Explaining the "other things equal" clause to Nick Rowe

At Worthwhile Canadian Initiative, Nick Rowe writes:

"Those of us who teach Intro Economics know we have to spend some time carefully explaining the "other things equal" clause, and why it matters. Because the students won't get it unless we explain it. We tend to take it for granted that the silent "other things equal" clause is understood, but it might not be understood by all."

Other things being equal, there's been a raging debate in philosophy of science over the past couple of decades regarding the legitimacy of "CP-laws" -- that is to say "laws" hedged by a ceteris paribus clause. The 'other things equal' clause may be headed in the same direction of a Santa Claus, something we let children believe in that we know doesn't exist. 

Anyway, there's a hilarious exchange in the 19th century between William Thornton and John Cairnes where they each respectively denounce and uphold and uphold and denounce seemingly "contrary" principles that are in fact simply different statements of the same principle. The secret to the debacle is the kakeidoscopic versatility of their respective ceteris paribus clauses. 

Just yesterday, I posted "Ceteris paribus, Dr. Jekyll tans his own Hyde" at Ecological Headstand. It's scheduled to publish on EconoSpeak next Tuesday as the penultimate installment in the supply-creates-its-own-demon series. But rather than send readers clicking all over the place, I'll just paste it again below:

"In too many cases one is unsure of exactly what restraints are being imposed and by what authority the exercise is legitimated. Fittingly, the history of ceteris paribus is a history of studied ambiguity." – Joseph Persky

Let us not worry about too many cases. Let's focus on the paradigmatic case. Persky identified Alfred Marshall's role in "spreading the word" of ceteris paribus:

"It is very likely that Alfred Marshall picked up his use of ceteris paribus from Cairnes. Although he doesn't cite Cairnes in his methodological discussions of the phrase, Marshall does use the following quotation from Cairnes in a discussion of the wages-fund theory: 'the rate of wages, other things being equal, varies inversely with the supply of labour.' 

"Whatever its origins, the fact remains that Marshall was the one to popularize ceteris paribus."

The phrase was actually "other things being the same," which appears eleven times in Cairnes's Some Leading Principles of Political Economy: Newly Expounded. Notice that Marshall cited Cairnes "in a discussion of the wages-fund theory." More specifically, Marshall was criticizing Cairnes's attempt to "resuscitate" the wages-fund theory, in which Cairnes avoided the old pitfalls "only by explaining away so much which is characteristic of the doctrine." Apparently, though, Marshall must not have noticed that it was precisely the infernal ambiguity of the ceteris paribus device that enabled Cairnes to explain away the pitfalls in the doctrine. Marshall went on to promote the use of the ceteris paribus "pound" in static analysis.

Persky's article mentions the methodological critique of ceteris paribus by twentieth century philosophers of science and cites Daniel Hausman's introduction to those arguments. A subsequent ceteris paribus "industry" has blossomed in philosophy in which "hardly a year passes without the appearance of at least a few articles on this topic in major journals." Although it would be an exaggeration to call it a consensus, there are cogent arguments "that extant attempts to save ceteris paribus laws from vacuity are massive failures." In a recent article, T. V. Carey has proposed Galileo's method of successive approximation as a "partial solution to the ceteris paribus problem."

While the philosophers are busy resolving the methodological difficulties raised by ceteris paribus, I would like to turn my attention to the political consequences of this magical clause. Cairnes's attempt to revive the wages-fund doctrine was a response to William Thornton's apparently decisive repudiation of it in On Labour Its Wrongful Claims and Rightful Dues; Its Actual Present and Possible Future. The wages-fund doctrine had lent pseudo-scientific legitimation to fierce partisan polemics against trade unionism.

Cairnes's response encompassed both defense and attack. It is in his defense of the wages-fund doctrine that the passage cited by Marshall appears. In a later chapter on trades unionism, Cairnes attacked a statement by Thornton to the effect that "the quantity of industrial work to be done is… 'at any give time a fixed quantity.'" Cairnes objected to this assumption vehemently:

"...I must make bold to say that, within the range of economic reasoning, no more profound fallacy finds a place than is contained in this inference; nor, I must add, is there one more pregnant with practical consequences of a pernicious kind."

The review of Thornton's book in The Edinburgh Review for July 1869 took a more good-natured and humorous view of Thornton's gaffe:

"That the rate of wages is governed, as Adam Smith and his followers have conceived, by the proportion between the capital disposable for the payment of labour and the number of the recipients of that capital, is a notion that Mr. Thornton scouts with contempt, and he consigns the chimerical 'wages-fund' to the lowest limbo of unrealities. Yet, while attacking the name, we find him occasionally, under the pressure of facts, using language which virtually admits the thing, as when he says, 'that at any given time the whole quantity of work to be done is a fixed quantity, and the uttermost which employers can afford to pay for having it done is a fixed amount'; and in other places his language recognises the inevitable fact that employment must be limited by the amount of capital which at the time being sets it in motion, that amount being the thing to which Smith, McCulloch, Fawcett, and other writers have assigned the offensive name."

Thornton erred in "virtually admitting" the chimerical notion that he "scouts with contempt." Cairnes compounded error by not noticing that the "profound, pernicious fallacy" he bitterly denounced on page 251 of his book was none other than a restatement of the wages-fund doctrine he had stoutly defended back on page 174.

How is it possible that both Thornton and Cairnes could commit the identical errors while taking diametrically opposite positions on the question of the wages-fund? The answer lies in the ineluctable vagueness and ambiguity of the ceteris paribus clause. In the hall of mirrors where "other things remain the same," what "other things" are included in or excluded from the ceteris paribus pound is tacit as is exactly how they are "the same."

Adding intrigue to irony, Persky credited William Petty with introducing the term ceteris paribus into economic discourse. It is also quite possible the Petty wrote the earliest version of Thornton's "fixed quantity of work to be done." Except in Petty's version it was "a certain proportion of work to be done," not a fixed quantity. There is a world of difference between a fixed quantity and a certain proportion. No doubt part of the shape-shifting magic of ceteris paribus arises from its equivocation on whether it is quantities or proportions or both that are being the same.

Maybe ceteris vertigus (other things being dizzy) would be a better name.

SCIOD 13: Beggars, Cranks and Feather Beds

Indeed? Wealth is everything, men are absolutely nothing? What? Wealth itself is only something in relation to taxes? In truth, then, there is nothing more to wish for than that the king, remaining alone on the island, by constantly turning a crank, might produce, through automata, all the output of England. -- J. C. L. S. de Sismondi, Nouveaux principes d'économie politique

The image of Sismondi's hypothetical king cranking out all of England's production recalls J. M. Clark's remark about armchair theorists grinding out misleading results. Sismondi has been portrayed at times as yet another kind of crank. For example, in their textbook, Labor Economics, Pierre Cahuc and Andre Zylberberg magically transformed Sismondi's sarcastic criticism of Ricardo into a "fantastic prediction" stemming from Sismondi's far-fetched "notion that technological progress destroys jobs."

Not all economists disdain cranks, though. In a 1934 BBC radio address, Keynes affirmed his allegiance with the heretics, "descendants of a long line of heretics who, overwhelmed but never extinguished, have survived as isolated groups of cranks." Four years earlier, in volume 2 of his Treatise on Money, Keynes declared his "strong sympathy with the school of writers of which Tugan-Baranovski was the first and the most original, and especially with the form which the theory takes in the works of Tugan-Baranovski himself, and of two American amateur-economists (cranks, some might say), Rorty and Johannsen."

Beggars occupy a lofty, strategic, albeit overlooked, station in the canon of political economy. It is, after all, "the beggar, who suns himself by the side of the highway," who supplies the conclusive illustration of Adam Smith's principle that the rich "are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants." As mentioned above, in Petty Foggery and Political Arithmetick, beggars also were fodder for John Graunt's skepticism about proposals for employing them productively. Likewise, Charles Davenant, in An essay upon the probable methods of making a people gainers in the ballance of trade, discoursed optimistically on the prospects of putting beggars to work.

Featherbedding (sometimes feather-bedding) erupted onto the lexicon of American slang in the late 1930s and escalated to a full-scale moral panic by 1943. Prior to 1938, there was no occurrence of the term in the Washington Post, the New York Times or the Wall Street Journal. Just before U. S. entry into World War II, the National Association of Manufacturers adopted outrage over "time paid but not worked" as one focus of a multi-pronged anti-union propaganda campaign. Other quarry included the union shop, absenteeism, union finances, strikes and the 40-hour work week.

