Banking Lending – the President Today and Paul Samuelson Over 60 Years Ago

President Obama expects our banks to expand lending:

President Obama pressed Wall Street bankers at the White House on Monday, urging them to make more loans and modify mortgages to help taxpayers who propped their banks up with federal bailouts. "My main message in today's meeting was very simple: America's banks received extraordinary assistance from American taxpayers to rebuild their industry," Obama said. "Now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy." The president was expected to pressure the nation's top dozen bank chief executives to open up the lending spigots to help the economic recovery.

It is true that the Federal Reserve is doing all it can to increase bank loans and the money supply and the Federal government did institute that TARP “bailout” of our major banks. Yet, banks have chosen to let reserves skyrocket. Paul Krugman notes that the recently departed Paul Samuelson sort of predicted this back in 1948:

Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected. By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves.

Samuelson was arguing back then that we might need more vigorous fiscal stimulus in situations like the one we have today. I think our President understands this as well but then there certain members of Congress who do not.

Two Important Iranian Blogs

Socialist Inside Iran Differ on the Green Movement:
http://iranianvoicesintranslation.blogspot.com/2009/12/socialists-inside-iran-differ-on-green.html

Feminist Political Scientist Analyzes Transformations in Iranian Society Today:
http://www.payvand.com/news/09/sep/1120.html

Destruction in Higher Education vs. Destruction of Higher Education

The Pen Is Mightier Than the Sword.

On Friday, protesters destroyed property at the home of Robert J. Birgeneau, Chancellor of the University of California, Berkeley. This action violated the law. At the same time, the law condoned a far deeper destruction of education throughout the state. The governor and the legislature decimated public education, all the way from the primary schools to the state's university system.

For the most part, business applauded the state's stance. Why not? Education will have no choice but to turn to the private sector to run public schools or to take stakes in the universities, as BP has done with the University of California, Berkeley.

Affluent taxpayers, who can afford private education, can rest easy, knowing that increase taxes are not on the horizon. Many ignorant people, whipped up by a false populism, also cheer on the shrinking of the state.

The loss of the Chancellor's planters and windows is regrettable, but they will be easily replaced. In contrast, the educational system may never recover.

The protesters did not constitute a threat. In fact, their actions may not even been productive.

Woody Guthrie once wrote: "Some will rob you with a six-gun, And some with a fountain pen.” Alas, we know who holds the fountain pens.

Was The Late Paul A. Samuelson "The Foremost Academic Economist Of The Twentieth Century"?

The New York Times online obituary section has just posted the death of Paul A. Samuelson at his home in Belmont, MA at the age of 94. The first sentence of the obit labels him "the foremost academic economist of the twentieth century." Whether he was or not, the death of this recipient of the second Sveriges Riksbank Prize in Economic Science in Memory of Alfred Nobel back in 1970 is of one who was unquestionably an enormously influential, whose real influence has somewhat slipped into the background in recent years as attention to many others has surged forward. Often when he has been thought of or mentioned, it has been in criticism by many from many different sides, as he is seen as the father of the postward neoclassical synthesis, promulgated most influentially in his textbook, whose 19th edition (now done by Nordhaus) has just come out with many changes from what it used to be (many not for the better), although the deeper intellectual influence has been his Ph.D. thesis, published in 1947 as _The Foundations of Economic Analysis_, with his publishing career dating all the way back to 1937, on many topics. His influence is so great in so many areas that the key papers by him that lie behind the standard textbook accounts in many areas do not even bother to cite them.

I have been critical of Samuelson myself, and gave him quite a hard time the first time I met him in person 38 years ago. However, starting with that encounter, I must confess that while he may be the ultimate origin of much that is misguided in deeply entrenched conventional economic thought, he himself was generally personally aware of the flaws and limits of many of his own ideas, even as near the end he insisted on reasserting some of them more strongly than ever. However, I would say that the greater sins have been by simplifying followers of his, the "sons of Samuelson," who have been more responsible for codifying and spreading and enforcing the more simplistic versions of what he posited. The man himself was more complicated and self-aware than many gave him credit for , and he is indeed the last of the giant economic thinkers whose professionally active roots go back clearly into the Great Depression.

An Open Letter to the Union of Concerned Scientists Regarding its Criticism of the Cantwell-Collins Bill

Dear UCS,

As one of the economists who signed in support of the UCS campaign for climate change legislation, I have to express my disappointment with your response to the Cantwell bill.


1. It is by far the best bill before Congress. It has two features that any serious environmentalist should enthusiastically support: no offsets and upstream (comprehensive) permitting. This is the right architecture. It is simply shocking to me that the bill would be criticized on exactly these grounds! You appear to endorse offsets as a means to secure an international agreement, as if this discredited approach were the only basis for moving forward globally. Clearly UCS is not paying attention to the current discussion around the validity of offsets.

2. You criticize the 2020 targets in Cantwell, but specific targets are meaningless. No matter what bill is passed, Congress will be revisiting these targets every year or two as new scientific evidence emerges and political winds shift (for better or worse). Any target announced today for more than a decade into the future is purely symbolic. What matters is getting the architecture right, so that, if there is political support for more stringent goals, they can be accomplished expediently.

3. Remarkably, UCS sees fit to attack the Cantwell bill on the other feature it gets right: it auctions all the permits and distributes most of the money back to households. Aside from the other justifications for this approach, it is now clear that this is the only way there can be enough political support for serious GHG mitigation. UCS' advocacy for spending carbon revenues on its own desired projects is politically naive. (a) UCS and its environmental allies will not control the allocation process. If Congress gets to parcel out these funds, you can be sure that most will go into "clean coal", biofuels, etc. (b) Carbon revenues are available to be allocated only if Congress passes a bill with a reasonably tight cap, provisions for auction, and few or no offsets. But this will be achieved only if the electorate is convinced it will not be at the expense of their household budgets. Only revenue recycling can accomplish this.

So why on earth has UCS adopted this position? Can it be because you have decided that Kerry et al. is the horse to ride, and that any other approach is a distraction? If so, you should say this and not trot out implausible and disingenuous arguments.

Again: I am really disappointed in UCS. I can't see myself signing any more of your petitions in the future, and in saying this I know I speak for many other environmentally-aware economists.

Peter Dorman

Where the Stimulus has the Biggest Bang

A world full of distressed corporate sellers is utopia for the huge global private equity companies. In the dying days of the unpopular Howard government the tax rules were changed. Foreigners no longer have to pay capital gains tax in Australia unless the bulk of their dealing is in property.

"At the time, the rationale for the change was that most of our major trading partners have the same rule in place. It was generally agreed by all international parties that it would be best if corporations and individuals paid tax in their home countries rather than in the country where the profits were made." [1]

But the huge profits made by the Texas Pacific Group didn't go back to the US.

"The cash went to a tax haven in the Cayman Islands and then on to a tax-effective structure in Luxembourg via the use of a Dutch company to take advantage of a tax treaty with the Netherlands."

TPG stands out as one of a small group of winners from the global financial crisis. They're hunting the world for as many assets (public utlitilies (water, forests, electricity, finance etc) to grab up at bargain-basement prices as quickly as they possibly can.

SOME RECENT HISTORY:
2009 – December 7th. Former Tasmanian Premier, Robin Gray, has a son who is head of the huge global private equity company TPG. TPG is involved in the creation of shell companies using offshore tax havens. This strategy has allowed TPG to avoid paying hundreds of millions of dollars in tax on just one transaction.

2009 – December 4th. TPG and American Airlines to invest $1.1bn in Japan Airlines. “Debt-laden JAL faces bankruptcy unless it undergoes a major restructuring to cut costs and is seeking a government bail-out as well as any capital from American Airlines or Delta (and other SkyTeam members). Japan Airlines is no stranger to hard times having been bailed out by the Japanese government three times since 2001, and currently seeking more state support. The company is struggling with a $15bn debt load and a pension deficit.”

2009 – November 24th. TPG and Carlyle considering a bid for Chinese autoparts maker Asimco (set up by Wall Street veteran Jack Perkowski 15 years ago).

2009 – November 21st. Australian Tax Office launched a legal action to stop Texas Pacific Group taking billions of dollars out of the economy (from the sale of Myer).

2009 – July 16th. Carlyle, Providence Equity Partners and TPG retender for Springer Science and Business Media

2009 – June 8th. TPG and Carlyle bid for Asciano (it has a duopoly on ports in Australia). Credit Suisse and General Electric are other bidders.

2006 – March. Newbridge (part of Texas Pacific private equity firm) acquired the Australian Myer Department Stores.

2009 – January 16th. Carlyle, TPG, KKR are bidding for AIG’s Aircraft-Leasing Unit and also Los Angeles-based International Lease Finance. (A shortage of buyers for a broad range of corporate debt has crippled the leasing companies’ ability to buy planes, leading to an “incipient crisis in the large civil aircraft market”). The world’s buyout firms are looking for ways to put their estimated $400 billion of committed capital to work after the global credit crisis restricted leveraged lending and reduced LBOs by about 70 percent last year. Forced sales by financial companies may provide some of the best opportunities. “You have a situation where there’s a distressed seller and these are the times when private-equity funds get their best returns.”

It was reported that such a debt-financed takeover binge came to a halt with the eruption of the sub-prime securitisation crisis in September 2007. In March 2008 Carlyle Group was, for instance, was reported to have failed to meet margin calls with four banks. What has changed the fortunes of these takeover merchants since that time?

[1] Day of the locusts as private equity rms bend the rules
November 21, 2009. Ian Verrender
http://www.smh.com.au/business/day-of-the-locusts-as-private-equity-rms-bend-the-rules-20091120-iqtg.html

Free Trade as a Stimulus Proposal – Little Bang

The Washington Post asks - How much bang would he get for the borrowed bucks? – in reference to the President’s latest stimulus proposals. This is an odd place to suggest that freer trade with Colombia and South Korea could represent “truly fresh thinking about job creation”. As Paul Krugman notes:

if you liberalize trade countries will export more. But they will also import more. If you’re worried about C+I+G+X-M, it’s a wash, because X and M rise equally … Even if the proposed trade deals with Korea and Colombia were remotely big enough to bear mentioning in the context of the crisis — which they aren’t — they wouldn’t be job creation measures.

Using this source, one can see that our exports to these two nations during 2008 were only $46 billion, while our imports from these two nations were $61 billion. Let’s say the “equally” part of what Krugman wrote isn’t quite right and that free trade increases our exports by 20 percent (some $9 billion) while imports rise by only $10 billion (some $6 billion). With GDP in excess of $14 trillion, even our generous estimate of this WaPo policy proposal has it adding a mere 0.02 percent to aggregate demand. Not exactly a big bang! Do the folks at the Washington Post know how to look up trade information?

Stirring the VAT

The elites who matter in the formation of economic policy have long favored a national value-added tax (sort of like a sales tax), and from time to time we see puff pieces like this one in today’s the New York Times. The story is always the same: we (the masses) need to consume less and save more, so that the economy can be fertilized with more investment and grow faster over the long run. The urgency of this message is amplified by two more current concerns: changing America’s consumption behavior is seen as key to bringing down the current account deficit, and the mushrooming fiscal deficit requires fresh thinking on the tax front.

It’s all rejectable.

1. The decision to save does not prompt a decision to invest. It might lower interest rates, but interest rates are only weakly related to business investment (unlike investment in housing which does not stoke productivity), and in any case interest rates will be low in the US for years to come. (Yield curves tell us this.) The only circumstance under which savings are a bottleneck for investment arises in an economy that is generating high levels of investment for other reasons. European countries that use a VAT, for instance, typically have industrial policies, whether they admit it or not, which keep investment bubbling. In the US, less consumer spending means depressed employment and output. This is in our probable future no matter what, but why exacerbate it?

2. We are back to the tail and the dog, the horse and the cart, or whatever metaphor strikes your fancy: is the yawning US trade deficit (down but not sustainably in the latest monthly release) the result of spending beyond our means, or have our means been downsized by decades of outsourcing and reliance on imports? Those who have followed this blog know that I think the weight of logic and evidence comes down mainly on the side of explanation #2. Thumbnail version: the first story depends on confusing identity with behavioral relations—to be a net importer is to identically be a net dissaver—and the evidence on potential transmission mechanisms clearly points to the primacy of trade competitiveness, or lack thereof, in recent US history. (There will be a new paper on this topic for the Atlanta meetings.)

3. Big fiscal deficits at a time of deep recession are the medicine, not the disease. If the US economy remains this depressed for years into the future then, yes, the deficits are dangerous—but the cause is the economy, not the fiscal policies taken to stanch the bleeding.

But there is a bigger story here. During the decades in which the Washington Consensus was gospel, we were told that, because markets could do no wrong, the private sector should be free to accumulate as much debt, and in whatever form, as it chose, whereas governments, being irredeemably corrupt and incompetent, must be held to the highest standards of fiscal prudence. Then the roof caved in, and now the private debt has been nationalized. Today we look to the sovereign advantages of government as debtor of last resort to hold off the threat of private insolvency and credit gridlock. Indeed, from a purely arithmetic standpoint, if households and businesses in the US commit to deleveraging, the US external deficit can only be sustained by fiscal deficits of a similar magnitude.

This problem cannot be solved by playing with the tax system.

Can you make head or tail of this China story?

Today, an article published on the Bloomberg website entitled 'China Factory Output Rises 19.2%, More Than Forecast' has left me rather confused about the state of the global economy.

In the opening paragraph it is written that the unexpected rise in 'factor output' signals "a strengthening recovery in the world’s third-biggest economy." However there are some rather odd assertions throughout the rest of this article.

China is experiencing deflation. "Producer prices fell 2.1 percent last month from a year earlier, after dropping 5.8 percent in October." Not to worry, the problem of deflation has been solved by higher food and energy prices: "Food and energy price increases helped to bring deflation to an end, said Sun Mingchun, chief China economist at Nomura Holdings Inc. in Hong Kong."

China suffers from inflation. "Consumer prices rose 0.6 percent." AND "Property prices in 70 cities rose at the fastest pace in 16 months in November and the benchmark Shanghai Composite Index has jumped almost 80 percent this year." AND "The government last month approved increases of as much as 8 percent to gasoline, diesel and jet fuel prices and raised retail power charges for the first time in 16 months."

There is economic growth but it has come from the Chinese Government printing money and from a general increase in debt. "A $586 billion stimulus package, record bank lending and incentives for purchases of cars and home appliances are supporting industrial output.."

There is overcapacity in certain sectors such as steel. But (in another article about Australia's current jobs boom: "BHP Billiton Ltd. [will] take on more workers to increase iron-ore production amid a surge in China’s demand for steel."

There is a global climate change catastrophe playing out in the context of an equally alarming world shortage of energy. However, "Bayerische Motoren Werke AG, the world’s largest maker of luxury cars, said last month that it will build a new factory worth 5 billion yuan to tap an auto market set to overtake the U.S. as the world’s largest this year."

Is there a creeping realisation that governments haven't fixed the problems arising from the global financial crisis? Governments have just increased the level of debt on top of the existing unsustainable levels. Finance is being directed into the production of more unsustainable oil guzzlers. Inflation + deflation equals 'stagflation'.

Whew! Global limits to growth can't be wished away by printing money and churning out more cars. Mass production, on the other hand, can't survive without large quantities of goods being produced to provide for the certain and regular demand that is essential to capitalism.

It's capitalism or us, I guess.

Stupid Web Tricks

"Submit a question" says the button at the bottom of the page on the "AFL-CIO Open for Questions with President Richard Trumka" gimmick. Nothing happens. There is no hyper-link associated with the submit-a-question doohickey. If the AFL-CIO job plan is as ineffectual as their web programming... well, we already know the answer to that question.

Somehow, someone managed to ask the question that Richard Trumka should be answering. "Why aren't we asking for a reduction of hours with no cut in pay?, asked UAW member Gene Lantz from Dallas. Trumka won't be answering that question, though, because it won't get enough "votes".

Let's Beat Up the Unemployed!

I have spent the last two weeks shackled to my computer, sifting through five-point, nine-point and utterly pointless "jobs plans" offered by the White House, the AFL-CIO, Change-to-Win, the Center for Full Employment and Price Stability and the Chicago School of Economics. I have digested -- or rather swallowed -- all the lucubrations of the purveyors of job creation policy: those who advise even more deficit spending on infrastructure, aid to states and cities and extended unemployment benefits; those who call for WPA-style direct employment by the government and, of course, those who call for a lower minimum wage and a balanced budget to starve the unemployment out of the system. All these proposals leave me in a dazed state of mind bordering on idiocy.

Nevertheless I began to become dimly aware of an obscure germ of an idea buried deep in my mind, far superior to the whole catalogue of old wives' remedies I had so recently browsed. But it was only the idea of an idea, something infinitely vague. I left my room with a terrible thirst. The passion for bad boilerplate engenders a proportionate need for fresh air and distilled beverages.

As I was about to enter a bar, an unemployed recent university graduate approached me with a resume and looked at me with one of those unforgettable expressions which, if spirit moved matter, would overturn thrones.

At the same time I heard a voice whispering in my ear, a voice I recognized perfectly; it was the voice of my good Angel, or good Demon, who accompanies me everywhere. This is what the voice whispered to me: "A person is the equal of another only if he or she can prove it, and to be worthy of liberty, a person must fight for it."

Immediately, I leaped upon the job-seeker. With a blow of my fist I closed one of his eyes which in an instant grew as big as an orange. I broke one of my fingernails breaking two of his teeth and since, having been born delicate and never having learned how to box, I knew I could not knock out the young fellow quickly, I seized him by the throat and began pounding his head against the wall. I must admit that I had first taken the precaution of looking around me in this deserted suburb and I felt certain that no policeman would disturb me for some time.

Then, having by a vigorous kick in the back, strong enough to break his shoulder blades, felled the youth, I picked up a large branch that happened to be lying on the ground, and beat him with the obstinate energy of a cook tenderizing a beefsteak.

Suddenly -- O miracle! O bliss of the philosoper when he sees the truth of his theory verified! -- I saw that underfed carcass turn over, jump up with a force I should never have expected in a machine so singularly out of order; and with a look of hatred that seemed to me a very good omen, the decrepit vagabond hurled himself at me and proceeded to give me two black eyes, to knock out four of my teeth and, with the same branch I had used, to beat me to a pulp. Thus it was that my energetic treatment had restored his pride and given him new life.

I then, by various signs, finally made him understand that I considered the argument settled, and getting up I said to him with all the satisfaction of a cable TV network pundit, "Sir, you are my equal! I beg you to do me the honor of sharing my purse. And remember, if you are really philanthropic, when any of your colleagues asks you for aid, you must apply the theory which I have just had the painful experience of trying out on you."

He swore that he understood my theory and that he would follow my advice.

Palin on Cap-and-Tax?

The Washington Post let Sarah Palin have some of its oped space to once again make a fool out of herself – this time on the subject of global warming. Interestingly, she simultaneously claims global warming does not exist AND that it does exist but is not caused by human factors. But Ravi Somaiya has already done a fine job of debunking most of this oped so let me focus on this line:

Meeting such targets would require Congress to pass its cap-and-tax plans, which will result in job losses and higher energy costs

Whether we decide to pass a Pigovian tax, which would be the preference of Greg Mankiw, or we go with cap-and-trade, the change in the relative price of energy would not lead to the kind of massive job losses that the rightwing liars such as Sarah Palin are asserting. But could someone kindly explain to Ms. Palin that there is no cap-and-tax proposal? We are talking about choosing between a tax plan versus a cap-and-trade plan.

The Basic Economics of Carbon Permits Versus Carbon Taxes

I think we need time out for a chalk talk.

The Basic Economics of Carbon Permits Versus Carbon Taxes

Carbon tax or cap and trade?

I stay away from debating whether regulation or taxes beat cap and trade on limiting CO2 emissions, because I don't think it is something to be settled theoretically. Or -- worse -- speculatively, say, on the grounds that we distrust markets more than we distrust the state. Or vice versa. As far as I'm concerned, both markets and the state are undesirable, because we collectively can't control them effectively. So, we need to disolve them, which can only result from a long series of revolutions. So, for the time being, the issue ultimately boils down to empirical measure and -- on the practical side -- a lot of trial and error.

The general theory appears straightforward to me. Well, kind of. Paul Krugman recently wrote in his blog that cap and trade and Pigouvian taxes (or subsidies for that matter) are essentially equivalent. I think he meant it in the following sense:



If you know the supply (or marginal cost) and demand (or marginal benefit) functions, private and social (i.e. without and with the external effects), then you can always determine the socially optimal level of CO2 emissions, level that you can then split into shares and allocate them to people, who can then trade them in a market. If people follow the script of their market functions (i.e. if the assumptions that underpin market functions hold), then the amount of emissions would be capped at the socially optimal level.

Similarly, if you know the supply and demand functions, you can always determine a Pigouvian tax (or subsidy) to induce producers to reduce emissions from the privately optimal level to the socially optimal one. All is required is setting the tax (or subsidy) at an amount equivalent to the size of the net external cost at the privately optimal (but socially inefficient) level of emissions. That forces emitters to internalize the net external cost, who then willingly limit their production to the socially optimal level.

Quick and dirty actions to solve practical problems beat no action at all in the hope that a perfect solution will fall from the sky. The practical experiences of taxation and cap and trade need to be studied very carefully -- something I've not done. But from afar I can see a few thorny practical issues, even if measuring the level of emissions were simple:

How on earth do you determine the private and social supply and demand functions? For example, the location and shape of estimated supply and demand functions is highly sensitive to the period of time considered. Basically, choose a sufficiently long period of time, and you can always make the elasticities arbitrarily large. With arbitrarily large elasticities, very tiny taxes (or subsidies) would -- in theory -- do the job. So, what is the relevant period of time? This wrecks all approaches, including plain regulation (i.e. telling emitters how much CO2 to emit, period). And this is separate from the technical, empirical issues of estimating market functions (well, their elasticities, from which you can integrate costs and benefits).

Another issue I find daunting is that supply and demand, private and social, are continuously shifted by a bunch of factors without prior notice: technology, consumption patterns, prices of virtually everything else. Basically, a perfect regulator would have to re-calibrate dynamically, continuously (or at least with such frequency that the benefits of recalibration are not offset by the associated transaction costs), the socially and privately optimal levels. Otherwise, there'd be garbage-in garbage-out with any of the approaches.

Then the practical issues of administering the approach, in the face of the profit motive, the incentives of public servants, the motivations of the public, etc.

By the way, I haven't seen anybody challenging what I believe is a fundamental presumption under cap and trade as is, namely that the national shares of allowed CO2 emissions are to be allocated to the emitters only. (Am I right that this is the presumption?) I'd expect to hear left-wing economists denouncing this as sheer theft. The rights of ownership over the atmosphere are assumed to belong exclusively to the main CO2 emitters? How about the rest of us? To start with, I would expect cap and trade allocating permits to everybody following a simple egalitarian rule: one (equal) share per person. We can then decide whether to trade it in the market or make origami figures with them.

