Book Highlights: Capitalism, Socialism, and Democracy, Schumpeter, (Part 2.2: Can Capitalism Survive?)

  • The conquest of the air may well be more important than the conquest of India was—we must not confuse geographical frontiers with economic ones.
  • Thus agricultural countries or regions may lose permanently by the competitive synthetic products (rayon, dyes, synthetic rubber for instance), and it may be no comfort to them that, if the process be taken as a whole, there may be net gain in total output.
  • But we cannot reason in this fashion about the future possibilities of technological advance. From the fact that some of them have been exploited before others, it cannot be inferred that the former were more productive than the latter. And those that are still in the lap of the gods may be more or less productive than any that have thus far come within our range of observation.
  • But for us the negative result suffices: there is no reason to expect slackening of the rate of output through exhaustion of technological possibilities.
  • Some economists have held that the labor force of every country had to be fitted out at some time or other with the necessary equipment. This, so they argue, has been accomplished roughly in the course of the nineteenth century. While it was being accomplished, it incessantly created new demand for capital goods, whereas, barring additions, only replacement demand remains forever after.
  • The period of capitalist armament thus would turn out to be a unique intermezzo after all, characterized by the capitalist economy’s straining every nerve in order to create for itself the necessary complement of tools and machines, and thus becoming equipped for the purpose of producing for further production at a rate which it is now impossible to keep up.
  • Was there no equipment in the eighteenth century or, in fact, at the time our ancestors dwelled in caves? And if there was, why should the additions that occurred in the nineteenth century have been more saturating than any that went before? Moreover, additions to the armor of capitalism are as a rule competitive with the preexisting pieces of it. They destroy the economic usefulness of the latter. Hence the task of providing equipment can never be solved once for all.
  • barring possible disturbances in the saving-investment process which it is the fashion to exaggerate—no
  • no different in the case of devices that economize outlay on capital goods per unit of the final product. In fact, it is not far from the truth to say that almost any new process that is economically workable economizes both labor and capital. Railroads were presumably capital-saving as compared with the outlay that transportation, by mailcoach or cart, of the same numbers of passengers and of the same quantities of goods that actually are being transported by railroads now would have involved.
  • Those who hope to see capitalism break down solely by virtue of the fact that the unit of capital goes further in productive effect than it used to, may have to wait long indeed.
  • First, with increasing wealth certain lines of expenditure are likely to gain ground which do not naturally enter into any cost-profit calculation, such as expenditure on the beautification of cities, on public health and so on.
  • When the habit of rational analysis of, and rational behavior in, the daily tasks of life has gone far enough, it turns back upon the mass of collective ideas and criticizes and to some extent “rationalizes” them by way of such questions as why there should be kings and popes or subordination or tithes or property.
  • First it exalts the monetary unit—not itself a creation of capitalism—into a unit of account. That is to say, capitalist practice turns the unit of money into a tool of rational cost-profit calculations, of which the towering monument is double-entry bookkeeping.4
  • This element has been stressed, and more suo overstressed, by Sombart. Double-entry bookkeeping is the last step on a long and tortuous road. Its immediate predecessor was the practice of making up from time to time an inventory and figuring out profit or loss; see A. Sapori in Bibhoteca Storica Toscana, VII, 1932.
  • it is a vital fact to notice that rational bookkeeping did not intrude into the management of public funds until the eighteenth century and that even then it did so imperfectly and in the primitive form of “cameralist” bookkeeping.]
  • The rugged individualism of Galileo was the individualism of the rising capitalist class. The surgeon began to rise above the midwife and the barber. The artist who at the same time was an engineer and an entrepreneur—the type immortalized by such men as Vinci, Alberti, Cellini; even Dürer busied himself with plans for fortifications—illustrates best of all what I mean.
  • Precapitalist economic life left no scope for achievement that would carry over class boundaries or, to put it differently, be adequate to create social positions comparable to those of the members of the then ruling classes. Not that it precluded ascent in general.5
  • But business activity was, broadly speaking, essentially subordinate, even at the peak of success within the craft guild, and it hardly ever led out of it. The main avenues to advancement and large gain were the church—nearly as accessible throughout the Middle Ages as it is now—to which we may add the chanceries of the great territorial magnates, and the hierarchy of warrior lords—quite accessible to every man who was physically and psychically fit until about the middle of the twelfth century, and not quite inaccessible thereafter.
  • At that I could leave this point if radical liturgy did not consist largely in picturesque denials of what I mean to convey. Radicals may insist that the masses are crying for salvation from intolerable sufferings and rattling their chains in darkness and despair, but of course there never was so much personal freedom of mind and body for all, never so much readiness to bear with and even to finance the mortal enemies of the leading class, never so much active sympathy with real and faked sufferings, never so much readiness to accept burdens, as there is in modern capitalist society; and whatever democracy there was, outside of peasant communities, developed historically in the wake of both modern and ancient capitalism.
  • Again plenty of facts can be adduced from the past to make up a counterargument that will be effective but is irrelevant in a discussion of present conditions and future alternatives.8
  • And it cannot be replied that “those were different times.” For it is precisely the capitalist process that made the difference.
  • As a matter of fact, the more completely capitalist the structure and attitude of a nation, the more pacifist—and the more prone to count the costs of war—we observe it to be.
  • The armored knights practiced an art that required lifelong training and every one of them counted individually by virtue of personal skill and prowess. It is easy to understand why this craft should have become the basis of a social class in the fullest and richest sense of that term.
  • The centerpiece, the king, was king by the grace of God, and the root of his position was feudal, not only in the historical but also in the sociological sense, however much he availed himself of the economic possibilities offered by capitalism. All this was more than atavism.
  • we might well wonder whether it is quite correct to look upon capitalism as a social form sui generis or, in fact, as anything else but the last stage of the decomposition of what we have called feudalism.
  • And we have finally seen that capitalism creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own; the bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes on to attack private property and the whole scheme of bourgeois values.
  • Why, practically every nonsense that has ever been said about capitalism has been championed by some professed economist.
  • rational recognition of the economic performance of capitalism and of the hopes it holds out for the future would require an almost impossible moral feat by the have-not.
  • In the short run, it is profits and inefficiencies that dominate the picture. In order to accept his lot, the leveler or the chartist of old would have had to comfort himself with hopes for his great-grandchildren. In order to identify himself with the capitalist system, the unemployed of today would have completely to forget his personal fate and the politician of today his personal ambition. The long-run interests of society are so entirely lodged with the upper strata of bourgeois society that it is perfectly natural for people to look upon them as the interests of that class only.
  • Secular improvement that is taken for granted and coupled with individual insecurity that is acutely resented is of course the best recipe for breeding social unrest.
  • Intellectuals are in fact people who wield the power of the spoken and the written word, and one of the touches that distinguish them from other people who do the same is the absence of direct responsibility for practical affairs. This touch in general accounts for another—the absence of that first-hand knowledge of them which only actual experience can give. The critical attitude, arising no less from the intellectual’s situation as an onlooker—in most cases also as an outsider—than from the fact that his main chance of asserting himself lies in his actual or potential nuisance value, should add a third touch.
  • Charles V was a devoted husband but, during his campaigns which kept him from home for many months at a time, he lived the life of a gentleman of his time and class. Very well, the public—and what particularly mattered to Charles, his empress—need never know, provided arguments of the right kind and weight were duly handed to the great critic of politics and morals. Charles paid up. But the point is that this was not simple blackmail which in general benefits one party only and inflicts un-compensated loss on the other. Charles knew why he paid though doubtless it would have been possible to secure silence by cheaper if more drastic methods. He did not display resentment. On the contrary he even went out of his way to honor the man. Obviously he wanted more than silence and, as a matter of fact, he received full value for his gifts. [5Pietro Aretino, 1492-1556.]
  • Cases in which among a dozen applicants for a job, all formally qualified, there is not one who can fill it satisfactorily, are known to everyone who has anything to do with appointments—to everyone, that is, who is himself qualified to judge.
  • Thus, though intellectuals have not created the labor movement, they have yet worked it up into something that differs substantially from what it would be without them.
  • The most glamorous of these bourgeois aims, the foundation of an industrial dynasty, has in most countries become unattainable already, and even more modest ones are so difficult to attain that they may cease to be thought worth the struggle as the permanence of these conditions is being increasingly realized.
  • the reader need only visualize the situation in a thoroughly practical spirit: the successful man or couple or the “society” man or couple who can pay for the best available accommodation in hotel, ship and train, and for the best available qualities of the objects of personal consumption and use—which qualities are increasingly being turned out by the conveyor of mass production3—will,
  • In any case there are no purely economic reasons why capitalism should not have another successful run which is all I wished to establish.]

Book Highlights: Capitalism, Socialism, and Democracy, Schumpeter, (Part 2.1: Can Capitalism Survive?)

  • Analysis, whether economic or other, never yields more than a statement about the tendencies present in an observable pattern. And these never tell us what will happen to the pattern but only what would happen if they continued to act as they have been acting in the time interval covered by our observation and if no other factors intruded. “Inevitability” or “necessity” can never mean more than this.
  • My final conclusion therefore does not differ, however much my argument may, from that of most socialist writers and in particular from that of all Marxists. But in order to accept it one does not need to be a socialist. Prognosis does not imply anything about the desirability of the course of events that one predicts. If a doctor predicts that his patient will die presently, this does not mean that he desires it.
  • There is however another method of dealing with obvious though uncomfortable truth, viz., the method of sneering at its triviality. Such a sneer will serve as well as a refutation would, for the average audience is as a rule perfectly unaware of the fact that it often covers the impossibility of denial—a pretty specimen of social psychology.]
  • But whether lasting or temporary, getting worse or not, unemployment undoubtedly is and always has been a scourge.
  • the real tragedy is not unemployment per se, but unemployment plus the impossibility of providing adequately for the unemployed without impairing the conditions of further economic development:
  • for obviously the suffering and degradation—the destruction of human values—which we associate with unemployment, though not the waste of productive resources, would be largely eliminated and unemployment would lose practically all its terror if the private life of the unemployed were not seriously affected by their unemployment. The indictment stands that in the past—say, roughly, to the end of the nineteenth century—the capitalist order was not only unwilling but also quite incapable of guaranteeing this.
  • But since it will be able to do so if it keeps up its past performance for another half century this indictment would in that case enter the limbo filled by the sorry specters of child labor and sixteen-hour working days and five persons living in one room which it is quite proper to emphasize when we are talking about the past social costs of capitalist achievement but which are not necessarily relevant to the balance of alternatives for the future.
  • But as soon as I implied that the following fifty years might actually display a similar average rate of increase, I apparently did commit a statistical crime; it is, of course, clear that a historical record of production over any given period does not in itself justify any extrapolation at all,1 let alone an extrapolation over half a century.
  • No doubt, the period that furnished our data was one of comparatively unfettered capitalism. But this fact does not in itself provide a sufficient link between the performance and the capitalist engine. In order to believe that this was more than coincidence we must satisfy ourselves first, that there is an understandable relation between the capitalist order and the observed rate of increase in output; second, that, given such a relation, the rate of increase was actually due to it and not to particularly favorable conditions which had nothing to do with capitalism.
  • 1. Unlike the class of feudal lords, the commercial and industrial bourgeoisie rose by business success. Bourgeois society has been cast in a purely economic mold: its foundations, beams and beacons are all made of economic material. The building faces toward the economic side of life. Prizes and penalties are measured in pecuniary terms. Going up and going down means making and losing money.
  • Wherever the bourgeois way of life asserts itself sufficiently to dim the beacons of other social worlds, these promises are strong enough to attract the large majority of supernormal brains and to identify success with business success. They are not proffered at random; yet there is a sufficiently enticing admixture of chance: the game is not like roulette, it is more like poker.
  • but if there were a way of measuring either that ability in general or the personal achievement that goes into any particular success, the premiums actually paid out would probably not be found proportional to either.
  • Spectacular prizes much greater than would have been necessary to call forth the particular effort are thrown to a small minority of winners, thus propelling much more efficaciously than a more equal and more “just” distribution would, the activity of that large majority of businessmen who receive in return very modest compensation or nothing or less than nothing, and yet do their utmost because they have the big prizes before their eyes and overrate their chances of doing equally well.
  • The term Classical Economists will in this book be used to designate the leading English economists whose works appeared between 1776 and 1848. Adam Smith, Ricardo, Malthus, Senior and John Stuart Mill are the outstanding names.
  • like every other branch of our knowledge, economics, as its analytic engine improves, moves fatally away from that happy stage in which all problems, methods and results could be made accessible to every educated person without special training.
  • And as regards practically all the finished products and services of industry and trade, it is clear that every grocer, every filling station, every manufacturer of gloves or shaving cream or handsaws has a small and precarious market of his own which he tries—must try—to build up and to keep by price strategy, quality strategy—“product differentiation”—and advertising. Thus we get a completely different pattern which there seems to be no reason to expect to yield the results of perfect competition and which fits much better into the monopolistic schema. In these cases we speak of Monopolistic Competition. Their theory has been one of the major contributions to postwar economics.9
  • One may hold that it always has been so and that all along output has been expanding in spite of the secular sabotage perpetrated by the managing bourgeoisie. Advocates of this proposition would have to produce evidence to the effect that the observed rate of increase can be accounted for by a sequence of favorable circumstances unconnected with the mechanism of private enterprise and strong enough to overcome the latter’s resistance.
  • If we economists were given less to wishful thinking and more to the observation of facts, doubts would immediately arise as to the realistic virtues of a theory that would have led us to expect a very different result.
  • The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process. It may seem strange that anyone can fail to see so obvious a fact which moreover was long ago emphasized by Karl Marx. Yet that fragmentary analysis which yields the bulk of our propositions about the functioning of modern capitalism persistently neglects it.
  • The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.
  • A system—any system, economic or other—that at every given point of time fully utilizes its possibilities to the best advantage may yet in the long run be inferior to a system that does so at no given point of time, because the latter’s failure to do so may be a condition for the level or speed of long-run performance.
  • But in the process of creative destruction, restrictive practices may do much to steady the ship and to alleviate temporary difficulties. This is in fact a very familiar argument which always turns up in times of depression and, as everyone knows, has become very popular with governments and their economic advisers—witness the NRA.
  • In analyzing such business strategy ex visu of a given point of time, the investigating economist or government agent sees price policies that seem to him predatory and restrictions of output that seem to him synonymous with loss of opportunities to produce. He does not see that restrictions of this type are, in the conditions of the perennial gale, incidents, often unavoidable incidents, of a long-run process of expansion which they protect rather than impede. There is no more of paradox in this than there is in saying that motorcars are traveling faster than they otherwise would because they are provided with brakes.
  • Among themselves, the three concerns behave in a way which should be called corespective rather than competitive: they refrain from certain aggressive devices (which, by the way, would also be absent in perfect competition);
  • Rational as distinguished from vindictive regulation by public authority turns out to be an extremely delicate problem which not every government agency, particularly when in full cry against big business, can be trusted to solve.6
  • Of course, plenty of cases of genuine price rigidity remain—of prices which are being kept constant as a matter of business policy or which remain unchanged because it is difficult to change, say, a price set by a cartel after laborious negotiations. In order to appraise the influence of this fact on the long-run development of output, it is first of all necessary to realize that this rigidity is essentially a short-run phenomenon.
  • A new type of machine is in general but a link in a chain of improvements and may presently become obsolete. In a case like this it would obviously not be rational to follow the chain link by link regardless of the capital loss to be suffered each time.
  • For, especially in manufacturing industry, a monopoly position is in general no cushion to sleep on. As it can be gained, so it can be retained only by alertness and energy.
  • But when all the facts of the case are taken into consideration, it is no longer correct to say that perfect competition wins out on that score. For though a concern that has to accept and cannot set prices would, in fact, use all of its capacity that can produce at marginal costs covered by the ruling prices, it does not follow that it would ever have the quantity and quality of capacity that big business has created and was able to create precisely because it is in a position to use it “strategically.”
  • The last candidate is technological progress. Was not the observed performance due to that stream of inventions that revolutionized the technique of production rather than to the businessman’s hunt for profits? The answer is in the negative. The carrying into effect of those technological novelties was of the essence of that hunt.
  • we are faced by still another question, viz., the question to what extent it is legitimate to assume that the capitalist engine will—or would if allowed to do so—work on in the near future, say for another forty years, about as successfully as it did in the past.
  • The second question is whether the forces and mechanisms offered by the theory of vanishing investment opportunity are the ones to stress. In the following chapters I am going to submit another theory of what will eventually kill capitalism,
  • 1. For every given state of human wants and of technology (in the widest possible sense of the term) there is of course for every rate of real wages a definite amount of fixed and circulating capital that will spell saturation. If wants and methods of production had been frozen for good at their state in 1800, such a point would have been reached long ago.
  • For if everyone’s wants were satisfied or nearly satisfied, increase in the number of consumers would ex hypothesi be the only major source of additional demand.
  • I am very far indeed from making light of the phenomenon under discussion. The falling birth rate seems to me to be one of the most significant features of our time. We shall see that even from a purely economic standpoint it is of cardinal importance, both as a symptom and as a cause of changing motivation. This however is a more complicated matter.
  • As far as that goes, those economists who predict a “flop” on this ground simply do what unfortunately economists have always been prone to do: as once they worried the public, on quite inadequate grounds, with the economic dangers of excessive numbers of mouths to feed,6 so they worry it now, on no better grounds, with the economic dangers of deficiencies.
  • It is gratuitous to assume not only that the “closing of the frontier” will cause a vacuum

Book Highlights: Capitalism, Socialism, and Democracy, Schumpeter, (Part 1: The Marxian Doctrine)

  • Yes, I do believe that most of the current talk about monopoly, like all the current talk about the dire effects of saving, is nothing but radical ideology and has no foundation in fact.
  • capitalism is being killed by its achievements.
  • A study of Marx begins most conveniently with the first volume of Das Kapital
  • In spite of a huge amount of more recent work, I still think that F. Mehring’s biography is the best, at least from the standpoint of the general reader.]
  • But it is perhaps superfluous to insist on the shortcomings of a theory which not even in the most favorable instances goes anywhere near the heart of the phenomenon it undertakes to explain, and which never should have been taken seriously.
  • A little reflection will convince the reader that this is not a necessary or natural thing to do. In fact it was a bold stroke of analytic strategy which linked the fate of the class phenomenon with the fate of capitalism in such a way that socialism, which in reality has nothing to do with the presence or absence of social classes, became, by definition, the only possible kind of classless society, excepting primitive groups.
  • The exaggeration of the definiteness and importance of the dividing line between the capitalist class in that sense and the proletariat was surpassed only by the exaggeration of the antagonism between them. To any mind not warped by the habit of fingering the Marxian rosary it should be obvious that their relation is, in normal times, primarily one of cooperation and that any theory to the contrary must draw largely on pathological cases for verification.
  • But nothing in Marx’s economics can be accounted for by any want of scholarship or training in the technique of theoretical analysis. He was a voracious reader and an indefatigable worker. He missed very few contributions of significance. And whatever he read he digested, wrestling with every fact or argument with a passion for detail most unusual in one whose glance habitually encompassed entire civilizations and secular developments.
  • To his powerful intellect, the interest in the problem as a problem was paramount in spite of himself; and however much he may have bent the import of his final results, while at work he was primarily concerned with sharpening the tools of analysis proffered by the science of his day, with straightening out logical difficulties and with building on the foundation thus acquired a theory that in nature and intent was truly scientific whatever its shortcomings may have been.
  • Both Ricardo and Marx say that the value of every commodity is (in perfect equilibrium and perfect competition) proportional to the quantity of labor contained in the commodity, provided this labor is in accordance with the existing standard of efficiency of production (the “socially necessary quantity of labor”). Both measure this quantity in hours of work and use the same method in order to reduce different qualities of work to a single standard.
  • Both answer critics by the same arguments. Marx’s arguments are merely less polite, more prolix and more “philosophical” in the worst sense of this word.
  • The labor theory of value, even if we could grant it to be valid for every other commodity, can never be applied to the commodity labor, for this would imply that workmen, like machines, are being produced according to rational cost calculations. Since they are not, there is no warrant for assuming that the value of labor power will be proportional to the man-hours that enter into its “production.”
  • To begin with, the doctrine of surplus value does not make it any easier to solve the problems, alluded to above, which are created by the discrepancy between the labor theory of value and the plain facts of economic reality.
  • Marx relies on the competition between capitalists for bringing about a redistribution of the total “mass” of surplus value such that each firm should earn profits proportional to its total capital, or that individual rates of profits should be equalized.
  • If we place ourselves on Marx’s standpoint, as it is our duty in a question of this kind, it is not absurd to look upon surplus value as a “mass” produced by the social process of production considered as a unit and to make the rest a matter of the distribution of that mass. And if that is not absurd, it is still possible to hold that the relative prices of commodities, as deduced in the third volume, follow from the labor-quantity theory in the first volume. Hence it is not correct to assert, as some writers from Lexis to Cole have done, that Marx’s theory of value is completely divorced from, and contributes nothing to, his theory of prices.
  • For Marx, saving or accumulating is identical with conversion of “surplus value into capital.” With that I do not propose to take issue, though individual attempts at saving do not necessarily and automatically increase real capital. Marx’s view seems to me to be so much nearer the truth than the opposite view sponsored by many of my contemporaries that I do not think it worth while to challenge it here.]
  • Now this tendency of the capitalist mechanism to equilibrate itself is surely not above question and any assertion of it would require, to say the least, careful qualification. But the interesting point is that we should call that statement most un-Marxian if we happened to come across it in the work of another economist and that, as far as it is tenable, it greatly weakens the main drift of Marx’s argument. In this point as in many others, Marx displays to an astonishing degree the shackles of the bourgeois economics of his time which he believed himself to have broken.]
  • Finally, the idea that capitalist evolution will burst—or outgrow—the institutions of capitalist society (Zusammenbruchstheorie, the theory of the inevitable catastrophe) affords a last example of the combination of a non sequitur with profound vision which helps to rescue the result.
  • Or capital in the Marxian system is capital only if in the hands of a distinct capitalist class. The same things, if in the hands of the workmen, are not capital.
  • Marxists claim that their system solves all the great problems that baffle non-Marxian economics; so it does but only by emasculating them.
  • Moreover, as every lawyer and every politician knows, energetic appeal to familiar facts will go a long way toward inducing a jury or a parliament to accept also the construction he desires to put upon them. Marxists have exploited this technique to the full. In this instance it is particularly successful, because the facts in question combine the virtues of being superficially known to everyone and of being thoroughly understood by very few.
  • If however we shake off the blinkers and cease to look upon colonization or imperialism as a mere incident in class warfare, little remains that is specifically Marxist about the matter. What Adam Smith has to say on it does just as well—better in fact.
  • For instance, the consistent support given by the American people to protectionist policy, whenever they had the opportunity to speak their minds, is accounted for not by any love for or domination by big business, but by a fervent wish to build and keep a world of their own and to be rid of all the vicissitudes of the rest of the world. Synthesis that overlooks such elements of the case is not an asset but a liability.
  • Big business has been able to take advantage of the popular sentiment and it has fostered it; but it is absurd to say that it has created it.
  • Matters become infinitely worse if, flying in the face of fact plus common sense, we exalt that theory of capital export and colonization into the fundamental explanation of international politics which thereupon resolves into a struggle, on the one hand, of monopolistic capitalist groups with each other and, on the other hand, of each of them with their own proletariat. This sort of thing may make useful party literature but otherwise it merely shows that nursery tales are no monopoly of bourgeois economics.
  • The attitudes of capitalist groups toward the policy of their nations are predominantly adaptive rather than causative, today more than ever. Also, they hinge to an astonishing degree on short-run considerations equally remote from any deeply laid plans and from any definite “objective” class interests. At this point Marxism degenerates into the formulation of popular superstitions.7
  • This superstition is exactly on a par with another that is harbored by many worthy and simple-minded people who explain modern history to themselves on the hypothesis that there is somewhere a committee of supremely wise and malevolent Jews who behind the scenes control international or perhaps all politics. Marxists are not victims of this particular superstition but theirs is on no higher plane.
  • The badge of Scientific Socialism which according to Marx is to distinguish it from Utopian Socialism consists in the proof that socialism is inevitable irrespective of human volition or of desirability. As has been stated before, all this means is that by virtue of its very logic capitalist evolution tends to destroy the capitalist and to produce the socialist order of things.8
  • The capitalist or any other order of things may evidently break down—or economic and social evolution may outgrow it—and yet the socialist phoenix may fail to rise from the ashes.
  • This should also solve the problem that has divided the disciples: revolution or evolution? If I have caught Marx’s meaning, the answer is not hard to give. Evolution was for him the parent of socialism. He was much too strongly imbued with a sense of the inherent logic of things social to believe that revolution can replace any part of the work of evolution.

Book Highlights: Zero to One: Notes on Startups, or How to Build the Future (Peter Thiel)

  • in the long run they could never create enough to save the average person from an extremely hard life.
  • Creating value is not enough—you also need to capture some of the value you create.
  • by “monopoly,” we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute.
  • If you lose sight of competitive reality and focus on trivial differentiating factors—maybe you think your naan is superior because of your great-grandmother’s recipe—your business is unlikely to survive.
  • Non-monopolists exaggerate their distinction by defining their market as the intersection of various smaller markets:
  • Monopolists, by contrast, disguise their monopoly by framing their market as the union of several large markets:
  • Do outsized profits come at the expense of the rest of society? Actually, yes: profits come out of customers’ wallets, and monopolies deserve their bad reputation—but only in a world where nothing changes.
  • If your industry is in a competitive equilibrium, the death of your business won’t matter to the world;
  • All Rhodes Scholars had a great future in their past.
  • Sometimes you do have to fight. Where that’s true, you should fight and win. There is no middle ground: either don’t throw any punches, or strike hard and end it quickly.
  • However, disruption has recently transmogrified into a self-congratulatory buzzword for anything posing as trendy and new.
  • Grandmaster José Raúl Capablanca put it well: to succeed, “you must study the endgame before everything else.”
  • “half luck, half good timing, and the rest brains.”
  • Today the whole Eurozone is in slow-motion crisis, and nobody is in charge.
  • The indefinite pessimist can’t know whether the inevitable decline will be fast or slow, catastrophic or gradual. All he can do is wait for it to happen, so he might as well eat, drink, and be merry in the meantime: hence Europe’s famous vacation mania.
  • Whether you were born in 1945 or 1950 or 1955, things got better every year for the first 18 years of your life, and it had nothing to do with you.
  • a whole generation learned from childhood to overrate the power of chance and underrate the importance of planning.
  • Gladwell at first appears to be making a contrarian critique of the myth of the self-made businessman, but actually his own account encapsulates the conventional view of a generation.
  • Finance epitomizes indefinite thinking because it’s the only way to make money when you have no idea how to create wealth.
  • To Nozick, any voluntary exchange must be allowed, and no social pattern could be noble enough to justify maintenance by coercion.
  • It starts with the professors who often become part-time consultants instead of full-time employees—even for the biotech startups that begin from their own research.
  • Jobs saw that you can change the world through careful planning, not by listening to focus group feedback or copying others’ successes.
  • Actually, there’s no evidence that Einstein ever said any of those things—the quotations are all apocryphal.
  • The error lies in expecting that venture returns will be normally distributed: that is, bad companies will fail, mediocre ones will stay flat, and good ones will return 2x or even 4x. Assuming this bland pattern, investors assemble a diversified portfolio and hope that winners counterbalance losers.
  • First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.
  • VC investment accounts for less than 0.2% of GDP. But the results of those investments disproportionately propel the entire economy. Venture-backed companies create 11% of all private sector jobs. They generate annual revenues equivalent to an astounding 21% of GDP.
  • Less obvious but just as important, an individual cannot diversify his own life by keeping dozens of equally possible careers in ready reserve.
  • You should focus relentlessly on something you’re good at doing, but before that you must think hard about whether it will be valuable in the future.
  • Most people act as if there were no secrets left to find. An extreme representative of this view is Ted Kaczynski, infamously known as the Unabomber. Kaczynski was a child prodigy who enrolled at Harvard at 16. He went on to get a PhD in math and become a professor at UC Berkeley. But you’ve only ever heard of him because of the 17-year terror campaign he waged with pipe bombs against professors, technologists, and businesspeople.
  • Religious fundamentalism, for example, allows no middle ground for hard questions: there are easy truths that children are expected to rattle off, and then there are the mysteries of God, which can’t be explained.
  • Free marketeers worship a similar logic. The value of things is set by the market. Even a child can look up stock quotes. But whether those prices make sense is not to be second-guessed; the market knows far more than you ever could.
  • Physics, for example, is a real major at all major universities, and it’s set in its ways. The opposite of physics might be astrology, but astrology doesn’t matter. What about something like nutrition? Nutrition matters for everybody, but you can’t major in it at Harvard. Most top scientists go into other fields. Most of the big studies were done 30 or 40 years ago, and most are seriously flawed.
  • “Thiel’s law”: a startup messed up at its foundation cannot be fixed.
  • Actually, a huge board will exercise no effective oversight at all; it merely provides cover for whatever microdictator actually runs the organization. If you want that kind of free rein from your board, blow it up to giant size. If you want an effective board, keep it small.
  • However, anyone who doesn’t own stock options or draw a regular salary from your company is fundamentally misaligned.
  • START WITH A THOUGHT EXPERIMENT: what would the ideal company culture look like? Employees should love their work. They should enjoy going to the office so much that formal business hours become obsolete and nobody watches the clock.
  • Why would someone join your company as its 20th engineer when she could go work at Google for more money and more prestige?
  • But there are two general kinds of good answers: answers about your mission and answers about your team.
  • People at a successful startup are fanatically right about something those outside it have missed.
  • Whatever the career, sales ability distinguishes superstars from also-rans. On Wall Street, a new hire starts as an “analyst” wielding technical expertise, but his goal is to become a dealmaker. A lawyer prides himself on professional credentials, but law firms are led by the rainmakers who bring in big clients. Even university professors, who claim authority from scholarly achievement, are envious of the self-promoters who define their fields.
  • Americans fear technology in the near future because they see it as a replay of the globalization of the near past. But the situations are very different: people compete for jobs and for resources; computers compete for neither.
  • And that’s the point: computers are tools, not rivals.
  • Social entrepreneurs aim to combine the best of both worlds and “do well by doing good.” Usually they end up doing neither.
  • Elon describes his staff this way: “If you’re at Tesla, you’re choosing to be at the equivalent of Special Forces. There’s the regular army, and that’s fine, but if you are working at Tesla, you’re choosing to step up your game.”

Book Highlights: The Midas Paradox (Part 5)

  • And in 2001 there was a similar inconsistency in statements made by officials at the Bank of Japan, who warned that quantitative easing would be ineffectual, but also that such a policy might lead to runaway inflation.
  • Fed adopted money supply targets in 1979, inflation fell to relatively low levels, where it has remained ever since.
  • Part of the problem was beyond their control. The “interest rate approach” to monetary policy is much easier to understand than the quantity of money approach—in fact it’s virtually the only approach used by the general public and the news media.
  • Monetarists understood at a theoretical level that what mattered was not so much the current change in the money supply, but rather the expected change in the future path of the money supply.
  • But monetarism was developed before the rational expectations revolution, and hence this insight was never fully incorporated into empirical monetarist analyses such as the Monetary History.
  • New Keynesianism is distinguished by its more sophisticated understanding of the potency of monetary policy and also its awareness that long-run wage and price flexibility give the economy a self-correcting mechanism.
  • Both of these insights can be seen as a belated recognition that Keynes misinterpreted both the apparent failure of the Fed’s 1932 open market purchases, and also the chronically high interwar unemployment rates triggered by policies such as the NIRA.
  • I believe that there is a much simpler explanation: Japan did not experience a liquidity trap but was instead successful at maintaining an inflation target of roughly 0 to -1 percent per annum.
  • Twice during the past decade, the Bank of Japan tightened monetary policy as the (core) inflation rate was approaching zero, from below.
  • When Ben Bernanke was asked in 2009 why the Fed didn’t aim for a higher inflation target, he didn’t claim the Fed was unable to generate higher inflation but rather argued that it would be undesirable.
  • In my view, this crisis has been misdiagnosed in a very similar way to the Great Depression. As in the 1930s, the current recession was associated with a severe drop in nominal spending (relative to trend), caused by excessively tight money. Of course, the mainstream view is that the recession was caused by a financial crisis, and that monetary policy was actually relatively expansionary.
  • More research needs to be done to explain why mar kets seemed to respond more bearishly to vague and uncertain fears of future devaluation than to expectations of imminent devaluation.
  • Virtually any neoclassical labor market model would predict that the announcement of a mandated 22 percent wage increase would reduce output sharply.
  • One would like an explanation that is rooted so deeply in the interwar political and economic systems that in retrospect, the Depression seems almost inevitable. But we would also like an explanation that would not have been obvious to the financial markets in mid-1929. This is not easy to do.
  • If there is a root cause to the Great Depression, it lies somewhere in the painful birth of the modern world, the difficulty that societies had in letting go of their emotional attachment to the “barbarous relic,” and moving to a more mature, and interventionist, monetary policy regime.
  • Temin is probably right that even had the interwar gold standard been relatively well managed, its eventual demise was both inevitable and desirable.
  • Capitalism was widely discredited by 1932.
  • During the 1932 campaign, even Hoover was discussing the need for a program like the National Industrial Recovery Act (NIRA)—and without the policy being accompanied by currency depreciation.
  • The fast-moving and extremely complex events of the interwar period simply do not allow us to resolve the age-old dispute between the “great man” and “deep historical forces” views of history, a debate that may tell us more about historians than it does about history.
  • Had either alternative strategy been followed, and a modest depression resulted, that alternative would have almost certainly received historical censure.
  • Here I should emphasize that not just my analysis of 1933, but the entire narrative in Chapters 2 through 10 hinges on monetary policy strongly impacting both prices and output almost immediately. If I am wrong, if policy has little or no immediate impact, then this entire narrative is essentially worthless.
  • I have found repeated links between policy shocks and contemporaneous movements in financial market prices, commodity prices, the WPI, and monthly industrial production. We know that all of these variables (with the possible exception of the policy shocks that I tried to identify) were highly correlated during the Depression. It makes no sense to argue, for instance, that monetary policy shocks had an immediate impact on stock and commodity prices but only impacted the WPI and industrial production with a long and variable lag. The series are simply too closely entangled.
  • At the risk of seeming to contradict myself, however, I continue to find much merit in Eichengreen and Temin’s view that the gold standard constrained U.S. policymakers in the early 1930s. But I would emphasize the psychological aspects of those constraints more than the technical aspects.
  • Previous studies have focused on the debate over the extent to which the international gold standard “constrained” monetary policymakers. This study adds several new perspectives to that analysis. First, policymakers do have some discretion, but only to the extent to which they can impact the world gold reserve ratio in the long run.
  • When there is too little money, monetary tightness doesn’t seem to be the problem. Interest rates are low and the public may be hoarding lots of cash. It’s much easier to argue that depressions are the inevitable hangover from a preceding bout of speculation. Today, most economists agree with Cassel; when nominal GDP falls in half, monetary policy has been far too tight, regardless of the level of interest rates.
  • And gold flows between any two countries might reflect either an expansionary policy in the country losing gold or a contractionary policy in the country receiving gold.

