Zero-Sum Foolery 4 of 4: Wage Prisoner's Dilemma

Soon after the wages-fund doctrine fell out of favor with economists, it was immediately attributed to trade unionists under the label of the "fixed work-fund fallacy" and then the "Theory of the lump of labour." In denunciations of the lump-of-labor fallacy, it has become fashionable recently to appeal to the notion of the "zero-sum game" in addition to the customary allegation of a "fixed amount of work to be done."

What follows is a brief sketch of the wage prisoner's dilemma that I modified from one posted last June. The outline can be elaborated by thinking of the dilemma in terms of Garrett Hardin's "Tragedy of the Commons" and Elinor Ostrom's analysis of common-pool resources. I have previously presented the perspective of labor power as a common-pool resource and a full treatment of wage prisoner's dilemma would incorporate those arguments. I've added a pay-off matrix at the end.

The principle of labor as private property is enshrined in the chapter, "Of Property," in 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 just "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 this augmented 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. However, weekly output per worker is the same for a 36-hour worker and a 44-hour worker. Hourly output is correspondingly higher for the 36-hour worker. Pay is determined by averaging total output and aggregate hours of the workforce as a whole.

After adjustment to the new schedules, the uniform wage rate will be 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.

One payoff matrix – out of 99 – for each worker would look something like the following, with the worker's choice occupying the rows:

Assuming an individual was indifferent about the loss of leisure time, that individual would be "better off" choosing a 44-hour workweek whether all the other workers chose 36 hours or 44 hours. Aside from that assumption, the best option would depend on the relative strengths of the worker's preference for leisure, risk aversion and assumptions about other workers' preferences.

This is, of course, an extremely simple-minded example. It is meant only to suggest that "zero-sum thinking" is not the sole possible explanation for people's anxieties about unemployment – it is unlikely to be the most plausible.

Despite all the arrogant rhetoric about zero-sum fallacies committed by advocates of shorter working time, early retirement, trade protectionism or limiting immigration, there doesn't appear to have been any research to substantiate the claims empirically. There has, however, been empirical research on prisoner's dilemmas or social traps, as the tragedy of the commons model is also known. Elinor Ostrom was one of the authors of "Cooperation in PD games: Fear, greed and history of play" that references Rapoport's earlier studies. "Take-Some Games: The Commons Dilemma and a Land of Cockaigne," by Peter Mitter is included in Paradoxical Effects of Social Behavior: Essays in Honor of Anatol Rapoport.

Another kind of game has evolved with a primarily didactic rather than investigative purpose. Julian Edney's nuts game and Linda Booth Sweeney's harvest game exemplify the commons dilemma or social trap learning game. In principle, there is no obstacle (other than time and money) to incorporating a harvest-type game into a research design similar to the prisoner's dilemma research conducted by Rapoport, Ostrom and their respective colleagues.

Epilogue: Is the Road to Hell Paved with Pareto Improvements?

The Paul K Smear Patrol

Krugman can be ferocious going after the Right, but he also has a thing for the Left, as I recall from his trade purism of the 90s.  Right now, he’s on an anti-Bernie, pro-Hillary jag and pulling no punches.

So the New York Times ran an article about how Sanders’ slow start in campaigning has put him in a hole it’s difficult for him to dig out of.  Fair enough.  In general, there were two points: he assumed early on that he didn’t have a realistic chance of winning, so he geared his campaign to spreading a message rather than building a constituency; also, he postponed direct criticism of Clinton over things like her Wall Street “will talk for money” shtick.  Ultimately, I think the problem haunting Bernie is one the US Left has had for decades, adaptation to powerlessness.  It has internalized its defeats in the 1970s and 80s and chosen expressive over practical politics.  That’s a longer story for another day, but I think Bernie was as blindsided by his success as anyone else.

But that’s not what Krugman reads.  According to him, Sanders is being criticized by the Left for not smearing Clinton soon and aggressively enough.  By “smear” Krugman refers to Clinton’s accommodations to the fossil fuel industry, finance, etc.  Lefties are deluded into believing Clinton is guilty of these things because they are under the spell of yesteryear’s “vast conspiracies” against the (Bill) Clinton presidency.

Well, what to say?  He reads an informative news article through a rather restrictive lens.  He is too partisan to recognize that the Clinton machine—the Foundation, the campaign—are accommodative toward big pools of money.  My speculation is that PK thinks the Left is a bunch of amateurs who have no business being anywhere near power, and that the citadels of expertise (which includes economists who are affiliated or will affiliate with Clinton) need to be defended against the barbarians.  If it isn’t that, something is causing this guy to lose his analytical balance.

Zero-Sum Foolery 3 of 4: Forecast Factory

Long before the issue of anthropogenic climate change arrived on the doomsday agenda, Lewis F. Richardson anticipated climate modeling with his failed attempt to forecast weather numerically. His calculations predicted surface pressures 150 times higher than observed:

Paradoxically, then, the most time-consuming, precisely calculated forecast in history was also among the least accurate ever prepared by any method.

Some consolation could be had, though, from Richardson's fantasy of the "forecast factory." In A Vast Machine: Computer Models, Climate Data, and the Politics of Global Warming, Paul Edwards praised Richardson's metaphors of the factory for "reach[ing] to the heart of computing as a coordinated human activity that harmonizes machines, equations, people, data, and communications systems":

At the same time, they stand in stark contrast to today’s dominant metaphors of computation, which are mostly individual: the brain, memory, neurons, intelligence. Richardson’s forecast-factory remains a better description of the practical reality of computing. The limits of computer power, even today, stem from these human and material dimensions.

Richardson had more success investigating the mathematics of arms races. The September 1957 issue of Conflict Resolution was devoted to Rapoport's essay on Richardson's mathematical theory of war, an essay that Schelling described as "magnificent."

In his assessment of the failures and successes of Richardson's theory, Rapoport stressed the investigative rather than explanatory function of mathematical models: "Contrary to a prevalent meaning of 'model' in many theoretical formulations, the main function of a mathematical model is not an 'explanatory' one." The distinction is fundamental to Rapoport's profound methodological objection to the pretentious "rational" pursuit of solutions to problems and answers to questions. In Strategy and Conscience, Rapoport reaffirmed that "The important end product of such [experimental] research is not an answer but a question."

The value of game theory, Rapoport was later to insist, lay precisely in its demonstration of the limits of supposedly rational choice. This is an insight that the strategists have either never grasped or refused to acknowledge. Philip Mirowski has been scathing in his criticism of "the strategic community" – including Schelling – for their misrepresentations of "what game theory could ever hope to do." The strategists' "image of game theory was one of the purest instrumentality, of the labcoated expert 'thinking about the unthinkable.'"

Not all "unthinkable" things were eligible to be thought about, though. Some thoughts, namely Rapoport's eloquent critique of strategic thinking, had to be castigated and dismissed as "defeatist," "moralistic" – much as the economists feel compelled to ridicule the fallacies of those who refuse to genuflect to the prescribed articles of faith.

As Rapoport observed in his reply to Albert Wohlstetter's bitterly dismissive commentary on Strategy and Conscience:

...the cognitive assumptions of the strategists are neither revealed truths nor self-evident facts. They are rather derivatives of a power-oriented value system, which sharply delimits the cognitive horizon of its adherents. It is high time we stopped identifying narrowness of vision with 'realism.' It is high time to stop calculating long enough to think awhile, perhaps even to listen to the voice of our conscience.

Rapoport's reply compared the strategists' assumptions to the way that 19th century political economy "conceptualized man's economic activity in a way which made it appear inevitable that the poor must forever remain poor." Central to that conceptualization were reverence for what eventually became known as Say's Law and the wages-fund doctrine, which conceived the wages-fund as a zero-sum game in which trade union action to secure higher wages for one group of workers could only result in lower wages for others.

Zero-Sum Foolery 4 of 4: Wage Prisoner's Dilemma

Do Rising Rents, Especially For The Poor, Mean We Do Not Have A Housing Bubble?

Aggregate housing prices in the US have recently been approaching the levels seen at the peak of the housing bubble back in 2006.  Indeed, in some locations they have gone higher than they did then, such as in San Francisco.  This has led some to speculate that the US is getting back into a housing bubble again.  Maybe, but probably not, and the reason is not something to be happy about: rising rents, especially for lowest income Americans who cannot afford to buy even a cheap house.

When in 2005 Robert Shiller published the second edition of his influential book, Irrational Exuberance, his new second chapter that documented the long historical path of price-rent ratios in US housing pretty much convinced anybody who looked at it that indeed the US was having a housing bubble as that ratio had been sharply rising and was at all time historical highs.  Indeed, it would peak a year later, with prices falling while rents did not as we plunged into the crash that led to the Great Recession through many channels.

The Economist has provided some more detailed data on prices and rents for three major US  cities, high growth San Francisco, more  intermediate growth New York, and more slowly growing Philadelphia.  Checking the various charts at this site one finds that San Francisco now has noticeably higher house prices than at the 2006 peak, New York has come up from its bottom by about a third to  the former peak, and Philadelphia has nearly fully recovered its peak, but not quite.  OTOH, price to rent ratios have behaved very differently.  At the peak, San Francisco was at 30, but is now just at 20, although rising somewhat.  New York's has not been rising at all, was at 25 at the peeak and now about 14 and stagnant.  Philadelphia was at 15 at the peak, at 10 at its bottom, but now only at 11.  It is simple arithmetic that if prices have been rising substantially while price to rent ratios have not been, then rents must be rising.

