labor

The minimum wage still bites

Vincent Geloso Current Events, Economics , , , , , , , , ,

Politicians, pundits and activists jumped on a new literature that asserts that there no negative effects of substantial increases of the minimum wage on employment. Constantly, they cite this new literature as evidence that the “traditional” viewpoint is wrong. This is because they misunderstand (or misrepresent) the new literature.

What the new literature finds is that there could be no significant negative effects on employment. This is not the same as saying there are no negative effects overall. In fact, it is more proper to consider how businesses adjust to different-sized changes by using various means. Once, the minimum wage is seen in this more nuanced light, the conclusion is that it still bites pretty hard.

The New Minimum Wage Literature

Broadly speaking, the new literature states that there are minimal employment losses following increases in the minimum wage. It was initiated twenty years ago by the works of Alan Krueger and David Card who found that, in Pennsylvania and New Jersey, a change in the minimum wage had not led to losses in employment. This caused an important surprise in the academic community and numerous papers have found roughly similar conclusions.

These studies imply that the demand for labor was quite inelastic – inelastic enough to avoid large losses in employment. This is a contested conclusion. David Neumark and William Wascher are critical of the methods underlying these conclusions. Using different estimation methods, they found larger elasticities in line with the traditional viewpoint. They also pointed out Card and Krueger’s initial study had several design flaws. With arguably better data, they reversed the initial Card and Krueger conclusion.

These critics notwithstanding, let us assume that the new minimum wage literature is broadly correct. Does that mean that the minimum wage is void of adverse consequences? The answer is a resounding no.

This is because of an important nuance that has been lost on many in the broader public. In a meta-analysis of 200 scholarly articles realized by Belman and Wolfson, there are no statistically discernable effects of “moderate increases” on employment. The keyword here is “moderate” because the effects of increases in the minimum wage on employment may be non-linear. This means that while a 10% increase in the minimum wage would reduce teen employment by 1%, a 40% increase will reduce teen employment by more than 4%. A recent study by Jeremy Jackson and Aspen Gorry suggests as much: the larger the increase of the minimum wage, the larger the effects on employment.

If labor costs increase moderately, the strategy to reduce employment may be relatively inefficient. The increase of labor costs needs to reach a certain threshold before employers choose to fire workers. Below such a threshold, employers may use a wide array of mechanisms to adjust.

Adjustment channels

Employers on their respective markets face different constraints. This diversity of constraints means that there is no “unique” solution to greater labor costs. For example, if the demand for one’s products is quite inelastic, labor costs can be passed on to consumers through an increase in prices. While this may not necessarily hurt workers at the minimum wage, it impoverishes other workers who have fewer dollars left to spend elsewhere. This is still a negative outcome of the minimum wage – its just not a negative outcome on the variable of employment.

In other cases, employers might reduce employment indirectly by reducing hours of work. This is an easy solution to use for employers who cannot, for a small increase in labor costs, afford to fire a worker. Even Belman and Wolfson – who are sympathetic to the idea of increasing the minimum wage – concede that increases in the minimum wage do lead to moderate decreases in labor hours. More skeptical researcher, like Neumark and Wascher, find that the effects on hours worked is much larger. Again, the variable affected is not employment measured as the number of people holding a job. However, a reduction in the number of hours worked is a clearly a perverse outcome.

Another effect is that employers might reduce expenses associated with their workers. Even Card and Krueger, in their book on the minimum wage, recognize that employers may opt to cut on things like discounted uniforms and free meals. An employer facing a 5% increase in the minimum wage will see his labor costs increase, but firing an employee means less production and lower revenues. Thus, firing may not be an option for such a small increase. However, cutting on the expenses associated with that worker is an easy option to use. This means fewer marginal benefits and on-job training. Employers adjust by altering the method of compensation.  For example, economist Mindy Marks estimated that a 1$ increase of the minimum reduced by 6.2% the probability that a worker would be offered health insurance.  Again, employers adjust and the effects are not seen on employment. Nonetheless, these are undisputedly negative effects.

The effect may also be observed on the type of employment. Employers may decide to substitute some workers by other types of workers. Economist David Neumark pointed that, subsumed in the statistical aggregate of “labor force” is a shift in its shift. In his article, written for the Employment Policies Institute, he stated that “less skilled teens are displaced from the job market, while more highly skilled teens are lured in by higher wages (even at the expense of cutbacks in their educational attainment)”. Another example could be that a higher minimum wage induces retired workers to return to the labor force. Employers, at the sight of a greater supply of experienced workers, prefer to hire these individuals and fire less-skilled workers. In such case, “total employment” does not change, but the composition of employment is heavily changed. The negative effects are clear though: less-skilled workers are not allowed to acquire new skills through experience.

Conclusion

None of these adjustment mechanisms in response to “moderate increases in the minimum wage” are desirable. Yet, all of these channels would allow us to conclude that there are no effects on employment. To misconstrue the ability of employers to select multiple channels of adjustments other than reducing employment as the proof that the minimum wage has no negative effects is perverse in the utmost. The statement that “moderate increases in the minimum wage has no statistically significant effects on employment” is merely a positive scientific statement with no normative implications whatsoever. If anything, the multiple adjustment mechanisms suggest that the minimum wage still hurts and that is both a positive and normative statement.

Coase’s “Nature of the Firm”: An Anthropological Critique

Brandon Christensen Economics, History , , , , ,

But is it a good one? Is it even made in good faith? I need help.

From American anthropologist John D Kelly’s The American Game…:

Ronald Coase’s theory of the nature of the firm rescued, for neo-classical economics, the existence of firms or corporations as rational entities […] Markets always come first, and the problem of the existence of firms is depicted as the problem of why a rational manager would rely on employees rather than markets. State planning and private firms are taking over what already exists, integrated by the price mechanism of markets, and are successful to the extent that they lower costs, since there are a variety of costs involved in market transactions. Thus marginalist analysis implies that an equilibrium will always be found between planning structures and integration by price mechanism, especially since, as Coase says in “The Nature of the Firm,” “businessmen will be constantly experimenting, controlling more or less” and “firms arise voluntarily because they represent a more efficient method of organizing production.” The rise of the firm, as Coase imagines it, is always a movement from many pre-existing contracts to a controlling structure, “For this series of contracts is substituted one.” (94)

The emphasis is mine. Kelly continues:

This imaginary fits poorly the situations that were precisely the actual origins of firms, as when banks gave mortgages to planters, or stock markets funded companies of young agents, prepared to cut plantations into captured wilderness for tropical commodities […] usually employing labor moved long distances and disciplined by direct violence. There is more in the universe than Coase’s imagination, more motives for controlling powers of firms than their cost efficiencies. (94-95)

Kelly goes on to give a brief account of 1) how corporations created commodity production out of thin air, 2) how these corporations were tied to European imperialism, and 3) how they used slaves and indentured servants even when it would have been cheaper to hire the locals.

