Thursday, 31 January 2013
The UK’s Vickers commission beavered away for a year or more with a view, amongst other things, to reducing the TBTF subsidy that banks get. Ditto Basel III and Dodd –Frank in the U.S. And the net result? They’ve managed to make matters worse, not better. See here.
Words and phrases like “shambles”, “cock-up” and “incompetence” spring to mind.(Hat tip to Mike Norman.)
Tuesday, 29 January 2013
Why was there no unemployment in caveman societies?
When cavemen had enough meat in their stomachs and enough bear skin coats to keep warm, they probably sat around doing nothing. The latter did not constitute unemployment because they were not looking for work.
In contrast, when they were hungry or needed a bear from which to make a bear skin coat, they went hunting. They didn’t bother waiting for a “hunting job” to appear in situations vacant columns: they just upped sticks, and went hunting.
As to the wage, that might have been several kilos of meat and a bear skin per hour’s work if they were lucky. Or it could be no meat and no bear skin at all, even after a day’s hunting. But at least they weren’t unemployed.
So . . . $64k question . . . why didn’t they experience unemployment? Well the reason was they were TOTALLY FLEXILBLE when it came to the wage they’d accept: even accepting a zero wage.
Now we could do the same, or similar. That is, if labour was allocated not by the market, but by the bureaucracy (i.e. the state), and employers paid nothing for such labour, there’d be almost no limit to the number of employees an employer would be prepared to take on. Well, “no limit” is perhaps an exaggeration, but certainly if something is free, you use it like water: i.e. the demand for labour would rise by more than enough to virtually wipe out unemployment.
The latter labour market would be highly inefficient, though it would have an important merit, of which more below. The inefficiency would arise from the fact that for the bureaucracy to judge who to allocate labour to, employers would have to apply for the types of labour they wanted, explain why they needed it. The bureaucracy would then have to decide which firms most merited particular types of labour and in what quantities.
The system would have similarities to Soviet style centrally planned economies: it would be inefficient. That is, much the best way to allocate any resource, particularly a valuable resource, is simply to let employers bid for it with the highest bidders getting the resource. That results in best use being made of the resoure.
However, 21st century unemployed labour is clearly not a “valuable resource” in the eyes of employers. To be more exact, while it is easy to use the above mentioned “bidding” process to get about 90% of the workforce employed, problems arise if the bidding process (i.e. raising aggregate demand) is used to get the final 5 or 10% employed: inflation tends to rear its ugly head. That is, given such additional demand, employers rather than take on the unemployed, tend to bid up the price of “already employed” labour (or give in more easily to wage demands.)
In short, unemployed labour is over-priced. Or put it another way, there wouldn’t be a problem if the unemployed behaved like cavemen and were prepared to work for nothing.
Now clearly we can’t ask the unemployed to work for nothing, but there is nothing to stop them being allocated to employers for free, with the state paying the “wage” or if you like, having the state make sure the unemployed don’t starve.
So . . . about 90% of the workforce is allocated using demand, with most of the remainder being allocated via the bureaucracy. That just leaves one problem: how do we stop employers taking on free labour which is in fact reasonably productive? And that point is of particular relevance since the potential output obtainable from any given individual varies dramatically from month to month. Reason is that one month there might be no vacancies in a given individual’s local labour market for which they are particuarly suited, while a month later, a vacancy might appear for which they are IDEALLY suited.
Well the solution to the latter problem is not too difficult: just put a strict time limit on how long a subsidised individual can stay with a given employer. At the end of the time limit, and assuming the relevant employee is well suited to their vacancy, then the employer will retain the employee and fund the employee’s wage. If not, the employer will “let the employee go” as the saying goes. And the bureaucracy can allocate the individual to another subsidised job.
Out of the mouths of babes and sucklings . . and cavemen (to misquote Psalms 8:2)
P.S. (3rd Feb 2013). Coincidentally a post appeared on the Worthwhile Canadian Initiative blog three days after the above one and on the subject of baboon economies. Plus the author, Frances Woolley says he might do a post on elephant economies. I look forward. We have much to learn from cavemen, baboons and elephants.
Monday, 28 January 2013
As mentioned in the last post here, Mervyn King is not just a stuffy central banker: he comes up with radical ideas in economics. Here’s one he produced some time ago (in green). (H/t Mike Norman).
“There is no reason products and services could not be swapped directly by consumers and producers through a system of direct exchange – essentially a massive barter economy. All it requires is some commonly used unit of account and adequate computing power to make sure all transactions could be settled immediately. People would pay each other electronically, without the payment being routed through anything that we would currently recognize as a bank. Central banks in their present form would no longer exist – nor would money.”
Interesting idea, but I think it’s flawed. Certainly “computing power” could get rid of a substantial proportion of transactions done with money. But there is a problem, as follows.
What about relatively large transactions (e.g. buying a house or car) where the purchaser wants to save up in order to be able to make the purchase? If the purchase makes shoes for a living for example, they could store up thousands of shoes and then purchase the house or car with the stockpile of shoes. But that’s hardly practical.
Money is a far more convenient form of saving for the above sort of transaction. As to whether the money is plonked in a bank, that’s a separate issue: the money COULD BE hoarded under a matress.
To be more exact, computing power could get rid of a well known problem with barter: the so called “coincidence of wants” problem. That’s the fact that if you make shoes for living and want ice cream, the ice cream seller will not necessarily want shoes – or shoes of the type that you produce. But computing power does not get rid of the above “saving” problem.
Sunday, 27 January 2013
I like Mervyn King because he combines two almost mutually exclusive characteristics. One is being a central banker, a job which requires conservative and measured language. The second is an awareness of radical economic ideas: ideas which he shouldn’t really back in public, but which he DOES BACK from time to time, if you read the small print. (My favourite King quote is: “Of all the many ways of organising banking, the worst is the one we have today.”)
So much for the complements. Now for a criticism.
He said in his speech that there were three factors behind Britain’s weak economic performance. As he put it, “Three factors in particular have adversely affected the pace of recovery in the UK. The first is an especially deep and protracted squeeze on the level of many people’s real take-home pay. Over the past four years, money wages have on average been rising at less than 2% a year. And higher energy and food prices, as well as tax changes and a lower exchange rate, passing through to the level of consumer prices, have all contributed to the squeeze. On average, real take-home pay is no higher than back in 2004.”
I smell a tautology: “weak economic performance” and “squeeze on take home pay” are one and the same thing – well almost. To be exact, there are several reasons why it’s possible for a country to have a “strong economic performance” while real wages remain stagnant, but none of these reasons are applicable to the UK in recent years, and/or they don’t justify the above claim by King.
Those reasons are as follows.
First, it’s possible to have a larger than normal proportion of GDP is being diverted to investment, and real resources consumed by investment are real resources not consumed by wage earners. But that’s not happening, and King doesn’t say anything about strange things happening with investment (in fact he alludes to the opposite: i.e. low investment levels).
Second, it’s possible that a particularly large proportin of GDP is diverted to exports. But that’s not happening either.
Third, it’s possible for the share of GDP taken by profits to rise, and the share taken by wages to decline. But that has not happened.And even if it were to happen, it would not explain weak economic performance if those in receipt of profits spend the same proportion of their increased income as wage earners would have. And even if “profit receivers” DID SPEND less of their increased income than wage earners would have, that’s no earthly excuse for poor economic performance: i.e. in that situation, there’d be nothing to stop monetary or fiscal policy giving the economy some boost.
A fourth possible explanation for depressed real wages is the deterioration in the exchange rate for Sterling over the last five years or so. Now that certainly HAS HAPPENED, and King refers to it. So the only REAL EXPLANATION for King’s “weak economic performance” and depressed real wages is the exchange rate.
Depressed real wages do not cause poor economic performance or vice-versa.
Conclusion: I suggest the first of King’s three reasons does not actually mean anything. So out of the three reasons, one is wrong. King gets 66%. Must try harder.