Thursday, August 21, 2014

SCIOD 9: This Magazine of Untruth

"Political economy," observed Frederic Harrison in his 1872 review of Thomas Brassey's Work and Wages, "professes to be a science based on observation."
But the bitter pedantry which often usurps that name usually assumes its facts, after it has rounded off dogmas to suit its clients. In practice this magazine of untruth escapes detection for two reasons. One is that the facts relating to labour are invariably seen through the spectacles of capital. ... The second reason which obscures the truth about industry is, that the facts about capital are almost never honestly disclosed.... 
The decade of the 1870s was an auspicious time for political economy. On the eve of the decade, John Stuart Mill recanted the orthodox dogma known as the wages-fund doctrine, which has a curious relationship to Say's Law. Dudley Dillard referred to Say's law of markets as "a corollary of the wages-fund doctrine in the context of the fourth proposition on capital." Mill's fourth proposition maintains that "demand for commodities is not demand for labour."

Perhaps Mill's dictum could be more clearly expressed as a positive, qualified statement rather than a negative proposition: it is the supply of capital (not the demand for commodities) that constitutes the demand for labor. Or, supply (of capital) creates its own demand (for labor). A cheap labor market is always full of employers. From this perspective there is no such thing as involuntary unemployment, only overpriced labor. That is what Harrison meant by "the bitter pedantry" that "usually assumes its facts, after it has rounded off dogmas to suit its clients ." British trade unionist George Howell wrote of the wages-fund doctrine in 1878:
Perhaps no single doctrine has been more persistently or mischievously urged by political economists against the claims of the working classes than the dogmatic assumption that there is a certain wage fund which constitutes a definite portion of the existing wealth of the country for the payment of wages, and that this amount will be wholly used for that purpose, and that not one penny more can be so used.
In Work and Wages, Thomas Brassey didn't reject the wages-fund doctrine. He did something far more lethal to the glib propaganda value of the dogma. He complicated it. Brassey was not a political economist. He was an industrialist, heir to an international railroad construction enterprise, started by his father, that was one of the largest employers in Britain at the time. He also inherited his father's vast accumulation of evidence on labor costs and their variation in response to different geographic, social, political and economic circumstances. From his analysis of this data, Brassey concluded that output per unit of wage cost was approximately equal, regardless of variations in the wage rate. Wages rates thus should be understood to incorporate differences in productivity of labor as well as fluctuations in supply and demand.

Conventional political economists were hardly unaware that there was a relationship between wages and the productivity of labor. It just wasn't central to their elaboration of the supposed wages-fund until Brassey's evidence proved too much to ignore. "With evidence like this before us," exclaimed Harrison in his review:
…we may well hesitate to accept the professorial dicta of so-called economists. They give us almost daily lectures based on the assumption that high wages inevitably imply dear goods and low profits…. And it is an axiom with some of these philosophers that every rise in wages is a fresh tax on British industry. Of course a rise in wages does not imply of necessity cheaper production; but it is, in a healthy state of trade, perfectly compatible with it. In point of fact economy in production has a progress far more steady, constant, and silent, than any advance in wages.
In his comprehensive critique of the wages-fund doctrine, American economist, General Francis Amasa Walker, cited the authoritative status of Brassey's evidence:
[B]y far the most important body of evidence on the varying efficiency of labor is contained in the treatise of Mr. Thomas Brassey, M.P., entitled Work and Wages, published in 1872. Mr. Brassey's father was perhaps the greatest "captain of industry" the world has ever seen… The chief value of Mr. Brassey, Jr.'s work is derived from his possession of the full and authentic labor-accounts of his father's transactions.... 
In turn, in what is "regarded to be the first modern economic textbook," Alfred Marshall credited Walker for "forcing constantly more and more attention to the fact that highly paid labour is generally efficient and therefore not dear labour…" Marshall judged that fact to be "more full of hope for the future of the human race than any other… [although it] will be found to exercise a very complicating influence on the theory of Distribution."

Under the weight of this complicating influence, the wages-fund doctrine retreated into the twilight of editorial boilerplate, old-school textbook orthodoxy and perpetual antiquarian controversy. Marginal utility theory stepped in -- gradually, very gradually -- to fill the void.

"In economics," Paul Samuelson once claimed, "it takes a theory to kill a theory; facts can only dent the theorist's hide." Perhaps. But perhaps the coup de grace can't be administered until the facts have given the old doctrine a thorough hiding.

On Glenn Hubbard’s Federal Taxes Being 18% of GDP

Dean Baker has some fun with Glenn Hubbard is Unhappy About the Budget Deficit. Dean notes:
Hubbard was the chief economic advisor to President George W. Bush when he pushed through his tax cuts in 2001. The tax cuts, along with the recession and the wars in Afghanistan and Iraq, pushed the budget from a surplus of 2.5 percent of GDP in 2000, to deficits of more than 3.5 percent of GDP in 2003 and 2004. While running large deficits was the right move for the economy in response to the recession created by the collapse of the stock bubble (although there were far better uses for the money than tax cuts to rich people and fighting unnecessary wars), there is more than a bit of inconsistency in Hubbard's apparent willingness to use deficits to boost the economy out of a recession in the last decade while at the same time disparaging President Obama's efforts to use deficits to lift the economy out of a far deeper hole.
This is a lot more to Dean’s rebuttal, but I want to lift one sentence from what Glenn wrote:
The still larger problem lies with Republicans who refuse to face facts. “Starve the beast” has been the mantra of conservatives since Ronald Reagan was president, a belief that, if taxes were low enough for long enough, rational Democrats would have no choice but to agree to bring federal spending down as well. Even though total federal revenue held level at around 18 percent of gross domestic product in recent decades, spending soared.
Glenn wants us to believe that spending is the problem – not a lack of tax revenues. But this last sentence does not square with the facts as our graph of the Federal tax revenue to GDP ratio from 1977 to 2013 shows. Yes, this ratio rose above 18 percent under President Carter. But then we got the Reagan tax cuts. OK, Clinton’s tax increase pushed this ratio near 20 percent by the time George W. Bush took office. And as Dean notes – Team Republican (Glenn being a member) decided to cut taxes again. Over the 2001 to 2013 period, this ratio has averaged only 16.3 percent. In defense of Republican politicians – how can they face the facts if their own economic advisors don’t present them?

