A Left-Right Convergence on More Child Labor

A few months back I reported on the movement of leftists to repeal or at least pare back child labor laws worldwide.  Hostility to child labor is understood by these people to be eurocentric, patriarchical and aligned with the labor market needs of modern capitalism—and therefore wrong.  Instead we are encouraged to support working children, and what these children tell us is they want to work.  So away with the restrictive laws.

But you don’t have to be on the left to endorse more child labor.  Here’s Joseph Sunde of the hard-conservative Acton Institute with a similar message.  Note the emphasis on the psychological benefits children are supposed to get from being productive; this is the same argument made by the left.  Similarly, the benefits of child work as a preparation for adult life figure strongly on both wings.

I’m reminded of the affection for Hayek shown by Foucault in his final years.

Border Adjustments and Transfer Pricing – the Case of iProducts

I promised to mull over the Auerbach and Holtz-Eaton claim that the House GOP’s Destination-Based Cash Flow Tax would eliminate the need to enforce transfer pricing and the answer is contained in the proposal under “border adjustments”. As the Tax Foundation notes:

In the context of a value-added tax, a border adjustment works by applying the tax to imports, but exempting exports from the tax. The GOP’s business tax is not a VAT, but the mechanism that makes it border adjustable is similar. In order to make the corporate tax border adjustable, the revenue from sales to nonresidents would not be taxable, and the cost of goods purchased from nonresidents would not be deductible.

This is an unbelievably bad proposal at some many levels. Let’s take the Tax Foundation’s first example:

So if a business purchases $100 million in goods from a supplier overseas, the cost of those goods would not be deductible against the corporate income tax.

The foreign profits on those goods would be taxable so how do the proponents of this idea address the prospect of double taxation? Of course a Canadian manufacturer would be tempted to price their goods at production cost so as to have no Canadian taxable income. That would eliminate the double taxation but no sane person would think the Canadian Revenue Agency would accept this non-arm’s length transfer pricing. But let’s have the Tax Foundation give the flip side:

if a business sells a good to a foreign person, the revenues attributed to that sale would not be added to taxable income.

The ultimate tax giveaway! Imagine some firm in Seattle that designs and distributes iProducts for sale here as well as abroad. Apple does not manufacture their products outsourcing production to Foxconn. Let’s assume that Foxconn sells the products for $200 while Apple sells them for $400 - $200 in value-added for Apple and its distribution affiliates. Before we get into the details of taxation, let’s note this early Trump failure:

One of those famed promises of Donald Trump's is that his policies, now that he's President-elect, will make Apple bring back their iPhone manufacturing to America…For all the expensive and really productive parts are already made in the U.S., with a little bit going to Japan. China has just the assembly--and that's such a trivial part of the process that it's simply not something worth worrying about at all.

Tim Worstall is right that Foxconn only assembles iPhones but I think most of the expensive parts are sourced from other Asian suppliers. But at the end of the day, the $200 is an arm’s length price with the income tax revenues going to the Chinese assembler and the Asian suppliers of components. So let’s focus on the $200 per product that goes to Apple. Let’s reasonably assume that the foreign distributors incur $40 per product in operating expense and deserve profits equal to $10 per product under arm’s length pricing. In our story - $150 per product represents the profits attributable to the intangible assets created in Seattle. The House GOP proposal would effectively say we do not get to tax these profits. And yes I know that Apple has found a way to get all these profits sourced to Bermuda anyway. But this was the whole point of Senate hearings on May 21, 2013. This proposal would entirely just give up on combatting Base Erosion and Profit Shifting. At times, I have suggested that certain Republicans in Congress really want to shut down enforcement of section 482. It seems I was correct. Did I say this was a horrible idea?

The Identity-Equals-Causation Fallacy, Yet Again

You’d think a trade deficit would be a trade deficit, but you’re wrong.  For many economists, a trade deficit is actually a capital account surplus in disguise.  Yes, US imports exceed exports, but according to this crowd it is not due to what the US does and doesn’t produce, or the cost or quality of our goods and services, or any other such factor, but simply reflects the net inflow of finance.  First we have policies that cause US financial assets to be more attractive, then we end up with a trade deficit.  This is the “insight” behind the view that bolstering national savings will fix the trade problem.

You can see this machinery at work in Gregory Mankiw’s latest opinion piece for the New York Times, which instructs us, “Don’t Worry About the Trade Deficit”.  It patiently explains that the money leaving the country on the current account (via trade) equals the money entering the country on the capital account (via financial flows), and that the latter drives the former.  The key paragraph reads:

The trade deficit is inextricably linked to this capital inflow.  When foreigners decide to move their assets into the United States, they have to convert their local currencies into American dollars.  As they supply foreign currencies and demand dollars in the markets for currency exchange, they cause the dollar to appreciate.  A stronger dollar makes American exports more expensive and imports cheapers, which in turn pushes the trade balance toward deficit.

So here we have a theory of the relationship between international capital flows and trade: a shift in net financial inflows causes an appreciation of the dollar, which then causes a greater trade deficit.  Where does this theory come from?

