Sunday, September 18, 2016

Definitive proof: Obama born a Keynesian

Definitive proof: Obama born a Keynesian

Saturday, May 28, 2016

Private-enterprise mumbo-jumbo

I spent parts of my childhood in Argentina and took several trips into the interior with my father to prospect for minerals.
My father was a confirmed free-market enthusiast and never ceased praising the virtues of free enterprise.
On our travels through rural parts of the country, as a matter of fact whenever we left the capital for the interior,  we usually stayed at a chain of hotels that was ubiquitous, clean and had good service and excellent food. The entire chain was owned and operated directly by a department of the Argentine federal government, I think it was called Dirección General de Turismo. The few times we had to stay in private hotels we found they were mostly pretty grungy outfits. We avoided private enterprise hostelry like the plague whenever we could, in order to indulge in the comfort of government digs.
Pity I never realized the discrepancy between my father’s theory and his practice until much later, when I studied economics.

Sometimes “Economics 101” is actually “Economics 000.”

Saturday, April 2, 2016

Friday, February 19, 2016

German Historical School’s critique of British economists

Adolf Wagner’s review of Marshall's Principles of Economics.
A commented summary
Quarterly Journal of Economics, volume 5, 1891, pp. 319-38.

Adolf Wagner was a prominent economist of the German Historical School, a school of economic thought that flourished in Germany during the 19th century. In 1891 he published a review of Alfred Marshall’s Principles of Economics. Marshall was the top English economist of his time. He started out as a classical economist in the mold of John Stuart Mill (1806-1873) but as he grew older he adapted to the neoclassical "marginalist” fashion that still prevails today and which the German Historical School polemicized against).
Thus this review reveals the main conflicts between the two schools of thought. The German Historical School inspired the so-called “institutionalist” current in American economics, which like its parent (G.H.S.) in Europe, was not very optimistic about capitalism.  The best-known proponent of American institutionalism, Thorstein Veblen, wrote witty satires of American capitalism that can be read with profit even today.
In this review by Adolf Wagner we see three premonitions of Nazism -- which would take power in Germany some four decades later: anti-Semitism, nationalism and a predilection for state socialism.  Thus the charge made by Ludwig von Mises against the German Historical School of being chauvinists has a certain ring of truth, although it cannot be applied to all members of the School. Others like Max Weber were quite liberal. And the man generally considered the founder of the German Historical School, Friedrich List (dates?) was decidedly a progressive liberal in his day. List made no claim to originality. After a stay in the USA in the 1840s, he returned to his native Germany singing the praises of the “American School”, by which he principally meant Carey, an unabashed proponent of industrial protectionism. The current professor of economics at Cambridge Ju Jing Hao (or something like that) shares the German Historical School’s critique of classical economics. He accuses Britain and other empires of becoming powerful through protection of their home markets and then becoming free-traders once it was to their advantage.
Wagner’s polemic against David Ricardo’s excessively neat logical constructions jars loudly with Karl Marx’ unbounded admiration for Ricardo and the Ricardian method. That is because Karl Marx shared many of the attitudes of the German Historical School. Marx’ masterful (and seemingly accurate) depiction in vol. 1 of Das Kapital of “primitive accumulation” in England   between the 13th and 17th centuries, when Parliament conducted a radical land reform through the so-called enclosures in England that dispossessed the small holders and made them landless laborers ripe for recruitment into the factories sprouting up in the early 1800s,

