Do machines complement labor, leading to higher wages and better living standards for ordinary workers?  Or do they substitute for labor, driving down living standards for ordinary workers and concentrating wealth in the hands of the few? We are now in the midst of what many economists call the Second Industrial Revolution.  The First Industrial Revolution introduced machines with physical power.  The Second Industrial Revolution induces machines with mental power. The First Industrial Revolution began late in the 18th century.  Early on, observers such as Charles Dickens and Karl Marx focused on the harsh conditions of the working class.  But by the latter part of the 20th century, it was evident that most workers had achieved much higher living standards.  It now appears that industrial age machines turned out to be complementary with labor.  If there was a loser from the Industrial Revolution, it was the horse.   How will the Second Industrial Revolution turn out?  These five books offer differing perspectives.  In chronological order, they are:   Robert Reich, The Work of Nations, 1992.  Reich saw that the future did not bode well for America to have a large manufacturing work force.  He saw information-age technology as complementary with  workers whose skills involve manipulating symbols–words, numbers, and computer code.  But it would substitute for workers who manipulate things.  As he saw it, America needed to train its work force to be symbol analysts.   Neal Stephenson, The Diamond Age, 1995.  In this science fiction novel, Stephenson depicts a world in which nanotechnology, as described in Eric Drexler’s monograph “Engines of Creation,” has matured.  As a result, no one lives in hardship.  Any standard product can be  made cheaply by a “matter compiler,” what we would now think of as a 3D printer with superlative capabilities.  Machines have substituted for labor to the point where a lower class, called “thetes,” enjoys a coarse consumer lifestyle without having to work.  An upper class, called “Vickies,” has skills that complement the machines, and this elite indulges in a taste for old-fashioned hand-crafted goods.   Ray Kurzweil, The Age of Spiritual Machines, 1999.  This is not a novel, but to many it reads like science fiction.  Kurzweil depicted a future in which artificial intelligence would catch up with and surpass human intelligence.  At that point, computers would be a substitute for every current form of work but still complementary with the human race, as humans and computers would eventually merge.   Robert Fogel, The Escape from Hunger and Premature Death, 1700 – 2100.    Fogel, an economic historian and Nobel Laureate, points out that there is a long-term trend of a rising share of consumption devoted to education and health care and a corresponding decline in the share devoted to food and manufactured goods.  If he is correct—and I believe that he is—then the many politicians, commentators, and policy wonks who argue for trying to preserve American manufacturing jobs are engaging in a Canute-like exercise of trying to hold back the tide.   Tyler Cowen, Average is Over, 2013.  Cowen points out that modern communication technology means that star performers in business and the arts can reach any and every consumer.  This makes superfluous the merely good artist or the merely good business.  This raises the possibility of a two-class society, reminiscent of that depicted by Stephenson.     As an Amazon Associate, Econlib earns from qualifying purchases.   (0 COMMENTS)

In recent years, the US government has imposed tariffs on a number of nations, notably China. The administration argued that these policies would reduce our trade deficit. Many economists pointed out that the trade balance is basically domestic saving minus domestic investment, and that our highly expansionary fiscal policy would actually make the trade deficit larger. (Budget deficits tend to reduce domestic saving.) And this is exactly what seems to have happened since 2016: Some of the products that were formerly exported from Chinese factories are now being produced in Vietnam.  With a growing Vietnamese trade surplus, the US government has now accused Vietnam of currency manipulation.  Here’s the FT: Vietnam had been one of the rare beneficiaries of Trump’s trade war with China — until now. Last Friday, the US administration announced late in the evening that it would launch a section 301 investigation — the same process it used to place tariffs on billions of dollars of Chinese imports into the US — to examine the country’s “unfair currency practices”. Why might the trade bods of the Trump administration be interested in Vietnam? The administration’s tariffs on China have not done much to persuade companies to move their manufacturing back to the US. Plenty have moved over to Vietnam instead, where they can secure cheap labour. In the past, currency manipulation charges were based on a specific set of rules developed by the Treasury Department.  This no longer seems to be the case: The inter-agency process here has left people in Washington scratching their heads. Traditionally, the US Treasury is in charge of international financial policy, and it would be it that would decide if another country was intervening in its exchange rate or not. As Mark Sobel, former Treasury official, has pointed out, there are all sorts of reasons that an emerging market currency might be undervalued against the dollar without necessarily indicating government manipulation. Now the process of labeling a country a currency manipulator seems purely discretionary, based on whether we are annoyed by a country’s trade surplus.  In a recent Mercatus paper, I argued that “currency manipulation” is not a useful concept. Until the US addresses its saving/investment imbalance, we will continue to run large deficits.  Like a game of whack-a-mole, shutting down imports from one country will merely expand the trade deficit with other countries. (0 COMMENTS)

