Worthwhile Canadian Initiative

Lump of Labour, Say's Law, and the slope of the AD curve

I wrote this partly for Sandwichman, and mostly I wrote it because this same question crops up time and time again. It's a very old question, but it always looks like a new question if the technology is new enough. People in caves were probably arguing about whether 3-D printing robots flints would cause mass unemployment. And my answer is an old one too. There's nothing new in this post.

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

Start at full employment, where everyone works 40 hours per week, and nobody wants to work any more than 40 hours.

Suppose technology changes, so that productivity doubles. Labour now produces 2 apples per hour. What happens? Will employment stay the same, so output doubles? Will output stay the same, so employment halves? Or something in between?

Is mass unemployment a possibility?

"Human Capital" and "Land Capital"

Branko Milanovic (HT Mark Thoma) misses the point about the usefulness of the concept "human capital". To explain the point, let me talk about "land capital" instead.

Raw land, in it's natural state, often isn't very productive. Before you can grow wheat on it, you usually need to clear it, or drain it, or fertilise it. There's an up-front investment, which is costly in the "opportunity cost" sense, because it uses resources that could have been used elsewhere to produce something else.

What we call "land" is as much capital as land. The rents on "land" are as much a return to capital as they are a return to raw land.

Some land needs very little investment to make it productive; other land requires a lot. Some land gives a high return on investment; other land gives a low return. It's all different.

Why do I hate driverless cars?

I hate driverless cars. That is the fact that needs to be explained. Not justified, but explained.

Driverless cars pose no threat to my job, my income, or my wealth. That's not it.

The insurance companies, or safety-nazis, might force us to use driverless cars. That would be a threat to my enjoyment of driving. But even if that threat were eliminated, so each of us always had the option to drive ourselves, I would still hate driverless cars. That's not it either.

What I hate is the very option to use a driverless car. Because being able to exercise that option, even if I did not have to exercise that option, would make "driving" something very different from what it is without that option. In much the same way that "hunting" means something very different today in an agricultural economy with supermarkets than it did for our ancestors. "Wouldn't it be cheaper and easier and safer to just buy some meat at the supermarket, or do you think it's fun to kill animals for sport?" "Why not just press the auto button, so you can sit back and relax and enjoy the scenery or read a book?"

A Lower Dollar Won't Reverse Manufacturing's Decline

The decline in the value of the Canadian dollar relative to the US dollar is expected to provide a boost to the manufacturing sector.  There is certainly no shortage of commentary on whether the fall in the dollar is the result of economic fundamentals or an engineered conspiracy designed to boost Conservative re-election prospects in the short-term.  Check out some of the commentary by Coyne, Corcoran or Babad.  Yet what I find more interesting is the belief that somehow a lower dollar will resurrect Canadian manufacturing and provide the antidote to a decade of “Dutch Disease”.  If that is indeed the hope, good luck with that.

Does the End of Growth Mean the Rise of Inequality?

Classical economics argued that eventually a stationary state or the end of economic growth was going to be reached but they did not forsee the technological change of 19^th century industrialization.  The result was income and wealth growing by leaps and bounds.  However, yet another paper - this time by Thomas Piketty and Gabriel Zucman of the Paris School of Economics - suggests it may all be coming to an end with important effects this time for wealth and inequality. 

Rates, rents, shares, and capital theory

I think this is the technology that Paul Krugman has in mind:

1. C + Kdot = A.L^a.K^(1-a)

C is consumption, K is the capital stock, Kdot is investment, L is employment, A is a parameter that represents productivity, a is a parameter that (in competitive profit-maximising equilibrium) will equal labour's share of national income, so (1-a) is capital's share. (I've ignored physical depreciation of capital for simplicity).

Macroeconomists commonly assume this technology, mostly because it's easy to work with. But this technology creates a problem for Paul. That's because with this technology (in competitive profit-maximising equilibrium)  the (real) rate of interest equals the rental rate on capital goods (equals the Marginal Product of Kapital), and Paul wants to explain why capital income has gone up while the rate of interest has gone down. (So he has to assume that monopoly power has increased, and that what looks like an increase in capital income is really an increase in monopoly rents.)

Let me make one small change. Change 1 to:

2. C + Kdot/A = L^a.K^(1-a)

(I've divided both sides of 1 by 'A', then deleted the 'A' underneath 'C'.)

Do New Keynesians need to assume (much) labour hoarding?

We know that measured productivity falls in a recession (relative to trend).

Real Business Cycle theorists say that this is because a negative productivity shock is what caused the recession.

Keynesians say that a negative aggregate demand shock is what caused the recession, and labour hoarding (firms don't like to lay off workers even if they don't need all of them to produce the goods they can sell) is what causes measured productivity to fall.

But New Keynesians assume firms are monopolistically competitive. As every first year economics student knows, monopolistically competitive firms in zero-profit long run equilibrium produce where their Average Total Cost curve slopes down. If the ATC curve slopes down, total factor productivity will fall if output falls (and rise if output rises).

So New Keynesians don't need to assume labour hoarding to explain why productivity is procyclical.

But do the numbers add up right? Is this effect big enough to explain all the cyclical variation in productivity? Maybe not. Maybe they need to assume some labour hoarding too.

I don't know if any of this is new.

Macroeconomics when all goods are non-rival

Sometimes it's good to build really weird models. Because bits of the real world are a bit weird, even if the whole world isn't as totally weird as the model, and taking an extreme case can help us understand the effect of those weird bits. Plus it's fun.

I'm going to assume that all produced goods are strictly "non-rival".

Testing productivity shocks vs labour hoarding in a traditional industry?

This is just an idea that's been floating uselessly in my mind for some time. I have never been able to apply it. But maybe someone out there could.

This isn't an earth-shattering post. Maybe someone else has already thought of the same idea. Or even applied it, and I just haven't heard about it. But I might as well throw it out there, just in case they haven't, and someone reading this might figure out how to pick up the ball and run with it.

There are two main theories of business cycle fluctuations:

1. Productivity shocks cause fluctuations in output and employment. (Real Business Cycle theory.)

2. Aggregate Demand shocks cause fluctuations in output and employment. (Keynesians and Monetarists etc.)

We've know for a long time that in a recession, output generally falls by a greater percentage than does employment (both relative to trend). We call this empirical regularity "Okun's Law".

Real Business Cycle theorists say that this is because there has been a negative productivity shock, because productivity is output per unit of input, and that same negative productivity shock is what caused the recession.

Aggregate Demand theorists say that a fall in Aggregate Demand is what caused the recession, but firms don't like to lay off workers, so they hoard some workers even if they don't really need them to produce goods right now, which is why measured productivity falls.

How can we test between the two theories? Was there really a productivity shock? Or did measured productivity appear to fall because of labour hoarding?

Is Economic Growth Really Ending?

Robert Gordon has argued in his recent NBER paper “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” that growth rates have slowed and we are reverting to very low historical growth rates and indeed a period of economic stagnation.  However, what I find intriguing is that an examination of some long-term data for Britain provides conflicting results that quite frankly puzzle me. 

Technology, preferences, and wages; kinks and curves, Moseley and Krugman.

Look at the red curve PF1 and the blue curve PF2 in this picture. Ignore everything else:

That's the picture Paul Krugman drew, showing how a capital-biased change in technology would shift the production function.

In praise of General Equilibrium Models

Q1. What happens if they built robots that could do my job as well as I could, and those robots got cheaper and cheaper over time? My wages would have to fall so I could compete with the robots, and I would be worse off.

Q2. What happens if they built robots that could do everyone's job as well as they could, and those robots got cheaper and cheaper over time? Everyone's wages would have to fall so they could compete with the robots, and everyone would be worse off.

Q1 is a partial equilibrium question and answer.

Q2 is a general equilibrium question and answer.

If you say "Therefore" between my Q1 and Q2, you are committing a Fallacy of Composition. The Fallacy of Composition is when you assume that what is true for each of the parts must be true of the whole. (The classic example is "If any individual stands up at the theatre that individual can see the stage better; therefore if every individual stands up every individual can see the stage better.")

Production of Robots by means of Robots.

(Sorry about the title. The devil made me write it.)

What are we afraid of? Let's think about the worst-case, nightmare scenario for the distribution of income.

Assume that all capital is robots, and robots are perfect substitutes for human workers. One robot can produce everything and anything one human worker can produce. And that includes producing more robots.

And assume that every year the technology of robot production improves, so that it takes less and less time for one robot to produce another robot.

That sounds nightmarish, right? Because robots will get cheaper and cheaper, and drive down human wages?

Well, no. They won't. Or rather, it all depends. It depends on whether we add other forms of capital, or land, to the model.

Capital-biased technical change vs low interest rates?

Paul Krugman says that recent technical change has been capital-biased. That robot story sounds plausible to me too. But if so, why are real interest rates so low? (Yes I know there's a global recession on, but real interest rates were falling even before the recession). Maybe we are forgetting a third factor, land, and land rents are rising?

Measuring Universities: Once More Unto the Breach

Making change sometimes involves an elaborate public discourse and preparation of affected stakeholders and in Ontario the discourse is towards getting people in the public sector to do more with less.  The latest target was drawn to my attention by Alex Usher’s Higher Education Strategy Associates (HESA) morning bulletin, which featured the preliminary report by the Higher Education Quality Council of Ontario (HEQCO) on The Productivity of the Ontario Public Postsecondary System. 

Growing Ontario One Report at a Time

The Conference Board of Canada has chimed in on what ails Ontario and how to get it moving in a recently released report titled Needed: A Comprehensive Growth Strategy for Ontario. The report argues that after rebounding from the 2008-09 recession, Ontario has slipped into tepid growth of around 2 percent annually and needs a comprehensive economic growth strategy to improve its long-term growth potential. What is to be done?

We Will Bury You...Eventually?

Few probably recall (I was not even born yet) the November 18, 1956 Western ambassadors reception at the Polish embassy in Moscow where the then Soviet First Secretary of the Communist Party Nikita Krushchev supposedly uttered the famous quote: “We will bury you.”  The actual line apparently was apparently something to the effect of “Whether you like it our not, history is on our side. We will bury you.”   Coming during the Cold War when the threat that the economy of Soviet Union and communism would overtake the world was taken seriously, the line took on a life of its own.  Krushchev apparently made a similar quote to Richard Nixon at a technology exhibit to the effect that the Soviet Union would eventually pass America and then “We’ll wave to you.”

Is the Stationary State Coming?

Robert Gordon has recently published an NBER paper titled “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds”.  The paper questions the universal assumption that gained currency in the 1950s with Robert Solow's work that economic growth is a continuous process that will persist forever.  Indeed, Gordon suggests that the past 250 years could be a very unique period in human history and we will be returning to an era of low economic growth – a state that has characterized human history prior to the 1750s.  For example, the UK’s real per capita GDP grew at an annual rate of 0.2 percent in the four centuries leading up to 1700.

What Does Health Spending Buy You?

Last WCI post, I used the OECD 2012 Health Data spending statistics to examine the growth of total health care spending.  The question I want to look at this time is what does increased spending yield a health care system in terms of the health care resources available?  While we are concerned with the cost and sustainability of a health care system, the fact is that in some sense you should also get what you pay for.  If you are spending more, over time is this associated with more doctors, nurses, equipment, etc…? Moreover, based on our international ranking in terms of health spending, how does Canada rank on these resources?

Permanent productivity differentials and Optimal Currency Areas

Many good economists, like Simon Johnson and Paul Krugman for example, have said something about permanent productivity differentials and optimal currency areas I simply do not understand. (Lots of other people say the same thing, but when good economists say it and I don't understand it I get worried.) Maybe they are making some implicit assumption that I'm just missing. Or maybe I am misunderstanding what they are saying. Or maybe, just maybe, what they are saying doesn't make any sense.

{Update: Hmmm, on re-reading both those economists a third time, maybe they are saying something different from what the others are saying. But it's still not clear to me.)