1. I trust the intellectual habits and practices of those really smart farm kids. Farming is an Ur profession. Providing for the community’s nourishment is a LOT harder than it looks. It is the basis of civilization itself. Out of this scramble came the people who literally built the country. And they created social structures as enlightened as any in human history.
2. Yea, for the home team. While I envied the childhood of James and wished I could have sat in a corner as JKG discussed the affairs of the world with the best educated economic minds of his generation, I could not. Northwest North Dakota is a LONG way from Harvard. What I could do, however, was recreate the education the farm kid from Ontario got watching his parents and neighbors as they sought to invent a way to get farming to pay the bills out at the thin edge of civilization. Products of this struggle have a reality base that informs the rest of their thoughts. Done right, the resulting thinking can be quite spectacular.

James Galbraith’s memoir of lifelong struggles to make economics a force for good

James Galbraith, 06/01/2020

Economics is sometimes portrayed as a contest between saltwater and freshwater, between the coastal pseudo-Keynesians and the Great Lakes neo-Walrasians, between the flaws-and-friction model-builders and the free-market hard-liners. As evolutionists know, both habitats are fairly sterile. Evolution occurs in the backwaters, in the mudflats, bogs, lagoons, cypress swamps and wetlands, in the shadows of perpetually endangered habitat. In this article I will sketch my personal journey through the backwaters. Intellectually they are my home, as they have been for every other recipient of the Veblen-Commons prize, with just one exception.

The exception was my father, who lived and worked on high ground, which he reached out of nowhere or more precisely Southern Ontario and Giannini Hall, by a unique combination of gifts including practical knowledge of price control and strategic bombing, the principled and imaginative use of state power under emergency conditions, and surpassing grace in command of the English language. But the high ground was barren ground. John Kenneth Galbraith’s influence spread around the world but it could not take root at home.

My father’s lasting gift to me has been a solid sense that an economist is either a practical player in policy battles or nothing at all. Economics is not a theology of the human condition. Nor is it a branch of pure logic, however much the attempt to make the notion into grist for undergraduates may warm academic seats. Catherine the Great had it right in 1765 when she chartered the Free Economic Society of Russia, suppressed in 1917, revived in 1982 and of which I’m the only known American member, and endowed it with the logo of a beehive and a one-word motto: “Useful.”

At Berkeley in 1969 one lecture, by Abba Lerner, did not deflect me from French literature and the anti-war movement. Then at Harvard I took my first economics course from Wassily Leontief, from whom I absorbed a fascination with hierarchical category schemes and matrix algebra, two misleading guides to the field, which spent thirty years in remission before breaking out to decorate a research agenda. I also became, uselessly, an expert on the production of ammunition for the Vietnam war.

In a year at Cambridge I saw Sraffa on his bicycle, absorbed enough capital theory to be inoculated against production functions, skirted the theatrics between Hahn and Robinson as much she inspired reverence and terror, drew close to Kaldor on the eve of his great last stand against Thatcher and monetarism, was amused by the geometric pyrotechnics of Richard Goodwin, entranced by the beautiful matching of Sraffa to Keynes in Pasinetti’s lectures, and admired Adrian Wood’s quasi-Galbraithian theories of profit and wages. Adrian, my tutor, to whom I owe a deep debt, also sensed the barrenness of high ground, and soon gave it up for the World Bank and China.

Henry Reuss extracted me to Washington in June 1975, just in time for two great events. One was the invention of the Conduct of Monetary Policy hearings, soon re-christened Humphrey-Hawkins, the first formal and regular congressional oversight of the Federal Reserve. They were my baby for five years, and they led to the “dual mandate” – full employment and price stability – the most Keynesian and most successful charter of any central bank. The other was the New York City financial crisis, the dawn of disaster capitalism, three weeks into my Hill career. I was thrown into it at 23 and never emerged, a life-long ambulance chaser of debt debacles.

Of my PhD years at Yale, 1976-1979, little comes to mind – routine drill on dying topics, logic-chopping whose flaws I already understood. Sid Winter generously lent his protection. With help from Lucy Ferguson, for a dozen years my wife, I explored numerical taxonomy and applied it to budget expenditure categories in a thesis only one person ever read: Paulo Du Pin Calmon, now of the University of Brasilia, who became my first PhD student and would help launch the inequality project. Otherwise I diverted myself, a week each month, by going back to Washington and the Banking Committee to skirmish with the resident monetarists and to harass the central bankers, from Arthur Burns to Paul Volcker, and eventually to Maryland for a year, marked most by a first major paper, a comparative institutionalist study of credit and industrial policies in France, West Germany, Great Britain and Sweden, published by the Joint Economic Committee in 1981.

