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It seems like discussion of Piketty’s Capital has run its course and much of the commentary has moved on (though not necessarily from the broader topic) so now is as good time as any to peer back and reflect on how the debate around the book ended (if such a thing can be summarized). From my own vantage point, the debate about the book (not necessarily the discussion) stalled out around a single question, so I will do my best to restate and clarify that question so as to focus where more evidence and argument is needed, should this be a conversation anyone wishes to resume. None of this is new, exactly, but it’s worth recanting given the importance of the question and the stakes surrounding it.
Around 1800 AD, living standards in some countries began to rise substantially, and over the past 200 years, that rise (as measured in GDP per capita) has been on the order of a factor of 50. This generally seems to correlate with other indicators of increased living standards to a degree that, with some exceptions (such as thinly-populated resource-rich countries) it is generally, though not universally, accepted practice to use GDP per capita as a good-enough shorthand for broad living standards. Whatever the case, exactly how and why this increase transpired is still a matter of debate, in no small measure because most people would find it desirable to replicate the phenomenon in those areas that have not yet experienced it. Indeed, some countries that did not begin experiencing the phenomenon in its initial emergence have experienced it since, leaving, essentially, three groups of countries – those who have experienced it, those who have not, and those in transition.
Piketty’s book, while not exclusively, overwhelmingly is focused on the first kind of country. A compelling portion of his narrative is documenting that transformation, yet the broader focus of the book is on what has transpired since that transformation was consolidated in the era following the Second World War. There are two key factors to be documented. The first is that the countries that have fully experienced this transformation are themselves not ‘complete’ in this regard – average living standards (recent economic troubles excepted) continue to rise and are generally, though not universally, expected to continue to rise in the absence of extreme calamity on the scale of global catastrophic climate change. The second is the change in the distribution of income – since a moment of ‘peak equality’ in roughly 1970, most of the countries Piketty analyzes have seen a sharp increase in inequality, the specific degree of which dependent on method of measurement but whose general contours is not really disputed. This, Piketty and many other believes, poses a problem for these countries that is not alleviable solely by continuing increases in average living standards or aggregate wealth and income growth.
Piketty devotes a lot of space to developing a simple model of how the aggregate quantity and distribution of capital can drive income inequality. This remarkably simple model requires only three input variables – the growth rate of the economy, the average return to capital, and the savings rate (perhaps better phrased as the rate of capital formation relative to national income) – to generate a long term prediction of two key ratios: the ratio of capital to income, and the capital share of national income. From there, wealth inequality can be used directly to compute a floor on income inequality – for example, if 1% of the population owns 50% of the national wealth and the capital share of income is 30%, then that 1% captures, at a minimum, 15% of national income.
And here we arrive at the crux of the debate. Piketty’s model implicitly assumes a certain exogeneity between those three input variables and the two ratios they converge towards, ie, that they are not inherently correlated with each other. This exogeneity poses a fragility in Piketty’s model and a challenge to mainstream economic theory. The fragility is that, if they are strongly correlated (in the direction such correlation is expected), and especially if there is iterative feedback between them over time, then Piketty’s model no longer produces outcomes in which wealth inequality drives income inequality. The key example here is the average return to capital; were it to fall in proportion to the rise of total capital accumulation, then the capital share of national income would be invariant to the quantity of capital, and thus largely undermine the mechanism by which present wealth inequality drives future income inequality. Furthermore, were this anticipatable decline in the in return to capital to drive a decline in savings, the capital/national income ratio would converge at a substantially smaller value than that projected by extrapolating from the initial period. This further depresses the likelihood of ever-increasing wealth-driven income inequality.
This is also precisely the challenge to mainstream economic theory. These correlations and feedbacks are precisely what are predicted by fundamental, strongly-held ideas about economics held by economists; most centrally that investment behavior is driven by that most central economic force, supply and demand. Piketty, however, is not simply laying down an alternative model, but an empirical challenge to this challenge. The most crucial assertion made by his model – that the return to capital fails to decline in proportion to the supply of capital – is not simply a theoretical alternative but one derived from the meticulously researched and calculated estimates in his unprecedented data. As I myself pointed out in my write-up of Piketty’s book, the data show that the return to capital is sufficiently resilient to its accumulation to justify Piketty’s model. At least, that is, without controlling for any additional factors.
And here is where debate stalled, with one side asserting that theory demands these variables be tightly correlated, and the other side responding that empirics demonstrates that they are not. The problem, of course, is that macroeconometric panel empirics is extremely sensitive to model specification, to the point of being perhaps the perfect example of how any decent statistically-versed researcher with strong priors can generate the outcomes from the data they which to receive. Certainly it is more than possible to generate a superfluity of complex models demonstrating the theoretically-predicted correlations, and these models will collectively have zero persuasive power because it is trivially easily to create as many or more equally-plausible equally-complex models that demonstrate the obvious.
Why does this all matter, to the degree it’s worth recounting in such detail to the tune of a thousand words? Because it strikes directly at the heart of the most important argument for tolerating high income inequality.
There are basically three arguments in favor of tolerating high income inequality, which I will attempt to summarize as fairly as I can.
- The ‘Just Deserts’ Position: incomes reflect the inherently just outcomes of markets. Beyond a certain threshold to prevent the worst form of miseries, it is therefore a violation of justice to take from the deserving and distribute to the undeserving.
- The ‘Pink Salt’ Position: income inequality is irrelevant except to the irremediably envious, resentful, or spiteful. What matters is preserving and increasing human happiness, which is largely driven by civil liberties, non-market institutions such as family and community, and the secondary impacts of economic progress.
- The ‘Golden Egg’ Position: income inequality may be ceteris paribus bad but aggregate economic growth is extremely good to a degree that in most plausible scenarios swamps income inequality. Furthermore, income inequality and economic growth may be conjoined outcomes of our economic system and cannot be modified independently. Therefore, we should be extremely cautious about attempting to alleviate income inequality through policies that slow the rate of economic growth, as this may reduce not just aggregate utility but the utility of those benefiting directly from redistribution.
It will shock nobody to hear that I reject outright the first argument in the strongest possible terms, and the second in quite strong terms as well. Indeed, I believe that the majority of Americans, and certainly the majority of voters in developed countries, disagree with those arguments as well. It is that third argument that gives pause to many – including, to a degree, me (though that pause is still far from convincing in my own case). The average person living in a developed country today as compared to a person living in that same country in 1800 is vastly better off, and it is not impossible to imagine that the average person living in a developed country in 2100 will be vastly better off than that average person today. Impeding our shared progress in that regard could simultaneously defer developments that improve the quality of most lives while simultaneously deferring developments (like innovation in renewable energy sources and storage) that could mitigate or reverse the worst consequences of economic growth to date.
This all converges on something of an ironic surprise. In this debate, it has been the left that has been advocating, implicitly or explicitly, on behalf of the resilience of capitalism (broadly defined) and its ability to deliver human prosperity, whereas it has been the right that has claimed, implicitly or explicitly, that capitalism and the prosperity it delivers is fragile, so much so that even increasing post-market redistribution (as opposed to pre-market regulatory redistribution through minimum wages, stronger protections for unions, and abridging the current rights and privileges of lenders and shareholders) could, to use a tired aphorism, kill the goose that lays the golden eggs. This ideological positioning isn’t wholly novel, and whether it is instrumental and ephemeral or representative of something larger remains to be seen; but it is notable, and worth pondering for what it says about the state of both the contemporary mainstream left and right movements in the United States (if not beyond).
Something that annoys me in the minimum wage debate is that the anti-minimum wage folks assume that labor markets (not “the labor market” – there is no “the labor market”) works like other markets.
And there are really, really good reasons for that! But let’s just look at one facet/outcome of that.
If you asked me “in an ideal world, what would be the price of [just about anything],” my answer would be “nothing!” Food? Free! Furniture? Free! Clothing? Free! Computers? Free! Because free implies a defeat of scarcity – that one day we will have replicators and 3d printers and servile robots and abundant clean energy and almost all goods and services will be without cost. That’s utopia.
But if you asked me, “in an ideal world, what would be the price of labor,” I would never, ever say free. Because what economists call “labor” most people call “time” – a finite, substantial quanta of someone’s finite time on Earth.
