Sunday, December 16, 2012
MOVED
I've moved the site to potential economics dot com! New name, new color scheme, same mildly interesting content. Please update your bookmarks and/or feeds. I promise I'll make it worthwhile.
Saturday, December 1, 2012
Friday, November 9, 2012
Panacea Failure
I wanted to share this excellent bit of reporting I came across in the Washington Post a few weeks ago. The original, longer article was done by ProPublica, and I would recommend it if you have time. If not, the shorter Post version should not be missed.
The article is important because it opens up a black box of questions that economists and politicians typically wave away or plaster over with assumptions. Most importantly, many economic models of trade trade and technological change assume "full employment". When economist talk about the "gains from trade", these 'gains' ignore potential losses from unemployment. Or put differently, when someone is laid off because their employer cannot compete with cheaper imports from abroad, these models assume they can instantly find another job. This assumption is valid in some situations, for example when there is high growth in other industries. But in other situations it is absurd on its face. Economists, however, rely on it because modeling the impact of trade on economies without it becomes extremely difficult.
A second, related assumption is that workers are able to move up the "value ladder" to find better-paying jobs than the ones they lost. Or that if this does not happen, then at least the country overall will be richer and the workers benefit via Trade Adjustment Assistance or some similar redistributive program.
A final reason these results are so alarming is that education is a basically the economic policy prescription of last resort. How do we compete with China? More STEM education. How do we get out of the recession? Go back to school to be more competitive. If nothing else is working, policymakers often turn to education and "skills" as the way to appease the market and bring about that illusive world where there are enough jobs and inequality is not spiraling out of control. Education is important, no question, but it should not be the only leg we attempt to stand on.
The Janesville study is an airhorn in the ears of anyone resting peacefully in these assumptions. It is not a perfect study; in fact there plenty of reasons to question the results, many noted by the authors themselves. But its results are so perfectly antithetical to common assumptions about retraining, employment, and competitiveness as to call into question the models that led us to those assumptions. We have to ask: what is the point of economic ideas that give results like these?
The article is important because it opens up a black box of questions that economists and politicians typically wave away or plaster over with assumptions. Most importantly, many economic models of trade trade and technological change assume "full employment". When economist talk about the "gains from trade", these 'gains' ignore potential losses from unemployment. Or put differently, when someone is laid off because their employer cannot compete with cheaper imports from abroad, these models assume they can instantly find another job. This assumption is valid in some situations, for example when there is high growth in other industries. But in other situations it is absurd on its face. Economists, however, rely on it because modeling the impact of trade on economies without it becomes extremely difficult.
A second, related assumption is that workers are able to move up the "value ladder" to find better-paying jobs than the ones they lost. Or that if this does not happen, then at least the country overall will be richer and the workers benefit via Trade Adjustment Assistance or some similar redistributive program.
A final reason these results are so alarming is that education is a basically the economic policy prescription of last resort. How do we compete with China? More STEM education. How do we get out of the recession? Go back to school to be more competitive. If nothing else is working, policymakers often turn to education and "skills" as the way to appease the market and bring about that illusive world where there are enough jobs and inequality is not spiraling out of control. Education is important, no question, but it should not be the only leg we attempt to stand on.
The Janesville study is an airhorn in the ears of anyone resting peacefully in these assumptions. It is not a perfect study; in fact there plenty of reasons to question the results, many noted by the authors themselves. But its results are so perfectly antithetical to common assumptions about retraining, employment, and competitiveness as to call into question the models that led us to those assumptions. We have to ask: what is the point of economic ideas that give results like these?
Friday, November 2, 2012
Who Built That?
Few words have resonated in people's minds this election season, firing up conservatives and giving liberals rashes, quite like the phrase "job creators". The two words loom large in conservative politics and over our national political discourse--a snappy obeisance to the employer class.
Ideas like "job creators" are used because they tell a convincing story about the economy, but the shorthand they provide can be dangerous. While I doubt many readers of this blog are uncritically in love with the phrase, in this post I want to look beyond its easy dismissal ("'job creators' is a sycophantic way to say 'rich people'"; "it's just top-down class warfare") and use the idea as a starting point for a look at what parts of our economy we value and why. In particular, I am interested in the ideas of production and "producerism" and how they relate to a range of economic and political ideologies.
In my last post I wrote about two roles of the economy--production and distribution--and described the critical role labor plays in distribution. This post is ostensibly about the production side, but really it is also about distribution, because the way we understand production impacts the way we understand distribution--and thus it impacts distribution itself. This idea is basically the underlying idea of the post, but I am going to meander a bit and may not mention it for a while, so keep it in mind.
Economies accomplish amazing things in amazingly complex ways. It is amazing that thousands of people designed and built the intricate mess of hardware and software that constitutes the laptop sitting on my lap. It is amazing that it was assembled thousands of miles away by people in Asia because they will work for less pay than american workers, and then flown--in the sky--back across a vast expanse of ocean. Most of the commercial products we buy boast a similarly byzantine heritage.
But importantly, all byzantine pathways are not the same: we value certain twists and turns in the roots of the production process over others. Differences in valuation are extremely important because they help us decide what to do, how to spend our time and energy. Correspondingly, we value certain types of work and certain types of workers over others. We value doctors over tech support providers. Soldiers over mall security guards. Entrepreneurs over middle managers. Farmers over migrant laborers. And their wages reflect this.
The question, should we bother to ask it, is why? Why do we see certain parts of our economy as more valuable than others?
Certainly some reasons are obvious: things like doctors are valuable because they strongly affect our lives, in good or bad ways. We value that and we pay them for it. But other reasons are a bit less direct, as in Adam Smith's diamonds/water paradox (why are diamonds more expensive when water is so much more useful?). Such "paradoxes" can be explained through concepts like markets, institutions, or human psychology and preferences.
In fact, there are a million different things that affect what is important in the economy. But that does not mean we factor all those things in perfectly when we think about them. Instead, we think in simplified mental models, that may or may not factor in all the relevant details. People think in terms of these modelsm and see those parts emphasized by their models as more important--more critical to the operation of the economy and more valuable.
When economists refer to value in an economy, they basically mean "quantifiable economic activity"--typically this includes everything that is paid for, but it may also mean other things like childcare, housework, or barter transactions.
In a way however, typical measures of value like GDP are more about measuring how much is going on than how much is going on that is worthwhile. Past attempts to measure how much is worthwhile, or simply find a more concrete measure of value than the aggregating all economic activity based on what people pay for things, has met with limited success.
One thing economists and almost everyone else can agree on, however, is that productivity and production is important. Not the only important thing in life, maybe, but something fundamentral. Because people generally want things, or want to have things done for them. Productivity has always been a crucial aspect of the economy.
It has maybe always been this way, from hunter gatherers surviving on whatever nuts or caribou they could find, to the irigations sytems and metal tools that sustained early civilizations, to the industrial revolutions and the advent of mass production. Economies that are better at making things and doing things for people, or at least make or do more things, are more productive and thus create more value (in the economic sense). The technical details of production, however, are almost banal compared with the influence of production on our culture--our politics, our ethics, and the daily lives we live.
