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The whole system is out of whack!

Introduction by Michael Phillips

The economist I'm most willing to listen to is Dale Jorgenson. As an individual I knew him when he was an assistant professor at Berkeley.   He had a steel-trapdoor mind for new information which operated at computer processing speeds. My most difficult-probing questions he answered in seconds with a full blackboard of simultaneous equations.   He was terse, precise and blunt.   His reputation as 'the genius' was already the coffee shop discussion among leaders in economics in 1961.

As an economist he has nothing to do with polemics and 'isms', he is a mathematician operating with a ferocious clarity.   Marx's theories become a variation in the labor supply function, Galbraith's announcements become a different variable in the consumption and money supply equation; 'ownership of capital' becomes a matter of two or three variables in a 40-equation mathematic model.

Jorgenson is a 1st rate scientist who looks for experiments "and 'proofs' that invalidate his models and falsify his predictions.   In the following interview he accepts the world economic conditions and policy failures as powerful evidence that shake the roots of economic theory.   He accepts that as a whole new challenge.

And he is not Just being open as a curious bystander.   Dale Jorgenson at 42 is one of the most pre-eminent economists among professionals throughout the world.   A full professor at Harvard, winner of Guggenheim and Ford Foundation fellowships; editor and assistant editor of all the major professional journals and a major contributor to nearly every econometric computer model of the US economy.   My guess is that more than 30% of the equations used in models to simulate the economy are his.   His 80 publications are the core building blocks of econometrics.

Our access to him and his willingness to talk with Stewart are extraordinary.   It reminds me of the relation Keynes had with George Bernard Shaw, a sort of joyous leak in a giant dam.   Here we have access to the thinking of the man that Ford Foundation pays for consulting, the Senate Finance Committee asks to testify, and who feels most comfortable with mathematicians and computer print-outs.   Usually bankers in Switzerland, today he talks to bare foot farmers.

The following conversation took place on November 11, 1974.   Jorgenson spent several hours with the transcript editing out repetitions, toning down the personal remarks and sharpening the impersonal ones.

Dale Jorgenson:   Yes, that's certainly true.   In fact that's now becoming the standard diagnosis of our current malaise. Previously when one country would go into a boom or depression then other countries, at least some of them, would be going in the opposite direction; now the world is moving up and down in coordination.  The fact that everybody moved into a boom in '72 or '73 created a lot of the inflationary pressure that we've seen in world commodity markets.  The pressure that resulted on international commodity markets has now dissipated except for oil.

SB:   Is that a positive feedback situation, that the more there is a depression, the more there is a depression?

DJ:   No; it would mean that the momentum of domestic business cycle development that would force a government to change its policies will be underestimated.   In other words, people will be constantly surprised by events and governments will always be late in changing policy.   Right now we're in a situation where the administration in Washington is completely mystified, having changed monetary policy too late, they're still on the course of trying to keep fiscal policy too tight. The domestic situation therefore is going to be much worse than they think it is.  This kind of development has aggravated the normal problems on maintaining economic stability. What's sad is that this is happening to everybody.   I mean, we're not the only people who are being surprised.   Everybody else is also being surprised, so that stabilization policies are out of kilter.  These policies can't contribute as much to rectifying the situation as they could if events in individual countries were a little bit better isolated from each other.

SB:   What places seem to be most in kilter, if any?

DJ:  Well, the Canadians, surprisingly enough, are pretty well in kilter.  The Germans are not too badly off; they have succeeded in pushing exports fairly effectively by adjusting their currency, so they're really in fairly good shape.  But except for Germany and Canada, I would say that most other countries are pretty badly out of kilter.  The United States is at the end of the list; the people who are badly off are the British and the Italians.  The French and the Japanese are at the same stage we are; they're not as badly off as the Italians or the British, but they're not as well off as the Germans or the Canadians.

SB:   Is there much in common between what the various countries are doing wrong?

DJ:  Well, what they're doing wrong now is to some extent a legacy of the past.  They all adopted extremely restrictive policies in 1974, hoping to cut off the boom and kill inflation; the inflation itself resulted from simultaneous adoption of expansionary policies in '72 and '73.   Now they are to the point where they all have to consider policy reversal. Only the Canadians and the Germans are on top of the situation.

SB:   If everyone reverses at the same time, is that also a problem?

DJ:   Yes; simultaneous reversal could lead to another boom of the sort that we had in '72 and '73, resulting in inflationary pressures.  All of this is one kind of cross-cut, right? The other cross-cut is what is going on in the petroleum market, which is a world of its own, creating severe disturbances in the world economy at the present time. But even in the absence of cartelization of the world petroleum market, there would be problems with stabilization because of the increase in international integration.  ["Cartel": an international syndicate to regulate output and prices. (Also: a written challenge to a duel.)]

SB: Are we getting a responsive [answering, or imitative] cartelization in other parts of the world economy? DJ:   No, there has been a lot of talk about cartelization elsewhere, but so far none of these efforts have been successful. You can see that especially in metal prices, where zinc, copper, and aluminum prices have recently been depressed. The world bauxite market is presently the closest to cartelization, but the cartel is unlikely to be effective with Guinea about to come into that market with sufficient capacity to supply the world demand at current prices. Of course, nickel is already a cartel. The prices we pay for nickel are prices that are set by the International Nickel Company in collaboration with the Le Nickel, the French nickel company.   I think, in the absence of everything besides this Middle East War situation, it would have been hard for the OPEC countries to organize a petroleum cartel; because of their great success in that situation and the political payoff that it had, they were able to bring it off, but that was a rather unusual situation. SB:  Is that likely to remain the same for oil, do you think?

DJ:  Well, as far as oil is concerned, they overdid it. OPEC is now charging more than the world monopoly price. Suppose you had a world monopoly in oil; you would set the price at $7 a barrel.   Right now in the Persian Gulf the price is 50% above that.  Producers are having to cut back supplies.  They have made a 10% cut in output and they are having to cut back more and more all the time.  Oil is coming out of everybody's shoes, almost ... a tremendous glut which is shaping up.  Most of the producers are in a position to go along with a ten per cent cutback.   If a cutback of fifty per cent were required to maintain prices, they would begin to balk; that would exert downward pressure on the price and the people at OPEC are beginning to realize this.  But of course they haven't done the precise calculations that I indicated, so they are not aware of how far they will have to restrict supply. They will have to lower the export tax for the Persian Gulf countries, which sets the world petroleum price structure, and my view is that this has to come before Christmas.

SB:  What period of time for continuing collapse do you draw now?

DJ:  Well, I continue to see problems well into '75.  Many people who are optimistic are looking for an upturn at the end of this year.   I just don't see that and I think it may be the end of '75 before we see a reversal. There are a lot of negative factors. The most important is that in the aggregate statistics the collapse of the automobile market hasn't yet been felt.  Then after that there will be the collapse of business investment.   Recovery could carry us well into early '76.

SB:  How well might the market go in a circumstance like that?

DJ:   The stock market? Well, the stock market is influenced by the economy, but it is also influenced by the financial situation, and especially by interest rates.  Right now interest rates are on the way down, and they could go down very, very rapidly.  There was tremendous movement last week in the long term market; the two preceding weeks there had been a substantial reduction in short term interest rates.   If the Arabs begin to move substantial funds into the United States, they will probably begin to buy treasury bills, very short term paper.  Then they'll move into the long term market where they can get very attractive interest rates.   Finally, they'll move into the stock market. With lower interest rates, and substantial foreign buying power, you've got to be an optimist about the stock market. My feeling is that the stock market will, with a few gasps, finally start moving.  I visualize that as taking place sometime in the Spring.  I hesitate to set a precise time because the timing of movement of money from Europe into the United States will play a very important role in determining the course of interest rates and determining the buying power that will be going into the stock market.  But, if I were advising someone about investing in the stock market, I'd attempt to get them to commit themselves progressively over the next two to three months.

SB: If a lot of Arab money comes in, investment, loans, T-bills [Treasury bills], and so on, don't we continue to hemorrhage through the debt-servicing— interest and such?

DJ:  What we're doing is selling our resources.  In effect, we will be letting foreigners acquire substantial parts of General Motors, General Electric and all those other generals that have been creating property income for Americans.  That income is now going to go to foreigners.

SB:  What effect will that have?

DJ:  Well, in the long run, that tends to lower our national income, relative to what it would be if we all did the saving ourselves.  It would be a little bit like foreign aid in reverse. We've been loaning lots of money to developing countries at low rates of interest; we have been essentially doing their savings for them through our government. Their savings has been less than it otherwise would have been; their capital accumulation has been more, but their national income lower than it would be if they undertook the savings themselves. We will gradually be retracting.   It'll start out by people buying pieces of us, and then gradually buying out our foreign investments.  This is exactly what happened to the British after World War II.  They began selling out their country to us and began drawing their own investments back from abroad; now, of course, they're big debtors.

SB: Are we likely to find ourselves in the situation England is in now?

DJ: Well, relatively speaking, yes.  Of course we'll have four times the income per capita, but as far as a relative decline in our role in the world economy . . . that's exactly what the scenario leads to in the long run.

SB:  How long is that run?

DJ:  Well, by the beginning of the next century, let's say.

SB: Is there any term yet for the situation where the world is much more one economy than it used to be?

DJ: Economic integration might be the generic term, I suppose, but I haven't seen any catch word that really describes the situation.

SB: Are we likely to get into a situation where labor union action goes international. . . where you migtit get a coal strike in several widely-spaced and significant countries at the same time?

DJ:  That could happen, beginning with a United States-Canadian coordination. We could have, say, an auto strike that would be for North America instead of just the United States or Canada. But I think the possibilities for international coordination are not that great at this time, but I'm not a specialist in that field, and I just have to plead ignorance. I don't know.

SB:  Michael, you're awfully quiet.

Michael Phillips:   Yes.   I was going to ask about the issue of the oil cartel, and, first of all, has this changed any views on the role of, say, the single price in total equilibrium? Are there any historic parallels to cartelization that would give any clue to what that does to equilibrium or price equilibrium?

DJ: Well, no.  I wouldn't say that there are. This is really a new situation at least in terms of scale; there are many cartels in the world right now, for example, the nickel cartel I mentioned earlier.  There are a lot of markets in Europe that are pretty well cartelized.  The market for consumer durables would be a good example. The Philips Company controls that market; if you want to buy a refrigerator or laundromat in Europe, you will find that you have to pay much more than for the equivalent commodity here.  They have a very effective restriction of entry through their control of the distribution system.  In this case, the cartels affect mainly the European market.
As a result of the petroleum cartel the world is going to become much less efficient in using energy; that will drag down the world GNP. On a long term basis we're going to be growing at the same rate after the initial disruption, but at a lower level.  The major effect will be a decline in efficiency. I've estimated that by the year 2000, the United States GNP will be 10% lower than it otherwise would be.

MP: What I was also trying to add is if. say $7 a barrel is the monopoly price based on the 1974 dollar, do all other prices have an equal rate, at least over a four or five year period, to the oil price?

DJ:   We know that other fuels have to be brought into line, so we find that there is a tremendous boom in coal, but people are not willing to expand. They anticipate that the price of coal, like the price of oil, will eventually go down, so they will hold back on supply.  Up goes the price. And the same thing has to be true of natural gas.  In this country that's a story that is complicated by regulation, but the price of natural gas has to go up, the price of refined products has to go up, and the price of electricity has to go up. These energy price increases distort the economy; they don't coincide with what people expected when they made their plans about how much energy they were going to use and how much capital investment to make, given that energy use. So they find that energy is much more expensive than they anticipated, that everything is a little bit out of kilter.  The unemployment rate suddenly shoots up as people begin to cut investment.  It only takes the collapse of a sector of the economy, like the automobiles, to make the unemployment rate increase substantially. What is the resporise of the politicians? The political pressure is going to be irresistible to pump up the economy, and so thereby cause more inflation.  There will be a tendency to pump the economy up; this depression that we're going to be in through '75 could be accompanied by inflation and followed by a new round of very substantial inflation. So it could be that the world petroleum cartel, by this sequence of events, does turn out to be a very powerful inflationary source.  But it's not just the direct impact of the energy crisis, which has a relatively minor effect of dislocation on the economies of these various countries.

MP:  One problem is, now that they're beginning to put prices on their energy figures, is that disequilibrium period will result in actual investments and negative net energy creations, and they haven't given an example, but some of the North Sea drilling may actually be net-energy-losing, where the total system energy required to obtain the oil is equal to or less than than what is in the oil they drill.

SB: Also, shale oil is a famous example of this.

DJ,:   Yeah, that's right.  There's truth in that argument, but certainly not in the net energy concept. What is true is that people anticipating that current energy prices are going to persist are making investments like shale oil that will later turn out to be big mistakes.  North Sea exploration might be in that category— I just don't know the cost situation that well.  It's only now that we begin to see that some of these things are beginning to turn sour. Compare the attitude toward shale between the federal auction of leases which got so much publicity and now. The only people who are really active in this thing are saying, we're not going ahead with this until further notice. The money that was put down for shale was probably a mistaken investment; at the time it looked pretty good.

MP: So what you're saying is that the price system in general does not result in negative net energy, but in disequilibrium?

DJ: When prices are out of kilter, there will be a lot of mistakes, not just in the energy sector.

SB: I'm curious about inflation. How does your twenty-five cent tour of the causes and likely future of inflation go these days?

DJ:  Well, I think there will be some moderation in inflation, down to 10% during '75, which will make people optimistic that it is going to go away; after that I'm afraid there is going to be a tendency to inflate again; this could occur more or less simultaneously in all countries, generating tremendous inflationary pressure.  Another thing that's important to notice is that once people build, say, a 10% rate of inflation into their calculations expansion doesn't start from zero again, it starts from 10%. So we're talking about a new increment.   If there's an inflationary bias in fiscal policy for all countries, that means the next move will be from 10 to 20%. You've got to believe that there's going to be more inflation. I just can't see how there's going to be less.

SB:   Until when?

DJ:   Indefinitely.   In other words, the only thing I think that could really dampen inflationary expectations at this point would be a very severe recession. We're in a situation where we're going into what people think of as a recession.  It's going to turn out to be much more severe than people anticipated. So that is good for inflation but bad for the people who are out of work.   It's bad for the economy.

SB:  What kind of unemployment might we get into in a situation like that?

DJ: Well, I wouldn't be surprised if we saw 8% unemployment next year.

SB:  One favorite topic of Michael's, and I've been hearing it more and more, is sort of a fond regard for the multi-national, trans-national corporations as a balancing factor in a world that was national formerly.  Do you have any interest or regard for that?

DJ:   I don't know about that. Maybe you could tell me a little bit more.

MP:   The view is that we don't really have any trans-national corporations, except possibly COMSA T because almost all capital that is now raised is raised domestically, per company, simply within the law.   But with COMSA T with an example, a couple of the markets, Japanese and German, and American markets becoming very similar in their structure, it may be possible for actual ownership of corporations to become more multi-national, and consequently they may act to go around national interests . . .

SB: And have the clout to do so, I gather?

MP:  Well, Shell and Texaco continued to provide Belgium and Israel with oil during the Oil Embargo because it validated their international interests, or didn 't validate the national interests of the governments by which they appear to be controlled, and that more trans-national corporations will create an infra-structure for the world economy which may evolve in the next ten years.   Especially, the President of Dow a few years ago said, "You show me a country that will let me make any profit I wanted, and I'd move there/ I don't have any more loyalty to America than I have to Mao."

DJ:  Well, I think there is truth to that story; the spread of multi-national corporations will facilitate the process of international integration that we've described.  My feeling is that the problems for stabilization in such an internationally integrated economy are really quite severe.  But the other arguments related to economic integration and its benefits would have to do with increased efficiency through the international division of labor.  The multi-national corporations will be creating the infra-structure for a world economy that will really make resource use more efficient.   I think the basic thrust so far of economic integration so far has been decreased cartelization.   Imports of automobiles from Japan and Europe, especially the growth of complete systems of distributorships for Volkswagen and Datsun, for example, has made the American automobile market much more competitive, and has made the choices of American car buyers much more attractive.  So I'm left with the conclusion that the only negative aspects are the serious problems which have been created for stabilization policy.

MP:  Stewart, you ought to have some questions about human beings.

SB:  Human beings.   I've got another which I'd rather ask first.   While you're hearing our questions, what questions are you asking yourself mostly these days about the economy and your business?

DJ:  Well, mainly specific questions about the energy situation, which I follow rather closely.  One other sort of question that I'm asking myself is rather abstract, the design of ideal tax systems, and how to make the American economy more efficient through re-design of the tax system.

SB: .What is the optimum individual strategy these days?

DJ:  My view of the optimal individual strategy Is predicated on the idea that inflation is going to continue, and that individuals have to be in a position to protect themselves against inflation.  That means a lot more calculation on all the economic decisions that people make; In a situation with inflation, relative prices are going to be shifting a lot, as people try to counteract the effects of unemployment, deal with the energy crisis, and so on.  The whole system, as we Indicated earlier, is out of whack.  And that means that people just have to spend more time calculating, worrying about the best buy.  Now as far as protection against inflation is concerned, the same thing has to be true with regard to the investments that people make.  The most important investment for most people is their investment in their own labor supply and capability, whether It takes the form of some sort of formal education or job experience.  It seems to me that those Investments have to be looked at much more critically; people have to think a lot harder about how to make them properly because we're experiencing a big change there In the return of various kinds of Investments.  As you know, there's been practically a collapse in the market for college education, equal to or greater than the collapse that has occurred in the stock market.   Rates of return on college education have dropped from large, positive numbers like 10% (which is what the stock market used to earn in the good old days) to numbers like 0%. College graduates are not all that much better off than people who started working right after high school, ending up with slightly less income than the college graduate after graduation.  That's the sort of thing young people have to worry about and parents have to worry about for their children. My feeling is that these are concerns that we don't have good answers to, that might deserve some looking in to; especially for your readers.  These are much bigger questions than looking at the food budget or going around turning off lights.

SB:  What are good personal investments?   You say college education is not such a good investment any more, what is a good one? What kind of job experience pays off now? What kind of education pays off?

DJ: Speaking of specific investments, I would say that the best buy currently is education and job experience that are health related.  There is a booming market, and not much expansion in supply.   In other words, at the high end, medical education, at the immediate end, say, nursing and pharmacy, and the low end, employments that are health-related, like medical technicians.  That range of investments still has a fairly high rate of return.

MP:   The classic ones were gold and land.

DJ:  Well, you're thinking now in terms of property as opposed to education.  Getting back to property, I would say in the current situation, probably the best buy is the stock market.   It's about as good a time to buy stocks as in the last recession of this severity, say in 1958.   If you bought in 1958, you'd look good now even though there's been a major decline in stock prices since 1966.  So I would say that the stock market is a great place to push your buck right now.  Agriculture turns out to be a very good investment, if you can do it on the right scale.

SB:  What's the right scale?

DJ:   The right scale turns out to be very large.   In the main agricultural areas of this country, say the Central Valley in California, Iowa, the Mississippi Delta, and so on, I think the minimum size of an efficient unit is well over $100,000.   It's very hard for an individual to get into that type of thing.   But there are a lot of opportunities related to agriculture which suggest that a few more people ought to stay down on the farm.  And I think that's a trend which you'll see in the population statistics. As it is, the number of people moving out of agriculture through retirement alone is very large.

SB:   Yes, I've heard that it's even dangerous.

DJ:   Yes, we now have an expanding international market and government control has been pretty largely eliminated on the agricultural production.  There will continue to be a tremendous market for food and fiber.  Agriculture looks like a very good investment, but that's not the advice that's easy for the individual to take unless the individual has some sort of family connections.   It's kind of like being a plumber in New York City.   Unless your Daddy was a plumber, it's fairly hard to get into the union. And I think the same thing is true of becoming a farm operator.  You pretty much have to be in a situation where you can move Into an existing situation.

SB:  How come we're hearing such loud complaints from the farmers currently?

DJ:   First of all, farmers have been taught that It pays to complain and it does; complaints get results from Washington. There are also some serious problems.  Prices are out of kilter there.   Right now, prices are high for basic grains and crops are not good.  This means lots of people raising meat are being squeezed. Including dairy farmers.  All these people have experienced Increases in their costs.   If you look at the agricultural sector as a whole, the returns still look fantastic.

SB:  One of the things we've been suggesting, inadvertantly almost, is when the economy is out of its mind, to participate in it at a minimum.  Just because of the kind of thing we promote, people we talk to are doing more of their own gardening, more of their own building, conserving energy not to conserve energy, but just because they're living out of connection.

DJ:   That's very good advice. One of the most important things about that is that the product you produce is your own, and furthermore, the IRS doesn't have a claim on it as they would If you take the time you spend puttering arouiid the house, and, say, spend it puttering around a construction site.

SB:  I never noticed that.

DJ:  That's a very important factor that's becoming more important because the tax bite is increasing as the inflation proceeds.

MP:   You mean the progressiveness of the tax will become very severe?

DJ:   Right. Somebody estimated that some large fraction of the construction industry consists of people adding on a room to their own house, putting in a bathroom, etc. Take the automobile repair industry. You have a bunch of mechanics fixing cars for money and paying income tax.  You also have
a bunch of kids, working on cars.   If you take that    the
efforts of the kids— as a fraction of automobile repairs, it's a large number.  None of their work results in taxable income. Self-produced consumption, whether it's gardening or carpentering or car repairing, is a large number from the economic point of view.

SB:   What happens if that number increases.   Does anybody know?

DJ:  One thing is that the GNP increases, and we don't observe it.  In other words, we're better off, but we don't know it. We can't see it in figures. We get a somewhat distorted view of what's going on. What happens is that we find that there's less labor available for work, the unemployment figures look worse than they really are because more people are spending time putting down a new floor or painting their houses.

SB:  I'll be damned.

DJ:  That's good. That means that the jobs they would have been-filling are available for some teenager after school.

SB:  What effect does more and more of that going on have on inflation? Does that bear any relationship to it at all?

DJ:   In a very indirect way. With more people doing their own thing there are fewer of them to work.  That creates less pressure for the government to pump up the economy. So that means less inflationary pressure.  It also means that real growth looks worse than it is.  It's probably good for the economy.

MP:  But it's such at an extremely small level.

SB:   That's an actual, genuine negative feedback cycle in there, because the more inflation there is, the more people are going to do things for themselves.

DJ:   I don't know how small it is.  I think one could put some numbers together like that. We could put some numbers together for people working on their own houses. We could also do the same for home-produced food; the Department of Agriculture does some of that already.  I think you would be surprised at how large those numbers would come out to be.

MP:  We're talking about an incremental change that might have some impact.

DJ: That's right, exactly.  It's also the case that with people getting less formal education, as college enrollments are going down, people are getting more skills on the job that they can use at home.  Right now there is a tremendous surplus of construction people, and presumably they are doing what construction people do— they are now taking advantage of the situation to do a lot of building that they wouldn't have otherwise done, on their own houses, on their relative's homes, in non-market transactions. So that is an offset against the really gloomy picture you get of what's going on in the housing industry. a lot of housing construction is still going on but it doesn't show up in the construction contract work.  You should be advising people to do that sort of thing.

MP:  To disintermediate themselves.

SB:  I've got a question about economists, who are just sort of famous buffoons these days, not because they are_, but because that's the thing the media is saying.  Who are economists you are finding more relevant, more predictive, and more useful to watch?
 
DJ:  My number one pick is a dark horse.  It's this guy who has written a tremendous flood of material named Roger Leroy Miller.  Have you heard of him?

SB: No, I haven't.

DJ:   He has written under the pseudonym Angus Black, but he's also written a whole bunch of popularly oriented stuff. He is getting a tremendous readership.  He would be a natural columnist for you, I should think.   His line is a liberal, non-aggressive version of Friedman.  He is trying to debunk all sorts of sacred cows; his own view is liberal in the political sense and liberal in the economic sense.  He's got kind of an unusual mix.   I view him as an up-and-coming guy.

SB: Does he have any books out? DJ:   Yes, he has maybe twenty books out. SB:   What would be a prime one to look at? DJ:  Well, just to give you the flavor of the man, a book has just come out on the energy crisis; he's probably working on food right this minute.   He had a book out in 1971 on Noxo-nomics, which was an attempt to analyze and deflate the President's program announced on August 15, 1971.  He has a textbook out that I think you'll find very interesting reading called Economics Today.

SB:   That's under his Miller name or Black name?

DJ:   Miller.  His first effort with Angus Black was something called A Radical Guide to Economic Reality; it was a very clever piece, because it was written in Anglo-Saxon and tried to convince radicals that they really ought to back Friedman. Although I view Friedman's views as very sound, he's a rather ineffective salesman. Miller, on the other hand, communicates much more effectively.

SB:   Who else looks good?

DJ:   In the energy area, the guy who makes the most sense has has so far circulated his material mainly within the professional community; his name is Paul MacAvoy at MIT.  He has been working in energy for fifteen years, and he understands the problem better than almost anybody I know.   He's the kind of guy who could end up as a member of the President's Council of Economic Advisors under the next Democratic Administration, or as the first Democrat appointed to being Director of the Federal Energy Administration.  That's the level at which he operates.  He is not the kind of guy who is going to be as much in the public eye as an economic commentator. Another new guy, a likely new face for the future, who would have some potential for this kind of role, is a guy named Bill Nordhaus who is a professor at Yale.

MP:  Are there any international people who are building an international model? I know that some of the radical economists are trying to build a world input-output model.

DJ:   Well, there are a lot of world models.  You probably saw the second report of the Club of Rome; that is a world model of sorts.  The world input-output model is being built by Leondief.   Is he a radical economist?

MP:  Surprisingly.   It was the American radical economists who got together with him.   They had a conference last summer in Vienna.   He's the father.   Most of the people who are doing the work are his disciples.

DJ:   I suppose there's something to that.   I'm familiar with his project; it's being done under UN auspices and it's a very interesting effort.  There is also a project called the LINK project, headed up by Lawrence Klein of the University of Pennsylvania.  Klein has a dozen or so econometric models linked together.

MP:  Technically you need a world input-output model before you can develop a simultaneous equation model?

DJ:   It would certainly help.

MP: So we may indeed heed the input before we can get the simultaneous equation model?

DJ:   It could be.  But we certainly need a world input-output model.   I think that's a very worthwhile project.

MP: Do you think there's enough data for a simultaneous equation model?
 
DJ:   I think that with a substantial investment, you could put together the data.   It would require a very substantial investment to do that, a half a million dollars or something. An input-output model would be somewhat less expensive.

MP: Are the national model equations appropriate?

DJ:   If economics were a science, which it is not, and if we were performing experiments, which we're not, and we were going to read the conclusions, which we're not, then I think you'd have to say that whatever theory that went into those models was wrong.   It just is contradicted by the events. Existing econometric models are completely off; they were all wrong on what was going to happen to the GNP in 1973; last year at this time they were all predicting an upturn right about now, and what we're experiencing is a further downturn. So you've just got to believe that they're wrong.

SB:  How far toward a science of economics can we really go?

DJ:   I regard that as an open question at this point.   I don't think a scientific challenge is fully on the agenda, and it will be, but I think not any time soon.   I view this as a situation which is really pregnant with implications for the development of economics, because I think that the existing framework has pretty well been broken down by events.   It's a situation that's not quite as catastrophic as the Thirties, but it's something like that.  Not that another Keynes is going to come along, but there is going to be a very substantial change in the way people think about economics.  The radicals have been pushing this idea for some time, but I think that the situation wasn't really ripe; I doubt that they will succeed in promoting themselves as the people who take the whole thing over.  But they're certainly going to try, and they have a much better situation than they did before the economy started to come unstuck.

SB:   They have a set of programs which is recognizable?

DJ:   They don't have a world view yet, but they have a program of developing a world view, which is supposed to be an alternative to their view of what the standard position would be, Keynesian economics.  They're now trying very hard to elaborate that view in various directions.  But, like everyone else, they're strapped by shortage of resources; there are only so many radical economists, they only have so much time, and they are doing their best, but aren't we all?

SB:   How is Keynes holding up as a theoretical base?

DJ:  This is something that depends on the generations.  Ideas in Physics, and I'm sure in Economics, die out by having people die out, and I think that if you asked Paul Samuelson how Keynes was doing, his answer would be "Just Great . . . this is a great opportunity for Keynes' economics, it just shows you how good Keynes' economics is . . ."  Milt Friedman, on the other hand, would say, "Here's a situation which demonstrates that Keynes was completely irrelevant to begin with, and this defeats Keynesian economics forever." My own view is a little bit closer to Friedman's; I think this shows the intellectual bankruptcy in not only the Keynesian approach, but in ideas that are related to it; we are in a situation where economics ought to lower its aspiration level and quit pretending that we have the answers. We shouldn't go around telling people that economics explains everything, it doesn't.  It's really much more limited in its applicability than we were taught to believe as students. That's nothing against Keynes or anyone else; they did their best.  The claims that have been made for the validity of their work are claims that we should start disbelieving. That doesn't drive me to dismiss Keynes or Economics, but it leads me to try and do what I can to deflate the wild claims that were made in the early sixties by people who were saying that the millenium was here, that everybody was now Keynesian, and that that was going to cure all of our problems.

SB:  I have a standard question, which has several directions. What have you read that electrified you lately, and this would be both in your field and in your life, and from technical papers and books.

DJ:   The most exciting book I've read recently is by Fogel & Engerman on slavery. Time on the Cross.  Have you seen it? It's an unbelievably radical book.   It advances the thesis that, in fact, under slavery the economy of the South was as efficient or more efficient than the Northern economy at the same time, and, furthermore, that the whole organizational structure of the slave economy was Black.   In other words, it wasn't just the people out in the fields picking cotton, but the overseers, the organizers, the managers who were Black. The only people who weren't Black were the people who were managing portfolios; in other words, the people doing financial calculations.   Fogel and Engerman view this as a great vindication of the Black race and its potential for economic accomplishment and achievement.  Their work leaves a great void as to what happened as a result of the Civil War.  Why is it that when we pick up the track in the late 30's or the early 40's the Blacks are then down at the bottom of the economic ladder? Their argument, essentially, is that we have to blame reconstruction and its aftermath, that we can't blame it on the slave society, and therefore we can't let contemporary American society off the hook for the condition of Blacks. We can no longer use the excuse, "that's because they were slaves." As slaves. Blacks were as productive economically as Whites at the same time.

SB:   Once again, intervention was the bad guy.   In this case, the goodhearted Northerners.

DJ:   If you mean that the Northerners intervened to end slavery, Fogel and Engerman would certainly regard that as good; however, the problem that remains is, what happened during reconstruction.   In any case the book is electrifying in its implications for American race relations.   It is probably the most important book that's been written on the subject since American Dilemma.

SB:  What else? We also include technical papers and things like this as sources of electrification.

DJ:   I was mildly electrified by this book that just came out of the Energy Policy Project into which I had substantial input, called The Time to Choose.  It's a book that was put together by Dave Freeman and his staff and it's an attempt to analyze the potential for energy conservation in this country. And the conclusion is that if you ever get over the short-term hurdle in dealing with disorganization which is involved, that the potential for energy conservation is really enormous.

SB:  What are the major cutback areas?

DJ:   The major cutback areas are in every area except transportation:   industry, business and household sectors. When I say cutbacks, of course, I mean in rates of growth. We're not talking about a decrease in energy consumption; we're talking about a decrease in the rate of growth of energy consumption.

SB: How would we get that book?

DJ:   You would write to Ballinger in Cambridge.  Ballinger is a subsidiary of Lippincott, and they publish the whole Energy Policy Project report; this one is called. The Time to Choose.

SB:   Michael?

MP:  I 'm so happy just sitting here in the sunshine.

SB: Ah, the California laze.