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Thanks for this, Nick. It helps clarify what we agree on. I agree that it depends on money. Preferences? Not so much... because the term is impossibly vague. Revealed preferences are tautological. "People want the moon." Keynes agreed that it depends on money. Thus the central bank as green cheese factory telling people green cheese is the same thing as the moon.

I'm also glad you brought Brad DeLong's "make Say’s Law true in practice, even though it is not true in theory" into this. That is what I called the pathos of aggregate demand. It makes my response easy:

http://econospeak.blogspot.ca/2014/08/the-pathos-of-aggregate-demand.html

In a nutshell, what I'm arguing in the above is that making something true in practice, even though it is not true in theory was precisely the contradiction of Communist ideology, as diagnosed by Harold Rosenberg in the late 1940s.

If Brad can solve that contradiction for the central bank, why not go all the way and solve it for the Central Committee?

Sandwichman: I can't see any practical way to resort to barter, and make Say's Law true in theory. The cure would be worse than the disease. We seem to be stuck with money.

Some monetary regimes are bad, and some are even worse. If we can find one that's a bit better than what we have, that's good enough for me. The next generation can try to make it a bit better and try not to make it a bit worse.

Communism, like barter, looks worse than the disease. Except they both sometimes work OK in small communities.

"It is easy to imagine circumstances where the supply of apples doubles but the demand for apples stays exactly the same, so the quantity of apples bought-and-sold stays exactly the same, and people only work half as many hours as they want to work. The doubling of productivity causes 50% unemployment due to deficient Aggregate Demand."

Hmmm. I wonder if there are some other important variables lurking here? For instance, what role, if any, does lack of imagination play in deficient AD? Is the apple model too simple to capture key factors?

Con permiso, let me muse about my own experience. I remember when I first got a personal computer. I imagined that it would be a labor saving device, enabling me to do work in less time. Au contraire, it enabled me to do more work in the same time. (A lump of labor? A lump of time?) In any event, I worked just as hard as before, but I accomplished more. I considered that to be an increase in productivity. But I did not just do more of the same thing as before. I did about the same amount of that, but I also did similar things. That's something that the simple apple model does not capture. It's not just apples, but apples and something new, like apple-walnut salad, which requires walnuts and greens and maybe raisins, as well. I think that we are missing something if we simply think of increased productivity as more of the same.

Now, as an individual, it was easy for me to decide what else to do with my increased productivity. It is not so easy, perhaps, for that to happen on a societal level. Especially if workers are considered to have limited capabilities. (Well, everybody has limits, but I mean that they are not given enough credit.) How, as a society, do we come up with new things to do? One way is to have entrepreneurs, individuals who are willing to take risks. And they need money in order to take those risks. Furthermore, their potential customers need money in order to buy what they provide. Henry Ford was right. If he was going to sell cars to the masses, the masses needed the money to buy those cars.

Now, banks and investors can bankroll entrepreneurs, and, as we have things set up, central banks can help that process, but what about getting money to the masses?

Also, money can facilitate communication of preferences. With enough money, a customer can say, I would like thus and such, and I would be willing and able to pay for it. When customers speak, entrepreneurs listen. :)

I like the nuance of this post. This issue comes up a lot with free trade agreements.

http://www.nber.org/papers/w20395

"Our central estimates suggest net job losses of 2.0 to 2.4 million stemming from the rise in import competition from China over the period 1999 to 2011."

Also http://www.epi.org/publication/briefingpapers_bp147/

Estimates 900,000 net lost jobs with NAFTA, together with downward pressure on wages and union busting for those jobs that remains.

" A Wall Street Journal survey in 1992 reported that one-fourth of almost 500 American corporate executives polled admitted that they were “very likely” or “somewhat likely” to use NAFTA as a bargaining chip to hold down wages (Tonelson 2000, 47). In a unique study of union organizing drives in 1993 though 1995, it was found that more than 50% of all employers made threats to close all or part of their plants during organizing drives (Bronfenbrenner 1997b). This study also found that plant closing threats in National Labor Relations Board (NLRB) union certification elections nearly doubled following the implementation of NAFTA, and that threat rates were substantially higher in mobile industries [...] "

There are real power issues here that the CB cannot fix. Similar distortions are being played out in our trading partners, who also have reduced real wages than they otherwise would have if they were allowed to run balanced trade with the rest of the world. Now, the domestic oligarchs don't need to price goods at a level that their workforce can afford to purchase, because the surplus can be exported overseas (along with the families and bank accounts of the political officials). How would you model nations forced to impose rigid capital controls and structurally required to continuously run large current account surpluses in order to maintain domestic employment and control unrest? It has to be a form of slavery, right? This is very far from the barter world.

Min,

That is a great point about how lack of demand can result in decreased entrepreneurship.

Also, Henry Ford was too unimaginative. He should have kept the wages low and sold most of the cars overseas. If his workers were just migrating in from rural areas, they would still be willing to work for him even if they had to pool a whole family's savings for a few years to buy just one car.

rsj: given that Current account must equal-Capital account, Chinese and Russians oligarchs must run a current surplus if they want to stash the loot abroad. NAFTA and the like are our enablers to that scheme.

Yup, but I don't think it's primarily corruption. I think prices and quantities are all screwed up over there because investments are still determined politically rather than via profitability concerns.

For some reason Chinese firms are unable to produce the type of output that Chinese consumers want at a price that their countrymen are able to afford. China is a nation with enormous empty cities while the people are crammed into tiny apartments with their parents. Ghost town shopping malls are springing up in overcrowded areas. Pig Farmers stockpiling tons of Copper. Banks building replicas of famous European cities, which stand mostly empty. Factories producing millions of tons of steel that no one wants to buy. I remember reading about the excess capacity in 2005 or so, and since then Chinese steel capacity quadrupled. There was a Wall Street Journal article "Beijing Fights Losing Battle to Rein In Factory Production." My friends there complain about how expensive everything is in comparison to the wages, yet to the rest of the world everything is so cheap.

There is something fundamentally wrong if firms think that a nation of 1.3 Billion consumers is too small of a market so that they must neglect it and sell their output to someone else, anyone else, to whom they don't need to pay wages or dividends. The idea that developing nations can only foster investment by exporting huge amounts of capital is something that Ricardo never imagined.

But this is wrecking havoc with prices and interest rates in the rest of the world, and is hurting a lot workers on both sides of the Pacific.

"Take a very simple example. Labour is the only input, there's a constant returns technology, and labour produces one apple per hour."

Nick, "very simple" models always make me nervous. They are not simple. They only look simple because they leave out or "assume" all the important stuff. A world where labour is the only input, there's a constant returns technology, and labour produces one apple per hour -- How do we get from here to there? How do we get from anywhere to there? We don't. We can't.

This reminds of Veblen's question, "why is economics not an evolutionary science?"

Reluctantly setting aside my anxiety about simple models and my aversion to preferences, though. I take the plunge. The thing is I don't give a fig about apples. I've got bushels of money and I want more money. Not to buy apples with. Just to have more money. Why would I want more money if I don't care about apples?

Well, you see there are some folks who have no money but want apples and they want them NOW. If they don't get an apple, they won't be able to work for an hour to get the money to buy an apple. They need the apple up front. I can loan them the money to buy an apple. For a price. I'm not in the business of making loans as a charity. Whether I make a loan and how much I charge for it depends on the demand for liquidity and the credit-worthiness of the borrowers. Like I mentioned, I'm not in this for my health or the eternal bliss of my soul. I want the lucre.

Now, of course, if there is a central bank that intervenes when money gets tight that affects me as well as my debtors. Opinions may differ as to what might be the optimal central bank policy.

How does that fit in the model?

"1. What are preferences? Do people want to work the same hours and consume twice as many apples? Or consume the same number of apples and work half as long? Or something in between? The sensible answer is probably "something in between". But I am going to assume they want to work the same number of hours as before and eat twice as many apples, because I want to consider the worst-case scenario for coordination failures where market economies fail to do what people want them to do (plus it's simple)."

What happens if policymakers assume want to work the same number of hours as before and eat twice as many apples when consume the same number of apples and work half as long is what is actually happening in the real world?

"What happens if policymakers assume want to work the same number of hours as before and eat twice as many apples when consume the same number of apples and work half as long is what is actually happening in the real world?"

Because... tax revenues! They can tax twice as many apples but they can't tax working less.

Min: "Henry Ford was right. If he was going to sell cars to the masses, the masses needed the money to buy those cars."

The historians tell me that that is a total myth. Henry Ford actually raised wages to reduce worker turnover and absenteeism. It's more an efficiency wage theory. Which makes a lot more sense to me than the myth. If the myth were true, why didn't he keep wages low but give the workers free cars, so they didn't spend the high wages on something else? There's some stuff on this on various blogs, but I can't remember where.

TMF: if the policymaker thinks the AS curve will shift right, so shift the AD curve right, but the AS curve actually does not shift, then there is an excess supply of money and an excess demand for apples, so P rises.

Sandwichman: If I put time into the model, and added intertemporal preferences, then I could talk about interest rates (either in the barter version or the monetary version of the model). And some changes in technology would cause interest rates to rise and real wages to fall (or vice versa). But over the last 10 or 20 years we seem to be seeing real interest rates fall, so that doesn't seem to be a current problem for labour (though it might be a problem in future). My hunch is that "land" (understood broadly) is more likely to be relevant. Or it might be something else, like different types of labour.

Min: "I think that we are missing something if we simply think of increased productivity as more of the same."

I think you are right. Apples have rapidly diminishing marginal utility. There's only so many apples you want to eat, so you prefer (mostly) extra leisure rather than extra apples when productivity increases. But if we add a cider technology to the model... And cider might make its appearance as a result of the improved technology. You don't make cider if your productivity only lets you produce just enough apples to keep you alive.

New technology sometimes creates new goods, not just better ways of making existing goods.

But I don't think this affects my main argument. It just gives a better explanation for why preferences are such that we mostly want extra consumption rather than extra leisure.

"we seem to be seeing real interest rates fall, so that doesn't seem to be a current problem for labour..."

Nick, The second part of your statement seems at odds with the analysis by Galbraith, Giovanoni and Russo, "The Fed's Real Reaction Function Monetary Policy, Inflation, Unemployment, Inequality - and Presidential Politics." The issue would seem to me to be not so much the long term trend of rates as the timing of changes. Or do you have evidence that all that has reversed over the last 10 years?

"Using a VAR model of the American economy from 1984 to 2003, we find that, contrary to official claims, the Federal Reserve does not target inflation or react to "inflation signals." Rather, the Fed reacts to the very "real" signal sent by unemployment, in a way that suggests that a baseless fear of full employment is a principal force behind monetary policy. Tests of variations in the workings of a Taylor Rule, using dummy variable regressions, on data going back to 1969 suggest that after 1983 the Federal Reserve largely ceased reacting to inflation or high unemployment, but continued to react when unemployment fell "too low." Further, we find that monetary policy (measured by the yield curve) has significant causal impact on pay inequality - a domain where the Fed refuses responsibility. Finally, we test whether Federal Reserve policy has exhibited a pattern of partisan bias in presidential election years, with results that suggest the presence of such bias, after controlling for the effects of inflation and unemployment."

I haven't been able to find any rebuttal to Galbraith, et al.'s findings. It might also be noted that the above mentioned paper was submitted to the House Financial Services Committee in support of Galbraith's testimony to that Committee on July 17, 2007. Galbraith had been a congressional staff economist in the 1970s and participated in the drafting of the Humphrey-Hawkins Full Employment and Balanced Growth Act.

Here is the conclusion from Galbraith's testimony:

"Mr. Chairman, my paper has pointed to several disturbing patterns in the actual conduct of monetary policy over the past quarter-century. In particular, the evidence suggests that the Federal Reserve has a habit of reacting adversely to low unemployment, even though full employment does not, by itself, pose an inflation risk.

"I believe Chairman Bernanke should be asked to provide guarantees that this pattern will not be repeated. He should be asked to assure Congress that interest rates will not be raised solely on the evidence of low or falling unemployment. He should be asked to re-examine any models which tie predicted inflation to the unemployment rate, and to report in detail on that review. He should be asked to examine the evidence that the world did change in the early 1980s, breaking the previous linkages between inflation and unemployment.

"He should be asked to take account of evidence that Federal Reserve policy directly influences not only unemployment, but also inequality.

"Finally, Chairman Bernanke should be asked to assure Congress that interest rates will not be cut or raised solely in anticipation of an election. The Federal Reserve would then be on notice that Congress is conscious of the evidence pointing to a political cycle in past behavior. It will become aware, as it should be, that future actions following these same lines will not escape examination by this Committee.

"Mr. Chairman, thank you for your time and again for this opportunity. I look forward to answering any questions you may have."

http://www.gpn.org/20070717_galbraith.pdf

How about them apples, Nick?

nice
I also am not sure about the preference issue, as we are talking about aggregate demand. Perhaps wants? it depends if we want more, no matter what the starting point.
Also, it would be interesting to expand the model to include government. I am suspicious about these very useful simplified models that do clarify thinking, but...
But why is it that there is no such simplified model for how government fits into the economy?
Pet peeves...
thanks again.

The article one more time makes a good job in emphasizing that "Lump of Labour fallacy really is a fallacy".

As to the requirement that "central bank's job is to make Say's Law true in practice" I would like to claim that in the infamous long run Say's law is true anyway. I recently wrote a text that used another toy society and attempted to find out whether it's morally fair to use the MMT style money issuance to pay state expenses as one type of helicopter money. My conclusion was that it's fair and not cheating. See https://olliranta.wordpress.com/moneycreation/ Some aspects of Say's law turn out as a mandatory part of the exercise.

I submit that Prof. Rowe's 2.C scenario is quite similar to what the Sandwichman explains in this post:

"Unemployment and Shorter Hours" -- Howard G. Foster
Friday, March 6, 2015
http://ecologicalheadstand.blogspot.com.au/2015/03/unemployment-and-shorter-hours-howard-g.html

To wit, Prof. Rowe's 2.C scenario involves an increase (doubling) of productivity, which results in "unemployment" (half the employed hours is used). In his words:

"It is easy to imagine circumstances where the supply of apples doubles but the DEMAND FOR APPLES STAYS EXACTLY THE SAME, so the quantity of apples bought-and-sold stays exactly the same, and people only work half as many hours as they want to work. The doubling of productivity causes 50% unemployment due to deficient Aggregate Demand."

Isn't that similar to the situation discussed in relation to the first and second tables in Sandwichman's post?

There it reads: "In the foregoing, it was assumed that demand for our employer's product had remained constant."

Bottom line: in Prof. Rowe's scenario, because -- by assumption -- there is no employer, an increase in productivity automatically results in a decrease in hours worked without a change in wages.

In Prof. Rowe's example -- because there's no employer, by assumption -- unemployment is not possible, it seems...

Am I missing something?

The Blackbird: I don't think you are missing much. In my example, the workers are self-employed. But they can still face 50% unemployment, if they produce 2 apples per hour, want to work 40 hours, but can only sell 40 apples. They will only be able to sell what they can produce in 20 hours, because there aren't any customers for the extra 20 hours of labour (extra 40 apples they can produce). Unless M/P increases so they can get to full employment.

Olli Ranta: "As to the requirement that "central bank's job is to make Say's Law true in practice" I would like to claim that in the infamous long run Say's law is true anyway."

It's a lot easier for the central bank to make Say's Law true in practice in the long run. But even here, we can imagine a central bank that really screws up badly for a long time. Sort of like Zimbabwe, only the exact opposite. When productivity increases and P falls, it reduces M proportionately, so there's always an excess demand for money and excess supply of goods and labour.

Thanks dan. I could add government into the model, but I'm not sure it would make much difference, except complicate things.

Sandwichman: suppose that the Fed had been targeting a level of unemployment above the level of unemployment consistent with stable inflation. Then we should have observed inflation always falling, and ever-increasing deflation. But until the 2008 recession, US inflation seemed to stay roughly constant over the previous 20 years, IIRC. Now it does depend on the Phillips Curve, and Jamie Galbraith probably has a different model of the Phillips Curve in mind. And if he is right about that, the Fed would have been setting (real) interest rates consistently too high, and targeting a level of unemployment consistently too high. But that would have been true regardless of productivity growth, presumably. And the trend of real interest rates was nevertheless falling, to levels that are very low by historical standards.

Nick,

Your reply assumes -- without re-examining the models or the evidence -- precisely the link between inflation and unemployment that Galbraith et al.'s paper fundamentally challenges. To repeat, Galbraith said in his conclusion, based on the analysis in his paper: "He [Bernanke] should be asked to re-examine any models which tie predicted inflation to the unemployment rate, and to report in detail on that review. He should be asked to examine the evidence that the world did change in the early 1980s, breaking the previous linkages between inflation and unemployment."

Sandwichman,

Well, in retrospect, I don't think Galbraith had too much worry about from Bernanke's tenure:

http://research.stlouisfed.org/fred2/graph/?g=14f9

rsg,

You've heard of a thing called "the great recession"? In July 2007, when Galbraith testified, the U.S. unemployment rate was 4.7%. After falling to 4.6% the following month, the unemployment rate rose to a peak of 10% in October 2009. By February 2015 the unemployment rate was still 0.9% higher than it had been in August 2007 and the employment to population ratio was nearly 4% lower.

Nick
Adding Government does add more than complication.
The question at hand is how does substitution for the labor factor impact the demand for labor.
You answer that it depends,
That it depends on preferences and
it depends on money.
You either are answering that money and preferences are necessary and sufficient - in which case I think that disagree with you.
Or, you are answering that they both are merely necessary, in which case, it's misleading - or frustrating.

Where I think I disagree is that money and preferences suffice, is that in using apples as a proxy for a good produced simplifies away an important feature of exchange. You assume that the supplier of the land or the labor captures a share of the apple produced respective to the risk taken in providing the labor and the land. But not all goods have such a convenient feature. For some goods, the reward is separated from the risk. Arguably all goods produced require the contribution of such a good in their production. So the question is, how do you regulate the provision of goods where the risk of providing it is separated from the reward of having done so? I don't mind if your answer is still money, I don't see it, but whatever the answer I wouldn't mind having an illumination of how to model it.

Moi: "Henry Ford was right. If he was going to sell cars to the masses, the masses needed the money to buy those cars."

Nick Rowe: "The historians tell me that that is a total myth. Henry Ford actually raised wages to reduce worker turnover and absenteeism."

Sorry for not being clear. Henry Ford did not employ the masses, only a relatively few workers. I was talking about what he advocated, not about his motives, to which I am not privy.

Sandwich
Are you seriously questioning that there is some demand for labor greater than the supply of labor which will be met by rising price of labor?

GDP infinity!

"In my example, the workers are self-employed. But they can still face 50% unemployment, if they produce 2 apples per hour, want to work 40 hours, but can only sell 40 apples. They will only be able to sell what they can produce in 20 hours, because there aren't any customers for the extra 20 hours of labour (extra 40 apples they can produce). Unless M/P increases so they can get to full employment."

Why would they want to work 40 hours, when they can fulfil their wishes in 20? Work produces disutility. Money has no utility. By assumption, their demand for apples did not change.

At any rate, if they are self-employed they can certainly cut their working hours (that's what they did in your example), but they didn't fire themselves. Personally, I wouldn't mind being "unemployed" in that case.


What kind of unemployment is that?

dan,

What are you trying to say?

"Take a very simple example. Labour is the only input, there's a constant returns technology, and labour produces one apple per hour."

I suspect that the concept of "unemployment" does not make much sense if labour is the only input.

Let's imagine a different model:

In the begining, one hour of labour and an acree of land produce one apple; than, you have a labour-saving, land-intensive technological change and now one hour of labour and 3 acres of land produce two apples.

If the quantity of land avaliable remains the same, you will have 66% unemployment.

In the same way, if you have labour-saving, capital-intensive technological progress, you will have growing unemployment (or perhaps simply lower wages?) if the stock of capital increases at a growth rate inferior to the level needed to compensate the reduction of the labour/capital ratio.

Ups, I did not notice the last paragraph of your post, saying more or less the same thing that me in my comment.

Sandwich,
I am only asking. You said something about the FED needing to reexamine the evidence for the link between inflation and employment.
I am just asking if you think that the demand for labor can be persistently greater than the supply of labor (along with the expectation that this will describe the future as well) without inflation.

Miguel: yep! (Your particular numerical example doesn't quite work though. If we assume that both land and labour were fully employed with the old technology, the discovery of the new technology may mean that W/P will fall, and R/P will rise, but W/P will not fall to zero. Because a landowner using 3 acres and no labour would produce 2 apples, but by hiring 3 hours of labour he could produce 1 extra apple, so would be prepared to pay up to 1/3 of an apple per hour to hire extra labour and go back to the old technology.)

Let's look at another complicating factor: suppose hours worked aren't scalable. Increased capital means one person can do the work of two, but it doesn't mean a person can produce the same in 20 hrs as he could in 40 hrs, because there's some increasing returns to hours worked for the individual worker. "Knowledge work" is likely to exhibit this kind of effect, because learning goes along with the work done and you can't learn on someone else's behalf.
Of course monetary policy that "makes Say's law true in practice" would prevent unemployment in this case just as well as in the other case, but I wonder how different the effects would be if monetary policy failed.

dan,

I was quoting Jamie Galbraith. What he was talking about was a particular model of relationship between inflation and unemployment. Your question poses an extreme hypothetical situation. Yes, a persistently greater demand for labour than the supply would cause an increase in its price. Would this lead to inflation? That actually depends on how the price of labour affects the prices of the final outputs.

The model Galbraith was challenging, NAIRU, didn't rely on a persistent excess of demand over supply of labour. It estimated a RATE OF UNEMPLOYMENT at which inflation would not increase exponentially. As Galbraith has pointed out elsewhere, this model is an "empirical theory" that sought to explain a relationship between particular historical index facts, just as the Phillips Curve had done earlier. When the facts change...

Nick said: "TMF: if the policymaker thinks the AS curve will shift right, so shift the AD curve right, but the AS curve actually does not shift, then there is an excess supply of money and an excess demand for apples, so P rises."

That is not the point I was hoping to make.

Real AS shifts right. Real AD shifts right in an improper way. Real AS shifts right again. Real AD shifts right in an improper way again. Real AS shifts right. Real AD shifts right in an improper way again.

Real AS shifts right again. This time real AD will not shift right because the improper way does not work this time.

Bernanke's Deflation: Making Sure "It" Doesn't Happen Here Speech

http://www.federalreserve.gov/boarddocs/Speeches/2002/20021121/default.htm

Footnote #1

"1. Conceivably, deflation could also be caused by a sudden, large expansion in aggregate supply arising, for example, from rapid gains in productivity and broadly declining costs. I don't know of any unambiguous example of a supply-side deflation, although China in recent years is a possible case. Note that a supply-side deflation would be associated with an economic boom rather than a recession."

I want to come up with a scenario where at first there is an economic boom and then later an economic bust/recession from a large expansion of real AS because real AD "for apples" is not unlimited.

Nick,

"Now we might have a problem. The supply of apples doubles (i.e. people want to sell twice as many apples for money), but does the demand for apples double (do people want to buy twice as many apples for money)? Those are not the same thing. Those are two different actions."

Does the demand for money double or does the willingness to work double? We have established that the supply of apples doubles, but we haven't established why that supply has doubled. If we are all growing apples with no thoughts toward profitability and no binding legal obligations (taxes, debt, etc), then we can produce more apples than are demanded and let the excess rot.

"It is easy to imagine circumstances where the supply of apples doubles but the demand for apples stays exactly the same, so the quantity of apples bought-and-sold stays exactly the same, and people only work half as many hours as they want to work."

That would depend on whether they are growing apples to obtain money or they are growing apples because they prefer work to leisure. Money in and of itself does not cause coordination problems - absent legal obligations, we can change what is used as money even if it is more inefficient. IMHO, legal obligations denominated in a particular money are at the heart of coordination issues.

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