If you are a hunter or a gatherer, production is important in an immediate way: your productivity determines how much you eat for the next few days. If you live in an agricultural society, your production one year may determine how much you will eat until the next harvest. A good harvest could also give you access to other goods, like cookware or building materials, or services, like a doctor.
(Disclaimer: I am not an anthropologist or historian and I realize that I am making incredibly simplistic assumptions about different societies that I know little to nothing about. If what I am saying is ridiculous, please let me know.)
Productivity in pre-capitalist societies was more straightforward, because almost everyone was a producer. With lower levels of technology, people engaged in work with clear inputs and outputs; "hard work" was at least immediately apparent. Those people that did not produce food or goods directly for markets usually engaged in work that was nevertheless understood as important by society: women cooked, cleaned, and raised children, clergy counseled and served as intermediaries with the devine, noblement governed and provided protection.
Two things changed. First, the joint-stock, limited liability corporation was invented (not out of thin air, but I will not get into that here) within the framework of the liberal state. Second, mass production was also invented. These inventions changed productivity forever, because they gave us organizational forms that increased the productivity of any individual exponentially. The more complex organization of production, however, also increasingly obscured the causes of the productivity.
There is a limit to how many fields a man can plow, even with the sturdiest horses. But the potential output of a man with GPS-guided, computer-controlled giant farming machines is almost limitless. Today, the major sources of productivity have almost nothing do with how many hours we spend toiling in the fields--they come instead from our technology. And the process that has produced that technology is managed by enormous, complex corporations.
Technology is best thought of not simply as new machines, but also as new forms of organization and new processes. Organization and processes may be consciously designed, like a legal proceeding or the hierarchy of a business, or they may arise more spontaneously, like a professional network. If we are ok stretching the term "technology" even further we can lump under its banner cultural values and mores, integrated with formal organizations and processes. For example, a fundamentally important aspect of our economy is that it is built to a large degree on trust.
Technology and our complex market economy obscure the source of productivity for a number of reasons. Most obviously, increasing technological complexity (along with increasingly complex societies) means the production process involces more and more people doing more and more things. These different people also become increasingly specialized, often in more and more complex areas--think of biologists that specialize in one small, rare organism or a computer programmer that specializes in programming certain types of software. Furthermore, we can think of such specialization as a kind of technology itself, as a rationalization of prodution processes--think of an assembly line, which is an important invention in its own right. This increasingly productive technology may have a clear source, like Henry Ford's assembly line, or it may be simply a byproduct of the work of many people, like a computer. But these parts of the system that change the system to increase productivity are also important.
All these parts in the system, and designers and remakers of the system, are competing, in a way, for our societal respect. But ideas like "complexity" and "systems" leave us on awfully abstract footing. We have to value something, in the end--like a person or at least an institution. Who should we thank for our productivity and productivity increases?
Well, what are our options? Let's make a list:
But first we should be aware that different political and economic ideologies in the modern age have already built their conceptual models, coherent or not, on different conceptions and attributions of value creation. Marxists celebrate workers, libertarians celebrate market forces and Randian innovators, and the vast middle celebrates a range of investors, teachers, businesspeople, technocrats, family values, and always, again, the market.
Every hero needs an enemy, however. These enemies often define our ideologies more strongly than the ideas themselves. The enemy of the market is the state, the enemy of the worker is the capitalist, the enemy of the technocrat is politics, the enemy of our values are other people's values. These enemies purportedly cripple us, keeping us from our true potential.
One ideology particularly germaine to this discussion is "producerism". Wikipedia does a good job of presenting many of the facets of producerism, the main idea being that there are productive groups in society and there are unproductive groups in society, and the unproductive leech off the productive.
While few if any people self-identify as "producerist", strains of producerist ideas are visible not just on the conservative side of the political spectrum (liberal elites and lazy underclasses sucking value from the productive middle) but also on the left (powerful ologpolistic corporations and mutant financial sectors diverting resources from productive manufacturing; capitalist owners taking more than their fair share of profit). The different sides vary in terms of where they believe value is created, but their basic argument is that value is being misdirected from its natural, rightful, or most effective course.
The range of producerist concern likely has something to do with the complexity of modern production we wrote about above. It is difficult to know exactly who to thank for your new iphone: Steve Jobs? workers happy to work for meagre wages at Foxconn? some faceless software designer? the bureaucrats who successfully reallocated the electromagnetic spectrum so that you could use 3G internet? investors in Apple? All of these workers and classes of people helped bring that iPhone to your pocket; how do we know they got their fair share of the value?
An interesting thing about producerist critiques is that they inherently utilize a structural model of the economy--and a structural model that is very intuitive. By structural I mean that they take the economy as a whole and examine how parts of it interact. Such models have been out of fashion in mainstream economics for some time, but what has replaced them has been something of a conceptual void in the form of marginalist economic theories of value. Marginalist theories can only describe value as something someone chooses over something else, eschewing normative claims in favor of a set of conceptual tools.
Producerist-type arguments from all sides of the spectrum tend to be directed most vociferously toward those in power, since those in power rarely have trouble demanding their fair share of an economy's value. But it is not just our economy that is complex; our political system is also complex--and we therefore end up with all kinds of ideas about how the system works and who is using it to their benefit. Whether or not these critiques have legitimate grievances, however, they are basically ignored by economists (whose marginalist tools are basically incapable of addressing any political ideologies besides imperfect markets) and rarely make it onto the centrist political radar unless they can raise enough electoral ruckus, a la the tea party.
~~
Where does all this leave us?
We should perhaps return to the link, glossed over earlier in the post by some handwaving about economists, between production and value. As noted, as a society we are basically required to think about value all the time, because it forms a basis for our decisions. And some production is more valuable than others, because it is more useful or scarcer or just because we humans, in our infinite arbitrariness, think it is valuable for other reasons.
Mostly, with all the complexity in the production process, we rely on wages and prices to put a value on work that is done. Wages help incentivize people to become programmers instead of, say, switchboard operators, and these incentives help increase the value in society. The invisible hand is in fact just your very visible paycheck.
But the wage and price system is not perfect. Competitive markets often require tending, new productivity can be nurtured but also stifled, and on top of it all there are people that are affected and allocative possibilities that are simply off the table (such as having government wages, or eliminating welfare entirely). Relying on markets to set the value of everything in society would be a horrible mistake, because markets fail too often in too many ways. Unfortunately we do not have a coherent alternative in our national discourse. Instead we resort to shorthand, simple ideas of what is valuable in our economy. Production is a process often subject to this simplification.
But production is a complex process. And we need to understand this in our political dialogue because the way we think about production influences the way we think about what is a fair, right, natural, or at least acceptible state of affairs. Unfortunately economics provides only the bluntest of tools, rough quantitative analysis, for understanding the relation between production and value, and determining what is important in our economy. Even less helpfully, it has a tendency to peddle the panglossian idea that everything is worth exactly its going rate in the market. In terms of priority-setting and direction, neoclassical economics is is unhelpful in many ways and downright misleading in others.
