Pages

Tuesday, December 31, 2019

The Story of Viner's Draftsman

The story of Viner's draftsman was fairly well-known to economists in the generation before me, and passed on by word-of-mouth to some of my generation, but my sense is that is barely known at all to more recent cohorts. For the sake of keeping the story alive, it goes like this:

Back in 1931, Jacob Viner published an article on "Cost Curves and Supply Curves" (Zeitschrift für Nationalökonomie/Journal of Economics, pp. 23-46, available via JSTOR). In the article, Viner presented a version of a diagram that now appears in just about every introductory economics textbook: a figure that combines short-run average cost curves and a long-run average cost curve. For the uninitiated, the conceptual difference here is that in a short-run average cost curve, there are fixed costs usually described as the existing level of plant and equipment which can't be changed in the short run, so a firm can only change its short-term inputs like the number of workers hired. Thus, there is a different short-run average cost curve for each different level of preexisting plant and equipment. In a long-run average cost curve, however, all factors of production can be adjusted.

Here's a figure from Viner's paper. There are series of U-shaped short-run cost curves. They are tangent to the long-run average cost curve, labeled with AC and a darker line in the figure. The idea is to show that the difference between the choices firms face in the short-run, when they are locked into a certain level of plant and equipment, and the choices available to firms in the long run as plant and equipment adjust. The downward slope of what is labelled as the AC curve in the figure shows economies of scale--that is, as the quantity produced by the firm expands (horizontal axis), and firms invest in large amounts of plant and equipment, the average cost of production (on the vertical axis) will decline.

But there's a problem with the figure, which Viner discusses in a footnote. To understand the problem, 21st-century economists need to know that there was once a time before computerized graphics. In those long-ago days, researchers who wanted a graph turned to a skilled draftsman, who tried to combine instructions of the author with personal judgement and a French curve to produce the desired result.

Viner's draftsman was a mathematician named Y.K. Wong. Viner gave Wong the instructions to draw the figure show that the U-shaped short-run average curves should be tangent to the downward sloping long-run average cost curve (in the figure, AC). Moreover, Viner said that he wanted the point of tangency to happen at the bottom of each individual short-run AC curve.

These instructions were impossible for Wang to follow. For any U-shaped curve, the point at the bottom of the curve is tangent to a horizontal line. It's not geometrically possible for the point at the bottom of a U-shaped curve to be tangent to a downward-sloping line. However, Viner insisted that Wong draw the lines so that the very bottom of the U-shaped short-run average costs curves touched the long run AC curve.  This caused a problem, which Viner described in a footnote to his 1931 article (p. 36):
It may be noticed that at certain points the short-run ac curves are drawn so as to sink below the long-run AC curve. If the AC curve is interpreted as having significance only at the N points, this is of no consequence. But if the AC curve is interpreted as a continuous curve, this is an error. My instructions to the draftsman were to draw the AC curve so as never to be above any portion of any ac curve. He is a mathematician, however, not an economist, and he saw some mathematical objection to this procedure which I could not succeed in understanding. I could not persuade him to disregard his scruples as a craftsman and to follow my instructions, absurd though they might be.
Paul Samuelson adds a grace note to this story in his essay, "Schumpeter as an Economic Theorist" (reprinted in Paul Samuelson on the History of Economic Analysis: Selected Essays, edited by Steven G. Medema, Anthony M. C. Waterman, 2015):
I may retell the story that, as late as 1935, Viner insisted to his Chicago class: ‘Although Wong is mathematically right, I can draw the envelope curve through the bottoms of the U’s.’ My cheeky rebuke as a nineteen year old was, ‘Yes Professor Viner, you can, with a thick pencil!’ As a twenty-five year old, I realized that I might better have added: ‘Or, of course, if your U-shaped short-run curves are V-shaped, with cornered minima, and provided the economies of plant enlargement aren’t too rapid.’
There are both economic and cultural lessons here. A subtle economic lesson is about what kinds of cost efficiency are possible in the short-run and the long-run, and I'll leave that lesson for the classroom. A broader economic lesson is how expositions that use algebraic or graphical mathematics can force you to sharpen your insights. A cultural lesson for economists is that when someone with another area of expertise tells you that your insight is impossible, even when that person knows no economics at all, perhaps you should pay attention. 

Monday, December 30, 2019

Judging Capitalism by its Operations and Socialism by its Aspirations: Sidney Hook

As a younger man back in the 1930s and 1940s, Sidney Hook thought of himself as a "communist without dogmas." He sought to differentiate his views from the cruelty of Soviet Communism and the crudeness of its propaganda. As he writes in his 1985 biography, Out of Step, he was viewed by at the time as a "reasonable, intelligent, and critical-minded Communist." He argued later in life that his fundamental values never changed, but along the way, he stopped seeing socialism as a political vehicle for those values. In a memorable phrase, he wrote of his earlier years (p. 175):
I cannot absolve myself from the guilt of failure to exercise critical responsibility toward my own radical ideals. I was guilty of judging capitalism by its operations and socialism by its hopes and aspirations; capitalism by its works and socialism by its literature. To this day, this error and its disastrous consequences are observable in the judgment and behavior or some impassioned individuals, mostly young.
In thinking about what he and others meant by "socialism," Hook wrote (pp. 599-601):
I cannot claim any special competence in economics, although I have read--not really studied--the great classical economists since Adam Smith. I believe I can say with justification that I was one of the few American "Socialist intellectuals" who read Marx's Capital closely but was drawn to socialism on moral grounds rather than economic ones. This I believe was true of all the leading Socialists of our time. Capital offered us evidence, so we believed, that the normal operation of a commodity-producing society rested on the exploitation of the worker. We did not realize what should have been evidence even before the Soviet economy confirmed it; that workers could be exploited in a collectivist society as well as in a free market economy--in the absence of free trade unions even more so--and that the distribution of social wealth could never be adequately accounted for in purely economic terms. As a group, although we were intensely interested in the economic questions of the day, we were indifferent to, and largely ignorant of, current-day economic theory. ...
Because our support of socialism as an economy rested on moral grounds, the very meaning of socialism changed once we abandoned serious advocacy of collective ownership of all social means of production, distribution, and exchange. Since World War II, the famous Clause IV of the Constitution of the English Labour Part, which advocated complete socialization of the economy, has never been taken seriously--not by the Labour Party itself nor by the Socialist Parties of Germany, France, and Italy nor by most of the members of the Socialist International, including its American affiliates. The primary reason for this is that they were more wedded to political democracy than to any totally planned economy. In time, the term socialism seemed to have changed its meaning to signify the responsibility of the stage to intervene in the economy to provide a safety net for those willing and able to work but who find themselves unable to find employment or make ends meet when they do. All major political parties in Western countries seem committed to preserve the free-enterprise system at the same time as they call for some form of government intervention into the economy and support for the welfare state. ...
I no longer believe that the central problem of our time is the choice between capitalism and socialism but the defense and enrichment of a free and open society against totalitarianism. ... Most human beings in modern societies prefer a social order in which their choices are voluntary rather than coerced. But sustained economic hardships and deprivation  can in time erode the allegiance to freedom among large masses of people. That is why we cannot organize a society on the purely economic principles of a free enterprise society.
Hook also writes about a basic problem for socialist thinking, including his own--an insufficient level of attention paid to problems of incentives (p. 600):
Socialists, and I include myself among them, never took the problem of incentives seriously enough in the socialized sector of the economy, in which there was to be guaranteed tenure and in which government subsidies were to underwrite the failure of productivity to match the rising costs of the welfare state. The irony of the situation is that we used to worry about who would do "the dirty work" under socialism, a problem that never existed in a capitalist economy because the market seemed automatically to provide diligent candidates for the available posts. ... What has happened in almost all socialist sectors of the economy is a decline in productivity, an erosion in the skills of craftsmanship and in the work ethic. ...
Our error consisted, I believe, largely in the uncritical extrapolation we made from our own mode of living and earning a living. We were teachers, students, writers, artists, and professionals. Our vocation was freely chosen, and we assumed that inasmuch as there would be no problem of incentive for us, since we found self-fulfillment in our work, this would apply to everyone else. But until some way can be found to organize a society in which everyone's way of earning a living is at  the same time a satisfactory way of living his or her life, there will always be a problem of incentive. 
The passages quoted here resonate with me for a number of reasons. Here, I want to focus on the implications for what people mean today when they talk about "socialism."

For example, when discussing "socialism," it does seem to me that many people have turned away from the dictionary definition, which specifies state ownership or control of the means of production, and instead their idea of socialism focuses on government support for those who lack jobs or whose jobs don't pay enough to make ends meet.

It's common to hear of "socialists" (including some prominent Democratic politicians) who say that their preferred set of policies would be something closer to those common in western Europe, and perhaps especially in Scandinavian economies. Of course, using the standard dictionary definition of socialism as involving government ownership or control of the means of production, countries like Sweden, Denmark, and Norway are clearly capitalist. And many Americans who feel supportive toward the governments benefits provided by these countries tend to quail when confronted by specifics of these economies, like a national value-added tax at rates of 20% or more, low corporate income tax rates, embrace of international trade, and (in Sweden) vouchers for school choice.

