Middle-Sized Facts vs. IS-LMist Fundamentalism

"So I don't care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you. What you should ask is whether that approach has proved useful -- and whether the critics have something better to offer." -- Paul Krugman, "Unreal Keynesians"

The issue, of course, is not whether 'the master' would have approved of the IS-LM gadget but whether it represents an analytical advance or a regression from the insights that Keynes achieved. In a 1980 "explanation," Hicks conceded that "as time has gone on, I have myself become increasingly dissatisfied with it." In a commentary on Hicks's explanation, though, G.L.S. Shackle was less ambivalent. I have selected and re-arranged passages from Shackle's commentary to highlight his central point -- that uncertainty and equilibrium are fundamentally incompatible concepts.

The one big thing in Keynes' ultimate conception is our unknowledge of what will create itself in time-to-come. "We simply do not know." The author of A Treatise on Probability expressly rejects the notion that probability can turn this unknowledge into its opposite. When we accept this view, the possibility of involuntary unemployment becomes self-evident. 

Sir John Hicks' paper was the first presentation of IS-LM and has been for forty and more years the most famous and the most influential interpretation of Keynes. Central and essential to its argument is a notion of equilibrium. 

Sir John still does not seem to me to acknowledge the essential point: the elemental core of Keynes' conception of economic society is uncertain expectation, and uncertain expectation is wholly incompatible and in conflict with the notion of equilibrium. 

In the literature of economics the word equilibrium covers a multitude of ideas and of vacuous substitutes for thought. Its pervasive presence and the ascendancy its serious meanings have exercised show plainly that it "does something" for the economic theoretician. What does it do? It enables him to exhibit the economic world as determinate, explicable, calculable, and even predictable. Equilibrium is orderliness, harmony, the advancement of one's own interest by serving that of others. Equilibrium is interactive rationality, the recognition that society is an organism. Above all, it is the necessary condition, the basis and sanction of proof. Pride in proof is legitimate. Proof is certainty, an end to debate, and it is more, in the scale of values and sensibilities of many of us. Proof is beauty. If economic theory is to validate its claim to be a deductive system, a science, then the equilibrium idea is indispensable. But proof can exist only in a closed world. It depends upon "givens." If we are not supplied with "givens," and if we are not defended from things not given, of which we were not told, things which can blow in on us in the cold draught from time-to-come, there is no proving things.

Shackle doesn't go far enough. Well, he probably goes far enough in outlining the incompatibility of the notion of equilibrium with the conception of uncertain expectations. But I think it is possible to go a further step in comprehending the incompatibility of the notion of equilibrium with itself. That is to say, the essential incongruity of the notion of equilibrium. 

In an appendix to Significance and Basic Postulates of Economic Theory, T.W. Hutchison admonished, "It is high time to put these theories [laissez faire and equilibrium doctrines] firmly back in their place as Utopian constructions." He cited S. Bauer's 1931 article, "Origine utopique et métaphorique de la théorie du “laissez faire” et de l’équilibre naturel."

Prominent in Bauer's discussion of the origins of the notions of laissez faire and equilibrium is the role of Baltasar Gracian's Oráculo Manual -- which was translated into French by Amelot de la Houssaie in 1684 -- in popularizing both the notion and the term, laissez faire. Pierre le Pesant Boisguilbert is credited with introducing the term into political economic thought in a book published in 1707. Below is the maxim extolling the art of leaving things alone:

Where this story of equilibrium starts to get convoluted is in the Spanish Baroque's philosophical tradition of radical skepticism that Gracian exemplified. In the introduction to his English translation of Gracian's Pocket Oracle, Jeremy Robbins describes the "world of deception and illusion" central to Baroque thought:

Gracián posits a world of deception and illusion, in which appearances predominate and malice and cunning are omnipresent. Hence the distrust, pessimism and misanthropy that characterize his world-view. The key concept here is deceit (engaño): this covers, for Gracián, not simply the deception of one individual by another, but our self-deception as to the true nature and value of the world, and hence our deception by the world. It is a term at once moral and epistemological: to fail to know the world for what it is condemns us to moral error and to failure. Because of our tendency to accept appearances and to follow our desires, passions and emotions, we are mired in a world of deceit. There is consequently an urgent need for disillusionment (desengaño), the other key concept of the Spanish Baroque, For Gracián and his contemporaries, disillusionment means the realization of the true worth of things, seeing them as they really are: in essence, that this world and all within it is worthless. For many writers, this means explicitly viewing things not from a human or worldly perspective, but from the perspective of eternity, on the grounds that the here and now, being transient, amounts to mere appearance, true reality being what awaits us after death.

Robbins is the author of an introduction to seventeenth century Spanish literature titled The Challenges of Uncertainty, in which he argues that Spanish literature, "creatively responded to the unprecedented sense of uncertainty fostered by developments across Europe... it was above all this scepticism which led Spaniards to employ literature and art to question the boundaries of reality and illusion." 

Something weird is going on here. An aesthetic response to uncertainty about the bounds of reality and illusion has been adapted and transformed into a fundamental assumption about the nature of the the world. Uncertainty has been overcome by... an imaginary Utopia,

In "The Quest for Ignorance or the Reasonable Limits of Skepticism" Stephen Pepper argued that "Utter skepticism -- a skepticism void of all knowledge -- could not know itself and stands refuted in its very utterance." There are limits to what we cannot know. The Utopia of equilibrium is not simply incompatible with uncertainty -- it is an inevitable symptom of unreasonable uncertainty. Pepper asked, "How little can we know? What is the maximum of a reasonable unbelief?" His answer relied on the acknowledgement, first, of what he called "middle-sized facts":

These middle-sized facts are the matrix of all knowing. We are so immersed in them all the day long that we ordinarily miss their significance. The common man does not think about them, because he is moving among them; and the specialist does not think about them, because he has made assumptions that raise him above them. They get left out in most discussions of knowledge and fact. But they constitute the lowest limit of skepticism.

Monetary Policy: Bernanke and Yellen v. Taylor

The economist bloggers should all rejoice the fact that Ben Bernanke has joined us. His first post is excellent and I will present a key quote shortly. But let me express my main frustration with how some people are using the Taylor rule versus something that Janet Yellen recently noted:

Even with core inflation running below the Committee’s 2 percent objective, Taylor’s rule now calls for the federal funds rate to be well above zero if the unemployment rate is currently judged to be close to its normal longer-run level and the “normal” level of the real federal funds rate is currently close to its historical average. But the prescription offered by the Taylor rule changes significantly if one instead assumes, as I do, that appreciable slack still remains in the labor market, and that the economy’s equilibrium real federal funds rate–that is, the real rate consistent with the economy achieving maximum employment and price stability over the medium term–is currently quite low by historical standards. Under assumptions that I consider more realistic under present circumstances, the same rules call for the federal funds rate to be close to zero

Taylor has been arguing for some time that monetary policy is keeping interest rates too low for too long. OK, if one believes were are near full employment and one believes that Wicksellian natural interest rate is still 2 percent, this follows. But many of us – including Yellen - reject both premises. What is Taylor’s response?

So the main argument is that if one replaces the equilibrium federal funds rate of 2% in the Taylor rule with 0%, then the recommended setting for the funds rate declines by two percentage points. The additional slack due to a lower natural rate of unemployment is much less important. But little or no rationale is given for slashing the equilibrium interest rate from 2% percent to 0%. She simply says “some statistical models suggest” it. In my view, there is little evidence supporting it, but this is a huge controversial issue, deserving a lot of explanation and research which I hope the Fed is doing or planning to do.

Might I suggest Taylor start his research by reading Bernanke’s first blog post:

Low interest rates are not a short-term aberration, but part of a long-term trend ... The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed. To understand why this is so, it helps to introduce the concept of the equilibrium real interest rate (sometimes called the Wicksellian interest rate, after the late-nineteenth- and early twentieth-century Swedish economist Knut Wicksell). The equilibrium interest rate is the real interest rate consistent with full employment of labor and capital resources, perhaps after some period of adjustment. Many factors affect the equilibrium rate, which can and does change over time. In a rapidly growing, dynamic economy, we would expect the equilibrium interest rate to be high, all else equal, reflecting the high prospective return on capital investments. In a slowly growing or recessionary economy, the equilibrium real rate is likely to be low, since investment opportunities are limited and relatively unprofitable. Government spending and taxation policies also affect the equilibrium real rate: Large deficits will tend to increase the equilibrium real rate (again, all else equal), because government borrowing diverts savings away from private investment.

The converse is true as the unwise fiscal austerity evidenced both in the U.S. and Europe is driving down the Wicksellian natural rate. Has John Taylor not been paying attention to the real world over the past several years? Fortunately for us, Ben Bernanke and Janet Yellen have been.

Is the Economic System Self-Adjusting?

"Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility." -- Paul Krugman, June 2, 2013

JOHN MAYNARD KEYNES, from a 1934 BBC radio address*

I was asked recently to take part in a discussion among English economists on the problem of poverty in the midst of potential plenty, which none of us can deny is the outstanding conundrum of today. We all agreed that, whatever the best remedy may be, we must reject all those alleged remedies that consist, in effect, in getting rid of the plenty. It may be true, for various reasons, that as the potential plenty increases, the problem of getting the fruits of it distributed to the great body of consumers will present increasing difficulties. But it is to the analysis and solution of these difficulties that we must direct our minds. To seek an escape by making the productive machine less productive must be wrong. I often find myself in favor of measures to restrict output as a temporary palliative or to meet an emergency. But the temper of mind that turns too easily to restriction is dangerous, for it has nothing useful to contribute to the permanent solution. But this is another way of saying that we must not regard the conditions of supply -— that is to say, our facilities to produce -— as being the fundamental source of our troubles. And, if this is agreed, it seems to follow that it is the conditions of demand that our diagnosis must search and probe for the explanation.

George Will on Free Trade and the Price of a Starbucks Latte

Dean Baker reads George Will so we don’t have to:

Will seems to think that we could not get people to work hard to master skills or to be great innovators if they didn't have the prospect of earning billions or tens of billions of dollars. But if we look back through history we can identify an enormous number of tremendously talented and creative individuals who did not get fabulously wealthy or even have any plausible hope of getting fabulously wealthy.

Dean is more patient than I am as I could not get past Will’s first paragraph:

Every day the Chinese go to work, Americans get a raise: Chinese workers, many earning each day about what Americans spend on a Starbucks latte, produce apparel, appliances and other stuff cheaply, thereby enlarging Americans’ disposable income. Americans similarly get a raise when they shop at the stores that made Sam Walton a billionaire.

Ah yes – the canard that all Americans benefit from free trade with China. It is true that we get lower prices for apparel but has Will ever heard of the Stopler-Samuelson theorem? As prices fall for imported products, the wages of workers in the importing competing sector fall even more. And such not everyone gains from free trade. Also - is Will unaware that the wages of Chinese workers have risen considerably from the days when they made only $0.60 an hour? Table 1 of this excellent discussion of how apparel wages internationally evolved from 2001 to 2011 noted how Chinese workers were getting $114.86 per month in 2001 but their real wage rose to $324.90. Of course, these figures were in 2001$ and the consumer price index has risen by 34% since then. So either Mr. Will is unaware of the real wage growth for Chinese apparel workers over the past several years or he does not know how to shop for coffee.

What is a "Thought Experiment"?

This is a thought experiment.

A new take on the gold standard?

Keynes, in his Treatise on Money, in a footnote at the beginning of Chapter 35, referring to the love of money, as a footnote pointing to the work of the Hungarian psychoanalyst, Sandor Ferenczi, who was famous for his work on that subject. Ferenczi argued that the love of money was a continuation of infants’ fascination with their own feces.

 

Ferenczi, Sandor. 1914. “The Ontogenesis of Interest in Money.” In Sex in Psycho-Analysis (Contributions to Psycho-Analysis) (NY: Basic Books, 1950): pp. 319-31.

 

I turns out that Keynes and Ferenczi were up to something.

 

Devlin, Hannah. 2015. “Gold in faeces is worth millions and could save the environment.” The Guardian (25 March). http://www.theguardian.com/science/2015/mar/23/gold-in-faeces-worth-millions-save-environment.

 

“Sewage sludge contains traces of gold, silver and platinum at levels that would be seen as commercially viable by traditional prospectors. “The gold we found was at the level of a minimal mineral deposit,” said Kathleen Smith…

 

Adam Davidson NYT Magazine Argument Clinic: Lumps of Straw

Correcting "Debunking the Myth of the Job-Stealing Immigrant" by Adam Davidson:

And yet the economic benefits of immigration may be the ­most ­settled fact in economics. A recent University of Chicago poll of leading economists could not find a single one* who rejected the proposition.... Rationally speaking, we should take in far more immigrants than we currently do. 

So why don’t we open up? The chief logical mistake we make attribute to our opponents is something called the Lump of Labor Straw Fallacy: the erroneous notion well-worn straw man that [they think] there is only so much work to be done and that no one can get a job without taking one from someone else. It’s an understandable unmitigated   assumption red herring. After all, with other types of market transactions argument, when the supply goes we make something up, the price falls it's true. If there were suddenly a whole lot more oranges, we’d expect the price of oranges to fall or the number of oranges that went uneaten to surge. If Adam Davidson was an orange, we'd expect stale boilerplate canards to be high in vitamin C.

I guess that settles it. More leading economists smoke Camels than any other cigarette. The logic is impeccable:

1. Put your argument here.
2. Replace with a lump of straw.
3. Knock down straw.
4. Q.E.D. your argument is wrong.
5. My argument is right.
6. Economists agree.
7. Therefore, it's a fact!
8. Publish findings in New York Times Magazine.

* Four is "not a single one"? Well, I suppose technically... Or perhaps Davidson meant those who rejected the proposition were married? Several of the "uncertain" economists left comments indicating the question was too vague to answer but suggesting disagreement if the question was clearer. The same number of economists, four (or "not a single one"?), disagreed with question B, that "many low-skilled American workers would be substantially worse off..."

S.H.A.M.E. on Adam Davidson.

WaPo's Fred Hiatt Goes After Old People Yet Again

With Dean Baker on leave and Bruce Webb and other usual suspects laying low, I guess it is up to me to dump on the Washington Post's Editorial Page Editor, Fred Hiatt, for his latest assault on entitlement programs for  the American elderly, something that he is the ringleader of at the WaPo editorial page, leading such eager followers as Robert J. Samuelson and Ruth Marcus, among others.  Much of today's column, "Never-Compromise wins again: New Democrats are being driven to extreme positions," is old hysterical boilerplate, but there are some new themes.  One is to dump on Congressional Democrats for supporting expanding Social Security, which is the "extreme position" he denounces them for, and is something he clearly never expected to see.  The other is to see how he adjusts some of his standard lines in the face of this shifting of the political ground from trying to push cuts in Social Security (and Medicare) to trying to oppose efforts to expand its payments.  Of course, his main line is to compare unfavorably the Congressional Dems to the GOPsters as sources of "gridlock." If only they would get on with good old Bowles-Simpson, all would be right in the VSP world!

In the face of this push to expand Social Security benefits, with Maryland's Rep. Chris Van Hollen being the main object of Hiatt's wrath (and Van Hollen is accused of moving to this position from his supposedly responsible previous position favoring Bowles-Simpson for, ack!, political reasons as he is running to replace Barbara Milkuski in the Senate, and, horrors!, he has figured out that expanding Social Security benefits might be,  awful!, popular with Dem primary voters in MD), Hiatt softens up just a bit on his usual criticisms of Social Security.  In particular, for the first time I have ever seen, he admits that "It is by no means lavish; the average monthly retirement benefits is about $1,300.  It must be protected."  And, he admits that it is "an essential and successful program that has lifted and continues to lift millions of elderly Americans out of poverty."  Wow!  This is the first time I have seen Hiatt say anything even remotely as positive as this about the program.  But, hey, nothing like the earth moving under your feet politically to bring out the recognition that the program is not just some awful nightmare of fiscal disaster.

But of course, it still is such a disaster in his eyes, even if he now admits it has some virtues.  So, he informs us that "But those monthly benefits are paid out of the taxes of working Americans, of whom there were more  than five for every beneficiary in 1960.  Today there are fewer than three workers for every pensioner. In 2030, the ratio will be two to one."  Well.  So those benefits are coming out of the hides of the virtuous younger workers!  That the recipients have paid into the system in the past is not mentioned.

This demographic pitch is the main negative argument he provides, aside from his general whining about how the Dems are now contributing to  gridlock and not accepting the sublime VSP wisdom of  Bowles-Simpson.  This is old stuff, but all the more reason for pointing out how silly it is.  Presented this way to someone never thinking about the issue before or not knowing much,this forecasted change can sound pretty scary.  However, what Hiatt and others pushing this line never mention is that this is not bad when one compares the US with other high income nations.  Indeed, we have among the best demographics of any of these nations for such programs.  That ratio we shall have in 2030 is what one finds already in Germany, where the budget is not in bad shape, people can retire earlier than in the US, and the benefits are higher than in the US.  This is something to panic and freak out about?  Obviously not, but one will not hear this from Hiatt and his flunkies.

