"Recession Is a Time of Harvest"

Noah and Seth say pretty much everything that needs to be said about this latest #Slatepitch provocation from Matt Yglesias.  [1] So, traa dy lioaur, I am going to say something that does not need to be said, but is possibly interesting.

Yglesias claims that "the left" is wrong to focus on efforts to increase workers' money incomes, because higher wages just mean higher prices. Real improvements in workers' living standards -- he says -- come from the same source as improvements for rich people, namely technological innovation. What matters is rising productivity, and a rise in productivity necessarily means a fall in (someone's) nominal income. So we need to forget about raising the incomes of particular people and trust the technological tide to lift all boats.

As Noah and Seth say, the logic here is broken in several places. Rising productivity in a particular sector can raise incomes in that sector as easily as reduce them. Changes in wages aren't always passed through to prices, they can also reflect changes in the distribution between wages and other income.

I agree, it's definitely wrong as a matter of principle to say that there's no link, or a negative link, between changes in nominal wages and changes in the real standard of living. But what kind of link is there, actually? What did our forebears think?

Keynes notoriously took the Yglesias line in the General Theory, arguing that real and nominal wages normally moved in opposite directions. He later retracted this view, the only major error he conceded in the GT (which makes it a bit unfortunate that it's also the book's first substantive claim.) Schumpeter made a similar argument in Business Cycles, suggesting that the most rapid "progress in the standard of life of the working classes" came in periods of deflation, like 1873-1897. Marx on the other hand generally assumed that the wage was set in real terms, so as a first approximation we should expect higher productivity in wage-good industries to lead to lower money wages, and leave workers' real standard of living unchanged. Productivity in this framework (and in post-GT Keynes) does set a ceiling on wages, but actual wages are almost well below this, with their level set by social norms and the relative power of workers and employers.

But back to Schumpeter and the earlier Keynes. It's worth taking a moment to think through why they thought there would be a negative relationship between nominal and real wages, to get a better understanding of when we might expect such a relationship.

For Keynes, the logic is simple. Wages are equal to marginal product. Output is produced in conditions of declining marginal returns. (Both of assumptions are wrong, as he conceded in the 1939 article.) So when employment is high, the real wage must be low. Nominal wages and prices generally move proportionately, however, rising in booms and falling in slumps. (This part is right.) So we should expect a move toward higher employment to be associated with rising nominal wages, even though real wages must fall. You still hear this exact argument from people like David Glasner.

Schumpeter's argument is more interesting. His starting point is that new investment is not generally financed out of savings, but by purchasing power newly created by banks. Innovations are almost never carried out by incumbent producers simply adopting the new process in place of the existing one, but rather by some new entrant -- the famous entrepreneur-- operating with borrowed funds. This means that the entrepreneur must bid away labor and other inputs from their current uses (importantly, Schumpeter assumes full employment) pushing up costs and prices. Furthermore, there will be some extended period of demand from the new entrants for labor and intermediate goods while the incumbents have not yet reduced theirs -- the initial period of investment in the new process (and various ancillary processes -- Schumpeter is thinking especially of major innovations like railroads, which will increase demand in a whole range of related industries), and later periods where the new entrants are producing but don't yet have a decisive cost advantage, and a further period where the incumbents are operating at a loss before they finally exit. So major innovations tend to involve extended periods of rising prices. It's only once the new producers have thoroughly displaced the old ones that demand and prices fall back to their old level. But it's also only then that the gains from the innovation are fully realized. As he puts it (page 148):

Times of innovation are times of effort and sacrifice, of work for the future, while the harvest comes after... ; and that the harvest is gathered under recessive symptoms and with more anxiety than rejoicing ... does not alter the principle. Recession [is] a time of harvesting the results of preceding innovation...

I don't think Schumpeter was wrong when he wrote. There is probably some truth to idea that falling prices and real wages went together in 19th century. (Maybe by 1939, he was wrong.)

