It Is Monday, And The Washington Post Is Saying Dumb Things About Foreign Policy As Well As Economics

(Well, Monday is now over, but... ) Yes, Robert J. Samuelson has a column about the Fed that ignores austerity fiscal  policies and other matters. But Dean Baker has done a good job tearing him and that to shreds over on Beat the Press (sorry, no link, too lazy), so I shall stick to the foreign policy side.

That  comes from Jackson Diehl, whom I have never figured out why he has ever had any credibility with anybody, although I guess he talks to the usual set of neoconnish VSPs that lurk  about Washington repeating increasingly empty and silly bromides to each other.  In this case it is about Syria,  with Diehl spouting stuff that Hillary apparently somewhat believed and supported when she was SecState, but appears to  have moved beyond to be closer to  the Obama admin's positions.  However, it may be that the point of this column is precisely to drag her back to things she once believed and supported, even as they are lying in tatters on the floor.

Diehl argues that Putin has taught Obama a "lesson" by upping his bombing and other military activities somewhat successfully in favor of the Assad government.  This supposedly shows that Obama was wrong to resist requests for more use of air power  that came from Kerry, Clinton, Petraeus, and Panetta, that unrealisticallly wimpy non-VSP prez.  If we had used more air power or otherwise "supported rebels" with no-fly zones more back in 2012 or so, we could have maybe attained a "political settlement favorable  to the United States and its allies."  This nonsense raises so many red flags, one almost does not know where to begin, but so we must.

Of course, one place to start is precisely that we have been supporting "the rebels," those favored by this group being some based mostly in northwestern Syria whom we have claimed were  "democratic moderates," but who have  long ceased to be that and to be dominated by al Qaeda-related groups. That has not kept us from supporting them, even if we never  instituted the no-fly zone this gang wanted, and that Hillary has quite recently claimed to still support (ugh). These folks  argue that if we had done this  back then, those virtuous democratic forces, supposedly derived from the original peaceful  anti-Assad demonstraters during the beginning of the 2011 Arab Spring, whom he crushed by attacking them with bombs and other military stuff, they would have just done peachy keen and taken power or something.  Anyway, supporting these mostly Sunni fundamentalist anti-Assad groups would please our "allies"(presumably Turkey and Saudi  Arabia, both of whom have become oppressive and engaging in unwise actions we should not support).  But the important thing has been to  overthrow Assad and put in place one or another of these groups, apparently not all that worried that they might be al Qaeda affiliated.

As it is, we have for some time in fact been both heavily bombing Syria and putting troops on the ground there more recently than 2012, namely against the group we have for several years considered to  be our Number One enemy in the world, Daesh/ISIL/ISIS/IS, whose caliphate's capital, al-Raqqa, is in eastern Syria. Our bombings have been directed against them and in support of Kurds of the leftist YPG, with whom around 300 US special forces are supposedly embedded, some of them reportedly wearing hammers and sickles on their uniforms.  This group had until very recently been advancing well and taking territory, with Obama and others reasonably arguing that they seemed to be the only group around interested in actually fighting Daesh.  Somehow, Diehl makes zero mention of any of this, although this clearly very important, especially now.  But they were poised to move on al Raqqa.

So where does Diehl get his argument about Putin?  Yes, Putin has increased aerial bombardments on various fronts, especially in the northwest against some of these al Qaeda linked groups we continue to  support (apparently mostly through the CIA, although I do not know that for sure).  Turkey was supporting these groups, while it does not like the Kurdish groups, whom it sees as allied with troublesome Kurdish groups in southeastern Turkey. In various parts of Syria, this bombing has worked to help Assad forces gain back territory and solidify its hold on power. These VSPs all of course think this is awful, and certainly Assad has been awful, supposedly killing up to half a million people.  But his regime does practice religious tolerance and support of the many ethnic minorities in Syria against a possible dictatorship by extremist Sunni Arabs, even if once there were some "moderates" and "democrats" in their midst.  Of course Diehl is right about Putin, and he goes on to say that Putin has done this  without "getting into a quagmire."  How nice.

But there is this minor detail  that he  fails to mention: Russia and the USSR before  have had a naval  base in Syria at Tartus since 1971.  They have been deeply involved in Syria for a long time and preserving that strategic hold has been a top priority for nearly half a century.  They also have an air base, so it is not surprising that they can easily increase use of air power in Syria without getting into  a quagmire  beyond their long historical presence, which we do not have at all.  Our situations are completely and totally different, and we are not  in alliance with the government in power  either, as they are.  That this might make comparing what Putin does with what Obama does completely irrelevant and ridiculous does not cross the consciousness of  Diehl.

Of course the more recent situation has indeed become completely absurd, which Diehl  does not discuss at all either.  He makes it seem we have not  supported those "moderates" in the northwest, (whom we should have supported more!),  But, they have morphed into the Syrian Free Army, whom ironically have come to be supported  not only by the US CIA but by Turkey and Russia.  Just as the US-Pentagon-backed Kurds were about to make their  move on al Raqqa, ah ha! Daesh gets saved by our CIA backed cavalry, the Syrian Free Army, which has swept in to block them and take territory from them, with the backing of  Turkey especially important who wants to block the Kurds and who has newly made friends again with Putin, thus accepting that maybe it  is OK to let the Assad regime survive.  So we have reached a  situation where we have US backed forces fighting US backed forces, but Diehl and his sources think  we should have gotten in even more deeply than we are.  I mean, heck, this is no quagmire...

