Friday, April 14, 2017

Noah Smith — Why the 101 model doesn't work for labor markets


Favorite line: 
If you raise the minimum wage, the increased income to those with jobs will also boost labor demand indirectly (somehow, activist and businessman Nick Hanauer figured this out when a whole lot of econ-trained think-tankers missed it!).
Anyone familiar with MMT would not have missed it either.

Noahpinion
Why the 101 model doesn't work for labor markets
Noah Smith

28 comments:

Ralph Musgrave said...

“If you raise the minimum wage, the increased income to those with jobs will also boost labor demand indirectly..”

Er – given that AD can easily be increased any time, as every MMTer knows, the question as to whether increased minimum wages increases AD or not is not desperately important, unless I’ve missed something.

It could be that an increased tax on alcohol with the proceeds being spent on rehab clinics would increase or decrease AD. But if I was a politician contemplating such a tax increase, the effect on AD would not be uppermost in my mind.

Bob Roddis said...

Since there is no failure of the market, there is no need for a minimum wage. Since the market does not fail, there is no need for violent intervention. Ever. Since the market does not lack or require momentum, there is no basis for a government “stimulus” in the form of “spending” or more funny money dilution.

"Aggregate Demand" is a nonsense term which mixes and conflates authentic "demand" in the form of a) what people properly own and control plus their skills; with b) funny money Cantillon Effects wealth theft that in its essence is just an artificial and unsustainable subsidy to those getting the new funny first. While “stimulus" definitely “stimulates”, the result is an artificial and unsustainable price, investment and capital structure that constantly requires more “stimulus” and which will ultimately collapse in any event.

At which point the socialists and Keynesians will blame the collapse of the interventionist funny regime upon laissez faire, libertarians and Hayek. It’s almost like when people blame Assad for the chemical weapons of America’s ally, Al Qaeda. No honor.

Ralph Musgrave said...

Bob,

I'm interested to hear that Keynsian stimulus is "unsustainable". It's been going for almost a hundred years now with no sign of the idea collapsing. At least it's almost 100 years since Keynes first started pushing his ideas.

In fact you could make that 200 years if you count Walter Bagehot's entirely artificial loans for banks in trouble during recessions. Come to that, in Ancient Rome 2,000 years ago they had a credit crunch and got out of it via increased public spending.

Anything which lasts 100/200/2000 years and doesn't seem to be getting out of breath seems to me to be thoroughly "sustainable".

Auburn Parks said...

The problem is thinking that Keynes has anything to do with the way the economy works. it isnt "Newton's" calculus because Newton is irrelevant to it. That capitalism runs on sales and spending depends on income and therefore more income means more spending, more sales and thus more capitalism is just how the system works. That you can increase the economy by using the Govt to give people more incomes with which to spend more and thus to generate a larger economy (aka "final sales" = GDP) is again just recognizing reality. So what that keynes recognized this obvious fact and wrote about it. The way modern capitalist economies works has nothing to do with Keynes.

So what does "stimulus" even mean here? All deficit spending is stimulative by definition compared to a balanced budget or surplus. What does it mean to be sustainable? The Govt cant run out of its own IOUs so that cant be it, inflation has averaged just 3% for 100 years so obviously we arent deficit spending too much. So maybe to put it more succinctly, what the fuck is liberatrian Bob talking about?

Noah Way said...

The fundamental law of capitalism is that if workers have no money, businesses have no customers.

Capitalism never was and never will be about "workers".

Auburn Parks said...

Pray tell Noah, what is "capitalism" all about? As far as I can tell Capitalism is a system based on private property, wage labor, and markets, hard to go from here to "capitalism" has agency and its against workers.

So there was no such thing as class distinction pre-18th century?
People didnt work before the 18th century?
Elites didnt try to appropriate as much social surplus to themselves as possible before the 18th cnetury?

Im asking a serious question here as I can nnever tell from capitalism bashers what it is exactly about capitalism that is so evil?

Is private property evil?
consensual wage labor?
Determining something individually using markets instead of collectively using Govt or other forms of social hierarchy? Is this evil?

I mean how much should shoes cost? How many kinds should there be? How long should they be designed to last? How many sizes need to be offered? Where should we make them? How many people should we use to make them? Who should we get the supplies from?

A million questions go into the production of shoes and every other necessary and guess what democratic or deliberative collective action is not the best and most efficient way to determine the answers to these questions for every possible material good and service.

So how is letting the market aka distributed decision making by individuals evil? Or is it not?

If these three things individually are not evil, its hard to see how capitalism which is just a system based on these three things can evil or let alone have agency against workers.

Auburn Parks said...

Wait I forgot one, before evil capitalism, good humans never exploited the environment for our species and individual benefit. So if we could jjust get back to golden age before evil capitalism or maybe evolve to a new system where we decide everything collectively then for sure humans would stop using our natural environment to make ourselves better off. yeah thats the ticket.