The void is filled by theories of right and wrong, political narratives of good and evil and efficacy and failure. These stories make sense to us because they offer a coherent story we can believe in and find meaning in. They help us understand what we value and and what we should value, often through their simplified explanations of the production process. Unfortunately they rarely do so except in self-serving ways that offer scant opportunity for real consideration of what we priotize or appreciation of the system's complexity. We should expect more.
~~
Update: I just came across a recent Krugman blog post on basically the same subject, though focusing on the value created by those employed by the government. Krugman compares those people claiming that "government can't create jobs" to the Physiocrats, a sort of economic paleo-ideology. It is easy to see the strains of producerism and claims and confusion about sources of value over the ages.
Ideas like "job creators" are used because they tell a convincing story about the economy, but the shorthand they provide can be dangerous. While I doubt many readers of this blog are uncritically in love with the phrase, in this post I want to look beyond its easy dismissal ("'job creators' is a sycophantic way to say 'rich people'"; "it's just top-down class warfare") and use the idea as a starting point for a look at what parts of our economy we value and why. In particular, I am interested in the ideas of production and "producerism" and how they relate to a range of economic and political ideologies.
In my last post I wrote about two roles of the economy--production and distribution--and described the critical role labor plays in distribution. This post is ostensibly about the production side, but really it is also about distribution, because the way we understand production impacts the way we understand distribution--and thus it impacts distribution itself. This idea is basically the underlying idea of the post, but I am going to meander a bit and may not mention it for a while, so keep it in mind.
Simplifying Complexity
Economies accomplish amazing things in amazingly complex ways. It is amazing that thousands of people designed and built the intricate mess of hardware and software that constitutes the laptop sitting on my lap. It is amazing that it was assembled thousands of miles away by people in Asia because they will work for less pay than american workers, and then flown--in the sky--back across a vast expanse of ocean. Most of the commercial products we buy boast a similarly byzantine heritage.
But importantly, all byzantine pathways are not the same: we value certain twists and turns in the roots of the production process over others. Differences in valuation are extremely important because they help us decide what to do, how to spend our time and energy. Correspondingly, we value certain types of work and certain types of workers over others. We value doctors over tech support providers. Soldiers over mall security guards. Entrepreneurs over middle managers. Farmers over migrant laborers. And their wages reflect this.
The question, should we bother to ask it, is why? Why do we see certain parts of our economy as more valuable than others?
Certainly some reasons are obvious: things like doctors are valuable because they strongly affect our lives, in good or bad ways. We value that and we pay them for it. But other reasons are a bit less direct, as in Adam Smith's diamonds/water paradox (why are diamonds more expensive when water is so much more useful?). Such "paradoxes" can be explained through concepts like markets, institutions, or human psychology and preferences.
In fact, there are a million different things that affect what is important in the economy. But that does not mean we factor all those things in perfectly when we think about them. Instead, we think in simplified mental models, that may or may not factor in all the relevant details. People think in terms of these modelsm and see those parts emphasized by their models as more important--more critical to the operation of the economy and more valuable.
Productivity Shapes the World
When economists refer to value in an economy, they basically mean "quantifiable economic activity"--typically this includes everything that is paid for, but it may also mean other things like childcare, housework, or barter transactions.
In a way however, typical measures of value like GDP are more about measuring how much is going on than how much is going on that is worthwhile. Past attempts to measure how much is worthwhile, or simply find a more concrete measure of value than the aggregating all economic activity based on what people pay for things, has met with limited success.
One thing economists and almost everyone else can agree on, however, is that productivity and production is important. Not the only important thing in life, maybe, but something fundamentral. Because people generally want things, or want to have things done for them. Productivity has always been a crucial aspect of the economy.
It has maybe always been this way, from hunter gatherers surviving on whatever nuts or caribou they could find, to the irigations sytems and metal tools that sustained early civilizations, to the industrial revolutions and the advent of mass production. Economies that are better at making things and doing things for people, or at least make or do more things, are more productive and thus create more value (in the economic sense). The technical details of production, however, are almost banal compared with the influence of production on our culture--our politics, our ethics, and the daily lives we live.
Technology Shapes our View of Productivity
If you are a hunter or a gatherer, production is important in an immediate way: your productivity determines how much you eat for the next few days. If you live in an agricultural society, your production one year may determine how much you will eat until the next harvest. A good harvest could also give you access to other goods, like cookware or building materials, or services, like a doctor.
(Disclaimer: I am not an anthropologist or historian and I realize that I am making incredibly simplistic assumptions about different societies that I know little to nothing about. If what I am saying is ridiculous, please let me know.)
Productivity in pre-capitalist societies was more straightforward, because almost everyone was a producer. With lower levels of technology, people engaged in work with clear inputs and outputs; "hard work" was at least immediately apparent. Those people that did not produce food or goods directly for markets usually engaged in work that was nevertheless understood as important by society: women cooked, cleaned, and raised children, clergy counseled and served as intermediaries with the devine, noblement governed and provided protection.
Two things changed. First, the joint-stock, limited liability corporation was invented (not out of thin air, but I will not get into that here) within the framework of the liberal state. Second, mass production was also invented. These inventions changed productivity forever, because they gave us organizational forms that increased the productivity of any individual exponentially. The more complex organization of production, however, also increasingly obscured the causes of the productivity.
There is a limit to how many fields a man can plow, even with the sturdiest horses. But the potential output of a man with GPS-guided, computer-controlled giant farming machines is almost limitless. Today, the major sources of productivity have almost nothing do with how many hours we spend toiling in the fields--they come instead from our technology. And the process that has produced that technology is managed by enormous, complex corporations.
Technology is best thought of not simply as new machines, but also as new forms of organization and new processes. Organization and processes may be consciously designed, like a legal proceeding or the hierarchy of a business, or they may arise more spontaneously, like a professional network. If we are ok stretching the term "technology" even further we can lump under its banner cultural values and mores, integrated with formal organizations and processes. For example, a fundamentally important aspect of our economy is that it is built to a large degree on trust.
Technology and our complex market economy obscure the source of productivity for a number of reasons. Most obviously, increasing technological complexity (along with increasingly complex societies) means the production process involces more and more people doing more and more things. These different people also become increasingly specialized, often in more and more complex areas--think of biologists that specialize in one small, rare organism or a computer programmer that specializes in programming certain types of software. Furthermore, we can think of such specialization as a kind of technology itself, as a rationalization of prodution processes--think of an assembly line, which is an important invention in its own right. This increasingly productive technology may have a clear source, like Henry Ford's assembly line, or it may be simply a byproduct of the work of many people, like a computer. But these parts of the system that change the system to increase productivity are also important.
Who do we Value?
All these parts in the system, and designers and remakers of the system, are competing, in a way, for our societal respect. But ideas like "complexity" and "systems" leave us on awfully abstract footing. We have to value something, in the end--like a person or at least an institution. Who should we thank for our productivity and productivity increases?
