Tuesday, July 29, 2014

SCIOD 2: A Left-Handed Mechanical Loom

In the summer of 1784, Edmund Cartwright, a clergyman, was on holiday in Matlock, Derbyshire, not far from Cromford, where Richard Arkwright had a cotton-spinning mill. Cartwright fell into conversation with some gentlemen from Manchester about what would happen when Arkwright's patent expired. "One of the company observed," Cartwright later wrote, "that... so many mills would be erected, and so much cotton spun, that hands never could be found to weave it."

Cartwright suggested that Arkwright ought to get busy inventing a mechanical loom. His companions scoffed at the impracticality of the idea. Knowing nothing about either weaving or machines, Cartwright called attention to the chess-playing automaton built by Baron Ludwig von Kempelen, which had recently been exhibited in London:
Now you will not assert, gentlemen, said I, that it is more difficult to construct a machine that shall weave, than one which shall make all the variety of moves which are required in that complicated game. 
Later on, recalling this conversation, Cartwright gave the matter more thought and came to the conclusion that such a machine was indeed possible. He hired a carpenter and proceeded to build a prototype, having "never before turned my thoughts to any thing mechanical, either in theory or practice, nor had ever seen a loom at work, or knew any thing of its construction." Needless to say, the first loom was rather crude but Cartwright persevered and in August of 1787 patented a loom, "nearly as they are now made," he wrote in a letter to Dugald Bannatyne, author of the Encyclopaedia Britannica article on "Cotton Manufacture," published in 1818.

In his communication to Bannatyne, Cartwright didn't say if he ever found out that the chess-playing automaton that inspired his invention was an elaborate hoax – a puppet operated by a man concealed in the device's cabinet. In an essay about the chess-player, published in 1836, Edgar Allan Poe observed, "we find every where men of mechanical genius, of great general acuteness, and discriminative understanding, who make no scruple in pronouncing the Automaton a pure machine." If these assumption had been correct, the chess-player would undoubtedly be "beyond all comparison, the most astonishing of the inventions of mankind." According to Poe, though:
The first attempt at a written explanation of the secret, at least the first attempt of which we ourselves have any knowledge, was made in a large pamphlet printed at Paris in 1785. The author’s hypothesis amounted to this — that a dwarf actuated the machine.… This whole hypothesis was too obviously absurd to require comment, or refutation, and accordingly we find that it attracted very little attention.
In 1789 a book was published at Dresden by M. I. F. Freyhere in which another endeavor was made to unravel the mystery…. His supposition was that “a well-taught boy very thin and tall of his age (sufficiently so that he could be concealed in a drawer almost immediately under the chess-board”) played the game of chess and effected all the evolutions of the Automaton. This idea, although even more silly than that of the Parisian author, met with a better reception, and was in some measure believed to be the true solution of the wonder, until the inventor put an end to the discussion by suffering a close examination of the top of the box. 
These bizarre attempts at explanation were followed by others equally bizarre. Of late years however, an anonymous writer, by a course of reasoning exceedingly unphilosophical, has contrived to blunder upon a plausible solution — although we cannot consider it altogether the true one.
After reviewing these previous attempts at explaining the secret of the Automaton, Poe endeavored "to show how its operations are effected, and afterwards describe, as briefly as possible, the nature of the observations from which we have deduced our result." After enumerating 17 observations, Poe concluded that the decisive clue is that the Automaton plays with his left arm – "for the Chess-Player plays precisely as a man would not":
Let us, for example, imagine the Automaton to play with his right arm. To reach the machinery which moves the arm, and which we have before explained to lie just beneath the shoulder, it would be necessary for the man within either to use his right arm in an exceedingly painful and awkward position, (viz. brought up close to his body and tightly compressed between his body and the side of the Automaton,) or else to use his left arm brought across his breast. In neither case could he act with the requisite ease or precision.
Although a plausible conjecture, Poe's conclusion seems at first hardly conclusive. A right-handed Automaton could be operated easily enough by a left-handed person. As it turns out, lefties tend to be more heavily represented among chess players than in the general population. But they are still outnumbered by roughly five to one. As Poe's character, Dupin, was later to remark in "The Murder in the Rue Morgue," "there is such a thing as being too profound. Truth is not always in a well." Superficial as it may seem, odds of 5 to 1 in hiring an operator for the puppet are probably sufficient cause for constructing a left-handed automaton.


Transocean Transfer Pricing and Corporate Inversions

Martin Sullivan had the perfect line four years ago for this corporate inversion debate:
By inverting, a multinational is no longer subject to U.S. tax from its foreign operations. In addition, the transactions often are accompanied by planning techniques that strip income out of the United States.
His paper documented the drop in the effective tax rate for certain oil drilling rigs that did corporate inversions between 1999 and 2002. Ensco complained about this back then but they have joined the club since. About the same time, Senator Baucus used the Senate Finance Committee to blast Transocean:
Transocean, still largely physically located in the U.S., moved its headquarters to the Cayman Islands in 1999, thus avoiding U.S. taxes, and has since relocated the headquarters to Switzerland. Baucus led the fight in the Senate to shut down this practice, known as corporate inversion, and successfully passed the American Jobs Creation Act of 2004, which closed loopholes in the tax code that made corporate inversion possible. Baucus sent a letter today calling on Transocean to provide detailed documents and explanations relating to the company’s tax practices. This information will help the Finance Committee discern the tax benefits Transocean received by exploiting the loopholes closed by the American Jobs Creation Act of 2004 and determine whether further legislative action is necessary to prevent erosion of the U.S. tax base through corporate inversions.
I read the questions for the CEO of Transocean and I hate to say but the Senator completely missed the boat – as in Bareboat Charter arrangements, which I’ll explain in a moment. His notion that Transocean is largely physically located in the U.S. is simply not true. Yes about 25 percent of their activity is here but they have oil drilling rigs all over the world. Oil drilling rig multinationals are an incredibly simply issue as all they do is to combine very expensive equipment with workers so the only issue is who gets the profits from their equipment, which is predominantly these rigs which often cost $500 million a piece. The trick is that formal ownership of the rigs is transferred to tax havens, which lease the use of the rigs to the operating affiliates in places like the US and the UK. Now if this planning technique does not offend you – the intercompany lease rates should. The UK government certainly is according to Reuters:
"Currently, some companies making significant operating profits in the UK are able to move up to 90 percent of these profits overseas and out of the UK tax net," a spokeswoman for the UK Treasury said … Osborne's change, which will limit the amount companies can deduct from profit for such lease payments to 7.5 percent of the historical cost of the rig, will replace generous deductions calculated on the market value of rigs, which has been soaring. Andrew Cox, Tax partner at Deloitte, said HMRC had most recently agreed in 2008 that drillers could take tax deductions of up to 15 percent of the market value of a rig each year.
Finance Minister George Osborne is very frustrated with his national income tax authority for not challenging clearly excessive intercompany lease deductions. I would submit to Senator Baucus that we should be equally upset with the IRS for their failure to challenge overly aggressive transfer pricing. Rather than get lost in endless and ineffective tax rules, why not simply look at the real economics of these multinationals transfer pricing?

