Making Sense of Brad DeLong's "Making Say's Law True in Practice"

Mark Thoma at Economist's View links to Brad DeLong's post Making Sense of Friedrich A. von Hayek in which DeLong once again reiterates his bizarre notion about "making Say's Law true in practice although it is false in theory." "Say's Law" (which is neither Say's nor a law!) is not even false in theory -- it is self-contradictory nonsense -- a "liar's paradox."

Making Say's Law "true in practice" is not consistent with Keynes's critique of the vulgar classical notion that "supply creates its own demand." As Keynes pointed out in chapter 23 of the General Theory, "Notes on Mercantilism...," the rejection of the wages-fund doctrine undermined one of the foundations of Say's Law: "Mill's successors rejected his wages-fund theory but overlooked the fact that Mill's refutation of Malthus depended on it." Dudley Dillard called Say's Law a corollary of the wages-fund doctrine.

But it gets weirder. As the Sandwichman has explained ad nauseum, the so-called lump-of-labor fallacy is a version of the wages-fund doctrine attributed to unions by their critics. Moreover, a standard refutation of the fallacy invokes the claim that "supply creates its own demand." The following sentence is true. The preceding sentence is false. Liar's paradox.

Brad DeLong knows that the lump-of-labor and the wages-fund doctrine are homologous. He knows that the wages-fund doctrine is a "standard move in the rhetoric of reaction." We discussed it 15 years ago.

This discussion, retrieved from PEN-L archives from January 1999, began with a discussion of a Louis Uchitelle column from the New York Times about Robert Heilbroner and his dissatisfaction with the narrow focus of modern economics. I challenged Mankiw's claim that economists do positive economics without normative judgments, arguing that economists simply disguise their value judgments as "descriptive statements" that they've cherry-picked from the data.  DeLong asked me for an examples. After giving my example. the following exchange ensued:

Sandwichman:

But, Brad, while we're asking for examples, can you give me an example of any economist who has challenged the sources of Samuelson & Nordhaus's perennial lump-of-labor fallacy? If anthropologists were as accommodating as economists, Piltdown man would still be in our evolutionary family tree.

Brad deLong:

Samuelson and Nordhaus's "lump of labor" fallacy is the Classical doctrine that fiscal and monetary policy cannot affect the total amount of employment--that the number of hours worked is fixed, unchangeable, unresponsive to government policies. And that the best we can do (when confronted with a situation like Europe's 10% unemployment today, or America's 25% unemployment in the Great Depression) is to spread the (limited) amount of work around fairly. 

But what Samuelson and Nordhaus want to argue--I think correctly--is that we know very well how to get to a better outcome in which unemployment is low not because a lot of us are working part-time (when we would rather be working full-time), but because demand for labor is high...

Sandwichman:

Ah, now we're getting somewhere. Wouldn't that Classical doctrine be what is known as the wages-fund doctrine, Brad?

Brad deLong (ellipsis in original):

Yep. But it remains alive, a standard move in the rhetoric of reaction to use against demands that the government do something to make the economy behave better... 

Sandwichman:

You bet the wages-fund doctrine remains alive as a standard move in the rhetoric of reaction. One need only peel back the textbook onion one layer from Samuelson and Nordhaus to the Raymond Bye and William Hewett textbooks of the previous generation (1930s, 1940s, 1950s). There you find the same hoary lump-of-labor fallacy forthrightly likened to the "general overprodution fallacy". Here is Bye's explanation of why the lump-of-labor fallacy is a fallacy:

"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." 

According to this explanation, then, any monetary or fiscal action of the government for the purpose of "creating jobs" is futile because all it can do is divert the means for employing labour from its natural course (determined by the identity of supply and demand), "at the expense of the other laborers who would have been employed, and at the expense of society, which has less wealth than might have been." 

I have another question, Brad, at what point in the history of political economy did the workers, trade unions, and social democratic politicians suddenly and inexplicably embrace the reactionary doctrine of the wages-fund? I'm puzzled because all I can ever find is attribution of this theory of the lump of labor to the workers, trade unions etc. On the other hand, I can find quite a bit of repudiation and denunciation of the wages-fund doctrine from socialists, trade unionists etc. Not the least from a certain K. Marx. 

Brad deLong (ellipsis in original):

that I do not know. Let me hunt around and see if I can find anything... 

Sandwichman:

I'd be much obliged. 

Brad must not have found anything. He never got back to me on that question. A year and a half later (August 2000), though, the question of the lump of labor arose again in Brad's admiration of some passages in Paul Krugman's book The Accidental Theorist.

Brad deLong (bracketed interpolations in original):

But my most favorite pieces of the book of all are three passages that go to the heart of Krugman's commitments--both moral and intellectual. The first is a biting denunciation of William Greider for being an "accidental" theorist: someone who does not think issues through, but who just looks at surfaces without peering into depths or thinking coherently and whose thought is thus shaped by implicit, unexamined theories of which he is not conscious:

" ...reducing the number of workers it takes to make [manufactures] reduces the number of jobs in the [manufactures] sector but creates an equal number in the [services] sector, and vice versa. Of course, you would never learn that from talking to [manufacturing] producers, no matter how many countries you visit; you might not even learn it from talking to [services] manufacturers. It is an insight that you can gain only... by engaging in [economic] thought experiments."

