Microfoundational cyborg dream
March 6, 2015
from Lars Syll
Are macro-economists doomed to always “fight the last war”? Are they doomed to always be explaining the last problem we had, even as a completely different problem is building on the horizon?
Well, maybe. But I think the hope is that microfoundations might prevent this. If you can really figure out some timeless rules that describe the behavior of consumers, firms, financial markets, governments, etc., then you might be able to predict problems before they happen. So far, that dream has not been realized. But maybe the current round of “financial friction macro” will produce something more timeless. I hope so.
So there we have it! This is nothing but the age-old machine dream of neoclassical economics — an epistemologically founded cyborg dream that disregards the fundamental ontological fact that economies and societies are open — not closed — systems.
If we are going to be able to show that the mechanisms or causes that we isolate and handle in our models are stable in the sense that they do not change when we “export” them to our “target systems,” they do only hold under ceteris paribus conditions and are a fortiori of limited value for understanding, explaining or predicting real economic systems. Or as the always eminently quotable Keynes wrote in Treatise on Probability(1921):
The kind of fundamental assumption about the character of material laws, on which scientists appear commonly to act, seems to me to be [that] the system of the material universe must consist of bodies … such that each of them exercises its own separate, independent, and invariable effect, a change of the total state being compounded of a number of separate changes each of which is solely due to a separate portion of the preceding state …
Yet there might well be quite different laws for wholes of different degrees of complexity, and laws of connection between complexes which could not be stated in terms of laws connecting individual parts …
If different wholes were subject to different laws qua wholes and not simply on account of and in proportion to the differences of their parts, knowledge of a part could not lead, it would seem, even to presumptive or probable knowledge as to its association with other parts …
These considerations do not show us a way by which we can justify induction … No one supposes that a good induction can be arrived at merely by counting cases. The business of strengthening the argument chiefly consists in determining whether the alleged association is stable, when accompanying conditions are varied …
In my judgment, the practical usefulness of those modes of inference … on which the boasted knowledge of modern science depends, can only exist … if the universe of phenomena does in fact present those peculiar characteristics of atomism and limited variety which appears more and more clearly as the ultimate result to which material science is tending.
America can be a full-employment economy once again
from John Komlos
Irving Berlin was dreaming of an old-fashioned Christmas. I’m dreaming of an old-fashioned economy in which everyone has a job. I know, it was ages ago, but what are dreams for anyway?
Isn’t it strange that full employment has to be a dream, even a quarter millennium after the beginning of our stupendous surge in wealth with the Industrial Revolution? But what is full employment? Well, it’s simple enough, isn’t it? An economy in which there are enough jobs to go around for everyone. But here is where the complications begin.
There are rationalizations galore why we have to accept unemployment as an integral part of our economic system.
The practitioners of the dismal science — those in charge of the concept — don’t think of it in those terms. True to their reputation, they believe that full employment is, well, simply unattainable. There will always be a lack of jobs; people are not buying enough stuff, businesses are investing too much overseas, we are importing too much, the banks are sitting on their money, unions are destroying jobs, people do not have gas money to look for a job, people are too easily discouraged from looking for a job, government regulation and taxes discourage firms from hiring, workers do not have the right skills, and then there is always the perennial scapegoat: the minimum wage. And even when there is an opening, it takes time to find the right person for the job. There are rationalizations galore why we have to accept unemployment as an integral part of our economic system.
These rationalizations have been formalized under the umbrella concept of the “natural rate of unemployment.” This is thought of as the minimum level of unemployment attainable in the economy. It would be futile for the Fed to try to use monetary policy to get the unemployment rate below that level because it would just lead to inflation. Fiscal policy wouldn’t help either because increasing government expenditures by borrowing would increase the interest rate and thus would just be at the expense of private investment. Or so the thinking goes.
The Fed has put the natural rate of unemployment, or the minimum attainable level of unemployment, at about 5.2 percent. This concept has become so engrained in the economists’ culture that even former Fed chair Ben Bernanke referred to it as “full employment.” The media adopted this euphemism — reminiscent of newspeak — which implies that 5 percent is as good as zero. Given that the unemployment rate right now hovers around 5.6 percent, by this logic, we are nearing full employment.
This attitude – that this is the best the U.S. can do – writes off some 8 million workers —roughly the population of New York City. That is invidious because it encourages policy makers to be complacent about the plight of a substantial segment of the labor force. And, of course, the confusion among the public about what full employment means is then complete. That is precisely why Noble laureate William Vickrey referred to the natural rate of unemployment as “one of the most vicious euphemisms ever coined.”
That is not all. This concept of full employment has other hidden flaws — namely that there are additional workers who are barely hanging on with the skin of their teeth but are not counted as unemployed. People who could find only half-time jobs even though they would like to work full time are considered employed for the purposes of the statistics, as Making Sen$e reported last year. So they are not counted as unemployed. Also left out are those who would like to work but have not looked recently because they thought it futile to do so — they have been turned down so often that they became depressed and could not muster the motivation or they ran out of gas money and could no longer afford to look for a job.
This group — let’s call them underemployed — is substantial: they are as numerous as the unemployed. Together the unemployed and the underemployed total an amazing 11.2 percent of the labor force or 17.5 million workers. These unfortunates add up to the whole labor force in 21 of the 50 U.S. states. This is not all. They obviously have dependents, so we are really talking about some 35 million people who are in this underprivileged group. Furthermore, the underemployment rate is much higher in many states. In 2014 it was near or above 15 percent of the labor force in Arizona, California and Nevada. Yet, according to the received wisdom, we are getting close to full employment. If that is not newspeak, I do not know what is.
Is this really the best we can do? My answer is a resounding no. We must reject the concept of the natural rate of unemployment. In 1944 the unemployment rate was 1.2 percent. That is what we should be aiming for. Sure that was wartime, you say, and we’re not likely to match that any time soon. But that just means that there was a high demand for tanks and airplanes, making work easy to find. Well, why not declare war… not in the conventional sense, of course, and not as Paul Krugman has suggested — tongue in cheek — by declaring an impending alien invasion, but by declaring other kinds of “wars”: on inferior school systems, on slums, on decaying infrastructure, on pollution, on global warming, on poverty, or on using fossil fuels. There is no shortage of such “wars” given the backlog of desperately needed investments in the economy. These projects could create enough jobs to create full employment for many years to come.
Insofar as exclusion from work threatens one’s very existence and given that most of us need to work in order to survive, the right to life implies straightaway that we must have a right to a job.
Let us diverge to assert the obvious, namely that people have a natural right to life. The Declaration of Independence even states that the right to “Life, Liberty, and the pursuit of Happiness” is “unalienable.” Moreover, the UN’s Universal Declaration of Human Rights states similarly, “Everyone has the right to work . . . and to protection against unemployment.” Insofar as exclusion from work threatens one’s very existence and given that most of us need to work in order to survive, the right to life implies straightaway that we must have a right to a job. Otherwise we cannot survive.
We first have to recognize that current labor market institutions will not deliver a true full-employment economy. If they have not done so since 1944 then “growing the economy” will never provide enough jobs. Rather, we need to think of new ways to restructure the labor market to begin to approach such a goal. We also need to acknowledge that the labor market is in need of repair. We would never have created a labor market in which the opportunity to work — like wealth and income — is so unevenly distributed across the labor force if we had designed a system from the ground up.
Currently, adjustments to the decline in demand for labor occur by reducing the number employed so that their labor time falls abruptly from 40 hours to zero. Employees work 40 hours, 20 hours or not at all. Would anyone “behind a veil of ignorance” design such a rigid system from scratch, a system with so much uncertainty and volatility–with working times ranging from zero to 70 hours per week even in normal times?
It would be much more palatable to have the adjustment occur in the number of hours worked so that instead of dismissing workers, the available work would be divided among those wanting to work. Hence, an institution that distributes work more evenly would be a reasonable solution to this quandary.
Thus, our aim should be to restructure the labor market in such a way that it would distribute the available work more evenly and thereby generate full employment. There are several ways to achieve this. For instance, we could reduce the standard full-time working day to seven hours. Note that, in this regard, for a long-time after the Industrial Revolution, even a 10-hour workday was a dream and most Americans worked 12 or more hours a day six days a week. The eight-hour day did not become the standard in the U.S. until the 1930s and workers literally had to fight for it because the employers were resisting it vehemently. Just think how much greater unemployment would be if people still regularly worked 10-hour days.
Given the substantial increase in productivity per hour since the 1930s it is about time that we reduce the number of hours worked per day to seven. That, by itself, would immediately open up more work opportunities for the underemployed and effectively eliminate underemployment. The extra salaries could come out of corporate profits that sum $1.9 trillion per annum and have increased by an incredible 50 percent since 2007 (before the financial crisis). No other component of Gross National Product increased by as much. If the private sector will not provide sufficient jobs then we have to restructure the institutions of the labor market in order to achieve these goals for the sake of equity.
Other policy steps could complement the above reduction in the work day. A government agency similar to the depression-era Work Progress Administration could become the employer of last resort similar to the government’s role as lender of last resort for the financial system. The new institution, whose role would be comparable to the Federal Reserve’s role in finance, could guarantee similar stability to the labor market. It would contribute to an inclusive economy in which absolutely no one is deprived of the opportunity to work.
Of course, we could also provide jobs by reducing, or even eliminating our $500-billion-a-year trade deficit as Warren Buffett advocated in Fortune magazine in 2003. It is crazy to stimulate the economy of the rest of the world at a time when our own economy desperately needs the stimulation. Getting our foreign trade in order alone would create millions of jobs and, in combination with the other two policies above, would create a full-employment economy. Such an economy would increase leisure time and reduce the psychological burden of unemployment, thereby increasing quality of life for millions of Americans. It would be a much fairer method of distributing the pain of a decline in the demand for labor (associated with globalization and technological change) than the prevailing system.
In sum, the natural rate of unemployment is a bogus concept. According to the UCLA economist Roger Farmer, “it is an idea that is past its sell-by date.” We must no longer be complacent about 17.5 million people being unable to find full-time employment. How inefficient! That is like the population of New York, Chicago, Los Angeles and Houston sitting around idly watching us work. It is up to us to stop dreaming and start acting to overcome the obstacles created by a “jobless recovery.” We can create a truly full-employment economy and eliminate the pain associated with being excluded from the labor market.