John Maurice Clark on Window Breaking

From The Costs of the World War to the American People, 1931:

We come next to the question whether disasters which consume or destroy wealth can be, after all, advantageous to the social economy because the demand they create is "good for business" and leads to increased production and circulation of wealth. Traditional economics says: "No. The breaking of windows, for example, can never be anything but destruction of wealth; it cannot be metamorphosed into the creation of wealth, no matter how far its effects may be traced as they ramify through the economic system." It is admitted that breaking windows may help glaziers for the moment, but only at the expense of other producers; those who would otherwise have received the money the glaziers got for replacing the panes, and in exchange would have satisfied some additional want beyond the need for windows that will keep the weather out. That extra satisfaction is lost when the pane is broken. And for the rest, glaziers work more and receive more, while others work less and receive less.  

This view is certainly sound, on traditional economic assumptions; but is it all sufficient and equally applicable to all cases? The experience of the War seems to afford ground for giving the question some fresh examination. The crux of the question lies here: is the effective demand for other things, and the consequent production of other things, necessarily cut down by exactly the amount that is spent on replacing the broken panes? Or, to put it the other way around, if the panes had not been broken, would other things have been demanded, produced, and consumed to an exactly equal amount?  

As a matter of long-run adjustment, the establishment of a permanent habit of breaking some thousands or millions of panes every year might be expected to have substantially this effect. But we are not dealing with the long run results of permanent habits, but with single events which break into the customary spending and producing habits of the people; and we must examine the case at issue on that basis. Such evidence as the war experience offers is suggestive, but not by itself conclusive. For the record of a complex historical episode seldom carries within itself the proof of the precise effect of each one of a multitude of collaborating causes.  

America prospered in the period of neutrality, when it was in the position of the glaziers in our illustration. Prosperity in such a situation proves nothing that is not admitted at the start. But the suggestive thing about this prosperity is the fact that we prospered by making goods without getting paid for them. The glazier who lets his customer's bill run may be doing well by himself, if the customer is "good pay" in the end, but we should hardly expect him to live high in the meantime from his work for that particular customer. From the fact that we improved our living moderately as well as expanded our glassworks very substantially over and above the credits we were accumulating for unbalanced exports, one may conclude that the actual situation contains elements which the simplified illustration does not indicate.  

The general nature of these elements of productive expansion has already been indicated: namely, the new demand not balanced by an equal falling off in other demands, the additional derived demand for capital equipment, the increase in employment and volume of work done, and the further resultant demand for goods by more prosperous workers and other participants in the earnings of industry. The net increase in aggregate money demand was seen to be made readily possible by the elasticity of the credit system, the stimulus to production intensified by the well-known effects of rising prices, and the increased money demand, representing an increase in the world's economic necessities, was enabled to take effect as an increased total of "effective demand" for actual goods by reason of the elasticity of our productive powers, which were then, as at most times, working short of full capacity.  

It may be remarked in passing that the "elasticity of the credit system" is no matter of inscrutable necromancy conjuring something from nothing, magical as its effects may appear. Banks can multiply purchasing power because depositors are willing to accept the position of lenders without interest. Depositors do this to the extent of most of their reserves for current spendings, in exchange for the privilege of calling these deposits at any moment by the process of drawing a check. This is a painless and largely unconscious form of lending, involving no increase of abstinence. Expansion of deposits through expansion of loans finds its main base (aside from adequate cash reserves) in a quasi-automatic increase in this painless and unconscious furnishing of credit.  

Turning to the experience of our actual participation in the War, the evidence it affords on the question at issue is less conclusive in one way than the experience of neutrality, and stronger in another. It is less conclusive in that consumption of wealth did not actually increase; and it is stronger in that whatever compensating effects were secured, were secured in the face of the fact that it was now our own windows that were being broken, as well as those of our European neighbors; so that we were no longer in the position of glaziers who might expect to profit for quite obvious reasons.  

The work and materials absorbed by our window-smashings were clearly not a net subtraction from our previous or our normal activities but involved an increase in the gross total. Production increased to a limit apparently set largely by congestion of rail facilities under an abnormal concentration of traffic at the Atlantic seaboard, rather than by any more general and abstract law of economic equilibrium. Economic effort, it must be noted, increased more than results; since war production was abnormally wasteful and lavishly expensive.  

Other nations fared far worse, in this respect, than the United States. In France, for instance, the calling of the army to the colors resulted in throwing a still larger army of unemployed on the streets: a condition which was only very gradually remedied. Instead of calling the existing unemployed into the workshops to take the places of those who had gone to the front, many shops were closed because the employer had gone to the front, and his employees not liable to service were left to find new work if possible. Thus French production fell off on account of this element of disorganization, as well as on account of the more obvious and unavoidable fact that the first invasion had snatched from her an area in which a large section of her heavy industries and mines was located. In this case the smashing of windows was emphatically not "good for business."  

Further evidence might be sought in the general testimony of studies of the business cycle, to the effect that reviving demand acts cumulatively, at least within fairly liberal limits. This does not prove that an economic disaster brings an increase in effective demand for goods; but it indicates that such an increase is not impossible.  

To sum up: the effect seems to depend on the character and extent of the disaster, on the attitude with which it is met, and on the state of the credit system and of business activity in general. A disaster which does not cripple the machinery of production, of an extent which spurs people to increased efforts rather than reducing them to helpless despair, coupled with a credit system and an industrial system each of which has some unused capacity for expansion-these conditions enable a disaster to be self-repairing in part at least, through stimulus to productive activity.  

One of the penalties of increasing economic power is the need to find new forms of consumption in which to embody it. This process is tentative, risky, and wasteful. We are limited in our imagination as consumers as to the best ways to use increasing spending power: still more as producers in devising economically practicable goods which will capture the consumers' unformulated buying potentialities. Nowadays producers must, perforce, try to meet the consumers' latent desires more than halfway-to form them, indeed, in ways capable of successful and profitable gratification. But this attempt is inherently uncertain. And there is, as a consequence perhaps in part of this uncertainty and of these limits on our economic imagination, a tendency to waste capital in unimaginative duplication of existing types of facilities, to produce familiar goods. This being the case, production by these facilities is limited by the limited demand for these familiar things; the more nearly unlimited potential demand for new goods being no help to those who have not diagnosed the potentialities aright. In such a situation, anything which increases the need for familiar types of goods may be a blessed relief from the very perplexities of progress, enabling industry to go ahead with certainty and confidence rather than undertaking the more difficult task of diagnosing the consumers' unknown potentialities and devising or selecting goods to call them forth. With a known wastage to make good, industry can count on what it has to do and on the necessary instruments; and it may move forward far more rapidly and easily in repairing the known wastage than if it were doing pioneering work in developing new and untested demands. Will the new demands therefore remain just so much longer undeveloped and unsatisfied? Perhaps that question may remain for omniscience to answer. 

One Lesson, Ad Nauseum

John Quiggin tells Crooked Timber readers that he's been working on a book that will reply to Henry Hazlitt’s Economics in One Lesson. Hazlitt's book was one of the first places I looked back in 1997 when I began my quest for the origin of the lump-of-labor fallacy claim. The word "fallacy" and its plural appears in the book twice as often (44 times) as the word "economist" and its plural (22 times).

In Quiggin's interpretation, Hazlitt’s one lesson is that prices are opportunity costs. According to Hazlitt, his one lesson is that economics consists of looking beyond the immediate effects of an action or policy, or "what is seen," to the longer term effects that remain unseen. Quiggin objects that there is nothing specifically economic about Hazlitt's avowed lesson, "it merely assumes what is to be proven, that a complete assessment of policy will yield free-market conclusions."

I posted a short comment on Quiggin's post, pointing out that Frederic Bastiat's "Parable of the Broken Window," which Hazlitt presents as an application of his one lesson, is simply a storified version of "supply creates its own demand." I would like to illustrate that point -- and indicate its connection with the lump-of-labor -- here with a  few excerpts from Economics in One Lesson. On page 15 (2007 edition), Hazlitt made explicit the connection between the broken window fable and Say's alleged Law:

Those who think that the destruction of war increases total “demand” forget that demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods. All this is inherent in the modern division of labor and in an exchange economy.

Again, on page 152:

The real purchasing power for goods, however, as we have seen, consists of other goods. It cannot be wondrously increased merely by printing more pieces of paper called dollars. Fundamentally what happens in an exchange economy is that the things that A produces are exchanged for the things that B produces.

Hazlitt's footnote for the argument cites Benjamin Anderson's "A refutation of Keynes' attack on the doctrine that aggregate supply creates aggregate demand," which Hazlitt later reprinted, with effusive praise for the author, in The Critics of Keynesian Economics.

Hazlitt doesn't use the term "lump-of-labor" in the book, but that fallacy argument recurs frequently. On page 45:

I have referred to various union make-work and featherbed practices. These practices, and the public toleration of them, spring from the same fundamental fallacy as the fear of machines. This is the belief that a more efficient way of doing a thing destroys jobs, and its necessary corollary that a less efficient way of doing it creates them.  

Allied to this fallacy is the belief that there is just a fixed amount of work to be done in the world, and that, if we cannot add to this work by thinking tip more cumbersome ways of doing it, at least we can think of devices for spreading it around among as large a number of people as possible. This error lies behind the minute subdivision of labor upon which unions insist. In the building trades in large cities the subdivision is notorious. 

Page 49:

The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering. The people who support such schemes think only of the employment they might provide for particular persons or groups; they do not stop to consider what their whole effect would be on everybody.  

The spread-the-work schemes rest also, as we began by pointing out, on the false assumption that there is just a fixed amount of work to be done. There could be no greater fallacy. There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied. In a modern exchange economy, the most work will be done when prices, costs and wages are in the best relations with each other. What these relations are we shall later consider.

Page 56:

Wages and employment are discussed as if they had no relation to productivity and output. On the assumption that there is only a fixed amount of work to be done, the conclusion is drawn that a thirty-hour week will provide more jobs and will therefore be preferable to a forty-hour week. A hundred make-work practices of labor unions are confusedly tolerated.

Page 131:

Most of these policies have been followed under the assumption that there is just a fixed amount of work to done, a definite “job fund” which has to be spread over as many people and hours as possible so as not to use it up too soon. This assumption is utterly false. There is actually no limit to the amount of work to be done. Work creates work. What A produces constitutes the demand for what B produces. 

But because this false assumption exists, and because the policies of unions are based on it, their net effect has been to reduce productivity below what it would otherwise have been. Their net effect, therefore, in the long run and for all groups of workers, has been to reduce real wages -- that is, wages in terms of the goods they will buy -- below the level to which they would otherwise have risen.

Note that in the last quote, Hazlitt rehearses the same "what A produces constitutes the demand for what B produces" argument that he later credits to B. M. Anderson. Hazlitt's juxtaposition of the "supply creates demand" doctrine and the "fixed amount of work" fallacy was not an idiosyncrasy but standard, textbook usage. 

Raymond Bye's Principles of Economics, first published in 1924, became one of the most widely adopted college introductory economics textbooks in the United States during the interwar period. In it, Bye presented an atypically clear exposition of the "'lump-of-labor' or 'make work" fallacy," which he defines as "very similar to the general overproduction fallacy..." "The reader," Bye assures, "will see the error in this sort of thinking if he understands the true nature of exchange." So what is the "true nature" of exchange?

Every laborer creates a product which is offered in exchange for the products of other laborers. The demand for labor thereby grows as fast as its supply; the one cannot be greater or less than the other, for they are the same thing. Every addition to the labor force of a community gives other laborers work to do providing for the needs of the newcomers, while the latter can find occupation catering to the ungratified desires of those who were already employed.

Of course, "supply creates its own demand" was the classical doctrine that Keynes likened to "an optical illusion, which makes two essentially different activities appear to be the same." No, those "two essentially different activities" Keynes referred to were not producing and consuming. They were "decisions to abstain from present consumption" and "decisions to provide for future consumption," the two of which are activated, Keynes argued, by different motives.

It is, then, the assumption of equality between the demand price of output as a whole and its supply price which is to be regarded as the classical theory’s ‘axiom of parallels’. Granted this, all the rest follows — the social advantages of private and national thrift, the traditional attitude towards the rate of interest, the classical theory of unemployment, the quantity theory of money, the unqualified advantages of laissez-faire in respect of foreign trade and much else which we shall have to question.

Why Say's Law did not "sink without trace" in the wake of Keynes's refutation is the topic of the final episode of the supply creates its own demon series.

SCIOD 1: Pantins' Pantomime

Imagine a world in which there are two kinds of people – employers and workers. Each worker is either employed or unemployed. The workers are identical and there is a fixed number of them. They work only because they enjoy buying things with the money they earn. If they can avoid it, they don't like to put any effort into their work. The employers' goal is to maximize profits. Their strategy is to get as many units of output as they can from each dollar they spend on wages.

I could go on with the features of this so-called "economic model" but I won't bother. As the reader may have gathered from the brief description, it is a very sparse and mechanical kind of world, sort of like the one Philip Mirowski likened to the Neues Zaubertheatre in the Steven Millhauser story, "The New Automaton Theater."

In Millhauser's story, "our city" (which remains unnamed) is renowned for its tradition of the miniature automaton theatre, in which it takes immense civic pride and derives deep spiritual pleasure. From time to time a genius of the art of the miniature automaton emerges who surpasses the accomplishments of previous virtuosi. One such prodigy is Heinrich Graum, who, from his youth, strides from triumph to triumph until one day, at the age of 36, he abruptly closes his workshop and abandons the art. A decade later, as suddenly and unexpectedly as he had left, he returns to launch the Neues Zaubertheatre, whose jarring and controversial performances prove to be unlike any automaton theatre the citizens have ever witnessed:

The new automatons can only be described as clumsy. By this I mean that the smoothness of motion so characteristic of our classic figures has been replaced by the jerky abrupt motions of amateur automatons.... They do not strike us as human. Indeed it must be said that the new automatons strike us first of all as automatons... In the classic automaton theatre we are asked to share the emotions of human beings, whom in reality we know to be miniature automatons. In the new automaton theatre we are asked to share the emotions of the automatons themselves... 

In spite of, or perhaps because of its disturbing novelty, the new theatre slowly supplants the traditional, realistically mimetic art and becomes the universal reference for the art. Mirowski "dragooned" Millhauser's story for his book, Machine Dreams, to serve in place of the standard outline of the book that usually appears in the first chapter of modern academic publications:

…the town is the American profession of academic economics, the classic automaton theatre is neoclassical economic theory, and the Neues Zaubertheatre is the introduction of the cyborg sciences into economics…

Except Mirowski's analogy isn't quite right. The workers in this mathematical model world are not "clumsy, amateurish automatons" with "jerky, abrupt motions." They are not automatons at all! They have no motions of their own. It is the model makers, the robotic academic economists, who perform the clumsy, jerky motions of amateurish automatons as they construct their two-dimensional, lifeless models.

In an earlier Millhauser story, "August Eschenburg," which is also about a virtuoso of the automaton theater, the narrator describes a cruel toy that fascinated Eschenburg as a child:

A hollow paper figure represented a clown, or a fireman, or a bearded professor [or a "Walrasian auctioneer" perhaps?]. When you put a captured bird inside, the poor creature's desperate attempts at escape produced in the paper figure a series of wild comic motions.

To amend Mirowski's analogy, it is hollow paper figures that are the microfounded models that academic economists concoct. The captured bird inside that moves the model is the profession's obstinate and anachronistic faith in supply and demand and the price mechanism as universal elixirs of allocative efficiency.

Supply Creates Its Own Demon (SCIOD): The Serial!

Enough is enough!

Erik Brynjolfsson and Andrew Mcafee wrote

This view – that automation and other forms of technological progress in aggregate create more jobs than they destroy – has come to dominate the discipline of economics. To believe otherwise is to succumb to the 'Luddite fallacy.' So in recent years, most of the people arguing that technology is a net job destroyer have not been mainstream economists.

To Brynjolfsson and McAfee's credit they point out that the theory and evidence for this argument are "less solid than they initially appear." What they don't point out -- and possibly don't realize -- is that the theory and evidence were discredited roughly 80 and 140 years ago.

"In economics," Paul Samuelson wrote and I quoted a short while ago, "it takes a theory to kill a theory..." But it doesn't have to be a better theory or a newer one. In fact, the surest way to kill a theory in economics is with a previously-deceased theory, as the same Samuelson demonstrated. (See another recent post.)

It turns out that bringing the dead back to life has been a recurrent theme among economists -- most literally in the case of Andrew Ure's experiments with Galvanism just a few months after publication of Mary Shelley's novel, Frankenstein (see episode 10).

As I've been trying to point out, the "will automation take our jobs?" motif is neither new nor interesting. Well... maybe it's interesting in a kind of morbid fascination way. But it's not interesting in the sense of "can we learn anything new from this?" The question has shuffled off this mortal coil. A more interesting question would be why does the anachronism persist?

I've got a 10,000-word draft, consisting of most of the projected twelve episodes of "Supply Creates Its Own Demon" (henceforth "SCIOD") in which I explore the extraordinary afterlife of a dead idea. I have scheduled two episodes a week, to be posted on Thursdays and Tuesdays at 5:00 p.m EDT. Links will become active as the scheduled episodes are posted. Here are the episodes titles:

1. Pantins' Pantomime 
Addendum
2. The Automatic Left-handed Loom 
3. Chariots of the Luddites 
Addendum: Petty Foggery and Political Arithmetick
4. Paradox Laws 
Addendum: Liar's Paradox
5. Supply Creates Its Own Demon 
6. A Trick! of the Clumsiest Description! 
7. The Frankenstein Factory 
8. The Secret Basis of Glut 
9. This Magazine of Untruth 
10. The Fund-a-mental Thing's Supply As Time Goes "Bye!"
11. Continuation of Brassey by Chapman August 28
12. Euclidean Rhapsodies 
13. Beggars, Cranks and Feather Beds 

Why do defunct ideas persist? Hypothesis: they fit into a multi-faceted repertoire of beliefs and behaviors in which they "make sense" because they legitimate and rationalize those beliefs and behaviors. It's no use refuting the wrong idea without directly confronting its repertory context.

Teasers:  Previously I have drawn on material from episodes 7, 8 and 12 for posts subtitled You Don't, Say!, Marc Andreessen and "Textbook Luddism" and Say's Law sank without trace.

Tim Worstall on the Alleged Benefits of Corporate Inversions

There is a wonderful debate on why inversions matter. Tim Worstall knows the technical side of tax law:

A tax inversion changes the way that profits made outside the US are taxed by the US, this is entirely true. But such a tax inversion, in and of itself, doesn’t change the way that profits made inside the US are taxed at all.

He’s talking about the Walgreen proposed inversion:

So, what happens when Walgreen’s does a tax inversion (by merging with or taking over Boots etc)? The taxation of those profits that Walgreen’s makes by doing business in the US doesn’t change … What does change is that Walgreen’s profits made outside the US have moved from being US domiciled to being non-US domiciled. And as those outside the US profits are neither US resident nor US domiciled then they’re not taxable in the US.

I guess Tim has not read the Walgreen 10-K as it is a domestic retailer. There are just not that much in the way of foreign based profits. OK, there are for AbbVie and for Medtronic. In fact, AbbVie has allocated over 87% of its profits abroad. Abbvie’s concern is this repatriation tax, which the Republicans want to get rid of anyway. Medtronic does not pay a repatriation tax as it permanently defers its foreign sourced income – which is just say of 60% of its worldwide profits. Tim tries to dispute a claim made by David Cay Johnston (and others) that these inversions will lead to more sourcing of income abroad:

There are, it is true, other things that the newly merged company could do to move such US profits out of the US tax net. They could, for example, sell the patents on drugs that they market in the US to some nice offshore subsidiary in, say, Bermuda. That Bermudan subsidiary then charges the US unit for the use of those patents and this moves profits outside the US tax net into Bermuda’s no tax net. That’s certainly possible although we’ve no news at all that leads us to think that they are planning this. So we might be able to say that a tax inversion opens the possibility to future movement of US profits offshore. However, do note something else that has to happen with that tactic. That Bermudan company must pay full market value for those patents when they are transferred. Meaning that the US part of the company would make a large profit of course: thus accelerating their payment of tax to Uncle Sam. This tax dodging stuff is rather harder than it sometimes looks: if you’re going to place IP offshore you can do that, certainly, but you’ve got to do it before it becomes valuable, not afterwards.

Tim is referring to section 367(d) which says migration of IP requires that the original owner of the IP be compensated at fair market value. Tim assumes that the IRS is incredibly effective at enforcing this sensible requirement. I guess he has no clue that most of these transfers occur at something like 10 cents on the dollar of what the market suggests is the fair market value. Fortunately for us, Kenneth Thomas understands how this works in practice. Of course, I still have one wee problem with this being discussed in terms of the AbbVie inversion. With over 87% of their profits being sourced abroad even before the inversion, hasn’t the horse already left the barn?

The Loathsome Timothy Taylor

I was composing a piece in which for some reason I referred to "the loathsome Timothy Taylor." But then I paused and asked myself "why loathsome?" Shortly after I read this comment by Owen Paine at Economist's View: "Timmy Taylor is a loathsome lamprey like creature..." referring to a piece by Taylor, "Are Labor Markets Exploitative," Mark Thoma had linked to. I have to credit Taylor with answering my query.

