J. Bradford DeLong's Blog, page 120

Four hours spent so far, and I am only 160 pages into T...

Four hours spent so far, and I am only 160 pages into Thomas Pikietty's Capital et Ideologie http://books.google.com/?isbn=9780674980822...

I can no longer claim to "read French" in anything other than a menus-and-street-signs sense...

#books #economichistory #equitablegrowth #noted #politicaleconomy

Telling lies about what the law has been in the past in...

Telling lies about what the law has been in the past in the hope of persuading people that this is how the law should be in the future: this is a very strange mode of rhetoric indeed...

I suppose we owe this to Sir Edward Coke: "I am afraid we should get rid of a great deal of what is considered law in Westminster hall, if what Lord Coke says without authority is not law..."���William Best (1824).

#cognitive #moralresponsibility #neofascism #noted #orangehairedbaboons

Hoisted from the Archives: David Glasner Says That I Am More of a Hayekian than I Think I Am...

David Glasner: Wherein Hayek Agrees with DeLong that Just Because You���re Rich, It Doesn���t Mean You Deserve to Be | Uneasy Money: "Recently Brad DeLong expounded on the extent to which the earnings that accrue to individuals do not correspond to the contributions total output that can be ascribed to the personal efforts of those individuals or the contributions made by resources owned by thoe people. Here���s DeLong: 'Pascal Lamy: ���When the wise man points at the moon, the fool looks at the finger������

...Perhaps in the end the problem is that people want to pretend that they are filling a valuable role in the societal division of labor, and are receiving no more than they earn���than they contribute. But that is not the case. The value���the societal dividend���is in the accumulated knowledge of humanity and in the painfully constructed networks that make up our value chains. A ���contribution��� theory of what a proper distribution of income might be can only be made coherent if there are constant returns to scale in the scarce, priced, owned factors of production. Only then can you divide the pile of resources by giving to each the marginal societal product of their work and of the resources that they own. That, however, is not the world we live in.

In a world���like the one we live in���of mammoth increasing returns to unowned knowledge and to networks, no individual and no community is especially valuable. Those who receive good livings are those who are lucky���as Carrier���s workers in Indiana have been lucky in living near Carrier���s initial location. It���s not that their contribution to society is large or that their luck is replicable: if it were, they would not care (much) about the departure of Carrier because there would be another productive network that they could fit into a slot in. All of this ���what you deserve��� language is tied up with some vague idea that you deserve what you contribute���that what your work adds to the pool of society���s resources is what you deserve.

This illusion is punctured by any recognition that there is a large societal dividend to be distributed, and that the government can distribute it by supplementing (inadequate) market wages determined by your (low) societal marginal product, or by explicitly providing income support or services unconnected with work via social insurance. Instead, the government is supposed to, somehow, via clever redistribution, rearrange the pattern of market power in the economy so that the increasing-returns knowledge- and network-based societal dividend is predistributed in a relatively egalitarian way so that everybody can pretend that their income is just ���to each according to his work���, and that they are not heirs and heiresses coupon clipping off of the societal capital of our predecessors��� accumulated knowledge and networks.

On top of this we add: Polanyian disruption of patterns of life���local communities, income levels, industrial specialization���that you believed you had a right to obtain or maintain, and a right to believe that you deserve. But in a market capitalist society, nobody has a right to the preservation of their local communities, to their income levels, or to an occupation in their industrial specialization. In a market capitalist society, those survive only if they pass a market profitability test. And so the only rights that matter are those property rights that at the moment carry with them market power���the combination of the (almost inevitably low) marginal societal products of your skills and the resources you own, plus the (sometimes high) market power that those resources grant to you.

