Author: JW Mason

Fitch

I just learned that Bob Fitch has died. He broke his leg last month, and then a few days ago a blood clot went to his brain, causing a stroke that left him in a coma; he also suffered several heart attacks. He died yesterday.

I hadn’t seen Bob in several years, maybe not since 2005 or 2006. But there was a time when I used to see him regularly, meeting at the Barnes & Noble on Union Square or his studio apartment around the corner on 17th St. There was a Japanese screen dividing his bed from the rest of the tiny space, and a huge portrait of Stalin on the wall. We’d talk about whatever he was working on at the moment — the Nietzschean roots of the postmodern Left, his critique of Immanuel Wallerstein (two long, brilliant essays that as far as I know were never published), the status of the dollar, the politics of land use, the structural reasons for union corruption (the argument that eventually became Solidarity for Sale), the need for a new political party. “Let’s start a party, Josh,” he said to me on a couple occasions in that warm and yet somehow wheedling voice I can hear now so clearly in my head, that teasing tone he used in argument that always seemed to suggest that of course you already agreed with him and he was just humoring your perverse insistence on pretending that you didn’t. “Well, don’t you agree that…” he’d begin, socratically, when he realized you weren’t with him. That makes him sound dogmatic, which isn’t true at all; it’s just, I think, that he was so caught up in his ideas that he genuinely couldn’t understand it if you didn’t share his enthusiasm. Once I walked with him as he took his laundry to the laundromat down the street; it seemed a little sad, this original, brilliant, genuinely important writer, probably nearing 60 then, still living such a penurious bachelor lifestyle. Like something out of Dostoevsky.

Fitch knew something about founding parties. In Berkeley in the ’60s (Berkeley in the 60s!) he’d been friends with Bob Avakian, and helped him start the Revolutionary Union, which later became the Revolutionary Communist Party. Once, he recalled, the two of them were driving around Oakland and saw some police. “Let’s shoot these cops,” Avakian says. “They’ll think the blacks did it, and when they crack down it will start a riot. We could make the revolution happen, we’d be like Lenin and Trotsky.” “No,” Fitch said,” we’re not Lenin and Trotsky. We’re just Bob and Bob.” No cops were shot; I’m not sure how long after that Fitch left the RU/RCP. He was a bit older than most of those Berkeley radicals, and had gotten there a bit differently; he’d been in military intelligence in the 1950s or early ’60s, seconded, I only just learned, from the 82nd Airborne.

Not that that’s why we’d admired him. Around the Grey City Journal at the University of Chicago, we mostly agreed that two of the most important areas to be thinking about were labor, and cities. We all read Jane Jacobs’ Death and Life of American Cities and Mike Davis’ City of Quartz, but The Assassination of New York was the book that made the deepest impression. It didn’t just have an inspiring or dystopian vision of the city, it told a story, it had an explanation, a political theory for why New York had evolved the way it had.

Fitch was one of that small group of unaffiliated intellectuals who exist only in New York. (Or maybe I should write existed, since there doesn’t seem to be a next generation.) Fitch, Doug Henwood, Barbara Garson, Dan Lazare, Steve Fraser. None of them were academics (Fitch had a PhD and adjuncted, mostly at CUNY; he taught at some point at John Jay, and his last teaching gig was at Laguardia, where my wife Laura teaches, and where there is now an annual Robert Fitch lecture in his memory.) All of them occupied the same broad region of the non-sectarian Marxist (or Marx-influenced) left. New York has, or had, a unique set of institutions that make that kind of milieu possible — the Brecht Forum, the Socialist Scholars Conference (now the Left Forum); a handful of progressive, even radical, unions (Fitch worked for a while for CWA Local 1180; Arthur Cheliotes was impressed enough by The Assassination of New York to hire him to come up with an alternative economic development strategy for the city); and magazines like The Nation, Dissent and The Village Voice. Bob wrote a bunch of articles for the Voice, back when the Voice printed real political journalism and paid real money for it; Chris Lehmann also printed some of his op-eds when he was editing the opinion pages at Newsday.

