Today's Buggy Topic

It's faithfully captured by the subject-title here, and you'll find the long bugged-out analysis --- full of hard evidence --- if you click here.

Today's 2nd Buggy Topic Is . . .

. . . A direct follow-up of today's 1st topic.  To grasp prof bug's current comments --- left at the Marginal Revolution a couple of weeks ago --- you probably need to read that earlier buggy post (January 28th, 2009).  Nothing more need be said by way of introduction.  Click here for the relevant Marginal Revolution thread.

Today's 1st Buggy Topic

Rational decision-making --- usually called rational-choice theory in economics and the other social sciences --- is at the heart of free-market theories about major economic agents . . . those spelled out in the title above.  It underlies the views of marginalism and opportunity costs in microeconomic theory --- agents consider choosing one option (working longer, spending money on a new car as opposed to repairing the old car, investing in the stock-market or the bond market, or business firms investing in a new risky technology) by calculating the likely benefits of that option compared to the risks and costs of choosing it in dollars spent or foregone.   Opportunity costs refer to those foregone options.   Thus the trade-off between leisure and working longer entails, if you decide to work voluntarily on the next four Saturdays, spending less time with your family or playing a sport you like or meeting with your friends. 

It's on this basis, given good information and making the best use of it, that market economies can move toward optimal efficiency and full employment, through self-adjusting changes in the prices of goods and services and in wages and interest-rates.  After reading the rest of these introductory comments, click here for prof bug's lengthy analysis that was left earlier in January 2009 at the Marginal Revolution.

A Newer Bent Still: New Classical Theory and Real Business-Cycle as Its Spin-off

Rational expectations, which lies at the heart of New Classical Theory --- a spin-off of some Nobel-prize winning economists and others of equal caliber starting in the late 1960s --- goes further. 

It assumes that economic agents have a full hypothetical knowledge of how a complex economy like the USA's --- including its global links --- works, at any rate as much as economists who seek to model the economy and key policymakers like the Federal Reserve and its targeting of interest rates or the money supply.   On these grounds, it follows that except for external shocks --- say, an entirely new technology that renders older technologies obsolete very quickly, or in a sudden new oil-cartel like OPEC raising the price of oil twice in 1973 and 1979 (gasoline in the US five times more expensive as a result), or a war abroad that disrupts imports from abroad or requires massive government spending to fight it as in World War Two --- except for these external shocks, the market economy is always in general equilibrium or will quickly adapt to it.  Unless, of course, governments gum up things by excessive regulation, excessive taxation, or excessive deficit spending that cheapens the national currency.

And hence even the business-cycle --- the ups and downs around long-term economic growth trends, the latter set by capital accumulation, the growth in the quantity and quality of the work force, and technological progress --- is something that market economies don't so much cause as have imposed upon them by these external forces.  The New Classical theory here that explains recessions and subsequent booms is called Real Business-Cycle theory, with a strong emphasis on the recurring impact of new technological changes.  In short, the business cycle's ups and downs are part of what constitutes economic progress.  Older, less profitable businesses will be weeded out.  Capital and workers will be freed for new, more technologically advanced sectors that incorporate the newer, more promising machines and products.  And fairly quickly --- if governments don't seek to control what they can't control: real economic factors that aren't amenable to either monetary fine-tuning or fiscal expansion --- the economy will, on its own, recover long-term trend.

Theoretical Challenges to Rational Decision-Making in the Market Economy: Three Sorts

Continue Reading:  

Today's Buggy Topic

Look at the subject-heading above.  If you were to believe a quote of Keynes made in 1942 --- Britain by then at war with Nazi Germany since the end of August 1939 and with Japan since Pearl Harbor and the subsequent attack by the Japanese on Singapore, Britain's chief naval base in the Pacific --- the answer seems to be a surprising . . . yes.  Keynes, as you can see if you click here --- the link taking you to the laudable econ-blog Marginal Analysis --- said in those quoted words that public works spending generally take to long to swing into action as an effective stimulus policy to counter a recession.

As It Happens, There's a Wider Debate Here

Yes, a debate prof bug was vaguely aware of . . . having studied, among other things, with some prominent British economists in his university training who had known Keynes well and had written important work on his creation of macroeconomics --- which means focusing on aggregate demand and urging fiscal stimuli (and public-works spending, not tax cuts) to act as a countercyclical antidote to recessions.   (One of these British economists was John Hicks, who invented the IS-LM presentation of Keynesianism that dominated the field for decades and for which, among other distinguished works, he would eventually win a Nobel Prize in economics).

That wider debate?  It started in the late 1930s, by which point Britain had recovered from the Great Depression ahead of the USA --- where the quick New Deal recovery of 1934-1936 was cut short by bad monetary and fiscal policies in 1937 . . . the result of which was a fairly severe one-year recession that raised unemployment from about 9.3% (down from over 20% in 1933) to double figures.  The debate in Britain, which Keynes was in the middle of, was not just whether a future Britain would need effective fiscal and monetary policies to combat recessions and maintain a publicly committed level of minimal unemployment, but how to deal with the likelihood of such policies entailing inflationary pressures in the later stages of a business cycle. 

The Debate Intensified in World War II 

It pitted the staid, largely pre-Keynesian British Treasury officials --- very powerful in Britain (for reasons set out in the buggy comments found at the Marginal Revolution --- against some notable Keynesians who manned a new Economic Section attached to the British War Cabinet.  The head of the Economic Section, a distinguished Austrian-influenced free-market economist, Lionel Robbins, found himself outmaneuvered by the younger Keynesians in his study-group . . . among them a future Nobel Prize winner, James Meade. 

Keynes himself, as was the case, wasn't in that Economic Section.  Made a Baron, he was in the House of Lords, but in constant contact with the Keynesians in that group, as well as with some younger but far less powerful Keynesian civil servants at the Treasury.  Enter a twist in the debate.  Keynes, you see, publicly talked a lot about the dangers of future inflation; he even published a small book about them.  That public record led some future economists to argue that Keynes had renounced his major commitments to public-works spending as the principal tool for fighting recessions . . . a position, it was argued by them, that put him at odds with the Keynesians in the Economic Section.

The Upshot for Our Concerns?

Prof bug, when he found an hour or so of free time late last night, did a google search and found a very good article on the debate and its twist by a British scholar.  It was from this article that the buggy guy was able to show the proper context in which the quote by Keynes had to be placed.  Specifically, as the article showed, Keynes' position was fully in accord with the Keynesian work being done in the Economic Section.  And so the quote doesn't really do what the poster, Tyler Cowen, apparently wanted it to do: show that even Keynes would be skeptical of Obama's plans for large-scale fiscal stimuli.

Click here for the original Professor Cowen post and prof bug's two comments . . . the lengthy important one, drawing extensively on the British article, found --- please note --- on page 2 of the comments.  That requires you to click at the bottom of the 1st page of comments to find prof bug's.  Or, come to that, click here for that second page.

Today's Buggy Topic

It's found at the laudable web-site run by Professor Mark Thoma of the University of Oregon . . . Economist's View. The subject that started the Thoma-thread was the best kinds of targets for fiscal stimuli, and Prof Thoma argued that increased spending on schools was a good candidate.

Prof bug took exception in his three lengthy analyses --- filled, as is his habit, with lots of hard data.  These data showed an extraordinary increase in government spending over the 20th century on our schools, whether measured as a percentage of GDP or amount spent per pupil in the primary and secondary school-systems in our country.  There was a particularly sharp rise in the long-term growth trend after 1960 down to 2004-05.

Worth It?

Prof bug went on to argue that we weren't seeing noticeably improvements in the last 40-45 years despite all this expenditure  . . . a declining trend in quality captured in SAT scores and repetitive international exams administered by the OECD and governments in several dozen countries that test, even four years, the math and science literacy of 15 year-olds.  Most studies also show a clear decline since the late 1960s in the quality of teachers, particularly among women --- mainly, it should be obvious, because the vast surge in professional opportunities for that started then led most talented women into the more prestigious and high-paying careers outside the school system itself.

No need to say more.  Please note that when you click here, you will be taken to page two of the comments --- well over 110 as of early morning January 23rd, 2009.  You will find prof bug's first lengthy analysis on that page.  Click at the bottom of that page and you will be taken to page three, where prof bug replies at even greater length --- with even more illuminating data and analysis --- to his critics.

The same Loony-Tunes half-hysteric who prof bug has mentioned before goes ape once more, much to his amusement and possibly your in this thread. 

Today's Buggy Topic

It's found in lengthy prof bug analysis set out at the Marginal Revolution ---specifically, in a thread that the head of that impressive economic blog, Professor Tyler Cowen, started on the topic of a liquidity trap.

Meaning?  It's a theoretical construct that John Maynard Keynes created in his path-breaking book, The General Theory of Employment, Interest and Money . . . a difficult work to interpret accurately, despite Keynes just reputation as a gifted writer.  All the same, it clearly broke with the dominant economic theories of the day regarding the 7 year-old Great Depression --- Keynes book published in 1936 --- and created the new field of a separate macroeconomics.  The long buggy commentary left in the Marginal Revolution thread deals with a crucial series of reasons why Keynes --- called by Milton Friedman, the father of modern monetarism (for which Friedman, among other things, won a Nobel Economic Prize) --- had to repudiate many of the ideas that he developed at length on economics, and especially his belief set out in his two volume work in 1930, Treatise on Money, that energetic and deliberate monetary expansion by Central Banks like our Federal Reserve could stop deflation, plunging GDP, and sharply rising unemployment with monetary policy alone. 

No need in those early days of the Great Depression for active fiscal policy stimuli of the sort that Keynes later proclaimed in The General Theory were alone likely to bring the economic crisis in the US, Great Britain, and virtually everywhere in the world to an end. 

Among Other Things, The Substantive Buggy Argument

. . . explains the reasons for Keynes drastic change of thinking on monetary policy and his endorsement of the crucial need for large fiscal expansionary policies in its place.  It's exactly what President Obama is planning to do, just as several governments in the EU and in Japan have been doing too . . . even as their and our Central Banks continue to pursue high-octane monetary policies such as reducing short-term nominal interest rates to zero, buying now long-term financial assets to reduce long-term interest rates, recapitalizing the banking system, and expanding directly the money supply.

Keynes and his more committed followers in contemporary economics doubt that these monetary policies will work to end our credit-crunch, and so they emphasize even far larger fiscal stimuli policies than President Obama's announced $800 billion government spending . . . including on public works.  In Britain, believe it or not, the existing Labour government has committed to spending an astronomical sum --- equal to 70% of Britain's GDP $2.2 trillion (allowing for purchasing power parity).  That would be the equivalent in the USA of spending over $10 trillion!  Wow!

Enter the Liquidity Trap

What Keynes had in mind by this new construct was this: the demand by the public for holding money to make purchases of goods and services currently and in the near-term --- whether held as currency (dollars and coins) or checking accounts in banks --- wasn't the only reason the public, especially affluent and rich people with large savings, wanted to hold money in a highly depressed economy that coincided with a system-wide financial breakdown and a credit crunch.  On the contrary, so Keynes argued, the demand for money --- which Keynes called liquidity-preference (as opposed to investing savings in the bond and stock markets) --- was highly sensitive to interest rates.

At high levels of real interest rates --- which takes into account inflationary trends in the price level of the economy --- it became very costly to hold money for what Keynes called reasons of uncertainty and worry about the future . . . more technically, he called them for speculative and precautionary reasons.  And so the demand to hold money for such reasons became very costly.  At low interest rates, though --- if enough worry and uncertainty about the current, near-term, and long-term prospects of the economy materialized (exactly the case in the 1930s, and possibly, some say, now) --- the demand for holding money not just for consumption-purposes but speculative and precautionary reasons meant that the demand curve for money would become horizontal and infinite. 

To clarify briefly: people with savings would, among other things, fear that financial investments in the stock market were too risky; and in the bond markets, there was the added risk that if you bought, say, $100 million with a promised interest-rate return of 1.5%, the bond market might turn favorable in the future.  In that case, the demand for transforming held savings into bonds would lead to a fall in the price of the bonds that  raised the interest-rate , say, to 4.0% in real terms (keep in mind, interest rates move oppositely to the prices of bonds).  The result?  Your $100 million worth of bonds would suffer huge capital losses.  Sure, you could hold onto the $100 million bonds, and get a return of $1.5 million a year.  But others who had large savings too and waited could now buy $100 million worth of bonds and get a return of $4 billion a year . . . a huge advantage.  And any effort by you to sell your low-return bonds and move, let's say, the money into the now booming stock market would bring you far less than $100 million in their sale.

The Result?

In Keynes' view, the added fear of capital-gains losses in the future compounded the existing worries and fears among affluent individuals and financial institutions about investing in either the bond or stock markets . . . though it's the bond markets for short-  and long-term financial assets that directly influenced the rise and fall of interest rates. 

To stimulate business investment, low interest rates in a serious recession were desirable.  The same is true for households looking for loans to buy cars, houses, and other important durable goods on credit.  But, Keynes argued in 1936 --- opposite to what he had argued in 1930 --- real interest rates couldn't fall low enough in a big recession to kick-start investment and consumption this way.  The reason?  The liquidity trap itself --- the infinitely demand for hoarding money for speculative and precautionary reasons instead of investing even large amounts in the bond markets. 