Well, what are our options? Let's make a list:
- Workers, because even productive technology needs workers to make it work
- Inventors, because they make the mechanical technology
- Businesspeople, because they create new organizations
- Capital allocators, because they pick good organizations to fund (and allow to exist)
- Technocrats, because they help the system function well
- Teachers, because they help train people to be more productive
- Values, because they keep society working well
- Market incentives, because they make people want to be productive
- God, luck, fate, etc...
But first we should be aware that different political and economic ideologies in the modern age have already built their conceptual models, coherent or not, on different conceptions and attributions of value creation. Marxists celebrate workers, libertarians celebrate market forces and Randian innovators, and the vast middle celebrates a range of investors, teachers, businesspeople, technocrats, family values, and always, again, the market.
Every hero needs an enemy, however. These enemies often define our ideologies more strongly than the ideas themselves. The enemy of the market is the state, the enemy of the worker is the capitalist, the enemy of the technocrat is politics, the enemy of our values are other people's values. These enemies purportedly cripple us, keeping us from our true potential.
Producerism (as an example)
One ideology particularly germaine to this discussion is "producerism". Wikipedia does a good job of presenting many of the facets of producerism, the main idea being that there are productive groups in society and there are unproductive groups in society, and the unproductive leech off the productive.
While few if any people self-identify as "producerist", strains of producerist ideas are visible not just on the conservative side of the political spectrum (liberal elites and lazy underclasses sucking value from the productive middle) but also on the left (powerful ologpolistic corporations and mutant financial sectors diverting resources from productive manufacturing; capitalist owners taking more than their fair share of profit). The different sides vary in terms of where they believe value is created, but their basic argument is that value is being misdirected from its natural, rightful, or most effective course.
The range of producerist concern likely has something to do with the complexity of modern production we wrote about above. It is difficult to know exactly who to thank for your new iphone: Steve Jobs? workers happy to work for meagre wages at Foxconn? some faceless software designer? the bureaucrats who successfully reallocated the electromagnetic spectrum so that you could use 3G internet? investors in Apple? All of these workers and classes of people helped bring that iPhone to your pocket; how do we know they got their fair share of the value?
An interesting thing about producerist critiques is that they inherently utilize a structural model of the economy--and a structural model that is very intuitive. By structural I mean that they take the economy as a whole and examine how parts of it interact. Such models have been out of fashion in mainstream economics for some time, but what has replaced them has been something of a conceptual void in the form of marginalist economic theories of value. Marginalist theories can only describe value as something someone chooses over something else, eschewing normative claims in favor of a set of conceptual tools.
Producerist-type arguments from all sides of the spectrum tend to be directed most vociferously toward those in power, since those in power rarely have trouble demanding their fair share of an economy's value. But it is not just our economy that is complex; our political system is also complex--and we therefore end up with all kinds of ideas about how the system works and who is using it to their benefit. Whether or not these critiques have legitimate grievances, however, they are basically ignored by economists (whose marginalist tools are basically incapable of addressing any political ideologies besides imperfect markets) and rarely make it onto the centrist political radar unless they can raise enough electoral ruckus, a la the tea party.
~~
Where does all this leave us?
We should perhaps return to the link, glossed over earlier in the post by some handwaving about economists, between production and value. As noted, as a society we are basically required to think about value all the time, because it forms a basis for our decisions. And some production is more valuable than others, because it is more useful or scarcer or just because we humans, in our infinite arbitrariness, think it is valuable for other reasons.
Mostly, with all the complexity in the production process, we rely on wages and prices to put a value on work that is done. Wages help incentivize people to become programmers instead of, say, switchboard operators, and these incentives help increase the value in society. The invisible hand is in fact just your very visible paycheck.
But the wage and price system is not perfect. Competitive markets often require tending, new productivity can be nurtured but also stifled, and on top of it all there are people that are affected and allocative possibilities that are simply off the table (such as having government wages, or eliminating welfare entirely). Relying on markets to set the value of everything in society would be a horrible mistake, because markets fail too often in too many ways. Unfortunately we do not have a coherent alternative in our national discourse. Instead we resort to shorthand, simple ideas of what is valuable in our economy. Production is a process often subject to this simplification.
But production is a complex process. And we need to understand this in our political dialogue because the way we think about production influences the way we think about what is a fair, right, natural, or at least acceptible state of affairs. Unfortunately economics provides only the bluntest of tools, rough quantitative analysis, for understanding the relation between production and value, and determining what is important in our economy. Even less helpfully, it has a tendency to peddle the panglossian idea that everything is worth exactly its going rate in the market. In terms of priority-setting and direction, neoclassical economics is is unhelpful in many ways and downright misleading in others.
The void is filled by theories of right and wrong, political narratives of good and evil and efficacy and failure. These stories make sense to us because they offer a coherent story we can believe in and find meaning in. They help us understand what we value and and what we should value, often through their simplified explanations of the production process. Unfortunately they rarely do so except in self-serving ways that offer scant opportunity for real consideration of what we priotize or appreciation of the system's complexity. We should expect more.
~~
Update: I just came across a recent Krugman blog post on basically the same subject, though focusing on the value created by those employed by the government. Krugman compares those people claiming that "government can't create jobs" to the Physiocrats, a sort of economic paleo-ideology. It is easy to see the strains of producerism and claims and confusion about sources of value over the ages.
Thursday, October 11, 2012
Distribution and Labor
What we refer to abstractly as "the economy" can be understood as (at the very least) two distinct but intimately connected systems: a system of production, and a system of distribution. The system of production includes not only the proverbial "making of things" but the doing of things that makes the making of things easier, and also the doing of things that makes doing things we want to do for their own sake easier. The system of distribution refers to all of the exchanges that do or could take place in an economy and way those exchanges work.
Since at least the advent of industrialization, our economies have had the somewhat counterintuitive problem of functioning better as systems of production that as systems of distribution. This is counterintuitive because if we see scarcity as the fundamental economic problem, distribution would appear to take on a secondary importance. Unfortunately, abundance is irrelevant if it is concentrated in the hands of a few people; good distribution is therefore of paramount importance as well.
However, it is important to understand what we mean when we talk about "good" distribution systems. We can imagine an ideal distribution system that distributes value (resources or money) exactly in proportion to the value provided by a person to society. A different ideal distribution system would distribute production equally among everyone. We can also evaluate distribution systems purely in terms of costs, where a costless distribution system would be the ideal.
Good distribution is important for a number of reasons. There is a substantial, purely moral argument to be made for a degree of distributive equality if we believe it is fair and right. There is also a moral argument to be made for some degree of merit-based distribution. There are political arguments, for example the argument that mass democracies require a sizable middle class. And there are utilitarian arguments from a purely economic standpoint: e.g., that being rewarded for work is an important incentive, or that an economy based on mass production requires a mass base of consumers.
Up to now, when talking about distribution I have been conflating consumption and production, which has made things somewhat awkward to think about. As I explained it in the first paragraph, distribution involves exchange, which means things are going both ways. Generally we do a reasonably good job of distribution in consumption markets--that is, selling products. What is becoming more and more a problem is distribution in production markets--that is, selling labor and capital.
