A Message to the "Super Committee"

Next!

UPDATE: Elevated from comments:

Krugman, Ike, Keyserling, Keynes and Kalecki: "Siphoning Off a Part of the Annual Increment of GNP"

In his NYT column today Paul Krugman backed off the ludicrous claim from his earlier blog post that "As far as aggregate demand in concerned... spending on bombs is as good as spending on public parks." But he continues to push the rationale that arms spending creates jobs and the somehow "liberals" are being hypocritical when they fail to acknowledge this.

I realize Krugman is not advocating an arms buildup. At least not directly. My objection is that he gives far too much credence to arguments (and alleged but unspecified "evidence") for the job-creating effects of military spending. The evidence is too clouded with confounding factors to make that case. Whether an arms buildup creates jobs and how many net jobs it creates, ultimately, depends on the circumstances. One of those circumstances is the displacement of more enduring job creating policies. If military spending creates some jobs in the short run but eclipses alternatives that would create more jobs in the long run, then the net effect is negative.

It needs to be stressed that it was a not a conservative but a "liberal," Leon Keyserling, who made the case for enshrining military Keynesianism as the crown jewel of American economic policy. I wrote the following piece last year. It puts military Keynesianism in the context of Keyserling's advocacy.

Siphoning Off a Part of the Annual Increment of GNP

The Perils of Krugmania

Paul Krugman, check your sources! In his blog post arguing that, "As far as aggregate demand in concerned... spending on bombs is as good as spending on public parks" Professor Krugman cited "the Kalecki point that admitting that the government can create jobs undermines demands that policies be framed to cater to all-important business confidence." Krugman linked to Rortybomb who linked to MRZine for the Kalecki paper.

One thing Krugman may have overlooked. As far as "spending on bombs being as good as spending on public parks" is concerned, Kalecki's OTHER point is particularly germane:

1. One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.

The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of 'sound finance', which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism there is no next government.

The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, 'discipline in the factories' and 'political stability' under full employment are maintained by the 'new order', which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.

So, yes, "spending on bombs is as good as spending on public parks" -- even better (if you're a fascist)! By the way, Professor Krugman. You still haven't replied to my earlier letter.

Paul Krugman is Wrong, Wrong, Wrong

Economics, as I say often, is not a morality play. As far as creating aggregate demand is concerned, spending is spending – public spending is as good as but also no better than private spending, spending on bombs is as good as spending on public parks.

Economics is not a morality play but spending on bombs is NOT "as good as" spending on parks. This is not a trivial side issue but the core of the problem. Spending on the wrong things ultimately defeats the purpose of Keynesian stimulus. Keynes knew this. It's a shame Krugman doesn't know his Keynes.

FIRE Sale! Haircuts 1/2 Off! GDP Revised Downward by 21%!

Washington, D.C.: Commerce Secretary John Bryson announced today a downward revision of U.S. GDP by a whopping 21% to reflect new information about the nature of debt. “One person’s debt is another person’s asset," economists explained, "therefore the level of debt doesn’t matter.” It follows from this self-evident law of double-entry bookkeeping that the financial services, insurance and real estate industry contributes no value added to the economy!

"D'oh!" exclaimed Commerce Secretary Bryson. "If we continued to count the value added of FIRE, it would result in double-counting in the GDP." This stunning information about how debt should be accounted for was revealed earlier this month in questioning from an academic audience at an Oxford lecture by Australian economist, Steve Keen.

The General Theory of Employment, Interest and Green Cheese

Part I: Employment

Part II: Interest

Part III: Green Cheese

Your Debt is My Asset. Not.

Steve Keen at Real World Economic Review Blog writes about his frustration with an academic audience who insisted the aggregate level of debt relative to GDP was irrelevant because “one person’s debt is another person’s asset, therefore the level of debt doesn’t matter.”

That assumption is not true but to understand why it is not, it is useful first to consider under what circumstance it would be true. (nb: the following is Sandwichman's analysis not Steve Keen's). It would be true IF AND ONLY IF the creditor was certain that the debt obligation would be honored. It is not true under uncertainty and the real world is uncertain. If the creditor is certain the debt will be repaid, he or she will not need to take any additional steps to secure payment. But the greater the uncertainty, the more precautionary steps will need to be taken to give the creditor security in the event of default.

If “one person’s debt is another person’s asset" there would be no securities industry. Naturally, as the aggregate level of debt increases relative to the resources for servicing that debt, the proportion of resources diverted to securing the debt must increase. Why? Because the cash flows for servicing the debt and the collateral assets for securing the debt are riskier at the margin.

That increased risk is recognized in the risk premium of higher interest rates. But the "risk premium" doesn't tell the whole story. The risk premium is a composite. Part of the premium is indeed an increased return for a riskier investment, but part of it is consumed in higher transaction costs -- more sheriffs, lawyers and paper work. Not only more sheriffs, lawyers and paper work because the debt is bigger but more sheriffs, lawyers and paper work PER DOLLAR OF DEBT. [And by "paper work" I include computerized "paper work"!]

So here we arrive at the limit. At some point, the additional transaction cost of securing increasingly risky debt completely absorbs the margin for risk premium on the interest rate. At that point the only additional loans a creditor can continue to make are either at a loss or effectively unsecured (or insufficiently secured). Now arrives the "Minsky moment" of elaborate financial fraud. Collatoralized Bond Obligations are actually unsecured debt disguised as securities.

Expansion of debt can continue only until creditors balk and/or debtors walk. At the point that expansion stops, contraction begins because the cash flows of the formerly less-risky debtors relied on continued expansion. With cash flow problems, marginal credit risks become poor credit risks and good credit risks become marginal.

Unemployment, Machines and Social Cost

Peter Frase reviews the e-book by Erik Brynjolfsson and Andrew McAfee of MIT, Race Against the Machine. Mark Thoma links to a New York Times review of the e-book.

To the Sandwichman, it looks like deja vu all over again. Eternal return of the same old, same old. I'm sure Professors Brynjolfsson and McAfee mean well, but it sounds to me like they are thinking inside the boxes -- and by boxes, I mean "those empty boxes" that D. H. Robertson lampooned in 1924:

The boxes, if I may make free with the metaphor, are not in my view properly to be loaded upon the same cab. It is almost as though one were a hat-box, and the other a monstrous compound of a box at the opera and a [flower?] box growing alongside a garden path.

"The problem of unemployment" is a phrase that has two meanings. One of those meanings has to do with an understanding of what unemployment is. The other has to do with the dislocations caused by unemployment and the search for a solution. You're not likely to find a good solution to unemployment if you don't understand what it is. And modern thought seems committed to avoiding such an understanding.

Unemployment is not an unfortunate accident, a structurally-inexorable tragedy or the just deserts of lazy people not spending enough time and effort honing their marketable skills. Unemployment is a functional relationship that both enables and compels firms to shift part of their overhead costs to society and individual workers. Is that so hard to grasp? Unemployment works -- that is until it doesn't anymore.

Guns don't kill people. People kill people. Machines don't discharge workers. Firms discharge workers. One would think, therefore, that unemployment would have something to do with "the nature of the firm" as well as the problem of social cost. All that other stuff is empty boxes.

Both John Maurice Clark and Ronald Coase examined "the nature of the firm and the problem of social cost." Clark received a standing ovation when he presented his paper, "Some Social Aspects of Overhead Costs," to the annual meeting of the American Economic Association in 1922. The reception of Ronald Coase's theorem by the Chicago school economists was initially more muted. George Stigler recalled the occasion when Coase was summoned to Chicago from the University of Virginia to explain:

We strongly objected to this heresy. Milton Friedman did most of the talking, as usual. He also did much of the thinking, as usual. In the course of two hours of argument the vote went from twenty against and one for Coase [with Coase voting for the affirmative] to twenty-one for Coase. What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.

There's just one little problem with "the problem of social cost." The word "unemployment" doesn't appear in Coase's article. Nor does the word "labor." The word "employment" does appear but it refers to employment of factors of production, not to jobs. That's what Sandwichman's paper, "The Problem with The Problem of Social Cost" (which will soon be edited into two complementary papers) is all about.

Sandwichman wants to know: is there a Sveriges Riksbank prize for taking down a Sveriges Riksbank prize-winner?

Distributon and Exchange

"The most helpful applications of mathematics to economics are those which are short and simple, which employ few symbols; and which aim at throwing a bright light on some small part of the great economic movement rather than at representing its endless complexities.

"Thus, then, dynamical solutions, in the physical sense, of economic problems are unattainable." -- Alfred Marshall

The Problem with "The Problem of Social Cost" -- revised

I've completed a second draft of "The Problem with 'The Problem of Social Cost'" and have posted the whole article (sans bibliography) as a Scribd embed. My earlier post, The Prince and the Pauper serves as a teaser for this new piece, which substantially reworks and rearranges some of the material I previously serialized on Ecological Headstand, starting about a month ago.

I'd like to say a few words about what I'm doing and why I'm doing it. To quote Ronald Coase, what is wrong with economics -- both in the world and in the academy -- is not due to "a few slips in analysis. It stems from basic defects in the current approach to problems of welfare economics."

I doubt, though, that Coase would endorse the rest of my argument. Those defects are not simple flaws of method or approach. They are symptoms either of pathological neurosis or cynical ideological deception. The system is either sick or evil. Period. My historical analysis allows for either possibility and I'm content to leave the question undecided.

What I don't find plausible, though, is simple mistake or misunderstanding. There is too much repetition of falsehood and concealment to credit "innocent" error. The "defects in the current approach" are either deliberate or they are compulsive. I say this partly from conviction and partly as a challenge to academic economists: "show me I'm wrong."

People who know about the Sandwichman's "obsession" may be surprised to find that the lump-of-labor fantasy doesn't appear anywhere in the draft. There's a simple explanation. It doesn't have to. The bogus fallacy claim was a symptom, a tic that pointed to something out of place. In "The Problem with 'The Problem of Social Cost'" I have identified what that missing something is that was out place and restored it to the narrative.

Keynes on Laissez-faire and Method

J.M. Keynes, The End of Laissez-faire, 1926:

The beauty and simplicity of such a theory are so great that it is easy to forget that it follows not from the actual facts, but from an incomplete hypothesis introduced for the sake of simplicity. Apart from other objections to be mentioned later, the conclusion that individuals acting independently for their own advantage will produce the greatest aggregate of wealth, depends on a variety of unreal assumptions to the effect that the process of production and consumption are in no way organic, that there exists a sufficient foreknowledge of conditions and requirements, and that there are adequate opportunities of obtaining this foreknowledge. For economists generally reserve for a later stage of their argument the complications which arise – (1) when the efficient units of production are large relatively to the units of consumption, (2) when overhead costs or joint costs are present, (3) when internal economies tend to the aggregation of production, (4) when the time required for adjustment is long, (5) when ignorance prevails over knowledge, and (6) when monopolies and combinations interfere with equality in bargaining – they reserve, that is to say, for a later stage their analysis of the actual facts. Moreover, many of those who recognise that the simplified hypothesis does not accurately correspond to fact conclude nevertheless that it does represent what is 'natural' and therefore ideal. They regard the simplified hypothesis as health, and the further complications as disease.

Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive 'natural liberty' in their economic activities. There is no 'compact' conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.

Coase on Marshall on Method

"Marshall on Method" R.H. Coase, Journal of Law and Economics, Vol. 18, No. 1 (Apr., 1975), p. 31:

What was it that Marshall found objectionable about the use of mathematics, at any rate, when used extensively? He thought we lacked the data to support any but relatively simple constructions. He feared that factors that could not easily be dealt with in mathematical form would be neglected. But above all, he thought that we would be tempted to engage in what he termed "mathematical diversions" or, as Pigou put it, we would be led to pursue "intellectual toys, imaginary problems not conforming to the conditions of real life." Marshall thought it would tend to divert our atten-tion from the real world in which poverty causes degradation and to the study of which he thought we should devote our whole energies.

In these days, when the mathematical method rides triumphant in economics, one may ask whether Marshall's fears were well-founded. Have we been tempted to embark on "long chains of reasoning" without adequate supporting data? Do we neglect factors difficult to put into mathematical form? Do we concern ourselves not with the puzzles presented by the real economic world but with the puzzles presented by other economists' analysis?... I very much doubt that what has happened in recent years would have led him to change his mind.

Opportunity Cost Defined

The doctrine that the real cost of anything is the forgone utility of other things perversely rules out all human considerations related to the supply side of exchange, by substituting an indirect and strictly irrelevant test for a direct and relevant one. It reminds one of the famous definition of sugar as “the stuff which makes tea nasty when you don’t put any in.” -- J. A. Hobson

The Prince and the Pauper

"paternity is always uncertain, maternity is most certain."

"The later stage in the development of the neurotic's estrangement from his parents... might be described as ‘the neurotic's family romance’. It is seldom remembered consciously but can almost always be revealed by psycho-analysis." -- S. Freud

"Marshall's proof that laissez faire breaks down in certain conditions theoretically, and not merely practically, regarded as a principle of maximum social advantage, was of great philosophical importance. But Marshall does not carry this particular argument very far and the further exploration of that field has been left to Marshall's favourite pupil and successor, Professor Pigou." -- J. M. Keynes

It is Sandwichman's contention that Professor Pigou was the heir and successor to Alfred Marshall's legacy in name only. In Marshall's own view, Pigou placed too great a reliance on the statical (or equilibrium) method that simply did not apply to the economic facts to be analyzed.

Instead of further exploring Marshall's philosophically-crucial "proof" of the theoretical break-down of laissez-faire, Pigou, in effect, merely inserted the prima facie market failure case for government intervention as yet another abstract assumption in yet another statical model, where Ronald Coase could ferret it out some 40 years later, expose its transaction cost-free presumption and figuratively restore the laissez-faire pretender to the throne.

But if Pigou's analysis was beside the point, then Coase's critique of Pigou is almost equally irrelevant, except in so far as it exposed the former's vulnerability. Coase's critique of Pigou didn't go far enough and as such wallows in the very substance of Pigou's metaphysical blunder while niggling over fine points. (in "Marshall on Method", however, Coase makes observations that support the general thesis presented here).

Pigou's core blunder -- "'a virtual confession of the futility' of the doctrine of marginalism" (Marshall citing Hobson) -- was identified by J. A. Hobson in 1914 in a criticism that struck Marshall as correct in so far as Pigou "overrates the possibilities of the static method." (See Krishna Bharadwaj, "Marshall on Pigou's Wealth and Welfare." Economica 1972)

The issue at stake here is the distinction between mechanical metaphors and what Marshall referred to as the Mecca of the economist: biology. In his unpublished autobiography, Marshall's other "favourite pupil", Sydney Chapman, reflected on his understanding of Marshall's biological metaphor:

I accepted that [Marshall's idea] and thought that I understood it, but it was not until I had immersed myself in the Lancashire Cotton Industry and traced its growth that I really began to see the economic world as a system of systems, each of which was in part a separate whole and in part a dependent portion of a larger whole. This, as it shaped itself in my mind, was a biological idea, and not merely a mechanical one, when the facts of growth were allowed for.

Although there is a kind of equilibrium that can be observed in biological processes it is not the same kind of equilibrium as that exemplified by physical forces at rest or in motion.

In a letter to Chapman upon publication of his Lancashire study, Marshall praised it as "the best monograph of the kind that has ever been published. It is both a realistic-impressionist study of human life and an economic treatise." Fifteen years later, Marshall cited Chapman's realistic study with approval several times in his book, Industry and Trade while Pigou's mathematical analysis was dismissed -- after a perfunctory note of superlative praise -- as inapplicable:

The brilliant work of Edgeworth and Pigou has special claims on English readers. But their route is not followed here: for mathematical analysis cannot easily be applied to conditional monopoly: it is almost constrained to start with the hypothesis of pure monopoly, and gradually to introduce successive limitations, corresponding to the various limitations and restrictions…

There was a didactic purpose to Mark Twain's tale of The Prince and the Pauper. Twain sought to call attention to the harshness and inequity of the law in 16th century England by portraying a prince being subjected to the hardships ordinarily endured by commoners. Similarly, there is an analytical purpose in reexamining this episode in the history of economic thought. It is to uncover old objections and qualifications raised at the very foundation of neo-classical economics that have been glossed over, evaded and shunted aside in the name of an analytical rigor whose usefulness and validity is itself called into question by those very same objections and qualifications.

Three Card Monte: Outing the Ringers

Parrying Perry with Parry: Flat is the New Stupid

Jared Bernstein writes, Flat Isn't Always Simple:

There’s a theme developing in the tax debate that a flat tax, like Herman Cain’s 9-9-9 or another version that Gov Perry’s now talking about, is simpler than a system of progressively higher, or graduated rates.

Not so. Both can be as simple or complicated as you like...

Flat is the new stupid. Does it dawn on these conservative tax savants that the principle they are espousing is equality?

That principle can be interpreted variously: equality of sacrifice, equality of outcomes, equality of opportunity. And each of those equalities can be interpreted in several ways: equality of sacrifice may mean a poll tax, where everyone pays the same absolute amount; a proportional percentage tax, such as the flat taxers advocate; or a progressively graduated tax that tries to account for the differential utility of an extra dollar of income to people of different incomes.

An early president of the National Association of Manufacturers, David M. Parry (with an “a”), wrote a dystopian novel in 1905, titled The Scarlet Empire, whose leitmotif was a reductio ad absurdum parody of the notion of equality. The excess uniformity ultimately came down to legislation that everyone had to chew their food the same number of chews. I suspect Parry would have had no objection to a uniform tax, though, in which everyone, rich and poor, paid the same amount but surely he would have embraced the abstract equality of Governor Perry’s flat tax proposal.

Funny thing about equality: everyone’s supposed to have been created equal but some kinds of equality are more equal than others.

"Rescued from Oblivion" -- Twice!!

From Sydney J. Chapman's unpublished autobiography:

I remember particularly well two courses by Professor Foxwell, one on Currency and Banking, and one on early English Socialistic writers, several of whom he had rescued from oblivion. Both courses had grown and grown as Foxwell added to his information and new facts had to be incorporated. It is much to be regretted that he did not publish a book on each subject. The only survival of any size that I know of is a lengthy introduction about early English socialistic writers contributed to a volume by another writer. But he had his excuse. He was kept continuously busy making his collection of early economic books and pamphlets, and his bibliography in connection with it, his great achievement. But for this many a print rare by then would have been lost by now to all intents and purposes.

One of those pamphlets Foxwell "rescued from oblivion" was the same pamphlet that Engels said Marx had rescued from oblivion: The Source and Remedy of the National Difficulties. Foxwell's "lengthy introduction" was to "The Right to the Whole Produce of Labour" [available from Internet Archive]] by Anton Menger (brother of Austrian economist Carl Menger).

In a footnote, Menger expressed doubt "whether Marx drew his views on this question from the pamphlet quoted by Engels, The Source and Remedy of the National Difficulties, London, 1821, which contains only faint hints of the theory." But Menger would not have had access to the Grundrisse or to the Economic Manuscript of 1861 -1863.

Chapman's Reticence

I should, I think, stress that he [Chapman] was always a rather shy and reticent man. He was obsessed with the idea that someone might write a "Life" or "Study" of him or his period or his friends or connections, and he made it a point of principle to destroy ruthlessly all correspondence as soon as he and my mother had read it.

The Same Old Same Old Pooh-pooh Maneuver

"It's a complaint U.S. pundits made regularly about the Occupy Wall Street protests -- that they lack a clear message or demand." -- Campbell Clark, Globe & Mail

Gosh, these "pundits" are so clever! They can swallow just about any kind of precious metal and regurgitate the same old boilerplate crap. Pundits are the Kim Kardashians of the technocratic crackpot meritocracy. Just as Kardashian is a celebrity who is famous just for being famous, pundits are expert at sounding like experts. Or pretending to sound like them. Or not even having to pretend because their inevitably unidentified expert status is most likely a figment of some slack-ass reporter's imagination. Mr. Clark, sir, WHO are your "pundits"? Are they hacks like you? Or are they press agents for Goldman Sachs?

Pay close attention, reader, because your faithful Sandwichman has descended deep into the pundit underworld to retrieve the secret of the pundits' dreaded Pooh-pooh Maneuver. It's not rocket science. The basic formula is 1. Phony he said, she said "balance" 2. degradation 3. "reasonable" derision 4. repetition. To demonstrate, I will parse the Globe & Mail sentence.

1. Balance: (often unnamed) pundits complain; OWS participants protest.

2. Degradation: the opinion of pundits interprets and frames the opinion of protestors. In fact, we don't even need to hear what the protesters are saying; the pundits will tell us what (they want us to believe) the protesters are saying.

3. Reasonable derision: the pundits' version of what the protester are protesting about makes it look silly; the pundits then tell us that it is silly (unclear, a fallacy). Isn't it silly of those disorganized protesters to have no clear message or demand? Who can argue with that?

4. Repetition: here is the real secret of boilerplate success. Steps 1,2 and 3 are futile without the ad nauseum. The demands were never clear to the pundits because it is the pundits' job to not listen. Repetition is the pundits' pledge to continue to do their job of not listening.

Here is the Sandwichman's one message and demand: Pundits, take your ritual bull shit boilerplate complaint about lacking a clear message or demand and shove it where the sun doesn't shine. Is that clear?

Is that clear?

Is that clear?

DHeLL with it

Em
Oh, Mama, can this really be the end,
C G F
To be stuck in Cincinnati
C G11 C
With the processed blues again.

Result Summary
Origin Service Area: LAMBETH - LONDON - UK
Destination Service Area: RICHMOND, BC - VANCOUVER - CANADA

Sunday, October 16, 2011 Location Time Pieces
11 Processed at CINCINNATI HUB - USA CINCINNATI HUB, OH - USA 17:05

Saturday, October 15, 2011 Location Time Pieces
10 Processed at CINCINNATI HUB - USA CINCINNATI HUB, OH - USA 01:19

Friday, October 14, 2011 Location Time Pieces
9 Clearance processing complete at CINCINNATI HUB - USA CINCINNATI HUB, OH - USA 02:41

Thursday, October 13, 2011 Location Time Pieces
8 Clearance delay CINCINNATI HUB, OH - USA 05:06

7 Arrived at Sort Facility CINCINNATI HUB - USA CINCINNATI HUB, OH - USA 03:31

Wednesday, October 12, 2011 Location Time Pieces
6 Departed Facility in EAST MIDLANDS - UK EAST MIDLANDS - UK 22:00

5 Processed at EAST MIDLANDS - UK EAST MIDLANDS - UK 11:08

Tuesday, October 11, 2011 Location Time Pieces
4 Arrived at Sort Facility EAST MIDLANDS - UK EAST MIDLANDS - UK 23:35

3 Departed Facility in LAMBETH - UK LAMBETH - UK 20:48

2 Processed at LAMBETH - UK LAMBETH - UK 20:16

1 Shipment picked up LAMBETH - UK 17:15

And I would send a message
To find out if she's talked,
But the post office has been stolen
And the mailbox is locked.

An' here I sit so patiently
Waiting to find out what price
You have to pay to get out of
Going through all these things twice.
Oh, Mama, can this really be the end,
To be stuck in Cincinnati
With the processed blues again.

UPDATE: 12 Departed Facility in CINCINNATI HUB - USA CINCINNATI HUB, OH - USA 18:28 [YAY!]

UPDATE #2: Way cool! Arrived in Seattle 50 minutes after it left Cincinnati! Rocket mail! It is 1964 miles from Cincinnati to Seattle. That rocket was traveling at over 2357 mph (not counting take off and landing; loading and unloading times! Wow!)
13 Arrived at Sort Facility SEATTLE - USA SEATTLE, WA - USA 16:18

This Shit's Got to Go!

Animated Sandwichman

Here is a photo of the Sandwichman, all dressed up in his frock coat and sandwich board, on his way down to the Occupy Vancouver October 15 event.

(Sande Waters photo)

The puppet hanging on the board is Paul Samuelson, iconic mathturbater and textbook author, whose Economics taught a generation of economists to bark like trained seals, "Lump-of-labor fallacy! Lump of labor fallacy!" The mouth opens and closes; the arms and legs flap.

In the background is the enigmatic slogan "only so much work to go 'round" -- the idea that "cannot withstand a nanosecond of thought" and thus gets recited thoughtlessly by economists who "half understand an ancient textbook legend, the premises of which they have forgotten."

Listening (Brian Roche photo)

Sex, Drugs and Rock 'n' Roll

"'Most people view it as a ragtag group looking for sex, drugs and rock ’n’ roll,' said one top hedge fund manager." (Top hedge fund managers are a ragtag group who consume copious amounts of sex, drugs, rock 'n' roll and other people's money.)

Somebody Gets it Right!

Kudos to Antony Mason at the Intergenerational Foundation for talking sense about the lump-of-labor fallacy and its irrelevance when jobs are actually disappearing.

Waiting for Guff Chapman

My photocopy of Sydney J. Chapman's unpublished autobiography from the archives at the London School of Economics is in the mail (courier). Meanwhile, I don't want to go too far out on a limb speculating about whether he recognized the significance of his contribution. Apparently, posterity hasn't yet grasped it, either.

Tongue in Cheek

No one at Adbuster's Magazine expected their spoof ad calling for the occupation of New York's financial district would be taken seriously, let alone spawn a nation-wide movement. Trickster rules!

Why Sir Laming Worthington-Evans Wears a Top Hat

Why is it, then, that Sir Laming holds such very odd opinions? It is like asking me why he wears a top hat. He is a Conservative. The reasons are wrapped in the mists of history. But, roughly, I think I know them. He half understands an ancient theory, the premises of which he has forgotten.

This theory assumes that all the productive resources -- savings, labour and the gifts of nature -- which are at any time in existence are normally employed because, so the argument assumes, whenever they are unemployed they are ready to accept a lower rate of remuneration, and employment will always be forthcoming at a sufficiently low rate of wages. That is to say, the theory starts off by assuming the non-existence of the very phenomenon which is under investigation. -- J.M. Keynes, A Cure for Unemployment, April 19, 1929

"What about labor?"

More from J.M. Clark's "Some Social Aspects: An Application of Overhead Cost to Social Accounting":

From J.M. Clark's "Some Social Aspects: An Application of Overhead Cost to Social Accounting"

The following is the summary John Maurice Clark presented in his 1923 paper, presented to the thirty-fifth annual meeting of the American Economic Association.

The Labor Market Myth

The term "labor market" reminds Sandwichman of the apocryphal remark attributed to Gandhi when asked what he thought of Western Civilization: "it would be a good idea." I'm not so sure a labor market would be such a good idea, but I am convinced that what actually exists is not a market in any analytically coherent sense of the term. Jamie Galbraith expressed similar reservations in "Dangerous Metaphor: The Fiction of the Labor Market." As the preface explains:

The Enigma of Costs: a note on "Externality" and "Market Failure"

Francis M. Bator, "The Anatomy of Market Failure" (1958): "I think it more natural and useful to broaden rather than restrict, to let 'externality' denote any situation where some Paretian costs and benefits remain external to decentralized cost-revenue calculations in terms of prices." In a footnote, he continues, "Recall that it is the existence of such 'externality,' of residue, at the bliss-point, of Pigouvian 'uncompensated services' and 'incidental uncharged disservices' that defines market failure."

Lunatics Never Combine

In a 1927 speech to the London Liberal Candidates Association, Keynes told an anecdote about "a friend" who had recently visited a lunatic asylum. "How is it," the friend asked a warder, "that it is safe for you to run the concern with such a small staff?" "Oh," came the reply, "lunatics never combine."

A Slow and Dragging Cure

Addendum to the Keynes and the Lancashire Cotton Industry. I need to integrate into the earlier section on Keynes the paragraph below, which so graphically illustrates why decline has to be looked at differently than development and which contains the compelling image of the "slow and dragging cure".

Work-sharing During the Great Depression: Did the ‘President’s Reemployment Agreement’ Promote Reemployment?

Economica (2011) 78, 133–158
Work-sharing During the Great Depression: Did the‘President’s Reemployment Agreement’ Promote Reemployment?

By JASON E. TAYLOR

Hedda Gablog

Funny thing. One would think that not posting new content to a blog was the surest way to lose audience. My traffic statistics are telling me, though, that my continuing series on the problem with the problem of social cost is strangling Ecological Headstand. Deirdre McCloskey once told an anecdote that might explain why:

The only appearance of economic historians in literature are the hero in Amis' Lucky Jim and the anti-hero Tesman in Ibsen's "Hedda Gabler":

Hedda: Tesman is a specialist, my dear Judge.

Brack: Undeniably.

Hedda: And specialists are not amusing traveling companions - Not for long, at any rate.... Just you try it! Nothing but the history of civilization morning, noon, and night.

Brack: Everlasting.

Hedda: And then all this business about the domestic industries of Brabant during the Middle Ages. That's the most maddening part of it all.

Substitute Sandwichman for Tesman, Lancashire for Brabant and Nineteenth Century for the Middle Ages and we've got the proverbial Trifecta here! Nevertheless, the Sandwichman will persevere because, amusing traveling companion be damned, he thinks the problem with the problem of social cost strikes at the heart of what is wrong with political economy today and offers pointers to a way forward.

The Logic of Not Demanding

"We don’t tell them what we want because they already know what we want: We want their system to die. Why make demands of the thing you want to destroy? Negotiating only grants legitimacy and continuity."

Social Cost, Overhead Costs and the Nature of the Firm

Although Ronald Coase paid no heed to Part III of Pigou's Economics of Welfare in "The Problem of Social Cost," it's not as though it simply disappeared. Donald Stabile (1993, 1995, 1996) has documented Pigou's influence on John Maurice Clark's analysis of the social overhead cost of labor in Studies in the Economics of Overhead Costs and K. William Kapp's analysis in The Social Cost of Private Enterprise.

Coase's omission is regrettable but understandable considering the limited focus of his paper on transaction costs. More puzzling is the almost total lack of attention to the implications of that omission by subsequent scholars – with the notable exception of Stabile – considering the prominence of Coase's article.

Stabile laid the issue squarely on the line in his 1996 article, "Pigou, Clark and modern economics: the quality of the workforce." when he asked in a section subtitled, "Social costs without labour",

If the costs of low wages are passed on to society, who represents it at the bargaining table? If Coase had applied social costs to labour, rather than a theory of the firm, he might have developed a theory of the union as a vehicle for minimising the transaction costs of negotiating wages sufficient to cover social costs.

Admittedly, Stabile diluted the force of his critique of Coase by not announcing it in his abstract or his opening paragraph and by indulging in somewhat of a digression on Pigou's "Victorian attitude toward women" and the social costs of women participating in the paid workforce. Although the relationship between social reproduction and workforce participation is indeed an important one, a much simpler case can be made regarding Pigou's observations on the direct effects of low wages, unemployment and excessive hours of work.

In the subsequent section, subtitled "Labour without social costs," Stabile observed that "without a social cost perspective for labour issues, modern economists make efforts to shift social costs back to business as 'a trade-off between equality and efficiency'(Okun 1975)." And "The idea that low wages led to inefficiency through non-payment of social costs, as Pigou and Clark suggested, was not part of Okun's analysis."

In "Coase, Institutionalism, and the Origins of Law and Economics," Herbert Hovenkamp (2011) has called attention to the fact that J. M. Clark had "developed a comprehensive theory fifteen years earlier [than Coase] that contracting and coordination costs determine when a firm will choose outside procurement or internal production." Hovenkamp offered the following summary:

Clark's Overhead Costs, just as much as Coase's Nature of the Firm, broke the business firm apart and explored its inner decision making. For both, the premise was that managers set out to maximize the firm's value. In that sense Clark's Overhead Costs was firmly marginalist just as if was firmly institutionalist. While Coase's Nature of the Firm is given considerable credit for producing nonmonopolistic explanations for business decisions, Clark's Overhead Costs did the same thing — pointing out, for example, that pricing above short run cost and price discrimination are not unique attributes of monopoly, but can exist in any market with fixed costs.

Next: Lunatics Never Combine

Lancashire, Labor and the Lump of Transaction Costs

Sydney Chapman's history of the Lancashire cotton industry was one of two "promising steps towards the establishment of a Marshallian school of industrial economics" (Raffaelli 2004). The other was a theoretical study by David H. Macgregor of the growth and combination of firms into giant industrial units. Chapter Six of Chapman's book, on factory legislation, contains the following passage:

The Manchester Committee of the National Association for the Protection of Labour put forward a general short-time bill of its own, but at the same time gave active support to Sadler's bill, if for no other reason because it was in effect a short-time bill for all working in the textile industries; and the eight hours day was made one of the chief objects of the Society for National Regeneration.

Sound as were the fundamental ideas for the realization of which the Society for National Regeneration had been instituted, its propaganda were frequently vitiated by appeals drawn from the doctrine of the labour fund, as the "lump of labour" fallacy might be called [S.: Marshall referred to "the fallacy that there is a fixed Work-Fund"]. Thus we read in its organ: "Reduce your numbers," says Parson Malthus, "by ceasing to beget children, and then there will be work enough for you all." Never mind your numbers," says the Regeneration Society, "but reduce your hours of working, and then those of you who have too much work can spare a little to those who have none, and still there will be enough for you all." The week previously the same paper, in an address to the hand-loom weavers of Bolton, had laid it down as a "law of Nature" that doubling a man's work halved his wages (i.e., piece rates), and that, therefore, all regulation of wages by statute must be futile. This doctrine was constantly advanced.* "Is there a trade in the country which does not see that the most certain and easy mode of preventing reductions of wages, and even of obtaining advances, is to limit the quantity produced?" it was written in the Poor Man's Advocate for February 25th, 1832. Three weeks later this advice was proffered to the operatives: "Let them endeavour, then, to lessen their labour that they may enjoy the more. Let them cease to 'produce' so much, that the 'demand' for their labour may increase." John Fielden put forward the doubtful view that "if the change" (the reduction of hours) "were general the lesser quantity produced would command as much money as the greater quantity now does," and argued from this that time-wages would not be affected by a reduction of hours. He omitted to consider the competition of other classes of labour, and he was also silent as to the effect on real wages as a whole of a rise in the price of cotton goods. It was commonly believed by the Lancashire operatives that their long hours of labour prevented many others from getting any work at all, and caused markets to be glutted, so that goods had to be sent abroad at a great depreciation in their value. We must notice, however, that those who advocated shorter hours, both in this period and later, found also many sound reasons for their action in the expected effect on the health and comfort of the operatives. They perceived that high wages were of little value to those who had little time to spend them. Moreover, the mistakes made by the operatives lay not so much in their fundamental opinions as in some of the reasons given by them for holding these opinions.

* The author of Character, Object and Effects of Trade Unions tells us that these views were thoroughly accepted among the spinners. "The union calculated," he said,

that had the Ten-hour Bill passed, and all the present factories worked one-sixth less time, one-sixth more mills would have been built to supply the deficient production. The effect of this', as they fancied, would have been to cause a fresh demand for workmen, and hence those out of employ would have been prevented from draining the pockets of those now in work, which would render their wages really as well as nominally high. Here we have the secret source of nine-tenths of the clamour for the Ten-hour Factory Bill.

Two features of Chapman's account are distinctive. Unlike most claims about the lump-of-labor fallacy, Chapman's presented evidence for the assertion, in the words of short-time advocates. Also unlike most accounts, Chapman characterized the "fundamental ideas" of the workers regarding the value of leisure as sound and distinguished between their opinions and the "reasons given by them for holding these opinions."

In the book's preface, Chapman went on at some length about how "much is said of the opinions held by those who share in the earnings of the Cotton industry." He called the "different guiding notions" of employers and employed a "striking feature in the history of the Cotton industry". It is unknown whether the pun was intended. It is reasonable to surmise that his theory of the hours of labor was a further investigation into these different guiding notions, with specific reference to the agitation for shorter hours outlined in the passage above. I have ordered a copy of Chapman's unpublished autobiography from the archives at the LSE and anticipate that it may shed further light on these speculations.

In my earlier discussion of Sidgwick on combinations, I mentioned that his section four recited a perennial complaint of employers regarding the alleged organized effort of unions to "extend uneconomically the amount of labour required, or to give as little work as he can in the time". That was, in effect, the "guiding notion" of employers about the motives of the employed in agitating for shorter hours. In the Lancashire Cotton Industry, Chapman began to investigate the workers' side of the question, an investigation that would culminate in his 1909 theory.

Eventually, I'll have to come to terms with the fact that the other famous paper by Ronald Coase, "The Nature of the Firm" (1937), also looked at industrial economics but from another perspective -- the relationship between the firm, the market and transaction costs. The Marshallian response to Coase might be something like the following: transaction costs are not static, they evolve, and thus the efficient boundaries -- but not the actual ones -- between market and firm also evolve.

Next: Social Cost, Overhead Costs and the Nature of the Firm

Answer: 2/3

Question: what's the "Cainsian multiplier"?

Say it ain't so, Joe!

Joe Stiglitz at Project Syndicate:

The prescription for what ails the global economy follows directly from the diagnosis: strong government expenditures, aimed at facilitating restructuring, promoting energy conservation, and reducing inequality, and a reform of the global financial system that creates an alternative to the buildup of reserves.

That might be a good prescription for the crisis of the 1970s. Unfortunately that train has left the station -- about 35 years ago. Today it is not just a question of manufacturing jobs leaving but also of service sector jobs becoming redundant, outsourced and "self-served".

Imagine a world in which you walk into a knowledge center and hand your information request to the search clerk behind the counter. The clerk enters a few key words on the keypad and a few seconds later prints out several pages of hard copy with your requested information. That world is not going to happen.

The dirty little secret is that the service economy sector with the greatest prospect of expansion is also the one in which the most efficient and least costly way of operating is for the customers to do it themselves.

Academics who are paid to figure this out can't figure this out because they are still getting paid for doing what thousands of unpaid, possibly unemployed, folks are doing for free in their "spare time." Go figure. Lawrence Katz and David Autor get paid for NOT knowing what the Sandwichman doesn't get paid for knowing!

Some people might think this is "unfair" but the Sandwichman doesn't give a crap about unfairness. Sandwichman only cares about its implications for creating jobs and "reducing inequality." Government spending, "restructuring" and energy conservation are not enough to do the trick.

Note on renaming PwPSC posts

The subject headings have become unwieldy for the continuing series on the problem with Coase's "The Problem of Social Cost," so I've deleted the series title and part number from them. For now, each entry will be linked to the next entry in the series, starting with The Problem with "The Problem of Social Cost." When the series is finished, all the posts will be collated into a single SCRIBD document linked to from a permanent Ecological Headstand Page.

Keynes and the Lancashire Cotton Industry

Originally, I had intended to move on from Sidgwick's analysis of the negative and positive aspects of combination to Chapman's theory of the hours of labor. The later theory turns the old prejudice that union regulations are organized shirking on its head to reveal a compelling case of common pool resource management. I was going to anchor my discussion with reference to Chapman's historical research on the Lancashire cotton industry, which was very much in the Marshallian tradition of the study of industrial localization.

It so happens, though, that a more famous economist – John Maynard Keynes, in fact – became interested, in the late 1920s, in the decline of the Lancashire cotton industry. Keynes's involvement in trying to engineer a solution to the industry's crisis has been described by Roberto Marchionatti as suggestive of the "microfoundations" for the subsequent macroeconomic General Theory of Employment, Interest and Money.

It's beyond the scope of this series on the problem of social cost to establish the links between Keynes's writing on the Lancashire cotton industry and his general theory, as is elaborating on the connections and differences between Keynes's discussion of the Lancashire cotton industry and Chapman's. But the salient feature is the key – that is to say, not peripheral – role played by "external economies" in both analyses of the industry.

In Marshall's view – faithfully represented by Chapman – localization enabled small and medium-sized firms to take advantage of proximity and evolve a mixture of competition and co-operation that was sometimes explicit and sometimes tacit. By contrast, Keynes viewed the unorganized collection of firms as preventing rationalization in the face of a profound change in international competitiveness. He termed the situation "a cumulative progress towards perdition only limited by the rate at which other countries can erect new spindles." His prescribed remedy for this hodgepodge was cartelization, enforced by pressure from the banks. In it's inability to adjust to the new circumstance, the Lancashire cotton industry resembled Sidgwick's fishery, in that it was clearly in the general interest that excess capacity be phased out and goods not be sold for under a certain price but it would be rash to rely on voluntary cooperation to bring about such a result.

The point I want to emphasize is that the notion of "externalities" is not something to do with nuisance side effects of economic production -- rabbits running amuck on a neighbor's estate or sparks from a locomotive causing a brush fire. It was a key element of Alfred Marshall's view of industrial development and of John Maynard Keynes's analysis of industrial decline. It may even be considered the unheralded microfoundation of Keynes's macroeconomic analysis.

Postscript: The Lancashire cotton industry was cartelized, as per Keynes's recommendations but continued its historical decline.

Next: Lancashire, Labor and the Lump of Transaction Costs

Sidgwick: Commons and Combination

As Steven G. Medema suggested in The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas, there is more continuity than contradiction between Adam Smith's notion of a "system of natural liberty" wherein self-interest unintentionally promotes the public good, Cecil Pigou's neoclassical analysis of market failure as constituting a prima facie case for government intervention and Ronald Coase's challenge to the Pigovian tradition in "The Problem of Social Cost." It is rather the subsequent interpretations of these economists' views that posit a stark contrast between the efficiency of the marketplace and the need for government intervention.

Medema chronicled an important transition between Smith's classical position and the neoclassical view in his chapter on "Harnessing Self-Interest: Mill, Sidgwick and the evolution of the theory of market failure." Medema summarized his explanation of the two-stage process of this transition as follows:

The argument here is that this transition occurred via a two-stage process, in which John Stuart Mill and Henry Sidgwick were central players. The first step involved the elaboration of a greatly expanded theory of the failure of the system of natural liberty – akin to what we today call "market failure" – as against the classical success story. Mill was instrumental in this expansion, and it continued at the hands of Sidgwick. The second stage involved a move to a more markedly positive assessment of the possibilities of corrective policy actions undertaken by the state than we find in the classical tradition, and it was here that Sidgwick took center stage.

In the second edition of his Principles of Political Economy, Sidgwick undertook a critical analysis of "The System of Natural Liberty Considered in Relation to Production." Sections four and five of that chapter dealt with "combinations", in both their injurious and supporting manifestations. Section four began with the observation that "private enterprise may sometimes be socially uneconomical because the undertaker is able to appropriate not less but more than the whole net gain of his enterprise to the community; for he may be able to appropriate the main part of the gain of a change causing both gain and loss, while the concomitant loss falls entirely upon others." After a brief consideration of the effects of monopoly, Sidgwick turned to "Combination" as an instance where the practical importance of the conflict between social and private interest is "much increased." The example Sidgwick gave is "where some combination of labourers exists" that can enable the labourer to "extend uneconomically the amount of labour required, or to give as little work as he can in the time (supposing that harder work would be more irksome)."

Section 5 discussed the positive contribution of combination, arguing that "in some cases combined action or abstinence on the part of a whole class of producers is required to realize a certain utility, either at all or in the most economical way…" The example Sidgwick gave for such constructive combination was a fishery, "where it is clearly for the general interest that the fish should not be caught at certain times, or in certain places, or with certain instruments; because the increase of actual supply obtained by such captures is much overbalanced by the detriment it causes to prospective supply." In such a circumstance, relying on voluntary co-operation would be rash, considering the increased incentives for a free-rider to exploit to abstinence of the others.

The latter example is a classic instance of the management of a common pool resource, while the former intimation of "shirking" by workers conformed to a litany of complaint and suspicion about the motives for union regulations that had become virtually a badge of common sense business practicality during the Nineteenth century. Subsequent economic analysis would reveal more affinity between the vulnerability of fisheries to over-fishing and of laborers to overwork.

Next: Keynes and the Lancashire Cotton Industry