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August 24, 2011

Latest Posts from Economist's View

Latest Posts from Economist's View

The Nobel Laureates Meetings at Lindau

Posted: 24 Aug 2011 03:33 AM PDT

Here's today's lineup:

09:30 - 11:00 Opening Ceremony // Welcome Address of German Federal President Christian Wulff // Induction Honorary Senate //
Plenary Panel Discussion "Sustainability in International Economics" with Laureates McFadden, Myerson, Stiglitz and Young Economists
11:00 - 11:30 Coffee Break
11:30 - 12:00 Prof. Dr. Peter A. Diamond Economic Sciences Search and Macro  
12:00 - 12:30 Prof. Dr. Christopher A. Pissarides Economic Sciences The Future of Work in Europe  
12:30 - 14:30 Lunch Break
14:30 - 16:00 Panel "Demographic Change, Economics and Politics": Peter A. Diamond, Sir James A. Mirrlees, Christopher A. Pissarides, Edward C. Prescott (Chair: Martin Wolf, Financial Times)
16:30 - 18:00 Afternoon Discussions with Laureates Diamond, Mortensen and Pissarides (for Laureates and Young Economists only)
20:00 - 22:00 Get-Together Evening at Congress Venue Inselhalle

The purpose of the meetings is to "provide a globally recognised forum for the exchange of knowledge between Nobel Laureates and young researchers." These young researchers -- at least the ones interested in macro -- are the ones who will be most likely to shake off the shackles of the past and develop new theories of the macroeconomy. So I'll be curious to see how that topic is handled. Will Stiglitz push hard in this direction and if so, how will the other Laureates, e.g. Phelps and Prescott, respond? Note that Prescott's abstract starts with "This is the golden age of aggregate economics." Stiglitz's abstract, on the other hand, begins with "The standard macroeconomic models have failed, by all the most important tests of scientific theory." Those two talks aren't until later in the week, but as I said I'll be very interested to see how this critical issue is presented to the upcoming generation of economists.

Update: I'm glad Stiglitz is here. In the opening panel, he began the discussion of macro models, and said (to applause) that macroeconomic models played a role in creating policies that caused the crisis. He also attacked austerity. Without him, there wouldn't be a strong advocate for these views at this meeting.

Bhagwati: The Outsourcing Bogeyman

Posted: 24 Aug 2011 03:24 AM PDT

Jagdish Bhagwati says outsourcing myths are standing in the way of free trade initiatives ("If free trade is to regain the support of statesmen who now hesitate over liberalizing trade with developing countries, the myths that turn outsourcing into an epithet must be countered"). He says we shouldn't worry about outsourcing jobs because we can always use protectionism to save them:

there are manmade restrictions to outsourcing particular types of expertise: professional organizations often intervene to kill outsourcing simply by requiring credentials that only they can provide. Thus, foreign radiologists need US certification before they are allowed to read the x-rays sent from the US. Until recently, only two foreign firms qualified.

So no need to worry. If assembly line work is threatened by outsourcing, simple, just require US certification for the workers who produce these goods.

Don't get me wrong, I think free trade is almost always the best answer. But in supporting it, we shouldn't hide from the short-run distributional consequences that fall on some segments of the population. Acknowledging that the costs exist, and then addressing them is a much better route to preserving free trade inititatives.

"A New look at the Industrial Revolution"

Posted: 24 Aug 2011 03:06 AM PDT

I'm curious to read the comments on this one:

Opening Pandora's box: A new look at the industrial revolution, by Tony Wrigley, Vox EU: The most fundamental defining feature of the industrial revolution was that it made possible exponential economic growth – growth at a speed that implied the doubling of output every half-century or less. This in turn radically transformed living standards. Each generation came to have a confident expectation that they would be substantially better off than their parents or grandparents. Yet, remarkably, the best informed and most perspicacious of contemporaries were not merely unconscious of the implications of the changes which were taking place about them but firmly dismissed the possibility of such a transformation. The classical economists Adam Smith, Thomas Malthus, and David Ricardo advanced an excellent reason for dismissing the possibility of prolonged growth.
Smith and Ricardo as growth pessimists
They thought in terms of three basic factors of production, i.e. land, labor, and capital. The latter two were capable of indefinite expansion in principle but the first was not. The area of land which could be used for production was limited, yet its output was basic – not just to the supply of food but of almost all the raw materials which entered into material production. This was self-evidently true of animal and vegetable raw materials – wool, cotton, leather, timber, etc. But it was also true of all mineral production since the smelting of ores required much heat and this was obtained from wood and charcoal. Expanding material production meant obtaining a greater volume of produce from the land but that in turn meant either taking into cultivation land of inferior quality, or using existing land more intensively, or both. This necessarily meant at some point that returns both to capital and labor would fall. In short, the very process of growth ensured that it could not be continued indefinitely. This was a basic characteristic of all "organic" economies, those which were universal before the industrial revolution. Adam Smith summarized the problem as follows:
In a country which had acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other countries, allowed it to acquire; which could, therefore, advance no further, and which was not going backwards, both the wages of labor and the profit of stock would probably be very low. (Smith 1789)
He went on to spell out in greater detail what his statement implied for the living standards of the bulk of the population and for the return on capital. When Ricardo tackled the same issue he came to the same conclusion and was explicit in insisting that the resulting situation "will necessarily be rendered permanent by the laws of nature, which have limited the productive powers of the land" (Ricardo 1817).
The constraint stressed by the classical economists can be expressed differently in a way that highlights the change that transformed the possibilities of expanding output and enabled an industrial revolution to take place.
Every form of material production involves the expenditure of energy and this is equally true of all forms of transport. In organic economies the dominant source of the energy employed in production was the process of photosynthesis in plants. The quantity of energy which reaches the surface of the earth each year from the sun is vast but photosynthesis captures less than 0.5% of the energy in incident sunlight.
Photosynthesis was the source of mechanical energy which came predominantly from human and animal muscle power derived from food and fodder. Wind and water power were of comparatively minor importance. Photosynthesis was also the source of all heat energy used in production processes since the heat came from burning wood.
The implications of this situation in limiting productive potential are clear and dire. The land constraint was a severe impediment to growth. It is epitomized in a phrase of Sir Thomas More. He remarked that sheep were eating up men. An expansion of wool production meant less land available to grow food crops. Or again, it is easy to show that, if iron smelting had continued to depend upon charcoal, a rise in the production of iron to the scale which became normal in the mid-nineteenth century would have involved covering the entire land surface of Britain with woodland.
Breaking free from photosynthesis
Access to energy that did not spring from the annual product of plant photosynthesis was a sine qua non for breaking free from the constraints afflicting all organic economies. By an intriguing paradox, this came about by gaining access to the products of photosynthesis stockpiled over a geological time span. It was the steadily increasing use of coal as an energy source which provided the escape route.
It was simple to substitute coal for wood as a solution to the problem of increasing the supply of heat energy, at least where the heat generated by burning coal and the object to be heated were separated by a barrier that allowed the transfer of heat but prevented chemical exchange.
Coal could, for example, readily be substituted for wood to heat salt pans or dye vats. It could also readily be used as a source of domestic heat in an open fire though it was some time before trial and error gave rise to a chimney which could both improve combustion and evacuate smoke. The early expansion of coal production was largely for domestic use, dominated by the supply of coal from coal pits near the Tyne to London. The east coast coal trade expanded so greatly from Tudor times onwards that by the end of the seventeenth century roughly half the tonnage of the merchant navy was devoted to this trade. But it took many decades of trial and error to enable coal or coke to be substituted for charcoal in smelting iron because the transfer of chemical impurities prevented a good quality result.
Until the early eighteenth century, coal, although used increasingly by the English, offered a solution only to the problem of supplying heat energy. Mechanical energy remained a matter of muscle power and was therefore limited by the photosynthesis constraint. Hence the central importance of the slow development of an effective steam engine that made it possible to convert heat energy into mechanical energy. Once this was possible the problem of limited energy supply was solved for the whole spectrum of material production and transport.
The phasing and scale of the energy revolution
In recent years, it has become possible to quantify the phasing and scale of the energy revolution since scholars in a number of European countries have agreed a common set of conventions for the description and measurement of energy consumption. They have produced illuminating data.

Figure 1. Annual energy consumption per head (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70


Source: Wrigley (2010).

Figure 1 depicts the growth in the annual consumption of energy per head in England over a period of three centuries. In Tudor times, coal was only a minor contributor to national energy consumption and the energy scene was dominated by the mechanical energy provided by people and draught animals which accounted for roughly half the energy total; and by firewood which supplied the bulk of the remainder. Already by the beginning of the eighteenth century half of all energy consumption came from coal and by the mid-nineteenth century coal supplied well over 90% of the total.
A similar depiction of energy consumption in Italy shows that at the time of unification its energy situation bore a strong similarity to that of England in Tudor times. Indeed as more information becomes available for other European countries the strong similarities between all countries whose economies remained organic is striking. None could break free from the constraint which Adam Smith described unless they turned to the accumulated product of photosynthesis in the past rather than depending on the annual cycle of current photosynthesis. Coal consumption per head in England rose at a remarkably uniform rate over the whole three centuries covered in Figure 1, roughly doubling every half-century.
As may be seen in Table 1, the nature of the change which took place in energy consumption is still more dramatic if expressed in absolute rather than per caput terms because the population of England more than quintupled from 3.036 million in 1561 to 16.732 million in 1851. All energy sources grew substantially in absolute terms (other than firewood) but in many cases grew less quickly than population. In absolute terms coal output was more than 240 times greater at the end of the period than at its beginning.


The implications of the new age, which were invisible to the classical economists, were only fully appreciated much later by the generation of Karl Marx. He and his contemporaries saw clearly that output was rising rapidly and that it was reasonable to expect it to continue to do so, though they differed widely about the implications of this new situation.
Pandora's box?
In Greek mythology, Pandora was created by Zeus to enable him to punish Prometheus for having stolen fire from the sun to animate his man of clay. Zeus intended that Pandora should marry Prometheus and had given her a jar with the instruction that she should present the jar to the man she married. She was ignorant of its contents. Prometheus was suspicious and repulsed her. She instead married his brother Epimetheus, who ignored a warning about acting imprudently and opened the jar. In so doing he released into the world a host of previously unknown and malign forces.
The story has parallels with the occurrence of the industrial revolution. Contemporaries were not aware of the radical and irreversible nature of the changes which were in train. The analogy is not, of course, exact. On balance, the forces released by the industrial revolution may be thought beneficial rather than malign but the balance is a fine one.
Every increase in the powers of production has been offset by a matching increase in the powers of destruction, exemplified perhaps most vividly by the atomic bomb. And the possible impact of the massive increase in the burning of fossil fuels on the environment may also call in question the future stability of the gains which have been made in productive power.
The great bulk of the literature about the industrial revolution has been devoted to explaining how it began. This has been to the neglect of the equally important question of why the growth did not grind to a halt as all previous experience suggested was inevitable. It is in this context that the history of energy usage is critical to the understanding of the changes which took place.
Societies whose productive capacities were limited by the annual product of photosynthesis operated within severe and seemingly immovable constraints. Societies which switched to depending on the stored products of photosynthesis in the form of fossil fuels were released from these constraints, though whether the immense benefits which were thus made possible will prove durable and stable remains an open question.
Ricardo, D (1817), On the principles of political economy, P Sraffa (ed.), Cambridge (1951), 125-126.
Smith, Adam (1789), An inquiry into the nature and causes of the wealth of nations, 5th Edition, E Cannan (ed.), London (1961), Volume I, p.106.
Wrigley, EA (2010), Energy and the English industrial revolution, Cambridge University Press.

Sharing the Burden

Posted: 24 Aug 2011 02:07 AM PDT

It's true that raising taxes on the wealthy won't, by itself, solve the long-run deficit problem. But it can still contribute quite a bit to the solution:

...Returning the average tax rate on the top 1 percent of taxpayers to its 1996 level of 29 percent could raise about $100 billion a year, or $1 trillion over the next decade.
By itself, of course, that wouldn't solve the country's long-term fiscal problems. ...  But $1 trillion over ten years is real money and would make a real dent in the deficit.

links for 2011-08-23

Posted: 23 Aug 2011 10:04 PM PDT

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