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Navigating Global Prosperity: An Interview with Paul Davidson

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Paul Davidson is America’s foremost post-Keynesian economist. Davidson is currently the Holly Professor of Excellence, Emeritus at the University of Tennessee in Knoxville. In 1978 Davidson and Sydney Weintraub founded the Journal for Post-Keynesian Economics. Davidson is the author of numerous books, the most recent of which is an introduction to a post-Keynesian perspective on the recent crisis entitled ‘The Keynes Solution: The Path to Global Prosperity’.

Interview conducted by Philip Pilkington

Philip Pilkington: Keynes famously claimed that the ideas of economists are extremely powerful and have huge influence on the way policymakers think. What struck me about your book The Keynes Solution was how well you related Keynes’ theoretical ideas to the problems the world is currently facing – and the proposed solutions. Before we talk in any detail about these ideas let me ask you this: to what extent do you think that Keynes was right about the ideas of economists?

Paul Davidson: He was absolutely right. All you need to do is look at the history of the US (and other developed countries) since World War II.

For the first 27 post war years, Paul Samuelson’s mistaken view of Keynes’ analysis reigned supreme as the Keynesian economic solution to all economic problems – and all politicians, whether Republican or Democrat, thought of fiscal stimulus as the correct response to recession. The Republicans via tax cuts and military spending, while the Democrats by more public spending.

The problem, as I indicate in my new book, was Samuelson got Keynes’ theory all wrong. Thus when inflation reared its ugly head in the early 1970s Samuelson had no idea as to Keynes’ solution to what Keynes called incomes inflation.

Instead Samuelson invoked the Phillips curve – which was not part of the Keynes analytical structure and was actually incompatible with Keynes’ General Theory – to advocate a trade-off between the rate of inflation and the rate of unemployment. When inflation rates increased as unemployment rates increased in the mid 1970s, i.e., stagflation – Samuelson’s Keynesianism was proved wrong and the door was open for Milton Friedman’s solution to all our economic problems; that is, the free market in goods and services, labor market free , and unregulated financial markets. Mrs. Thatcher and Ronald Reagan relied on this free market philosophy – as did to a large extent Clinton under the influence of Alan Greenspan and Robert Rubin.

As a result government regulations were reduced, labor unions were emasculated (remember Reagan and the air traffic controllers) the Federal Reserve aimed at targeting the rate of inflation (as Friedman’s quantity theory of money explained how the money supply did not affect real output and employment but merely affected the price level).

Milton Friedman and I had a debate about his theory vs. my view of Keynes in the Journal for Post-Keynesian Economics in the early 1970s which was then published as part of a book Milton Friedman’s Monetary Framework.

So we have two now defunct economists having the power to affect policies for more than 60 years through their academic scribbling – Samuelson for the first three decades after World War II and Friedman for the next three decades. Clearly this evidence of the power of economists – who Keynes claimed should be as humble as dentists.

PP: In the book you trace a lot of mainstream economics faith in markets back to what you call the ‘ergodic assumption’. Could you say something about the relevance of this concept to understanding mainstream theory – and why if this assumption is thrown out much of said theory has to go with it?

PD: Time is a device that prevents everything from happening at once. Economic decisions made today will have payoffs in days, weeks, months and/or years in the future. Mainstream economic theory presumes that decision makers can make optimal decisions regarding allocation of income and capital where the outcomes (payoffs) of such decisions are in the future. In order to make optimal decisions, these decision makers must ‘know’ future outcomes of all alternatives that they have to choose from. How do they ‘know’ these future outcomes?

To make statistically reliable estimates about future outcomes, the decision maker, following good statistical methodology, should draw a sample from the future and then calculate statistically reliable estimates about future probability of outcomes.

Since drawing a sample from the future is impossible, mainstream economists impose the ergodic axiom as a foundation of MAINSTREAM theory. This ergodic axiom states that the past, present and future economic events are all determined by a pre-existing and unchanging probability distribution. Therefore if one calculates probabilities on the basis of existing past market data, then , assuming the economic system is an ergodic system, this calculated probability distribution is the same as one would get if it calculated a probability distribution from a sample drawn from the future. In other words, the mainstream ergodic axiom presumes that data samples from the past are equivalent to drawing data samples from the future. Consequently the future is readily ‘knowable’ and decision makers will not make any mistakes.

Given this ergodic presumption individuals make the best choice possible to maximize their income and profits in markets free from government regulations and interference. This results in the rhetorical question that Ronald Reagan would often ask: “Why should bureaucrats in Washington know better than you do in how to spend your money?” The ergodic axiom is the basis of the laissez-faire philosophy that underlies mainstream economics.

[Note the risk management computer models used by large financial institutions such as Citibank, Lehman Brothers, etc. involved calculations of risk probabilities based on past financial market data to warn management about the future risks of any decision regarding future portfolio changes. These models, however, failed to warn these large financial institutions of the financial crash of 2007-2008. The result was that government had to bail out these large financial institutions in order to prevent a bigger economic disaster from occurring.]

On the other hand, if the future is uncertain as Keynes insisted is the case – i.e. the system is nonergodic – then there is a positive active role for government to produce market rules and regulations that prevent individuals from taking decisions that can cause markets to crash! [Similar to the government enforcing traffic rules to prevent auto accidents.] There is also a role for government to clean up the mess if the system does crash – via fiscal ‘stimulus’ policies and easy monetary policies!!

Accordingly, if one rejects the ergodic axiom as not relevant to our money using capitalist system, then all of mainstream theory is mere fiction.

[Note George Soros has argued that mainstream financial market theory is not applicable to real world financial markets because actions taken by market participants today can change the future outcomes in ways that are not predictable today – Soros calls this his ‘reflexivity’ concept. Thus Soros is in essence rejecting the ergodic axiom of mainstream theory.]

PP: Together with the ergodic axiom there is another key tenet of mainstream economics that you highlight in your book The Keynes Solution and that is the ‘neutral money argument’. Could you briefly explain this concept and why it is so important for mainstream economic theory?

PD: A second fundamental axiom of new and old classical mainstream economics is that “money is neutral”. For example, Milton Friedman asserted that money was always neutral – at least in the long run.

This neutral money presupposition of mainstream economics assumes that increases in the supply of money will affect neither the volume of goods produced nor the level of employment in the economy – even if there is significant unemployment and excess capacity to produce goods in the economy. In other words, the mainstream axiom of neutral money asserts as a universal truth that does not have to be proven that any monetary policy that increases the quantity of money available in the economy in order to increase market demand for the products of industry will have absolutely no effect on employment and production.

Consequently, the neutral money axiom is a presumption that any easy monetary policy is always inflationary. Thus when the Federal Reserve invoked what was called a ‘quantitative easing’ [often called QE policy] where the Central bank ‘printed’ money to finance an increase in market demand for goods, believers in mainstream classical economics insisted that the result of quantitative easing will be only to increase the inflation rate dramatically.

When inflation did not increase after QE and QE2 in 2010 and 2011 respectively, logically consistent mainstream economists said that the inflation rate increase was just around the corner and we will see it soon.

For Keynes and his Post Keynesian followers, inflation is not a matter of increasing the money supply. Inflation is the result of either speculation regarding stocks of existing commodities – what we call ‘Commodities Inflation’ and/or increases in profit margins and increases in wages relative to productivity increments – what we call ‘incomes inflation’. Consequently, anti-inflationary policies, as I explain in my book The Keynes Solution, involves a buffer stock policy for commodity inflation and an incomes policy for incomes inflation

Blind adherence to the neutral money axiom prevents mainstream theorists from recognizing that if there significant unemployment and idle capacity then additional government and private spending financed by the quantitative easing of the central bank will create profit opportunities for entrepreneurs to expand output and employment – and, of course, will not necessarily be inflationary if the government has a buffer stock policy and an incomes policy in action.

PP: Yet, Bernanke et al seem to be mainstream economists. Why is it that they occasionally advocate expansionary policies and yet continue to believe in their doctrines rather than scrutinising them in light of both their prescriptions and the evidence that emerges as a result of thee prescriptions?

PD: A sage once said: “Consistency is the mark of a small mind”. Nobody ever called Bernanke et al ‘small minded’. Yet there often appears to be an inconsistency with the policies Bernanke et al advocate and their logical theory.

Most mainstream economists such as Bernanke et al who call themselves [New] Keynesians never read Keynes’ General Theory. [Someone once said a ‘classic’ is defined as a book everyone cites but no one reads. For mainstream Keynesians Keynes's book The General Theory of Employment, Interest and Money is definitely a classic.]

Most post-WWII ‘Keynesians’ learned their views of Keynes – not from reading Keynes – but from what Nobel Prize winner Paul Samuelson said Keynes’ theory was. As I indicate in my book The Keynes Solution, in an interview in 1986 Samuelson specifically stated he found Keynes’ analysis ‘unpalatable’ and not comprehensible. Samuelson therefore stated “I finally convinced myself to stop worrying about it… I was content to assume that there was enough rigidity in relative prices and wages to make the Keynesian alternative to Walras operative.”

In other words, Samuelson merely assumed the system was a classical model but with [in the short run] rigidity in money wages – so that the classical market ‘solution’ only came about in the long run. This despite Keynes having an entire chapter in the General Theory entitled ‘Changes in Money Wages’ which analyzed how flexible wages (and prices) still did not automatically restore full employment in Keynes’ general theory. [Did Samuelson ever read Keynes' ‘classic’?]

Of course, 19th century economists already knew that if wages and prices were not flexible, unemployment could occur – so if Samuelson was correct in his interpretation of Keynes, then Keynes had nothing new to add to already well established classical theory! Consequently, if Samuelson was right, Keynes was a charlatan when he claimed to having provided a revolutionary new general theory.

Since the ‘master’ American post-war Keynesian, Paul Samuelson, was inconsistent between his short-run analysis and the long run, it is no wonder that his ‘Keynesian’ students and followers such as Bernanke, Krugman, Stiglitz, etc. are also inconsistent. As John Williamson [the originator of the so called ‘Washington Consensus’] once wrote to me: his view was that American Keynesians are too impatient to wait for the long run to solve the recession and unemployment problems. This ‘impatience’ is, I think, why Bernanke et al demand active government policies even though in the long run – according to their doctrine – no government intervention is better. I believe that is why Bernanke et al are inconsistent between their short run policy desires and the long run logical conclusion of their theoretical doctrine.

PP: Yes, that would explain it perfectly. While they find such solutions theoretically unpalatable, they nevertheless think them eminently practical. Interesting.

Moving on. You talk a bit in the book about commodity price inflations. What do you have to say about these and is there a Keynesian solution?

PD: Commodity inflation is identified with rising market prices of durable standardized commodities such as agricultural products, crude oil, minerals, etc. Typically these commodities are traded in public markets similar to the liquid asset security markets. These commodity markets tend to have prices associated with a specific date of delivery – either delivery today or at a specific date in the future. Markets for a future date delivery are limited to only a few months in the future.

Since most commodities tend to take a significant length of time to produce, the supply of commodities for any future date in these markets are fixed by already existing stocks plus any semi-finished product that are currently in the pipeline and are expected to be finished by the date of delivery. Accordingly, if there is any expectation of an increase in market demand for these commodities in the future, then people can speculate on these markets that the prices will rise.

Accordingly by buying a purchase contract in a market for future delivery the purchaser (speculator) believes he/she will make a large capital gain when he/she sells the product at the future delivery date in the spot market at a higher market price. In sum, any expected increase market demand will only inflate the price of these commodities today.

To prevent commodity price inflation requires the government to maintain an inventory of the commodity as a ‘buffer stock’ to prevent changes in demand and/or supply from inducing significant commodity price movements. A buffer stock is nothing more than some commodity shelf-inventory that can be moved into and out of the market to buffer the market from disorderly price disruptions by offsetting the previously unforeseen changes in demand or supply as they occur.

For example, since the oil price shocks of the 1970′s, the United States has developed a ‘strategic petroleum reserve’ where crude oil is stored in underground salt domes on the coast of the Gulf of Mexico. These oil reserves are designed to provide emergency market supplies to buffer the market price of domestic oil if there is a sudden decrease in oil supplies from the politically unstable Middle East. The strategic use of such a petroleum reserve means that the price of oil will not increase as much as it otherwise would if, for example, a political crisis broke out in the Middle East.

In other words, oil price inflation could be avoided as long as the buffer stock remained available to offset any immediately available commodity shortage. Thus, during the short Desert Storm war against Iraq in 1991, U.S. government officials made strategic petroleum reserves available to the market to offset the possibility of disruptions (actual or expected) from affecting the market price of crude oil. The Department of Energy estimated that this use of a buffer stock prevented the price of gasoline at the pump from rising about 30 cents per gallon during the brief Desert Storm period.

Use of buffer stocks as a public policy solution to commodity price inflation is as old as the biblical story of Joseph and the Pharaoh’s dream of seven fat cows followed by seven lean cows. Joseph – the economic forecaster of his day – interpreted the Pharaoh’s dream as portending seven good harvests where production (supply) would be much above normal causing prices (and farmers’ incomes) to be below normal. This would be followed by seven lean harvests where annual production would not provide enough food to go around while prices farmers received would be exorbitantly high. Joseph’s civilized policy proposal was for the government to store up a buffer stock of grain during the good years and release the grain to market, without profit, during the bad years. This would maintain a stable price over the fourteen harvests and avoiding inflation in the bad years while protecting farmer’s incomes in the good harvest years. The Bible records that this civilized buffer stock policy was a resounding economic success.

PP: There is a concern that, should governments pursue full employment policies we might see inflation arise due to wage-bargaining by workers. What do you think of this argument and how would you suggest dealing with this problem should it arise?

PD: Full employment might strengthen the bargaining power of labor sufficiently so that workers demand money wage increases which exceed the increase in the rate of productivity increase of labor, This will result in higher labor costs of production and therefore higher prices of products produced in firms throughout the economy. This increase in money wage rates that exceeds productivity increase is what Keynes called ‘incomes inflation’. Accordingly the government will have to institute some form of an ‘incomes policy’ to limit wage increases to not exceed productivity increases. A so called tax-based incomes policy or TIP policy would prevent this incomes inflation. TIP would use the corporate income tax structure to penalize the largest domestic firms in the economy if they agreed to such inflationary wage demands. If money wage increases could be limited to overall labor productivity increases, then workers end all other owners of inputs to the domestic production processes might willingly accept noninflationary money income increases.

PP: In your book you are sceptical about using a devaluation of the US dollar to decrease the trade deficit and raise employment. Yet many economists think that this would be a good strategy. Could you explain your scepticism and lay out briefly an alternative arrangement?

PD: There are several reasons for my scepticism that devaluing the US dollar is a desirable policy for reducing the US trade deficit by making imports sufficiently more expensive and making US exports cheaper to foreigners so that Americans reduce their total US spending on imports and foreigners increase their total US spending on US exports, until spending on imports equals what foreigners spend to buy US exports.

The first reason this is not a desirable plan is based on a technical condition called the ‘Marshall-Lerner condition’. Basically this condition says if the sum of the price elasticities for imports and exports is less than unity, then devaluation will increase the trade deficit. One need only note that in the 1980s when the US dollar exchange rate tended to decline rapidly, the US trade deficit increased! Consequently, from an empirical point of view, the Marshall-Lerner condition seems relevant to the USA trade balance problem then and therefore devaluation could worsen the US trade deficit, as it did in the 1980s. A sage once said: “those who do not study history are bound to repeat its errors”. The many economists you cite as thinking devaluation is a good strategy, obviously want the US to repeat the errors of the 1980s.

Secondly, those who argue that devaluation would end the US trade deficit are essentially arguing that if US exports become cheap enough to foreigners then US made products and their labor input would become ‘competitive’ with foreign produced goods’ labor costs. Since labor productivity in most manufactured goods is the same whether produced in the USA or in China, this means that the US labor costs per unit of output when measured in a single currency must be competitive with the labor costs , say, in China in order for US produced goods to be able to compete in the global marketplace.

