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The Future of Work Part 1: John Maynard Keynes

As the global depression spiraled towards its depths in 1930, John Maynard Keynes wrote a cheerful article on the future of work: Economic Possibilities for our Grandchildren. He argued that it wouldn’t be too long before capital accumulation and technological change would come near to solving the economic problem of material subsistence, of producing enough goods and services to provide everyone with the necessities of life and largely relieving them of the burden of work.

The paper begins with a very brief description of the problems of the time:

We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another. The increase of technical efficiency has been taking place faster than we can deal with the problem of labour absorption; the improvement in the standard of life has been a little too quick; the banking and monetary system of the world has been preventing the rate of interest from falling as fast as equilibrium requires.

This statement anticipates the views of Karl Polanyi in The Great Transformation, and of Hannah Arendt in The Origins of Totalitarianism. They argue persuasively that massive technological changes led to changes in social structures which were profoundly upsetting to large numbers of people. Polanyi says that a decent society would take steps to relieve people of these stresses, perhaps by forcing a slower pace of change, or perhaps by legislation to protect the masses. Arendt claims that for a while, imperialism offered a solution by absorbing some of the excess workers. Both believed that the stresses of constant change and displacement of workers played an important role in the rise of fascism.

Keynes then points out the history of growth in world output. From the earliest time of which we have records, he says, to the early 1700s, there was little or no change in the standard of life of the average man. There were periods of increase and decrease, but the average was well under .5%, and never more than 1% in any period. The things available at the end of that period are not much different from those available at the beginning. He argues that growth began to accelerate when capital began to accumulate, around 1700.

It’s interesting to note that this sketch of economic history accords nicely with that provided by Thomas Piketty in Capital In The Twenty-First Century. This is Piketty’s Table 2.5. Compare this with Figure 2.4, The growth rate of world per capita output since Antiquity until 2100.

Keynes argues that since 1700 there has been a great improvement in the lives of most people, and there is every reason to think that will continue. Certainly there was the then current problem of technological unemployment, with technology displacing people faster than the it was creating new jobs. But he says it is reasonable to think that in 100 years, by 2030, people will be 8 times better off, absent war and other factors. He says there are two kinds of needs, those that are absolute, and those with the sole function of making us feel superior to others. The latter may be insatiable, he says, but the former aren’t, and we are getting closer to satisfying them. In so doing, we are getting close to solving the ancient economic problem: the struggle for subsistence.

That problem is indeed ancient. It shows up in Genesis, 3:17. Adam and Eve have eaten the fruit of the Tree of Knowledge of Good and Evil, and the Almighty punishes Adam with these words:

To Adam he said, “Because you listened to your wife and ate fruit from the tree about which I commanded you, ‘You must not eat from it,’ “Cursed is the ground because of you; through painful toil you will eat food from it all the days of your life.

To be relieved of this ancient curse should be a wonderful thing. Keynes doesn’t think it will be an easy transition though. The struggle for subsistence is replaced by a new problem: how to use the new freedom, how to use the new-found leisure. He thinks people will have to have some work, at least at first, to give us time as a species to learn to enjoy leisure. He thinks that those driven to make tons of money will be seen once again in moral terms: as committing the sin of Avarice. They will be ignored or controlled in the interests of the rest of us.

As it turns out, this wasn’t one of Keynes’ better predictions. It isn’t clear that there is such a thing as a minimum absolute needs, for example, and technology has not yet removed the need for all work. Still, the goal of solving the economic problem seems sensible, and his discussion of the problems of a possible transition seems accurate.

People want to work, and they want everyone else to work too. There have been a number of reported interviews with Trump voters, many of who claim that this has become a give-away society. People complain that it pays better to be out of work than in work because of all the free stuff you get, health care (Medicare), free phones, food stamps, SSDI, free housing and so on, so they voted for Trump thinking he’d fix it so that only the deserving poor would get that free stuff. They think people don’t want to work, which feels like projection, and if they have to work, everyone should. Work has a number of social benefits, including a sense of purpose, responsibility, and pride. How are these to be handled in Keynes’ Eden?

