Fawcett: "The Regulation of the Hours of Labour by the State" (abridged) IV

by the Sandwichman

One last note on Fawcett's 1872 lecture. Can an economist talk about the hours of work without invoking the specter of 'fallacy'? Apparently not. Fawcett's charge of fallacy, however, is not the classic lump-of-labor version:

It is, however, probable that motives very different from these actuate many who most earnestly appeal to the State to impose a legal limit upon the day's work. This particular movement may be, to a great extent, regarded as a revival of the old fallacy that the wages of labour can be regulated by law.

Signs are not wanting to show that the opinion widely prevails, although it is rarely distinctly avowed, that if a law were passed reducing the day's work from ten hours to nine hours, as much would ultimately be paid for nine as for ten hours' labour. If, however, this should prove to be the case, then it would appear that the State has the power to regulate the remuneration of labour; it would consequently follow that wages depend upon legal enactments, and are not regulated by the recognised principles of economic science.

I shall not attempt [don't you love those pseudo-disavowals that introduce the mention of something with the phrase, "not to mention..."] to argue the case by referring to such well-known facts as that Parliament for centuries tried to control the wages of labour, and that all the numberless statutes that were passed to effect this object signally failed. Neither shall I refer to the general principles of political economy to establish the conclusion that the wages of labour cannot be controlled by the State. Such reasoning would not, in any way, affect the opinions of those who are most strongly in favour of the hours of labour being regulated by the State. According to their views the interposition of the State in this matter involves very different consequences, and is to be defended by very different arguments from any attempt which may be made to fix the rate of wages by Act of Parliament.

In case you're wondering, Fawcett's argument proceeds from the above to the case argued in installment II of this series: namely, that if the hours of work were indeed too long then employers would in every instance be compelled to yield to demands from the workers to shorten them (in spite of the unprecedented nature of the workers' triumph at Newcastle). The mind reels.

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And It Ain't Shinola...

by the Sandwichman

Wherein the Sandwichman documents the appalling intellectual vacuity of Lee E. Ohanian's "What -- or Who -- Started the Great Depression?" so the referees at the Journal of Economic Theory don't have to. Not that they would anyway.

First, let's cut to the chase. Ohanian summarizes his operative theory on pages 48 and 49. I will quote the section in full at the bottom of this post. For now, the two key sentences are "Any monetary explanation of the Depression requires a theory of a very large and very protracted monetary non-neutrality.... The non-neutrality is quantitatively large in the Hoover economy because Hoover's wage maintenance and work-sharing program reduces steady state hours and capital stocks [emphasis added]."

So what is the mechanism by which Hoover's program reduced capital stocks? For the answer to that, we take you back to pages 28-29 to an explanatory footnote about Ohanian's specified model. Again, I will present the full footnote at the bottom, but the key phrases are: "Capital input in this model is variable, and is equal to the capital stock scaled by the length of the workweek, or hours per worker." and "This treatment is also reasonable because there is evidence that worksharing that reduces the number of days an employee works, even keeping the length of the workweek fixed, also reduces output per hour."

The evidence Ohanian refers to is a 2001 article by Lanoie, Raymond and Shearer (hereafter Lanoie), "Work sharing and productivity: Evidence from firm level data." It is fair to point out that Lanoie is the only article in the paper's reference list dealing with the productivity effects of work-sharing. The article in question deals with a single, year-long "experiment" at a Canadian telecommunications firm in the early 1990s.

On first impression, the relevance to Hoover and the Great Depression of this single 1990s example may seem remote. But on closer inspection, it becomes laughable. The program was not simply a work-sharing arrangement. It was also a change in schedule to a nine-hour day precipitously imposed by management. Furthermore, the productivity impacts were found to be task specific. To generalize from this particular example to work sharing during the Hoover administration strains credulity, let alone plausibility. But here, in the authors' own words, are the peculiarities of the Canadian experiment that would be enough to disqualify it as in any way typical or representative of the Hoover-era experience:

These results suggest that the impact of work sharing on productivity is 'task specific' and that longer operations (both types of installations), for which the coordination cost is likely to be higher, are broadly more affected. As discussed earlier, another possible contributing factor to the decrease in productivity is the change in the work schedule that was introduced along with the work sharing programme. Namely that workers changed from working 8 hours a day for 5 days a week to working 9 hours a day for 4 days a week. It is possible that the extra hour tacked on to the end of the day was much less productive than the hours worked on the fifth day of the week. Unfortunately, without information on daily production, the data set does not permit identification of such effects. Certain officials also mentioned that managers were not well prepared to operate in this work sharing environment (the whole operation was implemented with a very short notice), and that coordination problems occurred not only between technicians, but also between technicians and dispatchers. One further possibility is that worker morale may have been negatively affected by the work sharing programme. Given that technicians were not given a choice of whether or not to participate in the programme whereas other types of workers were, technicians may have felt they were being unfairly treated (Akerlof, 1982). The fact that absenteeism increased following the introduction of the programme lends support to this interpretation.

To reiterate:

• impact on productivity was task specific;
  
• change in the work schedule was introduced along with work sharing; from 8 hours a day for 5 days a week to 9 hours a day for 4 days a week;
  
• managers were not well prepared to operate in this work sharing environment (the whole operation was implemented with a very short notice;
  
• technicians were not given a choice to participate (other employees were); morale may have been negatively affected.

What is absent from Lee Ohanian's article is any explanation of why he thinks the above 'evidence' is remotely relevant to his Great Depression theory. What does this say about the peer review process at the Journal of Economic Theory? Perhaps they should take a lesson from Navin Johnson's father:



Summary of Ohanian's theory, pages 48-49:

Any monetary explanation of the Depression requires a theory of a very large and very protracted monetary non-neutrality. Such a theory has been elusive because the Depression is so much larger than any other downturn, and because explaining the persistence of such a large non-neutrality requires in turn a theory for why the normal economic forces that ultimately undo monetary non-neutrality were grossly absent in this episode. That is, if the Depression is largely the result of monetary forces, then the size and the duration of the monetary non-neutrality were remarkably well outside estimates from any other period.

This paper provides such a theory for a large and protracted monetary non-neutrality. The non-neutrality is quantitatively large in the Hoover economy because Hoover's wage maintenance and work-sharing program reduces steady state hours and capital stocks. The non-neutrality persists in this model because it is a transition from a non-distorted steady state to the Hoover distorted steady state.

Footnote, page 28-29:

Capital input in this model is variable, and is equal to the capital stock scaled by the length of the workweek, or hours per worker. In the model, utilization falls in manufacturing, which is consistent with actual manufacturing utilization during the Depression. It is worth pointing out two issues about tieing [sic] the decline in utilization to hours per worker. One is that some of the decline in utilization was due to plant closings, rather than a shorter workweek across all plants. Another is that some worksharing was such that workers were employed for fewer days, but the plant could have had the same workweek length. I am unaware of data that can provide any type of detail on these distinctions, however, so I will treat the model as a parsimonious tool for capturing low capital input during the Depression, as it will allow the model to be consistent with actual manufacturing output per hour. This treatment is also reasonable because there is evidence that worksharing that reduces the number of days an employee works, even keeping the length of the workweek fixed, also reduces output per hour (see Lanoie, Raymond, and Shearer).

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Letter to a Portuguese Journalist

I was just asked some questions by a Portuguese journalist. Here is my response:

click here: (.pdf) or here: letter-to-a-journalist

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Fawcett: "The Regulation of the Hours of Labour by the State" (abridged) III

by the Sandwichman

Henry Fawcett concluded his lecture with an apparently heartfelt panegyric on the humanitarian benefits of shorter hours and the defects of excessive hours.

In making these remarks I should much regret if it were thought that I did not most entirely sympathize with those who desire to see a great diminution in the excessive toil of so many of our workmen. There is nothing perhaps more to be regretted than the fact that extraordinary commercial prosperity and an unprecedented accumulation of wealth have hitherto done so little to shorten the workmen's hours of labour.

As previously remarked, the undue length of time which men have been accustomed to work represents, so far as many branches of industry are concerned, a thoroughly mistaken policy. In many instances it is undeniable that men would not only get through more work, but would do it more efficiently, if they had more opportunity for mental cultivation and for healthful recreation.

No small part of the intemperance which is laid to the charge of our labourers is directly to be traced to excessive toil. When strength becomes exhausted, and the body is over fatigued, there often arises an almost uncontrollable desire to resort to stimulants. Again, it is unreasonable to expect that the moral qualities in man's nature can be duly developed, if life is passed in one unvarying round of monotonous work.

We are constantly being reminded of the ennobling and elevating influence produced by contemplating the beauties of nature, by reflecting on the marvels which science unfolds, and by studying the triumphs of art and literature. Yet no inconsiderable portion of the toiling masses are reared in such ignorance, and surrounded from early childhood to old age by so much squalor and misery, that life could be to them scarcely more dreary or depressing, if there were no literature, no science, and no art, and if nature had no beauties to unfold.

At a meeting recently held at Newcastle by some of the prominent advocates of the nine hours' movement, artisans were encouraged to look forward to a time when the condition of labourers generally throughout the country would be so much improved that they would have time for mental cultivation and various kinds of recreation; a hope was even expressed that the day might come when they and their families would be able to enjoy an annual holiday, gaining health and vigour either from the sea breeze or the mountain air. It is, however, particularly to be remarked, that those who shadowed forth these bright anticipations showed no tendency whatever to seek State intervention.

The leaders of the nine hours' movement at Newcastle, having won a great triumph, have just confidence in their own powers; they truly feel that what they have done might also be done by others, and they therefore object to the demands for State interference, which are constantly being put forward by the members of the International, and by many other workmen.

The speeches, to which I have just referred, were delivered at a meeting of the members of a co-operative engineering company. This society had grown out of the nine hours' dispute. The leaders of the movement, having once learnt the invaluable lesson of self-help, had the practical wisdom to see that the best way to emancipate themselves from what the International calls the tyranny of capital is not to indulge in idle declamation, nor to embark in schemes which are either impracticable or mischievous. They, on the contrary, came to the conclusion that if they wished to render themselves independent of capitalists they might do so by supplying the capital which their own industry requires. They have had little difficulty in gathering together a sufficient amount of money to commence business on their own account.

There is no reason why an establishment thus founded should not gain as great a commercial success as that which has been achieved by any private firm. Even if it should fail, there would be no grounds to feel discouraged. The experience which is obtained from failure often enables the road to be discovered which leads to future success. But whatever may be the fate of this particular experiment, there will still be good ground for the belief that the spirit of self-reliance displayed by these Newcastle workmen will not only do much to improve the lot of the labourer, but will act more powerfully than any other agency to promote the general well being of the whole community.

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We didn't know that Panama was bombed in 1989

This week I read for the first time that the US military (under the leadership of Colin Powell) invaded Panama on 20th December 1989. My partner was also not aware of this catastrophe. In fact, I would be surprised if any Australians in my local community know about this.

According to Webster G. Tarpley & Anton Chaitkin [1] 5,000 Panamanian civilians lost their lives, 10,000 were incarcerated in concentration camps and the cost to the Panamanian economy was then estimated to be $7 billion. Why the invasion? See below.

AN INVASION TIMELINE

1986-1987 - Noriega (President of Pamana) cooperated with US law enforcement officials in a number of highly effective anti-drug operations.

1987 – June. One month after a US glowing tribute had been written praising Noriega for his anti-drug efforts the US government declared war against Panama, initiating a campaign to destabilize Noriega on the pretexts of lack of democracy and corruption.

1987 – August 10th. "The political crisis follows closely what bankers here saw as a serious breach of bank secrecy regulations. Earlier in 1987, as part of an American campaign against the laundering of drug money, the Panamanian government froze a few suspect accounts here in a manner that bankers and lawyers regarded as arbitrary." These were precisely the actions lauded by Lawn. Had Noriega shut down operations sanctioned by the US intelligence community, or confiscated assets of the New York banks?

1988 – February: Noriega was indicted on US drugs charges, despite a lack of evidence and an even more compelling lack of jurisdiction.

1988 – March 2nd. Economic sanctions, an embargo on trade and other economic warfare measures invoked by the US against Panama.

1989 – April 6th. Bush formally declared that the government of Panama represented an "unusual and extraordinary threat" to US national security and foreign policy. He invoked the National Emergencies Act and the International Emergency Act to declare a state of "national emergency" in this country to meet the menace allegedly posed by the nationalists of little Panama.

1989 – May 1st. The issue of US News and World Report revealed that Bush had authorized the expenditure of $10 million in CIA funds for operations against the Panamanian government. These funds were obviously to be employed to influence the Panamanian elections, which were scheduled for early May.

1989 – May 7th. The US-supported ‘Civic Democratic Alliance’ purchased votes, bribed the election officials, and physically absconded with the official vote tally. The Pananmanian Govt annulled the election.
US forces in Panama began a systematic campaign of military provocations which continued all the way to the December 20 invasion (Operation Blue Spoon)

1989 – Mid December. The US had 24,000 troops in Panama arrayed against 16,000 of the Panamanian Defence Forces of whom only 3,500 were organised and equipped for military combat.

1989 – December 15th. The National Assembly of Panama passed a resolution to take note of the state of affairs that had been forced upon Panama by Bush. It was designed to permit the assumption of emergency powers by the Panamanian Government to meet the crisis. "The Republic of Panama," the statement read, "has for the last two years suffered a cruel and constant harassment by the US government, whose president has made use of the powers of war...to try to subject the will of Panamanians....The Republic of Panama is living under a genuine state of war, under the permanent hounding of the US government, whose soldiers not only daily violate the integrity of the Torrijos-Carter treaties... but trample our sovereign rights in open, arrogant, and shameless violation of the pacts and norms of international law....Therefore be it resolved that the Republic of Panama be declared in a state of war, for as long as the aggression unleashed against the Panamanian people by the US government continues." [43]

Bush Sr takes a leaf out of Hitler’s book copying the tactics Hitler employed to justify the invasion of Poland.
Black and mestizos make up the vast majority of the population of Panama. There would be only one non-white in the new endara cabinet.

Mad Max Thurman sent in the new Stealth and A-7 fighter-bombers, and AC-13 gun ships. El Chorillo was virtually razed along with the working-class district of San Miguelito and large parts of the city of Colon. The Institute of Seismology counted 417 bomb bursts in Panama City alone during the first 14 hours of the US invasion. Retaliatory fire by the Panamanians was to be answered by overwhelming US firepower without regard to the number of civilian casualties. Many civilian dead were secretly buried in unmarked mass graves at night time by US forces. Many other bodies were burned in the bombing holocausts. US official figures of Panamanian dead was 200. Other sources indicated 5,000 civilian victims.

10,000 incarcerated in concentration camps. Many political prisoners were held for months without being charged with any specific offense, a clear violation of habeas corpus.

Cost to the Panamanian economy of the bombings, invasion, and economic warfare: $7 billion. Severe poverty was the lot of most of the population. 15,000 were left homeless. Several thousand public servants purged by the Endara government. Endara and members of his Government involved in drug pushing and money laundering.

[1] George Bush: The Unauthorized Biography
by Webster G. Tarpley & Anton Chaitkin
Chapter -XXIII- The End of History
http://killtown.911review.org/bushbio/chapter23.html

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Ohanian the Onanian

by the Sandwichman

Brad DeLong takes the exact wrong tack by quibbling with Professor Lee E. Ohanian (Hoover's pro-labor stance helped cause Great Depression, UCLA economist says) instead of simply reading his silly paper and noting the cherry-picked piles of dog shit posing therein as empirical evidence.

It says in the news release, "...the latest UCLA study uses modern economic tools to quantify the impact of the president's wage freeze and job-sharing policies..."

Do modern economic tools include generalizing from a single Canadian firm in the 1990s that went from a five 8-hour days to four 9-hour day compressed work week? "...there is evidence that worksharing that reduces the number of days an employee works, even keeping the length of the workweek also reduces output per hour..." Yup. Never mind that there are piles of historical evidence (and actual economic theory!) suggesting otherwise. What was that about a swallow and a summer?

To evaluate the quantitative impact of Hoover's program, I calculate the equilibrium of a model economy with firms paying the observed real wage in the industrial sector and following the observed workweek. I find that Hoover's program substantially depressed the economy, reducing aggregate output and hours worked by about 20 percent.

Ohanian compares his latest general equilibrium fantasy with a benchmark model from an earlier study in which (lo and behold) he and Harold Cole found, "that wage shocks and banking shocks account for a small fraction of the Great Depression..."

To shed further light on the permanent impact of the policy on the economy, I compare these findings to those of Cole and Ohanian, Table 9, who studied the impact of the same real manufacturing wage sequence in a similar economy, but assuming that the wage distortion was transitory, rather than permanent, and with no workweek restriction.

Got that? Professor Ohanian compared estimations from one general equilibrium model, that relied on a sweeping generalization from a single 1990s Canadian firm with estimations from another general equilibrium model that had been used to find that wage shocks accounted for only a small fraction of the Great Depression to find that Hoover's pro-labor policies accounted for TWO-THIRDS of the economic decline after the stock market crash 1929. I didn't think so.

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My own prediction of the depression

In light of the discussion about who predicted the Depression, I thought that I would post the first chapter of The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression

http://michaelperelman.wordpress.com/2009/08/29/confiscation-of-american-prosperity-chapter-1/

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Fawcett: "The Regulation of the Hours of Labour by the State" (abridged) II

by the Sandwichman

In the previous installment, Henry Fawcett chronicled the signal triumph of the 1871 Newcastle Engineers bitter 14-week long strike for a 9-hour day and remarked upon the unprecedented nature of that victory: "The artisans in no previous dispute between Capital and Labour have ever obtained so signal a triumph."

In addressing the productivity argument, though, Fawcett takes another tack, proclaiming: "...the masters would, in every instance, be compelled to yield..."

The following may be considered a correct description of the opinions which are widely held on this subject. It is maintained that in many employments the day's work is a great deal too long, the strain upon the constitution is too severe, and physical strength is so much exhausted that a man is unable to labour hard during the whole time he is at work. It is therefore urged that if the day's labour were shortened, as much or even more work would be done in the shorter as in the longer period; employers would, consequently, be able to pay at least as much for a day's work after its length had been thus shortened.

Many facts can, no doubt, be adduced in support of this opinion. It can be scarcely denied that in some employments the hours of labour are habitually too long. Some very striking examples can be quoted to show that the shortening of the hours of labour confers a most important advantage both upon employers and employed. More work is done in less time, and the greater productiveness which is thus given to labour enables not only the wages of the workmen, but also the profits of the employer, to be increased.

Amongst many remarkable examples of the truth of this statement, it will be sufficient to refer to one case which is mentioned by Mr Macdonnell, in his "Survey of Political Economy." He states, on the authority of M. Chevalier, that a manufacturer employing 4000 hands reduced his spinners' time one half-hour per day, and that this reduction, contrary to all expectation, was accompanied by an increase in production of one-twenty-fourth. An admission that this fact is typical of what would generally take place if the hours of labour were shortened, would undoubtedly afford a powerful inducement and a strong justification to the workmen to extend throughout the country the movement which was commenced at Newcastle.

Such an admission, however, does not, to my mind, supply any argument in favour of a resort being had to State intervention. It has been proved that the workmen can succeed when they have as good a case to urge as they had at Newcastle; and the masters would, in every instance, be compelled to yield, even were it not their interest to do so, when facts can be adduced to warrant the conclusion that the hours of labour prevalent in any particular trade are too long to secure the maximum of industrial efficiency.

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Did Heterodox Economists Do Better At "Calling It" Than Mainstream Ones?

In a posting and comments yesterday, Mark Thoma at economists view argued that heterodox economists did not do a better job of "calling" the recent crashes and crises than did mainstream or conventional economists. Of course, part of the issue here involves both who one counts as "calling it," and also how one labels economists. In the comments, a list provided by Steve Keen of 11 who "called it," was invoked, with Thoma, at least, claiming that it did not show any preponderance of the heterodox. The list is as follows:

Dean Baker,US
Wynne Godley, UK
Fred Harrison, UK
Michael Hudson, US
Eric Janszen, US
Stephen Keen, Australia
Jakob Brochner Madsen and Jens Kjaer Sorenson, Denmark
Kurt Richebacher, US
Nouriel Roubini, US
Peter Schiff, US
Robert Shiller, US.

Keen categorizes these as follows in a private communication with me: 5 as Post Keynesian (Baker, Godley, Hudson, Keen, Sorenson), 2 as Austrian (Richebacher, Schiff), 2 as "from neoclassical backgrounds," but "mavericks" (Roubini, Shiller), one sort of a combination of Austrian and Post Keynesian (Janszen), and one unclear (Harrison). This looks about right to me to the extent I know about these people, although I note that Thoma claims that Baker is not "heterodox." I have not asked Dean, and he may not wish to comment, although he was once-upon-a-time a co-blogger on the predecessor to this blog, maxspeak, prior to starting his own punchy blog, Beat the Press. About four of these people I know nothing about.

I also note that there are quite a few others who can make the claim of having "called it" (I like to include myself in that gang, at least to some degree), and I also know that some of those are conventional, more or less, such as Andrew Lo of MIT, although he is now pushing a non-conventional theory about evolutionary financial dynamics. In any case, I think that the heterodox have the edge here, even if it is not clear what constitutes being in that category.

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Fawcett: "The Regulation of the Hours of Labour by the State" (abridged) I

by the Sandwichman

The 1958 article by Mark Blaug on "The Classical Economists and the Factory Acts" brought Henry Fawcett's fascinating (and contradictory) 1872 analysis of "The Regulation of the Hours of Labour by the State" to the Sandwichman's attention. Fawcett makes some compelling arguments against state intervention in setting of hours but in the course of doing so appears to strongly uphold collective action by trade unions and the argument that long hours of work are injurious both to productivity and to the well being of the workers.

Nevertheless, Fawcett's apparent enthusiasm for collective self-reliance is marred by a glaring contradiction. In the selection presented below, Fawcett introduces the topic by remarking on the unprecedented nature of the worker's victory in Newcastle. In a latter selection, dealing with productivity, Fawcett claims the (unprecedented) Newcastle victory proves the inevitability of success for workers' struggles to reduce the hours of work. The Sandwichman has amended the paragraphing of these selections and omitted long sections presenting commercial and libertarian objections to state regulation.

"The artisans in no previous dispute between Capital and Labour have ever obtained so signal a triumph."

Early in August, 1871, the engineers of Newcastle formally put forward the demand that a day's work should consist of nine hours. The masters refused to yield. The workmen thereupon carried out their threat to desist from work; and a general strike ensued. Although efforts at conciliation were repeatedly made, the dispute continued to rage fiercely for many weeks. Various persons offered themselves as mediators, in the hope of suggesting some compromise. But compromise after compromise was unceremoniously rejected by the masters.

Many circumstances combined to arouse strong and angry feelings. At the outset a bitter personal enmity had been excited by the workmen being told that the masters would not hold interviews with them, but that they must have their views represented by some legal adviser.

Still more angry passions were aroused when the manufacturers attempted to replace the labour of which they had been deprived, by the importation of foreign workmen. Agents were despatched to Belgium, Germany, and other places to engage at remunerative wages artisans who had been accustomed to engineering work. The English workmen on their side put forth equally strenuous efforts to check this importation of labour. Strong appeals based on international principles were addressed to the continental workmen; they were entreated to be loyal to the cause of labour, and they were told that the employed would be always vanquished unless the labourers of different countries were not only ready to unite, but were also prepared to make some sacrifices for the common cause.

In spite, however, of all these efforts the manufacturers obtained a considerable number of continental workmen. After their arrival, however, not a single moment was lost in bringing every possible kind of pressure to bear upon them to induce them to return. Occasionally the pressure assumed the form of threats of violence to any who might continue to work. Such threats, however, were exceptional; it was generally found that after the exact position of affairs had been explained to these foreign workmen, there was little difficulty in inducing them to return to their own countries if they were provided with the requisite funds. The funds required for this purpose were promptly procured by subscriptions raised among the artisans in every important centre of English industry.

In consequence of these exertions the manufacturers gradually became convinced that it was hopeless for them to expect to keep their works open by substituting foreign for English labour. The alternative therefore which was presented to them was either to suspend business or to grant the demands of those whom they employed.

The adoption of the former course involved many formidable difficulties. It has been often remarked that workmen in the disputes which they have had with their employers have very generally shown themselves to be extremely bad tacticians. They have generally struck work in order to resist a decline in wages consequent upon dull trade. But when trade is dull the victory of the employer is almost insured, for at such a period it costs him little in fact, it is often a positive advantage to him temporarily to suspend his business.

But, whether from accident or design, the Newcastle workmen commenced the Nine Hours' Movement at the very time above all others when they were most likely to obtain success. The engineering trade was in a state of unprecedented activity and prosperity; unusually large profits were being realised, and the order book of every manufacturer was filled with lucrative contracts. Victory therefore was virtually ensured to the employed when they deprived the employer of an adequate supply of labour; for he had the strongest possible inducement not to curtail, much less to suspend his business at a time when it was exceptionally profitable, and when the non-fulfilment of extensive contracts would render him liable to extremely onerous fines. After a struggle which was prolonged for fourteen weeks, the masters were compelled to succumb; and the demands put forward by the workmen were fully conceded to them.

No sooner was the Nine Hours' Movement successful in the engineering trade at Newcastle, than similar demands were immediately put forward by workmen engaged in a great variety of trades in different parts of the country. The battle having been once fairly fought out, employers very generally adopted the wise and prudent conclusion that it was far better not to renew the contest. It has therefore come to pass that in a few weeks, throughout no inconsiderable portion of the industry of the country, the principle has obtained practical recognition that nine hours is to be considered a day's work.

I have thought it important to give this description of the Nine Hours' Movement in order to show that in the course of a few weeks the workmen, entirely relying on their own efforts, and without any resort to State intervention, have secured a valuable concession for themselves, and have introduced a most important social and economic reform. Having thus seen what has been done without resorting to the State, let us proceed to inquire whether the workmen would have secured that which they desired more promptly and more efficiently if, instead of relying on their own efforts and their own powers of organization, they had rested their hopes on State intervention. If the latter course had been adopted, I think there will be little difficulty in showing that the shortening of the hours of labour might be either indefinitely postponed or might be so prematurely and inconsiderately introduced that confusion would be created and more evil than good would result.

If the workmen throughout the country should unite they would at once secure a predominance of power in the legislature. Let it be supposed that having gained this predominance they should at once pass a law applying the Nine Hours' principle to every employment throughout the country. As explained in a previous essay, such legislative interference constitutes a part of the programme of the International; and as there is reason to believe that many who are generally opposed to the doctrines of Socialism would support such a demand, the subject is evidently one of great practical importance at the present time.

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Beyond the f-word: Black on Black

by the Sandwichman

Hugo Black was Senator from Alabama from 1927 to 1937 and a Supreme Court Justice from 1937 to 1971. The Black Thirty-Hour Bill was passed by the US Senate, 53-30 on April 6, 1933 (a 1934 version of the bill). According to Hunnicutt, passage of the Black Bill gave the impetus to the Roosevelt administration to develop and implement a recovery program.

The Shorter Work Week and Work Day

By Hugo L. Black

THE desire on the part of the people to adjust the work day and the work week to the needs and demands of the time is in accord with social justice and economic necessity. It is an effort to stimulate human genius to nobler inventive activities; to raise the output of civilization’s vast productive machinery; to supply mankind with more of the comforts Nature has provided for his happiness; to give to labor a fairer return for the expenditure of energy; to provide jobs for all; and to afford opportunities for rest and recreation for all, instead of long hours for some with enforced idleness and misery for others. Those who advocate a shorter work day and work week abhor the 'economy of scarcity' that must inevitably result from long hours and low wages.

Long work hours and low wages, under our complex system of exchange and commerce, do not justify the often asserted, but wholly superficial, excuse that production is thereby increased. Our economic history should now prove to the most hidebound worshiper of inordinate profits and the most subservient student of economic dogmas, that long hours and low wages ultimately lower the level of production, retard the improvement and expansion of the tools and machinery of output, close factories, cause the abandonment of mines, paralyze business, and bring about destitution and human suffering among helpless millions of people.

The so-called boom and prosperity period of the nineteen-twenties was a time when the philosophy of long hours and low 'real' wages was given ample opportunity to bring forth its fruits. Men and women worked ten, fifteen, and even sixteen hours per day. While figures and money payments have been juggled in such manner as to mislead many to believe that wages were high, the cold statistics of that period, gathered by impartial agencies, show that labor received a smaller and smaller proportion of its own products, and that a greater and greater part went to profits and property. The cumulative effects of this unbalancing and unjust distribution of income resulted in decreased ability of the workers to buy. Our economic system produces only to sell. Whatever is the cause of inability of potential customers to buy is likewise the cause of the inability of producers and merchants to sell; of the consequent failure to produce; and of the resulting collapse of employment and business in general.

But, someone says, did not wages go up in the nineteen-twenties? On the contrary, the real wages of industrial workers and wages of farmers (measuring farmers’ wages by farm prices) both descended, in proportion to goods and services produced, and in relation to income flowing to profits and property.

Loss Through Inadequate Incomes

This increase in large incomes and decrease in small incomes by 1929 tells us why savings increased and over-expansion occurred. Theoretically, there was no overexpansion in many industries, because people actually needed the products. Practically, however, there was overexpansion because the output could not be sold. Year by year, the system of distribution of incomes had reduced the chief purchasers in ability to buy, and had increased the proportion of those whose personal wants were already satisfied, and who were therefore unable to buy more, and were compelled to invest.

Since business could not sell at its price, it reduced production, thus intensifying an 'economy of scarcity.' Ten million workers and then fifteen million workers lost all income. Probably fifteen million more worked part-time with reduced income. Production shot down, and the greatest waste in human history began its assault upon American life. It has been estimated that, expressed in dollars, this country has lost since 1929, two hundred to four hundred billion dollars’ worth of production of useful goods and services as a result of idle machinery, plants, lands, equipment, and men. This was not because of shortened hours. It followed long hours and unfair real wages. The loss in actual goods and services is infinitesimal in comparison with the injury to the health and the moral and physical stamina of the millions of harassed and jobless men and women. No money price would be too great to pay in order to remove this blighting disease that threatens our civilization. Already, however, we find a growing group insisting that we accept unemployment as inevitable and get out with the least possible money by adopting the most niggardly and character-destroying dole. They are thus willing to threaten the safety of succeeding generations in order to buy peace at the cheapest price for themselves.

Bargaining Power Needed

More than five years ago I said that this nation must choose between a dole and shorter hours of work; that is still my belief. But, unfortunately for America, the champions of the conditions that make the dole a part of our economic life are apparently gaining ground. Private business in America must support the people either through wages or taxes. It can give jobs or doles.

The only chance for labor to receive enough of the income from our national business system to buy the products of that system is through its own bargaining power or through operation of law. A single laborer in our present complex business system, with its constant oversupply of labor, has no bargaining power. He can work for the price offered, or go hungry. Only about 10 per cent of the workers belong to independent labor unions. Some of this 10 per cent have succeeded in obtaining reasonably fair working conditions and wages. It is a long step, however, to unions with sufficient numerical strength to obtain incomes sufficient to balance purchasing power with production.

A work week and a work day short enough to create an actual scarcity of labor, thereby causing employers once again to bid for labor, would be a wholesome economic tonic for America. Our greatest progress has been made when workers could actually bargain with their employers. Our industry expanded by leaps and bounds when men who were not given a decent wage could go to the unopened farms of the frontier.

It is nothing short of absurd to assert that a thirty-hour week would reduce production in America. As a matter of fact, it would greatly increase production. Every realistic observer of economics and business knows that production responds to effective demand. Desire may be created by skillful advertising, or it may result from an inherent need; but if this desire actually stimulates an increased production, it must be backed up by an ability to buy. The same system that produces and sells must supply the means to buy from such production and sales. If private industry should be compelled today to shorten the hours so as to create labor conditions under which employers would be required to bid for workers, every added dollar paid to labor would return to business. In addition, the effective demand of these workers would speed up production, require more efficient operation, and make useful inventions profitable.

Shorter Week Would Increase Production

To one who is familiar with the oscillations of the so-called 'business cycle' over a period of years, as distinguished from its results during any one particular year, the professed fears of 'reduced production' are laughable. Let us consider briefly the effect on the ten-year period from 1880 to 1940. The first five years of that period are history. Suppose the thirty-hour week, or some other week that would have employed the labor and given it bargaining power, had gone into effect January 1, 1880. (There is no magic in any particular number of weekly hours, so long as the result is obtained.) Certainly there has been no time since 1930 when national production would have been diminished by reason of the adoption of such shorter hours. No one would be so foolish as to predict that the next five years will require such a phenomenal production, if old unregulated hours should continue, as to raise the average for the ten-year period above the thirty-hour level.

In fact, national production would have been greater with a thirty-hour week since 1930, because many jobless with no money would have been transformed into workers and purchasers with money able to buy and stimulate production. Nothing but purchasers with means to buy has ever brought about production under our system, and nothing else ever will.

It is not the fear of laws that makes mills idle. It is not the fear of taxes. It is only the knowledge or belief that the output cannot be sold at a profit. There is no actual shortage of factories, mines, mills, or farms in America today, able to produce what can be sold. There is no shortage of capital. There is no shortage of men and women who want and who need the output of our business system. There is, and there has been for a long time, a shortage of purchasing ability possessed by our greatest customers, namely, the men, women, and children of the United States. Give them jobs. When more is produced, give them their part, exactly as they would get the fruits of their own labor if they were producing under the old handicraft system, where they could see, handle, and control the finished output. Do not subject our American workers to the crushing and destroying competition of ten to fifteen million jobless, eager for work and frequently hungry for food. Shorten the hours fairly and uniformly for all business enterprises that compete with each other, thereby supplying work for the jobless. Do this, and the fantastic, if not fictitious, dream that shortening hours will decrease production will go the way of other dogmas invented from age to age to retard opportunity for the many in order to bestow too much on the few.

Adequate Income Necessary

The farmers, the employees, and the small business and professional groups make up the greater proportion of our population. If farmers and workers secure inadequate incomes to buy the products of farm and factory at fair prices, these products cannot be sold. Unfortunately, our foreign trade has dwindled to the point where it is much less than 10 per cent of our total commerce. The fate of the United States worker and the amount of his income play a most important part in determining the price he can pay for the farmers’ products. It is also true that the price the farmer is able to pay for the goods of the mines and factories is determined by his income from his crops. The disaster that occurs to farmers, factories, mines, railroads, and business in general when the just return of farmers and workers is diverted from them into other channels was seen when business collapsed and folded up following 1929. This diversion from the farmer and the worker has proved that excessive capital in industry eventually helps no one, but injures, and sometimes destroys, both those from whom it was taken and those who took it.

I conclude by saying that no one has proved and no one can prove that a thirty-hour week would reduce production. I insist that it would greatly enhance production in any line of business.

In addition to this, it would put millions of jobless to work, taking them out of the deteriorating atmosphere of the idle and restoring them to the desirable status of self-supporting citizens. From 1920 to 1930 the factory workers’ productivity increased 44 per cent. Since 1930 this productivity has increased another 28 per cent. In March 1935 our factory production reached 91 per cent of the 1923-1925 production, but the factory employment of labor was only 82 per cent and the pay rolls only 71 per cent. This 91 per cent of production occurred with more than eleven million workers still out of work. If production had gone to 100 per cent of normal, we would still have had more than nine million unemployed.

Who can say what labor-saving improvements another generation will develop, and who believes that it is necessary for man to do the work that can now be done with the energy of our wood, our coal, our oil, our running streams, our tides, and perhaps sometime with the energy diffused by the rays of the sun? It has been my observation that most of the eulogies and panegyrics written on the glories of hard physical labor were spoken or written by those who either had never done it themselves or who had ceased to bend their backs or strain their muscles at the very first opportunity.

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The Bill and Hold Stimulus

by the Sandwichman

WASHINGTON (AP) -- Consumer spending edged up in July with help from the popular Cash for Clunkers program, but household incomes, the fuel for future spending increases, were flat.

The slight rise in spending reflected a 1.3 percent jump in purchases of durable goods such as cars, a gain propelled by the clunkers program that started at the end of July. Purchases of nondurable goods such as clothing actually fell 0.3 percent last month.

"Bill and hold" is designed to shift sales from future quarters to current ones. It's O.K. when the government does it... Actually, it is perfectly legal for private companies, too. It's just that the consequences can catch up to you.

Some participants in the Cash for Clunkers and First Time Homebuyers Credit programs are people who would have bought cars or house now anyway. Another portion are people who otherwise wouldn't have bought. But how many sales have simply been brought forward to boost current sales at the expense of future sales?

At Sunbeam, "Chainsaw Al" Dunlop sold a lot of electric blankets in the summer of 1997 and outdoor grills in the fall. But in the first quarter of 1998 Sunbeam lost $44.6 million. On June 13, the Sunbeam directors fired Chainsaw Al, "the worst CEO of all time." From Business Week July 6, 1998:

It didn't take long for alarm bells to sound. After the company reported its results in the second quarter of 1997, Shore says he began "getting pangs in my stomach." The numbers showed that Dunlap was building what Shore considered abnormally high inventory levels and accounts receivable. His trade contacts confirmed his suspicions that Sunbeam was giving lucrative terms to dealers to ship products aggressively.

"BILL AND HOLD." "I said to myself: 'Let's play the game a little longer,"' remembers Shore. "No one [had] soured on him yet. Very few picked it up, only the smart shorts at the hedge funds. I thought it would take several more quarters to play out." Shore alerted his clients to the warning signs but continued to recommend the stock because he thought investors would keep bidding it up.

He was right. Sunbeam's shares kept climbing, even though the company's third-quarter results created even greater cause for concern. Shore noted in one of his reports that there were massive increases in sales of electric blankets, usually a fourth-quarter phenomenon. Then, in the fourth quarter of 1997, he was alarmed by enormous increases in sales of grills, at a time when virtually no one buys those products. Still, Shore says, "I didn't think the story was over just yet. The market hadn't caught it."

Although unknown at the time, Dunlap was aggressively trying to push out more and more product. As the company later acknowledged, he began to engage in so-called "bill and hold" deals with retailers in which Sunbeam products were purchased at large discounts and then held at third-party warehouses for delivery later. By booking these sales before the goods were delivered, Dunlap helped boost Sunbeam's revenues by 18% in 1997 alone. In effect, he was shifting sales from future quarters to current ones. The approach was not illegal, but the extraordinary volume made it unusual. Dunlap defended the practice, saying that it was an effort to extend the selling season and better meet surges in demand. Sunbeam's auditors, Arthur Andersen & Co., later insisted it met accounting standards.

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GM Fact of the Day

To spend $200 million on manufacturing, we have to get board approval, with top management involved from an early stage. Yet we spend billions on marketing and delegate that to too many people at the lowest levels. It's insanity.

-Bob Lutz, General Motors Vice-Chairman

Stead, Deborah. 2009. "Bob Lutz, GM Salesman." Business Week (3 August): p. 16.

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Beyond the f-word: Green on Black

by the Sandwichman

The Black-Connery Thirty-Hour Bill was strongly backed by the American Federation of Labor President, William Green.

"Would a Thirty-Hour Week Increase Employment?"

President Green urges the 30-hour week as a means to absorb the unemployed, and maintain industrial stability.

by William Green, President, American Federation of Labor

OUR problem of unemployment must be solved. No other question of national policy, whether political, social or economic, must be permitted to obscure this major issue until it is definitely disposed of. It can be disposed of not through half measures but only through courageous and decisive action, jointly undertaken and carried to conclusion by government, management and labor.

The 11 million unemployed do not represent the whole of the vast numbers who are affected by unemployment and its consequences. The failure of our industrial system to provide jobs for these 11 million throws on public relief some 18 million persons and the number is growing larger. Support of this army of those denied an opportunity to earn a living, cannot be continued indefinitely. While the moral degradation of the dole is sapping the sources of individual initiative and the enterprise of these millions of Americans, public credit is being drained by the unsupportable load of unproductive expenditures.

Our economic organism cannot function normally as long as such a substantial portion of the body remains totally paralyzed. The disease is too dangerous and too widespread to be treated merely with palliatives and anaesthetics. It must be cured.

The cure proposed by the American Federation of Labor is the adoption of a work-week which will absorb the unemployed, assuring wage-earners the maintenance of their incomes at previous levels. The proposal rests on two fundamental principles: First, that genuine recovery is impossible unless achieved through the normal channels of production; and, second, that industrial stability can be realized only through a broad stabilization of employment and the assurance of purchasing power adequate to initiate and sustain increased production of wealth.

Recovery and reform cannot be separated. Unbalance in our economic system is of such a degree that automatic recovery is impossible. Thirty hours is both a reform and a recovery proposal.

Founded upon these principles, the thirty-hour week program will achieve the following results:

1. Through the shortening of hours to thirty per week, it will bring wage-earners now without work into our normal business organization;
   
   
2. Through maintaining existing earnings, and placing effective purchasing power in the hands of those who have been deprived of incomes through unemployment, it will increase total purchasing power;
   
   
3. By releasing a tremendous volume of pent-up consumers’ demand, it will stimulate industrial production in business activity;
   
   
4. By giving unemployed workers jobs in our normal industries and by providing for wage maintenance, it will give the wage-earners that security which they now lack;
   
   
5. By stimulating normal business activity, it will release the flow of credit in private business from the normal consumer, who constitutes the ultimate source of credit;
   
   
6. It will provide material means for higher standards of living for the American people and make effective new and widespread demand for goods and services.
   

The failure on the part of private industries to achieve a substantial reduction in unemployment brings out the full import of the grave national emergency underlying the present situation. Our proposal is designed to meet this emergency situation.

The opposition to 30 hours follows historical precedent. People who oppose the 30-hour week on the claim that a reduction in hours of work will mean a great decrease in the volume of production, are repeating arguments which were made one hundred years ago against the establishment of the 10-hour day, and fifty years ago against the 8-hour day. These arguments were made and are now made on the assumption of a static society—an assumption which is false, as a glance at history will show. For more than a hundred years there has been a movement in this country for a shorter work week. The fight for the 30-hour week is the present phase of this century-old movement.

There are two ways in which to judge the social import of the thirty-hour week: First, its effect as a remedy for the greatest social evil we have ever known—the unemployment of millions of our population, and the inevitable degeneration of those millions from unemployed to unemployable if unemployment is prolonged. Second, its more positive effect as a means of giving the people of this country the kind of life to which any human being has a right.

Our immediate problem is to provide work. Desperate social illnesses must be met not by mere palliatives, but by correctives comparable to the need. The thirty-hour week will put millions of men and women to work; it will restore the self-respect of those men and women; it will give them confidence in themselves, in their future and in their country; it will fulfill the original purpose of the National Recovery Program.