In other words for US goods to be competitive, devaluation must reduce the value of labor income in the in the US to the equivalent of what is earned in China (where a recent New York Times article indicated workers in a Chinese factory were paid $15 a day for a 12 hour work day and 6 day work week). But do we really want a policy which reduces the average American worker’s annual income to less than $5000 per year? (The economists who say ‘yes’ really mean as long as we don’t reduce economists incomes!)

I should think that we don’t want to advocate a policy that reduces American workers income to the level of a Chinese ‘coolie’. Especially when there is a simpler way to correct the US trade deficit. This alternative is what I have called the International Monetary Clearing Union [IMCU] where the trading nations would essentially enter into an agreement to spend all their income earned on exports on the purchase of imports from foreigners. [The details of my IMCU plan can be read in my book The Keynes Solution]. Accordingly no nation could run a persistent trade imbalance. While at the same time no nation need depress their workers income.

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50 comments

  1. charles sereno

    My apology for a lack of economic expertise. The alternative solution suggested by Davidson (IMCU) is POLITICALLY impossible now or in the foreseeable future. However, his analysis of post WW II economic history is compelling. I have a question about how important it is to maintain a balance of labor costs with productivity gains in order to achieve sustainable growth. The American experience in the 50′s and 60′s, in retrospect, looks good. Other successful economies, e.g., Japan or South Korea, on a later time schedule, should also provide confirmation or not. With regard to a contemporary example, is it possible that, in the Eurozone, the failure of German labor costs to keep up with productivity perversely contributed to the decline of the peripheral countries?

    1. diptherio

      There are marginal domestic competitors that will be helped by devaluation, sure, but they are just that: marginal. What amount of devaluation do you suppose would be necessary to lure garment or electronic manufacturing back to these shores? How much devaluation would we need to move to the downward sloping section of the J-curve? I think the answer may be much more than most people will willingly accept.

    2. diptherio

      Sorry about the missplaced reply. Wish I could edit after posting, oh well.

      I do agree with you that the IMCU concept seems somewhat difficult politically. Besides, I think there are better ways to accomplish the same tasks. I would suggest, for instance, creating industrial cooperatives. Turn the idle Detroit factories over to the layed-off workers and let them start producing cars themselves. Worker-owned cooperatives are unlikely to outsource their jobs.

      1. digi_owl

        In other words, play the Argentinian card?

        Would that not make the Tea Party go on a witch hunt for reds?

      2. F. Beard

        Turn the idle Detroit factories over to the layed-off workers and let them start producing cars themselves. Worker-owned cooperatives are unlikely to outsource their jobs. diptherio

        Just don’t let them issue their own money or Skippy will have a fit. Instead, they’ll just have to be subject to the nation (world?) wide boom-bust cycle, same as everyone else.

        1. skippy

          Carrying capacity based activity’s don’t engage in rampant speculation, no boom or bust, everyone lives, leisure time, more time for communal activity’s (altruistic behavior creating societal trust), no more job slavery, more time to study and reflect with out it being profit based, whats not to like?

          Skippy… money would not even be necessary. Go read about it, Google with out bias.

          1. F. Beard

            Carrying capacity based activity’s … skippy

            Who the heck knows what Earth’s “carrying capacity” really is? Mankind’s ingenuity seems unlimited. In the not too distant future the following will be true:

            Energy + Matter + Technology = everything Mankind needs materially speaking.

            We have at least a several hundred (thousand?) year supply of energy. Once fusion is perfected our energy needs will be assured for millions of years if not till the universe ends.

            As for matter, the Earth has more mass than it ever did (via the rain of cosmic dust).

            As for technology that is unlimited assuming we have the peace and stability to develop it.

            That leaves adequate living space for humans and protected environments for wild life as a concern. Well, prosperity is a very effective (and the most humane) form of birth control method. So then the question is: how do we maximize the likelihood for stable prosperity? That questions lead us back to our current money system – the single biggest threat to stability and enduring prosperity.

  2. reason

    I think Paul Davidson’s discussion of the trade deficit is somewhat wrong (and I’m surprised about that). Firstly, short-run elasticities and long-run elasticities are usually quite different. This results in what is called the J-Curve where deficits initially rise but then eventually shrink. Secondly, the argument about manufacturing labour costs is fundamentally misguided. Shrinkage of the trade deficit can come about through import replacement (i.e. insourcing) not just through exports. There will always be industries where there domestic producers are marginal competitors and in those industries domestic producers will benefit from exchange rate changes.

    1. diptherio

      The comment on Sereno’s link above was supposed to go here…oops!

      There are marginal domestic competitors that will be helped by devaluation, sure, but they are just that: marginal. What amount of devaluation do you suppose would be necessary to lure garment or electronic manufacturing back to these shores? How much devaluation would we need to move to the downward sloping section of the J-curve? I think the answer may be much more than most people will willingly accept.

      1. digi_owl

        I read somewhere that there are some electronic manufacturing returning to US shores. But mostly because they can automate the process with slight redesigns of the product, allowing for more reliable quality with less employees.

  3. Jim Haygood

    ‘Consequently, anti-inflationary policies, as I explain in my book The Keynes Solution, involves a buffer stock policy for commodity inflation and an incomes policy for incomes inflation.’

    Oh my … haha, he said ‘buffer stocks’! One would think that as a European, our PhilPil would recall the bad old days of wine lakes and butter mountains produced by the Common Agricultural Policy … and which also coincided with unpleasantly high levels of inflation.

