Saturday, February 28, 2015

Labour Defended Against the Claims of "Human Capital"

According to Guang-Zhen Sun, "Xenophon discussed in somewhat [sic] details the sexual division of labor within a family, a topic that was to be picked up by Thomas Hodgskin (1827) and Marxists in the 19th century and nicely integrated into a neoclassical theory of human capital in the 20th century (e.g., Becker 1985)." Except that Hodgskin's analysis of the topic was not "nicely integrated into a neoclassical theory of human capital." It was adamantly ignored because the point of human capital theory is to naturalize ideological claims about the utility maximizing motives of individuals and returns to factors of production attributable to their marginal contribution to production.

In Labour Defended Against the Claims of Capital, Hodgskin stated explicitly that the purpose of his essay was to refute the arguments of John Ramsay McCulloch and James Mill to show that: "the effects attributed [by them] to a stock of commodities, under the name of circulating capital, are caused by co-existing labour." In a prefatory note, Hodgskin wrote:
In all the debates on the law passed during the late session of Parliament, on account of the combinations of workmen, much stress is laid on the necessity of protecting capital. What capital performs is therefore a question of considerable importance, which the author was, on this account, induced to examine. As a result of this examination, it is his opinion that all the benefits attributed to capital arise from co-existing and skilled labour. He feels himself, on this account, called on to deny that capital has any just claim to the large share of the national produce now bestowed on it. This large share he has endeavoured to show is the cause of the poverty of the labourer; and he ventures to assert that the condition of the labourer can never be permanently improved till he can refute the theory, and is determined to oppose the practice of giving nearly everything to capital.
In Marx's discussion, in Capital, of the division of labour, he cites a passage from Hodgskin's "admirable work" in support of "The fact that the detail labourer produces no commodities." It is worthwhile quoting Hodgskin in full, here, with the passage cited by Marx highlighted in bold:
Whatever division of labour exists, and the further it is carried the more evident does this truth become, scarcely any individual completes of himself any species of produce. Almost any product of art and skill is the result of joint and combined labour. So dependent is man on man, and so much does this dependence increase as society advances, that hardly any labour of any single individual, however much it may contribute to the whole produce of society, is of the least value but as forming a part of the great social task. In the manufacture of a piece of cloth, the spinner, the weaver, the bleacher and the dyer are all different persons. All of them except the first is dependent for his supply of materials on him, and of what use would his thread be unless the others took it from him, and each performed that part of the task which is necessary to complete the cloth? Wherever the spinner purchases the cotton or wool, the price which he can obtain for his thread, over and above what he paid for the raw material, is the reward of his labour. But it is quite plain that the sum the weaver will be disposed to give for the thread will depend on his view of its utility. Wherever the division of labour is introduced, therefore, the judgment of other men intervenes before the labourer can realise his earnings, and there is no longer any thing which we can call the natural reward of individual labour. Each labourer produces only some part of a whole, and each part having no value or utility of itself, there is nothing on which the labourer can seize, and say: “This is my product, this will I keep to myself.” Between the commencement of any joint operation, such as that of making cloth, and the division of its product among the different persons whose combined exertions have produced it, the judgment of men must intervene several times, and the question is, how much of this joint product should go to each of the individuals whose united labourers produce it?
Hodgskin was defending labor against the (illegitimate) claims of capital. Becker was extending the claims of capital into the household. One of these things is not like the other.

Thursday, February 26, 2015

Hume & Kapp, et al.

Over at MaxSpeak, Sandwichman didn't get any response to his provocation that "human capital" was cooked up by the Chicago boys as a way of side-stepping the fundamental methodological critique posed by the institutional analysis in the tradition of John R. Commons and J. M. Clark, which dominated American labor economics -- and presumably labor economics journals -- in the 1940s and 50s. I particularly wanted to mention cost-shifting as an issue that "human capital" evades. This passage from  The Foundations of Institutional Economics by K. William Kapp highlights some of the central motifs of institutionalism's critique of conventional theory. It also has the merit of mentioning the contribution of David Hume, among others and thus enabling the pun in the title.
Institutional economists have raised some very specific objections to the dominant conventional theory; and while it is not necessary to analyze in minute detail all the well-known aspects of this critique, it will be useful to review some of the exceptions taken by representative institutionalists to certain methodological procedures of conventional economics, if for no other reason than to make clear the distinct perspective and mode of thought which have guided them from the beginning. These exceptions will illustrate clearly and fundamentally how institutionalism conceives the task of economic analysis in a radically different manner than the traditional, pure theory of valuation, value, and price.  
Starting with a brief outline of the evolution of the theory of value from its classical origins, we shall illustrate our thesis by brief references to the institutional critique, with particular emphasis on those elements of the critique that demonstrate the alternative perspective of the institutional approach. Both Adam Smith and David Hume made deliberate use of inherited concepts of natural order and natural law to show that the system of private enterprise, or "natural liberty," was not only theoretically conceivable and practically workable, but at the same time morally superior and more efficient in the use of given resources to the preceding mercantile system. Not only did this system tend to regulate itself, it also produced terms of exchange that possessed many, if not all, of the characteristics of a "just price," as the term was conceived and propagated by medieval thinkers; it guided labor, resources, and capital into the occupations and lines of production which corresponded to the wishes and preferences of the consumer. The labor theory of value, together with the hypothesis of maximizing behavior -- both major and central hypotheses of classical political economy -- asserted that market prices would gravitate around natural prices of goods and services at their normal level, or the level at which they covered their costs of production. Prices and wages could thus be considered just and equitable, and as such did not need to be controlled. If the labor theory of value, understood as an equilibrium, seemed to guarantee the theory of distribution, the maintenance of some form of macroeconomic balance or equilibrium was shown to be guaranteed by the principle of the conservation of purchasing power, which both Adam Smith and Jean-Baptiste Say considered self-evident. 
The classical theory of Smith and his successors borrowed the equilibrium concept from mechanics and supplemented its notion of natural order, natural liberty, and natural law with an increasing dependence on the quantitative, utilitarian psychology of Jeremy Bentham as a basis for its explanation of human behavior, and particularly of economic behavior. By measuring and aggregating all input and output magnitudes in terms of prices (at equilibrium levels), and by identifying the social output as the sum total of these values at market prices, the theory and system supposedly provided their own quantitative yardsticks for measuring the performance and growth of the economy over time. The economy was also said to produce the greatest sum of pleasure possible to the greatest number of people, by allowing every individual economic unit to choose goods, occupations, and investment outlets according to its own preferences. Thus, what began as an exercise in objective analysis ended in a system of normative and political conclusions, formulated without apparent or explicit value premises. This unprecedented achievement, unparalleled in any other discipline, is the outcome of a specific procedure. By first defining the scope of the analysis and postulating specific behavior patterns, the position of equilibrium is endowed with characteristics that give it the appearance of an objective optimum. Used in this fashion, the concept of equilibrium lends itself to a superficially convincing defense of the laissez-faire system of natural liberty. Philosophers, aware of the presupposition of classical and neoclassical analysis, have shown the logical limitations and weaknesses of the concept of natural order and natural law; they have demonstrated that such doctrines have been used repeatedly to support open and hidden valuations of the greatest variety and mutual incompatibility and shown that the ideology does not exist that cannot be defended by an appeal to the laws of nature. 
Institutional economists have developed their own analysis of the philosophical premises of classical and neoclassical economic theory into a thorough critique of their preconceptions. Veblen criticized the non-causal teleological character of the analysis in contrast to the viewpoint of modem science, and Gunnar Myrdal showed that conventional equilibrium analysis has continued a long tradition of normative (political) thinking while professing a commitment to a positive (value-free) and objective account of the natural world. In fact, both radical and conservative economists have been inclined to shape and use their economic analysis to support their political objectives and perform the logically untenable feat of arriving at normative political conclusions without explicit political premises. The political objectives of classical and neoclassical economists were those of anti-mercantilism, anti-regulation, and non-intervention. Theoretical economists appealed to natural order and natural law, based on a theory of man later reinforced by the utilitarian calculus. Aided also by the analogy to mechanics and stable equilibrium (i.e., under static conditions where no new “forces" produced changes in motion), they have developed a system of conclusions that make economic and political processes appear to work towards common goals and a maximization of "social welfare." Levels of equilibrium are so defined that processes of production and distribution, under the impulse of the forces of self-interest, tend automatically and in a self-correcting manner towards a socially desirable and optimal outcome. What was initially introduced as a simplifying assumption for the abstract representation of reality for purely analytical purposes is thus subtly converted into the idealized norm of a perfectly competitive market, providing direct criteria for economic policies without further diagnosis of the specific situation, and without explicit normative or moral value premises. This logically untenable feat of arriving at political conclusions without political premises is, however, achieved with the aid of logical fallacies, the norms and teleology derived from pre-analytical visions and ideologies have forced upon economics specious concepts, definitions, and assumptions. Thus, normative and ideological elements have shaped the concepts, language, distinctions, and modes of thinking of conventional economics. Institutional economics has made major contributions to identifying these fallacies, and in doing so has produced both a critique of conventional economic theory and a clear picture of the modern character of institutionalism itself, as a distinct approach to economic analysis. The most notable points of the institutional critique are the fallacies of the utilitarian foundations of economic theory, the fallacy of the doctrine of the sovereignty of the consumer, and the fallacy of the means-ends dichotomy.

