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Friday, August 23, 2013

Ryan Avent has some fun with Graeber.  Click for the article but here is a summary.

Graeber "The ruling class has figured out that a happy and productive population with free time on their hands is a mortal danger".

Avent (my bold)

"Employers had to retain such workers—had to pay them a wage sufficient to keep them on the job despite its dreadful tedium—because the machines of the era lacked the manual dexterity to complete the required tasks, and so a line of human machines was the only way to make the highly productive assembly-line system work. As technology evolved, however, automating routine tasks became ever easier. And the high wages needed to compensate labourers for the soul-crushing repetitiveness of their work gave employers every incentive to automate routine tasks as soon as it was technically feasible."

1) Graeber's "ruling class" is a mystical entity,the illigitimate child of the Zeitgeist and the species being.  But that doesn't mean there aren't a lot of bullshit jobs.

2) assembly line work is very boring. The wages were very high.  It is natural to guess, as you do, that the high wages were a compensating differential.  However, you don't have to guess. There is a huge literature which attempts to test your hypothesis.  Your guess is incorrect -- it is massively rejected by the data.  It is easy to see that high wages received by people without fancy degrees in manufacturing (especially heavy manufacturing)are definitely not just compensating differentials.  Such jobs are eagerly sought.  Quit rates are very low (note high wages because quit rates which are fine for other firms are too high for assembly line operations are *not* compensating differentials but rather efficiency wages).  I think it is safe to say that almost everyone who has studied the issue dismisses your compensating differential argument. The Chicago view is that the differentials are unobserved human capital.  The case against your hypotheis is so strong that the consensus that you are wrong is probably about as strong as the consensus that human activities contribute to global warming.  In any case it is a super highly studied issue and some familiarity with the massive Econmic literature might add to the value of The Economist.

Avent again

" How does the ruling class co-ordinate all this hiring, and if much of the economy's employment is useless in the first place why not just keep them on during recessions?"

3) You mock the idea that managers ever do anything which doesn't maximize profits and shareholder value.  This is a declaration of faith.  No one who studies actual firms believes this.  The profit maximizing firm is purely theoretical concept like an ideal gas of a frictionless system.  Another possibility noted by Northcoat Parkinson is that administrations tend to expand to fill the allowed space.  Again this is a testable hypothesis. If the managers are necessary, then firms making similar products will have similar numbers and there won't be a pattern of higher profitability of firms with a lower proportion of paper shuffles (really power point presenters) to production workers. That is you predict that GM and Toyota will be similar in number of layers of management and economic success.  Or how about Ford ?  When Iacocca left to save Chrystler a hated (and forgotten) Phillip Caldwell came and promtly laid of 30,000 headquarters staff.  What valuable management services did Ford then lack ? Which US car company didn't go bankrupt.
According to you the whole movement towards downsizing and delayering in the 90s was silly.  The layers and size are always presumably efficient.  The productivity growth, increase in accoutning profits and increase in market value must be an illusion (or maybe it was the Zeigeist doing it ?).

4. The pro market view is schizophrenic.  The presumptions is that people are the best judges of their own interest, that economic agents are rational (maybe not the full rational expectations) and that ordinary people are totally confused.  The workers who say they really really want manufacturing jobs don't know what's good for them. The workers who say their job is a waste of their employer's money don't either*.  The vast majority of the supposedly rational agents think you are full of it.  You argue that they understand the economy (needed for Pareto efficiency) and that they don't understand it at all.  Your argument is based simultaneously on self abasing esteem and utter contempt for the same set of people.  It is both conventional among economists and inconsistent.

* I am one of those workers.  But I don't suffer from the soul destroying tedium of doing pointless things.  I blog.

Thursday, August 15, 2013

Is there a Craig who own's Craig's list ?

Is there a Craig who own's Craig's list ?

This is an honest question.   If so,  why isn't he very rich ?  Classified ads were a huge cash cow for Newspapers.  The internet is killing them not because of say blogs, but because it is a better medium for classified ads (key word searches are much better than classification and why kill trees for something only a few people will read).  Importantly, there are huge network externalities in the classified ad biz.  One looks where there are listings and lists where people are looking.  But there is, as far as I know, no corresponding multi billionaire.  OK the is eMeg Witman, but eBay is odd.  No help wanted, no apartment for rent. I mean there are lots of things you can advertize but can't send in the mail.  So why ?

Look squirrel.

Pulled back from comments.  Hans Suter answers my question.  Craig Newmark doesn't seem to be interested in money.  The internet is vulnerable to infection.  Here a huge revenue flow seems to have been mostly destroyed by infectious non-greed.

Sunday, August 11, 2013

Ricardo and his followers

"Ricardo offers us the supreme intellectual achievement, unattainable by weaker spirits, of adopting a hypothetical world remote from experience as though it were the world of experience and then living in it consistently. With most of his successors common sense cannot help breaking in — with injury to their logical consistency." J M Keynes (1936) "The General Theory of Employment Interest and Money appendix to chapter 14).

With decades of effort, economists have managed to keep common sense from breaking in even when Ricardo himself couldn't.  Ricardian equivalence is a totally silly idea. Even Ricardo had enough sense to see that.  In this case he understood that actual real world economic agents weren't rational in the sense of having beliefs consistent with his model.

Numerous commentators over at Krugman's blog (link for a link and thanks) challenge Krugman's claim about the extreme implications of Ricardian equivalence.


Even leaving aside the implausible assumptions, what rational householder would plan present and future spending on the proposition that government debt must be repaid with future taxes? The United States has never paid its national debt and never will. It simply accumulates. Moreover, there is no discernible relationship between the level of taxes and debt. How is it rational to assume something will happen in the future that has never happened before?

However, the fact that the national debt never reaches zero and even the fact that budget surpluses are small and rare does not mean that there is no Ricardian equivalence  What would be needed is for the present value of debt at time t discounted to time now to not fall to zero as t goes to infinity.  So not the debt but the debt discounted to now.  That condition about the discounted value has to hold in models with a rational representative agent.  So it is a requirement of (foolish) consistency to assume it.

  • Done
  • Wisconsin
  • Verified

"is that even a helicopter drop of money has no effect in a world of Ricardian equivalence, since you know that the government will eventually have to tax the windfall away."
No. True helicopter money doesn't have to be taxed away. But even if it did, Ricardian equivalence has nothing to do with the hesitation of consumers to spend when given some extra cash.
This state is doubly wrong.
I reply
1) damn autocorrect and
2) We are commentino on Friedman Who (reasonably) calla the reduction in valute of money holdings due to inflation "inflation tax". With a helicopter drop either the economay stays in the liquidity trap forever or eventually the real balances reach the same equilibrium value so the added money exactly equals the present value of added losses due to inflation. Krugman did the math right (he tenda to).

my wife's iPad corrects my English to Italian. To tradurre

We are commenting on Friedman Who (reasonably) called the reduction in valute of money holdings due to inflation "inflation tax". With a helicopter drop either the economy stays in the liquidity trap forever or eventually real balances reach the same equilibrium value, so the added money exactly equals the present value of added losses due to inflation. Krugman did the math right (he tends to).

In reply to another comment about how money is not like bonds because it doesn't mature, I note that commenters think that Krugman solved a simple model with a representative consumer wrong over a decade ago and hasn't noticed the error nor has anyone pointed it out.  This is not likely.  Contemporary macroeconomists may have no common sense at all, but we can handle a bit of math.

Also Krugman has some common sense, but the point here is that he can do standard macro math.

Wednesday, August 07, 2013

A Perplexing Passage in Keynes II

David Glasner is perplexed by something Keynes wrote in The General Theory.  My main impression is that Keynes is quibbling with Fisher, because he was not pleased that Fisher thought of the Fisher effect before he did.  But Glasner is right that the two passages in The General Theory on the Fisher effect seem to contradict each other.  Briefly the issue is whether investment depends on the nominal interest rate or, as Fisher argued, on the real interest rate.  In chapter 17 Keynes agrees it depends on the real interest rate but insists on a mysterious distinction between existing and newly built capital.  The strange passage seems to argue that expected inflation must be zero or constant or maybe that the real interest rate must be zero or maybe that it is constant.  In short it is hard to understand.  The passage

The expectation of a fall in the value of money stimulates investment, and hence employment generally, because it raises the schedule of the marginal efficiency of capital, i.e., the investment demand-schedule; and the expectation of a rise in the value of money is depressing, because it lowers the schedule of the marginal efficiency of capital. This is the truth which lies behind Professor Irving Fisher’s theory of what he originally called “Appreciation and Interest” – the distinction between the money rate of interest and the real rate of interest where the latter is equal to the former after correction for changes in the value of money. It is difficult to make sense of this theory as stated, because it is not clear whether the change in the value of money is or is not assumed to be foreseen. There is no escape from the dilemma that, if it is not foreseen, there will be no effect on current affairs; whilst, if it is foreseen, the prices of existing goods will be forthwith so adjusted that the advantages of holding money and of holding goods are again equalized, and it will be too late for holders of money to gain or to suffer a change in the rate of interest which will offset the prospective change during the period of the loan in the value of the money lent. For the dilemma is not successfully escaped by Professor Pigou’s expedient of supposing that the prospective change in the value of money is foreseen by one set of people but not foreseen by another. (p. 142)

I think I've got it ! I will comment before I think again and realise I am confused.  I think the whole passage says that expected inflation and changes in expected inflation do not create arbitrage opportunities.  It doesn't say that changes in expected inflation are impossible or that they don't have real effects.

First my confusion.  I had thought that "the prices of existing goods will be forthwith so adjusted that the advantages of holding money and of holding goods are again equalized," was presented as a proof that expected inflation is impossible in equilibrium.  This would obviously contradict the discussion in chapter you note.  But now I think it just means that neither expected inflation nor a change in expected inflation creates arbitrage opportunities.

Note the conclusion "the advantages of holding money and of holding goods are again equalized" is just saying "no arbitrage opportunity is created".  Here in chapter 11, Keynes doesn't explain how they are equalized.  In particular, he does not assert (as he seems to assert) that the real interest rate must be zero, nor that it must be constant.  Now one of his eccentricities was in denying that the distinction between fixed capital  and other goods was fundamental.  The existing goods might be say a factory and "holding goods" might mean buying the factory or a share of the factory or a share of the firm that owns the factory.

There is no discussion of the advantages of producing new "goods" including new factories, that is of NIPA fixed capital investment.  I think the passage amounts to the claim that inflation does not create an arbitrage opportunity to profit by borrowing nominal and buying stock or a commodity and storing it.  Again in chapter 17 Keynes stresses that the way that expected inflation affects NIPA fixed capital investment is by affecting the value of the newly built capital  and not by affecting the return on the purely financial strategy of buying already existing capital.  The two passages taken together hint at the Q theory of investment and, in modern terms Keynes is saying Q is equal to 1 plus marginal investment costs.  It varies, for example if the nominal interest rate is constant and expected inflation varies,  but r- Qdot/Q equals the marginal product of capital so there are no arbitrage opportunities.

My problems with "My Milton Friedman Problem"

David Glasner
argues that Milton Friedman was too a closet Keynesian.  He generally criticizes Friedman but, to be sure, makes some concessions to Friedman's many admirers (from both sincere belief and the aim for Ballance I'm sure).

He basically says that Friedman used an IS-LM model augmented with the Fisher effect and a critique of the hypothesis that there could be a liquidity trap.  The critique is based on the Pigou effect (see post above).  Also Friedman attempted to develop a theory of the determination of the price level.  In this post Graeber correctly notes that he is describing things in Friedman's work which aren't in Hicks's paper on Keynes and the classics.  All but the Pigou effect are in the General Theory  (Keynes admitted that he hadn't gotten anywhere useful in his efforts to understand the price level, would that Friedman had been so modest as hey got to the exact same place).

I comment

I'd be very interested to know if anyone can find anything written by Friedman about unemployment and inflation which isn't there in Samuelson Solow (1960).  In contrast, Samuelson and Solow (1960) note that cyclical unemployment can become structural.  Friedman ignored this possibility in 1968.  It was quite a hot topic in 1985 when OJ Blanchard and Samuelson's nephew dusted off the concept and named it "hysteresis".

Solow and Samuelson (in the famous paper 1960 in the AEA papers and procedings) argued that there can't be a liquidity trap due to the Pigou effect.  Like Keynes, they argued that depressions  couldn't last forever.

The Friedman Samuelson Solow Pigou effect argument against the liquidity trap depends entirely on the undefended and indefensible assumption that the marginal propensity to consume out of wealth is higher for nominal creditors than for nominal debtors.  This silly idea is possible if one first simplifies by assuming there are two agents -- the public sector and the private sector.

Also the Pigou effect depends on assuming Ricardian non equivalence.  Friedman asserted both that Pigou's argument against the liquidity trap is obviously correct and also that "to spend is to tax." I am sure that he was smart enough to notice the contradiction.  I think he chose not to mention it because of intellectual dishonesty.

What Killed Theory

Noah Smith notes that the status of theory within economics has declined dramatically.  He gives the credit to psychologists.

Krugman has thoughts.  He finds two problems. First modern theory has no implications.  It turns out that the implications of old theory came from the simplifying assumptions made to achieve closed form solutions and that, with new mathematical tricks, it is possible to make a consistent model (with fully rational agents) which does anything one wants it to do.  This should have been obvious to everyone to begin with (in the 80s it certainly seemed obvious to me).

He writes "After a while, the new approaches came to seem tooliberating; by the early 90s the joke was that a smart graduate student could devise a model to justify any policy."  

The joke predates the early 90s.  Some time before 1989 in a chinese restaurant at around 1050 Mass avenue Robert Barro said, and I quote, "isn't there an existence theorem somewhere that there is a second best argument for anything"

Second Krugman notes that modern macro theory, in particular, has great difficulty avoiding plainly false implications.  I think these two cases are really similar and commented.

