Tag: teaching

Did It Matter?

Manufacturing #10A & 10B, Cankun Factory, Xiamen City, 2005. Edward Burtynsky

Classes finished up last week. One of the things I was teaching this semester was undergraduate economic history, which I hadn’t done in some years. (Perhaps I’ll have more to post on the class later.)

Our main books this time were Beckert’s Empire of Cotton, which I’ve used several times in this class; and Jonathan Levy’s Ages of American Capitalism and Joshua Freeman’s Behemoth, neither of which I had read before.

Behemoth is a history of the factory; the final chapter is on present-day factories in Vietnam and China, which are probably the largest factories that have ever existed. It’s a fascinating account, with a lot of details I hadn’t heard before. I was astonished to learn, for example, that all the iPads are made at a single facility in Chengdu.

A more interesting question is why these factories are so big. The answer, Freeman stresses, is not any sort of technical advantage. These giant factories in general are organized with small groups of workers doing the same tasks in parallel, independently of each other; there’s nothing like the division of labor that you have on an auto assembly line. Rather than economies of scale, he argues, the main reason production is concentrated in a few giant factories is to allow them to be more responsive to the changing demands of their clients, the Western companies whose subcontractors they are. As with giant factories through history, the impetus for concentrating workers in one facility is about centralizing authority and not just technical efficience, as people like Stephen Marglin and David Noble (or Levy in his chapter on River Rouge) have emphasized.

A question I posed to the class is: Is there any connection between China’s industrial success today and their earlier revolution? Is the fact that China had one of the 20th century’s greatest political revolutions connected to the fact that it is one of the 21st century’s greatest industrial-policy success stories? There was a bit of debate on this – some people pointed to the uniquely egalitarian organization of earlier Chinese factories, where workers discussed how to organize production, and even managers were required to spend time doing routine manual work. But others noted, correctly, that Foxconn isn’t anything like that – there are bosses who give orders just like everywhere else.

The picture you get from Behemoth and other careful accounts of modern Chinese factories is, in many ways, of a country that is following the same path that was blazed in Manchester andLowell and Detroit, albeit on a larger scale. This is, of course, a useful corrective to hysterical claims about industrialization based on slave labor and market manipulation, from people who ought to know better. But it’s a bit distressing if you would have hoped that the titanic struggles of the Chinese Revolution might have opened up a different road.

One way to think about whether, or how, the revolution mattered, I suggested, is to think about the counterfactual. We could look back at China 100 years ago – backward, riven by civil war, subjugated by Europe and Japan, desperately poor – and think that only some kind of radical political project could have rebuilt the country. Or in a longer view, we could say that for most of recorded history China has been one of the most advanced, prosperous and politically stable regions on Earth, so it’s hardly surprising that it would be returning to something like that position. Which of those seems more reasonable?

After they’d gone back and forth on that for a while, I asked them if they knew what major battle we’d just passed the 70th anniversary of. No one knew; I wouldn’t have expected them to. It’s Dien Bien Phu, I said. The decisive defeat of the French by the Viet Minh, the moment when Europeans were shocked to discover that they could be defeated by a backward, non-Western people in open battle. It was a major step in Vietnam’s road to full independence, and to the end of colonial empires all over the world – one of the most important battles of the 20th century. One of the biggest victories, one might say, for the liberation of humanity. And yet now Vietnam is manufacturing shoes for Nike just like everyone else.

So, did it matter? In the long run, do these titanic struggles between classes and nations make any difference? Do they really change how production is organized, and for what, and by whom?

I ended the class there. But one might add that how you feel about whether Dien Bien Phu is worth commemorating is probably as good a marker as any of the boundaries of radical politics. Does progress come through struggle — sometimes violent, always disruptive against the established order?  (And in these struggles, has America and “the West” been on the side of human liberation, or the other side?) Or does progress, if it happens, happen incrementally, on its own, regardless of who wins the battles?

 

ETA: I should have mentioned this essay by the Chilean socialist Manuel Riesco, which struggle with this same question. His answer is in the transition to capitalist modernity requires a popular revolutionary movement, especially in the periphery.

It may be useful to start from the hypothesis that the epoch of the twentieth century has been no different in character from that of the nineteenth century: that is, that right up to today we have been living through the period of transition from the old agrarian, aristocratic society to capitalist modernity. In this view of things, the revolutions of the twentieth century have not been anti-capitalist (despite the wishes or programmes of their protagonists and the fears of some of their enemies) but rather the same as the revolutions of the last century.

This hypothesis makes it possible … to claim that those revolutionary processes were progressive and ultimately successful, even though they culminated not as they said they would but, curiously enough, in the opposite way…

… the mass of people…, when called upon to act in each of these transitions to modernity, burst onto the stage and generally cut down what was rotten to its very roots. It was this which cleared the way for the new to be born. …

The leading role of the people does not define only one moment in the transition to modernity. … It may be that a much more complex analysis of the world-wide transition to capitalist modernity will regard that heroic moment as an irruption of the people necessary for the process to advance from one to another of its discrete phases. …

Perhaps we could say today that Jacobinism, in the broad sense given to it here, was a characteristic and appropriate political form in certain popular phases of the transition to capitalist modernity. In this sense, its progressive role has been gigantic. … It is to Salvador Allende, Jacobin president of Chile, more than to anyone else, that the modern nation it is coming to be owes its existence. The monument he deserves will be built sooner rather than later, ‘más temprano que tarde’, in the cities and hearts of his people.

