A Keynesian zombie idea

by John Quiggin on August 26, 2010

I’ve spent a lot of time double-tapping[1] the zombie ideas of market liberalism. But the comments on my recent rejoinder to Dan Drezner remind me that there are some zombie ideas on the Keynesian side of the fence as well. Perhaps the most important is the claim that the breakdown of the Keynesian system of demand management was the result of an exogenous event – the oil price shock of October 1973, which arose out of the embargo imposed by OPEC during the 4th Arab-Israeli war.

There’s a tiny element of truth in this – after the oil shock, the collapse was rapid and disorderly. But the Keynesian economic order had already broken down by October 1973, and the oil shock was a consequence of that breakdown, not a cause.


An inflationary upsurge had been going on for five years or moe by the time OPEC oil ministers met in October 1973. The term ‘stagflation’, apparently coined in 1965 by Iain MacLeod was in widespread use, to reflect the breakdown of the historically observed Phillips curve relationship between unemployment and inflation. Wage and price controls had been imposed in the US in 1971, but had broken down by early 1973 – the oil shock merely administered the coup de grace, leading to the final abandonment of controls.

Internationally, the Bretton Woods system, based on fixed exchange rates tied to gold by way of a fixed $US price of $35/oz had been under pressure since 1968. The Smithsonian agreement of 1971 was the last attempt at rescue, and the system had collapsed completely by February 1973, although it took a decade or so for the remnants of the associated regulatory architecture to be cleared away by the process of financial deregulation.

Prices of all kinds of commodities were skyrocketing,. Because of the cartelised nature of the oil market, oil prices responded with a lag, just as the world economy was beginning its downturn. The shift from dominance by a buyers cartel (the ‘Seven Sisters’ of Big Oil) to a sellers’ cartel meant a bigger and more sudden jump in prices than for some other commodities, but that’s just the way cartels work.

In response to all this monetary policy was being tightened, making a decline into recession inevitable. The recession was just as bad in countries like Australia, self-sufficient in oil and a net energy exporter, as in oil-importing countries like Japan and the US.

Why does this matter? To quote myself from Zombie Economics

The Keynesian Golden Age ended in the stagflation of the 1970s. The causes of this breakdown are many and complex, but they must be addressed if we are to avoid repeating them. In particular, it is important to avoid relying on easy excuses, such as the 1973 oil shock and to face the fact that the emergence of stagflation reflected serious failures in the dominant version of Keynesian macro theories, and in the political and industrial strategies of the social democratic, left, and labor movements. (emphasis added)

fn1. Rule 2 from Zombieland. I wish I’d seen this movie before I finished writing my book

{ 53 comments }

1

Tao Jonesing 08.26.10 at 3:10 am

My reading of Minsky’s “Stabilizing an Unstable Economy,” which does not blame the failure of Keynesianism on an exogenous shock, leads me to believe that what failed was not Keynesian theory but underlying assumptions that were no longer operative due to financial “innovation.” Change the assumptions to reflect reality, and Keynesian theory will work again (although I prefer Post-Keynesian theory).

2

The Tragically Flip 08.26.10 at 3:25 am

Point taken, as “yeah oil shock” is the usual response to a right wing troll shouting about Jimmy Carter’s stagflation economy. However, would we repeat these mistakes? For example, I’m not familiar with much of anything in modern liberal thought that is comparable to wage and price controls today. Yes, there’s still belief in a minimum wage, and some kind of limits on executive pay, but the latter is more of a political policy than an economic one. What other mistakes from that era do we seem apt to repeat if and when progressives were ever really in charge again?

3

Lemuel Pitkin 08.26.10 at 4:10 am

So what do you think of the wage-squeeze story — that capitalism cannot function with persistently low unemployment without labor discipline breaking down?

Originated by Kalecki, given canonical from in Capitalism Since 1945 by Andrew Glyn and his coauthors.

(I mention Glyn in particular because I know you don’t read Marxist economists in general, but you’ve often mentioned your admiration for him.)

4

John Quiggin 08.26.10 at 5:10 am

I’ve been very much influenced by Kalecki, both directly and via Glyn, and I think this story is basically right as regards the failure of the postwar boom. On the other hand, with the oversimplification appropriate to a comments thread, I take the Marxist view to be that this process is both inevitable (since history is governed by immutable laws) and desirable (since the resulting pattern and conflict will bring about the end of capitalism). And, although (1) and (2) are obviously contradictory at some level, Marxist practice has generally been to encourage unsustainable (within capitalism, at least) wage demands as a step towards a revolutionary challenge to the system.

As I said in my dispute with Drezner, I don’t think these developments are inevitable: conversely, I do think that democratic societies have a genuine capacity to make choices about how the economy will work, though of course these choices are constrained.

Second, I very much think that the breakdown in labor discipline in the 1960s was undesirable. There was, I think, a huge potential for continued advances towards a more equal and compassionate society with more democratic workplaces and so on. That was thrown away in a grab for higher wages which ended in defeat, the loss of all the wage gains, near-destruction of the union movement and so on.