In macro anything is possible too.  One bit of macro theory which never became popular is sunspot macro, in which fluctuations occur for no good reason.  In contemporary macro assumptions are made so that equilibrium is determinate.   I think the cases of macro and trade are more similar than you imagine.

I would place Lucasian macro about like Samuelsonian trade theory.  Models with solutions with implications which are grossly false. Macro was liberated by imperfect competition and spillovers too (I'm thinking mostly Jess Benhabib and Roger Farmer but really a lot of stuff which hardly anyone ever read).  It's just that you are one of that very vast majority of people who never found liberated macro the slightest bit interesting.

Another thing, what about numerical methods ?  Macro was totally taken over by computer simulations.  This liberated it (so that anything could happen) but also ruined the fun. When computers were new and scary, simulation based macro was scary and high status.  When everyone can do it, setting up a model and simulating just doesn't demonstrate brains as effectively as finding one of the two or three special cases with closed form solutions and then presenting them.  Also simulating unrealistic models is really pointless.  People end up staring at the comuter output and trying to think up stories which explain what went on in the computer.  If one is reduced to that, one might as well look at real data.  Models which can't be solved don't clarify thought.  Since they also don't fit the data, they are really truely madly useless.

Monday, August 05, 2013

Peak Stupid ?

Is it possibile that the stupidist think ever written on the internet has been found ? Is there leak stupid .  Mix ing. Metaphor is there a bottom of the intellettual barrel.  It cannot be'.  How ever, i am aware of all internet traditions and I approve this message 

Saturday, August 03, 2013


I coulda been rich if I had thought of this 250 years ago.

There once was the problem of measuring longitude which attracted the attention of the greedy in 1714 when Parliament promised a huge prize.  In 1714 they could tell their latitude by seeing how high the sun got at high noon (a minor cost was navigators all ended up blind in one eye from looking at the sun).  They couldn't tell their longitude by measuring when noon occured and contrasting it with the hour of noon at say Greenwich, because they didn't know what time it was.

The problem was "solved" (to the satisfaction of George III who personally intervened) by John Harrison who made clocks which kept good time for months at sea.  I use scare quotes, because when I say "clocks" I really mean "3 clocks" and a fourth would have cost a fortune to make (he worked on each for years).  The real practical solution was to figure out which stars are blocked by the moon as a function of time (and latitude ouch).  This produced a method based on ink on paper star charts which could be reproduced at low cost.

Once there were two huge clock problems.  The first is that clocks used pendulums so they didn't work on rocking  boats.  This was solved by Huygens et all who invented the main-spring (a coiled spring which oscilates horizontally and isn't much affected by gravity -- the way watches worked when I was a boy).  This lead to the second  problem which is that the period of the spring depended on the termperature.

Harrison had solved this problem for a pendulum clock.  He made a zig-zag pèndulum of copper and zinc one horizontal and one diagonal.  One expands more with temperature.  The height of a zig (or zag) depends on (diagonal squared minus horizontal squared (citation of Pythagoros needed).  The derivative with respect to temperature is 2(horizontal length)^2(expansion constant of the horizontal) - 2(diagonal lenght)^2(expansion constant of the diagonal).  With the right angle of the diagonal that would be zero at room temperature.

This trick is much more useful than the pendulum clock which isn't affected (to first order) by temperature.  It is the way thermostats work (well again in my childhood -- I have no idea how they work now).  If you have zink and copper strips stuck together at one end then the direction the thing points depends on the temperature.  Harrison accidentally invented a new thermometer. More usefully that direction could determine whether, say, the copper touched another conductor and completed a circuit.  Back in the 18th century, it might be necessary to have a person look and turn a flame off and on.

But you see that's it.  The problem can be solved by keeping the clock a constant temperature.  They didn't have refrigerators back then so the temperature would have to be fairly hot (over 100 F if one wanted to navigate the tropics).  Now this could probably semi work with a constant flame which the copper zink thingy moved closer to and further from the clock (with adjustment by hand occasionally).

Now this approach would require a person basically to work full time as time keeper (ok 2 or 3 people in shifts).  but it was better than waiting a decade for Harrison to make another temperature invariant clock.

Also, by the way, they could have made decent maps. The problem always was keeping time when at sea, that's when they wanted to know their longitude.  On land, they already had a good clock based on the work of Galileo. They could tell what time it was in Greenwhich by looking when moons of Jupiter appeared from behind Jupiter.  They couldn't keep a telescope pointed at Jupiter when at Sea, but they could have used this to find out where they were when they landed.  They didn't.  Old maps don't look at all like the territory, because they often had longitude off by several degrees (so hundreds of miles).