Wednesday, February 23, 2011

Gold Standard Versus Market Economics


Steven Bryan has just published a remarkable book: The Gold Standard at the Turn of the Twentieth Century: Rising Powers, Global Money, and the Age of Empire.

Excerpts:

 “This book is about the gold standard and how it came to be adopted worldwide at the turn of the twentieth century in ways and for reasons that had less to do with fealty to English power or English theory than with realpolitik concerns of national power, prestige, and anti-English competition. It was a use of the gold standard distinct  from neoclassical ideas, English influence, and late twentieth century and early twenty-first century ideas of market economics.”

“Since Britain had been the first country to fix the value of its currency to gold in the nineteenth century – and was by the mid-nineteenth century the world’s primary financial and trade power – setting a fixed value of one’s currency to gold meant, in practice, fixing the value of one’s currency to the British pound sterling. It was, in short, similar to countries in the 1990s, such as Argentina and Thailand, that fixed the value of their currencies to the U.S. dollar.”

“The chapters that follow show how the gold standard emerged outside of Europe in the late nineteenth century as a tool of nationalists and protectionists intent on fostering domestic industry and imperial expansion. In so doing, the book shifts the center of gravity for the gold standard from a cosmopolitan world of free markets, economic liberalism, and laissez-faire to one in which nationalist concerns with infant-industry protection and military power dominated.”


My comment:

This is quite coherent with my analysis (in The Second Twentieth Century) of the last quarter of the nineteenth century as the beginning of the era of centralization, imperialism and decline of democracy, which was to last until the mid-1970s and the contemporary information and communication revolution. 

It may also explain why the major powers tried to reinstate the gold standard after WWI, not, -- contrary to what they said -- , as a return to classical liberal policies and free trade, but much in accordance with the dominant protectionist, statist, and authoritarian trends of the late nineteenth and early twentieth century. Their mistake then would not have been in the designing of the wrong policy, dissonant with the general trends of the period, but of going too far in the dominant direction of market fragmentation and protectionism, and of adopting, in the pursuit of these policies adapted to the conditions of the time, extreme disequilibrium and  unsustainable exchange rates.   

Advice to the "goldbugs" who advocate a return to the gold standard as an example of a classical liberal, pro market policy “par excellence”: beware of what you wish for !

Thursday, February 17, 2011

Why Do (Some) Economics Professors Blog


Bryan Caplan (George Mason University) explains it all:

“For professors who’ve always wanted to live the life of the mind, blogging is a dream come true”, while doing "normal science" is boring. 

Read his Econlog post.

Wednesday, February 16, 2011

Tuesday, February 15, 2011

Love, Actually, Is a Superior Good

Love, it is said, is what economists economize. But academic psychologists try to measure it and even to link it to economic well being. A study published in the Journal of Research in Psychology demonstrates that the level of romance varies over regions of the world with East Asia having significantly lower levels of Emotional Investment, while North America had significantly higher levels than all other world regions. Their conclusion: love is a “luxury good”, one that people demand proportionally more as their income increase.

Read the report by Marina Adshade (in BigThink) here . It also includes a link to the original study.

Wednesday, February 9, 2011

The Top 20 AER Articles In A Century

The American Economic Review new issue publishes a paper by Arrow, Bernheim, Feldstein, McFadden, Poterba, and Solow, presenting the “Top 20” articles that appeared in the review during its first hundred years. The authors “decided against trying to define formally the criteria for inclusion”. It would have been a daunting task indeed.

Here are the first selected papers, by alphabetical order:

Alchian and Demsetz (1972): “Production, Information Costs, and Economic Organization” (I love that one …)

Arrow (1963): “Uncertainty and the Welfare Economics of Medical Care”.

Cobb and Douglas (1928): “A Theory of Production”.

And then:

Hayek: “The Use of Knowledge in Society”.

Modigliani and Miller: “The Cost of Capital, Corporation Finance and the Theory of Investment”.

Mundell: “A Theory of Optimum Currency Areas”.


Read the whole paper here .

Tuesday, February 8, 2011

The Great Stagnation Hypothesis

The main argument of Tyler Cowen’s new book, The Great Stagnation, is that technological progress has been slowing down during the last 40 years or so. David Beckworth explains why he is skeptic about the hypothesis.

According to Mike Mandel the Great Stagnation started in 1998 or 2000 rather than 1973 as Tyler Cowen would have it.

I agree with Mandel because of the IT boom, which started in the mid-1970s and lasted until about 2000, brought with it many opportunities to obtain extraordinary returns on investment during the last 30 years. This is coherent with the increased stock market valuation from the 1980s on, and increased risk taking (speculation and high leverage): Schumpeter-Kondratiev innovation phases are usually correlated with financial booms (the 1920s for example). And given the excessively high leverage and uncertainty of returns in innovation phases, the financial boom was due to give way to a crash. It happened in two bouts: the first, the IT crash, in 2001, and the second, the general crash, in 2007-2008, that led to the great balance sheet recession.

I thus take the financial excesses of the recent decades as a partial evidence of a long schumpeterian innovation phase, not of a slow down of innovation.

Wednesday, February 2, 2011

Great Decoupling and Great Stagnation

There are many comments on Tyler Cowen’s new e-book, The Great Stagnation. Here is one , by Lane Kenworthy, that strikes me as reasonable.

The Kenworthy objections:

First, it is not obvious that innovation has in fact slowed significantly (which is the main factor of stagnating median income according to Cowen). Moreover the Cowen measurement of innovation by patents is especially unconvincing.

Second, “the rate of economic growth has been lower in the recent era, but it’s nevertheless been decent. Yet median income growth has been very slow. This contrasts sharply with the prior period.”

Conclusion: “I’m all for helping to accelerate the rate of innovation. But the big change in the recent decades lies in the degree to which economic growth lifts middle-class incomes. If we want to understand slow income growth, that should be our focus.”

I agree and I suggest the following direction for research: couldn’t the slowing down of middle-class incomes growth be linked to the shrinking of the middle managers number in firms’ hierarchies? See my paper (with J. Hanoteau) on “The Shrinking Hand” on my SSRN page, or on my homepage (http://jjrosa.com).