One of the big questions now is whether, if we can reassert a role for Keynesian policy and for a commitment to full employment, we can avoid repeating this debacle. Of course, as noted @1, bringing the financial system under control is a crucial step. But then it’s necessary to make the case that there are limits to the extent to which equality can be pursued by increasing wages and reducing profits. Instead, we need to focus on reducing the concentration of private wealth, and on restoring progressive taxation of income.

5

Lemuel Pitkin 08.26.10 at 5:41 am

Thanks for the reply.

Leaving aside whether Marxists necessarily believe that history is “governed by immutable laws” (I don’t, anyway), let me pose a couple questions.

First, historically, is it really the case that the progress toward a more egalitarian society made in the postwar decades (and on that I agree with you completely) was undone by overreaching by labor, as you suggest? Or was it that the capitalist class (obviously via concrete political institutions) decided that an increase in workers’ shopfloor power and in the wage share of income that was perfectly sustainable economically was nonetheless an unacceptable diminution of their political power and social status, and deliberately adopted growth-reducing policies to break the power of labor? (Or was it perhaps a mix of both, in varying proportion between countries?)

It makes a big difference, no? To the extent one believes the first story, one looks for ways to limit the political power of workers in a context of full employment; to the extent one believes the second, one looks for ways to limit the political power of capitalists. (Of course you might say: Let’s limit the political power of everyone! The belief that this is possible is one of the things that distinguishes liberals from Marxists.)

Second, assuming our horizon is a full-employment capitalist economy with a strong welfare state, how does the firm operate when the threat of unemployment is no longer effective? ISTM that a fully realized social democracy depends much more on replacing extrinsic with intrinsic motivation in the workplace — as the successful ones in fact have — than most of its advocates acknowledge. And this may require fairly far-reaching changes to the organization of production. It may be that firms can function with no worker power, and with a lot of worker power, but not with an intermediate amount — enough for the workers to free themselves from the rule of the boss but not enough for them to rule themselves.

It may be that tomorrow’s social democracy will need to learn some things from the experiments in worker ownership going on in places like Venezuela and Bolivia today.

6

John Quiggin 08.26.10 at 5:58 am

Good points, LM. On the main one, I’d say a mixture of both failed overreaching by the labor movement, and highly successful (until v recently) overreaching by (particularly) financial enterprises. The oil shock excuse ignores both of these.

I agree absolutely with the point about intrinsic motivation, and would be interested in pointers to the Venezuela/Bolivia cases – there’s also Mondragon in Spain I guess. And I’d also stress the need to rehabilitate ideas of public service as against New Public Management, and (with some qualifications about their use to push narrow interests) craft and professional values. This needs more than a blog comment, I think.

7

Lemuel Pitkin 08.26.10 at 6:13 am

I’d also stress the need to rehabilitate ideas of public service as against New Public Management, and (with some qualifications about their use to push narrow interests) craft and professional values.</I.

Yes, exactly. The "professional conscience" — the disinterested desire to do a job well rather than poorly; I thought the phrase was originally Michelet's but can't find a cite — is probably one of the most important yet unacknowledged forces in economic life. And most of modern capitalism is actively hostile to it.

8

Lemuel Pitkin 08.26.10 at 6:18 am

(Maybe I should have written neoliberal or Anglo-American rather than “most of modern”. This I guess is another outstanding question: which forms of capitalism — of economic organization generally — develop the professional conscience, and which undermine it?)

9

ejh 08.26.10 at 7:58 am

Two points.

First is, as per Lemuel above, I don’t know how much contemporary Marxists would agree that there are immutable laws, or – even more so – inevitable outcomes.

Second – anybody with experience of organising a union will likely agree that wages come first. Organise a meeting about the annual wage roud – a hundred people turn up. Organise it about anything else – six people turn up. And it’s not easy to see how you change that, or the consequence, which is that a union which can’t reflect its members’ aspirations about wages is not lilely to be able to mobilise them in any other way.

This hasn’t been about “Marxist practice…(encouraging) unsustainable wage demands as a step towards a revolutionary challenge to the system”, it’s been about trade union members wanting such demands and believing they can be attained through strike action. It’s just not manipulable like that. You can’t make ’em strike for higher wages – and on the other hand, if you discourage them from doing so when they want to, they’re not going to do anything else you want.

10

Henri Vieuxtemps 08.26.10 at 10:13 am

@9: your first point seems to be somewhat in contradiction with your second point.

11

Zamfir 08.26.10 at 11:45 am

Lemuel, what makes you say that current Anglo/American capitalism is particularly damaging to the professional ethos? I can’t say I find people from those countries particularly less “professional”, and Americans in particularly sometimes seem to consider the mere thought of working less hours sinful. I can’t shake the feeling that many Americans work long hours and take little holidays because they think it is “the right thing to do”, more than because the extra stuff it buys really matters to them.

12

chris 08.26.10 at 1:37 pm

Second, assuming our horizon is a full-employment capitalist economy with a strong welfare state, how does the firm operate when the threat of unemployment is no longer effective?

