It is time to stop quivering in our boots in pointless fear of the future and just roll up our sleeves and build it.
- Ray Pierrehumbert

Monday, June 27, 2011

Is Full Employment Good Policy?

This is the fourth part in my utterly uncredentialed and hopelessly eccentric review of recent economic history. I will end up claiming that not only were Donella Meadows and Norbert Wiener right all along, but the the person who first picked up the thread of a civilized and sensible macroeconomics was no less than Bertrand Russell.

Previous parts are here:

The Missing Automation Crisis


The Leisure Crisis, Feminism, and Overwork


Divide and Conquer or Multiply and be Fruitful

Suppose you have a given proposition for public policy: more renewable energy, more highways, smaller teacher-to-student ratios, startup funding for entrepreneurs, public hospitals, whatever. No matter what the question, an ancillary debate always arises. Those opposing the effort will say "it is too expensive", and those supporting it say "it is not expensive at all: it creates jobs".

I was taught in US history in a Canadian high school that in the early days of the WPA, before federal work was well-organized, there were instances of work crews engaged to fill in ditches that other work crews has dug up. I wonder if this is true. I sort of hope it is, because there is the dignity of labor for you.

The hard-working protestant populace would not countenance paying unemployed people for their idleness, but they could tolerate paying them to undo one another's work, as long as it raised a sweat.

By the 1970s, I had read Wiener's The Human Use of Human Beings and was steeped in the ideology of the Leisure Crisis. At about this time I was subjected to an introduction to a Keynesian education at the hand of a then well-known economist who taught the introductory sequence at Northwestern. I'm afraid I've forgotten the fellow's name. I believe George McGovern intended to appoint him to his cabinet. Maybe someone can refresh me.

I clearly recall the argument that deficit financing in a recession was harmless, "you're borrowing from yourselves". Indeed Nixon said "we're all Keynesians now", and this counterintuitive spending-when-you're down was regarded as an intellectual breakthrough of Galilean proportions. This is how we would avoid financial crises for ever and ever. We would employ ourselves when we were poor, build up our nest egg, and once we had reached prosperity we would pay ourselves back! Nobody would be there to complain because there would be no "them", just "us" huzzah!

But I was unable to reconcile this with my idea that if one work gang digs a trench and another one fills it in, you might as well just fork over the mony and forego the trench-digging. Why all this fascination with full employment?

The other question, though, is demand. What exactly would people demand if they were endlessly wealthier. It wasn't clear. For awhile, there was creeping featuritis: the three channel TV became the five channel and the twenty channel and the three hundred channel TV, but the actual demand for television didn't change. The thousand square foot house became the five thousand square foot house, four thousand feet of which were only occupied by ill-disciplined children and their plastic detritus. Your word processor could do a god-awful job of being a spreadsheet, a desktop publishing program, and an illustration program, though when you made a numbered list in it all the enumerated items would be mysteriously numbered "5". (Eventually Steve Jobs became fabulously wealthy by helping people finally understand that the thing they most wanted from non-professional user interfaces was fewer features that they could remeber and understand.)

In the Keynesian scheme (and the Monetarist scheme which followed it, which I don't claim to understand as well) economic growth is the primary objective of governance, policing, education, transportation and security notwithstanding.

Such growth is expected to be substantial in "normal" times and is fueled by free choice of people to always have more, more, more.

But in the early 1970s, alarming signs of economic satisfaction began to emerge along with various ethical and spiritual dissatisfactions. "Demand" was going away. Young people, in particular, were not bending over backward in pursuit of "careers" so the trend looked bad. The dread "stagflation" emerged.

Stagflation basically derailed the Keynesian gravy train, because slow growth required stimulus while inflation required cutting back. They were not supposed to happen at the same time. (If I recall correctly, there was some mismanagement, petty by our standards, at the banks at the time which emerged as rapid inflation which in turn led to unaffordable mortgages which in turn led to - horrors - less employment and less demand!)

I believe this threat was eventually beaten back in the 1980s during the Reagan administration using a pair of interesting artifices. The first was to use the military as an instrument of economic revival. Unquestioned American technical superiority could be converted to unquestioned military superiority. The hidebound Soviet economy could be bled dry keeping up. In retrospect this part was, perhaps inadvertently, quite clever.

(Reagan himself was the first of the transparently unintelligent national republican figures, but he was following closely in the footsteps of the clever and ambitious Barry Goldwater, and now we're getting perilously close to the LBJ story which I'll forego at this point, except to advise you in the strongest terms to visit his memorial library when you are in Austin.)

But the second part of it was developing a new pillar of "conservative" "ideology": that "greed is good". Go ahead. Have the big house. So you only use that boat once a year. Buy it anyway! Think how it will impress everyone. Have houses in several states just like J. P. Morgan. We can all be fabulously wealthy, except perhaps for the famous friends and getting invited to all the right parties. But we can fake that too!

In short, a few years after the first talk of limits to growth, a few years after the emergence of an anti-materialistic counterculture, the problem was solved. Ignore the damn filthy hippies and party on! Despite the Christian posturing, I sometimes think the zeitgeist and the commercial classes were pretty much in the grips of a cocaine psychosis and an accompanying base cynicism of unprecedented proportions. (cf. Enron.)

And so, the questions of leisure and of limits and sustainability and of human ethics and of what sort of a society we wanted to build were all triumphantly subsumed in the Reagan administration by an orgy of celebrated excess and desperate growth. And still, there were these nagging episodes of flagging of demand. Would people buy ten thousand square foot houses? What to do, what to do?

Enter Private Sector Keynesianism, or Tobis's Theory of the Requisite Kluge, also known as Microsoft. Stay tuned.


Alexander Ac said...

Hi Michael, OT. Your fellow climate scientist Nielsen-Gammon has a comment on drought in Texas (written on 3rd July so the drought actually worsened) here:

McKibben wishes us to believe that detecting climate change in extreme weather is obvious. As I’ve pointed out before, the drought here in Texas is not independent of the floods elsewhere: if some places don’t get enough rain, others get too much. The simultaneous occurrence of droughts and floods is normal. The same weather pattern that made the Pakistani floods possible in summer 2010 also brought the Russian drought. Now, the intensity might be unusual, or the frequency might be unusual, but global warming does not get credit for the simultaneity.

But I always thought that AGW/weather extremes are about intensity/extent/duration - and not about AGW CAUSED this or that.



Dan Olner said...

I know you say you're avoiding reading on the topic at the mo, but when you're back on it, Ha-Joon Chang's Bad Samaritans is a lovely little book. Not directly about employment, but speaks very clearly about what we should be able to have some conscious control over. Crystal clear writing too, of the sort you only get from people who've been through turgid tecnical and come out the other side.

Shining Raven said...

Oh boy, this feels like watching a slow-motion train wreck. It is one thing to do some brain-storming without being to well-informed, and it is another thing to throw these ideas out without any serious validation.

I mean, seriously, do you think you can single-handedly come up with a brand-new economic system that is better than what we have? Without looking into the economic literature in a serious way?

Your caricature of Keynesianism is laughable, it sounds like you think that it is kind of a Munchhausen story of pulling one out of the swamp by one's one hair, but that is not at all what it is.

And stagflation does not "derail the Keynesian gravy train". It fits right into the theory. You know, there is economic literature on this, with facts beyond what you hope to "recall correctly".

I know you don't want to hear this, but your criticism of Keynesianism is right along the lines of the right-wing criticism and about as off-base and ill-informed. No point in mincing words on this.

And the requirement of "growth" as such has nothing to do with "Keynesianism", but is an element of all credit-based economies. If you want to get rid of that, you need something like Islamic usury laws. But even in the Islamic world, this approach has been abandoned.

I said before, I am not an economist, and I am not in a position to debate this in detail. It is too much work for me, because I would have to read up on it as well. But then, I feel that it is pointless to try to explain something to an educated person who refuses to get informed on a topic and do the basic reading. You of all people should be familiar with this feeling from numerous debates, no?

I think it should be obvious that one first needs to understand an idea in order to criticize it. Economic theory has lots of problems, but there are some well- understood and well-tested elements, and knowing them avoids having to make elementary mistakes.

You don't know me, but I really say this out of a spirit of general appreciation of your writing. Only this time I believe you have gone completely astray.

Shining Raven said...

This section really disqualifies you from a serious discussion, in my opinion:

I clearly recall the argument that deficit financing in a recession was harmless, "you're borrowing from yourselves". Indeed Nixon said "we're all Keynesians now", and this counterintuitive spending-when-you're down was regarded as an intellectual breakthrough of Galilean proportions. This is how we would avoid financial crises for ever and ever. We would employ ourselves when we were poor, build up our nest egg, and once we had reached prosperity we would pay ourselves back! Nobody would be there to complain because there would be no "them", just "us" huzzah!

Apparently your problems already start with John Stuart Mill in the 19th century, and you seem to have no idea what a liquidity crisis is and how a recession comes about. Once you have understood this, you can perhaps come up with a better theory, but the first step (understanding the current theory) really is mandatory.

For starters, I recommend again Paul Krugman and his non-serious stories:

see also

if you want a critique...

Dan Olner said...

I'd only add to Shining Raven's comment: I'm sort of a wannbe amateur economist, in that I've taken economic ideas for my thesis work and modelling. I come from a political science / sociology background, where there are A LOT of shoot-from-the-hip criticisms of economics. Over time, I've learned a pretty healthy respect for economists, and to be a lot more humble in my criticisms. It's a discipline uniquely tied to power structures, which in part of course gives academic battles a very different quality, and makes it a clear target for attack. (Can we think of any other discipline that is impinging more and more on power structures and thus attracting attacks from all angles...?)

It's an interesting process, as MT says, to go as far as you can without looking at extant theory, but I guess doing it on a live blog is going to mean people saying, "well, go and read the theory!"

As an example of the caricature of economics, I'm using simple utility theory in my stuff. There's a cacophony of attacks right there, of the "I can't believe economists buy into that nonsense!" sort - because, of course, 'people aren't like that'. The most succinct reason it's justified I've found is one line from Richard Feynman, from this little clip of him avoiding a cheating explanation of magnets: 'When you explain a 'why', you have to be in some framework that you allow something to be true. Otherwise you are perpetually asking why.'

Rich Puchalsky said...

Here's a couple more interesting things to read.

First, John Emerson's Is Economics A Science?. If you're going to criticize standard economics, I think that this is how to do it. John Emerson's take is well-respected by Brad DeLong, who is as much a member of the system as anyone. A quote:

"What’s really at stake here is the surplus authority economics claimed based on its scientific status. That was fraud and mystification. Economics is not nothing — there are a lot of things there that you need to know. Think of it as a useful craft or art, or as a form of knowledgeable advocacy like law. There are times when you need the best economists you can afford, because otherwise you’ll be at the mercy of the bad guys’ economists."

Second, in advocating less-than-full employment you may want to read Bruce Sterling, who in turn read Bob Black. His book Islands in the Net is the one, if I remember rightly, that has some of the anti-work stuff in it.

Michael Tobis said...

"I mean, seriously, do you think you can single-handedly come up with a brand-new economic system that is better than what we have? Without looking into the economic literature in a serious way?"

I don't think I can come up with a comparably rich, thought out literature. And while I haven't gone out of my way to emphasize it in the present series, I in no way wish to claim that in any particular instance my insights about any particular economic question are better than a trained economist's.

On the whole, I find the Keynesians make much more sense than the monetarists, and I generally find Krugman convincing until he gets to analysis of the long run, at which point the growth imperative permeates everything, the metrics of success strike me as arbitrary, and he loses me.

But if I think economics solves the wrong problem, I believe it is worth amassing the evidence to that effect.

Do I think I will succeed here? No. More likely there is something seriously amiss here, and I am sure it reads as ignorant to a trained economist as Tony Watts does to me.

But the thing is this: though I have no sympathy with Watts' attack on climatology per se, I refuse to take the general position that academic disciplines may only be attacked by those most familiar with the discipline. That way, literally, lies madness.

What I have seen of post-growth economics is no more sophisticated than I have come up with, and much of it takes a transparently totemist view of the second law of thermodynamics. It is them, not mainstream economics, with whom I should be seen as competing here.

I am convinced that mainstream economics is a massive attempt to analyze a question for which there is no answer: how to perpetuate economic growth. Or, perhaps not. Mainstream economics is a massive attempt to analyze economic activity given a false presumption that economic growth is inevitable over the long run.

Is it possible for some physically vague quantity to grow sufficiently as to allow the mythos of growth to persist and stable governance to emerge even though we are just trading sandcastles, or monopoly money, or YouTubes? That is, can we have a growth economy in fantasy and a near-steady-state economy in actual physical impacts? Now that's a good question. A lot of folks are hanging their hats on the affirmative. I wish it were possible but I see it as a very long shot. At least I'd like to see it reconsidered: the increasing irrelevance to economics of the actual physical infrastructure reminds me of this famous old SF story.

When the business pages of our newspapers are a hundred times more concerned about telephone apps than about corn and wheat, Haitians start starving. Is this surprising to anybody?

Michael Tobis said...

Rich, it's no secret that I am a >mad fan of Bruce Sterling's, and I've devoted several blog entries to him.

The Sterling essay I refer to here is a keystone of my present thinking.

And I had the pleasure of a brief but intense conversation with Bruce the day before his latest SXSW keynote. I hope it's not my last encounter with him.

Thanks all, for the references. I do intend to follow up.

Shining Raven said...

Okay, I do get your point, and I am not saying your attempt is without merit. But it is somewhat dangerous doing this publicly on a blog...

I certainly agree with many of you points of criticism of our current economic system, and there are indeed lots of problems.

But I fear you are approaching this like a lawyer, not as a scientist: you are not considering the problems and arriving at "growth" as the root, you are starting out from a position that sees "growth" as the fundamental problem and argues in support of this.

To me this seems more ideological than scientific. I think you need to approach this more open-mindedly and try to shoot down your hypothesis, instead of searching for support. Lots of pointers in the comments to the previous installments.

And this includes looking into more of the literature. I agree that it makes no sense to always exclude people from the discussion if they are not experts, but it is also tiring if you need to address certain points again and again. If there is a counter-argument in the literature, you need to address that, not restate your original point....

Nathan Johnson said...

@MT: I think your reply to Shining Raven was better than the original post.

Michael Tobis said...

Nathan, it wouldn't be unprecedented.

I think this will go round a couple of times before it is worthy of lifting out of the blog and into what might be called a polished essay. The comments, mine and others', are as much part of the raw material as the blog entries.

Anyway, I refer to these beliefs often enough. It's time I at least laid them out so people know what I think I am talking about.

Michael Tobis said...

This report from Matt Yglesias fits perfectly with my view of Keynesianism: demonstrated correct in the short run, essentially irrelevant in the long run.

Arthur said...

MT - thanks for writing on this. I think the questions you are asking are important - more, that what you are doing is an exploration of what the right questions are for an understanding of sustainable or slow-growth economics. And inevitably an exploration like that will take some wrong turns, don't worry about them as long as you're recognizing them and getting back on the right course.

I have to say I don't think much of "Shining Raven's" critique when we hear growth is "an element of all credit-based economies" - I've refuted that canard before but sometimes it seems impossible to communicate to those convinced otherwise. That's certainly not a Keynesian stance.

The issue of full employment where some of it is purposeless - the digging ditches and filling them in business - is exactly the problem I had with my reading of Keynes. Reagan's war economy is a larger scale version of the same thing: what are weapons but capital-destruction devices?

And yet - there is real demand for things that we do not have readily available. I'd love to do a bit of space travel; I'm sure I'm not alone. I'd love to be able to travel more freely on the Earth. I've been to Europe and North America, but the other continents are unknown to me. I'd love to be able to travel by rail all over, or even just for my commute to work, so I don't have to worry about driving and can enjoy my electronic devices or do other things I want to more of the time.

I'd love to be able to afford good meals at various favorite restaurants more often. I would like to spend more time on fun recreational activities with my kids, if they weren't so costly. I don't feel the need to acquire very much more in the way of material things (except perhaps some solar panels on the roof, and a Nissan Leaf or Tesla sedan). But there are lots of things I'd like to *do* if I could afford them.

Automation in principle brings more of those things into the realm of the affordable. To the extent every human is "doing more" that's a form of growth, however you want to measure it. It seems like to do this sustainably all we need is for the gradual increase in efficiency and automation to match the growth rate of "doing more", and you could keep everybody as worthily employed as they want to be in a sustainable economy of that sort.

Or is there something missing from my understanding of what can be done?

Holly Stick said...

It was John Kenneth Galbraith; you might find it worthwhile to read some of his books:

Michael Tobis said...

I am not a total pessimist: I think a beautiful future remains possible and within reach. But I have trouble seeing the necessary creativity, cleverness, and acceptance of risk in the general public to be too sanguine about getting there.

But I think the obsession with growth not only distorts many decisions. I think it also distracts attention from the normally boring "commodities sector", which is to say, the actual production of the stuff we actually need, as opposed to what we want.

Maybe we can distinguish between a growth economy in low-impact services and a steady-state economy in commodities. As long as there is some understanding that what makes life worth living is not worth much in the absence of what makes life possible, we can continue to support amazing creativity in arts and sciences.

I may get into a Stallman-style diatribe about intellectual property soon. Both the 1967-1976 period and the present day were periods of immense grass roots creativity specifically because of the weakening of intellectual property. Weak intellectual (or artistic) property leads to strong intellectual or artistic growth and weak economic growth.

Isn't it the case that the growth imperative actually acts against human intellectual and artistic growth, at least under present laws and customs?

Dan Olner said...

Apologies, going to paste big chunks from Marshall's principles. MT, I thought this would be interesting because of how you described economics here:

"I am convinced that mainstream economics is a massive attempt to analyze a question for which there is no answer: how to perpetuate economic growth. Or, perhaps not. Mainstream economics is a massive attempt to analyze economic activity given a false presumption that economic growth is inevitable over the long run."

Whether that's true now, have a read of Marshall's questions: quality brainfood. From p.114 in the physical book, and you can read more online here. Over to Marshall. Quite a range of things were open for discussion in 1895...


What are the causes which, especially in the modern world, affect the consumption and production, the distribution and exchange of wealth; the organization of industry and trade; the money market; wholesale and retail dealing; foreign trade, and the relations between employers and employed? How do all these movements act and react upon one another? How do their ultimate differ from their immediate tendencies?

Subject to what limitations is the price of anything a measure of its desirability? What increase of wellbeing is primâ facie likely to result from a given increase in the wealth of any class of society? How far is the industrial efficiency of any class impaired by the insufficiency of its income? How far would an increase of the income of any class, if once effected, be likely to sustain itself through its effects in increasing their efficiency and earning power?

How far does, as a matter of fact, the influence of economic freedom reach (or how far has it reached at any particular time) in any place, in any rank of society, or in any particular branch of industry? What other influences are most powerful there; and how is the action of all these influences combined? In particular, how far does economic freedom tend of its own action to build up combinations and monopolies, and what are their effects? How are the various classes of society likely to be affected by its action in the long run; what will be the intermediate effects while its ultimate results are being worked out; and, account being taken of the time over which they will spread, what is the relative importance of these two classes of ultimate and intermediate effects? What will be the incidence of any system of taxes? What burdens will it impose on the community, and what revenue will it afford to the State?

How should we act so as to increase the good and diminish the evil influences of economic freedom, both in its ultimate results and in the course of its progress? If the first are good and the latter evil, but those who suffer the evil, do not reap the good; how far is it right that they should suffer for the benefit of others?

Taking it for granted that a more equal distribution of wealth is to be desired, how far would this justify changes in the institutions of property, or limitations of free enterprise even when they would be likely to diminish the aggregate of wealth? In other words, how far should an increase in the income of the poorer classes and a diminution of their work be aimed at, even if it involved some lessening of national material wealth? How far could this be done without injustice, and without slackening the energies of the leaders of progress? How ought the burdens of taxation to be distributed among the different classes of society?

Dan Olner said...

(Marshall quotes 2)

Ought we to rest content with the existing forms of division of labour? Is it necessary that large numbers of the people should be exclusively occupied with work that has no elevating character? Is it possible to educate gradually among the great mass of workers a new capacity for the higher kinds of work; and in particular for undertaking co-operatively the management of the business in which they are themselves employed?

What are the proper relations of individual and collective action in a stage of civilization such as ours? How far ought voluntary association in its various forms, old and new, to be left to supply collective action for those purposes for which such action has special advantages? What business affairs should be undertaken by society itself acting through its government, imperial or local? Have we, for instance, carried as far as we should the plan of collective ownership and use of open spaces, of works of art, of the means of instruction and amusement, as well as of those material requisites of a civilized life, the supply of which requires united action, such as gas and water, and railways?

When government does not itself directly intervene, how far should it allow individuals and corporations to conduct their own affairs as they please? How far should it regulate the management of railways and other concerns which are to some extent in a position of monopoly, and again of land and other things the quantity of which cannot be increased by man? Is it necessary to retain in their full force all the existing rights of property; or have the original necessities for which they were meant to provide, in some measure passed away?

Are the prevailing methods of using wealth entirely justifiable? What scope is there for the moral pressure of social opinion in constraining and directing individual action in those economic relations in which the rigidity and violence of government interference would be likely to do more harm than good? In what respect do the duties of one nation to another in economic matters differ from those of members of the same nation to one another?

Dan Olner said...

I got started with Marshall thinking about Rich's citing 'Is Economics a Science?' Marshall starts Principles saying: 'Economic laws and reasonings in fact are merely a part of the material which Conscience and Common-sense have to turn to account in solving practical problems, and in laying down rules which may be a guide in life... Economic science is but the working of common sense aided by appliances of organized analysis and general reasoning, which facilitate the task of collecting, arranging, and drawing inferences from particular facts. Though its scope is always limited, though its work without the aid of common sense is vain, yet it enables common sense to go further in difficult problems than would otherwise be possible.'

Generally I find, as you go back in economic history, the questions become more searching. One might argue a developing discipline must become more rigid - but the development of economics into its present state was paralleled e.g. by a similar shift in political 'science': say, from international realism to 'neorealism', which was primarily game-theoretic. It's amusing reading Marshall on maths -

'It seems doubtful whether any one spends his time well in reading lengthy translations of economic doctrines into mathematics, that have not been made by himself.'

Marion Delgado said...

Paul LaFarge, Marx's son-in-law, called for limits to growth and said occasional high unemployment was an opportunity to reduce the work week, relax and pursue self improvement - the "Right to Be Lazy," the title of a series of articles by him in Egalite magazine.

Marx's semi-famous remark "If that's what Marxism is, all I can say is I'm not a Marxist," was made about a group including LaFarge. Marx had more of a WTO vision.

LaFarge also worked, sort of, with Pareto, and was the first writer on economics to systematically evaluate US monopolies and trusts.

Michael Tobis said...

Dan, Marion, thanks. Marion trumps my Bertrand Russell with an even older and almost as notable reference.

The limb I'm out on has at least got some precedent.

Rich Puchalsky said...

I may have been one of the people who referred you to Sterling in the first place: I remember commenting here years back that you should look him up since you both lived in Austin, and you hadn't heard of him.

At any rate. I have my doubts about his approach too. A blog post I wrote on the death of cyberpunk expresses it a bit tangentially. A belief that "the street finds its own uses for things" as in the cyberpunk trope leaves you pretty much defenseless when the government demonstrates that it is still quite capable of controlling most things that matter.

Holly Stick said...

You might find some food for thought here:

Michael Tobis said...

You may have reminded me of him.

I am not a full-bore Sterlingite, though I wish I could wield the language as effectively as he does.

I am not all that interested in "the street". The street can be clever but it cannot save us. The power is with the ultra-rich, the corporations, and the governments.

I focus on the slender possibility of a functioning democracy. That is why I loathe an excessive supply of personal ambition in society. What that displaces, first, is sleep, but not surprisingly, various other aspects of civilization follow in quick succession. In particular, collective ambition is totally lost in the shuffle, and it's there that the times demand we put our attentions.

Some solutions may start on the street, but they have to be tolerated by all and encouraged by many. The street is not enough.

Shining Raven said...

Blogger ate two small comments of mine, and that kind of discouraged me from more comments....

I do not understand the obsession with Keynes and "the long run". That is not what it is about. I mean, you all know the quote.

The question of recessions is one of short-term problems, and that is what Keynes was addressing. The fact that we have a growth-based economy has nothing to do with Keynes as such, do you disagree? This is the point I wanted to make with my reference to credit-based economy.

@Arthur: Could you point me to where you "refuted this canard"? Thanks.

What I understand MT to argue is that the current crisis has something to do with limits of long-term growth. In contrast, I contend:

1) The current crisis is a standard recession and could be addressed by Keynes' ideas.

2) The question of growth over the long term is completely separate from the questions governing the current recession.

3) Keynes' ideas as such do not address the question of growth over the long run. Obviously even the non-Keynesians believe in that, so it is not specific to his ideas.

Note that I do not say anything about how I believe we should organize our society and economy etc. I agree that there might be a bit of a problem. I specifically object to the conflation of the growth question on the long run with the current economic problems, which in my opinion have nothing to do with one another.

Aaron said...

Full employment economics assumes that the population does not get too large.

Workable full employment economics also assumes that the projects be investments in productive capital, (i.e., needed roads, needed public buildings, education) rather than than just make work or consumption spending.

Everyone forgets that economics is full of poorly stated assumptions.

greysparkles said...

"Blogger ate two small comments of mine, and that kind of discouraged me from more comments...."

Having had this happen either due to some fault of the program or because of some hasty action on my own part has lead me to writing my responses on Word and then doing some copy and paste work.

Given my poor spelling skills using a word processor usually results in getting my response completed without having to look through the dictionary at annoyingly frequent intervals. As irksome as it is to me to admit, Microsoft Word has actually improved my grammar.


Pangolin said...

First we have to discard our notions of efficiency......

Why have one person doing a job when there are two people available? Aren't we wasting the work-value of the second person by leaving them completely idle?

Take the fireman. The fireman spends most of his/her time doing more or less nothing. They polish the truck, clean the firehouse, do a little training exercise, read a manual and repeat the cycle. An airport fire crew may never actually see the jumbo jet fire that they are trained to fight in their entire careers. Should we discard firefighters then? No.

Trained, motivated, surplus capacity has many values not the least of which is those people have the time to imagine and tinker with better ways of doing things.

When we have sufficient quantity of things isn't it time we started raising the quality bar? Is Ikea really the best furniture that can be made? Couldn't we make some shoes that actually fit and lasted more than a year? Could we, perhaps, standardize a few things like jar lids so that they could be reused?

Economics reflects values not science. Our current economics seems to favor extreme wealth, extreme poverty, and waste; massive, massive waste.

King of the Road said...

Stuart Staniford thinks we'll all be unemployed.

Arthur said...

Shining Raven - I haven't posted on this publicly anywhere, only on several mailing lists. I'll just copy a commentary I used before below (most recently about 5 years back) - maybe it's not what you were getting at, but it seemed to be what you were hinting in your comment.

(3 parts due to length limit on comments here...)

Part 1.

This is the critical point, either you understand money, or you don't on this point:

M . V = P . Q

M = money supply
V = velocity: how many times a given unit of money is spent over the time period in question
P = average price level of goods purchased
Q = quantity of goods purchased (using the given type of money supply) over time period

so P.Q = total value of transactions in time period.

A given quantity of money can support many times its value in transactions over a year, say, as long as the velocity of that sort of money over the year is high enough. That's why there's no problem paying interest on a loan: the same money gets used several times over. That's just the way money works.
> Arthur Smith wrote:
> [...] As you pay the loan and interest, the money goes back to the
> bank
> for other uses, and through the economy eventually circulates back to
> you until you pay it all off (or default).
> Arthur Smith wrote:
> ...the money goes back to the bank for other uses...
> So Arthur, the bank is not obligated to remove that debt from its
> ledger? It can now just spend the money they previously created? Gee,
> why didn't the banking system in Japan just write off all that bad debt
> if it is this simple?

What does what I talked about have to do with writing off bad debt? Banks cannot loan unlimited amounts; the money supply is limited - it's a "supply" just like the supply of oil or anything else. As I stated in my recent post, banks are regulated on how much they can loan out, based on reserves and other non-loan assets, though in many ways financial regulations have been loosened in recent years and there certainly is a worry about over-extended debt (but lack of regulation is a completely different issue from "fractional reserve banking" which you seem so fixed on). And yes of course if you pay down the loan, that asset is replaced on the bank's books by the currency or other assets you used to pay it down, and that currency or other assets are then available to the bank for other uses; the asset while it was a loan to you was rather hard to use in more liquid transactions (though banks do sell loans to one another all the time).

Arthur said...

Commentary on credit/interest/growth Part 2:
Let's think about what's different between the following scenarios:

* You take a loan from the bank that gives you $1000 ("created", but only from the available money supply, a quantity that's unaffected by whether or not you obtain this loan: supply of course does expand if you're willing to pay higher interest rates etc). At a later date, you pay back the loan with interest, a total of $1500 say.

* You sell custom-built furniture to a store for $1000. At a later date, you spend $1500 in the same store.

* Your mother-in-law gives you $1000 as a gift. At a later date, you give her $1500.

With the bank loan there's an obligation and usually an asset of yours that is identified as collateral - but you can always default on a loan, or pay it early or late with a different amount. With the furniture store there's physical assets exchanged that contribute to other economic activity. With the relation, there's presumably some good-will exchanged. But as far as monetary transactions go, there's no real difference: each involves two exchanges of money. What's really so special about the one involving the bank?

> Arthur Smith wrote:
> "Interest" is just a service fee you pay to the bank, it pays salaries
> of bank workers, for bank capital expenses, profit goes to bank
> stockholders as dividends etc, and it compensates for bank losses on
> people who default.
> No Arthur. The banking profit is the difference in interest due the
> demand deposit the loan is made against. In this day of swept accounts
> there is no 'free' money. What do you think the discount window is for
> if a bank can just create money and keep the profits? Oh yea, they get
> to just spend the money they create along with the interest income.
Huh? I have trouble even parsing those sentences. Let's see:

"The banking profit is the difference in interest due the demand deposit the loan is made against."

You're saying that the profit is the difference between the interest rate of the loan and the interest rate paid out to depositors? Ok, I forgot to mention interest to depositors - though often the interest rates on demand deposits is so close to zero it's hardly worth mentioning. But for a corporation, profit is net - revenue minus expenses: not only is interest on demand deposits (and term deposits!) an expense for a bank, so are salaries, the cost of buildings, the cost of internet infrastructure, etc. After you subtract all that out, you have a corporate profit which goes to shareholders (or for credit unions, to the depositors themselves, in principle). So your statement on profit is also incomplete - and I also don't see the point of it in this context at all...

Arthur said...

Commentary on credit/interest/growth Part 3:
"In this day of swept accounts there is no 'free' money."

You're referring to accounts that optimize income on deposits so that as little as possible is kept in low-yielding demand deposits? That's fine, people are getting more interest on their savings on average than they used to. More of interest revenue goes to depositors, less to shareholders, fine, it makes no difference to me, and very little to the economy.

"What do you think the discount window is for if a bank can just create money and keep the profits? Oh yea, they get to just spend the money they create along with the interest income."

The discount window here refers to the short-term loans to banks from the Federal Reserve. Anyway, the obvious problem is in the second half of the first sentence, and the second. When did I say a "bank can just create money and keep the profits"?

What I did say was exactly this:
"[...] at any given time, they can either loan that fixed
amount available to you, or loan it to someone else, or use it
themselves to pay employees etc. It's not created "through your
borrowing", but through the existence of the banking system and the
controls that the final arbiter - the Federal Reserve in the US - places."

How on earth do you get from this that I think "a bank can just create money and keep the profits"? The money "exists" as a part of the supply of money the bank has access to under a given interest rate, the bank can choose either to loan it to you, or to use it to pay expenses: if it loans it to you, there's the promise of future profits from the interest you pay on the loan, which becomes an asset of the bank. If it pays present expenses, there is no associated asset owned by the bank, and no future profit from it, but in both cases the portion of the money supply available to the bank for other actions has been reduced by the amount of the loan or payment.

> And the existence of interest, or lack thereof, bears no fixed
> relationship to growth or reduction in the size of the money supply.
> Are you sure you don't just want to retract this? Why does the Fed do
> what it does?

Why do they keep changing their rates then? As you keep mentioning, in Japan they brought central bank interest rates to zero and still couldn't prevent money supply from declining. Alan Greenspan brought US interest rates to near zero and created a wonderful housing boom - for a while. No "fixed" relationship - that word was included in my statement for a good reason. The interest rate at any given time is a measurement of the demand for money vs its supply, just as the price of oil is a measure of demand vs supply in that area. It's a number that naturally changes dependent on market conditions and government action, not some fixed thing we have to bow down to.

Arthur said...

Commentary on credit/interest/growth part 3b (sorry, actually 4 parts):


In another thread, in response to my comment:

> Yes, it relies on trust, and requires regulation, perhaps a nebulous
> foundation for something that seems so real as "money", but it did take
> many centuries for our current systems to develop

you stated:

"No fiat currency had survived before this century. "

which century would that be? Interestingly enough, fractional reserve banking and the Federal Reserve itself (founded in 1913) long predate the renunciation of the gold standard for US dollars in 1971. So is the problem fiat currency or fractional reserve banking? In another thread you stated:

"Interest implies a fractional reserve system whether specie or fiat."

which I suppose is sort of a definition - assuming "fractional reserve" is meant to also include "zero reserve" loans. Note that there are full-reserve systems out there such as "e-gold". Interestingly enough, they charge "spend and storage fees" - the storage fee is 1%/year. That's essentially a negative interest rate on money you deposit with them; they have to earn their living somewhere after all. So here's a thought problem for you: does that 1%/year negative rate mean that the total quantity of e-gold must be continually decreasing, as the reverse situation to the positive-interest case with fractional reserve banking you have been going on about?

And why not? "

Pangolin said...

Arthur_ None of what you wrote changes some basic facts. The Federal Reserve Banks (they are plural) of the United States, are private entities. They have the power to create money with about the same effort that I use to type this sentence.

That is creating money out of thin air.

There may be some froo-fra about signatures, counter-signatures and security systems but the actual fact of the matter is that the money doesn't exist at one moment and the next moment it does due to some data entry into a computer system.

The money is then disbursed to other private banks and control of those banks is held by a closely-knit club of wealthy gentlemen. I would be shocked if the boards and CEO's of every bank in the US added up to 10,000 people. I suspect 5,000 is too large a number.

Actually I would rather we discuss distribution and flows of physical resources. It's pretty hard to fake oil consumption when so much of it travels by supertanker. As we learned in 2008; banking appears to be mostly fraud.

Arthur said...

Pangolin - yes, the Federal Reserve system is free to create or destroy money. But they're not entirely private, given the fact the president appoints and congress has to approve the governors, with regular reporting and some oversight, and the various links to the US Treasury.

Anyway, by "bank" in my commentary I was not referring to a central bank, which plays quite a different role in the system in limiting the supply of money.

Pangolin said...

Arthur_ As there is no law of physics that prevents the current head of the Federal Reserve bank from sitting down at his computer and creating 82 Quadrillion dollars that didn't exist before we have to assume that it's possible.

Simply because it might be illegal or unwise does not suffice.

Therefore, being that our current medium of exchange is fictional, even if it is a massively accepted fiction, it follows that it might be unwise to account for physical resource flows by tracking flows of a fictional currency.

Dan Olner said...

Slightly related - rather nice little illustration, via here. Oh, and the article's good too! - "Over time, superpowers acquire dysfunctionalities which they can carry because of their sheer plenitude of wealth and power, rather as a super-strong athlete can carry deficiencies in technique. When your strength wanes you suddenly need the technique; but it may be too late to get it back."

Shining Raven said...

@Arthur: Thank you, I haven't read it yet, but thanks a lot for posting it.