Home' Trinidad and Tobago Guardian : January 2nd 2014 Contents JANUARY 2014 • WEEK ONE www.guardian.co.tt BUSINESS GUARDIAN
THE ECONOMIST | BG23
William Petty was an innovation machine.
He designed an early form of catamaran,
conceived of a mechanical grain planter,
proposed attaching engines to boats and
patented a "double-writing" instrument,
which produced an extra copy of whatever a writer put down
Petty, who died at Christmas in 1687, also was an innovator
in the world of theories. By tinkering with data and simple
models, this little-known Englishman came up with many of
the ideas -- how to measure GDP, why the money supply and
banks matter, how lasting unemployment affects the economy
-- that form the bedrock of modern economics.
Born in 1623, the young Petty showed an early interest in
clockmaking and joinery, but did not enter either trade. His
hometown, Romsey, is close to the sea, and he left home on
a ship, as a cabin boy, at 14. That led to the first of two mishaps
that changed the course of his life.
After breaking his leg in a nautical accident, he was put
ashore for treatment in Normandy. As the injury healed he
enrolled in a Jesuit college in Caen, where he developed an
interest in anatomy, which he went on to study in Amsterdam
and Paris. In Paris he met and worked for Thomas Hobbes,
whose empiricism was a deep influence. Collecting data and
making real-world observations became central to his work.
Back in England by 1646, Petty continued his medical studies
at Oxford, rising to become a professor of anatomy at Brasenose
College by the time he was 27.
Then came the second upheaval. After witnessing a bungled
hanging, Petty appeared to bring the criminal, a woman, back
to life. She was pardoned, his reputation soared and he received
a lucrative post, as physician general, in Ireland. His travels
explain why Petty's economics are full of international com-
parisons: stagnant Ireland, more prosperous England and its
great rival at the time, the Netherlands.
Success in Ireland meant that Petty was granted an estate.
He was puzzled, however, as to how to value it.
He first calculated its benefits: If cattle grazing in a field
put on a certain amount of weight each year, the market price
of the extra meat was a logical measure. Next he needed to
work out how many years' income to tally. Men cared about
their children and grandchildren, he reasoned, but concerns
for the future were finite. Using data on the extent to which
generations overlapped, Petty reckoned that 21 years was right.
He had jumped from a blank sheet of paper to an embryonic
version of the "present value" calculation at the heart of
Petty's landholding also provided the spur for his most
important invention, gross domestic product. England fought
the Dutch three times between 1652 and 1674, and landowners
faced high taxes. Petty thought this unjust and, to explain
why, he set out the first set of national accounts for England
First, he asserted that total income must equal total spending.
Since 4.5 pence a day was needed for food, housing, clothing
and ''all other necessities,'' and the population was six million,
spending was £40 million a year. Next he tallied the income
from a long list of assets -- land, houses in London, ships --
for a sum of £15 million. If 15 million of the £40 million in
spending was income from assets, he reasoned, the remaining
£25 million must be wages. The tax burden, he argued, should
be shifted accordingly.
Other ideas were less self-serving. Out of concern that high
interest rates were holding back trade in Ireland, Petty developed
a sophisticated monetary theory, according to James Ullmer
of Western Carolina University in Cullowhee, North Carolina.
He calculated the cash needed for all the transactions in Ireland
each year, and how quickly it circulated, to derive an estimate
of the amount of money needed to keep a lid on interest rates.
This "quantity theory of money" is core to monetary economics,
and Petty's version of it came a century before the one published
by David Hume in 1752 that is usually credited as the first
Petty's monetary theories prompted him to dispute criticism
of England's fledgling banking system. Take, he argued, the
problem of an economy that needs a money supply of 100,000
pounds but has only 60,000 pounds in cash. It could keep
£20,000 as currency, with £40,000 put into banks. Because
banks could lend out the money, loans and deposits would
run close to £80,000. Add back the coins, and you have
£100,000. Since such "fractional reserve" banking could help
multiply money, Petty was a supporter: Banks could help Eng-
land compete with the Dutch, he concluded.
Petty also drew conclusions from his national accounts,
which pointed to the importance of income from labor. He
worried that unemployment would reduce men's facility to
work, precisely the job-market scarring or "hysteresis" about
which modern economists fret. He pre-empted a rhetorical
proposal made centuries later by John Maynard Keynes: Since
pointless work was better than none, he posited, the unemployed
could be paid to build a pyramid on Salisbury Plains or transport
Stonehenge to London. Petty's real point was that deficient
demand was a threat, and that in times of slump public invest-
ment could help offset it.
Various hues of academic snobbery explain why Petty is
little known. That he included data with everything he wrote
put him at risk, because later studies found different results.
In the century after his death, his data-first approach fell out
of favour, because it seemed purer to construct theories first
and then test them against data.
Worse, Petty did not seek an all-encompassing theory of
the world. Because he lacked a model that joined all markets
together, he has been labeled an "anticipator," but not a founder,
Today these complaints seem flimsy. The economists toiling
in central banks have ditched their overarching models and
now run lots of little ones. At firms such as Google and eBay,
data mining is no longer a sin but rather a lucrative skill.
Petty's economics have triumphed again. Like his catamaran,
his motorboat and his proto-photocopier, his economic ideas
have stood the test of time.
@2014 The Economist Newspaper Ltd. Distributed by the New
York Times Syndicate
The man who invented economics
Until now it widely has been assumed that construction
equipment made by Chinese companies, and even equipment
made in China by the leading foreign firms, was inferior
in both quality and technology to gear produced in the
foreign firms' factories back home.
These assumptions have been crushed by a new study
from CLSA, a broker which tested a range of Chinese-made
diggers and found them to be sturdy and high-performing.
Leading Chinese brands such as Liu Gong, Sany and Zoom-
lion, whose products also have the advantage of being cheap,
soon will be invading building sites around the globe.
Things have changed drastically since the global financial
crisis five years ago. Until then around 90 percent of the
diggers on Chinese building sites were foreign-branded,
albeit often made inside the country. The government's
huge fiscal stimulus, in 2008-2009, triggered a construction
boom which encouraged existing Chinese makers to expand
and spurred dozens of new firms to enter the market. The
local firms lacked the technical know-how of Japan's Hitachi
and the extensive product range of America's Caterpillar,
but they offered buyers such generous discounts and financ-
ing that by 2011 they had grabbed half of the domestic
As they have expanded, the best Chinese firms have
rushed to upgrade their technology by buying, or entering
joint ventures with, foreign competitors and suppliers. Sany
Heavy bought two German firms, Putzmeister and Intermix,
and entered a joint venture with Palfinger of Austria. Zoom-
lion bought CIFA of Italy. Liu Gong and Xugong formed
joint ventures with, respectively, America's Cummins and
South Korea's Doosan to improve their diesel engines.
As the effect of the government's stimulus has faded,
demand for construction equipment has softened. Thus
the foreign firms, which hitherto had been producing rel-
atively low-tech ''made in China for China'' products in
their local factories, increasingly have switched to making
more sophisticated ones for export, in particular to south-
CLSA's researchers subjected Chinese-made diggers from
six companies -- Caterpillar, Doosan, Hitachi and Sany, as
well as Kobelco and Komatsu of Japan -- to two weeks of
grueling tests of their productivity, durability and fuel effi-
ciency. They all came out well, but most striking was the
performance of Sany's machines. Though not quite as good
as the best, made by Caterpillar, they outperformed their
Japanese and Korean rivals.
CLSA concluded that technology gaps between the best
Chinese firms and their foreign rivals are now "almost non-
existent." It predicts that Sany and a handful of other larger
Chinese brands will lead a consolidation of the local industry,
in which 60 firms will become perhaps six.
The firm's test makes an interesting contrast with a
similar exercise in February, in which Sanford C Bernstein,
a research firm, stripped down two leading models of Chi-
nese-branded cars to examine their build quality. In this
case the Chinese firms were found to be still lagging their
Chinese companies have not yet learned how to make
world-class cars, in short, but they have now worked out
how to make top-quality construction equipment at attractive
prices. Their foreign rivals should be worried.
@2014 The Economist Newspaper Ltd. Distributed by the
New York Times Syndicate
China digs its way to progress
Links Archive January 1st 2014 January 3rd 2014 Navigation Previous Page Next Page