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Failing “Facts”

As I prepare for a seminar on economics for today’s progressive, this particular post has come back to haunt me.  It’s a bit subtle but hurts like a sledgehammer if you think about it.  The bizzy whirl of my life as I prepare to announce my plans requires a repeat – and this one is standing out.  Enjoy!

Back in the 1950s, people who studied complex things like economies felt they were making real progress. The general belief was that by understanding how it all worked we could even things out and usher in a new era of continuous prosperity that would benefit everyone.

Some of the underlying “facts” that were identified at this time have been accepted as simple truths. Growth is always good, and economic growth always flows to workers, making their lives better generation by generation. There’s only one problem lately – some of the “facts” appear to not be as true as they used to be. That means that the underpinnings of modern economic theory are all being questioned and, perhaps, if we don’t keep our eyes open the new era of prosperity will be far more elusive than anyone thought.

may-you-live-in-interesting-timesBarataria has written before about the great divergence of opinions among economists as to how to handle the current situation. It ranges roughly from austerity to stimulus – tightening our belts to flooding the world with more money to get it working again. But all of these theories depend on conventional economics working.

In 1957, Nicholas Kaldor was a Hungarian born economist working in Cambridge, UK. He found that over a very long period of time six things appeared to be true for the economies he studied:

1. Output per worker grows at a roughly constant rate that does not diminish over time.
2. Capital per worker grows over time.
3. The capital/output ratio is roughly constant. (1+2)
4. The rate of return to capital is constant.
5. The share of capital and labor in net income are nearly constant.
6. Real wages grow over time. (2+4+5)

Baron Nicholas Kaldor. Yes, he got a Lordship for his work.

Baron Nicholas Kaldor. Yes, he got a Lordship for his work.

This was eventually extended to all economies as they were found to be more generally true. They are called “Kaldor’s Facts” or the “Stylized Facts” and they can be summarized easily: Growth is good. Just about every theory about how to run a national economy starts with these basic assumptions and their reasonable conclusion.

But one of them, at least, is clearly broken. Number 4, that the rate of return accrues to both labor and capital in a constant rate, is no longer true. Labor’s share is falling around the world at a pretty alarming rate, and has been written about in several very illuminating articles on the subject.

This is almost certainly a side effect of globalism as we have come to know it. Advances in communication technology mean that capital can flow around the world in seconds, seeking out the highest possible rate of return. Not so with labor. People are tied to their nations, their lives, their mortgages, their kids – the things that make up life and how people are defined. Where money can cross international borders easily, labor cannot both by law and by the simple truth that no one can possibly pick up and relocate on internet time.

The problem is a lot bigger than it looks. If labor can’t expect their cut of the return from capital, real wages do not necessarily grow with time. That means that the foundation of a modern consumer economy is not a reliable fact. If a consumer economy can’t be relied on, a whole lot of assumptions about credit and how to re-start the developed world aren’t necessarily true, either.

Did you get our jobs?

Did you get our jobs?

What should be done about this? At the moment, economists are largely confused as to where they go next. It goes without saying, however, that anything which puts labor at a further disadvantage have to be the highest priority for anyone trying to get the economy rolling again. Taxes on wages alone, such as the FICA Social Security tax are a real problem – 7.62% on all wages up to $110k per year only, take from both the worker and their employer.

Barataria has called in the past for a reduction in the overhead per employee and a general effort to increase worker flexibility. It’s apparently one of the most important things to do as we prepare for the next economy. During a depression, like the one we are in, we can expect many things in the economy to fail – awaiting redevelopment in a new structure appropriate for the economy that comes next.

We can’t be sure about all the needs of the next economy, but one that we can be sure of is that the disadvantage that labor sees versus capital is very real, stark, and threatening the underlying assumptions that guide all economic theory. Not paying attention to this could be the difference between a strong new economic era and a time of effective wage slavery for those lucky few who even have jobs. We live in a world in which nearly everything is up for grabs. Are we grabbing ahold of what we need to?

