In his column yesterday, New York Times columnist Thomas Friedman quoted Kauffman's Bob Litan about the importance of new and young firms to job creation and emphasized the importance of immigrants to firm formation. It was a trademark Friedman column: factoid, examples, quotations from experts, and concise policy lessons. I'm biased because Friedman used Kauffman data, but it was a good column.
Not everyone, however, wants to hear about the economic change that new firms and immigrants visit upon the U.S. economy. At Beat the Press, Dean Baker took issue with Friedman's column and Kauffman's data. With a layer of snark that is by now wearily standard in the blogosphere, Baker writes: "Friedman's conclusion about the special importance of new firms is utter nonsense." His logic:
The claim that most net new jobs came from new firms conceals the fact that existing firms added tens of millions of jobs in this 25-year period. Of course existing firms also lost tens of millions of jobs. We can say that the net job creation for existing firms was zero, but if we did not have an environment that was conducive for the job adders to grow (how many jobs did Microsoft, Apple, and Intel create after their first 5 years of existence?), then existing firms would have lost tens of millions more jobs.
Well, yes, that's true--and that's precisely the point. There are basically two ways to look at job creation in the economy: gross and net. On gross terms, large existing companies hire thousands of people each year, but they also see thousands of people leave, voluntarily or involuntarily. Gross job inflows and outflows in the American economy are enormous, an indicator of the ongoing and dynamic reallocation of resources that drives economic growth.
At the end of the day, however, if we want to keep pace with an expanding labor force (new entrants) and changing economy (the rise and fall of sectors and companies), what matters is net job creation. We have fifteen million people unemployed in the United States right now, and over the next several years net job creation has to proceed at a remarkable pace to not only provide jobs for this population but also create jobs for the millions of new people who will enter the labor force in the coming years. The last two years have seen the two biggest matriculating classes ever in American higher education, which means that in four or five years we will see a large influx of new graduates searching for jobs. How does Baker propose we keep pace with such growth?
From a macro perspective, for keeping pace with this growth, the only thing that matters is net job creation. It would be little consolation if we had 100 people looking for jobs, and large company ABC hired those 100 people but also fired 100 different people. For Baker, this is a good thing. And it is--for the 100 people who were hired. But what does Baker do with the 100 newly unemployed folks? Relate to them the wonders of big companies and their gross hiring?
Big, established companies are indisputably important--the symbiosis between new and old, small and large is a key strength of the U.S. economy. But we only get net job creation--a positive increment of new jobs to keep pace with labor force growth--from new and young companies. True, this population is highly dynamic, equally adept at creating jobs as eliminating them. Whereas this dynamic process works out to a net gain of zero in big companies, the net result among new and young companies is positive. If you subtract startups from the American economy over the past thirty years, there is only a handful of years in which the economy would have created a positive net number of new jobs. This makes sense as a brand new company can only create, not destroy jobs, but from the perspective of adding new jobs--for those 100 people above--this doesn't change the fact that new jobs come from new and young companies.
Baker also neglects to mention that once a company survives to a certain age (at age six a company is no longer classified in the data as "young") it becomes not an organic generator of jobs but an acquirer of new jobs via other companies, which are largely young and small. Baker asks, seemingly rhetorically, how many jobs Microsoft added over the age of five, but companies like Microsoft and Intel and eBay and others can generally only add a positive increment of net new jobs by acquiring young companies. So even the appearance of net job creation in our largest companies reflects the contribution of new and young firms. None of this, moreover, even begins to approach the role of new and young companies in innovation and economic expansion--not monolithic growth but the evolution of sectors and firms into new and unknown territory.
Baker also appears to cast cold water on Friedman's emphasis on the importance of immigrants, but doesn't dwell on it. There is, however, a faintly palpable nativist tinge in the comments to Baker's post. Why bring in "foreigners" to start companies? Don't we trust Americans? Nowhere, however, does Friedman (or Kauffman) claim that Americans are insufficient for entrepreneurship. In fact, immigrants who start companies in the United States create thousands of jobs for Americans--who could argue against that? For a country made great on a history of immigration, the United States risks falling prey to nativist sentiment from both the right and the left, which will inevitably stifle economic dynamism.
In criticizing Friedman (and Kauffman), Baker tries to cover his tracks with snark, wishing someone would revoke Friedman's license to discuss economics. In an altogether brilliant post last week, Michael Pettis observed, "Snarkiness is always a sign of intellectual insecurity or confusion, and never an indication of insight." Rather than snark, Baker should consider how his vision of a big-companies-only economy would lead to stultified job growth, harming the people he claims to want to protect.
Growth economics is filled with errors. The Solow residual has become ingrained in conventional wisdom as "technology" when it is really a measure of intangibles. Technology, sure, but also culture, institutions, creativity. Not to mention, conventional wisdom assumes a linear link between more R&D spending and more innovation. What about entrepreneurs? Most startups I know don't have an R&D budget -- the whole company is a tech gamble! How can government officials measure that? They can't.
But the biggest myth of practical growth economics is getting punctured, thanks to India. The CW still hasn't digested the truth yet, because it is still beholden to the idea that manufacturing is the alpha and omega of prosperity. Well, India has been showing that a country need not "industrialize" to grow. Rather, India is leap-frogging (for the most part) the trail of sweatshop tears by embracing services-led development. You might call it a Globalization strategy instead of Industrialization strategy. And lest we forget, embracing Industrialization was no guarantee of success. Remember Africa circa 1960?
Here's Ejaz Ghani in a VOX essay:
... India’s growth pattern in the 21st century is remarkable because it contradicts a seemingly iron law of development that has held true for almost two hundred years since the start of the Industrial Revolution (Chenery 1960, Kaldor 1966). This law – which is now conventional wisdom – says that industrialisation is the only route to rapid economic development for developing countries. It goes further to say that as a result of globalisation the pace of development can be explosive. But the potential for explosive growth is distinctive to manufacturing only (UNIDO 2009). This is no longer the case.
... Service-led growth is sustainable because the globalisation of services is just the tip of the iceberg (Blinder 2006). Services are the largest sector in the world, accounting for more than 70% of global output. The service revolution has altered the characteristics of services. Services can now be produced and exported at low cost (Bhagwati 1984). The old idea of services being non-transportable, non-tradable, and non-scalable no longer holds for a range of modern impersonal services. Developing countries can sustain service-led growth as there is a huge room for catch up and convergence.
Maintream economics taught students that services dominate the non-tradeable sector (think haircuts) across distance. I always wondered what Elvis or Lassie would say to that. But now I just wonder what the accountants in India would say. Probably the same. Woof.
This is worth keeping in mind the next time someone tells you that "America used to be a place where people made things." It still is, but that's not the future. In the future, manufacturing will be automated. American factories will quietly produced more stuff with less, or no, workers on the line. Indeed, that trend may make China's industrialization strategy a bad bet over the long-term.
This is an overdue summary of the presentation Stanford's Paul Romer gave at the signature growth panel at the Atlanta AEAs ...
Romer started by observing the divergence of international incomes has been a powerful and vexing trend. Despite the ever-widening gap between developed and developing economies, he also noted research showing how life expectancy across countries has converged. This bodes well for the future, and suggests to me a stepping stone to convergence in other things.
Second, Romer made a fantastic point that the workhorse model of gains from trade (globalization) is comparative advantage, but it is a story that should be updated with new goods. Instead of the two trade goods being fish and apples, for example, we should talk about trade in cholesterol pills and blood pressure pills. The first implication seems to be the consumption benefits of trade are too often neglected. The implication Romer was making is that trading in recipe-driven goods represents an inefficiency. We should imagine a globalized economy where production is localized and IP is licensed, rather than one where final goods (physical objects) are traded. In his words, "globalization should be a flow of ideas, not goods."
But the real insight offered in Romer's talk was when he called out the "two errors" of development thinking. He got to them by sketching out a few growth equations, starting with the familiar
Y = A * F(K,H,L)
and then expanding the A term as a function of technology and rules:
Y = A(Technology,Rules) * F(K,H,L).
Understanding the importance of rules is the key insight. Private property is a kind of formal rule governing social interaction. We have other rules for marriage, educational advancement, and so on. Technology is the conventional way economists thought about the growth equation and includes hardware like computers, phones, and printing presses.
When thinking about how to accelerate economic development, the first error people tend to make “Technology cannot change.” The given tech level of a country is given. The second, and more important, error is that "Rules can change with stroke of a pen.” While there is a growing consensus that rules are the most important factor in permanent changes in a developing country, Romer forces us to accept that rules are very difficult to change. Nations in particular, even when its leaders recognize the need for rules to change, have difficulty making them happen.
Here in America, there is tremendous acrimony about new legislation of almost any kind. Witness the current fight in the U.S. Congress over health care reform. So why do we imagine it would be trivial for another country to change its laws, let alone norms, customs, cultures? So the real challenge for development practitioners is how to make rule-changing easier. Any thoughts?
In response to Dane's fine post on the rising complexity and fragility of an advanced economy, I have to wonder if the original essay by historian Bryan Ward-Perkins (see Financial Times op-ed) is confusing complexity with scale.
Complexity is a fascinating field, and I think the robust comments the post received are testimony to that (superb discussion!). Also, I adore the folks and research at the Sante Fe Institute, the capital of complexity studies, But the word "complexity" has become woefully trendy, and calls to mind the overuse and abuse of otherwise interesting topics like dolphins or innovation or Eastern religions. And in this case, I think it has been misapplied.
Let me quote both Ward-Perkins followed by Dane here:
"The more complex an economy is, the more fragile it is, and the more cataclysmic its disintegration can be."
Ward-Perkins' main point that complexity increases fragility, is wrong.
Keep in mind that Ward-Perkins is analogizing the current U.S. economy and recession to the British fringe of the Roman empire after the sack of Rome in 410. Rome v America is an interesting comparison, but Ward-Perkins' analysis is shockingly off target in linking 410 to 2010. I say shockingly because his book on the collapse of Rome is perhaps the single best accounting of hard evidence on Rome's demise that I've come across.
If you are interested in the fate of large nations, you study Rome. And if you study Rome, you need the facts, which is what Ward-Perkins does better than anyone. Fact number one is that the collapse of Roman civilization was real and terrible. His book destroys the trendy revisionism that suggests the post-Roman world was a gentle evolution and that no "civilization" was lost. This cautionary tale can not be overemphasized because it must be understood that systemic collapse could indeed happen again. Unfortunately, my admiration for Ward-Perkins' masterful documentation of the effects of Roman collapse do not extend to his attempt at causes.
Fact number two is that the collapse of Rome was not sudden. Ward-Perkins knows this, so why make the complexity argument? It sounds good sure, but it doesn't fit. The demise of scale economies is better understood as a consequence, not a casue, of collapse. Besides, the basic causes of Rome's weakend economy are not so mysterious. Bruce Bartlett wrote an excellent essay on this years ago (worth digging up). But the key point is that bald economic ignorance by its rulers set up Roman civilization for epic failure. It wasn't their fault, in one sense, because nobody knew economics then. Nonetheless, the city fell in 410, but that was preceded by more than a century of ... let's just list the key factors ... violent political strife, hyperinflation and currency debasement, regulated labor market rigidity in the extreme, slavery and the exhaustion of its supply, and the ultimate walling off of the outside. Any one of these is a better explanation for unsustainability and collapse than "fragile complexity."
Rome, like China, ultimately walled itself off from the world, became insular, became stagnant. talk about a non-entrepreneurial economy!
Indeed, the one idea I would like to push into the minds of modern policymakers is that economic growth relies precisely on the concept of scale. With scale comes labor specialization. This was the insight of Adam Smith (and an insight the Romans lacked). Scale can be increased externally by openness to other economies -- through trade, immigration, investment, and ideas. But scale can also be enhanced internally. Smart pro-growth policy recognizes both. Internal scale rises with bigger, better transportation networks. Scale rises with better communications technology. Indeed, the revolution in scale spawned by the internet and other digital technologies is the key reason to have confidence in a coming long boom.
Is economic scale fragile? I suppose it can be, but that is a much deeper question. Networks, as Dane describes, can be strong or weak. A strong network (think cellular telephony) can lose one or more nodes and still function. A weak network (think of local plumbing) needs all of its nodes to be up for the system to function. Overall, the modern economy leans much more towards the strong network. Consider, for example, what happens to all the other cities in the world economy when one is incapacitated. Not much. As tragic as Hurricane Katrina was on the lives of millions of Americans, the economic lesson was a surprise. The national economy was robust in the extreme -- economic growth barely flinched at the loss of a major port of trade, even the destruction of huge amounts of oil refining.
Here we are in Atlanta, host of this year's biggest annual meeting of economists from around the world, the AEAs. I had the fortune of bumping into David Warsh at the beginning of the one star-studded panel on growth, and we sat together near the back to list to Paul Romer, Daron Acemoglu, Dani Rodrik, and Philippe Aghion discuss "Growth in a Partially De-Globalized World."
Each presentation was interesting, but somewhat narrow I thought, aside from Romer. Romer is a big thinker's big thinker, and his concept of a Charter City can, in my opinion, truly change the world. Overall, the lack of panels on growth is a bit disappointing. Certainly, a great deal of attention is focused on macro and basic discussions of the near-term prospects for the U.S. and world economy. But I get the sense that growth is a bit stagnant again, in a kind of rut that it was almost 20 years ago before endogeneity shook things up.
The full listing of panels and some of the papers available for download are at this link:
Not to slight Acemoglu (his co-authored paper is a cautionary note about the possible negative correlation between rising militarism and declining trade openness -- a first stab that seemed somewhat obvious while at the same time historically myopic ... was WW1 really about the "end" of globalization or rather just a pause?) or Rodrik (his presentation focused on China and the dilemma of its currency manipulation, pretty interesting but I honestly didn't learn anything that changed my worldview, not that it wasn't impressive) or Aghion (his heterdox call for a smart industrial policy did not go over well, but his comments on other presentations were solid), but Paul Romer's presentation really merits extensive notes. I'll post those next...
By some estimates, the United States currently has vacant office space running into the hundreds of millions of square feet: law offices, Fortune 500 companies, cookie-cutter glass boxes constructed on sandpiles of debt, etc. And, as discussed previously, commercial real estate (CRE) could very well be the next economic shoe to drop, dragging down whatever economic recovery is materializing.
At the same time, it's increasingly clear to more and more people that recovery and expansion simply won't happen without entrepreneurs: new companies that bring innovations to market. Entrepreneurs are not the silver bullet solution, yet growth will not occur without them.
So let's see: how could we possibly address a looming CRE problem as well as encouraging incipient and potential entrepreneurs? Got it! Construct completely new science parks! Ignore both problems and travel a well-trod path that, if not inspired by Field of Dreams, at least follows the same blueprint: Build it and they will come.
Oh, wait, hold on a second, I'm being told that this idea is already being pursued--it seems that Congress has taken time from its time-consuming BCS debates to pass legislation that will ostensibly "spur innovation [and] economic with development" by building science parks. And wouldn't you know it, the bill miraculously finds empirical support from the Association of University Research Parks. This is a page right out of the NVCA's playbook.
Not that science parks are necessarily bad, but evidence on their effectiveness appears mixed and, in any case, the concept would seem to contradict, you know, the entire history of innovation.
The bill's title is "The Building a Stronger America Act," which should not be confused with Build a Stronger America, an entrepreneurs' movement that seeks, inter alia, to expand the popular notions of entrepreneurship and innovation beyond science parks and venture capital, beyond the idea of walling off our "innovators" from the huddled masses of ordinary humans.
One of the absolute best pieces to read on how innovation happens is J. Rogers Hollingsworth's chapter on "High Cognitive Complexity." Synthesis, not separation, is the key.
Update: Kedrosky has written a wonderfully scathing post focused on the CRE part of this issue.
The search is on for ideas that will stimulate short- and long-term economic growth in the United States without further adding to the budget deficit. Here's a no-brainer: allow university researchers with innovations that are ready to be commercialized to shop around to different technology licensing offices.
That's the idea advanced by Kauffman Foundation vice-presidents Lesa Mitchell and Bob Litan in the forthcoming issue of the newly revamped Harvard Business Review. This issue features the top "Breakthrough Ideas for 2010" and, happily, this idea comes in at number 6!
Currently, if you are a professor with a new technology or innovation, you typically must work through your own university's technology licensing office (TLO). This is inefficient for a variety of reasons. For one thing, not all TLOs are created equal: some have greater skill than others, while a handful excel. Several decades ago, federal funding of academic research was dramatically skewed toward those universities that engaged in the most commercialization: patents, licenses, spinoffs, etc. In the last twenty or thirty years, the distribution line of federal funding has flattened considerably, with a greater number of schools receiving money than before. This is not to say that the distribution is equal, but it's much less skewed than before.
Here's the kicker: the distribution of innovation output--patents, licenses, startups--has not changed. It's still skewed toward a handful of schools despite the huge increase in the number of universities receiving federal R&D money. We are not reaping the benefits of innovations that are presumably emerging from all that research and development.
While some TLOs are more competent than others, moreover, it's also likely that such competence varies by area: one TLO may excel at commercializing life science discoveries while another may have a comparative advantage in computer science. Opening up the market for discoveries and commercialization should help iron out the inefficiencies and barriers that exist.
Kudos to Lesa and Bob for a fantastic article and for advancing a top Breakthrough Idea of 2010.
Last week Tim wrote about a New York Times story on "biophysical economics," a small but apparently growing group of scholars who seek to make economics more in tune with the laws of thermodynamics and energy use. Several blogs linked to the story, which I take to mean that this line of thinking was somewhat new to the economic blogosphere. Many of the ideas put forward by these thinkers, however, are not new and if you happen to be interested in things like "net energy" and "energy return on investment" (EROI) and the continuing viability of civilization, you would not have been too surprised by the story.
Tim used the story as the latest installment in his "Pernicious Dystopian Myth" series, which I wholeheartedly applaud and periodically endorse. But for the sake of intra-blog dialogue, I was a bit confused by some of Tim's points. To recap: Tim says "efficiency in energy consumption" will continue," "efficiency in goods consumption is a dominant feature of economic growth," and that since services are less physical than goods, we should expect a less energy-intensive economy.
Let's take these in reverse order. First, services have never been a smaller share of the United States economy than manufacturing. This goes all the way back to 1789. Services have always been an important part of the economy, so it's not necessarily true that more and more services (there has to be a ceiling on this, one would think) will lead to a less energy-intensive economy. Furthermore, services are not necessarily more friendly toward energy efficiency. One of the great ironies of the "intangible" new economy is that many of things techno-utopians like to laud as transformational (the Internet, Web 2.0 companies, software startups, etc) are fundamentally dependent on something as physical as energy. Specifically, electricity and thus coal and water and nuclear power. The computing cloud that is a favorite futurist topic would not exist but for ways to generate electricity. Thus, we have no choice but to remain focused on energy use and extraction and efficiency, notwithstanding our so-called intangible services economy.
(As an aside, something as cutting edge as IBM's push into services science recognizes the enduring physicality of many service systems.)
Second, yes, efficiency in goods consumption has been a mark of economic growth. This doesn't mean it will continue to be. More deeply, some research does show that we have had to use more and more energy (as well as debt, a subject for another day) to generate incremental increases in economic output.
Tim's third assertion was that energy efficiency in general will continue. Efficiency here is a slippery term; the biophysical economics crowd, as noted in the NYT story, focuses on something called the energy return on investment (EROI), which basically measures the cost-benefit ratio for energy production and consumption. What is the marginal energy return on increasing investments in energy generation? You could still see positive efficiency even if the EROI is narrowing. And, in fact, mounting research does indicate that, at least when it comes to petroleum, the EROI has been falling. We are expending more and more energy to extract energy: the marginal return is falling. So even if "efficiency" appears to continue, it doesn't mean everything is fine and dandy.
In fact, there is nothing dystopian about saying that, pending a negative EROI on the source of energy that makes the world economy run, we are in for a rude awakening when it comes time to transition to whatever comes next. (Natural gas?) It might actually help if the biophysical economists made some headway and expanded the purview of economic analysis to include the things that actually make the economy go. (In this vein, Steven Johnson's latest book, The Invention of Air, includes some delightfully pithy observations about the sometimes invisible, sometimes ignored, connections between what is in the ground and what occurs in the human economy.)
So anyway, Tim's right that pessimism can go too far. But that doesn't mean pessimism is unwarranted.
Try to fill in the blanks (I know, I know, this kind of boilerplate crosses my eyes every few weeks as well, so it could truly be anything ... but this is from a very legit news organization, seriously).
They hope that a set of theories they call "________ economics" will improve upon neoclassical theory, or even replace it altogether. But even this nascent field finds itself divided, as evidenced by the vigorous and candid back-and-forth debate last week over where to go next. One camp says its models prove the world is headed toward a dramatic economic collapse as ________ takes hold, while another camp believes there is still time to turn the ship around. Still, all ________ economists see only very bleak prospects for the future of modern civilization, putting a whole new spin on the phrase "the dismal science."
Your choices are:
A. Singularity / technological acceleration and automation
B. Rawlsian / globalized labor arbitrage
C. Heterogenous / insolvent overconsumption
D. Biophysical / energy scarcity
Skip below to the see the answer ...
The answer is D. And it comes from the New York Times, hat tip Free Exchange / Tyler Cowen. And here's more:
In 1926, Frederick Soddy, a chemist who was awarded the Nobel Prize just a few weeks before, published "Wealth, Virtual Wealth and Debt," one of the first books to argue that energy should lie at the heart of economics and not supply-demand curves.
Soddy also criticized traditional monetary policy theories for seemingly ignoring the fact that "real wealth" is derived from using energy to transform physical objects, and that these physical objects are inescapably subject to the laws of entropy, or inevitable decline and disintegration.
The sharpest difference between biophysical economics and the more widely held "Chicago School" approach is that biophysical economists readily accept the peak oil hypothesis: that society is fast approaching the point where global oil production will peak and then steadily decline.
Let's take this seriously, and take it apart carefully.
1. I suspect a great many economists agree with the notion of peak oil, and it is a question of when and how, not if. Given a finite energy source and its increasing usage rate, will it deplete? Yes. The more interesting question is what happens to oil prices, and here I think neoclassical supply & demand is a great tool to understand the consequences.
2. Just labeling your straw man as the "Chicago School" is not much of an argument. Please. Stop.
3. The core argument of BPE is that all economics, and hence economic growth, is about physical goods. That all wealth, all consumption, all value comes from physical things and their production. This takes energy. And since energy is finite, QED, there is a thermodynamic limit. I think there are four problems in that chain of logic. (1) efficiency in energy consumption will continue (see Obama, smart energy grid), (2) efficiency in goods consumption is a dominant trait of economic growth, and impossible to violate (see the fixed quantity of atoms on Earth, endogenous growth theory, Paul Romer), (3) services are non-physical and an expanding component of GDP (see Poetry, Music, Medicine, Art, Athletics ...), (4) the Sun's energy is finite but not in our time horizon (see Sun).
4. Before the hate mail starts rolling in, keep in mind that I am a member of the Pigou Club. I'd love to see the U.S. replace taxes on labor with taxes on energy. It would do the world a world of good. And help economic growth!
I have refrained from commenting on Paul Krugman's lengthy critique of macroeconomics which was published earlier this month in the NYTimes Magazine. I am not sure if I have anything useful to add. It is an important essay that is part of the conversation economists will be having for years to come (which I am calling the "Macro War"). It is quintessential Krugman being Krugman: brilliant, funny, nasty, and a puzzling blend of revelation and overstretch. And forgive me for protesting, but if I see the baby co-op story in print again, I'm submitting Krugman to the authorities for unfairly regurgitating the same pop material to pad his pubs.
If you are genuinely interested in the macro war, do not miss an alternative critique recently published by Northwestern 's distinguished professor Robert Gordon. I highlight five sections here: the entire abstract, three clips on growth vis-a-vis macro, and his assessment of Krugman. It is amazing. (Thanks to Greg Mankiw for the pointer).
Is Modern Macro or 1978‐era Macro More Relevant to the Understanding of the Current Economic Crisis?
This paper differs from other recent critiques of “modern macro” based on DSGE models. It goes beyond criticizing these models for their assumptions of complete and efficient markets by proposing an alternative macroeconomic paradigm that is more suitable for tracing the links between financial bubbles and the commodity and labor markets of the real economy.
The paper provides a fundamental critique of DSGE and the related core assumptions of modern business cycle macroeconomics. By attempting to combine sticky Calvo‐like prices in a theoretical setting that otherwise assumes that markets clear, DSGE macro becomes tangled in a web of contradictions. Once prices are sticky, markets fail to clear. Once markets fail to clear, workers are not moving back and forth on their voluntary labor supply curves, so the elasticity of such curves is irrelevant. Once markets fail to clear, firms are not sliding back and forth on their labor demand curves, and so it is irrelevant whether the price‐cost markup (i.e., slope of the labor demand curve) is negative or positive.
The paper resurrects “1978‐era” macroeconomics that combines non‐market‐clearing aggregate demand based on incomplete price adjustment, together with a supply‐side invented in the mid‐1970s that recognizes the co‐existence of flexible auction‐market prices for commodities like oil and sticky prices for the remaining non‐oil economy. As combined in 1978‐era theories, empirical work, and pioneering intermediate macro textbooks, this merger of demand and supply resulted in a well‐articulated dynamic aggregate demand‐supply model that has stood the test of time in explaining both the multiplicity of links between the financial and real economies, as well as why inflation and unemployment can be both negatively and positively correlated.
Along the way, the paper goes beyond most recent accounts of the worldwide economic crisis by pointing out numerous similarities between the leverage cycles of 1927‐29 and 2003‐06, particularly parallel regulatory failings in both episodes, and it links tightly the empirical lack of realism in the demand and supply sides of modern DSGE models with the empirical reality that has long been built into the 1978‐era paradigm resurrected here.
(Krugman critique mentioned)
The malaise of modern macroeconomics has recently been the subject of strikingly vitriolic accusations. The Economist (p. 70) quotes Paul Krugman’s LSE Lionel Robbins Lecture of 10 June 2009 as stating “most macroeconomics of the past 30 years was spectacularly useless at best, and positively harmful at worst.” More recently Krugman (2009) has amplified this criticism in a long and overly argumentative denunciation of modern macroeconomics. In notably similar language that might have inspired Krugman, Buiter (2009) wrote three months earlier that “the typical graduate macroeconomics. . . training received at Anglo‐American universities during the past 30 years or so may have set back by decades serious investigations of aggregate economic behaviour and economic policy‐relevant understanding. It was a privately and socially costly waste of time and other resources.”
(Three sections that mention growth are below)
The adjective “business cycle” in front of the phrase “modern macro” represents an important qualification to the scope of this paper. Much of modern macro escapes its critical overview, including such broad areas of modern macro progress as growth theory, search and matching models of unemployment, theories of why prices and wages are only partial flexible, and attempts to use modern versions of production functions and factor input measurement to develop empirical counterparts to longstanding 1978‐era macro constructs such as potential GDP growth and the GDP gap.
Viewed more broadly, a more basic similarity between the 1920s and the period between 1995 and 2006 was the view that permanent prosperity had arrived, and that the good times should be allowed to roll. The underpinning of this benign environment was the parallel upsurge in productivity associated with the invention of new “general purpose technologies” (GPTs, Bresnahan and Trajtenberg, 1995). In the 1920s productivity was boosted by the delayed payoff of the invention in the late 19th century of two revolutionary GPTs, electricity and the internal combustion engine. Many of the reasons for the delay in the application of electricity to manufacturing in the analysis of David (1990) apply as well to the internal combustion engine which required technical development and highway construction fully to transform transportation and distribution. Likewise, in the late 1990s the invention of the internet together with other delayed applications of the computer, including bar‐code scanning, boosted productivity growth for several years after the collapse of the late 1990s investment boom itself. More rapid productivity growth held down inflation and in this decade allowed the Fed to justify its maintenance of low interest rates.
The required condition for continued full employment is the opening of a gap between the growth rate of nominal GDP and the growth rate of the nominal wage (Gordon, 1984, p. 40) to make room for the increased nominal spending on oil. If nominal wages are flexible, one option is for the growth rate of wages to become negative, allowing the growth rate of nominal GDP to remain fixed. At the alternative extreme with rigid wages, to avoid a decline in nonenergy output an accommodating monetary policy must boost nominal GDP growth by the amount needed to “pay for” the extra spending on oil, but this will lead to an inflationary spiral if expectations respond to the observed increase in the inflation rate. A third alternative, and the one that actually occurred in the 1970s, was a combination of wage rigidity with a partial response of nominal GDP growth, pushing down both real non‐energy spending and employment.
Guest post by Charles C. Johnson
Unveiled in 2000 by the United Nations, the Millennium Development goals have consistently unmet despite pledges from much of the industrialized world.
On his blog, Bill Easterly of NYU explains why, "Each aid organization tries to meet all MDGs and each fails to specialize. Therefore some aid agencies are forced to supply things they are bad at ... for which there is no demand."
Easterly explains in further detail:
UNICEF is working on swine flu, the traditional province of WHO, who is distracted by trying to do development research, which is the traditional specialty of the World Bank, who is in turn distracted by a new emphasis on children, which is the strength of – just to complete the circle – UNICEF.
Even very small aid agencies fail to specialize – Luxembourg’s $141 million aid budget was divided among 30 different sectors (out of a possible 37). The tiny Luxembourg budget also went to 87 different countries.
With high overhead costs for each separate activity for each country, the ratio of overhead costs to funds for the activity gets extremely high, sometimes over 100 percent. UNDP has one of the very LEAST specialized aid budgets by country and by sector, and it actually does have a ratio of overhead costs to aid disbursed of 129%.
One suspects overhead costs devoured even more of program costs for the $20,000 Greece spent on worldwide post-secondary education, the $30,000 the Netherlands spent on promoting worldwide tourism to developing countries, the $5,000 Denmark spent on worldwide emergency food aid, or the $30,000 Luxembourg spent on conflict, peace, and security. (Remember, these small sums may have been split even further among country recipients.)
One could think of many political economy reasons why aid agencies resist specialization. From my casual experience in a large bureaucracy (the World Bank), the primeval bureaucratic instinct is to give a tiny piece of the pie to every possible lobby group (internal or external). But what’s most clear is that it shows aid agencies lack of accountability, because it is such a wasteful practice that also drives the aid recipients crazy with duplication of efforts by every aid agency in every sector in every country.
I suspect that this problem is even more pronounced than Easterly recognizes. Part of the reason groups specialize, in accordance with Adam Smith, is that they receive a market signal such as a price rise to specialize and thereby innovate, but what evidence is there that there is any such signal in aid agencies? Remember, nobody loses his job for failing to stop poverty.
Guest post by Charles C. Johnson
There are some fascinating facts in a City Journal piece by technology guru, Geoge
Gilder that warrant careful attention for anyone seeking to explain why it is
In a general enthusiasm for public ownership of the means of
production and finance, the government through the 1990s owned four major
banks, 200 corporations, and much of the land.
The influx of Soviet Jews into
On the successes of
In under 25 years—starting from those
first modest tax reforms of the mid-1980s—
On the growth of
Guest post by Charles Johnson
Our foundation president, Carl J. Schramm, has criticized Yunus's approach to microfinance, most recently in his essay for the Claremont Review of Books. In comparing the Nobel Prizes awarded for economics and peace in 2007, Dr. Schramm argued in the Wall Street Journal that microfinance might not be the panacea for world poverty that aid development agencies, like the State Department, have suggested that it is. With co-author, Dr. Amar Bhidé, Schramm writes,
ameliorative entrepreneurship however is very different from the transformative
entrepreneurship that Mr. Phelps argues has been central to modern capitalism.
Indeed, most of the ventures funded by microloans in
development does wonders for peace, but what does microfinanced
entrepreneurship really do for economic development? Can turning more beggars
into basket weavers make
It seems, though, that microfinance, far from being the panacea, may simply encourage consumption at the expense of long term economic growth. As a welfare program, microfinance isn't necessarily bad, as it most likely going to keep people from starving, but it lacks the kind of true impetus to drive true growth. True, Yunus’s model may be preferable to the massive government to government loans and spending of the Bengladeshi government, but that isn’t really saying much, even if the money is put directly into the hands of individuals.
A most recent article, titled,”A $9 Trillion Question: Did the World Get Muhammad Yunus Wrong?,” in Foreign Policy makes a similar point: how can the estimated $17 billion in loans actually help elevate the living standards of the $4 billion in poverty and why has it been so lackluster at generating real results?
Peter Schaefer writes,
Moreover, most of the existing microfinance credit is subsidized. Very little comes from private, profit-seeking capital markets (as of 2004, just $2.7 billion, or about 60 cents per poor person per year). This is because development banks do not really require collateral for their microloans. They often use subsidized credit, as they generally aren't profit-seeking. But banks backed by private capital markets require collateral. This means that their loans are too expensive for most of the long-term needs of the poor.
instance, the private Mexican microbank Compartamos charges 100 percent
annualized interest -- which, to be fair, reflects the real risk of providing
an unsecured loan. But such long-term interest rates cannot encourage capital
investment in projects that need time to gestate. And though shorter-term loans with 25 or 50 percent annualized rates
beat the street rate, such debt cannot be carried for any length of time.
As a result, the pool of global capital is largely inaccessible to poor people.
And the solutions proposed by Yunus and
In short, too much debt tends to sink individuals faster than it takes for them to make long-term financial decisions. The author suggests that “micromortgages” could actually help promote real long-term growth. He writes,
would it work? Let's consider a poor individual living in a house without a
title or even an address in
The bank would then submit the individual's information to the government, ready for entry into an official national digital registry. Were the application accepted for processing, he could take out a form of title insurance from the bank, which could then safely extend credit to the applicant. The modest application fee would be added to his loan principal, allowing him to immediately use the balance for, say, a long-term micromortgage to finance a business.
Intuitively, tapping into the equity in your home makes sense. Many entrepreneurs in the U.S. have used home equity lines of credit to finance their businesses, why should the developing world be any different?
Tim posted two interesting entries in recent days, both touching on the recurrent question of whether or not we are entering an extended period of Dystopia. Given that it's been just over a year since I happily discounted the possibility of American Dystopia, I thought I might weigh in here. I won't keep you in suspense: I dramatically downgrade my optimism.
There are two related questions here, one pertaining to recent history, the other toward future projections. The first is whether or not the United States economy has really performed as well as we all like to think it has over the past two or three decades. This is a contentious issue among economists and I have nowhere near adequate space to address it, so I'll confine myself to Tim's point:
". . . the existence of the pernicious Dystopian Myth that middle class incomes are stagnant. The Dystopian Myth is social poison, a fiction shouted by the negative nabobs that convinces voters the American economic system is failing them."
Say it ain't so . . . but I will: it's sort of true. In June, Monthly Labor Review published this article, the abstract of which reads:
"OES [Occupational Employment Statistics] data from 2002–2007 reveal that an overall shift in employment towards occupations with lower mean wages hindered growth in the U.S. real average wage and that wage growth was concentrated in higher paying occupations; the data also show a shift in employment from the middle-paying occupations to the highest and lowest paying occupations."
The gist, as you can tell, is that real wage growth in this recent five-year period was basically stagnant overall because of the large growth in jobs paying the lowest wages--which actually appears to have come at the expense of better-paying jobs. The MLR article conveys the image, though not in so many words, of an emerging barbell-shaped wage distribution. Heartening. (I should just point out that Tim's characterization of the myth as a ploy to fool American voters is actually somewhat true--because voting participation follows income. Self-flattery as political vote-buying.)
Onto the larger point: is the United States now entering a Dystopian period of slow or stagnant growth, marred by class conflict, a dysfunctional national legislature (oh, wait, we already have that), and a "new normal" of diminished living standards? Again, this is a subject for a much longer disquisition, but for what it's worth, some recent reading I've been doing--and too many conversations with Paul Kedrosky--has me convinced that we are in for some very trying times ahead. We will see a short-term bounce in GDP growth here in the next quarter or two, but possibly 2010, and more likely 2011 and beyond, will bring discord, precipitated in large part by not only a higher "normal" of oil prices but also the realization that we are about to enter, prepared or not, a serious energy transition. Oh, and China's entire economy might be a bubble and we might be on the brink of having a failed state on our southern doorstep--because of plummeting oil production, not drug lords. (But they don't help; of course, if California legalizes marijuana to deal with its fiscal problems, this would be a boon for Mexico. Wouldn't it be ironic if the United States, irrespective of what party is in power, supported drug legalization because it would forestall the development of a basket case next door?)
OK, so I sound semi-apocalyptic. Don't get me wrong: I don't expect (at least, I don't think I expect) a Joseph Tainter-esque societal collapse. But there is a worrying disconnect between everyone who claims to see "green shoots" around every corner, even those who foresee a longer recession but eventual "normal" recovery, and the reality of long-term energy trends. Look, there is a reason why the Industrial Revolution has been more aptly named the Promethean Revolution (one of the best books on it is Landes' The Unbound Prometheus): humans harnessed inorganic energy. Our entire economic model is based on the premise of cheap coal and cheap oil: techno-utopians consistently ignore the inconvenient fact that much of that computing power they love to tout runs on such energy.
The obverse is that our economic model is not premised on permanently higher oil prices, whatever climate feedback loops we may be instigating, and the nontrivial risk of geopolitical instability. (The U.S. military, by the way, has little room for anything but a realistic appraisal of the future.)
Little of this will be new to readers: we all know we have energy issues to deal with. And, sometimes it's much easier to be pessimistic than optimistic about the future. To be sure, there are a few reasons for optimism. One is that humans are adaptive and we will likely find a way to adapt to the energy challenge. The profit motive will, or should, play a key role in this transition--this doesn't mean there is no role for government. Obviously, there is and should be: federal labs will be critically important going forward, but we need to unlock the innovations in those labs more efficiently. But government's role will be to do what it always does when it acts as facilitator, viz. frame incentives. In this case, it seems that a carbon tax would be an almost no-brainer. Then again, the fact that a carbon tax is treated like a shoot-the-moon option simply reinforces the pessimistic outlook.
A key piece to moving forward through the next energy transition--and to possibly suppress or at least mitigate whatever geopolitical unpleasantness arises therefrom--is the supply of entrepreneurs. I don't just mean clean tech. We're talking about wholesale economic and social changes here--let's hope in slow motion, rather than abruptly. Don't just take it from me. At the recent World Economic History conference, Robert Ayres presented this wonderful presentation on the relationship between energy and economic growth, concluding that only entrepreneurs can take us forward. How's that for framing a policy debate?
(This pessimistic outlook, of course, will bring some amusement, namely, the perpetual cognitive dissonance of so-called conservatives and liberals as they endlessly bloviate in endless legislative fights. Rightward-leaning folk don't really seem to have dealt with the inherent tension between their Edmund Burke impulse and their defense of free-market capitalism as a ceaseless source of creative destruction. You can't sanction one type of change and seek to prevent the other. And liberals--or in today's parlance, progressives--haven't reconciled the exact opposite dichotomy: their embrace of "social change" as an all-encompassing yet vacuous strategy, but their readiness to preserve nostalgic remnants of the mid-twentieth century economy.)
The most frustrating thing about such a discussion is that it's quite difficult to talk about an alternative future because all we have to structure our imagination of that future is the present state of affairs. When we're trying to imagine what the next economic model will be, and how it will differ from the one that has carried the world forward for the last century and a half, we have little to draw on by way of reference points. But this, oddly, might be the strongest case for optimism: human knowledge always advances in a desultory fashion. We adapt by trial and error and adoption. The potential for future innovation and new knowledge creation shouldn't be in doubt--it's the institutional response, the adoption and absorption, that should be of concern.
What's important is that we stop discounting the very real possibility that the future could be anything but bright: the fact that the last two hundred years have seen more or less upward progress in terms of human living standards, steadily spreading over the entire globe, is not a reason to believe that the future will simply be a continuation of this. Believing so is the mistake made by Taleb's "turkeys."
One the one hand, UC Davis economist Gregory Clark says that growth in the future will continue unabated. On the other hand, he claims most Americans will be left behind. I detect in the piece the pernicious Dystopian Myth mentioned in the last post. Some quotes:
No, the economic problems of the future will not be about growth but about something more nettlesome: the ineluctable increase in the number of people with no marketable skills, and technology's role not as the antidote to social conflict, but as its instigator. The battle will be over how to get the economy's winners to pay for an increasingly costly poor.
Winners compensate losers, an old standby in economic analysis. But what if w refuse to acknowledge that growth causes "losers," what then? In the long term, were buggy-whip makers net losers after the automobile was invented? I don't buy it.
I think the bigger assumption Clark is making is that demand for low-skill labor will dry up, but I would counter that an infinite demand for labor. Infinite. Now I don't know what the equilibrium price will be, but the experience of the last few thousand years suggests it will be higher than it is now. OK, here comes the dystopian myth (and Clark actually does use the word 'dystopia' in the essay!) ...
But in more recent decades, when average U.S. incomes roughly doubled, there has been little gain in the real earnings of the unskilled. And, more darkly, computer advances suggest these redoubts of human skill will sooner or later fall to machines. We may have already reached the historical peak in the earning power of low-skilled workers, and may look back on the mid-20th century as the great era of the common man.
Clark says that machines complemented workers and led to higher wages for basically all of modern history, but that trend is going to abruptly and coincidentally stop right now. Why is this pessimism so easy to believe? His rhetoric goes over the top here:
And as machines expand their domain, basic wages could easily fall so low that families cannot support themselves without public assistance.
He paints a mental picture of 1/3 of the population becoming "socially needy but economically redundant" and uses the example of France as proof that this can actually happen. Is there no sense of misplaced blame in ignoring French labor laws, the global standard for extreme protectionism?
Clark points to California as a harbinger of the U.S. situation, but frames the state's bankruptcy as hurting the "poorest children." He is skeptical that education can lift up the poor, or in his words can, "give the poorest the tools to resist the march of the machines" because most of the higher graduation rates are thanks to lower standards. Then he closes by warning that America will either become Marxist in effect if it does not confront poverty.
Weird. But maybe he's right.
Does our affection for democracy over alternatives require us to believe that citizens are rational and intelligent? The infamous and insightful comedian Bill Maher recently ranted that Americans are "stupid" and joked that legislators shouldn't bother listening to them during the August recess. At marginalrevolution, Alex Tabarrok blogged that Maher was unleashing his inner Bryan Caplan. Clips from the Maher essay first, then my take on why Tabarrok, Maher, and maybe even Caplan are missing the big picture.
I said [on CNN] 'I wouldn't put anything past this stupid country.' It was amazing - in the minute or so between my calling America stupid and the end of the Cialis commercial, CNN was flooded with furious emails and the twits hit the fan. And you could tell that these people were really mad because they wrote entirely in CAPITAL LETTERS!!! It's how they get the blood circulating when the Cialis wears off. ...
And before I go about demonstrating how, sadly, easy it is to prove the dumbness dragging down our country, let me just say that ignorance has life and death consequences. On the eve of the Iraq War, 69% of Americans thought Saddam Hussein was personally involved in 9/11. Four years later, 34% still did. Or take the health care debate we're presently having: members of Congress have recessed now so they can go home and "listen to their constituents." An urge they should resist because their constituents don't know anything. At a recent town-hall meeting in South Carolina, a man stood up and told his Congressman to "keep your government hands off my Medicare," which is kind of like driving cross country to protest highways. ...
And these are the idiots we want to weigh in on the minutia of health care policy? ...
And if you want to call me an elitist for this, I say thank you. Yes, I want decisions made by an elite group of people who know what they're talking about. That means Obama budget director Peter Orszag, not Sarah Palin.
Which is the way our founding fathers wanted it. James Madison wrote that "pure democracy" doesn't work because "there is nothing to check... an obnoxious individual." Then, in the margins, he doodled a picture of Joe the Plumber.
Let's be fair to Maher, who is clearly poking fun and going to extremes for a laugh. He's a comedian, but is he unserious? Maher is sincere in his elitism, but he clearly misunderstands James Madison whose fundamental message is that the danger of pure democracy required limiting central government power. Nevertheless, he is channeling an ancient dialogue.
I would note that Will Rogers was also a comedian who made his living with political humor. It is telling how times have changed that Rogers made his mark by mocking the powerful, whereas Maher and his fellow pundits score most of their points off of the public.
If we take this hostility towards democracy seriously, we have to squarely address the Caplan critique, and in doing so convince Alex why he should be a small d democrat. So let's get started.
For the record, Bryan Caplan is a friend of mine who wrote a great book a few years ago called "The Myth of the Rational Voter" which challenges a bedrock theory of political science. The median voter theory holds that democracy is unbiased in its policy preferences, and Bryan brilliantly exposes that conclusion as failure. This is not the end of the story. The Caplan critique is of great but limited value. It does not imply better alternatives. It affirms the Madisonian caution against mobocracy, and reaffirms the desirability of federalism and mixed government republicanism, the former as a channel for policy experimentation in a biased (imperfectly wise) world and the latter as a buffer against majoritarian populism. In the end, the Caplan critique confirmed my sense that policy discussions in a democracy can seem frivolous; voters ultimately cannot care about policy because of bounded rationality and instead care about pragmatic outcomes. Good outcomes equal re-election, regardless of policy particulars.
In sum, I think the Caplan critique of democracy write large fails (and he might agree). Here's why:
First, Caplan tells us that voters are irrational, not that they are stupid. This is big difference between the wise professor and the devious comedian.
Irrational voters are in some sense ignorant, but ignorance is no sign of stupidity. Many surgeons are perfectly ignorant about "frivolous" skills like gardening, automotive engineering, and probably even the inner physics of X-ray machines. But they know how to read an X-ray machine, and isn't that what matters?
