Sunday, December 31, 2023

Podcast Failures: Friedman and Chile, Hume and Public Debt

I listen to a few podcasts during my commute. Two that I often appreciate are Know Your Enemy, associated with Dissent Magazine,* a series of interviews on mostly right wingers by Matthew Sitman and Sam Adler-Bell, and Past, Present and Future, a series of monologues by David Runciman, sponsored by the London Review of Books.  Both are always entertaining and informative. I'm not a specialist in most of the subjects they discuss. However, two recent episodes (or at least I listened to them recently), one from each, dealt with economic issues, and they did leave a lot to be desired, to say the least.

Very briefly, the issue with the interview with Jennifer Burns about her biography (in many ways, from this interview, and the one with Tyler Cowen, it is hard not to see it as a hagiography; more on that as soon as I read the book; it's been ordered. I hope that's just a perception and that the book provides a more balanced view of his contributions and political views) of Friedman is that the hosts accepted almost all of her very monetarist interpretation of the Allende government, and her whitewashing of Friedman's relation with the Pinochet regime (see on that this and this). In all fairness, at least one of the hosts (sorry, not sure that was Matt or Sam) questions (around 1:16) the validity of her interpretation of the relation of Friedman with the regime. But there seems to be a complacent view according to which inflation in Chile was caused by excessive monetary printing driven by the expansion of the welfare state.

The role of the US sanctions, and Nixon's infamous instruction to "make the economy scream" are never cited. And the lack of dollars was at the center of the depreciation of the currency, inflation and the collapse of the economy. Let alone that the Pinochet period wasn't that good (yes they do claim that it created the basis for future growth, a typical conservative trope, that I should write about; in another occasion). I also recommend this post by Tom Palley. On a general evaluation of the regime see this piece by Jim Cypher in Dollars & Sense.

The issues with Runciman's podcast are considerably more problematic. They don't entail a misrepresentation of the ideas of a crucial intellectual, in this case, David Hume. In fact, Runciman is relatively correct when it comes to Hume's essentially negative views of public debt (which were not all that different than those of Adam Smith, at least according to Donald Winch**; btw it was called public credit at that time, so nothing weird about it). He makes to much of Hume's drastic solution, default, for public debt, and its comparison with suicide, for the nation not the individual. And he does recognize that events essentially proved Hume wrong.

But then he commits all of Hume's (and modern mainstream economics). Presumes that the only way out of debt is to run persistent surpluses, printing money and reducing its value in real terms (endorsing a Monetarist view of inflation; it's amazing how pervasive it is), and default. He misses that debts can fall as a share of income (GDP), that is, the ability to repay, if the economy grows faster than debt (the rate of interest), and that most debt consolidations actually happened that way, while running deficits. He also gives Argentina as an example of a country that has defaulted without noticing the differences between debt in domestic and foreign currency. It's a mess. Worse, in an environment in which many conservatives want to promote default in the US he suggest that talking about it would be reasonable. He is out of his depth, should apologize and invite someone to explain the problems with his analysis.

Again, I'm only commenting on these two episodes, because they do seem off, when compared to the quality of both podcasts in general.

* I published almost 20 years ago on Dissent. Because of this I did search their online archive and my piece, and my name was misspelled. Also, it was published in the Winter of 2004, and not of 1984. In the original magazine it was spelled correctly. Oh well.

** See Donald Winch, "The political economy of public finance in the 'long' eighteenth century," in John Maloney (ed.), Debt and Deficits: An Historical Perspective, Cheltenham: Edward Elgar, 1998.

Saturday, December 30, 2023

Second and third parts of the interview (in Spanish)

Second and third parts of my interview with Diego Polanco. On Argentina, Brazil, heterodox economics, and more. In Spanish. First was here.


Rest here:

Thursday, December 28, 2023

What's the deal with The Smiths


With friends like this...

This is NOT a review of the Smiths (the band), and neither of (or at least not a full one) of Glory M. Liu's (relatively) new book Adam Smith's America: How a Scottish Philosopher Became An Icon of American Capitalism. For a proper review go read Kim Phillips-Fein's one. In a sense, the book remind me of Bernard Shaw's famous saying that UK and the US were two countries divided by the same language. Here the gap is between fields, and there are two gaps, one within economics, modern mainstream economics and old classical political economy. Liu is a political scientist by training, and what she takes as economists views, including the understanding of the history of the discipline, are fundamentally from a mainstream perspective.

