Challenging Professor Glaeser

by the Sandwichman

Harvard Professor Edward Glaeser confuses the Jevons Paradox and the lump of labor fallacy.

The cash-for-clunkers policy seems based on the mistaken view that the number of miles traveled is independent of the price or pleasure of driving. I call this the 'lump of travel fallacy,' which is one of a family of lumpy errors that all assume things will stay fixed when they won’t...

The original lump fallacy is the 'lump of labor fallacy.' This fallacy holds that there is a fixed amount of work to be done in society, so restricting working hours will reduce unemployment. Encouraged by this logic, European polities have long restricted work hours. The history of Europe’s labor markets illustrates that more regulations makes hiring less attractive and reduces the total amount of work done in a society.

Dear Professor Glaeser,

You have an excellent point about the cash-for-clunkers program ("Program has clunky reasoning," Boston Globe, Aug 8). Unfortunately, you mess it up by referring to the wrong "economic principle". The idea that people will travel more in their snazzy new, more fuel efficient cars is an example of the Jevons Paradox not the lump of labor fallacy.

Moreover, the example that you presents to illustrate your fallacy claim is an inept distortion both of the original lump of labor fallacy and of recent employment history in Europe. The original lump claim was an anecdotal complaint about restrictions on output.

The tactic of attributing the motivation for reduced work time policies to some underlying fallacy is an intellectually dishonest smear. I've documented the history of the lump of labor claim about shorter working time and I challenge you, Professor Glaeser, to openly debate my rebuttal of the fallacy claim, with regard to reducing the hours of work.

Yours sincerely,

Tom Walker,
author, "Why Economists Dislike a Lump of Labor" Review of Social Economy, Fall, 2007,
http://tinyurl.com/lumpoflabor

Outrageous Poverty and the Blue Dogs

OK, you all know about Paris Hilton's $325,000 doghouse. Then the Wall Street Journal chimed in with an article by a British physician informing the American public that dogs get better health care than ordinary humans in the British medical system. Thank God for those good U.S. insurance corporations that protect us from such a fate. And thank God for warning us of the dangers of single payer.

Dalrymple, Theodore. 2009. "Man vs. Mutt." Wall Street Journal (8 August).

Then Barbara Ehrenreich published a brilliant piece showing how governments are criminalizing poverty -- yes, making it a crime to threaten society by sleeping on the street or some such violent act. Yet, dogs, are free to behave that way.

Ehrenreich, Barbara. 2009. "Is It Now a Crime to Be Poor?" New York Times (August 8)


From all this I have now learned that dogs have become the standard by which we must judge humanity. When workers complement bosses for treating them like dogs, we will understand. Poor people should aspire to enjoy canine cuisine.

Makes you want to join the Blue Dogs (or should that be Blue Bloods?). Or might there be a better system for organizing society? I don't have time to go any further. I have to get back to reading Kapital.

The criticism of religion ends with the teaching that man is the highest essence for man - hence, with the categoric imperative to overthrow all relations in which man is a debased, enslaved, abandoned, despicable essence, relations which cannot be better described than by the cry of a Frenchman when it was planned to introduce a tax on dogs: Poor dogs! They want to treat you as human beings!

Marx, A Contribution to the Critique of Hegel’s Philosophy of Right

Hours of Labour 8

by Sydney J. Chapman (translated and condensed by the Sandwichman)

We are assuming throughout, it must be remembered, that the wage will always be the worker's marginal worth – that is, what would be lost if he were dismissed – and that he knows it. Actually, of course, there is frequently an appreciable discrepancy between the marginal worth of labor and its wage, and the usual connection between them has not been commonly understood by the wage-earning classes. It would seem from the records of labor movements as if the worker's fear – based as much on ignorance as on distrust – lest the longer day should mean no more pay, though the weekly product would be greater, has protected him against the injurious consequences of short-sightedness; but I am inclined to think that the dominant force in these labor movements has consisted in ideals of life, formed half instinctively, which are unconnected with views, fallacious or otherwise, concerning the mechanics of distribution. Bad arguments have been used to justify good ends. To these ideals of life I shall refer again.


Actually, the actions of both employers and employed, in so far as they are governed by self-regarding motives, will compromise between immediate impulses and long-sighted calculations. Long-period results that are not very remote will usually be factored in, and employers as well as workers may aim at them, because the former may think the length of time a worker usually stays with one firm sufficient to justify a slight present sacrifice made with the object of securing improvement in the worker's efficiency.

The above analysis explains not only disagreements between employers and workers as regards the normal working day, but also the friction that is constantly generated in the matter of "overtime." Without the admission of overtime, heavy losses might be experienced by an industry in view of the inelasticity of its production and fluctuations in the market in which it sold; but, on the other hand, overtime once admitted sometimes tends to be worked out of proportion to the special need for it, and workers are apt to suspect that it is being used unfairly to extend the normal day.

Next

The Fundamental Truth of Basic Facts III

by the Sandwichman

Moving right along from Liberty Lobby Carothers and Brookings Institute Moulton we arrive at Thomas Nixon Carver's December 1931 presentation at the annual meeting of the American Economic Association, summarized in the American Economic Review for March 1932. Professor Carver was best known for his contribution to the abstinence theory of interest from the perspective of marginal productivity.

Professor Carver detected four 'errors' in the reasoning of those who advocate shorter working time as cure for unemployment:

First, shorter hours does not reduce unemployment, "it only smears it more evenly." Instead of 10% unemployed and 90% employed, everyone would be employed 90% of the time and unemployed 10% of the time.

Second, more leisure doesn't increase the demand for goods unless it is accompanied by greater purchasing power. Furthermore, leisure could just as easily be spent in the cultivation of the arts and graces. "If the cult of leisure should result in the popularization of Gandiism [sic], humanism or any of the highbrowisms, it would decrease the desire for material goods."

Third, if shorter working time is accompanied by an increase in wages to hold total income constant it will raise the unit cost of products, resulting in decreased sales. "Even though each worker produces less, it may not take any more workers to produce the reduced volume than it took before." Besides, even though workers' money income stayed the same, price increase would mean their real income went down.

If instead of reducing the hours of work, the money wages of workers were reduced, this would result in lower prices, expanded employment and more or less level real wages. Shorter work time bad; lower wages good.

Fourth, it is a mistake to assume that shorter hours would have the same effect globally as it might when applied in only one or a few industries.

"If, as the purchasing power of money wages falls, money wages are advanced in order to keep real wages at the old level, that will send the cost of production still higher, reduce the quantities that can be purchased by those who are not wage workers, call for a still smaller volume of production, and completely nullify any supposed advantage to the unemployed."

Ten Lost Years

by the Sandwichman

We interrupt the cheering for the better-than-expected, less-bad-than-previous-months unemployment increase for the following announcement:

Seasonally adjusted private nonfarm employment, August 1999: 108,959,000.

Seasonally adjusted private nonfarm employment, July 2009: 108,924,000(Preliminary).

A loss of 35,000 private jobs in TEN (10) years.

Unemployment Rate Falls as Employment-Population Ratio Declines

BLS reports even more job losses in July:

Nonfarm payroll employment continued to decline in July (-247,000), and the unemployment rate was little changed at 9.4 percent

But the unemployment rate was 9.5 percent in June. Had the Administration been Republican, Lawrence Kudlow would be hailing this report as good news. Paul Krugman offers a different tone:

Some readers have asked how it’s possible for unemployment to fall when the economy is still losing jobs, albeit at a slower rate. The answer is a bit annoying. First, the jobs number and the unemployment number are based on different surveys — a survey of establishments in the first case, a survey of households in the second. Sometimes employment rises by one measure while falling by the other, although it happens that this month there isn’t much difference in the jobs number.

The household survey also showed job losses – with its figure being 155,000, which drove the employment-population ratio down from 59.5% to 59.4%. The labor force participation rate, however, also fell from 65.7% to 65.5%. The employment picture got a little worse last month or as Paul concludes:

the employment situation is drifting down, but not plunging — occasional mixed signals are likely. No big deal. The basic story is that things are sort of stabilizing — but they’re definitely not improving yet.

THE LONG-TERM PROBLEM OF FULL EMPLOYMENT

by the Sandwichman

For those who still haven't "gotten the memo", I'm posting it again. I will continue to repost this memo each month around the time of the BLS report. Please see also Dean Baker's proposal of tax credits for paid time off. (How European!)

THE LONG-TERM PROBLEM OF FULL EMPLOYMENT

J.M. Keynes (May 1943):

1. It seems to be agreed today that the maintenance of a satisfactory level of employment depends on keeping total expenditure (consumption plus investment) at the optimum figure, namely that which generates a volume of incomes corresponding to what is earned by all sections of the community when employment is at the desired level.

2. At any given level and distribution of incomes the social habits and opportunities of the community, influenced (as it may be) by the form and weight of taxation and other deliberate policies and propaganda, lead them to spend a certain proportion of these incomes and to save the balance.

3. The problem of maintaining full employment is, therefore, the problem of ensuring that the scale of investment should be equal to the savings which may be expected to emerge under the above various influences when employment, and therefore incomes, are at the desired level. Let us call this the indicated level of savings.

4. After the war there are likely to ensure [sic] three phases-
(i) when the inducement to invest is likely to lead, if unchecked, to a volume of investment greater than the indicated level of savings in the absence of rationing and other controls;
(ii) when the urgently necessary investment is no longer greater than the indicated level of savings in conditions of freedom, but it still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment;
(iii) when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises.

5. It is impossible to predict with any pretence to accuracy what the indicated level of savings after the war is likely to be in the absence of rationing. We have no experience of a community such as ours in the conditions assumed, with incomes and employment steadily at or near the optimum level over a period and with the distribution of incomes such as it is likely to be after the war. It is, however, safe to say that in the earliest years investment urgently necessary will be in excess of the indicated level of savings. To be a little more precise the former (at the present level of prices) is likely to exceed £m1000 in these years and the indicated level of savings to fall short of this.

6. In the first phase, therefore, equilibrium will have to be brought about by limiting on the one hand the volume of investment by suitable controls, and on the other hand the volume of consumption by rationing and the like. Otherwise a tendency to inflation will set in. It will probably be desirable to allow consumption priority over investment except to the extent that the latter is exceptionally urgent, and, therefore, to ease off rationing and other restrictions on consumption before easing off controls and licences for investment. It will be a ticklish business to maintain the two sets of controls at precisely the right tension and will require a sensitive touch and the method of trial and error operating through small changes.

7. Perhaps this first phase might last five years,-but it is anybody's guess. Sooner or later it should be possible to abandon both types of control entirely (apart from controls on foreign lending). We then enter the second phase, which is the main point of emphasis in the paper of the Economic Section. If two-thirds or three-quarters of total investment is carried out or can be influenced by public or semi-public bodies, a long-term programme of a stable character should be capable of reducing the potential range of fluctuation to much narrower limits than formerly, when a smaller volume of investment was under public control and when even this part tended to follow, rather than correct, fluctuations of investment in the strictly private sector of the economy. Moreover the proportion of investment represented by the balance of trade, which is not easily brought under short-term control, may be smaller than before. The main task should be to prevent large fluctuations by a stable long-term programme. If this is successful it should not be too difficult to offset small fluctuations by expediting or retarding some items in this long-term programme.

8. I do not believe that it is useful to try to predict the scale of this long-term programme. It will depend on the social habits and propensities of a community with a distribution of taxed income significantly different from any of which we have experience, on the nature of the tax system and on the practices and conventions of business. But perhaps one can say that it is unlikely to be less than 7 per cent or more than 20 per cent of the net national income, except under new influences, deliberate or accidental, which are not yet in sight.

9. It is still more difficult to predict the length of the second, than of the first, phase. But one might expect it to last another five or ten years and to pass insensibly into the third phase.

10. As the third phase comes into sight; the problem stressed by Sir H. Henderson begins to be pressing. It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours.

11. Various means will be open to us with the onset of this golden age. The object will be slowly to change social practices and habits so as to reduce the indicated level of saving. Eventually depreciation funds should be almost sufficient to provide all the gross investment that is required.

12. Emphasis should be placed primarily on measures to maintain a steady level of employment and thus to prevent fluctuations. If a large fluctuation is allowed to occur, it will be difficult to find adequate offsetting measures of sufficiently quick action. This can only be done through flexible methods by means of trial and error on the basis of experience, which has still to be gained. If the authorities know quite clearly what they are trying to do and are given sufficient powers, reasonable success in the performance of the task should not be too difficult.

13. I doubt if much is to be hoped from proposals to offset unforeseen short-period fluctuations in investment by stimulating short-period changes in consumption. But I see very great attractions and practical advantage in Mr Meade's proposal for varying social security contributions according to the state of employment.

14. The second and third phases are still academic. Is it necessary at the present time for Ministers to go beyond the first phase in preparing administrative measures? The main problems of the first phase appear to be covered by various memoranda already in course of preparation. insofar as it is useful to look ahead, I agree with Sir H. Henderson that we should be aiming at a steady long-period trend towards a reduction in the scale of net investment and an increase in the scale of consumption (or, alternatively, of leisure) but the saturation of investment is far from being in sight to-day The immediate task is the establishment and the adjustment of a double system of control and of sensitive, flexible means for gradually relaxing these controls in the light of day-by-day experience

I would conclude by two quotations from Sir H. Henderson's paper, which seem to me to embody much wisdom.

"Opponents of Socialism are on strong ground when they argue that the State would be unlikely in practice to run complicated industries more efficiency than they are run at present. Socialists are on strong ground when they argue that reliance on supply and demand, and the forces of market competition, as the mainspring of our economic system, produces most unsatisfactory results. Might we not conceivably find a modus vivendi for the next decade or so in an arrangement under which the State would fill the vacant post of entrepreneur-in-chief, while not interfering with the ownership or management of particular businesses, or rather only doing so on the merits of the case and not at the behests of dogma?

"We are more likely to succeed in maintaining employment if we do not make this our sole, or even our first, aim. Perhaps employment, like happiness, will come most readily when it is not sought for its own sake. The real problem is to use our productive powers to secure the greatest human welfare. Let us start then with the human welfare, and consider what is most needed to increase it. The needs will change from tune to time, they may shift, for example, from capital goods to consumers' goods and to services. Let us think in terms of organising and directing our productive resources, so as to meet these changing needs, and we shall be less likely to waste them."

Hours of Labour 7

by Sydney J. Chapman (translated and condensed by the Sandwichman)

[technical footnote] The argument in the more technical parts of this address, concerned with the determination of the length of the working day, may be conveniently summarized with the aid of the following figure[s]. In order to avoid the complexities arising from the redistribution of labour between the industries of a country, suppose that only one industry exists. Measure units of time in the working day along OX, and units of money along OY.



Consider first the unbroken lines which represent the influences governing employers. The curve P expresses the long-period variations with the length of the working day of the marginal value of a fixed quantity of labour: the opinion that these can be represented by a curve has been defended in the body of this address. If On hours are worked, this daily value of labour and the wage will ultimately be Onda; if Ob hours are worked, this value and wage rises to Oba; if Oe hours are worked, it falls to Oba - bef.

The meaning of the curve P will now be plain. The curve is supposed to rise in the first instance because increasing the daily hours of labour would at first raise the level of efficiency, and if it did not, the larger wage would. But P must begin to fall at some point, and eventually cross OX, as is demonstrated in the body of the address. Actually, of course, P could not start at OY, because a man when engaged for only a fraction of his time daily could not live on the proceeds of his work, but it has been so drawn in the figures to enable us to picture the value and wage of labour by the area between the curve P and the co-ordinates.



The curve ck represents the immediate variations of the marginal value of a fixed quantity of labour with the length of the working day on the assumption that the normal working day has been Ob. Hence the value of the normal product of the last minute of the working day Ob is bg. Ex hypothesi Obgc must equal Oba. If the working day is lengthened to Oe the product will at first be augmented by bekg, but finally by a gradual decline it will sink to Oba-bef.



The influences guiding the operatives are expressed in the dotted lines, the meaning of which must now be explained. Draw any vertical line dl to the left of b. Then dn is the addition made in the long run to the money income of the operative when the Onth increment of time is added to the working day. Let dm be the long-period value to the operative, when his income is Onda, of the leisure destroyed by the addition of the Onth increment of time to the working day. The curve I is the locus of the point m. Evidently, starting at a, it will lie throughout its length below P, increasingly departing from P (because leisure is subject to the law of diminishing utility and the value of leisure rises with income), and cut OX to the left of b.

Apart from the satisfaction or dissatisfaction of working, therefore, the far-sighted operative who took into account the value of leisure would choose a normal day Oi, which is less than Ob (the choice of far-sighted employers in combination). When the normal day is Oi the marginal value of leisure to an operative with a wage Oiha would be ih, which equals the long-period marginal earnings attributable to the Oith increment of time in the working day.



Now, let L indicate the long-period values to the operative of the effects of different lengths of working day on the absolute satisfaction or dissatisfaction involved in the labour itself, L being otherwise interpreted, when units of money are measured along OY' as well as along OY, and the parts of the curve below OX indicate the prices which would be paid to escape the dissatisfaction involved in working, and the parts above OX the money value of the satisfaction involved in working. As some of the time devoted to production will probably be pleasant to the operative when the length of the working day is most favourable to his enjoyment of work, we may assume that L need not lie throughout its length below OX. Then the working day which perfectly wise operatives would choose would be On, the point n being such that nm = nl, the attainment of which equation is the condition under which the operative's satisfaction is maximised. If, as is theoretically conceivable but practically impossible, L lay further above OX for the abscissa Ob than I lay below it, the length of day most advantageous to the operative would be greater than Ob.

If normal hours are On, the operative who lives for the day and is aware that more work, measured by results, means proportionately more pay, will obviously desire hours longer than On for the following reasons. The product attributable to the Onth increment of working time is greater than dn, since dn represents the gain resulting from the Onth. less the loss occasioned by the reduction which will ultimately take place in the productivity of the operative's earlier hours in consequence of the addition of the Onth increment of time to the working day. For similar reasons the short-period or immediate value of leisure might be less than dm. Again, the money measure of the disutility of the Onth increment of working time is less than nl, because nl measures the results from the fact that the Onth increment of working time diminishes capacity in earlier hours to enjoy labour or sustain fatigue.

It is evident, therefore, that a balance of gain accrues to the operative from the work of the Onth unit of time, when everything, including wages is taken into account, but the effect of the work on the Onth unit of time on the gain associated with the rest of the working day ignored; and, further, that the balance of gain attributable to the Onth hours will not disappear, though it may contract if the working day be slightly extended. Hence we must conclude that operatives who are not alive to the reactions of long hours on efficiency and capacity to enjoy life and work will tend to choose a longer working day than is wise from their point of view. However, to repeat, they will not approve such long hours as employers who are equally blind to future reactions, because the latter, if purely self-interested, make no allowance for the disutility of labour to the operative or the utility to him of leisure.

In the event of progress in methods of production the new position of P would be such that the area enclosed between it and the co-ordinate axes would be increased. P in its new position might cut OX at b, but in all probability the new intersection with OX would be to the left of b. It is not likely to fall to the right of b, since improvements in the mechanical aids of labour seldom mean that work is rendered less exhausting.