Our economy today has two major means of distribution on the production side: labor and capital. Or at least, this is the common distinction economists use between money that flows to workers and money that flows to capital owners. Historically, the balance between labor income and capital income in the USA and most developed countries has been around 70% for labor and 30% for capital, meaning that 70% of the money going to people in our economy was through wages and 30% was through investment income.
The 70-30 split does not have any special significance. Depending on the amount of workers getting paid and the number of investors making money from investments, you can get significantly different distributional outcomes from a constant labor/capital ratio. The importance of pension funds are an excellent example of this, because they distribute investment income to (former) workers.
Still, the 70-30 split has been a fairly stable historical trend, and as such can tell us interesting things about the economy. Perhaps most importantly, it reminds us that our economy is based on jobs. This fact is not news to anyone, of course, but even amidst weekly unemployment estimates and constant campaign rhetoric we can easily forget the fundamental importance of labor for distributing wealth: labor income is perhaps the most important category of exchanges in our economy.
This assumption is so deeply embedded in our worldview that we take it for granted, even though it is something of a historical anomaly and appears to now be changing dramatically.
The prevalent view among current policymakers is that employment is best created by creating business-friendly conditions and then leaving markets to do their own thing--perhaps with some help for infant industries (e.g. green technology) and a few safeguards to cushion unemployment, if you are a liberal. What does it mean, though, that employers have been paying their employees a significantly smaller portion of income? If we can no longer expect labor income to stay within a certain range, what does that mean for our expectations of full or nearly-full employment? Even if we assume full employment (if workers choose not work, for example), what does it imply for society if only 50% of business income is routed to labor? Only 30%? Clearly we would be looking at a vastly different world. Could we transition to an economy that is not based on labor income? Or should we expect labor income to recover?
Stay tuned.
Since at least the advent of industrialization, our economies have had the somewhat counterintuitive problem of functioning better as systems of production that as systems of distribution. This is counterintuitive because if we see scarcity as the fundamental economic problem, distribution would appear to take on a secondary importance. Unfortunately, abundance is irrelevant if it is concentrated in the hands of a few people; good distribution is therefore of paramount importance as well.
However, it is important to understand what we mean when we talk about "good" distribution systems. We can imagine an ideal distribution system that distributes value (resources or money) exactly in proportion to the value provided by a person to society. A different ideal distribution system would distribute production equally among everyone. We can also evaluate distribution systems purely in terms of costs, where a costless distribution system would be the ideal.
Good distribution is important for a number of reasons. There is a substantial, purely moral argument to be made for a degree of distributive equality if we believe it is fair and right. There is also a moral argument to be made for some degree of merit-based distribution. There are political arguments, for example the argument that mass democracies require a sizable middle class. And there are utilitarian arguments from a purely economic standpoint: e.g., that being rewarded for work is an important incentive, or that an economy based on mass production requires a mass base of consumers.
Up to now, when talking about distribution I have been conflating consumption and production, which has made things somewhat awkward to think about. As I explained it in the first paragraph, distribution involves exchange, which means things are going both ways. Generally we do a reasonably good job of distribution in consumption markets--that is, selling products. What is becoming more and more a problem is distribution in production markets--that is, selling labor and capital.
Our economy today has two major means of distribution on the production side: labor and capital. Or at least, this is the common distinction economists use between money that flows to workers and money that flows to capital owners. Historically, the balance between labor income and capital income in the USA and most developed countries has been around 70% for labor and 30% for capital, meaning that 70% of the money going to people in our economy was through wages and 30% was through investment income.
The 70-30 split does not have any special significance. Depending on the amount of workers getting paid and the number of investors making money from investments, you can get significantly different distributional outcomes from a constant labor/capital ratio. The importance of pension funds are an excellent example of this, because they distribute investment income to (former) workers.
Still, the 70-30 split has been a fairly stable historical trend, and as such can tell us interesting things about the economy. Perhaps most importantly, it reminds us that our economy is based on jobs. This fact is not news to anyone, of course, but even amidst weekly unemployment estimates and constant campaign rhetoric we can easily forget the fundamental importance of labor for distributing wealth: labor income is perhaps the most important category of exchanges in our economy.
This assumption is so deeply embedded in our worldview that we take it for granted, even though it is something of a historical anomaly and appears to now be changing dramatically.
The prevalent view among current policymakers is that employment is best created by creating business-friendly conditions and then leaving markets to do their own thing--perhaps with some help for infant industries (e.g. green technology) and a few safeguards to cushion unemployment, if you are a liberal. What does it mean, though, that employers have been paying their employees a significantly smaller portion of income? If we can no longer expect labor income to stay within a certain range, what does that mean for our expectations of full or nearly-full employment? Even if we assume full employment (if workers choose not work, for example), what does it imply for society if only 50% of business income is routed to labor? Only 30%? Clearly we would be looking at a vastly different world. Could we transition to an economy that is not based on labor income? Or should we expect labor income to recover?
Stay tuned.
Sunday, September 30, 2012
Big Question: Equilibrium and Stability
My senior year of high school I took my first economics course. We did a business proposal for opening a new restaurant franchise, and we learned some theory. The theory seemed fairly inane and innocuous. All we did was draw X's, occasionally with a price floor or a price ceiling. What seemed so straightforward to me at the time is perhaps the major postulate of modern economics: the idea that markets help supply and demand meet in the middle, automatically. In this post I want to look a bit more closely at that idea and when and why it may be true.
One of the big ideas in economics is that in markets, supply and demand tend toward equilibrium. Equilibrium is the happy place where buyers and sellers, in aggregate, agree on a price that allows as many people to buy the goods as can be supplied by the sellers. If the amount people will pay for the good changes, or the amount it costs to produce the good changes, that side changes their offered price and then the quantity adjusts appropriately. If people want lots of tulips and are willing to pay more for them, then more people will grow them. Similarly, if clothes become cheaper to produce, suppliers will sell them more cheaply and more people will buy more clothes. We own a lot more t-shirts these days than they did 200 years ago.
This is all common sense; the interesting stuff begins when equilibrium doesn't happen.
Which we will come to in a second. First, it is worth mentioning that equilibrium can happen too much. That is, sometimes it is possible to have "multiple equilibria"--markets may have two (or more) price/quantity combinations that buyers and sellers could end up agreeing too. This happens when the demand or supply curve gets more complicated than the traditional X (for example). Another famous macroeconomic example of multiple equilibria is the (simplified Keynesian) explanation for the Great Depression, where a collapse in demand dragged supply down supply, and the economy stabilized below its potential. Multiple equilibria can happen in markets for individual products as well: think about an expensive hotel in an exclusive resort destination, and then a few years later when the everyone has heard about it and college kids go there for spring break. The product is the same (minus the exclusivity) but now supply and demand have come to rest at a lower price.
