Thursday, July 2, 2015

Cost and inconvenience


Krugman, from the textbook:
Economists use the term money in its narrowest sense to refer to cash and bank deposits on which people can write checks. People and firms hold money because it reduces the cost and inconvenience of making transactions.

"Cash and bank deposits on which people can write checks" is M1 money. That's the money I use.

//

The convenience of making transactions has a lot to do with technology. I was amazed a few years back when the TV commercial showed that you can deposit a check in the bank just by taking a picture of it with your phone. It still amazes me these days, when people at work actually deposit paychecks that way.

I don't do that. I don't live in the future. I prefer to have money in my pocket. Not in a device. I don't buy things on the internet. I don't pay bills on the internet. I don't deposit my paycheck with my phone. I don't have a phone.

The future has increased the convenience of using money. There's no denying that. They make it easy as hell for you to spend money.

Convenience and inconvenience aside, there is the matter of cost: People and firms hold money because it reduces the cost of making transactions.

That's my focus, cost.

Let's look at cost. Let's look at a simple world where there are two places you can keep your money: You can keep it where it earns interest, or you can keep it where it is available for spending. Granted, that distinction has blurred in recent decades because of technology and because of the deregulation of finance and because that is the long-term trend and because this is the future. But if the line blurs so much that you can't tell when you're paying interest and when you're not, things cannot end well.

If we could zero out embedded interest costs, the world would be a better place.

Wednesday, July 1, 2015

Jim Crotty: Stages and Levels


Continuing our look into J.R. Crotty's Keynes on the Stages of Development of the Capitalist Economy: The Institutional Foundation of Keynes's Methodology:

Professor Crotty views Keynes's methodology as "the integration of two distinct levels of analysis – "
a relatively abstract level (which we label Level I) and a more institutionally concrete level (Level II).

Crotty says Level I includes "the defining characteristics of the capitalist economy" and also "textbook Keynesianism". Level II specifies "the concrete institutions, classes, and agent motivations peculiar to each particular stage of economic development".

In addition to levels, Professor Crotty also discusses stages:
In The General Theory and elsewhere Keynes made evident his belief that no all-purpose, institutionally abstract macromodel can adequately capture the processes and outcomes of distinct phases or stages of capitalist development ...

I argue that Keynes provided the outlines of a theory of the evolution of two distinct stages of capitalist development (and anticipated the transition toward a third) ...

I wanted to take the time to point out these details of Professor Crotty's analysis, because I get confused. We have Level I and Level II and Stage I and Stage II and it wants to turn to mush in my head. But "Level" refers to the level of detail Keynes provided; and "Stage" refers to the stage of historical development.

Here's how Professor Crotty uses the levels to analyze the stages:
Looked at from this perspective, The General Theory can be said to be general because it contains Keynes's Level I analysis of the capitalist macroeconomy at the most abstract level. But its concrete object of investigation is the institutionally specific form of capitalism found in Britain (or the United States) in the interwar period. Thus, neither the theoretical nor the policy conclusions of The General Theory are directly applicable to earlier to later stages of development.

I like it. Had to read it a couple times, and work my way through three or four blog posts before I got there, but I like it.

//

Unless my brain is misfiring, all of the above is contained in the first two pages of the professor's PDF. It leads to what I think is a most interesting observation, on page five. Crotty writes:
My central thesis implies that Keynes did not intend this to be a theory of the instability of capitalism in general or in every stage of development.

For example:
Keynes often observed that Britain's domestic nineteenth-century capitalism was characterized by reasonably steady growth, price stability, adequate employment and rising living standards, all produced by a strong and relatively steady pace of capital accumulation.

Not really a description of instability.

I know. I'm thinking of the recession density visible on this graph:


There's hardly any white in the first half of the period shown. The economy spent more time in recession than recovery, I think. In the latter half of the graph, longer booms and shorter busts. Seeing this history, how can one claim that the 19th century was more stable than the 20th?

