Some guy comments on stuff, on the internet

Daniel Kuehn, in commemoration of this historical day, quotes a passage from John Maynard Keynes’s harsh condemnation of the Versailles treaty and the statesmen who forged it:

This was the atmosphere in which the Prime Minister left for Paris, and these the entanglements he had made for himself. He had pledged himself and his Government to make demands of a helpless enemy inconsistent with solemn engagements on our part, on the faith of which this enemy has laid down his arms. There are few episodes in history which posterity will have less reason to condone – a war ostensibly waged in defence of the sanctity of international engagements ending in a definite breach of one of the most sacred possible of such engagements on the part of the victorious champions of these ideals.

Now, Germany in 1918 was going to lose the war: it just didn’t have a prayer of turning it around. It also had the unhappy fortune of being governed by two generals who were stupid and greedy (both of whom would later throw their support to Adolph Hitler), and who vacilated irresponsibly about whether they were surrendering and whether they could accept the Allies’ terms. So the war would have ended without the heroic resistance of the naval officers, soldiers, and workers all over Germany who stopped cooperating, which brought the German war machine to a halt and rendered the generals impotent — though these people’s recognition of their leaders’ idiocy, and their refusal to keep going along with the war, reflect well on them. The war would have ended regardless of the terms offered by the allies or agreed to by the Germans.

Nonetheless, it was both shabby and stupid for the Allies to double-cross the Germans. It poisoned the peace that Armistice Day was originally supposed to honor.

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Today marks the 100th anniversary of the day when California voters approved a measure granting its female residents the right to vote. Here as in other places, the issue divided the cosmopolitan, forward-looking city folk — who worried that since women were more religious than men, they would quickly vote in Temperance and Bible-thumping dullards — and the more traditional, rural folk who thought exactly the same thing. The big hurdle that suffrage had to overcome was the overwhelming No sentiment in populous San Francisco. Incidentally, it is likely that the impetus for the Federal suffrage amendment in 1919 was the impending 1920 Census: everybody knew that it was going to count more people in the cities than the counties, reapportioning representation to favor these vile centers of corruption and vice.

Anyway, cheers to one milestone in the advance of equal rights.

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This Occupy _____ movement came as a complete surprise to me. It has had a noticeable impact on discussions: people are now speaking their minds about economic inequality, which, it turns out, a lot of them have really disliked for awhile. This is welcome, but from this valid starting point people sometimes seem to wander into what I regard as error. I don’t want to be pedantic in the least, but I also don’t want to see positive energy wasted on unfruitful pursuits.

There are several tendencies among Occupy people that seem to me misguided:

-Protectionism. There seems to be something very deep-rooted about the notion that trade with foreign countries is harmful. It used to be the avowed policy of the Republican Party that high tariffs were advantageous to American business. I have come across a number of compelling readings in the last year to the effect that trade barriers can in some cases be productive, but I still tend to agree with Paul Krugman that most of the time foreign trade enriches us

-Opposition to corporations. There is an argument that the corporate ownership structure creates anti-social outcomes. However, I see no evidence that businesses structured as corporations are worse malefactors than other business arrangements. What people mean, I think, when they say “corporations” is actually “big companies”. To some extent, certain big companies do have monopoly power that tips the scale in their favor (especially ones like Microsoft and Apple that rely heavily on intellectual property laws). However, there are also returns to scale that make large operations more efficient. Such businesses are frequently also the ones with unionized workers who can bargain for decent compensation. I’m going to bring in Paul Krugman again here to defend my lefty cred.

-Anti-capitalism. If central planning worked and guaranteed full employment, good wages, efficient production, and technological innovations comparable to the ones we get from the market system, then it would indeed be desirable. But most experiments with it have gone terribly. Central planning only seems to be workable in three special cases:

-during wartime, when people are willing to sacrifice for a common cause

-when motivated by religious zealotry

-when there is a policy of political terror in place to make the planning credible (e.g., France in 1794, Russia in the 1930s, &c.)

None of these is desirable and the latter two are not compatible with secular democracy. (Note that I am making a huge understatement here, because I’m operating on the Principle of Charity). Even with the political terror in place, a centrally planned economy can deliver truly awful results if the planners are stupid and dishonest (see China’s “Great Leap Forward“) The only places that have made central planning systems somewhat workable in the absence of these factors are those that have integrated market features into the system. So it’s probably unproductive to oppose capitalism as such. What is important to note is that we know from experience that it’s completely possible to have a mixed economy where markets distribute 50 percent or so of income and the state distributes the rest through social insurance and public services. Such systems actually seem to be more stable than laissez-faire ones, unless they are involved in ill-planned currency unions. (Incidentally, it also annoys me considerably that most communist types  I meet, who supposedly take inspiration from the work of Marx, seem to be almost entirely unfamiliar with his economic writings).

I will allow, however, that strategically, anti-capitalist arguments may be useful: Franklin Roosevelt saw himself as saving the capitalist system from people like this. So did Germany’s Otto von Bismarck, the conservative who instituted the welfare state there. You can be wrong and still be part of a push in the right direction.

-Opposition to the Federal Reserve and fractional reserve banking. Yes, the Federal Reserve operates in relative secrecy (which actually hampers its ability to act), but on balance we are lucky that we have it. Workers and businesses alike were in a worse position before the country had a central bank, and bank failures frequently wiped people out. The fact that banks can lend out more money than they have in deposits may seem unfair, but it also allows businesses to find credit on much better terms. Putting an end to fractional reserve banking would cause a serious recession and probably force the US into a debt crisis.

That’s my 2 cents. The big issue I haven’t heard addressed much is legal protections for unions, which are necessary if you want “the 99 percent” to have real power in dealing with the privileged, and which the mainstream Democrats rarely talk about.

UPDATE: Upon further reflection, it seems to me that earlier I missed the forest for the trees in this post. The important point is really what I conceded with a passing thought:

“I will allow, however, that strategically, anti-capitalist arguments may be useful: Franklin Roosevelt saw himself as saving the capitalist system from people like this.”

Up to now, the Krugman-DeLong-Thoma-Romer-Summers axis of moderate Keynesians have defined the “far left” extreme of policy discussions. The people who actually run the country have thus seen the arguments coming from the axis as hostile and dangerous, even though these arguments are quite moderate and reasonable. The Occupy people, if they keep it up, can change this dynamic. When the people who run the country are hearing loud demands for protective tarriffs and the end of capitalism, the Krugman-DeLong-Thoma axis suddenly looks quite reasonable and pro-business. When push comes to shove, big business will take Keynes every time if it thinks the alternatives it faces are more radical (Keynes famously described his work as “moderately conservative in its implications”). The loud demands needn’t be economically sound: indeed, it is preferable that they be loony and unfeasible. The “Tea Party” has no sensible ideas yet this doesn’t stop them from being influential.

I also now regret my response to a reader who some time ago recommended this video by David Harvey. I responded, basically, by denigrating the theories of money and value implicit in the video, seeing it as something of a distraction. I should have said it was interesting and I’d like to hear more. If David Harvey is in the discussion, Paul Krugman looks like big business’s best friend.

In short, I take back what I wrote earlier. The Occupy movement is more useful as an army of cranks and heretics than as purveyors of Gospel truth. So people should carry on and call for whatever their worldview advises. And while you’re at it, ask for a pony.

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Via the excellent David Glasner, I learned that the famed Austrian economist Ludwig von Mises was involved in the leadership of the John Birch Society in the 60s. That reminded me of this gem from the Chad Mitchell Trio:

At one point I spent a lot of time reading Bircher literature. Its paranoia and lack of any sense of humor or nuance was strangely fascinating. Eisenhower, JFK, Nixon: all devoted communists! The best send-up of this worldview was, I think, the fictional right-wing group in The Crying of Lot 49, by Thomas Pynchon, which opposed capitalism as a subversive development that would inevitably lead to socialism. We can also thank the Birchers for prompting Richard Hofstadter’s great essay, “The Paranoid Style.”

In any case, it does not speak well of Mises that he would affiliate with such a group.  I suppose everybody makes mistakes.

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I’ve made a wikipedia page to provide an answer to that question. Hopefully they will allow it to stay, and others with more knowledge or a better ability to research Cutting can add to it and improve it. Cutting’s career is quite murky, and the fact that he chose to have a common gerund as his last name makes it surprisingly difficult to search for information on him using online catalogues. It was difficult finding the information that I put in the article. Nonetheless, it is clear that Cutting was a well-known figure in the bay area — there is a boulevard in Richmond named for him — and he was well enough known for his economic writing that Upton Sinclair cited him approvingly (Cutting clearly was flattered by this endorsement). I am curious whether he at all influenced senator Carter Glass of Virginia, who was basically responsible for all the banking legislation of his generation, including the Federal Reserve Act, the creation of the FDIC, and the post-New Deal limitations on the scope of what individual financial institutions could do. The reforms that Glass produced following FDR’s election were fairly well in line with what Cutting advised.

