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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.

Tuesday, May 12, 2015

the parable of methods

In a letter to Sophie Valland, Diderot gave an account of an argument concerning method between his friend Grimm and M. Le Roy. Grimm hated method, or at least talk about method – either you knew how to arrange things through the force of things, or you do not. Le Roy took the opposite opinion. Just then the secretary of the ambassador of Naples in France – Ferdinando Galiani – spoke up:

“My friends, I am reminded of a fable: listen. It will be, perhaps, long, but it won’t bore you.
One day, in the midst of the forest, there arose a dispute concernng song between the nightingale and the cuckoo. Each vaunted his talent. “what bird, said the cuckoo, has a song as easy, as simple, as natural and also as measured as me?|”
- What bird, said the nightingale, has one that is sweeter, more varied, more lively and more light and more touching than mine?
- The cuckoo:  I say little, but what I say has weight, and order, and is thus memorable.
- The nightingale: I love to talk: but I am always new, and I am never tiring. I enchant the forests. The cuckoo saddens them. He is so attached to the lessons of his mother that he would not dare chance a tone that he hasn’t got from her. Myself, I don’t recognize a master. I play with the rules. It is when I infringe on them that I’m admired most. What comparison can there be between his fastidious method and my happy inspirations!

The cuckoo sought to interrupt the nightingale several times. But the nightingale sang on and didn’t listen: it is a little their characteristic fault. Ours, carried away by his ideas, followed them with rapidity, without caring about the responses of his rival.

However, after  the exchange of replies and counterreplies, they agreed to give the judgment of their dispute up to a third animal.
But where to find a third equally instructed and impartial who could judge them? It is difficult to find a good judge. The went in search of one everywhere.
They were crossing a meadow when they perceived an ass with the most grave and solemn aspect. Since the beginning of assdom, none had ever sported such long ears. “ah, said the cuckoo, in seeing them,”we are really fortunate that our dispute is an affair of  ears: here’s our perfect judge. God created him for us especially!”
The ass was eating grass. He hardly imagined that one day he’d be called upon to judge music. But Providence amuses itself with all kinds of things. Our two birds abased themselves before him, complimented him on his gravity and judgment, and exposed to him the subject of their dispute, after which they humbly begged him to listen to them and decide.

But the ass, hardly turning his heavy head and not missing a blade of grass, made them a sign with his ears that he was hungry and that today was not his day to assume the judge’s seat. The birds insisted: the ass continued to graze. In so doing, his appetite eased. There was some trees planted along the path through the meadow. “oh well, “ he told them, go there. I surrender to your wish: you will sing, I will digest, I will listen to you, and then I will tell you my opinion.

The birds went like a shot and perched themselves. The ass followed them with the air and step of a judge made of cement walking through the halls of the palace of justice. Finally he arrived and said: “begin, the court will hear you.” He was of course the sole court.

The cuckoo said: My lord, my argument is such that you cannot miss a word. Grasp the character of my song and, above all, observe the artifice and the method.” Then, breathing deeply and flapping his wings to emphasize the beat, he sang: coocoo coocoo coocoo coooocooo coocoo. And after having combined this in all possible ways, he fell silent.

The nightingale without a preambule deployed his voice, threw himself into the boldest of modulations, followed the newest tunes, and the ones that were the most rare. His cadences were such that they verged on the breathless; now one heard the sounds fall and murmur from the bottom of his throat like the ripples of a stream which loses itself among the pebbles, now the voice went higher, swellled little by little, filled the entirety of the air and remained there as though suspended. It was successively tender, light, brilliant, pathetic and painted whatever character it took on. But his song was not made for everybody.

Carred away by his enthusiasm, he kept singing; but the ass, who had already yawned many times, stopped him and said. I don’t doubt that everything that you sang there is very beautiful, but I don’t understand it. It appeared to me to be bizarre, tangled, and incoherent. You are perhaps more expert than your rival, but he is more methodical than you – and I, I am for method!

Such is the parable of methods.