Wednesday, November 30, 2022

An eye-opener from Samuel Milner

Samuel Milner:

Unwilling to wait decades for the political decline of New Deal liberalism, the core industries of post–World War II America repurposed collective bargaining as a means to reduce the costs of organized labor.

from the Abstract of "The Problem of Productivity: Inflation and Collective Bargaining after World War II" at ResearchGate.

Tuesday, November 29, 2022

Explaining the Growth of Finance

Profit as percent of GVA for Financial and Nonfinancial Corporate Business:

Graph #1 at FRED

GVA is like "GDP by sector".

Saturday, November 26, 2022

The Kennedy years

In the 1950s, cost-push inflation was sometimes attributed to low productivity.

In The Wage-Push Inflation Thesis, 1950-1957 Lowell E. Gallaway (1958) wrote:

Simply stated, the wage-push inflation thesis holds that money wage rates have increased more rapidly than physical productivity and, consequently, have exerted upward pressure on costs and prices.

 In Time magazine, 15 July 1957, we read:

General Motors set up the first automatic "annual improvement factor" increase in wage contracts in 1950
The upward trend of wages was due not only to the scarcity of labor but also to the spread throughout industry of the G.M. idea of automatic increases. This ran counter to traditional business practice because it placed emphasis on a long-term rise in productivity and kept wages rising even when productivity temporarily stopped rising (as it did last year) or business temporarily slackened (as in steel and autos this year).

Note that they knew already in 1957 that productivity "stopped rising" in 1956.

Note also that a decline in productivity will increase labor cost to business, just as wage hikes do. It would be an easy mistake to blame wages, if the problem was low or falling productivity. But you couldn't fix that problem by holding wages down, not in the 1950s, and not since the 1980s.

In the Kennedy years, productivity was sharply in focus. In 1996 the L.A. Times recalled that President Kennedy

used a tactic his economic advisor, Walter W. Heller, called “jawboning” to urge business and labor to behave responsibly. In Kennedy’s time, that meant pay increases shouldn’t exceed productivity gains--and price hikes shouldn’t exceed increases in wages.

And again:

In his [January 11] 1962 State of the Union, Kennedy declared, “Our first line of defense against inflation is the good sense and public spirit of business and labor--keeping their total increase in wages and profits in line with productivity.

Networker writes:

Kennedy, since the Inaugural Address and beyond, had been asking Americans and American business to exercise restraint to enable the United States to meet its obligations and strengthen its economy. The Steel Workers of America agreed to hold off their demands for higher wages if the Steel Companies, on their part, would not raise the price of steel. The workers kept their end of the bargain, the companies did not, ordering a price increase after a strike was averted. This dishonest and irresponsible act angered Kennedy, as is made clear in the following speech.

Then, from Kennedy's April 11 1962 speech:

... there is no justification for an increase in steel prices. The recent settlement between the industry and the union, which does not even take place until July 1st, was widely acknowledged to be noninflationary, and the whole purpose and effect of this Administration's role, which both parties understood, was to achieve an agreement which would make unnecessary any increase in prices.

In his very next sentences, again, productivity was central:

Steel output per man is rising so fast that labor costs per ton of steel can actually be expected to decline in the next 12 months. And in fact, the acting Commissioner of the Bureau of Labor Statistics informed me this morning that, and I quote, "employment costs per unit of steel output in 1961 were essentially the same as they were in 1958."

It's a good speech. Kennedy was angry. He called for "a higher sense of business responsibility for the welfare of their country".

It's not like Kennedy didn't know about productivity and cost. He knew. He was focused on it. And he tried to keep prices from rising.

It didn't work.

The above is taken from mine of 21 April 2021. In that post my focus was the cost of interest and its impact on wage hikes:

Debt was accumulating. The cost of finance was rising. Surely, by the time interest on household debt was taking more than 5% of employee compensation, people considered it part of the cost of living. Surely, rises in our paychecks had to cover the rises in our interest payments.

Annual household interest costs were above 5% of employee compensation by 1960. And with household interest cost growing faster than GDP from 1946 to 1986, wage hikes that covered the cost of interest would surely have looked like inflationary increases. Looked inflationary, and were inflationary.

Wage earners were trying to cover their costs. It was cost-push inflation, due to the rising cost of finance. It looked like inflationary wage increases for a reason, yes. But finance didn't get the blame. Wages did.

I should add that as long as we continue to ignore the cost of finance, we will never solve our economic troubles.


In the present post my focus is on the cost of finance for Nonfinancial Corporate Business (NCB), our creators of output.

Nonfinancial corporate business is NCB, not NFC. NFC is an NFL football thing.

The problem was not simply that the steel companies ignored Kennedy's jawboning in 1962. The problem was rising cost -- specifically, the rising cost of interest. In the mid-1950s, the interest paid annually by nonfinancial corporate business was less than two percent of the value of output they generated (as measured by Gross Value Added). In 1962 it was almost three percent. 

Graph #1: Interest Cost as a Percent of GVA for Nonfinancial Corporate Business

Interest cost is even higher when we compare it to profits. Annual Interest paid as a percent of NCB profits before tax amounted to 9.5% in 1955. By 1962 the interest cost had more than doubled, to 19.2% of before-tax profits:

Graph #2: NCB Interest Cost as a Percent of NCB Profits Before Tax

NCB interest cost as a percent of after-tax profits increased from 17.5% in 1955 to 34.3% in 1962.

Businesses keep track of their costs.  When U.S. Steel increased prices in 1962, angering Kennedy, they knew their interest costs were rising. Even if wage hikes were held down to match productivity gains, U.S. Steel needed a price increase to cover their rising interest costs.

But the negotiations, apparently, were all about productivity and the cost of labor.

Thursday, November 24, 2022

The US economy in the early years after WWII

The 1960 paper by Paul Samuelson and Robert Solow and the issue it addressed were the topic of James Forder's 2010 paper Economists on Samuelson and Solow on the Phillips Curve:

The question they were addressing was that of the explanation of the inflation of the 1950s – particularly the period 1955-57 – and the implications it had for macroeconomics. Mild though that was later to seem, this 'creeping inflation' as it was called was, at the time, a source of much anxiety.

This graph shows the years 1948 to 1978. The blue line shows inflation using the "urban" data that seems to serve as a "nationwide" measure. The red line shows the interest rate that the Federal Reserve raised or lowered to control inflation:

Graph #1: Blue is Inflation, shown as "percent change from year ago" of the CPI.
Red is the "Federal Funds" interest rate for which the Federal Reserve set targets.

After the end of the second World War, it took a few years to get inflation stabilized. But inflation (blue) did quiet down to below 1% by the end of 1952. The Federal Funds rate (red) doesn't appear on the graph until July 1954, but we can reasonably assume interest rates rose enough to reduce early-1950s inflation and create a recession in mid-1953: My proxy for FedFunds rises from the end of the 1949 recession to the start of the 1953-54 recession.

The red line shows the FedFunds rate following the same pattern after the 1953-54 recession: persistent increase from the end of one recession to the beginning of the next; rates only fall as the ensuing recession slows the economy and starts to bring inflation down. 

The graph shows the Federal Funds interest rate rising almost immediately as the 1953-54 recession ends. The graph shows that the interest rate kept going up even as prices fell for a whole year: The blue line (inflation) went below zero in September 1954 and didn't surface again until September 1955. As Lorraine Lee rightly says, "counterinflationary policy is basically severe austerity."

The increase in the blue line between 1955 and the 1957-58 recession was the inflation that Samuelson and Solow were writing about in 1960, the "creeping inflation".

And again, almost immediately after the 1957-58 recession, the Fed started raising the interest rate. The FedFunds rate hit bottom in July 1958 and started going up. Inflation continued falling until April 1959, and only rose after that.

This brings us to the 1960 recession.

The 1960 recession began in April 1960 and ended in February 1961. CQ Researcher provides Wage Policy in Recovery, a remarkable article by H. B. Shaffer dated June 21, 1961. The opening paragraph:

Satisfaction over multiplying signs that the country is fast leaving the recession behind is currently clouded by fears that too vigorous a recovery will set in motion a new inflationary surge. The risks in the situation have impelled the Kennedy administration to make special efforts to prevail on labor and management to keep wage-price levels steady as business activity expands.

Shaffer's words emphasize the bipolar approach to inflation management that is visible in the historical data. March, April, May, June: It took four  months to go from "Things are great!" to "Oh, no! Things are too good!" -- and Shaffer's article was written even before June was out. There was "much anxiety" about inflation, as James Forder said.

And this brings us to President Kennedy.

Tuesday, November 22, 2022

JFK assassination: 22 November 1963

Fifty-nine years.

I was in algebra class when they announced it.

Some things, you don't forget.

A detail

My habit is to use the inflation measure FRED calls CPIAUCSL because I memorized the name of it and because it was FRED's most popular inflation measure when I was looking for a name to memorize. (It still is their most popular inflation measure.) But that inflation measure gives the CPI "for all urban consumers". 

I figure most consumers are urban consumers. I used the urban measure for a long time without worrying that it might be different from the national measure. But now I have decided to take a look at it, and that is our adventure today.

On the graph I show the first dataset as a wide, bright blue line and the second one narrow and bright red so I can see how the one line matches the other. But it is easier to see if the image is bigger. To see a bigger version of the graph below, click on the graph image. To access the graph at FRED, click the word "Graph" in the caption.

Graph #1

By eye, red and blue differ a little in 1954, 1962, 1967, and 1970. But the two lines are similar enough that I figure the "urban" measure is a good match to the "national" measure. I should say, though, that I don't really know if the blue is a national measure. It sounds national from the dataset title "Consumer Price Index in the United States" but if it is a national measure, I don't really know.

The values used for the graph are annual.

The red line starts in 1948 and ends with the most recent annual data to date, 2021. The blue starts in 1951 (I don't know why) and ends in 2012; this series was "discontinued". I like it because the red line sticks out at both ends. I think that makes the graph easier to read.

Not that it matters, but FRED's name for the blue dataset is USACPIBLS. I didn't memorize this one, but it is easy enough to parse: For the USA, it is a measure of CPI from the BLS. Sometimes the names are easy like that.

If you remember the 1970s inflation, you know "CPI" is "Consumer Price Index"; it was on the news all the time. With this current inflation I don't know that they emphasize "CPI" so much. 

And BLS is the Bureau of Labor Something.


I'm not happy that I don't know if the blue line is supposed to represent "national" data. So I found another dataset that sounds like it might be national: "Inflation, consumer prices for the United States". I don't know if this one represents national data, either, but I figure two weak links are better than one because I'm using them in parallel, not in series: I'm using two chains to carry this analysis, each with one weak link.

FRED's name for this one is FPCPITOTLZGUSA. I didn't even try to parse it.

For this graph I used the one above, at FRED, and just swapped datasets. The colors and line widths worked themselves out automatically.

My second chain:

Graph #2

This time the blue line starts in 1960 and ends with the red one in 2021. And here, blue matches red so well it makes me wonder if they just used the red data and cut off the first few years to make the new dataset look different.

So I still don't know about urban vs national. But I'm going to keep using the "for all urban consumers" measure of inflation, and I'm gonna figure that it works as a measure of inflation nationwide.

Sunday, November 20, 2022

Monetary Interest Paid by Households as a Percent of Disposable Personal Income

Graph #1: Monetary Interest Paid by Households as a Percent of DPI, 1946-2021

Arthurian theory:

Interest cost to households rose from 1% of DPI in 1946 to 2% by 1951. Those costs rose to 3% by 1956, 4% by 1963, and 5% by 1977. That's fact, not theory.

Usually, a normal yearly pay raise is around 3%, they say. But the source graphs behind that claim only go back to 1998. Lacking better data, let's suppose the 3% annual pay increase was typical going all the way back to 1946. 

In 1956 households were paying 3% of their disposable income just to cover their interest costs. In other words, the pay raise that year barely covered the cost of interest. In later years, the annual interest cost kept rising -- reaching 8% by 1986 -- but the old reliable pay raise kept plugging along at 3% annual.

Maybe we should allow for inflation, which started climbing in the mid-60s. Raises would have increased; that's just part of the inflation. Does this affect this analysis? No, because the pay raises are reflected in the "disposable income" numbers, and the interest paid is shown as a percent of disposable income. Inflation did increase our income, yes. But even so, "monetary interest paid" increased faster than income in those years. That's what the graph shows.

Anyway, the inflation mostly impacts the graph (and the economy) after 1965 or so, and by then the annual interest cost amounted to more than four and a quarter percent of income and was still climbing. Even if pay raises amounted to more than 3% annual, the interest paid by households each year increased faster than after-tax income all through the 1950s and '60s and '70s, as the graph shows.

Reviewing what we know, annual interest costs after 1956 were higher than annual pay raises. Interest costs made gains on income every year. So the cost of interest, all by itself, could have been enough to get the Great Inflation going in the 1960s, as people struggled (many even going on strike) to keep their income from falling behind their costs.

Thus the rising cost of finance created the Great Inflation. That's Arthurian theory. Everyone else blames oil or wages.

This same cost problem, the cost of finance, would have affected the business world. One price increase that comes to mind is the 1962 increase by U.S. Steel. President Kennedy was not happy about that one.


My goal here, as always, is to show that the rising cost of finance is the one factor we can reasonably hold responsible for the decline of the US economy in the decades since the second World War.

Friday, November 18, 2022

If supply-side economics doesn't solve the problem, we could always try this

Another slavery quote from Arnold J. Toynbee:

When Attica, on Solon's initiative, led the way from a regime of mixed farming to a regime of specialized agriculture for export, this technical advance was followed by an outburst of energy and growth in every sphere of Attic life. The next chapter of the story, however, takes a different and a sinister turn. The next stage of technical advance was an increase in the scale of operations through the organization of mass-production based on slave labor... Here the technical advance was offset by a grave social lapse, for the new plantation slavery was a far more serious social evil than the old domestic slavery. It was worse both morally and statistically. It was impersonal and inhuman, and it was on a grand scale. It eventually spread from the Greek communities in Sicily to the great area of Southern Italy which had been left derelict and devastated by the Hannibalic War. Wherever it established itself it notably increased the productivity of the land and the profits of the capitalist, but it reduced the land to social sterility; for wherever slave-plantations spread they displaced and pauperized the peasant yeoman as inexorably as bad money drives out good. The social consequence was the depopulation of the countryside and the creation of a parasitic urban proletariat in the cities, and more particularly in Rome itself.

I was gonna leave it at that. But what follows is too good to leave out. Decline-of-Civ stuff:

Not all the efforts of successive generations of Roman reformers, from the Gracchi onwards, could avail to rid the Roman World of this social blight which the last advance in agricultural technique had brought upon it. The plantation-slave system persisted until it collapsed spontaneously in consequence of the breakdown of the money economy on which it was dependent for its profits. This financial breakdown was part of the general social debacle of the third century after Christ; and the debacle was doubtless the outcome, in part, of the agrarian malady which had been eating away the tissues of the Roman body social during the previous four centuries. Thus this social cancer eventually extinguished itself by causing the death of the society upon which it had fastened.


These "technical advances", Solon's and the plantation slavery, were by any measure economic developments. Economic issues are always most crucial, and -- as your negative reaction to that assertion will likely confirm -- are the least recognized as crucial until troubles get particularly bad. 

As Hayek said in The Road to Serfdom, the common view that economic matters are "matters of secondary importance only" is "altogether unwarranted."

Thursday, November 17, 2022

Toynbee on the growth of government

From A Study of History:

A classic example of this necessity of stepping ever farther into an ever-widening breach is afforded by the administrative history of the Roman Empire during the two centuries following its establishment. The Roman secret of government was the principle of indirect rule. The Hellenic universal state was conceived of by its Roman founders as an association of self-governing cities with a fringe of autonomous principalities in regions where the Hellenic culture had not yet struck political root. The burden of administration was to be left to these local authorities. This policy was never deliberately revised; yet, if we resurvey the Empire at the end of two centuries of the Roman Peace, we shall find that the administrative structure has been in fact transformed. The client principalities have been turned into provinces, and the provinces themselves have become organs of direct and centralized administration. The human resources for the conduct of local government gradually ran dry, and the central government, faced with this increasing dearth of local administrative talent, found itself constrained not only to replace client princes by imperial governors but to put the administration of the city-states into the hands of appointed ‘managers’. By the end of the story the whole administration of the Empire had passed into the hands of a hierarchically organized bureaucracy.

Toynbee explains the growth of governance (and authoritarian control) as the "necessity of stepping ever farther into an ever-widening breach".

We have an ever-widening breach. The attack on the Capitol was fruit of that poisonous tree. There is a lot of focus on that attack, and a lot of fret. All the focus is on the January 6th result of the breach. None of the focus is on the cause of the breach, which to my mind is the unrelenting decline of the US economy, and on the failure of Democrats even to acknowledge that decline.

A lifetime ago, evaluated President Trump's inaugural address; I wrote about that evaluation on my old blog. The Google hit that led me to FactCheck said, in part:

in his inaugural address, Trump portrayed the United States as a nation in decline, ...

That got me interested, because I also "portray" the United States as a nation in decline. Here's the summary of my critique of the FactCheck article:

FactCheck tells us that inaugurals usually serve up "broad platitudes and generalities". So we should expect the wording of the Trump inaugural to be broad and general. But FactCheck takes great schools, safe neighborhoods, and good jobs, filters them through the word "carnage", and gives us only "crime". FactCheck takes a focus on jobs and flushes it down the toilet by suggesting that we have all the jobs we need. And FactCheck takes a focus on improving our economy and reduces it to "welfare".