I'm interested in Schumpeter's story, though, as more than just intellectual history, fascinating tho that is. Todays consensus says that technology determines the long-term path of the economy, aggregate demand determines cyclical deviations from that path, and never the twain shall meet. But that's not the only possibility. We talked the other day about demand dynamics not as -- as in conventional theory -- deviations from the growth path in response to exogenous shocks, but as an endogenous process that may, or may not, occasionally converge to a long-term growth trajectory, which it also affects.

In those Harrod-type models, investment is simply required for higher output -- there's no innovation or autonomous investment booms. Those are where Schumpeter comes in. What I like about his vision is it makes it clear that periods of major innovation, major shifts from one production process to another, are associated with higher demand -- the major new plant and equipment they require, the reorganization of the spatial and social organization of production they entail ("new plant, new firms, new men," as he says) make large additional claims on society's resources. This is the opposite of the "great recalculation" claim we were hearing a couple years ago, about how high unemployment was a necessary accompaniment to major geographic or sectoral shifts in output; and also of the more sophisticated version of the recalculation argument that Joe Stiglitz has been developing. [2] Schumpeter is right, I think, when he explicitly says that if we really were dealing with "recalculation" by a socialist planner, then yes, we might see labor and resources withdrawn from the old industries first, and only then deployed to the new ones. But under capitalism things don't work like that  (page 110-111):

Since the central authority of the socialist state controls all existing means of production, all it has to do in case it decides to set up new production functions is simply to issue orders to those in charge of the productive functions to withdraw part of them from the employments in which they are engaged, and to apply the quantities so withdrawn to the new purposes envisaged. We may think of a kind of Gosplan as an illustration. In capitalist society the means of production required must also be ... [redirected] but, being privately owned, they must be bought in their respective markets. The issue to the entrepreneurs of new means of payments created ad hoc [by banks] is ... what corresponds in capitalist society to the order issued by the central bureau in the socialist state. 

In both cases, the carrying into effect of an innovation involves, not primarily an increase in existing factors of production, but the shifting of existing factors from old to new uses. There is, however, this difference between the two methods of shifting the factors : in the case of the socialist community the new order to those in charge of the factors cancels the old one. If innovation were financed by savings, the capitalist method would be analogous... But if innovation is financed by credit creation, the shifting of the factors is effected not by the withdrawal of funds—"canceling the old order"—from the old firms, but by ... newly created funds put at the disposal of entrepreneurs : the new "order to the factors" comes, as it were, on top of the old one, which is not thereby canceled.

This vision of banks as capitalist Gosplan, but with the limitation that they can only give orders for new production on top of existing production, seems right to me. It might have been written precisely as a rebuttal to the "recalculation" arguments, which explicitly imagined capitalist investment as being guided by a central planner. It's also a corrective to the story implied in the Slate piece, where one day there are people driving taxis and the next day there's a fleet of automated cars. [3] Before that can happen, there's a long period of research, investment, development -- engineers are getting paid, the technology is getting designed and tested and marketed, plants are being built and equipment installed -- before the first taxi driver loses a dollar of income. And even once the driverless cars come on line, many of the new companies will fail, and many of the old drivers will hold on for as long as their credit lasts. Both sets of loss-making enterprises have high expenditure relative to their income, which by definition boosts aggregate demand. In short, a period of major innovations must be a period of rising nominal incomes -- as we most recently saw, on a moderate scale, in the late 1990s.

Now for Schumpeter, this was symmetrical: High demand and rising prices in the boom were balanced by falling prices in the recession -- the "harvest" of the fruits of innovation. And it was in the recession that real wages rose. This was related to his assumption that the excess demand from the entrepreneurs mainly bid up the price of the fixed stock of factors of production, rather than activating un- or underused factors. Today, of course, deflation is extremely rare (and catastrophic), and output and employment vary more over the cycle than wages and prices do. And there is a basic asymmetry between the boom and the bust. New capital can be added very rapidly in growing enterprises, in principle; but gross investment in the declining incumbents cannot fall below zero. So aggregate investment will always be highest when there are large shifts taking place between sectors or processes. Add to this that new industries will take time to develop the corespective market structure that protects firms in capital-intensive industries from cutthroat competition, so they are more likely to see "excess" investment. And in a Keynesian world, the incomes from innovation-driven investment will also boost consumption, and investment in other sectors. So major innovations are likely to be associated with booms, with rising prices and real wages.

So, but: Why do we care what Schumpeter thought 75 years ago, especially if we think half of it no longer holds? Well, it's always interesting to see how much today's debates rehash the classics. More importantly, Schumpeter is one of the few economists to have focused on the relation of innovation, finance and aggregate demand (even if, like a good Wicksellian, he thought the latter was important only for the price level); so working through his arguments is a useful exercise if we want to think more systematically about this stuff ourselves. I realize that as a response to Matt Y.'s silly piece, this post is both too much and poorly aimed. But as I say, Seth and Noah have done what's needed there. I'm more interested in what relationship we think does hold, between innovation and growth, the price level, and wages.

As an economist, my objection to the Yglesias column (and to stuff like the Stiglitz paper, which it's a kind of bowdlerization of) is that the intuition that connects rising real incomes to falling nominal incomes is just wrong, for the reasons sketched out above. But shouldn't we also say something on behalf of "the left" about the substantive issue? OK, then: It's about distribution. You might say that the functional distribution is more or less stable in practice. But if that's true at all, it's only over the very long run, it certainly isn't in the short or medium run -- as Seth points out, the share of wages in the US is distinctly lower than it was 25 years ago. And even to the extent it is true, it's only because workers (and, yes, the left) insist that nominal wages rise. Yglesias here sounds a bit like the anti-environmentalists who argue that the fact that rivers are cleaner now than when the Clean Water Act was passed, shows it was never needed. More fundamentally, as a leftist, I don't agree with Yglesias that the only important thing about income is the basket of stuff it procures. There's overwhelming reason -- both first-principle and empirical -- to believe that in advanced countries, relative income, and the power, status and security it conveys, is vastly more important than absolute income. "Don't worry about conflicting interests or who wins or loses, just let the experts make things better for everyone": It's an uncharitable reading of the spirit behind this post, but is it an entirely wrong one?


UPDATE: On the other hand. In his essay on machine-breaking, Eric Hobsbawm observes that in 18th century England,

miners' riots were still directed against high food prices, and the profiteers believed to be responsible for them.

And of course more generally, there have been plenty of working-class protests and left political programs aimed at reducing the cost of living, as well as raising wages. Food riots are a major form of popular protest historically, subsidies for food and other necessities are a staple policy of newly independent states in the third world (and, I suspect, also disapproved by the gentlemen of Slate), and food prices are a preoccupation of plenty of smart people on the left. (Not to mention people like this guy.) So Yglesias's notion that "the left" ignores this stuff is stupid. But if we get past the polemics, there is an interesting question here, which is why mass politics based around people's common interests as workers is so much more widespread and effective than this kind of politics around the cost of living. Or, maybe better, why one kind of conflict is salient in some times and places and the other kind of conflict in others; and of course in some, both.

[1] Seth's piece in particular is a really masterful bit of polemic. He apologizes for responding to trollery, which, yeah, the Yglesias post arguably is. But if you must feed trolls, this is how it's done. I'm not sure if the metaphor requires filet mignon and black caviar, or dogshit garnished with cigarette butts, or fresh human babies, but whatever it is you should ideally feed a troll, Seth serves it up.

[2] It appears that Stiglitz's coauthor Bruce Greenwald came up with this first, and it was adopted by right-wing libertarians like Arnold Kling afterwards.

