Tuesday, April 9, 2013

Intellectual Honesty and Great Britain

Bob Murphy has a post on Free Advice that deals with the intellectually dishonest way that Paul Krugman portrays Herbert Hoover and the Andrew Mellon quote, "Liquidate the farmers, etc." Krugman clearly tries to claim that Hoover followed what Mellon said to do when, in fact, Hoover was dead set against it.

(David Henderson further exposes Krugman's dishonesty in posts here and here. Because of the intellectual environment in which he operates, Krugman does not have to worry about telling whoppers, as they fit the narratives that the people who surround him hold. Why bother with the truth when the narrative is more popular?)

Krugman no doubt would argue that because the results of the Hoover presidency saw a lot of business and farmer liquidation, that Hoover somehow must have been a closet Mellonite. After all, had Hoover actually intervened in the economy, then it would not have fallen so far, right?

Actually, this post is not about Hoover. Instead, it is about Krugman's recent blog post on Margaret Thatcher and Great Britain. Krugman asks whether or not Thatcher's policies actually had any positive effect on the British economy and concludes in a backhanded way (of course) that they did not.

Krugman's "proof" is shown on two graphs, the first showing Great Britain's GDP relative to France from 1950 to the present and the second a comparison of unemployment between the two countries from 1978 to now.




Contrary to what Krugman claims, the British economy relative to France did in fact see a GDP jump in the early 1980s following a steep recession. And while Krugman admits that when Thatcher took power in Britain in 1979, the country had "huge economic problems," but does not go on to explain what was the situation: 20 percent inflation, a huge and bloated government sector, and numerous nationalized industries better known for strikes and shoddy products. Andrew Sullivan writes:
To put it bluntly: The Britain I grew up in was insane. The government owned almost all major manufacturing, from coal to steel to automobiles. Owned. It employed almost every doctor and owned almost every hospital. Almost every university and elementary and high school was government-run. And in the 1970s, you could not help but realize as a young Brit, that you were living in a decaying museum – some horrifying mixture of Eastern European grimness surrounded by the sculptured bric-a-brac of statues and buildings and edifices that spoke of an empire on which the sun had once never set. Now, in contrast, we lived on the dark side of the moon and it was made up of damp, slowly degrading concrete.
Krugman political logic demands that once a politician takes office, the economy must immediately improve, with the rate of unemployment falling. Oh, I forgot, that didn't happen with Barack Obama's presidency, but Krugman has been willing to give a myriad of excuses for his beloved president. (And don't forget that Goldstein always has lurked in the background trying to destroy the economy and undermining Obama's efforts to subsidize more "green" industries, reflate the housing bubble, and print money out the wazoo.)

Indeed, we do see an upturn in the British economy during the early-to-mid 1980s with British unemployment falling. (The interesting thing about the unemployment graph is that during the 1980s, France was governed by a socialist government, yet unemployment also rose in that country during the early 1980s. I guess Francois Mitterand must not have believed enough in government.)

Krugman also fails to point out something that is painfully obvious in the first graph, and that is the rapid decline of the postwar British economy. Now, that should surprise any Krugman fans, given the British governments (and especially the Labor governments that Krugman so favors) were seizing industries, nationalizing medical care, and printing lots of money. The government still rationed food into the mid-1950s despite the fact that the other economies in Europe already were well on the way to recovery even though many countries had received much more physical damage from warfare. (In 1976, Great Britain received a bailout from the IMF and "60 Minutes" asked in one episode, "Will there always be an England?")

Furthermore, as invariably happens under socialism, capital deteriorated, the society became even more stratified, and many enterprising Brits left the country in hopes of doing better elsewhere. The numbers are clear, and one can see steady progress upward after Thatcher took office (with the exception of the 1990 recession, which also hit the USA).

Yet, Krugman wants us to believe that most likely Britain would have been better off with the old order in place, or at least wants us to think that nothing improved in the country until the Blair government took power in the mid-1990s. (And, don't forget that Blair did not follow his labor predecessors in nationalizing everything and reimposing socialism. His policies were not much different than those of the Tories, something that Krugman would ignore, of course.)

