Reproduced by permission, from
Cambridge Journal of Economics, Vol. 20 No. 4 July 1996 509-512
Copyright Oxford University Press and Cambridge Political Economy Society 1996
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My article "Is low inflation an important condition for high growth?" (March 1993) concluded: "No evidence has been found to support the notion that a low rate of inflation has in the past and in various countries been associated with improved growth rate. .... The evidence of previous work, which is largely not focussed specifically on this subject, appears generally to support, and nowhere to contradict, these conclusions".
At the time of writing the above, in 1991, the UK was still firmly within the ERM of the European Communities, and the necessity of low inflation was urged on all sides. At the time of publication, the UK had fallen out of the mechanism, and the trumpets were for a while silent. Now (1995), price stability is again the conventional wisdom, as the entire political class edges towards a single currency for the European Union. Price stability has powerful arguments in its favour which need not be rehearsed here. But any assertion, from Right or Left, that price stability, or the deliberate abandonment of it, affects economic growth simply has no factual foundation. The purpose of this note is to show that this position is supported by a recent paper in the Bank of England Quarterly Bulletin, although its conclusions state the opposite.
The paper is "Inflation and economic growth" by R. J. Barro (1995). It considers the effect on growth of inflation, and of "other determinants" such as fertility, education etc. Once the effects of the other determinants are removed, the residual growth is plotted against inflation. This plot, which is the nub of the paper (Chart 10), is reproduced here as Fig. 1. The performances of 120 countries over three time intervals in a 25 year period are represented. The fitted line is y = -.024x. A numerical check on the points shown gives values of standard deviation, for the vertical scatter of points about the line, of about 1.5 percentage points for the densely populated part of the plot (the enlarged part of the figure), and about 2 percentage points over the remainder (no values are given in the paper).
First, it may be noted from the figure that there is apparently no correlation of inflation with growth rate for countries with inflation rates less than, say 15%, which is already a vast range including every major country outside of South America, and excluding, apart from South America, a disparate hotch-potch of countries, for example, Zaire, Israel and Yugoslavia. Barro's figures (t=0.5 for the error on the coefficient) confirm this.
Second, even with a scale which extends up to inflation rates of 220% per year, the worst countries for growth rate can be matched by others, almost as bad, with a low inflation rate. This would suggest that the "costs" of inflation, which at a descriptive level are so convincing (see, for example, a review paper by C. Briault, 1995), are rather overdone.
Third, bearing in mind the cautionary remark of Solow (1994), quoted by Briault (" ... very different national economies are not to be explained as if they represented different points on some well defined surface ... "), one may question the rationale of subjecting such an array of data to statistical analysis, given that the density of points is very uneven, and that the countries are highly disparate. The fitting of an algebraic expression to a cloud of points implies a priori that the points form in some sense a population (another way of saying that Barro's "other parameters" form an exhaustive list, and are treated without error). This is a serious obstacle, since the final results are valueless if conviction is not carried at this stage. The likelihood of these points forming a population adequate to bear his analysis and his positive conclusions, and of his being able to furnish a convincing demonstration of this adequacy, is a priori remote. It is as if one might fit a parameter to points related to some human trait, when the great majority of points refer to people in normal health, but there is a tail to the distribution formed by individuals who are sick or severely abnormal. So, right at the start, the case is forlorn.
Fourth, if it is conceded for the sake of argument that the population is an apt one, and it is acknowledged that the indicated trend (1 percentage point more inflation knocks 0.024 percentage points off growth rate) is algebraically correct and statistically significant, the vertical spread of points about the fitted line (with a standard deviation of 1.5 to 2 percentage points in growth rate) would make it impossible to make any assertion of practical significance in the context of "normal" changes of a few percentage points in inflation. To say that two hundred percentage points of inflation decreases growth rate by 5 ± 2 percentage points would, if true, convey a meaningful message, but to say that one percentage point more inflation decreases growth rate by 0.024 ± 2 percentage points is, even if true, a near absurdity. It would mean that if you could, over a period of 10 years (most points in Fig. 1 represent averages over this period), observe two groups of 100 countries, each group having uniform and constant inflation rate within itself, but one with an inflation rate 1 percentage point higher than the other, then the 200 countries would individually have average annual growth rates spanning a range of about 8 percentage points (as clearly seen in the figure, near the origin), but the average of time-averages for one group of 100 would be 0.024 of a percentage point above that for the other group - virtually invisible within the general spread. That is, even if the prediction was correct as a statistical average when applied to the outcomes of a very large number of countries, the outcome for any specific country would be essentially unpredictable, even over a period of 10 years - hardly a convincing principle on which to hinge a country's economic policy.
Fifth, even this vanishingly weak conclusion cannot be sustained, even at a mathematical level, because it rests on an assumption that the true inflation/growth relationship is represented by a straight line. Clearly, with a vertical spread of 1.5 percentage points, the analysis shown in the graph is incapable of detecting any departure from straightness within the dense cloud of normal or typical countries. As mentioned above, Barro gives specific numbers for this restricted range which confirm this, and he confirms it verbally too, while appearing to state the opposite. " ... The data conform to a linear relationship ... Even at low rates of inflation, the data would not reject (my emphasis) the hypothesis that growth is negatively related to inflation". This is true but partisan, since the emphasised words would read "would neither confirm nor reject" in a neutral expression of the result.
The analysis is therefore open to criticism at a number of levels.
I now give Barro's conclusions in full.
"The bottom line from the empirical analysis is that the estimated effects of inflation on growth and investment are significantly negative when some plausible instruments are used in the statistical procedures. Thus, there is some reason to believe that the relations reflect causation from higher long term inflation to reduced growth and investment.
"It should be stressed that the clear evidence for adverse effects of inflation comes from the experiences of countries in which inflation exceeded 10% to 20% per year in some periods. The magnitudes of effects are also not that large; for example, an increase in the average inflation rate by ten percentage points per year is estimated to lower the growth rate of real per capita GDP by 0.2 to 0.3 percentage points per year.
"Over long periods, however, an apparently small change in the average growth rate has dramatic effects on standards of living. For example, if the growth rate of UK GDP from 1960 to 1990 had been higher by 1.1 percentage points per year, then UK GDP in 1990 would have been the highest in the world, instead of the 15th highest. More specifically, a reduction in the growth rate by 0.2 to 0.3 percentage points per year (produced by ten percentage points more of average inflation) means that the level of real gross domestic product would be lowered after 30 years by 4% to 7%. In 1994, the UK domestic product was £670 billion; 4% to 7% of this amount equals the substantial sum of £27 to £47 billion, more than enough to justify the Bank of England's keen interest in price stability."
The conclusions thus start with a flat statement that the inflation/growth correlation is significantly negative, and that the relationship is probably causative. Next it is stated that the firm conclusion just enunciated applies "clearly" only to countries with huge inflation rates, thus excluding virtually all OECD countries. Then, simply ignoring this important caveat, the two following hypotheses for Britain are presented, the first empty of fact, both quite unreal.
1) If the UK growth rate had been 1.1% higher over thirty years (not mentioning that this would have required an inflation rate forty percentage points lower than it actually had) the UK would by now have the highest GDP in the world.
2) If the annual inflation rate had been lower by ten percentage points for a
ssimilar time (thus being negative for most of the time), we would by now have £35 billion more per year.
That this far-fetched conclusion (which was re-stated by its author in an article in the Financial Times) raised little adverse reaction (see however Brittan, 1995), shows perhaps that this sort of material is so familiar in the media that few notice.
It is my view, proceeding from the above discussion, that the new statistical work of Barro in fact joins mine, in confirming that the existing data do not support the notion that a low rate of inflation has in the past and in various countries been associated with improved growth rate.
Barro, R. J. 1995. Inflation and economic growth, Bank of England Quarterly Bulletin, Vol. 35, no. 2
Briault, C. 1995. The costs of inflation, Bank of England Quarterly Bulletin, Vol. 35, no. 1
Brittan, S. 1995. Elusive case for stable prices, Financial Times, 18 May
Solow, R. M. 1994. Perspectives on growth theory, Journal of Economic Perspectives, Vol. 8, winter, pp45-54
Stanners, W. 1993. Is low inflation an important condition for high growth? Cambridge Journal of Economics, Vol. 17, no. 1
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Abstract. It seems rash even to raise the question in the title. The universal belief is
that the answer is and must be "yes". Yet factual evidence for this belief is curiously
lacking, maybe even felt to be unnecessary. This paper takes what is thought to be all
the, not very voluminous, post-war factual data which exists and which may bear on
the matter, and treats this data in every plausible way to find if any convincing
demonstration is possible that low inflation is associated with high long term growth
rate in GNP. This includes special attention to Germany, the country which is the
popular (and sole) paradigm among UK authorities and commentators. The paper
concludes that no such demonstration is possible.
Paper in HTML form
Abstract. In a previous paper, the author concluded that there was no evidence that
low inflation was associated with improved growth rate. In a later note, he examined a
paper by R. J. Barro which tended to the opposing view, and suggested that the
evidence of that paper in fact reinforced his conclusion. In this note he comments on a
paper by W. R. J. Alexander, concluding that time series analysis, especially with
additional variables as in this paper, is unlikely to be able to contradict cross-section
results.
Paper in HTML form
Abstract:
We all, including economics professors, statisticians and journalists, know just by looking around that our comfort and prosperity is determined by the plethora of objects produced by technical innovations over the millennia, centuries and decades. The earnings of billionaire investment managers may come from their “services”, but their prosperity is manifest in their possession of, or ability to buy, things which have been grown, cooked, mined, constructed, or manufactured. However, by some quirk of social psychology, those economics professors, statisticians and journalists (and no doubt bankers too) apparently believe, simultaneously, that things are not “important”. Agriculture has already been written off as “contributing only 2% of the economy”, and manufacturing is “declining” towards the same invisibility. Recently headlines appeared in the Financial Times and the Daily Mail that “business and financial services eclipse manufacturing” and “the City is supreme as factories fade away”. What was the source of those preposterous views? None other that our Office of National Statistics, whose own press release had been headlined in a similar way. As usual there was no response from any quarter, not even from the CBI Manufacturing Council, to point out that the ONS data had absolutely nothing to do with the only aspect of manufacturing that matters for national prosperity, namely physical output. This note suggests that the ONS should put its house in order. We need not only facts, but a balanced presentation, without attention-seeking headlines.
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Abstract. The general view of the media, bankers, business and politicians, not noticeably contradicted by academics, is that one of the main functions, or the main function, of the central bank is to analyse the progress of the economy, and then to steer it with skilful judgement towards health and growth, by making decisions to change their base interest rate, with carefully chosen timing, amount and direction. The data presented here show that it is impossible to sustain this notion of skilful time-critical steering, or even that the central bank does in fact lead or determine the short term interest rates available to savers or business. The contrary proposition, that commercial short-term interest rates are in fact observed and followed by the central bank, is mathematically sustainable, and generally in accord with the observed facts.
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Abstract: Following on from the note entitled “The Function of the Central Bank” (see above), this note brings the data up to date. It will be re-issued at intervals. It will monitor the tendency of short-term interest rates, give the author's judgement on the likely movement of the central bank rate in the UK, US and EU zones, and enable the reader to make his own judgement. An addendum shows that by the normal standards of statistical testing (which by their nature must always fall short of proof), the 3-month bank rate leads the changes announced by the central banks in their base rates.
Paper in HTML form
Abstract. Politicians, journalists - commentators on economic matters generally - evolve a sort of quasi-stable rhetoric. They select two or three foreign countries with which they like to compare their own, either as models to be followed, or traps to be avoided. Other countries are rarely or never mentioned. They repeat over and over again mantras such as "we are the fourth largest economy in the world" in the UK, or variants of "the dot.com revolution" or "the new paradigm" in the USA. In arguments in the UK over the replacement of sterling by the Euro, it is almost a daily occurrence to hear growth in the UK contrasted with recession in Eurozone Germany. It appears likely that these stories emerge in part from appraisals of GDP expressed for the purpose of cross-country comparison in a currency unit (the Euro or dollar, say) calculated at the ruling rate of exchange. This calculation can be done instantly. It is "news". The more recent method of using purchasing power is much more complex and its results are published late. They are not "news", and do not affect the established rhetoric. Nevertheless, they are the truth, or as near to that as economic data can be, and often quite strikingly at variance with the current story.
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Abstract. The notion of de-industrialisation arises from the fact that industrial
employment, having risen rapidly, is now in equally rapid decline. This paper presents
the view that agriculture and industry together form, and have always formed, a
"primary" sector which from the beginning, because of its inherent capacity for
productivity gains, has progressively freed labour for non-productive work. The
"industrial" revolution was really a "primary sector" (in the above sense) revolution.
There is no new phenomenon of de-industrialisation, merely a speeding up of a process
of labour-freeing from the primary sector, whose ever decreasing work force produces ever increasing output.
Paper in HTML form
Abstract. Economic theory is dominated by abstract structures. Underneath, there is no firm foundation. Above, there is a lack of rigorous confrontation with established fact. Basic theoretical concepts have no acknowledged definition. The apparatus of graphs, algebra and technical vocabulary are often vehicles for rhetoric rather than descriptions of truth. In this abstract world, it seems to be accepted without embarrassment that all opinions are possible, while adopting the style of science in delivering each conclusion as if it was a fact. The closest parallel is perhaps with theology, where also each practitioner presents his story as fact, but there are differing stories. This paper illustrates this theme, with particular reference to "deindustrialization".
It points out that it is tangible things which are the primary measure, literally the sine
qua non, of all material, cultural and intellectual progress. Official statistics necessarily
aggregate market transactions involving tangibles and intangibles at monetary
exchange values. However it is an error, in the sense of being a misperception leading
to wrong action, to mistake this equivalencing of things and non-things as more than a
necessary procedural fiction. In this system, one opera performance equals, say, 100
lorryloads of gravel, but the logical reality is that gravel is part of the primary
inventory, opera and all other intangibles are secondary or consequential. This
inversion of the important and the estimable lies behind the paradox of the
deindustrialization which is in process and the deagriculturalization which has already
run its course in some parts of the world - namely that our entire civilisation rests (and
logically and factually must always rest) on the output of this (in employment terms)
disappearing sector. Eventually, the sector which ultimately produces all value
will appear in the statistics as one which adds zero value in current terms.
Fortunately, the real word of affairs shows no sign of acting on this erroneous
perception. For those accustomed to see the world in abstractions, misperceptions still
seem to obscure the reality.
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Abstract: Is industrial production relatively in decline? No, it is not. This note displays the evidence that for the last 40 years, in the 6 largest economies of the world, industrial production has kept pace with total output.
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WoPEc - Working papers in economics - WUSTL December 2002 Paper in pdf form
Abstract: The author of this note takes it as self evident that prosperity and the provision of "things" (buildings, roads, furniture, furnishings, clothes, machines and equipment of all sorts) go together. The way people generally speak and act is in line with this view. If this is so, domestic manufacturing must continually keep pace with gross domestic product, provided that the necessary "things" are not imported from elsewhere. However, many people are persuaded that domestic manufacturing is in terminal decline, and that the lost output is being replaced by imports from the developing world. Almost daily, one may read of manufacturing jobs being "exported" to the Far East. However, it is simply impossible to import goods without a more or less balancing volume of exports, and there is in reality limited scope for exporting a sufficient volume of services. Imports of goods must more or less be balanced by the export of domestically produced goods. How can a widespread perception of decline be reconciled with a reality of growth? The answer is that the "decline" which is perceived is a decline in employment in the industrial sector, but this decline is more than counterbalanced by the rise of productivity, so that the domestic output of goods by and large keeps pace with the growth of GDP. This note summarises the statistical evidence for the accuracy of this view. A substantial footnote discusses the role of journalists and academics in sustaining the perception of the decline of manufacturing.
Paper in HTML form
Abstract:
When Pigou vigorously attacked Keynes immediately the General Theory was published, he wrote that, “since a detailed running commentary would be both tedious and un-illuminating, I shall not adopt that method”. These reading notes follow precisely this tedious route. The truth cannot always be entertaining. Keynes was one of the most fluent and plausible rhetoricians of his age, and it could be argued that his work can be examined only by dismantling his rhetoric line by line to expose the total logical vacuum which in cold objective fact the General Theory is.
Keynes’ book was seemingly written at speed, contains no bibliography, virtually no mention of factual data, little evidence, pseudo-algebra only for appearances, no attempt at anything which could be called scientific method. His acknowledged greatness lay in his cleverness, and his great skill as a debater, negotiator, journalist, and politician, not at all in his ability or interest in searching out the truth. His “theory” is presented in terms of mechanistic cause-and-effect models of economic society, but quite demonstrably, these models are based on nothing but the repetitious re-statement of Keynes’s prior and evidence-free conviction that the cure for unemployment and recession is to stimulate spending, any spending, useful or useless, either by individuals or by governments. Keynes used every rhetorical trick imaginable to hide the empty centre of his work, from “as I shall show … ” onwards. His mainstay, as Pigou remarked, was a deliberate lack of precision and clarity. The great sociological mystery is - how did this transparently fact-free “theory” sweep everything before it?
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Abstract. It has been said, fairly plausibly, that "Bayesian inference is one of the most
widely known eponyms in all of science". But unlike common scientific eponyms, it is
by no means clear exactly what "Bayesian" means, and what it has to do with Bayes.
"Bayesian", and the dozen or so words and phrases which are usually associated with
it, seem to be more like unspecific words of the English language, deployed by an
author as he wishes, rather than fixed technical terms. The obscurity of the language,
relative to the precise meanings associated with, say, Newton's laws or Heisenberg's
uncertainty principle, is matched by the obscurity of the history - the virtually unknown
Bayes, the posthumous paper, the impenetrable and incoherent style, the muddled
logic, the virtual silence on his work for 200 years, the sudden emergence in the last
several decades, not of new knowledge, but of new Bayesian additions to the
vocabulary. This note surveys the notions and the history. It concludes that the
Bayesian vocabulary is vague and pretentious, and serves no useful purpose.
Paper in HTML form
Abstract:
Wittgenstein and Russell both in their different ways showed that they believed that ultimately, there were better things to do with one’s life than study or talk about philosophy. Both were remarkable men. The words of both appear in the English translation of the Tractatus, Russell’s in his introduction to Wittgenstein’s book. This note comments on these words, almost one at a time. The lack of clarity, logic and coherence of both authors raises the puzzling question – in what does greatness lie? Is it in personality, debating skill, membership of a mutually admiring elite? This note discovers nothing of interest or importance in anything actually written between the covers of this book.
The note is essentially reading notes, as was my note on Keynes’ General Theory. I recall that when Keynes’ friend and rival, Pigou, vigorously attacked Keynes immediately the General Theory was published, he wrote that, “since a detailed running commentary would be both tedious and un-illuminating, I shall not adopt that method”. The notes below follow precisely this tedious route. The truth cannot always be entertaining. Pigou chose to challenge Keynes on the latter’s home ground, as a debater, a predictably hopeless task. For Wittgenstein, as for Keynes, I might argue that his work can be examined only by dismantling his rhetoric line by line to lay bare its lack of discipline, of coherence, of logical development, and of content.
Paper in HTML form
Abstract:
These are critical notes made while reading Deborah A Redmans's "Economics and the Philosophy of Science". The philosophy is largely that of Popper, Kuhn and Lakatos. Redman begins in the style of a neutral reporter, but later shows her impatience with the confusions sown by those eminent people. Hutchison supplies the main sceptical comments. My main comment is that neither Redman, nor the philosophers she quotes, appear to recognise that it is simply impossible to discuss "science" if the unstated assumption is that science is whatever anyone chooses to call science. One has to start with the strikingly observed worldwide unanimity of physicists and chemists within their respective disciplines, and take account of the fall-off of unanimity (that is, the widening scope for disagreement) as one moves through biology, medicine, etc. (that is, as the matters studied become more and more complex). Economists are in the absurd situation of claiming to be scientists, or at least, wanting to appear to be scientific, when the matters they study are simply too complex ever to lead to consensus. The absurdity is demonstrated when, for example, Friedman is cited in this book as claiming that there is no fundamental distinction between economics and the physical sciences. At the other end of the spectrum, historians and philosophers do well to ply their trade without making inappropriate claims of objectivity.
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This is my own translation of a work which appears from the bibliography to have a significant English-speaking audience, but of which there seems to be no readily accessible English version.
English translation
Abstract:
E O Wilson’s book "Consilience" is a notably unscientific plea for science to take over the so-called social sciences, from economics to psychology, and extend also into art and religion. The text rambles on, with exalted brilliance according to one reviewer, over this whole field, but the brilliance sheds no new light, and fails to explain exactly what consilience is, how it might be achieved, and what benefit would result if any of these subjects (for example, art) was connected back to genes, biology, chemistry and finally physics. It is not mentioned that such a connection to the "harder" sciences is in any case a pipedream.
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