Wednesday, June 27, 2012

Re: The Krugman-Layard "Manifesto for Economic Sense"

"The whole world suffers when men and women are silent about what they know is wrong." Paul Krugman and Richard Layard, Financial Times.
Mr. Keynes always knew this day would come:

"When the rate of interest has fallen to a very low figure and has remained there sufficiently long to show that there is no further capital construction worth doing even at that low rate, then I should agree that the facts point to the necessity of drastic social changes directed towards increasing consumption. For it would be clear that we already had as great a stock of capital as we could usefully employ." -- 1934, "Is the Economic System Self-Adjusting?"

And he had a prescription for it:

"when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises... [i]t becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours." -- 1943 "The Long-Term Problem of Full Employment."

He explained his rationale in a 1945 letter to T.S. Eliot:

"The full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less. Personally I regard the investment policy as first aid. In US it almost certainly will not do the trick. Less work is the ultimate solution. How you mix up the three ingredients of a cure is a matter of taste and experience, i.e. of morals and knowledge."

Ironically, both Professor Krugman and Professor Layard implicitly rejected Keynes's intellectual theorem with their unwitting embrace of the bogus "lump-of-labor (or output) fallacy" claim, which descended from a archaic prototype of Jean-Baptiste Say's "Law of Markets" (aggregate supply creates its own aggregate demand) that Keynes directly opposed.

(See also 'Kick-starting the Recovery': An Open Letter to Jonathan Portes.)

Saturday, June 23, 2012

"Kick-starting the Recovery": An Open Letter to Jonathan Portes

Dear Jonathan Portes,

As someone who has researched the lump-of-labour fallacy extensively -- and published academic articles on it -- I am constantly on the look out for proponents of the fallacy claim who might be persuaded to reconsider their views in light of the overwhelming historical evidence to the contrary. I have no illusions. I expect to be disappointed in my quest. Surprise me!

“The full-employment policy by means of investment”, Maynard Keynes explained to T.S. Eliot in a letter written towards the end of World War II, “is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less." Keynes's biographer and your fellow panelist this coming Tuesday at the After Austerity event, Lord Robert Skidelsky, is familiar with this statement by Keynes and has cited it several times.

In a post at your Not the Treasury View blog this past January, you remarked that you thought explaining the lump-of-labour fallacy to Secretaries of State for Work and Pensions was "probably the most useful thing I did, from a public policy perspective, in my six years as Chief Economist at Department for Work and Pensions." Are you aware that the "intellectual theorem" Keynes advanced directly repudiated the argument underlying the lump-of-labour fallacy claim?

In reply to a comment on that blog post, you further observed that it was a "great puzzle" why productivity-enhancing technologies in the U.S. haven't led people to work less and take more leisure. It seems to me that the puzzle dissolves as soon as one realizes the radical antithesis between Keynes's intellectual theorem and the fallacy claim.

What was Keynes's 'intellectual theorem'? In the simplest possible terms, it is the answer "No" to the question "Is the Economic System Self-Adjusting?" Keynes elaborated on that theme in a 1934 BBC radio address whose title asked that question:
Put very briefly, the point is something like this. Any individual, if be finds himself with a certain income, will, according to his habits, his tastes and his motives towards prudence, spend a portion of it on consumption and the rest he will save. If his income increases, he will almost certainly consume more than before, but it is highly probable that he will also save more. That is to say, he will not increase his consumption by the full amount of the increase in his income. Thus if a given national income is less equally divided, or if the national income increases so that individual incomes are greater than before, the gap between total incomes and the total expenditure on consumption is likely to widen.
Up to a point, the gap between total incomes and total expenditures on consumption can be made up by investment in capital goods -- but only insofar as business calculates that it would be profitable to do so. Eventually,
When the rate of interest has fallen to a very low figure and has remained there sufficiently long to show that there is no further capital construction worth doing even at that low rate, then I should agree that the facts point to the necessity of drastic social changes directed towards increasing consumption. For it would be clear that we already had as great a stock of capital as we could usefully employ.
Here, then, were two of the three applications of the intellectual theorem: promoting increased investment through fiscal and monetary policy and promoting increased consumption by "increasing the share of income failing to those whose economic welfare will gain most by their having the chance to consume more." The third application, working less, Keynes alluded to in his 1930 essay on "Economic Possibilities for our Grandchildren" and again in a 1943 Treasury Department memorandum on "The Long-Term Problem of Full Employment" as an effective alternative to increased consumption, "As the third phase comes into sight; the problem stressed by Sir H. Henderson begins to be pressing. It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours."

