Fascinating research by Julia Cagé and Valeria Rueda.
Archive for the ‘Economics – macro, micro etc’ Category
Both Idaho and Arizona are looking at allowing gold. silver etc to circulate as legal tender:
This exit interview of former SEBI chief UK Sinha has many interesting details about SEBi functioning and challenges. But it his views on regulatory independence which could catch immediate eyeballs. After all we just don’t know SEBI’s thinking on the matter:
What was the most toughest, most challenging part of your job in the last six years?
There is a perception and an ongoing debate in this country on how independent a regulator is and what should be the level of interference from the government. I have said it in the past and as I am leaving, I would like to reiterate it. Successive governments have been very, very supportive of SEBI and without the government’s support, SEBI would not have been able to achieve even a fraction of what it has achieved. Whenever we required any changes in regulations or laws, we got full support from the government. If, for example, when we were dealing with the collective investment scheme (CIS) matter and we realised that there is a lacuna in the law and the law would have to be amended, in 2013 the then government came out with three rounds of ordinances and this is rather unprecedented. When the government changed and the next government came, and they were in the position to pass this law, it was one of the first things they did. So we have got full support from the government.
The question of independence of the regulator has to be taken, not at a superficial level, but at a very intensive level. And that intensive level is, what is the role of a regulator? A regulator, and especially SEBI, is created by an act of Parliament, so the regulator has independence in operational matters. But the SEBI board has representation from people in the government. So SEBI has to work within the parameters of the policy requirements of the government.
For example, if the government of the day decides that there will be no minimum public shareholding in public companies, there is nothing more that SEBI can do. This is the law of the land. Take the example of foreign portfolio investors (FPIs). If the government of the day decides that there will be no inflows allowed for FPIs, there is nothing that SEBI can do. But once that policy decision has been taken, then the role of SEBI starts. As an expert body, we have full freedom to devise our regulations.
And once the regulations have been framed, the actions which are taken in specific cases…what can I say about the government interfering with me, even I can’t interfere with my investigation officers, I can’t interfere with my adjudication officers, I can’t interfere with my whole-time members. You’ll be surprised that many orders that are passed by SEBI, I come to know of them once they have been put on the website. That is the level of independence given to our officers. So it’s a wrong notion that the government of the day interferes in our work.
So the challenge you were talking of – about how the government interface has been – my opinion is that the government interface has been very, very positive. It has only helped in the strengthening the working of the SEBI.
Let me give you an example. The law of SEBI which was amended in 2014, has prescribed that the monetary penalty which will be imposed by adjudication officers, they have no discretion in that. So we said, ‘look this is not going to work out. There are accentuating circumstances where it has to be done.’ So the law was amended in 2014, and it said that based on certain criteria in the amended law, the officers can exercise their discretion. But there has been a case in the Supreme Court where the court has held that these amendments are prospective. So they can’t be applied retrospectively. The problem is that 80-85 percent of the cases we have on our hands today are prior to 2014. We have been urging the government to pass an amendment and issue a clarification that this also applies to retrospective cases. The government may have its own compulsions, and fine, they are not able to do it. But because of that, the adjudication process has been suffering. That is the point I’m making.
Actually independence is too strong a word for regulatory bodies which are created by the government. Likes of RBI, SEBI etc. get powers because they are formed by the government. So they can never be independent from the government.
The word independence should be replaced by autonomous and it is on latter we should judge regulatory actions. Given the broad policy objective set by the government, has the regulator gone about achieving it without interference. But then autonomous is hardly as glamorous as independence…
David de la Croix, Matthias Doepke, Joel Mokyr have a nice post.This quest to explain rise of Europe remains one of the holy grails of political economy.
They say apprentice system played an important role:
Carmen Reinhart has a piece explaining this dilemma:
Since the end of World War II, the United States’ share in world GDP has fallen from nearly 30% to about 18%. Other advanced economies have also experienced sustained declines in their respective slices of the global pie. But you wouldn’t know it from looking at the international monetary system.
