5.4 into 1 does not equal 5.4

I am doing a bit of cleaning up old filing boxes each day now as the date I will be moving offices approaches. It is actually an interesting process – looking through boxes and articles that have been stored away for some years now. Today, I came across an article that was in the US Magazine Challenge (March-April, 1982) entitled The Guilds of Academe and written by one Jack Barbash, who was an academic at the University of Wisconsin. It discussed the way in which the economics profession protects its belief system from criticism and avoids, as far as possible, addressing real world problems. The mainstream will talk as if they are addressing a real world problem – such as entrenched unemployment – but when you realise the models they are dabbling with you know that they are really talking about nothing real at all. This leads onto a forthcoming book by some British conservative MPs who have the temerity to argue that the British unemployment problem is due to the workers being to idle and diverted by pop music to bother working. You know instantly that the underlying model has come from a mainstream economist who hasn’t recently looked out the window or read any data.

The Challenge article was derived from a speech he made at the American Economic Association in December 1981. This Obituary in the New York Times gives you some impression of his background. He was an old-style institutionalist who considered trade unions to be important institutions in the capitalist system providing counterveiling power to the power exerted by employers.

If you have access to JSTOR then the paper is HERE.

In that paper, Jack Barbash is commenting on the way in which the economics profession had increasingly promoted “its craft … at the expense of its practical or problem-solving side”. He considered the mainstream profession to have become obsessed with the “paradigm”:

… thereby diminishing its ability to deal with specific problems.

The concept of a “paradigm” draws on Kuhn’s 1970 work and in Barbash’s words:

… establishes the analytical categories within which the professional discourse must be carried on if it is to gain guild recognition as a contribution to the discipline.

Elements of the dominant mainstream paradigm include the belief in “the maximizing individual in a free market” as the exemplar of welfare optimality and “the theory of economic equilibrium in a free market”, which would ensure the choices of those maximising individuals can have their voice and drive optimal resource allocations.

In effect, it has been very hard to operate as a professional economist in academic life if you chose to work outside of that “paradigm”. The elite (which operates like the mafia) generally controls the appointments processes; the editorship of major journals; the ranking systems that give weight to the journals they control; the leading panels on competitve national grant schemes; and the promotion processes within institutions.

Prior to even getting a doctorate, the elites control the curriculum; the grading systems; who gets postgraduate scholarships to pursue doctoral studies; and the examination panels to determine who gets doctorates.

There are gaps in this control. Some non-mainstreamers get through – but not many. And few get to the level of full professor, a position that bestows certain capacities (powers) independent of “paradigm” complicity. I have enough stories about the way the elite control things to fill several books. Maybe just one on that topic will materialise in the future when I have run out of other projects to pursue.

Jack Barbash captures the paradigm control function of my profession in this way:

Like the medieval craft guild, the academic discipline is built on a body of mysteries. But now, access to the mysteries is no longer protected by penalties and secret oaths but by a costly and arduous Ph.D. regimen of training and socialization in the ways of the discipline.

Notice he didn’t use the term “education” to describe the Ph.D. programs typically found in mainstream economics schools or departments. Training and socialisation rather than a broadening process of education to advance critical thinking.

Further:

The academic discipline, unlike the craft guild, also has no formal coercive apparatus at its disposal. It does have Kuhn’s “invisible college” … composed of a complex of professional associations, learned societies, annual meetings, journals, organized labor markets, graduate schools and their departments, foundations and government grantors – the equivalent of an “old-boy” network … [which] … hold out the prospect of advantage to those who conform to guild rules and guild disfavor to those who don’t.

He then proceeded to describe the way academic departments discipline thinking to ensure rebels are expelled and the compliant progress forward.

He considers the major work of mainstream economists to be “rigor over substance” and that behaviour is learned in graduate school. The student learns that “the most valued papers … become exercises in which method is more important than results. It does not detract from the result that it is nonsense in terms of the real world …”

Much earlier, the American (Marxist) economist Paul Sweezy wrote in 1972 in the Monthly Review Press article entitled Towards a Critique of Economics. that mainstream economics:

… remained within the same fundamental limits … of the C19th century free market economist … they had … therefore tended … to yield diminishing returns. It has concerned itself with smaller and decreasingly significant questions … To compensate for this trivialisation of content, it has paid increasing attention to elaborating and refining its techniques. The consequence is that today we often find a truly stupefying gap between the questions posed and the techniques employed to answer them.

Even the claim that the mainstream is the exemplar of rigour is misconstrued. In fact, there are many internal inconsistencies in the body of theory quite apart from whether the theory is devoted to counting the number of angels on a pinhead.

The 1960s and later Cambridge Controversies revealed that mainstream distribution theory is so deeply flawed that it is useless. That is, marginal productivity theory which purports that all product inputs are (fairly) rewarded according to their contribution to production (thereby eliminating any notion that profits are expropriated surplus value) was demolished by the critique.

More recently, the New Keynesian models which claim to be founded on micro-optimising principles (a five star badge type status) become so comprimised when they try to add, for example, unemployent to a highly abstract model where initially there is no money or labour market!

Please read my blog – Mainstream macroeconomic fads – just a waste of time – for more discussion on this point.

Jack Barbash acknowledges that there is some “ferment from within” the profession, which challenges the hegemony that the mainstream elites maintain. He provides a series of quotes – “culled from the president addresses before the American Economic Association” – which I publish in full.

1. Galbraith: “… In eliding power – in making economics a non-political subject – neoclassical economics destroys its connection with the real world.”

2. Leontief: “The weak and all too slowly growing empirical foundationclearly cannot support the proliferating superstructure of pure, or should I say, speculative economic theory.”

3. F.H. Hahn: “…. the spectacle of so many people refining the analysis of economic states which they give no reason to suppose will ever, or have ever come about …”

4. G.D.N. Worswick: “A marvellous array of pretend tools which would perform wonders if ever a set of facts should turn up in the right form.”

5. E.H. Phelps Brown: “… assumptions about human behavior that are plucked from the air.”

6. James H. Blackman: “The profession’s incentive system tends perversely to reward this kind of endeavor and to deflect the attention of gifted economists from the explortation of concrete problems and the dirty work that entails.”

7. R.A. Gordon: “The mainstream of economic theory sacrifices far too much relevance in it pursuit of rigor.”

He notes that this group of economists are hardly radical (“guild members of impeccable standing”).

The concluding part of the article is a reflection on suggested reforms. He says that students should be given a body of knowledge at the outset rather than being confronted with an abstract theoretical framework.

He says that:

Economic issues must be mastered on their own terms. It is the facts – If I may use that old fashioned word – which should lead to Theory, not the Theory which should select the facts … Theory tends to evolve into ideology when it becomes relevant only to itself. I believe this to be the current state of the art.

I was reminded of all that when I read the UK Guardian article (August 20, 2012) – Fixing Britain’s work ethic is not the answer to this economic mess – which once again shows that the mainstream economists and the policy makers they advise have no new tricks in their “paradigm bag” and are intent on restoring the sorts of policies that created the crisis in the first place.

Last week, Australia was “treated” to a visit from the UK Big Society advocate – the excessively pompous Phillip Blond – who told us that governments make things worse and individuals, pursuing their own self interest, should have command of the resources that the government takes via tax.

Please read my blog – The Big Society aka BS – for more discussion on why the BS is BS.

The UK Guardian article addresses a similar point. It ostensibly reviews a new book written by “five Tory MPs” who have “accused Britons as being among the worst idlers in the world”.

The familiar territory – the macroeconomy fails to generate enough work because aggregate spending is insufficient to entice firms to employ all those who want to work at the current wage levels and transfer payment arrangements.

Thousands, millions lose their jobs. Remember they were working then not working. No changes have occurred in the system of transfer payments (welfare benefits).

Mass unemployment persists as the deflationary multiplier further undermines aggregate spending – as a result of the lost income not spent from the unemployed workers reverberating through the economy.

Employment growth is weak if not negative and not sufficient to absorb the new entrants to the labour force and the unemployed. Social tensions emerge as people default on mortgages; lose their homes, lose their kids to care; commit suicide; take too many drugs or drink to much alcohol in despair; lose their social networks; all as a result of the worsening mass unemployment.

Some of the unemployed exit the active labour force to preserve their self-esteem – they get sick of applying for jobs that they never get even if they can find a job to apply for. The rising hidden unemployment attenuates the rise in official unemployment somewhat.

In this context, a neo-liberal government with an ideological obsession about small government and a disdain for the most disadvantaged citizens in their midst, imposes fiscal austerity – a policy that makes the entrenched unemployment even worse.

Then the spin starts. Intent on deflecting blame for their actions the government and its supporters then turn on the propaganda machine.

The nomenclature is developed to support the revisionism.

Australians might recall this appalling display by the current Federal Opposition leader Tony Abbott on ABC Four Corners program (a weekly national current affairs program that has been runnning for more than 50 years). As an aside, there is an excellent iPad app Four Corners 50 Years that is well worth installing and checking out.

On July 9, 2001, Tony Abbott, then the Federal Employment Minister appeared on the Four Corners program – Going Backwards – which was focused that week on the working poor who were on the rise in Australia and “not earning enough to get by”.

Data was produced by the show to show that “1 in 5 Australians living in poverty have wages or salaries as their main income” and that “the number of low-wage earners doubled between the mid-1980s and the mid-1990s” (although not all low-wage earners are below the poverty line).

The Federal Employment Minister told the program (among other things) that:

we can’t abolish poverty because poverty in part is a function of individual behaviour. We can’t stop people drinking. We can’t stop people gambling. We can’t stop people having substance problems. We can’t stop people from making mistakes that cause them to be less well-off than they might otherwise be. We cannot remove risk from society without also removing freedom and that’s the last thing that any government should do.

Tony Abbott also called the unemployed job snobs, which was mild compared to some of the other nomenclature used to describe the unemployed as neo-liberalism took its hold.

This 2010 MA Thesis from the University of Wollongong – Media, marketing and the dole cruisers – a welfare discourse case study – provides a good history of the way in which the conservatives vilified the unemployed.

The UK Guardian article notes that the Olympic euphoria “didn’t last long” – the adulation of the nation of gold medal winners has given way to:

… being depicted as a nation of slack-jawed lummoxes incapable of a decent day’s work, and to Iain Duncan Smith accusing the BBC’s economics editor Stephanie Flanders of “peeing all over British industry”, after she failed to greet falling unemployment figures with unquestioning wonderment.

The forthcoming Tory book claims that cohorts in Britain are “among the worst idlers of the world”. Australian conservatives call the unemployed – dole bludgers, job snobs, cruisers – the British, it seems call them idlers and preferring “a lie in to hard work”. Apparently, the British also use the term “welfare scroungers”.

The UK Office of National Statistics publishes a series VACSO1: Vacancies and unemployment – which allows us to compute the number of unemployed to each vacancy.

Here is the graph of the series from the first-quarter 2001. The series is currently at 5.4 – that is, there are at least five people seeking work than there are unfilled vacancies.

If you think about it, five point four into one doesn’t equal 5.4. Notice also the sudden jump as private spending collapsed as the world entered the global financial crisis. The Tory argument would require a very sudden behavioural change among millions of workers to be a fair account of what has happened.

I am sure psychologists would refute the claim that there was an outbreak of mass laziness in the UK around 2008. The Tories would also have to argue that the laziness spread very quickly throughout the world around then as well.

The Tory argument is the old worn out argument that is derived from undergraduate microeconomic courses on the impacts of welfare payments on job search effort.

Students learn about “corner-solutions” (no work all play) that are chosen by optimising agents given the current transfer payment level and the wage they might earn if they were to work. It becomes optimal to be unemployed. Students get inculcated with this “theory” every day and never really learn that five point four into one doesn’t equal 5.4.

They derive complex mathematical expressions for the corner solutions and take derivatives here and there (calculus derivatives that is) but lose sight of the obvious – the unemployed cannot find jobs that are not there.

Most neo-liberal economists, and certainly the major researchers who have influenced the OECD in designing their active labour market programs regime (which reflects the view that the unemployed are lazy), argue that the unemployment rate is higher now for a given level of vacancies because of structural shifts in the labour market. So they say the full employment unemployment rate is now higher than it was, say, in the 1960s because workers are less inclined to work (among other reasons associated with worker attitudes and preferences).

Representative of the supply-side emphasis and probably the most influential researchers in terms of the evolution of the 1994 OECD Jobs Study agenda, Layard, Nickell and Jackman (in their 1991 book: pages 4 and 38), explained the rise in the unemployment to vacancies ratio by:

… a fall in the search effectiveness … among the unemployed.

They also (page 268) claimed that the UV shift has been due to “rise in long-term unemployment, which reduces search effectiveness …” What does this mean? LNJ (1991: 38) offer the following explanation:

Either the workers have become more choosey in taking jobs, or firms become more choosey in filling vacancies (owing for example to discrimination against the long-term unemployed or to employment protection legislation.

They suggested that the first reason dominates. There is clearly an observational equivalence problem in attempting to test for this. Search time will lengthen when there are large cyclical downturns and the probability of gaining a job decreases.

However, it is a fallacy of composition to conclude that if all individuals reduced their reservation wage (the lowest wage they are prepared to accept) to the minimum (to maximise supply-side search effectiveness) that unemployment would significantly fall (given the small estimated real balance effects in most studies).

Further, unless growth in labour requirements is symmetrical and labour force growth steady on both sides of the business cycle, the pool of unemployed can rise and remain persistently high. But it is impossible to directly test changes in the motivation of individuals independent of the hypothesis that the shifts are collateral damage of severe recessions.

A vast number of studies have categorically demonstrated that increases in the unemployment to vacancy ratio occur during major cyclical downturns rather than any autonomous supply side shifts (arising from changes to welfare provisions).

Please read my blog – The unemployed cannot find jobs that are not there! – for more discussion on this point.

The Tory argument in this context has been discredited countless times.

But as the UK Guardian article argues that:

… what’s giving the politics of idleness a new lease of life is the marriage of an ancient Tory belief – that anyone can haul themselves up by their bootstraps, that failure means you’re not trying hard enough – with a newly fashionable argument about the decline of the decadent west and rise of the industrious east.

This is a new spin on the neo-liberal argument. That the communists in the east are doing better at capitalism than the inventors of it in Britain.

As the UK Guardian article notes the dole bludger is being melded with the living beyond our means narratives – the individual sloth and the national excess:

The young Tory turks are busy weaving a narrative not just of individual moral failing (too many workshy scroungers) but of national degeneration: a sense that we’ve been spoiled by years of easy money and need a collective kick up the backside. It’s intimately connected to austerity politics, with its inference that only rich countries can afford to go this soft.

Which translates into an all out attack on the twin evils – the disadvantaged and the “bloated public sector” – with some disdain for the youth who are “more interested in pop music and football” than in becoming lawyers.

The book also notes that average hours worked are shorter in Britain than elsewhere but the UK Guardian article is on to that one. The writer points out that the neo-liberal onslaught on full-time work and the rise of casualised, underemployed jobs leads – in a compositional sense – to a lower average.

Ultimately, the article gets it right:

Hauling ourselves out of recession might indeed be as easy as demanding everyone pull their socks up, if declining GDP really was just a fancy name for indolence.

Mass unemployment of the type being endured by Britain and most nations arises because of a systemic failure to create enough jobs and working hours.

The unemployed can do nothing about that. The overall aggregate demand constraint has to be lifted – spending rise – to entice firms to employ more workers.

The unemployed could trudge the streets until the cows come home. If there are not enough jobs then such job seeking will be in vain.

Please read my blog – What causes mass unemployment? – for more discussion on this point.

Regular readers will know of this little nursery story but it is worth repeating for new readers. I have updated it to reflect the current state.

Case study: the parable of 100 dogs and 92 bones

Imagine a small community comprising 100 dogs. Each morning they set off into the field to dig for bones. If there enough bones for all buried in the field then all the dogs would succeed in their search no matter how fast or dexterous they were.

Now imagine that one day the 100 dogs set off for the field as usual but this time they find there are only 92 bones buried.

Some dogs who were always very sharp dig up two bones as usual and others dig up the usual one bone. But, as a matter of accounting, at least 8 dogs will return home bone-less.

Now imagine that the government decides that this is unsustainable and decides that it is the skills and motivation of the bone-less dogs that is the problem. They are not skilled enough. They are idlers, bludgers and “bone-shy”.

So a range of dog psychologists and dog-trainers are called into to work on the attitudes and skills of the bone-less dogs. The dogs undergo assessment and are assigned case managers. They are told that unless they train they will miss out on their nightly bowl of food that the government provides to them while bone-less. They feel despondent.

Anyway, after running and digging skills are imparted to the bone-less dogs things start to change. Each day as the 100 dogs go in search of 92 bones, we start to observe different dogs coming back bone-less. The bone-less queue seems to become shuffled by the training programs.

However, on any particular day, there are still 100 dogs running into the field and only 92 bones are buried there!

You can find pictorial version of the parable here (for international readers this version was very geared to labour market policy under the previous federal regime in Australia and was written around 2001). I first screened this at a presentation that preceeded a talk by Tony Abbot, the then Federal Employment Minister now Opposition leader gave at the University as my guest.

In the UK there are about 92 bones for every 100 dogs and in Spain 75 bones for every 100 dogs!

The point is that fallacies of composition are rife in mainstream macroeconomics reasoning and have led to very poor policy decisions in the past.

There are simply not enough jobs

Conclusion

And on that note I will finish.

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved