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)

A Book Review of The Decadent Society (How We Became the Victims of our Own Success), by Ross Douthat.1 New York Times columnist Ross Douthat brings us a breathless and demoralizing story of the decline of Western civilization. The book raises a few meaty points about the Zeitgeist, but it overextends its reach, attempting to provide a theory of everything and succumbing to historical myopia. It offers an easy read at the cost of being fluffed well beyond the 3,000-word essay it could have been (why must we know that Douthat visited the White House “in the not-yet-humid DC air”?). Decadence, Kindly Despotism, and the Barbarians Who Just Won’t Sack Rome Douthat opens by lamenting the end of space-era excitement and the ensuing decadence of the modern liberal order. “Since Apollo, we have entered into decadence”—which he defines as a combination of economic stagnation, population decline, institutional decay and political deadlock, and cultural-intellectual exhaustion. Douthat laments the lack of technological innovation (with the exception of the internet) that followed the headiness of the 1960s space program. After the life-changing innovations of the 20th century (electricity, cars, the telephone, antibiotics, … ), progress has fizzled out. No human travel to Mars, no space colonization, no general artificial intelligence, no cure for cancer. Technological exhaustion has been accompanied by a decline in population and economic stagnation; with the exception of upper echelons, there has been widespread disappointment, as wages are flat and inequality increases. This stagnation has been matched by institutional sclerosis. A broken American political system has been worsened further by gridlock, polarization and populism. In the European Union, member states lost the ability to respond to the post-2008 crisis and the EU bureaucracy has become simultaneously overreaching and ineffective—culminating in Brexit and the rise of populist authoritarianism. The roots of decadence run deep. The West is producing little new, culturally or intellectually. Most of the current passions (from postmodernism to environmentalism and from political correctness to the decline of religion) are merely rehashes of earlier movements. While the internet is the one exception to technological decay, it has mostly brought about the evanescent pleasures of pornography and political dithyramb in 120 characters. This is partially good news, as it dampens extremism. This era resembles the 1930s, but “with fewer street fights and more memes,” as would-be revolutionaries can play-act extremism on the internet. President Trump, the culmination of populism and cultural anomie, is polarizing and loud, but largely weak and harmless, as his incompetence is dampened by institutional constraints and a lack of willingness to do the hard work of exercising power. The situation is exacerbated by a numbing culture of videogames over real violence, legal drugs (anti-depressants, anti-ADHD, and opioids) over dealing with reality, and pornography instead of sexual promiscuity or fecund marriage. Mass incarceration and abortion-on-demand once replaced churches and social mores; they have now been supplanted by pharmaceuticals, virtual sex, and virtual violence. Where does this leave the decadent West? The barbarians that overthrew the decadent empires of yesteryear aren’t coming, leaving the West to an exhausted coasting. Even potential threats are decadent: Islam has big internal problems (from civil war to poverty) and does not offer a seductive alternative; China’s bureaucratic efficiency and national cohesion do inspire some admiration… but China faces its own problems, from economic and technological stagnation to an aging society. If the barbarians won’t do the job, what happens next? Douthat sees two options: catastrophe or renaissance. Catastrophe could take one of several broad paths: an exogenous shock, whether economic or ecological, or economic instability from unsustainable deficits, compounded by an aging population (something like the economic crisis and political extremism of the Great Financial Crisis, but worse). More optimistically, decadence could result in a renaissance, stemming from many sources, or a combination thereof: some sort of universalism (whether traditionalist or the New International Socialism), a paradigm-shifting technological breakthrough, or a religious revival. In the end, Douthat closes with the spirit: a musing on UFOs and alien cultures (against human technological stagnation), and a speculation on divine intervention. “It shouldn’t surprise anyone if decadence ends with people looking heavenward: toward God, toward the stars, or both.” Sipping Bourbon and Belly-Aching Douthat’s case is ultimately overstated and simplistic. But I get it. I really do. I too am horrified by much of the contemporary turn, and I think I would greatly enjoy sitting with Douthat in leather wingback chairs, sipping bourbon, and belly-aching over the decline of Western civilization. I too am constantly appalled. Educated (or, I should say, credentialed) people who can barely line up a grammatically correct sentence. Rampant misuse of transitive verbs. The acceptability of wearing underwear in public (even when not commuting to a gym). Political philosophy that is reduced to superficial Facebook or Twitter comments. “Reading” that amounts to a few daily news links from social media—yet serves as a foundation for great expertise, as we see from the vast number of newly minted PhDs in epidemiology and economics over the weeks of COVID-19 confinement. People who spend social outings glued to their phones, ignoring interlocutors to post pictures of food, or favoring virtual friends who didn’t make the effort to come out over real friends who did. And the list goes on. Really. I get it. I grieve for the demise of manners, good taste, and critical thinking. Some of the problems identified by Douthat are real. But most are exaggerations. There is nothing new in bemoaning decadence and decline. God flooded a decadent humanity, dumped sulphur on depraved Sodom and Gomorrah, and called on the prophet Isaiah when society was going to the dogs (to name but a few examples). In the late Victorian era, an Irish observer from the Mountains of Mourne bemoaned English decadence: I believe that in writing a wish you expressed as to how the fine ladies in London are dressed/Now if you’ll believe me, when asked to a ball, they don’t wear no tops to their dresses at all/Oh I’ve seen them meself, and I could not in truth say if they were bound for a ball or a bath. Don’t go starting those fashions, now Mary McCree, where the mountains of Mourne sweep down to the sea. Oswald Spengler started the modern décliniste industry, with the 1918 publication of The Decline of the West. The portmanteau “affluenza” was coined in the early 1950s (during the heyday of a vibrant America for which Douthat longs)—a decade after Joseph Schumpeter warned that capitalism might contain the seeds of its own destruction. Right about the time Elvis—tame by today’s standards—was filmed from the waist up to preserve the virtue of young audiences, the mothers of River City were warned against the corrupting influence of a pool hall in the community. Mothers of River City! Heed the warning before it’s too late! Watch for the tell-tale sign of corruption! The moment your son leaves the house, Does he rebuckle his knickerbockers below the knee? Is there a nicotine stain on his index finger?… Well, if so my friends, Ya got trouble, Right here in River city! Of course, the pool hall is merely a gateway: One fine night, they leave the pool hall, Headin’ for the dance at the Arm’ry! Libertine men and Scarlet women! And Ragtime, shameless music That’ll grab your son and your daughter… Thirty years later, country singer Merle Haggard sang longingly for a lost America: I wish a buck was still silver It was back when the country was strong Back before Elvis, before the Vietnam war came along Before the Beatles and yesterday When a man could still work and still would Is the best of the free life behind us now And are the good times really over for good? He concludes the song with an impassioned plea to America: “Stop rolling downhill like a snowball headed for hell/Stand up for the flag and let’s all ring the liberty bell.” The point is, times change, and every generation thinks this is it. Everything is going to pot. Start with sloppy fashion, and before you know it the barbarians are at the gate. But then, somehow, things go on. I am certainly not making a naïve claim that history progresses whiggishly towards the good. There have been good developments and bad developments since the late 1960s, when decadence supposedly started. Mostly, though, the balance sheet is positive. Douthat’s Overstatements Douthat’s claims of technological stagnation are overblown. To be sure, progress—after the great gains of the 19th and 20th century—may have slowed down a bit. But it is easy to fall into historical myopia from within the midst of developments. An inefficient government space program (effective, perhaps, but not efficient) is slowly being replaced by the private sector. The potential for disruptive technology is just emerging. To name just two examples, Uber has already led to a drop in drunk driving and fatal accidents, and online banking is a lifeline to the estimated 25% of American adults who are unbanked or underbanked. Quantum computing and driverless cars aren’t quite there yet—but nor are they dead. Take a development that could not have been foreseen by Douthat (but one that shows how technology is growing faster than we might think). Technology has allowed a significant chunk of the population to continue working and eating through the pandemic; we can only imagine the unemployment rates if the pandemic and its social isolation had hit just ten years ago. Zoom may be imperfect, and online restaurant and grocery orders are not a panacea—but we can give two cheers, at least, for such quiet bourgeois victories, which allowed a fast but dramatic transition. They have helped