Looking Backwards and Forwards at the Same Time

Janus and Bi-Directional Smarts

The Roman god Janus looks backwards and forwards at the same time and learning to be somewhat Janus-like is very conducive in the metaintelligence (i.e., larger overview) quest.

There’s a useful French phrase, “reculer pour mieux sauter” which means like a high jumper, you have to take steps backwards to jump higher. In other words, learn to look bi-directionally at the world.

First look back, then forward.

Here’s a concrete example:

W. Arthur Lewis, the “father” of development economics, originally from the Caribbean, taught at Princeton. He won the Nobel in 1979 and wrote various classics such as Growth and Fluctuations, 1870-1913 (1978).

Lewis writes:

In this book we shall not be attempting to give formal or complete explanations of why fluctuations occurred. Like the captain of a ship navigating in stormy seas, we shall need to identify the waves, without needing an exhaustive theory of what causes waves.

When analyzing these fluctuations economists have identified four different cycles, distinguished by length of periodicity, each of which is named after the economist who first wrote about it:

the Kitchin (about three years)
the Juglar (about nine years)
the Kuznets (about twenty years)
the Kondratiev (about fifty years)

(W. Arthur Lewis, Growth and Fluctuations, 1870-1913, 1978, page 19)

Lewis gives us a quick overview of how we got to the era covered by his book:

“The essence of the industrial and agricultural revolutions in the first three quarters of the nineteenth century was in new ways of doing old things—of making iron, textiles and clothes, of growing cereals, and of transporting goods and services. In the last quarter of the nineteenth century the revolution added a new twist—that of making new commodities: telephones, gramophones, typewriters, cameras, automobiles and so on, a seemingly endless process whose twentieth century additions include aeroplanes, radios, refrigerators, washing machines and pleasure boats.”

(Growth and Fluctuations, 1870-1913, page 29)

Professor Norman Stone in his masterpiece on WWI calls this late nineteenth century explosion of material change and inventions the greatest fast quantum leap in world history in transforming the world.

If one reads these lines with a “Janus mind” we wonder, looking forward from the Lewis book and its era:

  1. How does his catchy metaphor of waves in the ocean relate to fluctuations and cycles? When Ben Bernanke (Fed Chair) describes recent decades as “The Great Moderation” does he mean to imply that Lewis-type waves disappeared or got much smaller?
  2. Can computers and mobile phones really match cars and planes in profundity of impact? Or is it only the tremendous spread of mobile or smartphones in the Global South that can?

In fact, the recent economic history classic, Robert Gordon’s The Rise and Fall of American Growth argues against the assumption of endless technical change as a growth accelerator or endless frontier:

In the century after the Civil War, an economic revolution improved the American standard of living in ways previously unimaginable. Electric lighting, indoor plumbing, home appliances, motor vehicles, air travel, air conditioning, and television transformed households and workplaces. With medical advances, life expectancy between 1870 and 1970 grew from 45 to 72 years. Weaving together a vivid narrative, historical anecdotes, and economic analysis, The Rise and Fall of American Growth provides an in-depth account of this momentous era. But has that era of unprecedented growth come to an end?

Gordon challenges the view that economic growth can or will continue unabated, and he demonstrates that the life-altering scale of innovations between 1870 and 1970 can’t be repeated. He contends that the nation’s productivity growth, which has already slowed to a crawl, will be further held back by the vexing headwinds of rising inequality, stagnating education, an aging population, and the rising debt of college students and the federal government. Gordon warns that the younger generation may be the first in American history that fails to exceed their parents’ standard of living, and that rather than depend on the great advances of the past, we must find new solutions to overcome the challenges facing us.

A critical voice in the debates over economic stagnation, The Rise and Fall of American Growth is at once a tribute to a century of radical change and a harbinger of tougher times to come.

  1. Why does one not read of the four cycles mentioned by Lewis (i.e., Kitchin) and the rest listed above in today’s business and financial press? Has there been some great discontinuity?