“Full” employment doesn’t make the threat of unemployment no longer effective. Finding a new job still takes time and effort, disrupts your income at least temporarily, and possibly when you do find a new job it will require relocation, which is expensive and inconvenient.

Now, admittedly, in a full-employment economy the pain of becoming unemployed is *less* than in conditions like the ones right now. But it’s certainly not nonexistent.

ISTM that if a labor discipline breakdown is going to result from weakening the threat of unemployment, it has to be because things like collective bargaining agreements actually legally restrain the employer from firing anyone in the first place (without six months of hearings and hard proof of misconduct etc.), not because they can find another job within a few months or even a few weeks. The latter still allows for a real threat that people will be willing to go to considerable effort to avoid.

And that’s even reckoning without the fact that a firing for cause will make it harder to find another job even in a “full” employment economy. If the worker can look ahead far enough to see that, then the incentive to avoid such a firing is even stronger.

Frankly, the idea that management would have no effective levers to get their workers to actually work is so bizarre that it’s nearly incomprehensible. (Even if actual firing isn’t one, surely someone could have thought of performance pay? Maybe management was just unwilling to *use* any lever that was a carrot instead of a stick, since it could mean reducing their own returns relative to achieving the same results by purely punitive means.)

But maybe I’m just too young to remember when workers didn’t live in constant fear.

13

PHB 08.26.10 at 1:38 pm

I think the biggest Zombie idea in economics is the idea that technology does not matter.

You can’t model the impact of technology so you just assume that it is constant. But the dominant change in world markets between 1965 and 1985 was the collapse in the cost of shipping goods internationally due to McLean’s shipping containers becoming mainstream.

Over less than a decade the docklands areas of every major port city shut down: London, New York, San Francisco. The price of shipping today is two orders of magnitude less than in 1950.

Containerization is the reason that the commodity prices spiked. Factories all round the world suddenly had the opportunity to meet demand in markets that were previously too far away to be served economically. Extractive industries take longer than manufacturing to increase production and so the short term result was a rise in commodity prices.

Oddly enough a drop in the cost of shipping can cause the delivered cost of a commodity to rise, at least from the perspective of one participant in the market. Before containerization the trade routes were essentially fixed on the colonial model. The cheapest way to ship goods from India to Italy was probably to send them through the Suez canal up past Italy to London and then back again. Drop the price of shipping and suddenly the number of parties who can economically purchase the commodity goes up and an increase in demand for a fixed supply means higher prices.

The same effect has been seen in the proliferation of shops selling cheap crap. Back in the day, the basement at Filenne’s department store made a nice trade selling overstock. This was so successful it spun off as a separate chain which in turn spawned several ‘me-too’ imitators. Before very long there were more stores selling ‘overstock’ than department stores. Demand for crap to sell outstripped supply, margins were squeezed and pretty much all of them went out of business.

Of course the point at which the chains actually failed was a recession. But that was merely the cause, not the reason. A market with more shops selling seconds than firsts is unsustainable.

Most technological developments are fairly narrow in their impact. Going from 5 inch to 8 inch wafers has a huge effect in VLSI but is not going to change GDP much. Containerization was a rare exception.

When the cost of transport goes from being the dominant cost in a finished product to a negligible cost in the space of twenty years, it is going to break all the economic models. The same is true of the Internet revolution.

14

John Protevi 08.26.10 at 1:47 pm

LM @5: I definitely agree about the need to rehabilitate the very idea of instrinsic motivation, which is always the target of the cheap cynicism of the neoliberals. In this context I like Elinor Ostrom’s work[1], which shows that making policies based on the assumption that only extrinsic motivation works will produce conditions that destroy intrinsic motivation and replace it with extrinsic motivation. So assuming only extrinsic motivation is a self-fulfilling prophecy. I like this line of thought as it gives the lie to the idea that neoliberals are just positivists and don’t dabble in theories of human nature or they are simply realists, and adopt “the only sensible theory of human nature, which we see around us everyday,” etc.

1. for example, “Policies that Crowd out Reciprocity and Collective Action.” In Herbert Gintis, Samuel Bowles, Robert Boyd, and Ernst Fehr, Moral Sentiments and Material Interests: The Foundations of Cooperation in Economic Life. Cambridge MA: MIT Press, 2005: 253-275.

15

bianca steele 08.26.10 at 2:04 pm

Lemuel, John:
If there is any work on professionalism, as lp called it, I (as a non-academic) would be interested in it. The only well articulated ways of thinking about professional workers that I can think of are (a) instrumentalism, which denies the professional’s ability to concern him/herself with the uses to which the work is put, and (b) MacIntyre’s early Aristotelian but Marxist-tinged analysis, which as far as I know was never expanded past a close engagement with Aristotle’s and Aquinas’ texts, and as a result has a quasi-military, quasi-communitarian tinge (where the only acceptable uses to put craft work to seem to be those which existed in ancient Athens).

