Sunday, August 31, 2014

Was an Industrial Revolution Inevitable? (Part Three)

Let's not ask whether the Industrial Revolution was inevitable. Let's ask something a little less hypothetical: Why England, and why around 1800?

The answer (of course) is "Money!"

Production and consumption both depend on spending. Spending can't happen without money. So if you want an inexplicable increase of industry, you're going to need a matchingly inexplicable growth of funding. I suppose you could say supply creates its own demand, and a doubling of output generates a doubling of income. And, you know, during the era we call the Industrial Revolution, you just might be right. For nothing short of the exuberance of the greatest age of the inducement to investment could have made it possible to lose sight of the theoretical possibility of its insufficiency.

Still, the doubling of income comes during or after the doubling of output, not before. So where does the money come to increase output in the first place, so that income may increase enough to sustain the higher level of output? ...But maybe I shouldn't be calling it "money". Maybe I should be calling it accumulated financial capital. Money people would want to sink into new ventures, if they had it.

So where does that money come from? From government spending, perhaps. Government spending is the source of private sector net assets. Government spending could have been a catalyst, providing the funds to generate a doubling of output, and another doubling, and more, till the process took on a life of its own.

Government Spending as Catalyst

The following is brought forward from mine of 31 August, 2010, tweaked just a tad.

Graph #1
You see in Graph #1 a mountain of United Kingdom debt spanning two centuries and more. Remarkably, that mountain of debt occurred at the same time as the Industrial Revolution, and the same time as the rise and reign of the British Empire.

To expand upon coincidence, the two centuries of the mountain of U.K. debt completely envelop the 150 years Keynes called "the greatest age of the inducement to invest." As I noted in an earlier post, one is almost forced to wonder whether that mountain of debt actually helped the economy along, encouraging the Industrial Revolution and leading Britain to the top of the heap.

[Four years ago when I wrote the above paragraph, I did not know there was the question Why England, and why around 1800?. So, four years ago, I said "one is almost forced to wonder" about a relation between England's public debt and the Industrial Revolution. Now I know there is that question. So now I will say: Why England? Because of the public debt. Why 1800? Because of the public debt.]

Graph #2
Outrageous thought? Maybe. Maybe not. Numbers from Measuringworth show GDP increasing at an accelerating pace in the early years of the Industrial Revolution. The 2nd and 3rd dots on the trendline at right (years 1759 and 1801) show the awakening of growth. The 4th, 5th and 6th dots (1811, 1821, and 1830) show accelerating GDP growth. The sharpest growth occurs in the 1821-1830 period, just as the UK's mountain of debt peaks and begins its descent.

So the general trend was a steep increase in debt from 1700 to 1820. And after more than a century of persistent increase in public debt, GDP was growing like never before.

Graph #3
Debt numbers for Graph #3 come from Robert J. Barro, in Macroeconomics: A Modern Approach, Chapter 14, page 342. Barro's mountain (Figure 14.2, page 344) is smaller than Chantrill's (Graph #1, above), but both show a mountain when debt is compared to GDP.

This look at the raw numbers shows that public debt in the UK did not "peak." It simply stabilized after 1820. It was the growth of GDP that made public debt seem to shrink.

The increase in government debt comes before the increase in growth. We have public debt increasing (1740-1790), increasing rapidly (1790-1820), then stabilizing at a high level. We have Real GDP stable (before 1759), increasing slightly at the beginning of the Industrial Revolution (1759-1811), accelerating (1811-1830), and then achieving the sort of growth we long for today.

We have the increase in public debt first, followed by the increase in GDP. Then there is an acceleration of public debt first, followed by acceleration in GDP. And then we have public debt stabilizing while GDP growth continues, causing the long decline in debt as a percent of GDP that appears on Graph #1. In these events, we witness the birth of capitalism.

The Industrial Revolution began in England around the year 1800. Why? Because society was ready, and technology was ready, but most of all because net financial assets were available in sufficient quantity.

Saturday, August 30, 2014

Was an Industrial Revolution Inevitable? (Part Two)

Today's post is a direct continuation from yesterday's.  Gregory Clark's paper is The Sixteen Page Economic History of the World, recommended by Integralds at Reddit.

On page three of his paper, Gregory Clark writes:

Thus world economic history poses three interconnected problems:
  • Why did the Malthusian Trap persist for so long?
  • Why did the initial escape from that trap in the Industrial Revolution occur on one tiny island, England, in 1800?
  • Why was there the consequent Great Divergence?
This book proposes an­swers to all three of these puzzles — answers that point up the connections among them. The explanation for both the timing and the nature of the In­dustrial Revolution, and at least in part for the Great Divergence, lies in pro­cesses that began thousands of years ago, deep in the Malthusian era.

Clark asks: "Why did the initial escape from that trap in the Industrial Revolution occur on one tiny island, England, in 1800?"

Integralds asks: "Why Britain? Why not Japan, China, India, or Europe?"

Yeah. So, what does Gregory Clark have to say about it?

His is an odd analysis, and I have some trouble with it because of the way I was brought up. Clark's "processes that began thousands of years ago" is a euphemism for "ongoing human evolution". For openers, he writes:

In this model the economy of humans in the years before 1800 turns out to be just the natural economy of all animal species, with the same kinds of factors determining the living conditions of animals and humans.

In the years before 1800, Clark suggests, we were still like dogs and cats and goldfish. He writes:

The Darwinian struggle that shaped human nature did not end with the Neolithic Revolution but continued right up until the Industrial Revolution.

Note: the Darwinian struggle. For Gregory Clark this is not a metaphor. It is an explanation. Not only did we evolve from apes; later, we evolved from cave men. We evolved from hunter-gatherers into agricultural societies and then at least some of us evolved yet again, and it became possible to have an industrial revolution. And then I suppose we evolved further because we had an industrial revolution. Clark plays fast and loose with the concept of evolution.

For me, human nature is human nature. That's what makes us human. For me, human nature doesn't change. (I'm not offering evidence to support my view; I'm just telling you what I have always thought.) I read something one time about Hitler and his "master race" and how after World War Two in the U.S. we have de-emphasized the idea of genetic superiority as a causal factor. And I think that's probably true, and I think that's how I was raised, and I have to say that for me, the idea of human evolution as the cause of the Industrial Revolution is way off base.

Clark writes:

For England we will see compelling evidence of differential survival of types in the years 1250–1800. In particular, economic success translated powerfully into reproductive success. The richest men had twice as many surviving chil­dren at death as the poorest. The poorest individuals in Malthusian England had so few surviving children that their families were dying out.

The genes of poor people were filtered out of the gene pool, and the genes of rich people spread. I have trouble evaluating this idea because it's creepy. Plus I want to say it is wrong. People are not poor because of their genes. It's a there but for the grace of God thing. You know: "those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune."

And yet, Clark seems to be backing his argument with data. All I have is the word creepy.


The attributes that would ensure later economic dynamism—patience, hard work, ingenuity, innovativeness, education—were thus spread­ing biologically throughout the population.

Yeah, I still have "creepy". Clark softens his touch, saying "the economy of the preindustrial era was shaping people, at least culturally and perhaps also genetically." (Emphasis added.) Perhaps. But I cannot evaluate the merits of his idea.

What I can say is, it's not my kind of economics. Economists always seem to want to manipulate people, to change people's behavior in particular ways so as to create particular economic effects. I think that's bullshit. I think the economists who do that are the ones who don't have a clue about the economy. And that's just what Gregory Clark is doing with evolution.

One more quote from Clark. This must be the one Integralds had in mind:

Why an Industrial Revolution in England? Why not China, India, or Japan? The answer hazarded here is that England’s advantages were not coal, not colonies, not the Protestant Reformation, not the Enlightenment, but the accidents of institutional stability and demography: in particular the extraordinary stability of England back to at least 1200, the slow growth of English population between 1300 and 1760, and the extraordinary fecundity of the rich and economically successful. The embedding of bourgeois values into the culture, and perhaps even the genetics, was for these reasons the most advanced in England.

Fecundity and genetics and values. Oh, my!

Friday, August 29, 2014

Was an Industrial Revolution Inevitable? (Part One)

I know. I just dissed Reddit, and now I'm back. Well, it's not like that really. I went back to Reddit because I was working on this "Industrial Revolution" post, this one right here, and while I was at Reddit I read the rules and took offense to Rule Two.

I think those rules were recently changed. Maybe not. Maybe I've been going there for N years and never noticed Rule Two before. I don't think so. Maybe I'm being overly sensitive. I don't think so. (Maybe I am. Thanks, G.) But anyway, that's not why we're here right now.

I went back to R/Economics for the discussion at the link mberre put up: Was an Industrial Revolution Inevitable?: Economic Growth Over the Very Long Run. Who could resist a title like that? Not me. Besides the discussion, there's a link to a 54-page PDF by Charles I. Jones, bearing the same title as mberre's link. It is an NBER working paper, paper #7375, dated October 1999. And -- I should get this out of the way first thing -- the paper is
© 1999 by Charles I. Jones. All rights reserved.
Having said that, it seems I am now allowed to quote short sections, not over two paragraphs in length, without first getting permission.

I want to quote a short section from the Introduction of the Jones paper:
Conservative estimates suggest that humans were already distinguishable from other primates 1 million years ago. Imagine placing a time line corresponding to this million year period along the length of a football field. On this time line, humans were hunters and gatherers until the agricultural revolution, perhaps 10,000 years ago — that is, for the first 99 yards of the field. The height of the Roman empire occurs only 7 inches from the rightmost goal line, and the Industrial Revolution begins less than one inch from the field’s end. Large, sustained increases in standards of living, our working definition of an industrial revolution, have occurred during a relatively short time — equivalent to the width of a golf ball resting at the end of a football field.

I like that imagery.

Let me jump back now from the Jones PDF to the discussion at mberre's link.

"No," says Integralds. "You will not drag me into an Industrial Revolution discussion today. But this paper gives me ideas for an Article of the Week around November/December."

You can tell from reading his stuff, Integralds has the perspectives of an economist; nobody's gonna boot his stuff off the site. You can tell he's good. You can't... I can't tell he's a "he" but I'm gonna take that bet to keep the text flow going.

"What did you have in mind?" mberre replies.

Integralds then identifies three papers he might want to recommend for "Article of the Week" and says he's already got other papers to recommend for September and October, so it looks like November or later for his contribution to the Industrial Revolution discussion. And then he says:

I think the idea that the IR was the single important macro event in history is still underappreciated by some. The discussions of "Why Britain? Why not Japan, China, India, or Europe?" are still interesting. The discussion of where the IR came from is interesting.

Ain't it, though? It's enough to bring you back to Reddit, despite Rule Two.

The first of the three papers Integralds identifies is Gregory Clark's Sixteen Page Economic History of the World. Who could resist a title like that? Not me.

Before I get into the 16-page paper, I want to quote another short section from the Jones paper -- this time, from the conclusion:
A long time ago, the world population was relatively small and the productivity of this population at producing ideas was relatively low, in part because of the absence of institutions such as property rights. For example, in the year 25000 B.C., the model suggests that it took several hundred years before the society of 3.34 million people produced a single new idea. Once this idea was discovered however, consumption and fertility rose, producing a rise in population growth, so that there were more people available to find new ideas, and the next new idea was discovered more quickly. In the model, this feedback leads to accelerating rates of population growth and consumption growth provided the aggregate production technology is characterized by increasing returns to accumulable factors.

In the absence of shocks, this general feedback seems capable of producing something like an industrial revolution. However, the quantitative analysis suggests that changes in institutions to support innovation have been extremely important. The rise and decline of institutions such as property rights could be responsible for the rise and decline of great civilizations in the past.

I didn't read all 54 pages. I skipped to the conclusion. Slow reader. But hey, I don't want his whole argument. I want his idea, and I don't want to wait "several hundred years" to get it.

The idea is, well this will be crude, there is maybe one good new idea in maybe two billion man-years of human existence. (" took several hundred years before the society of 3.34 million people produced a single new idea." Say 600 years. 600 years times 3.34 million people is just over two billion man-years.) (Oh I'm doing it again. ...just over two billion person-years. Does that comfort you?)

For Charles I. Jones, when a good idea comes along and works its way into the culture, society can support a little larger population than it did before. And then, with a larger population it takes fewer years to accumulate the next two billion man-years. So the next good idea comes along a little sooner. Then again, the good idea leads to a society that can support more people; and the larger population means the next new idea will again come along a little sooner the next time.

Kinda clever, kinda mundane. Not the most interesting analysis I've ever read. But it's a place to start. After all, as Integralds said:

The discussions of "Why Britain? Why not Japan, China, India, or Europe?" are still interesting. The discussion of where the IR came from is interesting.

It gets interesting.

So, the other guy. Gregory Clark. 16 pages. Here's his opening paragraph:
The basic outline of world economic history is surprisingly simple. Indeed it can be summarized in one diagram: figure 1.1. Before 1800 income per person—the food, clothing, heat, light, and housing available per head—varied across societies and epochs. But there was no upward trend. A simple but powerful mechanism explained in this book, the Malthusian Trap, ensured that short-term gains in income through technological advances were inevitably lost through population growth.

Okay, it's interesting already! Clark says a good idea comes along and pushes up per-capita income. Then the population expands, and per-capita goes down again.

The best part is, Clark and Jones totally contradict one another. They agree that a good idea (or a "technological advance") makes people better off. But they go two different directions from there. Jones says the population increases, so good ideas come sooner. Clark says the population increases, so the per-capita gains are lost. This is a classic contradiction. I love it.

Here's the thing. For Jones, the graph of human progress would look like a very slow, very long-term exponential rise. It's always upward. It just takes a really really long time to get to the far end of the football field. For Clark, it's not always upward. For Clark, it's up-and-down. Here's his Figure 1.1:

Clark Figure 1.1: World economic history in one picture. Incomes
rose sharply in many countries after 1800 but declined in others.

I think Clark's graph is more realistic than the one I made up for Jones. But I have to raise an eyebrow at Figure 1.1. It goes back in time some three thousand years, and the graph shows all that detail? Tell you the truth I was drawing wavy lines like that, underlining passages in my printout of Clark's PDF.

So far, I prefer Clark's 16-page argument. But we'll see how it goes.

Thursday, August 28, 2014

An open economy? Maybe. An open R/Economics?? No.

"Posts ... from perspectives other than those of economists ... will be removed."

Sayonara, R/Economics.

Wednesday, August 27, 2014

What do we gain by this? We reduce what it costs to have a money supply. And that's a big deal. It means we reduce the cost-push pressures that have troubled our economy since the 1960s.

At The Guardian: Nobel-winning economists challenge conventional thinking on recovery. I thought it was confusingly written. But there are a few sentences I have to address:

Princeton university professor Christopher Sims threw the first punch. Monetarists, he said, believe that an expansion of debt is like an expansion of money and can cause inflation. There are two reasons why this view is wrong. The first is that interest is paid on this debt, so it is not free money. More importantly, the newly minted central bank debt, which amounts to more than $5tn (£3tn), is a weak policy that has failed to increase consumer demand and therefore has little effect on inflation.

To go back a step, the expansion of money by central banks, familiar to us as quantitative easing (QE), was sold to politicians as a way to encourage bank lending, increase consumer spending and generate moderate inflation. Sims said QE is weak when governments accompany the bond buying with dire warnings of the need to tackle these debts at a later date – either through cuts in expenditure or higher taxes.

There's too many thoughts in there, and not enough focus. But anyway, Professor Sims says some people think "an expansion of debt is like an expansion of money and can cause inflation." Of course it is, and of course it can. And it has. Look at it from the other side: a shrinkage of debt is like a shrinkage of money and can cause deflation. One of the great concerns of the Federal Reserve in the years since the crisis was to avoid deflation. Back in 2009, for example, Glenn D. Rudebush of the San Francisco Fed wanted to "prevent inflationary expectations from falling too low". He wasn't fighting inflation. He was fighting deflation.

With falling debt comes deflation. With rising debt comes inflation. Professor Sims denies it. Why? Because "interest is paid on this debt, so it is not free money." This is like random thoughts from nowhere.

Yes, interest is paid on debt. It is the cost of keeping money in circulation. The alternative is to snatch a dollar out of circulation -- a dollar of income -- and use it to pay down debt. Until you do that, you are paying interest to keep money in circulation, the money that you borrowed and spent into circulation.

Here's the thing: The interest that we pay to keep money in circulation is an economic cost. For me, it competes with other uses of that money, like going out to dinner once in a while or buying a new computer. For businesses, the cost of keeping money in circulation competes with the cost of labor. Business interest costs compete with business labor costs for business dollars. The more they pay as interest, the less remains for wages and salaries.

// Today's post title is from yesterday's post.

Tuesday, August 26, 2014

"Slack" Samuelson

Take two.

Yesterday we looked at Robert J. Samuelson's remarks in the Washington Post: Interest rates and the Fed’s great ‘slack’ debate.

Today, definitions.

What does Samuelson mean by "slack"?

Is it time to consider raising rates to preempt higher inflation? The answer depends heavily on the economy’s slack: its capacity to increase production without triggering price pressures...

“Slack” is economics jargon for spare capacity. It means unemployed workers, idle factories, vacant offices and empty stores.

Got it? Slack is the thing we don't want.

But that's Samuelson's definition of slack, not mine. He's talking about slack in the real economy. I want to see slack in the financial system. Just because we know how to turn a dollar of money into $40 dollars of debt, doesn't mean we should do it. Why not reduce that number to $20 of new debt from each new dollar of money, and have $20 slack? If that's not enough credit, they can print more money. (It won't be inflationary, as long as debt-per-dollar is restrained.)

If $20 debt is still too much, cut it in half again, and double the money again. What do we gain by this? We reduce what it costs to have a money supply. And that's a big deal. It means we reduce the cost-push pressures that have troubled our economy since the 1960s.

We don't need more slack in the real economy. We need more slack in the financial sector, that's where we need it.

Monday, August 25, 2014

Economists know about the crisis. They know they missed a big one. They know they misunderstand something. Yet they go back to the same old song and dance.

From Robert J. Samuelson in the Washington Post, Interest rates and the Fed’s great ‘slack’ debate:

Call it the great “slack” debate. For nearly six years, the Federal Reserve has held short-term interest rates near zero to boost the economy. Is it time to consider raising rates to preempt higher inflation? The answer depends heavily on the economy’s slack: its capacity to increase production without triggering price pressures. Although economists are arguing furiously over this, there’s no scientific way to measure slack.

“Slack” is economics jargon for spare capacity. It means unemployed workers, idle factories, vacant offices and empty stores. Its significance is obvious. If there’s a lot of slack, inflation shouldn’t be a problem.

How much slack is there today?

We don’t know.

Economic policymaking is not an exact science. Ideally, the Fed would begin raising interest rates sometime just before the economy exhausts its slack. But we don’t know where that point is.

There is absolutely nothing new in Samuelson's view. People always argue whether the economy's growth indicates that interest rates should go up now or go up later. There's nothing new in that.

There's nothing new, either, in thinking that raising interest rates is the right solution to the inflation problem. That's widely agreed upon.

That's the problem. Raising interest rates is the ideal solution, according to Robert J. Samuelson. But it isn't. It's not even a good solution. It's a bad solution. It undermines growth. It increases "slack". It increases unemployment.

A better solution arises from looking at the problem in a new light.

Why cut off new growth by raising rates? Isn't that foolish? It's not future growth that is responsible for inflation, if and when we have inflation. It's recent growth.

Much of that recent growth will have been funded by recent borrowing. Recent borrowing. The money has already been spent. That's how we got the growth. And there is "extra" money that's still in the economy, contributing to price pressures.

Our solution, the universally accepted solution, Robert J. Samuelson's ideal solution, is to raise interest rates, cut off new growth, and cut off inflation.

I think not.

Leave rates low. Let it grow. If you're concerned about inflation, take the money out of the economy that's already in the economy, causing inflation. Take out the extra money that was put there by recent borrowing. Take that money out of the economy by getting the people who borrowed it to pay it back. Pay back that debt, extinguish that debt, and extinguish the money that came into existence along with that debt.

Fight inflation by reducing private debt. Fight inflation by creating incentives that encourage people to pay down debt. Pay down debt to fight inflation.

Borrow, you bastards! Borrow, and grow the economy. But tomorrow, pay it back.

Sunday, August 24, 2014

So I hit a rock with the mower...

Assuming "Balance on Current Account" is a flow, not a stock:

Graph #1: Balance on Current Account as a Percent of GDP
The accumulated balance was certainly in our favor until the early 1980s. The U.S. in other words must have had an accumulated surplus until the 1980s. Some minor trade deficits, but no trade debt till later.

On this graph you can't even see much instability arising with the closing of the gold window in 1971.

"An incident illustrates..."

Kenneth Arrow, quoted by Lars P. Syll:
It is my view that most individuals underestimate the uncertainty of the world. This is almost as true of economists and other specialists as it is of the lay public. To me our knowledge of the way things work, in society or in nature, comes trailing clouds of vagueness … Experience during World War II as a weather forecaster added the news that the natural world as also unpredictable.

An incident illustrates both uncertainty and the unwillingness to entertain it. Some of my colleagues had the responsibility of preparing long-range weather forecasts, i.e., for the following month. The statisticians among us subjected these forecasts to verification and found they differed in no way from chance. The forecasters themselves were convinced and requested that the forecasts be discontinued. The reply read approximately like this: ‘The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.’
On that theme, General George S. Patton:

I would rather have a good plan today than a perfect plan two weeks from now.