Barkley Rosser

Nine Spades Are a Lump of Leets

The section on capital from Joan Robinson's 1970 review of Charles Ferguson's The Neoclassical Theory of Production and Distribution employs the "lump of leets" motif to highlight a key issue in the Cambridge critique of neoclassical capital theory. Robinson's substantive lump-of-leets critique offers an instructive contrast to the abject flimsiness of the proverbial lump-of-labor fallacy claims.

For some years they remained cooped up in this position, repelling all attacks with blank misunderstanding. Then, growing bold, they descended to the plains and tried to prove Sraffa wrong. ...

Why Are the Big Banks Not Safer?

Larry Summers and Natasha Sarin report:

Since the financial crisis, there have been major changes in the regulation of large financial institutions directed at reducing their risk. Measures of regulatory capital have substantially increased; leverage ratios have been reduced; and stress testing has sought to further assure safety by raising levels of capital and reducing risk taking. Standard financial theories would predict that such changes would lead to substantial declines in financial market measures of risk. For major institutions in the United States and around the world and midsized institutions in the United States, we test this proposition using information on stock price volatility, option-based estimates of future volatility, beta, credit default swaps, earnings-price ratios, and preferred stock yields. To our surprise, we find that financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and some support for the notion that risks have actually increased. This does not make a case against the regulatory approaches that have been pursued, but does caution against complacency.

The authors highlight the equity betas for Bank of America, Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, and Wells Fargo which averaged 1.23 in 2015 and averaged only 1.18 before the crisis. If these banks were holding more equity relative to assets, we would expect a decline in these betas. But the authors also note that the average equity to asset ratio fell from 13% to 10%. Let’s break this out into leverage risk (which appears to have increased) and operational risk by estimating the average unlevered beta coefficient which appears to have fallen from around 0.15 before the crisis to 0.12 now. So is the real issue here that we are not requiring the big banks to hold more equity? Yes I know that these banks will protest that higher capital requirements will allegedly increase the cost of capital but this claim is inconsistent with basic finance as Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, and Paul Pfleiderer note:

Whereas equity, because it is riskier, has a higher required return than debt, it does not follow that the use of more equity in the funding mix increases the overall funding cost of banks. Using more equity in the mix lowers the riskiness of the equity (and perhaps also of debt or other securities that are used in the mix). Unless securities are mispriced, simply rearranging how risk is borne by different investors does not by itself affect funding costs. These observations constitute some of the most basic insights in corporate finance.

Racism Cancellation

Here is a metaphor to think about.  One common response to the problem of racism is to call for colorblind language and policy.  Don’t even think about race, much less talk about it.  Eliminate all programs that call attention to it.  Move immediately into a post-racial world by treating everyone without regard for race.

So think of racism as a kind of noise, a kind we want to get rid of.  How do you get rid of actual, nonmetaphorical noise with a set of headphones?  You can try to use isolation alone, blocking out all external sounds.  This could work, maybe, but it’s extremely difficult to do, especially if external noises are loud, and it’s impractical because there are also sounds out there we want to hear.  So we might use noise-cancelling headphones.  These work not simply by blocking sounds but also deliberately offsetting them, generating corrections that are out of phase with the noise we want to eliminate.

Racism cancelling works the same way.  It uses policies that take note of race but which are out of phase; where the racism “wave” crests, deliberately give it a trough.  Give extra consideration to candidates who typically get less because of racial bias.  Give extra resources to individuals who, because of racial inequality, have fewer.  Pay more attention to the views of people whose views have historically been less listened to.  And so on.

This also works for other types of inequality, like gender.  Don’t ignore it, cancel it.

Whither Agent-Based Macroeconomic Modeling?

Last week at this time I participated in a conference called "Economics, Economic Policies, Sustainable Economics in View of the Crisis." which took place at the Universita della Polytechnic in Ancona, Italy.  The main host was Mauro Gallegati, a prominent agent-based modeler, econophysicist, and more general complexity economist (also a sometime coauthor of mine).  It went on for three days with parallel session and most of the participants from Italy, although also from across Europe, including Russia, and beyond to such places as India and Australia.  The more well-known plenary speakers were Duncan Foley, Bruce Greenwald, Alan Kirman, David Colander, and me.  While there were papers on many subjects, including a bunch on ecological economics and sustainability, a very main focus was about macro modeling and how agent-based modeling (ABM)  relates to other kinds such as DSGE, VAR, and old reduced form many equation ISLM models, these latter three reportedly what get looked at seriously at the Fed and most other central banks.  A big question was given the problems with those and the hopes for ABMs, why are they not getting adopted as a fourth model in those settings or even a replacement for one of the others?