Not sure. Maybe "stability" doesn't mean what we think.

//

I got data for US Real GDP for 1800-2014 from MeasuringWorth and did some quick comparisons.

RGDP grew twice as fast in the 1800s as in the 1900s, century to century. For 50-year periods I see a seven- or eight-fold increase in the 1800s, five- or six-fold increase in the 1900s. Real growth in the 94 years before 1920 was 1.7 times that in the 94 years after 1920. But then, real growth in the 80 years before 1934 was only about 60% of the real growth in the 80 years after 1934.

But all those numbers are garbage, really. It's all a result of population growth. I did the same calcs for RGDP per Capita and the 20th century comes out better than the 19th century every time. In my numbers, what looks like higher economic growth in the 19th century was due to higher population growth in the 19th century.

So I'm a little disappointed. I don't find the evidence I was looking for.

Okay. But I go back to that last quote from James Crotty, on what Keynes observed: "reasonably steady growth, price stability, adequate employment and rising living standards". Maybe I need to reconsider the standard I'm using to evaluate Professor Crotty's argument.

I am leaving a lot out. The PDF contains plenty of evidence to support Professor Crotty's central thesis. Don't judge by the bits that I'm quoting. If you want to evaluate his thesis, go get his paper.

Tuesday, June 30, 2015

Crotty: Keynes and Commons


We're up to pages 5 and 6 in James Crotty's paper on the stages of development of capitalism.
Keynes clearly distinguished two historical stages of capitalist development: pre-World War I or "nineteenth-century" capitalism (which I label Stage One), and post-World War I or modern or twentieth-century capitalism (which I label Stage Two). He argued that these stages had qualitatively different economic outcomes because they had qualitatively distinct institutions and agent practices.

In a number of writings, Keynes asserted that while freedom of trade and of capital flows brought peace and prosperity in the nineteenth century, the same international system produced imperialism, war, and depression in the twentieth century (a point to which I return). In a similar vein, Keynes often observed that Britain's domestic nineteenth-century capitalism was characterized by reasonably steady growth, price stability, adequate employment and rising living standards, all produced by a strong and relatively steady pace of capital accumulation. In The General Theory Keynes made the point as follows. "During the nineteenth century," there existed:

a schedule of the marginal efficiency of capital which allowed a reasonably satisfactory average level of employment to be compatible with a rate of interest high enough to be psychologically acceptable to wealth-owners. There is evidence that for a period of almost one hundred and fifty years ...rates of interest were modest enough to encourage a rate of investment consistent with a rate of employment which was not intolerably low [Keynes 1964, pp. 307-8].

Later in the book he commented on "the exuberance of the greatest age of the inducement to invest" in nineteenth-century England [Keynes 1964, p. 353]. And in the Economic Consequences of the Peace he argued that before World War I, "Europe was so organized socially and economically as to secure the maximum of capital accumulation [with] some continuous improvement in the daily conditions of life of the mass of the population" [Keynes 1920, p. 18].

Second, note Keynes's belief in the need for a theory that could explain the evolution of qualitatively distinct stages of economic development. He aligned himself with Commons's view that economic theory had to reflect the existence of "three epochs, three economic orders, upon the third of which we are entering." The first, according to Keynes, was a precapitalist "Era of Scarcity with a maximum of communistic, feudalistic or governmental coercion," which was dominant through the sixteenth century and survived to some degree into the eighteenth century. Then came the "Era of Abundance" with "the maximization of individual liberty, the minimum of coercive control through government, and individual bargaining. ...[In] the nineteenth century this epoch culminated gloriously in the victories of laissez-faire and historic liberalism" [Keynes 1963, p. 334].

But, Keynes continued, we are now passing through a period of turbulence into a new stage of capitalism, an "Era of Stabilization" in which societal or governmental controls will replace laissez-faire. The coming era will require a "transition from economic anarchy to a regime which deliberately aims at controlling and directing economic forces in the interests of social justice and social stability" [Keynes 1963, p. 335].

