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