The FactCheck response is incorrect.

They were critical of Trump, so to my mind their view serves as part of the Democrat's response. But the response, the FactCheck response, was to get crabby because Trump "portrayed the United States as a nation in decline".

This is the graph I used in my old post:

The Long-Term Decline of Real GDP Growth

Our economy is in decline. Going by the black trend line, our economic performance fell from better than 4% annual in 1948, to less than 2% annual in 2013. Half the growth we had when our economy was good has been lost in a lifetime.

Republicans talk about making government small enough you could "drown it in a bathtub". But the problem is not that our government is too big. The economic problem is not that our government is too big. We could have bigger government or smaller government, I don't really care. Changing the size of government will not fix the economic problem.

We have to fix the economic problem. This problem, the economic problem, is the source of our "ever-widening breach".

Wednesday, November 16, 2022

Toynbee: "shepherds of men"

I hit the mother lode in Arnold J. Toynbee's A Study of History. Expect one post per day for the next three days.

Three posts. Okay, so maybe not a mother lode.

From "A Study of History", because it's good:

... the ‘shepherds of men’ are always economically—though not always politically—superfluous and therefore parasitic. From the economic standpoint they have ceased to be shepherds keeping watch over their flocks and have turned into drones exploiting the worker-bees. They have become a non-productive ruling class maintained by the labour of a productive population which would be better off economically if they were not there.


I should point out that Toynbee wasn't offering a general statement. In the "..." part of the quote above, he was describing a particular environment and a particular type of society. But I still like the quote.

Sunday, November 13, 2022

Inequality and the cycle of civilization

Keynes, retiring in 1945 after 33 years editing the Economic Journal, gave a toast at a dinner given in his honor. He toasted economists:

economists, who are the trustees not of civilization, but of the possibility of civilization.

Economists, he was saying, are responsible for making civilization possible. Should they fail at the task, civilization becomes impossible. The economy must be good, Keynes was saying, or civilization cannot endure.

Long-term slowing of economic growth is indistinguishable from the decline of civilization.

In my view, the cycle of civilization is an economic cycle driven by wealth: If the growth of wealth outpaces the concentration of wealth, times are good; otherwise, they are not.

What woke me up was the sudden thought that trade goes all the way back in human history. There has always been trade. There is always this force at work, concentrating wealth. And here's the thing: When wealth grows faster than it concentrates, wealth spreads. You get the upswing of an economic cycle. But when wealth concentrates faster than it grows, you get the downswing.

If you read me, you can guess where my mind takes these thoughts: A cycle ... since the beginning of human history ... driven by the concentration and distribution of wealth: A cycle of civilization.

Ordinarily, stopping the concentration of wealth might stop the decline of civilization. But things have now progressed too far: To preserve civilization, the concentration of wealth must be reversed. Keep in mind, ye preserver of civilization, that concentrated gains outweigh widely distributed gains:

Concentrated gains tend to lift the few and lower the many. Given the increase of inequality, there is a point beyond which the gains from economically viable choices are not sufficiently distributed to permit us to say that "humanity" is lifted. It is only below this determining point that the distribution of gains assures the lifting of humanity.

The ageing of capitalism increases economic inequality. This suggests that reducing inequality might help reverse the ageing process and restore the health and vigor of our economy, and of our civilization.

Britannica says that after the fall of Rome there was "a virtual disappearance of urban life" for three or four centuries.

The growth and decline of cities is a useful indicator of the growth and decline of civilization. The fall of New York's Twin Towers is a benchmark in our decline.

Carroll Quigley, on page 266 of The Evolution of Civilizations, lays out the "process" by which civilization "dies" and is "reborn". His process of decline includes the decline of cities:

there is a general exodus from the towns as people try to find a place in which they can be attached in some stable social and economic relationship to the food-producing earth...

We are not there yet. But we can judge by our cities, and say the decline of our civilization is under way.

Here, Timothy Taylor quotes Paul Cheshire, from the Housing Watch Newsletter:

... cities are the most welfare enhancing human innovation in history: they empowered the division of labour, the invention of money, trade and technical inventions like the wheel – let alone government, the arts or culture.

Welfare-enhancing? Sure: The growth of cities is part of the process of the growth of civilization. But to me, Cheshire's statement lacks context. It lacks the context that would be provided by thinking in terms of the cycle of civilization. 

Does Cheshire discuss the decline of cities? He does not. Not in the interview. The closest he comes is when he says

Another endemic problem of urban policy is what I have called ‘faith-based displacement activity’ – spending resources on problems urban policy cannot solve, such as societal inequality.

He calls inequality a "truly serious problem". But he complains about "spending resources" on such problems, problems that arise in the decline phase of the cycle of civilization. Problems that "urban policy cannot solve". But he does not see these problems in context. He does not see the rise of such problems as part of the decline of civilization.

He only sees the bright side. Cities, he says, are "welfare enhancing". Evaluating trends, he sees "the resurgence of large cities." Policy that "restricts the supply of urban land" is the problem, he says. It's lucky that "cities are so resilient because urban policy is generally so bad!" he says. Policy is "not useful for facilitating urban growth", he says.

It's all one-sided. Cheshire's view is all policy-related and all pro-city. Yes, he admits, cities give rise to incidental problems, but the real problems of cities (he says) are imposed on them by policy. Policies interfere with city growth, he says. It's lucky cities are so resilient. And that's it: That's his whole argument. 

But cities do not only decline because their policies are less than perfect. Big picture, cities decline with civilization.

Take a city out of the "rise" of civilization and drop it into the "decline" phase. Do the city's problems increase? Of course the problems increase. That's what I'm saying: Cheshire's argument lacks the context that the cycle of civilization could provide. He was "brought up in London and was always fascinated by it" -- and that is really all that his argument shows.

Our declining cities are evidence of the decline of our civilization.

For me, the problems of cities suggest 1. rise, and 2. decline. Cheshire sees 1. rise, and nothing beyond that. I am reminded of another Tim Taylor article: Macaulay on Economic Progress, 100 Years Before Keynes where Taylor asks a question:

"Yes, maybe economic progress is about to stop and reverse itself. Maybe we will be immiserated by new technology. Maybe the future is one of mass starvation from overpopulation. But looking back at the historical experience of the last several hundred years, what can be the basis for having any confidence in such pessimistic claims?"

The basis for such claims is the cycle of civilization. The "last several hundred years" were the upswing and the peak of the cycle. 

Taylor asks his question, I'd say, because he thinks it has no answer. He sees no answer to it because he excludes the possibility of the decline of civilization. I don't often invent views and attribute them to other people, but in this case I can see no reason to ask the question Taylor asks, except that he excludes the possibility of the decline of civilization.

Civilizations decline. This time is not different. Toynbee maintained that the fate of civilizations is determined by their response to the challenges facing them. We must rise to the challenge, and we must have the right response.

Accepting the idea that civilization runs in cycles does not mean we must accept every bad thing that happens as proof "the end is near". It only means we are willing to consider such an ending as possible, should events and logic demand it.

The irony here is that dismissing the concept of the Cycle of Civilization is the best way to assure that the decline phase runs its course.

Friday, November 11, 2022

The "stages" of capitalism

I want to talk about the stages of capitalism, but "stages" is not quite the right word. Like the economy itself, and life, capitalism evolves.

Let me begin with the brief analysis I wrote a few years back on conditions existing at the beginning of the capitalist period, and those near the end, without first defining "the end" of capitalism.

Wealth is like matter: It has mass, and it responds to the force of gravity.

Matter accumulates until black holes form and the known laws of physics no longer apply. Wealth accumulates until black holes form and the known laws of economics no longer apply.

The accumulation of matter does not begin with black holes, of course. It begins perhaps by chance. But once the accumulation begins, it begins to accelerate. For the force of gravity depends on mass: The greater the accumulation, the greater the mass, and the greater the force of gravity.

The greater the accumulation, the greater is the force drawing additional matter into the accumulation. Adam Smith described the process:

As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work...
Early on, the creation of output is a by-product of the process of accumulation. As long as it facilitates accumulation, the creation of output gives the appearance of being central to the process. It is not central to the process.

Late in the process of accumulation, little free matter remains in the universe. So the creation of output can do little to facilitate accumulation. Therefore, the process of accumulation evolves. The underlying force remains the same: The force of gravity attracts matter to matter, wealth to wealth. Late in the process, however, large accumulations attract large accumulations. Black holes consume black holes. Mergers and acquisitions serve the process of accumulation better than the creation of output ever could.

For those who have money, or for "some of them" at least, the goal is to accumulate more. As people accumulate more, and as more people accumulate, the process of wealth accumulation becomes an increasingly powerful force. This is the change that happens to capitalism, or one of the changes; and it happens from beginning to end -- not that capitalism necessarily ever ends.

Capitalism first arises when there are enough people with enough money they can use to accumulate more, just as Adam Smith describes. But of course there must also be enough people with enough money for the accumulators to gather up and accumulate, or capitalism isn't worth their while. At the beginning of capitalism, money is widely distributed and the accumulations are small.

Nearing the end of capitalism as we know it, almost all transactions are monetary transactions, and the accumulations are large. There is little left to accumulate, so normal business profits tend to be low for many businesses. Economic conditions are different at the beginning of capitalism than they are at the end.


Let me look at this change in capitalism another way: as diminishing returns. TechTarget lays it out clearly: 

The law of diminishing returns is an economic principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase ... As investment continues past that point, the return diminishes progressively.

The return diminishes progressively. The return diminishes over time.

Paul Samuelson (Economics, fourth edition, page 580-581) observed that

the law of diminishing returns applies to Capital as well as to other factors...

Samuelson provided an abstract example. He reduced the concept of diminishing returns to a series of numbers representing the rate of profit falling gradually over time:

Gradually, through thrift, capital formation takes place and the community finds it has exploited all the 12 per cent projects; with total labor and land fixed, diminishing returns to the varying Capital have set in. The community must then invest in 11 and 10 per cent projects.

In 1958 when the fourth edition came out, "percent" was still two words, and "capital" was capitalized. Things change over time. The rate of profit also changes over time. As profit is the "return" the capitalist receives, and the rate of profit gradually diminishes, this concept is called "diminishing returns"

As the growing accumulations are invested and reinvested "to make a profit" (Smith's words), the rate of profit gradually diminishes over time. Samuelson makes this clear. Mankiw makes it unclear. Mankiw does not talk of "varying Capital" as Samuelson does. Mankiw (Macroeconomics, fourth edition, page 48) changes the analysis by holding capital fixed:

Most production functions have the property of diminishing marginal product: holding the amount of capital fixed, the marginal product of labor decreases as the amount of labor increases.

Mankiw goes out of his way to avoid saying profit declines over time. He goes out of his way to avoid talking about the evolution of capitalism. The story Mankiw tells could be the story of an entrepreneur who sets up several simultaneous experiments, each with a different quantity of labor. This is certainly possible. It could be done. But it would not prevent diminishing returns. 

Mankiw does not mention time or the decline in the rate of profit over time. He does not explain the decline in the rate of profit over time. He does not acknowledge that capitalism evolves through decline in the rate of profit over time. But it does.

Mankiw is not lying. Not exactly. But he is obscuring facts instead of presenting them. This is what's wrong with economics today. Things like this. It is not, however, what's wrong with the economy or with capitalism.

The point is that the economy changes over time. Capitalism changes over time. And the rate of profit falls over time. This is a most significant change, whether you think of it in terms of diminishing returns or in terms of the effect of gravity on wealth.


