Globalization - here used synonymously with "free trade" - punishes countries which pay their workers too much. It lets a flood of cheaply manufactured goods into wealthy countries' markets - and these goods are cheaper precisely because of the difference in wages. In other words, each portion of wage in the importing country can capture more than an equal portion of wage in the exporter country.
Since wages are typically paid in national currencies, this effect sees its expression in currency exchange rates. Since currency can only be used to purchase goods within an economy, a nation that imports more than it exports will, ceteris paribus, find that over time its currency will decrease in value relative to those of nations that export more than they import. However, this measure of value is only meaningful if incomes and currency circulation patterns are also taken into account. The simple measure of literal exchange doesn't tell the full story of the value of a currency. If an hours' labor earned worker A 1000 yuan that were each worth 0.25 dollars, while worker B slaved for a pittance of 10 dollars per hour, can one really say that the yuan is a "weaker" currency?
For the typically encountered modern situation where one large consuming nation is served by several satellite nations that function as producers, any additional money entering the hands of an investor will tend to be invested in a satellite nation if it is invested in production and a few other outsourceable functions, and invested in the importer nation for purposes like distribution and retailing. Therefore, a true currency supply expansion, distributed uniformly (such as through tax relief) in an importing country would in part be transmitted to foreign countries and in part into the local economy. This ratio is determined by the nature of the goods that are intended to be produced and by incentive structures that apply to these goods. Thus, such a currency supply expansion will increase the wealth of both the importer and the exporter nation.
However, this effect is moderated - and can even be supplanted completely - by rent-seeking behavior. If wealthy individuals are able to cartelize or monopolize any stream of consumer necessities, acts of currency issuance instead lead to a near seamless increase in the costs of those necessities until the effect of the currency issuance is absorbed. If labor markets are sufficiently slack to keep workers from bargaining effectively, the system will essentially remain as it was, except that the price of goods in the importing country will rise or fall relative to each other, depending on the nature of the rent-seeking. If, on the other hand, labor markets are tight (and not necessarily because of low unemployment but also possibly because of a shortage of qualified workers) inflation will occur as the workers demand greater wages to counter the increase in cost of living and these wages motivate increases in prices. But here it is worth noting that price increases and wage increases in pair do sometimes serve a beneficial equalizing function in the society, if the worst off see these wage increases.
Anti-deficit hysteria hinges on value of currency as expressed not in the wages of workers but in exchange rates. But this means that nations which refuse to devalue their currency through deficit spending are essentially capitulating on trade deficits, agreeing to continue exporting industry and jobs. The sensible policy - indeed what appears to be the strategic equilibrium - is to have every nation locked in a currency devaluation race. Such a race would proceed until full employment was reached.
This strategy will doubtless lead to inflation, especially since workers who depend on cheap imports to maintain a low cost of living will see these imports increase in price due to the inferior exchange rate. However, this inflation should be moderated by the reduction of profits collected by the outsourced companies. The inflation is also beneficial in the sense that it forces workers to bargain for higher wages and undermines the total profits of the wealthy, delaying the rent-seeking behavior that would otherwise lead to increases in the value of real estate and other owner-income-stream-type assets. The inflation is necessary to stimulate the growth of local industry in the importer country - from the perspective of the entrepreneur, inflation has the same effect that tariffs would, except that the upward price trend will tend to make investment more favorable in the long term than tariffs would, especially since tariffs can be much more effectively countered by foreign government policies than currency devaluations.
Therefore, the pairing of Globalization with deficit terrorism is particularly odd. On the one hand, nations are expected to put up no resistance to the exporting of jobs overseas. On the other, expansions of money supply are criticized as irresponsible, even though such expansions would correct the imbalance caused by the strategy of globalization. In fairness, as has been noted before, government borrowing from wealthy investors doesn't really expand the money supply. However, it does effectively increase the money in circulation , but with a much more mild effect than non-parity currency issue. But in their economic ignorance, most deficit terrorists are blind to the actual workings of the money supply anyway. What we should never forgive them for is their willingness to blindly repeat political talking points as if they represent real analysis.
Monday, May 17, 2010
Monday, May 10, 2010
The role of bank capital scarcity on inflation
Increases in interest rates due to bank capital scarcity cannot generally lead to increases in prices, because interest rates are the arbiters of general employment levels which in turn control demand for goods. However, changes in interest rates can precipitate changes to market structure that cause increases in the cost of goods in individual markets, or occasionally precipitate both unemployment and inflation, given that economic growth within a region is sufficiently robust or the general population is sufficiently wealthy. To illustrate, begin with the following example of a single firm within a single industry.
Imperial Widgets (IW) is a widget factory facing capital replacement costs due to depreciation. The company is not profitable (zero net profit) and has no liquid assets that can be sold to finance such a purchase. Therefore, the company must take a loan to cover these replacement costs or cease operations. Supposing that IW takes such loans on a rolling basis and therefore faces similar monthly payments (without loss of generality) in each term.
Further, suppose that IW is making its price and quantity production decisions in a competent fashion, that is to say it is maximizing (or attempting to maximize) its profits. It expects an increase in price charged to lead to a decrease in sales sufficiently large to reduce profits and a decrease in price charged to similarly lead to an insufficiently higher volume of sales; additionally it is not likely to sell additional units produced, the marginal cost of production equals the marginal revenue, or IW is already producing at capacity. In other words, IW's profits would decline were it to maintain current capital stocks but change its price and/or quantity of production.
Now, suppose that interest rates increase. As IW considers its replacement schedule for depreciating capital, it realizes that it faces a change to its cost curve that could alter its price and quantity decisions. Depending on the capital objects to be replaced, IW may either curtail production and increase prices, or simply operate at a loss. In the first case, IW is likely to only obtain a partial replacement of capital, thus it is borrowing less. In the second case, IW is likely to finance these losses, causing an increase in borrowing.
The distribution between these two decisions across all firms is connected in a mutually causative way with the economic trend. At the macro level, some firms will move in one direction and some firms will move in the other, but a third option looms in the shadows. Here, long term expectations become significant - do firms that are operating at a loss hold out for better days or close shop? In any event, employment declines so long as at least one firm either cuts production or goes out of business.
The model case from here on will depend on market structure. It is virtually impossible to conceive of a monopoly enterprise that is not in the first place profitable, so we can focus instead on competitive and near-competitive markets. Within such a market some firms will be facing slightly higher cost curves and others slightly lower curves, but all firms will charge very similar prices for the same good, therefore some firms will be slightly profitable or have liquid asset reserves and some will be operating at a slight loss or have a deficiency in liquid asset reserves. When interest rates increase, some firms will face untenable finance positions and close. Therefore, interest rate increases can cause the breakdown of competitive market structures and lead to monopoly, cartel, or other degenerate market structures. This in turn allows the individual market to come to a higher price equilibrium due to the diminished competition within the market. This higher price equilibrium is generally accompanied by lower output.
However, if similar effects occur across too many markets at the same time, the reduction in employment level and wages that accompanies such restructuring leads to decreases in demand for goods through both revision of consumer budgets and increased incentives to save. In such a situation, the prices charged for goods must decrease as output declines, because prices follow a cost curve that is non-horizontal (due not just to the initial assumption of high interest rates and capital scarcity but also to the reduction in wages). A reduced output level must in turn exert downward pressure on interest rates.
Another under-appreciated aspect of this problem is the role that investment decisions play in the availability of capital to banks. Bank loans are a class of investment that competes with direct investment in corporations. During boom times, the increase of direct investment in corporations is a source of the very capital scarcity that leads to market consolidations as described above. However, during more stagnant economic times, companies cannot raise capital as easily because of the greater risk associated with direct investment. This means that capital is being held in bank accounts, implying a capital surplus - so interest rates should tend to fall as economic conditions deteriorate.
Economies go into crisis when prospects for direct investment become so bleak that essentially no direct investment occurs. Here, individuals will even settle for no interest and keep money in the bank, waiting for better times. These better times are caused by exogenous effects - technologies, government stimulus, and resource discoveries.
In contrast, economies also go into crisis when too few dollars are available for loans. If spending is sufficiently robust, investors will be unwilling to leave any money sitting. Capital for short term adjustments becomes too expensive for firms, and they are forced to curtail production. During times of especially strong demand, this can lead to prices increasing even as unemployment increases. Ultimately, the ability to spend is actually a function of wealth and not of income. Among other things, this explains the enigmatic "stagflation" of the 1970s.
In a previous post I have described these two contrasting situations as "disincentive" and "shortage". It is "shortage" that most closely corresponds with bank capital scarcity scenarios particularly the enigma of stagflation.
It is worth addressing whether such an effect - stagflation - can occur in a less developed country (I cringe and the imperialist heritage of this term. Is it conceptually much different than "less civilized" or "barbarian"?) due to the same forces as in a developed one. Here, banking and capital sources are primarily externally located. This is crucial, because it implies that any growth or decline in local demand will only have a marginal effect on the investing economy. These export economies do not get the benefit of profit capture or control, because the investors are not members of the economy itself and do not have a stake in the local community. It is the destabilization that the interests of the foreign investor bring to the political process that repeatedly dooms efforts at growth and social justice within a developing country. Generally, both loans and direct investment will always be available or unavailable in parity to the developing nation. It is not some economic law - but the political conditions of our time - that leads to suffering throughout the world.
Imperial Widgets (IW) is a widget factory facing capital replacement costs due to depreciation. The company is not profitable (zero net profit) and has no liquid assets that can be sold to finance such a purchase. Therefore, the company must take a loan to cover these replacement costs or cease operations. Supposing that IW takes such loans on a rolling basis and therefore faces similar monthly payments (without loss of generality) in each term.
Further, suppose that IW is making its price and quantity production decisions in a competent fashion, that is to say it is maximizing (or attempting to maximize) its profits. It expects an increase in price charged to lead to a decrease in sales sufficiently large to reduce profits and a decrease in price charged to similarly lead to an insufficiently higher volume of sales; additionally it is not likely to sell additional units produced, the marginal cost of production equals the marginal revenue, or IW is already producing at capacity. In other words, IW's profits would decline were it to maintain current capital stocks but change its price and/or quantity of production.
Now, suppose that interest rates increase. As IW considers its replacement schedule for depreciating capital, it realizes that it faces a change to its cost curve that could alter its price and quantity decisions. Depending on the capital objects to be replaced, IW may either curtail production and increase prices, or simply operate at a loss. In the first case, IW is likely to only obtain a partial replacement of capital, thus it is borrowing less. In the second case, IW is likely to finance these losses, causing an increase in borrowing.
The distribution between these two decisions across all firms is connected in a mutually causative way with the economic trend. At the macro level, some firms will move in one direction and some firms will move in the other, but a third option looms in the shadows. Here, long term expectations become significant - do firms that are operating at a loss hold out for better days or close shop? In any event, employment declines so long as at least one firm either cuts production or goes out of business.
The model case from here on will depend on market structure. It is virtually impossible to conceive of a monopoly enterprise that is not in the first place profitable, so we can focus instead on competitive and near-competitive markets. Within such a market some firms will be facing slightly higher cost curves and others slightly lower curves, but all firms will charge very similar prices for the same good, therefore some firms will be slightly profitable or have liquid asset reserves and some will be operating at a slight loss or have a deficiency in liquid asset reserves. When interest rates increase, some firms will face untenable finance positions and close. Therefore, interest rate increases can cause the breakdown of competitive market structures and lead to monopoly, cartel, or other degenerate market structures. This in turn allows the individual market to come to a higher price equilibrium due to the diminished competition within the market. This higher price equilibrium is generally accompanied by lower output.
However, if similar effects occur across too many markets at the same time, the reduction in employment level and wages that accompanies such restructuring leads to decreases in demand for goods through both revision of consumer budgets and increased incentives to save. In such a situation, the prices charged for goods must decrease as output declines, because prices follow a cost curve that is non-horizontal (due not just to the initial assumption of high interest rates and capital scarcity but also to the reduction in wages). A reduced output level must in turn exert downward pressure on interest rates.
Another under-appreciated aspect of this problem is the role that investment decisions play in the availability of capital to banks. Bank loans are a class of investment that competes with direct investment in corporations. During boom times, the increase of direct investment in corporations is a source of the very capital scarcity that leads to market consolidations as described above. However, during more stagnant economic times, companies cannot raise capital as easily because of the greater risk associated with direct investment. This means that capital is being held in bank accounts, implying a capital surplus - so interest rates should tend to fall as economic conditions deteriorate.
Economies go into crisis when prospects for direct investment become so bleak that essentially no direct investment occurs. Here, individuals will even settle for no interest and keep money in the bank, waiting for better times. These better times are caused by exogenous effects - technologies, government stimulus, and resource discoveries.
In contrast, economies also go into crisis when too few dollars are available for loans. If spending is sufficiently robust, investors will be unwilling to leave any money sitting. Capital for short term adjustments becomes too expensive for firms, and they are forced to curtail production. During times of especially strong demand, this can lead to prices increasing even as unemployment increases. Ultimately, the ability to spend is actually a function of wealth and not of income. Among other things, this explains the enigmatic "stagflation" of the 1970s.
In a previous post I have described these two contrasting situations as "disincentive" and "shortage". It is "shortage" that most closely corresponds with bank capital scarcity scenarios particularly the enigma of stagflation.
It is worth addressing whether such an effect - stagflation - can occur in a less developed country (I cringe and the imperialist heritage of this term. Is it conceptually much different than "less civilized" or "barbarian"?) due to the same forces as in a developed one. Here, banking and capital sources are primarily externally located. This is crucial, because it implies that any growth or decline in local demand will only have a marginal effect on the investing economy. These export economies do not get the benefit of profit capture or control, because the investors are not members of the economy itself and do not have a stake in the local community. It is the destabilization that the interests of the foreign investor bring to the political process that repeatedly dooms efforts at growth and social justice within a developing country. Generally, both loans and direct investment will always be available or unavailable in parity to the developing nation. It is not some economic law - but the political conditions of our time - that leads to suffering throughout the world.
Wednesday, May 5, 2010
Firefox Double Crashing
Dear firefox feedback,
Firefox is a very predictable product. If something causes it to crash, that same thing will cause it to crash again. Please forgive me for not sounding sophisticated here, but I don't have the statistics that your techie people have access to. This is because firefox is a computer program. It responds in a predictable fashion to the data that is fed into it.
The crash recovery option is designed to store, apparently in cached form rather than reloading them, all of the pages that were being viewed at the time of a crash. In 99.99% of situations, this means that when firefox is restarted, it simply crashes again. I reported this as a bug and was shut down:
https://bugzilla.mozilla.org/show_bug.cgi?id=506883
Apparently, having a product that crashes a second time after every crash is not a bug but a feature.
So, at the very least, I would like to have an option to turn this "feature" off. I know from searching support that I can go to some internal settings page to fix the problem - and I have. But for everyone else out there who is a loyal firefox user and might not know about this fix, I am asking you and the other tech people to do two things:
1. Come up with a crash recovery procedure that works in a meaningful way.
2. Include an option in preferences that can be checked to disable this feature.
On the first point,
I suggest storing any form data and URLs and simply saving them to a text file in the event of crash. Naturally you can exclude credit card and password info. Then, on recovery, firefox should simply display these contents in a form that makes them easy to copy and paste.
Especially in crashes, your current standard is really unrealistic. Paul Oshannessy said "I'll say that the common case, people just want Firefox to start back up and figure it out on its own. They don't want to be shown this potentially confusing page after Firefox crashes - they want it to 'just work'."
But it doesn't "just work". Common sense indicates that it won't. Programs can't just start back up after crashes with no data loss, because as soon as the program executes that same line of code a second time, the same result occurs! In the case of web content, crashes are the result of errors in the generation of webpage scripts or firefox's interpretation of the contents of those scripts. If firefox doesn't ask the servers that generated the pages to re-generate them, it will simply run the same scripts on those pages that caused the original crash, and because firefox is such a nice and stable product, it will crash again! But even re-generating pages will still cause a lot of crashes, almost as many as loading the cashed pages. What you find, and this is very much CS315, is that each time you strip away a layer of data, that is step back from the most recent page, the fewer crashes there are, until you find the only way to really prevent any crash is to not reload the offending page at all.
That gets back to the comment of the poor user that Paul shut down: Why not let the user choose which tabs to restore on the first restart?
On the second point,
I suggest you make it so that whatever Crash Recovery "solution" you end up implementing, you make it easy to turn off so that grouchy people like me can avoid going batshit insane. Make this an advanced option. That way average users who have no functional literacy won't go bumbling into that option, accidentally turn it off, and subsequently leave nasty messages demanding to know why their firefox doesn't double crash anymore.
Also, I would suggest that you take the time to figure out whose idea this was, because you might want to take future ideas by this same person with a grain of salt. As a general rule, clever marketing comes after the product - it should never motivate the creation of the product itself, unless you intend to defraud consumers.
Thank you. I feel better now.
Firefox is a very predictable product. If something causes it to crash, that same thing will cause it to crash again. Please forgive me for not sounding sophisticated here, but I don't have the statistics that your techie people have access to. This is because firefox is a computer program. It responds in a predictable fashion to the data that is fed into it.
The crash recovery option is designed to store, apparently in cached form rather than reloading them, all of the pages that were being viewed at the time of a crash. In 99.99% of situations, this means that when firefox is restarted, it simply crashes again. I reported this as a bug and was shut down:
https://bugzilla.mozilla.org/show_bug.cgi?id=506883
Apparently, having a product that crashes a second time after every crash is not a bug but a feature.
So, at the very least, I would like to have an option to turn this "feature" off. I know from searching support that I can go to some internal settings page to fix the problem - and I have. But for everyone else out there who is a loyal firefox user and might not know about this fix, I am asking you and the other tech people to do two things:
1. Come up with a crash recovery procedure that works in a meaningful way.
2. Include an option in preferences that can be checked to disable this feature.
On the first point,
I suggest storing any form data and URLs and simply saving them to a text file in the event of crash. Naturally you can exclude credit card and password info. Then, on recovery, firefox should simply display these contents in a form that makes them easy to copy and paste.
Especially in crashes, your current standard is really unrealistic. Paul Oshannessy said "I'll say that the common case, people just want Firefox to start back up and figure it out on its own. They don't want to be shown this potentially confusing page after Firefox crashes - they want it to 'just work'."
But it doesn't "just work". Common sense indicates that it won't. Programs can't just start back up after crashes with no data loss, because as soon as the program executes that same line of code a second time, the same result occurs! In the case of web content, crashes are the result of errors in the generation of webpage scripts or firefox's interpretation of the contents of those scripts. If firefox doesn't ask the servers that generated the pages to re-generate them, it will simply run the same scripts on those pages that caused the original crash, and because firefox is such a nice and stable product, it will crash again! But even re-generating pages will still cause a lot of crashes, almost as many as loading the cashed pages. What you find, and this is very much CS315, is that each time you strip away a layer of data, that is step back from the most recent page, the fewer crashes there are, until you find the only way to really prevent any crash is to not reload the offending page at all.
That gets back to the comment of the poor user that Paul shut down: Why not let the user choose which tabs to restore on the first restart?
On the second point,
I suggest you make it so that whatever Crash Recovery "solution" you end up implementing, you make it easy to turn off so that grouchy people like me can avoid going batshit insane. Make this an advanced option. That way average users who have no functional literacy won't go bumbling into that option, accidentally turn it off, and subsequently leave nasty messages demanding to know why their firefox doesn't double crash anymore.
Also, I would suggest that you take the time to figure out whose idea this was, because you might want to take future ideas by this same person with a grain of salt. As a general rule, clever marketing comes after the product - it should never motivate the creation of the product itself, unless you intend to defraud consumers.
Thank you. I feel better now.
Sunday, May 2, 2010
The Business Cycle - another explanation
At a given time t, the total production within an economy is distributed according to payments made by purchasers. Calling the sum of these payments the dollar expression of production, the corresponding goods expression of purchases is the total production expressed as a very large goods bundle. Neither term implies actual value. The only determinant of actual value is a detailed analysis of the goods bundle itself by experts who can evaluate the total social benefit of each good. For sake of simplicity, services provided are also considered part of production. The term "goods" will refer to both goods and services.
Alongside the acts of production are speculative sales. Speculation is defined as "ownership for the purpose other than use or consumption". An object, such as an ox, could be purchased simultaneously for production (use of the ox for plowing), speculation (sell if prices reach a certain level) or consumption (eat if food is not available). Similarly, homes are purchased for both use (to live in) and for resale (under the assumption that property prices will rise). The holding of money, such as in a savings account, or any other asset, is also an act of speculation. The act of holding is, essentially, "exchange with oneself". The sum of production purchases and speculative purchases at time t is the entirety of economic exchange at that time period. Furthermore, the total supply of money within an economy therefore participates in exchange in each time period.
Suppose that the supply of money within an economy increases at a rate greater than the total level of production. Then it must follow that speculation within that economy increases. Similarly, if production booms at a greater rate than expansion of the money supply, the number of speculative exchanges must decrease. Here, "level of production" refers to actual production and not production capacity, while "money supply" refers to actual currency in circulation and bank accounts (m1). It is premature at this juncture to make policy recommendations, because increases in the money supply can be made in a variety of ways, some of which can spur increased production in excess of the increase in money supply.
In any market, some individuals will have large, speculative holdings, and will hereafter be referred to as "wealthy". What conditions must persist over time for these speculative holdings to diminish? Similarly, what conditions must persist for these holdings to increase? Which of the two scenarios are more likely?
These questions are answered by looking at the essential choice that the wealthy have in the investment of their money. Either they invest in a productive enterprise by purchasing capital for use by that enterprise, or they invest in speculative enterprise by purchasing assets that they believe will appreciate in value. The act of simply holding onto money is tantamount to saying that all other investments are inferior, i.e. that money will increase in value.
In a situation where the economy is rapidly expanding, speculative holding tends to fall behind productive investment in terms of profit levels. Therefore, the wealthy can be expected to reduce their speculative holdings during such periods, instead investing in capital. Conversely, the wealthy will tend to withdraw capital and invest in speculative holdings during economic downturns. Despite the use of the term "Speculation" to describe non-productive investments of money, it is speculation that gives more stable (lower risk) returns to the investor, at least with respect to general market trends. Part of this risk equation is the magnification of economic events at the level of production relative to the level of simple wealth holding. The wealthy will obtain peak wealth levels by switching to speculation at the exact point of market reversal. This ensures that even as wages fall for workers, the prices of goods and rental costs do not fall proportionately (due to decreases in number of suppliers and increases in speculation in land). Thus, workers are impoverished and must consume less, leading to a decrease in prices of all speculative assets and eventually uniform deflation. This process of decay continues without any theoretical bottom, however in practice governments change policies, new technologies are developed, or wars and revolutions occur. In a broad sense, the wealthy class will only diminish in wealth concentration as a result of unexpected losses, which are correlated with changes in the direction of the general economic trend - the frequency of which principally depends on government action, as described below.
Two key features of modern economies are the dependence of the vast majority on the market for their subsistence and the use of fiat monetary systems. Historically, two different factors moderated the inescapable spiral described above: 1. The agrarian economic system, and 2. The precious metal economies. These two had particular synergies, such as feudal patterns of land ownership and the "free market" expansion of currency supplies which served to reverse economic trends. However, these counterbalances have now been totally removed from our present economies. Instead, we have a government system in which a fiat money system is implemented in a dishonest way where national governments essentially pretend to be bound by invisible rules which force them to maintain a fairly limited expansion to actual currency supplies. Furthermore, political leaders tend to know little to nothing about the economy, and of course there are virtually no academics who can honestly claim to know much more. It is therefore an operation of pure chance that brings a modern society out of economic slump.
Ironically, the cycles of growth and collapse are initiated by an underappreciated phenomenon called saturation. In a "goods saturation" collapse scenario, additional wages cannot motivate increased purchasing. Wage workers instead become speculators, accelerating any pyramidal effects already occurring within the economy. In a "speculation saturation" growth scenario, available speculative assets suffer from a relative deflation in value due to vastly overinflated prices and widespread cost of living inflation. Investors have no choice but to invest in industry in order to preserve their wealth.
A prescription for our own economy in this situation follows from the identification of our stage within this crisis: we are currently facing a non-inflationary collapse of production capacity. It is a slow moving crisis that in many ways began in the 1980s. To address it, we must devise a way to destabilize the prices of fixed assets like real estate and bonds. A rather painless way to do this is simply to reduce their opportunity cost, that is, to expand the money supply through giveaways as part of social welfare programs. The additional spending that such policies would engender would make productive investment more profitable than mere speculation, and the economic trend could be reversed.
Alongside the acts of production are speculative sales. Speculation is defined as "ownership for the purpose other than use or consumption". An object, such as an ox, could be purchased simultaneously for production (use of the ox for plowing), speculation (sell if prices reach a certain level) or consumption (eat if food is not available). Similarly, homes are purchased for both use (to live in) and for resale (under the assumption that property prices will rise). The holding of money, such as in a savings account, or any other asset, is also an act of speculation. The act of holding is, essentially, "exchange with oneself". The sum of production purchases and speculative purchases at time t is the entirety of economic exchange at that time period. Furthermore, the total supply of money within an economy therefore participates in exchange in each time period.
Suppose that the supply of money within an economy increases at a rate greater than the total level of production. Then it must follow that speculation within that economy increases. Similarly, if production booms at a greater rate than expansion of the money supply, the number of speculative exchanges must decrease. Here, "level of production" refers to actual production and not production capacity, while "money supply" refers to actual currency in circulation and bank accounts (m1). It is premature at this juncture to make policy recommendations, because increases in the money supply can be made in a variety of ways, some of which can spur increased production in excess of the increase in money supply.
In any market, some individuals will have large, speculative holdings, and will hereafter be referred to as "wealthy". What conditions must persist over time for these speculative holdings to diminish? Similarly, what conditions must persist for these holdings to increase? Which of the two scenarios are more likely?
These questions are answered by looking at the essential choice that the wealthy have in the investment of their money. Either they invest in a productive enterprise by purchasing capital for use by that enterprise, or they invest in speculative enterprise by purchasing assets that they believe will appreciate in value. The act of simply holding onto money is tantamount to saying that all other investments are inferior, i.e. that money will increase in value.
In a situation where the economy is rapidly expanding, speculative holding tends to fall behind productive investment in terms of profit levels. Therefore, the wealthy can be expected to reduce their speculative holdings during such periods, instead investing in capital. Conversely, the wealthy will tend to withdraw capital and invest in speculative holdings during economic downturns. Despite the use of the term "Speculation" to describe non-productive investments of money, it is speculation that gives more stable (lower risk) returns to the investor, at least with respect to general market trends. Part of this risk equation is the magnification of economic events at the level of production relative to the level of simple wealth holding. The wealthy will obtain peak wealth levels by switching to speculation at the exact point of market reversal. This ensures that even as wages fall for workers, the prices of goods and rental costs do not fall proportionately (due to decreases in number of suppliers and increases in speculation in land). Thus, workers are impoverished and must consume less, leading to a decrease in prices of all speculative assets and eventually uniform deflation. This process of decay continues without any theoretical bottom, however in practice governments change policies, new technologies are developed, or wars and revolutions occur. In a broad sense, the wealthy class will only diminish in wealth concentration as a result of unexpected losses, which are correlated with changes in the direction of the general economic trend - the frequency of which principally depends on government action, as described below.
Two key features of modern economies are the dependence of the vast majority on the market for their subsistence and the use of fiat monetary systems. Historically, two different factors moderated the inescapable spiral described above: 1. The agrarian economic system, and 2. The precious metal economies. These two had particular synergies, such as feudal patterns of land ownership and the "free market" expansion of currency supplies which served to reverse economic trends. However, these counterbalances have now been totally removed from our present economies. Instead, we have a government system in which a fiat money system is implemented in a dishonest way where national governments essentially pretend to be bound by invisible rules which force them to maintain a fairly limited expansion to actual currency supplies. Furthermore, political leaders tend to know little to nothing about the economy, and of course there are virtually no academics who can honestly claim to know much more. It is therefore an operation of pure chance that brings a modern society out of economic slump.
Ironically, the cycles of growth and collapse are initiated by an underappreciated phenomenon called saturation. In a "goods saturation" collapse scenario, additional wages cannot motivate increased purchasing. Wage workers instead become speculators, accelerating any pyramidal effects already occurring within the economy. In a "speculation saturation" growth scenario, available speculative assets suffer from a relative deflation in value due to vastly overinflated prices and widespread cost of living inflation. Investors have no choice but to invest in industry in order to preserve their wealth.
A prescription for our own economy in this situation follows from the identification of our stage within this crisis: we are currently facing a non-inflationary collapse of production capacity. It is a slow moving crisis that in many ways began in the 1980s. To address it, we must devise a way to destabilize the prices of fixed assets like real estate and bonds. A rather painless way to do this is simply to reduce their opportunity cost, that is, to expand the money supply through giveaways as part of social welfare programs. The additional spending that such policies would engender would make productive investment more profitable than mere speculation, and the economic trend could be reversed.
Tuesday, April 6, 2010
Laziness in economy: minimizing employment
When a human being sets to work on a task, he is compelled to complete that task in an efficient manner. In conceptualizing the task, he will have in mind some standard of quality, and go about the task with the goal of achieving that standard with the minimal expense of thought, time, resources, and muscular exertion that his expertise and available technology will allow, that is to say, to conserve effort. Typically the final result is somewhat below the standard of quality originally envisioned, but such results are tolerated by both the individual and society. This process, endlessly repeated through all the endeavors of human day-to-day life, is evidence of a governing principle of laziness that is more intimate and real, more potent in human events than any alleged "rationality" could ever be.
Here, the notion of laziness as a governing force does not imply a psychological or moral defect in the individual. Though the term technically refers only to the urge to shirk one's duties, laziness can also be seen as a pervasive force that expresses itself throughout our economic reality as a potent psychological drive to minimize effort. While a person who shirks an important duty is often punished by society, a person who does unnecessary work is often punishing himself. Even as those among us who work harder than the average win our praise and gain various types of prestige, they find themselves stressed, malnourished, culturally deprived, drug addicted, and even psychologically disturbed or physically injured. Laziness can be seen as a countervailing force, pushing back against desires to achieve and resisting unreasonable requests. Moreover, laziness is not the negative of effort, as it seems to play a role in the direction of effort. It is laziness that so often compels us to devise more efficient means in our day to day life.
Laziness is unfairly villainized within common discourse. Western society seems to retain ideas of work ethic that have their origins in feudal peasant agriculture. In such times, all work was of utmost importance. Each additional hour of labor either fulfilled a basic need or settled an obligation to a lord who dominated his vassals. Among the lowly peasants, there was never a need for each individual to independently judge others - the slackers would be dealt with systematically. However, among the more affluent, it was always possible to fake things in such a way that it brought harm and detriment to others. All social classes (distinct or arbitrarily divided) are lifted on a sea of secrets and conspiracies, by a political process. Rules are both protective and restrictive. As a person rises toward a position of power, additional burdens manifest themselves through the absence of these rules: the fledgling rule-maker discovers there are rules for making rules. In its essence, human power always flows from the consent of others to one's authority within an organized structure, that is to say, from unanimous consent of those who immediately receive orders. This consent is based primarily on evidence of ability to act in various capacities that illustrate the consent of others. It seems that all things that an individual seeks to acquire become objects not merely in themselves but symbols of the ability of that individual to acquire things, that is to say to obtain consent. Competition for acquisition sometimes develops over time, gaining conceptual depth and its own lexicon even as it remains fluid and somewhat undefined. Concepts of fashion and entertainment are examples of such competitive processes. Even though there is no wrong in losing such a competition, the losers must recognize the power of the winners, and in doing so, some agendas are advanced ahead of others. Moreover, the stakes can be very high: loyalty is itself a cardinal virtue (crimes such as treason come to mind), but in a broader sense loyalty to a cause is just one of many expressions of the authoritative consent required to further any ethical goal. Because of the limitations of the human mind and the limited flow of information, evaluations of the actual effect of any command passed down from an authority is typically exceedingly difficult or impossible for the average citizen. That is to say, our moral theory is subject to profound manipulation. It allows political processes controlled entirely by others to determine arbitrary tasks that we have a duty to complete. This in turn leads to a common perception of laziness that is based on the individual completion of these arbitrary tasks - and stacks endless obligations onto the psychology of the morally conscious individual. As an inevitable aspect of political reality, a profound skepticism of these obligations has likely been instilled into human nature - but ironically this skepticism is not expressed as a skeptic might express it. Though a skeptic might object by voicing technical objections to aspects of theory or illustrating absurd conclusions, he has still been captured by the structure, made to participate in its evolution. The only reprieve for the individual from these endless obligations is to focus on those concrete needs and wants in his immediate sphere - those things he can verify with his own eyes and address with his own hands. But as a person advances within society or as a society advances within a population, individuals find themselves more remote from both from suffering and from the means to address suffering.
In response to this dissonance, there is a great struggle within the discourse of a society, played out both on the public sphere and within the consciousness of participants and observers, to label factional allies (including the self) and enemies with politically charged descriptive terminology that imply various motives and behavioral tendencies. Within this context, the individual is compelled to labor. Even his freedom to pursue various leisure activities is in fact heavily structured: those things which individuals pursue for personal enjoyment within any society are invariably things which identify them with an immediate social group that wields some degree of political power and a more distant network of allegiances and animosities - consciously or unconsciously, an individual obtains dual purpose from his leisure. Indeed, all people have a secret and private set of vices that are publicly unmentionable, but in their own way these follow the same rules. It is questionable whether leisure itself is a motivating factor, or if some other psychological drive motivates the action, with the enjoyment of the activity being an internal aspect of some external, symbolic display. A motivational spectrum develops for the purpose of judging others, couched in a variety of explanatory terminologies, having both a negative aspect and a positive one. A person who does not labor enough can either be lazy (economics or business), of poor character (religion or philosophy) or mentally unhealthy (psychology). A learned person in any of these fields is less likely to emphasize such a concrete and real application of theory - he knows that the overwhelming lesson of education is the realization of how little is actually known in any of these disciplines. These terms and thinking techniques, rather than being illuminating of the problem, are rhetorical devices "painted over" the underlying logic of work ethic inherited from the agrarian peasantry. Ironically, the political act of judging laziness has lived on in (and is just one of many examples of) pedestrian misconceptions of academic discourse which preserve political devices that are detrimental to social welfare.
First, consider the negative aspect of this spectrum, expressed as various political acts harmful to the individual. The threat of these acts is ever present, as the typical member of a society sees their wrath visited on strangers, friends, coworkers, bosses, and subordinates. The fear, disgust, and stress that this induces forms a negative motivational spectrum that drives the members of a society to work hard, to present themselves as if they have done more work than they actually have, and to demonstrate their own allegiance to such values by joining in the ridicule and punishment of shirkers.
The positive motivational aspect, though superficially less harmful, shares many of the worst features with the negative. Here, the glittering jewels of recognition, promotion, and reward shimmer in the distance. The individual finds that recognition from unimportant individuals is easy to obtain, however it is problematic because it is typically meaningless and in a technical sense, false. As a result, he finds this recognition unsatisfying and thereby cultivates a torturous ambition, or he constructs a false belief that the recognition does have a deep meaning and thereby falsely elevates himself and the person who has recognized him beyond the position that the actual merit of his actions would normally imply. Within the relativistic soup of social reality, individuals will at times come to see the absence of punishment as reward, or the absence of reward as punishment. The only clear delineation between the two is in the mind of the authority responsible for declaring who will receive what. Promotion, properly speaking, is a type of reward but one implying potential rather than achievement. Therefore, its converse is also implied: a person passed up for a promotion is a person with less potential.
Over the ages, those who do work have applied their ingenuity to the tasks at hand, bringing about new ways of doing things (technologies) that reduce the load of work required for the completion of individual tasks. The effect of this development has been twofold: first, the individual finds that rather than being required to do less labor, the new technology is used to justify a higher level of production from each individual; secondly that as new technologies are developed, the complexity of production and therefore the hierarchical authority required to undertake each endeavor increases.
The cause of the first effect is the negotiating imbalance between the firms who offer the wages, and the workers, who provide the labor. It is not easy to summarize exactly why this persistent imbalance exists. In a deep and remote sense, the division of labor between the proletariat and capitalist class evolved from the division of labor between the lord and peasant. If the economy is seen as a dynamical system, could there simply be no force in effect to correct the initial imbalance, which has persisted like a standing wave to the present day? The proximate causes seem decidedly less satisfying but much more actionable: first, because there are many laborers, in persistent surplus and fewer firms; second, because firms are well informed relative to workers; third, because firms have the power to wait while workers must meet their immediate needs; fourth, because firms have political power. In the middle, there are revealing points, possibly the keys to the whole question: first, that the flow of currency through an economy is effectively constrained by the actions of the peak wealth accumulators, who desire to make money, meaning that the net flow is from the economy to them; second, that physical land and other essential resources of production are typically wholly partitioned in an unequal fashion, with firms investing to produce goods only when additional resource rights acquisition is unprofitable; third that worker budgets can never purchase the entire product of their own labor, thus only the constant increase in production from each worker can pay the rents associated with food, shelter, courtship, child raising, and everyday life.
The cause of the second effect is the basic nature of technology itself. Each element of a technology occupies a part of the human mind. The human mind is finite, thus, as technology developed, a threshold was reached beyond which a single mind could no longer contain all of the understanding required for technological processes. Those who share the process of understanding inherently engage in a political struggle for control of the means of production. In times when technology was simple, hierarchies could also be simple, but nowadays sophisticated management techniques are necessary.
The question of economic management is often posed as a question of how to increase production, raise the "standard of living", and limit unemployment. It is becoming clear that the unchecked desire to produce is destructive to the environment. Unexamined metrics that show increases in standard of living have also failed to correlate with individual happiness. Could it also be the case that increased employment can also be without benefit, or even harmful to the individual and the society?
Intuitively, the force of laziness indicates that there is a spectrum of employment within which an optimal point or region exists for a given level of production (unless production is measured poorly). Work has several dimensions: first, what type of work is being done; second, how are working hours distributed through the worker pool; third, how enjoyable is work for each worker?
The first question relates to appropriate levels of production and correct measurement of standards of living that reflects real quality of life. This question has been voluminously explored at www.stiglitz-sen-fitoussi.fr and I will not devote much time to it here. The answers to questions about where production ought be directed are clear. If society has the capacity to produce sufficient food that nobody goes hungry, ought society do so? If society has the capacity to build and organize cities in a way that everyone can live in the type of community they enjoy, ought society do so? If society can implement policies to protect the natural environment without harming its citizens, ought it do so? And, if the accumulation of property, patent rights, capital, and political power becomes injurious to the public good, ought the society vigorously pursue measures to correct such imbalance?
The third question relates to the inherent hierarchy of work. While some jobs are not enjoyable, others are. Concepts like the "career"might be satisfying for professionals, but other, more flexible concepts of work duties might better serve blue collar workers who work in a factory and repeat the same motion mindlessly for 40 hours a week. Civic education does not need to stop after high school - blue collar workers could have rotations and exchange programs to break up the monotony of life and to add perspective and pride to their role in industry.
The second question relates to the utilization of technology - if production is constrained to only production that increases quality of life, then there is no guarantee - in fact there is evidence against the idea - that there will be sufficient demand to provide employment at current standards of working hours for all. Thus, work must be partitioned between individuals in some way. When compared to the previous two answers, this one is by far the most radical. Yet it is the most provable of all three, and the most easily addressed by public policy.
Creating institutions to enforce a fair division of work is preferable to creation of a welfare state. In the broadest possible terms, the most general analysis possible creates three categories of possible work policy for a society. The first category are the societies that do not enforce a fair division of labor or provide unemployment services. In this system, the persistently unemployed depend on the charity of private groups in order to survive. This grizzly state of affairs is surely bad for the society as a whole, as there is little, if any, marginal benefit to those who do work and those without it suffer tremendously. The second category are the societies that do not enforce fair labor division but do provide unemployment services. These economies are divided into two overlapping classes: the middle and upper classes (hereafter called just upper class) who work hard, make significantly more than the minimum wage, and are engaged in investment and savings; and the lower class who may work hard but make close to the minimum wage, are moving frequently from one job to the other, depend on unemployment, and have either building debt or a lack of coherent investment and savings strategy. These two classes overlap because some investments always fail, some households have bad money management, and because of luck. Here, the extra labor hours that the upper class work relative to the poor generate some amount of extra wages. The poor, who are persistently unemployed and depend on social services, absorb some of these wages through the costs of their social programs being paid through progressive taxes that are visited on the upper classes. Thus, the situation is unfair to both the upper class, who must to some degree labor without compensation, and to the lower class who must go without work and the opportunities for advancement and life enrichment that work offers. The third option, the division of labor between all individuals in a society, with no long term unemployment compensation necessary, is the preferred policy. In this system, a limit on each individual's working hours is strictly enforced. For instance, the work week can be defined (such as it is now) to be only, say, 40 hours in a week. But no individual would be exempt from this. For example, if a scientist wants to work 60 hours a week on his research, he must be compensated as if he worked 20 hours of overtime, that is, paid 1.75 times his normal salary. Therefore, Universities whose policy it is to work their scientists more than 40 hours a week would be encouraged to hire more of them. This policy would then be coupled with a definition of the workweek that could be reduced based on unemployment trends. Very roughly speaking, to correct for 10% unemployment, the work week need only be reduced 10%, provided that a means exists to ensure that salaried individuals also work 10% less. This system is superior because no wealth transfer is necessary between the upper and lower class. Thus, the labor and compensation are brought into harmony.
In order to bring about an economic system focused on the fair division of labor, the ideas of work ethic that have been inherited from ancient times must be challenged. The matrix of insidious concepts that are tied to the work ethic ideal mean that this debate will be played out in numerous academic topics that seem entirely unrelated to the ideal of work ethic. But when the underlying assumptions of academic theories are laid out in detail, so often the most innocuous and basic things turn out to be incredibly complex, hiding places for endless preconceived notions. Social sciences have in general strayed too far from philosophy, and philosophy has strayed too far from its own roots. In physics, it took over 1000 years for the basic ideas such as motion and inertia to root before Isaac Newton was able to introduce his core concepts in an almost entirely philosophic work, the Principia Mathematica. If social science is to follow natural science, it must focus for some time more on the building blocks, both in experiment and in discourse. This essay has been illustrative, in part, of the simple solutions that emerge to vexing social problems when the building blocks are examined in detail.
Here, the notion of laziness as a governing force does not imply a psychological or moral defect in the individual. Though the term technically refers only to the urge to shirk one's duties, laziness can also be seen as a pervasive force that expresses itself throughout our economic reality as a potent psychological drive to minimize effort. While a person who shirks an important duty is often punished by society, a person who does unnecessary work is often punishing himself. Even as those among us who work harder than the average win our praise and gain various types of prestige, they find themselves stressed, malnourished, culturally deprived, drug addicted, and even psychologically disturbed or physically injured. Laziness can be seen as a countervailing force, pushing back against desires to achieve and resisting unreasonable requests. Moreover, laziness is not the negative of effort, as it seems to play a role in the direction of effort. It is laziness that so often compels us to devise more efficient means in our day to day life.
Laziness is unfairly villainized within common discourse. Western society seems to retain ideas of work ethic that have their origins in feudal peasant agriculture. In such times, all work was of utmost importance. Each additional hour of labor either fulfilled a basic need or settled an obligation to a lord who dominated his vassals. Among the lowly peasants, there was never a need for each individual to independently judge others - the slackers would be dealt with systematically. However, among the more affluent, it was always possible to fake things in such a way that it brought harm and detriment to others. All social classes (distinct or arbitrarily divided) are lifted on a sea of secrets and conspiracies, by a political process. Rules are both protective and restrictive. As a person rises toward a position of power, additional burdens manifest themselves through the absence of these rules: the fledgling rule-maker discovers there are rules for making rules. In its essence, human power always flows from the consent of others to one's authority within an organized structure, that is to say, from unanimous consent of those who immediately receive orders. This consent is based primarily on evidence of ability to act in various capacities that illustrate the consent of others. It seems that all things that an individual seeks to acquire become objects not merely in themselves but symbols of the ability of that individual to acquire things, that is to say to obtain consent. Competition for acquisition sometimes develops over time, gaining conceptual depth and its own lexicon even as it remains fluid and somewhat undefined. Concepts of fashion and entertainment are examples of such competitive processes. Even though there is no wrong in losing such a competition, the losers must recognize the power of the winners, and in doing so, some agendas are advanced ahead of others. Moreover, the stakes can be very high: loyalty is itself a cardinal virtue (crimes such as treason come to mind), but in a broader sense loyalty to a cause is just one of many expressions of the authoritative consent required to further any ethical goal. Because of the limitations of the human mind and the limited flow of information, evaluations of the actual effect of any command passed down from an authority is typically exceedingly difficult or impossible for the average citizen. That is to say, our moral theory is subject to profound manipulation. It allows political processes controlled entirely by others to determine arbitrary tasks that we have a duty to complete. This in turn leads to a common perception of laziness that is based on the individual completion of these arbitrary tasks - and stacks endless obligations onto the psychology of the morally conscious individual. As an inevitable aspect of political reality, a profound skepticism of these obligations has likely been instilled into human nature - but ironically this skepticism is not expressed as a skeptic might express it. Though a skeptic might object by voicing technical objections to aspects of theory or illustrating absurd conclusions, he has still been captured by the structure, made to participate in its evolution. The only reprieve for the individual from these endless obligations is to focus on those concrete needs and wants in his immediate sphere - those things he can verify with his own eyes and address with his own hands. But as a person advances within society or as a society advances within a population, individuals find themselves more remote from both from suffering and from the means to address suffering.
In response to this dissonance, there is a great struggle within the discourse of a society, played out both on the public sphere and within the consciousness of participants and observers, to label factional allies (including the self) and enemies with politically charged descriptive terminology that imply various motives and behavioral tendencies. Within this context, the individual is compelled to labor. Even his freedom to pursue various leisure activities is in fact heavily structured: those things which individuals pursue for personal enjoyment within any society are invariably things which identify them with an immediate social group that wields some degree of political power and a more distant network of allegiances and animosities - consciously or unconsciously, an individual obtains dual purpose from his leisure. Indeed, all people have a secret and private set of vices that are publicly unmentionable, but in their own way these follow the same rules. It is questionable whether leisure itself is a motivating factor, or if some other psychological drive motivates the action, with the enjoyment of the activity being an internal aspect of some external, symbolic display. A motivational spectrum develops for the purpose of judging others, couched in a variety of explanatory terminologies, having both a negative aspect and a positive one. A person who does not labor enough can either be lazy (economics or business), of poor character (religion or philosophy) or mentally unhealthy (psychology). A learned person in any of these fields is less likely to emphasize such a concrete and real application of theory - he knows that the overwhelming lesson of education is the realization of how little is actually known in any of these disciplines. These terms and thinking techniques, rather than being illuminating of the problem, are rhetorical devices "painted over" the underlying logic of work ethic inherited from the agrarian peasantry. Ironically, the political act of judging laziness has lived on in (and is just one of many examples of) pedestrian misconceptions of academic discourse which preserve political devices that are detrimental to social welfare.
First, consider the negative aspect of this spectrum, expressed as various political acts harmful to the individual. The threat of these acts is ever present, as the typical member of a society sees their wrath visited on strangers, friends, coworkers, bosses, and subordinates. The fear, disgust, and stress that this induces forms a negative motivational spectrum that drives the members of a society to work hard, to present themselves as if they have done more work than they actually have, and to demonstrate their own allegiance to such values by joining in the ridicule and punishment of shirkers.
The positive motivational aspect, though superficially less harmful, shares many of the worst features with the negative. Here, the glittering jewels of recognition, promotion, and reward shimmer in the distance. The individual finds that recognition from unimportant individuals is easy to obtain, however it is problematic because it is typically meaningless and in a technical sense, false. As a result, he finds this recognition unsatisfying and thereby cultivates a torturous ambition, or he constructs a false belief that the recognition does have a deep meaning and thereby falsely elevates himself and the person who has recognized him beyond the position that the actual merit of his actions would normally imply. Within the relativistic soup of social reality, individuals will at times come to see the absence of punishment as reward, or the absence of reward as punishment. The only clear delineation between the two is in the mind of the authority responsible for declaring who will receive what. Promotion, properly speaking, is a type of reward but one implying potential rather than achievement. Therefore, its converse is also implied: a person passed up for a promotion is a person with less potential.
Over the ages, those who do work have applied their ingenuity to the tasks at hand, bringing about new ways of doing things (technologies) that reduce the load of work required for the completion of individual tasks. The effect of this development has been twofold: first, the individual finds that rather than being required to do less labor, the new technology is used to justify a higher level of production from each individual; secondly that as new technologies are developed, the complexity of production and therefore the hierarchical authority required to undertake each endeavor increases.
The cause of the first effect is the negotiating imbalance between the firms who offer the wages, and the workers, who provide the labor. It is not easy to summarize exactly why this persistent imbalance exists. In a deep and remote sense, the division of labor between the proletariat and capitalist class evolved from the division of labor between the lord and peasant. If the economy is seen as a dynamical system, could there simply be no force in effect to correct the initial imbalance, which has persisted like a standing wave to the present day? The proximate causes seem decidedly less satisfying but much more actionable: first, because there are many laborers, in persistent surplus and fewer firms; second, because firms are well informed relative to workers; third, because firms have the power to wait while workers must meet their immediate needs; fourth, because firms have political power. In the middle, there are revealing points, possibly the keys to the whole question: first, that the flow of currency through an economy is effectively constrained by the actions of the peak wealth accumulators, who desire to make money, meaning that the net flow is from the economy to them; second, that physical land and other essential resources of production are typically wholly partitioned in an unequal fashion, with firms investing to produce goods only when additional resource rights acquisition is unprofitable; third that worker budgets can never purchase the entire product of their own labor, thus only the constant increase in production from each worker can pay the rents associated with food, shelter, courtship, child raising, and everyday life.
The cause of the second effect is the basic nature of technology itself. Each element of a technology occupies a part of the human mind. The human mind is finite, thus, as technology developed, a threshold was reached beyond which a single mind could no longer contain all of the understanding required for technological processes. Those who share the process of understanding inherently engage in a political struggle for control of the means of production. In times when technology was simple, hierarchies could also be simple, but nowadays sophisticated management techniques are necessary.
The question of economic management is often posed as a question of how to increase production, raise the "standard of living", and limit unemployment. It is becoming clear that the unchecked desire to produce is destructive to the environment. Unexamined metrics that show increases in standard of living have also failed to correlate with individual happiness. Could it also be the case that increased employment can also be without benefit, or even harmful to the individual and the society?
Intuitively, the force of laziness indicates that there is a spectrum of employment within which an optimal point or region exists for a given level of production (unless production is measured poorly). Work has several dimensions: first, what type of work is being done; second, how are working hours distributed through the worker pool; third, how enjoyable is work for each worker?
The first question relates to appropriate levels of production and correct measurement of standards of living that reflects real quality of life. This question has been voluminously explored at www.stiglitz-sen-fitoussi.fr and I will not devote much time to it here. The answers to questions about where production ought be directed are clear. If society has the capacity to produce sufficient food that nobody goes hungry, ought society do so? If society has the capacity to build and organize cities in a way that everyone can live in the type of community they enjoy, ought society do so? If society can implement policies to protect the natural environment without harming its citizens, ought it do so? And, if the accumulation of property, patent rights, capital, and political power becomes injurious to the public good, ought the society vigorously pursue measures to correct such imbalance?
The third question relates to the inherent hierarchy of work. While some jobs are not enjoyable, others are. Concepts like the "career"might be satisfying for professionals, but other, more flexible concepts of work duties might better serve blue collar workers who work in a factory and repeat the same motion mindlessly for 40 hours a week. Civic education does not need to stop after high school - blue collar workers could have rotations and exchange programs to break up the monotony of life and to add perspective and pride to their role in industry.
The second question relates to the utilization of technology - if production is constrained to only production that increases quality of life, then there is no guarantee - in fact there is evidence against the idea - that there will be sufficient demand to provide employment at current standards of working hours for all. Thus, work must be partitioned between individuals in some way. When compared to the previous two answers, this one is by far the most radical. Yet it is the most provable of all three, and the most easily addressed by public policy.
Creating institutions to enforce a fair division of work is preferable to creation of a welfare state. In the broadest possible terms, the most general analysis possible creates three categories of possible work policy for a society. The first category are the societies that do not enforce a fair division of labor or provide unemployment services. In this system, the persistently unemployed depend on the charity of private groups in order to survive. This grizzly state of affairs is surely bad for the society as a whole, as there is little, if any, marginal benefit to those who do work and those without it suffer tremendously. The second category are the societies that do not enforce fair labor division but do provide unemployment services. These economies are divided into two overlapping classes: the middle and upper classes (hereafter called just upper class) who work hard, make significantly more than the minimum wage, and are engaged in investment and savings; and the lower class who may work hard but make close to the minimum wage, are moving frequently from one job to the other, depend on unemployment, and have either building debt or a lack of coherent investment and savings strategy. These two classes overlap because some investments always fail, some households have bad money management, and because of luck. Here, the extra labor hours that the upper class work relative to the poor generate some amount of extra wages. The poor, who are persistently unemployed and depend on social services, absorb some of these wages through the costs of their social programs being paid through progressive taxes that are visited on the upper classes. Thus, the situation is unfair to both the upper class, who must to some degree labor without compensation, and to the lower class who must go without work and the opportunities for advancement and life enrichment that work offers. The third option, the division of labor between all individuals in a society, with no long term unemployment compensation necessary, is the preferred policy. In this system, a limit on each individual's working hours is strictly enforced. For instance, the work week can be defined (such as it is now) to be only, say, 40 hours in a week. But no individual would be exempt from this. For example, if a scientist wants to work 60 hours a week on his research, he must be compensated as if he worked 20 hours of overtime, that is, paid 1.75 times his normal salary. Therefore, Universities whose policy it is to work their scientists more than 40 hours a week would be encouraged to hire more of them. This policy would then be coupled with a definition of the workweek that could be reduced based on unemployment trends. Very roughly speaking, to correct for 10% unemployment, the work week need only be reduced 10%, provided that a means exists to ensure that salaried individuals also work 10% less. This system is superior because no wealth transfer is necessary between the upper and lower class. Thus, the labor and compensation are brought into harmony.
In order to bring about an economic system focused on the fair division of labor, the ideas of work ethic that have been inherited from ancient times must be challenged. The matrix of insidious concepts that are tied to the work ethic ideal mean that this debate will be played out in numerous academic topics that seem entirely unrelated to the ideal of work ethic. But when the underlying assumptions of academic theories are laid out in detail, so often the most innocuous and basic things turn out to be incredibly complex, hiding places for endless preconceived notions. Social sciences have in general strayed too far from philosophy, and philosophy has strayed too far from its own roots. In physics, it took over 1000 years for the basic ideas such as motion and inertia to root before Isaac Newton was able to introduce his core concepts in an almost entirely philosophic work, the Principia Mathematica. If social science is to follow natural science, it must focus for some time more on the building blocks, both in experiment and in discourse. This essay has been illustrative, in part, of the simple solutions that emerge to vexing social problems when the building blocks are examined in detail.
Monday, March 15, 2010
Measuring and aggregating incentives to work
In The Affluent Society, Galbraith asks whether it is the products of most laborer's work or the wages paid to them that have a greater positive social impact. By a strict Pareto analysis where market value is the only measure of worth, it must be the case that the product of the labor is more valuable. Rather than solving the problem, such a result is more of an example of absurdity, casting doubt on the Pareto Optimality concept.
The question can actually be broadened, as it has been by contemporary economists. Professor Randall Wray of UMKC looks at a variety of factors that workers gain from working rather than sitting idle, and argues that the social costs of unemployment are actually grossly underrated. Rather than utilize his analysis, which is not holistic enough for my tastes, I want to develop my own system for estimating the value of employment for the laborer.
Borrowing again and elaborating on arguments developed in The Affluent Society, Generally speaking, a worker will labor for some combination of the following reasons:
1. Pecuniary Compensation (wage, salary, bonuses)
2. Ideology (feelings of the righteousness, charity or necessity of his actions)
3. Fear (punishment awaits those that do not work)
4. Personal Education (Development of skills or specialized knowledge)
5. Conveyance of Status (The worker gains some status that is valuable, such as being considered "experienced" or being considered a brave or good person)
6. Leisure (The task is the preferred alternative to boredom)
Without this broad set of motivating factors, it becomes impossible to understand why some activities become ones that individuals pay for and others become ones that individuals desire to be paid for. These may be negative or positive.
An economy is actually a dynamical system, and so there are two more general considerations. First, that the relative value of each of these factors to an individual will be evaluated by that individual on the basis of net gains/losses from the individual's current position. Secondly, that a set of filters exist which limit the potential applicant pool for any given position. Once again, speaking generally, they are as follows:
1. Status (holding specific titles or claims to experience)
2. Education (having certain skills or knowledge)
3. Geographic proximity (worker and firm must be within a certain radius)
4. Cultural Conformity (being part of a sufficiently similar cultural group, in particular having a common language)
5. Search success (the firm or worker must search each other out and will not always find all matches)
6. Miscellaneous Hiring Filters (personality tests, interview "impressions", arbitrary limits to considered applicants, etc.)
These are not numerical values. They are subsets. The space that is the intersection of all of these constraints contains all the potential qualified applicants. Ideally, firms will then evaluate potential applicants within this space, and perform a cost-benefit analysis, ultimately hiring individuals who promise the greatest positive impact on the firm given their requested wage. But, to capture a real approximation of firm behavior in this respect requires an understanding of the internal politics of firms and empirical data for theories of internal politics to analyze.
The existence of so many constraints on worker pools harms the ability of firms and workers to to find matches that would work well for them. It is appalling, for instance, that so many individuals would happily work as CEOs or Doctors but are effectively prohibited from pursuing such careers. This has led, in once case, to vastly overinflated wages, and in the other case, to shortage.
Regardless of the cause, it is clear that the empirical state of the economy is far from ideal. Not only are many individuals who seek labor not finding it, but many tasks which would be highly enjoyable to a large sector of the population, such as philanthropic work, is not available to individuals. Finally, many people work extremely hard only to make enough for bare survival. Given our natural resource position, this can be due only to gluts in worker pools. Nobody should work only out of fear of poverty, homelessness, or starvation.
The question can actually be broadened, as it has been by contemporary economists. Professor Randall Wray of UMKC looks at a variety of factors that workers gain from working rather than sitting idle, and argues that the social costs of unemployment are actually grossly underrated. Rather than utilize his analysis, which is not holistic enough for my tastes, I want to develop my own system for estimating the value of employment for the laborer.
Borrowing again and elaborating on arguments developed in The Affluent Society, Generally speaking, a worker will labor for some combination of the following reasons:
1. Pecuniary Compensation (wage, salary, bonuses)
2. Ideology (feelings of the righteousness, charity or necessity of his actions)
3. Fear (punishment awaits those that do not work)
4. Personal Education (Development of skills or specialized knowledge)
5. Conveyance of Status (The worker gains some status that is valuable, such as being considered "experienced" or being considered a brave or good person)
6. Leisure (The task is the preferred alternative to boredom)
Without this broad set of motivating factors, it becomes impossible to understand why some activities become ones that individuals pay for and others become ones that individuals desire to be paid for. These may be negative or positive.
An economy is actually a dynamical system, and so there are two more general considerations. First, that the relative value of each of these factors to an individual will be evaluated by that individual on the basis of net gains/losses from the individual's current position. Secondly, that a set of filters exist which limit the potential applicant pool for any given position. Once again, speaking generally, they are as follows:
1. Status (holding specific titles or claims to experience)
2. Education (having certain skills or knowledge)
3. Geographic proximity (worker and firm must be within a certain radius)
4. Cultural Conformity (being part of a sufficiently similar cultural group, in particular having a common language)
5. Search success (the firm or worker must search each other out and will not always find all matches)
6. Miscellaneous Hiring Filters (personality tests, interview "impressions", arbitrary limits to considered applicants, etc.)
These are not numerical values. They are subsets. The space that is the intersection of all of these constraints contains all the potential qualified applicants. Ideally, firms will then evaluate potential applicants within this space, and perform a cost-benefit analysis, ultimately hiring individuals who promise the greatest positive impact on the firm given their requested wage. But, to capture a real approximation of firm behavior in this respect requires an understanding of the internal politics of firms and empirical data for theories of internal politics to analyze.
The existence of so many constraints on worker pools harms the ability of firms and workers to to find matches that would work well for them. It is appalling, for instance, that so many individuals would happily work as CEOs or Doctors but are effectively prohibited from pursuing such careers. This has led, in once case, to vastly overinflated wages, and in the other case, to shortage.
Regardless of the cause, it is clear that the empirical state of the economy is far from ideal. Not only are many individuals who seek labor not finding it, but many tasks which would be highly enjoyable to a large sector of the population, such as philanthropic work, is not available to individuals. Finally, many people work extremely hard only to make enough for bare survival. Given our natural resource position, this can be due only to gluts in worker pools. Nobody should work only out of fear of poverty, homelessness, or starvation.
Thursday, March 11, 2010
Pigouvian taxes and subsidies
There is a theory in economics that an effective way to reduce the incidence of a bad behavior is to place a tax on it. The reasoning goes that this tax increases the cost of the behavior, thus by the law of supply and demand, the quantity demanded decreases. The use of taxes for the purpose of balancing out externality costs is referred to as a Pigouvian tax.
The implementation of these strategies in the real world tests both the entire regulatory framework and the economic theories. This naturally complicates things - are failures the result of the theory being wrong or merely due to flaws in implementation? Many public policies that seem to have great promise may actually be nothing more than the fiscal equivalent of building a levee on this mile of the river: flooding is prevented here but made worse downstream.
I have been approached on multiple occasions by bicycle advocates who have suggested that better bike policies and funding for bicycles can best be brought about through a campaign against car usage. The reasoning goes that by not funding more roads and by increasing taxes on gasoline, the "cost" of driving increases. By the Pigouvian reasoning, this will lead - nay, force - people to pursue alternative transportation options.
There is certainly some marginal effect, but it will not follow a uniform curve. This marginal effect will be a function of the attractiveness of alternatives, and these alternatives can be quite varied. The temptation is to be lazy, and to assume that some intersection of continuous curves defines the demand functions, meaning that each incremental cost increase of driving would have a similar, incremental decrease in driving. This, of course, is not the whole story, because the reality of the situation depends on the discrete decisions that are made. A small increase may not be enough to actually push a different transportation option into the top spot - people are actually quite uniform in their transportation situations and the biking/public transit system tends to have a more or less uniform cost. Furthermore, an additional "hump" that represents the force of habit may block people from changing habits for savings that are insignificant.
Therefore, there is a threshold below which only an insignificant portion of drivers would bother changing their plans. Above this threshold, a large number of drivers would seek to change their plans. And so, the question now arises, "What is the value of incremental driving disincentives both below and above the key threshold?"
Below the threshold, taxes on gasoline and congestion promoting policies amount to little more than regressive taxes. That is to say, the cost is passed through the drivers. Rather than changing their driving habits, it merely leads them to have less wealth available to purchase other goods in the economy. Owing to the dependence of many goods on gasoline transport, these taxes may also be expressed in the cost of goods.
The story is essentially the same above the threshold as well: those who are still driving with high taxes on driving are unlikely to change their behavior simply because driving starts to have a slightly higher cost.
The real effect occurs at the threshold, where the variable is actually sensitive. This is the only area where a case can actually be made that the pigouvian incentive concept is a good idea, because here the tax actually does bring about a reduction in the unwanted behavior. Here, the supply of the chosen alternative goods must be sufficiently flexible to absorb the relatively rapid change in habits that the cost increases bring about. But are public transit and bike networks actually capable of making these sudden changes? Not really. Here again, even at the threshold, the consumers will find they are unable to switch because the existing bike infrastructure is insufficient and the existing mass transit system is already operating at capacity.
A similar argument can be made for subsidies of public transit and bicycle infrastructure: they will be underutilized and fail cost/benefit tests without a complimentary policy of increasing the cost associated with existing behavior.
So, it is sensible to propose a steep tax, and to cut back severely on existing vehicle infrastructure, such that the effect is sufficient to bring incentives across the threshold, only if a comprehensive expansion of public transit and bicycle infrastructure is also implemented in parity.
In reality, the issue of cost pass-through is present in every tax and subsidy scheme. It can have a variety of unintended consequences. Generally, cost driven changes in consumer behavior come in the form of regressive policies. Care should be taken by well intentioned reformers to take the two steps outlined here: first, to find any thresholds in the discrete consumption bundles of actual goods; and second, to find and assess the role of potential bottlenecks in the desired new behavior pattern.
Additionally, there are two more potential problems in the basic implementation of such systems.
First, the shift in behaviors as a result of increasing costs may be unpredictable. Could increases in driving cost drive a portion of people to simply never leave their houses, instead becoming Television and Internet addicts? Could toxic waste disposal fees, instead of leading to reductions in toxic manufacturing processes, lead to the marketing of building material mixtures that contain these toxins (so that they do not need to be disposed)? The regulatory framework, as well as the nature of the goods in question, are the determinants of such results. Thus, taxes may need to be imposed on a large number of goods, and subsidies or other supply expansions may need to be effected on a similar scale.
Secondly, the political cost may be great. A politician in anything but a safe district would have to be incompetent to back a gasoline tax. Even safe politicians may want to vote against a gas tax simply to preserve the stream of automobile lobby dollars. At some point, advocates for social and environmental justice will need to assess the political realities. Though it is a difficult task, compromise will be necessary in all environmental agendas. For real political change, a great deal of consensus, log rolling, and popular awareness are essential.
In conclusion, there are four prerequisites for the use of a pigouvian tax/subsidy scheme:
1. Discrete understanding of the supply/demand for the goods to be taxed and subsidized in terms of the consumption bundles of the consumer demographics.
2. Ability of policies to simultaneously cross both the demand threshold for the good that is to be suppressed and any necessary subsidy to supply of the substitute good.
3. Adequate regulatory structure to ensure that new consumer behavior will actually be as planned. This may require a comprehensive set of many taxes and many subsidies across a large number of goods.
4. A strong political position for the elected officials responsible for the policies that bring about 1-3, as well as an electorate that is highly sympathetic with the cause that such policies represent.
The implementation of these strategies in the real world tests both the entire regulatory framework and the economic theories. This naturally complicates things - are failures the result of the theory being wrong or merely due to flaws in implementation? Many public policies that seem to have great promise may actually be nothing more than the fiscal equivalent of building a levee on this mile of the river: flooding is prevented here but made worse downstream.
I have been approached on multiple occasions by bicycle advocates who have suggested that better bike policies and funding for bicycles can best be brought about through a campaign against car usage. The reasoning goes that by not funding more roads and by increasing taxes on gasoline, the "cost" of driving increases. By the Pigouvian reasoning, this will lead - nay, force - people to pursue alternative transportation options.
There is certainly some marginal effect, but it will not follow a uniform curve. This marginal effect will be a function of the attractiveness of alternatives, and these alternatives can be quite varied. The temptation is to be lazy, and to assume that some intersection of continuous curves defines the demand functions, meaning that each incremental cost increase of driving would have a similar, incremental decrease in driving. This, of course, is not the whole story, because the reality of the situation depends on the discrete decisions that are made. A small increase may not be enough to actually push a different transportation option into the top spot - people are actually quite uniform in their transportation situations and the biking/public transit system tends to have a more or less uniform cost. Furthermore, an additional "hump" that represents the force of habit may block people from changing habits for savings that are insignificant.
Therefore, there is a threshold below which only an insignificant portion of drivers would bother changing their plans. Above this threshold, a large number of drivers would seek to change their plans. And so, the question now arises, "What is the value of incremental driving disincentives both below and above the key threshold?"
Below the threshold, taxes on gasoline and congestion promoting policies amount to little more than regressive taxes. That is to say, the cost is passed through the drivers. Rather than changing their driving habits, it merely leads them to have less wealth available to purchase other goods in the economy. Owing to the dependence of many goods on gasoline transport, these taxes may also be expressed in the cost of goods.
The story is essentially the same above the threshold as well: those who are still driving with high taxes on driving are unlikely to change their behavior simply because driving starts to have a slightly higher cost.
The real effect occurs at the threshold, where the variable is actually sensitive. This is the only area where a case can actually be made that the pigouvian incentive concept is a good idea, because here the tax actually does bring about a reduction in the unwanted behavior. Here, the supply of the chosen alternative goods must be sufficiently flexible to absorb the relatively rapid change in habits that the cost increases bring about. But are public transit and bike networks actually capable of making these sudden changes? Not really. Here again, even at the threshold, the consumers will find they are unable to switch because the existing bike infrastructure is insufficient and the existing mass transit system is already operating at capacity.
A similar argument can be made for subsidies of public transit and bicycle infrastructure: they will be underutilized and fail cost/benefit tests without a complimentary policy of increasing the cost associated with existing behavior.
So, it is sensible to propose a steep tax, and to cut back severely on existing vehicle infrastructure, such that the effect is sufficient to bring incentives across the threshold, only if a comprehensive expansion of public transit and bicycle infrastructure is also implemented in parity.
In reality, the issue of cost pass-through is present in every tax and subsidy scheme. It can have a variety of unintended consequences. Generally, cost driven changes in consumer behavior come in the form of regressive policies. Care should be taken by well intentioned reformers to take the two steps outlined here: first, to find any thresholds in the discrete consumption bundles of actual goods; and second, to find and assess the role of potential bottlenecks in the desired new behavior pattern.
Additionally, there are two more potential problems in the basic implementation of such systems.
First, the shift in behaviors as a result of increasing costs may be unpredictable. Could increases in driving cost drive a portion of people to simply never leave their houses, instead becoming Television and Internet addicts? Could toxic waste disposal fees, instead of leading to reductions in toxic manufacturing processes, lead to the marketing of building material mixtures that contain these toxins (so that they do not need to be disposed)? The regulatory framework, as well as the nature of the goods in question, are the determinants of such results. Thus, taxes may need to be imposed on a large number of goods, and subsidies or other supply expansions may need to be effected on a similar scale.
Secondly, the political cost may be great. A politician in anything but a safe district would have to be incompetent to back a gasoline tax. Even safe politicians may want to vote against a gas tax simply to preserve the stream of automobile lobby dollars. At some point, advocates for social and environmental justice will need to assess the political realities. Though it is a difficult task, compromise will be necessary in all environmental agendas. For real political change, a great deal of consensus, log rolling, and popular awareness are essential.
In conclusion, there are four prerequisites for the use of a pigouvian tax/subsidy scheme:
1. Discrete understanding of the supply/demand for the goods to be taxed and subsidized in terms of the consumption bundles of the consumer demographics.
2. Ability of policies to simultaneously cross both the demand threshold for the good that is to be suppressed and any necessary subsidy to supply of the substitute good.
3. Adequate regulatory structure to ensure that new consumer behavior will actually be as planned. This may require a comprehensive set of many taxes and many subsidies across a large number of goods.
4. A strong political position for the elected officials responsible for the policies that bring about 1-3, as well as an electorate that is highly sympathetic with the cause that such policies represent.
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