In today's Washington Post, editorial page editor, Fred Hiatt, has a column under his own name entitled, "A critique of Obama catches on." The critique amounts to Obama being "too passive" in foreign policy, with this supposedly punctuated by the recent events in Ukraine, although there is not a shred of evidence that any action or lack thereof by Obama in the Middle East (Hiatt's main focus) would have deterred Putin from annexing Crimea and engaging in further games in Russia's near neighbors. Even having a couple of more ships in the Black Sea, which I would not have minded seeing and which Hiatt never mentioned, would not have made any difference on that, frankly.
So, anyway, Hiatt gets to join a general bashing of Obama and completely botches it, making a total fool of himself. What is his case? He argues that Obama missed his chance to play like George H.W. Bush at the fall of the Berlin Wall, with "the most heartbreaking being the missed opportunity of the Arab Spring," even as Hiatt notes that he still has troops in Afghanistan and has droned after al Qaeda and the Taliban in Yemen and Pakistan and elsewhere, with many thinking there has been way too much of the latter.
Hiatt pinpoints as where Obama should have done something two places: Iraq and Syria. For the former, he makes the absurd argument that the US should have kept troops in Iraq. This fails to notice that al-Maliki wanted us out totally and had been making this demand of Bush, Jr. prior to Obama becoming president. Was Obama supposed to insist on keeping our troops there over the virulent objection of the leader we supported to put in place there? In any case, while it is true that things have deteriorated in Iraq recently, the situation there has nothing to do with the Arab Spring. That did not remotely happen there, and the problems there reflect political mismanagement by al-Maliki, particularly his removal of any influence by Sunnis and outright repression of them. That this has now resulted in Sunnis in the western provinces becoming militarily active and supporting their fellow Sunnis in Syria is not at all surprising. But this has very little to do with either Obama or the Arab Spring.
Of course, Hiatt can argue that this does relate to Syria and he has long argued that Obama bungled by not supporting the moderate opposition more strongly when he was asked earlier. Of course, he is supporting that opposition, but those who are unhappy claim he should have done more, provided lots of military equipment. Well, maybe, but there were mighty good reasons not to. The main problem was that even back then it was clear that the radical Sunni opposition was strong, quite likely stronger in the long run than the rather wimpy moderates who wanted help, and the memory of Islamist radicals in Afghanistan using US weapons against us was very vivid and real. It was reasonably felt that the Islamist radicals would get their hands on these weapons as well. That danger only seems greater as time goes on, and although I dislike the Assad regime and he has clearly been bloodthirsty and thuggish, he looks better than the Sunni opposition. And, while there may have been some violations, it looks like the process of getting Assad's chemical weapons destroyed is on track, although Hiatt does not mention this.
So, arguably the uprising in Syria began as part of the Arab Spring and is now stalled out, but the events in Iraq have nothing to do with it. What about the rest of the Arab world and nearby countries?
Well, the Arab Spring began in Tunisia. After some hiccups, that is one nation where the hopes initiated with it look to maybe actually coming to pass. A more democratic and open regime is now in place. The US role there has been to stay on the sidelines and provide quiet support. Looks like a success, pretty much, although Hiatt has nothing to say about that.
There are only a few other nations where the Arab Spring took off, unless you want to count non-Arab Turkey, a US ally, where the uprisings have been crushed. There were several places where uprisings were either crushed quickly or bought off, notably in some of the wealthy Gulf oil states such as Bahrain. There are really only three other places where it seriously took off
One of those is Yemen. The former regime was in fact replaced by a new one, although apparently not much different from the old one. As Hiatt notes, there is an ongoing drone war there with al-Qaeda. What exactly was Obama supposed to do there that he did not? Hiatt does not say, and, again, many think he is doing too much right now with the drones.
The other biggies are Egypt and Libya. Egypt has certainly turned out to be a central disappointment, but it is not at all clear what the US could have done to improve things there, particularly given the deep alliance the US has with Israel, who did not want too much upsetting of the established order there. Mubarak was overthrown and the US supported democratic elections, which, as forecast by many for years, led to a victory by the Ikhwan, the Muslim Brotherhood. Now, they had a chance to play fair and make things go right, and the US was providing support for them, despite unease on the part of many. But they stepped too far and repressed too many, which led to a military coup supported by many who had supported overthrowing Mubarak. So, we are back to Square One there, although now with a younger military dictator than previously. Yes, very disappointing, but I have to say I do not see Hiatt mentioning anything that Obama could have done to bring about a better outcome, and I can think of nothing.
There is also Libya, which I discussed in a post yesterday. I shall go further than I did then and say that I think Obama handled that very well with his middle of the road "lead from behind" strategy. Unfortunately, although those officially in charge there are very pro-US, the situation is completely disorganized and chaotic, with the Benghazi! situation completely dominating all discussions in the US to the point of absurdity. But, looking past that and recognizing that the place is very much a mess, in some ways it is a success of the Arab Spring, with a dictatorship overthrown, even if the government that has followed has not been able to establish its authority. What is there is in fact fairly democratic. Not as bad as most think, really.
Finally, there is the matter of Israel-Palestine. I do not want to get into a broader discussion of this, and Hiatt does not mention it all. Indeed, the current view is that this is a big failure of Obama's and Kerry's. There they went, trying to bring about a peace accord against the advice of all the hawks and many others., shame on them. And they failed, just as all these wise pundits predicted. Hot stuff. But Hiatt's complaint is that Obama was not doing anything and only making minimal "hitting singles" moves. Offhand, I would say that this failed effort was exactly not that, if not related directly related to the Arab Spring. They went for a final settlement, a very ambitious goal, in the face of long odds. Their effort failed, but it was not for want of trying. Sneering at this effort while whining that Obama has not been trying anything daring strikes me as the height of hypocrisy. But then, Fred Hiatt has never been exactly fully consistent in his arguments.
Barkley Rosser
Monday, May 19, 2014
Vietnam: Invitation to a Morass: Chapter 5 of the Matrix
The Matrix: An Exploration of the Dangerous Paradoxical Interactions
Between War, the Economy, and Economic Theory
Brief Introduction to the Introduction: The Paradox of the Matrix
What follows the introductory material is a chapter entitled:
Chapter 5: Vietnam: Invitation to a Morass.
(Read the chapter at this link)
The Matrix is an exploration of the intricate relationships between war, the economy, and economic thinking. Because of the complexity of our subject, we have tried to make our exploration more manageable by organizing our analysis around a simplified matrix, consisting of the natural world upon which life depends, together with the and three man-made subjects mentioned in the title, treated as separate pillars. Throughout history, the interrelations between these relationships have proved to be extremely dangerous, largely because of their paradoxical nature in which seemingly people in power confidently take actions that set off unexpected chain reactions with tragic consequences. The Matrix will explore that history in order to throw light upon the present.
Although people had already thought about economic matters in ancient times, the idea of an economy as a separate sphere of society had not yet developed. Instead, economic thinking was largely the domain of philosophers, such as Adam Smith, who was a professor of moral philosophy. Only later did economics become a separate subject of study. By the late 19th century, a few economists were beginning to frame their work as the science of economics ‑‑ a name intended to indicate an affinity with physics. Soon thereafter, supposedly scientific economic thinking acquired increasing authority, so much so that people often became convinced that they could disregard economic analysis at their own peril. Their fear may not have been well‑placed considering how often well‑regarded economic theories helped to create disasters.
Between War, the Economy, and Economic Theory
Brief Introduction to the Introduction: The Paradox of the Matrix
What follows the introductory material is a chapter entitled:
Chapter 5: Vietnam: Invitation to a Morass.
(Read the chapter at this link)
The Matrix is an exploration of the intricate relationships between war, the economy, and economic thinking. Because of the complexity of our subject, we have tried to make our exploration more manageable by organizing our analysis around a simplified matrix, consisting of the natural world upon which life depends, together with the and three man-made subjects mentioned in the title, treated as separate pillars. Throughout history, the interrelations between these relationships have proved to be extremely dangerous, largely because of their paradoxical nature in which seemingly people in power confidently take actions that set off unexpected chain reactions with tragic consequences. The Matrix will explore that history in order to throw light upon the present.
Although people had already thought about economic matters in ancient times, the idea of an economy as a separate sphere of society had not yet developed. Instead, economic thinking was largely the domain of philosophers, such as Adam Smith, who was a professor of moral philosophy. Only later did economics become a separate subject of study. By the late 19th century, a few economists were beginning to frame their work as the science of economics ‑‑ a name intended to indicate an affinity with physics. Soon thereafter, supposedly scientific economic thinking acquired increasing authority, so much so that people often became convinced that they could disregard economic analysis at their own peril. Their fear may not have been well‑placed considering how often well‑regarded economic theories helped to create disasters.
Sunday, May 18, 2014
What Really Should Be Done About Benghazi
Not holding another hearing in the US House of Representatives to investigate who determined or approved of Susan Rice's talking points for a Sunday morning TV talk show in Fall 2012, which represented CIA views, and which in fact were pretty close to the facts, that the attack on the State Department building (not really a consulate) and the CIA building there was inspired by the video that had set off riots in many other Muslim cities around the world, most dramatically in Cairo a few hours earlier. It is taken for granted by those on the committee, and even many Democrats, that this claim was false, but it now appears to be substantially true, although the CIA and Ansar-es-Shariah had been engaging in a covert battle for some months in the city, which the CIA wished to cover up at the time of Rice's testimony (the anger over which led to being removed as a candidate to become Secretary of State due to Congressional opposition).
So, out of all the many hearings on Benghazi, I have lost count, what has Congress done? They have cut funding for security at US diplomatic facilities around the world. Can anybody justify this? No. They have also made it virtually impossible for the US to aid either the central government or the authorities in Benghazi itself in any substantial way whatsoever, because of, well, Benghazi! This in spite of the fact that both the central Libyan government, such as it is, and the local government in Benghazi, are massively pro-US, among the most pro-US in the entire Arab world. But neither has effective control, not the central government over the nation nor the local government in Benghazi over the groups that in fact carried out the attack on the US facilities there. We cannot help them because, well, Benghazi!
I recognize that it is far from clear that the US government handled the Libyan situation correctly. In the end, the Obama admistration effectively took a middle of the road stance with its "leading from behind" strategy there, with Republicans criticizing the administration both for doing anything at all as well as not for going in full force in a "leading from the front" approach, with certain politicians (Sen. Lindsey Graham comes to mind) actually making both criticisms within the same paragraph of a given speech. It is easy to forget that the US did not initiate the movement against Gaddhafi, who had become much friendlier to the US in recent years after giving up his nascent nuclear weapons program a decade or so ago. The impetus came from the Arab League, led at the time by Amr Moussa of Egypt, a fan of the now defunct "Arab Spring," who was hoping to ride this to the presidency of Egypt, something that did not remotely come to pass. But with the Arab League going after Gaddhafi, that got the UN Security Council on board, with Russia and China abstaining on the anti-Gaddhafi resolutions, which were followed by the active military involvement of Britain and France, along with some token input from a few Arab nations such as Qatar, and backup support from the US. One can argue that later there was not enough security provided in Benghazi, but it can also be argued that there was not (and still is not) enough security provided for the much more important embassy in Tripoli. Who knows? But if there was not enough security (which clearly there was not), Congress's subsequent cutting of funds for diplomatic security have not helped at all.
In the meantime a local military leader in Benghazi, Khalifa Haftar, is leading a Libyan National Army group (an old rebel group) against Ansar-es-Shariah and other Islamist groups in Benghazi, but without the support of the central government, and with the Speaker of the Parliament accusing him of wanting to foment a military coup. Up to 43 people have died with the fighting in Benghazi, which is still going on, with apparently little to zero input from either the US or Tripoli. Certainly the forthcoming hearings, apparently designed mostly to try to embarrass Hillary Clinton, will be completely irrelevant to whatever ends up happening on the ground in the actually existing Benghazi that is there beyond the imaginings of Fox News and others who are now so obsessed with the idea of the place, Benghazi!
Barkley Rosser
So, out of all the many hearings on Benghazi, I have lost count, what has Congress done? They have cut funding for security at US diplomatic facilities around the world. Can anybody justify this? No. They have also made it virtually impossible for the US to aid either the central government or the authorities in Benghazi itself in any substantial way whatsoever, because of, well, Benghazi! This in spite of the fact that both the central Libyan government, such as it is, and the local government in Benghazi, are massively pro-US, among the most pro-US in the entire Arab world. But neither has effective control, not the central government over the nation nor the local government in Benghazi over the groups that in fact carried out the attack on the US facilities there. We cannot help them because, well, Benghazi!
I recognize that it is far from clear that the US government handled the Libyan situation correctly. In the end, the Obama admistration effectively took a middle of the road stance with its "leading from behind" strategy there, with Republicans criticizing the administration both for doing anything at all as well as not for going in full force in a "leading from the front" approach, with certain politicians (Sen. Lindsey Graham comes to mind) actually making both criticisms within the same paragraph of a given speech. It is easy to forget that the US did not initiate the movement against Gaddhafi, who had become much friendlier to the US in recent years after giving up his nascent nuclear weapons program a decade or so ago. The impetus came from the Arab League, led at the time by Amr Moussa of Egypt, a fan of the now defunct "Arab Spring," who was hoping to ride this to the presidency of Egypt, something that did not remotely come to pass. But with the Arab League going after Gaddhafi, that got the UN Security Council on board, with Russia and China abstaining on the anti-Gaddhafi resolutions, which were followed by the active military involvement of Britain and France, along with some token input from a few Arab nations such as Qatar, and backup support from the US. One can argue that later there was not enough security provided in Benghazi, but it can also be argued that there was not (and still is not) enough security provided for the much more important embassy in Tripoli. Who knows? But if there was not enough security (which clearly there was not), Congress's subsequent cutting of funds for diplomatic security have not helped at all.
In the meantime a local military leader in Benghazi, Khalifa Haftar, is leading a Libyan National Army group (an old rebel group) against Ansar-es-Shariah and other Islamist groups in Benghazi, but without the support of the central government, and with the Speaker of the Parliament accusing him of wanting to foment a military coup. Up to 43 people have died with the fighting in Benghazi, which is still going on, with apparently little to zero input from either the US or Tripoli. Certainly the forthcoming hearings, apparently designed mostly to try to embarrass Hillary Clinton, will be completely irrelevant to whatever ends up happening on the ground in the actually existing Benghazi that is there beyond the imaginings of Fox News and others who are now so obsessed with the idea of the place, Benghazi!
Barkley Rosser
Friday, May 16, 2014
The Two Inequalities
In the wake of Piketty, “inequality” is in. But it comes marinated in confusion.
The problem is that there are two inequalities with relatively little in common. The one we had been arguing about for several decades is wage inequality. Most pay has stagnated in the US, while a few occupations, like finance, have seen stupendous rewards. Within the professions, a few superstars are making oodles while the rest are left to envy. There has been a big debate: is it about “human capital”? Winner-take-all? Deunionization, deregulation and political derepresentation?
But a second inequality has appeared on the scene: the growing share of income going to capital rather than labor. This is Piketty's issue, the topic of his book.
There is actually little overlap between them. Inequality I is about the division of labor income, inequality II the falling share of labor income overall. Inequality I is about the 99% versus the 1%; inequality II is about the 1% of the 1% (the top .0001) versus everyone else.
Solutions to Inequality I don’t touch inequality II. You can crank the minimum wage to $15, make college education free, and issue every worker a union card, and, if Piketty is right, the proto-dynastic ruling class of capital will continue to cement its domination. This is why P himself, despairing of any other approach, calls for a global wealth tax. (This of course is crazy, as is my earlier call for a stochastic jubilee, which could be designed to largely converge on a tax.)
The reason I'm writing this is that the current discussion mixes up these two inequalities, with the result that #2 is ignored. The first inequality is the one we think we understand, so we try to squeeze Piketty into it. But he doesn't fit.
The problem is that there are two inequalities with relatively little in common. The one we had been arguing about for several decades is wage inequality. Most pay has stagnated in the US, while a few occupations, like finance, have seen stupendous rewards. Within the professions, a few superstars are making oodles while the rest are left to envy. There has been a big debate: is it about “human capital”? Winner-take-all? Deunionization, deregulation and political derepresentation?
But a second inequality has appeared on the scene: the growing share of income going to capital rather than labor. This is Piketty's issue, the topic of his book.
There is actually little overlap between them. Inequality I is about the division of labor income, inequality II the falling share of labor income overall. Inequality I is about the 99% versus the 1%; inequality II is about the 1% of the 1% (the top .0001) versus everyone else.
Solutions to Inequality I don’t touch inequality II. You can crank the minimum wage to $15, make college education free, and issue every worker a union card, and, if Piketty is right, the proto-dynastic ruling class of capital will continue to cement its domination. This is why P himself, despairing of any other approach, calls for a global wealth tax. (This of course is crazy, as is my earlier call for a stochastic jubilee, which could be designed to largely converge on a tax.)
The reason I'm writing this is that the current discussion mixes up these two inequalities, with the result that #2 is ignored. The first inequality is the one we think we understand, so we try to squeeze Piketty into it. But he doesn't fit.
Thursday, May 15, 2014
The Proletarian Shirk Ethic
But it is not merely that they misuse their time; the main evil is that they are taught by the Unions that it is only by deliberate idleness and shirking of work that they can force up wages.From "The Working Man As He Is." The Saturday Review of Politics, Literature, Science and Art, April 1, 1876.
"When a reduction of hours was first proposed, a great deal was said about the working-man’s need of leisure to improve his mind, and the increased energy which he would put into such work as he did; but experience has shown very different results. It is certainly not surprising that ignorant men should not all at once appreciate the value of intelligent study or recreation, and it might be hoped that, in the course of time, they would make a better use of their new-found leisure. But it is not merely that they misuse their time; the main evil is that they are taught by the Unions that it is only by deliberate idleness and shirking of work that they can force up wages. Many of the men have, no doubt, a love of idleness for its own sake, and when this is indulged it grows terribly, and is shaken off with difficulty; but the majority decline to work more than a short time, not so much from a dislike of labour as with the object of making labour artificially scarce, and, as they think, consequently dear. Within certain limits this may perhaps be accomplished, but these limits have long been overpassed; and what the workingman has to consider is whether he will be content with a small income for little work, or whether he will do enough work to yield a satisfactory income. From every part of the country, and in regard to every branch of industry, we hear the same complaint that the industrial power of the nation is more or less paralysed by the caprices of the men. Not only are shorter hours insisted on, but during the hours of supposed work the great object is to take care that as little as possible shall be done. A good day’s work, as it was once known, is never heard of. The men dawdle about in the factory during their comparatively brief attendance, and take continual holidays. In some trades it is scarcely possible even for the most liberal masters to get their hands to stick steadily to work. As soon as they have got a little money, they go off to spend it, and come back in distress. They are quiet and subdued for a little while, recover their spirits as they find themselves once more in funds, and then off they go on other bouts of dissipation. It is impossible that such men can be good workmen. They have no heart in their work, and are constantly being corrupted by their bad habits and dishonourable evasion of honest labour.
