General Equilibrium, Partial Equilibrium and Costs

Neoclassical economics is now bifurcated between Marshallian partial-equilibrium and Walrasian general-equilibrium analyses. With the apparent inability of neoclassical theory to explain the coordination failure of the Great Depression, J. M. Keynes proposed an alternative paradigm to explain the involuntary unemployment of the 1930s. But within two decades, Keynes’s contribution was subsumed under what became known as the neoclassical synthesis of the Keynesian and Walrasian theories (about which I have written frequently, e.g., here and here). Lacking microfoundations that could be reconciled with the assumptions of Walrasian general-equilibrium theory, the neoclassical synthesis collapsed, owing to the supposedly inadequate microfoundations of Keynesian theory.

But Walrasian general-equilibrium theory provides no plausible, much less axiomatic, account of how general equilibrium is, or could be, achieved. Even the imaginary tatonnement process lacks an algorithm that guarantees that a general-equilibrium solution, if it exists, would be found. Whatever plausibility is attributed to the assumption that price flexibility leads to equilibrium derives from Marshallian partial-equilibrium analysis, with market prices adjusting to equilibrate supply and demand.

Yet modern macroeconomics, despite its explicit Walrasian assumptions, implicitly relies on the Marshallian intuition that the fundamentals of general-equilibrium, prices and costs are known to agents who, except for random disturbances, continuously form rational expectations of market-clearing equilibrium prices in all markets.

I’ve written many earlier posts (e.g., here and here) contesting, in one way or another, the notion that all macroeconomic theories must be founded on first principles (i.e., microeconomic axioms about optimizing individuals). Any macroeconomic theory not appropriately founded on the axioms of individual optimization by consumers and producers is now dismissed as scientifically defective and unworthy of attention by serious scientific practitioners of macroeconomics.

When contesting the presumed necessity for macroeconomics to be microeconomically founded, I’ve often used Marshall’s partial-equilibrium method as a point of reference. Though derived from underlying preference functions that are independent of prices, the demand curves of partial-equilibrium analysis presume that all product prices, except the price of the product under analysis, are held constant. Similarly, the supply curves are derived from individual firm marginal-cost curves whose geometric position or algebraic description depends critically on the prices of raw materials and factors of production used in the production process. But neither the prices of alternative products to be purchased by consumers nor the prices of raw materials and factors of production are given independently of the general-equilibrium solution of the whole system.

Thus, partial-equilibrium analysis, to be analytically defensible, requires a ceteris-paribus proviso. But to be analytically tenable, that proviso must posit an initial position of general equilibrium. Unless the analysis starts from a state of general equilibrium, the assumption that all prices but one remain constant can’t be maintained, the constancy of disequilibrium prices being a nonsensical assumption.

The ceteris-paribus proviso also entails an assumption about the market under analysis; either the market itself, or the disturbance to which it’s subject, must be so small that any change in the equilibrium price of the product in question has de minimus repercussions on the prices of every other product and of every input and factor of production used in producing that product. Thus, the validity of partial-equilibrium analysis depends on the presumption that the unique and locally stable general-equilibrium is approximately undisturbed by whatever changes result from by the posited change in the single market being analyzed. But that presumption is not so self-evidently plausible that our reliance on it to make empirical predictions is always, or even usually, justified.

Perhaps the best argument for taking partial-equilibrium analysis seriously is that the analysis identifies certain deep structural tendencies that, at least under “normal” conditions of moderate macroeconomic stability (i.e., moderate unemployment and reasonable price stability), will usually be observable despite the disturbing influences that are subsumed under the ceteris-paribus proviso. That assumption — an assumption of relative ignorance about the nature of the disturbances that are assumed to be constant — posits that those disturbances are more or less random, and as likely to cause errors in one direction as another. Consequently, the predictions of partial-equilibrium analysis can be assumed to be statistically, though not invariably, correct.

Of course, the more interconnected a given market is with other markets in the economy, and the greater its size relative to the total economy, the less confidence we can have that the implications of partial-equilibrium analysis will be corroborated by empirical investigation.

Despite its frequent unsuitability, economists and commentators are often willing to deploy partial-equilibrium analysis in offering policy advice even when the necessary ceteris-paribus proviso of partial-equilibrium analysis cannot be plausibly upheld. For example, two of the leading theories of the determination of the rate of interest are the loanable-funds doctrine and the Keynesian liquidity-preference theory. Both these theories of the rate of interest suppose that the rate of interest is determined in a single market — either for loanable funds or for cash balances — and that the rate of interest adjusts to equilibrate one or the other of those two markets. But the rate of interest is an economy-wide price whose determination is an intertemporal-general-equilibrium phenomenon that cannot be reduced, as the loanable-funds and liquidity preference theories try to do, to the analysis of a single market.

Similarly partial-equilibrium analysis of the supply of, and the demand for, labor has been used of late to predict changes in wages from immigration and to advocate for changes in immigration policy, while, in an earlier era, it was used to recommend wage reductions as a remedy for persistently high aggregate unemployment. In the General Theory, Keynes correctly criticized those using a naïve version of the partial-equilibrium method to recommend curing high unemployment by cutting wage rates, correctly observing that the conditions for full employment required the satisfaction of certain macroeconomic conditions for equilibrium that would not necessarily be satisfied by cutting wages.

However, in the very same volume, Keynes argued that the rate of interest is determined exclusively by the relationship between the quantity of money and the demand to hold money, ignoring that the rate of interest is an intertemporal relationship between current and expected future prices, an insight earlier explained by Irving Fisher that Keynes himself had expertly deployed in his Tract on Monetary Reform and elsewhere (Chapter 17) in the General Theory itself.

Evidently, the allure of supply-demand analysis can sometimes be too powerful for well-trained economists to resist even when they actually know better themselves that it ought to be resisted.

A further point also requires attention: the conditions necessary for partial-equilibrium analysis to be valid are never really satisfied; firms don’t know the costs that determine the optimal rate of production when they actually must settle on a plan of how much to produce, how much raw materials to buy, and how much labor and other factors of production to employ. Marshall, the originator of partial-equilibrium analysis, analogized supply and demand to the blades of a scissor acting jointly to achieve a intended result.

But Marshall erred in thinking that supply (i.e., cost) is an independent determinant of price, because the equality of costs and prices is a characteristic of general equilibrium. It can be applied to partial-equilibrium analysis only under the ceteris-paribus proviso that situates partial-equilibrium analysis in a pre-existing general equilibrium of the entire economy. It is only in general-equilibrium state, that the cost incurred by a firm in producing its output represents the value of the foregone output that could have been produced had the firm’s output been reduced. Only if the analyzed market is so small that changes in how much firms in that market produce do not affect the prices of the inputs used in to produce that output can definite marginal-cost curves be drawn or algebraically specified.

Unless general equilibrium obtains, prices need not equal costs, as measured by the quantities and prices of inputs used by firms to produce any product. Partial equilibrium analysis is possible only if carried out in the context of general equilibrium. Cost cannot be an independent determinant of prices, because cost is itself determined simultaneously along with all other prices.

But even aside from the reasons why partial-equilibrium analysis presumes that all prices, but the price in the single market being analyzed, are general-equilibrium prices, there’s another, even more problematic, assumption underlying partial-equilibrium analysis: that producers actually know the prices that they will pay for the inputs and resources to be used in producing their outputs. The cost curves of the standard economic analysis of the firm from which the supply curves of partial-equilibrium analysis are derived, presume that the prices of all inputs and factors of production correspond to those that are consistent with general equilibrium. But general-equilibrium prices are never known by anyone except the hypothetical agents in a general-equilibrium model with complete markets, or by agents endowed with perfect foresight (aka rational expectations in the strict sense of that misunderstood term).

At bottom, Marshallian partial-equilibrium analysis is comparative statics: a comparison of two alternative (hypothetical) equilibria distinguished by some difference in the parameters characterizing the two equilibria. By comparing the equilibria corresponding to the different parameter values, the analyst can infer the effect (at least directionally) of a parameter change.

But comparative-statics analysis is subject to a serious limitation: comparing two alternative hypothetical equilibria is very different from making empirical predictions about the effects of an actual parameter change in real time.

Comparing two alternative equilibria corresponding to different values of a parameter may be suggestive of what could happen after a policy decision to change that parameter, but there are many reasons why the change implied by the comparative-statics exercise might not match or even approximate the actual change.

First, the initial state was almost certainly not an equilibrium state, so systemic changes will be difficult, if not impossible, to disentangle from the effect of parameter change implied by the comparative-statics exercise.

Second, even if the initial state was an equilibrium, the transition to a new equilibrium is never instantaneous. The transitional period therefore leads to changes that in turn induce further systemic changes that cause the new equilibrium toward which the system gravitates to differ from the final equilibrium of the comparative-statics exercise.

Third, each successive change in the final equilibrium toward which the system is gravitating leads to further changes that in turn keep changing the final equilibrium. There is no reason why the successive changes lead to convergence on any final equilibrium end state. Nor is there any theoretical proof that the adjustment path leading from one equilibrium to another ever reaches an equilibrium end state. The gap between the comparative-statics exercise and the theory of adjustment in real time remains unbridged and may, even in principle, be unbridgeable.

Finally, without a complete system of forward and state-contingent markets, equilibrium requires not just that current prices converge to equilibrium prices; it requires that expectations of all agents about future prices converge to equilibrium expectations of future prices. Unless, agents’ expectations of future prices converge to their equilibrium values, an equilibrium many not even exist, let alone be approached or attained.