Fred Hiatt VSPs On Foreign Policy Again

Oh, I just cannot resist.  So in yesterday's Washington Post, editorial page editor, Fred Hiatt does his foreign policy Very Serious Person (VSP) act again (his domestic version has him calling for cutting social security benefits every several months or so) in a column, "An experiment gone wrong: Obama's policies expose the dangers of U.S. disengagement."  On the foreign policy side Hiatt ventilates neocon fantasyland mirages.  If only Obama had done this or that, all would just be so much better.  I agree that Obama has made mistakes, only my list of his mistakes tends not to be Hiatt's.  Most of this Hiatt has bloviated about previously, but some is new.  I shall note four quotes from his column (which is signed) and then comment.

1) "All U.S. troops were withdrawn from Iraq.  Whether this was at the insistence of Prime Minister Nouri al-Maliki, as Obama's defenders argue, or because Obama offered so few troops, and so half-heartedly, that Maliki was bound to reject the offer matters less than this: Obama was content with the zero option and as he made clear at the time, sanguine about Iraq's prospects without a U.S. presence"

Well, Iraq is certainly in bad shape now but there are two point on this.  The first is that it is utter nonsense to claim that if somebody says they want you out of their country then what is really going on is that they want you to demand that you keep an even larger amount of your troops in their country than you were otherwise asking to.  This is like saying that if a woman tells a man to stop raping her, what she really means is that he should rape her twice as much.  Hiatt and other VSP neocons constantly repeat this argument, but it is some of the worst nonsense I have ever seen, and Bush was being told to get out completely and unequivocally by Maliki when he was president.

The other point on this is that if the US had not invaded Iraq there would not have been any al Qaeda there or any spinoffs that would eventually become what is now this awful  Islamic State, led by a guy who spent four years in a US prison camp there, the erstwhile new caliph, al-Baghdadi.

2) "After bombing Libyan forces to depose Libyan dictator Moammar Gaddafi, Obama declined to send trainers or other support to the new government."

Now I happen to agree that it would have been better if the US, or better yet NATO, trainers had been sent to Libya after the fall of Qaddafi.  However the main problem is that the weak new Libyan government did not want or ask for any such trainers.  Only in the last year have they changed their mind and made a request for such from NATO, not from the US.  Those have not yet arrived, due to disagreements over who is to send those trainers, and it may be too late to prevent disintegration of the never unified post-Qaddafi government.  But "trainers" cannot be sent in if they are not requested, and they were not until recently.

There is also the minor problem that since Benghazi happened, nearly all discussion of Libya policy in the US has been dominated by congressional hearings on that event, with the entire foundation of such investigations having been based on a lie, as I have repeatedly pointed out, namely that what happened there had nothing to do with the infamous anti-Muslim video.  The recently captured organizer of the attack, Khattadi, has in fact repeated that the video did inspire the attack.

3)  "Obama declared that Assad, in gassing 1,400 civilians to death, had violated civilized norms and crossed his, Obama's, red line.  He asked for congressional approval for a military response; then he shelved that request in favor of a deal, brokered by Russian President Vladimir Putin, for Assad to hand over his chemical weapons."

Which he did.  Assad now has no chemical weapons that we know of.  Obviously it was the threat to bomb Syria that brought about this result.  We would have been better off if Obama had bombed Syria, killing who knows how many more civilians, but not have engaged in a negotiation to get rid of the chemical weapons?  Is Hiatt completely out of his mind? 

 4) "Obama offered Putin a 'reset' strategy of improved relations.  But when it became clear that Putin wasn't interested-that he wanted to re-create a Russian empire while blocking the achievement of a Europe whole and free-the West again had no strategic response.  Obama could have bolstered a unified Europe with military, diplomatic and trade measures. Instead, as Putin wrecked democracy in Russia, annexed Crimea and fomented war in Ukraine, Obama and his European counterparts were reactive and divided."

One upshot of the reset was that Obama obtained a renewed nuclear arms control treaty with Russia, which is still in place, despite some reports that now that relations with Russia have gone bad parts of it are having difficulty being implemented.  This would not have happened without any reset.

Given that Hiatt seems to want US troops on the ground in Iraq, Libya, maybe Syria, and also seems to support supporting US allies in Asia against China, if not necessarily a full "pivot to Asia," which he seems to mock, there are definite limits to how much military bolstering the US can do in Europe, and doing so in such a non-NATO (and non-EU) members as Ukraine was completely out of the question.  The US has been in negotiation with the EU over a trade agreement, but that has not gone anywhere fast because such things go very slowly anyway.  Europe is divided on many things, including degrees of economic relationship with Russia, whether nations are in NATO or not, the EU or not, and within the EU, in the eurozone or not.  The idea that there was something, anything, that Obama could have done to have fostered more unity in Europe is nonsense, and it is pretty obvious that there was very little that Obama or anybody in Europe could do to stop Putin from annexing Crimea or messing further in Ukraine once the Ukrainians themselves overthrew the Yanukovich government, which is what immediately triggered Putin's actions on both fronts (and I have been highly critical here repeatedly of Putin on those actions).

