Brad DeLong

The U.S. Equity Premium: Past, Present, and Future

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Did African Americans Exist as Moral Agents in 1860!

James Poulos sings the old neo-Confederate song:

Postmodern Conservative.: Abraham Lincoln, Suffering Sovereign: These are some of the most praiseworthy things I have to say about Lincoln, and by saying them, faithful readers might already know, I in no way intend to obscure the fact of US history that Lincoln resolved to bring that smiting and suffering upon large portions of Americans who exercised, through their elected representatives, their sovereign right to remain in the American nation but depart the American nation-state...

From my perspective, this is very bad and very extraordinary. The extraordinary thing about this sentence by James Poulos is how it overlooks the fact that a free vote of the inhabitants of each of the American slave states--including South Carolina--would almost surely have produced majorities not to secede but to stay in the union.

Anybody setting forth the self-evident principle that:

governments... instituted... deriving their just powers from the consent of the governed...

And asserting the people's sovereign right that:

any form of government... destructive of these ends... [triggers] the right of the people to alter or to abolish it, and to institute new government... on such principles and organizing its powers in such form... most likely to effect their safety and happiness...

had better have a solid majority on their side. Not a solid majority of an aristocracy. Not a solid majority of a political class. Not a solid majority of a race. But a solid majority of the people.

The confederate secessionists did not--few of the African-American slaves in the south, you see, preferred Jefferson Davis to Abraham Lincoln.

But it doesn't bother James Poulos very much that a majority of the people on whose behalf the "sovereign right to... depart the American nation-state" did not approve of the exercise of that right by those who claimed to be their representatives. African-Americans don't exist, after all--at least not as human beings with a moral claim to a form of government instituted to secure their unalienable rights.

We have seen this before in law professor Mark Graber's claim that the U.S. Constitution "ought" to have been revised in 1860 because it was a bargain between "Tribe A" northerners and "Tribe B" southern slaveholders, and it had unexpectedly worked out to the disadvantage of "Tribe B" (see http://delong.typepad.com/sdj/2007/01/more_dred_scott.html). Once again, African-Americans simply did not exist--at least not as human beings with moral claims.

Paul Krugman Wishes He Was a Happier Man

He writes:

What makes me happy - Paul Krugma: So, I was teaching one of my classes (WWS593), and somehow the subject veered off into monetary policy and the lessons of Japanese experience — so I decided to drop the prepared lesson plan and talk about Japan in the 90s. And one of my students said, “You look so happy!”

It’s true: back in the 90s, when I was writing about Japan’s liquidity trap and other overseas problems, were good years. My own country was governed by responsible people; we were actually having policy discussions based on intelligent, if differing, viewpoints. The truth is that I don’t like having to do what I do in the Times, pointing out lies and corruption all the time. I wish we were having a civilized discussion. But we aren’t.

Paul Krugman wishes he was a happier man. So do I.

I do think he views the Republicans of the 1990s through rose-colored glasses: remember, these were the people who explicitly said that the thing they had to stop above all were Democratic proposals that were good for the country.

Impeach George W. Bush. Impeach him now.

Bush Administration "Fiscal Restraint"

From Econobrowser:

Econbrowser: Perspective on Selective Fiscal Restraint and the Bush Administration: As the President and the Congress head to a showdown over SCHIP, it might be useful to see how, over the 2000-2005 period, the Federal government's fiscal exposure evolved.... I rely upon... the most recent version of David Walker's Fiscal Wake-up tour http://www.gao.gov/cghome/d061084cg.pdf.... "Medicare Part D", which was a zero entry in 2000. So when the Administration decries the $5 billion per year increase embedded in the [SCHIP] legislation, compare it to the $8.7 trillion fiscal exposure that the Congress passed and the President signed. (For more on the sordid story of information-suppression in the run-up to passage, see here.)

Political Economy 101: "Modern" Political Economy: The First Month of Audio Files

August 28: Opening Lecture

August 30: MISSING

September 4: Slow Spread of Industrialization Lecture

September 11: The Coming of World War I

September 13: World War I and John Maynard Keynes

September 18: Smithian Economics and Keynesian Economics

September 20: Europe Between the Wars

---

UPDATE: Marc Andreesen asks for downloadable audio files of my lectures this fall.

I am stuffing them all into:

http://www.j-bradford-delong.net/2007_audio

and:

http://web.mac.com/jbdelong/Brad_DeLongs_iWeb/Coffee_and_Tea_Audio_Podcasts/Coffee_and_Tea_Audio_Podcasts.html

With a podcast URL of:

Post-Lecture iPhone Blogging

Is something horribly wrong? Or is something wonderfully right?

Here I am, picking up after lecture. I am packing away:

• the iPod in my left shirt pocket that was recording the audio from the lecture
• the iPhone in front of me that has my lecture notes on it (and that I am blogging from)
• the laptop to my left which was controlling the screen
• the laptop to my right which I had connected via wireless and was checking quotes from Lincoln during the lecture

I am reminded of a wonderfully cheesy line from Isaac Asimov's wonderfully cheesy Second Foundation:

There you would have been invulnerable, in the midst of your minions and machines, and with your mental power...

I have no minions. But the machines and mental power I have.

Time to Shut Down the New Republic

The New Republic regards a suitable debating partner on tax policy to be... Grover Norquist:

How The GOP Became the Anti-Tax Party. A TNR Debate, Part 1.: A TNR ONLINE DEBATE: by Jonathan Chait & Grover G. Norquist: Editor's Note: Today we present the first part of a debate between Grover Norquist, president of Americans for Tax Reform, and TNR Senior Editor Jonathan Chait about Chait's new book, The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics, and America's tax policy. (You can read an excerpt from the book here.) The debate will continue this week.

Why oh why can't we have a better press corps?

Why You Should Read Jonathan Chait's "The Big Con"

Two reasons: (a) the book is very well written; (b) the book has a very important message.

Jonathan Chait summarizes the message of _The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by CrackpotEconomics in email:

Let me take this as a serious question and offer an answer: It's important to understand that the Republican Party is mostly an organized conspiracy to redistribute wealth upwards, that deceit is an essential element of their M.O., that the conservative movement is fundamentally radical and dangerous, that the national media have done an abysmal job of covering politics and policy, and that the Bush administration has overturned the basic norms of governance that have prevailed for decades...

Law Professor Mark Graber Strikes Again

When last we saw law professor Mark Graber, he was celebrating Martin Luther King, Jr. birthday weekend by asserting that Roger Taney's opinion in Dred Scott was sound--an act of judicial statesmanship--and had wedged himself into a position to the right of John C. Calhoun, arguing that the 1787 U.S. Constitution incorporated principle of "concurrent majorities" that made it substantively unconstitutional for legislation affecting slavery to be passed by a section-specific majority.

Now Mark Graber is back: This time it is one of the most bizarre ripping-of-quotations-from-context I have ever seen, asserting that the differences on slavery between Roger B. Taney and Abraham Lincoln were "almost trivial." In making this argument, Graber lets Lincoln speak for one single clause before silencing him and hustling him offstage:

Balkinization: A good case can be made for tearing down the bust of Roger Brooke Taney that stands in front of the city hall in Frederick.... Taney wrote the opinion for the Supreme Court in Dred Scott v. Sandford (1856)... that persons of color could not be American citizens and that slavery could not be prohibited in American territories.... While the bulldozers are rented, we might get our money’s worth and tear down all statues honoring Abraham Lincoln. Lincoln insisted he "never complained especially of the Dred Scott decision because it held that a negro could not be a citizen..."

From a contemporary perspective, the differences between Lincoln and Taney seem almost trivial. The sixteenth president opposed making persons of color citizens of Illinois, advocated federal fugitive slave laws, endorsed slaveholding in the nation’s capital, and insisted that the federal government had no power to interfere with slavery in any state in which human bondage was legal. Their only serious dispute was over whether slaveholders could take their human property to North Dakota, a place few if any slaveholders had expressed interest in settling...

Let us bring Abraham Lincoln back on stage, and let him say more than the nineteen words from his Alton speech that Graber lets him say. Here is what Lincoln said about the "almost trivial" differences between him and the anti-anti-slavery Democrats like Stephen Douglas (let along the pro-slavery Democrats like Roger Taney):

Last Joint Debate, at Alton. Mr. Lincoln's Reply. Lincoln, Abraham. 1897. Political Debates Between Lincoln and Douglas: Judge Douglas... says he “don’t care whether [slavery] is voted up or voted down” in the Territories. I do not care myself, in dealing with that expression, whether it is intended to be expressive of his individual sentiments on the subject, or only of the national policy he desires to have established. It is alike valuable for my purpose. Any man can say that who does not see anything wrong in slavery; but no man can logically say it who does see a wrong in it, because no man can logically say he don’t care whether a wrong is voted up or voted down. He may say he don’t care whether an indifferent thing is voted up or down, but he must logically have a choice between a right thing and a wrong thing. He contends that whatever community wants slaves has a right to have them. So they have, if it is not a wrong. But if it is a wrong, he cannot say people have a right to do wrong.... You may turn over everything in the Democratic policy from beginning to end, whether in the shape it takes on the statute book, in the shape it takes in the Dred Scott decision, in the shape it takes in conversation, or the shape it takes in short maxim-like arguments, it everywhere carefully excludes the idea that there is anything wrong in [slavery].

That is the real issue. That is the issue that will continue in this country when these poor tongues of Judge Douglas and myself shall be silent. It is the eternal struggle between these two principles—-right and wrong—-throughout the world. They are the two principles that have stood face to face from the beginning of time, and will ever continue to struggle. The one is the common right of humanity, and the other the divine right of kings. It is the same principle in whatever shape it develops itself. It is the same spirit that says, “You work and toil and earn bread, and I’ll eat it.” No matter in what shape it comes, whether from the mouth of a king who seeks to bestride the people of his own nation and live by the fruit of their labor, or from one race of men as an apology for enslaving another race, it is the same tyrannical principle...

Mark Graber may think this difference is "almost trivial." I cannot find anybody else who does.

Matthew Yglesias Praises Chris Dodd

He is right to do so. Chris Dodd does good:

Matthew Yglesias (August 15, 2007) - The Cuba Factor (Foreign Policy): Not that it's going to make him president, but Chris Dodd is making sense:

For more than forty-six years, the United States has maintained an isolationist policy toward Cuba, which I believe has not achieved its intended objectives, namely to hasten a peaceful and democratic transition on the Island of Cuba. Rather, it has solidified the authoritarian control of Fidel Castro, and has adversely affected the already miserable living conditions of 11 million innocent men, women, and children on the Island.

I think Democrats due themselves a disservice when they pander to the absurd views of the Cuban exile lobby rather than saying these words that everyone knows to be true. Among other things, it makes it difficult for Democrats to argue for engagement with Iran or Syria or wherever when they can't point to the most clear-cut and famous example of the failure of isolation strategies.

Today Is a Great Day in Finance!

Today is a great day in finance! That is, it is a great intellectual day for those of us who are friends of and committed to the intellectual project of Shleifer and Vishny, for today one of their theories is made flesh, and stomps about Wall Street like Godzilla:

Andrei Shleifer and Robert W. Vishny (1997), "The Limits of Arbitrage," Journal of Finance, 52:1, pp. 35-55. Abstract: Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them...

