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January 2012

Econ 1: U.C. Berkeley: Spring 2012: Why We Read Milton Friedman and Rose Director Friedman, "Free to Choose"

My Obituary for Milton Friedman:

"Lord, enlighten thou our enemies," prayed nineteenth-century British economist and moral philosopher John Stuart Mill in his "Essay on Coleridge" http://olldownload.libertyfund.org/Texts/MillJS0172/Works/Vol10/PDFs/Mill_1277.pdf. "Sharpen their wits, give acuteness to their perceptions, and consecutiveness and clearness to their reasoning powers: we are in danger from their folly, not from their wisdom; their weakness is what fills us with apprehension, not their strength."

For every left-of-center American economist in the second half of the twentieth century, Milton Friedman (1912-2006) was the incarnate answer to John Stuart Mill's prayer. His wits were smart, his perceptions acute, his arguments strong, his reasoning powers clear, coherent, and terrifyingly quick. You tangled with him at your peril. And you left not necessarily convinced, but well aware of the weak points in your own argument.

General William Westmoreland, testifying before President Nixon's Commission on an All-Volunteer [Military] Force, denounced the idea, saying that he did not want to command an army of mercenaries. Milton Friedman interrupted him:

General, would you rather command an army of slaves?

Westmoreland got angry:

I don't like to hear our patriotic draftees referred to as slaves.

And Friedman got rolling:

I don't like to hear our patriotic volunteers referred to as mercenaries. If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general.

And he did not stop:

We are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher http://www.davidrhenderson.com/articles/0199_thankyou.html.

As George Shultz likes to say:

Everybody loves to argue with Milton, particularly when he isn't there.

Thinking as hard as he could until he got to the root of the issues was his most powerful skill. "Even at 94," Chicago economist and Freakonomics http://www.amazon.com/exec/obidos/ASIN/006073132x/ author Steve Levitt wrote on his website yesterday, "he would teach me something about economics whenever we talked" http://www.freakonomics.com/blog/2006/11/16/sad-news-milton-friedman-has-died/. In this morning's New York Times http://www.nytimes.com/2006/11/17/business/17milton.html, Chicago economist Austen Goolsbee quotes from Milton Friedman's Nobel autobiography:

Friedman said that when he arrived [at the University of Chicago] in the 1930s, he encountered a "vibrant intellectual atmosphere of a kind that I had never dreamed existed."

"I have never recovered."

His world-view began with a bedrock faith in people, in their ability to make judgments for themselves, and thus an imperative to maximize individual freedom. On top of that was layered a deep faith and conviction that free markets were almost always the best and most magical way of coordinating every conceivable task. On top of that was layered a powerful conviction that a look at the empirical facts--a marking-to-market of your beliefs to reality--would generate the right conclusions. And on top of that was layered a fear and suspicion of government as an easily-captured tool for the enrichment of cynical and selfish interests that sought to grab whatever they could. Suffusing all was a faith in the power of argument and the utility of reason. He was an optimist: people could be taught the truths of economics, and if they were properly taught then institutions could be built to protect all against the corruption and overreach of the government.

And he did fear the government. He hated government's and society's sticking their nose into people's private business. And he interpreted "people's private business" extremely widely. He hated the War on Drugs, which he saw as a cruel and destructive breeder of crime and violence. He scorned government licensing of professions--especially doctors, who heard over and over again about how their incomes were boosted by restrictions on the number of doctors that made Americans sicker. He feared deficit spending: cynical politicians could pretend that the costs of government were less than they were by pushing the raising of taxes to pay for spending off into the future. He sought to innoculate citizens against such political games of three-card-monte: "Remember," he would say, "to spend is to tax."

This did not mean that government had no role to play. Enforcement of property rights, adjudication of contract disputes--the standard powerful rule-of-law underpinnings of the market--plus a host of other government interventions when empirical circumstances made them appropriate: Mayor Ken Livingstone's congestion tax on cars in central London is Milton Friedman's. Friedman's negative income tax is one of the parents of what is now America's largest anti-poverty program: the Earned Income Tax Credit. And, most important, government had a very powerful and necessary role to play in keeping the monetary system working smoothly through proper control of the money stock. If there was always sufficient liquidity in the economy--enough but not too much--then you could trust the market system to do its job. If not, you got the Great Depression, or hyperinflation.

In his belief that the government was required to undertake relatively narrow but crucially important strategic interventions in order to stabilize the macroeconomy--keep production, employment, and prices on an even keel--Milton Friedman was in the same chapter if not on the same page as John Maynard Keynes, the economic giant of the previous generation whose doctrines and influence Friedman worked tirelessly to supplant and minimize. The Great Depression had convinced Keynes that central bankers alone could not rescue and stabilize the market economy. In Keynes's view, stronger and more drastic strategic interventions were needed to boost or curb demand directly.

Friedman and his coauthor Anna J. Schwartz argued in their Monetary History of the United States that this was a misreading of the lessons of the Great Depression, which in Friedman's view was caused by monetary mismanagement--or perhaps could have been rapidly alleviated by skillful monetary management--alone.

Over the course of forty years, Friedman's position carried the day. Federal Reserve Chair Ben Bernanke right now holds Milton Friedman's view, not John Maynard Keynes's, of what kind of strategic interventions in the economy are necessary to provide for maximum production, employment, and purchasing power, and stable prices.

Milton Friedman's thought is, I believe, best seen as the fusion of two strongly American currents: libertarianism and pragmatism. Friedman was a pragmatic libertarian. He believed that--as an empirical matter--giving individuals freedom and letting them coordinate their actions by buying and selling on markets would produce the best results. It was not that he thought this was natural law--that markets always worked best. It was, rather, that he believed that places where markets failed were atypical; that where markets did fail there were almost always enormous profit opportunities from entrepreneurial redesign of institutions; that the market system would create now opportunities for trade that would route around market failures; and that government failure was pervasive--that any expansion of government beyond the classical liberal state would be highly likely to cause more trouble than it could solve.

For right-of-center American libertarian economists, Milton Friedman was a powerful leader. For left-of-center American liberal economists, Milton Friedman was an enlightened adversary. We are all the stronger for his work. We will miss him.


Twitterstorm delong: January 16, 2012

  • aterkel aterkel MT @davidmdrucker @ByronYork Sources say Santorum has 80-something vote lead. If it holds, Santorum, not Romney, wins Iowa. http://ow.ly/8vHPd 7 minutes ago Retweeted by delong

  • mark_dow Mark Dow Don't worry. Word is they are putting together bailout package for it RT @Brynjo S&P downgrades EU's bailout fund 24 minutes ago Retweeted by delong

  • delong J. Bradford DeLong @ @Noahpinion So is it fair to say that he hasn't done his homework on the expansion of negative liberty to non-white guys? And is it fair to say he hasn't done his homework on the pace of post-1980 U.S. economic growth? 1 hour ago

  • Noahpinion Noah Smith @ @delong Heh. True. His entire post is based on a blatant misinterpretation of your use of the word "end"...sigh. 1 hour ago Retweeted by delong

  • delong J. Bradford DeLong @ @Noahpinion Thanks... I think... I do have a day job. Engaging with a guy who hasn't done his political theory homework is not profitable 1 hour ago

  • felixsalmon felix salmon RT @Reddy: Mike Mussa, the former IMF chief economist known for his one-liners, died Sunday. My WSJ piece: http://on.wsj.com/zfBYuH 1 hour ago Retweeted by delong

  • AdamSerwer AdamSerwer Protip:If you find yourself bringing up "no Irish need apply" as a comparison to slavery, you're embarrassing yourself. http://ordinary-gentlemen.com/blog/2012/01/1… 1 hour ago Retweeted by delong

  • mattyglesias mattyglesias @ @interfluidity If "it's not about Ron Paul" then why express these ideas as hostility to Ron Paul's critics? 3 hours ago Retweeted by delong

  • ayeletw Ayelet Waldman On behalf of Jews everywhere, I apologize for that malignant blithering idiot, Jennifer Rubin. 3 hours ago Retweeted by delong

  • pkedrosky Paul Kedrosky Mt. Rainier in Washington is forecast to receive up to 12 feet of snow by Wednesday night /via @breakingweather 4 hours ago Retweeted by delong

  • mattyglesias mattyglesias People who think "negative rights" are more important than "positive" ones spend a lot of time pushing for traffic light abolition, right? 4 hours ago Retweeted by delong

  • afrakt Austin Frakt Be sure to read final 'graph. MT @ezraklein: Sully argues that Obama's been more successful than left or right realize: http://bit.ly/zDy83U 4 hours ago Retweeted by delong

  • delong J. Bradford DeLong Econ 1: UC Berkeley: Spring 2012: Why We Read Partha Dasgupta: "Economics: A Very Short Introduction" http://bit.ly/xJNsZY 5 hours ago

  • delong J. Bradford DeLong Economics for public policy http://milescorak.com 5 hours ago

  • delong J. Bradford DeLong Econ 1: U.C. Berkeley: Spring 2012: Why We Read Milton Friedman and Rose Director Friedman, "Free to Choose" http://bit.ly/xunFqY 7 hours ago

  • davidaxelrod David Axelrod Hunts called Obama "a remarkable leader," Mitt "perfectly lubricated weather vane." Now hes 4 Mitt, and decries loss of "trust" in politics? 8 hours ago Retweeted by delong

  • delong J. Bradford DeLong Reading Notes/Discussion Questions for Paul Seabright, "The Company of Strangers" http://bit.ly/xXAShT 15 Jan

  • delong J. Bradford DeLong JOLTS Data and Theories of the Great Recession http://networkedblogs.com/sIW1p 15 Jan

  • delong J. Bradford DeLong William Cohan Has Been Waiting for Decades to Take His Shot at Mitt Romney... http://bit.ly/wBVGea 15 Jan

  • delong J. Bradford DeLong @ @afrakt gmail took my account down for "account maintenance" and kept it down for 25 days. Now back up... 14 Jan

  • MrPABruno Paul Bruno For-profit colleges are unlikely to be better deals. RT @delong: For-profits vs not-for-profits | Felix Salmon blogs.reuters.com/felix-salmon/2… 1 hour ago »

  • Noahpinion Noah Smith @ @delong Cochrane feels no need to do any homework, he's already passed his prelims...(ooh, stairway wit) 1 hour ago

  • Noahpinion Noah Smith @ @delong The real issue is that you weren't saying expansion of liberty halted after 1980...you were praising Friedman... 1 hour ago

  • Noahpinion Noah Smith @ @delong Yes. It is really nuts. 1 hour ago

  • Noahpinion Noah Smith @ @delong Heh. True. His entire post is based on a blatant misinterpretation of your use of the word "end"...sigh. 1 hour ago

  • dylanmatt Dylan Matthews @ @delong @reihansalam Agreed. Even only counting negative liberty, it was not on the retreat in 1980. 5 hours ago

  • felixsalmon felix salmon @ @blakehounshell @delong [Mitt Romney] was short-term greedy, and didn't care about the reputational legacy he was leaving his successors. 15 Jan

  • haroldpollack Harold Pollack @ @afrakt I hope you didn't send @delong credit card #.There's no such person. http://t.co/bVV23hc is elaborate scam. Perp fled to Bahamas. 14 Jan

  • afrakt Austin Frakt @ @delong What on earth is gmail account maintenance? 14 Jan


Econ 1: UC Berkeley: Spring 2012: Why We Read Partha Dasgupta: "Economics: A Very Short Introduction"

Declan Trott:

‘The extent of the market’ is limited not just by transport but by trust: [T]here is also a feeling that some of the [recent] best-sellers have trivialised economics, titillating the reader with sex and drugs while neglecting the more important insights of the discipline. Nobody could accuse Partha Dasgupta of deepening this rut. In this Very Short Introduction, he has taken as his theme the original mystery of economics: the nature and causes of the wealth of nations. And he motivates the study not with unadorned GDP statistics but by comparing the lives of two young girls: Becky, who lives in an affluent American suburb, and Desta, the daughter of Ethiopian farmers. Why do two children, born so much alike, live such different lives?

The question is compelling, and presents an opportunity to explore many branches of economics, in a concrete and relevant way. Unfortunately… [w]hile there are many references to ‘Desta’s world’ and ‘Becky’s world’, these are too often brief appendages to abstract discussions of agents A, B and C and factors X, Y and Z. At times one could be reading a textbook, except there are no problem sets, fewer graphs, and the pictures are in black and white.

This is a great pity, because there is a deep, coherent and insightful argument at the core of the book.

One might begin with the proposition: wealth depends on the division of labour, and the division of labour is limited by the extent of the market. But the extent of the market is not limited only by transport and taxes. It is limited also by trust: by the rules and expectations that allow cooperation for mutual gain between people who do not know each other. And these rules and expectations, particularly the expectations, are hard to build but easy to destroy. In the worst case, not just the extent of the market but its very existence is threatened.

The logic for this argument is provided by game theory. Economic life, and indeed social life more generally, depends on trust… that most people will keep their word most of the time. But even this modest level of trust cannot be gained just by wishing for it. People must believe that the long-run benefits from successful cooperation outweigh the short-term gains from cheating. And they must believe that other people think the same….

If prospects for the future become less bright, or if confidence in the other party is reduced, even for trivial or fallacious reasons, the balance may tip from cooperation to conflict very quickly. This has become a cliché in Yugoslavia, Rwanda and Iraq: political uncertainty resurrects dormant divisions and peaceful neighbours become killers.

Less dramatically, such calculations may just restrict the number of people any individual can trust…. The ‘community’ is a natural boundary: any group which people are born into (and with no easy, voluntary exit) and must deal with repeatedly for their whole lives makes the penalties for cheating higher and more certain. The family is the ultimate example….

Yet… families… are small… limit the division of labour…. Markets… overcome these problems by allowing much larger numbers of people to cooperate. But these large numbers cannot rely on personal ties, so establishing the necessary trust is much more difficult….

While consideration of trust, and its implications for communities, markets, households and firms, is the key content of the book, other subjects are considered. It begins with a brief consideration of the history of economic growth, contains an interlude on the contrasting incentives and institutions in science and technology, and concludes with chapters on sustainability and democratic decision-making….

The Very Short Introduction series is advertised as being for ‘anyone wanting a stimulating and accessible way into a new subject’. Stimulating, yes. Accessible? I am not so sure. Popular economics is supposedly aimed at the whole literate population, or at least the university-educated, newspaper-reading part of it. Partha Dasgupta seems to equate them with his fellow Cambridge professors and their brightest students. And it is a shame, because the intellectual content of the book, combined with the Becky/Desta device, had the potential for a truly great and accessible introduction to economics.

Me:

This is a game theorist's short introduction to economics. It focus on on: individual goals, individual opportunities and constraints, individual incentives, strategies, exchange, trust, and equilibrium outcomes. It is, of course, greatly concerned with wealth and poverty--that is, after all, the point of the discipline of economics: it is an inquiry into nature and causes of the wealth of nations. You won't find lots of practice figuring out how price and quantity change in response to demand shocks or calculating multipliers. What you will find is the logic and rationale for why figuring out how price and quantity change in response to demand shocks or calculating multipliers is a worthwhile thing to do.

Definitely five stars.

T. Williams:

This is probably not the best intro to economics book (i.e. it is a little too concise in places), but I liked it nevertheless. Overall, the author did do a great job explaining ideas…. The main drawback is that there's little to no iteration i.e. I usually learn by being exposed to a concept or term several times but in this short book there's no room for that - you're told about a concept once…

manuelfisica:

If you want a textbook, get something else...