What is the 'lump-of-labour fallacy' claim? This is a more difficult question to answer because the real argument hides behind a false accusation that the advocates of some policy or other "assume that there is a fixed amount of work." There is no evidence or logical necessity for such a static assumption. All that needs to be assumed is a gap between total incomes and total expenditures on consumption and investment in capital goods -- something that Keynes stated explicitly. The real argument of fallacy claimants is thus that there is no gap between income and expenditure, that the economic system adjusts automatically.

Perhaps it would be useful to go back to the earliest-known instance of the fallacy claim for a more complete statement of the argument. It was presented in a 1780 pamphlet, "Thoughts on the Use of Machines in the Cotton Manufacture," written by a Lancashire magistrate, Dorning Rasbotham:

There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them. But if now machines perform a larger share than before, suppose one fourth part, so many hands as are necessary to work that fourth part, will be thrown out of work, or suffer in their wages. The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not hemmed in by great walls, beyond which it cannot go. By bringing our goods cheaper and better to market, we open new markets, we get new customers, we encrease the quantity of labour necessary to supply these, and thus we are encouraged to push on, in hope of still new advantages. A cheap market will always be full of customers.

The first thing to note about Rasbotham's fallacy claim is that he didn't name those who allegedly say there is a "precise limited quantity of labour" to be performed. The anonymity of those who allegedly commit the fallacy became a standard feature of subsequent versions of the fallacy claim -- presumably because it is extremely difficult to find anyone who actually says there is a fixed amount of work to be done. The amount of work doesn't have to be "fixed" for there to be a gap between the supply of labour and the demand for it (or, what amounts to the same thing, between total incomes and total expenditures). One can readily concede that "a cheap market will always be full of customers" without concluding from it that the cheap market will automatically absorb all the income available.

The great productivity/leisure 'puzzle.' In his 1934 radio address, Keynes advocated a long-run policy that he thought would tend "to make capital goods so abundant that the reward that can be gained from owning them falls to so modest a figure as to be no longer a serious burden on anyone." Today we have an abundance of capital goods, yet the reward gained from owning them falls to a tiny minority of the population. What might explain that discrepancy between prediction and actuality? Policy makers seem to have accepted Keynes's argument that the economic system is not self-adjusting but they have rejected two of the three applications of his intellectual theorem. As he told Eliot, Keynes regarded the investment policy as "first aid" and working less as the "ultimate solution." "How you mix up the three ingredients of a cure is a matter of taste and experience, i.e. of morals and knowledge."

But what if the "taste and experience" of policy makers (or of those they answer to) was to not permit the reward from owning capital goods to fall to a modest figure?

Are the policy prescriptions for economic stimulus put forward in the name of Keynes consistent with Keynes's own thought? Are they even coherent? Might the decades-long hiatus in North America in the historical decline of the hours of work have been policy-induced? If so, what have been the social and environmental consequences? Is the one-dimensional version of Keynesianism sustainable even in terms of the narrow goal of economic growth?

I think the answer to the last question is clear: "No."

Returning to your January blog post and comments, you concluded your reply to Luke Lea's comment with the point that "that working shorter hours doesn't in itself create (or destroy) jobs for anyone else." Taken literally, that may be correct. Simply reducing or increasing hours doesn't necessarily do anything -- in itself. Similarly, reducing or increasing prices or the supply of any particular good doesn't in itself result in a change in employment or anything else for that matter. It's not the hours alone we should be concerned with, though. There are also the connections between hours of work and income distribution, productivity, worker well being, education and motivation, and a multitude of other factors.