Like all strong politicians, Margaret Thatcher had a mixed record. Yet, she steered Great Britain away from an economic course that was strangling its once-magnificent economy. Great Britain is not the world power it was more than a century ago, but neither is it spinning off into irrelevancy as it was in 1979. That Krugman cannot recognize that fact should not surprise any reader.

30 comments:

Kevin said...

I just discovered your blog today and I think its great! Keep it up.

Dinero said...

Here is the article where Krugman displays an incorrect description of debt transactions . He makes his error by not including the original transer of funds from the creditor to the debtor, or, for that matter the spending of the debtor.

Here.

http://krugman.blogs.nytimes.com/2011/12/28/more-on-the-burden-of-debt/

Quote
“Suppose that for some reason the nation temporarily ends up being ruled by a guy who is driven mad by power, and decrees that everyone will……….(Woody Allen joke)… receive a large allotment of newly printed government bonds, adding up to 500 percent of GDP.The government is now deeply in debt — but the nation has not directly gotten any poorer: the public, in its role as taxpayers, now owes 500 percent of GDP, but the public, in its role as investors, now owns new assets equal to 500 percent of GDP. It’s a wash.” end quote.

In a real debt transaction the bonds would not possibly be a gift from the government , they would be purchased with a transfer of funds from the taxpayer to the treasury. And how would the taxpayers get their funds repayed? They have to repay it themselves ! So they never actually get a repayment for their loan. The statement “but the nation has not directly gotten any poorer” is incorrect because the government has received the money and spent it. Krugman incorrectly nets off debtor to creditor because his incorrect explanation of debt funded spending does not include the original transfer from creditor to debtor.

Dinero said...

correction, not the statement “but the nation has not directly gotten any poorer” but instead "its a wash" is incorrect as the tax payers no longer have the money to repay the bonds as they have allready sent it to the treasury when originally purchasing the bonds and the government has spent it.

Lord Keynes said...

"Indeed, we do see an upturn in the British economy during the early-to-mid 1980s with British unemployment falling."

lol... Falling unemployment in the early 1980s?

You should have looked at your data. Unemployment did nothing but rise under Thatcher right down to 1986:

Year | Unemployment Rate
1979 | 5.2%
1980 | 6.7%
1981 | 10.2%
1982 | 11.9%
1983 | 13.0%
1984 | 14.1%
1985 | 14.5%
1986 | 14.8%
1987 | 13.3%
1988 | 10.7%
1989 | 8.3%
1990 | 7.7%
Boyer, George R. and Timothy J. Hatton. 2002. “New Estimates of British Unemployment, 1870–1913,” The Journal of Economic History 62.3: 643–667.

Nor did it fall below 10% until 1989, the year before she was thrown out.

http://socialdemocracy21stcentury.blogspot.com/2013/04/thatchers-passing.html

"The government still rationed food into the mid-1950s despite the fact that the other economies in Europe already were well on the way to recovery even though many countries had received much more physical damage from warfare."

Your knowledge of history is poor.

Most rationing ended in the UK in 1948, certainly such as clothing and furniture rationing. There was some very limited rationing that continued until 1954. And MANY other European countries continued some rationing too just as the UK did after 1948, such as Germany.

...Krugman also fails to point out something that is painfully obvious in the first graph, and that is the rapid decline of the postwar British economy.

Relative intercountry comparisons of real GDP do not tell you whether UK real GDP was rising relative to past UK real GDP.

In fact in real terms, the UK had outstanding growth in real GDP and real per capita GDP in virtually every year from 1945 onwards. The growth from 1946-1973 was so high it was historically unprecedented.

Unemployment was historically low even down to 1979.

Anonymous said...

Just stumbled upon this very interesting site and care to make a few observations. First, the France vs. UK chart that Krugman cites unambiguously reveals a turnaround in the UK vs. France exactly one year after Thatcher came into office! I visited the UK in 1975 (when they were suffering from 24% annual inflation) and stayed in the dorm of the London School of Economics. Drinking with the students in the basement each night, it became clear that they were taught that no 3rd world country could emerge to first world status without Communism. Of course, all evidence points in the opposite direction of this argument. Second, Greece appeared to be a success story, since it's per capita income practically caught up with that of France by 2010. But the artificiality of inflating income with borrowing finally caught up with the country. Any income gains by a country must be adjusted by increases in govt. debt (all levels) to reveal the true performance of an economy. If one makes these sorts of adjustments, then few countries are performing well today.

