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Friday, May 15, 2015

Famines and Slumps: Galiani versus Smith, or a rehearsal for the Keynesians versus Chicago part one

It struck me as a bit of a revelation, yesterday, that a now obscure debate about trade legislation in 18th century France resonates in economic thinking to this day, as the sides that were drawn in that debate took a form that was inherited by political economists who, over the last two hundred and fifty years,   have variously called themselves by different names: liberal or conservative, radical or orthodox, saltwater or freshwater, etc. They are even now arguing about the meaning of the business cycle - which has a much more insistent position in economic thinking, now, than famine. Yet it was famine that first prefigured the division, within the circle of enlightenment thinkers, between what one might call, anachronistically, the pragmatists, and those that represent the economic mainstream, from Smith to Robert Lucas.  Until Keynes, the pragmatists had no central, doctrinal figure – but in the eighteenth century they did have Ferdinando Galiani, whose Dialogue on the commerce of grain conceals one of the wittiest texts of the 18th century beneath a title only an accountant could love.
The Dialogue came out in 1770.A little background, maestro, before we proceed with the explication de texte razzmatazz
In the 1760s – and here the go to texts are Stephen Kaplan’s series of books about bread and politics in 18th century France, including Bread, Politics and Political Economy in the Reign of Louis XV and the foreward to his edition of Galiani’s Le Bagarre – the physiocrats temporarily triumphed in their struggle to de-regulate agriculture, both in France and in Tuscany – both regions, as it happens, well known to Galiani. The traditional triumphalist history concedes, at this point, that instead of what was supposed to happen in theory –the increase in competition and efficiency, and the lowering of prices for grain – there followed a number of famines. By the end of the 1760s, the circle of philosophes around the encyclopedists were divided between the orthodox adherants of the free trade doctrine and dissenters, including Diderot. It was in 1770 that Galiani, who was previously seen as an advanced economist of the free trade type, published his dialogue. All hell broke loose.
Karl Gunnar Persson summarizes the physiocrat theory well: “ only free gran trade can achieve price stability. Local price stability required exports in tiems of abundant harvests, moderating the decline in prices. In lean years imports would make price increases less violent than if a region had to rely exclusively on its own supplies. Free entry to the grain trade was vital because with many merchants excess profits in the grain trade would not prevail: they would be arbitraged away by competing merchants.” (4)
One senses, here, the invention of a device that would be used over and over in the next two centuries. One was the important place given to the natural equilibrium of the unimpeded market. It would adapt to changed circumstances so as to bring about the most efficient outcome, unlike outcomes produced by regulation. The second is the place of competition. Competition would insure that the price system corresponded to that promised by the free market. This competition, it was assumed, would never devolve into monopoly. If it did, the price distortions would lure into the market space other competitors.
The physiocrats of course had other theories that are rejected today by mainstream economics – most notably, the idea that all wealth is based on agriculture. But this we will leave to one side.
Next, lets take our hero – Abbé Galiani. Ferdinando Galiani was a prodigy, writing letters like a dean when he was seventeen, lecturing when he was eighteen. Born in 1728, Galiani came from a distinguished and educated family. He wrote his treatise on money at the age of twenty; Schumpeter, among others, has remarked on its ingeniousness, both by the hypothesis of a subjective theory of value –  which is of course the way station to the marginalist revolution in the 19th century – and for his remarks on general equilibrium.
By the time he came to write the dialogues on the grain trade, Galiani had had a lot of subsequent experience as both a writer and an adminstrator. He had, in the latter role, experienced the brunt of famine in Tuscany. It is usual to call Galiani a sceptic, which is a polite way of saying that it is hard to place him in some whiggish history of economics. I think that scepticism is rooted in two things, intellectually: one is the spirit of Vico, who seemed to have influenced all Napolitan thinkers. I’m thinking especially of Vico’s famous strike against Cartesian philosophy, On the Study methods of our time, with its rebuke of the geometrical method in philosophy. The other influence, which I may simply be making up, is Shaftesbury. Shaftesbury was a Napolitan thinker by adoption, one might say, since he retired and died there.  Galiani was not an anti-Lockian, like Shaftesbury, whose animus was born of his personal connection; but  about reasoning I think Galiani was of the same mind as Shaftesbury in moving the cursor of definition from the individual to the social: it was a product of sociability rather than introspection. It was the product of dialogue and the conditions that made dialogue possible.
Now one of our persona is in place. Our other persona – for I am making this a two person essay, radically foreshortening the whole thing – is a man who needs no introduction, as he has been in your office, kitchen, bedroom and dreams whether you know it or not: Adam Smith.
I will hold back on the background with Smith. Since he is the more known of our figures, I will merely allude to the fact that the Scotland in which Smith lived and worked was, like the Kingdom of Naples, a primarily agricultural place. Scotland, in 1695, emulated the English by encouraging the export of grain in order to bring in national income. It was a very short lived sport of a policy:  “In Summer, 1695, they were very busie in giving rewards for having their Corn carried abroad, and a few months after, as impatiently employed in buying it back again.” (Karen Cullen, 31) In fact, over the next five years, the harvests in Scotland were so bad that the people experienced scarcity and famine, only returning to the norm in 1700. As demand increased, so did prices: “In the two years from 1695, prices increased as much as 110 percent… In 1697, prices moderated a little, but in 1698 and 1699 they rose to new heights. Though precise figures do not exist, large numbers of the population died from starvation and disease. The dearth had serious consequences for rural incomes; many tenants faled to porduce a surplus.” (Richard Saville, 39)

The argument I am going to make is that the formal couple of regulation or deregulation and famine have a conceptual similarity to other forms of regulation or deregulation of cyclical economic processes. And it is this conceptual similarity that makes the debate between Galiani and Smith an interesting precursor of the contemporary debates between slightly heterodox Keynesian approaches to the economy and orthodox ones.

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