Tuesday, February 24, 2015

Larry Summers Tells It Like It Is

From the unedited transcript, "Future of Work in the Machine Age" policy forum:
Third, when I was an undergraduate at MIT in the 1960s there as a whole round of concern about this -- will automation displace all the employment? And what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out, and if people got more productive they'd be richer and they'd spend and maybe we needed some transition assistance, but that it was all basically going to be okay. That was what I was taught. That's what Bob Solow thought; he was a hero and the other people were all a bunch of a goofballs was kind of what I learned. (Laughter)
I actually believed that for many years and actually repeated it often. It has occurred to me that when I was being taught that about six percent of the men in the United States between the age of 25 and 54 were not working. And that today 16 percent of the men in the United States between the age of 25 and 54 are not working, and it won't be very different even when the economy is at full employment by any definition. And so something very serious has happened with respect to the general availability of quality jobs in our society and we can debate whether it's due to technology or whether it is not due to technology. 
We can debate whether it's the cause of dependence or whether it is caused by policies that promote dependence. But I think it is very hard to believe that a society in which the fraction of people in -- choose whatever your most prime demographic group is that should be working, whatever that group is, a society in which the fraction of them who are not working is doubling in a generation and seems to be on an upward trend is going to be a society that is going to function well, or at least function well without major social innovations.

And I would want to leave you with that concern as there whether you think it's due to technology or whether you think it's due to globalization, or whether you think it's due to the maldistribution of political power, something very serious is happening in our society.

"The Future of Work" has a Chequered Past

The Hamilton Project had an event to discuss the Future of Work in the Age of the Machine. Lawrence Summers was there, along with Robert Rubin, Erik Brynjolfsson and Andrew McAfee, Laura D. Tyson and David Autor. Round up the usual suspects. They didn't invite the Sandwichman. No one ever invites the Sandwichman to these events.

The Hamilton Project's "framing paper" on the future of work takes its historical bearings from a fable about events that happened two centuries ago. Wouldn't it make sense to rely instead on documents from within our own lifetime? How credible are predictions about the future based on fictions about the past?

Writing in Fortune magazine 61 years ago, Daniel Seligman predicted achievement of the four-day week by 1980. He based that prediction on projection of historical trends. It didn't happen. Apparently a lump of labor got in the way -- the same fixed amount of fiction that the Hamilton Project framing paper frames the Luddites of 200 years ago with.

"Prediction is very difficult, especially about the future." Attribution is even harder. Niels Bohr? Yogi Berra?

At least Larry Summers got it right.

Fortune and the Four-day Workweek

What economists of the 1950s and 60s disparaged with the "lump-of-labor" hand, they typically celebrated with the "inevitable", "productivity gains", "income-leisure choice" hand. Based on past trends, the four-day week could be expected to arrive by 1980 -- presumably without legislative or collective bargaining "coercion." By now, 2015, workers would be enjoying the three-day, 21-hour week or, alternatively, three-month annual vacations. Didn't happen. But what's odd is how little thought is given to why it didn't happen and to what happened instead. The dots do connect. Rising inequality, financialization, economic instability and precarious employment -- all these cannot be entirely unrelated to the euthanasia of union arguments for shorter hours.

The Four-day week: How soon?

Daniel Seligman
Fortune -- July 1954

How far off is the four-day week? The standard five-day week has been lodged in American life for only a decade or so. Yet for some reason it is widely regarded today as something natural and immutable. Recently, Fortune mailed a questionnaire about the feasibility of a four-day week to fifty large industrial firms (more than 30,000 employees) and fifty medium-sized companies (300 to 3,000 employees). If there is a single U. S. company whose spokesmen are willing to affirm that a four-day week is possible and desirable in the fairly near future, it has not been found.

The fact that most American businessmen regard any future four-day week with misgivings and even hostility does not, of course, mean it is never coming. A quarter of a century ago there was a great debate about the five-day week. Speaking for the affirmative, but almost alone among businessmen, was Henry Ford. He had introduced the five-day week, he said shortly after the event, “because without leisure the working men— who are the largest buyers in the country—cannot have the time to cultivate a higher standard of living and, therefore, to increase their purchasing power.” Virtually all the businessmen who addressed themselves to the subject found differently. In general, they had three major objections to the five-day week: the cost would be prohibitive; the workers would not know what to do with their leisure time; and there was Biblical sanction for the six-day week.

An important reason for the cautiously noncommittal attitude of business men today is that their employees have been unionized. To declare that a four-day week might soon be feasible would be to give, gratis, a large bargaining counter to the union. On the other hand, to suggest that employees cannot look for any more leisure time would be inept public relations.

Labor leaders also appear to he preoccupied elsewhere. It is true that both the major labor federations have clearly defined ideas about affording more leisure for the American worker. But these do not include the four-day week—yet.

If both labor and management are uninterested in the four-day week, what good reasons are there for talking about it? Briefly, two kinds of reasons might be adduced: The four day week would be desirable, both for business and employees; and it would almost certainly be attainable.

The major reason for thinking a four-day week feasible is, of course, the continually increasing productivity of U. S. industry. Productivity—i.e., output per man-hour—has been rising by 2 or 3 per cent a year, taking the economy as a whole, for more than fifty years now. And, barring a war or a prolonged depression, Americans clearly have some further benefits in store. The question is whether they will take these benefits in the form of increased income, increased leisure time, or in a combination of both.

