January 23, 2013

Structlical Problems?

Unemployment in the United States is still high: it has been recovering, but very slowly. Compounding the unemployment problem is the increasing wage inequality that has been ongoing since the early 1980s. There are a number of theories floating around that try to address these issues; the simplest way to frame the unemployment debate is as a question of structural versus cyclical unemployment. Structural unemployment is when jobs cannot be filled because people do not have the right skills or access to jobs for other reasons (such as location). Cyclical unemployment is due to the business cycle and businesses laying off workers because the macroeconomy is doing poorly and businesses are not investing.

Last week I linked to several papers that attempted to address these issues:

~ NBER working paper arguing that unemployment is currently cyclical.

~ EPI paper arguing that changes in wages were not due to skill-biased technological change (SBTC); instead they were due to government policies.

In the past two weeks both of these papers have gotten a bit of a reaction. Most notable is the back-and-forth between Washington Post columnist Dylan Matthews and one of the EPI paper's authors, John Schmitt. Matthews argues that the SBTC is a bigger deal than the paper makes it out to be. Schmitt comes replies with a half-critique, half-reframing of the issue. Schmitt's main argument is that in the last decade SBTC has been almost non-existent according to some of the original data that prompted the paper that the EPI paper was mostly critiquing. Both articles are a good read.

I also came across a rather harsh critique of the NBER paper by Rob Atkinson of The Innovation Files/ITIF. Atkinson argues that the large (continued but increasing) slide in manufacturing employment over the past decade is clear evidence of structural change. On the other hand, EPI's Economic Snapshot of the day looks a lot like cyclical unemployment, with a graph showing how the number of job seekers dwarfs the number of job openings in every industry.

There are two points to be made.

The first is to point out the somewhat tangled political allegiances and the politcal conclusions attendant to the sides of the economic debate. If unemployment is cyclical, government stimulus (fiscal or monetary) can have an impact by prompting businesses to invest more and thus hire more. If unemployment is structural, government spending intended to stimulate the economy in the Keynesian sense will not encourage businesses to invest.

It's interesting to see who is arguing what here, however. The left of the political spectrum is generally pro-stimulus, and for policies that are explicitly pro-poor (welfare, etc...). Arguments for stimulus depend on cyclical unemployment being an important factor. But a focus on cyclical unemployment arguments detract from longer-term structural arguments. An example of this complexity is the way that Atkinson's post manages, somehow, to the attack the liberal wing of the neoclassical economic (basically neokeynesian) consensus, from a centrist pro-business standpoint, using arguments many leftists would be comfortable with.

This argumental jujitsu leads to my other point, which is that politics has a hard time with economic complexity. Most academic economists would support a wide range of policies from a wide range of the political spectrum. Economic findings, if economists are lucky enough to find any quantitatively sound conclusions, often make claims like "30% of the increase in X can be explained by Y". Such claims are underwhelming even if extremely important because having two causes is far less convincing than having just one. We like to think in absolutes--structural or cyclical--because it's simpler for us and for anyone we are trying to get to listen to us.

January 21, 2013

Production as Privilege: Productivity

This post is the fourth in a series trying to breathe new life into the connection between production and distribution.

Conceptual Tool #7: Productivity

A simple model: Three people are catching fish using their hands. It is hard work, fish are slippery, and they work all day to catch just enough so that they are not not hungry. But then: they get spears they can use to catch fish faster. With a spear they can catch bit more--enough that two of them can produce enough food for all three people.

Yay! Right?

More is usually better, especially in economics. And this situation sounds good: more free time to frolic in the meadows, paint pictures, or raise the kids.

But it is not quite so simple. While a productivity increase may seem like an unadulterated good thing, there are plenty of ways productivity increases can fail to live up to their potential--or even make things worse. As I have been repeating in my last few posts, the relationship between production (productivity) and distribution (who gets the productivity) is a complicated one.

Economics as a discipline has a tendency to skirt around this complexity via the following logic: perfect markets have efficient outcomes, imperfect markets can be fixed, and any further distribution issues are political. It is certainly not true that economists are never interested in distribution, but there is a general tendency to assume that increases in efficiency and productivity will nevertheless be good for the general population. Or from a different angle, that good things cannot happen in an economy without increases in productivity. Besides, worrying about distribution smacks of Marx, and every economist knows that his labor theory of value was wrong.

I should mention also that distribution is not the only potential problem with changing productivity. If you have some time to burn this classic essay by Jared Diamond is a good example of why productivity can be a bad thing for many more reasons than just its distributional effects. A recent post at Naked Capitalism highlights some other reasons that productivity can be problematic, even disastrous, in more modern societies. Distribution is the primary issue I am focusing on in this series of posts, however, so I will not go into much detail regarding other implications of productivity.


