Friday, 13 February 2015

A Journey Through Economic Time

I have just finished reading A Journey Through Economic Time: A Firsthand View by John Kenneth Galbraith, published in 1994. Galbraith's writing is clear and elegant, and his humour is dry and enjoyable.

In the following I have made some commentary on particular historical episodes and selected quotes, especially when he raised ideas I had not thought about, or provided a deep insight.

1. THE LARGER DYNAMIC


Galbraith points out the poor reputation of new industrial capitalists was due to adverse attitudes of traditionally rich and favored.
...new demand by older countries for the protection of aging and senile industries against the low-wage newcomers. 
...the rate of growth is the dynamic of modern capitalism.
Galbraith explains how "crises" or "panics" became "depression", "recession", "growth adjustment" and, finally, "an enduring underemployment equilibrium".
...we owe to Marx the concept of economic determinism... 

2. THE GREAT DIVIDE


The Great War ended the political, military, and economic system associated with landed aristocracy. Galbraith mentions 1910 as the year that the powers of the House of Lords was curbed.

He stresses that colonial territory was only marginally relevant to economic progress and presents the "...persuasive fact that colonies had become no longer economically worthwhile" as the reason for the end of the colonial era.
Ignorance, stupidity, in great affairs is not something that is commonly cited. 
Churchill "was the architect of the Dardanelles campaign, the most luminous catastrophe of the war, although there can be little doubt that responsibility for it was shared with remarkably incompetent generals and admirals."
...industrial democracy served the United States...
To a marked degree, modern American economic achievement is built on the errors of the European (and later the Japanese) ruling classes.

3. THE ROOTS OF DISORDER

...where war is concerned, there is the larger effect of politics and anthropology. 
Capitalism, tempered by democratic process, was showing itself to be a relatively secure economic system...
Regarding Clemenceau, "Anticipating what would soon become routine for failed statesmen, he went on a speaking tour of the United States."
...President Roosevelt escaped this remorseless anthropology of conflict by an early, well-timed death.
A closer knowledge of these adverse rites would have told Lyndon Johnson what to expect even had there been victory in Vietnam, and George Bush what would follow his seeming success in the Persian Gulf.
...one of the less celebrated facts of the war that the ordinary infantrymen were expected to combine bother economic and supreme sacrifice. 
In WWII FDR proposed that incomes be limited by tax to $25,000 a year. 
WWI inflow of gold from Britain and France made the U.S. the repository of the world's gold stocks. This led to New York City as the world financial center in the 1920s. 
Fear of inflation led to Galbraith enforcing price controls in 1941.

4. DEBT, INFLATION AND JOHN MAYNARD KEYNES

...a special reparations commission ... had a view that was almost grotesquely simple, as perhaps befitted those advancing it.
On Keynes:
When he himself received a notice calling him to military service, he laid it aside as an error. 
Here he overstepped the unwritten convention of scholarly discourse...: one can attribute wrong motives to leaders; one can charge error; one cannot assert mere stupidity.
Wilson he called "this blind and deaf Don Quixote." Clemenceau "had one illusion—France; and one disillusion—mankind." Lloyd George: "this goat-footed bard, this half-human visitor to our age from the hag-ridden magic and Celtic woods of antiquity."
All through 1923, it has been said, somewhere around half of the printing presses in Germany were printing money. At the end of 1923 inflation was ended by the introduction of the rentenmark, backed symbolically by landed wealth. 
In 1933 the British and French defaulted on their American debt, which left Finland in lonely if minute grandeur as the only country continuing to pay.

5. THE ECONOMICS SCENE THEN: A DIGRESSION


On Lenin's Swiss conferences in 1915 and 1916: "for possessing or disseminating this working-class view of the world ... two German officers and thirty-two privates were therapeutically shot."
Classical economics focussed on equilibrium forced by competition. Natural monopolies had to be regulated and others broken up. This led to the 1890 Sherman Anti-Trust Act. Trade unions were highly visible antitrust offenders and were so seen by the courts. 
In the 1980s ... the antitrust laws ... were simply not enforced. ...one of the less noticed developments of the Reagan years.