In such cases, the nominal interest rate is held too high to stimulate sufficient business investment and private consumption to bring the overall national economy out of the recession.  It runs up against a floor --- or so Keynes argued.  And so the more thorough-going Keynesians like Paul Krugman still argue.

Nor was that all. 

On Top of All This, Banks Might Be Unwilling to Lend Out Money

Monetary policy could expand bank reserves easily.  Right now, banks are obligated by law to hold 10% of their deposits in reserves (in their vaults or in very short-term Treasury bills of a few months duration). 

Banks, of course, are in business to take their customers' deposits --- on which they now pay interest, even on checking accounts --- and lending out the 90% remainder to the public . . . businesses of all size and credit-worthy households.  In a credit-crunch like now, though --- as in the 1930s --- banks might be stuck with all sorts of troubled assets: many of the existing ones like those for houses might be defaulted on.  In that case, they may be reluctant to lend out their depositors money to the full 90%.  Instead, they might let more and more of it pile up instead of undertaking even low-risk loans to businesses and individuals.  And if they have an alternative of investing those excess reserves in very safe if low interest-rate US Treasury bills --- now fetching only 0.33% return --- they could be sure of getting at least some totally safe return. 

The result?  Further limits to the effectiveness of monetary expansionary policies to get us out of the current recession and credit-crunch.  Or so Keynesians argue.

Click here for the buggy take on all this at the Marginal Revolution.

Today's Buggy Topic\

It involves two long comments posted by prof bug --- the 2nd one very long (full of quotes from a careful study of Keynes' personal prejudices about Jews, which never seemed to influence his behavior) --- and is really not worth all the huffing and puffing the topic entails . . . what with prof bug's extensive comments, drawing on that study by Anand Chandavarkar, that appeared at the Marginal Revolution yesterday.  So please first read the prof bug introductory comments and links to his posts there.

Why the Fuss? 

In particular, why go on at such length today at another first-rate economic web-site, Economist's View?  Seems downright silly, no?  Not to mention full of time-consuming donkey-work of a pedestrian sort.

Well, you see, the topic generated a lot of heat, and especially on the part of someone who posts about a dozen times a day at that site --- a half-hysterical compulsive who went ape at the very mention that her heroic idol, John Maynard Keynes, was a complex human being like most of us.  Apparently for Anne, who called Prof bug a liar several times --- oh, oh, Liar! Liar! Pants on Fire! --- her idolized humans are a combination of St. Francis, Mother Theresa, and Einstein-level intellect . . . nothing short of which can be remotely possible. 

And so, alas, prof bug had to respond to her challenge to show specific quotes from Keynes' life that documented his anti-Semitism or shut-up forever and be branded as the greatest falsifying fibber and con-man since the bygone days of P.T. Barnum --- the old circus guy who said that a sucker was born even second and was sent by Heaven to be fleeced.  Enter the problem.

You see again, the Chandavarkar appears in a scholarly journal that is gated: you either have to subscribe to the journal (really a weekly in this case) or access it through a library-subscription . . . exactly how the buggy prof downloaded it yesterday by an off-campus log-in to UCSB's library web-site.

Woe Is Me, The Bunco Buggy Fabricator!

Alas, poor prof bug had to spend a half hour or so quoting at length from the article in order that poor Anne and maybe one or two other loony-tunes' types stopped frothing at the mouth and be able to turn their minds to something else other than fantasies of slashing off prof bug's gonads and stuffing them down his throat, while he burned at the stake with the Grand Inquisitor and his or her pro-Anne groupies roasted marshmallows off his broiling flesh.

Click here for the biggest rage-fest on the Web, January

Today's 2nd Buggy Topic --- With Its Oddball Title

Like the 1st topic today, it's also found at the Marginal Revolution . . . and yes, despite its half-weirdo title, it's what the lengthy buggy commentary left in a thread at that admirable web-site discusses at length. 