So the Marshallian assumption that producers know their costs of production and make production and pricing decisions based on that knowledge is both factually wrong and logically untenable. Nor do producers know what the demand curves for their products really looks like, except in the extreme case in which suppliers take market prices to be parametrically determined. But even then, they make decisions not on known prices, but on expected prices. Their expectations are constantly being tested against market information about actual prices, information that causes decision makers to affirm or revise their expectations in light of the constant flow of new information about prices and market conditions.

I don’t reject partial-equilibrium analysis, but I do call attention to its limitations, and to its unsuitability as a supposedly essential foundation for macroeconomic analysis, especially inasmuch as microeconomic analysis, AKA partial-equilibrium analysis, is utterly dependent on the uneasy macrofoundation of general-equilibrium theory. The intuition of Marshallian partial equilibrium cannot fil the gap, long ago noted by Kenneth Arrow, in the neoclassical theory of equilibrium price adjustment.

Krugman on Mr. Keynes and the Moderns

UPDATE: Re-upping this slightly revised post from July 11, 2011

Paul Krugman recently gave a lecture “Mr. Keynes and the Moderns” (a play on the title of the most influential article ever written about The General Theory, “Mr. Keynes and the Classics,” by another Nobel laureate J. R. Hicks) at a conference in Cambridge, England commemorating the publication of Keynes’s General Theory 75 years ago. Scott Sumner and Nick Rowe, among others, have already commented on his lecture. Coincidentally, in my previous posting, I discussed the views of Sumner and Krugman on the zero-interest lower bound, a topic that figures heavily in Krugman’s discussion of Keynes and his relevance for our current difficulties. (I note in passing that Krugman credits Brad Delong for applying the term “Little Depression” to those difficulties, a term that I thought I had invented, but, oh well, I am happy to share the credit with Brad).

In my earlier posting, I mentioned that Keynes’s, slightly older, colleague A. C. Pigou responded to the zero-interest lower bound in his review of The General Theory. In a way, the response enhanced Pigou’s reputation, attaching his name to one of the most famous “effects” in the history of economics, but it made no dent in the Keynesian Revolution. I also referred to “the layers upon layers of interesting personal and historical dynamics lying beneath the surface of Pigou’s review of Keynes.” One large element of those dynamics was that Keynes chose to make, not Hayek or Robbins, not French devotees of the gold standard, not American laissez-faire ideologues, but Pigou, a left-of-center social reformer, who in the early 1930s had co-authored with Keynes a famous letter advocating increased public-works spending to combat unemployment, the main target of his immense rhetorical powers and polemical invective.  The first paragraph of Pigou’s review reveals just how deeply Keynes’s onslaught had wounded Pigou.

When in 1919, he wrote The Economic Consequences of the Peace, Mr. Keynes did a good day’s work for the world, in helping it back towards sanity. But he did a bad day’s work for himself as an economist. For he discovered then, and his sub-conscious mind has not been able to forget since, that the best way to win attention for one’s own ideas is to present them in a matrix of sarcastic comment upon other people. This method has long been a routine one among political pamphleteers. It is less appropriate, and fortunately less common, in scientific discussion.  Einstein actually did for Physics what Mr. Keynes believes himself to have done for Economics. He developed a far-reaching generalization, under which Newton’s results can be subsumed as a special case. But he did not, in announcing his discovery, insinuate, through carefully barbed sentences, that Newton and those who had hitherto followed his lead were a gang of incompetent bunglers. The example is illustrious: but Mr. Keynes has not followed it. The general tone de haut en bas and the patronage extended to his old master Marshall are particularly to be regretted. It is not by this manner of writing that his desire to convince his fellow economists is best promoted.

Krugman acknowledges Keynes’s shady scholarship (“I know that there’s dispute about whether Keynes was fair in characterizing the classical economists in this way”), only to absolve him of blame. He then uses Keynes’s example to attack “modern economists” who deny that a failure of aggregate demand can cause of mass unemployment, offering up John Cochrane and Niall Ferguson as examples, even though Ferguson is a historian not an economist.

Krugman also addresses Robert Barro’s assertion that Keynes’s explanation for high unemployment was that wages and prices were stuck at levels too high to allow full employment, a problem easily solvable, in Barro’s view, by monetary expansion. Although plainly annoyed by Barro’s attempt to trivialize Keynes’s contribution, Krugman never addresses the point squarely, preferring instead to justify Keynes’s frustration with those (conveniently nameless) “classical economists.”

Keynes’s critique of the classical economists was that they had failed to grasp how everything changes when you allow for the fact that output may be demand-constrained.

Not so, as I pointed out in my first post. Frederick Lavington, an even more orthodox disciple than Pigou of Marshall, had no trouble understanding that “the inactivity of all is the cause of the inactivity of each.” It was Keynes who failed to see that the failure of demand was equally a failure of supply.

They mistook accounting identities for causal relationships, believing in particular that because spending must equal income, supply creates its own demand and desired savings are automatically invested.

Supply does create its own demand when economic agents succeed in executing their plans to supply; it is when, owing to their incorrect and inconsistent expectations about future prices, economic agents fail to execute their plans to supply, that both supply and demand start to contract. Lavington understood that; Pigou understood that. Keynes understood it, too, but believing that his new way of understanding how contractions are caused was superior to that of his predecessors, he felt justified in misrepresenting their views, and attributing to them a caricature of Say’s Law that they would never have taken seriously.

And to praise Keynes for understanding the difference between accounting identities and causal relationships that befuddled his predecessors is almost perverse, as Keynes’s notorious confusion about whether the equality of savings and investment is an equilibrium condition or an accounting identity was pointed out by Dennis Robertson, Ralph Hawtrey and Gottfried Haberler within a year after The General Theory was published. To quote Robertson:

(Mr. Keynes’s critics) have merely maintained that he has so framed his definition that Amount Saved and Amount Invested are identical; that it therefore makes no sense even to inquire what the force is which “ensures equality” between them; and that since the identity holds whether money income is constant or changing, and, if it is changing, whether real income is changing proportionately, or not at all, this way of putting things does not seem to be a very suitable instrument for the analysis of economic change.

It just so happens that in 1925, Keynes, in one of his greatest pieces of sustained, and almost crushing sarcasm, The Economic Consequences of Mr. Churchill, offered an explanation of high unemployment exactly the same as that attributed to Keynes by Barro. Churchill’s decision to restore the convertibility of sterling to gold at the prewar parity meant that a further deflation of at least 10 percent in wages and prices would be necessary to restore equilibrium.  Keynes felt that the human cost of that deflation would be intolerable, and held Churchill responsible for it.

Of course Keynes in 1925 was not yet the Keynes of The General Theory. But what historical facts of the 10 years following Britain’s restoration of the gold standard in 1925 at the prewar parity cannot be explained with the theoretical resources available in 1925? The deflation that began in England in 1925 had been predicted by Keynes. The even worse deflation that began in 1929 had been predicted by Ralph Hawtrey and Gustav Cassel soon after World War I ended, if a way could not be found to limit the demand for gold by countries, rejoining the gold standard in aftermath of the war. The United States, holding 40 percent of the world’s monetary gold reserves, might have accommodated that demand by allowing some of its reserves to be exported. But obsession with breaking a supposed stock-market bubble in 1928-29 led the Fed to tighten its policy even as the international demand for gold was increasing rapidly, as Germany, France and many other countries went back on the gold standard, producing the international credit crisis and deflation of 1929-31. Recovery came not from Keynesian policies, but from abandoning the gold standard, thereby eliminating the deflationary pressure implicit in a rapidly rising demand for gold with a more or less fixed total supply.

Keynesian stories about liquidity traps and Monetarist stories about bank failures are epiphenomena obscuring rather than illuminating the true picture of what was happening.  The story of the Little Depression is similar in many ways, except the source of monetary tightness was not the gold standard, but a monetary regime that focused attention on rising price inflation in 2008 when the appropriate indicator, wage inflation, had already started to decline.

Why Price Stickiness Matters, or Doesn’t

When I was a young economics graduate student at UCLA in the early 1970s during the heyday of that wonderful department, convinced, like most of the other UCLA grad students, that I was in the best graduate program in the country (and therefore the world), where the deepest, most creative, economic theorists in the world, under the relaxed and amiable leadership of Armen Alchian — whose failure to win a Nobel Prize is really the failure of the Nobel selection committee — would eventually succeed in unifying economic theory by reformulating macroeconomics on correctly specified microfoundations, I naively entertained for a while the idea that I would write a Ph.D. dissertation on some aspect of the problem of price rigidity. However, I never could do more than formulate some general observations about the theoretical role of price rigidity in macroeconomic models and compose a superficial survey of the empirical literature on price rigidity, starting with the work of Gardiner Means in the 1930s on administered prices up to a volume, The Behavior of Industrial Prices, by Stigler and Kindahl that had just appeared. After many months of frustrating and fruitless efforts to come up with a hook on which to base a dissertation, I came to the painful conclusion that my theoretical ambition exceeded my intellectual resources and I would have to look for a dissertation topic that I could get my arms around.

I then went to the other extreme, choosing a straightforward empirical topic, a comparison of car insurance premiums in states with different regulatory regimes, eventually finding that, as suggested by the regulatory capture theory, stricter regulation was associated with higher, not lower, premiums. But in choosing a dissertation topic in which I had little emotional or intellectual investment, I paid an unforeseen cost of another sort; my lack of passion for my dissertation made me a poor candidate in the job market. So the only job offer I got was from an undistinguished upper-midwestern economics department.

