Do Machines Make History? A Lecture on the basis of Heilbroner's classic paper

 

This was for my class on the history of technology, in particular discussing Heilbroner's soft technological determinism. More entries here, and here.

The End of Bretton Woods

  

End of Bretton Woods with Barry Eichengreen, myself and Lilia Costabile, organized by L-P. Rochon and the Review of Political Economy.

Nixon ends dollar convertibility

50 years ago this Sunday. A debate with Barry Eichengreen on that today at 1pm NY time, and you can register here.

My paper can be read here.

Financialization, Deindustrialization, and Instability in Latin America

New working paper at the Political Economy Research Institute (PERI). From the abstract:

The paper analyzes the relation between premature deindustrialization in Latin America with what is termed premature financialization. Premature financialization is defined as a turn to finance, organized as an industrial concern, which is a vehicle for accumulation before the process of industrialization has reached maturity. This contrasts with developed countries where financialization occurs after an advanced stage of economic and social development is reached, and where the growth of the financial sector, beyond a certain threshold, can be detrimental to economic activity. The paper examines the consequences of premature financialization for investment, growth, and financial stability.

Read full paper here.

The Consolidation of Dollar Hegemony after the Collapse of Bretton Woods: Bringing power back in

Collapse, ma non troppo!

New IDEAS Working Paper on the alternative views of the collapse of Bretton Woods. From the abstract:

Contrary to conventional views which suggest that the collapse of Bretton Woods represented the beginning of the end of the global hegemonic position of the dollar, the collapse of the system liberated American policy from convertibility to gold, and imposed a global fiat system still dominated by the floating dollar. The end of Bretton Woods and the set of regulations that imposed capital controls were part of the agenda of many powerful groups within the US, and led to the creation of a more dollarized world. The challenge to the dollar might arise, eventually, from the decline in the United States’power to determine the pricing of key commodities in global markets; but it is premature to think about the demise of the dollar. The limitations of the dominant views about Bretton Woods are ultimately tied to mainstream economics.

Read it here.

The economics of New Developmentalism

New versus Classical Developmentalism

New paper by Tom Palley, titled “The Economics of New Developmentalism: A Critical Assessment” which has been published in Investigacion Economica. Palley argues that "the issues raised will be a key element in the 2022 Brazilian presidential election that will likely pit Ciro Gomes versus Lula in the first round. Gomes aligns with New Developmentalism. Lula inclines to Classical Developmentalism. Of course, economic analysis is just part of the development problematic. It must be reconciled and integrated with the political reality of Latin America’s unethical economic elite, its corrupted political class, and the omnipresent threat of US intervention against change that challenges the economic status quo."

The Price of Peace by Zachary D. Carter

Each era gets its own version of Keynes. The post-war era got the sanitized biography by his disciple and friend Roy Harrod. It emphasized the somewhat late Victorian values of what he called the presuppositions of Harvey Road, Keynes’ birth place at Cambridge, representing the ethical principles that he received from his parents. Not only it avoided any discussion of Keynes' sexuality, that was verboten at that time, and not just because Keynes’ mother was still alive, but also it was well suited to the moderate Neoclassical Synthesis version of Keynesianism that came dominate American academia and the profession with its emphasis on wage rigidities and imperfections. Lord Robert Skidelsky famously argued that Harrod’s biography was “an exercise in covering up and planting false trails” (Skidelsky, 1983: xxv).

 Skidelsky had the advantage of time, and his biography – the three volumes that came out after the publication of Keynes’ Collected Writings, one might add – was more direct and truthful about his subject. Yet, the biography was published between the 1980s and the early 2000s, the period in which the crisis of Keynesian economics was complete, and his ideas forgotten, or worse, as famously noted by Robert Lucas Jr., simply ridiculed. In many ways, Skidelsky’s biography, which broke new ground on the personal life of Keynes, was defensive and did not challenge the notion that his theory relied on imperfections.

