Economics

"To give the monopoly of the home-market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation."

"The partial absorption of art by domestic industry and by domestic female crafts, that is to say, the fusion of artistic activity with other activities, is a retrogression from the standpoint of the division of labour and professional differentiation."

"For 60 years Gross Domestic Product, or GDP for short, has been the yardstick by which the world has measured and understood economic and social progress. However, it has failed to capture some of the factors that make a difference in people’s lives and contribute to their happiness, such as security, leisure,income distribution and a clean environment–including the kinds of factors which growth itself needs to be sustainable."

"The term new Keynesians denotes a loosely connected group of researchers who shared a common belief that the synthesis that emerged in response to the rational-expectations critique was basically correct. But they also shared the belief that much remained to be learned about the nature of imperfections in different markets and about the implications of those imperfections for macroeconomic fluctuations."

"Colander: What’s your view of the New Keynesian approach? Tobin: I’m not sure what that means. If it means people like Greg Mankiw, I don’t regard them as Keynesians. I don’t think they have involuntary unemployment or absence of market clearing. It is a misnomer to call Mankiw any form of Keynesian. Colander: How about real-business-cycle theorists? Tobin: Well, that’s just the enemy."

"Macroeconomics has been in an unsettled state since the early 1970s. The Keynesian model, which was almost universally accepted as the basic paradigm until the late 1960s, is regarded by most economists as scientifically not quite respectable. Periodically, some group of economists tries to patch up the Keynesian framework—the most recent effort was by the new Keynesians in the 1980s—but the results have never really been successful."

"If you'd asked me five years after I went to Harvard, in 1940 when I left Harvard for MIT and after being a Junior Fellow of three years, I would have said, "Thank God I left Chicago. Because the three biggest things in economics have been the Keynesian revolution, the monopolistic competition revolution, and the mathematicization of economics", and Chicago was against all of these things during that period of time."

"In the 1930s economics appeared to be a little different at the University of Chicago than elsewhere, but the same statement could be made about most major universities. Frank Knight was skeptical of the moral and intellectual content of political behavior and particularly hostile to central economic planning, but he was also severely critical of the ethical basis of a competitive economy. No doctrinaire defender of private enterprise would find him a source of strength. Henry Simons had preached a form of laissez-faire in his famous 1934 pamphlet A Positive Program for Laissez Faire, but what a form! He proposed nationalization of basic industries … [and] urged an extremely egalitarian policy in the taxation of income and detailed regulation of business practices … Much of his program was almost as harmonious with socialism as with private-enterprise capitalism.… Jacob Viner, the other major figure, had nineteenth-century liberal tastes, but rebelled against simplified or “extreme” positions. The rest of the faculty were highly varied in their policy preferences: Paul Douglas favored a large economic role for the state; Simeon Leland was a traditionalist in taxation; Henry Millis was an old-fashioned labor economist; Lloyd Mints wrote only on central bank policy; Henry Schultz stuck to his mathematical and statistical knitting; and Oskar Lange was a socialist."

"One of the worst aspects of these economic fluctuations is the high levels of unemployment associated with the downturns. The actuality runs counter to a major hypothesis of Chicago-style economics and its particular models, that demand equals supply—for everything. But if demand for labor equals supply of labor, what does that say about unemployment? According to that mode of thinking, there's no such thing as unemployment. What does demand = supply mean when 9.8 percent of Americans are unemployed, as is the case now? How does the Chicago school interpret that stubborn figure? They say that the unemployed are really just enjoying leisure. They're getting a little bit of an early vacation. But when most people go on vacation, they are happy. If you look at most of the people who can't get a job, they're not enjoying a vacation. The Chicago school would say this is not a problem for economists; it's a problem for psychiatrists. The unemployed should all go see a psychiatrist and try to understand why they aren't enjoying their leisure. But my own view is this is really quite an absurd view of economics and what's going on today."

"[I]t was Chicago School economists such as George Stigler who wrote of the “capture theory of regulation” when it came to the trucking industry, the airline industry, and many others. That is, they produced dozens of scholarly articles demonstrating how government regulatory agencies ostensibly created to regulate industry “in the public interest” are most often “captured” by the industry itself and then used not to protect the public but to enforce cartel pricing arrangements.This was all good, solid, applied free-market economics, but at the same time the Chicago Schoolers ignored the biggest and most important regulatory capture of all — the creation of the Fed. The Chicago School simply ignored the obvious fact that the Fed was created as a governmental cartel enforcement mechanism for the banking industry — during an era when many other kinds of regulatory institutions were being created for the same purpose (i.e., “natural monopoly” regulation)."