AXEC / E.K-H said...

How to overcome the manifest silliness of Econ 101 and save the economy
Comment on Noah Smith on ‘Why the 101 model doesn’t work for labor markets’

The Econ 101 labor market theory does not work because it is based on microfoundations. Microfoundations are given with the neo-Walrasian axiom set: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

From these axioms together with some auxiliary assumptions follows what Leijonhufvud famously called the Totem of Micro/Macro, that is, SS-curve―DD-curve―equilibrium, which is the representative economist’s all-purpose tool.

This approach is false on all methodological counts, that is, supply-demand-equilibrium is a NONENTITY. General inapplicability implies that it is also inapplicable to the labor market.

Microfoundations is the wrong approach. This explains why economics is a failed science. The correct approach is macrofoundations.#1

The elementary version of the correct (objective, systemic, behavior-free, macrofounded) employment equation is shown on Wikimedia:#2
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, the public sector and foreign trade.

Item (i) and (ii) cover Keynes’s familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what standard economics teaches: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price.” (Tobin)

False theory leads to false policy guidance. Scientifically incompetent economists bear the intellectual responsibility for the social devastation of mass unemployment.

The systemic employment equation contains nothing but measurable variables and is therefore readily testable. There is no need for further brain-dead supply-demand-equilibrium blather: as always in science, a test decides the matter.

Egmont Kakarot-Handtke

#1 The macrofoundations approach starts with three systemic (= behavior-free) axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

#2 For details see cross-references Employment
http://axecorg.blogspot.de/2015/08/employmentphillips-curve-cross.html

Bob said...

Egmont Kakarot-Handtke said...

Item (i) and (ii) cover Keynes’s familiar arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism. The fact of the matter is that overall employment INCREASES if the AVERAGE wage rate W INCREASES relative to average price P and productivity R. This is the OPPOSITE of what standard economics teaches: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price.” (Tobin)

Since this is an economics blog, this point needs to be discussed.

Noah Way said...

what is "capitalism" all about?

Maximizing profit (to "owners") achieved by minimizing costs (especially labor), monopolies and captive markets (rents, trickle-up), manipulated markets, bribery (political donations, money=speech, etc.), profit from "financial instruments" (w/o material resources and labor), and so on.

Matt Franko said...

"I can never tell from capitalism bashers what it is exactly about capitalism that is so evil?"

They bash a system that they don't understand... they are frustrated..

They don't understand what is happening so they blame it on a conspiracy of "capitalists!" or "neoliberal conspiracy!" or wtf... meanwhile all of these elites are incompetent morons and have one thumb in their ass and one thumb in their mouth playing switch...

For instance the bashers are up Minsky's ass big time ... Minsky's claim to fame is "stability creates instability!" Which would be like happening upon the Apollo Program and explaining what was going on in the Apollo Program as "what goes up must come down!" or some shit....

They bail out intellectually and say "single payer!" which is a license to steal for providers... yet they complain about favoritism to some in the same breath...

They are all non technical people like artists, humanities people, etc.. they are not qualified or trained correctly to figure it out...

All heart and no brain.... which is perhaps to their credit but still doesn't get the job done...



Tom Hickey said...

"I can never tell from capitalism bashers what it is exactly about capitalism that is so evil?"

Rent extraction = free rider problem = not only "something for nothing" but also at others' expense.

What is so hard to understand about that?

Even neoclassical economics admits this. They just claim that there is no economic rent in the system, which is true in their symmetrical formal model that is supposed to represent the real economy. In this model everyone is reward based on marginal contribution, therefore just deserts.

They also claim that if there is economic rent, it is owing to government intrusion in the economic process, which is true to a degree. Neoliberalism as an "upgrade" to classical liberalism is based government capture to tip the playing field upward. Classical liberalism, where there is no government intrusion, is also rent-ridden owing to economies of scale resulting in imperfect competition, for example. This increases with endowments owing to hereditary wealth.

Ben Johannson said...

Capitalism can be understood as a system in which those controlling capital shift the costs of capital accumulation onto others. Wage theft and environmental destruction are therefore necessary to its function.

Ben Johannson said...

Auburn,

You can have distributed allocation of resources under a socialist system. It isn't unique to capitalism.

Ben Johannson said...

I think people asking "what's so bad" about a system whose practitioners openly praise unvirtuous and unethical behavior, really aren't interested in an answer.

Noah Way said...

All heart and no brain

Your heart is there to tell you that your brain is wrong. Well, maybe not yours ...

GLH said...

People criticizing capitalism are criticizing financial capitalism which is different from industrial capitalism. Industrial capitalism made this country wealthy whereas financial capitalism is extracting the wealth from the country. As Tom Hickey said financial capitalism is all about rent extraction.

Noah Way said...

