This Magazine of Untruth, Revisited

It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment. J.E.S. 1984.

"[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ… J.M.K. 1936.

Two-thousands words into a blog post about the prehistory of "efficiency wage theory" I stumble across the first sentence above. Can anyone please explain to me what the point is of doing "rigorous scholarship" when that kind of slipshod hearsay misrepresentation fronts an entire industry of poverty-pimping, "theoretical modeling" of unemployment?

Did The European Parliament Elections Show That The European Union Is Doomed?

There has been much moaning and wailing and gnashing of teeth in many quarters over the outcome of the European parliementary elections.  In many nations nationalist anti-immigrant parties made substantial gains, and many observers have argued this shows general disaffection with the European Union.  Supposedly Putin is overjoyed that parties led by people who admire him, such as Marine Le Pen and the National Front in France, and also like traditional values, have done so well.  Does this mean The End Is Night For The EU?  Probably not.

Certainly there is much unhappiness out there in the EU.  But the unpleasant results may not matter all that much nor indicate all that much.  While the European parliament is gaining increased powers, it remains still largely toothless compared with national legislatures.  Apathy is more what has been seen, with apparently a lower turnout than any previously.  Angry voters wanting to "send a message" have turned out, but otherwise not much has happened, and the more centrist parties will remain in control there, despite what appear to be embarrassing results for those centrist parties in several nations.

The other point, noticed by few observers and why I am shooting this off, is that amazingly enough the nations where we saw the biggest gains by these far right parties are not in the nations that have suffered the worst economic impacts from the euro crisis and Great Recession.  The three that saw a far right party do the best of any part are UK, France, and Denmark.  The UK is not even in the euro and its economic problems are due to its own policies, not the ECB or  the EU more broadly.  I have no particular explanation why France and Denmark showed their particular results, but note that Denmark is also not in the euro, and neither has been a particularly bad performer economically relative to other nations in the EU, despite much negative press coverage about France in particular.  Indeed, as many commentators have recently noted, France's job performance has been arguably superior, or at least no worse, than that in the US.

What may be surprising is that the nations where we have seen victories by overtly anti-EU parties have  not included the PIIGS nations, with one exception, these being the nations where economic suffering has been the worst, with that suffering arguably due to some extent being in the eurozone and suffering from policies imposed by the dominant Germans through the ECB, and so on.  The one exception is indeed the nation that has suffered the worst economic damage of all, Greece.  And there, the party that won is the main opposition party, left-wing Syriza, not a racist anti-immigrant party like France's National Front.  Indeed, it is not an anti-EU party at all.  Its complaint is against the austerity policies noted above, perfectly understandable that there would be unhappiness there about those.  What is amazing is that such parties did not do better in other of the more economically suffering nations rather than relatively well-off ones.

So, there are certainly reasons to worry about some of the political trends and manifestations going on in Europe, but offhand they are not nearly as bad as some of the publicity associated with them, and in the end they say much less about the future viability of the EU or even the eurozone than many are claiming.   Nobody should get all relaxed over this, but this is also not worthy of panicking over.

Barkley Rosser

Economic science: "this magazine of untruth"

The complaint one makes against that anti-social jargon, which so easily passes for economic science, is that it is in ludicrous opposition to the common observation of facts. Political economy professes to be a science based on observation. But the bitter pedantry which often usurps that name usually assumes its facts, after it has rounded off dogmas to suit its clients. In practice this magazine of untruth escapes detection for two reasons. One is that the facts relating to labour are invariably seen through the spectacles of capital. The employing class is virtually in possession of the whole machinery of information; and all judgments are tinged with the tone current among them. Thus we see the very newspapers which celebrate the amusements of the rich in a hundred different forms, scandalized at the coal miners objecting to grub in the pits every day in the week. Laziness, ingratitude, and extortion, seem the proper terms for sportsmen and fine ladies to apply to the men and children who swelter half their lives underground. The second reason which obscures the truth about industry is, that the facts about capital are almost never honestly disclosed.... -- Frederic Harrison (1872)

Stinting and saving... without stint or shirk!

'Tis work, work, work, without stint or shirk.
Till the world of his wares is full;
This worker, I trow, we all of us know,
And his name it is John Bull.

---- 

"Oh, then," cried the lad, "where's the good, I should like to know, of going through years of hard work, and stinting and saving, in order to get rich, if it's possible to make one's fortune in an instant, as you say."