This does not mean that the 30-hour week is merely a gigantic share-the-work movement. As such, it would lose its fundamental value as a recovery and a reform measure. Wages and hours of work must be fixed at the same time, one in relation to the other. The 30-hour week presupposes that earnings will be maintained at their present weekly, monthly, or yearly level, despite the reduction in hours. The workers must not be asked to continue to bear the burden of unemployment. Nor must the 30-hour bill be looked upon as only a relief measure. It seeks more equitable distribution of income. It is a plan to bring about basic readjustments in our social and economic order.

With the increased leisure which would come with the adoption of the 30-hour week, and with the increased purchasing power which would come from the maintenance of earnings, the workers would have time and money to function as consumers of the products of industry.

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The Real Trespassers

Today 23 protesters were arrested outside Parliament House in Hobart Tasmania. They were objecting to fast-track legislation that allows for an assessment and approval of a proposed giant pulp mill to be insulated from any form of legal public objection. The wording of this new 'Pulp Mill Assessment and Approvals Act' (PMAA) is dangerouly ambiguous.

Earlier this year three distressed Tasmanian landowners, concerned about their legal position if the existence and operations of this pulp mill destroyed their businesses, launched a Supreme Court action. They sought to ask the Tasmanian government for the reasons why they granted a permit for the pulp mill to be built in the Tamar Valley. "In July this year Justice Peter Evans dismissed their action, on the grounds that Section 11 of the PMAA prevented those questions from being answered. In response to the decision Tasmanian UTAS law academic, Tom Baxter, said that it removed the rights of any citizen to obtain information about provisions placed on the mill." [1]

This latest judgement follows a consistent pattern of state oppression that has played out here for decades now. Tasmanians are increasingly being treated as 'aliens' at the State Government's 'pleasure'. We can live here as long as we don't express any demands such as a requirement for a safe and habitable environment. Peaceful protest is met with police demands to 'move on' and a refusal to follow such unreasonable demands is met with instant arrest. Or, as Richard Flanagan noted a few years ago "to [merely] question or to comment is to invite the possibility of ostracism and unemployment." [2]

On the other hand, when strong evidence was presented that a Tasmanian Premier had broken the law two years ago "the matter was never investigated" due to the lack of an independent anti-corruption or ethics body in in the state.[3]

Amidst the backdrop, described by Richard Flanagan, of unique temperate rainforests being clearfelled and then burnt with napalm. "Forests of the tallest hardwood trees in the world, eucalyptus regnans being reduced to mud and ash" to be replaced with monocultural tree plantations. Our wildlife poisoned with 1080 lest they graze on plantation seedlings; disent against a giant pulp mill that promises to further sustain this paradigm should be regarded as the highest form of loyalty.

"Ingenuous comrades, there are bad men on the Earth. If you want to be an ecologist, you have to stop being a dummy...if nothing happens even though we're entering an ecological crisis of historic gravity, it's because those who have power in the world want it to be this way."

From Hervé Kempf's 'How the Rich Are Destroying the Planet'



[1] Section 11 Once More
PETER HENNING. 21st August 2009
Subsequent to: Tasmanian political rot: the PMAA revisited
http://tasmaniantimes.com/index.php?/weblog/article/section-11-once-more/

[2] Paradise lost - with napalm
http://www.guardian.co.uk/comment/story/0,,1197159,00.html
By RICHARD FLANAGAN

[3] Pulping the truth
Matthew Denholm | November 20, 2008
Article from: The Australian
http://www.theaustralian.news.com.au/story/0,25197,24677393-5006788,00.html

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Edward M. Kennedy, RIP

The first time I saw him speak was nearly 40 years ago at the University of Wisconsin, where he was heckled by anti-war protestors (he was slow to become a dove and was in the near aftermath of the unfortunate incident in 1969). I remember when he was first appointed to the Senate to take over his older brother's seat at the legally minimum age of 30. Many complained about nepotism and inexperience. Certainly he had many flaws and problems.

However, over the years he overcame them and became the "liberal lion of the Senate," and I am not going to elaborate on his long record, but passing a decent health care reform would be an appropriate act to memorialize his better works. It is funny that I also remember from when he first entered the Senate someone near the family commenting that he was actually the best politician of the family, and that in particular his skills were especially suited to the legislative branch rather than the executive one. As he never made it in the latter, we do not know for sure, but he did indeed become one of the most effective and progressive Senators in history.

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Blaug, Fawcett, Hicks... and Chapman

by the Sandwichman

Mark Blaug has been introduced as "perhaps the best known and most widely published historian of economic theory in the profession today."

Blaug's 1958 article, "The Classical Economists and the Factory Acts - A Re-examination" ends with the sage admonition: "There is a simple moral in all this: for some purposes a theory of economic growth is not enough."

But it is the penultimate paragraph of that article (and a footnote) that struck the Sandwichman early this morning:

In a class by itself is Fawcett's contention that pecuniary motives alone bring about the adoption of a work day that optimizes output per man-hour. This argument is open to the objection that it assumes perfect foresight. Contrariwise, Thornton's thesis amounts to a denial of perfect knowledge on the part of the entrepreneur. We should say today that entrepreneurs may have little incentive to reduce hours since the immediate effect, if wages are kept constant, is to increase costs and decrease output; whereas, a simultaneous reduction in wages under these circumstances is bound to affect efficiency adversely. Thus, employers may fail to maximize output per man-hour owing to an excessive emphasis on profit maximization in the short run. Be that as it may, Fawcett's line of reasoning clearly shows where the classical economists' treatment of hours legislation is deficient: they had no theory of the firm. [emphasis added]

The footnote to the bolded sentence above states:

See J. R. Hicks, The Theory of Wages, pp. 104-10. Even on the assumption of perfect foresight, this is a clear case of private costs diverging from social costs. There is no reason why the classical economists could not have considered this possibility; the distinction between private and social costs is implicit in Adam Smith's discussion of public works.

Only a pedantic Sandwichman would know (or perhaps care) that pp. 104-10 of Hicks's The Theory of Wages is actually a faithful précis of Sydney J. Chapman's Theory of the Hours of Labour! The irony contained in all this is that subsequently, in The Theory of Wages, Hicks went on to set aside the conclusions of Chapman's analysis, which he emphatically acknowledged as theoretically sound, on the "practical" grounds that:

...if the working day has previously been fixed at a length which is greater than the 'output optimum' the Union will not usually need to exert any considerable pressure in order to bring about a reduction" [because a} "very moderate degree of rationality on the part of employers will thus lead them to reduce hours to the output optimum as soon as Trade Unionism has to be reckoned with at all seriously (pp. 217-218).

Compare Hicks's (1932) rationale with Fawcett's (1872):

It has been proved that the workmen can succeed when they have as good a case to urge as they had at Newcastle; and the masters would, in every instance, be compelled to yield, even were it not their interest to do so, when facts can be adduced to warrant the conclusion that the hours of labour prevalent in any particular trade are too long to secure the maximum of industrial efficiency.

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One Hundred Years Ago Today...

by the Sandwichman

One hundred years ago today, in Winnipeg, Manitoba, Sydney J. Chapman presented his theory of the hours of labour as his presidential address to the Section on Economic Science and Statistics of the British Academy for the Advancement of Science.

That analysis came to be considered "the classical statement of the theory of 'hours' in a free market." But, curiously economists have "forgotten" Chapman's conclusions, which rather inconveniently undermine much of their standard assumptions about the determination of hours, wages and employment.

Today, as policy makers wring their hands about whether the next economic upturn will follow the course of a succession of "jobless recoveries," they would do well to pause and consider whether the questions they first forgot, then discounted, and eventually dismissed and trivialized might lead to the "ultimate solution" to the problem of full employment.

Last October, the Sandwichman serialized his chronicle of the strange disappearance of S.J. Chapman's Theory of Labour. I have linked up the segments and provide a comprehensive link page after the jump:

1
2
3
4
5
6
7
8
9
10
11
12
Conclusion
Bibliography

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Joblesse Oblige?

by the Sandwichman

Both the Congressional Budget Office and the White House Office of Management and Budget released economic estimates and projections today showing unemployment averaging around 10% (9.8% OMB, 10.2% CBO) next year and remaining above 8% until at least the end of 2011. Last March, the OMB estimated would average 8.1% in 2009 and decline thereafter.

In short, the unemployment rate is now much worse than anyone expected five months ago, it will get even worse and it will stay worse longer. Where are the proposals to respond to this unacceptable level of unemployment? Where is the political movement to demand a solution?

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Should Journals Have To Compete For Papers?

During the course of the discussions in various locations over the matter of proper formatting of papers for journals, the point was made that in some hard science disciplines (not sure which ones) it is acceptable for authors to submit a paper to more than one journal simultaneously. This is a major taboo in economics, with many journals asking specifically if one has submitted the paper elsewhere when one submits. However, it has always struck me as a bit inconsistent that it is OK to submit book proposals to more than one publisher. My thought on how to resolve this was that book proposals involve the author making money, whereas this is almost never the case for journal articles (although in some hard sciences, one has to pay for pages published in a journal).

I am wondering what people think of this. Should economics journals have to compete for the best papers (and the person who noted this in hard sciences said that this happens)? I can see the taboo arising from the interests of editors and referees. There is already a major problem of finding suitable and willing referees who will get reports back in reasonable time (hard sciences referees also tend to get their reports back much more quickly than do economist referees). Would this make it worse? The argument for moving towards the hard science view is that it is more likely to avoid the problem many young professors face of having their paper sit for lengthy periods of time at journals, only to get rejected, and putting them in danger of not having enough publications to get tenure, even if they have written a sufficient number of good papers.

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James K. Galbraith On The Current Situation

James K. Galbraith has issued a white paper based on a meeting that occurred in Paris at the Mayer Foundation this past June. It is entitled "Financial and Monetary Issues as the Crisis Unfolds," and is available at either http://www.epsusa.org/projects/crisisworkinggroups/financeandbanking.htm or http://www.levy.org/vtype.aspx?doctype=9. It is about 9,000 words in total, and the report concludes as follows:

In brief conclusion, the group of experts convened in Paris in June warns that the crisis is not over, that policies so far set in motion are not sufficient, and that the goals set by the authorities so far, which amount to a restoration of previous conditions, are neither desirable nor possible. It is time now to begin to take account of the irreversible characteristics of recent events, to chart a course of new construction instead of reconstruction, and to build the domestic and financial monetary institutions and safeguards necessary to make it possible to pursue that course.

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Beyond the f-word: The Teagle Plan

by the Sandwichman

The Teagle Committee was recruited in August 1932 by President Hoover in an attempt to promoted voluntary work-sharing as a palliative to unemployment. It is part of the context for the introduction of the more sweeping Black-Connery Thirty-Hour Bill in 1933.

THE SHARE-THE-WORK PLAN: TEAGLE ANSWERS ITS CRITICS

The Chairman of the Movement Holds That the Burden Is Carried Not Only by Men With Jobs but by Employers Also

In the share-the-work plan of dealing with unemployment, who bears the burden—the employer, the employee, or both? This is a question frequently raised in labor circles. In the article that follows it is answered by the chairman of the Share-the-Work Movement, who is also president of the Standard Oil Company of New Jersey, one of the large employers of labor.

By W. C. TEAGLE.

A POPULAR commentator on current affairs in one of our metropolitan journals writes that “there has been altogether too much bunk about share-the-work.” And a telegrapher In Oklahoma writes: “I have worked seven days per week for the last ten years. I would be very agreeable to the five-day week, for I realize It is the only way we will ever put the unemployed to work. Practically every one in my profession would be strongly in favor of this, and I do not see how the railroads could object, for it would not increase their costs. If this could be put in operation at once I know of ten or fifteen men with families that have been cut off the extra board who would be called back to work. It might cut my pay 40 per cent, but I would be glad to give that for the duration of the depression.”

In these two quotations we have the destructive and. constructive views of the move to extend work-sharing throughout the nation.

Most of the criticism has turned upon the allegation that it shoulders the total cost of unemployment on those who are least able to bear it, the wage earners. Sometimes it is characterized as a device for using public philanthropy as a cloak to cover the nakedness of a scheme to lighten tax burdens. The most radical go even further in saying that the movement is a deep-laid plot to get wages down to a subsistence level now so that when business revives and workmen are in demand corporations can make large profits.

The Origin of the Plan.

Sometimes the best way to understand an organism is to investigate its forebears. Let us look at the origin of the plan to help the unemployed.

Work-sharing is not somebody’s pet idea born in the past few months and developed under the careful nursing of theorists. It became established as a product of the times at least two years ago and was in successful operation in many industrial plants before any one gave thought to the matter of attempting to propagate it for wider usefulness. It grew naturally on sheer merit as a logical means of protecting the best interests of employers and workers in a period of poor business.

In 1930 a number of manufacturers began to spread a diminishing quantity of work as an alternative to laying off employees. There was no theory enunciated and no common plan of action agreed upon by those who reduced hours and wages to keep the largest possible number at work. Such a policy was in force at some refineries of Standard Oil Company of New Jersey subsidiaries from the time that the management first faced the necessity of laying off permanently a large number of workers, due to the installation of more efficient refining units; by United States Steel, Bethlehem Steel and International Harvester, among others.

No one thought to criticize this action, to credit its motivation to 'bunk' perhaps because it was essentially so fair and natural. It was not until two years later, when an organization got behind the plan, that any one discovered sinister aspects connected with it. And then the criticism did not emanate from those affected.

Limitations Pointed Out.

As a matter of record, initiation of the movement followed the most careful consideration of its possibilities, bad as well as good. A warning was incorporated in the first piece of literature and has been repeated in every subsequent presentation of the plan, to this effect:

A remedy used unwisely may aggravate the disease for which it is prescribed. Job-sharing has its limitations. While it holds obvious and far-reaching possibilities for improving the business situation, it is an emergency measure to help those without work and should not go beyond a certain point. This limitation is for the community and employer to decide with the cooperation of the employee. Many men and women now at work have incomes barely covering the necessities of life and they cannot in fairness be asked to divide with others.

In view of the emphasis placed on the limitations by proponents, it is strange that adverse criticism should rest on the assumption that the plan will not work after this emergency is over, or on its alleged unfairness to the employee receiving too little to permit him to get along comfortably if his wages are reduced by the amount of time shared.

Again and again the committee has asked support for work-sharing only as a proved remedy immediately available for a severe unemployment crisis. We have said that as business picks up and jobs again begin to seek the man, this movement will evaporate like gasoline in the open air. In every instance where it developed that workers were getting only enough for their needs we have urged that the employer try to see his way clear to the employment of more help without putting the cost on his existing force. In a number of instances, where the labor element is not too large an item in the cost of doing business, employers have shortened the week without reducing wages.

The New Hampshire plan, one of the earliest forms of work-sharing, exacts a financial contribution on a sliding scale from those in the higher wage or salary classifications, and the money thus released is used to pay added workers in lower brackets. In another variation, work-sharing has been accomplished by reducing pay uniformly by a small percentage down to a minimum wage agreed upon. In no case that has come to our notice has the employer taken advantage of the plan to reduce his operating overhead. On the other band, frequently he has assumed part of the cost in order to do his utmost for the relief of unemployment.

Parenthetically, it might be remarked here that the fellow who stands on a sidewalk finding fault with men who are trying to rescue persons involved in a street accident is not contributing anything helpful to the situation. If he knows a better way of effecting rescue he should take his coat off and go to it. To date, none of the critics who have sought to discredit the share-the-work movement has proceeded beyond efforts at belittling. If they have ideas for bettering a distressing situation, they are strangely reticent after finding fault with what others are doing.

Whatever its faults, no one can say the Share-the-Work Movement exists only as a theory. It got to work immediately and has produced far-reaching results exactly in keeping with its objectives. A single participant has 50,000 people In his plants and offices who would not be on his payroll but for his conviction that the times required a division of jobs and payrolls in the common interest; another, 35.000.

While the accomplishments in taking the idle from the street and putting them into jobs have not been so striking, the total thus employed, made up of a few here and a few there in various lines of activity, nevertheless is substantial. It will be much larger if employers of what is euphemistically referred to as the white-collar class will participate as generally as have the manufacturing industries.

Sponsors of the movement have never claimed that they are doing something of permanent value. They advocate it in spite of the feeling that, if carried too far, it has definite points of weakness. The driving thought is that we can meet an emergency situation through use of an emergency measure.

Less frequently the plan has been criticized because it contains no provision for increasing wages. No doubt this would be highly desirable in many lines and would greatly stimulate purchasing by those receiving the higher rewards. How a workman is to persuade his employer that he deserves more pay, with two or three of the idle waiting for his job at lower wages, the critics do not say. It is the man out of work who answers those who ask why the wage scale is not raised in cases where employees receive too little to participate in work sharing.

Some of the opposition to dividing work would disappear if a few fundamental facts about unemployment were thought through. No amount of shuffling him about will put the unemployed man where he is not a burden upon his fellows. We have in the United States a very large number of idle—exactly how many nobody knows because it is impossible to complete a census. Perhaps 10,000,000 is the best estimate. This is about one-fourth of the number gainfully employed outside of agriculture at the height of business activity.

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Kepler's Astronomia Nova

by the Sandwichman

I was under the impression that Copernicus definitively established the idea of the heliocentric universe. However:

In Kepler's day three models existed to explain the observed motions of the "wandering stars." However, no clear criteria of physical "truthfulness" existed to discern which of these models corresponded to the actual, physical universe. Each model could be used to predict the future longitude and latitude of planets in the sky for a few years out. All of them became less accurate as time progressed.

Copernicus's model was no more accurate than Ptolemy's because he built his system on Ptolemy's 1,500-year old data!

It was Kepler who painstakingly, over the course of 10 years, worked out the orbits and orbital planes of Mars and Earth and thus established a system for accurate measurement of the movements of the planets solar system.

What was the key to Kepler's intellectual rigor? The "difference between the straight and the curved" or the importance of "incommensurable magnitudes." Now, if we assume, "for simplicities sake" that a line is as good as a curve, we might be able to make short-term predictions, but we're going to miss something essential.

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Beyond the f-word: The Odenheimer Plan

by the Sandwichman

Below is the proposal made in November 1932 by Sigmund Odenheimer, a New Orleans cotton manufacturer and written up by Thomas Dabney in a book titled Revolution or Jobs?. Back in the Great Depression, even capitalists proposed radical solutions to unemployment!

We are confronted with a great emergency. It is said that the unemployed in this country equal in numbers the unemployed in all European countries. Nothing appears to be in sight to alleviate this condition. From a humanitarian standpoint, it is the most severe shock we have yet experienced. Viewing it in the light of safety to our institutions, and of the permanence of our present civilization, it is a menace of incalculable proportions. From what I can learn, the problem is growing worse.

There is only one remedy, and I propose that remedy.

It is, Jobs for every one, every week in the year.

We will need legislation to open these jobs; we will need an amendment to the Constitution.

That amendment would give Congress the power to legislate on hours of labor.

Only our government can meet our need in this critical time.

This amendment passed, Congress would create an 'Hours of Labor Commission.' The members would be appointed by the President, and would be responsible to him. The law would make it mandatory that one week after the Commission was appointed, it would issue a proclamation that the hours of labor in all industries, work shops, stores, etc., employing a minimum number of persons—say five—should not exceed a certain total a week.

Penalty for violating this law would be fine AND imprisonment for the employer.

The work-week would be just long enough to give jobs to every one. My estimate is that we need a 20-hour week now. Industry and business could operate as many hours a week as they wish; they would only have to put on more shifts.

This regulation of the work-week would be permanent. The Hours-of-Labor Commission would make the work-week short or long, as economic conditions changed. No matter how much or how little production—that is, work—there was, everybody who wanted a job would have one. We would lose the long line of unemployment; never again would we fall a victim to that unnecessary stupidity.

The present emergency justifies the immediate calling of Congress to pass on the submission of the Constitutional amendment to the Legislatures of the different states. It justifies the immediate convening of the Legislatures, to take action on the amendment.

With everybody employed, the nation would be freed of the terrific strain that is now almost causing it to fly into a thousand pieces, like a crystallized wheel.

The country would be freed of the burden of public and private contributions to support the destitute.

The unemployed would be freed of the misery of doubt about the next meal.

Those who are employed would be freed of the agony of fear that they will lose their jobs.

We would have a confidence which, by comparison with our present condition, would be the return of prosperity.

We would see an immediate pick-up in consumption, for two reasons:

First, employment, even on part-time, would give our present unemployed more money to spend than they now have under the piddling dole of the Reconstruction Finance Corporation;

Second, those who are employed would feel free to spend their hoardings for things they need but are doing without, because they would not be afraid of being thrown upon the street to-morrow.

I do not propose that a full week's pay should be given for a part-week's work. That would be a shock to the economic system which I do not believe it could stand without preparation.

It may be said that this plan would put no more purchasing power into the country than it now has, because it merely divides the present wages among more persons. That is true, in theory, and it would be true in practice, but only for a short time.

I believe that consumption would be so increased by the removal of the fear to spend, that there would be an instant increase in production. This would mean a call for more man-power, which would mean a longer work-week and more pay.

I believe that business would be so stabilized by this confidence, and by the elimination of dumping and rushing upon greater losses, that all employers would be justified in immediately increasing wages at least ten per cent, and probably twenty-five per cent, or even more, after a few weeks.

