Tuesday, October 2, 2012

Ned Ludd: Emperor Rogoff is Still Naked

Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, chief economist of the International Monetary Fund and recipient of the 2011 Deutsche Bank Prize in Financial Economics begins his King Ludd is Still Dead essay thus:
Since the dawn of the industrial age, a recurrent fear has been that technological change will spawn mass unemployment. Neoclassical economists predicted that this would not happen, because people would find other jobs, albeit possibly after a long period of painful adjustment. By and large, that prediction has proven to be correct [bracketing out a few "exogenous" wars, revolutions and depressions].
Professor Rogoff crowns his tapestry of platitudes and banalities with the following carbuncle: "Of course, some increase in unemployment as a result of more rapid technological change is certainly likely, especially in places like Europe, where a plethora of rigidities inhibit smooth adjustment."

The old "it's the rigidities, stupid," scam! Except there's no empirical support for that perpetual claim. No credible empirical support, that is.

As Richard Freeman explained back in 2006 ("Labour market institutions without blinders: The debate over flexibility and labour market performance"), "In short, priors aside, the best summary of the data, what we really know, is that labour institutions reduce earnings inequality but that they have no clear relation to other aggregate outcomes, such as unemployment."

"Why are supporters of the new orthodoxy so convinced that their analysis definitively convicts labour institutions while critics find inconclusive results in the same data?"

"Adherents to the new orthodox view search the data for specifications/measures that support their priors, while barely noticing evidence that goes against them. If results are inconsistent with the priors, they assume that something is wrong with their empirical specification or measures, rather than question the validity of their case. If results fit their priors, they rarely look further to find weaknesses."

For further criticism of the rigidity hypothesis see Howell, Baker, Glyn and Schmitt, "Are Protective Labor Market Institutions at the Root of Unemployment? A Critical Review of the Evidence."

See also Karl Marx on "the theory of compensation as regards the workpeople displaced by machinery," John Maynard Keynes on "Is the Economic System Self-Adjusting?"" and Hans Neisser on "Permanent Technological Unemployment"

1 comment:

  1. well said...and, by the way, superb comment on delong's blog