Trade-offs between inequality, productivity, and employment
I think there is a tradeoff between inequality and full employment that becomes exacerbated as technological productivity improves. This is driven by the fact that the marginal benefit humans gain from current consumption declines much more rapidly than the benefit we get from retaining claims against an uncertain future.
Wealth is about insurance much more than it is about consumption. As consumers, our requirements are limited. But the curve balls the universe might throw at us are infinite. If you are very wealthy, there is real value in purchasing yet another apartment in yet another country through yet another hopefully-but-not-certainly-trustworthy native intermediary. There is value in squirreling funds away in yet another undocumented account, and not just from avoiding taxes. Revolutions, expropriations, pogroms, these things do happen. These are real risks. Even putting aside such dramatic events, the greater the level of consumption to which you have grown accustomed, the greater the threat of reversion to the mean, unless you plan and squirrel very carefully. Extreme levels of consumption are either the tip of an iceberg or a transient condition. Most of what it means to be wealthy is having insured yourself well.
An important but sad reason why our requirement for wealth-as-insurance is insatiable is because insurance is often a zero-sum game. Consider a libertarian Titanic, whose insufficient number of lifeboat seats will be auctioned to the highest bidder in the event of a catastrophe. On such a boat, a passenger’s material needs might easily be satisfied — how many fancy meals and full-body spa massages can one endure in a day? But despite that, one could never be “rich enough”. Even if one’s wealth is millions of times more than would be required to satisfy every material whim for a lifetime of cruising, when the iceberg cometh, you must either be in a top wealth quantile or die a cold, salty death. The marginal consumption value of passenger wealth declines rapidly, but the marginal insurance value of an extra dollar remains high, because it represents a material advantage in a fierce zero-sum competition. It is not enough to be wealthy, you must be much wealthier than most of your shipmates in order to rest easy. Some individuals may achieve a safe lead, but, in aggregate, demand for wealth will remain high even if every passenger is so rich their consumption desires are fully sated forever.
Our lives are much more like this cruise ship than most of us care to admit. No, we don’t face the risk of drowning in the North Atlantic. But our habits and expectations are constantly under threat because the prerequisites to satisfying them may at any time become rationed by price. Just living in America you (or at least I) feel this palpably. So many of us are fighting for the right to live the kind of life we always thought was “normal”. When there is a drought, the ability to eat what you want becomes rationed by price. If there is drought so terrible that there simply isn’t enough for everyone, the right to live at all may be rationed by price, survival of the wealthiest. Whenever there is risk of overall scarcity, of systemic rather than idiosyncratic catastrophe, there is no possibility of positive-sum mutual-gain insurance. There is only a zero-sum competition for the right to be insured. The very rich live on the very same cruise ship as the very poor, and they understandably want to keep their lifeboat tickets.
If insurance were not so valuable, it would be perfectly possible to have very high levels of inequality and have full employment. The very rich might employ endless varieties of servants to cater to their tiniest whims. They’d get little value from the marginal new employee, but the money they’d lose by paying a salary would have very little value to them, so the new hire could be a good deal. But because of the not-so-diminishing insurance value of wealth, the value of hiring someone to scratch yet another trivial itch eventually declines below the insurance value of holding property or claims. There is a limit to how many people a rich person will employ, directly or indirectly.
In “middle class” societies, wealth is widely distributed and most peoples’ consumption desires are not nearly sated. We constantly trade-off a potential loss of insurance against a gain from consumption, and consumption often wins because we have important, unsatisfied wants. So we employ one another to provide the goods and services we wish to consume. This leads to “full employment” — however many we are, we find ways to please our peers, for which they pay us. They in turn please us for pay. There is a circular flow of claims, accompanied by real activity we call “production”.
In economically polarized societies, this dynamic breaks down. The very wealthy don’t employ everybody, because the marginal consumption value of a new hire falls below the insurance value of retaining wealth. The very poor consume, but only the most basic goods. In low productivity, highly polarized economies, we observe high-flying elites surrounded by populations improvising a subsistence. The wealthy retain their station by corruption, coercion, and extraction while the poor employ themselves and one another in order to satisfy these depredations and still survive. Unemployment is not a problem, exactly, but poverty is. (To be “unemployed” in such a society means not to be idle, but to be laboring for an improvised subsistence rather than working for pay in the service of the elite.)
Idle unemployment is a problem in societies that are highly productive but very unequal. Here basic goods (food, clothing) can be produced efficiently by the wealthy via capital-intensive production processes. The poor do not employ one another, because the necessities they require are produced and sold so cheaply by the rich. The rich are glad to sell to the poor, as long as the poor can come up with property or debt claims or other forms of insurance to offer as payment. [1] The rich produce and “get richer”, but often they don’t much feel richer. They feel like they are running in place, competing desperately to provide all the world’s goods and services in order to match their neighbors’ hoard of financial claims. However many claims they collectively earn, individually they remain locked in a zero-sum competition among peers that leaves most of them forever insecure.
It is the interaction of productivity and inequality that makes societies vulnerable to idle unemployment. The poor in technologically primitive societies hustle to live. In relatively equal, technologically advanced societies, people create plenty of demand for one another’s services. But when productivity and inequality are combined, we get a highly productive elite that cannot provide adequate employment, and a mass of people who preserve more value by remaining idle and cutting consumption than by attempting low-productivity work. (See “rentism” in Peter Frase’s amazing Four Futures.)
One explanation for our recent traumas is that “advanced economies” have cycled from middle-class to polarized societies. We had a kind of Wile E. Coyote moment in 2008, when, collectively, we could no longer deny that much of the debt the “middle class” was generating to fund purchases was, um, iffy. So long as the middle class could borrow, the “masses” could simultaneously pay high-productivity insiders for efficiently produced core goods and pay one another for yoga classes. If you didn’t look at incomes or balance sheets, but only at consumption, we appeared to have a growing middle class economy.
But then it became impossible for ordinary people to fund their consumption by issuing debt, and it became necessary for people to actually pay down debt. The remaining income of the erstwhile middle class was increasingly devoted to efficiently produced basic goods and away from the marginal, lower productivity services that enable full employment. This consumption shift has the effect of increasing inequality, so the dynamic feeds on itself.
We end up in a peculiar situation. There remains technological abundance: “we” are not in any real sense poorer. But, as Izabella Kaminska wonderfully points out, in a zero-sum contest for relative advantage among producers, abundance becomes a threat when it can no longer be sold for high quality claims. Any alternative basis of distribution would undermine the relationship between previously amassed financial claims and useful wealth, and thereby threaten the pecking order over which wealthier people devote their lives to stressing and striving. From the perspective of those near the top of the pecking order, it is better and it is fairer that potential abundance be withheld than that old claims be destroyed or devalued. Even schemes that preserve the wealth ordering (like Steve Keen’s “modern jubilee“) are unfair, because they would collapse the relative distance between competitors and devalue the insurance embedded in some people’s lead over others.
The zero-sum, positional nature of wealth-as-insurance is one of many reasons why there is no such thing as a “Pareto improvement”. Macroeconomic interventions that would increase real output while condensing wealth dispersion undo the hard-won, “hard-earned” insurance advantage of the wealthy. As polities, we have to trade-off extra consumption by the poor against a loss of insurance for the rich. There are costs and benefits, winners and losers. We face trade-offs between unequal distribution and full employment. If we want to maximize total output, we have to compress the wealth distribution. If inequality continues to grow (and we don’t reinvent some means of fudging unpayable claims), both real output and employment will continue to fall as the poor can serve one another only inefficiently, and the rich won’t deploy their capital to efficiently produce for nothing.
Distribution is the core of the problem we face. I’m tired of arguments about tools. Both monetary and fiscal policy can be used in ways that magnify or diminish existing dispersions of wealth. On the fiscal side, income tax rate reductions tend to magnify wealth and income dispersion while transfers or broadly targeted expenditures diminish it. On the monetary side, inflationary monetary policy diminishes dispersion by transferring wealth from creditors to debtors, while disinflationary policy has the opposite effect. Interventions that diminish wealth and income dispersion are the ones that contribute most directly to employment and total output. But they impose risks on current winners in the race for insurance.
Why did World War II, one of the most destructive events in the history of world, engender an era of near-full employment and broad-based prosperity, both in the US where capital and infrastructure were mostly preserved, and in Europe where resources were obliterated? People have lots of explanations, and I’m sure there’s truth in many of them. But I think an underrated factor is the degree to which the war “reset” the inequalities that had developed over prior decades. Suddenly nearly everyone was poor in much of Europe. In the US, income inequality declined during the war. Military pay and the GI Bill and rationing and war bonds helped shore up the broad public’s balance sheet, reducing indebtedness and overall wealth dispersion. World War II was so large an event, organized and motivated by concerns so far from economic calculation, that squabbles between rich and poor, creditor and debtor, were put aside. The financial effect of the war, in terms of the distribution of claims in the US, was not very different from what would occur under Keen’s jubilee.
Although in a narrow sense, the very wealthy lost some insurance against zero-sum scarcities, the post-war boom made such scarcities less likely. It’s not clear, on net (in the US), that even the very wealthy were “losers”. A priori, it would have been difficult to persuade wealthy people that a loss of relative advantage would be made up after the war by a gain in absolute circumstance for everyone. There is no guarantee, if we tried the jubilee without the gigantic war, that a rising tide would lift even shrinking yachts. But it might very well. That’s a case I think we have to make, before some awful circumstance comes along to force our hand.
[1] It is interesting that even in very unequal, high productivity societies, one rarely sees the very poor reverting to low-tech, low productivity craft production of goods the wealthy can manufacture efficiently. One way or another, the poor in these societies get the basic goods they need to survive, and they mostly don’t do it by spinning their own yarn or employing one another to sew shirts. One might imagine that once people have no money or claims to offer, they’d be as cut off from manufactures as subsistence farmers in a low productivity society. But that isn’t so. Perhaps this is simply a matter of charity: rich people are human and manufactured goods are cheap and useful gifts. Perhaps it is just entropy: in a society that mass produces goods, it would take a lot of work to prevent some degree of diffusion to the poor.
However, another way to think about it is that the poor collectively sell insurance against riot and revolution, which the rich are happy to pay for with modest quantities of efficiently produced goods. “Social insurance” is usually thought of as a safety net that protects the poor from risk. But in very polarized societies, transfer programs provide an insurance benefit to the rich, by ensuring poorer people’s dependence on production processes that only the rich know how to manage. This diminishes the probability the poor will agitate for change, via politics or other means. Inequality may be more stable in technologically advanced countries, where inexpensive goods substitute for the human capital that every third-world slum dweller acquires, the capacity and confidence to improvise and get by with next to nothing.
Update History:
- 4-Aug-2012, 6:10 p.m. EEST: Thanks to @EpicureanDeal for calling attention to my abysmal use of prepositions. Modified: “we have to trade-off extra consumption
forby the poor against a loss of insurancebyfor the rich.” Also, eliminated a superfluous “the”: “The zero-sum, positional nature ofthewealth-as-insurance is..” - 8-Oct-2012, 1:20 a.m. EEST: “If there is drought
terribleso terrible”; “Perhaps this is simply a matter ofthecharity”
Mr. Waldman, “Distribution is the core of the problem we face. I’m tired of arguments about tools. Both monetary and fiscal policy can be used in ways that magnify or diminish existing dispersions of wealth.”
You are not tired of discussing tools. You refuse to discuss the core of the problem, which is the destruction of the regulatory regime that gave developed world workers pricing power to demand wage increases by economists pushing for world trade rules that allowed multinational companies to offshore jobs to low wage countries. And a one off debt forgiveness jubilee doesn’t fix things because in several years you’d be back to the same problem of excess debt because developed world workers would go back to borrowing more than they can repay. And permanent transfer payments from the rich to the poor are dissesteeming, so not politically acceptable. The only solution in terms of money and self-respect is reinstating protectionist polices to give workers pricing power versus workers in countries with lower wages, or a war killing large numbers of workers. But I don’t think economists want to discuss protectionism and autarky, or war. (WWII boosted US wages obviously by destroying large numbers of workers and plants outside the US.)
And Kalecki didn’t originate worries about people voting the fisc. People have warned about that for over 2,500 years.
July 31st, 2012 at 11:50 pm PDT
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How about status in addition to insurance, especially in societies where social status is more a matter of wealth than pedigree? Over the past several decades, wealth has become a much more important factor than pedigree for determining social status in the contemporary US. On the other hand, more recently insurance has come more to the fore and inequality widens and social unrest more prevalent. Other indications of this are the centralization and militarization of the domestic security force and the suspension of constitutional rights and civil liberties as the US slips further into the crypto-fascism of the right.
July 31st, 2012 at 11:51 pm PDT
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This is an interesting theory but it stands or falls on a very curious premise, namely that a large proportion of what actually existing rich people do with their wealth is buy, not just insurance, but insurance of an inherently zero-sum kind against absolute systemic scarcity. Where is the evidence for that claim? You assert it but don’t back it up.
I’m dubious in part because it does not appear at all true of the slice of rich people I know well, namely SF Bay Area/Silicon Valley techies. There is one big way in which they– well, we– do use our wealth for positional goods in inherently limited supply: we buy real estate in the Bay Area. But we don’t do that for insurance reasons, we do it because we want pleasant places to live near the jobs that enable our lifestyle. And our spending beyond that is driven by consumption goals that do employ people: we have nice houses built/remodeled on that inherently-scarce land we’ve competed for; we send our kids to private schools and hire nannies, cleaners, etc to make child-raising less onerous; we take elaborate vacations and buy early-adopter gadgets and eat at fine restaurants and amass collections of wine and custom-tailored clothing and so on.
I can testify that sustaining that lifestyle requires wealth well above the 1% threshold. So if you’re going to have a theory where rich people insuring themselves in zero-sum ways distorts the economy as you say, then you must claim that either:
1. most rich people use their wealth totally differently from the ones I know
2. the relevant definition of “wealth” starts far enough above our wealth level to make the class of relevantly rich people very small indeed, the 0.1% or less rather than the 1%.
Which are you claiming, and how do you support the claim?
July 31st, 2012 at 11:52 pm PDT
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Nicholas Weininger-
The part of wealth used for insurance is the part that is not consumed, but held in financial form. For the really rich — a status that indeed begins well above the 1% mark — this includes the vast majority of their wealth, only a small fraction of which is spent on consumption of any kind during their lives.
August 1st, 2012 at 12:52 am PDT
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A lot of this post is developing arguments that I have thought about vaguely but had not managed to put down anything like this clearly and coherently. There is one thing I’m wondering about, though. What about those low-productivity jobs? Are they really sales of labor just like jobs in the “core” sectors, just for less? Or are they actually just the general claim on the social product that we all get as members of society (our payment for consent, if you like), dressed up as if it were a payment for labor services?
August 1st, 2012 at 12:56 am PDT
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Meant to add, this post reminds me of this bit from Theories of Surplus Value:
The payments to the majority of the population for not rioting or rebelling look better if they are dressed up payment for our work as mistresses, grooms, jugglers … or yoga instructors. Of course in a differently organized world, we could dispense with most of these jobs and take the benefits of increased productivity in some combination of shorter hours for productive workers and a shift toward more intrinsically fulfilling (craft-like) forms of productive work.
August 1st, 2012 at 1:12 am PDT
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JW Mason–
But not all financial wealth is used for insurance purposes; some of it is amassed for direct future consumption needs, as when one saves for the down payment on a house; what is consumed may be leisure too– imagine someone saving up so they can take a sabbatical or retire early or “downshift”. And even the insurance portion of financial wealth needn’t all be of the zero-sum positional type.
But suppose some significant share of, say, the income of the top 0.1-0.2% of the population is directed this way. Per http://www2.ucsc.edu/whorulesamerica/power/wealth.html the top 0.2% get 13-16% of all income these days in the US (depending on year). This is a hugely disproportionate number in one sense, but it is still a smallish minority of all income, and it puts a limit on how much disemployment effect we can expect to see from the insurance-direction of some subset of that income.
Then, too, the increasing income of that tier is dominated by financial sector returns which reflect other economic distortions that hurt employment. So it’s not clear to me how you’d distinguish the hypothesis that increasing insurance-direction by the greatly enriched top 0.1-0.2% is hurting employment from the alternative hypothesis that financial sector rent-seeking is both hurting employment and enriching the 0.1-0.2%.
August 1st, 2012 at 1:58 am PDT
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[…] is a new post from the excellent Interfluidity. I read it as a version of Keynes’s chapter seventeen, where the demand to buy insurance […]
August 1st, 2012 at 2:01 am PDT
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But not all financial wealth is used for insurance purposes; some of it is amassed for direct future consumption needs, as when one saves for the down payment on a house; what is consumed may be leisure too– imagine someone saving up so they can take a sabbatical or retire early or “downshift”.
This kind of lifecycle saving plays no role for the rich. Their current income exceeds their consumption in all periods.
But suppose some significant share of, say, the income of the top 0.1-0.2% of the population is directed this way. Per http://www2.ucsc.edu/whorulesamerica/power/wealth.html the top 0.2% get 13-16% of all income these days in the US (depending on year). This is a hugely disproportionate number in one sense, but it is still a smallish minority of all income, and it puts a limit on how much disemployment effect we can expect to see from the insurance-direction of some subset of that income.
I disagree. All that is required is that expenditure by the rest of us be reasonably related to current income. In that case, we get a multiplier. And remember, even the worst recessions involve only modest falls in output. So yes, if wealth owners seek to divert assets equal to a point or two of GDP from production of goods and services to safer financial claims, that’s more than enough to cause a severe downturn and enormous misery.
August 1st, 2012 at 2:11 am PDT
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it’s not clear to me how you’d distinguish the hypothesis that increasing insurance-direction by the greatly enriched top 0.1-0.2% is hurting employment from the alternative hypothesis that financial sector rent-seeking is both hurting employment and enriching the 0.1-0.2%.
I think the second claim is really just a version of the first. As Mitt Romney would say, the financial sector is people; specifically the owners of financial assets, in whose interests it operates. The reason we have a financial sector, at the end of the day, is specifically in order to allow rich people to hold their claims on society’s wealth in the abstract form of money rather than as authority over specific production processes.
August 1st, 2012 at 2:14 am PDT
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[…] Trade-offs between inequality, productivity, and employment – interfluidity […]
August 1st, 2012 at 3:07 am PDT
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[…] Trade-offs between inequality, productivity, and employment – interfluidity […]
August 1st, 2012 at 3:32 am PDT
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Nicholas Weininger: I think Silicon Valley entrepreneurs (and employees) are in a special category, you may be rich in relative terms and still live a life that is essentially middle class – in the sense that you spend most of your income – due to real estate prices and generally high costs of living where you do. Real estate is ultimately driving it, I think – real estate is special in many ways.
Question is, how much do you save/invest without a clear plan for how you will spend it? Even I do that, so I’m pretty sure you do too. But when we do this, it seems to me we’re “buying” the sort of insurance Waldman speaks of. On a very modest scale, not really consciously. And obviously the wealthy – or more accurately, the upper class – do a lot more of it.
It’s not immediately obvious to me when and how it should be zero-sum, though. Why is this vague future insurance in limited supply?
August 1st, 2012 at 3:51 am PDT
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“…I think an underrated factor is the degree to which the war “reset” the inequalities that had developed over prior decades.”
Excellent insight! Kind of like the elite’s ant farm got kicked. Now we just need to reboot the HAL9000.
August 1st, 2012 at 7:53 am PDT
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I still stubbornly believe that a debt jubilee is not necessary. The rich do not have to give up their hoarding, they only need to allow lower income to create more affordable realities for themselves. Allow technology to give us simple and affordable living units that even a disabled person could put together or take apart. Allow people to utilize freed up land with portable infrastructures that can be remobilized as needed. Allow people to fashion the kinds of economies they actually want to take part in with one another so that they do not have to feel useless and constantly dream of escape. I will not give up on these dreams.
August 1st, 2012 at 8:42 am PDT
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The context: high income concentration causes growing saving glut which causes growing asset-price volatility which settles into stable stagnation?
Perhaps there are other important causes of the last three or four decades of the growing global saving glut. I nominate geopolitical competition among sovereign states combined with a single market system. Of course, because of bounded rationality, some states/nations will save more than others. Specifically, neo-mercantilist states/nations will save far more than neoliberal/supply-side states/nations. China or Japan vs. USA or UK, for instance.
Also, some national cultures/institutions constrain income concentration more than others. Perhaps some national populations are less desirous than others of disaster insurance? Or, given constant desires for insurance (which you seem to assume), some national populations have more solidarity (aka ethnocentrism) and, hence, more constraint on income concentration, than others. Japan or Germany vs. USA or Greece, for instance.
August 1st, 2012 at 8:43 am PDT
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Very good, thought provoking post.
My one objection is SRW’s false equivalence between monetary and fiscal policy. As with most instances of false equivalence, it lets him avoid an issue which might distract from the point he’s trying to make. But it’s false nonetheless. Monetary policy is a weak tool and in no way comparable to fiscal policy, as the WWII example makes clear.
As Winterspeak put it: “Monetary policy in general has no mechanism to clearly stimulate (or dampen) economic activity, therefore Monetarist are reduced to talking about magic (the Confidence Fairy) or dressing up fiscal policy and calling it monetary policy.” [Winterspeak – NGDP Futures: Fairies helping Goldman Sachs]
August 1st, 2012 at 8:56 am PDT
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Regarding the comment on WWII, the other obvious explanation is that with the destruction of industry in Europe (save Great Britain, though there was clearly damage there) and Japan, the US economy was not troubled by imported goods. We were also self-sufficient in energy. With what was essentially a captive market and a huge industrial machine that was cranking out planes, tanks, and other military equipment all that had to be done was to transition to consumer goods. Remember that most of the automobile industry was largely converted to military uses during the war (my dad was a project manager in the aircraft industry and part of his job was traveling around to other company plants to coordinate production schedules; antitrust laws were not a factor during the war!) . Pent up demand because of rationing translated to a lengthy consumer boom that started to slow down when imported goods became more available (and necessary in the case of oil).
August 1st, 2012 at 9:01 am PDT
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Great post, very thought provoking and useful as a counter weight to the unsubstantiated claims that wealth is only deferred consumption. Obviously deserves to be fleshed out with further research.
I’d add that the role of positional goods deserves some thought, for at least the near wealthy if we expanded the model to include more categories, which from a political economy perspective is, I think, important.
And on WWII, I’d add that that event could be thought of as the wealthy spending some of their insurance at least in the US and Britain, and undoubtedly a bargain at the price.
August 1st, 2012 at 10:09 am PDT
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Out of the park again, as usual. Great post.
On “risk”: I’ve been thinking of it more lately in the obverse, as certainty, and freedom.
We don’t just hold money to defer current consumption; we hold it to defer *decisions* about future consumption (and investment, and “saving”) until we know (better), have more certainty about, what the future holds. The ability to defer those decisions is freedom.
Apologies to Kris Kristofferson:
Freedom’s just another word for…having money.
August 1st, 2012 at 10:16 am PDT
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“Consider a libertarian Titanic, whose insufficient number of lifeboat seats will be auctioned to the highest bidder in the event of a catastrophe. ”
The Titanic was a libertarian Titanic, First class passenger survival right exceeded Second class survival rate which exceeded Third class survival rate. It was only after the Titanic sinking that it became a legal requirement for ships to carry enough lifeboat seats for every passenger.
As for what “enough lifeboat seats for every passenger” means in economic terms, FDR’s Economic Bill of Rights is as good as road map as any.
http://www.youtube.com/watch?v=effDfpKYcVo
August 1st, 2012 at 10:48 am PDT
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In addition to insurance, wealth buys social status. You can think of the yacht as a piece of insurance, but in the event of a catastrophe, the yacht is worthless. As are many other luxury items (paintings, mansion, fancy cars, etc.). In the event of catastrophe, the only real currency is the things people really need. All these things, then, are better understood as status signals.
I say this because social status, like insurance, is something that must be vigilantly guarded, and it flows according to a zero-sum game as well. So it works equally well to explain why you can never have enough wealth. In your titanic analogy, one replaces the number of life-boats with the number of desirable romantic partners, or the number of chairs at the VIP table.
I think your analysis still follows. The status currency of wealth is not just the things you own — the yachts and paintings and mansions etc. — it’s the things you can buy at a moment’s notice. This is how you “guard” your status. And so you’re hesitant to spend too much; you must keep a lot in reserve. (I concede that at this point, my comments are sounding like your insurance argument. But the context is different, I think.)
August 1st, 2012 at 11:26 am PDT
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Some interesting stuff, but the deeper policy implication is silly and wrong…
I typed it out before so I’ll not do it again:
http://pegobry.tumblr.com/post/21427545322/morgan-warstler-via-steve-randy-waldman
My Guaranteed Income plan to Auction the Unemployed puts 100% of marginal workers to work as any auction does, simply because the lowest price man week ($40), is low enough that virtually EVERYONE in the top 1/3 of the population can go acquire themselves all kinds of new low cost man servants.
And that is a the worst case scenario.
In reality we see how deeply wrong Waldman is because NEW FIRM CREATION, and thus greater incumbent turn-over, becomes incredibly easy when all talent is organized and tracked week by week.
So:
1. EVERYONE is employed by a bossy boss who seeks to maximize returns.
2. EVERYONE is terrified of being suspended from the GI plan for obvious worker laziness.
3. EVERYONE has their nut covered as long as they give it the good old man servant try.
And you gain greater incumbent turn-over, lower cost services for the poor and their communities.
Waldman hasn’t done enough hiring in ODESK, Craiglist, etc. or watch enough $1 auctions on Ebay to see how wrong he is.
We can have maximum productivity, enforced distibutism, fairer capitalism, and do it all by just offering a GI to anyone who agrees to honestly participate in the auction of their labor.
August 1st, 2012 at 12:09 pm PDT
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On other small quibble…
Positive rights are not endless and growing. In fact they are limited, no matter how great the “inequality” once the bottom has X,Y,Z – they are covered and the rest can move forward mentally and morally comfortable that they have no further obligation.
And every year, the cost of delivering X,Y,Z goes down.
August 1st, 2012 at 12:13 pm PDT
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Land is the ultimate positional good and generally not produced at all, so while you can put it as just wanting a nice place to live and household services being demand for labor, these pale in value to the wealth stored in land. As Karl Smith says, capital investment is land and structures, mostly land though. The less that is spent on everything else, the more that is spent on land.
August 1st, 2012 at 1:13 pm PDT
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“The Titanic was a libertarian Titanic, First class passenger survival right exceeded Second class survival rate which exceeded Third class survival rate. ”
->
This is false.
*Women* had a higher survival rate than *men*, and the percentage of women was higher in First than Second, and higher in Second than Third. That is why it seems that class was the primary factor in survival.
The Titanic is a prime example of male heroism, not of a society based on class.
http://www.anesi.com/titanic.htm
August 1st, 2012 at 1:37 pm PDT
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s Karl Smith says, capital investment is land and structures, mostly land though.
Karl Smith says that? That’s pretty smart.
August 1st, 2012 at 1:42 pm PDT
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This is a very stimulating piece SRW. Thanks for writing it.
I am hung about a bit on this idea:
If insurance were not so valuable, it would be perfectly possible to have very high levels of inequality and have full employment. The very rich might employ endless varieties of servants to cater to their tiniest whims. They’d get little value from the marginal new employee, but the money they’d lose by paying a salary would have very little value to them, so the new hire could be a good deal. But because of the not-so-diminishing insurance value of wealth, the value of hiring someone to scratch yet another trivial itch eventually declines below the insurance value of holding property or claims. There is a limit to how many people a rich person will employ, directly or indirectly.
Consider some population P consisting of all of those who own the resources for production and consumption. Assume that within that population P, ownership claims on that store of resources are distributed equally, or held in common. Assume all productive work is done within P by the members of P to satisfy the consumption desires of the members of P alone. Assume the work effort is divided up in some manner that seems equal and fair to all, and the productive yield is also divided up equally. There is some insecurity about the contingencies of the future, so the members of P work hard enough to produce a surplus, which we can imagine is either distributed equally among them or saved. So we start with an initial state of communism.
Now suppose the members of P are not satisfied. They have abundant unemployed material resources that are saved perpetually, and sometimes go to waste, not because of anxiety about the future, but simply because there are not enough total hours in their all too finite lives, given the constraints imposed by the size of P itself, to dedicate to the work that would transform these resources into valued consumable goods. If some race of magical beneficent gnomes would visit them, do work on these unused resources, ask nothing in return, and hand the product over to the members of P as a gift, the latter would all be delighted. If some of these gnomes could also sing songs, tell jokes, draw pictures of the Arcadian homeland of the gnomes, and play enchanting tunes on their little gnomish instruments, so much the better.
However, there is a limit to the amount of work the members of P would appreciate. Beyond a certain number of gnomes, and a certain number of gnome-hours of work on the unemployed resources, the members of P would reach a point of satiety. Even if the members of P were as gluttonous and lusty and sensual as human beings can be, they would eventually reach a point where they say, “OK, that’s enough gnomes.”
Let’s suppose now that the members of this society learn how to create real gnomes in a laboratory, at a tiny cost per gnome. These gnomes are not exactly magical. They do have to eat a tiny bit to subsist, and require some modest shelter to survive, but are energetic little workers who are put to work doing the kinds of work that the members of P intend for the satisfaction of their needs. The additional output is more than enough to provide for the meager subsistence needs of the gnomes themselves along with the substantial improvement in the well-being of the members of P.
The gnomes are weak and generally cheerful little creatures, but are capable of some resentment. So among the things the members of P direct the gnomes to do is build some security fixtures and weaponry to protect the members of P against possible future uprisings of grumbling gnomes. Also, because of this added bit of insecurity and anxiety in their lives, the members of P adjust their savings desires, and deliberately set aside some of the resources. They also see to it that the combination of gnome labor and their own labor generates a larger surplus than previously.
Still, the members of P are finite human beings, with finite lives and a finite capacity to enjoy goods. There is thus some optimal gnome population G such that there lives keep improving until they have produced G many gnomes, but once they have reached G, the costs of producing, sustaining and guarding against additional gnomes exceeds the benefits to be gained from having more gnomes.
Now suppose the methods the members of P use for producing gnomes are not exact. Sometimes more gnomes than are needed are germinated by accident. What to do with these extra gnomes? Well the additional gnomes are a security cost that in itself diminishes the standard of living for P. But these costs are very small, because the gnomes are so weak. And the costs can be minimized so long as the extra gnomes are not provided with a subsistence, which costs the members of P more than they benefit from any additional gnome output that exceeds the satiety level for P.
So it seems to me that even if the marginal insurance value of additional savings is vanishingly small, there is no guarantee in theory that a society run by the owners of the means of production and consumption will always find it useful to employ the entire population, no matter how greatly it exceeds P. For a given world with given resources, and a population P consisting of the controllers of those resources, there will be some optimal additional population G of non-controllers, such that if the population is P + G + X, then X people will be unemployed.
August 1st, 2012 at 1:46 pm PDT
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“Monetary policy in general has no mechanism to clearly stimulate (or dampen) economic activity, therefore Monetarist are reduced to talking about magic (the Confidence Fairy) or dressing up fiscal policy and calling it monetary policy.”
I agree with the spirit of this 100% — I’ve been blogging about the limits to monetary policy myself lately. But the quoted statement is too general. It really depends on the institutional and regulatory specifics of the financial system. When you have binding reserve requirements, as was true in rich countries through much of the mid-20th century, central banks do have pretty strong tools to control the general pace of credit creation. Where you have speculative asset positions financed by short-term borrowing, as in the early 20th century and again recently, monetary policy can have a big effect on asset prices. Etc. What is true is that monetarists almost always ignore the actual transmission mechanisms of monetary policy, and only talk about the Expectations Fairy (a relative or colleague of the Confidence Fairy, but not quite the same.)
Also, you know that “monetary policy doesn’t work” was the mainstream Keynesian position in the immediate post-WWII period, right? I have no problem with reviving the orthodoxy of 50 years ago — so much better than the orthodoxy of today — but I wish that MMTers would acknowledge that that’s what they’re doing.
August 1st, 2012 at 1:51 pm PDT
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Dan K. @28-
I think you are missing the point that lots of existing employment is completely unnecessary from a technical standpoint. It exists because useless jobs are more socially stable than either mass poverty or a social wage. All that matters, for the purposes of this post, is that expenditure on these useless tasks have a reasonably strong relationship with current income.
In the long run, work will be found for people along the lines of the Marx passage I quoted @6. (This is not true in poor societies, where a large portion of the poor engage in subsistence labor, of either the traditional or garbage-picking variety.) In the short run, employment will rise and fall as the rich feel a smaller or a greater need for the insurance-value of financial wealth.
In general, you should know that reasoning this stuff out from first principles for a world without money or finance, is not a reliable way to think about economics.
August 1st, 2012 at 2:00 pm PDT
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JW Mason, you say
“The reason we have a financial sector, at the end of the day, is specifically in order to allow rich people to hold their claims on society’s wealth in the abstract form of money rather than as authority over specific production processes.”
This is true only for a larger definition of rich people, and a larger set of uses of those claims, than you’re relying on elsewhere. Financial abstractions’ benefit does disproportionately flow to people near the top but it’s not even close to benefiting only 0.1%ers, much less benefiting only their hedging against supply shocks.
And that’s what this is really about, isn’t it? The claim is that we see increasing resources directed not to productive investment but to bidding up assets that will (or at least the bidders think they will) hold their value in the face of exogenous negative supply shocks. As Harald Korneliussen is I think implying, you need this distinction to make the mechanism of inherent limitation on that insurance (and thus rationing of it by price) work. I still haven’t seen on this thread any suggested empirical way of testing the claim.
But if you think it’s true, then presumably you should seek policy responses that make such assets less attractive/effective, and are also good on other efficiency grounds in case you’re wrong, no? Which might include:
— Georgist taxation to capture rents on inherently fixed-supply assets
— NGDP targeting to reduce cash hoarding during slowdowns
— Easier mechanisms for (full or partial) default on various sorts of debt, up to and including sovereign debt
So the tools do matter here.
August 1st, 2012 at 2:33 pm PDT
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JW Mason, I’m just trying to use a fanciful counterexample to provide a motivation for the hypothesis that it is not the insurance value alone of the savings of the wealthy that is responsible for unemployment, and that we could have unemployment even that insurance value were negligible.
Some might argue that if we could reduce the property insecurity and political insecurity of the wealthy, they would employ more people. And perhaps that is true. But it could also be true that even with negligible security concerns, the wealthy would not have the incentive to create full employment.
It is also worth entertaining the hypothesis that the insecurity of the owners of capital is itself partly responsible for employment. Given the concentrations of wealth that might prevail in a given society, it could be the case that the owners could achieve satiety with 20%, 30% or 40% unemployment, and only employ the rest because they have it in the back of their minds that if they don’t then hordes of the unemployed will show up with pikes and brickbats.
I agree that you can’t determine the answer to these questions in an a priori manner, but SRW is reasoning hypothetically from assumptions and general principles, and so I’m just suggesting an alternative possibility.
On the question of whether there is a significant amount of technically useless employment, I only partially agree with you. The world I see is one in which there is always far more useful work to be done than there are human-hours to do it. There might indeed be people performing worthless tasks, or tasks whose value is not equal to the value of the share of output they receive in return. But I see situations like this as cases of inefficiency and the waste of human potential, and a challenge for improved social organization.
I’m not a believer in the robot paradise vision of our technological future. Human beings are finite and mortal, but their ambition to enhance the length and power of their existence is effectively unlimited, and extends, so to speak, into eternity. I don’t think we’ll ever have a society in which we have substituted so-called “leisure” for most of our work. As we become more productive, that only frees us up to do new and different kinds of work that previously we couldn’t dream of doing, and to satisfy new desires that we create for ourselves in the process of progressing. If people figure out how to live to be 150, they will want to live to be 200. And they will want to then figure out how to preserve the vitality of youth further into the lifespan. They will want to enhance their knowledge and talents, and the brains they need for attaining that knowledge. My feeling is that there will always be a frontier of existing human capacity, and the process of extracting new kinds of value from pressing ourselves up against that frontier will always be challenging and onerous. Most of us will want to press on, and those who don’t will be compelled to follow to earn their living. In one way or another, the human project is a collective endeavor, and we demand from one another that everyone does a fair share of the total work effort in exchange for a fair share of the output of goods the society is generating.
August 1st, 2012 at 2:48 pm PDT
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What about the desire to pass wealth on to your children, or does the love a parent feels for a child not count in Steve’s bold, egalitarian utopia?
Collectivist schemes of all sorts took aim at the family.
August 1st, 2012 at 3:46 pm PDT
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On a sinking boat power not money (or insurance)decides.
In a famine power not money (or insurance)decides.
When a mob takes over, contracts whether comprising honour, love, respect, presteige, ect. are nil and void. I am sure the rich insure themselves against the mob somewhat. Is this a fight over the premiums?
August 1st, 2012 at 5:31 pm PDT
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On a sinking boat power not money (or insurance)decides.
In a famine power not money (or insurance)decides.
Of course. And under capitalism, power preeminently takes the form of money. 500 years ago, the rich would have been seeking to accumulate land and titles as their hedge against the unknown future. Which from the point of view of encouraging productive activity, was even worse.
August 1st, 2012 at 9:09 pm PDT
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“Why did World War II, one of the most destructive events in the history of world, engender an era of near-full employment and broad-based prosperity, both in the US where capital and infrastructure were mostly preserved, and in Europe where resources were obliterated?”
I think it is reasonable to argue that wars with population-wide conscription always shake up class hierarchies, for several reasons: because commitment and sacrifice is required from the entire population; because the experience of military service has elements of solidarity and classless meritocracy (think: the poor, foreign-born bastard Alexander Hamilton, rising to be aide-de-camp for General Washington); and because the scarcity of manpower on the homefront gives laborers enormously more bargaining power.
In addition to what SRW says, it seems notable that full employment survived for almost exactly a generation after World War II. I wonder if the idea that the “greatest generation” deserved a sort of war-service dividend had anything to do with it.
August 1st, 2012 at 9:17 pm PDT
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JW Mason (quoting Marx):
“Those two-thirds of the population consist partly of the owners of profit and rent, partly of unproductive labourers… It can be supposed that… these unproductive labourers will on the whole have a higher level of culture than the unproductive workers had previously, and in particular that ill-paid artists, musicians, lawyers, physicians, scholars, schoolmasters, inventors, etc., will also have increased in number.”
This is why it seems to me that the productive-labor/unproductive-labor categories of classical economics is complementary to Veblen’s categories of production/conspicuous waste. Employing a literate and cultured servant to waste time in the view of others may aid social cohesion (as you suggest), but the fact of their being cultured also vouches for the employer’s status.
August 1st, 2012 at 9:25 pm PDT
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Dan K.,
With due respect, I think you’ve taken a wrong turn here. It seem like you are trying to give a supply-based explanation of unemployment. I.e. how the allocation of some stock of productive resources by some decision makers could generate unemployment. But unemployment is strictly a phenomenon of aggregate demand. Unemployment as we know it is *not* characterized by exogenous factor supplies and Leontief-type production functions, where some factors are exhausted leaving an excess supply of their complements. Unemployment inn capitalist economies involves laid-off workers *and* idle factories; it involves unemployed construction workers *and* rising homelessness; it involves idle farmworkers and apples rotting on the trees. Unemployment cannot be explained without talking about aggregate demand anymore than financial crises can be explained without talking about money and credit. It exists only to the extent that income and expenditure are determined simultaneously.
Unemployment rises when planned money expenditure falls for a given expected money income; unemployment falls when planned money expenditure falls for a given level of expected money income. Conditions of production have no (direct) effect one way or the other.
it is natural to think of unemployed people as people not engaged in productive work. This is wrong. The two things have nothing to do with each other. Unemployed people are those whose usual or primary claim on the social product takes the form of a wage, but who are not currently receiving a wage. There are lots of people who do not receive wages but are not unemployed because they have other claims on the social product — children, retirees, students, caregivers, the institutionalized, etc. Almost all of tehse people are capable of productive work, and many are actively engaged in it — caregiving and other forms of household production are essential to society’s continued existence. At the same time, there many people who do receive wages but who are not engaged in productive work; we’ll define these as people whose employment is part of the consumption out of rents.
While there is no relationship between people’s capability for and/or engagement in productive labor, on the one hand, and unemployment, on the other, there is a close link between aggregate expenditure and employment, simply because a very large fraction of expenditure takes the form directly or indirectly of wages, and aggregate wages adjust mainly on the extensive rather than the intensive margin. So when we see people unemployed, we should never ask, why does the production of society’s desired outputs no longer require their labor input? That is a nonsense question that will lead nowhere but confusion. Instead we should ask, why has there been a fall in planned expenditure?
August 1st, 2012 at 10:11 pm PDT
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An ironic implication of SRW’s post is that agitators worsen their own conditions by increasing the value of insurance relative to consumption, thereby decreasing total output and thus employment. Were they to simply devote themselves to insisting on the integrity of property rights, and indeed believing in them with every fiber of their beings, then the need for insurance would go down and consumption (however marginally beneficial) should go up.
In any case, I worry that like so many of SRW’s blinding flashes of insight, this one proves rather too much. What is so special about this historical moment that means the cycle of the last three centuries ends here? I can’t really accept with a straight face the idea that our rich people have hit the wall in their ability to consume. For goodness sake, large scale ego-promoting redistribution of wealth is a whole new frontier of high-status consumption!
August 1st, 2012 at 10:55 pm PDT
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An ironic implication of SRW’s post is that agitators worsen their own conditions by increasing the value of insurance relative to consumption, thereby decreasing total output and thus employment.
Could be. Same way that successfully demanding higher wages sometimes deters investment and raises unemployment. (And sometimes has the opposite effect, of course — aggregate demand in capitalist economies can be either profit-led or wage-led.) Capitalism is a crazy, irrational system, and sometimes efforts to make things better within this system end up defeating themselves. So, we can give up. Or we can work for a better system.
What is so special about this historical moment that means the cycle of the last three centuries ends here? I can’t really accept with a straight face the idea that our rich people have hit the wall in their ability to consume.
I don’t see that implication in the post. Consumption has never been the purpose of wealth.
August 1st, 2012 at 11:01 pm PDT
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“The Titanic was a libertarian Titanic, First class passenger survival right [rate] exceeded Second class survival rate which exceeded Third class survival rate. ”
->
This is false.”
From your link…
“This method shows that the expected overall survival rate for first class passengers was 44.68%, for second class 40.46%, for third class 36.32%, and for crew 21.38%.”
So you mean its false in the sense that its actually true.
“The Titanic is a prime example of male heroism, not of a society based on class.”
Right, its merely a statistical anomaly that 100% of the children in First class, 100% of the children and Second class but only 34% of the children in Third class were saved.
“The International Convention for the Safety of Life at Sea (SOLAS) was established in 1914. It passes regulations that require ships to carry enough lifeboats for all those on board.”
http://www.telegraph.co.uk/travel/cruises/9017985/Cruise-ship-safety-timeline-of-disasters-and-safety-regulations.html
August 2nd, 2012 at 12:03 am PDT
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JW Mason,
I’m not sure whether I agree with you or disagree with you. I don’t know what a Leontif production function is so I don’t know what kind of supply side views you are attributing to me.
But first, I am just trying to engage directly with what I understood to be SRW’s argument. Maybe I misunderstood the argument. But I understood him to be arguing that unemployment can occur when the insurance value of surplus wealth grows to such a degree as to diminish the willingness of the possessors of that wealth to use as much of it as they were using before to employ others to perform some labor services for them. I don’t really disagree with this, but I was trying to make the point that – it seems to me – unemployment could also occur even if the insurance value of the surplus wealth is not high. The people who, in aggregate, own all of the resources that could be used either as inputs for production, or as something to be exchanged for labor services that accomplish that production, might simply lack the incentive to employ those resources in that way.
What are the causes of unemployment? It seems easier to me to ask, “What are the causes of employment?” Employment is caused by people who own various kinds of resources hiring others to perform labor services which transform those resources into something different – something such that the addition of value that is brought about is worth to the owners whatever they have to surrender to the laborers in order to obtain the labor. Unemployment is caused by potential employment not happening. Involuntary unemployment happens whenever the total number of people that the owners of resources are willing to employ is less than the total number of people who are willing and able to work – and I doubt we can give some single uniform reason why that sometimes happens. In a society based on private property, employment occurs at the pleasure of the owners of resources. People who own no resources can’t employ themselves.
Can a decrease in aggregate demand cause a decrease in employment? Sure, but demand is not just just desire, right? Demand for some collection of products depends for its existence on the existence of people who don’t just have a desire for that product, but have something to exchange for the product that the owner of the product views as worth obtaining. I assume that a change in aggregate demand can result from a variety of factor. People might become insecure and come to have more intense savings desires. Their tastes might suddenly change. Or the employers of labor might have collectively decreased the wages of their workers over time, so that the workers can no longer afford to buy as much of the output as they did previously – or at least are not willing to pay the same prices they paid previously. An unanticipated drop in aggregate demand will, I assume, lead to an initial surplus of output that either goes to waste or is sold at a loss, and if the producers expect the low demand to persist, that will result in a decrease in production and the laying off of workers. As Keynes argued, after that initial result happens, the economy can settle into a stable state of persistent unemployment for a long time – an equilibrium in which there is not full employment. At that point, I’m not sure it makes sense any longer to say that the problem is either an aggregate demand problem or supply probelm, since the new supply and demand curves are doing their thing, and there is an equilibrium.
Given certain kinds of systems of private property, with the possibility of very unequal ownership of the society’s resources, it is sort of amazing that there would ever be something close to full employment. But societies with persistent unemployment can employ more people if they manage to lay hold of enough power to command unemployed resources, and transfer some of those resources directly from their current owners to new owners. This readjusts the distribution of the power to produce along with the incentives to produce. The public itself, as a political body, might decide to transfer real resources to itself and become one of the producers. Or it could distribute newly created money – claims on future output, to redistribute purchasing power and accomplish some of the same effects.
I know its difficult to define employment and unemployment. Yes, people who would like to work in other circumstances are almost always doing something productive. Even if they are begging alms, or growing potatoes in the abandoned warehouse behind the box they live in, or gathering crabs and mussels on a public beach, that is a kind of labor that produces an income. Maybe everyone commands some resources. But I suppose we want to define unemployment in terms of the availability of work opportunities that provide an income that meets some minimal threshold of decency.
August 2nd, 2012 at 1:05 am PDT
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Steve,
it’s rarely that I disagree with what you write, but I do now. In my experience, “as consumers, our requirements are limited” is false. Few years ago I thought the same, but then I had a chat with a friend – who’s a reasonable person, not someone weird – and we were talking about new cars. I was wondering why he wanted to buy a new car when his “old” one was only two years old. He happily admitted he’d buy a new car every month if he could.
Of course, pushing ad absurdum he can’t buy continuously, but he can buy more and more expensive cars monthly – as long as there are more expensive cars, and I believe if there’s demand, there’d be supply.
Our _physical_ needs are limited. We can’t live in two appartnemtns/houses at once. We can’t consume more than say 20 kgs of food a day (most of us, anyways). Etc. etc. Where the unlimitnedss comes from is comparison. We compare ourselves to others – how big a house we have, how good a car, what education our children got etc. etc. On those, sky’s the limit, and it’s self-reinforcing. Ultimate measure is the size of bank account (so to say), but hardly anyone I know who I’d claim is “rich” is even remotely thinking about it in terms you describe (short of a few apocalypse-nuclear-war types).
The insurance you’re talking about is too rational – and as a rational measure, even that has at some stage only minimal marginal benefits. I don’t agree with your Titanic scenario – the rational behaviour there is to buy your own lifeboat (a different Titanic) before you board ;). Can you come with a more plausible scenario? Nuclear war – well, money is worthless there, it’s the shelter, guns and sustenance that count. Revolution? History shows that if you’re there, even if you squirreled some/most of your wealth away, it’s not going to help if you’re dead. Moreover, there’s only limited number of places you can squirrel reasonably safely (places, not assets!). If we’re all on a Titanic, and can never get off, where would your lifeboat take you, even if you were able to buy it?
Moreover, large number of very rich people have they wealth hugely concentrated, which again is the counterclaim to the insurance interpretation as opposed to the status.
The real problem with inequality I see in an entirely different place, and to an extent it’s irrelevant why the inequality grows as far as the consequences go – it can be insurance that drives it,or status, or combination, or something entirely different – I don’t believe for a second that we will be able to do something effective about the cause (on a timescale measured even in a few generations), since whatever it is, it’s deeply ingrained into us as humans (hey, we even haven’t figured out how to live in large concentrated societies well, and that’s been around for a few hundred of years now – still nothing to the thousands and thousands of years when we lived in groups where you knew everyone and their dog, not to mention that most of them were your distant family too).
Growing inequality implies that the richest accumulate wealth faster than the economy is growing (otherwise the inequality could not grow).
When the poorer ones grow less than economy, they can spend less (since it’s their spending that drives the economy), which means recession (growth of earnings can be initially replaced by credit, as we saw).
That in turn means the richest want to save more (they assets don’t perform as well as before, because the poorer aren’t spending) – for example by automation – which means that they still want to grow faster then economy and excerbate the circle.
Positive feedback. Which I still maintain is THE problem in any system that is not reasonably tied down by real-world boundary conditions, and no monetary system has that, and there’s no foolproof way of dealing with it.
August 2nd, 2012 at 5:19 am PDT
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Fantastic post, SRW. Here’s my meagre response:
If it were possible for returns on financial assets to become substantially negative, this could correct the imbalance between the value of keeping wealth for insurance or trading it for consumption. As the average preferences of the holders of wealth for insurance versus consumption vary (e.g. increasing preference for insurance as inequality or material well-being rises), the rate of return on financial assets must also adjust in order for there to be full employment.
But the rate of return on financial assets is ‘sticky’, which is created by a combination of the fact that currency is zero-interest bearing, the nominal value of existing financial assets and liabilities are usually fixed and higher inequality means it is harder to get the central bank to create inflation so the real rate can adjust – for exactly the kinds of public choice reasons you’ve explained here many times. (Or maybe they’re just a function of self fulfilling expectations as JW Mason argues here http://slackwire.blogspot.co.uk/2012/07/does-fed-control-interest-rates.html. Search me.)
I guess what I’m saying is… there is a price at which the market for lifeboats will clear (if there are 1000 places, it will be roughly equivalent to the wealth of the 1000th wealthiest passenger, one presumes) if the price mechanism functioned in the Econ 101 sort of way. If you were right in our previous discussion (http://www.interfluidity.com/v2/3310.html) and the ‘sticky’ price is that of financial assets and liabilities, then that could be the root of the tradeoff you are talking about.
August 2nd, 2012 at 5:37 am PDT
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Hi Steve,
Fascinating post. I’ve posted a few thoughts about it (http://www.mindfulmoney.co.uk/13347/knowledge-bank/are-we-stuck-on-an-economic-titanic.html) as I think it’s a very important discussion.
While your point on the rising value of insurance makes sense to me, I wonder whether the competitive impulse to ensure relative position among the wealthy might eventually reverse the process. If there is a perceived change in economic circumstances (due to unanticipated policy action for example) could it have a domino effect?
August 2nd, 2012 at 10:06 am PDT
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I guess you can build a Victorian mansion on quicksand, but in the end all you have is debris.
The fundamental error in this piece is a misunderstanding of the positive sum nature of most economic activity in relatively free markets. Once you start out that there are no Pareto improvements, the rest of your assumptions are going to be equally absurd. If voluntary transactions with division of labor are zero sum, then insurance is zero sum and next thing you have is rich guys bidding up the last, fixed quantity of lifeboats on Planet Titanic.
Yes, it all follows. Now the challenge… can you spot the foundational error?
August 2nd, 2012 at 11:27 am PDT
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I’d just like to note what happened in the late 90s long after Japan and Europe came online.
Greenspan allowed unemployment to get down to 4 percent and labor shared in productivity gains. I’ve heard that he eased interest rates in response to Russia defaulting at the time while many on the FOMC wanted to tighten. So we had labor gaining alongside productivity and an absence of the great bogeyman – for Kervick and the banksters – runaway inflation. Granted what followed was a stock bubble, jobless recovery, Bush tax cuts, expensive wars, epic global housing bubble, financial crisis and costly recession combined with tight monetary policy and job and budget cutting by states and localities.
August 2nd, 2012 at 3:06 pm PDT
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Steve,
This absolutely stinks of Puritanical implications that the rich are rich because they deserve to be, and the poor are poor by their own fault.
Ever hear of rent-seeking, bud? Feudalism (or neo-feudalism)?
Yes, societies have a duty to their poor, but it goes a lot deeper than keeping the riot police on the bench.
In fact, given that we’ve had so much “growth” over the industrial era and so little social advancement, I’ve become convinced the whole economic model should be thrown out.
Social justice appears to produce the greatest common welfare, independent of the level of aggregate output. And yes, I am talking about redistribution.
See Wilkinson’s Ted talk on this at http://blog.ted.com/2011/10/24/how-economic-inequality-harms-societies-richard-wilkinson-on-ted-com/.
Economics is [almost entirely] bunk, Steve. Examine your implicit assumptions. You’re back-sliding, my friend.
cheers,
Benign
August 2nd, 2012 at 4:28 pm PDT
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August 2nd, 2012 at 5:00 pm PDT
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Human Rights vs. Capital Rights: Why does capital get to keep the labor surplus. Why money before people, leading to great inequity? Stop with the incentive argument, how many billions does it take to motivate? We have pushed this argument to absurdity and doubled down with tax breaks.
Should labor be equal to all other inputs in production? Should labor be a cost driven down through any means used to lower other inputs?
The other side of labor, often glossed over or ignored, is that labor is the consumer after they leave the factory floor. This is a very special and critical dual role. The rich don’t create jobs, there simply aren’t enough of them nor do they spend enough of their wealth to significantly create demand. GulfStreams, mansions and yachts don’t cut it. Claims that unshackling entrepreneurs from government regulation and confiscatory taxes assumes there are customer to purchase these new products. We are discovering the obvious, without broad demand, there is no investment. US corporations are sitting on a couple of trillion in profits for which they can not find a decent return on investment.
The wealthy are sitting on the sidelines waiting for the consumer to return to the economy. But consumer’s day jobs fund their sideline consumer role. Driving down labor cost, denying labor the surpluses of its input have gutted the middle class and killed the great American consumer. We are all slightly richer buying lots of cheap junk from China but are poorer as a society as the cost of education and healthcare cannot be supplied by cheap labor in China. The US labor force’s skills suffer as individuals are finding it harder to invest and maintain themselves to earn higher wages. Societal values need to be on an equal footing with economic, otherwise we end up exactly where we are today with huge inequity and surplus capital sitting idle.
August 2nd, 2012 at 5:12 pm PDT
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Peter, I have never expressed fears about “runaway inflation”. I have only expressed skepticism about the ability of the Fed to “target” higher inflation, as well as some skepticism that higher inflation would have the salubrious effects inflationists think it would.
I have argued a few times that general price inflation hurts those at the bottom most, because they are the least powerful participants in the economy, and are unable to bargain for a wage that keeps pace with the price increase. Their bosses take advantage of the price inflation to reduce real wages of their employees. This is especially likely to happen when there is 8.2% unemployment and beleaguered workers have nowhere else to go.
I have also expressed skepticism about the spending effect that inflation is supposed to cause. I learned back in college that inflation was supposed to make people spend more quickly, to take advantage of the current value of their money before its value is eroded. That’s what a model based on ideally rational agents predicts. But I’m not persuaded that is what actually happens. I think many people subjectively interpret price inflation – correctly or incorrectly – as a decline in their purchasing power, and as a result they save more to guard against uncertainty extend their purchasing power further into the future.
Here is one paper that presents some evidence along those lines:
http://ideas.repec.org/p/nbr/nberwo/17958.html
August 2nd, 2012 at 7:36 pm PDT
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I wonder if the Titanic is not “good” society, and the fear not the fear of drowning in the Atlantic, but of being cast out of good society into…McDonalds?
August 2nd, 2012 at 10:45 pm PDT
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This post strikes me as very wrong. I am in the 0.1% crowd, having made my considerable wealth employing people. The way I generate my social status is to spend a lot of time with members of the other 99.9%. If I associate exclusively with the 0.1%, then, indeed it becomes a zero sum status game. But there are a lot of other worthy humans to associate oneself with, generate social status from. When I do that, I naturally have to part with enough of my own claims to make them respect me. Indeed, at that level, I don’t actually worry about their “market value” – a lot of my close associates I pay well over what their going rate would be. They in turn consume most of their income, which …
To put this in a nutshell, a lot of the 1% crowd could generate its own status from associating with enough quantities of the 99% (and that status-seeking inevitably means parting with some of the claims held as insurance) that the zero-sum game within the 1% is mostly avoided.
Experimental real world evidence suggests this happens. Consider the richest person in Indianapolis, Indiana. Is he comparing himself with silicon valley tycoons who are many times wealthier than him or is he seeking status with the world of Indianapolis? If it is the latter, I claim that a lot of that status seeking comes from employing people and making local philanthropic contributions.
So what is different about present circumstances that this effect is insufficient to generate full employment? Due to rampant financialism, we ended up concentrating too much of the wealth in a tiny elite all in a few zip codes around New York. The very policies SRW wants, like NGDP targeting and so on, would end up concentrating it even more. In effect, we have disempowered the local elite of Indianapolis and Cincinnati and concentrated that in New York City environs. This was *policy* not some natural process that led to this.
August 3rd, 2012 at 12:37 am PDT
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I am in the 0.1% crowd, having made my considerable wealth employing people.
Your employees made you rich, not the other way around.
The monetary value they provided for you was much greater than the pay that they received, with your profit being the difference.
The fact that you claim to be “very rich” as a result of employing them only means that you benefited much more from them than they did from you — at least financially.
You are, effectively, bragging about underpaying people. Now perhaps there was a huge market failure that caused them to be paid so little, and you were merely a price-taker in this market failure.
But in any case, the reason why you managed to get so rich was because of this market failure that allowed you to pay so little to workers that created so much value for you.
But perhaps they should be grateful to have jobs at all, right?
This post strikes me as very wrong.
Yes, I suppose it would.
August 3rd, 2012 at 4:38 am PDT
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RSJ,
In mutually voluntary actions, both parties can gain. Again, the misunderstanding of this fact is at the heart of the economic nonsense being discussed here.
Employers and employees cooperate together to cooperate with consumers. All parties gain. The concentrated gains of the employer are mirrored by the widespread gains to lots of employees and even more consumers.
This OP confuses static and dynamic systems and totally distorts economics as a zero sum game.
August 3rd, 2012 at 9:02 am PDT
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SRW, this chart may be of interest to you.
http://www.npr.org/blogs/money/2012/08/01/157664524/how-the-poor-the-middle-class-and-the-rich-spend-their-money
August 3rd, 2012 at 10:09 am PDT
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Roger
Economics IS a zero sum game, at least as its being practiced during this recession. Sure, during the boom everyone made more (the real workers a lot less of more than the owners) but somehow when the growth stops or slows down, every attempt at stimulus must be “paid for” with cuts from elsewhere, govts need to tighten their belts so private markets wont be crowded out and a suggestion to remove payroll taxes must be funded by dollar for dollar spending cuts else where. All currently practiced monetary paradigms are wed to old gold standard thinking which is DEFINITELY zero sum. Its you that is distorting things by claiming otherwise.
It is this zero sum thinking that is killing us too, as a monetarily sovereign state we actually can pay for all we want, its just fiat.
August 3rd, 2012 at 12:11 pm PDT
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“The marginal consumption value of passenger wealth declines rapidly . . . .” Well, only in ordinary scenarios. In the iceberg scenario, the consumption value of that marginal jot of wealth that puts you into the top quantile is *huge*. Your dichotomy between consumption and insurance is really between present consumption and possible future consumption. (By the way, the fixed number of lifeboats in your Titanic example makes it unrepresentative of realistic situations that call for insurance.)
Because the wealthy don’t immediately consume all they could (declining marginal value of consumption), they *save* (refrain from possible consumption) and *invest*. But this in no way prevents full employment. People get employed to produce capital goods instead of consumption goods (which, of course, makes it easier in the long run to produce consumption goods).
By the way, many middle class people, and even some of the poor, also save. But this is not a “problem”: saving doesn’t cause unemployment.
“[I]n societies that are highly productive but very unequal . . . basic goods (food, clothing) can be produced efficiently by the wealthy via capital-intensive production processes.” “By the wealthy?” How about all the workers (who are *relatively* poor) who are involved in the production of basic goods? And how about the workers who produce capital goods?
Are you thinking that the wealthy hoard money and near-moneys, instead of investing; is *that* the (supposed) problem?
August 3rd, 2012 at 12:55 pm PDT
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One of the greatest lessons in life that I’ve learned so far came from the band The Who, when they sang “Meet the new boss, same as the old boss”. I’ve never forgot what that meant. It means that we all have to figure out how productivity convergences actually work, and what they make possible for society’s greatest aspirations. People will have to learn this up close and personal, at local levels, on their own psychological terms, so that they do not have to be arbitrarily ruled, yet again. If not, people stand to lose knowledge, or technology, or the benefits of capitalism and the Industrial Revolution, or all of the above.
August 3rd, 2012 at 12:59 pm PDT
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JW Mason, You quickly accept that the truly rich are well above the 1% level. That’s important, because the “reduce/eliminat inequality / tax the rich” movement is aimed at a much larger tranche of society than that. Businesses and households earning above the (constantly declining) “millionaire” threshold (now somewhere south of $200,000, last time I looked) are by no means “rich” in the parts of the country where most of them live, and often have little or no “insurance” against even the consequences of government over-spending, never mind a larger social upheaval.
August 3rd, 2012 at 1:18 pm PDT
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In mutually voluntary actions, both parties can gain.
A strawman.
Of course both parties can gain.
But if only one party gets rich, then you are still talking about economic rents being extracted due to wages being too low.
The concentrated gains of the employer are mirrored by the widespread gains to lots of employees and even more consumers.
In an efficient market, the gains would not be concentrated.
The employer would be paid purely the wage for supplying management services in the form of labor, based on the amount of labor the employer supplied, just like anyone else.
Again, it was market failure that made them rich, specifically the case of labor being paid too little, and management being paid too much.
Or perhaps that is what is meant by “getting rich by employing someone”.
August 3rd, 2012 at 2:33 pm PDT
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The top 1% by income cutoff is about $380,000/year. The top 1% wealth cutoff is about $8.4 Million.
http://economix.blogs.nytimes.com/2012/01/17/measuring-the-top-1-by-wealth-not-income/
I think in both cases, they are “truly rich”, although the word “rich” generally refers to wealth and not income.
August 3rd, 2012 at 4:37 pm PDT
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to nicholas weininger–
i think your cadre of rich folks seems different to you because (I am guessing) they are young and have a strong sense they are invincible.
August 3rd, 2012 at 6:53 pm PDT
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To rsj
The employer will not employ without profits.
The employer will not work for wages almost by definition.
August 3rd, 2012 at 8:26 pm PDT
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Lenny,
Sometimes they do and sometimes they don’t. Whether or not an employer can earn an economic profit is a function of how competitive the market is and what rents there are to be earned. Sometimes there are no rents to earn.
No one is saying that the OP is a bad egg. Of course anyone in a position to capture economic rents should do so, partly because the process of exploiting economic inefficiencies makes the market more efficient.
But let’s all be clear that you do not become a member of the top .01% — which requires a net worth of hundreds of millions of dollars — simply by employing people. You become rich only because of your ability to exploit market inefficiencies. Others operating in a more competitive market will find themselves employing just as many people but not earning anywhere near as much.
August 3rd, 2012 at 10:23 pm PDT
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rsj,
Every single person who has worked for me did so voluntarily. I started with zero. Really zero. I worked hard, saved money, hired people, built product, sold product, made profit, employed some more people, built more product, rinse, repeat and after a couple of decades that took me to the 0.01%
The products I built made my customers more efficient or saved them money.
I am now using that wealth to leave a legacy – another thing that SRW forgets is that people like me realize we are not going to take it with us, so the only thing we can leave is a legacy. That’s how the greatest universities, hospitals, libraries and such were built.
The theory you propound – that my surplus came from “exploiting” that labor – is Marxism. That was what I escaped when I came to this country. My employees are thankful I came. They are wealthier directly as a result of the employment I was able to provide them. Yes, they made me very wealthy too. It is *not* a zero-sum game.
August 4th, 2012 at 12:18 am PDT
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The poor do not employ one another, because the necessities they require are produced and sold so cheaply by the rich.
So basically the poor in high productivity, high inequality societies have high levels of unemployment because they are satisfied with having very little. If that’s true, the rest of the arguments presented here are superfluous.
August 4th, 2012 at 1:03 am PDT
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[…] From Steve Randy Waldman’s wonderful Interfluidity […]
August 4th, 2012 at 1:53 am PDT
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Sid,
Marxism!
LOL.
I was wondering how long it would take you to bring it up.
Indeed, the theory is Marxism, as authored by David Ricardo.
A friend of mine is a Palestinian who owns a coffee shop. He makes $60,000 in gross margins per month. With about two full time employees, being paid the minimum wage (plus tips).
He understands very well that he is rich because he is exploiting a market failure, and not because he hires people.
You don’t get rich by making expenditures, but by earning revenues in excess of your expenditures.
I know another man (French, not a good friend) who became a multi-millionaire by hiring Mexican gardeners — also paying the minimum. There were a lot of businesses opening campuses in Silicon Valley, and there wasn’t a lot of landscaping firms at the time to service them. So he managed to hire an army of grass cutters, paid them the minimum wage, and made a bundle.
But he must also be a Marxist (after all, he is French!) because he would never say something so stupid as “I got rich by hiring people”. This was way before the Romney era, when the wealthy had to constantly give each other philosophical handjobs about being “engines” and “job creators”. There was no Interfluidity, either.
He understood he got rich because of a market failure — a large pool of wealthy tech companies that needed landscape work for which they were willing to pay large amounts, and a large pool of Mexicans who were willing to work for small amounts.
It was all a voluntary exchange and welfare enhancing. Us Commies have — what did Lech Walesa say? “The theoretical underpinnings” which allow for all these effects to coincide in a coherent model.
So me and my Marxist friends are still puzzled by your belief that you can get fabulously wealthy by hiring people as opposed to hiring them for far less than the value of the services that they provide for you.
And this Marxist Platoon leader is not at all surprised at being outed so quickly — dare I say efficiently — by such a self-made job creator who is fighting Marxists all his life.
It reminds me of the Seinfeld episode in which Jerry and his uncle Leo — who sees a anti-semite under every bush — are having lunch. Uncle Leo orders a well-done hamburger, but the waitress serves him one that is medium. Leo spits it out and (literally frothing at the mouth) shouts
“Jerry! That woman is an anti-semite!”
“Uncle Leo, all she did was serve you a burger!”
(sotto voce) “Jerry, you don’t just serve a medium burger.“
August 4th, 2012 at 5:11 am PDT
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[…] Steve Randy Waldman, “Wealth is about insurance much more than it is about consumption. As consumers, our requirements are limited. But the curve balls the universe might throw at us are infinite.” (Interfluidity) […]
August 4th, 2012 at 7:11 am PDT
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“If there is drought terrible so terrible that there simply isn’t enough for everyone, the right to live at all may be rationed by price, survival of the wealthiest. Whenever there is risk of overall scarcity, of systemic rather than idiosyncratic catastrophe, there is no possibility of positive-sum mutual-gain insurance. There is only a zero-sum competition for the right to be insured. The very rich live on the very same cruise ship as the very poor, and they understandably want to keep their lifeboat tickets.”
I’m dim witted and slow, and not getting the math here.
That’s impeding my understanding of the rest of the post.
“Zero sum” as in sum of what?
As opposed to “positive sum” of what?
What is the understood insurance policy payout in this zero sum or not zero sum game?
What is the premium for the policy?
Please rescue me from my darkness, because the rest of the post looks mighty interesting.
Thx.
August 4th, 2012 at 9:28 am PDT
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Rsj,
You are ignoring the positive aspects of the maket discovery process. The employer is not just a management service. It is also an experimentation, investment and risk taking process. Profits are the rewards for discovering new market efficiencies. It is entirely possible to risk a million dollars to experiment with a new service which employs a hundred employees, enriches dozens of suppliers and benefits countless consumers. Where successful, the entrepreneur can become incredibly rich by enriching other people.
The above model doesn’t assume “wages are too low.” Wages are set fairly by voluntary action within a world of supply and demand. Profits are set the same way. Over time, profits will attract more competition, in which case, profits will go to those able to deliver the service most efficiently.
You don’t seem to grasp how the pieces fit together dynamically.
August 4th, 2012 at 12:30 pm PDT
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rsj,
I exploited a “market inefficiency?” What market inefficiency does the iPad exploit? What market inefficiency does the Toyota Prius exploit?
There *was* no market for tablets or hybrid cars until these products came out. They truly *expanded* the supply of goods on earth, making it possible for people to enjoy those goods.
Travel to a third world country, a poor village, and see for yourself that no one “exploits any market inefficiency”. There is also not much of a market for anything – only endless toil for barely enough to eat. There is no thai food, no iPads, no lawn mowing, and of course, no market inefficiency to exploit either.
My own considerable fortune comes from expanding the range of goods available in a particular market, goods that the customers voluntarily bought in sufficient quantities to bring me fortune. I paid employees well with the proceeds, and kept the rest, now spending the rest on legacy-making projects.
This is what I said in my first comment: my type of thinking comes naturally to most people in my situation, provided they are surrounded by people who are not as rich as themselves (which is also the natural course of events in an economy). In SRW’s terminology, I am buying insurance by doing some good with my friends and neighbors, in my town.
Macro-thinking like yours with your impersonal “market inefficiencies” ( there has to be a market *first* for any inefficiency to exist) has done no one any good as far as I can tell. It is Marxism in its purest essence, and I say that with all the intellectual contempt I can muster at a doctrine which is directly responsible for so much human suffering around the world.
Let me issue you a challenge: go help a fraction of the 1000+ people I have directly helped before you lecture me on Economics. I say that with utter intellectual contempt for your type.
August 4th, 2012 at 3:59 pm PDT
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[…] Is a Running Off the Rails The missing millions of Kibera Hedges and the Monasteries, a Follow Up Trade-offs between inequality, productivity, and employment “Job Creators”: Luntz Strikes Again Share […]
August 4th, 2012 at 4:45 pm PDT
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I exploited a “market inefficiency?” What market inefficiency does the iPad exploit? What market inefficiency does the Toyota Prius exploit?
Manufacturing is subject to increasing returns to scale.
Moreover with China (where the iPad is made), you have financial repression allowing for extremely low rates of return — effectively a tax on consumption and a subsidy to investment, as well as foreign currency intervention, which allows the products to be supplied to Apple at below cost, or below the cost that would have been obtained had these interventions not happened. Japan has followed a similar policy, and of course they also outsource much manufacturing.
Let me issue you a challenge: go help a fraction of the 1000+ people I have directly helped before you lecture me on Economics. I say that with utter intellectual contempt for your type.
I thought it was a voluntary exchange. Now, it has become a gift? Did they not also help you by making you wealthy? If you claim some form of moral credit for hiring them, can they not claim the same credit for working for you? Should you not be grateful to them as much as you believe they should be grateful to you? Or perhaps it is best to leave talk of “helping people made me wealthy” out of the picture. This isn’t a creepy Hamptons Fundraiser, so let’s leave the incoherent propaganda out of it.
But I think this is exchange is important. I would not call it insurance, but wealth represents power, power to act. Consumption is not the only need that we have. When our wealth reaches the point where consumption is satisfied, other needs come to the fore. Often this happens much earlier. In afghanistan, men are willing to blow themselves up to prevent women from attending school. In the U.S. we fought wars over slavery, and store owners refused money offered to them by black patrons, because the notion of living in a world in which there were black customers hurt them more than the loss of consumption opportunities as a result of turning business away.
So we are not driven purely by consumption, but by a variety of factors. Whatever those factors happen to be, wealth allows us to act on them. Therefore there is a demand for wealth independent of consumption. The specific individual motivation is less important than the overall demand for wealth.
But in the market, it is one dollar one vote. In the U.S., with have 40% of the wealth in the hands of 1% of the population who are going to act (in the eyes of the euler consumption equation) irrationally in response to changes in interest rates or prices.
This poses a serious problem for attempts to model the economy according to utility maximization in which only consumption enters into the picture. At the same time, you have the bottom half of the public that is severely credit constrained. To them, credit is only available to purchase investment assets and is not available to smooth consumption at all.
So I think wealth inequality creates big problems in how we try to model aggregate behavior. What SRW is doing is adding another element to the utility function, and I think it makes sense to do so. From my reading, he is not actually trying to specify a formal insurance contract.
August 4th, 2012 at 6:12 pm PDT
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[…] interfluidity » Trade-offs between inequality, productivity, and employment […]
August 4th, 2012 at 8:48 pm PDT
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The following is a letter from the poor, to the middle and upper classes:
We implore you, to let us travel on a boat of a size and make better suited for us. There is no need for us to be sharing the lifeboats that you need on your own ship. We ask you to give us a chance to take care of ourselves, so that you no longer need be burdened with our cares as you struggle to tend to your own. If you would only allow us to do so, there is a good chance your own worries would not be so troublesome in the near future.
There are few among us who would live in squalor and disarray if we are given a chance to take care of our own survival – indeed there are plenty among us that would flourish. All we ask is that technology be freed to provide the simple living environments we need, so that we can concentrate on knowledge and skills. It has only been a few years since knowledge was viewed as the primary wealth, and we can scarcely understand how so many of you (already!) see it as inferior to land. The poor in spirit still want knowledge to be the guiding light for humanity. Let us build our own boat. Please.
August 5th, 2012 at 3:42 pm PDT
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Sir,
Thx a lot of this kind of brain stirring thoughts. Please allow me to try to prove you correct or incorrect.
– What you call ‘wealth insurance’ is not insurance in the sense of pooled funds to be distributed when needed. What you are referring to is simply ‘status preservation’. Check Ted Turner here. It’s very, very human. Poor guy, he’s got only a couple of billion dollars left.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=afyLWnoS2WlA
– Thx for the term ‘idle unemployment’. I was trying to come up with something like that, but couldn’t until………you did. Case study:
A family is composed of husband, wife, 2 kids. One parent manages to make 1 million dollars per year but the other makes not much. They see that it makes no sense that the other parent goes to work, hence the lower income parent stays home to raise the kids.
Question: Is the stay at home parent unemployed? Or in ‘idle unemployment’? I say, no. That parent is employed. What do you say?
– As to Distribution vs Poverty.
There was a time during ancient Greece peak, that poverty was classified as having only 2 (non greek) slaves. Nowadays, the so called “poor” in the west, have food and medical care guaranteed, use their cars to go to supermarket to spend from their Electronic Benefit Transfer cards or commonly known as food stamps in USA. All these “poor” people have fridges, washing machines, hence no slaves required to do anything.
Question:Where do you see poverty? Are you expecting the rich to donate their Ferraris and Lamborghinis?
– As to WW2
That war did not create anything, it only destroyed. The difference is that it destroyed everything somewhere else, but destroyed nothing in USA and Canada. The production structure not only remained intact but got developed even more to produce weapons. Naturally the people from the destroyed areas will come “begging” from the people that can still produce. It is this simple. War is simply a black hole. It creates nothing.
August 5th, 2012 at 4:11 pm PDT
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One more thing. In this age that has made anything available and in abundance (thx to Izabella Kaminska) due to technology and countries like China, South Korea, Japan, Germany willing to be world producers of anything, the field of Finance is simply trying to remain relevant or to use a very commonly used phrase, Finance employees are simply trying to remain ’employed’, just like government workers.
There is simply no need for them any longer, right now. They can no longer create artificial scarcity of a sustained period. Huge finance unemployment is coming our way.
August 5th, 2012 at 4:39 pm PDT
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test
August 7th, 2012 at 1:18 pm PDT
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“Distribution is the core of the problem we face. I’m tired of arguments about tools. Both monetary and fiscal policy can be used in ways that magnify or diminish existing dispersions of wealth. On the fiscal side, income tax rate reductions tend to magnify wealth and income dispersion while transfers or broadly targeted expenditures diminish it.”
Not if that means more debt (whether gov’t or private).
savings of the rich = dissavings of the gov’t (preferably with debt) plus dissavings of the lower and middle class (preferably with debt)
Imo, distribution and debt are a medium of exchange problem.
August 7th, 2012 at 2:41 pm PDT
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“On the monetary side, inflationary monetary policy diminishes dispersion by transferring wealth from creditors to debtors, while disinflationary policy has the opposite effect.”
What if prices go up, but wages don’t? How does that help workers with debt?
August 7th, 2012 at 2:45 pm PDT
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For JKH, SRW, or anyone else, let’s say I have a checking account at bank A and at bank B. I write a check for $100 from bank A and deposit it at bank B. How does that clear? Is it with $100 of central bank reserves or some other amount? Thanks!
August 7th, 2012 at 2:59 pm PDT
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Your general proposition about wealth-as-insurance sounds like a much more complicated form of a relatively a simple idea–basically, that people’s balance sheets should enter the utility function, which basically the same as saying people are averse to holding debt. I know from my research on college debt that there is a lot of empirical evidence for this. You basically combine that with Barro’s theory of disaster risk or “rare events,” though I don’t think this really adds much to the model. Also, as to the explanation of unemployment, this basically just sounds like classic RBC indivisible labor theory–you are basically saying that there are non-divisible costs (in the form of foregone insurance) that can’t be considered at the margin. In practice that just means that labor will only be hired in discrete increments, so I think the result would be analytically very similar to indivisible labor models (I have in mind the literature that sprang out of Hansen (1985) “Indivisible Labor and the Business Cycle”in JME), and I don’t really see how it leads to that kind inequality.
I’ve written briefly here on how including assets in the utility function can improve macro-models’ abilities to explain equity premia and other phenomena: http://hyperplanes.blogspot.com/2012/07/balance-sheet-recessions.html I don’t know how original the idea is though. I also hadn’t considered how it could relate to inequality.
August 7th, 2012 at 5:23 pm PDT
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[…] can only consume so much, but you can hedge against risk to an unlimited degree, and the ultra-wealthy do, suggests Interfluidity, and this makes a mess of a consumption-based economy when you get too much wealth concentrated in […]
August 7th, 2012 at 6:53 pm PDT
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[…] Inequality Damages Resilience Posted on August 9, 2012 by Michael Tobis • 0 CommentsA very creative and insightful piece by Steve Randy Waldman on income inequality makes the case that social resilience in a productive […]
August 9th, 2012 at 10:55 am PDT
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[…] Interfluidity on the Productivity Effects of Wealth as Insurance: Waldman is excellent and thoughtful, as always. […]
August 10th, 2012 at 9:33 am PDT
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[…] Trade-offs between inequality, productivity, and employment – Interfluidity […]
August 11th, 2012 at 6:30 am PDT
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[…] this case, the notion that wealth, in a basically post-scarcity environment, serves in part the function of insurance. Wealth is about insurance much more than it is about consumption. As consumers, our requirements […]
August 12th, 2012 at 7:28 pm PDT
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In case of a true fire or ship wreck if the CEO and mailroom clerk are treated the same in the rescue, then Capitalism survives. I think the mob only gets mad when the captain does not go down with the ship.
August 14th, 2012 at 2:57 am PDT
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Wasn’t a major point of the post that when the ship is sinking, the CEO and clerk are definitely not treated the same – hence the wealth as insurance argument?
I think the mob would be more mad that the captain hit the iceberg in the first place.
August 14th, 2012 at 2:16 pm PDT
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sorry, was trying to quote “In case of a true fire or ship wreck if the CEO and mailroom clerk are treated the same in the rescue, then Capitalism survives. I think the mob only gets mad when the captain does not go down with the ship.” in previous comment…
August 14th, 2012 at 2:16 pm PDT
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