our lives immeasurably, with a whimper, if not the bang of earlier inventions. It is also not clear that we have seen cultural-intellectual stagnation. For example, from 1982 to 2012, the percentage of adults who attended a classical music concert in the past 12 months fell from 13% to 9%. But this modest drop is surely balanced by the rise of the internet. Instead of driving to Memphis or Washington, D.C., I have been able to enrich my pandemic isolation with free live performances of classical music. Music services like Spotify allow unprecedented exposure to the depth and breadth of the world’s musical heritage. At the click of a button, and with no cost above a small monthly subscription, I can listen to the entire discography of Dwight Yoakam, and watch his evolution over three decades, compare Herbert von Karajan’s treatment of Beethoven’s symphonies with that of Claudio Abbado, or listen carefully to the different tenors who play Don Ottavio, as a sincere paladin or as a wimpy fiancé, in Mozart’s Don Giovanni. Such cultural forays were once the work of a lifetime and thousands of dollars. The wage stagnation that Douthat decries is largely offset by the stunning drop in prices for consumer goods—which has increased the absolute lot of the poorest Americans. Of course, that is not the full picture: prices for almost all consumer goods have fallen, with the important exception of education, housing, and healthcare—but these are the three most subsidized and most regulated sectors of the economy, so we should not be surprised that those prices have increased. This leads us to the next section. Real Problems, Misdiagnosed Causes The last 40 years have seen an amelioration in the living conditions of the poorest, even if the overall gains have not been spread equally. But Douthat does not mention that in that time, total government spending as a percentage of GDP has increased from about 30% to 40%. To this, we can add growing federal regulations, which now cost about 10% of GDP in compliance, and have a demonstrated regressive effect. It is a small wonder that the politically-connected wealthy are seeing their income grow faster than the bottom four fifths of income earners, as the American constitutional system increasingly favors political over economic activity. Douthat is correct that demographic stagnation is problematic—but, really, only in terms of servicing unsustainable pay-as-you-go welfare programs and a soaring national debt. Douthat is correct that the European Monetary Union has hampered the responses of EU member states—but those problems were caused by their profligacy and inefficiency. Independent monetary policy would simply have complicated a debt problem with an inflation problem. Likewise, we should not forget that the housing boom and the Great Financial Crisis were caused by expansionary monetary policy and ill-conceived regulations that encouraged poor housing choices. Finally, environmental problems are primarily caused by government’s failure to enforce property rights and contracts, as it plays favorites through political capture of environmental bureaucracies. Declining church attendance does not represent a drop in religiosity, so much as a shift to the religions of state and environment. For all its weaknesses, modern technology is really not all bad. Many Americans have stopped any form of serious reading, but many others now have access to millions of books in a convenient and accessible electronic format. As Douthat rightly points out, the easy fantasy pleasures of the internet have led to a significant drop in violence. This may be a pyrrhic victory, but we cannot blame the machines for all our woes. Today’s students who are distracted by their cell phones were once distracted by comic books. Irresponsible drivers would have been smoking at the wheel instead of texting 30 years ago. C.S. Lewis reminds us that “there are always plenty of rivals to our work. We are always falling in love or quarreling, looking for jobs or fearing to lose them, getting ill and recovering, following public affairs. If we let ourselves, we shall always be waiting for some distraction or other to end before we can really get down to our work.” ADHD overdiagnosis is likely due to excessive school time rather than excessive screen time. Douthat rightly imagines a number of catastrophic scenarios that could mark the end of his supposed decadence, but this is nothing new. Throughout history, a Napoleon, a Spanish flu, or a bad harvest always lurked just around the corner. Finally, Douthat is right to decry the political sclerosis that has overcome the US and Western Europe. His diagnosis of a failed graft of a 20th century administrative state onto an 18th century constitutional system is rich and insightful, but it also misses two basic points. First, the growth of government is exacerbating the divide between the elites who live off the toil of the rest, and those who are tired of being milked dry. It is no wonder that eight of the 20 richest counties in the United States are in the Washington, D.C. area, a