#politicaleconomy Feed

The Pattern of Normal Politics, 1870-1914: An Outtake from "Slouching Towards Utopia?: An Economic History of the Long 20th Century, 1870-2016"

Il Quarto Stato

Left-wing avowedly socialist—parties in pre-World War I Europe wanted, for the present, only weak tea. The Socialist Party of Germany’s Erfurt and Gotha programs seek things like: universal male and female suffrage; the secret ballot, proportional representation and an end to gerrymandering; annual government budgets; elected local administrators and judges; the right to bear arms; free public schools and colleges; free legal assistance; abolition of the death penalty; free medical care including midwifery; public burial insurance; progressive income and property taxes; a progressive inheritance tax; a 36-hour minimum weekend; an occupational safety and health administration; equal status for domestic and agricultural workers; and a national takeover of unemployment and disability insurance “with decisive participation by the workers in its administration”. Rather white bread, no? Even their declared intention that:

the German Social Democratic Party… fights… every manner of exploitation and oppression, whether directed against a class, party, sex, or race...

would raise few eyebrows today, in western Europe at least.

But there was also:

  • “By every lawful means to bring about a free state and a socialistic society, to effect the destruction of the iron law of wages by doing away with the system of wage labor…”
  • “The transformation of the capitalist private ownership of the means of production—land and soil, pits and mines, raw materials, tools, machines, means of transportation—into social property and the transformation of the production of goods into socialist production carried on by and for society…”
  • “This… emancipation… [is] of the entire human race…. But it can only be the work of the working class, because all other classes… have as their common goal the preservation of the foundations of contemporary society…”

There was a tension here.

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Lecture: The Rise of Socialism, -350 to 1917

Let us talk about the rise of socialism, as background to the rise of really existing socialism—the system that lived behind what Winston Churchill called the Iron Curtain from 1917-1991, that shook the world, and that in the end turned out to be far, far, far from the brightest light on the tree of humanity’s good ideas.

Let us very briefly race through history—moral, intellectual, political, and social—from the year -350 to the year 1917, when Lenin and his Bolshevik Communist Party staged their coup in Russia.

There was a profound shift from the belief in “divine right” and “natural order” as the fundamental grounding for an unequal society to enlightenment values—that human institutions should be rationally designed on the basis of a rational understanding of human psychology in order to attain the greatest good of the greatest number, and thus that inequality is not given by the gods or by the requirements of nature, but rather is a thing to be allowed to the extent that it incentivizes cooperation and industry and thus enriches us all.

Back in the century of the -300s, Aristotle had taken it for granted that a good society was only possible if the society allowed for philosophy. And philosophy was only possible if you had a leisured upper class. And a leisured upper class was possible only with large scale-unfree labor—serfdom, or its harsher cousin slavery. Thus it was and thus it would always, be unless and until humans obtained the fantasy technologies of the mythical Golden Age...

https://www.icloud.com/keynote/0tIKCGGDU9duGkZ7XQ_5GkPdg


https://github.com/braddelong/public-files/blob/master/lecture-rise-of-socialism--350-1917-text.pdf

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Lecture Notes: The Development of Underdevelopment and W. Arthur Lewis

3086 words https://github.com/braddelong/public-files/blob/master/lecture-inequality-text.pdf

The large populations and low levels of material wealth and agricultural productivity in China and India checked the growth of wages. Workers could be cheaply imported and employed at wages not that far above the physical subsistence level. Low wage costs meant that commodities produced in countries open to Asian immigration were relatively cheap. And competition from the Malaysian rubber plantations checked growth and even pushed down wages of the Brazilian rubber tappers as well. The late nineteenth century saw living standards and wage rates become and remain relatively low (although higher than in China and India) throughout the regions that were to come to be called the third world. And as wages in economies that were to become the global periphery were checked, the prospects for having a rich-enough middle class to provide demand for a strong domestic industrial sector ebbed rapidly.

As a result, the chain of causation went thus:

  • The openness of some places where tropical goods could be produced to migration from China and India pushed down their prices in world markets.
  • Low prices in the world markets meant low wages everywhere tropical goods were produced.
  • Low wages meant no prosperous middle-class anywhere tropical goods were produced.
  • No prosperous middle-class meant no mass domestic demand for manufactures.
  • No domestic demand for manufactures meant no chance of starting industrialization.
  • No chance of starting industrialization meant no building a community of engineering practice.
  • No community of engineering practice meant no taking the next step and advancing in industrialization.
  • No advancing in industrialization meant no walking onto the escalator to modernity and prosperity.

That, in a nutshell, is the story of the relative underdevelopment of the global south. It was not that globalization left the global south alone in the years before World War I. It was that globalization put it on a road that made its industrialization more difficult, even though the openness of world markets made it more prosperous in that pre-World war I half century seen rightly as a global El Dorado.


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Dealing with Coronavirus: The Hunker Down and the Jubilee

Coronavirus

The problem of dealing with the economic policy consequences of the current coronavirus public health emergency is best analyzed in two pieces: the Jubilee, and the Hunker Down.

 

Bringing the Jubilee

What is the Jubilee? It happens after we have managed to get the virus under control, so that normal public health measures of (1) testing a random panel sample periodically to understand where we are, (2) testing the symptomatic, (3) tracing and testing their contacts, and (4) hospitalizing patients with serious illnesses can manage the situation as best as it can be managed.

Note: I say “managed” rather than eliminated. The extent of asymptomatic transmission means that this disease will not be eliminated. It will become endemic. The task is to delay until our virologists can work their miracles. The task is to delay so that the medical care system is not overwhelmed so that we can keep mortality from the disease at 1% rather than 5% or more.

Once the virus is under control—by June 1, say—we will want every job that existed on February 1 and every business that was running on February 1 to resume. We will want no business to have received a “bankruptcy shut down“ from the market system. We will want no worker to have a received a “you are not wanted“ signal from the market economy.

There is a side constraint on the Jubilee: whatever policies we adopt need to be crafted to minimize unjust enrichment. Perhaps the second biggest economic policy mistake committed by the Obama administration was that its policies to deal with the great recession were both inadequate out of the fear of being perceived to contribute to unjust enrichment, and yet somehow also managed to generate a huge amount of unjust enrichment for the financial sector.

 

Hunkering Down

Then there is the question of how to manage the Hunker Down. In the Hunker Down, social distancing needs to reach a level that reduces the caseload to what the medical system can currently handle, but should not be pushed far beyond that point. Beyond that point, the benefits of generating a situation in which our ICUs and emergency rooms have excess capacity are low and the costs are high. In the Hunker Down, as many people as possible need to be given financial incentives to move into new productive occupations that provide useful goods and services without disrupting social distance. And in the hunker down, everyone needs to receive the income flow they need to pay their bills.

Managing the Hunker Down and bringing the Jubilee are two separate problems that need to be designed and implemented separately. We need to think about both. We need to keep worries about bringing the Jubilee from damaging our ability to undertake the Hunker Down. We need to keep inplementing the Hunker Down from impairing our power to bring the Jubilee.

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Lecture Notes: Inequality

14487 words https://github.com/braddelong/public-files/blob/master/lecture-inequality-text.pdf

Philosophers, of course, if there are any in the audience here, will have winced by now. Perhaps they will have done more than winced—although I did not see any philosophers rise and run, screaming, from the room.

I have drawn strong conclusions about how high and important a priority reducing inequality should be for making a good society by being a bad philosopher. Philosophers would presumably say that I should first be a good philosopher. They would say that only after having reached good philosophical conclusions should I then use those conclusions as a springboard to derive “oughts” for political economy.

The problem, of course, is that there is no agreement on what the good philosophical conclusions are.

I maintain that my bad philosophy is a very useful middle ground. I draw conclusions for society from it. As you decide on what your view of good philosophy is, you move from my bad philosophy to yours, and that movement will carry with it a move of your political economy conclusions from the baseline I have established to those that you will think best. You will start with my conclusions, and adjust them in light of the difference between my bad and your good moral philosophy. My bad philosophy thus provides you with a convenient basecamp from which you—with your good philosophy—can begin your climb of the mountain of truth...

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1919: Inevitability and Chance: A Teaser for "Slouching Towards Utopia?: An Economic History of the Long Twentieth Century"

stacks and stacks of books

From 1870-1914 we can see global economic history as by-and-large following a logic that was if not inevitable at least probable, or explicable after the fact. Luck and probability gave humanity an opening around 1870 in the form of a quintuple breakthrough: the ideology and policy of an open world, the transportation breakthrough, the communications breakthrough, and—most important the coming of the research laboratory plus the large corporation to to more than double the pace of invention and greatly speed the deployment of new technologies. Thereafter to 1914 the economic logic rolled forward: the idea of invention, the specialization of inventors, the deployment of technology in corporations trade, the international division of labor, and global growth (but also the creation of a low-wage periphery, and the concentration of industrialization of wealth in what is still the global north); the beginnings of the demographic transition that curbed the tendency for technological progress to be nearly entirely eaten up by greater numbers; the shift of work from farm to factory; and the coming of sufficient (if ill-distributed) prosperity. These all raised the possibility that someday, not that far away, humanity, in the rich economies of the global north at least, might attain something that previous eras would have judged to be a genuine utopia.

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Shelton the Charlatan: Project Syndicate

In 1994 Milton Friedman wrote about Judy Shelton: "In a recent Wall Street Journal op-ed piece (July 15)... Judy Shelton started her concluding paragraph: “Until the U.S. begins standing up once more for stable exchange rates as the starting point for free trade...” It would be hard to pack more error into so few words.... A system of pegged exchange rates, such as the original IMF system or the European Monetary System, is an enemy to free trade. It is no accident that the 1992 collapse of the EMS coincided with the agreement to remove controls on the movement of capital..." https://miltonfriedman.hoover.org/friedman_images/Collections/2016c21/NR_09_12_1994.pdf. To turn monetary policy away from internal balance toward preventing exchange rate movements that market fundamentals wanted to see occur was, in Friedman's view, the road toward disaster. It was simply wrong. And it could be held together only if economies moved from free trade back toward managed trade—and so beggared not just their neighbors but themselves.

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Wealth Tax: Project Syndicate

Larry Summers hates this, and, given that I lose three of four arguments I have with him, that is a sign that I may well be wrong here. Maybe it is that I spend too much time back in the eighteenth century, and do not understand modern public finance. Maybe it is just that we upper middle class urban Californians pay huge wealth taxes, and so don't see why others think it is a big deal. But it seemed and seems to me that whether one taxes wealth, income, or consumption in order to try to minimize the utility cost of taxation by placing burdens on those with a very low marginal utility of wealth is overwhelmingly a question of administrative practicality: how to identify those with a low marginal utility of wealth:

Isn't a Wealth Tax Common Sense? https://www.project-syndicate.org/commentary/wealth-tax-common-sense-by-j-bradford-delong-2020-01: I was not surprised when Gabriel Zucman and Emmanuel Saez https://www.brookings.edu/wp-content/uploads/2019/09/Saez-Zucman_conference-draft.pdf in offices down the hall and Thomas Piketty over in Paris began proposing, and Democratic presidential candidates began endorsing https://www.vox.com/policy-and-politics/2019/1/24/18196275/elizabeth-warren-wealth-tax https://www.vox.com/policy-and-politics/2019/9/24/20880941/bernie-sanders-wealth-tax-warren-2020, the idea of a “wealth tax“. What did surprise me was what seemed and still seems to be a surprising amount of unexpected pushback—pushback from people I had always thought to be on the side of a more-progressive rationalization of the tax system.

Back up: When I learned public finance, I was taught that there were three principles of taxation, all spring from Jean-Baptiste Colbert‘s observation that the point was to extract the feathers from the goose with the least amount of hissing. That meant, first, always broadening the tax base so that you could hit your revenue target with the lowest possible and hence the least annoying tax rates. That meant, second, imposing taxes on items for which demand was inelastic, so that the tech system did as little as possible destructive distortion to the pattern of economic activity. That meant, third, taxing those for whom the utility cost of their tax payments was least—that is, taxing the rich. And what is the broadest possible tax base on which to tax the wealthy? It is their wealth, of course. And for what is the demand of the wealthy least elastic—what are they least willing to sacrifice to try to reduce their tax burden? Their wealth, of course.

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Friedrich Engels (1884): The Relative Autonomy of the State: Weekend Reading

Weekend Reading: Friedrich Engels (1884): The Relative Autonomy of the State https://www.marxists.org/archive/marx/works/download/pdf/origin_family.pdf: 'The state... is normally the state of the most powerful, economically ruling class, which by its means becomes also the politically ruling class, and so acquires new means of holding down and exploiting the oppressed.... The ancient state was, above all, the state of the slave-owners for holding down the slaves, just as the feudal state was the organ of the nobility for holding down the peasant serfs and bondsmen, and the modern representative state is the instrument for exploiting wage-labor by capital. Exceptional periods, however, occur when the warring classes are so nearly equal in forces that the state power, as apparent mediator, acquires for the moment a certain independence in relation to both. This applies to the absolute monarchy of the seventeenth and eighteenth centuries, which balances the nobility and the bourgeoisie against one another...

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Note to Self: MOAR political economy readings, 1920-1950


#history #notetoself #politicaleconomy #2020-02-22

Scheduled for Squawk Box: January 2, 2020 6:50 AM EST: Talking Points

Squawk-box

From: xxxx@nbcuni.com
Subject: Your Squawk Box segment this Thursday, January 2: Please get to the studio at UC Berkley by 6:40am est
Body: The anchors will be Joe and Becky. You’ll share the segment with Shermichael Singleton, political consultant, contributor at The Hill. The discussion will be about "running against the Trump economy". Trump has had the best 3 year performance out of every president since Reagan, since being elected. How does one run against this? Who has the potential to compete? Can Trump keep it up, how? Please send thoughts and talking points.

  • Jump in the S&P over the past eight years from 1300 to 2600 3200 [1]

    • A 1.5x 1.8x in the valuation ratio
    • A 1.16x due to inflation
    • A 1.15x due to an increase in the fundamental earning power underpinning each share of stock
      • All of that is due to buybacks. None of that is due to greater business earning power
      • Thus the optimism with respect to the valuation ratio—even given limited opportunities to earn money elsewhere—somewhat puzzles me
      • Plus there is the joker in the deck: will the wage share remain depressed indefinitely?
      • Usually I'm a "150% of your net worth in stocks" guy
      • Now we are moving money out, and I'm a "50% of your net worth in stocks" guy
  • The talk I hear about the "strong Trump economy" makes no allowance for the difficulty of the dive he has faced relative to that that other presidents face...

    • Trump was handed very good cards
    • Taking account of the difficulty of the dive, I think you have to say that:
      • The Clinton economy turned out much better than expected (due to good policy)
      • The Obama economy turned out better than expected (due to good but inadequate policy)
      • The Trump economy has turned out as expected—but with extra damage done by the trade war, which has on net hurt manufacturing and agriculture, and with no investment boom
      • The Reagan economy turned out somewhat worse than expected—policy incoherence between the tax cutter, the defense spenders, and Paul Volcker really stomped the entire economy over 1981-3 and the Midwest over 1981-1987.
      • The George H.W. Bush economy turned out worse than expected—they took their eye off the ball on the S&L crisis
      • The George W. Bush administration really _ _ the pooch...
  • It looks like we have dodged a recession...

    • We have had a manufacturing recession, but domestic manufacturing is no longer an important enough sector for a manufacturing recession to bring down the economy as a whole...
    • The Trump economy is very weak in productivity growth and the wage share, and those are very worrisome for long-term trends.
  • The most striking aspect of the political situation is the strong divergence between Trump's good unemployment and inflation numbers and his lousy approval numbers

    • Yet perhaps what should surprise me the most is that his approval numbers are so high
    • Policy incoherence while you insult people on Twitter would not have seemed to me to be a governing strategy that many Americans would approve of...
    • It's not just not doing your job...
    • It's undignified
    • Yet he has his fans—and very few of them are beneficiaries of his tax cut, and there are no beneficiaries of his trade war or his foreign-born sliming...
      • Perhaps all his fans think they will benefit from his tax cut?
      • Recall John Steinbeck: "We didn’t have any self-admitted proletarians. Everyone was a temporarily embarrassed capitalist..."
      • A new paper out by Alberto Alesina and Stephanie Stantcheva on how Americans think there is much more and Europeans think there is substantially less upward mobility than in fact there is—and how in real life there is more in Europe than in America

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Neoliberalism: Are We Sure That's the Right Word?: Talking to Noah Smith

Noah Smith and Bradford DeLong: Neoliberalism: Are We Sure That's the Right Word? http://www.pairagraph.com/dialogue/6420f501123b4520892978e93565cff9/1: Noah Smith: 'So we're supposed to be discussing neoliberalism, are we? Well, I was elected "Chief Neoliberal Shill of 2018" in a rigged joke online poll, so I spent a year looking around for reasons to think that "neoliberalism" might describe a good and useful policy outlook instead of Reagan/Thatcher/Milton Friedman libertarian dogma. I remembered that you had penned a defense of something called "neoliberalism" a while back: You framed "neoliberalism" as basically a program that protected markets as the basic engine of production and then tried to add a welfare state on top of those markets. And you depicted the main benefits of this system as being poor-country growth and global convergence. That strikes me as a useful definition and a solid assessment of its benefits...

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"There Speaks the Nineteenth Century!": For the Weekend

stacks and stacks of books

For the weekend: One powerful and very common presumption among the thinkers of the nineteenth century was that if the problems of overpopulation could be solved, and if that coupled with better technology solved the problem of inadequate resources to provide necessities, then the distribution of conveniences and luxuries would take care of itself, and the distribution of necessities would be unproblematic as an immediate consequence of common humanity in an age of abundance. They were wrong:

Edward Bellamy: Looking Backward 2000-1887 https://delong.typepad.com/files/bellamy-backward.pdf: '“Who is capable of self-support?” he demanded. “There is no such thing in a civilized society as self-support. In a state of society so barbarous as not even to know family coöperation, each individual may possibly support himself, though even then for a part of his life only; but from the moment that men begin to live together, and constitute even the rudest sort of society, self-support becomes impossible. As men grow more civilized, and the subdivision of occupations and services is carried out, a complex mutual dependence becomes the universal rule. Every man, however solitary may seem his occupation, is a member of a vast industrial partnership, as large as the nation, as large as humanity. The necessity of mutual dependence should imply the duty and guarantee of mutual support; and that it did not in your day constituted the essential cruelty and unreason of your system”...

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What Is the Political-Economic Agenda After Piketty?

Introduction: Let me write, overwhelmingly, about inequality understood as inequality between people who regard themselves as members of a common culture, economy, nation. There is the separate issue of inequality between the different cultures, economies, nations that make up the world, but let me leave that for the very end, and then deal with it only briefly.

History of Inequality: For most of human history since the invention of agriculture, typical settled human societies have been about 80% as unequal as they could possibly be: were anything to stretch out the distribution of income and wealth by more than an additional 20%, and working-class women would have become too skinny to ovulate regularity and working-class children would have had compromised immune systems, and so the population would have failed to reproduce itself. The typical economy's Gini index was about 45 or so (the same Gini value as if 72% of wealth and income were evenly divided among the top 28%, and the rest evenly among the rest)—with New Spain in the eighteenth century estimated up at above 60 (the same Gini value as if 4/5 were evenly divided among the top 1/5, and the rest evenly among the rest) and the Kingdom of Naples and China estimated down below 30 (the same Gini value as if 65% were evenly divided among the top 35%, and the rest of income evenly among the rest).

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Marx's Capital: “Freedom” Inverted: It’s Really Powerlessness

4.4.2) “Freedom” Inverted: It’s Really Powerlessness: Capitalists and their ideologists write about how everybody is “free” in a capitalist economy: slavery and serfdom have both been abolished, so that workers can go where they want, take the jobs they want, and so raise society’s productivity. Marx reacts with very heavy-handed snark.

The serf was not free: he was tied to the land, and had to stay there and present his lord with the customary feudal rents specified under that form of land tenure. The coming of capitalism frees the serf: he is no longer required to stay on his inherited piece of land, and farm it.

But the coming of capitalism “frees” the serf in another sense as well: he is “freed” from his connection with the land, which now belongs to the landlord. And he can do what he used to do—farm the land—only if he can strike a bargain and rent it from the landlord. He is, in the words of Milton and Rose Director Friedman, “free to choose”. But he is also free to lose. And—if he cannot strike a bargain to rent the land and then cannot strike a bargain to work as an employee—free to starve.

Yes, he is no longer constrained by the web of obligations that constrained him under the feudal or the petty-bourgeois mode of production. But by the same token that freedom from social position and social ties may well reduce his bargaining power when he goes to the labor market. Constraints can keep you from doing better, but they can also keep you fro being forced to do worse.

Moreover, that bargaining-power reduction is essential for the system’s operation, at least in Marx’s view. Capitalism can only form if there are a lot of workers who have lost their feudal status as serfs who are both owned by and own the land, and lost their petty-bourgeois status as artisans or merchants who own their tools and their businesses. Only if there is a proletariat—a large group of workers who must find a capitalist employer, and must do so under conditions in which workers have very little bargaining power:

The starting point of the development that gave rise to the wage labourer as well as to the capitalist, was the servitude of the labourer. The advance consisted in a change of form of this servitude, in the transformation of feudal exploitation into capitalist exploitation.… Revolutions are epoch-making that act as levers for the capital class in course of formation; but, above all, those moments when great masses of men are suddenly and forcibly torn from their means of subsistence, and hurled as free and “unattached” proletarians on the labour-market…

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Marx's Capital: Part VIII: Primitive Accumulation Proper

4.4) Part VIII: Primitive Accumulation: At the end of Part VII, Marx had completed his analysis of how the purpose of capitalism-as-a-system was simply capital accumulation, which produced ever more productivity, wealth, and misery, all three growing together, and all three growing together at an ever-increasing pace. The natural next step in Marx’s argument would be for him to lay out what he forecasts will bring this mad sorcerers-apprentice process to an end.

That, however is not what we get. We turn to the next page, and its title of “Part VIII: Primitive Accumulation” tells us that Marx is now jumping back to the historical beginnings of the process of capitalist capital accumulation.

He needed an editor.

Fortunately, this part is misnamed. “Primitive” accumulation is supposed to be about how the juggernaut of capitalism initially gets rolling. This part starts out being about that. But it then moves on, and is in its later stages also about much, much more.

4.4.1) “Primitive Accumulation” Proper: Part VIII does start out with its expressed topic. It hammers home the difference between the myth that the capitalist tell themselves and others, and the reality with which the system came into being. The myth is as follows, as Marx brings the snark:

Its origin is supposed to be.… In times long gone by there were two sorts of people; one, the diligent, intelligent, and, above all, frugal elite; the other, lazy rascals…. Thus it came to pass that the former sort accumulated wealth, and the latter sort had at last nothing to sell except their own skins. And from this original sin dates the poverty of the great majority that, despite all its labour, has up to now nothing to sell but itself, and the wealth of the few that increases constantly although they have long ceased to work. Such insipid childishness is every day preached to us in the defence of property…

The reality is very very different:

The process which creates the capital-relation can be nothing other than the process which divorces the worker from the ownership of the conditions of his own labour; it is a process which operates two transformations, whereby the social means of subsistence and production are turned into capital, and the immediate producers are turned into wage-labourers. So-called primitive accumulation, therefore, is nothing else than the historical process of divorcing the producer from the means of production. It appears as ‘primitive’ because it forms the pre-history of capital, and of the mode of production corresponding to capital…

And it is not just that history happened this way in some ethically neutral way. Great crimes were committed. And great was the role played by political corruption. Marx reviews British history starting in 1500, running from Henry VIII Tudor to William III Orange, and beyond:

The spoliation of the Church’s property, the fraudulent alienation of the state domains, the theft of the common lands, the usurpation of feudal and clan property and its transformation into modern private property under circumstances of ruthless terrorism, all these things were just so many idyllic methods of primitive accumulation. They conquered the field for capitalist agriculture, incorporated the soil into capital [a very interesting phrase], and created for the urban industries the necessary supplies of free and rightless proletarians…

The Glorious Revolution... brought into power, along with William of Orange, the landed and capitalist profit-grubbers. They inaugurated the new era by practising on a colossal scale the thefts of state lands which had hitherto been managed more modestly. These estates were given away, sold at ridiculous prices, or even annexed to private estates by direct seizure … The Crown lands thus fraudulently appropriated, together with the stolen Church estates, … form the basis of the present princely domains of the English oligarchy…

Employ the power of the state, the concentrated and organized force of society, to hasten, as in a hothouse, the process of transformation of the feudal mode of production into the capitalist mode, and to shorten the transition. Force is the midwife of every old society which is pregnant with a new one. It is itself an economic power…

Not just market buying-and-selling bring capitalism into being. Brutality and force are the “midwife” of every transformation from one kind of society to another—here the origins of society based on the capitalist mode of production born from the womb of the previous pattern of society based on the feudal mode of production:

Unleash[ing] the ‘eternal natural laws’ of the capitalist mode of production, to complete the process of separation between the workers and the conditions of their labour, to transform, at one pole, the social means of production and subsistence into capital, and at the opposite pole, the mass of the population into wage-labourers, into the free ‘labouring poor’, that artificial product of modern history.... [Feudalism] has to be annihilated; it is annihilated. Its annihilation, the transformation of the individualized and scattered means of production into socially concentrated means of production, the transformation, therefore, of the dwarf-like property of the many into the giant property of the few, and the expropriation of the great mass of the people from the soil, from the means of subsistence and from the instruments of labour, this terrible and arduously accomplished expropriation of the mass of the people forms the pre-history of capital…

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Marx's Capital: The Capitalist System Worsens Over Time

4.3.3) The Capitalist System Worsens Over Time: Remember, always, to Marx, capitalism is a system. It works, in the sense that it carries itself forward into the future:

Therefore, the worker himself constantly produces objective wealth, in the form of capital, an alien power that dominates and exploits him; and the capitalist just as constantly produces labour-power, in the form of a subjective source of wealth which is abstract, exists merely in the physical body of the worker, and is separated from its own means of objectification and realization; in short, the capitalist produces the worker as a wage-labourer. This incessant reproduction, this perpetuation of the worker, is the absolutely necessary condition for capitalist production…. The capitalist process of production, therefore, seen as a total, connected process, i.e. a process of reproduction, produces not only commodities, not only surplus-value, but it also produces and reproduces the capital-relation itself; on the one hand the capitalist, on the other the wage-labourer...

As the system carries itself forward into the future, it changes. It, Marx argues, becomes even worse and more destructive. The gap between what society could be given the magical productivity of human labor augmented by science and technology and what society is grows beyond measure.

Accumulation of capital leads to innovation and the invention of new kinds of more productive machines. The capital intensity of production rises. And as the capital intensity of production rises, downward pressure on workers’ wages rises as well.

Marx thinks he has an airtight argument that this will be so:

Since the demand for labour is determined not by the extent of the total capital but by its variable constituent alone, that demand falls progressively with the growth of the total capital, instead of rising in proportion to it, as was previously assumed. It falls relatively to the magnitude of the total capital, and at an accelerated rate, as this magnitude increases. With the growth of the total capital, its variable constituent, the labour incorporated in it, does admittedly increase, but in a constantly diminishing proportion... constantly produces, and produces indeed in direct relation with its own energy and extent, a relatively redundant working population, i.e. a population which is superfluous to capital’s average requirements for its own valorization, and is therefore a surplus population…

Marx believes that machinery is not a complement to but a substitute for labor. Here, once again, Marx has been betrayed by the labor theory of value. The century and a half after his writing of Capital has seen wages rise fifteen fold. It has seen inequality rise, fall, and more recently rise again. But even now, at our current inequality peak, it is only back to the level it was in mid-nineteenth century Britain here in the United States, and is lower elsewhere in the global north.