Wednesday, August 20, 2014

Aspen Strategy Group Overstates Russia's Problems

In today's Washington Post, the usually sharp David Ignatius reports on closed discussions at the Aspen Strategy Group by "senior current and former officials, plus some think tank leaders and journalists" ("Crafting a policy for Russia").  Supposedly a bit more hawkish than the administration, this group is presented as a bipartisan group of wise people who really know what they are talking about as they craft policies for the US to deal with Russia.  Much of what Ignatius reports is sensible ("Don't give in to Putin, but don't give up on Russia" and that the US should "play what one former Cabinet official called 'the long game'" in the face of "Russia's humiliation after the crackup of the U.S.S.R.").

Nevertheless, a disturbing aspect of Ignatius's report on this meeting of supposedly Very Smart (and Serious) People is how out of touch with basic facts they apparently are, mouthing old cliches that are no longer true.  So this group heard (not reported who was handing this stuff out) that Russia faces a "demographic disaster: a shrinking population, a chronic health crisis that puts Russia between Tanzania and Angloa in male life expectancy, and a dearth of entrepreneurship..."

Sorry, but the demographic disaster  was an accurate story some years ago, but has come sharply to an end.  Population growth has been positive since 2009, with an extra three million added with the annexation of Crimea.  Male life expectancy hit a low in 1994 of just below 58 years, but it rose after that for a few years only to fall again nearly to 58 by 2005, finally turning around and steadily increasing since then to be about 64 years.  That level, and overall life expectancy of just over 70, are just about back to where they both were at their previous peak in 1986, the last year of positive economic growth prior to the collapse of the Soviet Union.  Male life expectancy in Tanzania is just about 60.

Certainly many things are not all that great in Russia.   Positive economic growth, now pretty much zero, has mostly been due to higher oil prices, with military exports really the only other major growth sector.  Corruption and many other things hold back the economy, quite aside from the impact of the economic sanctions that have been imposed by foreigners on Russia for Putin's unnecessary adventurism abroad.  But it must be recognized that Putin has succeeded in reviving favorable self-image in Russia, the land "humiliated" by the end of the USSR.

I do not know if this change in image is what lies behind the improving health and demographic situation (birth rate has also been rising), but it certainly serves no purpose for supposedly wise US VSPs to continue to believe out of date horror stories about what is going on there.  According to Ignatius these people were only debating about whether Russia's supposedly inevitable decline will be gradual or sudden. That they seem to be completely unconscious that at least the demographic part of this story is simply total garbage is not encouraging.  I would hope that those who are actually advising Obama rather than just bloviating in Aspen know the facts rather than the right wing think tank fantasies left over from the past.

Barkley Rosser

Tuesday, August 19, 2014

SCIOD 8: The Secret Basis of Glut

Even though it appeared "when the factory system was comparatively but little developed," Marx observed that Ure's work, "perfectly expresses the spirit of the factory, not only by its undisguised cynicism, but also by the naïveté with which it blurts out the stupid contradictions of the capitalist brain." The most glaring contradiction Marx pointed to involved the relationship between unionism and the pace of technological change. In the early pages of the book, Ure noted the "instructive warning to workmen to beware of strikes," posed by the invention of the dressing machine, which proved:
…how surely science, at the call of capital, will defeat every unjustifiable union which labourers may form… Were it not for unions, the vicissitudes of employment, and the substitution of automatic for hand work, would seldom be so abrupt as to distress the operative.
Yet in the third section, Ure asserted that:
[h]ad it not been for the violent collisions and interruptions resulting from erroneous views among the operatives, the factory system would have been developed still more rapidly and beneficially for all concerned than it has been…" 
Perhaps, though, the contradiction is not quite as stark as it appears. Maybe Ure is assuming that capitalists would introduce different, more benign machines if they could confidently rely on docile workers? In that case, though, the contradictions are only displaced from the nature of machines to equally naïve and cynical assumptions about the inherent benevolence of the masters and malevolence of the "hands" (as Ure frequently referred to workers).

The section in Capital immediately following Marx's critique of Ure examines "The theory of compensation as regards the workpeople displaced by machinery." One might expect to find there a critique of Say's Law – or rather of the maxim that eventually came to be known as Say's Law. Instead, Marx referred to the insistence of "James Mill, MacCulloch, Torrens, Senior, John Stuart Mill, and a whole series besides…"

The only mention of Jean-Baptiste Say appears in a footnote referring to "a disciple of Ricardo, in answer to the insipidities of J. B. Say…" It repays the effort to ferret out the anonymous pamphlet cited by Marx, "An Inquiry into those Principles Respecting the Nature of Demand," &c. The anonymous pamphleteer presented a comprehensive critique of Say's maxim in pages 14 to 33 and returned to that topic on page 72, comparing specialized labour to fixed capital, in the passage Marx cited:
The habits of the labourers, where division of labour has been carried very far, are applicable only to the particular line they have been used to; they are a sort of machines. Then, there is a long period of idleness, that is, of labour lost; of wealth cut off at its root. It is quite useless to repeat, like a parrot, that things have a tendency to find their level. We must look around us, and see that they cannot for a long time find a level: that when they we cannot but see, that they are unable to find their level for a long time; and that when they do, it will be a far lower level than they set out from.
In Theories of Surplus Value, Marx described the pamphlet as "one of the best of the polemical works of the decade," notwithstanding disparaging remarks about "the infinite narrow-mindedness of these fellows" when examining capital. There he addressed "Say’s earth-shaking discovery that “commodities can only be bought with commodities…" and again quoted the above passage regarding the effects of division of labour. A few paragraphs later, he remarked, "What the author writes about Say is very true." "The theory of compensation as regards the workpeople displaced by machinery" can be read as a veiled response specifically to Say's maxim. Marx's critique owes a great deal to the anonymous pamphleteer, whom he both praised and disparaged.

It is curious that Marx didn't take the opportunity to directly confront Say, particularly as his discussion of the pamphlet in Theories of Surplus Value bears directly on the issue of crises of overproduction. After quoting the author's observation that "glut is synonymous with high profits," Marx affirmed that this was, "indeed the secret basis of glut." A few paragraphs later, his summary response to the pamphlet's argument is a succinct expression of Marx's crisis theory:
Over-production, the credit system, etc., are means by which capitalist production seeks to break through its own barriers and to produce over and above its own limits. Capitalist production, on the one hand, has this driving force; on the other hand, it only tolerates production commensurate with the profitable employment of existing capital.
Bernice Shoul mentioned neither the anonymous pamphlet nor the section in Capital on the theory of compensation in her 1957 article, "Karl Marx and Say's Law."