Yes, today we have reached the limits to arbitrage: most of the people who spend their lives trying to buy low and sell high using other people's money and leverage have given up extending their positions (and so pushing prices back toward normal-time fundamentals), and are hunkered down simply hoping to survive the next month.

Whether this will have macroeconomic implications is unclear, but I would bet not. The Fed and the ECB are pegging the prices of liquid securities, and injecting as much in the way or safe, liquid, short-term assets into the system as needed to keep that so. They are also in the market in other ways. And the nightmare scenarios always involved a simultaneous collapse in the dollar and in consumer demand, and a Fed that couldn't decide whether to fight the inflation coming from rising import prices or the unemployment coming from collapsing consumer spending. Neither of those show any signs of happening.

Yet.

http://scholar.google.com/scholar?q=shleifer+vishny+limits+to+arbitrage&num=100&hl=en&c2coff=1&safe=off&client=safari&rls=en-us&pwst=1&um=1&oi=scholart

Tyler Cowen on IQ Tests and Development

If the seventeen-year-old had dropped out of school at 15, stopped reading and writing and stopped going to math class and doing math homework, and gone to work on a farm in poor rural Mexico, his math SAT score right now would be close to his PSAT score then rather than 210 points higher, and his reading and writing SAT scores right now would be close to his PSAT score then rather than 180 points higher.

Tyler Cowen on IQ and development:

Marginal Revolution: IQ and the Wealth of Nations: IQ How many more times will someone suggest this book in the comments section of this blog?  I like this book and I think it offers a real contribution.  Nonetheless I feel no need to suggest it in the comments sections of other peoples' blogs. I do not treat this book as foundational because of personal experience.  I've spent much time in one rural Mexican village, San Agustin Oapan, and spent much time chatting with the people there.  They are extremely smart, have an excellent sense of humor, and are never boring.  And that's in their second language, Spanish. I'm also sure they if you gave them an IQ test, they would do miserably.  In fact I can't think of any written test -- no matter how simple -- they could pass.  They simply don't have experience with that kind of exercise.

When it comes to understanding the properties of different corn varieties, catching fish in the river, mending torn amate paper, sketching a landscape from memory, or gossiping about the neighbors, they are awesome. Some of us like to think that intelligence is mostly one-dimensional, but at best this is true only within well-defined peer groups of broadly similar people.  If you gave Juan Camilo a test on predicting rainfall he would crush me like a bug.

OK, maybe I hang out with a select group within the village.  But still, there you have it.  Terrible IQ scores (if they could even take the test), real smarts. So why should I think this book is the key to understanding economic underdevelopment?

Let Us Now Praise Famous Men

Alex Tabarrok directs our attention to the farmeres of Xiaogang:

Marginal Revolution: China and Industrial Policy: Brad goes over the top for Deng Xiaoping.... Without denying Deng's importance, I would say that China's great leap forward came with the death of Mao Zedong. Once Mao - quite possibly the greatest human killer of the twentieth century - was dead, China could almost not help but improve.... [T]he Chinese people, especially the peasant farmers, deserve a huge amount of credit.  Here's a couple of paragraphs I wrote recently:

The Great Leap Forward was a great leap backward - agricultural land was less productive in 1978 than it had been in 1949 when the communists took over.  In 1978, however, farmers in the village of Xiaogang held a secret meeting.  The farmers agreed to divide the communal land and assign it to individuals – each farmer had to produce a quota for the government but anything he or she produced in excess of the quota they would keep.  The agreement violated government policy and as a result the farmers also pledged that if any of them were to be jailed the others would raise their children.

The change from collective property rights to something closer to private property rights had an immediate effect, investment, work effort and productivity increased.  “You can’t be lazy when you work for your family and yourself,” said one of the farmers.

Word of the secret agreement leaked out and local bureaucrats cut off Xiaogang from fertilizer, seeds and pesticides.  But amazingly, before Xiaogang could be stopped, farmers in other villages also began to abandon collective property.

Deng and others in the central leadership are to be credited with recognizing a good thing when they saw it but it was the farmers in villages like Xiaogang that began China's second revolution.

Addendum: For the story of Xiaogang I draw on John McMillan's very good book, Reinventing the Bazaar.

Posted by Alex Tabarrok

Tyler Cowen Fears the Virginia Department of Transportation

In the mid-1990s Tyson's Corner was already a kind of "lasciate ogni speranza" place. I cannot imagine what it is like now--or what it will be like in the future:

Marginal Revolution: The destruction of Tysons Corner?: can't wrap my mind around how Tysons Corner will keep going.  The plan is to take one of America's most successful "edge cities" and centrally plan it into a walkable neighborhood, yet that is to happen while five major roads -- three of them multi-lane highways -- will continue to carve up the whole area.

Have I mentioned they will build elevated rail service to Dulles Airport?  This sounds quaint and European but there is already a dedicated, virtually traffic-free road to that airport, in addition to three or four totally usable back routes.  The new rail line will sit atop Route 7 (the major artery), necessitating its widening and the destruction of the side and access roads which make transversing the area a workable proposition.

Quotations like this scare me:

VDOT has agreed to narrow the eight future lanes of Route 7 to 11 feet from the standard 12, to allow for two additional pedestrian crossings beneath the aerial line and to build eight-foot sidewalks. "We've always emphasized that we need wider sidewalks, we need more pedestrian crosswalks, we need to slow traffic down," Stevens said...

I have heard construction will take six to eight years, which I assume means eight to twelve years.

Aesthetically you may or may not like what Tysons Corner has become, but at this point there is no turning back.  I simply do not see how an already traffic-heavy Tysons Corner will survive this onslaught.  The theory is that enough people will live in nearby condos (didn't the real estate bubble just burst?) that in the proverbial long run traffic will fall.  Betting markets, anyone?  When people rely on an area as one part of their programme for auto-based, carry-around-big-packages, lug the kids, multiple stops, mass transit doesn't have much of a chance.

I've already made my plans ("Find new Persian restaurant with Zereskh Polo") for avoiding the area altogether, quite possibly for the rest of my adult life...

Poor John Updike. Poor New Yorker. The Great Depression Once Again

Oh, this is sad. Really sad. Depressing. And pathetic. It is really too bad that the New Yorker gave Amity Shlaes's book about the Depression, The Forgotten Man to John Updike to review. A competent editor would have chosen a reviewer who knew economics and history. But Updike is lost from the start:

Laissez-faire Is More: [Shlaes tells us that the 1929] crash preceded an underlying problem, deflation, caused by not enough money in circulation as banks failed and shut their doors; a number of dollar-starved communities—Salt Lake City; Ventura, California; Yellow Springs, Ohio—issued their own scrip, while Presidents Hoover and then Roosevelt supported policies, like the gold standard, aimed at a nonexistent inflation...

We need to stop right there. Roosevelt abandoned the gold standard. That Updike thinks that Roosevelt spent the 1930s clinging to the gold standard to control "a nonexistent inflation" is the first sign that he has lost the game of intellectual three-card monte Amity Shlaes is playing with her readers. If Milton Friedman were here, he would blow the whistle at that point.

Updike goes on:

[T]he gravest problem, as Shlaes sees it, was government “intervention, the lack of faith in the marketplace.” Both Presidents tried to lift wages, when letting them sink would have liberated businesses to start hiring and resume business as usual. Business knows best...

Once again, Milton Friedman would blow the whistle if he were here. The main thing reducing the stock of money was bank failures. The main thing causing bank failures was falling prices of all kinds--of real estate, of consumer goods, and of labor. More of what Milton Friedman's teacher Jacob Viner called "unbalanced deflation" would have produced an even deeper depression.

If only Updike knew this. If only Updike knew that nearly all economists--from Milton Friedman to Ben Bernanke to John Maynard Keynes to John Kenneth Galbraith on left--believed that further and faster deflation would have made the Great Depression worse! Here's John Maynard Keynes's argument: "Changes in Money Wages" http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch19.htm. It was written in 1936, and still reads very well today. But nobody told Updike.

Hoove... was a dynamo... he favored government intervention, as long as it didn’t violate his sense of the Constitution, and sought control over economic events that would, according to Shlaes, have gone better if left alone.... Shlaes pursues her thesis through the thirties, few heroes emerge, and the most highly placed two are not apt to figure in many liberal pantheons: Calvin Coolidge and Andrew Mellon. Coolidge... is presented as a kind of Zen saint, a pillar of inaction.... [Shlaes] underlines Mellon’s honorableness, private generosity, and public spirit...

But she doesn't tell Updike that at the bottom of Mellon's personality was a pronounced social-darwinist streak, a belief that you had to be cruel to be kind. And Updike, of course, doesn't know. So he cannot quote Herbert Hoover's retrospective judgment of Mellon, that the policies Mellon had convinced him to follow made the Great Depression much worse:

[T]he “leave it alone liquidationists” headed by [my] Secretary of the Treasury Mellon... felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people”...

Updike forges on, lost in the swamp, so lost that he is unable to protest Shlaes's libel that that Roosevelt was practically a fascist and her argument--argument--a very serious argument that has never been made in such detail or such care--that Roosevelt wanted to make the government boss people around because he couldn't use his legs:

Shlaes, in a bold stroke of psychologizing, lays the hyperactivity to “the restlessness of the invalid.” She goes on, “Like an invalid, the country took pleasure in the very thought of motion.” More ominous was Roosevelt’s totalitarian tendency: “His remedies were on a greater scale and often inspired by socialist or fascist models abroad.”

Updike watches Shlaes make the claim that that communist Roosevelt hired other commies as New Dealers:

One of Shlaes’s chapter-length detours deals with a junket... to investigate and report on conditions in the Soviet Union.... [T]he economic commentator Stuart Chase.... Stuart Chase upon his return wrote, “Laissez-faire rides well on covered wagons, not so well on conveyor belts and cement roads.” Collectivism was the inevitable direction. After all, Chase wrote, “why should Russians have all the fun remaking a world?” The poisoned chalice was passed around...

But then she doesn't:

But “few New Dealers were spies or even communists,” she reassures the reader....

At the end of his review, Updike tries to fight back:

[T]he Depression slogged on, ending only in 1940, as the government decisively hiked defense spending.... My father had been reared a Republican, but he switched parties to vote for Roosevelt.... The impression of recovery-—the impression that a President was bending the old rules and, drawing upon his own courage and flamboyance in adversity and illness, stirring things up on behalf of the down-and-out—mattered more than any miscalculations in the moot mathematics of economics. Business, of which Shlaes is so solicitous, is basically merciless.... Government is ultimately a human transaction, and Roosevelt put a cheerful, defiant, caring face on government at a time when faith in democracy was ebbing throughout the Western world. For this inspirational feat he is the twentieth century’s greatest President, to rank with Lincoln and Washington as symbolic figures for a nation to live by.

A better New Yorker editor would have chosen a reviewer who at least knew what an aggregate demand curve was. Here's my take:

http://delong.typepad.com/sdj/2007/02/arnold_kling_vs.html: I, at least, think that as far as recovery was concerned the macroeconomic good done by the New Deal vastly outweighed the structural bad. Any reasonable counterfactual involving no New Deal that I can see has things a good deal worse in the middle and late 1930s than they were in our reality.

