J’Accuse…! (or “on the spirit of animals”)

Mister President,

If you may permit me, and with gratitude for the kind reception you once devoted to me, to have the attention of your just glory to remark that your star of justice, your joyful star, is in risk of being tainted by the most obscuring and indelible of threats.

Professor George Akerlof, Nobel Laureate of 2001, spoke in these terms to Bloomberg Radio on the 1st of April.

I feel that the most important animal spirit about the job market is what is creating the number of jobs we have. And for that, I think confidence is one. I think that stories about the economy is another. And the general feeling by the public, that the possibility that people may sell snake oil… And there is a long chapter about that.

Only today I heard Professor and Judge(!) Richard Posner speaking to Bloomberg Radio:

Animal Spirits is a John Maynard Keynes expression, and he said – and I think very insightfully – that because businessmen operate in a very uncertain framework, you known, uncertain environment… If you build a plant and its not gonna yield revenues for several years, you are really taking a shot in the dark. Because in a few years your markets may change, competitors may eat you alive, and so on. So you need some feeling of confidence, spirit, daring. And in a depression the economic environment becomes so uncertain, that people begin to freeze. So you see a lot of hoarding…

(Posner also adds that Frank Knight was an influence on Keynes. Sure, and the Easter Bunny was roommate to Santa Claus. No?)

Here is what John Maynard Keynes actually wrote:

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

It is, I hope apparent, that Keynes idea of an urgency to action, the animal leap away from reason and best judgment, has nothing to do with either “confidence” or the drive of the “entrepreneur.” It is not the memory of man Keynes that I wish to preserve from blemish. It is mine and the public’s right to sanity in preserving the meaning and sense of words, their power to guide our thoughts. In Akerlof or Posner there is just nothing animal about them spirits.

I have but one passion: to enlighten those who have been kept in the dark, in the name of humanity which has suffered so much and is entitled to happiness. My inflamed protest is simply the cry of my soul. Let them dare, then, to bring me before a court of law and let the proceedings take place in broad daylight! I am waiting.

With my deepest respect, Sir.

Blogs as historical objects

blogcartoon2To echo Yann’s reflection on wikipedia, I want to say a few words on my difficulty using economic blogs as an historical object. There are the very few posts I publish on this blog and there are the numerous I trash before they reach the playground. One reason for this is that I’m often left wondering about the significance of the opinions, anecdotes, controversies and disputes I find on the web, and on economists’ and journalists’ blog in particular –from Mankiw and de Long’s blogs to New York Times columns including Krugman’s,to  the freakonomics and marginal revolution blogs and others. Does such and such opinion reflect a wider one within the profession (and which professin matters: academic economists, economists working in administrations, banks, columnists, journalists…), does such and such event reflect a general move, a cultural evolution, an historical trend ? What are the blogs that matter and how do they matter? I remember this discussion we had with Tiago on wikio, technorati, and other ranking tools, where “authority” (in technorati) is estimated by counting the links to a blog within the last 6 months or 30 days. We discussed the limits of such tools (you have to ask to be registered, so what if you don’t want to enter the game?), in particular the use of links as a yardstick (what if a blog function as a forum where people discuss in the comments rather from blogs to blogs, what if “visual” content such a charts or videos is generally more “linked” that columns or texts), and most important, we discussed the meaning of such ranking. Tigao found them useful as measures of conversation, social networking. I found them limited and problematic as measures of influence (as regards the spread of ideas, the impact on decision makers, for instance), popularity and power. There are two sets of questions recurring with my everyday use of blogs:

-How do we use them in a research on the history of current economics? Will they replace Friedman’s Newsweek columns? Or do they vividly display science in the making the way the minutes of the first Mount Pelerin Society or Herbert Simon’s handwritten notes of meetings at the Ford Foundation do? Or rather opinion in the making? How to make sense of the comments which feed blogs when then are mostly anonymous. How are we to handle the multiple identities of those researchers-academics-columnists-bloggers-citizens-public intellectuals? Are blogs a separate forum? Do they replace others or get a new function?

