This is a famous paper by John Maynard Keynes. He saw that productivity was going to increase considerably over the next two generations, but really had no clue how that would play out. Now we're there, and it's not working out like anybody back then expected.
What Keynes missed was a consequence of a trend that could be seen back then - productivity increases are concentrated in certain areas, broadly, those involving "making stuff" - manufacturing and agriculture. In Keynes's day, that was most of the work force. In the US today, 14% of the work force makes all the stuff. (Yes, imports. If the US made all its own stuff, that number would still be well under 20%).
As a result, most of the work force is in low-productivity jobs - leisure and hospitality, retail trade, and health care are the biggest categories. Because each worker in those areas produces little revenue, wages tend to be low there. With most workers in low wage, low productivity areas, wages overall are driven lower. Although manufacturing could afford to pay higher wages, they don't have to be that much higher. A new hire in an auto plant today gets about half, in real dollars, what a new hire got in 1975.
That's part of how we got to where we are today. This wasn't forseen by prominent economists.
Indeed, and it was the starting point of the thought-provoking book How much is Enough? [1, review in 2] by noted Keynes biographer Robert Skidelsky and his son Edward, in which they advocate for more leisure, of the enlightened sort, instead of more work. It's a good read, though short on actual solutions.
One concern both Keynes and the Skidelskys had is this:
> Yet there is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy. It is a fearful problem for the ordinary person, with no special talents, to occupy himself, especially if he no longer has roots in the soil or in custom or in the beloved conventions of a traditional society.
> To judge from the behaviour and the achievements of the wealthy classes today in any quarter of the world, the outlook is very depressing!
(Keynes, 1930 (!))
Now, with the increase in inequality over the last two decades and stagnating real incomes for the bottom half, it looks like this problem will be confined to the "wealthy classes" a bit longer...
Income inequality has grown, but it is a common misconception that incomes have been stagnant.
According to the St Louis Fed the issue has been:
>...Economists long have noted that focusing on AHE
rather than total compensation yields an inaccurate picture
of labor compensation due to the omission from
AHE of employer-provided benefits.
Not sure that's really a relevant factor. A 2012 source I found said that from 1973 to 2011, productivity grew by 80%, but wages only 4%, and total compensation 10.7% - that's a bit more, but it's still much closer to wage growth than to productivity growth.
Annualised, that's productivity 1.55%, wage 0.1%, total comp 0.25%.
Those numbers conflict with the St Louis Fed, so not sure what to make of them. It is unfortunate that their source seems to be produced from the think tank itself.
"As a result, most of the work force is in low-productivity jobs"
Most of the workforce are in pointless jobs that wouldn't be there but for the obsession with the false notion that "the private sector creates jobs".
We can create all we need and grow all required with about 20% of the manpower. By definition the private sector destroys jobs with innovation and automation. That is its purpose.
The problem is that the power has shifted to corporations and away from the population since the 1970s. That power results in moribund governments and a system of oppression that ensures there are always fewer jobs available than people that want them.
A perfect system of control for a nation based upon the idea of excessive individualism, that has made it trivial to divide and conquer.
But, as the political scientist Mark Blyth puts it, the Hamptons are not a defensible position. Eventually they will come for you.
> As a result, most of the work force is in low-productivity jobs
Do we have a good understanding of how this shift of employment from high-productivity to low-productivity industries plays out? Is it even still happening? A BLS study comparing data from 2000 and 2010 found no association between an industry's change in productivity and change in employment. [1]
"Throughout history, governments have tried to solve financial problems by simply printing more money. This can drive the value of money drastically downward, especially in modern markets where money is not backed by gold."
That has nothing to do with gains in productivity. If you produce ten times the value you did ten years ago, that fact is unaffected by the nominal dollar equivalent you make. Inflation - in your quote, of fiat currency - devalues stores of money, not stores of value, because it's a change in the relation of money to value that is strictly controlled on the money end.
