Monday, April 14, 2014

Robert Samuelson Right For Once (About Long Term Unemployed)

I have probably picked on Robert Samuelson of WaPo more times than any other in posts here, most often over his regularly misleading columns on Social Security.  So, I guess I should note when for once he has it right.  He notes today in a WaPo column entiteld, "Idle and unwanted," that the long term unemployed are facing a very difficult situation in the US, with prospects that could lead to many of them simply never becoming employed again, and many of those who have managed to get jobs getting ones far below their previous jobs.  The problem is that prospective employers increasingly just assume that there must be something wrong with these people, and in many cases there is a problem of the degradation of specialized skills over time.  While he does not come out vigorously for demand expansion, he agrees that the economy is not near some inflationary breakout point, thus effectively supporting such an expansion to help these people, even if such an expansion may tend to help them less than others.

All of this may be widely accepted and effectively conventional wisdom almost.  But, I am pleased to agree with RJS for once.  Maybe he will write more that I can agree with in the future, although I suspect that he will continue to be a hopeless case on the Social Security issue.

Barkley Rosser

Suresh Naidu Responds: "Substitutes or Complements: Marx and Brad and Me"

Suresh Naidu at The Slack Wire:
Since Brad Delong has attributed some thoughts on Marx to me, and I have gotten some emails inquiring whether or not I did say them, I thought it would be useful to publically air what I understand to be the context.
Sandwichman was one of the inquisitors. In an earlier post, Return of the Creature from the DeLong Lagoon S. had questioned the accuracy of DeLong's attribution of these thoughts to Naidu. According to Naidu, however:
The context of the long-running conversation [between Naidu and DeLong] has been trying to establish a dialogue between Marx and modern growth theory. Inside the modern production function there is a pretty undifferentiated view of "K" (which leads it into some troubles as bad as any in the labor theory of value). Marx on the other hand distinguishes (at least) machines, technology, and money-qua-productive-input as different from each other conceptually. The fact that these are rolled into an aggregate production function by mainstream growth theory is not Marx's fault. And so when somebody is trying to translate Marx into modern economics, the slippage between what is "K" and "what Marx meant" can get confusing.
This no doubt explains DeLong's comment that Marx, "vanishes into the swamp which is the attempt to reconcile the labor theory of value with economic reality, and never comes out." It is not Marx's fault that he vanishes into the swamp of trying to establish a dialogue between Marx and modern growth theory (inside of which there is a pretty undifferentiated view...) the attempt to reconcile the labor theory of value with economic reality the modern production function. Or something.

Sunday, April 13, 2014

Presentation on Multiple Equilibria

I'm giving a lecture this week in my development class (Small World: Poverty and Development on a Shrinking Planet) on multiple equilibria. We're using Todaro and Smith, and the lecture is intended to provide an alternative approach to the material in Ch. 4 of that book.  Of course, I've been waving the flag of multiple equilibria, especially those arising from interaction effects, for over 30 years.  (My original paper on the topic was written in – gasp – 1982.)

For the pptx version, click here.  For the slightly less jaw-dropping pdf, try this.

Saturday, April 12, 2014

Who Gets To Decide Which Words And Spellings Are OK (Politically And Otherwise)?

Of course, this is an old problem as ongoing discussions about what the football team in Washington should be named and what people of African descent in the US should be called, and so on.  But lately I have seen other situations around the world where there seems to be confusion and also lots of regular insulting of people, with me not knowing how much of this is just ignorance and how much of it is politics, and even who it is who gets to decide these things.

My latest example is seeing the following names/spellings given for four prominent Ukrainian cities: Kiev, Kharkiv, Luhansk, Lviv.  The problem is that while the latter three are the Ukrainian spellings (or their standard English transliteration), the first one is the Russian one.  Ukrainians call it "Kyiv," while Russians call the latter three respectively "Kharkov, Lugansk, Lvov." How is it that we do not use a consistent set of spellings?  Just to really confuse things, I note that the the last one, the major city of western Ukraine, has also been spelled like the Russian way but with the "L" having a slash through it that makes it pronounced "W" more or less, which is the Polish spelling, the Poles having ruled it between the world wars, and before WW I, when it was part of the province of Galicia in the Austro-Hungarian Empire, it was named "Lemberg," obviously German.  The changes for this city's name all reflected who ruled it, but why is Kyiv still being called the Russian "Kiev"?

Here are some other ones that I think that most people simply do not know about, but which involve the people who are called by these names feeling insulted.  One is "Shi'ite."  This is considered insulting by those who follow that tradition of Muslim belief.  It is preferable to refer to such an individual person as a "Shi'i," and collectively as "Shi'a," which one does occasionally see in the media.  Most academic writings get this right, but somehow the insulting "Shi'ite" and "Shi'ites" has become entrenched in our media, although I think that most of those using it do not realize that it is insulting.