-How do you proceed to feel the zeitgeist of our times? Do you have a list of blogs and sites to eat up with the morning coffee ? If so, how does such list evolve over time? Do you just swin with the tide, jumping from links to links? What media and ideas do you choose to remember our times and how?

Open letter

Dear Yann,

I hope these words find you in good health and high spirits. [to add: short funny and self deprecating story about myself]

cadburrys_guardianI write you to collect your thoughts on a puzzle that has bothered me in the last few days. Some of the newspaper websites that I visit regularly have called on their readers to send “images of the recession.” National Public Radio’s Planet Money has collected in bulk over 300 pictures in flickr. The UK Guardian has a recession monitor, also in flickr, introduced frantically “So it looks like we’re in a recession, or heading for one. Or are we? How do we know? We want to see your shots of how the recession is (or isn’t) affecting your area.” Finally, the New York Times has not outsourced and hosts “Picturing the Recession” with some cool flash enabled browsing. I recall our conversations about the FSA photographs and discussing Cara Finnegan’s book Picturing Poverty on that same topic. These are items of visual culture as you are fond of calling them, and I of echoing. I wondered if you had noticed this phenomena and if you see how one can speak meaningfully about it.

Cynically, I see these as mostly gimmicks to draw people to web content and give them a stake of ownership. The websites and the newspapers make no direct use of the readers’ photographs, I found no references to these besides the appeals for more. It does not help newsprint in imagining the economy as the FSA photographs did by design. What do you think we can draw from these? May they tell us something about popular culture? If these are clues, what is the mystery?

[to add: tangent about some of the photographs, and so cool down the letter]

With best regards,
[to add: my name]

P.S. [to add: joke about recipe of cod and fava beans…]

A Useless Synthesis?

Punch (1851): Useless Information (John Leech Sketch archives from Punch)
Punch (1851): Useless Information (John Leech Sketch archives from Punch): "Now, Marm, this goes to the Christial Palis." / "Bless the man! I don't want no Christial Palises. I am goin' to the borough."

Last Friday, the graduate students from my department interested in macroeconomics organized a round table on the so-called “New Neoclassical Synthesis”, as Goodfriend and King (NBER Macroeconomics Annual, 1997, pp. 231-283) called the convergence in method in macro: the fact that “all” macroeconomists seem nowadays to subscribe to the use of a dynamic stochastic general equilibrium (DSGE) model for the analysis of the business cycle and growth.

The students invited three macroeconomists trained in different traditions (two were more “new classicals” and the other was more “post-Keynesian”) and myself to discuss the convergence in macro. The event surprisingly attracted a wide range of people to the audience: graduate students in general, other faculty members working on different areas, and undergraduate students (probably looking more for the heat of the debate than for its light…). A room for 130 people was packed.

The discussion was lively and interesting. One issue that was raised by one presenter was that academic economists do things for grasping better how the economy works, while economists at the Central Banks have to use in the best way they can the available theory to prescribe economic policies (clearly in a different time frame than the academics’), and economists and journalists in the media strategically criticize both academics and policymakers in order to sell their products.

In this vein, it was very interesting that a day prior to the event a friend had just called my attention to Willem Buiter’s comment on Financial Times (March 3rd). According to Buiter, who has important academic and policymaking credentials, modern macroeconomics has to be rewritten almost from scratch: it is simply incapable of dealing with economic problems during “times of stress and financial instability.” Thus, I add, macroeconomists may be proud of spreading the word that they now have a consensus method for doing economics, but a useless one according to some people: simply the wrong direction.

The current economic crisis may bring novel ways not only of doing economics but possibly also of looking at and using its past, a hope (or doubt?) with which Craufurd Goodwin closed his Palgrave (2008) entry on the history of economic thought. Any bets?

The uses and abuses of HET

Sometimes, we tend to focus so much on the decline of our discipline that finding names like Keynes and Hayek quoted by a newspaper’s columnist appears as a very exotic discovery. Historical arguments might not be used anymore by members of the economics profession but, obviously, some (Republican) media pundits think they’re still useful, especially when a financial crisis seems to unblock the road to socialism (or serfdom, depending on your opinion on current issues).

So here is reproduced, without further comment, Dick Armey‘s column published on Feburary, 4th by the Wall Street Journal:

“In the long run, we are all dead,” John Maynard Keynes once quipped. An influential British economist, Keynes used the line to dodge the problematic long-term implications of his policy proposals. His analysis of the Great Depression redefined economics in the 1930s and asserted that increased government spending during a downturn could revive the economy.

President Barack Obama and congressional Democrats (very few of whom likely have read Keynes’s 1936 book “The General Theory of Employment, Interest and Money”) have dug up the dead economist’s convenient justification for deficit spending in defense of their bloated stimulus legislation. But none ask the most important question: Was Keynes right?

According to Nobel economist Friedrich Hayek, a contemporary of Keynes and perhaps his greatest critic, Keynes “was guided by one central idea . . . that general employment was always positively correlated with the aggregate demand for consumer goods.” Keynes argued that government should intervene in the economy to maintain aggregate demand and full employment, with the goal of smoothing out business cycles. During recessions, he asserted, government should borrow money and spend it.

Keynes’s thinking was a decisive departure from classical economics, because arbitrary “macro” constructs like aggregate demand had no basis in the microeconomic science of human action. As Hayek observed, “some of the most orthodox disciples of Keynes appear consistently to have thrown overboard all the traditional theory of price determination and of distribution, all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics.”

Classical economists up to that time had emphasized a balanced budget and government restraint as the primary goals of fiscal policy. The simplistic notion that “aggregate demand” drove investment and employment threw all of that out the window, but it had one particular convenience for policy makers. Government spending is, according to Keynes’s construct, a key component in determining aggregate demand, so more spending, even to resod the Capitol Mall or distribute free contraception, drives the economy in the short run.

A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.

It’s clear why Keynes’s popularity endures in Congress. Intellectual cover for a spending spree will always be appreciated there. But it’s harder to see any justification for the perverse form of fiscal child abuse that heaps massive debts on future generations.

Today, one problem with manipulating the economy through “discretionary” spending — that part of the budget not mandated by one entitlement or another — is that entitlements have grown large enough to influence the economy, a phenomenon unheard of when Keynes was alive. Medicaid, Medicare, Social Security and other entitlements are becoming larger factors in economic decision making than what Congress spends on, say, roads. Discretionary spending is becoming irrelevant as a fiscal tool.

Of course, despite Mr. Obama’s campaign promises to adhere to “Pay As You Go” budgeting, no one seems terribly worried about paying for what will likely be a trillion-dollar stimulus package. What everyone should agree on is that the money has to come from somewhere, either through higher taxes, borrowing or printing.

If the government borrows the money for the stimulus, then it will either have to print money later or raise taxes to pay it back. If the government raises taxes to pay for the stimulus, it will, in effect, be robbing Peter to pay Paul. If the government prints the money, it will increase inflation, which will decrease the value of the dollar. That would, in effect, rob Paul to pay Paul back with devalued currency.

Taking money out of the private economy — either through taxes or inflation — and spending it in a way that doesn’t offset the loss of money with real economic gains is worse than doing nothing.

Years ago I developed the “Armey Curve” to explain the negative burden government has on prosperity. The idea, borrowing liberally from Arthur Laffer’s curve (which demonstrates that tax revenues fall when the tax burden gets so high that it no longer pays to work), is that at some point the burden of government spending exceeds the private economy’s ability to carry it. “Stimulus” spending often does more harm than good, because it takes more money out of the system than it creates and thereby destroys jobs and leads to stagnation and diminished prosperity for all.

Hayek, who famously debated Keynes in a series of articles after the release of “General Theory,” gave what I believe to be the most devastating critique of government action to stimulate “aggregate demand.” Hayek viewed the boom and bust of the business cycle as primarily a monetary phenomenon created by governments’ artificial inflation of money and credit.

Sound money policy, conversely, allowed the disparate knowledge of millions of economic actors to be conveyed through the price system, rationally allocating capital and labor through relative prices. The problem with government attempts to manipulate the economy through fiscal policy — spending that takes resources away from those who are productive and redistributes it to politically favored interests — is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families’ best interest.

“The real question,” according to Hayek, “is not whether man is, or ought to be, guided by selfish motives but whether we can allow him to be guided in his actions by those immediate consequences which we can know and care for or whether he ought to be made to do what seems appropriate to somebody else who is supposed to possess a fuller comprehension of the significance of these actions to society as a whole.”

In reality, no one spends someone else’s money better than they spend their own. The charade of the current stimulus package, chockablock with earmarks to favored pet constituencies and virtually devoid of national policy considerations, is the logical consequence of Keynesianism in action. It is about politics and power, not sound economics, and I believe that the American people will reject it.

And because, it is even more unlikely to encounter the signature of a historian of economics in the popular press, here is Kevin Hoover‘s response, published as a letter in the February 10th issue of the WSJ:

Regarding Dick Armey’s “Washington Could Use Less Keynes and More Hayek,” (Feb. 4): A wholly justified admiration for Friedrich von Hayek should not encourage Mr. Armey to quote John Maynard Keynes out of context. His most famous quotation comes from his “Tract on Monetary Reform” (1923) — perhaps his most orthodox economic work and a favorite of Milton Friedman. It is offered not as a justification for ignoring the ultimate consequences of the policies thought to follow from his more famous “General Theory” (1936), but as an observation that monetary policy is not neutral but has real effects (for example, on output and employment) in the short run — a point fully supported by Friedman. Rendered more fully, it says: “But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past, the ocean is flat again.”

It’s a fact: We live in the short run. Keynes’s point, to which Mr. Armey surely assents, is that what matters about a hurricane is whether the house collapses on the family. Mr. Armey could be right that some future short runs will be worse if we follow Keynesian demand-management policies. Houses will collapse in future hurricanes, but the issue is still what happens in some short run.

Blog think @ ASSA 2009

bloggerscycle-xOn Saturday, first day of the ASSA meetings, Tim Kane, blogger at Growthology hosted a lunch for economist bloggers. The list of the invited and the conclusions of the meeting can be read here. The History of Economics Playground was not invited. Had it been, it would have kept its head down trying to stay away from crossfire. Because I had left my “blue helmet” at home and was giving a paper at the same time, I was not prone to crash the party.

The conversation during and after brings out some interesting threads. Looking at Marginal Revolution, economist bloggers worry about think tank and ideological takeover and whether blogging will ever count as tenure worthy publication.

The effort of the Kauffman Foundation, shared by the participants, is to reflect on blogging practice. They hold the belief that the medium is still developing and innovation is desirable. Notably, they looked on to the editorial practices of the “oldie” Slashdot, and noted that most of the action in blogs happens tucked away in the comments sections.

From my own experience I agree that the social/collaborative dimension is the one with the greatest potential to change, to improve and to make a profound intellectual impact.

Blogging for what? Blogging for whom?

Browsing the net may not be the most productive thing you can do to improve your resume, but it is often amusing and it can be very useful to accelerate and improve one’s research. So I was browsing when I found this nice post on a fellow blog: http://etherwave.wordpress.com/2008/10/24/blogging-as-scholarship/

From this on, I had a look at Ben Cohen’s two short pieces (links are below). These posts and an exchange of mails we had with Tiago and Yann last week made me wonder about the reasons that lay behing my own commitment with this blog and the reason I feel it is an interesting scholarly-related task. Some like Ben Cohen believe that the main thing about blogs is that they provide for a larger audience and with a new pedagogical device. It is certainly true, but I must say that I did not realize this in the first place nor that it says much about my participation to the history of economics playground. I feel much closer to Will Thomas’s points 1, 2 and 4:

– The blog is a way to articulate more thoroughly the actual perspectives on the history of economic thought than what can be done in a journal or in a volume. In the blog, you can have something closer to a conversation than in the latters. It is much more open than a journal article or even a conference paper, in particular I encourage Phd doctorant to submit comment and queries to our respective post. On the other hand, it has the advantage of being stocked whereas a conversation is ephemeral.