Multiple equilibria are important--as the Keynes example shows, they are a factor in justifying major fiscal or monetary stimulus programs--but they are only one issue with the concept of equilibrium. The very idea that an economic system will gravitate toward any price point because of supply and demand forces is often suspect. Economists get around this by exploring "static" snapshots of reality, but even this is difficult because the only data you have is one point on the graph, and it is difficult to extrapolate the entire X from one point: the lines of the X may have different slopes or not be straight lines at all. Economists end up relying on "shocks" that hopefully affect only one side of the demand/supply equation: if the supply side stays constant, for example, it may be possible to see how the demand side of the curve is formed.
Static pictures, however, may fail to capture important dynamics--how the system may change over time because of the way supply and demand interact. This is what claims of equilibrium mean: that supply and demand, sellers and buyers, eventually agree on a price that supplies as many goods or services as can be supplied at the price people can pay for it. And eventually the amount supplied and demanded goes toward this price.
In many markets equilibrium may be a realistic assumption. But in others it may not be. Let's break it down a bit. Why might equilibrium--any equilibrium at all--not be a realistic state of affairs in a market?
We can think of markets with two other types of equilibria: equilibria that are unreachable or that are unsustainable. Unreachable equilibria are blocked for some reason, such as regulation or monopolization. The classic textbook example of an unreachable equilibria is price controls, where laws keep prices from reaching the point at which demand is met by as much supply as can be sustainably produced. Rent controls are a price ceiling, and may result in too little housing being provided--the shortage of housing prevents an equilibrium from being reached.
The idea of unsustainable equilibria is more complicated, because it depends on how supply and demand change and react to each other over time. This process of change and interaction works differently in different markets. One common way that they may fail to interact in a way that creates a sustainable equilibrium is when there is poor information: if price signals function poorly or not at all, suppliers and demanders may not have any way of communicating how much they want. This can happen if buyers do not have a good way of knowing how much a good is worth. Education "markets" are a good example: people buying education know that a good education is valuable but have no realistic way of knowing how valuable it will be, because their future is simply too uncertain.
Another example of unsustainable equilibria is Keynes's well-known idea of "animal spirits". This is slightly different than an information problem because, in markets where animal spirits play a prominent role, supply and demand may be based entirely on irrational emotions and perceptions of economic actors. That is, the problem is not in the imperfect information people have, it is in the imperfect rationality of the people themselves (they may have imperfect information as well, but that is beside the point).
Yet another market attribute that can disrupt the sustainability of an equilibrium is market connectedness: markets rarely exist in isolation, and the supply or demand of one market is often influenced by the supply and demand of other markets. One market may affect another market, and this second market may then affect the first market, either directly or through similar effects in other markets. The use of coal could lead to cheaper power which made the production of coal cheaper, for example.
In some cases linked markets may simply be understood as one market: if the cheaper price of flip-flops drives down the price of shoes, it may make better sense to simply analyze the footwear market overall. But in other cases it makes less intuitive sense to link markets because they do not serve as substitutes or complements to each other--they are only related because there is a finite amount of money in the system and money is fungible. Stuart Ewen, in his excellent critique of the genesis of the modern advertising industry, Captains of Consciousness, gives an example from the early days of industrialization: the demand for consumer products causes people to move to the city and work in factories to produce goods, but some of the goods demanded are demanded because of the move toward urbanization. Ewen writes about the Alpine Sun Lamp, which makes people feel like they are outdoors in the sunshine, which they presumably would have been if they still worked on a farm.
In this case connected markets experienced a kind of feedback loop. However, the connections between markets, or between markets and other social realities (such as politics), may have other impacts that preclude the existence of any meaningful equilibria. One example is the current price of Greek public debt: there is certainly a market "equilibrium" that is reached daily based on daily buying and selling, but this equilibrium is based to such a large degree on political expectations that it has little economic significance. Any equilibrium here only appears to be determined by supply and demand because those are the closest proximate causes. In reality, non-market political occurrences are far more powerful causes of market prices. Another example could be if the prices in a grain market are driven up by speculators searching for safer investments in commodities instead of in volatile currency markets. In such an example equilibrium in a single market may be meaningless, but any attempt to find an equilibrium across multiple markets is simply too complex to make meaningful sense of either (see: how quickly international trade models get hairy).
When thinking about equilibria, we need to make sure we understand that there may be economic forces (that is, incentives for market participants) pushing supply and demand toward an equilibrium, or there may not be. Or those forces could be pushing in several ways depending on other criteria. Or there may be outside forces that completely overpower any intra-market forces. In the words of Polanyi, "in no case can we assume the functioning of market laws unless a self-regulating market is shown to exist."
One of the big ideas in economics is that in markets, supply and demand tend toward equilibrium. Equilibrium is the happy place where buyers and sellers, in aggregate, agree on a price that allows as many people to buy the goods as can be supplied by the sellers. If the amount people will pay for the good changes, or the amount it costs to produce the good changes, that side changes their offered price and then the quantity adjusts appropriately. If people want lots of tulips and are willing to pay more for them, then more people will grow them. Similarly, if clothes become cheaper to produce, suppliers will sell them more cheaply and more people will buy more clothes. We own a lot more t-shirts these days than they did 200 years ago.
This is all common sense; the interesting stuff begins when equilibrium doesn't happen.
Which we will come to in a second. First, it is worth mentioning that equilibrium can happen too much. That is, sometimes it is possible to have "multiple equilibria"--markets may have two (or more) price/quantity combinations that buyers and sellers could end up agreeing too. This happens when the demand or supply curve gets more complicated than the traditional X (for example). Another famous macroeconomic example of multiple equilibria is the (simplified Keynesian) explanation for the Great Depression, where a collapse in demand dragged supply down supply, and the economy stabilized below its potential. Multiple equilibria can happen in markets for individual products as well: think about an expensive hotel in an exclusive resort destination, and then a few years later when the everyone has heard about it and college kids go there for spring break. The product is the same (minus the exclusivity) but now supply and demand have come to rest at a lower price.
Multiple equilibria are important--as the Keynes example shows, they are a factor in justifying major fiscal or monetary stimulus programs--but they are only one issue with the concept of equilibrium. The very idea that an economic system will gravitate toward any price point because of supply and demand forces is often suspect. Economists get around this by exploring "static" snapshots of reality, but even this is difficult because the only data you have is one point on the graph, and it is difficult to extrapolate the entire X from one point: the lines of the X may have different slopes or not be straight lines at all. Economists end up relying on "shocks" that hopefully affect only one side of the demand/supply equation: if the supply side stays constant, for example, it may be possible to see how the demand side of the curve is formed.
Static pictures, however, may fail to capture important dynamics--how the system may change over time because of the way supply and demand interact. This is what claims of equilibrium mean: that supply and demand, sellers and buyers, eventually agree on a price that supplies as many goods or services as can be supplied at the price people can pay for it. And eventually the amount supplied and demanded goes toward this price.
In many markets equilibrium may be a realistic assumption. But in others it may not be. Let's break it down a bit. Why might equilibrium--any equilibrium at all--not be a realistic state of affairs in a market?