Not a Human Logic, But Its Own Mad Logic: Why does the system work as it carries itself into the future—as it “reproduces itself”, as Marx likes to say? The rapid advances of science and technology on the one hand in the scope of the collective social division of labor mediated by the market on the other greatly increase the productive power of humanity. Why are these increased productive powers turned not to the greater good but to making greater evils? Marx has an answer: His answer is that the wishes and wills of humans have no purchase once the capitalist machine has started rolling. People must fit into their slots, and do what their slot in the system requires that they do. Workers who do not sacrifice their essential humanity to a hard, dehumanizing, and low-paying job find themselves and their families at deaths door. Capitalists who do not devote every moment to raising productivity, pushing down wages, and reinvesting their larger profits to increase their scale of operations faster find themselves outcompeted. They wind up going bankrupt–and then their children join the working class proletariat. Thus, according to the principle that the purpose of a system is what it does, the purpose of the capitalist system is maximum investment and capital accumulation:

Accumulation for the sake of accumulation, production for the sake of production: this was the formula in which classical economics expressed the historical mission of the bourgeoisie in the period of its domination. Not for one instant did it deceive itself over the nature of wealth’s birth-pangs. But what use is it to lament a historical necessity? If, in the eyes of classical economics, the proletarian is merely a machine for the production of surplus-value, the capitalist too is merely a machine for the transformation of this surplus-value into surplus capital…

Mark thinks he has an iron and water-tight argument that this process of investment in capital accumulation greatly raises the stock of instruments of production that workers use—no, in capitalist factories as Marx sees them workers do not utilize machines, instead, machines use up workers—while reducing the funds available to be spent paying the wages of the workers:

The law of the progressive growth of the constant part of capital in comparison with the variable part is confirmed at every step … by the comparative analysis of the prices of commodities, whether we compare different economic epochs or different nations in the same epoch. The relative magnitude of the part of the price which represents the value of the means of production, or the constant part of the capital, is in direct proportion to the progress of accumulation, whereas the relative magnitude of the other part of the price, which represents the variable part of the capital, or the payment made for labour, is in inverse proportion to the progress of accumulation…

Thus, for Marx, it is inconceivable that there might be a permanent, durable increase in the average wage level as the process of capital accumulation proceeds and as capitalism-the-sytem carries itself forward into the future. Supply-and-demand could not, and marks his analysis, lead to such an outcome, for supply-and-demand work in the context of a ever-growing surplus population that makes up an industrial reserve army of unemployed and hungry-for-jobs workers:

The industrial reserve army, during the periods of stagnation and average prosperity, weighs down the active army of workers; during the periods of over-production and feverish activity, it puts a curb on their pretensions. The relative surplus population is therefore the background against which the law of the demand and supply of labour does its work. It confines the field of action of this law to the limits absolutely convenient to capital’s drive to exploit and dominate the workers…

In fact, for Marx, it is inconceivable the average wage level will manage to stay above bare subsistence:

The most diverse machines are now applied to the manufacture of the machines themselves…. The labourers employed in machine factories can but play the role of very stupid machines alongside of the highly ingenious machines…. To sum up: the more productive capital grows, the more it extends the division of labour and the application of machinery; the more the division of labour and the application of machinery extend, the more does competition extend among the workers, the more do their wages shrink together…. A mass of small business men and of people living upon the interest of their capitals is precipitated into the ranks of the working class…. Thus the forest of outstretched arms, begging for work, grows ever thicker, while the arms themselves grow every leaner…

Thus, as Mark sees it, the more powerful and productive new workers become, the more dominated and exploited workers become. :Workers become not men but fragments of men: hands, no more than appendages to the machine. And working to make things becomes not a source of joy at accomplishment but into an alienated torment:

We saw in Part IV, when analysing the production of relative surplus-value, that within the capitalist system all methods for raising the social productivity of labour are put into effect at the cost of the individual worker; that all means for the development of production undergo a dialectical inversion so that they become means of domination and exploitation of the producers; they distort the worker into a fragment of a man, they degrade him to the level of an appendage of a machine, they destroy the actual content of his labour by turning it into a torment; they alienate…

In Marx’s analytical framework, wealth, productivity, and misery all grow together. Greater productivity produces greater wealth. And then greater wealth produces greater misery, because under capitalism wealth is used to dominate and, if the capitalist is going to survive, he must use his power to dominate to push down wages and worsen working conditions so that he can not consume but invest his profits to produce an even greater scale of production and even greater productivity:

In proportion as capital accumulates, the situation of the worker, be his payment high or low, must grow worse. Finally, the law which always holds the relative surplus population or industrial reserve army in equilibrium with the extent and energy of accumulation rivets the worker to capital more firmly than the wedges of Hephaestus held Prometheus to the rock. It makes an accumulation of misery a necessary condition, corresponding to the accumulation of wealth. Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery, the torment of labour, slavery, ignorance, brutalization and moral degradation at the opposite pole, i.e. on the side of the class that produces its own product as capital...

What is going to bring an end to this mad process?

Continue reading "Marx's Capital: The Capitalist System Worsens Over Time" »


Which Political Party's Policies Boost Investment in America, Again?

Investment-presidents

  • Suppose you were a stranger to humanity, and looked at this graph of trends in the investment share of output under various administrations.
  • Would you then credit the claim that the red-presidents political party was dedicated to boosting investment in America, and that the blue-presidents political party was dedicated to sacrificing investment and growth to achieve egalitarian redistributional social goals?
  • No.
    • One might claim that presidents don't control the economy or economic policy.
    • But presidents get most of what they ask for in terms of economic policy, and economic policy has a substantial impact on the actual economy.
    • One might claim that the big collapses of investment from the S&L and the subprime housing crises were bad luck for both Bush presidents.
    • But didn't mis- and under-regulation have something to do with it?

FRED: Gross Private Domestic Investment/Nominal Potential Gross Domestic Product https://fred.stlouisfed.org/graph/?graph_id=516170&rn=79#0...

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Marx's Capital: Part VII: The Accumulation of Capital

4.3) Part VII: The Accumulation of Capital: 4.3.1. The Bourgeoisie Is the Ruling Class: This is where the book starts to sing (to me, at least).

The first important thing I get out of Part VII is that, to quote from the Communist Manifesto, “the executive of the modern state is a committee for managing the affairs of the _business class”. Wealth speaks loudly, and influences the government to arrange things for the convenience of wealth—to keep wages low, and workers available.

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Marx's Capital: Parts V-VI

*4.2.5) Part V: Absolute & Relative Surplus-Value *: Here Marx is indeed repeating himself. You are trapped in some Groundhog Day-like scenario. This time through reading these chapters, my major thought was: Wouldn’t Engels pay for an editor? It goes over ground Marx has already gone over. And it loses itself in byways that seem pointless to me.

For example, what is the usefulness of this?:

From one standpoint, any distinction between absolute and relative surplus-value appears illusory. Relative surplus-value is absolute, since it compels the absolute prolongation of the working-day beyond the labour-time necessary to the existence of the labourer himself. Absolute surplus-value is relative, since it makes necessary such a development of the productiveness of labour, as will allow of the necessary labour-time being confined to a portion of the working-day. But if we keep in mind the behaviour of surplus-value, this appearance of identity vanishes. Once the capitalist mode of production is established and become general, the difference between absolute and relative surplus-value makes itself felt, whenever there is a question of raising the rate of surplus-value. Assuming that labour-power is paid for at its value, we are confronted by this alternative: given the productiveness of labour and its normal intensity, the rate of surplus-value can be raised only by the actual prolongation of the working-day; on the other hand, given the length of the working-day, that rise can be effected only by a change in the relative magnitudes of the components of the working-day, viz., necessary labour and surplus-labour; a change which, if the wages are not to fall below the value of labour-power, presupposes a change either in the productiveness or in the intensity of the labour…

Why is it not better to say that the rate of profit (or of surplus-value extraction) depends on five things; the length of the working day, the productiveness of labor, the intensity of labor, the cost of worker subsistence, and the deviation of the wage level from the cost of subsistence? What is gained by calling some of these ‘relative’ and the others ‘absolute’ as it is indeed true that, as Marx says: ‘relative surplus-value is absolute… [and] absolute surplus-value is relative’?

Perhaps there is a new nugget in Chapter 16 of this Part V. Marx wishes to establish that David Ricardo and John Stuart Mill have blinded themselves by confusing things that are present only under the capitalist mode of production with things that are always true of the human division of labor, and so confuse themselves. But Ricardo and Mill—and I—would respond: Yes, these things are only apparent and obvious under the capitalist mode of production, but they are always true in the sense that they are constraints on and opportunities arising from the construction of a societal division of labor under conditions of scarcity; it is just that under other systems of arranging the societal division of labor these constraints and opportunities are masked by how they are embedded in the networks of obligation and control that make up non-market societies.

This is an argument Marx ought to have wrestled with. But he did not.

And much of Part V is simply confused: Marx disappears into the swamp that is the labor theory of value, and criticizes other economists for not getting lost in the swamp in the same place he does.

4.2.6) Part VI: Wages: Once again, I find Marx in need of an editor: little said in a substantial space. However, chapter 22, on differences across nations in the level of wages, seemed to me to be of interest. Marx says that looking across countries there are those with:

more intense national labour… more productive nation[s]…. In proportion as capitalist production is developed in a country, in the same proportion do the national intensity and productivity of labour there rise above the international level…. It will be found, frequently, that the daily or weekly, &tc., wage in the first nation is higher than in the second, whilst the relative price of labour, i.e., the price of labour as compared both with surplus-value and with the value of the product, stands higher in the second than in the first…

So that a higher rate of exploitation, a higher rate of productivity, and a higher value of real wages in terms of the commodities they can buy go together. Comparing Russia to England, Marx finds:

Despite all over-work, continued day and night, despite the most shameful under-payment of the workpeople, Russian manufacture manages to vegetate only by prohibition of foreign competition…

English cotton mills pay their workers more and extract more profits and surplus value out of them. Russian cotton mills pay their workers less, over-work them more, and yet would fail to extract any profits or surplus value if not for government subsidies via tariffs. The more exploited are workers in Marx’s extraction-of-surplus-value sense, the better off there workers are.

This should have given Marx pause: if it is true looking from less-capitalistic to more-capitalistic nations that higher rates of exploitation and better-fed and better-housed workers go together, might it not also be true looking over time from less-capitalistic to more-capitalistic eras that we see the same? This should have led Marx to rethink. It did not.

4.2.7) Summing Up Parts I-VI: In summary, with the exception of Chapter 10, The Working Day, Parts I-VI of Capital do not sing for me. Confused, and where not confused usually wrong, is my judgment.

Part I makes Hegelian philosophical intellectual moves to construct an argument for the labor theory of value, an argument which I do not see as valid and which leads to a false conclusion. Part II makes the important point that capital is not a thing but rather a set of relationships or processes that generate a certain kind of economy with its patterns of production, distribution, and dynamic evolution. But this seems obvious to me: it is something I know in my bones. Marx presents it with what seems to me to be a lot of fluff and mystification.

Parts III-VI develop and use his analytical framework and, with the exception of chapter 10 on the working day, I find the framework creaky, inadequate, and often misleading: labor theory of value, rates of surplus value, organic composition of capital, and hidden behind the curtain the unsolved and unsolvable analytical problems of reduction and transformation.

It is only in Part VII that the book begins to sing to me.

Continue reading "Marx's Capital: Parts V-VI" »


I do confess that I am sad that §7.6 of my "Smith, Marx, Keynes" lecture notes https://www.icloud.com/keynote/0osOOsPvSrTaiK4__D5MghPVA is still just huge honking quotes from Paul Krugman's Mr. Keynes and the Moderns https://delong.typepad.com/files/keynes-moderns.pdf. I kinda want to say "just read the whole thing". But here are the passages I chose:

Chapter 12 is, of course, the wonderful, brilliant chapter on long-term expectations, with its acute observations on investor psychology, its analogies to beauty contests, and more. Its essential message is that investment decisions must be made in the face of radical uncertainty to which there is no rational answer, and that the conventions men use to pretend that they know what they are doing are subject to occasional drastic revisions, giving rise to economic instability. What Chapter 12ers insist is that this is the real message of Keynes, that all those who have invoked the great man’s name on behalf of quasi-equilibrium models that push this insight into the background, from John Hicks to Paul Samuelson to Mike Woodford, have violated his true legacy...

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Lecture Notes: Smith, Marx, Keynes: Thanksgiving 2019 DRAFT

I have finished (a draft of) my "Smith, Marx, Keynes" lecture notes—well, I have not written 7.6 and 8.2. For 7.6, I have simply dumped in (much of) Paul Krugman's Mr. Keynes and the Moderns. 8.2 I have not written anything on. But what it is, it is...

https://www.icloud.com/pages/0howtV7CndvjkSCCLmtjmq_SA

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Marx's Capital: Parts III-IV

4.2.3) Part III: Production of Absolute Surplus-Value: Formal Equality Masking Substantive Inequality and Oppression: Here Marx tries to peel back the mask that conventional liberal ideology places over the face of the capitalist market economy. The market economy pretends that it is a realm of freedom: everyone is independent, everyone is unbound by ties of slavery and serfdom, everyone owns what he or she owns, everyone produces, buys, and sells, everyone does so an an equal legal footing…

And yet..., and yet..., and yet...

Marx tries to lay out how such a formally-equal form of social organization like the market economy nevertheless produces massive and mammoth inequality. He does so by diving into the working day and the labor process: How is it that the value of labor-power is less than the value of the commodities that that labor-power the capitalist purchases then creates? Why doesn't the worker just work for themself and so reap the full value of the commodities they produce as the wage for their labor power?

However, Marx gets lost here in the swamp of the labor theory of value. And so the analytical apparatus he builds creaks. It is, I think, simply not up to the task.

Sources of Capitalist Social Power: I think, however, that it is easy to rescue Marx's argument by throwing his labor theory of value overboard and simply looking at average or market equilibrium prices. It is a fact that those without money have little social power. It is a fact that those without money have little ability to delay their purchases or sales in the hope that a better bargain will be. It is a fact that those who are desperate to buy or sell get a bad bargain. And it is a fact that workers are desperate to sell their labor, and then desperate to buy commodities now: they and their families have to eat.

But why can't workers just work for themselves? Why can't they be independent contractors, and so capture for themselves the surplus the capitalist exacts from the fact that workers are desperate to work and so will work for less than the value of what they will produce because they need money now? They can—if they have enough of a stake to tied themselves over. But as time passes and as production becomes more and more capital-intensive and value chains become longer and longer, the size of the stake needed to remain independent grows. Some succeed in maintaining the needed stake, and even enlarging it: they maintain a precarious independence or become capitalists themselves, respectively. Most, from bad luck, imprudence, or a failure to keep pace with increasing scale, fall into the proletariat, and so have to strike bad bargains with employers in which they capture little of the surplus created in the process of production.

That, at least, would be a coherent theoretical argument.

Marx Wrote at the End of an Era of Wage Stagnation: It would run into the empirical problem that the wages of labor today in the Global North are 15 times higher than they were two centuries ago, and that in the world as a whole only 9% of people earn too little in the global market to escape from extreme poverty while 80% were in extreme poverty 200 years ago. But it would be a coherent argument. And it would accurately describe the world of an Industrial Revolution with little or no increase in real wages that Marx had seen in his life up to 1867. (Albeit that phase of the world economy was about to end: wages, worldwide, were then about to start rocketing upward.)

Nassau Senior’s “Last Hour”: Please, I ask you, do not miss the last part of chapter 9: Section 3: Senior's "Last Hour". Marx’s evisceration of the argument in support of the cotton manufacturers of Britain by British classical economist Nassau Senior is a thing of beauty. And it was the source for the first economics article I ever wrote that would up published.

The Length of the Working Day: And read carefully and reread chapter 10. In chapter 10 the book descends from German Hegelian-philosophical and British classical-economic abstractions and theory into the condition fo the working class in England in the middle of the nineteenth century, and the book becomes great.

Creaky Abstractions Return: But in chapter 11 the abstractions and the creaky analytical apparatus are back.

