Saturday, August 30, 2014

Putin Completely Loses It Over START

Yes, you read me right, although this has not been reported in any English language media.  You are learning about it for the first time unless you follow Russian language media.

NTT, one of the Russian TV networks, has been producing a series of one hour shows that are basically making the case for an aggressive stance towards its neighbors and the West more generally.  Many issues have been dragged through and many claims made. One that has made  it into  the English language Russian media such as Russia Today is the claim that a promise was made to Gorbachev that NATO would not expand eastward if Germany was allowed to reunify.  Though the USSR made such a demand, no such promise was ever made and indeed Russia was invited to join NATO around 2000, which it declined to do.  However, this claim has been repeated regularly, and I see quite a few Americans repeating it also as if this justifies Russia violating its 1993 promise to respect the territorial integrity of Ukraine if Ukraine would turn over its nuclear weapons to Russia, which it did.

Another theme that has been hammered a great deal are claims that Gorbachev was bribed monetarily by the westerners to bring about an end to the Soviet domination of eastern Europe and then to bring about the end of the USSR itself.  Raisa's spending sprees have been mentioned in this regard, although the first of those, which got the most attention, occurred when she and Gorby visited London in late 1984, prior to his becoming top leader.  This was when Margaret Thatcher declared that he was "a man we can do business with."  While it was widely reported at the time that she was using an American Express card, apparently that was false.  They simply turned the bills over to the Soviet embassy in London to pay for her spending spree.  No western money behind that one, although, of course, nobody can rule out that somehow Gorbachev may have received secret payments that nobody has ever heard of. OTOH, more likely this is just made up lies by the Putin propaganda machine.

Well, all of this is more or less par for the course, but a very disturbing event happened on one of these shows, a moment where more than on any other or for that matter pretty much any public appearance that Putin has ever made, he completely lost it and was yelling with a highly raised voice.  The topic is disturbing, particularly given that it appears that he was lying when he engaged in this conduct.  The matter involved the final nuclear  weapons reduction deal signed between the US and the still-then existing USSR, on July 31, 1991, only about two and half weeks before the August 19 coup that led to Gorbachev effectively losing power and the Soviet Communist Party effectively ceasing to exist.  It was the Strategic Arms Reduction Treaty, or START, signed on that date by Gorbachev and then-US President George H.W. Bush.

Putin claims that this treaty was massively unfair, and that this was the ultimate betrayal and treason by Gorbachev, presumably also  for which he got paid off.  I would think that Gorbachev should stay out of Russia for the time being, given the garbage being spouted off about him by Putin and his flunkies, with some Russian legislators demanding that he be jailed for treason.

Was the treaty unfair?  The basis for making such a case is that the USSR agreed, and Russia carried it out with the treaty finally being fulfilled in 2001 just after Putin took over, to reduce its nuclear weapons stocks by a larger amount than did the US.  This is true.  However, the final outcome of this was that both nations ended up with equal sized nuclear weapons stocks, 6,000 weapons each, about a 30% reduction for the US and a 40% reduction for Russia (who inherited the nuclear weapons that had been located in Ukraine, Belarus, and Kazakhstan previously).  So, Putin is all enraged, and I mean seriously enraged, that this previous "advantage" was given up, although to this observer this seems like a pretty ridiculous advantage that did not amount to anything in practical terms.  Both sides had and still have enough nuclear weapons to totally destroy each other, as some Russian commentators have recently reminded us by pointing out that Russia is capable of "turning the US into nothing but radioactive dust."  Thanks, guys.

Another part of this speech that had  Putin yelling and screaming was a completely false claim that the treaty involved the US being able to tell USSR/Russia where it could have its military bases, without Russia having the same right with regard to the US.  This is just complete and utterly false nonsense.  The treaty did set up sites where each side could monitor the other's activity.  One of those curiously enough was in Ukraine, and after 1995, the US stopped using that site.  But, I do not see how this fits Putin's bizarre and apparently hysterical claim.

I find this seriously disturbing.  We have seen reports that Putin essentially lives in a bubble, surrounded by total sycophants.  He supposedly gets reasonably accurate intel reports, but who knows?  We have seen the Russians spouting absolutely looney propaganda in their media, such as the wild claim of now-deposed rebel Minister of  Defense in Donetsk, Igor Strelkov, that the downed Malaysian plane was full of already dead people.  I am very concerned that in his isolated cocoon, Vladimir Putin is beginning to believe some of his own nation's more ridiculous and phoney propaganda.  But this business of him losing it over totally false garbage about US-Russian nuclear treaties is extremely worrisome, at least to me, and it coincides with reports that indeed there has been a pretty much total breakdown in all cooperation between the two nations in terms of carrying out the successor to START, which Obama signed with then-President Medvedev in 2011 and struggled mightily to get barely ratified in the US Senate.  In any case, I find this development to be by far the most disturbing of all that I have heard about so far in the current deterioration of relations between Russia and the rest of the world, especially the United State.  I see nothing good coming of this, and potentially extremely bad things coming of it.

BTW, it appears that even most of the Moscow intelligentsia, usually cynical and critical of the government and able to see through obvious propaganda, is just sopping this up and totally accepting pretty much nearly all of it.  This is also a matter of considerable concern to me.  It is disturbing to essentially see an entire great nation just completely lose its mind in an orgy of aggressive frenzy, with this extending even to wild threats of nuclear destruction and false claims about supposedly unfair nuclear treaties unfairly arrived at.

Barkley Rosser

Friday, August 29, 2014

Coase at Cruising Altitude: A Closer Look at the Pay-Me-to-Not-Recline Argument

The recent dustup over the rights of recliners versus the people behind them who get jammed on  crowded airplanes tells us a lot about Coase’s analysis of externalities and the perils of having a simplistic Free Market Roolz understanding of economics.

First, to get a flavor of the two sides, read Josh Barro, followed by Damon Darlin, in the New York Times.  The question is whether passenger A in the row in front has the right to recline into the kneespace of passenger B in the row behind.  Barro invokes Coase: the solution is to have a market.  Clearly, the would-be recliner has the property rights in this matter, since the seat is built to allow reclining and flight attendants will enforce this right in the event of a dispute.  So turn it into a market, says Barro.  If you don’t want me to recline, pay me.  If you offer me enough money, I’ll take it and you can keep your few precious inches.  Darlin doesn’t question this invocation of Coase, but he says that the technology gives an unfair advantage to the recliner.  The playing (sitting?) field is leveled, according to him, if passenger B uses a Knee Defender.

First off, it should be clear that Darlin’s argument is muddled.  He would use the Knee Defender but then remove it if the passenger in front objects.  In other words, he is not really changing the allocation of property rights, just adding an extra step.  First Barro would have to say, “stow your Knee Defender, buster.”  Then he can add, “And if you want to stop me from reclining, show me the money.”  So we are back to square one.

So how well does Coase work here, actually?  At first blush, it looks reasonable.  The recliner values the opportunity to recline at a certain level, measurable in cash.  The reclinee values freedom from being reclined on at some other level, also measurable in cash.  If the first value exceeds the second no deal will be made, and reclining will take place.  If the second exceeds the first, a payment will be made and no reclining will be the result.  Thus the relative advantages and disadvantages will be weighed, even though they happen to different people, and the seat will tilt only if there is a positive net advantage.  Score one for Coase.

Ah, you say, this overlooks the transfer of money itself: the outcome is not only whether the reclining option will be used but also whether rear passengers have to shell out to front ones.  Isn’t there a social justice problem?  Barro’s answer is that the people who are willing to pay the most to avoid being reclined on are likely to be taller, and taller people make more on average than shorties; thus Coasian payments help redress a pre-existing injustice.  Perhaps this was a clumsy attempt at humor, but as economic analysis it’s pretty flimsy.  Average height-related income differentials are very small, especially relative to overall income inequalities.  (We are talking about minute differences in the mean relative to standard deviations.)  Income differences between randomly selected pairs of in-front and behind passengers are unlikely to be attributable to how much seat space they need.  (I’m over six feet, but my middling academic salary puts me below almost every business traveler onboard, no matter how short.)  A better argument would be that each reclinee is also a potential recliner, either on the current flight or a future one.  If a system of payments is adopted, transfers should roughly net out.

The real problem with Coase in this context, however, has to do with the incentive to threaten to recline.  Suppose I am indifferent between reclining and not; in other words, the value to me of being able to put my seat back is exactly zero.  Does this mean I’ll simply keep my seat upright and avoid all hassles?  Not if I’m Homo Economicus, I won’t!  No, as soon as I hear that reassuring electronic beep that says takeoff restrictions are ended, I’ll push my seat back as far as it can go and wait for you to make an offer.  My incentive is to hold out for as much as you are willing to shell out and then take it.

This is a well-known result in economics, of course.  In the classic case of pollution, assigning property rights to the polluter results, in dynamic equilibrium, in more entry of potential polluters and greater payments to them by pollutees relative to the static outcome.  (Not every introductory textbook mentions this, but the best ones do.)

Barro provides a useful example of someone whose understanding of Coase extends as far as the wonders of Markets in Everything and then simply stops.  We see the same phenomenon in just about every aspect of microeconomics, from the virtue of sweatshops (workers voluntarily take those jobs, no?) to the evils of rent control (deadweight loss! black markets!).  More complex considerations that take into account dynamics, interaction effects and the like never intrude.  What you end up with is an ideological truncation of economics, and, as the Great Airplane Debate illustrates, it is largely ideology that frames public discourse.

Thursday, August 28, 2014

SCIOD 11: Continuation of Brassey by Chapman

Sydney Chapman was another of Alfred Marshall's star pupils. He was awarded the Adam Smith Prize in 1900. Pigou won it three years later. In 1909 it went to John Maynard Keynes. Chapman wrote a three-volume "continuation of Lord Brassey's 'Work and wages' and 'Foreign work and English wages'" also titled Work and Wages. Brassey wrote introductions to each of the volumes. In the "analytical groundwork" for Volume 2, "Wages and Employment," Chapman presented a conventional version of the marginal productivity theory of wages, which he summarized, broadly, as "the forces of competition and substitution tend to cause each class of labour to obtain as earnings the value of its marginal productivity." In his introduction, Brassey condensed the theory even further to "Wages depend on the value of the work produced." Neither Chapman nor Brassey made any direct reference to the older wages-fund doctrine, although Chapman acknowledged that the marginal productivity theory "is not yet popularly accepted to the full."

In his economic history of the Lancashire cotton industry, Chapman referred to the "doctrine of the labour fund, as the 'lump of labour' fallacy might be called." Here, presumably, Chapman was using the term "labour fund" as a synonym for Marshall's "work fund," that is to say the demand for labor is assumed to be perfectly inelastic – the quantity demanded remains constant regardless of the wage rate.

Elsewhere, notably for example, in the 1887 English translation of Marx's Capital, the labour fund is a synonym for the wage fund, which implies a unit elasticity of demand for labor – the percentage decrease in demand for labor equals the percentage increase in the wage, so that aggregate of wages remains constant. The two terms were even used interchangeably in the same text as in the following passage from Frank Fairplay's (pseudonym) A Brief Plea for the Old Faith and the Old Times of "Merrie England", when Men had Leisure for Life and Time to Die:
What then constitutes the labour-fund? Certainly not money, which is merely the medium of exchange—a sign of value. There is not enough coined money and bank paper in all England to pay the wages of England for four months. The fund with which labour is paid, consists only of those articles which labourers consume. In Ireland the wage-fund is potatoes and old clothes. In England, as yet at least, it is composed of a sufficiently scanty portion of meat, bread, potatoes, and somewhat more decent apparel. It is obvious then, that the richer the labour-fund is in these articles, the more there will be to distribute.
It is clear from the context, however, that Chapman's meaning was work fund and not wages fund. The point that he is making is that the "fundamental ideas" behind proposals made by the Society for the Promotion of National Regeneration for reducing the hours of work were sound even though their rhetoric was tarnished with fallacious arguments. This is, of course, in agreement with Pigou's explanation that "conclusions are often right when the reasons adduced by their supporters are ridiculously wrong."

In volume 3 of his "continuation" of Work and Wage, published in 1914, Chapman reprised his analysis of the hours of labor that had been published in the Economic Journal five years earlier and that he had hinted at in declaring to be sound the fundamental ideas of the Society for the Promotion of National Regeneration. This theoretical analysis was also consistent with the evidence that Brassey had offered in his 1872 book. "It is equally true," wrote Brassey, after showing that wage rates were no indication of labor costs, "that the hours of work are no criterion of the amount of work performed."

In Chapter 6 of Work and Wages Brassey presented evidence of numerous cases where output increased following a reduction in the hours of work. Chapman's continuation and journal article supplied the theoretical explanation for that result. Twenty years after publication of Chapman's "Hours of Labour" article, Lionel Robbins observed:
The days are gone when it was necessary to combat the naïve assumption that the connection between hours and output is one of direct variation, that it is necessarily true that a lengthening of the working day increases output and a curtailment diminishes it. 
Would that were the case.

If Brassey's Work and Wages provided the evidentiary impetus for Chapman's theoretical analysis of the hours of labor, W. S. Jevons's Theory of Political Economy moulded one of its marginalist theoretical pillars. Chapter 5 of that book presents his theory of labor, including the analysis of the disutility of work, beyond a definite point. "A few hours' work per day may be considered agreeable rather than otherwise;" Jevons wrote, "but so soon as the overflowing energy of the body is drained off, it becomes irksome to remain at work. As exhaustion approaches, continued effort becomes more and more intolerable." This he illustrated with a diagram that illustrated the diminishing utility to the worker of wages earned and the increasing irksomeness of remaining at work as the duration of work lengthened. Chapman's diagram in his "Hours of Labour" article includes a work curve that is clearly analogous to the diagram Jevons presented in his theory of labor.

Economists: Lawyers? Shysters? Touts?

"Basically, a lot of economists use the tools of science to accomplish literary-- or lawyerly -- goals." -- Noah Smith, Economics Isn't Science or Literature
If that's the case, what's "the law"? What are the standards of evidence? I've been thinking a lot recently about the extensive reliance on "hearsay" in economics -- that is to say the flippant attitude of economists toward sources -- and about the preponderance of alibi stories (again with scant regard for proving the alibi). Unlike the legal profession, there is no formal professional code of ethics for economists. So, where do we draw the line between "lawyer" and "shyster"?
"...'shyster' lawyers -- a set of turkey-buzzards whose touch is pollution and whose breath is pestilence" -- "The Tombs," New York in Slices (1849)
"In England, although we have not the term 'shyster,' we have the animal thereby designated, and he is said to be particularly rife at the Old Bailey. A shyster is a tout, and touting may be practised either by a barrister, or by his clerk, or by his post or future clients… But in New York the shyster ventures upon proceedings from which the English tout would shrink. He makes his way into the prisons, and informs the prisoners committed for trial that he has great influence, and in some cases 'he goes so far as to say that he controls, aye, even owns the court and district attorney.'" -- The Saturday Review of Politics, Literature, Science and Art (1871)
"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 second reason which obscures the truth about industry is, that the facts about capital are almost never honestly disclosed." -- Frederic Harrison, Fortnightly Review (1872)
Update: (Lest we forget):
"In addition to business and government, Mr. Ferguson aims his critique at academia, suggesting that the discipline of economics and more than a few prominent economists were corrupted by consulting fees, seats on boards of directors and membership in the masters of the universe club. 
"When he challenges some of these professors, in particular those who held positions of responsibility in the White House or in the Federal Reserve, they are reduced to stammering obfuscation — Markets are complicated! Who could have predicted? I don’t see any conflict of interest — and occasionally provoked to testiness."  -- A. O. Scott, New York Times review of "Inside Job" (2010).

Wednesday, August 27, 2014

Graunt Work

"To understand the idea of inherent quantitative regularity which informs Graunt's text, and how he was able to devise a method which demonstrates this regularity in vital phenomena, it has been necessary to consider his synthesis of four period concepts: the method of observation prescribed by Bacon's natural history; the method of keeping accompts, with its several proportional checks and informal attitude to population totals; a mercantile system of natural and intrinsic balances, embracing people and trade; and a general model of society as a set of correspondences uniting man, God and nature." -- Philip Kreager, "New Light on Graunt," Population Studies 42, 1988, pp. 129-140.
What Graunt accomplished with his essay is astonishing. Kreager did a magnificent job of reconstructing the foundations of Graunt's method, rather than anachronistically identifying "aspects of Graunt's essay which anticipate later demographic measures and statistical inferences." But there is another story yet to be told -- of the unconscious survivals in subsequent political economy and economics of Graunt's innovative synthesis of natural history, bookkeeping and theology.

The clue here is that there is indeed at least one conspicuous survival, that it is unconscious and that it is significant resides in the incessant reiteration and unanimous misattribution of the highlighted phrase:
"…if there be but a certain proportion of work to be done; and that the same be already done by the not-Beggars; then to employ the Beggars about it, will but transfer the want from one hand to another…" -- John Graunt, Natural and political observations mentioned in a following index, and made upon the bills of mortality (1662).
So it turns out that the supposition of a fixed amount of work to be done* originates in the "ur-text" of political economy rather than in the half-baked ruminations of fearful Luddites and clueless trade unionists. What are the implications?

William Petty's pioneering estimate of national income relied crucially on his friend Graunt's calculations of population. These were essentially the "number, weight or measure" upon which Petty based his analysis. Alfred Chalk, in "Natural law and the rise of economic individualism in England," (1951) implied a causal link between Newton's Principia and Petty's Political Arithmetick:
"It was not mere chance that Petty chose to call one of his important works Political Arithmetick
"From the point of view of the development of economic theory, the emergence of a scientific philosophy of determinism was possibly the most significant fact of the seventeenth century. The great creative minds in mathematics, biology, physics, etc., gradually came to view the world as an intricate machine in which each part played a role that was rigidly predetermined by inexorable laws. Newton's Principia, published in 1687, provided the basis for a mechanistic outlook which would encompass the universe. In such a climate of opinion, social scientists began to search for a body of laws which would reveal a harmonious social order similar to that which physical scientists had discovered in their researches."
Except Newton's Principia was published in 1687. Graunt's Natural and political observations, on which Petty relied for his empirical information had been published 25 years earlier. The anachronism of seeking out "anticipations" of later thought in earlier texts obscures and misrepresents actual contributions, motives and methods. This leads, it would appear, to endemic confusion about the status and significance of economic "laws," related to the ambiguity of natural law doctrine and laws of nature. (It may be noted that John Locke delivered his Oxford lectures, subsequently published as Essays on the Law of Nature, in 1664. Locke owned a copy of Graunt's Observations. According to Ashcraft, "The influence of Graunt is particularly reflected in Locke's recording in his journals the weekly or monthly mortality rates for various cities while he was living on the continent.")

Citing Heckscher, Chalk claimed that "In mercantilist literature the law of nature was simply divested of almost all its religious, and even ethical, overtones." Kreager, however, presented a very different and more compelling argument:
The 'mix' in Graunt’s mixed mathematics owed, as has been said, to his application of an apparently humdrum practical art, bookkeeping. But beneath his 'shop-Arithmetic' lay a more fundamental and familiar set of associations: number, reckoning and death as the idiom of the Last Judgement. Graunt's simple similitude was that each death represents a subtraction from the living, an entry in God's or nature's 'accompts'. And just as death displaces a person or soul to some specific immortal 'population', so each christening incorporates a new person or soul into a mortal one. Graunt's chosen point of entry into this old theme was Bacon's Natural History of Life and Death. Bacon had argued that men should observe nature in order to discern possible reflections of God's laws; whilst such knowledge was bound to be a pale record of these laws, it nonetheless offered possible guidance on improving individual and collective life. Such a phrasing inevitably suggested that longevity was a kind of measure of man's success in this attempt.... Graunt, expressly taking up Bacon's inquiry, likewise adopted Classical images of the symmetry of divine, natural and political order.
It is a far cry from, say, the law of gravity to a "harmonious social order." But not quite so far if one assumes, a priori, the "symmetry of divine, natural and political order." Furthermore, the technology of double-entry bookkeeping superimposed a merchant's perspective on the social order, one implemented, according to Aho, largely to provide evidence for an alibi against suspicions of usury and unscrupulous business practices.

* I am aware of one instance of similar phrasing that occurs between Graunt's "certain proportion of work to be done" in 1662 and Dorning Rasbotham's "certain quantity of labour to be performed" in 1780: the definition of the verb, "task" in Dyche and Pardon's New General English Dictionary (1735) is "to appoint a person a certain quantity of work to be done in a certain time." Update: the distinction between Graunt's "certain proportion" and Rasbotham's "certain quantity" is an important one on which I will have more to say later.

Burger King’s Facebook Whopper of a Lie

Burger King wants us to believe they are not doing this corporate inversion. Did legal and marketing conspire to put out this misleading FB post?
We hear you. We’re not moving, we’re just growing and finding ways to serve you better. As part of the announcement made today, both Burger King Corp. and Tim Hortons will continue to operate as independent brands. We’ll just be under common ownership. Our headquarters will remain in Miami where we were founded more than 60 years ago and business will continue as usual at our restaurants around the world. The decision to create a new global QSR leader with Tim Hortons is not tax-driven – it’s about global growth for both brands. BKC will continue to pay all of our federal, state and local U.S. taxes. We’re proud of the heritage of Burger King and will maintain our long-standing commitment to our employees, franchisees and the local communities we serve. The WHOPPER isn’t going anywhere.
Burger King Corporation (BKC) is the U.S. subsidiary of Burger King Worldwide. BKW is their stock ticker for a reason. Of course, the U.S. subsidiary is staying in Miami but when the parent corporation relocates to Canada, the U.S. tax obligations of Burger King will be cut in half as they will no longer be subject to the repatriation tax. How stupid does Burger King think we are? And yes – it is “Perfectly Legal”.

Tuesday, August 26, 2014

SCIOD 10: The Fund-a-mental Thing's Supply as Time Goes 'Bye'

The eclipse of the wages-fund doctrine in political economy was the occasion for a peculiar twist in the rhetoric of anti-union polemicists. In 1867, on the eve of Thornton's critique of the doctrine and Mill's recantation, an anonymous article in the Quarterly Review condemned unions for their failure to understand the dynamic nature of the wages-fund:
The question for those who wish to raise the wages of labour is, not how to divide the existing wages-fund in a manner more favourable to the working man, but how to increase competition for his labour among employers.
According to the article, the price of labor depends on the demand for labor which depends on the rate of profit. "The real cause, therefore, of a high rate of wages is a high rate of profit."

Four years later, yet another Quarterly Review article discussed the refutations of the wages-fund and criticized unions for basing their strategies "on the same assumption of a permanent wage-fund" as the orthodox political economists. According to the author, John Wilson, trade unionists believed they could "cause the lion's share of that fund to come into their own hands, to the exclusion, as far as possible, of outsiders—that is to say, of the whole body of workpeople outside the Unions."

Later that same year, the engineers' strike in Newcastle, England for the nine hour day was occasion for several letters to the Times of London and a correspondent's report in the New York Times attributing the demand for the shorter day to a belief by the union "that the amount of work to be done is a fixed quantity, and that in the interest of the operatives, it is necessary to spread it thin in order to make it go far." This is a remarkably close paraphrase of the "false principle," denounced by Dorning Rasbotham, that "there is, say they, a certain quantity of labour to be performed."

Alfred Marshall – whose sympathy toward the working classes was tempered by a growing ambivalence, marked by occasional hostility, toward trade unions – annexed the "fixed amount of work" idea to a modified, purportedly union version of the discredited wages fund that he dubbed the "fixed Work-fund fallacy":
It is known that the immediate effect of a reduction of the hours of labour would be to cause those employers who had contracts on hand, and some others to take on extra men. And it is argued that therefore a reduction of the hours of labour would diminish the number of the unemployed, and raise wages.  
But there is not, as this argument assumes, a fixed Work-Fund, a certain amount of work which has to be done, whatever the price of labour. On the contrary the demand for work comes from the National Dividend; that is, it comes from work: the less work there is of one kind, the less demand there is for work of other kinds [Say's Law!]; and if labour were scarce, fewer enterprises would be undertaken.
Marshall's argument oscillates between self-evident truism and non-sequitur. Part of the problem is that Marshall had buried in the preceding paragraph the important qualification that the reduction in hours be independent of any effect on efficiency. The other part of the problem with the fallacy argument is that unions virtually always in the 19th century cited overwork and the efficiency gains that would results from shorter hours.

A few decades later, Marshall's star pupil and successor in his chair at Cambridge, Arthur Cecil Pigou rather delicately teased out some of the exceptions and qualifications to the alleged fallacy of the fixed work-fund. First, he conceded "an element of undoubted truth" to the idea that under many circumstances protectionism can be fruitful for workers in a particular industry and that those benefits may be long lasting. However, he contrasts that localized gain with the idea that there would be an overall benefit to all industries from, for example, limitation of imports. Having made that concession to the fallacy claim, Pigou then addressed a more fundamental issue about the relationship between ideas – however fallacious – and economic facts -- it is:
...unwarrantable to conclude that, because the reasons which popular thought offers in defence of any thesis are invalid, therefore, that thesis is untrue…. conclusions are often right when the reasons adduced by their supporters are ridiculously wrong.
Pigou then proposed the one and only condition under which this alleged popular thought could be vindicated: "that these devices succeed in rendering the labour and capital of the rest of the community more effective in production." Again, it needs to be reiterated that the "popular thought" that there is "only a fixed amount of work to be done" has always been – from Rasbotham to McCulloch to Wilson to Marshall – an idea attributed to some vague collectivity by the writer and never an argument uttered by an identifiable person or group. Those who do the attribution are no doubt quite certain that they have correctly characterized the unspoken "idea behind" one policy proposal or another. But they view as incomprehensible any suggestion that they need to back up such claims with evidence.

In 1926, Maurice Dobb added another wrinkle to the question of the Work-fund and its supposed fallacy – workers were not necessarily as concerned with maximizing aggregate earnings per capita, as the economists assumed, but in increasing "wages in proportion to the worker's expenditure of energy and his 'wear and tear,' and… wages as a proportion of the total social income":
What was implied in the economists' retort to the advocates of the so-called Work-Fund leads to the apparent paradox that the more the workers allow themselves to be exploited, the more their aggregate earnings will increase (at least in the long run), even if the result is for the earnings of the propertied class to increase still faster. And on this base is erected a doctrine of social harmony between the classes.
Even as economic theorists such as Dobb and Pigou were carefully dissecting and refuting the implicit assumptions of the Work-fund fallacy claim, economic textbook authors were diligently parroting the discredited claim. In economics, what is taught trumps what is thought. 

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.
The demand for labor grows as fast as its supply! They are the same thing! Bye's explanation surpasses "supply creates its own demand." Supply IS it's own demand.

Monday, August 25, 2014

Burger King Inversion - Dealbook Misses the Mark

In addition to that disappointing op-ed from Greg Mankiw, The New York Times missed the facts on the Burger King merger with Tim Horton:
Though the two companies are expected to argue that a merger would bring a host of strategic benefits, it would nevertheless count as a so-called corporate inversion. Many American companies have looked toward taking over foreign companies, and then moving their headquarters abroad, to lower their overall tax bill … The American corporate tax rate is about 35 percent, while Canada’s is about 15 percent. But people briefed on the deal negotiations said that the main driver in the talks was not taxes. Burger King already pays a tax rate of roughly 27 percent, and would shave off only a couple of percentage points by moving to Canada, according to the people briefed on the matter. And Burger King does not have a significant amount of cash held abroad, these people said. Companies often pursue inversions to gain access to their overseas cash without being hit by a big American tax bill.
Canada’s corporate tax rate is 26.5% not 15%. But if one takes a look at Burger King’s 10-K, you’ll see that foreign taxes relative to foreign sourced income is around 15%. You’ll also see that about 80% of its income is sourced abroad even though half of its stores are in the U.S. This screams out transfer pricing abuse, which of course Greg Mankiw ignored in his op-ed. Burger King has reported an effective tax rate near 27% precisely because they have been paying the repatriation tax, which is likely why they don’t have a lot of cash abroad. But without the repatriation tax, their effective tax rate would have been less than 20%. So when the NY Times says this “would shave off only a couple of percentage points”, they are incredibly wrong.

Saturday, August 23, 2014

Mankiw v. Kleinbard on Corporate Inversions

Greg Mankiw discusses the corporate inversion issue:
If tax inversions are a problem, as arguably they are, the blame lies not with business leaders who are doing their best to do their jobs, but rather with the lawmakers who have failed to do the same. The writers of the tax code have given us a system that is deeply flawed in many ways, especially as it applies to businesses. The most obvious problem is that the corporate tax rate in the United States is about twice the average rate in Europe ... A main feature of the modern multinational corporation is that it is, truly, multinational. It has employees, customers and shareholders around the world. Its place of legal domicile is almost irrelevant. A good tax system would focus more on the economic fundamentals and less on the legal determination of a company’s headquarters. Most nations recognize this principle by adopting a territorial corporate tax.
I find this an incredibly naïve discussion. I’ll be the first to admit that the U.S. tax code insistence on a repatriation tax is a bit weird as U.S. based multinationals are incredibly adept at not paying it. So we have an effective territorial system anyway as Eric Kleinbard notes:
Corporate executives have argued that inversions are explained by an "anti-competitive" U.S. tax environment, as evidenced by the federal corporate tax statutory rate, which is high by international standards, and by its "worldwide" tax base. This paper explains why this competitiveness narrative is largely fact-free, in part by using one recent articulation of that narrative (by Emerson Electric Co.’s former vice-chairman) as a case study. The recent surge in interest in inversion transactions is explained primarily by U.S. based multinational firms’ increasingly desperate efforts to find a use for their stockpiles of offshore cash (now totaling around $1 trillion), and by a desire to "strip" income from the U.S. domestic tax base through intragroup interest payments to a new parent company located in a lower-taxed foreign jurisdiction.
When Mankiw talks about a good tax system focusing on economic fundamentals, he is assuming there is no transfer pricing abuse. Kleinbard and many others have noted how incredibly abusive the transfer pricing practices of highly profitable multinationals has become. In fact, this concern is why the OECD is so concerned about Base Erosion and Profit Shifting. Is Greg Mankiw another Rip van Winkle being asleep for the last 20 years and missing this key portion of the discussion? Then again, he later notes his real agenda here:
So here’s a proposal: Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption.
I see – ignore transfer pricing abuse entirely as you are writing another op-ed for Team Republican where the real agenda is to shift the tax burden away from capital income entirely.

Autor's Alibi and the Lump of Jackson Hole

According to M. I. T. economics professor David Autor, in a paper presented yesterday at Jackson Hole:
"Economists have historically rejected the concerns of the Luddites as an example of the 'lump of labor' fallacy, the supposition that an increase in labor productivity inevitably reduces employment because there is only a finite amount of work to do."
Autor's paper, "Polanyi’s Paradox and the Shape of Employment Growth," was also featured in articles in the Wall Street Journal and the New York Times.

Professor Autor made a slight amendment to the textbook explanation of the lump of labor. Instead of a "fixed amount of work to be done," he referred to the fallacy of supposing "there is only a finite amount of work to do." Hypothetically, there may be an "infinite" amount of work to do in the universe in an eternity. But there is most certainly a finite amount of human labor that can be performed during any given period of time and only a fraction of that can be paid employment.

Aside from the grandiose delusion of an infinite amount of work to do, the bland boilerplate Autor recited is certified nonsense-on-stilts. The textbook version of the lump of labor is a sardonic restatement of the old wages-fund doctrine of classical political economic. Alfred Marshall used the phrase "fixed Work-fund" to emphasize the equivalence. The fallacy of a fixed amount of work is customarily refuted by the adage "technology creates more jobs than it destroys," a 20th century version of the "supply creates its own demand" interpretation of Say's Law. Finally, Say's Law is predicated on the truth of the wages-fund doctrine. Summing up, then, A = not A: Liar's Paradox.

But something is going on here besides mere paradox or glib foolishness. Autor is not alone in his rote recitals of the archaic fallacy myth. The fraternity of economists will, I'm sure, nod inattentively to Autor's lumpish refrain without raising an objection to either its logical contradiction or its irrelevance.

The fallacy claim is not part of an analysis. It is an alibi. Capital -- or "the competitive market system" -- is in the dock.

Where to begin? Or, rather, elsewhere to begin. In criminal law, an alibi is a defense based on the claim that the defendant was in some other place when the crime was committed and therefore physically could not have done it. Alibi is Latin for elsewhere. In common usage, alibi has come to signify any kind of excuse, often with the connotation of being a lame one.

The distinctive feature of an alibi story is that it revolves around an absence. What actually occurs at the other place is insignificant. What matters is the crime. The only significance of the alibi story is that it renders the action of committing the crime impossible for the accused.

Economics makes extensive use of alibi narratives. Private property entails the right to exclude others from access to and to alienate, or dispose of, the things owned. Alienate shares the Latin root alius with alibi. Unemployment highlights the displacement of workers from the usual condition of being employed. The enclosures of the commons in pre-industrial Britain excluded commoners from their former, collectively-cultivated fields, making those fields into an elsewhere for them. In "The Political Economy of the Sign," Jean Baudrillard identified "the strategic logic of the commodity" to be the treatment of use value as "a satellite of and an alibi for" exchange value.

The crown jewel of economic alibi, though, is equilibrium, the supposed tendency (or disposition) of demand and supply to move toward balance, guided by changes in price. Autor invoked this presumed inclination toward equilibrium as "theory" when he observed in his conclusion that "the long-run effects of these developments should in theory be positive..." In his conclusion, Autor confused static and dynamic analysis. Equilibrium, John Maurice Clark explained (87 years ago):
" an abstraction based on observation of the relative stability of economic values, and of oscillations whose behavior suggests a normal level toward which the economic forces of gravity exert their pull. The key to dynamics is a different problem: that of processes which do not visibly tend to any complete and definable static equilibrium." -- J. M. Clark, "The Relation Between Statics and Dynamics"
So Autor's "in theory" may best be understood as a colloquialism, rather than an allusion to actual economic theory, in the same way that alibi may refer loosely to any lame excuse rather than to the technical legal defense of being somewhere else. In his essay on static and dynamic economic analyses, Clark also raised the issue of the paradoxical character of reason,
"when it takes the form of 'rationalizing' or evolving ostensible motives for actions, where the real motive is one which civilized standards deem less respectable, or one which might even have to be suppressed unless it could be successfully disguised."
In his critique of "The Theory of Compensation as regards the Workpeople Displaced by Machinery," Marx satirized the disingenuous rationalizing of the "bourgeois economist" who "implicitly declares his  [Luddite] opponent to be stupid enough to contend against, not the capitalistic employment of machinery, but machinery itself." Marx's satire shanghaied the Dickens villain from Oliver Twist, Bill Sikes, and scripted for him an imaginary plea to the jury:
"Gentlemen of the jury, no doubt the throat of this commercial traveler has been cut. But that is not my fault; it is the fault of the knife! Must we, for such a temporary inconvenience, abolish the use of the knife? Only consider! Where would agriculture and trade be without the knife? Is it not as beneficial in surgery as it is in anatomy? And in addition a willing help at the festive table? If you abolish the knife -- you hurl us back into the depths of barbarism."
"Alibi Ike" is a short story by Ring Lardner, first published in the Saturday Evening Post in 1915. Ike is a baseball player. "His right name was Frank X. Farrell, and I guess the X stood for "Excuse me." Because he never pulled a play, good or bad, on or off the field, without apologizin' for it." Ike's habit of making up excuses for everything leads him inexorably into incriminating self-contradiction and ultimately into romantic troubles when he can't resist the urge to disown his true feelings during a conversation with his teammates.

The lesson that two alibis are not better than one is also illustrated by an anecdote in the American Bar Association Journal from March 1951:
"As court and council gathered in the robing room after an acquittal... the judge said to the successful lawyer, 'That was the most convincing alibi that I have ever had proved before me.' 
"'Thank you, sir', replied the lawyer, 'it is particularly gratifying to hear you say that. I value your judgment most highly and I am pleased to find that in this case it coincides with mine. I chose that alibi as the best of three that the defendant had.'"
What makes an alibi believable has, apparently, only recently come to be a focus of systematic research. The proliferation of discrepant alibi stories is one indicator that something may not be quite right. Other factors include, coherence, consistency, the presence or absence of physical evidence or witness testimony and the ease or difficulty of fabricating such evidence. In a future post, I hope to discuss some of the recent literature on alibi evaluation and consider its relevance to economic discourse.

Christian Right Hypocritically Ruins Reputation Of Oldest English Governorship In North America

That would be the governorship of the Commonwealth of Virginia, a position continuously dating from about four centuries, which has had such individuals as Thomas Jefferson and Patrick Henry holding it, but now facing for the first time having one of its own on trial for a felony corruption charge, Robert McDonnell.  McDonnell is trying to get out of this charge by blaming his troubled wife, even though he and his sons accepted numerous extravagant golfing outings on the bill of a donor without reporting any of this to the appropriate authorities.  It is bad enough that this reprehensible cad could have saved his wife and family from the massive humiliation they are currently undergoing if  he had accepted a relatively minor plea bargain offered him (yeah, it involved him confessing a felony, but with minor consequences).

 However, the really bad part of this that has not been reported on as this degrading and embarrassing spectacle has proceeded is the hypocrisy involved here.  It is fine for someone like WaPo's Petula Dvorak to point out how much support his wife, Maureen, provided him in many ways in his many campaigns, before he dumped her under the bus.  But the part that nobody talks about, and basically has not since he was elected governor, is his past  as a Christian Right fanatic, not really a past given that he carried out a major reduction of womens' rights by sharply reducing abortion providing facilities in the state, even if his more fanatical AG, the now-defeated Cuccinelli, was pushing this more than him.  McDonnell is a pure creature and creation of the hypocritical Christian Right in Virginia.

His Masters degree came from a place that does not deserve to be called a "university," Pat Robertson's Regents University. Robertson is the son of former  VA Sen. Willis Robertson (D-VA), which gives him more VA roots than the late Jerry Falwell who founded the equally disreputable and academically embarrassing Liberty "University," which has shown what a joke it is by hiring McDonnell to lecture there since he ended his governorship.  Anyway, his Masters thesis at Regents was all about how women should obey their husbands or any other nearby male authority. I can imagine that his wife, Maureen, is laughing over this, although she is most certainly nothing to write home about as a decent human being, much less a wife of anybody.

So, there we have it, ultimate Christian Right hypocrisy.  This man oversaw massive shutdowns of abortion clinics in VA and many other egregious reductions of womens' rights as first AG and then as governor.  He played blowdry moderate image, but when in office he took a hard line and followed up on what his thesis said: put women in their place.  His violation and betrayal of his wife in the court of law, when he could have taken a low key plea bargain, is not only a disgusting display of a lack of husbandly and manly behavior, but a massive manifestation of Christian Right hypocrisy.

Barkley Rosser

Thursday, August 21, 2014

SCIOD 9: This Magazine of Untruth

"Political economy," observed Frederic Harrison in his 1872 review of Thomas Brassey's Work and Wages, "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 second reason which obscures the truth about industry is, that the facts about capital are almost never honestly disclosed.... 
The decade of the 1870s was an auspicious time for political economy. On the eve of the decade, John Stuart Mill recanted the orthodox dogma known as the wages-fund doctrine, which has a curious relationship to Say's Law. Dudley Dillard referred to Say's law of markets as "a corollary of the wages-fund doctrine in the context of the fourth proposition on capital." Mill's fourth proposition maintains that "demand for commodities is not demand for labour."

Perhaps Mill's dictum could be more clearly expressed as a positive, qualified statement rather than a negative proposition: it is the supply of capital (not the demand for commodities) that constitutes the demand for labor. Or, supply (of capital) creates its own demand (for labor). A cheap labor market is always full of employers. From this perspective there is no such thing as involuntary unemployment, only overpriced labor. That is what Harrison meant by "the bitter pedantry" that "usually assumes its facts, after it has rounded off dogmas to suit its clients ." British trade unionist George Howell wrote of the wages-fund doctrine in 1878:
Perhaps no single doctrine has been more persistently or mischievously urged by political economists against the claims of the working classes than the dogmatic assumption that there is a certain wage fund which constitutes a definite portion of the existing wealth of the country for the payment of wages, and that this amount will be wholly used for that purpose, and that not one penny more can be so used.
In Work and Wages, Thomas Brassey didn't reject the wages-fund doctrine. He did something far more lethal to the glib propaganda value of the dogma. He complicated it. Brassey was not a political economist. He was an industrialist, heir to an international railroad construction enterprise, started by his father, that was one of the largest employers in Britain at the time. He also inherited his father's vast accumulation of evidence on labor costs and their variation in response to different geographic, social, political and economic circumstances. From his analysis of this data, Brassey concluded that output per unit of wage cost was approximately equal, regardless of variations in the wage rate. Wages rates thus should be understood to incorporate differences in productivity of labor as well as fluctuations in supply and demand.

Conventional political economists were hardly unaware that there was a relationship between wages and the productivity of labor. It just wasn't central to their elaboration of the supposed wages-fund until Brassey's evidence proved too much to ignore. "With evidence like this before us," exclaimed Harrison in his review:
…we may well hesitate to accept the professorial dicta of so-called economists. They give us almost daily lectures based on the assumption that high wages inevitably imply dear goods and low profits…. And it is an axiom with some of these philosophers that every rise in wages is a fresh tax on British industry. Of course a rise in wages does not imply of necessity cheaper production; but it is, in a healthy state of trade, perfectly compatible with it. In point of fact economy in production has a progress far more steady, constant, and silent, than any advance in wages.
In his comprehensive critique of the wages-fund doctrine, American economist, General Francis Amasa Walker, cited the authoritative status of Brassey's evidence:
[B]y far the most important body of evidence on the varying efficiency of labor is contained in the treatise of Mr. Thomas Brassey, M.P., entitled Work and Wages, published in 1872. 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.... 
In turn, in what is "regarded to be the first modern economic textbook," Alfred Marshall credited Walker for "forcing constantly more and more attention to the fact that highly paid labour is generally efficient and therefore not dear labour…" Marshall judged that fact to be "more full of hope for the future of the human race than any other… [although it] will be found to exercise a very complicating influence on the theory of Distribution."

Under the weight of this complicating influence, the wages-fund doctrine retreated into the twilight of editorial boilerplate, old-school textbook orthodoxy and perpetual antiquarian controversy. Marginal utility theory stepped in -- gradually, very gradually -- to fill the void.

"In economics," Paul Samuelson once claimed, "it takes a theory to kill a theory; facts can only dent the theorist's hide." Perhaps. But perhaps the coup de grace can't be administered until the facts have given the old doctrine a thorough hiding.

On Glenn Hubbard’s Federal Taxes Being 18% of GDP

Dean Baker has some fun with Glenn Hubbard is Unhappy About the Budget Deficit. Dean notes:
Hubbard was the chief economic advisor to President George W. Bush when he pushed through his tax cuts in 2001. The tax cuts, along with the recession and the wars in Afghanistan and Iraq, pushed the budget from a surplus of 2.5 percent of GDP in 2000, to deficits of more than 3.5 percent of GDP in 2003 and 2004. While running large deficits was the right move for the economy in response to the recession created by the collapse of the stock bubble (although there were far better uses for the money than tax cuts to rich people and fighting unnecessary wars), there is more than a bit of inconsistency in Hubbard's apparent willingness to use deficits to boost the economy out of a recession in the last decade while at the same time disparaging President Obama's efforts to use deficits to lift the economy out of a far deeper hole.
This is a lot more to Dean’s rebuttal, but I want to lift one sentence from what Glenn wrote:
The still larger problem lies with Republicans who refuse to face facts. “Starve the beast” has been the mantra of conservatives since Ronald Reagan was president, a belief that, if taxes were low enough for long enough, rational Democrats would have no choice but to agree to bring federal spending down as well. Even though total federal revenue held level at around 18 percent of gross domestic product in recent decades, spending soared.
Glenn wants us to believe that spending is the problem – not a lack of tax revenues. But this last sentence does not square with the facts as our graph of the Federal tax revenue to GDP ratio from 1977 to 2013 shows. Yes, this ratio rose above 18 percent under President Carter. But then we got the Reagan tax cuts. OK, Clinton’s tax increase pushed this ratio near 20 percent by the time George W. Bush took office. And as Dean notes – Team Republican (Glenn being a member) decided to cut taxes again. Over the 2001 to 2013 period, this ratio has averaged only 16.3 percent. In defense of Republican politicians – how can they face the facts if their own economic advisors don’t present them?

Wednesday, August 20, 2014

Aspen Strategy Group Overstates Russia's Problems

In today's Washington Post, the usually sharp David Ignatius reports on closed discussions at the Aspen Strategy Group by "senior current and former officials, plus some think tank leaders and journalists" ("Crafting a policy for Russia").  Supposedly a bit more hawkish than the administration, this group is presented as a bipartisan group of wise people who really know what they are talking about as they craft policies for the US to deal with Russia.  Much of what Ignatius reports is sensible ("Don't give in to Putin, but don't give up on Russia" and that the US should "play what one former Cabinet official called 'the long game'" in the face of "Russia's humiliation after the crackup of the U.S.S.R.").

Nevertheless, a disturbing aspect of Ignatius's report on this meeting of supposedly Very Smart (and Serious) People is how out of touch with basic facts they apparently are, mouthing old cliches that are no longer true.  So this group heard (not reported who was handing this stuff out) that Russia faces a "demographic disaster: a shrinking population, a chronic health crisis that puts Russia between Tanzania and Angloa in male life expectancy, and a dearth of entrepreneurship..."

Sorry, but the demographic disaster  was an accurate story some years ago, but has come sharply to an end.  Population growth has been positive since 2009, with an extra three million added with the annexation of Crimea.  Male life expectancy hit a low in 1994 of just below 58 years, but it rose after that for a few years only to fall again nearly to 58 by 2005, finally turning around and steadily increasing since then to be about 64 years.  That level, and overall life expectancy of just over 70, are just about back to where they both were at their previous peak in 1986, the last year of positive economic growth prior to the collapse of the Soviet Union.  Male life expectancy in Tanzania is just about 60.

Certainly many things are not all that great in Russia.   Positive economic growth, now pretty much zero, has mostly been due to higher oil prices, with military exports really the only other major growth sector.  Corruption and many other things hold back the economy, quite aside from the impact of the economic sanctions that have been imposed by foreigners on Russia for Putin's unnecessary adventurism abroad.  But it must be recognized that Putin has succeeded in reviving favorable self-image in Russia, the land "humiliated" by the end of the USSR.

I do not know if this change in image is what lies behind the improving health and demographic situation (birth rate has also been rising), but it certainly serves no purpose for supposedly wise US VSPs to continue to believe out of date horror stories about what is going on there.  According to Ignatius these people were only debating about whether Russia's supposedly inevitable decline will be gradual or sudden. That they seem to be completely unconscious that at least the demographic part of this story is simply total garbage is not encouraging.  I would hope that those who are actually advising Obama rather than just bloviating in Aspen know the facts rather than the right wing think tank fantasies left over from the past.

Barkley Rosser

Tuesday, August 19, 2014

SCIOD 8: The Secret Basis of Glut

Even though it appeared "when the factory system was comparatively but little developed," Marx observed that Ure's work, "perfectly expresses the spirit of the factory, not only by its undisguised cynicism, but also by the naïveté with which it blurts out the stupid contradictions of the capitalist brain." The most glaring contradiction Marx pointed to involved the relationship between unionism and the pace of technological change. In the early pages of the book, Ure noted the "instructive warning to workmen to beware of strikes," posed by the invention of the dressing machine, which proved:
…how surely science, at the call of capital, will defeat every unjustifiable union which labourers may form… Were it not for unions, the vicissitudes of employment, and the substitution of automatic for hand work, would seldom be so abrupt as to distress the operative.
Yet in the third section, Ure asserted that:
[h]ad it not been for the violent collisions and interruptions resulting from erroneous views among the operatives, the factory system would have been developed still more rapidly and beneficially for all concerned than it has been…" 
Perhaps, though, the contradiction is not quite as stark as it appears. Maybe Ure is assuming that capitalists would introduce different, more benign machines if they could confidently rely on docile workers? In that case, though, the contradictions are only displaced from the nature of machines to equally naïve and cynical assumptions about the inherent benevolence of the masters and malevolence of the "hands" (as Ure frequently referred to workers).

The section in Capital immediately following Marx's critique of Ure examines "The theory of compensation as regards the workpeople displaced by machinery." One might expect to find there a critique of Say's Law – or rather of the maxim that eventually came to be known as Say's Law. Instead, Marx referred to the insistence of "James Mill, MacCulloch, Torrens, Senior, John Stuart Mill, and a whole series besides…"

The only mention of Jean-Baptiste Say appears in a footnote referring to "a disciple of Ricardo, in answer to the insipidities of J. B. Say…" It repays the effort to ferret out the anonymous pamphlet cited by Marx, "An Inquiry into those Principles Respecting the Nature of Demand," &c. The anonymous pamphleteer presented a comprehensive critique of Say's maxim in pages 14 to 33 and returned to that topic on page 72, comparing specialized labour to fixed capital, in the passage Marx cited:
The habits of the labourers, where division of labour has been carried very far, are applicable only to the particular line they have been used to; they are a sort of machines. Then, there is a long period of idleness, that is, of labour lost; of wealth cut off at its root. It is quite useless to repeat, like a parrot, that things have a tendency to find their level. We must look around us, and see that they cannot for a long time find a level: that when they we cannot but see, that they are unable to find their level for a long time; and that when they do, it will be a far lower level than they set out from.
In Theories of Surplus Value, Marx described the pamphlet as "one of the best of the polemical works of the decade," notwithstanding disparaging remarks about "the infinite narrow-mindedness of these fellows" when examining capital. There he addressed "Say’s earth-shaking discovery that “commodities can only be bought with commodities…" and again quoted the above passage regarding the effects of division of labour. A few paragraphs later, he remarked, "What the author writes about Say is very true." "The theory of compensation as regards the workpeople displaced by machinery" can be read as a veiled response specifically to Say's maxim. Marx's critique owes a great deal to the anonymous pamphleteer, whom he both praised and disparaged.

It is curious that Marx didn't take the opportunity to directly confront Say, particularly as his discussion of the pamphlet in Theories of Surplus Value bears directly on the issue of crises of overproduction. After quoting the author's observation that "glut is synonymous with high profits," Marx affirmed that this was, "indeed the secret basis of glut." A few paragraphs later, his summary response to the pamphlet's argument is a succinct expression of Marx's crisis theory:
Over-production, the credit system, etc., are means by which capitalist production seeks to break through its own barriers and to produce over and above its own limits. Capitalist production, on the one hand, has this driving force; on the other hand, it only tolerates production commensurate with the profitable employment of existing capital.
Bernice Shoul mentioned neither the anonymous pamphlet nor the section in Capital on the theory of compensation in her 1957 article, "Karl Marx and Say's Law."

Monday, August 18, 2014

Immigration analysis on job market "refuted" with red herring

Dear Bob Birrell and Carla Wilshire,

In her attempt to refute Bob Birrell's analysis, Carla Wilshire makes the following claim:
Birrell chooses to ignore the dynamic effects of the labour market. The assumption that there are only so many jobs to go around has been roundly rejected. Labour economists have long known the number of jobs is not fixed. According to Nobel Laureate Paul Krugman, this lump of labour fallacy “encourages fatalism” and “feeds protectionism”. The trouble with promoting such notions is that policy-makers stop thinking about ways to create jobs.
There are so many errors in that brief paragraph, it is hard to know where to begin. But let's start with Paul Krugman. Krugman has indeed criticized the lump-of-labor assumption but he has also criticized, as "equally fallacious," the counter assumption (often referred to as Say's Law), that demand for labour increases with its supply. In fact, Paul Krugman has spent far more time recently refuting Say's Law than he has the lump of labor.

The problem with the supposed refutation of the supposed lump-of-labour fallacy goes deeper than that, though. Ultimately the refutation is based on the same hidden assumption as the alleged "fallacy" -- what was known in classical political economy as the wages-fund doctrine. In short, the fallacy and its supposed refutation are simply two sides of a paradox that arises from the static nature of analysis, similar to Zeno's paradox of the arrow.

Wilshire uses the word "dynamic" incorrectly. Wilshire is making the mistake of assuming that the colloquial connotation of "dynamic" is the same as the technical one. This is not acceptable in the context of claims about economic theory (see John Maurice Clark's discussion of "The Relation between Statics and Dynamics" or Alfred Marshall's discussion in "Distribution and Exchange").

What she presumably means by "dynamic effects" are the 'long term' effects of economic growth. But "what labour economists have long known" about the number of jobs in a growing economy is itself based on another static analysis, not on a dynamic analysis. The assumptions of the latter static analysis may be more realistic to the extent that they are based on empirical observation but that doesn't make the analysis dynamic. Often, though, the refutation is not based on empirical observation, in which case it is pure, empty assertion. There is nothing "inevitable" about economic growth.

Ms. Wilshire may have an alibi for her misuse of dynamic in that economists often make the same error of referring to static analyses as "dynamic" just because they incorporate a few rudimentary moving parts ( for example, DSGE: "dynamic" stochastic general equilibrium models). This is like referring to an animated GIF file as a "full-length moving picture."

Of course, Bob Birrell will be quite aware that he didn't assume a "fixed amount of work" (which is not the same thing as "only so many jobs to go around"). If at time "t" there are 10 jobs and 11 workers and at time "t+1" there are 12 jobs and 14 workers, then the amount of work is clearly not fixed but the number of unemployed has doubled and the unemployment rate has increased from 9% to 14%. The allegation of a belief in a "fixed amount" of work here is clearly inapplicable.

Accusing one's opponent of committing a lump-of-labour fallacy is such a hackneyed, inadequate argument, that it immediately raises suspicions that the person making the claim has no substantive argument to make.

Yours sincerely,

Tom Walker, author of
"Why economists dislike a lump of labor" and
"The "lump-of-labor" case against work-sharing: populist fallacy or marginalist throwback?"

Sunday, August 17, 2014

Disperse Mobs with Radio Police Automaton!

Robots, again?

This time its a viral Youtube video by CGP Grey. A million and a half views in four days. For those who don't have the attention span to sit through a 15-minute video, the script is posted at CGPGrey and concludes:
This video isn't about how automation is bad -- rather that automation is inevitable. It's a tool to produce abundance for little effort. We need to start thinking now about what to do when large sections of the population are unemployable -- through no fault of their own. What to do in a future where, for most jobs, humans need not apply.

Joshua Gans at Digitopoly presents an inadequate counter-argument to that conclusion, based on static analysis and wishful thinking: "I have faith that if it is in the interests of both business and consumers that money go from the employed to unemployed, it will. It will happen." and:
If the worker owns the robot, the quality advantage accrues to them. But in terms of their willingness to pay, there is an important difference between the two. If the capitalist does not own the robot, they can employ the worker (with their robot) as they always have done and so will they will appropriate part of the quality advantage. By contrast, if the worker does not own the robot, the worker gets nothing.
As I've been arguing in the Supply Creates Its Own Demon series, the problem is much, much more complicated than that. It can't be solved by static economic analysis. To put it as simply as possible: machines don't have the fantastic generative powers that have been attributed to them.

What a machine can do is strictly limited by the properties of the materials that it works on and is powered by and by the physical properties incorporated in it by its designer. What dazzles observers is simply the disclosure of the physical properties of matter and energy and the ingenuity of human science and applied social organization in revealing and operating on those physical properties.

The machinery debate that has been going on for two and a half centuries is a diversion. The "demon" in this debate, the alleged automaton, is an illusion -- at worst a hoax -- that distracts from the scale of human intervention required make the automaton's motion appear autonomous. The more remotely human intervention can take place, the more effective is the illusion. The operator has an alibi.

It was not, after all, the sheep who enclosed the commons and evicted the tenants.

Elsewhere and Nowhere: Alibi and Utopia

Such is the strategic logic of the commodity which makes [use value] a satellite of and an alibi for [exchange value]. -- Jean Baudrillard, The Political Economy of the Sign.

As court and council gathered in the robing room after an acquittal... the judge said to the successful lawyer, "That was the most convincing alibi that I have ever had proved before me." 
"Thank you, sir", replied the lawyer. "it is particularly gratifying to hear you say that. I value your judgment most highly and I am pleased to find that in this case it coincides with mine. I chose that alibi as the best of three that the defendant had." -- "No Alibi," ABA Journal, March 1951.

...alongside the eighteenth-century emergence of the realistic, but fictional, narrative form later called the novel, the word alibi also entered into ordinary English discourse. Technically the legal plea of 'elsewhere,' culturally speaking, an alibi indicated the mounting of a realistic story narrated in a law court. (This initial, specific sense of alibi as a story told in court contrasts with its use since the beginning of the twentieth century, when it began also to refer to a story that keeps one out of court or to any form of excuse tale.) -- Jonathan Grossman, The Art of Alibi: English Law Courts and the Novel.

If the elasticity of substitution is not constant, what is crucial is what happens to the elasticity asymptotically as resource input goes to zero. In these cases the produced input is sufficiently substitutable for the natural resource that the decrease in supply of the natural resource can be compensated for by an increased supply of capital. Of the two cases, the Cobb-Douglas case is clearly the most interesting for there natural resources are essential in the sense that some input of the natural resource is required for production (the isoquants never do hit the axes). But a small input of natural resource can be compensated for by a sufficiently large input of capital, and whether that is feasible for the economy depends simply on the relative shares of the two. -- Joseph Stiglitz, "Neoclassical Analysis of Resource Economics." 

"...this is not the only force driving men to thievery. There is another that, as I see it, applies more specially to you Englishmen." 
"What is that?" said the Cardinal. 
"Your sheep", I said, "that commonly are so meek and eat so little; now, as I hear, they have become so greedy and fierce that they devour human beings themselves. They devastate and depopulate fields, houses and towns. For in whatever parts of the land sheep yield the finest and thus the most expensive wool, there the nobility and gentry, yes, and even a good many abbots -- holy men -- are not content with the old rents that the land yielded to their predecessors. Living in idleness and luxury without doing society any good no longer satisfies them; they have to do positive harm." -- Sir Thomas More, Utopia, Book 1.

An escapist fiction, Book 2 allows the negotiator of wool contracts an alibi for being "elsewhere" just as it affords England the luxury of being purified as myth. As Richard Marius points out in his biography of More, there was a distinct need for the writer of Utopia to have available just such an alibi, so much are the circumstances of Utopia's composition at odds with its idealistic pretensions: 
It has usually gone unnoticed that More's embassy on which he began writing Utopia was intended to increase commerce, especially in wool, and that while he penned these immortal lines, he was working hard to add to the wealth of those classes in English society whom Raphael castigates for their heartless greed.
At this stage in the composition of Utopia, the hedging off of the island from historical contingencies reflects More's own personal situation. -- John Freeman, "Discourse in More's Utopia: Alibi/Pretext/Postscript"

Another offender of this class [of overworked words] is "alibi." Alibi is a legal term, meaning a plea on the part of the accused that he was somewhere else when the alleged act was committed.. I imagine that somebody came out of a court house one day after hearing this term used, and since it was new to him, and he fancied the sound of it, he began making use of it himself in a pedantic sort of way whenever opportunity offered. Finally his friends and admirers took it up, and now eight people out of ten think it quite the thing to do, when denying any sort of innocent accusation, to say, "I can prove an alibi." But a mere denial is not an alibi. -- M. V. P. Yeaman, "Speech Degeneracy."

In a legal context to be elsewhere necessitates the supporting details and corroboration provided by a narrative account of being elsewhere. Here—reversing the cliché—it is deeds without words that are empty. Alibi is thus especially well suited for narrative, for there is always a story or relevant sequence of events that depicts being elsewhere. 
…narrative alibis draw on the special significance of an absence. Beyond the legal context, an alibi is thus something we can give whenever we are called to account for ourselves. When we speak of whether someone "has" an alibi or not, we implicitly allude to the importance that having a story, being able to tell the story of oneself, holds for modern identity (even if it is the possession of a kind of absence). 
An alibi is an unusual form of narrative precisely because it is generated by absence, and thus alibi is a small, well-defined instance of the philosophical concept of negativity. Though a negative concept, an alibi does real work; it functions in a system of legally binding processes and confers a status upon those who employ it rhetorically. An alibi is a speech act rendering the real act, the crime, impossible, at least for the accused. The narrative opposite of a confession, it exculpates rather than implicates. An alibi is an account of not being there. So, an alibi is a kind of anticonfessional narrative. -- Justin Weir, Leo Tolstoy and the Alibi of Narrative.

Anatomically homologous to the two largest bones found in the human finger, the pastern was famously mis-defined by Samuel Johnson in his dictionary as "the knee of a horse". When a lady asked Johnson how he came to do so, he gave the much-quoted reply: "Ignorance, madam, pure ignorance." -- Wikipedia, "Pastern."

Friday, August 15, 2014

Everyone Should Have The Right To Marry Whom They Wish To Marry.

In 1975 in Helsinki a Cold War negotiation led to the Helsinki Accords, much derided at the time by various parties in various nations, but nevertheless ultimately officially signed on to by all the major parties of that now distant era, including the USA and the then existing USSR.  Many did not take it seriously, including individuals in the US State Department as late as 1986, when at the Reykyavik, Iceland summit those who were legally engaged as were me and my now wife, Marina Rostislavna Vcherashnaya Rosser (not to be imprecise here, although there are alternative transliterations of her last name from the Cyrillic) were not supported by the US negotiaters, despite a personal promise made to me at the time by then Deputy Secretary of State, John Whitehead.
      This would lead to me not too long after having a showdown with Thomas Simon, the Assistant Secretary for European Affairs, over this matter, after Whitehead's promise in front of a large group of people over this matter, with me holding a press conference in front of the State Department in which I publicly denounced both the US and USSR governments for conspiring to keep people legally engaged to marry from marrying, and my wife Marina and I had become legally engaged to marry on November 13, 1984 at 3 PM according to the Soviet Ministry of Marriages, "ZAGS."  I crucially had a piece of paper documenting this, which did not happen because the Soviet government refused to let me have a visa to re-enter the country to marry her at that time, after having received the official permission to do so in writing at that time from ZAGS.  We were unable to marry at the designated time, and my then legally designated fianceee, Marina, was subsequentlny fired from her job as a Senior Economist at the Institute for World Economy and International Relations (aka IMEMO).  Only on April 4, 1987 would she be allowed to go to the US, with us marrying finally on May 24, 1987. 
      We were the first such marriage to be allowed after much personal suffering and international protest. We were the first to be approved,with the US State Department finally supporting us after protests by me and others. Our case rewrote the rules, although it would still take lovers to provide written evidence of their having been blocked from legally getting married abroad to receive US official approval and support officially as well as in Helsinki in 1975.  Needless to say, we fully support the extension of this right to same sex couples, which the most recent court rulings appear to be about to allow such marriages to take place in Virginia. We look forward to celebrating with our friends who will be marrying soon here.

Barkley Rosser

Thursday, August 14, 2014

Common Pools and Wage Funds -- A Reply to Simon Wren-Lewis

Simon Wren-Lewis raises an extremely important issue regarding Inequality and the common pool problem: "there is a clear connection between the rise in incomes at the very top and lower real wages for everyone else."

Wren-Lewis explains the common-pool problem as being "about how the impact of just one fisherman extracting more fish on the amount of fish in the lake is small, but if there are lots of fishermen doing the same we have a problem." This needs a bit more explanation. The problem has to do with the difficulty of excluding fishermen (or limiting the catch of any particular fisherman) and with the limitation on the amount of fish in the lake. The essential reference on this is Elinor Ostrom's discussion of common-pool resources.

Two caveats: difficult does not mean impossible and limited doesn't mean non-renewable or fixed in quantity.

When it comes to income, it is easy to get lost in a money illusion. Yes, incomes are measured and paid in money amounts. But what they provide are rights of access to material things -- goods and services, "the power of purchasing; a certain command over all the labour, or over all the produce of labour, which is then in the market" (Smith).

Nominally, the amount of income can increase without limit. But in real terms, increases in income are constrained by the amount of goods and services available in the market. That last qualification, the amount of goods and services available in the market, has led to a prodigious amount of confusion in economic thought. The classical wages-fund doctrine assumed that the amount of wage goods available at any given time was fixed. Accordingly, if one group of workers formed a union to enforce a wage increase, their gain would be at the expense of other workers.

The amount of goods and services in the market at any given time is not fixed. But the key to the confusion is not the stipulated quantity but the imaginary temporal dimension of a "given time." Zeno's paradox of the arrow involves the same logical conundrum of dividing time into points.

In 1869, W. T. Thornton argued persuasively that the wages-fund doctrine was erroneous and John Stuart Mill concurred and "recanted" the wages-fund doctrine. Exactly what Mill recanted may be in dispute but that is beside the point -- the classical doctrine was consigned to the dustbin of history of political economy. Or so we are told...

By virtue of one of the most miraculous metamorphoses imaginable, the old wages-fund doctrine, used by polemicists as a club against unions demanding higher wages was transformed into the theory of the lump-of-labor, allegedly assumed by trade unionists, whose fallacy was used by economists as a club against unions demanding higher wages. "Heads I win" seamlessly became "tails you lose."

But, getting back to Wren-Lewis, isn't his contention that higher executive pay "has to come from somewhere [that is, from the other 99%]" a reversion to the wages-fund -- or lump of labor -- doctrine/fallacy? No, it isn't. But this requires more explanation. There are not one, but two illusions at work here. One is the money illusion. The other is the point-in-time illusion. Combined, these two illusions constitute a powerful temptation to cognitive dissonance.

To dispel those two illusions, let's first go back to Adam Smith's definition of wealth: "a certain command over all the labour, or over all the produce of labour, which is then in the market." 'Labor' appears to refer to a definite quantity and 'then' appears to refer to a definite point in time. Labor is not, however, a discrete distinction and a "point" in time is strictly conceptual. The amount of work to be done at any point in time is not only "not fixed" it is also not "an amount."

Just as with Zeno's arrow, no labor is performed in a "point in time." Labor can only be performed over a duration, be it an hour, a day, a week, a year or a lifetime. Furthermore, the amount of labor performed by one person during any interval of time is variable. It is not infinitely variable but it is flexible within certain definite limits. The expression labor-power indicates this characteristic of labor as potentially equivalent to a given quantity of production.

So, we can now amend Smith's definition as follows: income represents command over a portion of the labor-power in the market during a given extension of time. This definition could be further refined but the point that I want to get to is that it is the labor-power that constitutes the common-pool resource. The amount of goods and services that corresponds to this amount of labor-power is not fixed -- but neither is it "infinitely" variable.

The extent to which real GDP may vary depends on people's capacity to work, on their motivation and on their opportunities for employment, all of which may be affected by the distribution of income. In other words, great inequalities of income may well diminish the common pool of goods and services -- and ultimately of labor-power itself -- from which incomes are derived.

That is, executive pay may be taking a bigger slice of a pie that is smaller than it would be if executives weren't taking such a big slice of it. Or to put it bluntly, they may be being richly rewarded for a negative contribution to social production that results from their excessive incomes!

There is much more that can said (and has been said) about both the implications and the background of the analysis of labor-power as a common-pool resource. I will pause for now to see how the conversation unfolds.

SCIOD 7: The Frankenstein Factory

Andrew Ure's The Philosophy of Manufactures owes a considerable debt to Tufnell's Royal Commission report. The books 150-page third section, "Moral Economy of the Factory System" relies almost entirely on evidence from the Tufnell report. Ure shared Tufnell's antipathy toward trade unions and makes no secret of his admiration for this "masterly report" by a "most able and candid observer." So fond was Ure of Tufnell's argument that he adopted some of the text, word for word, without quotation marks or attribution.

Ure was trained as a physician but practiced medicine for only three years until he was appointed professor of chemistry and philosophy at Glasgow University. His writing on chemistry, displayed "a fatal facility… for discovering exact mathematical laws in a mass of inaccurate measurements."

In November of 1818, in collaboration with Dr. Jeffray, a professor of anatomy, Ure performed a series of galvanic experiments on the corpse of a freshly-executed criminal named Clydesdale. These experiments took place in the same year that Mary Shelley's Frankenstein was published. Speculation that Ure was the model for Victor Frankenstein, however, would be anachronistic since the novel was published in March, eight months before the experiments took place and even longer before they were publicized. Nevertheless, Ure's account of his experiments is ghastly and adds a further insight into his eagerness to leap to astonishing (and self-aggrandizing) conclusions based on flimsy evidence:
The subject of these experiments was a middle-sized, athletic, and extremely muscular man, about thirty years of age. He was suspended from the gallows nearly an hour, and made no convulsive struggle after he dropped; while a thief, executed along with him, was violently agitated for a considerable time. He was brought to the anatomical theatre of our university in about ten minutes after he was cut down. His face had a perfectly natural aspect, being neither livid nor tumefied; and there was no dislocation of his neck.

In the judgment of many scientific gentlemen who witnessed the scene, this respiratory experiment was perhaps the most striking ever made with a philosophical apparatus. Let it also be remembered, that for full half an hour before this period, the body had been well nigh drained of its blood, and the spinal marrow severely lacerated. No pulsation could be perceived meanwhile at the heart or wrist; but it may be supposed, that but for the evacuation of the blood,—the essential stimulus of that organ,—this phenomenon might also have occurred.

…by running the wire in my hand along the edges of the last trough, from the 220th to the 270th pair of plates: thus fifty shocks, each greater than the preceding one, were given in two seconds. Every muscle in his countenance was simultaneously thrown into fearful action; rage, horror, despair, anguish, and ghastly smiles, united their hideous expression in the murderer's face, surpassing far the wildest representations of a Fuseli or a Kean. At this period several of the spectators were forced to leave the apartment from terror or sickness, and one gentleman fainted.

In deliberating on the above galvanic phenomena, we are almost willing to imagine, that if, without cutting into and wounding the spinal marrow and blood-vessels in the neck, the pulmonary organs had been set a-playing at first, (as I proposed), by electrifying the phrenic nerve, (which may be done without any dangerous incision), there is a probability that life might have been restored. This event, however little desirable with a murderer, and perhaps contrary to law, would yet have been pardonable in one instance, as it would have been highly honourable and useful to science.
What makes this ghoulish, galvanizing episode relevant to Ure's Philosophy of Manufacture is the overarching use in that book of the body as a metaphor for the factory. It is not just any image of a body – an automaton body. Ure described manufacturing as having "three principles of action, or three organic systems: the mechanical, the moral and the commercial, which may not unaptly be compared to the muscular, the nervous, and the sanguiferous systems of an animal." Predictably, the mechanical system corresponds with the interests of the workers and should always be subordinated to the moral constitution," which is to say the factory owner. "The principle of the factory system this is, to substitute mechanical science for hand skill," with the eventual objective of eliminating skilled labor and replacing it with "mere overlookers of machines."

Ure's ideal, then is for the factory system to perform as a "vast automaton, composed of various mechanical and intellectual organs, acting in uninterrupted concert for the production of a common object, all of them being subordinated to a self-regulated moving force." Ure preceded this image of the automaton factory with three pages of discussion of automatons, including the "chess-player of M. Maelzel" which "imitates very remarkably a living being, endowed with all the resources of intelligence, for executing the combinations of profound study." Ure appears to have been unaware that the chess-player had been frequently suspected of being a hoax. His next paragraph, though, mentions a harpsichord automaton that "was found to contain an infant performer."

Although he mocked Ure as the "Pindar of the automatic factory," Karl Marx borrowed liberally from his imagery, only reversing its political polarity. The following passage from Capital is unmistakably a critical tribute to the central metaphors of Ure's vision:
An organised system of machines, to which motion is communicated by the transmitting mechanism from a central automaton, is the most developed form of production by machinery. Here we have, in the place of the isolated machine, a mechanical monster whose body fills whole factories, and whose demon power, at first veiled under the slow and measured motions of his giant limbs, at length breaks out into the fast and furious whirl of his countless working organs [emphasis added].