"It must not be supposed that we are drawing a sweeping indictment against a whole class of men, or that we attribute the misconduct which is gradually gaining ground among the labouring population to some inherent immorality on their part. There are, no doubt, still workmen who would be glad to secure a stable position for themselves and families by steady continuous work; but they too suffer from the spirit which is spreading among their class, and which is deliberately cultivated by the Trade-Unions."
Wednesday, May 14, 2014
Sandwichman on Tomasky on Summers on Piketty
Sandwichman received a promotion from Michael Tomasky at DEMOCRACY: A Journal of Ideas,
Dear Friend,
Thomas Piketty's Capital in the Twenty-First Century has commandeered our intellectual conversation in a way no other book has in recent years. You're probably thinking everyone has weighed in on it. Wrong.
Today, we're posting a sneak preview of our Summer issue -- our review of Piketty, by Lawrence H. Summers. The former Treasury secretary, one of our most distinguished economists, offers a comprehensive take on Piketty's arguments. While he has "serious reservations" about Piketty's theories as a guide to understanding inequality, he believes that his study of the phenomenon amounts to a "Nobel Prize-worthy contribution."
Our Summer issue hits newsstands in June. You can look forward to new essays from Gen. Stanley McChrystal, former Sen. Harris Wofford, E.J. Dionne Jr., Cristina Rodríguez, Paul Starr, Todd Gitlin, and Rachel Kleinfeld. As always, thank you for reading."
Sincerely,Sandwichman replied:
Michael Tomasky
Editor
Democracy: A Journal of Ideas
Dear Michael Tomasky,
I'm not sure how "comprehensive" Lawrence Summers's take on Piketty's arguments is. Inequality has "microfoundations" to use the "dry technocratic prose of most contemporary academic economists." And those microfoundations have been both concealed by the technocratic prose and reinforced by the resulting policy advice of academic economists, prominently including Dr. Summers.
Nearly a century ago, Thorstein Veblen offered insights into one important mechanism underlying the concentration of wealth that he termed "industrial sabotage" or the "conscientious withdrawal of efficiency" by business. The basic idea is that the pursuit of maximum pecuniary gain is not the same thing as maximizing output of product. Veblen's intuition is compatible with the neoclassical analysis of imperfect competition, but, as Warren Samuels noted twenty years ago, the dry technocratic academic economists who developed theories about efficiency wages and equilibrium unemployment didn't seem to care that the "shirking" they contemplated was entirely one-sided. Lawrence Summers was among those self-styled "New Keynesians."
There is much, much more to say about these "microfoundations." I have explored them in a series of blog posts at EconoSpeak titled "Microfoundations of Inequality and Sabotage."
Cheers,
Sandwichman
Monday, May 12, 2014
Microfoundations of Inequality and Sabotage
"In sum, these models [efficiency wage] provide a new, consistent, and plausible microfoundation for a Keynesian model of the cycle." -- Janet Yellen (1984).Inequality and Sabotage, explored the relationship between Thomas Piketty's "r > g" inequality and speculated, based on Veblen (1921) and Kalecki (1943), that businesses would pursue r > g efficiencies but oppose r < g efficiencies. Canny Ca'Canny, presented a hypothetical case study examining the relationship between wages, output and hours of work under imperfect competition for a firm with some degree of monopsony power to dictate wages and hours. Scoundrel Time, documented the pejorative one-sidedness, noted earlier by Warren Samuels, of the propositions about "shirking" in the efficiency wage literature and, most recently, The Sticky Wages of Sin reviewed criticisms of the efficiency wage hypothesis that make explicit its peculiarly inverted relationship to Marx's theory of the industrial reserve army. In common with the efficiency wage hypothesis, Kalecki saw unemployment as playing a key role in maintaining "discipline in the factories." Unlike the efficiency wage theorists, though, Kalecki underscored the political dimension of this discipline.
Conspicuously missing from the mainstream discussion of efficiency wages and shirking is the fact that work effort is composed of both intensive and extensive dimensions. That is to say, a worker might work twice as hard for half as long and produce the same amount of output. Or half as hard for twice as long. Labor productivity is calculated by dividing total output by the number of hours worked. Edmund Phelps (1992) gives a slight nod in this direction when he offers "on-the-job leisure" as a less pejorative substitute for "shirking."
If higher wages can act as a deterrent to "on-the-job leisure" why wouldn't the provision of greater off-the-job leisure perform the same feat? Robert LaJeunesse (1999) proposed just such an "efficiency week" hypothesis but there appear to have been few takers among the mainstream. The only source that cites him in connection with the Shapiro/Stiglitz hypothesis (Ferguson, 2004) curtly turns to other issues with the disclaimer that LaJeunesse's argument about reducing the hours of work increasing effort and output, "will not be pursued here."
Perhaps the lack of enthusiasm for an efficiency workweek model reflects mainstream adherence to the "canonical" labor-leisure choice model of labor supply in which the hours worked are the choice of the individual worker? Paradoxically, in such a model, the wage would have a considerable effect on workers' preferences, depending on the relative strengths of income and substitution effects. Furthermore, in the labor-leisure choice model, unemployment is treated as a voluntary preference for more leisure.
Efficiency wage theory clearly is incompatible with a labor-leisure choice model of labor supply, as noted by Sawyer and Spencer (2010) in their critique of the mainstream model's failure to make a clear distinction between the number of workers employed and aggregate demand for labour hours:
The approach of Shapiro & Stiglitz (1984) is formulated around a ‘no shirking’ condition, with dismissal from current employment being the consequence of being caught ‘shirking’: it is the threat of dismissal and the loss of employment, not the ‘threat’ of working fewer hours, in this instance, which deters shirking. In a similar vein, the ‘cost of job loss’ approach (Bowles, 1985), as its title indicates, is based on job loss, and not on fewer hours worked.It appears as though the efficiency wage theorists are content to leave the duration aspect of work effort unexamined. Too much cognitive dissonance. Nevertheless, Phelps's less pejorative framing of shirking as "on-the-job leisure" provides an opportunity to inquire further into the effects on output of variations in the hours of work as analyzed by Lionel Robbins (1929). The starting point of Robbins's analysis is that a reduction of hours doesn't necessarily result in a corresponding reduction in output:
Here fortunately it is possible to be brief. The days are gone when it was necessary to combat the naïve assumption that the connection between hours and output is one of direct variation, that it is necessarily true that a lengthening of the working day increases output and a curtailment diminishes it. Systematic study of the conditions of efficiency has abundantly vindicated the view, which after all is not very sophisticated, that, if we wish to maximise daily output, just as it is possible to work too little, so it is also possible to work too much.In "The Economic Effects of Variations of Hours of Labour" Robbins investigated the consequences, not the causes, of a change in the length of the working day, assuming such a change occurs. One scenario that Robbins discussed is of particular interest. It is the case of wages and hours fixed by collective bargaining, which in effect, Robbins maintains, "is only a simple application of the general theory of monopoly."
Instead of the price accommodating itself to the given supply so that the actual quantity demanded clears the market, the amount demanded accommodates itself to the price that is fixed.For our purpose here, we can ignore the stipulation that the wages and hours be fixed by "collective bargaining" and extrapolate Robbins's conclusions equally to the consequences of wages and hours unilaterally fixed by an employer with some monopoly power. Except, of course, the outcome for the firm will be the inverse of the outcome for the union members.
Robbins assumes first an agreement by workers to lengthen their working day and accept a reduction of hourly wages that keeps the daily wage constant. He argues that the resulting level of employment would vary according to the elasticity of demand for labor. At elasticity equal to unity, employment would remain constant. If elasticity is greater than one then "employment will be increased (or profits will rise); if it is less, it will be diminished."
The second case Robbins considers also involves a lengthening of the working day but stipulates maintaining constant employment, rather than constant daily wages. Under this scenario,
…it is not difficult to show that in certain cases a lengthening of the working day with increasing output must result in lower wages per head than would have prevailed if the day had not been lengthened… The popular belief that, if hours are lengthened, a fall in wages can always be averted or at least diminished, is only true when certain conditions are satisfied.
Clearly we are a long way here from the harmony we found existing between individual income and output. A group which puts more into the common pool may be compelled to take out less, and a group which diminishes the size of the pool may receive an enhanced share.Conveniently, Robbins didn't happen to notice that there is an intermediary -- the employer -- between the group and the "common pool." The extent to which an employer can arbitrage the discrepancy between the more the group puts in and the less it takes out is indeterminate but clearly depends on the employer's monopoly (monopsony) power. This, remember, is for the case in which an increase in working time results in an increase in output, although not necessarily proportionate.
At the beginning of his article, Robbins cited S.J. Chapman's "Hours of Labour" as authoritative on the technical, legal, economic and subjective factors that determine the hours of work. But there is another aspect of Chapman's article that bears directly on Robbins's point that a lengthening of the working day doesn't necessarily increase output, nor does a curtailment necessarily diminish it. Chapman's analysis goes further than that to conclude that, under competition, the hours of labour will tend to be set in excess of those that maximize output.
That "under competition" is an important disclaimer. Whether the hours set under imperfect competition will be too long, too short or just right is indeterminate. If not compelled by competition, state regulation, collective bargaining or ignorance, why would an employer set hours of work that were longer than optimal for output? I am arguing that maintaining overly long hours is a strategy to maintain both an artificial scarcity of product and an artificial surplus of labor inputs. On one side, by limiting output, the seller with some monopoly power can keep prices high and thus maximize marginal revenue. On the other side, by setting longer hours, the employer can, under certain conditions, enforce lower wages and thus minimize costs. Those certain conditions are that the employer exercises some monopsony power in the labor market and that the elasticity of demand for labor is less than one. Robbins might have had something like this possibility in mind when he cautioned, "Deliberately to recommend an increase of hours when the conditions of demand are not elastic is either very ignorant or very Machiavellian."
Robbins did not elaborate on his "Machiavellian" inference. Instead, he launched into a soliloquy aimed at the folly of arguing "from the possible success for a group of a policy of restriction to the probable success for society as a whole of a similar policy." As usual, it is labor, not business, that Robbins assumes to be the culprit in such policies of restriction.
With all due respect to Machiavelli, "Machiavellian" has come to be almost as pejorative a term as shirker. To ease up on the casting of aspersions, I propose to designate the necessity for slack a matter of "design tolerance." The variability of markets requires a flexible response. Since the source of the difficulty is external to the firm, naturally the entrepreneur would prefer to also externalize the cost of responding to it.
How might "on-the-job leisure" (to use Phelps's euphemism for idleness) be strategically imposed by management, at the expense of workers, with the objective of a “conscientious withdrawal of efficiency”? See Canny Ca'Canny for an illustration.
Note: the link above to S.J. Chapman's "Hours of Labour" takes you to a thirteen-part series posted to EconoSpeak in November of 2008. The full article is also available as a pdf file, Missing: The strange disappearance of S. J. Chapman's theory of the hours of labour. See also The Hours of Labour and the Problem of Social Cost.
Samuel Bowles (1985) "The production process in a competitive economy: Walrasian, neo-Hobbesian, and Marxian Models," American Economic Review, 75, pp. 16-36.
Sydney J. Chapman (1909) "Hours of Labour." The Economic Journal, 19: 75 , pp. 353-373.
William D. Ferguson (2004) "Worker Motivation, Wages, and Bilateral Market Power in Nonunion Labor Markets." Eastern Economic Journal, 30: 4, pp. 527-547.
Michal Kalecki (1943) "Political Aspects of Full Employment."
Robert M. LaJeunesse (1999) "Toward an Efficiency Week." Challenge, 42: 1, pp. 92-109.
Edmund S. Phelps (1992) "Consumer Demand and Equilibrium Unemployment in a Working Model of the Customer-Market Incentive-Wage Economy." The Quarterly Journal of Economics, 107: 3, pp. 1003-1032.
Malcolm Sawyer and David Spencer (2010) "Labour Supply, Employment and Unemployment in Macroeconomics." Review of Political Economy, 22: 2, pp. 263-279.
Carl Shapiro and Joseph E. Stiglitz (1984) "Equilibrium Unemployment as a Worker Discipline Device." The American Economic Review, 74: 3, pp. 433-444.
Lionel Robbins (1929) "The Economic Effects of Variations of Hours of Labour." The Economic Journal, 39: 153, pp. 25-40.
Janet L. Yellen (1984) "Efficiency Wage Models of Unemployment." The American Economic Review, 74: 2, Papers and Proceedings of the Ninety-Sixth Annual Meeting of the American Economic Association, pp. 200-205.
The Sticky Wages of Sin
"Only now can one fully understand the effrontery of these apologists." -- Karl Marx, Capital.
"Under capitalism, man exploits man. Under communism, it is just the reverse." -- Polish joke (cited by J. K. Galbraith in Journey to Poland and Yugoslavia, 1958).David Spencer (2002) and Aaron Pacitti (2011) have each observed similarities between the efficiency wage explanation for equilibrium unemployment (Shapiro and Stiglitz, 1984) and Marx's theory of the reserve industrial army. "In a sense," writes Spencer, "the debate has come full circle. Marx’s reserve army of labour, it seems, is alive and well and still operates to discipline resistant workers."
"Efficiency wage models arrive at the same conclusion," Pacitti argues, "but for reasons altogether different than those suggested by Marx." Because the efficiency wage model indicates an inverse relationship between the unemployment rate and the wage premium needed to discourage shirking, the hypothesis, "strengthens Marx's conclusion that unemployment will lead to lower wages, albeit through a different channel."
Both Spencer and Pacitti are critical of the efficiency wage hypothesis, as are Dean Baker and Mark Weisbrot (1994) and Warren Samuels (1994). Robert LaJeunesse (2004) cites Samuels's criticism of the asymmetrical treatment of shirking by the neoclassical mainstream and elaborates on Veblen's more balanced analysis of sabotage by both management and labor.
Spencer mentions in a footnote the incongruity of earlier economists viewing low wages as a necessary spur to work effort "to combat the labourer’s high demand for leisure and to maintain labour discipline." He also mentions in passing that "workers may deliberately slow down the pace of their work as a defensive reaction against the threat of unemployment."
Spencer neglected to mention, however, that indignation at such "restriction of output" by workers was a perennial motif of businessmen, economists and editorialists in their exasperated denunciations of a supposed lump-of-labor fallacy.
These accusations were the context for Elizabeth Gurley Flynn's I. W. W. pamphlet, Sabotage, that served as an inspiration for Veblen's (1921) discussion of the "conscientious withdrawal of efficiency" by business. "Sabotage..." wrote Flynn, "is a very old thing, called by the Scotch 'ca canny.' All intelligent workers have tried it at some time or other when they have been compelled to work too hard and too long."
In The Economics of Unemployment, John Hobson (1922) gave an unorthodox, even-handed account of the symmetry of workers' and the employers' versions of ca'canny:
Behind all these changes and chances of industrial life there lurks the abiding shadow of an unemployment due to the normal over-supply of labour-power beyond the current requirements of the market. Workers observe that, if this full supply is brought into effective use, it leads in a short time to a congestion of the markets, a fall of prices, a stoppage and a long period of under-employment. If, therefore, at any ordinary time the workers in employment were to give out their full productive energy, they would only expedite this process of congestion and depression. This, I think, is the underlying economics of 'ca' canny.'
If this labour-economics stood alone, it might be dismissed as shortsighted partisanship. But put by its side the corresponding doctrine and practice of employers, embodied in the economics of trusts and combinations. What is the directly impelling motive for the formation of most of these capitalist combines? The avoidance of 'cut-throat competition.' And what else is this than a recognition of a tendency of unregulated capitalism in an industry to produce goods faster than the market can and does expand to receive them, at a price adequate to cover costs of production? In other words, combination for restriction of output is the capitalist alternative to over-production, congestion and stoppage.Orthodox economic theory has thus come full circle, from viewing low wages as a prod to work effort and shirking as a misguided response by workers to the threat of unemployment to theorizing high wages as an incentive for work effort and unemployment as an employers' disciplinary device to discourage shirking. One element has remained constant, though: it is the workers who are presumed to sin against productivity.
Dean Baker and Mark Weisbrot (1994) "The Logic of Contested Exchange." Journal of Economic Issues, 28, pp. 1091–1114.
Elizabeth Gurley Flynn (1916) Sabotage. I. W. W.
John A. Hobson (1922) The Economics of Unemployment.
Robert M. Lajeunesse (2004)"Keeping Labor Productive: Veblen's notion of reserve capacity and procyclical productivity analysis." Journal of Economic Issues, 38:3, pp. 611-627.
Aaron Pacitti (2011) "Efficiency Wages, Unemployment, and Labor Discipline." Journal of Business & Economics Research, 9:3, pp. 1-10.
Warren J. Samuels (1994) "On 'Shirking' and 'Business Sabotage': A Note." Journal of Economic Issues, 28:4, pp. 1249-1255.
Carl Shapiro and Joseph E. Stiglitz (1984) "Equilibrium Unemployment as a Worker Discipline Device." The American Economic Review, 74:3, pp. 433-444.
David A. Spencer (2002) "Shirking the Issue? Efficiency wages, work discipline and full employment." Review of Political Economy, 14:3, 313-327.
Thorsten Veblen (1921) The Engineers and the Price System.
Saturday, May 10, 2014
Canny Ca'canny
Under imperfect competition, according to a 1960s Samuelson textbook, "The canny seller contrives an artificial scarcity of his product so as not to spoil the price he can get on the earlier pre-marginal unit." The obvious corollary to this rule is that the canny employer of labor who has some monopsony power contrives an artificial surplus of labor inputs so as to restrain labor costs. The old textbook deftly manages to evade that implication and instead treats wages and hours of work as if they were determined by perfect competition and worker preferences for income or leisure, unless disturbed by the monopolistic practices of collective bargaining. I'm guessing the omission is sustained in current textbooks.