I want to address Kelly’s summary of Coase’s paper (here is a pdf, by the way, in case you want to follow along), mostly because I’ve never read it although I know it’s important, but first I want to make a couple of digressions. Libertarians would more or less answer Kelly’s three charges listed above as follows: 1) yes, and this is a good thing, 2) state-sponsored corporations and private firms are two distinct entities with two very different incentive structures, and 3) see #2. There is also an issue of accuracy in regards to Kelly’s brief summary of world history since 1600. I don’t want to get into the details here, but I do want you to recognize that I am reading Kelly critically. My last digression is simply to point out that libertarians and Weberian Leftists like Kelly have more in common than we think.

To get back to Coase’s paper, and Kelly’s critique of it, I want to highlight one sentence from Kelly’s book in particular and then turn it over to the peanut gallery in the hopes of gaining some insight:

Markets always come first, and the problem of the existence of firms is depicted as the problem of why a rational manager would rely on employees rather than markets.

Is this the puzzle Coase was trying to grapple with in his paper? I ctrl+f’d Coase’s paper (“employe” – not a typo) and couldn’t find anything that actually confirms Kelly’s summary, but it would be an interesting project (if I am right in stating that Kelly’s summary of Coase’s paper is not accurate) to follow this line of thought and delve into Kelly’s insight about the reliance that entrepreneurs/firms have on employees (rather than markets)…

“On Working Shi**y Jobs”

Brandon Christensen Liberty, Links , ,

That’s the title of this short piece by yours truly. Please take a look and leave me some feedback. I am turning it into a longer essay that I hope to shop around once it’s complete.

The Dangerous Inequality Meme

Fred Foldvary Economics , , , , , , , , ,

The inequality of wealth and income has become a meme loaded with danger. A “meme” is an idea that gets propagated like genes in biology. Economic inequality has long been a topic of interest, but during the past few years, and especially during the 2015-2016 American elections, the inequality meme has erupted into a major political issue among those who identify as progressive, liberal, and socialist.

The facts about inequality in the USA are clear. Since 1970, income inequality has increased. As national income has grown, most of the gains have gone to the rich. Average incomes have even dropped since the recession of 2007-2009.

During the 1800s, the first economist to analyze equality and inequality was Henry George. Karl Marx had touched on economic inequality by saying that the surplus from production was due to labor but was captured by the capitalist, the owner of the firm and its tools. Thus, the proletariat, the workers, stay poor and the capitalists get rich, creating inequality. But Marx and his followers focused on the conflict between labor and capital rather than the inequality.

Henry George pointed out that the surplus from production is not in wages, nor in business profits, but in land rent, which is a pure surplus, since land has no cost of production. George showed how land rent captures the gains from economic progress, creating the inequality in wealth and income between workers and the landowners. Competitive firms make normal profits, which has no surplus. Of course monopolies can capture surplus also, but the profits from entrepreneurship are a bonus to society, rather than a social problem, as entrepreneurs drive innovation and economic progress.

Unfortunately, when the classical economics of the 1800s turned into the neoclassical doctrines of the 1900s, both by design (in opposition to the Georgist remedy of taxing land value) and for mathematical convenience, land was dropped as an input factor, and mainstream economics became the two-factor production function Q=f(K,L). It is illogical that land rent gets included in the distribution of income in the return on K, but excluded on the production side, as the models are based only on the two inputs, labor L and capital goods K. This contradiction is not questioned by graduate students in economics, who are too busy learning the calculus of “math econ” to bother asking if the whole system makes sense.

Therefore the inequality meme is now blended with the labor-capital meme, ignoring the real source of economic inequality, unequal land tenure. Politicians exploit the all-too-real economic inequality with a superficial, simplistic, and dangerous remedy: tax the rich and transfer the funds to the poor. Of course governments are doing that already, and that has not reduced inequality, but the welfare-statists insist that government should do more of it.

Conservative opponents of greater redistribution point out, correctly, that higher taxes and takings from the rich will stifle entrepreneurship and savings, reducing the economic growth. But other than eliminating some of the tax deductions and generating more growth by reducing the top tax rates, the conservatives have no effective remedy. Their call to flatten the tax rates play into the political agenda of the redistributionists who call for higher, not lower, tax rates on the rich.

The danger in the inequality meme is the confiscation of the wealth not just of the rich but also of the middle class. A family that spent all its income and now has no wealth would be given welfare aid, while the family with the same income but frugally saved its income for retirement or to provide for their children would have their wealth taken away, not just by ordinary and predictable taxation, but by a sudden taking, as happened in Cyprus in 2013. Government chiefs facing a debt crisis can kill two birds with one stone: confiscate savings and use some of it to pay off debt and the rest to transfer to the poor. Such confiscation has been suggested by the International Monetary Fund, which lends funds to countries bogged down in debt. In its publication Fiscal Monitor Report, the IMF stated (pdf):

The sharp deterioration of the public finances in many countries has revived interest in a “capital levy”— a one-off tax on private wealth—as an exceptional measure to restore debt sustainability. The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior (and may be seen by some as fair).” There we have the proposition that such confiscation of wealth can be “fair” (49).

This IMF capital-levy proposition was presented in Forbes with the title, “The International Monetary Fund Lays The Groundwork For Global Wealth Confiscation.” The Wikipedia article on “capital levy” shows that this meme is getting some traction, such as by Germany’s Bundesbank. The concept of a capital levy, confiscation of savings and investment, comes from the meme of economic inequality that looks only at the superficial existence of unequal wealth and not to the source.

It has been well pointed out by British journalist and economist Fred Harrison in his Youtube video “Ricardo’s Law: the Great Tax Clawback Scam” that while the rich pay much in taxes, many of them get the tax back, as a clawback, from government’s public goods, which generate higher rent and land value.