A calculation made by Fortune for the years since 1929 suggests that in the past quarter-century U. S. workers have been taking about 60 per cent of the productivity pie in the form of income, about 40 per cent as leisure. Assuming that the four-day week for non-agricultural employees will be attained when the total work week is in the vicinity of 32 hours, that productivity continues to increase at an average of 2 or 3 per cent a year, and that something on the order of the recent 60-40 ratio for income and leisure continues in effect, the 32-hour week should be spread throughout the whole non-farm economy in about 25 years.

If the four-day week seemed sufficiently appealing, of course, it could be achieved much sooner. A lot of Americans might, in other words, he willing to work nine hours a day. That, theoretically, would enable them to enjoy the four-day week when total hours of work were down to 36. If they made such a decision—if they traded the eight-hour day for the three-day weekend—then the great event would he scheduled to arrive, not around 1980, but in the 1960’s.

A large number of business men maintain that the four-day week has no applicability to their own operations. The following problems are suggestive of the wide variety of “insurmountable” obstacles that would he encountered:
Manufacturing companies with three-shift operations would run into formidable scheduling difficulties if the nine-hour day were introduced.  
Companies whose total hours of operation could not be reduced would have to hire more employees.
Retailing provides a peculiarly difficult situation. To remain open six days and give their employees a four-day week, department stores would have to hire 25 per cent more workers than they now employ. 
A final question must be considered. Do workers really want more leisure? Many employers are still convinced they do not. Now there is no doubt that, given more time off, some workers might drink too much, or beat their wives, or go insane watching daytime television. Others might work themselves to death on second jobs. But the $30-billion leisure market, the remarkable emergence, almost from nowhere, of a huge, new do-it-yourself market, and even the familiar Sunday-afternoon sight of cars crawling along bumper to bumper, suggest strongly that most American workers have a pretty good idea of what to do with their time off.

Meanwhile, in the income-leisure choice for the years ahead, there will be one strong pressure for leisure: The workers who have been energetically pushing their way into the middle-income class have, naturally, become increasingly preoccupied with federal tax demands. "If we get more dough," said one AFL man recently, "the government can take back part of it. But they haven’t yet figured out a way to tax your day off."

Monday, February 23, 2015

"Unemployment and Shorter Hours" -- Howard G. Foster

The excerpt below presents a hypothetical example of how reducing the hours of work can create jobs without assuming a fixed amount of work. It was developed by Howard G. Foster -- then a teaching assistant at the New York State School of Industrial and Labor Relations at Cornell -- and published in the April, 1966 Labor Law Journal. It can best be understood as a direct reply to arguments in the pamphlet, The Shorter Workweek by Marcia L. Greenbaum, published three years earlier by Cornell ILR. Both Foster and Greenbaum went on to distinguished careers as labor arbitrators.


from "Unemployment and Shorter Hours"

Howard G. Foster

A common reason given by economists who reject the proposal of a shorter workweek is based on what they call the "lump of labor" fallacy. Labor's analysis, they suggest, assumes that an employer has a fixed amount of work that must be done. If hours are reduced with no cut in weekly pay, the employer will react just as he would to any wage increase —that is, cut back output until marginal cost (which has risen) again equals marginal revenue. To suppose that the employer will maintain production in the face of a substantial cost hike is said to be clearly fallacious. ...

But does it follow that a rise in cost is a necessary concomitant of a cut in the workweek? A moment's reflection leads one to answer "no." The key to such a conclusion is the assumption that productivity is continually moving upward. This means either that a firm can produce more goods and/or services with the same amount of input than it could before the productivity increase, or that it can produce the same amount with less input. ...consider the following hypothetical situation.

Suppose a company employs 100 men who work 40 hours a week. Suppose further that average hourly pay is $1.00. Thus the average worker grosses $40 a week and the employer's total weekly payroll is equal to $4,000 (ignoring, for the moment, other employment costs such as social security payments, fringe benefits, etc.). Now let us assume that the union contract is about to expire, and during the course of the contract— two years—the company's productivity has risen by 5 per cent. This is not an unreasonable assumption, as the average annual productivity increase in American industry is estimated to be about 3.2 per cent. Now what might happen at the negotiations for a new contract?

Since productivity has risen by 5 per cent, the union will demand a share of the gains. If returns to all factors of production are to remain constant, labor would call for a 5 per cent increase in hourly wages. This is the same as saying that labor will receive the same amount relative to sales as before. Let us assume, however, that product demand has not changed. Total payroll, therefore, will have to remain at $4,000. Since hourly wages should be boosted by 5 per cent, then weekly pay can be maintained with a 5 per cent drop in weekly hours. This works out nicely, since the workers can still produce as much as before because of the productivity increase. To illustrate:


One might wish to interject at this point, "So what? You haven't improved the employment situation at all. The work force still numbers 100." This is all very true indeed, but it might be useful to reflect on just what would have happened had this particular sequence of events not occurred. Whether or not the union demands an hourly wage increase, the employer finds himself in a position where he can meet his production needs with 5 per cent fewer man-hours. So what are his alternatives? He can either cut back hours by 5 per cent or cut back men by 5 per cent—in other words, lay off five men. In the first instance he did the former. He can just as easily do the latter, as illustrated in row (b) of the table below:


In this situation, there are fewer men working at a higher weekly wage. Since we have proceeded from the premise that a certain number of men working at, for example, 38 hours is better than fewer men working at 40 hours, we must conclude that situation (a) above is preferable to (b). 

What is the significance of this? It is true that employment has not been increased in situation (a), but obviously the hours reduction has forestalled a decrease in employment. If hours were not cut, then five more men might be out of work. In policy terms there is little difference between steps to decrease unemployment and steps to prevent it from increasing. Furthermore, it should be noted that it appears to make little difference to the employer whether he cuts man-hours through cutting men or hours. It might be argued that in situation (a) the company is obliged to incur some extra cost over situation (b) in the form of fringe benefits, social security and unemployment compensation payments, and other costs which are dependent on the number of workers employed rather than the number of hours worked. It should be added, however, that the employer has the advantage in situation (a) of retaining men who are experienced and whom he could use in case of a spurt in demand without going to the trouble of hiring and training additional workers. At any rate, both of these factors would seem to be relatively minor cost considerations, since only 5 per cent of the work force is involved. Now let us expand the argument a bit. In the foregoing, it was assumed that demand for our employer's product had remained constant. It is not unreasonable to assume that in some cases demand will have risen. For the sake of simplicity, let us assume that sales have increased by 5 per cent, the same amount as the productivity increment. In such a situation, the employer will want to retain the same number of man-hours as before, since by definition the same input can turn out 5 per cent more output. Thus the company might simply raise hourly wages by 5 per cent, and everything would be fine. The situation would look like this (assuming that in 1963 8,000 units had been sold at $1.00 apiece, and that in 1965 the market will take 8.400 units at the same price):


Now suppose the union forces the company to cut the standard workweek to 38 hours. In such a case total payroll will have remained the same. Since the employer was willing to pay out an additional $200 in wages in the first place, he should have no objection to using that money in order to hire the extra workers he needs to meet the demand for his product. Thus we have the following situation:


At this point a critic might protest that the marginal cost of hiring five additional workers is greater than simply the total of their wages. There are administrative costs, benefit and tax costs, and training costs. This, of course, is a valid objection, but the problem is not insuperable. One way the difficulty could be circumvented might be to allow the employer sufficient leeway in the hours reduction to meet the extra costs. In other words, the union might agree to cut weekly hours by only 4 per cent, with no increase in weekly wages, allowing the employer 1 per cent of total payroll with which to pay the expenses of hiring new workers. Thus, again, it should make little difference to the employer how the complement of man-hours is composed— of 100 men and 40 hours, or 105 men and 38.4 hours (that is, a 4 per cent reduction of hours). Two possible situations have been examined, and with each two alternative ways of facing them have been suggested. First it was hypothesized that weekly sales had remained the same, and second, that sales had increased. It should be obvious that any other possibility can be reasoned out in the same manner. If, for example, sales should increase by, say, only 2.5 per cent, then the alternatives would look like this:


Tables representing situations in which sales are held to be any other amount may be similarly devised. Two points might be noted and emphasized here. First, it is evident that any increase in sales concurrent with a productivity increase opens the possibility of creating jobs. The more that sales rise, the more jobs can be found. Secondly, in all the above examples, the standard workweek was reduced without a rise in unit labor costs. This should at least suggest that in principle hours reduction might indeed be an instrument by which to alleviate the unemployment problem and is worth further study.

