Category Archives: Notes

Lucas on an OECD Economic Expert Report

In a Carnegie-Rochester paper from 1979, Robert Lucas reviews an earlier report to the OECD by a group of independent experts. Lucas views the report as vacuous, eclectic, and dangerous:

… I know of no other way to convey the Report’s undisciplined eclecticism. It meanders through the long list of issues which have been defined in popular debate as “policy problems,” accepting all as equally suited to treatment by government action and equally amenable to economic expertise, offering ambiguous and unsupported opinion on each. Nowhere can one discern a consistent set of economic principles underlying either the choice of questions to be addressed or the policy stances which are recommended.

As an economist, I find this alarming, but not because I believe the Report will in any direct way contribute to a worsening in economic policy in the OECD countries. On the contrary, the Report is so nearly vacuous that it will be difficult to tell which governments are attempting to follow its guidance and which are not. It is alarming because of the vision of economics it presents, to the public and to us: an economics limited to the writing of safely ambiguous lines for insertion in the speeches of treasury officials and central bankers. It is opportunism posing as pragmatism.

And he argues that economics and economists can only lose from contributing to reports of this kind.

It seems certain that economic policy in the OECD countries in the coming ten years will involve a wide variety of government interventions in particular sectors and industries. The particular interventions which emerge will, looked at in the right way, presumably exhibit some pattern. (For a social scientist, this much must be taken as an article of faith.) The chances that it will be economic theory which provides coherence to these policies must be judged, however, to be near zero. In these circumstances, the McCracken Committee is attempting to create the appearance that economic advisors are technically in control of developments, guiding them in a spirit of flexibility and pragmatism, supported by the technical research efforts of an entire
profession.

Yet is it in the interest of economics that these political developments be viewed as being supported by a consensus of professional opinion? The main reason to answer in the negative, stressed in this review, is also the simplest: it is not true. There is also a second reason, of a more “pragmatic” nature. There is every reason to believe that the economic policies of the coming decade will, being guided by no economic principles, lead to very bad results. What can be the benefit of claiming for economic theory the blame for a collection of policies which in no way follow from it?

It would be interesting to know how Lucas assesses contemporary reports issued by the OECD and other bodies.

Monetary Policy, the NK Model, and Humility

In an NBER working paper John Cochrane concludes that

… we have been guilty of playing with too-complex models when we don’t really understand basics, such as stability, determinacy, and the frictionless limit. …

Given the state of actual agreed-on knowledge, central banks’ proclamations of detailed technocratic ability to manipulate delicate frictions is laughable. Figure 10 shows in chart form the Rube-Goldberg list of mechanisms the ECB thinks it understands and can manipulate. Central bankers who think they have any idea how all these boxes and arrows work, and how to manipulate them, should reread Bob’s unsung classic “on a report to the OECD” Lucas (1979) once a week. A little humility would do us all good.

SNB Losses in the News

My written statement for 20minuten:

Anlageverluste der SNB sind schlecht für den Schweizer Steuerzahler, denn ihm gehört die SNB. Sie können aber auch Entwicklungen widerspiegeln, die ihre guten Seiten haben. Jetzt zum Beispiel führt die Frankenstärke zu Anlageverlusten, bremst aber auch die importierte Inflation.

Die Diskussion um die Höhe der SNB-Ausschüttungen ist vielfach fehlgeleitet. In der Debatte geht vergessen, dass Gewinnausschüttungen das Reinvermögen von Bund und Kantonen nicht verändern. Denn Ausschüttungen sind keine Transfers von Dritten an Bund oder Kantone – sie tauschen lediglich eine Aktivposition in der Bilanz von Bund oder Kantonen gegen eine andere aus, wie bei einer Dividendenausschüttung eines Unternehmens. Die Hauptwirkung von Ausschüttungen ist, dass sie Beschränkungen wie die Schuldenbremse vorübergehend lockern. Das mag der Grund dafür sein, dass manche Politiker und Wähler sie mögen.

And the resulting publication.

SRF website and SRF Echo der Zeit (interview taken on 26 July).

The SNB’s Financial Result, Currency Reserves, and Distribution Reserve

How are SNB profits and losses distributed and what issues are debated?

Annual Result Funds two “Reserves”

The annual result (Jahresergebnis) of the Swiss National Bank (SNB) is split into two parts. The first part funds “provisions for currency reserves” (Zuweisungen an Rückstellungen für Währungsreserven) which are meant to provide a buffer against future losses on the SNB’s asset positions. The second part funds current and future profit distributions to the Confederation and cantons (Ausschüttungen an Bund und Kantone) and dividend payments to SNB shareholders. The ad hoc announcement regarding the SNB’s 2021 annual result (English, German) provides an overview.

Allocation Rules

The SNB decides how the annual result is split, subject to some guidance in the National Bank Law (NBG, English, German, e.g., Art. 30 (1) and Art. 42 (2d) NBG). In practice the SNB follows a mechanical rule to determine the provisions for currency reserves. This rule operates “on the basis of double the average nominal GDP growth rate over the previous five years” or “10% of the provisions at the end of the previous year,” whatever yields higher provisions (source).

How the second part of the annual result is split between current and future distributions is governed by an agreement between the SNB and the Federal Department of Finance (English, German). The law prescribes that the “[t]he Department and the National Bank shall, for a specified period of time, agree on the amount of the annual profit distribution with the aim of smoothing these distributions in the medium term” (31(2) NBG). In practice the SNB and the Federal Department of Finance have frequently revised the agreement. This reflected the SNB’s rapidly growing balance sheet and larger profits.

The current agreement determines the profit distributions and dividends to shareholders as follows: Define the “distributable annual result” (Ausschüttbares Jahresergebnis) as the annual result net of the allocation to provisions for currency reserves. The distribution reserve (Ausschüttungsreserve), a liability item in the SNB’s balance sheet, amounts to the cumulative past distributable annual results, net of the payments to Confederation, cantons and shareholders. The sum of distribution reserve and distributable annual result yields the “net profit” (Bilanzgewinn). When the net profit is negative the agreement prescribes zero distributions to the Confederation and the cantons. When it is positive the agreement prescribes distributions that rise up to CHF 6 billion, depending on the size of net profits. Under no circumstances must distributions be so high as to directly imply that the distribution reserve becomes negative.

Discussion

That the SNB determines how the annual result is split certainly makes sense. After all the SNB bears responsibility for monetary policy and thus needs to be able to employ its balance sheet as far as this has current and future monetary policy implications. It is doubtful, however, that the mechanical rule the SNB follows adequately reflects foreign exchange and investment risks as well as monetary policy needs going forward. Preferably, the SNB should determine the adequate provisions based on an analysis of risks and monetary policy needs and communicate its analysis and conclusions to the public (see my proposal from February 2021). In June 2021 the SNB Observatory made a similar proposal, arguing that the SNB should “[d]etermine a target ratio of provisions-to-balance sheet or provisions-to-foreign investments. Provisions should not be accumulated beyond this point.” More specifically, the SNB Observatory criticized that the SNB never actually uses the provisions to cover losses when they occur; it proposed that the SNB “[u]se the provisions for foreign investments to cover losses when they occur. Replenish provisions with profits of subsequent years.”

The procedure to determine the split between current and future distributions is rather inflexible and thus requires frequent adjustment if the SNB’s balance sheet changes. The fact that the SNB smoothes payouts from the distribution reserve (at too low a rate according to the SNB Observatory) suggests a lack of trust in the ability of decision makers at the federal and cantonal level to responsibly manage the funds received from the SNB. I find this questionable (see my comments from February 2021) but I realize that the law does require some degree of smoothing.

Finally, many of the political discussions surrounding the amount of SNB distributions are misguided. The debate neglects that profit distributions do not significantly alter the net worth of the Confederation or the cantons. After all, SNB profit distributions are not transfers from a third party—they just swap one asset item in the balance sheets of the Confederation and cantons against another one, like dividend payouts of a firm. The main effect of distributions is to temporarily relax restrictions such as the debt brake (see my explanations with links to further analysis); that might be the reason why some politicians and voters like them.

Details

  • The agreement between the SNB and the Federal Department of Finance states that “[t]he non-distributed amount of the annual result is allocated to this [distribution] reserve, and any shortfall for a distribution is drawn from it.” I think it should read “[t]he non-distributed amount of the annual result net of provisions for currency reserves is allocated …”
  • Per January 2022 the provisions for currency reserves amounted to CHF 95 billion. The distribution reserve amounted to CHF 103 billion.
  • Between 2005 and 2020 the return rates on SNB investments never fell below -6% (source).
  • As of mid 2022 the return rate appears to be on the order of -8% (balance sheet length approximately CHF 1 000 billion, first-quarter loss CHF 33 billion (source), prospective second-quarter loss 50 billion).
  • Swiss net foreign assets amount to roughly CHF 600 billion.

Updates: Minor editorial changes, 29 July.

21st BIS Annual Conference

Central banking after the pandemic: challenges ahead

This year’s conference focused on the question of how central banks can meet their mission to preserve the value of money. The sessions focused on inflation – the containment of which is an important aspect of preserving money’s value – as well as preserving the value of money from the longer-term, structural perspective, focusing on the challenges of digital innovation.