More generally, Hiatt's VSPing amounts to criticizing a supposedly "cautious, modulated retreat from US leadership."  However, the only actual "retreat" involved in any of this is the troop removal from Iraq, which Hiatt is simply fantasizing could have been avoided without simply imposing our will on the Iraqi government.  All the rest amounts to criticizing Obama for not expanding military operations in a whole series of countries.  This was never feasible or reasonable, but making unfeasible and unreasonable recommendations is par for the course when Hiatt gets on his foreign policy VSP high horse, as he did here.

Barkley Rosser


Sunday, July 27, 2014

More on Moore’s Strategic Tax Cuts and Employment

Stephen Moore goofed again and Paul Krugman does something novel – actually looking at the data:
Actually, if you’re going to do something about state job growth, the very least you should do is bear in mind that the recession and recovery have had differential effects across states, so that you might want to look at job growth over the whole period of recession and recovery. If you do, the figure shows what you see for Moore’s four states … Texas is, not surprisingly, the best performer. New York comes in second, followed by California, with Florida in last place. Not much of a clear ideological message there. Nor should you expect there to be. Real empirical work on state growth shows multiple factors — mildness of climate, cheap housing, high wages, and yes, some impact from tax rates. The idea that you would find an overwhelming one-factor correlation with taxes alone is something only a, well, Heritage foundation analyst could believe.
If one compares employment in California as of June 2014 to where it was 7 years ago, it has risen by an incredibly modest 0.36%. What I found really amazing is that Moore did not present any information about Kansas. Employment in this state also suffered during the height of the Great Recession and over this same 7 year period has risen by a mere 0.04%. Of course, Moore’s oped is loaded up with excuses why supply-side tax cuts might not pan out in real world starting with the title:
Give Kansas tax breaks time to work
He also tosses in this goodie:
Well, it’s true, tax cuts don’t have magical powers, and it is an often-repeated caricature by the left that Laffer and I and others believe that to be true. There are dozens of reasons why some places grow and others lag behind — and taxes are only one of them. But what is irrefutable from the evidence in the states, not just Kansas, is that strategic tax-rate reductions can ignite growth and employment. Memo to Krugman: Read our new book: “An Inquiry into the Nature and Causes of the Wealth of States.”
You see – if a tax cut did not lead to an employment boom, Moore would argue it was not “strategic”. Dandy! Here in New York - where employment has risen by risen by 3.52% over the past 7 years – we have to endure statements from the governor of New Jersey about his supply-side policies. So how are they working out? Despite all of Christie’s shooting about record employment growth, the reality is employment is still 3.32% below where it was 7 years ago. I guess “voting with their feet” has a problem when Christie’s budgetary policies get in the way of fixing bridges and building tunnels. But hey – he kept gasoline taxes low. Or was it the reductions in public employment that caused this anemic performance? The balanced budget multiplier in action. But I have faith in the shifty charlatan known as Stephen Moore to praise this from New York:
Governor Andrew M. Cuomo today formally launched START-UP NY, the game-changing initiative that, starting today, will create tax-free zones to attract and grow new businesses across the state.
Oh boy – I bet this makes it in the 2nd edition of Laffer and Moore’s book. Pardon me if I don’t bother to read the 1st edition.

The Curious Case Of The Malofeev Mafia

Yesterday's Financial Times had an article, "Oligarch emerges as link between Russia and rebels," that revealed curious details about a most curious figure, 40-year-old Russian private equity billionaire, Konstantin Malofeev.  He is also a committed adherent of Russian orthodoxy, creationism, and a supporter of the restoration of the Russian empire and monarchy.  In January, he and the Russian Orthodox patriarch arrived in Sevastopol with some ancient relics, only to be met by 100,000 Crimeans who prayed, supposedly for union with Russia.  Malofeev got his wish later.  Ukraine complains that he is currently funding Russian separatists in eastern Ukraine, which claims is untrue.  But there is more to this tale, which is even more curious.

What is most curious is his relationship with the top two leaders of the Donetsk Peoples' Republic, Alexander Borodai and Igor Girkin, known as "Strelkov," the former its self-proclaimed prime minister and the latter its self-proclaimed minister of  defense, both of them Russian citizens from Moscow who somehow showed up heavily armed after Russia took Crimea (where Borodai advised the new pro-Russian leader of Crimea briefly) in eastern Ukraine, leading seizures of public buildings and proclaiming their republic.  Both are former employees of Malofeev.  Borodai was particularly close as a top PR consultant for Malofeev.  Girkin/Strelkov is closer in terms of ideology, also espousing Orthodox domination of an expanded and restored Russian empire ruled by a tsar.  This latter figure was the one who bragged about the separatists downing MH17 on his website, which he took down after it came out it was a commercial airliner, only to then promulgate the theory that the plane was full of already dead people, a claim reiterated seriously on Russian media, btw.

As for Malofeev himself, he is reported to be close to to people close to Putin (aside from the patriarch, who is so): Vladimir Yakunin, minister of railways, and Igor Shchelgov, minister of telecommunications (no wonder Russian media was reporting the Girkin/Strelkov claim that MH17 was a zombie plane).  He also apparently spends time hanging out with US evangelicals and attended a semi-secret meeting in Vienna of right wing political leaders, including Martine Le Pen, leader of France's National Front, and Heinz-Christian Strache.

Some western progressives like to repeat the Russian propaganda that Ukraine is run by "fascists" (yes, there are some in the new government) who were installed by machinating western powers, particularly the US, although the US has nearly zero direct economic interests in Ukraine at all.  But the idea that these Russian separatists in Donetsk and Luhansk are somehow progressives is just complete and utter nonsense.  They are about as reactionary as one can get, if not outright certifiably insane in the case of Strelkov, but they are the Malofeev mafia, and as such, they get a lot of support  from Russia's leaders.

Barkley Rosser

Saturday, July 26, 2014

Addendum to SCIOD 1: Pantins' Pantomime

Joseph Dorfman tells of the note John Maurice Clark sent to Wesley Mitchell on May 14, 1948, (the day after Sandwichman was born):
I have a theory of competition which argues that any fixed schematic laws must be misleading, because competition is an evolving thing. And I have a theory of human nature which can't be used as a basis for deductive theorizing, because it includes too many various elements and leaves too much room for personal and group differences in values and in behavior.
A week later, Clark added the sarcastic observation, "In dealing with the evolutionary character of the mechanisms, I sometimes think 'theory' of the abstract sort is a device for converting usefully enlightening ideas about behavior and motivation into paper mechanisms whereby armchair theorists can grind out misleading results."

A Neglected Point in Connection with Crises -- N. A. L. J. Johannsen

Joseph Dorfman, "Heterodox Economic Thinking and Public Policy," Journal of Economic Issues, March 1970, p. 20:
My last exhibit of an influential heterodox thinker is a man who had no college training whatever. The self-taught Nicholas August Ludwig Jacob Johannsen (1844-1928) dared long ago to espouse the greatest of heresies; namely that there could be a chronic condition of overproduction of goods, or in modem terminology, a "general deficiency of demand." Because of this, his audience among the orthodox economists was extremely limited. While he labored in relative obscurity any impression that this might give that his work was of little importance or influence would be misleading, for his limited audience included many of the best minds of the day both at home and abroad; to wit, J. B. Clark, J. M. Clark, Foster and Catchings, Friedrich von Hayek, John A. Hobson, Keynes, Mitchell and F. W. Taussig.  
His major work, A Neglected Point in the Theory of Crises, (1908) with its clear presentation of the multiplier and of the inability of unlimited saving to find investment has been hailed as one of the earliest successful formulations of what has become known as Keynesian economics.  
Johannsen followed up his intricate analysis with policy proposals that were likewise quite modern. For example, in one of his innumerable pamphlets appealing to the profession to attempt to understand his theory, he wrote that there were two alternative ways to "guard against depressions." One was to "create unlimited opportunities for building up new productive capital, so that the savings funds constantly accruing can always find investment in the beneficent way." The alternative was to "restrict or regulate the saving activity, . . . so as to keep it in healthy limits." Since "the greater the concentration of wealth in individual hands, the greater the saving power; such concentration . . . is not desirable, so far as the interests of society are concerned." 

John Maurice Clark on Window Breaking

From The Costs of the World War to the American People, 1931:
We come next to the question whether disasters which consume or destroy wealth can be, after all, advantageous to the social economy because the demand they create is "good for business" and leads to increased production and circulation of wealth. Traditional economics says: "No. The breaking of windows, for example, can never be anything but destruction of wealth; it cannot be metamorphosed into the creation of wealth, no matter how far its effects may be traced as they ramify through the economic system." It is admitted that breaking windows may help glaziers for the moment, but only at the expense of other producers; those who would otherwise have received the money the glaziers got for replacing the panes, and in exchange would have satisfied some additional want beyond the need for windows that will keep the weather out. That extra satisfaction is lost when the pane is broken. And for the rest, glaziers work more and receive more, while others work less and receive less.  
This view is certainly sound, on traditional economic assumptions; but is it all sufficient and equally applicable to all cases? The experience of the War seems to afford ground for giving the question some fresh examination. The crux of the question lies here: is the effective demand for other things, and the consequent production of other things, necessarily cut down by exactly the amount that is spent on replacing the broken panes? Or, to put it the other way around, if the panes had not been broken, would other things have been demanded, produced, and consumed to an exactly equal amount?  
As a matter of long-run adjustment, the establishment of a permanent habit of breaking some thousands or millions of panes every year might be expected to have substantially this effect. But we are not dealing with the long run results of permanent habits, but with single events which break into the customary spending and producing habits of the people; and we must examine the case at issue on that basis. Such evidence as the war experience offers is suggestive, but not by itself conclusive. For the record of a complex historical episode seldom carries within itself the proof of the precise effect of each one of a multitude of collaborating causes.  
America prospered in the period of neutrality, when it was in the position of the glaziers in our illustration. Prosperity in such a situation proves nothing that is not admitted at the start. But the suggestive thing about this prosperity is the fact that we prospered by making goods without getting paid for them. The glazier who lets his customer's bill run may be doing well by himself, if the customer is "good pay" in the end, but we should hardly expect him to live high in the meantime from his work for that particular customer. From the fact that we improved our living moderately as well as expanded our glassworks very substantially over and above the credits we were accumulating for unbalanced exports, one may conclude that the actual situation contains elements which the simplified illustration does not indicate.  
The general nature of these elements of productive expansion has already been indicated: namely, the new demand not balanced by an equal falling off in other demands, the additional derived demand for capital equipment, the increase in employment and volume of work done, and the further resultant demand for goods by more prosperous workers and other participants in the earnings of industry. The net increase in aggregate money demand was seen to be made readily possible by the elasticity of the credit system, the stimulus to production intensified by the well-known effects of rising prices, and the increased money demand, representing an increase in the world's economic necessities, was enabled to take effect as an increased total of "effective demand" for actual goods by reason of the elasticity of our productive powers, which were then, as at most times, working short of full capacity.  
It may be remarked in passing that the "elasticity of the credit system" is no matter of inscrutable necromancy conjuring something from nothing, magical as its effects may appear. Banks can multiply purchasing power because depositors are willing to accept the position of lenders without interest. Depositors do this to the extent of most of their reserves for current spendings, in exchange for the privilege of calling these deposits at any moment by the process of drawing a check. This is a painless and largely unconscious form of lending, involving no increase of abstinence. Expansion of deposits through expansion of loans finds its main base (aside from adequate cash reserves) in a quasi-automatic increase in this painless and unconscious furnishing of credit.  
Turning to the experience of our actual participation in the War, the evidence it affords on the question at issue is less conclusive in one way than the experience of neutrality, and stronger in another. It is less conclusive in that consumption of wealth did not actually increase; and it is stronger in that whatever compensating effects were secured, were secured in the face of the fact that it was now our own windows that were being broken, as well as those of our European neighbors; so that we were no longer in the position of glaziers who might expect to profit for quite obvious reasons.  
The work and materials absorbed by our window-smashings were clearly not a net subtraction from our previous or our normal activities but involved an increase in the gross total. Production increased to a limit apparently set largely by congestion of rail facilities under an abnormal concentration of traffic at the Atlantic seaboard, rather than by any more general and abstract law of economic equilibrium. Economic effort, it must be noted, increased more than results; since war production was abnormally wasteful and lavishly expensive.  
Other nations fared far worse, in this respect, than the United States. In France, for instance, the calling of the army to the colors resulted in throwing a still larger army of unemployed on the streets: a condition which was only very gradually remedied. Instead of calling the existing unemployed into the workshops to take the places of those who had gone to the front, many shops were closed because the employer had gone to the front, and his employees not liable to service were left to find new work if possible. Thus French production fell off on account of this element of disorganization, as well as on account of the more obvious and unavoidable fact that the first invasion had snatched from her an area in which a large section of her heavy industries and mines was located. In this case the smashing of windows was emphatically not "good for business."  
Further evidence might be sought in the general testimony of studies of the business cycle, to the effect that reviving demand acts cumulatively, at least within fairly liberal limits. This does not prove that an economic disaster brings an increase in effective demand for goods; but it indicates that such an increase is not impossible.  
To sum up: the effect seems to depend on the character and extent of the disaster, on the attitude with which it is met, and on the state of the credit system and of business activity in general. A disaster which does not cripple the machinery of production, of an extent which spurs people to increased efforts rather than reducing them to helpless despair, coupled with a credit system and an industrial system each of which has some unused capacity for expansion-these conditions enable a disaster to be self-repairing in part at least, through stimulus to productive activity.  
One of the penalties of increasing economic power is the need to find new forms of consumption in which to embody it. This process is tentative, risky, and wasteful. We are limited in our imagination as consumers as to the best ways to use increasing spending power: still more as producers in devising economically practicable goods which will capture the consumers' unformulated buying potentialities. Nowadays producers must, perforce, try to meet the consumers' latent desires more than halfway-to form them, indeed, in ways capable of successful and profitable gratification. But this attempt is inherently uncertain. And there is, as a consequence perhaps in part of this uncertainty and of these limits on our economic imagination, a tendency to waste capital in unimaginative duplication of existing types of facilities, to produce familiar goods. This being the case, production by these facilities is limited by the limited demand for these familiar things; the more nearly unlimited potential demand for new goods being no help to those who have not diagnosed the potentialities aright. In such a situation, anything which increases the need for familiar types of goods may be a blessed relief from the very perplexities of progress, enabling industry to go ahead with certainty and confidence rather than undertaking the more difficult task of diagnosing the consumers' unknown potentialities and devising or selecting goods to call them forth. With a known wastage to make good, industry can count on what it has to do and on the necessary instruments; and it may move forward far more rapidly and easily in repairing the known wastage than if it were doing pioneering work in developing new and untested demands. Will the new demands therefore remain just so much longer undeveloped and unsatisfied? Perhaps that question may remain for omniscience to answer. 

Friday, July 25, 2014

One Lesson, Ad Nauseum

John Quiggin tells Crooked Timber readers that he's been working on a book that will reply to Henry Hazlitt’s Economics in One Lesson. Hazlitt's book was one of the first places I looked back in 1997 when I began my quest for the origin of the lump-of-labor fallacy claim. The word "fallacy" and its plural appears in the book twice as often (44 times) as the word "economist" and its plural (22 times).

In Quiggin's interpretation, Hazlitt’s one lesson is that prices are opportunity costs. According to Hazlitt, his one lesson is that economics consists of looking beyond the immediate effects of an action or policy, or "what is seen," to the longer term effects that remain unseen. Quiggin objects that there is nothing specifically economic about Hazlitt's avowed lesson, "it merely assumes what is to be proven, that a complete assessment of policy will yield free-market conclusions."

I posted a short comment on Quiggin's post, pointing out that Frederic Bastiat's "Parable of the Broken Window," which Hazlitt presents as an application of his one lesson, is simply a storified version of "supply creates its own demand." I would like to illustrate that point -- and indicate its connection with the lump-of-labor -- here with a  few excerpts from Economics in One Lesson. On page 15 (2007 edition), Hazlitt made explicit the connection between the broken window fable and Say's alleged Law:
Those who think that the destruction of war increases total “demand” forget that demand and supply are merely two sides of the same coin. They are the same thing looked at from different directions. Supply creates demand because at bottom it is demand. The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want. In this sense the farmers’ supply of wheat constitutes their demand for automobiles and other goods. All this is inherent in the modern division of labor and in an exchange economy.
Again, on page 152:
The real purchasing power for goods, however, as we have seen, consists of other goods. It cannot be wondrously increased merely by printing more pieces of paper called dollars. Fundamentally what happens in an exchange economy is that the things that A produces are exchanged for the things that B produces.
Hazlitt's footnote for the argument cites Benjamin Anderson's "A refutation of Keynes' attack on the doctrine that aggregate supply creates aggregate demand," which Hazlitt later reprinted, with effusive praise for the author, in The Critics of Keynesian Economics.