Monday, August 18, 2014

Immigration analysis on job market "refuted" with red herring

Dear Bob Birrell and Carla Wilshire,

In her attempt to refute Bob Birrell's analysis, Carla Wilshire makes the following claim:
Birrell chooses to ignore the dynamic effects of the labour market. The assumption that there are only so many jobs to go around has been roundly rejected. Labour economists have long known the number of jobs is not fixed. According to Nobel Laureate Paul Krugman, this lump of labour fallacy “encourages fatalism” and “feeds protectionism”. The trouble with promoting such notions is that policy-makers stop thinking about ways to create jobs.
There are so many errors in that brief paragraph, it is hard to know where to begin. But let's start with Paul Krugman. Krugman has indeed criticized the lump-of-labor assumption but he has also criticized, as "equally fallacious," the counter assumption (often referred to as Say's Law), that demand for labour increases with its supply. In fact, Paul Krugman has spent far more time recently refuting Say's Law than he has the lump of labor.

http://krugman.blogs.nytimes.com/2013/02/10/still-says-law-after-all-these-years/
http://krugman.blogs.nytimes.com/2014/02/21/hearsay-economics-2/

The problem with the supposed refutation of the supposed lump-of-labour fallacy goes deeper than that, though. Ultimately the refutation is based on the same hidden assumption as the alleged "fallacy" -- what was known in classical political economy as the wages-fund doctrine. In short, the fallacy and its supposed refutation are simply two sides of a paradox that arises from the static nature of analysis, similar to Zeno's paradox of the arrow.

Wilshire uses the word "dynamic" incorrectly. Wilshire is making the mistake of assuming that the colloquial connotation of "dynamic" is the same as the technical one. This is not acceptable in the context of claims about economic theory (see John Maurice Clark's discussion of "The Relation between Statics and Dynamics" or Alfred Marshall's discussion in "Distribution and Exchange").

What she presumably means by "dynamic effects" are the 'long term' effects of economic growth. But "what labour economists have long known" about the number of jobs in a growing economy is itself based on another static analysis, not on a dynamic analysis. The assumptions of the latter static analysis may be more realistic to the extent that they are based on empirical observation but that doesn't make the analysis dynamic. Often, though, the refutation is not based on empirical observation, in which case it is pure, empty assertion. There is nothing "inevitable" about economic growth.

Ms. Wilshire may have an alibi for her misuse of dynamic in that economists often make the same error of referring to static analyses as "dynamic" just because they incorporate a few rudimentary moving parts ( for example, DSGE: "dynamic" stochastic general equilibrium models). This is like referring to an animated GIF file as a "full-length moving picture."

Of course, Bob Birrell will be quite aware that he didn't assume a "fixed amount of work" (which is not the same thing as "only so many jobs to go around"). If at time "t" there are 10 jobs and 11 workers and at time "t+1" there are 12 jobs and 14 workers, then the amount of work is clearly not fixed but the number of unemployed has doubled and the unemployment rate has increased from 9% to 14%. The allegation of a belief in a "fixed amount" of work here is clearly inapplicable.

Accusing one's opponent of committing a lump-of-labour fallacy is such a hackneyed, inadequate argument, that it immediately raises suspicions that the person making the claim has no substantive argument to make.

Yours sincerely,

Tom Walker, author of
"Why economists dislike a lump of labor" and
"The "lump-of-labor" case against work-sharing: populist fallacy or marginalist throwback?"

Sunday, August 17, 2014

Disperse Mobs with Radio Police Automaton!


Robots, again?

This time its a viral Youtube video by CGP Grey. A million and a half views in four days. For those who don't have the attention span to sit through a 15-minute video, the script is posted at CGPGrey and concludes:
This video isn't about how automation is bad -- rather that automation is inevitable. It's a tool to produce abundance for little effort. We need to start thinking now about what to do when large sections of the population are unemployable -- through no fault of their own. What to do in a future where, for most jobs, humans need not apply.


Joshua Gans at Digitopoly presents an inadequate counter-argument to that conclusion, based on static analysis and wishful thinking: "I have faith that if it is in the interests of both business and consumers that money go from the employed to unemployed, it will. It will happen." and:
If the worker owns the robot, the quality advantage accrues to them. But in terms of their willingness to pay, there is an important difference between the two. If the capitalist does not own the robot, they can employ the worker (with their robot) as they always have done and so will they will appropriate part of the quality advantage. By contrast, if the worker does not own the robot, the worker gets nothing.
As I've been arguing in the Supply Creates Its Own Demon series, the problem is much, much more complicated than that. It can't be solved by static economic analysis. To put it as simply as possible: machines don't have the fantastic generative powers that have been attributed to them.

What a machine can do is strictly limited by the properties of the materials that it works on and is powered by and by the physical properties incorporated in it by its designer. What dazzles observers is simply the disclosure of the physical properties of matter and energy and the ingenuity of human science and applied social organization in revealing and operating on those physical properties.

The machinery debate that has been going on for two and a half centuries is a diversion. The "demon" in this debate, the alleged automaton, is an illusion -- at worst a hoax -- that distracts from the scale of human intervention required make the automaton's motion appear autonomous. The more remotely human intervention can take place, the more effective is the illusion. The operator has an alibi.

It was not, after all, the sheep who enclosed the commons and evicted the tenants.

Elsewhere and Nowhere: Alibi and Utopia

Such is the strategic logic of the commodity which makes [use value] a satellite of and an alibi for [exchange value]. -- Jean Baudrillard, The Political Economy of the Sign.

As court and council gathered in the robing room after an acquittal... the judge said to the successful lawyer, "That was the most convincing alibi that I have ever had proved before me." 
"Thank you, sir", replied the lawyer. "it is particularly gratifying to hear you say that. I value your judgment most highly and I am pleased to find that in this case it coincides with mine. I chose that alibi as the best of three that the defendant had." -- "No Alibi," ABA Journal, March 1951.

...alongside the eighteenth-century emergence of the realistic, but fictional, narrative form later called the novel, the word alibi also entered into ordinary English discourse. Technically the legal plea of 'elsewhere,' culturally speaking, an alibi indicated the mounting of a realistic story narrated in a law court. (This initial, specific sense of alibi as a story told in court contrasts with its use since the beginning of the twentieth century, when it began also to refer to a story that keeps one out of court or to any form of excuse tale.) -- Jonathan Grossman, The Art of Alibi: English Law Courts and the Novel.