The ultimate source is the national income and product identity, augmented by the accounting relationship between savings and consumption.  From NIPA we have

Y ≡ C + I + G + NX

where Y is national income, C is consumption, I is private investment, G government spending (purchases of goods and services by government) and NX is the trade balance.  That “≡” sign means “is identical to”, which is subtly different from simple equality, “=”.  With equality, the stuff on the left hand side has the same value as the stuff on the right hand side.  With identity, the stuff on the left hand side is the same stuff as on the right hand side, just expressed differently.  If A = B, A and B could be different but for some reason aren’t.  If A ≡ B, A and B are two different ways of writing the same thing, so it is impossible for them to be different, even for an instant.

Now let’s add a second identity that represents the truism that all income is either consumed, publicly or privately, or saved or paid in taxes:

Y ≡ C + S + T

with S being savings and T being taxes.  Putting them together, we see that

C + I + G + NX ≡ C + S + T

Subtracting C from both sides and rearranging gives us

NX ≡ (S-I) + (T-G)

Read this as “the trade balance (net exports) is identical to the sum of net savings (savings minus investment) and the government’s budget surplus or deficit (taxes minus spending).”  This is not a theory of what causes what; it’s an identity, different ways of expressing the same “what”.

How can this be?  An important source of identity relationships in economics is the two-sided nature of economic transactions.  If I pay you $10 for something, this can be seen as $10 of spending (mine) as well as $10 of income (yours).  My spending is not equal to your income; it is your income: one transaction, two ways of recording it.  Add up these identities over a whole economy, subdivide income or spending into different categories, and you get a set of macroeconomic identities.

So now consider what an export or import means.  An export signifies the receipt of income by people in the exporting country but not the corresponding spending.  An import signifies spending without the corresponding income.  So a trade deficit has to take the form of national spending exceeding income, which means net borrowing.  This borrowing can occur either in the private sector (less saving relative to investment) or in the public sector (government borrowing).  And net borrowing on a national scale is what we mean by the capital account, so there we have it.

All of this is in the realm of identity.  There is no causation at work here.  Net exports does not cause net borrowing, nor is it the other way around; they are identical to one another, different ways of recording the same economic events.  Any measured discrepancy would be a problem of measurement, not a problem of whether the identity is true.  (This is an oversimplification, since it leaves out transfers, asset incomes and currency flows.  The main adjustment would be to add transfer payments and net asset income to the current account.  A further adjustment would need to be made for changes in holdings of currency, the reserve account, which is a non-borrowing method of finance.  That would add more algebraic symbols, but it wouldn’t alter the essential logic.)

So now reread the above paragraph from Mankiw.  This is telling a story of causation over time, not identity. First we have increased inflows of finance, then the dollar appreciates, then the trade deficit widens.  The first process could be virtually instantaneous, because currency markets are comprised of exactly these demands for and supplies of foreign exchange.  The second process, however, takes place over months, depending on the shape of the J-curve that depicts the change in trade balances over time in response to an exchange rate shock.  But we know from the identities that the trade balance is identitical to net borrowing at each moment; that’s what it means to be an identity.

The only valid theory of trade deficits and capital inflows would be one that looked at all the determinants of this identity simultaneously.  It would have to consider the factors that determine what goods a country produces, what it exports and imports, the terms of trade, differences in international growth rates and the demand and supply of financial assets.  One way of looking at the current account-capital account identity does not cause the other; the international position of the US economy, which can be measured either way, is caused by the balance of all the influences on trade and finance.  And yes, that includes the choices made by firms in the US to increase or offshore their productive capacity, along with everything else.  The relative importance of these factors is an empirical question, not a theoretical one.

The flaws in Mankiw’s analysis do not come from inaccurate data or a faulty assumption here or there, but a basic misunderstanding of Econ 101.  The guy needs to take an intro class.  Of course, if the textbook isn't very good it won't help him much.

Minimum Wages: Labor Markets in Manhattan v. New Haven

When I lived in New Haven (1980/81) one of my first questions related to what appeared to be an excess supply of eating establishments. My friends explained that this happened when the Yale janitors and cooks led a successful strike to increase their wages. In the year that I lived there, the secretaries finally were able to form their own union despite a lot of bullying from Yale. Brad DeLong reminded me of this with:

Back when Card and Krueger first suggested that there was substantial effective monopsony power in the low-wage labor market and thus that there would be no disemployment effect from (modest) increases in the minimum wage to make it binding, I said: "Clever, but nahhh." The reason for their findings, I thought, was that labor demand is just inelastic in the short and perhaps the medium run--but maybe not in the long run.

Card and Krueger was published in 1993. Brad is referring a more recent paper:

Over the past three years, 18 states plus the District of Columbia have implemented minimum wage increases, joining ten other states that have raised their minimum wages at least once since the last Federal increase in 2009. This column examines the impact of the more recent state increases on wages, weekly earnings, and employment among workers in the low-wage leisure and hospitality Industry. A comparison with states with no minimum wage increase since 2009 suggests that the recent legislation contributed to substantial wage increases with no discernible impact on employment levels or hours worked.

Back in 1980, the Wall Street Journal ran a series of op-eds criticizing the Yale secretary union with the usual Econ 101 model that pretends labor markets are perfectly competitive. I figured the authors of these op-eds had never taken Metro North to New Haven. After all in Manhattan, they had to compete with other newspapers, banks, law firms, and all sorts of employers for secretaries. Not that a competitive market could even raise their pay to the point where they did not have to ride the subways from the outer boroughs. But New Haven was a one company town – Yale was a monopsonist. I actually ghost wrote an op-ed for these secretaries. Alas I do not have a copy or a link by Brad ably captured the simple point:

Employers actually do have substantial monopsony power in the low-wage labor market--even though they shouldn't. And the minimum wage is best thought of as an anti-monopsony rate-regulation policy that raises low-wage employment, raises average low-wage earnings, and brings the market closer to its competitive equilibrium

In short – not all labor markets are the same, which is a point Dani Rodrik when he explained why we need to navigate model. Just before I moved, I had a few dates over beers with a lovely nurse who had moved from Boston to work for the Yale hospital. She was appalled that the hospital was so understaffed with nurses that were so underpaid. I gave her a copy of what I had ghost written and encouraged her to organize a nurses union.

Full Employment and the Myth of the General Strike

Georges Sorel thought he had made a 'happy choice' with his use of the term 'myth.' But he soon was disabused of that illusion by critics who dismissed the anachronism of myths and others who accused him of falsifying "the real opinions of revolutionaries."

In his essay, "Myths of the Twentieth Century" published three decades after Sorel's Réflexions sur la violence,," Robert Binkley credited Sorel -- along with Henri Bergson, William James, Vilfredo Pareto and Sir James Frazier -- with having "prepared the way" for the 20th century's metaphysical 'Tower of Babel' and, consequently, with having betrayed 'truth'. "For truth became a variable, determined by a personal equation, a problem, or a culture. As the prestige of truth fell, the prestige of myth rose... Men began to talk of the myth of science, the Christian myth, the myth of the nation, the myth of socialism, the myth of the general strike."

Binkley must have realized that he was blaming the messenger for the message. Whatever science and progress might have meant to its 19th century eulogists. their status as "truth" was contingent and ephemeral. Critics did not concoct out of nothing the defects they criticized.

Binkley summarized "four great myths in the contemporary western world" in the following passage:

These four are: the original Christian myth, from which the others are descended ; its secularized version of the world order or great society; the materialistic version with its eschatology of the proletarian paradise; and the antithetic or reactionary myth of the nation, with its mystery of blood and soil.

The House GOP’s Destination-Based Cash Flow Tax

The Tax Foundation explains a proposal from the House Republicans:

The GOP’s plan would alter the corporate income tax in five major ways: 1. The tax rate would be lowered to 20 percent. 2. Businesses would no longer need to depreciate capital investments. Instead, they will be able to fully write off, or expense them, in the way in which they purchased them. 3. Businesses would no longer need to pay tax to the IRS on profits they earn overseas. 4. Businesses would no longer be able to deduct interest as a business expense. 5. The corporate tax would be “border adjusted.” These changes turn the tax into what is called a “destination-based cash flow tax.”

Progressives might be alarmed about the significant reduction in the tax rate as well as the end of the repatriation tax. Quite frankly, this repatriation tax has not worked all that well so I’d settle for a more aggressive enforcement of transfer pricing under section 482. The Tax Foundation addresses this border adjustment as well. Alan J. Auerbach and Douglas Holtz-Eakin start their discussion with another explanation. But this document also seems to be a full throttled defense of the GOP proposal that includes the following claim:

the multinational would have no incentive to use transfer prices to shift profits away from the United States, even if the tax rate in the foreign country is very low. Indeed, it would benefit by shifting profits to the United States, to reduce the taxes it pays in the low-tax country.

So we do not need to worry about transfer pricing manipulation? Something tells me this is not quite right. I’ll have to give this one more thought.

The Carrier Deal and the Peso

Matt Gardner of Tax Justice expresses the general frustration of progressives of how much in tax giveaways had to be shelled out to save just half of those 2000 Carrier jobs in Indiana:

The Carrier Corporation Tuesday announced that it will not fully follow through on its threat to move 2,100 jobs from Indiana to Mexico, and instead will keep 1,000 of those jobs in the U.S. The move comes in the wake of “wide-ranging policy talks” between representatives of the incoming Trump administration and Carrier officials. The New York Times reports that Carrier’s reward for this apparent change of heart will include new tax incentives from the state of Indiana and a commitment from the Trump administration to aggressively pursue federal corporate tax reform in 2017…For decades, footloose corporations have used the threat of moving jobs to different cities, states or even countries to extract special tax incentives from state and local governments, despite the lack of evidence that these strategies create jobs. Company-specific tax breaks reward companies for what they likely would have done anyway, give tangible benefits to companies in exchange for tissue-thin promises of job creation, and send a clear signal to other tax-avoiding firms that they will be rewarded for making similar threats…And Carrier’s parent corporation, United Technologies (UTC), certainly fits the description of a tax-avoiding firm. The company routinely pays effective federal tax rates of 10 percent or lower, far below the 35 percent statutory tax rate its executives have complained about. UTC also has aggressively shifted its profits offshore, holding $29 billion in undisclosed foreign countries at the end of 2015. If doling out tax incentives is a shopworn strategy, giving these tax breaks to bad actors such as United Technologies should be seen as an outright capitulation by the Trump administration, rather than as a savvy deal.

While this is not a blatant violation of the WTO rules as tariffs on imports from Mexico, this combines the worst of trade manipulation and supply-side silliness. But the 1000 workers should be happy – right? Brad Setser weighs in:

Since the election, the broad dollar has appreciated by about 4%, presumably because of the impact of an expected loosening of fiscal policy…That works out to a very rough estimated loss of 390,000 jobs in export and import competing sectors from the stronger dollar (job losses that play out over time, as the exchange rate has an impact with a long lag)….And while the value of the dollar fluctuates, a persistent increase in the dollar – say from looser fiscal policy in the U.S. than in its peers – would have a persistent effect on the trade balance…To be clear, the loss of jobs in the tradables sector isn’t the loss of jobs in the economy overall, not when the economy is operating at full employment. A fiscal expansion that leads to a monetary tightening that pushes the dollar up will generate additional jobs in the non-traded parts of the economy.

Now you might protest that we are not yet at full employment. Well I would so protest. But Brad’s point about looser fiscal policy that our “peers” is an important one. If only we could convince nations like Germany to appreciate its currency with respect to the Euro and then adopt more fiscal stimulus. But we are talking about North America today, which reminds me that the peso has devalued by 10 percent since the election. It is going to take a whole lot of Carrier deals to offset this exchange rate change.

Two Generations of Trade Deficits: A Wee Complaint with Jared Bernstein

I was loving the latest from Jared Bernstein until I got to this passage:

I do know that we must start by lowering our economically large, persistent, and distortionary trade deficit, especially to the extent that it is pumped up by other countries manipulating savings and exchange rates.

Jared and I are the same age – both born in 1955. I started teaching economics when Ronald Reagan became President. It was about this period of time when we started witnessing persistent current account deficits. Most of us back then blamed a massive inward shift of the U.S. national savings schedule (created by Reagan’s tax cut for those of us who did not drink the Ricardian Equivalence Kool Aid) that led to a massive dollar appreciation. The next time we saw a large appreciation of the dollar was the late 1990’s. I recognize that Jared is channeling the excellent Dean Baker who often writes stuff like this:

Robert Rubin was also the chief architect of the “strong dollar” policy. Lloyd Bentsen, Rubin’s predecessor as treasury secretary, was quite happy to see the dollar fall. The logic was straightforward: A lower dollar would improve the US trade deficit. If the dollar falls relative to the euro, yen and other currencies, then it is more expensive for people in the United States to buy imported goods. Therefore, they buy domestically produced goods instead. Similarly, if the dollar falls in price relative to other currencies, then it is cheaper for people living in other countries to buy US exports. This will increase US exports, thereby further reducing the trade deficit. A lower valued dollar was in fact supposed to be one of the main dividends of the deficit reduction policy that President Clinton pursued from the start of his presidency. The argument was that lower deficits would lead to lower interest rates in the United States. If interest rates in the United States fell, then foreign investors would buy up fewer US government bonds and other financial assets. This gave us the lower dollar and improved trade deficit. That was more or less the picture until Rubin succeeded Bentsen as treasury secretary in 1995. Rubin began touting the strong dollar.

Dean is right to note the move to a mix of low interest rates and fiscal discipline that was part of the early Clinton years. This mix was the reverse of the Reagan macroeconomic mix. But as Dean blames the public statements of one official for the dollar appreciation over the next several years, I have a small problem:

If one thinks about the Clinton policy mix – fiscal restraint with easy monetary policy – it was the opposite of the Reagan policy mix. To the degree we lowered our interest rates relative to the rest of the world, one would expect ceteris paribus that the dollar would devalue increasing net exports. Of course the dollar appreciated and net exports fell but that was the result of the investment boom which led to a strong increase in real GDP, employment, and even real wages. When progressive critics complain that U.S. macroeconomic policy cost growth and jobs by letting net exports fall, they confuse cause and effect.

Should the U.S. pursue more national savings like we did in 1993? My answer would be no unless we could get more world investment given the legacy of the last several years with the Bernanke global savings glut combined with a dearth of investment. The hope in the U.S. is that we have our own infrastructure investment boom. Now if we can get nations like Germany and China to invest more, perhaps our next investment boom can be accompanied by rising U.S. net exports. But note alleged currency manipulation is not exactly the key issue.

The Electoral College, White Supremacy and Full Employment as "Reign of Terror"

Published in September 1947, Whither Solid South? A Study in Politics and Race Relations, by Charles Wallace Collins, "became both manifesto and blueprint" for the 1948 "Dixiecrat" campaign of Strom Thurmond and -- over the longer term -- the strategy whereby Southern white supremacists engineered a balance of power "lock" on the electoral college and thus on the Presidency. Matthew M. Hoffman examined the political consequences of that strategy in "The Illegitimate President: Minority Vote Dilution and the Electoral College," published 20 years ago in the Yale Law Journal. Joseph Lowndes discussed the broader influence of Collins's book on the emergence of a "New Right" in From the New Deal to the New Right: Race and the Southern Origins of Modern Conservatism. Collin's strategy can be summed up in a few paragraphs from chapter 17 "The South Need Not Surrender":

Comments on Milanovic on Marx

By Fred Moseley

I am a Marxist economist (Professor of Economics, Mount Holyoke College) and I appreciate Branko Milanovic's open-mindedness and his efforts in a recent post on his blog to educate economists who often have a crude and superficial misunderstanding of Marx’s labor theory of value.  

For context for my comments on Milanovic, I will first say a few words about my interpretation of Marx’s labor theory of value (LTV).  In my view, Marx’s LTV is primarily a macro theory and the main question addressed in Marx’s macro LTV is the determination of the total profit (or surplus-value) produced in the capitalist economy as a whole.  Profit is the main goal of capitalist economies and should be a key variable in any theory of capitalism.  Marx’s theory of the total profit is that profit is the difference between the value produced by workers and the wages they are paid, i.e. that profit is produced by the “surplus labor” of workers.

I argue that Marx’s “surplus labor” theory of profit has very significant and wide-ranging explanatory power.  Marx’s theory provides straight-forward and robust explanations of the following important phenomena of capitalist economies:  conflicts between capitalists and workers over wages, and over the length of the working day, and over the intensity of labor (i.e. how hard workers work, which determines in part how much value they produce); endogenous technological change (in order to reduce necessary labor and increase surplus labor and surplus-value); increasing concentration of capital and income(i.e. increasing inequality); the trend and fluctuations in the rate of profit over time; and endogenous cycles due to fluctuations in the rate of profit rate of profit.  (A more complete discussion of the explanatory power of Marx’s theory of profit is provided in my “Marx's Economic Theory: True or False? A Marxian Response to Blaug's Appraisal,” in Moseley (ed.), Heterodox Economic Theories:  True or False?, Edward Elgar, 1995).

This wide-ranging explanatory power of Marx’s surplus labor theory of profit is especially impressive when compared to mainstream economics.  In mainstream macroeconomics, there is no theory of profit at all; profit (or the rate of profit) is not even a variable in the theory!  I was shocked when I realized in graduate school this absence of profit in mainstream macro, and am still shocked that there is no effort to include profit.  Indeed, DSGE models go in the opposite direction and many models do not even have firms!

Mainsteam micro does have a theory of profit (or interest) – the marginal productivity theory of distribution – but it is a weak and largely discredited theory.  Marginal productivity theory has been shown by the capital controversy and other criticisms to have insoluble logical problems (the aggregation problem, reswitching, cannot integrate intermediate goods, etc.).  And marginal productivity theory has very meager explanatory power and explains none of the important phenomena listed above that are explained by Marx’s theory.  

Milanovic agrees that Marx’s LTV is primarily a macro theory, but he interprets it in this post as only the assumption that “sum of values will be equal to sum of production prices”.  And he continues:  “The former is an unobservable quantity so Marx’s contention is not falsifiable.  It is therefore an extra-scientific statement that we have to take on faith.  

I argue, to the contrary, that Marx’s macro LTV is primarily a theory of profit and my conclusion that Marx’s theory is the best theory of profit we have is not based on faith but is instead based on the standard scientific criterion of empirical explanatory power.  It is much more accurate to say that marginal productivity theory is accepted by mainstream economists on faith, as Charles Ferguson famously said in his conclusion to the capital controversy.

Now to my comments on Milanovic's three main points:  

1.  Milanovic's main point is that the LTV is often misinterpreted as a simple micro theory that assumes that the prices of individual commodities are proportional to the labor-times required to produce them.  Milanovic argues that is not true in a capitalist economy because of the equalization of the profit rate across industries with unequal ratios of capital to labor, so that according to Marx’s theory, long-run equilibrium prices are determined by the equation:  w + d + rK, where w is wages, d is depreciation and r is the economy-wide rate of profit (missing in this equation is the cost of intermediate goods, but I will ignore this).  

Milanovic emphasizes that Walras and Marshall had essentially the same equation for long-run equilibrium prices.  I agree that all three theories of long-run equilibrium prices have this same form, but there is an important difference.  Marx’s theory provides a logically rigorous theory of the rate of profit in this equation (based on his theory of the total profit discussed above) and Walras and Marshall just take the rate of profit as given, disguised as an “opportunity cost”, and thus provides no theory of profit at all.  Therefore, I think Marx’s theory of long-run equilibrium prices is superior to Walras’ and Marshall’s in this important sense.

2.  Milanovic's second main point is that Marx’s theory of long-run equilibrium prices are “clearly very, very far from derisive statements that the labor theory of value means that people are just paid for their labor input regardless of what is the ‘socially necessary labor’ required to produce a good.”  I presume that this derisive statement means that workers produce more value than they are paid and thus are exploited in capitalism.  But Branko is mistaken about this.  Marx’s theory of long-run equilibrium prices is based on his macro theory of profit according to which the source of profit is the surplus labor of workers.  This conclusion is indeed derisive and that is the main (non-scientific) reason that Marx’s theory of profit is rejected by mainstream economists in spite of its superior explanatory power.

I know from previous correspondence that Milanovic understands well Marx’s “exploitation” theory of profit, but he seems to overlook the connection between Marx’s micro theory of prices of production and his macro theory of profit.

3.  Milanovic's third point is that Marx’s labor theory of value is most helpful in understanding pre-capitalist economies and the relation between capitalism and non-capitalist economies today.  I argue, to the contrary, that Marx’s labor theory of value and profit is the best theory we have to understand the most important phenomena of capitalist economies, including 21st century capitalism.

It would be one thing if mainstream economics had a robust theory of profit with significant explanation power.  But it has almost no theory of profit.  Therefore it would seem to be appropriate from a scientific point of view that Marx’s surplus labor theory of profit should be given more serious consideration.

Thanks again to Milanovic and I look forward to further discussion.

It's Red Friday and Time to Discuss the Role of Exploitation in Profit

I would encourage all of you to read Fred Moseley’s case for the labor theory of value and the problems he has with Branko Milanovic’s interpretation of it.  This may seem like an exercise in Marxist antiquarianism, but the underlying questions are important.

For what it’s worth, my own view is that Fred is absolutely correct in arguing for the centrality of a theory of profit in any analysis of capitalist economies.  I’m less sure the LTV does this, however, since at best it’s simply an accounting relationship.  By contrast, Marx’s bargaining hypothesis, based on the reserve army of labor, has stood the test of time rather well, even if it now goes under the heading of the wage curve.

I think the time may also be coming to revisit the debate between Marx and Proudhon over the issue of profit and exploitation.  Proudhon argued for economies of scale, according to which workers would receive their marginal products, but the sum did not exhaust the value of production.  This was the basis for his advocacy of coops.  Of course, Proudhon did not have the math to express this with precision, leaving Marx with the impression that it was all a big muddle.

Most economists would now be inclined to side with Pierre-Joseph, and I would go along too, at least partly.  But the economy of scale argument also depends on the assumption there is normally a single efficiency optimum for the enterprise, which I would dispute strongly.  Reformulating Proudhon for a more complex vision of the economy, one that is multi-peaked and requires discovery and planning as well as scale, is an important task.  As both Marx and Proudhon would have understood, the theory of profit-making is at the core of figuring out how capitalism works and envisioning pathways beyond it.

Trumped Up Trade Policy

Brad DeLong challenges Donald Trump on his claims regarding trade policy:

In the United States 24% of nonfarm workers were manufacturing workers in 1971. It's 8.6% today. Maybe it would be 9% if NAFTA has not been negotiated and if China had not joined the WTO, but maybe it would still be 8.6%--analysts disagree on trade expansion vs. trade diversion here.

Granted but let’s go further. The standard Mundell-Fleming model notes that under floating exchange rates, trade protection tends to appreciate the currency which virtually offsets any benefits to net exports from the trade protection. Of course one might wonder if there is anything one could do to alter net exports to which Brad adds a little more wisdom:

Maybe it would be 12% if the United States had followed Japan's and Germany's roads of being high-savings low-currency value countries focused on nurturing their communities of engineering excellence, rather than running the Reagan and Bush 43 deficits and combining that with a focus on financialization and a strong-dollar policy. I certainly think that would have been a better policy road for the United States. But it gets you only to 12% at most--not back to 24%.

Again – the standard Mundell-Fleming result. Germany and Japan’s policies have been the reverse of the disastrous mix of tight monetary policy and excessive fiscal stimulus we witnesses in the early 1980’s, which led to a massive appreciation of the dollar and a massive decline in net exports. While I’m all for a large public infrastructure stimulus, let’s not overdo fiscal stimulus by also providing massive tax cuts for the rich. If the President elect wants to see more net exports, he should stop asking the Federal Reserve to raise interest rates. Trade restrictions are not the answer – a more intelligent mix of fiscal and monetary policy is.

Two Weeks In And Counting

The election was two weeks ago today, and two weeks is roughly the period of short-term memory, the time in which most people can remember what happened day by day with those memories highly salient while things before then become "long ago."  So we are now deep into getting used to Trump becoming president, even as Clinton's popular vote lead has now surpassed 1.7 million and continues to grow. I also note that of the highly salient two weeks just before the election had 9 out of the 14 days dominated by the totally off-base Comey/FBI plunge into Clinton's nothing emails, with how so little she did really was remotely criminal becoming clearer as Trump has dropped his plan to have a special prosecutor go after all that nothing.  Too bad for all those people who go so worked up chanting "Lock her ups!"  I do think the Comey bit looks like the leading factor in tilting some of those parts of WI, MI, and PA that put Trump over the top.  A few other random observations.

1)  If Trump can avoid pulling something that tanks the economy, he may end up getting credit for doing well with the economy. This is because the economy is now doing quite well, growing more rapidly than almost any time since the Great Recession, with wages actually beginning to grow.  This should go to Obama's credit (or nobody's), but Trump will claim it if it continues and will probably get this accepted by much of the public.  I doubt his fiscal stim will do much, especially given what a scam his "infrastructure spending" plan appears to be. But under current circumstances, all he has to do is avoid doing something drastic that would slow down what is already going on and will probably continue for awhile.

2)  Foreign policy remains very scary and very up in the air, especially given the extremists he has been appointing to national security posts combined with his apparently massive ignorance and thin-skinnedness.  But even here, again, if he can avoid blowing everything up (not a trivial mater), he may also claim credit for something that is really the doing of Obama, namely defeating ISIS.  It is down to controlling only two major cities, and the assault on the bigger of the two, Mosul, is in full swing, and while slowed down, will probably succeed, possibly before Trump takes office. The assault on al-Raqqa has just barefly begun, and is likely to have more trouble getting united support by those in Syria against ISIS, but probably it too will fall in the not-too distant future, but almost certainly after Trump takes office, and he will certainly take credit for it, repeating the argument that ISIS was all Obama's fault anyway, even though it never would have come to be if Bush had not invaded Iraq in the first place.

3)  Another thing that may well work in Trump's favor is that it looks like as of yesterday's You Tube from him that he may be backing off or holding back on some of his more extreme campaign promises and themes, although in some cases he simply said nothing so we do not know, and he is clearly very unpredictable, one of his more worrisome aspects.  But there was no mention of ending Obamacare, and his only mention of immigration was the almost trivially minor matter of going after people with visa problems.  If that is all he does, well, fine with me, although clearly he is appointing awful people to many jobs, with his leading candidates for SCOTUS apparently exceptionally awful.  We have a lot of bad stuff still to see.

4)  Finally we have a very weird contradiction or problem that I have yet to see anybody really nail down.  It is this business of his having some of his kids, especially daughter Ivanka, sitting in on meetings we think they should not, like ones with foreign leaders.  I mean, Ivanka does not have a security clearance and was not vetted, quite aside from all the conflict of interest issues with she and her siblings supposed to run the Trump business empire, and also all those anti-nepotism laws in place.  But it may turn out that we will want her in those rooms, probably with no official position and preferably removed from running his business, if he can figure out what he needs to do with that so as to avoid getting impeached for violating the anti-emoluments clause of the Constitution.  The problem is that it seems that there are very few people who can talk to Trump with him taking them seriously at all, with Ivanka maybe the most important one who can.  And given his ignorance and thin-skinnedness, we shall need somebody who can and can hopefully hold him back from doing the really crazy and dangerous things he might do on the spur of a moment.  It is rarely discussed, but almost certainly First Ladies have quietly played such a role, with those since Pat Nixon almost certainly doing so, popular, intelligent, reasonably knowledgeable, and with good common sense. But, unfortunately, Melania Trump does not appear to be any of those and will not provide that private ballast, with Trump needing it far more than any of his predecessors.  So, we shall really need for him to get Ivanka legalized so that he can rely on her to keep him from doing something really seriously crazy, if she can.

Barkley Rosser.

Scab Labour: Where do we go from here?

Bridget Phillipson is the U.K. Labour MP for Houghton and Sunderland South. "You're not fit to be prime minister and you’ve got to resign," she told Jeremy Corbyn at an extraordinary meeting of the Parliamentary Labour Party after the Brexit vote last June. Today, "The Staggers, The New Statesman's rolling politics blog" published an essay by Phillipson titled, Where do we go from here? 

It is a very long read but eventually comes to the Lakoff-inspired conclusion that the Labour Party needs "to frame the debate again as one between collective action and its absence."

And having formulated that clear sense of how the Britain of 2020 would be run differently between 2020 and 2025 by Labour, we need to work out how to persuade the electorate of that – to work out exactly how we should communicate our promises.

Before arriving at that stirring platitude, however, Phillipson let these dubious cats out of the bag:

I take the view that the right decisions for Britain’s future are not invariably the ones that are immediately and universally popular. If they were, all politicians would be redundant. Sometimes things that are true are deeply unpopular, and sometimes things that are popular would be catastrophic as policy choices. That to me is why we are a representative democracy rather than one governed by referendum after referendum. I also believe that as politicians we have a moral responsibility to tell the truth. ...

If we pretend things that are true aren’t so, and pretend that seductively popular options which would actually damage us are without downsides, we deserve to get in trouble. The fastest way to lose trust is to be found out in deceit, and once we lose that trust, we will then find it very hard to gain the support we need to change what can and should be changed. It’s easy for those who don't believe in government: they have nothing to lose from a diminution of faith in politics and politicians. As Labour politicians we have everything to lose: we have a double responsibility. 

