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Economic crisis

The following has been in the back of my mind during what now appears to be the whole of last year. In April 2014 Mario Monti gave an interview to Marc Peeperkorn in the Dutch newspaper Volkskrant, p10-13, “The man who saved Europe” (Dutch original: “De man die Europa redde“).

Mario Monti is not to be confused with Mario Draghi – especially where they collaborated on a rather dangerous trick.

Mario Monti was European Commissioner in 1995-2004 and Prime Minister of Italy in 2011-2013. Mario Draghi was Governor of the Bank of Italy in 2005-2011 and is President of the European Central Bank (ECB) since 2011. They performed their trick in 2012.

Mario Monti (left) and Mario Draphi (right) (Source: wikimedia commons)

Mario Monti (left) and Mario Draphi (right) (Source: wikimedia commons)

The trick is explained in the interview:

Monti: “During the European Summit in June 2012 I have used my full negotiation power – including a threat with a veto – to get approval for a seemingly boring paragraph. At four o’clock in the morning it had the signatures of all leaders, including Merkel, my good friend Rutte, and the Finish Prime Minister Katainen, you can say the monetary fire power from Northern Europe.

The paragraph mentioned curtly that countries in the Eurozone who did their homework, like Italy, were ensured of support from the European Central Bank. That statement – at the highest political level – did not impress the markets, since the leaders have authority but no money. A month later ECB-president Draghi came with his famous declaration: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” [verbatim, July 26 2012] That calmed the markets in one single stroke because Draghi has money. Draghi could say that because he had the political support from the leaders. Thanks to me, thanks to my position at the negotiation table. A half year sooner Draghi would have been devoured by the German monetary hawks, saying such a thing.”

Peeperkorn: “Draghi and Monti, thus it was an Italian set-up ?”

Monti (“laughing”): “See it as the Italian contribution to saving of the euro.”

As a trick, it deserves a compliment, and it would be difficult to argue convincingly that the European Summit has been misled in a significant way.

However, the trick comes with a price. This is that structural reform of the euro has not been put on the table.

The Eurozone leadership has been kept in the mental frame of muddling through, while instead it would have been useful to reconsider the monetary mechanism. The current set-up of the euro works like the gold standard, while our economies require the benefits of fiat money.

See my paper Money as gold versus money as water.

European leaders are not trained in economics and may not fully understand what has been happening. The two Marios however should understand. My proposal is that they meet again and discuss how their quick fix requires a follow up on structural reform.

Addendum March 29: Ambrose Evans-Pritchard in Venetian cunning of Draghi-Monti masterplan may save euro for now (The Telegraph August 5 2012) states what I tend to agree on:

  • “Just to be clear, I do not “support” the Draghi plan. It perpetuates a failed monetary union.”
  • “Yet it is churlish to deny that the two Marios have pulled off a feat of statecraft. They have wrested control of the ECB from Gold Standard zealots.”
  • “Europe remains a political minefield, but the risk of a global deflationary slump has dropped a notch. Hats off to the Italians.”

However, Evans-Pritchard seems to have no alternative other than a return to national currencies, and my paper suggests that the euro could survive with core national sovereignty provided that each nation adopts its own national Economic Supreme Court.

Economic paper: "Money as gold versus money as water" (RWER 2013)

Economic paper: “Money as gold versus money as water” (2013)

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The Dutch uncontrolled hate & rage about the new Greek crisis with Tsipras & Varoufakis may require an explanation.

But first remember Keynes.

Keynes on loans and debt

J.M. Keynes gave the argument twice:

  • After World War 1: that victors and creditors should allow Germany to recover.
  • After World War 2: that the USA as victor and creditor (also of the UK) should give easy terms to the rest of the world, to allow for their investments and exports.

Thus there is not only the responsibility of the debtor. There is also the responsibility of the creditor. The latter responsibility might even be larger since the creditor has more leeway.

The Press Conference of January 30 2015

Jeroen Dijsselbloem was mortally insulted when Yanis Varoufakis killed the Troika. Dijsselbloem had gone to talk and help in Dutch Polder Model fashion. His attitude was Calvinistic, as the Dutch tend to be. Varoufakis slammed this door shut, and they departed in ice.

Helena Smith for The Guardian:

“Send off for Joren Dijsselbloem ended with incredible stand-off as Varoufakis socked him one over the troika. The Dutchman looked enraged, bending forward to whisper something in Varoufakis’ ear to which the Greek finance minister did not respond. Greek finance ministry staff standing behind me said “Oh my God.”” (The Guardian, 2015-01-30)

Varoufakis & Dijsselbloem Press Conference, Jan 30 2015 ((c) Aris Messinis, AFP)

Varoufakis & Dijsselbloem Press Conference, Jan 30 2015 ((c) Aris Messinis, AFP)

To understand this:

  • This crisis concerns money, which is an issue that is dear to the Dutch heart and mind.
  • The Dutch find themselves exposed as greedy fools who have lent money to Greece, while they should have seen that it wouldn’t come back.
  • Holland is Calvinistic, with sin & eternal damnation, and looking elsewhere to avoid responsibility. (Catholics in Holland are still rather Calvinistic, and differ from those in Southern Europe or the Orthodox Greeks.)
  • Holland is a rather small country, and the natural temptation is to pick on an even smaller country.
  • Germany and Holland with their surpluses on the external account are a prime cause for the crisis, but Holland will not criticise Germany, let alone exert self-criticism.
  • The directorate of the Dutch Central Planning Bureau (CPB) censors the proper analysis since 1990, so that the Dutch public and young policy makers like Dijsselbloem have been trained for at least 25 years to see the world in a distorted mirror.
Jean-Claude Juncker stands with empty hands

Jean-Claude Juncker felt forced to embrace and hold hands with Alexis Tsipras, to show that the EU still loves Greece. However, Juncker doesn’t offer much. He stands with empty hands, so to say. The Tsipras-Varoufakis approach is fickle and incompetent at heart, see the earlier discussion.

The proper resolution must be looked for in Northern Europe, and Holland in particular.

Juncker takes the initiative to hold hands with Tsipras (Source: screenshot)

Juncker takes the initiative to hold hands with Tsipras (Source: screenshot)

Hence, let us look deeper into the issue of the Dutch uncontrolled hate & rage about Greece.

Dijsselbloem seemed rather controlled in his rage, but beware of appearances

Just to be sure:

  • Dutch behaviour and statements might seem to be controlled and polite. Do not be deceived.
  • Controlled hate & rage are properly defined as: both dealing with the emotion and maintaining one’s logical capacities.
  • The Dutch hate & rage show from the inability to apply logic and common sense & decency.
  • Dutch upbringing of children is targeted at conformity. This means the sublimation of emotions into the illogical conventions of the day.
  • Thus hate & rage are not shown, and they neither are a cause to think again and to analyse their origin.
  • Logic and analysis may be a cause for non-conformity and thus must be avoided.
  • We might also say that the Dutch hate & rage are repressed, but this neglects the consequences of such repression. It is better to say that they are uncontrolled, since this causes an awareness of such consequences.
  • I am just a tentative psychologist in suggesting this diagnosis. See my earlier suggestion how to apply social psychology to economics. The master is Daniel Kahneman with prospect theory. The value of a gain may be less than the regret of a loss.