But there is an argument to be made that an even better New Deal would have been possible, and ought to have been attainable.

Had Milton Friedman been special assistant to and whispering in the ear of Fed Chair Marriner Eccles in 1936-1938, he would have successfully headed off Eccles's boneheaded idea of raising reserve requirements on banks. Then the late 1930s would have been a much happier time. Had FDR given his baton in 1933 to trustbuster Thurman Arnold rather than to cartelizer Hugh Johnson and had the initial round of the New Deal increased rather than decreased the degree of competition in the American economy, then... well, the neoclassical part of my brain thinks that 1934 and 1935 would have been somewhat happier--but the Fundie Keynesian part of my brain thinks that Hugh Johnson's NRA was irrelevant because aggregate demand was a much bigger problem then than aggregate supply....

The New Deal essentially dusted off and implemented the unsuccessful Progressive Era program for the reform of American finance that had been pushed by the likes of Louis Brandeis during the 1900s and the 1910s. And Louis Brandeis was definitely on the side of the upwardly-mobile and the smart and technically competent, as opposed to the side of old wealth and new thrift.... Financial markets function well for the economy only when they do a good job of seeking out and transmitting information.... This requires that people be incentivized to seek out and uncover important pieces of information by being able to profit handsomely from doing so--which requires that there be a bright visible line between what you can do and what you can't, between legitimate research and illegitimate insider trading. The SEC as born in the New Deal has always found it relatively difficult to draw such a bright visible line....

[On the other hand] financial markets also function well only when they mobilize great masses of savings from scattered individuals by giving them confidence that their investments are liquid in that they can be bought and sold at a fair price.... Smart financial regulation attains a point of balance. There is... a general worry that the system the New Deal has left us pays too much attention to the desirability of a level playing field for buyers and sellers, and not enough to the desirability of having truly informed buyers and sellers....

[L]et's not lose sight of the fact that even badly-handled as it was, really-existing deposit insurance [implemented during the New Deal] was a mammoth improvement over no deposit insurance at all. I think that that is a good thumbnail summary of the entire New Deal: badly-handled, but a vast improvement over the preceding system and over the politically-viable alternatives--with the exception, I would argue, of Agriculture Support and the NRA, which did little if any good at immense long-run cost...

Links: I like J. Bradford DeLong's Journal of Economic Perspectives article http://econ161.berkeley.edu/pdf_files/Keynesianism_Pennsylvania.pdf and his still unpublished attempt to get at the guts of the economic advice Joseph Schumpeter and others were giving in 1933 http://econ161.berkeley.edu/pdf_files/Liquidation_Cycles.pdf--what John Maynard Keynes called "extraordinary imbecility." An online for-pay version of Joseph Schumpeter et al. (1934), The Economics of the Recovery Program is at< http://www.questia.com/library/book/the-economics-of-the-recovery-program-by-douglass-v-brown-edward-chamberlin-seymour-e-harris.jsp>. Schumpeter and company were fiercely critical of the New Deal. A contemporary review of their book by Princeton's Otto Nathan is here http://links.jstor.org/sici?sici=0022-3808%28193408%2942%3A4%3C537%3ATEOTRP%3E2.0.CO%3B2-D.

Wikipedia has good background entries on Huey Long http://en.wikipedia.org/wiki/Huey_Long, the Bonus March http://en.wikipedia.org/wiki/Bonus_march, and Father Coughlin http://en.wikipedia.org/wiki/Charles_Coughlin.

For Eichengreen and Sachs on abandonment of the gold standard--which Roosevelt did in 1933--as the key to even partial recovery from the Great Depression: "Exchange Rates and Economic Recovery in the 1930s" http://scholar.google.com/scholar?num=100&hl=en&lr=&safe=off&c2coff=1&client=safari&q=Eichengreen+and+Sachs&btnG=Search

Ben Bernanke's analysis of the role played by unstemmed financial panics, industrial bankruptcies, and bank closings is Ben Bernanke (1983), "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review, 73, (June) pp. 257-76 at google scholar >http://scholar.google.com/scholar?num=100&hl=en&lr=&safe=off&c2coff=1&client=safari&q=Nonmonetary+Effects+of+the+Financial+Crisis+in+the+Propagation+of+the+Great+Depression&btnG=Search>. Ben has a nice speech about money, gold, and the Great Depression http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm.

Milton Friedman and Anna Schwartz's account of the role played in the Great Depression by gold-standard and other policies that contributed to the sharp decline in the money supply is in the "Great Contraction" chapter of their Monetary History of the United States http://scholar.google.com/scholar?num=100&hl=en&lr=&safe=off&c2coff=1&client=safari&q=Monetary+History+of+the+United+States&btnG=Search.

"Orthodox" and "Heterodox" Economics Once Again

I'm going to duck and let Barkley Rosser duke it out with Thomas Palley.

Barkley says that leading American Keynesian or neo-Keynesian or new Keynesian Ben Bernanke--former co-editor of the flagship American Economic Review, former chair of the Princeton Economics Department, former chair of the President's Council of Economic Advisers, current chair of the Board of Governors of the Federal Reserve and of the Federal Open Market Committee, one of America's leading economists in institutional, research, and policy arenas--has "heterodox ideas." He is, according to Barkley, a "non-orthodox mainstream" economist who has spent his career "reviving a non-orthodox idea, financial fragility" and successfully "brought the idea out of the shadows of non-respectability where the rat[ional ]ex[pectations] 'revolution' had put it."

Palley says that orthodox economics "exclude[s] ideas that don’t fit... create[s] barriers to entry and expression.... [To] counter Diane Coyle’s claim that heterodox economists have nothing to complain about.... The last time a paper on macroeconomics with a Keynesian structure was published in the American Economic Review was in the early 1980s. Send in such a paper and it will be immediately rejected as “old” economics. That is a matter of taste. There is simply no scientific basis for rejecting the Keynesian description of how the economy works.... [T]he orthodoxy dismissed (and still dismisses) Keynesian theory on the grounds that perfectly flexible prices and wages will automatically solve real world unemployment.... [I]t is increasingly hard to have conversations with mainstream economists.... [H]eterodox economists know the orthodoxy.... [O]rthodox economists increasingly have no knowledge of heterodoxy and are proud of that ignorance..."

Hoisted from Comments: Barkley Rosser:

Ben Bernanke, Mortgages, the Financial Accelerator, and the Macroeconomic Consequences of "Financial Fragility": Well, conversation here has stopped, but I feel the need to add a bit more in light of my being wrong and brad's request about how all this relates to heterodoxy.... In 2004, David Colander and Ric Holt and I published an article ("The Changing Face of Mainstream Economics") in the Review of Political Economy.... [W]e distinguished between the concepts of "orthodox, mainstream, and heterodox" in the following way: orthodox is a set of ideas, presumably equaling "neoclassical economics" with its trinity of greed, rationality, and equilibrium; mainstream is a sociological category, consisting of the economists in charge of the leading departments, journals, and funding sources; and heterodox is both, anti-orthodox intellectually and also alienated from the mainstream sociologically, on the fringes professionally, with or without due cause.

The controversial aspect of this is that it allows for the category of "non-orthodox mainstream"... [like] George Akerlof, whose AEA presidential address had some people upset in the Chris Hayes Nation article on neoclassical mafias. There was this terribly respectable, mainstream economist, Nobel Prize winner and AEA president, uttering these clearly non-orthodox ideas about macroeconomics, egad!...

[W]e argued that the real intellectual action is on the boundary between the mainstream and the heterodox, with the orthodox in effect being... fossilized and ossified.... [T]he people who were more likely to be engaging in outright repression of ideas were less likely to be the elite at the very top of the mainstream, who tend to be pretty open-minded, but more second-tier players, stupidly enforcing dead (or dying) orthodoxies. Hence, at Notre Dame the villains were a bunch of third rate deans and nobodies, far less well known than some of the people they were criticizing and repressing, a pathetic joke really.

So, bringing this back to Bernanke, clearly he is an example of somebody who fits this non-orthodox mainstream category. He made his fame by reviving a non-orthodox idea, financial fragility.... I will give him credit that apparently he did cite Minsky and Kindleberger, as well as Fisher... brought the idea out of the shadows of non-respectability where the ratex "revolution" had put it... [and] to the attention of policymakers... although as I previously noted, many such policymakers never stopped taking it seriously.

Thomas Palley:

Are Heterodox Economists Just Unhappy Whiners?: Economists also use private languages to exclude the public, to exclude ideas that don’t fit those languages, and to create barriers to entry and expression.... I would like to... counter Diane Coyle’s claim that heterodox economists have nothing to complain about.... The last time a paper on macroeconomics with a Keynesian structure was published in the American Economic Review was in the early 1980s. Send in such a paper and it will be immediately rejected as “old” economics. That is a matter of taste. There is simply no scientific basis for rejecting the Keynesian description of how the economy works.

That leads to the practice of economics in the real world.... [T]he orthodox cup is filled with hard-core orthodox theory, [but] the lip of orthodox policy practice quickly and easily slips into Keynesian thinking. This suggests Keynesians may be more right than the orthodox.... [Consider] the scare with deflation during the last recession. Suddenly, the orthodoxy started arguing at the policy level that inflation could be damaging and the economy might get trapped with sustained unemployment... exactly what Keynes claimed, yet the orthodoxy dismissed (and still dismisses) Keynesian theory on the grounds that perfectly flexible prices and wages will automatically solve real world unemployment....

[I]t is increasingly hard to have conversations with mainstream economists.... [H]eterodox economists know the orthodoxy.... [O]rthodox economists increasingly have no knowledge of heterodoxy and are proud of that ignorance.... For instance, “old” Keynesian economics is often accused of lacking so-called “optimizing foundations”, which is complete nonsense. Keynesian economics has long emphasized rational consumers and profit maximizing firms – and has been criticized for it by other heterodox economists...

The kindest thing one can say about Thomas Palley is that he suffers from a bad Groucho Marx problem: "heterodox" ideas that appear in orthodox flagship journals in articles written by prominent mainstream economists cannot really be "heterodox" at all because everyone knows that economic orthodoxy is hegemonic and exclusive.

Say the secret word and win $100!

But let's give the microphone back to Palley:

Heterodox Alternatives: “[N]ew Keynesianism” – a form of intellectual cuckoo that took over the Keynesian nest and pushed out the real Keynesian ideas (PS. Brad, you’re not chopped liver, but you are scrambled eggs. PPS. Nice post about the tool kit)...

Mark Thoma on Progressive Taxation

Mark Thoma writes, on progressive taxation:

Economist's View: Progressive Taxation as a Political Shield for Globalization: First, when there is change such that makes one group better off at the expense of another as has happened recently with globalization, and when redistribution can leave everyone better off, then redistribution is justified.

Second, I think everyone should have equal opportunity to be a CEO or a hedge fund manager, or whatever they want to be. However, the playing field is far from level and there is a lot more we could do on this side of the equation. Not everyone will be a CEO of course, or achieve their dream job whatever it might be, but everyone should have an equal chance to be one of the winners. In the meantime, until more has been done to level the playing field, progressive taxation is a means of making up for inequality in opportunity.

