Gordon Tullock, RIP

By Kindred Winecoff

He was not my favorite economist, but there is no question that he had a strong mind that was consistently capable of locating puzzles which had escaped the attention of others. My favorite, perhaps, is his observation that given how much is at stake it is very surprising that there is so little money in politics. Spending even $1 billion on a presidential campaign is very little, when compared to the amount of influence over a $15 trillion economy that a president has. (The most up-to-date explanation for this is that spending on politics is mostly a consumption good, not rent-seeking.) On another occasion Tullock argued that if we really wanted to improve automobile safety we should replace all airbags with an 8 inch ice pick that would ram into drivers’ chests if they crashed. I know I’d drive more slowly and carefully under such conditions.

The fact that he died on Election Day is appropriate, or perhaps ironic. Tullock was an outspoken opponent of voting for instrumental reasons — voting incurs costs while the probability of impacting the outcome is minuscule, so the act of voting generates negative utility in expectation — and he extended the logic to revolutions. He had many interesting ideas, although whether they amount to a consistent philosophy or politics is debatable.

Understanding the Preferences of Finance

By Kindred Winecoff

Paul Krugman [1, 2] and Steve Randy Waldman are having an interesting exchange on why the wealthy support tighter monetary policy despite the fact that expansionary economic policy is good for them. This is often expressed as an aversion to lower central bank interest rates, quantitative easing programs, or other activist monetary actions. Krugman sums up the puzzle nicely:

I get why creditors should hate inflation, but aggressive monetary responses to the Lesser Depression have been good for asset prices, and hence for the wealthy. Why, then, the vociferous protests?

Krugman believes that this is false consciousness: “rentiers” oppose policies that benefit them because they adhere to a model of the world — in which loose monetary policy will lead to runaway inflation that will erode the value of their capital — that does not apply in our current circumstances. (Krugman does not mention that one reason why rentiers might believe this is because Keynesians like Krugman have been advocating for higher inflation partially for this reason for some time.) Waldman portrays this as simple risk-aversion: expansionary monetary policy will change something, and because recent circumstances have been favorable to rentiers that something is likely to negatively impact their station.

I prefer Kaleckian accounts that emphasize the general relationship between capital and labor. In Kalecki’s world, full employment gives bargaining power to workers because they have easy exit options. Conversely, underemployment gives bargaining power to capital. I believe that both Krugman and Waldman are sympathetic to this framework as well.

But I want to highlight another possibility that situates the U.S. macroeconomy within the context of the world economy. The simple Mundell-Fleming macroeconomic model, when combined with a Ricardo-Viner sectoral approach, tells us that when international capital mobility is high (as it is today) financial capital benefits from an exchange rate that is high and stable, while fixed capital and labor benefit from monetary policy flexibility and (often) a lower exchange rate. This relationship is discussed in detail in Jeffry Frieden’s 1991 International Organization article “Invested interests: the politics of national economic policies in a world of global finance”, from which the table below is taken:



The section of the article that begins on pg. 442 is especially relevant. There are several things to note. First, the preferences of financial capital diverge from those of fixed capital, which are divided in turn by whether it is engaged in export-oriented, import-competing, or nontradeable production. Second, the preferences of labor within these sectors will tend to side with capital within the same sector, and oppose capital (and labor) in other sectors. Third, the interests of financial capital will diverge from everyone else.

Why is this? Frieden notes that the interests of capital depend on how strongly tied that capital is for its specific current use. Financial capital is much more liquid and adaptable than an industrial plant. It can be deployed globally while fixed capital is must remain local. For this reason, exchange rate movements create an additional source of risk: a depreciation will negatively impact the value of local assets vis a vis foreign assets, while an appreciation will negatively impact the value of foreign assets vis a vis local assets. The point is that any exchange rate movement from the status quo will benefit some and negatively impact other status quo investments, which is why the interests of fixed capital are divided. But for financial capital, exchange rate movements are always bad for their status quo portfolio, at least inasmuch as an alternative portfolio created that anticipated the future exchange rate movement could have been constructed.

Why should finance support a higher exchange rate level in addition to low volatility when capital is mobile globally? Because, all else equal, a higher value in the local currency will increase purchasing power globally. This is particularly true if you have easy access to that currency via one’s central bank. It is probably true that U.S. banks have had greater access to dollar liquidity over the past five years than at any point in economic history; given that, they would prefer those dollars to be more valuable in exchange rather than less.

Frieden notes in his article that the distributional implications of the battle over exchange rate stability and interest rate levels would be especially severe among the European countries that were then debating joining a common currency, with finance preferring a high and stable exchange rate and low monetary policy flexibility. I would suggest that this expectation has been borne out exceptionally well, as the ECB has engaged in quite restrictive monetary actions despite suffering from a regional economic collapse that has few historical parallels. The story is a bit different for the U.S. because of its n-1 privileges, but it is unclear whether anyone in the U.S. — financial firms or even the Federal Reserve — really understands this. Even still the basic story works: high and stable exchange rates are better for finance capital than low and volatile exchange rates.

So from the perspective of financial capital the great risk of expansionary monetary policy is that it will impact exchange rates rather than interest rates, growth, employment, or even asset prices. Thus the Krugman-Waldman puzzle is not a puzzle at all. Financial capital wants restrictive monetary policy because it benefits them more than the alternatives.

Gary Becker, RIP

By Kindred Winecoff

Becker was a bogeyman for many who reflexively dislike “neoliberalism”, public choice economics, or markets more generally. In the minds of some he is further tarnished by his association with University of Chicago economics.

But Becker was undeniably brilliant, and his influence was very far-reaching. His primary contribution, as he explained in his 1992 Nobel lecture, was to conceive of economics as a way of thinking, thus extending moving economics past the study of industrial organization and value calculations into other aspects of society. What this meant for Becker is that behavioral incentives exist in all social settings, so the basic logic of cost/benefit analysis is useful generally. Others thought this intellectual project was less benign; when you hear people complain about the “moral limits” of markets or the need to disassociate economic logics from social interactions you are hearing an attack on Becker.

Typically these attacks miss Becker’s central insights or underestimate their quality. This point was made powerfully by Michel Foucault, of all people, as he explained in The Birth of Biopolitics lectures. Some years later Becker thoughtfully responded. Sometimes Becker did display reductionist tendencies that were severe enough to view his conclusions with some skepticism, but even then his insights were useful and the power of his logic is clear. (When reading him it is worth asking just how often ceteris really is paribus.)

I find Becker’s vision of human capital to be not only persuasive in a basic sense but also empowering. If it penetrated social consciousness more I believe a wide range of social outcomes would improve. It is relevant for current discussions of economic inequality and the usefulness of conceptualizing labor as a class in a modern economy.

Here is Becker on Google Scholar and also his profile page. His H-Index is an astounding 80. Tyler Cowen picks some of his favorite Becker deep cuts. I’ve always liked his “Crime and Punishment”, which is relevant to the argument Graham and I are having over social approbation and Donald Sterling.

No Work Makes Jack A Malcontented Boy

By Kindred Winecoff

In “Economic Possibilities for Our Grandchildren” John Maynard Keynes wrote that by 2030 or so humans could spend most of their time pursuing leisure:

For many ages to come the old Adam will be so strong in us that everybody will need to do some work if he is to be contented. We shall do more things for ourselves than is usual with the rich to-day, only too glad to have small duties and tasks and routines. But beyond this, we shall endeavour to spread the bread thin on the butter-to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!

In many respects this echoed Marx nearly eighty-five years earlier, in The German Ideology:

For as soon as the distribution of labour comes into being, each man has a particular, exclusive sphere of activity, which is forced upon him and from which he cannot escape. He is a hunter, a fisherman, a herdsman, or a critical critic, and must remain so if he does not want to lose his means of livelihood; while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic.

For contemporary treatments of similar ideas see John Quiggin and Ronald Dworkin. (Both of these are well worth reading in full.)

You may accept these goals or dismiss them. I would just like to note that we’ve basically achieved them, at the societal level. The Bureau of Labor Statistics reports that the average American spends 3.19 hours per day working. Obviously this mostly means that the distribution of working hours is highly unequal as is the renumeration from work. And the U.S. is hardly the world in this respect.

Still, if you squint hard enough from a high enough perch, we might be working about as much as we should be from a Utopian perspective. Even if you tack on the 1.74 hours per day we spend on “household activities” — from food preparation to lawn care — we’re basically in the realm that Marx envisioned. We spend 2.83 hours per day watching television. Marx really was a 19th century thinker whose outlook does not map easily onto 21st century realities but again: it’s worth knowing where we stand.

Our biggest crisis remains a jobs crisis, locally and globally. People seem to want to work even if their most basic needs are met. They want to work even if it means they would have to forego hunting in the morning or fishing in the afternoon or blogging in the evening. They seem to want to acquire and consume and improve their lives ever more. Keynes viewed this as avarice — a bit strange for him to say, given his relatively luxurious lifestyle — but maybe it isn’t. And if it isn’t then some basic planks of Utopian political theory might need re-thinking.