Analysis, whether economic or other, never yields more than a statement about the tendencies present in an observable pattern. And these never tell us what will happen to the pattern but only what would happen if they continued to act as they have been acting in the time interval covered by our observation and if no other factors intruded. “Inevitability” or “necessity” can never mean more than this.
My final conclusion therefore does not differ, however much my argument may, from that of most socialist writers and in particular from that of all Marxists. But in order to accept it one does not need to be a socialist. Prognosis does not imply anything about the desirability of the course of events that one predicts. If a doctor predicts that his patient will die presently, this does not mean that he desires it.
There is however another method of dealing with obvious though uncomfortable truth, viz., the method of sneering at its triviality. Such a sneer will serve as well as a refutation would, for the average audience is as a rule perfectly unaware of the fact that it often covers the impossibility of denial—a pretty specimen of social psychology.]
But whether lasting or temporary, getting worse or not, unemployment undoubtedly is and always has been a scourge.
the real tragedy is not unemployment per se, but unemployment plus the impossibility of providing adequately for the unemployed without impairing the conditions of further economic development:
for obviously the suffering and degradation—the destruction of human values—which we associate with unemployment, though not the waste of productive resources, would be largely eliminated and unemployment would lose practically all its terror if the private life of the unemployed were not seriously affected by their unemployment. The indictment stands that in the past—say, roughly, to the end of the nineteenth century—the capitalist order was not only unwilling but also quite incapable of guaranteeing this.
But since it will be able to do so if it keeps up its past performance for another half century this indictment would in that case enter the limbo filled by the sorry specters of child labor and sixteen-hour working days and five persons living in one room which it is quite proper to emphasize when we are talking about the past social costs of capitalist achievement but which are not necessarily relevant to the balance of alternatives for the future.
But as soon as I implied that the following fifty years might actually display a similar average rate of increase, I apparently did commit a statistical crime; it is, of course, clear that a historical record of production over any given period does not in itself justify any extrapolation at all,1 let alone an extrapolation over half a century.
No doubt, the period that furnished our data was one of comparatively unfettered capitalism. But this fact does not in itself provide a sufficient link between the performance and the capitalist engine. In order to believe that this was more than coincidence we must satisfy ourselves first, that there is an understandable relation between the capitalist order and the observed rate of increase in output; second, that, given such a relation, the rate of increase was actually due to it and not to particularly favorable conditions which had nothing to do with capitalism.
1. Unlike the class of feudal lords, the commercial and industrial bourgeoisie rose by business success. Bourgeois society has been cast in a purely economic mold: its foundations, beams and beacons are all made of economic material. The building faces toward the economic side of life. Prizes and penalties are measured in pecuniary terms. Going up and going down means making and losing money.
Wherever the bourgeois way of life asserts itself sufficiently to dim the beacons of other social worlds, these promises are strong enough to attract the large majority of supernormal brains and to identify success with business success. They are not proffered at random; yet there is a sufficiently enticing admixture of chance: the game is not like roulette, it is more like poker.
but if there were a way of measuring either that ability in general or the personal achievement that goes into any particular success, the premiums actually paid out would probably not be found proportional to either.
Spectacular prizes much greater than would have been necessary to call forth the particular effort are thrown to a small minority of winners, thus propelling much more efficaciously than a more equal and more “just” distribution would, the activity of that large majority of businessmen who receive in return very modest compensation or nothing or less than nothing, and yet do their utmost because they have the big prizes before their eyes and overrate their chances of doing equally well.
The term Classical Economists will in this book be used to designate the leading English economists whose works appeared between 1776 and 1848. Adam Smith, Ricardo, Malthus, Senior and John Stuart Mill are the outstanding names.
like every other branch of our knowledge, economics, as its analytic engine improves, moves fatally away from that happy stage in which all problems, methods and results could be made accessible to every educated person without special training.
And as regards practically all the finished products and services of industry and trade, it is clear that every grocer, every filling station, every manufacturer of gloves or shaving cream or handsaws has a small and precarious market of his own which he tries—must try—to build up and to keep by price strategy, quality strategy—“product differentiation”—and advertising. Thus we get a completely different pattern which there seems to be no reason to expect to yield the results of perfect competition and which fits much better into the monopolistic schema. In these cases we speak of Monopolistic Competition. Their theory has been one of the major contributions to postwar economics.9
One may hold that it always has been so and that all along output has been expanding in spite of the secular sabotage perpetrated by the managing bourgeoisie. Advocates of this proposition would have to produce evidence to the effect that the observed rate of increase can be accounted for by a sequence of favorable circumstances unconnected with the mechanism of private enterprise and strong enough to overcome the latter’s resistance.
If we economists were given less to wishful thinking and more to the observation of facts, doubts would immediately arise as to the realistic virtues of a theory that would have led us to expect a very different result.
The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process. It may seem strange that anyone can fail to see so obvious a fact which moreover was long ago emphasized by Karl Marx. Yet that fragmentary analysis which yields the bulk of our propositions about the functioning of modern capitalism persistently neglects it.
The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.
A system—any system, economic or other—that at every given point of time fully utilizes its possibilities to the best advantage may yet in the long run be inferior to a system that does so at no given point of time, because the latter’s failure to do so may be a condition for the level or speed of long-run performance.
But in the process of creative destruction, restrictive practices may do much to steady the ship and to alleviate temporary difficulties. This is in fact a very familiar argument which always turns up in times of depression and, as everyone knows, has become very popular with governments and their economic advisers—witness the NRA.
In analyzing such business strategy ex visu of a given point of time, the investigating economist or government agent sees price policies that seem to him predatory and restrictions of output that seem to him synonymous with loss of opportunities to produce. He does not see that restrictions of this type are, in the conditions of the perennial gale, incidents, often unavoidable incidents, of a long-run process of expansion which they protect rather than impede. There is no more of paradox in this than there is in saying that motorcars are traveling faster than they otherwise would because they are provided with brakes.
Among themselves, the three concerns behave in a way which should be called corespective rather than competitive: they refrain from certain aggressive devices (which, by the way, would also be absent in perfect competition);
Rational as distinguished from vindictive regulation by public authority turns out to be an extremely delicate problem which not every government agency, particularly when in full cry against big business, can be trusted to solve.6
Of course, plenty of cases of genuine price rigidity remain—of prices which are being kept constant as a matter of business policy or which remain unchanged because it is difficult to change, say, a price set by a cartel after laborious negotiations. In order to appraise the influence of this fact on the long-run development of output, it is first of all necessary to realize that this rigidity is essentially a short-run phenomenon.
A new type of machine is in general but a link in a chain of improvements and may presently become obsolete. In a case like this it would obviously not be rational to follow the chain link by link regardless of the capital loss to be suffered each time.
For, especially in manufacturing industry, a monopoly position is in general no cushion to sleep on. As it can be gained, so it can be retained only by alertness and energy.
But when all the facts of the case are taken into consideration, it is no longer correct to say that perfect competition wins out on that score. For though a concern that has to accept and cannot set prices would, in fact, use all of its capacity that can produce at marginal costs covered by the ruling prices, it does not follow that it would ever have the quantity and quality of capacity that big business has created and was able to create precisely because it is in a position to use it “strategically.”
The last candidate is technological progress. Was not the observed performance due to that stream of inventions that revolutionized the technique of production rather than to the businessman’s hunt for profits? The answer is in the negative. The carrying into effect of those technological novelties was of the essence of that hunt.
we are faced by still another question, viz., the question to what extent it is legitimate to assume that the capitalist engine will—or would if allowed to do so—work on in the near future, say for another forty years, about as successfully as it did in the past.
The second question is whether the forces and mechanisms offered by the theory of vanishing investment opportunity are the ones to stress. In the following chapters I am going to submit another theory of what will eventually kill capitalism,
1. For every given state of human wants and of technology (in the widest possible sense of the term) there is of course for every rate of real wages a definite amount of fixed and circulating capital that will spell saturation. If wants and methods of production had been frozen for good at their state in 1800, such a point would have been reached long ago.