I'm sure that something like this would be easier to implement than land reform in Mexico. If it worked, we could then confidently extend the practice to the myriad of other net externalities resulting from capitalism -- environmental and social. For example, if manufacturers produce gadgets along with garbage and sick workers; if TV, Frito Lay, and Pepsi produce pleasure along with stupidity, obesity, and consumerism; if banks produce whatever they produce along with crashes that ruin our lives; etc., then as rank-and-file users of the natural and social environment, we are entitled to the same allowance of permits to destroy nature and society as everybody else.

It would not be the end of markets and the state, but at least we'd be talking!

From Lumps of Labor to Common Pool Resources

The lump of labor charge has a long and complicated history, surviving several explanatory twists and turns and passing effortlessly from the propaganda mills of employer associations, to newspaper columns to introductory economics textbooks. If, on the one hand, claimants were remiss in providing textual evidence to support their claims of fallacy, their insistence that shorter work time advocates invariably committed the fallacy creates a double bind for the concept of economic man.

If workers are notoriously irrational about the question of selling their labor, how can they be generally assumed to be rational economic actors? One possible answer would be to say that it would be rational for workers individually or in small units to act as though there is a lump of labor even though in the aggregate, it does no good. That argument would resemble the paradox of thrift, with the difference that economists down through the ages have not devoted so much energy chastising and ridiculing savers. Less charitably, it would appear that the economists' perennial attachment to the fallacy claim discloses a profound and hypocritical ambivalence – that is to say, a lack of rigorous commitment – toward their supposedly rational economic actor. They don't really mean it. Rational economic man is only rational when it suits the economists' argument.

Leaving aside the ridiculous notion of a lump of labor of fixed quantity, viewing the labor supply as a collective or common pool resource may not be all that far-fetched. In "Foundations for Environmental Political Economy," John Dryzek explored the prospects of an alternative to economic man -- a Homo ecologicus. Dryzek dismissed previous efforts at posing an ethical, environmentalist economic subject as flawed by wishful thinking and reductionism. "The ecophilosophical house is an attractive dwelling but nobody has any idea how to build it." On the contrary, "we know how to build the microeconomic house, but it is an ugly and incommodious dwelling?"

The alternative Dryzek proposed was based on his interpretation (or over-interpretation, as Dryzek confesses) of Nobel laureate Elinor Ostrom's work on Common Pool Resources. That new political economy would be one that can account for instrumental rationality – and even deploy it in its proper place – but that also can point to alternatives grounded in something firmer than wishful thinking. Those alternatives can't be entirely specified in advance because they evolve over time in response to changed circumstances. However, their general characteristics can be deduced from past experience.

Those alternatives rely not only on subjectivity but also on inter-subjectivity; that is, on communicative rationality. What distinguishes the successful case studies Ostrom documented is that "individuals repeatedly communicate and interact with one another… they can learn whom to trust, what effects their actions will have on each other and on the common pool resource, and how to organize themselves to gain benefit and avoid harm. These practices and learning constitute a kind of social capital upon which they can build institutional arrangements for resolving difficulties." People learn to act differently. They begin to behave more "straightforwardly" toward each other and less strategically.

Successful institutions of this sort rarely come into being through explicit contracts. More often they evolve through long periods of informal, collective learning about what works and what doesn't. Another approach to these institutions would involve more deliberate experimentation with institutional innovations. For such institutional reconstruction to take place, however, it is essential that participation "move beyond the narrow community of political economists and political theorists and into society at large."

One such deliberate experiment would be to retrieve a lump of labor counter-narrative, modifying the conventional myth "just a bit" – but in a way that makes "all the difference in the world." Instead of a fallacious assumption, this re-functioned lump could stand for an ethic of collective and cooperative working behavior. In this ethic, people "hold up their own end," but they also do not run out too far ahead of everybody else. They "share and share alike" the burdens, the rewards, the pain and the joy of work.