If the elasticity of substitution is not constant, what is crucial is what happens to the elasticity asymptotically as resource input goes to zero. In these cases the produced input is sufficiently substitutable for the natural resource that the decrease in supply of the natural resource can be compensated for by an increased supply of capital. Of the two cases, the Cobb-Douglas case is clearly the most interesting for there natural resources are essential in the sense that some input of the natural resource is required for production (the isoquants never do hit the axes). But a small input of natural resource can be compensated for by a sufficiently large input of capital, and whether that is feasible for the economy depends simply on the relative shares of the two. -- Joseph Stiglitz, "Neoclassical Analysis of Resource Economics." 

"...this is not the only force driving men to thievery. There is another that, as I see it, applies more specially to you Englishmen." 
"What is that?" said the Cardinal. 
"Your sheep", I said, "that commonly are so meek and eat so little; now, as I hear, they have become so greedy and fierce that they devour human beings themselves. They devastate and depopulate fields, houses and towns. For in whatever parts of the land sheep yield the finest and thus the most expensive wool, there the nobility and gentry, yes, and even a good many abbots -- holy men -- are not content with the old rents that the land yielded to their predecessors. Living in idleness and luxury without doing society any good no longer satisfies them; they have to do positive harm." -- Sir Thomas More, Utopia, Book 1.

An escapist fiction, Book 2 allows the negotiator of wool contracts an alibi for being "elsewhere" just as it affords England the luxury of being purified as myth. As Richard Marius points out in his biography of More, there was a distinct need for the writer of Utopia to have available just such an alibi, so much are the circumstances of Utopia's composition at odds with its idealistic pretensions: 
It has usually gone unnoticed that More's embassy on which he began writing Utopia was intended to increase commerce, especially in wool, and that while he penned these immortal lines, he was working hard to add to the wealth of those classes in English society whom Raphael castigates for their heartless greed.
At this stage in the composition of Utopia, the hedging off of the island from historical contingencies reflects More's own personal situation. -- John Freeman, "Discourse in More's Utopia: Alibi/Pretext/Postscript"

Another offender of this class [of overworked words] is "alibi." Alibi is a legal term, meaning a plea on the part of the accused that he was somewhere else when the alleged act was committed.. I imagine that somebody came out of a court house one day after hearing this term used, and since it was new to him, and he fancied the sound of it, he began making use of it himself in a pedantic sort of way whenever opportunity offered. Finally his friends and admirers took it up, and now eight people out of ten think it quite the thing to do, when denying any sort of innocent accusation, to say, "I can prove an alibi." But a mere denial is not an alibi. -- M. V. P. Yeaman, "Speech Degeneracy."

In a legal context to be elsewhere necessitates the supporting details and corroboration provided by a narrative account of being elsewhere. Here—reversing the cliché—it is deeds without words that are empty. Alibi is thus especially well suited for narrative, for there is always a story or relevant sequence of events that depicts being elsewhere. 
…narrative alibis draw on the special significance of an absence. Beyond the legal context, an alibi is thus something we can give whenever we are called to account for ourselves. When we speak of whether someone "has" an alibi or not, we implicitly allude to the importance that having a story, being able to tell the story of oneself, holds for modern identity (even if it is the possession of a kind of absence). 
An alibi is an unusual form of narrative precisely because it is generated by absence, and thus alibi is a small, well-defined instance of the philosophical concept of negativity. Though a negative concept, an alibi does real work; it functions in a system of legally binding processes and confers a status upon those who employ it rhetorically. An alibi is a speech act rendering the real act, the crime, impossible, at least for the accused. The narrative opposite of a confession, it exculpates rather than implicates. An alibi is an account of not being there. So, an alibi is a kind of anticonfessional narrative. -- Justin Weir, Leo Tolstoy and the Alibi of Narrative.

Anatomically homologous to the two largest bones found in the human finger, the pastern was famously mis-defined by Samuel Johnson in his dictionary as "the knee of a horse". When a lady asked Johnson how he came to do so, he gave the much-quoted reply: "Ignorance, madam, pure ignorance." -- Wikipedia, "Pastern."

Friday, August 15, 2014

Everyone Should Have The Right To Marry Whom They Wish To Marry.

In 1975 in Helsinki a Cold War negotiation led to the Helsinki Accords, much derided at the time by various parties in various nations, but nevertheless ultimately officially signed on to by all the major parties of that now distant era, including the USA and the then existing USSR.  Many did not take it seriously, including individuals in the US State Department as late as 1986, when at the Reykyavik, Iceland summit those who were legally engaged as were me and my now wife, Marina Rostislavna Vcherashnaya Rosser (not to be imprecise here, although there are alternative transliterations of her last name from the Cyrillic) were not supported by the US negotiaters, despite a personal promise made to me at the time by then Deputy Secretary of State, John Whitehead.
      This would lead to me not too long after having a showdown with Thomas Simon, the Assistant Secretary for European Affairs, over this matter, after Whitehead's promise in front of a large group of people over this matter, with me holding a press conference in front of the State Department in which I publicly denounced both the US and USSR governments for conspiring to keep people legally engaged to marry from marrying, and my wife Marina and I had become legally engaged to marry on November 13, 1984 at 3 PM according to the Soviet Ministry of Marriages, "ZAGS."  I crucially had a piece of paper documenting this, which did not happen because the Soviet government refused to let me have a visa to re-enter the country to marry her at that time, after having received the official permission to do so in writing at that time from ZAGS.  We were unable to marry at the designated time, and my then legally designated fianceee, Marina, was subsequentlny fired from her job as a Senior Economist at the Institute for World Economy and International Relations (aka IMEMO).  Only on April 4, 1987 would she be allowed to go to the US, with us marrying finally on May 24, 1987. 
      We were the first such marriage to be allowed after much personal suffering and international protest. We were the first to be approved,with the US State Department finally supporting us after protests by me and others. Our case rewrote the rules, although it would still take lovers to provide written evidence of their having been blocked from legally getting married abroad to receive US official approval and support officially as well as in Helsinki in 1975.  Needless to say, we fully support the extension of this right to same sex couples, which the most recent court rulings appear to be about to allow such marriages to take place in Virginia. We look forward to celebrating with our friends who will be marrying soon here.