If you apply a “Janus mind” to the past (described by Lewis) and our sense of the future (described by techno-pessimists like Gordon) you get a more thoughtful sense of “the human prospect.”

Third Quarter 2019: Interest Rate Shift Helped Housing but Hurt Bank Net Interest Margins

(from the Federal Reserve Bank of San Francisco)

First Glance 12L provides a first look at banking and economic conditions within the 12th District. The report, “Interest Rate Shift Helped Housing but Hurt Bank Net Interest Margins,” [Archived PDF] notes that District banks’ average quarterly net interest margin slipped as lower interest rates and loan-to-asset ratios weighed on asset yields. The shifting asset mix contributed to margin compression but benefitted average liquidity and risk-based capital ratios. Districtwide loan and job growth cooled but remained above average, and lower interest rates boosted home prices, affordability, and homebuilding. In addition to supervisory hot topics, the report covers wildfire-related risks in California.

Read the full report [Archived PDF].

Economics—Policy Options: Increase Tax Rates on Capital Gains & Dividends

from Penn Wharton (University of Pennsylvania) Budget Model:

Policy Options: Increase Tax Rates on Capital Gains & Dividends

We estimate the budgetary and economic effects of increasing the top rate on long-term capital gains and qualified dividends from 20 percent to 24.2 percent, which is enacted on January 1st, 2021. We project that it will raise around $60 billion of additional revenue on a conventional basis over the 10-year budget window and increase GDP by 0.1 percent by 2050. [Archived PDF]

Education and the Movies: The Issue of Political Irrationality

The Prime of Miss Jean Brodie is a movie masterpiece that is enormously educational not for the particular details of the story but for the phenomenon of politics as an outlet for personal problems: The Prime of Miss Jean Brodie is a 1969 British drama film, based on the novel of the same name by Muriel Spark. Directed by Ronald Neame, it stars Maggie Smith in the title role as an unrestrained teacher at a girls’ school in 1930s Edinburgh.

Maggie Smith (whom you know from Downton Abbey as the aggressive matriarch) plays a romantically naive schoolteacher at a girl’s school in Scotland, 1930s. She has a “big time” crush on a handsome gym teacher whom she discovers in bed with one of the young girls—“Sandy” and has a kind of nervous breakdown or better, “image of the whole correctness of the world” breakdown.

The teacher sees newsreels of Mussolini in Italy and begins to think of him as a “romantic savior and ‘world-cleaner’ who will clean up the illegitimate situation at her girls’s school in Edinburgh and salvage her dignity and place and prestige and sense of how the world should be. On the one hand Miss Brodie talks about the girls of the school as ‘la crème de la crème’ but how does that comport with ‘Sandy’ and the male gym teacher sharing their beds with each other? The ‘cognitive dissonance’ (incompatibility) in Miss Brodie’s mind is causing her to break down and flee into fantasy land (i.e., Mussolini will restore the romantic world to the way it’s supposed to be). She goes deeper and deeper into this nutty vision of salvation and romantic re-balancing and at the end of the movie, ‘Sandy’ senses that she’s coming unglued and is borderline bonkers. Thus the title ‘the prime of’ can be thought of as ironical or sardonic since the teacher Miss Brodie is flipping out and ‘maps’ her romantic frustrations” onto Mussolini. This is what makes politics so dangerous (i.e., it serves as a “Rorschach test” for people’s inner irrationalities and yearnings and they “see” what they need to see).

Harold Lasswell (died in 1978) spent his life exploring politics and people’s private lives, order, sense of things, grievances, in such books as Psychopathology and Politics.  If you watch the movie The Prime of Miss Jean Brodie you will see how people use politics as a “screen” on which they project their emotions, grievances, hurts, humiliations, hysteria, anger.

Harold Dwight Lasswell (February 13, 1902 – December 18, 1978) was a leading American political scientist and communications theorist. He was a Ph.D. student at the University of Chicago, and he was a professor of law at Yale University. He served as president of the American Political Science Association (APSA), of the American Society of International Law and of the World Academy of Art and Science (WAAS).

He has been described as a “one-man university” whose “competence in, and contributions to, anthropology, communications, economics, law, philosophy, psychology, psychiatry and sociology are enough to make him a political scientist in the model of classical Greece.”

Table of Contents for Lasswell’s Psychopathology and Politics Book

Introduction
Preface
I. Life-Histories and Political Science
II. The Psychopathological Approach
III. A New Technique of Thinking
IV. The Criteria of Political Types
V. Theories of Personality Development
VI. Political Agitators
VII. Political Agitators—Continued
VIII. Political Administrators
IX. Political Convictions
X. The Politics of Prevention
XI. The Prolonged Interview and Its Objectification
XII. The Personality System and Its Substitutive Reactions
XIII. The State as a Manifold of Events
Afterthoughts—Thirty Years Later
Appendix A. Select Bibliography
Appendix B. Question List on Political Practices
Index

(2016 reprint of 1930 edition. Full facsimile of the original edition.)

First published in 1930, this classic study of personality types remains vital for the understanding of contemporary public figures. Lasswell’s pioneering application of the concepts of clinical psychology to the understanding of power brokers in politics, business, and even the church offers insights into the careers of leaders as diverse as Adolf Hitler and, arguably to more recent figures such as Richard Nixon, Donald Trump and the Clintons.

Movies should be your off-campus alternate university. You should ask yourself does this movie and Lasswell’s notions of psychopathology in politics help me understand authoritarian leaders today and such bizarre phenomena as half-dead prisoners in Stalin’s gulags bursting into tears in March 1953 when they learned of his death. Why sob over the death of the man who’s murdering you and tormenting you and your family?

Podcast-Alert: Cars, Steel & National Security

Listen to The Sound of Economics

Guntram Wolff is joined by Alan Beattie, the author of the FT’s new Trade Secrets newsletter, and by André Sapir, Bruegel’s very own trade expert to discuss President Trump’s tariffs and whether or not they’re working.

Bruegel has launched an updated series of the Sound of Economics, hosted by Bruegel’s Director Guntram Wolff, Deputy Director Maria Demertzis and former Economist journalist Nicholas Barrett. Subscribe on iTunes, Spotify or Google Podcasts.

Previous Episodes

How to Make the European Green Deal Work

The European Green Deal will be a defining feature of Ursula Von der Leyen’s incoming Commission. But will carbon border taxes and single carbon prices be enough to make Europe climate-neutral by 2050? This week, Nicholas Barrett and Guntram Wolff discuss Bruegel’s new paper “How to make the European Green Deal Work” [Archived PDF] with Grégory Claeys and Simone TagliapietraListen here.

How Not to Spend It

Digital banking has made our lives easier, but why are people use mobile banking more likely to be overdrawn? This week Maria Demertzis and Nicholas Barrett are joined by Annamaria Lusardi, Denit Trust Endowed Chair of Economics and Accountancy from George Washington University School of Business to discuss financial literacy. Listen here.

Emerging Markets: Trade Wars Send Manufacturers Scurrying Back Home…

Financial Times Briefing

EMERGING MARKETS

[subscription required for links]

Trade Wars Send Manufacturers Scurrying Back Home [link]
Economies of China and Germany look exposed as growth shifts

U.S. Companies Stay Cautious on Spending Under Strain of Trade War [link]
Executives signal further pullback in capital expenditure for fourth quarter

Australia: The Campus Fight Over Beijing’s Influence [link]
Clashes between pro- and anti-Hong Kong demonstrators have renewed scrutiny over China’s role in western universities

How To Limit Climate Change: Let the Private Sector Do Its Job [link]
This year’s U.N. climate summit must give business the rulebook it needs

China’s $1tn Scramble for Convertible Bonds Reflects Hot Market [link]
Bidding for new deals including Shanghai Pudong Development Bank stuns investors

Evo Morales Flies to Mexico After Being Granted Political Asylum [link]
Former Bolivian president boards flight as violence erupts following his resignation