I smiled ruefully at Hook's admonition that "we cannot organize a society on the purely economic principles of a free enterprise society." This sentiment is often voiced by those who express sympathy with socialism. But it's a "straw man" argument--that is describe an argument that literally no one is actually making, and then knock that argument down and declare victory. I'm unaware of any prominent economist, ever, of any political leaning, who has argued that free enterprise is sufficient for organizing a society. Anyone who makes such a claim is revealing (as Hook readily admits) that they have not actually studied economics.

Instead, economists have for decades argued that markets have been proven to have a lot of useful incentive properties when it comes to how a society addresses the necessary issue of production, distribution, and exchange of goods. Economists also recognize that pure free enterprise can lead to a range of problems: poverty and inequality, environmental issues, the appropriate social investment in education, health, technology, and more. Countries that call themselves "socialist" clearly have these problems, too. Thus, economics sees the problem of practical politics as how to arrange and constrain markets to support their strengths and to address their weaknesses.

From my own view, the idea that there is some group of people who believe in unfettered Darwinian survival-of-the-fittest free-for-all markets, while the alternative is to move to "socialism," is playing games with terminology. After all, the US has had nothing resembling truly unfettered markets for decades, and has certainly not been organized "on the purely economic principles of a free enterprise society." Indeed, it has been a favorite argument of some market-oriented thinkers to claim that the US economy has already been "socialist" for decades (for example, Milton Friedman often made this argument in the 1980s).

If "socialism" is going to be defined by a belief in democracy, it's important to remember that truly democratic countries operate through a mixture of popular voting along with various checks and balances, not by electing a dictator. Moreover, "democracy" contains its own black temptation, which is that some of those who claim to support democracy are also very quick to claim that democracy has been hijacked or fooled or corrupted when it doesn't lead to the result they prefer. But democracy is a process, not a result. If you only believe in democracy when it delivers your desired result, then you are a believer in the result, not the process, and you will tend to find excuses to jettison the inevitably imperfect real-world "democracy" when it produces outcomes that you deem incorrect or inconvenient. (As Hook noted, if you think that capitalism is the only form of oppression, or that countries which call themselves "democratic" don't oppress workers, you aren't paying attention.)

At the end of all these disputations, it seems to me that those who emphasize their support for big single-word terms like "socialism," "capitalism," or "democracy"L are pushed back to saying that they want "the right kind" of the system they favor. Some emphasize markets or capitalism, but "the right kind" of markets or capitalism. Some emphasize socialism, but of "the right kind." Some emphasize democracy, but again "of the right kind." In all of these settings, the qualifications about what "the right kind" means seems more important for making moral or practical judgment than the label that precedes it.

Being specific means digging into particulars, like the dramatic differences in how health insurance financing actually works in different countries, rather than just using labels like "market" or "single-payer" or "socialized medicine." It means being transparent about incentives and tradeoffs, rather than assuming them away. It means not making big judgments about one abstract system by focusing heavily on the shortcomings of its real-world operations, while judging alternative choices based on theories and promises.

Friday, December 27, 2019

C.S. Lewis on the Temptations of Mammon and Moloch

Back  in 1946, the writer and academic C.S. Lewis, author of the seven-book Chronicles of Narnia series starting with The Lion, The Witch, and the Wardrobe and the "space trilogy" series that starts with Out of the Silent Planet had an unlikely set-to with the scientist J.B.S. Haldane, who made foundational contributions to evolutionary biology and biostatistics, among other areas.

Haldane, who was a committed member of the Communist Party, wrote a sort-of book review of Lewis's space trilogy in the Modern Quarterly, a Marxist journal which a few years later in fact changed its name to the Marxist Quarterly. Given the publication outlet, Haldane's review was less focused on subtle analysis of character and plot, and more focused on whether Lewis was showing too much deference to the forces of markets and money and not enough deference to the virtues of  scientific planning of society by Communists.

Lewis wrote but never published in his lifetime an incomplete essay called "A Reply to Professor Haldane," which to my knowledge first appeared in 1966 in Of Other Worlds: Essays and Stories, a collection of C.S. Lewis works edited by Walter Hooper. Here, I'll quote from two paragraphs of that essay. Given that economists often find themselves defending the notion that markets should play an important role in social decision-making, and that monetary incentives are not the only mechanisms through which personal greed can operate, the passage (at least to me) offers plenty of food for thought: 
The difference between us is that the Professor sees the `World' purely in terms of those threats and those allurements which depend on money. I do not. The most `worldly' society I have ever lived in is that of schoolboys: most worldly in the cruelty and arrogance of the strong, the toadyism and mutual treachery of the weak, and the unqualified snobbery of both. Nothing was so base that most members of the school proletariat would not do it, or suffer it, to win the favour of he school aristocracy: hardly any injustice too bad for the aristocracy to practice. But the class system did not in the least depend on the amount of anyone's pocket money. Who needs to care about money if most of the things he wants can be offered by cringing servility and the remainder can be taken by force? This lesson has remained with me all my life. That is one of the reasons I cannot share Professor Haldane's exaltation at the banishment of Mammon from a sixth of our planet's surface'. [Haldane was trumpeting his support for the Soviet Union.]  I have already lived in a world from which Mammon was banished: it was the most wicked and miserable I have yet known. If Mammon were the only devil, it would be another matter. But where Mammon vacates the throne, how if Moloch takes his place? As Aristotle said: `Men do not become tyrants in order to keep warm.' All men, of course, desire pleasure and safety. But all men also desire power and all men desire the mere sense of being `in the know' or `in the inner ring', of now being `outsiders': a passion insufficiently studied and the chief theme of my story. When the state of society is such that money is the passport to these prizes, then of course money will be the prime temptation. But when the passport changes, the desires will remain. And there are many other possible passports: position in an official hierarchy, for instance. Even now, the ambitious and worldly man would not inevitably choose the post with the higher salary. The pleasure of being `high up and far within' may be worth the sacrifice of some income. ...
[W]as I attacking scientific planning? ...[i]f you must reduce the romance to a proposition, the proposition would be ... `Under modern conditions any effective invitation to Hell will certainly appear in the guise of scientific planning' ...Every tyrant must begin by claiming to have what his victims respect and to give what they want. The majority in most modern countries respect science and want to be planned. And, therefore, almost by definition, if any man or group wishes to enslave us it will of course describe itself as `scientific planned democracy.' It may be true that any real salvation mus equally, though by hypothesis truthfully, describe it self as `scientific planned democracy.' All the more reason to look very carefully at anything which bears that label.

Thursday, December 26, 2019

"Jesus Christ is Free Trade, and Free Trade is Jesus Christ"

As regular readers know, I'm generally a believer that international trade can be and often is a win-win situation, with benefits to the economies of all of the countries involved. But supporters of free trade have certainly had own lapses into overstated purple prose. One of my favorite purple prose statements along these lines was made by John Bowring in 1841: "Jesus Christ is Free Trade, and Free Trade is Jesus Christ."

What was the context for this remarkable claim? David Todd gives a useful overview of Bohring's career in "John Bowring and the Global Dissemination of Free Trade," published in the Historical Journal (2008: 51:2, pp. 373-397, available via JSTOR). Here's an overview from the introduction of Todd's piece (footnotes omitted):
[H]ow free ideas spread in practice around the globe in the mid-nineteenth century has received relatively little attention.

The extraordinary career of John Bowring (1792-1872), author, editor, and Board of Trade official, may illustrate several key aspects of that process of global dissemination. Bowring was an indefatigable and cosmopolitan propagator of free trade. In the aftermath of the 1830 Revolution in France, he toured dozens of cities there in the hope of making free trade 'vibrate' and spread like a 'fire' in public opinion. He later participated in the foundation of the Anti-Corn Law League in Manchester and propounded free trade policies in Bern, Rome, Berlin, Brussels, Cairo, Batavia (Jakarta), Bangkok, and Shanghai. In 1856, as British plenipotentiary in the Far East, he ordered the bombardment of Canton to enforce the rights of foreign merchants to enter the city. The decision triggered the Arrow War (1856-60), eventually resulting in Ch'ing China's full opening to Western trade.

Bowring's endeavours demonstrate that the global dissemination of free trade was an eminently practical process that required deliberate agency and material support from institutions. His extraordinary mobility, his capacity to harangue foreign merchants and journalists, and the generous salaries paid to him by the British government were important factors--possibly more important than the intellectual impact of international trade theory--in the spread of liberal ideas about trade. He collected information or proselytized in more than thirty countries on three continents, and authored or edited more than forty works, consisting primarily of translations, reports on foreign trade policies, travel accounts, and pamphlets concerned with the international circulation of commodities, ideas, and individuals. As befits such a global career, his papers are scattered among more than fifteen archive depositories in Europe and North America. ...

The global reach of Bowring's labours also suggests a greater continuity than is usually recognized between the rise of liberal ideas about trade in Europe and their forceful implementation in the extra-European world. Dissemination entailed reformulation in accordance with political and cultural contexts. In Western Europe, Bowring used a politically liberal rhetoric to woo public opinion. In less liberal countries such as Germany and Egypt, he sought to persuade absolute rulers and civil servants of the benefits of freer international communications. And in East Asia, he embraced 'gunboat diplomacy' to obtain the lifting of restrictions on foreign trade. 'Qui veut la fin veut les moyens', Bowring quipped to his adversaries, in Europe as well as in Asia. He resorted to different means in different circumstances. Yet his goal was everywhere the removal of international trade barriers. ...
Despite the flexibility of his methods, Bowring pursued the same goal from Bordeaux to Canton: the lifting of restrictions on the free movement of commodities, ideas, and travellers. This goal became increasingly intertwined, in Bowring's mind, with the spread of British 'influence' - a word he used to describe his exertions in France and Egypt as well as China. Support for free trade lobbies on the European Continent and the opening of East Asian markets by gunboats may be construed as two facets of the same policy. The dissemination of free trade should be considered not only as a practical, but also as a global and continuous process, changing in intensity according to local military, political, and cultural conditions.
But although Bowring was a fervent advocate for free trade, readers during this Christmas season will be relieved to hear that he was not actually blasphemous on the subject.  R.K. Webb describes Bowring's then-unconventional Unitarian beliefs in "John Bowring and Unitarianism," published in Utilitas (1992, 4:1, pp. 43-79). Webb writes:
For more than fifty years, John Bowring was active in Unitarian affairs. Indeed, the totality of Bowring's efforts give him some claim to have been the most prominent of Unitarian laymen. No one was more assiduous in attending Unitarian meetings, in taking the chair, in opening bazaars, in giving speeches on Unitarian occasions, whenever he was in Britain. ... 

Truth and liberty were watchwords, even code words, for nineteenth­- century Unitarians. Truth, which embraced the emerging discoveries of science as well as critical findings about the Bible and sacred history, also meant religious truth, which those Unitarians who thought deeply about it saw as progressive revelation, as it might emerge from experience and the findings of science and scholarship. ...
The liberty to which Unitarians were devoted was in the first instance the religious liberty for which they and their Dissenting forerunners came increasingly to contend in the eighteenth century. Going beyond the mere toleration written into law, they argued for a true marketplace of ideas, in religion as in everything else, an ideal to which the Established Church was a continuing reproach, the worse for the number of its adherents who were in substantial doctrinal agreement with the liberals but demeaned themselves by subscribing to what the rational Dissenters saw as outmoded and constricting formu­laries. The passion for liberty nurtured by the ambition of religious equality carried over into every form of social and political agitation­: antislavery, free trade, freedom of contract, parliamentary reform.
Webb and Bowring seem to agree that Bowring was clearly a Unitarian first and a Benthamite free trade second--but that he didn't see any contradiction between the two.  Webb quotes a report from the Bolton Chronicle, June 19, 1841:
Referring to the parable ... of the Good Samaritan, [Bowring] compared the Anti-corn law league . . . to that benevolent wayfarer. But not content with this alleged comparison, he proceeded, in the  warmth of his Unitarian zeal, to pronounce the following words,-'Jesus Christ is Free Trade, and Free Trade is Jesus Christ.' The awful and impious declaration was loudly cheered by a batch of Unitarian heathens upon the stage, who manifestly delighted in the opportunity of applauding such audacious irreverence.
Webb adds: "In reply, Bowring denied that he had spoken irreverently. Born of religious parents and religiously educated, he said, 'if in the question of free trade he felt deeply interested, it was because he   believed it to be intimately associated with religious truth and the exercise of religious  principles ...'"  (quotation from a follow-up story in the Bolton Chronicle, June 26, 1841).

As David Todd notes in his essay: "The spread of free trade within early nineteenth-century British society, for example, owed a great deal to the religious reinterpretation of market laws by 'evangelical' Christians." I find myself wondering if it's possible for a 21st century people to insert themselves into a mindset in which putting free trade and Christianity side-by-side makes a kind of humorous sense, rather than just sounding like an over-the-top non-sequitur.

Wednesday, December 25, 2019

Charles Dickens on Management and Labor

There's a sort of parlor game that the economically-minded sometimes play around the Christmas holiday, related to A Christmas Carol, by Charles Dickens. Was Dickens writing his story as an attack on economics, capitalism, and selfishness? After all, his depiction of Ebenezer Scrooge, along with his use of phrases like "decrease the surplus population" and "a good man of business" would suggest as much, and a classic example of such an interpretation is here. Or was Dickens just telling a good story with distinct characters? After all, Scrooge is portrayed as an outlier in the business community. The warm portrayal of Mr. Fezziwig certainly opens the possibility that one can be a successful man of business as well as a good employer and a decent human being. And if Scrooge hadn't saved money, would he have been able to save Tiny Tim?

It's all a good "talker," as they say about the topics that get kicked around on radio shows every day. As part of my own holiday break, I republish this essay each year on Christmas day.

I went looking for some other perspectives on how Charles Dickens perceived capitalism that were not embedded in a fictional setting. In particular, I checked the weekly journal Household Words, which Dickens edited from 1850 to 1859. Articles in Household Words do not have authors provided. However, Anne Lohrli went through the business and financial records of the publication, which identified the authors and showed who had been paid for each article. The internal records of the journal show that Dickens was the author of this piece from the issue of February 11, 1854, called "On Strike." (Lohrli's book is called Household Words: A Weekly Journal 1850-59, conducted by Charles Dickens, University of Toronto Press, 1973. Household Words is freely available on-line at at site hosted by the University of Buckingham, with support from the Leverhulme Trust and other donors.)

The article does not seem especially well-known today, but it is the source of a couple of the most common quotations from Charles Dickens about "political economy," as the study of economics was usually called at the time. Early in the piece, Dickens wrote: "Political Economy was a great and useful science in its own way and its own place; but ... I did not transplant my definition of it from the Common Prayer Book, and make it a great king above all gods." Later in the article, Dickens wrote: "[P]olitical economy is a mere skeleton unless it has a little human covering and filling out, a little human bloom upon it, and a little human warmth in it."

But more broadly, the article is of interest because Dickens, telling the story in the first person, takes the position that in thinking about a strike taking place in the town of Preston, one need not take the side either of management or labor. Instead, Dickens writes, one may "be a friend to both," and feel that the strike is "to be deplored on all accounts." Of course, the problem with a middle-of-the-road position is that you can end up being hit by ideological traffic going in both directions. But the ability of Dickens to sympathize with people in a wide range of positions is surely part what gives his novels and his world-view such lasting power. The article goes into a fair amount of detail, and can be read on-line, so I will content myself here with a substantial excerpt.

Here's a portion of the 1854 essay by Dickens:

"ON STRIKE"

Travelling down to Preston a week from this date, I chanced to sit opposite to a very acute, very determined, very emphatic personage, with a stout railway rug so drawn over his chest that he looked as if he were sitting up in bed with his great coat, hat, and gloves on, severely contemplating your humble servant from behind a large blue and grey checked counterpane. In calling him emphatic, I do
not mean that he was warm; he was coldly and bitingly emphatic as a frosty wind is.

"You are going through to Preston, sir?" says he, as soon as we were clear of the
CharPrimrose Hill tunnel.

The receipt of this question was like the receipt of a jerk of the nose; he was so short and sharp.

"Yes."

"This Preston strike is a nice piece of business!" said the gentleman. "A pretty piece of business!"

"It is very much to be deplored," said I, "on all accounts."

"They want to be ground. That's what they want to bring 'em to their senses," said the gentleman; whom I had already began to call in my own mind Mr. Snapper, and whom I may as well call by that name here as by any other. *

I deferentially enquired, who wanted to be ground?

"The hands," said Mr. Snapper. " The hands on strike, and the hands who help 'em."

I remarked that if that was all they wanted, they must be a very unreasonable people, for surely they had had a little grinding, one way and another, already. Mr. Snapper eyed me with sternness, and after opening and shutting his leathern-gloved hands several times outside his counterpane, asked me
abruptly, " Was I a delegate?"

I set Mr. Snapper right on that point, and told him I was no delegate.

"I am glad to hear it," said Mr. Snapper. "But a friend to the Strike, I believe?"

"Not at all," said I.

"A friend to the Lock-out?" pursued Mr. Snapper.

"Not in the least," said I,

Mr. Snapper's rising opinion of me fell again, and he gave me to understand that a man must either be a friend to the Masters or a friend to the Hands.

"He may be a friend to both," said I.

Mr. Snapper didn't see that; there was no medium in the Political Economy of the subject. I retorted on Mr. Snapper, that Political Economy was a great and useful science in its own way and its own place; but that I did not transplant my definition of it from the Common Prayer Book, and make it a great king above all gods. Mr. Snapper tucked himself up as if to keep me off, folded his arms on the top of his counterpane, leaned back and looked out of the window.

"Pray what would you have, sir," enquire Mr. Snapper, suddenly withdrawing his eyes from the prospect to me, "in the relations between Capital and Labour, but Political Economy?"

I always avoid the stereotyped terms in these discussions as much as I can, for I have observed, in my little way, that they often supply the place of sense and moderation. I therefore took my gentleman up with the words employers and employed, in preference to Capital and Labour.

"I believe," said I, "that into the relations between employers and employed, as into all the relations of this life, there must enter something of feeling and sentiment; something of mutual explanation, forbearance, and consideration; something which is not to be found in Mr. M'CulIoch's dictionary, and is not exactly stateable in figures; otherwise those relations are wrong and rotten at the core and will never bear sound fruit."

Mr. Snapper laughed at me. As I thought I had just as good reason to laugh at Mr. Snapper, I did so, and we were both contented. ...

Mr. Snapper had no doubt, after this, that I thought the hands had a right to combine?

"Surely," said I. " A perfect right to combine in any lawful manner. The fact of their being able to combine and accustomed to combine may, I can easily conceive, be a protection to them. The blame even of this business is not all on one side. I think the associated Lock-out was a grave error. And
when you Preston masters—"

"I am not a Preston master," interrupted Mr. Snapper.

"When the respectable combined body of Preston masters," said I, " in the beginning of this unhappy difference, laid down the principle that no man should be employed henceforth who belonged to any combination—such as their own—they attempted to carry with a high hand a partial and unfair impossibility, and were obliged to abandon it. This was an unwise proceeding, and the first defeat."

Mr. Snapper had known, all along, that I was no friend to the masters.

"Pardon me," said I; " I am unfeignedly a friend to the masters, and have many friends among them."

"Yet you think these hands in the right?" quoth Mr. Snapper.

"By no means," said I; " I fear they are at present engaged in an unreasonable struggle, wherein they began ill and cannot end well."

Mr. Snapper, evidently regarding me as neither fish, flesh, nor fowl, begged to know after a pause if he might enquire whether I was going to Preston on business?

Indeed I was going there, in my unbusinesslike manner, I confessed, to look at the strike.

"To look at the strike!" echoed Mr. Snapper fixing his hat on firmly with both hands. "To look at it! Might I ask you now, with what object you are going to look at it?"

"Certainly," said I. " I read, even in liberal pages, the hardest Political Economy—of an extraordinary description too sometimes, and certainly not to be found in the books—as the only touchstone of this strike. I see, this very day in a to-morrow's liberal paper, some astonishing novelties in the politico-economical way, showing how profits and wages have no connexion whatever; coupled with such references to these hands as might be made by a very irascible General to rebels and brigands in arms. Now, if it be the case that some of the highest virtues of the working people still shine through them brighter than ever in their conduct of this mistake of theirs, perhaps the fact may reasonably suggest to me—and to others besides me—that there is some little things wanting in the relations between them and their employers, which neither political economy nor Drum-head proclamation writing will altogether supply, and which we cannot too soon or too temperately unite in trying to
find out."

Mr. Snapper, after again opening and shutting his gloved hands several times, drew the counterpane higher over his chest, and went to bed in disgust. He got up at Rugby, took himself and counterpane into another carriage, and left me to pursue my journey alone. ...

In any aspect in which it can be viewed, this strike and lock-out is a deplorable calamity. In its waste of time, in its waste of a great people's energy, in its waste of wages, in its waste of wealth that seeks to be employed, in its encroachment on the means of many thousands who are labouring from day to day, in the gulf of separation it hourly deepens between those whose interests must be understood to be identical or must be destroyed, it is a great national affliction. But, at this pass, anger is of no use, starving out is of no use—for what will that do, five years hence, but overshadow all the mills in England with the growth of a bitter remembrance? —political economy is a mere skeleton unless it has a little human covering and filling out, a little human bloom upon it, and a little human warmth in it. Gentlemen are found, in great manufacturing towns, ready enough to extol imbecile mediation with dangerous madmen abroad; can none of them be brought to think of authorised mediation and explanation at home? I do not suppose that such a knotted difficulty as this, is to be at all untangled by a morning-party in the Adelphi; but I would entreat both sides now so miserably opposed, to consider whether there are no men in England above suspicion, to whom they might refer the matters in dispute, with a perfect confidence above all things in the desire of those men to act justly, and in their sincere attachment to their countrymen of every rank and to their country.

Masters right, or men right; masters wrong, or men wrong; both right, or both wrong; there is certain ruin to both in the continuance or frequent revival of this breach. And from the ever-widening circle of their decay, what drop in the social ocean shall be free!

Charles Dickens on Seeing the Poor

Charles Dickens wrote what has become one of the iconic stories of Christmas day and Christmas spirit in A Christmas Carol. But of course, the experiences of Ebenezer Scrooge are a story, not a piece of reporting. Here's a piece by Dickens written for the weekly journal Household Words that he edited from 1850 to 1859. It's from the issue of January 26, 1856, with his first-person reporting on "A Nightly Scene in London." Poverty in high-income countries is no longer as ghastly as in Victorian England, but for those who take the time to see it in our own time and place, surely it is ghastly enough. Thus, I repeat this post each year on Christmas day.

Economists might also wince just a bit at how Dickens describes the reaction of some economists to poverty, those who Dickens calls "the unreasonable disciples of a reasonable school." Dickens writes: "I know that the unreasonable disciples of a reasonable school, demented disciples who push arithmetic and political economy beyond all bounds of sense (not to speak of such a weakness as humanity), and hold them to be all-sufficient for every case, can easily prove that such things ought to be, and that no man has any business to mind them. Without disparaging those indispensable sciences in their sanity, I utterly renounce and abominate them in their insanity ..."  Here's a fuller passage from Dickens:

A NIGHTLY SCENE IN LONDON

On the fifth of last November, I, the Conductor of this journal, accompanied by a friend well-known to the public, accidentally strayed into Whitechapel. It was a miserable evening; very dark, very muddy, and raining hard.

There are many woful sights in that part of London, and it has been well-known to me in most of its aspects for many years. We had forgotten the mud and rain in slowly walking along and looking about us, when we found ourselves, at eight o'clock, before the Workhouse.

Crouched against the wall of the Workhouse, in the dark street, on the muddy pavement-stones, with the rain raining upon them, were five bundles of rags. They were motionless, and had no resemblance to the human form. Five great beehives, covered with rags— five dead bodies taken out of graves, tied neck and heels, and covered with rags— would have looked like those five bundles upon which the rain rained down in the public street.

"What is this! " said my companion. "What is this!"

"Some miserable people shut out of the Casual Ward, I think," said I.

We had stopped before the five ragged mounds, and were quite rooted to the spot by their horrible appearance. Five awful Sphinxes by the wayside, crying to every passer-by, " Stop and guess! What is to be the end of a state of society that leaves us here!"

As we stood looking at them, a decent working-man, having the appearance of a stone-mason, touched me on the shoulder.

"This is an awful sight, sir," said he, "in a Christian country!"

"GOD knows it is, my friend," said I.

"I have often seen it much worse than this, as I have been going home from my work. I have counted fifteen, twenty, five-and-twenty, many a time. It's a shocking thing to see."

"A shocking thing, indeed," said I and my companion together. The man lingered near
us a little while, wished us good-night, and went on.

We should have felt it brutal in us who had a better chance of being heard than the working-man, to leave the thing as it was, so we knocked at the Workhouse Gate. I undertook to be spokesman. The moment the gate was opened by an old pauper, I went in, followed close by my companion. I lost no
time in passing the old porter, for I saw in his watery eye a disposition to shut us out.

"Be so good as to give that card to the master of the Workhouse, and say I shall be glad to speak to him for a moment."

We were in a kind of covered gateway, and the old porter went across it with the card. Before he had got to a door on our left, a man in a cloak and hat bounced out of it very sharply, as if he were in the nightly habit of being bullied and of returning the compliment.

"Now, gentlemen," said he in a loud voice, "what do you want here?"

"First," said I, " will you do me the favor to look at that card in your hand. Perhaps you may know my name."

"Yes," says he, looking at it. " I know this name."

"Good. I only want to ask you a plain question in a civil manner, and there is not the least occasion for either of us to be angry. It would be very foolish in me to blame you, and I don't blame you. I may
find fault with the system you administer, but pray understand that I know you are here to do a duty pointed out to you, and that I have no doubt you do it. Now, I hope you won't object to tell me what I want to know."

"No," said he, quite mollified, and very reasonable, " not at all. What is it?"

"Do you know that there are five wretched creatures outside?"

"I haven't seen them, but I dare say there are."

"Do you doubt that there are?"

"No, not at all. There might be many more."

''Are they men? Or women?"

"Women, I suppose. Very likely one or two of them were there last night, and the night before last."

"There all night, do you mean?"

"Very likely."

My companion and I looked at one another, and the master of the Workhouse added quickly, "Why, Lord bless my soul, what am I to do? What can I do ? The place is full. The place is always full—every night. I must give the preference to women with children, mustn't I? You wouldn't have me not do that?"

"Surely not," said I. "It is a very humane principle, and quite right; and I am glad to hear of it. Don't forget that I don't blame you."

"Well!" said he. And subdued himself again. ...

"Just so. I wanted to know no more. You have answered my question civilly and readily, and I am much obliged to you. I have nothing to say against you, but quite the contrary. Good night!"

"Good night, gentlemen!" And out we came again.

We went to the ragged bundle nearest to the Workhouse-door, and I touched it. No movement replying, I gently shook it. The rags began to be slowly stirred within, and by little and little a head was unshrouded. The head of a young woman of three or four and twenty, as I should judge; gaunt with want, and foul with dirt; but not naturally ugly.

"Tell us," said I, stooping down. "Why are you lying here?"

"Because I can't get into the Workhouse."

She spoke in a faint dull way, and had no curiosity or interest left. She looked dreamily at the black sky and the falling rain, but never looked at me or my companion.

"Were you here last night?"

"Yes, All last night. And the night afore too."

"Do you know any of these others?"

"I know her next but one. She was here last night, and she told me she come out of Essex. I don't know no more of her."

"You were here all last night, but you have not been here all day?"

"No. Not all day."

"Where have you been all day?"

"About the streets."

''What have you had to eat?"

"Nothing."

"Come!" said I. "Think a little. You are tired and have been asleep, and don't quite consider what you are saying to us. You have had something to eat to-day. Come! Think of it!"

"No I haven't. Nothing but such bits as I could pick up about the market. Why, look at me!"

She bared her neck, and I covered it up again.

"If you had a shilling to get some supper and a lodging, should you know where to get it?"

"Yes. I could do that."

"For GOD'S sake get it then!"

I put the money into her hand, and she feebly rose up and went away. She never thanked me, never looked at me— melted away into the miserable night, in the strangest manner I ever saw. I have seen many strange things, but not one that has left a deeper impression on my memory than the dull impassive way in which that worn-out heap of misery took that piece of money, and was lost.

One by one I spoke to all the five. In every one, interest and curiosity were as extinct as in the first. They were all dull and languid. No one made any sort of profession or complaint; no one cared to look at me; no one thanked me. When I came to the third, I suppose she saw that my companion
and I glanced, with a new horror upon us, at the two last, who had dropped against each other in their sleep, and were lying like broken images. She said, she believed they were young sisters. These were the only words that were originated among the five.

And now let me close this terrible account with a redeeming and beautiful trait of the poorest of the poor. When we came out of the Workhouse, we had gone across the road to a public house, finding ourselves without silver, to get change for a sovereign. I held the money in my hand while I was speaking to the five apparitions. Our being so engaged, attracted the attention of many people of the very poor sort usual to that place; as we leaned over the mounds of rags, they eagerly leaned over us to see and hear; what I had in my hand, and what I said, and what I did, must have been plain to nearly all the concourse. When the last of the five had got up and faded away, the spectators opened to let us pass; and not one of them, by word, or look, or gesture, begged of us.

Many of the observant faces were quick enough to know that it would have been a relief to us to have got rid of the rest of the money with any hope of doing good with it. But, there was a feeling among them all, that their necessities were not to be placed by the side of such a spectacle; and they opened a way for us in profound silence, and let us go.

My companion wrote to me, next day, that the five ragged bundles had been upon his bed all night. I debated how to add our testimony to that of many other persons who from time to time are impelled to write to the newspapers, by having come upon some shameful and shocking sight of this description. I resolved to write in these pages an exact account of what we had seen, but to wait until after Christmas, in order that there might be no heat or haste. I know that the unreasonable disciples of a reasonable school, demented disciples who push arithmetic and political economy beyond all bounds of sense (not to speak of such a weakness as humanity), and hold them to be all-sufficient for every case, can easily prove that such things ought to be, and that no man has any business to mind them. Without disparaging those indispensable sciences in their sanity, I utterly renounce and abominate them in their insanity; and I address people with a respect for the spirit of the New Testament, who do mind such things, and who think them infamous in our streets.

Tuesday, December 24, 2019

When Coffee was the Newly Introduced Good Under Attack

Once coffee was the new invention, and at different places and times, it was repeatedly banned. William Akers tells many of the stories in his 1922 book, All About Coffee.

The "first persecution of coffee," as Akers calls it, happened in 1511 in Mecca, when Kair Bey was governor on behalf of the sultan of Egypt.
He appears to have been a strict disciplinarian, but lamentably ignorant of the actual conditions obtaining among his people. As he was leaving the mosque one evening after prayers, he was offended by seeing in a corner a company of coffee drinkers who were preparing to pass the night in prayer. His first thought was that they were drinking wine; and great was his astonishment when he learned what the liquor really was and how common was its use throughout the city. Further investigation convinced him that indulgence in this exhilarating drink must incline men and women to extravagances prohibited by law, and so he determined to suppress it. First he drove the coffee drinkers out of the mosque.
The next day, he called a council of officers of justice, lawyers, physicians, priests, and leading citizens, to whom he declared what he had seen the evening before at the mosque; and, "being resolved to put a stop to the coffee-house abuses, he sought their advice upon the subject." The chief count in the indictment was that "in these places men and women met and played tambourines, violins, and other musical instruments. There were also people who played chess, mankala, and other similar games, for money; and there were many other things done contrary to our sacred law ...

The lawyers agreed that the coffee houses needed reforming; but as to the drink itself, inquiry should be made as to whether it was in any way harmful to mind or body; for if not, it might not be sufficient to close the places that sold it. It was suggested that the opinion of the physicians be sought.

Two brothers, Persian physicians named Hakimani, and reputed the best in Mecca, were summoned, although we are told they knew more about logic than they did about physic. One of them came into the council fully prejudiced, as he had already written a book against coffee, and filled with concern for his profession, being fearful lest the common use of the new drink would make serious inroads on the practise of medicine. His brother joined with him in assuring the assembly that the plant bunn, from which coffee was made, was "cold and dry" and so unwholesome. When another physician present reminded them that Bengiazlah, the ancient and respected contemporary of Avicenna, taught that it was "hot and dry," they made arbitrary answer that Bengiazlah had in mind another plant of the same name, and that anyhow, it was not material; for, if the coffee drink disposed people to things forbidden by religion, the safest course for Mahommedans was to look upon it as unlawful.

The friends of coffee were covered with confusion. ... The mufti of Aden, being both an officer of the court and a divine, undertook, with some heat, a defense of coffee; but he was clearly in an unpopular minority. He was rewarded with the reproaches and affronts of the religious zealots.

So the governor had his way, and coffee was solemnly condemned as thing forbidden by the law; and a presentment was drawn up, signed by a majority of those present, and dispatched post-haste by the governor to his royal master, the sultan, at Cairo. At the same time, the governor published an edict forbidding the sale of coffee in public or private. The officers of justice caused all the coffee houses in Mecca to be shut, and ordered all the coffee found there, or in the merchants' warehouses, to be burned.

Naturally enough, being an unpopular edict, there were many evasions, and much coffee drinking took place behind closed doors.
However, Keir Bey had failed to check with his master, the sultan of Cairo, who apparently liked coffee himself, and quickly overturned the ban.

Aker's describes other episodes of coffee-related persecution which follow a common pattern: coffee was making people too happy, so it must be bad for health and morals, and therefore should be banned. But the bans were then widely evaded, and soon came to an end. Here's one more set of stories, from the arrival of coffee in Italy in the late 16th century.

Shortly after coffee reached Rome, according to a much quoted legend, it was again threatened with religious fanaticism, which almost caused its excommunication from Christendom. It is related that certain priests appealed to Pope Clement VIII (1535–1605) to have its use forbidden among Christians, denouncing it as an invention of Satan. They claimed that the Evil One, having forbidden his followers, the infidel Moslems, the use of wine—no doubt because it was sanctified by Christ and used in the Holy Communion—had given them as a substitute this hellish black brew of his which they called coffee. For Christians to drink it was to risk falling into a trap set by Satan for their souls

It is further related that the pope, made curious, desired to inspect this Devil's drink, and had some brought to him. The aroma of it was so pleasant and inviting that the pope was tempted to try a cupful. After drinking it, he exclaimed, "Why, this Satan's drink is so delicious that it would be a pity to let the infidels have exclusive use of it. We shall fool Satan by baptizing it, and making it a truly Christian beverage." ...

And here's one more:

About the year 1660 several merchants of Marseilles, who had lived for a time in the Levant and felt they were not able to do without coffee, brought some coffee beans home with them; and later, a group of apothecaries and other merchants brought in the first commercial importation of coffee in bales from Egypt. The Lyons merchants soon followed suit, and the use of coffee became general in those parts. In 1671 certain private persons opened a coffee house in Marseilles, near the Exchange, which at once became popular with merchants and travelers. Others started up, and all were crowded. The people did not, however, drink any the less at home. "In fine," says La Roque, "the use of the beverage increased so amazingly that, as was inevitable, the physicians became alarmed, thinking it would not agree with the inhabitants of a country hot and extremely dry."
The argument turned mainly on the medicinal question, the Church this time having no part in the dispute. "The lovers of coffee used the physicians very ill when they met together, and the physicians on their side threatened the coffee drinkers with all sorts of diseases."
Matters came to a head in 1679, when an ingenious attempt by the physicians of Marseilles to discredit coffee took the form of having a young student, about to be admitted to the College of Physicians, dispute before the magistrate in the town hall, a question proposed by two physicians of the Faculty of Aix, as to whether coffee was or was not prejudicial to the inhabitants of Marseilles.
The thesis recited that coffee had won the approval of all nations, had almost wholly put down the use of wine, although it was not to be compared even with the lees [that is, the deposits of dead yeast that fall to the bottom of a wine barrel during fermentation] of that excellent beverage; that it was a vile and worthless foreign novelty; that its claim to be a remedy against distempers was ridiculous, because it was not a bean but the fruit of a tree discovered by goats and camels; that it was hot and not cold, as alleged; that it burned up the blood, and so induced palsies, impotence, and leanness; "from all of which we must necessarily conclude that coffee is hurtful to the greater part of the inhabitants of Marseilles."
Thus did the good doctors of the Faculty of Aix set forth their prejudices, and this was their final decision upon coffee. Many thought they overreached themselves in their misguided zeal. They were handled somewhat roughly in the disputation, which disclosed many false reasonings, to say nothing of blunders as to matters of fact. The world had already advanced too far to have another decision against coffee count for much, and this latest effort to stop its onward march was of even less force than the diatribes of the Mohammedan priests. The coffee houses continued to be as much frequented as before, and the people drank no less coffee in their homes. Indeed, the indictment proved a boomerang, for consumption received such an impetus that the merchants of Lyons and Marseilles, for the first time in history, began to import green coffee from the Levant by the ship-load in order to meet the increased demand.
There are enough of these episodes of coffee-related persecution to make a person wonder: is there something in human nature that, when consumption of a good seems sociable and pleasant--and if not perfectly healthy, at least as healthy as the common alternatives on offer--nonetheless wants to limit and ban the good?

I ran across a mention of the coffee persecutions in a recent article by Matt Ridley, who focuses primarily on drawing a connection to what he views as overwrought reactions to fracking, which doesn't strike me as the most obvious analogy. But it's easy enough to come up with other examples of goods consumed that have pleased people enough that there has been a need to condemn them. Consumption of meat and saturated fats. Remember when butter was thought to be less healthy than margarine, and we were being encouraged by the US government to consume lots of carbohydrates in the form of grains? Sugar. Vaping, which isn't good for you, but is likely to be a lot better than smoking cigarettes. The US experience with Prohibition of alcohol, and the easing of the modern prohibition on marijuana. Food products where the gene-modification technologies were not "natural" cross-breeding over centuries but instead "unnatural" science.

Of course, there are good reasons for safety warnings on many products, like cigarettes, as well as for inspections and rules to ensure that what people consume is not contaminated in some way. But in a broader context, the coffee persecutions do seem like an example of what looks like a human need to have strong opinions about what other people will be allowed to consume, and sometimes to use existing power structures to give force to those opinions. 

Monday, December 23, 2019

William McChesney Martin: Keep the Economists in the Basement

William McChesney Martin chaired the Federal Reserve for 19 years and during the terms of five different presidents, from April 1951 to January 1970.  He became chair of the Federal Reserve at the time of the Treasury-Fed Accord of 1951, when the modern Federal Reserve invented itself by  declaring that it was no longer going to view its job as keeping interest rates low to facilitate government borrowing--as it had during World War II--but instead was going to focus on how monetary policy affected the economy as a whole. Martin became so synonymous with monetary policy that John F. Kennedy once told an adviser that, before he became president, he could only remember the difference between fiscal and monetary policy by reminding himself that "m" was the first letter of both "monetary" and "Martin." He's the one who publicized the phrase that the job of the Federal Reserve was like a chaperone who needs to take away the punch bowl just when the party is warming up.

Martin also had considerable skepticism about the role of academic economists. Here's a story about William McChesney Martin as told by Richard T. McCormack, who served in a variety of economic policy and diplomatic positions in the Nixon, Reagan, and first Bush administrations. It's from a 2013 book, A Conversation with Ambassador Richard T. McCormack, which in turn is a transcription of an interview by Charles Stuart Kennedy and McCormack in 2002. McCormack is describing how he was given the job in 1970 of coming up with candidates to head a proposed Council on International Economic Policy, so we went to talk to Martin. It turned out that it was Martin's last day on the job after 19 years; indeed, it may have been Martin's final appointment on his final day. Here's how McCormack quotes Martin:
If you want this new office to be relevant, do not appoint an academic economist, and particularly avoid econometricians. ...
We have 50 econometricians working for us at the Fed. They are all located in the basement of this building, and there is a reason why they are there. Their main value to me is to pose questions that I then pass along to my own network of contacts throughout the American economy. The danger with these econometricians is that they don't know their own limitations, and they have a far greater sense of confidence in their analyses than I have found to be warranted. Such people are not dangerous to me because I understand their limitations. They are, however, dangerous to people like you and the politicians because you don't know their limitations, and you are impressed and confused by the elaborate models and mathematics. The flaws in these analyses are almost always imbedded in he assumptions on which they are based. And that is where broader wisdom is required, a wisdom that these mathematicians generally do not have. You always want such technical experts on tap in positions like this, but never on top. 
Let me give you an example of what I mean. When I have a monetary policy decision to make, I get on the telephone and spend four or five days calling informed people around the country to seek their views of supply, demand, wage, and inflation trends. I speak with labor leaders, grain dealers, manufacturers, individuals I respect in the regional Federal Reserve Banks, and others who have their fingers on the pulse of the U.S. economy. Then I go up to New York City and spend two days visiting bankers and corporate leader and others I trust to seek their advice. The eventual results of these discussions form the basis for my monetary policy decisions.
Homage: I ran across this McCormack story about Martin in the 2016 book Signals, by Pippa Malmgren (pp. 80-82).

Friday, December 20, 2019

"Stop Referring to a Coming Post-antibiotic Era—iI’s Already Here:" Centers for Disease Control

The front face of antibiotic resistance is a problem for medicine. But behind the scenes, the problem of antibiotic resistance becomes a problem of incentives and therefore of economics.

For example, health care providers for a long time had an incentive to under-invest in preventing infections, because after all, it was easy and cheap to cure infections with antibiotics.

In addition, each health care provider individually has an incentive to focus only on the patient sitting in front of them, and whether "just-in-case" or precautionary use of antibiotics might help that patient, while not taking into account the consequence that widespread use of antibiotics will also lead to a rise in infection that are resistant to antibiotics.

Further, the incentives for researchers to seek out and commercialize new antibiotics (or alternative anti-infection treatments) is shaped by incentives for innovation embodied in government support of research and development spending, regulations affecting how soon a new drug can be commercialized, protections for intellectual property, and whether government health care finance would (at least in some cases) be willing to pay a higher price for newly invented anti-infection drugs.

These issues all arise in Antibiotic Resistance Threats in the United States 2019, published by the Centers for Disease Control (November 2019). A substantial portion of the report is given over to estimating the size of the problem, and thus why the CDC concludes that the "post-antibiotic era" is "already here."
More than 2.8 million antibiotic-resistant infections occur in the United States each year, and more than 35,000 people die as a result. The AR Threats Report also includes an estimate of the burden of Clostridioides difficile (C. difficile) infections, because C. difficile is caused by the same factors that drive antibiotic resistance—antibiotic use and the spread of germs. In 2017, nearly 223,900 people in the United States required hospital care for C. difficile and at least 12,800 people died.
To make the message just a little more grim, this issue is a global one. Globalization means that infections with antibiotic resistance can evolve anywhere, and then travel anywhere via people, animals, or even just in the environment.

It's also important to remember that antibiotics themselves can cause adverse drug reactions. (Some of my family members are allergic to just about any drug that ends in -cillin.)
Twenty percent of all hospitalized patients who received an antibiotic experienced an adverse drug event (ADE) as a result. In the community, antibiotic-associated adverse events often require emergency treatment. Among children, antibiotics are involved in 46 percent of emergency department visits for ADEs. Among adults, antibiotics are involved in 14 percent of emergency department visits for ADEs. This amounts to more than 214,000 emergency department visits each year. Because any antibiotic use has the potential to cause harm, clinicians should prescribe their patients these powerful drugs only when the benefits outweigh the potential risks.
Antibiotics definitely continue to make medical sense for specific targeted cases, but they are such a magic wand for fighting infection that they have been overused. "CDC  estimates that U.S. doctors’ offices and emergency departments prescribe about 47 million antibiotic courses each year for infections that don’t need antibiotics. That’s about 30% of all antibiotics prescribed in these settings." Antibiotics have also be used extensively with both pets and feed animals, and on crops as well. But some germs fight back and develop antibiotic resistance.

The possible options fall into a few categories. One is to take as aggressive steps to reduce infections in the first place, so that fighting them isn't needed. Hospitals have become acutely aware of the problem, and there is solid evidence that hospital-acquired infections are declining (although it would of course have been nice if these efforts had ramped up about 20 years earlier). Higher vaccination rates, in the US and around the world, make infections less likely. Just getting everyone to wash their hands a few times each day could make a meaningful difference.

Of course, there's always a hope that we might manage to invent ourselves out of the problem, but while new inventions will help, they aren't likely to be a complete fix. The CDC report notes:
As a result of difficult scientific obstacles and challenging business incentives, many pharmaceutical companies are getting out of the antibiotic business altogether.
  • Between 1962 and 2000, no new major classes of antibiotics were approved to treat common and deadly Gram-negative infections.
  • Since 1990, 78% of major drug companies have scaled back or cut antibiotic research due to development challenges.

In addition, the report provides evidence that there are 42 new antibiotics being researched, but only four have reached the stage of an application to the Food and Drug Administration to allow used of a specific drug. Also, only about one in four of the new antibiotics being researched represent a new class of drugs or a new method of action, and it's clear how well many of the others would address existing antibiotic resistance. The CDC concludes:
With so few novel antibiotics and the number of effective antibiotics dwindling, it is clear we cannot rely on traditional antibiotics alone to treat infections. Alternative antibiotic agents and improved testing are key components to our national healthcare strategy to prevent and treat infections in new ways.
In short, antibiotic resistance is preventing the US healthcare system from saving more than 45,000 lives per year, and it's not going away. The ongoing battle is to use antibiotics only where needed, and find other options wherever  possible, so that antibiotics have as good a chance as possible to keep working where they can do so much good.

Here are some previous posts about the interaction of antibiotic resistance and economics:

Thursday, December 19, 2019

How Big is the Space Economy?

The short answer for an estimate of the size of the space economy is: "Probably around $400 billion."

The longer answer is that the U.S. Bureau of Economic Analysis is planning to calculate a "Space Economy Satellite Account" to measure the contribution of economic activities related to space in the US GDP. The beginning of these efforts is described in "Measuring the Value of the U.S. Space Economy," by Tina Highfill, Patrick Georgi, and Dominique Dubria, in the December 2019 issue of the Survey of Current Business. They write:
Many estimates of the global and international space economy currently exist from various private and government organizations. The Space Foundation (2019), a nonprofit advocacy organization, reported global space activity to be $414.8 billion in 2018, with commercial space revenues representing 79 percent of total space activity. The OECD (2014) found commercial revenue in the global space economy was dominated by consumer services (58 percent), followed by space manufacturing and launch services (33 percent), and satellite operator services (9 percent) in 2013. The Canada Space Agency (2018) reported Canada's space sector generated revenues of $5.6 billion (CAD) in 2017, spearheaded by satellite communications. Likewise, the German space industry generated an estimated $3.1 billion in sales in 2013, driven by satellite manufacturing (OECD 2014).
In the United States, the FAA (2018) estimated the U.S. space industry was valued at approximately $158 billion in 2016. Similar to Canada, satellite communications reportedly lead the space sector in the United States, specifically, satellite services, manufacturing, ground equipment, and launch services (FAA 2018). The DOC Bureau of Industry and Security (2014, 3) estimated employment for the “U.S. space industrial base” was over 2.6 million workers in 2012. Additionally, a report by Aerospace Industries and Association (2019, 3) estimated that “space systems” within the aerospace and defense industries contributed $39 billion to U.S. economic output in 2018.
For an overview of where space economics is headed, a useful starting point is an article by Matthew Weinzeirl, "Space, the Final Economic Frontier." in the Spring 2018 issue of the Journal of Economic Perspectives. As Weinzeirl emphasizes, economic activity related to space is rapidly moving through a transition from being a primarily government-funded activity to being primarily privately funded, which in turn raises a variety of issues related to safety and liability, clean-up of space trash, property rights, and more. From the start of his article:
After decades of centralized control of economic activity in space, NASA and US policymakers have begun to cede the direction of human activities in space to commercial companies. Figure 1 shows that NASA garnered more than 0.7 percent of GDP in the mid-1960s, but that level fell precipitously in the late 1960s and then gradually but persistently over the next 40 years to around 0.1 percent of GDP today. Meanwhile, space has become big business, with $300 billion in annual revenue. Recent valuations of innovative space firms like SpaceX ($21 billion), Orbital ATK ($7.8 billion), and dozens of small startups (receiving $2.8 billion in funding in 2016) suggest the market is optimistic about what’s next. Recent high-profile successes, most recently the launch and return of SpaceX’s Falcon Heavy rocket, are generating a new surge of public interest and enthusiasm.

The shift from public to private priorities in space is especially significant because a widely shared goal among commercial space’s leaders is the achievement of a large-scale, largely self-sufficient, developed space economy. Jeff Bezos, whose fortune from Amazon has funded the innovative space startup Blue Origin, has long stated that the mission of his firm is “millions of people living and working in space.” Elon Musk (2017), who founded SpaceX, has laid out plans to build a city of a million people on Mars within the next century. Both Neil deGrasse Tyson and Peter Diamandis have been given credit for stating that Earth’s first trillionaire will be an asteroid-miner (as reported in Kaufman 2015). Such visions are clearly not going to become reality in the near future. But detailed roadmaps to them are being produced (National Space Society 2012), and recent progress in the required technologies has been dramatic (Metzger, Muscatello, Meuller, and Mantovani 2013). If such space-economy visions are even partially realized, the implications for society—and economists—will be enormous. After all, it will be our best chance in human history to create and study economic societies from a (nearly) blank slate. Though economists should treat the prospect of a developed space economy with healthy skepticism, it would be irresponsible to treat it as science fiction.
For a previous post on this subject, see "Property Rights in Space" (December 26, 2014).

Tuesday, December 17, 2019

With the Rise of Index Funds, Who Watches the Companies?

A standard argument for the social usefulness of the stock market is that shareholders have an incentive to monitor and to scrutinize the companies in which they have invested. When this incentive is combined with requirements for firms to disclose information, to be audited, and to answer questions from shareholders--along with the ultimate power of shareholders to replace top executives--publicly-owned corporations must live an examined life. One can have honest arguments over how well this shareholder monitoring works. But the rise of index funds is a direct challenge to these arguments.

Index funds, for the uninitiated, seek only to mirror the performance of the overall stock market (as measured, for example, by an index like the S&P 500 or the Russell 3000). Three big companies dominate the market for index funds: Vanguard, Black Rock, and State Street Global Advisors (commonly called SSGA). An index fund is a passive investor, and it can be set up as an automated investor. Indeed, one main reason why an index fund can charge such low fees is that it does very little monitoring of companies, because it doesn't pick and choose between companies.

The combination of very low fees and a return which matches the overall stock market can be an excellent deal for everyday investor deciding on how to invest money in their retirement account, like me. Indeed, the legendary investor Warren Buffett has recommended low-cost index funds to everyday investors, and in his will instructs that his legacy to his wife be managed as a low-cost index fund. John Bogle, who created the first prominent index fund at Vanguard, became a folk hero to many investors.  But while investors have been moving in the direction of index funds, the issue of what happens to a stock market with substantially less monitoring has received less attention. 

Lucian Bebchuk and Scott Hirsi have been writing a series of essays on this topic. In "The Specter of the Giant Three," published earlier this year in the  Boston University Law Review (2019, 99:3, pp. 721-742), they lay out some facts and estimates about the growth of the Big Three. They write:
This Article analyzes the steady rise of the “Big Three” index fund managers—Blackrock, Vanguard, and State Street Global Advisors (“SSGA”). Based our analysis of recent trends, we conclude that the Big Three will likely continue to grow into a “Giant Three,” and that the Giant Three will likely come to dominate voting in public companies. ...
  • Over the last decade, more than 80% of all assets flowing into investment funds has gone to the Big Three, and the proportion of total funds flowing to the Big Three has been rising through the second half of the decade;
  • The average combined stake in S&P 500 companies held by the Big Three essentially quadrupled over the past two decades, from 5.2% in 1998 to 20.5% in 2017;
  • Over the past decade, the number of positions in S&P 500 companies in which the Big Three hold 5% or more of the company’s equity has increased more than five-fold, with each of BlackRock and Vanguard now holding positions of 5% or more of the shares of almost all of the companies in the S&P 500; ... 
  • Because the Big Three generally vote all of their shares, whereas not all of the non-Big Three shareholders of those companies do so, shares held by the Big Three represent an average of about 25% of the shares voted in director elections at S&P 500 companies in 2018. ... 
Assuming that past trends continue, we estimate that the share of votes that the Big Three would cast at S&P 500 companies could well reach about 34% of votes in the next decade, and about 41% of votes in two decades. Thus, if recent trends continue, the Big Three could be expected to become the “Giant Three.” In this Giant Three scenario, three investment managers would largely dominate shareholder voting in practically all significant U.S. companies that do not have a controlling shareholder.

What are the possible risks? Bebchuk and Hirst address the question in "Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy." The paper is forthcoming in the Columbia Law Review in December 2019, but what looks like a final version is also available as a working paper from the European Corporate Governance Institute. As they note early in this essay, the analytical framework for this paper is based on an essay by Bebchuk, Hirst, and Alma Cohen, "The Agency Problems of Institutional Investors," which appeared in the Summer 2017 issue of the Journal of Economic Perspectives.

Here's a taste of the Bebchuk and Hirst argument:
We show that the Big Three devote an economically negligible fraction of their fee income to stewardship and that their stewardship staffing levels enable only limited and cursory stewardship for the vast majority of their portfolio companies. ... Our analysis of the voting guidelines and stewardship reports of the Big Three indicates that their stewardship focuses on governance structures and processes and pays limited attention to financial underperformance. ... 
[I]ndex fund investors could benefit if index fund managers communicated with the boards of underperforming companies about replacing or adding certain directors. However, our examination of director nominations and Schedule 13D filings over the past decade indicates that the Big Three have refrained from such communications. ... 
Index fund investors would benefit from involvement by index fund managers in corporate governance reforms—such as supporting desirable proposed changes and opposing undesirable changes—that could materially affect the value of many portfolio companies. ...  We find that the Big Three have contributed very few such comments and no amicus briefs during the periods we examine, and were much less involved in such reforms than asset owners with much smaller portfolios. ... 
Legal rules encourage institutional investors with “skin in the game” to take on lead plaintiff positions in securities class actions; this serves the interests of their investors by monitoring class counsel, settlement agreements and recoveries, and the terms of governance reforms incorporated in such settlements. ... Although the Big Three’s investors often have significant skin in the game, we find that the Big Three refrained from taking on lead plaintiff positions in any of these cases.

Interestingly, Bebchuk and Hirst do not find evidence in support of one concern sometimes raised: that because the big index funds want  high returns for investors, they will tend to favor less competition between firms as a way of generating higher profits for firms. The authors clearly believe that a reduction in firm monitoring by the growing Big Three index funds poses real problems, but this doesn't seem to be one of them.

In response to the growth of the Big Three index funds, Bebchuk and Hirst have some concrete suggestions. Various changes in accounting and other rules might encourage the index firms to spend more on interacting with companies in their portfolio. There are concerns that some index companies may have a conflict of interest: if an index company also runs the retirement fund for a given company, it may become reluctant to chastise management of that company. Such conflicts could be prohibited. There is also an issue that under Section 13(d) of the Securities and Exchange Act, an investor who holds more than 5% of a company's stock with the purpose of influencing control of the company faces a number of additional disclosure rules, and so the Big Three index funds demonstrate their lack of interest in influencing control by remaining largely uninvolved with specific companies.

These kinds of issue are likely to heat up in the next decade or two, as the share of stock markets held by the Big Three index funds continues to rise. In my own mind, I sometimes separate those corporate governance issues related to the strategy and leadership of a single company from those more general issues that may affect a broad range of companies. The Big Three index finds are in an interesting and potentially powerful position to take stances on that second group of more general issues.

Monday, December 16, 2019

Prescription Drug Prices are Falling (says the Consumer Price Index)

"[W]e conclude that the Bureau of Labor Statistics’ (BLS) CPI Prescription Drug Index (CPI-Rx) is the best available summary measure of the price changes of prescription drugs. According to this measure, not only are drug prices increasing more slowly than general price inflation; in the most recent period, drug prices have been decreasing. From the peak in June 2018 through August 2019, the CPI-Rx has declined by 1.9 percent. Figure 1 plots the year-over-year percentage change in the CPI-Rx. Through August 2019, the year-over-year change in the index has now been negative for 8 of the previous 9 months."

So reports the White House Council of Economic Advisers in "Measuring Prescription Drug Prices: A Primer on the CPI Prescription Drug Index" (October 2019). The report offers a useful explanation of why it's hard to measure an overall change in prescription drug prices, the key choices made by the Bureau of Labor Statistics in doing so, and the basis for news stories which claim that prescription drug prices have been rising quickly. 

As a starter, here's the Consumer Price Index for Prescription Drugs as calculated by the US Bureau of Labor Statistics:

A price index is of course an average over all prices. In addition, it's a weighted average, where those items on which many people spend a lot get more weight than those items where only a few people spend.

Thus, if the price of an anti-cancer prescription drug used by a few thousand people rises by 100%, but but at the same time generic substitutes for some other prescription drug used by 20 million people become available at a fraction of the brand-name price, the overall price index for prescription drugs is likely to fall. The CEA report explains how the entry of generic equivalents into the prescription drug market are treated in this way:
The FDA approves generics if, among other things, the active ingredient is the same as the branded drug and the generic drug is bioequivalent to the brand name drug. As a result, generic drugs are considered substitutable (in fact, almost a perfect substitute) for the branded version but typically have a lower price, and many consumers switch from the branded version to the generic version shortly after the generic version becomes available. This switch is a price decline (lower price for an identical product) that is not captured by tracking the branded drug or the generic drug’s price over time. The CPI-Rx accounts for generic substitution by tracking the initial entry of a generic drug. After roughly 6 months after patent expiration (enough time for the generic to establish market share), the branded drug is randomly replaced with the generic drug, with a probability equal to the generic’s market share, and the price difference is recorded as a price decrease.
In addition, prescription drugs often have both a "list price" and an actual "transaction price," which results from a negotiation between drug manufacturers, health insurance companies, pharmaceutical benefit managers, as well as in some cases direct rebates to consumers. The BLS price index is based on the transaction price, not the list price. As the CEA report notes: "Express Scripts, one of the largest pharmacy benefit managers, reported that even though list prices increased in 2018, the prices paid by their clients fell. Some drug companies have themselves warned investors that increased discounts and rebates would offset any list price increases and that net prices would either be flat or fall in 2019 ..."

In addition, there is reason to believe that the prescription drug price index calculated by the BLS overstates the actual rise in prices because of a standard problem sometimes called the "quality" or "new goods" bias. Say that an old drug is replaced by a new drug, which works better and has fewer side effects, but sells for the same price. In this hypothetical, you are getting more for your money with the new drug; in fact, even if you paid a little more for the new drug, you might be better off. But while a perfect price index would presumably hold constant the quality and variety of drugs available, the practical reals-world price index doesn't do this, and for that reason will tend to estimate a higher rise in prices.

So why do so many news stories give the impression that prescription drug prices overall are rising quickly? Each news story has its own hook, of course, and the CEA report runs through a number of examples. In some cases, the news story might be focusing on a particular drug or small group of drugs. In other cases, the news story might focus only the average price increase for prescription drugs where the price rose, leaving out others. In other cases, the news story might count up how many drugs has price increase compared to how many did not, leaving out the issue of how much each of  the actual drugs is used.

Of course, the CPI measure of changes in prescription drug prices has practical problems, as do all price indexes. It's based on a sample of prescription drugs, not all of them, and less-prescribed drugs are more likely to be left out. It is based retail prescription drugs, and so it doesn't include prices for hospital- and doctor-administered drugs. Figuring out transaction prices and gathering information on rebates to consumers is imperfect. If you personally need a certain drug, where they aren't good substitutes, and the price of that drug goes up, it's perhaps not very comforting to read about what is happening with an overall price index of drugs that includes all the ones you are not taking.

But if our society is going to address issues like the out-of-pocket cost of many prescription drugs, it's important to see the overall issue clearly. And the overall evidence is that the price index for prescription drugs has fallen in the last year or so. 

Friday, December 13, 2019

Interview with Douglas Holtz-Eakin: Career, Budgets, Deficits

Mark A. Wynne of the Dallas Fed has one-hour interview: "Douglas Holtz-Eakin on Economic Projections, Deficits and Climate Change" (December 12, 2019). Holtz-Eakin has had an eminent academic career at Columbia and currently at Syracuse, but he is perhaps most widely lfor his time as head of the Congressional Budget Office from 2003-2005. Audio is available, but no full transcript. Here are some comments from Holtz-Eakin:

Why I became an economist
I’m an economist because in my senior year in college, I had a good adviser who pulled me aside and said, “You’re not ready to have a job. You should go to graduate school.” I was a math and econ double major, so I applied to all the math schools I could, all the econ schools I could. I got into math schools. And I got into a couple of econ schools with a little bit of [financial] aid, but it wasn’t looking great. And then fairly late in the game, Princeton [University] admitted me with a full ride and a stipend. So, they paid me to go to graduate school. I firmly believe I became an economist because of a clerical error somewhere.
As a staff economist at the Council of Economic Advisers in the early 2000s
At the White House, I found out that two things were true. No. 1, I would go into these meetings and I found that I was really teaching economics to the people who were lawyers and strategists—people who were not economists. And I realized I liked to teach economics, that I had been right about that instinct. The second thing I found out was that the academic research was super important. You invest a lot in research because in the policy process, people can and will say anything to get what they want. The only thing that checks them is the large amount of professional research out there that says, “There are a lot of things that could happen; that’s not one of them.”
At the Congressional Budget Office
The CBO was created by the Budget Act in 1974. Its purpose is to give the Congress the information it needs to make budgetary decisions. Think of the CBO as a consulting firm for Congress. It is nonpartisan by statute. There are two things that CBO directors cannot do: They cannot give policy advice, and they cannot pick sides.
In 2000, it appeared that the U.S. budget was actually in balance. There were projections of surpluses as far as the eye could see. I spent most of my time at CBO explaining why they were wrong. .... It was one of the situations where I know I was doing my job because nobody liked me.
Addressing the Deficit
Right now, there’s no way around it. To my friends on the right, I say, “We’re going to have to raise revenue. I’m sorry, you can’t grow your way out of this. It won’t work. There’s no way.” Then the question is, how can you intelligently raise revenue? The discussion should be about the quality of tax policy, not taxes up or down.
And to my friends on the left, I say, “You’re going to have to deal with the Social Security system that we currently have before we do big expansions.” It is just wrong that the Social Security program is right now scheduled to exhaust the trust fund in about 12 years. And at that point, if nothing is done, there would be a 25 percent across-the-board cut to people’s benefits in their retirements. That’s wrong. That’s no way to run a pension program.