Archive for May, 2006

What the “Supply Siders” Were On About

My old friend Reuven Brenner (eight books, including History: the Human Gamble, Betting on Ideas:  Wars, Invention Inflation, and, most recently, The Force of Finance: Triumph of the Capital Markets) writes from McGill University, where he holds the Repap Chair of Business on the Faculty of Management,

I believe you make a mistake when you misunderstand why the “supply side” so much used that word – though they were talking about innovations, and prosperity all the time. The reason was simple: it was still the heyday of Keynesian vocabulary, and the notion was that governments could manage the economy by manipulating “aggregate demand.”  Remember? So on one side it was “demand, demand, demand” and that’s why Bob Bartley and Wanniski thought they needed one simple slogan to counterattack.  I remember having discussions about this with Bob.  (Indeed, I have always been hesitant of such one-word simplifications.  Laury Minard pushed me hard to come up with one describing my work – and it was him who suggested “leapfrogging” – which actually captures both the micro and the country parts well).  Newspapers are in the real estate business, so they have to be very economical with words. This has obvious benefits, but disadvantages too.

Brenner has long taken a broad view of entrepreneurship, always to be understood as taking place within a commercial hierarchy. His own sensible ideas on growth are elaborated briefly here, and at satisfying length in Labyrinths of Prosperity: Economic Follies, Democratic Remedies.

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What Is a Turnpike?

Lionel W. McKenzie of the University of Rochester, a significant player in Knowledge and the Wealth of Nations and careful reader of the book, has along sent “a little paper” untangling the highly-compressed description of turnpike theorems that appears in connection with the series of conferences on growth theory that occurred in the early 1960s. [P. 156: “Exciting new theorems about the existence of “turnpikes” were being proved and disproved (routes by which economies might swiftly move to higher levels of industrial development through forced investment in heavy industy).” ] He writes:

I was surprised when I worked on the notion of a turnpike in economics that it was not already explored by mathematicians as a part of the calculus of variations. However I have found many topics in the mathematics of economics which were not dealt with in the mathematical literature not because they were difficult but because they were too special for general mathematical interest. However I have now noticed that some mathematicians have taken an interest in the general problem as a problem in calculus of variations and indeed have even cited my papers.  The general problem of calculus of variations arises when we are presented with a set of functions F and a valuation function v which gives a value to every function in this set and we ask  which function f * in the set F satisfies the condition that v(f*) (> or =)  v(f) for any f in F. I believe the subject arose from considering in what curve a rope of given length suspended between two points would assume. This problem was transformed into the question of what curve would minimize the potential energy of the rope arising from the force of gravitation. The answer is a catenary.

__(‘Read the rest of this entry »’)

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Sex among Rhinoceroses?

Gavin Kennedy, emeritus professor at Edinburgh’s Heriot-Watt University and blogger at Adam Smith’s Lost Legacy, is upset (May 23 entry) that Knowledge and the Wealth of Nations doesn’t do justice to the subtley of the views of Adam Smith.  It most certainly does not. But then that is not what the book is about.

What it is about — how formal methods, mathematics in particular, have enabled economists to move beyond the ambiguities in the work of early literary economists, Smith in particular, to a demonstrably clearer understanding of the world — Kennedy airily dismisses with a wisecrack. “Of the controversies over the maths of competing economic growth theories, I shall say nothing. Like the sex life of a rhinoceros, they are of compelling interest only to other rhinos.”

I am more interested than most in Smith’s genius — did he or did he not actually visit a pin factory? — but from the first word of its title on, Knowledge and the Wealth of Nations is about knowledge, meaning all that has been grasped by the human mind, and the effect of its growth on human well-being.  The punchline, derived from mathematical economics, is that the economics of knowledge differs profoundly from the economics of things (and, for that matter, of skilled people), in that knowledge is nonrival:  it can be copied and used in many different activities and by many different people at the same time.

A great deal of wisdom is to be found in Adam Smith, but not that.   

    

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The Exceptional Amartya Sen

Asif Dowla, professor of economics at St. Mary’s College of Maryland, points out an error on page four of Knowledge and the Wealth of Nations, where it is asserted that the American Economic Association has never been headed by anyone who was not an American citizen, “the three who were born in Canada included.” Talk about spurious precision!

Amartya Sen, citizen of India, Nobel laureate, Lamont University Professor at Harvard, was the AEA’s president in 1994. Why was Sen the first (and so far only) non-US citizen to be elected? At the the annual dinner of Economists for Peace and Security last January,  Harvard University president Lawrence Summers described him this way:

“Amartya is a singular figure in our dismal science – a master of marshalling impressive arrays of evidence to support his pathbreaking ideas, but also a figure whose ideas and scholarship have transcended the bounds of our discipline to directly affect the lives of millions of people throughout every part of the world. Albert Einstein once said, perhaps indelicately, that, ‘We owe a lot to the Indians, who taught us to count, without which no worthwhile discoveries could have been made.’ I would go one step further – Amartya Sen, ‘immortal’ son of India, has taught all of us that it is simply not enough to count – but that we must never forget the value of that which we aggregate. That the enduring values of the human spirit can’t simply be reduced to numbers, but that through the thoughtful application of knowledge and insight the human spirit can indeed be set free.”

Summers’ graceful summary of the impact of Sen’s research can be found here.  And, just in case, a list of past presidents of the AEA is here.
 

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Poetry As Memorable Speech

Knowledge and the Wealth of Nations is the beneficiary of an especially perspicacious and kind review in the Economist.  

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The Dismal Origins of a Sobriquet

Stanford’s John McMillan enjoyed Knowledge and the Wealth of Nations. He writes, “I found no nits to pick, except one:  your use of ‘dismal science’ in a chapter heading. You might check out Carlyle’s article ‘Occasional Discourse on the Negro Question.’  Economic analysis was ‘dismal,’ in his view, because its proponents were using to it argue for the abolition of slavery.  No one would invoke the phrase if they knew how disgusting its origins were.”

The text of Carlyle’s anonymous 1849 essay in Fraser’s Magazine for Town and Country can be found here on the New School’s excellent History of Thought site. Carlyle argued that slavery should not have been abolished.  The relevant passage is this:

“Truly, my philanthropic friends, Exeter Hall philanthropy is wonderful; and the social science — not a “gay science,” but a rueful –which finds the secret of this universe in “supply and demand,” and reduces the duty of human governors to that of letting men alone, is also wonderful. Not a “gay science,” I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science. These two, Exeter Hall philanthropy and the Dismal Science, led by any sacred cause of black emancipation, or the like, to fall in love and make a wedding of it — will give birth to progenies and prodigies: dark extensive moon-calves, unnameable abortions, wide-coiled monstrosities, such as the world has not seen hitherto!”

This is indeed the origin of the famous phrase. And McMillan is right. Carlyle’s essay is a revolting piece of work.

I am not so certain, however, that its disreputable origins should lead us to eliminate “dismal science” from our vocabulary. The phrase neatly encapsulates what chapter five is all about — the dire implications for the human prospect of the Ricardian and Malthusian models.  Presumably this resonance is why the sobriquet endured, while Carlyle’s views racist views were soon forgotten.

It is a good thing, therefore, that for Economic Principals, I am reading The “Vanity of the Philosopher:” From Equality to Hierarchy in Post-Classical Economics, by Sandra J. Peart and David M. Levy.  The authors deal extensively with the 19th century alliance between evangelicals (among them, the Exeter Hall philanthropists) and English political economists, united in their support of the presumption of human equality — a good excuse to revisit this topic in the summer.    

 

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Early Notices

Second only in interest to the text of a new book is the reception it receives. Knowledge and the Wealth of Nations got a terrific review in the Sunday New York Times from Princeton economist/Times columnist Paul Krugman. It received a knowledgeable plug as well from George Mason economist Tyler Cowen, who modestly understated the role he plays in the story. (In 1988, Cowen and Amihai Glazer wrote a note that goaded Paul Romer into a far-reaching reformulation of the attributes of economic goods.) Columnist Steven Pearlstein of the Washingon Post commended it to readers of the Washington Post’s business page. 

Alas, KWoN didn’t make Greg Mankiw’s list of recommended summer reading for his students. Still, the early interest was enough to keep the title in the 20s on Amazon’s Top Sellers in Books for the first few days of the week. 

KWoN is published officially on Monday, May 22.

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How Ken Galbraith Became President of the AEA

Tucked away in the first chapter of Knowledge and the Wealth of Nations is a very short account of  the circumstances in which John Kenneth Galbraith was nominated to the presidency of the American Economic Association, in December 1970.  An early passage in the book states, “Indeed, go back far enough and you’ll find John Kenneth Galbraith, a literary economist who criticized the profession in a succession of widely-read books – and who is said to have won his presidency only after the immediate past president, Milton Friedman, angered the nominating committee (of which he was a member) by asserting that Galbraith ‘wasn’t an economist at all.’”

Milton Friedman has confirmed the story, although he recalls having described Galbraith as being more of a sociologist than an economist. Also on the committee was economist Hollis Chenery, who had just begun as chief economist at the World Bank (an institution he would serve for thirteen years).  Incensed by Friedman’s attitude, Chenery led the charge for Galbraith and carried the day. (Other committee members included Irma Adelman, Andrew Brimmer, Albert Fishlow and Harold Somers.)  In due course Galbraith was elected.

And so JKG served a spirited term in the tumultuous year of 1971, anointing panels for the annual meeting in December. Among them were sessions on market power, economic equality for women, black political economy, land-use policies, the economics of the arts.  He invited his old friend Joan Robinson to give the distinguished lecture – “The Second Crisis of Economic Theory.” It was distribution, she said; you could tell there was a crisis because of the preponderance of cranks prescribing remedies for problems that mainstream economists ignored.

“Charles Reich proposes to turn America green with a spade and hoe. J.W. Forrester proves on a computer that humanity is bound to be wiped out either by poison or by famine within a hundred years.  Our distinguished Chairman [JKG] can hardly be classed with the cranks, considering the seat he occupies this year, but next year, perhaps, he will be relegated once more to the position outside the pale of those who commit lese majeste against consumer sovereignty.”

Robinson was right. Soon the man his friends called Ken was again being ignored by most technical economists. In the late 1970s, the indignity was compounded when a significant part of the public shifted its fealty to Friedman, whose television series with his wife, “Free to Choose,” crushed Galbraith’s own “The Age of Uncertainty” in the ratings. Good books continued to flow from his pen – an autobiography, a pair of novels, a history of thought, collections of essays.  But never again did he have the enormous success he had enjoyed first with The Affluent Society in 1958, then in 1967 with The New Industrial State. (Richard Parker has written an extensive biography.) 

Galbraith died on April 29, at the age of 97. The year he served as president of the AEA is a forceful reminder that, while his chief celebrity derived from his role as a public intellectual, an unflagging spokesman for big-government liberalism, he most definitely was an economist as well. It is true he did not influence the profession directly so much as hold a place for economics in many minds with literary arguments. Later, these same ideas would be explored by formal methods and find secure places in other minds.

He taught development economics by example, serving as John F. Kennedy’s ambassador to India instead of writing a text. He illustrated monopolistic competition by writing about the “technostructure.” At a time when economists such as Chenery, Karl Shell, Richard Nelson, Edmund Phelps, Nathan Rosenberg and Burton Klein were unable to catch and hold the attention of the profession, Galbraith succeeded, at least for outsiders, in making economics more like real life, happily trading away precision and professional influence for popularity. If his grasp exceeded their reach, he was only too happy to pocket the difference. 

In time, insiders learned to capture the considerations at which Galbraith had merely hinted. Most of his issues have been overtaken by technical work. Avinash Dixit and Joseph Stiglitz were working on a Galbraithian problem of brand-proliferation – were there too many kinds of breakfast cereal? – when in 1977 they devised the model of monopolistic competition that has proven to be the workhorse of a revolution in the way in which we understand industrial organization. Jean Tirole codified the new learning in The Theory of Industrial Organization in 1988. Robert Lucas’ famous 40-page lecture “On the Mechanics of Economic Development,” first presented in 1986, probably did more to stimulate professional interest in the growth of newly-industrial countries around the world than anything Galbraith ever wrote. Yet before there was Lucas there was Galbraith, preaching the gospel that the lot of the world’s poor surely somehow could be improved by policy. Never mind that it was a very different policy than the one he advocated. He was a prophet of endogenous growth. 

Other economists have proved willing to take up the burden of going beyond their tools to engage in moral instruction:  Milton Friedman, for example. The most prominent representative of this type today probably is Jeffrey Sachs, the Harvard exile now presiding at Columbia University’s Earth Institute.

What is it that these people do for us?  They create the future. As William James wrote, in “The Moral Philosopher and the Moral Life,”  “We all help to determine the content of ethical philosophy so far as we contribute to the race’s moral life….    [T]here can be no final truth in ethics, and more than in physics, until the last man had had his experience and said his say.”  Yet some men and women, more than others, influence the course of events, most often by their demonstration of James called “the strenuous mood” — the capacity for “living hard, and getting out of the game of existence its keenest possibilities of zest.”  William James was one of these, Milton Friedman and John Kenneth Galbraith two others: not so much psychologist and economists, respectively, as moral philosophers. Almost all the copies of James’ The Will to Believe were borrowed from the two main Harvard libraries when I checked. Capitalism and Freedom and The Affluent Society will be similarly read by undergraduates throughout the 21st century.

 

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New Argonauts, Different Fleece

Larry Prusak, long-time management consultant and author of Working Knowledge, earlier noted the affinities between AnnaLee Saxenian’s New Argonauts: Regional Advantage in a Global Economy and Knowledge and the Wealth of Nations. 

He is right, of course. Knowledge doesn’t flow from place to place along currents in the upper atmosphere, like some fairy dust, or even person-to-person over the Internet. It is laboriously acquired by immigrant students, scientists and engineers, who, under some circumstances, may return to their homelands and, again, under certain circumstances, start companies that may in time, often surprisingy little time, become substantial industries.

Saxenian, dean of the School of Information Sciences at the University of California at Berkeley, is hardly the first scholar to study the mechanics of “catch-up.”  But by zeroing in on the stories of the foreign-born, technically-skilled entrepreneurs who travel back and forth between Silicon Valley to Taiwan, mainland China, india and Israel, she brings into sharp focus the reason why open borders are an important key to economic growth, especially for the well-trained. 

                                                                          DW  

 

 

 

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