Even if the new curve P passed through b, the new position of I would practically mean its intersection with OX to the left of i because of the enhanced value of leisure. Further L, though it might rise higher than before, would probably descend sooner and at least as steeply. It is to be observed in addition that but for interest, rent and heavy depreciation charges, industrial progress would bring about movements of P involving more considerable augmentation of the area contained between P and the co-ordinate
axes.

Improved education, apart from its effect on efficiency, would bring about a subsidence of the curve I, so that in its new position it would cut OX to the left of i. The effect wrought by progress on short-period forces need not be worked out in detail. The general conclusion is manifest that progress may be expected to be accompanied by a progressive curtailment of the working day.

Next

Harberger Triangles, Okun Gaps, and X Efficiency

I have written a paper that uses two episodes to illustrate the nature of Chicago economics. It is being rewritten for a mainstream journal, so I have to pull my punches. I would appreciate any comments.

http://michaelperelman.wordpress.com/2009/08/07/harberger-triangles-okun-gaps-and-x-efficiency/x-eff/

The Fundamental Truth of Basic Facts II

by the Sandwichman

In his article, "In Defense of the Longer Work Week," Harold G. Moulton offered a much more smoothly argued rebuttal of the thirty-hour work week bill than had Neil Carothers. The article appeared in the Annals of the American Academy of Political and Social Science early in 1936, accompanying an argument for the thirty-hour bill by the bill's sponsor in the Senate, Hugo Black.

Moulton was president of the Brookings Institute, which Rexford Tugwell described as "a kind of research organ for the conservatives." In the early months of 1933 Moulton and associates had drawn up detailed plans for the incoming Roosevelt Administration to accomplish "sweeping reductions in public expenditures, consolidation of bureaus, and elimination of government functions."

Moulton began his article by acknowledging two primary ideas underlying the proposal for a shorter work week. First, that the supply of labor chronically exceeded the demand for it and, second, that the shorter work week will generate greater purchasing power for workers and thus stimulate and promote economic recovery.

To evaluate the validity of these ideas, Moulton argued that "we must first have an accurate picture of the amount of goods and services which this country has produced at the time of its best performance, and the length of the work week that was then prevailing." Next, according to Moulton, we needed to ask whether the level of output prevailing at the peak provided an adequate standard of living for the population. Moulton concluded that the output in 1929 was not enough to supply an adequate standard of living for all, even if that output was divided equally.

The next question Moulton addressed was whether recent gains in efficiency were sufficient to enable a reduction in hours of work without sacrificing total output. He concluded that they weren't.

The principle that working hours should be reduced in proportion to increasing efficiency is utterly indefensible. It would freeze productive output and standards of living at the low level of 1919 or some other selected year. It would give us a static society in which progressively improving conditions for labor would be virtually impossible.

The careful reader may be left to wonder just how Moulton had extracted from a William Green quote (that advocates no such thing), the "utterly indefensible principle" that working hours be reduced in proportion to efficiency gains?

Having substituted a somewhat duplicitous discussion of output for the issue of imbalance between the supply of labor and the demand for it, Moulton then turned to address the issue of whether the shorter work week would stimulate business recovery. "In the first place," Moulton explained, "a great increase in pay-roll disbursements, unaccompanied by any increase in output, inevitably means a sharp increase in unit cost." Higher prices to the consumer would be the inevitable consequence of the increase in costs. Higher prices and higher wages combined would result in no increase in the standard of living.

Finally, Moulton addressed the shorter work week from the perspective of a relief measure for the unemployed. Here, he conceded that "a shorter work week would put people back on the pay rolls," objecting only that the 'real question' is who should bear the burden of relief, the workers or the American people as a whole? Moulton magnanimously declared that other (unspecified) methods than the shorter work week would be more equitable in providing relief to the unemployed. Besides not specifying which other methods he had in mind, Moulton declined to consider the political feasibility of those phantom methods.

Moulton's presentation was slicker than Carothers's but in the final analysis it relied on the same three flawed assumptions: that wages were paid out of a "fixed wages fund" consisting of a efficiency-optimized portion of the total output of industry, that the output of labor was proportionate to the hours worked and that aggregate hours worked were proportionate to hours per worker. The latter assumption was more of a rhetorical feint than an analytical error. Both Carothers and Moulton relied on the inattentiveness of the reader when they cuelessly segued from individual to aggregate hours.

Farmer to Fed: "Spread Manure!"

by the Sandwichman

Tim Duy at Fed Watch smells a new bubble fueled by a joblessly loose monetary policy. Meanwhile, at the Financial Times, Roger Farmer would like to see central banks act to sustain the wealth of the private sector by "buying and selling blocks of shares on the open market." Professor Farmer sez:

A stock market rally is not enough. The market must rally to the point where wealth enables households and firms to purchase the goods that will maintain full employment. If this does not occur, and I think this is likely, we are heading for a jobless recovery.

Translation: "A stock market rally is not enough. Give us a bubble!" Note the trickle down formulation: rallying markets (not wages!) create wealth that enables households and firms to consume -- also known as the "horse and sparrow" or "manure" theory.

Sandwichman calmly replies, "you say jobless, we say work less!"

Skidelsky on Keynes and Queens

by the Sandwichman

In yesterday's Financial Times, Keynes biographer Robert Skidelsky weighed in on the Queen's question about the sorry state of economics:

It is only by imagining a mechanical world of interacting robots that economics has gained its status as a hard, predictive science. But how much do its mechanical constructions, with their roots in Newtonian physics, tell us about the springs of human behaviour?

One of the most interesting contributions to the FT.com debate was the argument that, after Keynes, economists should have aligned their discipline with other social sciences concerned with human behaviour. Keynes opened the way to political economy; but economists opted for a regressive research programme, disguised by sophisticated mathematics, that set it apart. The present crisis gives us an opportunity to try again.

I want to seize this opportunity to tie in Skidelsky's current remarks with related observations he made a decade ago dealing with Keynes's wartime memorandum on full employment that the Sandwichman posts each month to coincide with the BLS's monthly employment situation report.

My final section can best be introduced by quoting from a letter Keynes wrote to T.S. Eliot on April 5, 1945: "The full employment policy by means of investment," he wrote, "is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less" (CW, XXVII, p. 384).

To make sense of this mysterious remark, one has to go back to Keynes' essay, "Economic Possibilities for our Grandchildren," first read to Winchester schoolboys in 1928, or even further back to G.E. Moore's Principia Ethica, the bible of his youth and the source of his ideas about the good life. Economics, Keynes always insisted, is only useful if it can get us over the hump of scarcity, as quickly as possible, into the realm of plenty, when man would confront his "real, his permanent problem--how to use his freedom from pressing economic cares ... to live wisely and agreeably and well" (CW, IX, p. 328). "The full employment policy by means of investment" is Keynes' method of accelerating through the barrier. From this perspective, the mass unemployment of the interwar years was not just the result of a random collapse of confidence, but the precursor of what can happen to rich societies that fail to make adequate preparations for the good life which wealth makes possible.

It is typical of Keynes that he should have returned to this vision during the war itself, as soon as it became clear that the Allies would win. The core of it is contained in a memorandum he wrote on May 25, 1943, entitled "The Long-Term Problem of Full Employment." He saw three phases after the war. In phase I, which he thought might last five years, investment demand would exceed full employment saving, leading to inflation in the absence of rationing and other controls. In this phase, the emphasis should be on securing a high rate of saving in order to reconstruct the war damaged economy. In phase 2, which he thought might last between five and ten years, he foresaw a rough equilibrium between investment and full employment saving "in conditions of freedom," with the state active in varying the pace of investment projects. In phase 3, investment demand is so saturated that it cannot be brought up to the level of full employment saving without embarking on wasteful and unnecessary programmes. In this phase, the aim of policy should be to encourage consumption and discourage saving, and so absorb some of the unwanted surplus by increasing leisure, with shorter hours and more frequent holidays. This will mark the entrance to the "golden age," the age of capital saturation. Eventually, Keynes thought, "depreciation funds should be almost sufficient to provide all the gross investment that is required" (CW, XXVII, pp. 321-324; also see Keynes to Josiah Wedgwood, July 7, 1943, p. 350). It is the age, foreshadowed in the General Theory, of the "euthanasia of the rentier," since there will be no demand for new capital.

The same objection can raised against this essay in prophecy that was raised against Keynes' earlier "Economic Possibilities for our Grandchildren": that it assumes that all material wants in the wealthy nations will be quickly saturated, and that it completely ignores the capital needs of the poor countries. In these respects Keynes was a child of his times. He did not foresee that technology would constantly create new products and underestimated the ability of advertising constantly to create new wants. Above all, he did not foresee the postwar population explosion in the developing countries. This factor, more than anything else, has rendered his prophecy academic.

Nevertheless, it does raise some pretty fundamental questions about what economics is for, as well as the distinctly awkward question of how far the peoples of wealthy nations should continue postponing their own "golden age" until everyone in the world has caught up with them. What is certain is that Keynes would never have worshipped at the altar of GDP. The rate of per-capita income growth was only important to him as an indication of the speed at which societies were approaching material abundance. Beyond that point, he expected that rates of growth would and should slow down. One can surmise that he would have had little sympathy for "endogenous growth theory" which promises to postpone the slowdown of rich countries, and thus the "catch up" of poorer countries, into a far distant future.

My purpose in this paper has not been to enter into an argument with Keynes. It has been to show that his thought, from whatever period of his life one chooses to take it, is richer, more suggestive, and more unexpected than the textbook Keynesianism that still flourishes, or the administrative Keynesianism that ruled policy in the 1950s and 1960s. His views on the minimum sustainable rate of unemployment and his fiscal philosophy still have a great deal to offer governments. His reminder that economics needs to retain its connection with the non-economic ends of life as these have been conceived by moralists and ethical philosophers remains a necessary warning against blind worship of the golden calf, and against marketization carried to extreme lengths. So I say: Down with Keynesianism, and up with Keynes!

Tax Cut Effect on Consumption – One Point Does Not Specify a Straight Line

While I tend to agree with Jeff Frankel, let me play devil’s advocate:

Martin Feldstein and others predicted that the tax-cut component of the 2009 fiscal stimulus package would have substantially less expansionary bang-for-the-buck than the spending component of the package, because much of the tax cut would be saved, as had been the case with the 2008 tax cut. (“Bang for the buck” in this case could be defined as demand stimulus divided by budget cost.) We knew this from Milton Friedman’s permanent income hypothesis, or even from good old Keynesian multiplier theory.

Actually, the Econ 101 version of Keynesian multiplier theory might tell you that most but not all of the tax cut would be consumed with a little bit going to savings but Martin Feldstein was capturing what the permanent income hypothesis would predict from a temporary tax cut:

Recent government statistics show that only between 10% and 20% of the rebate dollars were spent. The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending.

In other words, the claim is that most of the 2008 tax rebate was saved with very little of it being consumed. Feldstein argues that the same low bang for the buck effect is occurring with the tax cut portion of the 2009 fiscal stimulus.

Gary Burtless is not so sure this is quite right:

Before the recession began, American households saved very little. The personal saving rate was just 1.5% in late 2007. As the recession worsened, the saving rate soared. In the most recent quarter, it reached 5.2%. Critics of the government’s stimulus policies claim the surge in personal saving has undone the intended effects of the stimulus. In their view, the government’s efforts to boost the economy have failed. Is this claim credible? The last business cycle expansion reached a peak in the end of 2007. Since that time, the number of payroll jobs has shrunk without interruption and total U.S. output has fallen 3.7%. The drop in private personal income was even faster. It fell 4.4% in the six quarters after the end of 2007, a decline of more than $500 billion at an annual rate. At the same time, the net worth of American households fell more than $12 trillion, or about one-fifth. In the face of the sharp fall in private income and steep dive in household net worth, personal consumption expenditures fell just 2% from the beginning of the recession through the second quarter of 2009. One reason the drop in personal consumption was so small was the massive swing in household tax liabilities and government transfer payments. This swing was partly the result of two stimulus packages passed in 2008 and 2009 … The notion that the stimulus package failed is based on a very unrealistic benchmark. An assumption of stimulus critics seems to be that for the package to succeed, household consumption must remain constant or even rise in the face of sharply lower private incomes and household wealth. How realistic is this expectation? Not very. My interpretation is that the massive swing in taxes and government transfer payments, produced in part by the stimulus packages, moderated the fall in household consumption that would otherwise have occurred. The stimulus packages did not end the recession, but they reduced its severity.

The argument is that the consumption schedule shifted downwards due to a decline in wealth and the tax cuts did induce a movement along the new lower consumption schedule with a larger bang for the buck than Feldstein and Frankel are suggesting. Our graph shows both real GDP and real consumption from 2006QIII to 2009QII. While both series rose for a few quarters, both series have been declining since the end of 2007 with the net change in both being close to zero. With a reduction in taxes, after-tax income has increased but consumption has not. How much of this disappointing news is due to a low marginal propensity to consume for the tax rebates versus a wealth-induced downward shift of the consumption schedule appears to be open to debate.

Not open to debate in my opinion was the need for fiscal stimulus – and many economists think we still need more fiscal stimulus. And Jeff’s general point is still valid:

if it is short-term demand stimulus we are after, and we are, then government spending gives more bang for the buck than tax cuts.

The Fundamental Truth of Basic Facts

The April 1935 issue of Congressional Digest featured a debate between American Federation of Labor President, William Green and Neil Carothers, Professor of Economics at Lehigh University, on the topic "Would a Thirty-Hour Week Increase Employment."

Carothers presented the "con" position that the adoption of a 30-hour week would defeat its purpose and lower the standard of living by reducing industrial production. A supporter of FDR during the 1932 election, Carothers became an outspoken opponent of the New Deal and was a member of the National Advisory Council of the American Liberty League.

"The fundamental truth that you cannot help labor by reducing production is the basic fact in this 30-hour week matter."

Those who want to reduce the workweek are like a man who just jumped through a plate glass window. He can't remember why he did it but it seemed like a good idea at the time.

There is no economic issue more complex and obscure than the hours of work. The trained economist hesitates to speak on it. Nevertheless, there are some very elementary economics involved.

There are three factors of production: land, labor and capital. All three are paid out of the product of industry. Automatic forces of nature set the share of each. Whatever reduces the productivity of any one of them reduces the product and reduces wages.

If the average work week is 44 hours, then the national dividend is simply the product of 44 hours of labor applied to our land and capital. Cut this work to 22 hours and you destroy the American standard of living. Cut it again to 11 hours and our civilization disappears. Cut it once more to 5 and 1/2 hours, and death sweeps away the population.