The effective and equitable remedy for economic inequality is not redistribution but the proper initial distribution of income. Wages and capital yields should be kept by the workers and investors, while land rent should be equally distributed either as cash or in public services. Public revenue from land rent would equalize income while promoting growth and raising wages. We need to bring land back into economic discourse, but that requires penetrating the appeal of superficial thinking. That’s what Henry George tried to do, and the Georgist meme had reached up to the heads of state in China, Great Britain, and Russia (after the first revolution with Kerensky), but World War I blasted the impending tax reforms to bits.

The candidates who now rant against inequality, the corporations, and the billionaires, even if they don’t win the election, will influence policy and generate calls for more redistribution and, perhaps in the next financial crisis, a capital levy. While alarmists often exploit impending doom for their own gains, sometimes they are right.

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This article is also in progress.org under the title “Tyrants Exploit Income Inequality”

[Ed. note: I added tags, categories, and links, and patched up some grammar – BC]

Information doesn’t matter

Rick Weber Economics , , , , , , ,

The classical economists gave us three basic factors of production: Land (i.e. nature-given resources), Labor (i.e. human effort), and Capital (i.e. tools). Naturally this involves lumping together a lot of heterogeneous things. Capital includes a rock you might use to smash an assailant over the head as well as a particle accelerator. But prices do a brilliant thing: they provide information about the relative scarcity of goods and compress that information into a single dimension

This allows us to aggregate! It means that we can talk about how much capital per capita is available in a region (or better yet, provide a distribution of workers’ access to capital… a project I’m not sure if anyone’s done) and the like.

This whole intellectual project is necessary if we want to talk about the nature and causes of a particular economy’s well being. But the original factors have become less useful as the nature of economic activity has changed over time.

It gradually became clear that the concept of labor was too fuzzy: how do we compare the labor of a doctor with that of a stevedore with that of a professional wrestler? We could try to use prices, but for a variety of reasons that just won’t work very well. Household production and leisure don’t have market prices, market frictions are particularly pronounced, information asymmetries abound and are entangled with principal-agent problems (you don’t have to watch a wrench to ensure that it doesn’t slack off, but your administrator may very well cease to administrate while browsing Facebook).

Economists have dealt with the issue with the idea of human capital. In addition to physical tools, people also have mental tools (skills). This idea leads into the notion of social capital (people invest in relationships), and can be extended in any number of directions. It’s a wonderful lens through which to view the world because it lets us see the nature of what we do.

But it’s not the right way to think about the factors of production. Not because it’s difficult to measure human capital (I’m not convinced it’s really possible to measure much of anything of importance in economics… even though I keep trying to). The problem is that it doesn’t get us down to the core, atomic thing that we’re really interested in.

Boulding tells us [emphasis mine]:

It is much more accurate to identify the factors of production as know-how (that is genetic information structure), energy, and materials, for, as we have seen, all processes of production involve the direction of energy by some know-how structure toward the selection, transportation, and transformation of materials into the product.

And I think he’s on to something here. The basic stuff of our economy is information applied to objects (even information has to be physically embodied in writing, magnetic manipulation of hard drives, or the shape of our neural connections), which requires energy.

But we’ve got the information necessary to do far more than we actually do. What is it that stands between the vast amounts of knowledge at our command being applied to our enormous stocks of physical resources using our still plentiful and cheap energy? Why is there so much slack in our economic systems?

It could simply be transaction costs, but I think we can go deeper. Boulding’s factors give a more refined view of both labor and capital, but he’s still missing the fundamental kernel of labor. It’s not our know-how that matters–we all know we’re supposed to save for retirement and yet we don’t. It’s not that we don’t have enough energy. What’s missing is an appreciation of attention.

Attention is at the root of alertness which Kirzner tells us is the prime mover that sets in motion economizing behavior. Attention is what is necessary to learn. Most importantly, it is what is necessary to remember and apply what we learn. And it’s universal. Laborers have it and so will our future robot overlords. It’s easily as basic as energy and materials. The question then is how to tie it into the notion of know-how (the psychology of learning) and social sciences more generally.

“Just Leave Me Alone Goddammit!”*

Rick Weber Economics , , , , , ,

The basic argument I want to make is that we’ve been thinking about labor and human capital imprecisely,** and we would do better to think of labor as the selective application of attention, and habit (which economizes on attention) as the basic essence of human capital.

Attention

The kernel of this idea was planted when I read Pragmatic Thinking and Learning a few years ago. An important point it makes is that whenever our work is interrupted it takes something like 15 minutes to get back to work. Mental work is like barbecuing (or what the uninitiated erroneously call “smoking”). After 8 hours of cooking your guests are impatient (and drunk) and want you to check the meat. So you open up the barbecue and a plume of smoke billows out. You put in a meat thermometer and sure enough, the meat isn’t done. But now it’s going to take another 15 minutes for enough to smoke to build up to get the process moving again. 20 minutes later people want you to check again. (And that’s why our parties back in San Jose so often dragged on so long.) Showing up to work for 8 hours a day isn’t sufficient for getting your work done; sometimes you just need your boss to leave you alone long enough for you to focus deeply enough to solve the problem you’re facing.

Or we could think of work like juggling. Working on some difficult problem, you’ve got a few pieces of mental material in the air. When someone knocks on your door (or you take notice of an email notification on your phone) you drop the balls. Getting them going again takes some effort, so even a one second interruption sets you back a few minutes. Those of us who work at desks are familiar with how difficult thinking can be. Managing our attention takes effort. But with practice we can get better at coping with distractions and skipping the easy, but unproductive paths offered to us.

And what about grunt work? There’s less attention necessary (perhaps rhythm serves a role in maintaining that minimal bit of attention), but nobody gets paid for not doing what they’re told. Your job is to keep applying effort in the appropriate way. The only human capital you really need is what is necessary to get out of bed and get to work every day.

Habit Capital

People who smoke cigarettes, they say “You don’t know how hard it is to quit smoking.” Yes I do. It’s as hard as it is to start flossing.

—Mitch Hedberg

Habit offers a means of economizing on attention. Instead of using up our mental capacity to decide to brush my teeth every day, I just do it automatically. Flossing is not so easy… except that I was able to make it a habit by piggybacking it on an existing habit.

Many of the skills we have are built on a collection of complex little habits, whether it’s muscle memory (you must watch the video above), understanding how to read graphs, or bearing in mind that everything has an opportunity cost.

(Obviously) getting a college degree is not the same as accumulating human capital. What college does (we hope) is inculcate students with critical thinking habits and some basic knowledge deemed necessary or particularly helpful for navigating the world. Learning on the job is similarly about providing workers with habits, and both positive and normative knowledge (i.e. factual knowledge and norms/beliefs/corporate culture). Growing up is about building up human capital largely in the form of internalized norms (moral habits). Habits are everywhere and they’re at the core of what we mean when we use the term human capital.

Habit capital allow us to direct our attention to critical areas in the same way physical capital allows us to leverage (and ultimately replace) our physical effort. By establishing habits we can get certain things done (teeth brushed, books read, etc.) while conserving attention. This takes more attention upfront just as physical capital requires upfront investment.

Anticapital

Economists generally don’t think much about bombs as an investment. Bombs require foregoing current consumption, but once they’re made, they’re intended to get a negative return by destroying something of value. Physical anticapital, as a social scientific idea, falls primarily in the domain of International Relations. Which isn’t to say economists haven’t thought about investments that destroy value. The idea of rent seeking is an important one, but it’s one that has been rationalized.

There’s probably not much to gain by thinking about rent seeking as investment in anticapital.*** But we can bring bad habits out of the purview of irrationality and bring it into the warm, rational glow of economics with the concept of human anticapital.

Just like in biological evolution, we’re satisficing, not optimizing. Habits may initially be adaptive and turn bad as circumstances change. We should expect a tendency towards “good” habits–and how those habits propagate is certainly an interesting question–but we should also expect the odd bizarre byproduct, misfire, and obsolete habits to emerge.

“We are still very close to our ancestors who roamed the savannah. The formation of our beliefs is fraught with superstitions–even today (I might say, especially today). Just as one day some primitive tribeman scratched his nose, saw rain falling, and developed an elaborate method of scratching his nose to bring on the much-needed rain, we link economic prosperity to some rate cut by the Federal Reserve Board, or the success of a company with the appointment of the new president “at the helm.”

—Nassim Taleb

tl;dr:

Attention matters more than time. Habit economizes on attention. Mental work involves applying mental tools to particular problems and habit allows us to do so more or less automatically. In other words, habit is human capital.****

*That’s one possible title for the next paper I want to write. A more boring but descriptive possibility is “Habit Capital.” Another with more regional flavor is “Hey! I’m Working Here!” Maybe I’m not very good at titles…

**This follows in a similar vein as my entrepreneurship research which basically boils down to: entrepreneurship theory is good, but our empirical measures suck.

***Although I should mention that thinking about rates of depreciation will surely shed light on rent seeking questions.

****I’ll leave it for the comments to sort out whether it’s the only sort of human capital. Maybe you can also help me sort out how to wrap belief, understanding, and learning into this view.

Here’s why you should default on your student loans. And here’s why you shouldn’t.

Rick Weber Law , , , , , , , , ,

This article popped up on my newsfeed the other day and I (as always) read the headline (“Why I defaulted on my student loans”), looked to see if it was posted by one of my sane or insane Facebook friends (no idea…), then promptly forgot about. Then I saw this response: “The New York Times Should Apologize for the Awful Op-Ed It Just Ran on Student Loans” (posted by a sane friend). Okay, let’s give this some thought.

Lee Siegel (of the first article) writes that he made some bad decisions and faced the prospect of either living a life he didn’t want, or defaulting on his obligation. The question then is “should more people follow his example?”

Choosing a major is essentially an entrepreneurial decision. You are investing in a set of human capital goods that you hope will provide a return in the future sufficient to justify the cost of the investment. One thing we know about entrepreneurship is that it usually fails. We also know that this failure is often not socially wasteful but simply a cost of experimentation. America was lucky to end up with a system of bankruptcy that is uniquely easy on defaulters… why lucky? Because it turns out that this system meant to merely shift resources towards farmers also allows entrepreneurs to quickly dust themselves off and get back to work on their next experiment. Some turn out to be brilliant and ultimately outweigh the costs of past failures.

But this wasn’t what Siegel was advocating. His decision was to not pay his debt but to stay in the line of work he trained for. His thinking was “sunk cost, and now it’s someone else’s problem.” Yes, the higher-ed industry is screwy on all sorts of margins, and yes, he probably didn’t have great information beforehand. But rather than learn from his mistake, he simply ignored it.

Using bankruptcy to subsidize risky experimentation turns out to make sense in some cases (it’s hard to believe, but there it is). And this might be justified in some cases in schooling… it might be worth it to subsidize 100 post-secondary schools that try all sorts of crazy methods on the chance that we learn something useful from the experience. And I think we can justify defaulting on student loans that were made in fraudulent circumstances (“Hey Buddy, wanna get a degree?”). It might be sensible to allow loan forgiveness for students who get a degree in a field that turns out to be obsolete by the time they graduate… as long as it’s paired with a policy requiring student loan applicants to watch a 12 hour long video course on employment projections and labor economics.

We might even justify subsidies by partial loan forgiveness for students studying art or some other field that might generate positive spill overs–but if we do, the decision shouldn’t be left to those who already owe a lot of money for attending an expensive school. It’s not up to Siegel to determine that he should get a subsidy. He wasn’t suggesting walking away from his mistake and starting fresh, he was suggesting letting someone else pay for the cost of his mistake while he reaped the rewards.

If there’s anything to learn from Siegel’s decision, it’s that understanding costs isn’t a requirement for writing in high profile news papers and so we should be leery of policy advice given by journalists. I think the second article I linked to makes a compelling case that Siegel is a bum.

WORK

Jacques Delacroix History , , , , , , , , , , ,

This is an essay with a strange origin. My friend Peter Miller, an artist and a craftsman, is also a trained sociologist like me. He posted an essay on his blog about crafts. It’s a sophisticated and unusually perceptive essay. He asked me for comments. I begun answering him in a letter and then, quickly, I thought both his essay and my comments might be useful to others. I think anyone interested in the nature of work and changes in the nature of work should read both Peter’s essay (see above) and mine. I don’t know exactly in what order but it seems to me that my essay is easier for the non-specialist who pays a mortgage or who studies for his Calculus finals. It would not be hard to make me change my mind on this though.

Dear Peter:

This is a thick narrative that demands a lot from the reader. Those are separate and additive reasons to turn it into a book. It would benefit by being watered down; some of the things that you say in one sentence would be better said in three. Just an unsolicited opinion on form. (Lack of solicitation has never stopped me before.)

