Thursday, February 20, 2014

The 140 year cycle in macroeconomic thought

I am reading Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy by Henry George (free ebook available here)
I’ve been fascinated so far that the economic debates that occurred during the long recession of the 1870s are almost identical to those still occurring during the great recession. I would have expected more progress in macroeconomic thought in 140 years.

Here’s George describing the utter disarray of the economic elite of that time in explaining how the depression had arisen, and where to look for a remedy.

This is shown by the widely-varying attempts to account for the prevailing depression. They exhibit not merely a divergence between vulgar notions and scientific theories, but also show that the concurrence which should exist between those who avow the same general theories breaks up upon practical questions into an anarchy of opinion.  
Upon high economic authority we have been told that the prevailing depression is due to over-consumption; upon equally high authority that it is due to over-production; while the wastes of war, the extension of railroads, the attempts of workmen to keep up wages, the demonetisation of silver, the issues of paper money, the increase of labour-saving machinery, the opening of shorter avenues to trade, etc., etc., are separately pointed out as the cause by writers of reputation.

The modern equivalents are

1870s excuses                      2000s excuses
over-consumption           → excess household debt
over-production              → excess housing construction
wastes of war                  → government waste or regulation
high wages                      → high wages
currency debasement       → currency debasement
labour-saving machinery → robots

I found even more interesting the debates about the nature of capital and wealth that occurred at the time. George criticised the writers of common textbooks for not being specific in their definitions which caused much confusion when applying economic reasoning to the problems of the day. It seems an awful lot like the Cambridge Capital debates of the 1970s and reminded me of debates (or indeed lack of debate) around foreign investment that appear to have subsided in the past few decades. 

Here’s a snippet, which shows George would firmly be on the side of Cambridge, England, in the capital debates, and would be firmly of the position that foreign investment is merely a transfer and is not wealth-creating. 
As commonly used, the word " wealth " is applied to anything having an exchange value. But when used as a term of political economy it must be limited to a much more definite meaning, because many things are commonly spoken of as wealth which in taking account of collective or general wealth cannot be considered as wealth at all.

Increase in the amount of bonds, mortgages, notes, or bank bills cannot increase the wealth of the community, that includes as well those who promise to pay as those who are entitled to receive. 
The enslavement of a part of their number could not increase the wealth of a people, for what the enslavers gained the enslaved would lose. Increase in land values does not represent increase in the common wealth, for what land owners gain by higher prices, the tenants or purchasers, who must pay them, will lose. 
And all this relative wealth, which, in common thought and speech, in legislation and law, is undistinguished from actual wealth, could, without the destruction or consumption of anything more than a few drops of ink and a piece of paper, be utterly annihilated.  
By enactment of the sovereign political power debts might be cancelled, slaves emancipated, and land resumed as the common property of the whole people, without the aggregate wealth being diminished by the value of a pinch of snuff, for what some would lose others would gain.  
There would be no more destruction of wealth than there was creation of wealth when Elizabeth Tudor enriched her favourite courtiers by the grant of monopolies, or when Boris Godoonof made Russian peasants merchantable property. 
All things which have an exchange value are, therefore, not wealth in the only sense in which the term can be used in political economy.  
Only such things can be wealth the production of which increases and the destruction of which decreases the aggregate of wealth. If we consider what these things are, and what their nature is, we shall have no difficulty in defining wealth. 

What amused me is that George looked for answers in political economy

It must be within the province of political economy to give such an answer. For political economy is not a set of dogmas. It is the explanation of a certain set of facts. It is the science which, in the sequence of certain phenomena, seeks to trace mutual relations and to identify cause and effect, just as the physical sciences seek to do in other sets of phenomena.

Maybe it’s time to follow his lead, again, and look outside of sterile economic theory to resolve problems of macroeconomic instability.


  1. I wanted to contact you, but I don't see contact info.

    Dan Sullivan, president, Council of Georgist Organizations