Productivity, defined as output per person (or per person-hour) and illustrated in the fishing example above, is an important idea in modern economics. When economists or politicians talk about economic growth--and economic growth is generally assumed to be a fundamental prerequisite for a well-functioning and competitive economy--they mean increasing aggregate productivity. Productivity is important for individual businesses on the micro level as well, although they do not always view it in precisely these terms.

The fact that productivity is a ratio of two other things makes it a bit weird. Increasing productivity in an economy can result from two causes: either increasing output (the numerator) or decreasing workers (the denominator). Individual businesses typically think in terms of profit instead of productivity, but the connection is easy to see. Increasing profit comes from increased revenues or decreased costs; revenues are derived from the sales of output, and labor makes up a large portion of business costs. Instead of a ratio, profit is a defined using subtraction, but it can also be constructed as a ratio in various financial metrics.

In any case, if our economy assumes continued growth and relies on increasing productivity to fuel that growth, growth can come from either making more things, or making things with less people. If fishers start using spears, productivity will increase whether everyone keep fishing and catches enough fish for 4.5 people, or one of them stops fishing and two people catch enough fish for 3 people--in productivity terms, the amount is the same because it is being measured per person. This may seem trivial, but in fact it has important consequences.


We can apply the idea of scarcity to productivity increases. In the above model, in the beginning, the supply of fish exactly met the demand. When the fishers started using spears, though, it decreased the scarcity of fish by increasing supply.

How does this decreased scarcity affect distribution? Frankly, we do not have any idea. At this point the story could go almost anywhere, because we have not given enough background or fleshed out enough of the model.

Let's brainstorm what could happen. The three fishermen could simply work a third less. They could take turns fishing and get every third day off. One fisherman could sit around all day while the others fished. One fisherman could do other work. They could all keep fishing all day and save their extra fish, or trade them or even throw them away. They could all keep fishing and the biggest fisherman, or maybe the fisherman who invented spearing, could make the others give him their extra fish. They could fight about who gets to not fish. Two fishermen could gang up on the other one and make him fish all of his time while they split the remaining free time. Or the two fishers could keep fishing while making the third do worse work that benefited them, like gutting the fish. Their new more productive fishing techniques could deplete the fish stock leave everyone starving. Having extra fish to throw away could become a badge of honor and they could start fishing more and more until until they died of exhaustion.

Certainly many of these sound contrived. When one looks back at actual human history, though, the easy answer--that people will evenly divide the gains--appears just as contrived as the any other story. Just because a better outcome is possible, does that make a productivity increase an inherently good thing? Does it make sense to divorce the productivity increase from the new economic and social forces it unleashes?


It may be useful to use the brainstormed scenarios to suss out the forces, dynamics, and assumptions that contribute to different outcomes.

As we noted above, productivity can mean people working less or people making more things (or some combination of the two). These two options are easily seen in the scenario list: in most scenarios the fishermen are doing less fishing.

Whether they continue fishing even though they are producing more fish than they themselves currently demand depends on whether there is a demand for fish beyond their immediate need. This additional demand can come from the fishermen's own need in the future (if they can save the fish) or from other people that will trade for fish. It is also possible that their demand for fish could grow, if the fishermen started wanting fish for more than just eating--a new kind of demand for the same product.

In the scenarios where they stop fishing and increase productivity by decreasing the amount of people fishing, it is clear that the fishermen value other things more than the extra fish. "Other things" can be as simple as "doing things with your time that are not fishing", as complex as a house that productive fishermen built in that spare time, or as unfair as the foot massages massages they got from the newly subservient fisherman.

One thing that seems clear from the hypothesized scenarios is that productivity may create unfairness. If the fishermen must work all day, there is no excess wealth--neither time nor output--to hoard. But perhaps this is simply an artifact of how I constructed the thought experiment: is there really a time when people's production it could be argued that people have always profited from others because so rarely in recorded human history have we had to spend all our time on basic necessities. At the very least, profit is closely associated with commerce and is probably present in any society where there is specialization and trade.


But which is better? Three fishermen who must fish all day, or, say, two fishermen who fish and one who collects his fish as taxes or tribute? The typical economic answer would be the latter--the logic being that the economic situation has improved; the distribution problem is political.

Economics tends to wash its hands of distribution all too quickly. It is fond of statements like: “capital owners will benefit from opening trade barriers, while the outcome for labor is ambiguous but smaller than the benefit to capital owners. The most efficient solution will therefore be to liberalize trade and redistribute the gains.”

But society does not simply "decide" how to distribute gains from productivity: politics is not some alternate universe where economics does not apply. Decreasing labor's bargaining power in the economy may short-circuit their political power as well. Sometimes the processes determining distribution are best characterized as wholly political; but other times they have clear economic causes. Assuming a benevolent redistributive force is perhaps no less presumptuous than a benevolent distributive one (a.k.a. communism).

Instead of a simple net positive for society, productivity gains should be recognized for what they are--the restructuring of scarcity resulting in realignments of economic power. The new structure can be beneficial: it has improved our material lives beyond the wildest dreams of our ancestors and as a general historical trend, productivity has trickled down. But this should not be seen as an inevitable law: productivity gains in the USA in the past decades have gone almost entirely to capital owners and have been important drivers of the recent increase in inequality.

We can use several of the possible outcomes of the fishing scenario to flesh out occasions where power might come into play and ways for ensuring that productivity gains contribute to broad-based wealth increases. In the scenario where one fisherman owns the spears, the other fishermen are willing to pay the spear owner for their use. The spear owner is thus able to capture all of the gains from new technology. This is an example of economic power, and is less sensical in a state-of-nature example than it is in the real world, with our complex system of property rights.

In another scenario, the fishermen produce more because there is external demand for fish. This is a better outcome because they get stuff in exchange for the extra fish they catch. But if one fisherman does not have equal access to new technology, he may be unable to sell his fish as cheaply as the fishermen with better spears, and may have difficulty selling any at all. This is a passable explanation for much of the unemployment in developing countries, where workers have no way to be productive and are therefore unable to compete. Also, this example becomes more problematic in a specialized economy where workers are not producing for their own consumption at all—I will address this in depth in the next post.

The first way, then, to ensure productivity gains contribute to the general welfare is to ensure that new gains are not monopolized. Monopolization can depend on the accessibility of the market to new entrants, which facilitates competition that reduces the economic power of the initial producer. Our patent system, for example, grants temporary monopoly rights in exchange for making inventions public knowledge. In addition to laws, the technologies of production themselves can structure entry into a market: the airline industry requires advanced technology and expertise, for example. In markets with high barriers a monopoly is much more likely to form and a company is more likely to take advantage of their economic power by charging above cost for their product.

The second way to ensure that increasing productivity works for everyone is to ensure that scarcity remains in balance. A functioning economy relies on an intricate web of supply and demand in both product and labor markets. If scarcity is restructured in a way that eliminates demand for certain suppliers in the economy, the demand created by these suppliers will also be eliminated. In the fishing scenarios the fishermen are self sufficient whether or not they use a spear, but in our real economies today few people can simply go back to their farm. Instead, those laid off due to productivity increases may be unable to recapture a sufficient amount of scarcity. Even though the economy has more productive potential, output may decrease if there is no one to buy it.

Economists often make similar assumptions to ones we made about the fishermen, by assuming people choose not to work or there is always demand for other work. Such assumptions are not ridiculous: people do often choose not to work, and demand for work has increased or remained relatively steady despite continued advances in productivity over the past hundred years.

The question of whether demand will continue to emerge for new work--and whether it will emerge in a way that truly balances scarcity in an acceptable way--is beginning to make it back on to the radar of economists and policymakers. In the past new scarcity has arisen from the increasing complexity of our society: we need accountants, tech support specialists, and hundreds of other occupations that did not exist a hundred or even fifty years ago. Complexity can beget complexity, to a point. People also have a way of demanding silly things--often the exact things which are rare. These peculiarities of taste and new demand serve to even out the market a bit and create scarcity where no scarcity previously seemed to exist.

But these forces are not a guarantee that scarcity will continue to drive the economy forward. Even if it does, as we learned in the last post about elasticity, not all scarcity is created equal. As difficult as it is to anticipate where our productivity gains are taking us, we need to do more to understand how we are getting there. The tools of economics are limited but can be useful, if we are looking at the right things.

January 13, 2013

January 13th Links

I have been hard at work on new posts but nothing is finished yet. Instead, here are a few articles I enjoyed recently.

Thomas Frank with a sharp critique of the Occupy Wall Street movement and its "lazy libertarianism" in The Baffler.
Matt Taibbi at Rolling Stone and two writers at The Atlantic write about how badly we have failed to fix our financial system.
Fascinating history-of-ideas comparison of finance and art.
A Jacobiner article from last summer about work and the politics of labor.
[technical] Steve Keen wrote an excellent article this week on modeling dynamic systems.
[lots of econ jargon but not actually technical] The emminent Robert Solow on the sorry state of macroeconomics--back in 2003.
Labor Markets
NELP makes an important point about current labor woes in the USA.
[technical] Important paper from the NBER looking at whether employment is structural or cyclical. (NBER access required; email me if you want a copy.)
A depressing take on the economics and politics of agrculure in the USA from Washington Monthly.

January 6, 2013

Production as Privilege: Scarcity and Elasticity

This post is the third in a series attempting to breathe some new life into the connection between production and distribution. Each post presents a different tool for understanding the relationship; the hope is to articulate some ideas that have been furtively dwelling in my head and perhaps arrive at some new insights.

Thus far, the posts have been covering standard "econ 101" ideas. If you have a decent understanding of economics you can skip the two "tools" sections and start right after the squigglies, although I rather like my cat example.

Conceptual Tool #5: Scarcity

Everybody knows that economics is about supply and demand, and everyone has most likely seen the ubiquitous supply and demand "X" graph. "Scarcity" is a convenient shorthand for any situation where the supply and demand curves are not simply at zero along the vertical axis. In other words, when the supply cannot costlessly meet the demand--i.e. most situations, and certainly most situations where anything is exchanged. If something is more scarce, then we can expect people will give up more for it.

It may be useful to note that in common usage, "scarce" may mean simply something that is rare; in economics it connotes something that is both rare and desired. For example, imagine a pet cat with stripes. The exact pattern of the cat's stripes may be entirely unique, and thus extremely rare. However, if pet owners are only interested in a cat with stripes, and do not care exactly what the stripes look like, the pet cat would not be scarce in the economic sense. If any old stripes will do, a certain exact pattern is rare but not scarce.

Conceptual Tool #6: Elasticity

Elasticity is another foundational concept in economics, and one way to understand it is as how much "bargaining power" buyers or sellers have in a market. Technically, elasticity is the change in quantity demanded (or supplied) divided by the change in price. It represents how willing buyers are to pay more, or sellers are to sell for less, and is represented by the slope of the lines on the supply and demand "X". This technical representation amounts to "bargaining power" because it determines the range of other possible market outcomes: it shows whether a side of the market is able to reject market outcomes that are unacceptable to it, ensuring that market transactions will be more on their terms. More elastic supply or demand is associated with a stronger bargaining position.

Bargaining power is largely determined by the amount of substitutes in a market. Examples of elasticity are everywhere, but to continue the cat example from above, demand for a particular striped pattern may be very inelastic because buyers (people looking to buy a cat) do not care what pattern of stripes are on the cat. No one will be willing to pay more for a certain pattern of stripes if they can buy another pattern of stripes less and they do not care what the pattern of stripes is. However, if one cat's stripes look like Jesus, demand might become more elastic, with people willing to pay more for a Jesus cat because no other cats have stripes that look like Jesus. The demand side is unable to find substitutes and therefore becomes inelastic, willing to pay any amount for the same amount of cat.

Elasticity determines how each side of the market will react when either the other side of the market changes, or some other factor changes affects both sides of the market. If taxes are imposed, for example, the elasticity of each side of the market determines who pays the majority of the tax. Elasticity has a similar effect when other costs or benefits come into play, including natural "background noise"-type disruptions in a market.

While it is clearly an important determinant of market outcomes, elasticity is difficult to measure. It therefore often ends up playing a muted role in economic analysis. Measuring elasticity is hard because most economic data show only the intersection of supply and demand (i.e. the sale price and quantity sold in a market), and not the range of potential other prices that buyer and seller might agree to. There are some tricks to untangle the separate supply and demand elasticities, but they typically rely on isolated incidents and do not provide a comprehensive view.


Scarcity and elasticity provide the most fundamental rationale for the standard economic story about distribution. Simply conceived, we distribute income according to the scarcity of what we produce: we are paid according to how rare and desired the things are that we are able to do. If the thing we do is not rare, we may have weak leverage because the demand for the things we produce is inelastic (it is easy for buyers to find substitutes).

I have titled this series "Production as Privilege" because I want to think about where that scarcity comes from. "Privilege" is not necessarily the truest or clearest way of thinking about production, but it does turn the idea of production on its head, in a way, and because of that provides an interesting starting place. Work is not typically thought of as a privilege because it is a mutually agreed-upon exchange: we do something we do not like (unless we are one of the lucky love-my-jobbers) and get paid in return.

Yet neither the type of work that we are able to get paid for, nor the amount of pay we are able to secure in return, is as straightforward as it may seem. Scarcity and elasticity are helpful concepts for explaining the dynamics within a market, but they are less helpful for explaining how and why scarcity exists in the first place. Economists have a few basic platitudes (limited resources and unlimited wants) and a powerful toolbox of "market failures" that explain why markets might not function as well as they could (e.g. monopoly power, a la the previous post in this series).

But even these more powerful tools can explain only so much of an economy. Take the word "privilege" itself--what is privilege from an economic viewpoint? You can begin to explain privilege as economic rents--certainly we could think of rents as a type of privilege--or as exceptions to market rules. But privilege is much more. It is being born on the right side of the tracks, skipping the line, or waking up with a roof over your head. We can try to frame privilege in terms of scarcity, or even in terms of market failures, but these ideas only capture a small portion of what privilege is and means in a society.

Still, we have to start somewhere, and scarcity provides a useful framework.