There is no long run. This short note from the Fed suggests that the failure of output to return to its earlier trend following the Great Recession is not an anomaly; historically, recessions normally involve permanent output losses. This working paper by Lawrence Summers and Lant Pritchett argues that it is very hard to find persistent growth differences between countries. From opposite directions, these results suggest that there is no reason to think that supposedly “slow” variables are more stable than “fast” ones; in other words, there is no economically meaningful long run.
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Krugman on the archaeology of “price stability.” Here is Paul Krugman’s talk from the same Roosevelt Institute/AFR/EPI even I spoke at last month. The whole thing is quite good but the most interesting part to me was on the (quite recent) origins of the idea that price stability means 2 percent inflation. From Adam Smith until the 1990s, price stability meant just that, zero inflation; but in the postwar decades it was more or less accepted that that was one objective to trade off against others, rather than the sine qua non of policy success.
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Capital is back — or is it? Here’s an interesting figure from Piketty and Zucman’s 2013 paper, showing the long-term evolution of capital and labor shares in the UK and France:
What we see is not a stable or rising capital share, but rather a secular shift in favor of labor income, presumably reflecting the long term growth of political power of working people from the early 19th century, when unions were illegal, labor legislation was unknown and only property owners could vote. What’s funny is that this long-term decline in the power of capital is so clearly visible in Piketty’s data, but so invisible in the discussion of his book.
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Orange is the big lie. Like lots of people, I watched the Netflix show Orange Is the New Black and initially enjoyed it, enough to read the memoir on which it’s based. It’s not often you see ideology operation so visibly: The show systematically omits the book’s depictions of abuse and racism among the guards and solidarity among the prisoners, and introduces violence from the prisoners and compassion from the authorities that is not present in the book. For example, both book and show feature an affair between a female prisoner and a male guard, but in the show nothing happens to the prisoner while the guard is fired and prosecuted, while in reality the prisoner was thrown into solitary confinement and there were no consequences for the guard.
I am not sure I understand the implication (or perhaps the connection of the first point
with the second under the label the "long run"). The first
point seems to belie the idea of long term (unique and stable)
equilibrium that the economy necessarily returns to.
The second point seems to imply that growth is exogenous to the macroeconomy
so that (as you pointed out in an older post) the allocative efficiency
that macroeconomics is chasing may be irrelevant (except maybe perhaps
as unintended consequences).
Yes, that is a bit cryptic. Hopefully I will write a longer post.
Basically, the point is that most economists believe there is a "long run" in which the capital stock and most other variables adjust to a path determined by a few fundamental parameters — the population growth rate, the savings rate, some underlying rate of technologically determined productivity growth. But for this to make sense, there has to actually be such a long run — there have to be observable growth rates that last longer than business cycle fluctuations. These two papers suggest that the effects of business cycles are more persistent than usually thought, while growth differentials are less persistent. Combine those results and there is no longer any reason to think that the parameters governing long-run growth rates are any more stable than the ones involved in business-cycle fluctuations.
Does that make more sense?
It does though one point is worth clarifying. The growth differentials between countries matter presumably because they have different savings rates (is the technology part assumed to be uniform or disparate)?
The logic about the business cycle seems very clear (and intuitive, growth almost certainly has a social basis and unemployment is socially destructive). Indeed, the whole idea that growth is somehow determined by factors that don't include factors such as the health and the education of the population seems a little whacky
The whole virtues of capitalism story really seems to rest on the savings rate as a factor in growth and if not (possibly because the process of raising the savings rate might be more destructive than its worth), it really is a pretty fundamental objection, imo.
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The growth differentials between countries matter presumably because they have different savings rates (is the technology part assumed to be uniform or disparate)?
The Summers-Pritchett point is actually prior to that. It doesn't matter what we think explains growth differentials between countries, if there are no stable growth differentials. The question "what determines long-term growth rates" is only meaningful is there are in fact long-term growth rates out there in the world to explain.
I presume that by saying such long term rates don't exist, you mean any measurement of long term growth is not stable or predictable (heck, a choatic process could even be deterministic and still not produce a stable, predictable outcomes).
One small point about price stability:
I think that, as long as people before WW2 assumed a gold standard, they actually meant deflation for price stability, as they assumed a fixed "quantity of money" (gold) v.s. a grouwing economy.