It reminds me a bit, on rereading, of some of Rubashov’s musings towards the end of Darkness at Noon. But then Koestler, in that book, was more than a little “of the devil’s party without knowing it.”

Teaching notes on capitalism

I just put up a some new notes on my teaching pages, a brief handout on capital and capitalism.

The goal of this isn’t, of course,to give a comprehensive overview of what capital means or what capitalism has been historically. I just want to introduce students to the basic terms and concepts that they’ll encounter in the sort of Marxist and Marx-influenced historians I assign in my economic history class — Sven Beckert, Immanuel Wallerstein, Fernand Braudel, Ellen Meiksins Wood, Eric Foner, Mike Davis, and so on.

That said, I’ve tried to write it in clear, non-technical language and keep it focused on the most fundamental concepts, so if you are looking for an eight-page introduction to how Marxists think about capital and capitalism, perhaps this will do.

If you are a teacher yourself and think this is useful, feel free to use it in your own class. And if you have thoughts about ways it could be improved or expanded, I’d love to hear them.

How to Read a Regression

As I mentioned in an earlier post, I am for the first time teaching a class in quantiative methods in John Jay’s new economics MA program.[footnote]If you’re curious about this program, please email me at profjwmason@gmail.com.[/footnote] One thing I’ve found is that the students, even those who have taken econometrics or statistics classes before, really benefit from an explanation fo how to read regression results — what exactly all the numbers you find in a regression table actually mean. I’m sure there is a textbook out there that gives a good, clear, comprehensive, accessible explanation of how to read regression results, but I haven’t found it. Besides, I like making my own materials. Among other things, it’s a good way to be sure you understand things yourself, and to clarify how you think people should think about them. So I’ve been writing my own notes on how to read a regression. They are on my teaching materials page, along with lots of macroeconomics notes and a few other things.

If you teach an introductory econometrics or statistics class, take a look, and feel free to use them if they seem helpful. Or if you are taking one, or just curious. And if anything seems wrong or confusing to you, or if you know of something similar but more polished and complete — or just better — please let me know.

By the way, these notes, like my macroeconomics notes, are written in latex using the tufte-handout package.

Link: A guide to regressions

Lecture Notes for Research Methods

I’m teaching a new class this semester, a masters-level class on research methods. It could be taught as simply the second semester of an econometrics sequence, but I’m taking a different approach, trying to think about what will help students do effective empirical work in policy/political settings. We’ll see how it works.

For anyone interested, here are the slides I will use on the first day. I’m not sure it’s all right, in fact I’m sure some of it is wrong But that is how you figure out what you really think and know and don’t know about something, by teaching it.

After we’ve talked through this, we will discuss this old VoxEU piece as an example of effective use of simple scatterplots to make an economic argument.

I gave a somewhat complementary talk on methodology and heterodox macroeconomics at the Eastern Economics Association meetings last year. I’ve been meaning to transcribe it into a blogpost, but in the meantime you can listen to a recording, if you’re interested.

 

The Problem with Students Is They Work Too Hard

Something I’ve been thinking about lately: How many of the problems we have with students come from the fact that they have to take too many classes?

The standard requirement for a BA is 120 credit hours. That means that to graduate in four years, you need to take 5 classes a semester. And that’s assuming you pass everything; that you don’t need any remedial or other non-credit classes; that all your transfer credits are accepted (an especially big issue for students who transfer to 4-year schools from community colleges); that you don’t have any problems with distribution requirements; and so on. Realistically, for many students even 5 classes a semester is not going to be enough.

And in many cases those five classes are on top of jobs, even full-time jobs, and on top of caring for children or other family members. Especially for nontraditional students,  expecting a schedule of five classes every semester seems unrealistic. And if you want to finish in four years, five classes a semester is the best case.

A lot of students should be taking lighter loads. But the thing is, financial aid is often contingent on maintaining full-time status. So even if someone knows they are not in a position to take five classes and put an acceptable level of effort into each one, the financial penalties for a more realistic schedule may be prohibitive.

These aren’t such big problems at selective liberal arts colleges, where most students are traditional college-age without family responsibilities, don’t have to support themselves, aren’t taking remedial classes, get good advising and come in with AP credits. And students who don’t depend on financial aid have more flexibility about adjusting their courseload. But at most public universities, the system seems designed to ensure there will be a significant number of students taking more classes than they have time for.

Just speaking for myself, I never took five courses in a semester as undergraduate. With lots of credit from AP exams and so on, I didn’t have to. I never worked during the semesters, except for things like writing for campus newspapers. And when I felt like I needed to cut back to part-time for personal reasons, I wasn’t financially penalized for it.

It’s a crazy setup, when you think about it. The combination of financial aid contingent on fulltime status; AP credit; non-credit remediation courses; and problems with transferring credit from community colleges, means that we end up demanding the least from the students with the most advantages, and the most from the students with the least advantages. AP credit and the like seems especially perverse — it literally means that, the better the high school you went to, the less work you are required to do to earn a BA.

We all know about how excessive workloads undermine the quality of teaching, but I think we sometimes forget that the same goes for students. Just like with adjuncts as opposed to full time faculty, students from weak high schools, or who start their college education at community colleges, are asked to do more work for the same reward. And then we get angry at them for not living up to the standards of the better prepared students who are asked to do less. Just something to think about the next time someone doesn’t read the syllabus, or turn in their work, or show up for office hours.

Heterodoxy and the Fly-Bottle

(I have a review in the new Review of Keynesian Economics of a collection of essays on pluralist, or non-mainstream, economics teaching. You can the full review here. Since I doubt most readers of this blog are interested in the book, I’ve posted a shorter version of the review below – just the parts on the broader issues rather than my assessment of these particular essays.)

 

Wittgenstein famously described his aim in philosophy as “showing the fly the way out of the fly bottle.” The goal, he said, was not to resolve the questions posed by philosophers, but to escape them. As long as the fly is inside the bottle, understanding its contours is essential to getting it wherever it wants to go; but once the fly is outside, the shape of the bottle doesn’t matter at all.

Non-mainstream economists have a similar relationship to dominant theory. Because we’ve been inculcated for years that the best way to think about the economy is in terms of the exchange of goods by rational agents, criticisms of that framework are a necessary step on the way to thinking in other terms. But the logical and empirical shortcomings of thinking about economic life in terms of a perfectly rational representative agent optimizing utility over infinite future time don’t, in themselves, tell us how we should think instead.

The essentially negative character of economic heterodoxy is a special challenge for undergraduate teaching. You can’t teach criticisms of economic orthodoxy without first teaching the ideas to be criticized. Finding our way out of orthodoxy was, for many of us, central to our intellectual development. Naturally we want to reproduce that experience for our students. This leads to a style of teaching that amounts to putting the flies into the bottle so we can show them the way out. But how useful is it to our students to understand the defects of a logical system it would never have occurred to them to adopt in the first place? Having spent so much time looking for a way out, it sometimes seems we don’t know what do in the open air.

This dilemma is on full display in The Handbook of Pluralist Economics Education. In order to present a realistic model of the economy, Steve Keen writes in one of his two chapters, “an essential first is to demonstrate to students that the ostensibly well-developed and coherent traditional model is in fact an empty shell”. Many of the volume’s other contributors make similar claims. This is the spirit of Joan Robinson’s famous quip that the only reason to study economics is to avoid being fooled by economists. But if that is all we can offer, better to send our students to the departments of history, anthropology, engineering, or some other field that offers positive knowledge about social reality.

What then are we to do? Pluralism as such is not a useful guide; carried to an extreme it would, as Sheila Dow says here, amount to “anything goes,” which is not a viable basis for teaching a class (or for any other intellectual endeavor). This is a problem with pluralism as a positive value (and not only in economics teaching): Pluralism implies a number of distinct perspectives, but to be distinct they must be internally coherent, that is, unitary. Carried to an extreme, pluralism is self-undermining. To challenge the mainstream, at some point you must argue not just for the value of diversity in the abstract, but in favor of a particular alternative.

In practice, even economists who completely reject mainstream approaches in their own work often give them a large share of time in the classroom, in part because they feel obligated to prepare students for future academic work and in part, as Keen says, simply because of “the pressure to teach something”. Teaching is hard enough work even when you aren’t reconstructing the curriculum from the ground up. It’s much easier to teach a standard course and then add some critical material.

But pluralism in economics teaching doesn’t have to mean simply presenting orthodoxy and adding some criticisms of it. It could also mean approaching the material from a different angle that avoids — rather than attacks — the dominant formalisms in economics and gives students a useful set of tools for engaging with economic reality. For me, this means a focus on the definition and measurement of macroeconomic aggregates, and on the causal relationships between those aggregates. Concretely, it means reliance on flowcharts where the nodes are some observable variable, as opposed to the normal emphasis on diagrams representing functional relationships — ISLM, AS-AD, etc. — that can’t be directly observed.

A more specific problem in heterodox teaching — and heterodox economics in general — is the weight put on the financial crisis as an argument for alternatives to the mainstream. Many of the authors in this collection present the crisis of 2008 and its aftermath as a decisive refutation of economic orthodoxy. Edward Fullbrook declares that ‘no discipline has ever experienced systemic failure on the scale that economics has today.” David Wheat, less hyperbolically, argues that “the failure to foresee the financial epidemic in 2008” demonstrates a need to shift the focus of economics teaching away from long-run equilibrium. One might push back against this line of argument. It is true that several large financial institutions went bankrupt in 2008, and some financial assets fell steeply in value, to the dismay of their owners; but with the perspective of close to a decade, it’s less clear how much of a base these events offer for critique of either the economics profession or economic institutions. Singleminded focus on “the crisis” risks implying that the problem with our economic system is the rare occasions on which it fails to work well for owners of financial assets, while ignoring the ongoing problems of inequality, hierarchy and privilege; tedious and demeaning work; environmental degradation; and the fundamental disconnect between ever-increasing money wealth and unmet human needs – none of which has much to do with the failure of Lehman Brothers. As people used to say: capitalism is the crisis.

It is true, of course, that the economics profession failed to foresee or explain the 2008 crisis, but that’s nothing special. To make a list of phenomena unexplained by orthodox economics, just open the business pages of a newspaper. In any case, while it might have been reasonable at the time to expect some degree of self-criticism in the economics profession, and some increase in openness to alternatives, seven years later it is clear that there has not been. With a handful of exceptions – Naryana Kocherlakota is probably the most prominent in the US – mainstream economists have not revised their views in the light of the crisis; even those who were initially inclined to soul-searching have mostly decided that they were right all along. The case for heterodoxy must be made on other grounds.

Thoughts and Links for December 21, 2016

Aviation in the 21st century. I’m typing this sitting on a plane, en route to LA. The plane is a Boeing 737-800. The 737 is the best-selling commercial airliner on earth; reading its Wikipedia page should raise some serious doubts about the idea that we live in an era of accelerating technological change. I’m not sure how old the plane I’m sitting on is, but it could be 15 years; the 800-series was introduced in its present form in the late 1990s. With airplanes, unlike smartphones, a 20-year old machine is not dramatically — is not even noticeably — different from the latest version. The basic 737 model was first introduced in 1967. There have been upgrades since then, but to my far from expert eyes it’s striking how little changed tin 50 years. The original 737 carried 120 passengers, at speeds of 800 km/h on trips of up to 3,000 km, using 6 liters of fuel per kilometer; this model carries 160 passengers (it’s longer) at speeds of 840 km/h on trips of 5,500 km, using 5 liters of fuel per kilometer. Better, sure, but probably the main difference you’d actually notice from a flight 50 years ago is purely social: no smoking. In any case it’s pretty meager compared that with the change from 50 years earlier, when commercial air travel didn’t exist. The singularity is over; it happened on or about December 1910.

 

Unnatural rates. Here’s an interesting post on the New York Fed’s Liberty Street blog challenging the ideas of “natural rates” of interest and unemployment. good: These ideas, it seems to me, are among the biggest obstacles to thinking constructively about macroeconomic policy. Obviously it’s example of, well, naturalizing economic outcomes, and in particular it’s the key ideological element in presenting the planning by the central bank as simply reproducing the natural state of the economy. But more specifically, it’s one of the most important ways that economists paper over the disconnect between the the economic-theory world of rational exchange, and the real world of monetary production. Without the natural rate, it would be much hard to  pretend that the sort of models academic economists develop at their day jobs, have any connection to the real-world problems the rest of the world expects economists to solve. Good to see, then, some economists at the Fed acknowledging that the natural rate concepts (and its relatives like the natural rate of unemployment) is vacuous, for two related reasons. First, the interest rate that will bring output to potential depends on a whole range of contingent factors, including other policy choices and the current level of output; and second, that potential output itself depends on the path of demand. Neither potential output nor the natural rate reflects some deep, structural parameters. They conclude:

the risks associated with monetary easing are asymmetric. That is, excessive easing can be reversed, but excessive tightening may cause irreversible damage to the economy’s potential output.

In the research described in this blog, we focus on the effect of recessions on human capital. Recessions may affect potential output through other channels as well, such as lower capital accumulation, lower labor force participation, slow productivity growth, and so forth. Our research would suggest that to the extent that these mechanisms are operative, a monetary policy that seeks to track measured natural rates—of unemployment, interest rates, and so forth—might be insufficiently accommodative to engineer a full and quick recovery after a large recession. Such policies fall short because in a world with hysteresis, “natural” rates are endogenous. Policy should set these rates, not track them.

Also on a personal level, it’s nice to see that the phrases “potential output,” “other channels,” “lower labor force particiaption,” and “slow productivity growth” all link back to posts on this very blog. Maybe someone is listening.

 

More me being listened to: Here is a short interview I did with KCBS radio in the Bay area, on what’s wrong with economics. And here is a nice writeup by Cory Doctorow at BoingBoing of “Disgorge the Cash,” my Roosevelt paper on shareholder payouts and investment.

 

Still disgorging. Speaking of that: There were two new working papers out from the NBER last week on corporate finance, governance and investment. I’ve only glanced at them (end of semester crunch) but they both look like important steps forward for the larger disgorge the cash/short-termism argument. Here are the abstracts:

Lee, Shin and Stultz – Why Does Capital No Longer Flow More to the Industries with the Best Growth Opportunities?

With functionally efficient capital markets, we expect capital to flow more to the industries with the best growth opportunities. As a result, these industries should invest more and see their assets grow more relative to industries with the worst growth opportunities. We find that industries that receive more funds have a higher industry Tobin’s q until the mid-1990s, but not since then. Since industries with a higher funding rate grow more, there is a negative correlation not only between an industry’s funding rate and industry q but also between capital expenditures and industry q since the mid-1990s. We show that capital no longer flows more to the industries with the best growth opportunities because, since the middle of the 1990s, firms in high q industries increasingly repurchase shares rather than raise more funding from the capital markets.

