Why economists should look at horses

“If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?” Two things I’ve seen recently remind me of that line of Ely Devons.

When I approvingly tweeted Stephen Marglin’s account of the rise of the factory system, Pseudoerasmus referred me to Greg Clark’s paper (pdf). He argues that factory discipline emerged because when workers had freedom to choose their hours they short-sightedly worked too little and earned too little:

Whatever the workers themselves thought, they effectively hired the capitalists to discipline and coerce them. Even in the factories of the Industrial Revolution they were the ultimate masters of their fate, but weakness of the will meant they delegated that mastery to the capitalists… Though factory discipline was coercive, forcing the worker to do what he or she would otherwise not have done, the worker was in no sense exploited by the introduction of discipline. The workers voluntarily entered into the temporary servitude of the factory…Had they been able to exercise more self-control, factory discipline could have been avoided for most technologies in the 19^th century.

There is, though, a massive hole here. Clark gives us no direct empirical evidence that this actually happens. He points to no real worker who freely chose factory discipline as a commitment device; to no evidence as to how workers actually chose among different capitalists; and to no worker who was with hindsight grateful to capitalists for saving him from himself. The voice of actual workers is wholly absent*. Clark is not studying horses, but asking: what would I do if I were a horse?

He is not atypical. This is an example of something common in economics – “as if” modelling. Clark describes the rise of factories as if workers chose them as a commitment device, just as (say) Murphy and Becker describe smackheads as if they were rational maximizers. But this is insufficient. You can describe a woman’s black eye as if she had walked into a door. But if in fact her husband had beaten her, you are missing the truth and overlooking genuine oppression and injustice.

My second example was an exchange on Twitter about Cobb-Douglas production functions. Nobody saw fit to point out that if you want to know how useful they are, you should look at how actual firms produce actual stuff: do Cobb-Douglas functions describe the real world or not? Again, nobody’s looking at the horses.

What happens when they do? One nice example is a study (pdf) of a steel mill by Igal Hendel and Yossi Spiegel. They showed that it doubled production over 12 years with the same plant and workforce. Every time the mill seemed to be at “full capacity”, its managers found ways of tweaking production methods to eke out more output. “Capacity is not well defined” they conclude. If this is true of an old economy steel mill, how much more true might it be of intangibles-intensive firms which are more scalable?

To the extent that this is the case, it has an important implication. It means that growth in demand and a zero output gap will lead not to capacity constraints and rising inflation, but to productivity improvements. Hendel and Spiegel give us micro-empirical evidence for a claim by Joan Robinson:

When entrepreneurs find themselves in a situation where potential markets are expanding but labour hard to find, they have every motive to increase productivity.

Recent data is consistent with this. The UK and US have both recently seen unemployment fall to multi-year lows. And both saw productivity jump in Q3 after years of stagnation.

 If all this is the case, then Unlearning Economics is right: long-run growth can indeed be influenced by aggregate demand. Trend and cycle might not be so cleanly distinguished. A zero output gap is to be welcomed as a spur to productivity growth, not feared as a portent of inflation.

Now, I stress the “ifs” here. I’m not saying the evidence for this is overwhelming. All I’m doing in endorsing Sarah O’Connor’s point – that the best economists are those with dirty shoes.

* You might reply that we have few first-hand accounts of the lives of workers: history is written by the winners, or at least the literate. We must not, however, let our thinking be distorted by the availability heuristic.

Comments

[Luis Enrique]

How can you test a production function if labour and capital inputs are held constant? Many production functions include a technology parameter to capture those "tweaks". The fact we need to resort to such 'we don't really know what's going on' elements tell us imo that up to a point realism is a fools errand. Or rather, it might be possible to realistically formalise a firms production, buy what you'd get would be no use anywhere you actually need to put a production function to work.

But as to your main point, I believe there are many economists using firm level data, your claim nobody is looking at the horse is unfounded

[Luis Enrique]

Haltiwanger and Syverson are probably good examples of economists doing what you want to see

[Blissex]

«Clark gives us no direct empirical evidence that this actually happens. He points to no real worker who freely chose factory discipline as a commitment device;»

Well, one of them, whose arguments are equally based on the idea that workers can choose without consequence between unemployment, light work or hard work, gives a pretty apposite example:

http://www.thebigquestions.com/2014/10/29/amazons-bargemen/
“In early 20th century China, goods were frequently transported by barges pulled by teams of six men. The men were paid only if they delivered their goods on time. Therefore they all agreed to pull as hard as possible.
This is a classic example of what economists call a Prisoner’s Dilemma — a situation where everyone wants to cheat, regardless of whether he believes the others are cheating. Any bargeman might reason that “If the others are pulling hard, we’re going to make it anyway, so I might as well relax. And if the others are not pulling hard, we’re not going to make it anyway — so I still might as well relax .” Therefore they all relax and nobody gets paid.
According to my late and much lamented colleague Walter Oi, the bargemen frequently solved this problem by hiring a seventh man to whip them whenever they appeared to be giving less than 100%. You might suppose, at least if you’re a person of ordinary tastes, that hiring a man to whip you is never a good idea. There’s a sense in which you’d be right. But hiring a man to whip your colleagues can be a very good idea indeed, and if that requires getting whipped yourself, it might prove to be an excellent bargain.
...
That’s how I feel about the folks at Amazon. Based on the fabulous service I’ve been getting, I’m confident these people are knocking themselves out to do a good job for me. In fact, it’s been widely (and perhaps accurately) reported that during a heat spell a couple of summers ago, workers in an un-airconditioned Pennsylvania warehouse continued to fill orders even as several were being treated for heat sickness.
There’s a narrative going around that tries to paint these workers as victims, though I’ve heard no version of that narrative that makes clear who, exactly, is supposed to have victimized them — the stockholders? the management? the customers? the do-nothing Congress? But there’s little point in trying to make sense of this narrative, since it’s so obviously wrong to begin with.
Imagine a team of ambitious but relatively low-skilled workers. They know that if they all push themselves to the limit, they’ll all be more productive and therefore earn higher wages. They also know that if they all promise to push themselves to the limit, they’ll all break their promises, figuring that success or failure depends almost entirely on what the others do.
What these workers need, and presumably want, is an enforcer to prevent the breakdown of the agreement. Fortunately for those Amazon warehouse workers, they found that enforcer, presumably in the person of a good warehouse foreman. And even more fortunately, the foreman did his job. A warehouse foreman who sends you home in a heat wave might be no more useful than a whipman who puts down his whip when the going gets tough.
...
Now it’s easy to say that the world would be a better place if nobody had to work to the point of heat prostration in order to earn a living. That’s true, and we should work toward creating such a world. But it’s also true that we do not currently live in such a world, that people will therefore try to do the best they can in this world, and that we do those people no favor by trying to hamper their efforts. Poor but ambitious people will seek and find ways to be part of productive teams. Sometimes those productive teams will require a whipmaster or a harsh foreman as an additional partner. The teams will be glad to find those partners, and I for one will be sufficiently impressed with their ambition that I’ll seek to reward them by buying their products.”

It is one of the more magnificently glib arguments that I have read...

[Blissex]

«of the more magnificently glib arguments»

It will also please our blogger because it is entirely marxian in character, being the argument that exploitation, including self-exploitation, arises from the logic of the "capitalist system" which applies even to a co-op.

It is also fabulously deep in prevarication, as the argument is switched effortlessly from the case of a co-op members, which share in the profits of their business, to the agency workers of an Amazon warehouse, who don't, and whose incentive to keep working in dangerous conditions is simply to avoid being fired.

[Donald A. Coffin]

"It means that growth in demand and a zero output gap will lead not to capacity constraints and rising inflation, but to productivity improvements."

I would say "may lead" or "can Lead," not "will lead." It depends on how managers *and* workers respond, and there are always choices bening made.

[Billikin]

Isn't Clark asking how someone whom he considers inferior would do if they were a horse?

[Luis Enrique]

a further quick thought. The discussion on twitter you referenced was about aggregate production functions. In which case looking at horses (firms) is less helpful, because if you change K or L in aggregate, you are talking about factors moving across firms, not just changing within firms, and besides we know that outside a few freaky cases you cannot create an aggregate production function by combining micro ones, so iirc the best work in this area look at what sort of relationship between inputs and outputs emerge in aggregate if you start from certain distributions of firms and how you think factors reallocate across them. I may have remembered them wrong. But I think the fallacy of composition point is valid.

[Alex]

Productivity determined by demand, you say?

Productivity determined by demand.

http://www.harrowell.org.uk/blog/2017/10/15/demand-determined-productivity/

[Kaleberg]

"They know that if they all push themselves to the limit, they’ll all be more productive and therefore earn higher wages."

That might be true in some special cases, but in most cases the employers set a pay level and an expected output level below which one is fired. A worker who pushes himself harder will get no additional pay, but usually earns the enmity of his co-workers for raising the performance standard. You learn this if you've ever had a blue color job.

[Nanikore]

I think that we must be careful with the expression "output gap". Economists will use this to justify the existence and use of NAIRU. The term we should use is 'capacity constraint'. For example you may have very high unemployment, but for example if there is a lack of trained workers in a crucial industry, or because of political issues you can't source a crucial imported input or raw material, you will have a temporary capacity constraint in the economy.

NK.

[Nicholas Shaxson]

This is a rousing call for what James Henry calls "investigative economics." And once you've done it, you'll be hooked, believe me

[Blissex]

«"output gap". Economists will use this to justify the existence and use of NAIRU. The term we should use is 'capacity constraint'.»

That sounds like a right-wing argument that unemployment is never involuntary except when governments make markets less flexible.
Unless "capacity constraint" includes "insufficient demand", but all the examples made are supply-side.

Anyhow the distinction between "output gap" and "capacity constraints" exists and is useful, and it is well captured by the important distinction between "general glut" and "partial glut".
Leftoid Economists love to pretend that all "gluts" are "general gluts" (insufficient demand) and right-wing ones like to state that they are all "partial gluts" (insufficient supply).
Both can happen, and even at the same time.
I wonder if the distinction of the two very different situations is still taught in general Economics courses, or only in obscure and disappearing "history of economic thought" ones.

[Nanikore]

@Blissex

"Both can happen, and even at the same time."

Well answered, and I am complete agreement with what you say.