Trends in Living Standards

Brendan Walsh has an interesting post on the Irish Economy blog. I don't have anything much to add, but since he provides a link to the relevant Eurostat table I thought it would be interesting to start the graphs he presents in 1995 rather than 1999 and compare Ireland with somewhat different countries. This is the result:

Basically it's just another illustration of how the property bubble, which didn't really appear until 2002 or thereabouts, screwed up the development of a very promissing economy.

Cruise ships are getting to be quite a common sight in Dublin. The Cunard Queen Elizabeth is the most impressive I've seen.

UPDATE: While I'm sure the Queen Elizabeth is quite luxurious, here's how the 0.1% visits Dublin:

If you've got it baby, flaunt it! God knows the economy needs the boost.

The Krugman Alternative

Not a plot proposal for a convoluted film involving leaps onto moving vehicles, but a sketch of the background to the “debate” inspired by Paul Krugman’s post on taxing job creators. There is a tension between two claims which conservatives are wont to make about the rewards which go to producers. One of these claims was presented in its most explicit form by the economist John Bates Clark:

Firms operate in a region of their production functions where diminishing marginal returns cause each worker added to a work force to raise total output by a smaller amount than did the previous worker. The employer will hire more workers as long as the last one hired contributes at least as much to total revenue as the cost of employing that worker. Because every worker is the marginal worker, and because the last worker hired adds to the employer's gross income an amount equalling the wage rate in a competitive labor market, all workers are paid the values of their marginal products.

If we consider this simply as a statement about the implications of profit maximization it is irrefutable. To protect it from nitpicking it can be framed in rigorous mathematical form. But for Clarke and many conservatives it has a moral implication: capitalism is just, even if the justice it dishes out is a bit rough at times. The rewards received by workers are a fair reflection of their contribution to the production process. Unlike the mathematics, the morality can certainly be disputed, as Mark Thoma notes:

There have been many, many objections to the normative conclusions drawn by Clark from his marginal product theory. To name a few, it requires perfect competition, it rewards factors, not individuals (owning capital and land gives the owners income, but the income is for the contribution of the factors, not for the contributions of individuals receiving the income), there is no meaningful way to separate the contributions of factors to total product (when crops grow, was it the hoe used to weed the plot of land, or the person operating it?)

If John Bates Clark represents one strand of conservative thought, another, which is especially prevalent in America, is the entrepreneur-worship of Ayn Rand. The creators of businesses have a value to society which far exceeds the rewards they reap. Without them the looters and moochers who make up the mass of the population would be living in squalor:

Do you ever wonder after dealing with all that is going on with the economy and the upcoming election if it's getting to be time to "go John Galt." For those of you who have never read Ayn Rand's Atlas Shrugged, the basic theme is that John Galt and his allies take actions that include withdrawing their talents, 'stopping the motor of the world', and leading the 'strikers' (those who refuse to be exploited) against the 'looters' (the exploiters, backed by the government).

One-percenters of the world unite! I’m not the first to notice that the Randian world view owes a lot to Karl Marx. It’s a story of exploitation, with a creative elite taking the place of the proletariat as the victims. And so we come full circle. John Bates Clark used his theory to undermine Marxism. The workforce is not exploited, it gets the marginal product of labour and the capitalists get the marginal product of capital. Countless conservatives have endorsed this argument. Paul Krugman, tongue firmly in cheek, deploys the same argument against the Randroids. The magic of the market ensures that Galtian superheroes, too, receive their marginal product. “You got a problem with that?” (This appears to be the state motto of New Jersey.)

To date, no conservative blogger has shown much enthusiasm for Krugman’s deployment of Clark’s anti-Marxist weaponry against the Tea Party. For me, the interesting thing is seeing how they avoid getting caught on the horns of this dilemma: should they abandon Clark or Rand? There are various moves they can make, some of which could lead to an interesting debate, but it’s a bit sad that several of them have opted for the silliest response I can imagine: “Paul Krugman simply doesn’t understand the subtleties of that marginal productivity stuff!” No cigar, guys. If this was about bank clearing-systems or option-pricing theory you might be right, but an international trade theorist who doesn’t know this material is about as plausible as a chef who can’t brown onions. You don't score any points by interpreting "marginal reduction" to mean "shipping half of our best-educated people to Somalia."

A picture for Bob Murphy

Since I'm too lazy to use this blog for blogging, I might as well use it to illustrate the comments which I post on other blogs from time to time. This picture explains why I think Bob Murphy is doing Paul Krugman an injustice in this post. The picture shows how real GDP shrinks when Romney supporter John Q. Wheelerdealer reduces his input to the economy in disgust at the antics of President B. Hussein Obama. As I say in comments:

Krugman is applying the Envelope Theorem correctly: the difference between the income which WheelerDealer foregoes by going Galt and the reduction in national income is approximately zero. Not exactly zero, because there’s a small ‘triangle’ [see picture] under the marginal productivity curve with area 0.5 x dL x dW, where W is WheelerDealer’s real wage and L his input.

Art, innit?

This thing has been sitting on Sir John Rogerson's Quay for a few weeks now. This morning a group of people assembled in front of it to listen to a speech, so I guess it's here to stay.

Alas Scott and Joan

For some time now Scott Sumner has been giving the late, great Joan Robinson a hard time about this pronouncement, which appears in her 1938 review of Bresciani-Turroni’s study of the German hyperinflation:

An increase in the quantity of money no doubt has a tendency to raise prices, for it leads to a reduction in the rate of interest, which stimulates investment and discourages saving, and so leads to an increase in activity. But there is no evidence whatever that events in Germany followed this sequence.

Let’s break that down into bite-sized morsels, to see what the trouble appears to be:

An increase in the quantity of money has a tendency to raise prices. Very few economists would argue with that.

An increase in the quantity of money leads to a reduction in the rate of interest. This is the “liquidity effect” and there is ample evidence for it.

A reduction in the rate of interest stimulates investment and discourages saving. Maybe that could do with a ceteris paribus qualification or something, but really that seems like nit-picking. We’re talking about a hyperinflation, so it’s not as if there is any chance of a lower nominal interest rate being neutralised by lower inflation.

A stimulus to investment which also discourages saving leads to an increase in activity. Since the economy under discussion was operating at something like full capacity, it might have been better to stress that much of the “activity” consisted of frantic shopping, but again that’s surely obvious in context.

There is no evidence whatever that events in Germany followed the above sequence. Her paper discusses the sequence of events: “the violent inflation which set in in the second half of 1921 was inaugurated by a sudden fall in the mark exchange (May, 1921, 15 marks = 1 gold mark; November, 1921, 63 marks = 1 gold mark).” Whether this was caused by reparations payments or some other shock doesn’t much matter. The important point is that the inflation was transmitted through the prices of tradable goods, while other prices and wages lagged. “Moreover, the geographical diffusion of prices supports the argument, the movement spreading from the great ports and commercial centres to the interior of the country (p. 135).” Maybe modern scholars disagree with her about this but the few sources I’ve looked at seem to support her account.

In short, Joan Robinson’s pronouncement seems fairly innocuous to me. What’s bothering Scott Sumner? Let’s sample his comments:

1. "So easy money couldn’t possibly have caused the German hyperinflation because German interest rates were not very low. And everyone knows that easy money is associated with low interest rates. I won’t insult the intelligence of my readers by explaining what is wrong with her reasoning."

2. "So money couldn’t have been easy when German prices were soaring, because nominal interest rates weren’t that low."

3."...people like to mock how Joan Robinson said (in 1938) that easy money couldn’t have caused the German hyperinflation, after all, interest rates weren’t low."

Notice that in all these cases Scott Sumner attributes to Joan Robinson the view that interest rates were not low, or not very low, or all that low. Clearly she doesn’t express that view in the two sentences he quoted. Does she do so elsewhere in the paper? She does discuss interest rate policy. She says that the Reichsbank might have curbed the inflation at an early stage if it had followed a stricter policy:

If the quantity of money had not expanded it may be supposed that the rate of interest would have been driven up, investment impeded, and saving encouraged, so that unemployment would have appeared again and the rise in money wages would have been brought to an end. But, in fact, the budget deficit, the policy of the Reichsbank in ‘meeting the needs of trade’ and the various official and unofficial supplementary currencies which were improvised, combined to meet the demand for money, the short rate of interest did not begin to rise appreciably till July, 1922, and no obstacle was put in the way of the inflation. It is true that in 1923 the short rate of interest rose to such heights that loans were taken at 20 per cent per diem (though the maximum reached by the Reichsbank discount rate was only 90 per cent per annum). But by this time the expectation of a continued rise in prices was so strong that it was impossible for high interest rates to discourage entrepreneurs from investment or to restore the motive for saving to the ordinary public. Thus the fact that high rates did not stop the inflation in 1923 cannot prove that they would have been equally powerless in 1921. The champions of the quantity theory, therefore, may reasonably contend that it was the increase in the quantity of money which permitted the inflation to take place. [Emphasis mine]

There you have it.

A fragment from my autobiography

This post is an off-the-cuff response to Liam Delaney, who is tweeting about early retirement. In my case the relevant dialogue ran as follows:

Me: The voluntary severance package is very tempting. I'd like to take it.
Boss: It's actually intended for people we want to get rid of.
Me: Thanks, but I can make you want to get rid of me.
Boss: I'm sure you can.

We both knew that his boss wanted the headcount down. Who stays in a dead-end job if there's a financially attractive alternative?