From Regulation to Deregulation and (Perhaps) Back (Talk in Portuguese)

My talk at the Federal University of Rio de Janeiro yesterday, on the rise, fall, and perhaps rise again of the regulatory state in the US, and its relation to ideas, particularly institutionalist, and Chicago School views, as expressed by John R. Commons and George Stigler. In Portuguese, of course.

James K. Galbraith's Veblen-Commons award

Ritual and prestige among the Institutionalists

Jamie got the Veblen-Commons award, something his father received back in 1976. I introduced him, and as expected discussed a bit his contributions to economics, and the understanding of institutions. His most important contributions are on the field of inequality, and the work he has done with the University of Texas Inequality Project (UTIP).

There are many contributions that Jamie and UTIP have made. His use of the UNIDO payroll data, that he noted in his Godley-Tobin Lecture, has significant advantages over tax records and household survey data, and provides a different picture of global inequality. His use of the Theil decomposition is also original and provides new insights on inequality. And there is the more important contribution, his preoccupation with the macro-foundations of distribution theory.

I suggested, however, that perhaps his most provocative contribution to the understanding of economics and the evolution of institutions is in his notion of the Predator State, that in which private interest has taken over the commanding heights to promote the looting of what is left of the New Deal and Great Society project. This notion harks back to his father's famous trilogy -- American Capitalism, The Affluent Society and The New Industrial State (NIS), in particular the latter.

The evolution of of the bureaucratic state that was disappearing as his father wrote about it -- NIS was published in 1967 -- and its transformation into a predatory machine of the elites is central to understand inequality.

Kicking Away the Ladder, Too: Inside Central Banks

Last January the Association for Evolutionary Economics (AFEE) sessions at the Allied Social Sciences Association (ASSA) meetings revolved around the theme of "Inside Institutions," meaning that within institutions there are many actors with different sets of interests, so one must look under the hood, so to speak, of the institution itself to understand its actions. My paper followed my previous discussion of the historical evolution of central banks, and a brief discussion within the Argentine Central Bank. From the abstract of my paper:

Central banks are evolving institutions. In developed countries, particularly in Britain, central banks were used as instruments of the state to finance government and to promote economic development. However, once they went up the economic ladder, advanced economies kicked it to preclude developing countries from climbing it, too. It is in this context that the modern independent central bank, concerned with inflation targeting alone, which harkens back to the Victorian era, should be interpreted. This paper analyzes the recent evolution of the Argentine central bank in this broad historical perspective.

Download full paper here.

PS: This are the proofs and there are some mistakes. And yes, it should say seventeenth century in the first paragraph.

Mitchell and Clark on the business cycles

Starting my seminar on business cycles this week. Mainly theories and then a discussion of both Great Depression and Recession. In the US the original authority, and the intellectual driving force of the analysis of the cycle which started at the National Bureau of Economic Research (NBER), was undoubtedly Wesley Clair Mitchell. The figure above comes from an early analysis of global cycles published in the New York Times back in 1926 (subscription required). The Times quotes him saying that there was: "a trend in the direction of a world economy in which all nations will prosper or suffer together." In other words, a tendency to a global cycle.

In fact, Mitchell is often remembered more as a founder of the NBER and of the quantification of business cycles than his role as a disciple of Veblen and a founder of American Institutionalism.* His institutionalism, however, is often reduced to empiricism. In other words, Mitchell generally is not considered as a theorist. Howard Sherman suggests (subscription required), however, that: "embedded in his theory, but not made explicit in those terms, is a theory of the multiplier and the accelerator." In other words, a Keynesian approach to the cycle.**

This is consistent with the work we published with Luca Fiorito on another institutionalist from Columbia, namely: John Maurice Clark. As we noted then, the fact that the less mechanical, and also non-neoclassical version of Keynesian ideas, basically in contrast to the so-called Neoclassical Synthesis, was relegated to secondary status in the US in part explains how Keynesianism was reduced to a simple case of rigidities and imperfections. Not surprisingly the multiplier-accelerator interaction as the basis of the cycle, even though the empirical evidence for both components is strong, is not part of the mainstream macroeconomic textbooks.

* He was also one of the founders of the New School for Social Research in 1919.