For example, in Marx's and Ricardo's labor theory of value, the value [more or less equilibrium price] of a good depends on the socially necessarious [median?] quantity of labour to produce it. But, as tecnology improves, the quantity of labour socially necessarious to produce, e.g., a shoe, might drop for example from 1h to 40min. If we assume a fixed "quantity of money", for example 1g of gold for every 10 minutes of "value", we have the price of the shoes falling from 6g to 4g, due to the fact that the quantity of gold is fixed, but the quantity of shoes is increasing.
This way of calculate "values" make a lot of sense in a world where there is evident technological change but the quantity of money is somewhat fixed by the gold standard, so I think that this is what Marx and Ricardo were thinking.
Cite from Marx (Grundrisse), who is discussing the idea of using "time chits" (vouchers corresponding to worked ours) instead of gold, in order to prevent financial crises I think (Marx is against):
https://www.marxists.org/archive/marx/works/1857/grundrisse/ch02.htm#p136
"The gold or silver in which the price of a commodity, its market value, is expressed is itself a certain quantity of accumulated labour, a certain measure of materialized labour time.
[…]
The constant depreciation of commodities — over longer periods — in relation to time-chits, which we mentioned earlier, arises out of the law of the rising productivity of labour time, out of the disturbances within relative value itself which are created by its own inherent principle, namely labour time."
So if the labour value of gold doesn't change, the economy is in what we would call a constant deflation.
But they didn't call it "deflation" because they didn't use "real values" as a benchmark, but "labour values" in the case of Mark and Ricardo or an assumed fixed quantity of money in the case of the others, so that inflation or deflation of money are relative to the "gold/labour value" of the commodity, that itself however is deflating relative to what we would call "real values".
Falling prices is not the same thing as stable prices. That is a small problem for your theory.
Huh and also people in 1980 weren't in the gold standard so I'll amend my previous comment as:
1) I believe that the "classicals" didn't think of "price stability" but of "currency stability" vs. gold (or labour in the case of the LTV), and they assumed what we today would call a constant deflation;
2) Then at some point (maybe during the Keynesian revolution) the idea changed to price stability defined as, roughly, "the quantity of money increases the same that the quantity of stuff", thus keeping nominal prices for stuff stable. Note that this would be quite impossible in a non-fiat-money system;
3) Then it became, apparently in the first nineties, a matter of a stable, predictable, non accelerating rate of inflation, for some reason 2%.
JW, this is a really nice blog. You feature a nice eclectic blend of different views. If only more commentators would tap into the insights of the like of Gurley and Shaw and Minsky the way you do.
About this post specifically, I always found it unfortunate there is so little dialogue between mainstream economists and the so-called heterodox guys regarding the importance of demand-side effects in determining potential output and longer run aggregate supply. It seems to me, this would be a good place to start the dialogue (I'm less optimistic about money issues, where IMO the field is a mess ever since the monetarist diversion).
Haven't seen Orange is the New Black, but HBO recently reran 5 seasons of the Wire in 5 days. Definitely worth rewatching. Obama said Omar Little was his favorite character but Snoop is pretty good too.
https://www.youtube.com/watch?v=r3DvWA27iqg
There's a storyline about legalization – "Hamsterdam" – and the futility of the War on Drugs and interestingly 10 years later we have marijuana legalization in a few states.
I happened to read your explanation of Minsky at the same time I was listening to Dickens' Christmas Carol as my nightly insomniac audiobook, and it occurred to me again how for 19th century writers, the "money view" and the "real economy view" weren't just opposing analytical stances, they were (I would argue) something like opposing ideologies of what capitalism should be and what it is to be dignified and virtuous in a newly capitalist society. That is, Scrooge isn't bad because he is a capitalist, he is bad because he is laying up silver in a vault instead of throwing parties ala Fezziwig, instead of buying stuff and spending. The short book is full of descriptions of things for sale and the joy of purchase and consumption…
"The brightness of the shops where holly sprigs and berries crackled in the lamp heat of the windows, made pale faces ruddy as they passed. Poulterers’ and grocers’ trades became a splendid joke: a glorious pageant, with which it was next to impossible to believe that such dull principles as bargain and sale had anything to do. "
And the book's moral outrage is not directed towards the getting of money but towards the failure to spend it (for example when the servants pick through his paltry belongings after his putative death, or in this scene after he is reborn in Christ/consumption):
“It’s Christmas Day!” said Scrooge to himself. “I haven’t missed it. The Spirits have done it all in one night. They can do anything they like. Of course they can. Of course they can. Hallo, my fine fellow!”