Chile’s Stock Market Drops After Proposal To Rewrite Constitution [link]
Investors fear that the move by Sebastián Piñera would undermine the economy

Alibaba Aims To Deliver With $16bn Courier Venture [link]
Chinese ecommerce group follows Amazon in focusing on logistics

Trade Optimism Awaits a Big Test [link]
Mike Mackenzie’s daily analysis of what’s moving global markets

British Co-Founder of White Helmets Found Dead in Istanbul [link]
Investigation launched after body of former army officer James Le Mesurier discovered in street

Machlup and Knowledge-Watching

Fritz Machlup is an underappreciated emigre economist from Vienna. His 1962 book, The Production and Distribution of Knowledge in the United States (Princeton University Press, 1962), is a “bible” of knowledge-watching and the zones where knowledge meets information, where Machlup was very prescient.

Fritz Machlup was an Austrian-American economist who was president of the International Economic Association from 1971–1974.  He was one of the first economists to examine knowledge as an economic resource, and is credited with popularizing the concept of the information/knowledge society.

Born: December 15, 1902, Wiener Neustadt, Austria
Died: January 30, 1983, Princeton, NJ

Machlup distinguishes five types of knowledge:

  1. Practical knowledge
  2. Intellectual knowledge
  3. Small-talk and pastime knowledge
  4. Spiritual knowledge
  5. Unwanted knowledge

These five kinds of knowledge are discussed and analyzed in Machlup’s The Production and Distribution of Knowledge in the United States starting on page 21 (and are discussed in Daniel Bell’s The Coming of Post Industrial Society, 1976, Basic Books, page 175).

The more comfortably one can link types 1, 2, and 4 in the list above, the more “together” one’s understanding might become.  One does not have to be “dismissive” of Type 3.

Pleasant diversions are a a part of life and have their honorable place. One reason (to give a simple example) we’re drawn to poets like Wallace Stevens is that they seem to “sit comfortably” in their various (knowledge) roles: insurance salesman, poet, thinker and don’t “line up” or “array” these types of knowledge in a conflictual way but seem to “smile down” on all of them finding beauty everywhere.

Workaday knowledge might not have to “fight with” other kinds of knowledge. Insurance, say, is a form of risk-management and risk is essential to life and economics, as we have seen elsewhere.  Economics looks at cost-benefitrisk-uncertainty all together when it goes beyond the narrow confines of academe to become a fuller quest.  Cost-benefit analysis by itself is too restrictive.  Start with Machlup as a highly intelligent “backdoor” into these domains of knowledge, information, learning, social contexts.  This would help give you a handy additional “flashlight” on schooling in society including universities and campuses.

Economics Reconsidered to Include Uncertainty

Standard definitions for economics say that it is about “cost-benefit” thinking. Everything costs time or money or effort or lost opportunities but offers different levels of expected benefit.  Economics, in this view, matches decisions to this “menu” of items and prices.

Actually, that is not a complete description at all because economics is about cost-benefitrisk-uncertainty thinking and that implies one needs to get into the dimensions of risk and uncertainty. 

A real decision involves more than costs and benefits but implies all kinds of “how can I be sure?” questions which means risk and uncertainty considerations

World-watching modified in this way is explored at policyuncertainty.com (Kellogg School of Management, Northwestern University)

This implies the need for new indicators such as:

Call for papers:  “Uncertainty and Economic Activity:  Global Perspectives” [PDF]

The extraordinary rise in trade policy uncertainty [archived PDF].

Policy News and Stock Market Volatility [PDF].

They say that practitioners of a field are always like general “fighting the last war” not this one, like the French generals in 1940 who were mentally in 1914. 

One must augment all economics textbook talk in this direction of risk-and-uncertainty without which all analyses are like backward-looking “stills” as opposed to forward-looking “moving pictures.”  All standard textbooks are uninformative on these issues.

Postdicting the 2008 Great Recession: Macro and Finance

Prof. George Akerlof (2001 Nobel) shows how macroeconomics overlooked the issue of financial stability as a pillar. He argues that Rajan’s 2005 paper and talk were uniquely prescient on this.