He didn’t write that much, considering. An early book on Ghana; Assassination; and Solidarity for Sale. (I don’t know what he was working on when he died.) There was also the long series of articles he wrote with Mary Oppenheimer for Socialist Revolution (later Socialist Review, still later Radical Society) on “Who Rules the Corporations”. That should have been a book; it certainly had enough influence. David Kotz, well-known to most readers of this blog, was part of the radical political milieu in Berkeley at that point, making his living typing manuscripts. (A different world!) “Who Rules the Corporations” was one of the things he retyped; it inspired him to go to graduate school in economics, and his own dissertation, published as Bank Control of Large Corporations (a very good book) was essentially the working out of Fitch and Oppenheimer’s argument.

If there’s a theme that ran through his work, it’s political agency — an attention to the particular choices made by those with power. You could call it conspiracy theory, but in a positive sense, since after all the world contains real conspiracies, in the sense of decisions taken behind closed doors. There was a certain continuity from the question of how business was ruled by big banks, to how New York was ruled by the Rockefellers and their ilk, to how labor was ruled by … well, here’s where he lost me. “There are three great monopolies,” he used to say. “The monopoly of capital, the monopoly of land, and the monopoly of labor.” He’d written about the first in “Who Rules the Corporations,” the second in Assassination, the third in Solidarity for Sale. Me, I could never accept the parallel. “Monopoly of labor” applies maybe to a certain kind of job-control craft labor, but where does that exist now? in a few big-city segments of the building trades, and in Hollywood. And it’s under siege in both.

This disagreement probably contributed to my not seeing him these past five years. I was working for the Working Families Party; I believed that the union movement, for all its flaws, was the only substantial American institution not ruled by money. He thought it was hopelessly corrupt, and needed to be replaced, refounded from scratch. “You could just as easily clean up a garbage pile by spraying it with attar of roses,” he like to quote Debs, “as reform the AFL.” (But didn’t Debs spent years trying to arrange a merger of his own American Railway Union with the AFL-affiliated railroad brotherhoods?) Conspiracies, that was in a sense what his work was about. He sort of acknowledges this point in the preface to Assassination. “A focus on the [Rockefeller] family may annoy academic Marxists,” he wrote, “for whom the capitalist is only the personification of abstract capital and who believe, austerely, that any discussion of individuals in economic analysis represents a fatal concession to populism and empiricism. But New York is not capitalism in general…”

His journalism on labor corruption in New York, however much he may have (in my opinion) overgeneralized it into a critique of unions in general, was incredibly valuable. “Orgies,” I remember him excitedly whispering to me at one point, “orgies in the penthouse!” This was the top floor office of “Greedy” Gus Bevona, then-president of SEIU 32BJ, the giant NYC building-services local, whose corruption Fitch was one of the first people to expose. Soon enough Bevona was out and 32BJ became one of the best-led locals in the city, under the stewardship of Héctor Figueroa. That same penthouse became the public meeting space for all kinds of progressive groups. I’ve been there on various occasions, looking out over lower Manhattan; no little credit to Bob.

Maybe he was too smart for his own good. He always had some project; there was always some question which he, finally, had found the no-one-before-recognized answer to. “You realize how conventional that is,” he’d say to you, after you laid out what you thought was some original argument. Everyone read The Assassination of New York. Maybe it never established itself academically. But among radicals it was a touchstone. All of us have an angel on our shoulder; all of us, doing practical politics on the left, have an angel asking if we aren’t too ready to make compromises, if we aren’t too quick to sacrifice principle for getting something done. Probably for almost all of us that angel has a name. For me it’s Fitch. I learned as much sitting in that apartment as I ever did in a classroom. Maybe not concrete material — altho there was enough of that — as much as a sensibility. What it means to be an intellectual on the left. And what, more specifically, we need to demand from the labor movement. I hope I’ll never commit myself to any organization without asking at some point, what would Fitch think? Bob Fitch was a communist. He didn’t, I believe, believe in any organized religion. But here is the moment when we have to acknowledge that something of the person does outlast the person. “From the first inspiration down the windpipe to the last expiration out of it, all that a male or female does that is vigorous, and benevolent, and clean, is so much pure profit to him or her in the unshakable order of the universe, and throughout the whole scope of it forever.” What would Fitch have thought? I’m sorry I didn’t ask him.

UPDATE: It’s a real honor to have Jonathan Fitch and others use this space to share their memories of Bob. If you’re reading this, please do read the comments as well.