Another change: As the great accumulations increase in size, the size of the investment and the size of the market must increase in proportion, to minimize as much as possible the effect of diminishing returns. But the greater the accumulations, the less wealth remains to be accumulated, and the more difficult it is to obtain a rate of profit that makes the effort worthwhile. At some point you have wealthy people choosing to bail out. Melania in AD 404, for example. And I remember Robert Latouche, in The Birth of Western Economy, saying the wealthy few in Merovingian times were probably descended from a wealthy few who came from Rome after the fall. Can't find the reference just now, but it makes sense that Melania was unlikely to have been the only one.

You don't see that happen when wealthy people are still able to increase their wealth by working within the capitalist system.


Economic conditions are different at the beginning of capitalism from what they are at the end. At the beginning, capitalism draws people into a system of increasingly regular monetary payments -- people who may have been working the farm in exchange for food, shelter, and clothing, in a system where little money was exchanged. Hiring people for pay tended to increase the number of "people with enough money for the accumulators to gather up and accumulate" so that, in the early stages of capitalism, there is more to be accumulated, and more people can accumulate more. In this stage,  capitalism operates as a self-reinforcing feedback loop.

Economic growth itself is a process which increases income and output, increases the money available for accumulators to accumulate, and provides the trinkets that make consumers willing to contribute to the accumulation of capitalist wealth. 

There would have been a transition period during which the available "work force" grew as a portion of the population: slowly at first, then more and more rapidly as people came to see the new system as advantageous to them, and then less and less rapidly as a the work force became a relatively stable portion of the population. Thereafter, growth of the work force would depend on the growth of population. And late in the  cycle, with the evolution of capitalism having arrived at the stage of slowing growth, one would see what we are seeing: desperate and irrational calls for greater immigration as a way to enlarge the workforce, to reduce per-unit labor costs (which we call the average wage), and to boost capitalist accumulation.

If the capitalist makes a good profit on his investment, his accumulation increases and he has more to invest the next time. If he doesn't, he has little reason to invest at all, so economic conditions deteriorate and jobs become increasingly hard to find. That's early versus late capitalism, in a nutshell.

Wednesday, November 9, 2022

"a morass of ignorance and superstition"

Carroll Quigley, The Evolution of Civilizations, page 277:

In other words, the Classical culture we so esteem was the culture of a small minority of city dwellers except for a brief period of a century and a half (480-330 B.C.) in Athens. In this brief period it may be that the majority of the inhabitants of that city had some idea of what we call Classical culture. Otherwise, in other cities generally, and in rural areas always, the masses of the people lived in a morass of ignorance and superstition that is difficult for us to imagine. To them life was an irrational chaos of conflicting powers and forces of which the chief were a myriad of local gods and spirits.

Tuesday, November 8, 2022

An election-day quote from John Maynard Keynes

What with this inflation, and today being overturn-the-existing-basis-of-society day, it seemed this quote would be most appropriate:

there is no subtler, no surer means of overturning the existing basis of a society than to debauch the currency.

From Time Magazine, 31 December 1965, at Brad DeLong's.

Not that I'm predicting how the vote will turn out, or anything

Sunday, November 6, 2022

P2P: Five bullet points and an afterthought

Lorraine on MMT:

"Seemingly this is the most assertive claim of MMT, that you will have some combination of public and private debt, no matter what."

Well that's a realistic conclusion on their part. But there is more to it than having "some combination". I don't know what they look at. I look at the ratio of private debt to public debt -- the "P2P" ratio: 

But don't forget that the increase of private debt in a low P2P environment, which so effectively boosts growth, also increases the P2P ratio and reduces the benefit of subsequent increases in private debt. So we need new policy, to encourage the accelerated repayment of private debt and maintain the high-growth environment. Such a policy would also act as a fiscal-side anti-inflation tool, to complement interest rate policy.

Friday, November 4, 2022

Like a business cycle, only bigger

In response to Late-stage capitalism --

In the opening paragraph, Lorraine acknowledges (1) "the consequences of profligate state spending" and (2) "recession" as a likely consequence of cuts to that spending. An excellent opening: both sides of the government-spending issue are presented and Lorraine responds as the world has to that issue, going with its gut and resolving nothing. We could go back to LBJ in the mid-1960s for "guns and butter" spending -- which has always been blamed for starting the "Great Inflation" of the 1965-1984 period -- and to the series of recessions, ending with the 1982-83 recession, which has always been given credit for ending that inflation; but the government-spending issue has never been finally resolved and put to bed.

And yet, if "profligate state spending" is not the root problem, then the world's endless discussion of it is an attempt to solve a consequence of the root problem, and it can only fail. I would argue that this is exactly what has happened. 

It may be off-topic for this post, but I identify the root problem as excessive private-sector debt, the cause of which is misguided economic policy that always encourages the growth of finance and always fails to consider the growing cost of it.


The Cycle of Civilization

To the subject at hand: the cycle of civilization. Lorraine observes that the cycle I mention would last "perhaps a whole millennium", and that I seem to be saying "that the end of capitalism will be the beginning of another Dark Ages." 

For a successful civilization, "a whole millennium" would be a surprisingly brief duration, I think. Toynbee, in A Study of History (the abridged version), figured it was something like 6000 years "which bridges the interval between the emergence of the earliest known civilizations and our own day". 

Toynbee added: "Now, in surveying the relations of civilizations in time, the highest number of successive generations that we have met with in any case is three".

I take 6000 years, divide by 3 generations, and figure 2000 years as a useful rough idea of the length of life of a single civilization.

His "successive generations" idea fascinates me. In Toynbee's words, "... our Western Society [is] related to the Hellenic Society in a manner comparable (to use a convenient though imperfect simile) with the relationship of a child to its parent." To dumb it down to my level, Western civilization was offspring of the ancient Greek and Roman ("Hellenic") civilization, and Hellenic was offspring of the Minoan. Thus, three generations.