    Similarly, the Strategic Petroleum Reserve isn’t keeping gasoline prices from edging up to $4 a gallon here in the Land of Happy Motoring (and prolly twice that level where Phil lives).

    Sure, our Dear Peace Laureate could flood the domestic market with stored crude in the summer before the election, and might well do so. But the ensuing temporary dip would have no influence whatsoever on the long-term price trend.

    The ergodic assumption may be flawed, but it beats hell out of turning over economic policy to crooked, clueless politicians.

    Although secular declines in money velocity can make inflation appear quiescent, it is still a monetary phenomenon. Few would have believed in 1939, after two disinflationary decades, that the U.S. CPI would explode to nearly 20% year-on-year by 1947. Yet a decade of war and heavy borrowing produced that unhappy result.

    As the rich West hectors Iran and borrows hand over fist, do you not see a certain resemblance between today and those times?

    1. Philip Pilkington

      “The ergodic assumption may be flawed, but it beats hell out of turning over economic policy to crooked, clueless politicians.”

      Really? Europe falls apart as The Market works its ‘magic’. Unemployment remains chronic. Give me a Nixon any day…

      “Sure, our Dear Peace Laureate could flood the domestic market with stored crude in the summer before the election, and might well do so. But the ensuing temporary dip would have no influence whatsoever on the long-term price trend.”

      If Cook et al are right it will be a lot more than a temporary dip…

      1. George

        There is no place in the world where ‘The Market’ reigns, yet you attribute problems in Europe to ‘The Market’.

        The combined socio-politico-economic system in every developed country is an extremely complex system. Neither you nor I can tease out what causes what in these systems without doing experiments. Political economics is a very weakly experimental science at best, we can only observe different effects across countries with different policies.

        So I think you have no basis for that judgment. Correct me if I am wrong.

    2. j.grmwd

      Seriously dodgy argument here. High inflation through the war years proves that inflation is a monetary phenomenon ? Switching the majority of industrial production to items that are simply blown up rather than sold, and withdrawing the majority of young men from the productive economy (i.e. a supply shock) is the most relevant factor in wartime inflations.

      1. Jim Haygood

        Others argue that sovereign debt accumulated by chronic or acutely large deficits is the engine of inflation.

        Since WW II featured both gargantuan deficits and some monetization of Treasury debt under the Treasury-Fed accord, it’s difficult to disentangle the two. Certainly the supply-demand factors you cite contributed as well.

        Year-on-year CPI inflation peaked at 19.89% in March 1947, after munitions production and draft-induced labor shortages were over. To me, this points to a monetary phenomenon.

        One could also cite late 15th century European inflation caused by imports of New World gold. Increase the money supply without a corresponding increase in productivity, and (holding velocity constant) prices go up.

        Buffer stocks can serve a tactical purpose of tiding a nation through a bad harvest. But since commodity prices passively reflect the general price level through their cost of production, buffer stocks act only to temporally shift demand and supply. Commodity prices are a messenger of inflation, not its cause.

        1. Philip Pilkington

          Trying to attribute wartime inflation to growth in the money supply is deranged. I’m sorry. Too many supply side factors at work. And to tie it to debt monetisation… really?

          “Year-on-year CPI inflation peaked at 19.89% in March 1947, after munitions production and draft-induced labor shortages were over. To me, this points to a monetary phenomenon.”

          No place for the switching from a wartime economy producing tanks to a peacetime economy producing automobiles? The level of unreality here would leave Milton Friedman blushing…

          1. north country

            Reading the interview I was somewhat irritated by the interviewer’s frequent and simplistic parenthetical [..] interruptions.

            Now in the comments I find the interviewer again being rude to his readers. Mr. Haygood allows that supply/demand factors also contributed to WWII inflation, admits the difficulty of isolating causes, and says that the evidence he sees “points to” a monetary cause. Yet you make him out to be “seriously deranged”, the most fanatical of Austrians utterly out of touch with reality. Meanwhile, George (above) has made a valid point about another of your shoot-from-the-hip comments and he remains unanswered.

            I find the civil and reasoned discourse at NC refreshing, a treasure. Don’t you?

    3. craazyman

      Deepe Thawts

      the ergodic assumption isn’t flawed — unless future politicians are honest and insightful, making the future distinctly unlike the past. and unless governments don’t chaotically intervene in markets in the future, as they have in the past.

      whoa! wait a minute. maybe it is flawed. Oh well. What difference does it make anyway?

    4. Paul Tioxon

      We use 9 million barrels/day of refined gasoline in 2010. see link below:

      http://www.eia.gov/dnav/pet/pet_cons_psup_dc_nus_mbblpd_a.htm

      Three refineries have been idled, ready for sale or completely shut down permanently in the Philadelphia region representing 10% of gasoline usage. The number of refineries has steadily declined in the US. Do you think getting rid of the refineries that produce gasoline has an effect on the supply and do you think supply and demand as a concept is relevant to the price of gas at the pump? Well, do you Jim? The market has spoken, and there is less gasoline being produced.

      http://www.reuters.com/article/2012/02/14/refinery-operations-sunoco-philadelphia-idUSL2E8DE8LE20120214

      It seems, the gas price at the pump is going up as refineries are being permanently shut down.

    5. nonclassical

      ..we appear unable to define extortionary economics as exactly that-we should all know, with HFT (high frequency trading) computer generated, that we are sailing uncharted waters..

      and that monopoly and collusion are actually driving deregulated Wall $treet-financial sector, up from 19% of U.S. economy 2001 to 41% today.

      Check out history of other economies who have given up manufacturing for paper debt based economics..(Kevin Phillips-”American Dynasty”.

      Also check out Gretchen Morgenson’s work 2004-she defines Goldman Sachs held record 13.8% of world energy “futures” markets..JP Morgan held 7% or so, as did Bear Stearns, etc..

      They were selling said “futures” back and forth to one another to instigate rising price$…much as was done in late 1800′s (“Wall Street-A History”, Geisst). July, 2004, Morgenson notes, Goldman sold off 1/3 of said “futures”..other banks colluding took notice, but Goldman stated they would be buying back in, in blended fuels or biodiesel..but next month sold off another 1/3..leading to stampede selling September, 2004, just in time for bushit reelection…

      People need to see how manipulated this all is…Ayn Randers are in complete denial, as this precludes her “equality” of investor nonsense, that “free markets should regulate themselves”…nothing “free market” about manipulated HFT…

  4. Skippy

    Seemingly aggressive industrialization has a time limit, all monetary, fiscal, central banking policy used to shove it around the globe and *create substitutes* for it, go boom sooner or later.

    Skippy… equal and opposite thingy.

  5. Susan the other

    Seems like we crossed into unknown territory on all our theories of inflation and employment because we have reached the limits of environmental exploitation. The environment was actually our stockpile to buffer all the ills of economic theory. Now we’ve got a fine mess. We are so caught up in our contradictions it is no longer amusing. There is no way we currently know of to “balance” an economy in this world. But one thing is becoming increasingly obvious: If we do not do full employment we will have an extremely expensive wellfare and anger problem on our hands that will obliterate any pretense of economic understanding and theories of “capital.” The starting point for a new economic paradigm is political (as Kucinich says); full employment. Start with this assumption and play with projections and predictions. Do not start with protecting the “value” of money.

    1. F. Beard

      If we do not do full employment we will have an extremely expensive wellfare and anger problem on our hands that will obliterate any pretense of economic understanding and theories of “capital.” Susan the other

      What people need is money, not necessarily jobs. One day, robots will be able to do most everything of a non-creative nature. What then?

      And where is the leisure we have long been promised?

      1. securecare

        John Calvin is spinning in his grave !

        I hope he keeps spinning enough to dig a tunnel to hell where he and his fellow believers belong. All hail the cybernetic robotic production force.

        Seriously, for the good of the human community and our planet (space ship) it can’t happen fast enough.

  6. Passerby

    “Joseph – the economic forecaster of his day – interpreted the Pharaoh’s dream …”
    “..The Bible records that this civilized buffer stock policy was a resounding economic success…”

    How about a course on Intelligent Economic Design?

    1. F. Beard

      Good question!

      The Bible has quite a lot wrt economics. Gary North attempted such a work but ended up defending a gold standard and usury. Or rather, that is where he started from.

    2. Kukulkan

      Speaking of classics being books people don’t read…

      Joseph’s civilized policy proposal was for the government to store up a buffer stock of grain during the good years and release the grain to market, without profit, during the bad years.

      Without profit?

      From Genesis chapter 47:
      13Now there was no food in all the land, for the famine was very severe. The land of Egypt and the land of Canaan languished because of the famine. 14Joseph collected all the money to be found in the land of Egypt and in the land of Canaan, in exchange for the grain that they bought; and Joseph brought the money into Pharaoh’s house. 15When the money from the land of Egypt and from the land of Canaan was spent, all the Egyptians came to Joseph, and said, ‘Give us food! Why should we die before your eyes? For our money is gone.’ 16And Joseph answered, ‘Give me your livestock, and I will give you food in exchange for your livestock, if your money is gone.’ 17So they brought their livestock to Joseph; and Joseph gave them food in exchange for the horses, the flocks, the herds, and the donkeys. That year he supplied them with food in exchange for all their livestock. 18When that year was ended, they came to him the following year, and said to him, ‘We cannot hide from my lord that our money is all spent; and the herds of cattle are my lord’s. There is nothing left in the sight of my lord but our bodies and our lands. 19Shall we die before your eyes, both we and our land? Buy us and our land in exchange for food. We with our land will become slaves to Pharaoh; just give us seed, so that we may live and not die, and that the land may not become desolate.’

      20So Joseph bought all the land of Egypt for Pharaoh. All the Egyptians sold their fields, because the famine was severe upon them; and the land became Pharaoh’s. 21As for the people, he made slaves of them from one end of Egypt to the other. 22Only the land of the priests he did not buy; for the priests had a fixed allowance from Pharaoh, and lived on the allowance that Pharaoh gave them; therefore they did not sell their land. 23Then Joseph said to the people, ‘Now that I have this day bought you and your land for Pharaoh, here is seed for you; sow the land. 24And at the harvests you shall give one-fifth to Pharaoh, and four-fifths shall be your own, as seed for the field and as food for yourselves and your households, and as food for your little ones.’ 25They said, ‘You have saved our lives; may it please my lord, we will be slaves to Pharaoh.’

      Now, I’d say Pharaoh did quite well out of that deal.

      And there are various ways of describing it, but “civilised” really isn’t one of them.

