Middle-Sized Facts vs. IS-LMist Fundamentalism

"So I don't care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you. What you should ask is whether that approach has proved useful -- and whether the critics have something better to offer." -- Paul Krugman, "Unreal Keynesians"

The issue, of course, is not whether 'the master' would have approved of the IS-LM gadget but whether it represents an analytical advance or a regression from the insights that Keynes achieved. In a 1980 "explanation," Hicks conceded that "as time has gone on, I have myself become increasingly dissatisfied with it." In a commentary on Hicks's explanation, though, G.L.S. Shackle was less ambivalent. I have selected and re-arranged passages from Shackle's commentary to highlight his central point -- that uncertainty and equilibrium are fundamentally incompatible concepts.

The one big thing in Keynes' ultimate conception is our unknowledge of what will create itself in time-to-come. "We simply do not know." The author of A Treatise on Probability expressly rejects the notion that probability can turn this unknowledge into its opposite. When we accept this view, the possibility of involuntary unemployment becomes self-evident. 

Sir John Hicks' paper was the first presentation of IS-LM and has been for forty and more years the most famous and the most influential interpretation of Keynes. Central and essential to its argument is a notion of equilibrium. 

Sir John still does not seem to me to acknowledge the essential point: the elemental core of Keynes' conception of economic society is uncertain expectation, and uncertain expectation is wholly incompatible and in conflict with the notion of equilibrium. 

In the literature of economics the word equilibrium covers a multitude of ideas and of vacuous substitutes for thought. Its pervasive presence and the ascendancy its serious meanings have exercised show plainly that it "does something" for the economic theoretician. What does it do? It enables him to exhibit the economic world as determinate, explicable, calculable, and even predictable. Equilibrium is orderliness, harmony, the advancement of one's own interest by serving that of others. Equilibrium is interactive rationality, the recognition that society is an organism. Above all, it is the necessary condition, the basis and sanction of proof. Pride in proof is legitimate. Proof is certainty, an end to debate, and it is more, in the scale of values and sensibilities of many of us. Proof is beauty. If economic theory is to validate its claim to be a deductive system, a science, then the equilibrium idea is indispensable. But proof can exist only in a closed world. It depends upon "givens." If we are not supplied with "givens," and if we are not defended from things not given, of which we were not told, things which can blow in on us in the cold draught from time-to-come, there is no proving things.

Shackle doesn't go far enough. Well, he probably goes far enough in outlining the incompatibility of the notion of equilibrium with the conception of uncertain expectations. But I think it is possible to go a further step in comprehending the incompatibility of the notion of equilibrium with itself. That is to say, the essential incongruity of the notion of equilibrium. 

In an appendix to Significance and Basic Postulates of Economic Theory, T.W. Hutchison admonished, "It is high time to put these theories [laissez faire and equilibrium doctrines] firmly back in their place as Utopian constructions." He cited S. Bauer's 1931 article, "Origine utopique et métaphorique de la théorie du “laissez faire” et de l’équilibre naturel."

Prominent in Bauer's discussion of the origins of the notions of laissez faire and equilibrium is the role of Baltasar Gracian's Oráculo Manual -- which was translated into French by Amelot de la Houssaie in 1684 -- in popularizing both the notion and the term, laissez faire. Pierre le Pesant Boisguilbert is credited with introducing the term into political economic thought in a book published in 1707. Below is the maxim extolling the art of leaving things alone:

Where this story of equilibrium starts to get convoluted is in the Spanish Baroque's philosophical tradition of radical skepticism that Gracian exemplified. In the introduction to his English translation of Gracian's Pocket Oracle, Jeremy Robbins describes the "world of deception and illusion" central to Baroque thought:

Gracián posits a world of deception and illusion, in which appearances predominate and malice and cunning are omnipresent. Hence the distrust, pessimism and misanthropy that characterize his world-view. The key concept here is deceit (engaño): this covers, for Gracián, not simply the deception of one individual by another, but our self-deception as to the true nature and value of the world, and hence our deception by the world. It is a term at once moral and epistemological: to fail to know the world for what it is condemns us to moral error and to failure. Because of our tendency to accept appearances and to follow our desires, passions and emotions, we are mired in a world of deceit. There is consequently an urgent need for disillusionment (desengaño), the other key concept of the Spanish Baroque, For Gracián and his contemporaries, disillusionment means the realization of the true worth of things, seeing them as they really are: in essence, that this world and all within it is worthless. For many writers, this means explicitly viewing things not from a human or worldly perspective, but from the perspective of eternity, on the grounds that the here and now, being transient, amounts to mere appearance, true reality being what awaits us after death.

Robbins is the author of an introduction to seventeenth century Spanish literature titled The Challenges of Uncertainty, in which he argues that Spanish literature, "creatively responded to the unprecedented sense of uncertainty fostered by developments across Europe... it was above all this scepticism which led Spaniards to employ literature and art to question the boundaries of reality and illusion." 

Something weird is going on here. An aesthetic response to uncertainty about the bounds of reality and illusion has been adapted and transformed into a fundamental assumption about the nature of the the world. Uncertainty has been overcome by... an imaginary Utopia,

In "The Quest for Ignorance or the Reasonable Limits of Skepticism" Stephen Pepper argued that "Utter skepticism -- a skepticism void of all knowledge -- could not know itself and stands refuted in its very utterance." There are limits to what we cannot know. The Utopia of equilibrium is not simply incompatible with uncertainty -- it is an inevitable symptom of unreasonable uncertainty. Pepper asked, "How little can we know? What is the maximum of a reasonable unbelief?" His answer relied on the acknowledgement, first, of what he called "middle-sized facts":

These middle-sized facts are the matrix of all knowing. We are so immersed in them all the day long that we ordinarily miss their significance. The common man does not think about them, because he is moving among them; and the specialist does not think about them, because he has made assumptions that raise him above them. They get left out in most discussions of knowledge and fact. But they constitute the lowest limit of skepticism.