There are dark ages between civilizations, by the way.


Carroll Quigley, in his book The Evolution of Civilizations, page 84 (or page 82 of 425 in the PDF reader) provides a list of civilizations and their varying durations. Quigley has the Egyptian and Mesopotamian civilizations lasting more than 5000 years, the Hittite around 900 years, the Islamic and Chinese around 1400 years. His dates show that my "2000 years" is quite ridiculous; I'm fine with that.

Quigley also warned that we should be cautious when putting dates on civilizations (page 124 of 425 in the PDF reader): "... civilizations come into existence, rise and flourish, and go out of existence by a slow process which covers decades or even centuries, and historians are unable to agree on any precise dates for these events. This is perfectly proper...  In the following discussion it should be remembered that the dates given for historical periods are only approximate." 

I'm fine with that, too.



I see capitalism as a stage of economic development within the economic cycle that I call the cycle of civilization. Because I happen to live in capitalist times, I see capitalism as the "peak" of the cycle. This means that I must see both a rise to the peak (good capitalism) and a decline from the peak (bad capitalism). I do -- but I am not the only one who does.

I refer next to James R. Crotty's 1990 paper "Keynes on the Stages of Development of the Capitalist Economy: The Institutional Foundation of Keynes's Methodology" (I no longer have a working link).

Crotty says on page 5: "Keynes clearly distinguished two historical stages of capitalist development: pre-World War I or "nineteenth-century" capitalism (which I label Stage One), and post-World War I or modern or twentieth-century capitalism (which I label Stage Two)."

Crotty's "Stage One" is an exact match to Werner Sombart's "heyday of capitalism ... from 1800 to the first World War" as described at Wikipedia. (Sombart is one of the "cyclical history buffs" Lorraine mentions.)

Crotty's Keynes identifies the same stages that I identify in my response to Lorraine, where I said "'early' capitalism is the 'rise to the peak' and 'late' capitalism is the 'decline from the peak'". I take no credit for any of this, by the way; I'm just trying to fit puzzle pieces together.


Early, Late, and then what?

My notes here are largely in response to Lorraine noticing that I seem to be saying that "the end of capitalism will be the beginning of another Dark Ages." I do seem to be saying that, yes. But it is not what I intended to say.

In my response I did say "'early' capitalism is the 'rise to the peak' and 'late' capitalism is the 'decline from the peak' which leads to the end of civilization and a 'dark age'."

And in mine of 30 October 2022 I did say "'late' capitalism necessarily implies we are approaching the end of capitalism... After capitalism comes the decline and fall." Ouch! In this shortened version, Lorraine's "the end of capitalism will be the beginning of another Dark Ages" is exactly what I said. Sorry for creating confusion. I was trying to be brief. I guess I was too brief!

Let me soften something I said in the earlier response, and add to it: I might suggest as a metaphorical version of history, that the whole "Republic" (509 BC legendary - 27 BC) period of ancient Rome (after the Monarchy (753 BC legendary - 509 BC legendary) and before the Empire) was late-stage capitalism. 

After the Republic came the Empire (27 BC-AD 476, or about 500 years) which lasted quite a while. And the Dark Age started around the time of the Empire's demise in AD 476.

By my simplistic metaphor, the Roman Monarchy is "early" (good) capitalism, the Roman Republic is "late" (bad) capitalism, the Roman Empire was probably "worse" capitalism (or capitalism becoming something else; dunno), and after the Empire came the Dark Age. There could be quite some time between late capitalism and the Dark Age.



In her "Late-stage capitalism" discussion, Lorraine wonders "Is there a possibility of forestalling late capitalism and the subsequent Dark Age by getting aggressive on antitrust legislation or adjudication?"

Short answer: If merger and acquisition (M&A) was the root problem, then yes; but "a possibility" will in no way suffice.

Long answer: Antitrust is not an area of the economy that I focus on, so I have no links or quotes to offer; but I have read more than once that antitrust actions were much less favorable to mergers and acquisitions before Reagan, and are much more favorable to M&A since Reagan. Even if this is true, before Reagan the merging and acquiring share of total US business was growing relative to the total. It's not like M&A was prevented before Reagan. It was only slower. (I don't have data of this, but I am pretty sure what I say here is correct.)

Pondering the decline and fall of Rome, Vladimir Simkhovitch gathers his evidence from the writings passed down to us from ancient Rome. "The testimony of the eyewitnesses", he calls it. There was some decline in agricultural output, and thus some decline of income. But Rome was an agricultural society, so the decline of income was widespread. People were taking on debt to get by, thinking the next year would be better.

But as Simkhovitch lays it out, the gradual decline of agricultural output was due to gradual exhaustion of the soil. So things could not get better. They could only get worse. And indeed, things progressed to the point where "labor could not support life".

Simkhovitch describes the problem: "The increasing weight of accumulated interest on the loan and the decreasing productivity of the land seal the fate of the landowner."

Destitute farmers would sell their land, move to Rome, and live on the free grain the Emperor was distributing. More prosperous Romans would buy up the land and merge it into their holdings.

Simkhovitch writes: "In this way a farmer will be driven off the land and the holdings of some one else increased. That is the process of concentration of landed property. If this process should appear as a general phenomenon, as it did in Rome as well as in Greece, it is a factor of momentous social significance."

I come now to the point: Today's global corporations are the Roman latifundia of our time. Oh, and by the way: You don't need exhaustion of the soil to create insurmountable debt problems for the economy. It can be done with a simple commitment to a little bad policy.

Simkhovitch continues: "The entire history of Rome is but a series of illustrations of this story. Steady is the legislation against interest and drastic are the measures against the money lenders, but unchecked is the concentration of landed property even in spite of social resolutions and social wars."

Again: Steady is the legislation against interest and drastic are the measures against the money lenders, but unchecked is the concentration of landed property.