These not so pleasant reminiscences were triggered by my response a couple of days ago to the comments of Nick Rowe, Scott Sumner, Anon, and Wonks Anonymous on my posting “Krugman on Keynes and the Moderns.” In that post, I had chided Krugman for dismissing without any, much less adequate, explanation Robert Barro’s assertion that Keynes’s theory of high unemployment could be reduced to the following:  wages and prices are stuck at a level too high to allow full employment;  the problem could therefore be solved by monetary expansion raising equilibrium wages and prices, thereby obviating the reduction in wages and prices that “price stickiness” had been blocking.  In response, Krugman merely harrumphs, and complains that Barro doesn’t get it.

In  his comment, Nick distinguished between the cause for the decline in AD and why, once AD has declined, it is translated into a reduction in output and employment rather than a pure reduction in prices and wages with unchanged output and employment.  According to Nick’s interpretation, the Krugman/Barro dispute is seemingly reduced to a verbal dispute about the meaning of the word “cause.”  But, presumably, Krugman wants to say that a reduction in AD, must, for reasons deeper than mere “price stickiness,” have output and employment effects, not just price effects.

Then Scott weighed in with the following comment.

If wage and price stickiness aren’t needed for the Keynesian model, do the model without them. I don’t see how it can be done. I’ve never seen a Keynesian model with complete wage and price flexibility. If NGDP falls 99%, and so do wages and prices, how is there unemployment?

I responded to Nick and Scott as well as to further comments by Anon and Wonks Anonymous, but my comments may have been too terse to have been comprehensible.  At any rate, there was no response to my comment, so I don’t know if readers came away nodding or shaking their heads.

At the risk of boring even those who have made it this far, let me try to make a couple of crucial, but rarely noted, distinctions  about terms like “price stickiness,” “price inflexibility,” or “price rigidity.”  On the one hand, “rigid prices” can mean that, even though supply and demand have shifted in a way that implies that the price should change, the price doesn’t change.  On this interpretation, “price stickiness” is a kind of (perhaps externally imposed) market failure.  The virtue of the price system, as Hayek taught us, is that it transmits information about alternative uses for and supplies of resources, leading to efficient resource allocation with no need for central direction, purely through voluntary responses to price signals.

On this interpretation, “sticky” prices constitute a fundamental failure; prices and wages, either because of direct government intervention or monopoly privileges, do not adjust in the “normal” or “proper” way to changes in demand and supply; the price mechanism doesn’t function as it is supposed to.  Well, then, the argument goes, if the price mechanism is malfunctioning, because prices are “stuck” at levels too high for markets to clear, of course output and employment will contract.  If that is all there is to what Keynes was saying, what’s the big deal?  Everybody knew that.

I interpret this to have been Barro’s point about which Krugman complained.  And, Scott Sumner seems to agree with Barro that Keynesian economics is nothing other than the economics of sticky prices.  Nick Rowe, however, if I understand him correctly, at least wants to leave open the possibility that Keynesian economics is about more than just the assumption that the price mechanism is malfunctioning.

Here is where my UCLA training, and my seemingly fruitless efforts nearly 40 years ago, may give me (but certainly not just me) some added insight into the problem.  Let me ask the following question.  When aggregate demand drops, would we really expect workers immediately to take wage cuts and businesses immediately to reduce prices, the decline in aggregate demand being entirely reflected in instantaneously falling prices and wages, with no reduction in output and employment?  I doubt it.  At the moment aggregate demand falls, how many people are even aware of what has just happened?  It’s not easy to distinguish between a general decline in demand and a decline limited to just your own product.  If you are a worker told by your employer that you are being laid off because his sales are down, would it be more rational for you to ask how big a wage cut would allow you to hang on to your job, or to assume that some other employer would be willing to pay you a wage close to what you had been earning.  (And if there was none, why was your old employer paying you a much higher wage than anyone else was?)

This is the search rationale for unemployment developed at UCLA in the early 1960s and discussed in the classic introductory text University Economics by Alchian and Allen, later developed by others like Peter Diamond into a theory for which Diamond, not undeservingly, did win a Nobel Prize.  Axel Leijonhufvud, who came to UCLA while  turning his own Ph. D. dissertation into a wonderful book On Keynesian Economic and the Economics of Keynes, used the search-theoretic explanation of unemployment to suggest an interpretation of Keynes that didn’t rely on wage and price rigidity in the first sense.

Another UCLA luminary, Earl Thompson, restated the same basic point more elegantly in a Hicksian temporary equilibrium framework.  In temporary equilibrium, as understood by Hicks, individual supply and demand decisions depend on the possibly incorrect and conflicting price expectations of each transactor.  Only in full general equilibrium are all price expectations correct, but in temporary equilibrium prices do adjust to clear markets despite incorrect price expectations.  Suppose price expectations are too high, as they are after a decline in aggregate demand, then the quantities offered for sale by transactors will be less than would have been offered if expected prices were lower.  Given that expected future prices are too high, the price mechanism is working  as well as it can.  Prices are not sticky; no price adjustment would induce a mutually beneficial transaction given the price expectations held by the transactors.   But those incorrect price expectations, nevertheless, cause a cumulative contraction of output, with shrinking aggregate demand.  Even though price expectations may be revised downward, the fall in aggregate demand may prevent restoration of full equilibrium with correct price expectations.

That is how you can have declining real output and employment even with fully “flexible” prices in the only sense of the term that I can conceive of.  If someone wants to call this Keynesian or involuntary unemployment, it is fine with me. But I don’t think that the formal apparatus of what is commonly understood to be Keynesian economics is at all necessary to understand the mechanism. And I’m not so sure that the Keynesian model really helps us understand the nature of the dynamic at work in this situation.

Those were the days.

Krugman and Sumner on the Zero-Interest Lower Bound: Some History of Thought

UPDATE: Re-upping my post from July 8, 2011

I indicated in my first posting on Tuesday that I was going to comment on some recent comparisons between the current anemic recovery and earlier more robust recoveries since World War II. The comparison that I want to perform involves some simple econometrics, and it is taking longer than anticipated to iron out the little kinks that I keep finding. So I will have to put off that discussion a while longer. As a diversion, I will follow up on a point that Scott Sumner made in discussing Paul Krugman’s reasoning for having favored fiscal policy over monetary policy to lead us out of the recession.

Scott’s focus is on the factual question whether it is really true, as Krugman and Michael Woodford have claimed, that a monetary authority, like, say, the Bank of Japan, may simply be unable to create the inflation expectations necessary to achieve equilibrium, given the zero-interest-rate lower bound, when the equilibrium real interest rate is less than zero. Scott counters that a more plausible explanation for the inability of the Bank of Japan to escape from a liquidity trap is that its aversion to inflation is so well-known that it becomes rational for the public to expect that the Bank of Japan would not permit the inflation necessary for equilibrium.

It seems that a lot of people have trouble understanding the idea that there can be conditions in which inflation — or, to be more precise, expected inflation — is necessary for a recovery from a depression. We have become so used to thinking of inflation as a costly and disruptive aspect of economic life, that the notion that inflation may be an integral element of an economic equilibrium goes very deeply against the grain of our intuition.

The theoretical background of this point actually goes back to A. C. Pigou (another famous Cambridge economist, Alfred Marshall’s successor) who, in his 1936 review of Keynes’s General Theory, referred to what he called Mr. Keynes’s vision of the day of judgment, namely, a situation in which, because of depressed entrepreneurial profit expectations or a high propensity to save, macro-equilibrium (the equality of savings and investment) would correspond to a level of income and output below the level consistent with full employment.

The “classical” or “orthodox” remedy to such a situation was to reduce the rate of interest, or, as the British say “Bank Rate” (as in “Magna Carta” with no definite article) at which the Bank of England lends to its customers (mainly banks).  But if entrepreneurs are so pessimistic, or households so determined to save rather than consume, an equilibrium corresponding to a level of income and output consistent with full employment could, in Keynes’s ghastly vision, only come about with a negative interest rate. Now a zero interest rate in economics is a little bit like the speed of light in physics; all kinds of crazy things start to happen if you posit a negative interest rate and it seems inconsistent with the assumptions of rational behavior to assume that people would lend for a negative interest when they could simply hold the money already in their pockets. That’s why Pigou’s metaphor was so powerful. There are layers upon layers of interesting personal and historical dynamics lying beneath the surface of Pigou’s review of Keynes, but I won’t pursue that tangent here, tempting though it would be to go in that direction.

The conclusion that Keynes drew from his model is the one that we all were taught in our first course in macro and that Paul Krugman holds close to his heart, the government can come to the rescue by increasing its spending on whatever, thereby increasing aggregate demand, raising income and output up to the level consistent with full employment. But Pigou, whose own policy recommendations were not much different from those of Keynes, felt that Keynes had left out an important element of the model in his discussion. As a matter of logic, which to Pigou was as, or more important than, policy, an economy confronting Keynes’s day of judgment would not forever be stuck in “underemployment equilibrium” just because the rate of interest could not fall to the (negative) level required for full employment.

Rather, Pigou insisted, at least in theory, though not necessarily in practice, deflation, resulting from unemployed workers bidding down wages to gain employment, would raise the real value of the money supply (fixed in nominal terms in Keynes’s model) thereby generating a windfall to holders of money, inducing them to increase consumption, raising aggregate demand and eventually restoring full employment.  Discussion of the theoretical validity and policy relevance of what came to be known as the Pigou effect (or, occasionally, as the Pigou-Haberler Effect, or even the Pigou-Haberler-Scitovsky effect) became a really big deal in macroeconomics in the 1940s and 1950s and was still being taught in the 1960s and 1970s.