Marx then finds himself on the defensive. The profits that different manufacturers realize have nothing to do with the amounts of surplus value that Marx calculates different manufacturers extract from their workers. Why are the profits of one manufacturer who has few workers and so can extract no surplus value from them just as high as the profits of another manufacturer sweating surplus value out of tens of thousands? How I this consistent with Marx’s claim that profits in some sense are, or are the surface manifestation of the deep reality that is surplus value?

This is a natural question to ask. Asking it very much puts Marx very much on the defensive. So we find passages like:

The law... of surplus-value produced... clearly contradicts all experience based on appearance.... A cotton spinner, who... employs... little variable capital, does not, on account of this, pocket less profit or surplus-value than a baker... [with] much variable... capital. For the solution of this apparent contradiction, many intermediate terms are as yet wanted, as from the standpoint of elementary algebra many intermediate terms are wanted to understand that 0/0 may represent an actual magnitude.... It will be seen later how the school of Ricardo has come to grief over this stumbling block. Vulgar economy which, indeed, “has really learnt nothing,” here as everywhere sticks to appearances in opposition to the law which regulates and explains them. In opposition to Spinoza, it believes that “ignorance is a sufficient reason”...

To paraphrase, Marx is here saying: My theory says the sun rises in the west, but you say it rises in the east. You are confused by the surface appearance of things. I have a deeper understanding, and I will present my answer later.

He never did present an explanation.

As I said, the analytical apparatus creaks, and is not up to the task.

4.2.4) Part IV: The Production of Relative Surplus-Value: No, you are not caught in some Groundhog Day-like time loop. If this sounds to you like he is starting to repeat himself, you are right. And if you ask what makes some surplus value “relative” and other surplus value “absolute”, you will not get a clear answer.

I think that when the working day is expanded or the standard of living is lowered, that is an increase in absolute surplus value. I think that when productivity rises, that is an increase in relative surplus value. I would have called Part III “The Working Day and Surplus Value” and Part IV “Worker Productivity and Surplus Value”.

Deskilling: But do not skip or skim—too much. The analytical core of this part is an important insight: The market economy produces enormous incentives to innovate in technology and to then invest in labor-saving machinery in order to raise productivity:

A most furious combat rages between the capitalists for their individual share in the market... proportional to the cheapness of the product.... This struggle gives rise to in the use of improved machinery for replacing labour-power... the introduction of new methods of production... [and] a forcible reduction of wages beneath the value of labour-power is attempted...

And this pressure has a powerful impact in potentially "deskilling" workers. Marx quotes Adam Smith here:

The understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations … has no occasion to exert his understanding … He generally becomes as stupid and ignorant as it is possible for a human creature to become.... The uniformity of his stationary life naturally corrupts the courage of his mind … It corrupts even the activity of his body and renders him incapable of exerting his strength with vigour and perseverance in any other employments than that to which he has been bred. His dexterity at his own particular trade seems in this manner to be acquired at the expense of his intellectual, social, and martial virtues. But in every improved and civilized society, this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall...

Hence Adam Smith calls for a major deviation from laissez faire in favor of publicly-funded and mandatory public education:

The common people... have little time to spare for education. Their parents can scarce afford to maintain them.... As soon as they are able to work they must apply to some trade by which they can earn their subsistence.... But though the common people cannot, in any civilised society, be so well instructed as people of some rank and fortune, the most essential parts of education, however, to read, write, and account, can be acquired at so early a period of life that the greater part even of those who are to be bred to the lowest occupations have time to acquire them before they can be employed in those occupations. For a very small expense the public can facilitate, can encourage, and can even impose upon almost the whole body of the people the necessity of acquiring those most essential parts of education... by establishing in every parish or district a little school, where children may be taught for a reward so moderate that even a common labourer may afford it; the master being partly, but not wholly, paid by the public.... It was in this manner, by facilitating the acquisition of their military and gymnastic exercises, by encouraging it, and even by imposing upon the whole body of the people the necessity of learning those exercises, that the Greek and Roman republics maintained the martial spirit of their respective citizens....

The gross ignorance and stupidity which, in a civilised society, seem so frequently to benumb the understandings of all the inferior ranks of people... [leaves them] mutilated and deformed in... [an] essential part of the character of human nature. Though the state was to derive no advantage from the instruction of the inferior ranks of people, it would still deserve its attention that they should not be altogether uninstructed. The state, however, derives no inconsiderable advantage from their instruction. The more they are instructed the less liable they are to the delusions of enthusiasm and superstition.... An instructed and intelligent people, besides, are always more decent and orderly.... They feel themselves, each individually, more respectable and more likely to obtain the respect of their lawful superiors.... They are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition.... In free countries, where the safety of government depends very much upon the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously...

I dare say you might well be able to convince Adam Smith, were he here with us today, to ban cable news, and Facebook.

But to return to Marx and to the cause of “deskilling”, rather than attempts to counteract its effects, we have Marx:

Along with the tool, the skill of the worker in handling it passes over to the machine. The capabilities of the tool are emancipated from the restraints inseparable from human labour-power. This destroys the technical foundation on which the division of labour in manufacture was based.… In so far as the division of labour reappears in the factory, it takes the form primarily of a distribution of workers among the specialized machines.... In handicrafts and manufacture, the worker makes use of a tool; in the factory, the machine makes use of him. There the movements of the instrument of labour proceed from him, here it is the movements of the machine that he must follow.... In the factory we have a lifeless mechanism... independent of the workers... incorporated into it as its living appendages.… The machine... deprives the work itself of all content … [The] conditions of work employ the worker...

Capitalism as a Vampire: And so innovation further diminishes workers' power to strike a good wage bargain, in chief a reasonable working day. Dead Labor—capital—or rather Undead Labor—fastens upon Living Labor like a vampire sucking his or her blood:

Partly by placing at the capitalists’ disposal new strata of the working class previously inaccessible to him, partly by setting free the workers it supplants, machinery produces a surplus working population... compelled to submit to the dictates of capital.... Machinery sweeps away every moral and natural restriction on the length of the working day.... The most powerful instrument for reducing labour-time suffers a dialectical inversion and becomes the most unfailing means for turning the whole lifetime of the worker and his family into labour-time at capital’s disposal for its own valorization.... Dead labour... dominates and soaks up living labour-power...

There is even, Marx claims, a large downside to laws to protect workers, to raise minimum wages, and to shorten the maximum working day. Such laws relatively disadvantage small-scale producers, and drive them into bankruptcy:

If the general extension of factory legislation to all trades for the purpose of protecting the working class both in mind and body has become inevitable, on the other hand, as we have already pointed out, that extension hastens on the general conversion of numerous isolated small industries into a few combined industries carried on upon a large scale; it therefore accelerates the concentration of capital and the exclusive predominance of the factory system. It destroys both the ancient and the transitional forms behind which the dominion of capital is still partially hidden, and replaces them with a dominion which is direct and unconcealed...

What is worse:

The immense impetus given to technical improvement by the limitation and regulation of the working day is to increase the anarchy and the proneness to catastrophe of capitalist production as a whole, the intensity of labour, and the competition of machinery with the worker. By the destruction of small-scale and domestic industries it destroys the last resorts of the ‘redundant population’, thereby removing what was previously a safety-valve for the whole social mechanism...

“The Worse, the Better”: But there is a "the worse, the better" apocalyptic silver lining here:

By maturing the material conditions and the social combination of the process of production, it matures the contradictions and antagonisms of the capitalist form of that process, and thereby ripens both the elements for forming a new society and the forces tending towards the overthrow of the old one...

I tend to be very very suspicious of “the worse, the better” arguments.

Karl Marx’s Theory of History: Note also that it is in this Part IV of Capital that we get Karl Marx's big-picture theory of history and political economy:

My view is that each particular mode of production, and the relations of production corresponding to it at each given moment, in short ‘the economic structure of society’, is ‘the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness’ [mental conceptions, if you like], and that ‘the mode of production of material life conditions the general process of social, political, and intellectual life...

And it is in this part of Capital that we have get a very brief glimpse into Marx's speculations about the business cycle:

The factory system’s tremendous capacity for expanding with sudden immense leaps, and its dependence on the world market, necessarily give rise to the following cycle: feverish production, a consequent glut on the market, then a contraction of the market, which causes production to be crippled. The life of industry becomes a series of periods of moderate activity, prosperity, over-production, crisis and stagnation. The uncertainty and instability to which machinery subjects the employment, and consequently the living conditions, of the workers becomes a normal state of affairs...

Continue reading "Marx's Capital: Parts III-IV" »


Karl Marx: The Philosophical, Activist, Economist Layers Overlap. They Always Overlap

3.4.4) The Layers Overlap: Marx’s First Published Essay: You can see all three of these layers in Marx’s first published essay, On the Jewish Question. There is the German-philosophical layer: interrogating the concept of what it means to be free. There is the French-activist layer: how to organize and legislate to attain freedom. And there is the British-economist layer: the real problems lie in the economy, and how the workings of the economy drive people to be cruel to each other in spite of society’s overall prosperity. In On the Jewish Question Marx is pro-freedom. Jews are seeking equal rights. Many (including Marx’s about to be ex-friend Bruno Bauer) claimed that Germany was a Christian country in which Jews had no standing to ask for equal rights until they joined it—that is, became Christian—and then work for separation of state from church. Marx disagreed, stating that Jews’ status as Jews ought not to in any way be a bar to political emancipation.

But, Marx went on to write, political emancipation is not full human emancipation. In order to accomplish that, we need to transform the economy so that it no longer oppresses people.

Marx’s Antisemitism: And then Marx’s argument becomes unfortunate, because the way that the economy oppresses people, Marx says, is that it leads them to behave like he says Jews behave:

Let us consider the actual, worldly Jew–not the [observant] Sabbath Jew, as Bauer does, but the everyday Jew.

Let us not look for the secret of the Jew in his religion, but let us look for the secret of his religion in the real Jew.

What is the secular basis of Judaism? Practical need, self-interest. What is the worldly religion of the Jew? Huckstering. What is his worldly God? Money.

Very well then! Emancipation from huckstering and money, consequently from practical, real Judaism, would be the self-emancipation of our time.

An organization of society which would abolish the preconditions for huckstering, and therefore the possibility of huckstering, would make the Jew impossible. His religious consciousness would be dissipated like a thin haze in the real, vital air of society. On the other hand, if the Jew recognizes that this practical nature of his is futile and works to abolish it, he extricates himself from his previous development and works for human emancipation as such and turns against the supreme practical expression of human self-estrangement…

This was not a phrase Marx outgrew. A decade and a half later, in the mid 1850s, we find him writing things like:

Thus we find every tyrant backed by a Jew, as is every pope by a Jesuit. In truth, the cravings of oppressors would be hopeless, and the practicability of war out of the question, if there were not an army of Jesuits to smother thought and a handful of Jews to ransack pockets…

Yet by far the majority of the big bankers of mid-nineteenth century Europe were Christians. If he were around today, Marx would be one of those people who, when he wants to say something negative about bankers, will always say “Goldman Sachs” and never say “Bank of America” or “J.P. Morgan” or “Credit Suisse”. And the correspondence between Marx and Engels in which they express their envy of fellow German socialist Ferdinand Lassalle is just… weird. Simon Sebag Montefiore summarizes:

Both… were wildly jealous of Lasslle, who was in many ways what they wished to be: a political star, bon vivant… showman… lover… supported financially by his mistress, Countess von Hatzfeld…. Lassalle recognized Marx’s talent… helping him… get his work published…. Marx and Engles… repaid the favor with an endless stream of racist epithets… “stupid Yid”… “Jewboy”… “n——r”…. Lassalle… affair with a young woman engaged to a Wallachian prince whom he foolishly challenged to a duel. Lassalle was killed. Marx and Engels were astonished by the rise and fall of this flamboyant meteor…. Engels’s reflections on Lassalle’s intellectual and sexual power are particularly striking: “she didn’t want his beautiful mind but his Jewish cock”.

Marx was soon going to change his language away from On the Jewish Question’s claim that the big problem was that in market society all human beings acted like Jews: true human freedom would be thought of as the freedom of humanity from domination by the bourgeoisie, domination by the business class, rather than freedom from what Marx called “Jewishness”, and from an economic system that pushed people to act in what Marx called a “Jewish” way.

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Marx's Capital : Parts I-II

4.2) Capital, Parts I-II: Let me provide you with a brief guide in the form of my reactions on my last reading through Capital. And, truth by told, if I had made up the syllabus I would have assigned Parts VII and all but the last chapter of Part VIII, and dipped into Parts I-VI only for chapter 10, The Working Day, and a few selected passages. In place of the bulk of Parts I-VI, I would have substituted Marx’s 1847 essay Wage Labor and Capital; Marx and Engels’s 1848 The Communist Manifesto; Marx’s early 1850s study of French politics and political economy, The Eighteenth Brumaire of Louis Bonaparte; and his late-in-life Critique of the Gotha Program.

So here I am going to rush through Parts I through VI of Capital. I do not have time now to do more. Plus, with the exception of Chapter 10, The Working Day, which is great and which is by itself worth the price of the book, these pieces of the book do not sing to me.

4.2.1) Part I: Commodities and Money: The start of the book is, at bottom, a Hegelian German-philosophical argument for the truth of something called the labor theory of value: that the value of a commodity is the human labor that it took, directly and indirectly, to produce it. If you were a Hegelian German philosopher you might well find that argument somewhat convincing. But you are not. And in fact there are no Hegelian German philosophers at all: the consensus of philosophers is that Hegel is an important figure in the history of philosophy, but that his concepts and frameworks have little worthwhile bite.

Moreover, the labor theory of value is wrong, or at least profoundly unhelpful for Marx.

It involved him in spending years of his life trying to resolve all kinds of problems—the reduction problem, the transformation problem, how to characterize the capital-intensity of the economy—that were at best time-wasting sinks of energy and at worst led to what were in retrospect obvious analytical errors.

I get little out of Part I. But maybe I have not remade myself into the right kind of reader?

4.2.2) Part II: Transformation of Money into Capital “Capital” as Not Things But a Process: As the book moves out of Marx’s Hegelian German-philosopher mode it becomes, I think, much more promising. People typically think of “capital” as stuff: machines, buildings, inventories, and so on. But, Marx argues—I think correctly—that capital is better thought of as a particular form of social power: wealth directing human activity by being itself directed toward acquiring more wealth. Capital is money that is in the business of making more money by being used to buy and thus be transformed into commodities, and then back into more money. And, Marx argues, the most important commodity that capital is transformed into in its every-amplifying circular flow is labor-power, because the only reason that the system can produce profits on average—that the amount of capital can grow in general—is that the value of labor-power is less than the value of the commodities that that labor-power the capitalist purchases then creates.

But it takes Marx three chapters to say that.

Antisemitism Again: There is one piece of Part II that I should not pass over. It is:

The capitalist knows that all commodities, however tattered they may look, or however badly they may smell, are in faith and in truth money, are by nature circumcised Jews, and, what is more, a wonderful means for making still more money out of money…

What are “the Jews" doing here? Yep. This is a leftover from 1842, from the days when Marx and his soon to be ex-friends Moses Hess and Heinrich Heine were attacking “Jewishness” as the source of evil—cf. Heinrich Heine’s denunciation of his own city of Hamburg a:

a city of hagglers populated entirely by Jews, some baptized (I call all Hamburg’s inhabitants Jews)…

It’s people who behave like how Heine has been taught to think Jews behave who are the subject of his ire. Still, not at all a good look.

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Karl Marx’s Analytical System

4) Karl Marx’s Analytical System: 4.1. On Reading Capital: 4.1.1. Why Are We Making You Do This?: Marx spent the next 20 years of his life after writing On the Jewish Question trying to figure out the economics, and then write it down. And in 1867 he published Capital: A Critique of Political Economy. (Or, at least, he published volume I. He died before he finished volumes II and III to his satisfaction.) Capital is a big and difficult book. And we have set you to read it in order to gain a sense of what answers Marx arrived at: what he concluded and why, and whether his conclusions are correct.

Why have we set you to read it? We could, after all, digest it into twenty bullet points and say “these will be on the exam”.

4.1.2) The Skill of Reading Difficult Books: One answer is that the skill of reading difficult books is something we have to teach. The labor economists tell us that going to Berkeley, or to other elite American universities, is very good for you not just in terms of making you a more knowledgeable, thoughtful, and well-rounded person, but also in terms of inculcating you a lot of skills that give you many, many extra life choices. Chief among these skills are: presenting yourself in English in person; presenting yourself in English on paper; and figuring out how to get information out of all the written English words that appear before your eyes. Thus one thing we are here to do is to teach the valuable skill of reading hard and difficult but valuable books. And reading hard and difficult but valuable books with us on the teaching staff coaching you through the process is the best way to do that.

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Adam Smith & Inequality: Inequality Generated Outside the Market

2.5) Adam Smith & Inequality: 2.5.1. Inequality Generated Outside the Market: Smith’s first way of minimizing the importance of inequality—or at least minimizing the responsibility of the market and of the economy for fighting inequality—is to argue that inequality springs from politics and sociology rather than from market economics. Inequality arises from the role that hierarchy and command-and-control play in the mixed-up processes that are human society. The society of England becomes more unequal because William the Bastard from Normandy and his thugs with spears—300 families, plus their retainers—kill King Harold Godwinson, and declare that everyone in England owes him and his retainers 1/3 of their crop. The society of England becomes more unequal because Queen Elizabeth I Tudor grants a monopoly over trade with America to Sir Walter Raleigh. Why? Because he had successfully flirted with her. These are not economic processes. These are not closely connected with the “system of natural liberty” than is the market economy.

Indeed, the system of natural liberty is only one way you can organize society. Societies can be organized as ones of feudal lords and peasants, as priests and worshippers, robbers bands and their victims. But these ways of organizing society are impoverishing and, Smith claims in his very naming of his system the “System of Natural Liberty”—unnatural. Dugald Stewart quotes from one of Smith’s lectures that, at least in the lecture hall at Glasgow in 1749, Smith was blunt:

Little else is required to carry a state to the highest degree of affluence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things…

I believe that the later Adam Smith would note that “tolerable administration of justice” covers a lot of ground: the later books of An Inquiry into the Nature and Causes of the Wealth of Nations are very long indeed: Book III on how the historical development of Europe has let it to deviate from the System of Natural Liberty is 43 pages, Book IV on errors being made in 1776 by the governments of Europe is 273 pages, and Book V on what governments should and should not do is 276 pages—a total of 592 pages on what governments should, should not, and have unfortunately done, with only a total of 346 pages laying out Smith’s analytical system and its conclusions, among them that:

All governments which thwart this natural course, which force things into another channel, or which endeavor to arrest the progress of society at a particular point, are unnatural, and, to support themselves, are obliged to be oppressive and tyrannical…

As Heilbroner puts it:

The great enemy to Adam Smith's system is not so much government per se as monopoly—in any form. “People… meet[ing] together… [and] the conversation ends in… some diversion to raise prices.”… If the working of the market is trusted… anything that interferes… lowers social welfare. If, as in Smith’s time, no master hatter anywhere in England could employ more than two apprentices or no master cutler in Sheffield more than one, the market system cannot possibly yield its full benefits…. If, as in Smith's time, great companies are given monopolies of foreign trade, the public cannot realize the full benefits of cheaper foreign produce. Hence, says Smith, all these impediments must go…

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Karl Marx’s Intuitions: Marx’s Enthusiasm for the Market

3) Karl Marx’s Intuitions: Marx’s Enthusiasm for the Market: But back up. First, note that Karl Marx was much more enthusiastic about the market economy and the prospects for the societal division of labor than Smith had been. This enthusiasm had multiple causes:

  • Marx lived 75 years later, in a time of much more rapid economic growth.
  • Marx saw, much more clearly, technology as the magic force that it was going to be.
  • Smith wanted to make his way in the world as an upwardly mobile outsider intellectual taking a measured view of things and entertaining his potential audience; Marx wanted to leave his mark upon the world—hence all his enthusiasms, and all his hates, were outsized.
  • Marx was, in a very strange way, a Fundamentalist Christian—albeit a massively heretical one: a firm believer in the redemption and total transformation not of an individual soul bur of humanity at the hands of a benevolent power. As American literary critic Edmund Wilson was to write in 1940: a lot of Marx’s and Marxist writing makes no sense unless you replace phrases like “progress of history” and “dialectic of history” with “Providence” and “God”.

We see this enthusiasm show through in the passages of Capital in which Marx talks about the transformative work that is being done by the capitalist market economy. But it shines through much more clearly in Marx and Engels’s 1848 Communist Manifesto, in an extended passage that outstrips pretty much anything ever written by capitalism’s friends:

The bourgeoisie, historically, has played a most revolutionary part…. The bourgeoisie has disclosed how it came to pass that the brutal display of vigour in the Middle Ages, which reactionaries so much admire, found its fitting complement in the most slothful indolence. It has been the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals; it has conducted expeditions that put in the shade all former Exoduses of nations and crusades.

The bourgeoisie cannot exist without constantly revolutionising the instruments of production, and thereby the relations of production, and with them the whole relations of society. Conservation of the old modes of production in unaltered form, was, on the contrary, the first condition of existence for all earlier industrial classes. Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind.

The need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe. It must nestle everywhere, settle everywhere, establish connexions everywhere.

The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country. To the great chagrin of Reactionists, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilised nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations. And as in material, so also in intellectual production. The intellectual creations of individual nations become common property. National one-sidedness and narrow-mindedness become more and more impossible, and from the numerous national and local literatures, there arises a world literature.

The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation. The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after its own image.

The bourgeoisie has subjected the country to the rule of the towns. It has created enormous cities, has greatly increased the urban population as compared with the rural, and has thus rescued a considerable part of the population from the idiocy of rural life. Just as it has made the country dependent on the towns, so it has made barbarian and semi-barbarian countries dependent on the civilised ones, nations of peasants on nations of bourgeois, the East on the West.

The bourgeoisie keeps more and more doing away with the scattered state of the population, of the means of production, and of property. It has agglomerated population, centralised the means of production, and has concentrated property in a few hands. The necessary consequence of this was political centralisation. Independent, or but loosely connected provinces, with separate interests, laws, governments, and systems of taxation, became lumped together into one nation, with one government, one code of laws, one national class-interest, one frontier, and one customs-tariff.

The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground — what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?…

“What earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?”

The bourgeoisie —the market economic system in which the capitalists, the business class, hold the reins and have the wealth—has, is, and will create the material abundance needed for humanity to pass through the gates of history and enter its proper destiny of utopia.

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John Maynard Keynes's View of the Pre-World War I European Equilibrium

Il Quarto Stato

John Maynard Keynes (1919): The Economic Consequences of the Peace https://delong.typepad.com/files/keynes-peace.pdf

Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions...

After 1870 there was developed on a large scale an unprecedented situation.... The pressure of population on food, which had already been balanced by the accessibility of supplies from America, became for the first time in recorded history definitely reversed. As numbers increased, food was actually easier to secure.... [Any] tendency of cereals to rise in real cost was balanced by other improvements; and—one of many novelties—the resources of tropical Africa then for the first time came into large employ, and a great traffic in oil-seeds began to bring to the table of Europe in a new and cheaper form one of the essential foodstuffs of mankind. In this economic Eldorado, in this economic Utopia, as the earlier economists would have deemed it, most of us were brought up...

What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London... most important of all... regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice...

Europe was so organized socially and economically as to secure the maximum accumulation of capital.... The new rich of the nineteenth century were not brought up to large expenditures, and preferred the power which investment gave them to the pleasures of immediate consumption.... If the rich had spent their new wealth on their own enjoyments, the world would long ago have found such a régime intolerable. But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect.... The railways of the world, which that age built as a monument to posterity, were, not less than the Pyramids of Egypt, the work of labor which was not free to consume in immediate enjoyment the full equivalent of its efforts.... This remarkable system depended... on a double bluff.... The laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of Society into accepting a situation in which they could call their own very little of the cake.... The capitalist classes were allowed to call the best part of the cake theirs... on the tacit underlying condition that they consumed very little of it in practice. The duty of "saving" became nine-tenths of virtue and the growth of the cake the object of true religion..... And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation..... The virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.... In the unconscious recesses of its being Society knew what it was about. The cake was really very small in proportion to the appetites of consumption, and no one, if it were shared all round, would be much the better off by the cutting of it. Society was working not for the small pleasures of to-day but for the future security and improvement of the race.... If only the cake were... allowed to grow in the geometrical proportion... of compound interest... a day might come when there would at last be enough to go round, and when posterity could enter into the enjoyment of our labors. In that day overwork, overcrowding, and underfeeding would have come to an end, and men, secure of the comforts and necessities of the body, could proceed to the nobler exercises of their faculties...

The war has disclosed the possibility of consumption to all and the vanity of abstinence to many. Thus the bluff is discovered; the laboring classes may be no longer willing to forego so largely, and the capitalist classes, no longer confident of the future, may seek to enjoy more fully their liberties of consumption so long as they last, and thus precipitate the hour of their confiscation...

I have selected for emphasis... the instability of an excessive population dependent for its livelihood on a complicated and artificial organization, the psychological instability of the laboring and capitalist classes, and the instability of Europe's claim, coupled with the completeness of her dependence, on the food supplies of the New World. The war had so shaken this system as to endanger the life of Europe altogether.... It was the task of the Peace Conference to honor engagements and to satisfy justice; but not less to re-establish life and to heal wounds. These tasks were dictated as much by prudence as by the magnanimity which the wisdom of antiquity approved in victors...

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On Inequality, Adam Smith Gets Snarky, Stoic, and Cynical

Smith Gets Snarky, Stoic, and Cynical: Snarkism: Adam Smith’s third way of minimizing the importance of economic inequality is to snark. The aim of wealth is to make you happy. Smith thinks that what wealthy women wish they could buy is beauty, and what wealthy men wish they could buy is strength. But who are the beautiful and strong in England? Adam Smith tells us in an aside on nutrition on the good qualities of the potato:

The chairmen, porters, and coal-heavers in London, and those unfortunate women who live by prostitution, the strongest men and the most beautiful women perhaps in the British dominions, are said to be, the greater part of them, from the lowest rank of people in Ireland, who are generally fed with this root [the potato]…

The rich aren’t doing a terribly good job of using their wealth to promote human flourishing, are they? And there is the implication that the rich are none too happy. We see Smith, and what he is doing here, I think.

Stoicism: Adam Smith’s fourth way of minimizing the importance of economic inequality is to assume the philosophical pose of the stoic. One works hard. One sacrifices one’s peace and leisure in order to get rich. And what does that get you as you age? Adam Smith writes that to the aging, looking back at a life in which they have sacrificed their ease and their happiness in order to gain wealth:

Power and riches appear then to be, what they are, enormous and operose machines contrived to produce a few trifling conveniencies to the body, consisting of springs the most nice and delicate, which must be kept in order with the most anxious attention, and which in spite of all our care are ready every moment to burst into pieces, and to crush in their ruins their unfortunate possessor. They are immense fabrics, which it requires the labour of a life to raise, which threaten every moment to overwhelm the person that dwells in them, and which while they stand, though they may save him from some smaller inconveniencies, can protect him from none of the severer inclemencies of the season. They keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more, exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death…

Who then benefits from all the industry and toil of the upwardly-mobile? Adam Smith argues that it was, somewhat paradoxically, the poor. The rich sacrifice their true happiness to set in motion enterprises. And the commodities produced by those enterprises are principally consumed by the poor:

The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants…. The proud and unfeeling landlord…. The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of… all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice…

Cynicism: Fifth and last, Adam Smith minimizes the importance of economic inequality by claiming that there is little or nothing to be done about it. Human nature is such that people will seek to create, and then to obey, those whom they will call their superiors. It is the view expressed by Calvera in the movie The Magnificent Seven. Chico asks Calvera:

And the people of the village? What about them?

Calvera responds:

I leave that to you. Can men of our profession worry about that? If God did not want them to be sheared, he would not have made them sheep!

As Adam Smith puts it in his Theory of Moral Sentiments:

A stranger to human nature, who saw the indifference of men about the misery of their inferiors, and the regret and indignation which they feel for the misfortunes and sufferings of those above them, would be apt to imagine, that pain must be more agonizing, and the convulsions of death more terrible to persons of higher rank, than they are to those of meaner stations.

Upon this disposition… is founded the distinction of ranks, and the order of society. Our obsequiousness to our superiors more frequently arises from our admiration for the advantages of their situation, than from any private expectations of benefit from their goodwill…. We desire to serve them for their own sake, without any recompense but the vanity or the honour of obliging them…

To attempt to eliminate inequality is, for Smith in his cynical mode, like trying to bail out the sea: make society equal, and people will find somebody to look up to, and then figure out a way to give their money away to the rich.

So that is Adam Smith: worry about prosperity and wealth, yes; worry about poverty and want, yes; worry about inequality, not so much.

Needless to say, Karl Marx did not agree that income inequality is not worth a great deal of concern. He saw inequality as a necessary product of the market economy, a necessary product that poisoned all of its fruits, and one that made hopes of eliminating or even reducing poverty and dire poverty vain.

