Relevant and even prescient commentary on news, politics and the economy.

“Why Are Voters Ignoring Experts?”

That is the question Jean Pisani-Ferry asks at Project Syndicate. In the wake of the Brexit vote there is a veritable chorus of experts and economists asking the same question. One explanation I don’t expect to see very often is that the supposed experts systematically ignore their own critical literature. Hubris.

Professor Pisani-Ferry inadvertently presents an example when he suggests that economists should “move beyond the (generally correct) observation” that “if a policy decision leads to aggregate gains, losers can in principle be compensated.” This is not a “generally correct” observation. It is, in the words of I. M. D. Little “unacceptable nonsense.”

This “compensation principle” — also known as the Kaldor-Hicks criterion — has been thoroughly refuted. I have documented the embarrassing career of this supposed principle in several posts over the last two years at EconoSpeak. Here are links to four of those posts:

Public Works, Economic Stabilization and Cost-Benefit Sophistry
#NUM!éraire, Shmoo-méraire: Nature doesn’t truck and barter
For the Euthanasia of Kaldor-Hicks/Cost-Benefit Pseudo-Science
Cost-benefit analysis as “unacceptable nonsense”

Opposed to the critical literature is simply a game of make believe. Let’s pretend those fatal criticisms don’t exist or that we didn’t see them or that they’re not all that important or that we can continue to use the fundamentally flawed criterion “until something better comes along.” This is not good enough. For a single economist to not know about the invalidity of the compensation principle would be malpractice. For the professional consensus to tolerate and even promote such malpractice is malfeasance.

People ignore experts because the experts have been systematically misleading them about what the benefits of policies are likely to be.

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FLEXIT

“If, as a result of Brexit, the economy crashes it will not vindicate the economists, it will simply illustrate once more their failure.” — Ann Pettifor

You can see immigrants. You can’t see NAIRU or flexible labor market policies. Most people wouldn’t know a NAIRU from a Nehru jacket and have probably never heard of flexible labor market policies.

There is a simple logic behind the “growth through austerity” policies beloved by Cameron and Osborne: “wages are too damn high.” But there is also a more technical-sounding  obfuscation. This more convoluted explanation is that there is a long-run, “natural” rate of unemployment that is unaffected by aggregate demand, therefore fiscal stimulus will result in inflation. Thus the only non-inflationary way to reduce unemployment is to fine tune this hypothetical natural rate by removing labor market rigidities.

Sounds plausible? What it means in practice is “wages are too damn high.” In the 19th century, this superstition was known as the wages-fund doctrine. Also known as this magazine of untruth.

Another euphemism for these “flexible labor market policies” (i.e., “wages are too damn high.”) is “structural reforms.” In a press release from the  Center for Economic and Policy Research, Mark Weisbrot pointed out the connection between Brexit and these so-called structural reforms:

“While the movement in the UK to leave the EU had right-wing, anti-immigrant and xenophobic leaders, in most of Europe that is not the driving force of the massive loss of confidence in European institutions. The driving force in most of the European Union is the profound and unnecessary economic failure of Europe, and especially the Eurozone, since the world financial crisis and recession.

“It has cost European citizens millions of jobs, trillions of dollars in lost income, and is sacrificing a generation of youth at the altar of fiscal consolidation and ‘structural reforms.’ It has delivered an overall unemployment rate in Europe that is twice the level of the United States; more than seven years of depression in Greece; more than 20 percent unemployment in Spain, and long-term stagnation in Italy. In recent weeks French workers have been fighting against ‘structural reforms’ that seek to undermine employment protections and the ability of organized labor to bargain collectively.”

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The Iatrogenic and Incoherent “Theory” of Flexibility

In its report on “The long-term decline in prime-age male labor force participation,” President Obama’s Council of Economic Advisers writes:

Conventional economic theory posits that more ‘flexible’ labor markets—where it is easier to hire and fire workers—facilitate matches between employers and individuals who want to work. Yet despite having among the most flexible labor markets in the OECD—with low levels of labor market regulation and employment protections, a low minimum cost of labor, and low rates of collective bargaining coverage—the United States has one of the lowest prime-age male labor force participation rates of OECD member countries.

Although it has indeed become conventional, the ‘flexible’ labor markets mantra is not a theory. It is dogma. An article of faith. The theory behind the nostrum of flexible labor markets is Milton Friedman’s natural rate theory of unemployment, which, as Jamie Galbraith pointed out twenty years ago, was constructed by adding expectations to the empirical Philips Curve observation of a relationship between unemployment and inflation:

The Phillips curve had always been a purely empirical relation, patched into IS-LM Keynesianism to relieve that model’s lack of a theory of inflation. Friedman supplied no theory for a short-run Phillips curve, yet he affirmed that such a relation would “always” exist. And Friedman’s argument depends on it. If the Phillips relation fails empirically— that is, if levels of unemployment do not in fact predict the rate of inflation in the short run—then the construct of the natural rate of unemployment also loses meaning.