Book Highlights: The Midas Paradox (Parts 3 & 4)

  • I make two provocative claims in these three chapters. First, that in the absence of other policy initiatives, the devaluation of the dollar might have essentially ended the Depression by late 1934.
  • And second, that Roosevelt’s policy of increasing wages may have extended the Depression by nearly seven years and thus caused roughly half of all man-years of unemployment during the period from 1929 to 1941.
  • serious doubts arose as to the expansionary potential of monetary policies implemented in an environment where some linkage to gold was maintained.
  • The causality probably ran both ways, with banking troubles leading to fears of devaluation, and fears of devaluation leading to currency hoarding, and thereby triggering more banking holidays.
  • It is also important to recall that during this period, the federal government was perceived by investors as having a much greater ability to influence real asset prices than is the case today.
  • Yet, the only discernable macroeconomic consequence of this crisis would be a modest dip in industrial production during March 1933.
  • Even in the 1930s, it was widely understood that financial markets were not capable of withstanding great uncertainty over the soundness of a currency. That is why it was (and still is) standard operating procedure for policymakers to deny any intention of devaluation right up to the last minute.
  • now able to adopt expansionary policies without fear of a run on the U.S. gold stocks, markets reverted to their traditional pattern of welcoming lower discount rates.
  • one could argue that when deciding whether to construct a new building what matters is the expected price at which one can sell or rent the project, not the current rents paid by tenants under long-term contracts.
  • In the next chapter we will see how a mere two weeks after FDR torpedoed the World Monetary Conference, the National Recovery Administration (NRA) began to force wages much higher, which negated most of the benefits flowing from the policy of dollar depreciation.
  • I hope to show that the impact of the NIRA was much greater than almost anyone else has suspected—preventing what otherwise would have been a near full recovery by late 1934 or early 1935.
  • It is interesting to update Fisher’s model to the 1923–1935 period. The correlation between predicted output and actual output falls from .941 during 1915–1922, to .256 during 1923–1935.
  • The primary purpose of the NIRA was to establish industrial codes that would serve to prevent “ruinous” competition by setting minimum levels for wages and prices.
  • Consider the following hypothesis: rather than being a single event, “the” Great Depression was actually two distinction depressions. The first, demandside depression, ended in late 1934, by which time output had returned to its “natural rate.” A second, supply-side depression, began in late July 1933, sharply depressed the natural rate of output, and lasted for eight more years.
  • although real wages were highly countercyclical throughout the entire interwar period, nominal wages were essentially acyclical between 1920 and 1933 (when labor markets were relatively unregulated) and then became highly countercyclical for the remainder of the 1930s. In other words, higher wages don’t reduce output when they reflect market forces (such as productivity gains) but do depress output when they reflect nonmarket factors. Although hardly definitive, this pattern is exactly what one would expect if New Deal policies began generating autonomous wage shocks in 1933.
  • The “new information” received from July 19 to 21 was not precisely a 22.3 percent wage shock but rather an increase in the perceived likelihood of such a shock. This means that the three-day stock price collapse may significantly understate the overall impact of the Blue Eagle program on equity values.
  • A few have gone even further than Temin and Wigmore, arguing that the NIRA and AAA may have actually contributed to the recovery from the Depression.
  • A second difference is that most studies have relied on quarterly or annual data, not monthly data. Even using quarterly data, the production spike in July 1933 seems far less dramatic, and with annual data, this mini-business cycle is completely obscured.
  • I have argued that both dollar devaluation and the NIRA had extraordinarily powerful effects on output, but that the two policies roughly cancelled each other out.28 This means that a researcher focusing on monetary policy might see only modest evidence of the expansionary potential of the dollar depreciation program. Similarly, someone focusing only on the NIRA would tend to underestimate its contractionary impact.
  • And even if researchers did look at both monetary and wage policy, they may have used the wrong indicator of monetary policy. For instance, Weinstein (1981) did observe that in the absence of the NIRA, monetary expansion should have led to even more rapid economic growth during the mid-1930s. But Weinstein relied on money supply figures as a policy indicator, rather than the price of gold, and thus greatly underestimated the extent of monetary stimulus in 1933.
  • And finally, many other researchers seem to have underestimated the U.S. economy’s ability to self-correct. Great Contractions are so rare that we don’t really know much about the economy’s properties at 25 percent unemployment. Although economists sympathetic to Roosevelt often point out that recovery from the Depression was rapid, I cannot help agreeing with Cole and Ohanian’s (2004) view that the recovery was surprisingly anemic.
  • the United States was not “forced” off the gold standard; in fact, its holdings of gold were the largest in the world. Rather, the decision to talk down the value of the dollar was made pursuant to the broader macroeconomic objectives of the Roosevelt administration
  • On September 21, a New York Times headline reported that “ROOSEVELT CHECKS INFLATION DEMAND.”4 Stocks fell by a total of 7.7 percent on September 20 and 21, and the following day’s New York Times (p. 27) attributed the decline to “the disappointment of those traders who had counted too heavily of the prospect of currency inflation.”
  • To a much greater extent than today, the (inverse of the) price of gold was viewed as the value of the dollar.
  • If Roosevelt did operate under the assumption that any legal devaluation was likely to be permanent, then he would naturally have been reluctant to firmly commit to a new par value until it was clear that this value would be consistent with his price level objectives. When viewed from this perspective, Roosevelt’s policy options were quite limited. The traditional tools of monetary policy included discount loans and open market operations, but these were under the control of the Federal Reserve.
  • The November 17 New York Times (p. 2) reported rumors that President Roosevelt was trying to force France off the gold standard. Even if this story was fictitious, there is little doubt that the policy of dollar depreciation was putting the franc under great stress, and this was during a period when budgetary problems in France had already caused an outflow of foreign capital.
  • Recall that immediately after the dollar began depreciating in April, prices rose sharply while nominal wages were almost unchanged,
  • Under these circumstances, price level increases would raise nominal stock prices by pushing up the nominal value of corporate assets and could raise real stock prices if the higher commodity prices led to expectations of economic recovery.
  • Roosevelt listened to a variety of advisors and occasionally supported mutually incompatible policies.
  • It would be extremely difficult to discriminate between the gold hoarding caused by fear of dollar depreciation and hoarding due to factors such as fear of French devaluation.
  • Pearson, Myers, and Gans quote Warren’s notes to the effect that when the summer of 1934 arrived without substantial increases in commodity prices: The President (a) wanted more inflation and (b) assumed or had been led to believe that there was a long lag in the effect of depreciation. He did not understand—as many others did not then and do not now—the principle that commodity prices respond immediately to changes in the price of gold. (1957, p. 5664)
  • Most modern macroeconomists continue to make this mistake, taking a wait and see attitude toward initiatives such as “quantitative easing,” whereas the inflation expectations embedded in the Treasury Inflation-Protected Securities (TIPS) markets provided immediate evidence that the policy was nowhere near sufficient.
  • 1933 contained not one, but two of the most dramatic policy experiments ever conducted by the U.S. government.
  • Another important lesson from 1933 is that the only avowedly inflationary policy ever pursued by the United States was accompanied by rapid inflation in all of the price indices, despite high unemployment.
  • And the fact that the recovery aborted immediately following a government-mandated 22 percent wage increase (a classic adverse supply shock) provides additional confirmation of the basic aggregate supply/aggregate demand (AS/AD) model.
