Comments on: Leiter on Marx

By: Zizka

Zizka — Fri, 05 Dec 2003 15:20:25 +0000

Thank you Doug. You ahve a real consistency in your responses. Is what you just wrote germane to either of the points I tried to make?

By: Doug Muir

Doug Muir — Fri, 05 Dec 2003 12:33:06 +0000

Yes, zizka, there is such a thing as wage-price inflation. And there are such things as poisonous snakes. But not all snakes are poisonous, and not all poisonous animals are snakes. Similarly, not all inflation is driven by wage increases, and not all wage increases lead to inflation. In fact, in advanced countries in the last 30 years or so, the two phenomena have become increasingly decoupled; we’ve seen inflation without wage increases (late 1970s) and wage increases without inflation (mid-late 1990s). Does that help? Doug M.

By: Doug Muir

Doug Muir — Fri, 05 Dec 2003 12:08:03 +0000

“I utterly disagree, by the way, that NAIRU was primarily (in importance or in history) an empirical concept rather than a theoretical one.” “What, exactly, is the NAIRU? Strictly speaking the definition is statistical, not theoretical.” —Federal Reserve VP David Altig and Federal Reserve economist Paul Gomme, 2000 “[T]he contribution of unemployment rates to future inflation is about as close to an empirical fact as we get in this business. And that contribution is, at the empirical level, the entire content of the NAIRU.” —Paul Davidson, 1997 We might be talking about two different things. The idea that there was such a thing as NAIRU, you’re half right—it was a theoretical construct, although one based on empirical experience. But an attempt to actually model or predict NAIRU —no, you’re wrong. The literature of the last 30 years is littered with unsuccessful attempts to show what NAIRU was. Not a one of them worked in the long run. In the end economists had to look at what had actually happened, and try to use that as a guide. Putting aside whether that approach worked either, it’s the one that has come to dominate discussions of NAIRU. Doug M.

By: Doug Muir

Doug Muir — Fri, 05 Dec 2003 12:06:46 +0000

“output gap model, or Taylor rule, has a long term NAIRU, or something operationally equivalent to a NAIRU as its engine. Any central bank which sets policy rates using such a model is, fairly explicitly, aiming to trade off employment against inflation. Any such central bank, therefore, is relying on the chilling effect of a reserve of unemployed workers to keep down wage demands.” Well, I see your problem right there: unstated assumption between the penultimate and final sentences. You’re assuming that wage demands are the primary driver for inflation. Sometimes that’s true, but usually it isn’t. Neither of the last two inflationary bouts in the US had anything to do with wage rises. (I’m talking 1973 and 1978 here. Most economists don’t count the sharp but brief 1991 spike in the CPI as an inflationary episode, and neither do I—although I notice that one wasn’t driven by wage demands either.) To find wage-powered inflation in the US numbers, you have to go all the way back to 1969, and as inflation episodes go that was pretty small potatoes. The most savage recent attack of inflation, 1978-81, came at a period when real wages were slowly but steadily falling, and unemployment was high and (in the last three inflationary quarters) rising. When Volcker cranked interest rates into orbit, he wasn’t trying to depress wages—they were already depressed—he was trying to cut prices. And in fact the next year saw a modest /rise/ in real wages… accompanied by skyrocketing unemployment, to be sure. Me, I’d guess that wage increases overshot the declining inflation rate in the early ‘80s, enough to to offset the wage-depressing effect of high unemployment. That’s speculation; but the numbers are real, and they don’t match your model. Moving forward a few years, we see the next big hike in interest rates coming in 1994, when the Fed more than doubled them as a pre-emptive strike against inflation. Hmm, what happened to real wages in the mid-1990s? Anyone? Bueller? Bueller? I’d ask you to check your assumptions, but I have a feeling it’s not gonna happen. Look, the Fed’s mandate is to promote price stability, not wage stability. And it’s, well, it /is/ Econ 101 that the two are only loosely coupled; most obviously, increases in productivity can allow wage increases without price increases. And the Fed is entirely aware of this. You might want to look at the work of Todd E. Clark, another Vice President at the Fed. He’s written a modest pile of papers explicitly rejecting the notion that wage increases lead to inflation. (Interestingly, he thinks it’s more likely to work the other way around. Not exactly what you’d expect from a Federal Reserve VP in this day and age, but there it is.) BTW, even the strongest supporters of NAIRU now concede that they no longer believe in a “long term NAIRU”. Doug M.

By: Lawrence Krubner

Lawrence Krubner — Fri, 05 Dec 2003 01:33:10 +0000

Fernand Braudel, in the epilogue to his work Civilization and Capitalism, gives a history of the words “capital”, “capitalist”, and “capitalism”. He says that Marx died before the word “capitalism” came into wide spread use, and he says that Marx never used the word in any of the books published while he was alive. I don’t know enough of Marx’s work to say with certainty that he never used the word. I do know that it doesn’t show up in the Communist Manifesto. For instance, go to this page and search for the word “capitalism”: http://www.anu.edu.au/polsci/marx/classics/manifesto.html Every word has a peculiar meaning and flavor, its connotation and denotation. How can we be sure that Marx predicted the triumph of capitalism if he never said so? How can we be sure he predicted its demise if he never said so? We know he said that the bourgeious order would eventually be overthrown and replaced by a proletarian order, but on what grounds do we make the assumption that what he really meant is that communism would triumph over capitalism? Braudel goes on to question the usefulness of the word “capitalism”, which seems to mean different things to different people, but then finally he concludes that if we got rid of the word we would soon miss it and want it back. I’m not so sure. I think if we got rid of the word our thinking and writing regarding economics would suddenly take on a wonderful lucidity. I have heard some strange usages of the word “capitalism” or, if not strange, perhaps I mean highly varied. Libertarians mean one thing, pacifists another, union organizers another, rock musicians another, and business people another. I’ve heard George H. Bush called a socialist (this from a libertarian in New Hampshire), and I’ve heard Bill Clinton called the best apologist for capitalist imperialism that ever lived (this from someone on the left). I’ve heard capitalism called a Jewish conspiracy to undermine our Christian values. I’ve heard capitalism called the plan of our Founding Fathers. I’ve heard it said that Jesus promoted capitalism. I heard it said that he didn’t. I personally don’t believe in the existence of capitalism. I don’t believe that the word refers to a definite thing. There is “no there, there.” There is so little agreement on the meaning of the word, that the word basically has no value. It is, at best, a reflective symbolic term, meaning whatever a person needs it to mean at any given time. I once listened to a Rush Limbaugh show (I do this every once in awhile) and during a single show he used the term in 3 different, highly distinct ways. Depending on who is talking, and what they want to say, capitalism can be a moral system, an economic system, or a racial system, and depending who is talking, it can be a positive or a negative as either one of these things. I do recognize that one of my great weaknesses is my preference for empirical thinking over conceptual thinking. And if the word does productive work for conceptualists, then of course we must keep it. But for empirisists like me, hungry for something concrete, its demise would be greatly welcome.

By: Zizka

Zizka — Thu, 04 Dec 2003 19:42:40 +0000

If jobs start moving from Mexico to Thailand as soon as Mexican wages start to rise, that means that some of the benefits that were promised to Mexico from NAFTA will not be realized. The same thing can happen to Thailand if jobs jump to Bangla Desh. Only when everybody in the world has a job can we see the third world rise to first world standards. It’s not a bad thing for Thailand to get jobs, but as long as employers are able to shop among the global reserve army for the lowest wages, there are pretty strict limits to how much can be expected from that kind of development. As far as I know “wage-price inflation” is not a peculiar 1870-1880 error of Marx’s, but a well-known, orthodox, contemporary concept. I certainly didn’t make the term up. Likewise the idea that you raise interest rates to keep inflation down at the cost of increasing unemployment. Marx’s version of the truism, as opposed to the rebranded orthodox version, highlights some of the political and social consequences of the situation. And I’m still not convinced that the high-unemployment / low-inflation miracle of the 90’s wasn’t due to the fact that the labor force was being counted nationally for statistical purposes whereas hiring was being done globally.

By: dsquared

dsquared — Thu, 04 Dec 2003 19:37:12 +0000

Any output gap model, or Taylor rule, has a long term NAIRU, or something operationally equivalent to a NAIRU as its engine. Any central bank which sets policy rates using such a model is, fairly explicitly, aiming to trade off employment against inflation. Any such central bank, therefore, is relying on the chilling effect of a reserve of unemployed workers to keep down wage demands. Marx’s “reserve army of labour” argument was that the unemployed under capitalism serve the function of keeping down wage demands. I utterly disagree, by the way, that NAIRU was primarily (in importance or in history) an empirical concept rather than a theoretical one.

By: msw

msw — Thu, 04 Dec 2003 19:25:36 +0000

“Depress ‘em in particular sectors, sure. But aggregate? Nuh-uh, the macro don’t work.” I’m willing to be convinced of this, because economists seem awfully confident on this score, but my anectodal experience doesn’t fit. (I remember being shocked at a sign in a local Subway restaurant offering 2x the minimum wage plus medical benefits, circa 1998. I’m not seeing signs like that anymore, and I doubt that it’s because of a loosening demand for fast-food workers.) Labor seems more fungible to me than the “foreign competition is irrelevant” crowd believes. “I remember the 1990s as a time when sectoral labor shortages were all over the news, from IT workers to junior officers in the US military. But maybe that’s just me.” Saying that they were sectoral begs the question. What’s the difference between lots of sectors experiencing labor shortages and a general shortage of “labor”? And if the latter is possible, then offshoring seems to me to be a way to gain access to Marx’s “reserve army of the unemployed”. msw

By: Doug Muir

Doug Muir — Thu, 04 Dec 2003 19:08:44 +0000

This isn’t the first time I’ve seen Dave claim that NAIRU means Marx Wuz Right, but I still can’t figure out what he’s on about. One, NAIRU is hedged about with so many exceptions and restrictions that quite a few economists no longer consider it a particularly useful conceptual tool. (To give just one example: try reconciling NAIRU with the /employment/ rate. Turns out to be a lot trickier and more contingent than it looks. Google on, for instance, David Altig—he’s vice president of the Federal Reserve and hardly a wild-eyed radical, and he thinks NAIRU has long outlived whatever usefulness it may have had. Two, NAIRU is empirical and descriptive, not normative. It’s just the rate of unemployment that, based on historical experience, doesn’t seem to affect inflation. It doesn’t make policy; all it does is provide a tool (of whatever worth) for trying to judge the effects of policy choices. Dan seems to be implying that—gasp—sometimes the Fed has raised interest rates knowing that it will increase unemployment. Well, yeah, it has; and sometimes it has kept interest rates low, knowing full well that it would result in inflation. The latter choice has been out of style in the last generation or so, but it happened repeatedly in the 1960s and ‘70s. NAIRU doesn’t drive either choice; it just provides (perhaps) a way to measure the costs and benefits. 3) And it’s got jack to do with a “reserve army of the unemployed”, which was Marx’s way of expressing the fairly obvious point that high unemployment tends to put downward pressure on wages. But inflation /also/ tends to reduce real wages. (The only time since WWII that real US wages have actually gone backwards, in the aggregate, was during the two sharp bouts of inflation in the 1970s.) IOW, the smart worker wants a macroeconomic environment with low unemployment and low inflation too. Marx seems to have somewhat conflated rising wages with rising prices. Not entirely his fault; inflation was not well understood at all during the 1860s and ‘70s. (Conventional wisdom was that it was purely a result of debasing the currency, and IMS that’s exactly how Marx treated it in Capital.) Deflation was the much more serious threat back then. Well, that day may come again, but that’s another story. So, I don’t understand what you’re getting at with the NAIRU. Am I missing something? Doug M.

By: Chirag Kasbekar

Chirag Kasbekar — Thu, 04 Dec 2003 18:45:01 +0000

dsquared, OK, sorry—have to leave for the hospital (grandma’s in bad shape)—so posted in haste. I get your point, even if it doesn’t convince me totally.

By: Barry

Barry — Thu, 04 Dec 2003 18:45:01 +0000

Doug, IIRC, the late 1990’s saw a labor shortage. The early 1990’s didn’t.

By: Chirag Kasbekar

Chirag Kasbekar — Thu, 04 Dec 2003 18:32:54 +0000

dsquared: Yes, that’s what I was getting at. How is it intentional in reality?

By: dsquared

dsquared — Thu, 04 Dec 2003 18:26:53 +0000

Just to point out that it’s the opposite of the truth to suggest that “most economists rejected the idea of the reserve army of the unemployed”; in its form as the “Non Accelerating Inflation Rate of Unemployment”, it’s absolutely orthodox. Chirag; It’s more profound (or at least, more correct) to use a term like “reserve army” which implies that the effect of unemployment on wage demands is the result of an intentional policy, than a term like “excess supply”, which implies that it arose by accident.

By: Chirag Kasbekar

Chirag Kasbekar — Thu, 04 Dec 2003 17:10:27 +0000

And why is it suddenly more profound to call them a ‘reserve army of unemployed’ when they can more easily be called an excess supply of labour? BTW, this might be relevant.

By: Chirag Kasbekar

Chirag Kasbekar — Thu, 04 Dec 2003 17:02:17 +0000

Zizka, Do you mean to say that it’s bad that those jobs are going to Thailand or Bangladesh? Or that Mexico’s wages will now fall?