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Saturday, October 20, 2012

Why Teaching History of Economic Thought Is Important, Abba Lerner Edition


So Abba Lerner understood the idea behind these OLG models back in 1961, and was unimpressed:

"MESSRS. Bowen, Davis, and Kopf have shown that the real burden of a project using up resources in the present can be shifted to future generations by internal borrowing, providing one defines 'generation' in a particular way. It is just as easy to prove that all politicians are economists or that all economists are dunces, provided one defines 'economist' in a particular way...

"But there is no reason for supposing that the President was trying to use any language other than English, and what the President said is simply wrong (in English), unless indeed all the economists (including Bowen et al., as well as J. M. Buchanan, who plays similar linguistic tricks) are absolutely wrong.

"The real issue, and it is an important one, between the economists and Mr. Eisenhower is not whether it is possible to shift a burden (either in the present or in the future) from some people to other people, but whether it is possible by internal borrowing to shift a real burden from the present generation, in the sense of the present economy as a whole, onto a future generation, in the sense of the future economy as a whole."* (Emphasis mine: this is what I keep saying the OLG models are actually showing.)

As the OLG models show, no, you can't do the latter. Lerner was right in the first place! He had seen  through the "verbal trick" Rowe is touting as disproving Lerner's thesis five decades ago.

Abba P. Lerner
The Review of Economics and Statistics External Link 
Vol. 43, No. 2 (May, 1961), pp. 139-141
Published by: The MIT Press
Stable URL: http://www.jstor.org/stable/1928663


12 comments:

  1. Very interesting. Notice Lerner didn't say, "Paul Krugman was right on this."

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  2. Again, the David Brooks statement that drew Krugman and Baker's ire was that Americans were imposing "huge debt burdens on their children."

    Suppose we take the typical reader of Brooks' column and ask them whether they thought Brooks was saying:

    1) that our children will be worse off because we racked up so much debt.

    or

    2) that there will be a future time t such that at t U.S. GDP will be lower than it would have been if we hadn't racked up so much debt.

    Do you really think most people are going to pick the latter option?

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    Replies
    1. That's all fine, Blackaddder. It's just that Brooks is wrong because it is not the debt that is the problem. It is the inter-generational wealth transfers. The debt is neutral.

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    2. Is the system not set up so that those children will in turn receive inter-generational wealth transfers?

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    3. That's all fine, Blackaddder. It's just that Brooks is wrong because...

      Gene, do you realize you keep switching back and forth between what "the point" is? Go look at your Lerner quote. He didn't say what you are here saying. He didn't say, "The president is right that we are enjoying higher consumption and our grandkids will experience lower consumption, but he is wrong to blame it on the debt per se that we are racking up." No, Lerner said that it is a word trick to think that "future generation" means "future people," when clearly every American knows that "future generation" means "the economy in the future."

      Literally Gene, if I found that paragraph before you did, I would've posted it to say, "Ha ha! Look at this clown Callahan has been defending. Boy Gene will be embarrassed when he sees this, in all its absurdity." And yet, you say it first and exclaimed, "Aha! I knew it!"

      I'm not even being a wiseguy. This is fascinating to me that we're reading the same Lerner passage and having such opposite reactions to it.

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    4. Or, you have not yet gotten what I am saying, and my view seems to be shifting because of that misunderstanding.

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    5. 'No, Lerner said that it is a word trick to think that "future generation" means "future people,"'

      And you've clearly misunderstood Lerner, because that is NOT what he said!

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  3. Gene,

    Now you've got me confused.

    Lerner says that 1) debt can be a burden on a group of people in the future, but that 2) it's wrong to talk about debt burdening "future generations" because in ordinary English "future generations" refers not to a specific group of people but rather to GDP at a particular point in the future.

    I claim that Lerner is wrong about 2), and you response is that it doesn't matter because 1) isn't true. So what was the point of bringing up the Lerner quote?

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    Replies
    1. "Lerner says that 1) debt can be a burden on a group of people in the future"

      No, no, no, no, he does *not* say that! He says burdens can be shifted amongst groups of people at a point in time. One can do that now, or one can do that in the future. But you can't through debt at present burden the entire population 100 years from the present.

      Reading Lerner has really boosted my confidence I have a handle on this, and reading your and Bob's misreadings of Lerner confirm that further.

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    2. No, no, no, no, he does *not* say that! He says burdens can be shifted amongst groups of people at a point in time.

      In that case Lerner is doubly wrong. The whole point of Nick and Bob's spreadsheets was to demonstrate that shifting burdens among groups of people at a point in time can result in burdening a group of people in the future.

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    3. Sorry to have gotten frustrated blackadder. But, in any case, I know that is what Rowe and Murphy *thought* they were showing. But they weren't: I could always duplicate every one of their spreadsheets by merely duplicating the inter-generational transfers happening at each stage, with no debt involved. The debt was a red herring.

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    4. Gene,

      I get that you have a separate argument about why Nick and Bob are wrong, but let's bracket that for the moment as it's not Lerner's argument.

      Lerner's argument was an appeal to the ordinary English meaning of phrases like "future generations" or "our children." Lerner says that when people talk about debt burdening future generations, "generations" refers to the country at a particular point in time, rather than to a group of people over the course of their lives.

      I say this is wrong. People talk about the Baby Boomers as a generation, but they don't think Groucho Marx was a Baby Boomer even though he was alive in 1965. Similarly, when Ike or Brooks refer to the effect of debt on "our children" the natural reading is that they mean the children of present Americans, not the country in 2050.

      Delete