Is the Economic System Self-Adjusting?

"Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility." -- Paul Krugman, June 2, 2013

JOHN MAYNARD KEYNES, from a 1934 BBC radio address*

I was asked recently to take part in a discussion among English economists on the problem of poverty in the midst of potential plenty, which none of us can deny is the outstanding conundrum of today. We all agreed that, whatever the best remedy may be, we must reject all those alleged remedies that consist, in effect, in getting rid of the plenty. It may be true, for various reasons, that as the potential plenty increases, the problem of getting the fruits of it distributed to the great body of consumers will present increasing difficulties. But it is to the analysis and solution of these difficulties that we must direct our minds. To seek an escape by making the productive machine less productive must be wrong. I often find myself in favor of measures to restrict output as a temporary palliative or to meet an emergency. But the temper of mind that turns too easily to restriction is dangerous, for it has nothing useful to contribute to the permanent solution. But this is another way of saying that we must not regard the conditions of supply -— that is to say, our facilities to produce -— as being the fundamental source of our troubles. And, if this is agreed, it seems to follow that it is the conditions of demand that our diagnosis must search and probe for the explanation.

Up to this point of the argument, as I have said, we were all in substantial agreement. Each one of us was ready to find the major part of our explanation in some factor that relates to the conditions of demand. But, though we all started out in the same direction, we soon parted company into two main groups. What made the cleavage that thus divided us?

On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, and interrupted by time-lags, outside interference and mistakes. One adherent of this school of thought laid stress on the increasing difficulty of rapid self-adjustment to change in an environment where population and markets are no longer expanding rapidly, Another stressed the growing tendency for outside interference to hinder the processes of self-adjustment, while a third stressed the effect of business mistakes under the influence of the uncertainty and the false expectations caused by the faults of post-war monetary systems. These economists did not, of course, believe that the system is automatic or immediately self-adjusting, but they did maintain that it has an inherent tendency towards self-adjustment, if it is not interfered with, and if the action of change and chance is not too rapid.

Those on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting. They believed that the failure of effective demand to reach the full potentialities of supply, in spite of human psychological demand being immensely far from satisfied for the vast majority of individuals, is due to much more fundamental causes. One of them stressed the great inequality of incomes, which causes a separation between the power to consume and the desire to consume. Another believed that the great resources at the disposal of the entrepreneur are a chronic cause of his setting up plant capable of producing more than the limited resources of the consumer can absorb. A third, not disagreeing with these two, demanded some method of increasing consumer power so as to overcome the difficulties they pointed out.

The gulf between these two schools of thought is deeper, I believe, than most of those on either side of it realize. On which side does the essential truth lie?

The strength of the self-adjusting school depends on its having behind it almost the whole body of organized economic thinking and doctrine of the last hundred years. This is a formidable power. It is the product of acute minds and has persuaded and convinced the great majority of the intelligent and disinterested persons who have studied it. It has vast prestige and a more far-reaching influence than is obvious. For it lies behind the education and the habitual modes of thought, not only of economists but of bankers and business men and civil servants and politicians of all parties. The essential elements in it are fervently accepted by Marxists. Indeed, Marxism is a highly plausible inference from Ricardian economics that capitalistic individualism cannot possibly work in practice. So much so, that, if Ricardian economics were to fall, an essential prop to the intellectual foundations of Marxism would fall with it.

Thus, if the heretics on the other side of the gulf are to demolish the forces of nineteenth-century orthodoxy — and I include Marxism in orthodoxy equally with laissez-faire, these two being the nineteenth-century twins of Say and Ricardo—they must attack them in their citadel. No successful attack has yet been made. The heretics of today are the descendants of a long line of heretics who, overwhelmed but never extinguished, have survived as isolated groups of cranks. They are deeply dissatisfied. They believe that common observation is enough to show that facts do not conform to the orthodox reasoning. They propose remedies prompted by instinct, by flair, by practical good sense, by experience of the world — half-right, most of them, and half-wrong. Contemporary discontents have given them a volume of popular support and an opportunity for propagating their ideas such as they have not had for several generations. But they have made no impression on the citadel. Indeed, many of them themselves accept the orthodox premises; and it is only because their flair is stronger than their logic that they do not accept its conclusions,

Now I range myself with the heretics. I believe their flair and their instinct move them towards the right conclusion. But I was brought up in the citadel and I recognize its power and might. A large part of the established body of economic doctrine I cannot but accept as broadly correct. I do not doubt it. For me, therefore, it is impossible to rest satisfied until I can put my finger on the flaw in the part of the orthodox reasoning that leads to the conclusions that for various reasons seem to me to be inacceptable. I believe that I am on my way to do so. There is, I am convinced, a fatal flaw in that part of the orthodox reasoning that deals with the theory of what determines the level of effective demand and the volume of aggregate employment; the flaw being largely due to the failure of the classical doctrine to develop a satisfactory and realistic theory of the rate of interest.

Put very briefly, the point is something like this. Any individual, if be finds himself with a certain income, will, according to his habits, his tastes and his motives towards prudence, spend a portion of it on consumption and the rest he will save. If his income increases, he will almost certainly consume more than before, but it is highly probable that he will also save more. That is to say, he will not increase his consumption by the full amount of the increase in his income. Thus if a given national income is less equally divided, or if the national income increases so that individual incomes are greater than before, the gap between total incomes and the total expenditure on consumption is likely to widen. But incomes can be generated only by producing goods for consumption or by producing goods for use as capital. Thus the gap between total incomes and expenditure on consumption cannot be greater than the amount of new capital that it is thought worth while to produce. Consequently, our habit of withholding from consumption an increasing sum as our incomes increase means that it is impossible for our incomes to increase unless either we change our habits so as to consume more or the business world calculates that it is worth while to produce more capital goods. For, failing both these alternatives, the increased employment and output, by which alone increased incomes can be generated, will prove unprofitable and will not persist.

Now the school that believes in self-adjustment is, in fact, assuming that the rate of interest adjusts itself more or less automatically, so as to encourage, just the right amount of production of capital goods to keep our incomes at the maximum level that our energies and our organization and our knowledge of how to produce efficiently are capable of providing. This is, however, pure assumption. There is no theoretical reason for believing it to be true. A very moderate amount of observation of the facts, unclouded by preconceptions, is sufficient to show that they do not bear it out. Those, standing on my side of the gulf, whom I have ventured to describe as half-right and half-wrong, have perceived this; and they conclude that the only remedy is for us to change the distribution of wealth and modify our habits in such a way as to increase our propensity to spend our incomes on current consumption. I agree with them in thinking that this would be a remedy. But I disagree with them when they go further and argue that it is the only remedy. For there is an alternative, namely, to increase the output of capital goods by reducing the rate of interest and in other ways.

When the rate of interest has fallen to a very low figure and has remained there sufficiently long to show that there is no further capital construction worth doing even at that low rate, then I should agree that the facts point to the necessity of drastic social changes directed towards increasing consumption. For it would be clear that we already had as great a stock of capital as we could usefully employ.

Even as things are, there is a strong presumption that a greater equality of incomes would lead to increased employment and greater aggregate income. But hitherto the rate of interest has been too high to allow us to have all the capital goods, particularly houses, that would be useful to us. Thus, at present, it is important to maintain a careful balance between stimulating consumption and stimulating investment. Economic welfare and social well-being will be increased in the long run by a policy that tends to make capital goods so abundant that the reward that can be gained from owning them falls to so modest a figure as to be no longer a serious burden on anyone. The right course is to get rid of the scarcity of capital goods —- which will rid us at the same time of most of the evils of capitalism -— while also moving in the direction of increasing the share of income failing to those whose economic welfare will gain most by their having the chance to consume more.

None of this, however, will happen by itself or of its own accord. The system is not self-adjusting, and, without purposive direction, it is incapable of translating our actual poverty into our potential plenty.

If the basic system of thought on which the orthodox school relies is in its essentials unassailable, then there is no escape from their broad conclusions, namely, that, while there are increasingly perplexing problems and plenty of opportunities to make disastrous mistakes, yet nevertheless we must keep our heads and depend on the ultimate soundness of the traditional teaching —- the proposals of the heretics, however plausible and even advantageous in the short run, being essentially superficial and ultimately dangerous. Only if they are successfully attacked in the citadel can we reasonably ask them to look at the problem in a radically new way.

Meanwhile, I hope we shall await, with what patience we can command, a successful outcome of the great activity of thought among economists today —- a fever of activity such as has not been known for a century. We are, in my very confident belief —- a belief, I fear, shared by few, either on the right or on the left —- at one of those uncommon junctures of human affairs where we can be saved by the solution of an intellectual problem, and in no other way. If we know the whole truth already, we shall not succeed indefinitely in avoiding a clash of human passions seeking an escape from the intolerable. But I have a better hope.

*Transcribed from the reprint in the Nebraska Journal of Economics,  Volume 2, No. 2, Autumn 1963, pp. 11-15 of the article originally published as "A Self-Adjusting Economic System?" Keynes, J. M. New Republic. 2/20/35, Vol. 82 Issue 1055, pp. 35-37.

What is a "Thought Experiment"?

This is a thought experiment.

Adam Davidson NYT Magazine Argument Clinic: Lumps of Straw

Correcting "Debunking the Myth of the Job-Stealing Immigrant" by Adam Davidson:

And yet the economic benefits of immigration may be the ­most ­settled fact in economics. A recent University of Chicago poll of leading economists could not find a single one* who rejected the proposition.... Rationally speaking, we should take in far more immigrants than we currently do. 

So why don’t we open up? The chief logical mistake we make attribute to our opponents is something called the Lump of Labor Straw Fallacy: the erroneous notion well-worn straw man that [they think] there is only so much work to be done and that no one can get a job without taking one from someone else. It’s an understandable unmitigated   assumption red herring. After all, with other types of market transactions argument, when the supply goes we make something up, the price falls it's true. If there were suddenly a whole lot more oranges, we’d expect the price of oranges to fall or the number of oranges that went uneaten to surge. If Adam Davidson was an orange, we'd expect stale boilerplate canards to be high in vitamin C.

I guess that settles it. More leading economists smoke Camels than any other cigarette. The logic is impeccable:

1. Put your argument here.
2. Replace with a lump of straw.
3. Knock down straw.
4. Q.E.D. your argument is wrong.
5. My argument is right.
6. Economists agree.
7. Therefore, it's a fact!
8. Publish findings in New York Times Magazine.