The strengths of this book are: it avoids the trap of doing a developed-world only description, it really allows you to appreciate how economists think, it ties economic concepts to concepts from other disciplines. It can get technical sometimes for the least mathematical readership, but still a must read.

Chapter 5 alone justifies buying the book (Science and technology as institutions).


Econ 191: UC Berkeley: Spring 2012: Fiscal Policy in a Depressed Economy: April 17, 2012

Fiscal Policy in a Depressed Economy

April 17, 6:30-9:00 PM, 105 Northgate

Readings:


Don't Blame Lincoln and the Republicans for the Civil War

Ta-Nehisi Coates finds Howard Zinn being unpardonably lazy for anybody claiming to be a historian:

Civil War Counterfactuals: Zinn: So, the Civil War and its aftermath, you know, have to be looked at in a longer perspective. And yes, the question needs to be asked also: yeah, is it possible if slavery could have been ended without 600,000 dead? We don't know for sure. And when I mention these possibilities, you know, it's very hard to imagine how it might have ended, except that we do know that slavery was ended in every other country in the western hemisphere. Slavery was ended in all these others places in the western hemisphere without a bloody civil war.

Well, that doesn't prove that it could have been ended, and, you know, every situation is different, but it makes you think. If you begin to think, "Oh, the only way it could have been done is with a bloody civil war," maybe not. I mean, maybe it would have taken longer. You know, maybe there could have been slave rebellions which hammered away at the Southern slave structure, hammered away at them in a war of attrition, not a big bloody mass war, but a war of attrition and guerrilla warfare, and John Brown-type raids. 

Remember John Brown, who wanted to organize raids and a slave rebellion? Yeah, a little guerrilla action, not totally peaceful, no. But not massive slaughter. Well, John Brown was executed by the state of Virginia and the national government. He was executed in 1859 for wanting to lead slave revolts. And the next year, the government goes to war in a war that cost 600,000 lives and then, presumably, as people came to believe, to end slavery. There's a kind of tragic irony in that juxtaposition of facts. So it's worth thinking about, about the Civil War, and not to simply say, "Well, Civil War ended slavery, therefore whatever the human cost was, it was worth it." It's worth rethinking.

Ta-Nehisi Coates:

I really wish Zinn had pushed through, instead of simply posing questions. I wish he had made a case for Lincoln responding in some other way, after the Confederacy launched a war with the explicit aim of raising an empire that would protect and expand slavery. I really wish he'd taken a hard up the Haitian Revolution, which did not have a bloody "civil" war--but suffered a bloody war, nonetheless. I wish he'd tried to explain why these other places did not have Civil War, instead of retreating to the notion that we somehow just chose it.

I wish he would have tackled Lincoln's long record of advocating for paid emancipation as well as colonization, and the sordid results of those efforts. I wish he'd looked at the history of paid emancipation efforts in the South, and grappled with their repeated failure. I wish he'd tried to explain why, if Lincoln couldn't get Delaware to peacefully give up slavery in 1863, why he would have been able to convince South Carolina in 1860. I wish he'd grapple with the ethical dilemma of telling someone like Frederick Douglass that four million blacks should continue to live in a state perpetual violence, in hopes of forestalling violence for the rest of the country.

I am not being sarcastic here. There may well be a case. But too often I find that this argument is based in high-minded generalizations, and not in the tiny, hard facts of history. The history of emancipation attempts in Delaware and the South never come up. No one looks at how Sojourner Truth's son was sold into slavery in Alabama, after New York went with gradual emancipation. Instead we just get "war is bad." But some of us were already at war.

What most saddens me about this argument is the sense that Abraham Lincoln, who repeatedly advocated for peaceful means to end slavery, many of which were opposed by African-Americans (and rightfully so,) is somehow cast as a kind of war-monger. To put this in perspective, consider that Abraham Lincoln had to come to Washington on a secret train for fear that he would be killed. When he got there, he said this upon his inauguration:

We are not enemies, but friends. We must not be enemies. Though passion may have strained it must not break our bonds of affection. The mystic chords of memory, stretching from every battlefield and patriot grave to every living heart and hearthstone all over this broad land, will yet swell the chorus of the Union, when again touched, as surely they will be, by the better angels of our nature.

He was answered, a month later, when Confederates fired on federal property. The next five year took a toll on Lincoln which I can scarcely imagine. His wife was bipolar. His son died from typhoid fever. And Lincoln, himself, was murdered by an unrepentant white supremacist.

There's something distasteful, and cynical, about asking why Lincoln couldn't prevent a war, that was thrust upon him a month after he became President. Of course we could flip the question and ask why slaveholders elected to expand their war against black people to the entire country. But we already the answer. The truth is so very terrible.


Liveblogging World War II: January 16, 1942

World War II Day-By-Day: Day 869 January 16, 1942:

astern Front. 215 miles Northwest of Moscow, Soviet 3rd Shock captures Andreapol, opening a gap between German Army Group North and Army Group Center. The need for food drives the starving Red Army onwards towards the massive German supply dumps at Toropets. In Moscow, Stalin publishes the notorious “Reichenau Order” from German 6th Army commander Field Marshal von Reichenau, a copy of which was found in German documents at Klin.


National Review Celebrates Martin Luther King Day!

Rick Perlstein:

Conservatives and Martin Luther King: When Martin Luther King was buried in Atlanta, the live television coverage lasted seven and a half hours. President Johnson announced a national day of mourning:

Together, a nation united and a nation caring and a nation concerned and a nation that thinks more of the nation's interests than we do of any individual self-interest or political interest--that nation can and shall and will overcome.

Richard Nixon called King:

a great leader--a man determined that the American Negro should win his rightful place alongside all others in our nation.

Even one of King's most beastly political enemies, Mississippi Representative William Colmer, chairman of the House rules committee, honored the president's call to unity by terming the murder "a dastardly act."

Others demurred. South Carolina Senator Strom Thurmond wrote his constituents:

[W]e are now witnessing the whirlwind sowed years ago when some preachers and teachers began telling people that each man could be his own judge in his own case.

Another, even more prominent conservative said it was just the sort of:

great tragedy that began when we began compromising with law and order, and people started choosing which laws they'd break.

That was Ronald Reagan, the governor of California, arguing that King had it coming. King was the man who taught people they could choose which laws they'd break--in his soaring exegesis on St. Thomas Aquinas from that Birmingham jail in 1963:

Any law that uplifts human personality is just. Any law that degrades human personality is unjust. ... Thus it is that I can urge men to obey the 1954 decision of the Supreme Court, for it is morally right; and I can urge them to disobey segregation ordinances, for they are morally wrong….

[T]oday, of course… you get now are convoluted and fantastical tributes arguing that, properly understood, Martin Luther King was actually one of them--or would have been…. But, if we are going to have a holiday to honor history, we might as well honor history…. Conservatives--both Democrats and Republicans--hated King's doctrines. Hating them was one of the litmus tests of conservatism.   The idea was expounded most systematically in a 567-page book that came out shortly after King's assassination, House Divided: The Life and Legacy of Martin Luther King, by one of the right's better writers, Lionel Lokos, and from the conservative movement's flagship publisher, Arlington House. "He left his country a legacy of lawlessness," Lokos concluded. "The civil disobedience glorified by Martin Luther King [meant] that each man had the right to put a kind of Good Housekeeping Seal of Approval on laws that met with his favor."… This logic followed William F. Buckley, who, in a July 20, 1967 column titled "King-Sized Riot In Newark," imagined the dialogue between a rioter and a magistrate:

You do realize that there are laws against burning down delicatessen stores? Especially when the manager and his wife are still inside the store?

Laws Schmaws. Have you never heard of civil disobedience? Have you never heard of Martin Luther King?…

We know about the Chicagoans who hated King enough to throw bricks at him. We have forgotten that, while such hooliganism was universally reviled, the reviling establishment also embraced Reagan-like arguments about why that was only to be expected. Upon King's assassination, The Chicago Tribune editorialized: "A day of mourning is in order"--but this was because civil disobedience had finally won the day. "Moral values are at the lowest level since the decadence of Rome," the editors argued, but only one of their arguments was racial: "If you are black, so goes the contention, you are right, and you must be indulged in every wish. Why, sure, break the window and make off with the color TV set, the case of liquor, the beer, the dress, the coat, and the shoes. We won't shoot you. That would be 'police brutality.'" Another was: "At countless universities, the doors of dormitories are open to mixed company, with no supervision." The conservative argument, consistent and ubiquitous, was that King, claiming the mantle of moral transcendence, was actually the vector for moral relativism….

Shortly after the 1965 Selma voting-rights demonstrations, Klansmen shot dead one of the marchers, a Detroit housewife named Viola Liuzza, for the sin of riding in a car with a black man. Vice President Hubert Humphrey attended her funeral. No fair! Buckley cried, noting that a white cop had been shot by a black man in Hattiesburg shortly thereafter:

Humphrey did not appear at his funeral or even offer condolences.

He complained, too, of the news coverage:

The television cameras showed police nightsticks descending upon the bodies of the demonstrators, but they did not show the defiance... of those who provoked them beyond the endurance that we tend to think of as human…

Jeet Heer:

National Review and Terrorism Revisited: On September 15, 1963 a bomb went off at the 16th Street Baptist Church in Birmingham, Alabama, killing 4 black girls and injuring many more children. (Those killed were Cynthia Wesley, Carole Robertson, Addie Mae Collins, Denise McNair; McNair had been a classmate of the young Condoleezza Rice). The bomb was set by members of the Klu Klux Klan, as part of a wave of terror designed to intimidate the civil rights movement.

Here is how National Review commented on the bombing in the October 1, 1963 issue of their biweekly Bulletin:

The fiend who set off the bomb does not have the sympathy of the white population in the South; in fact, he set back the cause of the white people there so dramatically as to raise the question whether in fact the explosion was the act of a provocateur – of a Communist, or of a crazed Negro. Some circumstantial evidence lends a hint of plausibility to that notion, especially the ten-minute fuse (surely a white man walking away form the church basement ten minutes earlier would have been noticed?). And let it be said that the convulsions that go on, and are bound to continue, have resulted from revolutionary assaults on the status quo, and a contempt for the law, which are traceable to the Supreme Court’s manifest contempt for the settled traditions of Constitutional practice….

In the early 1960s, a renegade band of military men in France tried to assassinate Charles de Gaulle, after he made it clear that he was going to allow Algeria to become independent. In an editorial published in their May 6, 1961 issue, National Review celebrated the would-be assassins and excoriated the French President. About Maurice Challe, the leader of the putsch, the magazine wrote he:

has been, for France, the highest living embodiment of the ideal of the soldier: absolute in courage, skill, dedication, loyalty, self-sacrifice…. All normal and legal means having been exhausted, these soldiers… placed their duty to their country, their civilization, and their God above their duty to their commander in chief. By sheer interposition of their united will, they made a desperate and supreme attempt to block the enemy’s advance, and thus save France and Europe, and the Free World from a mortal danger….

On September 21, 1976 a bomb went off in Washington, DC killing Orlando Letelier (an exiled Chilean diplomat and critic of the Pinochet dictatorship) and his assistant Ronni Moffitt. The bomb had been planted by agents of the Chilean government, who were then engaged in a worldwide effort to assassinate perceived enemies of the regime. National Review, several of whose editors and writers had taken luxurious junkets paid for by the Pinochet government, went out of their way to try and defame Letelier as a communist and suggest (somewhat illogically) that he had been killed by the Cuban government.  On July  15, 1977 the magazine suggested that Letelier had been an “agent of the U.S.S.R.” On September 1, 1978 William F. Buckley wrote that “there are highly reasonable, indeed compelling, grounds for doubting that Pinochet had anything to do with the assassination.”… As with the church bombing, the whole point of these editorials and columns was to muddy the water and shift attention away from the guilty.


The Next-to-Last Scene of the Iliad

Or, is there any relationship that humans do not think ought to be turned into a reciprocal gift-exchange relationship? "Natural propensity to truck, barter, and exchange" indeed!

Book XXIV:

Iris, fleet as the wind, sped forth…. "Take heart," she said….

The lord of Olympus bids you go and ransom noble Hektor, and take with you such gifts as shall give satisfaction to Akhilleus…. Akhilleus will not kill you nor let another do so, for he will take heed to his ways and sin not, and he will entreat a suppliant with all honourable courtesy.…

[H]e lifted the lids of his chests, and took out twelve goodly vestments. He took also twelve cloaks of single fold, twelve rugs, twelve fair mantles, and an equal number of shirts. He weighed out ten talents of gold, and brought moreover two burnished tripods, four cauldrons, and a very beautiful cup which the Thracians had given him… to ransom the body of his son….

Priam and Idaeus as they showed out upon the plain did not escape the ken of all-seeing Jove, who looked down upon the old man and pitied him; then he spoke to his son Mercury and said, "Mercury, for it is you who are the most disposed to escort men on their way, and to hear those whom you will hear, go, and so conduct Priam to the ships of the Akhaeans that no other of the Danaans shall see him nor take note of him until he reach the son of Peleus." Thus he spoke and Mercury, guide and guardian, slayer of Argus, did as he was told….

[…]

Then answered Priam, "If you are indeed the squire of Akhilleus son of Peleus, tell me now the Whole truth. Is my son still at the ships, or has Akhilleus hewn him limb from limb, and given him to his hounds?"

"Sir," replied the slayer of Argus, guide and guardian, "neither hounds nor vultures have yet devoured him; he is still just lying at the tents by the ship of Achilles, and though it is now twelve days that he has lain there, his flesh is not wasted nor have the worms eaten him although they feed on warriors….

Ere long they came to the lofty dwelling of the son of Peleus for which the Myrmidons had cut pine and which they had built for their king; when they had built it they thatched it with coarse tussock-grass which they had mown out on the plain, and all round it they made a large courtyard, which was fenced with stakes set close together…. Mercury opened the gate for the old man, and brought in the treasure that he was taking with him for the son of Peleus…. Mercury went back to high Olympus. Priam… went straight into the house where Akhilleus, loved of the gods, was sitting. There he found him with his men seated at a distance from him: only two, the hero Automedon, and Alkimus of the race of Mars, were busy in attendance about his person, for he had but just done eating and drinking….

Priam besought Akhilleus saying:

Think of your father, O Akhilleus like unto the gods, who is such even as I am, on the sad threshold of old age. It may be that those who dwell near him harass him, and there is none to keep war and ruin from him. Yet when he hears of you being still alive, he is glad, and his days are full of hope that he shall see his dear son come home to him from Troy; but I, wretched man that I am, had the bravest in all Troy for my sons, and there is not one of them left. I had fifty sons when the Akhaeans came here; nineteen of them were from a single womb, and the others were borne to me by the women of my household. The greater part of them has fierce Mars laid low, and Hektor, him who was alone left, him who was the guardian of the city and ourselves, him have you lately slain; therefore I am now come to the ships of the Akhaeans to ransom his body from you with a great ransom. Fear, O Akhilleus, the wrath of heaven; think on your own father and have compassion upon me, who am the more pitiable, for I have steeled myself as no man yet has ever steeled himself before me, and have raised to my lips the hand of him who slew my son."

Thus spoke Priam, and the heart of Akhilleus yearned as he bethought him of his father. He took the old man's hand and moved him gently away. The two wept bitterly- Priam, as he lay at Achilles' feet, weeping for Hektor, and Achilles now for his father and now for Patroklus, till the house was filled with their lamentation. But when Akhilleus was now sated with grief and had unburthened the bitterness of his sorrow, he left his seat and raised the old man by the hand, in pity for his white hair and beard; then he said:

Unhappy man, you have indeed been greatly daring; how could you venture to come alone to the ships of the Achaeans, and enter the presence of him who has slain so many of your brave sons? You must have iron courage: sit now upon this seat, and for all our grief we will hide our sorrows in our hearts, for weeping will not avail us. The immortals know no care, yet the lot they spin for man is full of sorrow; on the floor of Jove's palace there stand two urns, the one filled with evil gifts, and the other with good ones. He for whom Jove the lord of thunder mixes the gifts he sends, will meet now with good and now with evil fortune; but he to whom Jove sends none but evil gifts will be pointed at by the finger of scorn, the hand of famine will pursue him to the ends of the world, and he will go up and down the face of the earth, respected neither by gods nor men. Even so did it befall Peleus; the gods endowed him with all good things from his birth upwards, for he reigned over the Myrmidons excelling all men in prosperity and wealth, and mortal though he was they gave him a goddess for his bride. But even on him too did heaven send misfortune, for there is no race of royal children born to him in his house, save one son who is doomed to die all untimely; nor may I take care of him now that he is growing old, for I must stay here at Troy to be the bane of you and your children. And you too, O Priam, I have heard that you were aforetime happy. They say that in wealth and plenitude of offspring you surpassed all that is in Lesbos, the realm of Makar to the northward, Phrygia that is more inland, and those that dwell upon the great Hellespont; but from the day when the dwellers in heaven sent this evil upon you, war and slaughter have been about your city continually. Bear up against it, and let there be some intervals in your sorrow. Mourn as you may for your brave son, you will take nothing by it. You cannot raise him from the dead, ere you do so yet another sorrow shall befall you.

And Priam answered:

O king, bid me not be seated, while Hector is still lying uncared for in your tents, but accept the great ransom which I have brought you, and give him to me at once that I may look upon him. May you prosper with the ransom and reach your own land in safety, seeing that you have suffered me to live and to look upon the light of the sun."

Akhilleus looked at him sternly and said:

Vex me, sir, no longer; I am of myself minded to give up the body of Hector. My mother, daughter of the old man of the sea, came to me from Jove to bid me deliver it to you. Moreover I know well, O Priam, and you cannot hide it, that some god has brought you to the ships of the Achaeans, for else, no man however strong and in his prime would dare to come to our host; he could neither pass our guard unseen, nor draw the bolt of my gates thus easily; therefore, provoke me no further, lest I sin against the word of Jove, and suffer you not, suppliant though you are, within my tents….

They lifted the ransom for Hector's body from the waggon. but they left two mantles and a goodly shirt, that Akhilleus might wrap the body in them when he gave it to be taken home…. Akhilleus himself lifted it on to a bier, and he and his men then laid it on the wagon. He cried aloud as he did so and called on the name of his dear comrade:

Be not angry with me, Patroklus," he said, "if you hear even in the house of Hades that I have given Hektor to his father for a ransom. It has been no unworthy one, and I will share it equitably with you.

Akhilleus then went back into the tent and took his place on the richly inlaid seat from which he had risen, by the wall that was at right angles to the one against which Priam was sitting. "Sir," he said:

your son is now laid upon his bier and is ransomed according to desire; you shall look upon him when you him away at daybreak; for the present let us prepare our supper. Even lovely Niobe had to think about eating, though her twelve children- six daughters and six lusty sons- had been all slain in her house. Apollo killed the sons with arrows from his silver bow, to punish Niobe, and Diana slew the daughters, because Niobe had vaunted herself against Leto; she said Leto had borne two children only, whereas she had herself borne many- whereon the two killed the many. Nine days did they lie weltering, and there was none to bury them, for the son of Saturn turned the people into stone; but on the tenth day the gods in heaven themselves buried them, and Niobe then took food, being worn out with weeping. They say that somewhere among the rocks on the mountain pastures of Sipylus, where the nymphs live that haunt the river Akhelous, there, they say, she lives in stone and still nurses the sorrows sent upon her by the hand of heaven. Therefore, noble sir, let us two now take food; you can weep for your dear son hereafter as you are bearing him back to Ilius- and many a tear will he cost you.

With this Akhilleus sprang from his seat and killed a sheep of silvery whiteness, which his followers skinned and made ready all in due order. They cut the meat carefully up into smaller pieces, spitted them, and drew them off again when they were well roasted. Automedon brought bread in fair baskets and served it round the table, while Achilles dealt out the meat, and they laid their hands on the good things that were before them. As soon as they had had enough to eat and drink, Priam, descendant of Dardanus, marvelled at the strength and beauty of Akhilleus for he was as a god to see, and Akhilleus marvelled at Priam as he listened to him and looked upon his noble presence. When they had gazed their fill Priam spoke first. "And now, O king," he said:

take me to my couch that we may lie down and enjoy the blessed boon of sleep. Never once have my eyes been closed from the day your hands took the life of my son; I have grovelled without ceasing in the mire of my stable-yard, making moan and brooding over my countless sorrows. Now, moreover, I have eaten bread and drunk wine; hitherto I have tasted nothing.

As he spoke Achilles told his men and the women-servants to set beds in the room that was in the gatehouse, and make them with good red rugs, and spread coverlets on the top of them…. Then Achilles said laughingly to Priam:

Dear sir, you shall lie outside, lest some counsellor of those who in due course keep coming to advise with me should see you here in the darkness of the flying night, and tell it to Agamemnon. This might cause delay in the delivery of the body. And now tell me and tell me true, for how many days would you celebrate the funeral rites of noble Hector? Tell me, that I may hold aloof from war and restrain the host.

And Priam answered:

Since, then, you suffer me to bury my noble son with all due rites, do thus, Achilles, and I shall be grateful. You know how we are pent up within our city; it is far for us to fetch wood from the mountain, and the people live in fear. Nine days, therefore, will we mourn Hector in my house; on the tenth day we will bury him and there shall be a public feast in his honour; on the eleventh we will build a mound over his ashes, and on the twelfth, if there be need, we will fight.

And Achilles answered, "All, King Priam, shall be as you have said. I will stay our fighting for as long a time as you have named."

As he spoke he laid his hand on the old man's right wrist, in token that he should have no fear; thus then did Priam and his attendant sleep there in the forecourt, full of thought, while Achilles lay in an inner room of the house, with fair Briseis by his side…


Reading Notes/Discussion Questions for Paul Seabright, "The Company of Strangers"

Trust and Panic/Who's in Charge?

  • Why do we need to trust strangers with our money?
  • Why is it unnatural to trust strangers with our money?
  • What kinds of animals engage in elaborate task sharing between genetically-unrelated individuals?
  • What institutions make elaborate task sharing even possible?
  • Roughly, how many people needed to cooperate to make and get his shirt to Paul Seabright?
  • Who is in charge of the supply of bread to London?
  • Which is a more important underpinning of our economy: our power to engage in rational calculation or our disposition to engage in strong reciprocity?

Man and the risks of nature/Our violent past/How have we tamed our violent instincts?

  • What role does risk-sharing play in making elaborate task sharing beneficial?
  • What role does specialization play in making elaborate task sharing beneficial?
  • What role does the collection of knowledge play in making elaborate task sharing beneficial?
  • Why does Seabright believe that humans--or at least human males--have been predisposed by evolution to be killer apes?
  • What fraction does Seabright think our current murder rate compared to what we think was the case 20,000 years ago?
  • Why do we pay taxi drivers? Why don't taxi drivers claim we stiffed them?
  • Can you think of something that happened this week in which your self interest and strong reciprocity reinforced each other?

How did the social emotions evolve?/Money and human relationships/Honor among thieves: hoarding and stealing/Honor among bankers: what caused the financial crisis?

  • Why is it important that we be able to trust and tend to help near-strangers?
  • In what sense is money perhaps our ultimate trust-making institution?
  • Why do we trust our money?
  • How does the government choose what our money will be?
  • In what sense is your idea that the money you deposited is still in the bank an illusion? In what sense is it a reality?
  • What is a bank run? Wherefore deposit insurance?
  • What is a Ponzi scheme?

Professionalism and fulfillment in work and war/The city, from ancient Athens to modern Manhattan/Water: commodity or social institution?

  • Why are planned cities so often boring?
  • What are we committing ourselves to when we treat water as just another economic commodity?

Prices for everything?/Families and firms /Knowledge and symbolism

  • What must be true about a market for what Seabright calls "tunnel vision" to be most effective?
  • In what sense are prices opinion polls?
  • What things should not be for sale?
  • How large should the islands of central planning in our market economy be? *Why do cities tell us that decentralized market exchange is not enough--that we need collective action, and governance?
  • What is a "winner take all" market? Why are there more of them than there used to be?
  • In what senses is intellectual property like and unlike other forms of property?

Exclusion: unemployment, poverty, and illness/States and empires/

  • "Machine operators become unemployed because other people stop trusting finance directors". How? Why?
  • What is an "information island"?
  • What are "public goods"?
  • Why, in what are supposed to be market economies, do North Atlantic governments spend 40% of the money?

Globalization and Political Action

  • What does Seabright think is wrong with the history modern liberalism tells about itself?
  • How fragile is the great experiment?

Econ 210a: Readings and Topics

Spring 2012: U.C. Berkeley:

January 18. The Malthusian Economy (Eichengreen)

  • Thomas Malthus (1798), An Essay on the Principle of Population, Chapters 1-2, pp.1-11, Electronic Scholarly Publishing Project, 1998. http://www.esp.org/books/malthus/population/malthus.pdf

  • E. Anthony Wrigley (1992), “Why Poverty Was Inevitable in Traditional Societies,” in Ernest Gellner, John Hall and I.C. Jarvie (eds.), Transition to Modernity, pp. 71-110. Cambridge: Cambridge University Press. On reserve at Graduate Services.

  • Gregory Clark (2007), A Farewell to Alms: A Brief Economic History of the World, Chapters 2, “The Logic of the Malthusian Economy,” pp. 19-39 and Chapter 3, “Living Standards,” pp. 40-70. Princeton: Princeton University Press. On reserve at Graduate Services. An earlier draft (not preferred) is available at http://tinyurl.com/dl20090112e (chapter 2) and http://tinyurl.com/dl20090112j (chapter 3).

January 25. The Commercial Revolution (DeLong)

February 1. The Agricultural Revolution (DeLong)

February 8. Slavery, Serfdom and Agriculture (DeLong)

  • Evsey Domar (1970), "The Causes of Slavery or Serfdom: A Hypothesis," Journal of Economic History, pp. 18-32. http://www.jstor.org/stable/i310677

  • Stefano Fenoaltea (1984), “Slavery and Supervision in Comparative Perspective: A Model,” Journal of Economic History 44:3, pp. 635-668. http://www.jstor.org/stable/2124146

  • Ralph Austen and Woodruff Smith (1992), "Private Tooth Decay as Public Economic Virtue: The Slave-Sugar Triangle, Consumerism, and European Industrialization," in Joseph Inkori and Stanley Engerman (eds.), The Atlantic Slave Trade: Effects on Economies, Societies, and Peoples in Africa, the Americas, and Europe , pp. 183-203. Durham, NC: Duke University Press. http://www.jstor.org/stable/1171366

  • Stanley Engerman and Kenneth Sokoloff (1994), "Factor Endowments, Institutions and Differential Paths of Development among New World Economies: A View from Economic Historians of the United States," NBER Working Paper no. 10066. http://papers.nber.org/papers/h0066.pdf

February 15. The Industrial Revolution (DeLong)

February 22. American Exceptionalism (Eichengreen)

  • Peter Temin (1966), “Labor Scarcity and the Problem of American Industrial Efficiency in the 1850s,” Journal of Economic History 26, pp. 277-298. http://www.jstor.org/stable/2115648

  • Kenneth Sokoloff (1984), “Was the Transition from the Artisanal Shop to the Non-Mechanized Factory Associated with Gains in Efficiency?” Explorations in Economic History 21, pp. 351-382. http://www.nber.org/papers/w1386

  • Robert Fogel (1964), Railroads and American Economic Growth: Essays in Econometric History, Chapters 1 and 6, pp. 1-6 and 207-249. Baltimore MD: Johns Hopkins University Press. On reserve at Graduate Services.

  • Alfred Chandler (1990), Scale and Scope, Chapter 3, pp. 47-89. Cambridge MA: Harvard University Press. On reserve at Graduate Services.

February 29. The Uneven Spread of Industrialization (DeLong)

March 7. Capital Markets (Eichengreen)

March 14. Labor Markets (Eichengreen)

  • Sanford Jacoby (1984), “The Development of Internal Labor Markets in American Manufacturing Firms,” in Paul Osterman (ed.), Internal Labor Markets, pp. 23-69. Cambridge, MA: MIT Press. On reserve at Graduate Services.

  • Susan Carter and Elizabeth Savoca (1990), “Labor Mobility and Lengthy Jobs in 19th Century America,” Journal of Economic History 50, pp. 1-16. http://www.jstor.org/stable/2123435

  • John James (1994), “Job Tenure in the Gilded Age,” in George Grantham and Mary McKinnon (eds.), Labour Market Evolution, pp. 185-204. London: Routledge. On reserve at Graduate Services.

  • Joshua Rosenbloom (1990), “One Market or Many? Labor Market Integration in the Late-19th Century United States,” Journal of Economic History 50, pp. 87-107. http://www.jstor.org/stable/2123439

  • Joshua Rosenbloom (2002), “Employment Agencies and Labor Exchanges: The Impact of Intermediaries in the Market for Labor,” in Joshua Rosenbloom, Looking for Work, Searching for Workers: American Labor Markets during Industrialization, Chapter 3, pp. 46-79. Cambridge, MA: Cambridge University Press. On reserve at Graduate Services.

March 21. Globalization and Crisis (DeLong)

  • Richard Baldwin and Philippe Martin (1999), “Two Waves of Globalization: Superficial Similarities, Fundamental Differences,” NBER Working Paper no.6904 (January). http://www.nber.org/papers/w6904

  • Douglas Irwin (1998), “Did Late Nineteen Century U.S. Tariffs Promote Infant Industries? Evidence from the Tinplate Industry,” NBER Working Paper no. 6835 (December). http://www.nber.org/papers/w6835

  • Barry Eichengreen and Michael Bordo (2002), “Crises Now and Then: What Lessons from the Last Era of Financial Globalization?” NBER Working Paper no. 8716 (January). http://www.nber.org/papers/w8716

April 4. International Money and Finance (Eichengreen)

  • Arthur Bloomfield (1959), Monetary Policy under the International Gold Standard, pp. 1-62. New York, Federal Reserve Bank of New York. On reserve at Graduate Services.

  • Barry Eichengreen (1992), Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, Chapter 2, pp. 29-66. New York: Oxford University Press. On reserve at Graduate Services.

  • Hugh Rockoff (1984), “Some Evidence on the Real Price of Gold, Its Costs of Production and Commodity Prices,” in Michael Bordo and Anna J. Schwartz (eds.), A Retrospective on the Classical Gold Standard,” pp. 613-650. Chicago: University of Chicago Press. http://ideas.repec.org/h/nbr/nberch/11139.html

  • Albert Fishlow (1985), “Lessons from the Past: Capital Markets During the 19th Century and the Interwar Period,” International Organization 39, pp. 383-439. http://journals.cambridge.org/action/displayFulltext?type=1&pdftype=1&fid=4281908&jid=INO&volumeId=39&issueId=03&aid=4281900

  • Juan-Huitzi Flores (2007), “Lending Booms, Underwriting and Competition: The Baring Crisis Revisited,” Working Paper in Economic History 07/01, Department of Economic History and Institutions, Universidad Carlos III de Madrid (January). http://docubib.uc3m.es/WORKINGPAPERS/WH/wp07-01.pdf

April 11. Origins of the Great Depression (Eichengreen)

  • Milton Friedman and Anna Schwartz (1963), A Monetary History of the United States, 1867-1960, Chapter 13, pp. 676-700. Princeton: Princeton University Press. On reserve at Graduate Services.

