Posts in Three Lines

Seeing as I’m not teaching this semester, maybe I’ll start blogging more regularly. If so, here are some of the posts I might write.


Taxes and investment. Discussions of tax cuts’ effects on investment need to distinguish between two possible channels: changes in the expected return on investment, and changes in internal funds available to the firm. Economists tends to focus on the first, but if external funds are not a good substitute for retained earnings then the second may be more important. Tax cuts will fail to stimulate investment in the first case if they raise the opportunity cost for investment as much as expected returns, and in the second case if shareholder demands mean that internal funds are no longer available to finance investment; or in either case if monopoly power, demand constraints, etc. mean that the expected return on investment curve slopes steeply down.

The probability approach in economics. Empirical economics focuses on estimating the parameters of a data-generating process supposed to underlie some observable phenomena; this is then used to make ceteris paribus (all else equal) predictions about what will happen if something changes. Critics object that these kinds of predictions are meaningless, that the goal should be unconditional forecasts instead (“economists failed to call the crisis”). Trygve Haavelmo’s writings on empirics from the 1940s suggest third possibile goal: unconditional predictions about the joint distribution of several variables within a particular domain.

Walking the labor-market tightrope. There’s a tension in how to think about the past couple years of low unemployment and somewhat faster wage growth. On the one hand, we’re still very far from reversing the declines in employment and wages after 2008, or from any other reasonable measure of full employment; but on the other hand, it’s important that there has been some progress — it means that despite fears of robots/China/etc., there is still a reliable link from aggregate demand to employment and wages. It’s also worth noting that the faster wage growth has come without any pickup in inflation, but has translated one for one into a higher wage share (and lower profit share).

The interest rate and the interest rate. Every couple months, Martin Wolf writes something to the effect that central banks can’t change the real interest rate. The idea seems to be that the monetary interest rate influenced by central banks must fundamentally correspond to the intertemporal rate of substitution in a Walrasian world without money, set by preferences and production possibilities. It’s worth thinking through all the reasons why this doesn’t work; I think they point to some deep fissures opened up by the incongruence of economic map with social territory.

Financialization. One critical response to my conversation about financialization with Seth Ackerman was that a focus on finance as a device for disciplining nonfinancial firms ignores the ways those firms themselves have become major players in financial markets. Several very smart comrades in heterodoxy have made this same argument, that nonfinancial firms are increasingly seeking to profit from ownership of financial assets rather than of means of production. I’m not convinced — I think that most or all of the apparent rise in financial assets on the balance sheets of nonfinancial firms is really goodwill from mergers, interests in unconsolidated subsidiaries, and similar accounting devices, rather than the sort of financial assets that you can purchase and collect an income from.

The European central bank is not the central bank of Europe. I finally finished my review of Yanis Varoufakis’ three books, months past the deadline (hopefully they’ll still take it). One important issue I couldn’t address in the review, is whether he is right to dismiss as politically inconsequential the question of who runs the Bank of Greece. Personally, I’m not convinced — I still think the national central banks are important strategic terrain that any future left government in the euro zone needs to get control of.

The boss’s brain is under the worker’s cap. Business Insider has been doing some great reporting on the chaos created by Whole Foods’ new inventory management system. One of the key points that comes out is the heroic effort and emotional energy that employees, including line managers, put in to keep the machinery running, no matter how hard top management tries to wreck it. I feel like much of corporate America is run by mad kings who sit around burning their tribute while insisting they deserve credit for everything the peasants do to produce it.

Evolution ≠ natural selection. My recent reading has included two books on evolutionary biology — Peter Godrey-Smith’s Darwinian Populations and Natural Selection, a high-level, philosophical restatement of the logic of natural selection; and Olivier Rieppel’s Turtles as Hopeful Monsters, a ground-level narrative of some particular debates within evolutionary biology. Reading these two books together really highlights the distinction between evolution (the concrete development of living creatures over time) and natural selection (a mechanism postulated to account for that development). One way of thinking about the evo-devo revolution is that it’s saying the former is not reducible to the latter — the capacity to produce large-scale, complex structures is not a generic implication of natural selection but a specific trait that itself has evolved.