What seems remarkable to me now about that whole episode is that the analysis simply left out the possibility that the zero-interest-rate lower bound becomes irrelevant if the expected rate of inflation exceeds the putative negative equilibrium real interest rate that would hypothetically generate a macro-equilibrium at a level of income and output consistent with full employment.

If only Pigou had corrected the logic of Keynes’s model by positing an expected rate of inflation greater than the negative real interest rate rather than positing a process of deflation to increase the real value of the money stock, how different would the course of history and the development of macroeconomics and monetary theory have been.

One economist who did think about the expected rate of inflation as an equilibrating variable in a macroeconomic model was one of my teachers, the late, great Earl Thompson, who introduced the idea of an equilibrium rate of inflation in his remarkable unpublished paper, “A Reformulation of Macreconomic Theory.” If inflation is an equilibrating variable, then it cannot make sense for monetary authorities to commit themselves to a single unvarying target for the rate of inflation. Under certain circumstances, macroeconomic equilibrium may be incompatible with a rate of inflation below some minimum level. Has it occurred to the inflation hawks on the FOMC and their supporters that the minimum rate of inflation consistent with equilibrium is above the 2 percent rate that Fed has now set as its policy goal?

One final point, which I am still trying to work out more coherently, is that it really may not be appropriate to think of the real rate of interest and the expected rate of inflation as being determined independently of each other. They clearly interact. As I point out in my paper “The Fisher Effect Under Deflationary Expectations,” increasing the expected rate of inflation when the real rate of interest is very low or negative tends to increase not just the nominal rate, but the real rate as well, by generating the positive feedback effects on income and employment that result when a depressed economy starts to expand.

Welcome to Uneasy Money, aka the Hawtreyblog

UPDATE: I’m re-upping my introductory blog post, which I posted ten years ago toady. It’s been a great run for me, and I hope for many of you, whose interest and responses have motivated to keep it going. So thanks to all of you who have read and responded to my posts. I’m adding a few retrospective comments and making some slight revisions along the way. In addition to new posts, I will be re-upping some of my old posts that still seem to have relevance to the current state of our world.

What the world needs now, with apologies to the great Burt Bachrach and Hal David, is, well, another blog.  But inspired by the great Ralph Hawtrey and the near great Scott Sumner, I decided — just in time for Scott’s return to active blogging — to raise another voice on behalf of a monetary policy actively seeking to promote recovery from what I call the Little Depression, instead of the monetary policy we have now:  waiting for recovery to arrive on its own.  Just like the Great Depression, our Little Depression was caused mainly by overly tight money in an environment of over-indebtedness and financial fragility, and was then allowed to deepen and become entrenched by monetary authorities unwilling to commit themselves to a monetary expansion aimed at raising prices enough to make business expansion profitable.

That was the lesson of the Great Depression.  Unfortunately that lesson, for reasons too complicated to go into now, was never properly understood, because neither Keynesians nor Monetarists had a fully coherent understanding of what happened in the Great Depression.  Although Ralph Hawtrey — called by none other than Keynes “his grandparent in the paths of errancy,” and an early, but unacknowledged, progenitor of Chicago School Monetarism — had such an understanding,  Hawtrey’s contributions were overshadowed and largely ignored, because of often irrelevant and misguided polemics between Keynesians and Monetarists and Austrians.  One of my goals for this blog is to bring to light the many insights of this perhaps most underrated — though competition for that title is pretty stiff — economist of the twentieth century.  I have discussed Hawtrey’s contributions in my book on free banking and in a paper published years ago in Encounter and available here.  Patrick Deutscher has written a biography of Hawtrey.

What deters businesses from expanding output and employment in a depression is lack of demand; they fear that if they do expand, they won’t be able to sell the added output at prices high enough to cover their costs, winding up with redundant workers and having to engage in costly layoffs.  Thus, an expectation of low demand tends to be self-fulfilling.  But so is an expectation of rising prices, because the additional output and employment induced by expectations of rising prices will generate the demand that will validate the initial increase in output and employment, creating a virtuous cycle of rising income, expenditure, output, and employment.

The insight that “the inactivity of all is the cause of the inactivity of each” is hardly new.  It was not the discovery of Keynes or Keynesian economics; it is the 1922 formulation of Frederick Lavington, another great, but underrated, pre-Keynesian economist in the Cambridge tradition, who, in his modesty and self-effacement, would have been shocked and embarrassed to be credited with the slightest originality for that statement.  Indeed, Lavington’s dictum might even be understood as a restatement of Say’s Law, the bugbear of Keynes and object of his most withering scorn.  Keynesian economics skillfully repackaged the well-known and long-accepted idea that when an economy is operating with idle capacity and high unemployment, any increase in output tends to be self-reinforcing and cumulative, just as, on the way down, each reduction in output is self-reinforcing and cumulative.

But at least Keynesians get the point that, in a depression or deep recession, individual incentives may not be enough to induce a healthy expansion of output and employment. Aggregate demand can be too low for an expansion to get started on its own. Even though aggregate demand is nothing but the flip side of aggregate supply (as Say’s Law teaches), if resources are idle for whatever reason, perceived effective demand is deficient, diluting incentives to increase production so much that the potential output expansion does not materialize, because expected prices are too low for businesses to want to expand. But if businesses can be induced to expand output, more than likely, they will sell it, because (as Say’s Law teaches) supply usually does create its own demand.

[Comment after 10 years: In a comment, Rowe asked why I wrote that Say’s Law teaches that supply “usually” creates its own demand. At that time, I responded that I was just using “usually” as a weasel word. But I subsequently realized (and showed in a post last year) that the standard proofs of both Walras’s Law and Say’s Law are defective for economies with incomplete forward and state-contingent markets. We actually know less than we once thought we did!] 

Keynesians mistakenly denied that, by creating price-level expectations consistent with full employment, monetary policy could induce an expansion of output even in a depression. But at least they understood that the private economy can reach an impasse with price-level expectations too low to sustain full employment. Fiscal policy may play a role in remedying a mismatch between expectations and full employment, but fiscal policy can only be as effective as monetary policy allows it to be. Unfortunately, since the downturn of December 2007, monetary policy, except possibly during QE1 and QE2, has consistently erred on the side of uneasiness.

With some unfortunate exceptions, however, few Keynesians have actually argued against monetary easing. Rather, with some honorable exceptions, it has been conservatives who, by condemning a monetary policy designed to provide incentives conducive to business expansion, have helped to hobble a recovery led by the private sector rather than the government which  they profess to want. It is not my habit to attribute ill motives or bad faith to people whom I disagree with. One of the finest compliments ever paid to F. A. Hayek was by Joseph Schumpeter in his review of The Road to Serfdom who chided Hayek for “politeness to a fault in hardly ever attributing to his opponents anything but intellectual error.” But it is a challenge to come up with a plausible explanation for right-wing opposition to monetary easing.

[Comment after 10 years: By 2011 when this post was written, right-wing bad faith had already become too obvious to ignore, but who could then have imagined where the willingness to resort to bad faith arguments without the slightest trace of compunction would lead them and lead us.] 

In condemning monetary easing, right-wing opponents claim to be following the good old conservative tradition of supporting sound money and resisting the inflationary proclivities of Democrats and liberals. But how can claims of principled opposition to inflation be taken seriously when inflation, by every measure, is at its lowest ebb since the 1950s and early 1960s? With prices today barely higher than they were three years ago before the crash, scare talk about currency debasement and future hyperinflation reminds me of Ralph Hawtrey’s famous remark that warnings that leaving the gold standard during the Great Depression would cause runaway inflation were like crying “fire, fire” in Noah’s flood.

The groundlessness of right-wing opposition to monetary easing becomes even plainer when one recalls the attacks on Paul Volcker during the first Reagan administration. In that episode President Reagan and Volcker, previously appointed by Jimmy Carter to replace the feckless G. William Miller as Fed Chairman, agreed to make bringing double-digit inflation under control their top priority, whatever the short-term economic and political costs. Reagan, indeed, courageously endured a sharp decline in popularity before the first signs of a recovery became visible late in the summer of 1982, too late to save Reagan and the Republicans from a drubbing in the mid-term elections, despite the drop in inflation to 3-4 percent. By early 1983, with recovery was in full swing, the Fed, having abandoned its earlier attempt to impose strict Monetarist controls on monetary expansion, allowed the monetary aggregates to grow at unusually rapid rates.

However, in 1984 (a Presidential election year) after several consecutive quarters of GDP growth at annual rates above 7 percent, the Fed, fearing a resurgence of inflation, began limiting the rate of growth in the monetary aggregates. Reagan’s secretary of the Treasury, Donald Regan, as well as a variety of outside Administration supporters like Arthur Laffer, Larry Kudlow, and the editorial page of the Wall Street Journal, began to complain bitterly that the Fed, in its preoccupation with fighting inflation, was deliberately sabotaging the recovery. The argument against the Fed’s tightening of monetary policy in 1984 was not without merit. But regardless of the wisdom of the Fed tightening in 1984 (when inflation was significantly higher than it is now), holding up the 1983-84 Reagan recovery as the model for us to follow now, while excoriating Obama and Bernanke for driving inflation all the way up to 1 percent, supposedly leading to currency debauchment and hyperinflation, is just a bit rich. What, I wonder, would Hawtrey have said about that?

