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Economic history in two (and a bit) charts

My MSc was in economic history. That probably sounds more straightforward than it actually is. Let me explain.

Adam Smith deployed episodes from history to illustrate the laws of economics he claimed to be outlining in The Wealth of Nations. These laws, like those Newton had just laid down for physics when Smith wrote, were held to be good at all times in all places. Just as Newton’s law of gravity dictated that the apple would always fall from the tree wherever it was in the universe, so did Smithian economists believe that the law of demand would hold anywhere at any time.

In the nineteenth century a group of economists in Germany challenged this. To them, economic theory was not something apart from the varied experiences of economic life. Instead, it grew from them. To these economists, it was ludicrous to argue that the lives of African tribesmen were dictated by the same economic laws as those of the industrial proletariat then emerging in European and North American cities. These economists thought, then, that economics should not be the study of a priori theories, but of the particular historical circumstances of economic life which varied from time to time and place to place. They set out to collect data on economic life, earning the nickname the Historicists and pretty much founding the field of economic history.

In recent decades theory has pushed back. The tools of econometrics were applied to historical data to create the field of cliometrics. Econometrics, essentially, is the application of statistical analysis to data to test economic theories. This appealed to economic historians as it gave their discipline the extra veneer of credibility that pages of impenetrable mathematical equations always bestows. But they needed theories to test. Thus were economics and economic history reunited. That is largely where the discipline stands today, at least at the LSE.

That is a brief history of economic history, what of economic history itself? The two big subjects can be laid out in the two and a bit graphs below.

First, the graph below shows GDP per capita from the year 0 to 2000. Two things are striking and worthy of study. First, why is the line so flat for so long? Second, why did the line take off like a rocket around 1800?

Image result for gdp per capita history

This chart doesn’t quite show everything though, so take a look at the ‘and a bit’ chart below.* This zeros in on the inflexion point of the line in the graph above. What we see is that the rocket didn’t take off for everyone around 1900. Some countries, with levels of GDP per capita previously comparable to the fast growers of the nineteenth century like Britain and France, stayed stuck on the launch pad, namely India and China.

This, then, gives rise to some further questions. Why did Britain’s economic growth take off? Why did China’s stagnate? Why did Japan’s catch up, both in the late nineteenth century and again after the Second World War? To carry on from above, the third question is in essence why did that GDP per capita line in the first chart diverge from country to country?

But even for those countries whose GDP per capita line did take off it did not proceed smoothly. At times the line has gone upwards very fast, at other times not so fast, and at still others it has even gone down. This is known, erroneously I think, as the business cycle and is illustrated by the chart below.

We see a steadily rising trend for GDP per capita but we also see fluctuations around that trend. We see, for example, the Roaring Twenties and the Great Depression which followed them. We see the sharp contractions in the US and UK in the late 1970s and early 1980s and the prolonged expansions which came afterwards.

If the first set of questions relates to why economies grow – or don’t, as it was for most of human history – the second set relate to why that growth fluctuates. Why do economies sometimes stop growing? What, if anything, can be done to get them growing again? These questions are the stuff of macroeconomics.

But that is another topic, macroeconomics, funnily enough. The rest, in a nutshell, is economic history as it is practiced today.

* These graphs are sometimes merged and that would have helped here. However, I couldn’t find such a graph at present and my graph drawing skills are such that I thought it best not to try.

Helicopter money – An introduction


Your humble narrator recently had an article in the Wall Street Journal about the new idea in monetary policy, ‘helicopter money’. An earlier draft had a rather tedious discussion of what it was. Mercifully excised from the printed version, I still thought it might be worth sharing. I’ve little doubt you’ll be hearing more about it soon…

Helicopter money takes its name from a 1969 paper by Milton Friedman called The Optimum Quantity of Money. In it Friedman set out to investigate just that. To analyse how people would adjust their cash holdings to achieve this optimum if the money supply were increased, he conducted a thought experiment in which a helicopter flew over a country dropping newly printed money. The point was simply to model an exogenous increase in the money supply, much as David Hume had in his 1752 essay Of Money. Indeed, Friedman also imagined a furnace destroying piles of cash in an effort to model the effects of an exogenous decrease in the money supply. The key point is that when Friedman wrote about helicopter money, he was not advocating anything like the policies currently bearing that title.

How has it come to this? Since the crash of 2008-2009, developed country economies have been stuck with sluggish growth. Their governments also have historically high peacetime levels of debt and new borrowing. With fiscal policy thus constrained, if stimulus is to be administered it is the central banks who will have to do so using monetary policy. Still others think that fiscal policy would be ineffective in any event. Either way, central banks are, as Mohamed El-Erian has written recently, the only game in town.

But the record of monetary policy’s impact is mixed. In 2002, Bernanke gave a speech frequently cited by advocates of activist monetary policy in which he argued that “under a paper-money system, a determined government can always generate higher spending and hence positive inflation”. But in recent years it hasn’t worked like that. Central banks have churned out new base money and pumped it into the banking system in return for (government) bonds, Quantitative Easing. As a result, in Britain, the monetary base has risen by 516% since May 2006. But, for the most part, this money has just sat on bank balance sheets; they have not used it as the basis for the creation of new credit. Hence, over the same period, broad money has risen by just 53%. The transmission mechanism of monetary policy via the banking system is blocked and increases in base money have not filtered through to increases in spending, also known as nominal GDP or aggregate demand. JK Galbraith’s old quip about expansive monetary policy “pushing on a string” has never been truer.

To look at it another way, consider the equation of exchange from your economics textbooks, one form of which is MV=Py. This says that the money supply (M) multiplied by the velocity of circulation (V) equals the price level (P) multiplied by output (y). Velocity of circulation – how many times in a given period a unit of money is spent – can serve as a useful proxy for the demand for money. If the demand to hold money increases, its velocity (V) falls. Conversely, if that demand falls and people want to swap their money holdings for goods or services, V rises. Velocity is the inverse of the demand for money.

When mortgage backed assets tanked in 2008, banks saw their balance sheets ravaged. They desperately demanded cash to shore them up, their V had fallen, in other words. In an effort to ward off a fall in prices and/or output (Py), central banks offset this by increasing M via low interest rates and QE.

But if the aim is to use increases in M to boost Py then the new money must be given to people whose demand to hold money has either fallen or not risen (their V is constant or rising); to put money in the hands of those who would spend it and boost prices rather than hold it as banks have done. This is where the helicopter comes in.

The success of this policy all depends on whether raising a nominal variable (the price level, P) will also raise a real variable (output, or y), that there is a Phillips’ Curve relationship, in other words. This is the notion of an inverse relationship between inflation and employment, which was long presumed dead among the rubble of the Stagflationary 1970s.

This is a point I intend to return to soon. 


Central Bankers Are All ‘Corbynistas’ Now



Your humble narrator is in the Wall Street Journal Europe again today. I’m arguing that increasingly popular and respectable monetary policies, in this instance ‘helicopter money’, are little different to the People’s Quantitative Easing announced by British Labour Party leader Jeremy Corbyn just less than a year ago, and widely mocked.  “They’re not laughing now”, as the great economist Bob Monkhouse used to joke.

An encounter with David Graeber

Recently, the respected monetary economist and historian George Selgin wrote a comprehensive demolition of David Graeber’s book Debt: The First 5,000 Years. Selgin has further written of Graeber’s bizarre, hysteric, and thoroughly unscholarly response to this article.

As Graeber has Selgin blocked on Twitter, I thought I’d share this with Graeber myself. The consequences are below.

I’m unable to locate any details of this supposed June conference online. If you can, please let me know. If the above is anything to go by it might be…fun, if not educational.