A conference in Italy is an especially appropriate place to raise these questions as it has been perhaps the world's center of ABMs, especially for macroeconomics, as well also being a major center for econphysics and complexity economics more generally.  Gallegati runs a group and his students have spread all over the country.  There is a major group in Milan led by Domenico Delli Gatti that often works with Gallegati's group (when they coauthor it is the "Gattis," with Gatti meaning "cat").  There is another group in Pisa, led by Giovanni Dosi, and another in Genoa led by Silvano Cincotti, with reps from all these groups (and some others from other countries) all there.

The situation may be seen by the group in Genoa, where the group developed the EURACE model, which Cincotti spoke, on, perhaps the most widely studied and used macro ABM there is.  He used it to show how increasing the Basel Accord capital requirements on banks could increase financial fragility in the system, a good ABM kind of result not al that easy to get from other kinds of models and certainly very macro and central banky.  It involved agents moving into the shadow banking sector, with some unsurprising results.

The cynic in me says that they did that model to try to lobby against stricter EU requirements on the Italian banking system, which is very fragile and near collapse.  The borderline bank is Monte dei Paschi di Siena, the world's oldest bank, dating from the 1400s, which has a fabulous Renaissance art collection based on pieces given to them as collateral from debtors who failed. More generally the Italian economy seems to be stagnant, going along, without people looking miserable in the streets or whatever, although I noticed some places closed that used to be open in Ancona.  The most romantic is an old hotel, the Roma e Pace, which hired Joseph Stalin in around 1906 as a doorman, but then fired him for being "troppo timido," (too timid), what a hoot.  They had a newspaper article in their lobby on that, but cannot see it anymore.  Gallegati also said that Mussolini had an affair there at one point with a famous Italian actress.  Oh well.

Anyway, there are these pretty interesting ABMs out there that seem to be able to do interesting stuff, but somehow they are not being picked up by the central banks.  Furthermore, I heard rumors that funding from the EU and INET and some other places may be cut for this kind of research.  If this turns out to be the case, I think it will be too bad.  In the end, it may be that the rival that is holding it off is not DSGE, which everybody dumped on at the conference, but the much less visible but still used old ISLM ones. This might make Paul Krugman glad. Atheortical VARs just seem to be too useful for very short term forecasting to get kicked aside.

There were other interesting debates, between Foley and Kirman and me over general equilibrium theory (with an eye to DSGE applications) and between Colander and Kirman over spontaneous self-organization, this arising from the recent article in the JEL by Kirman about Colander's recent book on Complexity and Public Policy.  Kirman really slammed spontancous self-organization, much pushed by Hayekian Austrians, but Colander pushed back enough that Alan actually said, "Well, maybe I need to get reorganized."

Anyway, I think there is still potential for macro ABMs, so will be sad and frustrated if the flow of money to study these does get shut down.  It will look like a major triumph for the mainstream establishment after all the hullabaloo over the huge crash that happened eight years ago in just a few days.  We should have learned more.

Barkley Rosser

Trump’s Penny Plan Does Not Add Up

Donald Trump apparently spoke at the New York Economic Club. Since I was not there, I do appreciate this fact sheet. At the risk of being rude, can I challenge the end of this “fact sheet”?

“The “Penny Plan” would reduce non-defense, non-safety net spending by one percent of the previous year’s total each year. Over ten years, the plan will reduce spending (outlays) by almost $1 trillion without touching defense or entitlement spending.”

So on average, we would see a 5% reduction per year in Federal nondefense government purchases if I read this right and that is supposed to average $100 billion per year. Of course nondefense Federal purchases last year were just shy of $500 billion so I am calling Trump on his awful arithmetic. I’m also calling him on this claim:

The Trump campaign's economist estimates that the plan would conservatively boost growth to 3.5 percent per year on average, well above the 2 percent currently projected by government forecasters, with the potential to reach a 4% growth rate.

Who are those “economists” again and what economic model did they use to make this rosy forecast? I could challenge his claim that the middle class will get the largest tax cut and his employment forecasts and just everything else in this spin sheet. But I did not wish to appear rude.

Neel Kashkari’s Supply-Side Solution to Mostly a Demand-Side Problem

Neel Kashkari tries to explain the slow pace of the recovery from the Great Recession:

When accommodative monetary policies were coupled with expansionary fiscal policies, other experts had reasonably expected a strong recovery from the depths of the Great Recession. Going back decades, the U.S. economy has exhibited a remarkable ability to bounce back: The rule of thumb was the deeper the recession, the stronger the recovery. Yet, the U.S. economy has experienced the weakest recovery in the postwar period, despite unprecedented policy responses to a very deep recession. Why?

My question here is why did you frame this so poorly? We had some fiscal stimulus in 2009 but it was not sufficient and followed by the fiscal austerity after 2010. Going back decades as in periods when the Federal Reserve engineered inflation fighting recessions by raising interest rates. Does Kashkari not get the fact that interest rates over the past several years are not at levels we saw a quarter of a century ago? I will give him credit for noting some key facts but his supposed expert on these matters is Greg Mankiw as it turns to seven possible underlying factors. After much discussion, here’s his bottom line:

We have come up with seven diagnoses and, like Mankiw, we don’t know for sure which ones are right. But looking at the symptoms, both domestic and global, suggests to me that we are likely seeing a confluence of three fundamental causes all combining to slow the economic recovery: (1) challenging demographics, (2) psychological scarring from the crisis and (3) lackluster technological innovation. Unfortunately, these headwinds aren’t likely to reverse anytime soon on their own. The good news is that we, as a country, aren’t powerless to address these fundamental causes. We have identified a series of policy responses that could be effective over time and have little downside risk. An obvious way to spur innovation and entrepreneurial activity is to increase government funding of basic research. Another promising policy is immigration reform, especially for high-skilled workers. Over the longer term, policies that improve education, streamline regulations and make the tax code more efficient should allow the United States to retain its dynamism, creativity and willingness to take risks.

Is it all about the supply-side? He continues:

Given today’s low borrowing costs, there is a strong case for increased government spending on deferred maintenance of infrastructure that will be necessary to sustain our economy. However, I am skeptical that a large-scale expansion of government spending by itself is the best way forward, since larger fiscal deficits will lead to higher expected future taxes, which could further undermine private sector confidence. Chronically weak demand might have been an important part of the diagnosis for the U.S. economy in the depths of the recession, when many workers and factories were idled. By 2016, however, the labor market appears closer to normal, which limits how much can be achieved by boosting demand to increase employment further.

His 3rd diagnoses was entitled “Secular Stagnation” and did consider some of the Keynesian suggestions for raising aggregate demand. Alas his post strikes me as too dismissive of this view relying a bit too much on supply-side solutions. But then his expert is Greg Mankiw.

Branko's Lumps

In a post at his blog globalinequality today, Branko Milanovic claims that "Robotics leads us to face squarely three fallacies." He then proceeds to "debunk" technological unemployment, satiation of human needs and the environmental carrying capacity of the earth. He concludes his post with the assurance that "history teaches us" we have nothing to fear regarding limits to growth, exhaustion of natural resources and replacement of humans by machines.

A week ago, I posted Outlaws of Political Economy in which I documented the total absence of evidence for the alleged false belief in a fixed amount of work. The fallacy claim, I argued, is a negative projection that is compulsively repeated by economists.

In my post, I cited the entry on "Economic Law" from the 1893 Palgrave's Dictionary of Political Economy. In turn, the Palgrave's entry cited an 1892 article, in German, by J. Bonar that I was unable to locate [update: found it]. But the search for it led me to Bonar's 1893 book, Philosophy and Political Economy, described by Warren Samuels as "one of the most remarkable works in the history of economic thought." In that latter book, Bonar discussed Niccolo Machiavelli's notion of a "fixed quantity of happiness" and mentioned Francis Bacon's enunciation of the same basic idea -- that one person or country's gain is a another's loss. The rationale, in a nutshell, of mercantilism.

Following up on the Bacon quote, I discovered much the same sentiment had been earlier expressed by Michel de Montaigne and was expressed by the mime author, Publilius before the current era. In short, long before the fallacy became a "fallacy," it was a maxim that circulated among the most distinguished literati, Montaigne, Machiavelli, Bacon...

Publilius's maxim translates as "Profits in trade can be made only by another's loss." Montaigne's is "One man's profit is another's loss."

It just so happens that James Bonar also delivered a series of lectures in 1910 addressing the "subtle fallacies which are apt to invade the reasoning of trained economists in spite of learning and discipline." One of the sources of error that Bonar discussed in his first lecture was "the existence and prevalence" of "watchwords" or "maxims" that keep alive biases inconsistent with the economist's reasoning. A watchword is "a detached phrase that has taken the place of an argument" and may even become "a substitute for an argument."

In his fifth lecture, Bonar specifically addressed one of those tricky watchwords, "in the long run" and replied, 106 years before the fact, to one of Milanovic's key arguments about "the lessons of history":

It is not easy to show that the invention of new machines will tend to increase wages. This was the tendency first supposed by Ricardo; but he changed his mind and wrote: "The same cause which may increase the net revenue of the country may at the same time render the population redundant and deteriorate the condition of the labourer." It was this change of view that made McCulloch doubt the infallibility of Ricardo. The more orthodox position (if we allow that any position of Ricardo's could be heretical) was that machinery tends in the long run to employ more labour than it has displaced; this was to be the consolation of the hand-loom weaver, thrown out of work by the factory system. It was to be a sufficient vindication of an economic principle, that, if it did not fit the facts now, it would fit them at some time in the future. But in the case of machinery there were more economic principles asserted than one. One seems quite to fit the facts: that there is a tendency under the regime of machinery towards a greatly increased production at less cost. It was a different proposition that the increased product tends to be equally shared. The economist has no warrant for saying that any economic tendency exists which by itself brings about good distribution. The sharing of property was matter of law and political institutions, in some countries religious prejudices; and the conditions so established might prevent any such consummation. It does not seem true that economic tendencies are all made beneficial by length of time any more than a man is necessarily made better by growing old. There is no saving virtue in the ''long run."

An economist from the 1930s named John Maynard Keynes also took issue with the policy relevance of the legendary long run. Ironically, our old mime friend, Publilius also had something proverbial to say about the long run: "Patience is a remedy for every sorrow."

Maxim-izing Utility

Lucrum sine damno alterius fieri non potest. -- Publilius Syrus  

Le profit de l'un est dommage de l'autre. -- Michel de Montaigne  

Whatsoever is somewhere gotten is somewhere lost. -- Francis Bacon 

For some two hundred years both economic theorists and practical men did not doubt that there is a peculiar advantage to a country in a favourable balance of trade, and grave danger in an unfavourable balance, particularly if it results in an efflux of the precious metals. But for the past one hundred years there has been a remarkable divergence of opinion. The majority of statesmen and practical men in most countries, and nearly half of them even in great Britain, the home of the opposite view, have remained faithful to the ancient doctrine; whereas almost all economic theorists have held that anxiety concerning such matters is absolutely groundless except on a very short view, since the mechanism of foreign trade is self-adjusting and attempts to interfere with it are not only futile, but greatly impoverish those who practice them because they forfeit the advantages of the international division of labour. […] Nevertheless, as a contribution to statecraft, which is concerned with the economic system as a whole and with securing the optimum employment of the system’s entire resources, the methods of the early pioneers of economic thinking in the sixteenth and seventeenth centuries may have attained to fragments of practical wisdom which the unrealistic abstractions of Ricardo first forgot and then obliterated. -- John Maynard Keynes

Trade will find its own level. -- Dorning Rasbotham

The price of corn, like water, will find its own level. -- Benjamin Franklin

Dexar hazer a la naturaleza allí, y aquí a la moralidad. -- Baltasar Gracian

Patience is a remedy for every sorrow. -- Publilius Syrus

“Select All” Disallowed

Google has just announced that, beginning next month, its popular apps will no longer permit users to check a single “select all” box.  This means, for instance, that if you want to delete a long list of email or phone messages, you need to check the box for each one of them; there will no longer be an option at the top of the list to select the whole lot.

“We don’t want users to make general decisions about their important data,” said a Google spokesperson, who asked not to be identified.  “It’s too easy to select the box at the top, delete, and then lose something you’ll regret later.  We want the user to stop and think about each individual item.”

There is speculation that Google’s decision was influenced by similar thinking on the part of election officials.

Paul Baer

Word has just arrived that Paul Baer, an ecological economist and cofounder of EcoEquity, has died.  Paul helped put together the Greenhouse Development Rights model and was one of the most reliably thoughtful participants in discussions around climate policy.  He was also an exceptionally warm and wonderful person.  I will miss him.

Captain Fantasy

I saw “Captain Fantastic” last night and have some thoughts.  Some are trivial, but eventually I want to get to the socially relevant part.

Start with trivial.  Man, is this movie a fantasy.  So this guy lives in the North Cascades as a Noam Chomsky-loving, leftwing survivalist.  His brood is beyond perfect: athletic outdoorskids, academically brilliant, courageous and creative.  No sibling rivalry, except for one black sheep.  The mountains are stunning, and it’s always summer.  (I’ve hiked the North Cascades, and even at the peak of summer they can get pretty harsh.)  There are no other humans to get in their way or make trouble for them.  They grow, hunt or gather all they need and are generally in great health.

This comic book vision is a problem for Viggo Mortensen.  He’s an extraordinary actor; his portrayal of Freud in “A Dangerous Method” was like a biographical essay.  I feel he was miscast here, however, because his subtlety and intelligence clash with the cartoonish aspects of the story.  The potential for something a lot better glimmered from time to time (for instance, the exchange with a daughter about Lolita), but mostly I found myself thinking, “This is just a put-on, but then, what’s the point?”

Oh, and someone out to show his cultivated musical tastes might specify he prefers the Goldbergs with Glenn Gould, but never the solo cello works with Yo-Yo Ma.  A weird, out of place middlebrow play.*

But let’s get to the more substantial stuff.  The real politics of movies is generally unconscious, what’s assumed by the film maker and the audience in order to get to the more deliberate parts of the package, like plot, character, ambience, or whatever.  Here are three political assumptions about the left that I noticed in this movie:

1. Wide open nature good, crowded cities bad.  The “organic” life is one that needs a lot of landscape.  Just in surface-of-the-earth terms, this family has a pretty big footprint.  How generalizable is their lifestyle?  Not at all.  We have a name for cool things that only a few can have the opportunity to enjoy: privilege.  It’s like people who think “green building” means rammed earth single-family homes surrounded by acres of inspirational forest or desert.  Multiply that by tens of millions and what do you have?  Rammed earth suburbia.

2. Rejection of the division of labor.  Self-sufficiency is assumed to be a foundation of “left” thinking.  It’s the ultimate in localization; forget the global economy, we’re not even going to import from the people down the road.  Of course, the accouterments of a modern, division of labor economy are all there when and as needed: the bus, the hospitals, the climbing gear, and even the Ball jars used for putting up food.  And all the clothing that isn’t made from animal skins.  So what does this family specialize in producing so they can pay their way in this economy?  Beats me.

3. Politics as aesthetics.  We all have our preferences.  We like some foods, music and activities more than others.  Fine.  And aesthetic criticism is OK too.  (I implied this about Yo-Yo Ma’s Bach, although my point was more sociological than musicological.)  The film, however, is steeped in the assumption that a “left” perspective on America is tied to, almost equivalent to, an aesthetic rejection of mainstream American culture.  Maybe that’s an accurate depiction of how it is, but if so, bad news for the left.

*Incidentally, if I read the credits correctly, that wasn’t Gould on the soundtrack, but they did have Ma.  My guess is that the recording quality of Gould would sound strangely antiquarian in this context.

The Asshole Theory of Profits

I’m reading Evicted: Poverty and Profit in the American City by Matthew Desmond and it’s wonderful.  You should read it too if you haven’t already.

In the middle of the book is a section in which the likely profit of one of the two slumlords Desmond tracks is estimated.  Roughly speaking, he takes in about half a million net of all expenses from a single trailer park south of Milwaukee.  To do this he has to make decisions every day that crush the lives of desperately poor people.  (Yes, people with drug issues, chaotic family lives and spotty maintenance habits, but real, breathing human beings all the same.)  He evicts some who have no place to go.  He charges rents that absorb nearly all the renter’s monthly income.  He skimps on repairs.  He does things that most of us could never do, and his reward is an income a lot higher than ours.

So what is the economic explanation for raking in half a million with relatively little work or skill?  He paid just over two million for the entire park, so his rate of return is 25%—rather more than the opportunity cost of capital.  In a competitive economy, either there would be a flood of new trailer parks built to chase these superprofits, or, if that were prevented by regulation, the price of the property would be bid up so its return was back to normal.  We need to understand this.

That’s where my asshole theory comes in.  There are a lot of highly lucrative opportunities out there that require you to basically sell your soul, to act like a jerk.  These are businesses or managerial jobs where you gouge money out of people or force them to work longer and harder or more dangerously than they want.  Your kid is sick and you want to stay home with him?  Do that and you’re looking for another job.  I’m sorry, putting on that gear each time you’re exposed to this machine takes too long; if you don’t like the risk go somewhere else.  It’s not my problem you had to pay the utility to keep your heat on and you don’t have enough for rent this month; you’re out of here.  Most of us can’t do this, but a few can.

Incidentally, this should not be thought of as a compensating differential process.  Whatever their initial feelings, people who choose this way of life quickly become inured to it and may even derive some pleasure from taking out their frustrations on those below.  You can see this in the portrait of the other slumlord in Desmond’s book, who started out with a bit of idealism but is being transformed, step by step, into someone who sees herself meting out justice when she throws tenants out into the street.  In winter.  In Milwaukee.

My theory is it’s a scarcity rent, pure and simple.  There’s a shortage of qualified assholes, and the ones who have what it takes to do these jobs earn the rewards.  Indifference to the hardship of others could be described as a form of human capital, and it earns a high return in an exploitive society.

It Is Labor Day And The Washington Post Is Picking On Workers

Well, heck, usually on Mondays they through Robert J. Samuelson pick on old people and Social  Security.  But this Monday is Labor Day, so obviously it is time to pick on workers.

OK OK, that is an exaggeration.  Indeed,  Robert J. Samuelson's column is far more reasonable and accurate than most of his Monday screeds.  The vast majority of his column, all the way up to the final three paragrapha accurately lays out how employment in the US has become increasingly temporary and part time, "alternative work arrangements," none of them permanent jobs with benefits,and Samuelson makes it clear that this is not a good  thing for workers, even if it might be good for corporate bottom lines. He sees that the overall percentage has risen from 10.7 percent of the US labor force in 2005 to 15.8 percent in 2015.  He notes the precarious nature of these jobs and their lack of benefits. He also dismisses the "gig economy"as employing less than 1/2 percent of workers.

So what is the problem?  In the final three  paragraphs he begins to see light ahead in the form of a supposedly tightening labor market, not noting the much lower rate of labor force participation going on now than before the Great Recession, although he points at the current 4.9 percent unemployment rate as a sign of this tightening, not to mention the impending retirements of lots of  baby boomers.  He also  notes that wages are now rising at 3.5 percent annually, up from 2 percent in 2013, which must be granted as A Good Thing.  The final sentence of the column reads, "On Labor Day 2016, the great hope for American workers is that we are quietly entering an era of labor scarcity."

Ah hah!  So, what is the headline for the column, probably picked out by Fred Hiatt, in any case probably not Samuelson?  "A new era olf labor scarcity?"  Hurray!  Problems are over!  Workers can sit back and cheer on Labor Day!   All those increases in "flexible" "alternative work arrangements"?  Not going to be a problem.  Indeed, things are so great, we can probably get back to plotting how to cut their future Social Security benefits, starting out by raising the retirement age so that they can all work longer now that they are becoming so scarce!  Hallelujah!

And, in the meantime, Happy Labor Day everybody.

Barkley Rosser

The Outlaws of Political Economy

'I don't have to show you
any stinking badges.'