The right way to think about this is the Star Trek universe, where almost all goods and services are provided costlessly by machines but people still put their time and effort into creative or rewarding projects, the kind of stuff we call today “artisinal production.” That stuff still “costs,” but its mostly a gift and barter economy where people brew their own delicious beer and give it to friends or trade it for delicious, home-distilled bourbon.
Now, the price of labor in our own, non-utopian world, has effects, large and small, on lots of things, and its not obvious what the best balance between the returns to labor vs. capital are, or the best mechanisms for obtaining them. But we also shouldn’t be trying to ceteris paribus drive down the price of labor like we should the price of chocolate or power cords or other commodities.
And because of the totally different way “labor” is conceptualized, and because of the totally different implications and underlying meanings of labor markets, they just don’t work like normal markets in so many key ways.
Put it this way: nobody thinks it’s morally wrong to prefer a brownie to a blondie or white fudge to dark fudge, but people do think its wrong to hire based on skin color. In fact it’s illegal, for very good reason.
When individuals have to cut back on expenditures, they don’t like it, but they do it; but bosses (at least good ones) agonize over firing employees and really loathe doing it.
When individuals have the chance to bargain or get a great deal on a good, they leap at the chance; but even when the economy is bad, employers do not take the opportunity to renegotiate salaries downward. If they have to, they’d rather lay off 5% of their workforce then give everyone a 5% pay cut.
And, just to finalize, think about how much people invest their self-worth into their career. Not that they should. But inevitably many do.
So labor markets are just not really like markets for goods and services at all, and people who insist that “fundamental laws of economics” mean that increased minimum wages absolutely must ceteris paribus reduce employment are making fundamental errors.
The wife and I watched Indie Game: The Movie the other night, and a) it was really good and you should watch it, and b) it led me to some thoughts relating to my earlier thoughts on the firm.
Adam Smith said a key to understanding the existence of firms is that they facilitated the division of labor which was key to unlocking higher productivity and thus more wealth. Interestingly, though, Indie Game: The Movie depicts a world where this force is potentially reversed – one where there is some market for goods that are consciously produced with undivided labor, that is, where every part of the production process is performed by the same individual or very small group of individuals. Essentially, reversion to past forms of production from more impoverished times have become a kind of luxury good in which people want to not merely play a game that is good but one that represents an artistic vision, one that is connected specifically to an individual.
Now, this isn’t a terribly novel argument, and it’s something that’s become common as a whole biosphere of local individual artisanal this’n’that has cropped up everywhere hipsters and yuppies have money to spend on nanobeer and $10 pickles or whatever. But what makes this really interesting in the case of video games is that unlike physical objects the instrinsic nature of digitization obliterates the distinction between arisinal and mass production. Super Meat Boy sold over one million copies. One million copies. How long would it take to make a million artisanal pickles? Probably a long, long time. Yet the marginal cost of distributing a copy of a video game is now essentially zero so as long as you don’t have endemic copyright violation two guys who could make a Super Meat Boy every two years could, assuming it’s $10 a pop and Valve or whoever takes 30% half of the proceeds, could each make $1.75 million/yr. That’s a lot of money! In some sense, that’s how the internet and digital technologies are chipping away at the necessity of firms.
It is worth noting, though, that receiving one’s income in lumpy increments is tax-penalized relative to a smooth equivalent.
Lately, I’ve been writing a lot of rambles about a subject that’s been on my mind without necessarily coming to some kind of big, obvious concluding point. I like writing these kinds of things and I’m not certain I deeply care whether anyone else likes to read them, so my incentives are pretty clear and I’m going to write another one! This is one is about theories of the firm
First, read Yanis Varoufakis’ post on this subject, specifically on how it applies to his employer, Valve.
Now, Valve is a little bit of an odd case – it’s likely more homogenous than most firms in a couple key respects, namely age, experience, salary, and job description, and therefore inherently requires less internal management than most firms. But this all still begs the question – why do firms exist at all? Surprisingly, it’s still a question that doesn’t have a clear or even an accepted received-wisdom answer from economics, especially surprising since a) firms are really important parts of the economy and b) they are really weird, at least from a neoclassical perspective. Because, basically, firms are vast marketless spaces in the market. Essentially, in a truly complete and full market, every individual would be an independent contractor, signing small, finite, discrete contracts for each sensible unit of production they create, and the economy would be a multifarious network of one-on-one contracts. It would look like this:
Where the black dots are individuals and the red lines are market relationships.