Hazlitt doesn't use the term "lump-of-labor" in the book, but that fallacy argument recurs frequently. On page 45:
I have referred to various union make-work and featherbed practices. These practices, and the public toleration of them, spring from the same fundamental fallacy as the fear of machines. This is the belief that a more efficient way of doing a thing destroys jobs, and its necessary corollary that a less efficient way of doing it creates them.  
Allied to this fallacy is the belief that there is just a fixed amount of work to be done in the world, and that, if we cannot add to this work by thinking tip more cumbersome ways of doing it, at least we can think of devices for spreading it around among as large a number of people as possible. This error lies behind the minute subdivision of labor upon which unions insist. In the building trades in large cities the subdivision is notorious. 
Page 49:
The spread-the-work schemes, in brief, rest on the same sort of illusion that we have been considering. The people who support such schemes think only of the employment they might provide for particular persons or groups; they do not stop to consider what their whole effect would be on everybody.  
The spread-the-work schemes rest also, as we began by pointing out, on the false assumption that there is just a fixed amount of work to be done. There could be no greater fallacy. There is no limit to the amount of work to be done as long as any human need or wish that work could fill remains unsatisfied. In a modern exchange economy, the most work will be done when prices, costs and wages are in the best relations with each other. What these relations are we shall later consider.
Page 56:
Wages and employment are discussed as if they had no relation to productivity and output. On the assumption that there is only a fixed amount of work to be done, the conclusion is drawn that a thirty-hour week will provide more jobs and will therefore be preferable to a forty-hour week. A hundred make-work practices of labor unions are confusedly tolerated.
Page 131:
Most of these policies have been followed under the assumption that there is just a fixed amount of work to done, a definite “job fund” which has to be spread over as many people and hours as possible so as not to use it up too soon. This assumption is utterly false. There is actually no limit to the amount of work to be done. Work creates work. What A produces constitutes the demand for what B produces. 
But because this false assumption exists, and because the policies of unions are based on it, their net effect has been to reduce productivity below what it would otherwise have been. Their net effect, therefore, in the long run and for all groups of workers, has been to reduce real wages -- that is, wages in terms of the goods they will buy -- below the level to which they would otherwise have risen.
Note that in the last quote, Hazlitt rehearses the same "what A produces constitutes the demand for what B produces" argument that he later credits to B. M. Anderson. Hazlitt's juxtaposition of the "supply creates demand" doctrine and the "fixed amount of work" fallacy was not an idiosyncrasy but standard, textbook usage. 

Raymond Bye's Principles of Economics, first published in 1924, became one of the most widely adopted college introductory economics textbooks in the United States during the interwar period. In it, Bye presented an atypically clear exposition of the "'lump-of-labor' or 'make work" fallacy," which he defines as "very similar to the general overproduction fallacy..." "The reader," Bye assures, "will see the error in this sort of thinking if he understands the true nature of exchange." So what is the "true nature" of exchange?
Every laborer creates a product which is offered in exchange for the products of other laborers. The demand for labor thereby grows as fast as its supply; the one cannot be greater or less than the other, for they are the same thing. Every addition to the labor force of a community gives other laborers work to do providing for the needs of the newcomers, while the latter can find occupation catering to the ungratified desires of those who were already employed.
Of course, "supply creates its own demand" was the classical doctrine that Keynes likened to "an optical illusion, which makes two essentially different activities appear to be the same." No, those "two essentially different activities" Keynes referred to were not producing and consuming. They were "decisions to abstain from present consumption" and "decisions to provide for future consumption," the two of which are activated, Keynes argued, by different motives.
It is, then, the assumption of equality between the demand price of output as a whole and its supply price which is to be regarded as the classical theory’s ‘axiom of parallels’. Granted this, all the rest follows — the social advantages of private and national thrift, the traditional attitude towards the rate of interest, the classical theory of unemployment, the quantity theory of money, the unqualified advantages of laissez-faire in respect of foreign trade and much else which we shall have to question.
Why Say's Law did not "sink without trace" in the wake of Keynes's refutation is the topic of the final episode of the supply creates its own demon series.

Thursday, July 24, 2014

SCIOD 1: Pantins' Pantomime

Imagine a world in which there are two kinds of people – employers and workers. Each worker is either employed or unemployed. The workers are identical and there is a fixed number of them. They work only because they enjoy buying things with the money they earn. If they can avoid it, they don't like to put any effort into their work. The employers' goal is to maximize profits. Their strategy is to get as many units of output as they can from each dollar they spend on wages.

I could go on with the features of this so-called "economic model" but I won't bother. As the reader may have gathered from the brief description, it is a very sparse and mechanical kind of world, sort of like the one Philip Mirowski likened to the Neues Zaubertheatre in the Steven Millhauser story, "The New Automaton Theater."

In Millhauser's story, "our city" (which remains unnamed) is renowned for its tradition of the miniature automaton theatre, in which it takes immense civic pride and derives deep spiritual pleasure. From time to time a genius of the art of the miniature automaton emerges who surpasses the accomplishments of previous virtuosi. One such prodigy is Heinrich Graum, who, from his youth, strides from triumph to triumph until one day, at the age of 36, he abruptly closes his workshop and abandons the art. A decade later, as suddenly and unexpectedly as he had left, he returns to launch the Neues Zaubertheatre, whose jarring and controversial performances prove to be unlike any automaton theatre the citizens have ever witnessed:
The new automatons can only be described as clumsy. By this I mean that the smoothness of motion so characteristic of our classic figures has been replaced by the jerky abrupt motions of amateur automatons.... They do not strike us as human. Indeed it must be said that the new automatons strike us first of all as automatons... In the classic automaton theatre we are asked to share the emotions of human beings, whom in reality we know to be miniature automatons. In the new automaton theatre we are asked to share the emotions of the automatons themselves... 
In spite of, or perhaps because of its disturbing novelty, the new theatre slowly supplants the traditional, realistically mimetic art and becomes the universal reference for the art. Mirowski "dragooned" Millhauser's story for his book, Machine Dreams, to serve in place of the standard outline of the book that usually appears in the first chapter of modern academic publications:
…the town is the American profession of academic economics, the classic automaton theatre is neoclassical economic theory, and the Neues Zaubertheatre is the introduction of the cyborg sciences into economics…
Except Mirowski's analogy isn't quite right. The workers in this mathematical model world are not "clumsy, amateurish automatons" with "jerky, abrupt motions." They are not automatons at all! They have no motions of their own. It is the model makers, the robotic academic economists, who perform the clumsy, jerky motions of amateurish automatons as they construct their two-dimensional, lifeless models.