In a 1932 article in The Journal of Political Economy, Dorothy W. Douglas extolled Ira Steward's eight-hour theory as a "philosophy of American wages and unemployment that sounds strangely apposite today." What impressed Douglas most about Steward’s theory was his argument that unemployment and low wages lay at the root of economic depressions. According to Steward (in Douglas’s words), capitalists "assume that just a little surplus labor is good for business." Too much unemployment would be an inconvenience and even a scandal. But employers welcome just enough unemployment to discourage demands for higher wages. The problem is "just a little surplus labor" tends to get out of hand. Once the genie of unemployment is out of the bottle, it is hard to get it back in again. Steward's theory was, of course, denounced by critics as a lump of labour fallacy.

It seems to me that we have come to the end of an era where advocates of Keynesian fiscal and monetary stimulus could, with impunity, disparage alternative applications of his intellectual theorem. There is a fundamental inconsistency in being opposed to austerity but at the same time maintaining, incongruously, that the economic system is somehow self-adjusting with regard to the hours of work and income distribution. The wheels are coming off that particular bandwagon.


Tom Walker

Monday, June 18, 2012

In Praise of Leisure

Robert Skidelsky and Edward Skidelsky at The Chronicle Review:
Imagine a world in which most people worked only 15 hours a week. They would be paid as much as, or even more than, they now are, because the fruits of their labor would be distributed more evenly across society. [...]

Thursday, June 14, 2012

"Say, hey!": Two Big Lies

Andrew Oxlade, editor of & dailymail/money, aims "to make our 2.7m readers richer" by lying to them:
But isn’t this older generation stealing jobs from the young? This, economists say, is the 'the lump of labour fallacy' – the belief that there is a fixed number of jobs in the economy. In reality, the economy expands, broadly, with the size of the workforce – one of the reasons for political acceptance of immigration.

1. In real reality, the economy doesn't expand "with the size of the workforce." It expands with the availability of credit. A larger workforce may encourage the expansion of credit but not necessarily.

2. Even if credit does expand and consequently the economy expands there is no guarantee of a one-to-one creation of new jobs for the added job seekers. Thus the number of jobs in the economy doesn't have to be "fixed" for unemployment to result from an expansion of the labour supply. The "lump-of-labor" assertion is a red herring.

Why do newspaper hacks (and economist hacks) keep peddling this discredited canard?

Tuesday, June 12, 2012

Green Plenty?

The Canadian Centre for Policy Alternatives has published a new report calling for a "Green Industrial Revolution." There are three elements in it that cry out for clarification. One is the concept of "just transition" for workers in highly-paid, unionized jobs that have high levels of greenhouse gas emissions, with a corollary of "decent work" for workers in service sector jobs with a small carbon footprint.
A key challenge is that many of the jobs that have high levels of GHG emissions per employee are highly-paid unionized jobs. This must be addressed with “just transition” plans that support workers as they change to sustainable careers. In contrast, many service sector jobs may have a small carbon footprint, but are low paying and provide little job satisfaction. For a green industrial revolution to truly fulfill its potential, green jobs must be synonymous with decent work.
Another is "the principle that prices should tell the truth about costs." In principle, I like that principle. But what does it mean in practice?
The principle that prices should tell the truth about costs of production (e.g. that environmental costs should be factored in) is fundamental to the shift to a sustainable economy.
A third puzzle has to do with "vested interests" who allegedly are embedded in government decision-making. Are these the same vested interests Veblen talked about in The Vested Interests and the Common Man ("A vested interest is a marketable right to get something for nothing.")?
The Canadian government needs to take a leading role in coordinating climate, industrial and labour market policies that are integrated, coherent and consistent. While much of the emphasis of climate action has been at the individual level, in fact many of the broad changes that dramatically reduce emissions are structural in nature, and thus requires collective action. To pull off an industrial revolution in the span of decades will require careful planning and clarity of the ultimate objective of eliminating fossil fuels in the Canadian economy. The single largest barrier to achieving this is not technology, but the embeddedness of vested interests from Canada’s resource extraction sector in government decision-making.
It seems to me that while the report calls upon the Canadian government to pursue integrated, coherent and consistent climate, industrial and labour market pollicies, it declines to integrate its own labour market and climate prescriptions. To be blunt, the report calls for workers to be compensated according to moral criteria of justice and decency while everything else is priced according to Social Cost of Carbon (SCC) estimates.

The Sandwichman is all in favour of justice and decency, but for the sake of coherence it would be nice to know what the "true cost" of justice and decency is in terms of their carbon footprints. It would be more than nice; it would be indispensable to the proverbial true-cost pricing scheme. Meanwhile, over at Crooked Timber they've been discussing Red Plenty by Francis Spufford. The inside jacket cover says:
Strange as it may seem, the grey, oppressive USSR was founded on a fairytale. It was built on the twentieth-century magic called 'the planned economy', which was going to gush forth an abundance of good things that the lands of capitalism could never match. And just for a little while, in the heady years of the late 1950s, the magic seemed to be working.
The thing about this "Green Industrial Revolution" is that it "will require careful planning and clarity of the ultimate objective" relying, at its very core, on a "comprehensive national industrial strategy, including green jobs and capital plans" and on calculated prices that, in theory, fully embed social costs but in practice rely on assumptions and judgments of economists that “go well beyond the usual boundaries of science or economics.”

So, given the superficial similarities between "Red Plenty" and the "Green Industrial Revolution" (or Green Plenty) it is fair to ask what are the differences? Well, for one thing, the Bolsheviks were in power in the USSR and, secondly, the Soviet fairytale was congruent with an avowed Marxist-Leninist ideology regarding the "forces and relations of production." In contrast to the CCCP, the CCPA is not in power and is not (overtly, at least) Marxist or Veblenian.

Elinor Ostrom 1933-2012, Presente!

Saturday, June 9, 2012

Growth, inequality and labor supply: the inverted "S" curve

According to the late Paul Samuelson, even second graders know that an increase in the supply of a good can lead to a decrease in its price. What is less obvious is that an increased supply can also lead to decreased total revenues, depending on the elasticity -- or inelasticity -- of demand.

Even less obvious are the conditions under which the inverse is also sometimes true: a decrease in the price of a good can result in an increased supply. The most famous instance of this is the so-called "backward bending labor supply curve" where people are supposed to prefer more leisure to income as their wage increases. Robert Prasch added a further wrinkle to the canonical supply curve by pointing out that at very low incomes people often worked more hours in an effort to maintain a subsistence level of total income. It seems to me that a similar constraint would apply to people with high levels of debt, even if their incomes are not at the bottom.

Prasch's modification to the backward-bending convention results in an "inverted 'S'-shaped labor supply curve." Coincidentally -- or perhaps not so coincidentally -- an inverted 'S"-shaped curve has also been described in the historical relationship between economic growth and income inequality. The conventional story of the growth/inequality relationship was Simon Kuznets's description of an inverted 'U' shape, in which initially economic growth was accompanied by rising inequality but eventually continued growth resulted in less inequality. More recent empirical studies show a return to rising inequality. (see Prasch, 2000, "Reassessing the Labor Supply Curve," Journal of Economic Issues; Sharif, 2000, "Inverted “S” — The complete neoclassical labour-supply function," International Labour Review; Nakamura and Murayama, 2010, "A complete characterization of the inverted s-shaped labor supply curve," Metroeconomica; Tribble, 1999, "A Restatement of the S-Curve Hypothesis," Review of Development Economics; List and Gallet, 1999, "The Kuznets Curve: What Happens After the Inverted-U?" Review of Development Economics).

Any link between the two inverted 'S' curves can only be tentative and speculative. After all, one of the curves is hypothetical and microeconomic while the other is empirical and macroeconomic -- and there are scads of intervening variables between the two. But the possibility emerges from these analytical observations that economic growth may generate absolute impoverishment.

This is not to say that any and all economic growth impoverishes people either relatively or absolutely. Only that a particular kind of economic growth, predicated on a logic of inequality may produce not only relative poverty in the sense of increased inequality but, to use a provocative term: immiseration. Under such conditions, to advocate reduced working time would seem to run counter to the perception that people are already having a hard time "making ends meet". On the contrary, it is entirely possible that the "distress sale" of countless hours of superfluous labor supply is depressing both the price of labor and the total revenue going to labor.

"But," an orthodox pundit might object, "the withdrawal of those hours of labor would diminish output, leaving less total product to go around." I don't think so. The effect of excessive hours of work is to reduce total output, not increase it. But at the same time, such a restriction of output, accompanied as it is by unemployment and increased competition for jobs, results in a reallocation upward of the income from that reduced production. Overwork reduces the total size of the pie but capital receives a larger slice of that smaller pie, thus increasing its power. In this way, obstructing the reduction of working time can perhaps best be understood as a form of "industrial sabotage" in Veblen's sense, that simultaneously maintains higher prices for product outputs and lower prices for labor inputs.

Tuesday, June 5, 2012

Sunday, June 3, 2012

Unrest, Sabotage and Overwork

"It is the wisdom of the ostrich, say you. No, by no means -- it is the wisdom of Argus who sees everything with his hundred eyes and knows that the only thing that can oppose the spreading of a truth is the spreading of a lie."

What if?

What if what?

What if employers, acting as a class, were fully aware of the effects of overwork on efficiency, operating through the intermediate stages of fatigue and unrest? What if employers, with their all-seeing Argus eyes, sought to restrict output, as Veblen maintained, and have determined that overworking labor is a particularly advantageous (to them) way of doing so?

Fatigue and Unrest

"DR. SARGANT FLORENCE'S long-awaited analysis of industrial fatigue is one of the most important contributions to practical economics which has yet appeared in the English language." -- C.K. Ogden, review of The Economics of Fatigue and Unrest, Economic Journal, 1926.

"Dr. Florence makes the distinction between fatigue and unrest turn upon the distinction, not always emphasised in studies of efficiency, between ability and willingness to work." -- Hugh Dalton, review of Fatigue and Unrest, Economica, 1925.

"Broadly speaking fatigue refers to a relative incapacity to work, unrest to a relative unwillingness to work; and these are simply two points in a variety of possible psycho-physiological states of the human factor that may affect behaviour and may be affected by external conditions." -- Ogden, op. cit.

Saturday, June 2, 2012

On the Nature and Uses of Sabotage.

From The Engineers and the Price System by Thorstein Veblen, 1921:

“Sabotage” is a derivative of “sabot,” which is French for a wooden shoe. It means going slow, with a dragging, clumsy movement, such as that manner of footgear may be expected to bring on. So it has come to describe any manoeuvre of slowing-down, inefficiency, bungling, obstruction. In American usage the word is very often taken to mean forcible obstruction, destructive tactics, industrial frightfulness, incendiarism and high explosives, although that is plainly not its first meaning nor its common meaning. Nor is that its ordinary meaning as the word is used among those who have advocated a recourse to sabotage as a means of enforcing an argument about wages or the conditions of work. The ordinary meaning of the word is better defined by an expression which has latterly come into use among the I. W. W., “conscientious withdrawal of efficiency” — although that phrase does not cover all that is rightly to be included under this technical term. The sinister meaning which is often attached to the word in American usage, as denoting violence and disorder, appears to be due to the fact that the American usage has been shaped chiefly by persons and newspapers who have aimed to discredit the use of sabotage by organized workmen, and who have therefore laid stress on its less amiable manifestations. This is unfortunate. It lessens the usefulness of the word by making it a means of denunciation rather than of understanding. No doubt violent obstruction has had its share in the strategy of sabotage as carried on by disaffected workmen, as well as in the similar tactics of rival business concerns. It comes into the case as one method of sabotage, though by no means the most usual or the most effective; but it is so spectacular and shocking a method that it has drawn undue attention to itself. Yet such deliberate violence is, no doubt, a relatively minor fact in the case, as compared with that deliberate malingering, confusion, and misdirection of work that makes up the bulk of what the expert practitioners would recognize as legitimate sabotage. The word first came into use among the organized French workmen, the members of certain syndicats, to describe their tactics of passive resistance, and it has continued to be associated with the strategy of these French workmen, who are known as syndicalists, and with their like-minded running-mates in other countries. But the tactics of these syndicalists, and their use of sabotage, do not differ, except in detail, from the tactics of other workmen elsewhere, or from the similar tactics of friction, obstruction, and delay habitually employed, from time to time, by both employees and employers to enforce an argument about wages and prices. Therefore, in the course of a quarter-century past, the word has quite unavoidably taken on a general meaning in common speech, and has been extended to cover all such peaceable or surreptitious manoeuvres of delay, obstruction, friction, and defeat, whether employed by the workmen to enforce their claims, or by the employers to defeat their employees, or by competitive business concerns to get the better of their business rivals or to secure their own advantage. Such manoeuvres of restriction, delay, and hindrance have a large share in the ordinary conduct of business; but it is only lately that this ordinary line of business strategy has come to be recognized as being substantially of the same nature as the ordinary tactics of the syndicalists. So that it has not been usual until the last few years to speak of manoeuvres of this kind as sabotage when they are employed by employers and their business concerns. But all this strategy of delay, restriction, hindrance, and defeat is manifestly of the same character, and should conveniently be called by the same name, whether it is carried on by business men or by workmen; so that it is no longer unusual now to find workmen speaking of “capitalistic sabotage” as freely as the employers and the newspapers speak of syndicalist sabotage. As the word is now used, and as it is properly used, it describes a certain system of industrial strategy or management, whether it is employed by one or another. What it describes is a resort to peaceable or surreptitious restriction, delay, withdrawal, or obstruction.