The phrase by Sraffa, that I have cited before fully applies here. He said:

"The classical economists said things which were perfectly true, even according to our standards of truth: they expressed them very clearly, in terse and unambiguous language, as is proved by the fact that they perfectly understood each other. We don’t understand a word of what they said: has their language been lost? Obviously not, as the English of Adam Smith is what people talk today in this country. What has happened then?" [Sraffa, Nov. 1927, D3-12-4, front page, 14]

In particular, the continuity in what has been aptly referred to as the surplus approach from William Petty to Smith, and the well documented trajectory from the ideas of Petty to Cantillon, to Quesnay, and then to Smith is lost in her relatively thin discussion of political economy aspects of Smith. The book by Tony Aspromourgos, On the Origins of Classical Economics: Distribution and value from William Petty to Adam Smith, is required reading on this subject. Smith clearly builds upon the core of the surplus approach, as developed by Petty-Cantillon-Quesnay, in particular on the question of the notion that manufacturing activities are productive. That is certainly an important aspect associated to the disputes between agrarian and industrial views of society.

But while there are differences in their views with respect to what might be termed the model of development (agrarian vs manufacturing), there is clear analytical continuity between Smith and the Physiocrats. They are all concerned with the material reproduction of society, in which the surplus (and, hence, profits and distribution) is a residual, and wages are at the level of the socially and institutionally determined (not merely physiologically) by the needs of survival of the working class. Smith saw distribution as conflictive. That's an analytical point that cannot be dismissed, and is not discussed in Liu's book at all.

This matters to some extent, because the general argument in Liu's book -- which is for the most part correct, that Smith ideas have been used by different groups to promote agendas that were not originally part of Smith's arguments, and that he was a complex author with more depth than often transpires in these several versions of reinvented Smiths (hence, the Smiths) -- misses the actual point of the original Smith. In her view, the nuance is provided by the fact that Smith was a moral philosopher and that in his other major work (and in his Lectures on Jurisprudence, based on students notes, and published posthumously), The Theory of Moral Sentiments (TMS), a Smith different from the one of The Wealth of Nations (WN) appears. Smith cannot be seen as a defender of selfish behavior, since he is clearly critical on TMS (the so-called Das Adam Smith Problem, about which Liu makes more than one should), neither an unqualified supporter of unregulated capitalism, since he qualified it, including in the WN (for example, with his approval of the Navigation Acts; I would add of the Bank of England). That's fine, but displays a limited understanding of the relation of Smith's and the surplus approach with modern economics.

Smith is misread by modern economics NOT because he was not an unqualified defender of unmitigated, unregulated, laissez-faire capitalism (which he wasn't), but because theoretically his economic system did not imply that markets produced optimal outcomes. His defense of laissez-faire and of commercial societies was not based on the allocative efficiency of markets (neither then intervention could be supported as a way to preclude inefficiencies), but simply as needed break with the remnants of feudal institutions that hampered the process of accumulation. As Marx noted in his The Poverty of Philosophy (Works, vol. 6: 176): "The Classics, like Adam Smith and Ricardo, represent a bourgeoisie which, while still struggling with the relics of feudal society, works only to purge economic relations of feudal taints, to increase the productive forces and to give a new upsurge to industry and commerce."

Of course, to sort this out one has to get into the theory of value.* The labor theory of value (LTV) (in an early and rude state of society) meant that the long term (natural) prices were determined by the relative amounts of labor, and supply and demand only determined short term market prices. This theory implied that profits were determined as a residual, for a given level of output and with real wages given, for historical and institutional circumstances, at the level of subsistence. The implication is that the theory did not imply the full utilization of labor, and that distribution is conflictive. So Smith's policy defense of laissez-faire was not based, like modern neoclassical versions (in particular the Chicago School that Liu's discusses in more detail, including Stigler, pictured above), on markets producing the optimal allocation of resources, including the full utilization of labor.

It is clear that Smith is not a forerunner of Marx, something that the latter understood. Marx shared an analytical framework with the classical authors, but rejected their a-historical categories. He argued that:

"Economists like Adam Smith and Ricardo, who are the historians of this epoch, have no other mission than that of showing how wealth is acquired in bourgeois production relations, of formulating these relations into categories, into laws, and of showing how superior these laws, these categories, are for the production of wealth to the laws and categories of feudal society." (Ibid.).

But it is also clear that the theoretical foundations of his policy views was very different than those that were built from the developments of the Marginalist Revolution, and closer, in fact, to Marx's own analytical framework. On that Milgate and Stimson (2009), in their very useful After Adam Smith, are also clear. They say:

"Indeed, if the contemporary economic case for liberty is ultimately made in terms of the language of the market, which if left unimpeded by the state is capable of solving a static problem of allocating a fixed supply of resources, then we have moved well beyond these eighteenth-century thinkers such as Smith. In this sense it might be reasonable to ask whether what we understand today as free market theory—against which a modern form of nationalist- led trade policies might be said to operate—is different in important ways from the eighteenth-century political economy from which it is said to have originated. It might also be well to ask just how that transformation of the conceptual framework of political economy and its relationship to politics that came about after Smith took shape" (2009: 32).

Without an understanding of the changes in political economics (and its transition to economics) after Adam Smith, one is left with the puzzle noted by Sraffa almost a century ago.

* On the reasons for the need for a theory of value go here. For more on the limits and problems of the LTV see this and this.

PS: I should note that Liu tells the story of Stigler's T-Shirt that read Adam Smith Best Friend (Nathan Rosenberg's paper on that here). Back when, my PhD students in Utah, did a T-Shirt on my suggestion that there should be an alternative to Stigler's one. The Heterodox Students Association (HESA) T-Shirt read: I read Adam Smith and Understood it. Enough said. Old post on that. A recurring theme around here.

Sunday, December 24, 2023

Robert Solow (1924-2023), who was on the board of ROKE, is dead

Over the years, I had the opportunity to interact with Bob Solow, who was very open to discuss with people he disagreed with, and debate the substantive analytical and empirical issues, taking seriously the ideas of others. I first met him because when I was an Assistant Director at CEPA (now Schwartz Center, SCEPA), back in 2000 or 2001, working for Lance Taylor, I found out he was spending some time in NY at the Russell Sage Foundation, and I invited him for a talk (if memory doesn't fail me the title was, The Good Five Years, about the Clinton boom). He presented, according to him, his first overhead projector slide.

At any rate, after that I invited him to be part of the board of ROKE, which he accepted. In his letter, he explained what he thought ROKE was about and what it should do to avoid the fate of other heterodox journals.

He also published this paper on Friedman's presidential address in 2017. His obit at the NYTimes here.

Wednesday, December 20, 2023

A short note on Argentina's depreciation, inflation and possible dollarization

That Argentina is in for a major crisis is, I think, pretty clear and well-known. I won't delve too much on the political aspects of what Finchelstein refers to as wannabe Fascistic tendencies of the new president.  Today a major protest should take place, and the same people that suggested that Peronists groups forced the recipients of social transfers to participate (something that was never proved) under threat of being cutoff, are threatening to cutoff those that participate. You know, because they defend individual liberties and all.

First of all, the economic plan (and many heterodox authors had been calling for what exactly done) was simply maxi-depreciation, of 100 percent, of the official exchange rate, to try to close the gap with the parallel market (or blue) rate, and the announcement of a massive fiscal adjustment, supposedly of about 5 percent of GDP. As discussed here several times, the effects of these policies are certainly a significant acceleration of inflation, and a massive recession. These are well-known effects of a maxi-depreciation. Prices will adjust to the massive increase in the cost of imported inputs, and the increase will reduce real wages (that, by the way, is one of the main reasons for the measure), and have a contractionary effect on spending, that will be compounded by the fiscal adjustment.

Two brief technical things. The adjustment may not per se improve the fiscal accounts, since the economic collapse will reduce revenue too. It is a well-known rule that consolidations (reductions of debt and of deficits, the results of policies) tend to be more successful with a growing economy, and without a massive adjustment (reduction in spending and/or higher taxes, the direct policies).* Second, the reduction in the exchange rate premium (the gap between official and parallel rates) is not an indication that things are better, if it is done, as it was, by depreciating massively the official rate. In particular, the question is what will happen with the parallel premium in the near future. The official exchange rate will be on a crawling peg, if the announcement of the new minister is believable. And the premium has been very high, because of the interest rate differential between returns in pesos and in dollars, adjusted for risk (see figure below, which shows the interest rate in pesos compared to the actual depreciation of the currency, plus the US rate and the EMBI from JP Morgan). The remuneration in dollars is always higher.

The government has also announced a plan to essentially transform the central bank bonds (Leliqs) into treasury bonds. And the interest rate on the central bank bonds were kept low, presumably to get everybody into the treasury ones. However, the treasury bonds will have to pay a very high rate, since the the expected depreciation is large, and the government announced it will continue. That suggests that they are expecting people to continue to go to dollars, and that might actually lead to a persistence or increase of the exchange rate premium. In particular, if there is significant wage resistance, to be expected after this massive depreciation, and inflation accelerates.

In the absence of dollars, there is little chance of a stabilization. The government may very well be trying to accelerate inflation to create the conditions for a dollarization later on.

* Most economists confuse adjustment and consolidation of fiscal accounts. In part to cloud the fact that consolidation does not require adjustment. The US reduced its massive debt accumulation during World War II, without adjustment, by growing fast in the post-war era, in which the government did run deficits frequently and the welfare state was actually expanded, particularly in the 1960s.

Saturday, December 16, 2023

Argentina and the Philippines: Similar development struggles

Friday, December 1, 2023

Tony Thirlwall (1941-2023)

Leading academic and Keynesian best known for Thirlwall’s Law on economic growth

John McCombie

The economist Tony Thirlwall, who has died aged 82, was, in his own words, an “unreconstructed Keynesian”. He saw this not as a pejorative title, but more as an accolade, considering that many of the insights of John Maynard Keynes, and in particular the importance of demand, are still relevant for understanding today’s economy.

Tony is perhaps best known for his original way of thinking about economic growth. This challenged the supply-side orthodoxy, which often assumes a closed economy in which the growth of demand is missing and the structure of production does not matter. Thirlwall took the Keynsian approach that it is demand that drives growth, but, importantly, the balance of payments can be a major constraint on demand.

In 1979 he established an economic relationship that has come to be known as Thirlwall’s Law. This was elaborated in his 1994 book, Economic Growth and the Balance-of-Payments Constraint, which I co-authored. The simplest form of the law is that the long-run growth of a country can be approximated by the ratio of its growth of exports to its income elasticity of demand for imports.

Any attempt by a country to grow faster than the ratio given by the law is likely to be thwarted by an unsustainable growth in the current account deficit.

It is testament to the importance of the law that research concerning it is still continuing, with a recent symposium in 2019. The law has also proved influential in policy institutions such as the UN’s Economic Commission for Latin America and the Caribbean, and the United Nations Conference on Trade and Development.

A major influence on Tony was the distinguished Cambridge economist Nicholas Kaldor. Tony had the highest regard for his work and extended Kaldor’s approach, especially, to economic growth. He wrote his intellectual biography (1987) and was also his literary executor after Kaldor’s death in 1986.

Tony started as a regional and labour economist, but his major research interest lay in development economics. He wrote many books and papers in this field, including on such topics as inflation in developing countries; financing economic development; and the effect of trade liberalisation on such countries.

His bestselling textbook, Growth and Development, With Special Reference to Developing Countries, was first published in 1971 and has run to 10 editions (with a later change in title to Economics of Development: Theory and Evidence). The last edition was co-authored with his wife and research collaborator, Penélope Pacheco-López, whom he married in 2011.

Tony’s expertise in this subject led to many invitations over the years to universities in the developing world, and also to give policy advice to a number of international organisations.

Born in Cockermouth, Cumberland (now Cumbria), Tony was the son of Ivy (nee Ticehurst) and Isaac Thirlwall, a railway clerk. At Harrow Weald county grammar school he was an accomplished athlete. After graduating with a BA in economics from Leeds University in 1962, followed by an MA at Clark University in Massachusetts in 1963, he started his PhD at Cambridge University, where he ran in the Oxford-Cambridge cross country race the same year. He took up running again in his early 40s and represented Britain in the 400 and 800 metres in the European Veterans championships in Strasbourg in 1982.

He returned to Leeds in 1964 to take up an assistant lecturer post, and was awarded his PhD there in 1967, a year after moving to Kent University, where he was made professor of applied economics by the age of 35. He was later director of graduate studies in economics at Kent for many years, with a master’s (and PhD) programme in development economics.

To celebrate the life and work of Keynes, Tony organised 11 biennial Keynes seminars between 1973 and 1991. These attracted large academic audiences, including some of Keynes’s contemporaries, such as Roy Harrod, Richard Khan, Kaldor, and Joan Robinson.

Tony’s research output was prolific: 18 books, several of which were translated into numerous languages, editor of 12 volumes and author of more than 200 refereed journal articles.

He retired from Kent in 2004, when he was made emeritus professor, and remained active in his research until just before his death.

His first marriage, to Gianna Paoletti in 1966, ended in divorce in 1986. They had three children, Lawrence, Alexandra and Adrian.Adrian died shortly after his birth.

Tony is survived by Penélope and their son, Oliver, by Lawrence and Alexandra, and by four grandchildren, Ben, Sam, Lorenzo and Sienna.

Anthony Philip Thirlwall, economist, born 21 April 1941; died 8 November 2023 

Originally published here.

Podcast with about the never ending crisis in Argentina

Podcast with about the never ending crisis in Argentina with Fabián Amico, and myself and interview by Carlos Pinkusfeld Bastos and Caio Be...