Then the Revolution came. A dog’s breakfast of damaging dogmas – supply-side economics, monetarism, deregulation and privatisation, each among the rising academic doctrines of the previous decade, softened in ultimate effect only by an aggressive tax-cut and military Keynesianism. The problem of the early Reagan revolutionaries was not that they were academically disreputable as many claimed, but that they actually weren’t. At the Joint Economic Committee we fought them all, cooks and bakers in the front lines, backed by stalwarts like Bob Eisner, Walt Rostow – and also great luminaries, Tobin, Leontief and Klein, who appeared together in 1982. The New York Times ran their picture on the front page with a caption, but no story; I was shattered until my Republican colleagues emerged from their offices, one by one, to offer strictly professional congratulations. A policy triumph followed: the collapse of monetarism, and a political triumph, 26 House seats in the 1982 midterms, aided by ten percent unemployment. It was enough to stall the revolution, for a time.

Thereafter the economy recovered but the damage was done. The rise of finance and technology, disinflation, globalisation, debt peonage and the decline of industry, the rise of bicoastal inequalities, and the rusting away of the Midwest, giving rise first to Clinton and then to Trump – for all of these the course was set by Reagan and Volcker in the early 1980s. And the dogmas too morphed and lived on, shapeshifting zombies reinvented as exportable commodities in the form of the Washington Consensus, inflation targeting and neoliberalism, each eventually squeezed dry of doctrine until only the policy shells remain – tax cuts, central bank independence, fire-sale privatisations, deficit – and debt-aversion, all too useful to require the foundation of thought.

I came to Texas as the Old Institutionalists – Ayres, Gordon, Marshall – were fading out. Yet their ethos lingered even if few could detect it. For me the path forward lay in merging Institutionalist mesoeconomics with Keynes’s monetary-production economic space-time, modelled on Einstein – a thought planted by Skidelsky at Rostow’s poolside – and the lot with Leontief’s matrix-sensibility, eigenvectors and eigenvalues complete, to complement neoclassically-inflected econometrics with a non-parametric paradigm revealing the half-hidden structures in economic data. Peter Albin caught the gist and urged me forward. All this was far beyond my abilities but somehow just the right group of students coalesced at just the right time – from China, Portugal, Korea, Mexico, and later on Spain, Belarus, India, Sudan, Colombia, Argentina, France, Poland, and Iran.

Two currents emerged from this work. One applied numerical taxonomy to time-series vectors, notably wage change, reconstructing industrial and national-income classification schemes to distil the underlying structural affinities revealed by co-evolution through time. Steven Weinberg told me this was “cladistics.” We combined it with the extraction of discriminant functions – eigenvectors and eigenvalues complete (!) – which isolate and rank the dominant forces of economic change in each place and time. A referee reported that “economists do not use these techniques.” Seismologists, I later learned, had worked them out to distinguish earthquakes from nuclear explosions.

The second current was the measurement of economic inequalities from administrative statistics – payroll and employment records, mostly – using a generalised entropy measure, the between-groups component of Theil’s T statistic. The advantages of this Institutionalist approach are depth, range and precision, with results that largely mirror the best household surveys but with dense and consistent matrices of measures, suitable for panel analyses using standard techniques, from which time-and space patterns emerge with great clarity, showing on a global scale how debt and exchange-rate crises and regime changes drive inequality up, and how better export prices, lower interest rates and sustained social-democratic growth can bring it down. After an early presentation to the American Philosophical Society in Philadelphia John Archibald Wheeler came up to encourage me; my circle back toward economic space-time was complete.

Our approach to inequality has proved impossible to ignore entirely – it’s easy, cheap, accurate and replicable. It can be applied to many problems; most recently Jaehee Choi and I have shown how US states with the greatest increases in inequalities drift toward Democrats in presidential elections. But the larger point is the relocation of distributive analysis from labour markets and micro theory to macroeconomics on a global, interdependent scale, driven by structures of financial hegemony and power. Once again extracting information from matrices, this empirical and descriptive work yields a merger in practice of Keynes, Minsky, Galbraith père and Pasinetti, with distributive dynamics and a potential to unify economic analysis under an Institutionalist, Post Keynesian, Structuralist, MMT common front, buttressed by evidence and an expansive research agenda. Charles Saunders Peirce on Kepler comes to mind, that his gift to astronomy lay in impressing on men’s minds that the thing to do was to sit down to the figures and work out what the places of Mars actually were. Once again, the mainstream turns a deaf ear, to this day the macroeconomics of inequality – let alone the global macroeconomics of anything – does not exist in the JEL classification codes.