16

John Protevi 08.26.10 at 2:25 pm

Bianca, I don’t know about professionalism, but I did take some notes on the Ostrom article I refer to above, which are available here. Her concern is with assumptions for modeling behavior, and claims that assuming only rational egoists creates two problems: a) it doesn’t fit lab results, which suggest you need to assume a mix of rational egoists and “strong reciprocators”; and b) it results in policies that “crowd out” reciprocity.

17

Matt 08.26.10 at 2:56 pm

Tying together some ideas from PHB in 13 w/ some of Lemuel’s comments, in Marc Levinson’s book on the history and development of container shipping, _The Box_, there’s a very interesting discussion about how the distinct east-coast and west-coast dock-workers unions took different approaches to the rise of container shipping, and how the approach taken by the east coast union was a disaster for them, while that taken by the west coast led to fewer jobs (and rightly so) but secure and high-paying ones. It’s a good example of how different approaches taken by different unions can have a big effect.

18

Francis 08.26.10 at 3:22 pm

As an (unemployed) lawyer (due to the Great Recession), I’m fascinated by this thread. Science 101 tells us that every model is wrong, but some of them (the good ones) are useful. Since I don’t know a d*mn thing about economics except what I read on Brad deLong’s and Paul Krugman’s blogs, my understanding of Keynsianism (and virtually every other theory of macroeconomics) is, shall we say, limited.

But this phrase “the emergence of stagflation reflected serious failures in the dominant version of Keynesian macro theories” needs a lot more explanation. What went wrong? Were the theories inadequate or misapplied?

More broadly, does any of this matter? Even I understand that basic microeconomic theory predicts that the incredible profits of the financial sector should have lead to a massive increase in the number of firms competing in the sector, leading to a reduction in profits. This hasn’t happened. Is there a useful theory of microeconomics that predicts, in advance and accurately, what sectors of the economy will wield the political power needed to protect their profits from competition?

Similarly, is there any politico-economic theory that predicted (or, for that matter, accurately models the past [postdicts?]) the political response of certain economists to the Great Recession? Presumably, this model would tell us that those who wield outsized political power will always create an economic narrative that the current system is the one true best system.

So, a truly useful political-economic model will tell us that we’re f*cked, because those in power will do whatever it takes to stay in power, including the creation and distribution of knowingly false economic theories.

Do I have any of this right?

19

Barry 08.26.10 at 3:31 pm

John: “But the Keynesian economic order had already broken down by October 1973…”

There’s a difference between having problems, and having broken down. I don’t believe that you’ve established that it had broken down before the Oil Shock, in the sense that people would widely believe that it had, if the Oil Shock had not occurred.

20

chris 08.26.10 at 3:40 pm

But this phrase “the emergence of stagflation reflected serious failures in the dominant version of Keynesian macro theories” needs a lot more explanation. What went wrong? Were the theories inadequate or misapplied?

I think this implicitly relies on the idea that “the dominant version” included the Phillips curve, which predicted that stagflation was impossible: unemployment should have prevented workers from having the power to demand wage increases, which should have stopped inflation in its tracks.

21

marcel 08.26.10 at 3:43 pm

“A market with more shops selling seconds than firsts is unsustainable.” @13 above.

Seems like an apt description of the domestic airline industry to me. Also, until recently, of domestic brand auto mfrs. The airline industry manages to survive with repeated bankruptcies. It looks like US flag auto mfrs are slowly adapting, although we can see the recent experience of bankruptcy playing a role there to.

On another note (or 2), I had to google ISTM. I think we need to come up with some internet jargon for which ISLM is appropriate. In light of JQ’s adressing Lemuel Pitkin as LM above in point 6, perhaps we could understand ISLM to mean IT SEEMS to LeMuel pitkin. Furthermore, if JQ wants to start addressing me or referring to me as IS (not that it has anything to do with my pseudonym), I would be honored.

22

Metatone 08.26.10 at 3:55 pm

bianca steele:

I don’t have my old papers to hand, otherwise there’s a longer list, but Andrew Abbott’s “The System of Professions” is a way into this stuff…

23

Lemuel Pitkin 08.26.10 at 4:22 pm

anybody with experience of organising a union will likely agree that wages come first. Organise a meeting about the annual wage roud – a hundred people turn up. Organise it about anything else – six people turn up.

You know, I do have some experience in union organizing. And I talk regularly with people who have a lot more. And I can’t agree with this. In fact I remember having this exact conversation a few years ago, with a friend working on a campaign to organize the nurses, at a hospital in western PA IIRC. Why, I asked, are people willing to risk their jobs and make all these sacrifices for an extra $50 a week? “Oh, it’s not about the money,” he said. “It’s about the chance to say ‘fuck you’ to their boss.”

