Measure for measure

"for with the same measure that ye mete withal, it shall be measured to you again"

Economic growth is defined as the rate of increase of output over a set period of time. In the EU at least, following the widespread adoption of the European System of Accounts (ESA 95)—which the UK did in 1998, for example—the standard measure of economic development is gross domestic product (GDP) at constant market prices.

GDP measures the value of final goods and services produced in the domestic economy in a given period of time, usually one year; it includes indirect taxes, net of any product subsidies (this explains the “market prices” bit).

By stripping out from the money value of current production—or nominal GDP—any changes in the average price level in the economy between one year and the next, we are able to derive real or volume data. One method for doing this is to value the output of a later year using the prices prevalent in the earlier or base year. By comparing the change in the level of real GDP between periods, we are able to calculate real rate of change of GDP per year (this explains the “constant” bit). Other measures of output, less common nowadays, include gross national product (GNP), which takes into account the net flow of resources into or out of the economy, and national income (net national product, NNP), which includes depreciation.

Typical conceptual criticisms of GDP as a measure of economic growth are that it fails to take into account what is not bought or sold—valuable non-market services such as housework, for example. It also fails to encompass the benefits or costs associated with the growth process: the positive or negative economic utility value of leisure or pollution, for instance. Consequently, measures such as net economic welfare (NEW) have been proposed to overcome some of these problems, but have not tended to catch on—so far, at least. Additionally, any attempt to measure growth is compromised by the fact that the permanent innovation (which is intimately linked with economic growth) makes comparisons of the value of products across time difficult or, if a new product allows an activity that could not previously be undertaken, impossible.

Mr Ricardo's political arithmetic

The question of why economies grow has been central to economics since its emergence from the Enlightenment as a discipline in its own right. On this, I shall take an approach that will allow me to look at the question from different angles, bit by bit. The best place to start, it seems to me, is with a little foray into the history of economic thought.

All the classical economic theories were theories of growth—that is, they were designed to show that freedom for economic actors and free trade were essential for improving the prospects for the growth of national wealth. Later, with the "marginalist revolution" of the 1870s, mainstream economists shifted their focus to the analysis of the static problem of resource allocation. In the 1950s they began to apply marginalist tools to the problem of the growth of whole economies over the long term. More recently, this approach to growth theory has itself come under fire.

Of the classical growth theories, that of David Ricardo is perhaps the easiest to expound in a small space. As is usual in classical economics, Ricardo looks at the growth process through supply-side glasses to explain the development of productive capacity; this he assumes will be the same as actual output because market mechanisms assure full utilisation.

Ricardo's model is of a mainly agricultural economy in which production is the outcome of the combination of three factors: land, labour and capital. At any point in time, land is fixed in quantity but variable in quality; the labour supply is fixed; and the stock of circulating capital, or wage fund, is also fixed (it is envisioned as a stock of corn).

In any one period of production, the owners of capital hire the owners of labour to work on the land. Capitalists deploy labour in such a way as to equalise the marginal product of labour. The wage rate of workers is determined by the size of the wage fund, divided by the number of workers (the labour force); capitalists will hire workers as long as the marginal rate of labour is higher than the wage rate, the difference between the two accruing to the capitalist as profit; the income of landowners, in the form of rent, is determined by the difference between the average and the marginal products of labour multiplied by the number of workers on a farm.

This is the static part of the model. The model is set in motion by the behaviour of the economic groups with regard to their income. Workers consume all their wages to reproduce themselves, so that they are fit for labour in the next production period. Capitalists tend to save their profits, adding it to the volume of circulating capital, the wage fund—which is the source of economic growth. Landlords spend all of their income on "unproductive consumption".

However, in Ricardo's model—and in contrast with the model of Adam Smith—growth is not without inherent limits. This depends crucially on the role played by the expansion of the population, which is stimulated as a growing wage fund boosts the wage rate, raising it above subsistence level. As production on existing farms intensifies and also moves outwards to less fertile land, rents increase, which is useless from the perspective of economic growth; worse, the marginal product of labour falls and, with it, profitability, eventually bringing the growth of the wage fund—and thus the growth of national income—to a halt. This is known as the stationary state.

Although Ricardo’s model retains a certain self-contained elegance, it cannot be reconciled to the growth process as it has subsequently happened. This is for three main reasons.

• Population growth has often been "exogenously" determined, and the envisaged close relationship between the income and population growth has not obtained.
• There has been steady progress in the development of agricultural technology, some of it induced by the pressures of population growth.
• The emphasis on the role in growth played by circulating capital ignores the contribution to growth from the employment of fixed capital—particularly in industry, but even in agriculture—through improvements in productivity.

Under the old regime

Looking through some of my old stuff, I thought that a useful approach might be to "recycle" material from the past, updating it where necessary. Of course, some material does not need updating, since the situation it refers to has passed away. However, the definitions and tools may be of continuing use.

Repressed inflation in STEs
The interlinked phenomena of inflation and shortage in Soviet-type economies (STEs) can be attributed to a number of causes. Inflation is the movement of the aggregate price level for goods and services across the economy as a whole, although, when looking at causes, it is sometimes helpful to distinguish between those that are "one-off" in nature, originating from "outside" the normal workings of the economic system (for example, from mistakes of economic policy, or exogenous shocks, such as a rise in energy prices or a bad harvest), and those that are systemic, when the conditions behind the rise in the aggregate price level are constantly reproduced from within.

Causes of inflationary pressure under state socialism
In the classical model of state socialism, the system-specific causes of inflationary pressure may be listed as follows.

• Persistent labour shortages put upward pressure on wages which, if reflected in actual wage increases for the economy as a whole, will tend to increase production costs.
• As producer-sellers, firms have some vested interest in raising prices.
• Operation of a passive monetary policy may lead to some uncontrolled growth in the money supply.
• There is persistent excess demand at a macro level.

The last of these, excess macroeconomic demand, exerts the strongest inflationary pressure. And although there are also variations in the degree of excess demand prevalent in different sectors of the economy, it is most powerful in the state inter-firm sphere.

From this perspective, perhaps the most important phenomenon to understand is the process of taut or overfull employment planning. This is when the output plan for the enterprise is deliberately set above the firm's production capacity. The aim is to "seek out" resources; for individual managers, increased physical output is also the criteria for promotion. The effects, however, are that firms try to cut corners—for example, by reducing product quality or raising costs. From the point of view of structural constraints on the firm, this presents few problems, since the question of exit of firms from production is not an economic decision but a bureaucratic-political one. The peculiarity of the state property form means that, while in theory it is owned by everyone, in practice, "no one has a true inner interest in ensuring caution in handling money".

Soft budgets, passive money
In effect, the regime of the output plan means that a firm's budget is not a strict restriction on its access to resources. If a transaction seems to be demanded by the plan, a cheque—even one in excess of the firm's budget—will be cleared. Herein lies the "soft" character of financial budgets at enterprise level, and also the "passive" character of money in the inter-firm sphere. "Money" in this sense exists only as an accounting unit and does not exert any buying power. The total monetary demand for firms follows the financing needs of the plan. This is the reason why the term "excess demand" is sometimes considered inappropriate, and we should use the term remembering that it is compromised by the non-market character of the transactions involved. For this reason monetary and fiscal policy has no effect on the level of output. The rationale for Kornai’s observation that the firm under the classical socialist model has no particular interest in limiting its demand for inputs is thus seen to flow from the imposition of “taut” planning.

What symptoms when prices are controlled?
In STEs the symptoms of inflationary pressure are revealed by means other than price rises. This leads us to the question of repressed inflation, which may be introduced by a method of contrast. For while inflationary pressure may lead to a rise in the aggregate price level (open inflation), or actual rises in the prices of goods and services may not find their way into the calculation of the inflation index (hidden inflation), repressed inflation is said to exist when upward pressure on the price level is resisted by administrative control. (It is also defined by Nuti as the rate of change of excess demand.)

In the consumer goods market, too?
First, the boundaries of the debate must be delimited by saying that while the existence of excess demand in the state inter-firm sector of STEs is rarely challenged, the question of the endemic nature of repressed inflation in the market for consumer goods has been hotly debated. Also, the credit expansion typically exhibited in the state inter-firm sector would not have inflationary effects in the consumption sphere unless the (usually strict) separation of the functions of money between the two began to break down—if, for example, enterprise credit was allowed to be used to pay for wage increases and it became someone's income (ie if it was “activised”).

How, then, are we to identify inflation if movements in the price level are ruled out? To those who argue that repressed inflation is endemic to the consumer goods market, the evidence seems obvious: the chronic existence of queues, of shortages and of black-markets. These phenomena seem to testify to real attempts to consume more than is officially being produced. This is the kind of thinking adopted by Kornai in his attempt to construct an "index or partial indicators" from, for example, the number of building orders refused, unfulfilled car orders, or the length of waiting lists for accommodation. Pindak takes an equally direct approach to an analysis of Czechoslovakia between 1972 and 1978 by tracking the decreasing proportions of goods in the market for foodstuffs and industrial products not experiencing supply problems.

Another approach is to look at trends in saving. The theory here is that if consumers cannot make their desired purchases, and the bureaucracy prevents a rise in retail prices that would choke off demand, it is likely to be reflected in the rapid and involuntary growth of savings in relation to income or sales. However, since it is difficult to detect a change in the savings rate which signifies the qualitative change from voluntary to involuntary saving, some observers have pointed to the growth of the money-income ratio in many STEs as evidence of involuntary saving (and hence repressed inflation) which, over time, develops into a monetary overhang: frustrated buying power accumulates over the economy in the form of liquid assets (cash and sight deposits).

Charemza and Gronicki take another approach, using the rational expectations hypothesis to estimate excess demand for consumption and labour both in absolute terms and relative to quantities transacted, the results of which show a U-shaped pattern for excess consumption demand in Poland between 1960 and 1980, bottoming out in 1970, steadily increasing to the mid-1970s at about 8% of total quantity of consumption sales. They also employ a static indicator—the difference between the estimated market-balancing price and the real price—to suggest the strong growth in the level of repressed inflation in Poland after 1970.

From this perspective, macroeconomic rationing—and therefore repressed inflation—is seen as a quintessential and permanent feature of STEs, even in the market for consumer goods. First, because excess purchasing power is often deliberately built into wage settlements by the planners, thus forcing the adjustment process onto consumers; and second, because it is seen as a basis of social discipline (and political power).

The initial criticism of this position must be that visible signs of shortage cannot, without further qualification, be taken as indicators of excess demand at the macroeconomic level. This is because the root causes of the observed phenomena may be microeconomic in character. They might, for example, be the result of inadequacies of distribution rather than production, or they may stem from the rigidities of pricing policy (that is, a problem of relative rather than aggregate prices). These observable indicators may be particularly misleading if we think of repressed inflation as the rate of change of excess demand.

Why do we need to know?
The question of the source of repressed inflation is an important one, as it will influence the choice of stabilisation policies pursued in the period of transition from socialist to capitalist economic systems.

Is aggregation appropriate in STEs?
Within the field, there has been a somewhat heated dispute over the theoretical justification for statistical aggregation, given the nature of Soviet-type economic systems. An example of the aggregative method is an econometric study of Portes and Winter. While arguing that the roots of the problem are microeconomic in character, they maintain the pertinence of a macro approach to an analysis of economic imbalance. They test and reject the hypothesis that excess macroeconomic demand is endemic to the consumer goods markets of STEs. On the contrary, they conclude that from the mid-1950s to the mid-1970s excess supply was the dominant regime in three out of the four countries analysed (Hungary, Poland the GDR and Czechoslovakia).

Kornai, in contrast, contends that in a shortage economy, the idea of excess macroeconomic demand is not an operational category. By this, I think he means that when the consumer is forced to substitute for their original buying intentions, or is deterred from following through the buying intention in any form, the netting out of shortages for some products against surpluses for others is inappropriate, since withdrawal from the market reduces the level of observable shortages; also, perhaps, that quantitative measures fail to take into account qualitative criteria. This may mean that Portes's rhetorical criticism of estimates of excess aggregate labour supply in Western countries because of the phenomenon of the "discouraged worker" may be inadvertently justified.

Holzman's indicator for repressed inflation—the ratio of free market (kolkhoz) prices to state prices for foodstuffs, weighted by share of output and expressed as an index—assumes that the level of repressed inflation in the state sector has a direct impact on the level of prices in the free market. The ratio indicates a decline in the level of repressed inflation in the USSR for the decade after 1955, followed by a period of stability that lasted until the mid-1970s, when a definite, though undramatic, increase occurred until 1979. (However, I couldn’t see from the data what the proportions of the repressed inflation were at the base date.)

It has also been argued that trends in the money-income ratio should be interpreted as a wealth-income ratio in STEs, since the underdevelopment of capital markets means that only a narrow range of assets is available. The trends taken to indicate the development of involuntary saving may therefore be better explained by factors that interpret them as increased rates of voluntary saving. Ofer suggests that two such factors are the need to build up levels of saving: first, to be able to purchase consumer durables when no consumer credit is available; and, second, to offset the deterioration of public services and real levels of social security pay. In addition, a significant rise in the wealth-income ratio is hardly surprising given the very low levels of the ratio that prevailed in many STEs at the beginning of the 1960s. Cotarelli and Blejer suggest that, applying the life cycle hypothesis to consumption behaviour in the USSR, the increase in the wealth-income ratio could be interpreted as resulting from the deceleration of disposable income growth in the period 1965-80.

Conclusions
The hypothesis of endemic repressed inflation in the market for consumer goods thus emerges battered from the criticisms of more nuanced, more plausible interpretations of data and of rigorous econometric analysis. Nuti seems to add to the weight of this criticism by pointing out that the acceleration in the growth of liquid assets could be explained by the higher market-clearing prices on secondary markets, or by the necessity of speculative holdings in conditions of erratic supply—both of which would invalidate the concept of involuntary holdings for the sector as a whole. This might go some way, he suggests, to reconciling the estimates of low overall excess demand in the consumer sphere with concern for market imbalance. However, he goes on to argue that the bulk of the stored up buying power would be pressing on the lower priced, quantity-constrained markets as a result of (I think) the lack of substitutability between (luxury and everyday) goods. Consequently, the level of excess demand could be increasing fast in the state consumption sector, while open inflation in the non-state consumption sector keeps the level of excess demand for the sector overall at a stable level.

Cheerful rebel

Cheerful and playfully arrogant,
done up in his boots and his good felt hat,
the slanting leaves that shared his accent
in the wood were smiling like sharpened axes
as he made past the barn and the sheepfold,
his weapon slung over his shoulder
as if he was heading to work in the field,
as per usual, though he was heading for the war.

Yet May fell within weeks and September
went AWOL; now he can’t for the life
of him, as he peers in his bag, remember
the ferns that waved him off: one loaf
of bread is left, and the devious enemy
is taking pot shots from ridges in the hills,
so he can't see their faces—if they have them.
Also, his boots pinch and his hat has holes.

So he crawls on his belly, he's flat on his face
on a slope of crumbling sand and mud
as the clattering hoof-beats of riders race
past above him on a raised dirt road,
and he’s holding his arms in a pincer
about his head, as a child, for camouflage;
he peeks up the mud-bank, where the air
and earth split his vision, half-and-half.

The sky still seems hopeful—if empty—
though the way out leads through a marsh.
He rubs at his side where the hardy
shoots of marram grass dug harshly
into his ribs, and he thinks—on rolling over,
once the riders are out of range—
"I would have laughed when I was younger:
now I just shake and cringe."

A ravenous wolf troop will sweep
through the countryside, ravaging hedge
and crop. Will the copse get the chop
along with the tree of knowledge
of good and evil? To use for another spear
shaft? To lighten a while the dismal mood
around that evening's pitiful campfire?
To ruin the gloom with the surplus firewood?

(Dawlish, 2001)

I really love you, Attila

About ten years ago, I did a reading course in Hungarian (it was supposed to allow us to make use of economics material in the original language, but the lecturers also covered some literature), and I translated a handful of the poems of Attila József. This was a labour of love, for which I sat in the old SSEES library with my English-Hungarian dictionary, splitting the words up one by one to discern their grammatical functions—consulting whatever English translations I could get my hands on for fresh possible connotations.

The best translations available in English at that time were by John Bátki; I still prefer the results of his first effort to those of his second, since the original formulations often seem to me to have more resonance—though perhaps that's because I read them first. (In one brash poem, called Attila József, he addresses himself: "I really love you, believe me. It's something I inherited from my mother".) Since then, the excellent Scots poet Edwin Morgan has produced a pamphlet, though it's difficult to get hold of and I've only seen a few of the individual poems.

As to my own efforts, I hadn't looked at them for some time, until reminded by the title of one of the posts below. Here is the poem in question, with its characteristic "list" form, illustrating the multifarious possibilities of action that the poet seems to be weighing up—illustrating too, perhaps, the anxiety and the luxury of choice. In Hungarian, it's in couplets, but that proved a bit too tricky.

To sit, to stand, to kill, to die
To shove this chair away from me,
to squat in front of a speeding train,
to climb a mountain carefully
or tip my bag out on the plain;
to feed a bee to my pet bug
or with some granny, snuggle close;
to have a tasty soup to sup,
to sneak through mud on tippytoes;
to place my hat on the railway line
or skirt the lake shore in a rush,
or sit on the bottom, looking fine—
or with the breakers, in a flush;
to bloom with the flowers of the sun
or merely to let out a lovely sigh
to drive away a fly—just one—
or dust my book of grit and grime;
to clean a mirror with my spit,
to make a truce with deadly foes—
or knife them all and from the slit,
study the blood as it overflows;
to watch a young girl as she turns
or sit around and twiddle my thumbs;
to light up Budapest so it burns,
to wait for a bird to take my crumbs;

o life, that's writing now this verse,
you tie me up, you let me loose,
you make me laugh, you make me curse—
o life, you make me choose!

(1926)

Dry, indecorous language

I've taken a week off work to study maths and economics, and may post some of my findings on these subjects throughout the week. I'm using this piece of software, bought for me by my wife for Christmas, though I haven't had a chance to look at it thoroughly until now. I might eventually write some sort of review of it.

O life, you make me choose

While filling out the "profile" section for this blog, it occurred to me that it might be a useful exercise to elaborate the extent—and so the limits—of my interests more fully, as an indication of the sorts of things I might want to write about. These take in:

Economics and political economy; maths in economics; methodology in the social sciences.

Politics, political sociology, political philosophy (favourite philosophers: Marx, Montaigne, Locke).

History (European, Russian, Ukrainian, Byzantine; Austro-Hungarian; the Renaissance; the Enlightenment; fascism; socialism; humanism; history of the UK; history of London; ancient history, especially of Rome; history of science and technology); historical materialism; the history of imperialism and theories of imperialism.

Novels: of the English, my favourite is Wuthering Heights, or perhaps Pride and Prejudice; of the American, USA by Dos Passos, or Fiesta by Hemingway—or, from my youth, Kerouac's Desolation Angels ("that part of the green he was that was given moving juice", he says at the top of the mountain of a caterpillar he spots on a leaf there); of the Russian, Platonov's The Foundation Pit, a savage satire of Stalinism and the power of jargon to oppress; also German (Kafka) and French (Proust). But I like classical science fiction too, especially Philip K Dick and Ray Bradbury.

Poetry: in English, my favourites are Chaucer, Shakespeare, Donne, Blake and Shelley; I'm also inordinately fond of Milton's Paradise Lost. Of the moderns, I'm especially fond of Patrick Kavanagh, the crazy Catholic mystic. Of the Americans, I like Walt Whitman, "a Kosmos", and Allen Ginsberg. From other countries: Blok, Mayakovsky, Mandelstam of the Russians; from elsewhere: Brecht's Poems 1913-56 (I've had this book since I was 16 and my copy is now held together by a pair of yellow-luminous shoe laces), Erich Fried (100 Poems Without A Country), Attila József (the greatest proletarian poet), Dante, Lucretius (De Rerum Natura), Yehuda Amichai, Irving Layton (sexist, but he has classical poise).

Favourite Shakespeare play: Hamlet, I'm afraid.

The films of Bergman (of the not so well-known ones, the one I like the most, I think, is Shame, a political drama about the impact of war or violent civil disruption on personal relations), Tarkovski (Solaris and Ivan's Childhood), Pasolini (The Gospel According to St Matthew), Rossellini (Rome, Open City); Visconti's The Leopard, with Bert Lancaster as the philandering old patriarch, the Prince of Salina; old Hollywood films (The Maltese Falcon); superior-quality Soviet propaganda films (eg The Dawns Are Quiet Here); Laurel and Hardy films (Sons of the Desert); Edgar Reitz's Heimat 1, 2 and 3 (number 2 is the greatest long film of all time, and the part with Reinhardt in Venice is an astounding film in its own right, comparable with anything at all, so far as I'm concerned).

And only recently I saw Csillagosok, Katonak ("Staries, soldiers", I think, but translated as "The Red And The White") by Miklós Jancsó, a profound and unusual film with almost no dialogue or soundtrack, about the Russian civil war and its cycles of meaningless, arbitrary violence. Very memorable.

Also: Dekalog, which is, of course, stupendous stuff (the one about killing is a brilliant polemic against the death penalty—though it is not only that; but I like the last one best, about the brothers' stamps). Oh, and the Iranian film, Where is My Friend's House?, which has fairytale-like or "oral" visual elements in it, such as the repetition of the image of the zigzag path between villages. Plus two heartbreaking Iranian-Kurdish films, A Time for Drunken Horses and The Blackboard.

Music: Nick Drake, Magazine, The Stranglers, Bob Dylan, Leonard Cohen, Shubert (especially the majestic 9th), Shostakovich, Nirvana, Urusei Yatsura.

Languages: I took a crash reading course in Hungarian at university (now mostly forgotten, sadly), and I've been studying Russian on and off for a while now.

I also take an interest in English grammar and comparative world religions.

Whither Rus?

What's all this about? Why now?

Four thoughts:

• there is currently loads of oil money washing about (so I'm told), boosting the confidence of the ruling elite, who, Nero-like, continue with violin practice while the Third Rome burns;
• America, pinned down, appears relatively weak;
• ahead of the "difficult" changeover in 2008, an appeal to "great power" nostalgia looks as though it might be helpful at home in binding and rallying the swindled masses to the patriotic cause of the state; and
• those proposals for positioning missile-defence systems in central-eastern Europe can't have helped.

Inaugural post

Having of late undergone some disillusionment, I have decided to dust myself down, pick up my paddle and set off once again in my small bark, across treacherous waters, on a quest to seek out an answer the question: What is true?

This, I realise, may take some time.