** Mind you he did write with Arthur Burns, who eventually became a Monetarist associated with Milton Friedman and the chairman of the Fed, a famous NBER book on the cycle.

Jane D'Arista: An Appreciation

By Tom Schlesinger

Throughout her career as an author, analyst, congressional staff economist and teacher, Ms. D’Arista has brought together several strands of heterodox economics. While she may be characterized accurately as one of the last great institutionalists, her work also defies easy classification. Perhaps the clearest way to view Jane is as a tough-minded empiricist who has produced critical, original insights into the functioning of the financial system and economy – and done so with the uncompromising goal of improving human welfare.

From the Introduction to the book Banking, Monetary Policy And The Political Economy Of Financial Regulation: Essays in the Tradition of Jane D'Arista. Read rest here. Jerry Epstein posted this on Elgar's blog too.

PS: Jane is also a poetess, see her book here. The drawing of her above was done by Robert D'Arista, her late husband.

Classic Paper by Arestis & Eichner: "The Post-Keynesian and Institutionalist Theory of Money and Credit"

Recently, (see here) Matias posted a link to Fred Lee's collection of a classic set of by papers by the late Alfred S. Eichner. He mentioned that this not a complete set of Eichner's remarkable work, and that there are plenty of other exceptional pieces; in particular is Eichner's paper with Philip Arestis: "The Post-Keynesian and Institutionalist Theory of Money and Credit." This work has influenced my research tremendously (especially concerning the authors adherence to the tradition of Veblenian Institutionalism, and their emphasis of an 'open-systems' approach to political economy).

From the Introduction (which is worth quoting at length):

The purpose of this article is two-fold: first, to identify the main elements of what constitutes post-Keynesian and institutionalist monetary theory and, second, to put forward a model general enough to encapsulate most, if not all, of the constituent elements of the post-Keynesian and institutionalist theory of money and credit. One further novel aspect of this article is that we account for the possibility of the openness of economic systems. This is an aspect that has been ignored by the literature on both post-Keynesian and institutionalist economics. 

The emphasis in post-Keynesian and institutionalist monetary theory is on the proposition that "Monetary economics cannot help being institutional economics" [Minsky 1982, p. 280] and that "Capitalism is a monetary economy" [Dilland 1987, p. 1641]. In this view money capital is an institution that is inseparable from the other institutions that comprise economic systems. Money is not merely a medium of exchange. It is tightly linked to the behavior of the enterprise sector and the economy as a whole. Therefore, the basic theme in this approach is inevitably, "The Monetary Theory of Production" [Keynes 1973; Veblen 1964]. It is in fact this Veblenian/Keynesian premise that constitutes the core of what we have labelled in this study "the post- Keynesian and institutionalist theory of money and credit." 

In this monetary theory of production, it is not surprising to find that credit rather than money is the mechanism that enables spending units to bridge any gap between their desired level of spending and the current rate of cash inflow. Money is viewed as essentially endogenous in a credit-based economy, responding to changes in the behavior of economic entities, rather than being subject to the control of the monetary
authorities. Money, in this view, is an output of the system, with the endogenous response by the financial sector governed by the borrowing needs of firms, households, and the government. Once it is recognized that money is credit-driven and therefore endogenously determined, any money creation emanating from fiscal or debt management operations initiated by the authorities or from a favorable balance of payments, can be neutralized through an equivalent reduction in commercial bank credit brought about by the actions of private economic agents.' It clearly follows that government may not be able to create money directly (see, however, Chick [1986]). 

What it can do, instead, is redistribute money among different groups of economic agents. This can happen when governments, in their attempt to increase/reduce the stock of money, set in motion the process whereby bank credit is created/destroyed by groups of economic agents. To the extent that the latter groups are different from those initially receiving/destroying money following the government's initiatives, redistribution of money between those groups takes place. 

The endogenous nature of money and credit is further elaborated upon in the next section with the constituent elements of the model under discussion being brought together in the section that follows. It is precisely here that the openness of economic systems is emphasized and its implications for the post-Keynesian and institutionalist theory of money and credit are compared with the neoclassical view. A final section summarizes the argument.

Read rest here (subscription required).

Alfred S. Eichner's papers

Have been posted by Fred Lee and are available here. These are not a complete set of papers and books by Eichner, and I assume that they are the ones that are part of Fred's collection. Still worth checking out.

Below the text of the New York Times obituary (the pdf of the article here). Eichner had been a student of Eli Ginzberg, who was in turn a student of Wesley Mitchell and John Maurice Clark (his not too kind comments on his teachers here), and was the link to the institutionalist tradition.

Alfred S. Eichner Is Dead at 50; Major Post-Keynesian Economist

Alfred S. Eichner, a leading member of the post-Keynesian school of economics and a professor at Rutgers University, died of a heart attack Wednesday in Closter, N.J., where he lived. He was 50 years old.

Dr. Eichner suffered the attack while playing racquetball. He was pronounced dead at Pascack Valley Hospital in Westwood.

A native of Washington, he was a graduate of Columbia College and received his doctorate in economics from Columbia, where he taught from 1962 until 1971. He headed the economics department at the State University of New York in Purchase from 1971 to 1980 and joined the Rutgers faculty the following year.

Dr. Eichner edited several books, including ''A Guide to Post-Keynesian Economics'' and ''Why Economics Is Not Yet a Science,'' both published in 1983 by M. E. Sharpe. His latest book, ''The Macrodynamics of Advanced Market Economies,'' is to be published this year, also by M. E. Sharpe. 

One of the Best Teachers

He was a member of the editorial board of the Journal of Post-Keynsian Economics and he lectured widely and testified before Congressional and other legislative committees.

With Eli Ginsberg, a professor of economics at Columbia, Dr. Eichner wrote an economic history of black Americans, ''The Troublesome Presence: The American Democracy and the Negro,'' published in 1964 by Free Press. Dr. Ginsberg recalled Dr. Eichner this week as ''a first-rate historian and one of the best teachers'' of economics.

As a leader of the post-Keynesian school, a small but influential group of economists in Britain and the United States, Dr. Eichner sought to go beyond the theories of John Maynard Keynes, who advocated government intervention in the free market and public spending to increase employment.

In the view of Dr. Eichner and his colleagues, investment is the key to economic expansion. He advocated a government incomes policy to prevent inflationary wage and price settlements as an adjunct to the customary fiscal and monetary means of regulating the economy.

Dr. Eichner is survived by his wife, Barbara; their sons, Matthew and James, both of Closter; two brothers, Martin, of Palo Alto, Calif., and Stanley, of Boston, and a sister, Belle Joyce Kass of Chicago.

There is more interesting stuff in Fred's page here.

Kirsten Ford, a young Old Institutionalist

Kirsten Ford (1976-2014)

I first met Kirsten in the mathematics leveling class for the incoming PhD students. I think it was in 2007, but it might have been the year before. She felt she needed to take more math courses, and did so at Westminster College, where she had obtained her Bachelor's degree. She had come to economics out of a concern with social justice, and her early views were shaped in Dick Chapman's classes on Keynes' General Theory and Chace Stiehl's discussion of classical political economy authors, both PhDs from Utah's graduate program, which influenced her choice for her graduate studies.

At that time I taught two regular courses in the graduate program, the second required macro class, which basically reviewed heterodox approaches and growth theory (both conventional and heterodox views), and the second history of economic thought course, which went from the Marginalist Revolution to the post-capital debates developments (the change in the notion of equilibrium, and what I referred to as the return of vulgar economics; the first part of the course on classical political economy and Marx was taught by E.K. Hunt). She and her classmates, which were among the best cohorts of students in the PhD program I can remember, took also two other elective courses with me. A seminar on Sraffian topics, and a course in international economic history.

That course was not chronologically organized. The topics covered emphasized unresolved controversial issues in international economic history, e.g. whether there was an Industrial Revolution, the critique of Eurocentric interpretations of History, and the revival of cultural and geographical explanations for relative backwarderness. One of the most fun courses I ever taught, not just because I basically taught what I wanted, but more importantly because I never learnt as much from my students as I did in that opportunity.

Kirsten's interests were broad, but she had a particular concern with the institutional aspects of economic development, approached from a historical perspective, and that would include the history of ideas. That was very much in line with the institutional/Marxist traditions that already existed in Utah's economics department, and fit with my own work in what might be called the Classical-Keynesian tradition (classical meaning the old classical political economists, including Marx, as interpreted by Sraffa, while Keynesian puts an emphasis on the radical followers of Keynes and Kalecki).

