peeking at oil

Despite my lack of faith in the "peak oil" theory, it's quite possible that oil and gas prices will continue the rest of the year. Perhaps they'll peak (as it were) on January 20, 2009. The reason I see higher oil prices in our future is because of the interview I heard last night on the Terry Gross "Fresh Air" show on US National Public Radio: Seymour Hersch, usually a very reliable source, talked about the Cheney-initiated and --led (and Congressionally-approved) covert US operations in Iran, clearly aimed at provoking a response by their government. The special forces are going, with CIA help, to provoke discontent among the ethnic minorities. It may not lead to an actual war (which I see as more likely after the November election) but it will definitely raise oil prices.

I wonder if members of the Cheney gang are buying oil long, hoping to profit from their policies? I wonder if their general attitude that high oil prices are okay (if not excellent) is one small piece of their bellicosity concerning Middle East issues?

(In the recent B movie "Get Smart," by the way, it should be noted that the spies
(CONTROL) report to the Vice President, not to the Prez.)
--
Jim Devine

$10,000 PRIZE! - THE RULES - $10,000 PRIZE!

by the Sandwichman

Sandwichman is grateful to cogito for reminding us that it is far, far easier to dismiss a paradoxical truth* by rote recitation of hallowed platitudes than to investigate the arguments. The reason I offered a $10,000 prize for refuting my rebuttal of the lump-of-labor fallacy claim was to create an incentive for people to actually do the investigative work -- and, of course, so that I would have a club with which to beat those who don't. But -- Alas! -- I buried my prize offer too deep in my May 1st posting. So today, I'm repeating the challenge in a more prominent place:

I am offering a $10,000 prize, in Canadian funds, to be awarded to the author who directly and conclusively refutes the argument in "Why Economists Dislike a Lump of Labor," (Review of Social Economics, September 2007). My argument is that the authenticity of the lump-of-labor fallacy claim, with regard to unemployment and the hours of work, is questionable; that various explanations of it are inconsistent and contradictory and that Sydney J. Chapman’s neglected theory of the hours of labor presents a more coherent analysis of the reduction of working time than the often-cited fallacy claim.

The article must be accepted for publication in one of the 30 top-ranked economics journals. Only anonymously peer-reviewed articles are eligible, not book reviews, commentary or other journal front or back matter. Journal rankings will be taken to be those specified in Kalaitzidakis, Mamuneas and Stengos "Rankings of Academic Journals and Institutions in Economics." Journal of the European Economic Association 1 (December 2003).

(And, no, it won't count if the article simply re-asserts the fallacy claim and follows that by grinding out yet another "empirical analysis". The article must directly confront the argument of my article. The question of whether the article successfully refutes my argument I will leave to be resolved by publishability.)

Enter by notifying me, Tom Walker, by mail or email that your article has been accepted for publication in one of the qualified journals. Mail address is 1204 Lakewood Drive, Vancouver, BC, V5L 4M4. Email: lumpoflabor [at] gmail [dot] com.

Deadline for entry is 11:59 p.m. on January 31, 2010. In the event an article is under review by a qualified journal on the deadline date, an extension may be granted provided the article was submitted to the journal on or before December 31, 2009. All requests for extension of the contest entry deadline must attach a copy of the submitted draft.

If no contest entry meets all of the above criteria, a consolation prize of $1000 Canadian may be awarded to an anonymously peer-reviewed article meeting the core argument criteria, published in a journal ranked 31-159 by Kalaitzidakis et al. Articles published in a non-ranked journal and articles submitted to but rejected by an economics journal may be given consideration for the consolation prize at the sole discretion of the contest organizer.

Prize money will be awarded only to the author or authors of the article specified in the winning entry. In the event of group authorship, prize money will be divided equally between the authors unless specified otherwise and agreed in advance by all authors.

*(The paradoxical truth, by the way, is not that shorter hours always increases wages. The paradox is that shorter hours may increase wages under given circumstances -- hours of work that are too long, wages that are too low and unemployment that is too widespread and persistent. Those are the very conditions that advocates of shorter working time believe to generally prevail under capitalism. Doctrinaire economists, on the other hand, contend that unemployment is voluntary and that hours and wages are set at their optima by workers' preferences and the magic mechanism of the free market -- perfect competition, universal omniscience, perpetual motion and all.)

WORK LESS, CONSUME MORE!

by the Sandwichman

"'Well,' says a workingman, 'I should certainly be very glad to work less hours, but I can scarcely earn enough by working ten to make myself and family comfortable.'

"Sir, as strange as it may seem to you at first blush, it is a fact that your wages will never be permanently increased until the hours of labor are reduced."

I would like to open a can of worms and call into question the assumed divergence between environmentalism and consumerism. I am as guilty as anyone of promoting the idea that economic growth is bad or obsolete. But I have been reading extensively in the 19th century literature of the eight-hour movement. The first shock I got was discovering that "keeping up with the Joneses" was an Ira Steward invention. Steward was the author of first two sentences quoted before the jump.

I've been reading Steward, George Gunton, their critics and defenders through the prism of a century's worth of disparagement of the "old, old fallacy that eight hours a day will mean more men to be employed." I'm beginning to realize that the opponents of the eight-hour movement not only suppressed an astonishingly advanced economic theory, they also usurped and defiled the accomplishments and the aspirations of the movement. This is not to say that Steward and Gunton got everything right but there is an immense amount to learn from their writings and legacy.

Getting back to the argument about higher pay, at first glance it wouldn't seem to be in accord with the admonition of my friends in the Work Less Party to "work less, consume less, enjoy more." I propose that the solution to this riddle is that we don't need to consume less. We actually need to spend more.

Our culture's unsustainable environmental footprint doesn't come from consuming "too much" but from consuming the wrong things -- cheap crap. Ironically, the reason we're consuming the wrong things is because wages are too low. WE CAN'T AFFORD the good life. What Juliet Schor identifies as "overspending" could better be viewed as throwing money away on disposable stuff because we don't have sufficient time or income to indulge in uplifting AND MUCH MORE EXPENSIVE social activities such as, say, taking five years off work to write a book, paint, sing in the opera, or play soccer.

One of the things that struck me as I was comparing Cambridge Professor Alfred Marshall's writing to that of Boston mechanic, Ira Steward, is that the truly innovative thinking usually comes from outside the academy. An inordinate amount of the output of professional intellectuals consists of obscurantist rationalizations and repetition of the obsolete or the obvious. How many people would like to have the time and financial security to really develop their artistic talent, athletic ability or scholarly interest without it having to be a perilous and constricting career track?

So I'm tempted to say, "Sir, as strange as it may seem to you at first blush, it is a fact that your way of life will never become environmentally sustainable until your wages are increased as a result of the hours of labor being reduced."

THE OLD, OLD FALLACY

by the Sandwichman

Still no nibbles on my $10,000 prize offer. More clues:

• "Thus their error lies in assuming that there is a fixed Work Fund, a certain amount of work which has to be done, whatever the price of labour." (Alfred Marshall, Elements of the Economics of Industry, 1892, page 383)
  
• "It is the statement as an economic fact of the old, old fallacy that men can restrict their output and thus make work for more men, and still have industry unaffected and providing work for all to do." (Walter Drew, "The Real Problem of the Eight-Hour Day", National Association of Manufacturers, 1911?)
  
• "And we have the old fallacy that eight hours a day will mean more men to be employed." ("The Proposed Federal Eight Hour Law and What it Means" The Review reprinted in The Square Deal, 1912)
  
• "This view is connected with the lump-of-labor notion. It assumes that men will work no faster in a shorter day, and that there is so much work to be done regardless of the rate of wages; and concludes that the shorter day will reduce the amount of labor for sale and cause wages to rise." (Frank Fetter, Economics, vol. 2: Modern Economic Problems, 2nd edition, 1923)

So we begin to discover that the old, old fallacy has a bit of an identity crisis. Clearly Fetter's lump-of-labor notion was another name for Marshall's fixed Work Fund. The main advantage to Marshall's discussion of the fixed Work Fund is that it is a lengthy discussion that hints at -- even if it doesn't unequivocally state -- the identity of the object of its critique. A second advantage derives from Marshall's stature as an economist and as a pioneer of the formal university teaching of economics as a discipline.

Who's idea was Marshall criticising, how well does that critique hold up and how consistent with Marshall's overall discussion was subsequent textbook lore about the lump-of-labor?

Although the names Ira Steward and George Gunton don't appear in Marshall's chapter, it is clearly Steward's eight-hour theory that Marshall had in mind. Considering that Gunton's Wealth and Progress had been published four years earlier, it is more likely that Marshall was addressing the Gunton elaboration of Steward's theory. Whether he actually read Gunton (or Steward) or was merely reacting to second-hand accounts is not entirely clear from the discussion.

In my estimation, Marshall's critique of Stewardism missed its mark. But it did so in ways that are instructive for the subsequent career of the lump of labor fallacy claim. In short, Marshall's fallacy claim is hemmed in by profuse qualification and the "putting aside" of circumstances that could readily be argued to be the central issue behind the reduction of working time -- namely, the longer term impacts of psychological fatigue on output.

In other words, the way Marshall frames the argument leaves the fixed Work Fund (or lump of labor) claim vulnerable precisely to what Marshall's student, Sydney Chapman, later pointed out regarding market failure in the determination of the hours of labor. This would seem to be confirmed by Marshall's -- and his protege, Pigou's -- endorsement of the Chapman theory.

Marshall's use of the term "fixed Wage Fund" is also revealing in that it directly relates the fallacy claim to the wages-fund doctrine of classical political economy. It echoed John Wilson's sentiments, twenty years earlier, about a "Unionist reading of the Wage-fund theory." This also is significant because Steward's 1865 pamphlet was grounded in an explicit repudiation of the wages-fund doctrine at a time when that doctrine remained an article of faith for respectable political economists.

Marshall commenced the last section of his discussion of shorter hours with the following rather ambivalent statement:

All this tends to show that a general reduction of the hours of labour is likely to cause a little net material loss and much moral good: that it is not adapted for treatment by a rigid cast-iron system, and that the conditions of each class of trades must be studied separately.

But, of course, a "rigid cast-iron system" was exactly what militant employers' groups would subsequently insist upon:

We must face the fact that the eight-hour day involves a proportionate decrease in the productive capacity of our workmen, that this in turn means a higher labor cost, and a consequent higher cost of production, and this finally results inevitably in higher prices for us and a lessening of the ability of our manufacturers to compete in the markets of the world. We must face the fact that restriction upon the productive capacity of our workmen will not result in increased wages to the individual, or in securing employment for the unemployed, or increasing the profits of our industries; but that it will directly tend to do the opposite of all three of these things. (Walter Drew, "The Real Problem of the Eight-Hour Day")

Escaping from the disaster front

I am now in Toronto for the History of Economics meetings. Lucky timing. The fires are continuing Chico. The American Red Cross Disaster Response Team is set up in one of the campus buildings. Arnold Schwarzenegger came to town yesterday to see how bad it was.

Fires and floods are becoming commonplace. Our only hope is drilling for oil offshore and Alaska.

You're All On Notice

Pascal’s Fallacy

Slopping thinking by the great mathematician has been enshrined for decades in the undergraduate economics and statistics curriculum. You know the story: the problem of whether to believe in the Christian god and follow church teachings can be formulated as one of expected value, the cost in pleasure of being religious times the likelihood that there is no such god compared with the cost in eternal damnation times the probability that the Bearded One actually exists. The small likelihood of divine existence is outweighed by the even greater imbalance in the value cofactor. Except that it’s all wrong.



There are different ways to approach the issue, but the simplest error is that of assuming only two possibilities, no god or the one particular god promulgated by Pascal’s church. Logically, the case for a Christian deity is no stronger than for many other pretenders. Pascal could follow all the church precepts, die and come face to face with a Hopi god, for example, or maybe a god no human group had latched onto. Perhaps the “godly” practices Pascal had adhered to would just annoy the true, ex post god. Or maybe, if there is a god, this omnipotent character has no self esteem problem to speak of and doesn’t care whether lowly mortals love, hate or ignore him/her/it. And I’m leaving out a wide swath of other possibilities, from multiple godheads to extra-dimensional beings we can’t begin to conceive of.

The point is that the expected value formula works only if you calculate over the full set of possible states or outcomes; the p’s have to add up to 1.

I’m reminded of this because of the column by Peter Bernstein in the Sunday NY Times, which repeats the Pascal chestnut even as it invokes the spirit (but not the name) of Nassim Nicholas Taleb to argue that we should anticipate the unexpected.

The Game Theory Boom

I'm linking to a nice paper [Nicola Giocoli: Three Alternative (?) Stories on the Late 20th-Century Rise of Game Theory] asking about the reasons for the sudden boom in the use of Game Theory in economics in the eighties. His bottom line is Harsanyi's development of tools for thinking about games of incomplete information, so-called Bayesian games. But he also gives some importance to the following circumstance: The Chicago School completely dominated Antitrust policy in the eighties. I remember in Grad school in the late 70's the suffocating growth of Panglossian Industrial Organization thinking. This was the stuff that would look at any apparent example of restraint of trade - resale price maintenance, eg - and find that it was rational and efficient. Predatory pricing was irrational and could never happen; the only real entry barriers were put in place by the dead hand of the state. Laissez faire; laissez allez, in short. Economists dissatisfied with this picture - in particular, thinkers associated with Stanford's Graduate Schoool of Business such as Paul Milgrom and John Roberts - used Harsanyi's Bayesian techniques to provide rigorous counter-examples to the Chicago conventional wisdom: to show how predation might make sense, how non-state entry barriers - such as building excess capacity, might well succeed, and so on.

A Bumper Sticker Response to High Oil Prices—But Not Obama’s

Oil prices are very high and moving higher. In Asia and Europe there have been large protest actions, while the popular response in the US is still at the grumbling stage. This is likely to be an important issue in the US elections, and progressive candidates need clear, non-wonkish ways to frame and deal with the problem.