As conditions improved, I believe we would work into a higher rate of pay than we have seen in the past. The trend of wages has been upward for a century, and if we help that trend, we will be contributing impressively to the development of our country, the enjoyment of its resources, and the living standards of the people who would measure their wealth by consuming power, not by the standards of the past.

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Fiscal Policy and Recoveries in Various Large Countries – a National Review Nitwit Opines Before Checking the Facts

It is been a long time since I ventured over to the National Review’s writings on economics but a “friend” suggested I check out Mark Steyn’s Why the Stimulus Flopped:

Meanwhile, in Brazil, India, China, Japan, and much of continental Europe the recession has ended. In the second quarter this year, both the French and German economies grew by 0.3 percent, while the U.S. economy shrank by 1 percent. How can that be? Unlike America, France and Germany had no government stimulus worth speaking of, the Germans declining to go the Obama route on the quaint grounds that they couldn’t afford it. They did not invest in the critical signage-in-front-of-holes-in-the-road sector. And yet their recession has gone away. Of the world’s biggest economies, only the U.S., Britain, and Italy are still contracting. All three are big stimulators, though Gordon Brown and Silvio Berlusconi can’t compete with Obama’s $800 billion porkapalooza. The president has borrowed more money to spend to less effect than anybody on the planet.

Of course the absolute value of our stimulus was larger than that of the UK or Italy but I have to wonder if Steyn bothered to read something Paul Krugman offered:

A number of commenters have argued that Germany’s slight growth in the second quarter proves that you don’t need a fiscal stimulus to fight the slump. Many points here - Germany had a much deeper slump than the US, etc.. But one thing I gather people don’t know is that there’s a dissonance between what Germany says and what it does: the Finance minister denounces Keynesianism, but at least according to the IMF Germany’s actual stimulus package is quite substantial — comparable to that of the United States! Meanwhile, France has suffered a smaller slump, 3.1% over the past year. Not too surprising, given that France didn’t have a big housing bubble and isn’t as dependent on durable manufactured exports as Germany.

Krugman’s post offers two insights that Mr. Steyn seems to have missed: (1) movements in real GDP depend not only on the size of the fiscal stimulus but also on the economic shocks it had to contend with so we should not be surprised that France’s economy is recovering as ours was still declining last quarter (albeit by not as much as before the fiscal stimulus started to work; and (2) Germany did have significant fiscal stimulus. Paul also provided a link to this IMF report with a table entitled “Stimulus Packages in Large Countries (in percent of GDP)”. The totals for 2008 to 2010 for the U.S. and Germany were 4.8% and 3.4% and note that for China, this was 4.4%. Yet Steyn appears to think China did not have significant fiscal stimulus. On the other hand, he thinks the UK and Italy did but their totals were 1.5% and 0.3% respectively as compared to France’s total which was 1.3%. Also note Japan’s total was 2.2% but Steyn thinks Japan has less fiscal stimulus than either Italy or the UK.

It would seem one does not need to know much about the size of the actual fiscal stimuli in different nations to write a comparative analysis on the topic for the National Review.

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Claiming the Social Security Benefits Will Fall

Stephen Ohlemacher must be out to scare people with Millions face shrinking Social Security payments:

Millions of older people face shrinking Social Security checks next year, the first time in a generation that payments would not rise. The trustees who oversee Social Security are projecting there won't be a cost of living adjustment (COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975. By law, Social Security benefits cannot go down ... Cost of living adjustments are pegged to inflation, which has been negative this year, largely because energy prices are below 2008 levels ... All beneficiaries received a 5.8 percent increase in January, the largest since 1982.

The Social Security Administration states:

Beginning in 1975, Social Security started automatic annual cost-of-living adjustments. The change was enacted by legislation that ties COLAs to the annual increase in the Consumer Price Index (CPI-W) ... Based on the increase in the Consumer Price Index (CPI-W) from the third quarter of 2007 through the third quarter of 2008, Social Security and Supplemental Security Income (SSI) beneficiaries will receive a 5.8 percent COLA for 2009.

CPI-W is the Consumer Price Index for Urban Wage Earners and Clerical Workers – if one is interested in how this index has behaved of late, check this out. When prices rose, nominal benefits also rose so as to keep real benefits the same. In the last year, this price index has declined and appears to be expected to decline for a while. So with unchanged nominal benefits – wouldn’t a better title be real benefits are expected to increase?

Ohlemacher may have a point if the relative price of premiums for the Medicare prescription drug program increases substantially but by his own account, the extra premiums do not appear dramatic enough to justify his scare title.

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Is It A Smart Signal To Submit Papers To Econ Journals With Incorrect Reference Formats?

Duh, the answer is no. But Alex Tabarrok at marginal revolution, http://www.marginalrevolution.com/marginalrevolution/2009/08/inefficient-journal-submission-policies.html#comments, told his microbiologist wife that if she submitted a paper with correct Reference formats she would be signaling that she is a "newbie," with nobody who knows anything doing that in economics. She followed his advice only to have her paper rejected upfront. He complained about an "inefficient equilibrium" of journal policies in the hard sciences, only to have lots of hard scientists point out that it is two lines of LaTEX to change formats. Of course, few economics journals require LaTEX, and few economists use it Now it is true that econ journal editors generally tolerate submissions not in correct formats, which get "fixed" later if accepted, and a majority of submissions do come in that way. But it is no signal of intelligence, experience, or anything else impressive for several reasons.

1) It is a pain in the ass for editors to ask accepted authors to fix this later, and is costly in time if the journal staff has to do the fixing themselves.

2) If anything, journal editors are somewhat sympathetic to "newbies" trying to get tenure and publish out of their dissertations.

3) Trying to signal that one is "experienced" by any means is a lost cause unless the editor has heard of the submitter. If the editor has not heard of the submitter and realizes the person is experienced, this simply counts against them, a loser who has been around but so pathetic or unproductive or worthless that that they are unheard of by the editor. If the editor has not heard of someone, better almost to be a "newbie." (Although, of course, showing multiple citations to one's own work in respectable journals in the paper can offset such an impression.)

3) Having correct Reference formats may signal that the paper has been submitted first to the journal, which sometimes strokes the egos of editors.

4) Of course, worse than simply having incorrect formats (which is tolerated in econ) is having sloppily incomplete or incorrect references, with papers cited in the paper not there or papers in the references not cited, or misspelled names or incorrect years or paper titles, etc. This is just incompetence and signals such pretty clearly. Bottom line is that References that are complete and accurate and in proper format signal professionalism, not some damning lack of experience.

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San Quentin vs. Higher Eduction in California

No words needed; the numbers speak volumes.

Thanks to Seth Sandronsky

http://michaelperelman.wordpress.com/?attachment_id=1219

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Open Letter to the Queen

Your Majesty,

We, the undersigned, noted with interest the letter to Your Majesty of 22nd July 2009 from the British Academy in which they respond to your question about how the current economic meltdown was missed. They talked of a "failure of the collective imagination of many bright people" and a "psychology of denial".

The Academy wrote "It is difficult to recall a greater example of wishful thinking combined with hubris." You will be aware of HRH The Prince of Wales's speech on 9th July 2009 in which His Royal Highness focused on far more serious examples of wishful thinking and hubris. We are writing to you because we are concerned that the British Academy's letter focuses on one particular aspect of current insecurity, namely financial, failing to address the wider context of more serious macro issues facing mankind. We are also writing to the Academy to invite them to debate these issues with us.

Symptoms of a much greater systemic failure

We live in tumultuous times. Many developed world citizens are losing their livelihoods. The effects on the world's poorest will, as ever, be dreadful. However we are surprised that the Academy has not addressed anything outside the narrow remit their letter covered. Far greater insecurities threaten the world's poorest due to our effects on the natural world.

The letter ignores the physical constraints which are central to this bubble and indeed most bubbles. It speaks of "the bigger picture" and of "individual risks being small" and "the system as a whole being vast", yet, for us has a limited horizon.

Our premise is that our current economic malaise is symptomatic of a far more serious systemic failure to acknowledge what Archbishop Rowan Williams has identified in saying "It has been said that 'the economy is a wholly-owned subsidiary of the environment'. The earth itself is what ultimately controls economic activity because it is the source of the materials upon which economic activity works".

Energy underlies everything – Scylla and Charybdis of peak oil and climate change. The underlying cause of the current economic meltdown is a multi-generational debt-binge inextricably linked to a concomitant multi-generational energy-binge. The Academy's letter focuses on some "imbalances in the global economy". However, the key to addressing our current situation is to recognise the far more serious imbalances between our insatiable hunger for energy, its finite nature and the environmental pollution in its use.

Energy is the lifeblood of any economy. Our exponential debt-based money system is in turn based on exponentially increasing energy supplies. It is therefore clear that the supply of that energy deserves our very highest attention. That this attention doesn't appear in the Academy's analysis is deeply worrying.

The impending peaking of production of oil and other hydrocarbons, along with the resulting peak in food production and everything on which oil relies, is now widely accepted. Leading UK companies including Arup, Scottish and Southern Energy, Solarcentury and Virgin have warned that a peak in cheap, easily available oil production is likely to hit by 2013, posing a grave risk to the economy. On 2nd August 2009, the International Energy Association's Chief Economist, Dr Fatih Birol, warned of an oil crisis in 2010.

The letter refers to the "overheating economy" but gives no mention of the effect and cause of the overheating of planet Earth. Climate change is now recognised by the world's scientists, political and business leaders as the most serious threat to mankind and is described by Sir Nicholas Stern as "the greatest market failure of our times". On an almost daily basis we get increasingly urgent signals that unstoppable, runaway climate chaos is almost upon us.

Members of The Prince of Wales's UK Corporate Leaders Group on Climate Change, including AXA, Shell, Tesco, Unilever and Vodafone, have now repeatedly asked politicians for more urgent action on climate change.

Growth versus prosperity

The Academy's letter mentions unprecedented global economic growth - yet it fails to mention the rapidly escalating environmental destruction caused by this insatiable growth. It also mentions the poor of the developing world who have been brought out of poverty to 'prosperity'; but not the far greater numbers condemned to an increasingly inequitable world and the ravages of peak-food and climate change.

Not just for ourselves, but also for the poor and disenfranchised, we in the rich world must now seek to redefine 'prosperity' and shift away from blind growth to an economic development fit for our damaged world. The distinction between quantitative 'growth' and qualitative 'development' is key.

A reverse gear for atmospheric carbon is needed and energy use must be radically reduced and redirected where it is most needed – into investments in a radical transition to a zero-carbon economy and the alleviation of poverty. However, the current Marshall-plan, to pump yet more economic growth, with a green veneer, risks plunging us headlong back into climate chaos.

As Professor Tim Jackson, author of the Sustainable Development Commission (SDC) report 'Prosperity Without Growth?' says: "Faced with the current recession, it is understandable that many leaders at the G20 Summit will be anxious to restore business as usual. But governments really need to take a long, hard look at the effects of our single-minded devotion to growth - effects which include the recession itself..... The myth of growth has failed us. It has failed, spectacularly, in its own terms, to provide economic stability and secure people’s livelihoods".

The letter talks of a "general feel-good factor", but doesn't address the fact that, in the developed world, general wellbeing long ago ceased to be linked with GDP growth. In July, The Prince of Wales called for an end to the "consumerist society where growth is an end in itself." His Royal Highness also said that "progress has come at a price" and that it "depends on how you define both 'growth' and prosperity’...in our modern situation these 'ends' have become dangerously confused with the 'means', to the point where, now, wealth, innovation and growth have become the final goals."

The debate is changing

Sir Jonathon Porritt says in his recent report Living Within our Means : "In their bones, world leaders know that if the global economy keeps growing at around 5% per annum (as it has done over the last couple of decades), then its game over for human civilisation as we know it." Adair Turner, past head of the CBI and now Chair of the FSA and Climate Change Committee, says in Do Good Live Have to Cost the Earth that we need to "dethrone growth'.

Despite the sclerotic nature of our politics, a notable few political figures are beginning to engage with the 'progress beyond growth' debate. These include President Horst Köhler, President Barroso, EU Environment Commissioner Dimas, OECD Secretary General Angel Gurria, David Cameron, the Swedish centre-right and President Sarkozy's Stiglitz Commission.

Beyond rhetoric there has been little deeper debate in politics about these issues. As the Sustainable Development Commission puts it, "We see [today] a society and a Government whose primary objective is still the achievement of economic growth as conventionally understood and measured, with as much social justice and environmental protection as can be reconciled with that central goal. We envisage a society whose primary goal should be the wellbeing of society itself and of the planetary resources and environment that sustains us all, with economic objectives shaped to support that central goal rather than the other way around."

Yes we can

Things can change. Harvard Professor John Quelch’s 2008 study Too Much Stuff says: "The mass consumption of the 1990s is fast fading in the rearview mirror."

Our current form of corporate-consumer-capitalism has been shown to be what many of us knew it was: a fundamentally flawed system which badly needs updating. Jeremy Paxman has asked if we are seeing the "end of capitalism". Martin Wolf of the FT has said that "the dream of global free market capitalism is dead". Bank of England Chair Sir Mervyn King has agreed saying Wolf's comment "strikes a chord."

Thomas Freidman said recently in the New York Times "Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it's telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said: 'No more'."

Thankfully there is a vibrant debate in civil society on these issues. Groups like Transition Towns, described by Jeremy Leggett as 'scalable microcosms of hope', and digital democracy Moveon.org, Getup.org, Dosomethingaboutit.org.uk, Localeyes.org and 38degrees.org.uk are giving individual citizens and collectives a new voice and real power in politics of change.

An invitation

It would appear from the British Academy's letter that they are not aware of the rapidly growing and vibrant debate around these issues. We agree with them about the need for "authorities with the power to act" and for appropriate levels of regulation fit for the task in hand. Their prescription is to consider how they "might develop a new, shared horizon-scanning capability". We will invite the Academy to join with us in a public dialogue about these issues and ask them to consider how this 'new capability' can make its primary horizon the the issues we raise in this letter.

We will of course report findings of such debate to Your Majesty.

Yours faithfully

Phillip Blond, CEO, ResPublica; Alain de Botton, Philosopher; Tom Burke CBE, co-founder E3G; Professor Herman Daly, Maryland University; Geraint Talfan Davies, Chairman, Institute of Welsh Affairs; Professor Lord Anthony Giddens; Stephen Hale, CEO Green Alliance; Andy Hobsbawm, Chair Agency.com, Founder dothegreenthing.com; Rob Hopkins, Founder of Transition Towns; Prof Tim Jackson, SDC; Tony Juniper, Author and ex Executive Director, Friends of the Earth; Professor Melissa Lane, Princeton University; Neal Lawson, Chair, Compass; Jeremy Leggett, Chair, Solar Century; Peter Lipman, Chair, Transition Network; Jules Peck, Partner, Abundancy Partners; Robert Phillips, Co-author, Citizen Renaissance; Sir Jonathon Porritt OBE, ex Chair, SDC; Mike Robinson, CEO, Royal Scottish Geographical Society, Chair, Stop Climate Chaos Scotland; John Sauven, Executive Director, Greenpeace; Anthony Seldon, Master, Wellington College; Matthew Taylor, CEO, the RSA; Professor Peter Victor; York University, Canada.

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(Can't Stop) Endlessly Spouting Chapman II

by the Sandwichman

In 2001, the Government of Queensland further summarized Sandwichman's summary of Chapman's theory in its submission to the Australian Industrial Relations Commission's Reasonable Hours Test Case. At 400 words, it's the shortest comprehensive summary of Chapman's theory I know of.

5.2.1 Theoretical review

The study of the relationship between work intensity and fatigue owes much to S.J Chapman's theory of the hours of labour, where in 1909 Chapman demonstrated market failure in the determination of working time. This argument initially involves the establishment of a concept of 'optimal hours'. The main points of this argument can be summarised as follows:

• a mass of evidence indicating that reductions in hours of work had not led to proportionate declines in output;
  
  
• in modern industry fatigue was increasingly less physical in nature and more a combination of psychological and physiological as a result of specialization and increased need for mental concentration;
  
  
• the reduction of hours allowed better-rested workers to produce as much or more in the shorter hours;
  
  
• the total value of the output would initially rise as the working day increased but eventually the total output as well as the output per hour would decline as the working day became so long that it prevented adequate recovery from fatigue for workers;
  
  
• this is the case because, beyond a certain point, each additional hour of work would be contributing to the output of the current day's total output but at the expense of the following day's output capacity; and
  
  
• the intensity of the work involved would dictate the point at which total output begins to fall and thus the length of the 'optimal' working day.
  

The second half of this argument explores whether the free market can arrive at the 'optimal' length of day, and can be summarised as follows:

• the maintenance of a long-term optimum by employers would require short-term restraint;
  
  
• each individual employer could never be certain of reaping the benefit of their restraint as another firm could potentially entice the employer's well-rested workers away with a wage premium;
  
  
• therefore the optimal output work time is a form of investment without equity;
  
  
• simultaneously, Chapman assumed that workers would choose a longer working day than was prudent (although not as long as the working day preferred by employers), primarily because of a general short-sightedness that would mean workers would consider their immediate earning capacity more than their long term earning capacity; and
  
  
• the outcome in a free market situation would therefore be one where employers and employees acting in self-interest would each tend to select a working day that was longer than the 'optimal' hours.

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Flash: The Head of the Bank of England Confesses

"As I look back, it now seems that, with all the thought and work and good intentions, which we provided, we achieved absolutely nothing ... nothing that I did, and very little that old Ben did, internationally produced any good effect -- or indeed any effect at all except that we collected money from a lot of poor devils and gave it over to the four winds."



Boyle, Andrew. 1967. Montagu Norman (London: Cassell): pp. 327-38.

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(Can't Stop) Endlessly Spouting Chapman

by the Sandwichman

Here's a shorter summary of the Chapman model, originally published in "The 'lump-of-labor' case against work-sharing: populist fallacy or marginalist throwback." from Working Time: International trends, theory and policy perspectives and reposted on MaxSpeak in 2006.

Chapman revisited the issue of the hours of labor in his presidential address -- delivered in Winnipeg, Manitoba -- to the British Association for the Advancement of Science, Section on Economic Science and Statistics (1909). That analysis came to be considered the "classical statement of the theory of 'hours' in a free market" (Hicks 1932: 102n.; Nyland 1989). Arthur Pigou restated Chapman's argument in Economics of Welfare (Pigou 1952; 462-469). Alfred Marshall referred to Chapman's analysis as authoritative, as did Lionel Robbins (Marshall 1961: 695; Robbins 1929: 25).

Concluding his footnote reference to Chapman and Pigou, Hicks declared, "There is very little that needs to be added to the conclusions of these authorities." Very little, perhaps, other than the strange occurrence that although Chapman's argument has never been challenged, economists today are oblivious to its major conclusions. Most are unaware not only of the theory's authoritative status but even of its existence.

Unlike Rae, Chapman saw no particular danger in workers' views -- "fallacious or otherwise" -- about the mechanics of distribution (Chapman: 365). On the contrary, Chapman suggested that such attitudes probably had protected workers "against the injurious consequences of short-sightedness."

Chapman began his discussion of the hours of labor by reviewing the mass of evidence that reductions in the hours of work had not led to proportionate declines in output. Chapman attributed the phenomenon to the fact that as production methods become more intensive, workers require more leisure time to fully recover from the fatigue of work. He emphasized that in modern industry fatigue was increasingly psychological, resulting from the demands of modern industry for specialization and mental concentration as well as from the workers' attitude toward leisure rather than from the strictly physiological demands of the work. When the hours of labour were reduced, the better-rested workers were often able to produce as much or more in the shorter hours than they had previously in longer hours.

The total value of the output from standard working days of different lengths would thus initially increase as the day became longer but eventually the total output -- not only the output per hour -- would decline as the standard day became too long to allow the worker to recover sufficiently from fatigue. Beyond a certain point, each additional hour of work would continue to add a quantum of output to the current day's total output but only at the expense of reducing the next day's hourly pace.

What that point was, Chapman maintained, depended on the intensity of the specific production methods and thus would vary in response to changes in those methods.
Having established the idea of an optimal length of standard working day that would maximize output, Chapman next turned to the questions of whether such an optimal length would likely be established by the workings of a free market and whether the optimal length of day for output coincided with the optimal length from the perspective of the workers' welfare. His conclusions in both cases were negative.

From the perspective of the employer, Chapman argued, the optimal length of day for output could only be achieved if all employers acted in enlightened accord. This is because the maintenance of the long-term optimum would always require some short-term restraint. A single employer could never be entirely certain of reaping the benefit of that restraint. Another firm could always potentially offer a small wage premium and hire away the first firm's well-rested workers. For employers, the optimal output work-time would thus be a form of investment without equity:

The reforming employer would run the risk of paying the whole cost of the labour value created by shorter hours and getting little in return; other employers might secure and exhaust the new labour value and no permanent good would be effected (1909: 361).

From the perspective of the worker, the optimal length of day could, for all practical purposes, be considered to be shorter than the optimal length of the day for output. Chapman considered three elements in assessing the optimal day for the worker:
· the wage, which Chapman assumed for the purpose of analysis to exactly equal the worker's marginal productivity;
· the marginal value of leisure, which Chapman assumed to vary in response to changes in the level of wages; and
· the disutility of work, which Chapman assumed to also be a function of the length of the working day -- during some intermediate period of the working day, Chapman assumed that work could often be experienced as pleasurable.

Chapman maintained that in forming their ideal of a working day, workers' would disregard the effects of changes in work time on efficiency, and hence on wages. As a consequence they would tend to prefer a working day longer than would be prudent in the long run, even though it would not be as long as that preferred by employers acting competitively. Thus the exclusive concern of both employers and workers with immediate self-interest would bias the preferences of each toward longer than optimal hours (1909: 367).

In the two decades following Chapman's address, his demonstration of market failure in the determination of working time led to systematic empirical study of the relationship between fatigue and work intensity. According to Nyland (1989), however, attention to the question of work intensity faded during the 1930s and after, largely because "the fact that worktime had both a temporal and intensive character made it difficult to utilise marginal productivity theory to determine the return on various factors of production" (1989: 33). As a simplifying abstraction, economists assumed that the given working day was of optimal length.

Eventually, the hypothetical -- and antithetical -- status of that assumption came to be overlooked. Economists negligently reverted to a pre-Chapman faith that unencumbered market forces would spontaneously lead to the establishment of an optimal length of work time.

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What "Academic Standards"?

by the Sandwichman

Posner writes at the end of his column:

This raises the question of the ethical responsibility of academic economists... who write for the media or join the government, either to adhere to academic standards in their nonacademic work or to make clear to the public that they are on holiday from those standards.

Sandwichman would like to know just what academic standards these are? Academic economists make shit up all the time, both in their nonacademic work and in their academic work. The only academic standards I know about for academic economists is "don't rock the boat" and "go along to get along".

Be that as it may, below is an as yet unanswered email the Sandwichman sent two days ago to David Ellwood, Dean of the Harvard Kennedy School of Government regarding "the question of the ethical responsibility of academic economists":

Dear Dean Ellwood,

I note that the Harvard Kennedy School website has posted Professor Edward Glaeser's Boston Globe op-ed from August 8. While I welcome Professor Glaeser's viewpoint and substantially agree with his argument regarding the efficacy of the Cash-for-Clunkers program I am writing to inform you that Professor Glaeser's piece also contains a egregious item of misinformation and misrepresentation with reference to the so-called "lump-of-labor fallacy", the alleged motives for recent policy initiatives in Europe regulating the hours of work and the outcomes of those policy initiatives.

I have extensively researched the quasi-fraudulent nature of the lump-of-labor fallacy claim and have published the results of my research in two scholarly publications, one in a peer reviewed journal, the Review of Social Economy and the other in the anthology, Working Time: International trends, theory and policy perspectives, edited by Lonnie Golden and Deborah M. Figart. I should point out that my 2007 article, "Why Economists Dislike a Lump of Labor" received over 400 abstract views last month making it the top ranking article in that category on the Research Papers in Economics website. Below is the abstract for that article:

"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."

After I read Professor Glaeser's op-ed in the Boston Globe, I emailed him offering to debate hiim on his lump of labor assertions. I received no reply. I also wrote a an op-ed article in response and sent it to the Boston Globe. I have also received no reply from the Globe. I am writing to you to request that, in the interest of balance and of critical scholarship, you post and publicize my response to Professor Glaeser's lump-of-labor claims on the Kennedy School website. I am pasting the text to that response below. I look forward to your positive response to this request.

Yours sincerely,

Tom Walker

----------------------------
Professor has 'lumpy' reasoning

Do Europeans really harbor an uncanny delusion that there is a "fixed amount of work to be done?" Do the resulting policies they espouse discourage hiring and reduce employment? That's the verdict pronounced by Harvard Professor Edward Glaeser. In an op-ed published last week in the Boston Globe, Professor Glaeser claimed that European policies restricting working hours are based on a lump of labor fallacy and are detrimental to employment.

Glaeser's parroting of the hoary fallacy claim is ill informed – and callous. The allegation has a curious history, originating as a yarn about workers' propensity to withhold work effort and evolving into reactionary textbook dogma about the futility of combating unemployment through reducing the hours of work.

One problem with the fallacy story is that there is no evidence for it or credible theory behind it. Unless, that is, countless repetition of unsubstantiated and implausible assertions counts as both theory and evidence. Here is some history:

In 1891, British lawyer and journalist, David Schloss, coined the phrase, "the theory of the lump of labour" – and decried it as a fallacy – in an article discussing workers' objections to piecework. As applied to shorter hours and unemployment, the theme originated with a Scottish journalist, John Rae, a proponent of shorter hours. Because reducing hours raised productivity, Rae discounted it as a remedy for unemployment. An American economist, Charles Beardsley, soon demonstrated Rae's argument to be inept.

At the turn of the twentieth century, the National Association of Manufacturers, under its militantly anti-union president, David Parry, raised the fallacy claim (minus the productivity gain) as its battle cry in the fight against legislation to establish an eight-hour day for government contractors.

In 1902, a U.S. Industrial Commission, appointed by Congress, concluded that, "there can be no question respecting the desirability of fewer hours, from every standpoint… arguments for reduction need no qualification from the standpoint of the workers and little from that of employers." John R. Commons, a founder of American labor economics, was principal researcher for that commission.

On August 26, 1909, Sydney Chapman presented what came to be regarded as the definitive theory of the hours of labor for neo-classical economics. Chapman's theory affirmed and gave algebraic expression to the conclusions of the U.S. Industrial Commission. Such notable economists as Alfred Marshall, Cecil Pigou, Lionel Robbins and John R. Hicks lauded Chapman's theory as authoritative.

In 1926, automaker Henry Ford introduced a five-day, forty-hour week in his factories. His rationale echoed arguments for shorter hours articulated some 60 years earlier by labor organizer Ira Steward. Six years later, at the height of the depression, economist Dorothy W. Douglas praised Steward's theory as "a philosophy of American wages and unemployment that sounds strangely apposite today." What most impressed Douglas was Steward's argument that long hours, low wages and unemployment lay at the root of economic depression.

Meanwhile, opposition to the Black-Connery thirty-hours bill came from 'orthodox' economists who also insisted that the proper way to stimulate economic recovery was to cut wages and slash government spending – positions few economists today would endorse. In 1937, the NAM – reversing itself to claim credit for an outcome it had long and adamantly opposed – erected billboards across the U.S. boasting the "world's shortest working hours" as the free enterprise fruit of the "American Way."

Toward the end of World War II, John Maynard Keynes wrote to the poet, T.S. Eliot, explaining that "the full-employment policy by means of investment is only one particular application of an intellectual theorem" and that the "ultimate solution" for unemployment was working less. Keynes had outlined these views two years earlier in a Treasury Department memorandum on "The Long Term Problem of Full Employment."

The above is only a sampling. Nevertheless, first-year economics students are diligently taught to "refute" a fallacy almost no one actually upholds. Never mind the allegation itself is bogus, incoherent and obstructs thinking about how to combat unemployment.

In the world outside Professor Glaeser's Harvard classroom there were 35,000 fewer private sector jobs in the U.S. in July 2009 than there were ten years earlier. One would hope economists would climb down from their lofty pulpits long enough to check their facts – and their dogmas.

Tom Walker
Vancouver, BC, CANADA

Tom Walker is author of two historical studies: "The 'lump of labor' case against work-sharing: populist fallacy or marginalist throwback?" and "Why Economists dislike a lump of labor."

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Posner’s Attack on Romer

With hat tip to Mark Thoma, let me cite a couple of lines from Richard Posner. First:

Romer answers the question in her title: "Absolutely." And despite the reference to "five months" in the subtitle, her focus is on the second quarter of 2009 (April, May, and June) and her claim is that the stimulus had a dramatic effect on output and employment during that quarter. I do not think her analysis is responsible, and I am concerned with the fact that academic economists, when they become either public officials or public intellectuals (like Paul Krugman), leave behind their academic scruples.

Did he even read Romer’s analysis before attaching her? Yes, the stimulus kept output from falling even further. In fact, check this out from Posner:

Let me make clear at the outset that I support the stimulus, though I wish it had been better designed. I support it for two reasons. The first is that, given the state of panic of the economy last winter, and the limited efficacy of the measures already taken to arrest the economic plunge

That’s right boys and girls – Posner recognizes that the economy was in a free fall. But it appears (just maybe) that the free fall has stopped. Isn’t that what Dr. Romer said? So how is this intellectually dishonest?

Update: Brad DeLong has a number of suggestions for Mr. Posner including actually reading what Dr. Romer wrote on this topic.

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Terrorist T-Shirts

How can people have been arrested for wearing anti-Bush T-shirts, while assault guns are ok?

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Kim Dae-Jung, RIP

The human rights leader and dissident of South Korea who was sentenced to death by the military dictatorship in 1980, spent many years in jail, and was tortured, has died at 85. He came to serve as president of the nation, 1998-2003. During his term he made the first visit by a South Korean president to North Korea, making agreements for some degree of opening between the governments, some of these now being rolled back by the current government. He received the Nobel Peace Prize for his efforts, a truly admirable man.

One of the signs that wackos were in charge of US foreign policy during the Bush administration came early on in March, 2001. President Kim went to Washington to meet the new US president. Then Secretary of State Colin Powell was operating on the assumption that US policy would be a continuation of what had been going on in the last year or so of the Clinton administration that supported Kim's diplomatic efforts with the North. An hour before his meeting with Bush, the meeting was suddenly cancelled, which led to a loss of face by Kim and a major collapse of favorable attitudes towards the US in South Korea that have not recovered since. We now know that this was due to Cheney and Rumsfeld's interventions, especially by Cheney, who argued to pressure the North Koreans more aggressively because they would collapse like the Soviets 20 years ago. Of course the outcome of this inane policy was that they got nuclear weapons and have not yet collapsed. In any case, I am prepared to join others here in South Korea in mourning the death of this heroic leader of theirs who was so stupidly humiliated by the Bush administration.

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Did William Petty (1623-1687) pioneer the carbon tax?

It is stable, easier to measure, hard to game

"Of all the Accumulative Excizes, that of Harthmoney or Smoak-money seems the best; and that onely because the easiest, and clearest, and fittest to ground a certain Revenue upon; it being easie to tell the number of Harths, which remove not as Heads or Polls do: Moreover, 'tis more easie to pay a small Tax, then to alter or abrogate Harths, even though they are useless and supernumerary; nor is it possible to cover them, because most of the neighbours know them; nor in new Building will any man who gives forty shillings for making a Chimney be without it for two."

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"You never want a serious crisis to go to waste."

In the famous words of Rahm Emanuel, the crisis is doing its work very well. One might have expected that people would be picking up the pitchforks to demand change; instead, they have been whipped up to demand more of the same. Can anybody here imagine what would've happened if lefties had tried to hold their own tea parties at Republican meetings? People got arrested for wearing anti-Bush T-shirts.

As a result and crisis management of Rahm Emanuel, the United States continues its rapid degeneration in fine fashion. Here at home, we're about to begin the first of our furloughs was the beginning of the semester. Presumably, we have to sign some paper agreeing not to do any work, probably to protect the state of the university from any kind of legal liability for forcing us to work without pay. Thinking about a twist on next week's lecture during such times would be some kind of violation of a legal contract.

Gov. Arnold is on a tear, pushing for an undermining of the state pension plan.

Hopefully, health care reform -- now rebranded as insurance reform -- will be dead. I assume that the major reform will be to reduce the funding of Medicare.


Obama said that the choice is between hope and fear. He should have used the past tense. Either through political incompetence or some deep-seated neoconservative instincts, he has dashed any hopes -- at least, the hopes of any rational person. In many ways, we have the third Bush administration -- secrecy, war, and the coddling of the rich and powerful.

In the Confiscation of American Prosperity, I wrote: "Since the election of Franklin Roosevelt in 1932, every Democratic administration with the exception of Lyndon Johnson’s has been more conservative -- often far more conservative -- than the previous Democratic administration. Similarly, every elected Republican administration, with the single exception of George Herbert Walker Bush’s, has been more conservative than the previous Republican administration." At least, Obama has made sure that I will now have to revise a second edition.

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Hours of Labour 12

by Sydney J. Chapman (translated and condensed by the Sandwichman)

Let me now summarize my main conclusions, and humanize them by restoring the moral and social elements from which our premises were to some extent abstracted. I have hitherto spoken of progress in such terms that the critic would have some excuse for charging me with narrowness of vision. Progress is not summed up in improvements in productive methods that reduce the cost of things, nor in these improvements combined with the application to production of ideas that render work pleasanter and more educative. Nor is it wholly, or in bulk, summed up even if we add improvements in distribution (resulting in a more satisfying sharing of wealth) and a greater responsiveness of production to the needs of the community. The essentials of what most of us really understand by progress are to be found only in the world of consciousness – in the spiritual constituents of the universe. I mean something we cannot exactly define if we are not philosophers – and hardly then – but something implying a full living, with understanding of life and its surroundings, including its ethics, and a living with volitional powers strong enough to enable us to follow our lights. As all this is actually, though vaguely, desired in some degree by humanity generally, it is no doubt covered by the satisfactions measured in demand, but the admission of its reflection on one plane cannot be regarded as its adequate inclusion in our social philosophy.

The most important aspect of the question of the length of the working day consists in its relation to the most intimate constituents of progress. Let us call progress in this sense "culture" – a term, perhaps the best of the single terms available, to convey my meaning. Now the world appears to be so designed that culture has on the whole a proportionately important place in the most primitive economic conditions. The hours of labor in such conditions may be long, but work is not so continuously absorbing that social intercourse during work is impossible, while variety of experience, contact with nature, and the calls made on initiative afford that intimacy with life as a whole, and that evocation of moral forces, which must be obtained in later stages of civilization largely through systematic education and books. I have argued above that each step in civilization brings intensified specialism. Work is by no means rendered non-cultural ultimately, but its cultural aspects are specialized, as are its objective aspects. Interest may be deepened on the whole, but it is no longer diffused; the need for thought and purpose may be no less than before, but the thought and purpose are of a confined character. The intensification of economic life that is implied is in itself all to the good, but the community must lose something of culture unless corresponding with this intensification there is an expansion of leisure and a specialized use of leisure for the purposes of culture. Certain expressions that have come into common use would seem to be significant of the needs and dangers of an industrial society highly advanced on the technical side. Thus we speak of the "cultured" classes and the "leisured" classes. For the attainment of culture, leisure is essential today as it was not in the past in quite the same sense, "culture" being broadly defined. I need not say that a "progress" that meant the "specializing out" of leisure for the sole enjoyment of one class would not commend itself to any reasonable person; and I do not discern any danger of "progress" of this sort; but there is some danger lest the growing importance of leisure generally, and of a proper use of leisure, should not be fully realized. Tangible things force themselves upon our attention as the more intangible do not, and some of us who have an economic bent of mind get into the way, in consequence, of thinking too much of the quantity of external wealth produced and too little of the balance between internal and external wealth. In ultimate terms, to those who care to put it that way, all wealth is life, as Ruskin insisted. There hardly appears to be any risk of a general underrating of external goods, but there is some risk of an underrating of the new needs of the life lived outside the hours devoted to production – which should themselves be, not a sacrifice to real living, but a part of it – and of an underrating of the dependence even of productive advance upon the widespread enjoyment and proper use of adequate leisure and an adequate income.

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China vs. the US: Class Warfare

In July, Chinese workers murdered beat an executive to death in protesting an immanent privatization of their steel mill.

Canaves, Sky and James T. Areddy. 2009. "Murder Bares Worker Anger Over China Industrial Reform." Wall Street Journal (3 August)

The state responded by halting the sale.

McGregor, Richard. 2009. "Killing of China Steel Plant Boss Halts Sale." Financial Times (26 July).

Now the money is being returned to the intended privatizer

Bradsher, Keith. 2009. "Bowing to Protests, China Halts Sale of Steel Mill." New York Times (16 August).

While not condoning violence, the role of the state is interesting here. China is not always known for respecting the interests of those who stand in the way of what we in the United States call economic progress. I would assume that a violent military response would occur here (unless the union would reorganize as a bank). Instead, the Chinese negotiated with the workers.

I assume that some sort of punishments will be meted out, but even so, I am amazed at what happened.

Here is the latest from the NYT

A Chinese provincial government halted the privatization of a state-owned steel mill on Sunday, apparently capitulating to thousands of workers who protested last week and took an official as hostage. The protests, in Henan Province in central China, were the latest sign of increasing labor activism in China’s steel industry, the world’s largest and a cornerstone of China’s construction-dependent economy. Three weeks earlier, rioting workers beat to death an executive who had been overseeing the sale of another state-owned steel company, Tonghua Iron and Steel, in northeast China’s Jilin Province, to a private business. The privatization of Tonghua was immediately postponed after that death.

The newspaper China Daily reported on Saturday that the police had tried to break through the ranks of workers on Friday in the latest incident, at the Linzhou Iron and Steel Company in the city of Anyang. China Daily did not say whether the police had been successful. Government agencies at all levels have been reluctant to use overwhelming force against protesting workers.

The official Xinhua news agency said that the workers had decided on Saturday to halt their protests, which had attracted up to 3,000 participants at a time, after a government mediation team agreed to reconsider the takeover; Xinhua did not mention what became of the official who had been held hostage.

Xinhua said that the Fengbao Iron and Steel Company had already paid $26.5 million of the $38.1 million it bid at an auction to acquire Linzhou Steel, which has 2,995 workers. The $26.5 million will be refunded, Xinhua said, citing an unidentified local official.

The success of Linzhou’s steel workers in blocking privatization could embolden workers in other industries, experts on Chinese labor issues said on Sunday. “It is no longer possible to push through privatization regardless, without considering the workers’ interests,” said Geoffrey Crothall, a spokesman for the China Labor Bulletin, a labor rights advocacy group based in Hong Kong.

In a sign of high-level interest in the recent unrest, the government-sponsored All-China Federation of Trade Unions has posted a prominent series of commentaries at the top of its Chinese-language Web site under the heading, “Corporate restructuring: participation of the trade union is essential.

In halting the privatization of the Linzhou mill, Xinhua said, the province’s government and its Communist Party committee issued a decision that, “Issues regarding the future of Linzhou Iron and Steel Co. Ltd. and benefits of its workers should be decided by its workers’ congress.” Chinese law has long required that privatizations be approved by the affected company’s workers’ congress. But local government officials and company managers have frequently been able to rig the approval until now by running the congresses themselves, Mr. Crothall said.

The global economic downturn has severely hurt the steel industry, which may be feeding labor unrest in the sector. Chinese steel exports were down 15.4 percent in the first half of this year. The Chinese government is also locked in a series of disputes with Australia over iron ore imports for steel production, the most notable of which led to the arrest of four Rio Tinto executives on accusations of bribery and trade secret infringement during price negotiations with Chinese steel makers. Rio Tinto has strongly denied any wrongdoing.

On Thursday, faced with a glut of steel-making capacity and many small steel companies vying to buy iron ore, Beijing officials ordered a three-year moratorium on the construction of any new steel mills or the expansion of existing mills.

But Beijing has had less success in its efforts to force a consolidation of existing steel mills, a step that might strengthen their bargaining power with the handful of multinationals that dominate the global iron ore business. Local and provincial government agencies have been wary of losing control of businesses that are often vital to their economies, and many workers are opposed.

Yet many older, less efficient steel mills are deeply troubled. The Linzhou mill is 40 years old and has not been operating since March because its sales fell, it ran short of cash and it failed to meet environmental standards.

... during the big shift toward private ownership from 1997 to 2001 [at] least 30 million workers at state-owned enterprises were laid off then, but local protests did not spread.

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Talk (about fiscal policy) Is Cheap

Paul Krugman makes an interesting observation about Germany’s fiscal rhetoric and policy:

there’s a dissonance between what Germany says and what it does: the Finance minister denounces Keynesianism, but at least according to the IMF Germany’s actual stimulus package is quite substantial

In other words, the Finance minister may be silly enough to advocate fiscal restraint during a recession but at least their actual policies avoided Herbert Hoover economics. In our country, the Republicans are also advocating Herbert Hoover economics but we are lucky enough to have smarter heads running fiscal policy today.

But consider this – Republicans also say they are for long-run fiscal restraint, which might be a very good thing if we actually had been practicing it for the past 28 years. Also, Republican led governments pushed fiscal irresponsibility over this period.

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Germany's "V"

by the Sandwichman

Barkley says, "the V bounce is happening. France and Germany actually grew in the second quarter." Paul Krugman posted the following graph:

You don't see the V? Just tilt your head 45 degrees to the right and it comes into view. Happy Laventine's day Barkvey!

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Hours of Labour 11

by Sydney J. Chapman (translated and condensed by the Sandwichman)

All advanced industrialism today feels the strain of an accumulation of forces tending to bring about a reduction of the working day and will continue to be. However, a firm limit is imposed on the reduction of hours by the steep interest and depreciation charges on machinery when it works only a fraction of the time for which interest must be paid. Buildings deteriorate in value at least as much when shut up as when they are occupied; machinery continues to wear out, and sometimes rapidly, when it is idle; and the reserve fund necessary because the market may contract at any time and because machinery may at any time be rendered obsolete, is independent of the length of the working day. Many inventions involve an extended use of capital per head. Interest and depreciation charges, on the one hand, discourage the use of some innovations that require heavier capital investment, and, on the other hand, prevent those applied from reducing hours so much as they otherwise would.

