To give you a flavor of where my new book is heading:
Here is the first & only sentence of the introduction and the first sentence of the book:
Besides describing some of the brilliant accomplishments of the colorful founders of economics, this book will also discuss their dark side, including a few murders, over and above crimes more commonly associated with economists. At the same time, these economists’ lives and work will throw light on both contemporary economics and economies.
Before discussing the work and life of William Petty (1623-1687), it might be of interest to note that he has the unique distinction of being the only economist in history credited with having brought a person back from the dead. We will get back to that feat later.
Wednesday, August 12, 2009
Tuesday, August 11, 2009
William Petty and Global Warming
I'm working on a book about 17th century and early 18th economics, beginning with William Petty. After describing his wild personal life, I'm trying to make the connection between Petty's emergence and the global climate at the time. Please tell me if this is too far-fetched.
Mother Nature may have smiled upon William Petty, whose maturity coincided with a short, but welcome break in the Little Ice Age. Shortly before Petty's death in 1687, the cold weather returned. For example, the winter of 1683‑4 was particularly harsh (Lamb 1982, p. 223).
Today, when the threat of global warming looms large, people might be more sensitive to the profound effects of the weather. In earlier periods of cold weather created equally harmful results. One long‑term study of the effects of weather over the centuries concluded: "cooling impeded agricultural production, which brought about a series of serious social problems, including price inflation, then successively war outbreak, famine, and population decline successively. The findings suggest that worldwide and synchronistic war‑peace, population, and price cycles in recent centuries have been driven mainly by long‑term climate change" (Zhang et al. 2007, p. 19215).
David Hackett Fischer's The Great Wave: Price Revolutions and the Rhythm of History paints the stark picture of the times of Petty's youth:
"Famine, pestilence, and economic depression were accompanied by war. During the entire century from 1551 to 1650, peace prevailed throughout the continent only in a single year 1610. These conflicts were remarkable not only for their frequency but also their ferocity."
"During the early seventeenth century, the armies of Europe reached their largest size since the Roman era. Their upkeep imposed heavy costs at the same time that public revenues were reduced by the combined effect of famine, pestilence, war, depression, regressive taxation and monetary inflation. They also were put to use in most of Europe." [Fisher 1996, pp. 96‑97]
Fisher went on to add: "The greatest works of literature, painting, philosophy and theology in this era commonly expressed a mood of increasing pessimism and despair" (Fisher 1996, p. 100). During the second half of the Seventeenth Century, conditions were improving grain prices tended to fall (Fisher 1995, p. 105).
None of this is meant to suggest that the world suddenly became a comfortable place of peace and prosperity. The winter of 1683‑4 was particularly cold. In addition, Petty's own work with the Royal Society was closely associated with preparing for military adventures. Some of his later writings suggested that the prospects for war with France were favorable. And finally, an optimistic belief in progress was not unknown during the cold period. Samuel Hartlib, Petty's own promoter was a case in point.
Nonetheless, the optimistic swagger of Petty's proposals fell on more fertile ground as future prospects were looking better. More broadly, economic thinking tends to follow one of two paths. First, some give an ideological justification of the status quo, arguing that what is happens to be the optimal arrangement for now and for the future. Others offer proposals for improvement. At times, such as the warming mid‑seventeenth century, when new possibilities seem to be opening, such proposals are more likely to fall on fertile ground.
For example, even though Hartlib's musings about information might seem quite modern in light of the Internet, he never exercised much influence. Petty, who also had his share of far‑fetched ideas, was generally recognized as an "universal
ercised much influence. Petty, who also had his share of far‑fetched ideas, was generally recognized as an "universal genius," even by many who disagreed with him.
The Sun Shines on William Petty
Mother Nature may have smiled upon William Petty, whose maturity coincided with a short, but welcome break in the Little Ice Age. Shortly before Petty's death in 1687, the cold weather returned. For example, the winter of 1683‑4 was particularly harsh (Lamb 1982, p. 223).