In particular, Professor Tyler Cowen --- the head of that economic blog --- started a new post that linked to an autobiographical set of comments left by Professor Paul Samuelson . . . one of the three or four most influential and important economists of the 20th century.  A Nobel Prize-winner, he has illuminated virtually every topic in economic theory --- whether micro or macro or methodological.  He's also Jewish, and his young brilliant career at Harvard in the late 1930s was cut abruptly short there by the virulent anti-Semitism of the economic department's chairman . . . along with support from some other top-dog members.  So Samuelson moved on to MIT, then a fairly undistinguished engineering and science university, where he created one of the two or three most significant economic departments in the world. (The same thing happened to Norbert Wiener, another precociously brilliant young scholar --- the most important American mathematician in the pre-WWII era.  He too was rejected for tenure at Harvard by a mathematics department headed by an intransigent high-octane anti-Semite and moved to MIT, where he helped make it into one of the half dozen great mathematics departments around the globe).

The Three Economists Samuelson Knew Personally and Found Anti-Semitic

One is John Maynard Keynes.  The other two were Austrian émigrés to Britain and the US --- Friedrich Hayek and Joseph Schumpeter, both justly famous for their contributions to economic theory.  As Prof Bug seeks to show, Keynes shared the near-pervasive anti-Jewish sentiments that marked the European mentality by the early 20th century . . . amid intensified militant nationalism and the impact of a nasty form of Social-Darwinism, with its emphasis on racism (something alien to Darwin himself). 

Click here for Professor Tyler's post, and the two buggy prof comments on it.  (Added Jan. 18th, 2009: be sure to click on the "next" button at the bottom of the linked Tyler thread.  As it happens, prof bug tossed in a lenghty comment earlier today, and it's found on page 2 of the thread.  And on January 19th, he dealt with the same subjects at Economist's View

Some Clarifying Background Needs to Be Sketched In Briefly Here

Amid the upper-classes on the Continent of Europe and in Britain as well as among the Wasp elites in the United States, this anti-Semitism --- which stereotypes Jews as usually intelligent (a view justified, by the way, in IQ studies: European Jewry and its American offshoot having by far the highest IQ worldwide), but deficient morally and socially and ultra-pushy and assertive and definitely not "one-of-us": rather "the other" in European history and Christianity more generally --- this anti-Semitism was reinforced by fears about Jewish competition in the financial, business, and intellectual worlds.  (Remember, in Europe until the late 18th and early 19th centuries, Jews were segregated and ghettoized --- having earlier been ejected, one time or another, from almost all European countries, including Britain twice. 

It was only by the early and mid-19th century that Jewish emancipation from ghettos and non-citizenshi in Europe freed this tiny minority --- still less than 1/4 of 1.0% of the world's total population, but with well over 30% of all Nobel prizes --- that Jews were able to enter European or American universities in the increasingly democratic Western countries and begin a rapid upward ascent in the business, financial, scientific, and intellectual worlds . . . much to the dismay of the challenged upper-class elites everywhere in Europe and its offshoots in the New World.

Enter Genocidal Jew-Hatred

By the interwar period, to make things worse, the use of Social-Darwinism had generated exterminationist racial-hatred of Jews, found to flourish especially in German Nazism, with its analogues in Austria and throughout Central and East Europe. 

It drew on 20 centuries of anti-Jewish sentiments in Christendom, but was aggravated and made even more vicious and eventually demonic and mass-murdering by the collapse of Czarist Russia and its replacement by the Communist regime and a world-wide Communist movement centered on Moscow, along with the scapegoating of Jews in Germany, Austria, and elsewhere for their defeat in World War I and the collapse of the Austro-Hungarian empire.  Then, to top it off, the Great Depression created a crackling, strung-out economic and financial crisis that could be blamed too on Jews --- capitalism industrialism never popular among the masses nearly anywhere in Europe, but especially disliked in the later industrializing and hence more backward peasant-societies of Central and Eastern Europe.

And so, by the 1930s, all these troubles in European civilization could now be blamed on Jews: singled out in Nazi and other ultra right-wing propaganda as behind both Bolshevism in Communist Russia and despised capitalism in London and Wall Street. 

The Holocaust

This feverish propaganda tapped deep, emotionally charged mental outlooks all over Europe --- less so, prof bug immediately adds, in Scandinavia, Holland, Britain, and even Fascist Italy than elsewhere --- and resonated with psychologically fearful masses and elites.  Small wonder that in occupied Nazi Europe during WWII, the Nazis found collaborating governments everywhere and lots of enthusiasm among certain elite and mass-circles to help them in their genocidal campaigns. 

The exceptions were one occupied country: admirable little Denmark.  And also two Nazi allies in the war against the Soviet Union: tiny Finland and Bulgaria.  Even the Francoist quasi-fascist regime in Spain --- which remained neutral despite Nazi pressure to join the German struggle for a Neue Europa, Juedenfrei and led by German Order and Discipline --- refused to deliver its small Jewish population to the Nazis for extermination.

Back to Keynes, Hayek and Schumpeter

As prof bug tries to show in his Marginal Revolution commentary (with a link there to an in-depth study of Keynes' anti-Semitism), Keynes did clearly share the garden-variety stereotyped anti-Semitism of the upper-class variant.  But he was personally a generous person; was always courteous and friendly to his Jewish mentors and friends; despised mass extremist movements like the small British fascist party headed by an upper class rabble-rouser, Oswald Mosley; and supported Zionism and its struggle to create a homeland for the world's persecuted Jews who survived the Holocaust. 

Prof bug also has some comments on Schumpeter's and Hayek's anti-Semitism.  Plus, to end with, some comments to clarify Paul Samuelson's unshakable reputation as an economist of enduring greatness . . . something hard for many of the more simpleminded libertarian posters in the thread at the Marginal Revolution to even contemplate, never mind believe.

Today's First Buggy Topic

It's found in two lengthy bugged-out comments left in a thread at the Marginal Revolution, the highly laudable economic web-site run by Professor Tyler Cowen --- an uncommonly flexible libertarian economist, with, to boot, a no less laudable, wide-ranging interest in cultural, artistic, and literary matters.  Virtually all his posts are stimulating and, at times, unfold an unexpected and provocative argument.  Whatever your own propensities might be, prof bug urges you to visit Professor Cowen's site daily.

As for the buggy topic linked to here, it's one more installment in the long, strung-out series on our economic challenges, and what we can or can't do effectively to shorten the recession and --- no less important (the two concerns inseparably entangled) --- make sure that our financial system is sanitized and regulated properly . . . the only way the existing credit-crunch can be overcome and normal economic activity commence anew. 

Not To Worry

Prof bug promises that he will finish formatting the second installment in the min-series begun yesterday --- January 15, 2009 --- on why the world is divided into rich and half-poor and very-poor countries . . . a theme otherwise know as the interacting causes of long-term economic development.  Among other things, too, that buggy argument sets out in concrete, down-to-earth terms the various developmental theories that exist today:

   * Some economists emphasize efficient capital accumulation and the growth in the quality and quantity of the labor force over long periods of time;

    * Other economists emphasize constant technological progress as the major long-term driving force, above and beyond the roles of capital accumulation and labor force quality and growth;

    * Yet others --- followers of Joseph Schumpeter: a Harvard economist of the 1930s and 1940s of Austrian origins --- stress that that every few decades since the industrial revolution of the late 18th century there  are clusters of revolutionary technological breakthroughs that eruptively disrupt national economies and require radical adjustments across various industrial and service-sectors. 

Schumpetarians, note quickly,  call the latter process of economy-wide dislocation and restructuring "creative destruction."  Conceivably the Great Depression of the 1930s --- like the Long Depression era of the latter two decades of the 19th century and our current troubles today --- reflect this Schumpeterian cycle of abrupt technological shocks of a clustered sort.  The new cutting-edge technological breakthroughs?  In bio-technology, alternative energy-systems, and nano-technology . . . the latter conceivably the most radical technology humans have ever created: the ability to work with all materials at the molecular level.  Plus, of course, new and unforeseen breakthroughs in existing information-and-communications industries, based on the computer chip.

    * Other economists again, a tiny but growing minority, who stress the role of different institutions across countries that are reflected in various organizations --- chief among them, political systems like an executive and legislature, legal systems (courts, attorneys, the police), administrative governmental bureaucracies, business and financial institutions, and the creativity of R&D in private and public institutions. 

    *And finally, a decidedly small group of these economists (among them prof bug himself, also a political scientist), add as a crucial corollary that all these institutions operate not just with concrete rewards and sanctions --- say, a business corporation that promotes its workers or fires them or a legal system that punishes criminals --- but within a wider socio-cultural network of beliefs about human nature, society, how to get ahead in it, and the cultural norms that follow and guide behavior of the flesh-and-blood members of those institutional organizations.

All this is for later though.

Right Now, Return to Today's Buggy Topic ---A New Variant on the Role of Keynesian Economics

It's a lengthy analysis that appears at another economic web-site, Economist's View . . . run by Professor Mark Thoma of the University of Oregon, and with lots of talent to boot.  Click here for the post left by Prof Thoma that started the thread in question, and prof bug's comments (plus some brief replies to those comments by others).