Taylor's schtick was to cite a long piece from a pro-slavery essay that also referred to labor markets as exploitive.

"Of course," Mr. Taylor demurs, "the fact that a point of view has some appalling allies doesn't make it incorrect." Of course, his whole point in citing the passage was to insinuate the very conclusion he disavows.

But what of Mr. Taylor's allies? I won't stoop to the sweeping generalities that he did but will here confine myself to the "lump-of-labor fallacy" crowd of professional detractors against shorter work time. Taylor, as I have pointed out, wrote a piece titled "Dept of Misunderstandings" reciting the bogus fallacy claim.

Well, there is a history to that claim (that I happen to have researched) and one of the more despicable documents I encountered was "An Arbitrary Workday" published in 1903 by Smith and Walmsley, one of the first commercial public relations firms to set up office in Washington D.C. The "report" by Robert H. Watkins is loaded with the same kind of sappy Horatio Alger uplift schmaltz that Taylor admires but, also this:

The passage of the bill would indeed in its clumsy way go far toward engrafting the system of eight hours a day throughout the United States, but to contemplate what that would mean is to think of nothing less than a national folly. In my humble opinion, if the bill should pass and every manufacturing concern in the country and every employer of labor should consent to and adopt the eight-hour system, it would instantly mark the decay of the splendid prestige of the United States as the richest and most powerful country on earth. As I have already said, I believe the measure an assault upon the liberty of both the employer and the employee. I do not wish to see the day when American manufacturers and American workmen should not have all the chances they desire with the manufacturers and workmen of the rest of the world. The arbitrary rule of eight hours would make men machines that would surely rust, and would discourage individuality of effort and purpose. It would subject us to a competition with foreign producers with which we could not possibly cope. Civilization has not yet reached the period of impossible felicity when multitudes of men may every day, year in and year out, quit work and go to improving themselves with idleness. The notion that the employer, finding he can not get as much out of his men by only eight hours, will be obliged to employ more men to complete the job, will not do to consider in these days. Under that system manufacturing in America will go backward and employers grow less. As line after line of production is abandoned the crowds of idle will be correspondingly increased. 

Having lived for some years in a Southern State which has made remarkable progress in manufacturing, especially in metal production and in mining, I contemplate with dread the effect there of a possible eight-hour system for labor. A great proportion of Southern labor is negro labor. To turn loose every day the hordes of negroes that would be idle so much of the day as the eight-hour system would give them would visit on the South nothing short of calamity. The negro problem is grave enough at best. It is vexing the calm of our greatest statesmen and baffling already the efforts of our most strenuous intellects. Who is going to provide entertainment, profitable and wholesome entertainment, for our negroes in their hours of ease? Who is going to guarantee that the passions of the blacks -- the millions of blacks -- will conform themselves to the invocations of the lyceum and the library? It is a matter of record that the towns and urban communities throughout the South show that there is most crime among negroes on days on which they are not at work, their few whole holidays and their once-a-week half-holidays. The eight-hour system would give them some holiday every day and the race would either degrade every community in the South or have to be exterminated. 

The negro is not the only human creature to whom enforced or optional idleness is a bane. The best gift of our institutions is in the chance of manful, self-reliant independence. The law should foster it and not hamper and degrade it.

The eight-hour crusade, once having enlisted the aid of the Congress of the United States, would be as stupendous and deplorable an absurdity as was the crusade of the fanatical children of the middle ages.

Now I'm not saying that Timothy Taylor is an advocate of racialist extermination. I'm simply pointing out the odiousness, the loathsomeness of his style of insinuated ad hominem guilt by association. Yes, indeed. The loathsome Timmy Taylor.

"A more despicable belly crawler is inconceivable," Owen Paine concluded in his comment on the Taylor blog post.

"Will Automatons Take Our Economists' Jobs?"

For some reason, economists think it's a good idea to keep asking the same hackneyed question over and over again and keep giving the same hackneyed answers.

"Will automation take our jobs?" is a perennial favorite. The answer, of course is "technology creates more jobs than it destroys," "a cheap market will always be full of customers," "supply creates its own demand" and "CREATIVITY!" All of which is bullshit (or parrot droppings).

The real answer is that waste and war and immiseration can always be counted on to keep people toiling away no matter what. Hooray for waste and war and immiseration!

My question is a little different. What will it take to automate economists's jobs? It was observed long ago that one could teach a parrot to say "supply and demand." Here is my answer that doesn't require the frequent changing of the newspaper at the bottom of the cage:

Congenital ironists might want to note that the textbook lump enunciated by the "Keynesian" Samuelson is the self-same "supply creates its own demand" version of "Say's Law" of which Keynes remarked:

Thus Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.

The "vitally important chapter of economic theory" that Keynes referred to was, of course, "the theory of employment to be worked out in the course of the following chapters..."

To Kill a Theory

Paul Samuelson once wrote, "In economics, it takes a theory to kill a theory; facts can only dent the theorist's hide."

Specifically which theory was he talking about being "killed" and which other theory was doing the killing?

Maybe Luhansk Rather Than Lugansk After All

Awhile ago I forecast here that the outcome in Eastern Ukraine would be a Transniestria-like situation with the self-declared peoples' republics achieving de facto independence, backed by Russia, but not de jure.  This became symbolized by whether western media would call the capital of the more eastern one "Luhansk" (Ukrainian) or "Lugansk" (Russian), and I declared that it would be "Lugansk," (some western media, such as the Washington Post have called it both names at different times).

Well, it seems that world-dominatrix Angela Merkel has gotten to Vladimir Putin and he now seems not to be backing the rebels there, even though their two main leaders, Igor Strelkov and Alexander Borodai, are born-in-Russia Russian citizens. They are now complaining of a lack of support from Putin, and they have been denounced in Russian media as "wreckless" and other such not favorable descriptors, apparently reflecting Putin's lack of support from them.  Crimea is enough to chew on for him, it would appear.

The real bottom line, of course, is on the ground, and there the formerly hapless Ukrainian military seems to have gained the upper hand, driving Strelkov out of his stronghold in Slovyansk.  An ultimate showdown in Donetsk appears to be in the works, and this may be over soon, especially if Putin continues his current attitude.

A curious aspect of this is how a number of progressive folk, including British economist Alan Freeman and British computer scientist sometimes economist, Paul Cockshott, have fallen for the line that the rebels are great progressives.  Maybe, but Strelkov has been an open supporter of monarchism, and the Putin regime is not remotely progressive.  It is true that there are neo-fascist elements in the Ukrainian leadership, but identifying the entire Ukrainian government as "fascist" and attempting to invoke World War II in all this has simply been a ridiculous propaganda ploy,  I think these people should be embarrassed that they have fallen for such nonsense.

Barkley Rosser

The Climate Misconceptions Series: Complete

The last post has been posted, and I've also gone back and revised the intro post, The Road from Carbonville, to include links to the whole shebang.

Done.

A Non-Misconceived Agenda for Combating Climate Change

The main purpose of this series has been to identify a number of misunderstandings that have grown up around the topic of policy to mitigate climate change.  There are a lot of them, so it’s been a big job.  It would be sneaky, however, to duck out at the end without saying a few words about what a better approach might look like.  What follows is a quick sketch of the main items.

1. The most direct and flexible way to limit fossil fuel extraction is by requiring anyone doing this to obtain a permit, and then restricting the number of permits according to an appropriate carbon budget.  In this series I’ve used the IPCC carbon limits as a matter of convenience; naturally, before committing to any specific number, there should be careful consideration of the risks in both directions—picking a target that’s too loose and doesn’t remove enough risk of catastrophe, or one that’s too tight and gives us too little extra security for the added cost.

Perhaps the hardest part of the target-picking problem is not distilling what we know today into a specific emissions cap, but setting up a dependable system for revising it as new knowledge comes in.  One possibility is to set up a semi-autonomous body, weighted toward science, which periodically reviews carbon targets and modifies them as needed.  Think of the carbon equivalent of a central bank.  Ultimately any such body is subject to political control, but it should have at least some discretion to make adjustments on its own.

Ideally the scope of a permit system would be global, but that’s unlikely to happen, at least at the start.  If several national partners are available, it could begin on a club basis, as described in the previous post, but it could also encompass just a single country.

The permits should not be time-dated.  Since the goal is to limit the accumulation of greenhouse gases and not necessarily their emissions in any single year, it should be possible to move permits backward or forward through time, leaving the total unchanged.  In theory this could be accomplished by markets alone: the entire stock of carbon permits over the period from the present to, say, 2050 could be auctioned off at once, and anyone thinking of using one would compare the value of extraction today to their expected future value if they are saved.  It’s a standard economic result that, under various conditions, the time profile of carbon extraction resulting from such a market would be optimal, in the sense that it would not be possible to increase the value we get from allowable fossil fuels by shifting their exploitation to different time periods.

In practice that's a big risk to take, however.  Markets go awry for a number of reasons: insufficient competition, herd effects, perverse incentives (especially associated with default risk), and so on.  It would be  advisable for the permit issuing body to withhold a large portion of the undated permits, so that markets are allocating only the remainder.  There could be periodic releases of withheld permits as markets demonstrate their ability to allocate them reasonably.

Permits should be issued specifically for the introduction of carbon into the economy, at the mine, wellhead, port or pipeline.  This maximally upstream location enables the economic response to be as flexible as possible, it’s easily enforced, and it’s comprehensive—unlike end user controls.

2. All permits should be auctioned, with no exceptions.  All revenues should be rebated back to the public on a per capita basis, but with two provisos.  First, a portion should be set aside for international transfer payments, to be discussed in a moment.  Second, a small amount may be set aside for specific domestic populations that are exceptionally vulnerable to the price impacts of the permit system.  These latter funds should have a remedial aspect to them, such as relocation subsidies for people who live in areas with unavoidably high fossil fuel demands or retraining subsidies for workers in the fossil fuel sector.

As for the international transfers: there are two ways of doing this.  One is to have separate national systems that auction carbon permits, and then have the higher income country set aside some of its revenues for the lower income one.  The other is to pool the permit system, so that there’s a single revenue stream, and per capita rebates automatically result in a richer-to-poorer transfer.  From a pure theory perspective, the second approach is preferable, especially since it targets the transfers more precisely (on the basis of income rather than location) and is less subject to interference.  But suppose that our club consists of the US and Brazil.  It’s not hard to imagine that the amount that a pooled system would transfer would make the program unacceptable to a large part of the US public, because their rebates would be too small to make up for much of the cost of energy price increases.  For practical reasons, then, it might be better to either set up a partial pool or have an explicit system of transfers.

For purposes of visualizing such a system, suppose that 20% of carbon revenues were set aside for global transfers and 5% for domestic subsidies.  This would leave three-quarters, enough to indemnify, at least initially, something like the bottom half of the income distribution and moderate the impact on the rest.  Indeed, the bottom deciles might well see net income gains, since their per capita share, even discounting 25%, exceeds their extra direct and indirect fuel expenses.  In other words, done right, climate policy can also be a form of progressive income redistribution.

3. The club of countries participating in the carbon permit system can be expanded primarily through the use of revenue transfers, either explicit or by pooling.  To qualify for a transfer, a low-income country would have to join the club.  On the other hand, the exports of countries outside the club would be subject to tariffs designed to offset as accurately as possible the production cost differences attributable to cheaper fossil fuel prices.  The idea is to prevent leakage, such as when production sites are relocated to take advantage of policy-driven energy cost differentials.

4. If someone develops a genuinely reliable system for long term carbon sequestration, new permits will be issued equal to the amount of sequestered carbon and given (not auctioned) to whoever does the sequestering.  They can sell them, and this provides the right level of subsidy: the value of carbon restrictions avoided.

5. As fossil fuel costs begin to rise, it should be possible to create support for a substantial shift in public spending in the direction of energy-saving technologies, renewable energy subsidies, and research and development to improve non-carbon technologies.  The money to pay for these things could come from redirecting existing spending, additional taxes, and increased public borrowing if depressed macroeconomic conditions persist.

6. Regulations may need to be introduced to minimize the perverse effects of otherwise desirable carbon incentives, such as the restrictions on conversion of food crops to fuel crops, as discussed in a previous post.

7. Adaptation is largely beyond the scope of this series, but that doesn’t mean it doesn’t matter.  In addition to all of the above, considerable sums will have to be spent protecting people from current and near-future climate impacts.  It is especially urgent the upper-income countries support this work in poorer regions: the better-off benefited from the use of fossil fuels in the past which are responsible for today’s climate forcing.

Climate change is about the planetwide relationship between “people” and “nature”, but it also exposes enormous and deeply unfair inequalities between those disproportionately on the causing and receiving ends of the problem.

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Climate Misconception #19: Unless all countries agree to act on climate change, any national action is useless

What gives many of these misconceptions legs is their partial claim on truth, and this final instance offers another example.  Climate change is a global problem, caused by the accumulation of greenhouse gases in a single atmosphere all of us share.  If one country emits a million tons of carbon less and another a million more, the net effect is no change at all.  Every coal plant in China affects the future climate in North America, just as every coal plant in North America affects China.

On top of that, the relative quantities of carbon emissions are shifting from the industrialized to the developing world, as China, India and other countries begin to catch up in the per capita size of their economies.  This is entirely justified, since low and moderate income countries need the boost that fossil fuels provide much more than upper income countries do.  There won’t and shouldn’t be a global agreement in which every country cuts its carbon emissions at the same rate.  In fact, by all appearances the world is far from any kind of meaningful agreement at all.

Nevertheless, if activists in countries like the US succeed in bringing about serious carbon policies, it will have a global impact, for three reasons.

First, at the present time the wealthier countries are responsible for about half the new carbon being introduced into the carbon cycle.  (They are also responsible for the vast majority of previous additions that have contributed to today’s greenhouse gas accumulations, but this can’t be undone.)  If they can begin making big cuts, they will still be big on a global scale, at least for the first decade or so of cutting.  It’s worth doing.

Second, the US plays a pivotal role in the global politics of just about everything.  It possesses the world’s second largest economy (if you lump the EU together as a single entity, which, politically, it's not), the world’s pre-eminent military force, and the world’s most aggressive ruling elite.  At present the US is at the center of resistance to mandatory controls on carbon.  Even the NSA has been enlisted to make sure that other countries follow the US script in climate negotiations.  If US policy were to change significantly, it might have a galvanizing effect on enough other countries to make a global framework achievable.  To be honest, we don’t know how large this effect would prove to be, but it is surely worth a try.

Finally, international cooperation does not have to be universal to be meaningful.  If the US, the EU and Japan, for instance, were to jointly set up a serious carbon tax or permit system without the initial participation of any other countries, they would constitute the nucleus of a global regime.  Additional participants could be attracted with various inducements and penalties.  In particular, as I will argue in the next post, side payments can be offered to less affluent countries that join the club, while tariffs can be placed on imports from countries that don’t limit carbon emissions, based on the cost advantages their non-policy gives them.  If forestalling catastrophic climate change is a primary goal of foreign policy—and why wouldn’t it be?—there are forceful but mostly cooperative tools that can be used to get there.

Cynicism and defeatism are never very attractive political attributes, but they are even less tolerable when voiced by citizens of a country like the United States that uses every available means to get what it wants for far less noble objectives.

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Climate Misconception #18: All we need to do is put a price carbon; the rest of the problems will take care of themselves

On one end of the spectrum we have people who think that climate change can be fought without the use of either carbon caps or taxes.  Some of them think that direct action can get the job done, others that investing in green technology provides a near-painless path to global nonwarming.  There are a few on the other side, though, who think that a carbon tax or something like it would be sufficient policy.  Maybe it’s not exactly a crowd, but we should still tak a moment to see why taxes and permits alone will not be enough.

First I have to admit, however, that in a technical sense a high enough tax or strict enough permit regime would be a complete mitigation strategy.  If by using a tool like this we could keep most of the carbon now in the ground securely in the ground for decades to come, we’d have the greenhouse gas problem under control.