In the current shortage economy, why are some goods are in shortage (in the economic sense: none available at the on-going price), others are simply not produced (intensifying the shortage), and some others (I’ll consider the case of ammunition) are produced as needed and sold at higher prices in violation of the states’ “price gouging” laws or the federal Defense Production Act? To answer this question, it is necessary to understand the economic concept of shortage, as opposed to a blob intuition (I call it “smurfage”) encompassing all situations where somebody does not have something that he would like to have, but not necessarily more than something else. In another post, I mentioned many ways in which producers—incentivized by consumers who bid up prices instead of having nothing—can stealthily increase prices (see “Why Shortages Are Not More Widespread,” August 17, 2020). One way is for producers to limit the diversity of their offerings, reallocating production to higher-margin products. Another example of that was provided by the Wall Street Journal a few days ago (“Coca-Cola to Discontinue Zico, May Drop Coke Life,” October 4, 2020). Like many social planners at heart, Bernie Sanders and Donald Trump don’t understand how product diversity is efficient when it corresponds to consumer demand backed with money. Sanders declared: You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers… In the same mode but for other reasons, Trump said, in his typical baby talk: I see people buying five dolls for their daughters, maybe buy two dolls for their daughters… Ways of satisfying consumer demand when government edicts (price controls or political allocation of available supplies) interfere include the black market or, when repression is mild or irregular, the grey market. This appears to be the current situation in the retail market for ammunition. As one can easily check online, established ammo retailers charge prices close to pre-control levels but, most of the time, the products are “out of stock” and the shelves, even online shelves, are bare. This market, however, is very competitive with many online competitors who are apparently willing to risk government suits or prosecutions, don’t have a politically-correct reputation to maintain, and charge what the market will bear. Consumers who need ammo for self-defense, shooting, or hunting can thus get some at higher prices—but, needless to say, they remain free to benefit from low government-capped prices and have nothing to buy. To give an example of the phenomenon, take 9mm cartridges, the most popular caliber for semi-auto pistols. You can easily check at any large retailer that 9mm ammo is still priced at roughly (or discreetly more than) pre-control prices: around $12 for a box of 50 cartridges used mainly for target shooting and twice that price for 20 premium self-defense cartridges. You can also check that on the grey online market, these prices are now much higher—typically about five times more, when they do have the ammo in stock. It is not perfect but it’s better than to have no choice at all. Note that there is less diversity on this grey market than there used to be on the white market. One reason is that the established manufacturers of ammo are still forbidden to “price-gouge” the retailers and thus have presumably reduced the diversity of their production. One interesting question is, Why do government prosecutors close their eyes to gray-market suppliers who offer ammunition at market-clearing and illegal prices? One hypothesis would that the government loves gun owners and rednecks, on whom the electoral fortune of the current administration may hinge. By allowing ammo prices to rise up to their market-clearing level, government prosecutors at least allow gun owners (and hunters) who need ammo more urgently to bid up prices; otherwise, long and haphazard queues would be the only hope. Of course, this hypothesis does not make sense as these same governments claim that laws against “price gouging” favor the consumers! Moreover, there are more than 40 state attorney generals who are supposed to enforce “price gouging” laws, a sizeable proportion of whom don’t like private gun owners at all. The opposite hypothesis—that governments hate private ammo buyers and do not mind throwing them in the paws of price gougers—does not make more sense. One explanation of this strange government tolerance for the grey ammo market is consistent with what classical liberal and libertarian theorists have demonstrated. When a government tries to control prices and allocate goods (like in the current emergency), it cannot respect the abstract and impartial rule of law; it has to arbitrarily discriminate among people and treat them unequally. Moreover, government planners are seldom efficient because they have little incentives to be and because they lack the knowledge necessary to control a vast, diversified, and complex economy. Arbitrary interventions and prosecutions also come from the difficulty and cost of going after everybody breaking the law: the personnel of state attorney generals is not infinite and their employers are broke. We are getting a glimpse at why, in a government-controlled economy, nothing works. The less government-controlled the economy is, the better things work. (0 COMMENTS)

In the current shortage economy, why are some goods are in shortage (in the economic sense: none available at the on-going price), others are simply not produced (intensifying the shortage), and some others (I’ll consider the case of ammunition) are produced as needed and sold at higher prices in violation of the states’ “price gouging” laws or the federal Defense Production Act? To answer this question, it is necessary to understand the economic concept of shortage, as opposed to a blob intuition (I call it “smurfage”) encompassing all situations where somebody does not have something that he would like to have, but not necessarily more than something else. In another post, I mentioned many ways in which producers—incentivized by consumers who bid up prices instead of having nothing—can stealthily increase prices (see “Why Shortages Are Not More Widespread,” August 17, 2020). One way is for producers to limit the diversity of their offerings, reallocating production to higher-margin products. Another example of that was provided by the Wall Street Journal a few days ago (“Coca-Cola to Discontinue Zico, May Drop Coke Life,” October 4, 2020). Like many social planners at heart, Bernie Sanders and Donald Trump don’t understand how product diversity is efficient when it corresponds to consumer demand backed with money. Sanders declared: You don’t necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers… In the same mode but for other reasons, Trump said, in his typical baby talk: I see people buying five dolls for their daughters, maybe buy two dolls for their daughters… Ways of satisfying consumer demand when government edicts (price controls or political allocation of available supplies) interfere include the black market or, when repression is haphazard and irregular, the grey market. This appears to be the current situation in the retail market for ammunition. As one can easily check online, established ammo retailers charge prices close to pre-control levels but, most of the time, the products are “out of stock” and the shelves, even online shelves, are bare. This market, however, is very competitive with many online competitors who are apparently willing to risk government suits or prosecutions, don’t have a politically-correct reputation to maintain, and charge what the market will bear. Consumers who need ammo for self-defense, shooting, or hunting can thus get some at higher prices—but, needless to say, they remain free to benefit from low government-capped prices and have nothing to buy. To give an example of the phenomenon, take 9mm cartridges, the most popular caliber for semi-auto pistols. You can easily check at any large retailer that 9mm ammo is still priced at roughly (or discreetly more than) pre-control prices: around $12 for a box of 50 cartridges used mainly for target shooting and twice that price for 20 premium self-defense cartridges. You can also check that on the grey online market, these prices are now much higher—typically about five times more, when they do have the ammo in stock. It is not perfect but it’s better than to have no choice at all. Note that there is less diversity on this grey market than there used to be on the white market. One reason is that the established manufacturers of ammo are still forbidden to “price-gouge” the retailers and thus have presumably reduced the diversity of their production. One interesting question is, Why do government prosecutors close their eyes to gray-market suppliers who offer ammunition at market-clearing and illegal prices? One hypothesis would that the government loves gun owners and rednecks, on whom the electoral fortune of the current administration may hinge. By allowing ammo prices to rise up to their market-clearing level, government prosecutors at least allow gun owners (and hunters) who need ammo more urgently to bid up prices; otherwise, long and haphazard queues would be the only hope. Of course, this hypothesis does not make sense as these same governments claim that laws against “price gouging” favor the consumers! Moreover, there are more than 40 state attorney generals who are supposed to enforce “price gouging” laws, a sizeable proportion of whom don’t like private gun owners at all. The opposite hypothesis—that governments hate private ammo buyers and do not mind throwing them in the jaws of price gougers—does not make more sense. One explanation of this strange government tolerance for the grey ammo market is consistent with what classical liberal and libertarian theorists have demonstrated. When a government tries to control prices and allocate goods (like in the current emergency), it cannot respect the abstract and impartial rule of law; it has to arbitrarily discriminate among people and treat them unequally. Moreover, government planners are seldom efficient because they have little incentives to be and because they lack the knowledge necessary to control a vast, diversified, and complex economy. Arbitrary interventions and prosecutions also come from the difficulty and cost of going after everybody breaking the law: the personnel of state attorney generals is not infinite and their employers are broke. We are getting a glimpse at why, in a government-controlled economy, nothing works. The less government-controlled the economy is, the better things work. (7 COMMENTS)

Last week I posted Part 1 of my observations on the discussion between Kevin Hassett and Austan Goolsbee. This is Part 2. I left with the issue of the federal deficit and debt. 35:30: Goolsbee doesn’t think we’ll be Greece. We have low income tax rates, no VAT, and better demographics. He argues that tax rates on grandkids will need to he higher. He thinks we need immigration to offset the aging of the population. DRH comment: I’m disappointed that neither Hassett nor Goolsbee discussed refinancing the debt to 10 to 30-year bonds, thus saving on a potential time bomb if interest rates rise by even 2 percentage points. 38:00: Goda says that the chance of kids today outearning their parents in the long run is less than for my generation outearning our parents. 39:00: Goda follows Goolsbee’s lead and turns to inequality. 39:45: Hassett talks about Trump’s opportunity zones and also notes Trump’s efforts on prison reform. 41:30: Hassett emphasizes that charter schools should not be curtailed. 42:00: Goda links the California fires and climate change. She doesn’t justify this. 42:30: Hassett emphasizes Trump’s “regulatory budget.” He also points out that Trump’s economists finally started including the deadweight loss from raising taxes to fund enforcement of regulation. (I think he confuses it by making a claim at first that even the cost of enforcing the regulations wasn’t included as a cost. That’s hard to believe.) 45:00: Goolsbee claims that Trump’s economists did cost/benefit analysis wrong. Hard to believe, but I don’t know. 47:30: Goda asks about trade. 48:00: Hassett points out that trade deals are thousands of lines and that he learned this from Goolsbee. Hassett says that trade deals were asymmetric in the past, with the U.S. conceding more than other countries. But this seems (to DRH) like a protectionist argument. “Conceding” to other countries presumably means dropping our tariffs and quota restrictions more than they drop theirs, so that our consumers gain more than their’s do. 50:30: Goolsbee says Trump’s approach is muscular declaration of trade wars with our allies: Canada, Mexico, Japan, Korea, Germany, the EU, and Australia. And with China. 52:25: Goolsbee surprises me by saying that the USMCA is better than NAFTA. For my view see “NAFTA 0.0,” Defining Ideas, December 20, 2019. 53:00: The U.S. is putting agriculture on the welfare payroll. 53:30: Hassett goes back to the asymmetry point. 54:40: Goda asks them to share their data, based on input from listeners. 55:10: Goda asks question from the audience about immigration. What’s the appropriate policy? 56:00: Hassett says that when he was in the White House, Jared Kushner and others put together a reform that would make U.S. immigration policy like Australia’s. 56:45: Goolsbee’s best moment. Without robust immigration, we’ll have problems with safety net (presumably Social Security and Medicare) due to baby boomers. Points out how actively hostile Trump is to legal immigration also. 58:40: “This is not the American way.” I could hug Goolsbee. 59:00: Goda asks about Biden’s tax policies. To be continued in Part 3. (0 COMMENTS)

