Long, long ago, before Economic Principals emerged, I published a book titled the Idea of Economic Complexity. In the context of President Trump’s two-prong assault on the independence of Federal Reserve and the Bureau of Labor Statistics I’ll try to explain the two big mistakes that I made.
I had left college a couple of years before, knowing little early modern history and still less modern economics. The editor of the magazine where I worked asked for a story about the likelihood of deflation. This was 1974, OPEC, and WIN buttons at the White House.
Standing in a library I was leafing through old books, I came across an article by Oxford economic historian E. H. Phelps Brown and Sheila V. Hopkins. That is how I met the price revolution of the sixteenth an seventeenth centuries.
It was an astonishing occurrence. For a hundred and fifty years, European prices rose to a level roughly six times what they had been before and, unlike previous centuries, didn’t go down again! They then settled on a new level for another hundred years before doubling again, during the Napoleonic wars. Again, prices never returned to their previous level. They were higher still today. There has been no deflation, except for short and sharp events that had caught investors napping.
The Price Revolution was well-known to modern historians, just not by me, and most of the magazine’s readers. After all, it had ended more than three hundred years before. The preferred explanation among ecnomists and many historians was that New World Treasure, shipped back to Spain, had been the cause.
Outside the library, prices had been rising again for forty years, this time in the second half of the twentieth century. Price level measurement is a complicated task undertaken then, as now, by the U.S. Bureau of Labor Statistics. Yet it didn’t take a computer to know that a repetitive candy bar had cost a nickel in 1950, and a smaller version now cost fifteen cents. By the ed of the decade it would cost 80 cents. This was the major phase of what today is known as The Great Inflation of the second half of the twentieth century.
By then, economists offered explanations, no longer historians. Was this a matter of “cost-push inflation,” in the language of the Seventies, or a case of “demand pull?” Or both? Cost-push meant that something or other was pushing up prices and keeping them there. Demand-pull meant that “too much money was chasing too few goods.” The issue, it seemed, was the direction of causation.
Two “price revolutions; two relatively sudden stops. Was there a common denominator? There was no New World Treasure in the second half of the twentieth century. Or was there?
This was my first mistake. Knowing little about money, credit and banking, understanding less, it didn’t occur to me that the monetary systems of both the sixteenth and twentieth centuries had experienced vast changes. In the first episode, the discovery of the New World had touched off rising prices. In the second, perhaps the invention and adoption of central banking had precipitate similar effects.
In the first instance, a system of commodity money had been perturbed. In the second, gold and silver had been replaced by a system of fiat money, its purchasing power backed by nothing more substantial than the acumen of central bankers -- and the wisdom, or lack thereof, of their governments treasury's.
A plausible surmise was that, in the first situation, prices stopped rising as mints and exchequers gained skill at controlling their system, managing bimetallic standards through minting, re-coinages, price-setting, and note issue. In the latter, central banks experimented with credit controls, tax cuts and increases, open market operations, inflation targeting, and so on, until things seemed to come under control.
Never mind, then, New World Treasure, at least for now. To avoid price revolutions an even worse – think of the collapse of the German mark in Weimar Republic of the Twenties – central banks and government spending would have to cooperate to achieve a stable careful balance in the twentieth and twenty-first centuries. That is common sense today, but there is precious little about it in The Idea of Economic Complexity.
But then, that wasn’t the point of the book. What about the direction of causation? In each case, developments taking place in the real economies may have been forcing the hands of the policy-makers responsible for the quantity and quality of money. In the fifteenth century for example, there were complaints in the years before of a “ currency famine.” Silver mines in central Europe weren’t producing enough ore to support the economy finally recovering from The Black Death epidemic of a hundred years before. Was it deflation or the improving economy that launched the Voyages of Discovery sponsored by the monarchs of Portugal and Spain?
If so, was that a “push” that unleashed forces that
explained – or helped explain – the price revolution? The Royal Shipyards of Seville and Lisbon were booming long before the swag arrived home. Those casks of silver financed plenty of ornamentation of Spanish churches. But the silver coins that diffused may have stimulated a first, less apparent, industrial revolution. They financed a global experiment in slavery, whose purpose was to clear the fields and harvest the timber of the New World.
In the same way, was the Federal Reserve easing modestly in the Fifties to accommodate the expenditures of the Korean War, the nuclear arms race, and an automotive revolution in the United States? Or because it didn’t know any better? By the time of the Vietnam Wat, there was little doubt that political servitude had begun the Great Inflation.
So, what was the common denominator between the first price revolution and the second? How to describe the changes in the real world that require more money, with which to chase these new and different goods? (Think of the vaccine medical and monetary responses to the Covid 19 epidemic.) That problem led to my second mistake. “Growth” was the word ordinarily employed to describe these chances; “development” gave a hint that things were changing. Both seemed to lack the descriptive snap that might tell you what to look for. Then, too, both were measured in terms of money, which was giving away the game before it started. The word I settled on to describe the changes occurring in the real economy was “complexity.” Complexity, I wrote, “is a word on the tip of the modern tongue.”
I was right, at least, about that much. Books about complexity have tumbled off my shelves ever since. Some of them I’ve read. The trouble is that, like my usage, they, too, lack specificity. Complexity of what? In The Emergence of Professional Social Science, Thomas Haskell wrote, “‘Complexity’ is a uniquely uninformative word, little more than a mirror-image of confusion.” I built my book around economist Peter Albin. César Hidalgo and Ricardo Hausman, put the word to better use. The sainted Joel Moses produced an architecture of complexity that may be the best so far, but don’t try to understand it.
A few years ago, while working on something else, it dawned on me that my second big mistake was to fail to specify that “complexity of the division of labor” was what I was thinking about: innovation, specialization, and interdependence. At least that would have grounded the usage in the tradition of Adam Smith and the path to present-day economics. I got close to saying as much in a lengthy passage that appeared on the back jacket of the book. In part, “A high degree of complexity is what slaps you in the face on a walk across New York City is what is missing in Dubuque, Iowa,”
The Idea of Economic Complexity was politely received by The New York Times, The Wall Street Journal, and The Philadelphia Inquirer. My friend Robert (Sam) Samuelson, a monetarist, wrote that I had got the story all wrong. Among several kind words, James Fallows called the book, accurately, “shaggy.”
And there I left it. The article that began it all had won a prize. The Boston Globe knocked at the door. I put price revolutions and complexity behind me, and began writing the Economic Principals column about what professional economists and neighboring social scientists were thinking and doing. For me, that was a most happy day.
Excellent perspective. I hope this is just a prelude to how you think the concept of complexity applies to day’s and tomorrow’s economy.