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17 thoughts on “Failing “Facts”

  1. In 1972 there was a book called Limits to Growth. It was commissioned by the Club of Rome. Even then it was realized that we couldn’t continue on this path with an ever expanding population, plundering the resources and polluting the ecosystem. At a certain point, traditional economic theories no longer apply. We are at that point. Labour’s share goes to the lowest bidder.
    Consumption taxes are an anathema to the people because it makes everyone a tax payer whether they benefit from the system with good paying employment or not. We have been here before and unless someone of great wisedom and strength can make the policies that actually benefit the people, I fear we will be domed social chaos.
    Leslie

    • In terms of resources, there is a finite limit and I agree that wise people have known for a long time that it cannot continue. But in terms of arts or services or other products of the mind there are no limits. The more we are a “software” world the more growth can, in fact, continue.
      But even that argument is dashed against something very fundamental failing right now. It’s chilling. One conclusion I hope people takeaway from this is that the maven who predict a wonderful software-based economy are also kidding themselves – unless we fix something much more fundamental, that is. Is it even fixable?

      • Good point and I do agree that the human potential is unlimited. However, it does require a supportive environment.
        Leslie

  2. Eggs-Actly! LOL – YES! I love the book, The Transition Handbook – http://www.amazon.com/The-Transition-Handbook-Dependency-Resilience/dp/0857842153

    it’s main topic is from transitioning from Oil dependency to local resilience, but many of the items listed for individual businesses, communities of workers, governments, etc., can be easily digested and put to use to improve the ‘system’ as a whole – one community at a time – 🙂

    Fixing the problem from a consumer driven stance is not easy – but I still believe it can be done – and now believe, consumer driven stance is the only think that will affect long term changes/betterment to the system –

    There are so many variable/layers to this issue, as I see it – and I’m not even well informed (though I’m getting better at it – thanks!) – but haven’t seen anything yet that couldn’t be fixed by folks taking matters into their own hands, just by being very, very picky, whenever possible, about who they are going to support and who they aren’t with their shopping dollars – Not an end all solution, but if the company you boycott goes out of biz, and they were employeed many of your neighbors (who they laid off in the process) do without buying and take the $ saved to support your neighbors with food, shelter, utilities till they get back on their feet –

    I know people who donate across the globe – but ask them to put a $50 in a card, and trust their local school, church or grocery store personnel to present the gift anonymously to someone those folks are in better position to know who really could use the break – – well – doesn’t happen – cuz ya can’t write it off your taxes – – 🙂

    • Resiliency is the key to me, which is why I’ve written about it (and around it) many times. I think that’s the main reason that too much Financial Capacity (as per the last post) is a problem. We cannot commoditize everything and expect that the world will not become a much more harsh place. I really think it’s that simple. The more we honor craftsmanship and decency the more we will have that in our lives – and better lives for everyone, everywhere.

      • Yes! I just finished up a website build for a craft cottage that runs on a collaborative model among the vendors – So excited to see more local entrepreneurs taking advantage of options to support local economy – etc. I just figure the only way it will be built to last is if it’s built by the people who create – and it’s banding together so their voice is heard – 🙂

      • That’s the promise of the internet – leveling the playing field in terms of media access by companies large and small. But it still takes a major cultural / attitude shift to make it happen. As I always say, the economy is all about value and values – those really are the same word despite how we use them distinctly.

      • YES!!! Eggs=Actly! – and this Devil’s Advocate personage, by nature and for the fun of it, so she can see what falls out of the conversation/fight she purposely picked to hear the opposing side’s perspective – is not too happy about yet another, “Yes!” agree completely”, response cuz where is the learning and fun in going along?