[3] I admit I'm rather skeptical about the prospects for driverless cars. Partly it's that the point is they can operate with much smaller error tolerances than existing cars -- "bumper to bumper at highway speeds" is the line you always hear -- but no matter how inherently reliable the technology, these things are going to be owned maintained by millions of individual nonprofessionals. Imagine a train where the passengers in each car were responsible for making sure it was securely coupled to the next one. Yeah, no. But I think there's an even more profound reason, connected to the kinds of risk we will and will not tolerate. I was talking to my friend E. about this a while back, and she said something interesting: "People will never accept it, because no one is responsible for an accident. Right now, if  there's a bad accident you can deal with it by figuring out who's at fault. But if there were no one you could blame, no one you could punish, if it were just something that happened -- no one would put up with that." I think that's right. I think that's one reason we're much more tolerant of car accidents than plane accidents, there's a sense that in a car accident at least one of the people involved must be morally responsible. Totally unrelated to this post, but it's a topic I'd like to return to at some point -- that what moral agency really means, is a social convention that we treat causal chains as being broken at certain points -- that in some contexts we treat people's actions as absolutely indeterminate. That there are some kinds of in principle predictable actions by other people that we act -- that we are morally obliged to act -- as if we cannot predict.

2012 Books, Part 1

Some books I read this year:

Mrs Dalloway, by Virginia Woolf. I didn't strictly read this, but listened to it, while driving between New York City and western Massachusetts. What a magnificent novel! I don't feel I have a lot to say about it: It's brilliant, it's beautiful, it captures the way one can be committed to one's life and choices while recognizing that they are ultimately arbitrary and contingent. "No doubt with another throw of the dice, had the black been uppermost and not the white, she would have loved Miss Kilman. But not in this world, no." (And then the alternative, the poor schizophrenic demobbed soldier, the destruction that awaits you if you insist everything happens for a reason.)

Prosperity Without Growth, by Tim Jackson. I used this in the macro class I taught this past spring -- I needed to do a unit on the environment and my old teacher Bob Pollin recommended using Jackson. I would use it for that again, and recommend it to anyone looking for a short, accessible overview of the intersections of macroeconomics and environmental issues. Not with great enthusiasm, though, but only because I don't know of anything better. (On the other hand the students seemed to like it a lot, so maybe I'm being too critical.) It's not deep, but it has good solid chapters on environmental critiques of national income accounting; climate change and the question of discount rates; decarbonization and limits to growth; and the importance of thinking of wellbeing in terms of capabilities (there's a lot of Sen) rather than just income. I particularly like that last bit; though he doesn't use the term, it's nice to see a strong argument for the progressive decommodification of social life from such a respectable source.

Hateship, Friendship, Loveship, Courtship, Marriage; Open Secrets; and others, by Alice Munro. Sometime this spring I asked for fiction recommendations on Facebook; Munro was the suggestion of my friend Deidre, who's from Alberta. Around the same time my mother, visiting Vancouver, happened to read some of the same collections after finding them in the house where she was staying. So it seems that despite all the dozens of Munro stories published in the New Yorker (she's apparently one of a handful of writers to whom the magazine has committed to print anything she submits), Munro still functions as a Canadian export. It would be hard to overstate how much I admire these stories. They're not flashy, there's almost nothing that stands out at the level of the sentence, and the lives they describe are usually (though not always) overtly ordinary. They do the thing that New Yorker stories are traditionally supposed to do, but seldom really achieve -- show the emotional depths and high moral stakes in the seemingly small choices of everyday life. The more recent stories I've been reading -- I don't know if this is also true of the earlier ones -- have a distinct and consistent construction: For the most part they don't have a narrative moving forward in time, but are static portraits of a particular situation. So you really can't imagine her writing a novel. Anyway, what's remarkable is how consistent the artistry is -- how thoroughly she works over the same material without its ever becoming less fresh -- how she manages to convey such powerful emotions with such careful restraint. When you think that she's over 80 now and still putting out story after story without ever hitting a wrong note, it's hard not to feel an almost religious awe.