Today, when the threat of global warming looms large, people might be more sensitive to the profound effects of the weather. In earlier periods of cold weather created equally harmful results. One long‑term study of the effects of weather over the centuries concluded: "cooling impeded agricultural production, which brought about a series of serious social problems, including price inflation, then successively war outbreak, famine, and population decline successively. The findings suggest that worldwide and synchronistic war‑peace, population, and price cycles in recent centuries have been driven mainly by long‑term climate change" (Zhang et al. 2007, p. 19215).
David Hackett Fischer's The Great Wave: Price Revolutions and the Rhythm of History paints the stark picture of the times of Petty's youth:
"Famine, pestilence, and economic depression were accompanied by war. During the entire century from 1551 to 1650, peace prevailed throughout the continent only in a single year 1610. These conflicts were remarkable not only for their frequency but also their ferocity."
"During the early seventeenth century, the armies of Europe reached their largest size since the Roman era. Their upkeep imposed heavy costs at the same time that public revenues were reduced by the combined effect of famine, pestilence, war, depression, regressive taxation and monetary inflation. They also were put to use in most of Europe." [Fisher 1996, pp. 96‑97]
Fisher went on to add: "The greatest works of literature, painting, philosophy and theology in this era commonly expressed a mood of increasing pessimism and despair" (Fisher 1996, p. 100). During the second half of the Seventeenth Century, conditions were improving grain prices tended to fall (Fisher 1995, p. 105).
None of this is meant to suggest that the world suddenly became a comfortable place of peace and prosperity. The winter of 1683‑4 was particularly cold. In addition, Petty's own work with the Royal Society was closely associated with preparing for military adventures. Some of his later writings suggested that the prospects for war with France were favorable. And finally, an optimistic belief in progress was not unknown during the cold period. Samuel Hartlib, Petty's own promoter was a case in point.
Nonetheless, the optimistic swagger of Petty's proposals fell on more fertile ground as future prospects were looking better. More broadly, economic thinking tends to follow one of two paths. First, some give an ideological justification of the status quo, arguing that what is happens to be the optimal arrangement for now and for the future. Others offer proposals for improvement. At times, such as the warming mid‑seventeenth century, when new possibilities seem to be opening, such proposals are more likely to fall on fertile ground.
For example, even though Hartlib's musings about information might seem quite modern in light of the Internet, he never exercised much influence. Petty, who also had his share of far‑fetched ideas, was generally recognized as an "universal
ercised much influence. Petty, who also had his share of far‑fetched ideas, was generally recognized as an "universal genius," even by many who disagreed with him.
Hours of Labour 9
by Sydney J. Chapman (translated and condensed by the Sandwichman)
I now would like to compare specifically the effect on wages with the effect on the working day of the mechanical action of pure competition. In the matter of wages, if workers were too weak to have much influence in settling their pay, competition between employers, were it keen and unchecked by combination, would at least secure to the workers as a wage, for a given working day, their marginal worth (within limits set by social friction) in view of their then state of efficiency. Thus in the circumstances supposed the worker would tend to get approximately the utmost possible – apart from the question of the reaction of wages on efficiency – in an active society based on free enterprise, for we may take it that in such a society the bidding of individuals against one another for labor would continue at least up to the known marginal worth of labor.
Observe, however, that the existence of such bidding may imply that new businesses are being established, or that old-established employers are anxious to make considerable extensions because old-established employers, knowing that similar workmen must be paid the same, might avoid a course of action that resulted in a gain less than the loss involved in the elevation of wages. It is doubtful whether employers would as a rule assume that if they did take steps leading to an advance in wages others would do so, for, not unnaturally, employers are commonly indisposed to disturb rates of wages except for strong reasons. Even if employers were endowed with a powerful telescopic faculty, they would not necessarily invest in paying wages in excess of the workers' present marginal productivity (for the purpose of enhancing their future physical and mental vigor) because of the danger that some workers would find employment elsewhere, thus transferring to rival employers the returns from the long-sighted investments made in them.
