The Breakdown of the Capital-Labor Accord and Okun’s Law

I’ve been thinking a lot lately about the periodization of recent history and its connection to economic theory. In particular, in economic sociology we talk a lot about the “post-war capital-labor accord” and the golden age of the 1940s-1970s. In these years, inequality went down, unions flourished, civil rights laws were passed along with LBJ’s Great Society programs like Medicare, etc. Corporations saw themselves as not just profit-seeking nexuses-of-contracts but also as institutions with duties to their stakeholders – employees, local community organizations, etc.

Then everything went to hell in the 1970s. Oil shocks, poor economic performance, large increases in foreign competition, an overheated economy created by the meeting of increased social spending and increased military spending, all combined to create massive inflation and other sorts of economic upheaval. The shooting war between labor and big business resumed, as union contracts were blamed for causing inflation and big business began to push for regulatory changes (to fight the hated EPA and OSHA, along with unions) and increased layoffs. Institutional investors, growing rapidly in size in part *because* of the prosperity of the “golden age” (e.g. the massive pension funds like CALPERS and TIAA-CREF), began to demand discipline from corporations unused to having to listen to anyone (cf. Berle and Means 1932, Useem 1996). Changes in financial regulations and institutions made possible the junk bond market and, in turn, a more active market for corporate control – suddenly, large firms that were used to making acquisitions became targets.
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Name the Decade from the Quote

No President since Franklin Delano Roosevelt has inherited an economy as beset by calamity as the one [New President] will command after Jan. 20. And no President since Roosevelt has had so much expected from him in righting all that has gone wrong.

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T. Roosevelt For One World Government?

From Roosevelt’s 1907 State of the Union Message (quoting an earlier speech):

The makers of our National Constitution provided especially that the regulation of interstate commerce should come within the sphere of the General Government. The arguments in favor of their taking this stand were even then overwhelming. But they are far stronger to-day, in view of the enormous development of great business agencies, usually corporate in form. Experience has shown conclusively that it is useless to try to get any adequate regulation and supervision of these great corporations by State action. Such regulation and supervision can only be effectively exercised by a sovereign whose jurisdiction is coextensive with the field of work of the corporations–that is, by the National Government.

If you update the last sentence, it reads pretty well.

Archives Are Awesome (and a Brief Complaint about Economic History)

I received approximately the coolest piece of mail ever today: the collection guide for the archive of Simon Kuznets’ papers at Harvard. It’s like a preview of coming/very old attractions. For example, Box 1 contains “Corresp. w/J.M. Keynes 1936; Corresp. w/Prof. Don Patinkin re-Keynes [Reprints]”. I do not know what this means or what the correspondence concerns (though I can make some educated guesses). At some point – summer of 2010? – I am going to go find out.

On an almost unrelated note, this article in the NYTimes about FDR’s economic policy rings a little false to me. Here’s a section:

Roosevelt’s New Deal is often portrayed as an embrace of Keynesian economics, which advocates increased government spending to combat economic downturns and generate jobs.

Yet despite New Deal programs and some aid to the states, total government spending — federal, state and local — as a share of the economy throughout the 1930s remained at just under 20 percent. (Today, total government spending is more than 35 percent, a larger buffer against weakness in the private sector.)

Here’s the thing: Keynes didn’t even publish the General Theory until 1936. What Keynes believed in 1930 was different from what he settled on by 1936 (for example, if I understand correctly, his emphasis on fiscal policy over monetary grows in that time period). So, the New Deal may be portrayed as an embrace of Keynesianism, but it wasn’t, at least not until around 1937. Alan Brinkley documents this story excellently in The End of Reform. In the 1933-1936 period, Roosevelt and his economic team were focused on managing separate crises with separate interventions. Jobs programs were conceptualized as just that – ways to help unemployed people make a living while doing something moderately socially useful. The Keynesian notion of aggregate demand, and its importance in the economy, enters into New Deal thinking relatively late, with the sudden downturn in 1937 following Roosevelt’s attempt to balance the budget. So, Roosevelt’s early actions (1933-1936) were not anything close to Keynesian, in intention anyway.

Add to that the fact that there wasn’t really a firm conception of “the economy”, specifically “the macroeconomy”, until the end of this period and the whole story makes even more so. Early New Deal policy was concerned with individual crises – declining agricultural prices, rising unemployment, the collapse of banks, and rising budget deficits (one of the acts FDR passed in 1933 was the “Economy Act” to reduce government spending. Economy didn’t yet mean what we now mean by it). These problems were tackled, albeit only partially, by a series of somewhat unrelated measures. The point of the WPA, TVA, etc. was not to stimulate aggregate demand but simply give people jobs who would otherwise be at loose ends and unable to make ends meet. Only as the concept of the macroeconomy becomes firmer, measured by official government statistics like the National Income figures produced by Simon Kuznets at the Department of Commerce in 1934, along with better national unemployment data, do Keynesian ways of acting on the economy become possible. A macro-level, above the individual market, becomes available as a site of intervention. Once unemployment is seen not just as a problem of people not being able to make a living, but rather as the source for a decline in aggregate demand which in turn affects private investment, etc. can “Keynesian” or even “macroeconomic” policies be implemented, rather than a host of microeconomic initiatives (interacting with single markets or problems at a time). So, yeah, the early New Deal wasn’t very good at being Keynesian.. but it wasn’t trying to be, nor could it have been.
Every time a historian writes about how pre-1930s economists were trying to understand “the economy”, or about whether or not some policy was “Keynesian” substantially before the General Theory, I get confused and annoyed*. So, to paraphrase Foucault, stop writing the history of the past in terms of the present, and start writing the history of the present!

* And yes, I know the article mentions Keynes visiting FDR to try and give him advice on what to do in 1934. But certainly the first 100 days stuff in 1933 can’t be judged against Keynesianism. No? Am I even coherent this late at night?

Democracy in America: The Great Depression Edition

From The Economist, November 23, 1929, a quote from a “high authority” on the causes of the stock market crash:

“The market fought its way upward against Reserve banks and member banks, and there was truth in the boast that it defeated them . . . bankers are not the owners of the funds in their custody, and the market defeated them by going round them and inducing depositors to place their funds at the disposal of ‘the street.’ Democracy triumphed over authority and leadership in the advance, and the orgy at the finish was all its own.”

The Past Was Not So Different: Spam Edition

So, I’ve always thought of the phenomenon of spam as a somewhat modern problem. I suppose there’s always been junk mail, but most junk mail seems to be of the coupons and contests variety. The quintessential piece of modern spam, on the other hand, is the Viagra or Cialis ad. We all get them, and no matter how good our spam filters are, one or two slip through. Would you like some Cialis? It’ll help please the ladies! Etc.

It turns out that the past was not so different. In Institutional Change and the Transformation of Interorganizational Fields: An Organizational History of the U.S. Radio Broadcasting Industry, Leblebici et al. discuss the birth of the modern radio industry. At first, most stations were paid for by radio manufacturers themselves, trying to increase demand (as there was excess capacity in the factories that had made radios for the military in WWI). A few large retailers joined in. But soon, as more and more people owned radios, and thus sales slowed for the manufacturers, new actors were needed to provide content and to pay for it. Several proposals were considered. The winners?

The prevailing idea, though, came from an unsavory group at the periphery of the industry. It was introduced by sellers of questionable commodities who could no longer persuade most print media to accept their advertising. They bought radio stations to offer services, ranging from fortunes in real estate to hair-loss remedies to fortune tellers. Prominent in this respect was “Doctor” J.R. Brinkley. He established Station KFKB in Milford, Kansas in 1923 to hawk his infamous goat-gland operations, of which he performed thousands, to revitalize elderly gentleman’s sex lives for a fee of $750.

That’s right folks, the modern radio industry was given birth in part by spam. And not just any spam, but by male impotence spam. And of course, once the spammers of the day showed the rest of the industry that direct advertising could work to fund broadcasts, major corporations moved in, and advertising agencies began to not just fund radio but to write and produce it as well.

The past is kind of awesome.

Trade, Wages and “The Economy” Part 1 of N: Economy and “The Economy”

I’ve been planning a series of posts on the issues of “the economy”, (free) trade and wages, public opinion on those subjects, and the role of economists in that debate. Unfortunately, I’ve been lazy and have had trouble narrowing it down to individual, bloggable bits. So in an attempt to start towards that, I give you a snippet from a somewhat interesting Q&A with former Labor Secretary Robert Reich:

Robert Reich Answers Your Labor Questions – Freakonomics – Opinion – New York Times Blog:

Q: Do you believe that wealth concentration is bad for the economy and can U.S. manufacturing be revived to be competitive again?

A: Two different questions. Yes, wealth concentration is bad for the economy because it tends to depress aggregate demand. Not enough people can afford to buy all the goods and services the economy produces. The rich won’t do it because they already have most of what they need. That’s what it means to be rich.

What’s interesting to me about this question and its answer are the ‘conditions of possibility’ for the discussion to even take place. 100 years ago, this question simply could not be formulated. If we believe Timothy Mitchell, the phrase (and the associated idea) “the economy” did not come into usage until Keynes and others in the 1930s (including Karl Polanyi) invented it. One could talk about the unemployed, about the wealth of a nation, about lots of related ideas, but there was no single fixed entity called “the economy” with a national scope. Building on the work of folks like Kuznets who built the statistical tools necessary to describe the economic activity of a country, Keynes and other began to speak about the economy – aggregate demand, supply, the unemployment rate (rather than the unemployed themselves), etc. Economy moved from being a term an idea denoting some sort of efficient means of achieving an end (e.g. political economy) to being a separate thing associated with a nation.