And:

Gutierrez and Philippon – Investment-less Growth: An Empirical Investigation

We analyze private fixed investment in the U.S. over the past 30 years. We show that investment is weak relative to measures of profitability and valuation… We use industry-level and firm-level data to test whether under-investment relative to Q is driven by (i) financial frictions, (ii) measurement error (due to the rise of intangibles, globalization, etc), (iii) decreased competition (due to technology or regulation), or (iv) tightened governance and/or increased short-termism. We do not find support for theories based on risk premia, financial constraints, or safe asset scarcity, and only weak support for regulatory constraints. Globalization and intangibles explain some of the trends at the industry level, but their explanatory power is quantitatively limited. On the other hand, we find fairly strong support for the competition and short-termism/governance hypotheses. Industries with less entry and more concentration invest less, even after controlling for current market conditions. Within each industry-year, the investment gap is driven by firms that are owned by quasi-indexers and located in industries with less entry/more concentration. These firms spend a disproportionate amount of free cash flows buying back their shares.

I’m especially glad to see Philippon taking this question up. His Has Finance Become Less Efficient is kind of a classic, and in general he somehow seems to manages to be both a big-time mainstream finance guy and closely attuned to observable reality.  A full post on the two NBER papers soon, hopefully, once I’ve had time to read them properly.

 

 

“Sets” how, exactly? Here’s a super helpful piece  from the Bank of France on the changing mechanisms through which central banks — the Fed in particular — conduct monetary policy. It’s the first one in this collection — “Exiting low interest rates in a situation of excess liquidity: the experience of the Fed.” Textbooks tell us blandly that “the central bank sets the interest rate.” This ignores the fact that there are many interest rates in the economy, not all of which move with the central bank’s policy rate. It also ignores the concrete tools the central bank uses to set the policy rate, which are not trivial or transparent, and which periodically have to adapt to changes in the financial system. Post-2008 we’ve seen another of these adaptations. The BoF piece is one of the clearest guides I’ve seen to the new dispensation; I found it especially clarifying on the role of reverse repos. You could probably use it with advanced undergraduates.

Zoltan Pozsar’s discussion of the same issues is also very good — it adds more context but is a bit harder to follow than the BdF piece.

 

When he’s right, he’s right. I have my disagreements with Brad DeLong (doesn’t everyone?), but a lot of his recent stuff has been very good. Here are a couple of his recent posts that I’ve particularly liked. First, on “structural reform”:

The worst possible “structural reform” program is one that moves a worker from a low productivity job into unemployment, where they then lose their weak tie social network that allows them to get new jobs. … “Structural reforms” are extremely dangerous unless you have a high-pressure economy to pull resources out of low productivity into high productivity sectors.

The view in the high councils of Europe is that, when there is a high-pressure economy, politicians will not press for “structural reform”: there is no obvious need, and so why rock the boat? Politicians kick every can they can down the road, and you can only try “structural reform” when unemployment is high–and thus when it is likely to be ineffective if not destructive.

This gets both the substance and the politics right, I think. Although one might add that structural reform also often means reducing wages and worker power in high productivity sectors as well.

Second, criticizing Yellen’s opposition to more expansionary policy,which she says is no longer needed to get the economy back to full employment.

If the Federal Reserve wants to have the ammunition to fight the next recession when it happens, it needs the short-term safe nominal interest rate to be 5% or more when the recession hits. I believe that is very unlikely to happen without substantial fiscal expansion. … In the world that Janet Yellen sees, “fiscal policy is not needed to provide stimulus to get us back to full employment.” But fiscal stimulus is needed to create a situation in which full employment can be maintained…. if we do not shift to a more expansionary fiscal policy–and the higher neutral rate of interest that it brings–now, what do we envision will happen when the next recession arrives?

This is the central point of my WCEG working paper — that output is jointly determined by the interest rate and the fiscal balance, so the “natural rate” depends on the current stance of fiscal policy.  Plus the argument that, in a world where the zero lower bound is a potential constraint — or more broadly, where the expansionary effects of monetary policy are limited — what is sometimes called “crowding out” is a feature, not a bug. Totally right, but there’s one more step I wish DeLong would take. He writes a lot, and it’s quite possible I’ve missed it, but has he ever followed this argument to its next logical step and concluded that the fiscal surpluses of the 1990s were, in retrospect, a bad idea?

 

Farmer on government debt. Also on government budgets, here are some sensible observations on the UK’s, from Roger Farmer. First, the British public deficit is not especially high by historical standards; second, past reductions in debt-GDP ratios were achieved by growth raising the denominator, not surpluses reducing the numerator; and third, there is nothing particularly desirable about balanced budgets or lower debt ratios in principle. Anyone reading this blog has probably heard these arguments a thousand times, but it’s nice to get them from someone other than the usual suspects.

 

Deviation and trend. I was struck by this slide from the BIS. The content is familiar;  what’s interesting is that they take the deviation of GDP from the pre-criss trend as straightforward evidence of the costs of the crisis, and not a demographic-technological inevitability.

 

Cap and dividend. In Jacobin, James Boyce and Mark Paul make the case for carbon permits. I used to take the conventional view on carbon pricing — that taxes and permits were equivalent in principle, and that taxes were likely to work better in practice. But Boyce’s work on this has convinced me that there’s a strong case for preferring dividends. A critical part of his argument is that the permits don’t have to be tradable — short-term, non transferrable permits avoid a lot of the problems with “cap and trade” schemes.

