"Luddite" Larry and the Downward Ramp of Opportunity

"...unless one regards envy as a virtue," writes Lawrence H. Summers in a column at the Financial Times, "the primary reason for concern about inequality is that lower- and middle-income workers have too little – not that the rich have too much."

Back in the days of Pope Gregory and Dante Alighieri, there were seven deadly sins, not one. Avarice, gluttony and pride were among them. Might we not have as much condescending solicitude for the souls of the rich as for those of the poor and middle class?

Summers argues that the policy impacts which matter most have more to do with health and opportunity for children than with income or wealth inequality. The subheading of his column is "The differences between the rich and everyone else are about health and opportunity." Along the way, though, he quietly substitutes educational achievement for opportunity and concludes:

It would be a tragedy if this new focus on inequality and on great fortunes diverted attention from the most fundamental tasks of any democratic society – supporting the health and education of all its citizens.

Who could be against health or education?

Than depends. Is educational achievement really the same as opportunity for children? Not according to research highlighted by Thomas Edsall in an Op-Ed, The Downward Ramp, at the NYT:

...evidence produced by Paul Beaudry and David A. Green of the University of British Columbia, and Ben Sand of York University, demonstrates that the collapse, between 1980 and 2000, of mid-level, mid-pay jobs — gutted by automation or foreign competition (and often both) — has now spread to the high-skill labor market. 

The U-shaped pattern of job growth characteristic of recent decades – strong at the top and bottom, but weak throughout the middle — has now become “a bit more like a downward ramp,” according to David Autor, an economist at M.I.T. who documented the decline in mid-level jobs in the 1980s and 1990s. 

...

"Many higher skilled workers have moved down the occupation ladder and accepted less challenging employment," Beaudry wrote in an emailed response to my inquiry about this development. "This movement down has been very detrimental to the low skilled, as higher skilled workers have taken many of 'their' jobs."

Not to worry, though. Allister Heath cheerily reassures us in a column at The Telegraph, "Capitalism is a process of creative destruction... It's scary but it works."

The faster the mechanisation process, the more likely we are to see productivity – the amount of output each worker generates – starting to grow again and, with it, wages. A greater use of artificial intelligence throughout the economy will benefit, not hurt, the overall workforce. ...it will be vital to help individuals displaced by the new technologies to find work in new areas. Better education and training will become even more vital. 

The lump of labour fallacy is the oldest myth in economics. There is no fixed stock of jobs; in a dynamic economy, millions of new ones are created every year to replace the equally large numbers that are lost. The luddites are as wrong today as they were two centuries ago.

One reader asks, though:

Given that technology has replaced so many jobs the obvious question is why we are still working such long hours? We don't seem to have taken advantage of technology in the ways predicted by nineteenth century thinkers.

As fate will have, Summers addressed both Luddites and long hours last July in his 2013 Martin Feldstein* Lecture, "Economic Possibilities for Our Children."

When I was an MIT undergraduate in the early 1970s, a young economics student was exposed to the debate about automation. There were two factions in those debates. There were the stupid Luddite people, who mostly were outside of economics departments, and there were the smart progressive people, who at that time were personified by Bob Solow. The stupid people thought that automation was going to make all the jobs go away and there wasn't going to be any work to do. And the smart people understood that when more was produced, there would be more income and therefore there would be more demand. It wasn't possible that all the jobs would go away, so automation was a blessing. I was taught that the smart people were right. Until a few years ago, I didn't think this was a very complicated subject; the Luddites were wrong and the believers in technology and technological progress were right. I'm not so completely certain now.

One might quibble that it's more than a matter of "changing sides" in the debate about automation as framed by the economics departments. This was no debate but a set piece demolition by the "smart people" of straw man arguments that had little to do with the real issues. Incidentally, the smart people at MIT -- presumably Keynesian Synthesists like "Uncle Paul" Samuelson -- appear to have been teaching the vulgar version of Say's Law, "supply creates its own demand," that Keynes repudiated.

In his reflections on his undergraduate education, Summers didn't connect the dots between the Luddite mythology and what Keynes supposedly "got wrong" in his "Economic Possibilities for our Grandchildren." Instead he offered the following anachronism:

But Keynes also got some things wrong. He predicted that as incomes rose eightfold, the workweek would fall to 15 or 20 hours. The reason he got that wrong is something that I hadn’t previously reflected on. 

When I took introductory economics, a big feature of the textbook was the backward bending labor supply curve, where it was explained that past a certain point, the income effect took over from the substitution effect and so the labor supply curve bent backwards. This does not get much attention in textbooks today. The reason is that people with higher wages now work more hours than people with lower wages. The time series tracks the cross section. Over time, as we have all gotten richer, the number of hours worked for many people has risen.

That backward-bending labor supply curve was indeed a big feature of the textbook when Summers took introductory economics. It wasn't in 1930, when the essay was first published, nor in 1928 when it was delivered as a talk to the Political Economy Club at Cambridge.

The confluence of mythology and anachronism in Larry Summers's education has more than pedantic relevance. As his casual reference to the platitude that Summers may not have even recognized as Say's Law suggests, his miseducation (or myth-education) on history of economic thought has theoretical consequences. And of course, Summers is not alone in his "delightful abundance of aberrations."

The creature that emerges from this anachronistic, mythological bend-over-backward Luddite lump-of-labor supply swamp is not "modern economics" any more than George Washington cutting down a cherry tree with a laser beam is "American history" It is that hoary old "magazine of untruth" masquerading as economics.

*Marty FeldSTEIN -- not to be confused with Marty FeldMAN as Igor ("it's pronounced eye-gore") in "Young FrankenSTEIN" -- was Larry Summers's mentor.

Learning about Learning about "New Keynesianism"

Mark Thoma links to Joseph Stiglitz's TIGER Forum 2014 lecture on "Creating a Learning Society":

Is our society learning if what we are taught is "false and misleading?"

May 30, 2014

Dear Professor Stiglitz,

I am conducting historical research on Alfred Marshall's conception of the efficiency wage and how it relates to the contemporary sense of the term. In the course of my research, I have come across a claim that you made in 1984 that I wonder if you could clarify. You wrote, in "Theories of Wage Rigidity" (1984): "It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." In contrast, in chapter 19 of the General Theory, Keynes wrote, "[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…"

It seems clear from the discussion in chapter 19 as a whole that Keynes rejected the hypothesis that rigid money wages were to blame for persistent unemployment. It would be possible to parse your sentence as ambiguous on the question of whether it was the assumption or the rejection of the assumption that "is central to Keynes' explanation." But of course the context of your article and of contemporary efficiency wage theory in general would seem to resolve any ambiguity. Was it your position, in 1984, that Keynes's explanation relied on the assumption that wage rigidity was to blame for the persistence of unemployment? If it was, is that still your position? If it wasn't your position -- or if your position has changed since then -- have you clarified that in any subsequent article? I thank you for any information you can provide on this matter.

Cheers,

Tom Walker

"It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." Joseph E. Stiglitz 1984.

"[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ…" John Maynard Keynes 1936.

O. F. Hamouda writes:

"Given the enormous literature on Keynes and Keynesianism and the flippant way in economics in which consensuses are formed to become the truth, there is need for a concordance to be undertaken to compare, in the light of this book, what was said at the source, what was ascribed first-hand as having been said, and then what was made second-hand of those accounts, multiplied over and over. There is a delightful abundance of aberrations… …it is not claimed that everyone, everytime, everywhere should always run back to the sources nor, as Hicks once said, that the source should be taken as divine, but when a claim is made, it must be able to stand, as few presently do."

One of the aberrations Hamouda cites is:

"It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment." Joseph E. Stiglitz 1984.

Paul Davidson also pointed out the New Keynesian reversal of Keynes's position in "Would Keynes be a New Keynesian?" Eastern Economic Journal, Vol. 18, No. 4 (Fall, 1992), pp. 449-463.

"The principle of a truth in labeling law that protects consumers from false and misleading claims is often violated by economics textbooks. Under the truth in labeling law, a minimum quantity of beef is required in a patty before society permits anyone to sell it as a hamburger. Similarly some minimum quantity of Keynes's logical analysis should be an essential ingredient in any theory sold as Keynesian, especially in textbooks to yet uneducated consumers.

"Paraphrasing a famous slogan of the 1988 Democratic presidential primary, 'Where's the Keynesian beef in New Keynesian economics"? This paper demonstrates that (1) New Keynesian Economics (hereafter NKE) does not contain any of Keynes's logical building blocks, and (2) NKE leads to policies that are the opposite of what Keynes advocated as solutions to the major problems facing real world economies."

---

"...Keynes specifically denied that fixed nominal wages and prices were a necessary condition for underemployment equilibrium. One complete chapter of The General Theory demonstrates why the existence of instantaneously flexible money wages can not assure full employment - even if no coordination failures exist. 'For the Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on the assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment ...My difference from this theory is primarily a difference of analysis'. In the fourth section, it will be shown that Keynes's use of wage units to measure his aggregate functions brings to the foreground this "difference of analysis" by requiring the feedback effects of flexible wages be traced on components of aggregate demand. These feedback effects had nothing to do with coordination failures!

"Keynes's chapter 19 analysis demonstrates that complete wage (or price) flexibility was neither a necessary nor a sufficient condition for full-employment equilibrium. Keynes's two major conclusions regarding the effect of instantaneously flexible money wages - even in condition of purely competitive supply - are that "there is, therefore, no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment" and that "to suppose that a flexible wage policy is a right and proper adjunct of a system which on the whole is one of laissez-faire, is the opposite of the truth".

"Consequently, anyone selling New Keynesian theoretical patties, in which the fixity of nominal wages or prices is the main ingredient, to students (or uneducated policy makers) would not get a franchise to use his name from the originator of Keynesian economics."

Artificial Scarcity and the Lopsided Economist

Jared Bernstein has launched a vital conversation around the question, "why is capital so much stronger than labor?" In his first post, Jared reflects,

...my experience as a policy wonk and economist in government has led me to believe that economics, as currently practiced, is part of the problem. Not the discipline itself, which historically has been flexible enough to offer wide ranging and useful tools for analyzing and solving economic problems. I’m talking instead about the way it interacts with wealth and power today to support capital and hamstring labor.

Part 2 of "why is capital so much stronger than labor?" is titled r > g meets c > l
Sandwichman comments on c > l as follows:

I'd like to propose substituting for the word "inequality," the word "lopsided." Inequality is their word and it carries with it a customary whiff of distinction, justified by merit. The connotation is undeserved but has been instituted through sheer repetition and amplification. Wealth and income are not merely unequal, they are literally lopsided: one side has been lopped off.

One side of economic analysis has been lopped off, too. It is the side that deals with the inherent imbalance, the lopsidedness. A lopsided economics makes a lopsided economy even more so.

But let me be more specific. As John R. Commons, pointed out, efficiency and scarcity are complements as well as substitutes. Lionel Robbins's famous definition of economics as "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses" implicitly (albeit ambiguously) posits the scarcity of the means as given and thus evades the crucial complication of artificial scarcity.

There has been in economics a long-lasting and lopsided preoccupation with one kind of artificial scarcity: the restriction of output by workers. Every once in a while a renegade economist such as Veblen looks directly into this lopsidedness and debunks it but the prejudice trundles on as if nothing had happened. As Warren Samuels noted 20 years ago, the contemporary "efficiency wage" literature is rife with pejorative anti-worker bias. Google scholar shows 10 results for Samuels's critique (four of them in articles by David Spencer) compared to 4589 results for Shapiro and Stiglitz's article on "shirking" and efficiency wages.

