The Elephant's Room

by the Sandwichman

My colleague, Peter Dorman wonders:

And where is the left? They rail against the bailout and the evils of finance capital, but when it comes time for them to put forward a constructive, functional alternative they change the subject.

To answer Peter's question requires a brief detour to consider the images of the elephant in the room, the emperor's new clothes and the three monkeys: see-no-evil, hear-no-evil and speak-no-evil. In short, what is not said is no coincidence. There is a conspiracy of silence. One has to learn to listen very carefully for the conspicuous absences.

Here is what the elephant looks like (I paraphrase from an abstract of Moishe Postone's Time, Labor and Social Domination): the core of the capitalist system is an impersonal form of social domination generated by labor itself and not simply by market mechanisms and private property. The industrial production process itself is an expression of this social domination and therefore cannot be a means of human emancipation.

Social domination in capitalism is something that largely occurs impersonally in the labor process. One sells one's time to make a living. That is to say, the employee accepts payment in return for agreeing to do what he or she is told to do during those hours of the day that one is employed.

Reducing the hours of work simply reduces the proportion of time during which individuals are under this impersonal form of domination. However, substantially reducing the hours of work not only reduces this period of domination proportionately, it also diminishes it's importance and displaces it from the center of life. That is what Herbert Marcuse meant when he said, "Civilization has to defend itself against the specter of a world which could be free. If society cannot use its growing productivity for reducing repression (because such usage would upset the status quo), productivity must be turned against the individuals; it becomes itself an instrument of universal control."

Has anyone other than the Sandwichman noticed that, aside from the Sandwichman's unrelenting obsession with the issue, NO ONE talks about reducing the hours of work as part of a policy response to the financial crisis. IT'S NOT IN THE CONVERSATION, FOLKS! It's what we've somehow tacitly agreed not to talk about. Why? Because it's the elephant in the room.

It's the unspeakable solution to "the unsolved riddle of social justice." It's the unmentionable "ultimate solution" to the problem of full employment. It's the unutterable "preliminary condition without which all further attempts at improvement and emancipation must prove abortive."

Rather than just passing on to some other topic without acknowledging what I'm trying to say here, can someone please explain to me why I'm wrong? Is there no elephant in the room? Is the emperor clothed in robes woven from silver and gold thread?

GOP Describes Alleged Perils of a Democratic Win

David Frum argues that Republican money should be focused on the Senate races as the McCain candidacy is a lost cause:

the Senate will have to play the same role after this defeat. That's especially true because of two unique dangers posed by the impending Democratic victory. First, with the financial meltdown, the federal government is now acquiring a huge ownership stake in the nation's financial system. It will be immensely tempting to officeholders in Washington to use that stake for political ends -- to reward friends and punish enemies. One-party government, of course, will intensify those temptations. And as the federal government succumbs, officeholders will become more and more comfortable holding that stake. The current urgency to liquidate the government's position will subside. The United States needs Republicans and conservatives to monitor the way Democrats wield this extraordinary and dangerous new power -- and to pressure them to surrender it as rapidly as feasible. Second, the political culture of the Democratic Party has changed over the past decade. There's a fierce new anger among many liberal Democrats, a more militant style and an angry intolerance of dissent and criticism. This is the culture of the left-wing blogosphere and MSNBC’s evening line-up -- and soon, it will be the culture of important political institutions in Washington.

Steve Benen suggests Frum has an “overactive imagination”. Steve also notes that McCain has another divided government message that assumes the Democrats get to 60 in the Senate and makes this economic prediction:

McCain said having Democrats in control of the White House, the U.S. House of Representatives under Speaker Nancy Pelosi of California and the Senate under Majority Leader Harry Reid of Nevada, would give Democrats unfettered power. The Democrats are expected to increase their majorities in both houses of Congress on election day. "Senator Obama's tax increase would put even more people out of work," McCain said. "We've seen this before in other countries. It doesn't work. The answer to a strong economy is not higher taxes.