  • Christina Romer (1990), "The Great Crash and the Onset of the Great Depression," Quarterly Journal of Economics 104, pp. 719-736. http://www.jstor.org/stable/10.2307/2937892

  • Ben Bernanke (1983), "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review 73:3, pp. 257-276. http://www.jstor.org/stable/1808111

  • Ben Bernanke (1995), “The Macroeconomics of the Great Depression: A Comparative Approach,” Journal of Money, Credit and Banking 27:1, pp. 1-28. http://www.jstor.org/stable/i336266

April 18. Recovery from the Great Depression (Eichengreen, with a possible cameo appearance by C. Romer)

  • Barry Eichengreen (1992), Golden Fetters: The Gold Standard and the Great Depression 1919-1939, Chapter 1, pp. 3-28. New York: Oxford University Press. On reserve at Graduate Services.

  • Christina Romer (1992), “What Ended the Great Depression?” Journal of Economic History 52, pp. 757-784. http://www.jstor.org/stable/2123226

  • Gauti Eggertsson (2008), “Great Expectations and the End of the Great Depression,” American Economic Review 98:4, pp. 1476-1516. http://www.jstor.org/stable/i29730117

  • Harold Cole and Lee Ohanian (2004), “New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis,” Journal of Political Economy 112:4, pp. 779-816. http://www.jstor.org/stable/10.1086/jpe.2004.112.issue-4

April 25. The Great Divergence, the Great Moderation and the Great Recession (DeLong, with a possible cameo appearance by C. Romer)


Econ 210a: Course Policies

Introduction to Economic History

Economics 210A: J. Bradford DeLong and Barry Eichengreen: Spring 2012: University of California, Berkeley

Wednesday 12:00-2:00 p.m. Formerly 608-7 Evans Hall
Economics 210a is required of Ph.D. students in the first year of the graduate program. The course is designed to introduce a selection of themes from the contemporary economic history literature, not to present a narrative account of world economic history. Emphasis is on the uses of economic theory and quantitative methods and on the insights that a knowledge of history can provide to the practicing economist.

Class meetings will consist of a mixture of lecture and discussion. When the course goes well, it is primarily discussion; when the course goes badly, it is primarily lecture. Because discussion will focus on issues raised by the assigned readings, readings should be completed before class.

Your grade will be based 50 percent on one-page memos due at the beginning of each class meeting (other than the first, when you will take the pop quiz instead), and 50 percent on the research paper (where the latter 50 percent will be based both on the synopsis you submit prior to spring break and the paper you submit at the end of instruction). Extra credit will be given for informed, constructive classroom discussion.

Weekly Memos

A memo on each week’s readings is due at the beginning of the class during which those readings are discussed. You will find the memo questions on Professor DeLong’s (http://econ161.berkeley.edu) and Professor Eichengreen’s (http://www.econ.berkeley.edu/~eichengr/index.html) websites. Typically the week’s question will be posted on the Thursday six days before the class meeting when your memo is due. The memo is due at the start of the class meeting; your instructors will not read late memos.

You are to write a memo of no more than two pages (in12-point type) on each question. Two-page memos cannot be exhaustive, nor can they provide definitive answers. But they can explain why a question is important, summarize how one or more articles assigned for the upcoming lecture approach it, and provide a provisional assessment of their conclusions.

Research Paper

Your research paper is due on Wednesday, May 2nd (one week after the last class meeting). Please put one copy in Professor DeLong’s and Professor Eichengreen’s mail boxes in the Economics Department main office in 530 Evans Hall. The office is open 9:00-4:00. Please provide hard copies; papers submitted as email attachments will not be accepted. The paper should not exceed 25 pages. Your instructors will not read late papers.

The writing and submission process requires that you meet two benchmarks. You should discuss your paper topic during office hours with one of your instructors during the first half of the semester and then submit a brief paper prospectus before spring break. That prospectus should motivate the topic (explain why it is important), state your hypothesis, and describe the historical materials that you will use to analyze it. Your paper grade will depend in part on the quality of your prospectus.

The paper should provide new evidence and analysis of a topic in economic history. It should not simply summarize an existing literature. You should use the tools of economics to pose and answer, to the best of your ability, an historical question. The paper must have historical substance. This is not a requirement in applied economics or econometrics that can be satisfied by relabeling the variables in theoretical models taught elsewhere or by mechanically applying new statistical techniques to old data.

Topic: The paper can cover almost any topic in economic history. The only requirement is that the topic must genuinely involve the past. Comparisons of past and current events are fine, but studies of developments solely after, say, 1973 are likely to be problematic.

Evidence: Historical evidence comes in many forms. The key evidence could be a list of goods traded or statements by government officials of what they were trying to accomplish. While economic historians sometimes use econometrics, tables and graphs displaying important variables can be enough to make a compelling argument. Successful Paper Topics from Previous Years Identifying a promising paper topic is arguably the most useful and difficult part of this requirement. Your entire graduate career (indeed your entire career) will center on identifying interesting questions. For this reason we will not give you a list of topics (although we will toss some out in class discussions). Instead, we describe here some topics that have been successful in the past and suggest ways of finding similarly successful topics.

  • The easiest type of paper to write is probably a comment on an existing paper. Such comments often turn out to be as important as the original work. Think about flaws in some paper that you read. Is there selection bias? Has the author left out a crucial variable? One year a student noticed a footnote in a paper that said one observation had been left out of the figure because it was large relative to the others. This same extreme observation was included in the empirical analysis. The student got the data and showed that his results depended crucially on this one observation.
  • Few events have no historical antecedents. If there is a modern development you are interested in, you could look for its historical roots or counterparts. For example, much has been written about the rise of the Internet and the revolution in communication in the 1990s. How do these developments compare to the rise of the telegraph and the telephone? The rise of TV and radio? Did investment and financial markets response similarly?
  • While it is not a good idea to let data availability drive your topic, it is reasonable to let serendipity play a role. Have you come across an unusual source in the library or during your undergraduate years? Is there an interesting question that this source could be used to answer? One year a student came across the catalogs for the 1851 World’s Fair. She had the idea that these descriptions of what each country exhibited could be used as a measure of innovation. She wrote a paper looking at the industrial composition of innovation across countries. (She is now a professor at Stanford.) Another student was looking through newspapers from San Francisco in the 1870s. He found many classified ads that read something like: "Wanted—man to work in store and loan store $1000." This student wondered why companies would tie employment and loans. He wrote a paper investigating whether ads such as these were a sign of credit market imperfections or a way of ensuring worker loyalty and honesty. (He is now an economist at the World Bank.) Both of these papers went on to be published in top journals.
  • You might take some interesting debate in economic history and come up with a new way of testing it. If everyone has been using quantities, for example, consider using prices. An example of this type of paper involves the debate over how business cycles have changed over time. One researcher suggested that instead of fighting over very imperfect estimates of real GDP, one could look at stock prices as an indicator of the volatility of the macroeconomy.
  • Just as one should be on the lookout for interesting sources, one should also be thinking about interesting events. History is full of natural experiments--a weird tax is imposed, a war is fought, a new regulation is imposed. Often such experiments can be used to answer crucial questions in economics--for example, what the changing speed with which liberty ships were built during World War II tells us about the size of learning-by-doing effects.

Readings

Readings are available either on the web or on reserve at Graduate Services http://www.lib.berkeley.edu/doemoff/grad/index.html at 208 Doe Library. Access to readings available through JSTOR and other proprietary sources may require you to log on through a university-recognized computer and/or enter your Calnet ID. There can be high demand for the readings on reserve at peak times, and the library can make available only limited numbers of copies. In past years students have found it useful to purchase some of the books from which material is assigned through their favorite online book seller and to assemble the materials for reproduction at a local copy shop. (Note that readers produced for earlier versions of this course will contain only a subset of this year’s material.)


William Cohan Has Been Waiting for Decades to Take His Shot at Mitt Romney...

And he does. It is very effective:

When Romney ran Bain Capital, his word was not his bond: Yet, there is another version of the Bain way that I experienced personally during my 17 years as a deal-adviser on Wall Street: Seemingly alone among private-equity firms, Romney’s Bain Capital was a master at bait-and-switching…. Other private-equity firms I worked with extensively over the years — Forstmann Little, KKR, TPG and the Carlyle Group, among them — never dared attempt the audacious strategy that Bain partners employed with great alacrity and little shame. Call it the real Bain way…. By bidding high early, Bain would win a coveted spot in the later rounds of the auction, when greater information about the company for sale is shared and the number of competitors is reduced…. In my experience — which I heard echoed often by my colleagues around Wall Street — Bain would seek to be the highest bidder at the end of the formal process in order to be the firm selected to negotiate alone with the seller, putting itself in the exclusive, competition-free zone. Then, when all other competitors had been essentially vanquished and the purchase contract was under negotiation, Bain would suddenly begin finding all sorts of warts, bruises and faults… that near-final Bain bid — the one that got the firm into its exclusive negotiating position — would begin to fall, often significantly….

Needless to say, this does not make for a very happy client (or a happy banker). By the end of my days on Wall Street in 2004, I found the real Bain way so counterproductive that I no longer included Bain Capital on my buyer’s lists of private-equity firms for a company I was selling…. Bain’s behavior also reveals something about the values it brings to bear in a process that requires honor and character to work properly. If a firm’s word is not worth the paper it is printed on, then its reputation for bad behavior will impair its ability to function in an honorable and productive way…. [T]hat was the way the firm’s partners competed when Romney ran the place….

I have no idea how Romney might behave in office. I do believe, however, that when he was running Bain Capital, his word was not his bond.


Liveblogging World War II: January 15, 1942

World War II Day-By-Day:

Malaya. By 10 AM, Japanese cross the repaired Gemencheh Bridge over the Kelamah River and engage Australian troops at Gemas. Japanese advance is held by Australian anti-tank guns, which destroy 6 tanks. In typical fashion, Japanese infantry then work around through the jungle behind the Australians who decide to withdraw across a second river (Gemas River). On the West coast at Muar, Japanese Imperial Guards (4th and 5th Regiments) overrun 4 companies from 45th Indian Brigade on the North side of Muar River (placed as forward defenses while the main bulk of 45th Brigade waits South of the river).


Quote of the Day: January 15, 2012: The Scourge of God

"How big a fiscal hole the loss of North Africa made in the western Empire’s budget is impossible to say, but we can work out the reduction in the armed forces implied by the revenue lost from just Numidia and Mauretania Sitifensis…. [T]otal tax lost from these provinces, because of the new remissions, amounted to 106,200 solidi per annum. A regular comitatensian infantryman cost approximately six solidi per annum, and a cavalry trooper 10. This means that the reduced tax from Numidia and Mauretania alone implied a reduction in army size of about 18,000 infantrymen, or about 10,000 cavalry. This, of course, takes no account of the complete loss of revenue from the much richer provinces of Proconsularis and Byzacena, so that the total of lost revenues from all of North Africa must have implied a decline in military numbers of getting on for 40,000 infantry, or in excess of 20,000 cavalry….

"We don’t have an updated version of the Notitia Dignitatum’s army lists (the distributio numerorum) for the early 440s, but if we did, they would certainly show a further substantial deterioration since 420. Only a massive new threat, therefore, could have made Aetius call off the joint east-west expedition and accept these disastrous consequences. Where had this threat come from? Merobaudes, in the surviving fragments of the panegyric of 443 at least, is allusive rather than explicit. Bellona, goddess of war, comments: ‘I will call forth nations situated far away in the North, and the Phasian stranger will swim in the fearful Tiber. I will jumble peoples together, I will break the treaties of kingdoms, and the noble court will be thrown into confusion by my tempests.’ Then she issues her orders to Enyo: ‘Force savage crowds into war, and let the Tana’is, raging in its unknown regions, bring forth Scythian quivers.’ Arrow-firing hordes from Scythia? In the middle of the fifth century, that could mean only one thing: Huns.

"And the Huns were, indeed, the new problem, the reason why the North African expedition never set sail from Sicily. Just as it was making final preparations to depart, the Huns launched an attack over the River Danube into the territory of the east Roman Balkans. Constantinople’s contingent for Carthage, all taken from the Danube front, had to be recalled immediately, pulling the plug on any attempt to destroy Geiseric. Yet all through the 420s and 430s, as we have seen, the Huns had been a key ally, keeping Aetius in power and enabling him to crush the Burgundians and curb the Visigoths. Behind this change in attitude lay another central character in the story of Rome’s destruction. It’s time to meet Attila the Hun…"

--Peter Heather: The Fall of the Roman Empire : A New History of Rome and the Barbarians


Department of "Huh?!": Partha Dasgupta's "Economics: A Very Short Introduction" Reviews Edition

A correspondent informs me that UCLA's Stephen Bainbridge really, really, really hates a book I have assigned for Econ 1 this semester--Partha Dasgupta's Economics: A Very Short Introduction:

1.0 out of 5 stars: Very disappointing, September 25, 2007: By Stephen M. Bainbridge "www.professorbainbridg... (Los Angeles, CA USA):

If you're looking for a VSI to Econ 101 and 102, skip this book. The treatment of microeconomic basics consists of exactly 14 pages. Macroeconomic theory gets a whopping 4 pages. The rest consists mainly of a political tract on wealth and poverty. It's the first VSI whose title amounts to a misrepresentation.

This is one of these: "one of us is crazy, and it ain't me…" moments.

A VSI can't be something you read instead of reading an Economics course textbook. That's not a task that can be accomplished, or should be attempted. E:AVSI does something very different, and does it superbly:

5.0 out of 5 stars: Why I Assign This Book to Freshmen, January 15, 2012: By James Bradford Delong "brad_delong" (Berkeley, CA USA):

This is a game theorist's short introduction to economics. It focuses on: individual goals, individual opportunities and constraints, individual incentives, strategies, exchange, trust, and equilibrium outcomes.

It is, of course, greatly concerned with wealth and poverty--that is, after all, the point of the discipline of economics: it is an inquiry into nature and causes of the wealth of nations.

You won't find lots of practice figuring out how price and quantity change in response to demand shocks or calculating multipliers. What you will find is the logic and rationale for why figuring out how price and quantity change in response to demand shocks or calculating multipliers is a worthwhile thing to do.

Definitely five stars.

I must say, the logic of Bainbridge escapes me. It's like a one-star restaurant review that says: "I ordered the duck, and it tasted nothing at all like tofu surprise!"


Twitterstorm delong: January 14, 2012

  • delong J. Bradford DeLong Buttonwood on Hedge Fund Returns http://bit.ly/zb6swc 4 hours ago

  • delong J. Bradford DeLong Discussion Questions for Milton Friedman and Rose Director Friedman, "Free to Choose" http://bit.ly/w6W62P 7 hours ago

  • hofrench Howard French The book on Bain. Excellent, informant read. RT @TNYJohnCassidy: One-stop shopping: The Mittster and Bain Capital: http://nyr.kr/yVjd4l 21 hours ago Retweeted by delong

  • DougHenwood Doug Henwood @ @moetkacik a quote that inspired a rare bit of wit in the NYT: "...an opinion now held by a much smaller number of people" 22 hours ago Retweeted by delong

  • cblatts Chris Blattman Oh @Cal. Calling me at 12am for $ for the 4th time, waking my 9m old. Does one have to ask to be on do not call list 4x? #imgivingtostanford 20 hours ago Retweeted by delong

  • delong J. Bradford DeLong Economy Currently Forecast to Grow at a 2.5%/Year Pace Between the End of Last September and the End of This March HTTP://bit.ly/wtaj32 23 hours ago

  • delong J. Bradford DeLong Econ 1: U.C. Berkeley: Spring 2012: T.H. Marshall: Citizenship and Social Class http://bit.ly/wMPSpk 13 Jan

  • delong J. Bradford DeLong Looks Like U.C. Berkeley's bSpace system is crashing this morning--and the semester has not yet begun... http://bit.ly/wkfOAI 13 Jan

  • AdamSerwer AdamSerwer I confess to being a little surprised that desecrating corpses = bad is not an matter of relatively firm bipartisan consensus. 12 Jan Retweeted by delong

  • EconOfContempt EconOfContempt It takes a special kind of hack to turn Cordray's appt into "Obama is trying to steer credit to his political cronies!" http://bit.ly/x8a1GW 12 Jan Retweeted by delong

  • jayrosen_nyu Jay Rosen Maybe this is just my own thing, but: The older I get the bigger denial seems as a factor in what happens in events directly in front of me. 12 Jan Retweeted by delong

  • jbouie Jamelle Bouie I'm pretty sure that Santorum just suggested that Obama's recess appointments were a crime worthy of impeachment. 12 Jan Retweeted by delong »

  • UnlearningEcon Unlearning Economics @ @Noahpinion @delong @bryan_caplan self interest is great, except when it leads you to question the status quo! 3 hours ago

  • Noahpinion Noah Smith @ @delong And who exactly is telling us to be quiet about inequality? Why, @bryan_caplan of course! ;-) http://t.co/kNZW6Mys 3 hours ago

  • kelleher_ Paul Kelleher Exactly the satire I was hoping it'd be. RT @delong: Should Vanity Fair Be a Spelling Vigilante? | Blogs | Vanity Fair http://t.co/IWBmDsdu 17 hours ago

  • pauloppu paul oppu RT @delong Start Making Sense: A critique of Bain Capital http://t.co/Y13xYlWV | Bain capitalism + managerial capitalism = now 20 hours ago

  • afrakt Austin Frakt @delong The last three emails I've sent to you @econ.berkeley.edu have bounced. Odder, they're bouncing from your gmail account. Huh? 13 Jan

  • juanFNDZ Juan Fernandez @ @dangillmor @delong . Mitt Romney’s extreme defense of capitalism - http://t.co/nTMFRgVR 12 Jan


Econ 1: UC Berkeley: Spring 2012: Section Reading Assignments

From: J. Bradford DELONG
To: Econ 1 Students
Subject: Section Reading Assignments for first week of classes

Dasgupta, Economics: A Very Short Introduction: "Preface", "Prologue", "Macroeconomic History", "Trust", and "Communities" sections...

Subsequent reading assignments from Dasgupta, from Friedman and Director Friedman, and from Seabright will be given in section, and may differ from week to week from those in the course wide syllabus.


Buttonwood on Hedge Fund Returns

Buttonwood:

Hedge fund returns: : Michael Edesess of Fair Advisors draws my attention to… Adam Aiken, Christopher Clifford and Jesse Ellis…. The authors look at the so-called alpha of funds (jargon for skill) that voluntarily report their numbers…. When things go wrong for a hedge fund, they tend to stop reporting their numbers to the commercial providers but they still have to report to the SEC. Almost half of all such funds still operate for two years after they stop reporting to the indices. Such funds produce returns that are more than 7 percentage points a year below those that continue to report…


EARLY DRAFT: Principles of Economics Problem Set #1

For this problem set, we will consider a toy economy with eight workers--Lucy, Ricky, Ethel, Fred, Chingachgook, Galla Placidia, Ibn Sina, and An Lushan--that produces two commodities: lattes (large, vanilla-caramel, half-caff, sweetened, made half with skim milk and half with half-and-half), and yoga lessons.

In a shift the eight workers could each teach at most the following number of yoga lessons: An Lushan 8; Chingachgook 8; Ibn Sina 4; Galla Placidia 3; Lucy 1; Ethel 1; Ricky 1; Fred 0.

In a shift the eight workers could prepare at most the following number of lattes: Lucy 20; Chingachgook 20; Ibn Sina 12; Ethel 10, Ricky 10, Fred 5; An Lushan 3; Galla Placidia 2.

Workers can split shifts: spend half their time teaching yoga and teaching half their maximum number of lessons and the other half pulling lattes and making half their maximum number, etc.

All 8 workers want to work a full shift.

  1. What is the largest number of yoga lessons that this economy could teach?

  2. What is the largest number of lattes that this economy could make?

  3. Suppose Joe Djugashvili comes along and--out of the goodness of his heart and his desire to serve the people--volunteers to take on the onerous labor of the head of Production Distribution Coordination and assign people to shifts and tasks. He grabs four workers at random and says “you are pulling lattes”. He tells the rest “you are teaching yoga classes”. What is the expected value of the number of yoga classes taught? What is the expected value of the number of lattes made?

  4. Graph the Production-Possibility Frontier--the PPF--of this economy.

  5. Louie von Mises comes along and says that Joe Djugashvili is a really lousy head of PDC. Is Louie right or wrong? Use the PPF you drew in (4) to motivate your answer.

  6. How many yoga lessons could the economy produce and still produce as many lattes as Joe Djugashvili expected the economy he ran to produce in (4)?

  7. How many lattes could the economy produce and still produce as many yoga lessons as Joe Djugashvili expected the economy he ran to produce in (4)?

  8. Suppose that lattes sell for $4 each. What is the opportunity cost for each of the eight workers of putting them to work teaching an extra yoga lesson?

  9. Suppose that all the students in a yoga lesson collectively pay $15 per lesson. What is the opportunity cost for each of the eight workers of putting them to work pulling an extra latte?

  10. Suppose Joe is still head of PDC. Oskar Lange comes along bearing the results of your calculations from (8) and says that he has a plan by which the economy can produce more than the random-assignment economy of (3). In what order does he tell Joe to pick the people who are going to teach the yoga lessons?

  11. What is the relationship between your answer to (10) and your answer to (4). Is Louie now happy (or at least less unhappy)?

  12. Suppose customers are willing to pay $4 each for lattes and $15 for yoga lessons. Who should Joe assign to teach yoga? To pull lattes? How many lattes will the economy make and how many yoga lessons will it teach?

  13. Suppose customers are willing to pay $4 each for lattes but only $5 for yoga lessons. Who should Joe assign to teach yoga? To pull lattes? How many lattes will the economy make and how many yoga lessons will it teach?

  14. Suppose customers are willing to pay $4 each for lattes and $45 for yoga lessons. Who should Joe assign to teach yoga? To pull lattes? How many lattes will the economy make and how many yoga lessons will it teach?

  15. Which economy--(3), (12), (13), or (14)--is the worst economy? Why?

  16. Which economy--(3), (12), (13), or (14)--is the best economy? Why?

  17. Suppose that the price of lattes is $4 each. Let the price of yoga lessons vary from $0 to $100, and draw the supply curve for yoga lessons.

  18. Suppose that the price of lattes is $2 each. Let the price of yoga lessons vary from $0 to $100, and draw the supply curve for yoga lessons.

  19. Why is your supply curve in (17) different from your supply curve in (18)?

  20. Suppose that the price of yoga lessons is $20 each. Let the price of lattes vary from $0 to $40, and draw the supply curve for lattes.

  21. Suppose that the price of yoga lessons is $10 each. Let the price of lattes vary from $0 to $40, and draw the supply curve for lattes.

  22. Why is your supply curve in (20) different from your supply curve in (21)?

  23. For the supply curve you drew in (18), suppose consumers demand 22 yoga lessons. What is the equilibrium price of yoga lessons?

  24. For the supply curve you drew in (18), suppose consumers demand 12 yoga lessons. What is the equilibrium price of yoga lessons?

  25. For the supply curve you drew in (18), suppose consumers are willing to pay $22 for yoga lessons. What is the equilibrium quantity of yoga lessons?

  26. For the supply curve you drew in (18), suppose consumers are willing to pay $4 for yoga lessons. What is the equilibrium quantity of yoga lessons?


Quote of the Day: January 14, 2012

"The assault was renewed, and it all seemed to be going Demetrius’s way. He planned to bring things to an end with a night attack through the breaches his engines had made. His men penetrated well into the city, but were bloodily repulsed. Demetrius began to prepare another assault, which would surely be the final one—but his father called him off. It was costing them too many men; besides the situation in Greece was rapidly getting worse, and he was needed there. Rhodes had survived. In gratitude to Ptolemy for keeping them supplied with men and food, the Rhodians instituted his cult as a savior god. Demetrius gained a new title too: Poliorcetes, the Besieger. Despite his failure, the title was not ironic. The siege technology he had applied was truly impressive and innovative. As always, warfare accelerated the rate of technological advances—though for the time being only warfare benefited from man’s ingenuity. Archimedes’ screw, accurate water clocks, the rotary olive press, amazing gadgets for entertainment—all the remarkable, peaceful developments of later decades lay in the future…"

--Robin Waterfield, Dividing the Spoils : The War for Alexander the Great's Empire


Discussion Questions for Milton Friedman and Rose Director Friedman, "Free to Choose"

Overview:

There are, I think two important things you should note when you start reading Friedman and Director Friedman's "Free to Choose". The first is that it was a book that was written 30 years ago. The second is that the Friedmans believed that they were fighting against the tide of history. They thought--in 1980--that liberty and prosperity were in retreat worldwide, and had been in retreat for at least fifty years.

This strikes us--this strikes me at least--as profoundly odd. When you ask me what "freedom" means, I tend to go back to Franklin Delano Roosevelt's four freedoms:

  • Freedom of speech
  • Freedom of religion
  • Freedom from want
  • Freedom from fear

When I think of major impingements on freedom, I don't think of the things that the Friedmans point to in 1980 as evidence that freedom is in retreat. I see 1980 as coming at the end of the fastest and most complete 50-yeear expansion of freedom, democracy, and prosperity the world had ever seen.

Try to figure out why the Friedmans do see these things they see as evidence that freedom is "in retreat" or under threat.


Discussion Questions:

Forward

  • Why have Milton Friedman and Rose Director Friedman written this book?
  • What do they hope will happen after people read the book?

Introduction

  • Who do the Friedmans think are the real founders of America?
  • What is the "road to serfdom"? Why do the Friedmans think in 1980 that America is on the road to serfdom?
  • What is the "new class" that the Friedmans see growing? What kind of a threat is it to freedom?

The power of the market

  • What are the large-scale ways that societies can organize production, exchange, and distribution?
  • How should PED be organized if we want to maximize prosperity?
  • How should PED be organized if we want to maximize freedom?
  • How many people need to cooperate to make--efficiently make--a pencil?
  • How do all the people making the pencil know that I want one?
  • Why does Milton Friedman hate Republican presidents Richard Nixon and Gerald Ford so much?
  • Karl Marx said that the most important thing to know about a market economy is that it is a powerful, subtle, and clever mechanism for transferring value from the working class that creates to the rich that consume it. Why would the Friedmans disagree?
  • What do the Friedmans think the government should do?

The tyranny of controls

  • Why aren't tariffs a way to make a country rich?
  • What are the valid arguments that th Friedmans see for tariffs?
  • Apple Computer and Toyota Motors do not allocate goods and services within their organizations with the market system--they use internal corporate central planning. How do the Friedmans explain the fact that large successful corporations are large islands of command-and-control central planning within the market system, and yet are well?
  • Why do the Friedmans think that we "intellectuals"--especially here in Berkeley--like communism?

The anatomy of crisis

  • Why is it very, very important for the Friedmans that they prove that the Great Depression was the result of the failure of a government agency--the Federal Reserve--and not the failure of the market system?
  • What do the Friedmans say is the proper monetary framework for a well-functioning market economy? Would Ron Paul agree?
  • What links do the Friedmans see between the coming of the Great Depression and the triumph of what they call "left-wing economics" after World War II?

Cradle to grave

  • What is Franklin Delano Roosevelt's "New Deal"?
  • What did the Great Depression convince the public of?
  • What did World War II--especially the victories of the Russian Red Army against the Nazis on the eastern front--convince the public of?
  • Why don't the lessons of World War II generalize to peacetime economies?
  • How do the Friedmans think a country's welfare and social insurance systems should be run?
  • What do they think are the biggest things wrong with the U.S.'s welfare and social insurance systems as they stood in 1980?
  • The Friedmans predict in 1980 that the next decade or so will see the admitted failure of and dismantling of social democracy in Britain and Sweden. Were they right? Why?

Created equal

  • What is the difference between "equality of opportunity" and "equality of result"?
  • Which should we care most about?
  • How good is capitalism at generating equality of opportunity?
  • How good is capitalism at generating equality of result?

What's wrong with our schools?

  • What do the Friedmans think is wrong with the public schools?
  • What do the Friedmans think is wrong with the public colleges?
  • How do they want to try to make K-12 education better?
  • How do they want to try to make public colleges better?

Who protects the consumer?

  • Are consumers really helped or hurt by agencies like the Food and Drug Administration?
  • Who really protects the consumer?

Who protects the worker?

  • Are workers really helped or hurt by unions?
  • Who really protects the worker?

The cure for inflation

  • Why is inflation a bad thing?
  • Why is trying too hard to maintain full employment a bad thing?
  • What is the right way to run a market economy to avoid inflation? Would Ron Paul agree?
  • What is the right way to run a market economy to avoid unnecessary high unemployment? Would Ron Paul agree?

The tide is turning

  • What is the "special interest state"?
  • Why do the Friedmans think that Fabian Socialism and New Deal Liberalism are unstable--that countries cannot remain there but will instead slide down the road to serfdom?
  • Why do the Friedmans think that they will in the long run succeed in constructing whawt I would call a libertarian utopia?

Reading Notes on Dasgupta, "Economics: A Very Short Introduction": Epilogue

Discussion Questions:

  • What distinction does Dasgupta draw between problems and challenges?
  • Which--problems or challenges--is better suited for analysis with the tools of economics?
  • What, after finishing this book, do you now think the most important tools of economics are?
  • Adam Smith:
    • "The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were perhaps very much alike, and neither their parents nor playfellows could perceive any remarkable difference. About that age, or soon after, they come to be employed in very different occupations. The difference of talents comes then to be taken notice of, and widens by degrees, till at last the vanity of the philosopher is willing to acknowledge scarce any resemblance. But without the disposition to truck, barter, and exchange, every man must have procured to himself every necessary and conveniency of life which he wanted. All must have had the same duties to perform, and the same work to do, and there could have been no such difference of employment as could alone give occasion to any great difference of talents. As it is this disposition which forms that difference of talents, so remarkable among men of different professions, so it is this same disposition which renders that difference useful. Many tribes of animals acknowledged to be all of the same species derive from nature a much more remarkable distinction of genius, than what, antecedent to custom and education, appears to take place among men. By nature a philosopher is not in genius and disposition half so different from a street porter, as a mastiff is from a greyhound, or a greyhound from a spaniel, or this last from a shepherd's dog. Those different tribes of animals, however, though all of the same species, are of scarce any use to one another. The strength of the mastiff is not, in the least, supported either by the swiftness of the greyhound, or by the sagacity of the spaniel, or by the docility of the shepherd's dog. The effects of those different geniuses and talents, for want of the power or disposition to barter and exchange, cannot be brought into a common stock, and do not in the least contribute to the better accommodation ind conveniency of the species. Each animal is still obliged to support and defend itself, separately and independently, and derives no sort of advantage from that variety of talents with which nature has distinguished its fellows. Among men, on the contrary, the most dissimilar geniuses are of use to one another; the different produces of their respective talents, by the general disposition to truck, barter, and exchange, being brought, as it were, into a common stock, where every man may purchase whatever part of the produce of other men's talents he has occasion for."

Reading Notes on Dasgupta, "Economics: A Very Short Introduction": Social Welfare and Democratic Government

Discussion Questions:

  • What are T.H. Marshall's "three revolutions"?
  • Why is each of them important?
  • How does a government based on T.H. Marshall's "three revolutions" tend to promote a prosperous market economy?
  • Does a prosperous market economy tend to promote T.H. Marshall's "Three Revolutions"--and if it does, does it promote them all?

Reading Notes on Dasgupta, "Economics: A Very Short Introduction": Sustainable Development

Discussion Questions:

  • Why are we destroying our fisheries? Why are we rapidly using up our atmosphere's capacity to absorb carbon dioxide without substantial increases in temperature? Why is such a large chunk of our population potentially short of fresh water?

  • Why have we been able to successfully capture and use 40% of the photosynthesis on earth without already severely disrupting our planet?

  • How have we managed to become so much more numerous and rich since 1800 without rapidly-rising prices of pretty much all natural resources?


Reading Notes on Dasgupta, "Economics: A Very Short Introduction": Households and Firms

Discussion Questions:

  • Where have all the women gone?
  • Why do we think that Africa's population is likely to grow much faster than India's population over the next fifty years?
  • How does Desta's household react to the fact that GEICO does not sell insurance policies in their neighborhood?
  • How does Becky's family react to the fact that they can borrow from Umpqua Bank and invest in the Vanguard Funds--rather than having to deal with the local moneylender?
  • Why does Becky's world have large-scale firms?
  • Why does Becky's world have joint-stock limited-liability companies?
  • Why does Becky's world have tradable financial assets?

Reading Notes on Dasgupta, "Economics: A Very Short Introduction": Science and technology as institutions

Discussion Questions:

  • Given that knowledge is non-rival--if I teach it to you, I don't have any less of it than I did before--what justification could there possibly be for charging people for access to knowledge and its uses?
  • If people weren't allowed to charge others for access to knowledge and its uses, would there be any reason to think that society would be putting a properly-large share of our resources into creating and disseminating knowledge?
  • Why can contests and the rule of priority be good ways to spur the creation and dissemination of knowledge?
  • How well do contests and the rule of priority fit with a private-property market economy?

Reading Notes on Dasgupta, "Economics: A Very Short Introduction": Markets

Discussion Questions:

  • How is having access to an ideal market the same as or different from having an economic network of ties (strong or weak) extending over the entire world?
  • In what sense is what Dasgupta calls an "ideal market" ideal?
  • Why did Friedrich von Hayek deserve his Nobel Prize?
  • How can a central planner nevertheless add value for society, even though Friedrich von Hayek did deserve his Nobel Prize?
  • Why should we worry about each of the four kinds of market failure that Dasgupta sees: distributional, free-riding, market power, and macroeconomic?

Reading Notes on Dasgupta, "Economics: A Very Short Introduction": Communities

  • Suppose that we have the norm (or the strategy) that a failure to share in any case leads to the end of the sharing relationship forever. How much of a large-scale social distribution of labor can be supported by tied engagements of this type?

  • What are the advantages to having an economic network built out of "weak ties"?

  • What are the difficulties in creating and maintaining an economic network built out of "weak ties"?


Reading Notes on Dasgupta, "Economics: A Very Short Introduction": Trust

Discussion Questions:

  • About what fraction of our wealth is the result of--or, perhaps, is enabled by--our collective ability to engage in a very large distribution of labor (rather than requiring that each extended household be close to self-sufficient)?
  • What are the possible ways of creating the "trust" needed for a small-scale--within the village or within the herding band, say--distribution of labor?
  • What are the possible ways of creating the "trust" needed for a large-scale division of labor?
  • What, in the world we see around us, turn out to be the most important ways of creating the "trust" needed to maintain a large-scale division of labor?

The Clive Crook I Used to Now Vanished More-or-Less When George W. Bush Began Running for President...

Now, Henry Farrell tells us, he has returned:

This column by Clive Crook today….

What’s ridiculous is the idea that Republicans take for granted and squirming Democrats tacitly endorse—that making the U.S. more like Europe would be a disaster.… The biggest step the U.S. needed to take in Europe’s direction, and the longest overdue, was health-care reform. The Affordable Care Act is a start.… Obviously, political cultures differ in deep ways, so there will never be One True Capitalism, right for everybody.… Still, Europe’s biggest economies all reflect a social-democratic tradition that puts more emphasis on collective provision and the guiding hand of government than seems natural in the U.S. The American political tradition stresses the rights and responsibilities of individuals; it exalts private enterprise and almost celebrates risk….

Europe’s politicians looked at the U.S. and decided they needed… more American incentives and more American creative destruction.… They said so explicitly… they weren’t embarrassed…. On the other hand, Europe can teach the U.S. a thing or two about social insurance—and not just in health care, the most egregious failure of the American economic model…. Republicans might also ask whether America is living up to the merit-society ideal.… In America… your chances of staying poor are higher than in Europe. The trade-off between economic vitality and economic security cannot be eliminated. But its terms can be improved in the U.S. and Europe, if each pays closer attention to the other.

presents a striking contrast with this one from three years ago.

Where has France gone too far, in the view of an American liberal?…Perhaps some liberals privately long to make the United States over in the image of France, but the great majority, I imagine, are more interested in taking the things they regard as best in the European economic model… and combining those “socially enlightened” policies with the traditional economic virtues of the United States…. Color me skeptical…. Culture—that bundle of traits of self-reliance, self-determination, innovation, and striving for success—underpins the American exception.… [I]t would be an error to assume that the policy transformation that some liberals long for—and which Obama, if his budget is any guide, appears to be aiming for—would leave America’s unusual cultural traits…. Repairs here and improvements there, of course, but transformation? It would be a shame…

Henry writes:

NB that I am noting, not criticizing, this apparent change of heart. People have different attitudes to returning prodigals. Except in the case of continued rank hypocrisy, I’m by and large in favor of killing the fatted calf (or at the least, keeping it nicely plump in the hopeful anticipation that the change will stick).


Econ 1: UC Berkeley: Spring 2012: YOU MUST ATTEND SECTION YOUR FIRST WEEK!!

Section meets two hours per week. If you do not attend your assigned discussion sections in the opening week of class, you will be AUTOMATICALLY removed from the class by the Economics Department administration. You must attend the section to which you are assigned by Telebears.

U.C. Berkeley as an institution is not doing a terribly good job at dealing with its budget crisis while still matching teaching resources with undergraduate demand. At the moment, more people want to take this course than there are seats in Wheeler—and we have no Econ 2 to take the overlap. To maximize efficiency in this sorting process, the Economics Department relies completely on TeleBears for enrollment purposes. To add the course, first check the online schedule of classes (http://schedule.berkeley.edu) to see which sections have space and then access TeleBEARS. Your chances are better if you choose a section that is underenrolled. If you are already on the waiting list but want to change your section choice, simply access TeleBEARS and use the change section option. Do not drop yourself from the course wait list, or you will lose your place “in line.” Simply change sections. See Head GSI Lanwei Yang (lanwei@econ.berkeley.edu) or Econ Undergrad Advisor Ginnie Sadil (gsadil@econ.berkeley.edu) for assistance.


Discussion Questions for Dasgupta, "Economics: A Very Short Introduction": Macroeconomic History

From: Brad DeLong
To: UCB Econ 1 Spring 2012 students
Subject: Discussion Questions for Dasgupta, "Economics: A Very Short Introduction": Macroeconomic History

  • In the long sweep of human history, is Becky very lucky, lucky, unlucky, or very unlucky?
  • In the long sweep of human history, is Desta very lucky, lucky, unlucky, or very unlucky?
  • How much richer is the world today than it was in the long centuries from 5000 BC to 1800?
  • How much richer are the world's rich today than the world's poor today?
  • What would count as an explanation of this divergence across space and time--that is, what kinds of things would count as "causes" and make you happy that you understood what was going on?
  • How many useful "hierarchies of causation" can you imagine here?

Discussion Questions for Dasgupta, "Economics: A Very Short Introduction": Prologue

From: Brad DeLong
To: UCB Econ 1 Spring 2012 students
Subject: Discussion Questions for Dasgupta, "Economics: A Very Short Introduction": Prologue

  • Why does Becky's household live outside of Chicago and earn money by having the father work all day outside of the house doing transactions processing rather than, say, living 100 miles further west and growing corn in DeKalb County?
  • How different would Becky's life be if her father (and mother) were corn-growing farmers in DeKalb County?
  • Why did they choose to become suburban Chicago yuppies?
  • Why doe Desta's household live in rural Ethiopia and grow their own corn rather than, say, living in Addis Ababa and earn money by having the father work all day outside of the house doing transactions processing?
  • How different would Desta's life be if her father were an Addis Ababa lawyer?
  • Why did they choose to become rural Ethiopian subsistence farmers?

Discussion Questions for Dasgupta, "Economics: A Very Short Introduction": Preface

**From: Brad DeLong
To: UCB Econ 1 Spring 2012 students
Subject: Discussion Questions for Dasgupta, "Economics: A Very Short Introduction": Preface

  • How different do you think the lives of Becky and Desta are?
  • How would you go about explaining why the lives of Becky and Desta are different?
  • How would an economist go about explaining why the lives of Becky and Desta are different?
  • What are the costs and benefits of thinking like an economist?
  • What kind of person would start an analysis by asking: "What are the costs and benefits of thinking like an economist?"

Quote of the Day: January 3, 2012

"He won his first public appointment while still underage. As praetor in charge of the games of the goddess Flora, he introduced the spectacular novelty of tightrope–walking elephants. Then he governed the province of Aquitania for nearly a year, and next held a consulship for six months. Curiously enough, Galba succeeded Nero’s father, Gnaeus Domitius, and preceded Salvius..." --Suetonius, *The Twelve Caesars*

Liveblogging World War II: January 13, 1942

Allies promise prosecution of war criminals:

On this day, representatives of nine German-occupied countries meet in London to declare that all those found guilty of war crimes would be punished after the war ended. Among the signatories to the declaration were Polish Gen. Wladyslaw Sikorski and French Gen. Charles de Gaulle. The core of the declaration was the promise of "the punishment, through the channels of organized justice, of those guilty of, or responsible for, these crimes, whether they have ordered them, perpetrated them, or participated in them."

Knowledge of German atrocities occurring in Poland and Russia were reaching both the Allied governments and the exiles from the countries in which the butchering of innocents was taking place. News of Jews, political dissidents, and clergy being systematically murdered, tortured, or transported to labor camps as the Nazi ideology advanced along with Hitler's armed forces increased the resolve and solidarity among the Allies to defeat the Axis.


Econ 1: U.C. Berkeley: Spring 2012: Partha Dasgupta: Prologue to "Economics: A Very Short Introduction"

From: Brad DeLong
To: UCB Econ 1 Spring 2012 students
Subject: The Prologue to Partha Dasgupta's "Economics: A Very Short Introduction"


Prologue

Becky's world

Becky, who is 10 years old, lives with her parents and an older brother Sam in a suburban town in America's Midwest. Becky's father works in a firm specializing in property law. Depending on the firm's profits, his annual income varies somewhat, but is rarely below 145,000 US dollars ($145,000). Becky's parents met at college. For a few years her mother worked in publishing, but when Sam was born she decided to concentrate on raising a family. Now that both Becky and Sam attend school, she does voluntary work in local education. The family live in a two-storey house. It has four bedrooms, two bathrooms upstairs and a toilet downstairs, a large drawing-cum-dining room, a modern kitchen, and a family room in the basement. There is a plot of land at the rear - the backyard - which the family use for leisure activities.

Although their property is partially mortgaged, Becky's parents own stocks and bonds and have a saving account in the local branch of a national bank. Becky's father and his firm jointly contribute to his retirement pension. He also makes monthly payments into a scheme with the bank that will cover college education for Becky and Sam. The family's assets and their lives are insured. Becky's parents often remark that, because federal taxes are high, they have to be careful with money; and they are. Nevertheless, they own two cars; the children attend camp each summer; and the family take a vacation together once camp is over. Becky's parents also remark that her generation will be much more prosperous than theirs. Becky wants to save the environment and insists on biking to school. Her ambition is to become a doctor.

Desta's world

Desta, who is about 10 years old, lives with her parents and five siblings in a village in subtropical, southwest Ethiopia. The family live in a two-room, grass-roofed mud hut. Desta's father grows maize and teff (a staple cereal unique to Ethiopia) on half a hectare of land that the government has awarded him. Desta's older brother helps him to farm the land and care for the household's livestock, which consist of a cow, a goat, and a few chickens. The small quantity of stuff produced is sold so as to raise cash income, but the maize is in large measure consumed by the household as a staple.

Desta's mother works a small plot next to their cottage, growing cabbage, onions, and enset (a year-round root crop that also serves as a staple). In order to supplement their household income, she brews a local drink made from maize. As she is also responsible for cooking, cleaning, and minding the infants, her work day usually lasts 14 hours. Despite the long hours, it wouldn't be possible for her to complete the tasks on her own. (As the ingredients are all raw, cooking alone takes 5 hours or more.) So Desta and her older sister help their mother with household chores and mind their younger siblings. Although a younger brother attends the local school, neither Desta nor her older sister has ever been enrolled there. Her parents can neither read nor write, but they are numerate.

Desta's home has no electricity or running water. Around where they live, sources of water, land for grazing cattle, and the woodlands are communal property. They are shared by people in Desta's village; but the villagers don't allow outsiders to make use of them. Each day Desta's mother and the girls fetch water, collect fuelwood, and pick berries and herbs from the local commons. Desta's mother frequently complains that the time and effort needed to collect their daily needs has increased over the years.

There is no financial institution nearby to offer either credit or insurance. As funerals are expensive occasions, Desta's father long ago joined a community insurance scheme (iddir) to which he contributes monthly. When Desta's father purchased the cow they now own, he used the entire cash he had accumulated and stored at home, but had to supplement that with funds borrowed from kinfolk, with a promise to repay the debt when he had the ability to do so. In turn, when they are in need, his kinfolk come to him for a loan, which he supplies if he is able to. Desta's father says that such patterns of reciprocity he and those close to him practise are part of their culture. He says also that his sons are his main assets, as they are the ones who will look after him and Desta's mother in their old age.

Economic statisticians estimate that, adjusting for differences in the cost of living between Ethiopia and the United States (US), Desta's family income is about $5,500 per year, of which $1,100 are attributable to the products they draw from the local commons. However, as rainfall varies from year to year, Desta's family income fluctuates widely. In bad years, the grain they store at home gets depleted well before the next harvest. Food is then so scarce that they all grow weaker, the younger children especially so. It is only after harvest that they regain their weight and strength. Periodic hunger and illnesses have meant that Desta and her siblings are somewhat stunted. Over the years Desta's parents have lost two children in their infancy, stricken by malaria in one case and diarrhoea in the other. There have also been several miscarriages.

Desta knows that she will be married (in all likelihood to a farmer, like her father) five years from now and will then live on her husband's land in a neighbouring village. She expects her life to be similar to that of her mother.

The economist's agenda

That the lives people are able to construct differ enormously across the globe is a commonplace. In our age of travel, it is even a common sight. That Becky and Desta face widely different futures is also something we have come to expect, perhaps also to accept. Nevertheless, it may not be out of turn to imagine that the girls are intrinsically very similar. They both enjoy playing, eating, and gossiping; they are close to their families; they turn to their mothers when in distress; they like pretty things to wear; and they both have the capacity to be disappointed, get annoyed, be happy.