Post Keynesianism in Practice

From the FT the other day:

That Facebook is worth $50bn or Twitter $10bn, is recounted as fact. … But there are still precious few numbers to analyse and business models are no more proved than for dotcoms a decade ago.

To illustrate the ridiculousness of trying to value these things consider LinkedIn. Its S-1 registration statement (with US regulators) provides rudimentary financial statements from which to model the company. Revenues, operating costs, capital expenditure and depreciation and amortisation schedules are available for the past five years. It is then a hop to forecast earnings before interest, tax, depreciation and amortisation and, thus, future free cash flows. Discount these cash flows (made easier because there is no debt) and you’ve got a valuation.

But who on earth knows what forecasts to make? Private secondary markets supposedly value LinkedIn at $2.5bn-$3bn. To arrive at the bottom of that range requires sales to expand 60, 50 then 40 per cent over the next three years, before tailing off to a terminal growth rate of 3 per cent in 2019. Ebitda as a proportion of revenues has to double to 20 per cent and stay there. … If sales growth tapers off faster than expected or if systems spending becomes a bottomless pit, you can halve that valuation for starters. But what if LinkedIn’s platform easily copes with millions of new members? Double ebitda margins to 40 per cent and a $5bn company is easily within reach. Who knows? No wonder it’s easier to simply quote the same price tag as everyone else.

Fundamental or Knightian uncertainty tends to get treated as something airy-fairy, as part of the philosophy-of penumbra rather than economics per se. But as this example shows, it’s unavoidable in plenty of practical questions. Mainstream models avoid dealing with the problem by assuming that the true probability distribution of all possible future events is always known. But in the real world of business people aren’t so silly. As the man says:

The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market. …

Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave… It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun.

Economists might not believe in Keynes any more. But business journalists certainly seem to!

Krugman vs. Persaud on China

Over on VoxEU, Avinash Persaud criticizes “otherwise respectable economists” (he doesn’t name names, but we know who he means) who blame China’s currency peg for contributing to the US current account deficit. “If you listen to the discourse in the US,” he writes, “you would believe that a country cannot run a trade surplus unless it manipulates its exchange rate.”

Krugman responds:

Avinash Persaud:

The current account includes “hot money” inflows that come under the exchange control restrictions and have ballooned since the China bashers created the belief that the renminbi is a one-way appreciation bet.

No, it doesn’t. The BEA explains:

The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers …

I don’t mean to be a snob here, but a commentator who lectures us on “mumbo-jumbo” but can’t be bothered to learn the rudiments of balance-of-payments accounting doesn’t deserve a hearing.

On the narrow point, Krugman is clearly right. But the narrow point isn’t really the point. Whether you’re looking at the current account or at the trade balance, as Persaud prefers, there are plenty of countries with floating currencies that have imbalances as large (relative to GDP) and as persistent as China’s. It’s nice for Krugman, really, that Persaud screwed up on the current account definition, since it lets him avoid discussing what would otherwise be a serious problem for him.

So, from someone

Quote of the Day

The always interesting Steve Randy Waldman, in response to Tyler Cowen’s argument for a technologically-determined “Great Stagnation”:

Rather than a paucity of new technologies, we might be experiencing a breakdown of an older gizmo that economists refer to as “markets”. As our economy tilts away from sectors in which value (however defined) and financial revenue are reliably cojoined, our primary means of orienting our behavior towards valuable activity, individually and collectively, become less and less effective.

The whole piece is very smart. But the specific point that the link between productive activity and claims on the collective product is much more tenuous, and institutionally-determined, than mainstream theory assumes is a very good one that I’ve been struggling to articulate for a while.

Not, of course, that it’s a new one. What’s that old line? “The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered… The conditions of bourgeois society are too narrow to comprise the wealth created by them.”

EDIT: A couple addenda:

The scenario that Waldman has in mind is a systematic bias in innovations toward labor-saving technologies. In the absence of political-institutional changes that raise labor demand in the public sector, and wages across the board, this will lead to a secular rise in unemployment and decline in wages, which is both politically untenable (in a democracy, anyway) and leads to chronic shortfalls in demand.