The strategy of choice right now seems to be “blame the speculators”, and Obama has jumped on this bandwagon. Not a good idea, in my opinion, for two reasons. First, there’s not much evidence that speculators are the cause of this price runup. Second, high oil prices—in fact, much higher oil prices—are good. They will combat climate change, slow down the environmental destruction of sensitive drilling areas and conserve a nonrenewable resource for future generations.

So what’s the alternative? The problem is not that oil is expensive, since burning it is truly costly for the human race, whether we pay the monetary price or not. The problem is that the money ends up in the hands of governments and oil companies that get rich simply because they’ve captured the resource. In economic terms, it’s the problem of rents: vast sums of money are being transferred from us, the consumers, to those who control a commodity in high demand but limited supply. And the solution is to get the money back. This is another reason why we need a cap-and-rebate plan for carbon. Put a tight cap on carbon fuels. Auction all the permits. Give the money back to the people. By drastically lowering demand we also put a lid on the price of oil at the wellhead. In other words, rather than paying lots of money to Exxon and the Saudi royal family, we pay it back to ourselves. Either way, oil will be expensive, because it has to be. But the solution is to get the money back, so we can protect our standard of living in other ways that won’t imperil the planet.

KEEPING UP WITH THE JONESES

by the Sandwichman

From the 1865 pamphlet A REDUCTION OF HOURS AN INCREASE OF WAGES by Ira Steward:

Many things can be done for self, family, and domicile which cost nothing but time and labor; but when done, are sure to suggest one or two things more, costing money. There is time after eight hours' labor to attend an evening concert, which adds a little to the expense, but much to the enjoyment of the family. The Smiths and Jones "and everybody" are going, "and who wants to be so different from everybody else." If these are trivial considerations to intelligent minds, they are the only ones which can be brought to bear upon the masses to tempt them to bid for higher wages. The great majority of men and women must "act like other folks." "What will people think?" or "What will people say?" is the most terrible question which they can be asked.



The expression "keeping up with the Jones" is commonly attributed (on the internet) to a comic strip of that name by Arthur Momand begun in 1913. But was the idea of "keeping up with the Joneses" original with Steward and his eight-hour theory?

Pass the Prozac!

So I take a tour around the economic blogosphere. What do I find: Delong pointing to Weintraub trashing Steve Marglin's new book. Tyler Cowen's and Steve Dubner's commenters (more than a few) telling me that the Greatest Thinker of Our Time is.......AYN RAND or THOMAS SOWELL. I'm not making this up. Right. Then the Greatest Cook Of Our Time is the guy who lowers the fry basket in the McDonald's down the street. Good Grief!

ENVIRONMENTALLY-FRIENDLY OFFSHORE OIL DRILLING

by the Sandwichman

There is no such thing.

Happy Bloomsday from Econospeak

This is June 16th, the day recounted in Joyce's Ulysses. I named my daughter Molly after the fictional Molly Bloom. Happy Bloomsday, Molly!

CGE Challenge Reloaded

It’s been two weeks since I put out a challenge to proponents and practitioners of computable general equilibrium (CGE) models. As you may recall (or if your short-term memory falters, reread), I pointed out that, in light of well-known issues in general equilibrium theory, and after 30 years of experience, the time had come for those who believe in CGE to step forward with performance data. Is there any evidence that predicted CGE results hold in the real world, or that CGE methods are seen as useful in the marketplace? Or is this simply a self-perpetuating enterprise, feeding off academic and government contracts in a world where results don’t matter?

In addition to its thunderous presence on EconoSpeak, my challenge was mirrored in several other venues. Thanks to the magic of Google, I was able to monitor the comments posted around the blogosphere, and here is what I got: nada. Oh, I read several lame arguments that it is in the nature or purpose of CGE that real-world performance data are impossible to come by or that they wouldn’t matter anyway, but no one had even a shred of evidence to offer.

So here we go again, and I will be more explicit. Unless anyone can demonstrate otherwise, I suggest that CGE is an academic bubble whose intellectual value is grossly inflated, and which will crash to earth once the idea dawns that conjectures are no substitute for results. Those who currently buy this sort of analysis, not to mention those who make the career decision to invest years in learning its technical arcana, are throwing away their time and money. There’s no there there. Show me why I’m wrong.

More Trade Nonsense from the New York Times

There is a lot I could jump on in Roger Lowenstein’s witless diatribe in today’s New York Times Sunday Magazine, but let’s keep it simple. Lowenstein, claiming to paraphrase Gary Hufbauer of the Peterson Institute (who should either sue for libelous misrepresentation or go into a different line of work), writes: “Thanks to the cheap dollar, U.S. exports are booming; trade is now the economy’s strong suit.” Now read that last clause again: “trade is now the economy’s strong suit.” Um, no. Have I mentioned that we have numbers on that?