Instead, we have this:
Where black dots are individuals and red lines are market relationships but the blue circles represent firms. So most people are in firms, and firms mostly do business with other firms, and inside of the firms there are no market relationships. Basically, individuals sign up for long term relationships with a firm at a fixed wage or something close to it and inside the firm there is hierarchical command-and-control. Certainly there are market-like incentives – good performance can lead to bonuses and promotion – but that’s different from a fundamentally market relationship where the only relationship between two equals is a contract, as opposed to having an employer and an employed.
Now, economists have come up with many theories which Varoufakis excellently summarizes, and each of these theories definitely has a part of the story. Adam Smith talks about the efficiency of labor division, which (other than Stephen Marglin) nobody I know of has thoroughly disputed, and which seems like its some part of the process. But that doesn’t explain firms, it explains specialization. Marx posited firms as basically vehicles for tacit collusion among the capitalist class to ensure uniform wages below the true average value of labor. There’s some truth to that, but I think if the only advantages to firm formation were to the capitalist class then the model would have proven less persistent than it has. Joseph Schumpeter thought that certain kinds of monopoly were necessary to create the economies of scale, both supply-side and demand-side, that financed major innovation. This is probably also true, but doesn’t quite get to the heart of the question because there are plenty of firms that are not part of the Schumpeterian innovation process that simply trudge along at a steady state. Ronald Coase’s transaction costs theory which is obviously correct and also is the only one whose theory so far explains a major corollary of the question – not merely why are there firms, but why do firms form the way they do?
There are two other established theories I’d like to discuss. One is Frank Knight’s classic distinction between risk and uncertainty and how the latter is the wellspring of profit. While not directly a theory of the firm, it is related to the theory of the firm (at least the modern firm) because a key aspect of the firm is limited liability. This is worth breaking down into two parts:
1) Where does the liability go? It goes to the corporation itself, not its managers and employees. Obviously if someone breaks the law they break the law but no individual employee of the firm is responsible for restituting losses of the firm if it is unprofitable or fails.
2) How much is the liability? The liability is limited to the assets of the corporation, not its owners.
So, a quick example – I own a firm that owes the bank $1 million. I have five employees, and unfortunately they are stupid and make bad decisions and the firm loses money and is forced to close. The five employees lose their job but keep all their income to date and property; the bank seizes all the assets of the corporation but not my assets.
So what does this have to do with uncertainty? Well, let’s say I have an idea that I think could change the world and/or make me fabulously rich. But I’m not certain that it will. In fact, there is some pretty large uncertainty involved here, which is probably why nobody else has put this idea into action. But thanks to limited liability, if I decide to take the big plunge and start a business to pursue this fabulous idea, I might lose all the (likely substantial) money I put into the business, but I won’t lose my house and my car and my shirt unless I explicitly agree to name those things as collateral. This is good, because it enables risk-taking (or should it be uncertainty-taking?) beyond what a “purely free market” might provide but the thing about uncertainty-taking is that a small number of successes can produce wealth that vastly outstrips the sum of all the failures.*
Another theory is the Nobel Memorial Prize-winning work of Oliver Williamson, who actually wrote about a network of effects, including some proto-behavioral effects like bounded rationality and opportunism, that lead to hierarchical firms emerging, but one in particular that I want to discuss is asset specificity and small-numbers bargaining.
Let’s say the government wants to build a road from City A to City B, and in between there are a thousand small lots each owned by a separate individual. This is a tricky situation. The issue is (and let’s just say for the sake of argument that this is through some narrow valley so you can’t just go around the lots) is that the government absolutely needs each and every lot to build the road. If I want to start a café I don’t need to buy all the coffee beans in the world, just a couple tons. This is oft cited as a clear justification for a government power like eminent domain – to deal with what isn’t one market with a thousand participants but a thousand markets with a sole monopolist.