Sandwichman:

Ironically (and ironic is too mild a term for it), the position from which Krugman criticizes Greider is itself based on an implicit, unexamined theory of which he is not conscious. That accidental theory holds that increasing the volume of trade is the only and certain way to expand employment (and, by implication, raise wages).  

BUT WAIT! Krugman's own "accidental theory" has a name. And I'm sure he's heard of it. I know Brad has. It is the wages-fund theory of classical political economy [correction 2014: I should have said "Say's Law, which depends on the wages-fund doctrine"] -- sometimes referred to as the discredited wages-fund doctrine. So Krugman beats Greider over the head with a defunct doctrine and Brad applauds. 

This indeed reminds one of Keynes. To be exact, it reminds one of Brad's "most favorite" Keynes quotes:

 "Practical men, who believe themselves to be quite exempt from any  intellectual influences, are usually the slaves of some defunct  economist. Madmen in authority, who hear voices in the air, are  distilling their frenzy from some academic scribbler of a few  years back..."

Brad and I had a brief exchange about the wages-fund theory a while back and I quote his characterization of it: "Yep. But it remains alive, a standard move in the rhetoric of reaction to use against demands that the government do something to make the economy behave better..." Putting two and two together, then, one of Brad's most favorite pieces of Krugman is when he employs a standard move in the rhetoric of reaction. Hmmmm.  

But just to carp on this theme a few moments longer, I shudder to mention that Krugman's allegation against Greider (and it is only an allegation -- a speculation really about how his thought has been "shaped") is that he, Greider, is making a static assumption, ultimately based on what was once called (Wilson, 1871), a "Unionist reading of the wages-fund theory."

I asked Brad some time ago just when it was that workers, trade unions and social democratic politicians (not to mention populist  muckrakers) enthusiastically but implicitly embraced the reactionary doctrine of the wages-fund theory. He replied: "that I do not know. Let me hunt around and see if I can find anything. . ."  

Brad didn't get back to me on that.

Brad never got back to the Sandwichman on that question. So the Sandwichman had to hunt around and see if he could find anything...

SCIOD 5: Supply Creates Its Own Demon

In August of 1807 several of Manchester's most prominent citizens petitioned the British government to grant an award to Edmund Cartwright for his valuable contribution to industry and commerce made by the invention of the power loom and other mechanical devices. Among the petition's signatories was Peter Ewart, an engineer and manufacturer who the following year was to read at the Literary and Philosophical Society of Manchester the historically significant paper, "On the Measure of Moving Force."

Ewart's precocious mechanical aptitude as a young boy is reminiscent of the character, August Eschenburg, in the Millhauser story mentioned earlier. From the age of nine, Ewart haunted the workshops of a watchmaker and a millwright and by the age of twelve had built himself a makeshift clock out of wooden parts. In memoirs of his childhood, he recalled lying awake at night, wondering if his clock was still operating and getting up from time to time to check on it.

In his 1808 paper, Ewart addressed an old controversy about how to estimate the force exerted by bodies in motion. Ewart supported the argument that force equaled the mass of the body multiplied by the square of its velocity; the other side argued that it was mass multiplied simply by velocity. At the time, British mathematicians and natural philosophers adopted the latter position, while engineers, like James Watt, subscribed to the former. Ewart's analysis directly influenced James Joule's concepts of work and vis viva and consequently played an formative role in the scientific debates that established the laws of thermodynamics.

Together with Edmund Cartwright and James Joule, Peter Ewart thus acted as a sort of collective conduit, transmitting an essence of Baron von Kempelen's ersatz chess-playing automaton from one end to James Clerk Maxwell's molecule-sorting demon at the other. Thomas Pynchon would be intrigued. Maxwell conceived of his demon (1867) just around the time Jevons was expounding on his paradox (1865) and Mill was recanting the wages-fund doctrine (1869). It was William Thomson (later Lord Kelvin) who called it a demon, Maxwell simply referred to it as a "being" To illustrate the strictly statistical nature of the second law of thermodynamics, he envisioned a vessel containing air at a uniform temperature, although the individual molecules are not moving at uniform velocities:

Now let us suppose that such a vessel is divided into two portions, A and B, by a division in which there is a small hole, and that a being, who can see the individual molecules, opens and closes this hole, so as to allow only the swifter molecules to pass from A to B, and only the slower molecules to pass from B to A. He will thus, without expenditure of work, raise the temperature of B and lower that of A, in contradiction to the second law of thermodynamics.

It's not as if Maxwell was trying to throw cold water on the second law, though. On the contrary, he described the second law of thermodynamics as having "the same degree of truth as the statement that if you throw a tumblerful of water into the sea, you cannot get the same tumblerful of water out again." Yet a great deal of free energy has been expended in the effort to exorcise Maxwell's demon. Each tumblerful of critique tossed into the ocean of demon exorcism becomes similarly dissipated.

Another embodied link between Maxwell's demon and von Kempelen's automaton surfaces in the form of information theory in the mid-twentieth century. In 1950 Claude Shannon of Bell Laboratories wrote the seminal paper on "Programming a Computer to Play Chess." In it he discussed the previous literature on the subject of chess-playing machines, including a reference to Poe's essay on "Maelzel's Chess Player." The following year, Leon Brillouin of I.B.M. published an article in which he used Shannon's discussion of information theory to show that "Maxwell's Demon Cannot Operate." It has more recently been argued that the impetus for Brillouin's argument – relating information and thermodynamic entropy– arises from a misconception of what Maxwell's intention was in positing the demon thought experiment.

Math Anxiety: Sandwichman's father was a carpenter

As that famous non-meteorologist, Bob Dylan, once sang, "You don't need a weatherman To know which way the wind blows."

Some background on the Gödel caper: about a week and a half ago, John Quiggin posted at Crooked Timber on "Austrian economics and Flat Earth geography." There was a bit of discussion there of Gödel incompleteness, mathematical formalism and economics, by John, Lee Arnold and Scott Martens.

Sandwichman posted several comments having to do with Henry Hazlitt's indignant response to Keynes's statement in the General Theory that classical economists resemble Euclidean geometers in a non-Euclidean world and, more extensively, on John Maurice Clark's 1921 essay "Soundings on non-Euclidean economics."

That essay is central to episode 12 of SCIOD, "Euclidean Rhapsodies" which is scheduled for publication on EconoSpeak on September 2. There were several allusions to "non-Euclidean economics" before Keynes's analogy -- by Pigou, Wesley Mitchell and Clark. The important things to keep in mind is, first, that "non-Euclidean economics" is a self-conscious metaphor but, more importantly, it is also a critique of a stealth metaphor.

Economists are not "simply doing math" when they use math in their arguments. They are also making claims about the relationship between their models and the world. You don't need to be a mathematician (or a mathematician's son) to question the validity -- even the coherence -- of those claims. Here is how Clark framed the issue:

It is fairly obvious, if one stops to think of it, that there are systems of economics with axioms fully as far removed from each other as the geometrics of Euclid and the non-Euclideans; perhaps as far apart as the conventional physics and Einstein. Probably the foremost non-Euclidean economist is Professor Veblen, and his theory of invidious prestige might be called a theory of economic relativity. 

Orthodox economics undertakes to interpret equilibrium: Veblen undertakes to interpret progressive change. And in the social world this is much the same as saying that orthodox economics studies the assumptions of contentment and Veblen the assumptions of discontent, both of which are undeniable facts. Since undeniable facts are difficult to ignore, the net result is very largely to call them by different names. 

… 

What do I mean by non-Euclidean economics in the present instance? The question can best be answered by taking six axioms which represent in a general way what might be called the orthodox position on a number of important points, and inverting them. …

It might be objected, pedantically, that Clark's axioms were somewhat arbitrary -- in a 1924 revision, he expanded them to eight -- and that his "inversions" were not, strictly speaking, inversions. Here are the axioms, the two added ones are in italics:

Proposition 1. Economics is the science of wealth, and wealth consists of things (a) useful, (b) limited in supply, (c) exchangeable, (d) appropriable. 

Proposition 2. Consumption is the end of economic activity and production is a means to that end. 

Proposition 3. The standard of economic service is the gratification of human wants through the increase of marketable goods and services. 

Proposition 4. A bargain between two persons concerns primarily those two persons, and only incidentally, under special conditions, becomes ‘affected with a public interest.’ 

Proposition 5. As a general rule, cost varies in proportion to output: “overhead costs” which are independent of output are the exception and arise in connection with large fixed capital only. 

Proposition 6. Private enterprise is necessary and efficient because people will work and sacrifice for their individual ends where they reap the fruits themselves and will not work as well for a collective end. 

Proposition 7. The rational foresight of individuals is at the basis of individualistic economics. 

Proposition 8. Capital, including machinery, consists of instruments of production utilized by human beings for the production of wealth.

Clark's father, by the way, was John Bates Clark, pioneer of marginal productivity theory.

Barkley Rosser Cuts Gödel's Mustard

It appears the Sandwichman has inadvertently stumbled onto Professor Rosser's inherited PRIVATE intellectual property:

"I do not disagree with your main point in this point, but please do not join the long list or [of] ignorami who spout off about Gödel inappropiatel[y], and, sorry, this post does not cut the mustard." 

Having read somewhere that Gödel's theorems are often referred to in the singular, I committed the unpardonable faux pas of assuming that I, a mere ignorami, could do the same. I also cited some folks views on Gödel that seemed reasonable to me. I must admit to having skimmed parts of a couple of articles by Professor Gödel Rosser that didn't seem wildly out of sync with the main point of my point post.