Chaos and Night, by Henry de Montherlant. This short novel from the 1950s is best known for the line, "I accuse the Americans of being in a continuous state of crime against humanity." Though it's spoken by Don Celestino, the book's central character, it's almost always attributed to Montherlant himself, which is a little odd since the conservative author hardly shares his protagonist's curdled leftism. Besides anti-Americanism, Montherlant is also known for -- at least it's where I first encountered him -- Simone de Beauvoir's savage attack on the misogyny of his novels. ("For Montherlant it is first of all the mother who is the great enemy; ... it is clearly seen that what he detests in her, is the fact of his own birth.") It's true that Celestino's daughter Pascualita, the novel's only female character, is vain, superficial and rather stupid. But she comes off much better than the protagonist himself, a delusional, rage-filled and hypocritical Spanish ex-anarchist. Though the book is constantly echoing Don Quixote, Celestino is a rancid parody of Quixote -- his fantasies are repulsive as well as unreal. It's about the least sympathetic portrayal of an old radical I have seen, a brutal travesty of the revolutionary intellectuals of the early 20th century.

So, why read such a thing? Mainly because it's an very nicely constructed little book, written in a perfect style and with a whole series of brilliant little set pieces. And Don Celestino, vicious and self-pitying, is one of those unignorable personalities who takes over the page, with his rage against the whole world, from America to his few friends down to the pigeons he goes out of his way to drive from their crumbs. Personally, I was hooked from the monologue that opens the book: "To the north, there's England, an incomprehensible country, and the Scandinavian states, incomprehensible countries. To the south there's the Vatican. The dome of St. Peter's is the candle-snuffer of Western thought... To the west there's the United States. The United States is the canker of the world..."

The American Political Tradition, by Richard Hofstadter. I picked this up after Seth Ackerman -- a very smart guy and good comrade, even if I don't share his political vision -- mentioned it here. I can't believe I hadn't read it earlier, it should be required reading for any halfway educated USAnian. The central theme is the fundamental conservatism of American political thought: With the partial exception of the abolitionists (represented here by Wendell Phillips), there's never been a popular anti-systemic politics with any real access to state power. At the highest levels it's just been a choice of conservatisms. Hofstadter has clear preferences among these. He likes best the reluctant radicals who under the pressure of events are prepared to change everything so that everything can remain the same, like FDR and Lincoln -- though as he pointedly notes in the case of Lincoln, this meant that he spent most of the Civil War seeking to restore the conditions that had produced the war in the first place. (This is always the problem for conservative reformers.) Much worse are the principled conservatives like Calhoun -- or more unexpectedly Grover Cleveland, who out of pure principle favored business over labor even more than the most venally pro-business Republicans of the Gilded Age. Worst of all are the populist conservatives like Bryan and Theodore Roosevelt. TR's is the most thoroughly repulsive of the generally unflattering portraits in the book, combining smug thoughtless aristocratic privilege with brutal petty-bourgeois resentment. He frankly said that the only good Indian is a dead Indian, and eagerly hoped that every strike would finally let him haul out the Gatling guns, or at least bring his "cowboys" around to smash some workers' heads. After reading this, it's hard to walk through the lobby of the Museum of Natural History without feeling a little queasy.

Not Entitled, by Frank Kermode. The thoroughly charming memoir of the critic and English professor. Somebody said that if we wrote about lives the way we experience them, there'd be a dozen chapters on childhood, two or three on adolescence, and a brief afterword covering the rest. Kermode more or less follows this formula, with almost half the book devoted to his childhood on the Isle of Man, and another third to life in the British navy during World War II; there's a couple short chapters on his postwar flounderings, and he passes over his long and successful academic career in a rushed handful of pages, as if embarassed by them. Which he probably was: The title of the book refers to what sailors were told on payday when they had incurred enough fines to cancel out their whole salary, but it's also the attitude Kermode takes toward his whole life. His successes were fortuitous and unearned; more deserving people missed their chance for no good reason. Even writing in his 70s, he describes himself as feeling always like the youngest one in the room, unprepared, the newcomer, off balance and out of place, having arrived late and trying to find his place in a conversation already under way. Traa dy lioaur, "at the heel of the hunt," in the Manx phrase his mother used to use of him. It's a long time since I've read a book in which I've found such a kindred spirit.

What the Best College Teachers Do, by Ken Bain. I won't lie, I picked this up to help me talk about teaching on the academic job market. But it's really good! It was recommended to me by Prof T., to whom it was recommended, I think, by some other teacher; it seems to be kind of a cult thing that way. Bain's central point is that we should think of classes in terms of what students do, not what the instructor does. Teaching isn't a matter of pouring "material" into students and hoping they "retain" it, it's about creating an environment in which they can actively engage in the same kind of work and critical thought that professionals do. (The same spirit someone like Andrew Lawrence brings to guitar teaching.) It's an insight I'd been stumbling toward on my own but which is much more fully developed here and backed up with research and case studies. This book goes on the short shelf with other pieces of everyday utopianism -- A Pattern Language, Cziksentmihalyi's Flow. It's a slighter book than those but the spirit is the same -- we don't have to just carry out our daily activities the way they always have been, but we also don't have to revolutionize them according to logic of profit. It is possible to think clearly, freely and genuinely about how to do things right on their own terms.

Man Gone Down, by Michael Thomas. A first novel by someone you've never heard of; he doesn't seem to have published even a story before this. It was recommended to me by my father when it came out a couple of years ago; I resisted reading it then because I knew it had a 9/11 subplot, and I'm allergic to WTC sentimentalism. But that's only a small part of the book, which as it turns out I like very much. It's a bit hard to say why. After all, it's an entry in the justly reviled struggling-writer-in-Brooklyn genre. And while I generally prefer a clean austere style, Thomas is a writer of compulsively detailed descriptions -- a single golf swing takes half a page. (Think Updike on Doritos.) Now one obvious difference between Thomas and "all the sad young literary men" is that he is African-American. It's treacherous to think that any work of art can allow you to really understand a subjective experience foreign to your own (but isn't that always what we hope for from art?) but this feels like a convincing picture of (one kind of) life as a black man in post-civil-rights America. In tone it's somewhere between Nathan McCall's memoir Makes Me Wanna Holler and the lovely Medicine for Melancholy. It's significant that, as a "type," the unnamed (but clearly autobiographical) protagonist is arguably a black man only second, and a struggling artist first. Why can't you have all the angst that goes with that just because you're black?, is one of the main themes of the book. There's a nice scene about halfway through where he plays a set at an open-mike night and, after doing various old blues songs ends with "Mr. Tambourine Man." The white hipster running the thing is disappointed: "I thought you were going in a different direction."

It's also a book about being broke, about alcoholism, and most distinctly, about blue-collar work. The narrator, who needs to earn money very quickly to preserve his marriage, has set aside his novel and returned to his old work as a carpenter. Thomas' overflowing, almost compulsive descriptions are so much more interesting when they're not about golf swings, but about the specific tasks and relationships involved in renovating a building. (So it's a book about gentrification too.) At one point the narrator finds himself in a nice restaurant, and all he can think about is how superb the dry-walling is. (This goes in the labor-as-man's-highest-need file, next to the poor hatmaker in Mrs. Dalloway, whose favorite activity in her walks around London is admiring the workmanship of ladies' hats.) That so much of the loving description is of manual labor rather than middle-class consumption rituals is one important thing that sets this book off from Updike and from the Jonathans. But setting aside all that, it's just beautifully constructed, it achieves what fiction is there for, it engages you emotionally. When the narrator finally has some bills in his pocket and seems set to squander them, when he seems set to give up in his fight against alcohol, you want to push your head through the page and shout, No.