For if everyone’s wants were satisfied or nearly satisfied, increase in the number of consumers would ex hypothesi be the only major source of additional demand.
I am very far indeed from making light of the phenomenon under discussion. The falling birth rate seems to me to be one of the most significant features of our time. We shall see that even from a purely economic standpoint it is of cardinal importance, both as a symptom and as a cause of changing motivation. This however is a more complicated matter.
As far as that goes, those economists who predict a “flop” on this ground simply do what unfortunately economists have always been prone to do: as once they worried the public, on quite inadequate grounds, with the economic dangers of excessive numbers of mouths to feed,6 so they worry it now, on no better grounds, with the economic dangers of deficiencies.
It is gratuitous to assume not only that the “closing of the frontier” will cause a vacuum
Some of the most fun things in the world are those that can be debated. Is Nascar a sport? If not, what defines a sport?
My preferred definition of a sport is when a game is played and the sides interact with each other. By my definition, golf is more of a ‘game’ and less of a ‘sport’. As a test, if it is something you could learn to do in isolation, and then compete at the highest level, it’s probably a game.
My definitions get into some tricky spots, like gymnastics, where the other team’s score may determine the difficulty of a performance, but where theoretically the opponent might not matter.
There is a second differentiator. Since my sports require an opponent who interacts, (i.e., basketball, not really darts), sports typically have a current metagame. Like basketball, where the best teams vacillate from being full of “bigs” who dominate the rim, to playing small ball. In fact, an NBA team’s success depends largely on whether they are built to compete with the rest of the league at that moment as opposed to how objectively well they play basketball (whatever they means) as a gymnast may be judged, or a sprinter timed.
A sprinter and a weightlifter are both competing to achieve an end, the way they get there doesn’t matter much. Some of the most beloved figures in ‘sports’ are people who transcend that boundary. Tiger Woods made golf feel like a sport when his opponents melted away on Sunday week after week as he demolished his opposition.
Like most things, it’s a continuum, very little is perfectly a game or perfectly sport.
The man, myth, and legend, Carl Richards, recently tweeted:
Please believe me…being a financial advisor IS NOT about spreadsheets and calculators. It is about emotional intelligence…
— Carl Richards (@behaviorgap) January 19, 2017
And I could not disagree more.
Richards is right, that there are plenty of otherwise good advisors who can’t communicate expert ideas at a beginner level and fail to connect with (especially) their less financially-fluent clients.
But there is another side, and I’d argue at least as important and more numerous, which is made up of advisors who are great at sounding convincing, but couldn’t calculate for the time value of money if a financial calculator hit them on the nose with NP, PMT, INT, and FV already punched in.
These are the kinds of shucksters who make calculations for 60 years out and don’t bother to discount the number for inflation or opportunity cost. I’ve talked with many of them, and frankly I think it’s less of a Sinclair problem and more of an intellectual firepower and technical skills problem.
To be fair, I think EQ has probably been underrated for a long time in most advisory professions (tax, law, finance, etc.), but it doesn’t seem to me to be the case any longer.
And Oxfam (which sounds like what millennial gym-friends might call each other) answered. They did not disappoint. That is to say, came off sounding one-toned and ignorant of their obvious disconnect from reality.
If it turned out that Oxfam was a strawman propped up by multinational firms just to make their detractors look incompetent, it wouldn’t be a surprise.
4. Oxfam talks about inequality but you pay your bosses’ fat-cat salaries – isn’t that hypocritical?
Oxfam is a confederation of 19 member organizations. The salary that each Oxfam pays to its own Executive Director differs – reflecting the size of the organisation as well as national market realities. In each case, the salary paid is entirely consistent with the individuals’ responsibility for running an organisation that is part of a major international humanitarian and development campaigning NGO.
As Tyler Cowen would say, market-based compensation for me but not for thee.
Next up, Oxfam conflates giving to charity and tax-dodging.
When it comes to stock markets, big firms like Goldman know better than anybody to give the people what they want to see. Witness, this slide:
It’s not crazy, it’s a path the market could conceivably follow, but a closer look is instructional.
- Note how it isn’t simply a line up and to the right, there’s no obvious profitable action to take on a forecast like that. Something like this, well certainly.
- It has an ‘up’ component built on “hope”, so if it doesn’t materialize, we can chalk it up to the markets being surprisingly rational, not our forecast being wrong.
- The numbers and timelines are conveniently round, simple to interpret for ever the layest of laymen.
- If the market goes up (most likely), goes down 5% at some point in the next 12 months (also most likely), and resumes the climb, success can more or less be claimed.
This chart is beautiful, if only for its ability to inspire the average day-trading dentist or pension fund trustees.
Before we leave, let’s take a look at a couple of other ads on the page and appreciate them for what they are, a dazzling ode to confirmation bias:
Like an eclipse, I recommend not viewing these kinds of things directly, they will blind you. However, if you must take a closer look, bring #14 welder’s glass or a pinhole camera.
The very interesting-sounding statistic that launched a thousand retweets is once again making the rounds because oxfam
is milking it yet again has updated their annual report.
That’s right, it’s time to find out about wealth inequality. Statistic wording of choice this time, “Eight richest men are worth the same as HALF the rest of the world.”
Now, this statistic sounds interesting, but is actually
very stupid highly misleading. The actual interesting statistic, courtesy of Jacob Falkovic, is that the total net worth of the bottom 37% is a tiny smidge above zero. I imagine this will need updating with the latest report, but I doubt it changed much.
That’s right, if you have a positive net worth, you are wealthier than the bottom 37% combined. I suspect this is related to the fact that China and India have about 36% of the world population and not a huge amount of its wealth, and when you add in a few dozen million of the people who have the largest negative net worths (new doctors, lawyers, etc.), you get to a negative figure.
Try not to be too hard on anyone who shares the stupid fact, they are smart enough to know there is something interesting there.
Edit: This podcast from Econtalk on the same subject came out a day after this post (coincidence? I think not) and was a worthy listen.
Universal Basic Income (UBI) is a concept that has gained significant momentum over the past few years, and is ubiquitous enough that most people are now at least passingly familiar with the concept.
I’m here to break the news that we already have it. Social Security is effectively a UBI that is limited to the elderly (perhaps that means the “U” in UBI needs an asterisk).
According to the SSA, nine out of ten individuals over 65 receive benefits, and I’d wager a few more tenths are waiting to claim either at their FRA or at age 70. Most of the others who don’t qualify probably receive another pension.
Most UBIs have a flat payout, not a formulaic one, but if I were a gambling man, and I am, I’d bet we see flattening payouts as part of the solution to the demographic problems the Social Security system is on track to have. Benefits for high earners are already significantly lower relative to amounts paid into the system thanks to the “bend points“. It would be a natural extension to have earners over a certain amount pay in but not increase their benefit, or to change the current bend points, or both.
This would exacerbate the “problem” of social security alone not covering pre-retirement cost of living, but would allow using social security as a ‘floor’ for the standard of living that we want to allow people to live at.
And, a natural extension of not wanting Grandma living under a bridge eating mustard sandwiches is that we don’t want anyone under a bridge eating mustard sandwiches. There are a lot of subtleties in moving from Grandma to everyone — e.g., if Grandma is eating mustard sandwiches she might not have any viable way to earn an income, while someone younger might, and maybe there are a few 20 year olds who would not work if you guaranteed they did not have to live under a bridge. This is the danger of making UBI equal to the cost of rent + food + netflix. This is called retirement, and most people find it perfectly acceptable from age 65+.
So the question, then, is: Do we wish to allow everybody, if they wanted to, to retire and watch netflix all day? It would certainly make some people better off, but the costs would have to be absorbed by others.
If the answer is yes, we have a fairly easy framework to implement with, simply allowing earlier and earlier (perhaps at more and more reduced amounts) filing for social security.
- Brazil’s Austerity Experiment: Scott Sumner walks us through some of the problems with ascribing any of the future economic success/failure of Brazil to the coming austerity. Very useful to learn how to think about economics. Also, Vox still sucks.
Might austerity hurt the supply-side of Brazil’s economy? I suppose anything is possible, but it’s hard to see how. Unlike China, Brazil’s high government spending goes to things like public pensions, not infrastructure.
- How Bad Will It Get for American Express?: Fun bloomberg article on Amex losing Costco as a customer. Porter nailed it with that bargaining power thing.
Jelinek interrupted, according to people who were briefed by Chenault about the call, and told him that as far as he was concerned, Amex was another vendor, just like the one that sold Costco ketchup. “If I can get cheaper ketchup somewhere else, I will,” he said.
- Health Care Reform: With a h/t to David Henderson for the link to this Bryan Caplan piece from 2012. More relevant than ever.
Gruber mentions people who “think they don’t need insurance because they are healthy” – then condescendingly adds, “They don’t realize that if they do get sick, they won’t be able to afford the care they need.” Yes, or maybe they’ve weighed the risks and reasonably decided to take their chances.
H/t to David Henderson for his link to this WSJ post from Hugh Hewitt on why, though he admits it is bad in theory, he thinks in practice eliminating the HID as the GOP seems to be posturing to do is a bad idea.
I’m here to put my stake in the ground in the “F!@# the HID”-camp.
Hewitt’s point is a little bit subtle, but to my reading basically boils down to two points:
- An immediate elimination of all or most of the HID would be unfair to recent homebuyers, or at least perceived that way.
- Eliminating the HID in such a way would harm the GOP.
I think its far more unfair to everybody in the country to continue a policy of economic distortion that tends to favor the wealthiest (and most creditworthy) than it would be to reverse such a policy. In fact, I would make the argument that the risk of HID elimination is priced into the market, and we would see even further distortions with a long range phase out like the kind Hewitt mentions.
There are far better ways to subsidize home purchasing than through a deduction that helps those with access to credit, which has increasingly been the very wealthiest.
In economic policy, it seems to me that ripping off the bandaid is almost always preferable to setting up a slow future change if only for the reason that most things that should happen in politics never do, and getting something done, even if the optimal solution was to do it over 10 years instead of 1, is better than the probability weighted chance that you get the optimal outcome versus, for instance, the next administration repealing your plan within 10 years.
Kevin Erdmann has a good post that touches on the HID as he discusses the arbitrary advantages that exist today for owning a home.
If eliminating the HID forces some people into homes they can afford with smaller mortgages, that will push prices down, which will be a benefit to renters, either through lower costs to buy a home or lower rents.
I do not find the argument persuasive that we should continue a policy that creates distortion simply because people have taken advantage of that distortion and would now be harmed if it were undone.
Tyler Cowen has a very stimulating piece on doomsayers missing an opportunity to sell short the markets. I think his (perhaps strawman) argument is correct for those whose views he portrays accurately.
However, I think most people are thinking about Clinton vs. Trump more like this:
Meaning: a Trump victory heralds a wider range of stock market outcomes. Tyler might argue that someone who believes that has an opportunity to trade volatility through VIX, but VIX measures a very specific kind of volatility which is far from a necessary condition for a decline in markets.
Another possible answer to Cowen’s question about why people aren’t putting their money where their mouths are is that most of the people merely expect worse outcomes for the stock market, but not negative returns. If we knew for a fact that for 4 years under Clinton the market would go up 10%/year and for 4 years under Trump the market would go up 8%/year, what would the appropriate strategy change after a surprise Trump election be? Probably not much.
Now clearly this doesn’t affect Cowen’s main claim and question:
When Donald Trump was elected president, some prominent economists predicted disaster for the stock market.
are Trump doomsayers obliged either to stick with that prediction and short the market or to tone down their rhetoric?
I don’t actually know who any of these people are (are we talking about Krugman?), which is probably some combination of my ignorance and Tyler thinking of people as prominent that I don’t follow closely. (And I’d confidently put myself in the 95th+ percentile of people who follow prominent economists.)
I do know of plenty of people who claimed a Trump victory would be a human rights disaster, and while obviously less measurable than the stock market, I think a ‘correction’ for human rights would be just as damaging to society as a correction in the markets.
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