We can think of markets with two other types of equilibria: equilibria that are unreachable or that are unsustainable. Unreachable equilibria are blocked for some reason, such as regulation or monopolization. The classic textbook example of an unreachable equilibria is price controls, where laws keep prices from reaching the point at which demand is met by as much supply as can be sustainably produced. Rent controls are a price ceiling, and may result in too little housing being provided--the shortage of housing prevents an equilibrium from being reached.
The idea of unsustainable equilibria is more complicated, because it depends on how supply and demand change and react to each other over time. This process of change and interaction works differently in different markets. One common way that they may fail to interact in a way that creates a sustainable equilibrium is when there is poor information: if price signals function poorly or not at all, suppliers and demanders may not have any way of communicating how much they want. This can happen if buyers do not have a good way of knowing how much a good is worth. Education "markets" are a good example: people buying education know that a good education is valuable but have no realistic way of knowing how valuable it will be, because their future is simply too uncertain.
Another example of unsustainable equilibria is Keynes's well-known idea of "animal spirits". This is slightly different than an information problem because, in markets where animal spirits play a prominent role, supply and demand may be based entirely on irrational emotions and perceptions of economic actors. That is, the problem is not in the imperfect information people have, it is in the imperfect rationality of the people themselves (they may have imperfect information as well, but that is beside the point).
Yet another market attribute that can disrupt the sustainability of an equilibrium is market connectedness: markets rarely exist in isolation, and the supply or demand of one market is often influenced by the supply and demand of other markets. One market may affect another market, and this second market may then affect the first market, either directly or through similar effects in other markets. The use of coal could lead to cheaper power which made the production of coal cheaper, for example.
In some cases linked markets may simply be understood as one market: if the cheaper price of flip-flops drives down the price of shoes, it may make better sense to simply analyze the footwear market overall. But in other cases it makes less intuitive sense to link markets because they do not serve as substitutes or complements to each other--they are only related because there is a finite amount of money in the system and money is fungible. Stuart Ewen, in his excellent critique of the genesis of the modern advertising industry, Captains of Consciousness, gives an example from the early days of industrialization: the demand for consumer products causes people to move to the city and work in factories to produce goods, but some of the goods demanded are demanded because of the move toward urbanization. Ewen writes about the Alpine Sun Lamp, which makes people feel like they are outdoors in the sunshine, which they presumably would have been if they still worked on a farm.
In this case connected markets experienced a kind of feedback loop. However, the connections between markets, or between markets and other social realities (such as politics), may have other impacts that preclude the existence of any meaningful equilibria. One example is the current price of Greek public debt: there is certainly a market "equilibrium" that is reached daily based on daily buying and selling, but this equilibrium is based to such a large degree on political expectations that it has little economic significance. Any equilibrium here only appears to be determined by supply and demand because those are the closest proximate causes. In reality, non-market political occurrences are far more powerful causes of market prices. Another example could be if the prices in a grain market are driven up by speculators searching for safer investments in commodities instead of in volatile currency markets. In such an example equilibrium in a single market may be meaningless, but any attempt to find an equilibrium across multiple markets is simply too complex to make meaningful sense of either (see: how quickly international trade models get hairy).
When thinking about equilibria, we need to make sure we understand that there may be economic forces (that is, incentives for market participants) pushing supply and demand toward an equilibrium, or there may not be. Or those forces could be pushing in several ways depending on other criteria. Or there may be outside forces that completely overpower any intra-market forces. In the words of Polanyi, "in no case can we assume the functioning of market laws unless a self-regulating market is shown to exist."
Saturday, September 22, 2012
All the King's Theories and All the King's Thoughts
On a fundamental level, a level so fundamental that it describes pretty much everything but is mostly meaningless and uninteresting, our brains are distinguishing machines. Basically, when we think, we separate things from each other mentally. The easiest metaphor, which is not really a metaphor, is the Hollywood view of someone regaining consciousness. On the screen we see the world through their vision: they open their eyes, their sight gradually sharpens, and they begin to distinguish one thing from another. From the moment we are born--and even before--we are separating things from each other in our mind. You could say we are "de-conflating" things.
But thinking is also about understanding the connections between things--understanding how things are not separate. Just like our hands connect to our shoulders by way of our arms or the light switch connects to the light, things are related by more abstract relationships as well: the ground is connected to the sky by relationships of gravity, distance, and the air in between; people connect to other people by means of family or friendship or professional or other relationships, now connects to later by means of all of the causes and effects that occur in between.
Sorry if this is sounding all mystical and wishy-washy; it is going to get worse before it gets better.
Because I am going to to talk about Yin and Yang for a second. I know next to nothing about non-western philosophy and my understanding of the concept of Yin and Yang does not go far beyond the the first few paragraphs of the wikipedia entry. The article summarizes the concept as describing "how polar opposites or seemingly contrary forces are interconnected and interdependent... and how they give rise to each other in turn in relation to each other." I have heard this described plenty of times and it seemed like an important truth and perspective on things but it never really grabbed me.
But the other day it kind of did, because I started thinking about it more in terms I usually use to think about other things--in this case, the distinction/connection framework above. And I rephrased it for myself in a way that I could understand a bit better.
Economics and politics are enormously complex systems that are full of relationships we can only scratch the surface of understanding. In our scratching, we have an easy enough time distinguishing something--we can measure GDP and payrolls and sales data, or votes, or demographics easily enough. (other things are much harder to measure and therefore distinguish, but that's a topic for another day) But we have a much harder time putting things back together. Economics is about cause and effect, and it has all kinds of snazzy ways to try and pull them apart, but putting them back together meaningfully is an awful lot of work and awfully indeterminate.
And so we arrive at the point I have been dancing around: we separate a lot of things in our minds that cannot truly be separated. Yin-Yang is a specific classic example of this: dark cannot exist without the light, good without evil. But our minds do this in all kinds of less abstract ways as well: supply and demand, employer and employee, policy and politician, winners and losers. We end up with two (or more) parts of something we have separated for convenience or because we did not understand them as one single thing.
And I am arguing that this can be a problem. When we forget that businesses need workers but they also need good leaders. When we forget that every dollar I have is a dollar you do not (or at least it lowers your purchasing power). When we forget that laws need people who understand them and obey them and are incentivized to do so.
Any time we are talking about an economic concept, that concept is embedded within a vast network of other concepts. This conceptual network has in turn been assembled to describe a vastly complex real world. Much of the most dangerous economic ideas--and I don't mean dangerous here in a good way--are those that ignore the vast complexity of reality in favor of their own internal logic. This can happen both through elaborate models based on shaky assumptions, or through a certain ignorance of the status quo and the variety of causes that have brought us to it.
More fundamentally, the idea of economics itself does not stand alone. Politics and economics are two concepts we separate but, when separated, they achieve a certain degree of rarefied meaninglessness. Trade may exist outside of formal authority (two merchant ships swapping rum for ale on the high seas, for example) but is never divorced from relationships of power (the ship with the bigger guns may end up with a better deal). Moreover, actual markets, in the sense of buyers and sellers coming together and creating a price) may indeed require formal authority. Certainly nobody is arguing too loudly that they do not; e.g. libertarians are arguing that markets require a very limited and specific amount of formal authority. Dean Baker describes the connection better than I can.
