Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.
Friday, 20 May 2011
Economics Prof falls for Lump of Labour fallacy!
Prof. Robert Skidelsky, for whom I normally have a lot of respect, has gone right off the rails in this article. (Incidentally, my previous post (16th May) was about economics Profs who have gone off the rails. And some goes for the next post in a day or two. So welcome to my “economics profs off the rails” series!)
Skidelsky starts:
As the world recovers from the Great Recession, it has become increasingly difficult to discern the true trend of events. On the one hand, we measure recovery by our success in regaining pre-recession levels of growth, output, and employment. On the other hand, there is a disquieting sense that today’s “new normal” may be slower growth and higher levels of unemployment.
So the challenge now is to formulate policies to provide work for all who want it in economies that, as currently organized, may not be able to do so.
Hang on. Since when have we been able to “provide work for all who want it”? Never! No country or economy has ever been able to do that, so the fact that we currently, or in the future wont be able to, is no big deal.
On the other hand if Skidelsky is suggesting that we won’t be able to “provide work” for AS MUCH OF THE WORKFORCE as we used to, what’s his basis for this suggestion? No more, far as I can see, than the “disquieting sense” mentioned in his first paragraph. That is not a logical argument.
He continues:
The problem has two aspects. As countries become more prosperous, one would expect their growth rates to slow. In earlier times, growth was fueled by capital scarcity: capital investment attracted a high rate of return, and this created a virtuous circle of saving and investment.
Cobblers! Why does the fact of becoming more prosperous mean that growth rates decline? GDP per head in what is now the UK was more or less constant between the time of the Roman Empire and about 1,500AD. Then by around 1900 it had shot up. But it didn’t stop rising after 1900 did it?
As for the idea that “growth” is “fuelled by capital scarcity”, that’s a strange one. Skidelsky claims there is a “capital scarcity”, but in the next sentence claims there is a “virtuous circle of saving and investment”. Now that’s what I call a self-contradiction. Is he saying that “in earlier times” there was an adequate supply of capital or not? Darned if I know.
And as for the idea that “capital scarcity” can “fuel growth”, I’m baffled. If we couldn’t afford computers, roads, houses, factories, etc etc, that would “fuel growth” and make us better off?? Sorry: I don’t get it.
He continues:
Today, capital in the developed world is abundant; the saving ratio declines as people consume more; and production shifts increasingly to services, where productivity gains are limited. So economic growth – the rise in real incomes – slows. This was already happening before the Great Recession, so generating full-time jobs that pay decent wages was becoming ever more difficult. Hence the growth of casual, discontinuous, part-time jobs.
More nonsense on stilts. Why on earth does the fact of economic growth slowing down mean that “generating full-time jobs that pay decent wages becomes more difficult” and that the prevalence of “casual, discontinuous, part-time jobs” rises?
Suppose that economic growth ceases altogether, say because improvements to technology grind to a halt, why does that make it more difficult to pay “decent wages”? Given constant GDP per head, wages will just remain constant, other things being equal, won’t they? And why does “generating full time jobs” become more difficult? Again, given constant GDP per head, why on earth does that mean that half the workforce switches from full time to part time work. That is, why does aggregate demand decline? I can think of no reason whatsoever. Skidelsky continues:
The other aspect of the problem is the long-term increase in technology-driven unemployment, largely owing to automation.
Hang on. He is simply assuming the validity of the Luddite argument, i.e. that technology causes unemployment. No reasons given, apart from the “disquieting sense” mentioned above.
He continues:
The market’s solution is to re-deploy displaced labor to services. But many branches of the service sector are a sink of dead-end, no-hope jobs.
Oh yes? Take doctors and nurses: they’re a real bunch of “dead-end, no hopers” aren’t they? And then there are lawyers and computer programmers: also a bunch of thick headed, knuckle dragging, uproductive, time wasters, I don’t think. He continues:
Immigration exacerbates both aspects of the problem. A large part of migration, especially within the European Union, is casual – here today, gone tomorrow, with none of the costs associated with full-time hiring. This makes it attractive to employers, but it is low-productivity work, and it increases the difficulty of finding steady employment for the majority of a country’s workforce.
Immigration exacerbates unemployment…is Skidelsky a BNP member? Immigration can certainly cause temporary disruption to labour markets, e.g. the big influx of East European construction workers to the UK between around eight and three years ago. That certainly pushed significant numbers of UK construction workers out of their jobs. But there is no LONG TERM effect: those pushed out of work retrain or retire, etc etc. America has absorbed A MILLION IMMIGRANTS PER YEAR FOR TWO HUNDRED YEARS!!! How come unemployment in the US over the last few decades has been no different to other developed countries? Skidelsky continues:
So, are we doomed to a jobless recovery? Is the future one in which jobs are so scarce that many workers will have to accept a pittance to find any employment and become increasingly dependent on social transfers as market-clearing wages fall below the subsistence level? Or should Western societies anticipate another round of technological wizardry, like the Internet revolution, which will produce a new wave of job creation and prosperity?
What? Unless GDP per head dramatically falls there is no reason to suppose the average wage will fall or that “workers will have to accept a pittance”.
As for the idea that “technological wizardry . . . will produce a new wave of job creation and prosperity”, I thought the learned professor was trying to push the idea that technology CREATES unemployment. Now he’s saying it does the opposite: i.e. reduces unemployment.
I’ve had enough. But your’re welcome to go through the rest of Skidelsky’s article. It’s as “entertaining”, if I can put it that way, as the first half of the article.
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Lump of labor "fallacy", eh, Ralph? Let's go through the ALLEGATION step by step. Below I have pasted a copy of my open letter to Paul Krugman discussing the lump. I will post it is segments to comply with the character limit.
ReplyDeleteDear Professor Krugman,
I am writing to you because three times over the last 14 months your authority has been invoked to me on behalf of the assertion that people who advocate shorter working time as a remedy for unemployment are guilty of a "lump-of-labor fallacy" assumption that there is only a fixed quantity of work in the world. As did John Maynard Keynes, I believe that working less is one of "three ingredients of a cure" for unemployment. I find it odd to learn that I (and presumably Keynes) am thereby assuming a palpable absurdity: that the amount of work to be done is invariant.
I have researched the history of the fallacy claim and published two scholarly articles on it and I have documented rather glaring discrepancies in the often-repeated claim. Because your authority on the alleged fallacy is so frequently cited, I would be extremely grateful if you would consider the evidence I outline below and respond to it. I believe the history is curious enough to be entertaining and thought provoking, whether or not you are persuaded by my presentation.
A column by you that has been held up to me as authoritative appeared in The New York Times on October 7, 2003. It was titled "Lumps of Labor." The first paragraph states as follows:
Economists call it the "lump of labor fallacy." It's the idea that there is a fixed amount of work to be done in the world, so any increase in the amount each worker can produce reduces the number of available jobs. (A famous example: those dire warnings in the 1950's that automation would lead to mass unemployment.) As the derisive name suggests, it's an idea economists view with contempt, yet the fallacy makes a comeback whenever the economy is sluggish.
I would like to organize my presentation of the historical evidence by parsing your first two sentences into three parts: "Economists call it the 'lump of labor fallacy'"; "It's the idea that there is a fixed amount of work to be done in the world"; and "Any increase in the amount each worker can produce reduces the number of available jobs." I will conclude with a look at a insightful remark you made in 2002, "the 'productivity growth helps jobs' story, if that's what it is, is just the flip side of the lump-of-labor fallacy," in response to a Financial Times article by Glenn Hubbard.
"Any increase in the amount each worker can produce reduces the number of available jobs."
ReplyDeleteF.H.J.'s dispatch included a significant bridge to an earlier tradition of fallacy mongering. This is the theme of the "ulterior design" of unions. According to the Times correspondent, the Nine-Hour League was "only an offshoot of the Unions, and the great object of the Unions is to surround production with all manner of restraints and restrictions, so that it shall not be accomplished too fast or by a small number of workmen." That is, of course, the flip side of stating that "any increase in the amount each worker can produce reduces the number of available jobs."
F.H.J. was explicit about the conspiratorial nature of this object of restriction, as were John Wilson in "Economic Fallacies and Labour Utopias" (1871), James Ward in his egregiously plagiarized Workmen and Wages (1868), the anonymous author of a Quarterly Review article, "Trades Unions" (1867), Harriet Martineau in "The Secret Organization of Trades" (1859), Archibald Alison in "Trade Unions and Strikes" (1838) and Edward Carleton Tufnell in The Character, Object and Effects of Trades Unions (1834).
Tufnell's pamphlet contains the most complete prototype of what was to become the lump-of-labor fallacy claim. The credibility of that claim needs to be evaluated in the context of the author's disposition toward trade unions. "Were we asked to give a definition of a Trades' Union," the author stated at the book's conclusion, "we should say that it was a Society whose constitution is the worst of democracies — whose power is based on outrage — whose practice is tyranny — and whose end is self destruction."
Tufnell was an Assistant Poor Law Commissioner who served on the Whig government's Royal Commission aimed at deflecting agitation for the Ten-hour factory legislation. According to Sidney and Beatrice Webb's History of Trade Unionism, Tufnell's anonymously-published pamphlet was said to have been commissioned and paid for by the Whig government. The key text concerns the alleged motive of the Manchester Cotton Spinners' Union in supporting the Ten-hour Bill:
The Union calculated, that had the Ten-hour Bill passed, and all the present factories worked one-sixth less time, one-sixth more mills would have been built to supply the deficient production. The effect of this, as they fancied, would have been to cause a fresh demand for workmen; and hence, those out of employ would have been prevented from draining the pockets of those now in work, which would render their wages really as well as nominally high. Here we have the secret source of nine-tenths of the clamour for the Ten-hour Factory Bill, and we assert, with the most unlimited confidence in the accuracy of our statement, that the advocacy of that Bill amongst the workmen, was neither more nor less than a trick to raise wages—a trick, too, of the clumsiest description; since it is quite plain, that no legislative enactment, whether of ten or any other number of hours could possibly save it from signal failure.
Walking back Tufnell's claim about the union's motive to the testimony before the Royal Commission, it is clear that Tufnell derived his conclusions from the supposition of a cotton manufacturer, Peter Ewart. Tufnell's question to Ewart was: "What do you suppose to be the chief motive for the operatives here advocating the Ten-Hour Bill?"
ReplyDeleteBesides being clearly labeled as supposition, Ewart's reply was more rambling, tentative and imprecise than Tufnell's sharply provocative allegations about the union's "secret motives" and "clumsy tricks." Ewart's testimony, in turn, can revealingly be interpreted as a rendition of the principles of popularized political economy – the wages-fund doctrine – such as was elaborated by Harriet Martineau in her 1832 story, "A Manchester Strike." In other words, what in Ewart's opinion made the supposed ideas of the union members fallacious was their non-compliance with the wages-fund doctrine. Moreover, the suspicion that they indeed held such views may have been suggested to Ewart not by their own words or actions but by a work of fiction.
Incidentally, the U.S. Commissioner of Labor investigated the ubiquitous claims of union restrictions on output and issued a 921-page special report in 1904, prepared and edited by pioneer labor economist John R. Commons, which found little substance to the claims, concluding, "the question of restriction of output… is not as simple as it has been supposed to be..." The report found that union regulations were aimed at ensuring that changes in work methods or organization were by mutual consent. To the extent such regulations were perceived by management as limiting output, it was in comparison to some hypothetical level of output that might presumably be attained if employers could impose their efficiency plans at will. Moreover, with respect to the reduction working time:
Considered solely with reference to speed or intensity of exertion, a moderate reduction in the number of hours of labor each day usually tends to increase the speed rather than to restrict it. From the standpoint of exertion, a reduction of hours is exactly the opposite from a restriction of output.
"The 'productivity growth helps jobs' story, if that's what it is, is just the flip side of the lump-of-labor fallacy."
ReplyDeleteOne of the favorite unintended-consequences stories in economics is the idea that "technology creates more jobs than it destroys." This was a standard rebuke to Luddites in the early 19th century, who were portrayed as fearing that machines would create chronic unemployment. It closely resembles the case argued against the mercantilism of the early 18th century by Henri Martyn in Considerations on the East India Trade. The lump-of-labor fallacy appears as the negative version of this story. In fact, the fallacy is sometimes called the Mercantalist or Luddite fallacy.
There is a crucial difference between the two sides of the story, though. The technology creates jobs story is openly embraced by economists and triumphantly played as the trump card in debates over employment policy. The fixed-amount-of-work story, though, is only attributed by economists to Luddites, shorter work time advocates and other "naive populists" they wish to discredit. In both cases it is the economist (not infrequently, The Economist) speaking, telling the uninitiated to sit down and shut up.
In 1865, William Stanley Jevons introduced a paradoxical joker into the unintended consequences deck. In Chapter 7 of The Coal Question, "Of the Economy of Fuel," Jevons explicitly cited the argument that increased labor productivity expands employment as his model for analyzing the effects of fuel efficiency on fuel consumption: "…the same principles apply, with even greater force and distinctness, to the use of such a general agent as coal. It is the very economy of its use which leads to its extensive consumption."
The Jevons paradox presents economists with a dilemma that they have not squarely faced. If, as economists so often insist, technology creates more jobs than it destroys, fuel consumption operates on the same principle and the alternative job strategy of work time reduction is based on a fixed-amount-of-work fallacy; then job creation can only occur through increased fuel consumption. Or, conversely, fuel conservation can only occur at the expense of job destruction.
Unemployment exists and so does environmental crisis – so simply dismissing the three associated claims as fallacies is not enough. But one of these fallacies is not like the others. It applies to an attributed view, not a self-expressed one. On the contrary, advocates of work time reduction have often pointedly disavowed any assumption of a fixed amount of work, to no avail.