Wednesday, May 11, 2011

Labor Fallacies

In micro, if supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity. Applied to labor it would say increased labor supply lowers wages, or would if it did not also increase demand. The question then is how much does it increase demand. In the infinitesimal limit supply and demand are simply additive and should have no effect on wages. This fails to be a good approximation at large scales however.

Increased labor supply lowers returns for productivity enhancing capital investment and human capital investment, and raises returns for resource producing or saving capital investment, or more simply, lowers the return to labor and raises the return to capital. In doing so, it will lower the growth of the labor supply and increase the growth of capital but this takes time. Increased labor supply increases output but diminishes the growth in output per capita as specialization is overrun by diminishing returns. Now larger markets afford greater specialization and specialization increases growth in output per capita, but specialization is more about technology than population even if population is the source of that technology. The path to growth of output per capita is better sought through technology than population.

Thursday, March 3, 2011

Depressions causes

Sticky prices and wages? Money? Necessary but not sufficient. Prices and wages are sticky and this causes adjustment problems during depressions, so lowering them will help, right? Yes and no. It helps to lower their real costs, not their nominal costs. Lowering their nominal costs can even make things worse as it boosts deflationary expectations and increase debt deflation. Nor would the result be equilibrium if they were perfectly flexible, but wild swings between self fulfilling deepest despair and exuberant euphoria. Sticky prices dampen reactions to fluctuations. A monetary depression can't occur without money but not many would wish to ban it to prevent them.

Depressions are examples of flee goods, seek money. The increase in money demand comes at the expense of the economy. Instead of being spent on consumption or investment, it is hoarded as fear grips the economy. Fear of risk and loss. Enlarged perceptions of risk and diminished expectations of gain. Not until they are assuaged or countered, not until those demands are satisfied can growth resume. In part the hoarding is thwarted by unemployment, forcibly turning savers into spenders. In part people doing what they must to survive. In part austerity fatigue. In main by the monetary authority persuading it has the power and the will to reverse it by providing the money needed.

Sunday, February 6, 2011

Living with Standards

Consider if you went to the store to buy bread and five varieties were offered all at the same cost. The next time you went fifty varieties were offered but still at the same cost. The cost of living remains unchanged. Since you are unlikely to eat any more, the economy hasn't grown either. Yet you have many more choices. Most would say they are better off even though the change would not show up in the data but how much better off. What if it came with the effect that oven hot fresh bread was no longer available? Would you consider yourself better off then? How much does the fiftieth variety add to your well being? How much would it add if it became the most popular and in fact extinguished five lesser varieties? Would you be better or worse off? Most would be unaffected by most changes but a few will be so in aggregate little of significance is changed, yet the aggregate of many such changes still can be. We have no method of measuring these for the individual much less between individuals or in aggregate. Living standards can improve or diminish without appearing in the measurements.

Saturday, January 29, 2011

Seasons of the Economy

Thinking in terms of Patterns of Sustainable Specialization and Trade, one could say that the economy develops such patterns over time but these patterns are subject to instability and collapse which then have to be rebuilt, usually in a new and different manner. One can consider it seasons of growth and decay. In spring, growth and production is low but improving, over summer strengthens and becomes vigorous, bearing the bounty and fruit of fall, in winter decaying and collapsing to a low level from which new growth develops. In summer, production and profits are high with high levels of specialization and trade, but winter comes, production and profits fall, and specialization and trade collapses. The economy itself is less productive until new patterns can be found to support growth. Meanwhile, people are left with time on their hands and find it cheaper to learn to do it themselves or do without than hire. One can argue this occurs continually so what is it that causes this to overwhelm the entire system and result in a recession? Just a matter of size and scope of the change required or errors and mistakes in trying to compensate for them, or in suddenness and rapidity with which it strikes?

This brings to mind the various kinds of specialization available to those of differing productivity and wealth, such as creator or owner that capitalizes on his creations or assets to extract rents if they can obtain and sustain them, performer that relies on his unique knowledge and talents to produce for the few or the many, and servant that relies on his general knowledge and specific spatial and temporal presence to produce. Creators and owners earn incomes without effort or with past effort and are not dependent on their efforts for their current incomes. Performers rely on their efforts and can work in conjunction with other performers to produce for many. Servants have little specialization to trade other than their general knowledge, effort, and specific presence. Servants lack the specialization to make it worthwhile to trade with each other. The best they can hope for is to work for one of the former or become one. If it becomes more difficult for creators and owners to sustain their rents and performers find it more difficult to sustain their advantage due to offshoring, greater numbers of servants will have difficulty as well. Sustaining incomes monetarily would still help through lowered exchange rates or inflation in countries with pegged currencies.