MGM:
KZSU Stanford, 90.1 FM. I'm Mark Mollineaux. This is the Henry George
Program. A show all about land, policy, and politics. In today's
program: a very special guest‒ we have David Colander, professor out
of Middlebury College, an economist with an illustrious career and
many publications. But today in this program, we're going to focus on
what has become something of a forgotten chapter in history, that is
the development of technical approaches to remedy inflation in the
1970s and beyond, of which David Colander was a co-creator of MAP, or
the Market Anti-Inflation Plan. So we'll get into the history and
theory of that, as well as some larger questions of efficiency versus
distribution, when economic ideas are sensible versus crazy, as well
as the philosophical underpinnings of economics. But without further
ado yeah, let's get into it. So, Professor Colander, thank you so much
for making it here. This is a real honor for you to be in the program.

                  David Colander:
Thank you. It's a real honor to be called a real honor to talk to.

                        MGM:
Absolutely. I guess the overall thread of what is inspiring this is
this kind of work that you did, I think, starting in the '70s about
innovative anti inflation plans. And I've been interested in this work
since, I think, first encountering references in William Vickrey
writing about in the '90s, kind of this history of a cap and trade
kind of market structure for inflation credits, which that's
interesting. And I already had encountered Abba Lerner's book,
"Flation", which is, I think, a very lucid and interesting book he
wrote in the mid '70s, kind of explaining the misconceptions about
what was going on with stagflation. All things were kind of pointing
together for your work with Abba Lerner with "MAP: A Market Anti-
Inflation Plan".

                  David Colander:
So I think Bill Vickrey was also involved in that. So it was actually
the three of us.

                        MGM:
Oh, interesting. As far as the authors on the book itself, the two of
us, Abba and I.

                  David Colander:
Bill had his own approach to things, but he was my dissertation
advisor, and so I was working on it with him as we were working on the
various parts.

                        MGM:
So I think, just for context, for people who just really aren't
familiar with the details here, could you, I guess, give a minute-
long elevator pitch. What is MAP? Explain this for someone who doesn't
know anything about it.

                  David Colander:
Sure. MAP is a market anti-inflation plan. Essentially, it tries to
view inflation as a technical problem, technical mathematical problem.
In order to have no inflation, the number of prices going up has to
equal the number of prices going down, adjusted for sort of all the
adjustments and everything else, so that you have prices just at a
balance and sort of how do you keep it at that? Well, the way we
currently keep it at that is we change the unemployment more
unemployment, sort of workers get less, and therefore you've solved
the problem. If you don't like that, you need something else in its
place. What MAP does is instill property rights. So people start with
a certain amount of value added where they have, which is easier to
talk about wages. So wages are there. If firms are raising their
wages, they have to pay another firm which will lower their wages
adjusted appropriately, so that the net wages of the two don't rise.
So essentially you have a market in that anybody who wants to increase
their wages sort of has to go and find the market with people who will
lower their wages and sort of therefore you have relative price
adjustments without any inflation. So inflation is what occurs when
you don't have some limit or anchor on the price level. And sort of
what it does is add that price level. What you have without that is an
anchor that can that's a very poor anchor. So you set it there and you
raise interest rates. Eventually that causes enough unemployment to
sort of slow inflation. But that's not the most efficient way to do
it. It's a much more efficient way to do it with the market. So MAP is
a plan developed by Avalarner and myself to sort of solve the problem
of inflation with the market itself. So it turns the market on the
market and says, here, it's the only thing strong enough to limit it.

                        MGM:
I guess you can talk about kind of like starting with your
dissertation, but in general kind of explain the motivation, what you
were seeing at the time, and how this kind of led you to, I guess,
this path of developing this.

                  David Colander:
Essentially, I was writing a standard dissertation, which means at
that time it was just turning into three essays. Earlier you used to
have to write a whole dissertation and then sort of in the '70s it
switched to where you wrote three essays. And now I think people write
one and a half essays and sort of call it three. But sort of each of
these developed. And I had written on optimal taxation, which in the
late, early '70s, late 60s was hot stuff and sort of people were doing
it, but it was technical and not especially interesting in my point of
view. But it was getting my dissertation done. I had finished two
essays and was working on the third. And so sort of inflation, this
was about 73, 74. Inflation was a big topic then among lots of people,
and we were discussing it, and so do I came up with this idea that
here, why don't we put sort of a market on inflation rights? So create
property. Rights and prices so that anybody who wants to raise their
price has to pay somebody else to lower their price by an offsetting
amount. Now, the reason for that, I mean, it was very simple if you
sort of follow a Coasean approach, but at the time, coast was just
getting involved in some of that. So people didn't think in that way.
But the advantage of it was it forced you to consider inflation as
both a technical and a general equilibrium phenomenon. So pretty much
whenever people talked about inflation, it was sort of a real messy
discussion because they talked about cost push inflation and everyone
sort of said, well, what you mean is just the change in relative
price. It was one price one time and that wasn't there. And so that's
what sort of was pushed for cost push inflation. Abba was different.
He sort of said "Flation" and tried to get around it but sort of
within the general discussion, that was the way if you were talking
about inflation, it was going to be sort of cost push, which happened
before full employment. And once you got to full employment with
straight demand, you only thought of demand and operating there. And I
didn't picture that at all. Number one, the Walrasian system was not
very good at sort of talking about inflation because essentially it
had no money, it had no rating, it had nothing other than sort of a
solution to a general equilibrium problem. And so here I thought this
is an interesting way of picturing inflation and forcing you to think
of it for what it is, not for this cost push demand pull fight, which
was a useless fight because it had to be both involved in it.