Third, for me at least, progressive taxation is justified by the equal marginal sacrifice principle (the last dollar paid should cause the same amount of disutility for everyone). Thus, even if opportunity is equal, and even if there were no winners and losers to worry about, justification for progressive taxation would remain. I think a more progressive tax structure than we currently have is needed to equalize the disutility of paying taxes.

We could list "preventing a political backlash" as a fourth reason for redistribution. But I'm not sure we need to invoke the political economy argument. If we use progressive taxation in accordance with the three principles above, then income will be more equally distributed and a backlash against globalization is less likely to occur.

James K. Galbraith's John Kenneth Galbraith Lecture

A very good meditation on issues discussed at TPM Cafe, through a family-history lens:

Hips, Heterodoxy, and the Abiding Economics of JKG | TPMCafe: A frequent comparison [of John Kenneth Galbraith] is to Thorstein Veblen, as a brilliant mind, writer and social critic. At one level, who would not be content with that? But I always thought that Galbraith deserved more – and that Veblen also deserves more than he characteristically gets from such comparison to Galbraith. The deficiency lies in the way they tend to be treated as economists....

What are the core propositions of Galbraith’s thought?....

From The Great Crash, we have of course the conviction that financial panics affect real activity. No one in the 19th century or with experience of agriculture ever seriously doubted that the economy runs on credit or that real activity depends on banks. Only in the higher reaches of academic life could such a thing be denied. The denial, nevertheless, took powerful hold. The Great Crash is a wonderful corrective.... Here we have not only mass psychology and vulnerable technology – the panic that outruns the ticker, as it did again in the market break of 1987. But The Great Crash also gives us the subtle interplay of players: How National City bribed the son of Peru’s president $450,000 for the privilege of marketing fifty million dollar loan. As Galbraith notes, “Juan’s services were of a rather negative sort. He was paid for not blocking the deal.”... The Great Crash is built on such stories. Taken together, they teach us that economics, like history, is made at least in part by particular persons. This is a message that the profession has stoutly resisted.... Though the essential precedent for this approach – generalization from example – goes back to Adam Smith, there are not many passages in economics since Smith that illuminate a new subject with such penetration....

The Affluent Society is now remembered for its endearing, enduring phrases, above all the “concept of the conventional wisdom,” and for its evocative passages on private opulence and public squalor, such as the one about the “family which takes its mauve and cerise, air-conditioned, power-steered and power-braked automobile out for a tour [and] passes through cities that are badly paved, made hideous by litter, blighted buildings, and posts for wires that should long since have been put underground...” before going on to “picnic on exquisitely packaged food from a portable icebox by a polluted stream [and spending] the night at a park which is a menace to public health and morals.” But... we find a logical demolition of the orthodox theory of consumer choice. It proceeds from the unassailable observation that stable preferences cannot exist for goods that do not exist. The process of innovation necessarily entails the creation of markets. Thus the Dependence Effect: the dependence of consumption on production and not the other way around....

Then we have the theory of economic organization in The New Industrial State. Here Galbraith built on the foundation of Berle and Means, on Joseph Schumpeter and to some extent on Max Weber, on the behavioral formalisms of Herbert A. Simon, and on his own American Capitalism of 1952 and its concept of countervailing power... conveying understanding not only of the separation of ownership from control but also the significance of the specific bureaucratic processes that generate corporate decision-making and the interplay of company and state. In The New Industrial State, Galbraith challenges us to contemplate rigorously what happens when power passes irrevocably into the organization. He forces us to recognize that the fundamental decision-making process of modern economics – maximization subject to constraint – is untenable in a world of asymmetric information (as Stiglitz has taught us to call it) and negotiated decisions representing the compromised interests of established players.

The New Industrial State did not anticipate later developments in many respects. The incursion of the Japanese technostructure (especially in steel and autos) onto the American scene in the 1970s, eventually stabilized by market sharing deals under President Reagan, wasn’t foreseen in the book. Nor was the return to power of high finance in the 1980s.... Galbraith also did not anticipate that part of the technostructure would spin away from the large industrial corporations in the 1990s, becoming a distinct and independently financed economic force, susceptible (as we learned) to bubble and pop....

One may argue that in the new millennium the large corporation has regained its central position on the American political scene – that we who are south of the border live in what I’ve called the “Corporate Republic.” Indeed one may argue for an understanding of the present American government almost precisely in terms of corporate governance as The Industrial State teaches it to be.

• We have the essentially clientelist character of decision making, unable to deliberate in an extended, goal-seeking way, because of the overriding necessity of deference to players who happen to occupy particular roles. Thus we have the capture of strategic direction – in national security, finance, regulation and other areas – by cliques who (like the Technostructure) can lay claim to expertise not available to outsiders, who can manufacture bogus expertise at will, claiming the privilege of dispensing it without fear of substantial contradiction.
• We have the public relations apparatus with the unique characteristic of a corporate propaganda machine, namely an inability to tell a truthful story that is consistent from one day to the next. Yet like the press releases of large corporations, this apparatus nevertheless expects and receives deferential treatment from the press. Meanwhile challengers and critics are treated as the financial papers handle trade unionists and tort lawyers.
• We had, until the rebellion of 2006, a rubber-stamping Board of Directors, to which in the modern United States we referred by the deferential title of “Congress.”
• We have the shareholders, nominal owners and participants in occasional elections, which the management was determined never under any circumstances to lose. Just how far that determination went, from rationing voting machines, to the “caging” of African-American voters (a felony crime), to the spurious prosecution of voter registration groups as revealed in the present scandal over the dismissal of United States Attorneys, and as many believe to electronic manipulation of the vote count itself, we are only beginning now to learn.
• Above all, we have the Chief Executive Officer as specialist in public relations – the man who spends his time on the golf course (or at the ranch) in order to show that he can, in order to advertise to the world that things are under control. Or more precisely to obscure the fact that they are not....

Where do we go from here? What are we doing here? Are we merely paying tribute to a great man? Or can we muster a deeper purpose? Are we willing to be part of a project of changing the way economics conducts its affairs? And if so, then what should we do about it? The answer will not be found in wit.... It can only be found in research. And one thing my father did not do – one thing that he never seriously attempted – was to build a research tradition that would carry on the spirit of his work.... But if the ideas are to survive, that task is before us now....

Critics of the neoclassical doctrines have penned, over more than a century, millions of words. Our task now is to build the alternative, one that is not merely a variant or a gloss on neoclassical doctrine.... Let me suggest a few key characteristics of what should follow.

1. My father opposed the micro/macro distinction and it should be abolished.... The new classicals have recognized this, and have abolished macro.... We should take the opposite tack: toward a unified economics of human behavior based on principles of organization and a recognition that macroeconomic forces shape personal and group response.
2. Empirical work should be privileged.... In the history of science, new technologies for measurement have often preceded new ideas. Believe it or not, this could happen in economics too.
3. Mathematics should mainly clarify the implications of simple constructs....
4. Our economics should teach the great thinkers, notably Smith, Marx, Keynes, Veblen and Schumpeter – and John Kenneth Galbraith. We need not reinvent the field; nor should we abandon it. Economics over the sweep of history is not mainly about scarcity (which technology overcomes) nor about choice (which is generally neither free nor the defining characteristic of freedom). Rather, economics is about value, distribution, growth, stabilization, evolution, and limits....
5. Pop constructs derived from neoclassical abstractions... are noteworthy as efforts to reconcile neoclassical ideas to real social problems....
6. An economics of modern capitalism should study the actual, existing features of our system....
7. Accounting matters, and counting can be done in many ways....
8. A focus on social structures and the data that record them requires new empirical methods....
9. Likewise the study of social structures.... Numerical taxonomy, discriminant functions, multidimensional scaling, and like techniques are available for studying the phenomena of real economic systems....
10. Finally, our economics is about problems that need to be solved....

Pluralism can and indeed must be combined with discipline and rigor. But let’s be conscious of two fundamental tests. One of them is well captured by a remark of Paul Samuelson’s, quoted by Richard Parker. Samuelson writes: “In the history of ideas, the thinker who creates a new synthesis and speaks in telling fashion to a new age is the one who plays the pivotal role in history.” Galbraith met that test and so should we...

I Rise, Like a Moth to a Flame...

It's all Suresh Naidu's fault.

There I was, head down, revising "Capital and Its Complements: The International Macroeconomic History of the Late Twentieth Century" and "The American Equity Return Premium: Past, Present, and Future," and ignoring the TPM Cafe symposium on heterodoxy on economics. Then Suresh Naidu caught me in the Peixotto Room: "You must have something to say," he remarked, as we stared out at the fog swirling around the Golden Gate from our concrete, glass, and steel eyrie eighty feet above the Berkeley campus.

And now the intelligent and thoughtful Jamie Galbriath trolls the bait further. How can I resist?

Jamie Galbraith: Invasion of the Name Snatchers | TPMCafe: [I]t is breathtaking for [Brad DeLong] to accuse David Ruccio of intellectual claim-jumping... and then to lay down the law on what is "Keynesianism."

Have a look at [Jordi Gali's advanced macroeconomics monetary policy graduate MIT] reading list. The phrase that turns up repeatedly is "sticky prices." This is no accident. For a certain type of modern macro-economist, sticky prices are the essence of what they call Keynesian doctrine. It is the essential term in the lexicon of self-described New Keynesians. Because prices are sticky, New Keynesians argue, markets do not clear, and there is a role for government in fighting unemployment. So far, so good. I have many friends and allies among New Keynesians on practical policy questions.

But to make this into the economics of John Maynard Keynes is to do deep violence to the ideas of that economist. And the attempt to do so, which goes back to the very first American reviews of the General Theory, is the essence of the intellectual claim-jumping that infuriates heterodox economists. Joan Robinson, who may be taken as an authority on this, called it "bastard Keynesianism."

To summarize radically, [for] New Keynesians... [t]he problem... is that wages are sticky, that they won't fall as far as they should so as to guarantee full employment. And since this is the case, New Keynesians believe that something else should be done. But Keynes entirely rejected the labor market analysis of unemployment.... That is what the opening chapters of the General Theory are about. Thus for Keynes, cutting wages is not the ideal solution for unemployment, while lower interest rates or government spending are some sort of second best. Rather, increasing aggregate effective demand is the only viable solution.

Keynes' own analysis is one thing. The "sticky wage" argument is another. You will not find it in Keynes. For New Keynesians to call themselves Keynesians is therefore intellectual claim-jumping of very long standing. But the fact that it has been well-established for half a century cannot change this, any more than time can erase the theft of the Black Hills from the Sioux...

Two points in response:

First, in the post I was responding to Thomas Palley opposes "Keynesians" to "orthodox" thus:

Are Heterodox Economists Just Unhappy Whiners?: the orthodoxy dismissed (and still dismisses) Keynesian theory on the grounds that perfectly flexible prices and wages will automatically solve real world unemployment...

Bastard Keynesians--neoclassical-synthesis types--New Keynesians--American MIT Keynesians--whatever you want to call them are not believers in perfectly flexible prices and wages, and are believers that real world unemployment is a big problem. If you take Palley's division between Keynesians and orthodox, people like Jordi Gali and me are a live and powerful faction of Keynesians, not a dispirited remnant shut out of journals and graduate teaching reading lists.

Second, Jamie Galbraith is right in his assertion that there is much more in Keynes than in mainstream American MIT Keynesianism. Mainstream American MIT Keynesianism is for the most part descended from Franco Modigliani (1944), who argued that because wages are sticky the classical adjustment channel that relies on wage deflation to restore full employment after a contractionary shock is ineffective, brutal, and destructive. Keynes believed that that was not the only reason that expansionary fiscal and monetary policy was a good idea. Lots of us "orthodox" agree with Keynes on this point--that wage and price stickiness are, contra Modigliani, best seen as stabilizing rather than destabilizing factors. For example:

• James Tobin (1975), "Keynesian Models of Recession and Depression," American Economic Review 65:2 (May), pp. 195-202 http://links.jstor.org/sici?sici=0002-8282%28197505%2965%3A2%3C195%3AKMORAD%3E2.0.CO%3B2-F
• J. Bradford DeLong and Lawrence H. Summers (1986), "Is Increased Price Flexibility Stabilizing?" American Economic Review 76: 5 (December), pp. 1031-1044 http://www.j-bradford-delong.net/movable_type/archives/000586.html
• Ben S. Bernanke (1983), "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review 73:3 (June), pp. 257-276 http://links.jstor.org/sici?sici=0002-8282%28198306%2973%3A3%3C257%3ANEOTFC%3E2.0.CO%3B2-0
• Ben Bernanke and Mark Gertler (1989), "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review 79:1 (March), pp. 14-31 http://links.jstor.org/sici?sici=0002-8282%28198903%2979%3A1%3C14%3AACNWAB%3E2.0.CO%3B2-U

Tobin, Bernanke, Summers, and Gertler are not figures without status in "orthodox" American economics today.

But while wage-stickiness macroeconomics is not all of Keynesianism, it is one important branch of Keynesianism--if, that is, "Keynesianism" refers to arguments that John Maynard Keynes thought were important and frequently deployed in a variety of contexts over an extended period of time. And with that, let me turn the microphone over to John Maynard Keynes, talking about the inadequacies of Winston Churchill as Chancellor of the Exchequer:

Keynes: The Economic Consequences of Mr. Churchill: I think that Mr. Churchill's experts also misunderstood and underrated the technical difficulty of bringing about a general reduction of internal money values.... [T]he minds of his advisers still dwelt in the imaginary academic world, peopled by City Editors, members of Cunliffe and Currency Committees et hoc genus omne, where the necessary adjustments follow "automatically" from a "sound" policy by the Bank of England; the theory is that depression in the export industries, which are admittedly hit first, coupled if necessary with dear money and credit restriction, diffuse themselves evenly and fairly rapidly throughout the whole community. But the professors of this theory do not tell us in plain language how the diffusion takes place.

Mr. Churchill asked the Treasury Committee on the Currency to advise him.... Their... vague and jejune meditations... are there for anyone to read. What they ought to have said, but did not say, can be expressed as follows:

Money-wages... have not adjusted themselves.... They are about 10 per cent, too high. If, therefore, you fix the exchange at this gold parity, you must either gamble on a rise in gold prices abroad... or you are committing yourself to a policy of forcing down money wages....

[T]his latter policy is not easy. It is certain to involve unemployment and industrial disputes. If, as some people think, real wages were already too high a year ago, that is all the worse....

[T[he course of events will probably be as follows. To begin with, there will be great depression in the export industries. This, in itself, will be helpful, since it will produce an atmosphere favourable to the reduction of wages.... Nevertheless, the cost of living will not fall sufficiently and, consequently, the export industries will not be able to reduce their prices sufficiently, until wages have fallen in the sheltered industries.

Now, wages will not fall in the sheltered industries, merely because there is unemployment in the unsheltered industries. Therefore, you will have to see to it that there is unemployment in the sheltered industries also.... By means of the restriction of credit by the Bank of England, you can deliberately intensify unemployment to any required degree, until wages do fall. When the process is complete the cost of living will have fallen too; and we shall then be, with luck, just where we were before we started.

We ought to warn you, though perhaps this is going a little outside our proper sphere, that it will not be safe politically to admit that you are intensifying unemployment deliberately in order to reduce wages. Thus you will have to ascribe what is happening to every conceivable cause except the true one....

Source: John Maynard Keynes (1925), "The Economic Consequences of Mr. Churchill," pp. 10-13.

To deny that sticky-wage Keynesianism is a prominent branch of Keynesianism is like... well, I can think of one analogy. It is like Louis Althusser's claim that everything Karl Marx wrote was corrupted by Hegelianism--and not truly "Marxist"--except for "the Critique of the Gotha Program (1875) as well as *Marginal Notes on Wagner's 'Lehrbuch der politischen Okonomie' (1882)." According to Althusser, these works written when Marx was 57 and 65 are the only works "totally and definitely exempt from any trace of Hegelian influence," and hence the only texts that are truly Marxist.

The U.S. Equity Return Premium: Past, Present, and Future

We have a new draft of J. Bradford DeLong and Konstantin Magin (forthcoming), "The U.S. Equity Return Premium: Past, Present, and Future," Journal of Economic Perspectives: http://delong.typepad.com/pdf/20070412_JEP_EP.pdf

It's good. It's not great yet. But we hope to make it great...

Hobsbawm's Age of Extremes: Hoisted from the Archives

Hoisted from the Archives. I wrote this back in 1995: Low Marx: A Review of Eric Hobsbawm's Age of Extremes:

Eric Hobsbawm (1994), The Age of Extremes (New York: Vintage: 0679730052) http://www.amazon.com/exec/obidos/asin/0679730052/braddelong00

Planet Hobsbawm

In the beginning was Karl Marx, with his vision of how the Industrial Revolution would transform everything and wash us up on the shores of Utopia. Marx saw the economy as the key to history: every forecast and historical interpretation must be based on the economy's logic of development. Sometimes--as in much of Eric Hobsbawm's previous work on the history of the nineteenth century--this functioned relatively well.

But sometimes it led to very bad results indeed. And when Marx and Engels's writings became sacred texts for a world religion called Communism, things passed beyond the absurd: the belief that the logic of development of the economy was the most important thing about society became entangled in the belief that Joe Stalin was our benevolent master and ever-wise guide.

Now it is over. The red stars of the Soviet Union no longer shine from the tops of the Kremlin towers at night. Radicals still seek Utopia, but they no longer think the road leads through the economy. Instead, they study culture--as if to change the world just by understanding it. It is difficult to see a future in which authors with the intelligence, industriousness, and audience of Eric Hobsbawm are disciples of Karl Marx in anything like the sense that Eric Hobsbawm is a disciple of Marx.

Now Eric Hobsbawm has written a history of the twentieth century, The Age of Extremes. It has by and large received good reviews: Stanley Hoffman in the New York Times Book Review; Eugene Genovese in the New Republic; Edward Said in the London Review of Books. But my reaction to The Age of Extremes was different. It struck me as history gone awry: a sketch of the twentieth century not as it has been lived here on earth but as it might have been lived somewhere else, on some "planet Hobsbawm" that might be found in one of those parallel universes often visited in Star Trek episodes, where what looks familiar at first glance turns out on close examination to be alien indeed.

Let me give an example: the last word of the book is darkness: it ends "one thing is plain. If humanity is to have a recognizable future, it cannot be by prolonging the past or the present. If we try to build the third millennium on that basis, we shall fail. And the price of failure, that is to say, the alternative to a changed society, is darkness." But a decade ago, when Hobsbawm finished an earlier book, Hobsbawm was optimistic: looking forward to a twenty-first century much better than the twentieth if nuclear war were successfully avoided.

What has happened in the past decade that has so darkened his vision of our human future?

The past decade has seen good news along a number of important dimensions: The environment is in better shape: the clean-up of the first world continues; the clean-up of the ex-Communist world has begun; and the third world is more aware of environmental degradation. Progress has been made in creating the international climate to guard against ozone depletion and global warming. Nuclear war is much less likely. China and India, more than one-third the human race, had their best economic growth decades in the 1980s.

In addition, many of the Communist régimes that ruled more than half the human race have fallen. Awful tyrannies have passed into history. Hundreds of millions have a chance for a more normal life--not spending six hours a day waiting in some commodity distribution line, not being spied on by one out of every ten of their eighbors, not seeing one out of every fifteen neighbors killed by the state's bullet, labor camp, or political famine.

Good news on the environment, on the danger of nuclear war, on Asian and Latin American (albeit not African) development, on the spread of democracy, and on the end of tyrannies have been the major developments of the past decade. If you were optimistic about the human future before the mid-1980s, you should be ecstatic today.

Yet Eric Hobsbawm is much gloomier than he was a decade ago.

There is no doubt that his gloominess is due to the end of European Communism. This is not to say that Hobsbawm still worships the post-1917 pre-1991 Soviet Union. The days are gone when he saw directives from Moscow as the logos of History speaking through the Party. He no longer judges "heroic" communists' obedience to Stalin's instructions to undermine Britain's World War II effort against Hitler (before June 22, 1941, that is), or claims "my International right or wrong."

Yet traces remain of the Eric Hobsbawm who was once a fanatic acolyte of the despotically-governed world religion of Communism. Judgments made then remain unexamined, or unsuccessfully reexamined, parts of the structure of his thought. It is as if a star--belief in the world religion of Communism--died, but light emitted before its death continues to reflect off planets and moons. The remains of Hobsbawm's commitment to the religion of World Communism get in the way of his judgment, and twist his vision.

On planet Hobsbawm, for example, the fall of the Soviet Union was a disaster, and the Revolutions of 1989 a defeat for humanity. On planet Hobsbawm, Stalin planned multi-party democracies and mixed economies for Eastern Europe after World War II, and reconsidered only after the United States launched the Cold War. On planet Hobsbawm, Hungarian--collectivized--agriculture is more productive than modern French agriculture.

Perhaps worst of all, on planet Hobsbawm modern democracy is not a good thing: elections are "contests in fiscal perjury" among voters with "no qualifications to express an opinion," that create governments that work only when they "did not have to do much governing." If there is a good word about really existing democracy--as a check upon official paranoia, as way of ensuring that people can lead a quiet life, or as a way of ascertaining the public interest--I missed it.

Cold-War Polemics

Let me briefly note one more belief that is false, but that was once part of the worldview of Stalin's acolytes:

The book has one single substantive sentence about the Korean War: "Shaken by the communist victory in China, the U.S. and its allies (disguised as the United Nations) intervened in Korea in 1950 to prevent the communist régime in the North of that divided country from spreading to the South." (p. 237). Now this simply will not do. It is not fair to tuck Kim Il Sung's army and Stalin's tanks into that little word, "spreading." The only other mention of Kim Il Sung's rule--264 pages later, in a discussion of the arts--calls it a "megalomaniac tyranny."