Perusing Palgrave's Dictionary of Political Economy from 1894 alerted me to the odd interaction of a pair of distinctions. The first distinction was between the study of "what is" and "what ought to be." The second distinction was between "economic science" (or "economics") and "political economy." Economic science presumably distinguished itself from political economy by its strict focus on describing "what is" rather than on prescribing "what ought to be."

Palgrave's explains the latter distinction to have been at least partly motivated by the confusion that arose over just what kind of laws -- legal or natural -- so-called "laws of political economy" were. Even after the attempt at rebranding, however:

"...even well-educated persons still occasionally speak of "laws of political economy" as being "violated" by the practice of statesmen, trades-unions and other individuals and bodies.

You can't "break" scientific laws. They are simply generalized descriptions of fact. A flying airplane doesn't break the law of gravity. It conforms to a more comprehensive complex of physical laws. The law of gravity isn't the only law.

Palgrave's Dictionary further noted that the "great complexity and variety of circumstance which surround every economic problem are such as to render the enunciation of general laws, on a large scale, barely possible and if possible barely useful."

So the whole "positive" economics rigamarole wasn't just about methodological rigor. It was a purification ritual to rid the political economist of the stigma of dogma. Economists who invoke the violation of so-called laws aren't only forfeiting any legitimate claim to economic science. They are contaminating their profession with atavistic hokum.

Speaking of atavistic hokum, I have been trying to track down ANY accessible published record of a trade unionist or advocate of the reduction of the hours of labor EVER overtly expressing the belief that there is a fixed amount of work to be done or a certain quantity of labor to be performed or whatever synonymous equivalent. There is none.

There is a reasonable explanation for this absence of evidence. The alleged false belief is expressed in abstract language that was not vernacular to the people accused of harbouring it. It's the wrong answer to a question workers never asked themselves.

False belief requires two conditions to be fulfilled: 1. the idea is false and 2. it is believed by someone to be true. The matrix below shows the possible states of belief and falsehood. An idea does not have to be true to be "not false" and it doesn't have to be believed to be false to be "not believed to be true." The fallacy claim asserts a simplistic (and false!) polarization in which the beliefs of the "unenlightened" are "the opposite" of economic orthodoxy.

In an 1861 letter to the Times of London "A Master Builder" alleged that George Potter, secretary of the carpenters' union, and his associates had "absurdly argued that there was only a certain amount of work to be done" during a 1859 strike and lock-out of the London building trades. There is a detailed report on the 1859 strike in an 1860 report on Trades' Societies and Strikes published by the National Association for the Promotion of Social Science. The 23-page account presents several items of correspondence from Potter outlining the union's position with not a hint of a lump in the load. The "certain amount of work to be done" was what Mr. Master Builder thought he heard when he mentally translated Potter's argument into his own capitalistic patois.

There was something else interesting in the 685-page document -- an overarching controversy about whether or not labor was a commodity just like any other and therefore whether or not unions violated the laws of political economy by trying to regulate wages and hours of work. The employers who maintained this were pretty dogmatic about it. "Rates of wages cannot be settled by mediation, but must be left to the free operation of supply and demand." It's the law!

This was not simply political economy It was vulgar political economy of the most self-serving and disingenuous kind. One has no difficulty whatsoever finding multiple evocations by employers of the so-called laws of political economy but the elusive lump remains "one of the most tenaciously held and generally least articulated of trade union beliefs."

Least articulated? Least articulated is an understatement. Try NEVER articulated. There is no there there. The alleged false belief is a pure projection by the laws-of-political-economy crowd onto the unbeliever. The eighth annual report of the New York Bureau of Labor Statistics for the year 1890 contains the responses of over 600 labor union locals to the question of whether and why they support an eight-hour day. Not one claims there is only a certain quantity of work to be done.

Below is an example of what an overt statement of the theory of the lump of labor looks like. It is not from a trade union manifesto or a pamphlet of the eight-hour day movement. It is from a propaganda tract put out by Nassau Senior's crew of Whig-Benthamites in defense of their New Poor Laws, which abolished outdoor relief and established the workhouse test:

The fact is, there is a certain quantity of work to be done, and the question is who ought to do it -- those who live by their labour, and their labour only, or those who have thrown themselves on public charity.

Can anyone find such an unequivocal articulation of the false belief by a trade unionist? Of course not. It's not the way that workers talk about their work. Work is not an abstract, disembodied quantity to those who do it. It is part of a lived experience. "A certain quantity of work to be done" is political economy speak, plain and simple. It's ceteris paribus and "all else being equal."

Paradoxically, for old school vulgarians there both is and is not a certain quantity of work to be done. There is a certain quantity of work to be done when it comes to disparaging the idea that workers might increase wages their through collective action:

There is a certain quantity of work to be done, and a certain number of hands to do it; if there be much work and comparatively few hands, wages will rise; if little work and an excess of hands, wages will fall. It is self-evident that combinations and strikes cannot alter this law. They can neither increase capital, nor diminish population; and, therefore, it is utterly impossible, in the very nature of things, that they ever can procure a permanent rise of wages.