Today's Buggy Topic

Found at the Marginal Revolution --- a very good web-site run by Professor Tyler Cowen, an uncommonly flexible libertarian economist --- it deals with the question found in the subject-title above.  Prof bug's lengthy comments there also link to an earlier, more data-detailed analysis of his posted at the same web-site a month or so ago . . . specifically, on December 2nd, 2008.

Click here for the buggy stuff and link.

Next  Bugged-Out Post Already Done

It just needs some formatting, and it will deal with the causes of long-term economic growth . . . long-term meaning several generations, and in the case of the richest countries for well over a century: come to that, over two centuries for Great Britain --- the pioneer of the industrial revolution.  Among other things, the buggy commentary will probably have to be divided into two different published posts . . . what with its high-pulsating length, close to bursting the bounds of prof bug's Internet end-server's computer chips. 

After reading those posts, you should have a good working idea of why there has emerged since the start of the 19th century such a huge gap in wealth across countries.  And why, more to the point, only some countries --- West European and their English-speaking spin-offs like the USA, followed in the late 19th century by Japan and after WWII in the rest of Northeast Pacific-Asia (including to an extent China now) --- have been able to exploit all the advantages of economic backwardness: in particular, those set out and explained in theories of convergence catch-up growth. 

Such As, To Be More Concrete:

• Having far more investment opportunities, once those countries can launch themselves onto a path of long-term economic development, than the richest countries at or near the technological frontier.

• Being able to import advanced technologies --- always very expensive to develop by the lead richest countries --- at bargain-basement rates, either through multinational activity or by licensing or by building around existing patents (a Japanese specialty at one time) or by outright piracy . . . now a Chinese specialty.

• Being able, simultaneously --- assuming a country's population is sufficiently educated and disciplined to work effectively with modern and advanced technologies --- not just to import those technologies by one means or another but, with efficient enough policies and market-flexibility, to diffuse them widely in the national economy over time.

• Enjoying access to rich markets abroad for their exports . . . which helps even small countries like Taiwan (20 million) or Singapore (5-6 million) or South Korea (50 million) develop large business firms able to benefit from economies of scale.

• Not least, adapt to local national conditions --- including institutions and culture --- the "best practices" or organizing and managing small and large firms.  Such adaptation, note, can also include sending large numbers of talented students abroad to study in the universities of the richer, more developed countries.

• Working with multinational firms, certain countries with sound enough institutions and policies and an educated population can also have access not just to their technologies, but also to their capital investments --- if need be --- and to their marketing on a global scale.

What You'll Also Learn 

Among those learning exercises, a few will stand out:

• Why convergence catch-up growth has worked with the European Union and still does, and why, all the same, the American lead in technological innovation--- multi-factor productivity in growth-models  --- has belied the expectation that countries able to qualify for membership in the "convergence club" will end up sooner or later with the same levels of productivity and per capita income.  The US lead over Japan and the big rich countries in the EU, believe it or not, is not much lower in 2009 than it was in 1909.

• Why, in turn, technological innovation is the major driving force of long-term economic progress. . . provided the countries able to sustain long-term growth enjoy institutions and policies that limit corruption among political and economic elites; limit too other predatory practices of powerful elites --- such as developing tight-knit crony patron-client networks and membership in them as the only major way to advance socially and economically; promote people in the private and public spheres thanks to clear accomplishment, not mutual back-scratching; and decentralize a great deal of decision-making to individual firms and other economic and now economic organizations such as free universities, free research institutes, a free media, and free professional associations.

• Why, too, the only effective way for countries to climb up a technological ladder is to let the forces of "creative destruction" operate over time --- an insight developed by Joseph Schumpeter, an Austrian-born Harvard economist in the 1930s and 1940s.  It's an insight that draws attention to the problems of governmental policymakers finding the right balance in regulatory apparatus that prevents excesses --- especially in the financial realm --- of the sorts that we have witnessed recently, while simultaneously not regulating to the point of choking off the necessary decline in older, more standardized industries in order to free up talented labor and capital for expanding in the new and more promising industries found at the technological frontier.

Today's Buggy Topic

The subject title above captures it pretty faithfully, starting at an economic blog in the Financial Times . . . one of the great newspapers of the world, centered in London but with various editions (like the Wall Street Journal) aimed at different regions of the globe.  It has, in particular, a bevy of good professional economists and financial specialists --- whatever the latter category amounts to these days for the reputation of the average specialist --- who comment extensively on their specialties.