Who prefers the surgeon to know less about anatomy and more about NAFTA, tax progressivity, and the effects of the minimum wage on teenage minorities? The surgeon is a voter, but an irrational one because she has incomplete information about political policies. Is this dangerous? Inefficient? Unjust in some way? If we prefer a society where more citizens live longer lives due to better surgeries, we must prefer an ignorant electorate, no?
Let's agree that the human mind can know one subject expertly, five or six subjects really well, and an additional thousand facts, all this in a world with an infinite amount of subject matter. We can trivially claim that a non-ignorant citizenry is an impossible standard. A utopia, of sorts. And the only way to realize such a utopia is to limit the scope of common knowledge, which hints darkly at Mao's little red book.
Second, a growing society requires more, not less, ignorance. In their new Modern Principles: Macroeconomics textbook, Tyler Cowen and Alex Tabarrok argue that the division of labor due to trade (i.e. scale) is better understood as a division of knowledge. Great point. In Chapter 18, they write
In a primitive agricultural economy in which each person or household farms for themselves, each person has about the same knowledge as the person next door. In this case, the combines knowledge of a society of one million people barely exceeds that of a single person. A society run with the knowledge of one brain is a poor and miserable society.
Again, the alternative to rule by all is rule by the few or rule by one. And yet here is evidence that a more complicated society is even less governable by elites than a pre-modern society was. I think a cursory glance at comparative political economies shows that oligarchies are negatively correlated with prosperity (with North Korea, most of sub-Saharan Africa, and Cuba at one extreme and South Korea and SE Asia moving towards the other end of the spectrum towards democracy).
Third, democratic "failure" is resolved by more federalism not more elitism. Look, if we believe that rational ignorance is a function of growth, then they are both poised to accelerate in the years ahead. As the division of labor and knowledge accelerates, the democratic challenge will be how to reconcile increasing levels of political ignorance with democracy.
Logically, more power will be shifted toward experts because increasingly ignorant citizens don't want to manage train schedules. People tend to desire more varieties of ice cream, barbers, and books, so why would we expect them to be satisfied with fewer choices in the political sphere? They will want more experts, not more powerful experts, to supply them with public goods. Also, it is far from clear that a technocracy is the pre-ordained outcome generated by political "ignorance." The efficient apportionment of public goods supply among various service providers is not something people will vote on in a booth. More likely, different nations will try different institutions, and there will be an iterative social learning process. But I suspect political markets may have a better chance of success than a coercive technocracy at finding optimal solutions.
An example that Bryan and I have discussed is the Federal Reserve, which has a kind of technocratic control over the money supply. I think money is a special case, so the Federal Reserve is a necessarily technocratic organization much like the Supreme Court is. Quite different are health care, transportation, welfare, crime, and education. It is not at all clear to me that a centralized organization can effectively manage those issues on a national scale. To the contrary, I trust voter choices among competing products (states, cities) far more than expert knowledge.
Congress is increasingly failing institutionally at selecting weapons systems efficiently, let alone managing public education. Congress' failures have been the luxuries of a rich nation without a basic budget constraint, which will soon change thanks to looming international financiers. When the pressures to balance the budget become critical, fixing of the "broken branch" will inevitably involve a devolution of central power. Congress is simply overcommitted right now, and the limits of taxation will prove unyielding.
So in the end big fiscal decisions about the balance of government services and taxation will play out among 50 state alternatives (with voters making choices via the right of exit -- voting with their feet). Voters may be ever more ignorant of the policies of the 50 states, but they will know where the good schools, low taxes, and growing economies are.
Doug Kass explains why all those "green shoots" will quickly wither. (One could also look at the data compiled by Barry Eichengreen and Kevin O'Rourke: even when the economy turns upward again, we have quite a distance to recover.)
This talk will pose a singular but challenging question for comparative history. Why did two pre-industrial economies, faced with the same level of depopulation from the Black Death, respond so differently to the same external shock? While England recovered, Egypt collapsed. Focusing on agrarian economics, this presentation will demonstrate that, while English landlords lost a battle with the peasants, the English economy recovered. On the other hand, Egyptian landlords won the battle with their peasantry and yet their economy collapsed. These contrasting outcomes were caused by the differences in the sociological dynamics of landholder-peasant relations. This study will show exactly how the structure of the two landholding systems determined these outcomes.
Summary of a recent paper presented at the World Economic History Conference:
The paper is focused on the possibilities of entrepreneurial promotion based on military demand and tries to answer the question to what extent military spending caused the development of efficient and long-lasting enterprises, influential in the economic activity at large. The problem is posed within the general frame of how the state addressed its spending, by way of contractors, or by direct administration, and particularly in the first case, what kind of entrepreneur emerged as a result.
The study is made on the sector of the munitions provisioning, and especially the production of cannon balls. A detailed study is made of the factory of Eugui, Navarra, which during many years was the only cannon balls factory in Spain, a fact that stresses its importance as an example of this relevant sector for the provisioning of the army and the navy. During the period under survey, 1689-1766, the factory was a private enterprise that worked always as a contractor, with a de facto monopoly on the provisioning of cannon balls for the state.
The conclusion is that state demand was not sufficient to promote a sound and stable entrepreneurial activity due to its weakness, to the fact that it was highly intermittent, and because of administrative encumbrances. Besides, it was difficult for the factory to alternate state demand with the production for the civil market, in fact it did nothing for the second. The reality is that the factory was totally dependent of the state demand which main characteristic was uncertainty.
[Today we happily welcome a guest post from one of our perspicacious interns, Charles Johnson.]
Dr. Kane's blog post about Easterly and the U.S. Army has gotten me thinking about how the military's Keynesian, supply side approach might fall short.
Total enterprise capital raised or deployed in emerging-market economies increased from $517 billion in 2001 to $1.57 trillion in 2006. These essentially private transactions greatly exceed sovereign-government financing totals for the years indicated. . . .
Enterprise-capital inflow into emerging-market economies has tripled in the past six years, and wherever it has gone, it has had an important effect on economic growth. Indeed, as shown by the experience of Russia, India, and China, the ability to attract relatively large quantities of capital for private investment has made possible exceptional economic-growth rates, despite the many difficulties and imperfections in these countries’ investment climates.
Enterprise capital now appears to be far more effective in generating growth in developing countries than foreign aid and loans from multinational development agencies or from individual countries’ robust government- allocated national economic development efforts, which for nearly fifty years were regarded as the world’s best solutions for ending poverty and distress in theThird World. These “solutions,” however, did little to generate the rates of economic growth needed in the Third World o alleviate the poverty and distress.