Thursday, March 12, 2015

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?


Denis Drew said...

Per Skidelsky -- and his: " ... many workers will have to accept a pittance to find any employment, and become increasingly dependent on social transfers as market-clearing wages fall below the subsistence level?"

I believe our economy has happily grown so much more productive since LBJ announced his War on Poverty that no market-clearing rate need fall below subsistence. Happy US? Not until our labor market is reformed so that labor is actually able to extract the max the consumer is willing to pay -- rather than be stuck with the minimum the boss can get away with paying (I call this a two-tier labor market).

Instant start: $15 min wage -- shift all of 3.5% of GDP to bottom 45% earners. Any two people can earn subsistence and a bit more. *

* "and a bit more": $11,000 silver plan for family of four (brill, p.346), $4,000 payroll taxes on $50,000, #15,000 rent and utilities -- and you haven't even put the dried beans in the pot to soak overnight to save on expensive canned.

Ideal of course: across the board unionization -- gold standard: centralized bargaining.

Right now 100,000 out of I estimate 200,000 Chicago, gang age males are in street gangs -- wont work for a min wage $3.50 lower than LBJ's, double per capita income later.

So, market clearing wages below subsistence could long ago been eliminated as a practical outcome.

Myrtle Blackwood said...

Re: Per Skidelsky - " ... many workers will have to accept a pittance to find any employment, and become increasingly dependent on social transfers as market-clearing wages fall below the subsistence level?"

What the Reverend Thomas Malthus described as the dilemma of being born in a nation where everything is already owned. You're either of the proprietor class or the (most common) 'labouring' class. The latter owning no property can only choose to work for proprietors to gain subsistence. Malthus believed that 'social transfers' served to keep wages down.

Ghandi believed that a degree of economic and political power could be found in do-it-yourself-for-yourself forms of production. It is worrying that so few economists openly present solutions that address environmental degradation and the quality of life under industrialisation.