Barkley Rosser

Thursday, August 14, 2014

Common Pools and Wage Funds -- A Reply to Simon Wren-Lewis

Simon Wren-Lewis raises an extremely important issue regarding Inequality and the common pool problem: "there is a clear connection between the rise in incomes at the very top and lower real wages for everyone else."

Wren-Lewis explains the common-pool problem as being "about how the impact of just one fisherman extracting more fish on the amount of fish in the lake is small, but if there are lots of fishermen doing the same we have a problem." This needs a bit more explanation. The problem has to do with the difficulty of excluding fishermen (or limiting the catch of any particular fisherman) and with the limitation on the amount of fish in the lake. The essential reference on this is Elinor Ostrom's discussion of common-pool resources.

Two caveats: difficult does not mean impossible and limited doesn't mean non-renewable or fixed in quantity.

When it comes to income, it is easy to get lost in a money illusion. Yes, incomes are measured and paid in money amounts. But what they provide are rights of access to material things -- goods and services, "the power of purchasing; a certain command over all the labour, or over all the produce of labour, which is then in the market" (Smith).

Nominally, the amount of income can increase without limit. But in real terms, increases in income are constrained by the amount of goods and services available in the market. That last qualification, the amount of goods and services available in the market, has led to a prodigious amount of confusion in economic thought. The classical wages-fund doctrine assumed that the amount of wage goods available at any given time was fixed. Accordingly, if one group of workers formed a union to enforce a wage increase, their gain would be at the expense of other workers.

The amount of goods and services in the market at any given time is not fixed. But the key to the confusion is not the stipulated quantity but the imaginary temporal dimension of a "given time." Zeno's paradox of the arrow involves the same logical conundrum of dividing time into points.

In 1869, W. T. Thornton argued persuasively that the wages-fund doctrine was erroneous and John Stuart Mill concurred and "recanted" the wages-fund doctrine. Exactly what Mill recanted may be in dispute but that is beside the point -- the classical doctrine was consigned to the dustbin of history of political economy. Or so we are told...

By virtue of one of the most miraculous metamorphoses imaginable, the old wages-fund doctrine, used by polemicists as a club against unions demanding higher wages was transformed into the theory of the lump-of-labor, allegedly assumed by trade unionists, whose fallacy was used by economists as a club against unions demanding higher wages. "Heads I win" seamlessly became "tails you lose."

But, getting back to Wren-Lewis, isn't his contention that higher executive pay "has to come from somewhere [that is, from the other 99%]" a reversion to the wages-fund -- or lump of labor -- doctrine/fallacy? No, it isn't. But this requires more explanation. There are not one, but two illusions at work here. One is the money illusion. The other is the point-in-time illusion. Combined, these two illusions constitute a powerful temptation to cognitive dissonance.

To dispel those two illusions, let's first go back to Adam Smith's definition of wealth: "a certain command over all the labour, or over all the produce of labour, which is then in the market." 'Labor' appears to refer to a definite quantity and 'then' appears to refer to a definite point in time. Labor is not, however, a discrete distinction and a "point" in time is strictly conceptual. The amount of work to be done at any point in time is not only "not fixed" it is also not "an amount."

Just as with Zeno's arrow, no labor is performed in a "point in time." Labor can only be performed over a duration, be it an hour, a day, a week, a year or a lifetime. Furthermore, the amount of labor performed by one person during any interval of time is variable. It is not infinitely variable but it is flexible within certain definite limits. The expression labor-power indicates this characteristic of labor as potentially equivalent to a given quantity of production.

So, we can now amend Smith's definition as follows: income represents command over a portion of the labor-power in the market during a given extension of time. This definition could be further refined but the point that I want to get to is that it is the labor-power that constitutes the common-pool resource. The amount of goods and services that corresponds to this amount of labor-power is not fixed -- but neither is it "infinitely" variable.

The extent to which real GDP may vary depends on people's capacity to work, on their motivation and on their opportunities for employment, all of which may be affected by the distribution of income. In other words, great inequalities of income may well diminish the common pool of goods and services -- and ultimately of labor-power itself -- from which incomes are derived.

That is, executive pay may be taking a bigger slice of a pie that is smaller than it would be if executives weren't taking such a big slice of it. Or to put it bluntly, they may be being richly rewarded for a negative contribution to social production that results from their excessive incomes!

There is much more that can said (and has been said) about both the implications and the background of the analysis of labor-power as a common-pool resource. I will pause for now to see how the conversation unfolds.

SCIOD 7: The Frankenstein Factory

Andrew Ure's The Philosophy of Manufactures owes a considerable debt to Tufnell's Royal Commission report. The books 150-page third section, "Moral Economy of the Factory System" relies almost entirely on evidence from the Tufnell report. Ure shared Tufnell's antipathy toward trade unions and makes no secret of his admiration for this "masterly report" by a "most able and candid observer." So fond was Ure of Tufnell's argument that he adopted some of the text, word for word, without quotation marks or attribution.

Ure was trained as a physician but practiced medicine for only three years until he was appointed professor of chemistry and philosophy at Glasgow University. His writing on chemistry, displayed "a fatal facility… for discovering exact mathematical laws in a mass of inaccurate measurements."

In November of 1818, in collaboration with Dr. Jeffray, a professor of anatomy, Ure performed a series of galvanic experiments on the corpse of a freshly-executed criminal named Clydesdale. These experiments took place in the same year that Mary Shelley's Frankenstein was published. Speculation that Ure was the model for Victor Frankenstein, however, would be anachronistic since the novel was published in March, eight months before the experiments took place and even longer before they were publicized. Nevertheless, Ure's account of his experiments is ghastly and adds a further insight into his eagerness to leap to astonishing (and self-aggrandizing) conclusions based on flimsy evidence:
The subject of these experiments was a middle-sized, athletic, and extremely muscular man, about thirty years of age. He was suspended from the gallows nearly an hour, and made no convulsive struggle after he dropped; while a thief, executed along with him, was violently agitated for a considerable time. He was brought to the anatomical theatre of our university in about ten minutes after he was cut down. His face had a perfectly natural aspect, being neither livid nor tumefied; and there was no dislocation of his neck.

In the judgment of many scientific gentlemen who witnessed the scene, this respiratory experiment was perhaps the most striking ever made with a philosophical apparatus. Let it also be remembered, that for full half an hour before this period, the body had been well nigh drained of its blood, and the spinal marrow severely lacerated. No pulsation could be perceived meanwhile at the heart or wrist; but it may be supposed, that but for the evacuation of the blood,—the essential stimulus of that organ,—this phenomenon might also have occurred.

…by running the wire in my hand along the edges of the last trough, from the 220th to the 270th pair of plates: thus fifty shocks, each greater than the preceding one, were given in two seconds. Every muscle in his countenance was simultaneously thrown into fearful action; rage, horror, despair, anguish, and ghastly smiles, united their hideous expression in the murderer's face, surpassing far the wildest representations of a Fuseli or a Kean. At this period several of the spectators were forced to leave the apartment from terror or sickness, and one gentleman fainted.

In deliberating on the above galvanic phenomena, we are almost willing to imagine, that if, without cutting into and wounding the spinal marrow and blood-vessels in the neck, the pulmonary organs had been set a-playing at first, (as I proposed), by electrifying the phrenic nerve, (which may be done without any dangerous incision), there is a probability that life might have been restored. This event, however little desirable with a murderer, and perhaps contrary to law, would yet have been pardonable in one instance, as it would have been highly honourable and useful to science.
What makes this ghoulish, galvanizing episode relevant to Ure's Philosophy of Manufacture is the overarching use in that book of the body as a metaphor for the factory. It is not just any image of a body – an automaton body. Ure described manufacturing as having "three principles of action, or three organic systems: the mechanical, the moral and the commercial, which may not unaptly be compared to the muscular, the nervous, and the sanguiferous systems of an animal." Predictably, the mechanical system corresponds with the interests of the workers and should always be subordinated to the moral constitution," which is to say the factory owner. "The principle of the factory system this is, to substitute mechanical science for hand skill," with the eventual objective of eliminating skilled labor and replacing it with "mere overlookers of machines."

Ure's ideal, then is for the factory system to perform as a "vast automaton, composed of various mechanical and intellectual organs, acting in uninterrupted concert for the production of a common object, all of them being subordinated to a self-regulated moving force." Ure preceded this image of the automaton factory with three pages of discussion of automatons, including the "chess-player of M. Maelzel" which "imitates very remarkably a living being, endowed with all the resources of intelligence, for executing the combinations of profound study." Ure appears to have been unaware that the chess-player had been frequently suspected of being a hoax. His next paragraph, though, mentions a harpsichord automaton that "was found to contain an infant performer."

Although he mocked Ure as the "Pindar of the automatic factory," Karl Marx borrowed liberally from his imagery, only reversing its political polarity. The following passage from Capital is unmistakably a critical tribute to the central metaphors of Ure's vision:
An organised system of machines, to which motion is communicated by the transmitting mechanism from a central automaton, is the most developed form of production by machinery. Here we have, in the place of the isolated machine, a mechanical monster whose body fills whole factories, and whose demon power, at first veiled under the slow and measured motions of his giant limbs, at length breaks out into the fast and furious whirl of his countless working organs [emphasis added].

Wednesday, August 13, 2014

How To Turn Economic Loss Into Political Gain: Putin's War Economy

I have been struck by an outpouring of commentary on Facebook and elsewhere by professional economists just flabbergasted that Vladimir Putin has responded to the tightening of economic sanctions by the US and EU (and some other nations also) by all but forbidding food imports from those nations.  The flabbergast comes from realizing that the impact on the living standards of most of the Russian population will be noticeably hit by this move, with the total  economic costs to the Russian economy and population far exceeding (certainly in percentage terms anyway) the costs of this on the exporting nations, not to mention substantially exceeding the costs of the western sanctions put in place so far.  For the US, probably the worst hit sector will be poultry, where 7% of chicken exports go to Russia, where the frequently imported drumsticks are known colloquially as "Barbara Bush legs," a reminder that it was under George  H.W. Bush that the Cold War came to an end the Soviet Union collapsed, not during the presidency of Ronald Reagan, as many Americans seem to believe.

In today's Washington Post, a column by Masha Gessen, "Putin's War Economy," explains what is up and how Putin is making political hay out of all this.  The crucial quote is "Russians are to think of their losses as heroic sacrifices made for the war effort."  This becomes a way of reinforcing the narrative that has been relentlessly propagated to the population that this is the Great Patriotic War (aka WW II) redux, that the Ukrainians are a bunch of fascists, and so just like their forebears, patriotic Russians must do without to overcome the evil fascist foreigners.  Most Russians probably will go along with this, as most are apparently buying what has already been sold, even when this amounts to looney bin stuff such as the seriously reported claim that the bodies in the MH17 flight were already dead, and were shot down by Ukrainian fighter planes anyway. (I do note that one of the minority parties in the Ukrainian government, Svoboda (ironically meaning "Freedom") can be reasonably accused of being effectively neo-fascist.  But then the same can be said about several parties in Western Europe that are loudly supporting Putin, such as France's National Front.)

Gessen adds a further twist I had not seen reported on elsewhere.  Along with the banning of many food imports (and it must be recognized that some of these foods can be obtained from nations not under the ban), PM Medvedev has also banned free Wi-Fi in restaurants.  Gessen says that a sub-text of all this is attacking "the cafe society" in Moscow where those who know foreign languages and have access to foreign media and have demonstrated in the past against Putin hang out and hatch their plots.  Some of the fancier food imports that are coming, which also grace the tables in the fancy restaurants where some of these intelligentsia dissidents do their internet plotting, mostly go to Moscow and St. Petersburg.  The solid rural supporters of Putin who might see their farm products selling for higher prices will not be negatively affected by not being able to buy "Italian mozzarella, Australian rib eye, Finnish yogurt and even cheap American drumsticks."  Those unpatriotic big city whiners can take the hit and also be partially silenced at the same time.  Let them eat good Russian bread and potatoes!

Barkley Rosser

Tuesday, August 12, 2014

Why Is Green Politics a Virtual Oxymoron?

These thoughts are occasioned by reading Crow Planet by Lyanda Lynn Haupt, this year’s mandatory all-campus reading at my college.  (I had nominated Behind the Beautiful Forevers, but common readings aren’t allowed to be downers.)

In many ways this is an admirable book.  It’s rather well-written.  I learned a lot about crows, which is important because I probably see them more often than any other animal except humans.  It also reminds us that nature is not some exotic place we have to travel to get to, but is all around us—and within us—all the time.  Good!

But it is also suffused with a sort of pop environmental psychology that is the bane of green politics, or more precisely, makes rational green politics a non-possibility.  Here is my caricature of this view of the world:

Modern people are surrounded by artificiality—artificial goods, artificial jobs, artificial needs—that make it difficult to realize our place in nature.  This is why we have screwed up our environment.  The solution is for each individual to cultivate a true appreciation for the natural world.  We should learn about the environment, beginning with our local ecoregion, and how each of our actions affects it.  We should develop a consciousness, or even a spirituality, based on the intricate web of interconnections that tie us to all of nature.  In doing this we will obtain wisdom for ourselves and become agents for the social change that’s needed to halt ecological destruction.

Sound familiar?

The insidious thing is that it’s not all wrong.  It is a good idea to learn more about your surroundings and your place in them.  Paying attention to other living things, individually and collectively, can be deeply satisfying.  There is probably truth to the notion that it’s not enough to just have an intellectual understanding of a problem, whether social or environmental; there also needs to be a passion that turns understanding into action.

But there are also two enormous problems with pop ecopsychology.

First, by exalting the select few with advanced ecological consciousness, it implicitly denigrates everyone else.  If acquiring personal ecological wisdom is the path to solving environmental problems, those not undertaking this journey must be the ones making the problem worse.  And who are these despoilers?  You know, the people who drive big cars or eat fast food or live in suburban housing developments.  They have a bad lifestyle, and the good, ecologically aware people need to either enlighten them so that their consciousness changes or force them to live more in harmony with the Earth.

My advice: if you want to make political change, you don’t start out by defining everyone who is not part of your movement—a substantial majority of the population in fact—as evil or benighted.  It’s not a great strategy for outreach.  In addition, there is something to be said for observing your fellow humans with the same open-mindedness you should bring to crows and spiders.  You might just find that there are plausible reasons why people drive big cars or eat fast food or live in the burbs.  That doesn’t mean their consumption patterns don’t have broader effects or are even in the best interest of those that engage in them, but they are not products of pure ignorance either.
  
The second problem is that, by passing immediately from individual consciousness to collective problems (like climate change), pop ecopsychology simply eliminates any role for the things that social scientists study, like social norms, economic interests, political structures, etc.  The notion that environmental problems stem from shortcomings of consciousness and that solutions depend on individual transformation is essentially religious.  In fact, the crow book makes repeated comparisons between the acquisition of eco-consciousness and the monastic discipline of the Benedictines.

Preaching to others that they might acquire the elevated level of consciousness you have already attained is not a political strategy.  At least since Aristotle, the terrain of politics has been understood as the “we”, the networks, structures, and interests that we jointly create and that create us.  Yes, the personal is political, but the opposite is not true: the political is not just the personal added up.  It’s something we do together, finding common interests across our myriad differences.

SCIOD 6: A Trick! Of the Clumsiest Description!

Peter Ewart acted as conduit for another cultural transmission, this one political-economic rather than mechanical. If Grimshaw's mill hadn't burnt down, it is likely that Edmund Cartwright would have profited significantly from the enterprise and there would have been no occasion for the petition to parliament on his behalf. By the early 1830s, workers' anxiety about being displaced by new machines or by downturns in trade was channeled into proposals for reducing the hours of work rather than into frenzies of machine breaking. Cotton spinning was almost entirely industrialized and weaving was well on its way. The growing population of factory hands was approaching parity with that of the rapidly declining handloom weavers.

In April 1833, the governing Whigs in the U.K. appointed a Royal Commission on the employment of children in factories to head off legislation for a ten-hour day supported by a coalition of Tories and Radicals in Parliament. At the end of November, the Society for the Promotion of National Regeneration met in Prince's Tavern in Manchester and issued a manifesto calling for an eight-hour day. Such calls for shorter hours of work were denounced in the supplementary Royal Commission report of Edward Carleton Tufnell, assistant examiner, as "schemes for the advancement of wages":
They [the factory workers] see that the fixed expences [sic] of the establishment remaining the same, and a smaller quantity being produced, the prices of the cotton goods would probably rise. A rise of prices they have usually found to cause an increase of wages, and therefore they conclude that a rise of prices caused by. the Ten Hour Bill will do so: thus committing the blunder of confounding a rise caused by increased demand with a rise caused by increased difficulty of production… They go on to argue, that, in consequence of less being produced, new mills will be erected to supply the deficiency; that this will cause a demand for fresh hands; and thus the workmen out of employ will be engaged, and prevented from beating down wages by their present competition for employment. So the Ten Hour Bill is to cause all to be in work for ten hours instead of twelve, and wages are to be the same for the former time as the latter. 
Tufnell went on to write the influential anti-trade union tract, Character, Object and Effects of Trades' Unions, which repeated and amplified the allegations of a nefarious ulterior design whose logic was based on fallacious opinions. The source for Tufnell's claims undoubtedly came from Peter Ewart's testimony before the Royal Commission – not from the factory workers themselves – and specifically from Ewart's answer to Tufnell's question, "What do you suppose to be the chief motive for the operatives here advocating the Ten-Hour Bill?":
Many of them expect to receive the same wages for ten hours as they now receive for twelve. The mule-spinners earning high-wages appear to be almost the only class of workpeople in this quarter who are in favour of a ten-hour bill. Many of that class have been thrown out of employment in consequence of their combinations to keep up nominal high wages. Their earnings are greatly encroached upon by the contributions they are compelled to make for the support of those who are unemployed, and they imagine that if the hours of work are to be limited to ten, new mills must be built to supply the diminished quantity of yarn, and that the unemployed hands which they now have to support will then be employed in these new-erected mills. This expectation is obviously fallacious, as the cost of yarn and cloth produced would be so much increased by the same expence [sic] of fixed capital falling on a smaller quantity that the demand cannot be expected to continue, especially as we have to meet the competition of foreigners who are working longer hours, and at much lower charges.
In Character, Object and Effects of Trades' Unions, Tufnell rendered Ewart's tale in the following manner:
The Union calculated, that had the Ten-hour Bill passed, and all the present factories worked one-sixth less time, one-sixth more mills would have been built to supply the deficient production. The effect of this, as they fancied, would have been to cause a fresh demand for workmen; and hence, those out of employ would have been prevented from draining the pockets of those now in work, which would render their wages really as well as nominally high. Here we have the secret source of nine-tenths of the clamour for the Ten-hour Factory Bill, and we assert, with the most unlimited confidence in the accuracy of our statement, that the advocacy of that Bill amongst the workmen, was neither more nor less than a trick to raise wages -- a trick, too, of the clumsiest description; since it is quite plain, that no legislative enactment, whether of ten or any other number of hours could possibly save it from signal failure.
Peter Ewart's speculation about what the workers' motives remained uncorroborated by any evidence from workers themselves. Nevertheless, it was elevated by Tufnell from a supposition (What do you suppose to be the chief motive…") to a fact, asserted "with the most unlimited confidence in the accuracy of our statement."