The Era of Scarcity, the Era of Abundance, and the Era of Stabilization: Three stages of capitalist development, proposed by Professor John Commons and (as Crotty says) developed by John Maynard Keynes.

Jim Crotty already made the point. We quoted it yesterday:

I argue that Keynes provided the outlines of a theory of the evolution of two distinct stages of capitalist development (and anticipated the transition toward a third) in which each stage is assumed to possess unique institutions and agent practices that differentiate its processes and outcomes from the other.


As for myself, I think it's optimistic to say "we are now passing through a period of turbulence into a new stage of capitalism, an 'Era of Stabilization'".

Why would the economy stabilize? Isn't "stable" the same as "in equilibrium"? It is convenient to think about the economy in equilibrium or approaching equilibrium, sure. But that doesn't mean we ever get there.

So if we have a time of "abundance" or let's say a time of generally improving conditions, and then the improvement tapers off... and if we don't achieve an era of stabilization, what happens?

It's easy. If the trend doesn't continue to climb, and it refuses to run flat, then the only direction left to go is down. So we would have rise to a peak: rise and decline. It would look like part of a business cycle.

It would look like only part of a business cycle because we're not looking at the whole picture. We're only looking at a few hundred years. A few hundred years near the peak. Keynes described the peak. He called it "the greatest age of the inducement to investment" and he said it lasted 150 years.

If the peak lasted 150 years, you're not going to see the whole cycle if you consider only 400 years or so. Don't think in terms of nations. Think in terms of civilizations and cycles of civilization. Thousands of years.

It's just a business cycle, really nothing out of the ordinary.

Out of the ordinary would be to achieve stabilization, an age of stabilization. That would be special. Something to shoot for, but not part of the natural course of events. We'll have to earn it.

Monday, June 29, 2015

Crotty challenges Samuelson's Keynes


When I type marxists into the URL box in my browser, I get links to the first few chapters of The General Theory, and to the last couple. Not so much to the middle chapters, where one finds the "highly abstract argument" and the "much controversy" that Keynes promised in his Preface.

I don't often go to the middle chapters. I always figured that was because I'm not an economist, and the middle-chapter stuff has a hard time getting thru my thick skull. I still figure that's true. But now I have another reason for preferring the first and last parts of Keynes's book: I found James Crotty's PDF on "the Stages of Development of the Capitalist Economy".

Crotty writes:
The generally accepted interpretation of The General Theory, pioneered and popularized by Paul Samuelson, suggests that the consumption, marginal efficiency of capital, liquidity preference, and labor supply functions constitute the scientific core of the book; the comments, observations and asides that surround this core, it is assumed, have little scientific value.

My favorite parts of the book have "little scientific value". Ouch. But they're still the best parts.

Jim Crotty doesn't accept the generally accepted interpretation. If that interpretation is correct, he says, then
The General Theory must be a model of capitalism-in-general, equally applicable in all times and in all places where the capitalist system dominates economic activity. I argue to the contrary that such a characterization of Keynes's theory is profoundly mistaken.

Furthermore, he says
In The General Theory and elsewhere Keynes made evident his belief that no all-purpose, institutionally abstract macromodel can adequately capture the processes and outcomes of distinct phases or stages of capitalist development ...

Now we're getting to the good stuff: the stages of capitalist development. And indeed, the title of Crotty's PDF should have given me a clue. The thick skull strikes again.

If Keynes's macrotheory is indeed historically contingent, then he should have developed different versions of his theory to describe and analyze institutionally distinct historical stages of capitalism. I argue that Keynes provided the outlines of a theory of the evolution of two distinct stages of capitalist development (and anticipated the transition toward a third) in which each stage is assumed to possess unique institutions and agent practices that differentiate its processes and outcomes from the other.

In other words, if Crotty is right about this, then we would expect to find in Keynes's work a partitioning of capitalism into stages. And, Crotty says, we *do* find this partitioning into stages.