24

Lemuel Pitkin 08.26.10 at 4:57 pm

what makes you say that current Anglo/American capitalism is particularly damaging to the professional ethos? I can’t say I find people from those countries particularly less “professional”

I should be clear that the professional conscience isn’t limited to work we call “professional,” but potentially applies to work of any kind. Studs Terkel’s classic Working has a whole series of wonderful examples, from a stonemason to a parking-lot attendant to a gravedigger, of people who take intense pride in their work. Barbara Garson, in her wonderful All the Livelong Day describes more contemporary examples, like the airline employee who goes out of her way to help people switch flights, not out of kindness, and certainly not because she’s required to — in fact she is penalized for spending extra time on the phone — but simply because she needs to feel her work is being done well. Or this, from Primo Levi’s The Drowned and the Saved:

The Fossano bricklayer who saved my life … detested Germany, the Germans, their food, their language, their war; but when they set him to build protective walls against the aerial bombs he built them straight, solid, with well-staggered bricks and as much mortar as was required, not in deference to orders but out of professional dignity.

How does capitalism undermine this? First, by routinizing and deskilling work to the point where it no longer involves the capabilities and commitment of the individual worker, and so is impossible to take pride in. (The best account of this remains IMO Braverman’s Labor and Monopoly Capital, but you could go back to Adam Smith, who thought the same thing.) Second, by breaking the social ties between the worker and the work — removing any sense of ownership (formal or informal) over the job or the firm. Third, by attempting to create measurements and incentives for every aspect of work. The logic of attempting to match pay and outcomes exactly is people only are, and only should be, interested in the money payment. It’s explicitly to impose the “one best way” of doing the job (the phrase is from Taylor, the father of scientific management) of doing a job from above, and minimize the worker’s autonomous ability to decide the best way for him or herself.

Of course this isn’t universal. Lawyers still have plenty of professional conscience (altho one does hear of pressure to routinize legal work.) Computer programming seems to have mostly resisted deskilling so far. There’s plenty of skilled, autonomous blue-collar jobs left in construction. And so on. But the tendency is real and, I think, destructive.

25

Lemuel Pitkin 08.26.10 at 5:08 pm

“Policies that Crowd out Reciprocity and Collective Action.” In Herbert Gintis, Samuel Bowles, Robert Boyd, and Ernst Fehr, Moral Sentiments and Material Interests: The Foundations of Cooperation in Economic Life.

Yes, I’ve learned a lot about this stuff from Sam. One of his favorite examples is giving blood — it’s a common finding that when you go from a system in which there are no payments for blood donations to one in which there are, the amount of blood given typically goes down, sometimes way down. Obviously this runs counter to the neoliberal view of the world, but it makes sense. Once you establish the idea that giving blood is something one gets paid for, you lose the idea that it’s something one does as a civic duty. In effect, if you plotted blood donations against payment rates, you’d see two peaks: one where payments are zero, and one where they’re quite high.

There’s a clear analogy to what happens in the workplace.

26

Hidari 08.26.10 at 6:38 pm

‘Perhaps the most important is the claim that the breakdown of the Keynesian system of demand management was the result of an exogenous event – the oil price shock of October 1973, which arose out of the embargo imposed by OPEC during the 4th Arab-Israeli war.’

Y’see when I heard that meme (which is doubtless an oversimplification) it had a rather major addition…..in the form I head it in it was:

‘The Keynesian system broke down because of the negative impact the Vietnam War was having on the US economy which dragged the rest of the world down…..and the system then received a killer blow from the 1973 oil shock’.

The collapse of Bretton Woods (which was also partly caused by the Vietnam War) is also perceived to have played a part.

I’m not quite old enough to remember the early 1970s, but it is obvious to anyone with even a cursory knowledge of the period that it is not true, (and nobody serious argues that it is true) that everything was fine and dandy in either the European or American economies in 1972.

27

Hidari 08.26.10 at 6:51 pm

Incidentally, neither (contemporary) Marxists, nor Marx, stated that history is ruled by ‘immutable laws’. Marx may have believed that when a country ‘turned capitalist’ so to speak, then there are certain tendencies in that country that will tend to develop, ceteris paribus, but it’s not at all clear that he believed that these tendencies had the same ontological status as (say) Boyle’s Law, nor is it clear that he believed that they had the same end: that is, to make quantitative deterministic predictions of the results of experiments.

28

John Quiggin 08.26.10 at 7:09 pm

The Vietnam part of the story is closer to the mark, but the budget deficits associated with Vietnam (and the Great Society) were considered acceptable, at least in part, because of (in my view, misapplied) Keynesian arguments. This is covered in the book – a draft is still online at zombiecon.wikidot.com.

As regards “immutable”, I did say it was an oversimplification, and I agree that contemporary Marxists are less likely to think this way. But, in its heyday, Marxism gained a lot of its support from the belief that victory was fore-ordained thanks to the laws of history discovered by Marx, and statements like ” Its [the bourgeoisie’s] fall and the victory of the proletariat are equally inevitable.” gave a pretty strong basis for this

29

chris 08.26.10 at 7:15 pm

I happened to be looking at a historical CPI chart and remembered this thread, and in fact, US inflation from the late 60s through 1972 was only around 4% — granted this is more than the early 60s, but hardly economy-destroying; in fact, most of the Reagan administration *after* inflation was “tamed” by the Volcker recession had similar inflation levels to the late 60s-early 70s period.

It wasn’t until 1974-1981 that the serious inflation kicked in, at least in the US. So I’m not so sure the oil shock is off the hook (and Jimmy Carter back on it) after all.