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Adam Smith: Wealth Inequality Prevents More Damage

2.5.2) Wealth Inequality Prevents More Damage: Adam Smith’s second way of minimizing the importance of economic inequality is to claim that it is a relatively gentle alternative to other forms of inequality that will emerge if economic inequality is reduced. Smith argues in Book III of the Wealth of Nations that the rise in inequality in market income and consumption went along with reduced inequality in social status and hierarchy—and in reduced societal violence as well. Great landlords who cannot earn and spend their wealth in the city will focus on arming and maintaining retainers, and the result will be that they will “make war according to their own discretion, almost continually upon one another, and very frequently upon the king; and the open country still continued to be a scene of violence, rapine, and disorder”. But once there are luxuries to be purchased by wealth earned by selling produce to the growing cities, “it was impossible that the number of their retainers should not as gradually diminish, till they were at last dismissed altogether”, and so peace came to the countryside.

As John Maynard Keynes was to write a century and a half later: “It is far better for a man to tyrannize over his bank balance than over his fellow citizens…”

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Adam Smith & Poverty

2.4) Adam Smith & Poverty: Adam Smith loathes poverty.

Adam Smith is eager to create a society in which there is no poverty.

Adam Smith spends a substantial amount of time investigating the course of poverty over time. For example, he takes time and care to write:

During the course of the last century, taking one year with another, grain was dearer in both parts of the united kingdom than during that of the present…. It is equally certain that labour was much cheaper. If the labouring poor, therefore, could bring up their families then, they must be much more at their ease now. In the last century, the most usual day-wages of common labour through the greater part of Scotland were sixpence in summer, and fivepence in winter.… Through the greater part of the Low country, the most usual wages of common labour are now eight pence a-day; tenpence, sometimes a shilling, about Edinburgh…. In England, the improvements of agriculture, manufactures, and commerce, began much earlier than in Scotland. The demand for labour, and consequently its price, must necessarily have increased with those improvements. In the last century, accordingly, as well as in the present, the wages of labour were higher in England than in Scotland. They have risen, too, considerably since that time, though, on account of the greater variety of wages paid there in different places, it is more difficult to ascertain how much…. Not only grain has become somewhat cheaper, but many other things from which the industrious poor derive an agreeable and wholesome variety of food have become a great deal cheaper. Potatoes… cost half the price which they used to do thirty or forty years ago. The same thing may be said of turnips, carrots, cabbages; things which were formerly never raised but by the spade, but which are now commonly raised by the plough. All sort of garden stuff, too, has become cheaper…. The great improvements in the coarser manufactories of both linen and woollen cloth furnish the labourers with cheaper and better clothing; and those in the manufactories of the coarser metals, with cheaper and better instruments of trade, as well as with many agreeable and convenient pieces of household furniture…

Which he then cross-checks with elite gossip:

The common complaint that luxury extends itself even to the lowest ranks of the people, and that the labouring poor will not now be contented with the same food, clothing, and lodging which satisfied them in former times, may convince us that it is not the money price of labour only, but its real recompense, which has augmented…

Having established that poverty has diminished, he next launches a full-bore attack on all those who claim this is a bad thing:

Is this… to be regarded as an advantage or as an inconveniency?… Servants, labourers, and workmen… make up the far greater part…. What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable…

And then he makes a strong appeal to human solidarity, and to the reciprocal obligations humans undertake by entering into the gift-exchange relationships that knit society together:

It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged…

“It is but equity, besides…” This is a very strong appeal to human solidarity. It is coming from someone often seen as and sometimes dismissed as an apostle of human self-interest.

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Karl Marx: Capital, Vol.3, Chapter 52: Classes: Weekend Reading

Karl Marx: Capital, Vol.3, Chapter 52: Classes https://www.marxists.org/archive/marx/works/1894-c3/ch52.htm: 'The owners merely of labour-power, owners of capital, and land-owners, whose respective sources of income are wages, profit and ground-rent, in other words, wage-labourers, capitalists and land-owners, constitute then three big classes of modern society based upon the capitalist mode of production...

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Adam Smith: Society & the “System of Natural Liberty”

2.3) Society & the “System of Natural Liberty”: Adam Smith was a genius because he had a truly game-changing insight into how our societal division of labor should be organized. As far as the production and distribution of our collective material wealth is concerned, you see, most of what we need and want is both excludible and rival.

If something is “excludible”, that means we can assign it an owner—some one of us can be designated to control it, and to decide on its use, or decide to transfer “ownership” of it to something else. If something is excludible, we can push the decisions about how it is to be used out to the periphery of society, to the people on the ground who know what is going on, rather than have the decision made by some centralized bureaucracy clueless because of its inability to reliably judge information conveyed to it at third- or fourth-hand. Having ownership makes sense if information about what is going on is dispersed and hard to assemble: giving control to people on the spot is then a very good idea.

If something is “rival”, that means that one person's use of it forecloses the opportunities of others: if I am using this iPhone, you cannot be using the same iPhone. If a good is rival, that one of us is using it diminishes the opportunities and possibilities available to others. That makes them poorer. Thus it makes sense to charge a price for somebody using a rival commodity. That makes them feel in their gut the effects of their decisions on the opportunities open to others. Charging prices is a way to align individuals’ incentives about whether it is worth it for them to make use of a commodity with the effects of their decision on the overall well-being of the society.

Hence, Adam Smith argued in his Inquiry into the Nature and Causes of the Wealth of Nations, the wealth of nations is most greatly enhanced by following the dictates of what he named the System of Natural Liberty—“liberty” because it leaves people free to do what they wanted with their labor and their possessions, “natural” because it conforms with human nature, "system" because it can be and is extended to the status of a general principle. Let people decide what they want to do with their things and their labor, and they arrange themselves in a large highly-productive societal division of labor. Self-interest focuses people on creating value. Competition curbs any distracting focus of self-interest on accomplishing exploitation.

This “System of Natural Liberty” is, Smith argues, good. As Heilbroner summarizes:

Self-interest… drives men to action…. [But] a community activated only by self-interest would be a community of ruthless profiteers. This regulator is competition, the socially beneficial consequence of the conflicting self-interests of all the members of society. For each man, out to do his best for himself with no thought of social cost, is faced with a flock of similarly motivated individuals who are in exactly the same boat…. A man who permits his self-interest to run away with him will find that competitors have slipped in… will find himself without buyers in the one case and without employees in the other. Thus very much as in the Theory of Moral Sentiments, the selfish motives of men are transmuted by interaction to yield the most unexpected of results: social harmony…. The… market is that it is its own guardian. If output or prices or certain kinds of remuneration stray away from their socially ordained levels, forces are set into motion to bring them back to the fold. It is a curious paradox which thus ensues: the market, which is the acme of individual economic freedom, is the strictest task master of all…

This leads to a fraught question: Is this a theological point? Is the fact that acting “naturally” in the sense of giving market exchange free rein produces good results evidence that there is a benevolent Providence out there? Is this a teleological point? Are, in some sense, money and gift-exchange aimed at creating prosperity? How is it that processes that are not human—that lead to consequences not desired directly by any human—have a mind of their own, and lead to good ends? It is indeed a marvel that, as Smith puts it, in his theory at least:

[While] every individual… endeavours… to direct that industry that its produce may be of the greatest value… labours to render the annual revenue of the society as great as he can…. He… neither intends to promote the public interest, nor knows how much he is promoting it…. He intends only his own security…. He intends only his own gain…. In this, as in many other cases, [he is] led by an invisible hand to promote an end which was no part of his intention…”

It is a marvel. But what kind of a marvel is it?

It is not that Smith is opposed to government. Government is necessary to protect property, and to enforce contracts: people—most people—will respect others’ property and keep their own contracts, most of the time. But for the non-most people and at the non-most times we need the police, hence we need government. We need public works. We need public education. We need national defense. Adam Smith is very clear on all of these. In fact, Book V of the Wealth of Nations on what the government should do and how it should do it is the largest of the five parts of the book. But, Smith is certain, attempts of some centralized bureaucrat to undermine the System of Natural Liberty in its proper sphere—to direct who should do what when and where—were likely to produce not wealth and prosperity but poverty and misery.

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Lecture Notes: Adam Smith

Salon

Adam Smith starts with the observation that humans are largely but not exclusively self-interested creatures: we are, largely but not exclusively greedy. Yet we have a complex and sophisticated societal division of labor. And that division of labor is essential to our prosperity. Indeed, it is essential to our survival: drop one or two of us into the Sierra Nevada, even in summer, and we will quite likely die. Drop 100 of us, and we will quite likely survive, and even flourish. How can animals that are by nature greedy nevertheless cooperate on a large scale? That is the deep moral-philosophical question that we can see in both of Smith’s big books...

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Adam Smith: From Human Nature to Human Society

2.2) From Human Nature to Human Society: Hence the key importance of the human cultural invention of money in forming our large-scale human society: money means that any one of us can make a short-term one-shot exchange relationship with any other one of us, someone who we may well never see again. Money, you see, is manufactured trust, and it allows us to extend our societal division of labor to encompass, indirectly, nearly everybody else in the world.

For example, consider the 30-foot bronze statue of Athene Promakhos—Athena Fighting-in-Front—that the council and people of Athens had cast and installed on the Acropolis around -450. The Greek geographer Pausanias wrote that anyone approaching Athens by sea by day could see her gleaming helmet and the tip of her spear as soon as they had rounded Sounion Head at the southern tip of Attika. 70 tons of bronze supposedly went into the statue, which survived until 1204—63 tons of copper, 7 tons of tin. Copper was abundant. But where in the -5th century were the artisans of Athens to find 7 tons of tin? The historian Herodotos states that he could find nobody in Athens who knew where the tin was coming from: all anyone could say was that the ships had picked up the tin, already mined, in Sicily, and that they thought it came from “tin islands” in the ocean on the other side of Europe. But he could find nobody who would claim to have actually seen these tin islands, or this ocean on the other side of Europe. So he doubted the stories.

The answer, of course, was that the tin was in Cornwall, at the southwestern tip of the island of Britain. The societal division of labor, as governed by the market, was a mechanism that “knew” that 7 tons of tin needed to be mined in Cornwall and then shipped, probably via the English Channel-Seine-portage-Rhone-Mediterranean route, to Athens via Sicily. And so it happened. But, apparently, nobody anywhere in the value chain knew its entire extent. The market knew things that no human individual knew. And this was almost 2.5 millennia ago: the market knows much, much, much more now.

Language, weak dominance, gift exchange, and money have enabled us to progress from perhaps 10,000 of us 70,000 years ago living at a global average living standard of perhaps three 3.5 dollars a day to today’s world-girdling societal division of labor now 7.5 billion strong, with a global average standard of living no about $35 a day. We are now, collectively, on average, at least 10 times as well-off and 750,000 times as numerous as we were 70,000 years ago back in the environment of evolutionary adaptation when we last passed through a Darwinian bottleneck.

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Adam Smith's View of Human Nature

2) Economic Sides of Adam Smith’s Philosophy: 2.1. Starting Points in Human Nature: Adam Smith starts with the observation that humans are largely but not exclusively self-interested creatures: we are, largely but not exclusively greedy. Yet we have a complex and sophisticated societal division of labor. And that division of labor is essential to our prosperity. Indeed, it is essential to our survival: drop one or two of us into the Sierra Nevada, even in summer, and we will quite likely die. Drop 100 of us, and we will quite likely survive, and even flourish.

How can animals that are by nature greedy nevertheless cooperate on a large scale? That is the deep moral-philosophical question that we can see both of Smith’s big books—his The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations—as aimed at. As Robert Heilbroner puts it in his The Worldly Philosophers, Smith:

is interested in laying bare the mechanism by which society hangs together. How is it possible for a community in which everyone is busily following his self-interest not to fly apart from sheer centrifugal force? What is it which guides each individual’s private business so that it conforms to the needs of the group? With no central planning authority and no steadying influence of age old tradition, how does society manage to get those tasks done which are necessary for survival?...

Adam Smith says that our ability to create and maintain a complicated societal division of labor that is so productive rests on three facets of human nature:

  1. language, that makes us an anthology intelligence—what one of us knows or learns, pretty quickly all of us within and many of us without earshot will quickly learn;

  2. hierarchy, in that we tend to form and respect weak dominance hierarchies in which we can command and obey;

  3. gift exchange: we bind ourselves by forming gift-exchange relationships, what Adam Smith called our “natural propensity to truck and barter“. We firmly expect to be and are very happy when I we trade favors with each other, and we are uneasy when we feel as though we are always giving or always receiving, for we want the exchange of gifts and favors to be reciprocal, and roughly balanced.

Back in our environment of evolutionary adaptation, we could form gift-exchange relationships only with a few: our close neighbors, our good friends, and our near kin. Trust, you see, is necessary for a long-term gift-exchange relationship, and short-term such relationships are rare because each has to have and be willing to give up something the other wants or needs right now. And since we are largely self interested, trust is hard to generate and maintain without other binding social ties.

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Three Great Books to Have Read—But Not Nefessarily to Read

I have been remiss in posting here because I have had the unexpected load of getting together lectures for the last 40% of: Economics 105: The History of Economic Thought: Smith, Marx, Keynes.

So let me apologize for the dearth of material by stepping through my lecture notes:

1) Smith, Marx, Keynes: The aim of this course it to examine the history of economic thought through the lens of three major economic thinkers: Adam Smith, Karl Marx, and John Maynard Keynes, each of whom wrote one long, difficult, but undeniably great book. Adam Smith in 1776 published his An Inquiry into the Nature and Causes of the Wealth of Nations. Karl Marx in 1867 published his Capital: A Critique of Political Economy (volume 1). John Maynard Keynes in 1936 published his The General Theory of Employment, Interest and Money (note the absence of the Oxford comma from Keynes’s title: Keynes was a British academic but not one from Oxford but rather from the University of Cambridge). In addition, read Robert Heilbroner’s excellent (if old) The Worldly Philosophers, a short survey of the history of economic thought, for context and background.

Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, Marx’s Capital: A Critique of Political Economy, and Keynes’s The General Theory of Employment, Interest and Money are great books to have read, if not easy books to read. They are, in fact, downright painful. (Heilbroner’s The Worldly Philosophers is, by contrast, painless, easy, and still great.) Learning how to read great but difficult books and make sense of them on your own is a very valuable skill to learn, but a difficult one to teach in any way but by doing it. Moreover, a great book is a great book only if the reader is ready and prepared to read it—and so learning to figure out how to become the kind of reader to appreciate a particular great book is another important skill to learn as well.

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Lecture Notes: Smith, Marx, Keynes: A View of the History of Economic Thought (UNFINISHED)

Well, I have wound up, by surprise, giving the last third of the lectures in Economics 105: The History of Economic Thought: Smith, Marx, Keynes. I admit I was not as averse to being imposed on by the Department as I might have been because I thought it might push me to get my head and my thoughts together.

Here they are—unfinished. But I should give the students an opportunity to see how I think about these thinkers and their works: https://www.icloud.com/pages/0howtV7CndvjkSCCLmtjmq_SA

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Orlando Letelier (1976): The ‘Chicago Boys’ in Chile: Economic Freedom’s Awful Toll: Hoisted from the Archives

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Orlando Letelier (1976): The ‘Chicago Boys’ in Chile: Economic Freedom’s Awful Toll: 'It would seem to be a common-sensical sort of observation that economic policies are conditioned by and at the same time modify the social and political situation where they are put into practice. Economic policies, therefore, are introduced in order to alter social structures. If I dwell on these considerations, therefore, it is because the necessary connection between economic policy and its sociopolitical setting appears to be absent from many analyses of the current situation in Chile. To put it briefly, the violation of human rights, the system of institutionalized brutality, the drastic control and suppression of every form of meaningful dissent is discussed (and often condemned) as a phenomenon only indirectly linked, or indeed entirely, unrelated, to the classical unrestrained “free market” policies that have been enforced by the military junta. This failure to connect has been particularly characteristic of private and public financial institutions, which have publicly praised and supported the economic policies adopted by the Pinochet government, while regretting the “bad international image” the junta has gained from its “incomprehensible” persistence in torturing, jailing and persecuting all its critics...

...A recent World Bank decision to grant a $33 million loan to the junta was justified by its President, Robert McNamara, as based on purely “technical” criteria, implying no particular relationship to the present political and social conditions in the country. The same line of justification has been followed by American private banks which, in the words of a spokesman for a business consulting firm, “have been falling all over one another to make loans.”

But probably no one has expressed this attitude better than the U.S. Secretary of the Treasury. After a visit to Chile, during which he discussed human rights violations by the military government, William Simon congratulated Pinochet for bringing “economic freedom” to the Chilean people. This particularly convenient concept of a social system in which “economic freedom” and political terror coexist without touching each other, allows these financial spokesmen to support their concept of “freedom” while exercising their verbal muscles in defense of human rights.

The usefulness of the distinction has been particularly appreciated by those who have generated the economic policies now being carried out in Chile. In Newsweek of June 14, Milton Friedman, who is the intellectual architect and unofficial adviser for the team of economists now running the Chilean economy, stated: “In spite of my profound disagreement with the authoritarian political system of Chile, I do not consider it as evil for an econ omist to render technical economic advice to the Chilean Government, any more than I would regard it as evil for a physician to give technical medical advice to the Chilean Government to help end a medical plague.”

It is curious that the man who wrote a book, Capitalism and Freedom, to drive home the argument that only classical economic liberalism can support political democracy can now so easily disentangle economics from politics when the economic theories he advocates coincide with an absolute restriction of every type of democratic freedom. One would logically expect that if those who curtail private enterprise are held responsible for the effects of their measures in the political sphere, those who impose unrestrained “economic freedom” would also be held responsible when the imposition of this policy is inevitably accompanied by massive repression, hunger, unemployment and the permanence of a brutal police state.

The Economic Prescription & Chile’s Reality: The economic plan now being carried out in Chile realizes an historic aspiration of a group of Chilean economists, most of them trained at Chicago University by Milton Friedman and Arnold Harberger. Deeply involved in the preparation of the coup, the “Chicago boys,” as they are known in Chile, convinced the generals that they were prepared to supplement the brutality, which the military possessed, with the intellectual assets it lacked.

The U.S. Senate Select Committee on Intelligence has disclosed that “CIA collaborators” helped plan the economic measures that Chile’s junta enacted imme diately after seizing power. Committee witnesses maintain that some of the “Chicago boys” received CIA funds for such research efforts as a 300-page economic blueprint that was given to military leaders before the coup. It is therefore understandable that after seizing power they were, as The Wall Street Journal put it, “champing to be unleashed” on the Chilean economy.

Their first approach to the situation was gradual; only after a year of relative confusion did they decide to implement without major modification the theoretical model they had been taught at Chicago. The occasion merited a visit to Chile by Mr. Friedman himself who, along with his associate, Professor Harberger, made a series of well-publicized appearances to promote a “shock treatment” for the Chilean economy—something that Friedman emphatically described as “the only medicine. Absolutely. There is no other. There is no other long-term solution.”

These are the basic principles of the economic model offered by Friedman and his followers and adopted by the Chilean junta: that the only possible framework for economic development is one within which the private sector can freely operate; that private enterprise is the most efficient form of economic organization and that, therefore, the private sector should be the predominant factor in the economy. Prices should fluctuate freely in accordance with the laws of competition. Inflation, the worst enemy of economic progress, is the direct result of monetary expansion and can be eliminated only by a drastic reduction of government spending.

Except in present-day Chile, no government in the world gives private enterprise an absolutely free hand. That is so because every economist (except Friedman and his followers) has known for decades that, in the real life of capitalism, there is no such thing as the perfect competition described by classical liberal economists. In March 1975, in Santiago, a newsman dared suggest to Friedman that even in more advanced capitalist countries, as for example the United States, the government applies various types of controls on the economy. Mr. Friedman answered: “I have always been against it, I don’t approve of them. I believe we should not apply them. I am against economic intervention by the government, in my own country, as well as in Chile or anywhere else.”

This is not the place to evaluate the general validity of the postulates advanced by Friedman and the Chicago School. I want to concentrate only on what happens when their model is applied to a country like Chile. Here Friedman’s theories are especially objectionable—from an economic as well as a moral point of view—because they propose a total free market policy in a framework of extreme inequality among the economic agents involved: inequality between monopolistic and small and medium entrepreneurs; inequality between the owners of capital and those who own only their capacity to work, etc. Similar situations would exist if the model were applied to any other underdeveloped, dependent economy.

It is preposterous to speak about free competition in Chile. The economy there is highly monopolized. An academic study, made during President Frei’s regime, pointed out that in 1966 “284 enterprises controlled each and every one of the subdivisions of Chilean economic activities. In the industrial sector, 144 enterprises con trolled each and every one of the subsectors. In turn, within each of ‘these 144 manufacturing enterprises which constituted the core of the industrial sector, a few shareholders controlled management: in more than 50 percent of the enterprises, the ten largest shareholders owned between 90 and 100 percent of the capital.”

On the other hand, studies also conducted during the pre-Allende period demonstrated the extent to which the Chilean economy has been dominated by foreign-based multinationals. As Barnet and Müller put it in Global Reach, “In pre-Allende Chile, 51 percent of the largest 160 firms were effectively controlled by global corporations. In each of the seven key industries of the economy one to three firms controlled at least 51 percent of the production. Of the top twenty-two global corporations operating in the country, nineteen either operated free of all competi tion or shared the market with other oligopolists.”

From 1971 to 1973, most of the monopolistic and oligopolistic industries were nationalized and transferred to the public sector. However, the zeal with which the military dictatorship has dismantled state participation in the economy and transferred industries to foreign ownership suggests that levels of concentration and mo nopolization are now at least as high as they were before the Popular Unity (Allende) Government.

An International Monetary Fund Report of May 1976 points out:

The process of returning to the private sector the vast majority of the enterprises which over the previous fifteen years, but especially in 1971-73, had become part of the public sector continued [during 1975]…. At the end of 1973 the Public Development Corpo ration (CORFO) had a total of 492 enterprises, includ ing eighteen commercial banks…. Of this total, 253 enterprises…have been returned to their former owners. Among the other 239 enterprises…104 (among them ten banks) have been sold; sixteen (including two banks) have already been adjudicated, with the completion of the transfer procedure being a matter of weeks; the sale of another twenty-one is being negotiated bilaterally with groups of potential buyers.

Competitive bidding is still to be solicited for the remaining enterprises. Ob viously the buyers are always a small number of powerful economic interests who have been adding these enter prises to the monopolistic or oligopolistic structures with in which they operate. At the same time, a considerable number of industries have been sold to transnational corporations, among them the national tire industry (INSA), bought by Firestone for an undisclosed sum, and one of the main paper pulp industries (Celulosa Forestal Arauco), bought by Parsons & Whittemore.

There are many other examples to show that, as far as competition goes, Mr. Friedman’s prescription does not yield the economic effects implicit in his theoretical model. In the first half of 1975, as part of the process of lifting regulations from the economy, the price of milk was exempted from control. With what result? The price to the consumer rose 40 percent and the price paid to the producer dropped 22 percent. There are more than 10,000 milk producers in Chile but only two milk processing companies, which control the market. More than 80 percent of Chilean paper production and all of certain types of paper come from one enterprise—the Compañia Manufacturera de Papeles y Cartones, controlled by the Alessandri interests—which establishes prices without fear of competition. More than fifteen foreign brands are offered in the Chilean home appliances market, but they are all in the hands of only three companies, which assemble them in Chile and determine their retail prices.

Of course, any of the followers of the Chicago School would say that, with the liberalization of the interna tional market, as prescribed by the model, Chilean monopolies and oligopolies would be exposed to competition from abroad. However, that does not happen. Chile so lacks foreign currency that it cannot import what it needs, of even the most essential goods. Still more important is the fact that foreign enterprises are not interested in sending to Chile goods which could compete with those, manufactured by their own Chilean subsidiaries. Besides, in Chile the economic interests which control the manu facturing industry also control the financial apparatus and import activities. These groups are not disposed to compete with themselves. In short, the application of Friedman’s theories to the real world of Chile means that the industrialists can freely “compete” at whatever price levels they choose.

Other aspects of the brand of economics taught at the University of Chicago are conveniently ignored by the junta’s economic advisers. One is the importance of wage contracts freely negotiated between employers and workers; another is the efficiency of the market as an instrument to allocate resources in the economy. It is sardonic to mention the right of the workers to negotiate in a country where the Central Workers’ Federation has been outlawed and where salaries are established by the junta’s decree. It may also seem grotesque to speak of the market as the most effective instrument for allocating resources when it is widely known that there are practi cally no productive investments in the economy because the most profitable “investment” is speculation. Under the slogan “We must create a capital market in Chile,” selected private groups enjoying the junta’s protection have been authorized to establish so-called “financieras,” which engaged in the most outrageous financial specula tions. Their abuses have been so flagrant that even Orlando Saez, former president of the Chilean Indus trialists’ Association and a staunch supporter of the coup, could not refrain from protesting. “It is not pos sible,” he said, “to continue with the financial chaos that dominates in Chile. It is necessary to channel into productive investments the millions and millions of finan cial resources that are now being used in wild-cat specu lative operations before the very eyes of those who don’t even have a job.”

But the crux of Friedman’s prescription, as the junta never ceases to emphasize, is control of inflation. It should, according to the junta, enlist “the vigorous efforts of all Chileans.” Professor Harberger declared categori cally in April 1975: “I can see no excuses for not stop ping inflation: its origins are well known; government deficits and monetary expansion have to be stopped. I know you are going to ask me about unemployment; if the government deficits were reduced by half, still the rate of unemployment would not increase more than 1 percent.” According to the junta’s official figures, between April and December 1975, the government deficit was reduced by approxi mately the 50 percent that Harberger recommended. In the same period, unemployment rose six times as much as he had predicted. The remedy he continues to advocate consists of reducing government spending, which will reduce the amount of currency in circulation. This will result in a contraction of demand, which in turn will bring about a general reduction of prices. Thus inflation would be defeated. Professor Harberger does not say explicitly who would have to lower their standard of living to bear the casts of the cure.

Without a doubt, excessive monetary expansion con stitutes an important inflationary factor in any economy. However, inflation in Chile (or any underdeveloped country) is a far more complex problem than the one presupposed by the mechanical models of the monetarist theorists. The followers of the Chicago School seem to forget, for example, that the monopolistic structure of the Chilean economy allows the dominant firms to maintain prices in the face of falling demand. They also forget the role that so-called inflationary expectations play in generating price increases. In Chile, inflationary expecta tions have lately been approximating 15 percent per month. Looking ahead, firms prepare for rising costs by raising their own prices. This continuous price “leap-frogging” feeds a general inflationary spiral. On the other hand, in such an inflationary climate, no one with liquid assets wants to hold them. Powerful interest groups, operating without government control, can thus manipulate the financial apparatus. They create institutions to absorb any available money and use it in various forms of speculation, which thrive on and propel inflation.

The Economic Results: Three years have passed since this experiment began in Chile and sufficient information is available to con clude that Friedman’s Chilean disciples failed—at least in their avowed and measurable objectives—and particu larly in their attempts .to control inflation. But they have succeeded, at least temporarily, in their broader purpose: to secure the economic and political power of a small dominant class by effecting a massive transfer of wealth from the lower and middle classes to a select group of monopolists and financial speculators.

The empirical proof of the economic failure is over whelming. On April 24, 1975, after the last known visit of Messrs. Friedman and Harberger to Chile, the junta’s Minister of Finance, Jorge Cauas, said: “The Hon. junta have asked me to formulate and carry out an economic program primarily directed to eradicate inflation. To gether with a numerous group of technicians, we have presented to the Chilean authorities a program of eco nomic revival which has been approved and is begin ning. The principal objective of this program is to stop inflation in the remainder of 1975.” (The “group of technicians” is obviously Friedman and company.)

By the end of 1975 Chile’s annual rate of inflation had reached 341 percent—that is, the highest rate of inflation in the world. Consumer prices increased that same year by an average 375 percent; wholesale prices rose by 440 percent. Analyzing the causes of Chilean inflation in 1975, a recent report of the International Monetary Fund (IMF) says: “The cutback in government spending, with its adverse effects on employment, in housing, and public works, went significantly further than programmed in order to accommodate the large credit demands of the private sector.” Later on it states:

Overall monetary management remained expansionary in 1975. Moreover, continued high inflationary expectations and the public’s attendant unwillingness to increase its real cash balances greatly complicated the implementation of the monetary program.

Referring to private organizations which have begun to operate without any control, the report adds that the “financieras” have been allowed to operate beside the commercial banking system and at interest rates up to 59 percent higher than the maximum permissible banking rate. According to the same source, the “financieras” were operating in 1975 at an interest rate of 14 percent a month, or 168 percent a year; they obtained loans in New York at 10 percent to 12 percent a year.

The implementation of the Chicago model has not achieved a significant reduction of monetary expansion. It has, however, brought about a merciless reduction of the income of wage earners and a dramatic increase in unemployment; at the same time it has increased the amount of currency in circulation by means of loans and transfers to big firms, and by granting to private financial institutions the power to create money. As James Petras, an American political scientist, puts it: “The very social classes on which the junta depends are the main instrumentalities of the inflation.”