In my next posting I will look a little more closely at some recent comparisons between the current non-recovery and recoveries from previous recessions, especially that of 1983-84.

Gabriel Mathy and I Discuss the Gold Standard and the Great Depression

Sometimes you get into a Twitter argument when you least expect to. It was after 11pm two Saturday nights ago when I saw this tweet by Gabriel Mathy (@gabriel_mathy)

Friedman says if there had been no Fed, there would have been no Depression. That’s certainly wrong, even if your position is that the Fed did little to nothing to mitigate the Depression (which is reasonable IMO)

Chiming in, I thought to reinforce Mathy’s criticism of Friedman, I tweeted the following:

Friedman totally misunderstood the dynamics of the Great Depression, which was driven by increasing demand for gold after 1928, in particular by the Bank of France and by the Fed. He had no way of knowing what the US demand for gold would have been if there had not been a Fed

I got a response from Mathy that I really wasn’t expecting who tweeted with seeming annoyance

There already isn’t enough gold to back the gold standard by the end of World War I, it’s just a matter of time until a negative shock large enough sent the world into a downward spiral (my emphasis). Just took a few years after resumption of the gold standard in most countries in the mid-20s. (my emphasis)

I didn’t know exactly what to make of Mathy’s assertion that there wasn’t enough gold by the end of World War I. The gold standard was effectively abandoned at the outset of WWI and the US price level was nearly double the prewar US price level after the postwar inflation of 1919. Even after the deflation of 1920-21, US prices were still much higher in 1922 than they were in 1914. Gold production fell during World War I, but gold coins had been withdrawn from circulation and replaced with paper or token coins. The idea that there is a fixed relationship between the amount of gold and the amount of money, especially after gold coinage had been eliminated, has no theoretical basis.

So I tweeted back:

The US holdings of gold after WWI were so great that Keynes in his Tract on Monetary Reform [argued] that the great danger of a postwar gold standard was inflation because the US would certainly convert its useless holding of gold for something more useful

To which Mathy responded

The USA is not the only country though. The UK had to implement tight monetary policies to back the gold standard, and eventually had to leave the gold standard. As did the USA in 1931. The Great Depression is a global crisis.

Mathy’s response, I’m afraid, is completely wrong. Of course, the Great Depression is a global crisis. It was a global crisis, because, under the (newly restored) gold standard, the price level in gold-standard countries was determined internationally. And, holding 40% of the world’s monetary reserves of gold at the end of World War I, the US, the largest and most dynamic economy in the world, was clearly able to control, as Keynes understood, the common international price level for gold-standard countries.

The tight monetary policy imposed on the UK resulted from its decision to rejoin the gold standard at the prewar dollar parity. Had the US followed a modestly inflationary monetary policy, allowing an outflow of gold during the 1920s rather than inducing an inflow, deflation would not have been imposed on the UK.

But instead of that response, I replied as follows:

The US didn’t leave till 1933 when FDR devalued. I agree that individual countries, worried about losing gold, protected their reserves by raising interest rates. Had they all reduced rates together, the conflict between individual incentives and common interest could have been avoided.

Mathy then kept the focus on the chronology of the Great Depression, clarifying that he meant that in 1931 the US, like the UK, tightened monetary policy to remain on the gold standard, not that the US, like the UK, also left the gold standard in 1931:

The USA tightens in 1931 to stay on the gold standard. And this sets off a wave of bank failures.

Fair enough, but once the situation deteriorated after the crash and the onset of deflation, the dynamics of the financial crisis made managing the gold standard increasingly difficult, given the increasingly pessimistic expectations conditioned by deepening economic contraction and deflation. While an easier US monetary policy in the late 1920s might have avoided the catastrophe and preserved the gold standard, an easier monetary policy may, at some point, have become inconsistent with staying on the gold standard.

So my response to Mathy was more categorical than was warranted.

Again, the US did not have to tighten in 1931 to stay on the gold standard. I agree that the authorities might have sincerely thought that they needed to tighten to stay on the gold standard, but they were wrong if that’s what they thought.

Mathy was having none of it, unleashing a serious snark attack

You know better I guess, despite collapsing free gold amidst a massive speculative attack

What I ought to have said is that the gold standard was not worth saving if doing so entailed continuing deflation. If I understand him, Mathy believes that deflation after World War I was inevitable and unavoidable, because there wasn’t enough gold to sustain the gold standard after World War I. I was arguing that if there was a shortage of gold, it was because of the policies followed, often in compliance with legal gold-cover requirements, that central banks, especially the Bank of France, which started accumulating gold rapidly in 1928, and the Fed, which raised interest rates to burst a supposed stock-market bubble, were following. But as I point out below, the gold accumulation by the Bank of France far exceeded what was mandated by legal gold-cover requirements.

My point is that the gold shortage that Mathy believes doomed the gold standard was not preordained; it could have been mitigated by policies to reduce, or reverse, gold accumulation. France could have rejoined the gold standard without accumulating enormous quantities of gold in 1928-29, and the Fed did not have to raise interest rates in 1928-29, attracting additional gold to its own already massive holdings just as France was rapidly accumulating gold.

When France formally rejoined the gold standard in July 1928, the gold reserves of the Bank of France were approximately equal to its foreign-exchange holdings and its gold-reserve ratio was 39.5% slightly above the newly established legal required ratio of 35%. In subsequent years, the gold reserves of the Bank of France steadily increased while foreign exchange reserves declined. At the close of 1929, the gold-reserve ratio of the Bank of France stood at 47.3%, while its holdings of foreign exchange hardly changed. French gold holdings increased in 1930 by slightly more than in 1929, with foreign-exchange holdings almost constant; the French gold-reserve ratio at the end of 1930 was 53.2%. The 1931 increase in French gold reserves, owing to a 20% drop in foreign-exchange holdings, was even larger than in 1930, raising the gold-reserve ratio to 60.5% at the end of 1931.

Once deflation and the Great Depression started late in 1929, deteriorating rapidly in 1930, salvaging the gold standard became increasingly unlikely, with speculators becoming increasingly alert to the possibility of currency devaluation or convertibility suspension. Speculation against a pegged exchange rate is not always a good bet, but it’s rarely a bad one, any change in the pegged rate being almost surely in the direction that speculators are betting on. 

But, it was still at least possible that, if gold-cover requirements for outstanding banknotes and bank reserves were relaxed or suspended, central banks could have caused a gold outflow sufficient to counter the deflationary expectations then feeding speculative demands for gold. Gold does not have many non-monetary uses, so a significant release of gold from idle central-bank reserves might have caused gold to depreciate relative to other real assets, thereby slowing, or even reversing, deflation.

Of course, deflation would not have stopped unless the deflationary expectations fueling speculative demands for gold were reversed. Different expectational responses would have led to different outcomes. More often than not, inflationary and deflationary expectations are self-fulfilling. Because expectations tend to be mutually interdependent – my inflationary expectations reinforce your inflationary expectations and vice versa — the notion of rational expectation in this context borders on the nonsensical, making outcomes inherently unpredictable. Reversing inflationary or deflationary expectations requires policy credibility and a willingness by policy makers to take policy actions – even or especially painful ones — that demonstrate their resolve.

In 1930 Ralph Hawtrey testified to the Macmillan Committee on Finance and Industry, he recommended that the Bank of England reduce interest rates to counter the unemployment and deflation. That testimony elicited the following exchange between Hugh Pattison Macmillan, the chairman of the Committee and Hawtrey:

MACMILLAN: Suppose . . . without restricting credit . . . that gold had gone out to a very considerable extent, would that not have had very serious consequences on the international position of London?

HAWTREY: I do not think the credit of London depends on any particular figure of gold holding. . . . The harm began to be done in March and April of 1925 [when] the fall in American prices started. There was no reason why the Bank of England should have taken any action at that time so far as the question of loss of gold is concerned. . . . I believed at the time and I still think that the right treatment would have been to restore the gold standard de facto before it was restored de jure. That is what all the other countries have done. . . . I would have suggested that we should have adopted the practice of always selling gold to a sufficient extent to prevent the exchange depreciating. There would have been no legal obligation to continue convertibility into gold . . . If that course had been adopted, the Bank of England would never have been anxious about the gold holding, they would have been able to see it ebb away to quite a considerable extent with perfect equanimity, . . and might have continued with a 4 percent Bank Rate.

MACMILLAN: . . . the course you suggest would not have been consistent with what one may call orthodox Central Banking, would it?

HAWTREY: I do not know what orthodox Central Banking is.

MACMILLAN: . . . when gold ebbs away you must restrict credit as a general principle?

HAWTREY: . . . that kind of orthodoxy is like conventions at bridge; you have to break them when the circumstances call for it. I think that a gold reserve exists to be used. . . . Perhaps once in a century the time comes when you can use your gold reserve for the governing purpose, provided you have the courage to use practically all of it.

Hawtrey’s argument lay behind this response of mine to Mathy:

What else is a gold reserve is for? That’s like saying you can’t fight a fire because you’ll drain the water tank. But I agree that by 1931 there was no point in defending the gold standard and the US should have made clear the goal was reflation to the 1926 price level as FDR did in 1933.

Mathy responded:

If the Fed cuts discount rates to 0%, capital outflow will eventually exhaust gold reserves. So do you recommend a massive OMO in 1929? What specifically is the plan?