I find it odd that Hobsbawm chooses to describe North Korea's government by the colorless word "régime" in the context of the Korean War: If Kim Il Sung is a megalomaniac tyrant when talking about the arts, he should also be a megalomaniac tyrant when talking about the Korean War.

And it matters: a war undertaken to stop military conquest by a megalomaniac tyranny is a different thing from a war undertaken to oppose the "spread of a régime."

Hobsbawm's Cold-War polemics would not, by themselves, necessarily greatly harm the book: Readers could speculate whether the change in description of Kim Il Sung's government is Hobsbawm's delieberate and conscious avoidance of any hint that the Cold War might have been a struggle between bad guys and less-bad guys. They would argue over whether the change of Kim Il Sung's government from a "megalomaniac tyranny" to a "régime" as it enters the context of the Cold War is the result of unbreakable habits of doublethink created by decades of Communist Party membership.

But Hobsbawm's past as a Communist acolyte does much more additional damage to his book. It warps its themes. Hobsbawm's history has one major theme that takes up nearly forty percent of available space: Communism as the Tragic Hero of the twentieth century. Too many other aspects of the century are crammed into the corners left over, with the positive aspects of the terrible and glorious twentieth century--the rise of political democracy, the technologically-driven explosion of material wealth, and the creation of social democracy with its mixed economies and welfare states--allowed less than one-tenth of available space.

And this is the wrong focus for anyone's history. The proportions should be reversed.

The fundamental source of the distortion is that, for Eric Hobsbawm, World Communism was the Tragic Hero of the twentieth century. It was born in unfavorable circumstances in a backward agricultural country. Lagging behind historians' judgments, Hobsbawm believes that it by and large succeeded in its historical task of industrialization. And before its death, according to Hobsbawm Communism saved the west and what little there is of good in the twentieth century twice:

The victory of the Soviet Union over Hitler was the achievement of the regime... [of] the October Revolution.... Without [Communism] the Western world today would probably consist (outside the USA) of a set of variations on authoritarian and fascist themes.... It is one of the ironies of this strange century that the most lasting result of the October Revolution... was to save its antagonist, both in war and in peace--that is to say, by providing it with the incentive, fear, to reform itself after the Second World War.

There is some here that is true, but much here that is false. There is an enormous and eternal debt for the defeats of Hitler's armies at Stalingrad (1942), Kursk (1943), 2nd Kiev (1944), the Beresina (1944), the Vistula (1945), and Berlin (1945) that collectively broke the back of the Nazi war machine. But this debt owed to Stalin and Stalin's régime? No. It is owed to the people of the Soviet Union.

Before Hitler attacked the Soviet Union, Stalin decimated his army through purges, attacked Finland and adding it to Hitler's allies, and fed the Nazi war machine with raw materials it could not get through the British naval blockade. Had Stalin joined the allies in September 1939, he would have had three allied armies--Polish, French, and British--fighting on the continent of Europe, and a neutral Italy. Add in the role played by the Comintern in gleefully helping to destroy the democratic center that lay between Hitler and Weimar Communists in Germany, add in what Hobsbawm calls "Stalin's... extraordinarily inept interventions into military strategy," and conclude that Stalin made the Soviet people's task in 1941-1945 more difficult.

One of the major themes of twentieth century history must be barbarism and mass murder. This is a century in which perhaps 160 million civilians have been killed by governments--through execution, overwork in prison camps, terror-bombing with no proportional military effect, and mass famine induced as an aim of policy. Perhaps three quarters of these civilians have been killed by their own governments. Thomas Hobbes wrote that people pledged allegiance to governments to protect them from the fear of violent death. In the context of the twentieth century Hobbes was a utopian optimist: governments--Communist governments above all--have been the principal source of violent death.

Hobsbawm's book contains some eloquent passages describing the tyrannies of Stalin and Mao. But they are oddly disconnected from the narrative of the "Age of Catastrophe" that was the first half of this century. For Hobsbawm, this disconnectedness serves a purpose: it allows him to write as if Stalin's Soviet Union was part of the solution in the struggle against tyranny in the twentieth century, rather than a large part of the problem.

As odd--and indefensible--is Hobsbawm's attempt to find roots of what he calls the post-World War II "Golden Age" in the October Revolution. It is even harder to see post-war success--prosperity, democracy, the welfare state, and greater economic equality--as due to World Communism. Hobsbawm wants the October Revolution to have provided "[Capitalism] with the incentive, fear, to reform itself after the Second World War." But "capitalism" is not a live, breathing, intelligent creature that feels fear and thus undertakes to reform itself. Concepts like "capitalism" do not make history. Humans make history--even if not just as they please, but under circumstances dictated by the past.

The post-World War II order in the industrial west was made by the voters who chose the Trumans, the Adenauers, and the Attlees, and who set the parameters of the politically possible within which politicians seeking to maintain public support and provide for the general welfare could operate. A secondary role in making the post-World War II order belongs to the politicians themseles, who drafted, negotiated, and enforced the laws that created the mixed economies, welfare states, and social democracies of the post-World War II industrial and democratic west.

They did a good job.

In the United States, they would have done a better job had Communism not existed; Stalin's presence brooding offstage was not helpful. In western Europe as well, the subservience of national Communists to Stalin meant that social democracy could only assemble majorities by taking several steps to the right, and thus limiting the coverage and scope of the welfare state. In the developing world, countries that adopted the Soviet model did so at an enormous price.

Hobsbawm half-recognizes that he has misused his space. He muses on "the changes in human life... brought about [by economic growth in the twentieth century] all over the globe" and calls them "as profound as they were irreversible." He notes that the twentieth "century marked the end of the seven or eight millennia of human history that began with the invention of agriculture." He concludes that "[c]ompared to this, the history of the confrontation between 'capitalism' and 'socialism'"--the major theme of his book--"will probably seem of more limited historical interest."

Yet he has only eleven pages--257 to 268--for the century's economic revolution, and only two chapters--10 and 11--for the consequences of the end of the ten thousand year era in which most humans worked growing or making things with their bare hands.

Hobsbawm would have served himself and his readers infinitely better if he had cut by three-quarters the space devoted to Communism and its struggles, and devoted it to the central theme of twentieth century history. Call it the "elevator to modernity," the explosion in productivity seen in the economies of the industrial core. A first corollary is the "escalator to modernity": the third world today is far from levels of prosperity found in the industrial core, but for more than three billion people this century has seen the beginnings of the industrial, urban, educational, and communications revolutions. And a second corollary is the triumph of social democracy: the combination of political democracy, the mixed economy, and the welfare state.

The Elevator to Modernity

This year--1995--the U.S. Commerce Department will report that the gross value produced in the United States by the average employed worker is about $56,970. A century ago--1895--historical statistics tell us that the gross value produced, divided by the number of workers, is some $14,150 measured at 1995 prices (and $408 when measured at 1895 prices). The average American worker produces some four times as much as a century ago according to this set of numbers, which roughly answer the question: "What would 1895's production be worth if we had it to sell today?"

But we are most interested in a different question: roughly, how much better is today's economy than that of a century ago in making what humans need and want? And simply valuing last century's goods at today's prices leaves out the important fact that we, today, produce a much wider range and quality of goods than a century ago. Anyone taken back in time to 1895 would feel cramped and harassed by the absence of so many of the goods and services we take for granted: no airplanes, limited telephones, no communications media or compact-disk players, limited prepared foods, no automobiles and no asphalt or concrete roads, no electrically-powered consumer durables.

How much does the expanded range of choice made possible by the inventions--new goods and new categories of goods--of the past century matter? If you try to duplicate in the past the capabilities we have today in the past, you fail. The capability of your compact-disk player--that of listening to, say, Don Giovanni in the evening in your home at whim--could not have been provided two centuries ago at any price.

Let me use Alan Greenspan's guess that the invention of new goods, new kinds of goods, and new features for old goods boosts our true standard of living by one-half to one and one-half percent per year: combining the fourfold multiplication in measured output per worker with the one-fifth decline in hours and the increase in the scope and range of goods and products, America as a society today is at least eight and perhaps as much as twenty-three times as wealthy as America a century ago. The average American today has a "real standard of living" higher than 999 out of every thousand Americans alive in 1895.

Perhaps the nineteenth century saw a doubling of real standards of living in the industrial core. Perhaps there was some progress not just in technology but in standards of living in the previous eighteen centuries of the Christian era--although I would not place high odds that the median Frenchman in the age of Louis XIV had a higher standard of living than the median Athenian at the birth of Christ.

Nevertheless, the difference between economic growth in any previous century and economic growth in the twentieth century is a large enough quantitative to invoke not just one, but several qualitative transformations. It is like the difference between climbing a ramp, and riding up the World Trade Center in an elevator.

Why has the twentieth century been so different from all previous centuries? Market economies have the standard advantages of giving manufacturers and traders every incentive to use resources most efficiently, and which have the additional advantage of providing that "sunset" for relatively inefficient organizations. Enterprises that are relatively inefficient cannot pay their bills, and vanish. This automatic weeding-out of inefficient organizations that fail the test of the market is so lacking where state enterprises draw on the general taxation or money-printing power of the state.

But markets alone do not generate the tenfold multiplication of human productive potential that the twentieth century has seen. Previous mercantile capitalisms, like Classical Athens, Sung dynasty China, Mediterranean Islam circa 1000, northern Italy in the late middle ages, or Augustan Britain have been relatively bright spots in human history. But they are only pale shadows of what we have seen this century.

If I had to lay odds on the necessary additional factors, I would bet on two: first, democracy; second, technological density.

Before our century, a productive mercantile economy was a goose that laid golden eggs--but there was always the temptation to squeeze the goose a little tighter to pay for a slightly greater degree of courtly splendor or a slightly higher military effort on whatever was the current active conquest frontier. History is littered with the corpses of golden geese. The loss of control by a mercantile aristocracy to a military one, or to a despot, meant that the best days of the local mercantile economy were past.

Successful democracy changes the calculus. Courtly splendor and an overmighty military become of less interest and less urgency than keeping real wages, employment, and profits rising--for political parties that are either unlucky to catch an unfavorable wave of the business cycle or unskillful enough to disrupt economic growth vanish rapidly. Economic growth and market institutions certainly coexist with political despotism for a while, but there is good reason to doubt their long-term compatibility.

But we need "technological density" as well: research and development has to become an industry in itself, rather than an avocation of a few learned gentlemen reading papers before a Royal Society, to maintain the pace of invention and innovation that we now take for granted. Only the confluence of all three, market institutions, political democracy, and high technological density, could generate the economic revolutions of the twentieth century.

This is the proper central theme of twentieth century history: the pace of economic transformation--its causes, its implications for productivity, for the structure of employment, for the use of education, for the value of capital, for society and social order, for cultural events, for politics. This is where a truly Marxist analysis could have been extremely powerful. For if there was ever an age in which changes in the material conditions by which humans produce and reproduce the necessities and conveniences of their life dominate every other sphere of human activity, it is the twentieth century.

The upward jump of productivity and wealth is not confined to the core of the world economy. In 1987, 97 percent of households in Greece, not usually considered one of the world's industrial leaders, owned a television set. In Mexico there was one automobile for every sixteen people, one television for every eight, one telephone for every ten.

On our low estimate of the pace of growth in the twentieth century, some 44 countries today--from South Africa and Estonia to Botswana and Brazil, from Slovenia and South Korea to Japan and Switzerland--are as rich as or richer than the United States was a century ago. And the United States a century ago was a society with a level of wealth previously unseen in world history. On our high estimate of growth, not 44 but 76 countries are wealthier today than the U.S. was at the turn of the cneuty.

The world's distribution of wealth, today, is probably more unequal than at any time in the past: the explosion of wealth in the industrial core carried them far above the four-plus billion below. But when future historians look back at the third world in the second half of the twentieth century, they will say that this was a period in which three billion humans climbed onto the escalator to modernity.

Social Democracy

A second theme of any history of the twentieth century should be the triumph of democracy over a large chunk of the globe, and the consequent arrival of the developed welfare state with its web of support services and social insurance programs.

A look back at human history can be read to suggest that, unless the extraordinary wealth generated by the twentieth century has had some subtle impact on political dynamics, that our current democracies may not survive for even half a millenium. Those writing history four or five centuries from now might live under imperial régimes: emperors whose dynastic titles are based on keeping relative peace, ruling through aristocracies that negotiate semi-consent with the ruled. Imperial aristocracy may be in the future, as it has been in the past, the canonical form of human government.

Nevertheless, just as the Classical experience with semi-democractic and republican forms of government has always been of great interest to Europe's historians and politicians, so our experience with democracy in the industrial west--even if it ultimately ends--will be of as great interest to historians and politicians in the future. As Thucydides, Plutarch, Livy, and Sallust spoke to Niccolo Machiavelli as he tried to preserve the Florentine and to James Madison as he tried to establish the American Republic, so we should try to speak to our possible successors perhaps a millennium hence.

The rise of stable democratic governments has transformed not only how governments work but what they do. The industrial, democratic west has for the past half century been the realm of the social insurance state. Whether called "mixed economy," "social democracy," or "social market economy," the major business of government has become social insurance: progressive tax systems, income support, and benefit provision programs to partially counterbalance the extremes of economic inequality produced by the market distribution of income, and to create countries that are more middle-class societies.

Thus the past fifty years in the industrial, democratic west marks one of the few eras in history in which the distribution of wealth and economic power is to a degree the result of political choice, instead of the distribution of economic power largely determining political organization. Opposing pressures have balanced: populist calls for taking "unearned increment" from the rich balanced by an admiration for entrepreneurs and savers, and a realization that economic life is a positive sum game; compassion toward the poor balanced by resentment of those seen as trying to get something for nothing--even if the something is pitifully small by middle-class standards.

But the political and economic balancing act of social democracy appears possible only if economic growth continues. And the record of the twentieth century is that modern mixed economies are not stable, and require the most delicate management to avoid economic chaos.

Go to Wall Street. Look around. Wall Street is, in a very real sense, the investment planning department of the human race. Power to purchase commodities that owners of property have earmarked for savings flow into Wall Street and, in a complicated social and economic dance, are distributed to enterprisers and bureaucracies seeking permission to invest, develop new enterprises, or expand old ones.

The future becomes visible only slowly: one day at a time. Our technological capabilities, individuals' preferences for spending and saving, and natural resources change very slowly. Thus Wall Street should be a quiet place. Financial prices are the shorthand that Wall Street-considered-as-investment-planning-department uses to assess the desirability of investment projects. They should move glacially, as an extra day's information causes forecasters to revise so very slightly their image of the economy's bottlenecks twenty years down the road.

But this is not how Wall Street works. Today Mexico is fifty percent off--the valuation of all things Mexican, whether the cost of employing a worker, the value of a house, the worth of Mexico's currency, or the long-term profits to be gained from investment in a Mexican enterprise, is today fifty percent less than what it was in the late summer of 1994. If you had wanted to buy insurance against a fall in the peso in the late summer of 1994, you could have done so extremely cheaply. Few saw a peso collapse of the magnitude seen in the winter of 1994-1995 as possible; no one saw it as likely.

What has caused such a change? In part, financiers now believe that they were overoptimistic about the economic future of. In large part, however, financiers concluded that other financiers' downgrading of Mexico meant that Mexico would be starved of capital and short of international means of payment, and that as a result of this shift in mood the Mexican economy would perform more poorly.

This is an old story: a régime that bet a large chunk of its chips on rapid industrial development financed by capital inflow from world financial markets finds itself suddenly subject to a panic. In the United States, 1873 saw British investors lose confidence that American railroads and infrastructure were that day's equivalent of investments in the Pacific Rim. The largest investment house in the United States--that of Jay Cooke, politically well-connected industrial visionary who financed Abraham Lincoln's armies, and whose picture the Treasury Department's antique custodians will not release for me to hang in my office--went bankrupt.

Then there was no International Monetary Fund, no Bank for International Settlements, no Exchange Stabilization Fund, no one willing to guarantee the liquidity of the financial system that had funneled capital to America from Europe. As a result of the collapse of Jay Cooke and Company the City of London sneezed. The U.S. economy caught pneumonia. The share of America's non-agricultural labor force building railroads fell from perhaps one in ten in 1872 to perhaps one in forty by 1877--a seven percentage point boost to non-agricultural sector unemployment from this source alone.

Now we have a keen awareness of what is lost when a crisis of confidence is allowed to lead to the unraveling of a financial network. We have governments and institutions willing to take action. Unlike the United States in the 1870s, Mexico in the 1990s will not undergo anything near to a great depression.

Nevertheless, for at least three centuries capitalist financial markets have been working their erratic will. No one has a preferable alternative to allowing financial markets to do our collective investment planning: Wall Street's vision of where investment capital should be directed is infinitely better than the vision any group of planners. All would agree that financial markets require the most delicate political regulation and management. But it is rare that you find any two agreeing on exactly what form that political regulation and management should take.

There are a number of rules-of-thumb for economic management: Run a government surplus to keep the government's hunger for resources from draining the pool of resources for society's non-governmental investments. Use "automatic stabilizers"--decreases in tax collections and increases in social welfare spending in recessions--to cushion declines in employment and increases in poverty that occur when financial market shifts trigger depressions. Guarantee the safety and soundness of the credit system as a whole in emergencies, even though it rescues many who made overrash bets and provides some encouragement for future overrash. Guarantee not just the domestic but the international credit system.

Governments balance conflicting goals: high investment to boost productivity growth, stable prices so that private economic planning decisions focus on productivity rather than on exploiting quirks in the price-adjustment process, and high employment. The terms of the tradeoff are lousy. Election cycles tend to emphasize short-term as opposed to long-term performance.

And even good macroeconomic management is no guarantee that the average over the business cycle will produce the levels of employment or of income distribution that you want. Structural policies to level out the income distribution and maintain a high average level of employment face their own tradeoffs. Structural labor market policies are expensive; if you try to do them on the cheap you wind up with an unfavorable distribution of income, or a high level of employment; if you commit the appropriate level of resources to education and training, to job search assistance and employment subsidies, you will surely hear complaints--sometimes justified--that taxes are too high to sustain growth and investment.

Moreover, the entire system can lose forward motion completely. It is possible to mismanage a capitalist economy so badly as to bring a halt to essentially all economic growth. Consider Argentina, on a par with France and ahead of Italy in GDP per worker, agricultural productivity, and some areas of industry in 1950. Yet Argentina today may have no higher a standard of living than it had in the aftermath of World War II.

Given the importance of the issue, for the world economic system is more fragile than anyone would wish and has gone completely off its rails once in this century, government management of the business cycle and the economy would seem worth an extended and thoughtful treatment. It should, say, receive more space than a discussion of the policy dilemmas facing Soviet planners trying to build authoritarian socialism-in-one-country in the 1920s and 1930s.

But Hobsbawm is not equipped to provide such a treatment, and shows no sign of wishing to equip himself. Perhaps I feel the flatness and ineptness of his narrative more because of my own particular training. But I would have expected at least a little curiosity about, say, why the Great Depression was so much larger than any previous or subsequent depression. It was more than three times as deep and more than twice as long as any other. Yet all Hobsbawm has to say to account for the Greatness of the Depression is to chant words--speculation, over-production, credit boom--that have equal force applied to earlier and later recessions and depressions, of one-tenth the size of the Great Depression.

Conclusion

Eric Hobsbawm might complain that I have been unfair: that my real gripe is that I wish that he had written another, different book. He might say that I want a Book Written for the Ages, that reflects what historians in future centuries will find of greatest interest. And he is right, I do. By contrast, he might say, his book is "written by a twentieth-century writer for late-twentieth-century readers," to whom "the history of the confrontation between capitalism' andsocialism'...[s]ocial revolutions, the Cold War, the nature, limits, and fatal flaws of `really existing socialism' and its breakdown" are worth discussing at length. He is writing for readers who take the central theme of twentieth century history to be the tragical-heroic course of World Communism.

But the tragical-heroic course of World Communism is simply not the central theme of twentieth century history. For what audience is Hobsbawm writing his book? To what "late twentieth century readers" can we recommend The Age of Extremes as covering the pieces of twentieth century history they want and need to learn?

For new students seeking a genuine overview, the flaws, euphemisms, and silences arising from Hobsbawm's past political commitments are too mischievous. Hobsbawm's past political commitments lead him to believe both that (a) Kim Il Sung was a megalomaniac tyrant, and that (b) U.S. intervention to stop his extending his empire by conquest was a backward step for humanity. You cannot understand the twentieth century without finding an answer to the question of how as keen-eyed an analyst as Eric Hobsbawm can have held both these beliefs--without apparent strain--for more than forty years.

Yet Hobsbawm's book is constructed as if he wants to make it as hard as possible for a new student to figure out that this is an important question to ask.

For informed and experienced students seeking an overview of how the twentieth century changed the world, its focus is awry. Forty percent of space on the world religion of Communism and ten percent on the triple successes of social democracy--material prosperity, political democracy, and successful creation of middle-class societies--is the wrong balance. Ten percent on the world religion of Communism and forty percent on social democracy would be infinitely preferable

For students of Communism who believe that on balance it--a social movement that has, after all, contributed two of the twentieth century's three members of the I-killed-thirty-million club (Hitler, Mao, and Stalin), and at least four members of the I-killed-one-million club (Kim Il Sung, Pol Pot, Vladimir Lenin, Mengistu)--was not one of the brighter lights on humanity's tree of good ideas, the book will be profitable. But it will be profitable as an index of the impact decades of doublethink can leave on a good mind, as well as as an interpretation of history.

How many potential readers are left?

Dean Baker, J. Bradford DeLong, and Paul Krugman (2005), "Asset Returns and Economic Growth"

Dean Baker, J. Bradford DeLong, and Paul Krugman (2005), "Asset Returns and Economic Growth," Brookings Papers on Economic Activity 2005:1.

Abstract:

We in America are probably facing a demographic transition—a slowdown in the rate of natural population increase—and possibly facing a slowdown in productivity growth as well. If these two factors do in fact push down the rate of economic growth in the future, is it still prudent to assume that the past performance of assets is an indication of future results? We argue “no.” Simple standard closed-economy growth models predict that growth slowdowns are likely to lower the marginal product of capital, and thus the long-run rate of return. Moreover, if you assume that current asset valuations represent rational expectations, simple arithmetic tells us that it is next to impossible for past rates of return to continue through a forthcoming growth slowdown. Only a large shift in the distribution of income toward capital or current account surpluses larger than those of nineteenth century Britain sustained for generations give promise for reconciling a slowdown in future economic growth with a continuation of historical asset returns.