To me, this is exciting stuff. I have always been fascinated by the many brief moments in the General Theory where the evolution of capitalism is brought to light. Both the General Theory and Essays in Persuasion. I wrote of it last year, and five years back.

Crotty continues:
Specifically, Keynes argues that nineteenth-century capitalism differed in institutional and class structure as well as in agent behavior patterns from post World War I capitalism. Because of these institutional differences, nineteenth-century capitalism exhibited impressive economic growth and stability, whereas twentieth-century capitalism was prone to stagnation-depression as well as to bouts of extreme instability.

It becomes important. We're talking about a time when capitalism was good, and a time now when capitalism is not so good. And in this time, when capitalism is not so good, there is a sort of nostalgia for the better times. We see many politicians and economists call for a return to the policies of the nineteenth century in hopes of restoring good to capitalism. Foolhardy, I think. I sympathize with their goal, but not their methods. Not sure yet where Crotty stands on that.

But let me quote him one more time, to wrap up what he has been saying:
Clearly, these sets of profoundly different outcomes cannot be comfortably generated by a single Keynesian theory of something called competitive-capitalism-in-the-abstract. This being the case, the question naturally arises as to precisely what The General Theory is a theory of, and in what sense it is general.

That leaves us at the top of page two in J.R. Crotty's 16-page PDF.

Sunday, June 28, 2015

Small world


Recently I found a Reddit link on "How Sovereign Debt Accelerated the First Industrial Revolution". Oh, I said. I know about that. Retrieving what I know brought me back to Tales of Debt Mountain (31 August 2010). And that brought me back to that thing Keynes said:

For nothing short of the exuberance of the greatest age of the inducement to investment could have made it possible to lose sight of the theoretical possibility of its insufficiency.

So I googled the phrase "the greatest age of the inducement to invest". Only a few results turned up -- mostly my own here on the blog and in comments on other blogs. But there was one solid hit that wasn't mine: John Maynard Keynes, Critical Assessment: Second series by John Cunningham Wood, in the Google Books.

In Wood's book is the article Keynes on the Stages of Development of the Capitalist Economy: The Institutional Foundation of Keynes's Methodology by J.R. Crotty, from the Journal of Economic Issues, September 1990, vol. 24, no. 3.

In Crotty's article Google found two hits for the "the greatest age" phrase. I was reading the article for a while, finding much that I like and only a little to raise an eyebrow at. (Unusual, I know.) Suddenly, I got feedback from my brain: J.R. Crotty... I think I've seen that name before! So I did a google search for it on the blog.


Yup, I referenced him before. Small world.

Seeming agreement, remarkable alignment, and all that. Pretty cool.As I read more of Crotty's article, I kept finding quotable stuff. So, welcome to Crotty Week.

Saturday, June 27, 2015

Off the mark


Via Reddit, from the IMF, the working paper What Really Drives Public Debt: A Holistic Approach (PDF, 25 pages). From the intro:
Recent years have witnessed a rapid increase in public debt—in 2007, gross general government debt in advanced economies stood at around 70 percent of GDP; by 2013, this had risen to over 105 percent (IMF, 2014). Concerns over sovereign debt sustainability have led to significant financial and economic disruption; and the optimal policy response to these elevated debt levels is a topic of controversy amongst policymakers and academics.

The proximate causes of this rapid increase in debt are well know. Deep recessions reduced nominal GDP and caused primary balances to deteriorate; banking sector recapitalisation forced step changes in the debt level; and in some cases, sovereign bond yields spiked, increasing the cost of debt. But what is less clear is how these various drivers of debt interacted with each other, to propagate or mitigate the eventual impact on the debt level.

Yeah, ain't that cute? A look at public debt. The world begins in 2007.

These people can't be that stupid. They have to know that for the 60 years before 2007, private debt increased, and private debt increased, and private debt increased some more. They recognize that "banking sector recapitalisation" was occurring, for example. And yet, their focus is "sovereign debt sustainability".


An overview of their conclusion:
This paper explores how the various drivers of sovereign debt – the primary balance, the interest rate, growth and inflation—interact with each other...

Sovereign credit markets do not seem to systematically respond to shocks to growth or the primary balance, but are sensitive to the debt level...

This paper, therefore, provides some empirical evidence to support the often cited opinion that monetary policy matters for sovereign debt sustainability...

They're doing what they call "debt sustainability analysis".

Why? Apparently they think high levels of public debt are a problem. Okay, let's not focus on whether they are right or wrong about that. It's their view, and that's what we have to deal with.

If you think high levels of public debt are a problem, what is the proper response? Do you want to find the best way to "manage" those high levels of debt, so that we can succeed in "sustaining" them?

Wouldn't it be more productive to figure out the reasons public debt grow to problematic levels? That way, there is a chance we can avoid those high levels of public debt in the future.

The authors skip the "cause" part, and go straight to analysis of results. The whole thing, all their effort, is a waste of time.

Friday, June 26, 2015

John Cochrane sees the private debt problem


A little, tiny bit from Taxes at The Grumpy Economist:

OK, mortgages taken out under the current tax law should get to keep the interest deductibility. We don't change rules in the middle of the game. But why should new mortgages get an interest deduction?

... And after a huge financial crisis, what in the world is the US government doing subsidizing debt anyway?

Sunday, June 21, 2015

"models are maps of an abstract territory"


From Keynes "hadn't got round to it" at Ecological Headstand:

More remarkable is the complete lack of connection between growth theory and growth as a policy slogan. No, this is not the difference between map and territory. The theoretical models are maps of an abstract territory in which some kinds of features have the same names as the kinds of features on the actual territory -- "labor", "income", "output," "capacity utilization" -- but those labels remain undefined in any way that would correspond to the real features with the same name.

Saturday, June 20, 2015

Same Data. Same Conclusion


Steve Keen:
If we’re honest, when we say “why can’t you just be normal?” to someone or about something, what we really mean is “why can’t you be the way I’d like you to be?” So by “normal times”, the Chancellor really means “when things are really good”.

There is something of the sour grapes in saying that by "normal times" we mean "really good" times. It's like saying the really good times were just a fluke, and we ought not expect good times to return. It is a willingness to settle for less than really good times. Sour grapes, and giving up.

Keen identifies the "really good" times:
In that sense, the ultimate “normal times” for the Western world were the years from the end of the Korean War until just before the OPEC Oil crisis—from 1954 until 1973. These were the socially tumultuous years from Happy Days and The Fonz, to the Beatles, the Vietnam War and the death of Jim Morison. But they were also the years when the economy boomed, with the real rate of growth in America averaging 4% a year ... So 1954 until 1973 is the yardstick for “normal times” in the modern, post-World-War era.

And in those normal times, the annual change in US government debt was normally plus 1.72% of GDP.

For the rest of the article, Keen refers to the really good times as "Happy Days".

Yes, that’s right, the “normal thing” for the government during those Happy Days was to run a deficit of just under 2% of GDP.

Okay, don't lose focus. We're not here to talk about Happy Days. Jokes and funnies and reader-coddling aside, Steve Keen notes the important detail that U.S. debt was growing during those good years. Growing at about half the rate of GDP.

For the past few days I have been trying to make the point that the growth of government debt didn't start with Reagan. Back in the 1950s and '60s, the federal government was, on average, running deficits. Small ones? Sure. That's the point. That's what I've been saying for the last three days: The deficits were small in the '50s, a little bigger in the '60s, bigger yet in the '70s, and Reaganesque in the '80s.

You can cry and moan about Reagan, and blame him for massive deficits, I don't care. But you can't ignore the fact that Federal deficits were growing for three decades before Reagan. And you cannot refuse to consider the possibility that anyone in Reagan's position -- at Reagan's time, I mean -- might have done the same.