  • Mankiw and Reis identify “three key facts” of modern business cycle theory: 1. “The Acceleration Phenomenon … inflation tends to rise when the economy is booming and falls when economic activity is depressed.” 2. “The Smoothness of Real Wages … real wages do not fluctuate as much as labor productivity.” 3. “Gradual Response of Real Variables … The full impact of shocks is usually felt only after several quarters.” (2006, p. 164)
  • In the preceding three chapters we have seen evidence of rapid inflation in an extremely depressed economy, rapid change in real wages (even before implementation of the NIRA), and industrial production responding almost immediately to monetary shocks.
  • Monetary policy doesn’t get much more exogenous than this: One morning (it was Friday, November 3), when Morgenthau came to the bedside tense with worry over some pressing problem and suggested that the [gold] price change that day be considerably greater than the 10 to 15 cents of immediately preceding days, Roosevelt promptly announced that the increase would be 21 cents. Why that figure? Because “three times seven” is a lucky number, said Roosevelt, his face straight but his blue eyes twinkling at Morgenthau’s recoil from such frivolous dealing with a serious matter (quoted in Davis, 1986, p. 294)
  • There are three generally accepted characteristics of a gold standard: maintenance of a fixed price of gold, free convertibility of the currency into gold, and adherence to the rules of the game—that is, a relatively stable gold reserve ratio. While prior to 1933, the United States did conform to the first two criteria, it did not even come close to adhering to the rules of the game. After 1934, the dollar was no longer freely convertible into gold, but its market price was still fixed, and changes in the monetary base were closely correlated with changes in the monetary gold stock.
  • In this account of the Great Depression, the two-and-a-half year period from February 1934 to September 1936 represents the eye of the hurricane. The purchasing power of gold was fairly stable, and (because the dollar was pegged to gold) a stable gold market meant a relatively stable price level. As gold flowed back from the gold bloc to the United States, the world gold reserve ratio declined. Thus, the deflationary impact of private gold hoarding (as well as currency hoarding) was roughly offset by the inflationary impact of gold flows.
  • From this perspective, those arguing that the Fed should have been more expansionary during 1934–1936 are actually arguing that the Fed should have taken it upon itself to repeal FDR’s high wage policy.
  • The economic impact of the 1937 gold scare, in particular, has not received the attention that it deserves. This eighteen-month period is one of the best examples of how the gold market approach to aggregate demand can provide insights not available from the traditional monetary or expenditure approaches.
  • By 1937, he had combined an anti-inflationary program with a policy of high wages, a poisonous combination for the equity markets.
  • And the December 28 New York Times (p. 23) was echoing the conventional wisdom when it suggested (five years prematurely) that, “1936 has proved unmistakably the definite ending of the cycle of depression.”
  • On February 5, Roosevelt announced his intention to pack the Supreme Court with six additional justices
  • The court packing scheme was the first of a series of steps that greatly strained relations between the Roosevelt administration and the much more conservative financial community during 1937–1938.
  • The fear that we were headed for “another 1929”11—that is, a speculative bubble—led the administration to impose curbs on federal purchases of commodities and durable goods as a way of restraining inflation.
  • Several articles noted that the relatively high buying price of gold created an excess supply of gold for the same reason that price support programs for wheat led to grain surpluses. There was speculation that the gold sterilization policy would eventually collapse under the pressure of market forces, and that a revaluation of the dollar was almost inevitable.
  • important differences, however, between gold and wheat markets. First, the medium-term (i.e., one to five years) elasticity of supply of gold is almost certainly far lower than for wheat. More importantly, unlike wheat, gold was the medium of account in the United States, and thus FDR could not change the dollar price of gold without having a profound impact on the entire price structure.
  • Because the 1937 gold panic was in some respects the mirror image of the devaluation scares of 1931–1932, it might have been expected to increase the U.S. price level.
  • He took President Roosevelt sharply to task for having failed to foresee in January 1934 that the devaluation of the dollar by 41 percent would lead to such a superabundance of gold. If, however, we look at Professor Cassel’s earlier writings, we find that he himself failed to foresee such developments, even at much later dates.
  • We read in the July 1936 issue of the Quarterly Review of the Skandinaviska Kreditaktiebolaget the following remarks by Professor Cassel: “There seems to be a general idea that the recent rise in the output of gold has been on such a scale that we are now on the way towards a period of immense abundance of gold. This view can scarcely be correct.” … Thus the learned Professor expected a mere politician to foresee something in January 1934 which he himself was incapable of foreseeing two and a half years later.
  • The intelligentsia generally picks up on a problem some time after market participants become aware of the problem.
  • In addition, both Soviet production and private dishoarding turned out to be smaller than what was projected during the height of the panic.
  • THE 1937–1938 CONTRACTION was roughly comparable in depth and duration to the 1920–1921 contraction, which makes it one of the most severe downturns of the twentieth century.
  • the French government had chosen to import gold rather than let the franc appreciate.
  • As with Hoover, FDR’s commitment to the gold standard prevented him from offering any effective policies for boosting the price level.
  • During the following week, stocks continued to rise on rumors of additional inflationary steps and on April 14 FDR announced a policy of gold desterilization as well as a reversal of the reserve requirement increase from the previous May.
  • These steps initiated the third phase of the administration’s macroeconomic policy. An expansionary policy was in place for most of FDR’s first term, gradual moves toward a contractionary policy began in mid-1936, and now the administration had switched back to an expansionary policy:
  • On the contrary, the denials aided market sentiment. (6/21/38, p. 29, emphasis added) The final sentence of the New York Times quotation is particularly interesting. The implicit assumption is clearly that devaluation rumors would normally boost the stock market, but that this time the market was aided by the suppression of those rumors. What the stock market most wanted was clarity. A devaluation of the dollar would boost prices, but decisive steps to restore confidence in the dollar would lessen gold hoarding, and this would also tend to raise prices.
  • Monetarists emphasize how the high levels of excess reserves reduced the money multiplier, and suggest that the Fed should have targeted the broader monetary aggregates.
  • The extraordinarily high demand for excess reserves tended to indirectly increase the demand for monetary gold, thus preventing the rapidly growing gold stocks from having the inflationary impact one might have normally expected.
  • Thus, the Depression was over even before the United States entered the war.
  • This points to another important lesson: that it is easy to confuse a lag in the impact of monetary policy with delays caused by something very different, a delay in the public’s willingness to accept that the policy change will persist.27
  • Does this more nuanced interpretation make the gold hoarding merely an endogenous factor, with no causal role in the ensuing depression? I think not,
  • The Fed’s decision to begin paying interest on reserves in October 2008 almost certainly contributed to the extraordinary increase in the demand for excess reserves (although it wasn’t the only factor). The Fed’s rationale was that they wanted to keep control over the Fed funds rate as they injected large amounts of liquidity into the banking system. This essentially meant that they wanted to prevent nominal rates from immediately falling to zero. Thus, the effect was contractionary, and at almost the worst possible time.
  • If we have learned anything from our study of the Depression, as well as the situation in Japan during the 1990s, it is that nominal rates are not a reliable indicator of the stance of monetary policy.
  • In short, low nominal interest rates may just as well be a sign of expected deflation and monetary tightness as of monetary ease.
  • But when prices started falling in late 2008 the Fed refused to adopt a higher inflation target in the United States. As a result, 2009 saw nominal GDP fall at the fastest pace since 1938. Let’s hope this is the last time the Fed adopts a policy aimed at encouraging money hoarding in the midst of a recession.

Book Highlights: The Midas Paradox (Parts 1 & 2)

  1. I was greatly influenced by monetarist ideas, particularly A Monetary History of the United States,
  2. Ultimately, I decided that the gold reserve ratio was the most sensible way of thinking about the stance of monetary policy under a gold standard.
  3. Obviously, “effect” cannot precede “cause”; what was actually happening was that markets were anticipating that gold market disturbances would impact future monetary policy, and this caused asset prices to respond immediately to the expected change in policy.
  4. I was shocked to see so many misconceptions from the Great Depression repeated in the current crisis: 1. Assuming causality runs from financial panic to falling aggregate demand (rather than vice versa). 2. Assuming that sharply falling short-term interest rates and a sharply rising monetary base meant “easy money.” 3. Assuming that monetary policy became ineffective once rates hit zero.
  5. (A modern example of this conundrum occurred when many pundits blamed the Fed for missing a housing bubble that was also missed by the financial markets.)
  6. One purpose of this study is to show that monetary policy lags are much shorter than many researchers have assumed, and that both stock prices and industrial output often responded quickly to monetary shocks.
  7. A recent study of the U.S. Treasury bond market showed that if one divides the trading day into five-minute intervals, virtually all of the largest price changes occur during those five-minute intervals that immediately follow government data announcements.6 There is simply no plausible explanation for this empirical regularity other than that these events are related, and that the causation runs from the data announcement to the market response.
  8. Previous economic historians have missed the way that gold market instability triggered the boom and bust of 1936–1938 and have mistakenly blamed the recession on tighter fiscal policy or higher reserve requirements.
  9. Keynes’s stagnation hypothesis falsely attributes problems caused by government labor market regulations to inherent defects in free-market capitalism.
  10. But under a gold standard, the nominal price of gold cannot change, and thus a fall in the value of gold can only occur through a rise in the price of all other goods.
  11. During the 1920s, prices were well above pre–World War I levels, and there was concern about a looming “shortage” of gold; that is, future increases in the world gold supply would not be sufficient to prevent deflation. (The term “shortage” is misleading; “scarcity” better describes the problem.)
  12. If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated.
  13. Some would argue that there is nothing the Federal Reserve could have done, but that’s not what Fed officials claim. Ben Bernanke has repeatedly emphasized that the Fed is never “out of ammunition.”
  14. By mid-1928, the United States had exported almost $500 million in gold and there was a growing perception of excessive speculation in the stock market. At this time, the Fed switched to a contractionary policy aimed at restraining Wall Street’s “irrational exuberance.”
  15. By March 1929 pundits were complaining that the Fed’s antispeculation policy was hurting the European economies, particularly Britain.
  16. Wall Street had rallied on the reassuring news that the Bank of England had refrained from an increase in its discount rate.24 Despite what we now know about its ultimate effects, it is hard to be too critical of the Fed’s action, given that the markets seem to have made the same miscalculation.
  17. While an unanticipated increase in the central bank’s target interest rate can be viewed as being contractionary on the day it is announced, over longer periods of time the nominal interest rate is an especially unreliable indicator of the stance of monetary policy.
  18. The U.S. stock market crash so reduced the demand for credit that existing discount rates throughout the world, and even somewhat lower rates, now represented highly contractionary policies capable of dramatically increasing the world gold reserve ratio.
  19. Although stocks did not fall on October 26, Bittlingmayer (p. 399) suggested that the speech’s “contents or fundamental message could have reached Wall Street a day or two earlier,
  20. As the seriousness of the Depression became more apparent during 1930, opposition to the tariff spread among the public, the press, and even many business groups.
  21. “tariff war does not furnish good soil for the growth of world peace.”
  22. suggests that the impact of German political difficulties on the U.S. markets owed more to their perceived effect on the prospects for international cooperation, than any impact they might have had on U.S. fiscal policy.
  23. Interestingly, the financial press seemed to interpret the relationship between stocks and commodities differently in 1929 than in 1930. Because stock prices fell far more sharply than commodity prices in October 1929, many analysts viewed the concurrent commodity price decline as merely a symptom of the stock market crash. By mid-1930 the order of causality was usually reversed, with the commodity markets (i.e., “deflation”) seen as exerting a “depressing” influence on stocks.
  24. More sophisticated observers held that declines in both markets could be attributed to monetary factors:
  25. How one partitions “blame,” depends on how seriously one takes the concept of the “rules of the game” (i.e., a stable gold reserve ratio). In my view, the system was fundamentally flawed, which makes it difficult to assign blame.
  26. Either the Great Depression was not forecastable in September 1929, or financial markets are not efficient.
  27. Indeed, Bordo and Eichengreen (1998) showed that with more enlightened monetary policies the world monetary gold stocks were sufficient to underpin the international gold standard for several more decades.
  28. The key U.S. policy error was the failure to accommodate Britain’s need to rebuild gold reserves in 1930,
  29. If the Federal Reserve (Fed) had pursued an expansionary policy (a lower gold ratio), then a vigorous recovery might have occurred.
  30. Contrary to popular belief, 1931 did not mark the end of the international gold standard; if it had, the Depression might have ended much more quickly. Instead, it marked the end of a stable international gold standard. For the remainder of the 1930s, a hobbled gold standard did far more damage than would have been possible from either a pure gold standard or a pure fiat money regime.
  31. The price of the German war reparations bonds, dubbed “Young Plan bonds” (YPBs), were a good indicator of political turmoil in Germany during late 1930 and proved to be an even better indicator during 1931 and 1932.
  32. A gold flow from the United States to France could be caused either by a reduction in the U.S. gold ratio (i.e., an expansionary policy in the United States), or an increase in France’s gold ratio (a contractionary policy in France).
  33. “traders took heart on the news that the slogan of the Hitler party will be: ‘private debts—yes; reparations—no!’”
  34. Britain can hardly be blamed for being among the first to recognize that gold was merely a “barbarous relic,” a view that is now widely held.
  35. The most controversial question from this period is whether the Fed’s bond purchases helped mitigate an otherwise disastrous set of exogenous shocks, had no impact on the economy, or actually worsened conditions by reducing confidence and increasing hoarding.
  36. The spring of 1932 was a period of severe depression and deflation, corporate default risk was soaring, and a highly aggressive open market purchase operation was driving T-bill yields to below ½ percent. This is exactly the sort of period when one would expect T-bond prices to rally. Thus, the fact that they continued to trade at well below par could be viewed as a sign that other (hidden) factors were putting upward pressure on long-term yields. One of those hidden factors was presumably fear of devaluation.
  37. Under a fiat money system, fears of future inflation will reduce the demand for money, thereby causing an immediate increase in prices. Under a gold standard, however, fears of future devaluation can be deflationary.
  38. the New York Times noted ironically that: It resembles the reasoning which attained much popularity in this country a year or more ago; which began by declaring that the stock market decline was the result of unfavorable trade [i.e., business] conditions, and ended by insisting still more vigorously that the trade situation was the direct result of the decline in stocks. (5/22/32,
  39. They argued that the business upswing in the late summer of 1932 was a delayed reaction to the spring OMPs, and that the Fed had prematurely abandoned the OMPs. It should be clear from the analysis in this chapter that I have some problems with this view. Monetary policy may impact macroeconomic aggregates with a lag, but it is difficult to reconcile the behavior of stock and commodity prices with the Friedman-Schwartz view.
  40. It is not surprising that Keynes would have confused absolute liquidity preference with the constraints of the gold standard.
  41. The United States still held massive gold reserves in 1932, and there is no reason why those reserves shouldn’t have been used more aggressively in an emergency such as the Great Depression.
  42. “a proper central bank does not fail because it loses all its gold in a banking crisis. It only fails if it does not.”
  43. Keynes viewed a liquidity trap as a situation in which further increases in the money supply would have no impact on aggregate demand, or prices. We have no real evidence that such a trap existed in 1932.32 Instead, the problem was that the gold standard limited the amount by which central banks could increase the monetary base.
  44. The biggest problem with Hsieh and Romer’s analysis is their conclusion (p. 172) that during the OMPs “virtually no sign of expectations of devaluation” surfaced. I would argue exactly the opposite.
  45. Yes, the forward discounts on the dollar were never very large in any of these crises, but that simply reflects that fact that traders never viewed dollar devaluation as a particularly likely outcome, especially within the next three months.
  46. Bernanke and James (1991, p. 49) provide an even more persuasive reason to doubt that real interest rates were high during the early 1930s. They pointed out that those countries that left the gold standard early (such as Britain) were able to arrest the decline in prices but continued to offer the same sort of low nominal yields on safe assets as did countries remaining on the gold standard, such as the United States and France.
  47. Given the unprecedented severity of the Depression, it seems implausible that any monocausal explanation is adequate.
  48. Even if the Great Contraction of 1929–1932 was essentially a monetary phenomenon, the preceding account suggests that it was monetary in the broad sense of a breakdown in the international monetary system (as emphasized by Temin and Eichengreen), rather than simply a result of inept Fed policy (the focus of Friedman and Schwartz).
  49. The large increases in the world gold reserve ratio during 1929–1930, and 1931–1932 did not reflect monetary policy being constrained by the gold standard.
  50. Market responses to policy shocks merely show that the markets believed that the Fed was likely to act as if it felt constrained by potential gold outflows.
  51. it doesn’t quite matter whether it was fiscal or monetary policy that caused this crisis. In either case the net effect of the crisis was to weaken the impact of countercyclical policy.
  52. Are we accusing countries of violating well-agreed-upon ground rules (like a player cheating in a sports competition) or are we accusing countries of adopting ill-advised policies that hurt others and themselves?
  53. In a sense, the interwar gold standard was both too flexible and not flexible enough. A rigid adherence to a fixed gold reserve ratio would have greatly reduced central bank hoarding during the early 1930s. Alternatively, a much more flexible regime which completely disregarded the gold reserve ratio would have allowed central banks to more easily cooperate to economize on the demand for monetary gold during a deflationary crisis.
  54. But the policymakers of that era (particularly in America) were living in a world where devaluation seemed almost inconceivable. The entrenchment of the gold standard regime in America helps explain why the financial markets placed such high hopes on the possibility of international monetary cooperation, despite the ultimate ineffectiveness of those initiatives. They saw it as the only game in town.
  55. Even our best-selling money textbooks emphasize the unreliability of interest rates as monetary policy indicators: It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates. (Mishkin, 2007, p. 606)
  56. Not so long ago, economists liked to make fun of statements such as Joan Robinson’s claim that easy money couldn’t have caused the German hyperinflation as (she argued) nominal interest rates weren’t low.
  57. Unfortunately, most economists seemed to miss the monetary nature of the second and more severe phase of the recent crisis, which began in mid-2008. Nominal GDP fell nearly 4 percent over the following twelve months, to a level more than 9 percent below trend.
  58. To those closest to the problem, a severe fall in aggregate demand, or nominal GDP, almost never looks like it was caused by monetary policy. It is likely to be accompanied by very low nominal rates, and a bloated monetary base (as people and banks hoard currency). That looks like “easy money” to the untrained eye.
  59. In the late 1990s, Milton Friedman also complained that modern economists had not really absorbed the lessons of the Great Depression: Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy… . After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die. (Friedman, 1998.)

Book Highlights: Antifragile

Antifragile: Things That Gain from Disorder (Incerto)
Nassim Nicholas Taleb

Antifragile: Things That Gain from Disorder (Incerto) by [Taleb, Nassim Nicholas]


  • I’d rather be dumb and antifragile than extremely smart and fragile, any time.


  • Which brings us to the largest fragilizer of society, and greatest generator of crises, absence of “skin in the game.”


  • Black Swans hijack our brains, making us feel we “sort of” or “almost” predicted them, because they are retrospectively explainable.


  • An annoying aspect of the Black Swan problem—in fact the central, and largely missed, point—is that the odds of rare events are simply not computable.


  • In short, the fragilista (medical, economic, social planning) is one who makes you engage in policies and actions, all artificial, in which the benefits are small and visible, and the side effects potentially severe and invisible.


  • no skill to understand it, mastery to write it.


  • To accord with the practitioner’s ethos, the rule in this book is as follows: I eat my own cooking.


  • philosophical notion of doxastic commitment, a class of beliefs that go beyond talk, and to which we are committed enough to take personal risks.


  • Hormesis, a word coined by pharmacologists, is when a small dose of a harmful substance is actually beneficial for the organism, acting as medicine.


  • I have called this mental defect the Lucretius problem, after the Latin poetic philosopher who wrote that the fool believes that the tallest mountain in the world will be equal to the tallest one he has observed.


  • You know, this economist had what is called a tête à baffe, a face that invites you to slap it, just like a cannoli invites you to bite into it.


  • Finally, a thought. He who has never sinned is less reliable than he who has only sinned once. And someone who has made plenty of errors—though never the same error more than once—is more reliable than someone who has never made any.


  • treating an organism like a simple machine is a kind of simplification or approximation or reduction that is exactly like a Procrustean bed.


  • employees, who have no volatility, but can be surprised to see their income going to zero after a phone call from the personnel department.


  • if you supply a typical copy editor with a text, he will propose a certain number of edits, say about five changes per page. Now accept his “corrections” and give this text to another copy editor who tends to have the same average rate of intervention (editors vary in interventionism), and you will see that he will suggest an equivalent number of edits, sometimes reversing changes made by the previous editor. Find a third editor, same.


  • Over my writing career I’ve noticed that those who overedit tend to miss the real typos (and vice versa). I once pulled an op-ed from The Washington Post owing to the abundance of completely unnecessary edits, as if every word had been replaced by a synonym from the thesaurus. I gave the article to the Financial Times instead. The editor there made one single correction: 1989 became 1990. The Washington Post had tried so hard that they missed the only relevant mistake.


  • Restaurants do not take your order, then cut the cake and the steak in small pieces and mix the whole thing together with those machines that produce a lot of noise. Activities “in the middle” are like such mashing.


  • “Provide for the worst; the best can take care of itself.”


  • people tend to provide for the best and hope that the worst will take care of itself.


  • I am fond of the brand of the unexpected one finds at parties (going to parties has optionality, perhaps the best advice for someone who wants to benefit from uncertainty with low downside).


  • For if you think that education causes wealth, rather than being a result of wealth, or that intelligent actions and discoveries are the result of intelligent ideas, you will be in for a surprise.


  • As per the Yiddish saying: “If the student is smart, the teacher takes the credit.” These illusions of contribution result largely from confirmation fallacies:


  • You would think that the people who specialized in foreign exchange understood economics, geopolitics, mathematics, the future price of currencies, differentials between prices in countries. Or that they read assiduously the economics reports published in glossy papers by various institutes. You might also imagine cosmopolitan fellows who wear ascots at the opera on Saturday night, make wine sommeliers nervous, and take tango lessons on Wednesday afternoons. Or spoke intelligible English. None of that.


  • Theory should stay independent from practice and vice versa—and we should not extract academic economists from their campuses and put them in positions of decision making. Economics is not a science and should not be there to advise policy.


  • As Yogi Berra said, “In theory there is no difference between theory and practice; in practice there is.”


  • the fragilista who mistakes what he does not understand for nonsense.


  • charlatans are recognizable in that they will give you positive advice, and only positive advice, exploiting our gullibility and sucker-proneness for recipes that hit you in a flash as just obvious, then evaporate later as you forget them. Just look at the “how to” books with, in their title, “Ten Steps for—” (fill in: enrichment, weight loss, making friends, innovation, getting elected, building muscles, finding a husband, running an orphanage, etc.). Yet in practice it is the negative that’s used by the pros,


  • For the Arab scholar and religious leader Ali Bin Abi-Taleb (no relation), keeping one’s distance from an ignorant person is equivalent to keeping company with a wise man.


  • Urban planning, incidentally, demonstrates the central property of the so-called top-down effect: top-down is usually irreversible, so mistakes tend to stick, whereas bottom-up is gradual and incremental, with creation and destruction along the way, though presumably with a positive slope.


  • “do you have evidence that this is harmful?” (the same type of response as “is there evidence that polluting is harmful?”). As usual, the solution is simple, an extension of via negativa and Fat Tony’s don’t-be-a-sucker rule: the non-natural needs to prove its benefits, not the natural—


  • Second principle of iatrogenics: it is not linear. We should not take risks with near-healthy people; but we should take a lot, a lot more risks with those deemed in danger.


  • Religion has invisible purposes beyond what the literal-minded scientistic-scientifiers identify—one of which is to protect us from scientism, that is, them. We can see in the corpus of inscriptions (on graves) accounts of people erecting fountains or even temples to their favorite gods after these succeeded where doctors failed.


  • I believe in the heuristics of religion and blindly accommodate its rules (as an Orthodox Christian, I can cheat once in a while, as it is part of the game).


  • For the Romans, engineers needed to spend some time under the bridge they built—something that should be required of financial engineers today.


  • Words are dangerous: postdictors, who explain things after the fact—because they are in the business of talking—always look smarter than predictors.


  • Anything one needs to market heavily is necessarily either an inferior product or an evil one.


  • my experience is that most journalists, professional academics, and other in similar phony professions don’t read original sources, but each other, largely because they need to figure out the consensus before making a pronouncement.


  • First, the more complicated the regulation, the more prone to arbitrages by insiders. This is another argument in favor of heuristics.


  • Everything gains or loses from volatility. Fragility is what loses from volatility and uncertainty.

Jack’s Links

Back at it again with the fresh links:

A twenty punch card investment portfolio is – by its nature – a concentrated investment portfolio. If I had run my portfolio like that I would have come out of the crisis with maybe six stocks, turfed one or two by now and added a single stock in 2012.

1.   The Fed raised rates last December, and just a week ago indicated that it is likely to raise rates again later this year.  Is that doing your best to inflate?

2.  The ECB and the BOJ have mostly disappointed markets this year, offering up one announcement after another that was less expansionary than markets expected.

So no, they are not doing their best.  If at some point they do in fact do their best, and still come up short, then by all means given them help.

I continue to be a reviewer on failed replications and re-analyses of the data — signing my reviews as I did in the Ranehill et al. (2015) case — almost always in favor of publication (I was strongly in favor in the Ranehill case). More failed replications are making their way through the publication process. We will see them soon. The evidence against the existence of power poses is undeniable.

A poster child for this problem is China and its narrowly pegged currency. In a world of freely floating currencies, the US dollar would weaken and the Chinese yuan would strengthen because the US runs a large trade deficit with China and the rest of the world.

Where does one start? No, China is not intervening to lower the value of the yuan; they are intervening to raise its value. And no, textbook theory does not say that exchange rates should adjust in the long run to balance trade in goods and services, unless long run means 1,000,000,000 years, in present value terms. But in that case the current US deficit presents no puzzle; it hasn’t lasted for a billion years.

Notice the schoolmarmy “And Trump still has not apologized to the president of the United States for an effort that many African-Americans saw as an effort to delegitimize the first black president.” As if that is relevant to a fact check.

Our findings provide empirical evidence that ride-sharing services such as Uber significantly decrease the traffic congestion after entering an urban area.

In other words, she would prefer to purposely make some other people worse off with higher taxes on what they buy (sales taxes) or earn (income taxes) than to raise the same amount of revenue by raising no taxes but instead legalizing a good so that the revenues are taken from people who are better off paying the revenues than buying in an illegal world.

That’s either ignorant or cruel, or both.

Books: I read a bunch of these little time sinks recently:

Get A Grip: One of a seemingly endless stream of fable-centric business management books. This one is about the “Entrepreneurial Operating System” that comes from an eponymous consulting group. Seems to be in the zeitgeist. More concrete than most other fabley books, and interesting take on the really popular notion of getting the right people on the bus then finding their seat later — basically defines seats on the bus first and then goes to fill them.

Get A Grip: An Entrepreneurial Fable . . . Your Journey to Get Real, Get Simple, and Get Results by [Wickman, Gino, Paton, Mike]

Antifragile:  Classic Taleb book, I’m thinking of doing a new kind of post on this one.

Antifragile: Things That Gain from Disorder (Incerto) by [Taleb, Nassim Nicholas]

The Ideal Team Player: Another business fable, this one from the Table Group, all about their three ‘virtues’, being humble, hungry, and smart. It may be because I haven’t read any of the other books in the series for a while, but I was more impressed than I thought I would be with their definitions of the virtues.

Humble is about not being arrogant, but also not being over-modest. Subtle distinction that I was surprised they made.

Hungry is pretty straight forward, and I liked that they mentioned that a candidate mentioning ‘work-life balance’ too many times is a red flag. All businesses want to think they let their employees find balance, but hiring someone who is focused on how much they won’t have to work is questionable.

Smart is focused on being people-smart, and people who can’t take social cues are undesirable as teammates.

As per usual for Lencioni, there were about a dozen awkward references to prayer, completely unrelated to the story, which I could have done without.

The Ideal Team Player: How to Recognize and Cultivate The Three Essential Virtues by [Lencioni, Patrick M.]

Like the links? Get them straight at yo face as soon as they are published:

Jack’s Links

  • I’m not sure through which rabbit-hole I stumbled upon the first link, an anecdote about someone whose code only crashed on Wednesdays, but I really liked it.

…if you dig deep enough; that “unrelated” errors rarely are; and that it’s almost certainly your own damn fault.

  • Why the 1% earn so much – from Brookings: one aspect that the article addresses is really picking up steam, people are starting to look at the distortionary effects of barriers to entry in different fields (medicine, law, etc.) and seeing how that creates a world where we have to greatly incentivize people (e.g., with large incomes or prestige) to overcome those barriers. It also limits the number of people who can engage in that job — instead of having 50 doctors, 50 nurse practitioners and 100 nurses, we end up with 75 doctors and 100 nurses.

  • Great article from Kitces on rebalancing via either time intervals or ‘variance bands’: it seems obvious that variance bands would outperform the relatively capricious timings of regular rebalances, though there are some surprises, including the outperformance of annual rebalancing versus shorter intervals (see below).

What are the sorts of things we might trade off against intelligence? Perhaps fitness, height, attractiveness, health, longevity, social well-adjustedness?

But in fact none of these trade off against intelligence, many are strongly positively associated with it, and in some the link has been proven genetic!

Book section:

I finished Dune Messiah, the second book and follow-up to Dune. As it seems is pretty much the norm, the book was okay, but not nearly the amazing piece of work that the original was. I’ll probably finish up with the third book and put the series down for a while.Capture

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