Program

When Children Die

Interview in NZZ with the leader of the palliative care section at the University of Zurich’s childrens’ hospital:

Wie sprachen [Kinder] darüber [ihre Ahnung, bald sterben zu müssen]?

Ein Kind sagte, es müsse zwei Koffer packen. Den einen nehme es auf seine Reise mit, den anderen lasse es zu Hause, damit es nicht vergessen werde. Ein anderes wollte auf einem Besen in den Himmel reiten. Ich habe auch schon ein kleines Kind erlebt, das kaum sprach und plötzlich zu seinen Eltern sagte, wie lieb es sie habe. Das war unglaublich berührend. Im Moment, als es das sagte, war der Satz noch nicht als Zeichen der Verabschiedung deutbar. Manchmal merken wir erst im Rückblick, dass das Kind gespürt hat, was kommt.

Was sagen Sie, wenn ein Kind Sie fragt, ob es bald sterben werde?

Das werde ich äusserst selten gefragt. Kinder fragen auch ihre Eltern nicht. Wenn, dann eher das Reinigungspersonal oder eine Lehrerin.

Weshalb?

Sie schützen die Eltern. Das heisst aber nicht, dass sie diese Frage nicht haben.

“Life Among the Econ”

White House on Digital Assets

An executive order dated March 9, 2022 outlines what is on the White House’s mind:

The United States has an interest in responsible financial innovation, expanding access to safe and affordable financial services, and reducing the cost of domestic and cross-border funds transfers and payments, including through the continued modernization of public payment systems.  We must take strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections; financial stability and financial system integrity; combating and preventing crime and illicit finance; national security; the ability to exercise human rights; financial inclusion and equity; and climate change and pollution. …

(d)  We must reinforce United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.  The United States has an interest in ensuring that it remains at the forefront of responsible development and design of digital assets and the technology that underpins new forms of payments and capital flows in the international financial system, particularly in setting standards that promote:  democratic values; the rule of law; privacy; the protection of consumers, investors, and businesses; and interoperability with digital platforms, legacy architecture, and international payment systems.  The United States derives significant economic and national security benefits from the central role that the United States dollar and United States financial institutions and markets play in the global financial system.  Continued United States leadership in the global financial system will sustain United States financial power and promote United States economic interests.

Passports for Sale

Henley & Partners lists what is costs.

A growing number of countries host residence and citizenship by investment programs (also known as golden visa programs) that offer a variety of attractive investment options designed to cater to each family’s unique requirements. In an unsettled, ever-changing world, wealthy individuals need a plan B for themselves and their families — one that offers them a safer place to live in times of crisis, while also providing them with greater access to global business and lifestyle opportunities.

Fabio Panetta on the Digital Euro

In a speech, the ECB’s Fabio Panetta argues that a digital Euro is necessary because

[i]n the digital age … banknotes could lose their role as a reference value in payments, undermining the integrity of the monetary system. Central banks must therefore consider how to ensure that their money can remain a payments anchor in a digital world.

He argues that

outsourcing the provision of central bank money [to stable coin providers] … would endanger monetary sovereignty [as would the absence of a national digital currency].

Panetta also argues that a digital Euro could

  • improve the confidentiality of digital payments and
  • increase choice and reduce costs

and should

  • avoid interfering with the functioning of the financial system and
  • be available within private payment solutions.

Panetta does not discuss

  • seignorage and
  • time consistency motivations.

Olga Tokarczuk’s “The Books of Jacob”

Goodreads rating 4.19.

A sweeping novel of 950 pages (!) which starts on page 960. The Nobel laureate describes hundreds of characters, with even more names; immerses in countless locations, languages, and creeds. Her protagonists always remain strangers.

There is something wonderful in being a stranger, in being foreign, something to be relished, something as alluring as candy. It is good not to be able to understand a language, not to know the customs, to glide like a spirit among others who are distant and unrecognizable. Then a particular kind of wisdom awakens—an ability to surmise, to grasp the things that aren’t obvious. Cleverness and acumen come about. A person who is a stranger gains a new point of view, becomes, whether he likes it or not, a particular type of sage. Who was it who convinced us that being comfortable and familiar was so great? Only foreigners can truly understand the way things work. (pp. 390)

From Smyrna and Athos to Ivanie, across fluid Poland, Brünn (exact location), Vienna (exact location) and Offenbach to Paris in times of the French Revolution and the Supreme Court. From pariah creditors to noble debtors. Jacob and his daughter Eva; Yente and Nahman; and the heroes in the background, Hayah, Asher, and Thomas. Life in the eighteenth century, torn between hunger, disease, murder and rape; lies that kill, curses that float; and debates about Aufklärung, when religious zeal morphs into political activism and the practice of law.