This wish to believe that you are not a moocher is what keeps people from seeing issues of distribution and allocation clearly���and generates hostility to social insurance and to wage supplement policies, for they rip the veil off of the idea that you deserve to be highly paid because you are worth it. You aren���t. And this ties itself up with regional issues: regional decline can come very quickly whenever a region finds that its key industries have, for whatever reason, lost the market power that diverted its previously substantial share of the knowledge- and network-based societal dividend into the coffers of its firms. The resources cannot be simply redeployed in other industries unless those two have market power to control the direction of a share of the knowledge- and network-based societal dividend. And so communities decline and die. And the social contract���which was supposed to have given you a right to a healthy community���is broken.

As I have said before, humans are, at a very deep and basic level, gift-exchange animals. We create and reinforce our social bonds by establishing patterns of ���owing��� other people and by ���being owed���. We want to enter into reciprocal gift-exchange relationships. We create and reinforce social bonds by giving each other presents. We like to give. We like to receive. We like neither to feel like cheaters nor to feel cheated. We like, instead, to feel embedded in networks of mutual reciprocal obligation. We don���t like being too much on the downside of the gift exchange: to have received much more than we have given in return makes us feel very small. We don���t like being too much on the upside of the gift exchange either: to give and give and give and never receive makes us feel like suckers. We want to be neither cheaters nor saps.

It is, psychologically, very hard for most of us to feel like we are being takers: that we are consuming more than we are contributing, and are in some way dependent on and recipients of the charity of others. It is also, psychologically, very hard for most of us to feel like we are being saps: that others are laughing at us as they toil not yet consume what we have produced. And it is on top of this evopsych propensity to be gift-exchange animals���what Adam Smith called our ���natural propensity to truck, barter, and exchange������we have built our complex economic division of labor. We construct property and market exchange���what Adam Smith called our natural propensity ���to truck, barter, and exchange��� to set and regulate expectations of what the fair, non-cheater non-sap terms of gift-exchange over time are. We devise money as an institution as a substitute for the trust needed in a gift-exchange relationship, and we thus construct a largely-peaceful global 7.4B-strong highly-productive societal division of labor, built on: (1) assigning things to owners���who thus have both the responsibility for stewardship and the incentive to be good stewards��� (2) very large-scale webs of win-win exchange��� mediated and regulated by market prices���

There are enormous benefits to arranging things this way. As soon as we enter into a gift-exchange relationship with someone or something we will see again���perhaps often���it will automatically shade over into the friend zone. This is just who we are. And as soon as we think about entering into a gift-exchange relationship with someone, we think better of them. Thus a large and extended division of labor mediated by the market version of gift-exchange is a ver powerful creator of social harmony. This is what the wise Albert Hirschman called the doux commerce thesis. People, as economists conceive them, are not ���Hobbesians��� focusing on their narrow personal self-interest, but rather ���Lockeians���: believers in live-and-let live, respecting others and their spheres of autonomy, and eager to enter into reciprocal gift-exchange relationships���both one-offs mediated by cash alone and longer-run ones as well. In an economist���s imagination, people do not enter a butcher���s shop only when armed cap-a-pie and only with armed guards. They do not fear that the butcher will knock him unconscious, take his money, slaughter him, smoke him, and sell him as long pig. Rather, there is a presumed underlying order of property and ownership that is largely self-enforcing, that requires only a ���night watchman��� to keep it stable and secure.

Yet to keep the fiction that we are all fairly playing the reciprocal game of gift exchange in a 7.4 billion-strong social network���that we are neither cheaters nor saps���we need to ignore that we are coupon clippers living off of our societal inheritance. And to do this, we need to do more than (a) set up a framework for the production of stuff, (b) set up a framework for the distribution of stuff, and so (c) create a very dense reciprocal network of interdependencies to create and reinforce our belief that we are all one society. We need to do so in such a way that people do not see themselves, are not seen as saps���people who are systematically and persistently taken advantage of by others in their societal and market gift-exchange relationships. We need to do so in such a way that people do not see themselves, are not seen as, and are not moochers���people who systematically persistently take advantage of others in their societal and market gift-exchange relationships. We need to do this in the presence of a vast increasing-returns in the knowledge- and network-based societal dividend and in spite of the low societal marginal product of any one of us.

