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.

Interest rates and monetary policy

The most technical essay in the collection describes the “IS-LM” economic model, where IS stands for investment-savings and LM stands for liquidity-money. 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.

The first view of how interest rates are determined is the “loanable funds” approach. It says that interest rates are determined by the supply and demand of savings. The demand for loans by businesses and other borrowers tends to push interest rates up, just as the demand for any commodity tends to push up its price. The supply of money to lend by people with savings tends to hold interest rates down. The market strikes a balance between the two with interest as the pricing mechanism, just as buyers and sellers do when they negotiate a price.

The second view of how interest rates are determined is the “liquidity preference” approach. It takes into account another variable, the degree to which savers prefer to keep their savings in cash, despite its earning little or no interest, rather than buying interest-earning bonds. Liquidity is valuable to people who expect to spend their money in the near future. Interest rates on bonds have to be high enough to overcome this liquidity preference.

Can the two approaches be reconciled? Yes, because both the supply and demand of savings and the liquidity preference are related to the Gross Domestic Product. In theory, there is a level of GDP at which both approaches converge on the same interest rate. This is an equilibrium point where everything balances. From the standpoint of the loanable funds approach, GDP should vary inversely with interest rates. When GDP is high, so is national income, which increases the supply of savings available for investment and holds interest rates down. But from the standpoint of liquidity preference, GDP should vary directly with interest rates. A booming economy means that people are spending their money and therefore keeping a lot of it liquid rather than tying it up in long-term investments. Interest rates must be high enough to overcome that liquidity preference and reward those who do invest. There should be an equilibrium point for GDP where the inverse and direct effects offset and everything is in balance. Interest rates are both low enough to make loans affordable for borrowers and high enough to overcome the liquidity preference of lenders.

Graphically, the model is represented by two curves relating GDP and interest rates. The downwardly sloping IS curve describes the inverse relationship between GDP and interest rates. The upwardly sloping LM curve describes the direct relationship between the same two variables. “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.”

This model does not claim that the equilibrium point always represents a desirable state of affairs, such as full employment. Nations can and do make political choices that affect economic outcomes, for better or for worse. When an economy is in recession, a form of government action that most economists support is for the central bank to expand the money supply and keep interest rates low, making it easier for businesses to finance expanded production.

However, Krugman emphasizes the limitations of monetary policy in his many discussions of the 2007-2009 recession and the economy’s long recovery. Monetary policy becomes ineffective or even counterproductive once interest rates fall to near zero, as they did then and have done again recently. At that point, 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. The economy has too much idle cash that is being neither spent nor productively invested. 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 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, that 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 3 or 4%, even during an economic expansion. 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 attack deficits only when they are created by the opposing party’s administration.

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 debts 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.

To be 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 constant 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


Evicted (part 3)

March 1, 2021

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The renters studied by Matthew Desmond in Evicted had incomes so low that they were effectively shut out of the market for good housing. The sad fact is that they had to pay too large a portion of their income even to live in housing at the bottom of the market.

Making housing affordable

The United States does have programs that partially address the housing problem. About 15 percent of poor renters live in public housing, which has evolved from the high-rise towers of the 1950s and 60s to “low-rise, attractive buildings dispersed over several neighborhoods.” Another approach, serving 17 percent of poor renters, is a housing voucher that pays part of the cost of renting in the private market. In both cases, renters only have to pay a portion of the rent based on their income, such as 30 percent. These programs leave about two-thirds of the poor to fend for themselves.

In Milwaukee, Desmond observed some of the limitations of housing assistance. Many landlords, such as Sherrena, would not accept housing vouchers because they came with higher standards and inspection requirements they preferred not to meet. When they did take vouchers, landlords tended to charge more rent, adding to the cost of the program for taxpayers. Public housing often excluded the families that needed it most, since “Housing Authorities count evictions and unpaid debt as strikes when reviewing applications.” Families that did qualify faced waiting lists and delays that could go on for years.

Desmond recommends that the United States do what many other developed countries have done—adopt a universal housing voucher program. He describes it this way:

The idea is simple. Every family below a certain income level would be eligible for a housing voucher. They could use that voucher to live anywhere they wanted, just as families can use food stamps to buy groceries virtually anywhere, as long as their housing was neither too expensive, big, and luxurious nor too shabby and run-down. Their home would need to be decent, modest, and fairly priced. Program administrators could develop fine-grained analyses, borrowing from algorithms and other tools commonly used in the private market, to prevent landlords from charging too much and families from selecting more housing than they need. The family would dedicate 30 percent of their income to housing costs, with the voucher paying the rest.

The logic here strikes me as similar to that of the Affordable Care Act. On the one hand, we set housing standards, analogous to the minimum requirements of Obamacare insurance policies, such as coverage of pre-existing conditions. On the other hand, we provide housing subsidies for the poor, analogous to subsidies of health insurance premiums. If we only try to enforce housing standards without putting more money into the low-end market, landlords may choose to take units off the market instead of spending money on them. That aggravates the housing shortage and contributes to homelessness. Under a universal plan, landlords would be prohibited from evading the housing standards by discriminating against voucher holders. How much the voucher could be worth for a given property would have to be set carefully. Set it too low and the renter still cannot afford a decent place; set it too high and it subsidizes an overpriced or luxurious unit.

Desmond tries to answer some of the objections that taxpayers may have. Would it cost too much? Actually, only an additional $22.5 billion a year, which is much less than the cost of middle-class tax breaks like the mortgage-interest deduction. Would it reduce people’s incentive to work? That’s a more complicated question:

One study has shown that housing assistance leads to a modest reduction in work hours and earnings, but others have found no effect. In truth, the status quo is much more of a threat to self-sufficiency than any housing program could be. Families crushed by the high cost of housing cannot afford vocational training or extra schooling that would allow them to acquire new skills; and many cannot stay in one place long enough to hold down the same job. Affordable housing is a human-capital investment, just like job programs or education, one that would strengthen and steady the American workforce.

Human capital investment is an idea I take very seriously. Are we really strengthening our economy by making children live in substandard housing, in the hope that the deprivation will motivate their mothers to work more hours (probably in low-wage jobs)? Maybe that benefits low-end employers and landlords, but does it contribute to the future productivity of poor children?

Poverty and class consciousness

If poor renters are a disadvantaged class, why don’t they unite as a class, cooperating as a political force to support causes like affordable health insurance and affordable housing? Desmond discusses a few reasons why they don’t.

One reason is that they have more pressing things on their mind than political participation, like scraping together the money for next month’s rent. “Under conditions of scarcity people prioritize the now and lose sight of the future, often at great cost.”

Another reason is that substandard housing and other effects of poverty take a toll on psychological health. They make people feel worthless, defeated and powerless. That applies especially to families who have been stuck in poverty for generations, as opposed to, say, new immigrants who are experiencing more opportunities than they had in their country of origin.

A third reason is that American culture discourages the poor from thinking collectively. America is supposed to be the land of opportunity for any hardworking person of good character. Poverty is easy to associate with individual failure—laziness, immorality or poor decisions. The family stories Desmond tells intermingle social conditions and individual events, allowing us, if we choose, to focus on what individuals did wrong. Arleen shouldn’t have given up her rent-subsidized apartment to live with a friend. Crystal shouldn’t have gotten into fights with other tenants. Vanetta shouldn’t have stolen purses. Larraine shouldn’t have spent money carelessly. Lamar, Scott, Pam and Ned shouldn’t have become drug addicts. The American poor often blame themselves and one another for their problems, developing what Desmond calls a high tolerance for economic inequality and social injustice.

Desmond discusses housing segregation, but he has less to say about the racial divide in our politics. The black poor mostly support the political party that represents their economic interests. The white poor are strongly drawn to the party that appeals to white privilege and Christian conservatism, despite its greater opposition to anti-poverty programs. That makes it pretty hard for the poor to see themselves as a disadvantaged class and join together for their collective advancement. Hopefully, books like this can stimulate a national discussion that can help change that.