wealth, namely a material thing and the ownership of that thing. But ownership, at least in its modern meaning of intangible property, means power to restrict production on account of abundance while the material things arise from power to increase the abundance of things by production, even overproduction.
Ownership is thus opposed to abundance that escapes its grasp. Perhaps Locke was on to something after all when he observed that "it is impossible for anyone to grow rich except at the expense of someone else." But it is not a physical amount that the grasping individual steals "from another man's heap." It is instead a capability and productive potential that the wealthy monopolize and hoard. One of the ways the owners impose on everyone else is by propagating myths about the sanctity of private property, the self-adjusting character of the price system and the fallacy and futility of any attempt by anyone other than owners to regulate or restrict production on behalf of the wider community of non-owners.