But one can imagine this going the other way. If one thinks of the wage share as exogenous, then the same technological bias produces a falling profit rate — this is the famous Law of the Tendency of the Rate of Profit to Fall. Or from a more Schumpeterian angle [1] there’s the idea that the fixed costs associated with capital investments can only be recouped if producers have some monopoly power, which tends to diminish as innovations get diffused. So without major new innovations it’s hard for industries with large fixed-capital requirements to remain profitable. In this scenario (can we call it Smithian?), the danger is a secular redistribution of income away from profits, not toward them. (Of course this is quite compatible with increasing technological unemployment, with the winners being a labor aristocracy and the owners of scarce natural resources.) But the point about the very loose articulation between the social division of labor and the incomes produced by the market is the same.

Also, Waldman assumes that causality runs only one way, from the innovations drawn from a set of technological possibilities given by nature, to the demand for and status of labor. This is often a reasonable way to look at things. But not always. Schumpeter, again, for example — despite the misconception that he believed in cycles driven by the exogenous incidence of major innovations — thought that there was almost always a backlog of unexploited technologies,a nd that their realization as economic innovations depended on the sociological factors — the rise of “new men” and “new firms”. Within Marxist economics, there’s an important tradition that sees labor-saving and deskilling not as accidental consequences of technological progress, but as an active goal in a system based on antagonistic relations of production. A system that did not regard skilled labor as a cost — and even more importantly, that did not need to ensure that a disproportionate share of the surplus went to the owners of the means of production — might find itself drawing a very different mix of innovations.

[1] Schumpeter’s student Minsky picked up on this point, in a way I hope to return to in a future post.

Stimulus Around the World

Interesting new working paper out from the NBER today, on Net Fiscal Stimulus During the Great Recession. It purports to compare the level of fiscal stimulus across 28 rich and developing countries, with results that are decidely gratifying for a Keynesian.

Purports, I say, because unfortunately their chosen measure of fiscal stance makes it hard to know how seriously to take their results. They look only at final expenditures by government, ignoring both transfers and taxes. While there are certainly contexts in which this is the right approach — where the alternative would be double-counting with private expenditures — it’s not at all clear that it’s right for the questions they are trying to answer. From the stimulus side, in theory one would expect the demand effect of final government purchases to be qualitatively greater than the effect of transfers or tax cuts only if the recipients of the latter don’t face credit constraints, so that temporary changes operate only through wealth effects. And while I do think that the importance of credit constraints in the Great Recession may be overstated for businesses, they’re clearly very important for households, especially the ones most likely to receive transfers like UI. On the debt burden side, obviously deficits add the same whatever their source. On the other hand, it may well be that changes in final expenditure by government is a good proxy for the fiscal stance in general, and perhaps a better one for discretionary stimulus spending. It would be nice to see the paper redone with other measures of stimulus, but let’s tentatively accept their findings. What do they show?

First, as Krugman says, if stimulus didn’t work in the US, it’s because it wasn’t tried. The US ranks 9th from the bottom of the 28 countries in the growth of government spending, and even that is only thanks to spending in 2007-08; taking all levels of government together public consumption and investment didn’t rise at all in 2009. Of course we knew that already (And we also knew, as Aizenman and Pasricha seem not to, that the earlier increase was almost all military spending.) But it’s useful to see it in comparative perspective.

Second, the most interesting finding, that countries with the biggest increases in public spending did not see any larger increase in real interest rates on public debt, either contemporaneously or in the following year, but they did see faster growth. This means the real debt burden – measured as (r – g) * d, where r is the real interest rate on public debt, g is the real GDP growth rate, and d is the debt-to-GDP ratio – fell in those countries where public spending rose the most. If it holds up, this is obviously a very interesting result.