Unsurprisingly, there are several more of these in the Middle East.  So, Saudi Muslims do not like being identified as being "Wahhabis" or slightly more correct, "Wah'habis."  Technically indeed their beliefs do follow doctrines established by one Muhammed ibn Wah'hab, who in 1740 converted Muhammed ibn Sa'ud, the founder of the Saudi royal family, that the very strict Hanbali Sunni shari'a is the code that all good Muslims should follow, and ever since the family has followed this doctrine, with it not entirely unreasonable to identify the doctrine with its founder.  However, they consider this insulting.  They prefer to call their beliefs by an Arab word that is usually translated as "Unitarian," however given that this word in English refers to a very liberal religious group and their beliefs are about as strict and conservative as any within the Muslim world, this would be very confusing.  I also note that the Wah'habis are often confused with the Salafis, and they share some views, but the are not identical and disagree on quite a few things, with Salafism being a 19th century doctrine that originated in Egypt.

Finally, I note that some groups manage to get others to stop using insulting names for them, as we have seen sometimes in the US.  So, the religious group that is dominant in western Ukraine may have become winners in more ways than one as a result of recent events involving their nation.  In the past, this religious group were generally called "Uniates," a term that they always considered insulting.  This group adheres to the Catholic Church, and has done so since a long period of  Polish rule in the past.  But they have long been allowed to use Orthodox liturgies and follow certain other Orthodox practices, such as allowing priests to marry.  In this way they are like the Maronites of Lebanon.  In any case, they have  long preferred to be called "Greek Catholics," and lo and behold in recent weeks I have seen press stories talking about priests in Ukraine whom are described as being just that, "Greek Catholics," not "Uniates."  So, maybe something good is coming out of all this mess yet, although I remain unclear who is really in charge of all this.

Barkley Rosser

Friday, April 11, 2014

Value of Life: The Singularity Speaks

Maybe I should, but I can’t let this one go by.  This morning on Economix, the prominent health economist Uwe Reinhardt writes that his view on the value of human life—that it is finite, determinate and should govern health-related policy decisions—“is shared by literally every American economist”.

Well, last time I looked in the mirror I was still there.  The book I wrote on this topic, Markets and Mortality: Economics, Dangerous Work and the Value of Human Life, still exists too.  Originally published in 1996, it was reprinted in 2009.  The argument it develops doesn’t lend itself to being condensed in a paragraph or two in a blog post, so I won’t try.  The book draws on the critique of utility theory, the social embeddedness of risk and health, and similar matters.  (It also goes after the hedonic wage regressions that are often used to put a price on deadly risk.)  I’ll admit my thinking has evolved since then, but not in Reinhardt’s direction.

Another nonexistent economist, by the way, is Frank Ackerman, who coauthored Priceless: On Knowing The Price Of Everything And The Value Of Nothing with Lisa Heinzerling.  He doesn’t buy the value of life business either.

I suppose I need to add that I don’t think that every expense should be borne in every circumstance to reduce the risk of premature death to its absolute minimum.  Obviously there are tradeoffs, but the question is whether attaching a fixed monetary value to “life” (or a life-year or whatever) helps us make them intelligently.  And I can certainly relate to Reinhardt’s outrage over the hypocrisy of politicians who grandstand about death panels but callously sacrifice the life chances of the poor, the military and others by denying them easily affordable protection.  My grumpiness is not about the politics of his piece, but the detail, minor in the larger scheme of things, of seeing myself drummed out of the economics profession.

Monday, April 7, 2014

Poo On Pew's Paul Taylor's Generational War

Dean Baker today has pretty much taken this apart, but I shall throw in a few more cents.  In yesterday's Parade magazine, generally a completely politically bland outlet to accompany comic strips in Sunday papers around the country, Vice President of the Pew Foundation, a supposedly terribly respectable place, Paul Taylor, unleashed a massively misleading hysterical screed about how the baby boomers are going to bust the millennials with all their awful Social Security and Medicare benefits, with him apparently having a book on this, so I must cynically think that Taylor is just lying to push his apparently worthless book.  However, we have really had enough of these misrepresentations.  Taylor's main misrepresentation is to claim that by the time all the boomers are on SS and Medicare, these programs will be broke, gobbling up half the budget.  Fundamentally this assumes that the rate of increase in medical care costs that we have seen in the past will continue, which does not look at all likely now.  Dean points out that SS finances are not in such a bad place given all the tax and benefit changes made in the past such as by the 1983 Greenspan Commission.

Let me note a simple fact that if Taylor knows it, he gives no evidence of doing so and that Dean did not mention, although he noted a number of other relevant issues.  As with so many other screeds of this sort, Taylor makes a big fuss over how by 2030 or so the ratio of workers to SS and Medicare recipients will have fallen to about 2 to 1 in contrast to today's 3 to 1.  This is supposed to make people just fall on the floor in a total freakout, with millennials rising up to demand that boomers head for the gas chambers ASAP, as I see regularly suggested on such anonymous econoblog sites as the abominable EJMR.  So, this simple fact is that right now one finds in Germany roughly this ratio, 2 to 1, with pensions if anything higher than they are in the US.  Is Germany failing to make its payments or suffering from a massive budget crisis?  Obviously not.  Indeed, the fact that all these hysterians routinely ignore is that of the higher income nations, the US is one of the best positioned demographically for dealing with this issue down the road.  Does Japan have a big problem?  Yes.  Does the US?  If it can get its medical care cost increases under control, no.

I want to add that I am increasingly frustrated at how widespread this false story of likely future failure of these programs for millennials has spread.  Anecdotal, but I just heard on a local radio station where several hosts were talking a younger one simply asserting that Social Security and Medicare "will not be there for me."  I constantly hear this from students, almost always asserted with an astounding degree of certainty and self-righteous pomposity.  Needless to say, this makes them susceptible to the games by politiicians who want to cut these programs back.  The irony is that if this happens, it will not happen much to the baby boomers, but will be set up to land much more on these very millennials.  They will be sold accepting definite future benefit cuts because, gosh, if they do not accept them, they might have to accept them.  The incoherence of thought and lack of knowledge about what is going on here I find really frustrating.

Barkley Rosser

Larry Summers CRUSHES the Lump of Lobster!

It isn't everyday the Sandwichman gets the opportunity to praise Lawrence H. Summers. Back in February, Summers tweeted, "The inverse of Say's Law holds today: Lack of demand creates lack of potential supply." At a full employment event put on last week by the Center on Budget and Policy Priorities, Summers elaborated on what he meant by that. Starting at about minute 22:20 of the video, Summers eviscerates the lump-of-lobster fallacy.

What is the lump-of-lobster fallacy? Samuel Brittan was wont to invoke the lump-of-labor fallacy in his columns at the Financial Times but occasionally the compositors would tamper with the copy, once rendering the old canard as the lump-of-lobster fallacy. It seems to me that this was an appropriate reductio ad absurdum of the nonsense claim that unspecified persons believed there was "a fixed amount of work to be done."

As the Sandwichman wrote back in January (Yasraeh's Law), "I have described the lump-of-labor fallacy claim as 'an inverted Say's Law on steroids.'"

Does Glenn Hubbard Want to be President Jeb Bush’s Chief Economic Advisor?

I saw on the news this weekend that Republicans are hoping Jeb Bush runs in 2016 – which may in part due to the latest on BridgeGate. Memo to the Republican Party – Chris Christie is not a good candidate. So that’s the good news. The bad news is that I had to endure another rant from Glenn Hubbard , which included:
But structural changes are plainly at work too, based in part on slower-moving demographic factors. A 2012 study by economists at the Federal Reserve Bank of Chicago estimated that about one-quarter of the decline in labor-force participation since the start of the Great Recession can be traced to retirements. Other economists have attributed about half of the drop to the aging of baby boomers. Baby boomers can't be the whole story, though, since the participation rate has declined for younger workers too. This part of the drop is a function of various factors, including simple discouragement, poor work incentives created by public policies, inadequate schooling and training, and a greater propensity to seek disability insurance.
Dean Baker does the needed clean-up on this canard:
Hubbard noted the sharp fall in labor force participation since the downturn. He attributed it to a lack of incentive for people to work. This is in striking contrast to the more obvious logic, that when people have been trying unsuccessfully to find jobs for 6 months or a year, they eventually give up ... The problem with Hubbard's story is that he doesn't have a good explanation for why people suddenly decided that they didn't want to work. He points to an increase in the length of unemployment benefits, but this happens in every downturn. Furthermore, the maximum duration of benefits has been cut back sharply from its peak of 99 weeks in the first years of the recession with no corresponding surge in employment. The Affordable Care Act will make it possible for many people to get health care insurance without working or without working full time, but that should only have begun affecting the data in the last few months as the health care exchanges came into existence. It would not explain the drop in labor force participation that was already quite evident by the summer of last year.
Dean discusses other reasons why Hubbard’s inward shift of the labor supply curve story does not fit the data. Let me simply add that if it were a lack of labor supply (as opposed to weak aggregate demand) to blame here, then why haven’t real wages increased? Hubbard does note aggregate demand factors:
Does this mean that the Obama administration's "targeted, timely and temporary" stimulus package was the right approach? Actually, no. Increasingly, it appears to have been a poor match for the severity of the downturn and the magnitude of the required boost. After the Great Recession's sharp decline in investment and employment, U.S. business probably needed a more curative jolt to restore confidence. A sustained infrastructure program, rather than a temporary one for "shovel-ready" projects, would have provided more reassurance of longer-term demand. And far-reaching tax reform could have provided both a near-term fillip from front-loaded business tax cuts and a credible prospect for future growth. What we don't know is whether the Obama's administration's activist policies failed to draw more Americans back to work because they were poorly executed or because they didn't do enough to raise aggregate demand. A better designed activist fiscal policy would have made more headway in encouraging growth, but deeper factors behind the downward shift in labor force participation still remain.
Why does this remind me of Romney’s 2012 campaign? Let’s be clear – Christina Romer pushed for a better designed fiscal stimulus back in 2009 with more in the way of government investment spending. And her call for a more sensible fiscal stimulus got zero support from Glenn Hubbard’s side in 2009. No – they pushed for low bang for the buck tax cuts without a clue as to how to pay for them in the long-run. I would hope Jeb Bush – if he does decide to seek the Republican nomination – could do better than Mitt Romney did in his 2012 Presidential campaign. And if he were to become the next President, let’s all hope that his economic policies are not as ill thought out as the economic policies enacted by his brother.

Sunday, April 6, 2014

GDP and Well-Being, Positive and Normative

There’s a review in today’s New York Times of Diane Coyle’s new book on the history of GDP calculation.  Shot through it is a crazy confusion, abetted—nay demanded—by standard economic practice.

It all goes back to the primordial distinction between positive and normative analysis.  Positive analysis is explanatory, predictive, or simply descriptive: what and why.  Normative analysis is evaluative: should.  We economists beat the heads of our poor charges each year in introductory classes with this distinction.  Positive analysis, we say, can be validated by reasoning and evidence, while normative analysis is ineluctably conditional on the values of whoever is doing the evaluating.

Yes and no.  The distinction is important, but it is not ironclad.  There are lots of ways the two types of analysis are connected, and I won’t get into the philosophical issues here, but it is obvious, just from paying attention, that economics wants to have a single analytical framework to answer both positive and normative questions.  Economists don’t want one model to predict what the equilibrium outcome will be and another, using completely different elements and based on different assumptions, to rank that outcome against others according to how beneficial it is.  Most models in economics do double-duty: they support positive and normative analysis equally.

So it is with GDP.  This is indispensable for the heavy lifting that positive economics, especially macroeconomics, requires.  You wouldn’t be able to document whether you were in a boom or a recession without it, or at least not nearly so well.  For instance, our NBER judgments of business cycle dating are surely more accurate today than their retrospective judgments of cycles before GDP measurement was established during the New Deal.  But GDP is also invoked as a measure of economic “success”—our policies are said to work if they crank up GDP growth or fail if they don’t.

Understandably, GDP has come in for a lot of criticism regarding its measurement of economic well-being.  It includes a lot of stuff that doesn’t make us better off (more cops if they’re just a response to an upsurge in crime), leaves out a lot of stuff that does (unpaid labor inside and outside the home), ignores harmful consequences of economic activity (pollution and resource depletion), and utterly fails to price many goods in a way that reflects their actual value to society (such as government-supplied services, which are priced at cost of production).  Finally, consumers (such as you and me) do not always spend our income in ways that maximize our well-being, and in some documented cases (e.g. commuting to work) spending can go up while well-being goes down.  Personally, I’m convinced: GDP is a deeply flawed indicator for normative purposes.

But what of positive analysis?  There I think we’re on much more solid ground.  GDP measures the size of the market economy.  We happen to live in a market economy, so this is a useful measure.  It works well for predicting market consumption, imports, paid employment, that sort of thing.  If you think about it, the very characteristics that people criticize from a normative standpoint—how the selection of traded goods and the prices they trade for misrepresent their true impact on us—are the ones that make GDP work for a well-defined set of positive tasks.  If we priced things according to their “true” value (supposing we could do that) instead of their market value, we would lose the market part.

Alas, it is sometimes necessary to blur this distinction.  For example, we need to have a conception of real GDP so we can tease out the rate of inflation.  Since the qualities of goods are constantly changing, they need to be priced in order to distinguish between price increases that contribute to inflation and those that reflect quality improvements.  (Or maybe prices are constant but should be seen as contributing to inflation because quality has gone down.)  Estimating the value of quality (hedonic regression) brings us closer to the line separating normative from positive.  I think the line is not (necessarily) crossed, however, if the (monetary) willingness to pay for quality is kept distinct from the effect of quality on consumer well-being.

And where does that leave us?  The distinction between positive and normative analysis is important and needs to be maintained.  There should be no presumption that the concepts and models that work for one will work for the other.  We should not sacrifice the fit between model and purpose in one realm in order to be able to shoehorn it into the other.  I think, though I will not follow it up here, that welfare economics has suffered mightily from attempts to squeeze its analysis into the same models that work well for positive—explanatory and predictive—work.

So let’s not visit the same damage on our properly-functioning positive models, like GDP.  Keep and even improve GDP as a measure of the size of monetary flows within an economy, and look elsewhere for appropriate indicators of human well-being.  (I have a hunch that economists, who are good at the first task, will prove to be less well-suited to the second.)  Do positive well, and do normative well, and don’t let either get in the way of the other.

The 'Technology' Trap: "'Permanent' Technological Unemployment: 'Demand for Commodities Is Not Demand for Labor'"

Hans P. Neisser, The American Economic Review, Vol. 32, No. 1, Part 1 (Mar., 1942), pp. 50-71:
The theory of technological unemployment is a stepchild of economic science. The facts seem to stand in such blatant contradiction to orthodox doctrine, according to which no "permanent" technological unemployment is possible, that most American textbooks prefer not to mention the problem itself. This attitude is of recent times. The analysis to which Ricardo subjected the displacement of labor by the machine in the last edition of the Principles had stimulated a lively discussion among the later classical economists, who, as we shall see instantaneously, followed two different lines of thought. With the rise of neoclassical equilibrium analysis, the discussion died down, at least in Anglo-Saxon literature' and only recently the oldest argument against technological unemployment, originally developed by McCulloch, was revised in a little more sophisticated form by two American economists, P. H. Douglas and A. Director in The Problem of Unemployment (New York, 1931). We can, therefore, distinguish three approaches:

1. The "Law of Markets" approach, formulated at first by McCulloch in Principles of Political Economy (first edition, 1825) Part I, chapter VII, and, as pointed out above, revised by Douglas and Director, applies Say's Law of Markets to the Labor Market. As there cannot be a general over-production of commodities produced, so there cannot be a general over-supply of labor. We shall analyze this argument in the first section of this paper, with some supplementary remarks in Section V.

2. McCulloch's argument was not taken up by the other classical authors, because it is at variance with the classical theory of the demand for labor. As John Stuart Mill stated it most pointedly: "Demand for commodities is not demand for labor" (Principles, vol. I, p. 5, para. 9). The maintenance of the demand for commodities according to Say's Law, therefore, does not militate against an over-supply of labor. It is the volume of circulating capital, interpreted as wage fund, that governs the demand for labor. Following Ricardo's lead, the theory of "compensation" of technological displacement of laborers was worked out. In contrast to the Law of Markets approach, which does not allow any exceptions to the denial of "permanent" technological unemployment, the Wage Fund School maintains the occurrence of compensation only as the general rule, exceptions from which are deemed possible though unlikely. In Section III, we shall consider this argument.

3. The neo-classical equilibrium approach differs from the preceding ones by denying the possibility of technological unemployment only as to a state of long-run general equilibrium proper, in which complete adjustment of all the variables of the economic system is attained (size of firm, input, output, prices of goods produced, prices of productive services, interest rate). The difference of the neo-classical approach from the Law of Markets approach is concealed by the use of the terms "temporary" and "permanent" by the latter school. By "permanent," Douglas and Director do not refer to the state of long-run equilibrium proper. This is clear from their definition of "temporary" technological unemployment (op. cit., pp. 113 ff.), which refers only to such obstacles to the reabsorption of laborers as: slow working of competitive mechanism, slow transfer of expenditure from one good to the other, or of workers from one industry to the other. A state of affairs in which these obstacles are overcome (as we shall assume throughout the present paper) still might be in a merely "short-run equilibrium" in the neoclassical sense, which is based on the assumption that all equipment is "given" as to quality and quantity, while long-run equilibrium proper in the neo-classical sense requires, among other things, the adjustment of the size of the firm and of the quality of equipment in such a way that average costs equal price for all firms. Indeed, if the Law of Markets is valid at all, it must be applicable to periods of any length, provided only the period is long enough to overcome the temporary obstacles; and similar considerations apply, as we shall see, to the wage-fund argument.
...
While there is little merit in the two classical approaches, the neoclassical one stands on much firmer ground, on account of its lesser scope. However, even the neo-classical approach is far from giving the unambiguous answer its adherents ascribe to it. This will be shown in Section IV. On the other hand, while the unqualified denial of "permanent" technological unemployment in traditional theory is not justified, preliminary empirical investigations (which cannot be presented in the present paper) have convinced the present writer that popular opinion vastly exaggerates the amount of unemployment which properly could be called "technological." The relative small size of technological unemployment in history is attributable, partly, to the independent forces increasing employment, which briefly will be discussed in the last section. In no case would it be permissible to use simply the current unemployment statistics as a verification or a repudiation of the theories which affirm or deny the existence of technological progress that creates unemployment. Hitherto the discussion has been marred by a confusion of historical and theoretical statements. ... What would one think of an argument against the law of gravity based on the undeniable truth that only a very small number of people habitually fall against the center of the earth with an acceleration of 33 feet per second? And yet, the reference to unanalyzed observation is not worse than the reference to unanalyzed historical facts. In order to obtain a reliable answer to our question, it is necessary to keep constant the other factors as far as they are truly independent, i.e., not exclusively or almost exclusively governed by the volume of technological unemployment itself.
The Technological Unemployment and Structural Unemployment Debates, Gregory Ray Woirol (1996)
In this mid to late 1940s theoretical literature, a third period of consensus was achieved to add to the consensus periods of 1927—29 (the Say-Douglas purchasing power argument) and 1933—40 (the neoclassical price-flexibility argument). As illustrated by the work of Neisser, Hagen, Lange, Belfer, and Pu, this consensus — built on Keynesian arguments — was that no mechanism existed in the economic system to guarantee the automatic reabsorption of technologically unemployed labor. 
This is where the technological unemployment debates ended. With the full employment of World War II and the spread of Keynesian policy ideas about how to achieve full employment, the pessimism about unemployment and productivity trends that had motivated the debates of the 1920s and 1930s disappeared.... In effect by the early 1950s the state of aggregate professional opinion about technological unemployment had returned to the confident views of the late 1920s.

Picketty, Picketty, Picketty

Well, I just got Capital in the 21rst Century and started in on it. It looks exciting, but I confess to being puzzled by the claim that r>g means that  inequality grows inexorably.  We have the capital share = r (K/Y), and K/Y in the long run equal to s/g (These are Picketty's "fundamental" equations)  where g is the sum of population and per capita output growth rates and s is the net saving ratio . Nothing to quarrel with there. But  then the capital share in the long run will be (rs)/g. Then if r and g are constant ( and s as well) --  the capital share remains constant whether r>g or r< g. What am I missing?

Krugman had a blog post where he spells out Picketty's argument that a decrease in g will increase r/g and thus the capital share: r will fall by less than g if, as Picketty argues, production is CES and  the elasticity of substitution is greater than 1. That makes sense, but this will be so whatever the initial level of r is relative to g, whether above or below unity.

?Help!

Saturday, April 5, 2014

Return of the Creature from the DeLong Lagoon

Project Syndicate published a version of Brad DeLong's ill-informed anti-Marx mutterings with an odd twist. Where his New York Times commentary had started out "I have long thought that Marx's fixation on the labor theory of value made his technical economic analyses of little worth," the Project Syndicate version attributes the unfounded criticism of Marx to Columbia University assistant professor Suresh Naidu:
The economist Suresh Naidu once remarked to me that there were three big problems with Karl Marx’s economics. First, Marx thought that increased investment and capital accumulation diminished labor’s value to employers and thus diminished workers’ bargaining power. Second, he could not fully grasp that rising real material living standards for the working class might well go hand in hand with a rising rate of exploitation – that is, a smaller income share for labor. And, third, Marx was fixated on the labor-theory of value.
Delong has indeed "long thought" that Marx "vanishes into the swamp which is the attempt to reconcile the labor theory of value with economic reality, and never comes out." People who know Suresh Naidu and his work find it extremely unlikely that the views attributed to him by DeLong are accurate. So what's this business of attributing his muddled misconceptions to something Naidu had "once remarked" to him?

Thursday, April 3, 2014

The Creature from the DeLong Lagoon

Professor Brad DeLong:
I have long thought that Marx's fixation on the labor theory of value made his technical economic analyses of little worth. Marx was dead certain for ontological reasons that exchange-value was created by human socially-necessary labor time and by that alone, and that after its creation exchange-value could be transferred and redistributed but never enlarged or diminished. Thus he vanished into the swamp, the dark waters closed over his head, and was never seen again.
Brad forgot to add that Karl Hussein Marx was born in KENYA

Brad DeLong or Karl Marx?
Just a few pages from Marx's A Contribution to the Critique of Political Economy are enough to show that DeLong's "long thoughts" about Marx must have emerged from a swamp with waters darker than anything even the creature from the black lagoon would deign to wallow in. In a section titled "Historical Notes on the Analysis of Commodities" Marx surveyed a century and a half of thought in classical political economy "beginning with William Petty in Britain and Boisguillebert in France, and ending with Ricardo in Britain and Sismondi in France" that dealt with the concepts of labor time and exchange value and their relationship. Of particular pertinence to refuting DeLong's ontological fantasy is Marx's discussion of the contributions of James Steuart and David Ricardo. 

In Marx's account, Steuart was the first to make a "clear differentiation between specifically social labour which manifests itself in exchange value and concrete labour which yields use values..."  Furthermore, Steuart was "interested in the difference between bourgeois labour and feudal labour," and consequently shows "that the commodity as the elementary and primary unit of wealth and alienation as the predominant form of appropriation are characteristic only of the bourgeois period of production and that accordingly labour which creates exchange-value is a specifically bourgeois feature [emphasis added]." In other words, the relationship between labour time and exchange value was viewed by Steuart (to Marx's approbation) as historically contingent, not as some ontological certainty, as Delong claims.

Ricardo, according to Marx, "neatly sets forth the determination of the value of commodities by labour time, and demonstrates that this law governs even those bourgeois relations of production which apparently contradict it most decisively." Does this imply that after its creation this exchange value is "never enlarged or diminished," as DeLong asserts? Marx notes the following qualification by Ricardo: "the determination of value by labour-time applies to 'such commodities only as can be increased in quantity by the exertion of human industry, and on the production of which competition operates without restraint.'"

Whatever one thinks of the labour theory of value, DeLong's claims about "Marx's 'fixation'" are so utterly groundless and fantastic as to make one suspect that perhaps Brad mistakenly thought his commentary was scheduled to be published on April 1st. Especially foolish is his account of Marx's alleged beliefs about the impossibility of re-employment of workers displaced by machinery:
Karl Marx in his day could not believe the volume of production could possibly expand enough to re-employ those who lost their jobs as handloom weavers as well-paid machine-minders or carpet-sellers. He was wrong.
Obviously DeLong is not aware that Marx devoted a section in Capital to precisely this question, "The theory of compensation as regards the workpeople displaced by machinery," the conclusions of which are more in accord with Keynes's 1934 radio address, "Is the Economic System Self-Adjusting?" than with DeLong's foolish caricature:
The labourers that are thrown out of work in any branch of industry, can no doubt seek for employment in some other branch. If they find it, and thus renew the bond between them and the means of subsistence, this takes place only by the intermediary of a new and additional capital that is seeking investment; not at all by the intermediary of the capital that formerly employed them and was afterwards converted into machinery.
Marx reserves his most caustic retort to "the theory of compensation," however, for the first paragraph of the succeeding section:
All political economists of any standing admit that the introduction of new machinery has a baneful effect on the workmen in the old handicrafts and manufactures with which this machinery at first competes. Almost all of them bemoan the slavery of the factory operative. And what is the great trump-card that they play? That machinery, after the horrors of the period of introduction and development have subsided, instead of diminishing, in the long run increases the number of the slaves of labour!
Was Marx wrong, yet again? I leave the last word to DeLong who smugly, albeit inadvertently, confirms Marx's prediction to the letter by playing what he imagines is the great trump-card of the worst-case scenario:
The pessimistic view is that some pieces of (3)* will be (a) mind-numbingly boring while (b) stubbornly impervious to artificial intelligence, while (4)** will remain limited and for the most part poorly paid. In that case, our future is one of human beings chained to desks and screens acting as numbed-mind cogs for Amazon Mechanical Turk, forever.
*"use our hands, mouths, brains, eyes, and ears to make sure that ongoing processes and procedures stay on track"

**"via social reciprocity and negotiation try to keep us all pulling in the same direction"

Wednesday, April 2, 2014

Rumpelstiltskin!

Rumpelstiltskin turns out to be uniquely relevant to the issue of inequality and technology in that it has to do with spinning, one of the key activities to be mechanized in the period leading up to the "Industrial Revolution." Figuratively speaking, the Spinning Jenny spun straw into gold. It also displaced women from a strategic productive activity. This aspect is discussed in Jane Schneider's "Rumpelstiltskin's bargain: folklore and the merchant capitalist intensification of linen manufacture in early modern Europe" and in Jack Zipes's "Fairy Tale as Myth, Myth as Fairy Tale ." I will leave these fascinating connections aside for the time being to focus only on the denouement of the Grimm Brothers' literary version of the story.

Rumpelstiltskin offers the miller's daughter/queen a way out of her contract to give him her baby if she can guess his name. This riddle element of the story, Zipes points out, is a device to build and hold suspense -- the name itself has no meaning. So how does the queen discover that name? Her servant observes the little creep chanting, "Rumpelstiltskin is my name!" Given that clue, it didn't require advanced study in forensic science or cryptography to figure out what his name was.

Capital's self-disclosure is slightly more subtle than Rumpelstiltskin's – but not much. Instead of prancing around and chanting "the real measure of wealth is disposable time," capital enforces a transparent taboo against any such resolution. When I say "capital" I am referring to a being no less fabulous than Rumpelstiltskin but nevertheless representative of actual social relations. Capital spins straw into gold through an employment system. But for the mechanics of that employment system to remain hidden it must also continually spin golden theory into straw man dogma.

"All models are wrong," wrote George Box, "but some are useful." Note the subjectivity of utility. Some models are "useful" precisely because they are wrong. Others are presumed wrong because they might be useful to the wrong people. In his reply to the New York Times debate question "Was Marx Right?" Brad DeLong wrote, "I have long thought that Marx's fixation on the labor theory of value made his technical economic analyses of little worth." Marx's "fixation" is a figment of Brad's imagination, with a long and disreputable tradition amongst authorities whose familiarity with Marx's writing is second or third hand. On the contrary, Marx was arguing that Capital fixated on labour time as a measure of value and that such a fixation was its "moving contradiction":
"Capital itself is the moving contradiction, [in] that it presses to reduce labour time to a minimum, while it posits labour time, on the other side, as sole measure and source of wealth. Hence it diminishes labour time in the necessary form so as to increase it in the superfluous form; hence posits the superfluous in growing measure as a condition – question of life or death – for the necessary. On the one side, then, it calls to life all the powers of science and of nature, as of social combination and of social intercourse, in order to make the creation of wealth independent (relatively) of the labour time employed on it. On the other side, it wants to use labour time as the measuring rod for the giant social forces thereby created, and to confine them within the limits required to maintain the already created value as value." (Grundrisse, "Fragment on Machines", Folks really ought to read the whole thing.)
Marx was writing critically about a fixation. That's different from having a fixation. Was Marx wrong about Capital's "positing labour time as sole measure and source of wealth"? That would be difficult to prove definitively but a long history of strenuous opposition to the reduction of working time is evidence in favour of the proposition. 

Remember that shorter working time was a prime objective of labour unions up until at least the middle of the 20th century.  It could be argued, I suppose, that resistance -- organized resistance -- from employers was simply irrational but that doesn't say much for the Homo economicus thesis. Nor does it say much for the academic economists who have cranked out facile but disdainful rationales for dismissing shorter work time demands.

Instead of prancing around, chanting "Rumpelstiltskin I am styled," apologists for longer hours bleat and repeat and repeat "Lump-of-labor fallacy!" whenever proposals for reducing work time are put forward. It's a nonsense phrase and that very nonsensicality should be a tipoff to its function as a shibboleth. Technological unemployment? "Lump of labor! Lump of labor!"

Sunday, March 30, 2014

Inequality and Sabotage: Piketty, Veblen and Kalecki (for anne at Economist's View)

One of Thomas Piketty's central concerns in Capital in the 21st Century is the inequality between the rate of return on capital (r) and the growth rate (g), which he expresses as r>g. In a recent opinion piece in the Financial Times, "Save capitalism from the capitalists by taxing wealth," Piketty wrote:
Even if wage inequality could be brought under control, history tells us of another malign force, which tends to amplify modest inequalities in wealth until they reach extreme levels. This tends to happen when returns accrue to the owners of capital faster than the economy grows, handing capitalists an ever larger share of the spoils, at the expense of the middle and lower classes. It was because the return on capital exceeded economic growth that inequality worsened in the 19th century – and these conditions are likely to be repeated in the 21st. 
Piketty's proposed (admittedly Utopian) remedy for the current tendency for returns to capital to accrue faster than the economy grows is a global wealth tax, which he describes as "difficult but feasible." One only needs to look at global climate negotiations to be skeptical of that feasibility assessment. There is a global consensus among governments on the need to limit greenhouse gas emissions but they still can't agree on a means for doing so. How likely is it that governments would even agree on the need to limit returns on capital?

A more realistic proposal may be developed from consideration of the mechanism that underlies the r>g dynamic. Nearly a century ago, Thorstein Veblen offered insights into this mechanism in his The Engineers and the Price System. To Veblen r>g (although he didn't use that term) was a strategy pursued by business, not simply a statistical finding. As Veblen points out, "this is matter of course, and notorious. But it is not a topic on which one prefers to dwell." Accordingly, economists have preferred not to dwell on it. They have pretended it doesn't exist:
The mechanical industry of the new order is inordinately productive. So the rate and volume of output have to be regulated with a view to what the traffic will bear — that is to say, what will yield the largest net return in terms of price to the business men who manage the country's industrial system. Otherwise there will be “overproduction,” business depression, and consequent hard times all around. Overproduction means production in excess of what the market will carry off at a sufficiently profitable price. So it appears that the continued prosperity of the country from day to day hangs on a “conscientious withdrawal of efficiency” by the business men who control the country's industrial output. They control it all for their own use, of course, and their own use means always a profitable price. In any community that is organized on the price system, with investment and business enterprise, habitual unemployment of the available industrial plant and workmen, in whole or in part, appears to be the indispensable condition without which tolerable conditions of life cannot be maintained. That is to say, in no such community can the industrial system be allowed to work at full capacity for any appreciable interval of time, on pain of business stagnation and consequent privation for all classes and conditions of men. The requirements of profitable business will not tolerate it. So the rate and volume of output must be adjusted to the needs of the market, not to the working capacity of the available resources, equipment and man power, nor to the community's need of consumable goods. Therefore there must always be a certain variable margin of unemployment of plant and man power. Rate and volume of output can, of course, not be adjusted by exceeding the productive capacity of the industrial system. So it has to be regulated by keeping short of maximum production by more or less as the condition of the market may require. It is always a question of more or less unemployment of plant and man power, and a shrewd moderation in the unemployment of these available resources, a “conscientious withdrawal of efficiency,” therefore, is the beginning of wisdom in all sound workday business enterprise that has to do with industry. [emphasis added] 
Veblen didn't attribute this strategy of sabotage to evil motives on the part of individual firms, on the contrary it is a imperative for survival:
Should the business men in charge, by any chance aberration, stray from this straight and narrow path of business integrity, and allow the community's needs unduly to influence their management of the community's industry, they would presently find themselves discredited and would probably face insolvency. Their only salvation is a conscientious withdrawal of efficiency. 
Veblen was referring, as his title indicates, to the effects of the "price system" -- the interaction in the market of supply and demand. The withdrawal of efficiency kept prices at profitable levels by limiting supply. But what about government intervention to ameliorate those effects through a full-employment policy of demand management (a government spending program)? Michal Kalecki's analysis in "The Political Aspects of Full Employment" addressed that prospect:
Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter's profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? 
Kalecki outlined three categories of business objection to a full employment by government spending: "(i) dislike of government interference in the problem of employment as such; (ii) dislike of the direction of government spending... (iii) dislike of the social and political changes resulting from the maintenance of full employment." It is the first and third of these objections that have the most direct bearing on the issue of r>g:
Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence.
 ...  
It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But 'discipline in the factories' and 'political stability' are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system.
For "state of confidence" substitute r>g; for "bargaining power of workers" substitute r<g. Veblen borrowed his term from the subtitle of Elizabeth Gurley Flynn's I.W.W. pamphlet, Sabotage: The Conscious Withdrawal of the Workers' Industrial Efficiency. Flynn's pamphlet was published in 1916 but the idea of workers deliberately restricting output is much older.

One of the most persistent objections to trade unions during the 19th century was that their principal mode of operation was to restrict production. Veblen simply turned this perennial complaint into a question about the 'innocence' of those making all the indignant accusations. Adam Smith had long ago observed famously, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

The missing link here, though, is the recognition that the particular efficiencies that the workers withdraw are not the same ones as those that the business firm withdraws. There are different modes of efficiency and those differences result in different effects on the rate of return to capital. In other words, there are r>g efficiencies and there are r<g efficiencies. An example of an r>g efficiency would be a new machine that uses less fuel and less labour to produce a given amount of output. An example of an r<g efficiency would be a reduction in the length of the standard working day that improves worker productivity by reducing fatigue and increasing overall well being. Both are examples of efficiencies but they differ as to whom the benefit of the efficiency gain primarily accrues.

Ironically, business has historically raised its most shrill objections to r<g efficiencies by making the false claim that they are intended as restrictions on production. The distinction between r>g efficiencies and r<g efficiencies also has profound implications for Say's Law (the vulgar version), the Jevons Paradox and Chapman's analysis of the effects of a reduction in the hours of labor, which I discussed in an earlier post.