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Thursday, July 10, 2003

What's in a Name?

Well I certainly don't make it easy for people to pin me down. In fact a recent exchange of views with Paul (on responsible irresponsibility, what else?) elicited the following formula:

Well, for what it's worth, I am still a bit confused. But I think you're playing John R Commons to my John Maynard Keynes - basically arguing that deep institutional stuff must be understood, that there are no easy solutions, while I'm saying "push this button".

At the time - apart from wondering what the hell the R stood for - I left it at that. It does seem to sum-up the difference between us, and while I'm not saying don't push the button, I am saying it won't be enough. I do also sympathise with the difficulty of trying to understand what I am saying at times, I have the same problem myself. And John Commons seems to have been such a noble soul. However my uncle Billy, who hung out in Camden, Arkansas and was a wobbly , (in fact everyone told me as a child I took after him), was almost perpetually drunk, out of work, and with no money to feed his kids. So it seems just having your heart in the right place isn't enough.

So today I got back to thinking about the problem. And then this occured to me: why don't we change the labels a bit, why don't I play Walt Whitman to his Paul Samuelson (textbook'n all)? No, not Walt the poet, silly, Walt Whitman Rostow. Still lost, well try this:

To return to the question of theory, I have six variables which I ask my students to use. Now if you wish to characterize my work compared to conventional economics, here it is 'Conventional economics evades these six variables: population; technology and investment; relative prices, which embrace the Kondratieff cycles; business cycles, but seen as a form which growth took - not abstracted from the whole system; the stages of growth, which repeat in a sense the technological revolutions, but from a different perspective - the perspective of a single country; and the non-economic variables which affect the world economy. Among these are perfectly obvious ones like the traumatic effects of wars - the Napoleonic Wars, the Civil War, and the World Wars. But the economy is also affected, for example, by how the ruler disposes of his limited resources ... There are three directions that rulers could take: they could dispose of resources to redress old wrongs; to build up the center versus the regions; and there was the question of welfare ... It's very important to be clear about the primacy of politics, generally, notably in modem economic development...........

Milton Friedman asserted flatly in one of his books or one of his essays, that he's going to stick with his theoretical view dominated by one variable. Some people are gifted that way; some are gifted to look at the whole of reality. What I would assert is that a historian is bound, by his profession, to deal with multiple variables. In that sense, I'm a historian. But, for each of my variables, I have a theory: a theory of demographic cycles, a theory of innovations and investment. I keep saying it very politely, but the proportion of income invested isn't at all the product of a Keynesian system. It isn't at all the product of the consumption function. It's a product of how much of the backlog of technology you missed and are as a society willing to make up.

After the war the Japanese ran a 30% investment rate. After the war the Europeans ran a 22 to 24% investment rate. In the United States it hovers around 15 to 17% and the rates of growth accommodate themselves to the investment rates. Well, the Japanese were furthest be- hind. The Japanese were impoverished; they had a broken society. But they came up like a rocket. They set about acquiring every type of technology. Along the way they started with cameras. The cameras arose out of their expertise at making bomb sights, and they were very good at it. And they went right up. They planned a technological chain. They were a well-educated people. They climbed a chain right up to the present crisis. And they ran, in so doing, a 30% investment rate for most of that period, although it fell off towards the end. The Europeans also came up. They had the war damage to make up, and they hadn't had the mass automobile age or the age of consumer durables. The automobile age came in the '50s and '60s. It was interesting to see the British and the Continental factories where the bicycle racks gave way to the parking lots. They didn't have American automobiles at the time. They had smaller automobiles and they had a big tax on petrol. But they had the automobile age, and they had refrigerators, and they used oil instead of coal, and they got rid of smog. In other words, the investment rate is a function of how close you are to the technological frontier and how acquisitive your entrepreneurs are.

Why was there a split so people feel that economic history - to quote Science magazine - became a 'backwater field' in the profession?

That's simply the triumph of Samuelson and The Foundations of Economic Analysis. The triumph of that kind of economics took the whole profession out of the game.............Because the differential calculus could not deal with these factors that matter: with population, with technology and investment, with relative prices, business cycles as an aspect of growth. So economics became everything you could deal with through the calculus.

I like Samuelson. I regard him as a friend. I would never, never question his right to deal with economics his way. I wish wistfully that he'd understood not only that 'mathematics is a language' - which is a direct quote - but also the wonderful wisdom that 'nature is much more complex than could be dreamt of by a single mind', or revealed by a single technique or variable. Despite what Keynes said about bridging the gap in economics between micro- and macro-analysis of prices, he didn't bridge it. His was a Marshallian short-period analysis in The General Theory. What is missing from the way we teach economics is the sector. It's the sector in which technology comes. It's the sector you must study to understand high prices of raw materials and the low prices of raw materials. There is no theory of the sectors. Think about it.

One problem?

Yes, it worries me more than any other: the fall in the birth rate in Japan and Russia and Germany. This means that these countries will hollow themselves out. Now improvement in medical science gives, in part, an out. We can extend the length of retirement from 60-65, which is arbitrary, to 75. These people can improve the work force. We can improve the productivity of the work force, as we're doing now in the United States. We also need to improve education. Eighty percent of the people in our public school system do not go to college for four years. They must be trained for the modem work force. Higher productivity of labor will help solve the problem. But still I fear for the older industrial countries versus the younger industrial countries on demographic grounds...............But you asked me what worries me most: it's the demographic issue.

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