Category Archives: Economic theory and policy

Samuelson v Tarshis – a battle of the books

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On the discussion on the HET website over introductory texts in economics, there is quite a bit on how the first Keynesian text in the US, Lorie Tarshis’s, The Elements of Economics, was killed off by an attack by William F. Buckley, which cleared the way for Samuelson to take the field in his own more cautiously written Keynesian tract. This story about Buckley and Tashis is an old established myth within the left of the economics community (which means most of it). This is the start of Buckley’s assessment, which has quite a bit to say for it, and is very prescient:

“Marx himself, in the course of his lifetime, envisaged two broad lines of action that could be adopted to destroy the bourgeoisie: one was violent revolution; the other, a slow increase of state power, through extended social services, taxation, and regulation, to a point where a smooth transition could be effected from an individualist to a collectivist society. The Communists have come to scorn the latter method, but it is nevertheless evident that the prescience of their most systematic and inspiring philosopher has not been thereby vitiated.

It is a revolution of the second type, one that advocates a slow but relentless transfer of power from the individual to the state, that has roots in the Department of Economics at Yale, and unquestionably in similar departments in many colleges throughout the country. The documentation that follows should paint a vivid picture.” — William F. Buckley, Jr. God and Man at Yale: The Superstitions of Academic Freedom, Henry Regery, 1951, p. 46-47.

And I might also mention Buckley’s attitude to Keynes, also from the same source:

The individualist insists that drastic depressions are the result of credit inflation; (not excessive savings, as the Keynesians would have it) which at all times in history has been caused by direct government action or by government influence. As for aggravated unemployment, the individualist insists that it is exclusively the result of government intervention through inflation, wage rigidities, burdensome taxes, and restrictions on trade and production such as price controls and tariffs. The inflation that comes inevitably with government pump-priming soon catches up with the laborer, wipes away any real increase in his wages, discourages private investment, and sets off a new deflationary spiral which can in turn only be counteracted by more coercive and paternalistic government policies. And so it is that the “long run” is very soon a-coming, and the harmful effects of government intervention are far more durable than those that are sustained by encouraging the unhampered free market to work out its own destiny.

The true reason that Samuelson won out is because it is a far better book, much more accessible. The macroeconomic side, with its C+I+G diagrams and others of a similar kind is a fantastic improvement in the underlying power of explanation. I have first editions of both Samuelson and Tarshis, and there is no comparison. Even the 1948 version is an order of magnitude better, both to teach and to learn from. There are virtually no diagrams in the macro half of Tarshis’s text while Samuelson has a number which bring out the underlying message in a way that the hundreds of pages of diagramless text in Tarshis does not.

I might add, but only just for fun, that in my Defending the History of Economic Thought (Elgar 2013) I discuss the ways in which diagrams have dumbed down economic thought, so that we now move lines in a two-dimensional space instead of trying to think through the actual economic adjustments that are supposedly going on. But that’s just by the way.

Clay’s Economics

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This was the query at the history of economics website, which I might note, has had quite an interesting response:

I’m working on an analysis of introductory economics textbooks published in the United States between about 1890 and 1950 (the period between Marshall and Samuelson, roughly). I’ve accumulated an ad hoc collection of texts based on the holdings of my library and scattered references in the secondary literature (Elzinga 1992, Walstad et al 1998, and Giraud 2013 in particular), but I was hoping that there might be some more systematic way to generate a universe of texts from which to sample. Does anyone have a recommendation for a good source that discusses principles texts in this period, perhaps with information on relative influence (number of editions, course adoptions, or sales)? Does such a source exist?

This was my own contribution:

In a reply to a recent request for any centenary celebrations coming up in economics in 2016 which was put out by the editors of the History of Economics Review, our HET journal here in Australasia, I wrote:

“2016 is the hundredth anniversary of the publication of what I think of as the best single introductory text on economics published in the twentieth century, Henry Clay’s Economics: an Introduction for the General Reader. I would very happily provide you with a shortish note on this great text – you have to see just its publication history from 1916 to 1942 when the second edition was published to appreciate just how extraordinary it was. Used everywhere, including Oxford and Cambridge, and not just mechanics institutes. Also the best summary of pre-Keynesian theory available, in my view, from any source.”

I realise that the request in this instance is for “introductory economics textbooks published in the United States” and Clay was published by Macmillan in the UK. But looking here at my lovely first edition, the second listing of the publisher’s location reads in a way which does suggest that it would have had a publication history within the US:

“The Macmillan Company
“New York . Boston . Chicago
“Dallas . San Francisco”

And as in indication of its presence in the United States, I also have this: Problems and Exercises to Accompany Clay’s Economics for the General Reader and Ely’s Outlines of Economics, which was published in 1921, whose author was:

“H. Gordon Hayes
“Professor of Economics in Ohio State University”

I might point out that in this set of questions – which you might for fun test your graduate students on for their understanding of economics – it is Clay who is mentioned before Ely.

I will finally mention that in The Great Gatsby, a text as American as it gets, we have this passage in reference to Gatsby himself as he stands waiting in the library for Daisy to arrive:

“[He] looked with vacant eyes through a copy of Clay’s Economics.”

If even Gatsby was reading Clay, who wasn’t?

What I didn’t mention was that I titled my own text to follow Clay’s: Free Market Economics: an Introduction for the General Reader. The number of out and out Keynesian falsehoods that are revealed by going through Clay is astonishing, starting with acceptance of Say’s Law means classical economists always assumed full employment. It’s not a short book, and its lack of diagrams makes it hard for someone of the present generation of economists to bother with, but it very efficiently gets the job done. And naturally, what I like best about it, is that it is the economics of John Stuart Mill, brought up to date for the first half of the twentieth century, just as my own text is Mill for the 21st century. Did I ever mention, by the way, that the cover of my book shows a Mill made of Clay?

The classical theory of the cycle rediscovered once again

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Maximillian Walsh has just re-discovered the classical theory of the cycle. This is from today’s AFR: The crises are different, but the cause is the same. Here is the sub-head:

In a global era, the next crisis is always just around the corner. The continuous expansion of debt is the cause at the bottom of all of them.

I suspect that we have been living in a “global era” for the last 250 years at least so technically I suppose he’s right, but I think he is trying to say there is something new in the world. He could, if he cared to look, find the same kinds of instability across the whole of the nineteenth century. If he would like to go back farther, I could send him to The Wealth of Nations, or he could investigate the Mississippi or South Sea bubbles, both eighteenth century.

The point, of course, is that with the advent of Keynesian economics, the classical theory of the cycle has disappeared and to my knowledge a full discussion is available from only a single source at the present time, although the Austrians are pretty close.

So yes, there is always another crisis around the corner, all the more so since those who manage our economies are the single most certain cause of it. The real question, then Max is this: what should we do, right now, to prevent this crisis from coming full term, or at least what can we do to make it less of a problem? For this, too, you need to go back to the classical theory of the cycle. They had no guaranteed answers either, but at least they knew what you should not do. And if you would like to see the kinds of things they would not have done in action, check out the Federal Reserve in the US, along with most of the other central banks now in charge, and see what they are doing right now.

The entrepreneurial evolution of the phone

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This is a pictorial history of the evolution of the phone which comes with this article, Evolution of the phone: From the first call to the next frontier.

The phone is my favourite example of a technology that never stops changing. And if we were to go back and think in terms of communications, the pony express existed for about two years and was almost immediately replaced by the telegraph. And all of it has been entrepreneurially driven, with governments only becoming involved because for the longest time, the phone was a natural monopoly where competition was constrained by the capital requirements. Still somewhat true, but nothing like it was, which is why the private sector has been finally able to muscle governments out of the way.

The consequences of having no English word for entrepreneur

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I have just finished a paper that will be published next year in a book that no one will read and so this will disappear. And to tell the truth, I cannot even tell how much this is even true, although it looks true enough to me. This is the conclusion to the paper, which seems to me to say all of this. But the point of the paper is that, because English did not originally have a word for “entrepreneur” our economic theories have been not just mis-shapen, but have led to such major distortions in our understanding of how economies work we ended up fostering the economic illiteracies of Marxism. Read the conclusion for yourself and see what you think.

Jean-Baptiste Say is properly recognised as the first economist to separate out the often entwined threads of the entrepreneur on the one hand and the owners of capital on the other. He did have, as John Stuart Mill noted, the advantage of having a separate word in French for this function, which allowed him a degree of conceptual clarity that was not available to those who wrote in English. But as noted, it was not until the fourth edition of his Treatise that even Say was able to see this distinction clearly, and even then placed his discussion within a footnote rather that make it a feature part of his text.

This distinction, as crucial as it is for clear thinking on economic issues, remained buried since the role of the capitalist at the time almost fully overlapped the role of the entrepreneur and therefore the term “capitalist” was used as an exact substitute. Marx in all his own works on economics, focused on the capitalist. There is not a single use by Marx of the term “entrepreneur” in the whole of the translated text of Volume 1 of Capital. But it is not due to any deficiencies on the part of the translator. The term “entrepreneur” does show up in Capital, but only once, in a footnote, and only because of a translation of a passage written originally by Molinari in French. This is the footnote:

“Even the mild, free-trade, vulgar economist, Molinari, says: “Dans les colonies l’esclavage a été aboli sans que le travail forcé se trouvait remplacé par une quantité équivalente de travail libre, on a vu s’opérer la contre-partie du fait qui se réalise tous les jours sous nos yeux. On a vu les simples travailleurs exploiter à leur tour les entrepreneurs d’industrie, exiger d’eux des salaires hors de toute proportion avec la part légitime qui leur revenait dans le produit. Les planteurs, ne pouvant obtenir de leurs sucres un prix suffisant pour couvrir la hausse de salaire, ont été obligés de fournir l’excédant, d’abord sur leurs profits, ensuite sur leurs capitaux mêmes. Une foule de planteurs ont été ruinés de la sorte, d’autres ont fermé leurs ateliers pour échapper à une ruine imminente…. Sans doute, il vaut mieux voir périr des accumulations de capitaux que des générations d’hommes [how generous of Mr. Molinaril]: mais ne vaudrait-il pas mieux que ni les uns ni les autres périssent?” (Molinari l. c. pp. 51, 52.) Mr. Molinari, Mr. Molinari! What then becomes of the ten commandments, of Moses and the prophets, of the law of supply and demand, if in Europe the “entrepreneur” can cut down the labourer’s legitimate part, and in the West Indies, the labourer can cut down the entrepreneur’s? And what, if you please, is this “legitimate part,” which on your own showing the capitalist in Europe daily neglects to pay? Over yonder, in the colonies where the labourers are so “simple” as to “exploit” the capitalist, Mr. Molinari feels a strong itching to set the law of supply and demand, that works elsewhere automatically, on the right road by means of the police.” (Marx [1867] 1906: 844)

In the wake of this tradition, even where the factors of production are discussed, they are usually summarised as land, labour and capital. It is only a rare exception in which there is any mention, let alone discussion, of the fourth possible factor which is the entrepreneur. Yet without the entrepreneur, the other three factors would lack direction and purpose.

There is, that is to say, the return on real capital, which is the return for ownership of various humanly produced tools and structures that are used in productive activity. There is then the return that comes from employing and directing each and every input as part of the production process in just such a way that a positive return over costs is earned. It is this second function that is the role of the entrepreneur. And it is this that is almost totally ignored in the economics of the English-speaking world, and as a result of the major influence of English-language economics on the world, with immense loss to our global understanding of the actual processes of a market economy, and indeed, of any economy beyond the primitive.

John Stuart Mill – Principles of Political Economy

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John Stuart Mill’s Principles of Political Economy is the greatest text on economic theory ever written. It was put together over the period from 1845 till 1848 when he had come to the conclusion that it was impossible to write a book on sociology that could address all of the contradictions that exist within human life. There were no principles of human life that could be summarised in the way that could be contained within a single set of covers. He turned therefore to economics instead.

The book is, however, unreadable today, partly because of the density of his writing and partly because of the presuppositions he brings along with him. I am therefore about to write an edited version of Mill’s Principles in which I will keep Mill’s words but edit the text down to its essentials. That is still around 300 words, but even then there will be the need to include introductory passages to underline the points Mill is trying to make. And the main reason I think I can do this is because I share most of Mill’s presuppositions myself, which I had originally learned from reading his Principles at the very moment I had discovered Say’s Law for myself.

A perfect example of someone in politics economically out to lunch

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I saw this at Andrew Bolt and it is absolutely perfect. Labor’s Catherine King claims government spending isn’t the same as taxpayers’ spending. Here are the quotes which could be made by anyone on the Labor front bench (and by all too many in the Coalition):

Is healthcare important in this country? Yes it is. Who pays for it? We think it is perfectly possible … for the government to continue to contribute alongside our taxpayers as they do both through the Medicare levy, Medicare levy surcharge and of course through general taxation to continue to have a sustainable Medicare system. . . .

When the Government points out that the co-payment will at least pay for a new $20 billion medical research fund, Labor health spokeswoman Catherine King tells the Government to keep the fund but ditch the tax to pay for it, claiming the Government could somehow “find the money from consolidated revenue”. You know, the great big money pot that magically refills?

One of the many problems that have been caused by Keynesian theory is to have substituted thinking in terms of money for thinking in terms of productive inputs. She sees no end to the money tree. Just keep printing and we can have everything. What she misses are the severe limitations on the productive real side of the economy.

Yet the undeniable fact is that there are a finite number of doctor-hours available across the economy, and these can only be expanded, over time, by reducing the number of other-profession-hours available. And there are only so many nurses-hours available and hospital-bed-nights available and ambulance-hours available, with none of these expandable other than incrementally and at huge cost in the other things we might do instead, like build schools, or roads, or trains, or submarines or anything else, like medical research, let us say.

I suspect that she and her colleagues are so dazzled by the billions they get to spend that they think there are no limits that matter. The reality is that she is so out of her depth, like so many of her colleagues, that they end up creating the fiscal mess that Julia and Kevin have left behind. It is a scandal, of course, but the level of economic education is now so low that even half the economists we graduate would not be able to immediately see the flaws in the arguments Catherine has made.

The expiry date for all forecasts is the very moment they are released

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Her Majesty raised the issue herself. Why hadn’t the world’s economists predicted the global financial crisis? Had she asked me, my answer would have been that such things are beyond the abilities of anyone, and if someone tells you different, they are only kidding themselves. And I say this as the AFR Forecaster of the Year in 1988, which I received for being the only economist in Australia to say that Australia would, under virtually no circumstances I could think of, have a recession that year. Everyone else thought the probability was high, so I won by default.

The sad part is that economics has now in many ways been reduced to forecasting a narrow range of published national statistics, as if that were the true issue. What economists should be doing instead is working out the best way to achieve community goals, by putting institutional structures in place that create the wealth we can all then partake of, most helpfully by participating in the wealth creation process.

Why this has come to mind are the latest ructions in the market for oil, that no one – NO ONE – could have forecast a year or so ago. And certainly no one did. Here is the article that has brought this to mind: Bank of America sees $50 oil as Opec dies.

The Opec oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over coming months as market forces shake out the weakest producers, Bank of America has warned.

Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a mucher cheaper source of gas for Europe.

Francisco Blanch, the bank’s commodity chief, said Opec is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,“ he said.

The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only the Mid-East petro-states with deepest pockets such as Saudi Arabia. If so, the weaker peripheral members such as Venezuela and Nigeria are being thrown to the wolves.

Of course, these are forecasts made in December 2014. And if you don’t like this one, come back tomorrow and I will give you another.