As the number of workmen that can be kept in employment by any particular person must bear a certain proportion to his capital, so the number of those that can be continually employed by all the members of a great society must bear a certain proportion to the whole capital of that society, and never can exceed that proportion. -- Adam Smith, The Wealth of NationsAn"invisible hand" reaches up out of the subterranean depths of that "whole capital" periodically to re-establish the "certain proportion," which lies somewhere between 20 and 25 percent. The average from 1948 to the end of 2017 was 22.43434%. It looks rather like this:
Household and non-profit net worth and GDP track each other quite nicely from 1948 to 1973 until "something happens" in 1973. (What could that "B"?!) After 1973, net worth underperforms GDP until sometime in the late 1990s when a series of wild gyrations commences. As you can see from the chart, though, the authorities have the situation well in hand and nothing could possibly go wrong.
Henry Hoyt in 1886 and Leo Amery in 1908 chided Smith's "fallacy" of "terminological inexactitude" and the consequence of ignoring the fact that the capital of a nation, "grows by the exercise of the qualities and energies of which it consists." Well, yes, but to some extent those qualities and energies are bound up in the possession of assets whose market values at any particular time can be aggregated. The amount of work to be done is not fixed but it is bounded. Hoyt and Amery had a point -- but so did Smith.
It seems to me that my little chart above tells a story of how those bounds might even be stretched a bit -- presumably by the expedients of easy credit, fiscal deficits and financial deregulation. But there seems to be inevitable leakage from stimulation to speculation and from speculation to Ponzi finance, as Minsky warned. From 1948 to 2016, the CPI-adjusted net worth of households and non-profits never exceeded five times real GDP (or GDP never less than 20% of Net Worth). At the end of the second quarter of 2018, GDP was 18.7% of Net Worth.
Wonderful essay, but where precisely is the data from for the graph?
ReplyDeleteFRED -- St. Louis federal reserve. Net Worth is household and non-profit org. net worth divided by Urban CPI. Both series are indexed to 1948 - 1973 average = 100.
ReplyDeleteI am grateful for the data, and again this is a terrific essay that I will present to students in your name.
ReplyDeletehttps://fred.stlouisfed.org/graph/?g=lmw7
ReplyDeleteJanuary 15, 2018
Gross Domestic Product and Net Worth for Households & Nonprofit
Organizations, 1948-2017
(Percent change)
https://fred.stlouisfed.org/graph/?g=lmvX
January 15, 2018
Gross Domestic Product and Net Worth for Households & Nonprofit
Organizations, 1948-2018
(Indexed to 1948)
Well, I have to say Smith has no point at all. His statement is unadulterated nonsense. If it means anything, to all intents and purposes it is the lump of labor fallacy, which I didn't think was too popular here.
ReplyDeleteWhat "the amount of work to be done being bounded" means is obscure. If it doesn't mean that the planet, resources and energy and the people on it are finite - has anybody every said different? - then I don't think it means anything.
More people working will do more work, and in a free society, it is their decision to work or not. Not some crackpot calculation of a proportion to "capital". This "more work" will yield more benefit to workers and others. There really isn't anything else to say about that.
To believe that there is a magical problem with just allowing and organizing everybody who wants to work, to work and get compensated for it - irrespective of "capital" whatever that means - is in the words of a pretty famous economist, "something that nobody could believe unless they had fuddled their brains with nonsense for years and years."
Finally, bringing Minsky in completely belies his own views. Of course he was against easy credit (ripoffs, Good Times ...) and even more against financial deregulation. But as a genuine follower of the above great mustachioed economist, not against deficit spending! Not relevant here, but Minsky was also a follower of the great bearded one too. Big Government (spending - & taxing, usually a bit less)) & Big Bank (regulating etc) were his two stabilizers to prevent "It". Above all, he was not against deficit spending for full/guaranteed employment, which was his main cure, not something he thought of as a disease, or something that was controlled by some obscure proportion.
"If it doesn't mean that the planet, resources and energy and the people on it are finite - has anybody every said different?" Yes, often. "The amount of work to be done is infinite because people's wants are unlimited." You really need to get out more.
ReplyDeleteO.K., consider this scenario: Ten workers and ten shovels digging a trench. Bring on another worker and output per worker may actually increase because you use the additional worker to enable rest breaks and the better rested workers are able to do more digging. Now bring on five or ten more workers. Eventually either you need to bring in more shovels or the output per worker declines. It's not rocket science.