One of the Dutch parameters thus is:

The value of a logical insight may be less that the regret of not conforming to social convention.

The young Dutch fail in holding their own elders accountable

The proper response of the younger Dutch generation would be to hold their elder Dutch generation accountable for past policy errors like the euro and the censorship of science since 1990.

But the young Dutch coat the eminences grises of Dutch politics like Ruud Lubbers, Wim Kok and Wim Duisenberg (deceased) in teflon.

It is easier to blame the Greeks, even when they are young.

The Dutch government consists of a coalition of VVD and PvdA that betrays campaign promises. Prime minister Mark Rutte (VVD) is a neoliberal ideologue. He recently got the Rathenau prize but the kind people who gave the prize made a conceptual error. The social-democratic PvdA with Dijsselbloem has lost compass and integrity decades ago. The political opposition parties are escapist, like the fickle D66, the xenophobic Geert Wilders or the (Maoist) Socialist Party (SP).

The distinction between PvdA and SP might be somewhat enlightening. The PvdA (in government) belongs to the European Socialists (Socialist International), who apparently also want to change “socialist” into “social-democratic” ( PES). Their logo has a rose in a fist, and one also hopes that the rose has no thorns (or perhaps it should). Their international outlook should make that the PvdA should want to help their Greek labour brothers. Instead, the SP (in opposition) is nationalistic, similar to the nazi’s but without the antisemitism and only a mild aversion to immigration. Their emblem is a tomato, and they want that the Greeks throw their own tomatoes. Mao’s principle was not to follow convoluted Western socialist ideology but to follow popular sentiment so that the party can grow. Following Mao, the SP is opportunistic but with tight organisational control so that internal democracy consists out of following the leader who has the best nose for popular sentiment. (Dutch readers could look here.)

Dutch economists and journalists fail

Dutch economists and journalists fail in properly analysing the situation and reporting to the general public. Even the professionals blame the Greeks and want their money back. They don’t explain in adequate fashion what the Dutch export surplus means and how austerity blocks even the Dutch national investments. (And observe the perfidity, that low investments mean higher unemployment, which the Dutch translate as more wage moderation so that they can export more, implying the “exporting of unemployment”.)

There is one report that I can agree with for 99%: that is by Michel Verbeek on Sargasso (2014-12-30 in Dutch), who is not an economist but a biologist now working as a computer system manager (his own weblog), and who applies common sense to try to understand the economic crisis.

My 1% disagreement is that you need my own analysis to complete the picture, see here. Fellow economists are advised to read my books DRGTPE (before the crisis, free PDF) and its supplement CSBH (2012, during this crisis, paywall).

Diagnosis and treatment of the European crisis

The ship is not lost. Diagnosis and treatment w.r.t. the European crisis are:

  • The European Monetary Union (EMU, euro) is a political project, and advised against by many (though too few) economists.
  • The current EMU treaty fails and a new one is required.
  • The EMU is also a product of a breach of scientific integrity, see the censorship and abuse of power w.r.t. Bernard Connolly in 1995.
  • The situation might also have been different had my analysis not been censored in Holland in 1990. If Dutch parliament had done an inquiry in 1991 into the Dutch export surplus then many of these problems could have been resolved.
  • Greece squandered its loans and the rich Greeks left the country with the proceeds.
  • The Troika suffers from neoliberal economic ideology & incompetence.
  • See my suggestions for a solution approach as I already explained to Varoufakis in 2012. (A kind reminder, no rage.)
  • Overall, see the lecture Cause and cure of the crisis (2014).
PM. A short term escape route for Tsipras & Varoufakis

Professor Bagio Bossone already pointed to this provision:

“Article 14.4 of the ESCB statute states that: “National central banks may perform functions other than those specified in this Statute unless the Governing Council finds, by a majority of two thirds of the votes cast, that these interfere with the objectives and tasks of the ESCB. Such functions shall be performed on the responsibility and liability of national central banks and shall not be regarded as being part of the functions of the ESCB.” (ESCB 2008).” (Bagio Bossone, VoxEU 2013) (Check the Statute.)

If Tsipras & Varoufakis find a bit more than 1/3 of the vote that give them the benefit of the doubt, with measures that would conform with the overall objectives and tasks of the ESCB, then they might be able to prevent a collapse of the Greek economy, now that the ECB has stopped supporting the Greek banks. I would tend to favour that idea, and advise Dijsselbloem to do so too.

Listening to Stavros Xarhakos, the beautiful Aman … Amen

How can, will, must Angela Merkel deal with the new Greek minister of finance Yanis Varoufakis (who wrote this book on the Minotaur that I didn’t read) ?

My earlier weblog discussion on Varoufakis was in May 2012 and it still gives my position.

I read the Modest Proposal by Varoufakis & Holland – not the version with Galbraith joined up – and discovered that I didn’t need to write a reaction. It is better that they, on their turn, read my analysis.

In 2011 I got two emails from Varoufakis that he would read my Economic Plan for Europe (for economists) and get back to me. Apparently the paper & plan did not inspire him, or, there was another reason not to further respond.

Parts of my analysis have been published in the international community of economic research or in an online Greek newspaper. Unfortunately without a response by Varoufakis. Well, other economists didn’t react either. Somehow I still think that when your economy is in Depression like in Greece, Spain or Portugal, you would want to show some interest in a new analysis by an economist from Northern Europe, even an economist from Holland who gives severe criticism about his own minister of finance Jeroen Dijsselbloem – but no.

Bull leaping in Crete (Source: www.mlahanas.de)

Bull leaping in Crete (Source: http://www.mlahanas.de)

Varoufakis now is in the spotlights. I am afraid that it will not help to focus on Greece, since no Northern European country will trust proposals coming from them. Varoufakis already lost his “benefit of the doubt credibility as a new face”, by killing the Troika in his first contact with Dijsselbloem, and sending confusing signals about a “write-off” versus “a swap for growth bonds”.

Instructive reads are by Frances Coppola earlier on the Modest Proposal and recently on what would really work for recovery and reform. See also Klaus Kastner who has been trying to talk sense to Varoufakis for some years now. Paul Krugman has some kind of Game Theory tabulation of the Game of Chicken, with the Greek population held at ransom. Angela Merkel would not want Syriza to win but neither wants the blame caused by Greek unreliability and incompentence. The problem is that Krugman hasn’t studied my new analysis.  Martin Wolf in the Financial Times with his overview of the Game of Chicken rather than stalemate. For the solution approach, I would include Economic Supreme Courts, resolution of the cause of the Great Stagflation, rational use of money, National Investment Banks, and for Greece and Southern Italy Investment Zones under International Law (leases like Hong Kong originally).

Jos Collignon - The caged mouse that roared (Source: (c) Collignon, reproduced here with permission)

Jos CollignonThe caged mouse that roared (Source: (c) Collignon, reproduced here with permission)

Rather than Greece, it is more important to look at Holland. Like we had “Greek statistics” there is also “Dutch economics”. This has an abuse of power and censorship of economic science. I call on the world to boycott Holland till scientific freedom of thought is restored in Holland. See here.