 Zachary D. Carter’s book is not quite a biography in the same way that the two cited above, or the one by Donald Moggridge, one of the co-editors of Keynes’ Collected Writings. There is little need for another detailed speculative analysis of the lesser known aspects of Keynes’ life and how these affected his economic views. Carter does something better. He provides a lively discussion of the rise and fall of Keynesian ideas, beginning with how Keynes’ developed his analytical framework, from his theoretical struggles of the 1920s, with some retrospective analysis of his previous life and work, to his premature death in 1946. He also discusses the apogee and the fall of Keynesian economics after Keynes’ death, and the rise to dominance of neoliberal ideas, at least until the last crisis. In that respect, the book has two parts. The first twelve chapters that discuss Keynes’ life and the intricate dance between economic policy debates and rapidly changing economic ideas that eventually propelled the Keynesian Revolution, and a second part from chapter thirteen to seventeen, where John Kenneth Galbraith and Joan Robinson pick up Keynes’ mantle as the proselytizers of the true Keynesian gospel. They battled not only with avowed neoliberals and anti-Keynesians like Milton Friedman and Friedrich Hayek, but also against the brand of Keynesianism that came to dominate academia, and the “greatest prophet of this ‘New Economics,’ as it would come to be known in the John F. Kennedy years, … Paul Samuelson” (p. 399).

 Read rest here.

Laissez-faire policies, self-adjusting market system, and neoliberalism

Classical political economics was in part a discourse for the rising bourgeoisie, and as such most of its members – that accepted some version of the labor theory of value and that distribution was conflictive – were for laissez-faire policies. That was certainly the case of the Physiocrats, and of Adam Smith and David Ricardo, the two most accomplished of the British political economists.

However, the classical analytical scheme did not assume full employment of labor or that the economic system was self-adjusted. Competition meant that market prices fluctuated around the natural prices, but those did not imply efficient allocation of resources. The notion that markets are self-adjusting with a tendency to full employment was a development of the last quarter of the nineteenth-century, and part of the so-called Marginalist Revolution. Marginalism also implied that each factor of production, capital and labor, received a share of income in accordance with the services rendered in production. Distribution was harmonious and not conflictive.[i] However, that did not imply that marginalist authors were all for laissez-faire.

It is clear that laissez-faire policies – leaving markets to its own devices without government intervention – could theoretically lead to efficient outcomes in the new theoretical scheme. But many marginalists authors believed that imperfections were relatively common in the real world and that under these circumstances some degree of government intervention was required. Market imperfections were a central reason for government intervention, before the Keynesian Revolution. In addition, most marginalists believed that economics was a science, technical in nature and not an art that required understanding of political factors, like class interests, wage bargaining, the power of capitalists, etc. These were imperfections, and they required government intervention. That was certainly the dominant view within marginalism associated with Cambridge University in England, and with its main academic figure Alfred Marshall.[ii]

Marginalists were part of a late nineteenth-century trend that believed in the power of experts, technocrats, in a period in which economics was becoming professionalized, and independent of the moral sciences. They were policy advisors. Simplifying considerably, one may say that classical authors were for laissez-faire, but not for the self-adjusting nature of capitalism, while marginalists were for the notion that markets are self-regulated, but less keen on hands-off governments. The conjunction of the two, the notion that laissez-faire capitalism is self-adjusting, was a distinctive feature of some of the marginalist authors, in particular the ones associated with the Austrian school, with Ludwig von Mises and his disciple Friedrich Hayek. That is, it is only with the rise of neoliberalism that laissez-faire and the self-adjusting nature of capitalism become associated.[iii]

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[i] The notion that distribution is harmonious and not conflictive as assumed by classical authors precedes marginalism or neoclassical economics, and was fundamentally developed in the period after the abandonment of Ricardian economics by pamphleteers and political economists that were afraid of the social implications of the work by David Ricardo, and the development of Socialist theories. Nassau Senior is probably the key author, and Frédéric Bastiat and Harriet Martineau the popularizers of the new dogma. Karl Marx referred to these post-classical authors as vulgar economists, and the term seems fitting.

[ii] Arthur Cecil Pigou, Marshall's main disciple, and John Maynard Keynes' teacher, was concerned exactly with the imperfections caused by externalities that required some sort of government intervention. These would be taxes or subsidies, depending on the nature of the externalities.

[iii] Later, in the 1940s after encountering insurmountable problems with his theory of cycles and the notion of capital, when he distanced himself from economics, Hayek exposed a different argument in favor of laissez-faire policies based on complexity and unintended consequences of government intervention. In this case, the argument was that government failures were worse than market failures or imperfections.

The Demise of Bretton Woods

ROPE will be hosting a special Zoom Webinar, hosted by Lilia Costabile. The webinar is on August 13, 2021, at 1 pm, NY time (Bretton Wood collapsed on August 15, 1971) . To register, please use the following link.

Impact factor

The Review of Keynesian Economics (ROKE) Clarivate impact factor has gone up again. The five year one is a bit higher at 1.397. For a critical discussion of the role of impact factors and journal rankings see this old post from when ROKE was just 3 years old and was ranked for the first time. Next year it will be the 10th anniversary of the journal.

Bitcoins and El Salvador

I haven't written about bitcoin in a long while, in part because it is somewhat irrelevant, like all notions of a future dominance of private currencies (another of Hayek's incredible blunders; more problems with Hayek here and here). Note that nation states are fine and well, and not going anywhere, and hence national currencies will remain dominant. Only a weak state without its own currency (El Salvador is dollarized; on that see here and here) would make bitcoins legal tender. But more on that later.

Even though it's discussed in my old post, let me first explain why bitcoin makes little sense as a currency. The first thing to note about bitcoiners is that they think that the state management of the currency is prone to abuse, and that the value of money, and, hence the price level (or its change, i.e. inflation) suffers as a result. The slow and persistent mining of bitcoins, in this view, is what leads to a stable price level. The value of money depends on its scarcity, according to some version of the Quantity Theory of Money (or if they were more sophisticated some notion of a natural rate, and that would work at full employment). Of course, that notion breaks down pretty fast, since inflation is seldom related to excess printing of money by the central bank.

Note that the value of bitcoins has recently collapsed from about 60,000 to around 33,000. It's closer to 34,000 or so now. At any rate, to make things simpler, and rounding things up, the price has been halved, in dollars. In other words, if you bought with one bitcoin something that costed US$60,000 now you need approximately 2 bitcoins rather than one to buy the same thing. Prices doubled in bitcoins in just a few days. That's a doubling of the price level, an increase of 100%, or very high inflation in bitcoins. So inflation in bitcoins (and in any currency really) has little relation with the amount of money. Exchange rate depreciation is crucial, as well as other costs (on alternative theories of inflation see here).

In other words, bitcoin is simply an asset, as gold since it was demonetized almost 50 years ago by Nixon, with the closing of the gold window (or 1968, if you take the link to Fed notes). It is something that is purely relevant for speculation, contrary to some other financial assets that might be relevant for other uses, even industrial uses like gold. Don't get me wrong, block chain technology and digital currencies might become relevant, but that would be once national governments and central banks, which are moving slowly in that direction, decide to adopt them.

I haven't read much on Bukele's decision to make bitcoin legal tender. But the notion that this would be good for the population is crazy. Notice that if you send one bitcoin, and the value collapses before its collected and changed back to dollars, in a period in which the price is reduced by half, then the person receives half the amount of dollars. The fluctuations of asset prices could be wild, and the losses staggering. And El Salvador depends heavily on remittances from the US; something around 20 percent of GDP. The only possible relevant use for bitcoins is for illegal transactions, other than speculation in which someone can win huge amounts, while many lose their pants. Other than that, this is a decision that compounds other terrible decisions taken by previous administrations, like dollarization and entering the free trade agreement with the US.

From developmental to failed state

The talk I gave for Rethinking Economics Peru (in Spanish). Go check their website and materials here or if you don't speak Spanish there's a lot of interesting material in the general (in many languages) Rethinking Economics here. An older post, in English, that discusses essentially the same thing.

The end of Friedmanomics?

Friedman's advisees

Zachary Carter, of Price of Peace fame (a good book that I recommend, btw), wrote an interesting piece on Milton Friedman's legacy, which I think is, as Hyman Minsky said of Joan Robinson's work, wrong in incisive ways. But even before we get to his main point, that the era of Friedmanomics is gone, it is worth thinking a bit about the way he approaches the history of ideas. This is clearly a moral tale for Carter, with good guys and bad guys. Gunfight at high noon. It is more about vision than analysis, in the terminology of Schumpeter.

He starts, like Nancy MacLean in her Democracy in Chains -- I discussed only tangentially

the issue here -- with Brown v. Board of Education, and Friedman's, rather than Buchanan's, insidious behavior favoring policies that allowed the persistence of segregation. He tells us that: "it is hard to believe Friedman was merely naïve and not breathtakingly cynical about these political judgments, particularly given the extreme rhetoric he used to attack anti-discrimination efforts." Yet, as he continues he seems to change his mind and argue that: "yet he appears to have genuinely believed what he said about markets eliminating racism." So it seems he was naïve after all, according to Carter.