Our tendency to cut thing up is useful, but it can limit our ability to see the bigger picture. The complexity of political economy makes it difficult to answer many big questions conclusively, but in dividing and conquering we may find our separate territories less firmly in our grasp than we had believed. How do we avoid these pitfalls, particularly when specificity is a prerequisite to truth? When we try to connect the pieces back together, will we have a useful model or a two-dimensional picture of a three-dimensional world? How can we know a complex system in a relevant way?
One way to start is to acknowledge the complexity, particularly where economic ideas intersect with policy and the everyday life of non-economists. The political relevance of economics pushes it toward simplicity--politicians need clear numbers and talking points, not lengthy explanations without conclusions. This is a difficult tendency to counteract, but a possible attempt could be through better economics education. Economics is taught like a hard science, giving new students a toolbox of concepts and uncritical assumptions. These teachings percolate unhelpfully into popular discourse, lacking nuance and serving in the interest of polemics; teaching more of the controversy and the relevance could give students a far better appreciation of the role of economics in our world.
Everyone has, at one point or another, had a feeling of revelation. Some revelations are extremely mundane, others are esoteric--I don't necessarily mean some kind of transcendental religious enlightenment, perhaps just understanding a new mathematical idea or realizing why your friend was acting strangely. Sometimes revelations involve connecting ideas that had existed independently in your mind, sometimes they are new ways of cutting ideas up. But they cause us to think differently about things we already knew, or thought we knew.
The social sciences are endlessly revealing of the world we know or think we know, and the ways they break apart and reassemble the human relationships we thought we understood can be both immensely useful when juxtaposed against our own. But our recreated understanding is not necessarily any more "true" than whatever understanding we had previously, and we stand to lose something in our careful scientific analysis, because the real world is not an equation. Yin and Yang resist being broken apart, the analysis destroys the subject.
Alright--we probably don't need to be so melodramatic about it. But we should at least be wary of the the limits of abstraction.
But thinking is also about understanding the connections between things--understanding how things are not separate. Just like our hands connect to our shoulders by way of our arms or the light switch connects to the light, things are related by more abstract relationships as well: the ground is connected to the sky by relationships of gravity, distance, and the air in between; people connect to other people by means of family or friendship or professional or other relationships, now connects to later by means of all of the causes and effects that occur in between.
Sorry if this is sounding all mystical and wishy-washy; it is going to get worse before it gets better.
Because I am going to to talk about Yin and Yang for a second. I know next to nothing about non-western philosophy and my understanding of the concept of Yin and Yang does not go far beyond the the first few paragraphs of the wikipedia entry. The article summarizes the concept as describing "how polar opposites or seemingly contrary forces are interconnected and interdependent... and how they give rise to each other in turn in relation to each other." I have heard this described plenty of times and it seemed like an important truth and perspective on things but it never really grabbed me.
But the other day it kind of did, because I started thinking about it more in terms I usually use to think about other things--in this case, the distinction/connection framework above. And I rephrased it for myself in a way that I could understand a bit better.
Economics and politics are enormously complex systems that are full of relationships we can only scratch the surface of understanding. In our scratching, we have an easy enough time distinguishing something--we can measure GDP and payrolls and sales data, or votes, or demographics easily enough. (other things are much harder to measure and therefore distinguish, but that's a topic for another day) But we have a much harder time putting things back together. Economics is about cause and effect, and it has all kinds of snazzy ways to try and pull them apart, but putting them back together meaningfully is an awful lot of work and awfully indeterminate.
And so we arrive at the point I have been dancing around: we separate a lot of things in our minds that cannot truly be separated. Yin-Yang is a specific classic example of this: dark cannot exist without the light, good without evil. But our minds do this in all kinds of less abstract ways as well: supply and demand, employer and employee, policy and politician, winners and losers. We end up with two (or more) parts of something we have separated for convenience or because we did not understand them as one single thing.
And I am arguing that this can be a problem. When we forget that businesses need workers but they also need good leaders. When we forget that every dollar I have is a dollar you do not (or at least it lowers your purchasing power). When we forget that laws need people who understand them and obey them and are incentivized to do so.
Any time we are talking about an economic concept, that concept is embedded within a vast network of other concepts. This conceptual network has in turn been assembled to describe a vastly complex real world. Much of the most dangerous economic ideas--and I don't mean dangerous here in a good way--are those that ignore the vast complexity of reality in favor of their own internal logic. This can happen both through elaborate models based on shaky assumptions, or through a certain ignorance of the status quo and the variety of causes that have brought us to it.
More fundamentally, the idea of economics itself does not stand alone. Politics and economics are two concepts we separate but, when separated, they achieve a certain degree of rarefied meaninglessness. Trade may exist outside of formal authority (two merchant ships swapping rum for ale on the high seas, for example) but is never divorced from relationships of power (the ship with the bigger guns may end up with a better deal). Moreover, actual markets, in the sense of buyers and sellers coming together and creating a price) may indeed require formal authority. Certainly nobody is arguing too loudly that they do not; e.g. libertarians are arguing that markets require a very limited and specific amount of formal authority. Dean Baker describes the connection better than I can.
Our tendency to cut thing up is useful, but it can limit our ability to see the bigger picture. The complexity of political economy makes it difficult to answer many big questions conclusively, but in dividing and conquering we may find our separate territories less firmly in our grasp than we had believed. How do we avoid these pitfalls, particularly when specificity is a prerequisite to truth? When we try to connect the pieces back together, will we have a useful model or a two-dimensional picture of a three-dimensional world? How can we know a complex system in a relevant way?
One way to start is to acknowledge the complexity, particularly where economic ideas intersect with policy and the everyday life of non-economists. The political relevance of economics pushes it toward simplicity--politicians need clear numbers and talking points, not lengthy explanations without conclusions. This is a difficult tendency to counteract, but a possible attempt could be through better economics education. Economics is taught like a hard science, giving new students a toolbox of concepts and uncritical assumptions. These teachings percolate unhelpfully into popular discourse, lacking nuance and serving in the interest of polemics; teaching more of the controversy and the relevance could give students a far better appreciation of the role of economics in our world.
Everyone has, at one point or another, had a feeling of revelation. Some revelations are extremely mundane, others are esoteric--I don't necessarily mean some kind of transcendental religious enlightenment, perhaps just understanding a new mathematical idea or realizing why your friend was acting strangely. Sometimes revelations involve connecting ideas that had existed independently in your mind, sometimes they are new ways of cutting ideas up. But they cause us to think differently about things we already knew, or thought we knew.
The social sciences are endlessly revealing of the world we know or think we know, and the ways they break apart and reassemble the human relationships we thought we understood can be both immensely useful when juxtaposed against our own. But our recreated understanding is not necessarily any more "true" than whatever understanding we had previously, and we stand to lose something in our careful scientific analysis, because the real world is not an equation. Yin and Yang resist being broken apart, the analysis destroys the subject.
Alright--we probably don't need to be so melodramatic about it. But we should at least be wary of the the limits of abstraction.
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