It seems to me that your argumentation is not finished, that you have not looped the loop. I explain.

The pilot automation that is the pretext for your essay seems to me to be only a special and late instance of a process that began massively and kind of suddenly in the late 18th century. I mean the rationalization of work associated with the Industrial Revolution, of which it is only one facet, I think. I think this because, if nothing had changed in the realm of production but the capture of large amounts of inanimate power, the world would have still experienced a big economic growth spurt. The rationalization of production supplied additional economic benefits.

“Rationalization of production” means the specification in advance of the one best way to achieve a well defined end. It’s not “whichever way works” but “the exact best way.” Nearly always, it involves the decomposition of a task into smaller components most of which are easier to complete than the whole, usually, much easier. This is contrast with crafts production which involves a trained worker doing a job from beginning to end.

Note: This contrast is overdone as far as many crafts are concerned. Craftsmen did not wait for the 18th century to rationalize their methods. They did it in small steps that spread slowly or not at all. (Ask me how we know this.) For every single instance of production the comparison between crafts and rationalized production is often exaggerated. This is in the nature of contrasts. The real difference on the ground is a matter of emphasis, of course.

Until recently, the rationalization of production was a pre-condition to mechanization, the replacement or, usually the partial replacement of human workers by machines. Mechanization is another source of enlarged societal wealth because machines are, on the whole, less expensive to employ than people. Machines don’t get sick; they are maintained at predictable intervals. They don’t take vacations. They don’t retire with benefits. They never feel lazy. They are never reluctant to do the work assigned to them. With machines, the same number of people can do more than without machines, other things being equal. The cost of machines plus their human tenders is normally lower than the cost of people plus people.

Rationalization does not require mechanization. It just makes it easier. Many clerical jobs were rationalized in the 19th century without benefit of any mechanization.

The rationalization of production, and of work that may or may not be considered production (rearing children, for example) is, to a large extent, an attempt to separate every job into parts each of which can be handled on a routine basis. This allows for production to increase seemingly while reducing the level of competence required of the line producers. (Yes, it sounds familiar to you, Peter, because I am paraphrasing someone; his first name was Charlie, his buddy was Freddie.) I mean by “level of competence” three things: specific job training, general education, intelligence and other otherwise desirable personal features. As the level required in all three for a given job drops, the cost of securing workers of the requisite competence also tends to decrease. At least, it drops at first. Over time, the story is vastly more complicated than this. (See below.)

The average worker of the early twentieth century was probably less skilled – any way you define skill – than his 17th century counterpart. He also needed less intelligence to do his work properly.

Here is an illustration of these basic ideas. Today, one can buy shoes made by machine in South Korea or by hand in India. That is, modern mass production along rationalized lines, in the world, exists side by side with craft production fairly similar to all shoe production before 1750. The average line worker in a Korean shoe production does not need to be very bright, and he can be satisfactorily trained in a month or so. By contrast, a traditional Indian shoe-maker is apprenticed for four to five years, or more.** He cannot be stupid and he needs patience, perseverance, and a superior ability to focus, among other personal traits. It’s true that today’s unskilled Korean worker probably has more formal education than the Indian shoe-maker. That’s not because he needs it to do his job but because he lives in a rich society where formal education is a consumption item. It may also be to enable him to spend rationally. It may make him a better citizen. It’s not required by his job beyond basic literacy, if that.

Historically, this rationalization of work driven by the search to save on production costs had an unexpected positive downfall: In many cases it reduced defects in the final product as well as accidents during work. These facts would have been enough to move forward the general movement toward rationalization wherever defects in the product were costly, as with steel, or silicon, or where human life was valued,* wherever the old process was dangerous.

The movement of rationalization of production never stopped; it continues as I write. Fast food restaurants modeled after McDonald are one of the most visible fairly recent results of this process. And some of us remember the days when service stations were staffed with adult men who actually knew how to check your oil and your tire pressure. Automatic piloting is just another instance of the same long societal process of rationalization. (Incidentally, I would guess that if you could compare the dangers of flying with or without automatic pilots while keeping everything the same – you can’t – you would find the former much safer.)

With every tiny step in the rationalization of work voices were raised to regret the crafts methods the new techniques were destroying. A few of those voices belonged to people who were fully qualified to pass judgment. I mean, individuals who had worked both in craft and in the corresponding rationalized industry, home weavers working by hand converted into weaving machine tenders, for instance. I am guessing there would have been and there are still few of those. Many more, like the artist and print-maker Peter Miller, know only the crafts side of things. (I don’t know this for a fact but I imagine that Peter has spent little time in a factory of any sort. He will correct me if I am wrong.) I can’t imagine that there were many who wrote on the lost world of crafts who also possessed both industrial experience and craft experience. Those imagined or proceeded from more or less distant observation. Others, a third kind of commentators, the loudest voices by far, belonged and still belong to professional intellectuals who have known neither craft nor modern industry. Karl Marx is the chief, the best known of those.

Digression: Pseudo “Marxists” in universities and elsewhere have derived a whole quasi-scholarly industry for fifty years from a few paragraphs in Marx’s youthful 1848 Manuscripts that have the merit of being easy to read. In one of those, Marx wrote of the “alienation” of the worker from his work contrasting the inherent pleasure of craft work with the sort of coitus interuptus of factory work. The fact that generation after generation of sociologists have failed to find empirical confirmation of such alienation among real live workers never stopped this industry from expanding. The best treatment of the topic comes the 1964 thin book by the French anarchist Jacques Ellul, The Technological Society. It provides a more sensitive, better informed, detailed, and of course, much more thorough view of the lost world of crafts than does anything in the Marxist tradition. End of digression.

Much of the nostalgia for a pre-rational world is simply mistaken, sometimes grossly mistaken. I sometimes overhear discontented, intemperate comments about the coffee shop chain Starbucks, which has managed to systematize the preparation and serving of coffee products while enlarging their scope. More often than not, I read between the figurative lines of the complaints a longing for the good old days when coffee in America was prepared and poured by real people in real places. In fact, I knew America well before Starbucks and I can assure you that nearly everywhere, the coffee was bad and bitter, the pouring sometimes surly, and the sitting stools hard. It is as if the Starbucks haters remembered their childhood in charming, civilized Florence or Rome, rather than in the real Fort Wayne and Buffalo where they grew up. Nostalgia will do this to you, the lying bitch!