But there isn't a certain amount of work when it comes to explaining why such foolish action isn't even necessary:

There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them... The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not hemmed in by great walls, beyond which it cannot go. By bringing our goods cheaper and better to market, we open new markets, we get new customers, we encrease the quantity of labour necessary to supply these, and thus we are encouraged to push on, in hope of still new advantages. A cheap market will always be full of customers.

Five years ago I compiled a database of over 500 instances of the claim in books and journal articles between 1890 and 2010 (Excel file). That's 500 claims without a single overt statement of the false belief from an alleged believer. Six claimants (about one percent) named culprits whose argument "arguably depends upon..." "makes an error equivalent to..." "indicates a belief..." "seems hopelessly involved in..." "is an example of the strange conclusions to which one may be carried by clinging clinging firmly to..." and "are driven by implicit assumptions." Each of those turns out to be a false alarm -- an uncharitable, speculative inference. Five hundred boys crying "wolf" and not a single wolf to be seen?

This is an astonishing performance. This compulsion to repeat is not "careless" or "dogmatic." It's neurotic.

The patient cannot remember the whole of what is repressed in him, and what he cannot remember may be precisely the essential part of it.. He is obliged to repeat the repressed material as a contemporary experience instead of remembering it as something in the past.

The atavistic return of the repressed "laws of political economy" conforms faithfully to a description toward the end of chapter 3 of Beyond the Pleasure Principle where Freud talks about the experiences of "people with whom every human relationship ends in the same way" and gives as a "singularly affecting" final example the events in a romantic epic, in which the hero, Tancred, repeatedly slays his beloved, Clorinda, each time she reappears in a different guise. In this example, as Gavriel Reisner notes,

Freud reverses the compulsion to repeat, showing how we will sometimes injure others in order to avoid injuring ourselves. Freud concludes that we often project the internal, masochistic drive as the external, sadistic drive, victimizing others to redirect an intent toward self-victimization.

The utilitarian political economists styled themselves advocates for "the greatest good for the greatest number" and viewed opponents as apologists for narrow special interests. The supposed laws they discovered, which operated through isolated exchanges between individuals in the market, vindicated a system of natural liberty and consequently freedom entailed obedience to those laws. Collective action and collective bargaining violated the laws of individual exchange, resulting in sub-optimal outcomes. Such perversity could only be motivated by false beliefs. The false beliefs of the adversary were presumably the opposite of the true beliefs of the faithful: trade unions operated through tyranny and their bizzaro-world political economy assumed that less output meant more income.

Reality discredited that polemic of political economy and calmer heads sought to rebrand the enterprise as economics. The ersatz laws were scaled back to tendencies, which operated within the admittedly abstract ceteris paribus pound of the economist's static model. Real life and the evolution of economic relations operated outside the ceteris paribus pound but maybe the static model could shed light on dynamic economic activity.

It was no longer fashionable to denounce "The Evils of Collective Bargaining in Trades' Unions" (Thomas Cree, 1898) because it was increasingly understood that the so-called laws of supply and demand operated quite differently with regard to the peculiar commodity of labor power (Richard Ely, 1886):

While those who sell other commodities are able to influence the price by a suitable regulation of production, so as to bring about a satisfactory relation between supply and demand, the purchaser of labor has it in his own power to determine the price of this commodity and the other conditions of sale.

But even as old-guard political economy was being gradually displaced by rebranded economics in the universities, employers' associations and business journalism emerged to propound and propagate the old-time religion. The break with quasi-scientific, quasi-legalistic, quasi-religious pseudo-laws was ambivalent, the reconciliation surreptitious. Employers' associations told the college teachers what to teach. Textbooks served up a smorgasbord of the obsolescent and the innovative.

In this twilight of science and superstition, the fallacy claim offered uncertain economists a distinctive advantage. It enabled them to continue to denounce violations of the laws of political economy without actually having to specify which laws were being violated. That left them exempt from any obligation to justify the validity of defunct laws. The burden of proof deftly shifted and the providence of economic science affirmed, albeit by default.

Economic science thus gets to have its "what is" humility... and eat its "what ought to be" hubris too! Evidence be damned.

---

That there was one particular offense singled out for condemnation by the self-appointed economic police is suggested by the example given in Palgrave's Dictionary for the common confusion between the legislative and scientific senses of law: "Thus it is often said that to regulate the hours of labour, or to introduce differential import duties, is to break economic law." The anachronism of such a view should require no explanation. The hours of labor are regulated.

Any proposal to repeal the Fair Labor Standards Act of 1938 on the grounds that it "breaks economic law" would no doubt be laughed at by Paul Krugman, David Autor, Jonathan Portes or Alan Manning. But, inadvertently, that is precisely the historical grammar of their lump-of-labor fallacy taunt. Although there is no logical imperative that links the law-breaking claim to the fallacy claim, they have been inseparably paired in usage from their inception. To invoke the latter is either to imply the former or it is a non sequitur.

At long last, economists, have you no scientific self-respect? On this labor day, 2016, would you still insist that regulating of the hours of work breaks the laws of economics?