Author: JW Mason

Karl Marx on the American Civil War

I’m sure I read somewhere — I’ve certainly repeated it enough — that Marx considered the US Civil War and the abolition slavery the only great world-historical event in his lifetime. This isn’t that, though it’s consistent with it. From The London Times on the Orleans Princes in America:

The people of England, of France, of Germany, of Europe, consider the cause of the United States as their own cause, as the cause of liberty, and that, despite all paid sophistry, they consider the soil of the United States as the free soil of the landless millions of Europe, as their land of promise, now to be defended sword in hand, from the sordid grasp of the slaveholder. … All the wars waged in Europe [since 1850] have been mock wars, groundless, wanton, and carried on on false pretenses. The Russian war, and the Italian war, not to, speak of the piratical expeditions against China, Cochin-China, and so forth… The first grand war of contemporaneous history is the American war. … In this contest the highest form of popular self-government till now realized is giving battle to the meanest and most shameless form of man’s enslaving recorded in the annals of history.

There’s also Marx’s letter, on behalf of the International Workingmen’s Association, congratulating Lincoln on his reelection:

When an oligarchy of 300,000 slaveholders dared to inscribe [the word] “slavery” on the banner of Armed Revolt, on the very spot … whence the first Declaration of the Rights of Man was issued, and the first impulse given to the European revolution of the eighteenth century…, and maintained slavery to be “a beneficent institution”, indeed, the old solution of the great problem of “the relation of capital to labor”, and cynically proclaimed property in man “the cornerstone of the new edifice” — then the working classes of Europe understood at once, even before the fanatic partisanship of the upper classes for the Confederate gentry had given its dismal warning, that the slaveholders’ rebellion was to sound the tocsin for a general holy crusade of property against labor, and that for the men of labor, their hopes for the future, even their past conquests were at stake in that tremendous conflict on the other side of the Atlantic…
The workingmen of Europe feel sure that, as the American War of Independence initiated a new era of ascendancy for the middle class, so the American Antislavery War will do for the working classes. They consider it an earnest of the epoch to come that it fell to the lot of Abraham Lincoln, the single-minded son of the working class, to lead his country through the matchless struggle for the rescue of an enchained race and the reconstruction of a social world.

Still not quite the definitive statement I’m looking for, but closer.

His assessment of Lincoln is interesting, too:

Lincoln is a sui generis figure in the annals of history.He has no initiative, no idealistic impetus, no historical trappings. He gives his most important actions always the most commonplace form. Other people claim to be “fighting for an idea”, when it is for them a matter of square feet of land. Lincoln, even when he is motivated by, an idea, talks about “square feet”. He sings the bravura aria of his part hesitatingly, reluctantly and unwillingly, as though apologising for being compelled by circumstances “to act the lion”. The most redoubtable decrees — which will always remain remarkable historical documents — flung by him at the enemy all look like, and are intended to look like, routine summonses sent by a lawyer... His latest proclamation, which is drafted in the same style, the manifesto abolishing slavery, is the most important document in American history since the establishment of the Union, tantamount to the tearing up of the old American Constitution.
Nothing is simpler than to show that Lincoln’s principal political actions contain much that is aesthetically repulsive, logically inadequate, farcical in form and politically, contradictory, as is done by, the English Pindars of slavery, The Times, The Saturday Review and tutti quanti. But Lincoln’s place in the history of the United States and of mankind will, nevertheless, be next to that of Washington. Nowadays, when the insignificant struts about melodramatically on this side of the Atlantic, is it of no significance at all that the significant is clothed in everyday dress in the new world?
Lincoln is not the product of a popular revolution. This plebeian, who worked his way tip from stone-breaker to Senator in Illinois, without intellectual brilliance, without a particularly outstanding character, without exceptional importance-an average person of good will, was placed at the top by the interplay of the forces of universal suffrage unaware of the great issues at stake. The new world has never achieved a greater triumph than by this demonstration that, given its political and social organisation, ordinary people of good will can accomplish feats which only heroes could accomplish in the old world!

Those Who Forget History, Are Probably Historians

There are hardly any economists or economic historians who have contributed more to our understanding of the role of international finance in the Great Depression than Barry Eichengreen and Peter Temin. [1] So it’s disappointing to see them so strenuously refusing to learn from that history.