Ewart's supposition can best be understood as a rote recitation of the inverted form of our old friend, the wages-fund doctrine, "formed from the facts of a perfectly exceptional time," as James Bonar described it, "and on the strengths of two truths misapplied, the doctrine of Malthus (on Population) in its most unripe form, and of Ricardo (on Value) in its most abstract." Jane Marcet's fictional 1816 conversation on what determines the rate of wages remains the clearest exposition of the doctrine, as well, perhaps, as its origin:
Caroline: …what is it that determines the rate of wages 
Mrs. B: It depends upon the proportion which capital bears to the labouring part of the population of the country. 
Caroline: Or, in other words, to the proportion which subsistence bears to the number of people to be maintained by it? 
Mrs. B: Yes; it is this alone which regulates the rate of wages, when they are left to pursue their natural course. It is this alone which creates or destroys the demand for labour.
Ewart disagreed with the workers' objectives, so he simply assumed that their motives were based on the opposite of what he believed was the correct analysis. There is too much symmetry in this assumption, as well as too much certainty. As Chapman later observed in his history of the Lancashire cotton industry, "those who advocated shorter hours, both in this period and later, found also many sound reasons for their action in the expected effect on the health and comfort of the operatives." Moreover, the cogency of the wages-fund doctrine was already being challenged in the radical press of the 1820s, long before Mill's recantation. Thomas Hodgkins, for example, argued that consumption articles for workers are not accumulated in advance as a stock but are constantly replenished as a flow.

The purpose here, though, is not to quarrel with the wages-fund doctrine or its shadow, the fixed-amount-of-work fallacy, or to uphold some alternative argument. Rather, it is a matter of tracing the career of the argument. From whence came it and how did it got credentialed, amplified and promoted until it was accepted as unquestioned and unquestionable axiom of economic science. Whether right or wrong, Ewart's and Tufnell's suppositions about workers' motives and their interpretations of political economic doctrine were transparently partisan and overtly hostile toward collective action by workers. Tufnell's framing of the underlying motives of trade unions – sometimes his exact words – echo through the works of subsequent writers hostile to trade unionism such as Andrew Ure, John Ramsay McCulloch, Edward Baines and James Ward (who plagiarized entire passages from Tufnell's book in the 1860s).

The Continuing Effort To Properly Credit Lionel McKenzie Regarding General Equilibrium Theory

One of the bigger long-running scandals in the economics scientific credit game has been the downgrading of the role of the late Lionel W. McKenzie in proving the existence of a competitive general equilibrium, generally credited to Arrow and Debreu.  Roy Weintraub, who has championed McKenzie's cause for over 30 years, has a new book out with Till Duppe from Princeton University Press, _Finding Equilibrium: Arrow, Debreu, McKenzie and the Problem of Scientific Credit_, which reveals fresh details about the matter.  David Warsh at economics principals has written an interesting summary with solid background, with Mark Thoma also linking to Warsh's excellent account (sorry I am failing to get the direct link to Warsh's account working, titled "The Startling Story behind a Famous Footnote").

The big new news from this book is about the role of Debreu in delaying the publication of McKenzie's paper and also suppressing knowledge of it, particularly to his coauthor, Kenneth Arrow (who, arguably, should have found out about the paper on his own).  McKenzie's paper was finished first and even though Debreu as referee for it at Econometrica delayed it, it actually came out one issue ahead of the slightly more general paper by Arrow and Debreu.  McKenzie cited their paper, but theirs did not cite his, which had been presented a day before theirs at a 1952 Econometric Society conference, with Debreu attending McKenzie's talk, which Arrow did not do, and Debreu not tellling Arrow about it.  Of these parties, only Arrow remains alive.  BTW, while it may be less general, McKenzie's proof is quite a bit simpler and has shown up in some textbooks over the years.

Weintraub also reports that McKenzie long ago accepted that he was going to get less credit and be forgotten largely, taking a philosophical attitude and noting all the famous and deserving people who never got the Nobel Prize in their fields.  More power to him on that, although one must feel sorry about the whole thing, with Weintraub attributing this to a "Matthew Effect" of who is already rich gets richer and who is poor gets poorer.  Weintraub continues to campaign that general equilibrium should be called "Arrow-Debreu-McKenzie" (or ADM), but with only a few people following his advice on this, even though properly it should be called "McKenzie-Arrow-Debreu."  This is definitely a case of somebody getting the shaft big time, although it is not the only such case out there, but then this is one of the most influential ideas in all of economics, so a pretty big deal.

I shall add an arguably irrelevant but ironic anecdote from personal experience about McKenzie and the economics Nobel.  It dates to my first attendance at an AEA meeting in Dec. 1973 in New York.  I remember that I was in an elevator in the Hilton and was randomly in there with Lionel McKenzie (I saw his name badge) and somebody else I did not recognize the name of.  I knew of McKenzie and even at that time about how he had gotten screwed over on this matter.  He and his companion were discussing the economics Nobel (please, no comments on how it is really the Swedish Bank Prize, I know, I know), and I note that this was just four years after the prize had been established.  Most of the "big trees in the forest" had not yet gotten it, although Arrow had, shared inappropriately with Hicks, so the fix was already in regarding what would happen to McKenzie (Debreu got it later by himself).

So, McKenzie argued to his friend that the next recipient would be Joan Robinson, and that the committee would give it to her for her 1933 book, _The Economics of Imperfect Competition_, which would certainly have been a justifiable award.  He then rather sarcastically commented that he expected her to reject the award for not being for her later work, leading to the two of them laughing quite a bit, although as far as I was concerned she also deserved it for her later work as well.  That was it as they then left the elevator.  Of course, neither Robinson nor McKenzie ever got the award, but I have always heard that she did not get it partly because of her politics and partly because of their fear that she would engage in some combative misbehavior from their perspective.

Barkley Rosser