The "Ngram" chart above shows the frequency of occurrence, in books published between 1890 and 2008, of the terms "efficiency engineer" and "efficiency wage." The blue hump represents the reception of Frederick Taylor's Scientific Management. The red hump marks the ascendency of New Keynesian microfoundations.

An early occurrence of "efficiency wage" appears in a 1912 American Economic Review report of a roundtable discussion of Scientific Management at the 24th annual meeting of the American Economic Association. That discussion also contains the following edifying remarks by one William Kent, esq.:

William Kent: Mr. Tobin has told us of the case related by Mr. Taylor where the work formerly done by 600 shovelers and other laborers with average wages of $1.15 per day was, after scientific management had been applied to it, accomplished by 140 men whose average earnings were $1.88 per day. Mr. Tobin says that what interests him the most is what became of the 460 men who were displaced. Mr. Taylor accounted for some of them by saying they got jobs for which they were better adapted than for shoveling, at higher wages, in the same works, but he had not kept track of the rest of them. 

It is creditable to Mr. Tobin's sympathetic heart that he thinks of the 460 men who were thrown out of a job, but if he thinks they long remained without jobs and that they were sufferers in the long run, he is infected by the fallacy commonly held by the unthinking that the amount of work to be done in the world is a definite and limited amount, and that if either by the use of machinery or by improvement in the method one man is enabled to do the work formerly done by two men, then one of the men is thrown out of work and he and his family are permanently injured. 

This fallacy is referred to by Mr. Taylor in his book on Scientific Management, page 13, in the following words. "The great majority of workmen still believe that if they were to work at their best speed they would be doing a great injustice to the whole trade by throwing a lot of men out of work; and yet the history of the development of each trade shows that each improvement, whether it be the invention of a new machine or the introduction of a better method, which results in increasing the productive capacity of the men in the trade and cheapening the costs, instead of throwing men out of work, makes in the end work for more men." 

The persistence of this fallacy of the workmen for the past 150 years, ever since the power-driven spinning and weaving machinery began to displace the old spinning wheel and hand loom, and the hand workmen destroyed the machinery and set fire to the mills, is based upon one of the best traits of human nature, sympathy for one's fellow man. Sympathy is one of the noblest emotions, but it is apt to exaggerate visible evils and be pessimistic. It says, "There is a poor workman thrown out of a job, the bread is taken out of his mouth, and he and his family are left to starve." It has no use for unemotional history, statistics, logic, and common sense, which all tend to the more optimistic view, that whenever a machine or a method of operation causes a piece of work to be done by fewer men, throwing some men out of employment, the money saved by reducing the cost of the work constitutes a fund which does not remain idle in the bank, but is used to give other employment to the same or to other men.

It is an axiom among men that have given thought to the subject that the work to be done in the world is not limited except by the facilities for doing it, and by the money available for paying for it. If the Bethlehem Steel Company saved $75,000 a year by throwing a large number of shovelers out of a job, it had that much more money to spend in other departments. Just as much ore was shoveled as before, and the $75,000 went into paying labor to add to the world's store of machinery or other desirable products.

In "The Causes and Cures of Unemployment in the Great Depression," Richard J. Jensen (1989) argued that hard core unemployment during the depression could be attributed to "efficiency wage" policies widely adopted by employers. Curiously, Jensen, an historian, made no reference to Taylor or Scientific Management in his article. In his analysis, Jensen relied heavily on the hypothesis that unemployment serves as a "worker discipline device" to discourage shirking:

A second dimension of efficiency wages involved shirking and stints. Some workers (some of the time) have an inner drive to work hard; most workers (most of the time) are willing to coast a little. Furthermore, shop-floor culture in the United States (as opposed to, say, Japan) encouraged peer group pressure against anyone who tried to work too hard. Close supervision to monitor output was expensive and was, in any case, keenly resented by good workers. It was better to select workers who were less inclined to shirk by offering high wages and to use a trial work period to screen out any shirkers who slipped through. Spot checks to identify and fire shirkers made loafing expensive for the workers; the higher the wage, the greater the possible loss. 

Closely related to shirking was the problem of the stint. A group of workers would develop a standard rate of performance -- a stint -- and would harass shop mates who surpassed it. When management tried to increase the stint, workers denounced it as a "speedup" and threatened to strike. But the stint, and the perception of speedup, were relative and psychological. By careful selection, it was possible to find those workers with higher stint levels and to create groups that naturally produced more -- working faster and with less waste -- than groups held back by workers with lower stint levels. Every employer wanted high-stint workers, and so had to pay more to hire and retain them. Efficiency wages and careful hiring policies allowed firms to select workers who demonstrated higher stint rates -- who worked harder. Firms which gained a reputation for high wages and hard work, soon attracted and kept workers who felt comfortable with such a regime. Workers without the characteristics desired by management were not hired (except by mistake -- and then quickly fired). The rising real wages are explained by efficiency wage models only if productivity increased; otherwise, management would be making a huge mistake in paying more wages but getting no more output.

Frederick Taylor called this alleged standard rate of performance "systematic soldiering," which he attributed, as Mr. Kent cited above, to the fallacious belief "that if they were to work at their best speed they would be doing a great injustice to the whole trade by throwing a lot of men out of work." Professor Jensen and Mr. Kent can't both be right. But they can both be wrong. Furthermore, the source of their error is endemic to the cult of economics. It arises from a facile, ambivalent usage of ambiguous terminology to mean one thing or its opposite depending on who is acting and who benefits.

The key term here is "stint." According to the dictionary, there doesn't appear to be an etymological connection between stint and abstinence. But -- just as Nassau Senior substituted "for the word 'capital,' considered as an instrument of production, the word 'abstinence'" -- there is no loss in meaning when we substitute the phrase, 'stinting and saving' for Nassau's word, 'abstinence.'

What is it about the action of stinting/abstinence that makes it praiseworthy when conducted by capitalists and contemptible when performed by workers? For the answer, it might be useful to consider the role of stinting in sustaining the traditional commons. In Common as Air: Revolution, art and ownership, Lewis Hyde explained that:

A true commons is a stinted thing; what Hardin described [in "The Tragedy of the Commons"] is not a commons at all but what is nowadays called an unmanaged common-pool resource. 

It should be noted, too, that as the commons were stinted, so was the market in goods (especially in grain). Markets could not operate without regard for the provisioning of commoners and the poor. Farmers, for example, were obliged to bring grain to market rather than sell it in the field to wholesalers, and markets themselves were fenced, as it were, so that speculators couldn't outbid the poor. A description of "the orderly regulation of Preston market" dated 1795 reads:

The weekly markets... are extremely well-regulated.... None but the town's-people are permitted to buy during the first hour, which is from eight to nine in the morning: at nine others may purchase, but nothing unsold must be withdrawn from the market till one o'clock, fish excepted....

In another town, "hucksters, higlers, and retailers" were excluded from eight in the morning until noon....  

As with the constraints on the commons, markets were stinted for social and moral ends. No one was left to follow his or her own ends without regard for the group. 

Stepping back from the temptation to romanticize the commons, it may be observed that the regulations Hyde cites -- however social and moral their ends may be -- favored "insiders" over "outsiders." The double standard exercised by economists doesn't represent anything new. It merely replaces one set of insiders and outsiders with another, thereby transforming "hucksters and higlers" into entrepreneurs and investors.

In The Anti-Capitalist Mentality, Ludwig von Mises carried the apotheosis of hucksterism and higgling to an outlandish extreme, crediting what he termed "the three progressive classes" of savers, inventors and entrepreneurs with sole responsibility for driving social evolution from savage cave dwellers to modern industry. In von Mises's account, as in the Polish joke, it is not the capitalists who exploit the workers but the other way around. It is "the common man", "the rest of mankind" who enjoy most of the fruits of the savers', technologists' and entrepreneurs' endeavors even though "they did not contribute anything" to the achievement of economic progress.

Cheese-eating Job Creators (and the lump-of-labor fallacy)

Paul Krugman in 2003:

"Traditionally, it is a fallacy of the economically naïve left -- for example, four years ago France's Socialist government tried to create more jobs by reducing the length of the workweek."

Paul Krugman in 2014:

Well, I hadn't looked at this data for a while; and where we are now is quite stunning:

"Since the late 1990s we have completely traded places: prime-age French adults are now much more likely than their US counterparts to have jobs. 

"Strange how amid the incessant bad-mouthing of French performance this fact never gets mentioned."

Now that you've mentioned this fact, Paul, how about revisiting the cogency of the lump-of-labor fallacy claim?

"Economists call it the "lump of labor fallacy." It's the idea that there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs. (A famous example: those dire warnings in the 1950's that automation would lead to mass unemployment.) As the derisive name suggests, it's an idea economists view with contempt, yet the fallacy makes a comeback whenever the economy is sluggish."

Fred Hiatt Thinks Obama Not Warwhooping Enough

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

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.

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

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 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."

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,
Michael Tomasky
Editor
Democracy: A Journal of Ideas

Sandwichman replied:

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

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.

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.

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.