growth

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If Only Stories

According to the Wall Street Journal:

“Economists and ordinary people often seem to inhabit different planets, but seldom has the chasm been this wide.

As former President Donald Trump and Vice President Kamala Harris compete for any possible edge in a tight election, they have offered a plethora of ideas that, while delighting voters by varying degrees, have appalled economists because they would distort markets or deepen America’s fiscal hole”

Well I never.  Imagine that.  Economists and regular folk inhabiting different planets.  Who would have thought it?

Of course they do.

What fascinates me about this supposed revelation is that it speaks to a profound and deep fissure in society generally, and, in particular, to a break down in trust of institutions that have long held status and prominence in our socio-economic lives.  Our academic friends need to think long and hard about this.

It also speaks to the recent upwelling of criticism of economics in particular as being of ever less relevance.  

The general argument is well captured by Bryan Caplan in a recent article he published on Substack.  He refers to a ‘pretty lie’ that economists utilize all the time.  So convinced are they of their special knowledge that they are proud to make pronouncements about potential rearrangements of society with abandon.  If only, they announce, everyone would behave this way or that way, we would all be better off.  Notice the absolutism of that statement.  All.  We would all be better off.  Maybe, but when?

Now, within the safety of academia it is quite possible to postulate radical social changes and sweep quickly or smoothly to the end point of those changes.  Blithely ignoring the disruption in between, economists are prone to present the world with visions of improvement — all those ‘if only’ statements — and then get frustrated when those of manifestly less intelligence suggest ‘if only’ is somewhat utopian.  

The obvious problem being, that whilst economists totally ignore the disrupted interim as we all travel towards the nirvana their theories suggest is just over that distant horizon, we all live within that disruption.  We live, you see, in the perpetual interim.  We never arrive.  Why?  Stuff happens.  ‘If only’ meets reality.  So some lives are made worse as we move towards the collective good.  In their sanctuary economists sweep such apparently temporary issues aside.  They are drawn in by the inevitability of their logic.  Their models truncate the transition and remove it as being of no consequence.  Their theories eliminate time.  Or, rather, they magically compress time by discounting it into the present.  There is, consequently, no movement.  The world simply jumps from where it is onto that new ‘if only’ space.  It leaps from one state to another without having to take into account the logistics and outcomes of the move. 

In an apparently unrelated commentary in this morning’s Financial Times, Japan Ganesh asks why it is that our political leaders have such a hard time maintaining any sort of popularity.  His argument can be summed up rather crudely in my language: we all suffer from ‘spoiled brat’ syndrome.

So successful have we been in generating decades of prosperity — perhaps two centuries of rapid improvement — that we now live in such entitlement that we have unrealistic expectations of our leadership.  Every little problem has to be solved quickly and with no pain.  Otherwise we pile blame on our leadership.  

In my view this spoiled brat attitude stems from the illusion we live in.  Our prosperity has made us feel that humankind has conquered its surroundings sufficiently, and has enough mastery, that nothing can now blow the stately ship-of-state off course.  

This is ridiculous.

And, at least in part, is a consequence of our belief  in our army of experts.  It isn’t simply our political leadership that we mistrust within this illusory state of control over all matters.  It is also the technocratic class —within  academia and business — that we mistrust.  They have made great claims to knowledge.  They have paid themselves well.  They have claimed the heights of social status.  And their predecessors have delivered.  We have all benefited from the knowledge of our scientists and business organizers.  They discovered great things.  And they made these things practical.  Our lives are longer, safer, and more bountiful than any generation that came before us.

So now we expect more of the same.  We expect the cornucopia to continue to flood forth.  And we are told to expect it.  Our technocrats assure us of it.  That’s why we accord them such status.

But.

In recent memory that expertise has been exposed as flawed.  Deeply flawed.  

First, came the Great Recession that exposed the error of the past few decades of economic and business acumen.  Second came the timid response to that crash which compounded our understanding of those flaws — the experts couldn’t get us back on track quickly.  And, then third and most recently, came the pandemic during which our experts visibly floundered in public as they developed a response.  

Perhaps. From within the bastion of technocracy, this is all easily explained.  Hypotheses need testing.  Theories need real world feedback.  The drama of the acquisition of knowledge is always irregular.  

But.

Then the status of our technocrats needs re-assessment.  They emerged onto center stage as a consequence of the surge to prosperity.  They claimed a special place in society.  They rewarded themselves handsomely both financially and socially.  They inserted themselves into every corner of decision making.  They told us endless ‘if only’ stories and justified their power by claiming special knowledge of how we can all become better off.  

In the beginning of the journey towards prosperity that was undoubtedly true.  What Tyler Cowan refers to as the low hanging fruit in social improvement and scientific progress was easy to theorize and then implement.  Robert Gordon says much the same thing.  The illusion was created that the trajectory was a permanent one and that any bumps along the way would be easily overcome by the clever people who enjoy the status that comes with being the elite leading the way.

Our expectation was encouraged.  It was nurtured.  As long as the illusion of permanence in improvement could be maintained our technocratic elite could bask in its accomplishment.  It could continue to reward itself.  It could continue to self-congratulate and self-refer.  It could award itself prizes.  It could preach and proselytize.  It was beyond impeachment.

But.

One of my favorite books has always been “The Passing of An Illusion” by Francois Furet.  It is a history of a noble and yet hapless idea.  It traces the rise and fall of communism in the twentieth century.  The arc of hope turning to disillusion turning to irrelevance is a metaphor for much of what we have known and aspired to know.  Perhaps our technocrats are now experiencing a similar period of disillusionment.  This is not the place the argue about Furet’s book.  Nor is it the place to debate communism.  The simple point is that we have a clutter of great ideas, many have more than a hint of utopia in them.  They are wonderful ‘if only’ stories.  How many are also illusions that cannot be translated well into concrete lived experience?

‘If only’.  As if getting from here to there is easy.  And, as if the journey is irrelevant.

Economists ought to be aware of this more than any of their technocratic peers.  After all one of the most enduring insights of economics is the very simple one of diminishing returns.  Why, with this knowledge, would we not expect the arc of improvement to bend back towards its historic norm?

The answer, so far, is that we are generating new ideas.  We give this idea generation a name: technical progress.  And we hang our hat on it as the device we use to defeat diminishing returns.  We are, collectively, getting more and more clever.  So, if we can only stick to those ‘if only’ plans we can keep the flood of prosperity flowing. 

Is cleverness an infinite quantity?  Is their no end to knowledge?  Is cleverness immune to diminishing returns?

We were clever enough to defeat the need for brute energy in feeding ourselves.  Our farms are a triumph of productivity.  We were clever enough to organize our manufacturing  and to defeat the need for brute energy there too.  Manufacturing is an ever smaller part of our economic employment.  Now we are service based.  We are ‘knowledge’ based.  Does this imply the elimination of work there too?  Are our clever people to be displaced by their own product — the machines they used to displace everyone else?  

Perhaps.

But.

Diminishing returns is a real thing.  It is a weight on the progression we take for granted.  It has crept into the clever people’s own realm.  Our ability to generate new ideas is slowing down.  That low hanging fruit has been picked.  The illusion is catching up with reality.  Constant growth is under threat.

And it is the illusion of constancy that underlies our ennui.  

Our technocrats have created a dilemma for themselves.  They achieved status based on the basis of  delivery of prosperity for all.  Then they brought us the inequality of the past few decades.  That was, they said, needed to provide incentive for continued growth.  Yet that continuation is under threat.  So the social cost of inequality has bought us very little.  And it has highlighted that the disruptions between where we are and those mythical ‘if only’ places can last a long time.  Indeed they sometimes appear to be permanent and not temporary.

So why incur the cost?

So why pay attention to the ‘if only’ stories?

Why listen to, anymore, to the technocrats.?  Perhaps they know less than they let on.

I was listening this morning to the American Secretary of State discuss the current mess in the middle east.  He sounds very authoritative.  He sounds confident.  He sounds assured in his knowledge.  He projects an air of self-confidence.  He sounds like the very epitome of our technocracy.  Clever, and knowingly so.  I have known many such people.  They border on bombast, but stop just short.   They wait for the congratulatory acclaim they have all received throughout their academic and work lives.  They demand our attention.  They demand our belief in them.

But despite all that projection he has no answer.  His mission is a repeated failure.  The mess continues.  His protestations of imminent solution are defied by day-to-day events, and even his claims to the possession of such solutions can be undermined by the insignificance of their relevance.  They are all kluges.  They are not solutions.  He is selling ‘if only’ to people living in the interim.  Their defiance of ‘if only’ undermines both his relevance and his authority.  He sounds empty as a consequence.

Or is it that there are competing ‘if only’ stories?  And he is committed to only one. It is hard to reconcile competing utopias.  Each wants — each needs — to eliminate.  How else can an ‘if only’ story justify its existence?  It has to be unique.  Wasn’t that the entire point of the Cold War and the invention of modern economics as the ‘if only’ story of the West?

Our ‘if only’ story tellers are running into diminishing returns.  Their stories are getting more fanciful.  History is revealing them to be less problem-solvers than problem-delayers.  They are in a constant battle to fend off history.  They sound jaded.  Or is it our trust that is jaded?  They want to be believed just long enough to benefit from adulation and status.  Just long enough to win that prize or to get that lifetime posting.  And then to fade before their solution is exposed as another empty ‘if only’ story.

‘If only’.

Technocrats have over-promised.  Their predecessors over-delivered.  We became spoiled.  Disillusion is inevitable.  Until we discover a better ‘if only’ story.

Meanwhile the journey into uncertainty continues.  But with less confidence in ourselves.

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The Vollrath Debate

I am about to begin reading Dietrich Vollrath’s “Fully Grown — Why a Stagnant Economy Is a Sign of Success”

Before I embark I thought I would collect a few of my own observations to provide a framework for thinking about his thesis.

The big issues are those talked about by Baumol.  For some reason I cannot avoid looking at current discussions about the slower rate of productivity growth without thinking of Baumol.  We have moved from increasing productivity in agriculture through to doing the same in manufacturing and become used to the growth that such a journey can provide.  We have used our machines to augment and then replace our own effort.  The consequence has been monumental.  We live within immense prosperity.  The bounty of applying machinery has produced far more than we ever imagined possible.

Not only this, but the constant fear of an ever growing surplus of unemployed people has never arrived.  The journey wasn’t simple or without stress.  But it was worth it.  And the true naysayers have all been wrong.  We are better off.  

As we think about what comes next we must also recall that this is all very recent history.  Our rush into modern prosperity only began back in the late 1880s.  DeLong and others would argue that it is only since 1870 that we have truly been on this path.  In that context much of what we take as solid or traditional is actually only ephemeral and shallow rooted.  Growth as we think of it today is an artifact of very recent modernity.  We ought not take it as something permanent or lasting. 

That, in turn, ought give us pause.  Modern society and our current social arrangements might be more transient than we would wish.  Our re-shaping of traditions is still underway.  The journey is incomplete.  What does stagnation imply for the rest of the journery?

That this modern cornucopia has come without costs is, of course, nonsense.  Our environment is paying a heavy price.  There might be limits to what we can do.  Our issue is that we are addicted to prosperity.  Advocates of slowing down are unable to explain how we de-escalate our progress without sacrificing the political progress that came along with that prosperity.  After all, without greater prosperity the perspective that history provides is that we would plunge back into authoritarian living.  Democratic freedom and expression are the products of abundance.  Rich people don’t like sharing.  Elites protect their position.  There was a reason early economists assumed wages for the majority would tend towards subsistence.  If we slow growth the tension that prosperity has reduced will return.  Power will matter even more than usual.  And the elite will prevail.  Subsistence, but at a higher level, would also return as the norm for most.

This journey has taken us through two economics sectors.  It has dumped us in the third.  That is Baumol territory.

We know how to feed ourselves in abundance.  We know how to mass produce the artifacts we enjoy.  What about service?  How do we provide services within a productivity driven framework?  By definition we prize “service” as an unproductive activity.  We cherish the one-on-one provision of those activities we cluster under the name of services.  After all “personal service” is something we aspire to experience.  How do we mass produce the personal experience in the same manner wemass produce food and physical things?  Isn’t there a basic contradiction in the very idea?

So, as we become a much more service oriented economy, Baumol suggests we should expect slowing productivity gains and thus growth.  A stagnant economy might just be the triumphant end point for our journey.

Perhaps artificial intelligence can help.  But who gets to decide that?  And are we capable of measuring its impact?  Most of our measures of growth were developed in the heyday of mass production.  They were intensely industrial in their origins and influence.  Are they appropriate for the digital age?

The same can be said for our economic institutions.  Our major business firms are all constructed along lines fit for an industrial age.  They have not been re-invented for a digital age.  One look at the so-called controversy created by work-at-home during the pandemic illustrates the gap between what is taken as “proper” organization and what is possible under a digital regime.  The organization of work, indeed even the definition of work, needs to be re-evaluated.  We have an abundance of buildings that housed industrial era activity.  Do we really need them for digital activity?

This leads us to an even larger discussion.  Society itself has been re-built to accommodate industry.  Wasn’t that the entire issue that gave rise to economics and its variants in the 1800s?    Whither society as the machines came to dominate activity?  The degradation of life in those early periods of change produced provocative counterpoints as different as Marx and Polanyi.  Where are our modern equivalents?  Social reconstruction brought with it the political changes I noted above.  Will democracy as we know it, child that it is of the industrial era, survive into the digital era?

A digital world is one of free-flowing information.  Physical boundaries are irrelevant in such a context.  Yet our boundaries appear important to us.  How do we reconcile this?  Globalization of production was to the benefit of the owners of the capital necessary in mass production.  So we are currently re-evaluating its worth in light of the effects it had within our boundaries.  We appear to be hesitant about further globalization.  Yet a digital economy must surely be global.  Information and digital experience seem impossible to prevent from flooding across borders.  So is it simply economic institutions that need too be revamped for the future.  Perhaps our political institutions do also.

This raises another important point: who gets to decide?   Do we really want to leave the reconstruction of society in the hands of those who own the machines?

Which returns me to stagnation.

Unless we find a way to maintain growth in wealth by reinventing our services, we appear doomed to slower growth and thus political tension.  In particular the perennial argument over the distribution of wealth will re-appear as the most potent driver of politics.  The owners of machines are not to be trusted in such an argument.  Perhaps that’s why they are racing to get ahead of our out-of-date political systems in the discussion over how power will be apportioned in future.

And we have already had a taste of what the rich actually feel about sharing power: the entire neoliberal reaction to the New Deal here in America tells you all you need to know.  They hate sharing.  They thus hate democracy and the redistribution it implies.

Oh, and where will economics fit in such a discussion?  After all modern economics has been purged of history and power precisely to sanitize it and make it useful in defense of the status quo as determined by the powerful.

So, I suppose, that’s what I will be looking for in Vollrath’s book.  How do we square democracy with stagnation?  Where will power reside?

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Addendum:

I have seen some people define some areas of the service economy as being “low value”.  This is an indicator of our problem.  They are “low value” in the context of our attempt to increase productivity in mass production or agriculture.  They are “low value” only in the sense that we cannot place a value on such a subjective phenomenon as the experience of watching a Shakespeare play.  We can only value it in our current methodologies in terms of measurable things like prices of entry, wages to actors, costs of production etc.  But is that a Shakespeare play’s true “value”?  This is a perennial question.  Measurability determines valuation.  The digital era elevates the immeasurable.  What does that mean for “value”?  For the economy?  For resource allocation?  For economics itself?  

We have a clue already in one of my favorite topics: total factor productivity.  That’s the black box that allows us to reconcile the traditional inputs to growth with the observed outcomes.  Information matters such more than economics takes into account.  Information that is, not in terms of messaging, but in terms of design and technique.  Information is in the way in which we get things done as well as in the way we talk about it.

Given a proper answer to this conundrum and perhaps we will not stagnate in a broader sense of “value” but only in the narrower sense of what we can measure.  It’s a computational and definitional problem. Does that matter?

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Notes for the Beginning of: What to Do?

This is how I explain what has happened to myself.

Nobody should begin without warning.  So we ought jot down some initial observations that provide a starting point for what follows.  Some will become highly relevant.  Others will fade as we dig deeper into our subject and discover that they were not germane to the main theme.  They are in no particular order, since imposing order suggests a level of understanding unjustified by experience.  We simply do not know what we do not know and therefore ought make no pretense otherwise. [My economist friends please note!]

Here goes [borrowing along the way from DeLong, Gerstle, and one or two others]:

  1. The spate of growth experienced in industrialized nations accelerated radically sometime around 1870
  2. The trajectory of that growth appears vertiginous and is, therefore, unlikely to be maintained.  But, we have grown accustomed to it and find it hard to face a future without it.  We make the assumption that the present is not an anomaly, but is a new normal
  3. This rapid growth — usually expressed in the terms economists use, and based entirely upon technological innovation — is the foundation upon which all modernity now rests.  Everything we enjoy, better health, longer lives, greater opportunities, broader cultural exposure, and better day-to-day security of existence, in sum our better wellbeing, are all due to the surge in economic growth since 1870.  Everything sits on an economic foundation — economics needs a better explanation of why/how this all happened
  4. This moment in history then, as many have observed, ought to be propelling us towards a future very different from the abject nature of all previous human history — we have broken free [temporarily?] from what has become known as the Malthusian trap and the fabled Utopia ought be within our grasp
  5. In particular this growth has allowed us to reshape our societies in ways that the constraints of the past disallowed.  We have created what we call democracies that include even the least privileged people — albeit haltingly —  in the political decision making framework
  6. It was the degrees of freedom created by rapid economic growth that gave traditional elites — aristocratic, monarchic, religious, military, and landed — both an incentive and the space to share their privileges.  Including the masses became both necessary, [as motivation], and wise, [as reward], in order to maintain elite benefits from growth.  The alternative, per the period 1789 through 1917, was revolution and destruction of traditional elite power
  7. Rapid growth also compressed history insofar as change occurred not across generations but within them.  Eras that used to be timed in terms of centuries are now timed in decades.  Couple this with the existence of multiple generations simultaneously and the traditional cohesion of memory and experience has been overturned.  We live with multiple histories and cultures competing for pre-eminence within each society all at once.  This complicates politics — inter-generational conflicts muddle class conflicts
  8. The political sharing of elite power and the greater speed of change initiated/was initiated by a vastly increased political conflict over the distribution of wealth.  Whereas traditional societies had set patterns of distribution based upon time honored social structures, modernity had to invent its own distributional values.  The battles to reach a so-called fair distribution has ebbed and flowed largely swept along by shifts in technology and ownership/use of that technology
  9. Distributional conflict led to a period of intense ideological creativity and argument: Fascism, Communism, and classic liberalism all emerged to compete as frameworks to establish and divide power, wealth, and status.   This argument appeared to end sometime in the late 1980s.  After which one ideology dominated for a while.  Some argued that history had ended, whereas it was only in abeyance
  10. Because things started to go wrong.  The pace of innovation slowed which, in turn, slowed the pace of productivity improvement; the degrees of freedom for elite power sharing were thus reduced; tension mounted; pre-modern social structures began to re-emerge; distribution consequently began to revert to traditional arrangements; ideological conflicts re-arose; politics soured.  The re-mergence of radical inequality — both vertical and horizontal [per Elizabeth Anderson] — undermined, if not destroyed, democracy. 
  11. The march towards utopia [per DeLong] — despite our evident historic prosperity — stalled.  Why?
  12. Because we went back in time — society congealed into more noticeable classes once more, only this time the elite was populated not by monarchs, aristocrats, the landed gentry, or military and religious leaders.  It was comprised of an upper echelon business class and its technocratic supporters or adherents [including academic economists per Diane Coyle].  This class accumulated a disproportionate share of the national wealth which it used as a resource to entrench itself by capturing government, dominating the framing of public and intellectual discourse, purchasing influence within the media and judiciary, and by upending the institutions meant to maintain balance in society 
  13. The chokehold of this new elite class is the primary cause of our malaise.   As this class syphoned off wealth from everyone else — as elites have usually done in the past — it ignored the ongoing structural transformation of the economy.  It benefitted from the globalization of capital and so could maintain its own upward trajectory, and, at the same time, overlook the long term consequences of climate change, demographic mix and aging, and the implications of the transition into a service rather than industrial economy 
  14. To these issues our elite has no answers — it has too narrow and self-serving a perspective to create novel responses to potential crises.  The intellectual bankruptcy of the ruling class became particularly evident in the lead up to, and in the aftermath of, the Great Recession.  Its obvious self-justification and rent-seeking have been on full display ever since.  It is a corrupting and negative influence that has to be eliminated if we are to return to our prior path of shared prosperity and relative political harmony.  We have collectively sacrificed any meaningful definition of liberty and justice at the altar of shareholder profit.  To restore any semblance of democratic dignity we need to rebel.  How?

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State of Play at Year End

Is it just me?

Or is the realm of punditry in a state of confusion?

There seems to be an emerging consensus that something big is happening.  It’s just that we don’t quite know what.  The problem is that the template we are all applying is frayed if not shattered.  Consequently we are searching for the safety of explanations but finding that our questions do not elicit comfortable answers.  This is not a place we like to inhabit.  What are we to do?

Let’s speculate.

Stagflation?  Growth seems to have slowed dramatically over the last decade if not longer.  There’s talk of malaise.  There’s talk of a post-growth economy.  Some folks even applaud the idea that the days of vertiginous growth are behind us.  Now, we are told, we can focus on the environment and pivot to a less material way of life.  We can manage with less stuff after all.  How many homes, cars, and trinkets do we really need?

Lots.  Lots say the pro-growth crowd.  Just look at the cornucopia we call contemporary America.  It is stashed full of goodies.  Our poor ancestors would be green with envy at all the gadgets, the health care, the cozy homes, and the relative lack of physical exertion needed to provide it all.  Why would we not want more?

Ah.  Some others say.  We might be knee deep in goodies overall, but there appears to a problem with the distribution of those goodies.  Too many end up in too few hands.  That’s not good.  It eats away at social cohesion.  It isn’t, as the elitists inevitably say, that the poor are envious.  Not at all.  It’s that the concentration of goodies leaks into a concentration of power.  And the elitists use that power to preserve what they have.  They reject the very nostrums of the liberalism they espouse.  They abhor competition.  And they absolutely don’t want to partake of anything social.  Except for the exotic parties and trips they enjoy.  They prefer their society over our society. 

Inflation?  The curse is back.  Some of us thought it was transitory.  But we didn’t define what we meant.  We did not mean, as the denizens of Wall Street suggest in error, that the transition would take a few weeks or even months.  We simply didn’t know.  What we did mean, however, was that transitory implied that the curse was not permanent and ought not be treated as such.  There was no need to impoverish workers by hammering them and their wage demands.  There are other things we could do.  How about controlling prices whilst the folks who screwed up their supply chains get themselves sorted out?  After all their shareholders benefited from those tenuous supply chains.  Why not make them pay for fixing them?  Why smash workers who had nothing to do with the decisions?  

Because monetary policy is one dimensional.  And we need to protect the creditor class from the debasement of their assets.  You know, the assets that appreciated in value during the long run of ultra low interest rates.  Asset inflation is, apparently, a positive thing.  Wage inflation not so much.  That bias is hidden in the words we use.  Do we talk of wage appreciation?  No.  Of course not.  But we do talk of asset appreciation.  Maybe that’s because we appreciate assets more than wages.

This bias means we just keep politics out of monetary policy.  No. No.  There are no politics in monetary policy.  Or so we are told.  It sits beyond the greedy grasp of the democratic mob.  It is protected within the technocratic walls of the central banks.  Independent central banks.  Unaccountable central banks.  Unaccountable that is, to the mob.  Phew.  Wall Street can breath easily.  The mob is being punished for its wage demands and having the temerity to criticize the wise heads who know what’s good for the economy.  Extra unemployment.  That’s good for the economy.  Apparently.

Except those wise heads are now all a-muddle.

Stagflation!

Having constructed an economy to their liking the wise heads are now rumbling in discontent.  Their creation isn’t behaving.

And the natives are restless.  It’s that mob again.  This time, though, the mob is not alone.  The wheels came off the rigged game back in 2008.  So we had to double down on the rigging.  Efforts to squeeze more from the workforce were re-doubled.  Those longer and less predictable work hours, fewer benefits, cuts to the safety net, the outsourcing of jobs, cuts to training, and all the siphoning off of profit to shareholders has produced … well not much.  We’ve run the place dry.  We are aground.

Aground because the middle class has been stripped bare.  Where once there were deep waters there are now only shallows.

And in such waters ugly rocks protrude.  We begrudge the poor.  After all we know they are poor because they don’t work hard.  Nor do they try to improve themselves.  They mooch.  They want entitlements.  Freebies.  We can’t afford that.  So we cut it back.  Good.

But the middle class?  Isn’t that the engine of consumption?  Why are they complaining?  Haven’t we showered them with stuff through the years?  What’s wrong?

Health care costs.  Education costs.  The threat of unemployment.  Housing costs.  Long commutes.  Cluttered suburbs.  Financial insecurity.  Reduced health and longevity.  Poor retirement prospects.  The list of complaints is long.  Perhaps worst of all is the sense of disillusionment.  The opportunity is gone.  Mobility isn’t what it used to be.  The kids will not be as well off as the parents were.  That’s not supposed to happen.

The ossification necessary to preserve the goodies for the elite has stopped the conveyor belt at last.  The mob is left looking up at a distant elite that has little to no empathy for the mess below.  A new Gilded Age is upon us.  

And no one seems to understand how this happened.

Didn’t the pundits realize that sending our capital and intellectual property to China in order to exploit low wages was, in effect, reducing wages here?  What is difficult about that?  Did they not realize that globalization implied the reduction of investment here?  Did they not see that reduced government investment in speculative research would cut off the supply of ideas for the private sector to profit from?  Or that lower taxes means eroding infrastructure?  Did they not realize that the transition to a service economy inevitably means lower productivity — unless we invest, which we didn’t? Did they not realize that concentration within industries opened the door to poor service and higher prices? Didn’t they realize that cutting investment in training and education would produce a workforce less capable?  Or that cutting research to favor short term profit is self-destructive?

When we privilege asset holders, and shareholders in particular, over all else — all else — then the place will inevitably get a bit threadbare.  

And threadbare isn’t a healthy place to be.  It certainly isn’t good for growth. 

So: stagflation.

The part that flummoxes me most is that the pundits and their clientele amongst the elite didn’t see this coming.  They didn’t read the statistics.  I wonder what they really thought about decades of flat wages?  Good for profits is what they thought.  A what’s good for profit is good for America.  It’s worse than this: they hired people in their captive think tanks to provide them with comfortable articles saying that stagnant wages were an illusion.  No, the elite was told, stories of poor wage growth and rising inequality were untrue.  Relax.  Go back to your second or third house and feel good.  Block out those complaints.  They are the lazy words of the envious.

No.  I am wrong.  The part that flummoxes me most is the lack of alternatives.  The punditry class has run out of ideas.  They simply recycle the same stuff more intensively in the hope that, somehow, the world will revert back to one in which those safe, tried and true ideas work once more.  They yearn for the Reagan years.  The good old days.  When the market was — in their minds — truly free.

When the facts defy your theory there is always a temptation to ignore those facts.  Creating a new theory is such hard work.  Besides a new theory might threaten the status quo.  There are too many reputations and livelihoods at stake.  So we repeat the old stories in the hope that the facts change.  It’s the more comfortable thing to do.  It’s what elites have always done.  Especially once the energy that brought them to their power and prestige has dissipated.  Now they are the lazy class.  Bereft of ideas.  Fearful of change.  Stuck.  But wealthy. 

Meanwhile, let’s impoverish a few more workers.  Keep them in line.  That’ll do the trick.  Won’t it?

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New Year, Old Arguments

“The universe is made of energy, matter, and information, and while energy and matter are here by default, information needs to find ways to emerge.  This is not always easy”  Cesar Hidalgo, “Why Information Grows — The Evolution of Order, from Atoms to Economies”

Why is it the economics still restricts itself to constructing its narratives around concepts like labor and capital?  Neither are very precise.  Both are amalgams of more fundamental concepts.  And, even in the hands of the very best of economists, no combination of them gives us much confidence that they explain major economic phenomena such as the extraordinary growth seen over the past two hundred years or so.

I regularly lampoon growth theory for its lamentable inability to eliminate its reliance on large, and only vaguely defined, things like “total factor productivity”.  This is after fifty odd years of trying.  Instead we get kluged and botched together substitutes for breakthroughs — endogenous growth theory being a prime example of such a kluge.  Only economists blinkered by their path dependent ways could possibly see the notion that the engine of growth somehow sits within the economy and is not some arbitrary exogenous factor as a breakthrough.  Apparently Schumpeter’s dramatic characterization of gales of destruction didn’t ring a bell loudly enough.

Growth implies change not the status quo.  That’s blindingly obvious I would have thought.  Yet we devote ourselves to the statics imported from other sciences back in the late 1800s.  They all moved on.  Economics didn’t.  So when it tries to delve into economic activities that imply out-of-equilibrium thought it has an unnatural and uncomfortable feel about it.  Economists in such circumstances start to sound out of place.  They begin to use ad hoc models instead of the great big ones they are so proud of when discussing equilibrium.  And they instinctively attempt to change the subject back so it can be re-framed within the boundaries they are familiar with.

But the real world stubbornly resists.  Perhaps instead of insisting on moulding the real world to conform with its out-of-date frameworks, economics ought to try a new framework.

Which gets me back to that Hidalgo book.

I think he tries to provide a new framework.

To me it is clear that an economy also consists of energy, matter, and information.  The interesting part is the process with which these things are combined.  With the emphasis on the concept of a process.  Or, to channel the physicist David Bohm, an economy is in a  constant state of becoming.  It is never still.  Trying to isolate it at a point in time and then examining that static fleeting moment is to ignore the essence of an economy:  it is never still, it is always moving.  New combinations of energy, matter, and information are being created moment to moment.  The computation continues relentlessly.

The interesting part, to me at least, is the information component.  As Hidalgo argues, the energy and matter surround us, they are, in our context, a given.  Information is not.   It has to emerge from combinations of energy and matter and is then inherent in what remains from those combinations.  This is not communication, it is information in a more broad and life-sustaining relevancy.

Information has to be contained and transferred in things.  It depends on the sustainability of its mode of transport.  It is commonplace nowadays to refer to algorithms as if they are some modern discovery.  But all forms of information preservation and transport are algorithms of some sort.  And it is the accumulation of information that allows energy and matter to become ever more useful to us.  Economic growth is inextricably linked with the parallel growth of information.

And since, as Hidalgo argues,  information is produced in out-of-equilibrium processes any scientific enquiry into growth has to include within it an account and application of the growth of information and the changes needed to create it.

Take, for example, the famous capital debates decades ago.  The argument hinged around the definition of capital.  How can we, the argument ran, combine such disparate items as factories, chairs, and staplers into one category without losing analytical precision?  Good point, and one that the mainstream has never truly engaged.  Instead it contented itself with the radically vague concept of capital that sits at the heart of growth theory.  And that vagueness contributed mightily to the consequent imprecision of the theory itself.  One very blunt and vague idea leads, inevitably, to another.

Capital is simply the ossification of older ideas — the embodiment of information that someone found useful and then managed to make concrete enough to be replicated and re-used.  So when we use capital in a production process we are using a pre-existing source of information and applying it to a modern problem.

Now some of you will be falling off your chairs and arguing that capital is properly seen as the embodiment of past labor.

But the concept of labor is as vague as that of capital.  What is labor if not the application of energy in combination with information [or skill] to matter?  Both capital and labor can be decomposed into their basic constituent parts in order to explore the underlying realities of the combinatorial variations that produce growth, or any other economic phenomenon.  This allows us, for example, to get to grips with the demand for labor in processes that depend more on information than on energy.  This is a characteristic of postindustrial economies and helps explain why there is a bias in economies towards the increasing reliance on capital in modern growth.  The politics of it all are, naturally, very different.

The proper starting point for economics is to conform with the other sciences rather than to defy them.  Those other sciences explain the environment within which an economy exists.  Yes, there are phenomena that can be described as uniquely within the realm of economics, but they cannot ignore the environment.  Which means that all economies comprise energy, matter, and information in varying ways, and those various ways employ more or fewer people and different degrees of capital.

Who owns the rights to the accumulated information we call capital is another matter.

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