William L. Anderson said...

I was waiting for someone to say that Great Britain had a wonderful, productive socialist economy up to 1979. The interesting thing to me is that if the economy were as great as LK claims it was (and that the Brits were building great cars), then why was inflation at 20 percent, why did GB need an IMF bailout in 1976, and why the heck did people vote for Maggie Thatcher instead of keeping Labor in power?

You see, socialists like LK believe that since capital magically appears and since socialism is so wonderful productive, then anyone who gets rid of the thing must be off his or her rocker.

If that is so, LK, then why is North Korea so poor? It has the kind of economy you admire -- pure command, and since you believe that governments can command prosperity, why is North Korea like it is? Or maybe you will post that it is the world's best economy. I'm waiting.

Anonymous said...

"If that is so, LK, then why is North Korea so poor? It has the kind of economy you admire -- pure command, and since you believe that governments can command prosperity, why is North Korea like it is? Or maybe you will post that it is the world's best economy. I'm waiting."

Calling Lord Keynes a "socialist" is going a bit too far, don't you think Anderson? These are the same deceptive tactics that the conservatives use to call anyone that doesn't agree with them "Marxists" or communists when in reality, progressives and modern day liberals come from completely different intellectual traditions than the actual socialists and communists.

Keynes was the furthest thing from being a "socialist" in the term in which you misuse the word.

Anonymous said...

Since when did LK ever advocate for a North Korea like economy or any of those who are social democrats in that they want a sort of Sweden like economy? How about Krugman? Stiglitz?

Stop trying to engage in this sort of right conflationism with your opponents, to quote Roderick Long. Obama is an example of a late capitalist in the Marxist jargon by the way.

Anonymous said...

Go look up the Nordic model before you ignorantly run your mouth at LK again and look how prosperous those countries have been.

Lord Keynes said...

"If that is so, LK, then why is North Korea so poor? It has the kind of economy you admire -- pure command, and since you believe that governments can command prosperity"

Your straw man nonsense is the equivalent of me saying:

"If that is so, Anderson, then why is Somalia so poor and nothing like Japan or Germany? Somalia has the kind of economy you absolutely love and drool over -- pure anarchism, and since you believe that pure laissez faire can command prosperity, why is Somalia a basket case? Or maybe you will post that it is the world's best economy. I'm waiting. ... blah, blah, blah".

Lord Keynes said...

Oh, and the vast majority of capital goods in the UK even from 1946-1980 were owned privately.

Yes, they had SOME nationalised industry, but then you should have read your Mises, old chap!! -- before running your mouth off and embarrassing yourself:

"There is no mixture of the two systems possible or thinkable; there is no such thing as a mixed economy, a system that would be in part capitalistic and in part socialist. Production is directed by the market or by the decrees of a production tsar or a committee of production tsars.

If within a society based on private ownership by the means of production some of these means are publicly owned and operated—that is, owned and operated by the government or one of its agencies—this does not make for a mixed system which would combine socialism and capitalism. The fact that the state or municipalities own and operate some plants does not alter the characteristic features of the market economy. These publicly owned and operated enterprises are subject to the sovereignty of the market. They must fit themselves, as buyers of raw materials, equipment, and labor, and as sellers of goods and services, into the scheme of the market economy. They are subject to the laws of the market and thereby depend on the consumers who may or may not patronize them. They must strive for profits or, at least, to avoid losses. The government may cover losses of its plants or shops by drawing on public funds. But this neither eliminates nor mitigates the supremacy of the market; it merely shifts it to another sector. For the means for covering the losses must be raised by the imposition of taxes. But this taxation has its effects on the market and influences the economic structure according to the laws of the market. It is the operation of the market, and not the government collecting the taxes, that decides upon whom the incidence of the taxes falls and how they affect production and consumption. Thus the market, not a government bureau, determines the working of these publicly operated enterprises. "


Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar's Edition. Mises Institute, Auburn, Ala. pp. 259-260.

John Dunham said...