Although inflation causes generally rising prices, it should not be understood as detrimental to all parties involved. It is highly lucrative for the government and the banking industry. When new money is printed (today, created electronically), it greatly benefits the first recipient because assimilating the new money into the economic organism takes time. Those first recipients (government and banks) can purchase goods and services at the old prices. As the money slowly works its way through the economy prices are bid up. Eventually when it reaches the salaried workers, prices have mostly adjusted. This process is a hidden tax on salaried workers, or anyone who receives the money late in the cycle. It is especially detrimental to those on fixed incomes, such as pensioners. Not only does the government understate the effects of inflation in its official numbers, any price decrease that would have occurred as a result of productivity gains are denied to the consumer as well. Inflation is nothing but wealth transfer. The government prints money and buys stuff with it. Prices rise and the salaried worker can buy less stuff. All the stuff the salaried worker could have otherwise bought has accrued to the government. Simple. Politically, it is far more palatable than raising taxes because the process is badly understood and well obfuscated.
"
Quoting sources is very impressive, but you're not making a real point. People are aware of how inflation works - unless you can explain how inflation would counter productivity increases in the general shape of the economy, you're not adding anything to the conversation.
no most people don't know on inflation really works I expeculate 99% of the people don't really know or have big misconceptions on how inflation works.
"Politically, it is far more palatable than raising taxes because the process is badly understood and well obfuscated."
It is really self-explanatory
"any price decrease that would have occurred as a result of productivity gains are denied to the consumer" trough inflation.
But we're not talking about a nominal dollar change in prices. The point was that the real wages have gone down, and that's not a direct result of inflation because you would expect workers to demand raises in line with inflation if they had the power to. Instead, manufacturing workers don't have that power.
"If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!"
Agreed!
The primary problem is politicians use of and reliance on economists as if they are fortune tellers.
The fact that there isn't an economic model in use which doesn't treat technology as an externality is to me the best sign of how far of from usefulness economy have become.
Of course there are areas where economy is good but it's not a science and it's use as a way to dictate politics is not founded in rationality.
Only in the last 20 years have economists begun to admit their traditional model of people in micro-economic markets, so-called "rational" actors, don't correspond to reality.
The amazing resistance of the field to such obvious claims (the more successful part of what's called behavioural economics) gives many of us looking in from the outside pause.
This is a common misconception. It is "traditional" macroeconomics (e.g. Keynes) did not engage with microeconomics at any point [1].
It was not until the 1970s and the Lucasian rationalist critique that microfoundations became an important inquiry. And that shift didn't occur because people were sentimentally attached to micro (if anything, they were attached to prevailing macro theories), it happened because Lucasian rationalism explained an empirical phenomenon (a shift in the Phillips curve) that was not explained by the other approaches. Since that time support for microfoundations has waxed and waned a few times, in response to several other empirical shifts.
In practice, economics is much like the other sciences, with a slightly wider diversity of thought. Like the other sciences, most people only understand a caricature of it that is given through the lens of politics. Unlike the other sciences, more people seem inclined to accept this caricature and criticize it on that basis, which is unfortunate.
The problem is that the notion that 'microfoundations' can be linked to the macro economy by searching for 'deep parameters' suffers from precisely the same critique.
It's even proved wrong within the body of theory that embraces it. The Sonnenschein-Mantel-Debreu theorem.
Economists then do a lot of hand waving and point to 'data', without acknowledging that the 'data' is collected from a system that has been under the influence of their ideas for over 40 years and therefore will, inevitably, be the right shape.
If you collect data from a man in a straitjacket, unsurprisingly it will look like a man in straitjacket. It can tell you nothing about ideas that involve removing the straitjacket.
Non-falsifiability of theorems is the hallmark of macroeconomics. Because it is an ideology dressed up as a science.
That's not exactly a fair representation of the recent work. It seems to be more that because people aren't very discerning, they often demand things which are bad for them.
The real mystery to me is why this was ever considered a bad thing, shouldn't the market reward competent participants at every level (including consumers)?
Say what you will, but before we introduced so much planning, the market worked just fine for most people, at the expense of some people; now it's been hobbled and it works poorly for nearly everyone, to the immense benefit of cronies and the bureaucrats who receive such generous donations for exercising the new control in their favour.
I agree. There have been great advances in the last 40 years. There is the need to distinguish between honest economists and those who have assumed a conclusion. Basically the equivalent of creationists. It's unfortunate that in economics it's so hard to distinguish the two.
Does classic economics describe commodity markets well under normal situations?
Quite. When all you have is a hammer... Its also a bit like inexperienced strategists mistaking the map for the terrain, and discounting actual reports from the field because they don't match what they expect from their model of the situation.
It seems that he has been generally correct about the economic problem gradually ending, though maybe inequality of distribution has been worse than he expected, so we are still somewhat distant from the real end. But if his picture is right, there should have been steady progress in the ability of the upper middle class to make better use of leisure time. Has there been? I have no clear sense of this.
You can watch a movie at 2am on your home theatre streamed from your personal computer in your couch in your own home. You can get one of a billion computerized entertainment products. You can get one of a billion billion noncomputerized entertainment products, delivered to your home in two days. In a day. In an hour. By truck. By bike. By drone. You can fly in a plane to Jamaica Friday evening and be back by Monday morning, don't even need to take a vacation day.
We're in an age of unprecedented personal entertainment, and the upper middle classes are in an ideal position to take advantage.
E.F. Schumacher responds directly to this paper in Small is Beautiful (1972), here are some snippets from this chapter of his book. Note that some people hate this book; read the amazon 1-star reviews for some scathing commentary.
TLDR: Western economics as Keynes suggests is an unbounded feedback loop; it generates income inequality which generates intolerable circumstances for poor people which leads to war.
----
This proposition can be divided into three parts: First, that universal prosperity is possible; Second, that its attainment is possible on the basis of the materialist philosophy of “enrich yourselves”; Third, that this is the road to peace
Is there enough to go around? … What is “enough”? … Not the economist who pursues “economic growth” as the highest of all values, and therefore has no concept of “enough.” There are poor societies which have too little; but where is the rich society which says: “Halt! We have enough”? There is none.
Economic growth has no discernable limit, must necessarily run into decisive bottlenecks when viewed from the point of view of the environmental sciences. An attitude to life which seeks fulfillment in the single-minded pursuit of wealth--in short, materialism--does not fit into this world, because it contains within itself no limiting principle, while the environment in which it is placed is strictly limited. … The developments of science and technology over the last hundred years have been such that the dangers have grown even faster than the opportunities.
Economic progress, [Keynes] counseled, is obtainable only if we employ those powerful human drives of selfishness, which religion and traditional wisdom universally call upon us to resist. The modern economy is propelled by a frenzy of greed and indulges in an orgy of envy, and these are not accidental features but the very causes of its expansionist success. The question is whether such causes can be effective for long or whether they carry within themselves the seeds of destruction. … It may look true in the short run and turn out to be false in the longer run.
I suggest the foundations of peace cannot be laid by universal prosperity, in the modern sense, because such prosperity, if attainable at all, is attainable only by cultivating such drives of human nature as greed and envy, which destroy intelligence, happiness, serenity, and thereby the peacefulness of man. … Their wealth depends on making inordinately large demands on limited world resources and thus puts them on an unavoidable collision course--not primarily with the poor (who are weak and defenseless) but with other rich people.
The cultivation and expansion of needs is the antithesis of wisdom. It is also the antithesis of freedom and peace. Every increase of needs tends to increase one’s dependence on outside forces over which one cannot have control, and therefore increases existential fear. Only by a reduction of needs can one promote a genuine reduction in those tensions which are ultimate causes of strife and war.
Never think that wars are irrational catastrophes: they happen when wrong ways of thinking and living bring about intolerable situations.
It is doubly chimerical to build peace on economic foundations which, in turn, rest on the systematic cultivation of greed and envy, the very forces which drive men into conflict.
Good to be reminded of that. I haven't read mine for years, time to take it off the shelf again.
I think that the point about selfishness and envy is spot on.
I'm convinced that one of the few things that were better in the past, well the bit that I inhabited in the 60s and 70s at least, was that people were not driven to the same degree by the need to acquire the latest gadget, and to excess in general.
Of course excess was there but in my experience in more episodic form, and therefore more sustainable and in fact more enjoyable.
"If economists could manage to get themselves thought
of as humble, competent
people, on a level with dentists, that would be splendid!"
Sadly this is still not the case. Macroeconomics in particular is still theory > scientific process.
And the frustrating thing about Keynes is that he failed to acknowledge the simple fact that Keynesian policy only works when every country in the world is not practicing it.
Microeconomics is where I think the real breakthroughs are happening.
"Keynesian policy only works when every country in the world is not practicing it."
Most economies acted along keynesian principles during WW2. There's nothing stopping any economy from raising aggregate demand to equal productive capacity, no matter what other countries are doing. It required an existential war for elites to stop pretending, though.
Sorry but this was a pretty novel idea and one-time solution for 2 countries in a time of serious crisis. It was not known or practiced by other nations at the time, so there was no counter-Keynesian policy enacted by other trading countries.
You are talking about Mercantilism and more specifically Protectionism. That is not Keynesianism at all. In fact Keynes was part of the British delegation to Breton Woods favoring negotiated trade balance.
No, it doesn't fit the accepted definition of Keynesian. Indeed, I've never heard of stimulus devaluing a currency. At 2% inflation since the Great Recession of December 2007 to June 2009, we do not have an overvalued currency and we had stimulus spending.
Keynesianism raises taxes to cool an overheated economy and spends those taxes to spur a stalled economy. The trouble is that no one likes taxes and they're easy to campaign against and everyone likes spending and they're hard to cut, especially in your district or on your project.
One of Hayek's big points which I count against Keynes is that we still don't fully understand market mechanics. It's as true today as ever. Going back to the initial quote about dentists, too many people think that it's an easily explainable macro-system.
I struggle to see how there won't be (and already haven't been) ramifications from printing money to support national economies. Printing more IOUs definitely devalues the existing IOUs....
Call it disinflation or deflation, it does exist. We're seeing it in Japan and in an increase in real (inflation-adjusted) short-term rates which are negative in several countries (Sweden, Denmark, etc).
>One of Hayek's big points which I count against Keynes is that we still don't fully understand market mechanics.
That, along with the notion that market mechanics were not necessarily rational, was one of Keynes' main points. He termed it "animal spirits".
>I struggle to see how there won't be (and already haven't been) ramifications from printing money
Nobody said that there wouldn't be ramifications.
>Printing more IOUs definitely devalues the existing IOUs
No, not necessarily. If an economy is operating way under capacity it will increase production, dampening inflation: you get the same number of widgets for your IOU it's just there are more widgets built.
If an economy is operating at capacity (as Zimbabwe's was), all it will do is devalue existing IOUs.
Ron Paul made a lot of hay (and fundraising) out of name dropping Hayek. Still Hayek had one idea that is in common use, price signals, but otherwise he's been adopted by a partisan crowd.
And the frustrating thing about Keynes is that he failed to acknowledge the simple fact that Keynesian policy only works when every country in the world is not practicing it.
I didn't downvote you at first, but I always downvote complaints about downvotes. I'd give it more time. Decent comments generally arrive back in the black.
Keynes basically advocated for massive government stimulus to make up for national economic slack. The problems with governments doing this is:
1. Governments are less efficient than free markets at spending money. See China.
2. It tends to lead to central bank stimulus (dilution and tight control of currency values).
3. Currency devaluation results in a more competitive international trade for the country in question. This puts more unnatural pressure on other nations' economies.
4. Everybody racing their currencies to the bottom to remain economically competitive. Which is why people got in a tizzy about Japan, China, and now Germany. If a politician can get away with it why wouldn't they tweak monetary policy to juice the economy under their watch? Trump has made comments to this effect and appears poised to continue the cycle. If you can believe anything he says..
These ingredients (high global trade levels compared to historical, tightly interconnected economies, disconnect from the established standard of trade ie: gold in favor of paper IOUs, yet competing and ambitious political interests) can only lead to one thing. An undeclared currency war.
Why else are we still witnessing weak to no inflation across the developed world?
> * Keynes basically advocated for massive government stimulus to make up for national economic slack*
This is an inaccurate summation of Keynesian policy. Keynes recommended counter-cyclical policies much like a feedback loop. Growing too fast? Cut spending. Growing too slow? Spend more. Keynesian is different from pure free market theory which is like an open loop.
My EE120 Linear Systems prof at Berkeley also taught in the Economics Department. So the idea that you'd want a feedback loop rather than an open loop makes a lot of sense to this gearhead.
> * 1. Governments are less efficient than free markets at spending money. See China.*
See GPS.
> * 2. It tends to lead to central bank stimulus (dilution and tight control of currency values).*
Yes. That is the mechanism.
> Everybody racing their currencies to the bottom
No. Europe is not racing the euro to the bottom. Japan is not racing the yen to bottom. The US is not racing the dollar to the bottom.
Yes, feedback loops loop. That's what they do. The trouble with open loops is that they crash and crashes are really bad. Keynesianism came to the forefront after the Great Depression which was horribly mismanaged by conservatives free market zealots. Crashes are really really bad. Roosevelt came into office with 25% unemployment. Let me say that again. Crashes are really fucking bad and are to be avoided.
In the US we currently have low inflation (1-2%) but not deflation. Same with Europe.
I am certainly excluding Libor (which would be very strange to include) and I'm definitely not excluding food and fuel from the CPI.
Airline Fares
Cable Television
Household Fuels
Leased Cars
Lodging Away from Home
Medical Care
Motor Fuels
Motor Vehicle Insurance
New Vehicles
Personal Computers and Peripheral Equipment
Rent and Rental Equivalence
Telephone Services
Tuition and Fees, College
Tuition and Fees, Elementary and High School
Used Cars and Trucks
>1. Governments are less efficient than free markets at spending money. See China.
It's worth noting that the free market is less efficient than governments in other areas, or at least, it does not optimise for outcomes in certain areas.
Government creep results in suboptimal outcomes for everyone, raising tensions and exacerbating economic books and busts. I point to Greenspan and the housing crisis. Maybe the U.S. shouldn't be subsidizing housing and student loans?
Additionally, currency and trade wars tend to become the violent kind.
You could argue that the real problem is that Keynesian backed governments never turn off the spigot, but why should they when the chosen stimulus policy neatly aligns with their own professional goals?
That sounds like "Keysian policy never works". dforrestwilson said "Keynesian policy only works when every country in the world is not practicing it" which sounds like a different claim entirely, so I'm confused.
It worked before and during WW2 because it was unprecedented and other countries did not engage in similar policies to remain competitive in international trade.
This is a famous paper by John Maynard Keynes. He saw that productivity was going to increase considerably over the next two generations, but really had no clue how that would play out. Now we're there, and it's not working out like anybody back then expected.
What Keynes missed was a consequence of a trend that could be seen back then - productivity increases are concentrated in certain areas, broadly, those involving "making stuff" - manufacturing and agriculture. In Keynes's day, that was most of the work force. In the US today, 14% of the work force makes all the stuff. (Yes, imports. If the US made all its own stuff, that number would still be well under 20%).
As a result, most of the work force is in low-productivity jobs - leisure and hospitality, retail trade, and health care are the biggest categories. Because each worker in those areas produces little revenue, wages tend to be low there. With most workers in low wage, low productivity areas, wages overall are driven lower. Although manufacturing could afford to pay higher wages, they don't have to be that much higher. A new hire in an auto plant today gets about half, in real dollars, what a new hire got in 1975.
That's part of how we got to where we are today. This wasn't forseen by prominent economists.
[1] https://www.marxists.org/reference/subject/economics/keynes/...
[2] https://www.bls.gov/emp/ep_table_201.htm