Loading document…
Opening in Pages for Mac...
Your browser isn’t fully supported.
For the best Pages for iCloud experience, use a supported browser.
Learn More
Cancel
Continue
THE
FALL
AND
RISE
OF THE
"SMITHIAN" ECONOMY
J. Bradford DeLong
Economics and Blum Center of U.C. Berkeley, WCEG, and
NBER
http://bradford-delong.com
brad.delong@gmail.com
@delong
https://www.icloud.com/pages/0T3bT42JX6K1UcyTZT0kVUVGg
https://www.icloud.com/keynote/0IrNvoyDNCe6k7FuDAxsKllFQ
https://www.icloud.com/pages/0ytOBbemlXLZtytkJqlvb_gXw
LF—Working, Earning, and Learning in the Age of Intelligent Tools
:
https://
www.icloud.com/pages/0gmnweaejr9JjfGa-0TwizGTA
January 5, 2018
Suzanne Scotchmer
I am very happy to be here this morning,
giving the Suzanne Scotchmer Memorial
Lecture. I am happy even though I was
mousetrapped into doing this. A couple of
years ago I discovered that Toulouse had a
Suzanne Scotchmer Memorial Lectrure. My
fi rst response was to blather on the Internet:
how come Berkeley, where she worked for
the bulk of her career, did not have such a
lecture? Paul Seabright took advantage of
this, saying:
“
Well, then, you have to come to
Toulouose to deliver such a lecture
!”
And lo
and behold here I am—
and
very happy.
I had known Suzanne for a very, very long
time indeed. I have known her from the very
start of the 1980s. Back then I was in
undergraduate at Harvard, trying to fi gure out
what I should do with my life. Back then
there was an entrepreneur, George Howell,
who started a coffee shop called The Coffee
Connection in a building called The Garage
(because it was a converted parking garage).
George Howell's Coffee Connection was the
very fi rst appearance of French style coffee in
Cambridge, MA.
I discovered it.
I became immediately and totally addicted to
espresso. And Suzanne discovered it as well:
she would spend mornings writing in The
Coffee Connection before heading up to her
offi ce in Littauer. So I got to know her rather
better than most undergraduates got to know
1
members of the Harvard tenure track faculty
back then.
For somebody trying to decide who to
become, Suzanne was a wonderful role model
—if, that is, deciding to become an economist
is a wonderful thing.
Two
things were clear
about Suzanne back then:
1.
S
he was focused on the important
questions
—what theory could tell us
about
how the economy actually worked
,
and how theory needed to be developed
to shed light on things.
2.
S
he was having a lot of fun playing with
ideas
: being an economist
was
no
t just a
job that did not require much digging of
ditches
,
heavy lifting
,
or crosschecking of
columns and fi gures
—
it was a job that
could clearly
,
for someone
who valued
being
intellectually alive
and stimulated
—
be a great deal of
fun.
I found that
extraordinarily encourag
ing.
Indeed, it
is one of the reasons I am here
today.
B
ut
—and here there is a “
but
”—
in this day
and age I should not let past the fact that
Suzanne was a
n icebreaker as a
female
economist in Harvard’s economics
department back in those days.
I
n the early and mid-1980s days
things
were
not what they are now
. Or were they?
Harvard in the early 1980s was a place
where
a
young female assistant professor
of
G
overnment
—
I hasten to say not Economics
—could be told: “Come across, or your
tenure
case
is
toast
”, and her harasser would then
rise to become a Vice Provost and a
Weatherhead Center Director with a lot of
control over funds and positions even though
his behavior was well known to Harvard Hall
and the numbers of whispering women grew.
Harvard in the 1980s was a place where
senior professors—unfortunately in
Economics—could and
would say casually to
t
heir
younger
,
untenured colleagues and
to
their
students that they really did
no
t think
females had the right kind of
brain to do fi rst
class
economics.
Harvard in the 1980s was a place where your
male students who belonged to ΦH or various
fi nals clubs like the Phoenix or Porcellian—
and other students as well—would write on
their teaching evaluations of female
professors: “Your lectures would be much
more interesting if you gave them naked”.
We
should remember that there were such
days. Or perhaps that we still live in such
times.
I asked Susan Collins
, Dean of the Ford
School at the University of Michigan,
who
was in the cohort of female assistant
professors
immediately follow
ing
Suzanne
,
what I should say about this—what it looked
like to those, like her, on the other side of the
hill from me.
She suggested something like:
It has always
been tough to be an assistant professor at
Harvard
—
and especially back in the 1980s, it
was much tougher still to be one of the few
females on Harvard's economics faculty.
There were no tenured women at all.
Suzanne was consistently professional
,
and a
much appreciated resource for the women
who came
after
her.
T
hose of us who do digital
e
conomics owe
Suzanne Scotchm
er a lot as we stand on her
shoulders. Those of us
who
seek a
free
and
equal
society
are deeply indebted to
Suzanne
along these
other dimensions as well
.
2
My Topic: Puzzles and
Problems
Today I am
going to talk about a set of ideas
that
I have
been thinking about for a couple of
years
, but without notable success in
organizing my thoughts. This is
my fi rst time
out
of the gate
with
these thoughts. So what I
have,
at the moment
, is
a set of problems and
puzzles
. It is
not a set of conclusions and
answers.
Thus I am
not specially attached to these
ideas—I will not claim that what I am going
to say today is what I believe. It is, rather,
simply my forecast of what I will believe
when I fi nd out what I believe about these
issues.
I
would
be happy to change my mind
. And I
would
be very happy if you change my mind
about anything
. After all, if there is one thing
we know, it is that we are all smarter
collectively than any of us are smart
individually
if we listen and think
. That is
certainly
true for everybody I have ever
met.
Well, that is probably true for everybody I
have met. It might be false for Jean Tirole—
his ability to run your mind on his wetware in
emulation faster than you can run it natively
—his ability to know what you are going to
say before you know it—is exceptional, as I
learned
during the year I was a lecture at MIT
in the mid-1980s
.
Let me introduce this Gordian Knot of
problems and puzzles with six observations:
1.
Since the foundation of economics as a
discipline, as something with a degree of
intellectual autonomy with respect to the
rest of the project of what used to be
called “moral philosophy”, the economy
has transformed itself many times. We
have moved from a c
ommercial economy
to
an
industrial economy (
with its leading
sectors powered by
steam and
metallurgy) to
the era of
modern
economic growth (
with its leading sectors
powered by
electricity
,
internal
combustion
, and industrial research labs
)
to
a
postindustrial
economy
(
with high-
valued
service
s and flexible-system
production overshadowing mass
production of standardized commodities
)
to
, now, the
“digital
” economy
. By
“digital”
we mean:
the characteristics of
“
rivalry
”
and
“
excludability
”
and even
the thin-
network market power
of
Chandlerian oligopoly fi rms
are no longer
dominant features
; moreover,
processes
and calculations
that
are
simple
,
but
are
outside
the
default cognitive toolkit
of the
East African Plains Ape have
now
become easy to perform at previously
unimaginable scale.
T
he human brain is
an amazing thing
: it
is a massively
parallel supercomputer that fi ts inside a
bread box and
draws
only 50 W of power
.
N
evertheless
,
an awful a lot of routine
accounting and calculation
exercises are
,
even
at a
small scale
,
far outside the core
evolutionary tool kit for which the
Darwinian an algorithm has
semi-
tune
d
our brains
. T
hese
have
now become easy
for our machines
. And we are trying to
think about how this matters.
2.
Economics has its base and roots as a set
of doctrines to be applied to the
commercial revolution economy. That is
the context of
Adam Smith’s bold and
aggressive claims for
what he called
the
“
system of natural liberty
”: the belief that
the establishment of property rights, the
3
enforcement of contracts, and the state as
“
night watchman
” curbing theft were
most of what was needed for coming
close to the frontier of attainable
economic prosperity. Perhaps some deep
thought was required for structuring
property rights—
perhaps
they need to be
“carved at the joints” in some way
to
minimize externalities
.
3.
Since 2007, a set of beliefs descended
from Adam Smith’s boldest and most
aggressive claims about the “system of
natural liberty” seem to have increasing
mindshare, at least in the public sphere.
Since 2007: the belief that it is not the
governments proper business to ensure full
employment of resources And equitable
distribution, but rather that the market
outcome has some deep logic of its own that
we monkey with at our peril...
Never have the conditions for the system of
natural liberty doctrines been less true than
today...
Conversely, it would seem that the conditions
for them to be true, or roughly true, ought to
have been met long before Adam Smith and
company ever wrote...
Not so much what he economists teach and
say, but what economists are thought to teach
and say, or what it is thought by non
economists that economists up to teach and
say...
With that as throat clearing...
----
Organization
Contrast between Adam Smith’s bold claims
for the “system of natural liberty” and their
status today:
At most, a lodestone: never forget you can
sometimes make problems of mechanism
design and governance easier by cutting
property rights at the joints
The usefulness of “system of natural liberty”
doctrine in the industrial age
The origin of “system of natural liberty”
doctrine
Why did it have to be set out? Why was it not
obvious?
The hold of “system of natural liberty”
doctrines today
The Rise and Fall of the "Smithian" Economy
J. Bradford DeLong
Economics and Blum Center of U.C.
Berkeley, WCEG, and NBER
Revised 2018-01-05
4
delong@econ.berkeley.edu http://bradford-
delong.com @delong
https://www.icloud.com/keynote/
0IrNvoyDNCe6k7FuDAxsKllFQ#
Organization
Contrast between Adam Smith’s bold claims
for the “system of natural liberty” and their
status today:
At most, a lodestone: never forget you can
sometimes make problems of mechanism
design and governance easier by cutting
property rights at the joints
The usefulness of “system of natural liberty”
doctrine in the industrial age
The origin of “system of natural liberty”
doctrine
Why did it have to be set out? Why was it not
obvious?
The hold of “system of natural liberty”
doctrines today
Adam Smith’s Bold Claims for the “System
of Natural Liberty”
“Little else is requisite to carry a state to the
highest degree of opulence from the lowest
barbarism, but peace, easy taxes, and a
tolerable administration of justice; all the rest
being brought about by the natural course of
things…”
“Every system which endeavours… to draw
towards a particular species of industry a
greater share… than what would naturally go
to it… is… subversive of the great purpose…
It retards, instead of accelerating the progress
of the society towards real wealth and
greatness…”
“All systems, either of preference or of
restraint, therefore, being thus completely
taken away, the obvious and simple system of
natural liberty establishes itself of its own
accord. Every man, as long as he does not
violate the laws of justice, is left perfectly
free to pursue his own interest his own way,
and to bring both his industry and capital into
competition with those of any other man, or
order of men…”
The Status of Those Bold Claims Today:
Requirements
The many requirements for the “system of
natural liberty” to work make up a long list:
Fully rival (i.e., no increasing returns)
Fully excludible (i.e., no externalities)
No information asymmetries (i.e., no adverse
selection)
No market power
Suffi cient trust and credit (macro balance and
liquidity)
Wealth distribution corresponding to need and
utility
Negishi social welfare weights
The Status of Those Bold Claims Today:
Implications
Then if all those requirements are met:
It makes sense to impose costs at the margin
to decentralize incentives
It makes sense to require profi tability to
assess utility
And the price-market mechanism can perform
those tasks
5
And government should (largely) get out of
the way
“Night watchman”
But the World We Live in Is Different
It was never the case that value was created
by arranging atoms and nurturing biological
processes in a fully-rival, constant returns to
scale way:
But with technological progress slow
Technology easy to pick up—“in the air”
But now we can’t pretend: “information” is so
salient everywhere
It was never the case that excludability was a
thing:
There is no excludability in a Hobbesian state
of nature
Excludibility always constructed by
governments or societies—and technology—
at some cost
So What Do We Do Today?
Today commodities are
Substantially non-rival
Dubiously excludible—and only at cost
Rife with information asymmetries
Often subject to market power
Subject to aggregate liquidity fi gures
A wealth distribution that strongly favors
those who control resources for which rich
people have a serious jones
We Do Economics!
Mechanism assessment
Mechanism design
Laissez faire at most, a lodestone: never
forget you can sometimes make problems of
mechanism design and governance easier by
cutting property rights at the joints
SoNL at Most a Lodestone
Requiring that you specify “the” market
failure a useful intellectual discipline
Never forget you can sometimes—often—
make problems of mechanism design and
governance easier by cutting property rights
at the joints
Think about properly designed and tweaked
markets as means to the broadly social
democratic end:
greatest good of the greatest number, via
inclusive prosperity and equitable growth
But when you are trying to keep more than
one market failure ball in the air, the juggling
becomes complex
And how many are we trying to keep in the
air?
Here I Do Not Have an Answer
Is it the best lodestone?