But you say, this is a proposal to cut to 30 hours. Exactly. It will have the same starvation tendency, but it will not go quite so far.

You can solemnly propound fool theories, you can talk glibly about "sharing the work," you can believe in impractical schemes for "absorbing the unemployed"; but this cold fact still stares you in the face. It has been a fact for a long time. That's all there is to it.

Well… almost all, except for some refined analysis. One of the glorious facts of American history is the slow but relentless reduction in the hours of labor. What has caused this blessed improvement? It was the operation of economic forces!

Labor's argument that reducing hours increases total output is, in general, not true. What is true is that when hours are uneconomically long they result in a loss to the employer and thus he can afford to reduce them.

Unfortunately, this only works for highly skilled workers with modern machinery. It's not for ditch diggers, dishwashers or retail sales clerks, though, poor devils! But economic history shows that it is wiser to restrict hours in these fields at least to the point where workers are not victims of exhaustion or deprived of home life and recreation. Arbitrary restrictions of their hours throws these workers on relief.

The increasing expense of capital equipment makes radical reduction of hours most dangerous. Shortening the hours of work increases the overhead cost and will wipe out returns from sales. All this tedious economics is essential for an understanding of the 30-hour week proposal.

In practice, the law would affect only a small proportion of the workforce and thus lead to a trivial amount of job creation. So, what is the real objective of the 30-hour workweek scheme, then? The real objective is to force a wage increase by law. The six-hour day will become an eight-hour day for a few privileged workers with the last two hours being worked at the overtime premium. In the long run, though, even these workers will not gain because their excessive wages will cause employers to replace them with machines and they will end up out of work, too.

Hours of Labour 6

by Sydney J. Chapman (translated and condensed by the Sandwichman)

I now pass on to analyze the determinants of the worker's choice in the matter of the hours of labor, assuming that his wage equals his marginal worth and that he knows it, and supposing in the first place that he is endowed with perfect foresight. Two things affect him that do not appeal to the self-interest of the employer, namely, the direct value of his (the worker's) leisure and the balance or dissatisfaction that his work yields of itself. By "satisfaction" or "utility" I merely intend a conventional objective representation of the subjective fact of preference, behind which the economist qua economist cannot penetrate. I say this in order to evade the charge so frequently made against economics that it implies the acceptance of Utilitarianism, psychological or ethical. Picking up again the main thread of our discourse, we observe that, apart from the two considerations mentioned above, namely, the value of leisure and the satisfaction got directly from the activity of labor, the worker's real income is maximized when his money income is maximized. Hence apart from these two considerations the choice, as regards the length of the working day, of perfectly far-seeing workers would be the choice of far-seeing employers were the latter combined.

Now take the value of leisure into account. If the worker derived greater utility from an increment of leisure than from the increment of wage sacrificed by transferring an increment of time from production to consumption, he would gain from a shortening of the working day regardless of the given length of the day, other things being equal. Referring to our earlier numerical example, we see that from the long-sighted point of view the productivity of the last fraction of the nine hours' day is zero, while its value as leisure must be greater than zero. Hence, the worker would choose to work less than nine hours a day, it being understood, remember, that he is paid his marginal worth and knows what that will be for different daily periods of work. Leisure consists in rival satisfaction – yielding occupations, active or passive, which are rendered possible by wages. There is consequently a close connection between this and the other determinant of the worker's choice, namely, the positive or negative utility associated with labor itself.

It may be assumed that in the long run, after the working day has exceeded a certain length, any further addition to it diminishes the satisfaction directly derived from working or adds to the balance of dissatisfaction. If a balance of dissatisfaction were associated in the long run with the efforts of the last minute in the working day that the worker would otherwise choose, as would ordinarily be the case, he would elect, other things being equal, to work an even shorter day, the duration of which would be determined at the point at which the gains and losses came to equivalence when everything was taken into account, that is to say, at the point at which his satisfaction was maximized. If the last minute of working still yielded satisfaction in the long run when the hours were nine (referring to the case supposed), which is so highly improbable as to be a negligible case, the worker would prefer to devote more than nine hours of his day to production were this satisfaction of working greater than the value associated in the long run with the last minute of leisure left when nine hours a day were given to business.

So far, in considering the workers' interests we have fixed our eyes on a remote perspective. We next focus our attention upon immediate tendencies and suppose them not to be counteracted by forces arising out of a regard for ultimate results. In these circumstances the worker would be inclined to select a longer working day than would be continuously the most advantageous to him, because be would be blind to the reaction of the longer hours on efficiency and consequently on earnings and the capacity to take pleasure in work. Many people lower the general level of their earnings in the future – and spoil their enjoyment of work and leisure in the future – by making as much as they can in the present. However, even in these circumstances, workers would not approve such long hours as employers who were short-sighted, because the latter would make no allowance for the disutility of labor to the worker or the utility to him of leisure.

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