HOISTED FROM OTHER PEOPLE'S ARCHIVES: Cosma Shalizi: The Rise of Intelligent Economies & the Work of the IMF

A reading from 2018-10-18: Still, I think, very wise on actually useful really-existing “AI” as very high-dimensional very big-data non-parametric regression & classification…

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Revised and Extended Remarks

<http://bactra.org/weblog/imf-2017-talk.html>:

Attention conservation notice: 2700+ words elaborating a presentation from a non-technical conference about AI, where the conversation devolved to “blockchain” within an hour; includes unexplained econometric jargon. Life is short, and you should have more self-respect. I got asked to be a panelist at a November 2017 symposium at the IMF on machine learning, AI and what they can do to/for the work of the Fund and its sister organizations, specifically the work of its economists. What follows is an amplification and rationalization of my actual remarks. It is also a reconstruction, since my notes were on an only-partially-backed-up laptop stolen in the next month. (Roman thieves are perhaps the most dedicated artisans in Italy, plying their trade with gusto on Christmas Eve.) Posted now because reasons.

On the one hand, I don’t have any products to sell, or even much of a consulting business to promote, so I feel a little bit out of place. But against that, there aren’t many other people who work on machine learning who read macro and development economics for fun, or have actually estimated a DSGE model from data, so I don’t feel totally fradulent up here.

We’ve been asked to talk about AI and machine learning, and how they might impact the work of the Fund and related multi-lateral organizations. I’ve never worked for the Fund or the World Bank, but I do understand a bit about how you economists work, and it seems to me that there are three important points to make:

  • a point about data,

  • a point about models,

  • and a point about intelligence.

The first of these is mostly an opportunity, the second is an opportunity and a clarification, and the third is a clarification and a criticism — so you can tell I’m an academic by taking the privilege of ending on a note of skepticism and critique, rather than being inspirational.


I said my first point is about data — in fact, it’s about what, a few turns of the hype cycle ago, we’d have called “big data”. Economists at the Fund typically rely for data on the output of official statistical agencies from various countries. This is traditional, this sort of reliance on the part of economists actually pre-dates the Bretton Woods organizations, and there are good reasons for it. With a few notable exceptions, those official statistics are prepared very carefully, with a lot of effort going in to making them both precise and accurate, as well as comparable over time and, increasingly, across countries.

But even these official statistics have their issues, for the purposes of the Fund: they are slow, they are noisy, and they don’t quite measure what you want them to.

The issue of speed is familiar: they come out annually, maybe quarterly or monthly. This rate is pretty deeply tied to the way the statistics are compiled, which in turn is tied to their accuracy — at least for the foreseeable future. It would be nice to be faster.

The issue of noise is also very real. Back in 1950, the great economist Oskar Morgenstern, the one who developed game theory with John von Neumann, wrote a classic book called On the Accuracy of Economic Observations, where he found a lot of ingenious ways of checking the accuracy of official statistics, e.g., looking at how badly they violated accounting identities. To summarize very crudely, he concluded that lots of those statistics couldn’t possibly be accurate to better than 10%, maybe 5% — and this was for developed countries with experienced statistical agencies. I’m sure that things are better now — I’m not aware of anyone exactly repeating his efforts, but it’d be a worthwhile exercise — maybe the error is down to 1%, but that’s still a lot, especially to base policy decisions on.

The issue of measurement is the subtlest one. I’m not just talking about measurement noise now. Instead, it’s that the official statistics are often tracking variables which aren’t quite what you want1. Your macroeconomic model might, for example, need to know about the quantity of labor available for a certain industry in a certain country. But the theory in that model defines “quantity of labor” in a very particular way. The official statistical agencies, on the other hand, will have their own measurements of “quantity of labor”, and none of those need to have exactly the same definitions. So even if we could magically eliminate measurement errors, just plugging the official value for “labor” in to your model isn’t right, that’s just an approximate, correlated quantity.

So: official statistics, which is what you’re used to using, are the highest-quality statistics, but they’re also slow, noisy, and imperfectly aligned with your models. There hasn’t been much to be done about that for most of the life of the Fund, though, because what was your alternative?

What “big data” can offer is the possibility of a huge number of noisy, imperfect measures. Computer engineers — the people in hardware and systems and databases, not in machine learning or artificial intelligence — have been making it very, very cheap and easy to record, store, search and summarize all the little discrete facts about our economic lives, to track individual transactions and aggregate them into new statistics. (Moving so much of our economic lives, along with all the rest of our lives, on to the Internet only makes it easier.) This could, potentially, give you a great many aggregate statistics which tell you, in a lot of detail and at high frequency, about consumption, investment, employment, interest rates, finance, and so on and so forth. There would be lots of noise, but having a great many noisy measurements could give you a lot more information. It’s true that basically none of them would be well-aligned with the theoretical variables in macro models, but there are well-established statistical techniques for using lots of imperfect proxies to track a latent, theoretical variable, coming out of factor-analysis and state-space modeling. There have been some efforts already to incorporate multiple imperfect proxies into things like DSGE models.

I don’t want get carried away here. The sort of ubiquitous recording I’m talking about is obviously more advanced in richer countries than in poorer ones — it will work better in, say, South Korea, or even Indonesia, than in Afghanistan. It’s also unevenly distributed within national economies. Getting hold of the data, even in summary forms, would require a lot of social engineering on the part of the Fund. The official statistics, slow and imperfect as they are, will always be more reliable and better aligned to your models. But, wearing my statistician hat, my advice to economists here is to get more information, and this is one of the biggest ways you can expand your information set.


The second point is about models — it’s a machine learning point. The dirty secret of the field, and of the current hype, is that 90% of machine learning is a rebranding of nonparametric regression. (I’ve got appointments in both ML and statistics so I can say these things without hurting my students.) I realize that there are reasons why the overwhelming majority of the time you work with linear regression, but those reasons aren’t really about your best economic models and theories. Those reasons are about what has, in the past, been statistically and computationally feasible to estimate and work with. (So they’re “economic” reasons in a sense, but about your own economies as researchers, not about economics-as-a-science.) The data will never completely speak for itself, you will always need to bring some assumptions to draw inferences. But it’s now possible to make those assumptions vastly weaker, and to let the data say a lot more. Maybe everything will turn out to be nice and linear, but even if that’s so, wouldn’t it be nice to know that, rather than to just hope?

There is of course a limitation to using more flexible models, which impose fewer assumptions, which is that it makes it easier to “over-fit” the data, to create a really complicated model which basically memorizes every little accident and even error in what it was trained on. It may not, when you examine it, look like it’s just memorizing, it may seem to give an “explanation” for every little wiggle. It will, in effect, say things like “oh, sure, normally the central bank raising interest rates would do X, but in this episode it was also liberalizing the capital account, so Y”. But the way to guard against this, and to make sure your model, or the person selling you their model, isn’t just BS-ing is to check that it can actually predict out-of-sample, on data it didn’t get to see during fitting. This sort of cross-validation has become second nature for (honest and competent) machine learning practitioners.

This is also where lots of ML projects die. I think I can mention an effort at a Very Big Data Indeed Company to predict employee satisfaction and turn-over based on e-mail activity, which seemed to work great on the training data, but turned out to be totally useless on the next year’s data, so its creators never deployed it. Cross-validation should become second nature for economists, and you should be very suspicious of anyone offering you models who can’t tell you about their out-of-sample performance. (If a model can’t even predict well under a constant policy, why on Earth would you trust it to predict responses to policy changes?)

Concretely, going forward, organizations like the Fund can begin to use much more flexible modeling forms, rather than just linear models. The technology to estimate them and predict from them quickly now exists. It’s true that if you fit a linear regression and a non-parametric regression to the same data set, the linear regression will always have tighter confidence sets, but (as Jeffrey Racine says) that’s rapid convergence to a systematically wrong answer. Expanding the range and volume of data used in your economic modeling, what I just called the “big data” point, will help deal with this, and there’s a tremendous amount of on-going progress in quickly estimating flexible models on truly enormous data sets. You might need to hire some people with Ph.D.s in statistics or machine learning who also know some economics — and by coincidence I just so happen to help train such people! — but it’s the right direction to go, to help your policy decisions be dictated by the data and by good economics, and not by what kinds of models were computationally feasible twenty or even sixty years ago.


The third point, the most purely cautionary one, is the artificial intelligence point. This is that almost everything people are calling “AI” these days is just machine learning, which is to say, nonparametric regression. Where we have seen breakthroughs is in the results of applying huge quantities of data to flexible models to do very particular tasks in very particular environments. The systems we get from this are really good at that, but really fragile, in ways that don’t mesh well with our intuition about human beings or even other animals. One of the great illustrations of this are what are called “adversarial examples”, where you can take an image that a state-of-the-art classifier thinks is, say, a dog, and by tweaking it in tiny ways which are imperceptible to humans, you can make the classifier convinced it’s, say, a car. On the other hand, you can distort that picture of a dog into an image something unrecognizable by any person while the classifier is still sure it’s a dog.

If we have to talk about our learning machines psychologically, try not to describe them as automating thought or (conscious) intelligence, but rather as automating unconscious perception or reflex action. What’s now called “deep learning” used to be called “perceptrons”, and it was very much about trying to do the same sort of thing that low-level perception in animals does, extracting features from the environment which work in that environment to make a behaviorally-relevant classification2 or prediction or immediate action. This is the sort of thing we’re almost never conscious of in ourselves, but is in fact what a huge amount of our brains are doing. (We know this because we can study how it breaks down in cases of brain damage.) This work is basically inaccessible to consciousness — though we can get hints of it from visual illusions, and from the occasions where it fails, like the shock of surprise you feel when you put your foot on a step that isn’t there. This sort of perception is fast, automatic, and tuned to very, very particular features of the environment.

Our current systems are like this, but even more finely tuned to narrow goals and contexts. This is why they have such alien failure-modes, and why they really don’t have the sort of flexibility we’re used to from humans or other animals. They generalize to more data from their training environment, but not to new environments. If you take a person who’s learned to play chess and give them a 9-by-9 board with an extra rook on each side, they’ll struggle but they won’t go back to square one; AlphaZero will need to relearn the game from scratch. Similarly for the video-game learners, and just about everything else you’ll see written up in the news, or pointed out as a milestone in a conference like this. Rodney Brooks, one of the Revered Elders of artificial intelligence, puts it nicely recently, saying that the performances of these systems give us a very misleading idea of their competences3.

One reason these genuinely-impressive and often-useful performances don’t indicate human competences is that these systems work in very alien ways. So far as we can tell4, there’s little or nothing in them that corresponds to the kind of explicit, articulate understanding human intelligence achieves through language and conscious thought. There’s even very little in them of the un-conscious, in-articulate but abstract, compositional, combinatorial understanding we (and other animals) show in manipulating our environment, in planning, in social interaction, and in the structure of language.

Now, there are traditions of AI research which do take inspiration from human (and animal) psychology (as opposed to a very old caricature of neurology), and try to actually model things like the structure of language, or planning, or having a body which can be moved in particular ways to interact with physical objects. And while these do make progress, it’s a hell of a lot slower than the progress in systems which are just doing reflex action. That might change! There could be a great wave of incredible breakthroughs in AI (not ML) just around the corner, to the point where it will make sense to think about robots actually driving shipping trucks coast to coast, and so forth. Right now, not only is really autonomous AI beyond our grasp, we don’t even have a good idea of what we’re missing.

In the meanwhile, though, lots of people will sell their learning machines as though they were real AI, with human-style competences, and this will lead to a lot of mischief and (perhaps unintentional) fraud, as the machines get deployed in circumstances where their performance just won’t be anything like what’s intended. I half suspect that the biggest economic consequence of “AI” for the foreseeable future is that companies will be busy re-engineering human systems — warehouses and factories, but also hospitals, schools and streets — so to better accommodate their machines.


So, to sum up:

  • The “big data” point is that there’s a huge opportunity for the Fund, the Bank, and their kin to really expand the data on which they base their analyses and decisions, even if you keep using the same sorts of models.

  • The “machine learning” point is that there’s a tremendous opportunity to use more flexible models, which do a better job of capturing economic, or political-economic, reality.

  • The “AI” point is that artificial intelligence is the technology of the future, and always will be.

The Dismal Science; Enigmas of Chance


  1. Had there been infinite time, I like to think I’d have remembered that Haavelmo saw this gap very clearly, back in the day. Fortunately, J. W. Mason has a great post on this.^

  2. The classic paper on this, by, inter alia, one of the inventors of neural networks, was called “What the frog’s eye tells the frog’s brain”. This showed how, already in the retina, the frog’s nervous system picked out small-dark-dots-moving-erratically. In the natural environment, these would usually be flies or other frog-edible insects.^

  3. Distinguishing between “competence” and “performance” in this way goes back, in cognitive science, at least to Noam Chomsky; I don’t know whether Uncle Noam originated the distinction.^

  4. The fact that I need a caveat-phrase like this is an indication of just how little we understand why some of our systems work as well as they do, which in turn should be an indication that nobody has any business making predictions about how quickly they’ll advance.^

Posted at October 18, 2018 23:30 | permanent link

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New Podcast!: Inflection Point: The Berkeley Political Economy Podcast

Relaunching! Relaunch starring John Ganz, author of the his truly excellent book When the Clock Broke: Con Men, Conspiracists, & How America Cracked Up in the Early 1990s. The conversation touches on the intellectual, political, and economic forces behind the rise of Trump and assays historical analogies to the current period from caeserism to fascism…

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Yes, we are now live with the relaunch episode of what we are calling the Berkeley Political Economy Podcast. Fight us! (Or come on it, and persuade us that something called The Berkeley Political Economy Podcast should be something else.

“We” are Dylan Riley and Brad DeLong. Here is the relaunch episode:

Inflection Point Podcast
“When the Clock Broke”, Starring John Ganz :: Inflection Point
This is the March 2025 soft launch of “Inflection Point”, the Berkeley Political Economy Podcast, hosted by Dylan J. Riley & J. Bradford DeLong. Here we have the brilliant John Ganz on to discuss his truly excellent book When the Clock Broke: Con Men, Conspiracists, & How America Cracked Up in the Early 1990s…
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Here is the podcast landing page:

Here is what Brad DeLong wrote about this project late last month:


And then there is the question of podcast artwork:

Dylan had a theme like this, which is good:

Brad has been playing around with something like this:

So I ask the good plain people of the Internet: In which direction should we go for art?

DRAFT: Mar-a-Lago Discord

For Project Syndicate: Sanewashing the Trumpists is in general a big mistake, for it carries you much further away from understanding what is actually going on. Today’s fallen victim of self-delusion is, I think, the very sharp Gillian Tett…

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Gillian Tett, I think unproductively, sanewashes the Trumpists. While she accepts that “many, if not most, mainstream economists might say that, in fact, elements of it are either crazy or doomed to fail”, she is certain that she sees “some element of a new framework”:

Gillian Tett: Conversation with Ezra Klein: ‘They want to ensure… the dollar remains supreme…. But… they also think that the dollar…overvalued… has made… industry less competitive…. The so-called Mar-a-Lago Accord… [would] weaken the dollar and… America offering… tariff relief… military protection, being allies and… swapping long-term U.S. debt for other forms of debt. It’s extraordinarily bold… a very dramatic break… a coherent plan… a new framework… remak[ing how]… countries cooperate…. Ask countries… to divide… into red, yellow and green buckets. The red are… foes…. The green are the friends… come inside the system to cut deals and be free of terrorists and get military protection and be part of a Mar-a-Lago Accord…. And the… yellow ones… do… transactional deals… <https://www.nytimes.com/2025/03/14/opinion/ezra-klein-podcast-gillian-tett.html>

However, whether you could build up American manufacturing via dollar-manipulation agreements without blowing other, more important foundations of American prosperity to smithereens—that is not a question we need to consider.

Your chances of doing that are zero without a coherent plan.

And, despite what Gillian Tett says, there is no coherent plan.

There is simply a chaos-monkey cage, filled with screaming chaos monkeys.

We all know this. We know what the “coherent plan” would have been, after all:

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LECTURE NOTES: A Feminist Angle on American Economic History

It is, of course, something substantially wrong with the way I am teaching this that feminist concerns are only about a tenth—rather than at least a quarter—of this course, & are, to much too great an extent, boxed off in this week. I had planned to rectify this last year. But we are not now what once moved heaven and earth—indeed, we never were. Still, we are what we are, and we at least try to do something

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2025 03 17 Econ 113 S2025
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R.I.P. Kevin Drum

Your memory is a blessing, my friend…

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I have felt too sad and do not have the heard to write an obituary for my late friend Kevin Drum. But here is a good one from Ben Dreyfuss.

Excerpted from Calm Ben Down <https://www.calmdownben.com/>:

Ben Dreyfuss: Kevin Drum was forced out of Mother Jones by people who didn’t know about a secret thing he did for them: ‘Kevin Drum has passed away…. I did get to know him somewhat…. I got a DM from the editor in chief of Mother Jones…. A few days after… suddenly, I wanted an excuse to live in San Francisco. And so I looked at my phone and thought about it and remembered something else I knew about Mother Jones that had eluded me the first time around: Kevin Drum had moved his blog there a few years earlier. That was the sign. Kevin was one of the five bloggers I had been reading since college, and if he had been there, it wouldn’t have been all bad….