Nowadays it seems quite common place to ask, “is this bad for the economy?” But it was not so long ago that this question could not be framed. Instead we might ask, “is this good for the poor?” Or, “is it good for industry?” But not “for the economy’. Reich’s answer is revealing as well – wealth concentration is supposed to be bad for the economy because rich people have most of what they need, and this will not spend their excesses. This lack of spending will reduce aggregate demand, and thus slow everything down. But notice what’s missing? It also means the people who have the least will be least able to get more. But the problem for ‘the economy’ is not that most (poor) people will not be able to afford what they want or need, but rather that aggregate demand will suffer. Sometimes it feels like the means (economy) has become the end (‘the economy’).

Indeed, at the end of the same interview, Reich makes the point eloquently:

Economists tend to believe that economic efficiency and economic growth are the two most important values. Therefore, any policies that reduce the incentive to work hard are suspect. (Economists worry, for example, that a higher Earned Income Tax Credit for low-wage workers may discourage them from working harder, since wage increases would lead to correspondingly larger declines in the E.I.T.C. wage subsidy.)

This strikes me as wrong-headed. The economy exists to make our lives better; we do not exist to make the economy better.

Sounds pretty close to right (although perhaps it ought to be amended to “the economy should exist…”). And yet, how have we come to a place where we need constantly remind ourselves of this seemingly obvious assertion?

What does economics do? Part 1 of N

One of the hot topics inside economic sociology (or, where economic sociology meets the sociology of knowledge/science/expertise) is the idea of performativity, and in particular, the performativity of economics. In simplest (and not uncontroversial) terms, performativity refers to the way in which a piece of knowledge affects the world, and in particular, the part of the world it claims to ‘know’. Donald MacKenzie, a sociologist of science and financial economics in particular, distinguishes three types of performativity. Here’s orgtheory superstar and economic sociologist Kieran Healy’s description of the three types, from a lengthy piece on MacKenzie’s new book:

MacKenzie distinguishes three kinds of performativity: “generic,” “effective” and “Barnesian” (together with the latter’s negative complement, “counterperformativity”). Generic performativity means the active use of some bit of theory not just by economists but also by economic agents, policy makers and the like. Effective performativity requires that the use of theory not just be window-dressing: it must “make a difference” (18 ) in practice. Finally “Barnesian” performativity (named for Barry Barnes) requires that the use of economics actively alter processes “in ways that bear on their conformity to the aspect of economics in question” (19). That is, the model or theory must bring participants into line with its picture of the world. In that case the model helps make itself true, in the sense that before the its public appearance the system did not behave in accordance with the model’s predictions, whereas subsequently it does.

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Some Thoughts on “A Perilous Progress: Economists and Public Purpose in 20th Century America”

So in my brief pause between courses and starting in on my very long prelim reading list, I’ve been trying to read up on the history of the economics profession. Other than David Warsh’s excellent, but specific, book Knowledge and the Wealth of Nations (a history of economists’ understanding of growth and knowledge and the connection between the two), Michael Bernstein’s A Perilous Progress: Economists and Public Purpose in 20th Century America is the first book-length history of economics I’ve read*. With that in mind, I’m not going to try and assess the accuracy of Bernstein’s historical account, but rather summarize some of the most interesting threads in his tale and try to see if I can make sense of them.
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From Homo Economicus to Homo Genomicus? Free Will vs. Your DNA

Fans of musicals will most likely remember the endearing West Side Story song, “Gee, Officer Krupke”. In the song, the juvenile delinquent Jets explain to the forces of the law that their delinquency is not their own fault but rather, as the pretend psychologist says, “Society’s played him a terrible trick, And sociologic’ly he’s sick!”* With this song, The West Side Story (unintentionally, we can assume) enters headlong into one of the most pernicious and annoying debates in the social sciences – structure vs. agency.

The form of this debate goes along lines something like this: Someone argues that a large structure of society (class, caste, etc.) determines the behavior of those people enmeshed in that structure. Someone else argues that, wait, you’ve forgotten agency! People have free will, don’t they? If they didn’t, why would there ever be deviation, innovation, or resistance? And the argument sallies forth from there, arguing about the relative importance of particular structures, mobilizing other structures to explain residual variation (for example, explaining the actions of women of color as some sort of interaction between the two structures of race and gender), etc.
In this post, I’m going to talk about various notions of responsibility, agency and determinism. Terms are usually poorly defined, and often the level of analysis varies widely between the two arguments (trying to explain societal level outcomes vs. trying to explain individual decision-making, for example).

I personally find the whole argument a little baffling. As much as class or gender are not the most rigorous of scientific concepts (compared to, say, the electron), they are still miles apart from ‘agency’ or ‘free will’ in the commonsense usage. What role can free will play in an explanation of society? Why does the argument “you’ve forgotten agency!” still play so well in these circles? One reason, I think, for the continued persistence of this argument has to do with enduring enlightenment ideas of free will and rationality. And that brings us to homo economicus, at least momentarily.
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