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.


The economics of sympathy


A common response to the horrible events in Brussels two days ago has been to condemn people in the UK or US, for example, who share their sympathy. People ask where was this sympathy when Baghdad or Ankara were bombed earlier this month? Is this, as I have seen argued often in the last two days, racism, stemming from the belief that these attacks only bother us when white people are killed?*

Perhaps economics can provide an answer.

Consider Lionel Robbins’ famous definition of economics: “Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses” This is economics as a study of resource allocation.

Now think of sympathy, such as that demonstrated by candlelit vigils in London for attacks in Paris or people changing their Facebook profile pictures. We only have a fixed amount of sympathy to allocate, a ‘sympathy budget’, if you will, which we can spend. Perhaps we are constrained by the costs of feeling bad, perhaps we are willing to incur this cost but we only have so many hours in the day to do it. Time, after all, is the budget constraint which we all face.

And there are, sadly, many tragic events to which we could allocate this sympathy budget. Natural disasters, horrific terrorist atrocities, ‘collateral damage’ casualties in attacks carried out by western governments…How do we allocate our budget of sympathy between so many competing, perfectly deserving ends?

This is to state the problem. All I’ve done so far is put what I think is a familiar problem into some economic terms. But how to answer it? This is perhaps more controversial.

One of the things driving empathy would seem to be the magnitude of the disaster. Or, rather, the magnitude of the disaster relative to some baseline of peril which the victims face constantly. Thus, the Tsunami of 2004 can draw a great response by its sheer size, even compared to the relatively higher mortality rates than in the west in many of the countries affected.

Another possibility might be the novelty of the event. I saw Amanda Palmer read a deeply moving poem about the Germanwings plane crash. But would she have written the poem if the plane had splashed into the sea owing to engine trouble rather than getting flown into a mountainside by a deranged pilot? Again, this could be measured against some baseline of peril which the victims normally face. Bombs attacks are, sadly, much more common in Iraq and Syria than they are in Brussels, so we discount their victims.

But another factor, possibly more controversial, seems to be how similar the people affected are to you. Take the bombing of the Brussels Metro as an example. I travel by tube in London everyday. Indeed, I was travelling on the tube on July 7th 2005. When I see the film of that blood drenched toddler crying over her dead mother in Brussels, I can picture it very vividly.

By contrast, the effect of a bunker buster on a block of flats in Syria I find harder to picture. To try and imagine it I find myself drawing, unconsciously to an extent, on Hollywood movies. That might sound trite or ridiculous, but to picture such an event and its consequences my brain searches for a comparable image stored away somewhere. With next to no actual experience myself of such things, it settles on the fictional representations I have seen.

I’m sure many of you will have seen something like the image below


Ask yourself what a Tragic World Map for, say, Africa might look like. We would probably see Africa shaded in red with the United States coloured green or blue. As different people in different circumstances have different subjective preferences when it comes to spending their budget of money, the same applies, if economic reasoning is appropriate here, when people spend their budget of sympathy.

Indeed, if you wanted to be really economicsy about it, you could say that S=f(MαNβY) where sympathy (S) is a function of the magnitude of the disaster (M), the novelty (N), and the similarities with the people to be sympathised with(Y). αand β represent the relations of the magnitudes to the baseline.

So a disproportionate concentration by the western media or westerners generally on western casualties is probably not a sign of widespread racism, though in a few cases it surely is. Rather, it is the result of people with a constrained budget of sympathy selecting via certain criteria (and feel free to suggest your own) how to allocate that budget. In short, don’t feel bad about who who you feel bad for.

* This argument is curious given that many non-whites were killed in Brussels as in Paris last November.

Stock markets gone wild

Today the BBC reported


I remembered something I wrote in the Wall Street Journal just over two years ago

As a result of this liquidity infusion (Quantitative Easing)—which the Fed last week cut to $75 billion a month—stock markets have nearly doubled since 2009 while the “real” economy has hobbled along with 2% growth. This perverse situation suggests that the stock market has joined government bonds and emerging markets as the latest inflating bubble.

On Aug. 15, the London Telegraph reported that British retail sales had risen unexpectedly sharply and that American unemployment had fallen to a six-year low. This would usually be promising macroeconomic news, but that day major indexes—the Dow Jones Industrial Index, the S&P 500, the CAC 40, among others—tumbled. Markets, hooked on the Fed’s cheap liquidity cocktail, were terrified that an improving U.S. economy might see the punch bowl removed with a Fed “taper” of quantitative easing.

A day later, when the results of a U.S. consumer confidence survey came in “far worse than expected,” stock markets rallied. Markets are supposed to be driven by the expectations of a stock’s perceived profitability, not the pursuit of speculative gains caused by the manipulations of central bankers. Now the economy appears to be in a position where the interests of financial markets are precisely at odds with the interests of the rest of the economy.

Little has changed.

The British state is not being shrunk beyond Thatcher’s dreams

In the Guardian recently, Polly Toynbee claimed that the current British government was “driving the state below the size of anything attempted by Margaret Thatcher”. The truth is that it isn’t.

Chart 1 shows British government total managed expenditure since Margaret Thatcher took office in 1979. It shows it in real prices, ie, corrected for inflation so the numbers across years are comparable.

Chart 1


Source: Office for Budget Responsibility

What it shows is that in real terms, on official projections, British government spending in 2020-2021 will be 81% above even the highest figure of Margaret Thatcher’s time in office (1984-1985).

It is difficult to believe that Ms Toynbee is unaware of this. What we appear to have here, then, is another, particularly glaring example, of someone saying something that isn’t true in the hope that nobody will actually check whether it is or isn’t. Sadly, much of what passes for public discourse these days is made up of statements like this.


Wages and immigration in the short run

The Bank of England has a new paper out titled The impact of immigration on occupational wages: evidence from Britain. Its key finding is that “the immigrant to native ratio has a small negative impact on average British wages…Our results also reveal that the biggest impact of immigration on wages is within the semi/unskilled services occupational group.”

Why, then, does the Bank of England correctly state that “There seems to be a broad consensus among academics that the share of immigrants in the workforce has little or no effect on native wages”? The reason is that “These studies typically have not refined their analysis by breaking it down into different occupational groups”, which the Bank’s paper does.

To de-jargon this, studies which find no effect of immigration on wages make no distinction between the wages and workers they are examining; they lump the falling wages of nine road sweepers in with the rising wage of one City banker and say that, on averages, the ten workers wages haven’t fallen. A paper from Oxford University which also dug down into the averages found similar results to the Bank of England; immigration disproportionately reduces wages at the bottom end of the labour market.

In the short run at least, this is what economic theory would lead you to expect. If you increase the supply of anything relative to the demand for it, ceteris paribus, the price of that thing, whether it is shoes or labour, will fall.

But that, too, is to fall into the trap of looking at ‘the average’. There is no labour market in which we are all willing sellers of homogeneous labour. I am not offering the same skills on the job market as Sergio Aguero or Stephen Hawking. The market for the labour of economists and the market for the labour of footballers are different markets, they are not part of ‘the’ labour market. Labour, like capital, is heterogeneous.

To simplify, consider an economy with two types of worker, highly skilled and lower skilled. The markets for each are shown below, for highly skilled labour in chart a and lower skilled labour in chart b.


Immigration of  lower skilled workers increases the supply of lower skilled labour – the rightward shift of the supply curve on chart b from S1 to S2. Ceteris paribus, this pushes wages for lower skilled workers down from P1 to P2. But, and this is the point the Bank of England paper makes empirically, this has no effect on the wages of highly skilled workers, as shown on chart a.

If the immigrants were skilled then the opposite would be the case. The wages of highly skilled workers would fall and those of lower skilled workers would be unaffected. It is doubtful, however, that this is currently the case, at least in Britain.

This debate over the effects of immigration on wages, in the short run it should be stressed, is another example of the difficulties economists can find themselves in when thinking of lumpy, homogeneous aggregates. Lumping all labour together for anayltical purposes makes no more sense than, for example, lumping all capital goods together. The Bank of England’s new paper is a welcome step towards greater acknowledgment of the heterogeneity of economic variables.

Has monetary policy been ‘loose’ or ‘tight’ in recent years?

One of the policy responses to the economic crisis of 2008 and comparatively subdued economic recovery, was the use of monetary policy.

Central bank policy rates were slashed to the point where the European Central Bank got a reputation for monetary rectitude for having a policy rate higher higher than 0.5%. On top of this, and less conventionally, there was Quantitative Easing, in which central banks printed up new money and used it to buy assets from the financial sector.

Despite this apparent monetary activism, there are some who think that monetary policy was too ‘tight’ – that central bankers were not getting newly printed money out of the door fast enough. Many economists, probably most in fact, think that monetary policy over the period has, by complete contrast, been unprecedentedly loose, for better or worse.

Where does the truth lie? A first step would be to determine what we mean by ‘loose’ or ‘tight’ monetary policy.

I asked this question a while ago. An economist I know told me that monetary looseness could be defined as a situation where MS > MD (money supply, MS, is greater than money demand, MD). It follows from this that monetary tightness would be where MS < MD, and the sweet spot of equilibrium would be where MS = MD. This seems a good place to start.

Well, how do you know whether MS > MD? How do we know when the S of anything is > than the D for it? By a fall in its price.

So what is the price of money? It is the inverse of the price level. To clarify that bit of jargon, think of a DVD that costs £10. That is its price. The inverse of that is that £10 costs one DVD. The DVD buyer gives up £10 to get a DVD, the DVD seller gives up a DVD to get £10.

So, a fall in the price of money would mean that more money could be bought with one DVD. Lets say that the price of money falls so that now the DVD seller only has to give up half of a DVD to get £10. For the buyer, the price of the DVD has risen to £20. In other words, a fall in price of money is better known as inflation.

The same works in reverse. If a DVD seller has to give up two DVDs to get £10, the price of money has risen, in other words, then each DVD will now only cost the buyer £5. As generally understood, prices have fallen and we have deflation.

So if we see inflation we are seeing monetary looseness and if we see deflation we are seeing monetary tightness. What have we seen in recent years?

Consumer Price Indices – RPI indices: 2008 to 2015: September 2008=100


Source: Office for National Statistics

The chart above shows a dip from the September 2008 pre-crash peak on an index of prices of 3.8% until January 2009. In the nearly six years since then, the index has risen to 23% above that trough and 19% above the pre-crash peak. This steady, but by historic standards modest, inflation, which equals a fall in the price of money, suggests a degree of monetary looseness, which equals MS > MD.

In short, by analysing money as thought it was like any other good or service, monetary policy in recent years has been loose, but not very.

Austerity? What austerity?

Since at least 2010, British political discourse has been dominated by ‘austerity’. With British government finances in a mess following the banking crisis of 2007/2008 and subsequent economic collapse, the coalition acted to close the resulting deficit relying primarily on spending cuts rather than tax rises. This is the ‘austerity’ that is frequently talked about.

The trouble is that its difficult to actually see it in the figures. The chart below shows British government spending since 1900 in inflation adjusted, 2005 sterling.


Source: UK Public Spending

The post-2010 period does stand out, but not, I think, as a particularly ‘austere’ time in terms of government spending. Indeed, all of the British government’s six highest spending years since 1900 have come since 2010. British government spending has risen from £702.09 billion in 2010 to £748.12 billion in 2015. What has happened since 2010 is that the rate of increase of government spending has slowed drastically.

So do we have ‘austerity’? If austerity = a decline in the increase of government spending, then yes. If austerity = a fall in government spending, then no.

A Short History of Financial Euphoria by John Kenneth Galbraith


Galbraith‘s reputation as an economist isn’t what it once was. There are few takers these days for tomes such as American Capitalism, The New Industrial State, or Economics and the Public Purpose, although The Affluent Society retains a readership. But as a writer of popular, accesible economics, he is, in my view, up there with Bastiat. His The Great Crash of 1929 is an excellent bit of descriptive writing and this short book is another riff on its themes.

Are the causes of economic events such as assets bubbles and busts endogenous – originating within the economic system, such as central bank action or new innovations – or exogenous – originating outside it, such as natural disasters? Galbraith comes down very firmly for the latter, rooting his explanation entirely in group psychology. For the same reasons I didn’t much likeAnimal Spirits, I find the total reliance on group psychology unsatisfactory. In the most recent boom and bust, that of sub prime mortgages and their derivatives, there were plenty of endogenous factors which cannot be ignored.

But Galbraith makes some good points. His focus on the repeated presence of leverage in these events is interesting and it is a shame that space does not allow for a more systematic analysis. Also, Galbraith is entirely right to castigate the quest for ‘the’ person to blame after the bust. For all the fuss about bankers since 2008, little popular flak has been directed at central bankers.

George Osborne hasn’t created more debt than every Labour government in history

Source: Another Angry Voice

If you have been at all aware of British of British politics over the last five years you are very likely to have seen the above. Is it true?

Chart 1 shows the annual increase in the public sector net debt each year going back to the first Labour government, Ramsay MacDonald’s short lived ministry of 1924. Adding these up, the coalition (in green, a mix of yellow and blue) has ‘created’ £523 billion of debt between 2010 and 2015. Adding up all the debt increases under the two MacDonald governments (1924 and 1929), the Attlee government (1945 to 1951), the Wilson government (1964 to 1970), the Wilson/Callaghan government (1974 to 1979) and the Blair/Brown government (1997 to 2010), the total comes to £665 billion.

Chart 1


Source: UK Public Spending

If anyone crunches the numbers and comes up with different answers, drop me a line.