UK Budget Appeals to Adam Smith’s Approach to Taxes… Sort of

[Cross posted from the History of Economics Playground – original here]

Yesterday the Chancellor of the Exchequer (or UK ‘finance minister’) gave his annual budget speech where UK fiscal policy is set for the coming years. In announcing his tax changes he name-dropped Adam Smith as the inspiration for his objectives on tax:

Two hundred years ago, Adam Smith set out the four principles of good taxation – and they remain good principles today. Taxes should be simple, predictable, support work, and they should be fair. The rich should pay the most, and the poor least.  George Osbourne, 21 March 2011

There has been a longer debate about whether Smith was in favour of progressive taxation or whether he simply intended a flat tax, where the rich by definition pay more than the poor. But putting that aside, I wanted to see if those four tax principles were Smith’s principles: Simple, predictable, support work and fair. Grabbing my trusty Wealth of Nations there is a whole section on taxes [Book V. ii. b] where Smith opens by saying that “it is necessary to premise the four following maxims with regard to taxes in general” [V.ii.b.2] – so far so good:

1. “The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities” [V.ii.b.3]. Well… this sounds like fair, but recall the controversy about what this actually means. Admittedly it does sound a lot like  ‘from each according to his…’ – but let’s not go down that path.

2. “The tax which each individual is bound to pay ought to be certain, and not arbitrary” [V.ii.b.4] – this has partly to do with knowing how much you are expected to pay so you are not “in the power of the tax-gatherer” and partly to do with avoiding corruption and tax avoidance. So this is probably wherepredictable or at a stretch simple comes from.

3. “Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it” [V.ii.b.4]. A practical approach to taxation, but it doesn’t really fit into any of the above neatly, although there is a case for simple and perhaps  the UK system of charging income tax automatically on wages, supports work. But I think both are tangential. This is really a matter of making taxes convenient to pay.

4. “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the publick treasury of the state” [V.ii.b.6]. Not sure where this fits in to the Chancellor’s overall scheme, as this is a long paragraph arguing that taxes should not be levied where it is too hard to collect or the incentive to smuggle is too high – so it should be administratively simple.

Given that, Adam Smith’s four principles could be summarised as fair, predictable, convenient to pay and administratively simple – not quite what Osbourne had, but perhaps closer to what he did?

Backhouse and Bateman wants Worldly Philosophers not dentists; not everyone agrees

[Cross-posted from the History of Economics Playground – original here]

Professors Roger Backhouse and Brad Bateman wrote an op-ed for the New York Times a few days ago, arguing that “thanks to decades of academic training in the “dentistry” approach to economics, today’s Keynes or Friedman is nowhere to be found” – we have stopped thinking big they say.

I was trying to channel something similar a few months back when I asked who does original research?. In a reply, erw rightly reprimanded me for taking such a naive view of how to do history, and Yann amplified the point that originality or greatness was not the historical question. Indeed ‘greatness’ should be studied as something relative.

As historians our role is to historicize such work asking for instance “what was it about the time, place, and community that led this particular work to be judged to be “fundamental” at that time? At another time? How did this claim function in a particular scientific or disciplinary community at a time and place?  -erw 26 July 2011

Backhouse and Bateman are saying that “economists, to whom we might expect to turn for such vision, have long since given up thinking in terms of economic systems — and we are all the worse for it.” And what do we as historians and economists reply? The Societies for the History of Economics mailing list (SHOE) has been hot with debate. Ironically they are debating how Backhouse and Bateman may or may not have under-represented the views of Hayek or Friedman, suggesting various books on history to understand ‘great’ economists, and generally performing dentistry. The debate is not about finding new worldly philosophers, and we are all the worse for it.

So what else can we do? If history tells you that we will not be able to see who is doing original or great research I would suggest that interesting work is at least within grasp. If we economists then think that systemic issues or capitalism as a subject is interesting, I guess there could be a shift. And from there on, I guess we have to rely on the concept from literature: You won’t know a classic until 50 years after it has been published. Maybe that’s a hint to write fewer articles and more books? Much like Niall ferguson said at Bretton Woods, and Backhouse and Bateman mention…

Why are the protesters so angry?

[Cross-posted from the New School Economic Review – original here]

Weeellll…. This very lovely slideshow from Business Insider has some pretty good suggestions to why there are protests on Wall Street, by St. Paul’s in London and in Greg Mankiw’s EC 10 class at Harvard… No really, they had awalk-out which saw 10-15% of the class leave, although I gather that some old students walked-in as a counter protest. Either way, if it wasn’t entirely clear what the problem is, have a look at the slideshow.

My brother recently pointed out that the tent camps in front of St. Paul indicated that this would be the “winter of our discount-tents”… But I digress.

Advice to young economists… zzzz

[Cross posted from New School Economic Review – original here]

A new video on the INET webpage promises ‘advice to young economists‘ but it’s not exactly awe-inspiring stuff (despite the star cast of the video). Best of the lot is probable INET director Rob Johnson who (paraphrasing Richard Hamming or Johnny Bunko) says to focus on important problems, because you only have so much time on earth and you should look at the big questions.

Beyond that John Kaye says to look at how people act, not how we think they should act – despite, as he says, the things he has been teaching over the last many years. Joe Stiglitz says to look at solving the problems of the developing world, Ian Goldin wants a toolbox and Anatole Kaletsky says these are exciting times to study economics. So yeah, despite the amount of interesting things these people usually have to say about economics, there’s not a lot to take away here. The cruel twist is perhaps Rob Johnson’s comment that he would give this advice to a ‘rising star in economics today’ … Of course, said rising star would probably not be coming with your radical or different ideas.

I think Deirdre McCloskey’s letter to a graduate student is a better time to spend five minutes, so let me leave you with her closing sentiment:

Please, please, my dear, be brave, and remake our splendid subject, the intelligent student of prudence, by bringing it back to science. I’ll hire you, if I can. And you’ll have a worthwhile life in science.

What a Nobel day to be back

[Cross Posted from the New School Economic Review – original here]

Courtesy of Banx at the FT

Back at the keyboard after a hectic late summer which included getting a final sign-off on the thesis, so that is all done, dusted and deposited in the university library. And what a day to be back. In a few hours they will announce who is going to win the Prize for Economics in memory of Alfred Nobel, and if Fama gets it this year I think it will be good fun. He was odds on favourite two years ago, but since the crash and recession all odds are off.

Harvard even had an on-line pool, but had to shut it down due to legal reasons. Oh well, we’ll know in a few hours. Either way, we’re back to our blogging ways now that term has properly started and there can be no more conference distractions.

Unfortunately, we have been advised by Harvard University to immediately shut down the Nobel pool due to legal reasons, and we have decided to comply with this request. We will fully reimburse the money of all participants, and we apologize for any inconvenience this creates for you. All participants will be contacted by email. (http://www.people.fas.harvard.edu/~pollmann/nobel/)

A call to arms for Historians and Economists

[Cross-posted from the History of Economics Playground – original here]

The Marshall Lectures often provide thought provoking talks and one talk in particular spoke to me looking at the relationship between history and economics: The speaker is a well known historian and he said exactly the right thing:

The only thing that encourages me to open my mouth, other than the pleasure of being on record as a Marshall Lecturer, is the feeling that, in the present state of your subject, economists may be prepared to listen to lay observations, on the ground that they cannot be less relevant to the present situation of the world than some of what they write themselves. Especially, one hopes, they may listen to a layman who appeals for a greater integration, or rather reintegration, of history into economics.

But Eric Hobsbawm said this in the 1980 Marshall lecture – I guess some progress has been made.

Who does original research?

[Cross posted from History of Economics Playground – original here]

INET is all about thinking new things, and indeed academia is supposed to inspire great thoughts. So why are there so little original research in economics? I don’t mean in total, but think of it as a percentage of the total output. The truly great research is pretty thin on the ground if you think of it that way, and in fact, even the mildly interesting is pretty thin. All this introspection was brought on by reading Richard Hammings talk “You and your research” (given some 25 years ago) – where he asks us to do Great research. ‘Us’ are the social scientists, scientists or all researchers out there. It is not clear to me that we economists follow his advice at many stages of our careers.

I am starting to think that doing original research is something we need to choose to do. And we need to actively choose it. Reading Dan Pink’s book on career advice: One of his key points is to stop doing jobs that are instrumental – you do them to achieve something else – and make sure you do a job (or research) which is fundamental – where we do things because we are interested. That rings some bells. Smith, Marx, Bentham, Marshall, Leontief, Keynes, Friedman and others were definetly fundamentalists in this sense. Deirdre McCloskey has talked about exactly this in economics, so perhaps there is something more fundamental to it. I think Dan Pink’s advice carries over, so I share it, via Garr Reynold’s slides here (but check out the book, or website).

Otherwise, we will all probably end up in the academic cycle that Jorge Cham has elegantly illustrated below. And I guess we all want to do great research – right?

When the U.S. last defaulted

[cross-posted from History of Economics Playground – original here]

Two things seem to be taken for granted in the current debt-ceiling debate: 1. The parties will come to an agreement on the debt ceiling because 2. These United States have never defaulted and will not start now. Well, Lexington has eight pretty good reasons why an agreement is not inevitable and as far as I can tell, the United States has defaulted in the past, and we need to recognize that fact…

The historical trick revolves around ‘these united states’ because these 50 States are somewhat recent. Hawaii and Alaska would finalize statehood in ’59. but various make-ups of the USA have indeed defaulted or re-structured its debt. Most recently – I think – was in 1933 when the then 48 State government refused to repay the gold annuity it owed to Panama. This was eventually repaid in 1936. I take that observation, and many more from Rogoff and Reinhart’s book (2010: 112-3) which I have commented on earlier.

We can add to that list debt restructuring in 1790, where interest was deferred by the government for ten years. Then there are State cases where the central government allowed default on debts and – I would suggest – implicitly accepts government default: 1841-42 when three States repudiated their debts altogether and 1873-83/4 where ten states were in default, with West Virginia not settling its account till 1919. One could throw in the confederate army debentures and bonds which for various reasons were never repaid to foreign investors, but whether that is legitimate US debt, I am not sure.

My point is simply that the USA has deferred, restructured or cancelled its debt before. If Lexington is right that “compromise may still be possible, but there is nothing inevitable about it,” then on track record you might expect to see an announcement to delay repayment of certain debts, for a long while, on 2 August.

We are moving the playground – come join us

[Cross Posted from The History of Economics Playground – Original here]

Some time ago we got an e-mail from the guys at the Institute for New Economic Thinking (INET) asking if we were interested in shifting our playground in their direction?  Well, as of Sunday we have moved our swings and slides to the brand new ineteconomics.org/blog/playground.

New shiny home, same Kids

So what does that mean? First off we intend to continue in the same vein and in keeping content control we think not much is changing… As usual, new young and restless (and good looking) historians will join as others move on, so the only change is if you are using RSS feeds, then you will need to update it. Other than that, it’s the same playground – only shinier.

OK, so it’s a lot shinier. In April – as you’ll know – they agreed to ship us to the INET conference, and our shiny badges means we  get interviews with people who we would not otherwise bump into. We’ve also been given a video editor who is working on the interview films which will be ready soon! Then they asked if we would be interested in covering the history related INET grants and presentations, meaning travel money and hopefully interesting blog posts. Reality is that we’d be reading this stuff anyway, but somehow INET agreed to fund our trips – I fear they missed our reservation price of zero. That said, we may have missed their reservation price too, as part of the deal includes a $25,000 grant to pay for research, travel and other work related to the blog and history, so expect more archival stories and maybe even a comic. All-in-all, we think this is a great opportunity, and if it all goes haywire, we’ll always have this spot.

So on behalf of everyone, I hope you like where we are taking this, and that you’ll join us. I noticed that Pedro and Yann have already started posting over on ineteconomics.org/blog/playground, so please, come over and play.

INET grants for New Schoolers

[Cross posted from the New School Economic Review – Original here]

Rejection is a standard – if frustrating – part of academic life, but with INETs (Institute for New Economic Thinking) Spring 2011 grant money just being announced there is much to celebrate from a New School side of things. From 400 submissions and a selected 23 grants, the New Shool economics faculty picked up one grant and the alums got another. Not too shabby for a global competition!

Prof. Anwar Shaikh’s proposed book on Turbulent Dynamics and Hidden Patterns wants to look at the world from a perspective of ‘magnificent dynamics’… I have to be honest and say that I am not entirely sure what that means, but a quick browse revealed this review article which helps. I hope we won’t lose Anwar for too long as he attempts the full manuscript, for which an outline is provided:

The book’s aim is to demonstrate that a revived form of the “magnificent dynamics” of the classical economists can explain the actual patterns of developed economies involving relative industrial prices, stock prices and interest rates, exchange rates, growth, cycles and inflation. The book develops a classical theoretical approach to these and other fundamental economic issues which it then contrasts to the corresponding theoretical arguments in the neoclassical and Keynesian traditions. It also confronts all theories with the relevant empirical evidence. It is my hope that this will encourage others to analyze the “two-sidedness” of markets: strong patterns achieved through turbulent processes.

Also in the list is one of our recent alumni Ph.D. Students, Stephen Kinsella currently at Limerick University in Ireland where he is collecting a lot of (well deserved) accolades. He wants to build a stock-flow consistent model of Ireland. It looks like an exciting and ambitious project, which I suspect follows on from other work in this area which Steve has been doing and is forthcoming in EEJ among other places (see the stock-flow-consistent model papers here).

No model helped predict or understand why Ireland’s economy has collapsed so spectacularly since 2007. This is because the real and financial sides of the economy aren’t modeled using current tools. Using INET funds, we will build a stock flow consistent model for Ireland to solve this practical problem, as well as a theoretical problem in the estimation of large stock flow consistent models highlighted in the literature. The project is important because previous modeling methods have largely failed, and because small open economies in an era of globalization all over the world face the same challenges as Ireland.

All in all good news, and I hope that we can continue this kind of success going forward. I wonder if any of the grad students submitted a proposal or worked with the faculty on one? It’s good experience and a great opportunity to get a yes.