      1. F. Beard

        Now that I have this day bought you and your land for Pharaoh, here is seed for you; sow the land. 24And at the harvests you shall give one-fifth to Pharaoh, and four-fifths shall be your own, as seed for the field and as food for yourselves and your households, and as food for your little ones.’ via Kukulkan

        Oh come on. A 20% tax rate isn’t so bad in exchange for not starving to death. Still, I guess they were bound to the land but that was not so unusual for farmers anyway in those days. But I admit that the deal does seem harsher than necessary.

        1. Kukulkan

          It wasn’t the 20% tax rate — especially since it was only on agricultural produce. It was the buying all the land and reducing everyone to slavery.

          Still, as you note, that was pretty much par for the course in ancient civilizations. And the whole story has a “just so” quality, as if it exists to explain how that situation came about, just like the story of the Tower of Babel offers an explanation of why separate groups of people speak different languages. Joseph’s shenanigans explain how Pharaoh got to own all the land and people of Egypt without going along with the more common explanation that the ruler was divine/related to divinities, which would have been unacceptable to monotheists like the Hebrews.

          The thing I find odd is how everyone remembers the first part of the story, while forgetting the second – even though the second part seems to be the whole point of the narrative.

          1. F. Beard

            Joseph’s shenanigans explain how Pharaoh got to own all the land and people of Egypt without going along with the more common explanation that the ruler was divine/related to divinities, which would have been unacceptable to monotheists like the Hebrews. Kukulkan

            Those pesky Kulaks can be very independent. I’m not surprised that it would take a famine to dispossess them. Plus the Flooding of the Nile is usually very reliable.

  7. proximity1

    RE:

    “[The details of my IMCU plan can be read in my book The Keynes Solution]. Accordingly no nation could run a persistent trade imbalance. While at the same time no nation need depress their workers income.”

    As an aside, it ought to read, “no nation need depress _its_ workers’ income.” “no nation”, being a singular antecedent, takes a singular verb, “its,” not “their”. And, by the way, the “workers’ income” is a plural possessive — but never mind,

    I want to suggest an even more arresting idea:

    the readers of this blog –that is, some of them, and especially those who’ve never read Keynes’ The General Theory of Employment, Interest and Money could take it up for reading–and for discussion, as a group in a thread devoted to that. This way, those with more specialist knowledge could help others, non-economists–through the work’s more difficult points. But much of it is not too difficult for a non-specialist to read and understand in the main points. The writing is usually both clear and brilliant.

    One of the advantages of doing this is that more people might be moved to ask themselves and others what the sense is in speaking of “post-Keynesian”.

    We are not in the main “post-Darwin” or “post-Einstein”. Their work was never given or defended as definitive or a complete answer to all outstanding issues and controversies at the time they lived, worked and published since, of course, no scholar can rightly make such a claim. Never the less, the main aspects of these thinkers’ work, while refined and modified in certain respects, still stands up to contemporary scrutiny. We’re not “post-Keynes,”, nor “post-Einstien”, nor even “post-Darwin” except in a silly trivial sense: these men are no longer living. So what? Their basic ideas are.

  8. diptherio

    On stopping “incomes inflation”: it seems that seeing as how wages have failed to keep pace with productivity for the last 30-40 years, income inflation for labor should not be seen as a problem since it may merely represent the re-claiming of productivity gains. So long as increases in wages at the bottom of the spectrum are being off-set by decreases at the top, I don’t see the problem. If any incomes policy is needed, it is surely only at the top. I don’t think many working folks would take kindly to the idea of the government keeping their wages from rising, even just in theory. Pay caps for the CEOs etc. would probably find much more support.

  9. Scott Schaefer

    Pardon me if this seems to be unsophisticated, ignorant, pedanticism … However:

    You assert ” .. the future is uncertain as Keynes insisted is the case – i.e. the system is nonergodic ..”, and then immediately assert both:

    1) ” .. there is a positive active role for government to produce market rules and regulations that prevent individuals from taking decisions that can cause markets to crash”, and

    2) “.. There is also a role for government to clean up the mess if the system does crash – via fiscal ‘stimulus’ policies and easy monetary policies”

    So, how do you propose to select the specific set of rules and regulations to influence individual decision-making in an uncertain future ? Similarly, how do you propose to select amongst specific fiscal stimulus and easy monetary policies, given those policies are to be effective in an uncertain future ? And, accepting the future is uncertain, why are policies other than government fiscal stimulus and monetary easing excluded from your set of alternatives “to clean up the mess” ?

    1. reason

      I don’t quite understand why this should be difficult. It is clear that the market selects for short term efficiency but not for long term resiliancy. Hence regulations that ensure long term resiliancy
      a. will not be made spontaneously by the market
      b. can be made by government regulation

      We do this a lot (social security is one clear example). Fishing quotas another. Regulations on wilderness preservation another. Regulations on machine maintenance (e.g. aircraft) are another. Guarantee requirements another. This doesn’t pick winners, it just ensures that sacrificing the future isn’t a winning commercial strategy.

  10. Quibbler

    I believe that Sage #1 was Emerson who said “Consistency is the hobgoblin of little minds.”
    And Sage #2 is, of course, Carlos Santana who wrote “Evil Ways.”

  11. Hugh

    Nice discussion but strangely beside the point. The three great issues of our time are kleptocracy, class war, and wealth inequality and I defy you to find even a whiff of any of them in this interview.

    This is important because it changes the whole nature of the discourse. Over the last 40 years, we have seen the construction of the present kleptocracy. There have been kleptocratic elements in other periods but never the fullblown construction. So no, we can’t compare past states to present ones, except in a highly selective fashion, like the crash of ’29 with the meltdown of 2008. So in a historical sense the meltdown was predictable, but more to the point, it was foreseeable simply on the basis of its faulty math. No one needed to be a high falutin’ economist to see that the housing bubble didn’t add up and that all the leverage and derivatives built upon it were nothing more than ticking time bombs.

    And all this talk of inflation is almost amazingly primitive. If you increase the money supply, that increase must go somewhere. It’s all in the definitions, you see. If it goes into labor or commodities, then we call it inflation. If it goes to pumping up bubbles in stocks and financialized instruments, then we don’t. But if it spills over into commodity speculation, as we see now, then it does.

    If you wanted to go for a grand unified theory of what is happening now. We are in a vast inflationary bubble driven by kleptocracy, class war, and wealth inequality. Within this, the 99% are experiencing deflation in their wages (wage cuts, benefit cuts, losses relative to the CPI, and of course the biggest deflator of this kind, unemployment) and assets (principally housing, but also interest income, 401ks, pensions, and access to the social safety net). They also suffer from the adverse impacts of the spillover effects of the inflationary bubble in terms of commodities of fairly inelastic demand, such as gasoline and food.

    [Anyone who thinks buffer stocks like the Strategic Petroleum Reserve (SPR) has any effect on this are dreaming. Not saying this will happen, in our present kleptocracy it is a given it won't happen, but if you wanted to wring speculation from oil markets, remove the non-commercial traders and eliminate over the counter markets.]

    We really need to distinguish. The rich are in a huge inflationary bubble fed by the proceeds of their looting, including essentially free money from the Fed, while the 99% are experiencing the double whammy of inflation inside deflation.

    This is the world most of us live in and I think it is time that we demand economists, especially liberal economists, to start addressing it.

    1. Fiver

      Great comment, Hugh. I particularly liked your phrase “almost primitive” to describe this myopic view of inflation – it IS 2012 after all.

    2. proximity1

      A fine example of how your analyses cut through distracting and unessential issues to clear such things away a refocus the attention on what is actually important, essential–showing, too,the how and why.

      I couldn’t agree more with the vivid picture of the distress for the vast majority coupled with the scandalous protected status of the tiny elite at the very top.

      This, as other posts of yours, shows why your posts are such valuable contributions here.

  12. George

    “On the other hand, if the future is uncertain as Keynes insisted is the case – i.e. the system is nonergodic – then there is a positive active role for government to produce market rules and regulations that prevent individuals from taking decisions that can cause markets to crash! [Similar to the government enforcing traffic rules to prevent auto accidents.]”

    These examples are not analogous. The market is a very complex system. Auto crashes are very much simpler, are understandable by people. Thus we can have rules for traffic.

    We do not understand the economy well enough to make rules. We do not write handbooks for life for the same reason.

    All Davidson has done here is to invoke a different level of the ergodic function. Intellectual bogosity of the highest order.

    1. Foppe

      Red herring. Commodity and asset speculation are not that hard to prevent, provided that you are willing to do so. Certainly the current crop of elites has conveniently “forgotten” how to spot them etc., but it does not follow from this that these events are not understood.
      I’m sure it’s very exciting to throw around terms like “bogosity”, and to complain about how “NC readers consistently fail to address [my] fundamental critiques”, but I really doubt it will get you very far unless you have something substantive to add.

  13. George

    The bloggers and major commenters at Naked Capitalism consistently fail to deal with any fundamental critique of the various strains of economic thought they espouse.

    They will argue minutia of an economic theory or economic policy to the end of time, but completely ignore any fundamental critique.

    I conclude that you all share a belief system, and agnostics are not welcome.

    1. charles sereno

      George, don’t despair. We need agnostics. I was the 1st “commenter” and I sincerely hoped to get answers to my question even though I wasn’t sure it was worthy. I was disappointed but I still won’t pick up up marbles and leave.

        1. charles sereno

          Thanks very much, greg, for that link. Flassbeck proves that it is possible to be brilliant without flamboyance. His charts were right on target. He put into clear words what I was searching for. He gave that talk over 2 months ago. We would be wise to pay heed as we enter the 2nd coming of “green shoots.”

  14. Fiver

    Hume was not the first to point out that none of us has reason to believe anything about the future other than what experience of the past, examined or no, has led us to expect – but mainstream economists are hardly the only ones to fall down the rabbit-holes of their own idealized constructions.

    Keynesians own a fair chunk of what’s gone wrong with the program. Consider what it meant, what the total implications were, of a full commitment of the State to support and maintain a PACE of economic activity/production geared to what amounted to wartime levels permanently – rather than an alternate pathway that could accommodate the need to adapt society to changed circumstances while allowing lower levels of non-essential activity. What Keynes as applied offered was an economy on speed for 8 decades – every bee in the hive bears the sear marks on his/her brain from various collisions with an “economy” and society and life that always goes faster, always leaving more and more people and nations behind or damaged (if not made complete wrecks). And as we now see all around us, the immense power of the very States that were supposed to be the vehicle for the advance of the public interest – the heart of the public trust – have been exposed everywhere as in the employ of someone other than the public. Growth, speed, power, action, war, grow, grow, grow…we’re in a race nobody is going to win but many stand to lose disastrously. We need somebody for this Depression, in this century, with things called multinational corporations that have long superseded mere nations, a huge, ravaging global network of interconnected production/distribution/consumption systems, a global banking mafia, unrelenting war and 1 biosphere. The hive is already about to explode. We need something better than just repeatedly smacking it.

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