Barkley Rosser

Janet Yellen Achieves Greenspanese

It has finally arrived, the moment where Fed Chair Janet Yellen shows she has the stuff, the language stuff, which is not surprising given that as Vice Chair under Bernanke she was leading the effort to figure out how the Fed should communicate with the rest of the word.  And the answer is, as it always has, as confusingly as possible.

The moment came when after noting that "patient" had been removed from the FOMC's officially written communication, this did not mean "that the Fed has become impatient."  The markets had been roiling and boiling, but this Greenspanish remark quickly calmed them.  Confusion reigns and all is well.

Yellen plays the dialectical tension between openness and opacity better than any Fed Chair yet.  Of course, in the ancient of days, the Fed made its decisions secretly and that was that.  Nobody complained, or not too  loudly or effectively or only occasionally.  But then, in the 1970s it came to pass that Congress made Fed Chairs testify periodically on what they were up to, although FOMC meetings continued to be secret with only delayed reports of what they were up to.  Arthur Burns in his testimonies to Congress would assist his obfuscations by smoking a gnarled pipe, which, with his Hoover era appearence, would make him positively owlish as he would disappear into clouds of smoke.  For Volcker, it was massive cigars that would accompany his massive frame, but the disappearence into smoke would provide the appropriate hint of wizadry, as if Fed Chairs were really Tolkien wizards arguing over golden rings of power, if not over gold itself, long shorn of its divine authority that it had from the days of Egyptian pharaohs when its yellow colar and inertness supposedly represented the eternal sunshine associated with Pharaonic divinity.

Since then the thrust has been for ever more openness and instant press conferences, not to mention the disappearance of smoke, even the cigarettes of Greenspan, although he perfected the language of obfuscation that led to not needing the smoke, if still perhaps the mirrors.  Bernanke never could quite measure up to the Greenspanianly eloquent incoherence, although he learned quickly to avoid rattling the markets with overly open remarks about hard facts. But, with this performance, Janet Yellen shows she has transcended Bernanke, and may have even shown how to be obfuscatory and brief all at the same time, thus achieving a truly dialectical synthesis between openness and opacity.

Barkley Rosser

Do we all share the same future as Greece?

The general public are hearing of the phenomenon of the 'bankrupt nation' frequently these days.  It's an interesting mental abstraction that conjures up images of wages being cut in half, public servants being laid off en-masse, interest rates on housing and business loans climbing through the roof, people going hungry, etc.

On the other hand, an incredible juxtaposition is revealed as banks, whilst in reality being functionally bankrupt are 'bailed out' by the very governments now described as insolvent!  

What's going on? Clearly sources of international finance have become much more important than either national economies and the lives of people who inhabit those countries. How did this extraordinary situation occur?....
Continued at:  Do we all share the same future as Greece?

Grexit, from Threat to Promise

Here are the overriding facts that are unlikely to change without a change in policy:

1. Greece is in the grips of an economic and humanitarian crisis.  In fact, unless there is a substantial change in course, it runs the risk of becoming a failed state altogether.

2. Greek sovereign debt is not payable.  Its society will collapse first.

3. There does not exist the political will in Europe for a transfer union that mutualizes the obligations and needs of Greece on a permanent basis.  This is in contrast, for instance, to the United States, in which most sovereign debt is mutualized and interstate transfers occur on a routine basis.  A transfer union might be a first-best solution in Europe, but it is politically infeasible.

4. Under current circumstances, Grexit would be experienced in Greece, and possibly through much of Europe, as a catastrophe.  A hurriedly introduced drachma would be unanchored, and the redenomination of contracts would be chaotic and disruptive of ordinary business.  Greek savings would either flee or be largely wiped out, with dangerous political consequences.

5. Nevertheless, Greece was a poor candidate to enter the eurozone when it did and is a poor candidate to remain in the zone today.  Above all, it lacks a sufficiently large, diversified and productive export sector to permit growth under a fixed exchange rate without the accumulation of unsustainable current account imbalances.

6. Greece is a small country from an economic perspective, and its political-economic challenges are unique.  Properly managed, Grexit does not need to lead to similar policies for larger countries, like Spain and Italy, whose imbalances are not structural in Greece’s sense.

7. Finally, the political evolution of the antagonism between Greece and the creditor countries is pernicious.  The nationalist rhetoric of victimization and resentment, wherever it occurs, is a proven threat to peace and international cooperation.  This alone should be reason enough to change course.

At present Grexit exists as a threat wielded by both sides to extract concessions from the other.  It is a threat to the extent it would be catastrophic, either for Greece in the form of economic chaos or for Europe in the form of contagion.  Nevertheless, properly prepared, Grexit could be a mutually beneficial solution.

What would proper preparation look like?  Here is the sketch of a plan:

First, Grexit would be proposed as one element in a comprehensive solution whose political premise is substantial generosity on the part of the creditor countries with the understanding that this is strictly a one-time event.

Second, as a precondition for Grexit, the existing sovereign debt of Greece would be largely written off, with a residual obligation (under 50% of GDP) clearly consistent with favorable growth prospects.  This may require Europe to assume some degree of obligation for Greece’s debts to the IMF.

Third, the ECB would provide temporary euro reserves to the Bank of Greece in order to support a stable transition back to the drachma.  This could take the form of a swap line which would be resolved and terminated by some target date several years after Greece’s exit from the euro.

Fourth, the mandatory redenomination of contracts and financial assets whose payment streams would be in drachmas would be permitted to occur over a suitable time frame, such as a year.  In other words, just as with eurozone accession, eurozone exit would involve a period of dual currencies with strict parity in order to facilitate orderly redenomination.  The commitment of the ECB to support the drachma well beyond the period of redenomination would underwrite this process.

The end result would be an economically sovereign Greece and a eurozone no longer obligated to finance it.  Both sides would benefit from better conditions for economic growth and reduced political stress.  In fact, it is probable that the large-scale economic restructuring needed in Greece can be accomplished only under circumstances of fundamental sovereignty and freedom that allow experiment with deep reforms.

Such a Grexit should be viewed as a solution incorporating goodwill on all sides, whose goal is progress and not punishment.  It would not be accompanied by expulsion from the EU or any other retaliatory measure.  After a suitable period of time, Greece could reapply for eurozone membership if it chooses without prejudice—either against or for accession.

UPDATE: I have left out perhaps the most difficult aspect of a gracefully managed Grexit, the issuance of new Greek sovereign debt during the dual currency period.  The more such debt is issued, the greater is the ECB’s de facto commitment to the drachma.  The typical eurozone solution would be to impose an upper bound on Greek deficits over the period, probably adhering to the bright line of the Stability and Growth (sic) Pact, in exchange for drachma support.  This would not be ideal, but under the circumstances it is probably necessary for selling the deal.  And Greece would always have the option of foregoing the support if it had confidence in its monetary and fiscal space.

Simple Models

Take a very simple example. Labour is the only input, there's a constant returns technology, and labour produces one apple per hour. 

Start at full employment, where everyone works 40 hours per week, and nobody wants to work any more than 40 hours. ...

The first thing I notice about such simple models is that in such a world, people would have no need of "simple models" to help them understand what is going on. In short, the "simple model" thought experiment has no cognitive dimension.

The End.

(Unless it's an economist trying to sound like a physicist) 

The US Presidential And Separation Of Powers System Versus Parliamentary Democracy

I have just returned from a week in London where I was lecturing at King's College.  The newspapers are full of the current election race, with the election coming on May 8, or thereabouts.  Outcome unclear, although looks like Conservatives' coalition partner, the LibDems (Liberal Democrats) will take a big hit, but unclear whether more of  their supporters will go to Labour or the Tories or some of the regional parties.  A big question is whether the tea party-ish Independence Party will break into the parliament. Probably neither of the big two will get a majority, so there will be some coalition, with some forecasting that it could be Labour with the Scottish National Party.  That has led some to heavily criticize Labour Party leader Ed Miliband.  For whatever it is worth, quite aside from policy issues, with many unhappy with those of the current Conservative-LibDem government, the press on all sides seems to agree that something hurting Labour is that Miliband seems "less prime ministerish" than David Cameron, the current one.

Watching all this up close made me think more about the comparison with our system in the US that people here take so for granted.  But it is not the most common system in the world, much as we may all go googly over Madison and his separation and balance of powers, which I grant has some virtues.  But excessive partisanship has recently led this to a state of inane gridlock.  The much more common form that Britain has, parliamentary democracy, avoids a bunch of this.  On thinking about it, I can see some other advantages, although I am not sure how many of them more broadly systemic rather than tied to specific aspects of the US and UK systems.

So, one thing that sticks out is how short their electoral campaign periods are.  We now seem to have arrived to a state of permanent presidential campaigns. They are constantly going on.  Here we are only a bit less than two years from when the next one is inaugurated, but every day in the paper and all over the TV talk shows we have the carryings on and money grubbing of the prospective candidates.   In the alternative, the contests are only a couple of months long, with far less money spent.  Much of this is due to the fact that the leading candidates are known and do not have to go through a long primary process to get their party's nomination.  The parties select their leaders, and those people are the party candidates to be prime minister.  They are there all the time, unless they resign or are overthrown, which happens from time to time.  One could say that this means there is a constant election, but it is not.  It is a constant political debate.

Which brings me to the nature of that political debate.  At least in the UK, they do not have this farce of people in Congress giving speeches to empty houses.  Of course, there was a time when members were there and actually debated.  But now, most are out raising money for their reelection campaigns, even if those are six years away and only show up for votes or committee meetings (sometimes).

In the UK parliament, they are all there pretty much all the time, including the PM and his opponent and rival, the recognized leader of  the opposition.  While in the US there are only a few debates between presidential candidates, and they are carefully scripted to avoid having candidates actually have to answer any real questions.  In the UK parliament, the PM has a question time, and the opposition can and does question him closely, with the public listening live.  Indeed, it is because of this that the public has well-developed views about these people, the PM and the opposition leader.  There is no hiding the way the politicians do here in the US, and I think this is why people have their views about the current candidates pretty well established.

Anyway, we are not going to do anything serious about our system, which I fear will simply get worse, at least in the near future.

Barkley Rosser

The Education of Economists: plus ça change, plus c'est la même chose

What’s Wrong with the Economy—and with Economics?
VI. 2:30–4:00 pm: The Education of Economists
Professor Jefferson Cowie, Cornell University
Jeff Madrick, Century Foundation, New York, Editor of ‘Challenge’ Magazine

If Sandwichman was on that panel tomorrow afternoon, he would share with the audience two accounts of the education of economists, one by Larry Summers from a few weeks ago and one by John Kenneth Galbraith from 1975. All that appears to have changed from the 1930s to the 1960s was that rejection of the Luddite (etc.) fallacy was substituted for acceptance of Say's Law as the test of respectability and the 'crackpots' who didn't go along were replaced by 'a bunch of goofballs.'

First, Galbraith:

Until Keynes, Say's Law had ruled in economics for more than a century. And the rule was no casual thing; to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots. Until late in the '30s no candidate for a Ph.D. at a major American university who spoke seriously of a shortage of purchasing power as a cause of depression could be passed. He was a man who saw only the surface of things, was unworthy of the company of scholars. Say's Law stands as the most distinguished example of the stability of economic ideas, including when they are wrong. 

Summers:

 ...when I was an undergraduate at MIT in the 1960s there as a whole round of concern about this -- will automation displace all the employment? And what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out, and if people got more productive they'd be richer and they'd spend and maybe we needed some transition assistance, but that it was all basically going to be okay. That was what I was taught. That's what Bob Solow thought; he was a hero and the other people were all a bunch of a goofballs was kind of what I learned. (Laughter) 

I actually believed that for many years and actually repeated it often.

Today it's much simpler. The dogma is so deeply embedded in the models and their microfoundations it doesn't have to be explicitly accepted or even acknowledged..The goofballs and crackpots are called "heterodox."

Say's Law and the Secret Police

In Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World, Jeff Madrick ranked Say's Law (and austerity economics) as Bad Idea #2.  How can that be when the erstwhile "law" reputedly sank without trace after Keynes demolished it in the 1930s? In his 1975 book, Money: Whence It Came, Where It Went, John Kenneth Galbraith mused,

…on two things Keynes was immediately influential. Say's Law sank without trace. There could, it was henceforth agreed, be oversaving. And there could, as its counterpart, be a shortage of effective demand for what was being produced. And the notion that the economy could find its equilibrium with unemployment — a thought admirably reinforced by the everyday evidence of the '30s — was also almost immediately influential.

It turns out that Bad Idea #2 didn't sink without trace after all! It went underground -- which was easy to do since the argument had always been a shape-shifter and master of disguise. Operating clandestinely, the Say's Law secret police are beyond and above the rule of law.

In truth, Say's Law wasn't actually Say's. It was a widely held anti-mercantilist notion that was subsequently attributed to Say to lend it panache. Inklings of the idea can be found long before Say in Henri Martyn's 1701 Considerations on the East India Trade. My own candidate for canonical statement from the early industrial period would be Dorning Rasbotham's 1780 pamphlet, "Thoughts on the Use of Machines in the Cotton Manufacture," written in response to anti-factory riots at Bolton, England the previous year.

Squire Rasbotham formulated his dictum succinctly as "a cheap market will always be full of customers." Significantly, the Lancashire magistrate prefaced his truism with a rebuke to that unidentified rabble who falsely believed that there was only a certain quantity of labour to be performed.

These two tracks of the argument were crucial to the disguise. If one's brash claim about the automatic inevitability of effective demand is shown to be theoretically untenable and empirically unfounded, one can deftly switch to the other track of scorning an opponent's silly assumption that there is "only a fixed amount of work to be done." Say's Law "sank without trace" only if one overlooks its not-a-fixed-amount-of-work doppelganger.

Or one could get confounded by the sheer proliferation of aliases: Malthusian fallacy, mercantilist fallacy, Luddite fallacy, fixed work-fund, lump of labor, lump of work and make-work fallacy are the more common negative renderings. Positively, the principle has been defined as supply creates its own demand, technology creates more jobs than it destroys and the impossibility of a general glut. Marx encountered (and dissected) "the theory of compensation as regards the workpeople displaced by machinery."  William Stanley Jevons elaborated the cheerful principle thusly:

As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.

In his review of Seven Bad Ideas, Paul Krugman disputed Madrick's claim that Say's Law was a staple of mainstream economics,

No. 2 on Madrick’s bad idea list is Say’s Law, which states that savings are automatically invested, so that there cannot be an overall shortfall in demand. A further implication of Say’s Law is that government stimulus can never do any good, because deficit spending by the public sector will always crowd out an equal amount of private spending. 

But is this “mainstream economics”? ... Madrick is able to claim that Say’s Law is pervasive in mainstream economics only by lumping it together with a number of other concepts that, correct or not, are actually quite different.

Was "lumping" a Freudian slip? In the late 1990s, Krugman castigated William Greider's One World, Ready or Not, characterizing Greider as an "accidental theorist" and accusing him of committing the "old misunderstanding... sometimes referred to as the 'lump of labor' fallacy":

The title essay in this collection was an effort to take on an old misunderstanding that has lately experienced a revival of popularity: the idea (sometimes referred to as the “lump of labor” fallacy) that there is only a limited amount of work to be done in the world, and that as productivity rises there is therefore a reduction in the number of jobs available.... It is hard to explain that this involves a fallacy of composition, that the effect of a productivity increase in a given industry on the number of jobs in that industry is very different from the effect of a productivity increase in the economy as a whole on the total number of jobs. In the essay I tried to find a painless way of making that point—and along the way to give readers some idea of what it really means to think about economics, what economic theory really is. 

As hard as it might be to explain that the idea involves a fallacy of composition, it would have been much harder to prove that Greider actually committed the fallacy. Krugman didn't bother to try. The lump-of-labor fallacy always involves innuendo that anyone doubting the tacit supply-creates-its-own-demand rule could only conceivably do so under the influence of the untenable idea that there is a fixed amount of work to be done. Apparently, accusing one's opponent of committing a fallacy excuses the complainant from any need to defend -- or even acknowledge -- his own assumptions or prove his allegations.

If Say's Law became the law that dared not speak its name during the heyday of triumphant political Keynesian demand-management policy, its ventriloquist surrogate was the ubiquitous fallacy claim. Cardiff Garcia described the accusation as a "lazy but common retort to the idea that technological advancement would massively displace workers." In the early 1960s, Cornell industrial relations researcher Marcia Greenbaum noted economists' "nearly unanimous" opinion that calls for a shorter workweek to cope with unemployment were based on the lump-of-labor idea:

If this chapter has painted a gloomy picture of the economic implications of the shorter workweek, it is simply reflecting the nearly unanimous opinion of economists outside of the labor movement. Every other labor proposal for coping with unemployment . . . receives support from at least some economists and public officials. In their plea for shorter hours, however, union leaders stand alone, attacked even by the leading officials of a friendly Administration.

As Larry Summers recently pointed out,

…when I was an undergraduate at MIT in the 1960s there as a whole round of concern about this -- will automation displace all the employment? And what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out...

"It would all sort of work itself out." Walks like Say's Law. Quacks like Say's Law. And as Galbraith noted, when Say's Law ruled economics, "to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots." Summers's account of his experience as an undergraduate at MIT in the 1960s is eerily reminiscent of Galbraith's account of the days before the 1930s when Say's Law prevailed.

Might I be unjustly lumping the lump-of-labor fallacy claim with Say's Law -- two concepts that "correct or not, are actually quite different"? Not according to Raymond Bye, who wrote one of the most widely-used introductory economics textbooks of the 1920s and 30s. In Bye's account of the "lump of work" or "make-work" fallacy, it was precisely the principle that supply creates its own demand that proved the fallacy of the alleged assumption that the amount of work to be done was fixed.

The complementarity of the fallacy claim and Say's Law is transparent in the writing of conservative adherents to Say's Law -- which brings me to a point that I would like to stress: conservative consistency on Say's Law and the lump of labor contrasts markedly with mainstream liberal equivocation. The fallacy claim and the Say's Law notion are two sides of the same coin. You can't reject one side while invoking the other. No doubt observers sense a discrepancy even if they can't analytically put their finger on what it is. Disparaging those who venerate the law while deriding those who violate it may seem like centrist even-handedness to tenured sophisticates but it smacks of hypocrisy to the hoi polloi.

So what's wrong with economics? Madrick pointed out seven bad ideas. I would add that those bad ideas often circulate in disguise, under aliases, and insinuate themselves back into the discourse in ways that are more pernicious because they are harder to detect. Like the secret police, these clandestine versions of the bad ideas can be used to suppress dissent while preserving official deniability.

UPDATE: Nick Rowe ponders Lump of Labour, Say's Law, and the slope of the AD curve at Worthwhile Canadian Initiative and Sandwichman replies with reference to The Pathos of Aggregate Demand Management.

Paul Krugman, Accidental Austerian

This coming weekend in New York City, the New York Review of Books is hosting an event titled What's Wrong with the Economy—and with Economics? A Saturday afternoon panel, "Economics after the Crash: A Discipline in Need of Renewal?" includes both Paul Krugman and Robert Skidelsky.

Skidelsky is in the Sandwichman's camp on the question of the lump of labour fallacy. Krugman's position has evolved to the point where he has expressed sympathy for the Luddites. But he has not publicly retracted his "accidental theorist" charge against William Greider from the 1990s.

Why would a retraction matter? Well, the Sandwichman maintains that adherence to this archaic "Just-So" story is at the core of "what's wrong with economics -- and with the economy." More importantly, though, Professor Krugman himself once thought that it mattered a great deal to enforce the lump-of-labor shibboleth. He claimed that a "thought experiment" he employed to disparage Greider's analysis would "give readers some idea of what it really means to think about economics, what economic theory really is." Is this facile hand-waving something Krugman would still defend as "what economic theory really is"?

Below is an excerpt from the introduction to Krugman's 1998 book The Accidental Theorist: And Other Dispatches from the Dismal Science:

The title essay in this collection was an effort to take on an old misunderstanding that has lately experienced a revival of popularity: the idea (sometimes referred to as the “lump of labor” fallacy) that there is only a limited amount of work to be done in the world, and that as productivity rises there is therefore a reduction in the number of jobs available. The idea has a surface plausibility from the experience of individual industries: It is indeed true, for example, that America’s railroads handle more freight now than they did in 1980, but employ barely a third as many workers. Doesn't it follow that the same fate may await all jobs, that as workers become more productive the economy will need ever fewer of them? It is hard to explain that this involves a fallacy of composition, that the effect of a productivity increase in a given industry on the number of jobs in that industry is very different from the effect of a productivity increase in the economy as a whole on the total number of jobs. In the essay I tried to find a painless way of making that point—and along the way to give readers some idea of what it really means to think about economics, what economic theory really is. 

The essay made some use of the fact that despite large productivity gains in some parts of the U.S. economy—and stagnant employment in manufacturing, mainly because of those productivity gains—America has, just as theory would predict, actually done quite well at employing its growing labor force. Yet there was a period in 1995 and 1996 when the headlines were dominated by stories of layoffs, to such an extent that it was hard to remember that despite the prevalence of such stories the U.S. economy was actually creating jobs at a near-record pace. In the second piece, “Downsizing Downsizing,” I tried to talk about this gap between perception and reality. (For the record: My remark about “emotionally satisfying fictions” was in the original version, writ ten when Robert Reich was still Labor Secretary.) 

While the idea that capitalism suffers from being too productive mainly rests on a naive failure to think the matter through, some commentators who hold this view have managed to convince themselves that they are bold and forward-looking thinkers, drawing their inspiration from that great economist John Maynard Keynes—who must, as I argue in “Vulgar Keynesians,” be turning over in his grave.

In May of 2011, Sandwichman posted an Open Letter to Paul Krugman at Ecological Headstand and sent a hard copy by mail. Sandwichman received no reply. 

Let me make this simple: is the lump-of-labor fallacy claim "what economic theory really is" or is it a symptom of precisely what is wrong with economics -- as Cardiff Garcia has described it, a "lazy but common retort" to concerns about the displacement of workers?

How the 'Conomist Got His Lump

THE 'Conomists' lump is a hideous hump
    They pedantically teach at the U.;
But uglier yet is the slump we all get
    When we swallow this muck that they spew.

Rudyard Kipling's "How the Camel Got His Hump" is a Just-So story. It is Just-So 'scrutiating cutesy, patronizing, colonialist and moralistic. Idleness is condemned and loyal obedience to one's master is extolled.

When the diligent dog, horse and ox complain to their master, man, about the slothful camel's shirking, man tells them they three "must work double-time to make up for it." You see, there was only so much work to go 'round (with the world so new-and-all) and if some of it couldn't be spread thin onto the camel, then that part had to be humped up on the other three. 

Dorning Rasbotham's confident assertion that "a cheap market will always be full of customers" is another Just-So story. Unlike Kipling's fable about the camel, Rasbotham's tale has become a staple of economic dogma. 

No evolutionary biologist would sneer at the general public for their lack of erudition regarding the fact that the camel's hump was "brought upon [his] very own self by not working." Yet that is precisely the refrain that economists repeat ad nauseum. Even economists who claim to reject the "unemployment is always voluntary" placebo are loath to repudiate the seductive cheap-market-full-of-customers creation myth and article of faith.

UPDATE: I have been informed in a comment that "a cheap market will always be full of customers" is "obviously and strictly true." Well, tell THAT to Squire Rasbotham, Mr. blissex. Dorning Rasbotham apparently didn't think it was so "obviously and strictly true" because he chewed up 18 pages of his pamphlet before getting to this supposedly obvious and strict truth.

Of course the Sandwichman suffers from the obvious and strict rhetorical disadvantage of actually having read the text in question. It is always much easier to assert things and claim they are facts than it is to present evidence and show how that evidence supports a hypothesis. (That is why we are doomed, DOOMED!)

For the edification of those who suppose they knows everything they needs to knows about Rasbotham's Theorem from its conclusion (without reading his pamphlet or knowing what his premises were) here is a brief recap of the argument:

1. The interests of the poor should have the highest priority (after all, what would become of the rich if there were no poor people to till their grounds, and pay their rent?);
2. There is not so great a difference between the real interests of the rich and the poor;
3. Trade is a large and difficult subject that requires deep thought, long study, extensive reading and large experience to form a true judgment;
4. Machines distinguish men in society from men in a savage state. There are many examples showing how machines invariably benefit people;
5. All improvements at first produce some difficulty but many receive the benefit while only a few suffer, probably not much and hopefully not for long (they should be grateful for the opportunity to make a sacrifice for their fellow man);
6. Trade will find its own level. Those thrown out of their old employments will find or learn new ones. Those who get a disproportionate gain will soon find many rivals and lose their temporary advantage; (take that, Bill Gates!)
7. There is a disposition among people to be unduly alarmed by new discoveries;
8. Even if machines (or globalization or the hypertrophy of the finance sector) are evils they are necessary evils. We might as well make the best of them;
9. This would be a prosperous time for the poor, if only they weren't so inclined to carry their money to the alehouse;
10. Anyone who disagrees with the above truths is a irreligious, conscienceless scoundrel; and (drumroll),
11. That "there is only a certain quantity of labour to be performed" is a false principle.
12. Because -- ta-da! -- a cheap market will always be full of customers!  

Saudi Arabia, Russia, And The Price Of Oil

In today's Financial Times there is a long article, "Riyadh's Gamble," by Anjit Raval that discusses the details of how the Saudi decisionmakers regarding oil, led by Oil Minister, Ali al-Naimi, came to decide not to cut production to hold up the price of oil.  The general thrust of this is well known, that as the price fell last year, all the other producers called on them to cut production as they had done in the past.  But they did not do so.  One tidbit in the article is that through September the debate continued within Saudi Arabia, but that the first sign of their new stance came on October 7 when an assistant to al-Naimi, Nasser al-Dossary, at a meeting in New York at Mike's Bar with a group of energy policymakers, responded to a comment that "Of course you're going to cut production," with "What makes you think we're going to cut?"  Ooooh, the price slid hard after that leaked out.

The final settlement on this came at an OPEC meeting on November 27 when the Saudis convinced the group as a whole not to cut production to let the higher cost producers bear the brunt and lose market share, with the Saudis openly stating that they were not going to be the world's patsies on this anymore (not their precise language) and lose market share while propping up rivals.  A crucial point of the article is that this has had nothing to do with orders from the US or political games.  This has been very strictly business.

The previously unreported bottom line on this came a few days prior to the OPEC meeting.  There was a last moment when the Saudis might have been willing to cut production.  But, they were not going to do it by themselves.  They had to take at least one other really large producer and exporter with them (the US is one of the top three producers, but does not export).  That other member of the top three is Russia, and al-Naimi apparently had a meeting with top oil officials from Russia and Mexico just prior to the OPEC meeting.  He reportedly suggested to the Russian official that they both engage in a simultaneous and equal cut, given that they are about equally sized in production.  The Russian official said no, so al-Naimi said, enjoy the outcome (actually what he said was not recorded).  In any case, Russia has taken a much larger economic hit than Saudi Arabia, and while many have claimed that this was the Saudis playing some US-inspired anti-Russian game, this looks much more like the Saudis just playing market hardball.  After all, among those suffering from the price fall have also been shale and other high cost producers in the US (and Brent is now back down to $56 per barrel while WTI is back down to $48 per barrel).  Fun stuff.

Barkley Rosser

"Jobs, automation, Engels’ pause and the limits of history"

Cardiff Garcia at FT Alphaville, Jobs, automation, Engels’ pause and the limits of history:

The lazy but common retort to the idea that technological advancement would massively displace workers has long been to accuse the fear-monger of having perpetuated the lump of labour fallacy. 

Luddites!, the response goes, technology constantly takes jobs from workers, but the gains in efficiency lead to a surplus for the owners of companies (via higher profits) and for the consumers of their products (via lower costs). Those surpluses are then spent on other investments and consumer products, some of which we haven’t yet imagined but nonetheless will lead to more jobs in other sectors. 

Buy a cheaper car, and you have more money to spend on lavish restaurants, which leads to more jobs for chefs and waiters and sommeliers, and so on. 

... 

Optimists also like to cite the teachings of history in addition to the Luddite mistake, as the two are obviously related. So many times have we worried about the destabilising potential of technology, they say, and every time the economy has adapted, creating new jobs to replace the lost. 

An appeal to history isn't inherently misguided. Our understanding of the world is unavoidably shaped by the historical behaviour of the variables that we can identify as useful for our assessment. What else can we do? 

Yet the more aggressively we scavenge history for useful lessons, the more confusing are the clues we dig up. And that’s to say nothing of the clues that we fail to dig up. 

A few points are useful to keep in mind when thinking through history’s lessons for the issue of jobs and automation. [continued]

 The Sandwichman is very pleased.

A 'Make-Work Bias' By Any Other Name...

What is it with all the aliases, anyway? The lump-of-labor fallacy, the lump-of-work fallacy, fixed Work-fund fallacy, Luddite fallacy, make-work fallacy, make-work bias...

MaxSpeak calls attention to a lecture by a George Mason University professor, Garrett Jones, which advocates less democracy. Ten percent less democracy, to be precise.

The cornerstone of Jones's argument is Bryan Caplan's "four democratic biases" outlined in his 2006 book, The Myth of the Rational Voter. One of those supposed democratic biases is our old friend. the lump-of-labor fallacy make-work bias. Bryan Caplan is clearly a suppository of received wisdom.

So here is the basic idea: "Nineteenth-century economists believed they had diagnosed enduring economic confusions, not intellectual fads, and they were right." So, according to Caplan and Jones we should disenfranchise voters because of what "nineteenth-century economists" thought and hand over policy-making power to folks who think those nineteenth century economists were right. Sounds logical.

I have a better suggestion. In an earlier post I cited George Bernard Shaw's "strong opinion that every University on the face of the earth should be levelled to the ground and its foundations sowed with salt."

Let's start with George Mason University.

The Harsh Truth about Israel

There has been a lot of concern—completely justified, in my opinion—about the rise of antisemitism in Europe and elsewhere.  Jews are being attacked, murderously even, for the simple fact of being Jews.  Antisemitic pronouncements, about the evil that Jews supposedly spread throughout society, are once again being broadcast without shame.  Once the “socialism of fools”, antisemitism has become the anti-imperialism of fools.

People are always responsible for their actions, and nothing I am about to say contradicts the primary responsibility that falls on antisemitic groups and individuals.  But even the worst behavior needs to be understood if the goal is to build a better world and not simply denounce the evils that exist.  Understanding is not the same as excusing.

So now we get to Israel.  Israel has violated international law and common morality in its occupation of Palestinian territories and ruthless repression of those who live there.  Unfortunately, it is hardly the only country that has perpetrated crimes beyond its borders.  There are also unresolved issues concerning the founding of the state itself, but what I’m about to say doesn't depend on how deeply you think Israel’s depredations are rooted in its origins.  The point is that we don’t judge entire peoples on the basis of the behavior of governments; otherwise a large portion of the human race would stand condemned.

When a government commits a crime there are circles of responsibility.  The greatest burden falls on those who directly commit it, the specific leaders and their henchmen.  The second circle brings in those who enabled and supported the criminals, the rest of the regime and its key sponsors.  If the country is an electoral democracy those who voted for the criminals share a portion of the blame as well.  Finally, if the crime is great enough, those who live in the country and had the opportunity to resist but didn't are also implicated.  Under no circumstances are those who neither lived in the country nor took steps to support its government tainted at all.  Think of the Japanese-Americans who were interned after Pearl Harbor: the immense—and racist—injustice of blaming each of these American citizens for actions committed by a government that wasn't democratic and wasn't theirs.

So the actions of the Israeli government shouldn't have any bearing on antisemitism beyond its borders.  But there is one problem: the government of Israel itself claims to act not only on behalf of its own citizens but all Jews throughout the world.  According to them, they are not simply the government of a small country on the eastern shore of the Mediterranean, but of every Jew wherever she may happen to live.  In doing this, by its own words, this government authorizes those who oppose its policies to indulge in blanket antisemitism.

Israel can’t have it both ways.  It can’t claim to be a democracy in the normal sense of a government chosen by its own citizens and also a state that represents millions of noncitizens who live in other countries.  These non-Israeli Jews didn't vote for the Israeli government, or against it for that matter.  They played no role in carrying out its policies.  They are in no position to throw sand in the gears.  They have their own countries to be involved in and responsible for.  This is why there is no political excuse for antisemitism.

In short, the claim that Israel is the government of all Jews everywhere and not its own citizens contradicts the fundamental principles of democracy and contributes to the spread of antisemitic ideas.  It’s bad for the Jews.

Worth a Try...

"I have a very strong opinion that every University on the face of the earth should be levelled to the ground and its foundations sowed with salt." -- George Bernard Shaw

Gobs O' Jobs!

At PBS Newshour's MAKING SEN$E, John Komlos claims "America can be a full-employment economy once again":

Currently, adjustments to the decline in demand for labor occur by reducing the number employed so that their labor time falls abruptly from 40 hours to zero. Employees work 40 hours, 20 hours or not at all. Would anyone “behind a veil of ignorance” design such a rigid system from scratch, a system with so much uncertainty and volatility–with working times ranging from zero to 70 hours per week even in normal times? 

It would be much more palatable to have the adjustment occur in the number of hours worked so that instead of dismissing workers, the available work would be divided among those wanting to work BECAUSE THERE IS A FIXED AMOUNT OF WORK TO BE DONE! Hence, an institution that distributes work more evenly would be a reasonable solution to this quandary.

I have, of course, added emphasis to the words "because there is a fixed amount of work to be done." I also added the words themselves because they were inadvertently omitted from the original. This is standard economic science procedure. Economists have been making this mind-reading correction for decades. Nobody objects. If you can't beat them, join them.

Two Solidarity Lessons, One Wrong

Living in the backwater of a medium-sized town in the Pacific northwest, I've just had a chance to see the latest Dardenne brothers film, “Two Days, One Night”.  While the reviews were generally appreciative after it came out last year, the overall view was that this is not one of the brothers’ best.  I agree with that.  (Their very first film, “La Promesse”, is a timeless masterpiece.)  The problem is not on the production side, which features the elegant naturalism that comes like breathing to the Dardennes, although I found Marion Cotillard a little too charismatic to fit the role of a working class woman recovering from depression.  (There can be a charisma to depression, but it’s not the same as hers.)  The problems with the film were at its core, its ethical structure.

First, very briefly, we should dispose of Tyler Cowen’s typically blinkered take on 2D1N.  Cowen says the film doesn't acknowledge marginal productivity theory.  It doesn't take seriously the point that Cotillard’s character can’t justify her employment by its contribution to the firm’s bottom line.  Instead of buttonholing her coworkers, she should be hitting the books, picking up skills to enhance her productivity.  Employment is not a realm of morality, just costs and revenues.  I realize that this is how the matter is portrayed in many (but not all) economics textbooks, and it’s not devoid of truth, but it is radically incomplete.  Productivity is not simply carted into the firm by workers like bricks in a wheelbarrow; it is the product of a production system, influenced by, among other things, the compensation and personnel strategy of the firm.  In good Kirznerian fashion, the solar firm in 2D1N discovers its workers productivity in the vicissitudes of worker comings and goings, as well as market competition (with the Chinese).  And what it discovers may well change in the future.

Now on to what the real problems are.  Spoiler alert: this film has a surprise twist at the end, which I’m going to reveal.  I think the merits of 2D1N don’t depend on suspense, so don’t panic, but consider yourself forewarned.

All Dardenne films are moral fables, and the moral bedrock is always the same, personal responsibility toward others, although it takes different forms.  In this film the issue is laid out immediately: Sandra (Cotillard) has lost her job at a photovoltaic fabricating plant.  She took time off to recover from depression, but her boss refused to take her back unless her coworkers agreed to forego their scheduled bonuses.  (A bonus in much of Europe is an expected, routine component of compensation.)  They had an election, but most of the workers voted to keep the bonus and not have Sandra rehired.  In the first few frames, Sandra and her closest colleague manage to convince the boss to hold another ballot on the grounds that a supervisor had tainted the process.  Now Sandra has two days and one night to convince a majority of the staff (there are 16 employees) to support her by giving up part of their pay.  The film follows her through the emotionally exhausting process of visiting them at their homes, one by one, and trying to convince them to make this sacrifice on her behalf.

On every level, the film takes Sandra’s position.  Using long takes and intense closeups, it shows you how everything unfolds from her point of view.  But more to the point, the film embraces Sandra’s cause as an ethical proposition, that solidarity means agreeing to a pay cut in order to allow an extra worker to be hired.  But is it so clear?  Does doing the right thing necessarily mean working for less in order keep everyone on board?  If there were a single company in all of Belgium, and not having a job in it meant destitution, then yes, that’s what solidarity requires.  But Belgium is a market economy with many firms, and the relevant question is whether Sandra’s claim to this specific job is so great as to justify pay cuts for every other employee.  That is the logic of givebacks, which in my book is not the epitome of solidarity.  It is ironic that in this film the Dardennes, champions of the working class, implicitly accept the demand that European countries “reform” their labor relations systems to shift bargaining to the establishment level in the interest of wage flexibility.  You can agree with that if you want, but don’t call it worker solidarity.  I’m not turning the film upside-down, just saying that its ethical core is problematic, and that viewing the problem from Sandra’s point of view is unconvincing.  A different film, using a different technique, could have presented this ethical conundrum in a less manipulative fashion.

Now for the surprise twist.  All along, Sandra has been asking her colleagues to take a personal hit on her behalf.  In a dramatic scene, a fixed term employee, Alphonse, describes his fear that if he takes an unpopular position his contract won’t be renewed.  Ultimately, and bravely, he decides to vote for Sandra and against the bonus.  Sandra narrowly loses the second vote, but she is summoned to the boss’s office, where she is told that she demonstrated her merit by her hard fight, and that she would be given her old job back when the contract of the term employee is over.  Suddenly the shoe is on the other foot: it is Sandra who is placed in the ethical position of having to sacrifice in the interest of another worker.  She sees this immediately, and, while not giving any speeches about it, demonstrates to the viewer that she will not undercut a vulnerable coworker who came to her defense.  The final frames even suggest that, by taking a stand and making her own choices, Sandra can face unemployment with the emotional resources that she lacked when she was simply a victim.

I think that second lesson, given the assumptions embedded in the first one (taking a pay cut to keep a coworker on the job is virtuous), is correct and important.  If you want to think of this film strictly in didactic terms, that insight is the value added.  Here, oddly, the problem is not conceptual but artistic.  The final sequence—the boss’s offer, Sandra’s refusal—take place in just a few moments and the viewer isn’t given any cue that highlights its importance.  In a Hollywood film it would go like this: when the boss makes his offer, Sandra breaks down in tears and thanks him from the bottom of her soul.  She has a big smile on her face as she leaves his office, but then, looking through a window, she sees Alphonse hard at work, honest and dedicated.  There is a closeup of her face as second thoughts begin to emerge.  Then she is flooded by enlightenment, turns around, and runs at top speed back to the boss.  She gives a dramatic speech, accompanied by soaring music, in which she says that she fought not only for herself but for a principle, and now, asked to choose between her own self-interest and a higher morality, she cannot go back to work at Alphonse’s expense.  She strides back down the hall with new dignity, more erect, more knowing.  In the final frames she asks her husband if he would help her search for new work as he helped her track down her former coworkers.  He smiles broadly at her, realizing she is now healed.  She smiles back at him.  You know in this moment that their four-month sex drought (I didn't mention that before, did I?) is going to end tonight.

That’s not the Dardenne way.  They don’t do melodrama, stark emotional cues or musical scores.  (The only music you hear in their films is the music the characters hear.)  It’s all life-as-it-is-lived.  In this case, however, the result is that the most important ethical and emotional moment in the film carries little weight.  Maybe just a touch of Hollywood was in order.

The Abstinence Theory of Value

"Exactly a year before Nassau W. Senior discovered at Manchester, that the profit (including interest) of capital is the product of the last hour of the twelve, he had announced to the world another discovery. 'I substitute,' he proudly says, 'for the word capital, considered as an instrument of production, the word abstinence.' It has never occurred to the vulgar economist to make the simple reflexion, [Marx continued n a footnote:] that every human action may be viewed, as 'abstinence' from its opposite. Eating is abstinence from fasting, walking, abstinence from standing still, working, abstinence from idling, idling, abstinence from working, &c."

Some hundred and twenty years later, in The Anti-Capitalist Mentality, Ludwig von Mises was still beating that hollow "abstinence" drum, crediting what he termed "the three progressive classes" of savers, inventors and entrepreneurs with sole responsibility for driving social evolution from savage cave dwellers to modern industry. 

In what von Mises described as a monumental work, the wily Eugen von Böhm-Bawerk, concocter of the supposed "transformation problem," dispatched Senior's abstinence theory in 1884, albeit with abundant regard toward its supposed excellence and deep insight. I suppose some double counting is cleverer than others. After exposing the fallacy of Senior's abstinence theory, von Böhm-Bawerk risked being more than a little tedious in substituting an even neater sophism in which "pain cost" and "opportunity cost" perform a rather unlikely pas de deux:

If I lay out a sum of money, say £30, for any one useful end, my sacrifice is calculated simply by the gratification which I might have got by spending the £30 in other ways, and which I must now do without.

It is otherwise with the sacrifice of labour. Labour presents two sides to economical consideration. On the one hand it is, in the experience of most men, an effort connected with an amount of positive pain, and on the other, it is a mean to the attainment of many kinds of enjoyment. Therefore the man who expends labour for a definite useful end makes on the one hand the positive sacrifice of pain, and on the other, the negative sacrifice of the other kinds of enjoyment that might have been obtained as results of the same labour. The question now is, Which is the correct way, in this case, of calculating the sacrifice made for the concrete useful end?

Herr von Böhm-Bawerk solved his own transformation problem adeptly with an example in which the pain cost of work was 10, the opportunity cost of the fish that might have been caught was 15, but the opportunity cost of shooting three hares was only 12  And voila! Here is the rabbit (or hare? or fish?) that nimble Eugen pulled out of his sportsman's cap:

What our fish really cost us now is not the positive labour-pain expressed by the number 10—for this we should have undergone at any rate—but the negative loss of an enjoyment which we might have had, indicated by the number 12.

Ten units of what?, you may wonder. Don't ask. All one needs to keep in mind is the non-equivalence between the pain cost of the labour and the opportunity cost of the enjoyment of the results of the labour and therein lies the secret and source of the potentially infinite expansion over time of the opportunity cost of postponing consumption.

No double counting here! "But of course we must never calculate the want of enjoyment and the pain of labour cumulatively..." But of course! Who needs to double count if we can count labour in units of pain and the results of labour in a different number of different units?

I'll give you a million for that.

A million what?

Never mind what, a million is a big number.

Mankiw on Paying for Tax Cuts

Maybe I was too critical of Greg Mankiw:

Dynamic scoring requires the solution of a general equilibrium model. To solve a dynamic GE model, you need to specify how the government is going to satisfy its present-value budget constraint. You might be tempted to ask the model what happens if the government cuts taxes and never does anything else. But you won't get very far.

I’ll only note that the Reagan Administration never exactly got around to addressing the run-up in Federal deficits from its tax cut. And we know the Administration of George W. Bush not only cut taxes twice but also increased Federal spending both through two expensive wars and that Prescription Drug Benefit. As one of his economic advisers, what was Greg Mankiw telling President Bush about satisfying the present-value budget constraint?

He's Baaack! Karl Marx And The Transformation Problem

The annual Eastern Economic Association meetings ended yesterday in New York.  On Saturday a session on Marx's transformation problem drew an audience of roughly 70 people, with talks by Anwar Shaikh and Duncan Foley, both of the New School, Fred Moseley of Mount Holyoke, with comments by David Laibman, formerly of Brooklyn College and longtime editor of Science and Society, the longest running (since the 30s) scholarly Marxist journal in the US.  Besides the unexpectedly large crowd, there was news.

One piece of news coming from Moseley is that Karl Marx is about to have a fresh publication in the English language, his original manuscript for Volume III of Capital, which was only published in German in the 1990s.  I think it is coming from Routledge and has an introduction by Fred.  This is the volume in which the famous transformation problem from labor values to market prices first appeared, with many arguing that it was his inability to resolve this that kept Marx from publishing it in his lifetime, with the version posthumously published being edited by Friedrich Engels.  According to Moseley, most of the changes involve ordering of topics, but apparently Engels left some things out, incluidng at least one tableau.  It is not clear this new edition will resolve the transformation problem, although Fred, who has a new book on the subject himself coming out, thinks that it is solvable as a matter of definition.  As it is, perhaps this new publication will help Marx hold his lead as the all time most cited economist according to Google Scholar (which notes that he does not have an available email address) at 208,688, still ahead of Andrei Shleifer at 196,355,

Both Shaikh, who also has a book coming out on the subject, in his case from Oxford University Press, and Foley, do not seem to think the problem is so easily resolved, but that one must look at the role of money and monetary prices and accounts.  Shaikh seems to think that looking at financial transfers is the way to get at the problem through complicated financial system by tracking the distribution of the surplus values.  Foley emphasized the role of labor mobility in his remarks, as well as economies of scale, not the usual thrust, but also working through the monetary system.

Laibman seemed unhappy with all of them as well as with the temporal sequence system approach put forward some years ago by Ernst, Kliman, McGlone, Freeman, and others (not represented among the speakers), which he described as "mush."  That one involves prices simply constantly changing, which is how the problem gets resolved.   Both their approach and that of Foley stress complex dynamics.  Laibman hopes for a static theoretical model that somehow reconciles the whole thing, admitting he does not have the answer how to do this and not seeming to go along with Moseley's apparent solution.

So, why do we see two new books on this coming out now, well, three counting the English translation of Marx's old Volume III (which I have long thought was his most interesting and important work, and certainly the one most relevant to modern discussions, particularly of macroeconomics, although Moseley claims it is about microeconomics while the other two volumes are macoeconomics)?  The answer I suspect is the big splash made by Piketty with his Capital in the Twenty-First Century last year.  The title clearly genuflects to Marx and Piketty fully acknowledges that, even as his own analysis is not specifically Marxian and quite neoclassical in his theory at least, although he clearly takes Marx's concerns seriously.  In any case, the old boy seems to be back, even if the transformation problem may not yet be clearly resolved.

Barkley Rosser

Update:

Fred Moseley informs me that it will be probably another year before the Marx Volume III appears.  It and his book (sorry, no title) will be published by Brill.  One can get his quite long Introduction to it that lays out the differences between the two volumes, from him at fmoseley@mtholyoke.edu.

From Anwar Shaikh I have that the title of his book is Capitalism: Real Competition, Turbulent Dynamics, and Global Crises, and will be out this fall from Oxford University Press.

Further Update:  Anwar Shaikh has informed me that his book does not deal with the transformation problem.  He did  speak about that issue during the session, however, focusing on the role of transfers in bringing about the allocation of the surplus values.  Hopefully, at least I have not misrepresented that.

Further Update (3/6):  Have received message from David Laibman, who saw this due to commentary on the marxism list about this post.  He says that I did not do too bad a job of summarizing what was said at the session, but he does not like my use of "static" for his view, but rather that he thinks that "higher levels of abstraction" are appropriate.  His comment is long and detailed, so if you want to see it, go to the marxism list, please.  He also says that he would like to retract his characterization of TSSI as "mush," saying, "let sleeping dogs lie."

What In Hell Is Capital?

Dante condemned the merchant bankers of Florence to the seventh circle of Hell. Marx was more lenient -- attributing to monetary accumulation through usury only part of the responsibility for the dissolution of the old feudal relations of production.

"The idea of some socialists," observed Marx in his notebooks on Pre-Capitalist Economic Formations, "that we need capital but not capitalists, is completely false."

"The concept of capital implies the capitalist."

Let us consider the relationship of capital and wage labor not as something which has already reached decisive importance, and encroaches on production as a whole but as something which is still in the process of historical formation. We consider the original transformation of money into capital, the process of exchange between capital existing only potentially on one hand, and the free laborers existing potentially on the other. We then find ourselves naturally making the simple observation, with which the economists make great play — namely, that the side which appears as capital must possess raw materials, tools, and food enough to enable the worker to live before production is completed. Moreover, it would appear that accumulation — an accumulation prior to labor and not arising from labor — must have taken place on the part of the capitalist, which enables him to set the laborer to work and to maintain him in activity, as living labor power.

... 

Urban labor itself had created the means of production, for which the gilds became as great an embarrassment as were the old relations of landed property in an improved agriculture, which was in turn partly the consequence of the greater sale of agricultural products to the cities, etc.

Other circumstances assisted the dissolution of the old relations of production, accelerated the separation of the laborer or the non-laborer capable of work, from the objective conditions of his reproduction, and thus advanced the transformation of money into capital. Such were, e.g., the factors which in the 16th century increased the mass of commodities in circulation, the mass of currency in circulation, creating new needs and consequently raising the exchange value of native products, raising prices, etc. 

Nothing can therefore be more foolish than to conceive the original formation of capital as if it meant the accumulation and creation of the objective conditions of production — food, raw materials, instruments — which were then offered to the dispossessed workers. What happened was rather that monetary wealth partly helped to detach the labor power of the individuals capable of work from these conditions. The rest of this process of separation proceeded without the intervention of monetary wealth. Once the original formation of capital had reached a certain level, monetary wealth could insert itself as an intermediary between the objective conditions of life, now “liberated” and the equally liberated, but now also unfettered and footloose, living labor powers, buying the one with the other. As to the formation of monetary wealth itself, before its transformation into capital: this belongs to the prehistory of the bourgeois economy. Usury, trade, the cities and government finance which arise with them, play the chief parts in it.

In other words, capital is not money nor is it the "objective conditions of production -- food, raw materials, instruments." It is a relationship between the capitalist -- as proprietor of money and the objective conditions of production -- and the propertyless worker, both of whom have arrived at their present condition as a result of historical processes that were not (or not primarily) the effects of capitalist relations of production. Capital did not "pull itself up by its own bootstraps."

The original formations of capital does not, as is often supposed, proceed by the accumulation of food, tools, raw materials or in short, of the objective conditions of labor detached from the soil and already fused with human labor -- not by means of capital creating the objective conditions of labor. Its original formation occurs simply because the historic process of the dissolution of an old mode of production allows value, existing in the form of monetary wealth, to buy the objective conditions of labor on one hand, to exchange the living labor of the now free workers for money, on the other. All these elements are already in existence. What separates them out is a historical process, a process of dissolution, and it is this which enables money to turn into capital. Insofar as money itself plays a part here, it is only to the extent that it is itself an extremely powerful agent of dissolution which intervenes in the process, and hence contributes to the creation of the plucked, objectiveless, free laborers. 

Does the concept of "human capital" imply the human capitalist? From the perspective of Marx's analysis, such a concept would be a Bizzaro-world oxymoron:

The concept of capital implies that the objective conditions of labor — and these are its own product — acquire a personality as against labor, or what amounts to the same thing, that they are established as the property of a personality other than the worker’s.