6. PORTENTS


On Churchill's decision to return to the gold standard at the old exchange rate, covered by $300 million in US supporting funds:
There followed perhaps the single most damaging error of modern economic and financial policy
On speculation:
Those who doubt are reviled as creatures of defective imagination. The buying and the supporting mood continue until the supply of mentally vulnerable, economically viable buyers is exhausted. 
Finally there is the search, in which economists are known to participate in a cooperative way, to find some reason for the bursting of the speculative bubble. It is almost never supposed that ... the speculation contains the seeds of its own destruction 
Ponzi was involved in the Florida land boom and
...his genius was to see that people who believe they are singled out to be rich are always available for fiscal suicide, however obvious its inevitability. 
Coolidge's last message to Congress on December 4, 1928:
The main source of these unexampled blessings lies in the integrity and character of the American people. 
...what is good for the more fortunate of the populace must, per se, be good for all.
On agricultural economics:
That the classical system in its most nearly perfect form could be associated with grave discontent and hardship was largely ignored.

7. THE CRASH


On the title of Galbraith's book about the Crash:
That isn't a book you could sell in an airport. 
Joseph P. Kennedy made his money via the "speculative pool" but "...he detached himself in time and was not ... the victim of his own presumed financial acumen."
The most famous example of this leverage was created by Goldman, Sachs and Company, which, in late 1928, organized the Goldman Sachs Trading Corporation. It's only reason for being was to own stock in other companies... 
Missing only was the yet-to-be-discovered fact that leverage could go viciously into reverse. 
Albert H. Wiggin, head of Chase, was found to be short in the stock of his own bank at the time of the crash... Wiggins said, nonetheless, that the short selling demonstrated his keen personal interest in the affairs of his employer. He was retired with a lifetime salary of $100,000 ..., which, on examination, turned out to be his own thoughtful gift to himself. 
I now turn to the aftermath of the crash ... and to the lessons that were then learned and have since been grievously unlearned.

8. THE GREAT DEPRESSION

It is one of the least advertised, and for the very affluent the least attractive, of economic truths that a reasonably equitable distribution of income throughout the society is highly functional. 
Left to itself, that [agricultural] industry is more than mildly self-destructive as to production and price. One result is that in all agricultural countries almost without exception there is some public mechanism of price and supply management for farm production. To this day this is regarded as politically deviant, a yielding to an everywhere-powerful farm lobby. It is not. 
...the industry that most closely conforms to the competitive ideal—to the purest of pure competition—is the least able to tolerate the result and lives, therefore, under the greatest measure of state control of prices and production. 
...nothing is more constant in depression or recession than the belief that more money for the affluent, not excluding oneself, will work wonders as to recovery. 
Then as now, intervention to support [dangerously vulnerable banks and financial] institutions was acceptable government policy. Unlike welfare support to the poor, it was not thought a burden. 
For many, and especially for many with political voice, money and influence, depression or recession is far from painful. 
Already in June 1930, and over the strongly expressed opposition of a full thousand economists, the Congress had passed the Smoot-Hawley tariff bill protecting a wide range of industrial products and with a special orientation to agriculture.

9. THE NEW DEAL

One small but highly articulate and even somewhat disciplined group there ... did unite on the need to abolish the system entirely--to accept that capitalism was a failure. 
...Federal Reserve policy for expanding the economy was a grave disappointment. You can pull but not push on a string. 
In October 1933...the President, Secretary of the Treasury...and...the head of the Reconstruction Finance Corporation, which was the purchasing agent, met each morning to set a new and higher price for newly mined gold. 
Britain, in particular, had by now abandoned the fixed parity of the pound with the dollar and gold that Keynes had so eloquently condemned and which, internally, had wrought such social havoc.
 On the PWA and WPA:
 Employment ... was the principal focus of this effort and for a wholly simple reason: the dominant feature of the underemployment equilibrium is unemployment. The unequivocal need, here dependent on no intervening theory, is to create employment.
 On traditional economics:
Both doctrine and practice emphasized, even assumed, fiscal responsibility, meaning that government must have revenues to cover its expenditures. 
It is with industry and urbanization that both old age pensions and unemployment compensation become socially essential. 
In Britain the passage, including through the House of Lords, of legislation providing social security provoked a major constitutional crisis. The opposition in the United States was also adequately bitter. 
In truth, it would be hard to identify any measure that has done more to help secure the future of capitalism.

10. REVOLUTION BY JOHN MAYNARD KEYNES


In 1933 Keynes
...took on the whole world of economics on its most compelling, even sacred belief. He said that the deficit had economic virtue, that it should be larger. To increase it was the path, indeed the only path, to recovery. The shock to conventional attitudes can hardly be exaggerated. 
Here entered macroeconomics, the general flow of purchasing power in the system as a whole.

11. THE LARGER WORLD

... by 1932, abandoning a near century of commitment to free trade, the British had put a tariff ring around ... the British Empire.
 On Europe in 1937 and 1938:
It was the political extremism, the intense and even insane nationalism so cultivated, that would set the stage for the descent into military conflict in the years to come. 
Of all the larger European countries, France was the least affected by the depression, and it was the most moderate in its response. 
One adverse economic aspect of the policies of National Socialism eventually did appear. The United States and Britain came to the Second World War with large reserves of available labor and plant capacity, while Germany came to it with no unused manpower and with an economy at the highest level of civilian production. 
The reservoir of unemployed workers and unused resources was to prove a major source of wartime strength for the western Allies.
 Regarding Sweden in the 1930s:
From Keynes one had the theory; from the Swedes one had the intensely practical—and democratic—experience.

12. THE SECOND WORLD WAR


Simon Kuznets introduced the Gross National Product. To avoid inflation, in 1942 the General Maximum Price Regulation controlled prices, and fairly comprehensive rationing was introduced. 
...price and wage controls had a strongly functional role in expanding wartime production.
In the fiscal years 1941-45:
The top bracket of income tax was raised to 91 percent, but—a later and highly convenient doctrine to the contrary—this did not visibly reduce the incentive to effort on the part of the relevant rich.
Mentions the negativity of the dollar-a-year men (an official or employee, especially a federal appointee, who receives a token annual salary) compared to the energy and initiative in the factories and shipyards.

13. BRITAIN AND THE OTHER SIDE


In January 1941, Lend-Lease was introduced to avoid post-war debt.
Already in 1941 [Britain] was outproducing Germany in major military requirements, an advantage that it maintained throughout the following year. This was partly because the German wartime economic management was strikingly inferior and frequently incompetent...
In the last days of the war Galbraith was involved with the (economic) interrogation of Goering and Speer, who had been in charge of German economic mobilization and war production
...women were not drawn into the German labor force. 
German factories worked only one shift throughout the war... 
[Speer] acquired a reputation for his perceptive view of National Socialism and his own achievements."
On bombing Germany:
Overall, the effect of the bombing was an increase in aircraft production. 
The belief in the efficacy of air power remains strong; the historical record is, at best, dim.
On the role of economics in war and as a peacetime instrument of foreign policy:
the transfer of production and sacrifice by citizenry ... accounts for the frequently minimal effect ... from sanctions, boycotts and embargoes.
On Japan:
...it was ground and naval warfare...that brought Japan's eventual surrender, not the economic loss of its military supplies through bombing raids. 
The Strategic Bombing Survey concluded, more than incidentally, that the atomic bombs advanced the end of the war by only a matter of weeks. 
Any assessment of the role of economic decisions in the war must see them in the perspective of the far more destructive political and military errors. Again the primal role of stupidity in shaping the course of history.

14. THE PEACE, I

In one of the more imaginative and civilized actions in modern history the soldiers released from active duty were offered the opportunity of paid schooling to compensate for the years they missed while in the service.
The force of the Employment Act "...put responsibility for macroeconomic management of the economy firmly on the government." and Galbraith gives full credit to Keyserling and his Council for the economic policy that led to "...the good years of American capitalism."

In September 1946 management of their own economic life was returned to the Germans, in a speech drafted by Galbraith.
For the defeated powers autonomy and responsibility were not enough. There had also to be working capital and the incentive to produce.

15. THE PEACE, II


Post-war, to reduce inflation,
The obvious solution was to diminish the regular currency outstanding by requiring the exchange of the existing notes for a smaller but functionality effective number. This, with characteristic pragmatism, the French did in the early months after the war. It had the further practical effect of denying to erstwhile black-market operators and those who had enjoyed special privileges under the collaborationist Vichy government any continuing advantage...; it was wise not to confess guilt by bringing in a currency hoard for exchange.
In 1948, Germany established a U.S. proposed currency exchange (designed with a capital levy) which, with the money from the Marshall plan, lead to the impressive recovery. This avoided the mistake of artificial conversion agreed in the loan from the U.S. to Britain.
However, was it just the availability of money that led to the post-war recovery? Galbraith argues that the economists decided how the money should be used. Richard Bissell is mentioned: he then worked for the CIA on the U2, and his career ended due to his responsibility for the Bay of Pigs operation.
A less publicized effect of the Marshall largesse was that much of the money flowed back to the United States...a powerful stimulant to the American economy.
Galbraith points out that the Japanese recovery was due to the Government and the zaibatsu, which, compared to Germany, is "...an important comment on the relative importance of external help and internal determination." The point that one motivation of the Marshall plan was to blunt Communism is strongly made, and this held true during the Cold War.

16. THE GOOD YEARS

Truman's victory in 1948 should not have been unexpected; American voters like Presidents who preside over peace and prosperity. 
The Korean War was unpopular, more so due to the "spectacularly irresponsible behavior of General Douglas MacArthur, who invited the Chinese to intervene ..."
Galbraith makes the point that international Capitalism trades across borders and economic development leads to calls for political union, reducing national tensions.

On monetary action:
No course of public action would be so successful in surviving disappointment about its efficacy...
He writes disparagingly about the impact of his 1958 book "The Affluent Society".
The achievements of Communism...led to the Cold War.

17. DECOLONIZATION, ECONOMIC DEVELOPMENT


Galbraith argues that the decisive factor for shedding colonies was that they were no longer economically advantageous. The World Bank and IMF were planned at the 1944 Bretton Woods Conference.

Regarding the UN:
...discussion of the problem, often replacing action, was extended and intense. 
Free and compulsory education was then seen as a prime requisite of economic progress. 
In modern times virtually all of the rich countries live at peace with each other. The poor, having nothing to lose, do not. Tribal conflict is exacerbated by poverty. So is religious conflict.
Galbraith views the history of the slow development of third world countries through an economic lens.

18. THE KENNEDY INITIATIVE

Kennedy did not take advice on economic matters casually. He sought diligently to understand the issue or issues under consideration; somewhat exceptionally, even idiosyncratically, for a politician, he gave every indication of enjoying economic discussion and the occasional intense debate.
On microeconomic policy:
In the early days of the Kennedy administration...there was acceptance that the wage-price spiral should be held in check.
The Peace Corps
...was both well publicized and well received... Of particular importance was the impression it gave to the world of President Kennedy, his administration and the United States.
Again, through Galbraith's prism, the rise of the civil rights movement was driven by the breakdown of feudal structure of the South in the 1960s due to the mechanization of agricultural production. 
...in economic matters one must always look well beyond the proclaimed purpose of any given initiative to see its ultimate effect.

19. THE WAR ON POVERTY AND THE WAR


On the failure of the Poverty Program:
The first was a deeply ingrained, even theological, opposition to providing income to the poor." "The danger [of income for the poor] is seen as peculiar to the underprivileged; for the affluent and the rich, idleness, called leisure, is not similarly deplored.
Galbraith was sent to Vietnam in 1962 by JFK on a fact-finding mission. His views on limit of effectiveness of air power, the deathless domino theory, and the awe and respect enjoyed by Communism at that time are interesting.
It is by no means incidental that much military expenditure, that for sophisticated weaponry in particular, rewards a comfortably affluent part of the larger population.
 In the 1972 election campaign, McGovern proposed a version of Friedman's "negative income tax".

Galbraith rates LBJ
...as one of the most socially perceptive and potentially effective of modern Presidents.