The context here is that I happened some time ago upon a copy of Cutting’s book, The Strangle-Hold. The title caught my attention, and when I began reading it I was amazed: the guy had such a good grasp of money that he was years ahead of his time in his analysis of the financial system, and he wrote with palpable outrage about the perversity and injustice of the then-accepted arrangements. His recommendations seemed to predict almost perfectly the developments that were later going to occur. He did not say anything about his influences, so its not clear whether he had read the best work that academic economists had done on monetary theory by that time (most of which was in Swedish — go figure). I tried to figure out why he was ignored in 1921… and all I found were antiquarians selling old copies of his long-out-of-print book, and records from one civil case in which his company was the defendant.

Cutting was at once a successful businessman and a strong progressive, and he saw no contradiction between these two roles. Indeed, he believed that progressive reforms to destroy the privileges of the vested interests were good news not only for poor workers and borrowers, but also for the competitive business environment, and the entrepreneurs who would enter it. He was, I believe, very much a man for this historical moment.

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To Kim Jong-il, General Secretary of the Korean Workers’ Party:

The western economy is in disarray, as your propagandists are fond of pointing out. Keynesian and Monetarist economists in the United States have recently converged on the idea that the Federal Reserve should embrace NGDP targeting as a strategy, in preference to the inflation-targeting approach that has been the norm for thirty years. In other words, the Fed should announce that it’s targeting a growth rate of 5 or 7 percent or whatever, and conspicuously stop talking about its inflation target. This would lead private investors to conclude that the Fed was determined to print as much money as it would take to get  the promised growth, which would change expectations just as if the Fed had actually printed a vast quantity of money. The promise would thereby become a self-fulfilling prophecy. Here is Christina Romer:

 It would work like this: The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.

HOW would this help to heal the economy? Like the Volcker money target, it would be a powerful communication tool. By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth.

Such expectations could increase spending and growth today: Consumers who are more certain that they’ll have a job next year would be less hesitant to spend, and companies that believe sales will be rising would be more likely to invest.

Another possible effect is a temporary climb in inflation expectations. Ordinarily, this would be undesirable. But in the current situation, where nominal interest rates are constrained because they can’t go below zero, a small increase in expected inflation could be helpful. It would lower real borrowing costs, and encourage spending on big-ticket items like cars, homes and business equipment.

Even if we went through a time of slightly elevated inflation, the Fed shouldn’t lose credibility as a guardian of price stability. That’s because once the economy returned to the target path, Fed policy — a commitment to ensuring nominal G.D.P. growth of 4 1/2 percent — would restrain inflation. Assuming normal real growth, the implied inflation target would be 2 percent — just what it is today.

Though announcing the new framework would help, it probably wouldn’t be enough to close the nominal G.D.P. gap anytime soon. The Fed would need to take additional steps. These might include further quantitative easing, more forceful promises about short-term interest rates, and perhaps moves to lower the exchange rate. Such actions wouldn’t just affect expectations; they would also be directly helpful. For example, a weaker dollar would stimulate exports.

There is a great deal of debate around whether and how this would work, but the real question is whether the Federal Reserve can be persuaded to adopt the policy at all. Most of the bank-appointed governors from the regional Federal Reserve banks are very conservative, and Chairman Bernanke prefers to operate by consensus rather than embracing the madman theory of macroeconomic stabilization. There is much that Bernanke could learn from a man like you, Secretary Kim!

What nearly all commentators seem to miss, somehow, is that the Federal Reserve is not the only actor that can credibly commit to print money until growth resumes! You, Secretary Kim, with the full power of the North Korean state at your disposal and the fourth-largest army in the world,  could do exactly the same thing. Indeed, you came upon this idea rather prematurely, and were caught in 2006 issuing what the New York Times described as “nearly flawless” US dollars. I beg that you resume this wise policy, but this time don’t be shy about it. Announce that you are going to print a trillion to spend on the finer things in life, and that you don’t know if that will be the end of it, but do note that if inflation kicks in you will switch to a better currency. You can spend the money on the many excellent Bourbons crafted in our country, or the prestigious California wines. That’s your business and I won’t presume to dictate your purchases. The United States does also export food in massive quantities, which might be of interest to some of your countrymen.

It is time, Kim Jong-il, to do introduce nominal G.D.P. targeting to the United States: humanity pleads it.

Distinguished sentiments,

Some Random Blogger

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Daniel Coit Gilman, in 1854, describing his impression of Russia:

In striking contrast with America and England, everything here is in Government control, and not merely in a general way, but in the particular administration of what would seem to us quite insignificant details. (The Life Of Daniel Coit Gilman, p. 23)

Will Cuppy on the finances of Peter “the Great”:

He needed more money for firing salutes to the Tsar, artillery practice, and fireworks. Russia never seems to change, somehow. (Decline and Fall of Practically Everybody, p. 136)

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Matt Yglesias tries to recap the development of astronomical science, plugging Thomas Kuhn’s great book on the subject along the way:

The way this went was as follows. Ptolemaic astronomy started with the observation that “the planets” (including the sun and the moon) seem to revolve around the earth. It assumed they moved in circular orbits, and made predictions based on that. As people bothered to pay attention, it became clear that this theory gives you the wrong predictions. So people developed the ad hoc concept of “epicycles.” The planets moved in circles-within-circles, with equations developed to account for the actual position of the planets. With more and more observations, the calculations became more and more complicated and a lot of people were unhappy with the increasingly messy picture. Then along comes Copernicus who as a young man had been involved in some neo-Platonist cults featuring sun-worship and a heliocentric worldview. He notes that if you reinterpret the heavens as centered around the sun, you can derive a considerably more parsimonious and theoretically elegant account of positions of various heavenly bodies. All the epicycles are gone! Victory.

Unfortunately, this is all wrong!

Here’s how it actually went down. It was Aristotle, and not Ptolemy, who proposed that the planets revolved around the earth in perfect circles. Aristotelian science made a big to-do about the supposed perfection of the heavens, and the perfect circularity of the orbits played into that. This feature of the Aristotelian system was to influence later Catholic cosmology in certain important ways, but that is beyond the scope of Kuhn’s book or of this discussion.

Ptolemy’s great contribution was in fact to note the total inadequacy of this model to explain the actually observed movements of the planets, particularly their occasional retrograde movement. It was Ptolemy, and not dissatisfied people trying to correct him, who introduced three important deviations from the pristine Aristotelian model: epicycles, deferents, and equants. Planetary movement thus modeled looked like this:

The point on the orbit that the planet rotates around is the deferent, the small circular path it follow is the epicycle, and the dot sitting astride the X from the earth is the equant.

These days the epicycle is the part of the Ptolemaic system that receives regular ridicule. But people at the time were fine with the epicycles, because they provided an explanation of retrograde planetary movements. What people really didn’t like, and what Copernicus in particular took exception to, was the equant. The concept of the equant meant that earth was not really the center of planets’ orbits, and this did not square well with the broader teachings of Aristotelian physics and philosophy.

Copernicus came along and developed a model of the solar system with the sun at the center. He washed his hands entirely of the hated equant. However, contra Yglesias’s account, Copernicus maintained the other major contributions of Ptolemy — the deferent and the epicycle — and maintained the perfectly circular orbits of Aristotle. Copernicus can in some respects be viewed as trying to preserve certain flawed characteristics of the old Aristotelian system against Ptolemy’s more empirical revisions.

As a practical matter, Copernicus’s system as he proposed it had much less predictive power than the Ptolemaic system. It was only after Kepler had thrown out the hypothesis of perfectly circular orbs that an empirically impressive sun-centered universe emerged. Newton then reintroduced a sort of “perfection” to the heavens by showing that the movement of heavenly bodies conformed to beautifully simple mathematical formulas.

In Yglesias’s exposition, then, the point of Khun’s book is lost: Copernicus did not in fact offer “a considerably more parsimonious and theoretically elegant account of positions of various heavenly bodies,” much as we would like to say he did. Nor did he offer an improvement over Ptolemy in empirical results. Rather, he offered a plausible alternative model that preserved many of the errors of the older approaches, and did so not so much because it better accounted for evidence as because it seemed more intuitively correct. It happened to contain a large element of truth, and to be just the nudge that astronomic science needed. But it was far less revolutionary, and also much less a matter of pure science, than Yglesias’s account implies.

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Percy Shelley:

I met a traveller from an antique land
Who said:—Two vast and trunkless legs of stone
Stand in the desert. Near them on the sand,
Half sunk, a shatter’d visage lies, whose frown
And wrinkled lip and sneer of cold command
Tell that its sculptor well those passions read
Which yet survive, stamp’d on these lifeless things,
The hand that mock’d them and the heart that fed.
And on the pedestal these words appear:
“My name is Ozymandias, king of kings:
Look on my works, ye mighty, and despair!”
Nothing beside remains: round the decay
Of that colossal wreck, boundless and bare,
The lone and level sands stretch far away.

The levelers have the last laugh. The passage of time is highly democratic.

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