Over the same period, China’s share of world GDP almost quadrupled, to around 16% (just behind the US), and emerging markets now account for about 60% of global output, up from about 40% in the immediate post-war years. Given that advanced-economies’ growth prospects remain subdued, these trends are likely to continue – even with the evident slowing in China and other emerging markets.
In a recent study that I undertook with Ethan Ilzetzki and Kenneth Rogoff, we document that the US dollar has retained its dominant position as the world’s reserve currency – and by a significant margin. Over 60% of all countries (accounting for more than 70% of world GDP) use the US dollar as their anchor currency. Other metrics, which include the proportion of trade invoiced in dollars and the share of US assets (notably Treasuries) in central banks’ foreign exchange reserves, suggest a similar degree of “dollar dominance.”
The euro is a distant second. From the early 1980s until the introduction of the euro in 1999, the Deutsche Mark’s (DM) influence expanded first in Western Europe and later in Eastern Europe. But the rise of the euro, which consolidated the DM and French franc (Africa) zones, appears to have stalled. By some measures (given the shrinking share of Europe in world output), its global importance has declined.
No other major established international currencies currently compete for global leadership.
This is nothing but the modern Triffin dilemma. The US can continue its existing ways but there are other possibilities as well:
Now as then, the US could meet the rest of the world’s appetite for dollars by issuing more dollar debt. This would require the US to run sustained current-account deficits, mirrored in fiscal deficits. Of course, while the link to gold is passé, any domestic fiscal objective to curb US debt growth would be at odds with the international role as sole provider of the reserve currency.
One way or another, China will figure prominently in the resolution of this modern “Triffin dilemma.” One possibility is that the inevitable reduction of US current-account deficits (whenever that comes) may result from sustained dollar depreciation (as in the 1970s), implying a capital loss for China and other major holders of US Treasuries. Alternatively, China could eventually become a new supplier of reserve assets. In this scenario, the supply of the reserve asset would align with the world’s fast-growing regions.
This connection could be direct, if the renminbi acquires reserve-currency status; or indirect, if the International Monetary Fund’s unit of account, special drawing rights, becomes a favored asset of reserve managers, as the renminbi is now in the SDR currency basket. Reserve status for the SDR is a long-held IMF ambition, though the idea has never gotten much traction.
But there is a third possibility: global demand for US reserve assets may subside. While China’s ongoing capital flight is fueling an immediate and substantial decline in demand for US Treasuries, a more sustainable scenario would entail China’s transition to a managed floating exchange-rate regime with a deeper domestic financial market – and less emphasis on maintaining a credible war chest of foreign reserves.
One doubts whether the transition would be as easy.
Brett Scott has a one of the best pieces on war on cash written so far. He sums up the issues nicely.
He first starts with his experience when one of the payment machines refused his card. Based on this, he writes how there are two kinds of cash. One is the physical fiat cash which we hold in hands and other is digital cash which we hold in our bank accounts. The latter one is used to make payments from one bank to another. Banks naturally hate the physical cash as they have to run ATMs etc to dispense the cash. They would love the digital world where money remains in hands of banks and they can keep playing with it.
However, there are two more players which are interested in war on cash:
n the autumn of 2011, as the world’s financial system lurched from crash to crisis, the authors of this book began, as undergraduates, to study economics. While their lectures took place at the University of Manchester the eurozone was in flames. The students’ first term would last longer than the Greek government. Banks across the west were still on life support. And David Cameron was imposing on Britons year on year of swingeing spending cuts.
Yet the bushfires those teenagers saw raging each night on the news got barely a mention in the seminars they sat through, they say: the biggest economic catastrophe of our times “wasn’t mentioned in our lectures and what we were learning didn’t seem to have any relevance to understanding it”, they write in The Econocracy. “We were memorising and regurgitating abstract economic models for multiple-choice exams.”