A further and ongoing evolutionary development is an elaboration, with Jing Chen, of the biophysical principles that must underpin a unified, reconstructed economics as they do every living and mechanical system. Only through this lens can economics understand scale, duration, resource costs, climate change and above all the essential role of regulation, without which mammals die, machines break, companies fail and banks and financial systems melt down. Our metaphors are already biophysical, somehow our thought and teaching and research should begin to catch up.

Still and finally, at least for now, an economist must be useful. For an academic like a politician this means taking your chances as they come along. In 1989 I helped to trigger debt default and the Brady Plan in Brazil, making of Luiz Carlos Bresser Pereira a lifelong friend. From 1993 to 1997 I was of some use as Chief Technical Adviser for Macroeconomic Reform and Strengthening Institutions to the State Planning Commission of the People’s Republic of China, my advice was largely to steer clear of Western economists and above all, not to open the capital account. Those results speak for themselves. Economists for Peace and Security kept me busy for twenty years. In 2015 I joined Yanis Varoufakis in Greece’s struggles against debt peonage and neoliberal austerity; we continue to work together on Democracy in Europe, the Green New Deal and the Progressive International. In 2017 I lectured in St Petersburg on the pragmatic economics of John Kenneth Galbraith, on the centennial of the storming of the Winter Palace and the 50th anniversary of The New Industrial State.

And when Bernie Sanders who does not need my advice becomes President next year, I’ll throw in with him for what it may be worth. I have hopes for a better world, free of imperial delusions, maximally demilitarised, authentically democratic, not too unequal, working together on common problems, saving the planet for a while longer. Well, anyway, one can dream.

Thank you very much.

Remarks by James Galbraith on receiving the Veblen-Commons Award of the Association for Evolutionary Economics. More information.
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The Dismal Forecasts of the Dismal Scientists

How economists keep getting things wrong and not learning from their mistakes

by James K. Galbraith
January 10, 2020

No matter where; of comfort no man speak:
Let’s talk of graves, of worms, and epitaphs;
Make dust our paper and with rainy eyes
Write sorrow on the bosom of the earth.
(Richard II, Act III, Scene 2)

So it was in San Diego in early January at the annual meetings among the gathered economists, dismal professionals to a man and (occasional) woman. The New York Times on January 8 aptly summarized the concerns: high deficits and public debt, low interest rates, trade wars, and slow productivity growth. According to the Times, these warnings were echoed by economists from the World Bank, the Federal Reserve, from Washington think tanks and, of course, from Harvard.

Beneath the ominous prognoses lie two impulses. One is the natural human desire not to be embarrassed—yet again—by failing to have warned that things may go bad. The academics quoted in the Times were in several cases architects of past disasters, or at best blind and mute as disasters approached. It would not do to have the same said again, and if a disaster does not occur, few will remember the warnings. The other impulse is intellectual inertia: The economists, like France’s Bourbons, learn nothing and forget nothing; they cast their omens in terms of parables read in textbooks many decades back. To change ideas now would call into question the very foundation of their careers.

Thus we read that trade wars are bad for growth. For a country running a large deficit, the opposite is actually true: Tariffs divert demand from imports and so support domestic expansion, unless the retaliation against exports is even more extreme, which has not been the case. Economists cannot admit this because they are tied to the doctrine of comparative advantage and the virtues of free trade, textbook principles at odds with the whole history of successful industrialization and development, including in the United States.

Low interest rates are said to be a risk because some day they will end. But the Federal Reserve has been trying to raise rates—or at least talking about it—for almost a decade. Every move in that direction brings financial turmoil, here or in the wider world, and the Fed backs off. The reality, at last bleakly admitted by the president of the New York Federal Reserve Bank, is that low interest rates are locked in—in technical terms, by the shallow yield curve. That is, you can’t raise short-term rates without pushing them up above sticky long-term rates, which is perhaps the world’s most reliable recipe for credit market chaos.

But if the likely permanence of low interest rates were fully admitted, then the Congressional Budget Office would have to revise its forecasts for future interest rates, which have for many years projected that they would rise far above current levels. And lowering those forecasts would, to a large degree, make the scary projections of high future federal deficits and rising debt ratios go away. This would undercut the third pillar of the pessimistic case, already weakened by devastating criticism of its feeble theoretical foundation and flawed empirical support. And yet, amazingly, there at the meetings was Harvard’s Kenneth Rogoff yet again, preaching to a large crowd about the public debt.

