November 9, 2012

Panacea Failure

I wanted to share this excellent bit of reporting I came across in the Washington Post a few weeks ago. The original, longer article was done by ProPublica, and I would recommend it if you have time. If not, the shorter Post version should not be missed.

The article is important because it opens up a black box of questions that economists and politicians typically wave away or plaster over with assumptions. Most importantly, many economic models of trade trade and technological change assume "full employment". When economist talk about the "gains from trade", these 'gains' ignore potential losses from unemployment. Or put differently, when someone is laid off because their employer cannot compete with cheaper imports from abroad, these models assume they can instantly find another job. This assumption is valid in some situations, for example when there is high growth in other industries. But in other situations it is absurd on its face. Economists, however, rely on it because modeling the impact of trade on economies without it becomes extremely difficult.

A second, related assumption is that workers are able to move up the "value ladder" to find better-paying jobs than the ones they lost. Or that if this does not happen, then at least the country overall will be richer and the workers benefit via Trade Adjustment Assistance or some similar redistributive program.

A final reason these results are so alarming is that education is a basically the economic policy prescription of last resort. How do we compete with China? More STEM education. How do we get out of the recession? Go back to school to be more competitive. If nothing else is working, policymakers often turn to education and "skills" as the way to appease the market and bring about that illusive world where there are enough jobs and inequality is not spiraling out of control. Education is important, no question, but it should not be the only leg we attempt to stand on.

The Janesville study is an airhorn in the ears of anyone resting peacefully in these assumptions. It is not a perfect study; in fact there plenty of reasons to question the results, many noted by the authors themselves. But its results are so perfectly antithetical to common assumptions about retraining, employment, and competitiveness as to call into question the models that led us to those assumptions. We have to ask: what is the point of economic ideas that give results like these?

November 2, 2012

Who Built That?

Few words have resonated in people's minds this election season, firing up conservatives and giving liberals rashes, quite like the phrase "job creators". The two words loom large in conservative politics and over our national political discourse--a snappy obeisance to the employer class.

Ideas like "job creators" are used because they tell a convincing story about the economy, but the shorthand they provide can be dangerous. While I doubt many readers of this blog are uncritically in love with the phrase, in this post I want to look beyond its easy dismissal ("'job creators' is a sycophantic way to say 'rich people'"; "it's just top-down class warfare") and use the idea as a starting point for a look at what parts of our economy we value and why. In particular, I am interested in the ideas of production and "producerism" and how they relate to a range of economic and political ideologies.

In my last post I wrote about two roles of the economy--production and distribution--and described the critical role labor plays in distribution. This post is ostensibly about the production side, but really it is also about distribution, because the way we understand production impacts the way we understand distribution--and thus it impacts distribution itself. This idea is basically the underlying idea of the post, but I am going to meander a bit and may not mention it for a while, so keep it in mind.

Simplifying Complexity

Economies accomplish amazing things in amazingly complex ways. It is amazing that thousands of people designed and built the intricate mess of hardware and software that constitutes the laptop sitting on my lap. It is amazing that it was assembled thousands of miles away by people in Asia because they will work for less pay than american workers, and then flown--in the sky--back across a vast expanse of ocean. Most of the commercial products we buy boast a similarly byzantine heritage.

But importantly, all byzantine pathways are not the same: we value certain twists and turns in the roots of the production process over others. Differences in valuation are extremely important because they help us decide what to do, how to spend our time and energy. Correspondingly, we value certain types of work and certain types of workers over others. We value doctors over tech support providers. Soldiers over mall security guards. Entrepreneurs over middle managers. Farmers over migrant laborers. And their wages reflect this.

The question, should we bother to ask it, is why? Why do we see certain parts of our economy as more valuable than others?

Certainly some reasons are obvious: things like doctors are valuable because they strongly affect our lives, in good or bad ways. We value that and we pay them for it. But other reasons are a bit less direct, as in Adam Smith's diamonds/water paradox (why are diamonds more expensive when water is so much more useful?). Such "paradoxes" can be explained through concepts like markets, institutions, or human psychology and preferences.

In fact, there are a million different things that affect what is important in the economy. But that does not mean we factor all those things in perfectly when we think about them. Instead, we think in simplified mental models, that may or may not factor in all the relevant details. People think in terms of these modelsm and see those parts emphasized by their models as more important--more critical to the operation of the economy and more valuable.

Productivity Shapes the World

When economists refer to value in an economy, they basically mean "quantifiable economic activity"--typically this includes everything that is paid for, but it may also mean other things like childcare, housework, or barter transactions.

In a way however, typical measures of value like GDP are more about measuring how much is going on than how much is going on that is worthwhile. Past attempts to measure how much is worthwhile, or simply find a more concrete measure of value than the aggregating all economic activity based on what people pay for things, has met with limited success.

One thing economists and almost everyone else can agree on, however, is that productivity and production is important. Not the only important thing in life, maybe, but something fundamentral. Because people generally want things, or want to have things done for them. Productivity has always been a crucial aspect of the economy.

It has maybe always been this way, from hunter gatherers surviving on whatever nuts or caribou they could find, to the irigations sytems and metal tools that sustained early civilizations, to the industrial revolutions and the advent of mass production. Economies that are better at making things and doing things for people, or at least make or do more things, are more productive and thus create more value (in the economic sense). The technical details of production, however, are almost banal compared with the influence of production on our culture--our politics, our ethics, and the daily lives we live.

Technology Shapes our View of Productivity

If you are a hunter or a gatherer, production is important in an immediate way: your productivity determines how much you eat for the next few days. If you live in an agricultural society, your production one year may determine how much you will eat until the next harvest. A good harvest could also give you access to other goods, like cookware or building materials, or services, like a doctor.

(Disclaimer: I am not an anthropologist or historian and I realize that I am making incredibly simplistic assumptions about different societies that I know little to nothing about. If what I am saying is ridiculous, please let me know.)

Productivity in pre-capitalist societies was more straightforward, because almost everyone was a producer. With lower levels of technology, people engaged in work with clear inputs and outputs; "hard work" was at least immediately apparent. Those people that did not produce food or goods directly for markets usually engaged in work that was nevertheless understood as important by society: women cooked, cleaned, and raised children, clergy counseled and served as intermediaries with the devine, noblement governed and provided protection.

Two things changed. First, the joint-stock, limited liability corporation was invented (not out of thin air, but I will not get into that here) within the framework of the liberal state. Second, mass production was also invented. These inventions changed productivity forever, because they gave us organizational forms that increased the productivity of any individual exponentially. The more complex organization of production, however, also increasingly obscured the causes of the productivity.

There is a limit to how many fields a man can plow, even with the sturdiest horses. But the potential output of a man with GPS-guided, computer-controlled giant farming machines is almost limitless. Today, the major sources of productivity have almost nothing do with how many hours we spend toiling in the fields--they come instead from our technology. And the process that has produced that technology is managed by enormous, complex corporations.

Technology is best thought of not simply as new machines, but also as new forms of organization and new processes. Organization and processes may be consciously designed, like a legal proceeding or the hierarchy of a business, or they may arise more spontaneously, like a professional network. If we are ok stretching the term "technology" even further we can lump under its banner cultural values and mores, integrated with formal organizations and processes. For example, a fundamentally important aspect of our economy is that it is built to a large degree on trust.

Technology and our complex market economy obscure the source of productivity for a number of reasons. Most obviously, increasing technological complexity (along with increasingly complex societies) means the production process involces more and more people doing more and more things. These different people also become increasingly specialized, often in more and more complex areas--think of biologists that specialize in one small, rare organism or a computer programmer that specializes in programming certain types of software. Furthermore, we can think of such specialization as a kind of technology itself, as a rationalization of prodution processes--think of an assembly line, which is an important invention in its own right. This increasingly productive technology may have a clear source, like Henry Ford's assembly line, or it may be simply a byproduct of the work of many people, like a computer. But these parts of the system that change the system to  increase productivity are also important.

Who do we Value?

All these parts in the system, and designers and remakers of the system, are competing, in a way, for our societal respect. But ideas like "complexity" and "systems" leave us on awfully abstract footing. We have to value something, in the end--like a person or at least an institution. Who should we thank for our productivity and productivity increases?

Well, what are our options? Let's make a list:
  • Workers, because even productive technology needs workers to make it work
  • Inventors, because they make the mechanical technology
  • Businesspeople, because they create new organizations
  • Capital allocators, because they pick good organizations to fund (and allow to exist)
  • Technocrats, because they help the system function well
  • Teachers, because they help train people to be more productive
  • Values, because they keep society working well
  • Market incentives, because they make people want to be productive
  • God, luck, fate, etc...
Each of these different attributions has at least a grain of truth, because they are all parts of our economic system. So how do we differentiate them by importance? We can, for starters, try imagining a world without them: while it may be difficult to construct counterfactuals and hypotheticals about which factors are essential and non-essential in an economy, such ideas do provide important justification for resource direction and control.

But first we should be aware that different political and economic ideologies in the modern age have already built their conceptual models, coherent or not, on different conceptions and attributions of value creation. Marxists celebrate workers, libertarians celebrate market forces and Randian innovators, and the vast middle celebrates a range of investors, teachers, businesspeople, technocrats, family values, and always, again, the market.