region with precious little industry or true production, beyond legislation and the ancillary snouts in the political trough. Second, the utter failure of government involvement in education has left us with an estimated 20% of high school graduates who are functionally illiterate. Where do we even begin with critical thinking and citizenship? In sum, the main problem is simple: Douthat’s arguments for decadence are exaggerated, but they are not entirely off the mark… but the catastrophes and renaissances he outlines are not reactions to the liberal order. That order died at the hands of the Progressives, who placed legislative whim and the tyranny of experts over constitutions and markets, and the New Deal, which irrevocably intertwined the market and the state. Conclusion The real threat to the West is internal: the continuing rise of collectivism and the growth of the state. This is a very vibrant, very strong, and very non-decadent movement; it is also not desirable. If it continues unchecked, the United States will certainly implode under the weight of its own debt and ignorance, as the state continues to undermine economics, education, and civil society. In closing, the two wisest murmurs within Douthat’s groans merit pause. He does spend one chapter on “giving decadence its due.” Things are indeed quite good, regardless of whether they are part of an overall decadence. In fact, things have never been this good, and I would like to have that conversation over bourbon with Douthat in 20 years. If the country has rolled back socialism, I think he will be surprised at the economic growth and technological wonders he fears are waning. Finally, I am reminded of my Jesuit mentor, who used Star Wars as an analogy for crisis. The superficial lesson of the trilogy is that there is a technology fix for everything—and yet, in the end, the solution is spiritual. Use the Force. Douthat closes his book with a similar techno-religious enjoiner: “So down on your knees—and start working on that warp drive.” His claim of technological stagnation may be overblown, but he does identify the heart of the matter: a soul-sickness. The real cure for decadence—if indeed we be decadent—is a return to the very liberal order that is supposedly being eroded (from within) or shunned (by the populists) but was abandoned a long time ago. The answer lies in stemming the tide of socialism and returning to liberty, with its breathing room for markets, civil society, human creativity, and opportunity for the least fortunate. Footnotes [1] Ross Douthat, The Economic Point of View, in The Decadent Society (How We Became the Victims of our Own Success). *Nikolai Wenzel is Distinguished Professor of Economics at Fayetteville State University (Fayetteville, NC), where he holds the L.V. Hackley Chair for the Study of Capitalism and Free Enterprise. His research interests are constitutional political economy and institutional economics, cronyism, Austrian economics, and history of economic thought. (0 COMMENTS)

Postmodern Theory and liberalism do not merely exist in tension: they are almost directly at odds with one another. Liberalism sees knowledge as something we can learn about reality, more or less objectively; Theory sees knowledge as completely created by humans—stories we tell ourselves, largely in the unwitting service of maintaining our own social standing, privilege, and power…. Liberalism values the individual and universal human values; Theory rejects both in favor of group identity…. Liberalism encourages disagreement and debate as means to getting at the truth; Theory rejects these as ways of reinforcing dominant discourses that suppress certain perspectives [and] promotes the idea that truth is a “language game”…. Liberalism accepts criticism, even of itself, and is therefore self-correcting; Theory cannot be criticized —Helen Pluckrose and James A. Lindsay, Cynical Theories: How Activist Scholarship Made Everything about Race, Gender, and Identity―and Why This Harms Everybody1 Helen Pluckrose and James A. Lindsay (PL) depict the intellectual journey that led to a movement many of us find baffling and disturbing. Their book Cynical Theories seeks to explain how the mindset that underlies Social Justice activism emerged. That mindset has been given many other labels, including Woke and intersectionality, but in describing its intellectual framework, PL generally use the term postmodern Theory, with a capital T. PL’s analysis can help us to understand some otherwise bizarre phenomena that took place this year, after the book went to press but prior to its publication date of August 25, 2020. Consider these two examples: —On July 4, 2020, hundreds of professors and administrators at Princeton University signed and sent to the President of Princeton what they called a Faculty Letter.2 The letter’s long list of “demands” included • Implement administration- and faculty-wide training that is specifically anti-racist • Establish a core distribution requirement focused on the history and legacy of racism in the country and on the campus • The Office of