In 1927, the Fed reduced its discount rate to 3.5%; in February 1928, it was raised the rate to 4%. The rate was raised again in August 1928 and to 6% in September 1929. The only reason the Fed raised interest rates in 1928 was a misguided concern with rising stock prices. A zero interest rate was hardly necessary in 1929, nor were massive open-market operations. Had the Fed kept its interest rate at 4%, and the Bank of France not accumulated gold rapidly in 1928-29, the history of the world might well have followed a course much different from the one actually followed.

In another exchange, Mathy pointed to the 1920s adoption of the gold-exchange standard rather than a (supposedly) orthodox version of the gold standard as evidence that there wasn’t enough gold to support the gold standard after World War I. (See my post on the difference between the gold standard and the gold-exchange standard.)

Mathy: You seem to be implying there was plentiful free gold [i.e., gold held by central banks in excess of the amount required by legal gold-cover requirements] in the world after WW1 so that gold was not a constraint. How much free gold to you reckon there was?

Glasner: All of it was free. Legal reserve requirements soaked up much but nearly all the free gold

Mathy: All of it was not free, and countries suffered speculative attacks before their real or perceived minimum backings of gold were reached

Glasner: All of it would have been free but for the legal reserve requirements. Of course countries were subject to speculative attacks, when the only way for a country to avoid deflation was to leave the gold standard.

Mathy: You keep asserting an abundance of free gold, so let’s see some numbers. The lack of free gold led to the gold exchange standard where countries would back currencies with other currencies (themselves only partially backed by gold) because there wasn’t enough gold.

Glasner: The gold exchange standard was a rational response to the WWI inflation and post WWI deflation and it could have worked well if it had not been undermined by the Bank of France and gold accumulation by the US after 1928.

Mathy: Both you and [Douglas] Irwin assume that the gold inflows into France are the result of French policy. But moving your gold to France, a country committed to the gold standard, is exactly what a speculative attack on another currency at risk of leaving the gold standard looks like.

Mathy: What specific policies did the Bank if France implement in 1928 that caused gold inflows? We can just reason from accounting identities, assuming that international flows to France are about pull factors from France rather than push factors from abroad.

Mathy: So lay out your counterfactual- how much gold should the US and France have let go abroad, and how does this prevent the Depression?

Glasner: The increase in gold monetary holdings corresponds to a higher real value of gold. Under the gold standard that translates into [de]flation. Alternatively, to prevent gold outflows central banks raised rates which slowed economic activity and led to deflation.

Mathy: So give me some numbers. What does the Fed do specifically in 1928 and what does France do specifically in 1928 that avoid the debacle of 1929. You can take your time, pick this up Monday.

Mathy: The UK was suffering from high unemployment before 1928 because there wasn’t enough gold in the system. The Bank of England had been able to draw gold “from the moon” with a higher bank rate. After WW1, this was no longer possible.

Glasner: Unemployment in the UK steadily fell after 1922 and continued falling till ’29. With a fixed exchange rate against the $, and productivity in the US rising faster than in the UK, the UK needed more US inflation than it got to reach full employment. That has nothing to do with what happened after 1929.

Mathy: UK unemployment rises 1925-1926 actually, that’s incorrect and it’s near double digits throughout the 1920s. That’s not good at all and the problems start long before 1928.

There’s a lot to unpack here, and I will try to at least touch on the main points. Mathy questions whether there was enough free gold available in the 1920s, while also acknowledging that the gold-exchange standard was instituted in the 1920s precisely to avoid the demands on monetary gold reserves that would result from restoring gold coinage and imposing legal gold-cover requirements on central-bank liabilities. So, if free-gold reserves were insufficient before the Great Depression, it was because of the countries that restored the gold standard and also imposed legal gold-cover requirements, notably the French Monetary Law enacted in June 1928 that imposed a minimum 35% gold-cover requirement when convertibility of the franc was restored.

It’s true that there were speculative movements of gold into France when there were fears that countries might devalue their currencies or suspend gold convertibility, but those speculative movements did not begin until late 1930 or 1931.

Two aspects of the French restoration of gold convertibility should be mentioned. First, France pegged the dollar/franc exchange rate at $0.0392, with the intention of inducing a current-account surplus and a gold inflow. Normally that inflow would have been transitory as French prices and wages rose to the world level. But the French Monetary Law allowed the creation of new central-bank liabilities only in exchange for gold or foreign exchange convertible into gold. So French demand for additional cash balances could be satisfied only insofar as total spending in France was restricted sufficiently to ensure an inflow of gold or convertible foreign exchange. Hawtrey explained this brilliantly in Chapter two of The Art of Central Banking.

Mathy suggests that the gold-standard was adopted by countries without enough gold to operate a true gold standard, which he thinks proves that there wasn’t enough free gold available. What resort to the gold-exchange standard shows is that countries without enough gold were able to join the gold standard without first incurring the substantial cost of accumulating (either by direct gold purchases or by inducing large amounts of gold inflows by raising domestic interest rates); it does not prove that the gold-exchange standard system was inherently unstable.

Why did some countries restoring the gold standard not have enough gold? First, much of the world’s stock of gold reserves had been shipped to the US during World War I when countries were importing food, supplies and war material from the US paid with gold, or, promising to repay after the war, on credit. Second, wartime and immediate postwar inflation required increased quantities of cash to conduct transactions and satisfy liquidity demands. Third, legislated gold-cover requirements in the US, and later in France and other countries rejoining the gold standard, obligated monetary authorities to accumulate gold.

Those gold-cover requirements, forcing countries to accumulate additional gold to satisfy any increased demand by the public for cash, were an ongoing, and unnecessary, cause of rising demand for gold reserves as countries rejoined the gold standard in the 1920s, imparting an inherent deflationary bias to the gold standard. The 1922 Genoa Accords attempted to cushion this deflationary bias by allowing countries to rejoin the gold standard without making their own currencies directly convertible into gold, but by committing themselves to a fixed exchange rate against those currencies – at first the dollar and subsequently pound sterling – that were directly convertible into gold. But the accords were purely advisory and provided no effective mechanism to prevent the feared increase in the monetary demand for gold. And the French never intended to rejoin the gold standard except by making the franc convertible directly into gold.

Mathy asks how much gold I think that the French and the US should have let go to avoid the Great Depression. This is an impossible question to answer, because French gold accumulation in 1928-29, combined with increased US interest rates in 1928-29, which caused a nearly equivalent gold inflow into the US, triggered deflation in the second half of 1929 that amplified deflationary expectations, causing a stock market crash, a financial crisis and ultimately the Great Depression. Once deflation got underway, the measures needed to calm the crisis and reverse the downturn became much more extreme than those that would have prevented the downturn in the first place.

Had the Fed kept its discount rate at 3.5 to 4 percent, had France not undervalued the franc in setting its gold peg, and had France created a mechanism for domestic credit expansion instead of making an increase in the quantity of francs impossible except through a current account surplus, and had the Bank of France been willing to accumulate foreign exchange instead of requiring its foreign-exchange holdings to be redeemed for gold, the crisis would not have occurred.

Here are some quick and dirty estimates of the effect of French policy on the availability of free gold. In July 1928 when France rejoined the gold standard and enacted the Monetary Law drafted by the Bank of France, the notes and demand deposits against which the Bank was required to gold reserves totaled almost ff76 billion (=$2.98 billion). French gold holdings in July 1928 were then just under ff30 billion (=$1.17 billion), implying a reserve ratio of 39.5%. (See the discussion above.)

By the end of 1931, the total of French banknotes and deposits against which the Bank of France was required to hold gold reserves was almost ff114 billion (=$4.46 billion). French gold holdings at the end of 1931 totaled ff68.9 billion (=$2.7 billion), implying a gold-reserve ratio of 60.5%. If the French had merely maintained the 40% gold-reserve ratio of 1928, their gold holdings in 1931 would have been approximately ff45 billion (=$1.7 billion).

Thus, from July 1929 to December 1931, France absorbed $1 billion of gold reserves that would have otherwise been available to other central banks or made available for use in non-monetary applications. The idea that free gold was a constraint on central bank policy is primarily associated with the period immediately before and after the British suspension of the gold standard in September 1931, which occasioned speculative movements of gold from the US to France to avoid a US suspension of the gold standard or a devaluation. From January 1931 through August 1931, the gold holdings of the Bank of France increased by just over ff3 billion (=$78 million). From August to December of 1931 French gold holdings increased by ff10.3 billion (=$404 million).

So, insofar as a lack of free gold was a constraint on US monetary expansion via open market purchases in 1931, which is the only time period when there is a colorable argument that free gold was a constraint on the Fed, it seems highly unlikely that that constraint would have been binding had the Bank of France not accumulated an additional $1 billion of gold reserves (over and above the increased reserves necessary to maintain the 40% gold-reserve ratio of July 1928) after rejoining the gold standard. Of course, the claim that free gold was a binding constraint on Fed policy in the second half of 1931 is far from universally accepted, and I consider the claim to be pretextual.

Finally, I concede that my assertion that unemployment fell steadily in Britain after the end of the 1920-22 depression was not entirely correct. Unemployment did indeed fall substantially after 1922, but remained around 10 percent in 1924 — there are conflicting estimates based on different assumptions about how to determine whom to count as unemployed — when the pound began appreciating before the restoration of the prewar parity. Unemployment continued rising rise until 1926, but remained below the 1922 level. Unemployment then fell substantially in 1926-27, but rose again in 1928 (as gold accumulation by France and the US led to a rise in Bank rate), without reaching the 1926 level. Unemployment fell slightly in 1929 and was less than the 1924 level before the crash. See Eichengreen “Unemployment in Interwar Britain.”