I discovered that Kevin had basically nothing to do with the rest of the magazine…. He just blogged….. Most people at Mother Jones never interacted with him. I was told not to interact with him unless it was necessary. This was not enough for me, so I found a reason to email him almost instantly….

I came up with a strategy to triple Mother Jones’ readership and it involved, in part, surfacing Kevin’s blog posts (that he just did with no editorial input) and optimizing their packaging for social media… recognizing a good steak and selling the sizzle…. By 2020, I was the editorial director of Mother Jones and no longer did much of anything directly except oversee the newsletters AND occasionally act as Kevin’s protector…. He was regularly the main character on Twitter, which wasn’t fair, and internally that spilled over to the point where the Mother Jones union was constantly complaining about him. All these staffers that didn’t know him would go on Twitter and get into a lather about how he was the devil and complain….

One day in 2019… go out to an Irish bar in Philadelphia. The union leader is one of two black people in the editorial department…. She was a very good reporter…. In the bar that night we’re all drunk and she starts to complain about Kevin. About how he is an embarrassment for the magazine. Now, I have been hearing this shit from woke kids at this magazine for awhile and am trying to be delicate in my defenese, but I am defending him because I know Kevin and they don’t. But the CFO, who is also quite young and does know Kevin, has less experience with this. And he responds by saying what I felt, “Kevin is not a racist. That’s dumb.”

This sets off an increasingly uncomfortable fight where the union leader is accusing the CFO of defending other white men and “explaining racism to a black woman” and I am trying to cool it down while also being like “Kevin is from a different era but it’s true he’s obviously not a racist.” Again, everyone is also very drunk so it’s basically an incoherent tear-strewn fight…. The CFO. He feels terrible! He has never interacted with the reporters like this and has certainly not meant to antagonize them, but he knows Kevin because of contracts and stuff and knows he’s not a racist. How could he not say something? He thought it was a friendly discussion until it wasn’t….

In June of 2020 the union starts making clear they want heads to roll… explicitly called Kevin Drum out for racism: “When our only opinion blogger repeatedly peddled ideas we found racist and offensive , our institution largely kept quiet, allowing him to operate without safeguards—until we had to account for a compromising piece, not on race, but about his thoughts on Tara Reade’s sexual assault claims, with no reporting to back its assertions…”. The entire text of the post was taken down and replaced. Kevin was told he needed to start sending any drafts on—as Clara explained it in an all-staff email—”subjects that are fraught or not in his wheelhouse” to this one very woke SF editor…. Kevin’s haters used this win to increase the expectation on him needing to apologize for other shit. Obviously, Kevin was totally right that Tara Reade was a full of shit lunatic…. A few months later, in the end of 2020, I went on book leave. That January, Kevin parted ways with Mother Jones. When I was ready to return to work in April of 2021, I was told I wasn’t welcome because I had “lost the staff”….

Now here is where I am going to turn the knife on lots of Mother Jones staffers…. Something… I knew that I wanted to say but never did because Kevin had asked me not to. Kevin Drum was responsible for a third of our traffic when I arrived. That proportion climbed as our overall traffic skyrocketed…. Kevin brought in revenue through ads. like a boss. A grinder. (And he was no slouch with donations.) And do you know what he did for the entire time I was at that company (and apparently the years before I arrived)? He turned down every raise, including COL, and explicitly had them redirected to the fellows. At any other company in America, he would have been paid fairly half a million to $750k a year. He brought in many times more revenue than that.. But he never made more than $85k. He asked every single year that they take the money and put it into paying the fellows more and giving them a better stipend or lower premium for healthcare….

One time I DM’d him and started to bring up a lot of the problems I have with our former friends in the leadership of Mother Jones. Even then, he wasn’t as petty as me. “They have to do what they have to do,” he said. RIP Kevin Drum. Mother Jones didn’t deserve you… <https://www.calmdownben.com/p/kevin-drum-was-forced-out-of-mother>

Calm Down
Kevin Drum was forced out of Mother Jones by people who didn’t know about a secret thing he did for them.
Kevin Drum has passed away from cancer. I can’t claim to have known Kevin terribly well, or even as well as I wanted, but I did get to know him somewhat and I’d like to share some of my thoughts with you…
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This <https://www.motherjones.com/media/2025/03/kevin-drum-remembrance/> does seem rather cowardly from Clara Jeffery, I must say…

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Don't Trust the Internet! Another Watching-Breathless-"AI"-Boosters Edition :: A Morning Rant

Modern Advanced Machine-Learning Models: useful interns and unreliable bullshitters. Beware the illusion of competence! Limitations really matter. Approach them all like the bluffing shitposters that they are! And recognize that you really need a real domain-knowledge expert to check them!…

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One of the things about the Internet is that it is filled with people making assurances that are simply not true.

Here is Vox’s Kelsey Piper:

Kelsey Piper: China’s new AI agent Manus Calls Its Own shots: ‘Hey readers, Modern large language models are really good at a lot of tasks, like coding, essay writing, translation, and research. But there are still a lot of basic tasks, especially in the “personal assistant” realm, that the most highly trained AIs in the world remain hopeless at. You can’t ask… “order me a burrito from Chipotle” and get one, let alone “book me a train from New York to Philadelphia”…. That such “AI agents” sometimes work, sort of, is about the strongest thing you can say for them right now… <[Sww.vox.com/future-pe...](https://Sww.vox.com/future-perfect/403896/artificial-intelligence-china-manus-chatgpt-openai-google-privacy)>

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The second two-thirds is correct, but they do not “sometimes” work. Rather, they rarely work:

@TetraBoston

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The first third of the quotation, however…

  • If you are no programmer at all, MAMLMs—Modern Advanced Machine Learning Models—will not help you write a program. If you are a bad programmer, MAMLMs can make you an adequate one in terms of getting you 90% of the way there via reminding you of exact syntax, as long as you are good enough to recognize where it has gone wrong from the error messages. If you are a good programmer, it is like having an intern looking at the documentation they do not understand whispering in your ear.

  • If you are no essay writer at all, MAMLMs will produce an essay at the level of an Internet shitposter—moreover, one that is bullshitting, and not actually transmitting ideas but rather gesturing in the direction in which ideas might be found, in the hope that the reader will fill in the gaps. If you are an OK essay writer, MAMLMs will give you starting points and paragraphs that are wrong in ways that you can try to correct. If you are a good essay writer, MAMLMs may produce useful verbiage in the sense that “explain it to your rubber duck” is a useful psychological trick to use on your recalcitrant brain; otherwise, you will spend more time wincing and rewriting than you would writing from scratch yourself.

  • If you are no translater or an OK translator, MAMLMs will surely in the first case and probably in the second case do much better than you would. The problem if you are an OK translator is that you will then think it is a better translation than it actually is. If you are a good translator—what it produces will be flat, and miss nuances, but it will definitely provide a starting place which you can improve.

  • If you are no researcher, then no, no, no, NO, NO, NO!!!!!! Go to Wikipedia instead. If you are an OK researcher, the additional linguistic flexibility of the vector-database map underpinning MAMLMs may give you an edge relative to keyword-bound google searches, especially in this age of SEO not yet tuned to MAMLMs. If you are a good researcher, it will wind up wasting your time.

  • If you are lucky, or if you are a superb “prompt engineer”—if you have somehow become adept at poking the MAMLM with your prompt in such a way as to direct it to the pools of vector representations of the Internet in which reliable information is to be found—you can get amazingly good results, truly. But what is high-class prompt engineering changes from month to month. And, in general, spending time on prompt engineering is of the “Clever Hans” nature: it spits out text until you recognize the right (or a right-enough) answer.

  • If your MAMLM is trained on a trusted, reliable, structured database (or maybe someday soon on an unstructured one?)—rather than trained to be an Internet shitposter—it can be a very useful and reliable natural-language front end.

  • If what you are interested in is not in producing high-quality first-class writing, but rather good-enough writing to serve purposes of what Marion Fourcade term “ritual”—what us non-sociologists call “boilerplate”—then MAMLMs may well be a golden tool, saving you huge amounts of time in creating documents that are really valuable only for the actions that their magic phrases trigger others to undertake.

But to say, without qualification, that “modern large language models are really good at a lot of tasks, like coding, essay writing, translation, and research”—that is not just creating a map that is not the territory, that is giving your reader a map of Kalamazoo and claiming it is a good guide to Long Island.

Now Kelsey might respond that I am not the typical user of MAMLMs: That I am a highly-trained consumer and producer of intellectual excellence in written English prose. That what I see is valid for me. But that for your typical guy who just wants to punch the clock and create documents that are respectable—it is a substantial leg up for everyone who did not go to an élite university, or if they did did not pay attention in their classes.

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References:

I fed ChatGPT 4 the two URLs <https://www.economist.com/by-invitation/2024/09/04/large-language-models-will-upend-human-rituals> and <https://www.vox.com/future-perfect/403896/artificial-intelligence-china-manus-chatgpt-openai-google-privacy>, asking it for University of Chicago author-data citations with attached live and working URLs.

The two entries above are what it gave me. It did not do so hot.

The actual citations are:

Capisce?

You are warned.

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DRAFT: Yes, This Is Who We Are: The Forthcoming Deportation of Mahmoud Khalil

Below the paywall fold because it is just a draft, and outside my wheelhouse anyway. An irritable gesture provoked by a very sharp person—Steve Vladeck—looking at his feet, rather than at what is really going on around him. Steve Vladeck sees “difficult questions…”. A less naïve observer—a Fred Rodell—would see a Supreme Court with a six-vote lock against taking steps to vindicate the rights of non-citizens to politically dissent. Power is now deciding who can speak and who cannot…

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There are lots of smart people wringing their hands these days who do not seem to understand what is really going on—or what I, at least, think is really going on.

Today’s exhibit: the very sharp Steve Vladeck:

Steve Vladeck: Five Questions About the [Mahmoud] Khalil Case: ‘The government’s arrest and detention of a pro-Palestinian Columbia student (and green card holder) raises difficult questionst…. To sustain… Khalil’s arrest, the government has to identify the specific basis on which… Khalil is subject to removal…. My best guess… 8 U.S.C. § 1227(a)(4)©… “An alien whose presence… the Secretary of State has reasonable ground to believe would have potentially serious adverse foreign policy consequences.. is deportable…. [once] the Secretary of State personally determines that the alien’s [continued presence] would compromise a compelling United States foreign policy interest”… [and] 8 U.S.C. § 1182(a)(3)(B)(i)(VII)… renders both inadmissible and removable any non-citizen who “endorses or espouses terrorist activity or persuades others to… support a terrorist organization”… (to wit… Hamas)…. It’s at least possible that the government has a non-frivolous case for seeking Khalil’s removal….

Now we get to the hard and important part—the unshakable appearance, if not the reality, that all of this is being done in retaliation for constitutionally protected speech…. [But] the Supreme Court… has made it very difficult to use a First Amendment retaliation claim to successfully defeat an enforcement proceeding… especially in immigration…. The First Amendment might require the Secretary of State to have substantial support for… [his] personal determination…. Courts could subject [that] to meaningful scrutiny…. The First Amendment might limit… removing LPRs for… [merely] “endors[ing]” or “espous[ing]” terrorist activity…. A Fifth Amendment challenge on… vague[ness]…. Devil… very much… in the details….

I would certainly hope that the federal courts will read the Constitution to require… an awfully compelling reason…. I suspect that no such reason exists…. But that’s what the litigation is going to test… not something about which I can be confident… <https://www.stevevladeck.com/p/131-five-questions-about-the-khalil>

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Immigration & the American Psyche :: American Economic History

Immigration has always been at the heart of America’s story & self-definition. It has also one of the if not the major source of America’s power & prosperity. But anxiety about welcoming immigrants has also always been a constant. Romulus established an asylum when he founded ancient Rome—a place welcoming fugitives, exiles, criminals, runaway slaves, and other marginalized or displaced individuals from elsewhere & making them full Roman citizens. Pre-Severan Dynasty Rome thus joined America as the only other ethnicity that self-defined not as descendants of a (usually fictional) small group of ancestors bound by blood and to the soil, but rather as something you could join as long as you pledged yourself to its cultural-political project. Welcoming outsiders has driven economic growth, cultural exchange, and political upheaval here in America. Will today’s debates about immigration end in a sharp break from tradition—and a likely draining-away of American prosperity and power. Or will they end in a return to the centuries-old pattern?

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First part of this year’s “Immigration” Lectures: To be followed by: “Immigration & the American Century”

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Immigration in the United States: Patterns, Policies, and Impact

Immigration played a crucial role in shaping what the United States came to be.

Since the early 1600s century, waves of immigrants have arrived in the land that is now the United States of America. The population flow has been driven by economic opportunity, declining transportation costs, and established networks of previous migrants.

The history of immigration has been dominated by the nation's openness to newcomers. But that openness has fueled periodic backlashes driven by social and political anxieties.


Immigration Trends from 1820 Onward

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From the first European settlement through the early 20th century, immigration to the United States rose steadily. European immigrants dominated these waves, with England and Scotland coming first, Germany second, Ireland third, and other immigrants mostly from northern and western Europe coming alongside in smaller numbers. The pace of immigration fell off during the Civil War and the economic depressions of the 1890s. But the overall trend was clear, and ever upward. Transportation costs fell, the expanding settlement-conquest resource-grab society preserved America’s high wage differential vis-à-vis Europe, information about life in America spread, and migration networks expanded. Increasingly, communities across Europe had ties to family members or neighbors who had successfully established themselves in the United States, and would offer to give relatives or the friends of relatives a helping hand up.

Mass immigration from China was cut off in the 1880s. And the overall steady flow of immigration from Europe was severely disrupted after World War I. The 1920s in America saw a sharp majority political and cultural reaction against immigration, rooted in fears that newcomers were undermining American society. This culminated in the Immigration Act of 1924, which drastically restricted immigration by implementing national origin quotas, restricting immigrants from a country to a proportion of those immigrants who had already come. These quotas favored immigrants from Northern and Western Europe: their annual quotas were never filled. These quotas greatly limited arrivals from Southern and Eastern Europe, as well as elsewhere.

As a result, immigration rates plummeted throughout the 1930s, 1940s, and 1950s. It wasn’t until the Immigration and Nationality Act of 1965 that these restrictions began to be gradually lifted, ushering in a new wave of migration.

By the late 20th century, immigration numbers (but not proportions) had risen to historic highs, with migrants arriving not only from Europe but also and more so from Latin America, Asia, and Africa.


The Changing Proportion of Foreign-Born Americans

The proportion of the U.S. population that was foreign-born has fluctuated significantly over time. In the colonial period, the majority of all non-First Nations people were immigrants. As of 1800, immigrants made up more than 25% of the population. This percentage gradually declined to around 14% by the time of the Civil War, and their it stuck steady through the early 1900s until 1930.

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Following the restrictive immigration policies of the 1920s, the share of immigrants in the population began to fall, reaching a low of about 5% by 1970. Since then, the proportion has risen steadily, returning to pre-1930 levels. Much of the anxiety about immigration in recent decades reflects a return to what was, historicallym normal for the United States—a diverse, immigrant-rich society, with the foreign-born amounting to one in seven residents, and with perhaps one in four being visibly culturally alien to the dominant WASP-based American culture by reason of their birth or their immediate descent from those born elsewhere.


Cultural & Political Impact: Panic

And so immigratiion has long sparked political debate in America. Historically, curiously—or perhaps not—concerns about newcomers have often been strongest in regions with the fewest immigrants, both absolutely and relatively.

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Rural areas and smaller towns, where immigrants were scarce, tended to express greater anxiety about cultural change than major cities, which have always been immigrant hubs.

This tension has deep historical roots. Periodic fears that immigration is "polluting" American identity have existed since the early 20th century and have resurfaced in recent decades.

The question remains: Did the relatively low immigration levels from 1940 to 1980 fundamentally alter American self-perception? Has the United States shifted from a country that celebrates its immigrant roots to one that sees itself as a more closed, "blood-and-soil" nation? Or is America’s psyche today back to what it was for most of its history, as a place that gloried in its acceptance of immigrants, with nay-sayers confined to a minority.

But the nay-sayers have long been a powerful minority.

We have, writing in 1891, Massachusetts Senator Henry Cabot Lodge, and his “Lynch Law & Unrestricted Immigration” <https://www.jstor.org/stable/25102181>, expressing deep concerns about immigration from Southern and Eastern Europe. Unrestricted immigrationm, in his view, posed a significant threat to American society by introducing dangerous criminal organizations like the Mafia, the Molly Maguires, and the Secret Polish Avengers. Lodge believed that secret societies rooted in immigrant communities posed a unique danger to public order, as these groups not only facilitated criminal activity but also undermined social cohesion. He cited the lynching of 11 Italian immigrants in New Orleans as a grim example of societal backlash against such threats.