To what extent depreciation and interest charges discourage shortening of the hours of labor depends, of course, on the relation between wages and payments for capital in the expenses of a business, which varies by industry. A rough calculation, nevertheless, for a particular industry of the saving in hours that might be effected by the continuous running of plant may be relevant. In the industry for which I have obtained figures, interest and depreciation would be reckoned ordinarily at 10 percent on the capital, about half for each, while wages would be in the neighborhood of 12 percent. Now, it being assumed provisionally that the depreciation charge varies as the hours worked, that the rate of interest is a constant, that the equipment of the industry remains as before and labor tends neither to leave the industry nor to flood into it, and that other costs of production are not affected, we find that hours could be reduced from ten to eight without any loss of wages, were the continuous running of plant substituted for the ten hours' day.

Actually, of course, some of the gain would be taken in the form of higher wages. Further, it must be noticed that the assumptions made do not accurately correspond with fact, though they are satisfactory for the purposes of a first approximation. On the one hand they lead to an over-estimate of the advantages of continuous running, because twenty-four hours of work could not possibly be squeezed into a twenty-four hours' day, and because the cost of artificial light during night work is disregarded, as are also the costs connected with awkward points in organzation, with the sharing of responsibility for the proper treatment of machinery, and with the fact, universally experienced, that night-shifts are not so productive as day-shifts. On the other hand, they lead to an under-estimate of the advantages of continuous running, because the cost of depreciation, as we have seen, is not proportional to the daily hours of work, because the shorter hours would raise the efficiency of labor, and because the demand for capital would be reduced, as would also the demand for land for manufacturing purposes. The inevitable contraction of the demand for capital is a point to be emphasized. If working hours per day were raised from ten to twenty-four, then, the reaction on the efficiency of labor still being disregarded, the old output could be obtained with five-twelfths of the old capital; the consequence would be a fall in interest, an augmentation of the amount of the plant per head of the people working with it at one time, and, therefore, an increased output per head.

In view of its great economies, the shift system calls for very careful consideration. The magnitude of the advantages that the wage-earners might hope to derive from its more extensive application has been denied, on the ground both of theory and of experience of those businesses in which it has been tried. But theoretic objections of a fundamental nature will be found to reduce to false doctrine concerning the determination of wages; and it must be remembered that as the benefits accruing from the comparatively few cases in which the shift system is practiced are by competition spread over the whole community, the gain of any individual is cut down to a very small figure. It must not be supposed that the effect of its universal adoption would be equally negligible.

Without general recourse to shift systems I cannot see any immediate prospect of much additional leisure for the mass of the population. Shifts could be designed so that no one shift would be particularly disagreeable to work in, and, if all shifts did not offer equal advantages, the workers could be moved round, being assigned for so many weeks to each shift. The shifts for foremen, and the management generally, which would have to be strengthened, might be arranged to run over a portion of two workers' shifts, so as to cement the new work on to the old; and the connecting of the work of each shift with that of the shift that it followed could also be secured by arranging that the unit of labor should be a group of partners, consisting of one man from each shift, it being the duty of each man before commencing work to see his partner in the displaced shift and receive instructions from him.

Naturally, a shift arrangement could only be introduced gradually. Are the objections to shifts of such gravity as to counteract their immense economies? The fact that objections were decisive in the past is no proof that they would be today in England, or even in industrial Canada. Conditions have been revolutionized in the last fifty years. Improvements in artificial lighting and in intra-urban transportation alone have swept away a mass of the unfavorable conditions that used to be associated with night work. And two or three shifts of approximately seven hours each, or three or four shifts of approximately six hours each – I state a not immediate attainable ideal – are very different in their effects upon social life, exclusive of those associated with the shorter period of toil for each workman, from two shifts of some ten or eleven hours each. With the shorter shift in use, arrangements could be made without much difficulty for all workers to get most of their sleep in the night, if they so wished, and to enjoy most of their leisure in daylight. But it is not my intention in this address to make a practical proposal or argue points of detail. I merely present certain theoretic corollaries that have incidentally been derived from our analysis of conditions determining the length of the working day. In conclusion, I may quote Dr. Marshall's final judgment that were shift systems more extensively adopted "the arts of production would progress more rapidly; the national dividend would increase; working men would be able to earn higher wages without checking the growth of capital, or tempting it to migrate to countries where wages are lower: and all classes of society would reap benefit from the change."

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A Journalist Out of His Depth

by the Sandwichman

"It is characteristic of journalists to be long on social commentary and perception and short on conceptual analysis, and [John] Rae is no exception."

Who the heck was John Rae? The Scottish journalist was a key figure in originating the lump of labor myth, as it pertains to shorter working time. He didn't use the term lump of labor but instead decried the

"gross but evidently very seductive economic fallacy, which leads so many persons to think that they will all increase the wealth they individually enjoy by all diminishing the wealth they individually produce..."

Rae's argument was not that shorter hours of work diminished per capita output. On the contrary, Rae argued that shorter work time could not relieve unemployment because it would increase output per worker and thus obviate the need to hire more workers.

Intuitively, Rae's reasoning may seem persuasive until one realizes that Rae is assuming that the increased productivity will have no effect on cost, price, purchasing power of the workers or effective demand. An American economist, Charles Beardsley made short shrift of Rae's conclusions.

Nevertheless, Rae's rhetorical riposte to shorter hours as a remedy to unemployment got incorporated into employer objections to the eight-hour demand of unions while his empirical observations about productivity were noted by Sydney Chapman. The irony being that the 'dead' rhetorical part of his analysis has survived, handed down from textbook lore to blackboard dogma, while the 'living' empirical part has perished from the memory of mainstream economists!

So I was delighted to come across the following discussion by Aaron Fuller (2003) of Rae's characteristic "shotgun" style as deployed on another topic, Henry George's economics.

Rae's three-part critical examination of George's ideas is presented much like a set of "even-if" arguments encountered in the formal argumentation of a legal brief. He first rejects George's ideas because they are inconsistent with the empirical evidence—poverty is not increasing with progress. But, he contended, even if poverty were increasing, a second reason to reject George's ideas, independent of the empirical evidence, is George's alleged theoretical error and confusion. Finally, he maintained that even if the empirical evidence and the analytical arguments were on George's side, a third independent reason to reject George is that his solutions to the problems he identifies are either incorrect or inadequate. Such a scattered array of independent arguments is sometimes called the "shotgun" approach to argumentation. Potentially deadly at the close quarters of journalistic and legal persuasion where the form of the argument may be more important than its contents, it is less effective at the longer range of analytical scholarship where logical and factual consistency weigh more heavily than persuasiveness. Rae's journalistic shotgun approach to criticism, composed of scattered independent arguments, did little serious analytical damage to George's analyses. But serious analytical damage may not have been Rae's intent; instead, he may have been trying to persuade his readers that George was a dangerous agitator who, like the socialists discussed elsewhere in Contemporary Socialism, threatened to disrupt British institutions.

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Fears of Inflation

Jack Healy reports on the current lack of inflation:

Consumer prices in the United States did not budge last month, easing, for now, concerns that the record deficit and huge new government spending would spur inflation. “It could be a very large long-run problem,” said Mickey Levy, Bank of America, chief economist. “But in the near-term, it’s not a problem at all.” The drift in prices suggests that enormous slack remains in the American economy, even as the recession bottoms out and some industries jump-start production. There are 14.5 million unemployed people in the United States, retail sales are sluggish, and many businesses and factories are still running at less than full capacity. The Labor Department reported on Friday that its consumer price index was unchanged from June on a seasonally adjusted basis, and that prices this summer were 2.1 percent lower than last July, when soaring oil costs drove gasoline prices to $4 a gallon and lifted the cost of food and other products.

One would not expect inflation given the enormous slack in this economy even with a significant fiscal stimulus which of course has yet to eliminate this slack. And why is Mickey Levy trying to tell us we have a very large long-run inflation problem? I just checked here for the Federal Reserve’s most recent reporting on nominal and real interest rates on 20-year government bonds. The former is 4.37% and the latter is 2.24%. So the market is expecting a long-term inflation rate around 2%. That’s a very large problem?

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To V or Not to V? Is That the Question?

by the Sandwichman

The Sandwichman is not 'optimistic' about a 'V' shaped recession. Ultimately the economy is not a numbers game. The numbers are epiphenomena. That is to say secondary symptoms, mere concomitants. Divining numbers from numbers is a fool's pass time.

The policy responses to the recession so far have not addressed the fundamental imbalance in the economy, which is the concentration of income shares and market power at the top of the pyramid.

Debt can be useful for pump-priming to the extent that it makes available in the present purchasing power that is expected to materialize in the future. But to the extent that a more prosperous future fails to materialize, accumulated debt becomes a drag on present consumption. The humus of broken promises leaves a barren soil for sowing new ones.

The homeostatic key to re-balancing incomes, consumption and labor supply is, in a word, leisure. Leisure is distinct from idleness in that it is valued free time. Unemployment is not leisure because no unemployed person would pay to stay unemployed longer.

The distinctive property of leisure as leisure that distinguishes it from ('other') commodities is that you cannot hoard it or accumulate it beyond the 24-hour per day per person allotment. This also explains why capital is jealous of leisure.

The depreciation of leisure that underpins the current economic crisis has been of long duration. We are looking at about a half a century of log jam. Even if there is one last band-aid in the first aid kit, it won't measure up to the bleeding.

'V' my ass.

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Will Dr. V Bounceback (Jim Morley) Prove Right?

I am increasingly of the more optimistic view that we may see a strong recovery of GDP growth in the near future in the US, if not a full V, then a U with a short bottom followed by a strong upswing. I am not usually a fan of WSJ polls of forecasters, but most of them are looking for at least a sort of V, see Menzie Chinn at http://www.econbrowser.com for link and discussion, including about debt ratios and implied multipliers.

I do not have a link, but did see recently that the much-less closely followed Case-Shiller index of housing price-to-rent ratios has now returned to long-term historical averages (partly driven by rising rents, ugh). Thus I think we have hit bottom on housing prices in the US, despite the likely continued pressure from more foreclosures to come. I do think Morley's inventory adjustment mechanism will be weaker now than in the past, and consumers will be saving more, thus weakening the multipliers, but there will be some of this inventory adjustment effect that bounces back more from deeper falls. More important to me is that the main mass of the spending fiscal stimulus (and not just in the US but elsewhere, with some other countries also showing signs of turning around) is yet to hit, with only about 10% of it out there (that figure including the weak tax cuts). The main spending stimulus will come next year, which should help put the boost in if the economy really does turn around.

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Further Decline of Economic Blogging?

I note that Brad Setser has announced that he will no longer be blogging. This is not due to disillusionment with blogging, but his taking a job with the National Economic Council. Nevertheless, this is a loss as he has had the best coverage of a variety of international financial issues, especially regarding reserve balances and China, since he started initially five years ago while still working with Nouriel Roubini. He will be missed.

Another that I suspect may be a disillusionment has been the lack of any postings since June 18 at the high quality http://rodrik.typepad.com, where he has at times in the past questioned whether blogging is a good use of time for a top flight academic economist. Perhaps he has decided not for himself, although without getting around to telling all of us, or maybe he is just on vacation or very busy.

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Why Deficits Have Not Increased Interest Rates: Brad DeLong Makes Me Go Huh?

Brad DeLong makes an interesting observation:

it is astonishing. Between last summer and the end of this year the U.S. Treasury will expand its marketable debt liabilities by $2.5 trillion--an amount equal to more than 20% of all equities in America, an amount equal to 8% of all traded dollar-denominated securities. And yet the market has swallowed it all without a burp

If Brad wanted to mock the standard new classical belief that we are always near full employment so any significant fiscal stimulus would drive up interest rates, this observation would be a nice rebuttal along the lines of the old fashion Keynesian notions that we are both below full employment and are in a liquidity trap. But what he writes seems to combine two very different propositions as if they were the same thing:

The standard Chicago "Ricardian equivalence" argument is that government deficits have no effect on nominal aggregate demand because private savings rise dollar-for-dollar with the government's deficit. The magnitude of the tax cuts associated with the stimulus package are running at about $25 billion per quarter--an extremely small share of the rise in Treasury borrowings. Otherwise, Chicago says, supply-and-demand are supposed to rule--and a sharp increase in Treasury borrowings is supposed to carry a sharp increase in interest rates along with it to crowd out other forms of interest sensitive spending.

If all of the fiscal stimulus had been in the form of tax cuts (what the Republicans advocated), Ricardian equivalence would hold that none of it would have been consumed, which would mean no outward shift of the IS curve. Of course, interest rates did not increase as the national savings schedule was unaffected. That what the first sentence in this passage says - but then the last sentence does something else. It talks about what would happen if fiscal policy did lower the national savings schedule and hence shift out the IS curve under new classical thinking.

To be fair, much of the Obama fiscal stimulus was in the form of higher government purchases (note some of us wanted all of it in the form of higher purchases) which would shift outward the IS curve. That this occurred with no increase in interest rates strikes me as evidence that we are both below full employment and are in a liquidity trap. I suspect this is what Brad is trying to say here.

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Hours of Labour 10

by Sydney J. Chapman (translated and condensed by the Sandwichman)

It would seem, therefore, that at least two reasons can be derived from economic theory for state intervention in the matter of the hours of labor, if it is assumed that the state can discover what is best for the country. One is to correct the tendency of people engaged in industry to agree upon an amount of sacrifice to money-making, which means a large future loss, involving the next generation, for a small present gain; the other is to fortify, if needful, the resistance of workers to the disposition of some employers to secure a greater product at the expense of the workers' convenience. This conclusion would, however, be too hasty a deduction.

Economic matters are settled, not merely by the self-regarding forces that we have hitherto emphasized, but also by social conceptions, embodied in public opinion and class notions of what is right and proper that defy expert analysis and any accurate evaluation as influences. These social conceptions, which are not deliberately framed on a rationalistic basis, but proceed insensibly as it were from the needs of human life, are less intermixed with religious elements now than they used to be, but are none the less powerful. Resting on the seventh day is not at present a religious observance to the extent it was in the past, but it has not universally been found necessary to supplement the declining religious sanction with a legal sanction. How far progress that runs counter to tendencies determined solely by self-regarding forces may be left to the operation of these incalculable motives that sway every community can be settled only by careful observation. It is sufficient now to recognize their existence, and to point to the reductions of the hours of labor in recent years.

I do not propose to consider here the merits of legislation for establishing standards for the hours of labor, except to observe, first, that Government interference aimed at securing reasonable hours for adult males in all the diversified industries of a country would entail elaborate, elastic, and frequent legislation and would no doubt be accompanied by many grave errors; and secondly, that a prima facie case can be made out for the regulation of the hours even of adult males by authoritative boards or by statute, when labor is weakly combined and hours are evidently sweated hours, and evidence is forthcoming that they are detrimental to health or vigor. Nor do I propose to consider whether it might not be better to suffer for a time present ills in the hope that there would grow up in the community an adequate power of self-regulation, possibly accompanied by valuable social consequences that otherwise might never have been elicited. I am hopeful that public opinion, directed by economic and ethical enlightenment will in the future become an increasingly effective factor in progress, apart from its expression in law. Even to-day, in view of the dependence of producers on demand, neither employers nor trade unions can afford to brave for long public sentiment, though unorganized, when it is aroused. Public sentiment in the years ahead may be expected to respond more sensitively to incidents in its surroundings that offend against social conceptions of what is right and proper. The cases of children, young persons, and women, which bring in special considerations, must be ruled off from the subject matter of this address.

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"Technological Unemployment" Redux

by the Sandwichman

A while ago, an anonymous commentator on this blog made the sage observation that the phrase "technological unemployment" is an unfortunate one and a distraction from the real issue -- "a feint to blame on technology what is simply a matter of economic policy."

The Sandwichman agreed with the point but was resigned to continue using the phrase. No longer. Last week in a Washington Post op-ed, Gregory Clark demonstrated the utter infelicity of the idea behind the phrase. In Clark's fevered imagination, robots were on the brink of permanently displacing human labor of the more ordinary sort and the only solution was to increase taxes on the "winners" to support the "losers".

So, how do we operate a society in which a large share of the population is socially needy but economically redundant? There is only one answer. You tax the winners ... to provide for the losers.

Clark's dystopian musings evoked a colossal harrumph from the usual free marketeer suspects such as Will Wilkinson and Tim Worstall, including the charge that Clark committed a lump of labor fallacy.

In this case, the Sandwichman upholds the objection. Clark commits the fallacy! Perhaps he got his future scenario from the Flight of the Conchords send up:

The distant future, the year 2000...

The future is quite different to the present.
Yes, what with there being no more stairs and all.
And most importantly, no more humans.
Finally, robotic beings rule the world.

The humans are dead,
The humans are dead.
We used poisonous gases
And we poisoned their asses.
The humans are dead.
(Yes they are dead.)
The humans are dead.
(I confirm they are dead.)
It had to be done
(They look like they`re dead)

O.K., let's reboot this untechnological unemployment misnomer.

Technology doesn't destroy jobs. What technology does is make possible and make necessary either increased consumption, increased leisure or both. Unemployment results not from a quantity of jobs deficit but from an adjustment deficit. Unemployment results, that is to say, from a failure to establish a new income, consumption and work time regime commensurate with the new production potential offered by the technological advance.

Furthermore, adjustment is no more "automatic" than is technological change. Hello? Has anyone ever heard of "patents"? Or of government financial subsidies to research and development. On the contrary, adjustment should be considered an inherent part of the reciprocal process of technological innovation. Why it is not treated as such by so-called economists is a question 26,000,000 unemployed and underemployed Americans deserve an answer to.

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The Wild Lives of Early Economists

To give you a flavor of where my new book is heading:

Here is the first & only sentence of the introduction and the first sentence of the book:

Besides describing some of the brilliant accomplishments of the colorful founders of economics, this book will also discuss their dark side, including a few murders, over and above crimes more commonly associated with economists. At the same time, these economists’ lives and work will throw light on both contemporary economics and economies.

Before discussing the work and life of William Petty (1623-1687), it might be of interest to note that he has the unique distinction of being the only economist in history credited with having brought a person back from the dead. We will get back to that feat later.

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William Petty and Global Warming

I'm working on a book about 17th century and early 18th economics, beginning with William Petty. After describing his wild personal life, I'm trying to make the connection between Petty's emergence and the global climate at the time. Please tell me if this is too far-fetched.

The Sun Shines on William Petty

Mother Nature may have smiled upon William Petty, whose maturity coincided with a short, but welcome break in the Little Ice Age. Shortly before Petty's death in 1687, the cold weather returned. For example, the winter of 1683‑4 was particularly harsh (Lamb 1982, p. 223).

Today, when the threat of global warming looms large, people might be more sensitive to the profound effects of the weather. In earlier periods of cold weather created equally harmful results. One long‑term study of the effects of weather over the centuries concluded: "cooling impeded agricultural production, which brought about a series of serious social problems, including price inflation, then successively war outbreak, famine, and population decline successively. The findings suggest that worldwide and synchronistic war‑peace, population, and price cycles in recent centuries have been driven mainly by long‑term climate change" (Zhang et al. 2007, p. 19215).



David Hackett Fischer's The Great Wave: Price Revolutions and the Rhythm of History paints the stark picture of the times of Petty's youth:

"Famine, pestilence, and economic depression were accompanied by war. During the entire century from 1551 to 1650, peace prevailed throughout the continent only in a single year 1610. These conflicts were remarkable not only for their frequency but also their ferocity."


"During the early seventeenth century, the armies of Europe reached their largest size since the Roman era. Their upkeep imposed heavy costs at the same time that public revenues were reduced by the combined effect of famine, pestilence, war, depression, regressive taxation and monetary inflation. They also were put to use in most of Europe." [Fisher 1996, pp. 96‑97]

Fisher went on to add: "The greatest works of literature, painting, philosophy and theology in this era commonly expressed a mood of increasing pessimism and despair" (Fisher 1996, p. 100). During the second half of the Seventeenth Century, conditions were improving grain prices tended to fall (Fisher 1995, p. 105).

None of this is meant to suggest that the world suddenly became a comfortable place of peace and prosperity. The winter of 1683‑4 was particularly cold. In addition, Petty's own work with the Royal Society was closely associated with preparing for military adventures. Some of his later writings suggested that the prospects for war with France were favorable. And finally, an optimistic belief in progress was not unknown during the cold period. Samuel Hartlib, Petty's own promoter was a case in point.

Nonetheless, the optimistic swagger of Petty's proposals fell on more fertile ground as future prospects were looking better. More broadly, economic thinking tends to follow one of two paths. First, some give an ideological justification of the status quo, arguing that what is happens to be the optimal arrangement for now and for the future. Others offer proposals for improvement. At times, such as the warming mid‑seventeenth century, when new possibilities seem to be opening, such proposals are more likely to fall on fertile ground.

For example, even though Hartlib's musings about information might seem quite modern in light of the Internet, he never exercised much influence. Petty, who also had his share of far‑fetched ideas, was generally recognized as an "universal
ercised much influence. Petty, who also had his share of far‑fetched ideas, was generally recognized as an "universal genius," even by many who disagreed with him.

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Hours of Labour 9

by Sydney J. Chapman (translated and condensed by the Sandwichman)

I now would like to compare specifically the effect on wages with the effect on the working day of the mechanical action of pure competition. In the matter of wages, if workers were too weak to have much influence in settling their pay, competition between employers, were it keen and unchecked by combination, would at least secure to the workers as a wage, for a given working day, their marginal worth (within limits set by social friction) in view of their then state of efficiency. Thus in the circumstances supposed the worker would tend to get approximately the utmost possible – apart from the question of the reaction of wages on efficiency – in an active society based on free enterprise, for we may take it that in such a society the bidding of individuals against one another for labor would continue at least up to the known marginal worth of labor.


Observe, however, that the existence of such bidding may imply that new businesses are being established, or that old-established employers are anxious to make considerable extensions because old-established employers, knowing that similar workmen must be paid the same, might avoid a course of action that resulted in a gain less than the loss involved in the elevation of wages. It is doubtful whether employers would as a rule assume that if they did take steps leading to an advance in wages others would do so, for, not unnaturally, employers are commonly indisposed to disturb rates of wages except for strong reasons. Even if employers were endowed with a powerful telescopic faculty, they would not necessarily invest in paying wages in excess of the workers' present marginal productivity (for the purpose of enhancing their future physical and mental vigor) because of the danger that some workers would find employment elsewhere, thus transferring to rival employers the returns from the long-sighted investments made in them.

Other things being equal, of course, the higher the efficiency of labor the greater is the gain, not only of the workman, but also of the employer. Now, as regards the working day, we have already seen that uncombined employers might keep it longer than would be desirable from their point of view, for the same reasons for which they might keep wages lower than would be desirable from their point of view. These reasons are, I repeat again, short-sightedness, or fear of incurring an expense the fruits of which other employers might reap. In this respect competition between employers is equally defective in its bearing on wages and in its bearing on the length of the working day. But, from the perspective of the quality of life of the workers, it has an additional defect in its bearings on the length of the working day; for although competition between employers in an competitive economy would bring about the length of working day that the workers would choose at the wages making it possible, the choice of the workers is apt to be distorted by a limited awareness of the positive effect of shorter hours on productivity and hence wages.

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My Youthful Encounter with Nuclear Warfare

Today is the anniversary of the dropping of the atomic bomb. It brings to mind a useful experience.

Sometime in the mid- or early-1950s, I was having dinner at my great aunt's house with my brother, my parents, and my mother's cousin, Morris Fiterman (sp?). Morris was a medical doctor, who served in the Army as an hospital administrator and was a close friend of the President's son, John Eisenhower. Morris was telling us about his work on any military commission to decide whether or not to use nuclear weapons against North Korea. He said that military rejected the idea only because the prevailing winds would have brought too much radiation down upon South Korea and the US soldiers.

I don't remember any of the other details, except what he told us about the Bataan Death March in which the Japanese army supposedly starved American prisoners. He said that the rations given to the Americans were identical to the Japanese. He also said that the Japanese prisoners complained that their American captors were putting their lives at risk by feeding them unpalatable food, such as bacon and eggs.

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Lindsey Graham Frames the Health Insurance Debate

Ezra Klein interviews the Republican Senator from South Carolina with the highlight line being:

My belief is that no private-sector entity can survive over a long period of time competing against the government.

Peter Harbage and Karen Davenport a few months ago argued that this is the essential reason we need a public option – a theme being echoed by progressives recently:

Lack of competition in this critical marketplace means poor transparency and accountability, resulting in costly health care that harms our national health, bleeds our personal finances and the federal budget, and hinders our economic competitiveness. None of this is acceptable amid the worst slide in economic growth in 60 years. Fortunately, our nation’s health insurance market can be fixed with a big dose of what fixes most sectors of our economy—healthy, well-supervised competition. One of the best ways to introduce this much-needed competition is for the federal government to offer a public health insurance plan that can compete with private insurers within an insurance “exchange” that ensures public and private health insurance plans compete equally and transparently in the public marketplace.

Maybe someone should ask Senator Graham whether he supports this lack of competition or whether he has an alternative means for introducing more competition.

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Calling Spirits fron the Misty Deep: Bob Eisner edition

The Administration needs to get people out there - such as Jared - hammering away at the difference between government consumption and government investment and drawing the relevant consequences for thinking about the effects of budget deficits. High deficits, for example, as the economy moves back towards potential output, will raise the level of the real interest rate relative to what it would have been. But if the deficits are to finance bridges to somewhere, and especially if it is for public investment that complements rather than substitutes for private investment, then worrying about the higher rate is just as misplaced as worrying about the interest rate consequences of a private investment boom. The neat thing about judicious public investment is that it's good for stimulus and good for growth. It's good for stimulus because it doesn't lower and may raise permanent income and so need not lower consumption at all, or even increase it, increasing the bang for the buck of G. And it's good for growth: does anyone think that the post-war to '73 golden age of growth had nothing at all to do with things like the construction of the interstate highway system and the GI bill? And Jared, or someone, could hammer away at the differences in the investment composition of the G we got from Bush's gang versus now, and how that would matter in a rational accounting - with the capital budgeting the late Bob Eisner called for - of the big bad Deficit.

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Challenging Professor Glaeser

by the Sandwichman

Harvard Professor Edward Glaeser confuses the Jevons Paradox and the lump of labor fallacy.

The cash-for-clunkers policy seems based on the mistaken view that the number of miles traveled is independent of the price or pleasure of driving. I call this the 'lump of travel fallacy,' which is one of a family of lumpy errors that all assume things will stay fixed when they won’t...

The original lump fallacy is the 'lump of labor fallacy.' This fallacy holds that there is a fixed amount of work to be done in society, so restricting working hours will reduce unemployment. Encouraged by this logic, European polities have long restricted work hours. The history of Europe’s labor markets illustrates that more regulations makes hiring less attractive and reduces the total amount of work done in a society.

Dear Professor Glaeser,

You have an excellent point about the cash-for-clunkers program ("Program has clunky reasoning," Boston Globe, Aug 8). Unfortunately, you mess it up by referring to the wrong "economic principle". The idea that people will travel more in their snazzy new, more fuel efficient cars is an example of the Jevons Paradox not the lump of labor fallacy.

Moreover, the example that you presents to illustrate your fallacy claim is an inept distortion both of the original lump of labor fallacy and of recent employment history in Europe. The original lump claim was an anecdotal complaint about restrictions on output.

The tactic of attributing the motivation for reduced work time policies to some underlying fallacy is an intellectually dishonest smear. I've documented the history of the lump of labor claim about shorter working time and I challenge you, Professor Glaeser, to openly debate my rebuttal of the fallacy claim, with regard to reducing the hours of work.

Yours sincerely,

Tom Walker,
author, "Why Economists Dislike a Lump of Labor" Review of Social Economy, Fall, 2007,
http://tinyurl.com/lumpoflabor

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Outrageous Poverty and the Blue Dogs

OK, you all know about Paris Hilton's $325,000 doghouse. Then the Wall Street Journal chimed in with an article by a British physician informing the American public that dogs get better health care than ordinary humans in the British medical system. Thank God for those good U.S. insurance corporations that protect us from such a fate. And thank God for warning us of the dangers of single payer.

Dalrymple, Theodore. 2009. "Man vs. Mutt." Wall Street Journal (8 August).

Then Barbara Ehrenreich published a brilliant piece showing how governments are criminalizing poverty -- yes, making it a crime to threaten society by sleeping on the street or some such violent act. Yet, dogs, are free to behave that way.

Ehrenreich, Barbara. 2009. "Is It Now a Crime to Be Poor?" New York Times (August 8)


From all this I have now learned that dogs have become the standard by which we must judge humanity. When workers complement bosses for treating them like dogs, we will understand. Poor people should aspire to enjoy canine cuisine.

Makes you want to join the Blue Dogs (or should that be Blue Bloods?). Or might there be a better system for organizing society? I don't have time to go any further. I have to get back to reading Kapital.

The criticism of religion ends with the teaching that man is the highest essence for man - hence, with the categoric imperative to overthrow all relations in which man is a debased, enslaved, abandoned, despicable essence, relations which cannot be better described than by the cry of a Frenchman when it was planned to introduce a tax on dogs: Poor dogs! They want to treat you as human beings!

Marx, A Contribution to the Critique of Hegel’s Philosophy of Right

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Hours of Labour 8

by Sydney J. Chapman (translated and condensed by the Sandwichman)

We are assuming throughout, it must be remembered, that the wage will always be the worker's marginal worth – that is, what would be lost if he were dismissed – and that he knows it. Actually, of course, there is frequently an appreciable discrepancy between the marginal worth of labor and its wage, and the usual connection between them has not been commonly understood by the wage-earning classes. It would seem from the records of labor movements as if the worker's fear – based as much on ignorance as on distrust – lest the longer day should mean no more pay, though the weekly product would be greater, has protected him against the injurious consequences of short-sightedness; but I am inclined to think that the dominant force in these labor movements has consisted in ideals of life, formed half instinctively, which are unconnected with views, fallacious or otherwise, concerning the mechanics of distribution. Bad arguments have been used to justify good ends. To these ideals of life I shall refer again.


Actually, the actions of both employers and employed, in so far as they are governed by self-regarding motives, will compromise between immediate impulses and long-sighted calculations. Long-period results that are not very remote will usually be factored in, and employers as well as workers may aim at them, because the former may think the length of time a worker usually stays with one firm sufficient to justify a slight present sacrifice made with the object of securing improvement in the worker's efficiency.

The above analysis explains not only disagreements between employers and workers as regards the normal working day, but also the friction that is constantly generated in the matter of "overtime." Without the admission of overtime, heavy losses might be experienced by an industry in view of the inelasticity of its production and fluctuations in the market in which it sold; but, on the other hand, overtime once admitted sometimes tends to be worked out of proportion to the special need for it, and workers are apt to suspect that it is being used unfairly to extend the normal day.

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The Fundamental Truth of Basic Facts III

by the Sandwichman

Moving right along from Liberty Lobby Carothers and Brookings Institute Moulton we arrive at Thomas Nixon Carver's December 1931 presentation at the annual meeting of the American Economic Association, summarized in the American Economic Review for March 1932. Professor Carver was best known for his contribution to the abstinence theory of interest from the perspective of marginal productivity.

Professor Carver detected four 'errors' in the reasoning of those who advocate shorter working time as cure for unemployment:

First, shorter hours does not reduce unemployment, "it only smears it more evenly." Instead of 10% unemployed and 90% employed, everyone would be employed 90% of the time and unemployed 10% of the time.

Second, more leisure doesn't increase the demand for goods unless it is accompanied by greater purchasing power. Furthermore, leisure could just as easily be spent in the cultivation of the arts and graces. "If the cult of leisure should result in the popularization of Gandiism [sic], humanism or any of the highbrowisms, it would decrease the desire for material goods."

Third, if shorter working time is accompanied by an increase in wages to hold total income constant it will raise the unit cost of products, resulting in decreased sales. "Even though each worker produces less, it may not take any more workers to produce the reduced volume than it took before." Besides, even though workers' money income stayed the same, price increase would mean their real income went down.

If instead of reducing the hours of work, the money wages of workers were reduced, this would result in lower prices, expanded employment and more or less level real wages. Shorter work time bad; lower wages good.

Fourth, it is a mistake to assume that shorter hours would have the same effect globally as it might when applied in only one or a few industries.

"If, as the purchasing power of money wages falls, money wages are advanced in order to keep real wages at the old level, that will send the cost of production still higher, reduce the quantities that can be purchased by those who are not wage workers, call for a still smaller volume of production, and completely nullify any supposed advantage to the unemployed."

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Ten Lost Years

by the Sandwichman

We interrupt the cheering for the better-than-expected, less-bad-than-previous-months unemployment increase for the following announcement:

Seasonally adjusted private nonfarm employment, August 1999: 108,959,000.

Seasonally adjusted private nonfarm employment, July 2009: 108,924,000(Preliminary).

A loss of 35,000 private jobs in TEN (10) years.

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Unemployment Rate Falls as Employment-Population Ratio Declines

BLS reports even more job losses in July:

Nonfarm payroll employment continued to decline in July (-247,000), and the unemployment rate was little changed at 9.4 percent

But the unemployment rate was 9.5 percent in June. Had the Administration been Republican, Lawrence Kudlow would be hailing this report as good news. Paul Krugman offers a different tone:

Some readers have asked how it’s possible for unemployment to fall when the economy is still losing jobs, albeit at a slower rate. The answer is a bit annoying. First, the jobs number and the unemployment number are based on different surveys — a survey of establishments in the first case, a survey of households in the second. Sometimes employment rises by one measure while falling by the other, although it happens that this month there isn’t much difference in the jobs number.

The household survey also showed job losses – with its figure being 155,000, which drove the employment-population ratio down from 59.5% to 59.4%. The labor force participation rate, however, also fell from 65.7% to 65.5%. The employment picture got a little worse last month or as Paul concludes:

the employment situation is drifting down, but not plunging — occasional mixed signals are likely. No big deal. The basic story is that things are sort of stabilizing — but they’re definitely not improving yet.

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THE LONG-TERM PROBLEM OF FULL EMPLOYMENT

by the Sandwichman

For those who still haven't "gotten the memo", I'm posting it again. I will continue to repost this memo each month around the time of the BLS report. Please see also Dean Baker's proposal of tax credits for paid time off. (How European!)

THE LONG-TERM PROBLEM OF FULL EMPLOYMENT

J.M. Keynes (May 1943):

1. It seems to be agreed today that the maintenance of a satisfactory level of employment depends on keeping total expenditure (consumption plus investment) at the optimum figure, namely that which generates a volume of incomes corresponding to what is earned by all sections of the community when employment is at the desired level.

2. At any given level and distribution of incomes the social habits and opportunities of the community, influenced (as it may be) by the form and weight of taxation and other deliberate policies and propaganda, lead them to spend a certain proportion of these incomes and to save the balance.

3. The problem of maintaining full employment is, therefore, the problem of ensuring that the scale of investment should be equal to the savings which may be expected to emerge under the above various influences when employment, and therefore incomes, are at the desired level. Let us call this the indicated level of savings.

4. After the war there are likely to ensure [sic] three phases-
(i) when the inducement to invest is likely to lead, if unchecked, to a volume of investment greater than the indicated level of savings in the absence of rationing and other controls;
(ii) when the urgently necessary investment is no longer greater than the indicated level of savings in conditions of freedom, but it still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment;
(iii) when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises.

5. It is impossible to predict with any pretence to accuracy what the indicated level of savings after the war is likely to be in the absence of rationing. We have no experience of a community such as ours in the conditions assumed, with incomes and employment steadily at or near the optimum level over a period and with the distribution of incomes such as it is likely to be after the war. It is, however, safe to say that in the earliest years investment urgently necessary will be in excess of the indicated level of savings. To be a little more precise the former (at the present level of prices) is likely to exceed £m1000 in these years and the indicated level of savings to fall short of this.

6. In the first phase, therefore, equilibrium will have to be brought about by limiting on the one hand the volume of investment by suitable controls, and on the other hand the volume of consumption by rationing and the like. Otherwise a tendency to inflation will set in. It will probably be desirable to allow consumption priority over investment except to the extent that the latter is exceptionally urgent, and, therefore, to ease off rationing and other restrictions on consumption before easing off controls and licences for investment. It will be a ticklish business to maintain the two sets of controls at precisely the right tension and will require a sensitive touch and the method of trial and error operating through small changes.

7. Perhaps this first phase might last five years,-but it is anybody's guess. Sooner or later it should be possible to abandon both types of control entirely (apart from controls on foreign lending). We then enter the second phase, which is the main point of emphasis in the paper of the Economic Section. If two-thirds or three-quarters of total investment is carried out or can be influenced by public or semi-public bodies, a long-term programme of a stable character should be capable of reducing the potential range of fluctuation to much narrower limits than formerly, when a smaller volume of investment was under public control and when even this part tended to follow, rather than correct, fluctuations of investment in the strictly private sector of the economy. Moreover the proportion of investment represented by the balance of trade, which is not easily brought under short-term control, may be smaller than before. The main task should be to prevent large fluctuations by a stable long-term programme. If this is successful it should not be too difficult to offset small fluctuations by expediting or retarding some items in this long-term programme.

8. I do not believe that it is useful to try to predict the scale of this long-term programme. It will depend on the social habits and propensities of a community with a distribution of taxed income significantly different from any of which we have experience, on the nature of the tax system and on the practices and conventions of business. But perhaps one can say that it is unlikely to be less than 7 per cent or more than 20 per cent of the net national income, except under new influences, deliberate or accidental, which are not yet in sight.

9. It is still more difficult to predict the length of the second, than of the first, phase. But one might expect it to last another five or ten years and to pass insensibly into the third phase.

10. As the third phase comes into sight; the problem stressed by Sir H. Henderson begins to be pressing. It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours.

11. Various means will be open to us with the onset of this golden age. The object will be slowly to change social practices and habits so as to reduce the indicated level of saving. Eventually depreciation funds should be almost sufficient to provide all the gross investment that is required.

12. Emphasis should be placed primarily on measures to maintain a steady level of employment and thus to prevent fluctuations. If a large fluctuation is allowed to occur, it will be difficult to find adequate offsetting measures of sufficiently quick action. This can only be done through flexible methods by means of trial and error on the basis of experience, which has still to be gained. If the authorities know quite clearly what they are trying to do and are given sufficient powers, reasonable success in the performance of the task should not be too difficult.

13. I doubt if much is to be hoped from proposals to offset unforeseen short-period fluctuations in investment by stimulating short-period changes in consumption. But I see very great attractions and practical advantage in Mr Meade's proposal for varying social security contributions according to the state of employment.

14. The second and third phases are still academic. Is it necessary at the present time for Ministers to go beyond the first phase in preparing administrative measures? The main problems of the first phase appear to be covered by various memoranda already in course of preparation. insofar as it is useful to look ahead, I agree with Sir H. Henderson that we should be aiming at a steady long-period trend towards a reduction in the scale of net investment and an increase in the scale of consumption (or, alternatively, of leisure) but the saturation of investment is far from being in sight to-day The immediate task is the establishment and the adjustment of a double system of control and of sensitive, flexible means for gradually relaxing these controls in the light of day-by-day experience

I would conclude by two quotations from Sir H. Henderson's paper, which seem to me to embody much wisdom.

"Opponents of Socialism are on strong ground when they argue that the State would be unlikely in practice to run complicated industries more efficiency than they are run at present. Socialists are on strong ground when they argue that reliance on supply and demand, and the forces of market competition, as the mainspring of our economic system, produces most unsatisfactory results. Might we not conceivably find a modus vivendi for the next decade or so in an arrangement under which the State would fill the vacant post of entrepreneur-in-chief, while not interfering with the ownership or management of particular businesses, or rather only doing so on the merits of the case and not at the behests of dogma?

"We are more likely to succeed in maintaining employment if we do not make this our sole, or even our first, aim. Perhaps employment, like happiness, will come most readily when it is not sought for its own sake. The real problem is to use our productive powers to secure the greatest human welfare. Let us start then with the human welfare, and consider what is most needed to increase it. The needs will change from tune to time, they may shift, for example, from capital goods to consumers' goods and to services. Let us think in terms of organising and directing our productive resources, so as to meet these changing needs, and we shall be less likely to waste them."

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Hours of Labour 7

by Sydney J. Chapman (translated and condensed by the Sandwichman)

[technical footnote] The argument in the more technical parts of this address, concerned with the determination of the length of the working day, may be conveniently summarized with the aid of the following figure[s]. In order to avoid the complexities arising from the redistribution of labour between the industries of a country, suppose that only one industry exists. Measure units of time in the working day along OX, and units of money along OY.



Consider first the unbroken lines which represent the influences governing employers. The curve P expresses the long-period variations with the length of the working day of the marginal value of a fixed quantity of labour: the opinion that these can be represented by a curve has been defended in the body of this address. If On hours are worked, this daily value of labour and the wage will ultimately be Onda; if Ob hours are worked, this value and wage rises to Oba; if Oe hours are worked, it falls to Oba - bef.

The meaning of the curve P will now be plain. The curve is supposed to rise in the first instance because increasing the daily hours of labour would at first raise the level of efficiency, and if it did not, the larger wage would. But P must begin to fall at some point, and eventually cross OX, as is demonstrated in the body of the address. Actually, of course, P could not start at OY, because a man when engaged for only a fraction of his time daily could not live on the proceeds of his work, but it has been so drawn in the figures to enable us to picture the value and wage of labour by the area between the curve P and the co-ordinates.



The curve ck represents the immediate variations of the marginal value of a fixed quantity of labour with the length of the working day on the assumption that the normal working day has been Ob. Hence the value of the normal product of the last minute of the working day Ob is bg. Ex hypothesi Obgc must equal Oba. If the working day is lengthened to Oe the product will at first be augmented by bekg, but finally by a gradual decline it will sink to Oba-bef.



The influences guiding the operatives are expressed in the dotted lines, the meaning of which must now be explained. Draw any vertical line dl to the left of b. Then dn is the addition made in the long run to the money income of the operative when the Onth increment of time is added to the working day. Let dm be the long-period value to the operative, when his income is Onda, of the leisure destroyed by the addition of the Onth increment of time to the working day. The curve I is the locus of the point m. Evidently, starting at a, it will lie throughout its length below P, increasingly departing from P (because leisure is subject to the law of diminishing utility and the value of leisure rises with income), and cut OX to the left of b.

Apart from the satisfaction or dissatisfaction of working, therefore, the far-sighted operative who took into account the value of leisure would choose a normal day Oi, which is less than Ob (the choice of far-sighted employers in combination). When the normal day is Oi the marginal value of leisure to an operative with a wage Oiha would be ih, which equals the long-period marginal earnings attributable to the Oith increment of time in the working day.