Concentration of wealth is not the marginal outcome of a difficult situation, but the base for a social project. The inflationary process, which the junta’s policies stimulated immediately after the coup, was slightly reduced in 1975 as compared to the unbelievable rate of 375.9 percent in 1974. Such a minor reduction, however, does not indicate any substantial approach to stabilization and seems on the whole utterly irrelevant to the majority of Chileans who must endure the total collapse of their economy. This situation recalls the story of a Latin Amer ican dictator at the beginning of this century. When his advisers came to tell him that the country was suffer ing from a very serious educational problem, he ordered all public schools closed. Now, more than seventy years into this century, there still remain disciples of the anec dotal dictator who think that the way to eradicate pov erty in Chile is to kill the poor people.

The exchange rate depreciations and the cutbacks in governmental expenditures have produced a depression which, in less than three years, has slowed the country’s rate of development to what it was twelve years ago. Real Gross Domestic Product (GDP) contracted during 1975, by nearly 15 percent to its lowest level since 1969, while, according to the IMF, real national income “dropped by as much as 26 percent, leaving real per capita income below its level ten years earlier.” The decline in the overall 1975 GDP reflects an 8.1 percent drop in the min ing sector, a 27 percent decline in the manufacturing indus tries and a 35 percent drop in construction. Petroleum extrac tion declined by an estimated 11 percent, while transport, storage and communications declined 15.3 percent, and com merce fell 21.5 percent. In the agricultural sector production appears virtually stagnant in 1975-76, with only an 0.4 percent variation from the previous agricultural year.

This stagnation has been caused by a combination of factors, including the con tinued rise in the cost of imported fertilizers and pesticides. The use of fertilizer dropped by an estimated 40 percent in 1975-76. The increase in import prices also accounted for the decline in production of pork and poultry, which are almost entirely dependent on imported feed. The re turn to the former owners of several million hectares of farm land that had been expropriated and transferred to peasant organizations under the 1967 Agrarian Re form Law, has also reduced agricultural production. As of the end of 1975 almost 60 percent of all agricultural es tates affected by the land reform—equivalent to about 24 percent of total expropriated land—has been subject to the junta’s decisions. Of this total, 40 percent of the agricul tural enterprises (75 percent of the physical acreage and more than 50 percent of the irrigated land) have entirely reverted to former owners.

In the external sector of the economy, the results have been equally disastrous. In 1975 the value of exports dropped 28 percent, from $2.13 billion to $1.53 billion, and the value of imports dropped 18 percent, from $2.24 billion to $1.81 billion, thus showing a trade deficit of $280 million. Imports of foodstuffs dropped from $561 mil lion in 1974, to $361 million in 1975. In the same period domestic food production declined, causing a drastic reduction in food for the masses of the popula tion. Concurrently, the outstanding external public debt repayable in foreign currency increased from $3.60 bil lion on December 31, 1974, to $4.31 billion on Decem ber 31, 1975. This accentuated Chile’s dependence on ex ternal sources of financing, especially from the United States. The junta’s policies have burdened Chile with one of the highest per capita foreign debts in the world. In the years to come the nation will have to allocate more than 34 percent of its projected exports earnings to the pay ment of external debts.

But the most dramatic result of the economic policies has been the rise in unemployment. Before the coup, unemployment in Chile was 3.1 percent, one of the lowest in the Western Hemisphere. By the end of 1974, the jobless rate had climbed beyond 10 percent in the Santiago metro politan area and was also higher in several other sections of the country. Official junta and IMF figures show that by the end of 1975 unemployment in the Santiago metro politan area had reached 18.7 percent; the corresponding figure in other parts of the country was more than 22 percent; and in specific sectors, such as the construction industry, it had reached almost 40 percent. Unemployment has con tinued to climb in 1976 and, according to the most conservative estimates, in July approximately 2.5 million Chileans (about one-fourth of the population) had no income at all; they survive thanks to the food and cloth ing distributed by church and other humanitarian organi zations. The attempts by religious and other institutions to ease the economic desperation of thousands of Chilean families have been made, in most cases, under the sus picion and hostile actions of the secret police.

The inhuman conditions under which a high percentage of the Chilean population lives is reflected most dramati cally by substantial increases in malnutrition, infant mortality and the appearance of thousands of beggars on the streets of Chilean cities. It forms a picture of hunger and deprivation never seen before in Chile. Families re ceiving the “minimum wage” cannot purchase more than 1,000 calories and 15 grams of protein per person per day. That is less than half the minimum satisfactory level of consumption established by the World Health Organization. It is, in short, slow starvation. Infant mortality, reduced significantly during the Allende years, jumped a dramatic 18 percent during the first year of the military government, according to figures provided by the U.N. Economic Commission for Latin America. To deflect criticism from within its own ranks against the brutal consequences of layoffs, the junta in 1975 established a token “minimum employment program.” However, it covers only 3 percent of the labor force, and pays salaries amounting to less than $30—a month!

Although the economic policies have more mercilessly affected the working classes, the general debacle has sig nificantly touched the middle-class as well. At the same time, medium-size national enterprises have had their expectations destroyed by the reduction in demand, and have been engulfed and destroyed by the monopolies against which they were supposed to compete. Because of the collapse of the automobile industry, hundreds of machine shops and small industries which acted as sub contractors have faced bankruptcy. Three major textile firms (FIAD, Tomé Oveja and Bellavista) are working three days a week; several shoe companies, among them Calzados Bata, have had to close. Ferriloza, one of the main producers of consumer durables, recently declared itself bankrupt. Facing this situation, Raul Sahli, the new president of the Chilean Industrialists’ Association, and himself linked to big monopolies, declared earlier in the year: “The social market economy should be applied in all its breadth. If there are industrialists who complain because of this, let them go to hell. I won’t defend them.” He is so quoted by André Gunder Frank in a “Second Open Letter to Milton Friedman and Arnold Harberger,” April 1976.

The nature of the economic prescription and its results can be most vividly stated by citing the pattern of domestic income distribution. In 1972, the Popular Unity Govern ment employees and workers received 62.9 percent of the total national income; 37.1 percent went to the propertied sector. By 1974 the share of the wage earners had been reduced to 38.2 percent, while the participation of property had in creased to 61.8 percent. During 1975, “average real wages are estimated to have declined by almost 8 percent,” according to the International Monetary Fund. It is probable that these regressive trends in income distribution have con tinued during 1976. What it means is that during the last three years several billions of dollars were taken from the pockets of wage earners and placed in those of capi talists and landowners. These are the economic results of the application in Chile of the prescription proposed by Friedman and his group.

A Rationale for Power: The economic policies of the Chilean junta and its re sults have to be placed in the context of a wide counter revolutionary process that aims to restore to a small minority the economic, social and political control it gradually lost over the last thirty years, and particularly in the years of the Popular Unity Government.

Until September 11, 1973, the date of the coup, Chilean society had been characterized by the increasing participation of the working class and its political parties in economic and social decision making. Since about 1900, employing the mechanisms of representative democ racy, workers had steadily gained new economic, social and political power. The election of Salvador Allende as President of Chile was the culmination of this process. For the first time in history a society attempted to build socialism by peaceful means. During Allende’s time in office, there was a marked improvement in the conditions of employment, health, housing, land tenure and education of the masses. And as this occurred, the privileged do mestic groups and the dominant foreign interests perceived themselves to be seriously threatened.

They have failed to destroy the consciousness of the Chilean people. The economic plan has had to be enforced. Despite strong financial and political pressure from abroad and efforts to manipulate the attitudes of the middle class by propaganda, popular support for the Allende government increased significantly between 1970 and 1973. In March 1973, only five months before the military coup, there were Congressional elections in Chile. The political parties of the Popular Unity increased their share of the votes by more than 7 percentage points over their totals in the Presidential election of 1970. This was the first time in Chilean history that the political parties supporting the administration in power gained votes dur ing a midterm election. The trend convinced the national bourgeoisie and its foreign supporters that they would be unable to recoup their privileges through the democratic process. That is why they resolved to destroy the demo cratic system and the institutions of the state, and, through an alliance with the military; to seize power by force.

In such a context, concentration of wealth is no acci dent, but a rule; it is not the marginal outcome of a difficult situation—as they would like the world to believe—but the base for a social project; it is not an economic liability but a temporary political success. Their real failure is not their apparent inability to redistribute wealth or to generate a more even path of development (these are not their priorities) but their inability to convince the majority of Chileans that their policies are reasonable and necessary. In short, they have failed to destroy the consciousness of the Chilean people. The economic plan has had to be enforced, and in the Chilean context that could be done only by the killing of thousands, the estab lishment of concentration camps all over the country, the jailing of more than 100,000 persons in three years, the closing of trade unions and neighborhood organizations, and the prohibition of all political activities and all forms of free expression.

While the “Chicago boys” have provided an appearance of technical respectability to the laissez-faire dreams and political greed of the old landowning oligarchy and upper bourgeoisie of monopolists and financial speculators, the military has applied the brutal force required to achieve those goals. Repression for the majorities and “economic freedom” for small privileged groups are in Chile two sides of the same coin.

There is, therefore, an inner harmony between the two central priorities announced by the junta after the coup in 1973: the “destruction of the Marxist cancer” (which has come to mean not only the repression of the political parties of the Left but also the destruction of all labor organizations democratically elected and all opposition, including Christian-Democrats and church organizations), the establishment of a free “private economy” and the control of inflation à la Friedman.

It is nonsensical, consequently, that those who inspire, support or finance that economic policy should try to present their advocacy as restricted to “technical consid erations,” while pretending to reject the system of terror it requires to succeed.


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Milton Friedman (1982): Free Markets and the Generals: Weekend Reading

Milton Friedman* (1982): Free Markets and the Generals: "The adoption of free-market policies by Chile with the blessing and support of the military junta headed by General Pinochet has given rise to the myth that only an authoritarian regime can successful ly implement a free-market policy. The facts are very different. Chile is an exception, not the rule. The military is hierarchical, and its personnel are imbued with the tradition that some give and some obey orders: it is organized from top down. A free market is the reverse. It is voluntaristic, authority is dispersed; bargaining, not submission to orders, is its watchword; it is organized from the bottom up...

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Ricardo's Big Idea, and Its Vicissitudes: Hoisted from the Archives

Hoisted from the Archives: Ricardo's Big Idea, and Its Vicissitudes https://www.bradford-delong.com/2017/10/ricardos-big-idea-and-its-vicissitudes-inet-edinburgh-comparative-advantage-panel.html:

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Ricardo's Big Idea, and Its Vicissitudes

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Perhaps. And Sometimes: Hoisted from the Archives from 2010

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Hoisted from the Archives: Perhaps. And Sometimes https://www.cato-unbound.org/2010/09/16/j-bradford-delong/perhaps-sometimes: In 542 AD the late Roman (early Byzantine?) Emperor Justinian I wrote to his Praetorian Prefect concerning the army — trained and equipped and paid for by the Roman State to control the barbarians and to “increase the state.” Justinian was, Peter Sarris reports in his Economy and Society in the Age of Justinian, upset that:

certain individuals had been daring to draw away soldiers and foederati from their duties, occupying such troops entirely with their own private business…. The emperor… prohibit[ed] such individuals from drawing to themselves or diverting troops… having them in their household… on their property or estates…. [A]ny individual who, after thirty days, continues to employ soldiers to meet his private needs and does not return them to their units will face confiscation of property… “and those soldiers and foederati who remain in paramonar attendance upon them… will not only be deprived of their rank, but also undergo punishments up to and including capital punishment.

Justinian is worried because what is going on in the country he rules is not legible to him. Soldiers — soldiers whom he has trained, equipped, and paid for — have been hired away from their frontier duties by the great landlords of the Empire and employed on their estates and in the areas they dominate as bully-boys. One such great landlord was Justinian’s own sometime Praefectus Praetorio per Orientem Flavius Apion, to whom one of Flavius’s tenants and debtors, one Anoup, wrote:

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Income and Wealth Distribution, or, Watching Professional Republicans Sell Their Souls Back in 1992: Hoisted from the Archives

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I have long wanted an undergraduate to write a senior thesis about this episode. I have never found one to advise to do so:

Hoisted from the Archives: The income distribution came on to the stage that is America's public sphere between February 14 and December 12, 1992. And the rhetoric of "X% of gains in per capita income over years Y-Z went to the top W%-iles of the income distribution" became a one in American political-economic discourse over that time period as well. Over those ten months then-New York Times economics reporter Sylvia Nasar wrote eight stories about income inequality in America. All of them were pitched at a high substantive and intellectual level—they would have fit into the New York Times's later Upshot (which has recently refocused at a less analytically-substantive level as concerned with "politics, policy, and everyday life"). This was, needless to say, very unusual for the New York Times.

Sylvia's first story addressed the peculiar fact that the "80's Boom", as Reagan Republicans and the New York Times called it, had seen the poverty rate not diminish but rise. Sylvia attributed that rise to union-busting, and a growing disparity between high- and low-wage jobs springing from a decline in relative manufacturing employment and possibly from boosted high-wage white-collar productivity from computerization. Her second story, on March 5, took a turn. Instead of continuing to investigate the causes of rising poverty and wage stagnation in a decade of supposed boom, it focused on "who had reaped the gains" from "the prosperity of the last decade and a half". It highlighted the "Krugman calculation". It began:

Populist politicians, economists and ordinary citizens have long suspected that the rich have been getting richer. What is making people sit up now is recent evidence that the richest 1 percent of American families appears to have reaped most of the gains from the prosperity of the last decade and a half. An outsized 60 percent of the growth in the average after-tax income of all American families between 1977 and 1989—and an even heftier three-fourths of the gain in average pretax income—went to the wealthiest 660,000 families, each of which had an annual income of at least $310,000 a year...

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My Job as the Economist Here Is to Do the Numbers...

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Council on Foreign Relations: The Future of Democracy Symposium: Session Two: Economics, Identity, and the Democratic Recession: My job as the economist here is to do the numbers.

Over the past forty, fifty years we’ve seen some alleviation of—call them gender hierarchies. Women, even women who are high school dropouts are making more money adjusted for inflation now than women were back in 1981. And that progress spreads up the distribution, so that the group that’s done at least as well as anyone else are women with advanced degrees in America. For them, America is fulfilling the promise that people thought or expect to have of it...

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Listening to Arsonists

No Longer Fresh at Project Syndicate: Listening to Arsonists: Barack Obama made a significant mistake in naming the Republican ex-senator Alan Simpson to co-chair the president’s deficit-reduction commission. Simpson was a noted budget arsonist when he was in the Senate, and he has recently expressed views that make no sense whatsoever: Simpson was a noted budget arsonist when he was in the Senate. Indeed, he never met a budget-busting, deficit-increasing initiative from a Republican president that he would not lead the charge to pass. Nor did he ever meet a sober deficit-reducing initiative from a Democratic president that he did not oppose with every fiber of his being...

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