“Hallo!” returned the boy.
“Do you know the Poulterer’s, in the next street but one, at the corner?” Scrooge inquired.
“I should hope I did,” replied the lad.
“An intelligent boy!” said Scrooge. “A remarkable boy! Do you know whether they’ve sold the prize Turkey that was hanging up there?—Not the little prize Turkey: the big one?”
“What, the one as big as me?” returned the boy.
“What a delightful boy!” said Scrooge. “It’s a pleasure to talk to him. Yes, my buck!”
“It’s hanging there now,” replied the boy.
“Is it?” said Scrooge. “Go and buy it.”
“Walk-er!” exclaimed the boy.
“No, no,” said Scrooge, “I am in earnest. Go and buy it, and tell ’em to bring it here, that I may give them the direction where to take it. Come back with the man, and I’ll give you a shilling. Come back with him in less than five minutes and I’ll give you half-a-crown!”
Orwell has a long essay somewhere about how Dickens isn't really a socialist, just someone who wants the existing system to be conducive to humane domesticity. I'd also argue that he was someone who wanted the existing system to take consumption as its central action rather than the accumulation of money claims:
"But now a knocking at the door was heard, and such a rush immediately ensued that she with laughing face and plundered dress was borne towards it the centre of a flushed and boisterous group, just in time to greet the father, who came home attended by a man laden with Christmas toys and presents. Then the shouting and the struggling, and the onslaught that was made on the defenceless porter! The scaling him with chairs for ladders to dive into his pockets, despoil him of brown-paper parcels, hold on tight by his cravat, hug him round his neck, pommel his back, and kick his legs in irrepressible affection! The shouts of wonder and delight with which the development of every package was received!"
As contrast, and to suggest that Dickens' normative framework wasn't uncontroversial in his own time– take for example, this passage from another of my insomniac pals, Thackeray's Vanity Fair:
I SUPPOSE there is no man in this Vanity Fair of ours so little observant as not to think sometimes about the worldly affairs of his acquaintances, or so extremely charitable as not to wonder how his neighbour Jones, or his neighbour Smith, can make both ends meet at the end of the year. With the utmost regard for the family, for instance (for I dine with them twice or thrice in the season), I cannot but own that the appearance of the Jenkinses in the Park, in the large barouche with the grenadier-footmen, will surprise and mystify me to my dying day: for though I know the equipage is only jobbed, and all the Jenkins people are on board wages, yet those three men and the carriage must represent an expense of six hundred a-year at the very least—and then there are the splendid dinners, the two boys at Eton, the prize governess and masters for the girls, the trip abroad, or to East-bourne or Worthing, in the autumn, the annual ball with a supper from Gunter’s (who, by the way, supplies most of the first-rate dinners which J. gives, as I know very well, having been invited to one of them to fill a vacant place, when I saw at once that these repasts are very superior to the common run of entertainments for which the humbler sort of J’s acquaintances get cards)—who, I say, with the most good-natured feelings in the world, can help wondering how the Jenkinses make out matters? What isJenkins? We all know—Commissioner of the Tape and Sealing Wax Office, with £1200 a-year for a salary. Had his wife a private fortune? Pooh—Miss Flint—one of eleven children of a small squire in Buckinghamshire. All she ever gets from her family is a turkey at Christmas, in exchange for which she has to board two or three of her sisters in the off season; and lodge and feed her brothers when they come to town. How does Jenkins balance his income? I say, as every friend of his must say, How is it that he has not been outlawed long since; and that he ever came back (as he did to the surprise of everybody) last year from Boulogne? 1
Undoubtedly the narrator's arch tone here is ironic, but the implied normative framework here is the familiar story of savings as virtue and debt as vice. The story Dickens tells, on the other hand, suggests that consumerist capitalism (as ideology and system) finds itself in competition with the equally "capitalist" desire to lay up silver against a darker day, a familiar theme for observers of recent macroeconomic phenomena or readers of your blog.