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Wednesday, April 27, 2016

A Vegetable Debate

Had we but world enough, and time


our vegetable debate should grow

Vaster than empires, and more slow;

I am moving this here, because I do not wish to further pollute a crooked timber thread here

Here is Henry Farrell explaining Doug Henwood's critique of Matthew Yglesias on July 18 2011

This means that vaguely-leftish versions of neo-liberalism often have weak theories of politics, and in particular of the politics of collective action. I see Doug and others as arguing that successful political change requires large scale organized collective action, and that this in turn requires the correction of major power imbalances (e.g. between labor and capital).


I’m sure that critics can point to political blind spots among lefties (e.g. the difficulties in figuring out what is a necessary compromise, and what is a blatant sell-out), but these don’t seem to me to be potentially crippling, in the way that the absence of a neo-liberal theory of politics (who are the organized interest groups and collective actors who will push consistently for technocratic efficiency?) is.

The post vaguely reminded Brad of Marxism. Farrell recently mentioned that he happens to be a Weberian social democrat (in case you were wondering).

I had some silly pointless thoughts.

One is that I would bet that Brad heard "No combination of market mechanisms and technocratic solutions without theory" when reading Farrell (except for the fact that Brad is a speed reader who doesn't hear words in his head when he reads).

In any case, in this crooked timber thread, I personally objected to the word "theories" with an analogy so clumsy that it caused some mixture of intellectual distress and amusement (for one thing I should have objected to the second passage including "theory" not the first including "theories").

"I don’t like the word “theories”. I don’t think that anyone including left neo-liberals needs a theory of change in order to achieve change. Trees have no theory of photosynthesis, but they grow all the same. "

I want to explain what I meant to write (or perhaps I want to write what I should have written). Actually, re-reading it seems clear to me and not to admit the interpretations made by Farrell and William Berry.

"I do disagree with your suggestion that you don’t need a theory of politics as politics grows like a tree" -- Henry Farrell

I note that didn't suggest that politics grows like a tree. I will rephrase my analogy to make it clearer (or to correct it)

"Straw Farrell says that left neo-liberals are "crippled" because of "the absence of a neo-liberal theory of politics". I imagine Straw Farrell meeting a hungry lion and saying to himself 'hmmm that lion probably wants to eat me, good thing that it is crippled by the absence of a leonine theory of muscular contractions". I would have to warn straw Farrell that the lion does not have to think about actin, myosin or ATP in order to run faster than straw Farrell (who need not worry as he would be very unappetizing being made of straw).

I think what Farrell meant was that neo-liberals rely on an unstated implicit thoery of change which does not correspond to reality at all. I at least would say that the possible problem is one of accidental theory -- reliance on theory which is made more absolute and blind because the neo-liberals don't understand that they are assuming a theory of change. Straw left neo-liberals have the theory that their analysis is sound, so all will recognize that it is sound, so all will use it to make the world better, since all agree on what would be better. The problem isn't the absence of a theory of change, or even the absence of an explicit theory of change. It is a totally false theory of change (which is so silly that it can't survive if made explicit).

Totally aside from the lions and the trees, Farrell and I agree that the left neo-liberals we are discussing do have theories of change and those theories are not at all similar to straw neo-liberals' theory.

Now William Berry

I am struck by Robert Waldmann’s grotesque analogy.

A tree doesn’t just grow; its growth is governed by constraints that are narrower than those of any theory, and that is the set of epigenetic processes that are mediated by the complex interactions of gene expression and the influences of a very particular environment.

And there is no such thing as a political movement without doctrinal discipline (i.e., theory) of some kind.

Berry seems to have read my claim that trees are not theorists to imply that there is no valid theory of tree biology. Desperately trying to be semi civil, I just note that I think the problem is that my claim was too obvious to be noticed. Photosynthesis isn't crippled if trees don't think about photosynthesis. It was a claim about trees' mental life (which follows from the belief that they have no mental life at all) not about photosynthesis, tree growth, or the possibility that biological research might be useful.

Political movements aren't necessarily crippled if the political actors don't think about theories of change.

My claim is entirely consistent with the hypothesis that we all should think about theories of change and that political movements in which the actors spend considerable time thinking about theories of change are more effective than others. It takes a lot for an "absence" to "cripple"

Well that was pointless. If anyone is still reading, I'd like to stress that I don't think that developing and testing theories of change is a waste of time. I think that it is a worthwhile branch of social science which is very useful to political movements. I think my objection actually was to the word "crippled" which, I think, overstates the costs of brief casual consideration of mechanisms of political change by wonks. Also, importantly, the wonks who are being discussed think a lot about politics and have theories of change. In fact they like the phrase theory of change. Yglesias sure does so does Ezra Klein Brad uses the phrase less (I'd guess he goes more for Weberian or Marxist jargon), Krugman. This is not a group of people characterized by an absense of theories of change.

Monday, April 25, 2016

A Comment on Henry Farrel commenting on Brad DeLong commenting on Henry Farrel commenting on Doug Henwood

Your post is admirably courteous in tone. I admire but am not able to emulate.

First I think I could make the polite debate between you and Brad even more polite. I didn't get the impression Brad claimed you are a Marxist. I think he suggested that Doug Henwood is a Marxist. Your quoted post explained an objection to left neo-liberals and said it had some merit. I think that perhaps you and Brad can agree that you see some merit in Marx's arguments (in any case he sure does).

However, I have some rude things to say about your writing as quoted by Brad. I don't like the word "theories". I don't think that anyone including left neo-liberals needs a theory of change in order to achieve change. Trees have no theory of photosynthesis, but they grow all the same. You can't really be surprised if an appeal to theory in the context of politics made Brad think of Marx. In any case, your interpretation of Henwood's argument appears to be that there is no convincing explanation of how the policies developed by Yglesias at all will actually improve the world, since they won't be implemented.


OK now I create straw Doug Henwood who argues that Yglesias (and Brad, C and D Romer, Ezra Klein, Larry Summers, David Cutler, and Jon Gruber) are off in their ivory towers designing policies which will never be implemented because they haven't thought enough about class struggle. The problem with Straw Henwood is too obvious even for a comment on a blog. The neo-liberals I listed have achieved political change (even though I resisted the temptation to include the neoliberal wonks named Barack Obama and Bill Clinton on my list).

It seems to me that your current post is an excellent critique of your earlier post. You explain Summers's theory of change -- he says the key is to get ahead by getting along and influence powerful people. I hazard the guess that this wasn't his first approach (OK I hazard dozens of vivid memories). Technocrats have power (by the definition of the suffice 'crat). They exist. Politicians seek their advice. This is the way political change has occurred (lest I seem to celebratory I think the most influential interaction of an intellectual of sorts and a politician who achieved change occurred when Arthur Laffer sketched a curve on a napkin).

Yglesias clearly has a plan. He argues that good policies are good politics -- that voters re-elect incumbents if things are going well even if the voters opposed incumbents policies when they were implemented. So, he argues, listen to technocrats -- we will tell you how to win re-election -- oh and also serve the people which, of course, is the reason you got into politics in the first place. Look what happened to B Clinton when he listened to Robert Rubin and raised taxes on Robert Rubin et al.

Now I don't know if there is any theory of history such that this plan is anything other than a pipe dream. But I do know that it works. Klein at least, hob nobs with the President of the United States. That president has achieved a lot (even if much less than one might hope). I'd say actual change trumps theories of change.

Sunday, April 03, 2016

Brad DeLong Marks His Beliefs about "The Return of Depression Economics" to Market

I am overwhelmed by admiration for Brad DeLong (happens a lot) who reposted his review of Krugman's "The Return of Depression Economics" from 1999 "Just in case I get a swelled-head and think I am right more often than I am ..."

update: Do read Brad's review/post. It is mostly brilliant (aside from the error which he stresses). In particular, Krugman and Delong both warn of the danger of allowing firms to borrow in foreign currency. Way back in 1999 it was widely agreed that East Asian countries had harmed themselves by borrowing in dollars. Later the Argentine crisis demonstrated this again with the worst recession after WWII and before Greece's recent crisis.

But it seems to have been forgotten. I read in the March 5-11 2016 economist "By the middle of last year, the stock of dollar loans to non-bank borrowers, including companies and government, had reached $3.3 trillion. Indeed until recently, dollar credit to borrowers outside America was growing more quickly than to borriwers within it. The fastest increase of all was in corproate bonds issued by emerging-market firms.

One can hope that, this time it's different and won't end in disaster. Well at least one can wish.

end update:

Way back in the last century, Brad thought he had a valid criticism of Paul Krugman's argument that Japan (and more generally countries in a liquidity trap) need higher expected inflation. I think the re-post is not just admirable as a self criticism session, but also shows us something about the power of Macroeconomic orthodoxy. Brad is just about as unorthodox as an economist can be without being banished from the profession, but even he was more influenced by Milton Friedman and Robert Lucas than he should have been. I reproduce the offending passage below.

The context is that Japan had slack aggregate demand at a safe nominal interest rate of 0 -- that is it was in the liquidity trap. Krugman argued that higher expected inflation would cause negative expected real interest rates and higher aggregate demand and solve the problem. Brad was unconvinced (way back then).

But at this point Krugman doesn't have all the answers. For while the fact of regular, moderate inflation would certainly boost aggregate demand for products made in Japan, the expectation of inflation would cause an adverse shift in aggregate supply: firms and workers would demand higher prices and wages in anticipation of the inflation they expected would occur, and this increase in costs would diminish how much real production and employment would be generated by any particular level of aggregate demand.

Would the benefits on the demand side from the fact of regular moderate inflation outweigh the costs on the supply side of a general expectation that Japan is about to resort to deliberate inflationary finance? Probably. I'm with Krugman on this one. But it is just a guess--it is not my field of expertise--I would want to spend a year examining the macroeconomic structure of the Japanese economy in detail before I would be willing to claim even that my guess was an informed guess.

And there is another problem. Suppose that investors do not see the fact of inflation--suppose that Japan does not adopt inflationary finance--but that a drumbeat of advocates claiming that inflation is necessary causes firms and workers to mark up prices and wages. Then we have the supply-side costs but not the demand-side benefits, and so we are worse off than before.

As Brad now notes, this argument makes no sense. I think it might be hard for people who learned about macro in the age of the liquidity trap to understand what he had in mind. I also think the passage might risk being convincing to people who haven't read enough Krugman or Keynes.

The key problems in the first paragraphs are "adverse" and "any particular level of aggregate demand". Brad assumed that an increase in wage and price demands is an adverse shift. The argument that it is depends on the assumption that he can consider a fixed level of *nominal* aggregate demand (and yet he didn't feel the need to put in the word "nominal"). The butchered sentence "would diminish how much real production and employment would be generated by any particular level of [real] aggregate demand." clearly makes no sense.

During the 80s, new Keynesian macro-economists got into the habit of considering a fixed level of nominal aggregate demand when focusing on aggregate supply. Because it wasn't the focus, they used the simplest existing model of aggregate demand the rigid quantity theory of money in which nominal aggregate demand is a constant times the money supply (which is assumed to be set by the monetary authority). This means that the aggregate demand curve (price level on the y axis and real gdp on the x axis) slopes down. This in turn means that an upward shift in the aggregate supply curve is an adverse shift.

More generally, the way in which a higher price level causes lower real aggregate demand is by reducing the real value of the money supply, but if the economy is in the liquidity trap the reduction in the real money supply has no effect on aggregate demand. In the case considered by Krugman, the aggregate demand curve is vertical. This means that he can discuss the effect of policy on real GDP without considering the aggregate supply curve.

The second paragraph just repeats the assumption that higher expected inflation causes "costs". There are no such costs (at least according to current and then existing theory) if the economy is in a liquidity trap.