– The blog is a way to speculate about one’s own research and one’s perspective on the discipline.

– The blog is a space where one can criticize the actual state of the art in History of economic thought as a way to create an alternative academic/scholarship culture for HET. This is an aspect that I feel is especially important for a blog managed by young researchers.

– The blog is a way to create links between those who post, comment and read it. Between those who post, it provides a sort of “My generation” effect which is important not only psychologically, but also because of the extention of one’s web it may result in new opportunities of cooperation and mutual exchanges. For example, I am not sure I would have begun cooperating on projects, at least as rapidly, with Tiago and Yann if the blog had not existed. But the blog is also a way to socialize with others either outside our generation or outside our community through comments or various exchanges (I read your blog, you read mine, we both benefit from it; e-mails etc.). Here again, the fluidity of the blog permits freer exchanges than conference sessions and journals and it is easier to get in touch with discipline outsiders through the blog than through an academic setting of sorts (departements, conferences, etc.).

– On a final note, I mention that I believe that blogs such are ours should be first and foremost aiming at a scholar-related audience.




If one were to create an archive of public media about the unfolding crisis what would one include?

  • newspaper and magazine clippings
  • blogs entries and podcasts
  • political literature, pamphlets, position papers, presidential campaigning
  • television clips, special programs and transcripts of news reports

The purpose would be to file a record of public imagination on the crisis. To do it as it unfolded and so capture a different kind of register that would otherwise be perishable. What am I missing?

Lenine or Benedict?

The picture is from the cover of Business Week of the 31st of March 2008 “Reluctant Revolutionary” issue. Since then the spotlight has not moved away from the Fed Chairman Ben Bernanke, as the economy swings between statements of paranoid alarm and insincere reassurance.

There are plenty of histories of the Federal Reserve System, with plenty of experts battling for the right to speak for it. But I would like to know if there is anything about the Fed in the public imagination.

It seems to me that since Volcker, if not since McChesney Martin, the Fed Chair has been awarded a papal status. He is subject to strident abuse (enter Jim Cramer) and praise, but overwhelmingly the Chairman is trusted without question, dare I say it: respected. In troubled times, criticism is notably mute. The economy is like a nervous and unreliable creature, and the most important public virtues are detached calm and bullishness. The Fed Chairman embodies virtue.

The Friedman brand

The University of Chicago has recently announced the creation of a Milton Friedman Institute. I think David Warsh, as usual, got it right when he reads this move in the context of the academic race for resources:

The allocation of resources among the departments of a university is a perennially sensitive matter, and the institute would give Chicago economists (and, to some extent, their crosstown compatriots at Northwestern University) a large source of off-balance-sheet funding for visiting scholars, post-docs, and researchers. In other words, it might confer the same out-of-sight advantages as does the presence of the National Bureau of Economic Research in Cambridge, Mass., for Harvard and MIT.

To siphon the cash, Chicago needs a recognized and alluring brand. Enter FriedmanTM, like margarine, universally loved and hated.

The final report, see here, arguing for the creation of the Institute states:

This connection of the proposed institute to the legacy of Milton Friedman’s intellectual contributions provides a special opportunity to recognize the distinguished place held by Friedman at Chicago and throughout the world.

But like anything worth having, there is a competition for it. An industry has arisen around the name and legacy Friedman, there is Free to Choose Media, there is even a Milton Friedman Day. And like any rock star, Friedman will become the T-shirt, the poster, and the merchandising.


In February 1973, Paul Volcker announced a 10% depreciation of the dollar. It was the second such move in less than two years and a final blow to the appreciated dollar and the fixed exchange regime.

The respectable way to tell this story is to look at the dollar-gold parity. The inebriated way and somewhat more fun, is to look at the dollar-wine parity. Did Americans load up their cellars of French wine? Did they speculate on wine futures? Did the wine speculators understand monetary uncertainty?

Ad from the The New York Times, March 3, 1973, page 9.