Wednesday, June 11, 2014

"Luddite" Larry and the Downward Ramp of Opportunity

"...unless one regards envy as a virtue," writes Lawrence H. Summers in a column at the Financial Times, "the primary reason for concern about inequality is that lower- and middle-income workers have too little – not that the rich have too much."

Back in the days of Pope Gregory and Dante Alighieri, there were seven deadly sins, not one. Avarice, gluttony and pride were among them. Might we not have as much condescending solicitude for the souls of the rich as for those of the poor and middle class?

Summers argues that the policy impacts which matter most have more to do with health and opportunity for children than with income or wealth inequality. The subheading of his column is "The differences between the rich and everyone else are about health and opportunity." Along the way, though, he quietly substitutes educational achievement for opportunity and concludes:
It would be a tragedy if this new focus on inequality and on great fortunes diverted attention from the most fundamental tasks of any democratic society – supporting the health and education of all its citizens.
Who could be against health or education?

Than depends. Is educational achievement really the same as opportunity for children? Not according to research highlighted by Thomas Edsall in an Op-Ed, The Downward Ramp, at the NYT:
...evidence produced by Paul Beaudry and David A. Green of the University of British Columbia, and Ben Sand of York University, demonstrates that the collapse, between 1980 and 2000, of mid-level, mid-pay jobs — gutted by automation or foreign competition (and often both) — has now spread to the high-skill labor market. 
The U-shaped pattern of job growth characteristic of recent decades – strong at the top and bottom, but weak throughout the middle — has now become “a bit more like a downward ramp,” according to David Autor, an economist at M.I.T. who documented the decline in mid-level jobs in the 1980s and 1990s. 
"Many higher skilled workers have moved down the occupation ladder and accepted less challenging employment," Beaudry wrote in an emailed response to my inquiry about this development. "This movement down has been very detrimental to the low skilled, as higher skilled workers have taken many of 'their' jobs."
Not to worry, though. Allister Heath cheerily reassures us in a column at The Telegraph, "Capitalism is a process of creative destruction... It's scary but it works."
The faster the mechanisation process, the more likely we are to see productivity – the amount of output each worker generates – starting to grow again and, with it, wages. A greater use of artificial intelligence throughout the economy will benefit, not hurt, the overall workforce. will be vital to help individuals displaced by the new technologies to find work in new areas. Better education and training will become even more vital. 
The lump of labour fallacy is the oldest myth in economics. There is no fixed stock of jobs; in a dynamic economy, millions of new ones are created every year to replace the equally large numbers that are lost. The luddites are as wrong today as they were two centuries ago.
One reader asks, though:
Given that technology has replaced so many jobs the obvious question is why we are still working such long hours? We don't seem to have taken advantage of technology in the ways predicted by nineteenth century thinkers.
As fate will have, Summers addressed both Luddites and long hours last July in his 2013 Martin Feldstein* Lecture, "Economic Possibilities for Our Children."
When I was an MIT undergraduate in the early 1970s, a young economics student was exposed to the debate about automation. There were two factions in those debates. There were the stupid Luddite people, who mostly were outside of economics departments, and there were the smart progressive people, who at that time were personified by Bob Solow. The stupid people thought that automation was going to make all the jobs go away and there wasn't going to be any work to do. And the smart people understood that when more was produced, there would be more income and therefore there would be more demand. It wasn't possible that all the jobs would go away, so automation was a blessing. I was taught that the smart people were right. Until a few years ago, I didn't think this was a very complicated subject; the Luddites were wrong and the believers in technology and technological progress were right. I'm not so completely certain now.
One might quibble that it's more than a matter of "changing sides" in the debate about automation as framed by the economics departments. This was no debate but a set piece demolition by the "smart people" of straw man arguments that had little to do with the real issues. Incidentally, the smart people at MIT -- presumably Keynesian Synthesists like "Uncle Paul" Samuelson -- appear to have been teaching the vulgar version of Say's Law, "supply creates its own demand," that Keynes repudiated.

In his reflections on his undergraduate education, Summers didn't connect the dots between the Luddite mythology and what Keynes supposedly "got wrong" in his "Economic Possibilities for our Grandchildren." Instead he offered the following anachronism:
But Keynes also got some things wrong. He predicted that as incomes rose eightfold, the workweek would fall to 15 or 20 hours. The reason he got that wrong is something that I hadn’t previously reflected on. 
When I took introductory economics, a big feature of the textbook was the backward bending labor supply curve, where it was explained that past a certain point, the income effect took over from the substitution effect and so the labor supply curve bent backwards. This does not get much attention in textbooks today. The reason is that people with higher wages now work more hours than people with lower wages. The time series tracks the cross section. Over time, as we have all gotten richer, the number of hours worked for many people has risen.
That backward-bending labor supply curve was indeed a big feature of the textbook when Summers took introductory economics. It wasn't in 1930, when the essay was first published, nor in 1928 when it was delivered as a talk to the Political Economy Club at Cambridge.

The confluence of mythology and anachronism in Larry Summers's education has more than pedantic relevance. As his casual reference to the platitude that Summers may not have even recognized as Say's Law suggests, his miseducation (or myth-education) on history of economic thought has theoretical consequences. And of course, Summers is not alone in his "delightful abundance of aberrations."

The creature that emerges from this anachronistic, mythological bend-over-backward Luddite lump-of-labor supply swamp is not "modern economics" any more than George Washington cutting down a cherry tree with a laser beam is "American history" It is that hoary old "magazine of untruth" masquerading as economics.

*Marty FeldSTEIN -- not to be confused with Marty FeldMAN as Igor ("it's pronounced eye-gore") in "Young FrankenSTEIN" -- was Larry Summers's mentor.

1 comment:

Padriag said...

It amazes me how many popular economists seem to think that, just because aggregate wealth increases, demand must increase as well. Since the wealthy save more of the income than do the poor, it matters for demand who exactly reaps the increase in wealth - so it could well be the case that technological changes that increase productivity and wealth might actually lead to falling demand, if these changes massively redirect income towards the wealthy, and the differential in the marginal propensity to save is high enough.

All of which is to say that I see no reason why this increase in productivity shouldn't allow the wealthy (who have lop-sided political influence) to siphon those gains off to themselves - even if the newly created low paying jobs are better paid (a major assumption, that), the switch from mid-skilled and mid-paid jobs to low-paid jobs could be quite consistent with falling demand.