13 thoughts on “Posts in Three Lines”

  1. A concern I do have about the role of financial firms in disciplining nonfinancial firms is that a strong majority of US firms are privately held. The ways that financial firms influence such companies are going to be very different than what we typically think of when we discuss this topic – i.e. these are not firms being pressured by activist investors to disgorge the cash.

    I strongly suspect that Whole Foods situation is what happens when someone high up is getting rewarded for some pretty narrow metrics – “keep inventory down”, etc. They’ll never admit that, of course.

    1. Yes, the rise in private equity and so on definitely changes the picture in important ways. But maybe private equity can be thought of as sort of the ultimate activist investors?

  2. “… we’re still very far from reversing the declines in employment and wages after 2008, […] but has translated one for one into a higher wage share (and lower profit share).”

    Looking at the graph in your link (but expanding it to earlier dates), it seems that the wage share just crumbled since 2001, and then regained some (but very few) between 2014 and 2016; it’s now stalling or slightly falling.

    It looks to me as if in 2001 there was some sort of structural change. So what happened in 2001?

    1. I think it might fit what we know about US political economy better if we say that there was a tendency for the wage share to decline from the end of the 1980s, which was ionterrupted for several years by the period of tight labot markets in the late 1990s. So what happened in 2001 was the end of the boom that had temporarily masked the structural factors weakening the position of workers.

  3. Wolf’s view is fringe even within economics, since it would need the quantity theory of money to hold even in the short run. (Though maybe he just means that central banks don’t have complete control over the real rate? That is a true but banal point.)

    1. It’s not entirely clear what domain his claim is supposed to apply over – he is a journalist rather than an academic so he does not have to spell it out. But if it’s intended only for the long run (whatever that is) then it’s not so fringe, is it?

      1. I think that the quantity theory of money is meaningless, since then everything depends on the “velocity” of money (because we are comparing a supposed stock of coins with a flow of stuff that is produced and consumed).
        I like much more the concept of a “melt” like in some neo-marxian theories.
        That said, I don’t think that the quantity theory of money is necessarious to explain why central banks can’t control the interest rate: the problem is the relationship between the interest rate on debt (that is denominated in currency) and the rate of profit of other capital assets, which automatically will be increased by the rate of inflation (because if I buy stuff today, and sell it tomorrow when all prices are up by 10%, my nominal profits will also be up by 10%).
        The point is that wealth owners can store their wealth in many ways, by buying various sort of capital assets, of which debt is only one (plus wealthowners can buy debt in various currencies, not just in dollars), so the real interest rate will necessariously be somewhat linked to the “normal” (average? modal?) rate of profit.

  4. Long run I assume it’s conventional wisdom that Wolf’s statement is true. I’m not even sure that it’s not true. Monetary policy in the US in the 19th century was pretty poor, which sometimes meant terrible economic performance in the short run, but the economy still grew in the long run.

    1. Wait what? There was no monetary policy in the US in most of the 19th century, seeing as there was no central bank to conduct it. And anyway, how does the existence of economic growth tell us anything about the degree or timeframe over which central banks can affect interest rates?

      1. I don’t think this is accurate. It’s not useful and just creates a historical muddle to say “monetary policy is what central banks do”. It’s much more useful to say “monetary policy is the actions public authorities take to influence private credit extension and impact interest rates”. By this definition there certainly was monetary policy. The Federal Treasury conducted monetary policy, as did the treasuries of individual states.

        1. Well, this is an interesting question. What do we mean by “monetary policy”? I take your point that “whatever a central bank does” isn’t a satisfactory answer. But I’m also not convinced that the Treasury conducted monetary policy in a useful sense in much of the 20th century. Most important for present purposes, was there any kind of interest rate target?

          1. There really wasn’t interest rate targets in the modern sense but only because usury laws did a lot of the work there. However, they certainly did things to affect interest rates i.e. to offset what are now called “autonomous flows” in central bank discussions. In any case, as we always talk about, the maturity issuance choices (both in timing and in quantity) by the treasury always impacts interest rates and the term structure. The independent treasury also purchased bonds.

  5. Maybe “monetary policy” is the wrong phrase, but there was money, and therefore there was the real effects of money.

    The 19th century had volatile “monetary policy” because there was no central bank, and had volatile output (hence the many Panics of 18XX). The fact that overall there was growth suggests to me that monetary policy (or its absence) is much more important in the short run than the long run.

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