Observe: the reason that you will not find so much of my work in the peer reviewed journals is that, of course, censorship must be lifted before the work can be published.

To return to the opening question: How can, will, must Angela Merkel deal with the new Greek minister of finance Yanis Varoufakis ? Well, it is part of the phenomenon of an economic crisis without national Economic Supreme Courts that this question will be hotly debated, with a rather risky outcome too.

PS 1. See also “Cause and Cure of the Crisis

PS 2. Bull-leaping is something else than the Minotaur, but I need a damsel in the picture to represent dr. Merkel.

PS 3. When I was in gymnasium I could draw the ancient plan of the Labyrinth at Knossos from memory, but these brain cells have been lost, while the current economic crisis anyhow is a maze:

maze refers to a complex branching (multicursal) puzzle with choices of path and direction; while a single-path (unicursal) labyrinth has only a single path to the center. A labyrinth in this sense has an unambiguous route to the center and back and is not difficult to navigate.” (quote in wikipedia)

PS 4. The title Modest Proposal is a satire by Jonathan Swift of 1729, that the poor people of Ireland offer their children for consumption by the rich, so that they at least serve some purpose. Copying this title by Varoufakis suggests satire, or it is a wrong choice. This fickleness on the title is a telling sign. I haven’t further checked Varoufakis’s work. If he did more on mathematics and Game Theory than econometrics as an empirical study, then we might see another case that mathematical abstraction can lead astray into wishful thinking. In that case I should perhaps read the version written jointly with Galbraith, whom I regard as an excellent and empirical economist. But the problem is not that I haven’t read this yet, but that they haven’t read my work (or responded with questions about what they don’t agree with or don’t understand yet). You cannot communicate something new if it isn’t read.

When you disagree with a newspaper, it is not the right approach to ring at the door, ask for the editor, climb the stairs, and shoot the editor and the crew. The outcry over the world on the massacre at Charlie Hebdo shows that civilised people agree on this.

Period. What else is there to say on this ? Basically nothing.

Still, the outcry by journalists themselves struck me as a bit too easy. Yes, they have every right & reason to protest that they shouldn’t be shot. Or spanked. Or tampered with. Or receive an ukase from Putin. So much is obvious.

However, journalists do make a lot of errors. They use too many lame excuses to cop out of criticism. They produce bad journalism, and bad journalism aggravates social problems.They should get their act together.

In a potential episode of the South Park animation we can well imagine that Eric, and some other dude under his spell who actually holds the gun, ring at the door, ask to see the editor, climb the stairs, and shoot the editor and the den of journalists. Like in a den of dragons, the journalists would be depicted as horrible monsters. See ? If you agree that you can imagine such a scene and would enjoy it, then it is not unreasonable to expect that you would be open to the idea that there is criticism and need for change.

Perhaps now is the moment that journalists might listen. If the argument is put as “we can imagine that some mean-spirited and revengeful people want to shoot journalists” then perhaps they pay attention – since apparently they don’t do so in normal life.

Let us mention some of these errors by journalism, and let us hope that they listen and get their act together:

  • Check the reporting on the creation of the euro. Bernard Connolly’s book The rotten heart of Europe still doesn’t get the attention that it deserves. Dutch readers may watch this video on NPO History on the Black Monday when monetary union and political union got separated.
  • There is my earlier weblog on the gap between science journalism (who neglect economics) and economic journalism (who neglect scientific standards like the integrity of science). Please note that religious radicalism would be less of a problem in the world if the economy would not be structurally depressed.
  • The reporting on the Bush & Blair invasion on Iraq was miserable. The US and UK governments presented Saddam Hussein as a member of Al Qaida responsible for 9/11 and in possession of weapons of mass destruction. Journalists succumbed to waves of patriotism instead of reporting that the governments misrepresented the facts.
  • Neighbourly love is great but scaring people with eternal damnation isn’t. News media do as if God exists while it is more reasonable to question the religions. Why not discuss the more reasonable case that Abraham, Moses and Jesus are mythical characters created for the purpose of the religious story itself ? See my book The simple mathematics of Jesus (SMOJ). If you think that a mythical origin is unreasonable, check how the myths of the Mormons came about, in this piece by Tarico & Nugent, and follow the money with Murdock.

Note that SMOJ is published as printing-on-demand, and that news media refuse to buy such books themselves. They want publishers to send them free copies. Guess what happens with most of those free copies: probably dumped in a waste bucket, so that the journalist can say that he or she threw it away, and then it is retrieved and sold to antiqbook or some outlet, so that the book editor has a small earning on the side. (This also happened to Eric’s book, which caused him to look for the editor and shoot him.)

PM 1. South Park just crossed my mind in looking for a cartoon figure, but it so happens that they had a problem on Mohammed too, see this Yahoo News report (easy journalism again). PM 2. The potential episode that I describe of course doesn’t exist (yet).

Addendum January 13 2015: I was happy to read Teju Cole Unmournable bodies in the New Yorker with a similar sobering note that the slogan of free speech comes along with hypocrisy.

Scene of South Park cartoon series (Source: Wikipedia)

A scene of the South Park animation series (Source: Wikipedia, (c) South Park)

The Dutch government in 1972 instituted a Scientific Council for Government Policy -in Dutch: “WRR”. The rationale is: while there are Ministries for actual policy and while there are Planning Bureaus for separate fields, the WRR is supposed to look over a longer horizon and across fields. Their YouTube channel may contain interesting material also for foreigners.

Here is the lecture by Joseph Stiglitz (1943): The future of globalization, given on Thursday November 6 2014.

Stiglitz pointed to world problems and the interconnectedness of nations, the rise of world governance, but the lack of instances of world government. The economic integration proceeds faster than the political integration. In the piecemeal system that arises it are special interests who take the lead. Bankers want to control financial markets. Producers want to control sales and thus dominate trade talks. National political systems become corrupt because of campaign financing.

Globalisation has been a huge and unpredicted success in other realms. With China and India 2.5 billion people have seen their prospects improve. China has taken care in the sequence and pacing of joining the world system. In September 2014 China became the biggest economy in the world, putting the USA in second place. Compared to 1815 China en India only take their historical position, and their position in the last two centuries was “only temporarily” affected due to Western colonisation. The new balance of economic power also requires a political balance, and the multipolar world requires new institutions.

Joseph Stiglitz on the Future of Globalisation, WRR November 6 2014 (Source: own picture)

Joseph Stiglitz on the Future of Globalisation, WRR November 6 2014 (Source: own picture)

What about my suggestion of Economic Supreme Courts ?

My suggestion, and not Stiglitz’s suggestion, is: Each nation could adopt an Economic Supreme Court (ESC), see my memo in the RES Newsletter this Fall, and also see the About page above. When these national ESCs communicate, then there will be some form of co-ordination based upon economic science. Governments will be better informed about the world situation, and the bargaining issues will be clearer.

I wondered what Stiglitz would think about this suggestion, since he had been chairman of the Council of Economic Advisers in 1995-1997 under Clinton. Asked after the lecture, his first reaction was that such a court might make such horrible mistakes as the US Supreme Court has made in the past. My  reply was: (a) It would be economists and not lawyers, and the court would be based in economic science, (b) Duration of terms would not be for life but for seven years, on a revolving basis with one new appointment per year, (c) Court decisions would be open to society so that the discussion before and after would remain open to science too. Stiglitz was willing to consider these aspects, and seemed to agree that the dynamics in policy making would change. Due to his initial negative reaction and my need to defend it, I didn’t get to ask Stiglitz about his reaction to the possible contribution to world governance via that mutual contact.

World governance is an old idea. It was supported by Jan Tinbergen who pointed to the obvious externalities and the need to incorporate them in the economic process (rather then leave them be with Coase’s Theorem). The idea also finds support in my book DRGTPE, see the About page.

TTIP

One of Stiglitz’s messages was that the Transatlantic Trade and Investment Partnership (TTIP) proposed trade agreement is “framed”. It uses terms of “trade” and “freedom” and “harmonisation”, but is actually a different kind of beast. The old trade agreements that dealt with comparative advantage have run much of their course. Tariffs are already quite low. What is at stake now are the so-called “non-tariff barriers” – but those are in place precisely because of national regulations that have their own reasons. Thus the real issue is deregulation again, but now under the guise of international trade agreements. An example is health regulation that might be abolished under international pressure. What is severely lacking in these negotiations is transparancy. Again it are the producers who want to have control over their sales, but one should wish that the consumers are also at the table.

In the EU TTIP  is politically sold with the argument that it would generate jobs. But trade agreements should create a balance between imports and exports, and thus the effect on jobs should rather be balanced too. The classic argument for trade and comparative advantage is income and not jobs. The EU should look for jobs elsewhere.

My own experience at the CPB in 1982-1991 with the Single European Act a.k.a. “Europe 1992” proposed by Delors was that the European Commission claimed efficiency gains from trade, but did not account for job losses that explained those gains. They overlooked the investments that would be needed to create new employment. See CPB (1989), “Europe 1992″, working paper 28, that might be only mildly critical.

Low wage unemployment

There is an economic theory that trade would enhance prosperity, but (with reminiscences of the Ricardo – Malthus debate on the Corn Law of 1815+) free trade now seems to have adverse effects for many. The factor price equalisation theorem causes lower wages for the lowly productive. Competition between governments causes cutbacks on public services and less progressive taxation. Globalisation exacerbates the national problems. The low income groups are worse off on all accounts. The median income of the full time male worker is as low as four decades ago. The minimum wage has the real level of five decades ago. Stiglitz claimed that trade had been a critical factor in the last 15 years to explain these developments in inequality. He referred to James Galbraith. An article that I could find is “A perfect crime: inequality in the age of globalization“. Galbraith also has this new book: The End of Normal (2014).

Another point that I could ask Stiglitz after the lecture was whether he was aware of the notion of a tax void. It is relatively hard to explain such a notion in a noisy reception hall, but professor Stiglitz has a Nobel Prize and seemed to get a major part of it. See my paper with the graphical display also for the USA. See my discussion of Larry Summers’s Tinbergen Lecture on Secular Stagnation, last Friday. After some confusion we established, for the US, that families with children might have such a tax credit that there might be no tax void, but that singles still would have a problem. I must be careful here since my last calculation for the US was from 2009 and that is five years ago. Overall there might be scope for an analysis to counter above negative effect of globalisation on the internal market, see this other paper on exposed and sheltered sectors. Professor Stiglitz seemed to think that the German introduction of a minimum wage shouldn’t be a problem, but I haven’t looked into that yet and am less optimistic.

Quantitative Easing

Stiglitz was quite critical of the Quantitative Easing (QE) that has pursued since November 2008. The funds didn’t go to the common people (e.g. by reducing the mortgage burden), but to the banks, who invested the sums in the emerging markets, aggravating their problems by exchange rates and inflation. Who is to blame the banks for selecting options with potentially higher returns ? According to Stiglitz the difference between the US and the EU is that the US didn’t have much austerity while the EU did – see indeed the Depression in Southern Europe. The difference has not been caused by the US with QE and the EU without QE. The policy by the ECB to embark upon QE, by buying up problematic assets, would be dubious.

I hadn’t seen that US link to the emerging markets yet. My paper Money as gold versus money as water (2013) however uses new money only for a targetted use, and thus doesn’t make that mistake with QE in the US and the new policy by the ECB.

Stiglitz was also critical that standard monetary policy neglects the impact on inequality. He claimed that 95% of QE since 2008 benefitted the top 1%. A low rate of interest hurts pensioners who save in bonds and benefits the rich who are active on Wall Street. Janet Yellen would have more awareness of the issue.

Other issues

One cannot discuss globalisation without a whole range of topics: bankruptcy law (also for sovereign debt, cf. Greece), (de-) regulation, capital controls, failure of co-ordination, the Bush-selected G20 of 2008 rather than the legitimate UN, tax havens, … Stiglitz pointed to several mechanisms how there can be regulatory capture and (deliberate) catch-22’s. A system with private prisons might welcome new prisoners. Take the farmaceutical case of a known drug, a placebo, and a new drug. A new competitor might not be able to do a test with the placebo, since it would be unethical not to use the known accepted drug. The competitor cannot create a good test with that known drug since it has no access to the required performance data.

A short response on this: A special feature of the US system is litigation, in which companies can even sue regulators. Others have already observed that China is ruled by engineers and the US by lawyers: a major element in tackling world problems is tackling litigation.

Of course, minister Lilianne Ploumen spoke as well. It came down to explaining the VVD-PvdA coalition government agreement since Fall 2012 for another time, now to the distinguished guest.

Discussion

For me the discussion did not add novelty. The moderator was professor Arnoud Boot from Amsterdam, who is member of the WRR, and who also chaired the KVS meeting last Friday with Larry Summers – see this discussion. There are some constants in the Dutch discussion on economics. Professor Boot is quite capable in many respects but observe his Catch 22:

  • If there is censorship of economic science by the directorate of the CPB then Dutch Parliament should investigate it.
  • Only such an investigation can establish that there is such censorship.
  • When Parliament does no investigation then we will never know and there is no need to discuss it.
  • Hence the issue does not exist.
Joseph Stiglitz and Arnoud Boot, WRR November 6 2014 (Source: own picture)

Joseph Stiglitz and Arnoud Boot, WRR November 6 2014 (Source: own picture)

Friday October 31 Larry Summers gave the 27th Tinbergen Lecture, organised by KVS, the Royal Dutch Association for Political Economy. The title of the lecture is Perspectives on Secular Stagnation. The main thesis: if the world doesn’t choose for a large fiscal expansion then it runs the risk of a long period of stagnation. The advantage of the lecture is that Summers runs through the various aspects, and presents the clear policy choices: (1) Structural reform (likely with austerity), (2) Raise spending (fiscal expenditure, government investments), (3) Reduce real rates (even more monetary expansion with likely more inflation). His joke: when presenting a case to the President, give three options, with your advice in the middle.

Larry Summers giving the 27th Tinbergen Lecture, October 31 2014 (Source: KVS-web)

Larry Summers gives the 27th Tinbergen Lecture, October 31 2014 (Source: KVS website)

I am “glad” that Summers confirms this part of my own analysis, though the prospect of stagnation isn’t something to be glad about. Summers’s advice actually may be some kind of turn-about, since in the past he was in the financial-monetary track.

My memo of April 2009 Gliding into the Bush-Obama Depression has the same theme. At that time Summers was director of the US National Economic Council, and pursued a policy of restoring banks and confidence in Wall Street. The US Fed had started quantitative easing in November 2008. We now know that much if not most new money didn’t land in the US but was exported to more promising investment opportunities in the emerging economies, raising their currencies and inflation (a critique by Joseph Stiglitz). During the Clinton Presidency 1993-2001 Summers was influential in the financial deregulation and the abolition of the Glass-Steagall Act and thus the onset of the crisis. Let me quote my 2009 memo:

“Does Obama have an alternative ? He must choose from US economists. Leonhardt (2008) refers to the “Battle of the Bobs” between Robert Rubin and Robert Reich during the Clinton Administration, that apparently Rubin won. Reich now has won the argument that deregulation has turned out to be disastrous. But that does not imply that he was right on intervention in the market to directly do something about unemployment. Conditional on the state of economic theory in the US, the “Battle of the Bobs” still is undecided. Robert Reich still hasn’t won the argument that the government should step in with an interventionist agenda, since his argumentation is unconvincing. But that does not mean that Robert Rubin has won the argument that it shouldn’t. When unemployment rises to 10% society better steps in, and for sure if it stays this high during a number of years. The real US problem is their state of economic theory. It is OK that the two Bobs discuss with each other but it is not OK that they are not open to a discussion with others.”

The New Yorker April 21, 2014, about Elizabeth Warren’s book, mentions another advice for Presidential circles:

“In the spring of 2009, after the panel issued its third report, critical of the bailout, Larry Summers took Warren out to dinner in Washington and, she recalls, told her that she had a choice to make. She could be an insider or an outsider, but if she was going to be an insider she needed to understand one unbreakable rule about insiders: “They don’t criticize other insiders.””

Overall, I would advise more openness in Presidential circles. It should be possible to present a critical argument and increase the quality of discussion both inside and outside.

Overall, my points w.r.t. Summers’s lecture are:

  • Summers said that It may matter who brings the message. He hoped that his argument would be heard by economists in Germany and Holland, since those have a better position to argue for investments than economists from Southern Europe who might be regarded as self-serving. However, to convince the Dutch, Summers must take into account that Holland has an export surplus since 1981 – thus some 33 years. See the lecture by H.J. Witteveen. There are vested interests her. The Dutch “mantra” of wage moderation makes for easy economic analysis and policy advice. Apparently it blocks thinking about alternatives.
  • Instead of general wage moderation, an alternative policy for Holland (and now Germany) would be a differential wage policy, notably: higher wages for productive workers (commonly in the exposed sectors), and lower wage costs (supported by proper taxation to support net income) for the lower productive workers (commonly in the sheltered sectors). See my 1996 paper on this, building on the analysis by Van Schaaijk and Bakhoven, and the original 1990 paper when I worked at the Dutch Central Planning Bureau (CPB) in 1982-1991.
  • My advice is that each nation adopts a constitutional Economic Supreme Court (ESC), based in economic science rather than bureaucracy, that checks the quality of information for decision making, and that has the power to veto the budget if the information in the budget would be misleading according to that court. This is my memo in the Royal Economic Society Newsletter of October 2014: http://www.res.org.uk/view/art7Oct14Features.html
  • When the Dutch Central Planning Bureau (CPB, founded by Tinbergen) would be changed into an ESC then it would mean a promotion. Current forecasts are conditional on the assumption that the government speaks truth and that policy will be successful, but an ESC would be able to make unconditional forecasts. The Executive Branch would still be free to decide what to do but would lose some degrees of freedom for disinforming Parliament and the public.
  • Olivier Blanchard, now at the IMF, in his 1999 Tinbergen Lecture, in reviewing macro-economic theory at that time, thanked me for my comment on the historical origin of the word “macro-economics”  – in 1999 I followed the Dutch convention that it was due to former CPB-director Pieter de Wolff in 1939 but it now appears that it is due to Ragnar Frisch in 1933, see Kevin D. Hoover 2012 and some fine sheets 2014 – but apparently Blanchard in 1999 wasn’t convinced yet about the advice for both an Economic Supreme Court and the advice on taxation and the minimum wage. He ought to be able to quickly relate to the issue once he realizes the link to the current threat of stagnation.

Present at the event were Sweder van Wijnbergen (1951) and Coen Teulings (1958). These professors have been participant in the discussion but also the creation of Dutch economic policy for a fairly long time after 1990. Van Wijnbergen was for a short time the top civil servant at the Ministery of Economic Affairs, and supervised the CPB. Teulings was head of an incomes policy unit at the Ministry of Social Affairs and was director of the CPB  in 2006-2013. Teulings did not accept that the economic crisis since 2007 was another confirmation of my analysis. They may not be aware of what I describe as “vested interests”. They may also not have been aware of the quality of the analysis. It may indeed matter who brings the message. Having heard Summers’s perspective on Secular Stagnation, they might perhaps help out that my analysis on unemployment is no longer blocked from discussion at the Dutch CPB, that I can run the Athena model there (that I helped build there, and adapt it where errors can be proven), and that my paper can be published so that the scientific community can discuss it. But everyone may doubt whether the world works like that. The chairman of the KVS and host to the Tinbergen Lecture, is Arnoud Boot (1960), professor in Amsterdam and member of the WRR Scientific Council for Government Policy. He has a general awareness of some of these issues but obviously isn’t convinced yet, either of Secular Stagnation or the relation of my analysis and the blockage at CPB to Secular Stagnation.

Arnoud Boot, Larry Summers, Sweder van Wijnbergen, Coen Teulings, at Tinbergen Lecture October 31, 2014 (Source: KVS website)

Arnoud Boot, Larry Summers, Sweder van Wijnbergen, Coen Teulings, at Tinbergen Lecture October 31, 2014 (Source: KVS website)

It appears that Summers was born in 1954 too, like Angela Merkel and François Hollande, and me. When I told Jan Tinbergen of the problem at CPB, he recognised that such problems might arise in the current institutional framework, but he also said that he was too old for that and that the younger generation ought to solve it. An understandable position. I hope that it still occurs in my generation.

PS 1. As I am reading Harlan McCracken (1961), Keynesian Economics in the Stream of Economic Thought, Louisiana State University Press, because of my earlier discussion of Malthus in Maastricht, it is amazingly logical to see McCracken discuss … secular stagnation. Well, McCracken 1961 refers to Alvin Hansen as Summers 2014 does, so there is no surprise there. McCracken tends to reject the danger of secular stagnation with the optimism of 1960, though he admits the impact of WW 2. Our “advantage” is the crisis of 2007+, though for me the situation after the Fall of the Berlin Wall 25 years ago sufficed to develop that alternative analysis on unemployment and the Economic Supreme Court, see here.

PS. 2. Since this weblog has a vested interest in the education of mathematics, we must report the following google results on Iris Mack and her Phat Math project on math education. Apparently the link http://www.phatmath.com doesn’t work and last month saw a failed attempt at fundraising. Her Wilmott weblog recently consists of links to events or reports by others. Apparently Mack worked at the Harvard Management Company (HMC) during Summers’s Harvard Presidency, warned about risks and had to depart around 2002, and later around 2007 she and Robert Rubin met in a Miami beach area; well, this is her story in the Huffington Post 2010. Playwright Nancy McCleman has tried to evaluate Mack’s website and ends up in disappointment. That seems to be a good description of my own sentiment too, that this weblog evaluation of the 27th Tinbergen Lecture must have this PS 2.

Thomas Robert Malthus (1766-1834) recently visited Maastricht, known for the creation of the European Monetary Union and the establishment of national debt and deficit ceilings. Sitting at the bank of the Meuse river and watching the ghosts of long departed salmon splashing in the stream and its gentle vortices, Malthus allowed for some soul searching as well. It appears that he always used the name Robert so that our intention to link him up with Tomas Sedlacek and Thomas Piketty collapses.

Malthus and Darwin

Malthus set Charles Darwin on the path of the theory of evolution. Darwin records in his autobiography:

“In October 1838, that is, fifteen months after I had begun my systematic inquiry, I happened to read for amusement Malthus on Population, and being well prepared to appreciate the struggle for existence which everywhere goes on from long- continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. The results of this would be the formation of a new species. Here, then I had at last got a theory by which to work”. (Taken from this weblink.)

Malthus and Keynes

Malthus set John Maynard Keynes on the parth of the theory of effective demand. Keynes in his Essays in Biography:

“If only Malthus, instead of Ricardo, had been the parent stem from which nineteenth-century economics proceeded, what a much wiser and richer place the world would be to-day!” (Keynes 1961 [1933], p. 120) (Quoted by John Pullen in HETSA here)

Relevant is also this archive of the History of Economics Review, and in particular Steven Kates on JMK and TRM and then also on JMK and McCracken,or see the longer discussion by Kates in HER 48, 2008.

“Thus, at the very time that he has commenced writing the book that will become the General Theory, the single most influential book on the business cycle written during the past century, Keynes states in no uncertain terms that the most fruitful approach to dealing with the economic issues raised by the cycle ought to be set within an analytical framework that descends from Malthus.” (Kates HER 48, 2008)

Note that David Ricardo isn’t kicked out of the window. His method of mathematical modeling is retained, of course. His arguments are duly weighted too. The only thing is that Malthus’s argument on the lack of demand finds proper recognition. What was counter-intuitive to Ricardo is rephrased so that it becomes the proper intuition that we enjoy today. Merely putting money in the bank doesn’t help: it are the real investments that determine income.

“The Keynesian Revolution, which swept the economics world in a matter of less than a decade, had its origins in Keynes’s reading of Malthus’s letters to Ricardo in late 1932. It was from these letters that Keynes discovered the issue of demand deficiency. Reading Malthus’s letters in the midst of the Great Depression infused within him the be­lief that demand deficiency was the cause of recession and mass unem­ployment. The essay on Malthus, found in Keynes’s Essays in Biography and published in February 1933, makes plain the extent to which he had absorbed Malthus’s economic views while reading Malthus’s writings. Malthus had been the leading advocate of demand deficiency in the nineteenth century. It was this message that Keynes’s carried into the twentieth.” (Kates 2010, History of Economic Ideas, xviii/2010/3)

The Keynesian revolution is still relevant. There is criticism whether the model still applies, but see the About page for my amendments to Keynes and Tinbergen so that there is a sound manner to tackle the economic crisis. See my memo in the Royal Economic Society Newsletter October 2014 for the need for an Economic Supreme Court per nation.

Allin Cottrell has the nice argument that the Ricardo-Malthus discussion used money as a veil, and that Keynes showed that Say’s Law only breaks down when money isn’t a veil: so that Malthus was wrong and so that it is curious that Keynes selects him as a hero. I have “always” been somewhat intrigued by the historical use of the tally stick, and wonder whether analysts like Hume and Smith and thus also Ricardo and Malthus could really regard money as only a veil, certainly after the creation of the Bank of England in 1694. Even more amazing is that Jean-Baptiste Say himself wrote letters to Malthus too, see the pdf at the Von Mises institute. But I am not a historian and all this leads too far.

I had thought that I could leave the matter at that, so that this would be a rather short section, but the ghost or google of Robert Malthus alerted me to an issue.

Sanjeev Sabhlok 2012 claims that Keynes plagiarized Malthus and McCracken. Sabhlok himself copies this 2010 article by Kates. However, Kates denies this plagiarism on some points and merely asks pointed questions on other points.

Thomas Robert Malthus 1766-1834 (Source: wikimedia commons)

Thomas Robert Malthus 1766-1834 (Source: wikimedia commons)

Kates provides statements from the Rymes lecture notes in Autumn 1932 that show Keynes referred to Malthus and a failure of effective demand. Keynes biography of Malthus of early 1933 would make clear that he came to this view independently.

Keynes can only plagiarize McCracken in that biography of Malthus if he would have used earlier articles by him without proper reference. But currently there is only evidence about an exchange in 1933, after the publication of the Essays in Biography.

The picture is diffuse, since Kates in this other text refers to John R. Commons (1862-1945) who apparently already wrote on Ricardo and Malthus around 1920, and whom Keynes wrote to in 1927. McCracken wrote his Ph. D. thesis with Commons, and there is a joint article in 1922 on the business cycle. There is for example also William Trufant Foster (1879-1950), apparently a precursor to Keynes too, but eclipsed by the impact of the General Theory. Thus, Keynes had ample impulses to look into the Ricardo-Malthus controversy, after the 1929 Wall Street Crash made that issue urgent again. But it seems that the Ricardo-Malthus controversy was part of general knowledge amongst researchers like Pigou and Keynes anyway.

Kates shows that McCracken in early 1933 sent a copy of his 1933 book to Keynes. Kates suggests that it is to Keynes as a person, but it may also have been for a review, since Keynes was editor of the Economic Journal. There is a review by (if I understand it correctly) James Meade, EJ, Vol 47 no 186 (June), p 337-339, 1937 – somewhat late for such an important book from 1933. Correction 2015-01-01: Keynes’s 1933 letter to McCracken clearly states: “Having now read your book, I must again thank you for having sent it to me.” Thus it must have been sent directly, and note the “again”. I thank Kates for correcting me on this, and his additional comment is: “if it is not a personally sent copy, there is no reason for Keynes to have written to McCracken at all.”

One supposes that Harlan McCracken (1961) “Keynesian Economics in the Stream of Economic Thought” would explain the situation himself. Kates quotes McCracken stating that Commons developed the theory of expectations (“futurity”) twenty years before Keynes. Common’s 1934 book that further develops that issue would almost certainly have drawn the attention of Keynes, who already admired him in 1927. (Addendum 2015-01-01: I now have a copy of McCracken (1961) and should return to the issue later on.)

However, did Commons put all the pieces of the puzzle together to create the General Theory ? One additional piece on Say’s Law was provided by McCracken himself, but there are also the issues of liquidity preference, the internal rate of return (a.k.a. marginal efficiency of capital), and the Knightian “uncertainty” related to the ‘animal spirits‘ (Aristotle’s spiritus animalis).

One point is that, when McCracken was writing on the history of economic thought in 1930, he might have tried to contact James Bonar, editor of Malthus, or Piero Sraffa, editor of Ricardo, and thus have indirectly caused Keynes to look at the Ricardo-Malthus correspondence. Malthus’s letters were rediscovered, but how exactly ? It is up to historians to see whether more evidence on this can be recovered.

The proper point to consider is:

“One could, of course, decide Keynes had found someone else who had come to the same conclusion as he had on Ricardo and Malthus. Coincidence possibly or parallel development of ideas.” (Kates 2010)

“The fortuitous arrival of McCracken’s Value Theory and Business Cycles in early 1933 was a prime example in the parallel development of thought. Keynes immediately recognised the strong similarity of view. How much Keynes already understood of the context of the Malthus-Ricar­do correspondence or the General Glut debates is difficult to know. But McCracken, being as he was a specialist in the history of thought, would have added to Keynes’s understanding of the issues at stake, and pro­vided an appreciation of what was needed to refute Say’s Law.” (Kates 2010)

Kates shows that Keynes took the summary of Say’s law as “supply creates its own demand” from McCracken rather than the common “supply and demand are in equilibrium”. Keynes had considerable literary talent and will have recognised the value of that formulation. His letter of August 1933 to McCracken therefor seems disingenious. Rather than thanking McCracken for his phrase, he suggests that both reached the same kind of insight at the same time. At best, perhaps Keynes realised only in 1934 that McCracken’s phrasing of Say’s Law was a very effective way to put the argument, but then, why not refer to McCracken in the General Theory ?

The term “insight” should not be overworked. Concluding that Ricardo was wrong and Malthus was right is important as an insight but doesn’t generate the very mechanism for 1933 how to tackle the Wall Street Crash of 1929.

A key question is: why the delay from 1933 to 1936 ? Why didn’t Keynes publish a recommendation in the Economic Journal for the world to read McCracken’s analysis ? In McCracken’s book some elements are already available, of what took Keynes three years to write himself, though in different words:

“If Aftalion [in 1913] has succeeded in establishing the possibility of a voluntary failure of demand by those who have purchasing power but insufficient keenness of desire, when facing expanded production under the influence of the principle of diminishing utility, then it constitutes one of the greatest contributions to economic theory in a generation. Say’s Law of Markets, according to which production financed consumption and supply generated adequate demand is in serious need of modification.” (Kates 2010 quoting McCracken 1933)

Of course, McCracken’s book did not contain other elements that Keynes was concerned about. He however could have said that too. This however would have put Keynes in the position of a reporter. Keynes did not see himself as a reporter. Correction 2015-01-01: I wrote this too fast, since I did not read McCracken (1933), and it might be guesswork what “Keynes was concerned about” (except trying to find clarity). Dr. Kates writes me that McCracken (1933) may be seen as “a preliminary version of The General Theory”. Thus, indeed, historians must read McCracken (1933) and tally the overlap and differences. But my idea that Keynes did not see himself as a reporter would hold. There could have been a choice in recommending the book to others or developing “his own argument”.

His focus was on being a scientist and develop his own theory. Apparently, Keynes was focused on the Einstein’s distinction between the special and the general theory of relativity. The special theory is Say’s Law, the general theory allows this law not to hold as well. He might use what was available in the literature, but his own contribution would be the complete picture. In that complete picture the elements changed their role because of that complete picture. In this, I merely rephrase Kates’s observation:

“However, in showing that savings might grow as a proportion of in­come as income increased, it would have been clear to Keynes that less than half the task in demonstrating the possibility of demand deficien­cy was complete. What was still needed was a theory to explain why the additional savings made available because of a proportionate drop in consumption would not be channelled into investment through adjustments in the rate of interest. The elements that went into this part of the story were, in essence, the theory of liquidity preference, the mar­ginal efficiency of capital and the related notions of expectations and economic uncertainty. These were, however, concepts that in early 1933 Keynes had not yet appreciated the significance of. As he noted in an oft-quoted passage in his letter to Harrod (cw, xiv, 85), these concepts would be assembled one by one. Each of these concepts had already been discussed in depth in the contemporary economic literature by leading economists but in each case with a different purpose in mind. Moreover, each of these econo­mists had had a book published during the early 1930s while Keynes was preparing the General Theory. Two of these works were published in 1933 and two in 1934, the years of greatest intensity in the development of Keynes’s core ideas.” (Kates 2010)

Keynes referred to Ricardo and Malthus but generally not to others. This modus operandi is totally unacceptable today.

A negative interpretation is intellectual theft. I am not convinced of this yet. I wonder whether a historian can give more information about the conventions in those days.

About Alfred Marshall writing his Principles of Economics it is known that he first developed an argument and then threw away the formula’s and references since the argument should be convincing by itself, and a reader should not be burdened by the need to look up the references. Marshall taught his students to work in that fashion. It seems that Keynes worked in that fashion indeed.

A positive interpretation is as follows:

  • Given the manner how arguments were settled in the academia and government circles in those days, nothing would do, except the formulation of the General Theory.
  • A reference would draw attention away from the General Theory. Reference would occlude the new role assigned to the particular piece in the puzzle. Such reference would cause discussion whether a definition was applied correctly, and whether it could indeed be put to such new use.
  • Since this applied to various authors who provided various pieces of the puzzle, the discussion would fragment over all these authors, instead of focus on the point that the puzzle was finally completed.
  • The book was about Keynes making up his mind, it wasn’t a report about how others contributed to the solution to the puzzle.

Kates asks:

“It is thus an interesting question why Foster and Catchings, worthy heretics in 1933, had been dropped from the list by 1936. Indeed, why McCracken is not on this list, and perhaps Commons as well, are questions that might well be asked.” (Kates 2010)

An answer is – of course unacceptable in our days:

  • References to Foster and Catchings and Commons and McCracken might weaken the General Theory, for, all arguments that had been waged in the past to those authors would then be wielded against the General Theory.
  • A reference would cause a discussion of particulars, refutation of old arguments, and only then the introduction of the new application.
  • The General Theory might require more than double its present pages.
  • Reference would not be necessary for the connaisseurs (who also read the Wall Street Journal) and who would recognise the relevant authors anyway.
  • Keynes did not mind referring to some authors that clearly differed from the General Theory so that there would be little discussion about overlap.

Compare Keynes’s argument why he did not refer to Fisher originally and only did so after some urging by others:

“My definition of the marginal efficiency of capital is quite different from anything to be found in [Marshall’s] work or in that of any other classical economist (except for a passage which he makes little subsequent use of in Irving Fisher’s latest book).” (Kates 2010 quoting Keynes cw, xiii, 549)

It is a convoluted statement that indeed is rather disingenious. Why not clarify Marshall’s method of exposition ? Marshall might say: Why waste time on discussing Fisher’s use of that definition if it doesn’t pertain to the role that the notion has for the General Theory ?

A key question: Did the General Theory settle the various disputes or did it create more dispute ?

One may suppose that there would have been much earlier discussion about references and priorities w.r.t. Kahn, Commons, McCracken, Schumpeter, Fisher, Knight, Foster & Catchings, and the Swedes, if the Harrod, Hicks & Meade IS-LM model hadn’t surfaced soon and shown the usefulness of the complete picture. There has been ample discussion of the precursors to the General Theory, but Kates’s inclusion of McCracken and the subsequent deconstruction indeed is a new twist to the story.

PM 1. On the use of the words “uncertainty” and “risk” see this discussion. PM 2. See how consumer durables would be investments that satisfy Say’s Law. PM 3. The wikipedia article on effective demand Oct 26 2014 is deficient. Effective demand is the actual production occurring in the present short period, following the decisions that entrepreneurs have made, based upon their expectation of what people will demand and they will be able to sell. PM 4. My analysis on unemployment continues from that of Keynes and Tinbergen, see the About page. I am willing to defend that theory and have no vested in interest in Keynes’s ethics w.r.t. his references. PM 6. Perhaps the best introduction to the GT is Fanning & O Mahony (1999) “The General Theory of Profit Equilibrium: Keynes and the Entrepreneur Economy“. PM 7. See Coleman’s review of Kates’s earlier book on Say’s Law. Kates is a bit in danger of suggesting “Keynes stole, but from crackpots”. The true story would be that Malthus and others weren’t crackpots and that Keynes might have reasons, seemingly defensible at that time in the Marshall way, for not referring to all. Kates seems a fine scholar to me, but in his IEA weblog he attacks a rather vulgar ‘keynesianism” that is very remote from the real Keynes, as if this Steve Kates here is a quite different person. PM 8. See my protest against plagiarism in the research in mathematics education.

Malthus and McCloskey

Deirdre McCloskey (1942) invokes Malthus to maintain that homo sapiens sapiens (but rather, with Darwin, the little bit more intelligent version born circa 65,000 years ago, perhaps in the wake of the Toba volcanic eruption) lived on $3 a day until 1800 AD, after which income exploded 30-fold. Her theory is that the latter income explosion derived from respect for the individual, such that ideas & innovation, that normally occur in 10% of the population but that are suppressed by tyrants and priests, finally got the chance to work their wonders. She tends to state that the process started in Holland, see our earlier weblog text on the Dutch World Empire.

A hypothesis concerns the influence by Geert Groote (1340-1384), from the Hanseatic towns of Deventer and Zwolle. The Wikipedia article is lackluster on him, for it doesn’t emphasize that Groote started elementary schools and that his convents were factories that produced hand-written bibles for common people to read. Johannes Gutenberg was inspired to invent the printing press in 1455 only because there was already a big market for people reading the bible because of Geert Groote. See this weblog text on the Scottish Enlightenment and Adam Smith, and this CPB research paper.

There is an instructive Nebraska 2014 video in which McCloskey wiggles her finger to illustrate Malthus’s law of population from 250,000 years ago (this should rather be 65,000) to 1800 AD and then the woosh take-off. Perhaps you must know that she has a small speaking disorder that might take to get used to. Overall she makes a lot of sense. The spoken presentation is simpler than Rostow’s theory of stages but her analysis is rather more involved, which you can discover by trying her books – thanking Gutenberg. Unfortunately, McCloskey hasn’t grasped the analysis of this website yet. E.g. she gives the advice of a basic income, and see my reply to that.

The reference to J.R. Commons is not without relevance for McCloskey. Commons, in his stages of economic development, distinguished stages (1) scarcity / feudal, (2) abundance / individual, (3) stabilisation / modern, see Skidelsky “John Maynard Keynes: The Economist as Saviour, 1920-1937”, Macmillan 1992, p229-231.

Capitalism, wild or tamed

Rostow already asked: “where is compound interest taking us? Is it taking us to communism; or to the affluent suburbs , nicely rounded out with social overhead capital; to destruction; to the moon; or where?”

Interviewer Evan Davis, The Spectator May 24 2014, who compares Piketty and McCloskey, summarizes:

“Wealth, by whatever means it is originally created, thus begets more wealth; successful entrepreneurs, through their initial accumulation of capital, go on to ‘become more and more dominant over those who have nothing but their labour’. In Piketty’s excellent phrase, it is through capital that ‘the past devours the future’.

(…) She enthuses about the Great Enrichment of the 19th century. ‘What happened, understand, is not 100 per cent growth, but anywhere from 2,900 per cent growth to 9,900 per cent growth. A factor of either 30 or 100.’ That jump in incomes came about not through thrift, she says, but through a shift to liberal bourgeois values that put an emphasis on the business of innovation. In place of capitalism, she talks of ‘market-tested innovation and supply’ as the active ingredient of our economic system. It is incidentally a system ‘drenched’ in values and ethics overlooked by economists.

(…) Bill Gates or Liliane Bettencourt? They co-exist, of course, and have both had a pretty good time of it in recent decades. The question is which one better characterises the very rich. And also which risk you would rather take: taxing the Bills at the risk of deterring them from creating Microsofts? Or not taxing the Lilianes, at the risk of letting them become ever wealthier and more powerful while sitting at home doing nothing?

(…) I know that the 99 per cent of the population have no difficulty coming to a view. I’m in the sad 1 per cent, who can see both sides.”

Speaking about Bill Gates: recall Malcolm Gladwell on Outliers, and the specific turns in technology that make some people rich, like also Carnegie and VanderBilt. See my earlier discussion of Piketty’s case.

The Maastricht Treaty question

Phillip Longman in his May 2 WSJ review of Robert J. Mayhew (2014) Malthus. The life and legacies of an untimely prophetdistinguishes the young and old Malthus. One might find it a bit surprising that the old Malthus provides exactly the position of this weblog, see the About page:

“To accommodate such anomalies to his original theory, Malthus developed the concept, later reformulated by Keynes, of effective demand. The main cause of poverty, Malthus gradually conceded, was not that there were too many people or too few natural resources; rather it was that society was organized in such a way that too few people had a way to earn the money necessary to buy the resources they needed. Give them a job or some other way to make money, Malthus concluded, and the problem would be solved. As Keynes summarized Malthus’s intellectual journey, which was one that Keynes himself followed: “Just as the young Malthus was disturbed by the facts of population as he saw them round him and sought to rationalise that problem, so the older Malthus was no less disturbed by the facts of unemployment.”” (Longman, WSJ 2014)

We are thus left with the final question in this musing with Robert Malthus on the banks of the Meuse river that flows through Maastricht:

What to do with the economic crisis in the European Union ?

Alas, a chilly October breeze touches Malthus and he drifts off, solving in fragments, evaporating over the Meuse’s waters.