The difficulty is that we are not interested in minimizing climate change because we have some general aversion to change, but because we want to safeguard the well-being of present and future generations.  Simply keeping carbon in the ground and not dealing with any of the other consequences will result in immense social and economic costs, to the point where the political feasibility of the carbon price becomes inconceivable.

The main reason is that, without ancillary investments in renewables, energy conservation, alternative ways of meeting human needs that are less carbon-intensive, and research in all these areas, we will be forced to forego more and more goods and services year after year until even a climate disaster might look like the better alternative.

Take one obvious example, transportation.  The United States is primarily car- and truck-dependent for commuting, shipping and other transportation needs.  In nearly every case the fuel is petroleum.  Switching all of them over to electric power would cause a surge in electricity demand which would be impossible to meet under current technology in the absence of fossil fuels.  Now in theory you could just say “tough luck” and leave it at that, but the disruption would be so great that stranded car-owners would rise up and demand their old gas stations back.  Realistically, without large investments in mass transit, fuel efficiency, and denser living arrangements, it’s not a viable scenario.  A few research breakthroughs in renewable fuels wouldn’t hurt either.

This observation does not contradict my earlier point that investment in renewable energy and other green technologies is not the same as fossil fuel reduction.  That remains true.  The measure of reduced fossil fuel extraction is reduced fossil fuel extraction and nothing else.  Nevertheless, the policies we need to keep these fuels in the ground won’t be adopted unless the costs are relatively bearable.  It’s in this sense that I suggested that green investments should be thought of as a form of adaptation, not to climate change but to climate change policy.

The bad news is that there has been little success in the US in getting the public to make an early commitment to the kinds of investments that will reduce the cost of controlling carbon.  Even Obama’s high speed train initiative, meager as it was, was largely rejected.  The good news is that once we start putting a price on carbon, it is likely that the politics of green investment will change in a hurry.  A new rail line looks more inviting if you’re shelling out $10 a gallon at the pump.  With luck the investment side of the policy can get up a head of steam before fossil fuel restriction becomes draconian.

There’s a second kind of policy adjustment that will be needed when carbon gets priced: counteracting the negative incentives this may generate in other parts of our economy.  Here’s an example.  When fossil fuels start to get really expensive, there will be an even greater demand for biofuels.  Farmers will be able to make more money by ripping out their food crops and planting fuel crops instead.  Up to a point this may even be warranted.  But we live in a horribly unequal world where many people live in luxury while millions of others starve for lack of income.  Shifting large parts of the world’s food production to biofuel crops so that the relatively affluent strata are not inconvenienced would be unconscionable.  Thus either regulations, taxes or subsidies need to be used to keep food production up and food prices at an affordable level.

Climate policy needs to be multifaceted and multi-instrumental.  It’s true, however, that one big piece has to be direct restriction, through taxes or permits, on the extraction and burning of fossil fuels.

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More Economic Illiteracy from the New York Times

I’d have more time to enjoy life if I didn’t feel compelled to correct gross economic errors in places like the New York Times.  I try to give it a day, but if someone else like Dean Baker doesn’t stomp on it first I have to do my bit.

Today’s absurdities can be found in an article about the EU’s push to measure the underground economy—stuff like prostitution and drugs—to improve their estimates of the region’s GDP.  (They’re also switching to a reclassification of R&D expenditures, something the US has already done.)  Actually, in many of their national economies large swaths of the vice trade are fully legal, tastefully zoned, and not underground at all.

Anyway, gross error number one is the claim that, by doing a better job of measuring commercial sex and drugs, statistical agencies will give the impression that economic growth has improved—that this is even their motivation.  No, no, no!  It’s not like that at all!  There will be a footnote in the GDP tables explaining that coverage changed between one quarter and the next.  In fact, they’ll put out two tables side by side, one with the change, the other without.  That will continue for a year or two, even longer if they can’t put together a methodology to extend the new computation back in time.  Sure, some rubes will try to compare numbers from one table to another, not bothering to read the small print, but econoblogging guard dogs like me will give them hell for it.

In fact, I’ll give the New York Times hell for it if they print an article a year or two from now saying that EU GDP shot up, when it was just a change in the methodology.

Then the second blooper is the discussion in the latter part of the article about whether including sex and drugs (without rock ‘n roll, a travesty) will make GDP a worse measure of well-being.  Huh?  GDP is not a measure of well-being.  No one—no one!—in the statistical agencies goes through the expenditures item by item and screens them for whether they make the world a better place or not.  I mean, nuclear weapons are included in GDP.  (They’re entered at cost.  The demand price would be much higher—ask international terrorists or James Bond villains.)  GDP is about how much money is flowing through the economy to produce and purchase goods and services.  That’s something you might want to take into account if you’re looking at the broader picture of how a country is doing, but mainly for a sense of whether the macroeconomy is on track.  Every introductory textbook, even the bad ones (i.e. not mine), say this.

Sorry for the rant, but now the world is back in balance.  The New York Times has disseminated BS and I’ve complained about it.  Life remains normal.

Switched at Death

This switcheroo by ABC News is really something.

"Quick!  Get me footage of Israelis being bombarded by Arab terrorist rockets!"

"Sorry, there apparently isn't any.  Not much damage there.  But we do have these powerful clips of Palestinians whose houses have been destroyed by Israeli rockets."

"That's good enough.  Call them Israelis and let's get on with it."