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A New Economics — Against the Economists?

Economists get blamed for a lot by layfolk and commentators on all sides of the ideological spectrum. Based on my unscientific assessment of friends, neighbors, relatives and social media, on the right, it’s as if the rational expectations revolution never occurred in macroeconomics, let alone real business cycle theory. In this popular mind, Milton Friedman aside, economists remain big government Keynesians. They point to New York Times columnist Paul Krugman and, perhaps, Joseph Stiglitz as exemplars of the pro-government bias among economists. On the other hand, many on the left regard economists as little more than capitalist apologists, those who glob a thin veneer of intellectual respectability on the inequality and exploitation wrought by markets.

Among much of the commentariat on the left and within the communitarian right, modern microeconomics is held responsible for eroding community in modern society, the transition from Gemeinschaft to Gesellschaft, because of the instrumental reasoning the discipline promotes, and its use of subjective “preferences” in its models. On the left this is the background to much of, say, T.J. Jackson Lears’ work, on the right, the background to, say, Patrick Deneen’s efforts.

Writing broadly in the spirit of this latter vein, albeit writing from within the profession, is a recent article by Richard Spady, an economics professor at Johns Hopkins University, “Economics as an Ideology.” While critical of aspects of economics, as I mentioned, Spady writes as one firmly nested within the academic profession. His career has focused mainly on solving problems in econometrics, that is, high-powered statistical models economists (and other quantitative social scientists) use.

While written for a popular audience, Spady develops his argument carefully, he avoids painting his criticism of his own profession with too broad a brush. There is a lot to chew on in his short, albeit serious and restrained, article. I plan to chat about different topics Spady raises in the article in my next few blog posts.

I start where Spady starts, with his characterization of what he terms one of economics’ “great principles,” which he states this way: “Being able to do something you couldn’t do before is always good, or at least not bad.” He then identifies “three leading expressions of this principle,” namely, expanding trade, greater mobility for labor and capital, and technological innovation. He argues, however, that none of the three are unalloyed goods that economists claims they are. He points out that there are consequences to these changes that leave some people worse off, therefore these phenomena do not in fact align with this great principle, despite many economists invoking them as though they did.

Spady is certainly right that the three cases he points to do not in fact leave everyone better off and no one worse off. There are two items of note in his discussion, however. The first is that his argument ultimately becomes one of economics against the economists. That is, instead of showing that ideological economists are economists who are far gone in following the consistency of their first principles, he in fact shows that ideological economists are those who do not consistently implement their disciplinary models.

Secondly, and relatedly, I think there’s a more natural setting for Spady’s arguments as a criticism of liberalism, classical liberalism, specifically, although also a criticism of important parts of the social-legal domain of modern liberalism, rather than as a criticisms of economics.

Let me first discuss what Spady posits (correctly, in my understanding) as a great principle of economics, “Being able to do something you couldn’t do before is always good, or at least not bad.”

I take Spady to be referring implicitly to the concept of Pareto optimality (or Pareto efficiency). In economics, a state of the world is Pareto optimal if there is no feasible alternative state of the world in which at least one person can be made better off without making at least one other person worse off.

While the formulation strikes the uninitiated ear oddly, the intuition it reflects is basically that of a unanimity rule. To wit, a suboptimal, or inefficient, state is one in which there is at least one (feasible) alternative state in which no one would object to moving. And people “object” to the move only if they would lose something in the transition. So, if there would be unanimous agreement to move to state B from state A (in the sense that no one would object to moving to state B from state A, and at least one person actually prefers to move to state B), then state A is a suboptimal state.

On the other hand, if there is no alternative, feasible state to which the set of people could move from state A without at least one person being made worse off, then state A is optimal, or efficient.

Here’s how Pareto optimality implies Spady’s statement of the principle, “Being able to do something you couldn’t do before is always good, or at least not bad”: Let’s say we’re in a country in which some ruler in the past prohibited serving pizzas with anchovies on them. The ruler did so because the ruler did not like anchovies on pizzas, and rebelled at the very thought of anchovies being served on pizzas. The ruler then passes away. Some years later a proposal is made to the new ruler to decriminalize putting anchovies on pizza.

