Category Archives: Economics

Why Thomas Piketty’s “Capital” Could Revolutionize Economics

Almost anyone with access to media has by now heard of Thomas Piketty’s “Capital in the 21st Century” – a book that is already being hailed as possibly the most important work of economics of the decade.

The book looks at 200 years of economic data and argues that free markets lead to growing economic inequality in the long run. It has made headlines for its main argument, and for its call for a global wealth tax to combat inequality. But just as importantly, it marks the return of history in economic analysis. This is a very, very big deal.

For the last few decades, mainstream economic thought has existed in a sort of timeless vacuum. Millions of college students, me included, read textbooks that presented macroeconomic laws as eternal truths, impervious to historical change: output always returns to its fixed, natural equilibrium; government intervention only ever affects prices in the long run; economic crises always solve themselves by lowering labor costs. These “laws”, textbooks imply, were as true in 1914 as in 2014.

Economics wasn’t always this ahistorical. In the 19th and early 20th century, leading economists like David Ricardo, Karl Marx and Joseph Schumpeter all analyzed economics within a larger historical trajectory, and their theories centered on change over time.

But the rise of neo-liberal economic thought has pushed history out of the profession. Modern economists, beginning with Alfred Marshall in the late 19th century but really taking off at the University of Chicago in the 1950s and 60s, have sought to turn economics into a science, with fixed laws based on math. If the laws of physics and chemistry don’t change over time, their thinking went, why should economic laws?

It’s not that these economists never referred to history to support their claims, but their theories still ended up being completely ahistorical.

While neo-liberal economic theories are far from universally accepted, they have succeeded in transforming the profession from a social science into a want-to-be natural science.

The main problem with this approach is that many of these scientific models in economics are based on unrealistic assumptions – perfect competition, completely rational actors and equal access to information, to name just a few – and therefore hardly ever work in reality.

Following the 2008 financial crisis, economists who take a less natural-science based approach to economics and base their theories on the recognition that markets aren’t perfect and actors not always rational have received more attention. The buzz surrounding Piketty’s book is the culmination of that trend.

Bringing history back into the study of economics may cost the discipline its scientific veneer, but it also offers a better understanding of how economic forces truly work, and how they change over time. As Piketty put it in his introduction to “Capital in the 21st Century”:

“To put it bluntly, the discipline of economics has yet to get over its childish passion for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. (…) This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.”



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Why Measuring Productivity Differently Will Change the Way We Live

Can you imagine a world without 9-to-5 jobs? Adam Davidson suggests it’s not too far away. In the latest New York Times Magazine, the journalist urges us to change the way we measure productivity. Accountants and Lawyers bill by the hour, encouraging slow work. Paying people by what they produce, rather than by how long it takes them to produce it, would more accurately reflect productivity in the modern economy.

What’s really interesting about Davidson’s argument is his historical narrative. He claims that measuring productivity by hour of work, popularized among accountants in the 1950s, is a leftover of the industrial age. This way of measuring made sense for assembly-line manufacturing, where time units had a fixed correlation to output. But since the 1960s industrial production has become less and less important at the expense of services and the creative economy. Measuring productivity of the latter has little to do with hours worked.

Davidson writes: “Measuring productivity is central to economic policy — it’s especially crucial in the decisions made by the Federal Reserve — but we are increasingly flying blind. It’s relatively easy to figure out if steel companies can make a ton of steel more efficiently than in the past (they can, by a lot), but we have no idea how to measure the financial value of ideas and the people who come up with them. “Compared with the mid-1900s, goods production is not as important a part of our economy, but we continue to devote about 90 percent of our statistical resources to measuring it,” says Barry Bosworth, a Brookings Institution economist who is a leading thinker on productivity in the service sector.”

Davidson doesn’t address the consequences of measuring creative work by its value rather than by time worked, but they would certainly revolutionize our economy. On a microeconomic level, it might mean the end of the 8-hour work day. Measuring the value of ideas would let us work until we have achieved results, not until the clock hits five. How about working 2 hours on Tuesday and 13 on Wednesday? What’s already a reality in some creative professions could become the norm.

The possible macroeconomic effects are just as intriguing. Countries still tend to measure the productivity of their workforce by how many hours people work in a day. For example, business advocates have long lambasted unions for trying to shorten work days. During the Euro Crisis, some have urged Spain to scrap the Siesta, a lengthy lunch break, and stretch out work days to increase productivity. But what if a long break and shorter work days increase productivity in our modern service economy? A one-hour nap might make a good idea more likely than 20 hours of hard work. Perhaps the supposedly lazy Greeks are way ahead of the hard-working Americans.

The entire capitalist system revolves around the notion of productivity. If it turns out we’ve been measuring it incorrectly, sweeping changes are bound to follow.

Here’s a link to the article:

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Reading Tip

This article explains how the fact that everyone today buys diamond rings for their engagement is the result of one incredibly successful ad campaign by De Beers in 1938. If you consider the imprint global demand for diamonds has left on post-colonial Africa (Sierra Leone is the most famous case), a re-evaluation of the role ad agencies play in global politics might be in order. Interesting stuff.

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The rise of corporate money in politics

A couple of weeks ago, I heard the former governor and ambassador Jon Huntsman talk about the current state of U.S. politics. He argued that the biggest problem facing America’s democracy is the disproportionate influence of private money on politicians, which he effectively labelled as corruption. This claim was quite surprising. Not so much because it is new (it certainly isn’t), but because it came from a Republican. After all, the supposedly pro-business GOP has always received the lion’s share of corporate donations, a fact that put Mitt Romney at a significant financial advantage in last year’s presidential election.

Marxists tend to argue that democratic governments have always been in the hands of big capitalists, and yet the case of the United States puts this claim into question. The current influence of corporate money on politics in Washington is a distinctly contemporary phenomenon and the culmination of a development that began less than 50 years ago. The founder of modern corporate political activism was Lemuel Ricketts Boulware, vice president of General Electric in the 1940s and 50s. The post-war years were a time when unions were stronger than ever before and Keynesian demand management had pretty much become the consensus choice of economic policy. Boulware perceived this liberal consensus as an existential threat to the very future of American prosperity. Union leaders, he argued, were socialists that prevented the country “from progressing to that better material and spiritual America” of individual freedom.

His response to this threat were a number of management tactics that became known as Boulwarism. As GE vice-president, he rejected any kind of compromise with unions and spread anti-union propaganda among his employees. But, most importantly, he supported conservative politicians such as Barry Goldwater. Ronald Reagan received campaign donations from Boulware in 1966, and the then-governor of California wrote a letter to Boulware thanking him and promising that he would “fight back against government’s increasing lust for power over free enterprise”. Boulware urged other businessmen to follow his lead. Many did, and he gained an immense influence in American conservative circles. His legacy was, in the words of historian Kimberly Phillips-Fein, to instill “the sense in a part of the business community that ideological and political engagement was an appropriate, legitimate and absolutely essential part of being a businessman”.

While Boulware may have provided the ideological foundation for today’s corporate involvement in politics, the overall financial commitment by companies was still comparatively small. This changed in the 1970s. Much like their predecessors in the post-war years, many businessmen in the early 70s felt threatened by the New Left, student radicalism and the still persistent Keynesian consensus.

The lawyer and future supreme court judge Lewis Powell, who at the time sat in the board of directors of several large corporations, argued that “the overriding first need for businessmen is to recognize that the ultimate issue may be survival”. The conclusion he drew from this observation was that corporations needed to use their funds to influence politics. He published these views in a memorandum that circulated widely among conservatives. In the following years, conservative think tanks such as the American Enterprise Institute and the Heritage Foundation sprung up, financed by businessmen who, as in the case of Joseph Coors, were greatly impressed by the Powell Memorandum. The new corporate activism of the 1970s was perhaps most visible in the growth of lobbying. In 1971 only 175 companies had registered lobbyists, eight years later 650 had. Similarly, the number of PACs grew from 89 in 1974 to 821 in 1978. The 1970s also saw the transformation of the Chamber of Commerce into an effective lobbying organisation. The Chamber had 1400 Congressional Action Committees with 20 members each, who were in charge of lobbying local legislators.

The third big transformation in corporate political involvement after Boulwarism and the 1970s obviously took place in the wake of the Citizens United v FEC verdict of 2010. We all know the story of the rise of Super PACs and I won’t describe it in detail here. What is interesting is a comparison of the three transformations. Both Boulwarism and the Powell Memorandum were born out of a strong sense of threat and general weakness. Boulware and Powell believed that government and public opinion were controlled by left wing radicals and by organised labour, and that Businessmen had to pour their money into politics if they wanted to save the free market.

A case can be made that the Super PACs are ballooning in a similar environment. One only has to look at Donald Trump’s post-election twitter rant to understand how threatened many conservative businessmen feel by the most liberal president since who knows when (LBJ?). ( We tend to view corporations’ influence on politicians as a sign of their strength, and in a way it is. But history shows us that the political activism of businesses is just as much an expression of their perceived weakness.

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Will the Eurozone Collapse? Lessons from the 19th Century

Not a week went by in 2012 without some much-echoed warning about the Eurozone’s imminent collapse. Every election in some European fringe state, every meeting of the ECB board, every phone call by Angela Merkel was interpreted as an event that would either save or doom the common currency. Behind this panic lay the belief, regularly expressed in The Economist’s briefings, that the Eurozone was so flawed in its construction that it either had to choose the path of radical reform and become some form of fiscal union, or break apart.

Surprisingly, the crisis of the European treasury bond markets appears to be over now, and yet the Eurozone has neither collapsed nor transformed itself into a fiscal union. This development defies the logic of everything we have read over the past year. And yet, a look at the 19th century indicates that a breakup of the Euro was perhaps never as likely as most journalists and economists liked to claim.

The Euro is usually portrayed as a bold experiment without precedent. This view ignores the fact that much of 19th century Europe had something of a common currency for many decades: The Latin Monetary Union. Last summer, I wrote a lengthy feature on the union for Die Welt am Sonntag. Those who can read German can take a look at it here:

The Latin Monetary Union was formed by Belgium, France, Italy and Switzerland in 1865 and soon included Greece, Spain, Romania, Bulgaria, Serbia and Austria-Hungary. Unlike the Euro, back then the coins of each state could keep their name, but they became mutually exchangeable at a fixed rate of 1:1.

The union soon slid into serious crisis because, guess what, fiscally irresponsible Greece and Italy abused the union’s flawed construction for their own financial gain. I will spare you the economic details (you can read more about it in Luca Einaudi’s “From the franc to the ‘Europe’: the attempted transformation of the Latin Monetary Union into a European Monetary Union, 1865-1873“, in Journal of Economic History, Vol. 53, No.2, 2000), but essentially the coins were based on a bimetallic standard that overvalued silver. Italy and Greece, chronically on the verge of bankruptcy, printed a myriad of silver coins and paper banknotes that soon led to an outflow of coins into the union’s other member states, where they caused inflation.

The states of the south lived above their means, and the fiscally prudent states of the north, in this case Belgium and France, paid the bill. The nature of public opinion in the latter was quite similar to that in Germany today, and Belgium came very close to leaving the union at least once. The union never really worked, and yet it weathered numerous financial crises and stayed intact until World War I. This longevity was due to the fact that a breakup would have cost France and Belgium dearly, since the overvalued silver coins would have immediately lost a lot of value.

Even though the union was dysfunctional and in an almost permanent state of crisis, it lasted for more than 30 years after Belgium first threatened exit and was only destroyed in the wake of the disastrous First World War that took down the old European economic order.

There are many differences between the Latin Monetary Union and the Euro and I do not mean to imply that the Euro will last a long time because its predecessor did. Compared to the Euro, the LMU was a rather loose network that didn’t even apply to banknotes. But what the example of the LMU shows us is that a monetary union can be quite resilient even if it doesn’t really work. As long as the political will is there and the cost of breakup significant enough, we shouldn’t be surprised if it survives without radically reforming itself. It took a World War to break up the Latin Monetary Union, and it may take a lot more than an election victory by Silvio Berlusconi on Sunday to doom the Euro.


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