I [i.e. Adolf Wagner] protest against the belief that all German economists approve of the patronizing and pretentious attitude towards English authors [i.e. Adam Smith, David Ricardo, etc.] shown by some of the extreme German representatives of the historical school.
The most  uncompromising representatives of the older German historical school, Roscher and Knies, narrow opinions of the younger historical school - Schmoller                  
Most economists in Germany are in so far members of the historical school that we point to the need of induction side by side with deduction; [This criticism of Wagner’s against the English economists I warranted, since Ricardo tends to ignore many details in order to create a logical model. On the other hand the German Historical School has certain methodological preferences that cannot be justified by reference to induction vs. deduction. For example the German Historical School’s aspiration to a comprehensive theory encompassing the whole of society instead of just parts of it cannot be grounded in terms of induction/ deduction. On the other hand the German Historical School did do a good job of studying actual historical processes of economic change and development, e.g. Schmoller’s study of the cloth industry in Lorraine in the early modern age, which Schmoller pointedly entitled the “German" cloth industry of Lorraine, fewer than 20 years after the  German  Empire had snatched traditionally German Alsace and Lorraine from France in the  Franco-Prussian War of 1870.]
We warn against exclusive reasoning on the basis of economic self-interest. [This has always been a grave defect of the English school and remains so today. It presumes a non-existent rationality of economic behavior, Disproved by Daniel Kahnemann’s behavioral economics in the 1980s, and by John Maynard Keynes in the 1930s with his General Theory of Employment, Money and Interest, where he denounces the irrational herd behavior of the traders on the London financial markets. ]
but we do not want to do away with all abstract thought or abstract statements.
Such agreement among economists of different nationalities, whose thought has developed in entire independence of each other, is doubtless much more general than one would expect if attention were paid only to the extremists.
I doubt Marshall’s proposition that the main characteristic of modern industry is not free competition, but free industry and enterprise.
Marshall does not mention the fact that England enjoyed the favorable strategic position resulting from its insular location.  
Since the discovery of America, the situation of the British Islands
has been a factor of prime importance in  the economic development of Great Britain, because military expenditure absorbed a much smaller proportion of its strength than in continental Europe. Germany by contrast was sandwiched between bitter enemies like the Russians and the French. [Here a German nationalist tone surfaces, That was typical of the right wing of the German Historical School.]
To its geographical position and natural security England owes more than to Englishmen’s hard work.
I disagree with the praise bestowed [by Marshall] on the German Jew, whether in economic theory or in industry. In the intellectual field, as in others, the Jew is much more apt to be a middleman than an original producer; and in German industrial life his activity is generally harmful.
Hermann [This statement is not supported by historical fact. As a matter of fact Jews published the first newspapers in Germany. On the other hand it would be accurate to say that there were no Jews in heavy industry, e.g. Krupp steel, which enjoyed pride of place in the hearts of German nationalists of the time. ]
The younger German historical school is guilty of confused thinking upon this point also; and its extreme opposition to the abstract political economy of authors like Ricardo is in part a consequence of this confusion.
The hot-heads of the younger German school refuse to speak of "economic laws" at all, that being unscientific. [On the contrary, it is unscientific to deny the existence of something without proof. And it is generally quite difficult to prove that things don’t exist.]
Discussion of the whole subject of socialism.
Mistake in Marshall: wrong definition of the term "net income," -- a mistake which results partly from the failure to distinguish sufficiently between the industry of the people as a whole and the industry of any private individual. [Here Wagner is quite right, this lack of theoretical moorings is a hallmark of English thinking. Marx too deplored some English thinkers' “brutal obsession with the issues", at the expense of any clear theoretical consistency. Neglect of fundamental issues is characteristic of sloppy thinking that can turn a respectable theory into a  tool of ideological manipulation.]  
Marshall's third book begins at once the separate discussion of demand, production, and similar topics of detail. I find here the same gaps which exist in the writings of English economists and in those of the older authors of Germany and the continent. To my mind, a series of fundamental discussions should be inserted at this point. There should be a consideration of industry in general, of the industry of a given community, of population and industry in their mutually dependent relations, of the organization of industry, the State, and the legal foundations which underlie industrial life, slavery, freedom of person, the law of property.  In Marshall's book, as in that of most previous systematic authors, discussions of this sort are either entirely omitted or else not put in the proper place.
the laborer is regarded as a means for production, not production as a means for the laborer. [This critique by Wagner puts him very close to socialist thought.]
Human life and human development are, after all, the objects of all production. [Just replace “human” with “Germanic” and we get close to Nazi ideology.]  
Marshall says nothing of the organization of industry, or of law and the legal foundations of society.
Too little attention is paid to the historic development of industry, and to those developments, already foreshadowed for the future, beyond the system of simple free exchange and private industry, [Here Wagner seems actually almost Marxist in his belief that socialism is a natural outgrowth of capitalism. Which likewise seems to have no clear historical confirmation.]  
this is the point of view of the German State socialist [i.e. Adolf Wagner. See? I told you!],
who is used to government intervention and disposed to favor it,
the true relation between the theory of marginal or final utility, as developed by Jevons, Menger and Böhm-Bawerk
and the doctrine of cost of production
the German historical economists occasionally treat law of diminishing returns as an antiquated remnant
distinction between individual capital and property, and social capital and property ...
Recent economic changes have brought about an absolute improvement in the condition of the masses [About the same time the Marxist leaders of the German Social Democratic party like Bernstein and later Kautsky were saying the same thing, that capitalism had become more benign and that social welfare made life acceptable.]