We Are Go for March 31...

Ah. We are go for presentation on March 31:

Dean Baker, J. Bradford DeLong, and Paul Krugman (forthcoming), "Asset Returns and Economic Growth," Brookings Papers on Economic Activity.

J. Bradford DeLong (2002), "Review of Robert Skidelsky (2000), John Maynard Keynes, volume 3, Fighting for Britain"

J. Bradford DeLong (2002), "Review of Robert Skidelsky (2000), John Maynard Keynes, volume 3, Fighting for Britain," Journal of Economic Literature.

http://www.j-bradford-delong.net/Econ_Articles/Reviews/skidelsky_jel.html

J. Bradford DeLong (2000), "The Triumph [?] of Monetarism"

J. Bradford DeLong (2000), "The Triumph [?] of Monetarism," Journal of Economic Perspectives (Winter).

http://www.j-bradford-delong.net/Econ_Articles/monetarism.html

J. Bradford DeLong (1999), "Seeing One's Intellectual Roots: A Review Essay on James Scott's Seeing Like a State"

J. Bradford DeLong (1999), "Seeing One's Intellectual Roots: A Review Essay on James Scott's Seeing Like a State," Review of Austrian Economics 12:2, pp. 257-64.

http://www.j-bradford-delong.net/Econ_Articles/reviews/seeing_like_a_state.html

J. Bradford DeLong (1999), "Why We Should Fear Deflation"

J. Bradford DeLong (1999), "Why We Should Fear Deflation," Brookings Papers on Economic Activity (Spring).

http://www.j-bradford-delong.net/Econ_Articles/deflation.html

J. Bradford DeLong (1997), "Cross-Country Variations in National Economic Growth Rates: The Role of 'Technology'"

J. Bradford DeLong (1997), "Cross-Country Variations in National Economic Growth Rates: The Role of 'Technology'", in Jeffrey Fuhrer and Jane Sneddon Little, eds., Technology and Growth (Boston: Federal Reserve Bank of Boston), pp. 127-49.

http://www.j-bradford-delong.net/Econ_Articles/Growth_and_Technology/growthandtechnology.html

J. Bradford DeLong (1997), "America's Peacetime Inflation: The 1970s"

J. Bradford DeLong (1997), "America's Peacetime Inflation: The 1970s," in Christina Romer and David Romer. eds., Reducing Inflation: Motivation and Strategy (Chicago: University of Chicago Press).

http://www.j-bradford-delong.net/pdf_files/Peacetime_Inflation.pdf

J. Bradford DeLong (1997), "American Fiscal Policy in the Shadow of the Great Depression"

J. Bradford DeLong (1997), "American Fiscal Policy in the Shadow of the Great Depression", in Michael Bordo, Claudia Goldin, and Eugene White, eds., The Defining Moment: The Great Depression and the American Economy in the Twentieth Century (Chicago: University of Chicago Press).

http://www.j-bradford-delong.net/pdf_files/Defining_Moment_Draft.pdf

J. Bradford DeLong and Andrei Shleifer (1994), "Princes and Merchants: European City Growth Before the Industrial Revolution

J. Bradford DeLong and Andrei Shleifer (1994), "Princes and Merchants: European City Growth Before the Industrial Revolution," Journal of Law and Economics.

http://www.j-bradford-delong.net/pdf_files/Princes.pdf

Robert B. Barsky and J. Bradford DeLong (1993), "Why Does the Stock Market Fluctuate?"

Robert B. Barsky and J. Bradford DeLong (1993), "Why Does the Stock Market Fluctuate?" Quarterly Journal of Economics 108: 2 (May), pp. 291-312.: Archive Entry From Brad DeLong's Webjournal

http://www.j-bradford-delong.net/pdf_files/Fluctuate.pdf

J. Bradford DeLong and Kevin Lang (1992), "Are All Economic Hypotheses False?"

J. Bradford DeLong and Kevin Lang (1992), "Are All Economic Hypotheses False?" Journal of Political Economy 100:6 (December), pp. 1257-72.

http://www.j-bradford-delong.net/pdf_files/False.pdf

J. Bradford DeLong and Lawrence H. Summers (1992), "How Robust Is the Growth-Machinery Nexus?"

J. Bradford DeLong and Lawrence H. Summers (1992), "How Robust Is the Growth-Machinery Nexus?" Rivista di Politica Economica (November).

J. Bradford DeLong and Richard Grossman (1992), "Excess Volatility on the London Stock Market, 1870-1990"

J. Bradford DeLong and Richard Grossman (1992), "Excess Volatility on the London Stock Market, 1870-1990" (Cambridge, MA: Harvard University Department of Economics).

http://www.j-bradford-delong.net/pdf_files/London_Volatility.pdf

J. Bradford DeLong (1992), "Machinery Investment as a Key to American Economic Growth"

J. Bradford DeLong (1992), "Machinery Investment as a Key to American Economic Growth," in Mark Bloomfield, Margo Thorning, and Charls Walker, eds., Tools for American Workers (Washington, DC: American Council for Capital Formation).

http://www.j-bradford-delong.net/movable_type/pdf_files/ACCF.pdf

J. Bradford DeLong and Lawrence H. Summers (1992), "Equipment Investment and Economic Growth: How Robust Is the Nexus?" Brookings Papers on Economic Activity (Fall).: Archive Entry From Brad DeLong's Webjournal

J. Bradford DeLong and Lawrence H. Summers (1992), "Equipment Investment and Economic Growth: How Robust Is the Nexus?" Brookings Papers on Economic Activity (Fall).

http://www.j-bradford-delong.net/pdf_files/Brookings_Equipment.pdf

J. Bradford DeLong (1992), "Productivity and Machinery Investment: A Long Run Look 1870-1980"

J. Bradford DeLong (1992), "Productivity and Machinery Investment: A Long Run Look 1870-1980," Journal of Economic History 53: 2 (June), 307-24.

http://www.j-bradford-delong.net/pdf_files/JEH_Machinery.pdf

J. Bradford DeLong and Barry J. Eichengreen (1992), "Der Marshall-Plan--ein Strukturhilfeprogramm"

J. Bradford DeLong and Barry J. Eichengreen (1992), "Der Marshall-Plan--ein Strukturhilfeprogramm," in Rüdiger Dornbusch, Wilhelm Nölling, and Richard Layard, eds., Der Wiederaufbau Deutschlands nach dem Zweiten Weltkrieg--Lehren für Osteuropa, no. 10 of Hamburger Beiträge zur Wirtschafts- und Währungspolitik in Europa (Hamburg).

J. Bradford DeLong and Andrei Shleifer (1992), "Closed End Fund Discounts: A Yardstick of Small-Investor Sentiment"

J. Bradford DeLong and Andrei Shleifer (1992), "Closed End Fund Discounts: A Yardstick of Small-Investor Sentiment," Journal of Portfolio Management 18:2 (Winter), pp. 46-53.

J. Bradford DeLong and Marco Becht (1991), "'Excess Volatility' in the German Stock Market, 1876-1990" (Cambridge, MA: Harvard University Department of Economics). : Archive Entry From Brad DeLong's Webjournal

J. Bradford DeLong and Marco Becht (1991), "'Excess Volatility' in the German Stock Market, 1876-1990" (Cambridge, MA: Harvard University Department of Economics).

http://www.j-bradford-delong.net/pdf_files/German_Volatility.pdf http://www.j-bradford-delong.net/pdf_files/German_Volatility_Appendix.pdf

J. Bradford DeLong and Andrei Shleifer (1991), "The Stock Market Bubble of 1929: Evidence from Closed-End Funds."

J. Bradford DeLong and Andrei Shleifer (1991), "The Stock Market Bubble of 1929: Evidence from Closed-End Funds," Journal of Economic History 52: 3 (September), pp. 675-700.

http://www.j-bradford-delong.net/pdf_files/Bubble_1929.pdf

Robert B. Barsky and J. Bradford DeLong (1991), "Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard," Quarterly Journal of Economics 106: 3 (August) , pp. 815-36.

Robert B. Barsky and J. Bradford DeLong (1991), "Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard," Quarterly Journal of Economics 106: 3 (August) , pp. 815-36.

http://www.j-bradford-delong.net/pdf_files/Pre-World_War_I.pdf

J. Bradford DeLong (1991), "Did J. P. Morgan's Men Add Value?: An Economist's Perspective on Financial Capitalism."

J. Bradford DeLong (1991), "Did J. P. Morgan's Men Add Value?: An Economist's Perspective on Financial Capitalism," in Peter Temin, ed., Inside the Business Enterprise: Historical Perspectives on the Use of Information (Chicago, IL: University of Chicago Press for NBER), pp. 205-36.

a href="http://www.j-bradford-delong.net/pdf_files/Morgan_Temin.pdf">http://www.j-bradford-delong.net/pdf_files/Morgan_Temin.pdf

J. Bradford DeLong and Lawrence H. Summers (1991), "Equipment Investment and Economic Growth."

J. Bradford DeLong and Lawrence H. Summers (1991), "Equipment Investment and Economic Growth," Quarterly Journal of Economics 106: 2 (May), pp. 445-502.

http://www.j-bradford-delong.net/pdf_files/QJE_Equipment.pdf

J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1991), "The Survival of Noise Traders in Financial Markets."

J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1991), "The Survival of Noise Traders in Financial Markets," Journal of Business 64: 1 (January), pp. 1-20.: Archive Entry From Brad DeLong's Webjournal

http://www.j-bradford-delong.net/pdf_files/Survival_Noise_Traders.pdf

J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1990), "Noise Trader Risk in Financial Markets."

J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1990), "Noise Trader Risk in Financial Markets," Journal of Political Economy 98: 4 (August 1990), pp. 703-738.

http://www.j-bradford-delong.net/pdf_files/Noise_Traders_Main.pdf

J. Bradford DeLong (1990), "'Liquidation' Cycles: Old-Fashioned Real Business Cycle Theory and the Great Depression."

J. Bradford DeLong (1990), "'Liquidation' Cycles: Old-Fashioned Real Business Cycle Theory and the Great Depression."

http://www.j-bradford-delong.net/pdf_files/Liquidation_Cycles.pdf

Robert B. Barsky and J. Bradford DeLong (1990), "Bull and Bear Markets in the Twentieth Century," Journal of Economic History 50: 2 (June), pp. 1-17.: Archive Entry From Brad DeLong's Webjournal

Robert B. Barsky and J. Bradford DeLong (1990), "Bull and Bear Markets in the Twentieth Century," Journal of Economic History 50: 2 (June), pp. 1-17.

http://www.j-bradford-delong.net/pdf_files/Bull_and_Bear.pdf

J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1990), "Positive-Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance 45: 2 (June), pp. 374-397.

J. Bradford DeLong, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1990), "Positive-Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance 45: 2 (June), pp. 374-397.