The third paragraph shows confusion about the cause of the "demand side benefits". They are caused by higher expected inflation not by higher actual inflation. If there were higher expected inflation not followed by higher actual inflation, Japan would enjoy the benefits anyway. Those benefits would outweigh the non-existent costs.

Krugman actually did consider a model of aggregate supply, but it is so simple it is easy to miss. As usual (well as became usual as Krugman did this again and again) the model has two periods -- the present and the long run. In the present, it is assumed that wages and prices are fixed. In the long run it is assumed that there is full employment and constant inflation. Krugman's point is that all of the important differences between old Keynesian models and models with rational forward looking agents can be understood with just two periods and very simple math. The problem is that the math is so simple that it is easy to not notice it is there and to assume that he ignored the supply side.

I am going to be dumb (I am not playing dumb -- I just worked through each step) and consider different less elegant models of aggregate supply. The following will be extremely boring and pointless

1) fixed nominal wages, flexible prices and profit maximization (this is Keynes's implicit model of aggregate supply). In this case, the supply curve gives increasing real output as a function of the price level. An "adverse" shift of this curve would be a shift up. It would not affect real output in the liquidity trap since the aggregate demand curve is vertical. it would not impose any costs as the increased price level would reduce the real money supply from plenty of liquidity to still plenty of liquidity. This model of aggregate supply is no good (it doesn't fit the facts). It is easy to fear that Krugman implicitly assumed it was valid when in a rush (at least this is easy if one hasn't been reading Krugman every day for years -- he doesn't do things like that).

2) a fixed expectations unaugmented Phillips curve which gives inflation as an increasing function of output. An "adverse" shift of he Phillips curve would imply higher inflation. This would have no costs.

3) an expectations augmented Phillips curve in which expected inflation is equal to lagged inflation -- output becomes a function of the change in inflation. In a liquidity trap, there would be either accelerating inflation or accelerating deflation. For a fixed money supply accelerating inflation would reduce real balances until the economy would no longer be in a liquidity trap. The simple model would imply the possibility of accelerating deflation and ever decreasing output. This model is no good, because such a catastrophe has never occurred, Japan had constant mild deflation which did not accelerate, even during the great depression the periods of deflation ended.

4) An expectations autmented Phillips curve with rational expectations -- oh hell I'll just assume perfect foresight. Here both the aggregate demand and aggregate supply curves are vertical. If they are at different levels of output, there is no solution. The result is that a liquidity trap is impossible. This is basically a flexible price model. If there were aggregate demand greater than the fixed aggregate supply, the price level would jump up until the real value of money wasn't enough to satiate liquidity preference. Krugman assumed that, in the long run, people don't make systematic forecasting mistakes. So he assumed that the economy can't stay in the liquidity trap for the long run. Ah yes, his model had everything new classical in the long run (this is the point on which Krugman has marked his beliefs to market).

The argument that Krugman would not have reached his conclusions about the economics of economies in liquidity traps if he had considered the supply side only makes sense if it includes the intermediate step that, if one considers the supply side, one must conclude that economies can never be in liquidity traps. This is no good as Japan was in the liquidity trap as are all developed countries at present.

I think the only promising effort here was 3 -- a Phillips curve with autoregressive expectations. The problem is why hasn't accelerating deflation ever occurred ? Way back in 1999, Krugman clearly thought that the answer was just that we had been lucky so far. He warned of the risk of accelerating deflation. Now he thinks he was wrong. Like Krugman, I think the reason is that there is downward nominal rigidity -- that it is very hard to get people to accept a lower nominal wage or sell for a lower price. This depends on the change in the wage or price and *not* in that change minus expected inflation.

Clearly this rigidity isn't absolute (Japan has had deflation and there were episodes of deflation in the 30s). But it is possible to get write a model in which unemployment is above the non accelerating inflation rate, but nominal wages aren't cut. In this case expected inflation remains constant -- actual deflation doesn't occur so expected deflation doesn't occur. The math can work. See here