Finally, there’s a point they don’t make. They observe, correctly, that the US is far from any objective financial constraint on public spending. And they observe; also correctly, that the most aggressively countercyclical fiscal policy is found in middle-income countries like Korea, in sharp contrast to previous downturns, especially the late 90s. But they don’t offer any explanation for this change except a vague suggestion that countries chastened by the Asian crisis got their fiscal houses in order, leaving them plenty of space for stimulus. But that’s obviously not right. As they themselves note, there’s no correlation between the public debt burden prior to the crisis and the trajectory of government spending over the past few years. As I’ve pointed out before, what’s different in countries like Korea in the period before this crisis compared with the Asian Crisis isn’t the fiscal balance, but the external balance. They were running external deficits then, external surpluses this time. That’s what created the extra space for stimulus. (Same thing in Europe: public-sector surpluses in Spain and Ireland didn’t matter because the countries had big current account deficits. It was the corresponding private liabilities thy ended up on public balance sheets in the crisis and created the pressure for spending reductions.) Which brings me to the punchline: If the US had had a smaller trade deficit with,say, Korea in the past few years, that would have had a negligible direct effect on US demand and there’s no reason to believe that it would have created space for more expansionary fiscal policy, since we’re using nowhere near the space we have. But it very well might have forced Korea to adopt a more contractionary policy, just as other not-exorbitantly-privileged countries without external surpluses have had to. In that sense, though they certainly don’t draw this conclusion, I think this paper supports the view that global imbalances have moderated rather than exacerbated the crisis.

Egypt and Exorbitant Privilege

Interesting article on how Mubarak spent his last days in office:

Hosni Mubarak used the 18 days it took for protesters to topple him to shift his vast wealth into untraceable accounts overseas, Western intelligence sources have said. The former Egyptian president is accused of amassing a fortune of more than £3 billion – although some suggest it could be as much as £40 billion – during his 30 years in power. It is claimed his wealth was tied up in foreign banks, investments, bullion and properties in London, New York, Paris and Beverly Hills. In the knowledge his downfall was imminent, Mr Mubarak is understood to have attempted to place his assets out of reach of potential investigators.

On Friday night Swiss authorities announced they were freezing any assets Mubarak and his family may hold in the country’s banks while pressure was growing for the UK to do the same. Mr Mubarak has strong connections to London and it is thought many millions of pounds are stashed in the UK.

But a senior Western intelligence source claimed that Mubarak had begun moving his fortune in recent weeks. “We’re aware of some urgent conversations within the Mubarak family about how to save these assets,” said the source, “And we think their financial advisers have moved some of the money around. If he had real money in Zurich, it may be gone by now.”

Interesting, of course, as a reminder of what it means, practically, to be “our son of a bitch.” But also interesting, if you’re an economist, for the light it throws on another exorbitant privilege — that of the dollar.

This is the empirically well-established fact that US assets abroad consistently earn higher returns than foreign assets in the US. This differential is an important pillar of the continued (and, for my money, likely to continue for some time) role of the dollar as a reserve currency: Even large US current account deficits don’t lead to cumulating interest payments abroad. But why foreign investors in the US get such comparatively low returns — in one year in the late ’90s the total return on foreign assets in the US was actually negative — remains a bit of a mystery.

Seems to me the Mubarak story points toward (part of) the answer. I have no idea how realistic the higher figure for his fortune is, but it’s a big number — roughly equivalent to a year’s worth of Egyptian imports. [1] And of course Mubarak presumably isn’t the only Egyptian whose bank balance might not go over well in Tahrir Square. For these “foreign investors”, the chance of holding onto their assets when the people they were stolen from ask for them back, has got to be a major component of expected return. And by and large, that means keeping them in forms denominated in dollars. Along with central banks reserves, I reckon this is going to be a substantial portion of net demand for US assets that is relatively insensitive to yield. Enough to explain a significant part of the lower return on foreigners’ assets here? I don’t know. Could be. But the bigger point is, reserve currency is a political status. I haven’t read Barry Eichengreen’s new book yet — it’s in the pile on my desk — but hopefully the Mubaraks of the world will get a central role in his story.

[1] It would be better to compare it to the country’s total stock of foreign assets, but I don’t know where to find that number for Egypt.

Microfoundations, Again

Sartre has a wonderful bit in the War Diaries about his childhood discovery of atheism:

One day at La Rochelle, while waiting for the Machado girls who used to keep me company every morning on my way to the lycee, I grew impatient with their lateness and, to while away the time, decided to think about God. “Well,” I said, “he doesn’t exist.” It was something authentically self-evident, although I have no idea any more what it was based on. And then it was over and done with…

Similarly with microfoundations: First of all, they don’t exist. But this rather important point tends to get lost sight of when we follow the conceptual questions too far out into the weeds.