Sabotage, accordingly, is not to be condemned out of hand, simply as such. There are many measures of policy and management both in private business and in public administration which are unmistakably of the nature of sabotage and which are not only considered to be excusable, but are deliberately sanctioned by statute and common law and by the public conscience. Many such measures are quite of the essence of the case under the established system of law and order, price and business, and are faithfully believed to be indispensable to the common good. It should not be difficult to show that the common welfare in any community which is organized on the price system cannot be maintained without a salutary use of sabotage — that it to say, such habitual recourse to delay and obstruction of industry and such restriction of output as will maintain prices at a reasonably profitable level and so guard against business depression. Indeed, it is precisely considerations of this nature that are now engaging the best attention of officials and business men in their endeavors to tide over a threatening depression in American business and a consequent season of hardship for all those persons whose main dependence is free income from investments.

Sabotage and Solidarity: "the only thing that can oppose the spreading of a truth is the spreading of a lie."

"Sabotage is the most formidable weapon of economic warfare, which will eventually open to the workers the great iron gate of capitalist exploitation and lead them out of the house of bondage into the free land of the future." -- Arturo M. Giovannitti, Introduction to the English translation of Émile Pouget's Sabotage, Essex County Jail, Lawrence, Massachusetts, August 1912.
The fact is that modern society rests only on appearances and illusions, and derives its raison d’etre not from the existence or nonexistence of certain things, but on the general accepted credence that these things do or do not exist. Truth becomes a menace to society and hence a crime, not when it is seen and felt by personal experience, though everybody see and feel it, but only when it is told and exposed, for then only it becomes subversive by being discussed and reasoned over.

This is especially true of the conditions of the working classes. Every working man is poor and miserable, but only when he hears his woes described from the speaker's platform or sees his tragedy re-enacted on the stage does he become conscious of it, and therefore dangerous to the digestion of his masters.

Hence, the necessity of agitators and "fanatics" and the frantic efforts of the master class to keep tightly the cover on the Pandora jar. That Sabotage has been practiced more or less generally. for centuries they unmistakingly know, but that it should be now told, explained, justified and perfected into a veritable weapon of attack and defense they cannot for one second countenance. For these gentlemen, there are no classes in America. There was no Socialism in America up to four years ago, when it yelled so loud that they had to jump up and bow to it.

Now there is no Syndicalism, and, of course, there never was and never shall be any Sabotage except in the vaporings of some frothy-mouthed foreign agitators.

It is the wisdom of the ostrich, say you. No, by no means -- it is the wisdom of Argus who sees everything with his hundred eyes and knows that the only thing that can oppose the spreading of a truth is the spreading of a lie.