30

Hidari 08.26.10 at 7:17 pm

John

I have no problems with the second paragraph above, but it really has to be made crystal clear that ‘scientific socialism’ owes little or nothing to what Marx actually said and did.

You must remember that Marx was, amongst other things, a politician. Indeed, his most famous work is a manifesto for a political party. When politician X states that ‘it is inevitable that my party will win the election’ is he play-acting at being a scientist, and proposing immutable scientific laws of political development?

31

Davis X. Machina 08.26.10 at 7:53 pm

@LMThe three phases you mentioned: routinizing, reducing ownership, and Taylorizing (incentives, the ‘one right way’) are at the heart of all the most popular school reform initiatives.

32

John Protevi 08.26.10 at 7:58 pm

Davis X. Machina (still the best screen name evah!) @31: you’re right, and it’s at the university level too, not just primary and secondary level. Though still resticted for the most part to instructors teaching service courses (e.g., English comp; intro Math; etc.) with standardized syllabi across sections, etc.

33

Mitze 08.26.10 at 11:32 pm

Nixon never cared about enforcing price controls. Inflation temporarily dropped from pure jawboning and memories of WW2 price controls. Then business cottoned on that lack of enforcement was not due to tardiness in implementation but tacit White House policy. Inflation went up to pre-“control” levels, and then doubled due to the oil shock. Inflation was not on average much higher prior to the shock than the 4% inflation goal during Reagan’s years. Granted, that kind of inflation rate is not good when trying to maintain a gold standard, but a gold standard is not a necessity for Keynesian policies.

34

Jason McCullough 08.27.10 at 3:31 am

Thanks to PHB’s comment about the decline of dockworker employment, driving home today I realized Jon Bon Jovi’s Living on a Prayer is actually kind of about 1980s US de-industrialization.

35

John Quiggin 08.27.10 at 4:06 am

Actually, the US inflation rate had reached 7 per cent in the months immediately before October 1973 – it kept rising after the shock but there was no obvious break in trend.

http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=3

36

desert Pete 08.27.10 at 7:58 am

Quiggin,

I’m having a little trouble with your premise. The inflationary pressure of the 70’s didn’t come from the application Keynsian policy. It came about because the Fed opened up the spigots as far as they would go to help Nixon get re-elected. And of course there was already some residual inflationary pressure due to LBJs determination to have both guns and butter (i.e. his war and social reform).

Are you willing to argue that actions of LBJ and Nixon were grounded in Keynsian doctrine? And if not, how can you call the consequences of these actions the breakdown of the Keynesian economic order?

37

RBurns 08.27.10 at 11:47 am

Stupid is a relative term and I have alot of relatives. But my meagre understanding has that when Mr Quiggin refers to as Keynesian he’s refering to those in the sixties and seventies who would employ fiscal policy as ballast against the business cycle. As I understand Keynes, he says the way to prime the the economic pump in a depression is with government spending. The former is making a general principle from the latter’s special case. I have similar issues with the Laffer Curve. There is possible state of affairs where lowering marginal tax rates generates business investment and grows the economy to the point that tax revenues increase. But people try to generalize from the exception.

38

Lemuel Pitkin 08.27.10 at 3:54 pm

RBurns-

You are half right — it’s true that Keynes did not write much about countercyclical demand management. However, he strongly believed that depression was the normal state of mature capitalist economies. He argued that the “marginal efficiency of capital” — the expected rate of return on new investment — would tend to fall over time but that the long-term rate of interest would not fall, leaving a chronic gap between desired savings and investment at full employment. (That the interest rate is by far the most important “sticky price” is one of the less appreciated parts of Keynes’ system.) So he anticipated a secularly rising share of government spending and a declining role for private finance — in his famous phrase, “a more or less comprehensive socialization of investment” and the “euthanasia of the rentier.”

On various occasions, Keynes explicitly rejected the metaphor of pump-priming, which suggests that increased public spending is a temporary expedient.

He did acknowledge that capitalist economies might sometimes reach full employment, when the classic economics of scarcity, focused on allocative efficiency, would come back into force. But he basically saw those times as limited to total wars.

But fundamentally, Keynes thought that the special case was a capitalist economy with private investment operating at full employment, and that the case he was describing was the general one. That’s why he called his book The General Theory.

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chrismealy 08.27.10 at 7:06 pm

Thanks everybody who replied to my question in the Drezner post. Lemuel Pitkin, thanks for the heads up on Glyn. I started reading his last book, “Capitalism Unleashed,” and it’s terrific.

I think I understand why Post-Keynesians are so big on coming up with incomes policies, because they’re worried if we ever have full employment again we’ll have a replay of the 1970s.

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James Kroeger 08.28.10 at 11:00 am

Many thanks to John Quiggin for re-visiting the topic of full-employment vs. the inflation of the 1970’s. And thanks to Lemuel Pitkin for asking: ”

Second, assuming our horizon is a full-employment capitalist economy with a strong welfare state, how does the firm operate when the threat of unemployment is no longer effective?

