The second two chapters in Empire of Liberty (hereafter EL)outline the foundations of the debate between Federalists and Republicans. There are a number of provocative issues raised by Woods in these chapters including:
1. Role played by the state in the emergence of political and economic institutions
2. The pace and scope of the transformation over the last 20 years of the 18th century
3. Role of Madison in the widening debate between Hamilton and Jefferson
4. The role of the state in the emergence and evolution of financial institutions
Chapter 3 - The Federalist Program
Woods writes: "Hamilton expected that these interest payments would make the United States the best credit risk in the world, as well as create an attactive system of investment . . . "(97).
The fundamental element of the Hamiltonian program - assumption and full repayment of the debt by the national government to create a national debt which he called a blessing (see Hamilton's Blessing by John Steele Gordon) and was opposed by those who would agree with Thomas DiLorenzo that this would be Hamilton's Curse has shaped political economy in the US. In reading Reihart and Rogoff's This Time is Different (see oage 70 the North discussion of the Glorious Revolution and the impact on financing by the state)it is clear that Hamilton's goal was achieved - at least from his time to today and the authors of this excellent analysis suggest those days may well be numbered. But the significance of the debt, as Woods points out, goes beyond the structure of capital markets as it would profoundly impact the money supply in ways that could not be anticipated. (97). This debate over the role of the government in money and banking was eventually won by Hamiltonians, although Selgin and White outline the minority opposition that continues today. Charles Kindleberger's classic Manias, panics, and Crashes identifies the challenge faced by the government (and the private sector) to the "continuous' expansion/evolution of the money "and existing money has been used ever more efficiently in periods of boom to finance expansion, including speculation."(59 in 1977 edition). Paul David argues that this type of evolution will outpace the ability of institutional structures to cope with destabilization, in the absence of a strong control presence, if my reading of David is correct. Kindleberger seems pessimistic about the efficacy of a central control: "The process [of control] is Sisyphean akin to efforts at tax reform in which lawyers seek out tax loopholes, Congress and the IRS block them up, and the tax lawyers carve out new ones." (60)
Adam Smith anticipated and articulated the concern about the nationalization or federalization of debt (96) and Woods argues that Hamilton had intents for the debt that were policy based and would shape government intervention in the future: " . . . he [Hamilton]had no intention of paying off the outstanding principal of the debt. Retiring the debt would only destroy its usefulness as money and as a means of attaching investors to the federal government."(96). I would argue that this last clause could be seen over time as attaching investors to US debt - think the British during the canal and railroad booms and busts to the Chinese today to fund the consumer boom and . . .
This issue of the role of the government was addressed over on EconTalk in two outstanding and accessible podcasts - George Selgin and Larry White. This latter podcast is a must listen as White overviews a bit of history, the Austrian perspective and free banking.
Chapter 4 - The Emergence of the Jeffersonian Republican Party
This chapter raises a series of issues centered around institutional emergence and evolution, the pace of this change and the role of the state. This chapter strongly evokes the work of Douglass North and the school of thought that argues for and understanding of the role of institutions in economic change.
Woods makes an interesting contention on page 160 - "Because the United States was still without firmly established institutions and structures of political behavior . . . ". Really, after almost 180 years there were no firmly established institutions? This area is not one of expertise for me, so I am anticipating comment and discussion on this topic at book club.
But the rate of transformation echoes a posting byDavid Warsh regarding a Paul David article that seems to be on point, if the point is that individual and organizational behavior evolves in advance of institutional structures and that this emergence can potential destabilize the system or "network" in David's words. This is a provocative article, one that is worth a review as David uses the May 6, 2010 stock market drop as a powerful example of this black swan.
Warsh writes of David's article:
David takes his parable in a different direction. There is a parallel, he says, between what happens when human beings are deprived of feedback from their own communications what happens in the communication of diseases. Pathogens transmitted person-to-person – tuberculosis, say — have evolved in the direction of diminished virulence, as opposed to those borne by insects that have had no previous contact with a human host. “Communities of dependence” between carrier and host tend to diminish the bad results. In each case, feedback – what traders call liquidity – is your friend.
An implication is that Hamilton may well have been correct, that the pace of change and the incentives of entreprenuears to arbitrage this change may lead to destabilizing or destructive systemic plagues that threaten the system itself - that this activity will outpace institutional change - in both formal and informal forms.
I learned from this reading the evolutionary role that Madison played as he initially mediated the Hamilton/Jefferson debate. I strongly recommend the Kramer podcasts over at Gilder/Lehrman.
Great sources
http://www.econtalk.org/archives/_featuring/george_selgin/Selgin on Free Banking
George Selgin of West Virginia University talks with EconTalk host Russ Roberts about free banking, where government treats banks as no different from other firms in the economy. Rather than rely on government guarantees to protect depositors (coupled with regulation), banks would compete with each other in offering security and return on deposits. Selgin draws on historical episodes of free banking, particularly in Scotland, to show that such a world need not be unduly hazardous or filled with bank runs. He also talks about Gresham's Law and an episode in British history when banks successfully issued their own currency.
http://www.econtalk.org/archives/_featuring/lawrence_white/
Larry White on Hayek and Money
Larry White of George Mason University talks with EconTalk host Russ Roberts about Hayek's ideas on the business cycle and money. White lays out Hayek's view of business cycles and the role of monetary policy in creating a boom and bust cycle. The conversation also explores the historical context of Hayek's work on business cycle theory--the onset of the Great Depression and the intellectual battle with Keynes and his work. In the second half of the podcast, White turns to alternative ways to provide money, in particular, the possibility of private currency and free banking explored by Hayek late in his career. White then describes his own research on free banking and in particular, the more than a century-long experience Scotland had with free banking. The podcast concludes with the economics rap "Fear the Boom and Bust," recently created by John Papola and Russ Roberts. The song itself can be downloaded at EconStories.tv where viewers can also watch the video, read the lyrics, and find related resources on the web for Keynes and Hayek.
Larry Kramer Podcasts
“Madison and the Constitution”
What was James Madison's background? How did he feel about the idea of democracy? What ideas did he contribute to the drafting of the Constitution? Larry Kramer, Dean at Stanford Law School, discusses Madison's legacy.
Kramer has 6 excellent podcasts - this is a must listen
Larry Kramer
“The Rise and Fall of Federal Power from the 1800s to the 1930s”
Throughout American history the Supreme Court has played a role in striking a balance between the power of federal vs. state governments. Larry Kramer, Dean at Stanford Law School, traces the rise and fall of federal power during the first 150 years of the nation's existence.
David article
May 6th – Signals from a Very Brief but Emblematic Catastrophe on Wall Street
Paul A. David
Stanford University - Department of Economics; University of Oxford - All Souls College; UNU-MERIT (Maastricht); Ecole Polytechnique & Telecom ParisTech
June 27, 2010
Abstract:
This essay begins by looking closely at the underlying structural causes of the discontinuity that appeared in the behavior of the U.S. stock market at 2:40pm in the afternoon of 6th May 2010, because the emblematic “catastrophic” aspect of the collapse of equity prices, and their subsequent equally abrupt rebound, renders these events potentially informative about things that can happen in a wider array of dynamical systems or processes – including those with consequences about which there is cause for serious concern. What transpired in those 7 minutes is viewed as being best understood as a hitherto unrecognized “emergent property” of structural conditions in the U.S. national stock market that all the actors in the story collectively had allowed to come into existence largely unremarked upon, through an historical process that was viewed generally as benign and therefore left to follow its own course of evolution unimpeded. The deeper significance of the events of May 6th lies in the attention it directs to the difference between a society being able to create and deploy technical “codes” enabling greatly enhanced connectivity for “exchange networks” – the condition of “hyper-connectivity” among an increasing number of its decentralized sub-systems, and a society that also provides timely mutually compatible institutional regulations and administrative rules for the coherent governance of computer-mediated transactions among “community-like” organizations of human agents. Regulating mechanisms operating to damp volatility and stabilize systems in which there is beneficial positive feedback are considered, as are a variety of circumstances in which their absence results in dysfunctional dynamic behavior. It is suggested that in view of the growing dependence of contemporary society upon on-line human-machine organizations for the performance of vital social and economic functions, continuing to focus resources and creative imagination upon accomplishing the former, while neglecting the latter form of “progress” is a recipe for embarking upon dangerous trajectories that will be characterized by rising systemic hazards of catastrophic events of the non-transient
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment