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October 13, 2010

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"Bourgeois Dignity: A Revolution in Rhetoric"

Posted: 13 Oct 2010 12:33 AM PDT

Deirdre McCloskey says the industrial revolution was caused by the "idea of bourgeois dignity and liberty":

Bourgeois Dignity: A Revolution in Rhetoric, by Deirdre McCloskey, Cato Unbound: A big change in the common opinion about markets and innovation, I claim, caused the Industrial Revolution, and then the modern world. The change occurred during the seventeenth and eighteenth centuries in northwestern Europe. More or less suddenly the Dutch and British and then the Americans and the French began talking about the middle class, high or low — the "bourgeoisie" — as though it were dignified and free. The result was modern economic growth.
That is, ideas, or "rhetoric," enriched us. ... The cause was not in the first instance an economic/material change — not the rise of this or that class, or the flourishing of this or that trade, or the exploitation of this or that group. To put the claim another way, our enrichment was not a matter of Prudence Only, which after all is a virtue possessed by rats and grass, too. A change in rhetoric about prudence, and about the other and peculiarly human virtues, exercised in a commercial society, started the material and spiritual progress. Since then the bourgeois rhetoric has been alleviating poverty worldwide, and enlarging the spiritual scope of human life. ...
In other words, I argue that depending exclusively on materialism to explain the modern world, whether right-wing economics or left-wing historical materialism, is mistaken. ...
The Big Economic Story of our own times is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy, and came to attribute a dignity and a liberty to the bourgeoisie formerly denied. And then China and India exploded in economic growth. The important moral, therefore, is that in achieving a pretty good life for the mass of humankind, and a chance at a fully human existence, ideas have mattered more than the usual material causes. ... And contrary to the usual declarations of the economists since Adam Smith or Karl Marx, the Biggest Economic Story was not caused by trade or investment or exploitation. It was caused by ideas. The idea of bourgeois dignity and liberty led to a rise of real income per head in 2010 prices from about $3 a day in 1800 worldwide to over $100 in places that have accepted the Bourgeois Deal and its creative destruction.
Innovation backed by ideology, then, promises in time to give pretty good lives to us all. ... 
I claim that a true liberalism, what Adam Smith called "the obvious and simple system of natural liberty," contrary to both the socialist and conservative ideologues, has the historical evidence on its side. Despite the elements of regulation and corporatism defacing it (and the welfare programs improving it), it has worked pretty well for the poor and for the people for two centuries. I reckon we should keep it — though tending better to its ethics. ...
I suggest ... that we recoup the bourgeois virtues, which have given us the scope, in von Humboldt's words, to develop the highest and most harmonious of our powers to a complete and consistent whole. We will need to abandon the materialist premise that reshuffling and efficiency, or an exploitation of the poor, made the modern world. And we will need to make a new science of history and the economy, a humanistic one that acknowledges number and word, interest and rhetoric, behavior and meaning.

Greg Clark disagrees:  Why Economics MUST Explain the Modern World.

links for 2010-10-12

Posted: 12 Oct 2010 11:02 PM PDT

Unlearned Lessons from the Economic Crisis

Posted: 12 Oct 2010 08:01 AM PDT

I have a new column:

Unlearned Lessons from the Economic Crisis, by Mark Thoma: President Obama's former White House Chief of Staff Rahm Emanuel said that "you never want a serious crisis to go to waste." Though he had something different in mind when he made this statement, a severe crisis, for all its bad parts, is an opportunity to learn important lessons. But that opportunity is wasted if the lessons are missed, or, worse, if we learn the wrong things.
There are several important ways in the present crisis has been wasted, making it much more difficult to reduce the frequency and severity of future economic crises. The first and most important is that unregulated markets — free markets — do not necessarily produce optimal outcomes. ... The second most important lesson that we have failed to learn has to do with fiscal policy. Many people have concluded that fiscal policy doesn't work, but the experiment upon which this conclusion is based was flawed. ... A third important unlearned lesson involves the financial bailout ...
The overarching lesson in all of this is that getting government out of the way isn't always the best path to prosperity. The crisis should have taught us that government has an essential role to play in preventing problems from occurring in the economy, and in correcting problems when they occur despite our attempts to prevent them. But, unfortunately, due to poorly executed policy, political posturing, obstructionism in Congress, and ineffective rebuttal from the administration, that's not the lesson that has been learned. [full column]

Eichengreen and Irwin: How to Prevent a Currency War

Posted: 12 Oct 2010 07:56 AM PDT

Eichengreen and Irwin say aggressive domestic monetary policy is the key to avoiding a trade war:

How to Prevent a Currency War, by Barry Eichengreen and Douglas Irwin, Commentary, Vox EU: Three years into the financial crisis, one might think that the world could put Great Depression analogies behind it. But they are back, and with more force than ever. Now the fear is that currency warfare, leading to tariffs and retaliation, could cause disruptions to the international trading system as serious as those of the 1930's.
There's good reason to worry, for the experience of the 1930's suggests that exchange-rate disputes can be even more dangerous than deep slumps in terms of generating protectionist pressures. ...
In the 1930's, the countries that raised their tariffs and tightened their quotas the most were those with the least ability to manage their exchange rates – namely, countries that remained on the gold standard. ... But trade restrictions were a poor substitute for domestic reflationary measures, as they did little to arrest the downward spiral of output and prices. They did nothing to stabilize rickety banking systems. By contrast, countries that loosened monetary policies and reflated not only stabilized their financial systems more effectively and recovered faster, but also avoided the toxic protectionism of the day.
Today, the United States is in the position of the gold-standard countries in the 1930's. It can't unilaterally adjust the level of the dollar against the Chinese renminbi. Employment growth continues to disappoint, and fears of deflation will not go away. Lacking other instruments with which to address these problems, the pressure for a protectionist response is growing.
So what can be done to address the situation without getting into a beggar-thy-neighbor, retaliatory free-for-all? In the deflationary 1930's, the most important way that countries could subdue protectionist pressure was to use monetary policy actively to push up the price level and stimulate economic recovery. The same is true today. If fears of deflation were to recede, and if output and employment were to grow more vigorously, the pressure for a protectionist response would dissipate.
The villain..., then, is not China, but the US Federal Reserve Board, which has been reluctant to use all the tools at its disposal...
Of course, with China pegging the renminbi to the dollar, the Fed would, in effect, be reflating not just the US but also the Chinese economy. ... China might not be happy with the result. Inflation there is already too high for comfort. Fortunately, the Chinese government has a ready solution to this problem: that's right, it can let its currency appreciate.

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