Finally, the hypothetical situations described above assumed that the employer's annual rate of productivity increase was 2.5 per cent. To be sure, all companies do not enjoy such good fortune. Since the average rate has been estimated at 3.2 per cent, however, some industries must have a rate of increase that is even higher; and in these areas of the economy, hours reduction should have its greatest effect. In industries with low rates of productivity gains, the proposal will be less effective. It seems reasonable to suggest, however, that any company willing to grant a wage increase in the first place, for any reason, can do it just as easily by cutting hours as by raising weekly wages. As stated above, productivity is the key to the shorter-hours proposal in that productivity is the principal factor which enables wage increases in any form to be granted. So long as productivity in American industry continues to rise, hours of work can be cut without inflating unit costs and in this way labor may indeed be able to "create jobs" at the bargaining-table.

UPDATE: Addendum to Foster

A small wrinkle that Foster left out is the observation that, within a certain range of hours, a reduction in working time may often be expected to contribute to productivity by reducing fatigue, etc."The days are gone," wrote Lionel Robbins in 1929, "when it was necessary to combat the naïve assumption that the connection between hours and output is one of direct variation, that it is necessarily true that a lengthening of the working day increases output and a curtailment diminishes it." Below is the hours and output table presented by Sydney Chapman in his 1909 "Hours of Labour" paper:


Assuming that this table is an educated guess, the productivity "rebound" from reducing the daily hours of labor works out to be around one-third. It takes time to realize that productivity gain so it would be safer to say that over a two-year period, a two percent reduction in working time would add an additional one percent to productivity growth (or half a percent per year). With Foster's baseline productivity gain of 2.5% per year, this adds up to a productivity gain --  in the second two-year period -- of 6%. Assuming again that sales grow at the same rate as productivity produces the following table:


The work force continues to grow. Wages increase modestly and so do weekly earnings but per unit costs remain unchanged to slightly lower. Not a lump in a carload!

*************************************
Five years after Foster's article was published, H. D. and N. J. Marshall wrote in their textbook, Collective Bargaining:
The arithmetic of the theory is simple. lf there are 50 million people presently working forty hours per week, let them now work for only thirty-five hours. The resulting reduction of 250 million hours of labor will create openings for more than 7 million (250 divided by 35) additional workers.  
Few businessmen or economists have been convinced of the validity of this reasoning...
The arithmetic IS indeed simple, just not so stupid. The Marshalls' argument is even simpler: ignore the argument that is made; substitute a flimsy straw man; knock down the straw man. Few businessmen or economists are not convinced of the validity of their reasoning. Witness the Hamilton Project's February 2015 framing paper, The Future of Work in the Age of the Machine.

Kudlow’s Deficit Dance

I was not invited to the private dinner with Scott Walker but Paul Krugman notes who was on the guest list:
Scott Walker, the governor of Wisconsin, is said to be a rising contender for the Republican presidential nomination. So, on Wednesday, he did what, these days, any ambitious Republican must, and pledged allegiance to charlatans and cranks … the three most prominent supply-siders: Art Laffer (he of the curve); Larry Kudlow of CNBC; and Stephen Moore, chief economist of the Heritage Foundation.
Paul notes some of the recent ramblings from this trio including their predictions that the use of expansionary monetary policy to combat the Great Recession would lead to runaway inflation and high interest rates. But let’s turn back the clock to the first term of the Bush43 Administration when Kudlow writing for the National Review was all in defending Bush’s fiscal stimulus and arguing at several points how the labor market was booming even when it was not. Kudlow was infamous for claiming the household survey was a better measure of employment when it showed that employment was rising while the payroll survey said the opposite. Of course there were months when the payroll survey showed better job growth than the household survey showed – to which Kudlow declared the payroll survey was more reliable. And during those months when the unemployment rate fell even though the employment-population ratio fell, Kudlow was all aglow that labor force participation rates were falling. After all, spinning for the Bush-Cheney 2004 campaign was more important than actual improvement in the labor market: My favorite Kudlow spin had to be what he wrote on November 22, 2002:
The federal budget deficit was $158 billion for fiscal year 2002. Democratic politicians blame this shortfall on the Bush tax cut of 2001. But how can they? The bulk of the reduction in personal tax rates designated in that cut do not occur until the 2004 to 2006 period. Thus far, only about 10% of the tax cut has even taken place. The real blame for the deficit can be placed on sub-par economic growth over the past two years .. As a result, actual economic performance has fallen below the long-term 3.5% historical trend line, which reflects the economy’s indisputable potential to grow. If that trend line were extended through 2002, as though no slowdown had occurred, then the potential third-quarter gross domestic product would have been $9.829 trillion. Instead, actual GDP fell $364 billion short of the mark. Cumulatively, over the past two years, the loss of potential GDP comes to $1.95 trillion — a considerable amount. If you apply the 18% economy-wide tax rate of recent years to the nearly $2 trillion loss of potential output, you get a $351 billion shortfall in tax revenues — which we’d be counting now if the economy had been running at full steam.
I used to watch The Capital Gang until I could not take Robert “That’s Class Warfare” Novak lecturing to everybody that only he knew anything about economics, which he tended to get by reading Kudlow. One Saturday night in November of 2002, he claimed that if the economy were only at full employment – we would have a $190 billion surplus. OK, I knew that despite all the Bush cheerleader from the National Review, we did have a considerable GDP gap. But this claim sounded extreme so I found Kudlow’s Deficit Dance which is where Novak got this bizarre claim. Where to begin with this? One could point out that Kudlow is using the unified budget deficit as the starting point which pulls the Social Security Trust Fund into the discussion as an offset to the larger General Fund deficit. Our first graph shows, however, that not only did total debt (TD) grow relative to GDP after both the 1981 tax cut and the 2001 tax cut but debt held by the public (DHP) also grew relative to GDP. One could also point out that potential GDP does not always grow at 3.5% per year especially when fiscal stimulus reduces national savings and investment (a topic for another post). But the real problem is that this implicit assertion that the GDP gap was $2 trillion per year is based on summing 8 observations when one should be taking the average. OK Kudlow said this $2 trillion was a gap over 2 years so we can blame Novak by not dividing these figures by two. But Kudlow was also using annual flow information as if it were quarterly flow information. So to correct even what he wrote – we needed to further divide his figures by four. Our second graph shows the GDP gap on an annual basis using the CBO estimate of potential GDP and they were nowhere near $1 trillion per year. Could Kudlow really be this incredibly stupid or did he know he was trying to deceive stupid readers? I guess he did because Robert Novak certainly fell for this incredibly misleading and incorrect assertion.

