Today’s New York Times has an article that claims that “leading economists” (paragraph four) and “environmental economists” (paragraph eight) are upset with Francis for the economic portion of his encyclical “Laudato Si”. Their sole source for this is Harvard’s Robert Stavins, who is quoted as saying that the Pope “is out of step with the thinking and the work of informed policy analysts around the world, who recognize that we can do more, faster, and better with the use of market-based policy instruments...” Later he compares the Pope’s line of thinking to a
small set of socialist Latin American countries that are opposed to the world economic order, fearful of free markets, and have been utterly dismissive and uncooperative in the international climate negotiations....
That’s quite a put-down. Francis is one of these south-of-the-border pinkos, an enemy of freedom, and out of step with educated opinion. That’s Stavins’ side of the story.
What’s the other side? Well, as a matter of fact, the encyclical (paragraph 195) strongly endorses the polluter pays principle and argues that economic growth needs to be viewed as a means, not an end—which would not be regarded as blasphemy in the halls of today’s World Bank, among other places. As for carbon trading, on this the Pope is right and Stavins is wrong: this is a misguided approach in theory (it fails the incentive compatibility test) and has proved disastrous in practice.
More generally, the two mechanisms that could form the basis of an effective climate strategy, a stiff carbon tax or a system of mandatory carbon permits, are vehicles of public control, not private initiative. The one puts you in jail if you don’t pay the government-mandated tax on fossil fuels, the other if you extract fossil fuels without a permit. They are market-using instruments but in themselves not market-based. Either will rapidly increase the cost of energy and energy-intensive goods, which means that social justice requires that action on climate be coupled with substantial resource transfers from rich to poor. The result will be less luxury consumption by the few so that the many can survive.
Come to think of it, the Pope would be a better choice to teach environmental economics. Maybe they could switch jobs: how up is Stavins on the last two thousand years of Catholic doctrine?
Does that phrase, abolition of the wages system, bring to mind "abolition of the law of gravity" or "proposals for the speedy extinction of evil and misery"? This is unfortunate and misleading because unlike gravity, evil and misery, the wages system is a relatively recent innovation. That is not to say that wages were unheard of before they became systematic. Only that they weren't the principal means of subsistence for a large proportion of the population until recent centuries.
The telegraphic version of my argument against the wages system is that it is based on a false accounting analogy, just as national income accounts are based on a false accounting analogy.
The analog is the business enterprise with its system of double-entry bookkeeping. For the profit-seeking firm, monetary receipts and expenditures transit a boundary that corresponds, by definition, with the legal entity of the firm. For the individual employee and for the nation, there is no such obvious correspondence between exchange transactions and welfare. In both cases, the accounting analogy ignores the contribution to public and private welfare of non-market work and environmental amenities and effectively double counts remedial costs -- such as medical expenses and commuting costs -- by what Hueting calls "asymmetric entering": counting expenditures to restore a loss as income with no offsetting entry for the loss.
It turns out that these accounting anomalies are advantageous for some parties in the transactions. That is the "beauty" of capitalist production -- beautiful from the perspective of the capitalist. As Joan Martinez-Alier paraphrases K.W. Kapp, negative social and environmental externalities "are not market failures, they are cost-shifting successes." There is nothing inevitable, universal or eternal in the use of an inappropriate accounting analogy. It is not gravity.
Instead of the conservative motto: "A fair day's wage for a fair day's work!" they ought to inscribe on their banner the revolutionary watchword: "Abolition of the wages system!"
With that sentence Karl Marx concluded the second part of his address on the topic of wage-labor, prices and profit to the Central Council of the International Workingmen's Association. To the end of his exposition, Marx appended three proposed resolutions, the last of which proclaimed:
Trades Unions work well as centers of resistance against the encroachments of capital. They fail partially from an injudicious use of their power. They fail generally from limiting themselves to a guerilla war against the effects of the existing system, instead of simultaneously trying to change it, instead of using their organized forces as a lever for the final emancipation of the working class, that is to say, the ultimate abolition of the wages system.
In his address, Marx refuted the wages-fund doctrine of classical political economy, four years before John Stuart Mill famously recanted his defense of the doctrine in reply to William Thornton's critique. Three years later, the final nail was hammered into the coffin of classical political economy with the publication of Thomas Brassey's Work and Wages, whose conclusions Alfred Marshall predicted "will be found to exercise a very complicating influence on the theory of Distribution."
Before Mill recanted the wages-fund doctrine, it had been the chief "scientific" weapon for denying the legitimacy of trade unionism and the possibility of raising real wages through collective action. After Mill recanted the doctrine, the chief propaganda weapon against unions, higher wages and shorter hours became the claim that the unionists clung to a version of the discredited wages-fund doctrine. This supposed mistaken belief was eventually given the name of the Theory of the Lump of Labour.
In short, until around 1869, unions were wrong because they didn't subscribe to the wages-fund doctrine. After 1870, unions were wrong because they did subscribe. One things was certain. They were always wrong no matter what they believed.
June 27, 2015 is the one-hundred and fiftieth anniversary of Marx's call for the abolition of the wages system -- a fitting occasion for renewing that call:
We do not forget that we are fighting with effects, but not with the causes of those effects; that we are retarding the downward movement, but not changing its direction; that we are applying palliatives, not curing the malady. We shall not, therefore, be exclusively absorbed in these unavoidable guerilla fights incessantly springing up from the never ceasing encroachments of capital or changes of the market. We understand that, with all the miseries it imposes upon us, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society. Instead of the conservative motto: "A fair day's wage for a fair day's work!" we inscribe on our banner the revolutionary watchword: "Abolition of the wages system!"
At Foreign Affairs, Erik Brynjolfsson and Andrew McAfee trot out the legendary Luddites and the proverbial lump-of-labor fallacy as they ask, "Will Humans Go the Way of Horses?"
Humans, stuffed and mounted?
In their penultimate paragraph, B. and M. make a welcome call for discussion about "what kind of society we should construct around a labor-light economy" and ask "How should the abundance of such an economy be shared?"
It's a good question. It's actually quite a simple question, if it weren't for a dense propaganda smokescreen, this magazine of untruth, laid down over more two centuries.
There are three issues here. One is that reducing the hours of work would be a marvelously effective way of sharing the abundance of a "labor-light economy." That's the good news. The second issue is that it takes materials and energy to construct and operate robots. Did someone mention greenhouse gas emissions and climate change? I didn't think so. The third issue is that the good news answer to the first issue is a taboo "fallacy" according to the lump-of-labor smokescreen.
Karl Marx, to whom Brynjolfsson and McAfee refer in their second paragraph, described the "great beauty of capitalist production" as consisting of the fact that "it not only constantly reproduces the wage-worker as wage-worker, but produces always, in proportion to the accumulation of capital, a relative surplus population of wage-workers [emphasis added]."
By "beauty," I don't think Marx meant aesthetically pleasing. More like "it's a feature, not a bug." The relative surplus population of workers, the reserve army of the unemployed, is not incidental to capitalist production. It is not a "market failure" or an "externality." It is how the system works. To solve the problem of a relative surplus population of workers would require abolishing the wages system -- thus Marx's declaration, in the June 27, 1865 conclusion to his speech on Value, Price and Profit to the First International Workingmen's Association:
...the working class ought not to exaggerate to themselves the ultimate working of these everyday struggles. They ought not to forget that they are fighting with effects, but not with the causes of those effects; that they are retarding the downward movement, but not changing its direction; that they are applying palliatives, not curing the malady. They ought, therefore, not to be exclusively absorbed in these unavoidable guerilla fights incessantly springing up from the never ceasing encroachments of capital or changes of the market. They ought to understand that, with all the miseries it imposes upon them, the present system simultaneously engenders the material conditions and the social forms necessary for an economical reconstruction of society. Instead of the conservative motto: "A fair day's wage for a fair day's work!" they ought to inscribe on their banner the revolutionary watchword: "Abolition of the wages system!"
Abolish the wages system? But how?
Conveniently, the beneficiaries of the wages system (those FT monkeys) have been telling us how for 235 years. Only they have been screaming, "Don't!" Why is the reduction of the hours of work denounced as being based on a fallacy? Because ultimately, eventually, it could lead to the abolition of the wages system! We wouldn't want that to happen, would we?
Thus the law of supply and demand of labour is kept in the right rut, the oscillation of wages is penned within limits satisfactory to capitalist exploitation, and lastly, the social dependence of the labourer on the capitalist, that indispensable requisite, is secured...
To the naked eye, abolition may look like a one-shot, all or nothing proposition. Not so. Abolition can be incremental. It can proceed in stages. The first stage can consist of simply not forgetting that in their everyday struggles over wages "they [the working class] are fighting with effects, but not with the causes of those effects."
Going beyond not forgetting, I have proposed a form of unionism, the "labor commons", that regards labor power as a common-pool resource to be collectively managed rather than as a commodity to be sold by each individual worker. Conceiving of labor as something other than an extension of and thus the private property of the individual worker is a tall order. The principle of labor as private property is enshrined in chapter five, "Of Property," of John Locke's Second Treatise of Civil Government:
...every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his.
Except for the most part we are not talking about "the labour of his body, and the work of his hands." We are referring to a complex division of labor, co-operation and means of production that dwarfs the manual labor of a person. Regarding labor power as a common-pool resource recognizes the greatly-enhanced social productivity of labor. The wages system is calculated to siphon off the lion's share of that social productivity and award it to the owners of capital.
How does that happen? Consider the wage prisoner's dilemma: given a choice between working long hours for more money and working short hours for less money, many will chose to work longer hours. But if a preponderance of workers choose (or are compelled) to work long hours, they will oversupply the labor market, depressing wages. They may end up working longer hours for less money.
This is not rocket science. It is elementary supply and demand: an observed regularity. And, no, it does not imply or assume "a fixed amount of work to be done." If I flood the market with bananas, it is likely the price of bananas will fall even if the demand for bananas increases in response to the lower price. It is conceivable that the temporarily lower price could instigate a banana craze that subsequently overwhelms the initial price decline. But as a rule...
Imagine the following scenario:
One hundred workers are fully employed for 40 hours a week. The current wage is $10 an hour. Due to some inscrutable technical feature of the production process, it is determined that optimal scheduling requires workweeks of either 36 hours or 44 hours.
After adjustment to the new schedules, the uniform wage rate will be adjusted to somewhere between $9.09 and $11.11 an hour, depending on the proportion of workers who choose each schedule. Weekly pay will thus range between $328 and $400 for those working a 36-hour week and between $400 and $488 for those working a 44-hour week.
If half the workers choose a 36-hour week and half choose a 44-hour week, hourly wage will remain at $10 and thus the weekly pay will be $360 and $440 respectively. If a majority of more than 55% of workers chose the 44-hour schedule, some workers will have to be laid off, starting with those who have opted for the 36-hour schedule. That should be about enough information to figure this out.
Guardian: "UK under pressure to respond to latest Edward Snowden claims"
The reports first appeared in the Sunday Times, which quoted anonymous senior officials in No 10, the Home Office and security services. The BBC also quoted an anonymous senior government source, who said...
Milton: Of Reformation in England, the Second Book
To be plainer, sir, how to solder, how to stop a leak, how to keep the floating carcass of a crazy and diseased monarchy or state, betwixt wind and water, swimming still upon her own dead lees, that now is the deep design of a politician!
Paul Samuelson,"Evaluation of Real National Income,"1950
Production possibilities as such have no normative connotations. We are interested in them for the light they throw on utility-possibilities. This is why economists have wanted to include such wasteful output as war goods in their calculations of national product; presumably they serve as some kind of an index of the useful things that might be produced in better times.
Or to paraphrase George Orwell, "If this boot wasn't stamping on your face, you could put it on your foot and it would keep your toes warm -- FOREVER!"
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.