In an earlier Millhauser story, "August Eschenburg," which is also about a virtuoso of the automaton theater, the narrator describes a cruel toy that fascinated Eschenburg as a child:
A hollow paper figure represented a clown, or a fireman, or a bearded professor [or a "Walrasian auctioneer" perhaps?]. When you put a captured bird inside, the poor creature's desperate attempts at escape produced in the paper figure a series of wild comic motions.
To amend Mirowski's analogy, it is hollow paper figures that are the microfounded models that academic economists concoct. The captured bird inside that moves the model is the profession's obstinate and anachronistic faith in supply and demand and the price mechanism as universal elixirs of allocative efficiency.

Wednesday, July 23, 2014

Supply Creates Its Own Demon (SCIOD): The Serial!

Enough is enough!

Erik Brynjolfsson and Andrew Mcafee wrote
This view – that automation and other forms of technological progress in aggregate create more jobs than they destroy – has come to dominate the discipline of economics. To believe otherwise is to succumb to the 'Luddite fallacy.' So in recent years, most of the people arguing that technology is a net job destroyer have not been mainstream economists.
To Brynjolfsson and McAfee's credit they point out that the theory and evidence for this argument are "less solid than they initially appear." What they don't point out -- and possibly don't realize -- is that the theory and evidence were discredited roughly 80 and 140 years ago.

"In economics," Paul Samuelson wrote and I quoted a short while ago, "it takes a theory to kill a theory..." But it doesn't have to be a better theory or a newer one. In fact, the surest way to kill a theory in economics is with a previously-deceased theory, as the same Samuelson demonstrated in another recent post.

It turns out that bringing the dead back to life has been a recurrent theme among economists -- most literally in the case of Andrew Ure's experiments with Galvanism just a few months after publication of Mary Shelley's novel, Frankenstein (see episode 10).

As I've been trying to point out, the "will automation take our jobs?" motif is neither new nor interesting. Well... maybe it's interesting in a kind of morbid fascination way. But it's not interesting in the sense of "can we learn anything new from this?" The question has shuffled off this mortal coil. A more interesting question would be why does the anachronism persist?

I've got a 10,000-word draft, consisting of most of the projected twelve episodes of "Supply Creates Its Own Demon" (henceforth "SCIOD") in which I explore the extraordinary afterlife of a dead idea. I have scheduled two episodes a week, to be posted on Thursdays and Tuesdays at 5:00 p.m EDT. Links will become active as the scheduled episodes are posted. Here are the episodes titles:
  1. Pantins' Pantomime coming July 24
  2. The Automatic Left-handed Loom July 29
  3. Chariots of the Luddites July 31
  4. Paradox Laws August 5
  5. Supply Creates Its Own Demon August 7
  6. A Trick! of the Clumsiest Description! August 12
  7. The Frankenstein Factory August 14
  8. The Secret Basis of Glut August 19
  9. This Magazine of Untruth August 21
  10. The Fund-a-mental Thing's Supply As Time Goes "Bye!" August 26
  11. Continuation of Brassey by Chapman August 28
  12. Weighs Like a Nightmare, Sinks Without a Trace September 2
Why do defunct ideas persist? Hypothesis: they fit into a multi-faceted repertoire of beliefs and behaviors in which they "make sense" because they legitimate and rationalize those beliefs and behaviors. It's no use refuting the wrong idea without directly confronting its repertory context.

Teasers:  Previously I have drawn on material from episodes 7, 8 and 12 for posts subtitled You Don't, Say!Marc Andreessen and "Textbook Luddism" and Say's Law sank without trace.


Tim Worstall on the Alleged Benefits of Corporate Inversions

There is a wonderful debate on why inversions matter. Tim Worstall knows the technical side of tax law:
A tax inversion changes the way that profits made outside the US are taxed by the US, this is entirely true. But such a tax inversion, in and of itself, doesn’t change the way that profits made inside the US are taxed at all.
He’s talking about the Walgreen proposed inversion:
So, what happens when Walgreen’s does a tax inversion (by merging with or taking over Boots etc)? The taxation of those profits that Walgreen’s makes by doing business in the US doesn’t change … What does change is that Walgreen’s profits made outside the US have moved from being US domiciled to being non-US domiciled. And as those outside the US profits are neither US resident nor US domiciled then they’re not taxable in the US.
I guess Tim has not read the Walgreen 10-K as it is a domestic retailer. There are just not that much in the way of foreign based profits. OK, there are for AbbVie and for Medtronic. In fact, AbbVie has allocated over 87% of its profits abroad. Abbvie’s concern is this repatriation tax, which the Republicans want to get rid of anyway. Medtronic does not pay a repatriation tax as it permanently defers its foreign sourced income – which is just say of 60% of its worldwide profits. Tim tries to dispute a claim made by David Cay Johnston (and others) that these inversions will lead to more sourcing of income abroad:
There are, it is true, other things that the newly merged company could do to move such US profits out of the US tax net. They could, for example, sell the patents on drugs that they market in the US to some nice offshore subsidiary in, say, Bermuda. That Bermudan subsidiary then charges the US unit for the use of those patents and this moves profits outside the US tax net into Bermuda’s no tax net. That’s certainly possible although we’ve no news at all that leads us to think that they are planning this. So we might be able to say that a tax inversion opens the possibility to future movement of US profits offshore. However, do note something else that has to happen with that tactic. That Bermudan company must pay full market value for those patents when they are transferred. Meaning that the US part of the company would make a large profit of course: thus accelerating their payment of tax to Uncle Sam. This tax dodging stuff is rather harder than it sometimes looks: if you’re going to place IP offshore you can do that, certainly, but you’ve got to do it before it becomes valuable, not afterwards.
Tim is referring to section 367(d) which says migration of IP requires that the original owner of the IP be compensated at fair market value. Tim assumes that the IRS is incredibly effective at enforcing this sensible requirement. I guess he has no clue that most of these transfers occur at something like 10 cents on the dollar of what the market suggests is the fair market value. Fortunately for us, Kenneth Thomas understands how this works in practice. Of course, I still have one wee problem with this being discussed in terms of the AbbVie inversion. With over 87% of their profits being sourced abroad even before the inversion, hasn’t the horse already left the barn?

