Humans’ Comparative Advantage: Wanting Things
Frances Coppola sums up and expresses a great deal of great thinking in her recent Pieria piece, The wastefulness of automation.
I’d like to highlight one point, one that I’ve been pondering for a long time. There’s one area where machines — until they get sentient — can’t replace people (here from her response in comments):
only humans desire to consume in excess of basic living needs. Show me a robot that wants a Gucci handbag. Or a Shire horse that wants an iPad.
Or…an expert system or drill press that wants a massage. As she concludes the article:
Maybe capitalists DO need a large labour force. Their survival depends on it.
Which leads me, once again, to wonder why I’m not hearing a lot more people discussing Ed Lambert’s work on “effective demand” and its relation to labor’s share of income.
Cross-posted at Asymptosis.
Nice. Even Henry Ford in the pterodactyl age understood this.
Steve, I don’t worry about it. The approach is new. People want to see if the predictions come true and that takes time.
In the meantime, I continue to develop this new approach to effective demand.
I think there are two hard concepts for people to wrap their heads around. One is the difference between labor and capital income.
Another is how labor share can constrain utilization of capital. Which you picked up on extremely well by connecting Frances Coppola’s article to effective demand. She wrote an extremely brilliant piece about the effects of declining labor income leading to low demand.
My approach to effective demand shows a way to quantify the constraint of declining labor income.
If I may add some personal thoughts… the constraint works as a compression against real output. As output rises, the compression increases up to a limit. When real GDP is low, the effect of effective demand is small. Yes, you will see low utilization of labor and capital, but real GDP does not fall to the same extent. Purchases don’t fall like utilization of labor and capital.
As the economy rebounds, effective demand compresses real GDP little by little toward a limit. Real GDP can fight against that limit by raising productivity, raising wages, lowering credit standards, creating some inflation, changing interest rates… but once real GDP hits the effective demand limit, “combined” utilization of labor and capital come to a stop, unless the economy is allowed and encouraged to go into a cost-push inflation. The graphs at my most recent post show this.
You will also see in those graphs that the economy appears to go into recession sometimes many quarters before officially going into recession. Utilization of labor and capital will fall, but real GDP keeps rising, in spite of people losing income. Eventually enough is enough and real GDP gives in and a recession starts.
The graphs at that most recent post tell an interesting story. Demand can set a limit upon output, but there are ways to get around that limit, that are only temporary fixes, that eventually succumb to recession, or create bubbles that eventually collapse in even a larger way.
And now we see something happening that never happened in a previous recession since the 60’s. We see a large negative output gap, because the CBO sets Potential real GDP very high. But effective demand is now below the CBO’s projection. This has never been seen. In effect, the compressive limit of effective demand will keep real output from reaching CBO’s projection. If the economy is unable to break through that limit with increased productivity, raising wages, lowering standards of credit, or something else, utilization of labor and capital will stop increasing at a real GDP much below CBO’s projection. This sets the stage for higher unemployment and eventually a recession…. Would an early recession come as a surprise to most economists? I don’t think so, but who really wants to go on record saying that?
I would say most economists maybe choose to think that I am a dooms-day type. Well, all one has to do is look through those graphs at my post and they will see the effect when real GDP reaches the effective demand limit. The graphs show that different scenarios will take place, but each scenario is a reaction to that limit, with its own consequences and dynamics.
I try to understand what sort of dynamics will occur when real GDP hits effective demand the next time. And I see much weakness, heaviness and instability. The economy won’t have many tricks up its sleeve to get around this time. Thus I believe the economy will succumb to recession faster once it hits the effective demand limit.
“Demand can set a limit upon output, but there are ways to get around that limit, that are only temporary fixes, that eventually succumb to recession, or create bubbles that eventually collapse in even a larger way.”
Sounds familar . . . You are not a doomsday person, it is a fact. You can eliminate Labor to a point as to where the product produced can not be bought except, except by the4.1 million people representing the 3% of the households making >$200,000 annually. There was a point in the fifties were it was predicted people would have more leisure time and still make a good salary. Instead they got the more leisure time without the pay.
If the economy is unable to break through that limit with increased productivity, raising wages, lowering standards of credit,…
Well, 2 of the three have been and are being used. Yet here we are. I would say the third one is up against 40 years of economic demagoguery. And that don’t change easily.
What’s that saying about America always doing everything else first before doing the correct thing?
well, maybe i’m just too dumb to understand.
but having farmed “by hand” and having done it with a tractor, i am all in favor of labor saving machinery.
the problem is not that machines don’t buy gucci. the problem is that we are too stupid to pay ourselves enough to take some time off. then we might not need the gucci to feel better about ourselves.
on the other hand, i doubt gucci destroys the planet any more than a five dollar bag from bi mart. so maybe gucci is a better way to feel better about ourselves than a 3000 square feet home in the country and a 20 mile commute in our really expensive mercedes.
and i wouldn’t count on the capitalists needing that labor force. “the rich” got along just fine without automation and without taking care of “workers” for maybe the last ten thousand years or so.
and they seem to be doing just fine with ten – twenty percent unemployment right now.
I still think you have something interesting and important to say, and since some people here seem to understand it, and no doubt the important people you are writing for understand it… perhaps you will be heard.
But for the rest of us, we do indeed have trouble wrapping our heads around some of those concepts. I don’t actually think the fault is ours. Until you have discussed those concepts at some length and we have a “feel” for them, abstract definitions simply don’t work. As far as I can tell even the economists who write about them don’t really know what they are talking about. They are just manipulating and re-manipulating words they heard in school.
You are right. I have a responsibility to explain the concepts.
The concept seems simple… labor’s share of income determines constraints on the economy.
Yet, getting a model for that has apparently eluded economics.
When I first discovered the model, I thought, well this is pretty simple. Then I realized its simplicity has a lot of complexity. And yet the model itself is simple. The complexity comes in how the diverse dynamics of the economy conform to the model.
For example, Frances Coppola had a doubt about the model. She thought the model implied no savings, and no consumer credit to adjust demand. It is true that the model does not explicitly have a variable for savings or credit. Yet the effects of savings and credit are imbedded in the dynamics of the model.
As you can see in the graphs that I posted about past recessions, the model for effective demand sets a limit for utilization of labor and capital. But you can also see many diverse dynamics taking place leading up to each recession. The limit of effective demand holds in each case, but the tricky thing is seeing how all those diverse dynamics of the economy are imbedded in the relationship between real GDP and effective demand.
Explaining those dynamics is the key for you. You want to see how it works. You want to take the model apart and see the gears inside like a clock. The clock just tells the time, but you want to understand how the clock works. So we have to open it up and observe the working parts. That is what you want to see with the effective demand model.
The sad truth is that modern human societies view materialism and the attainment of things as the key measure in establishing hierarchy. Animals sort out leaders and status by other means, we do it by what we possess, consume, give, earn and spend. As long as modern humans value things more than they do other non-material things, we will want more. One of the more insidious signs of this trait is the need to grow. Why would a person view a company that has solid profits, great wages, good but steady revenues and great products lacking if on a quarter by quarter basis, they grew less than their competitors? We value growth over all other measures in a mad dash to consume everything in our grasp as if we lived on an infinite planet capable of sustaining an infinite number of people consuming at an infinite level. You might say that I used the term infinite too loosely but your obligation then would be to define the limits to human activity given a growing population. At what point in the future does growth stop being a desired outcome?
I agree. but even here “definitions” can trip us up. If “growth” means using more and more unsustainable resources, then growth is cancerous.
But we could grow by learning to use resources more productively, especially human resources. And that does not mean producing more widgets per hour or per gallon. It might mean producing things of more value. or learning to value the time that comes from not producing anything.
i am not sure humans are capable of this, because by the time you create a sane society, that society’s neighbors start producing more guns, and well, here we go again.
you are kinder to me than i deserve. i think you are too close to what you have done to be the best explainer of it. things that are obvious to you just raise question after question in the mind of the serious student.
Yes, i always want to see how the clock works. But if you have to, and can just present the results… see my equation. see the input. see the prediction. see what happens. You should get their attention.
you might need to find a way to incorporate savings and credit explicitly into your model… even if only to find they cancel out.
good luck to you.
Seems to be a version of underconsumption theory,,,,,might want to glance through
Crisis Theories: Underconsumption
That is actually a good article for this issue. It is very instructive. I don’t see economics as Marx saw it, but I do have some common views with him.
What do you think of the under-consumption theory? Are we experiencing it now?