Galbraith’s evisceration of the natural rate theory and NAIRU is incisive, persuasive and accessible. Read it.

At the other end of the flexibility spectrum, intellectually, is Layard, Nickell and Jackman’s Unemployment: Macroeconomic Performance and the Labour Market. In their influential textbook, Layard et al. grafted the dubious NAIRU concept onto the archaic lump-of-labor fallacy claim to create their own chimera hybrid, the LUMP-OF-OUTPUT FALLACY.

Galbraith’s “Time to Ditch NAIRU” has 293 citations on Google Scholar. Layard et al’s “Unemployment” has 5824.

To appreciate the pretzel logic of Layard et al., one has to first understand that the old fallacy claim is essentially an inversion of the “supply creates its own demand” nutshell known as Say’s Law. Jamie’s dad, John Kenneth Galbraith, had argued back in 1975 that Say’s Law had “sank without trace” after Keynes had shown that interest “was not the price people were paid to save… [but] what was paid to overcome their liquidity preference” and thus a fall in interest rates might encourage cash hoarding rather than investment, resulting in a shortfall of purchasing power.

So, at one end of their graft Layard et al. were resuscitating the old dogma that Keynes had supposedly “brought to an end.” At the other end of the graft was Friedman’s tweaking of an atheoretical empirical observation — the Philips Curve — that was  “patched into IS-LM Keynesianism to relieve that model’s lack of a theory of inflation. (James Tobin once elegantly described the Phillips curve as a set of empirical observations in search of theory, like Pirandello characters in search of a plot.)” And let’s not even get started with IS-LMist fundamentalism.

Churchill’s “riddle wrapped in a mystery inside an enigma” quip about the Soviet Union has nothing on Layard et al.’s antithetical and anachronistic graft on a tweak of an atheoretical patch on an unsatisfactory “attempt to reduce the General Theory to a system of equilibrium,” as Joan Robinson described IS-LM “Keynesianism”:

Whenever equilibrium theory is breached, economists rush like bees whose comb has been broken to patch up the damage. J. R. Hicks was one of the first, with his IS-LM, to try to reduce the General Theory to a system of equilibrium. This had a wide success and has distorted teaching for many generations of students. Hicks used to be fond of quoting a letter from Keynes which, because of its friendly tone, seemed to approve of IS-LM, but it contained a clear objection to a system that leaves out expectations of the future from the inducement to invest.

And by “expectations,” Keynes clearly had in mind uncertainty, not honeycomb equilibrium.

So that’s the tangled ‘theory’ behind ‘flexible’ labor market policy prescriptions. A regurgitated dog’s breakfast of contradiction and amnesia.

Layard et al.’s lump-of-output fallacy flexibility chimera thus resembles a sort of a theoretical ouroboros chicken-snake swallowing its own entrails:

To many people, shorter working hours and early retirement appear to be common-sense solutions for unemployment. But they are not, because they are not based on any coherent theory of what determines unemployment. The only theory behind them is the lump-of-output theory: output is a given. In this section we have shown that output is unlikely to remain constant.

This is simply FALSE. Shorter working hours is based on the same theory as full employment fiscal policy: Keynes’s theory. But don’t take my word for it. In an April 1945 letter to T.S. Eliot, Keynes wrote:

The full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less. Personally I regard the investment policy as first aid. In U.S. it almost certainly will not do the trick. Less work is the ultimate solution.

 

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Is “Political Correctness” to Blame for Orlando Massacre?

Well, well, the dear old National Rifled Assholeciation has weighed in with its theory. Assault weapons don’t kill people, “political correctness” does.

“The National Rifle Association (NRA) on Tuesday defended gun rights, two days after a gunman killed 49 people and left 53 others injured at a gay nightclub in Orlando,” Jesse Byrnes at The Hill reports:

“In the aftermath of this terrorist attack, President Obama and Hillary Clinton renewed calls for more gun control, including a ban on whole categories of semi-automatic firearms,” Chris Cox, executive director of the NRA Institute for Legislative Action, wrote in a USA Today op-ed.

“They are desperate to create the illusion that they’re doing something to protect us because their policies can’t and won’t keep us safe. This transparent head-fake should scare every American, because it will do nothing to prevent the next attack,” he said.

Cox said “political correctness” allowed for the deadliest mass shooting in U.S. history to take place, noting that the FBI had interviewed the shooter multiple times since 2013 and that he maintained a government-approved security license.

“Unfortunately, the Obama administration’s political correctness prevented anything from being done about it,” Cox wrote.

Presumptive Republican presidential nominee Donald Trump, who the NRA has endorsed, also attacked “political correctness” in a speech following the shooting.

So what exactly is the connection between “political correctness” and mass murder? Let’s ask an expert: mass murderer Anders Breivik (the following is reposted from EconoSpeak, August 2015)

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Dear Omar al-Ubaydli:

omartwitter

Yes, Omar, I would be delighted to elaborate. Thank you for asking.

The point I am trying to make was stated by John Stuart Mill in On Liberty, “He who knows only his own side of the case, knows little of that.” The truth of that maxim is illustrated by the claim, in your counterpoint to Dean Baker, that “proponents of work-sharing believe an economy requires a fixed amount of work to be performed by a limited number of people.”

Not only is that assertion untrue, but it has been repeated ad nauseum for two hundred and thirty-six years without any effort by claimants to ascertain what “proponents of work-sharing” (etc.) actually believe.

Not only is the claim unfounded, but it has been refuted half a dozen times or more by notable economists. Those rebuttals have never been addressed by the antagonists who repeat and repeat the fixed amount of work mantra.

Not only is the claim untrue and unfounded, but it is rote — a monotonous, mechanical repetition of the same catchwords and phrases that have been recited a thousand time over the span of more than two centuries.

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As Common as Ditchwater

I would like to draw the readers’ attention to an item I posted yesterday and say a few words about the significance of the discovery mentioned in it. The mock “theory of the Lump of Labour” was invented in 1891 by David Frederick Schloss in an article titled “Why Working-Men Dislike Piece Work.” The Oxford Dictionary cites Henry Mayhew’s London Labour and the London Poor (1851) as an early published instance of “lump labour,” referring to a form of labor subcontracting that was common on the docks and persisted in the building trades.

John Mills’s 1843 novel, The Stage Coach, or the Road of Life predates Mayhew by more than half a decade, it employs the exact phrase, “lump o’ labour” rather than a close approximation and, most importantly, it provides a substantial context that illustrates what the characters meant by the phrase. From that context, it is clear that the lump of labor refers to a given expenditure of effort and is related to the expectation of a proportionate reward for that effort. Jack Hogg’s father ruminates, “we ought to be well satisfied when we get moderate profits to a lump o’ labour or pain.”

Evidence that the phrase is consistent with working-class London patois from the period is found in the expression “lump o’ lead,” which is Cockney rhyming slang for head. The Lump or “lump hotel” is a slang term for the workhouse. Mills’s lump o’ labour thus had a concrete reference and is not an abstraction contemplating change — or lack of it — in the macro-economy. The theory of the lump of labor is strictly Schloss’s fiction. More precisely, the kind of fiction Schloss engaged in was caricature, based on social class, that presumed the superiority of the classes from which the readers of The Economic Review were drawn. Such derisive caricature — frequently based on ethnic, racial and gender stereotyping — was rampant in the late 19th and early 20th century.

Schloss’s caricature of “theory” was relatively mild — condescending rather than overtly hostile and defamatory. But that should not obscure the fact that it patently wasn’t an attempt to explain or understand what workers thought. Rather it was a routine maneuver in the construction of otherness — so standard as to be a cliche. Schloss’s “certain fixed amount of work to be done” hearkened back more than a century to Dorning Rasbotham’s “certain quantity of labour to be performed” by way of half a dozen or so intervening slight paraphrases and reiterations.

It is almost as if the Schloss/Rasbotham fixation on fixedness is trying to tell us something about their own discourse. In “The Other Question,” Homi Bhabha described the “dependence on the concept of ‘fixity’ in the ideological construction of otherness” in colonial discourse:

Fixity, as the sign of cultural/historical/racial difference in the discourse of colonialism, is a paradoxical mode of representation: it connotes rigidity and an unchanging order as well as disorder, degeneracy and daemonic repetition. Likewise the stereotype, which is its major discursive strategy, is a form of knowledge and identification that vacillates between what is always ‘in place’, already known, and something that must be anxiously repeated… as if the essential duplicity of the Asiatic or the bestial sexual license of the African that needs no proof, can never really, in discourse, be proved.

To state it plainly, the lump-of-labor fallacy myth is colonial discourse in which the worker is the colonized other — the “idiot Luddites” Larry Summers was taught as an undergraduate at M.I,T, to dismiss as “a bunch of goofballs.” That was way back in the 1970s. Just the other day, in a point/counterpoint with Dean Baker (Point: Shorter Workweeks Will Defeat the Robots), Omar al-Ubaydli (Counterpoint: Shorter Workweeks Will Increase Unemployment) trotted out the old formula:

A glaring red flag is how simple the proposed solution seems to be: Proponents of work-sharing believe an economy requires a fixed amount of work to be performed by a limited number of people.

That tired old colonial discourse. Shame.

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Pain for Profit

from The Stage Coach, or the Road of Life (1843) by John Mills, Chapter XI “The Mudlark”

The night was very bright; a sharp frosty air whistled from the east, and the moon and the stars sparkled like frozen sleet in the sun. After the governor had scraped off the worst part of the slush, cleaned my face, and did the best he could for me, he shelled out the contents of the sack upon the side o’ the wessel, and commenced countin’ and feelin’ the pieces of silver with wonderful pleasure.

“I feel, Jack,” said the governor, smilin’ as if a feather was blown into his ear, ” I feel, Jack, as though I could play leap-frog with the lamp-posts. There’s a hundred ounces if there’s one.”

“If there hadn’t been a good swag,” replied I, almost fit to blubber with smarting so, “there’d a-been a deal o’ pain for short commons o’ profit.”

“As common as ditchwater, that is,” added my father, fixin’ the sack over his shoulders, “and we ought to be well satisfied when we get moderate profits to a lump o’ labour or pain. However, Jack, get on my back, and I’ll carry ye home.”

lumpolabour

The above is the earliest literary mention of the “lump o’ labour” that I have ever found. “One-eyed” Jack Hogg is telling the story of the time when he was 10-years old and there was a fire at the silversmith’s shop at the corner of Adam Street.The melted silver was carried by the water into the storm drain. Jack’s father, a scavenger (the “mudlark”), sends him into the sewer to recover the lumps of silver but on his way back Jack drops his lantern and is immediately attacked by the sewer rats. He runs to the exit where his father beats off the last clinging rats and then cleans him up in the river. The retrieved “swag” is enough to keep the family in relative luxury for the next six months.

The preceding chapters of the book tell the story of a visiting professor of phrenology and the ruse played on him using a plaster cast from a Swedish turnip.

 

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I Confess, Graunt Didn’t Invent Economics…

Aristotle did. As Philip Kreager reminded me:

Historians of economics have for some time treated his [Aristotle’s] writings as formative, even though relevant passages in the Politics and Ethics amount to only a few pages.

Wait. There’s more:

In the Politics, however, population is a recurring topic, extensively discussed and integral to the overall argument. “The first part of a state’s equipment,” Aristotle says, “is a body of men, and we must consider both how many they ought to be and with what natural qualities,”

The almost obsessive focus on proportionality I noted in Graunt and Locke is no proof of Graunt’s influence on Locke. The proportional view was central to Aristotle’s Politics and everybody in early modern humanism “up to and including Adam Smith” was doing Aristotle. You didn’t have to read Aristotle. The commentaries on Aristotle were ubiquitous. For Aristotle,

The logic of proportional versus numerical relationships also describes the economy of the household in relation to its size, and this in turn shapes the wider demography of constituent groups. Oikos, the household, is the root of oikonomia, the art of household management, from which we derive the modern term “economics.”

What Graunt did contribute was a brilliant synthesis of humanist Aristotelianism with the techniques of merchant bookkeeping.

Graunt’s work brilliantly synthesized humanist methods of natural history and rhetorical communication that were basic to Aristotelianism with techniques of merchant bookkeeping in which population totals are treated as open or relative accounting balances, rather than closed aggregates; his method arose as a direct response to the need to calculate balances in the body politic.

So no, Graunt didn’t invent economics. He did invent the science of population statistics, though, and thus laid the foundation for modern social sciences. As for Graunt’s contribution relative to Petty’s, Walter Wilcox aptly summed up my own impression, “To the trained reader Graunt writes statistical music; Petty is like a child playing with a new musical toy which occasionally yields a bit of harmony.”

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“A certain proportion of work to be done”: How John Graunt invented economics

John Graunt’s Natural and Political Observations on the Bills of Mortality (1662) is acknowledged as the inaugural text of “political arithmetick.” Graunt is ranked along with William Petty, Charles Davenant and Gregory King as a major pioneer of “the art of reasoning by figures, upon things relating to government.”

In their Outline of the History of Economic Thought, Screpanti and Zamagni, however, describe Graunt as a “follower” of Petty. In books and articles on history of economic thought, Petty is mentioned ten times as often as Graunt (JSTOR, Google Scholar). Graunt is more frequently thought of as a pioneer of population studies and vital statistics. Regarding that latter capacity, Philip Kreager has written extensively and wonderfully on Graunt’s truly innovative methodology.

It is convenient at this point to recall that to produce, to consume and to trade are actions first, as are supply, demand, value and price – before they can be treated as things and aggregated. People perform those actions and they do them in proportion to their numbers, abilities and appetites.

Proportion, by the way, is central to Graunt’s methodology. Did I mention the word appears no fewer than 68 times in Graunt’s Observations? Kreager’s article, “New Light on Graunt” contains 48 occurrences of the word. The methodological significance of this word for Graunt cannot be overstated. I am therefore quoting in full Kreager’s explanation of the analytical role of proportional checks in bookkeeping and Graunt’s Observations:

A population, like a commercial enterprise, must achieve at least an equilibrium of income and expenditure over time, if it is to survive. Graunt noticed that the bills, like a merchant’s day-book, provided a continuous record of additions and subtractions in a constantly changing numerical whole. The diversity of transactions in people and trade, however, make such a simple running account difficult to interpret. The ‘method of double-entry’ bookkeeping, widely promoted in Graunt’s time, claimed to provide a solution to this problem by revealing the inherent order and regularity of trade. The procedure may be summarized as follows. On the basis of his daily journal of transactions, a merchant was supposed to classify and tabulate every entry according to a few major types of account. Successive transactions pertaining to an account were then entered twice in a ledger, in parallel columns, one entry showing the changing balance of debt, and the other of credit. The comparison or proportion of the two columns relative to starting and subsequent balances provided the merchant with an immediate evaluation of the current and past status of the account, relative to others. This made it possible to spot accounting errors, to isolate losses, and to distinguish real profits from diverse fluctuations in income.

Therefore, when Graunt wrote, “…if there be but a certain proportion of work to be done; and that the same be already done by the not-Beggars; then to employ the Beggars about it, will but transfer the want from one hand to another…” it is virtually certain that he was not referring to a “fixed amount” of work. Instead he was referring to a regularity. Change happens but disproportionate change may be cause for concern.

It is difficult to think of a economically-significant fact that doesn’t involve “a certain proportion” of something to something else. GDP per capita gauges a certain proportion between economic output and population. Productivity measures a certain proportion between economic output and hours of work. Economic growth reflects a certain proportion between one year’s output and the next’s. The unemployment rate considers a certain proportion between the labor force and the number of people who are looking for work. It is certain proportions all the way down.

Compare, though, Dorning Rasbotham’s lament, 118 years after Graunt, about people who say there is a “certain quantity” of labor to be performed:

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Prayer – Science = 0

Yes, it’s okay to talk about climate change right now. The devastating natural disaster in Fort McMurray is “consistent” with climate change.

Fort McMurray

The Fort McMurray wildfire is horrific. Miraculously, no people have been killed, so far. Saying that the unseasonably hot conditions in Alberta are “consistent with” climate change is not to say that they are “caused by” anthropogenic global warming. But there is no jurisprudential rationale here for requiring that guilt be established beyond a reasonable doubt. On the contrary, the precautionary principle is the appropriate standard for evaluating the possible connection.

A lot of people take to social media to proclaim their prayers for the people affected by the disaster. There’s nothing wrong with prayers. I do wonder about the public testimonial of praying, though. If that isn’t a politico-religious act, what is?

But what really gets the Sandwichman’s goat are the sanctimonious edicts against “politicizing” the disaster by mentioning the connection to climate change. “Now is not the time.” And if not now, when? If expressions of religious faith are welcome in times of trouble, why should affirmations of scientific conscience be considered disrespectful?

Green Party leader Elizabeth May has been castigated for “linking” the fire to climate change even though she qualified the connection by stipulating that no single event is caused by climate change alone. Prime Minister Justin Trudeau subsequently “corrected” May, pointing out that no single event is caused by climate change alone. You can read the two leaders’ statements right in the same CBC news bulletin.

Outgoing NDP leader Thomas Mulcair boldly evaded the controversy with a forthright equivocation that “It’s not the time to start laying blame…” This is like one of those NRA pronouncements after a mass shooting that “now is not the time” to discuss preventative measures.

“Blame”? Talking about science is “laying blame”? Well, I suppose if some folks refuse to talk about science, deny the science, then talking about science might be seen as laying blame.

I shudder at the long lines of pickup trucks idling in evacuation traffic, running out of fuel… but I must qualify that no single pickup truck’s running out of gas in wildfire evacuation traffic can be directly attributed to the consequences of anthropogenic global warming alone. There’s a lot of factors involved. It’s complicated. Let us pray.

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