Institutional Equity and Diversity should collaborate with individual departments on discipline-specific action plans for anti-racist research, teaching, hiring, and retention • Reconsider the use of standardized testing (SAT, GRE, etc.) • Substantially increase the University’s financial contributions to community organizations in central New Jersey that are directly involved in the work of rectifying racial and socioeconomic inequality • Fund a chaired professorship in Indigenous Studies for a scholar who decenters white frames of reference • Enforce repercussions (as in, no hires) for departments that show no progress in appointing faculty of color • Acknowledge, credit, and incentivize anti-racist student activism • Constitute a committee composed entirely of faculty that would oversee the investigation and discipline of racist behaviors, incidents, research, and publication on the part of faculty The letter provoked a sharply critical response by a classics professor, Joshua Katz.3 His essay was in turn denounced by leaders at Princeton,4 including its President. —Later in July, The Smithsonian National Museum of African American History and Culture unveiled, as part of a portal called “Talking About Race,” a description of “Whiteness.” This virtual exhibit originally included a chart that described White culture as including, among other things: the scientific method; the Protestant work ethic; delayed gratification; English common law; protection of property; competition; and being polite.5 This chart was construed by critics as implying that people with black skin either could not or should not share such values. Although the museum removed the chart to quell the controversy, it nonetheless reflects what PL depict as Theory. PL trace the Theory deployed by Social Justice activists to express their viewpoint to postmodern philosophy. This is a fraught exercise. In my observation, before academic ideas reach the broader public, they are refracted by at least two processes: popularization and implementation. The popularizers of an academic idea make it accessible to a wider audience. Often, but not always, the popularizer is another academic, as when Paul Samuelson published his textbook which popularized Keynesian economics. Once an idea has been popularized, influential disciples take the ideas into the real world for implementation.6 For example, in the late 1970s, some economists, most notably Martin Feldstein, undertook research on the economic impact of the incentive effects of various taxes. This was popularized as “supply-side economics,” most notably by Arthur Laffer with his eponymous curve. It was implemented by the Reagan Administration, working with a Democratically controlled House of Representatives. At the time, Feldstein was Chairman of the Council of Economic Advisers, where he reportedly differed sharply with the policies that emerged in practice. In fact, it is not uncommon for the implementation of an idea to disappoint the academics who spawned it. They are often unhappy with the modifications that have taken place during popularization and implementation. In the case of postmodern philosophy, the academic originators include Michel Foucault, Jacques Derrida, and many subsequent thinkers. The popularizers of what PL call Theory include Ibrahim X. Kendi (How to be an Anti-Racist) and Robin DiAngelo (White Fragility). The ideas have been adapted for use in real-world situations by those who composed the Princeton faculty letter and the Smithsonian Whiteness chart, as well as administrators who promulgate rules and policies in K-12 schools, higher education, government, and corporate personnel management. PL fail to draw this distinction between academic originators, popularizers, and those who implement ideas. I think this leaves them open to the charge that they have misread the academics, regardless of how accurately they have portrayed Theory as it was articulated by those who have popularized and implemented it. Instead, PL describe postmodern Theory as having evolved in three phases. The first phase was simply the original postmodernism, as developed in the 1960s and 1970s. The second phase, which took place in the late 20th century and early 21st, PL term “applied postmodernism,” meaning that it applied the methods of postmodernism to particular realms, including colonialism, race, and gender. The third phase, which began around 2010, they call “reified postmodernism,” which emphasizes real-world activism. PL describe postmodernism as a system of thought grounded in two principles and having four themes. The postmodern knowledge principle: Radical skepticism about whether objective knowledge or truth is obtainable and a commitment to cultural constructivism. The postmodern political principle: A belief that society is formed of systems of power and hierarchies, which decide what can be known and how. The four major themes of postmodernism are 1. The blurring of boundaries 2. The power of language 3. Cultural relativism 4. The loss of the individual and the universal Again, PL have undertaken a fraught exercise. Hardly any school of philosophy can be boiled down to just a few bullet points. It is particularly challenging here, because as PL point out, postmodernism is a reaction against systematizing thought. I suspect that no self-described postmodernist philosopher would sign on to PL’s principles and themes. Nonetheless, PL’s model fits closely the rhetoric and actions of those who have popularized and implemented postmodernism in the form of Social Justice activism. As a result, Cynical Theories is immensely valuable in helping us to get inside the minds of the people in the movement. While there have been many attempts, by Jonathan Haidt and others7, to speculate on the individual psychological needs and broader social conditions that have given rise to the movement, PL’s approach is one of cognitive empathy. That is, their book can help us understand the ideas of the activists on their own terms. The PL model helps to “predict” the Princeton faculty letter and the Smithsonian Whiteness chart. For liberals, knowledge is a relationship between a human and reality. For postmodernists, knowledge is created by and embedded in a culture, which in turn makes it responsive to the power relationships within that culture. PL write, Because of their focus on power dynamics, these thinkers argued that the powerful have, both intentionally and inadvertently, organized society to benefit them and perpetuate their power. They have done so by legitimating certain ways of talking about things as true, which then spread throughout society, creating societal rules that are viewed as common sense and perpetuated on all levels. For example, in the relationship between the West and the countries that it colonized, A liberal mind-set says: “All humans have the capacity to be rational and scientific, but individuals will vary widely. Therefore, all humans must have all opportunities and freedoms.” A postmodern mind-set says: “The West has constructed the idea that rationality and science are good in order to perpetuate its own power and marginalize nonrational, nonscientific forms of knowledge production from elsewhere.” So, while the liberal mind-set rejects the arrogant colonial claim that reason and science belong to white Westerners, the postmodern one accepts it, but regards reason and science themselves as just one way of knowledge and as oppressive In this context, one can view the Smithsonian Whiteness chart as an attempt to apply postmodernism and to decolonize black Americans. But the chart shocked people with the liberal mind-set, to whom it resembled a return to racist colonialism. “Social Justice activists are so imbued with outrage over the power structures that influence culture that their postmodernism has morphed from epistemological skepticism to moral absolutism.” The original postmodernism put a lot of emphasis on what PL call the knowledge principle, which is skeptical of any absolute truth. But the later, “reified postmodernism” leans most heavily on the political principle. Social Justice activists are so imbued with outrage over the power structures that influence culture that their postmodernism has morphed from epistemological skepticism to moral absolutism. As a consequence, their ideology is incommensurate with liberalism. Professor Katz may have believed he was merely pointing out obvious problems with the Princeton faculty letter. But his essay provoked an outcry from his enemies, while receiving less sympathy than he probably expected from his friends. If the mission of the postmodernists is to fight oppression by exposing it, then the mission of Pluckrose and Lindsay is to fight postmodernism by exposing what it has become in recent years. I wish that I could arrange that for every reading list that incorporates a Kendi or a DiAngelo, Critical Theories would also be included. Footnotes [1] Helen Pluckrose and James A. Lindsay, Cynical Theories: How Activist Scholarship Made Everything about Race, Gender, and Identity―and Why This Harms Everybody. Pitchstone Publishing, August 2020. [2] Marissa Michaels, “In open letter, faculty call for anti-racist action, diversity in decision-making”. The Daily Princetonian, July 7, 2020. [3] Joshua Katz, A Declaration of Independence by a Princeton Professor. Quillette, July 8, 2020. [4] “The Speech Police at Princeton.” The Editorial Board, Wall Street Journal, July 14, 2020. [5] Marina Watts, “In Smithsonian Race Guidelines, Rational Thinking and Hard Work Are White Values.” Newsweek, July 17, 2020. [6] For example, see Jonathan Haidt and Tobias Rose-Stockwell, “The Dark Psychology of Social Networks”. The Atlantic, December 2019. *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Philosopher and author Zena Hitz of St. John’s College talks about her book, Lost in Thought, with EconTalk host Russ Roberts. Hitz defends learning for its own sake–learning that has nothing to do with passing an exam or preparing for a career. For Hitz, learning is a refuge and an essential part of what makes […] The post Zena Hitz on Lost in Thought appeared first on Econlib.