At the beginning of February 1943, Barron's magazine published an article whose title alleged "'Featherbedding' hampers the war effort." Reader's Digest printed a condensed version in March. Congressional committees held hearings and even the Assistant Attorney General for the Roosevelt administration, Thurman Arnold, added his voice to the chorus of denunciations of featherbedding by organized labor. Senator Sheridan Downey of California described the Reader's Digest article as unfair and misleading, pointing out that:

… there are approximately 500 railroad engineers and firemen who have what we call a fast blue-chip run. The article in the Reader's Digest discussed that particular group of 500 men as though its members worked under conditions typical of those of hundreds of thousands of other railroad workers.

Featherbedding was defined by its detractors as one of the multifarious, nefarious union restrictions on output (motivated, allegedly, by a false belief in a fixed amount of work to be done). Arthur Ross noted sardonically that the evils of featherbedding were "customarily illustrated" by a "Chamber of Horrors" whose exhibits "remain about the same from year to year and from decade to decade." Labor lawyer Henry Kaiser called it "folklore."

Over the years, labor leaders and their sympathizers repeatedly disavowed the intention to restrict output. Four decades before the World War II featherbedding flap arose, the U. S. Commissioner of Labor launched an investigation into claims publicized by the National Association of Manufacturers that union work rules imposed restrictions on output. The 932-page Special Report of the Commissioner of Labor. Regulation and Restriction of Output found that union regulations affecting changes in work organization, methods or materials only resulted in "restrictions of output" when compared to some hypothetical level that might presumably be attained if employers could impose their efficiency plans at will – assuming the employers' schemes were well-founded (which often they weren't).

David F. Schloss – who, in 1891 coined the expression, "the theory of the lump of labour" – reviewed the Labor Commissioner's report in the Economic Journal for December 1905 and concurred with its conclusion that "the question of restriction of output in Great Britain is not as simple as it has been supposed to be."

Some 60 years after the U. S. Labor Commissioner issued his report on alleged restriction of output, Ivar Berg and James Kuhn critically examined economists' definitions and use of the featherbedding term:

Most employers and many economists define and use the term "featherbedding" in such a way as to condemn work rules and practices without a full consideration of all the facts. The condemnation rests upon a definition that assumes causes and consequences highly questionable in the light of work experience. 

Because the charge of featherbedding embarrasses unions and puts workers on the defensive, one can understand why employers use it whenever it is to their bargaining advantage. But why some economists should use the term to play the employers' game is harder to understand. Not being involved in the heated encounter between union and employer, economists might be expected to be wary of so value-laden a word as "featherbedding" and to examine its meaning and implications carefully. Often, however, they define and use "featherbedding" in a way indistinguishable from employers. 

These definitions of featherbedding assume, first, that only workers and union work practices lead to "featherbedding"; second, that these practices are wasteful and inefficient; and third, that since they are wasteful, emotion, not reason, prompts workers to "featherbedding." None of these assumptions is self evident except to those who affirm what they set out to prove. 

Few observers of business would be so bold as to assert that only workers engage in featherbedding practices, since many employees—managers as well as workers—try to minimize their expenditure of effort and to increase their leisure and privileges on the job. If "featherbedding" is peculiarly a worker and union activity, then its essence inheres not in the activity itself but rather in an employer's (or economist's) judgment. Only as employers object to some employee practices and ignore others can an outside observer determine what featherbedding is.

Advantage Ordo-Liberalism

At least in Hesse, Uber won’t be able to offer its peer-taxi service due to a ruling by a court in Frankfurt.  No, they weren’t objecting to the absence of an umlaut; rather to the fact that Uber doesn’t require that drivers have licenses or that they have to pick up anyone who needs a ride.  To understand this, note that (1) taxi drivers, like just about everyone else in Germany, go through apprenticeships that certify their mastery of the relevant skills, and (2) it is illegal for taxi companies to refuse service to anyone willing to pay for it.  The court ruled that if Uber wants to compete it has to meet these same criteria.

No doubt we will be hearing a lot in the coming days about how backward and inefficient, monopolistic even, the Germans are, and how they need to be rescued by Anglo-Saxon entrepreneurialism.  Not from me though.  I’m with the German court: the ordo part is not expendable.

The most important stipulation is the obligation to provide universal service.  If laissez-faire means that some people or parts of town won’t be served, scratch laissez-faire.  But maintaining a high level of skill is also valuable.  Maybe in only one ride in ten I’ll need a driver who knows obscure destinations and how to get to them, or how to avoid a particular traffic tie-up, but when I need it I really need it.  Guaranteeing that drivers are safe is obviously essential.  And there is a social interest in maintaining a living wage and professional respect for service providers of all sorts.  Obviously this is a question of balance, finding the right mix of competition and regulation, but the uber approach, like its name (with an umlaut) implies, puts the first over the second unconditionally.

If Uber’s take on taxi service is technologically superior, let them demonstrate this by competing on an equal social basis.

The Last Of The Wobblies

Two days ago my deep friend of a half century, William ("Billie") J. Grogan "blew his brains out," as it was first reported to me earlier today.  He was retired, living on a farm in Wisconsin north of Madison, where he was born of an engineering prof dad, just outside of "Daneco," as he called it (Dane County, which includes Madison), where he viewed them as being too regulatory and telling him what to do on his uber-green farm, very much up on the latest enviro tech and deep study of local ecology (his farm was a masterpiece of endangered species habitat, some of them quite obscure and seriously endangered), sitting on the divide between  the Rock and Wisconsin river watersheds, both tributaries of the mighty Mississippi.

The most immediate cause of his choosing to take his own life, by gun, apparently with the full understanding of his loving wife, a daughter of a participant in the Manhattan Project, who herself holds a PhD in Hindu dance, was that he had been in deep physical pain for many years, and finally simply, as the friend who reported this to me quoted his widow, "He just could not take the pain anymore."

He was a rebel against his academic ancestry, and had a long and complicated work career that involved real industrial worker experience, including at the now defunct Gisholt Machine Factory on East Washington Avenue in Madison, where a long time ago he was in a serious work accident that deeply injured him, causing pains that contributed to his suicide. After a long series of other work experiences his final job was as the IT guy in the physics department at the UW-Madison, where he even helped me out a decade ago in getting a highly technical paper in proper form for publication.

So, what about this Wobblie connection?  For many decades, and until the last time I asked him, he was an actual card-carrying member of the Industrial [I earlier incorrectly said "International"] Workers of the World, the IWW, or "Wobblies."  It seemed like a private joke.  I would occasionally ask to see his membership card, and he would pull it out, all in red, with dues paid up.  He was a notorious Irish wisecracker, who would regularly make up phoney stories about his various idiosyncratic experiences and exploits, many actually real, although you would never know which. But on this matter he never joked.

So, the IWW was founded in 1905, a "universal" (syndicalist) union to be of all workers, who also abjured all governments and were therefore anarchist. They had a violent rep in those days and were strong in isolated labor groups such as lumberjacks, often ethnically, such as the heavily Finnish lumberjacks of Northern Wisconsin, one of whom, the late Gus Hall, would end up as General Secretary of the US Communist Party for many decades.  But, no, Billie was not of that persuasion.

So indeed the Bolshevik Revolution/Coup was the moment of bifurcation for the IWW.  A substantial chunk became the major real working class/labor foundation of the US Communist Party.  The remnant that did  not join the Party became a rump that never really caused any serious future trouble to the Establishment, to be frank and honest. But it was this more idealistic anarchist group that my old friend adhered to most seriously for many decades, even paying his dues.

I can attest, as I followed his long ideological and intellectual meanderings, to the extent one could decipher them (he often spoke cryptically, some of it utter nonsense and some of it profoundly insightful and forward looking), that he retained his anarchist leanings along with his pro-labor leanings.  The former led him to locate in a place where he was minimally regulated (ant taxed) by local government, accurately knowing more about the local ecology than they did.  But I know that his past experiences as an industrial worker who suffered injuries on the job not properly covered for health insurance and all that, left him strongly supportive of the labor movement more broadly, and very much opposed to the increasing inequalities of income and wealth in America.