Saturday, February 21, 2015

Economic Wisdom in Germany

The negotiations between Greece and the rest of the Eurogroup were largely about how far, if at all, Germany could be pulled toward compromise.  German thinking about the economics of the currency zone is decisive: they set the boundaries and, to a large extent, the discourse.  The most prestigious group of economists in Germany is the Sachverständigenrat, the Council of Experts commonly referred to as the Five Wise Men.  (They currently have a single female member.)

This body released a statement about the Greek negotiations which you can read here.  Simon Wren-Lewis went after it here, but I want to say a bit more.  First, read the words of the Wise.

Now that you’re done, consider this.  Only once in this document is there even a passing reference to unemployment.  There is no mention of output gaps, nor of living standards.  Governments are seen strictly as borrowing and lending entities with no particular obligation other than paying their bills.  In other words, macroeconomics as the rest of the world understands it is essentially absent from beginning to end.  The message is: your government borrowed too much, we gave you some relief, and now you have to pay the rest.  There is nothing more to discuss.

The topic of reforms appears on occasion.  There isn't much discussion of their content other than that they are to be “market-oriented”.  Ireland, Portugal, Spain and Italy are held up as examples of the success of such reforms, although what success means in this context isn't specified.  (I think it means, the governments are continuing to pay on their debts.  Spain and Portugal in particular are no one’s idea of successful economies.)

Meanwhile, the document is studded with truly outlandish statements.  Try this one: “For an economy in the dismal Greek situation, it essentially made no difference that it remained a member of the Eurozone – in any case, adjustment was unavoidable, and it would be painful and accompanied by strong social tensions. The adjustment process of countries that experienced debt and currency crises follows a very similar pattern. This is irrespective of whether they successfully defended a fixed exchange rate or allowed their exchange rate to devalue in order to support external economic adjustment.”  This is followed by a pair of charts, the second of which compares Greece’s GDP growth (decline) to that of the Baltics, along with Korea and Thailand in the late 90s.  But: (1) The Baltics were defending a fixed exchange rate and they did, and are doing, terrible.  (2) The East Asian countries, which had scope for devaluation, were back in growth territory within two years, unlike Greece.  (3) It’s a selective list!  Where’s Argentina, for instance?  Or Iceland.  Oh, but right: “success” means paying your bills, and Argentina and Iceland didn't do this.

About debt relief: “A debt relief of public creditors could not substantially improve the comfortable state of the Greek government, let alone be justified easily vis-à-vis its lenders.”  Read that one over a few times to let it sink in.

The wrap-up: “Greece is suffering very hard times. But the real tragedy is that it elected a government that threatens to exacerbate the situation and spoil the looming economic recovery, on the basis of a thoroughly wrong assessment of its current bargaining situation and the policy alternatives available for achieving sustainable growth in Greece and the Eurozone.”  In short: we will be happy to see you leave the Eurozone, so we don’t have to give an inch.  And there is no alternative to the current policies which, as anyone can see, have been blazingly successful at restoring growth.

And these are the supreme experts.  Imagine what the reasoning must look like down in the second and third tiers.

Bizarre Russian Propaganda

Yesterday I learned that blogs in Moscow, at least one called Energy-Life, are posting a supposed report put out by the RAND Corporation on July 3, 2014 that contains a supposed plan for the Ukrainian government to reconquer eastern Ukraine by Sept. 1, impose martial law, set up internment camps, and then lift it by January 1.  I shall quote from it below, detailing some horrific things  that were supposed to be done according to this plan.  I found it by googling "RAND report Ukraine Novorossiya, and there was a link at the second hit, a site called oped news and a post by David William Pear, who provided a link to the actual report (the link here only goes to the general site but not his report; you will have to google it as I described above to see it, sorry).  His post went up on Feb. 4, 2015, and he posted another round the next day without the link, but referring to it and taking strongly pro-Russian positions.  It would seem that this posting by him has received no attention here, but it is now hot stuff in Russia, and from what I hear, lots of people believe its contents.  I note that while Pear mostly praised the releasing of this report, he did say, "The authenticity of this report is yet to be verified."

So, I am 99.9% certain that this is something cooked up by somebody in Russia.  The actual Memorandum is two pages long and addressed to nobody in particular, nor does it have a date or any names on it, although the link claimed it was issued on July 13 last year.  It has an opening section and then three sections, one on "Isolation," then one on "Mop-up," then one on "Return to Normal."  The flavor of it is best given by simply providing a few quotes.  Its two pages do have a RAND logo on their lower right corners, although I must say that I have never seen official paper of any entity, government, corporate, academic, non-profit, whatever, that had its logo in that location on its official paper, although who knows, maybe that is how they do it at RAND.

From the opening section, which describes the supposed advantages of this plan: "Activists of a pro-Russian political movement get decimated, pro-Russian voters get disorganized."

This is followed by a plan to shut down both the "coal industries" and also "the Donbass industries," with this being praised as a good idea  because it  will  reduce eastern Ukraine's dependence on natural gas (they use gas in the coal mines?).

In the "Isolation" section imposing martial law is proposed and detailed.  Near the end of this section it states that "use of non-conventional weapons shall not be ruled out."

In the second section, description of the takeovers of individual towns contains the following tidbit: "Infantry shall move in next to relocate male adults [ages 13-60] into internment camps."  Apparently all of them, no testing them for ideology or views before doing so.

In the third section it says that these camps will be guarded by people with approved ideology, and then in discussing refugees returning to the area it says, "However, men aged 18-60 shall be checked for possible support of separatists in internment camps."  Yes, that is sic.  Why for this bunch the 13-17 year olds get off is unclear.  In any case, all of these people are supposed to be released from the camps after two months.Or maybe those returnees are not to be tested in the camps but to be tested for whether or not they support those in the camps ("Hey, do you support these people in these camps, with it clear that if you say so we shall put you there?")

There is more, but you get the idea and the tone, including the rather clunky English (nothing in the future is ever "will" but "shall").

Probably the most telling detail of all that convinces me that this was indeed written by somebody in Russia (or somebody very pro-Russian, not pro-Ukrainian) is that twice it refers to "the Lugansk region."  Now quite some time ago, I posted here about whether that city and its region should be spelled as "Luhansk" or "Lugansk."  The former is the Ukrainian spelling, while the latter is the Russian spelling.  I noted on May 1 here that the Washington Post had for a short time switched from calling it "Luhansk" in the Ukrainian way to calling it "Lugansk"in the Russian way, but only for a short while and just before May 1 it switched back to using the Ukrainian spelling of "Luhansk," which it has used ever since as has virtually every media source I have seen in the US.  I seriously doubt that a report written by the RAND Corporation in early July that was supposed to be sent to the Ukrainian president would have used the Russian spelling as this one does. 

I think this pretty much settles it, but I shall simply add that back in July there was in fact a fairly successful campaign by the Ukrainian government to reconquer territory held by the separatists. The cities of Slovyansk and Mariupol were reconquered, the latter a port.  In August, some of this territory was reconquered by the separatists, who have more recently gained more territory, and are near the port of Mariupul, which many fear they may retake.  In any case, if there was anything to this plan we might have seen some of these proposals put into action.  But, I am unaware of any "decimation" of activists,any use of "non-conventional weapons," any setting up of internment camps with the male adults of Slovyansk and Mariupol being put into them, and certainly no shutting down of coal mines or any other "Donbass industries."  Maybe it has been going on, but nothing of the sort has been reported that I have seen, and amusingly enough even the Russian propagandists are not claiming that any of this has occurred in those areas, even as they are now touting to their population this purported plan that was to be activated last summer that urges all this awful stuff to be done.