Simkhovitch doesn't say it, so I must: The legislation against interest, and the drastic measures against money lenders, were evidently not the correct policies. That legislation and those measures addressed consequences of the problem, rather than the root problem itself. 

If, as Simkhovitch suggests, the root problem was exhaustion of the soil, then to stop the concentration of landed property it would have been necessary to make better farmland management part of economic policy. If you just leave it to people that can't afford to do it, it won't get done.

In ancient Rome, land was wealth. Those who could afford to do so purchased land. The result was latifundia, the gigantic estates. In our time, a successful business is wealth. I simplify, but those who can afford to do so buy up successful businesses. The results are the growing dominance of merger and acquisition, and the gigantic conglomerates.

Legislation against interest and moneylenders was not successful against the rise of latifundia. Clearly, it was the wrong policy.

Antitrust legislation, even with favorable adjudication before Reagan, did not halt the process of merger and acquisition. As Annie Lowrey described Ernest Mandel's view in mine of 30 October: "'late capitalism' denoted the economic period that started with the end of World War II and ended in the early 1970s, a time that saw the rise of multinational corporations..."

Most of the grunt work of merger and acquisition was already done before 1980. More of the same sort of ineffective policy, today, is unlikely to prevent additional mergers and acquisitions. It might help a little, yes. But applying policy that undermines the driving force behind M&A would be far more effective.

"The engine which drives Enterprise," Keynes wrote, "is not thrift but Profit." If mergers and acquisitions are unstoppable, it is because they are profitable. The key word here is profit. If you spend a dollar producing your product, and you sell the product for $1.05, the five cents is your profit. Your five cent profit is subject to the business income tax. The balance of your $1.05 income, the dollar, is your recovered capital, and you do not pay business income tax on recovered capital. (I'm not an account or a tax guy, but this is my understanding of how the business income tax works.)

The more capital you can keep cycling through your business, the more income you do not pay tax on. If I can only spend a dollar in my business and you can spend $10 of yours, you have a bigger tax advantage than I do. If you are the size of a multinational corporation, you have a far bigger tax advantage than I do.

Suppose there are two good-sized, independent companies that pay the business income tax. If one of them buys the other, it will henceforth write off all of the revenue that the two, combined, wrote off previously. The bigger the business, the bigger the tax advantage.

Note, however, that the bigger guy only gets the bigger tax advantage because THAT IS HOW THE BUSINESS INCOME TAX IS SET UP. Change the tax code, and you change everything. Change the tax code, and you can remove the tax advantage that makes M&A so appealing to business people.

Hey, I'm not a tax guy. What do I know. But if mergers and acquisitions were not profitable, they wouldn't be so common. 

Check this out.


Lorraine asks: "Is there a possibility of forestalling late capitalism and the subsequent Dark Age by getting aggressive on antitrust legislation or adjudication?"

Suppose instead we ask a different question: "Is there a possibility of forestalling late capitalism and the subsequent Dark Age by other means?

Yes. Most definitely yes. First, however, we must discover the root problem that is the source of our economic troubles. But perhaps you don't agree that there is only one such source. 

I can identify many, many economic problems of our time as consequences not of excessive government, but of excessive finance and excessive private sector debt. All my eggs are in that basket. If excessive finance is not the root cause of all our economic problems, it is surely the root cause of many of them. And my money says most of the rest are consequences of the consequences of excessive finance.

For now, I'll leave it at that.

Wednesday, November 2, 2022

It came up in conversation

The text that follows has been hidden away on my off-line test-and-development blog, dated June 30, 2021. For some reason, I never posted the thing. But it came up in conversation, the Hopf quote did, so I'm posting it now.

Good writing makes good argument, but it doesn't make the argument true

Good writing makes good argument. But it doesn't make the argument true. Here, Alex Noonan quotes G. Michael Hopf from Those Who Remain:

“Hard times create strong men. Strong men create good times. Good times create weak men. And, weak men create hard times.”

That's damn good writing. But I quote it because it expresses a view that embraces the fall of civilization: We are strong. We are tougher than the tough times. We can do what needs to be done. We will survive.

Glorified ignorance. And that's the thing: We won't survive. Oh, some of us, or some of our offspring or their descendants will survive, certainly. But "we" -- our society -- will not survive. Life as we know it will not survive. And our better life, as it was before, gone for good.

But I get ahead of myself. I just spent too much time searching for that "hard times" quote in context. No luck. So I can't say what it meant to the guy that wrote it. Some of the sites I found took "strong men" and "weak men" as a description of military success or failure.

The change is happening already. The view that finds the Michael Hopf quote appealing is the view captured here by the historian Rostovtzeff, a view that supports the "shifting of values":

"What happened was a slow and gradual change, a shifting of values in the consciousness of men. What seemed to be all-important to a Greek of the classical or Hellenistic period, or to an educated Roman of the time of the Republic and of the Early Empire, was no longer regarded as vital by the majority of men who lived in the late Roman Empire and the Early Middle Ages. They had their own notion of what was important..."
How can we reject the covid vaccine? Only by thinking we are stronger than covid. How can we deal with what's been happening in politics and government? Only by thinking we are better than the politicians. Better people. 

"We" (really, they) have made a break with the past. What seemed important to "us" in the time of Nixon, say, is "no longer regarded as vital" by a large and growing share of the people. Government has failed "us", and "we" have moved on. 

But Rostovtzeff was talking about causes of the fall of Rome. Do we really want to toy with that? The big picture is not so simple. It's not "Make a break with the past, and we're done." That break with the past is like a small crack in a steel plate. The stress that created the crack makes the crack bigger, eventually weakening the plate until it fails.

That building in Florida that fell, the Surfside condo, fell after standing for 40 years.

The attitudes that made possible the insurrection of 6 January have been developing for 50 years, if we use Nixon as a benchmark. Near 60 years if we take the JFK assassination as a starting point. But 6 January was not the fall of anything. It was only the first crack in that steel plate.