Now, let L indicate the long-period values to the operative of the effects of different lengths of working day on the absolute satisfaction or dissatisfaction involved in the labour itself, L being otherwise interpreted, when units of money are measured along OY' as well as along OY, and the parts of the curve below OX indicate the prices which would be paid to escape the dissatisfaction involved in working, and the parts above OX the money value of the satisfaction involved in working. As some of the time devoted to production will probably be pleasant to the operative when the length of the working day is most favourable to his enjoyment of work, we may assume that L need not lie throughout its length below OX. Then the working day which perfectly wise operatives would choose would be On, the point n being such that nm = nl, the attainment of which equation is the condition under which the operative's satisfaction is maximised. If, as is theoretically conceivable but practically impossible, L lay further above OX for the abscissa Ob than I lay below it, the length of day most advantageous to the operative would be greater than Ob.

If normal hours are On, the operative who lives for the day and is aware that more work, measured by results, means proportionately more pay, will obviously desire hours longer than On for the following reasons. The product attributable to the Onth increment of working time is greater than dn, since dn represents the gain resulting from the Onth. less the loss occasioned by the reduction which will ultimately take place in the productivity of the operative's earlier hours in consequence of the addition of the Onth increment of time to the working day. For similar reasons the short-period or immediate value of leisure might be less than dm. Again, the money measure of the disutility of the Onth increment of working time is less than nl, because nl measures the results from the fact that the Onth increment of working time diminishes capacity in earlier hours to enjoy labour or sustain fatigue.

It is evident, therefore, that a balance of gain accrues to the operative from the work of the Onth unit of time, when everything, including wages is taken into account, but the effect of the work on the Onth unit of time on the gain associated with the rest of the working day ignored; and, further, that the balance of gain attributable to the Onth hours will not disappear, though it may contract if the working day be slightly extended. Hence we must conclude that operatives who are not alive to the reactions of long hours on efficiency and capacity to enjoy life and work will tend to choose a longer working day than is wise from their point of view. However, to repeat, they will not approve such long hours as employers who are equally blind to future reactions, because the latter, if purely self-interested, make no allowance for the disutility of labour to the operative or the utility to him of leisure.

In the event of progress in methods of production the new position of P would be such that the area enclosed between it and the co-ordinate axes would be increased. P in its new position might cut OX at b, but in all probability the new intersection with OX would be to the left of b. It is not likely to fall to the right of b, since improvements in the mechanical aids of labour seldom mean that work is rendered less exhausting.

Even if the new curve P passed through b, the new position of I would practically mean its intersection with OX to the left of i because of the enhanced value of leisure. Further L, though it might rise higher than before, would probably descend sooner and at least as steeply. It is to be observed in addition that but for interest, rent and heavy depreciation charges, industrial progress would bring about movements of P involving more considerable augmentation of the area contained between P and the co-ordinate
axes.

Improved education, apart from its effect on efficiency, would bring about a subsidence of the curve I, so that in its new position it would cut OX to the left of i. The effect wrought by progress on short-period forces need not be worked out in detail. The general conclusion is manifest that progress may be expected to be accompanied by a progressive curtailment of the working day.

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Harberger Triangles, Okun Gaps, and X Efficiency

I have written a paper that uses two episodes to illustrate the nature of Chicago economics. It is being rewritten for a mainstream journal, so I have to pull my punches. I would appreciate any comments.

http://michaelperelman.wordpress.com/2009/08/07/harberger-triangles-okun-gaps-and-x-efficiency/x-eff/

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The Fundamental Truth of Basic Facts II

by the Sandwichman

In his article, "In Defense of the Longer Work Week," Harold G. Moulton offered a much more smoothly argued rebuttal of the thirty-hour work week bill than had Neil Carothers. The article appeared in the Annals of the American Academy of Political and Social Science early in 1936, accompanying an argument for the thirty-hour bill by the bill's sponsor in the Senate, Hugo Black.

Moulton was president of the Brookings Institute, which Rexford Tugwell described as "a kind of research organ for the conservatives." In the early months of 1933 Moulton and associates had drawn up detailed plans for the incoming Roosevelt Administration to accomplish "sweeping reductions in public expenditures, consolidation of bureaus, and elimination of government functions."

Moulton began his article by acknowledging two primary ideas underlying the proposal for a shorter work week. First, that the supply of labor chronically exceeded the demand for it and, second, that the shorter work week will generate greater purchasing power for workers and thus stimulate and promote economic recovery.

To evaluate the validity of these ideas, Moulton argued that "we must first have an accurate picture of the amount of goods and services which this country has produced at the time of its best performance, and the length of the work week that was then prevailing." Next, according to Moulton, we needed to ask whether the level of output prevailing at the peak provided an adequate standard of living for the population. Moulton concluded that the output in 1929 was not enough to supply an adequate standard of living for all, even if that output was divided equally.

The next question Moulton addressed was whether recent gains in efficiency were sufficient to enable a reduction in hours of work without sacrificing total output. He concluded that they weren't.

The principle that working hours should be reduced in proportion to increasing efficiency is utterly indefensible. It would freeze productive output and standards of living at the low level of 1919 or some other selected year. It would give us a static society in which progressively improving conditions for labor would be virtually impossible.

The careful reader may be left to wonder just how Moulton had extracted from a William Green quote (that advocates no such thing), the "utterly indefensible principle" that working hours be reduced in proportion to efficiency gains?

Having substituted a somewhat duplicitous discussion of output for the issue of imbalance between the supply of labor and the demand for it, Moulton then turned to address the issue of whether the shorter work week would stimulate business recovery. "In the first place," Moulton explained, "a great increase in pay-roll disbursements, unaccompanied by any increase in output, inevitably means a sharp increase in unit cost." Higher prices to the consumer would be the inevitable consequence of the increase in costs. Higher prices and higher wages combined would result in no increase in the standard of living.

Finally, Moulton addressed the shorter work week from the perspective of a relief measure for the unemployed. Here, he conceded that "a shorter work week would put people back on the pay rolls," objecting only that the 'real question' is who should bear the burden of relief, the workers or the American people as a whole? Moulton magnanimously declared that other (unspecified) methods than the shorter work week would be more equitable in providing relief to the unemployed. Besides not specifying which other methods he had in mind, Moulton declined to consider the political feasibility of those phantom methods.

Moulton's presentation was slicker than Carothers's but in the final analysis it relied on the same three flawed assumptions: that wages were paid out of a "fixed wages fund" consisting of a efficiency-optimized portion of the total output of industry, that the output of labor was proportionate to the hours worked and that aggregate hours worked were proportionate to hours per worker. The latter assumption was more of a rhetorical feint than an analytical error. Both Carothers and Moulton relied on the inattentiveness of the reader when they cuelessly segued from individual to aggregate hours.

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Farmer to Fed: "Spread Manure!"

by the Sandwichman

Tim Duy at Fed Watch smells a new bubble fueled by a joblessly loose monetary policy. Meanwhile, at the Financial Times, Roger Farmer would like to see central banks act to sustain the wealth of the private sector by "buying and selling blocks of shares on the open market." Professor Farmer sez:

A stock market rally is not enough. The market must rally to the point where wealth enables households and firms to purchase the goods that will maintain full employment. If this does not occur, and I think this is likely, we are heading for a jobless recovery.

Translation: "A stock market rally is not enough. Give us a bubble!" Note the trickle down formulation: rallying markets (not wages!) create wealth that enables households and firms to consume -- also known as the "horse and sparrow" or "manure" theory.

Sandwichman calmly replies, "you say jobless, we say work less!"

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Skidelsky on Keynes and Queens

by the Sandwichman

In yesterday's Financial Times, Keynes biographer Robert Skidelsky weighed in on the Queen's question about the sorry state of economics:

It is only by imagining a mechanical world of interacting robots that economics has gained its status as a hard, predictive science. But how much do its mechanical constructions, with their roots in Newtonian physics, tell us about the springs of human behaviour?

One of the most interesting contributions to the FT.com debate was the argument that, after Keynes, economists should have aligned their discipline with other social sciences concerned with human behaviour. Keynes opened the way to political economy; but economists opted for a regressive research programme, disguised by sophisticated mathematics, that set it apart. The present crisis gives us an opportunity to try again.

I want to seize this opportunity to tie in Skidelsky's current remarks with related observations he made a decade ago dealing with Keynes's wartime memorandum on full employment that the Sandwichman posts each month to coincide with the BLS's monthly employment situation report.

My final section can best be introduced by quoting from a letter Keynes wrote to T.S. Eliot on April 5, 1945: "The full employment policy by means of investment," he wrote, "is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less" (CW, XXVII, p. 384).

To make sense of this mysterious remark, one has to go back to Keynes' essay, "Economic Possibilities for our Grandchildren," first read to Winchester schoolboys in 1928, or even further back to G.E. Moore's Principia Ethica, the bible of his youth and the source of his ideas about the good life. Economics, Keynes always insisted, is only useful if it can get us over the hump of scarcity, as quickly as possible, into the realm of plenty, when man would confront his "real, his permanent problem--how to use his freedom from pressing economic cares ... to live wisely and agreeably and well" (CW, IX, p. 328). "The full employment policy by means of investment" is Keynes' method of accelerating through the barrier. From this perspective, the mass unemployment of the interwar years was not just the result of a random collapse of confidence, but the precursor of what can happen to rich societies that fail to make adequate preparations for the good life which wealth makes possible.

It is typical of Keynes that he should have returned to this vision during the war itself, as soon as it became clear that the Allies would win. The core of it is contained in a memorandum he wrote on May 25, 1943, entitled "The Long-Term Problem of Full Employment." He saw three phases after the war. In phase I, which he thought might last five years, investment demand would exceed full employment saving, leading to inflation in the absence of rationing and other controls. In this phase, the emphasis should be on securing a high rate of saving in order to reconstruct the war damaged economy. In phase 2, which he thought might last between five and ten years, he foresaw a rough equilibrium between investment and full employment saving "in conditions of freedom," with the state active in varying the pace of investment projects. In phase 3, investment demand is so saturated that it cannot be brought up to the level of full employment saving without embarking on wasteful and unnecessary programmes. In this phase, the aim of policy should be to encourage consumption and discourage saving, and so absorb some of the unwanted surplus by increasing leisure, with shorter hours and more frequent holidays. This will mark the entrance to the "golden age," the age of capital saturation. Eventually, Keynes thought, "depreciation funds should be almost sufficient to provide all the gross investment that is required" (CW, XXVII, pp. 321-324; also see Keynes to Josiah Wedgwood, July 7, 1943, p. 350). It is the age, foreshadowed in the General Theory, of the "euthanasia of the rentier," since there will be no demand for new capital.

The same objection can raised against this essay in prophecy that was raised against Keynes' earlier "Economic Possibilities for our Grandchildren": that it assumes that all material wants in the wealthy nations will be quickly saturated, and that it completely ignores the capital needs of the poor countries. In these respects Keynes was a child of his times. He did not foresee that technology would constantly create new products and underestimated the ability of advertising constantly to create new wants. Above all, he did not foresee the postwar population explosion in the developing countries. This factor, more than anything else, has rendered his prophecy academic.

Nevertheless, it does raise some pretty fundamental questions about what economics is for, as well as the distinctly awkward question of how far the peoples of wealthy nations should continue postponing their own "golden age" until everyone in the world has caught up with them. What is certain is that Keynes would never have worshipped at the altar of GDP. The rate of per-capita income growth was only important to him as an indication of the speed at which societies were approaching material abundance. Beyond that point, he expected that rates of growth would and should slow down. One can surmise that he would have had little sympathy for "endogenous growth theory" which promises to postpone the slowdown of rich countries, and thus the "catch up" of poorer countries, into a far distant future.

My purpose in this paper has not been to enter into an argument with Keynes. It has been to show that his thought, from whatever period of his life one chooses to take it, is richer, more suggestive, and more unexpected than the textbook Keynesianism that still flourishes, or the administrative Keynesianism that ruled policy in the 1950s and 1960s. His views on the minimum sustainable rate of unemployment and his fiscal philosophy still have a great deal to offer governments. His reminder that economics needs to retain its connection with the non-economic ends of life as these have been conceived by moralists and ethical philosophers remains a necessary warning against blind worship of the golden calf, and against marketization carried to extreme lengths. So I say: Down with Keynesianism, and up with Keynes!

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Tax Cut Effect on Consumption – One Point Does Not Specify a Straight Line

While I tend to agree with Jeff Frankel, let me play devil’s advocate:

Martin Feldstein and others predicted that the tax-cut component of the 2009 fiscal stimulus package would have substantially less expansionary bang-for-the-buck than the spending component of the package, because much of the tax cut would be saved, as had been the case with the 2008 tax cut. (“Bang for the buck” in this case could be defined as demand stimulus divided by budget cost.) We knew this from Milton Friedman’s permanent income hypothesis, or even from good old Keynesian multiplier theory.

Actually, the Econ 101 version of Keynesian multiplier theory might tell you that most but not all of the tax cut would be consumed with a little bit going to savings but Martin Feldstein was capturing what the permanent income hypothesis would predict from a temporary tax cut:

Recent government statistics show that only between 10% and 20% of the rebate dollars were spent. The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending.

In other words, the claim is that most of the 2008 tax rebate was saved with very little of it being consumed. Feldstein argues that the same low bang for the buck effect is occurring with the tax cut portion of the 2009 fiscal stimulus.

Gary Burtless is not so sure this is quite right:

Before the recession began, American households saved very little. The personal saving rate was just 1.5% in late 2007. As the recession worsened, the saving rate soared. In the most recent quarter, it reached 5.2%. Critics of the government’s stimulus policies claim the surge in personal saving has undone the intended effects of the stimulus. In their view, the government’s efforts to boost the economy have failed. Is this claim credible? The last business cycle expansion reached a peak in the end of 2007. Since that time, the number of payroll jobs has shrunk without interruption and total U.S. output has fallen 3.7%. The drop in private personal income was even faster. It fell 4.4% in the six quarters after the end of 2007, a decline of more than $500 billion at an annual rate. At the same time, the net worth of American households fell more than $12 trillion, or about one-fifth. In the face of the sharp fall in private income and steep dive in household net worth, personal consumption expenditures fell just 2% from the beginning of the recession through the second quarter of 2009. One reason the drop in personal consumption was so small was the massive swing in household tax liabilities and government transfer payments. This swing was partly the result of two stimulus packages passed in 2008 and 2009 … The notion that the stimulus package failed is based on a very unrealistic benchmark. An assumption of stimulus critics seems to be that for the package to succeed, household consumption must remain constant or even rise in the face of sharply lower private incomes and household wealth. How realistic is this expectation? Not very. My interpretation is that the massive swing in taxes and government transfer payments, produced in part by the stimulus packages, moderated the fall in household consumption that would otherwise have occurred. The stimulus packages did not end the recession, but they reduced its severity.

The argument is that the consumption schedule shifted downwards due to a decline in wealth and the tax cuts did induce a movement along the new lower consumption schedule with a larger bang for the buck than Feldstein and Frankel are suggesting. Our graph shows both real GDP and real consumption from 2006QIII to 2009QII. While both series rose for a few quarters, both series have been declining since the end of 2007 with the net change in both being close to zero. With a reduction in taxes, after-tax income has increased but consumption has not. How much of this disappointing news is due to a low marginal propensity to consume for the tax rebates versus a wealth-induced downward shift of the consumption schedule appears to be open to debate.

Not open to debate in my opinion was the need for fiscal stimulus – and many economists think we still need more fiscal stimulus. And Jeff’s general point is still valid:

if it is short-term demand stimulus we are after, and we are, then government spending gives more bang for the buck than tax cuts.

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The Fundamental Truth of Basic Facts

The April 1935 issue of Congressional Digest featured a debate between American Federation of Labor President, William Green and Neil Carothers, Professor of Economics at Lehigh University, on the topic "Would a Thirty-Hour Week Increase Employment."

Carothers presented the "con" position that the adoption of a 30-hour week would defeat its purpose and lower the standard of living by reducing industrial production. A supporter of FDR during the 1932 election, Carothers became an outspoken opponent of the New Deal and was a member of the National Advisory Council of the American Liberty League.

"The fundamental truth that you cannot help labor by reducing production is the basic fact in this 30-hour week matter."

Those who want to reduce the workweek are like a man who just jumped through a plate glass window. He can't remember why he did it but it seemed like a good idea at the time.

There is no economic issue more complex and obscure than the hours of work. The trained economist hesitates to speak on it. Nevertheless, there are some very elementary economics involved.

There are three factors of production: land, labor and capital. All three are paid out of the product of industry. Automatic forces of nature set the share of each. Whatever reduces the productivity of any one of them reduces the product and reduces wages.

If the average work week is 44 hours, then the national dividend is simply the product of 44 hours of labor applied to our land and capital. Cut this work to 22 hours and you destroy the American standard of living. Cut it again to 11 hours and our civilization disappears. Cut it once more to 5 and 1/2 hours, and death sweeps away the population.

But you say, this is a proposal to cut to 30 hours. Exactly. It will have the same starvation tendency, but it will not go quite so far.

You can solemnly propound fool theories, you can talk glibly about "sharing the work," you can believe in impractical schemes for "absorbing the unemployed"; but this cold fact still stares you in the face. It has been a fact for a long time. That's all there is to it.

Well… almost all, except for some refined analysis. One of the glorious facts of American history is the slow but relentless reduction in the hours of labor. What has caused this blessed improvement? It was the operation of economic forces!

Labor's argument that reducing hours increases total output is, in general, not true. What is true is that when hours are uneconomically long they result in a loss to the employer and thus he can afford to reduce them.

Unfortunately, this only works for highly skilled workers with modern machinery. It's not for ditch diggers, dishwashers or retail sales clerks, though, poor devils! But economic history shows that it is wiser to restrict hours in these fields at least to the point where workers are not victims of exhaustion or deprived of home life and recreation. Arbitrary restrictions of their hours throws these workers on relief.

The increasing expense of capital equipment makes radical reduction of hours most dangerous. Shortening the hours of work increases the overhead cost and will wipe out returns from sales. All this tedious economics is essential for an understanding of the 30-hour week proposal.

In practice, the law would affect only a small proportion of the workforce and thus lead to a trivial amount of job creation. So, what is the real objective of the 30-hour workweek scheme, then? The real objective is to force a wage increase by law. The six-hour day will become an eight-hour day for a few privileged workers with the last two hours being worked at the overtime premium. In the long run, though, even these workers will not gain because their excessive wages will cause employers to replace them with machines and they will end up out of work, too.

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Hours of Labour 6

by Sydney J. Chapman (translated and condensed by the Sandwichman)

I now pass on to analyze the determinants of the worker's choice in the matter of the hours of labor, assuming that his wage equals his marginal worth and that he knows it, and supposing in the first place that he is endowed with perfect foresight. Two things affect him that do not appeal to the self-interest of the employer, namely, the direct value of his (the worker's) leisure and the balance or dissatisfaction that his work yields of itself. By "satisfaction" or "utility" I merely intend a conventional objective representation of the subjective fact of preference, behind which the economist qua economist cannot penetrate. I say this in order to evade the charge so frequently made against economics that it implies the acceptance of Utilitarianism, psychological or ethical. Picking up again the main thread of our discourse, we observe that, apart from the two considerations mentioned above, namely, the value of leisure and the satisfaction got directly from the activity of labor, the worker's real income is maximized when his money income is maximized. Hence apart from these two considerations the choice, as regards the length of the working day, of perfectly far-seeing workers would be the choice of far-seeing employers were the latter combined.

Now take the value of leisure into account. If the worker derived greater utility from an increment of leisure than from the increment of wage sacrificed by transferring an increment of time from production to consumption, he would gain from a shortening of the working day regardless of the given length of the day, other things being equal. Referring to our earlier numerical example, we see that from the long-sighted point of view the productivity of the last fraction of the nine hours' day is zero, while its value as leisure must be greater than zero. Hence, the worker would choose to work less than nine hours a day, it being understood, remember, that he is paid his marginal worth and knows what that will be for different daily periods of work. Leisure consists in rival satisfaction – yielding occupations, active or passive, which are rendered possible by wages. There is consequently a close connection between this and the other determinant of the worker's choice, namely, the positive or negative utility associated with labor itself.

It may be assumed that in the long run, after the working day has exceeded a certain length, any further addition to it diminishes the satisfaction directly derived from working or adds to the balance of dissatisfaction. If a balance of dissatisfaction were associated in the long run with the efforts of the last minute in the working day that the worker would otherwise choose, as would ordinarily be the case, he would elect, other things being equal, to work an even shorter day, the duration of which would be determined at the point at which the gains and losses came to equivalence when everything was taken into account, that is to say, at the point at which his satisfaction was maximized. If the last minute of working still yielded satisfaction in the long run when the hours were nine (referring to the case supposed), which is so highly improbable as to be a negligible case, the worker would prefer to devote more than nine hours of his day to production were this satisfaction of working greater than the value associated in the long run with the last minute of leisure left when nine hours a day were given to business.

So far, in considering the workers' interests we have fixed our eyes on a remote perspective. We next focus our attention upon immediate tendencies and suppose them not to be counteracted by forces arising out of a regard for ultimate results. In these circumstances the worker would be inclined to select a longer working day than would be continuously the most advantageous to him, because be would be blind to the reaction of the longer hours on efficiency and consequently on earnings and the capacity to take pleasure in work. Many people lower the general level of their earnings in the future – and spoil their enjoyment of work and leisure in the future – by making as much as they can in the present. However, even in these circumstances, workers would not approve such long hours as employers who were short-sighted, because the latter would make no allowance for the disutility of labor to the worker or the utility to him of leisure.

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Eugene Steuerle: Deficit Hawk in the Middle of a Depression

AP News reports:

Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion. Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receip