Part of this book describes what happened next: how the economic crisis turned into a crisis of economics. It deserves a good account, since the activities of these Manchester students rank among the most startling protest movements of the decade.
After a year of being force-fed irrelevancies, say the students, they formed the Post-Crash Economics Society, with a sympathetic lecturer giving them evening classes on the events and perspectives they weren’t being taught. They lobbied teachers for new modules, and when that didn’t work, they mobilised hundreds of undergraduates to express their disappointment in the influential National Student Survey. The economics department ended up with the lowest score of any at the university: the professors had been told by their pupils that they could do better.
The protests spread to other economics faculties – in Glasgow, Istanbul, Kolkata. Working at speed, students around the world published a joint letter to their professors calling for nothing less than a reformation of their discipline.
Economics has been challenged by would-be reformers before, but never on this scale. What made the difference was the crash of 2008. Students could now argue that their lecturers hadn’t called the biggest economic event of their lifetimes – so their commandments weren’t worth the stone they were carved on. They could also point to the way in which the economic model in the real world was broken and ask why the models they were using had barely changed.
We have moved from one extreme to another:
The Econocracy makes three big arguments. First, economics has shoved its way into all aspects of our public life. Flick through any newspaper and you’ll find it is not enough for mental illness to cause suffering, or for people to enjoy paintings: both must have a specific cost or benefit to GDP. It is as if Gradgrind had set up a boutique consultancy, offering mandatory but spurious quantification for any passing cause.
Second, the economics being pushed is narrow and of recent invention. It sees the economy “as a distinct system that follows a particular, often mechanical logic” and believes this “can be managed using a scientific criteria”. It would not be recognised by Keynes or Marx or Adam Smith
(Third)… By making their discipline all-pervasive, and pretending it is the physics of social science, economists have turned much of our democracy into a no-go zone for the public. This is the authors’ ultimate charge: “We live in a nation divided between a minority who feel they own the language of economics and a majority who don’t.”
This status quo works well for the powerful and wealthy and it will be fiercely defended. As Ed Miliband and Jeremy Corbyn have found, suggest policies that challenge the narrow orthodoxy and you will be branded an economic illiterate – even if they add up. Academics who follow different schools of economic thought are often exiled from the big faculties and journals,
I doubt how many of today’s monetary scholars have read Vera Smith’s dissertation- The Rationale for a Central Bank? What must have been a must read some years ago is hardly part of any course these days. The thesis was written under Hayek’s supervision and looked at reasons behind formation of various central banks. We take central banking for granted without looking at various ways in which they come in different countries.
Karl-Friedrich Israel has a piece in Mises Institute which looks at five reasons given by Smith for having a central bank. Smith gave these reasons during GOld Standard days. After many years, do the reasons remain valid?
Joe of Bloomberg points to this interesting article. The article shows how investors anticipating some exits from Euro are buying short term German bonds. Though, the risks are not as large as seen in 2010 period.
However, the sources of concerns are different. He adds that this time the risks are from political troubles and Draghi’s 3 magic words “whatever it takes” will not help:
Once again, traders are placing bets on a breakup of the euro area. Investors are piling into short-dated German government bonds, which would presumably be the safest of safe havens if calamity were to strike.
But is the euro really at risk of a breakup? You’d think, perhaps, that if the currency survived 2010-2012 then it can survive pretty much anything. And obviously at this point (at least going by peripheral spreads) investors aren’t anywhere near as concerned as they were back then.
But one thing to consider is that the problems faced back then by Europe were essentially about monetary architecture. Governments lacked a fiscal union and a central-bank backstop, exposing them to the whims of bond vigilantes. Mario Draghi solved the problem in 2012 with his “whatever it takes” speech.
This time, the stresses building in Europe are perceived as more political. Anti-euro factions are on the rise while mainstream center-right and center-left parties are seeing their support melt away. As risk transfers from the monetary realm to a political one, these problems won’t go away with three simple words from a central banker.