They start by correctly observing that the fatal flaw of the gold standard was the “asymmetry between countries with balance-of-payments deficits and surpluses. There was a penalty for running out of reserves .. but no penalty for accumulating gold.” Thus the structural tendency toward deflation in the gold standard era, and the instability of the system once workers recognized that lower wages for “sound money” wasn’t such a great deal. If Temin and Eichengreen want to draw a parallel with the Euro system today, well, I’m not sure I agree, but it’s an avenue worth pursuing. But as they want to apply it, to the US and China, it’s unambiguously wrong, as economics and as history.

“The point,” say Temin and Eichengreen, “is not to let deficit countries off the hook.” Barry, Peter — read your books! Letting the deficit countries off the hook is exactly the point. If there’s one lesson in Lessons from the Great Depression, it’s that no practical response to the crisis was possible until the idea that a trade deficit represented a kind of moral failing was abandoned. The whole point, first, of leaving the gold standard, and later, of the Bretton Woods institutions, was to free deficit countries from the obligation to “live within their means” by curtailing domestic investment and consumption.

Keynes couldn’t have been clearer on this. The goal of postwar monetary reform, he wrote, was “A system which would maintain balance of payments equilibrium without trade discrimination but also without forcing unemployment .. on deficit countries,” [2] in other words, a system in which governments’ efforts to pursue full employment was not constrained by the balance of payments. We needn’t take Keynes as holy writ, but if we’re going to analyze current arrangements in light of his writings in the 1940s, as Temin and Eichengreen claim to, we have to be clear about what he was aiming for.

One would expect, then, that they would go on to show how “global imbalances” are constraining national efforts to pursue full employment. But they don’t even try. Instead, they offer ambiguous phrases whose vagueness is a sign, perhaps, of a bad conscience: Keynes “wanted measures to deal with chronic surplus countries.” What kind of surpluses, exactly? and deal with how?

The beginning of wisdom here is the to recognize the distinction between the balance of payments and the current account. Keynes was concerned with the former, not the latter. Keynes didn’t care if some countries ran trade surpluses or deficits, temporarily or persistently; what he cared about was that these imbalances did not interfere with other countries’ freedom “to pursue full employment and progressive social policies.” In other words, current account imbalances were not a problem as long as the financial flows to finance them were guaranteed.

“Creditor adjustment” is rightly stressed by Eichengreen and Temin as a central feature of Keynes’ vision of postwar monetary arrangements, but they seem to have forgotten what it meant. It didn’t mean no one could run a trade surplus, it just meant that the surplus countries would be obliged to lend to the deficit ones as much as it took to finance the trade imbalances. As Keynes’ follower Roy Harrod put it,”The most important requirement [is] to get the United States committed to creditor adjustment. …. Creditor adjustment could be secured most simply by an agreement that the creditor would always accept cheques from the deficit countries in full discharge of their debts. … So long as their credit position cannot cause pressure elsewhere, there is no harm in allowing a further accumulation.” All of Keynes’ proposals at Bretton Woods were oriented toward committing the countries with surpluses to lend, at concessionary rates if necessary, to the deficit ones.

China today accepts American checks in full discharge of our debts; they don’t demand payment in gold. The Chinese surplus isn’t putting upward pressure on US interest rates, or constraining public spending. All Keynes ever wanted was for all surplus countries to be like China.

“Sixty-plus years later, we seem to have forgotten Keynes’ point,” Eichengreen and Temin conclude. True that.

[1] The strangely forgotten Robert Triffin is one.

[2] The historical material in this post post, including all quotes, is drawn from chapters 6 and 9 of the third volume of Robert Skidelsky’s biography of Keynes.

Keyes Is Right

Alan Keyes says, “If citizenship is not a birthright then it must be a grant of the government. And if it is a grant of the government, it could curtail that grant in all the ways that fascists and totalitarians always want to.”

In other words, the rights vis-a-vis the state we call citizenship, are prior to the legal acts that formalize them.

Joshua Micah Marshall thinks that’s “dramatically crazier than any of the opinions on offer,” since Keyes attributes the priority of citizenship, in part, to God.

But as a historical matter, Keyes is certainly right. The founding documents of political liberalism — the Declaration of the Rights of Man and Citizen, the Declaration of Independence — explicitly state that the rights of the citizen are prior to their recognition by governments. If a government fails to recognize them, it’s that government’s legitimacy that is diminished, not the rights of the citizen.