The Times accurately notes that economists are coming around to the view that even under the best conditions economic growth will remain slow—a position argued at book length by yours truly five years ago, but never mind. Part of my argument in The End of Normal concerned the fourth pessimistic pillar, slow productivity growth. I argued that in our age of technological upheaval capital goods have become cheap, therefore business investment as a share of total output has declined, and so the economy relies more than ever on the strength of consumer demand, bolstered by credit cards and student and automotive debt. The evidence since then bears this out. Alas, this means that otherwise worthy calls for new spending on brick-and-mortar infrastructure and on research and development bear no relation to the supposed problem of low productivity growth.

Recessions happen not when public deficits are large and interest rates low, but when the private sector takes on more debt than it can handle and interest rates rise.

In reality, as an unquoted presentation at San Diego by modern monetary theorist Randall Wray of the Levy Economics Institute showed, recessions happen not when public deficits are large and interest rates low, but when the private sector takes on more debt than it can handle and interest rates rise. This is what happened in the late 1990s and in the mid-2000s, in the run-ups to the NASDAQ crash and the mortgage debacle. It hasn’t happened this time—yet. So far this recovery, thanks to federal spending and to tax cuts, however regressive, the overall private sector in the United States is still solvent. It is so precisely because private saving and public deficits are mirror images, and because lower import prices and surging onshore energy production have kept the trade deficit under control as the economy grew. And while household debt has grown, lower interest rates have kept the burden of that debt manageable, so far.

Does all this mean there are no downside risks? Alas not. It means only that you won’t learn about them from brand-name economists who never outgrew their textbook models. A new paper, “Into the Abyss,” by an obscure young Finn, Tuomas Malinen, should however be considered for a prizewinning doomsday scenario.

Malinen is a financial economist, which means he studies a sector that most mainstream economists pretend doesn’t exist. What he finds, in a nutshell, is over-leveraged banks and hedge funds propped up with increasing desperation by central-bank operations in the repo market—overnight repurchase agreements for Treasury bills—which is today the major source of central-bank liquidity for the financial sector. The over-leverage is the result of inveterate speculative reach-for-yield, an instance of Hyman Minsky’s rule that stability creates instability, and that safe financial practices naturally degrade into Ponzi schemes. On top of this, securitized corporate loans (CLOs) have begun to look shaky, and could lose value massively in a downturn affecting corporate profits.

Those financial losses would in turn trigger bank failures, perhaps starting with Deutsche Bank, a vast operation with, Malinen says, “it is rumored” over $30 trillion in derivatives contracts—a nominal value roughly 40 percent larger than U.S. annual GDP. A failure at DB would quickly lead to bank failures throughout Europe, in countries that lack the will or the capacity to offset the calamity with the vast increases in public spending and reduced tax burdens that would be required, alongside other emergency measures such as capital controls. He further argues that China would be unable to pick up the slack—a point I’ll dispute in a minute.

Malinen has a free-market streak, and his main scenario leans toward an Andrew Mellon–style mass liquidation, followed by recovery of the survivors. He would prefer this, for all the carnage, including physical death and destruction, to a “Green-Left fascism, suppressing both individual rights and unpopular economic activities.” Even if it were true that “Nature could be saved … but at the expense of humanity reverting to slavery and oppression.”

This seems a bit over the top. Europe may well be at extreme risk as Malinen fears; the experience of Greece in the financial crisis shows that the financial and political leadership of the European Union is ruthlessly self-protective and predatory; there is no accountability for the suffering caused or recourse for the victims. China is, however, different. The government may be authoritarian but it responds quickly—and massively—to crisis because otherwise it would not survive. Financial analysts have a bit of a blind spot with respect to China; many see that country’s banking sector through Western eyes. In reality, China’s banks are backed by the government and protected by capital controls, making them essentially inseparable from the Chinese state.

And in the next crisis, the United States may finally be moved to free itself from the deadweight of mainstream economic thought, to retire a worn-out generation of policy advisers, and to move on with the great social, economic, and environmental project known as the Green New Deal. There is a history of radical experiment and popular mobilization in this country, from which democracy emerged stronger, not weaker, than it ever was before. And for many Americans, to escape from the debt trap and from domination by bankers and billionaires into a world of work and public purpose would be the very opposite of slavery and oppression. A better word would be liberation, along with a new freedom, and a new hope. more

James K. Galbraith holds the Lloyd M. Bentsen Jr. Chair in Government/Business Relations at the LBJ School of Public Affairs and a professorship in government at the University of Texas at Austin.