One of Lodge’s key accusations was that so-called "benevolent societies" elsewhere actively encouraged undesirable migrants—including criminals, ex-convicts, and impoverished individuals—echoes of “they’re eating the dogs! they’re eating the cats!… they’re emptying the asylums”—to leave their home countries and settle in the United States, and so sought to reduce their own nation's lumpenproletariat and the accordant social burdens by shifting them to America.

Plus Lodge—falsely—thought the new immigrants speaking languages outside the German branch of the Indo-Europen language tree as reluctant to assimilate. He claimed that these groups resisted adopting American social and political norms, instead reinforcing ethnic enclaves that hampered national unity. Lodge’s concerns extended beyond crime and social integration; he also linked immigration to radical political ideologies: socialism and anarchism.

Of course, an anti-immigrant senator from Massachusetts in any generation previous to Lodge would have denounced not just the Molly Maguires but all of the immigrants from Ireland. But in Henry Cabot Lodge’s day every politician in Massachusetts at least lumped the Irish—even Catholic Irish—into a single good-immigrant category, as people from the “British Isles”.

Lodge was far from alone in his socio-cultural panic. We find an even stronger such argument from future President Woodrow Wilson. The end of Wilson’s 1893 history textbook, Division and Reunion, 1829-1889 <https://archive.org/details/divisionreunion100wilsuoft>, identifies three threats to America: Mormons, spendthrift Republicans, and immigrants: New York: Longmans, Green, and Co. .

The other leading questions… the granting of pensions and the regulation of immigration. Congress had hastened from one lavish vote to another in providing pensions for the soldiers who had fought in the civil war, until at length generosity had passed into folly. President Cleveland for the time put a stop to the reckless process by a vigorous use of his veto power.

Immigration had long since become a threat instead of a source of increased wealth and material strength, bringing, as it did, the pauperized and the discontented and disheartened of all lands, instead of the hopeful and the sturdy classes of former days; and public opinion was becoming veryn restless about it. But Congress did little except act very harshly towards the immigrants from a single nation. By an Act of 1888 the entrance of Chinese into the country was absolutely cut off.

Congress undertook… to deal in summary fashion with polygamy among the Mormons of Utah. The charter of the Mormon church was declared forfeit, polygamy was made criminal, and all persons were excluded from the elective franchise in the Territory who would not take oath to obey the stringent provisions of the federal statutes… aimed at the principal domestic institution of the Mormon sect…

Before his hopeful conclusion:

The end of the first century of the Constitution had come… but twenty-four years since the close of the war between the States; but these twenty-four years of steam and electricity had done more than any previous century could have done to transform the nation into a new Union. The South… freed from the incubus of slavery, she had sprung into a new life… lost her old leisure and her old-time culture, but began very fast to build… material foundations…. The old alienation of feeling between the sections could not survive…. Days of inevitable strife and permanent difference came to seem strangely remote….

New troubles came, hot conflicts between capital and labor; but the new troubles bred new thinkers…. New problems quickened sober thought, disposed the nation to careful debate of its future. The century closed with a sense of preparation, a new seriousness, and a new hope…

And more than a century before Lodge and Wilson we had Benjamin Franklin, still then a loyalist focused on the transatlantic British identity, and not at his best:

A Nation well regulated… [if you] cut it in two… each deficient Part shall speedily grow out of the Part remaining. Thus [with]… Room and Subsistence… you may of one make ten Nations, equally populous and powerful; or rather, increase a Nation ten fold in Numbers and Strength…. Detachments of English [sent] from Britain… to America, will have their Places at Home so soon supply’d and increase so largely here.

[So] why should the Palatine [German] Boors be suffered to swarm into our Settlements, and by herding together establish their Language and Manners to the Exclusion of ours? Why should Pennsylvania… become a Colony of Aliens, who… Germanize us instead of our Anglifying them, and will never adopt our Language or Customs, any more than they can acquire our Complexion….

The Number of purely white People in the World is proportionably very small. All Africa is black or tawny. Asia chiefly tawny. America (exclusive of the new Comers) wholly so. And in Europe, the Spaniards, Italians, French, Russians and Swedes, are generally of what we call a swarthy Complexion; as are the Germans also, the Saxons only excepted, who with the English, make the principal Body of White People on the Face of the Earth.

I could wish… [White People’s] Numbers were increased…. While we are… clearing America of Woods, and so making this Side of our Globe reflect a brighter Light to the Eyes of Inhabitants in Mars or Venus, why should we in the Sight of Superior Beings, darken its People? Why increase the Sons of Africa, by Planting them in America, where we have so fair an Opportunity, by excluding all Blacks and Tawneys, of increasing the lovely White and Red?…

The only saving grace is Franklin’s “and Red”. For Franklin, America is for the Amerindians as well as for the British (and Saxon!) ethnicity.


Cultural & Political Impact: The Majority Pro-Immigrant American Self-Definition

But these nay-sayers were a definite minority. Not until 1924 did anything significant restricting truly open borders other than the Chinese Exclusion Act become law.

The majority has always been best expressed by the strongly pro-immigrant J. Hector St. John Crèvecœur and his 1782 Letters from an American Farmer <https://dn720206.ca.archive.org/0/items/bim_eighteenth-century_letters-from-an-american_st-john-de-crvecoeur-_1782_0/bim_eighteenth-century_letters-from-an-american_st-john-de-crvecoeur-_1782_0.pdf>:

What then is the American; this new man?… That strange mixture of blood, which you will find in no other country. I could point out to you a family whoſe grandfather was an Englishman, whose wife was Dutch, whose son married a French woman, and whose preſent four sons have now four wives of different nations.

He is an American; who leaving behind him all his ancient prejudices and manners, recieves new ones from the new mode of life he has embraced, the new government he obeys, and the new rank he holds. He becomes an American being received in the broad lap of our great Alma Mater. Here individuals of all nations are melted into a new race of men, whose labours and posterity will one day cause great changes in the world. Americans are the western pilgrims, who are carrying along with them that great mass of arts, sciences, vigour, and industry which began long since in the east; they will finsſh the great circle. The Americans were once scattered. all over Europe; here they are incorporated into one of the finest systems of population which has ever appeared, and which will hereafter become diftinct by the power of the different climates they inhabit.

The American ought therefore to love this country much better than that wherein either he or his forefathers were born. Here the rewards of his industry follow with equal steps the progress of his labour; his labour is founded on the basis of mature self-interest; can it want a stronger allurement? Wives and children, who before in vain demanded of him a morsel of bread, now, fat and frolicksome, gladly help their father to clear those fields whence exuberant crops are to arise to feed and to clothe them all; without any part being claimed, either by a despotic prince, a rich abbot, or a mighty lord. Here religion demands but little of him; a small voluntary salary to the minister, and gratitude to God; can he reſuse these?

The American is a new man, who acts upon new principles; he must therefore entertain new ideas, and form new opinions. From involuntary idleness, servile dependance, penury, and useless labour, he has passed to toils of a very different nature, rewarded by ample subsistence;—This is an American…

Coming to the New World to build a society free from the grievous mistakes of the Old World, and showing the unlucky elsewhere what a truly good—a truly utopian—society could be. And all welcome just as long as they arrive and pledge themselves to the project of America.

In world history, it is unique. Or, rather, almost unique. Something similar took place in Rome. The founding myth was that when Romulus founded the city, one of the first things he did was establish the Asylum between the Arx, the citadel peak of the Capitoline Hill, and the other peak on which was built the Templus Iovis Optimus Maximus. Make it to the Asylum and pledge yourself to Rome, and you were a Roman citizen. No matter what you had been, people—whether fugitives, exiles, criminals, runaway slaves, or otherwise marginalized or displaced—were Romans, hardy and ambitious even though lacking in social refinement. Like being an American, being a Roman was an ethnicity you could decide to join. That lasted up until the year 200 or so, when the Roman citizen body began to be divided into honestores and humiliores.

In the Roman case, making Roman ethnicity a matter of election and adoption (provided you found a patron willing to sponsor you) shook western Eurasia and North Africa for more than a millennium. In the American case, making American ethnicity a matter of election and adoption has shaken the world for two centuries. But will it last? And for how much longer?


Economic and Demographic Consequences

Immigrants have been essential in building the modern United States. Without sustained immigration, America's population today would likely resemble that of Canada or Australia—perhaps only 60 million people rather than the 330 million we see today.

The idea that immigration drives growth is supported by the simple math of population expansion. Even with natural increases in birth rates, the absence of immigration would have severely limited America's workforce and economic potential. Immigrants have filled critical roles in industry, agriculture, and services, contributing to the country’s prosperity.


But Is America Today Out of Room?

In short, no. The distribution of America’s population has followed patterns shaped by economic opportunity and geography. Major cities such as New York, Los Angeles, and Chicago have long served as magnets for immigrants due to job availability and established ethnic communities.

Yet America's population density, even in its most crowded regions, remains relatively low compared to other parts of the world. The so-called "megalopolis" from Washington, D.C., to Boston has a population density comparable to Britain or Germany—significant, but far from the density seen in regions such as the Pearl River Delta in China or the Tokyo metropolitan area in Japan.

Economic opportunity has played a major role in shaping migration patterns. Cities like Los Angeles grew rapidly due to the film industry, oil production, and wartime manufacturing. San Francisco and Sacramento developed as gateways to California's gold country, while Portland and Seattle emerged as commercial hubs for the Pacific Northwest. Meanwhile, cities like Houston and Oklahoma City thrived thanks to oil production and port access.

Some urban centers, such as Dallas, grew without an obvious geographic advantage. Instead, their success stemmed from aggressive promotion and development efforts, reflecting the broader American pattern of cities emerging where economic and social incentives align.


Conclusion

The United States has long defined itself a nation of immigrants, and the country’s demographic and economic growth has depended heavily on newcomers.

While political anxieties about immigration have often flared, so far these concerns have always been part of a broader historical cycle of ebb and flow.

The question for American politics today is whether optimistic rose-colored quasi-memories of America between 1940 and 1980—when immigration levels and the foreign-born population were unusually low—will turn out to have permanently shifted the American psyche and American identity away from the pattern of welcome established in 1620 that lasted until 1924, and resumed in 1965.


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Pre-Lecture Notes: Immigration :: American Economic History

I am now officially behind! For the first time this semester, I have to give a lecture on Monday & I did not have a rough draft of it in hand before the semester began! (Fortunately for me, Monday March 10 is the only day in which I am in this pickle until… Monday April 14. I have had drafts of my “Feminism”, “Mass-Production Economy”, & “New Deal Order” lectures in hand for months and months…

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Major Orienting Points to Hit:

  1. Except for 1945-1995, America is a country in which 10-15% of its population are foreign-born—first-generation immigrants, or at least potential first-generation immigrants…

  2. Even over 1945-1995, America’s wealth and global power spring from its powers of assimilation: because it is a nation of immigrants…

  3. What is a nation of immigrants? A nation of people fleeing the catastrophes of the Old World and wanting to build something better, together, in the New World…

  4. Everyone who commits to that project is, in the eyes of most Americans all of the time, an American—all of us children of the Pilgrims by election and adoption…

  5. But there is always backlash—whether Benjamin Franklin saying that swarthy Germans should be kept out and America reserved for the White Man and the Red Man, Woodrow Wilson saying everyone from Germany north and west is fine but those south and east are really bad news, or Donald Trump calling for the deportation of everyone (save Melanija Knavs of Slovenia and Elon Musk of South Africa) who came here and started to work illegally.

  6. Strangely enough, the backlash appears unrelated to how many immigrants there are around you you meet every day or indeed the proportion of immigrants in the country…

  7. Yes, immigrants and their children assimilate at a ferocious rate once they learn English—as nearly all children of immigrants do…

  8. American culture and civilization are very attractive—indeed, there are repeated moral panics elsewhere that their children will become Americans even without every living here, and those moral panics are not unreasonable…

  9. No, immigrants are not assimilating more slowly in this wave than in earlier waves…

  10. Yes, immigrants are changing American culture and civilization…

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PROJECT SYNDICATE: Bond Vigilantes! Or Is It "Bond Vigilantes?'?

Normal countries, countries with “exorbitant privilege”, and the threat of the loss of same. For even for those those with “exorbitant privilege” cannot be confident the privilege will stick. For them the rules are different—until they aren’t. Looking back at the fall of Liz Truss and the rise of Bill Clinton’s “fabulous decade”. The looming question for today: When do bond markets start cracking the whip? The leash is short for most economies—but even the strongest currencies can lose their safe-haven status if policymakers forget the risks…

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Extended Version

J. Bradford DeLong: What Role for the Bond Vigilantes?: “Bond vigilantes”—investors who sell off a country’s bonds if they fear irresponsible fiscal policy—have long played a crucial role. Their appearance disciplines governments’ borrowing and spending decisions. And fear of their sudden appearance on the horizon anticipatorily disciplines, governments’ borrowing and spending decisions.

In most countries, their influence is both immediate and can be severe.

If investors lose confidence, interest rates spike. If the country has any significant debt that needs to be rolled over soon, borrowing costs threaten to become unsustainable. Economic turmoil often follows, and political turmoil always follows as the debt-servicing shock hits the government budget.

The leash, in other words, is short for countries with any considerable amount of debt that they soon need to rollover.

However, there are a few exceptional countries that possess what Valér Giscard d’Estaing labeled and what economist Barry Eichengreen has popularized as exorbitant privilege. That is the ability to issue debt and currency that the world treats as one of its ultimate safe assets. Whenever there is a “flight to safety” in the world economy, demand for such assets rise. And, as long as the country retains its exorbitant privilege, there is no place safer in terms of asset classes to flee to.

For these nations—most notably the United States, and to a lesser extent historically the United Kingdom and, today, the eurozone and Japan—the typical bond market constraints are much looser.

Investors are willing to hold their debt even at very low interest rates because they see it as a secure store of value, rather than a risk-laden financial asset. In a sense, these countries’ government debt functions more like deposits in a highly trusted bank—akin to the role played by early-modern institutions like the Medici Bank—where people effectively pay for the privilege of storing their money safely, rather than expecting high returns in compensation for risk.

Yet even for countries with exorbitant privilege, the bond market’s discipline is not entirely absent. The key risk is the potential loss of that privileged status, which, if it happens, can be sudden, destabilizing, and extremely difficult to reverse.

The United Kingdom under Liz Truss and Kwasi Kwarteng in 2022 provided a stark reminder. Their ill-conceived fiscal plans—massive unfunded tax cuts in an already fragile economic environment—shattered market confidence almost overnight. Gilt yields soared. The pound plummeted. Their government collapsed in record time. Most of the fallout was the result of the peculiar politics of the Palace of Westminster, rather than any material harm to the U.K. economy. But there was fallout.

By contrast, U.S. policymakers in the 1990s in Bill Clinton’s administration were acutely aware of the need to maintain financial market confidence and to guard and protect the U.S.’s exorbitant privilege. Their fiscal strategy—centered around deficit reduction, careful monetary-fiscal coordination, and a commitment to preserving the dollar’s status as the world’s reserve currency—helped sustain America’s exorbitant privilege, reinforced global trust in U.S. debt markets, and produced what Alan Blinder and Janet Yellen named the “fabulous decade” of extraordinarily good macroeocnomic performance.

Thus, even in the most privileged nations, policymakers need to keep this reality in their peripheral vision. Markets may seem forgiving, but the moment they turn, the consequences can be swift and brutal. And they can turn whenever there are alternatives—other assets than their debt—that can fulfill safe-harbor roles equally well.

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<https://www.project-syndicate.org/magazine/bond-vigilantes-will-they-come-for-us-other-major-economies-by-j-bradford-delong-et-al-2025-03>


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Brief Comments on the Economic & Political-Economic State of the Trump

I did a short interview with the BBC. Cleaned-up transcript. And my talking points. None of which I got to use...

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Cleaned-Up Transcript:

Let's talk about inflation first then. What's your, your take on how things stand?

Well, I think Trump told a big lie about inflation. This was not the worst episode of inflation that the United States has had. I can think of at least seven previous ones that were bigger. And that was just one of many lies: America has spent nowhere close to $350 billion on Ukraine. Robert F. Kennedy Jr. is not going to cure autism. We do not have millions of dead people more than a hundred years old receiving Social Security checks.

The tariffs that Trump are proposing—they are not going to make the America stronger. Think of it as the equivalent of a Brexit. Boris Johnson, Nigel Farage, and company inflicted Brexit on the United Kingdom in the 2010s and shrunk the British productivity by between five and 10%. Donald Trump appears to be gung-ho on doing that to the United States. The only blinking he has done so far has been that after being told that his 25% tariffs on Mexico and Canada will bankrupt General Motors within nine months, he has “paused” auto tariffs. Otherwise, he is raring to go to make the United States a poorer as a country by breaking a good deal of our international division of labor.

====

There can often be a disconnect from what we see from what President Trump says and what we sort of see happening in, in reality. Whe these tariffs do start to bite, it's gonna become quite apparent to the American people, aren't they? That tariffs have increased their cost of living?

Well, it ought to. On the other hand, Starmer is not proposing to reverse Brexit. That would seem to be very close to a no brainer—especially since very few of the original Brexit campaigners actually wanted to win. They wanted to demonstrate they were standing up for England against the Eurocrats. They wanted to lose and go down boldly. They then wanted to use that to gain power within the Tory party. And when they won, they had absolutely no idea what to do.