The Word rules.

… the world is made of words that, once uttered, lay claim to every order, so that all things seem to occur at their behest. All things belong to them. Every curse, even the slightest, has an effect. Every single word that’s said. (pp. 645)

Nahman’s creed:

… I patiently stumble forward, not inquiring into the price I will have to pay, and even less so about any reward. My friend and ally is that moment, that urgent hour, the dearest time to me, when suddenly out of nowhere the writing gets easy, and then everything appears to be wonderfully able to be expressed. What a blissful state it is! Then I feel sage, and the whole world becomes a cradle that the Shekhinah has laid me down in, and now the Shekhinah leans in over me like a mother over an infant.

The path to the left is only for those who have shown they deserve it, those who understand what Reb Mordke always said—that the world itself demands to be narrated, and only then does it truly exist, only then can it flourish fully. But also that by telling the story of the world, we are changing the world.

That is why God created the letters of the alphabet, that we might have the opportunity to narrate to him what he created. Reb Mordke always chuckled at this. “God is blind. Did you not know that?” he would say. “He created us that we would be his guides, his five senses.” And he would chuckle long and hard until he began to cough from the smoke.

The novel comes with a bibliography, so is the story real?

Literature is a particular type of knowledge, it is … the perfection of imprecise forms. (p. 14)

In any case,

… any person who toils over matters of Messiahs, even failed ones, even just to tell their stories, will be treated just the same as he who studies the eternal mysteries of light. (p. 10)

Goodreads summary:

The Nobel Prize-winner’s richest, most sweeping and ambitious novel yet follows the comet-like rise and fall of a mysterious, messianic religious leader as he blazes his way across eighteenth-century Europe.

In the mid-eighteenth century, as new ideas–and a new unrest–begin to sweep the Continent, a young Jew of mysterious origins arrives in a village in Poland. Before long, he has changed not only his name but his persona; visited by what seem to be ecstatic experiences, Jacob Frank casts a charismatic spell that attracts an increasingly fervent following. In the decade to come, Frank will traverse the Hapsburg and Ottoman empires with throngs of disciples in his thrall as he reinvents himself again and again, converts to Islam and then Catholicism, is pilloried as a heretic and revered as the Messiah, and wreaks havoc on the conventional order, Jewish and Christian alike, with scandalous rumors of his sect’s secret rituals and the spread of his increasingly iconoclastic beliefs. The story of Frank–a real historical figure around whom mystery and controversy swirl to this day–is the perfect canvas for the genius and unparalleled reach of Olga Tokarczuk. Narrated through the perspectives of his contemporaries–those who revere him, those who revile him, the friend who betrays him, the lone woman who sees him for what he is–The Books of Jacob captures a world on the cusp of precipitous change, searching for certainty and longing for transcendence.

Goodreads reader Marc’s summary:

For those who like wide-ranging historical novels, this is the real thing. Tokarczuk immersed herself in 18th-century Greater Poland, which then covered large parts of Eastern Europe. Seen from the West, it was a perifere area, but it stood in intense contact with the Eastern Ottoman Empire, which at that time still controlled almost the entire Balkans. Tokarczuk sketches dozens of characters who constantly go back and forth between those two regions. These are especially Jews, and the author examines that Jewish world in great detail.

Her central story focuses on a Jewish heretic movement which actually existed in the middle of the 18th century. The movement was led by Jacob Frank, an Ottoman Jew. He was a very unlikely guru, but had an enormous charisma and managed to get tens of thousands of Jews behind his ‘Trinity Faith’. He seduced them with an eclectic mix of Judaism, Christianity and Islam, which was particularly attractive because it offered the Jews, with their always precarious position in Catholic Poland, the prospect of civil rights through baptism.

Olga Tokarczuk is the most acclaimed Polish writer of the moment (twice the Niké prize, once the Man Booker International prize, and, of course, the Nobel Prize 2018), but with this book she has had a really difficult time in her own country. Her focus on the Catholic discrimination against Jews in Greater Poland was not appreciated by the right-wing, conservative government currently in power in Warsaw. Also the picture she paints of an extremely diversified Polish nation, with a jumble of ethnicities and religious movements that lived together, contradicts the homogenic Polish identity that has been cultivated since the 2nd world war.

But that is precisely what makes this book extremely interesting. The way Tokarczuk brings all these different movements, cultures and ethnicities to life is a feast for the reader’s eye. Her narrative style even has a certain Marquezian flair, with a dash of magical realism through the character of the old Yenta who remains in a state of coma for hundreds of pages, and – stepped out of herself – glides through space and time, guiding the story a step further.

But there is a downside to this verbal firework: the immersion in all those worlds, the dozens of characters, the constant changes in perspective and time, all this makes reading this very bulky book a real test. For instance, it takes a quarter of the book, almost 250 pages, before the real story about the heresy of Jacob Frank takes off; until then Tokarczuk builds up, with constantly new characters, and travels back and forth between Poland, the Balkans and Smyrna (present-day Izmir in Turkey). Also the sometimes very intense theological discussions among the Jewish rabbis, diving into kabbala, demand a lot from the reader.

Again: this historical novel is quite a tour de force , not only in terms of size and depth. For me, the charm of the reading was mainly in the Chagal-like character of the visual language of Tokarczuk: she regularly sketches dreamy scenes with the comatose Yenta that floats over time and space and oversees everything. But in the long run it’s all a bit too much: the story just lingers on, endlessly, and I missed a real existential story, with people of flesh and blood. Hence the slightly lesser rating. But I’m definitely going to dive into Tokarczuk’s other work!

The FT Favors a Digital Dollar

On the question whether the Fed should seriously consider retail CBDC, the FT sides with the pro camp.

While elsewhere such central bank digital currencies can appear “a solution in search of a problem”, America’s lacklustre retail banking system and the importance of the dollar in cross-border money flows make an obvious case for reform.

Compare the contributions by Darrell Duffie and Chris Waller in the CEPR eBook.

 

Blockchains, dApps, and Smart Contracts—A Critical Review

Blog post by Dave Peck and the PSL team. Some issues they discuss:

Very few categories of data belong on-chain …

Today’s smart contract programming models are deeply flawed …

  • Smart contracts can’t reference the “real-world”. They can only reference the blockchain itself. This is known as the “oracle problem” and it makes blockchains a necessarily closed system. This may sound like a trivial problem, but it is actually profound. For instance, it forces smart contract developers to jump through hoops to build “price oracles” when they want their on-chain code to reference real-world asset prices. Companies like Chainlink act as oracles,
  • Smart contracts can’t be upgraded …
  • Smart contracts require complex distributed systems to run, effectively, forever.

Distributed consensus technology could change radically in the next decade.

Steven Koonin’s “Unsettled”

Goodreads rating: 4.39.

The book offers

  • a brief tour of the physics behind climate change and the role played by human activity;
  • a skeptical discussion of climate models;
  • some stronger, some weaker examples of distorted reports, by scientists and the media, regarding causal links between human activity, climate change, and extreme weather events, sea level change, or production (opponents claim that these examples are cherry-picked; Koonin retorts that scientific reports should be correct);
  • a plausible prediction of national adaption policies rather than international cooperation to strongly reduce emissions.

For some critical reviews (some not compelling) of the book, see Wikipedia.

Aggregation

David Baqaee in SED Newsletter, November 2021.

Hulten’s theorem:

… the elasticity of aggregate TFP to a microeconomic TFP shock is equal to the sales of the producer being shocked divided by GDP. … Furthermore, if labor supply is inelastic or if the definition of GDP is expanded to include the market value of leisure, then this irrelevance result also applies to real GDP (or under some additional assumptions to welfare).

This result, oftentimes known as Hulten’s Theorem (Hulten, 1978), is a consequence of the first welfare theorem, and therefore, is remarkably general. … As with other irrelevance results in economics, like the Modigliani-Miller Theorem or Ricardian Equivalence, much of the economics of aggregation can be understood in terms of deviations from Hulten’s theorem.

Nonlinearities:

… disaggregated details … that do not matter to a first-order, do matter for understanding the nonlinear effect of shocks.

The key conceptual breakthrough is to recognize that nonlinearities are captured by changes in sales shares. Intuitively, in response to a negative shock to oil or electricity, we expect the sales shares of oil or electricity to skyrocket. On the other hand, in response to a negative shock to Walmart, we expect the sales share of Walmart to decline (perhaps rapidly). The sign and magnitude of changes in sales shares tell us that output is very concave with respect to energy shocks and convex with respect to Walmart shocks. … we characterize in very general and abstract terms the equations that determine changes in sales shares

Changes in sales shares are determined by what we call forward and backward propagation equations. Forward propagation equations show how a shock to the marginal cost of a producer propagates through forward linkages, from suppliers to consumers, to change prices downstream. The backward equations show how a shock to the sales of a producer propagates through backward linkages, from consumers to their suppliers, to change sales upstream …

These equations not only help answer questions about the nonlinearities in output in efficient environments, but they can also be used to answer microeconomic questions including, for example, how shocks propagate from one firm to another in general equilibrium, or how the distribution of factor income shares responds to shocks … Furthermore, unlike Hulten’s theorem itself, the forward and backward propagation equations straightforwardly generalize to more complex environments where the first welfare theorem does not hold, and these generalizations will allow us to extend our analysis beyond efficient equilibria.

… nonlinearities magnify negative shocks and attenuate positive shocks, resulting in an aggregate output distribution that is asymmetric (negative skewness) and fat-tailed (excess kurtosis), with a negative mean, even when shocks are symmetric around zero and thin-tailed. Average output losses due to short-run sectoral shocks are an order of magnitude larger than the welfare cost of business cycles calculated by Lucas (1987)

Frictions:

Hulten’s theorem derives its deceptive simplicity from two facts: (i) marginal-cost pricing ensures that the expenditures by firms on every input measures the elasticity of output with respect to that input (Shephard’s lemma); (ii) marginal-cost pricing ensures production is efficient, meaning that reallocating resources from one user to another does not change real GDP to a first order. Since reallocation effects can safely be ignored to a first-order, (ii) implies that the elasticity of aggregate output to shocks can be computed by assuming that the allocation of resources stays constant and resources simply scale up or down proportionally according to initial shares. From (i) we know that this will change each firm’s output by that firm’s expenditure share on the input being scaled. This “mechanical” effect of scaling resources by initial shares when summed over all input users yields sales, which is the Hulten formula.

Inefficient economies break Hulten’s theorem in two ways. First, sales shares no longer capture the “mechanical” effect of scaling up input usage because of wedges between output elasticities and expenditures shares. Second, reallocation effects, which are first-order irrelevant in efficient equilibria, now matter to a first-order and must be solved for.

… In other words, when a producer becomes more productive, the impact on aggregate TFP can be broken down into two components.

First, given the initial distribution of resources, the producer increases its output, and this, in turn, increases the output of its direct and indirect customers; this is the mechanical effect that would be equal to sales shares in the absence of wedges. Second, there are reallocation effects that can raise or lower aggregate output holding fixed the level of technology. We show that this reallocation effect can be measured by a specific weighted average of changes in wedges and changes in factor income shares (in an economy with a single factor, say labor, this is simply the labor income share). Intuitively, if a shock reallocates resources in such a way that boosts aggregate output, then this shock will “save” on factor usage. This reallocation makes factors less scarce and causes factor prices and, ceteris paribus, factor income shares to decline on average. The fact that factor income shares decline on average therefore captures changes in aggregate TFP due to reallocation effects.

… average markups have been increasing primarily due to a between-firm composition effect, whereby firms with high markups have been getting larger, and not to a within-firm increase in markups. From a social perspective, these high-markup firms were too small to begin with, and so the reallocation of resources towards them increases aggregate TFP over time.

… we find that in the U.S. in 2015, eliminating markups would raise aggregate TFP by about 20% (depending on the markup series). This increases the estimated cost of monopoly distortions by two orders of magnitude compared to the famous estimate of 0.1% of Harberger (1954).

… changes in aggregate demand, for example, monetary policy shocks, can naturally affect an economy’s TFP due to reallocation effects. In particular, we propose a supply-side channel for the transmission of aggregate demand shocks by showing that in an economy with heterogeneous firms and endogenous markups, demand shocks can have first-order effects on aggregate productivity.

Intuitively, if high-markup firms have lower pass-throughs than low-markup firms, as is consistent with the empirical evidence, then an aggregate demand shock, like a monetary easing, generates an endogenous positive “supply shock” that amplifies the positive “demand shock” on output. The result is akin to a flattening of the Phillips curve. We derive a tractable four-equation dynamic model, disciplined by four sufficient statistics from the distribution of firms, and use it to show that a monetary easing generates a procyclical hump-shaped response in aggregate TFP and countercyclical dispersion in firm-level TFPR.

Non-convexities:

Unlike first-best policies, which are independent of network structure and simply ensure efficiency market-by-market, the effects of second-best policies are network-dependent. In particular, for economies with increasing returns to scale, we rationalize and revise Hirschman’s influential argument that policy should encourage expansion in sectors with the most forward and backward linkages, and we give precise formal definitions for these concepts. We show that the optimal marginal intervention aims to boost the sales of sectors that have strong scale economies, but are also upstream of other sectors with strong scale economies.

Household heterogeneity:

… we provide a modified version of Hulten’s theorem that does answer welfare questions in general equilibrium economies with non-homothetic, non-aggregable, and unstable preferences. We show that calculating changes in welfare in response to a shock only requires knowledge of expenditure shares and elasticities of substitution and (given these elasticities) does not require income elasticities and taste shocks. We also characterize the gap between changes in welfare and changes in real consumption.

David Graeber’s “Debt”

Goodreads rating 4.19.

Graeber’s book contains many interesting historical observations but lacks a concise argument to convince a brainwashed neoclassical economist looking for coherent arguments on money and debt. After 60 pages, 340 more seemed too much.

Chapter one:

… the central question of this book: What, precisely, does it man to say that our sense of morality and justice is reduced to the language of a business deal? What does it mean when we reduce moral obligations to debts? … debt, unlike any other form of obligation, can be precisely quantified. … to become simple, cold, and impersonal … transferable.

… money’s capacity to turn morality into a matter of impersonal arithmetic—and by doing so, to justify things that would otherwise seem outrageous or obscene. … the violence and the quantification—are intimately linked. … the threat of violence, turns human relations into mathematics.

…The United States was one of the last countries in the world to adopt a law of bankruptcy: despite the fact that in 1787, the Constitution specifically charged the new government with creating one, all attempts were rejected, or quickly reversed, on “moral grounds” until 1898.

… historically, credit money comes first [before bullion, coins]

… ages of virtual credit money almost invariably involve the creation of institutions designed to prevent everything going haywire—to stop the lenders from teaming up with bureaucrats and politicians to squeeze everybody dry … by the creation of institutions designed to protect debtors. The new age of credit money we are in seems to have started precisely backwards. It began with the creation of global institutions like the IMF designed to protect not debtors, but creditors.

… the book begins by attempting to puncture a series of myths—not only the Myth of Barter … but also rival myths about primordial debts to the gods, or to the state … Historical reality reveals [that the state and the market] have always been intertwined. … all these misconceptions … tend to reduce all human relations to exchange … [but] the very principle of exchange emerged largely as an effect of violence … the real origins of money are to be found in crime and recompense, war and slavery, honor, debt, and redemption. … an actual history of the last five thousand years of debt and credit, with its great alternations between ages of virtual and physical money …

… many of Adam Smith’s most famous arguments appear to have been cribbed from the works of free market theorists from medieval Persia …

Chapter two (“The Myth of Barter”) contains questionable claims about economics as well as interesting historical facts (or claims?):

When economists speak of the origins of money … debt is always something of an afterthought. First comes barter, then money; credit only develops later. …

Barter … was carried out between people who might otherwise be enemies …

… “truck and barter”’ [in many languages] literally meant ”to trick, bamboozle, or rip off.”

What we now call virtual money came first. Coins came much later, … never completely replacing credit systems. Barter, in turn, … has mainly been what people who are used to cash transactions do when for one reason or another they have no access to currency.

Chapter three (“Primordial Debts”) argues the the myth of barter is central to the discourse of economics, which according to Graeber downplays the state as opposed to markets, exchange, and individual choice. He tries to confront this view with Alfred Mitchell-Innes’ credit theory of money, Georg Friedrich Knapp’s state theory of money, the Wizard of Oz (i.e. “ounce”), and John Maynard Keynes (original?) claim that banks create money.

In all Indo-European languages, words for “debt” are synonymous with those for “sin” or “guilt,” illustrating the links between religion, payment and the mediation of the sacred and profane realms by “money.” [money-Geld, sacrifice-Geild, tax-Gild, guilt]

Wikipedia article on the book:

A major argument of the book is that the imprecise, informal, community-building indebtedness of “human economies” is only replaced by mathematically precise, firmly enforced debts through the introduction of violence, usually state-sponsored violence in some form of military or police.

A second major argument of the book is that, contrary to standard accounts of the history of money, debt is probably the oldest means of trade, with cash and barter transactions being later developments.

Debt, the book argues, has typically retained its primacy, with cash and barter usually limited to situations of low trust involving strangers or those not considered credit-worthy. Graeber proposes that the second argument follows from the first; that, in his words, “markets are founded and usually maintained by systematic state violence”, though he goes on to show how “in the absence of such violence, they… can even come to be seen as the very basis of freedom and autonomy”.

Reception of the book was mixed, with praise for Graeber’s sweeping scope from earliest recorded history to the present; but others raised doubts about the accuracy of some statements in Debt, as outlined below in the section on “critical reception”.

 

Max Horkheimer and Theodor Adorno’s “Dialektik der Aufklärung”

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Enlightenment:

Schon der Mythos ist Aufklärung, und: Aufklärung schlägt in Mythologie zurück. …

Seit je hat Aufklärung im umfassendsten Sinn fortschreitenden Denkens das Ziel verfolgt, von den Menschen die Furcht zu nehmen und sie als Herren einzusetzen. Aber die vollends aufgeklärte Erde strahlt im Zeichen triumphalen Unheils. …

Als Sein und Geschehen wird von der Aufklärung nur anerkannt, was durch Einheit sich erfassen lässt; ihr Ideal ist das System, aus dem alles und jedes folgt. … Als Gebieter über Natur gleichen sich der schaffende Gott und der ordnende Geist. … Mythen wie magische Riten meinen die sich wiederholende Natur.

Odysseus, myth, enlightenment:

Der listige Einzelgänger ist schon der homo oeconomicus, dem einmal alle Vernünftigen gleichen: daher ist die Odyssee schon eine Robinsonade. Die beiden prototypischen Schiffbrüchigen machen aus ihrer Schwäche — der des Individuums selber, das von der Kollektivität sich scheidet — ihre gesellschaftliche Stärke. Dem Zufall des Wellengangs ausgeliefert, hilflos isoliert, diktiert ihnen ihre Isoliertheit die rücksichtslose Verfolgung des atomistischen Interesses.

Juliette, enlightenment, morals:

Der Bürger, der dem kantischen kategorischen Imperativ aus der Kritik der praktischen Vernunft beistimmt … folgt keiner wissenschaftlichen Vernunft, sondern einer Narretei, wenn er sich deswegen einen materiellen Gewinn entgehen lässt. …

Bei de Sade wie bei Nietzsche wird das „szientifische Prinzip ins Vernichtende“ gesteigert. … Alles bleibt sinnfrei der Willkür des verbrecherischen Lustprinzips verhaftet. … So demontiert Sades Juliette alle Konventionen und Werte – Familie, Religion, Gesetz, Moral –, nichts vermag übrig zu bleiben, was die Gesellschaft ehemals zusammenhielt, alles fällt dem Wirtschaftsbetrieb und der enthemmten Ökonomie der aufgeklärten Verbrechergangs zum Opfer.

Wikipedia on the book:

… die These, dass sich bereits zu Beginn der Menschheitsgeschichte mit der Selbstbehauptung des Subjekts gegenüber einer bedrohlichen Natur eine instrumentelle Vernunft durchgesetzt habe, die sich als Herrschaft über die äußere und innere Natur und schließlich in der institutionalisierten Herrschaft von Menschen über Menschen verfestigte. Ausgehend von diesem „Herrschaftscharakter“ der Vernunft beobachteten Horkheimer und Adorno einen Aufschwung der Mythologie, die „Rückkehr der aufgeklärten Zivilisation zur Barbarei in der Wirklichkeit“ …

… habe nicht einen Befreiungs-, sondern einen universellen Selbstzerstörungsprozess der Aufklärung in Gang gesetzt. …

Nach Horkheimer und Adorno ist die Abstraktion das Werkzeug, mit dem die Logik von der Masse der Dinge geschieden wird. Das Mannigfaltige wird quantitativ unter eine abstrakte Größe gestellt und vereinheitlicht, um es handhabbar zu machen. … Alles, was sich dem instrumentellen Denken entzieht, wird des Aberglaubens verdächtigt. Der moderne Positivismus verbannt es in die Sphäre des Unobjektiven, des Scheins.

Aber diese Logik ist eine Logik des Subjekts, die unter dem Zeichen der Herrschaft, der Naturbeherrschung, auf die Dinge wirkt. Diese Herrschaft tritt dem Einzelnen nunmehr als Vernunft gegenüber, die die objektive Weltsicht organisiert.

… Die wissenschaftliche Weltherrschaft wendet sich gegen die denkenden Subjekte und verdinglicht in der Industrie, der Planung, der Arbeitsteilung, der Ökonomie die Menschen zu Objekten. … an die Stelle der befreienden Aufklärung aus der Unmündigkeit tritt das wirtschaftliche und politische Interesse, das Bewusstsein der Menschen zu manipulieren. Aufklärung wird zum Massenbetrug. …

Nach Auffassung Horkheimers und Adornos raubt industriell hergestellte Kultur dem Menschen die Phantasie … Die „Kulturindustrie“ liefert die „Ware“ so, dass dem Menschen nur noch die Aufgabe des Konsumenten zukommt. … erwünscht ist es, die reale Welt so gut wie möglich nachzuahmen. Triebe werden so weit geschürt, dass eine Sublimierung nicht mehr möglich ist. …

Das Ziel der Kulturindustrie ist – wie in jedem Industriezweig – ökonomischer Art. Alles Bemühen ist auf wirtschaftliche Erfolge ausgerichtet.

Die authentische Kultur hingegen ist nicht zielgerichtet, sie ist Selbstzweck. … fördert die Phantasie des Menschen, indem sie Anregungen gibt, aber anders als die Kulturindustrie, den Freiraum für eigenständiges menschliches Denken lässt. Authentische Kultur will nicht die Wirklichkeit nachstellen, sondern weit über sie hinausgehen.

English Wikipedia article.