Interesting piece on how tides have turned for the two countries.
Earlier Indonesia was a hotbed of cronyism but now it is Malaysia:
With populists emulating autocrats from Azerbaijan to Zimbabwe, free markets are being forced to confront crony capitalism.
One response is visible in the reversal of fortunes of Malaysia and Indonesia. The two nations still wrestle with the politics of ethnicity and religion at odds with the capitalism of market competition. In Indonesia, Basuki Tjahaja Purnama, a Chinese Christian who is the governor of Jakarta, is running for office while defending himself against charges of blasphemy against Islam in a country of predominantly Muslim voters. Malaysia’s embrace of an ideology of Malay supremacy and the low interest rates that invite a debt bubble are impediments to a dynamic economy.
But the historic advantage that Malaysia, with just 30 million people, has enjoyed over its Southeast Asian neighbor of 250 million is disappearing amid a barrage of corruption allegations challenging Prime Minister Najib Razak.
Najib, who was elected in 2009, says hundreds of millions of dollars in his personal bank accounts came from a gift from an unidentified Saudi donor, denying a U.S. Justice Department complaint filed in federal court last July that accuses Najib of stealing from a Malaysian government investment fund, 1Malaysia Development Berhad, or 1MDB.
The markets have noticed this:
The divergent growth rates are reflected in the stock market, where the 539 companies in the Jakarta Stock Exchange Composite Index gained 287 percent during the past 10 years, according to Bloomberg data. That’s more than three times the 95 percent return during the same period for the 30 companies that make up the FTSE Bursa Malaysia Kuala Lumpur Index, and amounts to Indonesia outperforming Malaysia by 7.6 percent each year. The gap has grown more pronounced since 2014, as the Indonesia market has outperformed Malaysia’s by 9.3 percent annually.
In the bond market, Indonesian government securities provided a total return (income plus appreciation) of 100 percent since 2010. That’s 6.5 percent per year more than Malaysian government debt, which returned 30 percent over the same six years, according to Bloomberg data. Since 2014, Indonesia’s advantage has widened to 7 percent.
The inferior performance of Malaysia’s debt is reflected in the country’s deteriorating fiscal outlook during the past two decades. Since 1997, when both countries saw their surpluses transformed into deficits, Indonesia kept its budget close to balanced with an average annual deficit of 1.32 percent of its GDP, according to data compiled by Bloomberg.
Nothing is granted..
Interesting paper by Italo Colantone and Piero Stanig:
The title of the post comes from this depressing cartoon.
Why do so many corporate boards treat the shareholder value theory as gospel? Aside from the power of ideology and constant repetition in the business press, Pearlstein, drawing on the research of Cornell law professor Lynn Stout, describes how a key decision has been widely misapplied:
Let’s start with the history. The earliest corporations, in fact, were generally chartered not for private but for public purposes, such as building canals or transit systems. Well into the 1960s, corporations were broadly viewed as owing something in return to the community that provided them with special legal protections and the economic ecosystem in which they could grow and thrive.
Legally, no statutes require that companies be run to maximize profits or share prices. In most states, corporations can be formed for any lawful purpose. Lynn Stout, a Cornell law professor, has been looking for years for a corporate charter that even mentions maximizing profits or share price. So far, she hasn’t found one. Companies that put shareholders at the top of their hierarchy do so by choice, Stout writes, not by law…
For many years, much of the jurisprudence coming out of the Delaware courts—where most big corporations have their legal home—was based around the “business judgment” rule, which held that corporate directors have wide discretion in determining a firm’s goals and strategies, even if their decisions reduce profits or share prices. But in 1986, the Delaware Court of Chancery ruled that directors of the cosmetics company Revlon had to put the interests of shareholders first and accept the highest price offered for the company. As Lynn Stout has written, and the Delaware courts subsequently confirmed, the decision was a narrowly drawn exception to the business–judgment rule that only applies once a company has decided to put itself up for sale. But it has been widely—and mistakenly—used ever since as a legal rationale for the primacy of shareholder interests and the legitimacy of share-price maximization.