McCain keeps telling middle class voters that Obama plans to raise their taxes, which of course, is a lie. It’s interesting to note that McCain failed to identify those other countries that raised taxes only to see a rise in the unemployment rate. Why don’t we talk about the United States the last time we had a Democratic White House and Democratic majorities in both the House and the Senate. We did have a tax increase in 1993 and Republicans back then predicted a recession. But it seems the Clinton years witnessed strong economic growth with large increases in employment.

Mankiw's Contradiction

Today's New York Times column by Greg Mankiw again shows the limits of orthodox economists' thinking. See my comments below.

October 26, 2008 / Economic View / New York Times

But Have We Learned Enough?
By N. GREGORY MANKIW

Like most economists, those at the International Monetary Fund are lowering their growth forecasts. The financial turmoil gripping Wall Street will probably spill over onto every other street in America. Most likely, current job losses are only the tip of an ugly iceberg.

But when Olivier Blanchard, the I.M.F.'s chief economist, was asked about the possibility of the world sinking into another Great Depression, he reassuringly replied that the chance was "nearly nil." He added, "We've learned a few things in 80years."

Yes, we have. But have we learned what caused the Depression of the 1930s? Most important, have we learned enough to avoid doing the same thing again?

The Depression began, to a large extent, as a garden-variety downturn. [a big ellipsis here, where Mankiw scetches a conventional story about the onset of the Depression]

The banking panics put downward pressure on economic activity in two ways. First, they put fear into the hearts of depositors. Many people concluded that cash in their mattresses was wiser than accounts at local banks.

As they withdrew their funds, the banking system's normal lending and money creation went into reverse. The money supply collapsed, resulting in a 24 percent drop in the consumer price index from 1929 to 1933. This deflation pushed up the real burden of households' debts.

Second, the disappearance of so many banks made credit hard to come by. Small businesses often rely on established relationships with local bankers when they need loans, either to tide them over in tough times or for business expansion. With so many of those relationships interrupted at the same time, the economy's ability to channel financial resources toward their best use was seriously impaired....

Less successful were various market interventions. According to a study by the economists Harold L. Cole and Lee E. Ohanian, both of the University of California, Los Angeles, and the Federal Reserve Bank of Minneapolis, President Roosevelt made things worse when he encouraged the formation of cartels through the National Industrial Recovery Act of 1933. Similarly, they argue, the National Labor Relations Act of 1935 strengthened organized labor but weakened the recovery by impeding market forces....<

Here we see a big contradiction! Above, Mankiw first blames deflation (steadily falling prices) for being a major force pushing the US economy into Depression. Then, he blames FDR for fighting deflation! Note that at the time, many policy-oriented economists were explicitly in favor of preventing deflation (and instead in favor of "reflation"). Though they were often often unorthodox, their reasons were very similar to those of Irving Fisher, a famous and very orthodox economist of the time: to quote Mankiw, "deflation pushe[s] up the real burden of households' debts."

Now, it may be that if we looked deeper into this question, there's no contradiction here, but he doesn't address the issue at all. He instead seems to be assuming the standard economics BS about falling prices being a good thing at the macro level. This should be called "knee-jerk economics."

He continues:... three researchers show that the leading economists at the time, at competing forecasting services run by Harvard and Yale, were caught completely by surprise by the severity and length of the Great Depression. What's worse, despite many advances in the tools of economic analysis, modern economists armed with the data from the time would not have forecast much better. In other words, even if another Depression were around the corner, you shouldn't expect much advance warning from the economics profession.

Let me be clear: Like Mr. Blanchard at the I.M.F., I am not predicting another Great Depression. We have indeed learned a lot over the last 80 years. But you should take that economic forecast, like all others, with more than a single grain of salt.

It's about time! This Harvard elite economist is actually expressing modesty, something he's never been good at. So the financial melt-down has had at least positive effect.

Jim Devine

Economic and Social Importance of the Eight-Hour Movement

The first condition for social opportunity which consists of frequent contact with an increasing variety of social influences is LEISURE. So long as one's time is all occupied in the mere getting of a living, the chance for social influences to operate upon him, which creates new desires, is impossible.

The first condition for social opportunity which consists of frequent contact with an increasing variety of social influences is LEISURE. So long as one's time is all occupied in the mere getting of a living, the chance for social influences to operate upon him, which creates new desires, is impossible. Whatever increases the draft upon the physical and nervous energies of man make him less susceptible to the refining, and more disposed to the stimulating and vulgarizing influences. It is one of the characteristic features of modern industrial life that by its division and specialization of labor, it tends to increase the intensity of the strain upon the nervous energies of the laborer. In no country in the world is this fact more prevalent than in America. The persistency with which industrial energies are intensified in this country have come to be almost regarded as a national characteristic. It has become a recognized fact by medical science that the first step toward remedying this condition is more leisure, more physical and mental repose, more and longer periods of relief, from the strain which the specialized industrial life imposes. This has become absolutely necessary for both physical and social reasons. For physical reasons, because it makes wholesome living and normal physical health possible, and socially because without it frequent social contact is prevented or the susceptibility to the socializing influences is destroyed. The great mass of laborers are compelled to work all the year round under the same monotonous condition. This is made indispensable by the very nature of modern methods in industry. Under the factory system the laborers become mere wheels in a colossal machine, in which the presence of all is necessary to the efficient labor of any. Since the conditions under which any considerable number of the laborers work, must necessarily be those of all, nothing can increase the leisure and enlarge the social opportunities of the laboring classes which does not make a general reduction of the hours of labor.

Bailing Out the Banks but Not the Economy

One of the best pieces of reporting to emerge from the bailout insanity is this gem from Joe Nocera of the New York Times. You must read it: doctor’s orders. It makes it crystal clear that Paulson has a plan for his friends in the financial world, but there is no plan for the economy. You can lead a bank to liquidity but you can’t make it loan. For his chutzpah in listening in on a conference call intended only for JP Morgan staff, Nocera deserves a Pulitzer, a Nobel or something.

My first thought on reading this exposé was that we just need to hang on for three more months, when the real cavalry will come to push aside this bunch of imposters. But then I realized that there is no guarantee that Rubin, Summers et al. will have the courage or freshness of vision to do what needs to be done. They too have been shouting “Capitalization, Capitalization”, which may rescue them but falls far short of rescuing us.

I reiterate: we need to put a public financial alternative on the table. Bailing out the financial institutions (a) may not succeed on its own terms and (b) does not deal with the fact that the real economy is plunging. A public entity can step up and provide the credit we need to avoid a suffocating slump, so we are not held hostage to the Jamie Dimons of this world.

And where is the left? They rail against the bailout and the evils of finance capital, but when it comes time for them to put forward a constructive, functional alternative they change the subject. As far as I can see, it comes down to this: either we bail out the existing institutions and somehow browbeat them into countercyclical lending behavior, which they will resist with all their fiber, or we let them go to their fate and put our marbles into a public institution that can do the job. The first is an ethical swamp, reeking of moral hazard, and may well fail. The second is the straightest, fairest, most reliable route to recovery. Please raise your voice for a public alternative. If the bailout fails to prevent a full-bore economic collapse, by the time we find out it will be too late.

New Scientist: The Folly of Growth

Kate Soper: Nothing to fear from curbing growth

It doesn't help that virtually all representations of pleasure and the life we should aspire to come from advertising, with its incessant message that our happiness is dependent on consuming ever more "stuff". We hear little about the joys of escaping the stress, congestion, ill-health, noise and waste that come with our "high" standard of living.

In fact, there is plenty of evidence that the work-dominated and materially encumbered affluence of today is not giving us enjoyable lives, and that switching to a more sustainable society in which we work and produce less would actually make us happier. For example, rates of occupational ill-health and depression have been shown to be linked to the number of hours we work, and once a certain level of income is reached further wealth does not correlate with increased happiness.

The absurdity of our situation is illustrated by the way our economy profits from selling back to us the pleasures that we have lost through overwork: the leisure and tourist companies that sell us "quality time"; the catering services that provide "home cooking"; the dating and care agencies that see to personal relations; the gyms where people pay to walk on treadmills because the car culture has made it unsafe or unpleasant to walk outside. As the economy continues to expand, consumer culture becomes ever more reliant on our willingness to accept this.

A growing number of people are starting to realise that there may be more to life than working to spend. Troubled by the negative impacts of a high-stress lifestyle, they are simplifying their lives and rethinking their values and desires. If we were to shift en masse to a less work-intensive economy, it would reduce the rate at which people, goods and information had to be delivered, cutting both resource use and carbon emissions.

Rather than entailing any sacrifice to our lifestyles, this would bring huge benefits. People would reclaim time for personal and family life. They would commute less and enjoy healthier modes of travelling such as walking, cycling and boating. Supermarket shopping would cede to a resurgence in local stores, making town centres more individual and boosting local communities. All this would transform urban and rural living, and provide more tranquil space for reflection, as well as opportunities for sensual experience now denied by harried travel and work routines. These revised ideas of the "good life" might also inspire less-developed countries to reconsider the conventions and goals of development, enabling them to avoid some of the less desirable consequences of the current model.

My one reservation regarding the above is that Kate Soper finesses the political economy of working less -- that is to say the trade-off between reduced hours of work and unemployment that growth-obsessed economists would rather not acknowledge but rather would actively suppress because it undermines their admittedly flawed "model of how the world works".

It's co-existence or no existence

What prospect is there for national forms of economic prudence when we're drowning in a giant global liquid pool of finance capital of which only a tiny fraction derives from the production of real goods and services? [1]

Doug Nolan this week:

"....Think in terms of the surge of inflation that forced thoughtful policymakers in economies such as Australia, New Zealand and elsewhere to significantly tighten monetary policy. Rising rates, however, only enticed more disruptive speculative finance flowing loosely from (low-yielding) Credit systems including the U.S., Japan, and Switzerland. Speculation could have been as simple as shorting a low-yielding security anyplace to finance a higher-returning asset anywhere. Or, why not structure a complex leveraged derivative transaction that, say, borrowed in a cheap currency (i.e. yen or swissy), played the upside of rising emerging equities markets, and at the same time had triggers to hedge underlying currency and/or market exposure. And the counterparty exposure for a lot hedges could be wrapped up in collateralized debt obligations (CDOs). And the more loose global finance inflated the world, the more the leveraged speculating community inundated “commodity” economies such as Australia, Canada, Brazil, South Africa and Russia. Of course, speculative inflows ignited domestic asset market and Credit systems, in the process fostering dangerous Bubbles...." [2]

And some comments from Naked Capitalism in the last few days:
"a lot of the depression we're all going to get now is because Japan expanded its money supply but held interest rates low for those 15 years in a attempt to duck recession. With low domestic rates, there was no place for the money domestically so it went abroad via the carry trade and blew bubbles all over the planet...

"...I never saw [Japan's] zero [interest rate] policy as anything but a long-term disaster; one can't get any kind of velocity or domestic economy at long term zero or neg rates, it's madness. The destabilizing impact of dollar debt expansion has mattered far more in this global bubble than the cheap yen, but the irrationality of the Japanese yen bloat backstoped their standard of living for fifteen years at the coast of their _next_ fifteen years, yes, and they have their share of irresponsibility in the global bust. Why didn't Japan, really, take a knock and move on? Hard times would have socially knocked their crony capitalist one-party regime out of authority for something rather more leftish. This wasn't so much about saving the banks but about saving the 'Power System.' Which is why US public authorities are trying the same bad approach: it's all about saving the One Party Capitalist system... [3]




[1] The title is a quote from Dr Martin Luther King.

[2] History's Biggest Margin Call
by Doug Noland October 23, 2008
http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10142

[3] Richard Kline.

Economic and Social Importance of the Eight-Hour Movement

The wants of mankind are everywhere simple or complex according to the quality of the habits and Customs of the society in which he moves. Habit not only governs our social wants, but it exercises an important influence over our physical wants also.

As wages are governed by the standard of living, and the standard of living is governed by the social wants of the laborer, how then are the social wants determined? A little observation will show that the wants of mankind are everywhere simple or complex according to the quality of the habits and Customs of the society in which he moves. Habit not only governs our social wants, but it exercises an important influence over our physical wants also. While it does not determine whether or not we shall eat, it does decide how and what we shall eat, the clothes we shall wear, the kind of house we shall live in; nay, more, the very language we speak, the morals we adopt, and the religion we profess, are all determined by the habits and customs of those among whom we live. Whether we are Christians, Mohammedans or Buddhists; whether we eat with chop-sticks, or use knives and forks; whether we live upon rice, wear wooden shoes and a cotton frock, or eat black bread and dress in sheep-skins, or enjoy the comforts and luxuries of modern civilization, mainly depends upon the prevailing social habits and customs of the country we happen to live in. In fact, habit is the strongest force in human affairs. It is more powerful than governments, armies or absolute despotism. It is at once the motor force and ratchet wheel of human progress. Wants push the car of civilization forward, the habits and customs prevent it from slipping backward. In short, the habits and customs of a people constitute its real social character.

A Pre-Keynesian View of the Current Recession

Of course in several chapters of the General Theory (especially # 12) Keynes discussed the vagaries of financial markets and how they can crash. But in general that is not the main mechanism for macro fluctuations in Keynes. While there were predecessors to Keynes who can be seen as emphasizing broader shifts in aggregate demand, including Malthus, Sismondi, and Marx, the more common model of macro fluctuations posited by classical economists of the nineteenth century often focused on investment declines after bank failures after the crash of a speculative bubble, with the Panic of 1837 and its subsequent recession in the US an example (due to a crash of a speculative bubble in cotton lands). I shall indulge by quoting at length John Stuart Mill on speculative bubbles, who certainly saw this as the main source of macro fluctuations in the manner described above (J.S. Mill, Principles of Political Economy, Book II, Chap. 9, Section 3, 1848):

"The inclination of the mercantile public to increase their demand for commodities by making use of all or much of their credit as a purchasing power depends on their expectation of profit. When there is a general impression that the price of some commodity is likely to rise from an extra demand, a short crop, obstruction to importation, or any other cause, there is a disposition among the dealers to increase their stocks in order to profit by the expected rise. This disposition tends in itself to produce the effect that it looks forward to - a rise of price; and, if the rise is considerable and progressive, other speculators are attracted, who, as long as the price has not begun to fall, are willing to believe that it will continue rising. These by further purchases, produce a further advance, and thus a rise in price, for which there were originally some rational grounds, is often heightened by merely speculative purchases, until it greatly exceeds what the original grounds will justify. After a time this begins to be perceived, the price ceases to rise, and the holders, thinking it time to realize their gains, are anxious to sell. The the price begins to decline, the holders rush into the market to avoid a still greater loss, and, few being willing to buy in a falling market, the price falls much more suddenly than it rose. Those who have bought at a higher price than reasonable calculation justified, and who have been overtaken by the revulsion before they had realized, are losers in proportion to the greatness of the fall and to the quantity of the commodity which they hold, or have bound themselves to pay for."

Economic and Social Importance of the Eight-Hour Movement

Frequent contact with enjoyable conditions creates desire for them, and by repeated satisfaction the desire grows into a taste, and tastes into absolute wants, which ultimately become a part of the habits and fixed character, or second nature.

Since the established wants of a people govern its industrial activities and social relations, and these in turn establish its habits or social conduct, whatever effects human wants exercises a commensurate influence upon the character of the people. Accordingly, we find the world over, that the social character of every community is elevated and refined, civilization most advanced, and of course wages the highest, and the well-being of the masses the most complete where the normal wants of the people are the most numerous, and their social life the most complex. Obviously, therefore, the real fulcrum upon which to place the lever with which to lift social character and thereby advance civilization is human wants.

Nor is the influence of a want confined to its own satisfaction. In accordance with the principle, that the strength of a desire increases with its gratification, does the complete satisfaction of a want tend to give rise to new desires. Each new want calls forth a new effort for its gratification, and thereby enlarges the field of experience by making more frequent and varied social intercourse necessary from which new desires naturally arise. Thus it is that frequent contact with enjoyable conditions creates desire for them, and by repeated satisfaction the desire grows into a taste, and tastes into absolute wants, which ultimately become a part of the habits and fixed character, or second nature. In fact, there is no conceivable limit to the development of man's social wants, and his ability to satisfy them, except those fixed by his opportunities.

The power of social influences in shaping man's desires, wants, habits and character is everywhere manifest. It is the recognition of this fact that makes us so solicitous about what our children shall hear and see, or where they shall go, the school they shall attend, the company they shall keep, the amusement they shall have, etc. Even parents who are in the habit of frequenting saloons will forbid their children going to such places, and none but the most degraded will allow their children to see them do so.

Indeed, the whole history of the human race is one continuous stream of evidence of the universal operation of this principle. Wherever man's social opportunities have been the most restricted, his wants, tastes and desires are the most limited and his industrial and political character has made the least progress, and vice versa. For the same reason that the extent of man's wants and the development of his character is the measure of social progress; so, too, the extent of his opportunities to increase those wants and develop that character is the true measure of civilization. Therefore, how to increase the wants, develop the character, and. consequently advance the wages of the laboring classes, ultimately resolves itself into the question: How can the social opportunities of the masses be enlarged?

The Future is Now!

In the year 2008:

* "The single most important item in 2008 households is the computer." Check.

* "Money has all but disappeared." Check.

* "People have more time for leisure activities in the year 2008. The average work day is about four hours."

Maestro Finds A Flaw

by the Sandwichman

Greenspan: "I discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works."

Ira Steward, 1865: "It is but little more than three [now four and a half] hundred years since everybody believed that the sun revolved around the earth. But Copernicus finally exploded this mistake and proved that the earth goes around the sun; and many have been the cases in which men have been forced to admit that the truth was exactly the reverse of all their past opinions or experiences."

Hey, shit happens.

Plea for comments

I need to submit a proposal to a major publication tomorrow. I have had to rush it off. Any comments would be appreciated.

How is it that the American dream suddenly morphed into a nightmare? The subprime crisis is a symptom of something larger and far more dangerous. Even the meltdown of Wall Street is a symptom of something larger and even more threatening. Without extreme care, the intended cure is likely to make matters worse. Papering over a crisis, even with a trillion dollar bailout, may temporarily eliminate the symptoms, perhaps even making the economy look healthy again, but the underlying problems are almost certain to break out again in a more virulent form.

A rational response to the crisis requires recognizing the deeper, systemic dimensions of the problem. On the most superficial level, the public face of problem was a group of people buying houses they could not afford. This perspective is misleading, especially because many of the loans were to people who were already homeowners or small-time speculators who were looking to flip houses.

Like a Russian nesting doll, another face is below the surface: predatory lenders, who were pushing deceptive loans that could never be repaid. Pulling away these predatory lenders exposes a more complex presence: the great banking institutions now on the public dole. These supposedly respectable businesses, protective of their public face, do not allow their corporate names to be used by the predatory lenders, but they represent a very profitable component of their businesses. At the next levels, first a dysfunctional financial system appears and, then, something more abstract -- a political movement fanatically committed to deregulation, which allowed the whole financial system to go haywire.

Recent scrutiny has exposed most of these actors, but even deeper forces have gone unnoticed. To get a handle of these forces requires looking back at the pattern of crisis and response over many decades. Since comparisons of the current crisis with the Great Depression have become commonplace, that period may be a good place to start.

The Depression of the 1930s had disastrous human consequences, but it made the economy stronger in the long run. In effect, the depression drew much of the poison from the system. It swept away outdated, inefficient, and obsolete businesses, plant, and equipment. Under extraordinary market pressure, business found ways to improve efficiency. Finally, the Depression wiped out a great deal of debt, while New Deal legislation allowed unions to lift wages. The World War II economy built up considerable wealth in the U.S. while the economies of international competitors were left in ruins. This constellation of forces left business and the public able to purchase goods and services once employment recovered.

Shortly after the war ended, the U.S. enjoyed what economists call the Golden Age, because of the extraordinary economic performance of the time. Business came to expect that the experience of the Depression had taught government how to make those good times last forever. Obviously, they did not.

By the late 1960s, falling profits created enormous dissatisfaction for business. Both business and the public tended to hold the Democrats responsible for the faltering economy. In the decades that followed, the Democrats managed to elect only two presidents, both of whom governed like traditional Republicans, while the Republicans became increasingly ruthless about promoting business interests. The underlying obsession of both parties was to resurrect the profitability of the Golden Age.

I will tell the story of the people and policies that set out to recreate the economic performance of the Golden Age. The reader will see how, instead of a Golden Age, they gave the world a jerry-rigged Gilded Age -- one in which the gilding covered up an increasingly dilapidated economy. Profits still rose, approaching their pre-Depression peak, but their recovery marked deeper problems.

Normally, one would expect healthy profits to be a payoff from a productive economic structure, based on intelligent investments in plant, equipment, and a well-trained workforce. Instead, the improvement in profits reflected a combination of cheap labor (real hourly wages peaked in 1972), deregulation, low interest rates, and financial manipulation. The driving force of this new Gilded Age was credit rather than income for the majority of workers. Recurrent crises should have signaled the need for fundamental change. Instead, government and business chose to treat the symptoms.

Tax Progressivity: Adam Smith as a Socialist?

Steve Coll reminds us of this passage from the Wealth of Nations:

The necessaries of life occasion the great expense of the poor. . . . The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. . . . It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.

Coll has also been watching Faux News so we don’t have to:

Smith’s notion of reasonableness did not anticipate the Fox News Channel, however. Last Tuesday, Wurzelbacher appeared on that network, where he denounced Obama’s comments as “socialist.” He said that Obama “scared me,” because he “wants to distribute wealth.”

I guess Adam Smith would also scare Joe the Plumber!

Mussey/Douglas on Eight-Hour Theory

by the Sandwichman

From his vantage point in the mid-1920s, Henry Mussey ("Eight-Hour Theory in the American Federation of Labor" in Economic Essays, edited by Jacob H. Hollander, Macmillan Company, 1927) admired the political pragmatism of Samuel Gompers’s use of eight-hour philosophy to nurture the fledgling American Federation of Labor. "No student of American labor history," Mussey wrote, "can fail to be struck with the extraordinary importance of the eight-hour issue in union thinking during the formative years of the American Federation of Labor."

It is the ideas underlying the movement, especially in its earlier period down to 1892, with which we are concerned. Why did the men who were to unify the American labor movement take up first the question of hours, and for ten years make the shorter workday the central demand in their positive platform? The opinion may be hazarded that it is because the theory of the eight-hour day happened to fit particularly well the practical needs of their situation, and was therefore a tool well-nigh indispensable to them in their hard task of organization.

Mussey was less convinced of the theoretical soundness of the Federation’s eight-hour philosophy, pioneered by Ira Steward in the 1860s. His apparent skepticism was in keeping with the almost obligatory disdain of academic economists toward populist panaceas for unemployment. Academic economists proclaimed the shorter-hours theory false, most of them apparently without bothering to read it. It didn’t conform to their preconceptions -- so it must be wrong and not worth examining.

Mussey himself comes across in his article as somewhat agnostic on the matter of that economic orthodoxy. "Any cub productivity theorist," he remarked, "can upset the idea [of increasing employment by spreading existing work among a larger number of workers working shorter hours] by a mere reference to long-time effects on wages, but the unionists were blissfully ignorant of such theories, and confident of the union’s power to maintain living standards and wages, so the theoretical fallacy did not trouble them." Does a "mere reference" by a "cub" productivity theorist add up to a decisive rebuttal of the eight-hour theory or is it a wry commentary on the superficiality of the pro forma academic dismissal of the theory? Was the "blissful ignorance" of the unionists a defect or a blessing? Mussey left it ambiguous as to exactly where his irony stood on the question.

Only five years after publication of Mussey’s account, Dorothy W. Douglas ("Ira Steward on Consumption and Unemployment," The Journal of Political Economy, August 1932) was extolling Steward’s eight-hour theory as a "philosophy of American wages and unemployment that sounds strangely apposite today." What had intervened decisively between Mussey’s 1927 ambivalence and Douglas’s 1932 enthusiasm was a financial collapse and the start of a deep depression.

Douglas condensed the two main aspects of Steward’s theory and their interconnection:

One, the stimulating effect of leisure and leisure-time consumption upon the standard of living and hence the wage demands of the lowest classes of labor... and the other, the stimulating effect of this more expensive labor upon the technique of production itself -- the effect of "driving" labor saving machinery. Finally, uniting the two, is a plea, now familiar to our ears of mass demand as alone making mass production possible.

What impressed Douglas most about Steward’s theory was his argument that unemployment and low wages lay at the root of economic depressions. According to Steward (in Douglas’s words), capitalists "assume that just a little surplus labor is good for business." Too much unemployment would be an inconvenience and even a scandal. But employers welcome just enough unemployment to discourage demands for higher wages. As an aside, such an attitude is evident in the acceptance in mainstream economics since the 1970s of the idea of a "natural" or "non-accelerating inflation rate of unemployment"(NAIRU).

The problem with this Goldilocks theory of unemployment (not too high, not too low, but just right), as Steward pointed out, is that there is, in effect, a multiplier effect. "An unemployed man is the most deadly fact that exists outside of a graveyard... Without raising a hand he takes more bread from others than he himself can eat.. more clothes than he can ever wear..." This specter of unemployment makes those who are still employed willing to work for longer hours and lower wages in "the deadly competition between those who have nothing to do and those who do too much for fear of doing nothing." Furthermore, the still employed workers become reluctant to spend what income they have for fear of future unemployment. "The most cautious and calculating laborers, who are not themselves discharged, are sufficiently alarmed by the first few discharges that occur about them to wait before buying." Meanwhile, employers find themselves with no choice but to lay off workers in response to the contraction of business.

Ironically, though, and again in contrast to Mussey, Douglas judged Steward’s practical proposals to be naive. Mussey had hailed the practical success of a labor strategy founded on Steward’s theory but doubted the soundness of that theory. Douglas admired the theoretical side, while discounting the likelihood of its practical political implementation. As things have turned out, both the theoretical and practical dimensions have been abandoned by economists and unionists, respectively.

Unbeknownst (apparently) to either Mussey or Douglas, Steward’s theory was given powerful, independent support in the neoclassical theory of the hours of labor expounded by Sydney Chapman, a star pupil of Alfred Marshall. Practically, a policy prescription quite similar to Steward’s was articulated by John Maynard Keynes in 1943. There is no indication that either Chapman or Keynes was familiar with Steward’s theory or its endorsement by the AF of L.