20. THE DIM YEARS


Four factors led to the "dim years":
  1. wage-price spiral
  2. energy prices (not inflation due to Vietnam war)
  3. negative perception of government due to Nixon
  4. reduced competitive position of US 
On Nixon and his conservative economic advisors when freezing wages and prices in 1971: 
Although their commitment to the free market was eloquently avowed, their commitment to reelection was even stronger.
On government deregulation: 
In the American experience this was to be a strong and especially damaging example of the error in substituting broad principle, verging as ever on theology, for relevant, if always painful, thought.
Galbraith clearly explains why deregulation of the airline industry, an oligopoly, lead to the failure of some old established carriers and bankruptcy for others. However, safety standards were still enforced by the government as even free-marketers want to be safe when flying.


21. VICTORY FROM DEFEAT


Galbraith points to Adam Smith's "Wealth of Nations", published in 1776, as the origin of the modern-day laissez-faire politics. He argues that long-range government support for industry explains much of the economic advantage of Germany and Japan after WWII. In the US, military expenditure was a strong restraining factor on American economic development.

On corporations:
Responsible to itself, protective of its own interest, the management is interested in compensation, security of tenure and perquisites. Defending management interest in personal reward against hostile takeover attack and extending management power through merger or acquisition take precedence over efficient operation of the corporation. When management attention is diverted from such efficient operation, the modern large corporation becomes subject to a bureaucratic stasis, an inner-directed bureaucratic immobility. Thought and needed change become subordinate to established policy. Initiative is diffused through the organization and is not tested for its effect but for its conformity with what has been done before.
Sounds like UWA...

His musings on Detroit in the 1990s could be seen as foretelling its more recent decline. He also identified the social tension in Germany due to foreign migration. He saw that in Japan and Germany the industrial advantage of peasantry was coming to an end. Regarding Italy after the war, Galbraith writes:
No one has attributed this economic achievement to the precision of Italian government economic policy. 
...more than any other ethnicity, the Italians have recognized that the arts are not only enjoyable but, industrially speaking, highly functional.

22. THE REAGAN ACHIEVEMENT

The objective of the new administration coming to office in the new decade was, not surprisingly, to serve its own constituents.
The threats were taxation and Communism, and behind the latter, the Soviet Union. To fund the fight against Communism
...the deficit, in turn, became (as it remains) an independent force in its own right in keeping down social-welfare expenditures.
As the rich needed the incentive of more money, so the poor needed the incentive of less. 
Nothing so weakens a union's claims as the workers' need to keep the employer in existence.

23. THE GREAT IMPLOSION


On the fall of Communism:
Not the least remarkable feature of this latter-day revolution was how completely it was not foreseen.  
Galbraith again spends considerable time on arguing the case that agricultural economists are outside traditional economic discourse.

He also argues that human rights are an emergent property of economic achievement:
...economic advance produces more educated men and women than ... can be kept quiet and excluded from a role in public life.
So, how does this argument apply to China in 2015? Is the government repression and control sufficiently strong or is there a unique cultural mindset that encourages the preservation of the status quo?

Galbraith was wrong to think that the transition from Communism would be peaceful; one cannot sweep the collapse of Yugoslavia under the carpet. Whilst ethnic forces were at play here, one cannot ignore this episode. However, I do agree with his depressing analysis of the poor transition from Communism to Capitalism.

24. THE UNCERTAIN MIRACLE


The Saving and Loans through a guarantee of their deposits
... went on a an unparalleled speculative spree, which was laced with a far from subtle admixture of both mental delinquency and forthright larceny. 
Servicing the debt of mergers and acquisitions had a strongly depressive effect. 
 ...a highly unequal distribution of income can be dysfunctional...

25. THE LAST CHAPTER

Asked for my opinion by President Kennedy, I helped to persuade him to veto a small illustrated publication telling how to dig a backyard shelter...
As a teenager I recall my father's books on the nuclear Armageddon, and Hans Bollig's Booragoon house with 3 bedroom bomb shelter, air vents, and long-term food storage.
At the same time there must be an end to one of the more disastrous legacies of the Cold War, namely the supply of arms to the poor nations and the arms trade in general. 
There must be a suspension of sovereignty by international authority when this is necessary to stop domestic slaughter.
The composition of the U.S. armed forces
...is for the less favored, the minorities and the poor...
Thus to the problem: ... it is far easier for the comfortable to find flaws in the character of those who make up the underclass and increasingly also in the immigration laws and their enforcement.