She published early on a paper (in a Brazilian journal called Versus, which I suggested as a venue; accessible version here) that was based on a previous one done in a development course with Nilüfer Çağatay. It was a critique of the New Institutionalism of Douglas North, and a discussion of the Veblenian, or Old Institutionalist roots in the radical development economics of Ha-Joon Chang. She also published, with Bill McColloch, one of her colleagues in the graduate program, a paper on the Journal of Economic Issues on the methodological compatibility between Marx and Veblen (working paper version available here), influenced by Hunt's views on the topic, to some extent.

Kirsten also collaborated with me, and Nathaniel Cline, another graduate student at the U, on a paper on the persistence of mainstream policy advice, even after the crisis of the marginalist paradigm in the 1970s, in which we hinted that a real world economic crisis, like the Global Recession of 2008, was an unlikely cause for significant changes in the direction of research, which was published in the Journal of Philosophical Economics (see here). Kirsten was particularly interested in the role of the IMF as a the institutional instrument by which conservative policies were maintained in developing countries. Further research on the lack of change in the IMF policy positions that she conducted will be published later this year in Development and Change.

She was also interested in the role of institutionalist authors during the New Deal, and helped me to do research on Marriner Eccles papers at Marriott Library. We had a project of publishing some of Eccles speeches as the chairperson of the Fed.

Kirsten was extremely generous in her intellectual exchanges, unwilling to take her contributions as exclusively her own, and sharing them as part of the knowledge of the group. Surprisingly that's not common among the heterodox tribe, in which pride and the desire for prominence often lead to fratricidal disputes. She was also generous with her time, dedicating immense amounts of it to organize the Heterodox Economics Student Association (HESA), and making the economics department better for other graduate students, and to her classes and her students. Economics as a profession is a little bit better because of her work.

On principles courses, DeLong, Krugman and the limits of the mainstream

 

'cause it has no implications...

In a previous post, Anonymous commented: "Brad DeLong has been posting slides from one of his classes going over supply and demand (and quotas and price ceilings, market equilibrium, etc.) on his blog. They're pretty entertaining and filled with pop-cultural references. I was wondering what a Post-Keynesian perspective on them might be."

I promised to check Brad's posts and provide a short answer. So here it is. In fact, this semester I am teaching an intro course, something I haven't done since my time in Kalamazoo College. This is not a regular course for me to teach, in other words, like say intermediate macro. At Bucknell all intro courses provide more than the neoclassical (marginalist) perspective. While Brad starts with a neoclassical version of supply and demand (see here) on the basis of Krugman's intro textbook, we start with history and history of ideas, based on a discussion of the classical authors and Marx (here, here and here) and only then get to the supply and demand approach (here). In fact, I am also using Krugman's textbook, together with Heilbronner and Milberg's The Making of Economic Society and additional readings.

In other words, while there is a need to teach the basics of what the mainstream of the profession thinks it is relevant, it is also important to provide critical alternatives to the mainstream. The liberal arts education in the US allows for a lot of flexibility and for the introduction of alternative perspectives. The textbooks (almost all neoclassical) tend to fudge the fact that the notion that economics is about rational choices of individuals faced with scarcity is relatively new (the Marginalist Revolution of the 1870s)*, and quite different from the old classical (or surplus approach) tradition of the material reproduction of society.

* Interestingly enough, in the US the profession was not dominated by neoclassical economics until the 1930s and 1940s, when the rise of Keynesian economics, in the Neoclassical Synthesis version, brought it to the forefront of research, teaching and policy influence. Samuelson's 1948 Economics, the forerunner of all mainstream textbooks, did probably more than any other book to make neoclassical economics the dominant view. Before that the profession in the US was dominated by a potpourri of eclectic and institutionalists authors that held the main teaching positions and were at the head of key institutions like the American Economic Association and the National Bureau of Economic Research (NBER).

Why the crisis didn't discredit mainstream (neoclassical) economics?

There are probably many answers to the question. I suggested before that the best way to look at it is from a sociological standpoint. The same people hold the same positions at the key 'respectable' universities, go to the same 'relevant' meetings, and award the same 'important' prizes. And research does build on previous research. Let alone that the economics profession, like the others, is there to protect and reproduce the status quo.