In the specific 14th Amendment context, the point is that the right of the freedmen to citizenship wasn’t created by the 14th Amendment, but already existed by virtue of their living in this country and being subject to its laws. Did Congress have the power or the authority to deny them citizenship? Seems to me the Civil War answered that question clearly in the negative. The law binds most of the time, but ultimately it derives its authority from a set of norms that are prior to it.

This is certainly how the founders of liberal political orders, here and elsewhere, understood the relationship between the rights of the citizen and the law. That’s why they were ready to overthrow existing governments by force. Of course today it’s the Constitution and the law that regulate citizenship. But it’s important to remember that the fact that we — or almost anyone else — are citizens at all is not the result of legal or constitutional acts.

EDIT: It’s funny that reference to the founding documents of political liberalism is these days almost a monopoly of conservatives. Of course it’s not so strange, since conservatism is backward-looking by nature, while progressives naturally believe in progress. But the DNA of liberalism hasn’t changed that much, and Jefferson, Madison, and Hamilton, Lafayette and Saint-Just, and other Enlightenment political figures expressed it pretty robustly.

Unlike their forebears, modern liberals tend to insist on the absolute autonomy of the law in general, and the Constitution in particular. They’re unwilling, for obvious reasons, to accept a political order grounded on divine revelation, but they don’t have any alternative ground to put it on, so it ends up floating in the air. (Carl Schmitt is very good on this.) There’s what’s useful, and there’s what’s legal, under the law as it exists; but there’s no category of political legitimacy behind the law. Given the remarkable political stability of the United States since the Civil War, and just as important, as Herbert Croly emphasized, the continuously rising standard of living here, we’ve mostly gotten along fine without one. But one suspects that it wouldn’t take that much political strain for “government by lawyers” (Croly’s phrase) to experience its Wile E. Coyote moment, when it turns out that the authority of the law wasn’t underpinned by anything but a lack of good reasons to question it. Not unlike, perhaps, what happened in the financial crisis of 2008, when it turned out that not only did the traditional tools of monetary policy not work, they’d stopped working some time before.

The Golden Age Is In Us

Walking through Central Park a week or so ago, a perfect summer afternoon. Here are the trees, the birds, people playing frisbee, reading, walking dogs, picnicking, the rollerbladers performing by the bandshell, a woman working on an oil painting of Turtle Pond, a pickup soccer game. And look: nothing is for sale, no one is giving orders. But this isn’t passive, private leisure: All around is activity, often intense, focused; all around people are cooperating, being together, in a thousand different ways.

Like here, just past Sheep Meadow, where two middle-aged men are performing intricate classical and baroque pieces arranged as saxophone duets. They’re playing just for themselves, they don’t even have a tip basket. But they’re good, they’re tight; they must have been playing together for years. I’m walking somewhere but not in a hurry. I stop and join the two or three other people leaning against the fence and listening.

Is there any music recording, any music performance, that compares to the music that emerges, unexpectedly in the middle of something else? Is there ever a better performance than the one that’s not for any audience?

In The Ring of Time, E. B. White describes watching a young circus rider practicing some “elementary postures and tricks” in a back lot of the Ringling Brothers’ winter home in Florida:

The ten minute ride the girl took achieved — as far as I was concerned, who wasn’t looking for it, and unbeknownst to her, who wasn’t even striving for it — the thing that is sought by performers everywhere, on whatever stage, whether struggling in the tidal currents of Shakespeare or bucking the difficult motion of a horse. …

Long before the circus comes to town, its most notable performances have already been given. Under the bright lights of the finished show, a performer need only reflect the electric candle power that is directed upon him; but in the dark and dirty old training rings and in the makeshift cages, whatever light is generated, whatever excitement, whatever beauty, must come from original sources — from the internal fires of professional hunger and delight, from the exuberance and gravity of youth. It is the difference between planetary light and the combustion of stars.

This saxophone duo was the combustion of stars. The ten or fifteen minutes I spent listening to them I felt so purely happy, I almost cried.

We don’t need to build socialism, or not from scratch. It’s here all around us. We just have to scrape away the other crap.

A modest proposal: No more *s

Proposed for discussion: We should all stop reporting regression results with one or more asterixes for significance levels, and just give standard errors instead.

Why?

First, because use of the stars confounds statistical and economic significance, as then-Donald McCloskey so nicely put it in that classic article. An estimate may be more than two standard errors from zero, but still too small to be economically important. Conversely, it may be less than two standard errors from zero, but still convey useful information, since zero is not necessarily the relevant null. (And this is leaving aside the problem that standard errors become increasingly hard to interpret the more regressions you run, and these days people run a lot of regressions.)

Second, and even more seriously, because it leads to a focus on qualitative rather than quantitative results, as Deirdre McCloskey so damningly laid out in this recent pamphlet. I reckon tehre are far more interesting economic questions that take the form of how much rather than whether, but the habit of reporting significance levels rather than standard errors implicitly assumes that you are only interested in whether questions — specifically, whether or not the effect predicted by theory exists. Significance levels don’t give you any help in determining whether two estimates are consistent. They’re suited for qualitative, abstract-formal work but not for concrete, historical or policy-oriented work.

I don’t claim any of these observations are original. I’d even say they were commonplace — except why, then, do people insist on scattering those stupid little stars all over their tables, instead of just reporting the (much more informative) standard errors?

Frontiers in securitization

The prospect of industrialization in Africa is certainly thrilling. That’s perhaps the part of the world where the need for (and meaningfulness of) economic growth is clearest. It would be nice to see the term “developing” go from a bad joke to a neutral descriptor.

And, the questions Rajiv Sethi raises about history and convention (or expectations) as two distinct alternatives to an equilibrium approach to macroeconomics are very interesting.

But I can’t help it, the proposal to “securitize” future foreign aid flows makes my skin crawl. It’s not just doubts about whether the one-time windfall would be used to finance “big push” public investments, as opposed to tanks and palaces and Swiss bank accounts. It’s not just a suspicion that the foreign exchange earnings of most African countries are more than sufficient to finance the capital-goods imports needed for industrialization, if they were simply allowed to impose exchange controls (as almost all late industrializers have.) It’s not even the general observation that when the previously non-marketable assets of the poor are commodified, the usual long-term outcome is simply the transfer of those assets to the rich, without any additional cash in the hands of the poor. (There’s a reason we don’t allow people to sell kidneys.)

No, it’s just the idea that whatever hold Africa’s poor have on the world’s conscience is supposed to become one more natural resource, to be stripped off and sold to the West. Because what else does securitizing aid mean except, Give us the money upfront and then, if people here still end up starving, you don’t have to feel guilty?

Where do the rich get their money?

Well, from us, of course. All their dollars represent, is claims on our labor.

Still, it’s interesting to ask what forms those claims take. Especially since there is a widely-held belief that today, unlike in the bad old days, the incomes of even the super rich are, at least on paper, mainly compensation for their work — that they’re a return on “human capital” rather than the old-fashioned kind. Is there anything to that?

Here’s what the IRS Statistics of Income says:

Share of total income by source, filers reporting $1 million or more

Year Wages and salaries Interest, dividends, rent Capital gains Business income
1995 31.0% 17.2% 28.4% 23.1%
2000 33.2% 10.3% 42.5% 13.1%
2005 26.9% 15.7% 38.1% 22.3%
2008 30.7% 19.8% 30.4% 23.2%

Share of total income by source, filers reporting $10 million or more

Year Wages and salaries Interest, dividends, rent Capital gains Business income
2000 25.0% 8.6% 58.2% 7.4%
2005 17.5% 17.4% 50.8% 17.8%
2008 18.8% 22.1% 45.4% 18.7%

Share of total income by source, all filers

Year Wages and salaries Interest, dividends, rent Capital gains Business income
1995 76.4% 7.3% 4.0% 6.9%
2000 70.0% 6.5% 9.7% 6.6%
2005 69.5% 6.8% 8.9% 8.9%
2008 72.0% 8.1% 5.6% 7.5%

Source: IRS Statistics of income, author’s calculations
Notes: Income above $1 million not broken out before 2000. All nonwage income is net of losses. Business income includes business/professional income, S corporation and partnership income, and farm income.

So no, it’s no more true than it ever was that the rich earn their money, in even the most limited formal sense.

EDIT: In retrospect, I guess it would have been better to do the tables by year, with the rows by income class. Oh well.

What is Keynesianism?

[A bit of thumbsucking inspired by discussion here.]

As a policy of countercyclical demand management, Keynesianism is based on the idea that there are no automatic forces in industrial capitalism that reliably equilibrate aggregate supply and aggregate demand. In the absence of government stabilization policies, the economy will waver between inflationary periods of excess demand and depressed periods of inadequate demand. The main explanation for this instability is that private investment depends on long-term profitability expectations, but since aspects of the future relevant to profitability are fundamentally uncertain [1], these expectations are unanchored and conventional, inevitably subject to large collective shifts independent of current “fundamentals”. Government spending can stabilize demand if G+I varies less over the business cycle than I alone does. For which it’s sufficient that government spending be large. It’s even better if G and I move in opposite directions, but the reason Minsky answered No to Can “It” Happen Again? was because of big government as such, not countercyclical fiscal policy.The focus on cyclical stabilization assumes that there is no systematic long-term divergence between aggregate supply and aggregate demand. But Keynes believed that there was a secular tendency toward stagnation in advanced capitalist economies, so that maintaining full employment meant not just using public expenditure to stabilize private investment demand, but to incrementally replace it. Another way of looking at this is that the steady shift from small-scale to industrial production implies a growing weight of illiquid assets in the form of fixed capital. [2] There is not, however, any corresponding long-term increase in the demand of illiquid liabilities. If anything, the sociological patterns of capitalism point the other way, as industrial dynasties whose social existence was linked to particular enterprises have been steadily replaced by rentiers. [3] The whole line of financial innovations from the first joint-stock companies to the recent securitization boom have been attempts to bridge this gap. But this requires ever-deepening financialization, with all the social waste and instability that implies. It’s the government’s ability to issue liabilities backed by the whole economic output that makes it uniquely able to satisfy the demands of wealth-holders for liquid assets. In the functional finance tradition going back to Lerner, modern states do not possess a budget constraint in the same way households or firms do. Public borrowing has nothing to do with “funding” spending, it’s all about how much government debt the authorities want the banking system to hold. If the demand for safe, liquid assets rises secularly over time, so should government borrowing.From this point of view, one important source of the recent financial crisis was the surpluses of the 1990s, and insufficient borrowing by the US government in general. By restricting the supply of Treasuries, this excessive fiscal restraint spurred the creation of private sector substitutes purporting to offer similar liquidity properties, in the form of various asset-backed securities. (Here is a respectable mainstream guy making essentially this argument. [4]) But these new financial assets remained at bottom claims on specific illiquid real assets and their liquidity remained vulnerable to shifts in (expectations of) the value of those assets. The response to the crisis in 2008 then consists of the Fed retroactively correcting the undersupply of government liabilities by engaging in a wholesale swap of public for private liabilities, leaving banks (and liquidity-demanding wealth owners) holding government liabilities instead of private financial assets. The increase in public debt wasn’t an unfortunate side-effect of the solution to the financial crisis, it was the solution. Along the same lines, I sometimes wonder how much the huge proportion of government debt on bank balance sheets — 75 percent of assets in 1945 vs. 1.5 percent in 2005)contributed to the financial stability of the immediate postwar era. With that many safe assets sloshing around, it didn’t take financial engineering or speculative bubbles to convince banks to hold claims on fixed capital and housing. But as the supply of government debt has dwindled the inducements to hold other assets have had to grow increasingly garish. From which I conclude that ever-increasing government deficits may in fact be better Keynesianism – theoretically, historically and pragmatically – than countercyclical demand management.
[1] Davidson, Shackle, etc. would say nonergodic. This strand of Post Keynesian thinking often wanders beyond my comfort zone.[2] This shift is ongoing, not just historical — not only do capital-output ratios continue to rise in manufacturing, but we’re seeing the “industrialization” of retail, health care, etc.

[3] Schumpeter is the only major economist to give sufficient attention to the sociology of the capitalist class, IMO. Marx’s insistence that the capitalist is simply the human representative of capital is a powerful analytic tool for many purposes, but it leaves some important questions unasked.

[4] Here is another.

Does fiscal policy need to be paid for in advance?

Let’s be clear: Paul Krugman is a national treasure. On fiscal policy – and politics generally – he has been saying exactly what should be said, clearly and forcefully, and just as important, from a platform that people can’t ignore. No one of remotely his stature has been as clear or consistent a critic of the Administration from the left. That said, his economics can be … problematic. I don’t know if it’s just because I’m interested in trade, or if, ironically but perhaps more likely, it’s because it’s where he made most of his own contributions, but it’s on international economics that Krugman seems most committed to orthodoxy, and correspondingly out of tune with reality. Case in point: This blog post, where he notes, correctly, that the most consistent expansionary response to the crisis has been in Asia, and then goes on to endorse the suggestion of David Pilling (in the Financial Times) that today’s Asian stimulus is the reward for fiscal rectitude in previous years:

Deficit spending is what you should do only when the economy is depressed and interest rates are at or near the zero lower bound. When times are good, you should be paying debt down. Pilling: “The scale of Asia’s stimulus may have matched, even surpassed, the west. But the context has been entirely different. Asian governments had plumped-up their fiscal cushions after the 1997 crisis, building a formidable pool of reserves. … when the crunch came, they had the wherewithal to spend.”

I’m sorry, but this is just wrong. First of all, let’s look at stimulus spending and earlier fiscal stances in various Asian countries:

Country Fiscal stimulus 2008 Average fiscal surplus, 1998-2007 Average fiscal surplus, 2003-2007
Malaysia 0.9 -1.72 -1.72
India 1.5 -5.50 -2.93
Indonesia 2.7 10.04 10.04
Australia 4.4 -3.00 -1.65
Philippines 4.5 -0.69 -0.69
Korea, Rep. of 5.4 0.98 1.20
New Zealand 5.9 -2.10 -2.23
Thailand 7.7 -4.80

n/a

Singapore 8 -1.34 -1.93
China 13.5 2.70 4.69
Japan 14.6 -0.80 -0.95

See that striking correlation between prior surpluses and stimulus spending? Yeah, me neither. It’s true that some countries, like China and Korea, show prior surpluses and big stimulus. But others that are pursuing expansionary policy have had fiscal deficits for years, like Japan (as Krugman should know as well as anyone.) Empirically, the Krugman-Pilling argument that in Asia, fiscal surpluses paved the way for fiscal stimulus just does not hold up.
No, what’s allowed Asian countries to respond aggressively to the crisis is not their (mostly nonexistent) fiscal surpluses, but their current account surpluses. Unlike in past crises (or lots of countries in the current crisis, especially on the periphery of Europe) they are not dependent on private capital inflows, so they are under no pressure to undertake contractionary policy to maintain external balance. The case of Korea is exemplary. True, it was running a fiscal surplus prior to the crisis — but it was also running a fiscal surplus in the mid-1990s prior to the Asian Crisis, to which it responded with brutal austerity. The difference was that the current account was in deficit then, and in surplus this time. The fiscal position was irrelevant.(Incidentally, Pilling literally does not seem to realize there is a difference between a current account surplus and a fiscal surplus. That’s why he’s able to write something like “Asian governments had plumped-up their fiscal cushions after the 1997 crisis, building a formidable pool of reserves,” without realizing it’s a non sequitur.)What about the larger argument, that good Keynesian governments should engage in the precautionary accumulation of financial assets in good times to finance demand-boosting spending in bad times? Krugman himself admits that the Bush deficits are not a binding constraint on fiscal policy today, which is rather a blow to his argument. More broadly, it’s far from clear that there is any meaningful sense in which the existing level of public debt affects the space for fiscal policy. The argument for prudential saving might apply to the government of a premodern or underdeveloped country, which rests on a narrow fiscal base; but if substantial excess capacity exists in an industrialized country the government always can mobilize it. (Matt Yglesias gets this, even if Krugman does not.) As for the traditional Keynesian argument for federal surpluses in boom times, it has nothing to do with precautionary accumulation of financial assets, and everything to do with preventing aggregate demand from running ahead of aggregate supply.In the end, I suspect this idea of paid-in-advance Keynesianism says less about his intellectual weaknesses than about his institutional commitments. As a certified big-name economist, you have to make some concessions to orthodoxy if you don’t want to see your intellectual capital devalued. And what orthodoxy demands now — above all from those who want more expansionary policy — is gestures of somber concern with future deficits. (If not austerity today, at least austerity tomorrow.) With a few honorable exceptions, even left-leaning economists seem happy to comply.