So to the point: the ‘lump of labour,’ the notion that there are a finite number of jobs to go round, is a long-known fallacy. Those who pretend otherwise or deny that finding should be treated with the same bemused contempt as Douglas Carswell when he claimed the tides were driven mainly by the sun. ... There is something horribly un-socialist about blaming people for the consequences of political decisions of a right wing government. That is the politics of populism not socialism, the politics of easy answers rather than right answers.

If it is the "double responsibility" of Labour politicians to "tell the the truth," it is a prerequisite responsibility for them to know what "the truth" is and not simply parrot something they happen to have heard from Jonathan Portes or Nigel Stanley. The claim about a lump-of-labour fallacy was conceived and propagated as the core reactionary "frame" for refuting the legitimacy of collective action by workers.

The Father of Systems Dynamnics Dies: Jay W. Forrester

Jay W. Forrester has died at age 98, the father of systems dynamics.  He arrived at the MIT to study electrical engineering in 1939 and during WW II would develop the first human-computer interactive system, the flight simulator.  He would invent the magnetic core system of computer memory, long widely used for RAM in many computers.  In 1956 he joined the Sloan School of Management at MIT where he remained for the rest of his career and founded the Systems Dynamics Society that year, which still exists and of which I am officially a member, although I have not been to one of their meetings since the 50th anniversary one at MIT a decade ago.

The main principles of systems dynamics were laid out in his most famous book from 1961, Industrial Dynamics, which would be followed some years later by Urban Dynamics, and then World Dynamics, which provided the program (DYNAMO) and the basic model used by the Club of Rome group in their much more famous The Limits to Growth (Meadows, Meadows, Randers, and Behrens, 1972). Many of both the virtues and flaws of systems dynamics can be seen in that effort, with the benefits being use of an integrated system of nonlinear difference equations to model a large-scale system, along with a tendency to over-aggregation of important variables along with weak statistical or econometric foundations for posited relationships and equations within the model.  In the case of the Club of Rome book, this led to exaggerated forecasts of impending global ecological-economic doom that did not happen, even as many of the problems highlighted in that book remain serious.

My old friend and complexity colleague, Richard H, Day, has long been an advocate of Forrester's work, which also included models of long economic waves in multi-sectoral models, as an early part of complexity modeling via nonlinear dynamics.  Something that Forrester long emphasized, and which is correct, is that such systems of interrelated nonlinear differential equations (to be more general) can lead to "counterintuitive results."  Funny things can happen on the way to Broadway when the world is full of nonlinear relationships, especially when some of those involve positive feedback effects that can lead to destabilizing dynamics in such systems.  Forrester's work dating from the late 50s and early 60s was among the first to warn of such matters, which indeed must be taken seriously, whether we are modeling financial markets or global climate dynamics.

The only time I really had a chance to talk to Forrester myself at any length was a decade ago at the 50th anniversary conference of the Systems Dynamics Society.  He was then fully alert and sharp, despite being 88 years old, and also full of his many strong views of the world.  Something I had not realized until then was the sharp competition he engaged in intellectually with Norbert Wiener and his cybernetics approach, which from my view have many similarities.  I have long listed cybernetics as the first of the "Four C's" of complexity: cybernetics, catatstrophe, chaos, and agent-based complexity.  I have long argued that in effect the last of these, also known as Santa Fe complexity (or small-tent complexity), essentially replaced cybernetics, which also shared the problem of over-aggregation that its rival, systems dynamics.  In principle neither of them needed to.  This may be more a matter of timing and improved computer power over time, rather than something fundamental.  Our modern computers can handle the much greater complexity of modern agent-based models than the earlier computers that the old cybernetics and systems dynamics models ran on. 

I note a curious personal aspect of my relation to all this. The very first paper I ever wrote to get published in the early 1970s while still a grad student was a critique of certain parts of Forrester's model used in his book, Urban Dynamics, which he had used as the basis for some testimony before Congress.  He had testified that the government should not build low-income housing because it would just attract poor people to cities where it was built, which would then lower investment and growth.  His model simulations showed such an outcome, but looking at it closely it was clear that this was driven by an equation that had inter-urban migration being driven most strongly by relative housing prices, whereas virtually all the literature said that it was jobs and wages which were the most important driving variables.  My paper was rejected by the journal I sent it to, with very poor in my opinion referee reports. I expressed a desire to send a letter to one referee to point out his errors, but the editor made it clear in no uncertain terms that he would not let me do this.  As it was, I never sent the paper anywhere else, and it remains unpublished to this day.  Ironically, housing prices may in fact now be beginning to impact migration and employment growth as we see high housing price locations possibly facing growth slowdowns as it becomes too expensive to live in them.

In any case, I think that Jay Forrester's role in the development of modern complexity economics based on nonlinear dynamics has been insufficiently appreciated.  I mourn his passing and recommend his work for those more deeply interested in these matters.

Barkley Rosser