Dan Crawford, reposting work by New Deal Democrat at Angry Bear today, lays out more details on what is going on, including one graph that shows the steady rise in rents over time.  More striking and disturbing is the information about rents being paid by lower income people, particularly the bottom third in income of renters.  Their rents spiked noticeably in 2014 (data since not yet available), with the proportion of their incomes these people now paying on rent approaching 50%.  This is a serious problem, and I do not know why exactly this is happening. But there has been little notice or publicity about it. In any case, it is precisely these people who are not able to  afford to buy a house and thus must rent in order to live somewhere.

So, no, despite housing prices approaching former peaks, it does not look like we have a housing bubble (although possibly in a few locations).  But it certainly looks like we have an acute low income rental housing crisis that has not been publicized that has become very severe, making life much harder for those at the bottom in what is supposedly a nicely recovering, almost "Goldilocks," economy.

Addendum:  After posting this read today's Business section of the Washington Post where on p. 2 there is a fairly substantial article by Emily Badger detailing the cost of  living problems for basics for the poor, nothing that transportation, food, and medical costs have also  risen for the poor, although houising cost increases have been the most serious and reconfirming the figure that for the poorest third of renters, housing costs now consume nearly 50% of their income.

Barkley Rosser

The Recession Template, Except there Isn’t One

Barry Ritholtz reassures us that there’s no recession on the horizon.  He could be right, but his argument isn’t.  He says that the business cycle follows a predictable pattern: after its drubbing in the latest downturn, the economy slowly picks up steam.  Growth accelerates and unemployment falls.  Wages rise.  Eventually inflation breaches the central bank’s target, and interest rates are hiked to cool things down.  That’s when we get another recession.  Since wages have barely begun to move, inflation is minimal, and interest rates are scraping bottom, we can be sure that we are a long way from the next slump.

Sounds good, except it imposes a single model on business cycles, when in fact they don’t all fit in one box.  There are three different kinds of cycles, as helpfully laid out in an exemplary textbook I’m familiar with.  One is the policy cycle, as described by Ritholtz.  Yes, that one is flashing a steady green.  The second is the investment/profit cycle, whose theoretical basis goes back to Marx, includes Samuelson’s accelerator model, and is driven by the interaction of business costs (including wages), demand, and new investment.  The key indicator there is of course profit (and expected profit), and there are no clouds on that horizon at the moment.  The third is the financial cycle, of which 2008 was the most recent example.  Instability of that sort results from credit growth that props up asset prices rather than increasing revenues or from mismatches between liabilities and revenues.  In theory it’s possible to see this kind of trouble in advance, although the actual record is spotty.  If we are in for a crunch within the coming year it will probably come from financial forces.

The bottom line is that there are different kinds of business cycles that display different patterns.  You can’t show that one type is signaling expansion and conclude that risk is minimal.  I don’t put any effort myself into forecasting, and I have no idea how likely a recession is in 2016.  People ask me, and I say something like one in three, but that’s just an uninformed prior.

Zero-Sum Foolery 2 of 4: Doomsday Climate Machine

We have met the doomsday machine and it is us.

The "doomsday machine" became a household word after Herman Kahn speculated about building such a device in his 1960 book, On Thermonuclear War. Stanley Kubrick's Dr. Strangelove: How I learned to stop worrying and love the bomb (1964), immortalized the doomsday machine in the following exchange between two Peter Sellers characters, President Merkin Muffley and Dr. Strangelove:

Muffley: Dr. Strangelove, do we have anything like that in the works? 

Strangelove: A moment please, Mr. President. Under the authority granted me as director of weapons research and development, I commissioned last year a study of this project by the BLAND corporation. Based on the findings of the report, my conclusion was that this idea was not a practical deterrent, for reasons which, at this moment, must be all too obvious. 

Muffley: Then you mean it is possible for them to have built such a thing? 

Strangelove: Mr. President, the technology required is easily within the means of even the smallest nuclear power. It requires only the will to do so. 

Muffley: But, how is it possible for this thing to be triggered automatically, and at the same time impossible to untrigger? 

Strangelove: Mr. President, it is not only possible, it is essential. That is the whole idea of this machine, you know. Deterrence is the art of producing in the mind of the enemy... the fear to attack. And so, because of the automated and irrevocable decision making process which rules out human meddling, the doomsday machine is terrifying. It's simple to understand. And completely credible, and convincing. 

General Turgidson: Gee, I wish we had one of them doomsday machines, Stainsy. 

Muffley: But this is fantastic, Strangelove. How can it be triggered automatically? 

Strangelove: Well, it's remarkably simple to do that. When you merely wish to bury bombs, there is no limit to the size. After that they are connected to a gigantic complex of computers. Now then, a specific and clearly defined set of circumstances, under which the bombs are to be exploded, is programmed into a tape memory bank.... 

Strangelove: Yes, but the... whole point of the doomsday machine... is lost... if you keep it a secret! Why didn't you tell the world, eh?

Also in 1964, Rapoport's Strategy and Conscience was published.

Rapoport used a systematic exposition of decision theory to demonstrate the essential irrationality of strategic thinking, which prides itself on its supposedly rigorous rationality. Of course, the strategic thinkers missed Rapoport's point, stayed calm and carried on thinking strategically.

It would be timely to revisit Herman Kahn's footnote on the feasibility of a doomsday machine and ask if it doesn't describe something that exists today and is actually in operation:

While I would not care to guess the exact form that a reasonably efficient Doomsday Machine would take, I would be willing to conjecture that if the project were started today [1960] and sufficiently well supported one could have such a machine by 1970. I would also guess that the cost would be between 10 and 100 billion dollars. … The mechanism used would most likely not involve the breaking up of the Earth, but the creation of really large amounts of radioactivity or the causing of major climatic changes or, less likely, the extreme use of thermal effects.

I have added emphasis to the phrase, "the causing of major climatic changes." Nowadays, we refer to it simply as climate change. Anthropogenic climate change is a doomsday machine. Who would have thought?

How and why does one build such a terrible thing? Well, it turns out one doesn't have to build it -- it builds itself. All one needs to do is to keep thinking strategically and to broaden the scope of strategic thinking from brinkmanship to growthmanship.

Kubrick read a reprint of an article by Thomas Schelling, "Meteors, Mischief and War," that had originally been published in the September 1960 Bulletin of the Atomic Scientists. In his article, Schelling reviewed Peter George's novel (published under the pen name of Peter Bryant), Red Alert. Kubrick tracked down the novelist and together they visited Schelling at Cambridge. The three of them concluded that the new ICBMs rendered the plot line of Red Alert no longer plausible. Dr. Stranglove was gestated in these deliberations.

A central issue Rapoport raised in Strategy and Conscience is the pressure on strategic thinkers to reduce non-zero-sum game situations to the zero-sum dimension. He stressed the  point again at a conference in Berkeley in 1964, discussing Schelling's investigation of the role of communication in non-zero-sum games:

In this situation, the center of interest has switched to persuasive skills. If the interplay of persuasive attempts can also be cast in the form of a game of strategy, the resulting game will be viewed as a zero-sum game, since persuading the other is conceptualized in strategic thinking as a "win," while having been  persuaded is interpreted as a "loss." Therefore, introducing communication in this manner reduces the non-zero-sum game to a zero-sum game on another level. 

There is thus a relentless pressure inherent in strategic thinking to cast conflict situations in the framework of zero-sum games, i.e., to view them as conflicts of irreconcilable interests. Schelling has said that thinking derived from game theory is trapped by the conceptualization of the zero-sum game. I heartily agree with this verdict and would amplify it by pointing out that even when situations are cast in non-zero-sum game models (of which Chicken is an example), strategic analysis, as it is usually practiced, leads toward a formulation which reintroduces the zero-sum game on another level.

Schelling's Strategy of Conflict (1960), was ranked in 1995 by Times Literary Supplement as one of the hundred most influential books published since World War II. Reviews by James Meade and Charles McClelland discussed Schelling's contribution in relation to Kenneth Boulding's Conflict and Defense and Anatol Rapoport's Fights, Games and Debates.

Boulding, Schelling and Rapoport collaborated in the Journal of Conflict Resolution in the late 1950s. But their relationship appears to have grown increasingly tense because of disagreements about the rationality and the military applications of strategic thinking.

Schelling reviewed Rapoport's Fights, Games and Debates and Strategy and Conscience and Boulding's Conflict and Defense. Both Boulding and Rapoport reviewed Schelling's Strategy of Conflict. Rapoport judged the greatest value of that book was to suggest "that the very framework of thought in which the strategist must operate precludes a breakout from our present situation..." Boulding's review was blunter, even impolite:

Schelling's world, rational as it pretends to be, is in reality a world of rational nightmare, devoid of "mercy, pity, peace and love," slipping into rational deceit, rational cruelty, endless and implacable rational hostility, rational despair, and rational terror. It all ends, one fears, in the rational lunacy of eventual mutual annihilation. One fears Schelling has been seduced by the RAND Corporation which he so much admires.

Paul Erickson offers a fascinating glimpse into the complicated relationships between these three men in The World the Game Theorists Made. Erickson cites reviews by Oskar Morgenstern and Martin Shubik of both Fights, Games and Debates and Strategy and Conflict, both of which are much kinder to Rapoport's book than to Schelling's. In his autobiography, Rapoport recalled that at first neither he nor Schelling realized that their positions were "poles apart" (Certainties and Doubts, p. 128). Perhaps it was the initial illusion of accord followed by the shock of discovering fundamental differences that stoked the apparent resentments.

Starting with his role as an adviser on environmental issues to the Carter administration, Schelling has written prolifically on the economics of global warming. In 1996, Schelling was the first to speculate about the strategic aspects of geo-engineering and ambiguously refers to himself as "perhaps" to be included among the "enthusiasts" for it.

My familiarity with Schelling's writing on climate change is limited, but judging from this 2008 Cournot Centre forum, Economics and Climate Change: Where Do We Stand and Where Do We Go from Here?, moderated by Robert Solow, Schelling's view of the urgency of action would appear to be more closely aligned with Martin Weitzman's than with either William Nordhaus's or Nicholas Stern's.  Responding to Stern's enthusiasm about prospective global emission reduction targets, Schelling observed that, "announcing a radical target for the future won't be taken seriously..."

Zero-Sum Foolery 3 of 4: Forecast Factory

Zero-Sum Foolery 1 of 4: Game Theory Gamesmanship

It has become fashionable recently, in denunciations of the lump-of-labor fallacy, to appeal to the notion of a "zero-sum game" in addition to the customary allegation of a "fixed amount of work to be done." In this manner, pseudo-intellectual poseurs can evoke the urgency and panache of mathematical game theory without knowing the first thing about it.

Here are a few examples:

The main reason the lump of labor theory is wrong is that it is based on the assumption that everything that is going to be invented has been invented, and that therefore economic competition is a zero-sum game, a fight over a fixed lump. – Thomas Friedman, The World is Flat.

The idea that increased participation of older workers will negatively affect employment for younger people is known as the lump of labor fallacy. This fear of displacement is grounded in the assumption of a zero-sum labor market in which every job occupied by an older worker is one less potential job for a younger person. – World Bank, Live Long and Prosper: Aging in East Asia and Pacific (with credit to Munnell and Wu, and Zhang and Zhao).

The argument that jobs taken by low-skilled immigrants are jobs forgone to native-born Americans rests on the erroneous assumptions that immigrant labor can easily substitute for native labor and that employment is a zero-sum game. The fallacy, known as the lump of labor.” was popularized in 1891 by the economist David Schloss, who described it as the erroneous belief that the amount of work was fixed and could be parceled out in various ways. – Susan K. Brown and Frank D. Bean, "Population Growth" in Debates on U. S. Immigration, edited by Judith Gans et al.

One misunderstanding we ought to dispel immediately is the so-called lump of labor hypothesis. This philosophy maintains that there is a fixed amount of work to be done—a lump of labor—so if the elderly can be encouraged to leave the workforce, there will be more jobs for the young. This zero-sum thinking is simply wrong. Economists treat labor as one of the primary inputs into economic output, and the more input, the more output. – George P. Shultz and John B. Shoven, Putting Our House in Order: A Guide to Social Security and Health Care Reform.

As far as I can determine, Paul Samuelson was the first to use this analogy in a 1978 Newsweek column on the "Economics of Discrimination":

Upon thoughtful analysis of the nature of the economic system, economists find that it is essentially not a zero-sum game. Economists call it "the lump-of-labor fallacy" to believe that in any period – 1933 or 1978 – there are only so many jobs: it is false philosophy of despair, economists point out, to insist on cutting down on each worker's weekly hours in order to spread out an allegedly limited total of work and of income among as many people as possible.

Sandwichman has previously noted in passing the zero-sum allusions but hasn't paid much attention to them. That is about to change.

Arguably, the most likely assumption of the unidentified non-economists (those nobodies presumed to commit the alleged fallacy) is not a "zero-sum game" but a repeated prisoner's dilemma. It is Samuelson, Shultz, Munnell, Friedman and their ilk who plunge zealously into what Anatol Rapoport described as a zero-sum TRAP – which is to say, the conceptual reduction of non-zero-sum games to zero-sum games in order to render them "solvable" as a predetermined type of "problem." Attributing a zero-sum view to their opponents enables the propagandists to insinuate that their alternative is a bowl of cherries. If zero-sum is win/lose, then non-zero sum must be win/win, right?

The arguments supporting my critique of Samuelson et al.'s fraudulent game-theory gamesmanship are rather involved. So why would anyone want to spend time reading about the refutation of yet another bucket of boilerplate propaganda? Because this one bears not only on crap economic policy but also on crap arms race strategy and crap climate change policy, which I will get to in the second post in this series.

In his preface to Strategy and Conscience, Rapoport recounted an exchange he had with a strategist who had come to his university to talk about "Defense and Strategy in the Nuclear Age." Overcome with revulsion at the speaker's clinical detachment in addressing mass extermination, Rapoport asked the speaker, "how would he defend himself if at some future time he were a co-defendant in a genocide trial." The speaker respectfully replied that "he would plead 'partially guilty.'" But it was the response of many of his colleagues to his question that rattled Rapoport. They thought the very question was inappropriate and violated the standards of academic discourse. Somehow, even in discussing "the unthinkable," some thoughts must remain taboo.

Unlike Rapoport's strategist, the propagandists who recite the lump-of-labor, zero-sum fallacy catechism are unlikely to acknowledge even partial responsibility for promoting economic inequality and social injustice. After all, why should they? They were only repeating what they have heard and have been told to say. They didn't know what they were talking about.


Zero-Sum Foolery 2 of 4: Doomsday Climate Machine

Dr. Krugman Loves a Lump

From Equities.com:

Free Trade Claims that Deserve Some Lumps 

Alan Tonelson | Thursday, 31 March 2016 09:54 (EST) 

All knowledgeable students of economics know that a big reason for rejecting most critiques of U.S. trade policy is their allegedly heavy reliance (explicitly or not) on the “lump of labor fallacy.” 

As explained by economics Nobel-ist and New York Times columnist Paul Krugman, the fallacy holds that “there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs.” And it’s especially pernicious, Krugman explained, because it “feeds protectionism. If the public no longer believes that the economy can create new jobs, it will demand that we protect old jobs from new competitors in China and elsewhere.” 

So it was interesting, to say the least, to see a leading economist this week make clear that this fallacy isn’t so fallacious, and that its existence strengthens the case for U.S. policies that depart from the free trade norm. Even more interesting: His name is Paul Krugman.

Why Has Finance Gotten So Rich in a Competitive World?

This is what Kevin Drum logically asks.  I’m running off to a meeting, so my answer will be telegraphed:

1. Rent extraction from profit-making firms.  The wage share has fallen, but the profit share hasn’t risen correspondingly.  The reason is that finance has found ways to extract the difference.  Exactly how is a longer story, but it’s at the core of what “financialization” means in practice.

2. Externalities.  In a lot of trading activity there are external costs that are not accounted for, especially the cost of public backstopping in the event of insolvency.  Finance has gotten better at playing the risk/reward game by externalizing the risks.

Have to go.

Tropical Mathematics and Classical Economics

I have just returned from a conference of the Japan Association for Evolutionary Economics at the University of Tokyo.  There I met Yoshinori Shiozawa of Osaka University who has applied a form of math I did not know of previously, tropical mathematics, to Ricardian trade theory, providing a version that depends on input-output analysis that he claims is consistent with Ricardian-Sraffian classical theory with the labor theory of value intact.  His first paper on this appeared in the journal of SIAM, the Society for Industrial and Applied Mathematics, and one last year appeared in the Japanese journal, Evolutionary and Institutional Economics Review, in a special issue edited by mathematician, Donald Saari.  His papers on this and related topics can be accessed at Research Gate.

Tropical math comes out of algebraic geometry and involves semi-rings with two operations, one a minimizing one and the other an additive one.  This generates a linear piecewise linear skeletonized hypersurface, which in the context of trade theory looks to me to bound facets of a PPT that define zones of comparative advantage for different products.   Shiozawa uses a version that depends on a variant called "sub-tropical algebra" (and geometry).  This form of math was invented by Brazilian-based (for which the name "tropical" was given) but Hungarian-born Imre Simon, who died in 2009.

The other application in economics that I am aware of has been by Paul Klemperer in designing product-mix auctions, first used by the Bank of England in 2007 for carrying out in a single auction  of multiple differentiated product what used to involve a multiple series of auctions.  Klemperer has a few papers on this, with probably the most prominent being "The product-mix auction: a new design for differentiated goods," Journal of the European Economic Association, 2010.