Their parents are also alike. They are knowledgeable about the ways of their worlds. They also care about their families, finding ingenious ways to meet the recurring problem of producing income and allocating resources among family members - over time and allowing for unexpected contingencies. So, a promising route for exploring the underlying causes behind their vastly different conditions of life would be to begin by observing that the opportunities and obstacles the families face are very different, that in some sense Desta's family are far more restricted in what they are able to be and do than Becky's.

Economics in great measure tries to uncover the processes that influence how people's lives come to be what they are. The discipline also tries to identify ways to influence those very processes so as to improve the prospects of those who are hugely constrained in what they can be and do. The former activity involves finding explanations, while the latter tries to identify policy prescriptions. Economists also make forecasts of what the conditions of economic life are going to be; but if the predictions are to be taken seriously, they have to be built on an understanding of the processes that shape people's lives; which is why the attempt to explain takes precedence over forecasting.

The context in which explanations are sought or in which prescriptions are made could be a household, a village, a district, a country, or even the whole world - the extent to which people or places are aggregated merely reflects the details with which we choose to study the social world. Imagine that we wish to understand the basis on which food is shared among household members in a community. Household income would no doubt be expected to play a role; but we would need to look inside households if we are to discover whether food is allocated on the basis of age, gender, and status. If we find that it is, we should ask why they play a role and what policy prescriptions, if any, commend themselves. In contrast, suppose we want to know whether the world as a whole is wealthier today than it was 50 years ago. As the question is about global averages, we would he justified in ironing out differences within and among households.

Averaging is required over time as well. The purpose of the study and the cost of collecting information influence the choice of the unit of time over which the averaging is done. The population census in India, for example, is conducted every ten years. More frequent censuses would be more costly and wouldn't yield extra information of any great importance. In contrast, if we are to study changes in the volume of home sales across seasons, even annual statistics would miss the point of the inquiry. Monthly statistics on home sales are a favourite compromise between detail and the cost of obtaining detail.

Modern economics, by which I mean the style of economics taught and practised in today's leading universities, likes to start the enquiries from the ground up: from individuals, through the household, village, district, state, country, to the whole world. In various degrees, the millions of individual decisions shape the eventualities people face; as both theory, common sense, and evidence tell us that there are enormous numbers of consequences of what we all do. Some of those consequences have been intended, but many are unintended. There is, however, a feedback, in that those consequences in turn go to shape what people subsequently can do and choose to do. When Becky's family drive their cars or use electricity, or when Desta's family create compost or burn wood for cooking, they add to global carbon emissions. Their contributions are no doubt negligible, but the millions of such tiny contributions sum to a sizeable amount, having consequences that people everywhere are likely to experience in different ways. It can be that the feedbacks are positive, so that the whole contribution is greater than the sum of the parts. Strikingly, unintended consequences can include emergent features, such as market prices, at which the demand for goods more or less equals their supply.

Earlier, I gave a description of Becky's and Desta's lives. Understanding their lives involves a lot more; it requires analysis, which usually calls for further description. To conduct an analysis, we need first of all to identify the material prospects the girls' households face - now and in the future, under uncertain contingencies. Second, we need to uncover the character of their choices and the pathways by which the choices made by millions of households like Becky's and Desta's go to produce the prospects they all face. Third, and relatedly, we need to uncover the pathways by which the families came to inherit their current circumstances.

These amount to a tall, even forbidding, order. Moreover, there is a thought that can haunt us: since everything probably affects everything else, how can we ever make sense of the social world? If we are weighed down by that worry, though, we won't ever make progress. Every discipline that I am familiar with draws caricatures of the world in order to make sense of it. The modern economist does this by building models, which are deliberately stripped down representations of the phenomena out there. When I say 'stripped down', I really mean stripped down. It isn't uncommon among us economists to focus on one or two causal factors, exclude everything else, hoping that this will enable us to understand how just those aspects of reality work and interact. The economist John Maynard Keynes described our subject thus: 'Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world.'

As economists deal with quantifiable objects (calories consumed, hours worked, tonnes of steel produced, miles of cable laid, square kilometres of equatorial forests destroyed), the models are almost always mathematical constructs. They can be stated in words, but mathematics is an enormously efficient way to express the structure of a model; more interestingly, for discovering the implications of a model. Applied mathematicians and physicists have known this for a long time, but it was only in the second half of the 20th century that economists brazenly adopted that research tactic; as have related disciplines, such as ecology. The art of good modelling is to generate a lot of understanding from focusing on a very small number of causal factors. I say `art', because there is no formula for creating a good model. The acid test of a model is whether it discriminates among alternative explanations of a phenomenon. Those that survive empirical tests are accepted - at least for a while - until further evidence comes along that casts doubt on them, in which case economists go back to their drawing board to create better (not necessarily bigger!) models. And so on.

The methodology I have sketched here, all too briefly, enables economists to make a type of prediction that doesn't involve forecasting the future, but instead to make predictions of what the data that haven't yet been collected from the contemporary world will reveal. This is risky business, but if a model is to illuminate, it had better do more than just offer explanations after the events.

Until recently, economists studied economic history in much the same way historians study social and political history. They tried to uncover reasons why events in a particular place unfolded in the way they did, by identifying what they believed to be the key drivers there. The stress was on the uniqueness of the events being studied. A classic research topic in that mould involved asking why the first industrial revolution occurred in the 18th century and why it took place in England. As you can see, the question was based on three presumptions: there was a first industrial revolution; it occurred in the 18th century; and it was based in England. All three premises have been questioned, of course, but there was an enormous amount of work to be done even among those who had arrived at those premises from historical study. In the event, the literature built round those questions is one of the great achievements of economic history.

In recent years economists have added to that a statistical approach to the study of the past. The new approach stays close to economic theory, by laying emphasis on the generality of the processes that shape events. It adopts the view that a theory should uncover those features that are common among economic pathways in different places, at different times. Admittedly, no two economies are the same, but modern economists work on the commonality in the human experience, not so much on its differences. Say, you want to identify the contemporary features in Desta's and Becky's worlds that best explain why the standard of living in the former is so much lower than in the latter. A body of economic models tells you that those features are represented by the variables X, Y, and Z. You look up international statistics on X, Y, and Z from a sample of, perhaps, 149 countries. The figures differ from country to country, but you regard the variables themselves as the explanatory factors common to all the countries in the sample. In other words, you interpret the 149 countries as parallel economies; and you treat features that are unique to each country as idiosyncrasies of that country. Of course, you aren't quite at liberty to model those idiosyncrasies any way you like. Statistical theory - which in the present context is called econometrics - will set limits on the way you are able to model them.

On the basis of the data on the 149 countries in your sample, you can now test whether you should be confident that X, Y, and Z are the factors determining the standard of living. Suppose the tests inform you that you are entitled to be confident. Then further analysis with the data will also enable you to determine how much of the variation in the standard of living in the sample is explained by variations in X in the sample, by variations in Y, and by variations in Z. Those proportions will give you a sense of the relative importance of the factors that determine the standard of living. Suppose 80% of the variation in the standard of living in those 149 countries can be explained by the variation in X in the sample; the remaining 20% by variations in Y and Z. You wouldn't be unjustified to conclude, tentatively, that Xis the prime explanatory variable.

There are enormous problems in applying statistics to economic data. For example, it may be that your economic models, taken together, suggest that there could be as many as, say, 67 factors determining the standard of living (not just X, Y, and Z). However, you have a sample of only 149 countries. Any statistician will now tell you that 149 is too small a number for the task of unravelling the role of 67 factors. And there are other problems besetting the econometrician. But before you abandon statistics and rush back to the narrative style of empirical discourse, ask yourself why anyone should believe one scholar's historical narrative over another's. You may even wonder whether the scholar's literary flair may have influenced your appreciation of her work. Someone now reassures you that even the author of a historical narrative has a model in mind. He tells you that the author's model influenced her choice of the evidence displayed in her work, that she chose as she did only after having sifted through a great deal of evidence. You ask in response how you are to judge whether her conceptual model is better than someone else's. Which brings us back to the problem of testing alternative models of social phenomena. In the next chapter we will discover that historical narratives continue to play an important role in modern economics, but they are put to work in conjunction with model-building and econometric tests.

There are implicit assumptions underlying econometric tests that are hard to evaluate (how the country-specific idiosyncrasies are modelled is only one of them). So, economic statistics are often at best translucent. It isn't uncommon for several competing models to co-exist, each having its own champion. Model-building, data availability, historical narratives, and advances in econometric techniques reinforce one other. As the economist Robert Solow expresses it, `facts ask for explanations, and explanations ask for new facts'.

In this monograph, I first want to give you a feel for the way we economists go about uncovering the economic pathways that shape Becky's and Desta's lives. I shall do that by addressing the three sorts of questions that were identified earlier as our concern. I shall then explain why we need economic policies and how we should go about identifying good ones. We will certainly build models as we go along, but I shall mostly use words to describe them. I shall also refer to empirical findings, from anthropology, demography, ecology, geography, political science, sociology, and of course economics itself. But the lens through which we will study the social world is that of economnics. We will assume a point of view of the circumstances of living that gives prominence to the allocation of scarce resources - among contemporaries and across the generations. My idea is to take you on a tour to see how far we are able to reach an understanding of the social world around us and beyond.


Letter of Introduction

Letter of Introduction

The first short essay requirement: by the start of the first lecture, please write a 250-word essay—a “letter of introduction” to your GSI. Include your name, and outline:

  • the reasons why you are choosing to spend 3% of your scarce college curriculum time taking this course this year,
  • what you hope to learn from this course,
  • what you hope to do in the future as a result of this course, and
  • anything else about yourself that you would like to share with your GSI.

Please include or embed a photo of yourself, as this will help your GSI learn your name.


Econ 1 Spring 2012 U.C. Berkeley: Topics

ECON 1: SPRING 2012: PRELIMINARY OUTLINE

5-unit course

Lectures MW 11-12 Wheeler Auditorium
DeLong office hours: W 3-5 Evans 601

Textbook:

  • Reich, Tyson, DeLong--currently being written...

Auxilliary reading books:

  • Partha Dasgupta: Economics: A Very Short Introduction 

  • Paul Seabright: The Company of Strangers

  • Milton Friedman and Rose Director Friedman: Free to Choose


PART I: MARKETS

W Jan 18: Demand and Supply

  • Reading for Section: Dasgupta, Prologue, Macroeconomic history

M Jan 23: Market Equilibrium

  • Reading for Section: Dasgupta, Trust, Communities
  • Section: How to do problem set 1: demand and supply

W Jan 25: Market Elasticity

  • Reading for Section: Dasgupta, Markets
  • Section: Problem set 1 due

M Jan 30: Price Ceilings/Floors

  • Reading for Section: Dasgupta, Science and technology as institutions
  • Section: How to do problem set 2: elasticities, price ceilings/floors/quantity restrictions

W Feb 1: Markets as Win-Win Institutions

  • Reading for Section: Dasgupta, Housholds and firms
  • Section: Problem Set 2 due

M Feb 6: Governments Create Markets

  • Reading for Section: Dasgupta, Sustainable development, Social well-being and democratic government, Epilogue
  • Section: How to do problem set 3: win-win/consumer and producer surplus

W Feb 8: Governments Correct Markets

  • Reading for Section: Friedman and Friedman, Introduction, The power of the market, The tyranny of controls
  • Section: Problem set 3 due

M Feb 13: Governments Override Markets

  • Section: Go over sample midterm

W Feb 15: MIDTERM 1

  • No section; graded midterms to DeLong for review by Monday Feb 20

PART II: BUSINESSES AND HOUSEHOLDS

W Feb 22: Consumers

  • Reading for Section: Friedman and Friedman, The anatomy of crisis, Cradle to grave

M Feb 27: Businesses

  • Reading for Section: Friedman and Friedman, Created equal, What's wrong with our schools?
  • Section: How to do problem set 4: consumers and households
  • Section: hand back graded exams

W Feb 29: Perfect Competition

  • Reading for Section: Friedman and Friedman, Who protects the consumer? Who protects the worker?
  • Section: Problem set 4 due

M Mar 5: Monopolistic Competition

  • Reading for Section: Friedman and Friedman, The cure for inflation
  • Section: How to do problem set 5: businesses/perfect competition

W Mar 7: Monopoly

  • Reading for Section: Friedman and Friedman, The tide is turning
  • Section: Problem set 5 due

M Mar 12: Oligopoly and Strategy

  • Reading for Section: Seabright, Introduction, Who's in charge?
  • Section: How to do problem set 6: market power, adverse selection, moral hazard

W Mar 14: The Labor Market

  • Reading for Section: Seabright, Part II prologue, Man and the risks of nature
  • Section: Problem set 6 due

M Mar 19: Economic Inequality

  • Reading for Section: Seabright, Our violent past, How did the social emotions evolve?
  • Section: How to do problem set 7: strategy/labor/inequality

PART III: MACROECONOMICS

W Mar 21: What Macroeconomics Is

  • Reading for Section: Seabright, Money and human relationships, Honor among thieves? Honor among bankers?
  • Section: Problem set 7 due

M Apr 2: MIDTERM 2

  • No section; graded exams to DeLong for review by Apr 6

W Apr 4: Aggregate Demand and Aggregate Supply Equilibrium

  • Section: Go over midterms
  • Section: Short essay on Friedman and Friedman due

M Apr 9: Shifting the Aggregate Demand Curve

  • Reading for Section: Seabright, Professionalism and fulfillment, Epilogue to parts I and II
  • Section: How to do problem set 8: aggregate demand and supply
  • Section: Hand back graded exams

W Apr 11: Aggregate Supply, the Phillips Curve, and Inflation

  • Reading for Section: Seabright, Prologue to part III, The city, Water
  • Section: Problem set 8 due

M Apr 16: Long-Run Economic Growth

  • Reading for Section: Seabright, Prices for everything? Families and firms
  • Section: How to do problem set 9: inflation and unemployment, economic growth

W Apr 18: The Government Budget and the Macroeonommy

  • Reading for Section: Seabright, Knowledge and symbols, Exclusion, Epilogue to Part III
  • Section: Problem set 9 due

M Apr 23: The Global Savings Glut, the Housing Bubble, the Financial Crisis, and the Recession

  • Seabright, Prologue to part IV, States and empires, Globalization and political action
  • How to do problem set 10: the government budget

W Apr 25: Policies to Stem the Recession, the Jobless Recovery, the European Financial Crisis

  • Reading for Section: Seabright, How fragile is the great experiment?
  • Section: Problem set 10 due

M Apr 30: REVIEW

  • Section: Short essay on Seabright due

T May 7 3-6PM: FINAL EXAM


Chicago Macro: Will It Ever Stop?

There are a bunch of email requests that I go through Cochrane again, at a somewhat more formal level, especially given continued claims that seem to me to be highly frivolous that it is not stupid at all...

So here goes…

Cochrane:

(B): Let’s think of a “fiscal stimulus” in which the government borrows money and spends it, but with the clear plan that the debt will eventually be repaid with future taxes, not just by printing money.  Can this kind of stimulus work, and if so how?… [I]f money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend…. Every dollar of increased government spending must correspond to one less dollar of private spending.  Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of  “crowding out” is just accounting, and doesn't rest on any perceptions or behavioral assumptions…. [T]he economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.

The model underlying this paragraph is the simple quantity theory of money:

(1) MV = PY

where P is the price level, Y is the level of production, V is the "velocity" of money, and M is the economy's money stock. The hidden assumption in Cochrane's paragraph is the--false--claim that the velocity of money is a technological constant rather than an economic variable. Without that assumption Cochrane's claim that expansionary fiscal policy cannot be effective is not a manner of "just accounting".

(C): Third, people must ignore the fact that the government will raise future taxes to pay back the debt. If you know your taxes will go up in the future…. Now the net effect of fiscal stimulus is exactly zero, except to raise future tax distortions…

The government purchases $100 billion of goods, issues $100 billion of bonds, and raises taxes by $3 billion a year in order to amortize the bonds. The $100 billion of extra government demand this year comes along with a $100 billion reduction in private household wealth, but that does not mean that the net effect of fiscal stimulus is exactly zero. Government purchases go up by $100 billion this year. Private consumption goes down by $3 billion this year. Net fiscal impetus is not $0 but rather $97 billion. Cochrane doesn't understand what the Ricardian Equivalence argument is.

(D): The baseline question is whether the multiplier exceeds zero…. The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is… people and our government, are not doing nearly enough borrowing and spending…. The government must step in force us all to borrow and spend more. This diagnosis is tragically comic once said aloud.

Later on, Cochrane himself flirts with this "we as a country are not doing enough borrowing and spending" diagnosis further down, in what I have labelled (E) and (I). He calls it "logically consistent". It is not clear how that is consistent with his labeling it "tragically comic" here.

(E): The institutions that channel your and my savings into consumer and business borrowing are not working…. New issues of securitized debt have dropped to next to nothing, unless they are guaranteed by the Federal Government.  Savings is going to low-interest Treasuries and guaranteed agency debt, yet consumers and businesses who need credit face a small supply at very high prices…. [Right now] the Treasury and Fed are issuing huge amounts of Government debt, and they are turning around and lending the proceeds to consumers and businesses.  This basic idea makes sense, though there is plenty to worry about in the details…. If the Treasury borrows and the Government uses the proceeds for investment, then the government is in some sense acting as the missing intermediary. The focus on investment spending in the Obama plan reflects some of this thinking, though investment is anathema to the traditional Keynesian insistence that stimulus be channeled to consumption spending…

Cochrane appears to be trying to build up--from scratch, without plans, and on his own--the framework of Knut Wicksell's Interest and Prices. I&P looks for equilibrium in the flow-of-funds through financial markets: the stock of bonds that households want to hold equals the current stock of bonds B plus households' desired savings. The stock of bonds that borrowers want to have outstanding equals the current stock of bonds B plus business investment I plus the government deficit D:

(2) B + S = B + I + D

If these are equal at full employment, then everything is fine. If the left side is greater than the right, we have depression.

This "basic idea makes sense", Cochrane says. Cochrane is correct.

Cochrane then says, fiscal policy can be effective inasmuch as increasing the government deficit D when I is depressed due to the collapse of financial intermediation. This is correct, for expansionary fiscal policy then balances the flow-of-funds through financial markets with "government… in some sense acting as the missing intermediary".

But then, in the last sentence of (E), Cochrane loses the thread. There is nothing in "traditional Keynesian" thinking to say that you ought to boost consumption rather than, say, infrastructure. Nothing at all.

At this point, it is useful to take stock, to step back and consider where Cochrane is.

He has made arguments based on two equations:

(1) MV = PY, the quantity theory of money

(2) B + S = B + I + D, the Wicksellian flow-of-funds through financial markets

Cochrane presents these two equations as contradictory. the first--as Cochrane interprets it--says that fiscal policy cannot be effective as a "just accounting". The second says that fiscal policy can be effective.

Cochrane takes no steps to reconcile this confusion in his argument.

And Cochrane spends the rest of his paper wobbling back and forth between arguments based on (1) and arguments based on (2), grabbing each one when it is convenient, never attempting to reconcile why his conclusions from (2) aren't upset by his arguments from (1), and never attempting to reconcile why his conclusions from (1) aren't upset by his arguments from (2).

The right step to take at this point would be to point out:

  • that the velocity of money V depends on the (short-term safe nominal) interest rate i--that the higher is i the larger will be the velocity of money
  • that the level of savings S depends on production Y
  • that the level of private investment I depends on the the long-term risky real interest rate r
  • that the long-term risky real interest rate r depends on (i) the short-term safe nominal rate i, (ii) the expected inflation rate π, and (iii) the risk spread ρ, itself a product of investor risk tolerance, the riskiness of the market, and the ability of the private financial system to grade, classify, and manage risks.

Had Cochrane done that, he would have simply rederived the IS-LM framework that Hicks (1937) originated and that is in the front of Paul Krugman's, Olivier Blanchard's, Stan Fischer's, and a good many other economists' minds right now.

Then Cochrane could have started thinking coherently about the issues...

But because he does not know Hicks, does not know Wicksell, he does not understand that he is in the middle of rederiving IS-LM from scratch. And so he backs away. (E) is the closest that his paper comes to shedding light on the issues.

Cochrane's next move is to conclude that his largely right (E) is in fact wrong:

(F): However, this is a poor argument, since stimulus “investment” spending is on much different projects than the private sector would have funded. Fiscal stimulus investments make fuel oil, not gasoline.  Moreover, the extra issues of Treasury debt will largely come from the few dollars that are flowing from savings to private investment, just what the “credit crunch” does not need.  To “intermediate,” additional government borrowing would have to come out of consumption. People would have to be attracted to postponing a trillion dollars of consumption by slightly higher treasury yields.

This appears to be a return to:

(1) MV = PY

with its false ancillary assumption that the velocity of money is not an economic variable but a technological constant. That, he says, makes (E)'s--correct--argument based on (2) invalid.

If anybody has any way to interpret Cochrane's (F) that does not see at as an Econ 1-level mistake, I would be anxious to hear from them.

Cochrane's next move is to modify (1). Back at the start he was very firm that expansionary fiscal policy simply could not work as a simple matter of accounting: claims that fiscal policy could work were on the order of 2+2=5.

Now he muses that perhaps he was wrong--that fiscal policy is not ineffective as a matter of metaphysical necessity. What, he asks himself, if the velocity of money is not a technological constant at all?:  

(G): A monetary argument for fiscal stimulus, logically consistent but unpersuasive… [S]uppose the Government could borrow money from people or banks who are pathologically sitting on cash, but are willing to take Treasury debt instead.  Suppose the government could direct that money to people who are willing to keep spending it on consumption or lend it to companies who will spend it on investment goods. Then overall demand for goods and services could increase, as overall demand for money decreases.  This is the argument for fiscal stimulus because “the banks are sitting on reserves and won’t lend them out” or “liquidity trap.”

This (G) is completely correct. That the velocity of money is an economic variable is how you can have an economy in which both (1) and (2) hold.

But then Cochrane says that (G) is wrong:

(I) This is not a convincing analysis of the present situation…. Bank excess reserves… have increased from $2 billion in August [2008] to $847 billion in January [2009]. However, our Federal Reserve can create as much more money as anyone might desire and more…. If money demand-induced deflation is the problem, money supply is the answer…. [But t]his monetary story also does not ring true…. People are trying to shift their portfolios out of stocks and especially out of anything with a whiff of credit risk, and into cash or treasuries…. [T]he private sector has become much more averse to holding risks…. The bottom line, then, is that people want to hold more of both money and government debt – and don’t particularly care which. Trying to get it, we are trying to buy less of both consumption and investment goods…. [M]onetary policy is impotent…. The Fed can arbitrarily exchange Treasury debt for money…. But nobody cares if it does so, since the “flight to liquidity” is equally towards all forms of Government debt…. Looking at it this way gives us a logical reason that fiscal stimulus might work. It leaves the private sector with a trillion more dollars of government debt in their pockets. But the Fed’s many facilities also issue government debt and money, which helps to satisfy the demand for government debt…

Note that nowhere in (I) is there any argument that the (correct) (G) is wrong: there is just an assertion.

Note also that here Cochrane says that it is not the case that the velocity of money is a technological constant. He says, in fact, that it is indeterminate--that it falls or rises one for one with open market operation-induced rises or falls in the money stock. If the Federal Reserve buys $100 billion of 30-Year Treasury bonds for cash, Cochrane says, this has no effect on spending or the economy because "people want to hold more of both money and government debt – and don’t particularly care which".

And note that if you take this paragraph (I) to be Cochrane's final answer--his main argument--that (B), (F), and (L) below are complete tripe.

Note, last, the end of (I), which says that fiscal stimulus "might work" because as the government issues bonds to finance infrastructure and education spending it creates the safe assets that investors want to hold in their portfolios. But, Cochrane says, "the Fed’s many facilities also issue government debt and money, which helps to satisfy the demand for government debt".

How does this work?

Suppose the Federal Reserve embarks on quantitative easing, issuing $500B of reserve deposits and using them to buy up $500B of Fannie Mae-guaranteed mortgage-backed securities. There are now an extra $500B of safe government liabilities out there--government debt plus Federal Reserve deposits--for those who want to hold safe assets in their portfolios to hold. But there also are $500B less of Fannie Mae-guaranteed mortgage-backed securities for those who want to hold safe assets to hold. Maybe government liabilities are 11.1% safer than GSE-guaranteed MBS--that those who had been holding the $500B in GSE-guaranteed MBS are happy putting $50 billion of that in equities and only soak up $450B of the additional reserve deposits in their portfolios. But if they do, all that this $500B episode of quantitative easing has done is create a net $50B of safe assets for those who had been uncomfortable with the risk level of their portfolios to buy.

By contrast, a $500B fiscal expansion would have seen the government put unemployed people to work to buy $500B of useful stuff--bridges, road repairs, human capital for 12-year olds, research in to global warming, vaccinations, etc.--and have created a net $500B of safe assets for those who had been uncomfortable with the risk level of their portfolios to buy.

At this point, I would expect to see Cochrane make an argument to justify his claim that quantitative easing--Federal Reserve facilities--are a better way to boost the supply of safe assets than having the government issue debt and buy stuff.

But Cochrane doesn't make such an argument. He, instead, writes:

{I'): I would be happiest if the Fed and Treasury5 satisfied the large demand for government debt and money by transparently buying or lending against high quality corporate and securitized debt, at market prices. I am happiest of all when they buy newly-issued commercial paper and securitized debt, acting as the missing intermediaries to help address the “credit crunch,” as well as supplying government debt. These actions are easiest to unwind. When investors get sick of holding so much money or government debt, the Government can, in effect, take back in government debt in exchange for this private debt, and probably make a good profit.

This seems to me to be a declaration that the Fed and the Treasury need to boost the supply of safe assets by not boosting the supply of safe assets.

And then he goes into a rant. Why? Because the Fed and the Treasury have been using their facilities to actually take risk onto the government's balance sheet, and thus to actually boost the net supply of safe assets:

(J): [T]he Fed and Treasury’s current actions are not so clear. The Fed and Treasury are essentially running the world’s largest hedge fund: short treasuries and long a lot of obscure credit risk…. When it’s time to unwind, will these assets be worth anything?… “Troubled asset” purchases from banks at above-market values can make those banks look better, but these are simple subsidies to banks shareholders and debt holders at the expense of future taxpayers or inflation. The government is also guaranteeing trillions of dollars of credit…. If the government has to make good on any of these guarantees, there will be even less available to unwind all our new credit…. The Government’s borrowing and taxing ability is limited. When the crisis fades, we will need fiscal resources to unwind a massive increase in government debt…. If the Fed’s kitty and the Treasury’s taxing power or spending-reduction ability are gone, then we are set up for inflation; essentially a default on the debt…. Some say, “we’re in a crisis, we can’t worry about the long run or inflation.” However, the inflation can happen much sooner than you might expect, and it can happen long before the economy recovers. We are in a credit crisis,  as well as experiencing a fall in aggregate demand. Even with perfectly managed aggregate demand, output will be lower while we rebuild credit markets, and there will be unemployment as people move from building houses to other jobs. We can easily have stagflation of monstrous proportions, and it can happen very soon after stimulus spending gets going…

There are, I think, two things to note here:

First, it seemed to me at the time--three years ago--that this argument was incoherent. If the point is for the Fed and the Treasury to use their facilities to boost the net supply of safe assets, then they have to use their facilities to boost the supply of safe assets. They have to issue safe liabilities and use them to buy unsafe things. For Cochrane to say that they need to increase the net supply of safe assets and then to complain when they do so because they have bought unsafe things with their money seems to me a sign that he has lost the thread of his own argument.

Second, now--three years later--it is worth pointing out how wrong all of Cochrane's empirical claims in (J) are.

That should provoke a major rethink.

But, at least to my knowledge, there has been no rethinking of Cochrane's High Trimphalist mode of the winter of 2009.

And this High Triumphalist mode is something to see:

(K) This is not fancy economics. Most of my arguments come from simply asking where the money is going to come from, simple arithmetic. Why are so many economists said to support fiscal stimulus? Am I some sort of radical? No. In fact economics, as written in professional journals, taught to graduate students and summarized in their textbooks, abandoned fiscal stimulus long ago. Keynesians gave up by the 1970s…. The equilibrium tradition which took over professional academic economics in the mid-1970s has even less room for fiscal stimulus…. [M]acroeconomics was revolutionized starting in the 1950s, by the realization that what people think about the future is crucial to understanding how policies work today…. [T]he classic Keynesian analysis of fiscal stimulus falls apart. In textbooks and graduate curriculums across the country, stimulus is presented at best as quaint history of thought with no coherent defense that one should believe it in the context of modern economics.  (For example, David Romer’s classic graduate text Advanced Macroeconomics.) At worst, it is presented as a classic fallacy. (My view of the treatment in Tom Sargent’s Dynamic Macroeconomic Theory  and Sargent and Ljungqvist’s Recursive Macroeconomic Theory.)… Keynesian economics was a failure in practice…. Keynes left Britain 30 years of miserable growth…. Fiscal stimulus advocates are hanging on to a last little timber from a sunken boat of ideas, ideas that everyone including they abandoned, and from hard experience…. Empirical work is hard…. If you bleed with leaches when you have a cold, empirical work might say that the leaches cured you…. [N]othing in recent empirical work on US data has revised a gloomy opinion of fiscal stimulus…. The Administration's estimates for the effect of a stimulus plan cite no new evidence and no theory at all for their large multipliers…. [T]hey state that every dollar of government spending generates 1.57 dollars of output always! If you've got magic, why not 2 trillion dollars? Why not 10 trillion dollars? Why not 100 trillion, and we can all have private jets?… "Well," I'm often asked, "we have to do something. Do you have a better idea?" This is an amazingly illogical question. If the patient has a heart attack, and the doctor wants to amputate his leg, it's perfectly fine to say "I know amputating his leg is not going to do any good," even if you don't have a five-step plan to cure heart attacks…

I don't think that (K) needs any comment at all.

Then comes the conclusion:  

(L): Fiscal stimulus can be great politics…. The beneficiaries of government largesse know who wrote them a check…. My analysis is macroeconomic…. If it’s a good idea to build roads, then build roads. (But keep in mind the many roads to nowhere, and ask why fixing Chicago's potholes must come from Arizona's taxes funneled through Washington DC.) If it’s a good idea for the government to subsidize green technology investment, then do it…. The government should borrow to finance worthy projects, whose rate of return is greater than projects the private sector would undertake with the same money, spreading the taxes that pay for them over many years, after making sure its existing spending meets the same cost-benefit tradeoff. Just don’t call it “stimulus,” don’t claim it will solve our current credit problems, “create jobs” on net, or do anything to help the economy in the short run, and don't insist that we have to pass this monstrous bill in a day without thinking about it.

A return to the quantity theory of money (1) with a technologically-determined velocity--which we thought he had abandoned in (I).