* Four is "not a single one"? Well, I suppose technically... Or perhaps Davidson meant those who rejected the proposition were married? Several of the "uncertain" economists left comments indicating the question was too vague to answer but suggesting disagreement if the question was clearer. The same number of economists, four (or "not a single one"?), disagreed with question B, that "many low-skilled American workers would be substantially worse off..."

S.H.A.M.E. on Adam Davidson.

Simple Models

Take a very simple example. Labour is the only input, there's a constant returns technology, and labour produces one apple per hour. 

Start at full employment, where everyone works 40 hours per week, and nobody wants to work any more than 40 hours. ...

The first thing I notice about such simple models is that in such a world, people would have no need of "simple models" to help them understand what is going on. In short, the "simple model" thought experiment has no cognitive dimension.

The End.

(Unless it's an economist trying to sound like a physicist) 

The Education of Economists: plus ça change, plus c'est la même chose

What’s Wrong with the Economy—and with Economics?
VI. 2:30–4:00 pm: The Education of Economists
Professor Jefferson Cowie, Cornell University
Jeff Madrick, Century Foundation, New York, Editor of ‘Challenge’ Magazine

If Sandwichman was on that panel tomorrow afternoon, he would share with the audience two accounts of the education of economists, one by Larry Summers from a few weeks ago and one by John Kenneth Galbraith from 1975. All that appears to have changed from the 1930s to the 1960s was that rejection of the Luddite (etc.) fallacy was substituted for acceptance of Say's Law as the test of respectability and the 'crackpots' who didn't go along were replaced by 'a bunch of goofballs.'

First, Galbraith:

Until Keynes, Say's Law had ruled in economics for more than a century. And the rule was no casual thing; to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots. Until late in the '30s no candidate for a Ph.D. at a major American university who spoke seriously of a shortage of purchasing power as a cause of depression could be passed. He was a man who saw only the surface of things, was unworthy of the company of scholars. Say's Law stands as the most distinguished example of the stability of economic ideas, including when they are wrong. 

Summers:

 ...when I was an undergraduate at MIT in the 1960s there as a whole round of concern about this -- will automation displace all the employment? And what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out, and if people got more productive they'd be richer and they'd spend and maybe we needed some transition assistance, but that it was all basically going to be okay. That was what I was taught. That's what Bob Solow thought; he was a hero and the other people were all a bunch of a goofballs was kind of what I learned. (Laughter) 

I actually believed that for many years and actually repeated it often.

Today it's much simpler. The dogma is so deeply embedded in the models and their microfoundations it doesn't have to be explicitly accepted or even acknowledged..The goofballs and crackpots are called "heterodox."

Say's Law and the Secret Police

In Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World, Jeff Madrick ranked Say's Law (and austerity economics) as Bad Idea #2.  How can that be when the erstwhile "law" reputedly sank without trace after Keynes demolished it in the 1930s? In his 1975 book, Money: Whence It Came, Where It Went, John Kenneth Galbraith mused,

…on two things Keynes was immediately influential. Say's Law sank without trace. There could, it was henceforth agreed, be oversaving. And there could, as its counterpart, be a shortage of effective demand for what was being produced. And the notion that the economy could find its equilibrium with unemployment — a thought admirably reinforced by the everyday evidence of the '30s — was also almost immediately influential.

It turns out that Bad Idea #2 didn't sink without trace after all! It went underground -- which was easy to do since the argument had always been a shape-shifter and master of disguise. Operating clandestinely, the Say's Law secret police are beyond and above the rule of law.

In truth, Say's Law wasn't actually Say's. It was a widely held anti-mercantilist notion that was subsequently attributed to Say to lend it panache. Inklings of the idea can be found long before Say in Henri Martyn's 1701 Considerations on the East India Trade. My own candidate for canonical statement from the early industrial period would be Dorning Rasbotham's 1780 pamphlet, "Thoughts on the Use of Machines in the Cotton Manufacture," written in response to anti-factory riots at Bolton, England the previous year.

Squire Rasbotham formulated his dictum succinctly as "a cheap market will always be full of customers." Significantly, the Lancashire magistrate prefaced his truism with a rebuke to that unidentified rabble who falsely believed that there was only a certain quantity of labour to be performed.

These two tracks of the argument were crucial to the disguise. If one's brash claim about the automatic inevitability of effective demand is shown to be theoretically untenable and empirically unfounded, one can deftly switch to the other track of scorning an opponent's silly assumption that there is "only a fixed amount of work to be done." Say's Law "sank without trace" only if one overlooks its not-a-fixed-amount-of-work doppelganger.

Or one could get confounded by the sheer proliferation of aliases: Malthusian fallacy, mercantilist fallacy, Luddite fallacy, fixed work-fund, lump of labor, lump of work and make-work fallacy are the more common negative renderings. Positively, the principle has been defined as supply creates its own demand, technology creates more jobs than it destroys and the impossibility of a general glut. Marx encountered (and dissected) "the theory of compensation as regards the workpeople displaced by machinery."  William Stanley Jevons elaborated the cheerful principle thusly:

As a rule, new modes of economy will lead to an increase of consumption according to a principle recognised in many parallel instances. The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened. Often the very labourers whose labour is saved find their more efficient labour more demanded than before.

In his review of Seven Bad Ideas, Paul Krugman disputed Madrick's claim that Say's Law was a staple of mainstream economics,

No. 2 on Madrick’s bad idea list is Say’s Law, which states that savings are automatically invested, so that there cannot be an overall shortfall in demand. A further implication of Say’s Law is that government stimulus can never do any good, because deficit spending by the public sector will always crowd out an equal amount of private spending. 

But is this “mainstream economics”? ... Madrick is able to claim that Say’s Law is pervasive in mainstream economics only by lumping it together with a number of other concepts that, correct or not, are actually quite different.

Was "lumping" a Freudian slip? In the late 1990s, Krugman castigated William Greider's One World, Ready or Not, characterizing Greider as an "accidental theorist" and accusing him of committing the "old misunderstanding... sometimes referred to as the 'lump of labor' fallacy":

The title essay in this collection was an effort to take on an old misunderstanding that has lately experienced a revival of popularity: the idea (sometimes referred to as the “lump of labor” fallacy) that there is only a limited amount of work to be done in the world, and that as productivity rises there is therefore a reduction in the number of jobs available.... It is hard to explain that this involves a fallacy of composition, that the effect of a productivity increase in a given industry on the number of jobs in that industry is very different from the effect of a productivity increase in the economy as a whole on the total number of jobs. In the essay I tried to find a painless way of making that point—and along the way to give readers some idea of what it really means to think about economics, what economic theory really is. 

As hard as it might be to explain that the idea involves a fallacy of composition, it would have been much harder to prove that Greider actually committed the fallacy. Krugman didn't bother to try. The lump-of-labor fallacy always involves innuendo that anyone doubting the tacit supply-creates-its-own-demand rule could only conceivably do so under the influence of the untenable idea that there is a fixed amount of work to be done. Apparently, accusing one's opponent of committing a fallacy excuses the complainant from any need to defend -- or even acknowledge -- his own assumptions or prove his allegations.

If Say's Law became the law that dared not speak its name during the heyday of triumphant political Keynesian demand-management policy, its ventriloquist surrogate was the ubiquitous fallacy claim. Cardiff Garcia described the accusation as a "lazy but common retort to the idea that technological advancement would massively displace workers." In the early 1960s, Cornell industrial relations researcher Marcia Greenbaum noted economists' "nearly unanimous" opinion that calls for a shorter workweek to cope with unemployment were based on the lump-of-labor idea:

If this chapter has painted a gloomy picture of the economic implications of the shorter workweek, it is simply reflecting the nearly unanimous opinion of economists outside of the labor movement. Every other labor proposal for coping with unemployment . . . receives support from at least some economists and public officials. In their plea for shorter hours, however, union leaders stand alone, attacked even by the leading officials of a friendly Administration.

As Larry Summers recently pointed out,

…when I was an undergraduate at MIT in the 1960s there as a whole round of concern about this -- will automation displace all the employment? And what I was taught as an undergraduate was that basically the people who thought it would were a bunch of idiot Luddites and that obviously there would eventually be enough demand and it would all sort of work itself out...

"It would all sort of work itself out." Walks like Say's Law. Quacks like Say's Law. And as Galbraith noted, when Say's Law ruled economics, "to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots." Summers's account of his experience as an undergraduate at MIT in the 1960s is eerily reminiscent of Galbraith's account of the days before the 1930s when Say's Law prevailed.

Might I be unjustly lumping the lump-of-labor fallacy claim with Say's Law -- two concepts that "correct or not, are actually quite different"? Not according to Raymond Bye, who wrote one of the most widely-used introductory economics textbooks of the 1920s and 30s. In Bye's account of the "lump of work" or "make-work" fallacy, it was precisely the principle that supply creates its own demand that proved the fallacy of the alleged assumption that the amount of work to be done was fixed.

The complementarity of the fallacy claim and Say's Law is transparent in the writing of conservative adherents to Say's Law -- which brings me to a point that I would like to stress: conservative consistency on Say's Law and the lump of labor contrasts markedly with mainstream liberal equivocation. The fallacy claim and the Say's Law notion are two sides of the same coin. You can't reject one side while invoking the other. No doubt observers sense a discrepancy even if they can't analytically put their finger on what it is. Disparaging those who venerate the law while deriding those who violate it may seem like centrist even-handedness to tenured sophisticates but it smacks of hypocrisy to the hoi polloi.

So what's wrong with economics? Madrick pointed out seven bad ideas. I would add that those bad ideas often circulate in disguise, under aliases, and insinuate themselves back into the discourse in ways that are more pernicious because they are harder to detect. Like the secret police, these clandestine versions of the bad ideas can be used to suppress dissent while preserving official deniability.

UPDATE: Nick Rowe ponders Lump of Labour, Say's Law, and the slope of the AD curve at Worthwhile Canadian Initiative and Sandwichman replies with reference to The Pathos of Aggregate Demand Management.

Paul Krugman, Accidental Austerian

This coming weekend in New York City, the New York Review of Books is hosting an event titled What's Wrong with the Economy—and with Economics? A Saturday afternoon panel, "Economics after the Crash: A Discipline in Need of Renewal?" includes both Paul Krugman and Robert Skidelsky.

Skidelsky is in the Sandwichman's camp on the question of the lump of labour fallacy. Krugman's position has evolved to the point where he has expressed sympathy for the Luddites. But he has not publicly retracted his "accidental theorist" charge against William Greider from the 1990s.

Why would a retraction matter? Well, the Sandwichman maintains that adherence to this archaic "Just-So" story is at the core of "what's wrong with economics -- and with the economy." More importantly, though, Professor Krugman himself once thought that it mattered a great deal to enforce the lump-of-labor shibboleth. He claimed that a "thought experiment" he employed to disparage Greider's analysis would "give readers some idea of what it really means to think about economics, what economic theory really is." Is this facile hand-waving something Krugman would still defend as "what economic theory really is"?

Below is an excerpt from the introduction to Krugman's 1998 book The Accidental Theorist: And Other Dispatches from the Dismal Science:

The title essay in this collection was an effort to take on an old misunderstanding that has lately experienced a revival of popularity: the idea (sometimes referred to as the “lump of labor” fallacy) that there is only a limited amount of work to be done in the world, and that as productivity rises there is therefore a reduction in the number of jobs available. The idea has a surface plausibility from the experience of individual industries: It is indeed true, for example, that America’s railroads handle more freight now than they did in 1980, but employ barely a third as many workers. Doesn't it follow that the same fate may await all jobs, that as workers become more productive the economy will need ever fewer of them? It is hard to explain that this involves a fallacy of composition, that the effect of a productivity increase in a given industry on the number of jobs in that industry is very different from the effect of a productivity increase in the economy as a whole on the total number of jobs. In the essay I tried to find a painless way of making that point—and along the way to give readers some idea of what it really means to think about economics, what economic theory really is. 

The essay made some use of the fact that despite large productivity gains in some parts of the U.S. economy—and stagnant employment in manufacturing, mainly because of those productivity gains—America has, just as theory would predict, actually done quite well at employing its growing labor force. Yet there was a period in 1995 and 1996 when the headlines were dominated by stories of layoffs, to such an extent that it was hard to remember that despite the prevalence of such stories the U.S. economy was actually creating jobs at a near-record pace. In the second piece, “Downsizing Downsizing,” I tried to talk about this gap between perception and reality. (For the record: My remark about “emotionally satisfying fictions” was in the original version, writ ten when Robert Reich was still Labor Secretary.) 

While the idea that capitalism suffers from being too productive mainly rests on a naive failure to think the matter through, some commentators who hold this view have managed to convince themselves that they are bold and forward-looking thinkers, drawing their inspiration from that great economist John Maynard Keynes—who must, as I argue in “Vulgar Keynesians,” be turning over in his grave.

In May of 2011, Sandwichman posted an Open Letter to Paul Krugman at Ecological Headstand and sent a hard copy by mail. Sandwichman received no reply. 

Let me make this simple: is the lump-of-labor fallacy claim "what economic theory really is" or is it a symptom of precisely what is wrong with economics -- as Cardiff Garcia has described it, a "lazy but common retort" to concerns about the displacement of workers?

How the 'Conomist Got His Lump

THE 'Conomists' lump is a hideous hump
    They pedantically teach at the U.;
But uglier yet is the slump we all get
    When we swallow this muck that they spew.

Rudyard Kipling's "How the Camel Got His Hump" is a Just-So story. It is Just-So 'scrutiating cutesy, patronizing, colonialist and moralistic. Idleness is condemned and loyal obedience to one's master is extolled.

When the diligent dog, horse and ox complain to their master, man, about the slothful camel's shirking, man tells them they three "must work double-time to make up for it." You see, there was only so much work to go 'round (with the world so new-and-all) and if some of it couldn't be spread thin onto the camel, then that part had to be humped up on the other three. 

Dorning Rasbotham's confident assertion that "a cheap market will always be full of customers" is another Just-So story. Unlike Kipling's fable about the camel, Rasbotham's tale has become a staple of economic dogma. 

No evolutionary biologist would sneer at the general public for their lack of erudition regarding the fact that the camel's hump was "brought upon [his] very own self by not working." Yet that is precisely the refrain that economists repeat ad nauseum. Even economists who claim to reject the "unemployment is always voluntary" placebo are loath to repudiate the seductive cheap-market-full-of-customers creation myth and article of faith.

UPDATE: I have been informed in a comment that "a cheap market will always be full of customers" is "obviously and strictly true." Well, tell THAT to Squire Rasbotham, Mr. blissex. Dorning Rasbotham apparently didn't think it was so "obviously and strictly true" because he chewed up 18 pages of his pamphlet before getting to this supposedly obvious and strict truth.

Of course the Sandwichman suffers from the obvious and strict rhetorical disadvantage of actually having read the text in question. It is always much easier to assert things and claim they are facts than it is to present evidence and show how that evidence supports a hypothesis. (That is why we are doomed, DOOMED!)

For the edification of those who suppose they knows everything they needs to knows about Rasbotham's Theorem from its conclusion (without reading his pamphlet or knowing what his premises were) here is a brief recap of the argument:

1. The interests of the poor should have the highest priority (after all, what would become of the rich if there were no poor people to till their grounds, and pay their rent?);
2. There is not so great a difference between the real interests of the rich and the poor;
3. Trade is a large and difficult subject that requires deep thought, long study, extensive reading and large experience to form a true judgment;
4. Machines distinguish men in society from men in a savage state. There are many examples showing how machines invariably benefit people;
5. All improvements at first produce some difficulty but many receive the benefit while only a few suffer, probably not much and hopefully not for long (they should be grateful for the opportunity to make a sacrifice for their fellow man);
6. Trade will find its own level. Those thrown out of their old employments will find or learn new ones. Those who get a disproportionate gain will soon find many rivals and lose their temporary advantage; (take that, Bill Gates!)
7. There is a disposition among people to be unduly alarmed by new discoveries;
8. Even if machines (or globalization or the hypertrophy of the finance sector) are evils they are necessary evils. We might as well make the best of them;
9. This would be a prosperous time for the poor, if only they weren't so inclined to carry their money to the alehouse;
10. Anyone who disagrees with the above truths is a irreligious, conscienceless scoundrel; and (drumroll),
11. That "there is only a certain quantity of labour to be performed" is a false principle.
12. Because -- ta-da! -- a cheap market will always be full of customers!  

"Jobs, automation, Engels’ pause and the limits of history"

Cardiff Garcia at FT Alphaville, Jobs, automation, Engels’ pause and the limits of history:

The lazy but common retort to the idea that technological advancement would massively displace workers has long been to accuse the fear-monger of having perpetuated the lump of labour fallacy. 

Luddites!, the response goes, technology constantly takes jobs from workers, but the gains in efficiency lead to a surplus for the owners of companies (via higher profits) and for the consumers of their products (via lower costs). Those surpluses are then spent on other investments and consumer products, some of which we haven’t yet imagined but nonetheless will lead to more jobs in other sectors. 

Buy a cheaper car, and you have more money to spend on lavish restaurants, which leads to more jobs for chefs and waiters and sommeliers, and so on. 

... 

Optimists also like to cite the teachings of history in addition to the Luddite mistake, as the two are obviously related. So many times have we worried about the destabilising potential of technology, they say, and every time the economy has adapted, creating new jobs to replace the lost. 

An appeal to history isn't inherently misguided. Our understanding of the world is unavoidably shaped by the historical behaviour of the variables that we can identify as useful for our assessment. What else can we do? 

Yet the more aggressively we scavenge history for useful lessons, the more confusing are the clues we dig up. And that’s to say nothing of the clues that we fail to dig up. 

A few points are useful to keep in mind when thinking through history’s lessons for the issue of jobs and automation. [continued]

 The Sandwichman is very pleased.

A 'Make-Work Bias' By Any Other Name...

What is it with all the aliases, anyway? The lump-of-labor fallacy, the lump-of-work fallacy, fixed Work-fund fallacy, Luddite fallacy, make-work fallacy, make-work bias...

MaxSpeak calls attention to a lecture by a George Mason University professor, Garrett Jones, which advocates less democracy. Ten percent less democracy, to be precise.

The cornerstone of Jones's argument is Bryan Caplan's "four democratic biases" outlined in his 2006 book, The Myth of the Rational Voter. One of those supposed democratic biases is our old friend. the lump-of-labor fallacy make-work bias. Bryan Caplan is clearly a suppository of received wisdom.

So here is the basic idea: "Nineteenth-century economists believed they had diagnosed enduring economic confusions, not intellectual fads, and they were right." So, according to Caplan and Jones we should disenfranchise voters because of what "nineteenth-century economists" thought and hand over policy-making power to folks who think those nineteenth century economists were right. Sounds logical.

I have a better suggestion. In an earlier post I cited George Bernard Shaw's "strong opinion that every University on the face of the earth should be levelled to the ground and its foundations sowed with salt."

Let's start with George Mason University.

Worth a Try...

"I have a very strong opinion that every University on the face of the earth should be levelled to the ground and its foundations sowed with salt." -- George Bernard Shaw

Gobs O' Jobs!

At PBS Newshour's MAKING SEN$E, John Komlos claims "America can be a full-employment economy once again":

Currently, adjustments to the decline in demand for labor occur by reducing the number employed so that their labor time falls abruptly from 40 hours to zero. Employees work 40 hours, 20 hours or not at all. Would anyone “behind a veil of ignorance” design such a rigid system from scratch, a system with so much uncertainty and volatility–with working times ranging from zero to 70 hours per week even in normal times? 

It would be much more palatable to have the adjustment occur in the number of hours worked so that instead of dismissing workers, the available work would be divided among those wanting to work BECAUSE THERE IS A FIXED AMOUNT OF WORK TO BE DONE! Hence, an institution that distributes work more evenly would be a reasonable solution to this quandary.

I have, of course, added emphasis to the words "because there is a fixed amount of work to be done." I also added the words themselves because they were inadvertently omitted from the original. This is standard economic science procedure. Economists have been making this mind-reading correction for decades. Nobody objects. If you can't beat them, join them.

The Abstinence Theory of Value

"Exactly a year before Nassau W. Senior discovered at Manchester, that the profit (including interest) of capital is the product of the last hour of the twelve, he had announced to the world another discovery. 'I substitute,' he proudly says, 'for the word capital, considered as an instrument of production, the word abstinence.' It has never occurred to the vulgar economist to make the simple reflexion, [Marx continued n a footnote:] that every human action may be viewed, as 'abstinence' from its opposite. Eating is abstinence from fasting, walking, abstinence from standing still, working, abstinence from idling, idling, abstinence from working, &c."

Some hundred and twenty years later, in The Anti-Capitalist Mentality, Ludwig von Mises was still beating that hollow "abstinence" drum, crediting what he termed "the three progressive classes" of savers, inventors and entrepreneurs with sole responsibility for driving social evolution from savage cave dwellers to modern industry. 

In what von Mises described as a monumental work, the wily Eugen von Böhm-Bawerk, concocter of the supposed "transformation problem," dispatched Senior's abstinence theory in 1884, albeit with abundant regard toward its supposed excellence and deep insight. I suppose some double counting is cleverer than others. After exposing the fallacy of Senior's abstinence theory, von Böhm-Bawerk risked being more than a little tedious in substituting an even neater sophism in which "pain cost" and "opportunity cost" perform a rather unlikely pas de deux:

If I lay out a sum of money, say £30, for any one useful end, my sacrifice is calculated simply by the gratification which I might have got by spending the £30 in other ways, and which I must now do without.

It is otherwise with the sacrifice of labour. Labour presents two sides to economical consideration. On the one hand it is, in the experience of most men, an effort connected with an amount of positive pain, and on the other, it is a mean to the attainment of many kinds of enjoyment. Therefore the man who expends labour for a definite useful end makes on the one hand the positive sacrifice of pain, and on the other, the negative sacrifice of the other kinds of enjoyment that might have been obtained as results of the same labour. The question now is, Which is the correct way, in this case, of calculating the sacrifice made for the concrete useful end?

Herr von Böhm-Bawerk solved his own transformation problem adeptly with an example in which the pain cost of work was 10, the opportunity cost of the fish that might have been caught was 15, but the opportunity cost of shooting three hares was only 12  And voila! Here is the rabbit (or hare? or fish?) that nimble Eugen pulled out of his sportsman's cap:

What our fish really cost us now is not the positive labour-pain expressed by the number 10—for this we should have undergone at any rate—but the negative loss of an enjoyment which we might have had, indicated by the number 12.

Ten units of what?, you may wonder. Don't ask. All one needs to keep in mind is the non-equivalence between the pain cost of the labour and the opportunity cost of the enjoyment of the results of the labour and therein lies the secret and source of the potentially infinite expansion over time of the opportunity cost of postponing consumption.

No double counting here! "But of course we must never calculate the want of enjoyment and the pain of labour cumulatively..." But of course! Who needs to double count if we can count labour in units of pain and the results of labour in a different number of different units?

I'll give you a million for that.

A million what?

Never mind what, a million is a big number.

What In Hell Is Capital?

Dante condemned the merchant bankers of Florence to the seventh circle of Hell. Marx was more lenient -- attributing to monetary accumulation through usury only part of the responsibility for the dissolution of the old feudal relations of production.

"The idea of some socialists," observed Marx in his notebooks on Pre-Capitalist Economic Formations, "that we need capital but not capitalists, is completely false."

"The concept of capital implies the capitalist."

Let us consider the relationship of capital and wage labor not as something which has already reached decisive importance, and encroaches on production as a whole but as something which is still in the process of historical formation. We consider the original transformation of money into capital, the process of exchange between capital existing only potentially on one hand, and the free laborers existing potentially on the other. We then find ourselves naturally making the simple observation, with which the economists make great play — namely, that the side which appears as capital must possess raw materials, tools, and food enough to enable the worker to live before production is completed. Moreover, it would appear that accumulation — an accumulation prior to labor and not arising from labor — must have taken place on the part of the capitalist, which enables him to set the laborer to work and to maintain him in activity, as living labor power.

... 

Urban labor itself had created the means of production, for which the gilds became as great an embarrassment as were the old relations of landed property in an improved agriculture, which was in turn partly the consequence of the greater sale of agricultural products to the cities, etc.

Other circumstances assisted the dissolution of the old relations of production, accelerated the separation of the laborer or the non-laborer capable of work, from the objective conditions of his reproduction, and thus advanced the transformation of money into capital. Such were, e.g., the factors which in the 16th century increased the mass of commodities in circulation, the mass of currency in circulation, creating new needs and consequently raising the exchange value of native products, raising prices, etc. 

Nothing can therefore be more foolish than to conceive the original formation of capital as if it meant the accumulation and creation of the objective conditions of production — food, raw materials, instruments — which were then offered to the dispossessed workers. What happened was rather that monetary wealth partly helped to detach the labor power of the individuals capable of work from these conditions. The rest of this process of separation proceeded without the intervention of monetary wealth. Once the original formation of capital had reached a certain level, monetary wealth could insert itself as an intermediary between the objective conditions of life, now “liberated” and the equally liberated, but now also unfettered and footloose, living labor powers, buying the one with the other. As to the formation of monetary wealth itself, before its transformation into capital: this belongs to the prehistory of the bourgeois economy. Usury, trade, the cities and government finance which arise with them, play the chief parts in it.

In other words, capital is not money nor is it the "objective conditions of production -- food, raw materials, instruments." It is a relationship between the capitalist -- as proprietor of money and the objective conditions of production -- and the propertyless worker, both of whom have arrived at their present condition as a result of historical processes that were not (or not primarily) the effects of capitalist relations of production. Capital did not "pull itself up by its own bootstraps."

The original formations of capital does not, as is often supposed, proceed by the accumulation of food, tools, raw materials or in short, of the objective conditions of labor detached from the soil and already fused with human labor -- not by means of capital creating the objective conditions of labor. Its original formation occurs simply because the historic process of the dissolution of an old mode of production allows value, existing in the form of monetary wealth, to buy the objective conditions of labor on one hand, to exchange the living labor of the now free workers for money, on the other. All these elements are already in existence. What separates them out is a historical process, a process of dissolution, and it is this which enables money to turn into capital. Insofar as money itself plays a part here, it is only to the extent that it is itself an extremely powerful agent of dissolution which intervenes in the process, and hence contributes to the creation of the plucked, objectiveless, free laborers. 

Does the concept of "human capital" imply the human capitalist? From the perspective of Marx's analysis, such a concept would be a Bizzaro-world oxymoron:

The concept of capital implies that the objective conditions of labor — and these are its own product — acquire a personality as against labor, or what amounts to the same thing, that they are established as the property of a personality other than the worker’s.