Now the Tories are out and Labour is in. Yet Brexit stands tall.

====

With Donald Trump and what's happening in the US, you see that same sort of situation playing out?

It could well. The cowardice of the Remainer Tories after the passage of Brexit seems to be matched by the extraordinary cowardice of a Republican power structure that sees hugging Donald Trump's core voters as the only way they survive primaries.

===

Moving on quickly, I want to get your thoughts on, on the government cuts and tax cuts that we are seeing that were he laid out in his speech. What do you think the implications of that will be?

They don't add up. He promised to balance the budget, too? It's not at all clear what is coming down the pike. It does seem clear there will be substantial cuts to the Medicaid program. They will be sold as we're getting rid of waste, fraud and abuse. But there's little waste fraud and abuse in Medicaid to cut. So what healthcare sector muscle and bone will be cut? We will see.

Tax cuts for the rich are always welcome for the rich. But the spending cuts, aside from, perhaps, Medicaid appear small in magnitude, but large in destructive effect. Breaking the medical research system, which has enormous downstream biotech benefits that we really need as we move into the Attention Info-Bio Tech Economy will be very expensive in terms of economic growth for very little savings. Eliminating USAID—we are eliminating programs that have enormously high benefit-cost ratios and that massively more than repay themselves in global American credibility and influence.

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Talking Points:

  • What were my expectations for Trump’s address to congress? That he would say that he is great. That he is making America great. That the Democrats are awful, and I'll expect he'll go off script and riff about how extraordinarily unfairly he's been treated by all kinds of people…

  • Bessent would, I thought, try to get him to focus on not scaring markets. I think he's unlikely to succeed. Afterwards there would be a frantic attempt to do what comic books writers called “retroactive continuity”—to say that we did not see and hear what we in fact saw and heard…

  • As best as I can see, there is no non-crazy faction within the Trump Administration that wants the tariffs. The few that may are like those who maintain to this day that Brexit in the United Kingdom was a great success rather than a catastrophic policy disaster that has cost them perhaps 10% of their national wealth…

  • As you know, I am a Hamiltonian. I think there is a strong argument for smart tariffs as one of the many tools for building your communities of engineering practice, and you do want to build your communities of engineering practice because they bring with them strong externalities. If your government has sufficient state capacity to make your tariffs genuinely smart, genuinely Pigovian, go for it. But that is not what Trump's tariffs are. Trump’s tariffs are random. They are going to pull apart the North American and global division of labor to the United States' substantial detriment…

  • Other countries now have a very difficult task. Donald Trump's word is not good. Canada and Mexico tstruck a deal with Trump in the USMCTA. And now Trump has torn it up. So everyone now has to set up the game board by building reserve capabilities, so that when Trump breaks the agreement, he'll wind up being significantly less his word—which he will—they are OK and Trump is not. Immediate sanctions need to be built into everything…

  • Scott Bessent says that Donald Trump thinks the value of the stock market is the way he keeps the way the US economy is valued. Thus that policies that push the stock market down will be very quickly reversed. That is what the Bessent affinity is telling everyone. Maybe. Maybe not. Bessent does not know any better than we do…

  • James Madison and Alexander Hamilton wrote, back in 1787, that there had been significant improvements in the science of government since the times of the classical Greeks. Those improvements, they claimed, meant that in modern times democracies no longer inescapably vibrated between tyranny and anarchy. Madison may have believed that. He probably did. I do not know a Hamilton scholar who thinks Hamilton believed it. Hamilton wanted a constitutional monarchy. He backed the republican constitution of 1787 because Washington backed it, and Hamilton was Washington’s creature. He was talking his book…

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DRAFT: Night Thoughts on Dictatorial Court & Courtier Politics...

With the exoteric subject of the post being the rise of Deng Xiaoping to paramountcy in China in the late 1970s at the head of a coalition of PLA Fourth Front Army veterans, and the esoteric subject being obvious. Why any dictator not superstrong cannot afford even semi-competent senior lieutenants. Behind the paywall as I still hope to turn it into a, you know, actual essay, rather than a gnawing on the bone that is an analytical problem…

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In my view, very smart by UCSD’s Victor Shih. From his book Coalitions of the Weak:

Why a dictator cannot afford a too-competent and too-connected lieutenant. And why in the 1940s Zhou Enlai—in his cups (or was he?)—would tell U.S. naval attaché staff that he had no higher ambitions than to rise to be #3 in the hierarchy of the CCP:

Victor Shih: Coalitions of the Weak: ‘The rise of Deng has never been satisfactorily explained…. He headed the Second Field Army, but there were a dozen or so other commanders…. Deng took a tough stance against “Two Whateverism,” but why was he able and willing to do so?… Mao needed Deng rehabilitated so that he could strengthen command over the military… [but with] so many veterans who had joined the party before the end of the Long March, why was Deng uniquely suitable to put the military in order? Why was he rehabilitated so soon after the fall of the Gang of Four?… The composition of the core leadership group in the 1980s—Deng Xiaoping, Chen Yun, Ye Jianying, and Li Xiannian—in many ways seemed unlikely.

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Anchoring Your Thoughts Against the Blizzard of Trumpist Lies Is Very Important for You!

Proper mental hygiene is essential if you are to be a useful part of humanity-as-an-anthology-intelligence over the next four years. Start now! Remember: Ukraine has never been in any sense "ungrateful” to the United States & the aid it has provided. Every single day please ground your mind in reality by surfing over to Daniel Dale <https://www.cnn.com/profiles/daniel-dale> at CNN—his “Fact Check” series…

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Martin Mycielski, back in 2017, gave us some important advice about how we should be thinking and behaving today:

Martin Mycielski: The Authoritarian Régime Survival Guide: ‘1. They will come to power with a campaign based on fear, scaremongering and distorting the truth. Nevertheless, their victory will be achieved through a democratic electoral process. But beware, as this will be their argument every time you question the legitimacy of their actions. They will claim a mandate from the People to change the system. Remember – gaining power through a democratic system does not give them permission to cross legal boundaries and undermine said democracy.

2. They will divide and rule…. Don’t let them divide you – remember you’re one People, one Nation, with one common good. 3. They will subjugate state media…. Fight for every media outlet, every journalist…. There’s no hope for freedom where there is no free press. 4. They will create chaos…. See through the chaos, the fake danger, expose it…. 5. They will distort the truth, deny facts and blatantly lie…. Always think critically, fact-check and point out the truth, expose ignorance with facts. 6. They will incite and then leak fake, superficial “scandals”…. See through superficial topics… and focus on what they are actually doing.

7. They will propose shocking laws to provoke your outrage… [then] seemingly back off…. In the meantime they will push through less “flashy” legislation…. Focus your fight on what really matters. 8. When invading your liberal sensibilities they will focus on what hurts the most…. Women and minorities have to be ready to fight the hardest… and you must fight together with them. 9. They will try to take control of the judiciary…. Preserve the independence of your courts at all cost…. 10. They will try to limit freedom of assembly…. Oppose any legislation attempting to interfere with freedom of assembly….

11. They will distort the language, coin new terms and labels, repeat shocking phrases until you accept them as normal and subconsciously associate them with whom they like…. Fight changes in language in the public sphere, remind and preserve the true meaning of words. 12. They will take over your national symbols…. Show your national symbols with pride, let them give you strength, not associate you with the tyranny they brought onto your country. 13. They will try to rewrite history to suit their needs and use the education system to support their agenda…. Guard the education of your children, teach them critical thinking…. 14. They will alienate foreign allies and partners, convincing you don’t need them…. Don’t let them build walls promising you security instead of bridges giving you prosperity. 15. They will eventually manipulate the electoral system…. Oppose any changes to electoral law….

And above all, be strong, fight, endure, and remember you’re on the good side of history. EVERY authoritarian, totalitarian and fascist regime in history eventually failed, thanks to the PEOPLE.

– With love, your Eastern European friends… <https://verfassungsblog.de/the-authoritarian-regime-survival-guide/>

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With respect to (1), (3), (5), (6), (11), and (13), you should—every day—be grounding your mind in reality by surfing over to Daniel Dale <https://www.cnn.com/profiles/daniel-dale> at CNN—his “Fact Check” series. And you should be boosting and reposting it and its conclusions, spreading it as far as possible through your own network.

Today, you should be boosting:

Daniel Dale: Fact check: 33 times Zelensky thanked Americans and US leaders: ‘During a remarkably combative Oval Office meeting on Friday, both President Donald Trump and Vice President JD Vance told Ukrainian President Volodymyr Zelensky that he was insufficiently thankful. “You have to be thankful. You don’t have the cards,” Trump said, adding a bit later, “You gotta be more thankful.”… It’s worth noting that Zelensky has thanked the United States on numerous occasions since Russia launched its full-scale invasion in February 2022 – expressing gratitude to Trump and President Joe Biden, to members of Congress from both parties, to US defense companies and their employees, and to the American people. After Zelensky left the White House on Friday, he wrote on X: “Thank you America, thank you for your support, thank you for this visit. Thank you @POTUS, Congress, and the American people. Ukraine needs just and lasting peace, and we are working exactly for that.” Here are 33 previous examples of Zelensky thanking or expressing gratitude toward the United States, its officials or its people for their support. This is not a comprehensive list. Notably, we did not review Zelensky’s many domestic remarks in Ukrainian… January 21, 2022, on X: “Thank you @POTUS for the unprecedented (American) diplomatic and military assistance for (Ukraine)”… <https://www.cnn.com/2025/02/28/politics/volodymyr-zelensky-thankful-us-fact-check/index.html>

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"Inflection Point", Hosted by Dylan Riley & Brad DeLong

Yes, another podcast, as if the world needed more…
We are going to try to soft-relaunch “Inflection Point” next week, with our first guest being the highly estimable John Ganz, author of When the Clock Broke: Con Men, Conspiracists, & How America Cracked Up in the Early 1990s, and proprietor of Unpopular Front <https://www.unpopularfront.news/>. Stay tuned!…

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Back in the days of the Plague, Dylan Riley set in motion a project for a Berkeley Political Economy-Macrohistorical Sociology (do not ask me for the difference) podcast. He recorded a very interesting three-part conversation with UCLA’s Robert Brenner <https://web.archive.org/web/20210422124242/https://n2pe.berkeley.edu/podcast/robert-brenner-and-dylan-riley/>.

But then, as with so many things in the time of the Plague, the project fell into the jaws of entropy.

Now it is time to restart!

I have enthusiasm!

And I have a brand new coäx-cable hardwired connection!

Thus we—Dylan Riley and me—are going to try to soft-relaunch “Inflection Point” next week, with our first guest being the highly estimable John Ganz, author of When the Clock Broke: Con Men, Conspiracists, & How America Cracked Up in the Early 1990s <https://us.macmillan.com/books/9780374605557/whentheclockbroke>, and proprietor of Unpopular Front <https://www.unpopularfront.news/p/the-last-days-of-discourse>.

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The original remit for Inflection Point was this:

Our show presupposes that we live in a time of transition…. There was, roughly… a global economic order… roughly comparable to today’s European social democratic capitalism: high taxes, a big welfare state, lots of regulation over corporations. Then… that… was dismantled and replaced with… call it market fundamentalism, or neoliberalism. Since the 2008 financial meltdown, however, neoliberalism has been in crisis… discrediting of free trade as a bipartisan policy objective… distrust of elites… ascent of Bernie Sanders on the left and Donald Trump on the right… Neoliberalism… [might become] ascendant again… [or] might not. It could be replaced by a different economic order, or myriad… orders… socialist upheavals… ethno-nationalist regimes… something else entirely…. What comes next?

And that still sounds very good to me.

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I reviewed John Ganz’s book last year:

The thread of my argument then:

Since 1870 technological progress has doubled human wealth every generation, promising unparalleled well-distributed prosperity and yet failing to deliver…. The reaction to this broken promise of general well-distributed prosperity has been a constant of modern political life. Now comes John Ganz with his new book, When the Clock Broke, on how the latest version of this story took its sinister shape in the early 1990s. From David Duke’s alarming gubernatorial run to Pat Buchanan’s inflammatory presidential campaign, accompanied the hierarchical ravings of Samuel Francis and Joseph Sobran… a new conservative ideology that rejected racial equality, equality of opportunity, and, indeed, the entire American dream…. How did we get from Reagan’s “Morning in America” conservativism to the conservatism of the Mob and the Race, anyway?…

The forward rush of technological change was not smooth and broad-based. It was narrow and discontinuous. The system could not adapt—could not shift production from consumption to investment and back again to keep everybody at work, and to sustain all of the businesses that were productive for society against commercial crisis-driven bankuptcy and dissolution. The system could not adapt—could not smoothly adopt labor-saving technologies and simultaneously expand the scale of production to avoid placing skills, occupations, livelihoods, industries, and communities in the bullseye that was the “destruction” part of Schumpeterian creative destruction…. [When] what people think ought to be general technology-driven advancing prosperity turns on them, and becomes the threat or the actuality of the loss of position, place, income, and wealth as it is their turn on the bullseye, people react—badly….

In America, for most of the time, the socioeconomic distress produced by creative destruction was manageable: productivity was rising fast enough as technology and natural resources were deployed, intensively enough, those who saw themselves as having a legitimate beef against the system, and had the social power to try to do something about it were relatively small in numbers, and those who valued the system could find resources out of the American technological dividend to buy enough of the discontented off almost all of the time. Until 1992….

Then, with the election of Bill Clinton, the Republican Party followed the lead of Newt Gingrich and began its [long] slide from a party of those who saw the economy and the future as their friend—of millionaires voting with their feet for opportunity and of temporarily embarrassed would-be millionaires who thought things were about to turn around—to a party of those who thought that they did not have enough and that the system was going to try hard to take the not-enough that they had away….

It is the coming of this mode of neofascism and its rise to a place where it currently rules… that is the story John Ganz tells in When the Clock Broke. And I highly recommend the book…. The firebell in the night was the 1991 Louisiana gubernatorial election, in which former Ku Klux Klan leader David Duke made a significant albeit losing impact. Duke’s campaign was marked by a blend of racial appeals and Reaganite rhetoric, addressing issues like welfare dependency, affirmative action, and black crime. This approach alarmed the Republican establishment. It mirrored their own strategies. But it said the quiet things loud: much more overtly racist. And, somehow, Duke’s defeat did not diminish his influence within right wing circles…. Opportunity was scarce. It should be restricted to white men—and not [not included were] white men who were embarrassed by their advantages…

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Next week I get to see whether I still think I was right.

Below the fold, my current so-far musings on the issues…

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Staging Post for 2025-02-26 We Econ 113 "American Exceptionalism: Some Numbers on the 'Great Traverse' Counterfactual" Lecture...

Scratch notes Tuesday afternoon…

Jupyter Notebook Python File: <https://delong.typepad.com/--2025-files/2025-02-25-econ-113-great-traverse.ipynb>


Robert Allen: American Exceptionalism as a Problem in Global History: ‘How countries could respond to the environment was an important question, and a standard development model was elaborated in the United States, in the first instance (Allen 2011). This model consisted of four imperatives: Create a large internal market by eliminating domestic barriers to trade and constructing infrastructure. Erect an external tariff to protect your industries from British competition. Establish an effective banking system to stabilize the currency and promote investment. Found a system of universal education to prepare the citizens for industrial employment. How successful were these policies in the United States? Nationalists around the world wanted these policies, too. Would they have worked well had they been adopted in Egypt and India?…

To make the point in monetary terms, the very large volumes of exports of farm and forest products were inflationary–they produced a “Dutch disease” situation in which prices of non-tradable, protected imports, and labor were raised to levels that made manufacturing uncompetitive. The effect of abundant natural resources in a global economy was to retard the industrialization of United States–not to promote it…

After 1880, however, the incentives to invent higher productivity technology led to an American lead. The incentives to use more power per worker in America increased significantly in this period–without a corresponding change in Britain. As well, the restricted supply of child labor may have created a long-run tendency in American industry to invent technology that took the place of the children who populated British factories…

Expansion also entailed an extremely rapid growth in the American capital stock. In 1870 the capital stock of the United States was about 25 percent greater than that United Kingdom’s; in 1910 the U.S. capital stock was almost four times larger. Over that period, the increase in the U.S. capital stock was six times greater than the growth of the British stock (Allen 2012). Rapid growth in the demand for capital goods provided a great market for inventors. Improvement in technology (including organization methods, e.g., Chandler 1977) depends on experimental data, and that data is often generated as a byproduct of investment…

Why didn’t Egypt or India industrialize by adopting British technology like the United States did?… One problem was that labor in these countries was not trained for factory work…. The bigger problem was that, at the low wage, handicraft methods were the cost-minimizing choice of technique for most production…. Labor was cheap relative to energy and capital. It did not pay to adopt the technology that would have alleviated their poverty. In the United States, a tariff was necessary to make industry pay, but once in place American industry chose the modern methods. Development of the Third World required policies that ignored comparative advantage. From this perspective, Egypt is one of history’s great missed opportunities. In 1805 Mohammed Ali seized power and tried to turn Egypt into a modern military-industrial power. A Soviet-style procurement policy financed stated led industrialization. It all came undone in 1838 when the British forced a treaty on the Ottoman overlords that ended the fiscal system. The Egyptian economy reverted to the pattern implied by comparative advantage, and Egypt remained an underdeveloped country…

After 1895 America became a leading industrial power by developing high productivity manufacturing. This was a more unusual achievement that rested on three factors–(1) cheap energy, (2) universal public schooling that induced firms to develop technology to raise the productivity of adult labor while at the same time training children to meet that demand, and (3) the rapid growth of manufacturing before 1895. While the nineteenth-century industrial sector was not internationally competitive, the high rate of capital accumulation led to a rapidly growing demand for capital goods as well as learning by doing and collective invention. The accumulation of engineering experience provided knowledge inputs for the inventions that augmented adult labor…

The American development model was exceptional in the sense that it would not have delivered similar results if applied in poor countries…. Transportation investment, universal schooling, and tariff protection…. The tariff raised prices for consumers but… since relative factor prices were similar to those in Britain, so the transfer of advanced technology was profit maximizing…. [In] Egypt and India… it was not worth investing large sums to save cheap labor…. Traditional hand technology remained the least-cost choice of technique. In that circumstance, the America model was a non-starter, and more draconian policies were necessary for successful industrialization…

The United States was an outlying province of Britain–albeit an increasingly dynamic one. Both Britain and the United States were rich, while much of the rest of the world was poor. Indeed, globalization and the character of technological change widened the gap…


Reference:

Desperate & Semi-Despairing Night Thoughts About Ukraine

Can you negotiate a peace with sooooo many liars in the room? Is there an unstable path to Ukraine’s future?

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How can one try to negotiate a peace with a lying fantasist chaos monkey in the house—with multiple lying fantasist chaos monkey in the house—anyway?

If, for once, what Donald Trump says is true—if Vladimir Putin really has no objections to peacekeeping troops in Ukraine—then the end of the Putin war on Ukraine should be immediate:

  • International recognition of Russian acquisition of Crimea.

  • Plebiscites or “plebiscites” in eastern oblasts to determine which will join Russia.

  • Immediate free-trade zone between Ukraine and the EU with full membership to come later.

  • And NATO “training” and “peacekeeping” battalions all over the place.

But nobody believes Trump tells the truth. And so we have:

Robert Armstrong & Aiden Reiter: Investor sentiment vs consumer sentiment: ‘Vladimir Putin told Donald Trump that he had no problem with the presence of peacekeeping troops in Ukraine after the end of the war in that country. Or so Trump said yesterday. This is, in the words of one analyst, “bombshell” news that changes the odds of peace significantly — if it is true. But no one is sure if Putin actually said it, and if he said it, whether he meant it. So Trump’s comments didn’t even make front pages. In 2025, in politics as in markets, nobody knows what to believe… <https://www.ft.com/content/9734000e-b63f-4729-85f3-49561cba0801>

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Thus the problem is, as Rob Armstrong and Aiden Reiter point out, Trump is such a liar that what he says is worth reporting only for whatever clues it might give to his fantasy state of mind, rather than to any form of reality ground truth out there in the world.

But maybe now that Trump has claimed it, the door to that compromise peace, the one in which Putin gets to claim victory by establishing international recognition of Putin’s possession of Ukraine and ingathering more of the Great Russian people to the Motherland, is open a little bit?

Certainly the world should not ignore the problem. People have been dying at a horrific rate for three years now. Forcing complete and public defeat on a nuclear superpower was always too dangerous to be a victory condition you seek. And the fact that that was the public position of NATO led the very wise and humane Robert Skidelsky to be despairing of the path that brought us here:

Robert Skidelsky: Britain’s insistence on total Ukrainian victory was misguided – it’s time for a realistic compromise: ‘What was right was the forthright condemnation of Russia’s so-called “special military operation” in Ukraine…. [Yet] The contradiction between militaristic rhetoric and unwillingness to “do what it takes” to secure victory for fear of Russian retaliation was the crucial fissure in the British approach. No one was willing to risk nuclear war to save Ukraine. Logically, this should have led to a search by Ukraine’s supporters for a compromise peace…. But within the UK, the only acceptable condition of peace was a Ukrainian victory…. From my perch in the House of Lords I repeatedly heard ministers say it was up to Ukraine to decide when, and on what terms, to make peace… <https://www.theguardian.com/commentisfree/2025/feb/25/britain-ukraine-victory-compromise-peace-negotiations-uk>

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However, I was always more optimistic.

I had always interpreted “it was up to Ukraine to decide when, and on what terms, to make peace” as meaning something different. I saw it as a public message. And I saw, underneath it, a private message to Ukraine: Things will change, and while we will not now undermine you by saying “there must be peace soon”—and thus forcing you to accept whatever Putin offers in the next three months—you do need to get busy.

I had always thought that private message was being sent loud and clear by everyone except possibly Idiot Boris Johnson. (But I may have been wrong.)

Perhaps Putin thinks that peace can be made while Trump assures people that peacekeepers who will never actually appear will show up real soon now. And then he thinks he will be able to resume the war when he wishes. That is not a scenario Ukraine will accept. So the question is how to move to a scenario in which the peacekeepers actually do show up, rather than one with empty promises from Trump that they will.

Thus the urgency right now of Europe pointing out to Putin that they can and will step in to provide the support that Trump will not, that the fact that Trump is now trying to give away the store is irrelevant because the store is not his to give away, and that his semi-isolationist United States is not the relevant player here. Perhaps Putin’s victory conditions are already down, territorially to what he can get: Crimea and pieces of the eastern oblasts.

But the ultimate sticking point? Security guarantees? Actual rather than pretend ones?

Skidelsky rejects peacekeepers as ungettable:

Robert Skidelsky: Britain’s insistence on total Ukrainian victory was misguided – it’s time for a realistic compromise: ‘Can we somehow insert ourselves into a peace process that we repeatedly disdained? Certainly not by sending British “peacekeepers” to Ukraine, as Kier Starmer has suggested. Our prime minister must know this is a deal breaker, not maker, as there is not the slightest chance Putin will agree to it… <https://www.theguardian.com/commentisfree/2025/feb/25/britain-ukraine-victory-compromise-peace-negotiations-uk>

But maybe the fact that Trump says that Putin has agreed opens the door a sliver?

Maybe there is a place not for “peacekeepers” but rather “training battalions”, plus a restating of the 2004 peace agreement, but in which this time Ukraine’s guarantors agree not just to “consult” but to intervene if Ukraine’s sovereignty is infringed?

Just maybe this disaster is not doomed to continue or worsen over the next several years.

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Slides for Tomorrow's (2025-02-24 Mo) "American Exceptionalism" American Economic History Lecture

Why isn’t the United States of America one Giant Australia (or New Zealand)? Why the u.s. didn’t stay a land of farmers & miners. How infrastructure, immigration, scale, and not-stupid tariffs built an economic superpower…

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The Road Taken: How America Chose Hamilton Over Jefferson

The Natural Path: A Primary Product-Focused Economy

Standard economic logic—the principle of comparative advantage—would have, starting in 1789, pushed the settlement-conquest economy of the United States, so abundant in land and natural resources, to a comparative and competitive advantage as the world’s largest and most productive primary product-exporting economy. The basic intuition is straightforward: a country with an abundance of a particular resource is pushed by very powerful incentives to specialize in producing and exporting those goods which it can make with its relatively most abundant and hence relatively lowest=price resources, while importing that require resources it relatively lacks. The newborn United States, starting in the wake of the plagues that had devastated the First Nations of America and believing that God had called it to a Manifest Destiny to conquer and settle a continent, had a massive land frontier, rich soils, and extensive mineral deposits It was scarce in labor. It was scarcer in capital and in technologists. Those factors all pushed toward a comparative-advantage configuation in which it would have become the natural supplier of foodstuffs, cotton, timber, and metals to the industrializing economies of northwest Europe.

Indeed, there were very powerful—indeed, for most of the period before the Civil War, dominant—political and cultural forces also pushing America toward the development path of its initial-conditions comparative-advantage configuration. Farming, exporting, and rurality as the suitable and meet occupations for a free people is an idea associated with Thomas Jefferson and his political heirs. Commerce and industry and urbanity as a package is an idea associated with Alexander Hamilton and his political heirs. There is a giant Jefferson Memorial in Washington DC, on the Tidal Basin surrounded by cherry trees. There is no giant Hamilton Memorial.

Under this—natural—model, the U.S. would have exported raw materials while importing finished goods, much like Argentina, Australia, and New Zealand did. (Canada followed the U.S. pattern, as Ontario became part of the U.S. Midwestern industrial economy.). This economic trajectory would have created a wealthy agrarian society—with possibly a small élite of truly plutocratic resource barons—and sustained a relatively high-wage labor market due to land abundance. It would have delivered prosperity. But the prosperity would have been one with a relatively simple economic structure, without high complexity or deep industrialization. Moreover, once the best farmland was occupied and the mechanized tapping of the richest mineral deposits exhausted, population growth would likely have slowed. The primary-product-based economy would have lacked the ability to sustain large-scale urbanization, and hence there would have been no obvious reason for the huge flow of immigrants the historical U.S. attracted to come to an America where there was much less opportunity on the Lower East Side of Manhattan, in Southie in Boston, or on Taylor Street in Chicago,


The “Jeffersonian” Primary Product Trap(s)

Economic history teaches us that this particular comparative-advantage path carries substantial risks, in terms of wealth distribution, its long-term economic resilience, and its long-term economic growth. Specializing in primary products places an economy in a precarious position for several reasons:

  1. Inelastic Demand and the Distribution of Technological Gains
    When a country specializes in manufacturing, productivity gains from technological improvements tend to benefit producers, as demand for manufactured goods is more elastic—more and better cars, appliances, and electronics create new consumer markets. But for primary products, demand tends to be inelastic: people do not consume dramatically more wheat or iron ore just because production becomes more efficient. Instead, productivity gains drive down prices, disproportionately benefiting consumers and reducing the profits of producers. This means that while technological advances in manufacturing translate into wealth accumulation for the manufacturing country, advances in agricultural and mineral extraction often predominantly benefit the industrial consumers elsewhere rather than the raw material exporters.

  2. Economic Simplicity and the Fragility of the Division of Labor
    A primary-product-focused economy remains structurally simple. Unlike manufacturing, which develops extensive networks of suppliers, engineers, financiers, and skilled workers, primary product economies tend to cluster around a few major exports. This concentration makes the economy vulnerable to global demand shifts and price volatility. The result is a fragile economic structure, unable to sustain a broad division of labor and ill-prepared for the shocks of deglobalization.

  3. The Engineering Externality: Innovation Happens Where Engineers Are
    Industrial economies create communities of technological expertise—engineers, machinists, and scientists who work together in innovation hubs. These hubs generate vast knowledge spillovers that accelerate productivity growth. In contrast, primary-product economies merely adopt external innovations rather than generating them. By failing to cultivate homegrown technological expertise, primary-product economies miss out on long-term economic dynamism.

Given these disadvantages, remaining a raw material supplier to industrial Europe would have constrained American economic potential, leaving it structurally dependent on global markets for growth and innovation.


The “Hamiltonian” Turn: How America Chose Industrialization

Yet, the United States did not remain trapped in this trajectory. Instead, it embarked on a radically different path—one that prioritized technological, industrial, and educational investments. This divergence was neither inevitable nor automatic; it was the product of deliberate policy choices, political battles, and historical contingencies:

  1. Alexander Hamilton’s Vision
    One of the most consequential early voices for an industrialized America was Alexander Hamilton. In his 1791 Report on Manufactures, Hamilton argued that economic independence required a strong manufacturing sector. He proposed protective tariffs, government subsidies for industry, and infrastructure investments to nurture domestic production. His vision countered the Jeffersonian ideal of an agrarian republic, which saw manufacturing as a source of corruption and dependency.

  2. Tariff Protection and Industrial Policy
    Throughout the 19th century, the U.S. government actively protected nascent industries through high tariffs on imported goods, ensuring that domestic manufacturers could develop without being crushed by foreign competition. By the late 19th century, this protectionist approach had nurtured a robust industrial base, allowing American manufacturers to compete on the global stage.

  3. The American System of Manufacturing
    By the mid-19th century, American manufacturing had adopted key innovations—interchangeable parts, mass production techniques, and labor-saving machinery—that gave it a distinct competitive edge. Innovations such as the McCormick reaper in agriculture and the mechanization of textile and firearm production helped industrialization spread beyond traditional centers.

  4. Infrastructure and Scale
    The U.S. federal and state governments invested heavily in infrastructure—canals, railroads, and later highways—facilitating the movement of goods and labor. This infrastructure expansion helped integrate the national economy, creating economies of scale that reinforced industrial growth.

  5. Education and Human Capital
    Unlike Britain or continental Europe, the U.S. prioritized mass education early on, ensuring a literate workforce. The land-grant university system, established in the mid-19th century, played a crucial role in training engineers and scientists, further enhancing technological capabilities.

  6. Mass Immigration and Workforce Development
    The United States became a magnet for skilled and unskilled labor, drawing millions of immigrants who contributed to its industrial workforce. Unlike Australia or Argentina, which had similar resource endowments but smaller labor pools, America’s massive immigration waves allowed it to scale up industrial production rapidly.

  7. World War II and the Birth of the Military-Industrial Complex
    The final push that cemented America’s industrial supremacy was World War II. The war effort required massive production, leading to technological breakthroughs in aviation, computing, and materials science. The postwar order, shaped by American dominance, further reinforced its industrial strength.


Conclusion: The “Unnatural Path” That Became Destiny

Economic logic initially suggested that America would follow a natural resource-exporting model, much like Australia or Argentina. But thanks to strategic policy interventions—infrastructure investments, industrial subsidies, educational investments, and not-stupid tariffs—America shifted toward an industrial model that unlocked higher long-term growth.

The key lesson is that primary-product economies face structural disadvantages that limit their ability to control their own destinies. By choosing the path of manufacturing, innovation, and technological leadership, America not only escaped the primary-product trap but also positioned itself as the dominant economy of the 20th century.

Hamilton, it turns out, had the last laugh over Jefferson.

But how, exactly, did this reversal of fortune come to be?

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2025 02 24 Econ 113
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First Principles of Fiscal Policy, with Some of Their Practical Applications

My Godley-Tobin Lecture at the Eastern Economic Association’s annual meeting at the Sheraton Times Square hotel, New York, New York…
It has turned out to be a full-throated defense of Federal Reserve monetary policy in the 2020s: moving late & moving fast has been remarkably successful ex post, and was certainly much more than defensible as a strategy ex ante. We are very lucky to have had Jay Powell, his committee, and his staff in the hot seats so far this decade.

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Whether the Biden administration & the congress made a major mistake in 2021 with the American Rescue Plan and thus dealing the Fed a more difficult hand—that is a closer question, but I still come down on the side of no ex ante, although clearly yes ex post.

There remain two big questions:

The first is: Was the inflation of the first third of the 2020s was a bad thing, or a good thing—avoiding the worse outcome of possible recession and a return to secular stagnation on the one hand, and an essential component toward a very desirable sectoral and industrial reörientation of the American economy into a more productive configuration? I think that the balance of the evidence is that it was a good thing for all those reasons.

The second is: Are the political consequences of inflation—that it annoys every voter, and makes them all conclude that the government is not competent to fulfill its macroeconomic managemetn contract with the public—sufficiently bad to override the production-economics benefits of the inflation we just experienced? This question, I think, is in close balance. But I have been impressed by the fact that only voters misinformed about the economy broke for Trump, while voters who knew what was what for others as well as for themselves broke for Harris by large margins.

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HOISTED FROM THE ARCHIVES: Again, This Year, I Lament I Have No Opportunity to Give My "How to Think Like an Economist" Lecture

It seems to me that this is important stuff—that people really should know it before they begin studying economics, because it would make studying economics much easier. But it also seems to me—usually—that it is pointless to give it at the start of a course to 𝜈Bs: they just won’t understand it. And it also seems to me—usually—that it is also pointless to give it to students at the end of their college years: they either understand it already, or it is too late. By continuity that would seem to imply that there is an optimal point in the college curriculum to teach this stuff. But is that true? &, if so, when is it?
What do you think?…

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This year I just had time to spend five minutes on this, with one new slide:


Every new subject requires new patterns of thought; every intellectual discipline calls for new ways of thinking about the world. After all, that is what makes it a discipline: a discipline that allows people to think about a subject in some new way. Economics is no exception.

In a way, learning an intellectual discipline like economics is similar to learning a new language or being initiated into a club. Economists’ way of thinking allows us to see the economy more sharply and clearly than we could in other ways. (Of course, it can also cause us to miss certain relationships that are hard to quantify or hard to think of as purchases and sales; that is why economics is not the only social science, and we need sociologists, political scientists, historians, psychologists, and anthropologists as well.) In this chapter we will survey the intellectual landmarks of economists’ system of thought, in order to help you orient yourself in the mental landscape of economics.

For that reason I wrote up my “How to Think Like an Economist” Lecture, and each year lament that I do not have an opportunity to give it.

But at least my lamentations are limited: I have never managed to write up my “How to Think Like a Historian” lecture, so I have no excuse for lamenting my lack of an opportunity to give it:

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Economics: What Kind of Discipline Is It?

If you are coming to economics from a background in the natural sciences, you probably expect economics to be something like a natural science, only less so: You probably think that to the extent that it works, it works more or less like chemistry, though it does not work as well. It does not work as well because economic theories are unsettled and poorly described. It does not work as well because economists’ predictions are often wrong.

If you are coming to economics from a background in the humanities, you probably see it as a combination of two centuries out-of-date psychology and moral philosophy, coupled with obscure and often wrong—yet somehow authoritative in some way—mathematical manipulations.

If you hold either of these opinions, you are half-right.

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American Economic History Midterm This Friday!

Here are my slides for the pre-midterm review class… These are the things I want to have handy today, both to talk about the format and the types of questions that will be on the exam and also to answer substantive questions about the course that come up during the course of the class…

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(yes, there is an error in the answer chosen for question #5)
(Parenthetically, the illustration to the “Why Do Economics” slide: I asked ChatGPT to provide me with a picture of John Maynard Keynes talking to Adam Smith, Alfred Marshall, W. Arthur Lewis, and Claudia Goldin. It pretty much failed—but it failed most extremely in that Arthur Lewis definitely looks Afro-Caribbean and Claudia Goldin is a person of XX-ness. I wonder if programmers have been frantically unwoking ChatGPT? For it seems to me very odd that the internet-footprint association of “male, elderly, overdressed” with the word “economist” is so outweighing explicit references to W. Arthur and Claudia D. Claudia D., by now, must surely have a very impressive internet word-association footprint with which to tickle ChatGPT’s simulated neural network, no?)

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We start with the title slide, followed by slides on exam format, sample questions, and exam philosophy—this is for the most part a “police the reading” exam, in that the questions on it should be easy if you have done the reading, but not so easy if you have not. Then come two slides reminding students of what kind of course this is—an economic history course—and why such a combination might be better than either “pure” history or “pure” economics.

That brings us all the way to the end of the slides that I expect to put up. Later slides in the deck are to use to answer questions asked about the substance of the course, week-by-week.

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The way the course is going, it is not a standard chronological history with a Grand Narrative. It is, rather, episodes. In each week, readings are background, Monday lecture sets the stage with interesting economics and economics-related issues, Wednesday does calculations bringing economic models and methods to bear on those issues, and Friday I am reserving what would otherwise be lecture-prep and lecture time to quiz each of the 150 students one-on-one so I can figure out what they are thinking.

So far we have done:

  • WEEK 1: Introduction:American Exceptionalism”: Is America exceptional and thus worth studying for reasons other than that we happen to be here—or, rather, in what ways has America been and is now exceptional, and how does that matter?

  • WEEK 2: American Economic Growth in Long-Run Global Perspective: What is the shape, historical and global, of human economic growth—and how does America fit into that bigger picture?

  • WEEK 3: The Conquest-Settlement Resource-Grab Economy: What is overly politely called “the frontier” and its role in American history—How much did it matter for what America had become by 1880 that it believed for both utilitarian and sacred reasons that it has a “Manifest Destiny” to conquer a resource-rich continent? 60%…

  • WEEK 4: Slavery, Civil War, & After: Who really benefitted most from the “peculiar institution” of Southern plantation slavery?—and how much?

Still to come, after this WEEK 5: Review & Midterm, are:

  • WEEK 6: American Exceptionalism, 1789-2025: Comparative Advantage & Industrial Policy—What was the balance of economic forces and factors that diverted America from the standard resource-heavy economic configuration of “economies of northwest European settlement”?

  • WEEK 7: The 2nd Industrial Revolution, 1850-1910: Technological Change—What factors transformed America from an 0.4%/year technology-growth economy before 1870 to a 2.5%/year technology-growth economy after 1870?

  • WEEK 8: Immigration: Labor Economics—What would America be like today if it had not been an immigrant welcoming and assimilating society?

  • WEEK 9: Feminism, 1776 to Present: Feminist Economics—it ought to be 1/3 of economics, and it ain’t, so what role did economic factors play in the decline of High Patriarchy we have seen over the past century and a half?

  • WEEK 10: The Mass Production Economy, 1908 to 1980: Increasing Returns & Industrial Organization—where did Big Business as we have known it come from, and what difference did its emergence make for how the American economy has worked and works today?

  • WEEK 11: The Social-Democratic New Deal Order: Political Economy—How did America become and for a good long while remain a social-democratic society of Big Business, Big Labor, and Big Government, and what differences did that make vis-à-vis a continuation of something like the Belle Époque Pseudo-Classical Semi-Liberal Gilded Age Order?

  • WEEK 12: The Rise of Silicon Valley, 1950 to 2025: Invention, Innovation, & Finance—from the Mass-Production through the Globalized Value-Chain to the Attention Info-Bio Tech Economy.

  • WEEK 13: Inequality & Economic Mobility, 1945 to 2025: Human Capital—How much difference did it make that we shifted from the New Deal Order of the Mass-Production Economy to the Second Gilded-Age Neoliberal Order of the Globalized Value-Chain Economy?

  • WEEK 14: The Attention Info-Bio Tech Economy & The Future, 2000 to ?: What comes next?—& how does what has come before illuminate it?

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Blame the Right-Wing Noise Machine, Not the Facts on the Ground, for Voters' Dismay About the Economy

No, our economic statistics were not painting us an unusually rosy picture last fall. Yes, the state of the American economy is very disappointing. But the gap between what the statistics tell us and the amount of disappointment present in the actual reality—there was no sense in which that gap was unusually large last fall…
America’s economic data wasn’t hiding an unusual crisis—voters were just misled into believing one existed. The real distortion was in the narrative being fed to and believed by voters. Yes, America’s underemployment and inadequate wage rate is 24%, but that or worse has always been the case. And to say that there was an unusual gap between reality on the one hand and official statistical measures on the other is simply wrong…

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A rather odd piece last week from the smart, thoughtful, and usually careful Gene Ludwig:

Gene Ludwig: Voters Were Right About the Economy. The Data Was Wrong: Here’s why unemployment is higher, wages are lower and growth less robust than government statistics suggest…. Many Democrats were puzzled by the seeming disconnect between “economic reality” as reflected in… statistics and the public’s perceptions…. They charged that right-wing echo chambers were conning voters into believing entirely preposterous narratives about America’s decline…. What they rarely considered was whether something else might be responsible for the disconnect — whether, for instance, government statistics were fundamentally flawed… <https://www.politico.com/news/magazine/2025/02/11/democrats-tricked-strong-economy-00203464?cid=apn>

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And:

Gene Ludwig: Voters Were Right About the Economy. The Data Was Wrong: ‘The filters used to compute the headline statistics are flawed… paint a much rosier picture of reality than bears out on the ground. Take, as a particularly egregious example… unemployment. Known to experts as the U-3, the number misleads…. It counts as employed the millions of people who are unwillingly under-employed…. It does not take into account many Americans who have been so discouraged that they are no longer trying…. [It] does not account for the meagerness of any individual’s income…. I don’t believe those who went into this past election taking pride in the unemployment numbers understood that the near-record low unemployment figures — the figure was a mere 4.2 percent in November — counted homeless people doing occasional work as “employed”…. If you… include as unemployed people who can’t find anything but part-time work or who make a poverty wage (roughly $25,000), the percentage is actually 23.7 percent. In other words, nearly one of every four workers is functionally unemployed in America today — hardly something to celebrate… <https://www.politico.com/news/magazine/2025/02/11/democrats-tricked-strong-economy-00203464?cid=apn>

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My first reaction is: This has always been the case. Always.

And the Bureau of Labor Statistics knows this.

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Gini Coefficients...

Yes, 0 is complete equality and 1 is complete inequality; but, in between, what do they mean, really?
What meaningful distinctions do intermediate values convey? I keep on trying to gain intuition, and I fail—or rapidly lose it when I do think I have gained some…

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Earlier this semester, I put this chart from Milanović, Lindert, & Williamson (2011)
<https://piketty.pse.ens.fr/files/MilanovicLindertWilliamson2011.pdf> up in front of some of my students:

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And then I felt as though I had to give them some intuition as to what the vertical axis on the damned thing meant—what a Gini Coefficient actually means.

I felt I need to do so because I do not have much intuition for that, and everytime I think I have gained some, I then find that I have rapidly lost it.

Yes, a Gini of 0 is complete equality. Yes, a Gini of 1 is complete inequality—one person has all the [income, wealth, consumption]. But was China’s Gini of 0.25 in 1880 meaningfully different from complete equality? Was Holland’s 1732 Gini of 0.62 meaningfully different from complete inequality? And did life in Brazil in 1872, with a Gini of 0.43, as far as inequality is concerned, feel meaningfully closer to China or Holland—or was it qualitatively as well as quantitatively equally different from the two?

Here is what Corrado Gini’s definition of the coefficient says that it means:

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HOISTED FROM THE ARCHIVES FROM 1998: Robber Barons

“Industrial Statesmen”, Robber Barons, & billionaires: wealth, power, & the politics of fortune from railroads to Silicon Valley—how the rules of capitalism shape who becomes ultra-wealthy, & what that means for the rest of us…

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The extremely sharp Duncan Weldon says:

Duncan Weldon: ‘Been re-reading @delong.social’s very fine 1998 Robber Barons essay. Highly recommend… <https://bsky.app/profile/duncanweldon.bsky.social/post/3lhouidgwbk2c>

But the version he links to has some broken image links (not that 1990s MacPaint images are worth much. So here is a cleaner one:

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I. Introduction

‘Robber Barons’: that was what U.S. political and economic commentator Matthew Josephson (1934) called the economic princes of his own day. Today we call them ‘billionaires.’ Our capitalist economy–any capitalist economy–throws up such enormous concentrations of wealth: those lucky enough to be in the right place at the right time, driven and smart enough to see particular economic opportunities and seize them, foresighted enough to have gathered a large share of the equity of a highly-profitable enterprise into their hands, and well-connected enough to fend off political attempts to curb their wealth (or well-connected enough to make political favors the foundation of their wealth).

Matthew Josephson called them ‘Robber Barons’. He wanted readers to think back to their European history classes, back to thugs with spears on horses who did nothing save fight each other and loot merchant caravans that passed under the walls of their castles. He judged that their wealth was in no sense of their own creation, but was like a tax levied upon the productive workers and craftsmen of the American economy. Many others agreed: President Theodore Roosevelt–the Republican Roosevelt, president in the first decade of this century–spoke of the ‘malefactors of great wealth’ and embraced a public, political role for the government in ‘anti-trust’: controlling, curbing, and breaking up large private concentrations of economic power.

Their defenders–many bought and paid for, a few not–painted a different picture: the billionaires were examples of how America was a society of untrammeled opportunity, where people could rise to great heights of wealth and achievement on their industry and skill alone; they were public benefactors who built up their profitable enterprises out of a sense of obligation to the consumer; they were well-loved philanthropists; they were ‘industrial statesmen.’

Over the past century and a half the American economy has been at times relatively open to, and at times closed to the ascension of ‘billionaires.’ Becoming a ‘billionaire’ has never been ‘easy.’ But it was next to impossible before 1870, or between 1929 and 1980. And at other times–between 1870 and 1929, or since 1980–there has been something about the American economy that opened roads to the accumulation of great wealth that were at other times closed.

Does it matter whether an economy is open to the accumulation of extraordinary amounts of private wealth? When the economy is more friendly to the creation of billionaires, is economic growth faster? Or slower? And what role does politics play? Are political forces generally hostile to great fortunes, or are they generally in partnership? And when the political system turns out to be corrupt–to serve as a committee for extracting wealth from the people and putting it into the pockets of the politically well-connected super-rich–what is to be done about it? What can be done to curb explicit and implicit corruption without also reducing the pressure in the engine of capital accumulation and economic growth?

These are big questions. This essay makes only a start at answering them.

After this introductory section, the second part of this essay reviews the economic history of America’s great fortunes over the past hundred and fifty years. It tries to draw connections between the wealth of those at the very top of the wealth distribution and wider measures of economic inequality and growth.

The third section of this essay focuses on the robber barons of a century ago. How did they make their money, by and large? The fourth section focuses on a few case studies in which politics–political influence and leverage–turned out to be more than usually important in creating and maintaining great fortunes.

The fifth and last section draws somewhat optimistic conclusions. If the presence of billionaires does not seem to materially accelerate economic growth, at least it does not significantly retard it–and it may reflect eras of structural change that lay the groundwork for subsequent rapid leaps of economic growth. If democratic politics withes to curb private accumulations of wealth, it can do so without materially affecting long-run rates of growth. There are cases in which wealth and political power work in partnership, and in which the government becomes a committee for the exploitation of the rest of society for the sake of the politically powerful. But even corrupt democratic governments are not that corrupt, and genuine public purposes are accomplished in the making of great fortunes.

Since this is a Carnegie Endowment publication, I should pause here for an aside: among the chief of the robber barons was Andrew Carnegie, the turn-of-the-last-century steelmaster who dominated American heavy industry and who subsequently established the Carnegie Endowment to promote world peace–to try to work toward a world in which Ministers of Foreign Affairs would cease to think of bombs and bullets and think, instead, of trade and dialogue. Like most of the robber barons, Carnegie was a mass of contradictions–as if he was not one but three or four different people at once.

There was the son of the Scottish peasant, who had been forced off the land to America when the landlords wanted to replace peasant farmers with grazing sheep and when the coming of the power loom to Britain had destroyed the livelihood of the perhaps 4% of the British population who wove thread into cloth by hand in their cottages–the so-called ‘handloom weavers.’ There was the extremely energetic and intelligent young-man-in-a-hurry in the U.S. telegraph and railroad industries, trying to impress his supervisor Thomas Scott, a high Pennsylvania Railroad executive, with his diligence and foresight.

There was the iron master who had the best grasp in America of what the best technologies for making iron and steel were going to be–and who had the (rare) sensibility to recognize where potential economies of scale were so large that the best business strategy was to build up capacity well ahead of demand and then use it by underselling all your competitors.

There was the union-buster who unleashed his lieutenant Henry Clay Frick to destroy the Amalgamated Iron and Steel Workers union’s control over the Homestead, Pennsylvania steel plant: one of the bloodiest episodes in the already-bloody nineteenth century history of American labor relations.

There was the senior industrialist who threatened the financial capitalist J.P. Morgan with an extended price war that would cost Carnegie perhaps $100 million (a large sum, at that time: think of it as the equivalent of perhaps $8 billion today) but that would in all likelihood bankrupt the sprawling, less-efficient steel firms that Morgan had assembled–who threatened Morgan with this unless Morgan were to raise the money on Wall Street to buy Carnegie out. Morgan did so, and claimed that he had made Carnegie the richest man in the world.

And there was the philanthropist trying to figure out what to do with all his money–and deciding that the thing to do was to establish the Carnegie Endowment for International Peace, and to subsidize the building of libraries all across the United States. He was a man of great powers, of great flaws, of great benevolence, and great ruthlessness.

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II. Wealth Concentration and ‘Billionaires’

A. Economy-Wide Wealth Concentration: When the United States was founded in 1776 it was–Black slavery very much definitely aside–a relatively equal, and relatively free, society (see Jones, 1980). It was relatively equal because the indigenous population had not yet recovered from the wave of Eurasian diseases brought by Christopher Columbus, and they had no military technology to match that of the European settlers. So land was essentially free. And landlords–and rent–were unknown.

The United States was relatively equal because it was only relatively free. If you were white, the country was sparsely populated enough that anyone who did try to make you an ‘indentured servant’–essentially a serf–soon found that he had to treat you like a free laborer, or see you leave town with no possibility of return.

But if your skin was anywhere near black, the presumption was that you were somebody’s slave.

As best we can tell, the United States at its founding had about the same level of wealth concentration as in the mid-1970s, at the high tide of the redistributional push of the post-Great Depression social insurance state. Perhaps 18 percent of the wealth was held by the wealthiest one percent of households.

Between the Declaration of Independence and the end of America’s Civil War in 1865 wealth concentration increased a little. On the one hand the slaves were freed (although their ‘freedom’ was a transition from being chattel property to being a despised and oppressed minority). On the other hand agricultural land located close to major transportation routes was no longer effectively free. We acquired landlords, and the first industrialists.

Between 1870 and 1900 the United States became an industrialized economy–the leading industrial nation in the world. And wealth became markedly more concentrated. We think that the share of national wealth held by the richest one percent of households peaked at around 45 percent sometime around 1900.

After 1900 the concentration of wealth began a slow decline. Wars–and the higher taxes and inflation that accompanied them–took a heavy toll of the financial wealth of the rich. Stock market booms (like the 1920s and the 1960s) saw wealth concentration take a step upward; but prolonged bear markets (like the 1930s and the 1970s) eroded wealth concentration. The coming of the social-democratic social insurance state eroded wealth concentration: near-universal education boosted the productivity and wages of those near the bottom of the pyramid, progressive income and estate taxes trimmed some wealth off the top, and explicit government wage policy–minimum wages, restrictions on connections between finance and industry, and support for union-centered collective bargaining–shifted the distribution of income and wealth toward labor without producing mammoth amounts of classical unemployment (see Lindert and Williamson, 1976).

Economists still argue over the extent to which the severe restrictions on immigration introduced in the 1920s diminished the supply of unskilled labor and so led to diminished wealth concentration (see O’Rourke and Williamson, forthcoming).

Whatever the causes, wealth concentration fell, and further in the 1960s as a result of the expansion of social democracy and in the 1970s as a result the collapse of the real value of the stock market and the inflation of the 1970s.

And whatever the causes, the period since the mid-1970s has seen wealth concentration in the United States increase more rapidly than ever before–even during the heyday of industrialization in the last decades of the nineteenth century. Aggregate measures of wealth concentration today are greater than at any time since the election of Franklin D. Roosevelt in the Great Depression, and are within striking distance of the peak in wealth concentration reached during the Gilded Age (see Wolff, 1994).

B. Billioniares: Overall shifts in wealth concentration are matched by changes in the wealth of those at the very top of the income distribution. Today we call those at the very top of the income distribution ‘billionaires’–for their wealth is more than one billion dollars. According to Forbes Magazine’s attempts to count, the year 1996 saw some 132 billionaires in America–and of the top twenty, at least four owed their wealth to Microsoft: the three Microsoft billionaires William Gates, Paul Allen, and Steven Ballmer, and Intel founder Gordon Moore whose wealth has been greatly multiplied by the synergies between Microsoft software and Intel microprocessors over the past two decades.

Generalize the idea of a ‘billionaire’: a billionaire in the past is someone whose estimated total wealth then was as large a multiple of average GDP per worker in the United States then as a billion dollars today is a multiple of average GDP per worker in the United States today. Note that this generalization arbitrarily ignores a number of issues. Let me mention one: perhaps we are more concerned not with wealth but with control. After the death of the elder J.P. Morgan, Standard Oil company president John D. Rockefeller reportedly remarked that Morgan–who had died with an estate worth (then) less than $100 million or so (the equivalent in relative income terms of perhaps $8 billion today)–was ‘not even a very rich man’ (see Carosso, 1987). And Morgan was not very rich, if you happened to be John D. Rockefeller. But during the panic of 1907 when all factions of New York’s financial oligarchy were working together to try to keep the network of financial claims from collapsing into near-universal over-leveraged bankruptcy, Rockefeller and his people had done exactly what Morgan and his people had asked when they had asked them to do it (see Corey, 1930). Morgan’s power appeared to vastly exceed his wealth.

Focusing on wealth relative to the median income, however, on this definition there are today in America five and a half times as many billionaires today as there were in 1982–132 compared to 23. And there were half again as many billionaires in 1982 as there had been in 1957–when it appears that there were 16. That was a low point. 1925 saw approximately 32 billionaires. 1918 saw approximately 30. And 1900 saw approximately 22.

A generation before 1900 we find few. In 1865 there may have been two billionaires–William B. Astor (whose father John J. Astor had made a fortune in the fur export trade, and who had compounded it by investing in New York City real estate), and Jay Cooke (who had sold the bonds that had financed the United States government’s successful suppression of the slaveholders’ rebellion in the Civil War of 1861-65). But perhaps not.

A billion dollars today is the total economic product of 20,000 average workers in the United States. Not even the richest of the pre-Civil War southern slaveholders disposed of that much property. And probably William Astor and Jay Cooke did not, at least not at the end of the Civil War.

It is striking how closely numbers of ‘billionaire’ match shifts in aggregate wealth inequality: when the frequency of billionaires in the labor force is high, wealth concentration is high. A simple linear regression predicts that the frequency of billionaires would drop to zero should the share of wealth held by the top one percent drop to twenty percent or so–and, indeed, we find no billionaires back when wealth concentration was so low.

Economic historians try to account for the history of wealth concentration byf the changing dynamic of the supplies of factors of production and of the changing technologies of production. Their stories sound convincing. But the factors they appeal to are very different from those factors that lead to the appearance and disappearance of very great fortunes. Very great fortunes have three origins:

  • inheritance, plus a stock market boom.

  • persuading the government to do your enterprise a truly massive favor. being at the right place at the right time: creating an enterprise of truly enormous social utility–and thereafter both retaining the market power to turn a large chunk of that extra social utility into firm profits, and

  • retaining a sufficient ownership share and access to capital markets to turn capitalized firm profits into an enormous fortune.

These causes of immense wealth have little to do with the determinants of the relative supplies of skilled and unskilled workers, or with the technological requirements of production. It makes me think that the overall level of wealth concentration is much more a ‘political’ and a ‘cultural’ phenomenon than an ‘economic’ one: that we through our political systems and our attitudes have much more to do with the concentration of wealth than does the dance of factor supplies and technology-driven factor demands.

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III. The Robber Barons of a Century Ago

A. The Robber Barons of 1900: Look at America’s billonaires as they stood at the peak of wealth concentration–and the peak of the relative frequency of billionaires– in approximately 1900. Nine out of the twenty-two fortunes were railroad fortunes: fortunes made constructing and operating the 200,000 miles of railroad track that were built to cover the United States in the nineteenth century. Three of the fortunes were inherited. Five were in finance–and in 1900 finance meant almost exclusively railroad finance.

There were a few non-railroad fortunes: one ironmaster (Andrew Carnegie), a couple of department store owners, and stray fortunes derived from other industries. But you do not go too far wrong if you remember that the first wave of American billionaires’ fortunes were railroad fortunes.

So how do we evaluate these railroad fortunes? What do we think of names like Leland Stanford, Colis Huntington, Jay Gould, and James J. Hill?

First, we think that they were very different people. James J. Hill was a superb engineer and manager. E.H. Harriman had extraordinary abilities to pick engineers to improve the operations of the Union Pacific Railroad. His friends said that E.H. Harriman (father of future U.S. Ambassador to the Soviet Union Averell Harriman) was honest and incorruptible.

His enemies had a different view. There was one stockholder’s meeting at which E.H. Harriman, as chairman, made the surprise ruling that because the corporation laws of the state of Illinois did not recognize proxies, that the part of the corporation’s bylaws which did recognize proxy votes was illegal and could not be applied. Hence the proxy votes of his clients that J.P. Morgan had brought to the meeting were invalid, and J.P. Morgan’s candidates for the Board of Directors would not be elected (see Corey, 1930).

This is the second thing about the robber barons: they all were ruthless.

But everyone agreed that they would rather do business with E.H. Harriman than with Jay Gould, who never bothered to learn anything about railroad operations, costs, or technology. While Secretary of the Erie Railroad, Jay Gould refused to enter the shares that British investors had bought on the company’s books–hence disenfranchising foreign investors. The Erie’s stock price plummeted, as investors concluded that Jay Gould was paying the railroad’s money into shell construction companies that Gould owned and were doing no work. Eventually Jay Gould mortgaged his other assets, bought up shares of the Erie, and announced his retirement from involvement in the railroad. The Erie’s stock price jumped–investors rejoiced that Gould would not be around in the future to loot the railroad. But approximately one-fifth of the capitalized expected future value of not having to deal with Jay Gould in the future went straight into Gould’s own pockets (see Adams, 1886; Adams, 1916).

And this is the third thing to note about the turn of the century robber barons: even though the base of their fortunes was the railroad industry, they were for the most part more manipulators of finance than builders of new track. Fortune came from the ability to acquire ownership of a profitable railroad and then to capitalize those profits by selling securities to the public. Fortune came from profiting from a shift–either upward or downward–in investors’ perceptions of the railroad’s future profits. It was the tight integration of industry with finance that made the turn of the twentieth century fortunes possible.

The fourth thing that stands out about the robber barons is how completely, totally corrupt they all were–or, rather, if we allow them to defend themselves, how completely and totally corrupt was the system in which they were embedded. As Californian Collis Huntington reportedly wrote in 1877, explaining why he was in Washington D.C. pouring bribe money out like water:

If you have to pay money [to a politician] to have the right thing done, is is only just and fair to do it…. If a [politician] has the power to do great evil and won’t do right unless he is bribed to do it, I think… it is a man’s duty to go up and bribe (see Josephson, 1934) …

B. Early in the Twentieth Century: Between 1900 and 1930 the list of billionaires grows (from 22 to 30 or so). It loses its concentration around railroads and their financing. The industries in which the billionaires of 1918 made their fortunes are highly diverse: photography, retailing, chemicals, tobacco, farm machinery, automobiles, food processing, local municipal railroads, oil, steel, and finance.

Two things are worthy of note about the billionaires of 1918:

First, their industries are almost identical to those that Chandler (1982) studied in his book on the rise of the modern managerial corporation. They were all industries in which there was the potential for enormous economies of manufacturing scale through the application of technology. They were all industries in which attaining the volume of sales necessary to come anywhere close to realizing such economies of scale depended on the ability to sell to a national market. The railroad network had to be in place to allow the products to be shipped cheaply and quickly, and firms had to invest in building up a sales network to support nationwide distribution.

In industry after industry Chandler finds the seeming paradox: near monopoly or near oligopoly (as larger competitors take advantage of economies of scale to drive out smaller ones), coupled with falling prices (as near-monopolists and oligopolists find their marginal cost curves falling as output expands).

The billionaires of 1918 or so come as close as we will ever find to being examples of situations in which enormous wealth comes from being in the right place at the right time–able to build large organizations to take advantage of hitherto unexploited economies of scale, and retaining large enough ownership stakes and access to the capital market to then transform expected future profits into present wealth.

Second, what turned these individuals into billionaires was Wall Street’s willingness to buy their companies. In case after case–and this is where the financiers of 1918 got their billion dollar fortunes–the financier’s job was to allow the founding entrepreneur to retire, to bring in a professional management to keep the business going, and to reassure those who are going to purchase the founding entrepreneur’s ownership share that this is a prudent and worthwhile investment.

The jump in wealth of the founders of these lines of business was intimately tied up with the creation of a thick, well-functioning market for industrial securities. And that would turn out to be a source of weakness when Wall Street came under fire during the Great Depression.

C. Other People’s Money: Many in America in the first thirty years of this century feared and hated the super-rich. Some feared and hated the super-rich because they thought that the rich corrupted the legislature. They were not completely wrong: Senator Aldrich from Rhode Island, for example, was called the ‘Senator from Standard Oil.’ Indeed, his descendants married the Standard Oil clan: recall that the American Vice President in the 1970s, Nelson A. Rockefeller, was Nelson Aldrich Rockefeller. People who wanted to compete with the Pennsylvania Railroad by building an alternative line from west to east across the Apallachian mountains somehow found that their requests for Pennsylvania corporation charters never emerged from the committees of the Pennsylvania legislature.

But rather more feared the super-rich not because they corrupted politics (or, in the view of the super-rich, were exploited by a politics that was already corrupt), but because they had power.

‘They control the people through the people’s own money.’ So wrote left-wing crusader and future Supreme Court Justice Louis Brandeis in 1913, as he tried to mobilize Progressives for a political offensive to break the financial stranglehold that he saw John Pierpont Morgan, Morgan’s partners, and their few peers hold over America at the turn of the century (see Brandeis, 1913). Every time in the first decade of the twentieth century that an American corporation had sought to raise more than $10,000,000 in capital, it had done so by hiring the services of and paying commissions to the partnership of J.P. Morgan & Co or one of three other, smaller investment banks.

If Morgan did not think he should help a corporation raise money, money would not be raised. The firm’s expansion plans would not be carried out. The flow of investment in the United States was thus directed to and the expansion of industrial capacity took place in industries and firms that Morgan and his few peers wished to see expand, not elsewhere.

This was the reverse side of the role played by J.P. Morgan and his peers in helping entrepreneurs retire from their companies and capitalize their fortunes. To the extent that successful participation by a company in the market for industrial securities required that Morgan or one of his peers validate the company’s prospects–and Morgan and his peers did all think alike–the Wall Street financial oligarchy did have a surprisingly large ability to direct American investment in large corporations around the time of World War I (see U.S. Congress, 1913).

The perspective from the high seats of the partnership of J.P. Morgan and Company, or from those of the other billionaires of 1920 whose wealth was founded upon dominant market positions in industries with increasing returns to scale was very different. In the view of Morgan’s partners, they appeared to have power over the economy only because investors trusted their financial judgment. If they did anything other than fund those lines of business that promised the highest profit, they would soon find their ability to direct the flow of capital vanishing. In the view of any of the others, their wealth depended on their commitment to sell at the lowest price and in the highest volume. If they did anything else, they would soon find one of their competitors outstripping them in economies of scale, and they would soon vanish (see Carosso, 1987).

Their attitude was similar to that you find the Microsoft billionaires expressing today. ‘Yes,’ they say:

We have a dominant market position and enormous profits. But IBM had a dominant market position and enormous profits in 1988. Wang Laboratories had a dominant market position and enormous profits in 1983. If we do not pay close attention to the market, Novell or Netscape or Sun or some competitor now unknown could destroy our business in the next decade–even though we do have 90% of the market today.

But the Progressives did not believe that the billionaires were just the helpless puppets of market forces. In 1896 Democratic presidential candidate William Jennings Bryan called for the end to the crucifixion of the farmer by a gold standard working in the interests of Morgan and his fellow plutocrats. Fifteen years later Louis Brandeis warned Morgan partner Thomas Lamont–after whom Harvard University’s main undergraduate library is named-that it was in fact in Morgan’s interest to support the Progressive reform program. If Morgan’s partners did not do so, Brandeis warned, the Progressives would recede. Their successors on the left wing of American politics would be real anarchists and real socialists (DeLong, 1991).

Louis Brandeis and company did not much care whether the billionaires of what they called the ‘money trust’ were in any sense economically efficient. In Brandeis’s mind, they evil because their interests were large. Brandeis saw American development as depending on:

the freedom of the individual. The only way we are going to work out our problems in this country is to have the individualfree to work and to trade without the fear of some gigantic power threatening to engulf him every moment.

Thus size alone made a billionaire’s fortune ‘dangerous, highly dangerous.’

Given the heat of political hostility, it is somewhat surprising to me that the large fortunes lasted as long as they did. The so-called ‘money trust’ was subject to two major congressional investigations. The first took place in 1912-1913, and was conducted by a special House committee counseled by Samuel Untermyer (a former lawyer for the Rockefeller interests whom, it appears, was unhappy at least in part because he thought he had not received his proper share of the profits from the creation of the Amalgamated Copper Company; see U.S. Congress, 1913; Lawson, 1905). The second took place in 1932-1933, and was conducted by the Senate Banking Committee.

Populists from the American midwest found this set of issues a reliable one, and their senators took turns calling for political and economic changes to reduce the power exercised by the super-rich. (Note, however, that the son of one of these midwestern senators–the Charles Lindbergh who was the first to fly nonstrop across the Atlantic Ocean–married Anne Morrow, the daughter of J.P. Morgan and Company partner Dwight Morrow.)

The political debate was resolved only by the Great Depression.

The presumed link between the stock market crash and the Depression left the securities industry without political defenders. The old guard of Progressives won during the 1930s what they had not been able to win in the three earlier decades.

Ironically, it was Republican president Herbert Hoover who triggered the process. Hoover thought that Wall Street speculators were prolonging the Depression and refusing to take steps to restore prosperity. He threatened investigations to persuade New York financiers to turn the corner around which he was sure prosperity waited. Thus, as Franklin D. Roosevelt put it, ‘the money changers were cast down from their high place in the temple of our civilization.’ The Depression’s financial market reforms act broke the links between board membership, investment banking, and commercial banking-based management of asset portfolios that had marked American finance before 1930. Investment bankers could no longer be commercial bankers. Depositors’ money could not be directly used to support the prices of newly-issued securities. Directorates could not be interlocked: that bankers could not be on the boards of directors of firms that were their clients.

D. The Drying-Up of the Inflow of New Billionaires: Whatever else Depression-era financial reforms did (and there are those who think it crippled the ability of Wall Street to channel finance to new corporations) and whatever else the New Deal did (and it did a lot to bring social democracy to the United States and to level the income distribution), one important–and intended–consequence was that thereafter it was next to impossible to become a billionaire.

Not that it was ever easy to become a billionaire, mind you, but the channels through which lucky, skilled, dedicated, and ruthless entrepreneurs had ascended were largely closed off.

Power to commit large sums of money to industrial or other enterprises no longer rested in the hands of Wall Street financiers: there was no possibility for someone who was basically on operating company executive Leland Stanford or a Charles Schwab raising money on Wall Street or otherwise by large-scale borrowing: to borrow on a large scale you had to be an investment banker divorced from manufacturing or construction operations, or a commercial banker divorced from both operations and from securities issues.

A Charles Schwab or a Leland Stanford could then direct the flow of finance to an enterprise that would provide him with an enormous fortune. But after 1933 an investment banker–a Douglas Dillon or a Prescott Bush–would have to turn the money raised over to professional operating managers because of the separation of ownership from control.