                        MGM:
Yeah. And I feel like the kind of way this is developed, you see the
introduction of, I guess, deficits, which is not only I mean, I think
if you smooth everything out to a Walt Racy and everyone goes to the
bourse and everyone just basically is a perfect auction and everything
happens in the world we live in. There is institutions in which there
is price setters and price takers and there's different basic power
differentials of who can set, who can take. And I think seeing how
this developed in this in the worry, in retrospect, it's very easy to
say, oh, the issue is too much money, there's a lot of deficit phobia.
And there's a very solid trendline of people just looking back at
Volcker saying only Volcker realized the kind of fundamentals that you
have to just show the ability to stare down inflation in the eye and
raise rates. But I mean, this just kind of sidesteps the entire like
what is the goal of this? Because the cost that was taken with the
Volcker shock is we can take substantially higher unemployment until
we give up. And basically one of the institutions in that case would
be, I guess labor unions would stop their side of this wage price
spiral. In this case, it seems like that sort of discourse is very,
very common among people who have a surface level understanding in
your mind the story of, I guess, Stagflation in the '70s. What is the
right way to explain what was going on and what we could have done
about it.

                  David Colander:
I see inflation, as always, a combination of cost push and demand pull
processes. So that what you could have done is a political question.
What you can do to sort of change the speeds of adjustment so that
prices, some prices go up more slowly and other prices go down faster.
And so it's speeds of adjustment of prices, not whether they're high
or low, that you're really looking at. And so if you're talking about
equilibrium in sort of this dynamic system, dynamic vulrazian system,
sort of the pressures pushing the price level up, whatever that price
level is, has to be equal to the pressures pushing it down. And so
therefore, once they're equal, then you will stop inflation. So you
think of it within that terms. The first thing that does is stop you
thinking about money, stop you thinking about wages separately from
that. And we talk in terms of value added units. So we're not saying
whether it's wages. That's an institutional question. Sort of it
really was here all the pressures pushing it up next it sort of forces
you to take a look at what am I using as the index of inflation,
because there's thousands of possible indexes of inflation that you
might use. And indeed, if you think of the way it's often used, it
includes asset inflation. But when we talk about inflation, we're not
trying to stop asset inflation. So when we said there wasn't enough
inflation out there, there was enormous amounts of asset inflation and
so that's where it was going. And if you look at sort of a forward
looking phenomenon where people are spending in the future, sort of,
that can be their shadow prices for all those contingent goods in the
future. All those are part of the inflation process. So imagine
there's 500 inflation games being played of which you're talking about
one particular sub inflation index that emphasizes certain things and
sort of saying here money is going to affect it, money is going to
affect these 500. This one is only minor and it might be important at
some times, but others not. And so here it's trying to get people to
think that when you're talking about inflation, it is not a scientific
phenomenon, it's a political phenomenon of this relative prices that
you choose to look at at the particular time. And so it gets you
thinking about the role of money in the system differently than what
it is. But again, in terms of your question, which is much more
practical and pragmatic, sure, my answer to that is I don't know
because these institutions are so damn complicated. And so I think you
should be dealing with institutions and saying that's what's there.
But unless you know them, know how they work and sort of what they're
going for, to be able to come up with an actual solution to it is
impossible. So that's why I emphasize the theoretical solution. Part
of it sort of here, it's useful to think and this was a time when they
were it was in the beginning of the '70s that they started pushing the
Tips Tax anti inflation programs where they'd sort of tax firms that
raise their wages too much. And sort of Henry Wallich was there, and
there were other people, and they were pushing that. But the way that
was understood was much more in a partial equilibrium system. So what
I wanted to do was change that to get that to be a general equilibrium
discussion. So that you were thinking here of these speeds of
adjustment and sort of to think there's a single equilibrium
unemployment rate is crazy. Because if you have lots of pressures
pushing up on prices and very few down, you've got to get some more
pressures pushing down or you're going to get accelerating inflation.
The way to get that is sort of here, put a tax on it or sort of let
people sell. So anybody who wants to raise their price has to pay
somebody else. The price immediately goes to the equilibrium level
that stops all inflation. So if there's no pressure to raise prices,
then it can be zero. If there is pressure to raise prices, it stops
it. But in stopping it, it allows you to run a lower unemployment
rate. So in other words, the more higher rate price you're willing to
accept on raising price, the lower the unemployment rate can be. And
you can have that unemployment rate, whatever is feasible within that
system. So to say, I was arguing there was not a single narrow in the
economy. There's a large number of them, and they're dependent on the
institutional structure that you choose. And so it's only by looking
and sort of understanding that institutional structure, they can
understand what happens. As soon as you see it that way, what happens
in the '70s becomes much better understood, because now what you have
is globalization was occurring. Globalization changed the underlying
structure of the wage setting process and the price setting process,
because competition from China was enormous. Anytime workers tried to
raise their wages, firmers would say, we'll move to China or somewhere
else. And globalization sort of put a fix on how prices could go. And
therefore you no longer had the inflation problem, but that meant you
still had all the other problems. But as opposed to saying, we still
have it. We got to deal with these other problems, they said, that
means we can do whatever we want. And sort of they went and expanded
far more than I think was warranted, given the institutional
structure. If you want to expand, and I believe you should, to help
more people, you've got to change the underlying institutional
structure in a way that most politicians don't want to discuss.

                        MGM:
Yeah, and I think when you talk about, I guess, what is the feasible
employment situation, this kind of speaks back to kind of an
antecedent, which was John Kenneth Galbraith writing during World War
II. In that case, there was extremely tight labor markets. People are
being pushed into labor market who never were involved before. And at
that time, he used kind of the practice of rationing to write a
general theory of price controls.

                  David Colander:
I thought his theory of price controls was brilliant.

                        MGM:
I've not read the book. I need to get a copy of it. But you certainly
build it up.

                  David Colander:
He said it was his best book and six people had read it.

                        MGM:
Yeah, but in general, I guess when we're having a discussion about
what should be done, the idea of price controls and rationing is seen
upon as unserious by many. Certainly in the economics field, there's
kind of an allergy to it.

                  David Colander:
It appears that I tried to change because the idea of thinking of this
as sort of a property right that you could sell to somebody else and
sort of stop the inflation said here there's no difference between
that and control except sort of the institutional structure of how
we're sort of getting that to take place. They want it to be a
political discussion here. One group sort of agrees to adjust with the
other. I take the politics out of it and create it in sort of property
rights. The politics is embedded in the property rights. But of
course, it's the assignment of those property rights that has all the
same problems as the debate about who's going to raise what. So I said
it isn't whether you can control the price level, you can control the
price level. It's whether you want to accept all the costs in
practical terms of what doing that will mean. And those are
institutional questions which sort of economists avoid.

                        MGM:
Yeah. I mean, the fact if you talk about the structures of kind of
collective rights to enjoy profits, collective property rights, how
this is administered, it's really dealing with who owns what, what
they can do. This is it's very general questions about kind of the
public role in administering an economy. But I guess when it's
something is a tax, it feels like a bloodless system. But I remember
you saying that at one point you were talking to someone in the
context of the Carter administration and they said this would be like
such a fundamental change. This would be as big as the Federal
Reserve.

                  David Colander:
Right. That was Alfred Kahn.

                        MGM:
Yeah. It's interesting to think about because in a lot of ways it's
like, oh, it's a tax and cap and trade market for inflation. Credit
sounds bloodless. But when you think about what this institution
means, it has a lot of very big implications and how you interpret.

                  David Colander:
Property rights, how you sort of allow them to continue, and sort of
the actual measurement of prices. Now, we did it on value added per
unit inputs to stay away from any quality goods or anything like that
and sort of wanted to blend together sort of wages and profits into
value added units. So that sort of that fight was taken off the table
because what had always happened up until that time became a fight
between those who wanted wage controls and sort of here allowed prices
sort of fluctuate. And we said it doesn't matter whether the higher
prices go to wages or to profits, somebody's getting it and the
consumer isn't getting it. So we wanted to compare it to the consumer.
So that, I think was a change which never really got accepted by the
profession, mainly because here it sort of changed the policy
political discussion that took place at the time.

                        MGM:
Do you think in practice, I think at least in the last couple of
years, we've seen kind of a tightening of labor markets which seem to
indicate some sort of tipping up of a higher labor share. And insofar
as I mean, I guess this was processed through public discourse around
inflation and so on, but it was seen as essentially unacceptable.
There was public discourse about a labor shortage and it was clamped
down which I mean this has been the story of since the Volcker shock,
the productivity gains have essentially not gone to labor share. If
there was this system, I guess you're saying the fight for labor share
would go out of the realm of kind of administering quote unquote,
inflation and would be essentially an actual bargaining. What do you
see those dynamics is looking like if something like this were in
place?

                  David Colander:
Well, again, I think we've gotten now to where we have excess demand
for labor in terms of the way you normally express it. I don't believe
excess demand because that's a static concept. What it means is
there's upward pressure on low level wages and that seems reasonable.
And indeed, depending on how we handle immigration and how we handle
sort of other people coming in and sort of tariffs in that you could
sort of get low level wages up to minimum of $30 an hour and operate
there. But it requires all kinds of decisions about how you want
international markets to operate. People don't discuss it, they say,
well, allowing people in sort of to work americans don't want the job,
so it's not taking away well, they don't want the job at the pay that
it's giving, but if the pay was high enough, they take the job, but we
are not part of that. So that doesn't go on there. So there's a whole
bunch of discussion, political discussion that people do not want to
sort of undertake or that cannot be undertook because if you did,
you'd say we don't want it, whereupon sort of you're stuck with sort
of where you are and that's where I think we are at the moment. I've
seen sort of the wages going up on the low end as being a positive of
what's going on. And the real problem was prices should have been
going down a lot more than what they are. So in other words, if you
think of it in terms of MAP situation where inflation is being caused
is where prices are going up or more than what they would sort of
otherwise be the case and sort of where you can slow them. So what we
did with property rights to all types of sort of intellectual property
is to give it to people and sort of give it to people where they could
have all kinds of additional sort of wealth and income coming in. So
what that meant is that other people had to get much less because if
they get more, the other people have to get less. So what we wanted to
do was here sort of include that in where here where they got the
property rights they'd have to pay other people. So the property
rights gains would have been distributed much differently than they
currently are in the system.

                        MGM:
Yeah, it seems like to have any sort of opening where prices have a
distinct pressure to go down in sectors because I feel like the
general stickiness it's hard to think outside of, I guess maybe
different tiers of the bleeding edge of electronics. Things just
generally don't get cheaper.

                  David Colander:
But that's a political decision that they don't get cheaper. They
should have. And so the cause of inflation, in my view, was in
intellectual property rights, the biggest cause of inflation because
they did not go down anywhere near as much as they should have gone
down to sort of allocate it out differently.

                        MGM:
Yeah. Insofar as MAP was proposed, this book was published in the late
1970s... 1980 is the publication date. But it was being proposed and
shopped around. In fact, as we all know, it was not put into place.
But there was a number of I think you were continuing to facilitate
discussions around it for many years past that. There's a couple
releases of books, including one called "Incentive-Based Incomes
Policies: Advances in TIP and MAP", which you edited and released in
1986. And I guess the question is, at that time it seemed that, I
guess, the political appetite for it was not really there. Was part of
this kind of like do you feel at the time there was still a way to
not, I guess, say that Volcker won? Or was this trying to create a
blueprint for what could be happened during the next inflation crisis
which I believe you say you anticipated would happen at some point?

                  David Colander:
Again, sort of Abba had a much greater hope within his lifetime and
when he had a stroke and stopped working, then I spent less time sort
of thinking about the practical ones because I never regarded the
politics as very possible, for sure. And so my interest was
theoretically and I hoped to change the way people thought about sort
of micro foundations and the operations that was sort of kept me
going, working on it for another eight or ten years. And then when
that didn't catch on as people moved away from that, I just stopped
pushing so much on it. So that's why I ended the push on it, mainly
because I saw it as really important theoretical insights into
microfoundations. But that weren't part of the discussion that was
taking place. The politics of it is such I don't think I'd say Volcker
won or not. I mean, what I understand with Volcker was that here there
was a fight between those who wanted to say you should control the
money supply or you should control interest rates. And sort of the Fed
had always said we control interest rates, not the money supply.
Friedman said, you control the money supply. Volcker sort of said,
well, if Friedman is going to make that argument, let's agree with him
that we control sort of the money supply. We'll control the money
supply then and let inflation go to where it will and let the interest
rates go to where they will. And that was the only way they could
raise the interest rates to 18 or 20% to sort of create a shock and
sort of make it. But it was a short term shock that you had to sort of
break out of at the moment. I think this time is different in the
sense of here we haven't gotten into sort of the place where we really
are at 10% inflation going there. I think the solution to their
problem is 4%. That essentially what they'll do is stop saying, we're
shooting for 2% inflation targets, we'll shift it up to 4%. And at 4%,
because you'll, err a little on the side, you'll get it that'll last
for another five or six years and then you'll get some higher ones and
then you might need a shock to sort of bring expectations down. But
expectations gets built underneath all of it and sort of expectations
in the 70s, it's people scared of inflation here. I think they can
pull people away from being as scared of inflation as they have been.
So that's my view on how the politics will play out.

                        MGM:
That's interesting. People have, like said in the last, I guess, a
couple of political cycles, inflation has been on people's minds. I
think a lot of people would say inflation remains kind of
irrationally, despised, even if like if you see nominal price rises,
you know, I guess the the things that economists will point to are
things like menu costs and things that actually are disruptions to
running businesses. But it seems like the general public, even if
their wages are keeping pace, which that could or could not be the
case, people just seem not to like it. Which is, I suppose, like one
great potential of MAP is instead of the standard 2% guidelines or
kind of goals. You really could drive it to a strict zero in theory at
least, right?

                  David Colander:
If you want to. And it depends on what price index you're talking
about.

                        MGM:
Yes.

                  David Colander:
Now this goes back to this discussion right at the beginning. There's
hundreds of price indexes out there that you could control. And so the
reason I moved away technically from MAP in some degrees is there were
just too many of them. Which one should you be controlling? And sort
of where asset prices fit in? The driving force with much of the
politics and much of the distributional fight has to do with forward
markets operating and sort of what's happening with asset prices.
That's really the driving force. When we had considered MAP issues, we
hadn't considered asset prices at all sort of sitting in there and
they were the ones that were doing 80, 90% of sort of the push. And
the interesting thing was here they were allowing much more demand to
be created than could possibly be considered. And the way it did that,
it created demand for new type things that you never knew you wanted
or anything else or sort of let people believe that they could have
more than what they can have. If everyone tried to spend the money now
that they think they have in asset prices, there would just be a total
deflation. So it allows that to take place because it never takes
place. And that's irrationality in the system that works to the
advantage of the system. So you can get all kinds of rich people who
if they actually sort of wanted to use their wealth, wouldn't be able
to as a group.

                        MGM:
Yeah, I mean, you talk about stickiness. I mean, as far as it goes,
like housing prices right now people believe they have this certain
equity but certainly at the moment people cannot liquidate their real
estate assets at the prices they believe they're entitled to. And it
seems that people are in any short term unlikely to really, I guess,
settle for it for a lower bid. There's a certain bit of generational
thing too, if kind of entire generation believes this is our nest egg
for the future. But would they actually be able to liquidate it all at
once and kind of cash out?

                  David Colander:
The answer is no, but the answer is also yes because the politics of
the situation would say we better let them liquidate or will be
liquidated.

                        MGM:
Exactly. Yeah.

                  David Colander:
And so the politics will force a reaction of the government which sort
of allows sort of the beliefs to continue to the degree they have to
continue for the system to continue operating.

                        MGM:
I suppose that is, I guess, the practical question, which is you can't
in this case build up kind of essentially a promise which is the
American dream is predicated upon building up your home equity and
cashing out at the right times that you kind of feel you're obligated
to. I. Guess is a question. Could you expand the field of the
technical interventions to inflation to kind of bring in more asset
inflation, including housing?

                  David Colander:
Again, there's discussions of that in Goodwin and some others. It's
pretty hard because asset prices are so poorly measured and fluctuate
so much that I don't know what you could do. But I really think it's
there create cryptocurrencies and sort of let everyone buy
cryptocurrencies and sort of hold all kinds of it and then see that
only rich people hold cryptocurrencies and they lose most of it. Then
you sort of resolve the problem to some degree.

                        MGM:
Yeah, I mean, that's the thing with assets. It's really nice if you
have assets that no one cares about. I mean, cryptocurrencies are the
great exhaust pipe of just nonsense.

                  David Colander:
Well, I mean, they're just like gold. Then you have that and you have
museum quality artworks and sort of skeletons for things and old
paintings and various things. You could create all kinds of stuff that
people want. And so here you have all the things that people want as
long as they aren't the ones that are affecting here's what society
needs to produce to sort of provide it, everyone's happy.

                        MGM:
Yeah. I suppose this is like as far as the assets go, the only one
that really feels like it really matters to most people who you're
forced to in one way or another is real estate because everyone needs
a place to live. And I suppose as far as a technical intervention, I
think something that comes up not-infrequently is the idea of a
technical intervention to higher real estate prices would be basically
higher taxes, especially on the land itself. And that is, as you said
earlier, this is essentially a political fight over what does everyone
own. Because if you tax their real estate holdings, really, you could
say, oh, that's just a tax, but this is actually shaping who owns what
in this entire.

                  David Colander:
I see you're a Georgian.

                        MGM:
Yeah, exactly. It feels like that's in my mind. That is the name of
the program here. But yeah, as far as it goes, that is in some sense a
technical solution to real estate inflation. But good luck with it, I
guess. One more question, too, about kind of technical answers. I
mean, do you consider, like, sectoral bargaining it's in the field as
like all the other alternatives to, I guess, MAP in the field of kind
of.

                  David Colander:
I don't know enough about sectoral bargaining to say anything about it
one way or the other.

                        MGM:
Okay, that's fair. Do you feel that there is you said in the 1980s,
microfoundations of inflation were something which was you were
interested in pursuing, but it didn't really go as far as you'd hope
it would. I'm seeing much more energy from like post Keynesians in the
last couple of years than I feel you've seen in generations. Is anyone
kind of tapping into these same questions you're seeing as far as.

                  David Colander:
Not in the way I tapped into them. So the answer is I pulled away, I
think, from a lot of the sort of work there because it was going in
different directions. I'm sort of this in between person wanting to
write within sort of the standard sort of structure, but sort of
wanting to look at it differently. Whereas I think a lot of the
heterodox economists want to attack the existing structure a bit more
than I'm interested.

                        MGM:
In doing, just too much the actual they want to see the scrum and the
fight.

                  David Colander:
Of saying, here, this is an interesting, useful way to look at
something, and there's lots of ways to look at it. And what we have to
do is sort of say, here is the most efficient way of looking at this
particular problem, understanding what the other people are. And
that's why I shifted really to a lot of work and methodology and sort
of discussions about that, because that was more where I felt the
fight was at, as opposed to sort of where one came out in the
particular areas that were talking about policy.

                        MGM:
Do you feel like at the time, insofar as you definitely speak to
different temperaments between you and Abba Lerner when you're working
on this project, where he was definitely, I feel you say, more hopeful
as far as prophesizing, a kind of future here? Do you feel like
there's like a combination of those kind of energies that do you
really kind of need both working together in some sense to achieve
something here?

                  David Colander:
Depends on how it's put together, as opposed to whether what you
achieve you can have good, great discussions and not be able to write
together or something? No, I think it was just he was always
impractical. So when he sort of went up to visit Keynes, he told him,
here, I can solve all your problems for you. For Abba, sort of
political problems were easily solved if he could solve it
analytically. He was really sort of a brilliant analyst and could
analyze things mathematically far beyond what other people could see.
And so that was really his strength and he did that, but he didn't
have practical sense. So he sort of would suggest, "here is the
deficit. You can run as large a deficit as you want, it doesn't
matter. There's no limit on the deficit." Keynes said this objected to
him. He was at a seminar at the Fed and told Abba that he was way off
and didn't understand it. Later on, Keynes was going back to England
on whatever, the Queen Mary or whatever, and sort of wrote Abba that
he was wrong, he was technically right about the deficit, but heaven
forbid if we tell anybody that, because it'll eliminate our chances of
ever getting any of our policies in. And so Keynes adjusted to sort of
fit here's what's politically possible, whereas Abba politically
possible wasn't of interest to him, especially.

                        MGM:
Yeah. I think was it like some line about you need the right amount of
kind of the proper amount of humbug to sound to sound serious or
something, but as opposed to completely blue sky thinking. It's
interesting. I mean, your advisor, William Vickrey, he definitely
treated like when he was awarded the Nobel Prize, he was very excited
to say, like, this would give him the legitimacy to, I guess, move
more into the kind of political advocacy space. And it's interesting
that he was going.

                  David Colander:
To talk about MAP at the Nobel Prize inauguration. Yeah, That was his
attempt. Actually, Abba was going to talk about it, too. So Abba was
up for the Nobel Prize number of times before, and a lot of people
said the reason he didn't get it was because they didn't want him
talking about MAP, because they thought it was a pretty crazy scheme.
People would say, economists have gone crazy. Vickrey was going to
talk about it too, but there was sort of political pressure, sort of
because of his other work, to allow him in. And they said, he won't
talk about it too much. I don't think you have to worry. So I
prevented a whole bunch of people from sort of getting either getting
the Nobel Prize or actually talking about it.

                        MGM:
What do you think makes them draw the line between what's too crazy
and what's what's serious?

                  David Colander:
I think it's sort of what other people say when you see people's face
react to things, and so there's a gut reaction that people have.
Vickrey was amazing because he was extremely impractical and extremely
practical at the same time. So he's the one who sort of figured out
all the sort of pricing schemes for airlines and everything else and
for roads, except he made him practical. He went down to Hong Kong and
sort of developed putting numbers on your dashboard, which allowed you
to go on certain days that sort of developed it. And he was figuring
all this out. And I remember the first time I talked to him, he was
telling me how he was figuring out these toll booths, which would sort
of measure as the car went by and charge it, figuring out what the
math was to sort of allow that to happen. So he was a pure engineer.
He jumped from one side to the other. Abba stayed totally on one side.
So that was really the difference between the two of them.

                        MGM:
Yeah. It's fascinating to see. I guess we're going to talk about
macroeconomics. You can't really go to the workshop. But Vickrey could
say, figured out, we can get kind of a working prototype for under $20
that everyone could put in their car. And then you solve congestion
pricing. I proved it. Look at it.

                  David Colander:
Yeah. And he did it. As soon as he figured it out, he'd say, how do I
practically implement it and sort of that became very much part of it,
and he'd do what he could to sort of implement. So I think if you look
back on these developments, he was way ahead of the time and sort of
actually sort of led to it. Because on both the theoretical front and
on the practical front yeah, I think.

                        MGM:
It'S interesting that Vickrey, I guess, throughout his career under a
microscope drilling drilling down into all these problems, but I guess
it was like his last decades of his life, he really, I guess, shifted
focus to macroeconomics, at least kind of his advocacy. Wrote a lot of
interesting papers.

                  David Colander:
He decided it was the far more important reason so many people are
hurt by macroeconomics compared to micro that he said he wanted to
focus on and actually sort of I had been writing I started out telling
him about my dissertation. I'd been writing three essays on optimal
taxation and was just about finished. And then I wrote this little
paper called The Free Market Solution to Inflation where I outlined
sort of this. He wrote me back and sent a copy to my chairman saying,
this is the most brilliant paper I've seen in the last 20 years, which
may be pretty good operating. So I went to him and said, if I change
my dissertation and develop it, can I finish in a year? And he said
yes. So then I went to Ed Phelps, who was my other dissertation
advisor, and said, Vickrey said I can finish in a year. If I change?
Can I change? He said, yes. So both of them had pretty much signed off
before I started. And it was a good thing, too, because the
dissertation was awful.

                        MGM:
When you talk about optimal taxation, what were the details? Was it
general?

                  David Colander:
What was optimal income taxation?

                        MGM:
No. Income taxation?

                  David Colander:
Yeah. What you'd want is a regressive tax is optimal.

                        MGM:
Oh, no.

                  David Colander:
If you're interested in efficiency, regressive taxes are much more
efficient than that. You don't talk about income taxes as efficiency.
But why not? Why do we talk about regulated taxes in terms of
efficiency and the income taxes in terms of sort of income
distribution? I argue they should be all the same. And the optimal tax
is 100% tax at the lowest income, going down to zero at the highest
income. So that was one of my results.

                        MGM:
Sounds kind of a reductio ad absurdum of the idea of efficiency.

                  David Colander:
Well, yeah, well, that's what it was.

                        MGM:
Yeah.

                  David Colander:
It says here if you're talking about efficiency, you're going to have
to sort of get high income tax rates at some point early on. And
that's the problem with basic income. If you're going to sort of
provide basic income at a high level to people, somehow you've got to
sort of have really high taxes. And people are going to have to
because you got to get down to where you're bringing in positive
taxes. And the faster you get down, the more efficient is because the
more people you get per marginal effect. And that's what you're
talking about with efficiency, how much marginal effect you get. And
if you do it at the beginning, it works as a lump sum tax on all
higher income people, whereas if you do it at the end, you don't get
that lump sum tax. So the advantage of regressive taxes is they
provide lump sum taxes on the rich. And so if you think of it that
way, you come and sort of have a different way of talking about here,
where do we want the high tax rates to be? And you have it initially,
but they pay 90% of your 1st 100,000 after you start earning it, then
you get a lot more. So you work hard and sort of you get a lot more
and you get the other coming in. And so some people who have very low
productivity and low efficiency choose not to work. You provide income
to them. And so that's a way of sort of operating, so it's a way of
sort of looking differently at things. Another one was saying all this
stuff on efficiency is pretty much crap because here as soon as we go
and measure sort of the taxes and the cost of taxation, it's sort of
all types of sort of administrative costs, various other costs, these
other costs totally overwhelm the efficiency cost. And why are we
talking about efficiency where it's 2%, when sort of these are all
other costs are ten to 12% for taxes that they have to be integrated
in? And the third was sort of a Rawlsian tax. If you believed in
Rawls, how would you set the taxes in the tax system, in a system
that's operating? So that's what I was doing, but then I dumped it and
sort of did the free market solution where I developed MAP as my
dissertation.

                        MGM:
Well, as far as the Rawls goes, would that have to do something with
basically taxing the luck of what you end up with after you exit the
veil of ignorance?

                  David Colander:
No, I did it Rawls sort of was minimizing the minimax sort of there.
And what it was was saying here it's the same idea of the negative or
the need for the tax initially to be very regressive. You'd still want
it very regressive in the Rawlsian one, because here it's regressive,
but it's designed to bring in income in another way. So here you can't
sort of combine bringing in income with the taxes. That's a poor way
to do it. It's much better to sort of shift it around and operate
differently in general.

                        MGM:
What are your thoughts of just I think before we started recording,
you were talking about kind of how things can be a distributive
problem but not really set as such. But economists want to talk about
efficiency but are very seemingly reluctant to talk about distributive
effects, I guess in explicit.

                  David Colander:
Ways because we don't have the tools. We haven't been taught how to
talk about those. I mean, there's a whole different approach to sort
of discussing things, a philosophical approach where truth is found by
sort of arguing sort of arguing and coming to sort of a reasoned
agreement with other people. Now, that sort of way is the way you deal
with non scientific problems that can't be solved through empirical
methods. Economists aren't trained to do that. But in order to talk
about policy, you need people trained to do that. So economists aren't
trained to talk about policy.

                        MGM:
Well, what could they be done to be like do you think they should be
just trained more?

                  David Colander:
Yeah, trained more in philosophy, basic philosophy. But here everyone
should sort of know here's Rawls's veil of ignorance. You should know
Smith's impartial Spectator. And you should also know that within sort
of this debate it's a debate to sort of not prove that you're right,
but it's a debate to sort of understand what the other person is
saying and sort of expand your sort of understanding that that's the
way in which you gain sort of sufficient insight to develop sort of
ways of understanding that can be combined with the scientific and
efficiency discussions to put together. And here's a novel way that
might work. So what I believe economists should be doing is thinking
of novel ways to sort of integrate the needs that you can discover in
philosophical discussions with the scientific realities of how the
limitations are. So that's why it wasn't problem didn't find it a
problem at all that the optimal income tax was highly regressive
because it's just a way of talking about things. If it is, then where
do I do it? I don't have if highly regressive, is there some other way
to do it? So you're achieving ends and that I don't think economists
do at all.

                        MGM:
It's interesting to say when kind of goals are introduced. I mean, to
look at I guess William Vickrey in his macroeconomic work, I was just
very kind of interested that he went out of his way to kind of
redefine or kind of explicitly define tight labor markets. In his
Chock-Full Full Employment, he defined it really kind of in a very, I
guess, intuitive way, which is just basically anybody can go out and
get a job within 48 hours that pays a living wage. Which kind of fuses
not only what does it practically look like for, I guess, failing job,
but also cost of living. Because it's not just a job, it's a job that
will actually sustain you.

                  David Colander:
Problem is again, sort of the international setting within that, which
makes it hard. But yeah, I agree. If you look at sort of the Keynesian
sort of development, the work early on, the initial work done for the
government and everything, full employment was defined as where the
number of unemployed significantly are below the number of jobs. So
Vacancies exceed jobs by two or three times. And so that was to create
a system within which sort of it would be fair for people. The problem
is as soon as you create a system that's fair for people within that
sense, all kinds of people from outside want to be in the system too.
And if those numbers are so big that they overwhelm the others, it
breaks it down. And that's what it does.

                        MGM:
Yeah. Internationally, even within domestically, if you have a city
that has hot labor markets, you're going to see more immigration to
that city and the kind of political fights over who is able to live
where in a city that can be pretty ugly itself.

                  David Colander:
Yeah. And that's where got to the point where then I don't have an
answer. So where do you fit internationally? And in some ways, I think
early economists sort of felt, yes, this will probably hurt not help
at least well off in our country, but it'll certainly help the other
people an enormous amount. And it has the gains to society, of world
society have been enormous over the last 2030 years.

                        MGM:
I guess the question is I don't really have an answer to that, but I
guess we're running short on time here. But I think thanks for the
overview and kind of the discursions and the other things, I suppose
in general, do you think someone I mean, it sound like yourself,
you've moved to different directions, but I still find a lot of really
interesting I think this is still worth stumbling upon and reading. Do
you think someone is misguided? Do you think that there's still a lot
of potential and application?

                  David Colander:
No, I think, number one, there's a lot of theoretical potential in
sort of specifying that because what it does is operate in between
micro and macroeconomics and that's where the developments have to
take place. So I think there's enormous potential gains there. And in
sort of framing the policy discussion, I think there's enormous
possibilities for that. On both of those, I think there's enormous
possibilities. And I made a decision that I go to a liberal arts
school and teach. So I didn't get the graduate students that I would
have wanted and hoped for to discuss that because I would have been
suggesting a whole variety of sort of movements along those lines and
suggesting that. So yes, I think anybody's interested sort of should
read about it and think about it because it's a different way of sort
of thinking about the aggregate economy. That's a way that's
consistent with what I think good theoretical economists understand
and good practical economists also understand the limitations of what
you can do.

                        MGM:
Okay. I think my only regret is that it isn't easier to run across
copies and print. I was lucky enough to stumble upon here and there,
but I guess fingers crossed. Maybe they go back and print someday.

                  David Colander:
Good.

                        MGM:
Yeah. Thanks for sharing the time here today. It's really been a
pleasure to talk.

                  David Colander:
Good. Nice talking to you.

                        MGM:
We have been talking to Professor David Colander all about market,
antiinflation plans and much, much, much more. You can find this
program in all previous episodes of the Henry George Program at the
website. Seethecat.org, this is a presentation of KZSU Stanford.