Barkley Rosser

Trump Destroys No First Nuke Use Focal Point

It has never been formally stated, at least not in a diplomatic ceremony or treaty, but well before the end of the Cold War a focal point norm had gradually developed among the nations that possessed nuclear weapons that nobody would be the first to use nuclear weapons, although there was a sort of implicit remnant of "Unless we are seriously invaded and our national existence is threatened."  But the very lack of statement in any official way was part of what made the focal point norm exist.  Many credit Thomas Schelling with being the crucial figure in all this, both by inventing the idea of focal points in game theory (which was what he officially received his Nobel Prize for) as well as for privately and behind the scenes pushing specifically for such a focal point norm, with apparently getting at least the relevant US figures to go along with it, with the US of course being the only nation ever to actually use nuclear weapons against another nation (and I am especially aware of this having just been at a conference in Tokyo).  And it was US figures, most notoriously the late Gen. Curtis E. LeMay, who most loudly advocated using them in various situations, such as in his old "Bomb them back to the stone age," with regard to North Vietnam.

Now Donald Trump has blown apart the focal point, even if few seem to be focusing on that as perhaps the worst thing he has done so far in his generally nauseating campaign, where there seems to be more attention on how his  wife has behaved and what size his body parts are. He has allowed as how he might consider using tactical nukes against ISIS, and it would appear that Ted Cruz does not disagree with him, although maybe the Dem candidates do, or at least Bernie.  But the cat is now out of the bag.  No longer is  use of nuclear weapons not in response to a nuclear attack a forbidden norm/focal point.  Anything can happen.

OK OK, I recognize that at least one commentator in Russia made noises about using nukes against the US, and now Kim of North Korea has produced a video of a nuclear attack on Washington.  But neither of these were or are really taken seriously, at least not in the near future. But Trump is another matter, and if he gets into the White House with his finger on the nuclear trigger, all bets will be off.  All that effort by Thomas Schelling will be down the drain.

Barkley Rosser

The Politics of Futility

This morning’s rebuttal by Kevin Drum against Matt Taibbi’s endorsement of Bernie Sanders strikes a familiar note.  A lot of the commentary on the Democratic contest has taken the form of policy differences between the two candidates don’t matter because nothing much can be enacted because of the Republicans/public opinion/supreme court/zeitgeist/etc.  This is a politics that takes futility for granted.

Here are some phrases excerpted from Drum:

“But anyone who thinks Bernie could make a dent in this is dreaming.”
“....neither Hillary nor Bernie would be able to do much about it.”
“....neither one will accomplish much....”
“....there's virtually no chance of making progress on this....”
“....if you're disappointed by Obama, who's accomplished more than any Democratic president in decades, just wait until Bernie wins. By the end of four years, you'll be practically suicidal.”

The error in this way of thinking is that it’s all static, no dynamic.  It’s a judgment of what is feasible under current political conditions.  It assumes away even the possibility of changing those conditions.  If you think about the Reagan presidency’s long run effect on America, for instance, how much of it was about specific policy victories versus the shift in agenda and discourse that has been with us ever since?

What rankles a lot of us about Obama is not that he compromised, but that he pre-compromised by watering down his proposals before they were challenged, compromised down from that, and then acted and spoke as if none of this had been a compromise at all—as if his deepest desire was to leave the political context as unruffled as possible.  A lot of Bernie’s appeal is that he promises to do the opposite.

Why Declining Oil Prices Can Be Contractionary

Maury Obstfeld et al., writing on the IMF’s blog site, don’t do a very aggressive job of advertising their main observation, so let me do it here.

The problem is that you’d think that the decline in global oil prices since 2014 would be a net plus for the world economy, in the same way that the price spikes of the 70s were a (big) net minus.  That’s not what we’re seeing, however.  Overall, it’s a wash or possibly a slight negative, even if we don’t read too much into the link between oil and stock prices.  You might argue reverse causation, that it’s the slack in the economy that’s pulling down oil and other commodity prices, and there’s some truth in this, but, as Obstfeld and his coauthors point out, econometric studies have put most of the explanation for the price drop on increases in supply rather than reductions in demand.  So what gives?

Their point is simple but important.  Monetary policy throughout most of the developed world has been stuck at the zero lower bound, despite recent forays into negative rates for some instruments.  Under this circumstance, declines in the price level translate into perverse increases in real interest rates, and our IMF sources provide evidence that oil prices are moving in step with inflation expectations:

The bottom line (which they fudge around a bit) is that monetary policy really, really needs help.  Fiscal expansion is essential.