I may be out of line here in making this observation, as I have not spoken with his widow whom I both deeply love and respect, but, I do not think that it is an accident that this long-term member of a group that barely exists, maybe sort of in New York and Denver at least (latest google check), did himself in on the eve of Labor Day.  While the main motive for his suicide was his serious personal health problems, I think that probably the precise date of his doing himself in was not simply random. I know that he had been planning this for some time, and I honor his memory by noting what I suspect somebody would notice: that this old Wobblie, maybe not the last, but definitely one of the last, that the condition of the working class in the United States of America is not good.  On his death I report this, to honor my old friend as best I can.

Barkley Rosser

Later Addition: When I wrote this last evening, I was listening to a vinyl record Billie recommended to me nearly a half century, John Fahey's "The Transfiguration of Blind Joe Death," which I always associated with him.  The curious figure on the front of Blind Joe Death Transfiguring looks rather like him when he was being more obscure than usual, :-).

SCIOD 12: Euclidean Rhapsodies

"It is fairly obvious," John Maurice Clark, explained to Irving Fisher, Frank Knight and other participants in a 1920 American Economic Association seminar, "that there are systems of economics with axioms fully as far removed from each other as the geometries of Euclid and the non-Euclideans..."

Non-Euclidean geometry was topical in 1920. On May 29, 1919, a total eclipse of the sun could be viewed from Brazil and Africa and provided the opportunity to test a prediction of Einstein's theory of general relativity about the displacement of light from a star as it passes the sun. The conclusions from those observations were hailed as "the most important result obtained in connection with the theory of gravitation since Newton's day."

Clark's paper, "Soundings in non-Euclidean Economics," was not the first foray into this particular metaphor, nor would it be the last. In his inaugural lecture as Professor of Political Economy at Cambridge, "Economic science in relation to practice," Arthur Cecil Pigou quoted extensively from Bertrand Russell's Principles of Mathematics regarding the relationship between the Euclidean and non-Euclidean geometries, which "are equally true," and realistic science, which can only be decided, "so far as any decision is possible, by experiment and observation." 

In 1920, Pigou recycled his 1908 non-Euclidean ruminations -- and the Russell quote -- in The Economics of Welfare, arguing that Russell's distinction was "applicable to the field of economic investigation. It is open to us to construct an Economic Science either of the pure type represented by pure mathematics or of the realistic type represented by experimental physics."

In The General Theory of Employment, Interest and Money Keynes also employed the geometrical metaphor, comparing classical theorists (Professor Pigou among them!) to:

Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight as the only remedy for the unfortunate collisions which are occurring.

Of course it was not literally the axioms of Euclidean geometry that classical economic theorists clung to but rather the doctrine, taught by them "from the time of Say and Ricardo..." that "supply creates its own demand..."

-- meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product.

As it informs a theory of employment --"practically without discussion" -- that doctrine suggests what Keynes described as "two fundamental postulates," that: "1. The wage is equal to the marginal product of labour" and "2. The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of labour."

Clark was more prolific in cataloging the axioms of the "Euclidean" economic orthodoxy. Originally, he listed six propositions and expanded that to eight in a revised version published in 1924. In both versions, it was the final proposition that Clark dwelt on: "Capital, including machinery, consists of instruments of production utilized by human beings for the production of wealth."

In contrast to this standard assumption, Clark suggested "the alternative proposition that human beings are instruments of production utilized by machines for the machines' increase and biological development." Instead of the operationally pointless speculation about whether machines might development consciousness and enslave humans, Clark offered the more realistic question, "how many and how important and far-reaching are the things the machines have done to us which we did not intend nor foresee, compared to the things we specifically employed them to do?" I have condensed Clark's own answer to his question, while indicating ... the ellipses:

Machines may be conceived as making bargains with man in which they offer him things he very much desires, and in exchange bind him to serve and maintain them, to eliminate the unfit among them and promote their racial progress, and to alter his own social and political arrangements in whatever ways may be necessary in keeping pace with the increasingly complex social organization of the machines themselves, and in keeping the children of man faithful to the service the machines require.… By such methods they have succeeded in imposing on man many things he never bargained for, some of which he finds extremely unwelcome.… 

They are responsible for the "industrial cycle," and as long as their own overhead costs are covered in periods of depression, they have not assumed full responsibility for the corresponding overhead costs of human beings.... 

As for their methods of maintaining control: some classes they bribe with large rewards, other classes, largely technicians, and technical-scientists, do not need to be bribed: their minds are captured by the material they work in.… 

What I have called Euclidean Economics, in general, serves the interests of the machines. It directs attention to the bribe they offer, and away from the conditions they exact. It has countenanced the machines in neglecting to assume the burden of human overhead costs, and in this, as in other matters, by insisting on putting man on a higher level than machines in respect to freedom, it has sometimes put him on a lower level in respect to care for his material needs.… 

The machines tend to confine discretion in industry to the few whom they take into their confidence, while the bulk of labor has largely lost the power to make any constructive contribution to the technique of industry. The job belongs to the machine, and labor feels little responsibility for it. Labor's state of mind and conduct shows the consequences of this, and many laborers appear to alternate between the slave-morality of getting as much as possible and giving as little, and the spasmodic need of exerting power of some sort. 

Two points are worth emphasizing. First, Clark's brief mention of overhead costs obliquely alludes to his monumental forthcoming work on the economics of overhead costs. Second, the complicity of what Clark called Euclidean Economics with the interests of the machines implicates that economics as one of the machines to the extent that it "grinds out" conclusions from premises. 

Clark did indeed use the language of machinery to describe economic theory in a 1948 note to Wesley Mitchell:

"In dealing with the evolutionary character of the mechanisms, I sometimes think 'theory' of the abstract sort is a device for converting usefully enlightening ideas about behavior and motivation into paper mechanisms whereby armchair theorists can grind out misleading results."

By this time, however, he was not only referring to the "Euclidean" ideas of classical economists but equally to the "more orthodox than the master" school that had grown up around Keynes. In a 1941 letter to Keynes, Clark had also referred to a "mechanism," in this case, "the 'income flow analysis' of which yours is the most noted presentation..." Clark was concerned that this Keynesian school risked succumbing "to the dangers of too-undiscriminating application from which classical economics suffered." In his reply, Keynes concurred with this view.

Reviewing a 1949 essay by Paul Samuelson on the mathematics of income determination,  Clark again reiterated his concerns about "what happens to the Keynesian theory when it is simplified by isolating the central mathematical formula and its corollaries from the context of factors that do not lend themselves to this treatment, and which Keynes handled in 'literary' fashion." Clark summed up his misgivings about Samuelson's approach in the following terms:

The upshot seems to be that investment cannot be treated as a simple rising function of current income alone, without doing violence to the essential facts; and that a more realistic (and dynamic) treatment inevitably introduces instability. Even without allowing for this, equilibrium comes to depend on the intersection of two lines which are so nearly parallel that the determinateness of the outcome becomes dubious (current graphic representations sometimes grossly exaggerate the angle of intersection). Samuelson saves himself by a concluding sentence, emphasizing "the violence done to complex reality by the simplified statistical abstractions of this paper." But is such a vague and general last-moment caveat sufficient? (emphasis added)

In noting "the intersection of two lines which are so nearly parallel," the "simple mathematical device" Clark criticized was Samuelson's graphic exposition of investment and consumption. He could as easily have been talking about matters having to do with a distinction between Euclidean and non-Euclidean geometries, which, after all, "are equally true" (and equally non-realistic).

Big Money Wants Hard Money—But Why?

Let’s see if we can shed some light on the dialogue between Paul Krugman and Steve Randy Waldman (or indeed between Paul Krugman and Paul Krugman).  It is an indisputable fact that the rich have a strong bias in favor of tight monetary policy and high real interest rates.  They panic at the slightest threat of higher inflation.  As Waldman pointed out, this surfaced as early as the 1896 presidential election, when tycoons invested heavily in the defeat of William Jennings Bryan.  The issue is not whether but why.

Broadly speaking, there are three types of financial assets anyone, rich or poor, can hold, money, credit and equity.  Money is money.  Credit is claims on debt service payments from borrowers.  Equity is claims on flows of net revenue from real, mostly corporate, assets.  In a perfectly certain world only money would be affected by changes in inflation, since forward-looking agents would build ups or downs in inflation into the prices at which they would buy or sell other assets.  If you knew that the nominal earnings of a corporation were sure to rise due to accelerated inflation, for instance, the nominal share price would have to rise correspondingly.  Same with credit terms.  Only unanticipated changes in inflation can affect real equity and credit values.

How would we expect this to play out?  The effect on credit is not disputed: creditors lose as a result of unanticipated increases in inflation and debtors gain.  The effect on equity is less clear.  To the extent that loose monetary policy is expansionary, episodes of rising inflation will also be times of near-to-full-employment, meaning greater demand for goods and services and healthier profits.  On the other hand, if loose monetary policy is undertaken during a period in which its impact on demand is small relative to its contribution to higher inflation, it will be need to be counteracted, sooner or later, by a subsequent tightening, with negative effects on profits and equity values, at least in the short run.  Think Paul Volcker in this context.  Thus, while hard money is good for creditors, its effects on holders of equity is less clear.

Now the stylized facts go something like this: (1) Rich people hold very little cash.  The direct effect  of inflation on their wealth is small.  (2) Rich people are distinctive in the extent to which their portfolios are balanced toward equities.  They can afford the greater risk and reap the higher returns, especially since they can afford to hire expert investment assistance.  (Piketty spends some time on this point.)  (3) Therefore the class interest of the rich with respect to monetary policy ought to vary with the business cycle.  They should be for soft money when demand is weak, as it is now, in order to support equities, and for hard money in the vicinity of business cycle peaks.  Yet the rich seem to be wedded to hard money throughout the cycle.  That is what needs to be explained.

Waldman argues that, for the truly rich, it is relative and not absolute wealth that matters.  Moreover, the rich are risk averse, and inflationary episodes tend to reshuffle the wealth orderings, since some equities shoot ahead of prices and others slip behind—not predictable in advance.  My response would be that this hypothesis is not very Occam: it rests on several assumptions, none of which, to my knowledge, is empirically established.  Is it true that wealthy folks are more driven by relative than absolute standing?  Are they sufficiently risk averse with respect to these standings?  What is the historical correlation between times of rising inflation and the stability of wealth orderings?  It’s a hard story to establish.

I do agree with Waldman on one count though: part of the explanation should rest on risk aversion.  We have a tendency to think about the political economy of issues like monetary policy and inflation by focusing on their effects on expected wealth, less on the role of dispersion around those central estimates.  Since the relationship between hard/soft money and real equity values is difficult to forecast, the (possible) neutrality of changes in inflation with respect to mean future values is not decisive.  I think the combination of anticipated losses (money and credit assets) and uncertainty costs (equities) goes some distance toward giving us the explanation we’re looking for.

But not far enough.  Surely during times of clearly depressed demand, such as the present, the prospective benefits to equity values should be compelling.  This, in fact, is exactly what Keynes was counting on from a political perspective.  His analysis of anti-recessionary policy is political-economic: it makes an economic argument that is intended to contribute to the formation of a political coalition in favor of expansion.  In his own life, Keynes was preoccupied with political maneuvering of exactly this sort.  What makes The General Theory a watershed is not just its economic content, but its role in precipitating Keynesian political coalitions during the post-WWII decades.

Of course, we all know that this political project has collapsed.  In no country today is there a significant portion of the capitalist class that is willing to align with working class movements (if they even exist) in favor of aggressive full employment policy.  Really, Krugman’s question—why don’t the rich recognize a positive effect of expansionary monetary policy on their equity holdings?—converges with this second one—why has the Keynesian coalition vanished from modern politics?

I like the specificity of the Krugman version of this question, which cuts through a lot of the abstract speculation of the political economy set on matters like financialization, globalization and the like.  Here we have a very concrete problem, the resistance of the rich to the notion that countercyclical monetary policy, under the right circumstances, could actually make them richer.

Personally, I think Krugman is partly right about what he calls false consciousness, and I would simply label as the relative autonomy of ideology.  For a variety of reasons (this post is getting too long!) an ideology hostile to low real interest rates has become prevalent among the affluent 20% or so, encompassing the very rich but extending well beyond them.  This ideology is very well established socially and in the media, and it exerts force even when it obscures actual economic relationships.  Consider the ubiquity of Type II money illusion, for instance.

But I do think that there are objective considerations as well.  Remember that portfolios of the rich are balanced in some fashion.  The extent to which wealth-holders can indulge in higher-risk equity investments depends on the cushion they acquire from lower-risk credit assets.  Indeed, when credit performs especially poorly investors are tempted to reach for yield, which even they recognize as problematic.  In short—and this really calls for a much deeper, more quantitative analysis—I doubt that the putative benefits to mean equity forecasts stemming from loose monetary policy fully offset the likely costs to credit assets.

Finally, there is the fundamental question: is Krugman right to see a predictable positive response of profits, and therefore equities, to Keynesian fiscal and monetary policy in the slump?  Consider the profit boom of the last few years.  To Krugman’s horror (and mine too), political elites in Europe and North America have simply turned their backs on Keynesian policy, accepting prolonged stagnation as the new normal.  Demand has remained weak, and investment is paltry at best.  But this has been good news for unit labor costs, as workers settle for less and less.  The upshot is a much higher profit share of a non-growing pie, and equities are doing just fine, thank you.  Understanding these dynamics gets us to the crux of the demise of the Keynesian coalition.  That is, the instability of the labor share in the post-1970 period is a key aspect of what differentiates it from former times.

Note: there is a longer but nonpartisan and open-ended treatment of these issues in my new macroeconomics textbook.  I felt it was not possible to depict the trajectory of 20th century macroeconomics without bringing in the political dimension.

Lump of Labor Day Special: Advanced (Elementary) Concepts in Mathematics

"…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…" – John Graunt, 1662.

In a previous post, Graunt Work, I discussed the theological foundations of John Graunt's Natural and Political Observations made upon the Bills of Mortality and hinted at the unacknowledged survival of assumptions of divine providence in expectations of a harmonious social order. This post is concerned with the distinction between the "certain proportion of work" assumed by Graunt (or possibly inserted by Petty) in his discussion of employing beggars and the "fixed amount of work" assumption, alleged by economists to be a widespread fallacy.

Proportion and number are two distinct concepts in mathematics. The distinction is fundamental to mathematical reasoning. The title of Fra Luca Pacioli's classic Summa de Arithmetica, Geometrica, Proportioni et Proportionalita suggests the importance of the concept of proportion.

"One of Graunt's prevailing concerns," Philip Kreager has argued, "was to show that the body politic was integrated in the divine order in virtue of the numerical symmetry, intrinsic proportionality, and correspondences which could be found in its constituent parts." The word "proportion" appears 40 times in Graunt's text, where it consistently refers to the relation of one part to another or of a part to a whole -- not to simple quantities or amounts. "Quantity" occurs only once in the book and "amount" not at all. Quantities and amounts are indicated in Graunt's text by the word "number."

There has been some conjecture regarding the extent of William Petty's contribution to Graunt's book. In his 1939 introduction, Walter Willcox suggested passages may be ascribed to Petty:

"...wherever conjectures, whether numerical or not, are made but no evidence offered in support of them… Furthermore, numerical statements which apply to matters of popular or political interest, but are of no importance for science, are supposed to be his." 

Using Willcox's criteria, the passage about employing beggars is arguably Petty's. Petty shared with Graunt the idea of a unique and profound significance to proportionality. Petty was educated as a physician and had been an anatomy instructor at Oxford. In his preface to The Political Anatomy of Ireland, Petty wrote:

"Sir Francis Bacon, in his Advancement of Learning, hath made a judicious Parallel in many particulars, between the Body Natural, and Body Politick, and between the Arts of preserving both in Health and Strength: And it is as reasonable, that as Anatomy is the best foundation of one, so also of the other; and that to practice upon the Politick, without knowing the Symmetry, Fabrick, and Proportion of it, is as casual as the practice of Old-women and Empyricks."

So if proportion has such a conspicuous significance, how does it get confused with quantity? For example, after citing Graunt on the "proportion of work to be done," historian Peter Buck went on to state that "Graunt presupposes that there is only a fixed amount of work to be done…" apparently oblivious to the crucial distinction between a certain proportion and a fixed amount.

One might suppose that economics has inherited a special concern for proportion from Graunt and Petty, the pioneers of political arithmetic. Unemployment and interest rates; productivity and price indices; efficiency, equality and inequality; elasticity of demand and of substitution are all proportional. Even the intersection of supply and demand is a proportion (an equality). So where does the attributed assumption of a "fixed amount of work" fit in with all this proportionality?