Firms would be forced by competition in the labor market to operate with a work environment where managers are far more solicitous to the hired help than we see today. Management teams would discover that they are able to retain good employees if/when they are able to please them. They’ll realize that they need to offer something more than just financial compensation to get people to work for them; they’ll also have to offer them an environment of respect.

Quid pro quo would continue to be the basis of the employment contract. Certain violations of the contract would provide sufficient grounds for dismissal, but employers might find themselves doing a bit more soul-searching when the time comes to give someone the sack.

Of course, we already how employers in general would respond to a chronic labor shortage. A number of high-tech firms has had to figure out how to deal with just such a situation. Yes, they offered more money, but when they still still weren’t able to get the talent they needed, they hired individuals with less attractive resumes, whom they hoped they could turn into valued employees after providing them with a good deal of additional training/education.

Employers of unskilled labor might need some federal assistance to help them adjust to a new relationship with labor. They might not like the loss of raw power they used to enjoy, but there is no reason for them to stop running their businesses as long as they are continuing to earn profits.

Profits exist in full-employment economies because demand is strong and plenty of customers are around who have enough money to spend on their output. What does the working class do with extra dollars/pounds? They hand them right back to the business class through their expenditures.

Some individuals may be revealed to be virtual sociopaths due to their failure to hold any job for any length of time, but the numbers of such people is likely to be very small, due to extraordinary peer pressure. If lazy people actually exist in a social environment where there are more jobs available than there are people available, then they will be revealed, and society will find a solution to a rather small problem.

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Henri Vieuxtemps 08.28.10 at 11:13 am

@40, Yes, they offered more money

Most notably, I think, they offered stock options – shared ownership. That’s what has to happen.

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Earnest O'Nest 08.28.10 at 12:12 pm

If lazy people actually exist in a social environment where there are more jobs available than there are people available, then they will be revealed, and society will find a solution to a rather small problem.

I for one am looking forward to being revealed because now I realize that I am a problem who is looking for a solution. Also, we love the smell of ‘extraordinary peer pressure’ in the morning, it is the one thing that has the ability to unite the political extremes.

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engels 08.28.10 at 12:55 pm

If lazy people actually exist in a social environment where there are more jobs available than there are people available, then they will be revealed, and society will find a solution to a rather small problem.

Nothing against full employment but am I the only who finds this sentence really creepy?

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Earnest O'Nest 08.28.10 at 2:22 pm

It is hard to choose between the creepiness of ‘your unemployment being revealing’ or merely ‘a way of making the employment of others more economically viable (i.e. less rewarding)’.

On reflection: the only thing I have against full employment is my employment. I tend to be sympathetic to those who think like me, though.

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James Kroeger 08.28.10 at 6:44 pm

Earnest 42:
I for one am looking forward to being revealed because now I realize that I am a problem who is looking for a solution. Also, we love the smell of ‘extraordinary peer pressure’ in the morning, it is the one thing that has the ability to unite the political extremes.

The ‘problem’ being addressed is the presumed laziness of the poor, and not the laziness of the wealthy. If you are both lazy and poor, then you suffer from a deplorable flaw in your character. If you are lazy and well-off, then your laziness is presumed to be a reward for virtue.

Concern about the laziness of the poor is something you see mostly among the working poor. It is their issue.

What ultimately matters, of course, is benefiting from a fully productive society. The poor benefit, everyone benefits. Recognition of that fact establishes a “value” that most people share.

One consequence: a general expectation among the majority that everyone “pulls his own weight.” If you do so you are considered worthy of esteem. If not, it’s disapproval.

That’s the way the world works.

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Lemuel Pitkin 08.28.10 at 6:58 pm

Re 45:

When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. … The love of money as a possession … will be recognised for what it is, a somewhat disgusting morbidity, one of those semicriminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. …

I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue-that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.

— John Maynard Keynes, “Economic Possibilities for Our Grandchildren”

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James Kroeger 08.28.10 at 8:17 pm

Engels:

If lazy people actually exist in a social environment where there are more jobs available than there are people available, then they will be revealed, and society will find a solution to a rather small problem.

Nothing against full employment but am I the only who finds this sentence really creepy?

I suppose I did word that in a curious way.

“they will be revealed” is supposed to make sense within the context of a political debate: between the Republicans, who like to suggest that all poor people are simply lazy, and those bleeding heart Democrats, who claim that poor people are generally victims [of unemployment, mostly].

My personal, unsubstantiated belief is that ‘lazy’ poor people are typically victims, but like Barack Obama, I do acknowledge that ‘personal responsibility’ is a factor that comes into play. The key question is how much of a factor is it? I say that the answer to that question would be revealed if/when society finally achieves the ideal of full-employment.

If this ideal were ever achieved, I believe it would be very difficult to find any individuals who could be called ‘lazy’ without reservation. But if society still wanted to take on a problem of such minor importance, I’m sure that a noble outreach effort could be launched to rescue those few remaining lazy people from the throes of ignominy.

Not all that creepy, actually…

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LFC 08.28.10 at 9:46 pm

JQ @4:
“it’s necessary to make the case that there are limits to the extent to which equality can be pursued by increasing wages and reducing profits.”

With reference to profits: It’s often argued, I believe, that one of the main aims of Reaganism/Thatcherism/neoliberalism was to restore and enhance corporate profit margins. To what extent had this part of the neoliberal program succeeded before the financial crisis hit? Some, e.g. I. Wallerstein, argue that long-term structural forces in the global economy are putting and will continue to put downward pressure on corporate profits and that this represents a definite problem for capitalists and capitalism. Is this just pouring the old Marxist wine of the tendency of the rate of profit to fall into new bottles? And even if it is, could it still be correct? Any thoughts from the economists (and/or non-economists) here?

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James Kroeger 08.29.10 at 1:01 am

John Quiggin:

In particular, it is important to avoid relying on easy excuses, such as the 1973 oil shock and to face the fact that the emergence of stagflation reflected serious failures in the dominant version of Keynesian macro theories, and in the political and industrial strategies of the social democratic, left, and labor movements.

I wonder if Keynesian macro theories would have been perceived as failed if wisely thought-out credit controls had been implemented?

I’m not intimately familiar with the categories that were primarily responsible for the inflation spikes of 1974 and 1980, but I am aware that most of the new money that enters the economy during periods of high inflation does so initially through the lending of banks, and not as a consequence of the unreasonable demands of unionized wage earners.

Once that new [borrowed] money is spent, it will either inflate the incomes of only/primarily the wealthy (as we have seen during the last couple of Republican decades) or some of it will be shared with the wage earners, enabling their incomes to become inflated a bit as well. From this perspective, it makes little sense to blame labor leaders for driving the pace of inflation with their greed.

Properly designed credit controls have never been tried in America. (The Fed did impose “credit controls” in 1980, but alas, they were voluntary.)

http://www.nd.edu/~nmark/MonetarPolicy/Paul%20Volker.pdf

Properly designed credit controls would set an absolute limit on the number of dollars/pounds/euros that banks are permitted to lend. It is an absolute certainty that if these restrictions were obeyed, disinflation would soon follow. If stringent credit controls had been implemented in 1980 and they had been allowed to work, would we even be discussing the supposed failures of “the dominant version of Keynesian macro theories?”

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Earnest O'Nest 08.29.10 at 9:15 am

Hey James, how did you imagine curing tthe lazy from ‘the throes of ignominy’? Concretely, if you don’t mind. Maybe the lazy and well-off are the role models of the poor and lazy; and both of us believe that we are so small a problem to the industrious that they will in the end realize it is in their best interest to leave us Carping our Diems in peace and quiet. We offer our creativity in order to rid both the lazy and industrious from poverty, at which point there is no point to us being prosecuted.

The lilies in the bloody field may not fucking toil, they do what it takes to make life tolerable.

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James Kroeger 08.29.10 at 12:56 pm

Earnest 50,

Hey James, how did you imagine curing tthe lazy from ‘the throes of ignominy’?

Is is actuallly possible that you didn’t notice the sardonic intent of my comment, Earnest?

Let’s see…

But if society still wanted to take on a problem of such minor importance, I’m sure that a noble outreach effort could be launched to rescue those few remaining lazy people from the throes of ignominy.

If you had been paying attention, you might have noticed that I agree with you that the lazy “are so small a problem to the industrious that they will in the end realize it is in their best interest to leave us Carping our Diems in peace and quiet.

How do I imagine an effort to cure the lazy from the throes of ignominy might unfold? Well, I suppose it would involve the use of a variety of expressions of approval and disapproval, as well as an effort to be ‘helpful’ in various other ways. I imagine that an effort would be made to make the lazy feel ‘included,’ and to inspire them to feel eager to please the other members of the tribe.

———————————–

In an attempt at synthesis, I would argue that an individual can be wholly committed to the ideals of tolerance without feeling obliged to accept different viewpoints/values/etc. as “equally legitimate.” To ‘tolerate’ is merely to eschew the use or threat of physical violence, or extreme punitive sanctions, to motivate people to ‘be good.’ But it does not mean that you must abandon any and all efforts to persuade other people to ‘be good.’

To be tolerant is to rely primarily on logic and persuasive argument to change people’s opinions. But it does not also mean that you are proscribed from expressing criticism = disapproval of those types of actions that are recognized as immoral. Indeed, I would say that one has a moral obligation to express disapproval of immoral behavior, or at least to withold expressions of approval.

Does that sound like a libertarian nightmare, Earnest?

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Earnest O'Nest 08.29.10 at 1:27 pm

It does. It really does. But carry on regardless.

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PHB 08.30.10 at 12:23 am

The whole debate about keynsianism is off base in my view.

Unlike later charlatans, Keynes did not claim to have a complete understanding of the economy or how to optimize output. He did claim that the specific situation in the Great Depression was due to certain causes and he did predict unpleasant outcomes from the WWI reparations. But he didn’t claim that fiddling about with money was the primary cause of a good or a bad economy.

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