About all I can say is that it is a sign of how brainwashed current Russians are that so many apparently are believing this tripe.  This is not a good sign.

Barkley Rosser

Friday, February 20, 2015

Homage to Max

I have not asked the permission of Max of Maxspeak to post this, but I think there is a matter of public record that needs to be stated officially.  So, the issue is that from time to time, here and there (sorry, no links), I have complained in the econoblogosphere about how one cannot access the old files of the old MaxSpeak. In its heyday the old MaxSpeak was a borderline top ten econoblog, mostly due to Max's regular, witty, and insightful posts.  I was kind of the second player, with Sandwichman of this blog and others from time to time on board, including Gar Lipow, and even briefly Jason Furman, currently the Chair of the CEA, our brief nod to establishmentarianism, not to mention that even good old Dean Baker was on board for awhile before he started Beat the Press.

Those were the good old days, but Max shut the show down and this blog, Econospeak, became its successor, which was 40-70 on the old Gongol rankings, which I miss, and I do not know what has replaced that. Anyway, after Max shut down the shop I complained from time to time that one could not access the old MaxSpeak files.  There were a few posts of mine, with followups, that I particularly was unhappy about not being able to access or link to, and I kvetched here and there. The one that I most regretted the loss of was my post about the problems of some Kurds in Harrisonburg, VA where I live, who were being persecuted by the FBI, and due to my post on MaxSpeak, at least partly, we (a lot of other people besides me were involved with this), we managed to help save some of these guys from jail.  I shoot off my mouth a lot, but saving somebody from jail is one of those few things that I can say that I am unequivocally proud of.  Given the disappearance of the original posts, the only public record of any of this is at Juan Cole's site, where I provided a guest post discussing the matter (I just tried to link to the post at Informed Comment, but it did not work, but if you google, "Juan Cole Rosser Kurds," you will get it as the top hit).  It is there, really.

So, what happened? Max's wife had cancer, suffered, and died.  This prettty much explains it.  Her illness was why he shut down the old MaxSpeak. Recently he sent me an email explaining what happened to the old files of the old MaxSpeak.  They existed ultimately as physical discs, and he finally told me that what happened is that he has simply lost them in all the confusion of his life assoicated with what I mentioned above. I hope that he finds them, but in the meantime, I can only say that I am sorry and sympathize.

So, MaxSpeak was great, and Max is a great guy.  I must say that I underatand and appreciate what has happened.  I wish him the best.  This is life.


Barkley Rosser

Break Their Haughty Frames

They have taken untold millions that they never toiled to earn,
But without our brain and muscle not a single wheel can turn.
We can break their haughty power, gain our freedom when we learn
That the union makes us strong.
The Hamilton Project bills its "The Future of Work in the Age of the Machine" as a "framing paper." The "frame" (or frame-up) appears on page two of the paper:
The Luddites, as they were called, were revolting against a phenomenon that would fundamentally alter the economies of the world. Technological change would dramatically increase the productivity of labor, creating new possibilities in manufacturing, agriculture, mining, and transportation. While these changes ultimately raised the standard of living in industrialized countries, the Luddites, and many others, saw their jobs disappear (Easterly 2001).
Those "Luddites" (as they were called) were notorious for breaking frames. They were also framed.

From the report of the proceedings of the trial of George Melior (or Mellor), William Thorpe and Thomas Smith for the murder of William Horsfall of Huddersfield, Yorkshire, it would appear (to this reader at least) as though the defendants were indeed guilty as charged. So in what sense am I claiming they were "framed"? The prosecutor, Mr. Richardson saw fit to present his "general observations on the case" -- unsupported by the testimony of witness -- regarding a certain "delusion that has prevailed... amongst the lower orders."

Mr. Horsfall is represented to me to have been a man, who had upwards of four hundred persons at work under him, extremely beloved by his men, and they greatly attached to him. He had very large manufactories, of course, from the employment of so many men; and he employed the machinery which was the object of the abuse of these misguided people. I have not the means of making such observations as I have frequently and lately heard made, upon the delusion which has prevailed upon that subject, amongst the lower orders. It has been supposed that the increase of the machinery by which manufactures are rendered more easy, abridges the quantity of labour wanted in the country. It is a fallacious argument: it is an argument, that no man, who understands the subject at all, will seriously maintain. I mention this, not so much for the sake of you, or of these unfortunate prisoners, as for the sake of the vast number of persons who are assembled in this place. 
I hope that my learned Friend on the other side, will give me credit, that I mean to state no facts as bearing upon the prisoners at the bar, that I shall not, as I conceive, bring home to them. But I cannot help making general observations upon the subject, to draw their Lordships' attention, and yours, to the case itself. I would rather, for perspicuity's sake, go to the facts which constitute the crime, and then apply it to the prisoners. Mr. Horsfall was a man, I understand, of warm feelings*, of great and good understanding, and who saw the fallacy of these arguments; and he, perhaps imprudently (though I do not think so, for I do not think any man acts imprudently in stating his sentiments on a subject which has been under his full consideration) he, I say, stated he would support this species of machinery, because he was sure it was advantageous to the country. He was perfectly well known, in consequence of the part he has taken in reference to these disturbances; and it was proposed by some persons, that he should be taken off.
* What Mr. Richardson meant by "warm feelings" is not what one might suppose. The "warmth" doesn't refer to compassion or tenderness. It alludes instead to Mr. Horsfall's taunt that he wished to "ride up to my saddle girths in Luddite blood."

Catch that? "I have not the means of making such observations..." "I mean to state no facts as bearing upon the prisoners at the bar, that I shall not, as I conceive, bring home to them." In short, this peroration was a digression. It was admittedly incidental to the matter at trial. But it was politically crucial. Not only was Mr. Richardson concerned with securing a conviction for murder but, perhaps even more urgently, with establishing, for the record, the collective guilt of those "lower orders" for "outrages" arising from their delusion and their fallacious argument. Those lower orders had no grounds for complaint.

The authors of the Hamilton Project framing paper cited William Easterly as the source for their digression on the Luddites (as they were called). Easterly called his passage on the Luddites "an aside about the Luddite fallacy." Apparently not having consulted Mr. Richardson's Indictment, Easterly claimed that "the intellectual silliness came later":
Some people believe labor-saving technological change is bad for the  workers because it throws them out of work. This is the Luddite fallacy, one of the silliest ideas to ever come along in the long tradition  of silly ideas in economics. …  
The original Luddites were hosiery and lace workers in Notting  ham, England, in 181 1. They smashed knitting machines that embodied new labor-saving technology as a protest against unemployment (theirs), publicizing their actions in circulars mysteriously  signed “King Ludd.” … The intellectual silliness came later, when some thinkers generalized the Luddites’ plight into the Luddite fallacy: that an economy-wide technical breakthrough enabling production of the same amount  of goods with fewer workers will result in an economy with—fewer  workers. Somehow it never occurs to believers in Luddism that there’s another alternative: produce more goods with the same number of workers.
Actually the allegation of intellectual silliness came three decades earlier -- in the form of a pamphlet by the Lancashire magistrate, Dorning Rasbotham, Thoughts on the Use of Machines in the Cotton Manufacture. Accusing frame breakers of irrational techno-phobia became a commonplace in industrializing Britain. That way you don't have to acknowledge or deal with their grievances.The Luddite fable serves the same purpose today  Opponents of austerity, pension cutbacks, neo-liberal trade policies and labor-market deregulation, along with proponents of work-time reduction can be glibly dismissed without having to acknowledge their arguments. Those lower orders are all deluded. They assume that their is only a fixed amount of work to be done. There's no point listening to their silly ideas or reasoning with them.