 

 

Why teach the worst? In a post at Developing Economics, New School grad student Ingrid Harvold Kvangraven forthrightly makes the case for teaching “the worst of mainstream economics” to non-economists. As it happens, I don’t agree with her arguments here. I don’t think there’s a hard tradeoff between teaching heterodox material we think is true, and teaching orthodox material students will need in future classes or work. I think that with some effort, it is possible to teach material that is both genuinely useful and meaningful, and that will serve students well in future economics class. And except for students getting a PhD in economics themselves — and maybe not even them — I don’t think “learning to critique mainstream theories” is a very pressing need. But I like the post anyway. The important thing is that all of us — especially on the heterodox side — need to think more of teaching not as an unfortunate distraction, but as a core part of our work as economists. She takes teaching seriously, that’s the important thing.

 

 

Apple in the balance of payments. From Brad Setser, here’s a very nice example of critical reading of the national accounts. Perhaps even more than in other areas of accounts, the classification of different payments in the balance of payments is more or less arbitrary, contested, and frequently changed. It’s also shaped more directly by private interests — capital flight, tax avoidance and so on often involve moving cross-border payments from one part of the BoP to another. So we need to be even more scrupulously attentive with BoP statistics than with others to how concrete social reality gets reflected in the official numbers. The particular reality Setser is interested in is Apple’s research and development spending in the US, which ought to show up in the BoP as US service exports. But hardly any of it does, because — as he shows — Apple arranges for almost all its IP income to show up in low-tax Ireland instead. To me, the fundamental lesson here is about the relation between statistical map and economic territory. But as Setser notes, there’s also a more immediate policy implication:

Trade theory says that if the winners from globalization compensate the losers from globalization, everyone is better off. But I am not quite sure how that is supposed to happen if the winners are in some significant part able to structure their affairs so that a large share of their income is globally (almost) untaxed.

 

Links for March 14

A few things elsewhere on the web, relevant to recent conversations here.

1. Michael Reich and his colleagues at the Berkeley Center for Labor Research have a new report out on the impacts of a $15 minimum wage in New York. It does something I wish all studies of the minimum wage and employment would do: It explicitly decomposes the employment impact into labor productivity, price, demand and labor share effects. Besides being useful for policy, this links nicely to the macro discussion of alternative Phillips curves.

2. I like Susan Schroeder’s idea of creating a public credit-rating agency. It’s always interesting how the need to deal with immediate crises and dysfunctions creates pressure to socialize various aspects of the financial system. The most dramatic recent example was back in the fall of 2008, when the Fed began lending directly to anyone who needed to roll over commercial paper; but you can think of lots of examples, including QE itself, which involves the central bank taking over part of banks’ core function of maturity transformation.

3. On the subject of big business’s tendency to socialize itself, I should have linked earlier to Noah Smith’s discussion of “new industrialism” (including my work for the Roosevelt Institute) as the next big thing in economic policy. Eric Ries’ proposal for creating a new, nontransferable form of stock ownership reminded me of this bit from Keynes: “The spectacle of modern investment markets has sometimes moved me towards the conclusion that  the purchase of an investment [should be] permanent and indissoluble, like marriage, except by reason of death or other grave cause… For this would force the investor to direct his mind to the long-term prospects and to those only.”

4. In comments to my recent post on the balance of payments, Ramanan points to a post of his, making the same point, more clearly than I managed to. Also worth reading is the old BIS report he links to, which explicitly distinguishes between autonomous and accommodative financial flows. Kostas Kalaveras also had a very nice post on this topic a while ago, noting that in Europe TARGET2 balances function as a buffer allowing private financial flows and current account balances to move independently from each other.

5. I’m teaching intermediate macroeconomics here at John Jay, as I do most semesters, and I’ve put some new notes I’m using up on the teaching page of this website. It’s probably mostly of interest to people who teach this stuff themselves, but I did want to call attention to the varieties of business cycles handout, which is somewhat relevant to current debates. It’s also an example of how I try to teach macro — focus on causal relationships between observable aggregates, rather than formal models based on equilibrium conditions.

What Do People Need to Know About International Trade?

On the first day of my trade class, we read Paul Krugman’s article “What Do Undergrads Need to Know About Trade?” In an admirably succinct four pages, it captures all the important things that orthodox trade theory claims to tell us about trade policy. I don’t think orthodox views on trade policy have changed at all in the 20 years since it was written. [1]

So what’s Krugman’s answer? What undergrads need to know, he says, is just what Hume and Ricardo were saying, 200 years ago: If relative costs of production are different in two countries, then total world output, and consumption in each individual country, will always be greater with trade than without, and prices will adjust so that trade is balanced. Free trade is always beneficial for all countries involved.

Krugman’s additions to this Ricardo-Hume catechism are mostly negative — a list of things we don’t need to talk about when talk about trade.

Don’t worry about development. The idea that a country can benefit from changing the sectors or industries it specializes in is, he says “a silly concept.” Yes, we look around the world and see workers in rich countries producing things like airplanes and software, which are worth a lot, and workers in poor countries putting the same effort into producing agricultural goods and textiles, which are worth much less. But

Does this mean the rich country’s high standard of living the result of being in the right sector, or that the poorer country would be richer if it tried to emulate the other’s pattern of specialization? Of course not.

Of course not. This blanket dismissal is rather odd, since the work Krugman won the Nobel for explicitly supports an affirmative answer to both questions. [2] It’s a case of esoteric versus exoteric knowledge, I guess — some truths are not meant for everyone. Or as Krugman delicately puts it, “the innovative stuff is not a priority for undergrads.”

Don’t worry about demand. In debates over policy, “the central issue is employment” in the arguments on both sides. But this is wrong, he says:

The level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with policies like tariffs having little net effect. Trade policy should be debated in terms of its impact on efficiency…

It’s not immediately obvious why the claim that employment depends on aggregate demand is inconsistent with the claim that trade flows have important employment effects. After all, net exports are a component of demand. The implicit assumption is evidently that the central bank (or some other domestic policymaker) is maintaining the level of demand at the full-employment level, and will offset any effects from trade. [3]

Don’t worry about trade deficits, and the financing they require. “The essential things to teach students are still the insights of Ricardo and Hume. That is, trade deficits are self-correcting…”

The whole piece is frankly polemical — it’s clear that the goal is not to educate in the normal sense, but to equip students to take a particular side in public debates. This is not specific to Krugman, of course. If anything, most contemporary textbooks are even worse. [4] One  reason I am using Caves and Frankel in my class is that it has less obnoxious editorializing than other texts I looked at. But less is still a lot.

Enough Krugman-bashing. What’s the alternative? What should people know about international trade? Matias Vernengo has one good alternative list. Here is mine.

There are three frameworks or perspectives in which we can productively think about international trade. The questions we ask in each case will depend on whether we are thinking of trade flows as the adjusting variable, or as reflecting an exogenous change to which some other variable(s) must adjust.

1. Trade flows are part of aggregate expenditure. On the one hand, a good way to predict trade flows is to assume that a fixed fraction of each dollar of spending goes to imported goods. As Joan Robinson and others have stressed, in the short run at least, adjustment of trade balances comes mainly or entirely through income changes. (This is also the perspective developed in Enno Schroeder’s work, which I’ve discussed here before.) On the other hand, if we can’t assume there is some level of full employment or potential output to which to which the economy always returns, then we have to be concerned with trade flows as one factor determining the level of aggregate income. This might be only a short-run phenomenon, as in mainstream Keynesian analysis, or it might be important to economic growth rates over the long run, as in models of balance of payments constrained growth.

2. Trade flows are part of the balance of payments. In a capitalist world economy, there are many different money payments and obligations between countries, of which trade flows are just part. In a world of liquidity constraints, certain configurations of money payments or money commitments are costly, or cannot be achieved at all. That is, a country in the aggregate cannot in general borrow unlimited amounts at “the” world interest rate. The tighter the constraints on a country’s financial position, the more positive a trade balance it must somehow achieve. On the other hand, for a given level of financing constraint, a more positive trade balance allows for more freedom on other dimensions. This interaction between trade flows and financial constraints is central to the balance of payments crises that are such a prominent feature of the modern world economy.

3. Trade flows involve specialization. Thinking now in terms of baskets of goods rather than money flows, the essential thing about international trade is that it allows a country’s consumption and production decisions to be made independently. Given that productive capacities vary more between countries than the mix of consumption goods chosen at a given income and prices, in practice this means that trade allows for specialization in production. If we take productive capacities as given, it follows that trade raises world output and income by allowing countries to specialize according to comparative costs. This is the essential (and genuine) insight of Ricardo. On the other hand, if we think that inherent differences between countries are small and that differences in productive capacity arise mainly through production itself, then international trade will lead to a historically contingent pattern of international specialization in which some positions are more advantageous than others. If causality runs from trade patterns to productive capacities and not just vice versa, then there is a case for including activity trade policy in any development strategy.

The orthodox trade theory has legitimate value and deserves a place in the curriculum. As we’ll discuss in the next post, simple textbook models of the Ricardo-Mill type can be used to tell stories with more interesting political implications than the usual free-trade morality tales. But they are only part of the picture. Much of what matters about trade depends on the fact that it involves flows of money and not just exchanges of goods.

[1] Have Krugman’s views changed since he wrote this? As reflected in his textbooks, no they have not. As reflected in his blog, seems like sometimes yes, sometimes no. Someone should ask him.

[2] For example, one of Krugman’s more widely cited articles is this one, which develops a model in which an innovating region (“the North”) develops new products, which it exports to a non-innovating region (“The South”). In the model,

Higher Northern per capita income depends on the quasi-rents from the Northern monopoly of new products, so the North must continually innovate not only to maintain its relative position but even to maintain its real income in absolute terms. 

This is hard to distinguish from the arguments for industrial policy that Krugman dismisses as silly.

[3] What’s especially odd here is that orthodox theory says that in a world of mobile capital, the only tool the central bank has to maintain full employment is changes in the exchange rate. In standard textbooks (including Krugman’s own), it is impossible for monetary policy to boost employment unless it improves the trade balance.

[4] For example, David Colander’s generally undogmatic intro textbook includes a section titled “If trade is so good, why do so many people oppose it?”The answer turns out to be, they’re just confused.

International Trade: What Are the Questions?

This semester, I’m teaching an upper-level class at Roosevelt on international trade. Trade is an interest of mine, but not something I’ve ever taught. So it will be a learning experience for me at least as much as for the students.

One way to organize a class like this is to start with the orthodox approach and then present the various heterodox alternatives. I don’t know if that’s the best way to do things; but it is what I am doing. So we divide things up:

1. Orthodox trade theory. Orthodox approaches to trade (the first half of any standard textbook; we are using Caves and Frankel) treat trade as an exchange of goods for goods. We assume that trade is always balanced and that all resources are fully employed, and show how specialization by different countries in their preferred activities leaves everyone better off. We can divide this approach into Ricardian models, which treats countries preferred activities as dictated by inherent differences in productive capacities, on the one hand; and on the other, the Heckscher-Ohlin models that regard countries as having the same productive technology but different “endowments” of (a relatively small number of) “factors of production.” As far as I can tell, these two kinds of models are not associated with distinct schools of thought in any larger sense; but it seems to me that the tension between them is one of the more interesting things in the orthodox theory.

2. Keynesian approaches. Here the important thing is the systematic relationship between income-expenditure and trade flows. On the one hand, we think a predictable fraction of incremental expenditure will fall on imports, and on the other, net exports are a form of autonomous demand boosting income. The short-run version of this approach used to be fully respectable; one very good presentation is Dornbusch’s 1980 textbook, Open Economy Macroeconomics. [1] The long-run version of the Keynesian approach is Thirlwall’s model of balance-of-payments constrained growth. I don’t know that this has ever been respectable but I think it’s useful and sensible and, I hope, teachable.

3. New trade theory. The starting point here is that while orthodox theory says that the biggest gains come from trade between countries that are most different (in terms of productive capacities or factor endowments), what we see in the real world is that most trade is between basically similar industrialized countries. The explanation, according to this approach, is that most trade is not in fact driven by comparative advantage, but by increasing returns, which reward specialization even in the absence of any inherent differences between countries or regions. This is the stuff Paul Krugman got his prize for. One puzzle about the new trade theory is that its practitioners almost all endorse the same free-trade policy orthodoxy underwritten by the old trade theory, even though the substantive content would seem to undermine it. What the new theory says is, first, that the pattern of specialization between countries is in some important respect arbitrary and at least potentially shaped by choices; and second, that the global distribution of income is a function of who ends up with which specialty. in this sense, there is some affinity between the new trade theory and Marxist theories of imperialism, dependency and unequal exchange. I’d wondered for a while if anyone had written about this connection. The answer turns out to be yes: Krugman himself. He even cites Lenin!

4. Development, dependency and unequal exchange. There is a large body of radical theory here, which I admit I have not quite got my arms around. For current purposes, let’s think in terms of two strands of analysis — or at least two sets of questions, which may or may not correspond to different schools or bodies of theory. First, there is the relationship between trade and economic development. Historically, we could put this at the very beginning of the list, since it seems that many of the earliest writers on what we now call economics were centrally concerned with this question. But for our purposes, we are interested in the tradition that runs from Hamilton to Friedrich List to Gerschenkron to Dani Rodrik and Ha-Joon Chang. These mostly pragmatic analyses, associated politically with rising rivals to the current hegemon, include a mix of infant industry/”import protection as export promotion” arguments, and trade restrictions as devices to expand the domestic policy space (the positive side of mercantilism emphasized by Keynes.) Second, there are the various theories that go under the names of dependency and unequal exchange. The key claim here is that there is a systematic movement of prices that favors the North and disfavors the South. We may further subdivide these theories into Prebisch-Singer and related approaches, and more Marxist analyses from Hobson, Lenin and Luxembourg through Baran to Frank, Wallerstein, Amin and Emmanuel.

Another way of looking at this: Among the assumptions of the orthodox theory are that all resources are fully employed, that prices always adjust so as to balance trade (or equivalently, that goods trade directly for goods), and that countries’ productive capacities can be taken as exogenous and determine the pattern of trade. Keynesian approaches reject the first two of these assumptions, the new trade theory rejects the third; the various development/dependency approaches also reject the third assumption and in some versions the first two as well.

There reason I’m posting this here is I’d like to integrate my teaching more with this blog. So the hope is to have a bunch of posts about all this over the next few months. I’m sure I’ll get a lot of things wrong; maybe the readers of the blog can correct some of them.

[1] On the other hand, this contemporary (and very admiring) review of the Dornbusch book does chide him for starting with 

a nonmonetary “Keynesian” model with rigid prices, fixed exchange rates, and unemployment … The basic consideration is short-run full employment; long-run problems of allocation and prices are left in the background. Economists with a more “classical” turn of mind may be a little disconcerted to find tariffs introduced as instruments to raise employment and to see real wages explained by the “claims” of trade unions. They would probably prefer to start out with the long-run picture, linking monetary aspects firmly to the pure theory of international trade. 

So maybe it wasn’t ever fully respectable. One thing I’d like to understand better is exactly when and to what extent “Keynsian” theory was accepted among academic economists.