"There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them. But if now machines perform a larger share than before, suppose one fourth part, so many hands as are necessary to work that fourth part, will be thrown out of work, or suffer in their wages. The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand." – Dorning Rasbotham, 1780. 

"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." – David F. Schloss, 1891. 

"Economists have historically rejected the concerns of the Luddites as an example of the 'lump of labor' fallacy, the supposition that an increase in labor productivity inevitably reduces employment because there is only a finite amount of work to do." – David H. Autor, 2014.

Characteristic of the hundreds of denunciations of the supposed lump-of-labor fallacy (Sandwichman has amassed over 500 examples) is a obstinate refusal to substantiate allegations of such a belief with documentary evidence. "We don't have to show you any stinking badges!" Oddly enough, the denunciations also omit reference to particular authorities on the fallacy claim, settling for allusions to a nebulous view held by unnamed "economists" -- the above Autor quote is typical. Moreover, various arguments offered as "proof" of the fallacy of the assumption of a fixed amount of work evaporate with the simple substitution of a "certain proportion" for the conventional "fixed amount."

Of course a "certain proportion of work" is also vague. It might refer to a proportion of work to population, to industrial output, to resource consumption or to virtually anything else. Nevertheless, the alternatives of an "infinite amount of work to do" or of demand for labor that automatically adjusts to changes in the supply of labor are even less tenable.

One might also suppose that the increasing reliance of economics on mathematical modeling would make economists sensitive to the not-so-subtle distinction between quantity and proportion. Such a supposition would be premature, however. Liping Ma's study of math teachers' understanding of math fundamentals in China and the United States, reviewed by Roger Howe, found that:

"…successful completion of college coursework is not evidence of thorough understanding of elementary mathematics. Most university mathematicians see much of advanced mathematics as a deepening and broadening, a refinement and clarification, an extension and fulfillment of elementary mathematics. However, it seems that it is possible to take and pass advanced courses without understanding how they illuminate more elementary material, particularly if one’s understanding of that material is superficial."

So much for rigor. In addition, it's not a sure thing that understanding of math guarantees an unbiased use of it. Kahan et al. found that "more numerate subjects would use their quantitative reasoning capacity selectively to conform their interpretation of the data to the result most consistent with their political outlooks."

In a reply to comments from four economists on his General Theory of Employment, Keynes doubted that "many modern economists really accept Say's Law that supply creates its own demand. But they have not been aware that they were tacitly assuming it." Similarly, although economists may not have expressly believed, "that every individual spends the whole of his income either on consumption or on buying, directly or indirectly, newly produced capital goods," nevertheless, they tacitly assumed it. "They have discarded these older ideas without becoming aware of the consequences."

Keynes was wrong. Economists didn't "discard" the older ideas, they renounced the form in which they were expressed and devised new bottles in which to store the coveted old wine.

The tacit assumptions that Keynes highlighted are assumptions of inherent proportionality (the divinely ordained harmonious social order). Say's Law can be restated as: demand increases in proportion to an increase in supply. The tacit assumption about spending is that an increase in income will result in proportional increases, respectively, in consumption and investment.

One of the inevitable consequences of these tacit assumptions is that the proportion of work to be done must also be a constant. In other words, the alleged lump of labor, which in its distorted "fixed amount of work" formula is refuted by Say's Law is, in its original form of a "certain proportion of work," a corollary to Say's Law!

Dana Milbank Joins Parade Of WaPo Hysterics Over Social Security And Medicare

Dean Baker has posted on this more completely and effectively than I shall do here (and his url is so long on this one, I shall not link directly, sorry), but I simply want to throw in my two cents completely supporting him on this.  As several of us have been doing for some time, we have been criticizing a bunch of Very Serious People (VSPs) at the Washington Post (WaPo) for their repeated rantings and ravings to the effect that the US faces an awful future due to its future liabilities with regard to both Social Security and Medicare, with somehow these people usually focusing on cutting future Social Security benefits now, because if we don't, eeeeek, we might have to in the future (and they somehow also think that this is easier to achieve politically than other budget adjustments.).  Those in this parade have long been led by editorial page editor, Fred Hiatt, who often does columns under his own name as well as unnamed ones officially for the Post, on this matter.  His most regular follower on this has been the long execrable Robert J. Samuelson, although Ruth Marcus is also part of this group.  It is sort of funny that most of these people are nominal liberals, sort of, but it means that WaPo's house conservatives such as George Will can ignore this issue to prattle on about other stuff, given that these people spout conservative lines on this matter.

So now we have yet another of these sort of nominal liberals joining this pathetic parade, Dana Milbank, and he makes an even bigger spectacle of himself than most of these others do, waxing seriously hysterical about the matter.  What is really funny, and Dean is great on the irony of this, is that the report that triggers this outbreak of panic by Milbank in fact is an optimistic one, the CBO now projecting slightly smaller budget deficits in the future than awhile ago.  A decade from now the debt to GDP ratio is expected to be 77%.  This sets Milbank into a frenzy of  fear, "bone-chilling" he calls it, and, one of my favorite words, "catastrophic." Yikes, we should all run for the hills faster than we can put our pants or other lower body wear on.

Of course, not only is this lower than was previously forecast for that time (and not much higher than our current ratio), it is well below what we see in most other high income nations.  With a few exceptions, most of these nations are having no problems financing their ongoing budget deficits at quite low interest rates.  Milbank's hysteria is ludicrously misplaced, quite aside from the silliness of it responding to a report that says things will be a bit better in the future than we recently thought.  All I can think is that Hiatt is really coming down on his minions to toe the paper's party line on this, and somehow Milbank is sufficiently insecure about his position that he has to fall in line spouting the prevailing line, although maybe even Hiatt might realize that the trigger for this silly report is really quite absurd.  But, as Dean Baker notes, it is policy at the Post to punch old people in the face rather than suggest any reductions of income for drug companies or other beneficiaries of our out-of-control medical establishment, with it obvious that the really effective way to reduce future budget deficits would be too seriously rein in medical care costs in the US.

Barkley Rosser

Putin Completely Loses It Over START

Yes, you read me right, although this has not been reported in any English language media.  You are learning about it for the first time unless you follow Russian language media.

NTT, one of the Russian TV networks, has been producing a series of one hour shows that are basically making the case for an aggressive stance towards its neighbors and the West more generally.  Many issues have been dragged through and many claims made. One that has made  it into  the English language Russian media such as Russia Today is the claim that a promise was made to Gorbachev that NATO would not expand eastward if Germany was allowed to reunify.  Though the USSR made such a demand, no such promise was ever made and indeed Russia was invited to join NATO around 2000, which it declined to do.  However, this claim has been repeated regularly, and I see quite a few Americans repeating it also as if this justifies Russia violating its 1993 promise to respect the territorial integrity of Ukraine if Ukraine would turn over its nuclear weapons to Russia, which it did.

Another theme that has been hammered a great deal are claims that Gorbachev was bribed monetarily by the westerners to bring about an end to the Soviet domination of eastern Europe and then to bring about the end of the USSR itself.  Raisa's spending sprees have been mentioned in this regard, although the first of those, which got the most attention, occurred when she and Gorby visited London in late 1984, prior to his becoming top leader.  This was when Margaret Thatcher declared that he was "a man we can do business with."  While it was widely reported at the time that she was using an American Express card, apparently that was false.  They simply turned the bills over to the Soviet embassy in London to pay for her spending spree.  No western money behind that one, although, of course, nobody can rule out that somehow Gorbachev may have received secret payments that nobody has ever heard of. OTOH, more likely this is just made up lies by the Putin propaganda machine.

Well, all of this is more or less par for the course, but a very disturbing event happened on one of these shows, a moment where more than on any other or for that matter pretty much any public appearance that Putin has ever made, he completely lost it and was yelling with a highly raised voice.  The topic is disturbing, particularly given that it appears that he was lying when he engaged in this conduct.  The matter involved the final nuclear  weapons reduction deal signed between the US and the still-then existing USSR, on July 31, 1991, only about two and half weeks before the August 19 coup that led to Gorbachev effectively losing power and the Soviet Communist Party effectively ceasing to exist.  It was the Strategic Arms Reduction Treaty, or START, signed on that date by Gorbachev and then-US President George H.W. Bush.

Putin claims that this treaty was massively unfair, and that this was the ultimate betrayal and treason by Gorbachev, presumably also  for which he got paid off.  I would think that Gorbachev should stay out of Russia for the time being, given the garbage being spouted off about him by Putin and his flunkies, with some Russian legislators demanding that he be jailed for treason.

Was the treaty unfair?  The basis for making such a case is that the USSR agreed, and Russia carried it out with the treaty finally being fulfilled in 2001 just after Putin took over, to reduce its nuclear weapons stocks by a larger amount than did the US.  This is true.  However, the final outcome of this was that both nations ended up with equal sized nuclear weapons stocks, 6,000 weapons each, about a 30% reduction for the US and a 40% reduction for Russia (who inherited the nuclear weapons that had been located in Ukraine, Belarus, and Kazakhstan previously).  So, Putin is all enraged, and I mean seriously enraged, that this previous "advantage" was given up, although to this observer this seems like a pretty ridiculous advantage that did not amount to anything in practical terms.  Both sides had and still have enough nuclear weapons to totally destroy each other, as some Russian commentators have recently reminded us by pointing out that Russia is capable of "turning the US into nothing but radioactive dust."  Thanks, guys.

Another part of this speech that had  Putin yelling and screaming was a completely false claim that the treaty involved the US being able to tell USSR/Russia where it could have its military bases, without Russia having the same right with regard to the US.  This is just complete and utterly false nonsense.  The treaty did set up sites where each side could monitor the other's activity.  One of those curiously enough was in Ukraine, and after 1995, the US stopped using that site.  But, I do not see how this fits Putin's bizarre and apparently hysterical claim.

I find this seriously disturbing.  We have seen reports that Putin essentially lives in a bubble, surrounded by total sycophants.  He supposedly gets reasonably accurate intel reports, but who knows?  We have seen the Russians spouting absolutely looney propaganda in their media, such as the wild claim of now-deposed rebel Minister of  Defense in Donetsk, Igor Strelkov, that the downed Malaysian plane was full of already dead people.  I am very concerned that in his isolated cocoon, Vladimir Putin is beginning to believe some of his own nation's more ridiculous and phoney propaganda.  But this business of him losing it over totally false garbage about US-Russian nuclear treaties is extremely worrisome, at least to me, and it coincides with reports that indeed there has been a pretty much total breakdown in all cooperation between the two nations in terms of carrying out the successor to START, which Obama signed with then-President Medvedev in 2011 and struggled mightily to get barely ratified in the US Senate.  In any case, I find this development to be by far the most disturbing of all that I have heard about so far in the current deterioration of relations between Russia and the rest of the world, especially the United State.  I see nothing good coming of this, and potentially extremely bad things coming of it.

BTW, it appears that even most of the Moscow intelligentsia, usually cynical and critical of the government and able to see through obvious propaganda, is just sopping this up and totally accepting pretty much nearly all of it.  This is also a matter of considerable concern to me.  It is disturbing to essentially see an entire great nation just completely lose its mind in an orgy of aggressive frenzy, with this extending even to wild threats of nuclear destruction and false claims about supposedly unfair nuclear treaties unfairly arrived at.

Barkley Rosser

Coase at Cruising Altitude: A Closer Look at the Pay-Me-to-Not-Recline Argument

The recent dustup over the rights of recliners versus the people behind them who get jammed on  crowded airplanes tells us a lot about Coase’s analysis of externalities and the perils of having a simplistic Free Market Roolz understanding of economics.

First, to get a flavor of the two sides, read Josh Barro, followed by Damon Darlin, in the New York Times.  The question is whether passenger A in the row in front has the right to recline into the kneespace of passenger B in the row behind.  Barro invokes Coase: the solution is to have a market.  Clearly, the would-be recliner has the property rights in this matter, since the seat is built to allow reclining and flight attendants will enforce this right in the event of a dispute.  So turn it into a market, says Barro.  If you don’t want me to recline, pay me.  If you offer me enough money, I’ll take it and you can keep your few precious inches.  Darlin doesn’t question this invocation of Coase, but he says that the technology gives an unfair advantage to the recliner.  The playing (sitting?) field is leveled, according to him, if passenger B uses a Knee Defender.

First off, it should be clear that Darlin’s argument is muddled.  He would use the Knee Defender but then remove it if the passenger in front objects.  In other words, he is not really changing the allocation of property rights, just adding an extra step.  First Barro would have to say, “stow your Knee Defender, buster.”  Then he can add, “And if you want to stop me from reclining, show me the money.”  So we are back to square one.

So how well does Coase work here, actually?  At first blush, it looks reasonable.  The recliner values the opportunity to recline at a certain level, measurable in cash.  The reclinee values freedom from being reclined on at some other level, also measurable in cash.  If the first value exceeds the second no deal will be made, and reclining will take place.  If the second exceeds the first, a payment will be made and no reclining will be the result.  Thus the relative advantages and disadvantages will be weighed, even though they happen to different people, and the seat will tilt only if there is a positive net advantage.  Score one for Coase.

Ah, you say, this overlooks the transfer of money itself: the outcome is not only whether the reclining option will be used but also whether rear passengers have to shell out to front ones.  Isn’t there a social justice problem?  Barro’s answer is that the people who are willing to pay the most to avoid being reclined on are likely to be taller, and taller people make more on average than shorties; thus Coasian payments help redress a pre-existing injustice.  Perhaps this was a clumsy attempt at humor, but as economic analysis it’s pretty flimsy.  Average height-related income differentials are very small, especially relative to overall income inequalities.  (We are talking about minute differences in the mean relative to standard deviations.)  Income differences between randomly selected pairs of in-front and behind passengers are unlikely to be attributable to how much seat space they need.  (I’m over six feet, but my middling academic salary puts me below almost every business traveler onboard, no matter how short.)  A better argument would be that each reclinee is also a potential recliner, either on the current flight or a future one.  If a system of payments is adopted, transfers should roughly net out.

The real problem with Coase in this context, however, has to do with the incentive to threaten to recline.  Suppose I am indifferent between reclining and not; in other words, the value to me of being able to put my seat back is exactly zero.  Does this mean I’ll simply keep my seat upright and avoid all hassles?  Not if I’m Homo Economicus, I won’t!  No, as soon as I hear that reassuring electronic beep that says takeoff restrictions are ended, I’ll push my seat back as far as it can go and wait for you to make an offer.  My incentive is to hold out for as much as you are willing to shell out and then take it.

This is a well-known result in economics, of course.  In the classic case of pollution, assigning property rights to the polluter results, in dynamic equilibrium, in more entry of potential polluters and greater payments to them by pollutees relative to the static outcome.  (Not every introductory textbook mentions this, but the best ones do.)

Barro provides a useful example of someone whose understanding of Coase extends as far as the wonders of Markets in Everything and then simply stops.  We see the same phenomenon in just about every aspect of microeconomics, from the virtue of sweatshops (workers voluntarily take those jobs, no?) to the evils of rent control (deadweight loss! black markets!).  More complex considerations that take into account dynamics, interaction effects and the like never intrude.  What you end up with is an ideological truncation of economics, and, as the Great Airplane Debate illustrates, it is largely ideology that frames public discourse.

SCIOD 11: Continuation of Brassey by Chapman

Sydney Chapman was another of Alfred Marshall's star pupils. He was awarded the Adam Smith Prize in 1900. Pigou won it three years later. In 1909 it went to John Maynard Keynes. Chapman wrote a three-volume "continuation of Lord Brassey's 'Work and wages' and 'Foreign work and English wages'" also titled Work and Wages. Brassey wrote introductions to each of the volumes. In the "analytical groundwork" for Volume 2, "Wages and Employment," Chapman presented a conventional version of the marginal productivity theory of wages, which he summarized, broadly, as "the forces of competition and substitution tend to cause each class of labour to obtain as earnings the value of its marginal productivity." In his introduction, Brassey condensed the theory even further to "Wages depend on the value of the work produced." Neither Chapman nor Brassey made any direct reference to the older wages-fund doctrine, although Chapman acknowledged that the marginal productivity theory "is not yet popularly accepted to the full."

In his economic history of the Lancashire cotton industry, Chapman referred to the "doctrine of the labour fund, as the 'lump of labour' fallacy might be called." Here, presumably, Chapman was using the term "labour fund" as a synonym for Marshall's "work fund," that is to say the demand for labor is assumed to be perfectly inelastic – the quantity demanded remains constant regardless of the wage rate.