Of course, to determine whether Friedman was cynical or naïve is a thankless task and somewhat besides the point. Friedman was analytically wrong. There is a reason Schumpeter's monumental book is A History of Economic Analysis, and not of economic ideology. And Carter argument is built on moral, ideological grounds. Friedman is the bad guy. He tells us that: "[t]he chief political disputes of the 1950s and 1960s, as today, really were about moral values, not technical predictions." Don't get me wrong, vision matters, and it's hard to disentangle from analysis, but it is clear that Friedman's views differed analytically from the ones discussed by the Keynesian disciples at Cambridge (less so in the case of some of the Neoclassical Synthesis Keynesians that came to accept Friedman's notion of a natural rate of unemployment by the late 1960s). But it is hard to say that Friedman was for segregation, when he explicitly says he was against, and Carter himself thinks that he might have been sincere about that. Other than finding archival material that shows that Friedman knew better we are left with conjecture and guess work.

The key analytical differences between Friedman and the more heterodox Keynesians I alluded above, were not so much in his classic book on monetary history with Anna Schwartz, cited by Carter, but in his AEA presidential address from 1968. The return of the natural rate was the foundation that allowed, once the political circumstances were ripe for the demise of the Golden Age, for the return of marginalist analysis. In a sense, the notion of a natural rate of unemployment went full circle and added to the Neoclassical Synthesis notion that Keynes was fundamentally about wage rigidities or other imperfections. Note that this happened after the capital debates, when the logical foundations of the neoclassical theory was in shambles. In favor of Friedman, I might add, he did write the analytical model down in the debate with his critics, in contrast with Hayek, that after abandoning economics in the 1940s dedicated himself to ideological discussions without any analysis. Vision without analysis as my good friend Fabio Freitas poignantly says.

Carter is on firmer ground when he argues that Friedman was not a classical liberal, and had little in common with Adam Smith, although Friedman himself might have thought so; understanding of history of ideas is sadly vey uncommon among economists. Carter tells us that: "Friedman preferred to be identified as either a 'neoliberal' or a 'classical liberal,' invoking the prestige of the great eighteenth- and nineteenth-century economists—while conveniently gliding past their often profound differences with his political project. (John Stuart Mill, for instance, identified as a 'socialist,' while Adam Smith supported a variety of incursions against laissez-faire in the name of the public interest)." The differences with Smith were not fundamentally political though, but analytical (Stuart Mill is a more complicated transition author). Markets did not produce efficient allocation of resources or full employment of labor for Smith, as in the Marshallian world of Friedman and the Chicago School.

At any rate, the notion that Friedmanomics (or Neoliberalism for that matter; on that here) is dead is at best an exaggeration. In part, the misdiagnosis results from Carter's view according to which: "Friedman’s major theoretical contribution to economics—the belief that prices rose or fell depending on the money supply— simply fell apart during the crash of 2008." That's definitely not the main lesson from Friedmanomics. The quantity theory was never particularly dominant. It was a return to the simple notions of marginalism, of the theory of value, that suggests that supply and demand produce optimal outcomes, that lead to full employment, and that can fix all sort of social maladies (including racism, as Carter notes correctly) that was central to Friedmanomics, and neoliberalism.

In other words, his main legacy was the idea that the market society is a panacea. That free markets are prerequisite for a democratic society (Hayek was more forceful in that argument, without even trying to provide the analytical foundations). Something used cynically to favor the interests of a narrow group by the politicians Friedman advised (the three on top, for example). And while it is true that the last financial crisis (the 2008 one) has led to a reassessment of the role of government, and more so with the pandemic, as I discussed here, the notion that Friedmanomics is gone is wishful thinking.

Even though the profession has abandoned Friedman's Marshallian version of marginalism, his notion that markets do produce optimal outcomes has received no serious challenge within academia, and, in policy circles, interventions follow a pragmatic notion that market imperfections are worse than government imperfections. But that could change rapidly, like Larry Summers support for expansionary fiscal policies. Friedmanomics will certainly make a come back.