Thus between the late 1920s and the mid 1950s the number of billionaires in America dropped in half as the labor force grew by at least forty percent. Old billionaires dropped off the list; new ones were rarely added. If not for two industries–aluminum, and oil–the proportion of billionaires would have dropped much further and faster. Aluminum proved to be a source of enormous wealth because of aluminum’s unique, lightweight role in the aircraft industry (especially the military aircraft industry) and because of the near-monopoly over Jamaican sources of ore held by Alcoa, the Aluminum Corporation of America. Oil proved to be a source of enormous wealth because there was a lot of oil in the ground, and a lot of people willing to make very risky bets on undeveloped Texas oilfields in the hope of becoming very rich.

The hostility of Roosevelt’s New Deal to massive private concentrations of economic power was effective: the flow of new billionaires dried up, as the links between finance and industry that they had used to climb to the heights of fortune were cut.

Did the hostility of America’s political and economic environment to billionaires between 1930 and 1980 harm the American economy? Did it slow the rate of economic growth by discouraging entrepreneurship? As an economist–someone who believes that there are always tradeoffs–I would think ‘yes.’ I would think that there must have been a price paid by the closing off of the channels of financing for entrepreneurship through which E.H. Harriman, James J. Hill, George F. Baker, Louis Swift, George Eastman, and others had made their fortunes.

But if so, there are no signs of it in aggregate growth data. Taken together the 1930s and the 1940s were average decades as far as long-run economic growth is concerned. And the 1950s and 1960s were definitely above-average decades as well. There were worries that the absence of industrial princes was harming the American economy. Early in the 1930s Adolf Berle and Gardiner Means (1932) raised the possibility that the relative decline of investment banking meant that firm executives had become effectively independent. Executives could use the resources of the firm to rally support for their slates of candidates in annual meetings, while slates of potential executives opposed to current management had no effective channels to use to rally support.

Before 1929 a potential insurgent management team seeking a change in a firm’s policy could have gone to talk to Morgan. If he found their arguments convincing the old management might soon be gone and old policies reversed. After 1945 they had to find some way of reaching widely-scattered individual shareholders and of convincing them that it was worth their while to support a change of control. This lack of long-term relationships between those investors who provided the money and the managers who governed the corporation frightened even John Maynard Keynes. But it is very hard to put a solid quantitative shape onto these fears: it is hard to see any quantitative evidence that the political backlash against the billionaires harmed the American economy.

E. The Return of the Super-Rich: The years since 1980 have seen the return of the super-rich in the United States. Some of this is due to the great stock market boom of the past decade and a half, which has carried many of those who inherited their wealth and whose ancestors had never achieved ‘billionaire’ status into the billionaire category. These are America’s first true inherited aristocracy: the first generation of those with immense social and economic power who have inherited it.

More of the return of the super-rich is due to the blurring of the lines between financiers and corporate managers as the Depression-era order of American finance has fallen apart. It is once again possible to raise large sums of money and then direct them to suit one’s own interest, rather than turning them over to salaried managers interested in perpetuating organizations.

And perhaps we can discern the rise of a new ‘leading sector,’ akin in the creation of many of America’s present-day billionaires to the role played by the railroads in late nineteenth century America. Combine electronics, software, entertainment, and telecommunications, and you have what may become one single industry early in the next century–and an industry that is producing a very large share of the current crop of billionaires: a quarter or more.

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IV. Wealth and Politics

In the 1860s, on the western slope of California’s Sierra Nevada mountain range, Colis Huntington and Leland Stanford won a government contract to build a railroad from San Francisco to the east. The government offered them, in incentives, $24 million in government financing and 9 million acres of land. They had then negotiated with the cities and towns of central California: if a town did not contribute funding to the railroad, the railroad would avoid that town–and it would in due course disappear.

It was claimed that Huntington, Stanford–then also Governor of California–and their partners had built the railroad without putting up a dime of their own money (see U.S. Congress, 1873).

By 1869 they had built the Central Pacific Railroad was built, from San Francisco out to Ogden, Utah, where it met the Union Pacific.

The stockholders of the Central Pacific then discovered that the railroad was in horrible financial shape.

Some $79 million of stocks and bonds (including the $24 million from the government) had been floated, and the cash had been expended. $79 millon in cost of materials and payment for construction had been paid to the Central Pacific Credit and Finance Corporation. The Central Pacific Credit and Finance Corporation had spent some $50 million in wages and materials costs to build the railroad, and its shareholders had pocketed the remaining $30 million.

Who were these shareholders? Colis Huntington, Leland Stanford, and two of their other partners. Who were the Central Pacific executives who had approved this arrangement with the Credit and Finance Corporation? Colis Huntington, and Leland Stanford…

Stanford University, in Palo Alto, California, is today a very nice place indeed.

The financing of the other half of the United States’s first transcontinental railroad line was even worse. The Union Pacific which ran from the Missouri River to meet the Huntington-Stanford line used the same plan on a larger scale: skim off the profits into a contstruction company owned by insiders, the Credit Mobilier, and leave the government and the other invetors with a railroad near bankruptcy.

To keep political support–to keep the government land grant and construction subsidies flowing–the officers of the Credit Mobilier used Massachusetts congressman Oakes Ames as an intermediary, to distribute stock not in the railroad but in the construction company to influential members of the legislature. In 1873 Oakes Ames panicked, thinking that he was about to be sacrificed to a public outraged at corruption in railroad subsidies. So he testified that he had given stock to: Representative James Brooks, legislative leader of the opposition Party; future President James Garfield, the Vice President, the Vice President elect, several of President Grant’s cousins, perhaps thirty others.

The legislative uproar ended in the impeachment of Ames and Brooks–one member from each party–and with the agreement of the two major political parties to try their best to forget that the whole thing had ever happened (see U.S. Congress, 1873).

From this narrative it is easy to reach a judgment: the post-Civil War program providing subsidies to western railroads was a disaster, a way of transferring $100 million of the people’s wealth to a few politically well-connected plutocrats. It would have been much better if the program had never been attempted.

Yet a closer look at the situation dissolves the certainties that underlie this judgment. For even with all the political influence that a judicious channeling of wealth back into the pockets of legislators could buy, and even with mammoth government subsidies to build long-distance railroads, their construction was still a near-run thing.

Consider the fate of the Northern Pacific Railroad.

Jay Cooke had been one of the principal financiers of the Civil War era: he and his staff of salesmen had found buyers for the bonds that enabled Abraham Lincoln to pay for the armies that marched down the Mississippi, through Georgia, and to Richmond–and that freed the slaves. During the war Cooke had become a close friend of the leading union general, Ulysses S. Grant, who was president from 1868 to 1876.

After the Civil War ended, Jay Cooke went into the business of railroad finance and construction. He proposed to build not through the deserts of the south, and not over the high Rocky Mountains and the Sierra Nevada (the route of the Central-Union Pacific line), but from the Great Lakes in the northern United States to the Pacific coast, roughly to Seattle.

Perhaps Jay Cooke did not get as lavish a deal in subsidies. Perhaps he and his executives were worse at supervising construction. They were certainly worse at bribing the Congress: the executives of the Northern Pacific seemed to think that Congress should vote subsidies primarily because they were in the public interest, and only secondarily because their palms had been greased.

In any event, by the middle of 1871 it was clear that the Northern Pacific needed more money. It was also clear that there was no point in having half a northern transcontinental railroad. No one lived between the Mississippi-Missouri valley in the middle of the country and the Pacific Coast.

As financiers tend to do when they run into trouble, Jay Cooke borrowed and bet again: he committed the borrowing capacity of his banking house to funding the railroad. But that was not enough. Revelations from the Credit Mobilier scandal helped scare off British investors in the Northern Pacific, who wondered if they would be left with a highly-leveraged and unprofitable railroad while the profits went into the hands of some insiders’ construction company. In the fall of 1873 the Northern Pacific Railroad and Jay Cooke–who had been one of the richest men in the United States five years before–went bankrupt. The collapse of the Northern Pacific triggered the panic of 1873. The share of the non-agricultural labor force employed in railroad construction fell from 10% in 1873 to 2% three years later. The U.S. economy went into a depression, and did not emerge from depression until 1879.

Thus of the three groups–all with mammoth government subsidies, and all willing to pour bribe money out like water to keep the flow of subsidies coming–that tried to build transcontinental railroads in the 1860s and 1870s, one (the southern route) never got private financing, one (the two groups combining to build the central route) built a railroad line and together pocketed a spectacular $70 million in profits, and one (the northern route) went bankrupt, dragging the American economy into depression as a result.

And, when the dust settled, the United States did have a transcontinental railroad. You could travel from New York to San Francisco. And without the offer of mammoth government subsidies such railroad construction would not have happened for another two decades. It was not until the late 1880s and 1890s that transcontinental railroads were built without the offer of mammoth government subsidies.

So there is an alternative reading of the situation: that the subsidies promised were sufficient to call forth the desired investment, but not large enough to make riskless fortunes for politically well-connected entrepreneurs. (After all, the most politically well-connected entrepreneur, Jay Cooke, went bankrupt trying to build his transcontinental railroad.) That the bribes paid out to congressmen were an unfortunate consequence of the corruption of Gilded Age politics, but were only a small part of the capital gambled (and in the Northern Pacific’s case, lost) on linking the Atlantic and Pacific coasts. And that the fact that legislators skimmed off a share of the profits for themselves does not mean that the policy of railroad construction was bad policy.

Now not every political interference in railroad building represented sound public policy. What was the sound public policy when judges beholden to Jay Gould refused to order him to allow British shareholders of the Erie Railroad to vote in corporate elections? The case of the transcontinental railroads, in which the policy of subsidization had a rationale is probably an exception (although it was the source of the largest of the railroad fortunes).

Nevertheless, it seems that–given the corruption of American politics at the time–allowing Colis Huntington and Leland Stanford to make their fortune (and to pay off congressmen) was an inescapable part of the price of building a transcontinental railroad in the 1860s. And to those who value the railroad and the economic development that such works of infrastructure made possible, this particular set of robber barons becomes harder to condemn.

As we move away from railroads, government plays a smaller and smaller role. Meat packers based in Chicago used federal government regulation as a competitive weapon, but as a defensive weapon to protect themselves from exclusion from eastern urban markets where local economic interests could dominate legislatures and exclude competition under color of regulating ‘health and safety.’ The Texas oil fortunes of the 1950s and 1960s depended upon the successful price-fixing strategies of the Texas Railroad Commission, which kept oil prices higher and thus the fortunes of the Hunts and Gettys far higher than would otherwise have been the case.

But once one leaves the railroads behind, government power seems to be exerted as often to try to curb the power of billionaires as to enhance it. Consider today: Microsoft’s fortunes owe little to government actions to establish its market share and market power, yet the Justice Department’s antitrust division is the principal threat to Microsoft’s continued existence. Beyond the railroads, the principal dynamic appears to be populist American distrust of large fortunes, rather than political influence exerted by billionaires.

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V. Tentative Conclusions

So what can Americans expect from their current crop of billionaires? Or rather what can they expect from the processes that have allowed their creation?

They should be extremely dubious about billionaires’ social utility.

Their relative absence from the 1930s to the 1970s did not seem to harm economic growth in the United States. Their predecessors’ claim to much of their wealth is, to see the least, dubious. And their large-scale presence was associated with the serious corruption of American politics.

Perhaps those who are going to be industrial statesmen have as reasonable a chance of truly being industrial statesmen in an environment hostile to billionaires, as in an environment friendly to their creation: at that level of operations, after all, money is just how people keep the score in their competitions against nature and against each other. Theodore N. Vail was a powerful industrial statesman in his role as head of the American telephone company, yet he did not become a billionaire (see DeLong, 1991).

On the other hand, their personal consumption is only an infinitesimal proportion of their total wealth. Much less of Andrew Carnegie’s fortune from his steel mills went to his own personal consumption than has gone to his attempts to promote international peace, or to build libraries to increase literacy.

The child who in mid-nineteenth century Scotland painfully learned to read from the handful of books he had access to in his family’s two-room cottage as they fell closer and closer to the edge of starvation–that child is visible in the Carnegie libraries that still stand in several hundred cities and towns in the United States, and is visible around us now.

Adam Smith wrote about the rich of his day that they:

only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only… the gratification of their own vain and insatiable desires, they [inevitably] divide with the poor the produce of all their improvements. They are [thus] led by an invisible hand to make nearly the same distribution of the necessaries of life [as] …had the earth been divided into equal portions (Smith, 1776)…

He was not completely wrong.

So if there is a lesson, it is roughly as follows: Politics can put curbs on the accumulation of extraordinary amounts of wealth. And there is a very strong sense in which an unequal society is an ugly society. I like the distribution of wealth in the United States as it stood in 1975 much more than I like the relative contribution of wealth today. But would breaking up Microsoft five years ago have increased the pace of technological development in software?

Probably not. And diminishing subsidies for railroad construction would not have given the United States a nation-spanning railroad network more quickly.

So there are still a lot of questions and few answers. At what level does corruption become intolerable and undermine the legitimacy of democracy? How large are the entrepreneurial benefits from the finance-industrial development nexus through which the truly astonishing fortunes are developed? To what extent are the Jay Goulds and Leland Stanfords embarrassing but tolerable side-effects of successful and broad economic development?

I know what the issues are. But I do not yet–not even for the late nineteenth- and early twentieth-century United States–feel like I have even a firm belief on what the answers will turn out to be.

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References

Adams, Charles Francis. 1886. Chapters of Erie. New York: Henry Holt. https://archive.org/details/chaptersoferie00adam

Adams, Charles Francis. 1916. Charles Francis Adams, an Autobiography. Boston: Houghton Mifflin. https://archive.org/details/charlesfrancisa00adamgoog

Barron, Clarence. 1930. They Told Barron. New York: Harper and Brothers. https://archive.org/details/theytoldbarron0000clar

Barron, Clarence. 1931. More They Told Barron. New York: Harper and Brothers. https://archive.org/details/moretheytoldbar0000barr

Berle, Adolf, and Gardiner Means. 1932. The Modern Corporation and Private Property. New York: Harcourt, Brace, and World. https://archive.org/details/moderncorporatio00berl

Brandeis, Louis D. 1913. Other People’s Money and How the Bankers Use It. New York: Frederick Stokes. https://archive.org/details/otherpeoplesmone00braniala

Carosso, Vincent. 1987. The Morgans: Private International Bankers, 1854–1913. Cambridge: Harvard University Press. https://archive.org/details/morgansprivatein00caro

Chandler, Alfred D. 1982. The Visible Hand: The Managerial Revolution in American Business. Cambridge: Harvard University Press. https://archive.org/details/visiblehandmanag0000chan

Corey, Lewis. 1930. The House of Morgan. New York: Howard Watt. https://archive.org/details/houseofmorgan0000core

DeLong, J. Bradford. 1991. “Did J. P. Morgan’s Men Add Value? An Economist’s Perspective on Financial Capitalism.” In Inside the Business Enterprise: Historical Perspectives on the Use of Information, edited by Peter Temin, 205–36. Chicago: University of Chicago Press for NBER. https://www.nber.org/books-and-chapters/inside-business-enterprise-historical-perspectives-use-information

Jones, Alice Hanson. 1980. Wealth of a Nation to Be: The American Colonies on the Eve of the Revolution. New York: Columbia University Press. https://archive.org/details/wealthofnationto0000jone

Josephson, Matthew. 1934. The Robber Barons: The Great American Capitalists, 1861–1901. New York: Harcourt, Brace, and Company. https://archive.org/details/robberbarons00jose

Lawson, T. W. 1905. Frenzied Finance. New York: Thayer-Ridgway. https://archive.org/details/frenziedfinance00lawsgoog

Lindert, Peter, and Jeffrey Williamson. 1976. Three Centuries of American Inequality. Madison: University of Wisconsin. [No known full-text URL available; check university library databases.]

Moody, John. 1904. The Truth About the Trusts: A Description and Analysis of the American Trust Movement. New York: Moody Publishing. https://archive.org/details/truthabouttrust00mood

Moody, John. 1919. The Masters of Capital: A Chronicle of Wall Street. New Haven: Yale University Press. https://archive.org/details/mastersofcapital00moodrich

Moody, John. 1919. The Railroad Builders: A Chronicle of the Welding of the States. New Haven: Yale University Press. https://archive.org/details/railroadbuilders00moodrich

O’Rourke, Kevin, and Jeffrey Williamson. Forthcoming. Globalization and History. Cambridge: MIT Press. [No valid link yet, as it is forthcoming.]

Riegel, R. E. 1926. The Story of the Western Railroads. New York: Macmillan. https://archive.org/details/storyofwesternra0000rieg

U.S. Congress. 1873. The Credit Mobilier Investigation. House Reports, No. 77, 42nd Congress, 3rd Session. Washington, DC: Government Printing Office. https://archive.org/details/creditmobilierin00unit

U.S. Congress. 1913. The Concentration of Control of Money and Credit. Pujo Committee Report. Washington, DC: Government Printing Office. https://archive.org/details/cu31924030217536

Wolff, Edward. 1994. Top Heavy: A Study of Increasing Inequality in the United States. New York: Twentieth Century Fund. https://archive.org/details/topheavystudyofi00wolf

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