I was watching a TV documentary on the history of engineering car safety. It talked about the really good inventions like better brakes, steering, suspension, and tires, that help the driver avoid an accident. And things like safety glass, crumple zones, seat belts and air-bags that help you survive an accident you don't avoid. Then right at the end it talked about the ultimate engineering problem: the loose nut behind the steering wheel. It showed cars that could drive themselves, and said all cars would be doing this sometime in the future, so fewer of us would die on the roads.
My reaction was immediate and visceral. "I hope I die before that happens".
I'm probably in a minority, but I'm not alone. I don't want a computer to drive my car for me, even if it could do a better job. I want to drive myself.
Paul Krugman doesn't agree. He prefers taking the train, precisely because it leaves him free to read a book or do other things. "…the thing about cars is that you have to drive them, which kind of limits other stuff." To me, what's so great about cars is precisely that — you have to drive them.
That's OK. Nobody says we all have to enjoy the same things. This is not really an argument with Paul Krugman (though reading his post got me thinking about this). This is not even an argument about cars vs trains and planes. Though that makes a good example.
What I'm worried about is that standard cost-benefit analysis may be leaving something out.
Suppose I were doing a standard cost-benefit analysis of cars vs trains and planes. Or of adding computers to cars that did the driving for you. And I wasn't aware of the fact that some people just liked driving themselves. I would underestimate the benefits of cars vs trains and planes. I would overestimate the benefits of adding computerised chauffeurs to cars.
The mistake is obvious in that example. It would be even more obvious in the example of games like crossword puzzles. "I know, why don't we just print the newspaper with the crossword puzzle solved, so people don't have to waste their time solving it themselves?". But are there examples where it's less obvious that people sometimes just like doing things for themselves? They want to be in control of their own destiny, even if the decisions they make aren't better than a computer or someone else would make for them?
We aren't consequentialists. We don't just care about the results. We care about the process of getting those results. And, in particular, we like to have some sort of control over our lives. Because having control over our own lives is part of what makes our lives worth living.
Ideologically, there's a couple of different ways you could take this argument. Libertarians would approve, of course. But so would advocates of participatory democracy. Central planners would disapprove. So would technocrats.
I insist on driving a car with a manual transmission. I have always argued that it's because manual transmissions are better. The newest automatic transmissions (unlike traditional automatics they are really manual transmissions inside with a little computer working the gears and clutches) have made my argument hollow. The newest automatics are able to do everything better than I can. But I still don't want one, even for free. That's not real driving.
And I don't want a GPS either. I'm not going to ask for directions. I want to get lost by my own efforts. And I want to fix my car myself, or at least try.
Most new cars, despite everything they can do, don't tempt me at all. But there is this one:
Now, put that in a cost-benefit analysis!
Worthwhile Canadian Initiative 
Nick, that is the “price anchor” part of the ELR.
You can also argue that ELR poses a credible threat to private sector employers, because their employees can leave and work for the ELR pool, and because fear of unemployment is taken away. For example, all proposals I know of have ELR providing full health care coverage, as some include job training options.
So there are two credible threats, and that will be balanced by the wages and benefits we provide to ELR workers as a matter of policy. This is really the same inflation/growth trade-off as before. Think of the current system as one in which the ELR wage is zero.
I don’t actually think of MMT as particularly “lefty” and it has other deficiencies, IMO, on which this discussion has not at all touched (such as the little matter of imported energy…). I find it primarily useful as an exercise in showing the ephemeral nature of some of the categories of analysis used by economists and that it situates unemployment clearly and correctly in the world of political choices and cui bono. Who the cui that is bonoing is another matter, and has other remedies.
OK, Determinant, but let’s not talk about unions right now.
Assume for the moment that we do not believe that the economy operates according to a general equilibrium framework, but a disequilibrium framework, and let’s further assume that firms go bankrupt, there are planning errors, allocation errors, signaling errors, agency problems, etc., so that the economy is not able to employ all people (or for that matter, efficiently use all resources). Therefore there is involuntary unemployment because the market itself has some level of inefficiency. That is basically the NAIRU concept once you stop blaming unions for the existence of Enron, New Coke, or Countrywide Financial.
And let’s further assume that if the government were to increase demand up until all factors could be profitably employed, that the price level would be indeterminate. Therefore we as a people are enjoying a stable price level only at the expense of maintaining an army of scabs who by definition will tend to be the most disadvantaged people. Moreover, they are being made more and more disadvantaged each additional month that they seek work and are unable to find it. Their skills deteriorate, social relations deteriorate; there are many mental and physical health problems as a result of unemployment.
Why not compensate the losers — those who are willing to work but unable to find it? They are the ones on whose backs we enjoy a stable price level. That would not create hyperinflation, it would be a Pigovian tax on the market because we recognize that the market as a whole is inefficient.
How do we know wether they are consuming leisure or looking for work? Offer them work. There is no shortage of useful work.
Then we are at least partly undoing the externality caused by the market inefficiency. We as an economy will be richer for it. Those who do not want to work can live off of their savings and consume leisure however they want.
Now the program wont be perfect. It will suffer from the same inefficiencies and management errors that the economy as a whole suffers from. You will have horror stories, but not on the scale of the Exxon Valdez or Wall Street. Think of it as an imperfect solution to an imperfect market, but better than just letting them rot while we enjoy price stability.
I’m with you, RSJ. Please carry on. 🙂 But let’s not talk about health care either, it doesn’t really belong in a Canadian blog and there are other ways to skin that cat which deserve their own thread.
I love your last post, mostly because it assumes *imperfection. Those are the theories I really like.
“Offer them work. There is no shortage of useful work.”
You’re treating “work” as a commodity, which it obviously is not. Perhaps the unemployed are looking for highly-skilled jobs in niche sectors, which the government would have very little demand for. Unemployment insurance programs do require job search, yet we do not count everyone on UI as “employed” by the insurance provider. For the same reasons, job guarantees would be even more problematic.
RSJ: what you have just described is very close to my vision of unemployment in macro.
3 minor changes, then one big one.
1. “..and let’s further assume that firms go bankrupt, there are planning errors, allocation errors, signaling errors, agency problems, etc., so that the economy is not able to employ all people (or for that matter, efficiently use all resources).”
Add monopoly power (including unions) to that list.
2. “And let’s further assume that if the government were to increase demand up until all factors could be profitably employed, that the price level would be indeterminate.”
It would become indeterminate before that, as soon as unemployment got permanently below the NAIRU/natural rate. (Might be what you meant, anyway).
3. “…it would be a Pigovian tax on the market because we recognize that the market as a whole is inefficient.”
Not strictly a Pigou tax, because a Pigou tax is designed to reduce the amount of activity to a smaller level, whereas the problem here is there’s not enough market employment.
(None of that really affects the substance of what you wrote.)
4. “Why not compensate the losers — those who are willing to work but unable to find it? They are the ones on whose backs we enjoy a stable price level.”
They are indeed the ones on whose backs we enjoy (not a stable, but) a determinate price level. But, if we compensate them how will that affect the number of losers?
Let me give you the nightmare scenario of the efficiency wage theory of unemployment, for example. In the Bowles/Gintis (Marxists) Shapiro/Stiglitz (lefties) model, for example, real wages and unemployment adjust until the fear of unemployment is just sufficient to prevent worker “malfeasance”. In that model, there is an Iron Law of Constant Misery of the unemployed. If you halve the misery of each unemployed worker (relative to an employed worker), you just double the equilibrium number of unemployed, so the total misery stays the same. In that popular New Keynesian model (though nobody dares mention this implication in public) the optimal policy would be to flog the unemployed (unless flogging were very expensive). Even though, in equilibrium, unemployment is never the fault of the unemployed worker.
Rather Dickensian?
That’s why I would rather either: go for a more radical solution, to try to remove or at least reduce the root of the problem; do nothing.
It really does depend on what causes unemployment, and how you model it. You really do have to think about the implications of a policy change on the equilibrium level of unemployment. You can’t just stop at step one.
BTW:
That version of the efficiency wage model is an example of an agency problem — agency is one of the things on RSJ’s list of causes of unemployment.
When I talk about the “equilibrium” level of unemployment, I do not mean it’s voluntary, and I do not mean it’s market-clearing or demand=supply. “Equilibrium” doesn’t mean that in economics any more. It just means “what the model predicts”, or, taking all interactions into account, or, the solution to a set of equations.
OK, Nick, I’ll accept all of your corrections.
But I don’t buy the model you mentioned, because I don’t think unemployment is a productivity problem, but rather a price problem. There is no reason why, for any level of productivity, you cannot achieve full employment, if factors are paid appropriately.
My thinking is not very clear, but basically I believe that the market throws resources away ex-post in a way that is not known ex-ante, when contracts are set.
I once worked in a start up, and we were competing with two other start ups. Each of us had about 50-100 employees, and were rushing into a new market. Engineers pulling all nighters, salesmen rushing around spreading misinformation about the competition. Multiple people salesmen wooing a single potential client, etc. Eventually our firm “won” and the other two went out of business, laid off all their employees. We had high fixed costs (e.g. development) and marginal costs were low. Even though we captured the entire market, we did not triple our hiring. We doubled engineering and sales, and added a few more customer support guys. I think we got one more technical writer, too. Ex-post, the other two firms spent large fixed costs on developing products that were only briefly used, and their customers spent a large amount of money un-installing the products after they were no longer supported — the uninstall process was extremely cumbersome — it took weeks and touched mission critical systems. Given these costs, you could easily argue that the contribution to national income of our competitors was negative, ex-post.
So that is an extreme example of the market hiring three people to do the job of one.
The market is a competition in which the losers go bust and the winners take over their revenue. But there are fixed costs, sunk costs, there is duplication of effort, as well as resources expended on imposing costs on competitors.
I don’t think convex production sets capture this carnage.
The point is that those resources do not contribute to national income, nevertheless they are required to be spent.
In terms of an aggregate production function, you could model this by assuming that everyone is overpaid, and therefore this is why there is unemployment.
But at the micro level, it’s not that wages are too high, but that the production process is “lossy”. Each individual firm does not know whether it will be the loser, and there is no motivation ex-ante for the individual firm to not pay each worker the marginal product in that firm, which means that prices must increase.
You would need some way of suppressing wages in order to achieve price stability. You need firms with market power bargaining down workers, and you need a reserve army of unemployed.
But in that case, a tax on everyone else that is used to pay the reserve army to provide public goods would be a good idea. There is no reason why the reserve army should be paid zero.
If you pay them a living wage, you would get slightly less private output, as some marginal firms will be priced out, but this would be offset by public goods, and many more would have the opportunity to earn a living doing useful work.
I have to think more about this, but it seems plausible.
RSJ, if your startup was “rushing” into the market, that was presumably due to a first-mover advantage. We do expect that such advantages will lead to wasteful competition: in fact, the entire rent may be dissipated.
You also mention firms imposing direct costs on the competition, such as salesmen spreading misinformation. This may in fact be very useful, because the competition is probably spreading hype about their own product. Customers are interested in accurate info, so they benefit by hearing both sides. At least one of the sides is going to have good arguments in its favor, and these are usually quite transparent.
RSJ, I have been thinking similar thoughts, but you finally managed to capture my train of thought coherently and concisely. Thank you. 🙂
Thanks, Determinant, but I don’t feel like what I wrote was either concise and coherent! That is rarely the case.
Anon, I agree.
I am grappling with trying to come up with some model that explains how something can be both inefficient and useful, as well as necessary 🙂
Here is a more concise and coherent version, I hope.
I think it’s the costs of competition, of innovation.
Competition requires inconsistent beliefs.
Both sides need to think that they can gain market share from each other, so the total estimated market share is greater than 100%. We want firms to fight over market share.
It was good that there were several different firms, each trying to build a slightly different product in a slightly different way; that’s how you discover what customers are willing to pay for, and whether one production technique is better than another.
But ex-post, paying three engineers to write three equivalent products, of which only one survives, is inefficient.
Those who lend capital to the firm understand that only one firm will survive — they are lending to all three firms, so they impose a risk-premium to take into account the likelihood of default.
But each individual firm believes that it will be the one to survive, and it negotiates the wages of the engineers — e.g. taking into account how valuable the code will be, assuming that the firm survives.
In aggregate, labor costs are too high (as two of the products will not survive, so the aggregate labor productivity is much lower) but capital costs are just right. We don’t know which engineers are producing useless output, but in aggregate, we don’t need to know.
But according to each individual firm, capital costs are too high, and labor costs are just right.
The government can reduce unemployment if it lowers capital costs, but then in aggregate, the interest rate will be lower than the natural rate. Or, you can reduce unemployment if each firm pays the engineer less than it believes the engineer is worth.
OK, three for one is extreme, but you just need the sum of market share estimates be greater than 100% — you just need competition.