Janet Yellen Achieves Greenspanese

It has finally arrived, the moment where Fed Chair Janet Yellen shows she has the stuff, the language stuff, which is not surprising given that as Vice Chair under Bernanke she was leading the effort to figure out how the Fed should communicate with the rest of the word.  And the answer is, as it always has, as confusingly as possible.

The moment came when after noting that "patient" had been removed from the FOMC's officially written communication, this did not mean "that the Fed has become impatient."  The markets had been roiling and boiling, but this Greenspanish remark quickly calmed them.  Confusion reigns and all is well.

Yellen plays the dialectical tension between openness and opacity better than any Fed Chair yet.  Of course, in the ancient of days, the Fed made its decisions secretly and that was that.  Nobody complained, or not too  loudly or effectively or only occasionally.  But then, in the 1970s it came to pass that Congress made Fed Chairs testify periodically on what they were up to, although FOMC meetings continued to be secret with only delayed reports of what they were up to.  Arthur Burns in his testimonies to Congress would assist his obfuscations by smoking a gnarled pipe, which, with his Hoover era appearence, would make him positively owlish as he would disappear into clouds of smoke.  For Volcker, it was massive cigars that would accompany his massive frame, but the disappearence into smoke would provide the appropriate hint of wizadry, as if Fed Chairs were really Tolkien wizards arguing over golden rings of power, if not over gold itself, long shorn of its divine authority that it had from the days of Egyptian pharaohs when its yellow colar and inertness supposedly represented the eternal sunshine associated with Pharaonic divinity.

Since then the thrust has been for ever more openness and instant press conferences, not to mention the disappearance of smoke, even the cigarettes of Greenspan, although he perfected the language of obfuscation that led to not needing the smoke, if still perhaps the mirrors.  Bernanke never could quite measure up to the Greenspanianly eloquent incoherence, although he learned quickly to avoid rattling the markets with overly open remarks about hard facts. But, with this performance, Janet Yellen shows she has transcended Bernanke, and may have even shown how to be obfuscatory and brief all at the same time, thus achieving a truly dialectical synthesis between openness and opacity.

Barkley Rosser

Do we all share the same future as Greece?

The general public are hearing of the phenomenon of the 'bankrupt nation' frequently these days.  It's an interesting mental abstraction that conjures up images of wages being cut in half, public servants being laid off en-masse, interest rates on housing and business loans climbing through the roof, people going hungry, etc.

On the other hand, an incredible juxtaposition is revealed as banks, whilst in reality being functionally bankrupt are 'bailed out' by the very governments now described as insolvent!  

What's going on? Clearly sources of international finance have become much more important than either national economies and the lives of people who inhabit those countries. How did this extraordinary situation occur?....
Continued at:  Do we all share the same future as Greece?

Grexit, from Threat to Promise

Here are the overriding facts that are unlikely to change without a change in policy:

1. Greece is in the grips of an economic and humanitarian crisis.  In fact, unless there is a substantial change in course, it runs the risk of becoming a failed state altogether.

2. Greek sovereign debt is not payable.  Its society will collapse first.

3. There does not exist the political will in Europe for a transfer union that mutualizes the obligations and needs of Greece on a permanent basis.  This is in contrast, for instance, to the United States, in which most sovereign debt is mutualized and interstate transfers occur on a routine basis.  A transfer union might be a first-best solution in Europe, but it is politically infeasible.

4. Under current circumstances, Grexit would be experienced in Greece, and possibly through much of Europe, as a catastrophe.  A hurriedly introduced drachma would be unanchored, and the redenomination of contracts would be chaotic and disruptive of ordinary business.  Greek savings would either flee or be largely wiped out, with dangerous political consequences.

5. Nevertheless, Greece was a poor candidate to enter the eurozone when it did and is a poor candidate to remain in the zone today.  Above all, it lacks a sufficiently large, diversified and productive export sector to permit growth under a fixed exchange rate without the accumulation of unsustainable current account imbalances.

6. Greece is a small country from an economic perspective, and its political-economic challenges are unique.  Properly managed, Grexit does not need to lead to similar policies for larger countries, like Spain and Italy, whose imbalances are not structural in Greece’s sense.

7. Finally, the political evolution of the antagonism between Greece and the creditor countries is pernicious.  The nationalist rhetoric of victimization and resentment, wherever it occurs, is a proven threat to peace and international cooperation.  This alone should be reason enough to change course.

At present Grexit exists as a threat wielded by both sides to extract concessions from the other.  It is a threat to the extent it would be catastrophic, either for Greece in the form of economic chaos or for Europe in the form of contagion.  Nevertheless, properly prepared, Grexit could be a mutually beneficial solution.

What would proper preparation look like?  Here is the sketch of a plan:

First, Grexit would be proposed as one element in a comprehensive solution whose political premise is substantial generosity on the part of the creditor countries with the understanding that this is strictly a one-time event.

Second, as a precondition for Grexit, the existing sovereign debt of Greece would be largely written off, with a residual obligation (under 50% of GDP) clearly consistent with favorable growth prospects.  This may require Europe to assume some degree of obligation for Greece’s debts to the IMF.

Third, the ECB would provide temporary euro reserves to the Bank of Greece in order to support a stable transition back to the drachma.  This could take the form of a swap line which would be resolved and terminated by some target date several years after Greece’s exit from the euro.

Fourth, the mandatory redenomination of contracts and financial assets whose payment streams would be in drachmas would be permitted to occur over a suitable time frame, such as a year.  In other words, just as with eurozone accession, eurozone exit would involve a period of dual currencies with strict parity in order to facilitate orderly redenomination.  The commitment of the ECB to support the drachma well beyond the period of redenomination would underwrite this process.

The end result would be an economically sovereign Greece and a eurozone no longer obligated to finance it.  Both sides would benefit from better conditions for economic growth and reduced political stress.  In fact, it is probable that the large-scale economic restructuring needed in Greece can be accomplished only under circumstances of fundamental sovereignty and freedom that allow experiment with deep reforms.

Such a Grexit should be viewed as a solution incorporating goodwill on all sides, whose goal is progress and not punishment.  It would not be accompanied by expulsion from the EU or any other retaliatory measure.  After a suitable period of time, Greece could reapply for eurozone membership if it chooses without prejudice—either against or for accession.

UPDATE: I have left out perhaps the most difficult aspect of a gracefully managed Grexit, the issuance of new Greek sovereign debt during the dual currency period.  The more such debt is issued, the greater is the ECB’s de facto commitment to the drachma.  The typical eurozone solution would be to impose an upper bound on Greek deficits over the period, probably adhering to the bright line of the Stability and Growth (sic) Pact, in exchange for drachma support.  This would not be ideal, but under the circumstances it is probably necessary for selling the deal.  And Greece would always have the option of foregoing the support if it had confidence in its monetary and fiscal space.

Simple Models

Take a very simple example. Labour is the only input, there's a constant returns technology, and labour produces one apple per hour. 

Start at full employment, where everyone works 40 hours per week, and nobody wants to work any more than 40 hours. ...

The first thing I notice about such simple models is that in such a world, people would have no need of "simple models" to help them understand what is going on. In short, the "simple model" thought experiment has no cognitive dimension.

The End.

(Unless it's an economist trying to sound like a physicist) 

The US Presidential And Separation Of Powers System Versus Parliamentary Democracy

I have just returned from a week in London where I was lecturing at King's College.  The newspapers are full of the current election race, with the election coming on May 8, or thereabouts.  Outcome unclear, although looks like Conservatives' coalition partner, the LibDems (Liberal Democrats) will take a big hit, but unclear whether more of  their supporters will go to Labour or the Tories or some of the regional parties.  A big question is whether the tea party-ish Independence Party will break into the parliament. Probably neither of the big two will get a majority, so there will be some coalition, with some forecasting that it could be Labour with the Scottish National Party.  That has led some to heavily criticize Labour Party leader Ed Miliband.  For whatever it is worth, quite aside from policy issues, with many unhappy with those of the current Conservative-LibDem government, the press on all sides seems to agree that something hurting Labour is that Miliband seems "less prime ministerish" than David Cameron, the current one.

Watching all this up close made me think more about the comparison with our system in the US that people here take so for granted.  But it is not the most common system in the world, much as we may all go googly over Madison and his separation and balance of powers, which I grant has some virtues.  But excessive partisanship has recently led this to a state of inane gridlock.  The much more common form that Britain has, parliamentary democracy, avoids a bunch of this.  On thinking about it, I can see some other advantages, although I am not sure how many of them more broadly systemic rather than tied to specific aspects of the US and UK systems.

So, one thing that sticks out is how short their electoral campaign periods are.  We now seem to have arrived to a state of permanent presidential campaigns. They are constantly going on.  Here we are only a bit less than two years from when the next one is inaugurated, but every day in the paper and all over the TV talk shows we have the carryings on and money grubbing of the prospective candidates.   In the alternative, the contests are only a couple of months long, with far less money spent.  Much of this is due to the fact that the leading candidates are known and do not have to go through a long primary process to get their party's nomination.  The parties select their leaders, and those people are the party candidates to be prime minister.  They are there all the time, unless they resign or are overthrown, which happens from time to time.  One could say that this means there is a constant election, but it is not.  It is a constant political debate.

Which brings me to the nature of that political debate.  At least in the UK, they do not have this farce of people in Congress giving speeches to empty houses.  Of course, there was a time when members were there and actually debated.  But now, most are out raising money for their reelection campaigns, even if those are six years away and only show up for votes or committee meetings (sometimes).

In the UK parliament, they are all there pretty much all the time, including the PM and his opponent and rival, the recognized leader of  the opposition.  While in the US there are only a few debates between presidential candidates, and they are carefully scripted to avoid having candidates actually have to answer any real questions.  In the UK parliament, the PM has a question time, and the opposition can and does question him closely, with the public listening live.  Indeed, it is because of this that the public has well-developed views about these people, the PM and the opposition leader.  There is no hiding the way the politicians do here in the US, and I think this is why people have their views about the current candidates pretty well established.

Anyway, we are not going to do anything serious about our system, which I fear will simply get worse, at least in the near future.

Barkley Rosser

The Education of Economists: plus ça change, plus c'est la même chose

What’s Wrong with the Economy—and with Economics?
VI. 2:30–4:00 pm: The Education of Economists
Professor Jefferson Cowie, Cornell University
Jeff Madrick, Century Foundation, New York, Editor of ‘Challenge’ Magazine

If Sandwichman was on that panel tomorrow afternoon, he would share with the audience two accounts of the education of economists, one by Larry Summers from a few weeks ago and one by John Kenneth Galbraith from 1975. All that appears to have changed from the 1930s to the 1960s was that rejection of the Luddite (etc.) fallacy was substituted for acceptance of Say's Law as the test of respectability and the 'crackpots' who didn't go along were replaced by 'a bunch of goofballs.'

First, Galbraith:

Until Keynes, Say's Law had ruled in economics for more than a century. And the rule was no casual thing; to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots. Until late in the '30s no candidate for a Ph.D. at a major American university who spoke seriously of a shortage of purchasing power as a cause of depression could be passed. He was a man who saw only the surface of things, was unworthy of the company of scholars. Say's Law stands as the most distinguished example of the stability of economic ideas, including when they are wrong. 

Summers:

 ...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, and if people got more productive they'd be richer and they'd spend and maybe we needed some transition assistance, but that it was all basically going to be okay. That was what I was taught. That's what Bob Solow thought; he was a hero and the other people were all a bunch of a goofballs was kind of what I learned. (Laughter) 

I actually believed that for many years and actually repeated it often.

Today it's much simpler. The dogma is so deeply embedded in the models and their microfoundations it doesn't have to be explicitly accepted or even acknowledged..The goofballs and crackpots are called "heterodox."

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.