I agree that unemployment had been a serious problem in Britain before 1928. But that wasn’t because sufficient gold was lacking in the system. Unemployment was a British problem caused by an overvalued exchange rate; it was not a systemic gold-standard problem.

Before World War I, when the gold standard was largely a sterling standard (just as the postwar gold standard became a dollar standard), the Bank of England had been able to “draw gold from the moon” by raising Bank rate. But the gold that had once been in the moon moved to the US during World War I. What Britain required was a US discount rate low enough to raise the world price level, thereby reducing deflationary pressure on Britain caused by overvaluation of sterling. Instead of keeping the discount rate at 3.5 – 4%, and allowing an outflow of gold, the Fed increased its discount rate, inducing a gold inflow and triggering a worldwide deflationary catastrophe. Between 1929 to 1931, British unemployment nearly doubled because of that catastrophe, not because Britain didn’t have enough gold. The US had plenty of gold and suffered equally from the catastrophe.

Franklin Fisher on Adjustment Processes and Stability

As an addendum to yesterday’s post I will merely quote the first three paragraphs of Franklin Fisher’s entry in The New Palgrave on “Adjustment Processes and Stability.” The whole article merits careful attention and study as does his great book Disequilibrium Foundations of Equilibrium Economics. See also a previous post of mine on Fisher’s work

Economic Theory is pre-eminently a matter of equilibrium analysis. In particular, the centerpiece of the subject — general equilibrium theory — deals with the existence and efficiency properties of competitive equilibrium. Nor is this only an abstract matter. The principal policy insight of economics — that a competitive price system produces desirable results and that government interference will generally lead to an inefficient allocation of resources — rests on the intimate connections between competitive equilibrium and Pareto efficiency.

Yet the very power and elegance of equilibrium analysis often obscures the fact that it rests on a very uncertain foundation. We have no similarly elegant theory of what happens out of equilibrium, of how agents behave when their plans are frustrated. As a result, we have no rigorous basis for believing that equilibria can be achieved or maintained if disturbed. Unless one robs words of their meaning and defines every state of the world as an “equilibrium” in the sense that agent do what they do instead of something else, there is no disguising the fact that this is a major lacuna in economic analysis.

Nor is that lacuna only important in microeconomics. For example, the Keynesian question of whether an economy can become trapped in a situation of underemployment is not merely a question of whether underemployment equilibria exist. It is also a question of whether such equilibria are stable. As such, its answer depends on the properties of the general (dis)equilibrium system which macroeconomic analysis attempts to summarize. Not surprisingly, modern attempts to deal with such systems have been increasingly forced to treat such familiar macroeconomic issues as the rule of money.

We do, of course, have some idea as to how disequilibrium adjustment takes place. From Adam Smith’s discussion of the “Invisible Hand” to the standard elementary textbook’s treatment of the “Law of Supply and Demand”, economists have stressed how the perception of profit opportunities leads agents to act. What remains unclear is whether (as most economists believe) the pursuit of such profit opportunities in fact leads to equilibrium — more particularly, to a competitive equilibrium where such opportunities no longer exist. If one thinks of a competitive economy as a dynamic system driven by the self-seeking actions of individual agents, does that system have competitive equilibria as stable rest points? If so, are such equilibria attained so quickly that the system can be studied without attention to its disequilibrium behaviour? The answers to these crucial questions remain unclear.

Involuntary Unemployment, the Mind-Body Problem, and Rubbernecking

The term involuntary unemployment was introduced by Keynes in the General Theory as the name he attached to the phenomenon of high cyclical unemployment during the downward phase of business cycle. He didn’t necessarily restrict the term to unemployment at the trough of the business cycle, because he at least entertained the possibility of underemployment equilibrium, presumably to indicate that involuntary unemployment could be a long-lasting, even permanent, phenomenon, unless countered by deliberate policy measures.

Keynes provided an explicit definition of involuntary unemployment in the General Theory, a definition that is far from straightforward, but boils down to the following: if unemployment would not fall as a result of a cut in nominal wages, but would fall as a result of a cut real wages brought about by an increase in the price level, then there is involuntary unemployment. Thus, Keynes explicitly excluded from his definition of involuntary unemployment, unemployment caused by minimum wages or labor-union monopoly power.

Keynes’s definition has always been controversial, because it implies that wage stickiness or rigidity is not the cause of unemployment. There have been at least two approaches to Keynes’s definition of involuntary that now characterize the views of mainstream macroeconomists to involuntary unemployment.

The first is rationalization. Examples of such rationalization are search and matching theories of unemployment, implicit-contract theories, and efficiency-wage theories. The problem with such rationalizations is that they are rationalizations of why nominal wages are sticky or rigid. But Keynes’s definition of involuntary unemployment was based on the premise that reducing nominal wages does not reduce involuntary unemployment, so the rationalizations of why nominal wages aren’t cut to reduce unemployment seem sort of irrelevant to the concept of involuntary unemployment, or, at least to Keynes’s understanding of the concept.

The second is denial. Perhaps the best example of such denial is provided by Robert Lucas. Here’s his take on involuntary unemployment.

The worker who loses a good job in prosperous times does not volunteer to be in this situation: he has suffered a capital loss. Similarly, the firm which loses an experienced employee in depressed times suffers an undesired capital loss. Nevertheless the unemployed worker at any time can always find some job at once, and a firm can always fill a vacancy instantaneously. That neither typically does so by choice is not difficult to understand given the quality of the jobs and the employees which are easiest to find. Thus there is an involuntary element in all unemployment, in the sense that no one chooses bad luck over good; there is also a voluntary element in all unemployment, in the sense that however miserable one’s current work options, one can always choose to accept them.

R. E. Lucas, Studies in Business-Cycle Theory, p. 242

Because Lucas believes that it is impossible to determine the extent to which any observed unemployment reflects a voluntary choice by the unemployed worker, or is involuntarily imposed on the worker by a social process beyond the worker’s control, he rejects the distinction as artificial and lacking empirical content, the product of Keynes’s overactive imagination. As such, the concept requires no explanation by economists.

Involuntary unemployment is not a fact or a phenomenon which it is the task of theorists to explain. It is, on the contrary, a theoretical construct which Keynes introduced in the hope that it would be helpful in discovering a correct explanation for a genuine phenomenon: large-scale fluctuations in measured, total unemployment. Is it the task of modern theoretical economics to “explain” the theoretical constructs of our predecessors, whether or not they have proved fruitful? I hope not, for a surer route to sterility could scarcely be imagined?

Id., p. 243

Lucas’s point seems to be that the distinction between voluntary and involuntary unemployment is purely semantic and doesn’t correspond to any observable phenomena that are of scientific interest. He may be right, and if he chooses to explain observed fluctuations in unemployment without reference to the distinction between voluntary and involuntary unemployment, he is under no obligation to accommodate the preferences of those economists that believe that involuntary unemployment is a real phenomenon that does require an explanation.

There is a real conflict of paradigms here. Surely Lucas is entitled to reject the Keynesian involuntary unemployment paradigm, and he may be right that trying to explain involuntary unemployment is unlikely to result in a progressive scientific research program. But it is not obvious that he is right.

One might argue that Lucas’s argument against involuntary unemployment resembles the argument of physicalists who deny the reality of mind and of consciousness. According to physicalists, only the brain and brain states exist. The mind and consciousness are just metaphysical concepts lacking any empirical basis. I happen to think that denying the reality of mind and consciousness borders on the absurd, but I am even less of an expert on the mind-body problem than I am on the existence of involuntary unemployment, so I won’t push this particular analogy any further.

Instead, let me try another analogy. Within the legal speed limits, drivers choose different speeds at which they drive while on a turnpike. Does it make sense to distinguish between situations in which they drive less than the speed limit voluntarily and situations in which they drive less than the speed limit involuntarily? Sometimes, there are physical bottlenecks (e.g., lane closures or other obstructions of traffic flows) that prevent cars on the turnpike from going as fast as drivers would have chosen to but for those physical constraints.

Would Lucas deny that the distinction between driving at less than the speed limit voluntarily and driving at less than the speed limit involuntarily is meaningful and empirically relevant?

There are also situations in which drivers involuntarily drive at less than the speed limit, not because of any physical bottleneck on traffic flows, but because of the voluntary choices of some drivers to slow down to rubberneck at something at the side of the turnpike but doesn’t physically obstruct the flow of traffic. Does the interaction between the voluntary choices of different drivers on the turnpike result in some drivers making involuntary choices?

I think the distinction between voluntary and involuntary choices may be relevant and meaningful in this context, but I know almost nothing about traffic-flow theory or queuing theory. I would welcome hearing what readers think about the relevance of the voluntary-involuntary distinction in the context of traffic-flow theory and whether they see any implications for such a distinction in unemployment theory.

What’s so Great about Supply-Demand Analysis?

Just about the first thing taught to economics students is that there are demand curves for goods and services and supply curves of goods and services. Demand curves show how much customers wish to buy of a particular good or service within a period of time at various prices that might be charged for that good or service. The supply curve shows how much suppliers of a good or service would offer to sell at those prices.

Economists assume, and given certain more basic assumptions can (almost) prove, that customers will seek to buy less at higher prices for a good or service than at lower prices. Similarly, they assume that suppliers of the good or service offer to sell more at higher prices than at lower prices. Reflecting those assumptions, demand curves are downward-sloping and supply curve are upward-sloping. An upward-sloping supply curve is likely to intersect a downward-sloping demand curve at a single point, which corresponds to an equilibrium that allows customers to buy as much as they want to and suppliers to sell as much as they want to in the relevant time period.

This analysis is the bread and butter of economics. It leads to the conclusion that, when customers can’t buy as much as they would like, the price goes up, and, when suppliers can’t sell as much as they would like, the price goes down. So the natural tendency in any market is for the price to rise if it’s less than the equilibrium price, and to fall if it’s greater than the equilibrium price. This is the logic behind letting the market determine prices.

It can also be shown, if some further assumptions are made, that the intersection of the supply and demand curves represents an optimal allocation of resources in the sense that the total value of output is maximized. The necessary assumptions are, first, that the demand curve measures the marginal value placed on additional units of output, and, second, that the supply curve measures the marginal cost of producing additional units of output. The intersection of the supply and the demand curves corresponds to the maximization of the total value of output, because the marginal cost represents the value of output that could have been produced if the resources devoted to producing the good in question had been shifted to more valuable uses. When the supply curve rises above the demand curve it means that the resources would produce a greater value if devoted to producing something else than the value of the additional output of the good in question.

There is much to be said for the analysis, and it would be wrong to dismiss it. But it’s also important to understand its limitations, and, especially, the implicit assumptions on which it relies. In a sense, supply-demand analysis is foundational, the workhorse model that is the first resort of economists. But its role as a workhorse model does not automatically render analyses untethered to supply and demand illegitimate.

Supply-demand analysis has three key functions. First, it focuses attention on the idea of an equilibrium price at which all buyers can buy as much as they would like, and all sellers can sell as much as they would like. In a typical case, with an upward sloping supply curve and a downward-sloping demand curve, there is one, and only one, price with that property.

Second, as explained above, there is a sense in which that equilibrium price, aside from enabling the mutual compatibility of buyers’ and sellers’ plans to buy or to sell, has optimal properties.

Third, it’s a tool for predicting how changes in market conditions, like imposing a sales or excise tax, affect customers and suppliers. It compares two equilibrium positions on the assumption that only one parameter changes and predicts the effect of the parameter change by comparing the new and old equilibria. It’s the prototype for the comparative-statics method.

The chief problem with supply-demand analysis is that it requires a strict ceteris-paribus assumption, so that everything but the price and the quantity of the good under analysis remains constant. For many reasons, that assumption can’t literally be true. If the price of the good rises (falls), the real income of consumers decreases (increases). And if the price rises (falls), suppliers likely pay more (less) for their inputs. Changes in the price of one good also affect the prices of other goods, which, in turn, may affect the demand for the good under analysis. Each of those consequences would cause the supply and demand curves to shift from their initial positions. How much the ceteris-paribus assumption matters depends on how much of their incomes consumers spend on the good under analysis. The more they spend, the less plausible the ceteris paribus assumption.

But another implicit assumption underlies supply-demand analysis: that the economic system starts from a state of general equilibrium. Why must this assumption be made? The answer is that it‘s implied by the ceteris-paribus assumption that all other prices remain constant. Unless other markets are in equilibrium, it can’t be assumed that all other prices and incomes remain constant; if they aren’t, then prices for other goods, and for inputs used to produce the product under analysis, will change, violating the ceteris-paribus assumption. Unless the prices (and wages) of the inputs used to produce the good under analysis remain constant, the supply curve of the product can’t be assumed to remain unchanged.

On top of that, Walras’s Law implies that if one market is in disequilibrium, then at least one other market must also be in disequilibrium. So an internal contradiction lies at the heart of supply-demand analysis. The contradiction can be avoided, but not resolved, only by assuming that the market being analyzed is so minute relative to the rest of the economy, or so isolated from all other markets, that a disturbance in that market that changes its equilibrium position either wouldn’t disrupt the existing equilibrium in all other markets, or that the disturbances to the equilibria in all the other markets are so small that they can be safely ignored.

But we’re not done yet. The underlying general equilibrium on which the partial equilibrium (supply-demand) analysis is based, exists only conceptually, not in reality. Although it’s possible to prove the existence of such an equilibrium under more or less mathematically plausible assumptions about convexity and the continuity of the relevant functions, it is less straightforward to prove that the equilibrium is unique, or at least locally stable. If it is not unique or locally stable, there is no guarantee that comparative statics is possible, because a displacement from an unstable equilibrium may cause an unpredictable adjustment violates the ceteris-paribus assumption.

Finally, and perhaps most problematic, comparative statics is merely a comparison of two alternative equilibria, neither of which can be regarded as the outcome of a theoretically explicable, much less practical, process leading from initial conditions to the notional equilibrium state. Accordingly, neither is there any process whereby a disturbance to – a parameter change in — an initial equilibrium would lead from the initial equilibrium to a new equilibrium. That is what comparative statics means: the comparison of two alternative and disconnected equilibria. There is no transition from one to the other merely a comparison of the difference between them attributable to the change in a particular parameter in the initial conditions underlying the equilibria.

Given all the assumptions that must be satisfied for the basic implications of conventional supply-demand analysis to be unambiguously valid, that analysis obviously cannot provide demonstrably true predictions. As just explained, the comparative-statics method in general and supply-demand analysis in particular provide no actual predictions; they are merely conjectural comparisons of alternative notional equilibria.

The ceteris paribus assumption is often dismissed as making any theory tautological and untestable. If an ad hoc assumption introduced when observations don’t match the predictions derived from a given theory is independently testable, it adds to the empirical content of the theory, as demonstrated by the ad hoc assumption of an eighth planet (Neptune) in our solar system when predictions about the orbits of the seven known planets did not accord with their observed orbits.

Friedman’s famous methodological argument that only predictions, not assumptions, matter is clearly wrong. Economists have to be willing to modify assumptions and infer the implications that follow from modified or supplementary assumptions rather than take for granted that assumptions cannot meaningfully and productively affect the implications of a general analytical approach. It would be a travesty if physicists maintained the no-friction assumption, because it’s just a simplifying assumption to make the analysis tractable. That approach is a prescription for scientific stagnation.

The art of economics is to identify the key assumptions that ought to be modified to make a general analytical approach relevant and fruitful. When they are empirically testable, ad hoc assumptions that modify the ceteris paribus restriction constitute scientific advance.

But it’s important to understand how tenuous the connection is between the formalism of supply-demand analysis and of the comparative-statics method and the predictive power of that analysis and that method. The formalism stops far short of being able to generate clear and unambiguous conditions. The relationship between the formalism and the real world is tenuous and the apparent logical rigor of the formalism must be supplemented by notable and sometimes embarrassing doses of hand-waving or question-begging.

And it is also worth remembering the degree to which the supposed rigor of neoclassical microeconomic supply-demand formalism depends on the macroeconomic foundation of the existence (and at least approximate reality) of a unique or locally stable general equilibrium.

My Conversation about Hawtrey with the Hawtrey Study Group

About six weeks ago, I was contacted by Jay Pocklington, who leads the Hawtrey Study Group, one of many study groups conducted under the auspices of the Young Scholars Initiative, of The Institute for New Economic Thinking. Jay asked if I would be willing to participate in a zoom conversation with the group about Hawtrey and my interest in, and my engagement with, his work. I was of course happy to accept the invitation, and the conversation took place about two weeks ago on May 26.

The timing was very convenient, because I had just finished working through all of the sixteen essays (both previously published and never published) to be included in a forthcoming volume to be published by Palgrave Macmillan. My limited blogging activity in recent months has been partly due to my need to work on the essays before submitting them for publication. Earlier versions of several of the essays in the volume originally appeared as, or were developed from, posts on this blog, whose tenth anniversary is about to occur four weeks hence. The working title of the volume is Studies in the History of Monetary Theory: Controversies and Clarifications.

Before the zoom conversation, I shared a draft of the introductory chapter, which lists eight key ideas that underlie, and are recurrent themes in, the subsequent chapters and explains how those ideas stem from my training as an aspiring young economist at the storied UCLA economics department. The first part of the zoom conversation was prompted by that introductory chapter.

The entire conversation is now posted on Youtube.

Here is the Table of Contents of the volume

Studies in the History of Monetary Theory: Controversies and Clarifications

1 Introduction

Part I: Classical Monetary Theory

2 A Reintepretation of Classical Monetary Theory

3 On Some Classical Monetary Controversies

4 The Real Bills Doctrine in the Light of the Law of Reflux

5 Classical Monetary Theory and the Quantity Theory

6 Monetary Disequilibrium in Ricardo and Thornton

7 The Humean and Smithian Traditions in Monetary Theory

8 Rules versus Discretion in Monetary Theory Historically Contemplated

9 Say’s Law and the Classical Theory of Depressions

Part II: Hawtrey, Keynes, and Hayek

10 Good and Bad Trade: A Centenary Retrospective

11 Hawtrey and Keynes

12 Where Keynes Went Wrong

13 Deflation, Debt and the Great Depression (With Ronald Batchelder)

14 Pre-Keynesian Theory of the Great Depression: Whatever Happened to Hawtrey and Cassel? (With Ronald Batchelder)

15 Sraffa versus Hayek on the Natural Rate of Interest (With Paul Zimmerman)

16 Hayek, Deflation, Gold and Nihilism

17 Hayek, Hicks, Radner and Four Equilibrium Concepts: Intertemporal, Sequential, Temporary and Rational Expectations


About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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