Arguing with Zombies (part 3)

April 16, 2021

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Note: I have also revised part 2 to present the the IS-LM model of interest rates more clearly.

Here I will discuss two other areas where Paul Krugman feels he is arguing with bearers of zombie ideas—climate change and social inequality.

Climate change

Krugman targets three familiar objections to doing anything about climate change: “Climate change is a hoax. Climate change is happening, but it’s not man-made. Climate change is man-made, but doing anything about it would destroy jobs and kill economic growth.” Economists have most to say about the third objection, but all three may be perpetuated out of economic self-interest. Krugman notes that the most prominent climate change deniers are profiting in some way from fossil-fuel industries. Economic ideology is also a factor. “Rigid free-market ideologues don’t want to believe that environmental concerns are real” because the solutions require some form of government intervention in the market. Krugman considers the issue so pressing that it requires a moral as well as scientific response. Because “climate denial is rooted in greed, opportunism, and ego,” it is both foolish and downright evil.

From the standpoint of economics, the most straightforward way to stop people from doing something is to make it more costly. Like many economists, Krugman recommends a carbon tax on fossil fuels. He does not want to rely on it exclusively, however, because its costs to the public make it a hard sell politically. Also, more positive incentives can be useful in encouraging the transition to renewable forms of energy. He welcomes the general approach of the “Green New Deal” proposed by progressive Democrats, which emphasizes investments and subsidies rather than taxes. He argues that reductions in carbon emissions:

…could be achieved with a combination of positive incentives like tax credits and not-too-onerous regulation. Add in investments in technology and infrastructure that support alternative energy, and a Green New Deal that dramatically reduces emissions seems entirely practical, even without carbon taxes. And these policies would visibly create jobs in renewable energy, which already employs a lot more people than coal mining.

The deniers, of course, support neither new taxes nor incentives, preferring to do nothing about the problem.

Krugman seems most interested in technological fixes facilitated by economic incentives, and less interested in the possibility of new lifestyles that consume less energy. Some environmentalists may contest his claim that carbon emissions can be cut by two-thirds without any reduction in energy consumption. But whether or not we consume less energy, I think there will be plenty of goods and services we can consume, so I agree with Krugman that intelligent responses to climate change are compatible with continued economic expansion.

Economic inequality

Krugman complains about an “inequality-denial industry” comparable to climate change denial. Too many economists and politicians have ignored or minimized the evidence of rising economic inequality, which is especially a problem in the United States. What has been happening for the past forty years is in sharp contrast to the “broad-based prosperity” of the decades following World War II. “Over that period incomes of all groups rose at roughly the same rapid clip, more than 2.5 percent annually.” Since then, not only has income growth been slower overall, but what growth has occurred has been much more concentrated at the top of the distribution.

What has become known as the “Krugman calculation” asks what percentage of the overall rise in average income has gone to the top 1 percent. The answer is about 70 percent. He argues that other ways of presenting the income numbers obfuscate rather than clarify the issue. In contrast to our cherished notions of a classless society or land of opportunity, it is the rich who are mainly getting richer, and “America stands out as the place where economic and social status is most likely to be inherited.”

In various essays in his chapter on inequality, he attacks popular explanations for inequality that fail to address what he thinks is the real problem. The first attributes it to the widening wage gap between more and less educated workers. There is some truth to that, but the college educated constitute a much larger percentage of the population—35% counting bachelors degrees and above—than the 1% who are really thriving. He attributes the “rise of a narrow oligarchy” not to increasing education, but to increasing power.

Similarly, technological change is not mainly what is holding back the average American worker. Technological change used to translate into increasing productivity and higher wages. That connection has been broken, but not by industrial robots. “There is a growing though incomplete consensus among economists that a key factor in wage stagnation has been workers’ declining bargaining power–a decline whose roots are ultimately political.” American workers have become far less unionized than workers in many other democracies, although Krugman does not get into the specific reasons for that.

A third explanation Krugman rejects is a decline in working-class family values, with fewer men marrying or staying married and supporting their families. Although today’s working-class families are indeed troubled in many ways, he argues that “the symptoms of social decline we see in working-class America are the result, not the cause, of declining opportunity.”

Krugman agrees with Enrico Moretti, author of The New Geography of Jobs, that structural changes in the economy have congregated more educated workers together in thriving regions, leaving many parts of the country behind. But even there, political policies have aggravated the inequality. Republican states have been making cuts in education and refusing to expand Medicaid. “Trumpland is in effect voting for its own impoverishment.”

Krugman introduces the concept of power relations to account for the inequality that more traditional economic variables fail to explain. He uses the term three times, most notably when he says that “the idea that free markets remove power relations from the equation is just naive.” Yet none of the essays in this collection discuss it in any depth, analyzing the dynamics of power or its possible redistribution. I also noticed that the index to his 600-page Macroeconomics text has no entry for the words power, power relations, bargaining power or oligarchy. This suggests a new frontier for mainstream economics, even for liberal economists like Krugman. The modern field of economics developed out of what used to be called “political economy.” Is it time to revive that broader perspective?


Arguing with Zombies (part 2)

April 7, 2021

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Many of Paul Krugman’s essays deal with the need to combat economic recession by basing public policy on sound economic ideas. Here is where the zombie ideas that “should have been killed by contrary evidence” do the most mischief. Occasionally his arguments get a little technical, but overall he does a good job of explaining his ideas in pretty plain English, and he puts warning labels on his more “wonkish” essays. One essay—his discussion of the determinants of interest rates—sent me scurrying to his macroeconomics textbook for a more thorough explanation.

Interest rates and monetary policy

The most technical essay in the collection describes the “IS-LM” economic model, where IS stands for the relationship between investment and savings, and LM stands for the relationship between liquidity preference and money supply. It is a macroeconomic model describing relationships among some of the most important variables in the economy.

In Krugman’s formulation, the IS-LM model is a way of reconciling two different views of how interest rates are determined. Interest rates are, of course, crucial to the workings of a capitalist economy because interest is the price of financial capital. Businesses pay interest when they borrow money to finance business expansion, and so do consumers when they finance major expenditures. Both views of interest rates rest on the laws of supply and demand as applied to money. We start with the idea that the price of anything varies directly with the quantity demanded and inversely with the quantity demanded. Low prices increase the quantity demanded and discourage the quantity supplied, while high prices do the opposite. In theory, the price mechanism brings supply and demand into balance, making transactions acceptable to both parties.

How does this apply to the interest rate, which is the price of money? The two approaches focus on different forms of money. The first view of how interest rates are determined is the “loanable funds” approach. It says that interest rates are determined by the supply of savings and the demand to use those savings for investment spending. The interest rate has to balance the desire of savers to earn a high return against the desire of borrowers to obtain funds at a reasonable cost. In this context, think of the borrower as a company borrowing to finance business expansion.

The second view of how interest rates are determined is the “liquidity preference” approach. It focuses on the supply and demand of “money”, meaning liquid forms of money like the cash in your wallet or your checking account, which is earning little or no interest. Here we have something of a riddle. How can the interest rate be the price of money for money that earns no interest? In this case, the interest rate is the opportunity cost of money, the price you pay for keeping money in cash instead of loaning it out at interest. The higher the interest rate, the higher the cost of liquidity and the lower the demand for liquidity. In this approach, the supply of money is a simpler concept, since it is just the money placed in circulation by the central bank, which controls the national money supply. The balancing of supply and demand in the money market is not just a matter of reconciling the wishes of buyers and sellers, or of lenders and borrowers. It is a matter of reconciling the conflicting desires of anyone with income—the desire for both money to spend and money to lend. Too much liquidity and spending, and interest rates must rise to attract more money into lending. When the desire to save and lend is very high, interest rates can fall, bringing down the opportunity cost of liquidity.

Can the two approaches be reconciled? Yes, because interest rates balance supply and demand in both the loanable funds market and the money market, the two being interconnected. Suppose the Federal Reserve deliberately increases the money supply—we won’t worry about exactly how—in order to stimulate the economy. That lowers interest rates, encouraging businesses to borrow for expansion. That in turn increases production and national income, which increases the supply of loanable funds when people save some of the increased income. Krugman’s Macroeconomics (with co-author Robin Wells) says, “As a result, the new equilibrium rate in the loanable funds market matches the new equilibrium interest rate in the money market….” The two approaches are focusing on different sides of one adjustment process.

To return to Arguing with Zombies, The IS-LM model synthesizes both approaches by relating both markets to the Gross Domestic Product. The balancing of investment and savings in the loanable funds market implies a negative (inverse) relationship between interest rates and GDP. Low interest rates encourage businesses to borrow for investment, and investment spending contributes to GDP. This can also be looked at the other way around, since high GDP means high incomes, and high incomes provide the supply of savings for investment, which holds interest rates down. This negative relationship between interest rate and GDP is described by the downwardly-sloping IS curve on a graph plotting interest rate on the vertical axis and GDP on the horizontal axis.

However, the balancing of supply and demand in the money market implies a positive (direct) relationship between interest rate and GDP. A growing economy with higher GDP increases the demand for money to spend rather than save, especially if wages and prices are rising. That tends to push interest rates up. That is represented graphically by an upwardly-sloping LM curve, based on the dynamics of liquidity preference and money supply. Put the IS and LM curves on the same graph, and “the point where the curves cross determines both G.D.P. and the interest rate, and at that point both loanable funds and liquidity preferences are valid.”

The IS-LM model is useful for understanding the effects of monetary policy. If the Federal Reserve increases the money supply, that tends to reduce interest rates, stimulating the economy by encouraging borrowing for investment. As long as prices are “sticky”—that is, they react slowly to the increased spending—the IS effect can predominate, and the economy can move to a new equilibrium at higher GDP. But when and if prices rise, the increasing demand for money may force interest rates back up (and eventually GDP back down). Monetary policy can have a stimulating effect, but mostly in the short run.

The analysis does get very technical, but it’s important because it supports some of Krugman’s main conclusions. One is that more than one relatively stable point of equilibrium is possible. Another is that a particular equilibrium does not always represent the most desirable state of affairs, such as full employment with inflation under control. Nations can and do make political choices that affect economic outcomes, for better or for worse. An economy can remain in a less than ideal state for a long time, if the wrong political choices are made.

When an economy is in recession, most economists support an expansionary monetary policy, and some advocate it to the exclusion of fiscal policy (deficit spending by government). However, Krugman emphasizes the limitations of monetary policy in his many discussions of the 2007-2009 recession and the economy’s long recovery. For one thing, the benefits of monetary policy tend to be short-term, easily undone by longer-term rebalancing, as described above. And monetary policy becomes ineffective or even counterproductive once interest rates fall to near zero, as they did during the 1930s, after the 2008 financial crisis, and again in 2020. Then the economy may fall into a “liquidity trap,” where people are hoarding cash because they have no financial incentive to lend. If things reach that point, it’s a sign that economic demand is really depressed. Companies are reluctant to borrow for expansion not because interest rates are too high, but because they don’t see a good market for more of their product. What the economy needs is not looser monetary policy, but aggressive fiscal policy—especially more government spending.

Fiscal policy

Many people, including many political leaders, make the mistake of describing an economy as if it were an individual household, always benefiting from spending no more than it receives in income. Statements like, “People are having to tighten their belts, so the government should tighten its belt too” epitomize that kind of thinking. But in the economy as a whole, everyone cannot run a budget surplus at once; my surplus is someone else’s deficit, and my spending provides someone else’s income. If everyone tries to cut spending at the same time, they just reduce overall production and income. Government is a big player in the economy, and it can help the economy by increasing spending when others are cutting theirs.

Economists have found relationships between GDP, unemployment, and government fiscal policy. Okun’s law states that unemployment varies inversely with GDP. A reasonable rule of thumb is that GDP must go up at least 2% to reduce unemployment by 1%. In our $21 trillion economy—I am updating the number from Krugman’s book—that would mean increasing GDP by $420 billion for each 1% desired drop in unemployment. Fortunately, government spending has a multiplier effect, which Mark Zandi has estimated at 1.5. That means that a mere $280 billion increase in spending should increase GDP by $420 billion and reduce unemployment by 1%.

What about tax cuts? Estimates of their stimulus effects vary, but most estimates put the multiplier at no more than 1.0. In general, a tax cut will stimulate the economy less than a spending increase of the same size, especially if it puts more money into the hands of people who are sitting on cash already. Krugman argues that the Obama stimulus package was less effective than it could have been because it relied too much on tax cuts in order to win conservative votes. It was an economic success anyway, reversing the downslide and saving millions of jobs. Yet Republicans turned it into a political liability for Democrats by declaring it a failure and blaming it for the sluggishness of the economic recovery. That set the stage for Donald Trump, who described the economy as a disaster and proposed even more tax cuts as the solution.

As I noted in the last post, Krugman calls the Trump tax cuts “the biggest tax scam in history.” He says that the “core of the bill is a huge redistribution of income from lower- and middle-income families to corporations and business owners.” He sees it as a continuation of standard Republican policy of cutting taxes mainly for the rich, and then using the fear of excessive government debt as an excuse to cut spending on the social safety net. But more to the point of fiscal policy, he describes the Trump tax cut as a “fizzle” because it didn’t produce the promised boom in investment. Corporations did not use very much of their tax cut to add jobs and productive capacity. What was holding them back was not a shortage of capital, but a lack of market demand for their products.

Krugman wrote the essays in this book before President Biden proposed his $1.9 trillion Covid Relief plan. He has written about it elsewhere, however, such as here. If the estimate based on Okun’s law is at all correct, and it takes only a $280 billion stimulus to reduce unemployment by 1%, we can understand why some economists regard $1.9 trillion as stimulus overkill. Unemployment is currently around 6%, and economists doubt that we can get it down below a “natural” level of 4 or 5% without risking runaway inflation. Krugman acknowledges the “good-faith criticism coming from people who actually have some idea what they are talking about, as opposed to the cynical, know-nothing obstructionism that has become the Republican norm.” Nevertheless, he defends the plan, for two reasons. First, he compares it to fighting a war, when a country just has to spend what it takes now, and worry about the costs later. World War II spending brought us high taxes and inflation, but it also won the war, ended the Depression, and sparked the postwar economic boom. Second, he thinks that the plan’s price tag may exaggerate its actual stimulus, since a lot of the cash benefits will probably be saved by households and state or local governments rather than spent or invested.

The price of debt

How much of a problem are budget deficits and the rising national debt for the future economy? Krugman steers a middle course between minimizing and exaggerating their effects. He reserves some of his harshest criticism for politicians who do both, minimizing their own deficits and attacking those incurred by the other party.

First, the good news. The rate of interest on government debt is normally lower than the growth rate of the economy. That means that even if debt is rising in absolute dollar terms, it can shrink as a percentage of GDP. If the government runs a deficit when interest rates are especially low, and if deficit spending stimulates economic growth, the country can come out ahead. This is exactly what happened to the debt accumulated by the end of World War II. “When and how did we pay it off? The answer is that we never did. Yet…despite rising dollar debt, by 1970 growth and inflation had reduced the debt to an easily handled share of G.D.P.” Krugman calls this “melting the snowball.”

Some economists warn that deficit spending can undermine growth by raising consumption but lowering investment. All that government borrowing siphons off resources that could have been used for private investment. But that argument is least relevant in times of recession, when companies aren’t investing enough anyway, and a boost in consumption is what the economy needs to get it moving. When the economy is running at full capacity, government has to be more careful about borrowing too much.

Krugman acknowledges that debt can become too large under unusual circumstances. He uses an example where the national debt is 300 percent of GDP, and the interest rate is 1.5 percent above the economic growth rate. Then in order to keep the debt-to-GDP ratio from spiraling out of control, the government would have to run an annual surplus of at least 4.5 percent of GDP. That would require politically difficult tax increases or benefit cuts. Right now the debt-to-GDP ratio is about 130% of GDP. Reinhart and Rogoff argued that anything over 90% is a big problem, but other economists have been unable to verify that conclusion.

Finally, Krugman distinguishes among different kinds of expenditures proposed by progressives. First are expenditures that can truly be regarded as public investments, such as infrastructure improvements. He is least worried about paying for them because they should boost future productivity enough to pay for themselves in economic growth and higher tax revenues. “If you can raise funds cheaply and apply them to high-return projects, you should go ahead and borrow.” His second category includes projects where “the sums are small enough that the revenue involved could be raised by fairly narrow-gauge taxes,” like the taxes imposed to pay for Obamacare. These too are easily justified as fiscally responsible. His third category is a “major system overhaul,” such as replacing all private health insurance with Medicare. That type of expenditure could not be undertaken without convincing the public that the gains in universal access and efficiency are worth the additional taxes.

Notice that Biden’s infrastructure proposal, although very costly, falls into Krugman’s first category, the kind of expenditure we shouldn’t worry about paying for. But Biden does propose to pay for it, by reversing some of the tax cuts on corporations and the wealthy. No doubt, opponents will try to argue that such tax increases hurt the economy more than infrastructure spending helps it, but they will not have the evidence on their side. Krugman is especially upset that we have let infrastructure spending fall to historically low levels, when it is one of the best investments a society can make.

Continued


Arguing with Zombies

April 3, 2021

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Paul Krugman. Arguing with Zombies: Economics, Politics, and the Fight for a Better Future. W. W. Norton, 2020.

This book is a collection of essays previously published by economist Paul Krugman, many of them in the New York Times. They cover a wide range of issues, including the debates over Social Security and Obamacare, the response to the financial crisis, problems with the European Union, trade wars, climate change, and the Trump phenomenon. The book ranges too widely to be easily summarized, but I will concentrate on the main connections between Krugman’s economics and his contributions to domestic policy debates. Although no one essay lays out his economic perspective very systematically, the main points of his largely Keynesian perspective become clear over the course of the book.

Krugman uses the term “zombies” to refer to “ideas that should have been killed by contrary evidence, but instead keep shambling along, eating people’s brains.” Apparently, he’s not calling his adversaries zombies, just some of their ideas. What he calls the “ultimate zombie” is the idea that taxes on the wealthy are bad for the economy, and that tax cuts for the wealthy are remarkably good for the economy. This idea thrives not because the evidence supports it, but because billionaires can spend a lot of money to support politicians, think tanks and partisan media that promote it.

This example show how easily economic questions are politicized, and how hard it is to have a honest economic debate in a politically polarized society. Nevertheless, Krugman believes that many economists—including himself—really do want such a debate, and really care about distinguishing fact from self-serving fiction.

Zombies in politics

Krugman introduces his collection of essays by saying that “in 21st-century America, everything is political.” The main issue still dividing people is the role of public policy in influencing market outcomes. Do we want a society like America in the Gilded Age, when government did little to alleviate the risks and inequalities of the market economy? Or do we want to become more like Denmark and other social democracies, paying the taxes necessary to support a stronger safety net and more worker protections?

One thing that keeps this from being an honest debate among people who just have different values and opinions is that the people who stand to gain the most from Gilded Age policies are themselves rather gilded. The rich have a vested interest in pushing the argument that what’s good for them is good for everyone. Their views are represented out of all proportion to their numbers—and to the economic merits of their arguments.

Krugman also observes that our two major parties are very differently organized. While the Democratic Party is a “loose coalition of interest groups,” the modern Republican Party is part of a much more organized movement that he and others call “movement conservatism.” In a 2018 essay, he described this as:

a monolithic structure held together by big money—often deployed stealthily—and the closed intellectual ecosystem of Fox News and other partisan media. And the people within this movement are, to a far greater degree than those on the other side, apparatchiks, political loyalists who can be counted on not to stray from the party line.

The word “stealthily” is significant here. On the one hand, it refers to the shroud of secrecy surrounding the political donations of rich people and the uses to which those donations are put. But it can also refer to the need to disguise self-serving economic proposals as policies for the general good. When Republicans cut taxes for corporations and the wealthy, they exaggerate the benefits of tax cuts to the economy and dismiss concerns about budget deficits. When they oppose government spending to help the disadvantaged, they ignore the benefits and warn of a deficit apocalypse. They also describe such spending as “socialist,” in order to confuse social-democratic programs that millions of Americans support with Venezuelan-style state socialism that few Americans would support. Meanwhile, the Democratic Party increasingly embraces social-democratic measures like universal access to health insurance, measures that Krugman regards as fully compatible with a thriving capitalist economy.

Since Krugman regards the Republican economic agenda as essentially elitist, he is not surprised that movement conservatism often appeals to racial and cultural anxieties in order to win working-class votes. He sees the Trump presidency as the culmination of this trend, as I myself have argued. Judging by his political appointments and his tax, health and labor policies, Trump is not really a populist but simply a fraud. He claims to be for the working class, but his economic policies belie that claim. Krugman considers Trump’s tax cut “the biggest tax scam in history.” Economic elitism also goes hand-in-hand with paranoia and authoritarianism. If you can’t win political arguments by showing that what you propose is good for the majority, then you will likely resort to demonizing your opponents as agents of sinister conspiracies against “the people.” In an essay entitled “The Paranoid Style in G.O.P. Politics,” Krugman says that the Republican Party has become “an authoritarian regime in waiting.” He wrote that essay two years before Trump claimed that he was cheated out of reelection and his supporters stormed the Capitol.

Zombies in economics

While zombie ideas are alive and well in what passes for political debate, they are not entirely absent from the field of economics itself. Here Krugman is concerned about the most extreme forms of “neoclassical” or “laissez-faire” economics, which should have been laid to rest after the Great Depression and the turn toward “Keynesian” ideas. The Depression discredited the idea that economies are entirely self-regulating, and market outcomes are always the best outcomes. In the 1930s, John Maynard Keynes argued that government could help stabilize the economy, especially by spending more when productive resources are underutilized and less when the economy is running at full capacity. Although conservatives tried to suppress the teaching of Keynesian ideas in some places, they became part of mainstream economics in the postwar era. A rough consensus emerged around what Krugman describes as a “moderate economic policy regime…that by and large lets markets work, but in which the government is ready both to rein in excesses and fight slumps….” The Paul Samuelson text that many of my generation studied in college represented that consensus.

It didn’t last very long. When government appeared unable to combat “stagflation”, a combination of both high unemployment and high inflation in the 1970s, the consensus broke down, sending economists back to the drawing board. Conservative opponents of an active economic role for government came to the forefront, attacking Keynesianism and reviving neoclassicism. Under the leadership of Milton Friedman, “monetarists” argued for limiting government intervention to central bank management of the money supply.

Part of the appeal of neoclassical economics was that it made simple assumptions about how economies work, and economists could formulate the logical implications of those assumptions in elegant mathematical models. “As memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations….” Economists could easily mistake a useful simplification of reality for the actual reality, especially if they left out important factors like power relations. The simple assumption that workers get paid as much as they contribute to production fails to mention that workers who are prevented from organizing may get less than their productivity would justify.

More recent events reveal the retreat from Keynesianism to have been something of an overreaction. The great housing bubble and financial crisis of 2008 showed that deregulated financial markets were not as self-stabilizing as the neoclassicists made them out to be. The failure of monetary policy to provide sufficient stimulus once interest rates approached zero showed that government spending was important after all. Krugman concludes that Friedman was largely wrong, and that “Keynesian economics remains the best framework we have for making sense of recessions and depressions.”

As with political disagreements, the economic disagreements here are not just honest differences of opinion among economists who are doing their best to follow the evidence. Krugman accuses some economists of “engaging in whatever intellectual contortions it takes to preserve the free-market faith.” In an article entitled “Bad Faith, Pathos, and G.O.P. Economics,” he identifies a group he calls “professional conservative economists,” who are really economists in name only:

They’re people who even center-right professionals consider charlatans and cranks; they make a living by pretending to do actual economics—often incompetently—but are actually just propagandists. And no, there isn’t really a corresponding category on the other side, in part because the billionaires who finance such propaganda are much more likely to be on the right than on the left.

Krugman charges that the modern Republican Party would rather listen to such people than to serious economists.

Zombies and the media

Krugman’s critique of the mainstream media is very different from what we hear from the right side of the political spectrum. He does not describe the mainstream media as “fake news,” or as suffering from a “liberal bias.” He sees conservative economic views well represented, often better represented than the evidence warrants. He was, for example, dismayed to see how quickly the mainstream media lost interest in economic stimulus in the aftermath of the Great Recession of 2008. With unemployment still very high, most media discussion turned to the dangers of deficits, the potential for as-yet nonexistent inflation, and the need for government austerity. In the “Myths of Austerity” (2010), Krugman explains why cutting spending is counterproductive during a recession. (See also my review of Mark Blyth’s Austerity: The History of a Dangerous Idea.) The media took Paul Ryan’s so-called “deficit reduction plan” far too seriously, considering that it was “basically a trade-off of reduced aid to the poor for reduced taxes on the rich, with the net effect of the specific proposals being to increase, not reduce, the deficit.”

When the media are not being taken in by weak economic arguments and half-baked proposals, they are professing neutrality, seeing a false equivalence even between ideas of unequal merit. Krugman likens this to a headline saying, “Views differ on shape of planet,” when one side is declaring the earth to be flat. Too many in the media avoid doing the work necessary to distinguish a position that is well-founded from one that is merely well-funded.

For all these reasons, fact-based economic ideas get overlooked, while zombies walk the land. My next post will discuss Krugman’s economic positions in a little more detail.

Continued


The Knowledge Economy (part 2)

March 24, 2021

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Roberto Unger’s book lays out his vision of the emerging knowledge economy, with rapidly innovative, knowledge-based processes in the vanguard of production. So far, however, these advanced practices of production remain highly restricted—employing few workers, controlled by technological elites, and mainly benefiting a small number of global corporations. Unger observes what he calls “pseudo-vanguardism,” in which a company uses the products of advanced production—such as sophisticated software—to run large, highly regimented operations, often in parts of the world far from corporate headquarters. The creative knowledge workers of Silicon Valley are supported by low-paid assembly workers in Asia. “Genuine vanguardism remains restricted to a small inner circle of entrepreneurs, managers, and technicians—an elite of capital and of knowledge—disengaged from the social entanglements of mass production.”

This has two unfortunate consequences: the domination of the global economy by large oligarchies and the weaker position of labor in relation to capital. Most workers don’t yet receive the potential benefits of the knowledge economy, but experience instead greater job insecurity and a declining share of income relative to the owners of capital. Innovative firms want flexible work forces, so they replace secure employment with subcontracts to low-wage firms or part-time and temporary hires. These trends contribute to the “hollowing out” of the middle of the wage distribution and the increase in overall inequality. The potential of the knowledge economy to unleash creative impulses, boost productivity and raise incomes across the board is yet to be realized.

These trends are especially noticeable in the United States, as evidence I have been citing from many sources supports. Frey reported that in the last 40 years, the share of US income going to labor rather than capital has declined from 64% to 58%. Among the 36 countries in the OECD, only three rank higher than the US on the Gini index of income inequality, based on after-tax income.

Unger’s explanation for these restrictions on the knowledge economy starts with the observation that the standardized, formulaic practices of industrial mass production are simply easier to spread from one place to another. Innovative, imaginative forms of work are harder to emulate because they “cannot, as mass production can, be reduced to a stock of readily transportable machines and procedures and easily acquired abilities.” The knowledge economy makes heavier demands on society to provide cultural and institutional support for economic growth and transformation.

What would it take to make the knowledge economy more inclusive? Unger identifies requirements of several kinds:

  • Cognitive-educational requirements include technical training that is not too job-specific, more emphasis on the imaginative side of the mind, in-depth study as opposed to “encyclopedic superficiality,” cooperative rather than authoritative learning, and discussion of contrasting points of view.
  • Social-moral requirements include more emphasis on the kinds of social interdependence that we more often associate with families, communities and churches, as opposed to the unbridled self-interest of traditional business. Social supports that could help compensate for greater flexibility of employment could include portable benefits that workers could take from job to job, or a “social inheritance” granted at birth, available to help finance human capital development and career transitions.
  • Legal-institutional requirements include new forms of coordination between governments and firms. The aim would be to help more firms acquire and use the new means of production, similar to how government helped small farmers in the nineteenth century with land grants, agricultural education and economic support. Analogous support today would include intellectual property reform to keep large corporations from monopolizing the ownership of online, user-generated data.

Unger advocates for a more vigorous democracy, since he sees today’s relatively weak democracies as too easily captured by powerful interests. He wants something in between the minimal government of laissez-faire capitalism and the more intrusive government of state socialism. A stronger democracy would respect and empower group differences, but also develop more rapid and effective means of resolving disputes among them. Otherwise, government may stand by helpless and gridlocked while the economy is generating undemocratic outcomes.

In the long run, Unger expects the emerging knowledge economy to support a more egalitarian society, recent trends in the opposite direction notwithstanding. He also expects it to ameliorate the chronic imbalances of economic supply and demand that create periods of recession and stagnation. He agrees with the Keynesian economists that supply does not create its own demand, and that there is no automatic connection between advances in productive capacity and the capacity to consume. That is the main reason for economic instability. A particularly innovative firm can expand a market by producing a product at lower cost, but that may not solve the problem of economy-wide aggregate demand.

Keynesian demand-side stimulus by government can help, through easy credit or “redistributive social spending.” Government can tax or borrow under-invested savings from the wealthy in order to boost spending and consumption for all. But even that may not be enough, if the problems of stagnation and inequality are severe. This is where Unger sees an institutional solution in the transition to the knowledge economy:

[W]e eventually come to a class of solutions that do expand demand by the same means through which they increase supply: an institutionalized broadening of access to the resources, opportunities, and capabilities of production. At this point, and only at this point, that which increases demand also increases supply. What the prevalent way of thinking supposes to be the natural state of economic life—the reciprocal accommodation of supply and demand—is in fact a characteristic of exceptional varieties of economic organization: those that have the property of breaching the limits of both supply and demand by equipping more economic agents with the means and occasions for productive initiative.

To make this more concrete, consider service workers whose means of production consist mainly of personal computers, software and skills, both cognitive and social. They are both workers and owners of capital, and their capital is intellectual and social as well as material and financial. Assuming they are providing a desired social service, they simultaneously produce something of value and generate income for their own consumption. Anything that increases their access to capital—broadly defined—helps them do so. The sharp division of owners and workers so typical of industrial capitalism—and so central to its inequalities and instabilities—starts to break down.

Unger accuses mainstream economics of a “poverty of institutional imagination,” the kind of imagination he associates with Adam Smith and Karl Marx. The most “fundamentalist” of economists defend the institutional arrangements that developed in Europe and America as part of the fixed laws of capitalism. Others are “agnostic” about such arrangements, limiting the subject matter of economics to what they think would be true of any market economy. Unger doesn’t want to defend or ignore institutions like property law and labor law, but instead bring institutional change back to the center of economic analysis.

In his final chapter, Unger discusses the “higher purpose” of making the knowledge economy more inclusive. The present economy is not only vulnerable to stagnation and growing inequality, but it also wastes human potential.

By condemning the vast majority of the labor force in even the richest countries, with the most educated populations, to less productive jobs, it also belittles them. It forces them to live diminished lives, giving inadequate scope to the development of their powers and to the expression of their humanity. To overcome the evil of belittlement through the transformation of workday experience is the higher purpose of an inclusive knowledge economy.

Keynes looked forward to a time when industrial productivity would eliminate scarcity and free people from the demands of work. That made sense at a time when highly productive manufacturing workers were demanding both good wages and a shorter work week. While some material things have become more abundant, Unger doubts that we could ever have enough of every marketable commodity. He points instead to the human capacity to keep finding new things to desire, especially in an economy that can offer more customized goods and services. Even if we limit our consumption of material things—and I expect limitations on natural resources to make us do so—I agree with Unger that “there is no limit…to our desire for service and attention from one another.” Instead of “freedom from the economy,” he looks for more “freedom in the economy.” This is consistent with his willingness to let the robots do the formulaic work, while humans devote themselves to the more creative functions.

Here are Unger’s closing thoughts:

As it deepens and spreads, the knowledge economy makes the practice of production more closely resemble the workings of the imagination….

Imagination is freedom because it is transcendence in the working of the mind. A form of production giving more space to the imagination than any previous practice of production ever gave represents an advance in freedom. It justifies the hope that we might find freedom in the economy rather than only freedom from the economy.

A knowledge economy in which many can take part does more than increase productivity and diminish inequality. It has the potential to lift us up together, to offer us a shared bigness.


The Knowledge Economy

March 23, 2021

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Roberto Mangabeira Unger. The Knowledge Economy. Brooklyn: Verso, 2019.

Roberto Unger is a Brazilian philosopher who has studied a wide range of disciplines. Here he sets forth his vision of the emerging knowledge-centered economy. I would describe Unger’s perspective as post-mechanistic in a double sense: He describes an economy that is moving beyond mechanized manufacturing as its core economic activity; and his conception of that economy emphasizes creative processes of institutional change rather than universal mechanical laws. That places him in the tradition of heterodox economic thinking, along with critics of capitalism like Marx and institutional economists like Veblen. The more orthodox neoclassical tradition tends to be less historical, assuming that capitalism works the way it does because of its conformity with timeless mathematically formulated laws.

Unger denies that there is any “natural and necessary way to organize a market economy,” or that capitalism is “governed by immutable regularities, like the ones studied as laws, symmetries, and constants of nature, by fundamental physics.” He calls institutional structures “artifacts” and “ramshackle constructions: the outcomes of many loosely connected sequences of conflict among interests and among ideas.”

How work is changing

Like Adam Smith in the eighteenth century, Unger wants to understand an emerging economy by focusing on its “most advanced practice of production,” or what he calls its vanguard. In Smith’s day, that was a rudimentary form of mechanized manufacturing. Today it consists of rapidly innovative, knowledge-based processes that continually alter the relationship of humans to nature and to one another. Unger says that “economic life has…always been a story of the troubled advance of the imagination,” but now that is becoming truer than ever before, applying across every sector of the economy from agriculture to hi-tech manufacturing to knowledge-intensive services. However, within every sector, the newest practices of production remain highly restricted—employing few workers, controlled by technological elites, and mainly benefiting a small number of global corporations. If we can extend those practices to more work processes, the emerging economy has the potential to alleviate two of the perennial problems of economics–chronic stagnation and extreme inequality. This potential:

…bears on our chances of more fully realizing in practice the ideal that commands the greatest authority in the world and the strongest kinship to democracy: the ideal of effective agency, of the ability of every man and woman to act upon the circumstances of his or her existence.

Unger believes that the best way to stimulate productivity is not just to automate production but to enhance the human ability to innovate and cooperate, which is the promise of a more “inclusive vanguardism.”

The typical work organization of the knowledge economy will differ from the classic industrial factory in many respects. It will engage in more constant innovation in both product design and methods of production. It will create more customized products without entirely sacrificing the economies of scale that come from producing many of the same kind of thing. It will encourage more worker initiative while maintaining teamwork and unity of purpose. It will stop sharply dividing workers into order-givers and order takers. Think of a team of software designers developing a new app, or a team of financial planners using such an app to generate customized financial plans for many clients.

Features of knowledge-intensive production

Unger goes on to discuss three deeper features of knowledge-intensive production that he expects to emerge only as it develops and becomes more widespread. The first is that the economy will be less constrained by the problem of diminishing marginal returns, the decreasing gains in output from increments of one factor of production (such as labor) when other factors of production (such as machinery) are held constant. That is less of a problem when constant innovation based on developing knowledge is upgrading the quality of labor and technology all the time.

The second feature is the closer connection between how people work and how they think. “Now it becomes more accurate to say that the growth of knowledge becomes the centerpiece of economic activity.” Here Unger’s philosophical background is on display as he distinguishes the human mind as a machine from the mind as more than a machine. The first aspect of mind is “formulaic”, operating under stable formulas or algorithms repeated over and over. The second is more imaginative, reacting against established modes of thinking and freely recombining old thoughts into new insights.

Under earlier advanced productive practices—mechanized manufacturing and its successor, industrial mass production—the worker worked as if he were one of his machines. His movements—in Adam Smith’s pin factory or Henry Ford’s assembly line—recalled theirs. The parallelism of worker and machine was more than a metaphor or a distant analogy; it was studied and codified by experts in industrial organization such as Frederick Taylor and offered as a practical guide to managers and foremen.

Under earlier advanced practices of production, we see the mind as machine…. [L]ittle by way of education was in fact required of the worker in the age of mechanized manufacturing and industrial mass production. What he needed was a disposition to obey, basic literacy and numeracy, and manual dexterity, especially hand-eye coordination.

The third feature of the knowledge economy is a relational change to produce more trusted and trusting workers. The factory system of production, with its order-givers and order-takers, has relied on strict managerial control rather than trust. Employees often act as adversaries of management, doing only as much as they are made to do, just like many students in factory-like schools. But workers whose knowledge and imagination are valued must be trusted to exercise discretion in support of the team objectives they share.

Working less or working smarter?

Unger’s conception of the knowledge economy relates directly to the debate over automation’s impact on jobs. In Rise of the Robots, Martin Ford warned of a “jobless future,” where so much of the work is performed by robots that masses of people are unable to find employment at all. They will have to rely on a basic income guaranteed by government, receiving “enough to get by, but not enough to be especially comfortable.” That sounds to me like a rather grim prospect, the ultimate devaluation of human labor by capital and technology. Unger sees a very different potential:

The fact that machines operate formulaically might suggest that their greatest value is to allow those who use them to operate nonformulaically. The users of the machines can then reserve their supreme, and in a sense their only, resource—time—to those activities that we have not yet learned to repeat and therefore to encode in a mechanical device….

The most effective use of these machines is their use by workers who do not work and think as if they were machines. The combination of the machine and the anti-machine—that is to say, the worker—is much more powerful than the worker or the machine alone.

As I discussed in my review of Carl Frey’s The Technology Trap, economists have done some detailed analyses of occupations and specific tasks to determine which jobs are most vulnerable to future automation. They have found that even many non-manufacturing jobs are at risk, especially in the areas of office and administrative support, production, transport and logistics, food preparation, and retail. But they have also found that the vulnerability to automation is much greater for lower-skilled, lower-paid work. If there is a new frontier for job creation, it probably lies in the area of skilled services. There technology can enhance human labor with less risk of replacing the human laborer.

While acknowledging that this has not yet happened on a large scale, Unger believes that the knowledge economy can make workers less dependent on large owners of financial capital and machinery, encouraging freer forms of work like self-employment and cooperating teams that pool their resources. Workers will rely on smart machines to do the jobs that can be reduced to an algorithm, but make creative use of those machines to produce what they can imagine.

Much of this may sound like pie-in-the-sky to someone working in a low-wage, uncreative service job. As I mentioned earlier, Unger sees the vanguard of innovative production as highly restricted within the current economy. I will elaborate on that problem in the next post.

Continued