The Loathsome Timothy Taylor

I was composing a piece in which for some reason I referred to "the loathsome Timothy Taylor." But then I paused and asked myself "why loathsome?" Shortly after I read this comment by Owen Paine at Economist's View: "Timmy Taylor is a loathsome lamprey like creature..." referring to a piece by Taylor, "Are Labor Markets Exploitative," Mark Thoma had linked to. I have to credit Taylor with answering my query.

Taylor's schtick was to cite a long piece from a pro-slavery essay that also referred to labor markets as exploitive.

"Of course," Mr. Taylor demurs, "the fact that a point of view has some appalling allies doesn't make it incorrect." Of course, his whole point in citing the passage was to insinuate the very conclusion he disavows.

But what of Mr. Taylor's allies? I won't stoop to the sweeping generalities that he did but will here confine myself to the "lump-of-labor fallacy" crowd of professional detractors against shorter work time. Taylor, as I have pointed out, wrote a piece titled "Dept of Misunderstandings" reciting the bogus fallacy claim.

Well, there is a history to that claim (that I happen to have researched) and one of the more despicable documents I encountered was "An Arbitrary Workday" published in 1903 by Smith and Walmsley, one of the first commercial public relations firms to set up office in Washington D.C. The "report" by Robert H. Watkins is loaded with the same kind of sappy Horatio Alger uplift schmaltz that Taylor admires but, also this:
The passage of the bill would indeed in its clumsy way go far toward engrafting the system of eight hours a day throughout the United States, but to contemplate what that would mean is to think of nothing less than a national folly. In my humble opinion, if the bill should pass and every manufacturing concern in the country and every employer of labor should consent to and adopt the eight-hour system, it would instantly mark the decay of the splendid prestige of the United States as the richest and most powerful country on earth. As I have already said, I believe the measure an assault upon the liberty of both the employer and the employee. I do not wish to see the day when American manufacturers and American workmen should not have all the chances they desire with the manufacturers and workmen of the rest of the world. The arbitrary rule of eight hours would make men machines that would surely rust, and would discourage individuality of effort and purpose. It would subject us to a competition with foreign producers with which we could not possibly cope. Civilization has not yet reached the period of impossible felicity when multitudes of men may every day, year in and year out, quit work and go to improving themselves with idleness. The notion that the employer, finding he can not get as much out of his men by only eight hours, will be obliged to employ more men to complete the job, will not do to consider in these days. Under that system manufacturing in America will go backward and employers grow less. As line after line of production is abandoned the crowds of idle will be correspondingly increased. 
Having lived for some years in a Southern State which has made remarkable progress in manufacturing, especially in metal production and in mining, I contemplate with dread the effect there of a possible eight-hour system for labor. A great proportion of Southern labor is negro labor. To turn loose every day the hordes of negroes that would be idle so much of the day as the eight-hour system would give them would visit on the South nothing short of calamity. The negro problem is grave enough at best. It is vexing the calm of our greatest statesmen and baffling already the efforts of our most strenuous intellects. Who is going to provide entertainment, profitable and wholesome entertainment, for our negroes in their hours of ease? Who is going to guarantee that the passions of the blacks -- the millions of blacks -- will conform themselves to the invocations of the lyceum and the library? It is a matter of record that the towns and urban communities throughout the South show that there is most crime among negroes on days on which they are not at work, their few whole holidays and their once-a-week half-holidays. The eight-hour system would give them some holiday every day and the race would either degrade every community in the South or have to be exterminated. 
The negro is not the only human creature to whom enforced or optional idleness is a bane. The best gift of our institutions is in the chance of manful, self-reliant independence. The law should foster it and not hamper and degrade it.
The eight-hour crusade, once having enlisted the aid of the Congress of the United States, would be as stupendous and deplorable an absurdity as was the crusade of the fanatical children of the middle ages.
Now I'm not saying that Timothy Taylor is an advocate of racialist extermination. I'm simply pointing out the odiousness, the loathsomeness of his style of insinuated ad hominem guilt by association. Yes, indeed. The loathsome Timmy Taylor.

"A more despicable belly crawler is inconceivable," Owen Paine concluded in his comment on the Taylor blog post.

Tuesday, July 22, 2014

"Will Automatons Take Our Economists' Jobs?"

For some reason, economists think it's a good idea to keep asking the same hackneyed question over and over again and keep giving the same hackneyed answers.

"Will automation take our jobs?" is a perennial favorite. The answer, of course is "technology creates more jobs than it destroys," "a cheap market will always be full of customers," "supply creates its own demand" and "CREATIVITY!" All of which is bullshit (or parrot droppings).

The real answer is that waste and war and immiseration can always be counted on to keep people toiling away no matter what. Hooray for waste and war and immiseration!

My question is a little different. What will it take to automate economists's jobs? It was observed long ago that one could teach a parrot to say "supply and demand." Here is my answer that doesn't require the frequent changing of the newspaper at the bottom of the cage:



Congenital ironists might want to note that the textbook lump enunciated by the "Keynesian" Samuelson is the self-same "supply creates its own demand" version of "Say's Law" of which Keynes remarked:
Thus Say’s law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.
The "vitally important chapter of economic theory" that Keynes referred to was, of course, "the theory of employment to be worked out in the course of the following chapters..."

To Kill a Theory

Paul Samuelson once wrote, "In economics, it takes a theory to kill a theory; facts can only dent the theorist's hide."

Specifically which theory was he talking about being "killed" and which other theory was doing the killing?