Thought for the day: the paradox of toil exists
from Merijn Knibbe
In a recent paper, Eggertson and Krugman introduced the ‘paradox of toil’: when there is a lot of debt, working harder and smarter can lead to less demand and, therefore, to less production. Does that exist? Yes, it does (the example is not for households as in the paper, but for companies). Read this, from the Washington Post:
“MAXTON, N.C. – Not far from where Federal Reserve Chairman Ben S. Bernanke grew up, a revolution inside a Campbell Soup Co. plant explains why corporations are piling up profits – with little need to hire more people”.
At the moment this happens everywhere in the USA according to some stats in the article: productivity and profits increase as people work harder and smarter and also (see below) for lower wages – but cash is piled up and not reinvested.
David Raithel has, on this blog, already called our attention to comparable developments at the Harley Davidson plant where wages are decreased and productivity is increased. I propose to call such a situation the ‘Raithel-Davidson paradox’. Purple has, on this blog, called attention to the fact that this is a textbook example of a shifting balance of power on the labor market and increasing exploitation in a Marxist sense. That leads to the following question: does less power for labor in the labor market lead to ‘the paradox of toil’?
In arguing this, has not Krugman accepted that the “Lump of Labour Fallacy” is a fallacy? That is, that as the historical evidence shows, widespread un- and under-employment is quite normal?
Is the paradox of toil not a form of theory to justify the stance taken by the luddites two hundred years ago?
Mind you, the luddites were more sophisticated than is commonly realised. They understood the long-term benefits of technology, they just worried about the short-term effects
But, I think that today we have another factor that gets too easily forgotten: the Internet.
Recently, Chris Anderson (author of the Long Tail) said that video on the Internet has done for face to face communication what Guttenberg’s printing press did for the written word.
If anything, I think he understates the truth. The Internet is perhaps the most important innovation for encouraging specialisation and cooperation since the invention of the printing press, which itself may have been the most important invention for specialisation and cooperation since the invention of writing.
That in turns means that companies ability to improve productivity will increase. But, there is a growing risk that profits will rise, but not wages, ultimately leading to a short-fall in aggregate demand
Michael Baxter
See: Why the super rich should pay more tax, and the rest should pay a lot less
http://www.investmentandbusinessnews.co.uk/headline/why-the-super-rich-should-pay-more-tax-and-the-rest-should-pay-a-lot-less/11922
and Did globalisation cause the economic crisis?
http://www.investmentandbusinessnews.co.uk/headline/did-globalisation-cause-the-economic-crisis/7129
Peter, I’m of the opinion that this ‘fallacy fallacy’ is a fallacy. The number of jobs can increase, the number of hours worked can increase. And decrease. And this did often, but surely not always, happen in the entire western world and beyond, before as well as after WW II. Widespread employment and under-employment does not have to be normal (one of the most exiting episodes by the way: the job market changes in the USA and Canada as well as Europe, 1944 – 1950: unemployment, which had been so persistent during the thirties, just vanished, despite massive disarmament. One of the good things of the present economic situation is that it makes economists re-analyse the 1910 – 1950 period).
I do think that a flexible labor market does not necessarily increase the number of jobs or hours: it’s a bit like ‘musical chairs’. Quite a lot of tension, movement and shifting of chairs – but the tension and the like does not increase or decrease the number of chairs. Other factors however do – just look at the job statistics of the Bureau of Labor Statistics, the OECD or Eurostat. A very alarming statistic is however that the USA at the moment does seem to have something of a ‘Lump of Labor’: the 2010 number of jobs is not larger than the 1999 number of jobs. While the 1999 number was much larger than the 1988 number and the 1988 number was much larger than the… etcetera.
I’m of course not the first one to draw attention to this dismal job record. When consulting Wikipedia while preparing this answer, I encountered the next 2003 information from, of all people, PK:
” The latest lump-of-labor revival came to my attention when I realized how eagerly certain commentators were picking up on a new study by economists at the Federal Reserve Bank of New York. In it, Erica Groshen and Simon Potter argue that the pattern of laying off workers during recessions and rehiring them during recoveries has changed: since 1990 employers have become much less likely to rehire former workers. It’s an interesting study, and it might — repeat, might — shed some light on why businesses have added so few jobs during our so-called recovery”
What happened after 1990?
OK I’ll bite. What happened after 1990?
An entire generation of managers educated in neoclassical economics took up the reins of management and pressed forward with notions of shareholder value as their primary, explicit, goal. Squeezing layers out of management – remember that? – was the first step. Reducing union power was next. Then came efficiency; “re-engineering” and any number of other management fads promulgated by the big consulting firms and the MBA schools. Modern finance undergirding all this is inherently the stepchild of orthodox economics and is deeply embedded as the acceptable managerial technology. Those ideas still motivate the business bureaucracies that oversee our biggest businesses.
Implicitly, of course, this drive for efficiency – aka higher returns on equity – was driven by the spread of asymmetrical incentive structures that rewarded upper management for the production of ever higher short term profits.
Thus the post war contract between labor and management was sundered and an ever increasing proportion of the gains from productivity was syphoned off to profit.
Indeed, I would go further: the entire purpose for increasing productivity became the boost to profits that it provided. It is no accident that the only major economic indicator to flourish in the past decade has been corporate profits. Wages have languished. That this would eventually lead to declines in demand and thus investment and so on, eludes this generation of managers. And, presumably, the people who taught them.
Does that fit?
“Does that fit?”
Close enough. I would add that this managerial drive was augmented on the macroeconomic side by the assurance that government would do whatever needed to be done to maintain demand in spite of whatever management might do to undermine it.
The persistence of the bogus lump-of-labor fallacy claim in spite of its definitive rebuttal is prima facie evidence of the ideological, non-scientific character of ‘mainstream’ economics.
“Why Economists Dislike a Lump of Labor.”
http://tinyurl.com/lumpoflabor
The “Lump-of-Labor” Case Against Work-Sharing: Populist Fallacy or Marginalist Throwback?
http://hussonet.free.fr/lumplab.pdf
A Fixed Amount of Work to Go Round: Chapter Eight in Jobs, Liberty and the Bottom Line. See also Chapter One.
http://www.scribd.com/doc/41965697/Jobs-Liberty-and-the-Bottom-Line
I’m blushing. Be advised: Though I unashamedly point to who I am and I say exactly what I want the way I want it said at my blog (which is not for people’s whose sensibilities are more sensible than my own), I truly am a pariah here in Columbia, Missouri. I’ve been denounced in public by all sorts of respectable people. You might do best for yourselves accepting that I’m more like a court-jester, the fool who says embarrassing things and points to inconvenient truths, because somebody has to…and I love seeing the expressions I sometimes provoke on other peoples’ faces ….
My experience is that the more respectable people disdain you, the more likely it is you have found something important to say. It’s an inverse law. Plus: the fewer economics textbooks you have read the more you know about economics … but that’s another story.
Merijn
Thanks for the reply. I am not an economist – I am an amateur historian. So I am familiar with periods when, clearly, there was not enough “work” to go round. EG, in pre-modern societies a lot of labour was soaked up in status-display (ten footmen or, earlier, 50 retainers following each lord around). And as well there were usually problems of beggary, “masterless men” and so on, plus warfare. A check of Wikipedia shows an estimate for average weekly hours worked for medieval peasants that is less than the modern industrial average. So clearly something happened – there was a “lump of labour” then.
One explanation might lie in that the energy available to any economic system can support only so many productive niches. Complex social structures syphon energy up from the bottom – leaving less “work” available (although, as with display, they can then re-cycle some). In the US, the structure has grown more complex (eg more energy going to finance and to elites in general) over the past three decades, while available energy has not increased commensurately. But that’s an ecological explanation, not an economic one.