Every hero needs an enemy, however. These enemies often define our ideologies more strongly than the ideas themselves. The enemy of the market is the state, the enemy of the worker is the capitalist, the enemy of the technocrat is politics, the enemy of our values are other people's values. These enemies purportedly cripple us, keeping us from our true potential.

Producerism (as an example)

One ideology particularly germaine to this discussion is "producerism". Wikipedia does a good job of presenting many of the facets of producerism, the main idea being that there are productive groups in society and there are unproductive groups in society, and the unproductive leech off the productive.

While few if any people self-identify as "producerist", strains of producerist ideas are visible not just on the conservative side of the political spectrum (liberal elites and lazy underclasses sucking value from the productive middle) but also on the left (powerful ologpolistic corporations and mutant financial sectors diverting resources from productive manufacturing; capitalist owners taking more than their fair share of profit). The different sides vary in terms of where they believe value is created, but their basic argument is that value is being misdirected from its natural, rightful, or most effective course.

The range of producerist concern likely has something to do with the complexity of modern production we wrote about above. It is difficult to know exactly who to thank for your new iphone: Steve Jobs? workers happy to work for meagre wages at Foxconn? some faceless software designer? the bureaucrats who successfully reallocated the electromagnetic spectrum so that you could use 3G internet? investors in Apple? All of these workers and classes of people helped bring that iPhone to your pocket; how do we know they got their fair share of the value?

An interesting thing about producerist critiques is that they inherently utilize a structural model of the economy--and a structural model that is very intuitive. By structural I mean that they take the economy as a whole and examine how parts of it interact. Such models have been out of fashion in mainstream economics for some time, but what has replaced them has been something of a conceptual void in the form of marginalist economic theories of value. Marginalist theories can only describe value as something someone chooses over something else, eschewing normative claims in favor of a set of conceptual tools.

Producerist-type arguments from all sides of the spectrum tend to be directed most vociferously toward those in power, since those in power rarely have trouble demanding their fair share of an economy's value. But it is not just our economy that is complex; our political system is also complex--and we therefore end up with all kinds of ideas about how the system works and who is using it to their benefit. Whether or not these critiques have legitimate grievances, however, they are basically ignored by economists (whose marginalist tools are basically incapable of addressing any political ideologies besides imperfect markets) and rarely make it onto the centrist political radar unless they can raise enough electoral ruckus, a la the tea party.


Where does all this leave us?

We should perhaps return to the link, glossed over earlier in the post by some handwaving about economists, between production and value. As noted, as a society we are basically required to think about value all the time, because it forms a basis for our decisions. And some production is more valuable than others, because it is more useful or scarcer or just because we humans, in our infinite arbitrariness, think it is valuable for other reasons.

Mostly, with all the complexity in the production process, we rely on wages and prices to put a value on work that is done. Wages help incentivize people to become programmers instead of, say, switchboard operators, and these incentives help increase the value in society. The invisible hand is in fact just your very visible paycheck.

But the wage and price system is not perfect. Competitive markets often require tending, new productivity can be nurtured but also stifled, and on top of it all there are people that are affected and allocative possibilities that are simply off the table (such as having government wages, or eliminating welfare entirely). Relying on markets to set the value of everything in society would be a horrible mistake, because markets fail too often in too many ways. Unfortunately we do not have a coherent alternative in our national discourse. Instead we resort to shorthand, simple ideas of what is valuable in our economy. Production is a process often subject to this simplification.

But production is a complex process. And we need to understand this in our political dialogue because the way we think about production influences the way we think about what is a fair, right, natural, or at least acceptible state of affairs. Unfortunately economics provides only the bluntest of tools, rough quantitative analysis, for understanding the relation between production and value, and determining what is important in our economy. Even less helpfully, it has a tendency to peddle the panglossian idea that everything is worth exactly its going rate in the market. In terms of priority-setting and direction, neoclassical economics is is unhelpful in many ways and downright misleading in others.

The void is filled by theories of right and wrong, political narratives of good and evil and efficacy and failure. These stories make sense to us because they offer a coherent story we can believe in and find meaning in. They help us understand what we value and and what we should value, often through their simplified explanations of the production process. Unfortunately they rarely do so except in self-serving ways that offer scant opportunity for real consideration of what we priotize or appreciation of the system's complexity. We should expect more.


Update: I just came across a recent Krugman blog post on basically the same subject, though focusing on the value created by those employed by the government. Krugman compares those people claiming that "government can't create jobs" to the Physiocrats, a sort of economic paleo-ideology. It is easy to see the strains of producerism and claims and confusion about sources of value over the ages.