But private individuals can’t use eminent domain! And fortunately threatening to injure or kill people is illegal and frowned-upon besides. So if a private person, say, that makes a relatively obscure widget needs a relatively obscure component, you’re going to find yourself in monopolist-monopsonist bargaining which as economists will tell you ends up taking a long fracking time and surprisingly just failing altogether. So if you don’t make just novelty birthday cards (which requires commodities like card stock and ink) but birthday cards that sing “Happy Birthday To You” when you open them then you need the computer chip that goes in the card that plays “Happy Birthday To You,” and maybe that’s a small market so there’s really only one dude who makes that, and so you’re the only person buying them and they’re the only person making them and you both have something over the other guy but you also need their thing and this is actually for all intents a purposes a hostage negotiation of sorts.
So instead you basically form a firm (“Irritating and Expensive Cards, Inc”) that internalizes and therefore negates that negotiation, you collaborate to make as many chips and then as many cards as possible and split the profits.
The thing about this logic is that it also brings surprising benefits. Say, for example, the price of card stock jumps up. If there’s no firm then maybe the cardmaker can’t make ends meet and both of you go out of business; if there is a firm you maybe find a way to cut costs elsewhere (hey look China makes cheaper chip components!) but even if there isn’t you could both stay afloat at a narrower margin for at least a little while. There’s security in a firm.
There are also network effects. This gets us to Sears. Mina Kimes wrote a phenomenal and fascinating story about how idiot Master-of-the-Universe Eddie Lampert basically attempted to atomize Sears – he should have read about the theory of the firm! Each individual element of Sears is an undiversified and volatile investment, but Sears on the whole is a diverse portfolio that creates security and stability. More importantly, there is branding and internal unity of purpose and harmony that is undermined (maybe we’ll talk about that later).
Theories of the firm can explain why firms might arise but can’t necessarily explain why firms settle, at least for some time, at the size and diversity they do. Here’s an odd case – Terminix. Terminix is a company that, superficially, eradicates pests, especially termites. But in truth Terminix is an insurance company – once Terminix certifies your home as termite-free, you can sign a contract with them that obligates them to not merely eradicate termites should they emerge but also to pay for all damage those termites would cause. My question: why do existing homeowner insurance companies not do what Terminix does? What distinguishes termites from the other long list of things that insurance companies will protect you from? Why hasn’t State Farm or AIG purchased Terminix? Why doesn’t Terminix merely exterminate as a contractor for home insurance companies who offer termite protection?
The answer is likely branding and inertia. The former is difficult to quantify, difficult to accumulate, extremely valuable, but also easy to squander. The latter has something to do with Coase’s transaction costs theory – that the Terminix/homeowner’s insurance division could emerge for arbitrary reasons, but once emerged, it could persist simply because there is not enough benefit inherent in undoing the status quo. Private equity essentially exists to find sufficiently large “inefficiencies” in the status quo that it is profitable to invest the time and resources to undo them (inefficiencies, in this case, often meaning non-legally-binding trust networks), but certainly there must be some non-negligible number of cases where the status quo persists because even if it is less inefficient than some hypothetically superior alternative the cost of transition is less than the net benefit (or at the very least the capturable benefit for the transactor).
Things like this make you wonder what, exactly, binds the now Washington Post-less Washington Post Company. My guess is just that, in general, to phrase it econometrically the best predictor of t is t-1; that is, intertia is a large force, and the finitude of human experience alone means that most of the time most things persist over the short-to-medium term. This force is worth incorporating into one’s model of the world – one should not overly privilege the status quo in any case, but certainly not when someone argues that free markets inherently lead to just or efficient outcomes.
*It’s worth noting here that this is why universal health care is a really good idea.
Noah Smith mused about a subject I’m interested in – the fundamental conceptual issues at the nature of saving – in a way I like to muse about it – thought experiments – so how could I not deconstruct his post in excruciating detail?
Specifically, I’d like to focus on the economy of his deer hunter (one of many, in his example, but just one for this purpose): a man who lives, alone, in the woods, hunting deer. I’m going to break this down as much as I can while abstracting away the non-deer parts of his economy (shelter, clothing, tools, etc). Because the deer hunter is an economy – and while he might be an economy of only one human, who we’ll call Vronsky -, we can productively and fruitfully view him as a vertically-integrated economy, and break him down into four sectors:
1) A firm that hunts deer. The firm locates as many deer as possible and kills them, then sells them to the next sector. It has most fixed costs (labor to hunt deer) and therefore pays relatively fixed wages, the rest collected as profit.
2) A firm that processes dead deer into venison. This firm always purchases all the deer killed by the first firm, and always sells all of its venison to the next two sectors. It has more variable wages (because it has variable labor as its primary input) and takes the rest as profit.
3) A firm that stores processed deer. This firm always buys all the surplus venison produced by the processing firm, salts it, and stores it until there is a market for it. We will discuss its economy in more detail below.
4) The consumer. It always buys a certain amount of venison (let’s call it C) no matter what.
Now, in actuality, all these firms are the same person – Vronsky, who owns all the firms, provides all the labor, and collects all the wages and profits (which he then proceeds to, largely, eat). But we can break the internal economy of his life away from Williamson-ian integration and imagine a market that works something like this:
There are flush years and lean years – periods, that is, in which D (the amount of deer caught by the hunting firm) is either greater than or less than C. Let’s see what happens in a flush year.
The first firm kills some amount of deer, D, that is bigger than C (we’ll call it C + S). It sells C + S deer to the second firm, pays its wages, and collects profit (let’s imagine the firm breaks even in years when D = C).
The second firm processes all the deer into venison, and sells C venison to the consumer and S to the third firm. This firm always breaks even because its labor varies in direct proportion to its production which varies in direct proportion to the available venison.
Now, the third firm. What should be clear is that the third firm is the closest this economy has to a financial sector – it buys venison when it’s plentiful and sells it when it’s, er, dear. This means it, essentially, stabilizes the internal price of venison (and also raw deer). It also is a very different firm from the other two, since labor is a minimal input – it is a capital-intensive firm that specializes in storage and market mastery (we’re assuming it inherits all the capital, physical and intellectual). Assuming our flush year is t=1, the firm has costs – purchasing the venison, salting it, and storing it – but no revenue. Which means it has to borrow. From whom? The consumer’s wages should always = C, so it must borrow from the profitable sector of the economy – the first firm, who has profited from a plenty of deer to kill. Essentially, the amount of raw deer necessary to produce an amount of venison = C costs exactly the wages of a year’s worth of deer hunting, and the wages of processing the deer into venison are equal to the mark-up of venison over deer, meaning all the profits flow to the first firm – the hunting firm. So it loans the money to the third firm, the storage firm.
This works in reverse in lean years. In a lean year (let’s say t=2 is exactly as lean as t=1 is flush, so C-S) the hunting firm is in the red, since it pays wages beyond it’s revenue. However, it can call in a loan from the storage firm, which has almost no costs incurred but suddenly tons of revenue from selling its surplus! So it can pay back the loan to the first firm. So there are now no net savings, nominally or physically. Balance. Om.
But let’s say there isn’t long-term balance. That creates two potential scenarios – one of long-term scarcity, whose end is obvious and really quite sad for poor Vronsky. But long-term plenty is more…interesting.
If there is long-term plenty, a couple things could happen. If we are speaking strictly ceteris paribus, then we would see larger and larger imbalances between the accumulated bonds of the hunting firm and the accumulated debt of the storage firm, ending in…financial crisis! Salted venison doesn’t last forever, so it would be essentially squatting on toxic assets it would be loathe to revalue without the projected revenue to pay off it’s accumulated debt. It would go belly-up, and basically need its loans forgiven – by which we mean, of course, that Vronsky has to write off a lot of old, stinky venison into the river.
But assuming non-ceteris paribusity, what we would actually see is that, as salted venison becomes plenty, prices decline to the point where no amount of hunting can support the wages of the hunting firm. To skip the boring stuff, what happens is that Vronsky consumes more leisure as he eats down his stock of salted venison and takes up whittling or something.
Now, over the truly long term, endless plenty absent productivity increases is impossible for Malthusian reasons unless you want to assume a Children of Men kind of deal. But even there, we wouldn’t see infinite saving because Vronsky would, sitting on a giant pile of meat, only hunt to the extent he wanted to, not needed to.
The key, in the end, is this – that saving is just as much about production than consumption, and it’s really about the future-orientation of production. In a world where Vronsky is alone, and has no reason to invest in future growth, he won’t endlessly stockpile venison because of diminishing returns and will therefore shift to other forms of spending his time. But in a world where Vronsky was future-oriented, at least minimally, he might spend his savings to create extra time he could use to develop more efficient hunting tools, thus saving even more time in the future. Or he could develop a game that would amuse him. Or he could pack a sack full of salt venison and go on a quest to find a friend, or at least a basset hound.
The real point, in the end, is that nominal savings (which always equal nominal debt) are very disconnected from whether current production is creating value for the future. In the 00’s we simply invested too much of our productive capacity in building overly-large houses in low-cost but low-value locations, which created a lot of nominal debt and therefore nominal savings but didn’t enable the United States to be more productive in the future. On the other hand, higher taxes that built high-speed rail wouldn’t show up as saving, but from the perspective of society, we would be deferring fleetingly pleasurable consumption of movies and candy and craft beer and what have you towards building valuable infrastructure that would make us richer in the future. That’s not nominal savings, and in the short-term GDP looks the same, but that’s true saving in the modern world.
The estimable Keith Humphreys has made what I believe to be a misguided attack, at least in the general case, on the critics of Jim Messina’s Tory turn. I think he is being a too credulous of Messina and a little naïve about politics.
Great Britain is largely ruled by 2.5 (2.25?) political parties, the primary two of which are the Tories on the right and Labour on the left. Now, Humphreys is correct to argue that, were the American Republican Party to adopt wholesale the Tory platform, they would on many major issues find themselves in agreement or even to the left of the Democratic party and the center American politics would shift very far to the left.
But that’s not what Messina is doing or trying to accomplish. What he is trying to accomplish is doing his level best to ensure that Tories, rather than Labour, governs the United Kingdom. This suggests that, if you model politics purely as a hyper-rational act of selecting a set of optimal policies and supporting the political coalition that most closely reflects that set, that Messina’s policy set is delicately balanced to the left of the GOP but to the right of Labour. This is entirely possible! But I’m going to venture that it’s quite unlikely, and it’s more likely that Messina doesn’t have policy views this well-developed.
There is another way to look at politics – as a struggle between groups over rights, privileges, wealth, and power in society. In this view, for example, you could look at politics everywhere as a struggle between “workers/labor” and “business/capital” and believe that direction takes precedence over position and therefore endorse the pro-worker/labor party in general with substantial (if not total) disregard for whether workers in one country are better or worse off than those in another.
Now, I’ll admit to not being terribly well-versed on what, at this very moment, are the key differences between Labour and the Tories going into the next UK election. But what I do know is if you asked me this question:
“Will British workers be better off 50 years from now if Labour wins the majority of elections between now and then or if the Tories win the majority of elections between now and then?”
I could rather confidently answer that question with “Labour.” There are indeed certain situations where the leftist party in certain countries is endorsing foul or noxious platforms, is corrupt or has engaged in substantial misconduct, or is simply nomination odious leaders, that one might considering wavering from this heuristic (let’s call it “solidarity” for old-times sake) but these are still exceptions. In this case, it is entirely possible that Messina has strong personal feelings about David Cameron or Ed Milliband or some item in Labour’s platform or simply believes in maintaining a certain balance-of-power between labor and capital but I’m going to go ahead and say that the Tories wrote him a big check and he’s cashing it with little regard for the substance of the politics, and lacking a clear reason to the contrary it is perfectly acceptable for American progressives to reflexively support Labour and question a Democratic Party figure who would support the Tories.
Kevin Drum’s fantastic piece on our robot future is best read in tandem with Peter Frase’s piece Four Futures. Whiel Drum’s piece is much more detailed on the likely path technological progress will take, Frase’s piece by virture of its author’s more heterodox perspective more easily grasps something Drum struggles with. Namely: work is not the point.
We (meaning those humans lucky enough to live in the developed world) currently live in a society where, to a large degree with some variation, the social contract is as follows: if you can work, you likely must; but in exchange, your needs will be met and above-and-beyond that you will be given claims on the output of our socioeconomic system, and if for some reason you are temporarily without work you need not fear the worst.