Refuge in History I: Utility
The usefulness of SoNL thinking in the Early
Industrial Age…
Keynes, trying to proclaim the end of laissez-
faire as a useful doctrine some 96 years ago:
“Almost everything which the State did in the
eighteenth century in excess of its minimum
functions was, or seemed, injurious or
unsuccessful…” from a greatest-good-of-the-
greatest-number perspective
Material progress over 1750-1850 came from
individual initiative:
6
Small scale
Aristocratic, rentier, and militaristic
governments had no clue
The poor quality of opposed doctrines
Simplicity
Refuge in History II: Origins
Hume and Smith: Young Scotsmen on the
make
Equilibrium thinking
Contrarian and clever:
Anti-theology
Anti-hierarchy
Anti-mercantilism
Anti-physiocracy
System of natural liberty
Adam Smith’s Optimism on the System of
Natural Liberty
“Little else is requisite to carry a state to the
highest degree of opulence from the lowest
barbarism, but peace, easy taxes, and a
tolerable administration of justice; all the rest
being brought about by the natural course of
things…”
“Every system which endeavours… to draw
towards a particular species of industry a
greater share… than what would naturally go
to it… is… subversive of the great purpose…
It retards, instead of accelerating the progress
of the society towards real wealth and
greatness…”
“All systems, either of preference or of
restraint, therefore, being thus completely
taken away, the obvious and simple system of
natural liberty establishes itself of its own
accord. Every man, as long as he does not
violate the laws of justice, is left perfectly
free to pursue his own interest his own way,
and to bring both his industry and capital into
competition with those of any other man, or
order of men…”
Caveat I: Adam Smith
“According to the system of natural liberty,
the sovereign has only three duties…
protecting the society… protecting… every
member … from the injustice or oppression
of every other member… erecting and
maintaining certain public works, and certain
public institutions which it can never be for
the interest of any individual, or small
number of individuals, to erect and maintain;
because the profi t could never repay the
expence to any individual or small number of
individuals, though it may frequently do
much more than repay it to a great society.
Caveat II: The Enlightenment Itself
The Republic of Letters—with its economy of
prestige and precedence
The progress of the arts and sciences
Leading-edge industrial policy of the
eighteenth century:
“The Congress shall have power… to
promote the Progress of Science and useful
Arts, by securing for limited Times to Authors
and Inventors the exclusive Right to their
respective Writings and Discoveries…”
Caveat III: Psychological “Invisible Hand”
“It is well that nature imposes upon us in this
manner…. The proud and unfeeling
landlord… in imagination consumes himself
the whole harvest…. [But] the capacity of his
stomach bears no proportion to the immensity
of his desires, and will receive no more than
7
that of the meanest peasant. The rest he is
obliged to distribute among those, who
prepare, in the nicest manner, that little which
he himself makes use of…. The produce of
the soil maintains at all times nearly that
number of inhabitants which it is capable of
maintaining. The rich only select from the
heap what is most precious and agreeable.
They consume little more than the poor, and
in spite of their natural selfi shness and
rapacity, though they mean only their own
conveniency… are led by an invisible hand to
make nearly the same distribution of the
necessaries of life, which would have been
made, had the earth been divided into equal
portions among all its inhabitants, and thus
without intending it, without knowing it,
advance the interest of the society, and afford
means to the multiplication of the species…”
Caveat IV: Mercantile “Invisible Hand”
“The uneasiness… he feels at being separated
so far from his capital generally determines
him to bring part both of the Konigsberg
goods which he destines for the market of
Lisbon, and of the Lisbon goods which he
destines for that of Konigsberg, to
Amsterdam: and though this necessarily
subjects him to a double charge of loading
and unloading… he willingly submits to this
extraordinary charge; and it is in this manner
that every country which has any
considerable share of the carrying trade
becomes always the emporium, or general
market, for the goods of all the different
countries whose trade it carries on…. But a
capital employed in the home-trade… puts
into motion a greater quantity of domestic
industry… than an equal capital employed in
the foreign trade…. Every individual
naturally inclines to employ his capital in the
manner in which it is likely to afford the
greatest… revenue and employment to the
greatest number of people of his own country
He intends only his own gain; and he is in
this, as in many other cases, led by an
invisible hand to promote an end which was
no part of his intention. Nor is it always the
worse for the society that it was no part of
it…”
Caveat V: Reproduction
Population, Malthus, and social conservatism
Population will be limited
By the positive check—famine, malnutrition,
disease, mass poverty
By the preventative check—late age of
female marriage, and few births out of
wedlock
Preventative check requires:
Fathers: “You can’t marry my daughter until
you have a farm of your own”
Priests: “Fornication damns you to hell”
Patriarchy, Orthodoxy, Monarchy
The “Malthusian Devil”—as Late as 1871
1871: John Stuart Mill: “Hitherto it is
questionable if all the mechanical inventions
yet made have lightened the day's toil of any
human being…. Only when, in addition to
just institutions, the increase of mankind shall
be under the deliberate guidance of judicious
foresight, can the conquests made from the
powers of nature by the intellect and energy
of scientifi c discoverers become the common
property of the species, and the means of
improving and elevating the universal lot…"
The “Malthusian Devil”—as Late as 1919
1919: John Maynard Keynes: “The pressure
of population on food… became for the fi rst
time in recorded history defi nitely reversed….
