Some defunct economist

"To understand the man you have to know what was happening in the world when he was twenty." Napoleon's claim helps explain one of the big problems with centre-left economic policy.

He was right. We now have strong evidence that economic conditions in our formative years shape (pdf) our outlook much later in life. People who experienced recessions when young are less likely to own risky assets when they become old and rich enough to do so. Chief executives who saw hard times in their youth run their companies more conservatively (pdf) than others; and central bankers who saw high inflation when young are likely (pdf) to be more hawkish when they are in office.

And here's the thing. For most of us over 40, our youth was characterized by mass unemployment or the threat thereof, something we know to be a cause of great misery (pdf): the jobless rate was over 11% when Starmer (and I!) turned 20, for example. This means the economic thinking of well-meaning people throughout their lives has been dominated by one question: how to create jobs. It's no surprise, therefore that despite scaling back the Green New Deal, Starmer is still promising to create tens of thousands of good new jobs.

But, but, but. The ideas of one era are not always well-suited to the next. As Maynard Keynes famously wrote:

Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

This is true today - and that "defunct economist" is Keynes himself, and in particular this:

I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use...When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.

This passage is pretty much wholly inapplicable today. The volume of employment is satisfactory: we are not quite at full employment, but close to it, especially for skilled workers.

In this context, creating good jobs would be inflationary. Yes, vacancies at decent pay for home insulators, housebuilders, care workers, solar panel manufacturers, nuclear weapons producers and so on would attract applicants. But they'd come not so much from dole queues and the economically inactive as from workers in other jobs. In an attempt to retain their staff their employers would raise pay. The result would be inflation.

Of course, macroeconomic policy can prevent this by either raising taxes or interest rates, both of which destroy jobs as a means of curbing inflation. At near-full employment, such destruction is the necessary counterpart of shifting labour towards a Labour government's higher priorities.

There's another reason why we need job destruction. It's a necessary part of raising productivity. As Jonathan Haskel and colleagues have shown (pdf), a lot of productivity growth comes not from existing firms improving their efficiency but from inefficient plants shutting down and better-performing ones opening. This is why more market competition must be part of any strategy to raise productivity: it encourages the entry of better firms and exit of worse ones.  

Which poses another problem: which jobs do we want to destroy? Higher interest rates hit hardest the construction sector - meaning you can say goodbye to Labour's hope of "getting Britain building again." Which suggests that, as Simon says, Labour should break its commitments and raise income taxes, thereby destroying jobs in consumer-facing industries such as retail and hospitality.

These jobs, however, might not be the only ones we want to cut. Keynes was flat wrong. The existing system does seriously misemploy factors of production.

In some cases, this is because of bad policy choices. An excessively complicated tax and benefit system has created unnecessary jobs for lawyers, accountants and DWP bureaucrats. The fact that policy is up for sale has created a big lobbying industry. And our regulatory agencies have been more effective in expanding bureaucracy than in reining in the industries they nominally oversee: Ofgem and Ofcom have over 2500 employees between them.

In other cases, it's because of standard market failures. Asymmetric information means that “genuinely unskilled” fund managers stay in work at the expense of their clients. Unpriced externalities mean that polluting industries are too big - be it the environmental pollution of carbon producers, the risk polluters of the financial system or the intellectual pollution of the legacy media. And agency failures and monopoly have led to the creation of bullshit jobs and excessive workplace surveillance. Friedman was right to say that "if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get" but he should have added that this problem isn't confined to the public sector.

None of these government or market failures will be solved by the standard macro policies of higher taxes or interest rates. They require microeconomic policies which few people other than some "degrowthers"* are thinking about. As Jason Hickel has written:

What industries are already big enough and shouldn't grow any larger? What industries could be usefully scaled down? What industries do we still need to expand? We have never asked these questions. (Less is More, p220)

In this context, we encounter some more defunct economics - the notion that a high wage equals a good job. This is not necessarily the case, even in those cases where wages are equal to marginal product. For one thing, it is the private marginal product that sets wages not the social product, and the two can differ: contract killers (pdf) often have high wages (pdf) but we wouldn't want to create these "good jobs". In the same way, we should aim to reduce, not increase, jobs in socially useless finance, in advising on tax avoidance or in producing pollution.

What we need, therefore, is job destruction. Not just the creative destruction that increases productivity in well-functioning markets, but also the destruction of some jobs to shift labour to higher priorities. Right now, we need less Keynes and more Schumpeter.

Here, however, we run into an unavoidable trade-off. Rachel Reeves has rightly spoken of economic insecurity being "corrosive of individuals’ physical and mental health": those of us who spent our formative years in such insecurity are well aware of this. But such insecurity is the flipside of much-needed job reallocation. A big policy question is how to ameliorate this trade-off. A more intelligent welfare state and active labour market policies are part of the answer. What's not part of the answer is the pretence that creating jobs is the whole of the story. It's not 1982 any more.

* A bad word for a possibly good thing.

Comments

[monopsnoopy]

Good post and something the left as well as labour needs to reckon with, my one quibble is that imo recent experience has shown Keynes and Schumpeter to be strong complements rather than substitutes. Rather than needing a depression to weed out unproductive firms as Schumpeter (iirc) thought, it's during tight labour markets that bad firms are outcompeted and workers reallocate into better jobs (thinking of recent work by Dube + Moscarini/Postel-Vinay), and so keeping the labour market tight is going to remain important to any labour gov's attempt to drive up productivity.

[Jonathan Da Silva]

It is amazing how our main political parties (Labour et tu) are simultaneously anti Capitalism and anti Worker.

Mere tools of land, finance and corporate monopolies who say 'The Market' a lot. Shades of fascism if one believes Mussolini [Fascism should more properly be called corporatism because it is the merger of state and corporate power]. Quasi v Crypto. Love Britain Hate Britons. etc.

Example: Streeting funded by private health care [see Cooper and Starmer] the other day essentially demanding Drs move to private sector - or where does this {insert pejorative here} think private capacity comes from? Pitiable stuff.

[Nick Peters]

This is absolutely right. We need a significant reallocation of labour into productive industries that generate real value locally and nationally. Advanced technology will not plug the gap. We need skilled, trained people, young and, yes, older, repurposed workers.

[Jan Wiklund]

"A bad word for a possibly good thing" – yes really! Some things should grow, others should shrink. The word is part of the neoclassic misconception that all economic activities are equal and only measurable through immediate demand.

[Darren]

“Degrowth” is not just a bad word it was a real own goal for folks like Hickel who now have to spend the first part of any intervention they make explaining why it doesn’t mean what it says. And it’s a gift to “eco-modernists” who get a rhetorical boost by calling it austerity.

It also seems that today Andrew Rawnsley is channeling Chris, though tellingly the “radical” non-spending policies he congratulates Blair/Brown for and proposes for a Starmer govt are mostly liberal social policies rather than socialist economic ones like worker democracy or active, planned allocation of labour and other resources.

[Aris]

Even with high interest rates, if construction and building were deregulated, there'd be a boom in housing. The value of new homes is higher than the cost of building them - i.e. supply is artificially constrained.

[Peter]

"Yes, vacancies at decent pay for home insulators, housebuilders, care workers, solar panel manufacturers, nuclear weapons producers and so on would attract applicants. But they'd come not so much from dole queues and the economically inactive as from workers in other jobs. In an attempt to retain their staff their employers would raise pay. The result would be inflation."

Can you explain what would cause the inflation?

I am picturing an economy of 100 people all of working age and full employment, with half the workforce making computers and smartphones for £50k and the other half picking fruit for £25k. GDP is £3.75m.

Then 20 people move from fruitpicking to smartphone manufacture and make an extra 25k, while fruit picker salaries rise 10k. GDP increases by £0.8m (30x10k+20x25k) so demand does go up in general. But so has supply (in £ terms not necessarily in sheer volume of products, but it's the former that's relevant here for both supply and demand).

I can't see a casus belli for inflation? With more/less production, smartphones could become cheaper and fruit more expensive, but (i) presumably that's (perhaps wholly) offset by the increased/decreased demand that led to the shift in the labour market in the first place and (ii) even if it did happen, cheaper expensive goods and more expensive cheap goods still amounts to a lower CPI/RPI rather than a higher one?

[rsm]

Why no mention of basic income?

[Blissex]

«This passage is pretty much wholly inapplicable today. The volume of employment is satisfactory: we are not quite at full employment, but close to it, especially for skilled workers. In this context, creating good jobs would be inflationary.»

Between 2008 and today the average real wage has fallen by 8%, the average real property price in the south-east has risen by 60-80%, and population has grown by 9 million, people, from 62 million to 71 million.

According to our amazing blogger these are all indicators that there is full employment in the UK and in a previous recent post he went as far as claiming there is a dire shortage of workers.

I guess that in 2008, when real wages were 8% higher and population was 9 million lower, employer has to resort to abductions from the street to find workers, and rival teams of employers fought over the few people they could find.

But I cannot remember anything like that, which confirms that my fantasy parallel world and the real world observed by our blogger are so radically different.

[Blissex]

«For most of us over 40, our youth was characterized by mass unemployment or the threat thereof»

That applied only to that majority of "losers" and "suckers" from the "trot" areas who worked in manufacturing. People who went into property and finance services instead saw the beginning of 40 years of an extraordinary boom in their living standards. At least in my imaginary world.

«the jobless rate was over 11% when Starmer (and I!) turned 20, for example.»

When counted in the same way it is still not that far from that level.

«This means the economic thinking of well-meaning people throughout their lives has been dominated by one question: how to create jobs.»

Obviously “well-meaning people” are not the voters of New Labour, LibDems and Conservatives, whose thinking “throughout their lives has been dominated by one question”: is the government pushing up the cost of housing fast enough for me to retire in comfortable affluence?

«It's no surprise, therefore that despite scaling back the Green New Deal, Starmer is still promising to create tens of thousands of good new jobs.»

Tens of thousands! Amazing figures! And if someone believes that, I have a very interesting proposition for them concerning a bridge in central London going for cheap.

«What we need, therefore, is job destruction. Not just the creative destruction that increases productivity in well-functioning markets, but also the destruction of some jobs to shift labour to higher priorities.»

And here our blogger switches to the "schoolmasterly politics" that he has derided in the past.

What “we need” is just an abstraction, however sensible it looks, what an electoral majority and New Labour want is much higher housing incomes and lower wage cost. How do you overcome that?

[Blissex]

«if construction and building were deregulated, there'd be a boom in housing. The value of new homes is higher than the cost of building them - i.e. supply is artificially constrained.»

If only such noddily simplistic arguments were even vaguely plausible!

Why aren't builders then covering Angola with 3-bed semis and aren't UK middle class people buying them in large numbers? There is no supply constraint in Angola, a largely empty country, and the validity of the argument made here does not stop magically at the UK border, and after all there is a global market in housing as in anything else :-).

Why then have been housing prices been falling robustly in 2/3 of the UK area as the following map demonstrates?
https://loveincstatic.blob.core.windows.net/lovemoney/House_prices_real_terms_lovemoney.jpg
http://www.lovemoney.com/news/53528/property-house-price-value-real-terms-2005-2015-uk-regions

Strangely enough many people from Angola and those 2/3 of the UK move from those place to places where there is scarcity of housing like the UK south-east.

That seems weird unless it is understood that the issue is not the supply of housing is constrained, the supply of jobs is concentrated in a few areas by governing party policy (New Labour, Conservatives, LibDems) and by the determined desire of those vested interests (mostly affluent proprietors) who vote or "sponsor" those parties to shake down those who work in those areas as hard as possible.

Because, even if many people forget that, housing costs are mostly a tax paid by workers for access to jobs.

[aragon]

Blissex:
"what an electoral majority and New Labour want is much higher housing incomes and lower wage cost. How do you overcome that?"

A (the next?) financial crisis.

It is debt (Government, Commercial, Household) that is inflationary (as long as it is rolled over. Not wages, nor labour shortages.

https://www.bbc.co.uk/news/business-68534537

One fifth of the workforce is economically inactive including school leavers.

This is due to a lack of opportunities, but New Labour echos the scrounger/illness rhetoric of the Tories.

https://www.newstatesman.com/business/economics/2024/02/the-qe-theory-of-everything

"In retrospect, Osborne and Bernanke were either naive to think that the people enriched by the wealth effect would splurge it on consumer goods, or they were happy that rising asset prices were good in their own right (Tory voters do love rising house prices). Statistics showed an employment rate well above that of previous recessions, but the work on offer was changing: as companies such as Uber and Deliveroo arrived on a QE-powered wave of technology and investor confidence, the new jobs were “part-time, self-employed or zero-hours”, says Coppola, with many of them in hospitality. The problem was not unemployment but underemployment, and as workers competed for more shifts in lower-skilled work, wages stagnated. In terms of real spending power, the average British worker’s pay is yet to recover."

No Jobs, Jobs with no security and low pay, does that sound like a tight employment market or one sixth of the population born abroad not reflect high immigration. Distributing wealth through debt (Government, Private and Household) is also a unsustainable model. Which will all end with another financial crisis and double digit interest rates.

Minsky was right...

[Blissex]

"what an electoral majority and New Labour want is much higher housing incomes and lower wage cost. How do you overcome that?"
«A (the next?) financial crisis.»

Financial crises can be fixed by the government, by cramming down (as in 2008) that part of their population that is not part of their constituency. What government cannot fix is foreign debt/currency crises, because they cannot as easily cram down foreign suppliers.

http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/
“Yet the economic solution is seldom very hard to work out. No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.
Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. [ ... ] They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. [ ... ] Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.”

[Blissex]

«It is debt (Government, Commercial, Household) that is inflationary (as long as it is rolled over. Not wages, nor labour shortages.»

Not all debt, and anyhow that is more of a symptom, or even a mechanism, and "inflation" does not mean "cost of living" (and there are relative price adjustments as opposed to "inflation").

I think the better understanding is that "inflation" is always and everywhere a political phenomenon, either the method or the consequence of the ruling classes decision to redistribute income and wealth.

For example 40 years of big housing cost inflation in southern England are indeed related to an extraordinarily loose credit policy by the New Labour, LibDem, Conservative governments, but more meangingfully to the desire of those governments to redistribute enormous amounts of income and wealth from the servant classes to their core constituency of southern affluent property owners.

[aragon]

Can't post
Can't discuss...

In the UK bottom fifth are so poor they can't be compressed. Or doing so will not save much money.

Rishi Sunak, is attempting to deprive people of sickness benefits as unemployment benefit is at destitution levels.

[Blissex]

«In the UK bottom fifth are so poor they can't be compressed.»

Ah such marvelous optimism is heart-warming at the start of the week-end. Most of that 20% do not yet live in fully dickensian conditions, and only a small minority of those who do are women (see appended).

«Or doing so will not save much money.»

Saving money perhaps is not as important as terrorizing the working class and middle class with living examples as to what could happen to them if they fail to be compliant.

====

http://blogs.telegraph.co.uk/finance/ianmcowie/100023915/mystery-of-life-assurance-why-do-10-times-more-people-buy-cover-that-costs-four-times-more-than-its-rival
“Perhaps the grimmest statistic to emerge from the credit crisis to date is that about 30,000 people a year now have their funerals funded by the state because they and their families – if any can be found – lack the means to pay for it. Interestingly, the Local Government Association reports that more than three quarters of the people who receive a “public health funeral” are men.”

http://www.mirror.co.uk/news/politics/dickensian-style-paupers-funerals-soared-10180956
“Soaring numbers of grieving families are being forced to give their loved-ones Dickensian-style ‘pauper’s funerals’ because they cannot afford basic burial costs. Damning new stats show the number of taxpayer-funded pauper’s funerals has rocketed almost 50% since the Tories came to power. A pauper’s funeral - now re-branded a ‘Public Health Funeral’ - was seen as the ultimate indignity in Victorian times, funded by the local authority when cash-strapped friends and family could not afford a proper service. The deceased is usually given a simple early-morning service before being cremated or buried in a communal grave. Figures released under the Freedom of Information Act show a 47% increase in pauper’s funerals between 2011 and 2015, from 1,769 to 2,609. And the true number will be far higher, as only 200 of the 393 councils nationwide provided data.”

[rsm]

Who cares about inflation if your income increases faster? Have the rich not learned this lesson by printing money through the alchemy of banking, much quicker than prices rise?