David Beckworth directed me to an interesting post by Tim Duy: Most likely, net job growth will continue even if at a slower pace. That job growth will be sufficient to drive income growth, and income growth will support consumption. But what about the missing fiscal stimulus, you say? I know this will be widely hated, but the decline in spending in nominal and real terms at this point pretty much matches the decline in income excluding current transfer payments . . . The fall in consumption exceeded the fall in incomes early in the cycle while, on net, transfer payments are ending up as forced saving. The virus is the key impediment to growth at this point; there are certain sectors of the economy, leisure and hospitality in particular, with limited prospects until the virus is under greater control. There isn’t really a debate on this point; there is simply a nontrivial supply-side constraint on the economy right now. I don’t hate Tim Duy for saying that the key problem now is on the supply side, as I’ve also been making that argument.  That’s not to say that demand stimulus would have no value right now—both Duy and I would prefer somewhat higher inflation expectations—but this isn’t the main factor currently holding back the recovery. Some people complain that the Fed’s new “average inflation targeting” policy is quite vague and ambiguous.  That’s true, but in an earlier blog post I argued that as a practical matter it is pretty clear what the Fed intends to do.  Duy linked to a speech by Chicago Fed president Charles Evans that confirms my prediction: Forget the many years of underrunning 2 percent since 2008, and let’s just start averaging beginning with the price level in the first quarter of 2020. Core PCE inflation in the SEP is projected to be 1-1/12 percent this year and then gradually rise to 2 percent in 2023.12 Suppose it hits 2-1/4 percent in 2024 and then stays there. In this scenario, cumulative average core inflation starting from the first quarter of 2020 does not reach 2 percent until mid-2026. That is a long time. If you can produce 2-1/2 percent inflation in 2024, you can get there about a year quicker. That was my view as well, that the Fed would start the clock at the beginning of 2020 and begin to push inflation a few tenths of percent above 2.0% in 2024, until the near-term inflation undershoot was offset.  I don’t think there’s much doubt any longer as to what the Fed intends to do.  The only question now is whether they will do what they promise or renege on their promise.  We’ll probably know the answer by 2025. (1 COMMENTS)

Last month, in a post on an EconTalk with Bob Chitester, I seconded Bob’s view of the importance of poetry. One of my favorites, which I never see anyone else quote, is one I learned in high school. My high school English teacher, believe it or not, was Miss English. It’s titled “On the Shortness of Time” and is by Wilfrid Scawen Blunt. My favorite lines are the last two. Here it is: If I could live without the thought of death, Forgetful of time’s waste, the soul’s decay, I would not ask for other joy than breath, With light and sound of birds and the sun’s ray. I could sit on untroubled day by day Watching the grass grow, and the wild flowers range From blue to yellow and from red to grey In natural sequence as the seasons change. I could afford to wait, but for the hurt Of this dull tick of time which chides my ear. But now I dare not sit with loins ungirt And staff unlifted, for death stands too near. I must be up and doing — ay, each minute. The grave gives time for rest when we are in it.     (0 COMMENTS)

Sam Peltzman, a University of Chicago emeritus professor, could easily win this year’s Nobel Prize in Economics for his pioneering work on the economics of regulations. Peltzman’s odds of winning have probably improved because of his work nearly a half century ago on the impact of the FDA’s efficacy requirement for drug approval, which was imposed in 1962. Before that year, drugs only had to pass the FDA’s safety standards. Peltzman found that the added approval standard substantially increased drug development costs, which caused a serious drop-off in new drugs developed and multiyear delays in the introduction of approved drugs. Peltzman and other economists following his lead have found that the added development costs caused hundreds of thousands of deaths from drugs never making it to market or being introduced after long delays. A Nobel for Peltzman is long overdue. Peltzman’s impact can be heard today from a variety of sources, including the Trump Administration, calling for a speed-up in the FDA’s approval of Covid-19 vaccines. Delays in approval can only increase Covid cases and deaths. Peltzman’s findings remain applicable, critics insist. The rigor of approval standards for sleeping pills (or beta-blockers and many other drugs) need not, and cannot, be the same as those for Covid vaccines, a point Peltzman would likely accept. Sleeping pills are largely for the users’ benefit—more sleep—with the effects on others nil or inconsequential. The death-reduction case for reducing such drugs’ development costs remains as strong as ever. However, vaccines are different in one critical respect: Vaccines benefits those vaccinated and many others through the development of “herd immunity” (the point at which the spread of a disease is throttled by the prevalence of inoculation). Herd immunity can reduce cases and deaths of those vaccinated as well as others not vaccinated. However, herd immunity depends on a substantial portion of the population (many epidemiologists say 60 or more percent, while one recent study from two European universities has found 43 percent is adequate) willingly getting vaccinated (with a working rule, the greater the spread in immunity, up to a point, the greater the decline in disease spread). This means that, barring forced vaccinations, herd immunity is not only dependent upon the science of testing, but also on people’s perception of the safety and efficacy of the testing processes. Cutbacks in testing rigor (or just the amount of time devoted to testing) can have a two-pronged effect: They can reduce earlier than otherwise Covid deaths among early vaccinated people, but the cuts in rigor can also cause many people to resist vaccination (or even join the ranks of “anti-vaxxers”), delaying the development of herd immunity and extending spread of the disease, which, in turn, can cause more Covid deaths in the long run than are saved in the short run. Ironically, the greater people’s resistance to vaccination, the more rigorous the testing may have to be just to assuage their safety and efficacy fears and induce them to get vaccinated, so that they contribute to the spread of herd immunity and add to derivative economic gains (more jobs and incomes). By seeking to speed up the FDA approval process, Republican officials could have sewn doubts on the net value of vaccines and slowed the development of herd immunity. Similarly, many Democrats could have compounded the problem by suggesting that Trump has pressed the FDA to compromise its testing rigor for his reelection ends. Media hostility toward Trump, including emphasis on his efforts to press for vaccine development at “warp speed,” has probably compounded political pressures for vaccine resistance. Peltzman’s line of argument suggests that greater resistance to vaccination can increase the needed payments to spread vaccinations and, again, to achieve herd immunity. The testing rigor for vaccines may also need to be greater than for sleeping pills because the last thing wanted during a pandemic is a vaccine-prescription requirement, which can slow the development of herd immunity by raising the costs of vaccinations. The politics of vaccines could be having the unintended effect of elevating resistance to Covid vaccinations. In May, the Pew Research Center reported that 72 percent of polled Americans said that they would “definitely” or “probably” be vaccinated for Covid, while 27 percent said they would not. Earlier this month, the percentage of Americans willing to get vaccinated was down by almost a third, to 51 percent. Those unwilling to get vaccinated was up by more than two-thirds, to 49 percent. These findings portend a new form of the well-known “tragedy of the commons,” a wider and longer spread of Covid and more unintended deaths, given that a check on vaccine politics will unlikely be driven by concern for the common good. Now, as reported by Wall Street Journal editors, officials from the CDC, FDA, NIH, and drug companies are having to work overtime to assure Americans that drug-testing protocols continue to be follow with the upmost rigor.           Richard McKenzie is an emeritus professor of economics in the Merage Business School at the University of California, Irvine. His latest book under development is The Human Brain on Economics.   (0 COMMENTS)

This post is a follow-up to my recent post on the “masquerading problem”. Recall that changes in interest rates are not a reliable indicator of changes in the stance of monetary policy. A new paper by Marek Jarociński and Peter Karadi discusses an interesting method of identifying monetary shocks: Central bank announcements simultaneously convey information about monetary policy and the central bank’s assessment of the economic outlook. This paper disentangles these two components and studies their effect on the economy using a structural vector autoregression. It relies on the information inherent in high-frequency co-movement of interest rates and stock prices around policy announcements: a surprise policy tightening raises interest rates and reduces stock prices, while the complementary positive central bank information shock raises both. These two shocks have intuitive and very different effects on the economy. Ignoring the central bank information shocks biases the inference on monetary policy nonneutrality. I see this as a promising first step toward the market monetarist goal of using asset prices linked to NGDP as an indicator of monetary policy.  To be sure, stock prices are a very noisy indicator of NGDP expectations, but they are better than changes in short-term interest rates, which often don’t even have the right sign.  Tight money can occasionally cause lower nominal interest rates, as NeoFisherians have pointed out.  In the Jarociński and Karadi paper, only interest rate increases associated with falling stock prices are identified as an actual move toward tighter money.  Ideally we’d replace stock prices with NGDP futures prices. This article was sent to me by Basil Halperin, who also made the following comment about my earlier masquerading problem post: The Wolf paper mentions the “sign restrictions” identification strategy that is usually credited to Uhlig (2005). . . . I think of your 1989 JPE with Silver as having done a proto-version of this approach! Both your paper and the Uhlig paper use the idea that “monetary shocks should send output and inflation in the same direction” to identify which episodes are demand shocks, versus which are supply. Readers who are studying economics might be interested in the background of our 1989 JPE paper.  In the late 1980s, I was interested in studying business cycles.  When I looked at the data, the 1920-21 depression seemed like the purest example I could find of a stereotypical business cycle.  It saw the steepest one-year drop in industrial production, the steepest one-year drop in the monetary base, the steepest one-year drop in the price level, and the steepest one-year rise in real wages.  This made me sympathetic to the sticky wage theory of the business cycle, which is based on the idea that a severe deflation is contractionary because wages fall more slowly than prices. Later I discovered research that found real wages to be procyclical, falling during booms and rising during recessions.  This surprised me, so I tried to reconcile these results with the evidence from 1921.  It turns out that the more recent studies that found procyclical real wages tended to rely heavily on some business cycles associated with the two oil shocks (1974 and 1979), which were periods when inflation rose and real wages fell during recessions. Steve Silver and I responded with a study that divided business cycles up into two types, those with procyclical inflation (like 1921) and those with countercyclical inflation (such as 1974 and 1979).  Real wages were countercyclical during demand-side recessions such as 1921 and procyclical during the supply-side recessions of the 1970s.  This pushed me even more firmly into the sticky wages camp, as both findings are consistent with the idea that nominal wages are sticky when the price level moves suddenly and unexpectedly. This work also dovetails nicely with my general view that NGDP is a good measure of monetary policy.  During supply shocks, prices and output move in the opposite direction, and NGDP doesn’t necessarily change all that much.  In contrast, tight money causes both falling prices and falling output.  If nominal wages are sticky then this results in higher real wages and higher unemployment.  This is why I later switched my focus from price level shocks to NGDP shocks. NGDP measures monetary shocks better than does the price level. George Selgin also reached this conclusion a few decades back, albeit for a slightly different set of reasons. Perhaps it might seem “unscientific” to base one’s views on a single episode like 1920-21.  But my view is that extreme events are very revealing.  Yes, you should not use data mining to test a model, but data mining is a very good way to develop a model.  Then test it with a completely different set of data.  I’d encourage younger economists to pay close attention to Fed announcements that led to unusually pronounced real time market reactions, such as January 2001, September 2007 and December 2007.  In those cases, the background “noise” is less likely to disguise the causal relationships.  In my book on the Great Depression I discuss numerous such natural experiments. PS.  There was a slightly steeper drop in IP right after WWII, but that was clearly a very unusual business cycle.  There was a larger drop during the Great Depression, but spread over a much longer period of time.  So I believe 1920-21 is the purest negative demand shock.  Furthermore, the drop in demand was not endogenous.  It wasn’t partly caused by bank failures as in the 1930s; it was almost entirely due to the Fed sharply reducing the monetary base. (0 COMMENTS)

Crisis spurs demands for government action. Crisis is today fueled by waves of migration, structural change from technology and globalization, concern over climate change, and repercussions from the Great Recession. These changes spur moves towards nationalism and protectionism. The demands for action come from below and above. All tend to give rise to greater government control. Ideas of economic planning are dusted off and sent into battle. Lessons can be culled from the interwar era. After the 1929 outbreak of the Great Depression, demand for economic planning—in contrast to market “anarchy”—advanced in many countries. The 1930s was an era of populism, nationalism, protectionism, government intervention, and attempts to create planned economies. One need only mention five year planning in the Soviet Union, four year plans in Nazi Germany, corporatist planning in fascist Italy and the United States, and the many initiatives in Great Britain. During the 1920s, the socialist calculation debate unfolded in German on the European continent, triggered by Ludwig von Mises’s (1881-1973) work Gemeinwirtschaft.1 His foremost opponent was the Polish economist Oskar Lange (1904-1965). In the 1930s, the debate expanded into the Anglo-American world, mainly through Friedrich Hayek’s (1899-1992) Collectivist Economic Planning2, which has been labelled “the opening salvo in the English-language calculation debate.”3 Hayek met with opposition from a colleague at the London School of Economics, E. F. M. Durbin (1906-1948), who mobilized a battery of arguments for planning, later collected in Problems of Economic Planning.4 The 1940s battle over economic planning was fierce, fueled by purportedly successful wartime planning, but the basic arguments were chiseled out in the interwar era. In another country, an intense debate on economic planning played out parallel to, but seemingly not inspired by Mises, Lange, Hayek or Durbin. This country is Sweden. The main adversaries in this debate were four economists, representing different generations: Gustav Cassel (1866-1945) and Eli Heckscher (1879-1952) were classical/market liberals opposed to economic planning. Gunnar Myrdal (1898-1987) and Bertil Ohlin (1899-1979), their two most famous yet wayward pupils, socialist and “social liberal” respectively, advocated planning. The questions of this article are: What were the main arguments of these four? What were their sources of inspiration? How do they compare to Hayek and Durbin? I will be short on references when trying to answer these questions. For details I refer to my recent book on Swedish economists in the 1930s debate on economic planning.5 Main Arguments In the 1920s and early 1930s, Gustav Cassel and Eli Heckscher were Sweden’s most well-known and influential economists. They were both market liberals and active shapers of public opinion. They mobilized arguments against economic planning in the mid-1920s, when they perceived threats from Swedish Social Democracy, Soviet communism, and Italian fascism. Heckscher visited Russia in 1925 and could observe the chaos there with his own eyes. Cassel and Heckscher mobilized an impressive number of arguments: • The market economy is not anarchic but a form of decentralized planning. • No central planner can master the enormous amount of information handled by free price formation (the invisible hand). • Politicians are not suited to be economic managers. • Bureaucracy is “a brake on the wheel.” • Central planners cannot tolerate workers’ free choice of occupation, trade unions, or consumers’ free choice of goods. • Planning experiments exhibit planlessness, and governments cannot even manage some of their most basic tasks like taking care of the monetary system. Heckscher anticipated a major public choice argument: One cannot assign a perfect theoretical state to correct imperfections in a real market. In the real world there are both market and government failures.6 Cassel forwarded a similar idea when he dismissed “the belief in the absolute rationality and effectiveness of state management of trade and industry.”7 A common perception is that Gunnar Myrdal, the famous “social engineer,” alongside the Social Democratic Minister of Finance Ernst Wigforss, was the chief instigator of economic planning ideas in Sweden. However, Bertil Ohlin began his attacks on market liberalism, inspired by the new British Liberals in general and John Maynard Keynes in particular, several years before Myrdal appeared on the planning stage. His message: “A planned organization, guaranteeing rationality and efficiency, instead of the laissez-faire system of the old society, has become the order of the day.”8 Rationality, so-called, was more important than freedom. In 1930, Heckscher accelerated the debate on economic planning through his attacks on an interventionist measure intended to help farmers, which he branded as “economic planning with no plan, after the pattern familiar in Soviet Russia.”9 The debate culminated in 1934. Planning was, to quote Myrdal, an idea “which creeps in everywhere” but which was actually a “very undetermined thing.”10 When Myrdal succeeded Cassel as professor of economics at Stockholm University he gave an inaugural lecture in which he dismissed his liberal teachers and their faith in markets as “an outdated utopia nourished by occasional untimely dreamers.”11 Ohlin and Myrdal emphasized that economic conditions had changed, mostly through larger economic units and an engineering mindset, which necessitated a new policy framework and new institutions. The economic crisis had necessitated a host of government interventions—the alternative would have been revolution and dictatorship—and these interventions must be coordinated in a rational and efficient way. The opponents to planning also expanded their set of arguments: • Planners will prioritize producer interests. • The government will be overstrained. • A planning authority will not be able to react fast enough in the face of changing circumstances. • There will perhaps be fewer but much bigger mistakes. • Nationalist planning means that every business transaction becomes a political act. • The end result will be dictatorship. Heckscher was reminded of Frankenstein “who created the monster to which he himself fell a victim.”12 During a famous debate at the Swedish Economic Association he taunted his younger colleagues as “apostles of the planned economy” and added: “Their nostrils are filled with the new air to the point where they seem to be in no condition to breathe any other.” Myrdal dissociated himself from the “horrifying depiction” of a “disorganized, planless and forced economy” outlined by Heckscher, and Ohlin could not understand the picture painted “of some sort of mystical, extreme command economy.”13 Advocates and opponents of planning shared some basic understandings. Economic conditions—the size of economic units and the dynamics of the world economy—as well as popular mentality had changed. However, they completely disagreed about how to tackle these changes. The advocates wished for a rational and long-term framework. The opponents wished to retain as much leeway for market forces as possible since they regarded them as best suited to guide the continuous economic transformation. Both sides acknowledged that, whatever government interventions might be instituted, they must be coordinated. However, advocates wished for more, opponents for less. The advocates wished to solve a range of specific problems. The opponents figured that each intervention would cause another in a cumulative process leading to dictatorship and the end of spiritual freedom, elaborating what was later called the intervention dynamic. Both sides wished to defend democracy but disagreed on the means. The advocates believed that democracies had to use much of the same means as dictatorships to be able to compete. “It is the Manchester liberal diehards, opposing all state intervention, who prepare the ground for dictatorship and communism,” said Ohlin at a summit for Nordic economists in 1935.14 Cassel argued to the contrary that “the bewildering mass of government interference of a steadily cumulative nature” meant that “Planned Economy will always tend to develop into Dictatorship” and stifle economic progress.15 The opponents were convinced that the foundation of liberal democracies—the market economy—must be protected. Myrdal, however, argued that the perception that economic freedom can be greater or lesser was a “metaphysic apriorism” in the heads of naïve market liberals.16 The advocates of planning perhaps had the upper hand in their claims of being informed about the latest economic conditions, but they hesitated to discuss principles. They wished to discuss reasonable interventions but the coordinating of all the interventions was an aim to be tackled some time in the future. In this attitude, the kinship between socialism and planning can be seen: sharp criticism of current conditions but reluctance to discuss what an alternative model would really entail. The opponents wished to discuss principles—so old fashioned! They wished to debate what a fully developed command economy would look like and they sometimes used communist, fascist and Nazi examples to substantiate their dystopia. Ohlin’s Free or Directed Economy (Fri eller dirigerad ekonomi) in 1936 rounded off the debate on planning and laid out a “middle way.” Ohlin had been the leading planning advocate among economists early on, and he had been tough on his mentors Heckscher and Cassel. He had always, unlike Myrdal, drawn a boundary against socialism and proposed some kind of framework planning. Like Keynes, he wished to save essential elements of private enterprise, and as the economy recovered the (classical) liberal traits of his social liberalism grew stronger. Ohlin anticipated the new institutional economics when he explained that institutions make out “the rules of the game” in order to reduce friction (transaction costs).17 Myrdal had expressed similar thoughts in his inaugural lecture. Sources of inspiration The Swedish economists seldom referred to any sources of inspiration. This is not very surprising since their arguments were mostly put forward in public debates and newspapers. Ohlin was the exception and his sources were mainly British: Lloyd George’s Liberals, people like Keynes, Arthur Salter, and Basil Blackett. How the others acquired their ideas is more or less obscure. As for Cassel and Myrdal, the mentor and the mentee remained alike in one respect: Each was known for claiming to be the originator of most of his ideas. One question, which can hardly be answered, is whether the opponents to planning were aware of the contemporaneous socialist calculation debate. In any case, they did not refer to Mises or Hayek. One should bear in mind that Cassel and Heckscher were both older than Mises, and much older than Hayek. Cassel and Heckscher had fought socialism since the turn of the century and probably did not experience any need to import arguments from younger colleagues in other countries. Cassel in particular was notorious for not crediting others. However, in his memoirs most of the people of any importance with whom he had interacted are mentioned.18 Mises and Hayek are not among them. Heckscher exchanged a few letters with Hayek, but only after World War II (concerning the Mont Pelerin Society). Comparison with Hayek and Durbin To what extent did the Swedes deliver arguments of enduring relevance? I will limit myself to considering the main arguments distilled from the Swedish debate against the most influential body of arguments against planned economy ever presented, Hayek’s The Road to Serfdom, and to counter-arguments delivered by his critic Durbin. All the major arguments of the Swedish opponents to planning appear in Hayek’s book. The market economy is not anarchic; no central planner can master the amount of information handled by free price formation; planning authorities are not able to react fast enough in the face of changing circumstances; bureaucracy is “a brake on the wheel”; central planners cannot tolerate workers’ free choice of occupation, trade unions, or consumers’ free choice of goods; planners will prioritize producer interests; one intervention will cause another in a cumulative process leading to dictatorship and the end of spiritual freedom; nationalist planning means that every economic transaction between nations becomes a political act. Some of the advocates’ arguments can also be compared to Hayek’s positions. Myrdal’s view of planning as “a very undetermined thing” corresponds to Hayek’s statement that the “idea of central economic planning owes its appeal largely to [the] very vagueness of its meaning.” The advocates’ argument that technological change, with ever larger economic units, makes planning inevitable is dismissed by Hayek as one of the “familiar economic fallacies.” The idea that planning arose out of an engineering mentality was not questioned by Hayek, but he figured it was “fostered by the uncritical transfer to the problems of society of habits of thought engendered by the preoccupation with technological problems.”19 Finally, some comparisons with Durbin’s arguments. Ohlin and Myrdal envisioned planning as something undetermined. Durbin states that “Planning does not in the least imply the existence of a Plan.” Ohlin and Myrdal questioned the picture of a mystical, extreme command economy. Durbin in the same way questioned Hayek’s picture of a “regimented and cruel society.” Ohlin and Myrdal did not see planning leading to dictatorship. Neither did Durbin: “We have a long tradition of increasing democracy combined with the growing activity of the State.”20 All in all, it seems that the Swedish economists were at least as forward in producing arguments for and against economic planning as their foreign colleagues. Part of the reason for that forwardness was Sweden’s strong culture, at that time, of frank and open engagement of intellectual adversaries in the main forums of public discourse. In hundreds of articles Cassel and Heckscher debated with Myrdal and Ohlin, each man pushing the others to hone and clarify the arguments for their position. Footnotes [1] Mises, Ludwig von, 1922. Gemeinwirtschaft: Untersuchungen über den Sozialismus. Jena: Verlag von Gustav Fischer. [2] Hayek, Freidrich A. von (ed), 1935/1975. “Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. Clifton: Augustus M. Kelley Publishers. [3] Caldwell, Bruce, 2005. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek. Chicago & London: The University of Chicago Press, p. 199. [4] Durbin, E. F. M., 1949. Problems of Economic Planning. London: Routledge & Kegan Paul Limited. [5] Carlson, Benny, 2018. Swedish Economists in the 1930s Debate on Economic Planning. Cham, Switzerland: Palgrave Macmillan/Springer. [6] Heckscher, Eli F., 1928. “Den icke-socialistiska framtidsstaten,” Dagens Nyheter, February 17. [7] Cassel, Gustav, 1933. “Staten och näringslivet,” Sunt Förnuft, 13(December), p. 399. [8] Ohlin, Bertil, 1927. “Liberalismen vid skiljovägen,” Stockholms-Tidningen, December 27. [9] Heckscher, Eli F., 1930. “Inmalningstvånget och dess konsekvenser,” Dagens Nyheter, May 28. [10] Myrdal, Gunnar, 1932. “Socialpolitikens dilemma II,” Spektrum 2(4), p. 30. [11] Myrdal, Gunnar, 1935. “Installationsföreläsning den 31 mars 1934.” In Samhällskrisen och socialvetenskaperna. Stockholm: Kooperativa förbundets bokförlag, p. 37. [12] Heckscher, Eli F., 1934. “Planned Economy Past and Present,” Index, IX(5), p. 99. [13] Nationalekonomiska Föreningen, 1934. “Planhushållning,” November 20, pp. 153, 167, 185. [14] Forhandlinger ved det tiende nordiske nationaløkonomiske møte i Oslo den 17-19 juni 1935, 1935. Oslo: Grøndahl & Søns Boktryckeri, p. 38. [15] Cassel, Gustav, 1934. “From Protectionism through Planned Economy to Dictatorship.” International Conciliation. Documents for the year 1934. New York, p. 323, and 1934. “Planned Economy,” American Bankers Association Journal, 26 (July). [16] Myrdal, “Installationsföreläsning,”, p. 23. [17] Ohlin, Bertil, 1936. Fri eller dirigerad ekonomi. Stockholm: Studieledningen för Folkpartiets Ungdomsförbund, p. 111. [18] Cassel, Gustav, 1940-41. I förnuftets tjänst. Vol. 1-2. Stockholm: Natur och Kultur. [19] Hayek, Friedrich A., 1944. The Road to Serfdom. London: G. Routledge & Sons Ltd, pp. 34, 188, 20. [20] Durbin, Problems of Economic Planning, pp. 95, 92, 106. *Benny Carlson is professor emeritus in economic history at the Lund University School of Economics and Management. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)