There are really two questions we are dealing with here. First, do inputs to production earn their marginal product? Second, do the owners of non-rival ideas have market power or not? -- Dietz Vollrath "What Assumptions Matter for Growth Theory?"
Dietz Vollrath has a new post that goes a long way toward clarifying the battle lines in the fight over the foundations of growth theory. -- Paul Romer, "The Assumptions in Growth Theory"
Huh? These fellows omit the main assumption, the analogy -- "growth is a concept whose proper domicile is the study of organic units..." (Kuznets, 1947). Kuznets cited with approval Sidney Hook's discussion of the dangers of the use of this analogy.
As an argument it is formally worthless and never logically compelling. An argument from analogy can be countered usually with another argument from analogy which leads to a diametrically opposed conclusion.... The belief that society is an organism is an old but fanciful notion. It can only be seriously entertained by closing the eye to all the respects in which a group of separate individuals differs from a system of connected cells, and by violently redefining terms like 'birth,' 'reproduction,' and 'death.'
Growth "theory" gets around this objection to the uncritical use of analogy by ignoring it -- by 'closing the eye' to explicit caveats in the seminal contribution to the measurement of growth. Let's pretend that the economy really is an organism that grows perpetually but never dies.
...growth is not necessarily bad for the environment. And, as a practical matter the only way we will be able to advance environmental goals is by tying them to a growth strategy.
O.K. let's play a game called "[pick a number] myth[s] about [fill in the blank]" "three myths about growth."
Myth: "When people hear the term 'growth' they tend to think of physical objects such as houses, cars, and refrigerators. Growth can mean more of these products."
Reality: "Newer and better treatments for cancer and other diseases are also growth. So is an increase in the number of people going to college or other getting other types of education. Better software is also growth."
Truth: Services don't run on breathair. Services employ workers and require infrastructure. When all the inputs are accounted for -- including labor and infrastructure -- "service and household sectors are not much less energy intensive than are the other sectors of the economy," (Stern, "Economic Growth and Energy" Encyclopedia of Energy, vol 2)
Myth: "growth has been associated with increased use of fossil fuels and other resources."
Reality: "that link has gotten much weaker over the last 15 years."
Truth: The last 15 years? Why stop there? Why not the last 35 years? Or 70 years? Look at David Stern's Figure 4, below. Since 1945 relatively less primary energy has been used per dollar of real GDP. That relative decoupling accelerated after, oh, 1973.
Now look at Stern's Figure 7.
What happened to that "relative decoupling" of GDP from energy use prior to 1973? It appears to have been more than entirely the result of the shift to higher quality fuels. After 1973, there does appear to be some relative decoupling but, as Stern pointed out:
If decoupling is mainly due to the shift to higher quality fuels, then there appear to be limits to that substitution. In particular, exhaustion of low cost oil supplies could mean that economies have to revert to lower quality fuels such as coal.
It's like the warning, "objects in mirror are closer than they appear." In this case, GDP growth and energy use are more closely coupled than they appear. Past results are not a reliable indicator of future outcomes.
Myth: "there are considerable political obstacles to implementing environmental policies in the United States and other countries"
Reality: "there are clearly much bigger political obstacles to putting in place a new economic system"
Truth: Who the fuck knows? Are the relative probabilities of implementing environmental policies or of putting in place a new economic system known? Are they quantifiable? Dean's contention here is where the argument gets interesting. Recall that quote from his op-ed:
...growth is not necessarily bad for the environment. And, as a practical matter the only way we will be able to advance environmental goals is by tying them to a growth strategy.
Yes, in theory, growth is not necessarily bad for the environment. But as a practical matter, it has been increasingly bad for the environment and there is no persuasive evidence of an imminent, fundamental change. So, when Dean says tying environmental goals to a growth strategy is a practical matter, does he really mean 'practical' or does he mean 'rhetorical'?
Dean appears to acknowledge that questioning growth is taboo. Proposals that confront the legitimacy of the growth imperative are systematically excluded from respectable, mainstream conversation. They are dismissed as ill-informed fringe talk by people who "don't understand" that growth isn't necessarily bad for the environment -- that it doesn't necessarily mean more "physical objects such as houses, cars, and refrigerators."
