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Friday, October 25, 2013

Transcript: Technology and Growth, the Business Cycle, Minsky and Keynes

Today on the podcast, whither the business cycle? Whither growth? Can part of the strength in the stock market be explained by rich people having to spend their money somewhere? And the best part, some Hyman Minsky on John Maynard Keynes.
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We are not at all amused that technology is the mainstream explanation for growth. To call it a canard is perhaps too harsh, but technology is an aspect of growth, not the cause. No doubt it is the mainstream explanation. Exogenous technology shocks promote new waves of productivity or new categories of products. But answer me, Is this not another aspect of the fantasy that the economy is a machine? Somehow with the right parts the thing will work to its optimum, and we can safely ignore the questions of equality, income distribution, and so forth.

In fact, it is the human capital, the institutions and the public goods available which produce technological advances and the wherewithal to absorb and integrate them efficiently. Not unlike fertile soil and appropriate nurturing produce good crops. The schools and the availability of education, the public sponsored R&D, often in the US through the Defense Department, but also through public universities, the so-called research universities), the legal and political framework -- yes, including capitalism -- these are the roots of growth. Technology is a part of that growth.

Technology doesn't fall from the sky, and it is not produced by incentives to profit. Enough of the literature shows that the implementation of new ideas is the wheelhouse of private enterprise, not the foundational breakthroughs.

That comes up with a recent look at Romer and Jones by Lars Syll at Real World Economic Review.

Of the three state variables that we endogenize, ideas have been the hardest to bring into the applied general equilibrium structure. The difficulty arises because of the defining characteristic of an idea, that it is a pure non-rival good. A given idea is not scarce in the same way that land or capital or other objects are scarce; instead, an idea can be used by any number of people simultaneously without congestion or depletion.

Because they are non-rival goods, ideas force two distinct changes in our thinking about growth, changes that are sometimes conflated but are logically distinct. Ideas introduce scale effects. They also change the feasible and optimal economic institutions. The institutional implications have attracted more attention but the scale effects are more important for understanding the big sweep of human history.

The distinction between rival and non-rival goods is easy to blur at the aggregate level but inescapable in any microeconomic setting. Picture, for example, a house that is under construction. The land on which it sits, capital in the form of a measuring tape, and the human capital of the carpenter are all rival goods. They can be used to build this house but not simultaneously any other. Contrast this with the Pythagorean Theorem, which the carpenter uses implicitly by constructing a triangle with sides in the proportions of 3, 4 and 5. This idea is non-rival. Every carpenter in the world can use it at the same time to create a right angle.

Of course, human capital and ideas are tightly linked in production and use. Just as capital produces output and forgone output can be used to produce capital, human capital produces ideas and ideas are used in the educational process to produce human capital. Yet ideas and human capital are fundamentally distinct. At the micro level, human capital in our triangle example literally consists of new connections between neurons in a carpenter’s head, a rival good. The 3-4-5 triangle is the non-rival idea. At the macro level, one cannot state the assertion that skill-biased technical change is increasing the demand for education without distinguishing between ideas and human capital

Jones and Romer have a bit of a clue here, but it is not complete, or totally accurate.

It possible, I suppose, for the idea to transcend the human base which holds it, but htere is nothing so common as a bad idea. The clash of ideas in politics, and the slowness with which some ideas are adopted while others take over overnight, demonstrates that the population that is the cultural medium for the idea is more important than the idea itself.

A bit tangential to where we started, but it is connected.

Rival goods here are the private goods of our treatment in Demand Side, the book, (check out DemandSideBooks.com). Human capital is well explained. Omitted from this excerpt are public goods. Private goods are rival goods. Non-rival goods here are not the public goods of Demand Side the book. The roads and schools and legal framework shared by all provide the opportunity for the idea. You don't get ideas or technology advancing in Africa.

Have to leave that there.

Maybe a parting shot -- an educational system such as we had in the fifties, sixties and into the seventies, eighties and nineties created a meritocracy, where the bright and motivated could flourish. The GI Bill. Free and cheap four-year schools. Jobs doing things that were worth doing. Now, with the best and brightest priced out, we are getting second rate talent, people whose parents can pay, and they are occupying key positions. So we are getting second rate results

Elsewhere in the article, Jones and Romer remember six stylized facts from Nicholas Kaldor, another non-winner of the Sveriges Riksbank Prize for Economics Sciences in Memory of Alfred Nobel. Then they remember a few of their own. What is missing from them all are public goods and the Commons. We are trudging along in a world of factories and factory labor, a world of the Nineteenth Century, long after the rise of Big Government, and we are ignoring Big Government. The explosion of population and the expansion of prosperity and the rise of Big Government happened simultaneously. The public goods that arrived with Big Government are a proximate explanation for expansion and prosperity in a period of population boom.

Growth in mainstream economics, as we've argued, ignores the Commons. Much growth in the early and mid part of the last century was bringing non-monetized activity into the market. List your services here. Much other growth is technology stealing from the environmental property of the planet. Stealing somebody's TV set and selling it is not economic growth, but stealing the atmosphere and the ocean and the habitability of the planet is counted as growth. One of the most often mentioned bonanzas for American growth these days is shale gas, fracked oil. We can pump it up out of the ground and convert it into poison for the atmosphere and count it as growth, but to do something that is actually sustainable, that is quite too expensive.

Now, before we run out of time, Hyman Minsky and the business cycle. We should say John Maynard Keynes, Hyman Minsky and the business cycle. We've been re-reading Minsky's best book, according to some, which is John Maynard Keynes -- not a biography, a development of thought.

A note on the stock market to get us warmed up. The only healthy sign in the current economy is the buoyant stock market, financial markets. We have long argued that this is the result of the QE's, with the Fed taking on a trillion dollars a year in debt securities, pushing money into risk -- so-called risk, although we have yet to see the Fed allow any actual experience of risk in the feathers of the markets. But income disparity is also a driver of buoyancy. It is not that corporate securities are so much better now, nor that the prospects for business are rosy. Instead, it is the QE's and the demand from the well-to-do. Yes, corporations are showing profits, but it is coming from unhealthy sources -- refinancing debt at low interest rates, squeezing the workers and cutting costs.

Minsky put it simply, and if I could find it here I would quote it directly. Paraphrased, it is that the rich divide their spending between consumption and investment quote-unquote in financial assets. Since even lavish consumption is a smaller proportion of their incomes than for workers, who may spend all their income on consumption, the demand for financial assets goes up.

Now, on to Minsky and Keynes, and the question of the business cycle.

Quoting from Minsky:
Keynes's theory of investment and finance ... is an alternative to today's conventional wisdom, which holds that the valuable insights of The General Theory have been incorporated into the neoclassical synthesis. [But] the neoclassical synthesis leads to propositions that the normal path of a market economy can be characterized as one of full-employment growth.... The alternative [Keynesian] interpretation leads to propositions that the normal path of a capitalist economy is cyclical; ...

In the alternative interpretation, the core of Keynes's system consists of an analysis of capitalist finance in the context of uncertainty, and of how capitalist finance affects the valuation of items in the stock of capital assets and thus affects the pace of investment. This core of Keynesian economics is fundamentally inconsistent with the static-production-function and invariant-preference-system constructs which are the basis of the neoclassical synthesis. Keynes and the neoclassical view blend only if one or the other is distorted. In the neoclassical synthesis, Keynes has been distorted.

In Keynes's theory, investment is the proximate tune caller for aggregate demand. ... In portfolio terms, the production of an increment to the capital stock is equivalent to the creation of an addition to the stock of financial assets. However, where the production of an addition to the stock of ordinary financial assets does not generate a significant demand for labor or increase productive capacity, investment requires the employment of labor and increases productive capacity. In addition, investment must be financed. This implies that investment leaves behind a residue of proper financial instruments.

.. 131-132

then p. 126

The combined effect of the short-run stabilizing properties of consumption expenditures, the stabilizing properties of government expenditures and tax schedules, the influence of those monetary assets which are not the debt of any unit, and the central bank acting as a lender of last resort will bring a debt-deflation and its accompanying income decline to a halt. However, because a debt-deflation process has both an immediate and a lingering effect upon investment and desired debt positions, it will lead to a period of persistent unemployment. A relatively low-income, high-unemployment, stagnant recession to uncertain depth and duration will follow a debt-deflation process.

Minsky completed Keynes

The theory that business cycles and fluctuations are a function of external shocks -- sometimes positive t3echnology improvements, sometimes untoward events j-- is the conventional paradigm. But it is obtuse, to say the least. At least as obtuse as the phobia of government debt. Perhaps not as obtuse as the ignoring of climate change. But obtuse.

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