Pet Peeve: An America that Sees Only Itself

This is a small but typical example: the New York Times today ran a story about frictions in the switch to embedded-chip credit cards.  The process has been bumpy, and retailers think the banks and payment processors have been exploiting them, while the processors blame the retails for dragging their feet.  I don’t know anything at all about this, but one thing I do know is that the same transition occurred years ago in Europe.  You’d think a reporter delving into this topic would contact sources in Chipland, so our experience could be compared to theirs.  Maybe we could learn something that would help us sort out the tangle of charges and countercharges (so to speak).

But no.  Not a single word about the world beyond our borders.

I see this all the time.  People fulminate about the role of money in politics and the sins of Citizens United but pay no attention to the various forms business influence takes in other developed countries with a variety of campaign finance laws.  We can have a big debate about the economics of Bernie Sanders’ proposal to make public higher education tuition-free without so much as a glance at the many countries where that has been a reality for decades—one of which is right over the border to the north.

The problem isn’t American exceptionalism, it’s American self-absorption.

The Lesson of Carrier: America Needs a Real Socialist Agenda

I just finished listening to the video clip that has been making the rounds, in which a spokesman announces to the assembled workers at the Carrier plant in Indianapolis that their jobs will be moved to Mexico.  It’s embedded in a long article in today’s New York Times that uselessly follows the framing of this and similar events in American political discourse: it’s about whether you are for “free trade” or not, how you feel about Mexican workers versus US workers, etc.  The whole discussion takes as given the way corporations in the US (and Mexico) are run and the purposes they serve.  It invites us down a rabbit hole that leads to nowhere useful—tariffs and other barriers, or whether we need more programs to redirect some of the “gains from trade” to unemployed workers in the form of checks and education subsidies.  Not that trade doesn’t matter, of course, but it’s really missing the point to think that the deindustrialization of America is the simple result of engaging in international trade.

You’ll get to the heart of the matter if you linger on a passage that comes near the end:

Over all, United Technologies [Carrier’s parent] earned nearly $7.6 billion last year, and $2.9 billion of that came from the climate, controls and security division that includes Carrier.  Those profits aren’t under pressure; in fact, margins in the unit have steadily expanded in recent years. 

But that’s not good enough, said Howard Rubel, a senior analyst at Jeffries, who notes that United Technologies has vowed to cut at least a half-billion dollars in costs annually for the next few years.  “The stock hasn’t done well,” Mr. Rubel pointed out.

So here’s the problem: Carrier is profitable and there are no apparent threats to its continued profitability.  But it could be more profitable if it replaced workers in Indiana with workers in Mexico who can be paid about a tenth as much.  Investors, of course, demand these higher profits.  If the purpose of the company is to satisfy its investors, that’s what it needs to do.

But what should be the purpose of a company?  Businesses have many beneficial purposes: they can produce things people want and are willing to pay for, they can provide employment for workers and an economic base for their communities, they can promote education through training programs and linkages with schools and universities, and they can pitch in to promote social objectives like sustainability and racial and gender equality.  Through their R&D they can contribute to society’s fund of useful knowledge, and through their management and governance they can help cultivate democratic values of participation, cooperation and respect.  Of course, to do all these good things they need to be profitable, not just now and then, but on an ongoing basis, anticipating future threats to profitability and responding with innovation and toughness when necessary.

But putting the interests of investors above all others, and putting profit maximization above any other benefit they can provide, can turn them into instruments of economic, social and political decline.  It’s not just about shipping jobs to Mexico; moving jobs around the US to force workers to make concessions or simply because the costs of dislocation don’t matter to them, can be just as harmful.  Or maybe the way to make an extra buck is to cut corners on the environment, or to avoid paying taxes or to invest in politicians who can rig the system for you.  The ability of clever executives to devise new ways to boost profits at the expense of society will always exceed the capacity of regulators to keep them in line.

To put it in a nutshell, the actions of Carrier and the rest of corporate America reflect a system in which investors come first, and the primary goal of business is to maximize profits.  We need a system in which investors are just one of many constituencies, and the financial goal is to maximize the probability of remaining profitable over an extended time horizon.  Profit has to become a means, not an end.

The socialist agenda, as I understand it, is about the many reforms that move us closer to such a world.  It includes worker participation in corporate governance, but also representation of other community interests.  It can include measures to broaden ownership, including a role for public and social ownership vehicles along with private ones.  Financial reform also has a large contribution to make, especially if it expands the role of public and cooperative banking.  Consideration should also be given to measures that would alter the incentives to issue preferred rather than common stock or otherwise attenuate the connection between ownership and control—in other words, perform a Reverse Jensen.  And this is just the beginning: once you start thinking about it, you can see the agenda is enormous, especially because it’s been in mothballs for generations.

I wish there were a socialist running for president right now.