Wanna bet?
The above clip is from Caroline Baum's Henry Hazlitt Memorial Lecture at the 2010 Austrian Scholars Conference, held at the Mises Institute in Auburn, Alabama. You may wonder why Austrian scholars traveled all the way to Alabama for their conference? Never mind.
Baum's lecture, fetchingly titled "Still nonsense after all these years," dwelt on the Sandwichman's favorite fallacy, an appropriate theme for a Hazlitt memorial in that Hazlitt's Economics in One Lesson contained no fewer than four denunciations of "the false assumption that there is just a fixed amount of work to be done."
Less well-known than his ad nauseumLesson was Hazlitt's outspoken disdain, in the 1950s, for what he termed "the fetish of national income statistics." Point four in Hazlitt's catalogue of reasons for doubting the trustworthiness of growth rate comparisons was the following:
Professor G. Warren Nutter has pointed out that there is 'a long-run tendency... for the industrial growth rates to slow down, or retard, as the level of production gets higher.' There are several basic explanations of this. One has to do with a trick of percentage figures. Another has to do with a physical satiety point in human needs. If only one family in a country has a bathtub, and the next year 50 families get one, the rate of growth is 5,000 percent. But when everybody has a bathtub net growth stops. This principle applies to houses, automobiles, radios, television sets, and so on.
Did you see what they did there?
we want bigger houses, fancier appliances, more cars. In the fifties it was a car in every driveway and that gave way to the two-car garage and now the three and the four-car garage.
...
But when everybody has a bathtub net growth stops. This principle applies to houses, automobiles, radios, television sets, and so on.
...
When people hear the term 'growth' they tend to think of physical objects such as houses, cars, and refrigerators
The rhetorical coupling between economic growth and physical objects is highly malleable. It is Sandwichman's contention that it is precisely this ambiguity that has made growth so rhetorically persuasive. Growth appears to mean just about whatever the speaker chooses it to mean with regard to physical objects.
You want bigger houses? Growth means bigger houses! You want to protect the environment? Growth doesn't necessarily mean more or bigger houses! When everybody has a bathtub, net growth of bathtubs stops. But in the fifties, it was a bathtub in every bathroom. That gave way to the two-bathtub bathroom and now the three and the four-bathtub bathroom. Bathtub? Did somebody say bathtub?
This sleight-of-hand is the rhetorical equivalent of the three-card monte trick of throwing down the top card. But it needs to be remembered that the card trick alone is not the whole hustle. Of equal (or greater) importance is the dramatic build-up that induces the mark to bet money on the game.
It makes little sense to argue that the three-card monte game could be played honestly if there were no shills and the dealer did not engage in card tricks. Playing honestly is not the object of the game.
Dean means well when he claims that the only way "to advance environmental goals is by tying them to a growth strategy." Realistically, it's the only way to get into the oldest floating permanent policy crap game in D.C. when it's taboo to not tie goals to a growth strategy.
It is perhaps an understatement to say that there are huge political obstacles "to putting in place a new economic system" but when the existing system precludes effective environmental policies, then there really is not much choice. The rhetoric of growth discounts policies that could make growth "not necessarily bad for the environment."
The struggle against hopelessness is in some ways very personal and in some ways very common. The idea that the global capitalist system as it is today cannot be changed is almost universal. Indeed, this fatalism — at least at the level of individual motivations — is ironically one of the driving forces behind the system’s perpetuation. The vast majority of those whose labors reproduce capitalism (from CEOs and politicians to lawyers and professors; to journalists and software engineers; to store clerks and strip miners) do not do so out of any particular love of the system or economic sadomasochism. Indeed, it is widely recognized that the present order is tremendously destructive, both to the world at large and to our own lives.
Rather, like most of us, they participate — to a greater or lesser extent — in making capitalism ‘work’ because they believe there is no other option. How many of us take up positions in the architecture of power based on the rationale that our reluctance or refusal to do so would be meaningless? How many of us have been forced to compromise our values because of the economic pressures of the system? How many of us have justified these compromises in the name of inevitability? Of course, most of us work because of economic coercion; only a few of us are ever privileged enough to entertain the opportunity to say ‘no’. But, even so, we can credit the relatively minimal involvement of populations in social movements less to ignorance and apathy and more to a sense of utter futility. If capitalism and its co-optation of all that we value is inevitable, why bother to resist? Why not simply seek to do the best one can within the system?
Ravi Kanbur and Adam Wagstaff have weighed in on inequality of opportunity, and you can read their thoughts here. As it happens, I provided a short discussion of the same topic in my textbook, Microeconomics: A Fresh Start. It appears in the appendix to Chapter 18 on Inequality, where I briefly run through various theories of distributive justice. Here's my take:
Equality of opportunity. Perhaps the world is too complex to measure either contribution or effort with any accuracy. There are so many different kinds of effort to compare, and the ways contributions are combined in real-world production systems makes it difficult to tell just who contributed what. Moreover, perhaps both contribution and effort should be recognized, although not in any precise combination. In that case we might be drawn to an approach that says, let all start with an equal chance to succeed, and let effort, contribution and luck determine outcomes however they will. Specifically, the criterion of equal opportunity embodies two elements, that there should be a moment in each individual’s life (the “starting point”) at which equality should reign, and that the rules that govern success should not be biased toward any particular individuals or groups. These are extremely demanding requirements, and it is doubtful that any existing society meets them completely; yet they could serve as goals to be pursued. In practical terms, the first will usually require substantial intervention in market outcomes, since the advantages that children of rich parents would otherwise have need to be offset, but the second is usually thought of as compatible with the way markets should work if they are regulated to be transparent and fair.
There are two large difficulties with equal opportunity as a principle of justice. First, what exactly should be this hypothetical moment of perfect equality—the equal starting line, to use the metaphor of a footrace? Should it be birth? This means that the unequal distribution of luck before birth must be counterbalanced, so that those who are congenitally stronger or more clever should be disadvantaged in equal measure. If that doesn’t appeal to you, then you perhaps imagine a moment even before birth and before genetic qualities are doled out. But related to this is the problem that, as soon as we are born, we begin to do things or have things done to us that, if not offset, will lead to unequal life chances down the road. The further back we push the moment of equality, the more subsequent inequality we must accept. If opportunities are to be equal at birth, then the advantages that some get in childhood will not count against “equal opportunity”. Perhaps you would set a much later age for the “starting point”—say 18. This commits you to much greater intervention to offset all the many pluses and minuses that can accrue by that age, including many that are due to the choices that children make for themselves. At the same time, it can be seen as a bit heartless, since it doesn’t allow for second chances. If someone discovers what they truly want at the age of 25 or so, too bad: they missed the moment of equality and they will have to make do with whatever opportunities they are lucky enough to still have. This sort of criticism can be addressed by requiring a multiplicity of “somewhat equal opportunities” that can reappear as one grows older, but then the criterion loses its sharpness: how equal must these second chances be and how many must be offered?
The second large difficulty is that equality of opportunity is compatible with almost any level of general inequality, as we defined it in this chapter. Suppose, for example, that you have a society that works according to this rule: every year a lottery is held with just one winning number. The individual who wins that year gets everything—every last penny of income, all the wealth, the land, everything of value. Everyone else must beg for enough to survive on. The principle of equal opportunity demands only one thing, that the lottery be perfectly fair, so that each person has the same chance to be tycoon-for-a-year, but surely this demand does not go far enough. Can extremely unequal divisions of life’s good things be viewed as just simply because the system is fair at the moment just before division?
I think there are rather simple, uncomplicated explanations for what is going on.
1. Tsipras and his Syriza allies really oppose the creditors’ terms. The current situation of Greece is intolerable, and there is no way out through the “bailout” deal on offer. It only prolongs the depression and leads to the next round of fruitless negotiations, and the next. The Greek government is not following a game-theoretic strategy. It has reached the limit of what it can put on the table, period. Arguably, as Yves and others here have said, their limit was too broad.
2. The creditors believe, with some justification, they have a grip on Greece that extends beyond the current set of arrangements. A “default” is not the same as a writedown, at least not in this case. Greece can miss payments, and the ECB can force them out of the eurozone, as I think likely. But Greece’s economy is so enmeshed with the rest of Europe’s that repayment conditions can be attached to a neverending list of rights and privileges: citizen movement, access to electronic fund transfers and clearing, tariff exemptions and trade access, regulatory approvals, you name it. There will be permanent pressure to repay. Under these circumstances, from a strictly repayment perspective, it makes no sense to give a centimeter.
3. The eurozone is also a political vehicle to facilitate the disembedding of capital, a project that is infeasible at the national level in most European countries where durable social bargains have been struck. This is what the end of national capitalism means in Europe, and why reform always translates to liberalization. Consider the current strike of pharmacists in Greece, resisting the removal of laws that prevented pharmaceuticals from being sold only in pharmacies. This could not have been achieved without strong supranational pressure. And it isn’t happening (yet) in Germany, precisely because no such pressure has been applied. If the demand to liberalize on all fronts can be rejected by a government as exposed to pressure as Greece’s, what’s the point of the entire project?
4. Despite the handwringing I hear, I have no doubt that finance officials in Greece have prepared a rapid transition to a parallel currency which may or may not be the drachma, complete with transitional capital controls. Obviously they cannot publicize this in advance.
5. Default and the introduction of a new currency will be accompanied by at least several months of economic and political chaos. The middle class, whose need for liquidity prevented them from simply squirreling away their assets to a safe location north of the Alps, will be hit hard. There will be intense political polarization, with demonstrations and counterdemonstrations. But no elections are scheduled. (Incidentally, this is one reason why it makes sense for Syriza to hold the line and face the crisis now rather than delay for a year or two.) In the absence of a coup, and assuming that the economic situation stabilizes later this year, Syriza has an excellent chance to emerge from the transition even stronger than before.
6. The only murky point for me has to do with the possibility of a coup. In a period of extreme polarization, it is always possible to make a military invention appear to be a step toward calm, reasonableness and the restoration of democracy. It’s not as though we haven’t seen a number of such coups in the past few years, in places like Honduras, Egypt and Thailand. The question is whether there is a faction willing and able to step in and assume this role. I have absolutely no idea. But if there is, it cannot act without getting a preliminary nod from Europe. Is it conceivable that support for a coup could be part of the punishment meted out by Europe in retaliation for the “irresponsible” behavior of Syriza?
"After all, an export is more than just an item we are shipping overseas. It is also a product of the values of the people who created it, which it represents."
Also will grow thick new hair on your bald head and give you a younger wife. What else?
The liberty-loving wit and wisdom of Herr Ludwig von Mises:
The vain arrogance of the literati and Bohemian artists dismisses the activities of the businessmen as unintellectual moneymaking. The truth is that the entrepreneurs and promoters display more intellectual faculties and intuition than the average writer and painter. The inferiority of many self-styled intellectuals manifests itself precisely in the fact that they fail to recognize what capacity and reasoning power are required to operate successfully a business enterprise.
The emergence of a numerous class of such frivolous intellectuals is one of the least welcome phenomena of the age of modern capitalism. Their obtrusive stir repels discriminating people. They are a nuisance. It would not directly harm anybody if something would be done to curb their bustle or, even better, to wipe out entirely their cliques and coteries.
In response to musings by Paul Krugman on inequality and growth, Dean Baker asks whether taking more of the benefits in leisure time might skew the appearance of the data. That is to say if the value of leisure wasn't excluded from GDP, those countries that took more leisure -- and, incidentally, are relatively more equal -- would have higher growth rates.
Ironically, Dean doesn'thave the time just now to check that one out. Sandwichman has time but not Dean's virtuosity with data.
As Krugman argues, "there just isn't a striking, simple relationship between inequality and growth; all the results depend on doing fairly elaborate data massaging..." There isn't a striking result to be had from the data for a good reason. There isn't a single relationship in the underlying reality. The results are also constrained by what questions are being asked.
The presumptive question seems to be whether inequality is good or bad for growth. Is that the only question worth asking? Is it the best question? Dean framed his question about leisure as a supplement. He remarks, mock apologetically, "there is nothing wrong with taking the benefits of higher productivity in the form of leisure rather than income."
Wanna bet?
There must indeed be "something wrong" with taking the benefits of higher productivity as leisure. Otherwise, why would economists echo, decade after decade, the lump-of-labor refrain against the "fallacy" of reducing working time? If there really was nothing wrong with taking the benefits of productivity as leisure, then, hey presto, that boilerplate injunction would be superfluous -- inappropriate, even.
Sixty years ago, Simon Kuznets -- who won the Sveriges Bank ("Nobel") Prize for his pioneering work in national income accounting -- was puzzled by his finding that for a limited sample of industrially-advanced countries, inequality didn't increase with growth. He was puzzled, in part, because ceteris paribus, "the cumulative effect of such inequality in savings would be the concentration of an increasing proportion of income-yielding assets in the hands of the upper groups." This was the famous inverted "U"-shaped Kuznets curve. Subsequent research by Thomas Piketty has shown the curve to be an anomalous statistical artifact of the periodization and country selection.
There are a multitude of factors that could explain the Kuznets curve anomaly and it is doubtful that knot could ever be untangled. But let me suggest a factor candidate. The period in which the Kuznets curve prevailed was the period in which the eight-hour day became standardized in the industrially-advanced countries. Instead of looking exclusively at the relationship between growth and inequality, might there not be greater insight gained from investigating the triad of growth, inequality and leisure?
There are two dominant theories of the firm in modern economics, one centered on transaction costs, the other viewing the firm as a nexus of contracts. Both are premised on the notion that, absent any frictions, and especially those due to incentive problems, market coordination would always be superior to the coordination supplied by firms. Hence firms are anomalies, and in the benchmark utopia of competitive general equilibrium they don’t exist at all except as accounting units.
There is a longstanding tradition that attempts to explain the existence and extent of firms according to their efficiencies rather than flaws in the market. Such a view is implicit in Schumpeter, for whom entrepreneurship was a creative force that could not arise in markets composed of infinitely small players. Chandler similarly tried to argue for efficiencies in coordination, especially in continuous process systems. Neither succeeded in providing a formal explanation of what it was about the mechanisms that concerned them that indicated that firms rather than markets would house them, and their views have been largely banished from economic theorizing. Nonetheless, the field of management, where questions of firm capacity and strategy are paramount, continues to draw on a conception of the firm in which administrative organization is capable of coordination that markets cannot supply.
In fact, there is a theory of the firm based on a single and, once it is laid out, rather obvious concept that provides a formal underpinning for management-centered approaches: the role of interactive nonconvexity in production systems. Here are two explanations, one formal, the other intuitive.
Formal: The mono-equilibrium property of decentralized allocative methods depends on (quasi-) convex preference and production sets. There are two potential sources of nonconvexity. One is “wrongly” signed elements along the principal diagonal of matrices of cross-partial derivatives, especially as resulting from increasing returns in production. The other is the presence of off-diagonal elements whose absolute value is sufficiently large to offset the effect of principal diagonal elements in determining the sign of the matrix of cross-partials. The number of equilibria (local optima of an objective function encompassing this structure) is given by the degree of the underlying function. Firms are instruments for selecting among (local) optima by direct specification of detailed quantities or processes.
Intuitive: Markets proceed through an adding-up process, where the collective result is the sum of many small transactions undertaken separately. There exist situations, however, in which the outcome of taking an action depends on the action taken by others—this is the central problem in cooperative game theory, for instance. Markets accommodate just one such interaction effect, the role that cumulative offers (demand and supply) plays in determining prices. But there are many other types of interactions that markets are unable to coordinate. Many arise in production, the effect that one person’s productive activity has on the productivity of another. It is because of such interaction effects that it is necessary to draw up and implement a plan, a set of coordinated activities. The firm is the organizational structure with the capacity to do this.
This view of the firm is based on an understanding of the limits of markets, but not on a presumption of market failure, as that term is understood by economists. Specifically, the presence of externalities (missing markets) is neither necessary nor sufficient for the presence of interactive nonconvexities. Thus there is no policy fix that can render the coordination of activities by firms unnecessary. Also, the make-or-buy decision, which is central to any theory of the firm, is not governed solely by efficiency but depends also on the advantages of implementing plans that cannot be accomplished through contracting externally.
The value of this theory is demonstrated in a practical application: how do we explain the difference in the roles played by worker problem-solving in different kinds of firms? In a recent paper, written with my coauthor Heike Nolte, we show that arguments based on nonconvex profit sets, along with institutional factors that influence strategic choice, can do this.
The central idea that links our coordinated activity theory of the firm to strategic differentiation is the profit landscape, as seen here, with an arbitrary starting point A.
In fact, this kind of landscape is familiar from evolutionary biology, where it is commonplace. In biology the horizontal axes represent two particular traits genetically available to an organism, while the vertical axis represents evolutionary fitness. The point is that natural selection, being nonpurposive, optimizes only locally, and there is no guarantee that organisms can adapt successfully as the landscape changes. In our context, however, the horizontal axes represent a pair of activities the firm might undertake, and the vertical axis is profit. Of course, this three-dimensional landscape is an immense simplification of the large-dimensional relationships analyzed by biologists or students of business.
The firm can navigate its profit landscape purposively, but it does so under conditions of uncertainty: the true hills and valleys are not known and can only be inferred. The core tradeoff is between strategies that emphasize the generation and use of local knowledge to move readily toward hills adjacent to the one currently occupied, versus strategies that seek to minimize encumbrances that might interfere with movements toward more distant hills, less knowable but potentially more profitable. The first is flexible in its existing operations, the second in its ability to exit and enter different operations.
In categorizing firms, we use two related distinctions, between stakeholder and shareholder enterprise models and between coordinated and liberal market environments. The polar cases are stakeholder/coordinated and shareholder/liberal, but we are also interested in hybrids. Our key assumption is that the shareholder firm seeks to maximize the present value of its profit stream, while the stakeholder firm wishes to maximize the likelihood of being profitable over a given time horizon. Logically, this means that the shareholder firm is a “prospector” in the profit landscape, willing to take greater risks in order to maximize potential returns. It makes fewer commitments, including fewer commitments to its workforce, that might interfere with its freedom to shed existing assets and acquire new ones. The stakeholder firm, for which profit outliers are of less value, prefers to specialize in its local production space, taking less risk and maintaining its viability through operational flexibility. The liberal/coordinated market distinction enters by altering the costs or feasibility of pursuing one strategy or the other.
These imputed preferences have implications for the role of workers within the firm. The shareholder firm in a liberal environment will tend to recruit less qualified workers for routine tasks, make fewer commitments to them, invest less in their acquisition of new skills, accord them less autonomy in workplace decision-making, and utilize monetary incentives for performance. It acquires less value from the locally-specific learning of workers who have the capacity and freedom to investigate their own operations. The stakeholder firm in a coordinated environment will tend to recruit more qualified workers on the basis of long-term commitments, provide opportunities for skill-upgrading, permit much greater decision-making autonomy (as well as greater scope for autonomy), while relying to a greater extent on normative approaches to motivation. It will implement more micro-innovations which can form the basis for navigation to adjacent profit hills. If this schema is correct, we should observe these proclivities in the role of worker problem-solving in these different types of firms.
We have thus far conducted three intensive case studies, one with a stakeholder firm in a coordinated environment (Germany), another with a stakeholder firm in a liberal environment (the US), and a third with a shareholder firm in a coordinated environment (Germany again). What we found are the patterns in worker problem-solving suggested by our theory, and informants describe institutional features, motivations and activities to which our theoretical explanations seem to apply.
We intend to continue case study research in worker problem-solving at additional firms. The theoretical apparatus also lends itself to many other questions in economics and business.
Why is it, then, that Sir Laming holds such very odd opinions? It is like asking me why he wears a top hat. He is a Conservative. The reasons are wrapped in the mists of history. But, roughly, I think I know them. He half understands an ancient theory, the premises of which he has forgotten.
This theory assumes that all the productive resources -- savings, labour and the gifts of nature -- which are at any time in existence are normally employed because, so the argument assumes, whenever they are unemployed they are ready to accept a lower rate of remuneration, and employment will always be forthcoming at a sufficiently low rate of wages. That is to say, the theory starts off by assuming the non-existence of the very phenomenon which is under investigation. -- J.M. Keynes, A Cure for Unemployment, April 19, 1929
Together with Simon Kuznets, Atkinson more or less single-handedly originated a new discipline within the social sciences and political economy: the study of historical trends in the distribution of income and property.... All subsequent work on historic trends in income and property inequality to a certain extent follow in the wake of Kuznets’s and Atkinson’s groundbreaking studies. -- Thomas Piketty,"A Practical Vision of a More Equal Society"
Note that word "historical" there. Simon Kuznets's 1947 essay on "Measurement of Economic Growth" outlined many of the biases and obstacles in the way of defining and measuring income and thus growth.
Growth is a concept whose proper domicile is the study of organic units, and the use of the concept in economics is an example of that prevalent employment of analogy the dangers of which have been so eloquently stressed recently by Sidney Hook.
The Sidney Hook reference is to a contribution by him to a slim volume on Theory and Practice in Historical Study, which sought to bring some coherence and consistency to historians' use of terminology. Recall that when economists are writing about historical trends they are practicing historiography. The following are some key passages from Hook's entry on the use of analogy in historiography:
An analogy is a comparison which, on the basis of certain points of resemblance between two cases, suggests the existence of some further resemblance selected because of its relevance to the purposes of the comparison. As a figure of speech it functions as a metaphor to enliven and enrich historical style, e.g , when a revolution is described as a "storm that shook the land" or as a "fever" through which society has passed. As an argument it is formally worthless and never logically compelling. An argument from analogy can be countered usually with another argument from analogy which leads to a diametrically opposed conclusion. E.g., when an analogy has been drawn between colonies and children to suggest the duty of accepting the rule of the mother country, it can be countered with an analogy between colonies and matured offspring whose subsequent growth depends upon independence of their parents.
At best an analogy can only suggest a plausible conclusion whose validity must then be established on other grounds.The uncritical use of analogies is the bane of much historical writing, particularly when the resemblances lack clear definition or when they are blurred and presented as identities. The two most pervasive analogies in historiography are those drawn from biology and physics. For example, "cultures are organisms and world history is their collective biography" (Spengler). "This country will yet be viewed and reviewed as an organism of historic growth, developing from minute germs from the very protoplasm of state-life" (H. B. Adams). The belief that society is an organism is an old but fanciful notion. It can only be seriously entertained by closing the eye to all the respects in which a group of separate individuals differs from a system of connected cells, and by violently redefining terms like "birth," "reproduction," and "death."
Although the proper domicile of the concept of "growth" may indeed be the study of organic units, as Kuznets observed, there is actually another, more crucial and more subtle, analogy being employed in the national income and product accounts. That is the analogy between the firm and the nation. To paraphrase Hook, the analogy between nation and firm is no less formally worthless and logically deficient as an argument than is the analogy between nation and organic unit.
As Hook pointed out, analogy as a figure of speech functions as a metaphor. In the case of "economic growth" (and consequently income distribution) this double analogy -- to firm and to organic unit -- is a decidedly mixed metaphor, which invites all kinds of interpretive mischief from conveniently switching back and forth between features of firms and the features of organisms.
Throw in the mathematical models whose "proper domicile" is neither the organic unit nor the profit-seeking firm but the machine and the historiographic study of economic growth and income inequality truly resembles a dog's breakfast of scientific incoherence.
The most helpful applications of mathematics to economics are those which are short and simple, which employ few symbols; and which aim at throwing a bright light on some small part of the great economic movement rather than at representing its endless complexities.
Thus, then, dynamical solutions, in the physical sense, of economic problems are unattainable. -- Alfred Marshall, "Distribution and Exchange:"
But, as Egmont K-H asked, "Who said what to whom -- and does it matter?"
Well, if you really want to know what Kuznets meant about the dangers of analogy, you have to know what the text he was referencing said. Kuznets, as Piketty pointed out, was the originator of a discipline. He didn't reject analogies; he employed them, critically. Today, we use the analogies indiscriminately. This uncritical abuse of metaphor gets very close to (psst... this is an analogy) Gregory Bateson's description of schizophrenia:
...the ‘word salad' of schizophrenia can be described in terms of the patient’s failure to recognize the metaphoric nature of his fantasies. In what should be triadic constellations of messages, the frame-setting message (e.g., the phrase 'as if') is omitted, and the metaphor or fantasy is narrated and acted upon in a manner which would be appropriate if the fantasy were a message of the more direct kind.
Thanks to John Halasz, this tidbit from "The Growth Delusion," a post on Anne Pettifor's blog, Debtonation:
There are limits. Not just to the lifespan of firms, markets and human lives, but above all to our ecosystem and planet.
So why, when we apply this language to the economy do we assume ‘growth’ is limitless?
...snip...
...while there are clear limits to the growth of the real economy, there appears to be an infinite boom in the growth of credit.
Is that so hard to understand? Any impediment to "economic growth" is an impediment to the growth of credit and any impediment to the growth of credit is an impediment to the accumulation, and concentration of an increasing proportion of, income-yielding assets in the hands of the creditors. Otherwise, how could compound interest compound limitlessly?
Stephen Moore has another silly parade of disinformation:
the unemployment rate started to decline rapidly and job growth climbed. Not just a little. Nearly 200,000 jobs have been added since 2013 and the unemployment rate has fallen to 5.5% from 7.9%. There is a debate about how many of North Carolina’s unemployed got jobs and how many dropped out of the workforce or moved to another state. But the job market is vastly improved and people didn’t go hungry in the streets.
Moore wants to claim employment has soared and he says there was a “debate” about how many people dropped out of the workforce.
Paul Krugman addressed this last year:
because employment in North Carolina hasn’t actually shown any upward bump. Here’s employment in NC and the nation as a whole … There has been a sharp drop in the NC labor force, probably in large part because workers who could no longer get unemployment benefits — which require that you search actively for work — gave up on what they knew was a hopeless quest. The point is that to the extent that there has been a distinctive drop in North Carolina’s measured unemployment rate, it has to do with reduced job search rather than increased employment.
Krugman’s graph document the decline in the labor force after the reduction in unemployment insurance benefits. And Moore wants to say there was a debate? If we go back to February 2008 and graph employment in North Carolina, the net increase has only been 57 thousand not 200 thousand. So there has not been a miracle increase in North Carolina. Average hourly earnings of all employees in North Carolina has increased from $21 an hour in 2010 to $21.85 as of April 2015. A 4 percent nominal increase over a 5 year period is below what we have seen on a national level. This does not sound like an economic miracle at all. I guess the Wall Street Journal will publish even the dumbest of dishonesty.
Who needs decoupling when we've already got maximum feasible disconnect? Is there a difference? Probably not.
"Decoupling" refers to the wishful thinking that GDP growth can be decoupled from greenhouse gas emissions. There are two problems with this pipe dream -- actually three problems. The first problem arises from the distinction between relative and absolute decoupling. Relative decoupling means that GHG emissions continue to rise, just not as fast as GDP growth. Relative decoupling happens.
Absolute decoupling requires that GHG emissions stop growing or decrease while GDP continues to grow. It has never happened.
The second problem is that mere absolute decoupling of GHG emissions from GDP growth is not enough. To stabilize or reduce atmospheric GHG concentration requires reducing GHG emissions to a level at or below the natural rate of absorption of GHG.
The third problem is that there doesn't appear to be the political will to even aim at mere absolute decoupling. The rhetoric of decoupling obscures the distinction between relative and absolute decoupling and celebrates the former as if it was a "sign of progress" toward the latter.
In contrast to the decoupling discourse, disconnect simply talks about restoring output growth to its "potential" without mentioning or considering the relationship between industrial activity and GHG emissions. In disconnect mode, there is no need to pretend that relative decoupling is a sign of progress toward absolute decoupling. That's another department.
But, really, since relative decoupling is inherent in the technological trend, anyway. It probably makes little difference whether one is ignoring the connection between industrial activity and GHG emissions or pretending that a worsening situation is a sign of progress toward improvement.
Those FT monkeys covered in banknote Have champagne and brandy on tap They're up to their eyeballs in franc notes We're up to our noses in crap Those gorilla-mouthed fakers Are longing to see us all rot The gentry may lose a few acres But we lose the little we've got Revolution, it's more like a ruin They're all stuffed with glorious food They think about nothing but screwing And we are the ones who get screwed