Elsewhere, notably for example, in the 1887 English translation of Marx's Capital, the labour fund is a synonym for the wage fund, which implies a unit elasticity of demand for labor – the percentage decrease in demand for labor equals the percentage increase in the wage, so that aggregate of wages remains constant. The two terms were even used interchangeably in the same text as in the following passage from Frank Fairplay's (pseudonym) A Brief Plea for the Old Faith and the Old Times of "Merrie England", when Men had Leisure for Life and Time to Die:

What then constitutes the labour-fund? Certainly not money, which is merely the medium of exchange—a sign of value. There is not enough coined money and bank paper in all England to pay the wages of England for four months. The fund with which labour is paid, consists only of those articles which labourers consume. In Ireland the wage-fund is potatoes and old clothes. In England, as yet at least, it is composed of a sufficiently scanty portion of meat, bread, potatoes, and somewhat more decent apparel. It is obvious then, that the richer the labour-fund is in these articles, the more there will be to distribute.

It is clear from the context, however, that Chapman's meaning was work fund and not wages fund. The point that he is making is that the "fundamental ideas" behind proposals made by the Society for the Promotion of National Regeneration for reducing the hours of work were sound even though their rhetoric was tarnished with fallacious arguments. This is, of course, in agreement with Pigou's explanation that "conclusions are often right when the reasons adduced by their supporters are ridiculously wrong."

In volume 3 of his "continuation" of Work and Wage, published in 1914, Chapman reprised his analysis of the hours of labor that had been published in the Economic Journal five years earlier and that he had hinted at in declaring to be sound the fundamental ideas of the Society for the Promotion of National Regeneration. This theoretical analysis was also consistent with the evidence that Brassey had offered in his 1872 book. "It is equally true," wrote Brassey, after showing that wage rates were no indication of labor costs, "that the hours of work are no criterion of the amount of work performed."

In Chapter 6 of Work and Wages Brassey presented evidence of numerous cases where output increased following a reduction in the hours of work. Chapman's continuation and journal article supplied the theoretical explanation for that result. Twenty years after publication of Chapman's "Hours of Labour" article, Lionel Robbins observed:

The days are gone when it was necessary to combat the naïve assumption that the connection between hours and output is one of direct variation, that it is necessarily true that a lengthening of the working day increases output and a curtailment diminishes it. 

Would that were the case.

If Brassey's Work and Wages provided the evidentiary impetus for Chapman's theoretical analysis of the hours of labor, W. S. Jevons's Theory of Political Economy moulded one of its marginalist theoretical pillars. Chapter 5 of that book presents his theory of labor, including the analysis of the disutility of work, beyond a definite point. "A few hours' work per day may be considered agreeable rather than otherwise;" Jevons wrote, "but so soon as the overflowing energy of the body is drained off, it becomes irksome to remain at work. As exhaustion approaches, continued effort becomes more and more intolerable." This he illustrated with a diagram that illustrated the diminishing utility to the worker of wages earned and the increasing irksomeness of remaining at work as the duration of work lengthened. Chapman's diagram in his "Hours of Labour" article includes a work curve that is clearly analogous to the diagram Jevons presented in his theory of labor.

Economists: Lawyers? Shysters? Touts?

"Basically, a lot of economists use the tools of science to accomplish literary-- or lawyerly -- goals." -- Noah Smith, Economics Isn't Science or Literature

If that's the case, what's "the law"? What are the standards of evidence? I've been thinking a lot recently about the extensive reliance on "hearsay" in economics -- that is to say the flippant attitude of economists toward sources -- and about the preponderance of alibi stories (again with scant regard for proving the alibi). Unlike the legal profession, there is no formal professional code of ethics for economists. So, where do we draw the line between "lawyer" and "shyster"?

"...'shyster' lawyers -- a set of turkey-buzzards whose touch is pollution and whose breath is pestilence" -- "The Tombs," New York in Slices (1849)

"In England, although we have not the term 'shyster,' we have the animal thereby designated, and he is said to be particularly rife at the Old Bailey. A shyster is a tout, and touting may be practised either by a barrister, or by his clerk, or by his post or future clients… But in New York the shyster ventures upon proceedings from which the English tout would shrink. He makes his way into the prisons, and informs the prisoners committed for trial that he has great influence, and in some cases 'he goes so far as to say that he controls, aye, even owns the court and district attorney.'" -- The Saturday Review of Politics, Literature, Science and Art (1871)

"The complaint one makes against that anti-social jargon, which so easily passes for economic science, is that it is in ludicrous opposition to the common observation of facts. Political economy professes to be a science based on observation. But the bitter pedantry which often usurps that name usually assumes its facts, after it has rounded off dogmas to suit its clients. In practice this magazine of untruth escapes detection for two reasons. One is that the facts relating to labour are invariably seen through the spectacles of capital.... The second reason which obscures the truth about industry is, that the facts about capital are almost never honestly disclosed." -- Frederic Harrison, Fortnightly Review (1872)

Update: (Lest we forget):

"In addition to business and government, Mr. Ferguson aims his critique at academia, suggesting that the discipline of economics and more than a few prominent economists were corrupted by consulting fees, seats on boards of directors and membership in the masters of the universe club. 

"When he challenges some of these professors, in particular those who held positions of responsibility in the White House or in the Federal Reserve, they are reduced to stammering obfuscation — Markets are complicated! Who could have predicted? I don’t see any conflict of interest — and occasionally provoked to testiness."  -- A. O. Scott, New York Times review of "Inside Job" (2010).

Graunt Work

"To understand the idea of inherent quantitative regularity which informs Graunt's text, and how he was able to devise a method which demonstrates this regularity in vital phenomena, it has been necessary to consider his synthesis of four period concepts: the method of observation prescribed by Bacon's natural history; the method of keeping accompts, with its several proportional checks and informal attitude to population totals; a mercantile system of natural and intrinsic balances, embracing people and trade; and a general model of society as a set of correspondences uniting man, God and nature." -- Philip Kreager, "New Light on Graunt," Population Studies 42, 1988, pp. 129-140.

What Graunt accomplished with his essay is astonishing. Kreager did a magnificent job of reconstructing the foundations of Graunt's method, rather than anachronistically identifying "aspects of Graunt's essay which anticipate later demographic measures and statistical inferences." But there is another story yet to be told -- of the unconscious survivals in subsequent political economy and economics of Graunt's innovative synthesis of natural history, bookkeeping and theology.

The clue here is that there is indeed at least one conspicuous survival, that it is unconscious and that it is significant resides in the incessant reiteration and unanimous misattribution of the highlighted phrase:

"…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…" -- John Graunt, Natural and political observations mentioned in a following index, and made upon the bills of mortality (1662).

So it turns out that the supposition of a fixed amount of work to be done* originates in the "ur-text" of political economy rather than in the half-baked ruminations of fearful Luddites and clueless trade unionists. What are the implications?

William Petty's pioneering estimate of national income relied crucially on his friend Graunt's calculations of population. These were essentially the "number, weight or measure" upon which Petty based his analysis. Alfred Chalk, in "Natural law and the rise of economic individualism in England," (1951) implied a causal link between Newton's Principia and Petty's Political Arithmetick:

"It was not mere chance that Petty chose to call one of his important works Political Arithmetick. 

"From the point of view of the development of economic theory, the emergence of a scientific philosophy of determinism was possibly the most significant fact of the seventeenth century. The great creative minds in mathematics, biology, physics, etc., gradually came to view the world as an intricate machine in which each part played a role that was rigidly predetermined by inexorable laws. Newton's Principia, published in 1687, provided the basis for a mechanistic outlook which would encompass the universe. In such a climate of opinion, social scientists began to search for a body of laws which would reveal a harmonious social order similar to that which physical scientists had discovered in their researches."

Except Newton's Principia was published in 1687. Graunt's Natural and political observations, on which Petty relied for his empirical information had been published 25 years earlier. The anachronism of seeking out "anticipations" of later thought in earlier texts obscures and misrepresents actual contributions, motives and methods. This leads, it would appear, to endemic confusion about the status and significance of economic "laws," related to the ambiguity of natural law doctrine and laws of nature. (It may be noted that John Locke delivered his Oxford lectures, subsequently published as Essays on the Law of Nature, in 1664. Locke owned a copy of Graunt's Observations. According to Ashcraft, "The influence of Graunt is particularly reflected in Locke's recording in his journals the weekly or monthly mortality rates for various cities while he was living on the continent.")

Citing Heckscher, Chalk claimed that "In mercantilist literature the law of nature was simply divested of almost all its religious, and even ethical, overtones." Kreager, however, presented a very different and more compelling argument:

The 'mix' in Graunt’s mixed mathematics owed, as has been said, to his application of an apparently humdrum practical art, bookkeeping. But beneath his 'shop-Arithmetic' lay a more fundamental and familiar set of associations: number, reckoning and death as the idiom of the Last Judgement. Graunt's simple similitude was that each death represents a subtraction from the living, an entry in God's or nature's 'accompts'. And just as death displaces a person or soul to some specific immortal 'population', so each christening incorporates a new person or soul into a mortal one. Graunt's chosen point of entry into this old theme was Bacon's Natural History of Life and Death. Bacon had argued that men should observe nature in order to discern possible reflections of God's laws; whilst such knowledge was bound to be a pale record of these laws, it nonetheless offered possible guidance on improving individual and collective life. Such a phrasing inevitably suggested that longevity was a kind of measure of man's success in this attempt.... Graunt, expressly taking up Bacon's inquiry, likewise adopted Classical images of the symmetry of divine, natural and political order.

It is a far cry from, say, the law of gravity to a "harmonious social order." But not quite so far if one assumes, a priori, the "symmetry of divine, natural and political order." Furthermore, the technology of double-entry bookkeeping superimposed a merchant's perspective on the social order, one implemented, according to Aho, largely to provide evidence for an alibi against suspicions of usury and unscrupulous business practices.

* I am aware of one instance of similar phrasing that occurs between Graunt's "certain proportion of work to be done" in 1662 and Dorning Rasbotham's "certain quantity of labour to be performed" in 1780: the definition of the verb, "task" in Dyche and Pardon's New General English Dictionary (1735) is "to appoint a person a certain quantity of work to be done in a certain time." Update: the distinction between Graunt's "certain proportion" and Rasbotham's "certain quantity" is an important one on which I will have more to say later.

Burger King’s Facebook Whopper of a Lie

Burger King wants us to believe they are not doing this corporate inversion. Did legal and marketing conspire to put out this misleading FB post?

We hear you. We’re not moving, we’re just growing and finding ways to serve you better. As part of the announcement made today, both Burger King Corp. and Tim Hortons will continue to operate as independent brands. We’ll just be under common ownership. Our headquarters will remain in Miami where we were founded more than 60 years ago and business will continue as usual at our restaurants around the world. The decision to create a new global QSR leader with Tim Hortons is not tax-driven – it’s about global growth for both brands. BKC will continue to pay all of our federal, state and local U.S. taxes. We’re proud of the heritage of Burger King and will maintain our long-standing commitment to our employees, franchisees and the local communities we serve. The WHOPPER isn’t going anywhere.

Burger King Corporation (BKC) is the U.S. subsidiary of Burger King Worldwide. BKW is their stock ticker for a reason. Of course, the U.S. subsidiary is staying in Miami but when the parent corporation relocates to Canada, the U.S. tax obligations of Burger King will be cut in half as they will no longer be subject to the repatriation tax. How stupid does Burger King think we are? And yes – it is “Perfectly Legal”.

SCIOD 10: The Fund-a-mental Thing's Supply as Time Goes 'Bye'

The eclipse of the wages-fund doctrine in political economy was the occasion for a peculiar twist in the rhetoric of anti-union polemicists. In 1867, on the eve of Thornton's critique of the doctrine and Mill's recantation, an anonymous article in the Quarterly Review condemned unions for their failure to understand the dynamic nature of the wages-fund:

The question for those who wish to raise the wages of labour is, not how to divide the existing wages-fund in a manner more favourable to the working man, but how to increase competition for his labour among employers.

According to the article, the price of labor depends on the demand for labor which depends on the rate of profit. "The real cause, therefore, of a high rate of wages is a high rate of profit."

Four years later, yet another Quarterly Review article discussed the refutations of the wages-fund and criticized unions for basing their strategies "on the same assumption of a permanent wage-fund" as the orthodox political economists. According to the author, John Wilson, trade unionists believed they could "cause the lion's share of that fund to come into their own hands, to the exclusion, as far as possible, of outsiders—that is to say, of the whole body of workpeople outside the Unions."

Later that same year, the engineers' strike in Newcastle, England for the nine hour day was occasion for several letters to the Times of London and a correspondent's report in the New York Times attributing the demand for the shorter day to a belief by the union "that the amount of work to be done is a fixed quantity, and that in the interest of the operatives, it is necessary to spread it thin in order to make it go far." This is a remarkably close paraphrase of the "false principle," denounced by Dorning Rasbotham, that "there is, say they, a certain quantity of labour to be performed."

Alfred Marshall – whose sympathy toward the working classes was tempered by a growing ambivalence, marked by occasional hostility, toward trade unions – annexed the "fixed amount of work" idea to a modified, purportedly union version of the discredited wages fund that he dubbed the "fixed Work-fund fallacy":

It is known that the immediate effect of a reduction of the hours of labour would be to cause those employers who had contracts on hand, and some others to take on extra men. And it is argued that therefore a reduction of the hours of labour would diminish the number of the unemployed, and raise wages.  

But there is not, as this argument assumes, a fixed Work-Fund, a certain amount of work which has to be done, whatever the price of labour. On the contrary the demand for work comes from the National Dividend; that is, it comes from work: the less work there is of one kind, the less demand there is for work of other kinds [Say's Law!]; and if labour were scarce, fewer enterprises would be undertaken.

Marshall's argument oscillates between self-evident truism and non-sequitur. Part of the problem is that Marshall had buried in the preceding paragraph the important qualification that the reduction in hours be independent of any effect on efficiency. The other part of the problem with the fallacy argument is that unions virtually always in the 19th century cited overwork and the efficiency gains that would results from shorter hours.

A few decades later, Marshall's star pupil and successor in his chair at Cambridge, Arthur Cecil Pigou rather delicately teased out some of the exceptions and qualifications to the alleged fallacy of the fixed work-fund. First, he conceded "an element of undoubted truth" to the idea that under many circumstances protectionism can be fruitful for workers in a particular industry and that those benefits may be long lasting. However, he contrasts that localized gain with the idea that there would be an overall benefit to all industries from, for example, limitation of imports. Having made that concession to the fallacy claim, Pigou then addressed a more fundamental issue about the relationship between ideas – however fallacious – and economic facts -- it is:

...unwarrantable to conclude that, because the reasons which popular thought offers in defence of any thesis are invalid, therefore, that thesis is untrue…. conclusions are often right when the reasons adduced by their supporters are ridiculously wrong.

Pigou then proposed the one and only condition under which this alleged popular thought could be vindicated: "that these devices succeed in rendering the labour and capital of the rest of the community more effective in production." Again, it needs to be reiterated that the "popular thought" that there is "only a fixed amount of work to be done" has always been – from Rasbotham to McCulloch to Wilson to Marshall – an idea attributed to some vague collectivity by the writer and never an argument uttered by an identifiable person or group. Those who do the attribution are no doubt quite certain that they have correctly characterized the unspoken "idea behind" one policy proposal or another. But they view as incomprehensible any suggestion that they need to back up such claims with evidence.

In 1926, Maurice Dobb added another wrinkle to the question of the Work-fund and its supposed fallacy – workers were not necessarily as concerned with maximizing aggregate earnings per capita, as the economists assumed, but in increasing "wages in proportion to the worker's expenditure of energy and his 'wear and tear,' and… wages as a proportion of the total social income":

What was implied in the economists' retort to the advocates of the so-called Work-Fund leads to the apparent paradox that the more the workers allow themselves to be exploited, the more their aggregate earnings will increase (at least in the long run), even if the result is for the earnings of the propertied class to increase still faster. And on this base is erected a doctrine of social harmony between the classes.

Even as economic theorists such as Dobb and Pigou were carefully dissecting and refuting the implicit assumptions of the Work-fund fallacy claim, economic textbook authors were diligently parroting the discredited claim. In economics, what is taught trumps what is thought. 

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.

The demand for labor grows as fast as its supply! They are the same thing! Bye's explanation surpasses "supply creates its own demand." Supply IS it's own demand.