At any rate, in his new book Philip Mirowski, from Notre Dame, and a member of Institute for New Economic Thinking (INET; which has funded I should say several heterodox authors) dedicates, in part, his first chapter to the topic. He says about the INET meetings, which were supposed to display some of the changes in the profession after the crisis:

"[...] the first INET meeting at Cambridge University in 2010 bore some small promise—for instance, when protestors disrupted the IMF platitudes of Dominique Strauss-Kahn in Kings great hall, or when Lord Adair Turner bravely suggested we needed a much smaller financial sector. But the sequel turned out to be a profoundly more unnerving and chilly affair, and not just due to the caliginous climate. The nightmare scenario began with a parade of figures whom one could not in good conscience admit to anyone’s definition of “New Economic Thinking”: Ken Rogoff, Larry Summers, Barry Eichengreen, Niall Ferguson and Gordon Brown ... The range of economic positions proved much less varied than at the first meeting, and couldn't help notice that the agenda seemed more pitched toward capturing the attention of journalists and bloggers [oh my, I'm included in this one], and those more interested in getting to see more star power up close than sampling complex thinking outside the box. It bespoke an unhealthy obsession with Guaranteed Legitimacy and Righteous Sound Thinking."

I always thought naïve to think that the crisis would lead to the demise of neoclassical economics. In fact, in the US it was the Great Depression and the development of a certain type of Keynesianism (the Neoclassical Synthesis one) that led to the domination of neoclassical economics (before that the profession was more eclectic and if anything dominated, in the US, by institutionalists). But I had some hopes for INET to open dialogue with less crazy (sold out?) within the mainstream. The fact that Mirowski calls the second meeting a nightmare scenario does not bode well for the future of the profession.

Property rights and the Industrial Revolution

I have discussed here a few times (here, here and here, for example; last one by Cesaratto) the role of institutions in the process of economic development. Within the mainstream the dominant view is that property rights are the essential institution for promoting growth. I only now came across the excellent paper by Julian Hoppit.* He says:

"Such views of the interrelated importance of property and the rule of law have led to major interpretations of the interplay of Britain’s economic, social and political histories, including that secure property rights were a vital foundation for the first industrial revolution. Yet property was often heavily taxed, frequently expropriated and, exceptionally, eradicated through redefinition. Such vulnerabilities did not diminish after the Glorious Revolution, they increased—mainly because parliament now met annually, had greater sovereign power than earlier monarchs and legislated prolifically regarding property. After 1688, Britain’s economic precocity rested less on the enhanced ‘security’ of property in any general sense of the word, much more on respect for parliament’s authority and its willingness to allow property to be alienated, most usually by particular interests claiming to act for the public or wider good. At times this required the reversal of commitments made only a generation earlier, raising doubts about central government’s credibility. Taken together, these uncertainties over property rights were sufficient for some to question whether property had a sound theoretical basis at all.
...
The scale of that expropriation was such, and the consequences so profound, as to undermine an important thesis that property rights became more secure after the Glorious Revolution, developed in a notable essay by Douglass North and Barry Weingast and now conventional amongst some ‘new institutional economists’."

Hoppit looks at the extensive expropriations in financial markets, after the South Sea Bubble, in heritable jurisdictions (offices granted by the Crown), and in the property of slaves. Very little is left of the new institutional argument.

* Julian Hoppit in "Compulsion, Compensation and Property Rights in Britain, 1688-1833," Past and Present, No. 210, Feb. 2011 (here; subscription required).

Reversal of fortune and settlement colonies

Acemoglu and others have discussed the concept of reversal of fortune, the idea that the areas with high income per capita around the 1500s (basically the areas colonized by Europeans in the Americas and Asia) became relatively poor, and vice versa. The idea is that there is a negative relationship between economic prosperity in 1500 and income per capita today. They suggest that the type of settlement and the institutions built by colonizers explain the apparent paradox.

The idea is that in settlement colonies, were more equalitarian societies were built, institutions protected property rights and led to higher investment and growth (à la North). They use the mortality rates associated to a particular region as an instrument for the type of settlement and institutions built by European colonizers. High mortality rates imply low European population density, more indigenous or African slaves, and more unequal institutions, with less protection of property rights.

It is a clever argument, no doubt (put forward by Engerman and Sokoloff, in fact), and more importantly a creative use of the notion of settlement colonies.* I have several problems with it, nonetheless. It is far from clear that equality is really connected to growth, and that causality runs from Western type property rights to growth, rather than vice-versa. I tend to spend quite a bit of time on this in my Latin American History classes. There are also significant problems with Engerman and Sokoloff's notion that institutions responded to factor endowments [fundamentally the idea that in capital-abundant/labor-scarce societies, wages were high leading to technological development; yes the capital debates again, but I'll leave this for another time].

Recently I found the graph below in Angus Maddison's Contours of the World Economy 1-2030 AD: Essays in Macro-Economic History.

The graph shows that Southern Europe, North Africa, and the Eastern Mediterranean were the high income regions, while Northern Europe was relatively poor. In this case, in fact, disease is not a good guide for the type of institutions built in the different regions. Other than the Italian Peninsula, it is the Nile Valley, i.e. Egypt, that had the highest income per capita during the Roman Empire. The Reversal of Fortune is also evident in this case, with France having a significantly higher income per capita than Egypt, for example. It is hard, however, to think that mortality rates associated to tropical diseases (with Southern Europe and North Africa closer to the Tropics) would have something to do with this particular reversal of fortune.

It was the region of older agricultural settlement, more urbanized, more directly connected with Eastern trade, the Eastern Mediterranean part of the of the Empire that was more developed, and that survived for a longer period (until the Turkish conquest of Constantinople in 1453). The reasons for the reversal of fortune in this case, are connected to the rise of the Atlantic economy, related to the Great Discoveries, and the expansion of the African route to Asia. If you ask me, more relevant than the incentives provided by property rights in explaining the Portuguese (and then Dutch and British) search for the alternative routes to Asia, is the rising and changing patterns of demand in Western Europe (and success is based on the naval-military advantage, Guns and Sails, Cipolla would say). But for our purposes here it is only relevant to note that mortality rates no longer seem a relevant instrument for the types of institutions.

* Moses Finley suggests that the idea of settlement versus exploitation colonies (note that Acemoglu et al., avoid the use of the term colonies of exploitation referring only to the settlement ones) was originally developed by Wilhelm Roscher of the German Historical School and later by Paul Leroy-Beaulieu, a liberal (in the European sense of the word) French economist.

Rethinking Trade and Commercial Policy at the University of Utah

Peter Ho, from the University of Denver, gave a nice and stimulating talk based on his recently published book. He tries to rethink classical political economics views on trade, reviewing the contributions of Smith, Ricardo and Stuart Mill, and the trade policy advise that derives from it. Without having read the book, the presentation suggests a sort of institutionalist approach to the critique of the mainstream.

One thing that did strike me out as peculiar to the presentation, but which may not be reflected in the book, was the critique of the mainstream view of trade on the basis of Ricardo/Mill rather than the Heckscher-Ohlin (HO) model. Note that comparative advantage in the HO story is associated to full utilization of resources and relative prices determined by scarcity (for a critique see here). That's clearly not the case in Ricardo.

Also, the Ricardian (properly understood as part of the surplus approach) story is less about the benefits of trade in general, and more about which social class benefits and which one loses from protection (see my discussion here).

One last point about the talk, that I would have liked to discuss with Peter (I had to leave for a defense) was on Mill. He was a peculiar author in-between classical political economy and marginalism, and his contributions are more problematic to properly understand than authors like Ricardo and Marshall. In fact, Mill is a key author to understand the break between the surplus approach and marginalism. As noted by Krishna Bharadwaj, what was Ricardian in Mill's theories does not appear in Marshall's work, and what is proto-Marshallian in Mill's ideas was not part of Ricardo's views of political economy. In that sense, while I'm comfortable with a Smith/Ricardo approach to trade, I'm less keen about adding Stuart Mill to the mix.

PS: I should have noted that his discussion of trade policy builds on Hamilton, List, Prebisch, Myrdal, Singer and others, like the work of Ha Joon-Chang. A paper of mine on a similar subject is the entry on Export Promotion for the International Encyclopedia of the Social Sciences, edited by Sandy Darity (here).