"The Chicago, group... owes its origins to Professor Frank H. Knight of the University of Chicago, who is Mises’s junior by a few years. Like Mises, Knight owes his original reputation to a theoretical monograph; notwithstanding an early lack of recognition, the latter’s Risk, Uncertainty and Profit (1921) eventually became, and for many years continued to be, one of the most influential textbooks on economic theory, although it had not originally been designed as such. Knight has since written a great deal on questions of economic policy and social philosophy—mostly in articles the majority of which have since been published in book form. The best-known, and perhaps also the most characteristic, volume is The Ethics of Competition and Other Essays (1935). Knight’s personal influence, through his teaching, exceeds even the influence of his writings. It is hardly an exaggeration to state that nearly all the younger American economists who really understand and advocate a competitive economic system have at one time been Knight’s students."

"Henry C. Simons... his pamphlet, A Positive Program for Laissez Faire, offered a new and common basis for the aspirations of America’s young liberals. Hopes for a systematic and comprehensive work from Simons were disappointed; instead, he left a collection of essays which appeared in 1948 under the title Economic Policy for a Free Society. This book became very influential owing to its wealth of ideas and to the courage with which Simons discussed such delicate problems as trade unionism. Today, the nucleus of a group of like-minded economists—no longer confined to Chicago—is formed by Simons’ closest friend, Aaron Director, and two of the best-known younger American theoreticians, George Stigler and Milton Friedman. Director has edited Simons’ papers and carried on his work."

"This Chicago-style approach, sometimes known as ‘Price Theory’ because of the fundamental role that prices often play, is exemplified in the path-breaking work of Gary Becker, Ronald Coase, Milton Friedman, Sherwin Rosen, George Stigler, and many others. Price theory has shed light not only on the most fundamental topics of traditional economics (e.g. consumption, saving, taxation, regulation), but also pioneered the use of economic tools in studying a wide range of other human behavior (e.g. crime and corruption, discrimination, marriage)."

"[ Milton Friedman was] the dominant member of the so-called Chicago school of economics [during his tenure at Chicago]... The economics department increasingly reflected his approach and interests. These included deep commitment to the truth, appreciation of markets and free enterprise, frank and blunt discussion, and enormous zeal to convince the heathen. But most important was the commitment to economic analysis as a powerful instrument for interpreting economic and social life."

"A key tenet of the Chicago school is that free markets function well in most circumstances, so government intervention into the economy ought to be limited. A second theme is that economic analysis has substantial explanatory power for empirical phenomena, not only in the narrow economic realm but also—as Gary Becker (whom I discuss next) has particularly demonstrated—in a wide variety of social interactions."

"The other mystery is the reason why there is a business cycle - the irregular rhythm of recessions and recoveries that prevents economic growth from being a smooth trend."

"Inevitably, any attempt to break down the past down into cycles involves beginning and ending points that are, to some degree, arbitrary. Others might well divide the market's cycles somewhat differently. But virtually every market historian agrees on the larger picture: the history of the market is a story of bull and bear markets that take place against a backdrop of much longer waves—weak and strong cycles that last long enough to convince us that they are the norm."

"That very large system, with interconnected industries responding to each other through delays, entraining each other in their oscillations, and being amplified by multipliers and speculators, is the primary cause of business cycles. Those cycles don't come from presidents, although presidents can do much to ease or intensify the optimism of the upturns and the pain of the downturns. Economies are extremely complex systems; they are full of balancing feedback loops with delays and they are inherently oscillatory."

"The postwar era has not surprised Arthur Burns, for business cycles have continued their "unceasing round." although the United States recession of 1981-82 was the eighth since World War II and the deepest postwar slump by almost any measure, the 1983-84 recovery displayed an upward momentum sufficient to befuddle forecasters and delight incumbent politicians. Nor would a reincarnated Joseph Schumpeter be disappointed in the current status of business cycle research in the economics profession. To be sure, interest in business cycles decayed during the prosperity of the 1960s, as symbolized in the 1969 conference volume, Is the Business Cycle Obsolete? and in Paul Samuelson's remark the same year that the National Bureau of Economic Research "has worked itself out of one of its first jobs, namely, the business cycle.""

"For well over a century business cycles have run an unceasing round. They have persisted through vast economic and social changes; they have withstood countless experiments in industry, agriculture, banking, industrial relations, and public policy; they have confounded forecasters without number, belied repeated prophecies of a "new era of prosperity" and outlived repeated forebodings of "chronic depression.""

"Periodically, our economic system becomes the spectacle of unemployed men who are able and eager to work; abundant tools to work with and materials to work upon; and a nation in need of the goods that these men, by the use of these idle machines, might make out of these surplus materials. Yet, month after month, the men and machines and materials are not brought into productive relations with each other."

"This book offers an analytic description of the complicated processes by which seasons of business prosperity, crisis, depression, and revival come about in the modern world. The materials used consist chiefly of market reports and statistics concerning the business cycles which have run their course since 1890 in the United States, England, Germany and France."

"Business-cycle theorists concerned themselves with why the economy naturally generated fluctuations in employment and output, [while the rest of the profession] continued to operate on the assumption that full employment was the natural, equilibrium position for the economy."

"The competitive price system uses supply-demand markets to solve the trio of economic problems — What How, and For Whom All demand relations are shown in blue. all the supply relations, in black."

"How do we measure the net national product, NNP? The general idea is simple. Figure 10-1 shows the circular flow of dollar spending in an economy with no government and no accumulation of capital or net saving going on."

"Figure 12-6 pulls together in a simplified way the main elements of income determination. Without saving and investment, there would be a circular flow of income between business and the public: above, business pays out wages, interest, rents, and profits to the public in return for the services of labor and property; and below, the public pays consumption dollars to business in return for goods and services. Realistically, we must recognize that the public will wish to save some of its income, as shown at the spigot Z. Hence, businesses cannot expect their consumption sales to be as large as the total of wages, interest, rents, and profits."

"The circular flow diagram separates the economy into the business sector and household sector. The business sector supplies products and demands resources used in the production process. The household sector demands products and supplies resources used in the production process."

"Business cycles are a type of fluctuation found in the aggregate activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar character with amplitudes approximating their own."

"In this model (circular-flow diagram), the economy is simplified to include only two types of decision makers—firms and households. Firms produce goods and services using inputs, such as labor, land, and capital (buildings and machines). These inputs are called the factors of production. Households own the factors of production and consume all the goods and services that the firms produce."

"The circular-flow diagram a visual model of the economy that shows how dollars flow through markets among households and firms change much. We may even make the extreme and artificial assumption that all prices are completely fixed."

"No two business cycles are quite the same; yet they all have much in common. They are not identical twins, but they are recognizable as belonging to the same family."

"The daily expenditures by consumers for new consumers' goods, upon which business stability largely depends, are determined in part by the total volume of money in circulation, in part by other factors including the frequency with which that money is returned to consumers. The flow of money, therefore, from use in consumption to another use in consumption should not be overlooked in studies of the causes and conditions of business fluctuations. It is the purpose of this paper to describe certain aspects of this circuit flow of money, to raise the question whether it does not deserve more attention that it has yet received in our analyses of business cycles, and to suggest pertinent lines of investigation. Unfortunately, the statistics upon which the most important conclusions concerning this subject must be based are not at hand and are not likely to be for a long time to come. The following discussion will have served its purpose if it stimulates further inquiry in profitable directions and helps to hasten the day when the necessary statistics are available."

"The circular-flow diagram is a visual model of the economy. The circular flow of income is coordinated by four key markets. First, the resource market (bottom loop) coordinates businesses demanding resources and households supplying them in exchange for income. Second, the loanable funds market (lower center) brings the net saving of households plus the net inflow of foreign capital into balance with the borrowing by businesses and governments."

"[We may view the] economic organization as a system of prize relations. Seen in the large, free enterprise is an organization of production and distribution in which individuals or family units get their real income, their "living," by selling productive power for money to "business units" or "enterprises", and buying with the money income thus obtained the direct goods and services which they consume. This view, it will be remembered, ignores for the sake of simplicity the fact that an appreciable fraction of the productive power in use at any time is not really employed in satisfying current wants but to make provision for increased want-satisfaction in the future; it treats society as it would be, or would tend to become, with progress absent, or in a “static” state."

"Knight’s wheel of wealth emphasizes the circular flow of income in the economy as money is exchanged for factor services and final goods at successive stages in the production process. His emphasis on equalization of returns at the margin implicitly made his model an equilibrium one. And Knight’s approach contrasts with Carl Menger’s emphasis on the demand for final goods determining the prices of factors of production. Knight stressed instead the importance of opportunity cost, a characteristic feature of both Chicago economics and the Virginia School of Political Economy."

"The circular flow diagram occurs in virtually all modern introductory economics textbooks as a way of explaining flows of income between firms and households and their measurement in the national accounts."

"If the society toward which we are developing is not to be a nightmare of exhaustion, we must use the interlude of the present era to develop a new technology which is based on a circular flow of materials such that the only sources of man's provisions will be his own waste products."

"Fiscal, monetary, and growth policies are used by the government to maintain a healthy economy. We will look at their interaction and effects on the economy in two ways. The first is to use the circular flow diagram with government and the international sectors added. Another is to look at how these policies affect aggregate demand and aggregate supply."

"Knight is the first to use the circular- flow diagram as a means of explaining the way in which the interaction of individuals and businesses in goods and factor markets simultaneously solve all the functions required for effective social organization (Knight 1951, pp. 61–6). Prices provide a measure of the social importance of goods and services (albeit ‘not a true index of social importance according to any recognized ethical standard’), ensure that productive resources are allocated to the production of goods and services which place the highest value on them, and simultaneously distribute income across the productive resources accordingly. ‘The principal connection between the price system and social progress’, meanwhile, ‘is mediated by the phenomenon of interest on capital’ (pp. 63–5)."

"Haavelmo was the first to recognize the capacity of economic models to guide policies. This paper describes some of the barriers that Haavelmo’s ideas have had (and still have) to overcome, and lays out a logical framework that has evolved from Haavelmo’s insight and matured into a coherent and comprehensive account of the relationships between theory, data and policy questions. The mathematical tools that emerge from this framework now enable investigators to answer complex policy and counterfactual questions using simple routines, some by mere inspection of the model’s structure."

"The corporatist-economic model of society appears to be governing us. Economists, often in the pay of transnationals, are deciding, for us, what democracy is, and will be."

"Much of my work in this period was concerned with exploring the logic of economic models, but also with attempting to reconcile the models with every day observation."

"Economists also use models to learn about the world, but instead of being made of plastic, they are most often composed of diagrams and equations. Like a biology teacher’s plastic model, economic models omit many details to allow us to see what is truly important. Just as the biology teacher’s model does not include all the body’s muscles and capillaries, an economist’s model does not include every feature of the economy."

"The circular-flow diagram offers a simple way of organizing the economic transactions that occur between households and firms in the economy. The two loops of the circular-flow diagram are distinct but related. The inner loop represents the flows of inputs and outputs. The households sell the use of their labor, land, and capital to the firms in the markets for the factors of production. The firms then use these factors to produce goods and services, which in turn are sold to households in the markets for goods..."

"Analyzing business cycles means neither more nor less than analyzing the economic process of the capitalist era.... Cycles are not like tonsils, separable things that might be treated by themselves, but are, like the beat of the heart, of the essence of the organism that displays them."

"The striking parallel between the economic models that are currently under discussion and some engineering systems suggests the hope that in some way the rapid progress in the development of the theory and practice of automatic control in the world of engineering may contribute to the solution of the economic problems."

"Unlike Hegel’s progress model of history, which moves by stages, each containing its own logic of growth and decline, the economic model develops as the simple function of one money-variable over time, with a long-term trend which increases monotonically."

"Real economic efficiency implies including all resources that affect sustainable human well-being in the allocation system, not just marketed goods and services. Our current market allocation system excludes most non-marketed natural and social capital assets and services that are critical contributors to human well-being. The current economic model ignores this and therefore does not achieve real economic efficiency. A new, sustainable ecological economic model would measure and include the contributions of natural and social capital and could better approximate real economic efficiency."

"The long term solution to the financial crisis is to move beyond the ‘growth at all costs’ economic model to a model that recognizes the real costs and benefits of growth."

"Unless the fundamental categories of economics such as ‘property’ were to be redefined in a radically personal way the liberal rationalist curse which had established economics as a scientific discipline cut off from human interests would proliferate. Economic models … have failed to incorporate any meaningful index of individual benefit other than the original utilitarian one, … the index of increasing income or an increasing flow of commodities."