Other things being equal, of course, the higher the efficiency of labor the greater is the gain, not only of the workman, but also of the employer. Now, as regards the working day, we have already seen that uncombined employers might keep it longer than would be desirable from their point of view, for the same reasons for which they might keep wages lower than would be desirable from their point of view. These reasons are, I repeat again, short-sightedness, or fear of incurring an expense the fruits of which other employers might reap. In this respect competition between employers is equally defective in its bearing on wages and in its bearing on the length of the working day. But, from the perspective of the quality of life of the workers, it has an additional defect in its bearings on the length of the working day; for although competition between employers in an competitive economy would bring about the length of working day that the workers would choose at the wages making it possible, the choice of the workers is apt to be distorted by a limited awareness of the positive effect of shorter hours on productivity and hence wages.
Next
I now would like to compare specifically the effect on wages with the effect on the working day of the mechanical action of pure competition. In the matter of wages, if workers were too weak to have much influence in settling their pay, competition between employers, were it keen and unchecked by combination, would at least secure to the workers as a wage, for a given working day, their marginal worth (within limits set by social friction) in view of their then state of efficiency. Thus in the circumstances supposed the worker would tend to get approximately the utmost possible – apart from the question of the reaction of wages on efficiency – in an active society based on free enterprise, for we may take it that in such a society the bidding of individuals against one another for labor would continue at least up to the known marginal worth of labor.
Observe, however, that the existence of such bidding may imply that new businesses are being established, or that old-established employers are anxious to make considerable extensions because old-established employers, knowing that similar workmen must be paid the same, might avoid a course of action that resulted in a gain less than the loss involved in the elevation of wages. It is doubtful whether employers would as a rule assume that if they did take steps leading to an advance in wages others would do so, for, not unnaturally, employers are commonly indisposed to disturb rates of wages except for strong reasons. Even if employers were endowed with a powerful telescopic faculty, they would not necessarily invest in paying wages in excess of the workers' present marginal productivity (for the purpose of enhancing their future physical and mental vigor) because of the danger that some workers would find employment elsewhere, thus transferring to rival employers the returns from the long-sighted investments made in them.
Other things being equal, of course, the higher the efficiency of labor the greater is the gain, not only of the workman, but also of the employer. Now, as regards the working day, we have already seen that uncombined employers might keep it longer than would be desirable from their point of view, for the same reasons for which they might keep wages lower than would be desirable from their point of view. These reasons are, I repeat again, short-sightedness, or fear of incurring an expense the fruits of which other employers might reap. In this respect competition between employers is equally defective in its bearing on wages and in its bearing on the length of the working day. But, from the perspective of the quality of life of the workers, it has an additional defect in its bearings on the length of the working day; for although competition between employers in an competitive economy would bring about the length of working day that the workers would choose at the wages making it possible, the choice of the workers is apt to be distorted by a limited awareness of the positive effect of shorter hours on productivity and hence wages.
Next
Monday, August 10, 2009
My Youthful Encounter with Nuclear Warfare
Today is the anniversary of the dropping of the atomic bomb. It brings to mind a useful experience.
Sometime in the mid- or early-1950s, I was having dinner at my great aunt's house with my brother, my parents, and my mother's cousin, Morris Fiterman (sp?). Morris was a medical doctor, who served in the Army as an hospital administrator and was a close friend of the President's son, John Eisenhower. Morris was telling us about his work on any military commission to decide whether or not to use nuclear weapons against North Korea. He said that military rejected the idea only because the prevailing winds would have brought too much radiation down upon South Korea and the US soldiers.
I don't remember any of the other details, except what he told us about the Bataan Death March in which the Japanese army supposedly starved American prisoners. He said that the rations given to the Americans were identical to the Japanese. He also said that the Japanese prisoners complained that their American captors were putting their lives at risk by feeding them unpalatable food, such as bacon and eggs.
Sometime in the mid- or early-1950s, I was having dinner at my great aunt's house with my brother, my parents, and my mother's cousin, Morris Fiterman (sp?). Morris was a medical doctor, who served in the Army as an hospital administrator and was a close friend of the President's son, John Eisenhower. Morris was telling us about his work on any military commission to decide whether or not to use nuclear weapons against North Korea. He said that military rejected the idea only because the prevailing winds would have brought too much radiation down upon South Korea and the US soldiers.
I don't remember any of the other details, except what he told us about the Bataan Death March in which the Japanese army supposedly starved American prisoners. He said that the rations given to the Americans were identical to the Japanese. He also said that the Japanese prisoners complained that their American captors were putting their lives at risk by feeding them unpalatable food, such as bacon and eggs.
Lindsey Graham Frames the Health Insurance Debate
Ezra Klein interviews the Republican Senator from South Carolina with the highlight line being:
Peter Harbage and Karen Davenport a few months ago argued that this is the essential reason we need a public option – a theme being echoed by progressives recently:
Maybe someone should ask Senator Graham whether he supports this lack of competition or whether he has an alternative means for introducing more competition.
My belief is that no private-sector entity can survive over a long period of time competing against the government.
Peter Harbage and Karen Davenport a few months ago argued that this is the essential reason we need a public option – a theme being echoed by progressives recently:
Lack of competition in this critical marketplace means poor transparency and accountability, resulting in costly health care that harms our national health, bleeds our personal finances and the federal budget, and hinders our economic competitiveness. None of this is acceptable amid the worst slide in economic growth in 60 years. Fortunately, our nation’s health insurance market can be fixed with a big dose of what fixes most sectors of our economy—healthy, well-supervised competition. One of the best ways to introduce this much-needed competition is for the federal government to offer a public health insurance plan that can compete with private insurers within an insurance “exchange” that ensures public and private health insurance plans compete equally and transparently in the public marketplace.
Maybe someone should ask Senator Graham whether he supports this lack of competition or whether he has an alternative means for introducing more competition.
Calling Spirits fron the Misty Deep: Bob Eisner edition
The Administration needs to get people out there - such as Jared - hammering away at the difference between government consumption and government investment and drawing the relevant consequences for thinking about the effects of budget deficits. High deficits, for example, as the economy moves back towards potential output, will raise the level of the real interest rate relative to what it would have been. But if the deficits are to finance bridges to somewhere, and especially if it is for public investment that complements rather than substitutes for private investment, then worrying about the higher rate is just as misplaced as worrying about the interest rate consequences of a private investment boom. The neat thing about judicious public investment is that it's good for stimulus and good for growth. It's good for stimulus because it doesn't lower and may raise permanent income and so need not lower consumption at all, or even increase it, increasing the bang for the buck of G. And it's good for growth: does anyone think that the post-war to '73 golden age of growth had nothing at all to do with things like the construction of the interstate highway system and the GI bill? And Jared, or someone, could hammer away at the differences in the investment composition of the G we got from Bush's gang versus now, and how that would matter in a rational accounting - with the capital budgeting the late Bob Eisner called for - of the big bad Deficit.
Sunday, August 9, 2009
Challenging Professor Glaeser
by the Sandwichman
Harvard Professor Edward Glaeser confuses the Jevons Paradox and the lump of labor fallacy.
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
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...Dear Professor Glaeser,
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.
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.
Marx, A Contribution to the Critique of Hegel’s Philosophy of Right
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
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
Friday, August 7, 2009
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.
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:
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.A loss of 35,000 private jobs in TEN (10) years.
Seasonally adjusted private nonfarm employment, July 2009: 108,924,000(Preliminary).
Unemployment Rate Falls as Employment-Population Ratio Declines
BLS reports even more job losses in July:
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:
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:
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!)
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
[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
Thursday, August 6, 2009
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/
http://michaelperelman.wordpress.com/2009/08/07/harberger-triangles-okun-gaps-and-x-efficiency/x-eff/
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