This is why we find thinking about, say, the Panic of 1873 so instructive especially when one adds an “omnidirectional” analysis: In 1873, we get Around the World in Eighty Days with the transport revolutions that make winning this bet about circling the world in eighty days, at all possible: railroads, steamships, etc.  London is shown to have emerged as the world money center, as described in Walter Bagehot’s classic Lombard Street. The opening line of The Magnificent Ambersons is (in paraphrase):  “The financial crisis of 1873 destroyed the fortunes of most people but made the Ambersons and this was the basis of their magnificence.”

The novel The Age of Innocence by Edith Wharton, set in the 1870s, shows the financial shocks of 1873 as a major player in the story.

Prof. Adam Tooze of Columbia published in 2018 a masterful account of finance and macro and politics relevant to our 2008 fiasco in his Crashed:

Crashed:  How a Decade of Financial Crises Changed the World

Hence Akerlof’s depiction, in the current Journal of Economic Perspectives, of how macroeconomics became separated from financial instability analyses is key:

“The Keynesianneoclassical synthesis that had emerged by the early 1960s put constraints on macroeconomics. Foremost, it divorced macroeconomists from working on financial stability.  Luckily, after the crash of 2008, the prior work of finance economists has been belatedly acknowledged, and the subfield of macro stability has also emerged as quite possibly the most vibrant research frontier in economics.  Nevertheless, macroprudential concerns remain as back matter in the textbooks.  Correspondingly, macroprudential policy is undervalued in the councils of government.  Yet its importance remains, given the likelihood of another crash.”

In this context, little damage could be done by macro models lacking the details of the financial system.  But exclusion of such detail (with the attendant possibility of financial crash) from standard macroeconomics could be a problem in a different context: if the financial system changed in fundamental ways.  That was exactly the topic of Rajan’s (2005) Jackson Hole talk, “Has Financial Development Made the World Riskier?” [PDF] which did predict the crash of 2008 as it actually happened.  In terms of the skeletal model, had that “financial development” beyond a well-supervised banking system with deposit insurance driven the financial system out of the safe region of always hold?  In September 2008, the answer to Rajan’s question became clear: “yes, it had.” 

Journal of Economic Perspectives—Volume 33, Number 4—Fall 2019—Pages 171–186

What They Were Thinking Then: The Consequences for Macroeconomics during the Past 60 Years [PDF] by Prof. George Akerlof.

Bureau of Economic Analysis Materials for Every Student, Regardless of Major

We mentioned in a previous essay that an economist receives certain Bureau of Economic Analysis and Bureau of Labor Statistics updates and that allows them to “guesstimate” next year’s GDP growth by adding up average labor productivity growth (Y/L) to labor force growth. Remember Y (GDP) equals Y/L multiplied by L and percentage growth in Y is approximately equal to the sum of the other two variables: Y/L and L.  The sum approximates GDP growth and requires no mental gymnastics with complex mathematics of any kind.  A wise student would learn what’s on offer by these government update services and realize simple familiarity is half the game in everything.  The economics pundits are not ten feet tall.  They simply follow simple materials that the typical student does not have and has no idea that these materials exist.

BEA News:  Gross Domestic Product by Industry, 2nd quarter 2019 and annual update:

“The U.S. Bureau of Economic Analysis (BEA) has issued the following news release today:

“Professional, scientific, and technical services; real estate and rental and leasing; and mining were the leading contributors to the increase in U.S. economic growth in the second quarter of 2019. The private goods‐ and services‐producing industries, as well as the government sector, contributed to the increase.  Overall, 14 of 22 industry groups contributed to the 2.0 percent increase in real GDP in the second quarter.”

The full text of the release [archived PDF] on BEA’s website can be found here

The Bureau of Economic Analysis provides this service to you at no charge.  Visit us on the Web at www.bea.gov.  All you will need is your e-mail address.  If you have questions or need assistance, please e-mail subscribe@bea.gov