Sunday, August 9, 2015

Botswana: Triumph of Central Planning

Botswana: Triumph of Central Planning[1]
Carl Stoll[2]
There is one shining point of light on the bleak African continent:
Botswana has pursued goals of good governance and preserves a democratic tradition from the time before Europeans arrived. It has known no coups d’état, hyperinflation, famine or civil war. Its growth rate has been steady throughout the years, in dramatic contrast to declining per capita incomes in most other black African countries.
So, have we found the philosopher’s stone, Hayek’s oh-so-spontaneous social harmony by virtue of impersonal market forces?
Well, Hayek isn’t ENTIRELY off the track. There is a vague family resemblance between Botswana’s successful political and economic policies and Hayek’s recommendations, in that both are embedded in 19th-century liberal democratic traditions like rule of law, etc.
But in Botswana there is nothing to be seen of the drastic privatization that is often recommended invoking (not always accurately) Hayek’s ghost.
Botswana stands out because it is the only Sub-Saharan African country that has become steadily more prosperous for 35 years, while almost all other Sub-Saharan countries have had negative long-term growth rates. It has had no civil wars or coups d’état. Democratic elections are held regularly. There is little corruption.
When Botswana became independent in 1965 it was very poor and had almost no educated citizens. 84% of the land is sandy desert. Its only business was cattle. It was much poorer and far worse educated than Uganda or Zambia. But it is now richer than either of them.
Various different factors have been named as responsible for this exceptional stability and growth.
1. British colonialism did not destroy pre-existing tribal political structures. The British basically ignored their colony of Botswana, since it had no apparent mineral wealth and was not attractive for European settlers. It served principally as a buffer state to prevent expansion of German colonialism and Boer influence.
2. Traditionally the native Tswana people have had political institutions that enabled free discussion of public affairs by ordinary people, and even allowed criticism of tribal chiefs. These institutions were integrated into the republic that became independent in 1965. The chief of the most powerful tribe was elected president, but he did not particularly favour his own tribe. He later greatly reduced the power of the tribal chiefs and increased the power of government.  
3. Law and order have prevailed. This legal security afforded large segments of the population security in their property rights, encouraging people to be productive and thrifty.
4. After independence mineral wealth was discovered in the form of diamonds, whose export provides a steady income. In other African nations mineral wealth has been a factor of discord, rivalry and corruption, but not here.
Does Botswana confirm Hayek’s thesis in The Road to Serfdom?  In other words, was Botswana successful because the government is small and does not meddle with the economy?
Botswana has indeed strong restraints on the executive and property rights are secure. It has followed sound economic policies, has had low inflation, avoided budget deficits and has protected private property (of both rich and poor).
However it has in no way followed a free-market ideology. 
Government has played a big role –- but not an overwhelming one -- in the country’s economic development. The government is the sole owner of all mineral wealth. On independence the government nationalized the only industry in the country –- a slaughterhouse, and has since built two new government slaughterhouses. The government heavily subsidises veterinary medicine, vaccines and agricultural extension services for cattle ranchers. The government’s revenue from diamonds is prudently invested in productive projects.
To put it in polemical terms, Botswana is a triumph of central planning.

[1] All information about Botswana was extracted from An African Success Story: Botswana, by Daron Acemoğlu, Simon Johnson & James A. Robinson, MIT Department of Economics Working Paper No. 01-37, July 2001 Download at:
Of course, Botswana has not known central planning in the striuct sense of the term, namely all production and consumption of all goods and services are planned by a central board 5 years in advance, down to the last tiddlywink. However free-market enthusiasts deliberately smear all government intervention in the economy as “central planning”.