Willem Buiter and Martin Wolf: Contrasting Views about Keynesianism and Fiscal Stimuli and Anglo-Saxon Free-Markets

One of the more commendable things about the economists --- two of whom have just been mentioned --- is that they represent very different views on macroeconomics. 

Martin Wolf, a regular reporter fully employed by the FT, is a convinced Keynesian and has an admirable ranging knowledge of economics, including economic development . . . but a Keynesian who finds the less regulated, less welfarist Britain, America, Ireland, and Australia as hewing far more to free-markets than their counterparts on the Continent of West Europe and further afield in Japan and the rest of East Asia.  It's Buiter's lengthy thought-provoking commentary that starts the thread where you will find Prof Bug's long analytical reply today.

Click here for the thread.  Be sure to read Buiter's comments.  Then, too, some of the replies left by other posters in the thread are worth a cursory look too.  Prof bug's stuff is toward the end, and as usual, it includes some hard data to bring high-flying economic comments back toward terra firma. 

Note: FT May Require a Free Registration

It's not clear.  Prof bug himself is a registered visitor, and he visits the FT daily --- its economic coverage better than the WSJ's and rivaled only by The Economist . . . also centered in London, but with global distribution and far more subscribers in the US than elsewhere. There's also a paid subscription, which gives you access to far more offerings at FT's web-site, but it's not necessary.  Prof bug himself once had one, only to find it's enough to get along with the freebie.

Today's Buggy Topic

The subject title above captures only part of the topic --- prof bug's lengthy analytical commentary left at the Marginal Revolution in a thread that was started by the talented economist who runs that blog, Professor Tyler Cowen of George Mason University . . . an uncommonly flexible, open-minded libertarian free-market economist. 

The Solow Growth Model

More specifically, prof bug's comments deal with the utility of the most prominent and pioneer theory of long-term economic growth, created by a Nobel prize-winning economist, Robert Solow of MIT, back in the mid-1950s . . . anyway, to clarify the claim, the most prominent and original since the great work of Adam Smith and David Ricardo in the late 18th and early 19th century.  It's often called the "exogenous theory of economic growth" --- mainly because the major influence in keeping economies from falling into a a hypothetical "steady-state" of growth rates, owing to diminishing returns to cumulative capital, is technological change, something that the model draws attention to clearly, but without being able to "endogenize" the technological variable inside the formal modeling. 

Another name for the Solow modeled theory is the "neo-classical" theory of economic growth. 

The chief reason: neo-classical work, inspired mainly by some path-breaking economists in the late 19th century and continued right down to the present --- in effect, it's the basis of microeconomics today (with lots of modifications and some controversies) --- introduced the notion of marginalism into economics and used it to perfect our understanding of supply and demand in various individual markets: for labor, for capital, and land and natural resources.  Solow's work, as you'll see, was one of the first and certainly the most influential in using these concepts --- including the older Ricardian theory of diminishing returns, regarded as part of the classical tradition in economics until the neo-classicals focused on marginalism, opportunity-costs, supply and demand in individual markets, the price-system, and information and prices.

Click here for a good summary of classical and neoclassical theories.

The Prof Bug Commentary Ranges Much Wider

It shows how a fairly simple model that could be mathematically formulated --- irrespective of its "truth correspondence" to whatever people mean by "reality" (in this case, the "realities" of economic growth) --- could, thanks to its instrumental or pragmatic view of theories, be altered to make its explanations and predictions more useful over time . . . and even encourage what many regard as an alternative theory of "endogenous" growth.  And hence, as prof bug tries to show in schematic form, to make sense, say, of why the world is divided into rich and poor countries; why some poor countries that once lagged way behind Britain, Continental West Europe, and their offshoots like the US, Canada, and Australia --- think of Japan early in the last century, much later South Korea, Taiwan, and Singapore, more recently China and India --- have been able to close a large part of the gap in productivity levels and per capita income. 

And why, by extensionm the "augmented" Solow model or its variants --- which include technological progress, human capital, and social capital or institutional/cultural influences --- can predict with a certain high degree of likelihood that China's impressive and epochal growth since 1979 is likely to lead in the next decade or two, and maybe even sooner now in the global financial meltdown and recession, to enter a crisis-stage unless the CP monopoly of power and the vast and pervasive corruption, bureaucratic clumsiness, and huge inequalities across regions and between cities and the countryside as well as between social classes are radically altered . . . not to mention a far greater reallocation of resources and money to dealing with the high-pounding harm to the country's environment. 

Click here for the buggy comments.