Above all, forget about the masterful lampoon and exposé of this dodgy frame by Marx in section 6, chapter 15. volume I of Capital, "The theory of compensation as regards the workpeople displaced by machinery":
It is an undoubted fact that machinery, as such, is not responsible for "setting free" the workman from the means of subsistence. It cheapens and increases production in that branch which it seizes on, and at first makes no change in the mass of the means of subsistence produced in other branches. Hence, after its introduction, the society possesses as much, if not more, of the necessaries of life than before, for the labourers thrown out of work; and that quite apart from the enormous share of the annual produce wasted by the non-workers. And this is the point relied on by our apologists! The contradictions and antagonisms inseparable from the capitalist employment of machinery, do not exist, they say, since they do not arise out of machinery, as such, but out of its capitalist employment! Since therefore machinery, considered alone, shortens the hours of labour, but, when in the service of capital, lengthens them; since in itself it lightens labour, but when employed by capital, heightens the intensity of labour; since in itself it is a victory of man over the forces of Nature, but in the hands of capital, makes man the slave of those forces; since in itself it increases the wealth of the producers, but in the hands of capital, makes them paupers-for all these reasons and others besides, says the bourgeois economist without more ado, it is clear as noon-day that all these contradictions are a mere semblance of the reality, and that, as a matter of fact, they have neither an actual nor a theoretical existence. Thus he saves himself from all further puzzling of the brain, and what is more, implicitly declares his opponent to be stupid enough to contend against, not the capitalistic employment of machinery, but machinery itself. 
No doubt he is far from denying that temporary inconvenience may result from the capitalist use of machinery. But where is the medal without its reverse! Any employment of machinery, except by capital, is to him an impossibility. Exploitation of the workman by the machine is therefore, with him, identical with exploitation of the machine by the workman. Whoever, therefore, exposes the real state of things in the capitalistic employment of machinery, is against its employment in any way, and is an enemy of social progress! Exactly the reasoning of the celebrated Bill Sykes [the villain from Dickens's Oliver Twist]. "Gentlemen of the jury, no doubt the throat of this commercial traveller has been cut. But that is not my fault, it is the fault of the knife. Must we, for such a temporary inconvenience, abolish the use of the knife? Only consider! where would agriculture and trade be without the knife? Is it not as salutary in surgery, as it is knowing in anatomy? And in addition a willing help at the festive board? If you abolish the knife — you hurl us back into the depths of barbarism."
***
Is there aught we hold in common with the greedy parasite,
Who would lash us into serfdom and would crush us with his might?
Is there anything left to us but to organize and fight?
For the union makes us strong.

Thursday, February 19, 2015

Bad Faith Economics: A Cheap Market Will (almost) Always (tend to) Be Full of Customers (except when it isn't)

As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before. -- William Stanley Jevons, The Coal Question, 1865.
In other words, technology creates more jobs than it destroys. Or, to be precise: as a rule, technology often, eventually creates more jobs than it destroys. What's the difference between those two statements?

This old saw appears to form the theoretical core of neo-liberal industrial policy. Witness the Hamilton Project's February 2015 "framing paper" The Future of Work in the Age of the Machine. After the obligatory swipe at Luddites -- "The Luddites, as they were called, were revolting against a phenomenon that would fundamentally alter the economies of the world" -- the Wall Street Democrats' think-tank presents a qualified version of the platitude:
There is a consensus that, historically, technological progress has created winners and losers, but over the long run, new technology has tended to create more jobs than it has destroyed, while increasing society’s productivity and wealth.
What is the counter-statement to the principle that technology creates more jobs than it destroys? Is it "technology destroys more jobs than it creates"? "Technology doesn't necessarily create more jobs than it destroys"? "There is a fixed amount of work to be done"?

Surely it can't be the third statement because there could be a situation where the amount of work to be done increased but the number of jobs still decreased. A fixed amount of work is overkill. The first counter-statement is the mirror image of the dogmatic assertion of the principle. The second is actually consistent with the more contingent, provisional version of the principle.

There is no way to predict whether people disputing the dogmatic claim that technology creates more jobs than it destroys do so on the basis of belief in counter-statement one, two or three. As a rule, however, it is discourteous to attribute to an opponent the least plausible motivation for their beliefs. It would be more respectful -- and more prudent -- to attribute the most plausible and defensible motivation.

There is no evidence for the claim that union arguments for shorter hours assume a fixed amount of work and thus commit a lump-of-labor fallacy. There is, however, proof that those who make the accusation actually do commit the fallacy.

The first proof was by Charles Beardsley in 1895. I discussed it in my "Why economists dislike a lump of labor." Pigou in 1913 and Dobb in 1928 demonstrated other fallacies committed by the "fixed Work-Fund" plaintiffs. In Some Leading Principles of Political Economy, published in the 1870s, John Elliott Cairnes bitterly denounced on page 251 the "profound, pernicious fallacy," which is a restatement of the wages-fund doctrine he had obstinately defended back on page 174.

Below is a typical example of the case against the "more refined" 1960s union arguments for shorter hours, which suggested that labor cost increases could be mitigated by the productivity gains resulting from the reduction in fatigue, etc. It is from Collective Bargaining by H. D. Marshall and N. J. Marshall (1971):
Two points need to be made with respect to future gains in productivity resulting from a shortening of hours. First the truer the statement is, the less valid is the union argument that a reduction in hours serves as a solution to the problem of unemployment. The original "lump of work" argument was that if each worker did less work, there would be more work available for others. However, if the reduction in hours induces the worker to produce nearly as much (or even possibly more) than he did on a longer time schedule, the increased availability of work for others will be at least partially lost. Union leaders have often presented these arguments side by side without realizing that they are inherently contradictory.
Subtle. The truer the statement about productivity is, the less valid is the supposed lump of work argument as a solution to unemployment. What the authors overlook, though, is that "future gains in productivity" are -- no less than the introduction of new machinery -- "new modes of economy" and thus may be expected as a rule to eventually widen the sphere of employment. (Unless, of course, the amount of work to be done is fixed.)

The Marshalls' second point was that "it is at least possible that further reductions in the work week below forty hours may not have as stimulating an effect on productivity as previous reductions seem to have had." O.K. Outcomes in the future may be different from those in the past. That sounds reasonable. But shouldn't the same reservation apply then to other new modes of economy -- such as the introduction of new machinery?

The principle of economy has to apply in the same way and to the same extent whether productivity gains result from new machinery or shorter hours. If productivity gains from new machinery create more demand for labor, then productivity gains from shorter hours create more demand for labor. If future results for shorter hours may be different from past results, then future results for new machinery may be different from past results. Applying different standards to the two modes of economy is "bargaining in bad faith."

How many times would you suppose fallacy claimants have responded to the rebuttals from Beardsley, Pigou or Dobb? Did you guess a total of zero? Well, here is yet another unanswered rebuttal to the bad faith lump-of-labor fallacy claim: Howard G. Foster, "Unemployment and Shorter Hours." Labor Law Journal, April 1966, pp. 211-225. Foster presented a simple, non-lump model of shorter hours with improved productivity creating more employment. In each of his examples, "the standard workweek was reduced without a rise in unit labor costs." As Foster observed, "This should at least suggest that in principle hours reduction might indeed be an instrument by which to alleviate the unemployment problem and is worth further study." In a future post, I will explicate Foster's model.

Wednesday, February 18, 2015

The Utility of Utility (about the methodology of economics)

For those who think that economics is, above all, a method and not a subject matter, the centerpiece of the whole enterprise is utility.  In the canonical set of models, individuals act to maximize their utility, and the purpose of economics is to identify the two-way relationship between factors that impinge on this choice procedure and the choices themselves.  The external environment (institutions, policies, claims on resources, technology, preferences of other agents), combine with the decision-maker’s own preferences to generate a choice, and the choices of all the relevant agents cumulatively alter their shared environment.  This is the program for all standard microeconomics and for microfounded macro.  One convenient feature is that, if you use this approach, the same analysis that provides your positive explanations and predictions does double duty as a normative tool: maximizing utility is why people do things and also the goal to be sought after.

A variant has appeared in the form of behavioral economics.  In this approach, people are ascribed decision rules that vary from utility maximization—some form of “irrationality” due to limited cognitive resources, convenient heuristics, etc.  The predictions cranked out by such models differ from those you get from utility maximization, and the normative task becomes that of devising clever tweaks so that predictably irrational behavior will nevertheless approximate a Pareto superior outcome.

Behavioral economics takes one step away from the utility framework, but remains connected to it.  Utility and its maximization remain the benchmark, and behavioral departures are defined in terms of the U-max requirements that are dropped or altered.  If you step back, however, this continued fealty to utility is rather strange, since utility does not play either a positive or normative role in any school of thought within psychology, which is presumably the academic discipline that tells us most of what we know about human behavior.

In formal terms, this is a problem of external consistency.  Internal consistency is about whether the elements in a model are consistent with one another; you can test this with algebra.  External consistency is about whether these elements are consistent with what is already known by those who work in other domains with other models.  If you devise a heat pump based on a set of assumptions about how its components work, and one of these assumptions violates the Second Law of Thermodynamics, your design might be internally consistent but fail the external consistency test.  That’s the state of economics today: it uses models which, if you accept their maintained assumptions, are internally consistent, but the assumptions are inconsistent with what research outside the discipline has demonstrated.  Or to put it more crudely, if economics is right, psychology is wrong.  Who are you going to believe if the question is about human behavior?

I know what some of you are thinking: this is absurd because economists have accumulated mountains of evidence consistent with utility and utility maximization.  And it’s true.  The problem here is “is consistent with”: the evidence we have for economic behavior is generally consistent with a wide range of assumptions, one of which is utility maximization.  If the price of something goes up people buy less of it.  You could get that outcome from U-max but also from a number of other psychological mechanisms.  When the predictions of U-max come into conflict with what other, more plausible mechanisms tell us, U-max generally performs worse.  That’s why psychologists don’t push U-max as a preferred theory of how people think and act.

That said, there is a valid use for utility, as a heuristic element in thought experiments.  Take game theory, for instance.  The analysis of strategic choice can get very complicated, and it’s helpful to construct models in which players attempt to maximize something we call utility; this helps us figure out the logical processes at work.  That does not mean, however, that we should assume that real human beings in the real world are crunching out expected utility values of their choices, much less that the normative value of a game’s outcome can be assessed on the basis of how much utility participants are getting.  A heuristic device is not a theoretical proposition; it’s just an aid to thought.

The confusion between heuristics and theory runs deep in economics, I’m afraid.  It’s difficult to find an article with even a smidgen of theoretical content that doesn't treat utility as if it were an actual psychic quantity whose pursuit motivates actual human decision-making.  This is as much a problem on the micro side as the macro, and it’s hard to imagine how this can change any time soon.  My only piece of advice is to stop thinking of economics as a normative enterprise at all, since nothing in their training prepares economists to have a special insight into what makes people better or worse off.  Wealthier, yes; better off, no.  If you can do that, you will at least abandon one of the main purposes behind unreflected utility-speak.

Tuesday, February 17, 2015

Who knew? People oppose austerity -- because the lump of labour fallacy!

ht
"The basic story put forward to justify austerity is that a reduction in debt will generate an economic turnaround, but why have people rejected this narrative? Some economists would say that people have rejected it simply because it is wrong, but the problem is more protracted than this." -- Achim Kemmerling
Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.
Yes, a disclaimer is probably a good idea. Especially when you are publishing nonsense that has been thoroughly discredited. In short, the lump of labour is NOT an idea that some people have; it is an idea that some people ATTRIBUTE to other people. It is a projection. The fallacy is in the head of the beholder.
Tom Walker
Review of Social Economy, 2007, vol. 65, issue 3, pages 279-291

Abstract: The lump-of-labor fallacy has been called one of the “best known fallacies in economics.” It is widely cited in disparagement of policies for reducing the standard hours of work, yet the authenticity of the fallacy claim is questionable, and explanations of it are inconsistent and contradictory. This article discusses recent occurrences of the fallacy claim and investigates anomalies in the claim and its history. S.J. Chapman's coherent and formerly highly regarded theory of the hours of labor is reviewed, and it is shown how that theory could lend credence to the job-creating potentiality of shorter working time policies. It concludes that substituting a dubious fallacy claim for an authentic economic theory may have obstructed fruitful dialogue about working time and the appropriate policies for regulating it.

Most Public Intellectuals Today Aren't Literati: Is That a Problem?

I finally got around to reading the very long, very thin screed, “What’s Wrong with Public Intellectuals?” by Mark Greif, printed in last Friday's Chronicle of Higher Education.  Greif longs for the golden age when elegant writing and clever thinking emanated from the pages of the Partisan Review.  He tried to put the magic back in the can with n+1, but couldn’t find the authors he was seeking among the engagé professoriat.

Well, I’m sorry that I have to be the one to say this, but times have changed.  Back in the 1940s, if you were an intellectual drawn to political and social critique, you were a novelist, a poet or a critic.  The social sciences were still getting on their feet, and the few people who could bridge the worlds of economics/sociology/political science/etc. and politics were also writers and critics—J. K. Galbraith (novelist), David Riesman and the like.  A literary epoch.

Today there are scads of public intellectuals using their social science chops to tackle the big themes of politics and culture.  By and large, they are not literary stylists.  They are active researchers, typically using abstruse methods to shed light on large or murky data sets.  Their professional writing is incomprehensible to those without grounding in the relevant academic literatures.  To reach a more general audience they are forced to commit the very sin that Greif excoriates, dumbing down.

My problem is that my world has too many public intellectuals.  I can spend all day reading fascinating blog posts by economists and other social scientists and postpone forever doing my own work.  This writing does not have the literary flair (usually) that the finest writers are able to display, but the ideas are far more precise and engaged with empiricism than anything you will find in the archives of Partisan Review.  You can learn more from a good day in the social science blogosphere than a year of reading Dwight Macdonald, and I actually like Dwight Macdonald.

Being a superior writer is no longer a sufficient basis for expertise in culture and politics.