One of those articles was a review essay on a book by Weintraub on the Evolution of Mathematical Economics. The other article was titled "Belief: Its Role in Economic Thought and Action" and again I didn't see anything there that flatly contradicted my argument. Here's some of what Professor Rosser wrote there:

In the face of this Kuhnian critique, many have attempted to salvage something of the positivist apparatus. A strong response is Friedman’s emphasizing the predictive content of a theory. But a serious problem for economics arises when we see the severe disagreements over appropriate econometric techniques and methodologies that occur. It is rarely unequivocal that one model predicts better than another. 

A widely discussed middle ground was staked out by Lakatos (1970) using the concept of the 'methodology of scientific research programs.' Such a program is judged on its 'fruitfulness' in generating interesting and useful questions in a progressive manner. Within the program, positivist rules apply. But the program as a whole is a paradigm in Kuhn’s sense, ultimately judgeable only by some higher level criterion of belief. Within the program, a 'hard core' set of axioms must be accepted without question and are not testable by positivist methodologies, much like the undecidable statements in a Gödelian logical system [emphasis added]. The hard core is protected by a 'protective belt' which fends off arguments with a 'positive heuristic' that sometimes turns an attack into supporting evidence.

So where does this leave economics? At the level of crude empiricism of the instrumentalist sort, a remnant of positive economics remains. 

… 

The problem becomes more serious in moving from raw data to generalizations and to theory. Encountered are all the issues of paradigm conflicts and the ultimate unjudgeability of scientific research programs. Despite all efforts at mathematical abstraction, normative aspects become very important in these conflicts and judgments. There is the basic question: do economists make unrealistic assumptions to generate predictions which satisfy their normative prejudices? 

A notorious example from the perspective of many non-economists is the assumption made in standard neoclassical economic theory of 'rationality' on the part of economic agents. This assumption is that people know what they want, that what they want is internally consistent, and that they act to get what they want to the best of their ability on the basis of the information available to them. But there is considerable evidence that people do not always know what they want, that even if they think they do that it is frequently internally inconsistent, and that their behavior reflects these inconsistencies.

I invite and welcome substantive criticism. I don't consider "you're over your head." "do not join the long list of ignorami," "this is family for me" or "this post does not cut the mustard" to be substantive arguments. I'm flattered to hear that the Barkster does not disagree with my main point and would dearly love to read elaboration on that, too!

Your call, Barkley.

Addendum to SCIOD 4: Liar's Paradox

Gödel's Theorem illustrated with regard to Say's Law and the Theory of the Lump of Labour:

1. "...a fallacy long recognized by economists as being especially pernicious. It is based upon the old exploded 'lump of labor theory'—the theory that there is a limited amount of work to be done. The truth is, of course, that every worker turning out a salable product thereby automatically generates a demand for other products, and thus sets others to work."


2. "The theory of a wage-fund and that of a 'lump of labor' naturally cohere, and there seems to be as much truth in one as in the other."


3. "Mill's successors rejected his wages-fund theory but overlooked the fact that Mill's refutation of Malthus depended on it." -- Keynes


4. "Of all the opinions advanced by able and ingenious men, which I have ever met with, the opinion of M. Say, which states that, Un produit consommé ou detruit est un débouché fermé appears to me to be the most directly opposed to just theory, and the most uniformly contradicted by experience." -- Malthus

Daniel R. Fusfeld (1980) "The Conceptual Framework of Modern Economics."  Journal of Economic Issues, 14, 1, pp. 7-8:

Gödel's theorem offers a profound challenge to the theory of knowledge on which logical empiricism is based. Unprovable propositions compromise the completeness of theoretical models. The results depend on the assumptions made about the unprovable propositions, and since those assumptions cannot be proven to be correct (or incorrect), the results must also be unprovable. If investigators try to avoid assumptions by using casual empiricism as the foundation for their unprovable propositions, they will then find themselves testing their hypotheses with the empirical data from which their casual empiricism was drawn, and the argument becomes circular. The only alternative is to leave the entire system open and unprovable through pure assumption or faith. The knowledge derived from formal axiomatic models must be imperfect, subjective, problematic.  

Gödel's theorem has had little impact on economic method, however, and has not been discussed by economists [Sandwichman: prior to Mirowski]. They have always used the ceteris paribus assumption to close their models. The embarrassing presence of an undecidable proposition can be avoided by inserting at any convenient point in the chain of deductive reasoning the simple assumption that "everything else remains the same." This procedure closes the model at that point and allows the remaining axiomatic model to be logically complete -- qualified, of course, by the "as if" assumption made when "everything else remains the same." This procedure was traditional in economics long before the epistemological problems raised by Gödel's theorem were recognized. Economists have been able to proceed as if Gödel had never lived.

"Gödel's Theorem seems to me to prove that Mechanism is false, that is, that minds cannot be explained as machines." J. R. Lucas (1961) "Minds, Machines and Gödel." Philosophy, 36, 137.

SCIOD 4: Paradox Laws

The moral to this story, as to any tale, is not fully circumscribed by its plot. The story's composition, its reception and retelling, the motives of its narrators are all implicated. The customers crowding the cheap market are not all there to buy the products on display. Some show up simply to loiter and observe. "In the flaneur," Walter Benjamin wrote, "the intelligentsia sets foot in the marketplace — ostensibly to look around, but in truth to find a buyer."

The supply of explanations creates its own demands. At the plot level alone, the theoretical consequence of Say's supposed law is that overproduction – a general glut on the market – is impossible. Leaving the "true" meaning of Say's Law to the pedants, what concerns us here is precisely its indeterminateness. Dogma arises out of mystery and assertion. The anthropologist Peter Yu describes the reasons given for ritual acts as being linked to a "general system of thought. If the system changes, as frequently happen, without disturbing the ritual acts, they will be reinterpreted in terms of the new system." Whatever else they are, whatever other meanings and uses they have acquired, the exchange of commodities or services for money and of money for commodities or services are ritual acts. In this case, the explanation of those ritual acts, the law that supposedly governs them, has itself become a ritual act. A textbook from the mid-19th century asserts dogmatically:

The proposition, that all men desire wealth, is inconsistent with the occurrence of a general glut. Some have supposed such a thing possible; it is plainly impossible.

So what exactly does "the proposition, that all men desire wealth" mean? Why is this proposition, even if true, "inconsistent" with a general glut? What is so "plain" about an impossibility asserted on the grounds of an alleged inconsistency? And finally, when is an inconsistency not inconsistent? Answer to the last question: when it is a paradox. Say's Law (or Platitude) has also been referred to as Say's Paradox, particularly in light of its relationship to another paradox – proposed by William Stanley Jevons in 1865.

"It is wholly a confusion of ideas," wrote Jevons in The Coal Question, " to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth." He went on to explain:

As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.

In other words, to recall Rasbotham's Rule: "A cheap market will always be full of customers." No sooner is a product created than it opens a market for other products. Supply creates its own demand, not least because more supply makes products cheaper... and we all know what happens in a cheap market.

As with any aphorism, there are a lot of underlying assumptions, qualifications and corollaries to Say's Law, Jevons's Paradox and Rasbotham's Rule that are "understood" (or perhaps they are not understood, misunderstood or understood differently in different circumstances by different people). This sea of ambiguity make it possible for the same authority to believe in Say's Law and simultaneously scoff at the Jevons Paradox even though they are simply two statements of the exact same principle. There is, indeed, such a thing as being "too profound."

Both positive and negative valences attach to the bird trapped inside the hollow paper figure, the man concealed in the chess-playing automaton, the enigma of steadfast doctrines that dissolve into a mare's nest of platitudes and paradoxes. The economists' economic laws and theoretical models are, in fact, no more autonomous in their moves than was von Kempelen's mechanical Turk.

Theory of the Lump of Labour: "not as simple as it has been supposed to be"

Eleventh Special Report of the Commissioner of Labour. Regulation and Restriction of Output, reviewed by David F. Schloss, The Economic Journal, Vol. 15, No. 60 (Dec., 1905), pp. 558-564.

In the concluding chapter it is stated, that "it will probably appear to one who has read the foregoing Report that a study of the question of restriction of output in Great Britain is not as simple as it has been supposed to be." This is a conclusion which the brief analysis of the Report contained in the preceding pages will, it is believed, explain and justify.  -- David F. Schloss

In his 1891 article, "Why Working Men Dislike Piece Work," David F. Schloss, reported a conversation with a laborer making washers on piece work. "I know I am doing wrong," Schloss quoted him. "I am taking away the work of another man. But I have permission from the Society." It was to those italicized passages that Schloss assigned the name, "the Theory of the Lump of Labour."

In accordance with this theory it is held that there is a certain fixed amount of work to be done, and that it is best in the interests of the workmen that each shall take care not to do too much work, in order that thus the Lump of Labour may be spread out thin over the whole body of work-people. As the result of this policy, it is believed that the supply of available labour being in this manner restricted, while the demand for this labour remains (as it is supposed) unchanged, the absorption into the ranks of the employed of those who are now out of work will follow as a necessary consequence. 

As I was saying...

A little over a year ago, Sandwichman posted Peer Review: Economists and the Rhetoric of Groveling. It may seem a bit unfair to single out economists for engaging in a behavior that is undoubtedly universal. Folks grovel. Indeed, the use of the word "folks" -- as in "we tortured some folks" -- is a prime example of groveling.

My point, though, was that much of what economists perceive as economics is no such beast. It's genuflection, plain and simple. Or, as Fitzmaurice observed regarding the rhetoric of late modern English letters, "the rhetorical structures adopted by the men seeking patronage indicate the extent to which epistolary mendicity is conventionalized in humiliative discourse..."

In fewer syllables: untruth abounds in the service of groveling. To be more specific, the form this groveling often takes relies on denigrating lower social orders: beggars, cranks, shirkers, free-loaders, featherbedders, manual laborers. It's a pathetic attempt to persuade one's social superior to identify with the supplicant by emphasizing their mutual distinction from the rabble.

ProGrowthLiberal asks if economists should be honest or civil. Isn't it a bit late for civility? The only question left is whether they should be honest or deceitful in their incivilities. And I don't mean any disrespect to economists when I suggest they are "pandering lackeys." I simply don't see any immanent grounds for exempting them from the consequences of their own rhetorical strategies.

The Natural Rate Does Not Equal NAIRU: A Reminder

I am not keen on poking at a post appearing on Angry Bear, a friendly blog that often links favorably to posts here by many of us and with which I generally agree.  But maybe it is precisely because of this usual agreement that I am posting here an extension I made of a comment there on an August 1 post by Edward Lambert arguing that not only is 6.2% the US natural rate of unemployment, but that it is also the NAIRU (Non-Accelerating Inflation Rate of Unemployment), because, hey, the two are equal to each other, period.

Much of the post is quite good and interesting.  Lambert has a model that focuses on such things as capital stock capacity utilization and such measures for land aalso, as well as the unemployment rate.  Based on his model, levels of capital stock capacity utilization are now in ranges that look like full employment of capital stock, at least.  This may reflect the low rate of capital stock formation in recent years, a supply-side damage coming from insufficient aggregate demand over an extended period of time, but Lambert may well be on to something. 

Let me also state that I am not necessarily opposed to the idea of a "natural rate of unemployment," although I think that one should not make too much of it, which Lambert does (along with many others).  I think it is more useful to think of a "natural rate of employment," more relevant to the current state of low labor force particpation.  Indeed, Lambert trumpets that he beat out the Brookings Institution in forecasting the most recent unemployment rate.  They (and "most economists") said the UR would go down while he said it would go up, and, whoop de doo!, he was right.  However, it turns out that this was not due to some failure of job growth, but due to a favorable response on the labor force participation side.  There are plenty of reasons for employment to continue rising without any inflationary presssure in the near term, something Lambert actually admits, but what happens to the unemployment rate per se may really mean nearly nothing.

As it is, the original definition of the natural rate of unemployment by Milton Friedman back in 1968 was simply a rate that the economy would tend to go to if left to itself with "neutral" policy (if that can be defined) at any point in time.  Such may well exist. The issue is whether this natural rate has any signfiicance for policy, and for that things are not at all convincing.  Indeed, from the very beginning, others who were pushing similar ideas, notably Edmund Phelps, were heavily caveating the concept with the fact this natural rate is highly endogenous to the recent rate, particularly for labor force participation reasons, many of those related to how labor market skills (if not labor skills themselves) can deterioriate during lengthy periods of unemployment, an issue most relevant to the current situation.

My big complaint here has to do with identifying this natural rate with NAIRU, a highly problematic concept.  Friedman vaguely suggested such a link in his original talk, but he never really made a case for why inflation would not only increase, but that the rise would accelerate.  Indeed, aside from some handwaving about expectations, the case for why such an acceleration should occur at URs below the natural rate has never ever been made anywhere in any rigorous or coherent way by anybody.  That said, the subsequent inflation of the 70s was blamed by many on the supposedly excessively stimulative policies of the 60s, even as the acceleration of that inflation coincided with rising unemployment (and unemployment rates) in the notorious staglation.  But this somehow came to be identified with Friedman being right, and the identification of the natural rate with NAIRU entered macro textbooks at nearly all levels despite the lack of clear or rigorous or even empirically validated arguments supporting it.  It became something "everybody knows," (or should know) with even progressive economists who should know better such as Lambert falling for this empty nonsense.

Quite aside from the warnings from Day One about endogeneity of the natural rate to the recent actual rate, the famous episode of the 90s when Greenspan, urged on by Janet Yellen btw, allowed continued stimulative monetary policy even as the UR went below its then widely advertised natural rate and we saw falling inflation rather than rising, much less accelerating.  Many considered this to be the death knell of this identity, with some such as James Galbraith declaring it publicly in print in the Journal of Economic Perspectives in 1997 in "Time to Ditch the NAIRU" (although Jamie made it clear then that he had never thought much of the concept, and I don't think he has ever thought much of the natural rate concept either).

Now Lambert does recognize the Greenspan episode, but elides the issue  by saying that it set up the economy for the next recession, which took a good half a decade to show up.  What caused that recession in most peoples' books was the collapse of the dot.com bubble.  Now, maybe it was the stimulative monetary policy that goosed that bubble to ridiculous levels, but it had been going on for some time and was associated with real capital investment in that leading sector that did generate a lot of non-inflationary growth with lowered unemployment and reduced inequality.  Not too bad.  And the end of it was not associated with any increase in inflation.

Lambert's position is given in his final remarks:

"...when unemployment pushes below its natural level, the economy tends to overheat and become unstable.  At which point, the economy would like to return to its natural level.  The paths of that process can involve inflation, reduced output, falling capacity utilization and even tighter monetary policy."

Well, just two final comments on this.  One is that he leaves out what happened last month and also what happened during the three year period in the mid-80s when employment and output grew but the UR remained stuck at 7.0%, namely that labor force participation can increase, particularly if it has been "unnaturally" suppressed for an extended period.  The"natural rate of unemployment" may not even be tied to any particular level of the economy, much less its "natural" level.

The other comment is that in fact those declines in output and capacity utilization that have occurred in the past when "overheating" has occurred have usually been triggered by the tighter monetary policy, which has usually been a result of either actual inflation picking up or in many cases the Fed (or foreign central banks such as the ECB in recent years) getting nervous that inflation might pick up, in some cases spooked into doing so by taking too seriously all these fantasy stories so embedded in so much literature about the natural rate equaling the NAIRU.

This is a fantasy that needs to be exposed once and for all and banished from the textbooks once and for all, and indeed from publich discourse more generally, particularly by economists.

Barkley Rosser

Should Economists Be Honest or Civil?

The question of course is directed towards Laurence Kotlikoff. I guess this was an attempt to be honest:

The fiscal gap — the difference between our government’s projected financial obligations and the present value of all projected future tax and other receipts — is, effectively, our nation’s credit card bill. Eliminating it, would require an immediate, permanent 59 percent increase in federal tax revenue. An immediate, permanent 38 percent cut in federal spending would also suffice. The longer we wait, the worse the pain. If, for example, we do nothing for 20 years, the requisite federal tax increase would be 70 percent, or the requisite spending cut, 43 percent. Even if we do nothing — which, given Washington, is the likeliest outcome these days — we should at least be transparent about our insolvency. A bill introduced last year by the Democratic senators Tim Kaine of Virginia and Chris Coons of Delaware and the Republican senators Rob Portman of Ohio and John Thune of South Dakota would require the Congressional Budget Office, the Government Accountability Office and the Office of Management and Budget to conduct such “generational accounting.”

I have no problem with a well informed version of generational accounting but I do share the concern expressed by Dean Baker that Kotlikoff’s habit of ginning up very big numbers tends to scare more than it informs. Paul Krugman echoes Dean’s wisdom here. The day after this exchange over long-term budget forecasting, Kotlikoff offers Krugman this advice:

I think public intellectuals, like Paul Krugman, have a responsibility to act like grownups in speaking with the public. If they start calling people with different views “stupid,” they demean themselves and convey the message that name calling rather than respectful debate is appropriate conduct. It certainly is not … But what I’m writing about is not Paul Ryan. I’m writing about the level of national discourse. No one, and I mean no one, deserves to be called stupid.

Brad DeLong has already pointed out that Krugman did not call Congressman Ryan stupid. What Paul was really saying is that the Republican fiscal policy wonk was a con artist:

all the alleged fiscal responsibility lay not in the much-hyped changes to Medicare, but in magic asterisks claiming huge but unspecified savings from discretionary spending and huge but unspecified revenue gains from closing loopholes he refused to name.

Ryan has often called for large reductions in taxes on the well to do. Kotlikoff on the other hand frets that we are not raising enough in taxes to pay for all the things that the government has promised. And yet Kotlikoff wants us to be nice to politicians like Paul Ryan who are not being honest with us. I’m speechless.

Economist's Squares

Mark Thoma's daily links has jumped the shark, recycling mostly the same old same old 'celebrity' economic bloggers gossiping about each other. Case in point: "Simon Wren-Lewis and Nick Rowe Annoy Each Other... - Brad DeLong"

Plot summary: Simon and Nick disagree about something Paul said, so Brad steps in to settle the dispute (probably a rerun or at least a rehash of a sequel to a remake). Most Lucky-like ("...the skull the skull the skull the skull in Connemara in spite of the tennis...") sentence -- what Brad wrote:

Conventional monetary policy that swaps liquid cash for short-term safe nominal assets cannot help unless and until it summons the Inflation Expectations Imp and so makes interest rates at the zero interest rate lower bound consistent with the configuration of real interest rates across the risk spectrum that corresponds to the current Wicksellian natural rate.

What the reader sees:

Blah, blah, blah, blah, Nick Rowe, blah, blah, blah, Simon Wren-Lewis, blah, blah, Brad DeLong, blah, blah, blah, blah, Paul Krugman, blah, blah, blah, blah, blah.

Storyline for Economist's Squares (adapted from the storyline for Hollywood Squares):

Nine celebrity economist bloggers, seated in a three-by-three tier as in a tic-tac-toe board, joined two contestants, one of them a champion, in a game known best for the celebrities' wonkish answers to questions. The object was to win an otherwise standard game of tic-tac-toe by determining whether a celebrity economist was giving a correct answer to a general knowledge question or bluffing ("agree" or "disagree"). Contestants selected a celebrity, for which host Mark Thoma reads a question; a correct decision to agree or disagree by the player allowed him/her to place their mark in that box, while the opponent's mark was placed there if said decision was incorrect (unless it led to tic-tac-toe, in which case the contestant had to earn the box). During the first complete game of a show, a "Secret Square" game offered the contestants a bonus prize package for a correct answer. The contestant winning the best-of-three match was champion and returned to face a new challenger.

Jobless Future or Futureless Jobs?

In a Washington Post Innovations blog op-ed published July 21, Vivek Wadhwa wrote:

In an op-ed in The Wall Street Journal, former Treasury Secretary Lawrence Summers revived a debate I’d had with futurist Ray Kurzweil in 2012 about the jobless future. 

He echoed the words of Peter Diamandis, who says that we are moving from a history of scarcity to an era of abundance. Then he noted that the technologies that make such abundance possible are allowing production of far more output using far fewer people.

Asking the wrong question again. There will not be a "jobless future." There may not even be a future. And that's the good news!

The bad news is that if machines replace enough people (and everything else remains the same) then wages will fall to a low enough level that it will be cheaper to use people to do the work that machines could otherwise do. Of course, everything else won't remain the same.

When writing about jobless futures, "futurists" seem to forget that using more and more machines requires burning more and more fuel. Burning fuel emits carbon dioxide and requires more and more work to find and get and refine the fuel. Reductio ad absurdum implies that all the fuel and all the work will be expended going after the fuel to enable the process of going after the fuel -- a sort of perpetual inertia machine.

We won't ever get there. But we might travel too far in that direction to allow us to turn back.

Wadhwa makes a suggestion the Sandwichman has long advocated: "The only solution that I see is a shrinking work week. We may perhaps be working for 10 to 20 hours a week instead of the 40 for which we do today." I don't suppose Wadhwa realizes how deeply embedded the antagonism towards this "only solution" is among the high priests of fookerism.

Addendum to SCIOD 3: Petty Foggery and Political Arithmetick

"The meaning of fooker might be 'capitalist.'" -- Anatoly Liberman

In Chariots of the Luddites, I cited Dorning Rasbotham's allegation, "There is, say they, a certain quantity of labour to be performed..." as a precursor of Say's law of markets and the locus classicus of what eventually came to be known as the lump-of-labor fallacy claim. But who are "they"?

"They" turn out to be either John Graunt, William Petty or both. The following passage appears in Graunt's Natural and Political Observations made upon the Bills of Mortality:

We have said, 'Twere better the Publick should keep the Beggars, though they earned nothing, &c. But most men will laugh to hear us suppose, That any able to work (as indeed most Beggars are, in one kind of measure, or another) should be kept without earning any thing. But we Answer, That if there be but a certain proportion of work to be done; and that the same be already done by the not-Beggars; then to employ the Beggars about it, will but transfer the want from one hand to another…

There was some dispute about the authorship of the work which appeared under Graunt's name with probably the most credible explanation being that Graunt was indeed the author of the pathbreaking statistical analysis (and thus the "Columbus" of vital statistics) but that his intimate friend Petty may have contributed literary embellishments. Since the cited passage is more in the nature of an embellishment, it is quite possible, then, that Petty wrote it.

Just What the World Needs: Two More Introductory Economics Textbooks

Well, just maybe.  My offerings, Microeconomics: A Fresh Start and Macroeconomics: A Fresh Start are now available in print and as e-books.  The elevator version goes like this: the books embody substantial changes designed to close the gap between the way economics has been taught to undergraduates and the way it is practiced by professionals.  Their approach is empirical and open-minded.  They aren't my own personal take on the subject, since I hope some instructors will adopt it who aren't me.

They are published by Springer, so they don’t have the snazzy production values of the Big Boys.  But on the other hand you can buy them new for about $75 apiece.  (Hardbound, 450 pp.)

If you want the backstory, which will no doubt persuade you that these texts are what's been missing from your life all these years, click here.  And here are the links for ordering exam copies of the micro text and its macro companion.

Nike’s Bermuda Affiliates Are Named After Its Shoes

Forbes is also a fan of the good work of the Citizens for Tax Justice (CTJ) and note something a little odd:

What does Nike have to do with taxes? It turns out that Nike is very aggressive when it comes to sheltering profits overseas … Twelve of those subsidiaries are in Bermuda alone! The CTJ says that Nike has about $7 billion of profits parked offshore that are not being taxed by the United States or any other country … What is fun about this is that Nike apparently named its tax shelters after its shoes. According to the CTJ, 10 of the Bermuda subsidiaries are actually named after Nike shoes: Air Max Limited, Nike Cortez, Nike Flight, Nike Force, Nike Huarache, Nike Jump Ltd., Nike Lavadome, Nike Pegasus, Nike Tailwind, and Nike Waffle.

I guess you can say that the Nike tax planners have some fun with their jobs. But I do have a couple of issues with how CTJ is spinning this. Counting the number of affiliates in tax havens is not a great way of measuring profit shifting. If they parked $7 billion in one Bermuda affiliate, it would have the same financial impact. Also – this $7 billion figure must be an accumulation over time. Nike generates around $3 billion in profits each year on $25 billion in sales. I checked their 10-K which shows a 25% effective tax rate in part because 52% of their income over the past three years stays in the U.S. And some of the rest goes to distribution affiliates in other high tax nations. Of Nike’s sales, 55% are to foreign customers. But given the profits attributable to Nike’s trademarks, I guess one could expect more of the income coming back to the U.S.