Yes, your textbook announces that “Nothing appears in this book that is not based on explicit microfoundations.” But then 15 pages later, you find that “We assume that all individuals in the economy are identical,” and that these identical individuals have intertemporally-additive preferences. How is this representative agent aggregated up from a market composed of many individuals with differing preferences? It’s not. And in general, it can’t be. As Sonnenschein, Mantel and Debreu showed decades ago, there is no mathematical way to consistently aggregate a set of individual demand functions into a well-behaved aggregate demand function, let alone one consistent with temporally additive preferences. So let’s say we are interested in the relationship between aggregate income and consumption. The old Keynesian (or structuralist) approach is to stipulate a relationship like C = cY, where c < 1 in the short run and approaches 1 over longer horizons; while the modern approach is to derive the relationship explicitly from a representative agent maximizing utility intertemporally. But since there's no way to get that representative agent by aggregating heterogeneous individuals -- and since even the representative agent approach doesn't produce sensible results unless we impose restrictive conditions on its preferences -- there is no sense in which the latter is any more microfounded than the former. So if the representative agent can’t actually be derived from any model of individual behavior, why is it used? The Obstfeld and Rogoff book I quoted before at least engages the question; it considers various answers before concluding that “Fundamentally,” a more general approach “would yield few concrete behavioral predictions.” Which is really a pretty damning admission of defeat for the microfoundations approach. Microeconomics doesn’t tell us anything about what to expect at a macro level, so macroeconomics has to be based on observations of macro phenomena; the “microfoundations” are bolted on afterward. None of this is at all original. If Cosma Shalizi and Daniel Davies didn’t explicitly say this, it’s because they assume anyone interested in this debate knows it already. Why the particular mathematical formalism misleadingly called microfoundations has such a hold on the imagination of economists is a good question, for which I don’t have a good answer. But the unbridgeable gap between our supposed individual-level theory of economic behavior and the questions addressed by macroeconomics is worth keeping in mind before we get too carried away with discussions of principle.

Is Liberalism Done Yet?

I don’t have much to add to Mike Konczal’s respectful but thorough rebuttal of the idea that the passage of health care reform marks the end of the liberal project; Yglesias is so clearly wrong, for so many reasons. Most immediately, the health care bill as passed will leave 8 percent of the population uninsured, so even if universal health insurance is the finish line, we haven’t crossed it yet. More generally, there are clear areas where expansion of public provision and regulation is almost inevitable, whenever the political climate turns favorable. Most obvious is childraising (and caring labor more generally), where our current system of uncompensated household labor is being steadily eroded by the acid of the market, even while the demands on it increase. In a few years, universal childcare will be seen by liberals as essential to a civilized society, just as universal health coverage is now.

More broadly, I’m reminded of Stephen Resnick’s story of his fellow MIT grad student Stephen Hymer going in to Robert Paul Samuelson’s office (this would be the early ‘60s) and asking him if there was anything important in Marxism that you couldn’t talk about using conventional economics. Samuelson’s answer: “Class struggle.”

Liberals and radicals do disagree over ultimate ends – more stuff, more equitably distributed, for them; the full and free development of human capacities, for us. But the more salient disagreement, at least in the current conjuncture, is over means. Liberals believe that the political process is ultimately a form of rational debate, in which the objectively best ideas win out and are then executed by a neutral administrative mechanism. Political engagement means situating yourself within shouting distance of the seat of power, and then making the case that your preferred policy is in the best interests of everyone. Who you are doesn’t matter, just the merits of your views. Carl Schmitt, interestingly enough, gives one of the clearest statements of this conception of politics:

All specifically parliamentary arrangements and norms receive their meaning first through discussion and openness. This is especially true of the fundamental principle that the representative is independent of his constituents and party… The characteristic of all representative constitutions … is that laws arise out of a conflict of opinions, not out of a struggle of interests. … Conduct that is not concerned with discovering what is rationally correct, but with calculating particular interests and the chances of winning and with carrying these through according to one’s own interests is … not discussion in the specific sense.

Schmitt, the anti-liberal, saw better than liberals that this mode of politics is specific to the particular institutional context of parliamentarianism. A context that remains very important, of course, outside of the formal political domain as well as within it. [1] But it’s not universal, and in particular it can’t be the last word in a society that is divided by fundamentally conflicting interests.

Radicals, by contrast, see the conflict of interests as fundamental. Or rather, we see it as inescapable in politics as long as it exists in economic life and society generally. From this point of view, arguments are won in parliament only thanks to the rioters, literal or figurative, in the streets outside. And liberalism as a concrete political project is a compromise between opposing interests, one that’s always open to renegotiation when the balance of forces changes. So unlike in science (liberalism’s implicit ideal), progress is always reversible, so no political struggle is ever definitely finished. Any given compromise is only sustainable to the extent that there are social forces striving for a horizon beyond it.

[1] For example, I’m current serving on a university hiring committee, and the norm that discussions must be conducted only in terms of differing opinions, never opposing interests, is very strongly felt.

What’s Going On With Inventories?

One of the weirdly under-discussed features of the current macroeconomic situation is the huge role of inventories in the recovery. I read a lot of economics blogs — there are a lot more I don’t read — and at least sporadically the business press, and I’ve hardly seen this discussed at all. But check it out:


The orange line is the change in GDP, the blue line is the contribution of inventory changes. (Sorry it’s fuzzy. I’m technologically hopeless.) Since the end of the recession, 62 percent of GDP growth has been accounted for by inventories. Inventories have accounted for the majority of GDP growth in four of the five post-recession quarters; in the fifth, they were 48 percent. There’s really no precedent for this. It’s not unusual for inventories to be the main source of growth in one post-recession quarter, but never in the past 50 years have they accounted for half of GDP growth for two quarters in a row, let alone for five. [1]

The question then is, what’s it mean. Honestly? I don’t know.

The natural theory is that it’s supply chain risk and credit risk. When you’re not confident you’re regular suppliers will still be in business a few months from now, you want to keep a stash of whatever inputs you depend on them for on hand. And as transactions move toward a cash-on-the-barrelhead basis, everyone has to hold more goods in stock (along with more cash, but that’s happening too.)

But I suspect there are better answers, if one understood the concrete realities underlying the BEA statistics. Any of you hypothetical readers have ideas?

[1] The first post-war recovery in 1947-48 saw inventories play a similarly large role. I doubt the reasons were the same.

Are Microfoundations Necessary?

A typically thoughtful piece by Cosma Shalizi, says Arjun.

And it is thoughtful, for sure, and smart, and interesting. But I think it concedes too much to really existing economics. In particular:

Obviously, macroeconomic phenomena are the aggregated (or, if you like, the emergent) consequences of microeconomic interactions.

No, that isn’t obvious at all. Two arguments.

First, for the moment, lets grant that macroeconomics, as a theory of aggregate behavior, needs some kind of micro foundations in a theory of individual behavior. Does it need specifically microeconomic foundations? I don’t think so. Macroeconomics studies the dynamics of aggregate output and price level, distribution and growth. Microeconomics studies the the dynamics of allocation and the formation of relative prices. It’s not at all clear — it certainly shouldn’t be assumed — that the former are emergent phenomena of the latter. Of course, even if not, one could say that means we have the wrong microeconomics. (Shalizi sort of gestures in that direction.) But if we’re going to use the term microeconomics the way that it’s used, then it’s not at all obvious at all that, even modified and extended, it’s the right microfoundation for macroeconomics. Even if valid in its own terms, it may not be studying the domains of individual behavior from which the important macro behavior is aggregated.

Second, more broadly, does macroeconomics need microfoundations at all? In other words,do we really know a priori that since macroeconomics is a theory of aggregate behavior, it must be a special case of a related but more general theory of individual behavior?

We’re used to a model of science where simpler, more general, finer-scale sciences are aggregated up to progressively coarser, more particular and more contingent sciences. Physics -> chemistry -> geology; physics -> chemistry -> biology -> psychology. (I guess many people would put economics at the end of that second chain.) And this model certainly works well in many contexts. The higher-scale sciences deal with emergent phenomena and have their own particular techniques and domain-specific theories, but they are understood to be, at the end of the day, approximations to the dynamics of the more precise and universal theories microfounding them.

It’s not an epistemological given, though, that domains of knowledge will always be nested in this logical way. It is perfectly possible, especially when we’re talking societies of rational beings, for the regular to emerge from the contingent, rather than vice versa. I would argue, somewhat tentatively, that economics is, with law, the prime example of this — in effect, a locally law-like system, i.e. one that can be studied scientifically within certain bounds but whose regularities become less lawlike rather than more lawlike as they are generalized.

Let me give a more concrete example: chess. Chess exhibits many lawlike regularities and has given rise to a substantial body of theory. Since this theory deals with the entire game, the board and all the pieces considered together, does it “obviously” follow that it must be founded in a microtheory of chess, studying the behavior of individual pieces or individual squares on the board? No, that’s silly, no such microtheory is possible. Individual chess pieces, qua chess pieces, don’t exist outside the context of the game. Chess theory does ultimately have microfoundations in the relevant branches of math. But if you want to want to understand the origins of the specific rules of chess as a game, there’s no way to derive them from a disaggregated theory of individual chess pieces. Rather, you’d have to look at the historical process by which the game as a whole evolved into its current form. And unlike the case in the physical sciences, where we expect the emergent phenomena to have a greater share of contingent, particular elements than the underlying phenomenon (just ask anyone who’s studied organic chemistry!) here the emergent phenomenon — chess with its rules — is much simpler and more regular than the more general phenomenon it’s grounded in.

And that’s how I think of macroeconomics. It’s not an aggregating-up of a more general theory of “how people make choices,” as you’re told in your first undergrad economics class. It is, rather, a theory about the operation of capitalism. And while capitalism is lawlike in much of its operations, those laws don’t arise out of some more general laws of individual behavior. Rather they arose historically, as a whole, through a concrete, contingent process. Microeconomics is as likely to arise from macroeconomics as the reverse. The profit-maximizing behavior of firms, for example, is not, as it’s often presented, a mere aggregating-up of utility maximizing behavior of individuals. [1] Rather, firms are profit maximizers because of the process of accumulation, whereby the survival or growth of the firm in later periods depends on the profits of the firm in earlier periods. There’s no analogous sociological basis for maximization by individuals. [2] Utility-maximizing individuals aren’t the basis of profit-maximizing firms, they’re their warped reflection in the imagination of economists. Profit maximization by capitalist firms, on the other hand, is a very powerful generalization, explaining endless features of the social landscape. And yet the funny thing is, when you try to look behind it, and ask how it’s maintained, you find yourself moving toward more particular, historically specific explanations. Profit maximization is a local peak of lawlikeness.

Descend from the peak, and you’re in treacherous territory. But I just don’t think there’s any way to fit (macro)economics into the mold of positivism. And there’s some comfort in knowing that Keynes seems to have thought along similar lines. Economics, he wrote, is a “moral rather than a pseudo-natural science, a branch of logic, a way of thinking … in terms of models joined to the art of choosing models which are relevant to the contemporary world.” It’s purpose is “not to provide a machine or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organized and orderly way of thinking about our particular problems.” (Quoted in Carabelli and Cedrini.)

[1] Economist readers will know that most mainstream macro models, including the “saltwater” ones, don’t include firms at all, but conduct the whole analysis in terms of utility-maximizing households.

[2] This point is strangely neglected, even by radicals. I heard someone offer recently, as a critique of a paper, that it assumed that employers behaved “rationally,” in the sense of maximizing some objective function, while workers did not. But as a Marxist that’s exactly what one should expect.

EDIT: Just to amplify one point a bit:

I suggest in the post that universal laws founded in historical contingency is characteristic of (some) social phenomena, whereas in natural science particular cases always arise from more general laws. But there seems to be one glaring exception. As far as we know, the initial condition of the universe is the mother of all historical contingencies, in the sense that many features of the universe (in particular, the arrow of time) depend on it beginning in its lowest entropy (least probable) state, a brute fact for which there is not (yet) any further explanation. So if we imagine a graph with the coarse-grainness of phenomena on the x-axis and the generality of the laws governing them on the y-axis, we would mostly see the smoothly descending curve implied by the idea of microfoundations. But we would see an anomalous spike out toward the coarse-grained end corresponding to economics, and another, somewhat smaller one corresponding to law (which, despite the adherents of legal realism, natural law, law and economics, etc., remains an ungrounded island of order). And we would see a huge dip at the fine-grained end corresponding to the boundary conditions of the universe.

FURTHER EDIT: Daniel Davies agrees, so this has got to be right.