8
It is possible that about the year 1900… a
diminishing yield of Nature to man’s effort
was beginning to reassert itself…. Before the
eighteenth century mankind entertained no
false hopes. To lay the illusions which grew
popular at that age’s latter end, Malthus
disclosed a Devil. For half a century all
serious economical writings held that Devil in
clear prospect. For the next half century he
was chained up and out of sight. Now perhaps
we have loosed him again…”
Why Did the Doctrine Have to Be Set Out in
the First Place?
Commodities had been rival and (largely)
excludible for a long time
Technological progress had been very slow—
there was not a time when it had not been
slow
But there was this discipline of “Political
Oeconomy”, as Keith Tribe puts it, which was
all about “police”—and defi nitely not the
“system of natural liberty”
Grain, guilds, and jurisdiction
The Control of Grain Markets
What use does Louix XVI make of his Swiss
Guards when he is in the Tuileries?
He sends a third of them down the Seine to
guard the movement of the grain import
convoys to Paris
Negishi social welfare weights, remember:
Holding constant your (low) wealth…
As your need grows greater, your weight in
the market’s SWF drops
Cf.: Amartya Sen on entitlement crises and
the Bengal Famine
Grain price control a second (third? fourth?)
best way of trying to deal with income
maldistribution…
The Role of Guilds
How do you fi nd trustworthy counterparties?
We see this most sharply in Avner Greif and
his work on the Maghrebi traders:
Few Norman Kings of Sicily (Christian) will
judge in favor of an Egyptian (Muslim)
merchant…
Few Sultans of Egypt (Muslim) will judge in
the favor of a Sicilian (Christian) merchant…
So turn it over to the Jews…
Even with rivalry (constant returns to scale),
there were still powerful information
asymmetries
And excludability—theft?
And Excludability—Theft?
It is often better to keep things inside the
mercantile community
Kings, nobles, and their judges can (indeed,
want to be) bribed
The idea of enforced property and contract
rights is a relatively late one
Bandits
Local notables
The functionaries of the state
The “night watchman” state that enforces its
property and contract order is a remarkably
powerful and unusual institution unhistorical
perspective
As we see in Washington DC now
Jurisdiction: Property and Seisin
9
Which brings us to jurisdiction
What did it mean to “own” land?
How is it that Robert de Clare can draw his
rents from the Honor of Pembroke?
“Strongbow”
Who Watches the “Night Watchman”?
Grain market control: second (or third or
fourth)-best tool for managing the distribution
of wealth
Guilds: in the absence of trust and
information
Jurisdiction, seisin, and property
The “system of natural liberty” is only
possible after the construction of the
Enlightenment state…
The Hold of the “System of Natural Liberty”
on Us Today
Three aspects:
The good: Keynes and variety life
The bad: presumption that market failures
rarely larger than government failures
The ugly: the market giveth, the market
taketh away: blessed be the name of the
market
Hold maintained by our history, and also by
material interests
The Good: John Maynard Keynes and Variety
of Life
“Filling in the gaps in the classical theory…
indicate[s] the nature of the environment…
within this fi eld the traditional advantages of
individualism will still hold good. Let us stop
for a moment to remind ourselves what these
advantages are. They are partly advantages of
effi ciency… decentralisation and… self-
interest. … But, above all, individualism, if it
can be purged of its defects and its abuses, is
the best safeguard of personal liberty…
greatly widens the fi eld for the exercise of
personal choice… the best safeguard of the
variety of life… the loss of which is the
greatest of all the losses of the homogeneous
or totalitarian state…. Variety preserves the
traditions which embody the most secure and
successful choices of former generations; it
colours the present with the diversifi cation of
its fancy; and, being the handmaid of
experiment as well as of tradition and of
fancy, it is the most powerful instrument to
better the future…”
The Bad: presume market larger than
government failures
The Stigler-Friedman tradition
Somehow property and contract as
established by the post-Edward Coke English
common law got it exactly right
Embarrassing…
Chief Justice William Draper Best: “We
[would] get rid of a great deal of what is
considered law in Westminster Hall if what
Lord Coke says without authority is not
law…”
Why this happy coincidence?
The Ugly: “The market giveth…
…the market taketh away: blessed be the
name of the market”
John Kenneth Galbraith: “The quest of
conservative thought throughout the ages has
been "the search for a higher moral
justifi cation for selfi shness…”
10