Something interesting happens, though, if we depart from the fairy tale about perfectly competitive setting of wages and hours of work and consider what might happen where the employer has considerable latitude in such matters. Keeping in mind the firm's objective is to maximize profits (not maximize output) a longer than optimal-for-output working day may offer attractive prospects.
Table 1, below, presents a hypothetical case in which an eight-hour day would be optimal for output. That is to say, over the long period in this scenario, working a longer day than eight hours would subtract from potential physical output due to fatigue or "systematic soldiering." The scenario assumes that workers are identically productive and work the same number of hours. Compensation is based on output per day. The hourly rate is thus arrived at by dividing the daily compensation by the number of hours in the workday.
As Table 1 shows, to achieve approximately the same output in a day, the fewest workers are required if an eight-hour day is worked. The number of workers required increases with either an increase or a decrease in the hours of work because daily output per worker declines in either direction.
Now compare the eight-hour day and the nine-hour day. Daily pay per worker for the nine-hour day is almost the same as for the eight-hour day. There are only two additional workers required to produce approximately the same output. But there is nearly a 15% increase in the number of hours supplied. That's 118 more hours per day to deal with such contingencies as late deliveries, equipment breakdowns, coverage of lunch and coffee breaks, shift changes and absenteeism.
Although, there is no overtime premium in the calculation, this could easily be accommodated by dividing the daily compensation by, for example, nine and a half hours instead of nine. Thus for a nine hour day, pay would be $15.08 for the first eight hours and $22.62, "time and a half for overtime" for the ninth hour.
In our example, those 118 hours cost the employer ten bucks -- or less than a dime an hour. Such a deal! Moments are indeed the elements of profit.
A ten-hour schedule would provide even more slack time but would result in a much reduced hourly rate and daily income in addition to increases in per-employee fixed costs. In the event of layoffs, there's also a 10% greater cost reduction per layoff for the nine-hour day than the ten-hour day. Remember, the employer's power to set wages and hours is not absolute.
The example in Table 1 makes it plain that although the maximum output per worker per day may be achieved in fewer hours, an extension of the working day beyond that output optimum offers greater flexibility to the employer to alter the rate and volume of output in response to external conditions, especially if the cost of providing that flexibility is borne by the workers, either through layoffs or through imposed, unpaid "on-the-job leisure."
This example can, of course, be extended to look at the revenue side of the profit maximizing problem for the firm, assuming imperfect or monopolistic competition. That would be a routine introductory textbook exercise.
The above demonstration is not routine, however. I have withheld discussion of the background analysis and literature for a later post because I think the example in Table 1 makes two crucial points: first, that the distinction between maximizing profits and maximizing output has consequences for the determination of wages and hours of work; second the standard "perfect competition" fairy tale ignores these consequences.
Something interesting happens, though, if we depart from the fairy tale about perfectly competitive setting of wages and hours of work and consider what might happen where the employer has considerable latitude in such matters. Keeping in mind the firm's objective is to maximize profits (not maximize output) a longer than optimal-for-output working day may offer attractive prospects.
Table 1, below, presents a hypothetical case in which an eight-hour day would be optimal for output. That is to say, over the long period in this scenario, working a longer day than eight hours would subtract from potential physical output due to fatigue or "systematic soldiering." The scenario assumes that workers are identically productive and work the same number of hours. Compensation is based on output per day. The hourly rate is thus arrived at by dividing the daily compensation by the number of hours in the workday.
As Table 1 shows, to achieve approximately the same output in a day, the fewest workers are required if an eight-hour day is worked. The number of workers required increases with either an increase or a decrease in the hours of work because daily output per worker declines in either direction.
Now compare the eight-hour day and the nine-hour day. Daily pay per worker for the nine-hour day is almost the same as for the eight-hour day. There are only two additional workers required to produce approximately the same output. But there is nearly a 15% increase in the number of hours supplied. That's 118 more hours per day to deal with such contingencies as late deliveries, equipment breakdowns, coverage of lunch and coffee breaks, shift changes and absenteeism.
Although, there is no overtime premium in the calculation, this could easily be accommodated by dividing the daily compensation by, for example, nine and a half hours instead of nine. Thus for a nine hour day, pay would be $15.08 for the first eight hours and $22.62, "time and a half for overtime" for the ninth hour.
In our example, those 118 hours cost the employer ten bucks -- or less than a dime an hour. Such a deal! Moments are indeed the elements of profit.
A ten-hour schedule would provide even more slack time but would result in a much reduced hourly rate and daily income in addition to increases in per-employee fixed costs. In the event of layoffs, there's also a 10% greater cost reduction per layoff for the nine-hour day than the ten-hour day. Remember, the employer's power to set wages and hours is not absolute.
The example in Table 1 makes it plain that although the maximum output per worker per day may be achieved in fewer hours, an extension of the working day beyond that output optimum offers greater flexibility to the employer to alter the rate and volume of output in response to external conditions, especially if the cost of providing that flexibility is borne by the workers, either through layoffs or through imposed, unpaid "on-the-job leisure."
This example can, of course, be extended to look at the revenue side of the profit maximizing problem for the firm, assuming imperfect or monopolistic competition. That would be a routine introductory textbook exercise.
The above demonstration is not routine, however. I have withheld discussion of the background analysis and literature for a later post because I think the example in Table 1 makes two crucial points: first, that the distinction between maximizing profits and maximizing output has consequences for the determination of wages and hours of work; second the standard "perfect competition" fairy tale ignores these consequences.
Classical and High
OK, let’s play with this: what should be programmed for the potheads? To begin with, I like most of Jeremy Denk’s and John Adams’ suggestions, the latter of which should come as no surprise, since his music appeals to the same pleasure centers. But there are always other possibilities:
Start with his almost-namesake, John Luther Adams, much of whose music is quite spacy, in an appealing way.
Then add rhythm with Steve Reich. I’ll bet there has been many a cannabis-enclouded evening spent with Music for 18 Musicians.
Bela Bartok comes to mind. You can’t go wrong with his Music for Strings, Percussion and Celesta, and the first two piano concertos should hit the spot too.
Finally, reaching back a bit, we have Leos Janacek’s Glagolitic Mass, selected by Kenneth Anger for his Inauguration of the Pleasure Dome. (Warnings about equating opium and pot are heard and accepted.)
Readers can chime in if posting a comment is not too much hassle.
Start with his almost-namesake, John Luther Adams, much of whose music is quite spacy, in an appealing way.
Then add rhythm with Steve Reich. I’ll bet there has been many a cannabis-enclouded evening spent with Music for 18 Musicians.
Bela Bartok comes to mind. You can’t go wrong with his Music for Strings, Percussion and Celesta, and the first two piano concertos should hit the spot too.
Finally, reaching back a bit, we have Leos Janacek’s Glagolitic Mass, selected by Kenneth Anger for his Inauguration of the Pleasure Dome. (Warnings about equating opium and pot are heard and accepted.)
Readers can chime in if posting a comment is not too much hassle.
Friday, May 9, 2014
Scoundrel Time
Twenty years ago, the Journal of Economic Issues published a note by Warren Samuels on "'Shirking' and 'Business Sabotage'." Citing Thorstein Veblen's analysis of business sabotage, Samuels was scathing in his criticism of the ideological double standard of the mainstream efficiency wage literature:
Pejorative emphasis on shirking merely, but effectively, constitutes either taking the employer side or assuming that there is nothing further to be worked out, which in practice is typically simply inaccurate. Indeed, even talking about management's failure to solve the principal-agent problem privileges the employer position. Mainstream theory is asymmetrical.And:
The analyst who opposes worker shirking without criticism of industrial sabotage is taking sides, and the analyst who opposes industrial sabotage without criticism of shirking is also taking sides.It's worth delving into just how pejorative shirk is. Oxford defines it as "to avoid meanly, to shrink selfishly from duty... Slink or sneak away, practice fraud or trickery..." Etymologically, the word is suspected of coming from the German Schurke, a scoundrel. Well, there's your value-free positive, eschewing the normative, neoclassical economics for you!
Samuels's criticism was resoundingly ignored by economists theorizing about shirking. A Google Scholar search turns up ten citations, four of them by David Spencer. By contrast there are 4575 results for a search on the canonical source by Carl Shapiro and Joseph Stiglitz, "Equilibrium Unemployment as a Worker Discipline Device."
Searching inside the search results for Shapiro and Stiglitz gives further insight into the asymmetry of mainstream theory. Using ten phrases such as "shirking workers" and "employee who shirks" and a like number of complementary phrases, "shirking employers" and "firms who shirks" returns totals of 588 and 3, respectively, after eliminating the false positives for the latter such as "…to prevent shirking, employers…"
Interestingly enough, one of the three dissident results that turns up is from a fireside chat from July 1933 by Franklin Delano Roosevelt, explaining the New Deal's Industrial Recovery Act:
The proposition is simply this:
If all employers will act together to shorten hours and raise wages we can put people back to work. No employer will suffer, because the relative level of competitive cost will advance by the same amount for all. But if any considerable group should lag or shirk, this great opportunity will pass us by and we will go into another desperate winter. This must not happen.
...
It will be clear to you, as it is to me, that while the shirking employer may undersell his competitor, the saving he thus makes is made at the expense of his country’s welfare...
May 8 And May 9
The Washington Post reports (5/8/14) that on the 69th anniversary of the end of WW II in Europe, the granddaughter, Susan Eisenhower, of the commander of the Normandy invasion, Susan Eisenhower, spoke at the WW II memorial in Washington, reciting her grandfather's "Victory Order of the Day," and I shall I quote the opening passages, "Men and women of the Allied Expeditionary Force,...The crusade on which we embarked in the early summer of 1944 has reached its glorious conclusion...Full victory in Europe has been attained."
Today in Moscow, May 9, there will be as there has been for 69 years, a celebration of the victory of the Stalin-led Soviet victory over Hitler's Germany, when at the first celebration the flags of Hitler and his allies were repudiated and massively publicly reviled.
WaPo reported Susan Eisenhower's speech at DC's pathetic WW II memorial (no disrespect to Bob Dole, whose one functioning hand I once shook, and he is responsible for the fact that even this pathetic joke of a memorial exists in Washington), was reported on p.2 as a barely there story.
So, I do not yet have what the ceremony will be in Moscow, but for this one , a day later than the US one, there will be a total national blowout in celebration. The simple explanation for this is that US deaths were a bit under a million, while those in what used to be the USSR were over 20 million.
This celebration invokes the Russian-Ukrainian conflict, where both on the surface agree in celebration, but many, particularly in parts of eastern Ukraine, see it more precisely as a statement of their separate existence from Russia (or the former USSR).
Fortunatel,y the latest reports are that Putin is pulling back troops from the border. He is discouraging the barely functional separatist referendum in the eastern Ukaine, which was by last report only ready to go in maybe three cities. Putin knows this is not enough and on this great anniversary he does not want to start another world war,
Barkley Rosser
Today in Moscow, May 9, there will be as there has been for 69 years, a celebration of the victory of the Stalin-led Soviet victory over Hitler's Germany, when at the first celebration the flags of Hitler and his allies were repudiated and massively publicly reviled.
WaPo reported Susan Eisenhower's speech at DC's pathetic WW II memorial (no disrespect to Bob Dole, whose one functioning hand I once shook, and he is responsible for the fact that even this pathetic joke of a memorial exists in Washington), was reported on p.2 as a barely there story.
So, I do not yet have what the ceremony will be in Moscow, but for this one , a day later than the US one, there will be a total national blowout in celebration. The simple explanation for this is that US deaths were a bit under a million, while those in what used to be the USSR were over 20 million.
This celebration invokes the Russian-Ukrainian conflict, where both on the surface agree in celebration, but many, particularly in parts of eastern Ukraine, see it more precisely as a statement of their separate existence from Russia (or the former USSR).
Fortunatel,y the latest reports are that Putin is pulling back troops from the border. He is discouraging the barely functional separatist referendum in the eastern Ukaine, which was by last report only ready to go in maybe three cities. Putin knows this is not enough and on this great anniversary he does not want to start another world war,
Barkley Rosser
Wednesday, May 7, 2014
Regression Analysis and the Tyranny of Average Effects
What follows is a summary of a mini-lecture I gave to my statistics students this morning. (I apologize for the unwillingness of Blogger to give me subscripts.)
You may feel a gnawing discomfort with the way economists use statistical techniques. Ostensibly they focus on the difference between people, countries or whatever the units of observation happen to be, but they nevertheless seem to treat the population of cases as interchangeable—as homogenous on some fundamental level. As if people were replicants.
You are right, and this brief talk is about why and how you’re right, and what this implies for the questions people bring to statistical analysis and the methods they use.
Our point of departure will be a simple multiple regression model of the form
y = β0 + β1 x1 + β2 x2 + .... + ε
where y is an outcome variable, x1 is an explanatory variable of interest, the other x’s are control variables, the β’s are coefficients on these variables (or a constant term, in the case of β0), and ε is a vector of residuals. We could apply the same analysis to more complex functional forms, and we would see the same things, so let’s stay simple.
What question does this model answer? It tells us the average effect that variations in x1 have on the outcome y, controlling for the effects of other explanatory variables. Repeat: it’s the average effect of x1 on y.
This model is applied to a sample of observations. What is assumed to be the same for these observations? (1) The outcome variable y is meaningful for all of them. (2) The list of potential explanatory factors, the x’s, is the same for all. (3) The effects these factors have on the outcome, the β’s, are the same for all. (4) The proper functional form that best explains the outcome is the same for all. In these four respects all units of observation are regarded as essentially the same.
Now what is permitted to differ across these observations? Simply the values of the x’s and therefore the values of y and ε. That’s it.
Thus measures of the difference between individual people or other objects of study are purchased at the cost of immense assumptions of sameness. It is these assumptions that both reflect and justify the search for average effects.
Well, this is a bit harsh. In practice, one can relax these assumptions a bit. The main way this is done is by interacting your x’s. If x1 is years of education and x2 is gender (with male = 1), the variable x1 x2 tells us that education is regarded as a factor if the observation is male, otherwise not. In this way the list of x’s and their associated β’s can be different for different subgroups. That’s a step in the right direction, but one can go further.
So what other methods are there that make fewer assumptions about the homogeneity of our study samples? The simplest is partitioning subsamples. Look at men and women, different racial groups or surplus and deficit countries separately. Rather than search for an average effect for all observations, allow the effects to be different for different groups.
Interacting variables comes close to this if you interact group affiliation with every other explanatory variable. It doesn't go all the way, however, because (1) it still requires the same outcome variable for each subgroup and (2) it imposes the same structural form. Running separate models on subsamples gives you the freedom to vary everything.
When should you evaluate subsamples? Whenever you can. It is much better than just assuming that all factors, effects, and sensible regression choices are the same for everyone.
A different approach is multilevel modeling. Here you accept the assumption that y, the x’s and structural methods are the same for everyone, but you permit the β’s to be different for different groups. Compared to flat-out sample partition, this forces much more homogeneity on your model, but in return you get to analyze the factors that cause these β’s to vary. It is a way to get more insight into the diversity of effects you see in the world.
Third, you could get really radical and put aside the regression format altogether. Consider principal components analysis, whose purpose is not hypothesis testing (measurement of effects, average or not), but the structure of diversity within your sample population. What PCA does, roughly, is to find a cluster of correlations that appear among the variables you specify, making no distinction between explanatory and outcome variables. That gives you a principal component, understood as subpopulation with distinctive characteristics. Then the procedure analyzes the remaining variation not accounted for in the first set of correlations; it comes up with a second cluster which describes a second subgroup with its own set of attributes. It does this again and again until you stop, although, in social science data, you rarely get more than three significant principal components, and perhaps less than this. PCA is all about identifying the “tribes” in your data sets—what makes them internally similar and externally different.
In the end, statistical analysis is about imposing a common structure on observations in order to understand differentiation. Any structure requires assuming some kinds of sameness, but some approaches make much more sweeping assumptions than others. An unfortunate symbiosis has arisen in economics between statistical methods that excessively rule out diversity and statistical questions that center on average (non-diverse) effects. This is damaging in many contexts, including hypothesis testing, program evaluation, forecasting—you name it.
I will mention just one example from my own previous work. There is a large empirical literature on whether and to what extent workers receive compensating differentials for dangerous work, a.k.a. hazard pay. In nearly every instance the researcher wants to find “the” coefficient on risk in a wage regression. But why assume such a thing? Surely some workers receive ample, fully compensating hazard pay. Some receive nothing. Some, even if you control for everything you might throw in, have both lower wages and more dangerous jobs, because there is an irreducible element of luck in the labor market. Surely a serious look at the issue would try to understand the variation in hazard pay: who gets it, who doesn't, and why. But whole careers have been built on not doing this and assuming, instead, that the driving purpose is to isolate a single average effect, “the” willingness to pay for a unit of safety as a percent of the worker’s wage. It’s beyond woozy; it’s completely wrongheaded.
The first step toward recovery is admitting you have a problem. Every statistical analyst should come clean about what assumptions of homogeneity are being made, in light of their plausibility and the opportunities that exist for relaxing them.
UPDATE: I fixed a couple of bloopers in the original post (an inappropriate reference to IV and a misspelling of PCA).
You may feel a gnawing discomfort with the way economists use statistical techniques. Ostensibly they focus on the difference between people, countries or whatever the units of observation happen to be, but they nevertheless seem to treat the population of cases as interchangeable—as homogenous on some fundamental level. As if people were replicants.
You are right, and this brief talk is about why and how you’re right, and what this implies for the questions people bring to statistical analysis and the methods they use.
Our point of departure will be a simple multiple regression model of the form
y = β0 + β1 x1 + β2 x2 + .... + ε
where y is an outcome variable, x1 is an explanatory variable of interest, the other x’s are control variables, the β’s are coefficients on these variables (or a constant term, in the case of β0), and ε is a vector of residuals. We could apply the same analysis to more complex functional forms, and we would see the same things, so let’s stay simple.
What question does this model answer? It tells us the average effect that variations in x1 have on the outcome y, controlling for the effects of other explanatory variables. Repeat: it’s the average effect of x1 on y.
This model is applied to a sample of observations. What is assumed to be the same for these observations? (1) The outcome variable y is meaningful for all of them. (2) The list of potential explanatory factors, the x’s, is the same for all. (3) The effects these factors have on the outcome, the β’s, are the same for all. (4) The proper functional form that best explains the outcome is the same for all. In these four respects all units of observation are regarded as essentially the same.
Now what is permitted to differ across these observations? Simply the values of the x’s and therefore the values of y and ε. That’s it.
Thus measures of the difference between individual people or other objects of study are purchased at the cost of immense assumptions of sameness. It is these assumptions that both reflect and justify the search for average effects.
Well, this is a bit harsh. In practice, one can relax these assumptions a bit. The main way this is done is by interacting your x’s. If x1 is years of education and x2 is gender (with male = 1), the variable x1 x2 tells us that education is regarded as a factor if the observation is male, otherwise not. In this way the list of x’s and their associated β’s can be different for different subgroups. That’s a step in the right direction, but one can go further.
So what other methods are there that make fewer assumptions about the homogeneity of our study samples? The simplest is partitioning subsamples. Look at men and women, different racial groups or surplus and deficit countries separately. Rather than search for an average effect for all observations, allow the effects to be different for different groups.
Interacting variables comes close to this if you interact group affiliation with every other explanatory variable. It doesn't go all the way, however, because (1) it still requires the same outcome variable for each subgroup and (2) it imposes the same structural form. Running separate models on subsamples gives you the freedom to vary everything.
When should you evaluate subsamples? Whenever you can. It is much better than just assuming that all factors, effects, and sensible regression choices are the same for everyone.
A different approach is multilevel modeling. Here you accept the assumption that y, the x’s and structural methods are the same for everyone, but you permit the β’s to be different for different groups. Compared to flat-out sample partition, this forces much more homogeneity on your model, but in return you get to analyze the factors that cause these β’s to vary. It is a way to get more insight into the diversity of effects you see in the world.
Third, you could get really radical and put aside the regression format altogether. Consider principal components analysis, whose purpose is not hypothesis testing (measurement of effects, average or not), but the structure of diversity within your sample population. What PCA does, roughly, is to find a cluster of correlations that appear among the variables you specify, making no distinction between explanatory and outcome variables. That gives you a principal component, understood as subpopulation with distinctive characteristics. Then the procedure analyzes the remaining variation not accounted for in the first set of correlations; it comes up with a second cluster which describes a second subgroup with its own set of attributes. It does this again and again until you stop, although, in social science data, you rarely get more than three significant principal components, and perhaps less than this. PCA is all about identifying the “tribes” in your data sets—what makes them internally similar and externally different.
In the end, statistical analysis is about imposing a common structure on observations in order to understand differentiation. Any structure requires assuming some kinds of sameness, but some approaches make much more sweeping assumptions than others. An unfortunate symbiosis has arisen in economics between statistical methods that excessively rule out diversity and statistical questions that center on average (non-diverse) effects. This is damaging in many contexts, including hypothesis testing, program evaluation, forecasting—you name it.
I will mention just one example from my own previous work. There is a large empirical literature on whether and to what extent workers receive compensating differentials for dangerous work, a.k.a. hazard pay. In nearly every instance the researcher wants to find “the” coefficient on risk in a wage regression. But why assume such a thing? Surely some workers receive ample, fully compensating hazard pay. Some receive nothing. Some, even if you control for everything you might throw in, have both lower wages and more dangerous jobs, because there is an irreducible element of luck in the labor market. Surely a serious look at the issue would try to understand the variation in hazard pay: who gets it, who doesn't, and why. But whole careers have been built on not doing this and assuming, instead, that the driving purpose is to isolate a single average effect, “the” willingness to pay for a unit of safety as a percent of the worker’s wage. It’s beyond woozy; it’s completely wrongheaded.
The first step toward recovery is admitting you have a problem. Every statistical analyst should come clean about what assumptions of homogeneity are being made, in light of their plausibility and the opportunities that exist for relaxing them.
UPDATE: I fixed a couple of bloopers in the original post (an inappropriate reference to IV and a misspelling of PCA).
On Piketty "Not Reading Capital"
Did he or didn't he?:
Like his predecessors, Marx totally neglected the possibility of durable technological progress and steadily increasing productivity, which is a force that can to some extent serve as a counterweight to the process of accumulation and concentration of private capital.
My conclusions are less apocalyptic than those implied by Marx’s principle of infinite accumulation and perpetual divergence (since Marx’s theory implicitly relies on a strict assumption of zero productivity growth over the long run).
For Marx, the central mechanism by which “the bourgeoisie digs its own grave” corresponded to what I referred to in the Introduction as “the principle of infinite accumulation”: capitalists accumulate ever increasing quantities of capital, which ultimately leads inexorably to a falling rate of profit (i.e., return on capital) and eventually to their own downfall. Marx did not use mathematical models, and his prose was not always limpid, so it is difficult to be sure what he had in mind. But one logically consistent way of interpreting his thought is to consider the dynamic law β = s / g in the special case where the growth rate g is zero or very close to zero.
In Marx’s mind, as in the minds of all nineteenth- and early twentieth-century economists before Robert Solow did his work on growth in the 1950s, the very idea of structural growth, driven by permanent and durable growth of productivity, was not clearly identified or formulated.... Today we know that long-term structural growth is possible only because of productivity growth. But this was not obvious in Marx’s time, owing to lack of historical perspective and good data.
That Marx actually had a model of this kind in mind (i.e., a model based on infinite accumulation of capital) is confirmed by his use on several occasions of the account books of industrial firms with very high capital intensities. In volume 1 of Capital, for instance, he uses the books of a textile factory, which were conveyed to him, he says, “by the owner,”
Marx was also an assiduous reader of British parliamentary reports from the period 1820–1860. He used these reports to document the misery of wage workers, workplace accidents, deplorable health conditions, and more generally the rapacity of the owners of industrial capital. He also used statistics derived from taxes imposed on profits from different sources, which showed a very rapid increase of industrial profits in Britain during the 1840s. Marx even tried—in a very impressionistic fashion, to be sure—to make use of probate statistics in order to show that the largest British fortunes had increased dramatically since the Napoleonic wars.
The problem is that despite these important intuitions, Marx usually adopted a fairly anecdotal and unsystematic approach to the available statistics.
Marx seems to have missed entirely the work on national accounting that was developing around him, and this is all the more unfortunate in that it would have enabled him to some extent to confirm his intuitions concerning the vast accumulation of private capital in this period and above all to clarify his explanatory model.
No doubt Marx’s literary talent partially accounts for his immense influence.
In Chapter 6 I return to the theme of Marx’s use of statistics. To summarize: he occasionally sought to make use of the best available statistics of the day (which were better than the statistics available to Malthus and Ricardo but still quite rudimentary), but he usually did so in a rather impressionistic way and without always establishing a clear connection to his theoretical argument.
Tuesday, May 6, 2014
Gary Becker: Able To Disagree Without Being Disagreeable
This past weekend I toasted Ed Nell at his retirement function at the New School on being "a member of a vanishing species, a true gentleman and scholar of the Old School." The death of Gary Becker reduces by one the size of that species, given that while Ed is now retired, he is still alive and hopefully still active, but Becker is no longer among us.
In making that toast I noted that many now view such a label as ironic or even silly, and few under the age of 40, or maybe even 50, would take it seriously. "Scholar" is one thing and still generally OK when appropriate (clearly so in both of their cases), but "gentleman" is a much more questionable term, with many essentially instantly asuming that its use implies that the person in question is probably a classist or sexist or some other undesirable "ist," and I would probably agree that anybody running around claimng loudly to be one is likely to also be one of these not so admirable "ists." But, with that caveat of being "of the Old School," this means that the person in question is not one of those "ists." They respect others and are polite and friendly to others, even when they disagree with those others. Indeed, the mark of this is being able to disagree without being disagreeable, something that applied to both of these Old School gentleman-scholars.
I did not know Gary Becker at all well. However, I did have a number of professional interactions with him over the years. Most of these involved in some way my editing journals that have behavioral economics as a main theme of what they publish. Justin Wolfers has just posted a claim that Becker was really the frist behavioral economist, even while admitting that he would not have liked to have labeled himself as such. In general, Becker has been viewed by most behavioral economists as "The Enemy," probably the most important and influential scholar advocating a strongly rationalistic approach to economics, even as he took a broad view of what might enter into a person's preferences, which might include altruism and concern for others. In any case, in all my personal and professional dealings with Gary Becker, he was always the utmost gentleman and scholar, able to disagree without being in the least disagreeable, a model gentleman-scholar.
Without doubt, however, Becker introduced into sociology, law, and several other disciplines an approach from economics that emphasized analysis based on a rational agent approach, and the influence of this will continue, and these models certainly serve as benchmarks, even when they are not fully correct. He has certainly been the most important figure since WW II, indeed, possibly in the entire history of economics, to have spread this view, even as he took a moderate view of what constitutes what it is that agents prefer or are seeking to maximze in a possible utility function. I have also heard that he, along with several others of his colleagues at Chicago, were unhappy and dismissive when they received word that the founder of behavioral economics, the late Herbert Simon, had received a Nobel Prize in 1978, although I cannot verify that for certain. Regarding these reported attitudes, I respectfully disagree.
This may not be very proper, but I am going to poke at his broader perspective, not on ideological grounds as many reading this might, but on substantive grounds, while keeping in mind that he always was indeed the perfeect gentleman-scholar (of the Old School). So, Tyler Cowen at Marginal Revolution linked to a 1962 paper by Becker in the JPE, "Irrational behavior and economic theory," which Tyler described as showing that the theorems of economic theory hold even in the face of irrational behavior. I must report that this does not appear to be the case, and that this paper is much weaker in its arguments than I expected, although I suspect Becker would have provided more sophisticated arguments in more recent years.
So, the paper follows strongly on the "survivalist" arguments of Alchian and Friedman, that individuals and firms may not know what they are doing or be engaging in conscious optimization, but that those who survive the best will be those who are in fact coming closest to optimizing. However, Becker pushes the argument further. He identifies "rational behavior" as implying "downward-sloping demand curves," and while later in the paper he refers to this as a "tendency," early in the paper he simply asserts it to be true, no matter what. He does not even recognize the theoretical possibility of Giffen goods, which have since been shown fairly strongly to exist in at least some cases (rice in China for one). I suspect he was listening to George Stigler, who strongly asserted that there were no empirical Giffen goods, and in any case, Becker does not offer any possible exceptions in particular, although using "tend" in places later in the paper. In any case, Becker accepted that individuals might "behave irrationally," with impulse buying his main example, but then argued that they, and especially aggregated markets, and also firms, would nevertheless face downward-sloping demand curves due to budget constraints. Sorry, but no dice.
I note an even more striking possible exception to his claims about downward-sloping demand curves and indeed how these relate back to the fundamental argument about rationality. I am thinking about speculative bubbles. Now, at the time Becker wrote, he was almost certainly under the "survivalist" influence of Milton Friedman who had not too long previously dismissed the idea that speculative bubbles might lead to instability in foreign exchange markets on the grounds that speculators would lose money and be driven out of the market. They would not survive because they would stupidly buy high and sell low. However, we have since learned from DeLong et al that in fact "noise traders" can not only survive but can even be the best performers in a market. Ooops.
And in fact we have seen lots of markets in recent years since Becker's 62 paper that certainly look like bubbles, with the dotcom stock market one and housing markets in many nations more. On the surface, these phenomena look like violations of "the law of demand." Prices rise and people buy more of whatever it is, and vice versa, selling (or buying less) when price falls. We see lots of this out there. This is not all that uncommon. So, the usual explanation in standard views is that the demand curve is shifting outwards, although still downward sloping. It is shifting because ceteris is not paribus, and in particular, expectations are changing. Now, there are some special cases where such shifting expectations mght be rational, but the vast majority of evidence suggests that when we see this, we are not seeing rational behavior but what Minsky and Kindleberger would call a "mania." These are cases where irrational behavior does not result in clearly downward-sloping demand curves. I deeply respect Becker's scholarship and intellect, but on this one he was misguided.
BTW, I cannot resist closing on a personal note. Many years ago, indeed, decades ago, I submitted a paper to a journal about speculative bubble dynamics. The paper was rejected with a referee declaring that if bubbles existed that would mean that Giffen goods existed, and George Stigler had shown that they do not. End of report and basis of paper rejection. And, indeed, as I suggested above, I think Stigler misled Becker on that matter back in those days as well, although Becker may well have changed his mind on these matters in more recent years.
Let me close by noting one more positive aspect of Becker and his intellect. While I disagree (as noted above) with many things he argued, I also recognize that he was consistent in his views. He was not a simple ideologue or party hack, and supported things that many who admire him did not but that were consistent with his broader philosophy. He was indeed, whatever one thinks or thought of his arguments or positions, a genuine gentleman and scholar of the Old School.
Barkley Rosser
In making that toast I noted that many now view such a label as ironic or even silly, and few under the age of 40, or maybe even 50, would take it seriously. "Scholar" is one thing and still generally OK when appropriate (clearly so in both of their cases), but "gentleman" is a much more questionable term, with many essentially instantly asuming that its use implies that the person in question is probably a classist or sexist or some other undesirable "ist," and I would probably agree that anybody running around claimng loudly to be one is likely to also be one of these not so admirable "ists." But, with that caveat of being "of the Old School," this means that the person in question is not one of those "ists." They respect others and are polite and friendly to others, even when they disagree with those others. Indeed, the mark of this is being able to disagree without being disagreeable, something that applied to both of these Old School gentleman-scholars.
I did not know Gary Becker at all well. However, I did have a number of professional interactions with him over the years. Most of these involved in some way my editing journals that have behavioral economics as a main theme of what they publish. Justin Wolfers has just posted a claim that Becker was really the frist behavioral economist, even while admitting that he would not have liked to have labeled himself as such. In general, Becker has been viewed by most behavioral economists as "The Enemy," probably the most important and influential scholar advocating a strongly rationalistic approach to economics, even as he took a broad view of what might enter into a person's preferences, which might include altruism and concern for others. In any case, in all my personal and professional dealings with Gary Becker, he was always the utmost gentleman and scholar, able to disagree without being in the least disagreeable, a model gentleman-scholar.
Without doubt, however, Becker introduced into sociology, law, and several other disciplines an approach from economics that emphasized analysis based on a rational agent approach, and the influence of this will continue, and these models certainly serve as benchmarks, even when they are not fully correct. He has certainly been the most important figure since WW II, indeed, possibly in the entire history of economics, to have spread this view, even as he took a moderate view of what constitutes what it is that agents prefer or are seeking to maximze in a possible utility function. I have also heard that he, along with several others of his colleagues at Chicago, were unhappy and dismissive when they received word that the founder of behavioral economics, the late Herbert Simon, had received a Nobel Prize in 1978, although I cannot verify that for certain. Regarding these reported attitudes, I respectfully disagree.
This may not be very proper, but I am going to poke at his broader perspective, not on ideological grounds as many reading this might, but on substantive grounds, while keeping in mind that he always was indeed the perfeect gentleman-scholar (of the Old School). So, Tyler Cowen at Marginal Revolution linked to a 1962 paper by Becker in the JPE, "Irrational behavior and economic theory," which Tyler described as showing that the theorems of economic theory hold even in the face of irrational behavior. I must report that this does not appear to be the case, and that this paper is much weaker in its arguments than I expected, although I suspect Becker would have provided more sophisticated arguments in more recent years.
So, the paper follows strongly on the "survivalist" arguments of Alchian and Friedman, that individuals and firms may not know what they are doing or be engaging in conscious optimization, but that those who survive the best will be those who are in fact coming closest to optimizing. However, Becker pushes the argument further. He identifies "rational behavior" as implying "downward-sloping demand curves," and while later in the paper he refers to this as a "tendency," early in the paper he simply asserts it to be true, no matter what. He does not even recognize the theoretical possibility of Giffen goods, which have since been shown fairly strongly to exist in at least some cases (rice in China for one). I suspect he was listening to George Stigler, who strongly asserted that there were no empirical Giffen goods, and in any case, Becker does not offer any possible exceptions in particular, although using "tend" in places later in the paper. In any case, Becker accepted that individuals might "behave irrationally," with impulse buying his main example, but then argued that they, and especially aggregated markets, and also firms, would nevertheless face downward-sloping demand curves due to budget constraints. Sorry, but no dice.
I note an even more striking possible exception to his claims about downward-sloping demand curves and indeed how these relate back to the fundamental argument about rationality. I am thinking about speculative bubbles. Now, at the time Becker wrote, he was almost certainly under the "survivalist" influence of Milton Friedman who had not too long previously dismissed the idea that speculative bubbles might lead to instability in foreign exchange markets on the grounds that speculators would lose money and be driven out of the market. They would not survive because they would stupidly buy high and sell low. However, we have since learned from DeLong et al that in fact "noise traders" can not only survive but can even be the best performers in a market. Ooops.
And in fact we have seen lots of markets in recent years since Becker's 62 paper that certainly look like bubbles, with the dotcom stock market one and housing markets in many nations more. On the surface, these phenomena look like violations of "the law of demand." Prices rise and people buy more of whatever it is, and vice versa, selling (or buying less) when price falls. We see lots of this out there. This is not all that uncommon. So, the usual explanation in standard views is that the demand curve is shifting outwards, although still downward sloping. It is shifting because ceteris is not paribus, and in particular, expectations are changing. Now, there are some special cases where such shifting expectations mght be rational, but the vast majority of evidence suggests that when we see this, we are not seeing rational behavior but what Minsky and Kindleberger would call a "mania." These are cases where irrational behavior does not result in clearly downward-sloping demand curves. I deeply respect Becker's scholarship and intellect, but on this one he was misguided.
BTW, I cannot resist closing on a personal note. Many years ago, indeed, decades ago, I submitted a paper to a journal about speculative bubble dynamics. The paper was rejected with a referee declaring that if bubbles existed that would mean that Giffen goods existed, and George Stigler had shown that they do not. End of report and basis of paper rejection. And, indeed, as I suggested above, I think Stigler misled Becker on that matter back in those days as well, although Becker may well have changed his mind on these matters in more recent years.
Let me close by noting one more positive aspect of Becker and his intellect. While I disagree (as noted above) with many things he argued, I also recognize that he was consistent in his views. He was not a simple ideologue or party hack, and supported things that many who admire him did not but that were consistent with his broader philosophy. He was indeed, whatever one thinks or thought of his arguments or positions, a genuine gentleman and scholar of the Old School.
Barkley Rosser
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