January 19. Introduction, and the Malthusian Economy (DeLong)
R.G. Hawtrey (1925), "Public Expenditure and the Demand for Labour," Economica 13 (March), pp. 36-48. http://www.jstor.org/stable/2548008
John Hicks (1937), "Mr. Keynes and the 'Classics': A Suggested Interpretation," Econometrica 5:2 (April), pp. 147-159. http://www.jstor.org/stable/1907242
Eugene Fama (2009), "Bailouts and Stimulus Plans" (January 13). http://www.dimensional.com/famafrench/2009/01/bailouts-and-stimulus-plans.html
Jared Diamond (1987), "The Invention of Agriculture: The Worst Mistake in the History of the Human Race," Discover. http://delong.typepad.com/sdj/2005/09/the_malthusian_.html
Gregory Clark (2005) on the Malthusian Economy, draft chapters 2 and 3 of A Farewell to Alms (published version: Princeton University Press, 2007). Clark-2.pdf and Clark-3.pdf
M. I. Finley (1965), "Technical Innovation and Economic Progress in the Ancient World," Economic History Review, New Series, 18:1, pp. 29-45. http://tinyurl.com/dl20090112f
The readings for the first week of Econ 210a fall into three groups.
First come three readings on the determination of nominal spending. Among them we have, first, R.G. Hawtrey trying to tease out the implications of the quantity theory of money for the effect of government fiscal policy on total nominal spending. Hawtrey makes two mistakes. First, he implicitly assumes that the velocity of money is not a function of the nominal interest rate--that, at least as far as the effects of fiscal policy on spending are concerned, we have a rigid cash-in-advance economy. Second, he assumes that all agents in the economy have the same desired spending velocity--that even though the government is a vastly larger entity able to self-insure against fluctuations in its cash flow, it must hold the same ratio of cash to spending as the smallest household.
The second nominal spending reading is John Hicks's reconciliation of Knut Wicksell's macroeconomics (which saw the level of spending as determined by the balance of planned savings and planned investment at an interest rate set by a central bank that controlled the money supply) and Irving Fisher's macroeconomics (which saw the level of spending as determined by the money stock and money velocity at an interest rate set by the equilibration of planned savings and investment). Hicks points out that money demand is interest-elastic and that planned savings and investment are spending-elastic: thus you have two unknowns--the flow of nominal spending PY and the interest rate i--and two equations--S(i, PY) = I(i, PY) and PY = MV(i).
Starting from Hawtrey and Hicks you can begin to think about under what circumstances an expansionary fiscal policy like Christina Romer's Recovery Act might make sense--and under what circumstances it might not.
And the fascinating thing is that Eugene Fama has heard of absolutely none of this, and tries to reason out the issues over a weekend... and implicitly assumes a rigid cash-in-advance economy with a technologically-fixed velocity. The painful thing is that there is nothing special about the government in his argument: Fama appears to have proved that nominal spending can never fluctuate--for, after all, even a helicopter drop of money is offset by the higher future taxes needed to cover the future liability of withdrawing the money when the bills wear out.
This is, I think, a cautionary tale: it is very important to test your theoretical arguments against as broad a range of historical cases and past economists' thought as possible in order to keep in touch with the world as it is.
The second group is made up of Diamond and Clark on the Malthusian economies of the agrarian age. We think that there were perhaps 5 million people alive at the start of the Neolithic Age in 7500 BC--and if we want to be very brave we can assign them a living standard of $500 of today's international dollars per capita. We think that there were perhaps 500 million people alive 9000 years later in 1500--and if we want to be very brave we can assign them a living standard of $500 of today's international dollars per capita. Probably the upper class lives a lot better in 1500 than it had lived in 7500 BC. But the peasants and the craftsmen? Probably not. For one thing, you had 100 times the population density.
The key to understanding why effectively all technological progress from 7500 BC to 1500 went into rising populations and next to none of it into higher living standards rests on four facts:
- That effective birth control is hard to do.
- That almost nobody wants effective birth control in a world in which surviving descendants are one of the very few ways you can save for your old age.
- That although customs and cultures can drive a large wedge between the standard of living at which population is stable and the poverty at which ovulation ceases and deficiency diseases collapse your immune system, such customs and cultures are unstable.
- That technological progress was never fast enough to get any group over the hump and into the range where female literacy and better public health begin to give people incentives to work hard to restrict their fertility.
And this brings us to the third of our topics. Why was the rate of technological progress so slow? We don't think we have anything to teach Sophocles about writing plays or Homer about writing epics or Sappho about writing poetry. We don't have anything to teach Cicero about pulling the wool over the eyes of a jury or Julius Caesar about blitzkrieg. We might have some things to teach Pericles and Augustus about how to set up a stable and non-oppressive government, but not very much. Yet we have a huge amount to teach everybody in the past not just about technology but how to make more and better technology, not just our inventions but rather the master invention of how to make the process of invention more-or-less routine.
For it is a fact that if you do the arithmetic you see that we have about the same relative productivity growth in one year as previous pre-1500 epochs had in a century.
There are two big theories as to why. The first is what I think of as Michael Kremer's density hypothesis: two heads are better than one, and a literate head is better than an illiterate one, and so it is our greater population and greater wealth that makes our technological progress faster.
The second is the more "cultural" approach that I associate with M.I. Finley. When William Gates wants to make his mark on the world at the end of the twentieth century, he drops out of college and starts a software company to make money by selling people operating systems, games, and office programs--and rises to become the richest man in the world. When Williams Marshall wants to make his mark on the world in the middle of the twelfth century, he practices with sword, shield, lance, and horse and then heads out into the world as a combination of professional athlete, bully-boy, soldier, and then courtier-administrator--and rises to become regent of England for Henry III and Earl of Pembroke.
This is the background for Finley's discussion of why it was that (military applications aside) the literate brainpower of the pre-industrial world was not directed at things of practical utility.