Archive for April 23rd, 2019

How the Chicago School changed the meaning of Adam Smith’s ‘invisible hand’

April 23, 2019

Glory Liu (postdoctoral research associate at Brown University) in this article:

You don’t have to look very far to find people invoking Adam Smith’s name in U.S. political debate. These days, trade policy with China, the Green New Deal and even energy policy have all led people to rally around his purported legacy: the virtues of free markets, the harmful effects of government intervention in economic affairs.

At the same time, political theorists and historians like me have argued that the Scottish moral philosopher didn’t just stand for free markets and that, in fact, Smith’s invisible hand wasn’t a warning about state intervention but state capture. Rather unlike the caricature of Smith who espouses unchecked economic growth, they’ve also argued that Smith was deeply worried about the moral consequences of growing inequality.

So how did Adam Smith become such a popular icon in the first place? And why did the “invisible hand” become such a powerful political catchphrase?

In a recent article published in Modern Intellectual History, I suggest that we can trace the popular version of the “free-market Smith” to the “Chicago School” of economics in the 20th century. Today the Chicago School (the economics faculty at the University of Chicago) is simultaneously famous for being one of the most decorated economics departments in the world (it can claim more Nobel Prizes in economics than any other institution) and infamous for its degree of free-market fundamentalism.

Within Chicago School, the blame is on Friedman but of course…

Does demographics explain decline in US natural interest rate?

April 23, 2019

Before 2008 crisis, there was thinking that US natural rate of interest is hovering around 2.5%. Natural rate is the rate at which economy grows without creating inflation.

As crisis struck in 2008, the Fed brought rates close to zero and as economy recovered, the idea was to push the interest rates to its natural level. But then there was a change in thinking that may be natural rates themselves have declined to below 1%. This leads to the thinking that may be Fed has tightened the rates a bit too much and needs to bring them down towards natural rates.

This piece by Sungki Hong and Hannah G. Shell in St Louis Fed research suggests demographics have a role in declining natural interest rates:

Demographics can affect the natural rate of interest through several channels. Remember, if potential output declines, the natural rate declines with it. An aging population and slowing population growth limit the supply of available workers in an economy. Therefore, holding labor productivity constant, a decrease in workers—a higher old-age dependency ratio—reduces the output generated by an economy. A smaller working-age population means fewer people with a lot of disposable income to consume. These factors decrease an economy’s productive capacity and thereby lower the natural rate. U.S. labor force participation is up compared with the 1960s, despite a long decline since the mid-1990s.1 By itself, this rising labor force participation would tend to raise the natural rate by increasing productive capacity and, in turn, the natural rate of interest. 

An aging population also impacts the natural rate of interest through the savings rate. A higher savings rate increases the supply of loanable funds that banks can lend out, therefore decreasing interest rates. As life expectancy increases, the time individuals spend in retirement increases as does the amount of money they will need to last through retirement. If working-age individuals believe social safety nets will fail, they are likely to save more to offset the risk.2 The U.S. savings rate did increase somewhat from 2005 to 2008; however, for the most part, U.S. household savings has declined since the 1970s. 


Tracking churning in Indian capitalism via the history of BSE Sensex

April 23, 2019

Another nice piece by Niranjan (Cafe Economics):

The Indian equity market was in the midst of turmoil a hundred years ago, as the speculative boom after the end of World War 1 ended. The colonial government set up a committee in 1923 to take a closer look at the operations of the Native Share and Stock Brokers’ Association of Bombay, aka the Bombay Stock Exchange. The report of the committee has data on perhaps the first index of tradable securities — dominated by textile companies — with July 1914 prices as the base. “Considerable difficulty was experienced from the absence of daily official lists … It is desirable that the Bombay Stock Exchange should publish daily official lists on the lines of the London Stock Exchanges and similar exchanges. Where considerable fluctuations take place it is desirable that the opening, closing, highest and lowest prices should be known,” the committee members complained in their report.

Such a lack of basic price information is worth recalling at a time when a lot of attention has been focused in recent days on the fortieth anniversary of the benchmark BSE Sensitive Index (Sensex). As Narendra Nathan pointed out in the Economic Times, the Sensex was set up only in 1986, though its base is 1979. The Reserve Bank of India constructed an index of traded securities in 1949, but Indian investors had to wait till 1986 for a credible daily gauge of market movements.

The list of 30 companies that make up the Sensex have changed since 1986. The changing composition of the benchmark index offers interesting clues about the changing nature of the Indian corporate sector.

The first iteration of the Sensex was dominated by the Tata Group. There were as many as six Tata companies in the index — ACC, Tata Power, Tata Steel, Tata Motors, Voltas and Indian Hotels. The extended Birla Group had another five — Century Textiles, Grasim, Indian Rayon, Hindalco and Hindustan Motors. The Sensex now is less dominated by a few groups although there are still three Tata companies in the list.

There has been a lot of churn in the Sensex over the decades. Corporate power in India seems to be more fragile than usually understood. Only a handful of companies such as Tata Motors, Hindustan Unilever, Mahindra & Mahindra, ITC, and Larsen & Toubro have managed to hold their place in the index. Many of the older industrial houses such as the Thapar group, the Walchand group and the Kirloskar group have slipped out of the benchmark index. Even the real estate and infrastructure giants who had a strong presence in the Sensex a decade ago — Jaiprakash Associates, Reliance Infrastructure and DLF, for example — are no longer in the index.


The changing composition of the Sensex tells us two big stories — of the rise of a new generation of Indian firms as well as the shift from manufacturing towards services.

Lots of business and economic history in the piece….Read the whole thing…

Competence and not nationality should determine the next ECB chief…

April 23, 2019

Nice interview of Mr Benoit Couvre of ECB.

He says competence alone should be the basis for next ECB chief:


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