Monday, July 28, 2014

Supply Creates Its Own Demon (SCIOD): The Serial!

I've started the "Supply Creates Its Own Demon" series at EconoSpeak. I wont be cross posting the episodes at Ecological Headstand because of the extensive links editing (and opportunity for misdirection) that would be required. But I am posting the table of contents below. The title of episode 12 is likely to change but I'm leaving the original title there until the new one evolves.

Enough is enough!

Erik Brynjolfsson and Andrew Mcafee wrote
This view – that automation and other forms of technological progress in aggregate create more jobs than they destroy – has come to dominate the discipline of economics. To believe otherwise is to succumb to the 'Luddite fallacy.' So in recent years, most of the people arguing that technology is a net job destroyer have not been mainstream economists.
To Brynjolfsson and McAfee's credit they point out that the theory and evidence for this argument are "less solid than they initially appear." What they don't point out -- and possibly don't realize -- is that the theory and evidence were discredited roughly 80 and 140 years ago.

"In economics," Paul Samuelson wrote and I quoted a short while ago, "it takes a theory to kill a theory..." But it doesn't have to be a better theory or a newer one. In fact, the surest way to kill a theory in economics is with a previously-deceased theory, as the same Samuelson demonstrated in another recent post.

It turns out that bringing the dead back to life has been a recurrent theme among economists -- most literally in the case of Andrew Ure's experiments with Galvanism just a few months after publication of Mary Shelley's novel, Frankenstein (see episode 10).

As I've been trying to point out, the "will automation take our jobs?" motif is neither new nor interesting. Well... maybe it's interesting in a kind of morbid fascination way. But it's not interesting in the sense of "can we learn anything new from this?" The question has shuffled off this mortal coil. A more interesting question would be why does the anachronism persist?

I've got a 10,000-word draft, consisting of most of the projected twelve episodes of "Supply Creates Its Own Demon" (henceforth "SCIOD") in which I explore the extraordinary afterlife of a dead idea. I have scheduled two episodes a week, to be posted on Thursdays and Tuesdays at 5:00 p.m EDT. Links will become active as the scheduled episodes are posted. Here are the episodes titles:
  1. Pantins' Pantomime coming July 24
  2. The Automatic Left-handed Loom July 29
  3. Chariots of the Luddites July 31
  4. Paradox Laws August 5
  5. Supply Creates Its Own Demon August 7
  6. A Trick! of the Clumsiest Description! August 12
  7. The Frankenstein Factory August 14
  8. The Secret Basis of Glut August 19
  9. This Magazine of Untruth August 21
  10. The Fund-a-mental Thing's Supply As Time Goes "Bye!" August 26
  11. Continuation of Brassey by Chapman August 28
  12. Weighs Like a Nightmare, Sinks Without a Trace September 2
Why do defunct ideas persist? Hypothesis: they fit into a multi-faceted repertoire of beliefs and behaviors in which they "make sense" because they legitimate and rationalize those beliefs and behaviors. It's no use refuting the wrong idea without directly confronting its repertory context.

Teasers:  Previously I have drawn on material from episodes 7, 8 and 12 for posts subtitled You Don't, Say!Marc Andreessen and "Textbook Luddism" and Say's Law sank without trace.

Friday, July 25, 2014

One Lesson, Ad Nauseum

John Quiggin tells Crooked Timber readers that he's been working on a book that will reply to Henry Hazlitt’s Economics in One Lesson. Hazlitt's book was one of the first places I looked back in 1997 when I began my quest for the origin of the lump-of-labor fallacy claim. The word "fallacy" and its plural appears in the book twice as often (44 times) as the word "economist" and its plural (22 times).

In Quiggin's interpretation, Hazlitt’s one lesson is that prices are opportunity costs. According to Hazlitt, his one lesson is that economics consists of looking beyond the immediate effects of an action or policy, or "what is seen," to the longer term effects that remain unseen. Quiggin objects that there is nothing specifically economic about Hazlitt's avowed lesson, "it merely assumes what is to be proven, that a complete assessment of policy will yield free-market conclusions."

I posted a short comment on Quiggin's post, pointing out that Frederic Bastiat's "Parable of the Broken Window," which Hazlitt presents as an application of his one lesson, is simply a storified version of "supply creates its own demand." I would like to illustrate that point -- and indicate its connection with the lump-of-labor -- here with a  few excerpts from Economics in One Lesson. On page 15 (2007 edition), Hazlitt made explicit the connection between the broken window fable and Say's alleged Law:
Those who think that the destruction of war increases total “demand” forget that demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods. All this is inherent in the modern division of labor and in an exchange economy.
Again, on page 152:
The real purchasing power for goods, however, as we have seen, consists of other goods. It cannot be wondrously increased merely by printing more pieces of paper called dollars. Fundamentally what happens in an exchange economy is that the things that A produces are exchanged for the things that B produces.
Hazlitt's footnote for the argument cites Benjamin Anderson's "A refutation of Keynes' attack on the doctrine that aggregate supply creates aggregate demand," which Hazlitt later reprinted, with effusive praise for the author, in The Critics of Keynesian Economics.

Hazlitt doesn't use the term "lump-of-labor" in the book, but that fallacy argument recurs frequently. On page 45:
I have referred to various union make-work and featherbed practices. These practices, and the public toleration of them, spring from the same fundamental fallacy as the fear of machines. This is the belief that a more efficient way of doing a thing destroys jobs, and its necessary corollary that a less efficient way of doing it creates them.  
Allied to this fallacy is the belief that there is just a fixed amount of work to be done in the world, and that, if we cannot add to this work by thinking tip more cumbersome ways of doing it, at least we can think of devices for spreading it around among as large a number of people as possible. This error lies behind the minute subdivision of labor upon which unions insist. In the building trades in large cities the subdivision is notorious. 
Page 49:
The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering. The people who support such schemes think only of the employment they might provide for particular persons or groups; they do not stop to consider what their whole effect would be on everybody.  
The spread-the-work schemes rest also, as we began by pointing out, on the false assumption that there is just a fixed amount of work to be done. There could be no greater fallacy. There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied. In a modern exchange economy, the most work will be done when prices, costs and wages are in the best relations with each other. What these relations are we shall later consider.
Page 131:
Most of these policies have been followed under the assumption that there is just a fixed amount of work to done, a definite “job fund” which has to be spread over as many people and hours as possible so as not to use it up too soon. This assumption is utterly false. There is actually no limit to the amount of work to be done. Work creates work. What A produces constitutes the demand for what B produces. 
But because this false assumption exists, and because the policies of unions are based on it, their net effect has been to reduce productivity below what it would otherwise have been. Their net effect, therefore, in the long run and for all groups of workers, has been to reduce real wages -- that is, wages in terms of the goods they will buy -- below the level to which they would otherwise have risen.
Note that in the last quote, Hazlitt rehearses the same "what A produces constitutes the demand for what B produces" argument that he later credits to B. M. Anderson. Hazlitt's juxtaposition of the "supply creates demand" doctrine and the "fixed amount of work" fallacy was not an idiosyncrasy but standard, textbook usage. 

Raymond Bye's Principles of Economics, first published in 1924 became one of the most widely adopted college introductory economics textbooks in the United States during the interwar period. In it, Bye presented an atypically clear exposition of the "'lump-of-labor' or 'make work" fallacy," which he defines as "very similar to the general overproduction fallacy..." "The reader," Bye assures, "will see the error in this sort of thinking if he understands the true nature of exchange." So what is the "true nature" of exchange?
Every laborer creates a product which is offered in exchange for the products of other laborers. The demand for labor thereby grows as fast as its supply; the one cannot be greater or less than the other, for they are the same thing. Every addition to the labor force of a community gives other laborers work to do providing for the needs of the newcomers, while the latter can find occupation catering to the ungratified desires of those who were already employed.
Of course, "supply creates its own demand" was the classical doctrine that Keynes likened to "an optical illusion, which makes two essentially different activities appear to be the same." No, those "two essentially different activities" Keynes referred to were not producing and consuming. They were "decisions to abstain from present consumption" and "decisions to provide for future consumption," the two of which are activated, Keynes argued, by different motives.
It is, then, the assumption of equality between the demand price of output as a whole and its supply price which is to be regarded as the classical theory’s ‘axiom of parallels’. Granted this, all the rest follows — the social advantages of private and national thrift, the traditional attitude towards the rate of interest, the classical theory of unemployment, the quantity theory of money, the unqualified advantages of laissez-faire in respect of foreign trade and much else which we shall have to question.
Why Say's Law did not "sink without trace" in the wake of Keynes's refutation is the topic of the final episode of the supply creates its own demon series.

Tuesday, July 22, 2014

Will Automatons Take Economists' Jobs?

For some reason, economists think it's a good idea to keep asking the same hackneyed question over and over again and keep giving the same hackneyed answers.

"Will automation take our jobs?" is a perennial favorite. The answer, of course is "technology creates more jobs than it destroys," "a cheap market will always be full of customers," "supply creates its own demand" and "CREATIVITY!" All of which is bullshit (or parrot droppings).

The real answer is that waste and war and immiseration can always be counted on to keep people toiling away no matter what. Hooray for waste and war and immiseration!

My question is a little different. What will it take to automate economists's jobs? It was observed long ago that one could teach a parrot to say "supply and demand." Here is my answer that doesn't require the frequent changing of the newspaper at the bottom of the cage:

Congenital ironists might want to note that the textbook lump enunciated by the "Keynesian" Samuelson is the self-same "supply creates its own demand" version of "Say's Law" of which Keynes remarked:
Thus Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.
The "vitally important chapter of economic theory" that Keynes referred to was, of course, "the theory of employment to be worked out in the course of the following chapters..."

Thursday, July 10, 2014

View Page Source: "Are Jobs Obsolete?"

The other day, Sandwichman posted a passage from an interview with Google co-founder and CEO Larry Page in which he mentioned working less as a response to worries about technological unemployment. Page cited Peter Diamandis's book Abundance so I thought I would track down the source for Page's musings.

Page's source can be found in an appendix: "Dangers of the Exponentials" and is contained in an extended quotation from a 2011 CNN article, "Are Jobs Obsolete," by media theorist, Douglas Rushkoff. Here is Rushkoff in an 2011 Wall Street Journal interview, discussing the question, "Does America Really Need More Jobs?":

Tuesday, July 8, 2014

"A Very Complicating Influence on the Theory of Distribution"

Google co-founder and CEO, Larry Page:
I totally believe we should be living in a time of abundance, like Peter Diamandis' book. If you really think about the things that you need to make yourself happy - housing, security, opportunities for your kids - anthropologists have been identifying these things. It's not that hard for us to provide those things. The amount of resources we need to do that, the amount of work that actually needs to go into that is pretty small. I'm guessing less than 1-percent at the moment. 
So the idea that everyone needs to work frantically to meet people's needs is just not true. I do think there's a problem that we don't recognize that. I think there's also a social problem that a lot of people aren't happy if they don't have anything to do. So we need to give people things to do. We need to feel like you're needed, wanted and have something productive to do. 
But I think the mix with that and the industries we actually need and so on are-- there's not a good correspondence. That's why we're busy destroying the environment and other things, maybe we don't need to be doing. So I'm pretty worried. Until we figure that out, we're not going to have a good outcome. 
One thing, I was talking to Richard Branson about this. They don't have enough jobs in the UK. He's been trying to get people to hire two part-time people instead of one full-time. So at least, the young people can have a half-time job rather than no job. And it's a slightly greater cost for employers. I was thinking, the extension of that is you have global unemployment or widespread unemployment. You just reduce work time. 
Everyone I've asked-- I've asked a lot of people about this. Maybe not you guys. But most people, if I ask them, 'Would you like an extra week of vacation?' They raise their hands, 100-percent of the people. 'Two weeks vacation, or a four-day work week?' Everyone will raise their hand. Most people like working, but they'd also like to have more time with their family or to pursue their own interests. So that would be one way to deal with the problem, is if you had a coordinated way to just reduce the workweek. And then, if you add slightly less employment, you can adjust and people will still have jobs.
It's not a new idea. Sandwichman has been on this file for a couple of decades. As some media commentators observed, Keynes mooted the idea of a 15-hour workweek back in 1930. But it wasn't a new idea then, either.
Prince's Tavern, Princess-street, Manchester,
Monday, Nov. 25, 1833. At a meeting called, at the above time and place, of the Working People of Manchester, and their Friends, after taking into their consideration—
That society in this country exhibits the strange anomaly of one part of the people working beyond their strength, another part working at worn-out and other employments for very inadequate wages, and another part in a state of starvation for want of employment;
That eight hours' daily labour is enough for any human being, and under proper arrangements, sufficient to afford an amply supply of food, raiment, and shelter, or the necessaries and comforts of life, and that to the remainder of his time every person is entitled for education, recreation, and sleep ;
That the productive power of this country, aided by machinery, is so great, and so rapidly increasing, as from its misdirection, to threaten danger to society by a still further fall in wages, unless some measure be adopted to reduce the hours of work, and to maintain at least the present amount of wages:— It was unanimously Resolved, 
1. That it is desirable that all who wish to see society improved and confusion avoided, should endeavour to assist the working classes to obtain ' for eight hours' work the present full day's wages,' such eight hours to be performed between the hours of six in the morning and six in the evening; and that this new regulation should commence on the first day of March next. 
2. That in order to carry the foregoing purposes into effect, a society shall be formed, to be called 'the Society for Promoting National Regeneration.' 
3. That persons be immediately appointed from among the workmen to visit their fellow-workmen in each trade, manufacture and employment, in every district of the kingdom, for the purpose of communicating with them on the subject of the above Resolutions, and of inducing them to determine upon their adoption. 
4. That persons be also appointed to visit the master manufacturers in each trade, in every district, to explain and recommend to them the adoption of the new regulation referred to in the first Resolution. 
5. That the persons appointed as above shall hold a meeting on Tuesday evening, the 17th of December, at eight o'clock, to report what has been done, and to determine upon future proceedings.
O.K., but it wasn't yet a respectable idea when just a bunch of working people and their friends thought it up. Thirty-nine years later, Thomas Brassey Jr. made it respectable, with the publication of his book, Work and Wages, which was based on the extensive empirical evidence accumulated in the account books of the worldwide railroad engineering firm established by his father, Thomas Brassey Sr. Chapter Six of Work and Wages was titled "Hours of Labour" and presented the empirical observation that, no more than wages are an adequate measure of the cost of labor, "the hours of work are no criterion of the amount of work performed."
Thomas Brassey, Senior

Another 35 years would pass before Sydney J. Chapman would provide the theoretical explanation for Brassey's observation, published in the Economic Journal in an article conspicuously titled, "Hours of Labour." Chapman, who had been one of Alfred Marshall's star pupils at Cambridge, also collaborated with Brassey on a three-volume "continuation" of Work and Wages, with Brassey providing the introduction to each volume.

Chapman's collaboration with Brassey wasn't "out of the blue." In The Wages Question (1876), General Francis Amasa Walker, credited Brassey's Work and Wages as containing "by far the most important body of evidence on the varying efficiency of labor..."
Mr. Brassey's father was perhaps the greatest "captain of industry" the world has ever seen… The chief value of Mr. Brassey, Jr.'s work is derived from his possession of the full and authentic labor-accounts of his father's transactions.
Fifteen years later, in his Principles of Economics, Alfred Marshall praised "the lead taken by General Walker and other American economists" for its effect in:
...forcing constantly more and more attention to the fact that highly paid labour is generally efficient and therefore not dear labour; a fact which though it is more full of hope for the future of the human race than any other that is known to us, will be found to exercise a very complicating influence on the theory of Distribution." 
What those complications are can only be fully comprehended in the context of Chapman's analysis of the hours of labor. Brassey to Walker to Marshall to Chapman (to Pigou to J. M. Clark to Kapp) OR (to Robbins to Hicks to oblivion).