History of Economic Thinking

I have just delivered my last lecture in history of economic thought (ECON 105) for the summer. On August 22, the beginning of the fall semester, a new round will begin.

For the last lecture I make an effort to tie it all together, this time with the help of Giovani Arrighi. It seems impossible, but Arrighi’s Long Twentieth Century (originally published in 1994) is now over twenty-four years old. It still packs a punch. (Obviously did global markets — and, more to the point, incomes of working families — increase dramatically; did manufacturing return to the US; did the US Congress pass single-payer health care, high speed interurban and inner city light rail, Arrighi’s book would immediately be dated.)

Image result for military conflicts around the world 2018
Hot wars around the globe 2018

The hardest nut to crack in this issue of ECON 105 is the last thirty years. In our penultimate seminar, we cover two theses: Robert J Gordon’s Rise and Fall of American Growth (2017), and Steven Teles and Brink Lindsey’s 2018 best-seller, The Captured Economy. Both books are well worth the read. Both directly address the post-1971 period of sluggish growth and the pitiful purchasing power of working families. In RJ Gordon’s view, it is a simple matter of innovation. We cannot imagine another innovation on the level of the networked home (electricity, water, refrigeration, communication, heat, and waste removal) or transportation (the combustion engine) that would, in so short a time, spread to every — literally every — household. In Teles and Lindsey’s book, the whole problem after 1971 is rent-seeking and capturing. One version of this story — that the political establishment, Democratic and Republican, sold the US economy to the highest bidder — strikes me as spot-on. The story Teles and Lindsey tell — that labor and capital each contributed to the captured economy? — not so much. Moreover, haven’t we suffered from rent-seeking from year one; the three-fifths clause, etc. etc.? To explain 1971-present, we need a more accurate instrument.

Which is why G Arrighi is so delightful! Delightfully wrong; but delightful! According to Arrighi (as CSN&Y once intoned), “we have all been here before.” To be precise, at least since the quattrocento, this is how capital has always behaved. Using paid mercenaries, Genoese merchants make a killing on “global” markets — which, in fact, for the fourteenth century were quite extensive. Their markets benefit all of the markets on their periphery: Portugal, Spain (and, through Spain, the Dutch), the Hapsburgs, the Swiss, southern France, and southern German lands. Everyone’s a winner. Gains from trade. Yada, yada.

But enhanced wealth leads to enhanced competition, leading two powers in particular — Spain and its Dutch colony — to wonder whether they could capture Genoese markets. The Dutch feel they are better situated and more attuned. They rebel against their Spanish overlords. At which point Genoese investors conclude: hey, they might be right. At which point, Genoese capital begins to flow into both Amsterdam and Spain, but mostly Amsterdam. Amsterdam wins (with Genoese assistance), kicks out the Spanish, and a new round ensues. Everyone begins to invest in the United Provinces’ enlarged trading empire. And everyone who does wins; but specially the French and the British, who each believe they could do better what the Dutch are doing. Investors — including Dutch investors — agree. And they all begin to invest in France and England, but mostly in England. France and England mix it up. England wins. Bang. Global empire.

Once again, everyone invests in England. There are gains from trade. In particular, the US and (a recently united) Germany gain from trade. In fact, each thinks it can outdo England. And, so, now everyone is competing for global markets. The Germans and the Americans go at it, not once, but twice; and twice the US wins, making America Great Again. The US establish an even broader, more dynamic, trading empire, made greater on account of the political liberties enjoyed by its trading partners. Yeah! The US system makes everyone great again. Eventually, however, Europe takes advantage of efficiencies — in health care, transportation, education, and leisure — that make its high tech, high end product lines more attractive than the United States’ heavily subsidized agriculture, oil and inferior goods markets. Global competition induces even US investors to shift their liquid assets to other markets around the globe. End game.

Its a riveting story — all except for the conclusion, wherein disenfranchised of the global north and global south throw off their chains, come together, hold hands, and sing “Kumbaya.” End of story. Or a fragmentation into warring factions. Or a successor hegemon: China? the EU? Russia?

With systemic ecological failure hanging over the whole mess.

Envelope please.

Here is my problem. From day one, in 1870, we have been driving home the production function, that ratio lying at the heart of every capitalist’s deepest dreams: more with less. It is the ground of competition: my ability — through cheaper labor, fewer benefits, better technology — to generate more value with less capital and less labor. The miracle of efficiency. This is not a pipe dream. It is what we are doing. Now. To generate efficiencies.

So what’s the problem? The problem is, we generate these efficiencies and then send them up to the tippy top of the income hierarchy, where they perform least efficiently. Other markets have elected to flatten the distribution of their market efficiencies. They have elected to create labor markets of highly skilled, healthy, and reasonably happy applicants. They have elected to create create political communities not easily swayed by fake news, where citizens enjoy a superior education, and where publics enjoy sufficient wealth not to be easily bribed. But they have also elected to create private markets in which players are not given incentives to rig the system in their favor. In these markets, it is not too difficult to imagine a different, less apocalyptic, more hopeful future.

This future cannot be realized without political action, but nor does it consist solely of politics. The efficiencies are already here. They simply need to be regulated differently. (The story that efficiencies distribute themselves is pure hogwash. Efficiencies follow courses set by law. Otherwise the Koch brothers would not attempt to change laws in order to distribute them differently.) An alternative distribution of efficiencies holds hope that apocalypse can be avoided, not because states have been abolished (or universalized), but because they have adopted republican ideals and democratic process. But reaching this outcome is only ever a possibility. Others besides this possibility offer themselves to us; mostly apocalyptic.

End of lecture. End of semester.


Like you, I spent a good part of my day thinking about Janus, the Supreme Court decision that reduced the wage negotiation to an act of political speech. https://nyti.ms/2lBcoHS.

I then spent twenty minutes in each one of my three summer school courses guiding discussion and fielding questions on the economic significance of the ruling. Here, in abbreviated form, is what I said:

First, I told them what classical economists had written on the subject. Here is Adam Smith, who in 1776 wrote:

What are the common wages of labour depends every where upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour (I.viii.11).

Smith then answers his own question:

The masters,  being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, a while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. . . . Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long-run the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate (I.viii.12).

He then adds:

But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. . . . We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things which nobody ever hears of. Masters too sometimes enter into particular combinations to sink the wages of labour even below this rate (I.viii.13).

The classical economists, at least, were never so dull as to believe that the “combinations” of “masters” were not as, or even more, political as “combinations” of “workmen.”

Next, I went into a brief history of labor union density. My students are intimately familiar with the $4.5T (in 2018 dollars) Congress appropriated in 1938 to defeat fascism in Europe and nationalism in Asia; with the tremendous boost in aggregate consumer spending that followed this, the largest public investment in all of history. They know that this investment, combined with the Marshall Plan, gave rise to three decades of steady economic growth and expansion.

What they may not have known is that it was within this same time frame that David and Chuck Koch’s father made his fortune, first building oil refineries for Adolf Hitler and Joseph Stalin, but then by capturing rents on the consumer demand generated in the US by Congress’s $4.5T outlay. Yes. Fascist German and Communist Russian public moneys are not drawn upon the US Treasury. But the consumer demand generated by Congress’s war bonds undoubtedly were. The point is, up and down  the Kochs built their fortunes on public largesse — fascist, communist, social democratic.

I next discuss why the bottom began to fall out of the economy in 1968. The critical events are as follows: (1) Japanese and German economies return to full employment and full industrial capacity placing downward pressures on prices and, so, rates of growth for investors in all three markets; (2) Richard Nixon’s 1971 devaluation of the dollar helped bring US manufactured goods back within the reach of domestic and foreign consumers; but devaluation of the dollar brought investors to seek higher growth economies in Asia, South America, and the Middle East; (3) the OPEC oil embargo of 1973 sent oil prices soaring which hit US markets specially hard; of the three major industrial economies only the US had eliminated light rail and high speed rail as alternatives to private automobiles.

Indeed, in this regard it is worth noting that President Nixon, a Republican, before devaluing the dollar, first tried to win passage of a plan for single-payer, universal healthcare; funding for high speed and inner city urban light rail; and virtually free public higher education. All three were shot down by labor unions that feared government incursion upon their turf: the UAW for transportation and the AFT for education. No one knew that it was the last, best opportunity for labor to secure all three.

Finally, I pointed out why, absent Democratic cooperation, first Nixon, then Jimmy Carter, then Ronald Reagan, and then Bill Clinton joined arms with Congress to deregulate financial markets, lower taxes on wealth, and lower barriers for investors to invest in high-risk/high-return financial instruments. Such instruments deliver high returns not on account of increases in productivity or economic expansion. They deliver high returns on account of speculation in financial markets.

Finally, in 1979, Jimmy Carter’s appointment as Fed Chair, Paul Volcker, raised interest rates to 20%, therein killing any hope of industrial growth. Investors liquidated as quickly as they could, forever killing any hopes of an industrial revival.

This sets the stage for a dramatic shift in how investors assign their wealth to different asset classes. Until 1968, I might have assigned some of my wealth to US manufacturing. After 1976, that expectation is comatose. By 1980, it is dead. This whole trajectory is brilliantly captured in the statistics we have for union density:

Essentially, the health of our economy corresponds to the health of it organized laborers. When labor unions enjoy high wages and superior benefits, and when labor membership is at its highest density, there the US economy is performing at peak performance. Where investors begin to recover their swagger, when their returns begin to climb, there the US economy begins to falter.

Why? To economists trained in the Cambridge School, this is absolutely no mystery. Consumer demand drives economic growth. Consumer demand is driven by disposable consumer income. Disposable consumer income is driven by the wages and benefits enjoyed by working Americans. It is that simple.

This fall, when my labor union comes to the table to bargain its wages, benefits, and working conditions — thanks to Janus — it will face a battery of highly compensated lawyers all in concert seeking to lower my wage — my marginal propensity to consume. Now, thanks to Janus, my side of the table will be staffed by a skeleton crew, only the lawyers I can afford out of the dues from members.

Every undergraduate knows how this will shape aggregate consumer demand. And how this will shape GNP. But, it will further pad the bank accounts of Janus’ principle funders: Chuck and David Koch.

Alternative forms of value

The contemporary economic model works only so long as all factors are reducible to one another. So, for example, we can measure the value of any good produced in terms of the labor (and/or capital) used in its production only because the labor (and/or capital) is also measured in dollars, or yen, or renminbi, or euro. Which makes it challenging when we are seeking to measure health care outcomes, let us say, in terms of educational achievements. So far, the only meaningful way I have found to perform this function is the same way everyone else does: let x be some standard health care outcome; let y be some educational achievement; graph them linearly and see whether there is a meaningful correlation.

We could then add a variable; call it leisure time l. We could then run a multivariate test to see how the addition of this variable, leisure time (l) lent a different shape to our curve. As a hypothesis, I would venture that high educational achievement along with high leisure time gave rise to more favorable health care results; and that high educational achievement and superior health care outcomes would also be highly prediction of leisure time. We could then add a fourth, a fifth, a sixth . . . variable to test the relative correlation of these variables with different outcomes.

There is only one problem. All of these variables — health, education, leisure, racegenderincome, and so on — are nested within a social formation in which abstract value (akin to, but not the same as, money) mediates social relations. Lurking in the shadows, we might say, are policies that inflect health, education, and welfare in the direction of MPL (marginal product of labor) or MPC (marginal product of capital).

Here it might be helpful to hold y and k (labor and capital) equal. What if those at the lowest end of the income hierarchy were awarded a coefficient that bolstered the income advantage of those at the bottom — with a hazard rate indexed to each income level in between; or the highest end of the income hierarchy were weighted with a coefficient that plunged their income advantage to bring them equal to those at the bottom — with a (-) hazard rate indexed to each income level plummeting to the bottom.

Controlling for y and k, I would hold that we would find a positive correlation to education, leisure time, and health.

But why would we even perform this operation?

We would perform it because we know that some policy makers refuse to recognize the positive correlation between health, education, and welfare. They would like us to correlate every outcome to marginal profit. Marginal profit, however, measures only one in a wide range of dependent variables. Why not make educational achievement the independent variable; or health; or leisure; or family-time?

We have internalized a narrative about value that is toxic. It is killing us. It will kill us. But the solution is not abandoning rigorous mathematical modeling. The solution is applying it rigorously.