When all is said, I am not attempting here to argue against the merits of crafts activity. Anyone who has even built and painted a garden fence he was not forced to make for pay knows that there is pleasure in making things from beginning to end. It does not take even long before one learns the difference between a well built fence and an ugly one. Craft work is learning work. And millions of what the French call “Sunday painters” (like me) are well aware of the fact that their artistic creations give them more pleasure than almost anything else on earth except babies (and sometimes, making babies). I mean both the result on canvas and the process itself. By the way, “Sunday painters” are amateur artists who know their work has no economic prospects and may not even deserve to be shown. I don’t have a survey in mind but I suspect that even those who are aware of committing frankly bad paintings love their art. Activity that links the senses, brain, and hands is often a labor of love. That’s why we miss the crafts.

Not surprisingly, nostalgia for the crafts era is all around us and it’s in most of us if not in all of us. My house was built in 1906 of planks that were probably hewn with primitive tools. That’s one (one) of the reasons my wife and I bought it. When I made some repairs on it I found hand forged nails that I put away like treasures. If I am told that a pot was hand-made I become immediately willing to pay a premium for it over a machine-made pot that looks identical to me. Examples are legion. Most of us have an addiction for an “authenticity” that is often the product of selective ignorance. The magnificent Gothic cathedrals, built largely by hand, survived; the clay and straw hovels that abutted them did not. Neither did the results of the lack of toilets immediately at the foot of the great cathedrals. Crafts nostalgia may even taken tragic forms and yet survive.

In France, every year, several people die from eating “artisanal” cheese. It’s labeled by the government according to specific rules. (This is France, after all where the government does almost everything!) One component is that it’s made from unpasteurized milk; another is that it’s shaped by hand. The first feature probably accounts for all the deaths. Some consumers no doubt want unpasteurized milk because it’s more “natural.” Others and some of the same, chose cheese made by hand for aesthetic and sentimental reasons. They get the deadly bacteria as a bonus. The striking thing is that French society broadly defined appears to consider a few deaths an acceptable price to pay for the privilege of consuming cheese issued from a crafts process. The consensus includes those who would never touch artisanal cheese with the business end of a fork.

So what to do with our nostalgia for the crafts and for their more or less imaginary era?

First, we must all admit that we don’t wish to go back to the days when every nail was forged by hand and cost $5.99 retail! Poverty does not mean not earning enough money; it means not earning enough money to buy the things you need or want. If your income is stationary but the price of bread shoots up to $10 a pound, you are poorer. If lettuce is $5 a pound, – as with organic lettuce – you are poorer than if it costs $1.50. We should not allow our nostalgia to drive us into poverty.

Second, we must recognize that the rationalization of production – together with mechanization and reliance on fossil fuels – have made us rich beyond belief, rich to a degree that I, myself, couldn’t have believed fifty years ago. (Good point to plug my book: I Used to Be French: an Immature Autobiography – which goes in detail over the poverty of everyone fifty and sixty years ago.) We are richer because we have become collectively enormously more productive in the past 150 years and accelerating in the past fifty years. We are more productive because of fossil fuels, because of mechanization but also because of the rationalization of production alone. The higher productivity is obvious in the manufacturing fields but I can’t go into it here because of the complicating factor of outsourcing. Let’s take agriculture because Americans import relatively little by way of agricultural products. Here are some numbers that are easy to remember to implant the facts firmly in your mind:

In 1860 about 60% of the American workforce was employed in agriculture and in lumber. Today, the percentage is less than 3% (three per cent). We are not worse fed than in 1860, food has just dropped in price. No catch!

Let’s go back to our shoe workers. Rationalization of much production has made all of us very rich by historical standards irrespective of our individual merits. The low-skill, borderline idiotic shoe machine tender in South Korea earns ten times more money than the skilled, smart, attentive shoe craftsman of India. One lives in a society where rationality of production prevails, the other, not.

The cheapness of the things we need is such that we are not forced to work very long to secure them. In addition, a very large fraction of our society does not work at all (children, many adolescents, middle-class wives and ex-wives, retirees with thirty more years before them). Collectively, we have enormous leisure as compared to our ancestors, even our near ancestors.****

Wealth gives us, with leisure time, the luxury to experiment and schools of all kinds (including California community colleges). Wealth even makes it easy to preserve old traditional techniques as in Peter’s examples: Am I willing to spend pennies each year to support the preservation of craft techniques of Japanese pottery I have never even heard about? Yes; why not? Those who are so inclined can become craftsmen in the broadest sense of the word because we can afford to try and fail. I would bet that there are more painters in Santa Cruz County (“Silicon Valley Beach”), population 50,000, today than in all of Paris in 1880. Are they any good? Not my topic; my topic is nostalgia for crafts production. It’s not art criticism. Crafts are here, in abundance, where I live, no doubt about it.

Note: I understand that real craftsmen in the traditional mold, such as Peter, may argue that I stretch the meaning of crafts beyond recognition because it does not incorporate the common notion of a long, supervised apprenticeship. I think they are wrong. I suspect they confuse “craftsman” and “good craftsman.” (I don’t know exactly, in fact, what Peter would argue; I am just guessing on this. We will find out, I hope.)

Here is my third proposal about what to do about our nostalgia for crafts: We can believe that we have entered  the age of post-rationalization of production. Manufacturing is under control, agriculture too, as I pointed out. Such a belief would not be completely absurd. Today, the amorphous category “Services” accounts for about 70% of American GDP, (the sum total of the value of what all Americans produce in one year at home). The percentages are similar for other developed, rich countries. But, “Services ” is a bad category; it was invented more than a hundred years ago to mean: “everything but agriculture, forestry, fishing, mining and manufacturing.” It did not amount to much at the time. “Services” was a sort of residual category. Nonetheless, on the face of it, it’s possible to believe that in a short time, almost all of us, will be teachers, brain surgeons, professional poets, software “architects,” brewers, not to forget waiters – excuse me, “waitpersons.”

All these occupations have in common that they rely on tacit information. That’s information that is not well understood by the user himself. For that reason, it’s also difficult to transmit that kind of information deliberately to others and in a systematic manner. It’s normally communicated to others through more or less formalized apprenticeship arrangements favoring direct observation of more senior workers.

My own position about this belief in a world of production changing in that direction is like my attitude toward Sasquatch***** I don’t believe in it but I would like to be wrong.

I am not sanguine no, I am rather cautious for two reasons. The first is that the least likely industries have been rationalized in my lifetime; burger making is a strong case in point. The second cause of my cautiousness is that I am witnessing right now, as I write, massive rationalization taking place around me in another unlikely industry, the practice of medicine. I can already see the day when we will be remembering with longing the Bill’s Burger days of medicine when the doctor knew our name and used mostly his intuition to diagnose us. (Sometimes with fatal results, of course.)

A final note in passing. Being beyond the age of rationalization would have serious benefits in terms of power relations in general. Hierarchical arrangements are much less useful, or more difficult to implement when the work process is not rationalized. We see see this in Silicon Valley every day. Unfortunately, this does not mean that it’s the wave of the future. This is yet another story, of course.

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* Yes, I mean Christian and, especially formerly Christian regions of the world well on their way to secularization. (This means more or less endowed with some degree of religious indifference.)

** I suspect that the apprenticeship time could be cut in half without damage to competence but that’s another story and it would still remain a long time.

*** “Artisan” just means “craftsman.” “Artisanal” means produced according to a more or less crafts method rather than in a plant with machines. Saying it in French in the US allows for a higher profit margin by exploiting the naive and pretentious.

**** It’s true that traditional peasants have much down time but it’s mostly not leisure because they are lacking the other ingredients of leisure. As I write, I realize I may be overstating my case on this. More thinking needed.

***** Also known as “Bigfoot” and, “L’ Abominable Géant des Forêts“.

The burden of imperialism, the virtues of immigration, and the importance of data

Brandon Christensen Current Events, Religion , , , , , , , , ,

One thing I have noticed about the terrorist attacks in Paris is the relatively little that imperialism is brought up. The Muslims of France hail from parts of the world that were once a part of the official French empire. This empire is still a force in much of its old official boundaries. The British and the Dutch also have problems with Muslims that were once a part of an official empire. The Germans and the Turks are a different case, as the Ottoman and German empires had more of a deal between themselves in regards to cheap labor than the cases of Western Europe, but the relationship is still not one of immigration – not in the sense that is perceived by Americans, Canadians, and Australians.

I wonder how much of the tension between natives and immigrants is due to the imperial relationship of the sides involved. I would wager quite a bit. I also have to wonder about the role of land in all of this. Land, of course, is the ugly cousin of labor and capital, two of the three factors of production utilized by economics (there is a fourth sometimes cited, entrepreneurship, but I am not yet convinced that this belongs and neither are many economists).

Immigration is different than what the former imperial states of Western Europe are dealing with. I know the similarities are seemingly the same, but they are not. I would be happy to flesh this out more in the ‘comments’ threads if anyone takes issue with it.

Here is the abstract from an excellent article in Social Forces on the futility of deriving any conclusions about a society based on simple perceptions:

We investigate the thesis widely credited to Max Weber that Protestantism contributed to the rise of industrial capitalism by estimating the associations between the percentage of Protestants and the development of industrial capitalism in European countries in the mid- to late nineteenth century. Development is measured using five sets of variables, including measures of wealth and savings, the founding date of the principal stock exchange, extension of the railroads network, distribution of the male labor force in agriculture and in industry, and infant mortality. On the basis of this evidence, there is little empirical support for what we call the “Common Interpretation” of Weber’s The Protestant Ethic, namely the idea that the strength of Protestantism in a country was associated with the early development of industrial capitalism. The origin of the Common Interpretation and its popular success are probably derived largely from selected anecdotal evidence fortified, through retrospective imputation, by the perceived well-being of contemporary Protestant countries.

The article is titled “The Beloved Myth: Protestantism and the Rise of Industrial Capitalism in Nineteenth-Century Europe” and it can be read here (pdf). As you read through analyses of the terrorist attacks in Paris, be sure to keep this in the back of your mind.

By the way, the piece is co-authored by Jacques, who has failed to adhere to his own standards when it comes to discussing Islam.

Unemployment is Completely Unnecessary

Fred Foldvary Economics , , , , , ,

In U.S. government statistics, a person is unemployed if he is 16 years of age or more, and that person is able and willing to work at prevailing wages. The labor force includes the employed and the unemployed. If one is not employed for wages because one does not wish to work or to seek work, that person is not in the labor force, and not counted as unemployed.

The unemployment rate in the USA is now about six percent, down from a peak of ten percent in 2009. About one percent of the labor force is in “frictional” unemployment, meaning that the worker is between jobs or recently graduated from school and engaged in job search, or about to be hired. When the economy is depressed, there is “cyclical” unemployment, those not working as firms reduce employment. There is also the “structural” unemployment of workers losing their jobs in declining industries, and the seasonal unemployment of those employed only during a season such as in resorts or during harvests.

An economy is in full employment when the only unemployment is frictional. The economic puzzle is why there is any other unemployment. Cyclical unemployment is no mystery, as firms have fewer sales as demand falls, and falling demands become a downward spiral as falling purchases by some become falling production by others. The recession ends when materials prices and real estate rentals have fallen so low that production becomes profitable again.

Since recessions are caused by monetary and fiscal subsidies, a pure market economy would have neither, so it would have no recessions and no cyclical unemployment. So the puzzle consists of chronic unemployment, those unable to obtain work even during prosperous times. Most of the unemployed have been out of work for months or years. Those long unemployed have even more difficulty finding employment, because employers wonder why that person can’t find any job.

Some economists consider idle labor to have a positive side. You car is not wasted when you don’t use it, because it provides the service of availability. Empty seats in a theater have value because the theater needs that capacity for popular shows. Likewise, in this viewpoint, idle labor provides workers when firms need to hire. Also, the unemployed need time to engage in job search, so they are busy even if unemployed. But one can be employed at least part time while looking for better work, and while idle labor may be good for employers, it is bad for workers who need the income, and for taxpayers who have to support those not working.

In a pure market economy, there would not be any unemployment at all. There would be no seasonal unemployment, because workers could find other jobs in other seasons. There would be no structural unemployment, because workers could shift to other industries, and work in temporary jobs while searching for full-time employment. Even workers in frictional unemployment would be able to work some of the time, since job search is not full-time.

One of the premises of economics is that human desires are unlimited. There is always a demand for something. That demand provides an opportunity for workers to be employed to satisfy that desire. In a pure market economy, one could also be easily self-employed. Any person who is not totally incapacitated would be able to offer some service at some wage. If the wage one can obtain is too low to bother with working, then that person would not wish to work, not be in the labor force, and not be unemployed.

Unemployment exists because there are barriers that prevent labor from having access to land and capital goods. If the cost of hiring a worker is greater than his productivity, he will not be hired. In a pure market, the wage would be set where the quantity of labor supplied by workers equals the quantity demanded by employers.

Government policy raises the cost of labor above the pure market wage. Minimum wage laws prevent employers from hiring the least productive workers. On top of the minimum wage are imposed costs: the employer’s share of payroll taxes, mandated medical insurance, worker accident insurance, and the unemployment compensation tax. The firm also has to withhold taxes from wages and send then to the government. There is also a litigation risk and cost of hiring labor, as labor laws promote excessive litigation to combat malpractice, discrimination and sexual harassment. Also, union labor monopolies, and laws favorable to unions, push up the wages of union workers at the expense of less employment. Finally, laws making it costly to fire workers raise the cost of hiring them, creating more unemployment.

In a full-employment economy, when firms seek to expand, they would pull workers away from other firms, or pulled into the labor force, by offering higher wages and better conditions. There is no need for idle labor.

The best policy for labor is full employment. Labor laws that seek to protect workers end up imposing barriers that prevent employment. Full employment requires hiring flexibility and the removal of government-imposed costs. Full employment requires the elimination of taxes on labor, exchange, production, and consumption. Public revenue from land rent or land value could replace all these labor-hampering taxes, while promoting the productive use of land which would further increase wages.

A shift in taxation from labor to land would both increase employment and increase wages, while letting the worker keep his wage. It is not unemployment that is a puzzle, but rather why workers are not demanding the abolition of their wage-tax burden.

The Theory of the Non-Working Class

Fred Foldvary Economics , , , , , , , ,

In the USA, people of age 16 and above are considered of working age. Of those of that age range, those who are working, seeking work, or hired but not yet working, are designated to be in the labor force. The labor force participation rate is the number of people in the labor force divided by the number of those of working age.

From 1950 to 2000, the labor force participation rate in the USA rose from 59 percent to 67 percent. Much of that increase came from the doubling of the participation rate of women, from 30 percent in 1950 to 60 percent in 2000. But total labor participation has declined since 2000 to 63 percent.

While the portion of women in the US labor force rose, the portion of men has been declining. The prime working years are considered to be from age 25 to 54, and one sixth of the men of that age range are not working. In 1950, only four percent of men of that range were not employed.

Many of those not working are not seeking work, and are therefore not counted in the labor force. They are also not counted as unemployed, because by definition, the unemployed are those actively seeking work plus those who have been hired but not yet started to work for wages. Two thirds of working age men are not seeking work, although some who sought work but stopped because they were discouraged, would take a job if offered.

About 40 percent of the men seeking work have been unemployed for six months or more. The chronically unemployed are less likely to become employed, so the long-term unemployment feeds on itself.

The real wage of lower-skilled workers has been falling since 1970. For workers who did not finish high school, the real wage (adjusted for inflation) has fallen 25 percent. That fall in wages is offset somewhat by the availability of new products such as cell phones and by the fall in the relative prices of electronics and other goods, but the cost of housing, medical care, taxes, and college tuition have risen to offset some of that productivity gain.

There are several reasons why male labor participation has fallen. First, more men are attending college. Second, due to the expansion of the war on drugs, the portion of men in prison has risen. Third, as more women work for wages, some male partners choose home production, doing house work and child care at home, which is real labor but not counted in the output data. Fourth, more people are obtaining government’s disability income. Very few on disability go back to work. Fifth, many in the first of the baby-boom generation, born during 1946-1950, are retiring.

The downward trend of labor participation will continue. The Congressional Budget Office estimates that the participation rate will fall to 61% by 2024. CBO calculates that the Affordable Care Act reduce the labor force by more than 2 million jobs. Workers will be able to quit their jobs without losing medical coverage, and the expansion of Medicaid will induce many more adults to obtain medical care without having a job.

One of the problems with a lower labor participation rate is that it reduces the ratio of workers to non-workers. Social Security and Medicare are supported by transferring income from workers to non-workers. A smaller labor participation rate will use up the trust funds and create a deficit for these programs sooner. Also, fewer workers results in lower economic growth, which implies that more of those in poverty will stay that way.

Much of the labor participation decline is not voluntary, but caused by tax and subsidy policies. Without taxes on wages and enterprise profits, both wages and employment would be higher. If the funds now going into Social Security instead went into tax-free private retirement accounts, those who retire would rely on their own past savings rather than transfers from those working. Without the income-tax distortion caused by tax-free medical insurance and taxed money wages, workers would be able to choose the insurance plan that fits them best rather than having to accept the limited plans offered by employers and the government.

The best alternative to taxing wages is to tax land rent or land value. But even without such a fundamental shift in policy, the labor force participation rate can be made more voluntary with employee and self-employment incentives for those long out of work, such as tax offsets and exemptions from restrictions (e.g. licensing, union rules, and city zoning) that prevents working at home, and exemptions from litigation risks. Immigration reform – legalizing those already in the country and allowing more of those with labor skills into the country, would also substantially increase the labor population.

The basic problem with labor world-wide are restrictions on hiring and firing labor, and the heavy costs imposed by taxes, regulations, and mandates on employers. If an employer, including a self-employer, could simply hire a worker without having to deal with forms and regulations, and with no taxes on the employer and the employee, we would have full employment at wages that would provide a decent standard of living. The labor problems we have are iatrogenic, a disease caused by the doctor, in this case, the economic malady caused by government policy. The government people look to for solving economic problems has caused them in the first place.

The Oppression of American Labor

Brandon Christensen Current Events, Liberty, Politics , , , , ,

Over at the Real-World Economics blog, economist Edward Fullbrook presents a graph of labor’s demise in the United States as well as an article from Al-Jazeera English titled America in Denial that promotes Fullbrook’s new book.

Fullbrook brings it to the attention of work-weary Americans that they work far too many hours per year compared to other rich societies in the West (there are, of course, no rich societies outside of the West, but that’s a different blog for a different day).

Behold! The cold, hard facts informing American workers of their own oppression! Continue reading →