Monetary and Banking History
From Larry Neal’s review of the new book Monetary and Banking History: Essays in Honour of Forrest Capie:
Part II, “Crisis Management,” has Mae Baker and Michael Collins evaluating the information exchanges between Bank of England officials and private bank managers before and during the financial crisis of 1836; Eugene N. White arguing that the Banque de France did apply Bagehot’s rule effectively even in financial crises caused by miscalculations in the derivatives markets in Paris in the 1880s; and Charles Calomiris insisting that the Bank of England got the lender of last resort role right by 1856, while the U.S. financial system was repeatedly waylaid by misguided regulation. Baker and Collins demonstrate how intense were personal communications between bankers and regulators dealing with the vicissitudes of impersonal and international money markets at the outset of global financial markets. White elucidates how Bagehot’s rule depended on the role of collateral, but it took independent experts to assess the quality of collateral. Calomiris highlights the problems of inadequate information and capital that plagued the fragmented American unit banking system as contrasted with both the British and Canadian systems of concentrated branch banking.
Links of Interest
Greg Mankiw peeks into Obama’s mind.
An interview with Robert Lucas.
Richard Green on the housing cycle and the business cycle.
Gross Domestic “Transactions”
PRI recently ran a story featuring the work of Eric Zencey, a University of Vermont political scientist. Zencey doesn’t like the concept of GDP as a measure of well-being, suggesting we rename it “gross domestic transactions.” It’s not clear why it would matter if we replaced the word “product” with “transactions,” but there are deeper problems with Zencey’s logic than the name he prefers to use.
In justifying his renaming of GDP, he said:
“That’s all it is, it totes up the monetary value of all the transactions. And if it had that name that would help break the association people have with the idea that more GDP is better. It’s like hmmm, more transactions are better? Well it depends on what you’re transacting.”
Think about that for a moment – Zencey is wondering whether having more GDP (in other words, more income) is better (presumably against the alternative of having less). He goes on to say that it does not ”measure the actual thing you’re trying to do, which is improve the living standards and well-being of people.”
There’s nothing wrong with trying measure other things like education or health, but Zencey seems to approach the issue from the assumption that there is something wrong with consumption (at least at modern levels). It may well seem that way, but it is important to remember that vulgar levels of ostentatious consumption are nothing new. One only has to read Veblen’s Theory of the Leisure Class to see that’s not the case (0r, McCloskey’s excellent recent book Bourgeios Dignity – she points out that the only thing new is that a vastly larger percentage of the population is now able to indulge in the vast vulgarities).
More importantly, GDP does measure the “living standards and well-being of people.” People who are richer – those who live at higher levels of per capita GDP – have higher living standards. They can afford the vulgarities of modern economies, yes, but they can also afford to consume more Beethoven symphonies and to donate to charities. Circa 1800, the average person lived on around $3 per day (and this corrected for inflation). As McCloskey notes,
“two centuries later the world supports more than six-and-a-half times more souls. Yet contrary to a pessimistic ‘Malthusian’ belief that population growth would be the big problem, the average person nowadays earns and consumes almost ten times more goods and services than in 18oo.”
Not only do they earn and consume so much more, but they live longer too. So, no, GDP measures are not perfect but they certainly do measure the ‘thing we’re trying to do,’ which is to raise living standards.
Links of Interest
Greg Mankiw links to a new CBO report on taxes, and offers a suggestion.
Offering a much different view of tax policy, Paul Krugman longs for a return to a 91% top marginal rate.
Bernanke on economic recovery and policy.
Calculated Risk on an improving housing market.
Author
Brandon Dupont, Ph.D. is Associate Professor of Economics at Western Washington University where he teaches economic history, the history of economic thought, microeconomics, labor economics and political economy. He has published on a variety of topics in American economic history and labor economics and is currently working on an undergraduate history of economic thought textbook.