  In a recent blog post, I wrote: Aside for non-economists: Why would reductions in income tax rates on corporations and on high-income individuals even be expected, at a theoretical level, to increase real wages? By increasing the incentive to invest in capital. The greater the capital to labor ratio, the higher are real wages. Commenter Robert asked: Could someone expand on this a bit for me? Does investing in capital, mean investing in capital goods (i.e., land, machinery, tools, etc)? I don’t understand why that would necessarily lead to higher real wages. Commenter Laron gave a nice succinct answer: The capital goods like machinery increase labor’s productivity, which increases wages. Others can chime in with more detail or to correct me tho. Here’s what the article on “Capital Gains Taxes” in The Concise Encyclopedia of Economics says about the issue: Between 1900 and 2000, real wages in the United States quintupled from around fifteen cents an hour (worth three dollars in 2000 dollars) to more than fifteen dollars an hour. In other words, a worker in 2000 earned as much, adjusted for inflation, in twelve minutes as a worker in 1900 earned in an hour. That surge in the living standard of the American worker is explained, in part, by the increase in capital over that period. The main reason U.S. farmers and manufacturing workers are more productive, and their real wages higher, than those of most other industrial nations is that America has one of the highest ratios of capital to worker in the world. Even Americans working in the service sector are highly paid relative to workers in other nations as a result of the capital they work with. In their textbook, Nobel laureate Paul Samuelson and William D. Nordhaus noted: “Because each worker has more capital to work with, his or her marginal product rises. Therefore, the competitive real wage rises as workers become worth more to capitalists and meet with spirited bidding up of their market wage rates.” The capital-to-labor ratio explains roughly 95 percent of the fluctuation in wages over the past forty years. When the ratio rises, wages rise; when the ratio stays constant, wages stagnate. The quintupling in the above is certainly an underestimate because the Consumer Price Index, used to adjust for inflation, overstates inflation. A way to think about it is with a person on a desert island catching fish. If he does it with his bare hands, he can catch, say 2 fish a day, enough to keep from starving. But if he fashions a stick that can spear the fish, he can catch, say 4 fish a day. So that one piece of capital, the spear, has doubled his productivity. His real wage has doubled. Then Robert followed up: Thanks Laron. That was kind of what I was assuming was meant in the quote. I don’t know if I fully trust a business to return higher productivity back to workers in the form of higher salaries, but I can see how and why that could happen. Here’s why it would happen. A worker becomes more productive, not just with his current employer but also with other potential employers. So if an employer does not pay the employee an increased wage for increased productivity, another employer will offer more than the current employer. That will happen until the marginal revenue product (the marginal revenue produced by the employee’s marginal product) equals the wage. (1 COMMENTS)

Should powerful people be treated differently? Should they get special treatment? Should their bad behavior be more easily excused? It seems to me that there are two arguments to consider: 1. Decisions made by powerful people are more consequential for all of us. 2. Societies operate more effectively if there is an egalitarian sense of solidarity. With the first argument, one might want to excuse occasional bad behavior, as there could be a great cost to replacing a powerful person with someone less skilled. Here you might think of the famous case of General Patton slapping a soldier suffering from shell shock, or General McArthur’s attempt to undercut Truman’s authority in Korea. Neither is a perfect example of this dilemma, but in both cases these two issues come into play to some extent. Another example is presidential scandals. I’ve seen several examples in my lifetime that would have led to the individual being fired from his job if he were less powerful. This sense of the leader being above the law is of course much more pronounced in less developed countries, or in pre-modern times in the West. One can also find some evidence of the solidarity principle at work. US presidents earn a salary of $400,000. While that is well above a middle class salary, it’s still a sum that average people can visualize–perhaps they know a doctor or lawyer with that income–unlike the eight figure salaries of top corporate executives. This may be society’s way of making the president seem less special. On the other hand, the US president receives a “total compensation” that is arguable the highest on Earth. He lives in the best house, has the best transport, the best bodyguards, the most deferential servants, dinner parties with the most distinguished guests, etc. Even Jeff Bezos can’t easily replicate that consumption bundle. At first glance, it might seem like the utilitarian position would be to provide special treatment to the powerful, as their decisions are so consequential. In fact, all good arguments are utilitarian arguments. Countries with a high degree of social cohesion and solidarity tend to do better in terms of governance. A place like Denmark is less likely to offer special treatment to its leaders than the Congo or Syria, and more likely to be better governed.  That fact is also of relevance to utilitarians. I suspect there are no hard and fast rules here, which apply in every single case. As a general principle, there are some clear social benefits to creating a society where each person is viewed as having equal value, and no one is exempt from the rules. On the other hand, there may be individual cases where applying this principle strictly means that society is shooting itself in the foot. It’s sort of like torture.  Have a general rule against torture, but if there’s a ticking nuclear bomb in NYC . . . (0 COMMENTS)