Oh, I get it now. Financial robber barons are bad, but industrial robber barons are good. Thanks for clearing that up.

Tom Hickey said...

As Tom Hickey said financial capitalism is all about rent extraction.

There are different forms of economic rent, land rent, monopoly and monopsony rent, and financial rent.

Joan Robinson has said – “The essence of the conception of “Rent” is the conception of a surplus earned by a particular part of a factor of production over and above the minimum earnings necessary to induce it to do its work.”

According to [Kenneth] Boulding – “Economic Rent may be defined as any payment to a factor of production in an industry in equilibrium which is in excess of the minimum amount necessary to keep that factor in its present occupation.”


meaning-and-types-of-rent/13913

Bob said...

There are garment workers in Bangladesh who are critical of industrial capitalism. Probably because they are experiencing Dickensian living standards. Should we point to history and tell them to be more patient?

AXEC / E.K-H said...

Tom Hickey

The concept of rent is ill-defined because economists do not know since Smith and Ricardo what profit is. See ‘When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1932119

Egmont Kakarot-Handtke

The Rombach Report said...

GLH - "Industrial capitalism made this country wealthy whereas financial capitalism is extracting the wealth from the country. As Tom Hickey said financial capitalism is all about rent extraction."

Does anyone think that abandonment of Bretton Woods gave rise to financial capitalism? Why did the first financial derivatives markets like currency and Treasury futures emerge in the 1970s rather than in the 1960s? Is it a coincidence that the great migration of best and brightest minds to Wall Street began in the 1970s? Wasn't this great migration all about "extracting wealth from the country"?

GLH said...

The Rombach Report: I will suggest a good book for you to read. It is one that Mike Norman plugged and it explains a lot. I suggested it to one other person here but he didn't seem to have the time to read it. It is, "Why we Can't Afford the Rich," by Andrew Sayer. If you haven't already read it I think you will find it worth your while.

Tom Hickey said...

Here is a short review:

Book Review: Why We Can’t Afford the Rich by Andrew Sayer

Matt Franko said...

LOL here is Keen out there:

http://www.zerohedge.com/news/2017-04-17/steve-keen-can-we-avoid-another-financial-crisis-spolier-alert-no

"Keen builds on the work of Hyman Minsky and Joseph Schumpeter to explain why it is that private debt created out of nothing by private banks leads to economic instability."

With friends like this who needs more enemies ...

Matt Franko said...

Noah maybe you and Paul Ryan can work at a soup kitchen together sometime...

Bob Roddis said...

Better late than never.....

Auburn Parks wrote:

That capitalism runs on sales and spending depends on income and therefore more income means more spending, more sales and thus more capitalism is just how the system works. That you can increase the economy by using the Govt to give people more incomes with which to spend more and thus to generate a larger economy (aka "final sales" = GDP) is again just recognizing reality.

I totally denied those claims above and deny them once again. "Capitalism" is based upon private property, personal physical safety, the enforcement of contractual promises and a strict prohibition upon the initiation of violence. Under those circumstance, people tend to engage in mutually advantageous and voluntary exchanges. That is the reality of the common law of property, contracts and laws against various assaults. The interventionists have the burden of proof to demonstrate the need for violent government intervention to solve whatever problems they claim occur under those rules. They cannot prove their claims and they never even try.

Ralph Musgrave wrote:

I'm interested to hear that Keynesian stimulus is "unsustainable". It's been going for almost a hundred years now with no sign of the idea collapsing.

Keynesians and interventionists insist upon the necessity of violent intervention for a reason. They are the ones who claim that laissez faire is unsustainable without such intervention and that an unstimulated economy otherwise leads to massive unemployment plus economic crises and depressions without such intervention. The Austrian position is a blow by blow detailed description of how it is the violent intervention itself which is the cause of the those problems. According to the Keynesians, the government must inject "stimulus" into the economy because it is otherwise unsustainable. We Austrians demonstrate that those problems do not exist but for the alleged "cures" inflicted upon society by the interventionists.

To conclude: Keynesian solutions are directed at curing problems that do not otherwise exist. In other words, the Keynesian solutions are the cause of the alleged problems that their proponents are claiming to cure.

How is it possible that you guys do not at least know the basic claim of Austrian analysis? Unless you do not want to know it?

jrbarch said...

Capitalism is a cloak the wolf wears so as not to frighten the sheep.

Law of the Jungle: 'Big fish eat little fish'.

Law of Civilisation: 'Big fish help little fish'.

(... and that's not, under the guise of education 'help' little fish become big fish and gobble up everything smaller). That is primitive and backwards.

For me, a human being is something that wants to learn and evolve: - the essence of humanity is kindness, intelligence, and will, which we express imperfectly. It is innate Law which we break, and pay the penalties (not just in $dollar terms). Innate Law is just as powerful as Nature's Laws. Look around the world - we are not able to break the cycles of revenge and harm done through acquisition.