The pace of technological change has picked up. It not only affects blue-collar workers, it’s starting to hit on doctors, lawyers and even translators. Here’s an article on improvements in translation based on neural network machine learning from the New York Times Magazine; and here’s a report from the White House on the impact of artificial intelligence on jobs. And here’s an article in the NYT’s Upshot column discussing the White House Report, and a rebuttal from Dean Baker.

These problems are crucial to the future of democracy. They concern the nature of our institutions and our social structures, as well as questions about our nature as human beings. I’ll take these up in more detail in future posts in this series.

Update: Here’s a link to the Keynes paper discussed in this post.

Mankiw’s Principles of Economics Part 8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services

The introduction to this series is here.
Part 1 is here.
Part 2 is here.
Part 3 is here.
Part 4 is here.
Part 5 is here.
Part 6 is here.
Part 7 is here.

Mankiw’s eighth principle of economics is: a country’s standard of living depends on its ability to produce goods and services. He points out that there are vast differences between the average incomes of different countries. In the US, average income has increased about 2% per year adjusted for increases in the cost of living, he says, and doubles about every 35 years. The explanation for this change is productivity, defined as “the amount of goods and services produced from each unit of labor time.” The growth rate of a nation’s productivity determines the growth rate of its average income, he asserts. He dismisses other explanations, such as the prevalence of labor unions and minimum wage laws. He claims that US productivity dropped in the 1970s which accounts for the slow growth of average wages over that period. He concludes with this claim:

To boost living standards, policymakers need to raise productivity by ensuring that workers are well-educated, have the tools needed to produce goods and services, and have access to the best available technology.

This principle supports Philip Mirowski’s Sixth Commandment of Neoliberalism: Thou Shalt Become the Manager of Thyself. “Human beings [are reduced] to an arbitrary bundle of “investments,” skill sets, temporary alliances (family, sex, race), and fungible body parts.” The goal of the entrepreneur of you is to find some way to make yourself valuable enough to fill a slot in some corporate entity that will pay off on your investments. It also supports the Ninth Commandment, Thou Shalt Know that Inequality is Natural, because it tells the entrepreneur of you that if you fail, it’s your fault for being insufficiently productive. The problem is always the workers; and never the owners of capital for they can do no wrong. That comes from the Tenth Commandment, Thou Shalt Not Blame Corporations and Monopolies, especially for investing their capital in foreign countries so jobs are created there instead of in the US. After all, the free flow of capital is critical in Capitalism, as we learn in Mirowski’s discussion of Commandment 8: Thou Shalt Keep Thy Cronyism Cosmopolitan.

Mankiw’s explanation is intellectually dishonest. He only talks about average incomes, not median incomes, and not the incomes of the working people of the US. That enables him to paint a false picture of the economy, and of the role of productivity in increasing standards of living. The leading work on this issue was done by Larry Mishel at the Economic Policy Institute. His April 2012 paper, The Wedges Between Productivity And Median Compensation Growth is the seminal work on this issue. Here’s an updated chart showing the disparity between wages and productivity. For a discussion of the productivity measurement, see this 2014 Bureau of Labor Statistics paper. It’s important to note that Mishel is using the median wage growth for production/non-supervisory workers, not total labor compensation. With this statistic, we look at the actual experience of approximately 80% of workers.
Wage-Productivity gap 1

According to Mishel, the gap in the chart from 2000 to 2011 is the result of three factors (see Table 1):

1. Income inequality increased, with the great gains going to the top few percentiles and the rest stagnant or falling, accounting for 39% of the gap.
2. Income shifted from labor to capital, accounting for 45% of the gap.
3. Output prices diverged from consumer prices, accounting for 16% of the gap.

Dave Dayen discusses Mishel’s paper here, focusing on efforts of conservatives to discredit Mishel’s work. The only consideration that seems even questionable is 3, and Dayen’s discussion seems fair. He concludes with this:

If you believe the Lawrence/Yglesias argument, policies that raise wages are secondary to policies that raise productivity more generally. If you believe the Mishel argument, reconnecting wages to productivity becomes central. Rather than stressing the need to acquire more education and skills, you would support increasing the minimum wage and allowing for more union organizing to put leverage in the hands of labor over capital. You would support proper use of overtime laws to reduce wage theft, and paid family and medical leave to keep wages strong during times of family stress.

But if productivity gains just leak out to the wealthy through financial engineering, all the growth in the world won’t benefit the typical worker.

Mankiw doesn’t acknowledge the problems with his principle, problems which have been evident for a long time as the chart shows. The source of this principle is the neoclassical argument of William Stanley Jevons and John Bates Clark which I discuss in detail here and here. Mankiw is preaching from the Natural Law Bible without mentioning it. This is a perfect example of Keynes’ dismissive statement on these writers: “We have not read these authors; we should consider their arguments preposterous if they were to fall into our hands.“ Certainly this principle is preposterous both factually and theoretically.

Keynes on Paradigm Change

John Maynard Keynes wrote about paradigm change long before Thomas Kuhn’s The Structure of Scientific Revolutions. In a 1926 essay, The End of Laissez-Faire Keynes discusses the lingering doctrines of Laissez-Faire economics well into the period economists were for the most part persuaded by the examples of Alfred Marshall, and the proponents of the marginal utility school that the main ideas of laissez-faire were wrong. Keynes was a brilliant writer, witty and insightful, but he was also a fine scholar. This isn’t a long essay, and it is certainly worth reading, for the giraffe analysis if nothing else. I am going to pick out a few points that show why Keynes thought old and strange ideas cannot be rooted out of economics. Here’s the laissez-faire he is talking about:

Finally, in the works of Bastiat we reach the most extravagant and rhapsodical expression of the political economist’s religion. In his Harmonies Économiques, [he writes]

I undertake [he says] to demonstrate the Harmony of those laws of Providence which govern human society. What makes these laws harmonious and not discordant is, that all principles, all motives, all springs of action, all interests, co-operate towards a grand final result … And that result is, the indefinite approximation of all classes towards a level, which is always rising; in other words, the equalisation of individuals in the general amelioration.

That sure sounds like any Republican or corporatist Democrat, any TV economist or any person who plays economist on TV, and it’s just a shade riper than the average commenter on an article in which Bernie Sanders is identified as a Social Democrat.

Keynes identifies several social and political issues which led to this florid statement. There was struggle against monarchy, which led Locke and others to fetishize private property and the freedom to do as one will with that property. There was a philosophical basis in the Social Contract ideas and the theories of the Utilitarians. There was Darwin and his scientific colleagues who seemed to argue for the necessity of competition for evolution. There was the “corruption and incompetence of eighteenth-century government”, coupled with the successes of the early industrialists. There was the support of the economists of that time, a new group, but once seemingly versed in science, saying that government interference with private property would be bad.

He explains that although economists of the day generally supported laissez-faire, it wasn’t they who preached the gospel as laid out by Bastiat. Instead, it was the “popularisers and the vulgarisers”, who pushed the doctrine into the public mind, and it was the philosophers, not the economists, whose views it fit best. He quotes the popularisers, including the fabulous Mrs. Marcet, and I can’t resist:

CAROLINE. The more I learn upon this subject, the more I feel convinced that the interests of nations, as well as those of individuals, so far from being opposed to each other, are in the most perfect unison.

MRS B. Liberal and enlarged views will always lead to similar conclusions, and teach us to cherish sentiments of universal benevolence towards each other; hence the superiority of science over mere practical knowledge.

The economists turned away from this stuff immediately, Keynes says, treating it as a useful idea but hardly one with evidentiary or theoretical support. But the idea remains fixed in the public mind. To be clear, Keynes agrees that government should be limited, but he firmly believes that limits on the use of private property of various kinds and a sensible government are both crucial to controlling the practice of capitalism. The idea that the government could do nothing useful, which underlies laissez-faire as taught by the likes of Mrs. Marcet, is foreign to Keynes, as he shows in Part IV of the essay.

In Part III, Keynes dismantles this analysis. Here’s a taste:

This assumption, however, of conditions where unhindered natural selection leads to progress, is only one of the two provisional assumptions which, taken as literal truth, have become the twin buttresses of laissez-faire. The other one is the efficacy, and indeed the necessity, of the opportunity for unlimited private money-making as an incentive to maximum effort. Profit accrues, under laissez-faire, to the individual who, whether by skill or good fortune, is found with his productive resources in the right place at the right time. A system which allows the skilful or fortunate individual to reap the whole fruits of this conjuncture evidently offers an immense incentive to the practice of the art of being in the right place at the right time. Thus one of the most powerful of human motives, namely the love of money, is harnessed to the task of distributing economic resources in the way best calculated to increase wealth.

Shades of Thomas Piketty. Keynes’ primary target is professors of economics who teach the the simplest and most reductive assumptions as the norm, with all of the messy complications of reality excised. “They regard the simplified hypothesis as health, and the further complications as disease.” He says that the alternatives, Marxian socialism and protectionism, are terrible themselves. Third, there’s this:

Finally, individualism and laissez-faire could not, in spite of their deep roots in the political and moral philosophies of the late eighteenth and early nineteenth centuries, have secured their lasting hold over the conduct of public affairs, if it had not been for their conformity with the needs and wishes of the business world of the day.

And in conclusion to that analysis, he writes in Part IV:

Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive ‘natural liberty’ in their economic activities. There is no ‘compact’ conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.

Keynes believed that a capitalist economy could be made to work better through government actions as the situation demanded. “Our problem is to work out a social organization which shall be as efficient as possible without offending our notions of a satisfactory way of life.” I would have written that we should have a satisfactory way of life, made as efficient as possible, but maybe that’s what Keynes meant.

Given these forces, it’s hard to see the basis for Keynes’ hope that the principles of laissez-faire might be eradicated, and, of course, they weren’t. They govern the economic thinking of the Republicans and the corporatist Democrats even today, as the vote on the TPP indicates. They are people who ignorantly repeat the tropes of laissez-faire without reading their original proponents: “… we should consider their arguments preposterous if they were to fall into our hands.“

That’s certainly true, more so today than ever. It points to the central reason why stupid economic ideas cannot be vanquished:

To suggest social action for the public good to the City of London is like discussing the Origin of Species with a bishop sixty years ago. The first reaction is not intellectual, but moral. An orthodoxy is in question, and the more persuasive the arguments the graver the offence.

A Possible Paradigm of Neoliberal Economics

In this post I ask what the paradigm of economics might be, and if there is one. I did not address the question of the exact nature of the paradigm as discussed by Kuhn, leaving it at the broadest possible level: the theories, instruments, methods, prejudices and so on common to a community of scholars working in a fairly specific area of human knowledge. The general question of the nature of the paradigm is the subject of a number of papers, most concluding that the concept is too unclear to support careful analysis. That’s the position taken by George Stigler in a remarkable paper, Does Economics Have a Useful Past? 1 Hist. of Pol. Econ. 225 (1969). Stigler dismisses Kuhn because he can’t find an example of a paradigm that completely defeats a prior paradigm.

To be concrete, the marginal utility revolution of the 1870s replaced the individual economic agent as a sociological or historical datum by the utility-maximizing individual. The essential elements of the classical theory were affected in no respect. (A possible, but uncertain, aftereffect in twenty years was the development of the marginal productivity theory.) Until Kuhn gives us criteria of a revolution (or a paradigm) which have direct empirical content, it will not be possible to submit his fascinating hypotheses to test.

I assume Stigler means that Kuhn’s ideas aren’t applicable to economics. Certainly the book is full of examples from physics and chemistry of theories that completely replace older theories, leaving the old to as nothing more than objects of interest. Let me propose one such idea for economics. It is a certainty of economics that taxes exist for the purpose of raising revenue for the government. That was probably true before the advent of fiat money. When nations left the gold standard, it became untrue, as the Chairman of the Federal Reserve Bank of New York, Beardsley Ruml, wrote in 1946 in a paper titled Taxes For Revenue Are Obsolete. This idea is as revolutionary as the Copernican Revolution. It forms the basis of Modern Money Theory, and both the idea and the elaboration into a coherent theory are fiercely ignored or fiercely fought by the dominant economists. As it happens, this idea is leaking into public discussion despite their best efforts.

I have little else to add to this discussion about the nature of paradigms. I’ll follow Stigler in accepting that there are communities of scholars engaged in the same general areas of study, and in these communities, there is a mutual agreement on theories, instruments, methods, measurements, and even prejudices, and these guide the thinkers in their day to day efforts. Stigler considers this a good picture of economics, and for my purposes, it serves to connect Kuhn’s ideas to economics.

The neoclassical school dominates economic discourse and is widely taught as authoritative at every level in the US. N. Gregory Mankiw, Harvard professor and author of the leading economics textbook, wrote this in a New York Times column in May 2009:

Despite the enormity of recent events [meaning the Great Crash], the principles of economics are largely unchanged. Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses.

Let’s try to tease out the paradigmatic points of the neoliberal school. Mankiw’s best-selling economics textbook contains these 10 principles of economics:

  1. People face tradeoffs
  2. The cost of something is what you give up to get it
  3. Rational people think at the margin
  4. People respond to incentives
  5. Trade can make everyone better off
  6. Markets are usually a good way to organize economic activity
  7. Governments can sometimes improve market outcomes
  8. A country’s standard of living depends on its ability to produce goods and services
  9. Prices rise when the government prints too much money
  10. Society faces a short-run tradeoff between Inflation and unemployment

The primary method of this school is mathematical modeling, which adds at least two covert assumptions, that collective and individual human behavior is continuous enough so that it’s reasonable to use college calculus, and that aggregate behavior is nothing but the sum of individual behaviors which exist independently of each other at all times. The theory is premised on the idea that the motivation of all people is efficiency, and that economic efficiency is the most prized value in a society, with all other goals held as secondary. The models are used to give normative policy advice.

This school of thought, to follow Stigler, replaced Keynesianism. P. 228. Why? Stigler suggests that a school of thought cannot survive the life of its leader. That seems very odd, because many of the ideas of the neoliberals are taken from the past. As Stigler says:

The young theorist, working with an increasingly formal, abstract, and systematic corpus of knowledge, will seldom find it necessary to consult even a late-nineteenth-century economist. He will assume, just as the mathematician or chemist assumes, that all that is useful and valid in earlier work is present — in purer and more elegant form — in the modern theory. P. 217-8

I won’t belabor the obvious point that every element of the neoliberal school is contested. Instead, I continue to focus on this question. The canonical explanation of the rise of neoliberalism is that Keynesianism failed in the 1970s, and was replaced by neoliberal economics which offered a better solution to the problem that Keynesianism stumbled over. That explanation leaves a bunch of questions. Not the least is exactly why the events of the 1970s were somehow a failure of economic theory. The solution offered by neoliberalism was the traditional conservative solution: hammer the workers and coddle the capitalists. Why is that a better solution? Remember, Keynes believed that the goal of economic recovery was to give people useful work to do [see paragraph 5], not to help the rich. And why isn’t neoliberalism facing extinction in the wake of its disastrous failure? Both Kuhn and Keynes have something to offer on this question, and I’ll take that up next.