Thursday, February 19, 2015

Bad Faith Economics: A Cheap Market Will (almost) Always (tend to) Be Full of Customers (except when it isn't)

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. -- William Stanley Jevons, The Coal Question, 1865.
In other words, technology creates more jobs than it destroys. Or, to be precise: as a rule, technology often, eventually creates more jobs than it destroys. What's the difference between those two statements?

This old saw appears to form the theoretical core of neo-liberal industrial policy. Witness the Hamilton Project's February 2015 "framing paper" The Future of Work in the Age of the Machine. After the obligatory swipe at Luddites -- "The Luddites, as they were called, were revolting against a phenomenon that would fundamentally alter the economies of the world" -- the Wall Street Democrats' think-tank presents a qualified version of the platitude:
There is a consensus that, historically, technological progress has created winners and losers, but over the long run, new technology has tended to create more jobs than it has destroyed, while increasing society’s productivity and wealth.
What is the counter-statement to the principle that technology creates more jobs than it destroys? Is it "technology destroys more jobs than it creates"? "Technology doesn't necessarily create more jobs than it destroys"? "There is a fixed amount of work to be done"?

Surely it can't be the third statement because there could be a situation where the amount of work to be done increased but the number of jobs still decreased. A fixed amount of work is overkill. The first counter-statement is the mirror image of the dogmatic assertion of the principle. The second is actually consistent with the more contingent, provisional version of the principle.

There is no way to predict whether people disputing the dogmatic claim that technology creates more jobs than it destroys do so on the basis of belief in counter-statement one, two or three. As a rule, however, it is discourteous to attribute to an opponent the least plausible motivation for their beliefs. It would be more respectful -- and more prudent -- to attribute the most plausible and defensible motivation.

There is no evidence for the claim that union arguments for shorter hours assume a fixed amount of work and thus commit a lump-of-labor fallacy. There is, however, proof that those who make the accusation actually do commit the fallacy.

The first proof was by Charles Beardsley in 1895. I discussed it in my "Why economists dislike a lump of labor." Pigou in 1913 and Dobb in 1928 demonstrated other fallacies committed by the "fixed Work-Fund" plaintiffs. In Some Leading Principles of Political Economy, published in the 1870s, John Elliott Cairnes bitterly denounced on page 251 the "profound, pernicious fallacy," which is a restatement of the wages-fund doctrine he had obstinately defended back on page 174.

Below is a typical example of the case against the "more refined" 1960s union arguments for shorter hours, which suggested that labor cost increases could be mitigated by the productivity gains resulting from the reduction in fatigue, etc. It is from Collective Bargaining by H. D. Marshall and N. J. Marshall (1971):
Two points need to be made with respect to future gains in productivity resulting from a shortening of hours. First the truer the statement is, the less valid is the union argument that a reduction in hours serves as a solution to the problem of unemployment. The original "lump of work" argument was that if each worker did less work, there would be more work available for others. However, if the reduction in hours induces the worker to produce nearly as much (or even possibly more) than he did on a longer time schedule, the increased availability of work for others will be at least partially lost. Union leaders have often presented these arguments side by side without realizing that they are inherently contradictory.
Subtle. The truer the statement about productivity is, the less valid is the supposed lump of work argument as a solution to unemployment. What the authors overlook, though, is that "future gains in productivity" are -- no less than the introduction of new machinery -- "new modes of economy" and thus may be expected as a rule to eventually widen the sphere of employment. (Unless, of course, the amount of work to be done is fixed.)

The Marshalls' second point was that "it is at least possible that further reductions in the work week below forty hours may not have as stimulating an effect on productivity as previous reductions seem to have had." O.K. Outcomes in the future may be different from those in the past. That sounds reasonable. But shouldn't the same reservation apply then to other new modes of economy -- such as the introduction of new machinery?

The principle of economy has to apply in the same way and to the same extent whether productivity gains result from new machinery or shorter hours. If productivity gains from new machinery create more demand for labor, then productivity gains from shorter hours create more demand for labor. If future results for shorter hours may be different from past results, then future results for new machinery may be different from past results. Applying different standards to the two modes of economy is "bargaining in bad faith."

How many times would you suppose fallacy claimants have responded to the rebuttals from Beardsley, Pigou or Dobb? Did you guess a total of zero? Well, here is yet another unanswered rebuttal to the bad faith lump-of-labor fallacy claim: Howard G. Foster, "Unemployment and Shorter Hours." Labor Law Journal, April 1966, pp. 211-225. Foster presented a simple, non-lump model of shorter hours with improved productivity creating more employment. In each of his examples, "the standard workweek was reduced without a rise in unit labor costs." As Foster observed, "This should at least suggest that in principle hours reduction might indeed be an instrument by which to alleviate the unemployment problem and is worth further study." In a future post, I will explicate Foster's model.

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