Greed over everything else..
How economists should advise Governments: lessons from Walter Heller who pushed Kennedy to cut taxes…February 20, 2017
Beatrice Cherrier’s blog is quickly becoming one of the blogs to read.
In her recent post, she points how Walter Heller as a Chief Economic Adviser managed to advise the Kennedy Government. This is important as there is lot of criticism on role of economic expertise:
Trump’s decision to demote whoever might be nominated chairman of the Council of Economic Advisers (CEA) from his cabinet has been interpreted as a final blow to a though year – in which economists’ advice has been systematically ignored by voters- within a though post-financial crisis decade. Economists are under the impression that since 2008, their expertise has been increasingly challenged, and they have offered several analyses and remedies: more micro, more data, more attention to distribution and less to efficiency, more humility, more awareness to the moral and political element in economic expertise, more diversity and more interdisciplinarity –economic education included- Few of these however rely on the whopping literature on the history and sociology of scientific expertise.
Histories of how economists painfully gained reputation and trust during the XXth century abound. Most of them are focused on public policy – data on private businesses are more difficult to obtain, and tracking economists’ influence on the public is elusive–. And none of them fail to mention the canonical proof that economists’ expertise is/have been influential: it was Walter Heller, 4th CEA chairman, who convinced J.F. Kennedy and L.B. Johnson to propose a massive income and business tax cut, passed by the Congress in 1964.
The facts are well-known: Eisenhower’s legacy was a sluggish decade, with growth stuck at 2,5% per year and unemployment at 8%. Recurring budget deficit, which topped 12 billions in 1959, prevented much needed defense, education and welfare expenditures. Kennedy’s campaign was consequently focused on the promise of restoring growth, of “get[ting] this country moving again.” The candidate had nevertheless straightforwardly rejected the fiscal stimuli proposed by those economists, including Paul Samuelson, who had participated in his Democratic Advisory Committee. Kennedy came to the oval office with the notion, inherited from his father, that the budget should be balanced and the money supply tightly controlled. Under the influence of his CEA chairman, Walter Heller, Kennedy became more favorable to sustaining a budget deficit, and by early 1963, he had submitted to Congress the largest peacetime voluntary budget deficit: $12 billion. He proposed to reduce income tax rate from 20-91% to 14-65% and corporate income tax rate from 52 to 47% and to abolish loopholes and preferential deductions to enlarge the tax base. He promised that, should the Congress pass his tax cuts, the 1965 budget would be equilibrated. The proposal was finally enacted in 1964, under Johnson. 1965 saw the smallest Federal deficit of the decade (1 billion), strong growth and unemployment down to 4%. The trend persisted throughout the decade, with inflation pressures slowly building in response to Johnson’s spending frenzy.
Thought the contribution of the tax cut to this period of prosperity, and to subsequent imbalances, is still fiercely debated, its positive spillovers on the whole profession commands wide agreement. Heller’s CEA has contributed to shift economists’ image from ivory tower technicians to useful experts and to strengthen public trust. It has been heralded as the canonical example for economists’ ability to increase society’s welfare, a symbol of a (some would say lost) golden age. The scope of Heller’s influence has, in fact, extended ways beyond the tax cut. He was instrumental in putting poverty on the presidential agenda, and, as recently unearthed by Laura Holden and Jeff Biddle, he was the one who turned human capital theory into an argument in favor of federal funding for education. His peculiar status as the “economic experts’ expert” was immediately recognized. He made Time’s cover twice in two years. No other CEA chair made the cover of the magazine before the late 1976, and none ever made it twice as CEA chair. But if the fallouts of his expertise are well known, its determinants are less so. The nagging question remains: how did he do it?
Read the post for more details.