The new ruler takes a poll of his subjects, and learns that 95 percent of the people would not eat a pizza with anchovies on it. That does not end the discussion, however. In trying to persuade the new ruler to repeal the law, the proposer invokes a version of the principle in this way: Legalizing anchovies on pizza “Pareto dominates” their prohibition. While few people actually prefer to eat pizzas with anchovies, those few who actually do like anchovies would now be better off with decriminalization than they were before. They can now eat the type of pizzas they like. The many people who hate anchovies on pizza, well, they’re not left worse off at all. They will continue to eat anchovy-free pizzas. So legalizing anchovies makes some people better off, and leaves no one worse off. Therefore repeal the prohibition.

A couple of observations.

First, the discerning reader will already have noticed the principle is basically a version of J.S. Mill’s harm principle, that any action some people may want to choose should be permitted as long as allowing that choice does not harm other people.

Despite the fact Mill wrote this over a century ago, the intuition behind the harm principle is, I believe, the driving force behind the revolution in social expectations and behavior over the last several generations in the U.S. Sex outside of marriage? Don’t do it if you don’t want to do it. But the fact that you don’t want to do it should not constrain those who do want to do it. People who want to “do it” aren’t hurting the others who do not want to do it. So eliminating social mores against sex outside of marriage, let alone decriminalizing it, Pareto dominates sustaining those mores. So with divorce, smoking pot, pornography, buying beer on Sundays, praying in school, etc., etc., etc.

To be sure there’s pushback on specific applications of the harm principle, as, for example, whether divorce harms children, and, if so, how that harm should count against the parents’ desires to split up. But this does not implicate the principle itself, it pertains whether it applies in one or another case.

This is the basis of the Millian presumption, that more liberty, or more choice, is presumed to Pareto dominate less choice unless proven otherwise. The Millian presumption powers the liberal case for more choice from the popular level to the Supreme Court, from relaxing social mores to relaxing legal regulations.

The thing is, it’s not true in general, and economics has taught us that. The great, dismal implication of the Prisoners’ Dilemma is that, in situations in which the incentive structure holds true, more choice leaves people worse off. Or we can reverse it. In prisoners’ dilemma situations, less choice leaves people better off.

Importantly, the claim is not that prisoners’ dilemmas are ubiquitous. The claim is only that they exist. But the mere existence of prisoner dilemma situations destroys the power of the Millian presumption. Rather than “Being able to do something you couldn’t do before is always good, or at least not bad,” the principle instead is indeterminate, “Being able to do something you couldn’t do before is sometimes good and sometimes bad.”

The indeterminacy destroys the Millian presumption. There is no more reason to presume that more choice leaves people better off than there is to presume that more choice leaves people worse off. One outcome is no more natural than the other. Proposals for more choice face the same burden of proof as proposals for less choice.

Spady’s argument strikes me as more radical and wide ranging than he frames it. It is more a criticism of liberalism than it is a criticism of the abuse of modern economics.

Indeed, there is an irony is Spady framing his article as a criticism of the ideology of economics: Spady does not actually criticize ideological economists for being far gone in economistic thinking, but for not thinking economistically enough. As he points out, the three examples he references — expanding trade, greater mobility for labor and capital, and technological innovation — do not represent unalloyed Pareto improvements. Spady’s argues for a consistent application of economic first principles against inconsistent application of those principles by ideologically blinkered economists.

Reader Discussion

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on March 29, 2018 at 12:04:56 pm

"Expanding trade, greater mobility for labor and capital, and technological innovation," are unmixedly good. They are not good for people who make bad choices, anymore than freedom is good for people who abuse their freedom to choose foolishly. But the problem is not in the freedom; the harm to the individual comes from how he chose to use his freedom. Expanding trade is good for all except those who would prefer to limit the options of their customers and force them to pay more for something that they could get for less. The same is true for labor and capital mobility and innovation.

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Wayne Abernathy
on March 29, 2018 at 16:01:41 pm

On March 19 I encouraged the authors at the Library of Law & Liberty to take up the topic of Spady’s essay . I’m grateful to Rogers for doing so. I value the opportunity to discuss it for two reasons: (A) The argument as phrased is misguided, yet (B) the argument addresses important topics—topics that, ironically, would benefit from economic analysis.

(And, ok, I value this opportunity because First Things bans people such as me from commenting. You can sympathize, I'm sure...)

First, The argument as phrased is misguided. Again, I emphasize that the authors discuss important issues. But because they misapprehend/misapply the tools of economics, they do address those topics only obliquely rather than head-on. They frame their arguments about society as a critique of economics, but ultimately only manage to criticize a caricature of economics. And this straw man argument does not merely distract from their larger point, it prevents them from recognizing that economics provides a framework for analyzing the very problems they identify.

Being able to do something you couldn’t do before is always good, or at least not bad.

Spady and Rogers expend roughly 8000 words on this alleged axiom of economics, yet never manage to quote even a single economists saying anything of the sort.

Now, how would I dare to contradict Spady, an econ prof, on this topic? Well, I googled “Market failure.” Wikipedia defines the term as “scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point of view”—or, translated into Professor Spady’s terminology, results that are “bad.” Next I googled “Industrial Organization” and learned about an entire field of economics dedicated to designing policies in order to manage the harms that arise from people pursuing their self-interest. Then I googled “game theory,” which explores many of the challenges we confront when trying to constrain people’s pursuit of self-interest.

Ok, that’s nice in theory, but do we ever encounter “market failures” in real life? Well, look at every institution in which people are constrained from “doing something [they] couldn’t do before.” We create ARMIES, the POLICE, the COURTS, the PRISONS, the DEPARTMENT OF JUSTICE’S ANTITRUST DIVISION, the FEDERAL TRADE COMMISSION, the SECURITIES AND EXCHANGE COMMISSION, the FEDERAL ENERGY REGULATORY COMMISSION, the FEDERAL COMMUNICATIONS COMMISSION, the ENVIRONMENTAL PROTECTION AGENCY, the NATIONAL LABOR RELATIONS BOARD, the U.S. MINT, the SECRET SERVICE, the CONSUMER PRODUCTS SAFTEY COMMISSION, the NATIONAL HIGHWAY SAFETY BOARD, the OCCUPATIONAL HEALTH AND SAFETY ADMINISTRATION, etc., etc. etc. And this is just at the federal level. In short, the US expends enormous effort trying to constrain people’s socially harmful pursuit of self-interest. An economist would have to lead a rather cloistered life not to know this.

Indeed, this caricature of economics is so loopy, even Spady and Rogers can’t keep up the pretense. Rogers states “Let me first discuss what Spady posits (correctly, in my understanding) as a great principle of economics, ‘Being able to do something you couldn’t do before is always good, or at least not bad.’” But then he concedes, “The Millian presumption powers the liberal case for more choice from the popular level to the Supreme Court, from relaxing social mores to relaxing legal regulations. The thing is, it’s not true in general, and economics has taught us that.” Indeed it has! And given this observation, what sense does it make to say that economics articulates a great principle that economics not only does not articulate, but clearly refutes?

As a matter of economic calculus, the gains to the winners from the exploitation of the new opportunities are sufficient to compensate the losers for the disruption and its negative consequences to their overall utility. But these compensations are difficult to calculate and effect. It is easier to pretend that the gains will be widespread, or if not, significant enough to allow for politically uncontroversial redistribution.

These are Spady’s words. Rogers responds with this: “I take Spady to be referring implicitly to the concept of Pareto optimality (or Pareto efficiency). In economics, a state of the world is Pareto optimal if there is no feasible alternative state of the world in which at least one person can be made better off without making at least one other person worse off.”

Half credit to Rogers. To get full credit, Rogers could have mentioned the existence of Welfare Economics, an entire field of study dedicated to exploring the trade-offs between efficiency and equity. Anyone acquainted with that field would know that there are at least two concepts of efficiency: One (Pareto) in which no one is made worse off, and another one (Kaldor-Hicks) in which the gains from a change would be sufficient to compensate all the losers, whether or not such compensation ever occurs. Spady alleges that economists engage in faulty reasoning because they fail to distinguish between these two concepts. Yet a simple visit to a Wikipedia page demonstrates that economists fully acknowledge the distinction. Rather than reveal the weakness in economics, Spady’s comments reveal Spady’s ignorance of economics—or, at this, of this branch of economics.

In short: No, economics does not ignore the problems that Spady and Rogers identify. Hell, in 1995 an episode of The West Wing dealt with precisely the issues Spady discusses. Specifically, President Bartlett (an economist) acknowledges that free trade is generally beneficial to all, but that the benefits will be felt unevenly and that some people lose their jobs. His staff cajoles him into keeping the message simple for political reasons. But the fact that POLITICIANS characterize economic theory as simple does not mean that ECONOMISTS do.

To the contrary, fields of economics focuses on precisely those problems. By disparaging the study of economics, Spady and Rogers would cut us off from people who make the study of these problems their life’s work, and instead replace them with—Aristotle and John Mills? Not to disparage those fine thinkers, but I’m not persuaded that society’s wealth of useful ideas ended with them.

All this notwithstanding, Spady and Rogers (and other) raise important questions about social change and the allocation of costs and benefits. I hope to address those, too—but not right now.

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nobody.really
on March 30, 2018 at 07:16:14 am

On this web page on March 19, James Bruce posted his “Make Communities Great Again” essay. In response, I suggested that it would be useful to have a discussion of Spady’s recent essay at First Things, “Economics as an Ideology.” I’m grateful to Rogers for doing so. I value the opportunity to discuss it for two reasons: (A) The argument as phrased is misguided, yet (B) the argument addresses important topics—topics that, ironically, would benefit from economic analysis.

(And, ok, I value this opportunity because First Things bans people such as me from commenting. You’ll empathize, I’m sure.)

First, The argument as phrased is misguided. Again, I emphasize that the authors discuss important issues. But because they misapprehend/misapply the tools of economics, they do address those topics only obliquely rather than head-on. They frame their arguments about society as a critique of economics, but ultimately only manage to criticize a caricature of economics. And this straw man argument does not merely distract from their larger point, it prevents them from recognizing that economics provides a framework for analyzing the very problems they identify.

Being able to do something you couldn’t do before is always good, or at least not bad.

Spady and Rogers expend roughly 8000 words on this alleged axiom of economics, yet never manage to quote even a single economists saying anything of the sort.

Now, how would I dare to contradict Spady, an econ prof, on this topic? Well, I googled “Market failure.” Wikipedia defines the term as “scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point of view”—or, translated into Professor Spady’s terminology, results that are “bad.” Next I googled “Industrial Organization” and learned about an entire field of economics dedicated to designing policies in order to manage the harms that arise from people pursuing their self-interest. Then I googled “game theory,” which explores many of the challenges we confront when trying to constrain people’s pursuit of self-interest.

Ok, that’s nice in theory, but do we ever encounter “market failures” in real life? Well, look at every institution in which people are constrained from “doing something [they] couldn’t do before.” We create the military, the police, the Courts, the Prisons, the Department Of Justice’s Antitrust Division, the Federal Trade Commission, the Securities And Exchange Commission, the Federal Energy Regulatory Commission, the Federal Communications Commission, the Environmental Protection Agency, the National Labor Relations Board, the U.S. Mint, the Secret Service, the Consumer Products Safety Commission, the National Highway Safety Board, the Occupational Health And Safety Administration, etc., etc. etc. And this is just at the federal level. In short, the US expends enormous effort trying to constrain people’s socially harmful pursuit of self-interest. An economist would have to lead a rather cloistered life not to know this.

Indeed, this caricature of economics is so loopy, even Spady and Rogers can’t keep up the pretense. Rogers states “Let me first discuss what Spady posits (correctly, in my understanding) as a great principle of economics, ‘Being able to do something you couldn’t do before is always good, or at least not bad.’” But then he concedes, “The Millian presumption powers the liberal case for more choice from the popular level to the Supreme Court, from relaxing social mores to relaxing legal regulations. The thing is, it’s not true in general, and economics has taught us that.” Indeed it has! And given this observation, what sense does it make to say that economics articulates a great principle that economics not only does not articulate, but clearly refutes?

As a matter of economic calculus, the gains to the winners from the exploitation of the new opportunities are sufficient to compensate the losers for the disruption and its negative consequences to their overall utility. But these compensations are difficult to calculate and effect. It is easier to pretend that the gains will be widespread, or if not, significant enough to allow for politically uncontroversial redistribution.

These are Spady’s words. Rogers responds with this: “I take Spady to be referring implicitly to the concept of Pareto optimality (or Pareto efficiency). In economics, a state of the world is Pareto optimal if there is no feasible alternative state of the world in which at least one person can be made better off without making at least one other person worse off.”

Half credit to Rogers. To get full credit, Rogers could have googled Welfare Economics, an entire field of study dedicated to exploring the trade-offs between efficiency and equity. Anyone acquainted with that field would know that there are at least two concepts of efficiency: One (Pareto efficiency) in which no one is made worse off, and another one (Kaldor-Hicks efficiency) in which the gains from a change would be sufficient to compensate all the losers, whether or not such compensation ever occurs. Spady alleges that economists engage in faulty reasoning because they fail to distinguish between these two concepts. Yet a simple visit to a Wikipedia page demonstrates that economists fully acknowledge the distinction. Rather than reveal the weakness in economics, Spady’s comments reveal Spady’s ignorance of economics—or, at this, of this branch of economics.

In short: No, economics does not ignore the problems that Spady and Rogers identify. Hell, in 1995 an episode of The West Wing dealt with precisely the issues Spady discusses. Specifically, President Bartlett (an economist) acknowledges that free trade is generally beneficial to all, but that the benefits will be felt unevenly and that some people lose their jobs. His staff cajoles him into keeping the message simple for political reasons. But the fact that POLITICIANS characterize economic theory as simple does not mean that ECONOMISTS do.

To the contrary, fields of economics focuses on precisely those problems. By disparaging the study of economics, Spady and Rogers would cut us off from people who make the study of these problems their life’s work, and instead replace them with—Aristotle and John Mills? Not to disparage those fine thinkers, but I’m not persuaded that society’s wealth of useful ideas ended with them.

All this notwithstanding, Spady and Rogers (and other) raise important questions about social change and the allocation of costs and benefits. I hope to address those, too—but not right now.

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nobody.really
on March 30, 2018 at 11:48:41 am

MODERATOR: Whoops, I double-posted. Please delete.

Thanks.

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nobody.really
on March 30, 2018 at 15:07:57 pm

nobody:;

Take your hat off - it is the quickest way to let the *bee* get out from under that piece of apparel.

Seriously, though. good points especially re: the politico's tendency, either due to ignorance, or a belief that the citizenry is too ignorant to comprehend or for simply political advantage (both righties and lefties).

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gabe
on March 30, 2018 at 19:17:01 pm

Defining the Problem: Overview

Here’s the irony: While Spady and Reno and others express deep concern for those who lose their jobs—and thus, great distain for those who they regard as insufficiently sympathetic—these commenters bring no intellectual tools to the job of analyzing the problem or fashioning a solution. They seem to have a teenager’s conviction that if you only CARE ENOUGH, then the purity of your motivations will be sufficient to solve any problem. Indeed, their primary intellectual tools are the tools of fundamentalism: Modernity had frustrated our expectations: Ergo, modernity bad. We need to return to an (imagined) past when everything was better—or, at least, better for the people we care about. When discussing public policy, I would hope we could apply greater analytical rigor than the Taliban.

But if we apply some tools of economics to the discussion, we might arrive at some different conclusions. Admittedly, these tools are not crystal balls: Different people can use these tools to arrive at different conclusions, not only about the future but also about the past. But here’s what they tell me (and others):

1. The “normal” past to which people aspire was, in fact, far from normal. It was created under extraordinary circumstances that are unlikely to recur. “Normal” levels of social stratification look more like “Downton Abbey” than “Leave It To Beaver.”

2. Thus, the solution to our problems lies not in pining for an economic order that has past, but in fashioning a new economic order based on the new and emerging economic facts. We don’t have to accept the status quo. But we must understand the forces that are creating the status quo, and design policies to confront those forces.

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nobody.really
on March 30, 2018 at 19:18:05 pm

Defining the problem: Autonomy and Kaldor-Hicks Efficiency

Recall Rogers’s discussion of efficiency: “In economics, a state of the world is Pareto optimal if there is no feasible alternative state of the world in which at least one person can be made better off without making at least one other person worse off.” Spady implies that economists (and, by extension, government/society) have wrongfully neglected to insist on this kind of efficiency. This seems like a standard that vindicates stability and autonomy/property rights: Don’t change things until you get the consent of everyone who would be effected. Sounds reasonable, right?

But think about that: If you accept a job offer, that job offer is now no longer available to me, which makes me worse off. Thus, if we insist on Pareto efficiency, then no one can accept a job offer. Or rent an apartment. Or buy a house. Or marry a (monogamous) spouse. Or take a breath.

Pareto efficiency is a great standard for preserving the status quo at any given instant. But what Spady neglects to mention is that preserving the status quo is WILDLY expensive—especially for those of us who have grown accustomed to breathing. Obviously Spady doesn’t oppose all change. But he fails to articulate any standard for distinguishing desirable change from undesirable change. So that’s the challenge: to identify the optimal mix of stability and change, and to devise policies to achieve that mix.

Among the tools we have developed to guide our choices are autonomy rights (property law) and Kaldor-Hicks efficiency. Property law implies that people have a degree of autonomy that extends beyond their bodies, and that we should secure their permission before doing things that impinge upon that autonomy. And under a Kaldor-Hicks test, we reject changes that would make society worse off on an overall basis, even if some people might be made better off.

This is generally the state of the playing field: On one boundary, we try not to get in the way of Pareto efficient changes—that is, changes where no affected person objects. On the other boundary, we try to stop changes that violate people’s property rights, or that violate Kaldor-Hicks efficiency. But clearly a lot of stuff can happen in between these two boundaries. Can we articulate a new standard that would move the second boundary closer to the first—thereby excluding certain changes that we find objectionable, even when those changes don’t infringe upon autonomy and do make society better off on an overall basis?

One option is adopting a Pigouvian tax on changes would result in Kaldor Hicks efficiency but not Pareto efficacy—that is, when a change would generate more benefits than harms, but the benefiting parties would differ from the harmed parties. Put simply, government could tax the benefiting parties and use the benefits to compensate the harmed parties. For example, Obamacare would cause government to spend money, but would generate new revenues for medical device companies (among others). As designed, Obamacare would tax those companies and use the revenues to offset some of Obamacare’s costs.

More on this later.

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nobody.really
on March 30, 2018 at 19:19:14 pm

Defining the Problem: Supply and Demand

Why do people regard post-war America as a norm? First, it seemed normal when contrasted with the Great Depression and WWII. Second, it seemed normal when contrasted with the 1960s counter-culture. Third, it seemed normal because it was the era first captured on our most influential media, television. Thus, images of post-war America—and these were mostly idealized images—have become indelibly imbedded in the minds of many of today’s political commentators. And the more conservative the commentator, the more obsessed they are with these images.

Of course, I hardly need to belabor the point that post-war America was not ideal we see depicted in those black-and-white reruns.

The larger point is this: Post-war America was the product of extraordinary circumstances. People who imagine that we could recreate that era by limiting immigration, for example, as mistaken. We could not recreate the post-war era without recreating the post-war circumstances.

What were those circumstances? First, the developed world experienced great pent-up demand during the Great Depression and WWII. Second, following WWII all of our economic rivals had their physical capital in ruins and their human capital in graveyards. Third, the labor supply was restricted: It heavily restricted participation by blacks, women, foreigners, and people with disabilities. Lack of technology limited the degree of competition from automation. And high shipping costs limited the degree of competition from abroad. Translated into econ-speak: The supply of labor was low while the demand was high. Just as economics predicts, this produced a boom in demand for labor.

So, in order to recreate that era, we’d need to recreate those circumstances. People caught in the grips of nostalgia may imagine that they’d like to recreate those circumstances, but I hope you can see that it would be monstrous to really desire such a thing.

Moreover, while nostalgia-sodden commentators feel free to rail against immigrants, or even women in the workplace, few propose that we abandon technology. But technology is arguably the biggest job-killer.
Seriously. Consider that in 1800, 83 percent of the US workforce worked in agriculture. Today is closer to 1.5 percent, yet we produce more than ever. How? Automation. Obviously there was tremendous loss of agriculture jobs, especially for the undereducated. So where are the Fox News commentators proposing that we build a wall around John Deere dealerships?

Now look at manufacturing: Similar pattern. Employment is way down, especially for the undereducated—yet output has never been higher. How? Automation. Trump claims that “we don’t make things anymore.” But that’s akin to saying “We don’t generate food anymore.” The opposite is true.

And so it goes, in industry after industry.

This observation is hardly new among anyone with even a passing interest in economics. It has been the main thesis in Eric Brynjolfsson and Andrew McAfee’s Race Against the Machine (2011), Tyler Cowen’s Average is Over (2013), Thomas Piketty͛s Capital in the Twenty-First Century (2014), Martin Ford’s Rise of the Robots (2015), Ryan Avent’s The Wealth of Humans (2016), etc. But their work was just building off the 1930 observation of John Maynard Keynes in his “Economic Possibilities for our Grandchildren,” wherein he predicted—in the face of the Great Depression--that per capita wealth would skyrocket even as demand for labor declined:

I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is today....

....Time spent working would dwindle to perhaps fifteen hours a week, and then to nothing. And the main problem humanity would face would be just what to do with itself in a world of abundant leisure.

For what its worth, Advent estimates that rich economies have already experienced a fourfold increase in living standards. Who can say what we’ll achieve by Keynes’s deadline of 2030?

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nobody.really
on March 31, 2018 at 11:55:05 am

nobody:

Goodness gracious - someone has really upset you.

YET, there is much truth in what you say, especially when shorn of some excess.

Yep, the 1950's are gone "and they ain't never comin' back" as The Boss has sung.

BUT, do you really believe that people, in particular the Right, long for a return of the 1950's or that any rational person expects that it would be possible to bring them back?

Perhaps, you read a little too much into the essayists comments? while you may be correct that he offers no specific prescription, nor any detailed econometric methodology for assessing the propriety of any alternative, I suspect that this is because Rogers is not making an economic argument but rather a political one in which he asserts that Spady's argument "... is more a criticism of liberalism than it is a criticism of the abuse of modern economics."

Also, one other minor quibble:

You argue that while employment is down, output is up.
Depends - upon how you calculate output / productivity.
Yes, automation has improved output tremendously, exponentially in some areas BUT: that automation has, in fact, been deployed overseas in far too many instances. Thus, the overseas manufacturer derives the benefit of the automation.
What follows is this. The *value added* activities (both manual and machine) are subsumed under the total output of the "final assembly" operations that may (or may not) be conducted in the USA and are included in the final selling price of a unit. We then add $35K in output for the sale of a Toyota (as an example). Yet, US value added activities contribute only the costs of final assembly of the overseas produced engines, transmissions, electronics, body panels and, yep, tires. This is not theory. This is how it works. Yet, we continue to insist that both output AND productivity are UP!!!
That may very well be true BUT it is the apportionment of that increased productivity with which we may wish to concern ourselves. Then again, maybe not if one is no longer concerned about, or has deep affection for one's own people. Is this not what our globalist, one-world types believe?

Yeah someone benefits - someone loses; no Pareto efficacy for you! (or me).
Recognizing this, what is, or ought, one to do about it??????

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gabe
on March 31, 2018 at 22:20:23 pm

The *value added* activities (both manual and machine) are subsumed under the total output of the “final assembly” operations that may (or may not) be conducted in the USA and are included in the final selling price of a unit. We then add $35K in output for the sale of a Toyota (as an example). Yet, US value added activities contribute only the costs of final assembly of the overseas produced engines, transmissions, electronics, body panels and, yep, tires. This is not theory. This is how it works.

Perhaps that’s true with respect to some data set; you neglect to say which data you are referring to.

But it’s not true of the calculation of Gross Domestic Product, which includes the selling price of finished goods minus the price of all imported goods. Nor it is obvious that this is true of the Federal Reserve’s Industrial Production Index, which “measures real output for all facilities located in the United States manufacturing, mining, and electric, and gas utilities (excluding those in U.S. territories)” (emphasis added).

According to the 2018 Fed article Here's Why U.S. Manufacturing is Fundamentally Strong, “It may seem obvious that more imported manufactured goods leads to less U.S. manufactured goods. But, contrary to this popular opinion, imports do not crowd out aggregate domestic production. Instead, there is a strong positive relationship between imports and manufacturing output and employment. Many imports are intermediate materials and capital goods that, in fact, not only are essential to domestic production, but also increase the productivity of U.S. manufacturers who produce goods that are exported.

Then again, maybe not if one is no longer concerned about, or has deep affection for one’s own people. Is this not what our globalist, one-world types believe?

“What is written in the Law?”

“‘Love the Lord your God with all your heart and with all your soul and with all your strength and with all your mind’ and, ‘Love your neighbor as yourself.’”

“You have answered correctly.”

“And who is my neighbor?”

“A man was going down from Jerusalem to Jericho, when he was attacked by robbers. They stripped him of his clothes, beat him and went away, leaving him half dead. A priest happened to be going down the same road, and when he saw the man, he passed by on the other side. So too, a Levite, when he came to the place and saw him, passed by on the other side. But a Samaritan, as he traveled, came where the man was; and when he saw him, he took pity on him. He went to him and bandaged his wounds, pouring on oil and wine. Then he put the man on his own donkey, brought him to an inn and took care of him. The next day he took out two denarii and gave them to the innkeeper. ‘Look after him,’ he said, ‘and when I return, I will reimburse you for any extra expense you may have.’ Which of these three do you think was a neighbor to the man who fell into the hands of robbers?”

“The one who had mercy on him.”

“Go and do likewise.”

Luke 10:25-37

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nobody.really
on April 01, 2018 at 10:40:52 am

And Happy Easter to you!

I guess the question becomes "to whom should the Samaritan direct his / her beneficent impulses"

Shall we direct those impulses towards our own "travelers" or towards those in the developing world who work for (barely) subsistence wages and in many instances in intolerable conditions while simultaneously casting on to our own roads our fellow citizens?

BTW: I do not assert that imported "value added" components (as opposed to raw materials) deny the possibility of domestic manufacture; only that they do diminish the native capability to do so AND that such diminishment in essential industries has a consequent effect of adversely affecting other related technology capabilities, not to mention the disruption to our own "travelers" on the road to Jericho.

BTW: Are those numbers in the studies listed adjusted for infaltion; does it reach the actual number of units produced. As an example, take capital goods. One in particular with which I am familiar is automated electronic component placement equipment. Whereas, the tens of millions of dollars of equipment I used to purchase were designed and manufactured in the USA (upstate NY), such production was moved offshore, ultimately being overtaken by a foreign competitor. Now the US's ability to produce this critical equipment is nearly gone as are those jobs AND the ability to rapidly scale up production in this and related fields should the proverbial organic matter ever meet the spinning blades. This concerns me.

anyway, take care

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gabe
on April 03, 2018 at 23:08:00 pm

In contrast to the foregoing, here is Spady's assessment of the problem:

What are our problems? The short answer: widespread despair, resentment, and dysfunction among the lower two-thirds of American society as ranked by some mixture of income, education, and social class. For these people, our society has not worked or is on the verge of not working, or they have a justified fear that their children will face a crisis. There is a widespread sense that the children of middle-income, middle-­educated, and middle-talented Americans would not have faced these problems in the past and that the future will bring new troubles of even greater severity. This intensifies our usual anxiety about the future. It’s not just that the future is unknown; to many it seems it will be worse.

In themselves, these economic and cultural challenges and difficulties would not implicate economics as a discipline. What age does not have its problems? But our difficulties have a distinctive character, and I can summarize it by observing that those responsible for leading our society over the last generation have no contrition.

Spady correctly observes that people have expectations, and that those expectations are not being fulfilled. Fair enough.

And he argues that "those responsible" are to blame for this, and should therefore exhibit contrition. Unfair enough.

Yes, people are feeling frustration. But I can't blame anyone for that unless I can see that there was some alternative that would not have led to their frustration. And Spady offers no such alternative.

In contrast, I've outlined a number of factors that have led to our current situation. For which of these changes should "those responsible" apologize: For failing to create a new Great Depression and World War with which to dampen expectations and bottle up demand? For failing to force women, people of color, and people with disabilities out of the labor market? For failing to eliminate technology? For failing to block ever more people from pursuing education? Spady doesn't say.

Spady offers no solutions (except the implicit fundamentalist promise of returning to an idealized past). Rather, he offers scapegoats.

In criticizing Spady, I don't mean to criticize people for feeling frustrated. As I said, I expect that we are entering a world with less demand for labor--and that's going to require a lot of adjustments for everybody. There are real class divisions here. But there have ALWAYS been real class divisions; working-class Blacks have endured them for years. The only thing new is that white working-class people are also starting to find themselves on the opposite side of those divisions.

We need solutions. But those solutions will not come from looking back, but from looking forward.

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nobody.really
on April 04, 2018 at 00:26:40 am

Solutions.

How to cope with a world that will require ever less labor, when our economy currently distributes wealth via the labor market? Three possible remedies:

1. Back to the future: Try to restore the past. Shun women out of the workplace. Subordinate people of color and those with disabilities. Restrict the labor supply. This strategy will require ruthless tactics, and will inflict great harm of large segments of society—but it may restore the status of a white working class.

2. Keep the labor supply the same, but adopt policies that make work much less efficient. In that manner we can keep more people feeling productive. This would resemble a caricature of the European stagnation: high costs, ridged employment structures, relatively low output—but stability.

3. Permit markets to work efficiently for purposes of production—but then require sharing the wealth via taxation and guaranteed incomes + social programs. This scenario would require great political will and class-consciousness, because it would require enormous wealth transfers. The majority would be arrayed against the interest of the wealthy—and we can see the challenging politics that this creates today. This scenario would also require ever more people to achieve a sense of self-worth via some method other than the labor market. People might have to acquire a sense of worth by persuading themselves that they are made in the image of a god who cares about them, or something like that.

Of these three options, I favor Option 3. But I acknowledge the daunting political challenges it creates. And the first challenge of all will come from members of the white working class who have grown up looking down on people who are on “assistance.” They would have to acknowledge that large socioeconomic dynamics, not just individual merit, causes people to rely on government for reallocation of resources—and that there’s nothing wrong with it. People will come to pursue ever more activities for which we have a weak labor market: taking kids to their doctor’s appointments, visiting mom, reading to kids in after-school programs, mentoring people in AA, etc. The world will change—for good as well as bad, and perhaps on net for the better.

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nobody.really

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