The traditional craft workers' ethic involved treating employment as something very similar to a common resource. That is to say, it included the proposition of a "lump of labor" to be divided up between the available hands. That is, not an abstractly 'fixed' amount of work, but a concretely given quantity. It follows from such an ethic that if there aren't jobs enough to go around, those who have one should share by giving up some of their hours. Whether or not that idea makes sense in terms of industrial efficiency, as an ethical proposition it is no more or less fallacious than the golden rule or the Ten Commandments. It is simply the inevitable reciprocal movement to co-operation.

Although economists have traditionally insisted that the lump-of-labour idea is a fallacy, one economist, Sir Sydney Chapman, suggested that even if it was a fallacy, it might have prevented workers from competing ruthlessly for jobs and thus undermining their standard of living. If so, it led them to do the right thing even if it was for the wrong reason. Chapman may have almost hit upon something rather profound. What if we view the so-called lump-of-labor as an ethical proposition rather than as an economic assumption – fallacious or otherwise? Collectively, working people would be better off if they joined in refusing to compete in a race to the bottom. Of course some individuals might have to forgo receiving more than their share of the "economic progress" that would result from competition between workers and the resulting low wages. But where does it say that it is ethical for a few people to benefit at the expense of the many? Furthermore, by collectively conserving work effort, the workers acting co-operatively could achieve higher levels of productivity than otherwise as well as build greater social solidarity and security.

What I'm getting at here is not only that labor can be regarded as another common pool resource among many but that it is the common pool resource par excellance – a case that can provide the most far-reaching and democratically vital instance of a CPR. Donald Stabile alluded to something similar when he noted, in "Accountants and the Price System: The Problem of Social Costs," that "Human labor is also the primary constituent of the society whose values must be part of any criterion of social evaluation. The appropriate starting point in any policy directed at social costs is with those imposed on labor."

In his article, Stabile focused on the perspectives introduced by John Maurice Clark in his Studies in the Economics of Overhead Costs. Clark argued that labor should be treated, socially, as an overhead cost of doing business rather than as a variable cost of the employing firm because the cost of maintaining the worker and his or her family "in good stead" has to be borne by someone whether or not that worker is employed. "If all industry were integrated and owned by workers, what would be the relation of constant to variable expense? ...it would be clear to worker-owners that the real cost of labor could not be materially reduced by unemployment."

Commenting on the movement of accountants during the 1970s that sought changes in the way social costs were accounted for on the corporate account books, Stabile concluded that the movement had not developed useful concepts for examining social costs. To explain why it had failed, Stabile placed the ideas of social cost accounting in an institutionalist context, using the perspective on social costs set forth by Clark and by K. William Kapp. In their work, Clark and Kapp introduced a framework that included a process of social evaluation, a process in which analysis of the social costs of labor is central. Such an outlook is missing from the works of social cost accountants, "Market values are a weak thread from which to hang a whole system of value," Stabile argued, "but accountants cling to it doggedly. Without an alteration of this basic tenet of accounting, social cost accounting cannot develop into a criterion of social value."

Returning once again to the thought experiment of the hypothetical state where all industry is integrated and owned by workers, here is an instance of a non-market process of social evaluation whose results can readily be readily be worked out with little hesitation, unemployment would be regard as waste rather than as a regrettable but necessary measure for containing the cost of labor. This is another way of saying that a social accounting for unemployment would come to a very different assessment of economic "efficiency" than would a narrowly financial one. The "fallacy" of the lump of labor thus results from the refusal of workers to arbitrarily limit their perspective to the narrow, self-interested terms favored by business propagandists and economists. "In any highly developed discipline," wrote Eugene McCarthy and William McGaughey, in Nonfinancial Economics: The Case for Shorter Hours of Work:

…there is a tendency for thought processes to become so specialized and refined that its respected practitioners appear to lose common sense. If medieval philosophers counted the number of angels that could dance on the head of a pin, some contemporary economists deal in equally strange and fictitious concepts. To many of them, it would seem, money is reality, while leisure is an empty spot in time devoid of wealth-producing activities.