Say's Law and the Secret Police

In Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World, Jeff Madrick ranked Say's Law (and austerity economics) as Bad Idea #2.  How can that be when the erstwhile "law" reputedly sank without trace after Keynes demolished it in the 1930s? In his 1975 book, Money: Whence It Came, Where It Went, John Kenneth Galbraith mused,

…on two things Keynes was immediately influential. Say's Law sank without trace. There could, it was henceforth agreed, be oversaving. And there could, as its counterpart, be a shortage of effective demand for what was being produced. And the notion that the economy could find its equilibrium with unemployment — a thought admirably reinforced by the everyday evidence of the '30s — was also almost immediately influential.

It turns out that Bad Idea #2 didn't sink without trace after all! It went underground -- which was easy to do since the argument had always been a shape-shifter and master of disguise. Operating clandestinely, the Say's Law secret police are beyond and above the rule of law.

In truth, Say's Law wasn't actually Say's. It was a widely held anti-mercantilist notion that was subsequently attributed to Say to lend it panache. Inklings of the idea can be found long before Say in Henri Martyn's 1701 Considerations on the East India Trade. My own candidate for canonical statement from the early industrial period would be Dorning Rasbotham's 1780 pamphlet, "Thoughts on the Use of Machines in the Cotton Manufacture," written in response to anti-factory riots at Bolton, England the previous year.

Squire Rasbotham formulated his dictum succinctly as "a cheap market will always be full of customers." Significantly, the Lancashire magistrate prefaced his truism with a rebuke to that unidentified rabble who falsely believed that there was only a certain quantity of labour to be performed.

These two tracks of the argument were crucial to the disguise. If one's brash claim about the automatic inevitability of effective demand is shown to be theoretically untenable and empirically unfounded, one can deftly switch to the other track of scorning an opponent's silly assumption that there is "only a fixed amount of work to be done." Say's Law "sank without trace" only if one overlooks its not-a-fixed-amount-of-work doppelganger.

Or one could get confounded by the sheer proliferation of aliases: Malthusian fallacy, mercantilist fallacy, Luddite fallacy, fixed work-fund, lump of labor, lump of work and make-work fallacy are the more common negative renderings. Positively, the principle has been defined as supply creates its own demand, technology creates more jobs than it destroys and the impossibility of a general glut. Marx encountered (and dissected) "the theory of compensation as regards the workpeople displaced by machinery."  William Stanley Jevons elaborated the cheerful principle thusly:

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 his review of Seven Bad Ideas, Paul Krugman disputed Madrick's claim that Say's Law was a staple of mainstream economics,

No. 2 on Madrick’s bad idea list is Say’s Law, which states that savings are automatically invested, so that there cannot be an overall shortfall in demand. A further implication of Say’s Law is that government stimulus can never do any good, because deficit spending by the public sector will always crowd out an equal amount of private spending. 

But is this “mainstream economics”? ... Madrick is able to claim that Say’s Law is pervasive in mainstream economics only by lumping it together with a number of other concepts that, correct or not, are actually quite different.

Was "lumping" a Freudian slip? In the late 1990s, Krugman castigated William Greider's One World, Ready or Not, characterizing Greider as an "accidental theorist" and accusing him of committing the "old misunderstanding... sometimes referred to as the 'lump of labor' fallacy":

The title essay in this collection was an effort to take on an old misunderstanding that has lately experienced a revival of popularity: the idea (sometimes referred to as the “lump of labor” fallacy) that there is only a limited amount of work to be done in the world, and that as productivity rises there is therefore a reduction in the number of jobs available.... It is hard to explain that this involves a fallacy of composition, that the effect of a productivity increase in a given industry on the number of jobs in that industry is very different from the effect of a productivity increase in the economy as a whole on the total number of jobs. In the essay I tried to find a painless way of making that point—and along the way to give readers some idea of what it really means to think about economics, what economic theory really is. 

As hard as it might be to explain that the idea involves a fallacy of composition, it would have been much harder to prove that Greider actually committed the fallacy. Krugman didn't bother to try. The lump-of-labor fallacy always involves innuendo that anyone doubting the tacit supply-creates-its-own-demand rule could only conceivably do so under the influence of the untenable idea that there is a fixed amount of work to be done. Apparently, accusing one's opponent of committing a fallacy excuses the complainant from any need to defend -- or even acknowledge -- his own assumptions or prove his allegations.

If Say's Law became the law that dared not speak its name during the heyday of triumphant political Keynesian demand-management policy, its ventriloquist surrogate was the ubiquitous fallacy claim. Cardiff Garcia described the accusation as a "lazy but common retort to the idea that technological advancement would massively displace workers." In the early 1960s, Cornell industrial relations researcher Marcia Greenbaum noted economists' "nearly unanimous" opinion that calls for a shorter workweek to cope with unemployment were based on the lump-of-labor idea:

If this chapter has painted a gloomy picture of the economic implications of the shorter workweek, it is simply reflecting the nearly unanimous opinion of economists outside of the labor movement. Every other labor proposal for coping with unemployment . . . receives support from at least some economists and public officials. In their plea for shorter hours, however, union leaders stand alone, attacked even by the leading officials of a friendly Administration.

As Larry Summers recently pointed out,

…when I was an undergraduate at MIT in the 1960s there as a whole round of concern about this -- will automation displace all the employment? And what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out...

"It would all sort of work itself out." Walks like Say's Law. Quacks like Say's Law. And as Galbraith noted, when Say's Law ruled economics, "to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots." Summers's account of his experience as an undergraduate at MIT in the 1960s is eerily reminiscent of Galbraith's account of the days before the 1930s when Say's Law prevailed.

Might I be unjustly lumping the lump-of-labor fallacy claim with Say's Law -- two concepts that "correct or not, are actually quite different"? Not according to Raymond Bye, who wrote one of the most widely-used introductory economics textbooks of the 1920s and 30s. In Bye's account of the "lump of work" or "make-work" fallacy, it was precisely the principle that supply creates its own demand that proved the fallacy of the alleged assumption that the amount of work to be done was fixed.

The complementarity of the fallacy claim and Say's Law is transparent in the writing of conservative adherents to Say's Law -- which brings me to a point that I would like to stress: conservative consistency on Say's Law and the lump of labor contrasts markedly with mainstream liberal equivocation. The fallacy claim and the Say's Law notion are two sides of the same coin. You can't reject one side while invoking the other. No doubt observers sense a discrepancy even if they can't analytically put their finger on what it is. Disparaging those who venerate the law while deriding those who violate it may seem like centrist even-handedness to tenured sophisticates but it smacks of hypocrisy to the hoi polloi.

So what's wrong with economics? Madrick pointed out seven bad ideas. I would add that those bad ideas often circulate in disguise, under aliases, and insinuate themselves back into the discourse in ways that are more pernicious because they are harder to detect. Like the secret police, these clandestine versions of the bad ideas can be used to suppress dissent while preserving official deniability.

UPDATE: Nick Rowe ponders Lump of Labour, Say's Law, and the slope of the AD curve at Worthwhile Canadian Initiative and Sandwichman replies with reference to The Pathos of Aggregate Demand Management.

Paul Krugman, Accidental Austerian

This coming weekend in New York City, the New York Review of Books is hosting an event titled What's Wrong with the Economy—and with Economics? A Saturday afternoon panel, "Economics after the Crash: A Discipline in Need of Renewal?" includes both Paul Krugman and Robert Skidelsky.

Skidelsky is in the Sandwichman's camp on the question of the lump of labour fallacy. Krugman's position has evolved to the point where he has expressed sympathy for the Luddites. But he has not publicly retracted his "accidental theorist" charge against William Greider from the 1990s.

Why would a retraction matter? Well, the Sandwichman maintains that adherence to this archaic "Just-So" story is at the core of "what's wrong with economics -- and with the economy." More importantly, though, Professor Krugman himself once thought that it mattered a great deal to enforce the lump-of-labor shibboleth. He claimed that a "thought experiment" he employed to disparage Greider's analysis would "give readers some idea of what it really means to think about economics, what economic theory really is." Is this facile hand-waving something Krugman would still defend as "what economic theory really is"?

Below is an excerpt from the introduction to Krugman's 1998 book The Accidental Theorist: And Other Dispatches from the Dismal Science:

The title essay in this collection was an effort to take on an old misunderstanding that has lately experienced a revival of popularity: the idea (sometimes referred to as the “lump of labor” fallacy) that there is only a limited amount of work to be done in the world, and that as productivity rises there is therefore a reduction in the number of jobs available. The idea has a surface plausibility from the experience of individual industries: It is indeed true, for example, that America’s railroads handle more freight now than they did in 1980, but employ barely a third as many workers. Doesn't it follow that the same fate may await all jobs, that as workers become more productive the economy will need ever fewer of them? It is hard to explain that this involves a fallacy of composition, that the effect of a productivity increase in a given industry on the number of jobs in that industry is very different from the effect of a productivity increase in the economy as a whole on the total number of jobs. In the essay I tried to find a painless way of making that point—and along the way to give readers some idea of what it really means to think about economics, what economic theory really is. 

The essay made some use of the fact that despite large productivity gains in some parts of the U.S. economy—and stagnant employment in manufacturing, mainly because of those productivity gains—America has, just as theory would predict, actually done quite well at employing its growing labor force. Yet there was a period in 1995 and 1996 when the headlines were dominated by stories of layoffs, to such an extent that it was hard to remember that despite the prevalence of such stories the U.S. economy was actually creating jobs at a near-record pace. In the second piece, “Downsizing Downsizing,” I tried to talk about this gap between perception and reality. (For the record: My remark about “emotionally satisfying fictions” was in the original version, writ ten when Robert Reich was still Labor Secretary.) 

While the idea that capitalism suffers from being too productive mainly rests on a naive failure to think the matter through, some commentators who hold this view have managed to convince themselves that they are bold and forward-looking thinkers, drawing their inspiration from that great economist John Maynard Keynes—who must, as I argue in “Vulgar Keynesians,” be turning over in his grave.

In May of 2011, Sandwichman posted an Open Letter to Paul Krugman at Ecological Headstand and sent a hard copy by mail. Sandwichman received no reply. 

Let me make this simple: is the lump-of-labor fallacy claim "what economic theory really is" or is it a symptom of precisely what is wrong with economics -- as Cardiff Garcia has described it, a "lazy but common retort" to concerns about the displacement of workers?

How the 'Conomist Got His Lump

THE 'Conomists' lump is a hideous hump
    They pedantically teach at the U.;
But uglier yet is the slump we all get
    When we swallow this muck that they spew.

Rudyard Kipling's "How the Camel Got His Hump" is a Just-So story. It is Just-So 'scrutiating cutesy, patronizing, colonialist and moralistic. Idleness is condemned and loyal obedience to one's master is extolled.

When the diligent dog, horse and ox complain to their master, man, about the slothful camel's shirking, man tells them they three "must work double-time to make up for it." You see, there was only so much work to go 'round (with the world so new-and-all) and if some of it couldn't be spread thin onto the camel, then that part had to be humped up on the other three. 

Dorning Rasbotham's confident assertion that "a cheap market will always be full of customers" is another Just-So story. Unlike Kipling's fable about the camel, Rasbotham's tale has become a staple of economic dogma. 

No evolutionary biologist would sneer at the general public for their lack of erudition regarding the fact that the camel's hump was "brought upon [his] very own self by not working." Yet that is precisely the refrain that economists repeat ad nauseum. Even economists who claim to reject the "unemployment is always voluntary" placebo are loath to repudiate the seductive cheap-market-full-of-customers creation myth and article of faith.

UPDATE: I have been informed in a comment that "a cheap market will always be full of customers" is "obviously and strictly true." Well, tell THAT to Squire Rasbotham, Mr. blissex. Dorning Rasbotham apparently didn't think it was so "obviously and strictly true" because he chewed up 18 pages of his pamphlet before getting to this supposedly obvious and strict truth.

Of course the Sandwichman suffers from the obvious and strict rhetorical disadvantage of actually having read the text in question. It is always much easier to assert things and claim they are facts than it is to present evidence and show how that evidence supports a hypothesis. (That is why we are doomed, DOOMED!)

For the edification of those who suppose they knows everything they needs to knows about Rasbotham's Theorem from its conclusion (without reading his pamphlet or knowing what his premises were) here is a brief recap of the argument:

1. The interests of the poor should have the highest priority (after all, what would become of the rich if there were no poor people to till their grounds, and pay their rent?);
2. There is not so great a difference between the real interests of the rich and the poor;
3. Trade is a large and difficult subject that requires deep thought, long study, extensive reading and large experience to form a true judgment;
4. Machines distinguish men in society from men in a savage state. There are many examples showing how machines invariably benefit people;
5. All improvements at first produce some difficulty but many receive the benefit while only a few suffer, probably not much and hopefully not for long (they should be grateful for the opportunity to make a sacrifice for their fellow man);
6. Trade will find its own level. Those thrown out of their old employments will find or learn new ones. Those who get a disproportionate gain will soon find many rivals and lose their temporary advantage; (take that, Bill Gates!)
7. There is a disposition among people to be unduly alarmed by new discoveries;
8. Even if machines (or globalization or the hypertrophy of the finance sector) are evils they are necessary evils. We might as well make the best of them;
9. This would be a prosperous time for the poor, if only they weren't so inclined to carry their money to the alehouse;
10. Anyone who disagrees with the above truths is a irreligious, conscienceless scoundrel; and (drumroll),
11. That "there is only a certain quantity of labour to be performed" is a false principle.
12. Because -- ta-da! -- a cheap market will always be full of customers!  

Saudi Arabia, Russia, And The Price Of Oil

In today's Financial Times there is a long article, "Riyadh's Gamble," by Anjit Raval that discusses the details of how the Saudi decisionmakers regarding oil, led by Oil Minister, Ali al-Naimi, came to decide not to cut production to hold up the price of oil.  The general thrust of this is well known, that as the price fell last year, all the other producers called on them to cut production as they had done in the past.  But they did not do so.  One tidbit in the article is that through September the debate continued within Saudi Arabia, but that the first sign of their new stance came on October 7 when an assistant to al-Naimi, Nasser al-Dossary, at a meeting in New York at Mike's Bar with a group of energy policymakers, responded to a comment that "Of course you're going to cut production," with "What makes you think we're going to cut?"  Ooooh, the price slid hard after that leaked out.

The final settlement on this came at an OPEC meeting on November 27 when the Saudis convinced the group as a whole not to cut production to let the higher cost producers bear the brunt and lose market share, with the Saudis openly stating that they were not going to be the world's patsies on this anymore (not their precise language) and lose market share while propping up rivals.  A crucial point of the article is that this has had nothing to do with orders from the US or political games.  This has been very strictly business.

The previously unreported bottom line on this came a few days prior to the OPEC meeting.  There was a last moment when the Saudis might have been willing to cut production.  But, they were not going to do it by themselves.  They had to take at least one other really large producer and exporter with them (the US is one of the top three producers, but does not export).  That other member of the top three is Russia, and al-Naimi apparently had a meeting with top oil officials from Russia and Mexico just prior to the OPEC meeting.  He reportedly suggested to the Russian official that they both engage in a simultaneous and equal cut, given that they are about equally sized in production.  The Russian official said no, so al-Naimi said, enjoy the outcome (actually what he said was not recorded).  In any case, Russia has taken a much larger economic hit than Saudi Arabia, and while many have claimed that this was the Saudis playing some US-inspired anti-Russian game, this looks much more like the Saudis just playing market hardball.  After all, among those suffering from the price fall have also been shale and other high cost producers in the US (and Brent is now back down to $56 per barrel while WTI is back down to $48 per barrel).  Fun stuff.

Barkley Rosser

"Jobs, automation, Engels’ pause and the limits of history"

Cardiff Garcia at FT Alphaville, Jobs, automation, Engels’ pause and the limits of history:

The lazy but common retort to the idea that technological advancement would massively displace workers has long been to accuse the fear-monger of having perpetuated the lump of labour fallacy. 

Luddites!, the response goes, technology constantly takes jobs from workers, but the gains in efficiency lead to a surplus for the owners of companies (via higher profits) and for the consumers of their products (via lower costs). Those surpluses are then spent on other investments and consumer products, some of which we haven’t yet imagined but nonetheless will lead to more jobs in other sectors. 

Buy a cheaper car, and you have more money to spend on lavish restaurants, which leads to more jobs for chefs and waiters and sommeliers, and so on. 

... 

Optimists also like to cite the teachings of history in addition to the Luddite mistake, as the two are obviously related. So many times have we worried about the destabilising potential of technology, they say, and every time the economy has adapted, creating new jobs to replace the lost. 

An appeal to history isn't inherently misguided. Our understanding of the world is unavoidably shaped by the historical behaviour of the variables that we can identify as useful for our assessment. What else can we do? 

Yet the more aggressively we scavenge history for useful lessons, the more confusing are the clues we dig up. And that’s to say nothing of the clues that we fail to dig up. 

A few points are useful to keep in mind when thinking through history’s lessons for the issue of jobs and automation. [continued]

 The Sandwichman is very pleased.

A 'Make-Work Bias' By Any Other Name...

What is it with all the aliases, anyway? The lump-of-labor fallacy, the lump-of-work fallacy, fixed Work-fund fallacy, Luddite fallacy, make-work fallacy, make-work bias...

MaxSpeak calls attention to a lecture by a George Mason University professor, Garrett Jones, which advocates less democracy. Ten percent less democracy, to be precise.

The cornerstone of Jones's argument is Bryan Caplan's "four democratic biases" outlined in his 2006 book, The Myth of the Rational Voter. One of those supposed democratic biases is our old friend. the lump-of-labor fallacy make-work bias. Bryan Caplan is clearly a suppository of received wisdom.

So here is the basic idea: "Nineteenth-century economists believed they had diagnosed enduring economic confusions, not intellectual fads, and they were right." So, according to Caplan and Jones we should disenfranchise voters because of what "nineteenth-century economists" thought and hand over policy-making power to folks who think those nineteenth century economists were right. Sounds logical.

I have a better suggestion. In an earlier post I cited George Bernard Shaw's "strong opinion that every University on the face of the earth should be levelled to the ground and its foundations sowed with salt."

Let's start with George Mason University.

The Harsh Truth about Israel

There has been a lot of concern—completely justified, in my opinion—about the rise of antisemitism in Europe and elsewhere.  Jews are being attacked, murderously even, for the simple fact of being Jews.  Antisemitic pronouncements, about the evil that Jews supposedly spread throughout society, are once again being broadcast without shame.  Once the “socialism of fools”, antisemitism has become the anti-imperialism of fools.

People are always responsible for their actions, and nothing I am about to say contradicts the primary responsibility that falls on antisemitic groups and individuals.  But even the worst behavior needs to be understood if the goal is to build a better world and not simply denounce the evils that exist.  Understanding is not the same as excusing.

So now we get to Israel.  Israel has violated international law and common morality in its occupation of Palestinian territories and ruthless repression of those who live there.  Unfortunately, it is hardly the only country that has perpetrated crimes beyond its borders.  There are also unresolved issues concerning the founding of the state itself, but what I’m about to say doesn't depend on how deeply you think Israel’s depredations are rooted in its origins.  The point is that we don’t judge entire peoples on the basis of the behavior of governments; otherwise a large portion of the human race would stand condemned.

When a government commits a crime there are circles of responsibility.  The greatest burden falls on those who directly commit it, the specific leaders and their henchmen.  The second circle brings in those who enabled and supported the criminals, the rest of the regime and its key sponsors.  If the country is an electoral democracy those who voted for the criminals share a portion of the blame as well.  Finally, if the crime is great enough, those who live in the country and had the opportunity to resist but didn't are also implicated.  Under no circumstances are those who neither lived in the country nor took steps to support its government tainted at all.  Think of the Japanese-Americans who were interned after Pearl Harbor: the immense—and racist—injustice of blaming each of these American citizens for actions committed by a government that wasn't democratic and wasn't theirs.

So the actions of the Israeli government shouldn't have any bearing on antisemitism beyond its borders.  But there is one problem: the government of Israel itself claims to act not only on behalf of its own citizens but all Jews throughout the world.  According to them, they are not simply the government of a small country on the eastern shore of the Mediterranean, but of every Jew wherever she may happen to live.  In doing this, by its own words, this government authorizes those who oppose its policies to indulge in blanket antisemitism.

Israel can’t have it both ways.  It can’t claim to be a democracy in the normal sense of a government chosen by its own citizens and also a state that represents millions of noncitizens who live in other countries.  These non-Israeli Jews didn't vote for the Israeli government, or against it for that matter.  They played no role in carrying out its policies.  They are in no position to throw sand in the gears.  They have their own countries to be involved in and responsible for.  This is why there is no political excuse for antisemitism.

In short, the claim that Israel is the government of all Jews everywhere and not its own citizens contradicts the fundamental principles of democracy and contributes to the spread of antisemitic ideas.  It’s bad for the Jews.

Worth a Try...

"I have a very strong opinion that every University on the face of the earth should be levelled to the ground and its foundations sowed with salt." -- George Bernard Shaw

Gobs O' Jobs!

At PBS Newshour's MAKING SEN$E, John Komlos claims "America can be a full-employment economy once again":

Currently, adjustments to the decline in demand for labor occur by reducing the number employed so that their labor time falls abruptly from 40 hours to zero. Employees work 40 hours, 20 hours or not at all. Would anyone “behind a veil of ignorance” design such a rigid system from scratch, a system with so much uncertainty and volatility–with working times ranging from zero to 70 hours per week even in normal times? 

It would be much more palatable to have the adjustment occur in the number of hours worked so that instead of dismissing workers, the available work would be divided among those wanting to work BECAUSE THERE IS A FIXED AMOUNT OF WORK TO BE DONE! Hence, an institution that distributes work more evenly would be a reasonable solution to this quandary.

I have, of course, added emphasis to the words "because there is a fixed amount of work to be done." I also added the words themselves because they were inadvertently omitted from the original. This is standard economic science procedure. Economists have been making this mind-reading correction for decades. Nobody objects. If you can't beat them, join them.

Two Solidarity Lessons, One Wrong

Living in the backwater of a medium-sized town in the Pacific northwest, I've just had a chance to see the latest Dardenne brothers film, “Two Days, One Night”.  While the reviews were generally appreciative after it came out last year, the overall view was that this is not one of the brothers’ best.  I agree with that.  (Their very first film, “La Promesse”, is a timeless masterpiece.)  The problem is not on the production side, which features the elegant naturalism that comes like breathing to the Dardennes, although I found Marion Cotillard a little too charismatic to fit the role of a working class woman recovering from depression.  (There can be a charisma to depression, but it’s not the same as hers.)  The problems with the film were at its core, its ethical structure.

First, very briefly, we should dispose of Tyler Cowen’s typically blinkered take on 2D1N.  Cowen says the film doesn't acknowledge marginal productivity theory.  It doesn't take seriously the point that Cotillard’s character can’t justify her employment by its contribution to the firm’s bottom line.  Instead of buttonholing her coworkers, she should be hitting the books, picking up skills to enhance her productivity.  Employment is not a realm of morality, just costs and revenues.  I realize that this is how the matter is portrayed in many (but not all) economics textbooks, and it’s not devoid of truth, but it is radically incomplete.  Productivity is not simply carted into the firm by workers like bricks in a wheelbarrow; it is the product of a production system, influenced by, among other things, the compensation and personnel strategy of the firm.  In good Kirznerian fashion, the solar firm in 2D1N discovers its workers productivity in the vicissitudes of worker comings and goings, as well as market competition (with the Chinese).  And what it discovers may well change in the future.

Now on to what the real problems are.  Spoiler alert: this film has a surprise twist at the end, which I’m going to reveal.  I think the merits of 2D1N don’t depend on suspense, so don’t panic, but consider yourself forewarned.

All Dardenne films are moral fables, and the moral bedrock is always the same, personal responsibility toward others, although it takes different forms.  In this film the issue is laid out immediately: Sandra (Cotillard) has lost her job at a photovoltaic fabricating plant.  She took time off to recover from depression, but her boss refused to take her back unless her coworkers agreed to forego their scheduled bonuses.  (A bonus in much of Europe is an expected, routine component of compensation.)  They had an election, but most of the workers voted to keep the bonus and not have Sandra rehired.  In the first few frames, Sandra and her closest colleague manage to convince the boss to hold another ballot on the grounds that a supervisor had tainted the process.  Now Sandra has two days and one night to convince a majority of the staff (there are 16 employees) to support her by giving up part of their pay.  The film follows her through the emotionally exhausting process of visiting them at their homes, one by one, and trying to convince them to make this sacrifice on her behalf.

On every level, the film takes Sandra’s position.  Using long takes and intense closeups, it shows you how everything unfolds from her point of view.  But more to the point, the film embraces Sandra’s cause as an ethical proposition, that solidarity means agreeing to a pay cut in order to allow an extra worker to be hired.  But is it so clear?  Does doing the right thing necessarily mean working for less in order keep everyone on board?  If there were a single company in all of Belgium, and not having a job in it meant destitution, then yes, that’s what solidarity requires.  But Belgium is a market economy with many firms, and the relevant question is whether Sandra’s claim to this specific job is so great as to justify pay cuts for every other employee.  That is the logic of givebacks, which in my book is not the epitome of solidarity.  It is ironic that in this film the Dardennes, champions of the working class, implicitly accept the demand that European countries “reform” their labor relations systems to shift bargaining to the establishment level in the interest of wage flexibility.  You can agree with that if you want, but don’t call it worker solidarity.  I’m not turning the film upside-down, just saying that its ethical core is problematic, and that viewing the problem from Sandra’s point of view is unconvincing.  A different film, using a different technique, could have presented this ethical conundrum in a less manipulative fashion.

Now for the surprise twist.  All along, Sandra has been asking her colleagues to take a personal hit on her behalf.  In a dramatic scene, a fixed term employee, Alphonse, describes his fear that if he takes an unpopular position his contract won’t be renewed.  Ultimately, and bravely, he decides to vote for Sandra and against the bonus.  Sandra narrowly loses the second vote, but she is summoned to the boss’s office, where she is told that she demonstrated her merit by her hard fight, and that she would be given her old job back when the contract of the term employee is over.  Suddenly the shoe is on the other foot: it is Sandra who is placed in the ethical position of having to sacrifice in the interest of another worker.  She sees this immediately, and, while not giving any speeches about it, demonstrates to the viewer that she will not undercut a vulnerable coworker who came to her defense.  The final frames even suggest that, by taking a stand and making her own choices, Sandra can face unemployment with the emotional resources that she lacked when she was simply a victim.

I think that second lesson, given the assumptions embedded in the first one (taking a pay cut to keep a coworker on the job is virtuous), is correct and important.  If you want to think of this film strictly in didactic terms, that insight is the value added.  Here, oddly, the problem is not conceptual but artistic.  The final sequence—the boss’s offer, Sandra’s refusal—take place in just a few moments and the viewer isn’t given any cue that highlights its importance.  In a Hollywood film it would go like this: when the boss makes his offer, Sandra breaks down in tears and thanks him from the bottom of her soul.  She has a big smile on her face as she leaves his office, but then, looking through a window, she sees Alphonse hard at work, honest and dedicated.  There is a closeup of her face as second thoughts begin to emerge.  Then she is flooded by enlightenment, turns around, and runs at top speed back to the boss.  She gives a dramatic speech, accompanied by soaring music, in which she says that she fought not only for herself but for a principle, and now, asked to choose between her own self-interest and a higher morality, she cannot go back to work at Alphonse’s expense.  She strides back down the hall with new dignity, more erect, more knowing.  In the final frames she asks her husband if he would help her search for new work as he helped her track down her former coworkers.  He smiles broadly at her, realizing she is now healed.  She smiles back at him.  You know in this moment that their four-month sex drought (I didn't mention that before, did I?) is going to end tonight.

That’s not the Dardenne way.  They don’t do melodrama, stark emotional cues or musical scores.  (The only music you hear in their films is the music the characters hear.)  It’s all life-as-it-is-lived.  In this case, however, the result is that the most important ethical and emotional moment in the film carries little weight.  Maybe just a touch of Hollywood was in order.

The Abstinence Theory of Value

"Exactly a year before Nassau W. Senior discovered at Manchester, that the profit (including interest) of capital is the product of the last hour of the twelve, he had announced to the world another discovery. 'I substitute,' he proudly says, 'for the word capital, considered as an instrument of production, the word abstinence.' It has never occurred to the vulgar economist to make the simple reflexion, [Marx continued n a footnote:] that every human action may be viewed, as 'abstinence' from its opposite. Eating is abstinence from fasting, walking, abstinence from standing still, working, abstinence from idling, idling, abstinence from working, &c."

Some hundred and twenty years later, in The Anti-Capitalist Mentality, Ludwig von Mises was still beating that hollow "abstinence" drum, crediting what he termed "the three progressive classes" of savers, inventors and entrepreneurs with sole responsibility for driving social evolution from savage cave dwellers to modern industry. 

In what von Mises described as a monumental work, the wily Eugen von Böhm-Bawerk, concocter of the supposed "transformation problem," dispatched Senior's abstinence theory in 1884, albeit with abundant regard toward its supposed excellence and deep insight. I suppose some double counting is cleverer than others. After exposing the fallacy of Senior's abstinence theory, von Böhm-Bawerk risked being more than a little tedious in substituting an even neater sophism in which "pain cost" and "opportunity cost" perform a rather unlikely pas de deux:

If I lay out a sum of money, say £30, for any one useful end, my sacrifice is calculated simply by the gratification which I might have got by spending the £30 in other ways, and which I must now do without.

It is otherwise with the sacrifice of labour. Labour presents two sides to economical consideration. On the one hand it is, in the experience of most men, an effort connected with an amount of positive pain, and on the other, it is a mean to the attainment of many kinds of enjoyment. Therefore the man who expends labour for a definite useful end makes on the one hand the positive sacrifice of pain, and on the other, the negative sacrifice of the other kinds of enjoyment that might have been obtained as results of the same labour. The question now is, Which is the correct way, in this case, of calculating the sacrifice made for the concrete useful end?

Herr von Böhm-Bawerk solved his own transformation problem adeptly with an example in which the pain cost of work was 10, the opportunity cost of the fish that might have been caught was 15, but the opportunity cost of shooting three hares was only 12  And voila! Here is the rabbit (or hare? or fish?) that nimble Eugen pulled out of his sportsman's cap:

What our fish really cost us now is not the positive labour-pain expressed by the number 10—for this we should have undergone at any rate—but the negative loss of an enjoyment which we might have had, indicated by the number 12.

Ten units of what?, you may wonder. Don't ask. All one needs to keep in mind is the non-equivalence between the pain cost of the labour and the opportunity cost of the enjoyment of the results of the labour and therein lies the secret and source of the potentially infinite expansion over time of the opportunity cost of postponing consumption.

No double counting here! "But of course we must never calculate the want of enjoyment and the pain of labour cumulatively..." But of course! Who needs to double count if we can count labour in units of pain and the results of labour in a different number of different units?

I'll give you a million for that.

A million what?

Never mind what, a million is a big number.

Mankiw on Paying for Tax Cuts

Maybe I was too critical of Greg Mankiw:

Dynamic scoring requires the solution of a general equilibrium model. To solve a dynamic GE model, you need to specify how the government is going to satisfy its present-value budget constraint. You might be tempted to ask the model what happens if the government cuts taxes and never does anything else. But you won't get very far.

I’ll only note that the Reagan Administration never exactly got around to addressing the run-up in Federal deficits from its tax cut. And we know the Administration of George W. Bush not only cut taxes twice but also increased Federal spending both through two expensive wars and that Prescription Drug Benefit. As one of his economic advisers, what was Greg Mankiw telling President Bush about satisfying the present-value budget constraint?

He's Baaack! Karl Marx And The Transformation Problem

The annual Eastern Economic Association meetings ended yesterday in New York.  On Saturday a session on Marx's transformation problem drew an audience of roughly 70 people, with talks by Anwar Shaikh and Duncan Foley, both of the New School, Fred Moseley of Mount Holyoke, with comments by David Laibman, formerly of Brooklyn College and longtime editor of Science and Society, the longest running (since the 30s) scholarly Marxist journal in the US.  Besides the unexpectedly large crowd, there was news.

One piece of news coming from Moseley is that Karl Marx is about to have a fresh publication in the English language, his original manuscript for Volume III of Capital, which was only published in German in the 1990s.  I think it is coming from Routledge and has an introduction by Fred.  This is the volume in which the famous transformation problem from labor values to market prices first appeared, with many arguing that it was his inability to resolve this that kept Marx from publishing it in his lifetime, with the version posthumously published being edited by Friedrich Engels.  According to Moseley, most of the changes involve ordering of topics, but apparently Engels left some things out, incluidng at least one tableau.  It is not clear this new edition will resolve the transformation problem, although Fred, who has a new book on the subject himself coming out, thinks that it is solvable as a matter of definition.  As it is, perhaps this new publication will help Marx hold his lead as the all time most cited economist according to Google Scholar (which notes that he does not have an available email address) at 208,688, still ahead of Andrei Shleifer at 196,355,

Both Shaikh, who also has a book coming out on the subject, in his case from Oxford University Press, and Foley, do not seem to think the problem is so easily resolved, but that one must look at the role of money and monetary prices and accounts.  Shaikh seems to think that looking at financial transfers is the way to get at the problem through complicated financial system by tracking the distribution of the surplus values.  Foley emphasized the role of labor mobility in his remarks, as well as economies of scale, not the usual thrust, but also working through the monetary system.

Laibman seemed unhappy with all of them as well as with the temporal sequence system approach put forward some years ago by Ernst, Kliman, McGlone, Freeman, and others (not represented among the speakers), which he described as "mush."  That one involves prices simply constantly changing, which is how the problem gets resolved.   Both their approach and that of Foley stress complex dynamics.  Laibman hopes for a static theoretical model that somehow reconciles the whole thing, admitting he does not have the answer how to do this and not seeming to go along with Moseley's apparent solution.

So, why do we see two new books on this coming out now, well, three counting the English translation of Marx's old Volume III (which I have long thought was his most interesting and important work, and certainly the one most relevant to modern discussions, particularly of macroeconomics, although Moseley claims it is about microeconomics while the other two volumes are macoeconomics)?  The answer I suspect is the big splash made by Piketty with his Capital in the Twenty-First Century last year.  The title clearly genuflects to Marx and Piketty fully acknowledges that, even as his own analysis is not specifically Marxian and quite neoclassical in his theory at least, although he clearly takes Marx's concerns seriously.  In any case, the old boy seems to be back, even if the transformation problem may not yet be clearly resolved.

Barkley Rosser

Update:

Fred Moseley informs me that it will be probably another year before the Marx Volume III appears.  It and his book (sorry, no title) will be published by Brill.  One can get his quite long Introduction to it that lays out the differences between the two volumes, from him at fmoseley@mtholyoke.edu.

From Anwar Shaikh I have that the title of his book is Capitalism: Real Competition, Turbulent Dynamics, and Global Crises, and will be out this fall from Oxford University Press.

Further Update:  Anwar Shaikh has informed me that his book does not deal with the transformation problem.  He did  speak about that issue during the session, however, focusing on the role of transfers in bringing about the allocation of the surplus values.  Hopefully, at least I have not misrepresented that.

Further Update (3/6):  Have received message from David Laibman, who saw this due to commentary on the marxism list about this post.  He says that I did not do too bad a job of summarizing what was said at the session, but he does not like my use of "static" for his view, but rather that he thinks that "higher levels of abstraction" are appropriate.  His comment is long and detailed, so if you want to see it, go to the marxism list, please.  He also says that he would like to retract his characterization of TSSI as "mush," saying, "let sleeping dogs lie."

What In Hell Is Capital?

Dante condemned the merchant bankers of Florence to the seventh circle of Hell. Marx was more lenient -- attributing to monetary accumulation through usury only part of the responsibility for the dissolution of the old feudal relations of production.

"The idea of some socialists," observed Marx in his notebooks on Pre-Capitalist Economic Formations, "that we need capital but not capitalists, is completely false."

"The concept of capital implies the capitalist."

Let us consider the relationship of capital and wage labor not as something which has already reached decisive importance, and encroaches on production as a whole but as something which is still in the process of historical formation. We consider the original transformation of money into capital, the process of exchange between capital existing only potentially on one hand, and the free laborers existing potentially on the other. We then find ourselves naturally making the simple observation, with which the economists make great play — namely, that the side which appears as capital must possess raw materials, tools, and food enough to enable the worker to live before production is completed. Moreover, it would appear that accumulation — an accumulation prior to labor and not arising from labor — must have taken place on the part of the capitalist, which enables him to set the laborer to work and to maintain him in activity, as living labor power.

... 

Urban labor itself had created the means of production, for which the gilds became as great an embarrassment as were the old relations of landed property in an improved agriculture, which was in turn partly the consequence of the greater sale of agricultural products to the cities, etc.

Other circumstances assisted the dissolution of the old relations of production, accelerated the separation of the laborer or the non-laborer capable of work, from the objective conditions of his reproduction, and thus advanced the transformation of money into capital. Such were, e.g., the factors which in the 16th century increased the mass of commodities in circulation, the mass of currency in circulation, creating new needs and consequently raising the exchange value of native products, raising prices, etc. 

Nothing can therefore be more foolish than to conceive the original formation of capital as if it meant the accumulation and creation of the objective conditions of production — food, raw materials, instruments — which were then offered to the dispossessed workers. What happened was rather that monetary wealth partly helped to detach the labor power of the individuals capable of work from these conditions. The rest of this process of separation proceeded without the intervention of monetary wealth. Once the original formation of capital had reached a certain level, monetary wealth could insert itself as an intermediary between the objective conditions of life, now “liberated” and the equally liberated, but now also unfettered and footloose, living labor powers, buying the one with the other. As to the formation of monetary wealth itself, before its transformation into capital: this belongs to the prehistory of the bourgeois economy. Usury, trade, the cities and government finance which arise with them, play the chief parts in it.

In other words, capital is not money nor is it the "objective conditions of production -- food, raw materials, instruments." It is a relationship between the capitalist -- as proprietor of money and the objective conditions of production -- and the propertyless worker, both of whom have arrived at their present condition as a result of historical processes that were not (or not primarily) the effects of capitalist relations of production. Capital did not "pull itself up by its own bootstraps."

The original formations of capital does not, as is often supposed, proceed by the accumulation of food, tools, raw materials or in short, of the objective conditions of labor detached from the soil and already fused with human labor -- not by means of capital creating the objective conditions of labor. Its original formation occurs simply because the historic process of the dissolution of an old mode of production allows value, existing in the form of monetary wealth, to buy the objective conditions of labor on one hand, to exchange the living labor of the now free workers for money, on the other. All these elements are already in existence. What separates them out is a historical process, a process of dissolution, and it is this which enables money to turn into capital. Insofar as money itself plays a part here, it is only to the extent that it is itself an extremely powerful agent of dissolution which intervenes in the process, and hence contributes to the creation of the plucked, objectiveless, free laborers. 

Does the concept of "human capital" imply the human capitalist? From the perspective of Marx's analysis, such a concept would be a Bizzaro-world oxymoron:

The concept of capital implies that the objective conditions of labor — and these are its own product — acquire a personality as against labor, or what amounts to the same thing, that they are established as the property of a personality other than the worker’s.

Can Tax Cuts Lower Economic Growth?

Jonathan Chait has some fun with uber-supply-sider Lawrence Kudlow which we will come back to. But first – let me offer a complaint about the latest from Greg Mankiw. It is true that Mankiw called Dynamic Scoring a can of worms which is an incredible admission for someone on Team Republican. But in many ways, this does not go far enough:

Indeed, having an economic impact is a big part of why policy makers use the tools at their disposal, whether it is the tax cuts of Ronald Reagan and George W. Bush or the stimulus package of Mr. Obama … accurate dynamic scoring requires more information than congressional proposals typically provide. For example, if a member of Congress proposes a tax cut, a key issue in estimating its effect is how future Congresses will respond to the reduced revenue.

President Obama proposed fiscal stimulus when he first entered office because we were in a very deep recession with interest rates near zero, which is an incredibly different situation from where we were in 1981. It is well established that the Volcker FED was going to dictate the path of real GDP with his zeal to conquer inflation so all the Reagan tax cuts accomplished was to dramatically increase real interest rates lowering investment demand and hence long-term economic growth. Mankiw in fact noted this in one of the early editions of his macroeconomic text book but I guess drinking from the Bush43 Kool Aid has tempered his writings over the past 14 years. Which brings me to what Chait wrote about Kudlow:

He has argued continuously, since Bill Clinton raised taxes on the rich in 1993, that higher taxes on the rich must necessarily destroy economic growth, and that lower taxes on the rich must necessarily bring prosperity. As (perhaps owing largely to unfortunate coincidence) the exact opposite has happened instead, he has resorted to a series of frantic post-hoc revisions … Also, Kudlow “says Bush’s temporary and targeted 2001 and 2008 tax cuts failed, but that his big rate cuts in 2003 spurred a five-year ‘boom.’” So, to sum up, Bush’s supply-side tax cuts worked. But he also passed non-supply-side tax cuts (in 2001) that failed, and he spent too much.

Read the rest of Chait’s more accurate account of fiscal policy and the Bush economy. I will only note that there were almost as many conflicting explanations for the 2001 tax cut as there were for the invasion of Iraq. Greg Mankiw at the time argued we needed tax cuts to stimulate consumption and hence aggregate demand. Glenn Hubbard on the other hand was arguing that we needed tax cuts to encourage more savings. Of course these two rationales are mutual contradictions. My whole problem with Dynamic Scoring is that it may have the sign wrong. If we are in a situation where monetary policy can get us back to full employment, a tax cut that encourages consumption will lower national savings if it is not paid for by reductions in government purchases. As such, real interest rates rise lowering investment. Let me close by giving credit in two places starting with an interesting paper on real interest rates over history by James Hamilton et al,:

although it is often assumed in theoretical models that there is some long-run constant value toward which the real interest rate eventually returns, our long-run data lead us to reject that hypothesis

Note in particular the high real interest rates during the 1980’s which should cause anyone to question the supply-side claim that the Reagan tax cuts promoted growth. But let’s also give credit to John Oliver for noting the need for government infrastructure investment even if that requires a rise in gasoline taxes. Odd that an English comedian understands fiscal policy better than someone like Kudlow but then some claim that Kudlow is nothing more than a clown.