This system developed because it was optimal; it was optimal because, in a post-industrial world aggregate social wealth is a positive externality, ie, the product of everybody working was more than the sum of its parts. Therefore, while the system could bear a certain amount of free riding, too much and you lose the broad sense of stability and security that knits the whole thing together and therefore implosion.
However, systems that emerge for practical reasons often become reified into self-justifying ideological constructs; that is, when it is advantageous for humans to believe in something, they do, and once the belief system takes hold widely and firmly enough it tends to persist past its usefulness. And so it will be with work – the idea that hard work is in-and-of-itself a good, as opposed to merely a means to an end both individually and collectively, will die hard.
But, die it must. For when the robots and computers lead to prosperity not merely orders of magnitude higher than we currently experience but orders of magnitude of orders of magnitude higher, tethering the rights to claim a share of that prosperity with once’s willingness to toil, despite both the uselessness of the toil and it’s lack of meaning to the toiler, will be simply cruel. Therefore, when Drum says “we’re not prepared for [a future of mass unemployment]” and frets about redistribution of income and capital he’s implicity buying into the idea that employment is the end and not merely the means to broad-based prosperity. A world where nobody is employed and everyone has everything is utopian, not dystopian. This world will be so different from ours that it will be difficult to even apply the current frame of post-industrial early-informational capitalism to it.
This is not to say we are in for a future of couch potato-ism. While some will certainly opt for that, there will likely still be a value on participatory activity and a value on things created by humans. Which is to say, there will be a lot of artists and artisans, a lot of restaurants, a lot of informal sports leagues, a lot of therapists. People will still compete for status, always, forever. But what there won’t be is a necessity to sit in a cubicle or stand on a factory floor or behind a cash register for forty hours a week. And we’ll all be better off for it.
This probably would have been better blogged last Monday, but better late than never – walking past a beautiful house on my block with a "Sale Pending" sign reminds me that we’d all be better off if our tax returns were public.
Think about the housing market. When a buyer and seller go to transact the sale of a house, both are armed with a lot of information – the last sale price of the house, as well as the last sale price of every similar house in that neighborhood and metro area, along with detailed information about the size of that house and its lot and its age and how many bathrooms it has. A common meme has it that the diminishing average time between listing and sale is a sign of bubbliness in the housing market, but it could just be the internet and ability of buyers and sellers to focus in on a narrow range of "correct" sale prices with far greater ease.
On the other hand, labor markets are a hornet’s nest of bamboozlement, opacity, resentment, and potential exploitation. Not knowing what anyone else is paid to do what work and especially given high unemployment, the median workers has relatively little leverage with which to bargain.
"But Squarely," you’ll say, "people have a right to privacy!" And so they do. But I would assert that one’s salary is sufficiently distinct from information indisputably covered by a right to privacy that, at the very least, it’s not axiomatic that one’s wages are inherently private. Firstly, if you work for the public sector, they’re not private. This includes public universities – if you want to know how much Tyler Cowen makes, just go find out. Secondly, if you play professional sports, they’re not private. Thirdly, if you are the CEO, CFO, or one of the other three most highly-paid officers of a public company, they’re not private. Fourtly, similar disclosures are required for public charities. Fifthly, while not required, these kinds of disclosures are expected of candidates for public officers, unless you’re, oh, what was that guy’s name? You know, that guy. Anyway.
Clearly, there are certain other unobjectionable concerns that override the right to salary privacy in many cases. And this is clearly distinct from other kinds of "private" activity – a database of who public employees have slept with, or what publications the CEOs of non-profit organizations choose to read in their homes, would clearly engender outrage, while publicizing their salary does not. I think making all salaries public (via the mechnanism of tax returns, perhaps truncated, edited editions for public consumption) would have salutory effects on labor markets and the labor share of national income. If you disagree, I think you need to disagree on those grounds.
Ruminating on my earlier mortification, I realized that my mistake was actually accidentally onto something vaguely interesting. After checking my math (note to self: always check your math) then asking FRED, I produced this lovely graph:
Assuming I haven’t fracked the pooch yet again, what this ought to be telling us is RGDP-per-capita over the population:worker ratio; ie, the share of RGDP-per-capita that actually ends up in workers’ pockets assuming a perfectly even wealth distribution. This may or may not be interesting.
For those who crave trendlines: