‘Every Hand in Motion’ Edward Wests Classical Theory of Demand and Employment

According to Cannan Edward West was the ‘first Ricardian before Ricardo himself’.

He is remembered as one of the co-discoverer with the classical theory of rent, together with Malthus, in 1815.

Much less well known than his 1815 work, though much better written by a more mature writer, was his 1826 Essay on the Price of Corn etc.   I have reread it this evening and again am struck by how ahead of his time he was.

Yet this essay was forgotten, with the period in the depression in the price of corn over interest in political economy lagged.  JS Mills pamphlet on unsolved problems lay unpublished for a generation.  West was a lawyer, was too busy to publish earlier.  Becoming a judge in Bombay he died tragically early, spending his lost year on a lost and unfinished treatease on the whole subject of political economy.  Let us hope that in some Bombay chest it some day turns up as his 1826 Essay, referring to a follow up work, indicates that West had made remarkable advances to the core concepts of classical economics.

In the introduction to the 1826 Essay he claims priority to certain key concepts of ‘ricardian’ economics. He certainly held to the core surplus view, and that given a fixed real wage prices and profits were determined. But in one key respect he broke with Smith and Ricardo decisively.

West attacked the concept that the demand for labour depended solely on the amount of capital. An error he considered that pervaded almost every page of political economy.

‘ how important it is to distinguish the price of labour from the wages of labour. From the omission of this distinction Mr. Ricardo did not see that wages and profits may increase together; though perhaps the price of labour and profits cannot increase together. The demand for and money-wages of labour may be increased without any increase of the capital of the country….a brisk trade, a demand for our manufactures caused by whatever circumstances, without any preceding increase of capital, sets every hand in motion; whilst the contrary circumstances cause a stagnation of trade without any preceding diminution of capital, and throw many out of employment.’

This is clearly a theory of aggregate demand, many years before JS Mill, and a very modern theory dependent on the real wage – here there was no’classical duality’ criticised by Keynes of treating prices and money separately.

Wests distinction, in book III, between the price of labour and the rate of wages is key. Price of labour is the cost of production, West concedes that Ricardo is right that profit is inverse wages if considered as cost of production, but wrong if considered as rate of wages. West essentially makes two arguments, firstly productivity can go up, induced by technology, the price of labour remains the same but the real wage goes up.

Secondly, and this is where it gets interesting West develops a model, of two sectors, what today we would call basic and luxury goods. His essential argument seems to be that if the price of the basic sector goods falls then the real wage increases, in a monetary economy the circuit of reproduction would recycle this benefit and this refutes the doctrine of a fixed wages fund.

This is remarkable on many levels. It seems to be the model for Marxs Reproduction schemes in volume II of Capital. Perhaps he was intrigued and wanted to complete the model. It also seems to be the inspiration for Sraffas basics/non-basics two sector model. As others have commented on it seems to anticipate some features of modern growth models. West also understood that demand depended not just on money but on credit and the sources of confusion arose from the different functions that coin performs.

Also of great interest is chapter 2. Here is a very clear exposition of the concept of opportunity cost. Wests theory of price is important. He clearly sets out a schedule of demand and explains that price is set at the point along that schedule of the lowest price someone will offer for a given supply. If the amount demanded is less than the cost of production it provides an ‘impulse’ to increase supply etc,

The theory is important because it provides a missing coherent theory of demand and aggregate demand/employment to classical theory, and because it removes the weakest link of the classical model – its iron law of wages. It also helps demonstrate I think that marginal concepts could have been incorporated within the classical surplus model to a greater degree without going down the neoclassical route.

Will US Housing Market trigger a double dip?

The Telegraph has a report of a double dip in the US housing market.

I have reported here my worries of a china induced dip.

My favourite economist Prof Steve Keen confidently predicts a double dip here on you tube. As economist turned minster of the dept he wanted to abolish, Vince Cable did last week.

How can this be squared with the report this week predicting a house price recovery?

The critical and worsening housing shortage clearly places upward pressure on house prices, but only so far as individuals and banks have deleveraged debt and can borrow/lend again. We are not yet at that point.

Aggregate demand=spending=income+change in debt

So long as debt is being deleveraged aggregate demand will fall. Why then did the economy recover – a smidgeon – before debt were fully deleveraged. The Credit Impulse theory Prof keen refers to – by three London bankers.

Biggs, Mayer and Pick unpick credit into its stock and flow components.

‘a rebound in economic activity is closely related to a rebound in the flow of credit, rather than the stock of credit. The flow of credit can rebound even when the stock continues to decline’

This is a key insight and explains the dead cat bounce, low recession induced interest rates decrease household debt, leading to an increase in aggregate demand, but if for any reason interest rates go up or household spending decreases (such as through spending cuts) the amount of deleveraging households and firms can afford is reduced – balance sheets remain negative. The three need to be carefully balanced to ensure recovery. If the flow of debt payments starts to increase again the stock can grows if households cant afford it and aggregate demand is reduced.

Three solutions seem to be advanced

1) The New Treasury View – though these days its as much the IMF view, slash spending, internally devalue eventually you will get growth, Latvia is the poster child. Ill cover the problems with this in another post

2) Debt doesnt matter – this is the view of MMT (Modern Monetary Theory), put in a nutshell this argues that government debts and private savings must balance as an accounting identity (‘understand why in Monopoly the Banker can never run out of money’), so governments can keep spending. Its based on chartalism and has gained some leverage on the net and has elements of truth. But it is high risk and flawed. Again ill deal with this elsewhere.

2) Managed Forbearance – The managed and mutual cancelling or writing down of debts with special measures for those at risking of losing savings in Zombie Institutions. Effectively this is what many pragmatic institution’s are doing already.Bankers have noticed that if you bankrupt people you get little back if the secured assets are in negative equity, yet if you exercise forebearance in the majority of cases you get a payment stream, you dont depress aggregate demand and dont induce Koo/mcculley paradox of deleveraging – asset firesales driving down prices further. The numb headed UK financial services authority seems agast, surely they are ripping off the shareholder (the government in the uk!) no they are looking at from the perspective of the bank not the economy – who do they think there stickholders are!. The view that debt=credit, debtors=creditors is a neoclassical fallacy. In the real world there can be significant accounting inequalities and mutually beneficial cancellations and write downs. This gives us clues to ways which government debt can be reduced in ways which arn’t inflationary. Ill flesh this out in a future post,



National Planning Policy Framework Forensics#1 Sustainable Development-Definition

Im starting a daily series which will look at the practitioners draft of the NPPF in some detail, focussing on areas where policy has been changed, through alteration, omission or addition.

It is clearly meant to be comprehensive ‘designed to consolidate policy statements, circulars and guidance documents into a single concise National Planning Policy Framework’

Or as Grant Schapps said at a recent speech

This is a document that will take over one thousand pages of Planning Law and a further six thousand pages of Guidance (much of it as you know contradictory) and replace the whole lot with one simple, short document!

No more PPS’s. No more PPG’s.

So dont look for that circular on planning, conditions, obligations, costs etc. If it aint here it wont exist.  But this seemed to contradict an earlier statement by Greg Clark that it would only replace PPSs/PPGs/MPGs and related documents – around 40 documents, although other good practice guidance was ‘given too much weight’ as it could be better done by outside institutions.

Planning has operated for 15 years on the ‘Wakeford Principle’ that national policy should be introduced following consultation and not introduced through statements or worse after dinner speechs. Hopefully the NPPF will see a return to that principle.

It will be an epic task and the window of consultation will be exceptionally important, but I don’t think the task is is impossible. After a rocky start national policy Wales is widely respected and much easier to use than its English equivalents. There are many examples internationally of good succinct national planning policy statements. The Welsh document is nearly 200 pages though rumor has it that Pickles wants England’s on 10 pages – you might get general principles on 10 pages or less but I cant see anything being operationally useful on less than 75-150 pages, unless key circulars are rolled into the General Development (procedure) order – which has been increasingly the trend.

Hopefully the government, when it finally goes out to consultation, will publish a full list of all documents proposed to be replaced and those which would remain.

Ill start with the definition of sustainable development – the next post will deal with its operational in the ‘presumption in favour of sustainable development’.

Section 39 of the 2004 Act requires any person or body exercising a function with relation to a development plan must exercise the function with the objective of contributing to the achievement of sustainable development.

The last government and this has resisted putting a definition on the face of any statute beliving it a complex issue of interations and any statute could lose this.  They are right.

However the section 39 duty is one sided.

It should state that the purpose of the planning system is to secure sustainable development.  Secondly it should make it a requirment of anyone exercising any function under the acts to have regard, as they must do to the development plan.  This would be much stonger and could easily be added at House of Lords committee stage to the localism bill.

There could be fears that this could lead to legal challenges if the decision maker did not give reasons to this effect.  Easily dealt with give the reason in the decision, we are well used to doing this in relationship to development plans in inspectors reports etc. etc.

In July 2010, the Government announced that it would cease funding the Sustainable Development Commission (SDC) at the end of the current financial year, and at the same time enhance Defra’s capability and presence to improve the sustainability of Government.

Defra has policy responsibility for sustainable development across government.

The last Government’s strategy on sustainable development SDS, Securing the Future, was published in 2005. This set out a strategic framework for sustainable development, agreed by the UK Government and the Devolved Administrations covering the whole of the UK. It set out four priorities:
Social profess which recognizes the needs of everyone.
 Effective protection of the environment.
 Prudent use of natural resources.
 Maintenance of high and stable levels of economic growth and employment

On the 28th Feb the current government published On 28 February, the Government published its ‘vision’ for embedding sustainable development—Mainstreaming Sustainable Development: The Government’s vision and what this means in practice.

‘This refreshed vision and our commitments build on the principles that underpinned the UK’s 2005 sustainable development strategy, by recognising the needs of the economy, society and the natural environment, alongside the use of good governance and sound science.’

Our Vision for Sustainable Development
Sustainable development recognises that the three ‘pillars’ of the economy, society and the environment are interconnected. The Government has initiated a series of growth reviews to put the UK on a path to strong, sustainable and balanced growth. Our long term economic growth relies on protecting and enhancing the environmental resources that underpin it, and paying due regard to social needs. As part of our commitment to enhance wellbeing, we will start measuring our progress as a country, not just by how our economy is growing, but by how our lives are improving; not just by our standard of living, but by our quality of life.

In response to a report by the Commons Environmental Audit Committee on the 25th May indicated that ‘Securing the Future’ remained as the national strategy. but each of the devolved administrations were free to pursue their own approach to implementation and action. This is consistent with verbal evidence given to the same committee on16th Feb by chief planner Steve Quartermain.

Peter Aldous: How do you plan to work up the definition of sustainable development that local authorities and then others will use? Will you be using the existing definition or will you be working up a new one?

Steve Quartermain: The Minister has accepted that the principles of the definition that are in the 2005 document will be underpinning the basic principles of our definition.

The position of Defra is clear, and civil servants is clear, Securing the Future remains the strategy and definition, Mainstreaming Sustainable Development is the vision and plan of action.

Why then does not the draft refer to these, even in footnotes?  Why is the vision not on the first page of the draft in a big box?

The draft only refers to the Brundland definition, rightly criticised as being old, vague and open to interpretation,  the Securing the Future definition itself has been criticised but at least it operationises it in terms of some key policy objectives, though at the expense of loosing the concept of intergenerational equity central to the Brundtland definition.

The government is laying itself open to the criticism that it is ‘watering down’ the definition through sloppy drafting. Worse it raises the suspicion that the Defra vision is not shared by the Treasury and Dept Communities. It gives the impression of a government that is not joined up or worse is prepared to change its definition of sustainable development to secure a development that secures growth.

Definitions are important, If the whole planning system is predicated on the principle of a ‘presumption in favour of sustainable development’ the first thing a planning inspector or judge will want to know is how it is defined.

At the source of this issue I believe is that Defra has in fact changed the definition and this hasnt yet reached all corners of government.

This SDS definition has been criticised in the environmental community, including its jaded members such as myself because it is ultimately not possible to reconcile exponentially increasingly levels of economic growth with the scientific fact that we are living in a materially non-growing, closed system of which the economy is just a subsystem.

Classical economics understood this well. Resources such as population, resources and extent of international markets created limits on growth, leading to a tendency towards a ‘steady state‘, although changes of technique (technology) allowing higher productivity could create a new higher growth path – for a time. This tendency was of course famously misinterpreted and misunderstood by Marx. The concept has been revised by a number of economists in the last century – notably Kenneth Boulding – who brought the insight that greater ‘flows’ (the neoclassical definition of wealth) could only be sustainable if ‘stocks’ were maintained and not run down – an insightful definition of what ensures sustainablility. Hence ‘growth’ in terms of income flows can be sustainable – but only if stocks are managed and various principles (such as not breaching the second law of thermodynamics through exponential increases in Energy consumption – see Georgescu-Roegen – The Entropy Law and the Economic Process for example) are met.

This principle has been promoted by the Green movement but woefully misunderstood by it. The understanding of the basic economic principles underlying it, and in particular of the causes of economic growth in the first place (division of labour, competition, capital accumulation etc,). Hence they have often persued an anti-economy line. What is needed is a different kind of growth, not no growth, growth which recognises limits and pursues  a sustainable trajectory.

The vision above seems to recognise some of these criticisms, it talks of economic, environmental and social issues being ‘interconnected’, of a ‘balanced’ approach to them. It refers to protecting the resources that underpin growth and of not just measuring progress by money, but in environmental and social terms as well – what is known as the ‘Triple Bottom Line’. This is all rather radical and progressive stuff – one wonders if the message has got through to the Treasury etc.

The NPPF starts off after the confusing definition – or lack of – with a statement of how planning must pursue the three strands of sustainability, and then says.

These objectives should be pursued in an integrated way, looking for solutions which deliver multiple goals. In principle, there is no contradiction between facilitating increased levels of development and the environmental role of planning, as long as development is planned and undertaken responsibly. The planning system must play an active role in guiding development to sustainable solutions, mitigating significant impacts and promoting positive strategies for environmental enhancement.

It would be better if the welcome note on multiple goals came first. This is the key good planning is a series of ‘spatial solutions’ that meet multiple goals, for example higher densities next to good public transport nodes meets multiple goals. Meeting multiple goals through ecological design solutions is at the heart of ‘hard sustainability’, as opposed to the ‘soft sustinability’ concept of ‘trade offs’ trade-offs where the environment always comes off worst in the name of ‘growth’.

Rather than integration though the draft is structured around the three ‘objectives’ . Setting out a plan structure by objectives has been popularised by Johnathen Porretts Charity ‘Forum for the Future – it was followed for example in the original Southwalk UDP and the original London Plan. The idea is if you structure around sustainable development objectives you get a sustainable plan.

The problem is, and it is a point I have been banging on about for years and hope to have had some influence on the profession, is that it produces hard to read and use plans with no logical or narrative structure, Wherever it has been used it has been abandoned on future versions of the plan. Rather plans need to tell a storey, a classic three act structure, set out the problem, describe your solutions and provide a climax, how you will deliver in time where everyones role is known. Policies are bundled spatial solutions in that narrative.

The draft continues

The notion that economic growth necessarily leads to environmental degradation must be firmly laid to rest by ensuring that development is undertaken responsibly and that it generates benefits which help secure local economic, social and environmental objectives.

But it does lead to degradation if it results from irresponsible use of resources and degradation of the natural stock. Without reference to this, to active sustainable resource management, it could be interpreted as allow the growth, growth is sustainable, then use the money to clean up afterwards.

Elsewhere on my blog I have explored various definitions used in other commonwealth countries and have suggested the following

‘an ongoing process to improve the living conditions of the present generation that does not compromise the ability of future generations to do so, and that ensures, as far as possible, a harmonious integration of the environmental, social and economic dimensions of development within the limits set by the environment and technology.”

The next post will deal will how the draft operationalises the ‘presumption in favour of sustainable development’ as drafted its just ‘yes to development – development is sustainable’.

Fracking Earthquake

Interesting piece in the Guardian on claims that the controversial process of ‘fracking‘ – injecting liquids at high pressure to break down shale gas deposits – has caused a minor earthquake in Blackpool.

Ive been following this for sometime. The practice has become highly controverisal with claims of water contamination, even water that catches fire, in the States. It is the subject of a film shown at Sundance and Oscar nominated ‘Gasland‘.

It has caused such an impact that a fake industry funded ‘astroturf’ group ‘Energy in Depth’ has been founded to counter – funded by the American
Petroleum Institute.

A commons committee has concluded the problems are caused by poor implementation which should be prevented by the UKs stricter regulatory environment – hmm how does a regulator assess rationally the risks of an earthquake?