        But I do so appreciate your writing – you take complex, multi-level issues and make them comprehensible, without waiting for someone to be willing to read for years to get up to speed – I can shout at the wind, in my own ‘language’ however I wish – but it won’t make the same difference, in the long run – that your posts do – so thanks! For saying what I so badly want to convey, but, like Edward Everette, Abraham Lincoln, after the Gettysburg day of ceremony, ” I should be glad, if I could flatter myself that I came as near to the central idea of the occasion, in two hours, as you did, in two minutes.” – Alas, replace two hours with 2 centuries – that’s what is the reality – and appreciate you gifts – 🙂

        Signed, the gal that did a near-four hour debate with someone more stubborn than I on why the internet had the awesome potential to be a force for good and bring about a new level of ‘democracy/freedom’ as so many understand it – 4 hours! and you can do it in a post or comment that doesn’t come close to 4 hours – Love it!

  3. There is a quite human problem that is illustrated in this piece and that is the hubris of those who would turn theory into facts that appear to them eternal. Observing the economic growth in the 50’s, the economists of the day were dealing with a slice of time, limited to broad regions of the planet. From their observations that were making fairly adamant assertions about economic systems.

    Perhaps it’s my training as a psychotherapist that causes me to look into human behavior as a starting point, rather than the results of that behavior the economic endpoint. As with the Great Apes, much of human behavior is shaped by individuals/groups will to power. That human need has shaped society ever since humans began to coalesce into social groups, who then aspired to grow in terms of power and numbers.

    In the 1950’s America had been shaped by the “New Deal” ideals, victory in war and a struggle for hegemony in the world. That struggle, the “Cold War” required the simplistic assumption that what was at stake was “democracy” vs. “autocracy”. The argument devolved into a battle of economic systems: capitalism (democracy) vs. communism (autocracy) and hung on the minutia of their differences. Economists chose various sides of the argument, using their varied measurement techniques to provide theories of which system was “good” and which system was “evil”. However, left out of their equations was the truth that humans function not from systems of logic, but from psychological drives that that co-opt logical systems as rationales for selfish behavior.

    What we see today, as we are moved towards an evermore divided society, is that our economic systems are being run by a tiny fraction of humans, who are driven to enhance their status (read power and wealth) at the expense of everyone else. My own thinking is that the “wealth gap” is being artificially created so that our society is moved towards aristocracy. Aristocracies bring fulfillment to its members exactly from the class differences imposed. They are irrational in that the need is for self-glorification and a developed pecking order among ones peers, with competition then focused on improving ones position. We see Forbes Magazine and other outlets providing lists of who are wealthiest from year to year. We see the “Royals”, celebrity and fashion breathlessly followed by masses of people, who see their own life arcs as trivial. And finally, we see many economists who use their numbers to blind them to the irrationality of our economic systems and who try to provide rationales for their functioning. The fact that many are minions paid in one way or another by centers of power certainly doesn’t hurt.

    I apologize for this rant, which is certainly not directed at your excellent work, but it represents my frustration with how our jury-rigged systems of economics are given more intellectual weight than they deserve.

    • No need to apologize – the implications of this peeling back of the veneer of understanding (and implied control) are vast. And indeed it’s a very human thing, or at least a modern human thing, to delude ourselves into the belief that everything can be put into a permanent equilibrium and controlled forever.
      Consider the Black-Scholes-Merton equation that supposedly takes risk out of investing but still generates a decent net return. There is obviously something wrong in the whole approach, but it wasn’t until the fall of Lehman that we understood it – risk wasn’t dispatched, it was shared. Socialized, in fact, across the markets and ultimately by the taxpayers. It was all nonsense and should have been dispatched as so right away.
      But the beliefs that we have in place which presume that what we see today is true forever are indeed very human. Does the sun not come up every day? There ya go. 🙂

    • We have always been kidding ourselves, yes. But we’re learning a little more with each blow-up in our understanding of the “facts” – if that helps at all. 🙂

  4. Everything about this is disturbing – the idea that there could be such “facts”, the idea that they were so widely held as “facts”, the “fact” that they failed. This is really depressing.

    • Good point. The postwar world is starting to look so antique it’s hard to make any sense of it.
      Welcome to the other side of the Managed Depression – a time when everything changes! 🙂

  5. Pingback: Reinventing the Labor Market | Barataria - The work of Erik Hare

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