I think calling L.K a Marxist discredits Marx and the value of his work.

While I know that nobody in the economics academe has read more than a few pages or quotes from Marx, or for that Matter Smith, or ... well ... Keynes, the fact is that Karl Marx was a straight out Classical economist. He may have had a different opinion on how the economy and history work together, but the economic system that he described in Kapital is straight out market economics - much closer to Schumpeter and Mises than most would want to admit.

Marx would never have suggested that one could create wealth out of thin air. In fact, the Labor Theory of Value would totally preclude that.

Based on my 3 years studying Marx I would also argue that the bearded one would have been horrified by the state ownership model promoted by folks like L.K. the Great One, and their political masters. In fact, Marx was horrified by monopoly and was certain that the concentration of capital (read North Korea or 1970s Britain) would lead to revolution since the workers would be completely exploited (again, see North Korea).

Its a shame that we don't understand the basics of our own theories.

Mule Rider said...

"If that is so, Anderson, then why is Somalia so poor and nothing like Japan or Germany? Somalia has the kind of economy you absolutely love and drool over -- pure anarchism, and since you believe that pure laissez faire can command prosperity, why is Somalia a basket case? Or maybe you will post that it is the world's best economy. I'm waiting. ... blah, blah, blah".

The argument against this hypothetical that leftists like to throw around has been discussed before. Somalia is basket-case because, despite low taxes and generally government-free exchanges of goods and services, transparency is suspect and there is very little respect for the rule of law, enforcing contracts, and private property rights, all key pillars of a truly free economy idealized by libertarians.

What's funny, though, is that Somalia's economy, while still shaky, has shown signs of improvement since drifting away from central-planning to more of a laissez-faire model. In other words, they're starting from a pretty low starting point, brought on by previous state-sponsored oppression. Even under the most optimistic changes and adoption of free market policies, it'll take tame to get out of that hole. Basically, Rome wasn't built in a day.

Pulverized Concepts said...

There seems to be a great deal of assumption made about the conditions in Somalia by people that have never been there. It's taken as a given that the place, for lack of an oppressive central government, is some kind of a hell hole. I, for one, ain't buying it.

William L. Anderson said...

Exactly. I'm still amazed that LK is trying to claim that Great Britain had a growing, vibrant economy in the late 1970s. I guess Darrell Huff was right.

Lord Keynes said...

"I'm still amazed that LK is trying to claim that Great Britain had a growing, ... economy "

Its average growth from 1947-1979 was higher than under Thatcher and all subsequent neoliberal periods:

Average real per capita GDP growth rate, 1948–1973: 2.34%
Average real per capita GDP growth rate, 1948–1978: 2.17%
Average real per capita GDP growth rate, 1979–1990: 2.05%
Average real per capita GDP growth rate, 1979–2001: 1.99%

Dinero said...

Mr Anderson what does GDP really tell us.

GDP is measured from the prices at which transactions took place. It does not tell what, or the quality of what, is being bought and sold. What matters is the standard of living.

R.E.B said...

LKs comments are clearly ludicrous to anyone who knows the reality of life in the UK in the 1970s. I know, I was there. The UK went bankrupt for pity's sake. The idea that we were thriving is insane.

William L. Anderson said...

Great Britain had 20 percent inflation which no doubt would boost the nominal GDP numbers. Furthermore, the U.S.S.R. also had very fast-growing GDP numbers all during the 1950s, 60s, and 70s, yet the standard of living there was terrible.

LK has done what all Keynesians do: use state-sponsored statistics to "prove" that state-control of an economy creates economic miracles.

Dinero said...

I live in the UK and the quality of goods and services in the UK is better now than in the 70's. but this would not be shown in the GDP figures.
Even if LKs figures are adjusted for inflation there is something else to consider -GDP per capita does does not take into account the number of hours worked per year to acheive those figures.
If everyone took 12 weeks holday a year on a sunny beach and acheived the same GDP that would be a rise in the standard of living - again not shown in the GDP figures.

Bala said...

Prof. Anderson,

Correct me if I am wrong, but here is my position. The real reason LK stands completely discredited is his dependence on GDP data, given that GDP is a nonsense concept that, unlike the tall claims made by its proponents, miserably fails to measure economic output simply because it ignores the heart of a capitalist economy - Capitalist saving. To make matters worse, it was coined as a concept ONLY in 1934, which means that all the GDP data he cites prior to that date, especially GDP data of the 18th and 19th centuries, is nonsense upon stilts because no one actually measured GDP at that time.

If I am right, however, do help me understand why serious Austrian economists do not dismiss it from discussions and arguments over economics.

Lord Keynes said...

(1) Those are not nominal GDP stats, but inflation-adjusted, real GDP data, which you could easily verify in A. Maddison, The World Economy: Historical Statistics (OECD Publishing, Paris, 2003 63, 65).

UK real per capita GDP in 1979 was at nearly the same level as Germany.

(2) Yes, the UK had high inflation in late 1970s due to the second oil shock and wage-price spirals, and union disputes. But if you think that was the "end of the world" or some such nonsense, then you ought to read up on a little thing called the Great Depression.

(3) "LK has done what all Keynesians do: use state-sponsored statistics to "prove"

Yet you have also just used "state-sponsored statistics" above in your graphs to prove your point, so obviously all your arguments above based on "state-sponsored statistics" must be rubbish? Is that so?

Anonymous said...

"I live in the UK and the quality of goods and services in the UK is better now than in the 70's. but this would not be shown in the GDP figures."

I think it would help if there was a website to prove your assertion. Otherwise, people are going to believe that you're just telling an unverifiable anecdote like how Professor Anderson was accused of making up anecdotes with his health care observations.

Dinero said...

> Lord Keynes

GDP doesn't tell as much about Economic policy as you say. If a country finds oil its GDP goes up, and since the sixties there has been an increase in two Income house holds, which would boost the GDP per capita measurement in itself

Bitter Clinger said...

Three points:
#1. It is a good thing that a Good Leader is not judged upon the unemployment rate alone or else President Obama would be judged the Worst Leader since the Great Depression.
#2. While Liberty and Equality are on opposite ends of a continuum, there is a third choice, which is a society (Like Somalia) where you have neither Liberty nor Equality. See my letter to (http://4clingers2.blogspot.com/2013/01/freedom-and-equality.html) Milton Friedman in 1980.
#3. Regulated markets ARE Regulated Markets. LK’s belief that the more incompetently, corruptly, or criminally a market is regulated, the closer it is to Free Enterprise is absolutely false. The financial and housing markets in this country are the third most regulated markets. (Only behind nuclear power and medicine). There was no Free Market in the housing and financial collapse it was all caused by corrupt, incompetent, and criminal REGULATION.

Mike said...

Dinero,
You are spot on. GDP without context just an interesting factoid. If I have my kids drop out of school and get jobs at a coal mine that would improve GDP.

Dinero said...

> Hi mike

Yeh cheers that the type of example I had in mind.

Dinero said...

I found some figures on a site called
measuring worth.com

UK Average Annual Real Earnings
(In 2010 £s)
1970 13,024
1971 13,253
1972 13,904
1973 14,513
1974 14,703
1975 14,991
1976 14,883
1977 14,023
1978 14,627
1979 14,895
1980 15,188
1981 15,333
1982 15,449
1983 16,020
1984 16,175
1985 16,534
1986 17,257
1987 17,857
1988 18,514
1989 18,751
1990 18,791
the figures are RPI adjusted to the nominal figure of 1990

The figures show a general incline with a drop at 76, 77 and a pick up 85,90

R.E.B said...

Well, I have got to say Iam totally staggered. I do not know how old you are Mr LK, but as someone who witnessed the 1970s and 1980s first hand, not from some academic ivory tower 30 years later I can catagorically tell you that the UK economy was not a success. I repeat we went bankrupt. We couldn't even produce enough electricity to get us through the week. You repeat the Krugmanite fallacy that the inflation was simply down to oil prices and refuse to address the monetary policy aspect. And no it was not the end of the world, because we elected Mrs Thatcher to kick the lunatics into touch. Nevertheless, I enjoy the robust debate, so keep it coming!

Dinero said...

11.01 AM correction -

- RPI adjusted to the nominal earnings of 2010 ,

from the website measuring value.com