What is interesting is how in US you can actually remain relevant as an economist knowing about policy and people. These ideas are so important for history of thought. Whereas in India there is no chance despite such a rich history..
The IMF must be commended for imposing self-evaluation reports upon itself. They sometimes come on top of reports by the IMF’s Independent Evaluation Office (for the report on Greece, see Wyplosz and Sgherri 2016). It is about speaking truth to yourself, which can be delicate because the programme’s actors, most of whom are active in the building, have skin in the game.
These reports can fulfil an extremely important role if they identify mistakes that should not be repeated in the future. Does it happen? A previous self-evaluation took place after the first Greek programme. Many of its observations are the same as those of the second report, which is disheartening. The Fund argues that, because the first report was published after the start of the second programme, its conclusions could not be taken on board. It calls for a faster production of the self-evaluation reports. Would that be enough? Scepticism is warranted when we observe that a number of the mistakes reported in this report were already mentioned after the East Asian crisis.
With all its limitations, the fact that self-evaluation occurs and that the report is made public deserves to be commended. The procedure should be a model for the two other Troika institutions, the European Commission and the ECB. Most regrettably, self-evaluation is not part of their institutional culture. They seem to follow the prescription attributed to Napoleon: “In politics never retreat, never retract, never admit a mistake”.
These lessons are hardly new. Similar issues were seen in previous IMF rescue plans as well. But IMF continues with its usual hubris.
The irony of all this is that role of IMF comes to eminence only during crises, But each time it makes same types of mistakes and remains relevant..
Peter Radford has a hard hitting piece and one has little choice but to agree on most points.
One of the most nervous moments one faces as an economist is when one is crowded by families/friends asking you for suggestions to improve their well-being. After all, this is an impression economists have created over the years that “they are the ones”. The bombard of media has also strengthened the impression when so many economists come before the box to tell us about state of economy/investments and so on. We are seen as these magicians. So it is but natural for people to ask you to improve their well-being.
However, here is irony of it all. It is one thing to talk on TV about things and completely another when family/friends ask for suggestions. One realises how inadequate economics training has been all these years. If one has any suggestion, it either comes out from work experience (say in financial markets) or plain observing/reading about things outside of economics (following newspaper for local news). The disconnect between modern economics training and reality is so wide (and continues to widen) that it is perhaps one of the biggest Houdini acts that public continues to believe in power of economics. The crisis has dented the image for sure but given lack of alternatives economists continue to dominate.
Radford sums this dilemma. Don’t study economics to understand economy:
A nice speech by Mr Frank Elderson, Executive Director of the Netherlands Bank.
He nicely mixes the consulting/strategy talk with that of central banking:
Now, the banking industry is facing several challenges. Fintech is rising, consumer trust is damaged and Basel 3.5 is on the horizon. Then there is doubt about the future of Europe, growing criticism of globalisation and uncertainty about the geopolitical landscape. Meanwhile, the world is trying to achieve the Sustainable Development Goals and implement the Paris Agreement.
Banks will have to adapt – perhaps contribute – to this and the question is how. What is an appropriate business model or strategy? And what is the best form for the key functions that banks perform, such as safeguarding money, providing loans, and determining risk and return? Or is there a future in which non-banking entities perform banking functions?
In discussing these questions, perhaps it’s worthwhile to distinguish between change and transformation. To me, change implies an increase or decrease over time of something while its nature remains constant. Money was first metal, then paper and now digital, but it’s still money. And today’s stock exchanges are in essence quite similar to those established centuries ago.
Transformation is different. It implies something essential changes and a new order emerges. A caterpillar transforming into a butterfly. A child transforming into an adult. Philips, as Hans de Jong so eloquently described it, transformed from a consumer tech company into a health tech one. Transformation takes time, vision and the courage to take tough decisions. And it is anything but easy to genuinely transform an organisation’s culture.
Having said that I wonder: is the banking industry changing or transforming? Perhaps both? I am sure this is something we can debate at our tables later on. For now, I would like to stress that transformation is not just an inspiring concept, but also a practical and operational process. People and organisations have a capacity to transform that can be nurtured. In today’s turbulent environment, banks would do well to evaluate this capacity. It could mean the difference between relevance and irrelevance.
Sums up the issue quite neatly indeed.
He then points to some lessons from the central bank on their work on pension funds:
DNB has conducted research into the capacity of pension funds to transform and we found several things I am sure apply to other industries.
For example, we found that leadership is key. Specifically, individual leaders with the capacity to identify changes in the landscape, develop best-case and worst-case scenarios and create a compelling vision. Also leaders who are able to develop a strategy around this vision and then execute it. The leadership team is of importance, too.
There needs to be openness, trust and diversity in terms of personalities and competences. We also found that pension funds need to be appropriately equipped.
They need to be agile, have an up-to-date IT infrastructure, have sufficient budget and task the right people with the transformation process. And pension funds need to have their house in order. For unless everything runs smoothly, the organisation will focus its attention on managing the present rather than designing the future.
Finally, we found that pension funds need to be proactive. If they wait until the environment forces them to change, they are at risk. Instead, they should proactively adapt. Some pension funds began to transition from a defined benefit to a defined contribution system years ago and they are now in a good shape. Those who haven’t, are struggling to adjust to changing realities. So transformation is a process that can be managed. But the process needs to lead to something. Transformation is a means, not an end. So what is or should be the end result of a bank or the whole banking industry transforming?
He says organisations should have a well-defined purpose (vision/mission?) and work towards their purpose. Netherlands central bank purpose is financial stability (as monetary function in hands of ECB):
De Nederlandsche Bank believes in the value of having a purpose and we cherish ours. We are in this world to contribute to the sustainable welfare of the Netherlands by promoting financial stability. Through this, we also contribute to the realisation of the Sustainable Development Goals. This inspires us and guides us in relating to our stakeholders. And it seems we are not alone in this. Last December, the Dutch Banking Association published a report in which it explored how banks can contribute to the Sustainable Development Goals. I wholeheartedly encourage such explorations.
Many issues simplified..
In a time of great powers and empires, just Europe experienced extraordinary economic growth. How and Why?February 16, 2017
One of the holy grails of economic history is how and why did Europe experience economic growth in 18th century. Prof Mokyr says there is no one answer:
How and why did the modern world and its unprecedented prosperity begin? Learned tomes by historians, economists, political scientists and other scholars fill many bookshelves with explanations of how and why the process of modern economic growth or ‘the Great Enrichment’ exploded in western Europe in the 18th century. One of the oldest and most persuasive explanations is the long political fragmentation of Europe. For centuries, no ruler had ever been able to unite Europe the way the Mongols and the Mings had united China.
It should be emphasised that Europe’s success was not the result of any inherent superiority of European (much less Christian) culture. It was rather what is known as a classical emergent property, a complex and unintended outcome of simpler interactions on the whole. The modern European economic miracle was the result of contingent institutional outcomes. It was neither designed nor planned. But it happened, and once it began, it generated a self-reinforcing dynamic of economic progress that made knowledge-driven growth both possible and sustainable.
How did this work? In brief, Europe’s political fragmentation spurred productive competition. It meant that European rulers found themselves competing for the best and most productive intellectuals and artisans. The economic historian Eric L Jones called this ‘the States system’. The costs of European political division into multiple competing states were substantial: they included almost incessant warfare, protectionism, and other coordination failures. Many scholars now believe, however, that in the long run the benefits of competing states might have been larger than the costs. In particular, the existence of multiple competing states encouraged scientific and technological innovation.
There are so many things which we just take for granted now but were so instrumental back then..
A former Dallas Fed employee has written a stinker of a book accusing Federal Reserve (applies to most central banks) for all kinds of things. The book is titled as: Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America.
The WSJ article provides a glimpse: