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Stairway to Serfdom

Stairway to Serfdom

I posted the above chart four days ago in “From Social Distance to Social Justice” to illustrate Arthur Dahlberg’s argument about the eventual consequences of a declining labor share of income. Dahlberg was inspired by Stephen Leacock’s The Unsolved Riddle of Social Justice and both Leacock and Dahlberg were influenced by Thorsten Veblen.

The chart also illuminates arguments made by Moishe Postone about Marx’s theory of capitalist production. I happen to agree substantially with Postone’s interpretation of Marx even though I find his presentation repetitive and difficult to follow. That is, I think I agree with what I think he was trying to say in Time, Labor and Social Domination.

What the chart shows is that in spite of a more than threefold increase in productivity over roughly the last half-century, the per capita hours of work increased in a series of steps with each successive business cycle culminating in a higher level of hours per capita. “Because total value created is a function only of abstract labor time expenditure.” Postone wrote, “increased productivity yields a greater amount of material wealth but results only in short-term increases in value yielded per unit time.” Postone later remarks that one consequence of this dynamic “is the accelerating destruction of the natural environment.”

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From Social Distance to Social Justice: An Unsolved Riddle

In the last two weeks of March and the first week of April, 2020 16.5 million new claims for unemployment were filed in the U.S. After the novel coronavirus is successfully contained some but not all of those jobs will return. The post-pandemic economy will not be the same as the economy before and to assume a return to business-as-usual economic growth would be folly.

There will need to be immediate share-the-work policies along with basic income guarantees. These must be viewed not as temporary measures to be abandoned as soon as “normality” returns but as transitional steps toward an entirely new regime of work, income and common wealth. Addressing climate change has momentarily taken a back seat to the urgent immediacy of the pandemic. But the irreversible long-term consequences of failing to free ourselves from the fossil-fueled treadmill of growth will make Covid-19 seem like a flash in the pan.

In The Unsolved Riddle of Social Justice, published shortly after the end of World War I (and, incidentally, the flu epidemic of that time), Stephen Leacock observed that the surprising resilience of industry during the recent war had “thrown its lurid light upon the economics of peace.” The coronavirus pandemic has once again “thrown its lurid light upon the economics of peace.” What the lurid light of war revealed to Leacock was the immense superfluity of peacetime employment. “Not more than one adult worker in ten…” Leacock speculated, “is employed on necessary things.”

Leacock’s estimate of superfluous workers may seem high but, to be honest, we don’t really know how much of the work that is done is necessary to sustain a society. If even one-fifth or one-quarter of the work being done was unnecessary, that would be a compelling rationale for suspending the growth imperative. Why not phase out current waste before producing even more waste?

But what if the proportion of superfluous to necessary work is even larger than that? How would we know it isn’t? As commentators from Simon Kuznets and Robert F. Kennedy to Marilyn Waring and Joseph Stiglitz have pointed out, national income accounts do not distinguish between “good” and “bad” commodities. They do not differentiate between necessities, comforts, luxuries and ugly Christmas sweaters that go from the closet to the trash. Furthermore, they do not account at all for the prodigious production of waste by-products. Nobody buys the carbon dioxide emissions from burning fossil fuels – even though somebody, someday, will indeed pay for them – with their lives if not money.

The absence of authoritative metrics serves as a convenient alibi for keeping things as they are or for actively making them worse. Efforts to construct alternative indices to the national income accounts, such as the Genuine Prosperity Index, have provided glimmers of insight but have ended up abandoned orphans that national governments have disdained to adopt.

What I am proposing here as an alternative to these global metrics focusing on the average number of hours that individuals work annually and the hours per capita worked in the economy as a whole. How many of those hours are devoted to wasteful production – built-in obsolescence, excess productive capacity, propaganda, disposable fashion, and other forms of sheer waste? For the answer, we turn to Arthur Dahlberg’s analysis of the effect of long hours on labor’s share of income.

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How Low Can You Go?

This is not a prediction. Only an observation. From 1952 to 1996, U.S. nominal net worth of households and non-profits tracked nominal GDP pretty closely. Net worth remained pretty close to 15 times GDP. That consistent relationship ended after 1997. In the third quarter of 2007, net worth was nearly 20 times GDP but by the second quarter of 2009 it had reverted to just 17 times GDP. One might argue that it was roughly 15 times what trend GDP would have been at that time.

In the second quarter of 2019, net worth was 21 times GDP  or about 28% above the historical norm from 1952 to 1996. To revert to that historical norm would entail a loss of asset valuation of around $32 trillion.

 

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A “Wild and Dangerous” Scheme, Part Two: What’s “fixed” got to do with it? Do with it?

“…we have seen a calculation… which shows that the fixed charges, for machinery and the general management of a mill, are as nearly as possible equal to the cost of wages in the process.”

In my earlier post on the “Wild and Dangerous Scheme” I teased the “egregious accounting error” committed by the author of the 1844 article in the Economist. In plain terms the error was double counting — the author deducts 16.5% from wages to compensate for a decrease in output and then attributes a second loss of 16.5% to the decrease in output resulting from it’s effect on “fixed charges.”

That double-counting error seems self-evident to me but there is also a semantic smoke screen at play that obscures it for some readers. The term “fixed charges” seems to refer to an immutable absolute quantity of costs and — implicitly perhaps? — an unalterable production process. It doesn’t. It refers to accounting entries, as the term “charges” indicates.

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A “Wild and Dangerous” Scheme!

“…a scheme at once wild and dangerous.”
“…a trick, too, of the clumsiest description…”

I was hunting for the exact location of “Prince’s Tavern” in Manchester in 1833 when I stumbled upon an Economist article from March 30, 1844 addressing the “practical consequences” of  reducing the length of the factory working day from 12 hours to 10. I am always fascinating by the profound and enduring hostility of a faction of employers — amplified by their mouthpieces in academia and the press — to the reduction of working time. I’m amazed how often their bile and zeal leads them to compound the error of biased, unfounded assumptions with boneheaded accounting mistakes. There is nothing so edifying as the sharp-eyed calculation of a businessman who has naught but the most important boon (far beyond any amount of benevolent sympathy or charity!) to the moral and physical independence of the operative at heart!

I’m going to leave this snippet here and invite commentators to identify the egregious accounting error the author commits. Later, I will demonstrate another instance of the exact same error, performed some 27 years later by an employer. These people weren’t merely wrong, they were systematically and consistently mathematically illiterate and intellectually bereft. Frederic Harrison was on the mark when he called the purported “economic science” of his day “this magazine of untruth.

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Standing on the shoulders of cranks

Standing on the shoulders of cranks

I use the term “crank” affectionately. The figure below is a valiant effort by Arthur O. Dahlberg to depict the “socio-economic process” as a network of troughs, pipes and valves. Even this elaborate contraption is confined to “the movement of the major social variables.”
Dahlberg believed that his chart technique communicated his analysis more effectively than words could. What the chart communicates to me, besides Dahlberg’s intense commitment is “it’s complicated” and “everything is connected to everything else.” That’s not nothing.

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“What is the Most Useful Idea in Economics?”

NPR’s Planet Money went to the 2020 American Economic Association conference in San Diego where they asked economists, “what is the most useful idea in economics?” David Autor appears near the end of the episode (minute 16:00) to talk about the lump-of-labor fallacy. Almost exactly 87 years earlier, on January 18, 1933, Arthur Dahlberg appeared before a Senate subcommittee to give testimony on the thirty-hour work week bill. The lump-of-labor fallacy would be a useful idea indeed if it would show economists how little they have learned and how much they have forgotten in the intervening 87 years.

In his Planet Money interview, Autor rehearses the standard refrain about there not being a “finite” amount of work to be done so we are not in danger of running out of jobs. Then he introduces the caveat that although we will not run out of jobs, that doesn’t mean that there is nothing to worry about — some people will end up in worse jobs than they previously had or would have had. Autor’s remedy for this is to develop policy that will improve people’s skills so they qualify for better jobs or raise the productivity in personal service jobs so they pay more.

Eighty-seven years earlier, Dahlberg also disagreed with the idea that machines create technological unemployment. He also saw that the new jobs created by technological change would be different than the old ones. But Dahlberg carried his analysis several steps further than Autor. In Dahlberg’s view many of the new jobs would differ from those they replaced in that the demand for their products or services would not be spontaneous but would need to be artificially induced by, for example, advertising.

Autor acknowledges something similar when he mentions that a hundred years ago 70 percent of consumer spending was on necessities compared to only around 40 percent now. But Dahlberg raised the issue that wages are determined by bargaining and the shift away from spontaneously-demanded goods and services undermines labor’s relative bargaining power, resulting in a smaller labor share of income. Recipients of capital income may spend their larger share either on personal consumption or investment but eventually they will want to “cash in” on that investment. Spending on new investment will decline faster than spending on consumption rises. Dahlberg thus invoked the business cycle as the “slow-moving effect” of the introduction of labor-saving technology.

Here is a link to the transcript of the Planet Money interview with David Autor. Below is the transcript of Arthur Dahlberg’s testimony to the Senate subcommittee on the thirty-hour work week:

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2020 Hindsight: Why the world is not zero-sum

According to a report, Global Waves of Debt, pre-published by the International Bank for Reconstruction and Development:

Waves of debt accumulation have been a recurrent feature of the global economy over the past fifty years. In emerging and developing countries, there have been four major debt waves since 1970. The first three waves ended in financial crises—the Latin American debt crisis of the 1980s, the Asia financial crisis of the late 1990s, and the global financial crisis of 2007-2009.

A fourth wave of debt began in 2010 and debt has reached $55 trillion in 2018, making it the largest, broadest and fastest growing of the four. While debt financing can help meet urgent development needs such as basic infrastructure, much of the current debt wave is taking riskier forms. Low-income countries are increasingly borrowing from creditors outside the traditional Paris Club lenders, notably from China. Some of these lenders impose non-disclosure clauses and collateral requirements that obscure the scale and nature of debt loads. There are concerns that governments are not as effective as they need to be in investing the loans in physical and human capital. In fact, in many developing countries, public investment has been falling even as debt burdens rise.

We hear from time to time that “the world is not zero sum.” Rarely is that dictum explained in other than mystical terms (e.g. “supply creates its own demand,” “human wants are insatiable,” etc.). The explanation, however, is simple: debt. Without debt there would be no “economic growth.”
Debt finances growth; growth services debt. And they all lived happily ever after. But some debt takes “riskier forms.” Hyman Minsky wrote about the first of those four debt waves in “The Bubble in the Price of Baseball Cards.” In that paper Minsky addressed the price of baseball cards, the Latin American debt crisis, the Japanese, Korean and Taiwanese real estate and equity booms of the ’80s, and “[o]ne of the puzzles of the 1980s… the rapid rise in the financial wealth of Donald Trump.”
What the rise in Trump’s wealth had in common with the Latin American debt crisis was that they both were predicated on a precarious differential between real interest rates and increases in asset values that could change very suddenly with an increase in the former or a decrease in the latter.
One of Minsky’s best shots was a drive-by — relating the regional increase in real estate prices to “rapid increase in incomes in banking and financial services — sort of a derived demand from the financial success of Drexel Burnham.” That Drexel Burnham “success” was, of course, transitory and involved fraud. The inference was that Trump’s financial success, too, was ultimately — at least indirectly — fraudulent.
John Kenneth Galbraith coined the term “bezzle” for the amount by which total wealth is inflated by embezzlement in the period before the embezzlement is discovered:

At any given time there exists an inventory of undiscovered embezzlement in—or more precisely not in—the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle.

Any large quantity of debt includes an inventory of embezzlement. A certain amount of it will never be paid back. Some was never intended to be repaid. As the debt increases relative to income, the proportion of prospective embezzlement also increases.

Happy New Year!

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