Thus we need to do this via clever redistribution rather than via explicit wage supplements or basic incomes or social insurance that robs people of the illusion that what they receive is what they have earned and what they are worth through their work. Now I think it is an open question whether it is harder to do the job via predistribution, or to do the job via changing human perceptions to get everybody to understand that: (a) no, none of us is worth what we are paid; (b) we are all living, to various extents, off of the dividends from our societal capital; (c) those of us who are doing especially well are those of us who have managed to luck into situations in which we have market power���in which the resources we control are (i) scarce, (ii) hard to replicate quickly, and (iii) help produce things that rich people have a serious jones for right now...

Compare with Hayek���s Law, Legislation and Liberty volume 2, pp. 73-74:

It has been argued persuasively that people will tolerate major inequalities of the material positions only if they believe that the different individuals get on the whole what they deserve, that they did in fact support the market order only because (and so long as) they thought that the differences of remuneration corresponded roughly to differences of merit, and that in consequence the maintenance of a free society presupposes the belief that some sort of ���social justice��� is being done. The market order, however, does not in fact owe its origin to such beliefs, or was originally justified in this manner. This order could develop, after its earlier beginnings had decayed during the middle ages and to some extent been destroyed by the restrictions imposed by authority, when a thousand years of vain efforts to discover substantively just prices or wages were abandoned and the late schoolmen recognized them to be empty formulae and taught instead that the prices determined by just conduct of the parties in the market, i.e., the competitive prices arrived at without fraud, monopoly and violence, was all that justice required. It was from this tradition that John Locke and his contemporaries derived the classical liberal conception of justice for which, as has been rightly said, it was only ���the way in which competition was carried on, not its results���, that could be just or unjust.

It is unquestionably true that, particularly among those who were very successful in the market order, a belief in a much stronger moral justification of individual success developed, and that, long after the basic principles of such an order had been fully elaborated and approved by catholic moral philosophers, it had in the Anglo-Saxon world received strong support from Calvinist teaching.It certainly is important in the market order (or free enterprise society, misleadingly called ���capitalism���) that the individuals believe that their well-being depends primarily on their own efforts and decisions. Indeed, few circumstances will do more to make a person energetic and efficient than the belief that it depends chiefly on him whether he will reach the goals he has set himself. For this reason this belief is often encouraged by education and governing opinion ��� it seems to me, generally much to the benefit of most of the members of society in which it prevails, who will owe many important material and moral improvements to persons guided by it. But it leads not doubt also to an exaggerated confidence in the truth of this generalization which to those who regard themselves (and perhaps are) equally able but have failed must appear as a bitter irony and severe provocation.

It is probably a misfortune that, especially in the USA, popular writers like Samuel Smiles and Horatio Alger, and later the sociologist W. G. Sumner, have defended free enterprise on the ground that it regularly rewards the deserving, and it bodes ill for the future of the market order that this seems to have become the only defence of it which is understood by the general public. That it has largely become the basis of the self-esteem of the businessman often gives him an air of self-righteousness which does not make him more popular. [If only!]

It is therefore a real dilemma to what extent we ought to encourage in the young a belief that when they really try they will succeed, or should rather emphasize that inevitably some unworthy will succeed and some worthy fail ��� whenever we ought to allow the views of those groups to prevail with whom the over-confidence in the appropriate reward of the able and industrious is strong and who in consequence will do much that benefits the rest, and whether without such partly erroneous beliefs the large number will tolerate actual differences in rewards which will be based only partly on achievement and partly on mere chance....

#shoistedfromthearchive #moralphilosophy #politicaleconomy

Neoliberalism and Its Discontents: Podcast

Brad DeLong, Reed Hundt, and Joshua Cohen: Neoliberalism and Its Discontents: "At the end of the Carter administration and throughout the Reagan Revolution, belief in the power of markets became America's preferred economic policy doctrine. President Bill Clinton all but announced the triumph of free markets when he declared that 'the era of big government is over'. President Barack Obama faced the worst economic crisis since the Great Depression and pushed a recovery plan that was more limited than many had hoped, seeming to protect the very sectors that had created it.... In his new book, A Crisis Wasted, Reed Hundt... makes the argument that Obama missed an opportunity to push for a new progressive era of governance, a miscalculation that ultimately hobbled his administration.... A very special conversation between Hundt and DeLong about the limits of, and challenges to, free-market economics... in conversation with Joshua Cohen, co-editor of Boston Review...

#noted #highlighted #neoliberalism #politicaleconomy

Brad DeLong, Reed Hundt, and Joshua Cohen: Neoliberalism ...

Brad DeLong, Reed Hundt, and Joshua Cohen: Neoliberalism and Its Discontents: "At the end of the Carter administration and throughout the Reagan Revolution, belief in the power of markets became America's preferred economic policy doctrine. President Bill Clinton all but announced the triumph of free markets when he declared that 'the era of big government is over'. President Barack Obama faced the worst economic crisis since the Great Depression and pushed a recovery plan that was more limited than many had hoped, seeming to protect the very sectors that had created it.... In his new book, A Crisis Wasted, Reed Hundt... makes the argument that Obama missed an opportunity to push for a new progressive era of governance, a miscalculation that ultimately hobbled his administration.... A very special conversation between Hundt and DeLong about the limits of, and challenges to, free-market economics... in conversation with Joshua Cohen, co-editor of Boston Review...

#noted

Gary Forsythe: A Critical History of Early Rome: "Beloch ...

Gary Forsythe: A Critical History of Early Rome: "Beloch (1926, 602) estimated that at the end of the Latin War Roman territory had grown to 5,289 square kilometers, which is about three and a half times his estimate of 1,510 square kilometers for the size of the Roman state in 396 B.C., following the conquest and annexation of Veii. Under the Varronian year 332 B.C., Livy (8.17.10) records that the Romans concluded a treaty with Alexander, the king of Epirus and the uncle of Alexander the Great, who had crossed over into southern Italy at the request of Tarentum in order to defend the Greek cities from the expanding pressure of Oscan-speaking people.15 The only major military operations conducted by the Romans during these years were directed against the Volscian town of Privernum (Livy 8.20���21). This minor war, however, offers perhaps the first clear picture of Roman stan- dard methods and thoroughness in dealing with resistance. After putting up a valiant effort against Rome for a few years, Privernum was finally cap- tured in 329 B.C., and the principal leader of the resistance, Vitruvius Vaccus, was apprehended and executed, while the senators of Privernum were sentenced to live north of the Tiber. Although Livy (8.21.10) says that the general population of Privernum was given Roman citizenship, it is likely that they received the status of civitas sine suffragio, just like the neigh- boring Volscian towns of Fundi and Formiae. Besides this modest augmen- tation, the Romans founded three colonies at this time. In 334 (Livy 8.16.13���14), the Latin colony of Cales was established with twenty-five hun- dred settlers, on land in northern Campania near Teanum Sidicinum and the Ager Falernus, one of the richest agricultural districts in Italy. In 329 (Livy 8.21.11), three hundred settlers were sent out to form a Roman maritime colony at the Volscian coastal site of Anxur, which was renamed Terracina. It commanded a strategic node along the Volscian coast, a place where the mountains come down almost to the sea, forming a narrow pass. In 328 (Livy 8.22.2), a Latin colony was founded at Fregellae on the farther bank of the Liris River near its junction with the Trerus. It was doubtless intended to be an outpost to confront the Samnites...

#noted #history

Tim Duy believes that the Fed will cut interest rates fas...

Tim Duy believes that the Fed will cut interest rates fast enough and far enough to avoid a recession, and that that���rather than a recession���is the scenario driving the current inversion of the yield curve. After the recent declines in interest rates, I would give that only a 50-50 chance of being true. Equilibria are fragile, and multiple. At an equity P/E of 20, a 100 basis-point fall in the very long bond rate should carry with it a 20% increase in equity value, holding risk adjusted expected future cash flows constant. Yet the S&P composite has not moved since late October. That is a hell of a large fall in risk adjusted expected future cash flows:

Tim Duy: On Rising Recession Probabilities: "My interpretation is that market participants have correctly anticipated the Fed���s reaction function with the expectation of substantial easing in the months ahead hence creating the inversion on the short end. This easing will be sufficient to derail impending recessionary threats. If the Fed���s easing was expected to be insufficient, I would expect that the 10s2s spread would be inverted. Consequently, at this point I still do not expect a recession in the near year. Under my baseline scenario, the Fed���s upcoming rates cuts will slightly steepen yield curve and the picture will look like 1995...

...Bottom Line: I agree with the assessment that risks to the economy have grown in the past 6 months. Boiled down to the essentials, the economy is slowing to trend and the multiplying downside risks leave it vulnerable to slowing below trend. The yield curve is telling me that these shocks will not overwhelm the Fed. Powell & Co. can still sustain the expansion and are expected to do so. ���Expected��� is key of course; the slower the Fed moves, the more likely they are to miss the opportunity to avoid recession. A policy error is a very real potential outcome here. To enhance the odds of avoiding recession, I would advise the Fed to get a 50bp cut done at the next meeting. While I fully expect the Fed to ease at the September meeting, at the moment the Fed seems likely to stick with the less aggressive 25bp cut.

#noted

I would like to say that the very sharp Rana Foroohar is ...

I would like to say that the very sharp Rana Foroohar is wrong here, that global recession probabilities are low. The problem is that we live in a world of multiple equilibria, and so���if enough people are now thinking like she is thinking���she may well be right: Rana Foroohar: Braced for the Global Downturn: "Well-meaning central bankers cannot offset the impact of an erratic US president on the real economy.... Last week���s market volatility... at heart, it���s about the inability of the Federal Reserve to convince us that its July rate cut was merely 'insurance'... Any number of indicators now show... [that] the global downturn has already begun. Asset prices will undoubtedly begin to reflect this, and possibly quite soon.... 'US equities are at the second most expensive period in 150 years', says Mr Lindahl. 'Prices must fall'. I don���t think it���s a question of whether we���ll see a crash���the question is why we haven���t seen one yet...

#noted

Comment of the Day: Ebenezer Scrooge: "I've never met an ...

Comment of the Day: Ebenezer Scrooge: "I've never met an absolute property right. Every damned one of them has an exception. Even a person's right to their own labor���the inalienable right guaranteed by the 13th Amendment���is subject to the draft, imprisonment, and covenants not to compete. Non-allodial rights in real estate are conditional on paying taxes and subject to takings. (While on takings, not all takings are compensated.) Copyright is subject to fair use. Property rights of use ('enjoyment', in the Hegelian trichotomy) are subject to many restrictions���consider all the things you could do with a baseball bat that would result in jail time. Property rights of exclusion or alienation I'll leave as an exercise to the reader. Etc., etc. The proper term is 'strong' property right....

#commentoftheday

Frederick Douglass (1870): The Cause of Death of Robert E...

Frederick Douglass (1870): The Cause of Death of Robert E. Lee: "We are beginning to get at the cause of General Lee's death. Jeff. Davis says, that 'he died of a broken heart'; and one journal has declared, that he died being sadly depressed at the condition of the country, that he could stand it no longer. From which we are to infer, that the liberation of four millions of slaves and their elevation to manhood, and to the enjoyment of their civil and political rights, was more than he could stand, and so he died...

#noted