And just what IS a wage anyway? It is a ratio. It is a rate of remuneration PER period of time or unit of output. By far the most common form of wages today are time wages. What would one think of an analysis of capital that analyzed the return without reference to the principal? Yet contemporary economics treats the supply of hours of labor as unproblematically generated by workers' preferences for leisure or income. There is NO theoretical foundation for this treatment. There is NO empirical foundation for it. The "leisure device" has been shown to be utterly unfounded and yet it forms the basis of the systematic exclusion from contemporary economic theorizing of the question of the efficiency of the given hours of work.

Again, the "New Keynesian" efficiency wage hypothesis literature provides a stark illustration of this lopsided exclusion. Bob LaJeunesse's 1999 Challenge article on the efficiency week garnered ONE citation and even that by an author who declined to pursue the analysis.

Concern with the efficiency of the hours of labor, as well as the rate of pay for those hours is not just some quaint institutionalist (or Marxist) hobby horse. Marshall's neoclassical analysis of an "efficiency wage" and that of his star pupils, Pigou and Chapman, was influenced both directly and indirectly by Thomas Brassey's Work and Wages, which focused explicitly on the productivity effects of variations in the hours of labor. The neo-Walrasian, mathematical modelers have opted for a pre-marginalist doctrine, in effect resurrecting on the "revealed preference" supply side the defunct wages-fund doctrine that was long ago discredited and disavowed as an explanation of the demand for labor.

In conclusion, lopsided outcomes in income and wealth are hardly a surprise in an economic system in which the power to restrict output and thus to maintain a profitable advantage through artificial scarcity is itself lopsided. A lopsided economics that treats the entrepreneur as the epitome of efficiency and workers as shirkers is unlikely to disclose the sources of income and wealth lopsidedness. The lopsided treatment of the wage as somehow immune to operations on the divisor side of the ratio is equally unlikely to consider the full range of appropriate remedies for the lopsidedness of income and wealth.

Whack-a-Mole Tim and the Fixed Amount of Cheese-Eating Work Fallacio

Tim Taylor writes:

Here's one snapshot of how the U.S. economy evolved in the last 15 years: an identical number of total hours worked in 1998 and 2013, even though the population rose by over 40 million people, but a 42% gain in output.

What is the difference between"an identical number of total hours worked" and "a fixed amount of work"? The former is an empirical fact. The latter is an alleged fallacy. Here is what Mr. Taylor wrote ten years ago:

If the quantity of work were fixed, as the lump-of-labor fallacy holds, one way to reduce unemployment would be to limit the hours individuals can work, or to encourage early retirement. But fighting unemployment with these policies have [sic] not succeeded. 

France passed laws in the last decade requiring a 35-hour workweek. Much of the impetus was that the unemployment rate in France had exceeded 11 percent for most of the 1990s. But international comparisons yield no evidence of a statistical link between lower average hours worked and the unemployment rate. Back in 1998, workers in France already averaged a relatively low 1,600 hours of work a year, compared with roughly 1,850 hours per worker in the United States and Japan – countries with much lower rates of unemployment. 

France and other European countries have also encouraged early retirement, partly on the grounds that it “creates jobs” for other workers. (Among the promises of early retirement for some and more jobs for others, the question of who will pay for early retirees to enjoy the living standard they’ve come to expect was rarely discussed.) Today roughly 37 percent of French and Germans 55-64 years of age hold jobs, compared to 58 percent of the same age group in the United States and 52 percent in Britain. Despite the success of France and Germany in encouraging early retirement, they face chronic unemployment far in excess of the rates in America and Britain. Attempts to honor the lump-of-labor fallacy by spreading out a supposedly fixed quantity of work over more workers have thus proven unsuccessful.

And here is what Paul Krugman wrote about a week and a half ago:

Well, I hadn't looked at this data for a while; and where we are now is quite stunning:

"Since the late 1990s we have completely traded places: prime-age French adults are now much more likely than their US counterparts to have jobs. 

"Strange how amid the incessant bad-mouthing of French performance this fact never gets mentioned."

Yes, strange, isn't it?

Why economists dislike a lump of labor, Tom Walker, Review of Social Economy, 2007, vol. 65, issue 3, pages 279-291

Abstract: The lump-of-labor fallacy has been called one of the “best known fallacies in economics.” It is widely cited in disparagement of policies for reducing the standard hours of work, yet the authenticity of the fallacy claim is questionable, and explanations of it are inconsistent and contradictory. This article discusses recent occurrences of the fallacy claim and investigates anomalies in the claim and its history. S.J. Chapman's coherent and formerly highly regarded theory of the hours of labor is reviewed, and it is shown how that theory could lend credence to the job-creating potentiality of shorter working time policies. It concludes that substituting a dubious fallacy claim for an authentic economic theory may have obstructed fruitful dialogue about working time and the appropriate policies for regulating it.

This Magazine of Untruth, Revisited

It is widely recognized that the assumption that wages are rigid is central to Keynes' explanation of the persistence of unemployment. J.E.S. 1984.

"[T]he Classical Theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. In its crudest form, this is tantamount to assuming that the reduction in money-wages will leave demand unaffected.… It is from this type of analysis that I fundamentally differ… J.M.K. 1936.

Two-thousands words into a blog post about the prehistory of "efficiency wage theory" I stumble across the first sentence above. Can anyone please explain to me what the point is of doing "rigorous scholarship" when that kind of slipshod hearsay misrepresentation fronts an entire industry of poverty-pimping, "theoretical modeling" of unemployment?

The Robots are Us!

Imagine a world in which there are two kinds of people – employers and workers. The workers are identical and there is a fixed number of them. They enjoy buying things but they don't like to put any effort into their work. Each worker is either employed or unemployed.

I could go on with the features of this so-called efficiency wage world but I won't bother. It is, as the reader may have gathered from the brief description, a very sparse and mechanical kind of world. It is the world Philip Mirowski, in Machine Dreams, likened to the  Neues Zaubertheatre from the Steven Millhauser story, "The New Automaton Theater":

…the town is the American profession of academic economics, the classic automaton theatre is neoclassical economic theory, and the Neues Zaubertheatre is the introduction of the cyborg sciences into economics.

Except, Mirowski was wrong. The workers in this mathematical model world are not "clumsy, amateurish automatons" with "jerky, abrupt motions." They are not automatons at all. They have no motions of their own. Instead it is the model builders, the robotic academic economists, who enact the clumsy, jerky motions of amateurish automatons as they display their phantom models.

In an earlier story, "August Eschenburg," which is also about a virtuoso automaton theater, Millhauser describes a cruel toy that fascinated Eschenburg as a young boy:

A hollow paper figure represented a clown, or a fireman, or a bearded professor. When you put a captured bird inside, the poor creature's desperate attempts at escape produced in the paper figure a series of wild comic motions.

The hollow paper figures are the micro-founded models that academic economists concoct. The captured bird inside is the data, whose frantic attempts to escape its makeshift cage produce a travesty of action in the figure of the representative agent.

Economic science: "this magazine of untruth"

The complaint one makes against that anti-social jargon, which so easily passes for economic science, is that it is in ludicrous opposition to the common observation of facts. Political economy professes to be a science based on observation. But the bitter pedantry which often usurps that name usually assumes its facts, after it has rounded off dogmas to suit its clients. In practice this magazine of untruth escapes detection for two reasons. One is that the facts relating to labour are invariably seen through the spectacles of capital. The employing class is virtually in possession of the whole machinery of information; and all judgments are tinged with the tone current among them. Thus we see the very newspapers which celebrate the amusements of the rich in a hundred different forms, scandalized at the coal miners objecting to grub in the pits every day in the week. Laziness, ingratitude, and extortion, seem the proper terms for sportsmen and fine ladies to apply to the men and children who swelter half their lives underground. The second reason which obscures the truth about industry is, that the facts about capital are almost never honestly disclosed.... -- Frederic Harrison (1872)